UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
EXCHANGE ACT OF 1934
For the quarterly period ended
or
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number:
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) |
(Address of Principal Executive Offices)
(
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Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class |
| Trading symbol |
| Name of Exchange on which registered |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☐ | ||
☒ | Smaller reporting company | Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
As of August 5, 2022, there were
TABLE OF CONTENTS
2
PART I —FINANCIAL INFORMATION
Item 1. Financial Statements
JOHN MARSHALL BANCORP, INC.
Consolidated Balance Sheets
(In thousands, except share and per share data)
(Unaudited)
| June 30, 2022 |
| December 31, 2021 | |||
Assets |
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Cash and due from banks | $ | | $ | | ||
Interest-bearing deposits in banks |
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Total cash and cash equivalents |
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Securities available-for-sale, at fair value |
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Securities held-to-maturity, fair value of $ |
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Restricted securities, at cost |
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Equity securities, at fair value |
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Loans, net of unearned income |
| |
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Allowance for loan losses |
| ( |
| ( | ||
Net loans |
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Bank premises and equipment, net |
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Accrued interest receivable |
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Bank owned life insurance |
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Right of use assets |
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Other assets |
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Total assets | $ | | $ | | ||
Liabilities and Shareholders’ Equity |
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Liabilities |
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Deposits: |
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Non-interest bearing demand deposits | $ | | $ | | ||
Interest-bearing demand deposits |
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Savings deposits |
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Time deposits |
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Total deposits |
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Federal Home Loan Bank advances |
| — |
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Subordinated debt |
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Accrued interest payable |
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Lease liabilities |
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Other liabilities |
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Total liabilities | $ | | $ | | ||
Commitments and contingencies |
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Shareholders’ Equity |
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Preferred stock, par value $ | $ | $ | ||||
Common stock, nonvoting, par value $ |
| — |
| — | ||
Common stock, voting, par value $ |
| |
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Additional paid-in capital |
| |
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Retained earnings |
| |
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Accumulated other comprehensive loss |
| ( |
| ( | ||
Total shareholders’ equity | $ | | $ | | ||
Total liabilities and shareholders’ equity | $ | | $ | | ||
The accompanying notes are an integral part of these consolidated financial statements.
3
JOHN MARSHALL BANCORP, INC.
Consolidated Statements of Income
(In thousands, except per share data)
(Unaudited)
Three months ended | Six months ended | |||||||||||
June 30, | June 30, | |||||||||||
| 2022 |
| 2021 |
| 2022 |
| 2021 | |||||
Interest and Dividend Income |
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Interest and fees on loans | $ | | $ | | $ | | $ | | ||||
Interest on investment securities, taxable |
| |
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Interest on investment securities, tax-exempt |
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Dividends |
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Interest on deposits in banks |
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Total interest and dividend income | $ | | $ | | $ | | $ | | ||||
Interest Expense |
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Deposits | $ | | $ | | $ | | $ | | ||||
Federal Home Loan Bank advances |
| |
| |
| |
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Subordinated debt |
| |
| |
| |
| | ||||
Total interest expense | $ | | $ | | $ | | $ | | ||||
Net interest income | $ | | $ | | $ | | $ | | ||||
Provision for loan losses |
| — |
| |
| — |
| | ||||
Net interest income after provision for loan losses | $ | | $ | | $ | | $ | | ||||
Non-interest Income |
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Service charges on deposit accounts | $ | | $ | | $ | | $ | | ||||
Bank owned life insurance |
| |
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Other service charges and fees |
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| |
| |
| | ||||
Gains on securities |
| — |
| — |
| — |
| | ||||
Insurance commissions |
| |
| |
| |
| | ||||
Other operating income (loss) |
| ( |
| |
| ( |
| | ||||
Total non-interest income | $ | | $ | | $ | | $ | | ||||
Non-interest Expenses |
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Salaries and employee benefits | $ | | $ | | $ | | $ | | ||||
Occupancy expense of premises |
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Furniture and equipment expenses |
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Other operating expenses |
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| |
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Total non-interest expenses | $ | | $ | | $ | | $ | | ||||
Income before income taxes | $ | | $ | | $ | | $ | | ||||
Income tax expense |
| |
| |
| |
| | ||||
Net income | $ | | $ | | $ | | $ | | ||||
Earnings per share, basic | $ | | $ | | $ | | $ | | ||||
Earnings per share, diluted | $ | | $ | | $ | | $ | | ||||
The accompanying notes are an integral part of these consolidated financial statements.
4
JOHN MARSHALL BANCORP, INC.
Consolidated Statements of Comprehensive Income (Loss)
(In thousands)
(Unaudited)
Three months ended | Six months ended | |||||||||||
June 30, | June 30, | |||||||||||
| 2022 |
| 2021 |
| 2022 |
| 2021 | |||||
Net Income | $ | | $ | | $ | | $ | | ||||
Other comprehensive income (loss): |
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| ||||
Unrealized gain (loss) on available-for-sale securities, net of tax of $( |
| ( |
| |
| ( |
| ( | ||||
Reclassification adjustment for gains on available-for-sale securities included in net income, net of tax of $( |
| — |
| — |
| — |
| ( | ||||
Amortization of unrealized gains on securities transferred to held-to-maturity, net of tax of $( |
| ( |
| — |
| ( |
| — | ||||
Total other comprehensive income (loss) | $ | ( | $ | | $ | ( | $ | ( | ||||
Total comprehensive income (loss) | $ | | $ | | $ | ( | $ | | ||||
The accompanying notes are an integral part of these consolidated financial statements.
5
JOHN MARSHALL BANCORP, INC.
Consolidated Statements of Shareholders’ Equity
For the Three Months Ended June 30, 2022 and 2021
(In thousands, except share and per share data)
(Unaudited)
|
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|
| Accumulated |
| ||||||||||
Other | Total | ||||||||||||||||
Additional Paid- In | Retained | Comprehensive | Shareholders’ | ||||||||||||||
Shares | Common Stock | Capital | Earnings | Income (Loss) | Equity | ||||||||||||
Balance, March 31, 2021 |
| | $ | | $ | | $ | | $ | | $ | | |||||
Net income |
| — |
| — |
| — |
| |
| — |
| | |||||
Other comprehensive income |
| — |
| — |
| — |
| — |
| |
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Exercise of stock options |
| |
| — |
| |
| — |
| — |
| | |||||
Restricted stock vesting, net of |
| |
| — |
| — |
| — |
| — |
| — | |||||
Share-based compensation |
| — |
| — |
| |
| — |
| — |
| | |||||
Balance, June 30, 2021 | | $ | | $ | | $ | | $ | | $ | | ||||||
Balance, March 31, 2022 |
| | $ | | $ | | $ | | $ | ( | $ | | |||||
Net income |
| — |
| — |
| — |
| |
| — |
| | |||||
Other comprehensive loss |
| — |
| — |
| — |
| — |
| ( |
| ( | |||||
Cash dividends attributable to changes in common shares through the record date | — |
| — |
| — | ( | — | ( | |||||||||
Exercise of stock options |
| |
| |
| |
| — |
| — |
| | |||||
Restricted stock vesting, net of |
| |
| — |
| — |
| — |
| — |
| — | |||||
Share-based compensation |
| — |
| — |
| |
| — |
| — |
| | |||||
Balance, June 30, 2022 |
| | $ | | $ | | $ | | $ | ( | $ | | |||||
The accompanying notes are an integral part of these consolidated financial statements.
6
JOHN MARSHALL BANCORP, INC.
Consolidated Statements of Shareholders’ Equity
For the Six Months Ended June 30, 2022 and 2021
(In thousands, except share and per share data)
(Unaudited)
|
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|
| Accumulated |
| ||||||||||
Other | Total | ||||||||||||||||
Additional Paid- In | Retained | Comprehensive | Shareholders’ | ||||||||||||||
Shares | Common Stock | Capital | Earnings | Income (Loss) | Equity | ||||||||||||
Balance, December 31, 2020 |
| | $ | | $ | | $ | | $ | | $ | | |||||
Net income |
| — |
| — |
| — |
| |
| — |
| | |||||
Other comprehensive loss |
| — |
| — |
| — |
| — |
| ( |
| ( | |||||
Exercise of stock options |
| |
| |
| |
| — |
| — |
| | |||||
Restricted stock vesting, net of |
| |
| — |
| — |
| — |
| — |
| — | |||||
Share-based compensation |
| — |
| — |
| |
| — |
| — |
| | |||||
Balance, June 30, 2021 | | $ | | $ | | $ | | $ | | $ | | ||||||
Balance, December 31, 2021 |
| | $ | | $ | | $ | | $ | ( | $ | | |||||
Net income |
| — |
| — |
| — |
| |
| — |
| | |||||
Other comprehensive loss |
| — |
| — |
| — |
| — |
| ( |
| ( | |||||
Dividend declared on common stock ($ | — |
| — |
| — | ( | — | ( | |||||||||
Exercise of stock options |
| |
| |
| |
| — |
| — |
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Restricted stock vesting, net of |
| |
| — |
| — |
| — |
| — |
| — | |||||
Share-based compensation |
| — |
| — |
| |
| — |
| — |
| | |||||
Balance, June 30, 2022 |
| | $ | | $ | | $ | | $ | ( | $ | | |||||
The accompanying notes are an integral part of these consolidated financial statements.
7
JOHN MARSHALL BANCORP, INC.
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Six months ended | ||||||
June 30, | ||||||
| 2022 |
| 2021 | |||
Cash Flows from Operating Activities |
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| ||
Net income | $ | | $ | | ||
Adjustment to reconcile net income to net cash provided by operating activities: |
|
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Depreciation |
| |
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Right of use asset amortization |
| |
| | ||
Provision for loan losses |
| — |
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Share-based compensation expense |
| |
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Net amortization of securities |
| |
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Fair value adjustment on equity securities |
| |
| ( | ||
Amortization of debt issuance costs |
| |
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Gains on sales and calls of available-for-sale securities |
| — |
| ( | ||
Deferred tax expense (benefit) |
| |
| ( | ||
Increase in cash surrender value of life insurance |
| ( |
| ( | ||
Changes in assets and liabilities: |
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|
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| ||
Decrease in accrued interest receivable |
| |
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Increase in other assets |
| ( |
| ( | ||
Increase in accrued interest payable |
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Decrease in other liabilities |
| ( |
| ( | ||
Net cash provided by operating activities | $ | | $ | | ||
Cash Flows from Investing Activities |
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|
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| ||
Net increase in loans | $ | ( | $ | ( | ||
Purchase of available-for-sale securities |
| ( |
| ( | ||
Purchase of held-to-maturity securities |
| ( |
| — | ||
Proceeds from maturities, calls and principal repayments of available-for-sale securities |
| |
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Proceeds from maturities, calls and principal repayments of held-to-maturity securities |
| |
| — | ||
Net redemption of restricted securities |
| |
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Purchase of equity securities |
| ( |
| ( | ||
Purchases of bank premises and equipment |
| ( |
| ( | ||
Net cash (used in) investing activities | $ | ( | $ | ( | ||
Cash Flows from Financing Activities |
|
|
|
| ||
Net increase in deposits | $ | | $ | | ||
Net repayment of Federal Home Loan Bank advances | ( | ( | ||||
Issuance of subordinated debt | | — | ||||
Cash dividends paid | ( | — | ||||
Issuance of common stock for share options exercised |
| |
| | ||
Net cash provided by investing activities | $ | | $ | | ||
Net increase in cash and cash equivalents | $ | | $ | | ||
Cash and cash equivalents, beginning of period |
| |
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Cash and cash equivalents, end of period | $ | | $ | | ||
Supplemental Disclosures of Cash Flow Information |
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Cash payments for: |
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Interest | $ | | $ | | ||
Income taxes |
| |
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Supplemental Disclosures of Noncash Transactions |
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Unrealized loss on securities available-for-sale | $ | ( | $ | ( | ||
Right of use asset obtained in exchange for new operating lease liability | | | ||||
The accompanying notes are an integral part of these consolidated financial statements.
8
JOHN MARSHALL BANCORP, INC.
Notes to Consolidated Financial Statements
(Dollars in thousands, unless otherwise stated)
(Unaudited)
Note 1— Nature of Business and Summary of Significant Accounting Policies
Nature of Banking Activities
John Marshall Bancorp, Inc. (the “Company”), headquartered in Reston, Virginia, became the registered bank holding company under the Bank Holding Company Act of 1956 for its wholly-owned subsidiary, John Marshall Bank (the “Bank”), on March 1, 2017. This reorganization was completed through a one-for-one share exchange in which the Bank’s shareholders received one share of voting common stock of the Company in exchange for each share of the Bank’s voting common stock. The Company was formed on April 21, 2016 under the laws of the Commonwealth Virginia. The Bank was formed on April 5, 2005 under the laws of the Commonwealth of Virginia and was chartered as a bank on February 9, 2006, by the Virginia Bureau of Financial Institutions. The Bank is a member of the Federal Reserve System and is subject to the rules and regulations of the Virginia Bureau of Financial Institutions, the Board of Governors of the Federal Reserve System (the “Federal Reserve”) and the Federal Deposit Insurance Corporation (“FDIC”). The Bank opened for business on April 17, 2006 and provides banking services to its customers primarily in the Washington, D.C. metropolitan area.
Basis of Presentation
The accounting and reporting policies of John Marshall Bancorp, Inc. conform to generally accepted accounting principles in the United States of America (“GAAP”) and reflect practices of the banking industry. The accompanying unaudited consolidated financial statements have been prepared in accordance with GAAP for interim financial reporting and with applicable quarterly reporting regulations of the U.S. Securities and Exchange Commission (“SEC”). They do not include all of the information and notes required by GAAP for complete financial statements. As such, these consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto as of and for the year ending December 31, 2021, included in the Company’s Registration Statement on Form 10 as amended, filed with the SEC on April 18, 2022.
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. All significant intercompany accounts and transactions between the Company and the Bank have been eliminated. In preparing financial statements in conformity with GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses.
In the opinion of management, all adjustments, consisting only of normal recurring adjustments, which are necessary for a fair presentation of the results of operations in these financial statements, have been made. The results of operations for the three and six months ended June 30, 2022 are not necessarily indicative of the results to be expected for any other interim period or for the full year. All amounts and disclosures included in this quarterly report as of December 31, 2021, were derived from the Company’s audited consolidated financial statements. Certain items in the prior period financial statements have been reclassified to conform to the current presentation. These reclassifications had no effect on prior year net income or shareholders’ equity.
Recent Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The amendments in this ASU, among other things, require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit
9
deterioration. The FASB has issued multiple updates to ASU 2016-13 as codified in Topic 326, including ASUs 2019-04, 2019-05, 2019-10, 2019-11, 2020-02, and 2020-03. These ASUs have provided for various minor technical corrections and improvements to the codification as well as other transition matters. Smaller reporting companies who file with the U.S. Securities and Exchange Commission (“SEC”) and all other entities who do not file with the SEC are required to apply the guidance for fiscal years, and interim periods within those years, beginning after December 15, 2022. As part of the Company’s implementation efforts, we have reconciled and validated historical loan, charge-off and recovery data, determined segmentation of the loan portfolio for application of the current expected credit losses (“CECL”) calculation, determined the key assumptions to be utilized in the calculation, selected lifetime loss reserve calculation methods and established a methodology framework, updated our qualitative factor framework, performed parallel runs of the CECL calculation, and engaged an external vendor to assist with model validation commencing in the third quarter of 2022. The ultimate impact of CECL on the allowance for credit losses will depend on the size and composition of the loan portfolio, the portfolio’s credit quality and economic conditions at the time of adoption, as well as any refinements to the CECL model, methodology and key assumptions. At adoption, the Company will record a cumulative effect adjustment to retained earnings for incremental change in the allowance for credit losses.
In March 2022, the FASB issued ASU No. 2022-02, “Financial Instruments-Credit Losses (Topic 326), Troubled Debt Restructurings (“TDRs”) and Vintage Disclosures.” ASU 2022-02 addresses areas identified by the FASB as part of its post-implementation review of the credit losses standard (ASU 2016-13) that introduced the CECL model. The amendments eliminate the accounting guidance for troubled debt restructurings by creditors that have adopted the CECL model and enhance the disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. In addition, the amendments require a public business entity to disclose current-period gross write-offs for financing receivables and net investment in leases by year of origination in the vintage disclosures. The amendments in this ASU should be applied prospectively, except for the transition method related to the recognition and measurement of TDRs, where an entity has the option to apply a modified retrospective transition method resulting in a cumulative-effect adjustment to retained earnings in the period of adoption. For entities that have not yet adopted ASU 2016-13 (such as the Company), the effective dates for the provisions of ASU 2022-02 are the same as the effective dates in ASU 2016-13. Early adoption is permitted if an entity has adopted ASU 2016-13; however, the Company does not expect to adopt ASU 2016-13 in advance of the required implementation date. The Company is currently assessing the impact that ASU 2022-02 will have on its consolidated financial statements.
10
Note 2— Investment Securities
The following table summarizes the amortized cost and fair value of securities held-to-maturity and available-for-sale and the corresponding amounts of gross unrealized gains and losses at June 30, 2022 and December 31, 2021.
| June 30, 2022 | |||||||||||
Gross | Gross | |||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||
(Dollars in thousands) | Cost |
| Gains |
| (Losses) |
| Value | |||||
Held-to-maturity |
|
|
|
|
|
|
|
| ||||
U.S Treasuries | $ | | $ | — | $ | ( | $ | | ||||
U.S. government and federal agencies |
| |
| — |
| ( |
| | ||||
Collateralized mortgage obligations |
| |
| — |
| ( |
| | ||||
Taxable municipal |
| |
| — |
| ( |
| | ||||
Mortgage-backed |
| |
| — |
| ( |
| | ||||
Total Held-to-maturity Securities | $ | | $ | — | $ | ( | $ | | ||||
Available-for-sale |
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|
|
|
|
|
|
| ||||
U.S Treasuries | $ | | $ | | $ | ( | $ | | ||||
U.S. government and federal agencies |
| |
| |
| ( |
| | ||||
Corporate bonds |
| |
| — |
| ( |
| | ||||
Collateralized mortgage obligations |
| |
| |
| ( |
| | ||||
Tax-exempt municipal |
| |
| — |
| ( |
| | ||||
Taxable municipal |
| |
| |
| ( |
| | ||||
Mortgage-backed |
| |
| |
| ( |
| | ||||
Total Available-for-sale Securities | $ | | $ | | $ | ( | $ | | ||||
| December 31, 2021 | |||||||||||
Gross | Gross | |||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||
(Dollars in thousands) | Cost |
| Gains |
| (Losses) |
| Value | |||||
Held-to-maturity |
|
|
|
|
|
|
|
| ||||
U.S Treasuries | $ | | $ | — | $ | ( | $ | | ||||
U.S. government and federal agencies |
| |
| — |
| ( |
| | ||||
Collateralized mortgage obligations |
| |
| — |
| ( |
| | ||||
Taxable municipal |
| |
| — |
| ( |
| | ||||
Mortgage-backed |
| |
| — |
| ( |
| | ||||
Total Held-to-maturity Securities | $ | | $ | — | $ | ( | $ | | ||||
Available-for-sale |
|
|
|
|
|
|
|
| ||||
U.S Treasuries | $ | | $ | — | $ | ( | $ | | ||||
U.S. government and federal agencies |
| |
| |
| ( |
| | ||||
Corporate bonds |
| |
| |
| — |
| | ||||
Collateralized mortgage obligations |
| |
| |
| ( |
| | ||||
Tax-exempt municipal |
| |
| |
| — |
| | ||||
Taxable municipal |
| |
| |
| ( |
| | ||||
Mortgage-backed |
| |
| |
| ( |
| | ||||
Total Available-for-sale Securities | $ | | $ | | $ | ( | $ | | ||||
During 2021, the Company transferred investment securities with a carrying value of $
The Company did
11
Securities having a market value of $
The following tables summarize the fair value of securities held-to-maturity and securities available-for-sale at June 30, 2022 and December 31, 2021 and the corresponding amounts of gross unrealized losses. Management uses the valuations as of month-end in determining when securities are in an unrealized loss position. Therefore, a security’s market value could have exceeded its amortized cost on other days during the prior twelve-month period.
| June 30, 2022 | |||||||||||||||||
Less than 12 Months | 12 Months or Longer | Total | ||||||||||||||||
Gross | Gross | Gross | ||||||||||||||||
Fair |
| Unrealized |
| Fair |
| Unrealized |
| Fair |
| Unrealized | ||||||||
(Dollars in thousands) | Value | Losses | Value | Losses | Value | Losses | ||||||||||||
Held-to-maturity |
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| ||||||
U.S Treasuries | $ | | $ | ( | $ | — | $ | — | $ | | $ | ( | ||||||
U.S. government and federal agencies |
| |
| ( |
| |
| ( |
| |
| ( | ||||||
Collateralized mortgage obligations |
| |
| ( |
| |
| ( |
| |
| ( | ||||||
Taxable municipal |
| |
| ( |
| |
| ( |
| |
| ( | ||||||
Mortgage-backed |
| |
| ( |
| |
| ( |
| |
| ( | ||||||
Total Held-to-maturity Securities | $ | | $ | ( | $ | | $ | ( | $ | | $ | ( | ||||||
Available-for-sale |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
U.S Treasuries | $ | | $ | ( | $ | — | $ | — | $ | | $ | ( | ||||||
U.S. government and federal agencies |
| |
| ( |
| |
| ( |
| |
| ( | ||||||
Corporate bonds |
| |
| ( |
| — |
| — |
| |
| ( | ||||||
Collateralized mortgage obligations |
| |
| ( |
| |
| ( |
| |
| ( | ||||||
Tax-exempt municipal |
| |
| ( |
| — |
| — |
| |
| ( | ||||||
Taxable municipal |
| — |
| — |
| |
| ( |
| |
| ( | ||||||
Mortgage-backed |
| |
| ( |
| |
| ( |
| |
| ( | ||||||
Total Available-for-sale Securities | $ | | $ | ( | $ | | $ | ( | $ | | $ | ( | ||||||
| December 31, 2021 | |||||||||||||||||
Less than 12 Months | 12 Months or Longer | Total | ||||||||||||||||
Gross | Gross | Gross | ||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||
(Dollars in thousands) | Value |
| Losses |
| Value |
| Losses |
| Value |
| Losses | |||||||
Held-to-maturity |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
U.S Treasuries | $ | | $ | ( | $ | — | $ | — | $ | | $ | ( | ||||||
U.S. government and federal agencies |
| |
| ( |
| |
| ( |
| |
| ( | ||||||
Collateralized mortgage obligations |
| |
| ( |
| — |
| — |
| |
| ( | ||||||
Taxable municipal |
| |
| ( |
| |
| ( |
| |
| ( | ||||||
Mortgage-backed |
| |
| ( |
| |
| ( |
| |
| ( | ||||||
Total Held-to-maturity Securities | $ | | $ | ( | $ | | $ | ( | $ | | $ | ( | ||||||
Available-for-sale |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
U.S Treasuries | $ | | $ | ( | $ | — | $ | — | $ | | $ | ( | ||||||
U.S. government and federal agencies |
| |
| ( |
| |
| ( |
| |
| ( | ||||||
Collateralized mortgage obligations |
| |
| ( |
| — |
| — |
| |
| ( | ||||||
Taxable municipal |
| |
| ( |
| — |
| — |
| |
| ( | ||||||
Mortgage-backed |
| |
| ( |
| |
| ( |
| |
| ( | ||||||
Total Available-for-sale Securities | $ | | $ | ( | $ | | $ | ( | $ | | $ | ( | ||||||
U.S. Treasuries - The unrealized losses in
12
maturity, the Company did not consider those investments to be other-than-temporarily impaired at June 30, 2022 or December 31, 2021.
U.S. Government and Federal Agencies - The unrealized losses in
Collateralized Mortgage Obligation Securities - The unrealized losses in
Municipal Securities - The unrealized losses in
Corporate Securities - The unrealized losses in
Mortgage-Backed Securities - The unrealized losses in
The Company reviews each debt security for other-than-temporary impairment on at least a quarterly basis based on criteria that include the extent to which cost exceeds market price, the duration of that market decline, the financial health of and specific prospects for the issuer, the security’s ratings, the Company’s best estimate of the present value of cash flows expected to be collected from debt securities, the intention with regards to holding the security to maturity and the likelihood that the Company would be required to sell the security before recovery. The Company did not consider those investments to be other-than-temporary impaired at June 30, 2022 or December 31, 2021. Additionally, the Company has not recognized any other-than-temporary impairment on any of the investments owned as of June 30, 2022.
13
The table below summarizes, by major security type, the contractual maturities of our investment securities as of June 30, 2022. Borrowers may have the right to call or prepay certain obligations and as such, the expected maturities of our securities are likely to differ from the scheduled contractual maturities presented below.
| June 30, 2022 | |||||
Amortized | Fair | |||||
(Dollars in thousands) |
| Cost |
| Value | ||
Held-to-maturity |
|
|
|
| ||
Due in one year or less | $ | — | $ | — | ||
Due after one year through five years |
| — |
| — | ||
Due after five years through ten years |
| |
| | ||
Due after ten years |
| |
| | ||
Total Held-to-maturity Securities | $ | | $ | | ||
Available-for-sale |
|
|
|
| ||
Due in one year or less | $ | | $ | | ||
Due after one year through five years |
| |
| | ||
Due after five years through ten years |
| |
| | ||
Due after ten years |
| |
| | ||
Total Available-for-sale Securities | $ | | $ | | ||
In the prevailing rate environments as of June 30, 2022 and December 31, 2021, the Company’s investment portfolio had an estimated weighted average remaining life of approximately
The table below summarizes the carrying amount of restricted securities as of June 30, 2022 and December 31, 2021.
(Dollars in thousands) |
| June 30, 2022 |
| December 31, 2021 | ||
Federal Reserve Bank Stock | $ | | $ | | ||
Federal Home Loan Bank Stock |
| |
| | ||
Community Bankers’ Bank Stock |
| |
| | ||
Total Restricted Securities | $ | | $ | | ||
The Company held equity securities with readily determinable fair values totaling $
Note 3— Loans
The following table presents the composition of the Company’s loan portfolio as of June 30, 2022 and December 31, 2021.
(Dollars in thousands) |
| June 30, 2022 |
| December 31, 2021 | ||
Real Estate Loans: |
|
| ||||
Commercial | $ | | $ | | ||
Construction and land development |
| |
| | ||
Residential | | | ||||
Commercial - Non-Real Estate: |
|
|
|
| ||
Commercial loans |
| |
| | ||
Consumer - Non-Real Estate: |
|
|
|
| ||
Consumer loans |
| |
| | ||
Total Gross Loans | $ | | $ | | ||
Allowance for loan losses |
| ( |
| ( | ||
Net deferred loan costs |
| |
| | ||
Total net loans | $ | | $ | | ||
14
Note 4— Allowance for Loan Losses
The following tables present the activity in the allowance for loan losses for the six months ended June 30, 2022 and June 30, 2021.
June 30, 2022 | |||||||||||||||||||||
Real Estate | |||||||||||||||||||||
Construction | |||||||||||||||||||||
Land | |||||||||||||||||||||
Dollars in thousands | Commercial | Development | Residential | Commercial | Consumer | Unallocated | Total | ||||||||||||||
Allowance for loan losses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Beginning Balance, December 31, 2021 | $ | | $ | | $ | | $ | | $ | | $ | | $ | | |||||||
Charge-offs |
| ( |
| — |
| — |
| — |
| — |
| — | ( | ||||||||
Recoveries |
| — |
| — |
| — |
| — |
| — |
| — |
| — | |||||||
Provision |
| |
| ( |
| ( |
| ( |
| |
| ( |
| — | |||||||
Ending Balance, June 30, 2022 | $ | | $ | | $ | | $ | | $ | | $ | | $ | | |||||||
June 30, 2021 | |||||||||||||||||||||
Real Estate | |||||||||||||||||||||
Construction | |||||||||||||||||||||
Land | |||||||||||||||||||||
Dollars in thousands | Commercial | Development | Residential | Commercial | Consumer | Unallocated | Total | ||||||||||||||
Allowance for loan losses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Beginning Balance, December 31, 2020 | $ | | $ | | $ | | $ | | $ | | $ | | $ | | |||||||
Charge-offs |
| ( |
| — |
| — |
| ( |
| — |
| — | ( | ||||||||
Recoveries |
| — |
| — |
| — |
| — |
| — |
| — |
| — | |||||||
Provision |
| |
| |
| ( |
| ( |
| ( |
| |
| | |||||||
Ending Balance, June 30, 2021 | $ | | $ | | $ | | $ | | $ | | $ | | $ | | |||||||
The following tables present the balance of the allowance for loan losses, the allowance by impairment methodology, total loans, and loans by impairment methodology as of June 30, 2022 and December 31, 2021.
June 30, 2022 | |||||||||||||||||||||
Real Estate | |||||||||||||||||||||
Construction | |||||||||||||||||||||
Land | |||||||||||||||||||||
Dollars in thousands |
| Commercial |
| Development |
| Residential |
| Commercial |
| Consumer |
| Unallocated |
| Total | |||||||
Allowance balance attributable to loans: | |||||||||||||||||||||
Individually evaluated for impairment | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||
Collectively evaluated for impairment | | | | | | | | ||||||||||||||
Total allowance | $ | | $ | | $ | | $ | | $ | | $ | | $ | | |||||||
Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Individually evaluated for impairment | $ | — | $ | — | $ | | $ | — | $ | — | $ | — | $ | | |||||||
Collectively evaluated for impairment | | | | | | — | | ||||||||||||||
Total loans | $ | | $ | | $ | | $ | | $ | | $ | — | $ | | |||||||
15
December 31, 2021 | |||||||||||||||||||||
Real Estate | |||||||||||||||||||||
Construction | |||||||||||||||||||||
Land | |||||||||||||||||||||
Dollars in thousands |
| Commercial |
| Development |
| Residential |
| Commercial |
| Consumer |
| Unallocated |
| Total | |||||||
Allowance balance attributable to loans: | |||||||||||||||||||||
Individually evaluated for impairment | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||
Collectively evaluated for impairment | | | | | | | | ||||||||||||||
Total allowance | $ | | $ | | $ | | $ | | $ | | $ | | $ | | |||||||
Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Individually evaluated for impairment | $ | — | $ | — | $ | | $ | — | $ | — | $ | — | $ | | |||||||
Collectively evaluated for impairment | | | | | | — | | ||||||||||||||
Total loans | $ | | $ | | $ | | $ | | $ | | $ | — | $ | | |||||||
Gross commercial loans included $
The following tables present a summary of impaired loans and the related allowance as of June 30, 2022 and December 31, 2021.
June 30, 2022 | |||||||||||||||||||||
Recorded | Recorded | ||||||||||||||||||||
Unpaid | Investment | Investment | Total | Average | Interest | ||||||||||||||||
Principal | with | with | Recorded | Related | Recorded | Income | |||||||||||||||
(Dollars in thousands) |
| Balance |
| No Allowance |
| Allowance |
| Investment |
| Allowance |
| Investment |
| Recognized | |||||||
Real Estate Loans | |||||||||||||||||||||
Commercial | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||
Construction and land development |
| — |
| — |
| — |
| — |
| — |
| — |
| — | |||||||
Residential |
| |
| |
| — |
| |
| — |
| |
| | |||||||
Commercial |
| — |
| — |
| — |
| — |
| — |
| — |
| — | |||||||
Consumer |
| — |
| — |
| — |
| — |
| — |
| — |
| — | |||||||
Total Impaired Loans | $ | | $ | | $ | — | $ | | $ | — | $ | | $ | | |||||||
December 31, 2021 | |||||||||||||||||||||
Recorded | Recorded | ||||||||||||||||||||
Unpaid | Investment | Investment | Total | Average | Interest | ||||||||||||||||
Principal | with | with | Recorded | Related | Recorded | Income | |||||||||||||||
(Dollars in thousands) |
| Balance |
| No Allowance |
| Allowance |
| Investment |
| Allowance |
| Investment(1) |
| Recognized(1) | |||||||
Real Estate Loans | |||||||||||||||||||||
Commercial | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||
Construction and land development |
| — |
| — |
| — |
| — |
| — |
| — |
| — | |||||||
Residential |
| |
| |
| — |
| |
| — |
| |
| | |||||||
Commercial |
| — |
| — |
| — |
| — |
| — |
| — |
| — | |||||||
Consumer |
| — |
| — |
| — |
| — |
| — |
| — |
| — | |||||||
Total Impaired Loans | $ | | $ | | $ | — | $ | | $ | — | $ | | $ | | |||||||
| (1) | Amounts shown for the twelve month period ended December 31, 2021. |
16
The following tables present a summary of past due and non-accrual loans by class as of June 30, 2022 and December 31, 2021.
| June 30, 2022 | |||||||||||||||||||||||
30-59 Days | 60-89 Days | 90 Days or | 90 Days or More | |||||||||||||||||||||
Past | Past | More | Total Past | Total | Past Due and | Nonaccrual | ||||||||||||||||||
(Dollars in thousands) |
| Due |
| Due |
| Past Due |
| Due |
| Current |
| Loans |
| Still Accruing |
| Loans | ||||||||
Real Estate Loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Commercial | $ | — | $ | — | $ | — | $ | — | $ | |
| $ | | $ | — | $ | — | |||||||
Construction and land development |
| — |
| — |
| — |
| — |
| |
| |
| — |
| — | ||||||||
Residential |
| — |
| — |
| — |
| — |
| |
| |
| — |
| — | ||||||||
Commercial |
| — |
| — |
| — |
| — |
| |
| |
| — |
| — | ||||||||
Consumer |
| — |
| — |
| — |
| — |
| |
| |
| — |
| — | ||||||||
Total Loans | $ | — | $ | — | $ | — | $ | — | $ | | $ | | $ | — | $ | — | ||||||||
| December 31, 2021 | |||||||||||||||||||||||
30-59 Days | 60-89 Days | 90 Days or | 90 Days or More | |||||||||||||||||||||
Past | Past | More | Total Past | Total | Past Due and | Nonaccrual | ||||||||||||||||||
(Dollars in thousands) | Due |
| Due |
| Past Due |
| Due |
| Current |
| Loans |
| Still Accruing |
| Loans | |||||||||
Real Estate Loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Commercial | $ | — | $ | — | $ | — | $ | — | $ | | $ | | $ | — | $ | — | ||||||||
Construction and land development |
| — |
| — |
| — |
| — |
| |
| |
| — |
| — | ||||||||
Residential |
| — |
| — |
| — |
| — |
| |
| |
| — |
| — | ||||||||
Commercial |
| — |
| — |
| — |
| — |
| |
| |
| — |
| — | ||||||||
Consumer |
| — |
| — |
| — |
| — |
| |
| |
| — |
| — | ||||||||
Total Loans | $ | — | $ | — | $ | — | $ | — | $ | | $ | | $ | — | $ | — | ||||||||
The following tables present a summary of credit quality information for loans by class as of June 30, 2022 and December 31, 2021.
| June 30, 2022 | |||||||||||||||||
Special | Total | |||||||||||||||||
(Dollars in thousands) |
| Pass |
| Mention |
| Substandard |
| Doubtful |
| Loss |
| Loans | ||||||
Real Estate Loans |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Commercial | $ | | $ | | $ | — | $ | — | $ | — | $ | | ||||||
Construction and land development |
| |
| — | — |
| — |
| — |
| | |||||||
Residential |
| |
| — |
| |
| — |
| — |
| | ||||||
Commercial |
| |
| — |
| — |
| — |
| — |
| | ||||||
Consumer |
| |
| — |
| — |
| — |
| — |
| | ||||||
Total Loans | $ | | $ | | $ | | $ | — | $ | — | $ | | ||||||
| December 31, 2021 | |||||||||||||||||
Special | Total | |||||||||||||||||
(Dollars in thousands) |
| Pass |
| Mention |
| Substandard |
| Doubtful |
| Loss |
| Loans | ||||||
Real Estate Loans |
|
|
|
|
|
| ||||||||||||
Commercial | $ | | $ | | $ | | $ | — | $ | — | $ | | ||||||
Construction and land development |
| |
| — |
| |
| — |
| — |
| | ||||||
Residential |
| |
| — |
| |
| — |
| — |
| | ||||||
Commercial |
| |
| — |
| — |
| — |
| — |
| | ||||||
Consumer |
| |
| — |
| — |
| — |
| — |
| | ||||||
Total Loans | $ | | $ | | $ | | $ | — | $ | — | $ | | ||||||
The Company assesses credit quality based on internal risk rating of loans. Internal risk rating definitions are:
Pass: These include satisfactory loans that have acceptable levels of risk.
17
Special Mention: Loans classified as special mention have a potential weakness that requires close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the Company’s credit position at some future date. These credits do not expose the Company to sufficient risk to warrant further adverse classification.
Substandard: A substandard asset is inadequately protected by the current worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified as substandard must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.
Doubtful: Loans classified as doubtful have all the weaknesses inherent in a substandard asset with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.
Loss: Loans classified as loss are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be received in the future.
As part of the Company’s loan modification program to borrowers experiencing financial difficulty, the Company may provide concessions to minimize the economic loss and improve long-term loan performance and collectability.
The Company had a recorded investment in TDRs of $
As of June 30, 2022 and 2021, all loans in TDR status were in compliance with their modified terms. There were
All TDRs are considered impaired and impairment is determined on a loan-by-loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent. As of June 30, 2022 and December 31, 2021,
Note 5— Deposits and Borrowings
The following tables show the components of the Company’s funding sources.
(Dollars in thousands) |
| June 30, 2022 |
| December 31, 2021 | ||
Deposits: |
|
|
|
| ||
Non-interest bearing demand deposits(1) | $ | | $ | | ||
Interest-bearing demand deposits(1) |
| |
| | ||
Savings deposits |
| |
| | ||
Time deposits(2) |
| |
| | ||
Total Deposits | $ | | $ | | ||
|
|
|
| June 30, 2022 |
| December 31, 2021 | |||||
(Dollars in thousands) | Stated Interest Rates | Weighted-Average Interest Rate | Carrying Value | Carrying Value | |||||||
Long-term Debt: |
|
|
|
|
|
|
|
| |||
Subordinated debt |
| % | | % | $ | | $ | | |||
FHLB advances(3) |
|
| — |
| | ||||||
Total Long-term Debt: |
| $ | | $ | | ||||||
(1) Overdraft demand deposits reclassified to loans totaled $
18
| (2) | The aggregate amount of certificates of deposit with a minimum denomination of $ |
| (3) | The Company’s Federal Home Loan Bank (“FHLB”) advances were called by the FHLB during the second quarter of 2022. |
The Company obtains certain deposits through the efforts of third-party brokers. Brokered deposits totaled $
At June 30, 2022, there were
The Company completed a private placement of a $
The Company from time to time uses FHLB advances as a source of funding. These FHLB advances are secured by a blanket floating lien on all real estate mortgage loans secured by 1-to-4 family residential, multi-family and commercial real estate properties. At June 30, 2022, the Company did not have any outstanding FHLB advances. Available borrowing capacity based on collateral value amounted to approximately $
The Company also has federal funds lines of credit with correspondent banks available for overnight borrowing of $
The Company also has the capacity to borrow up to $
The following table shows the carrying amount of the Company’s time deposits by contractual maturity as of June 30, 2022.
(Dollars in thousands) |
| June 30, 2022 | |
2022 | $ | | |
2023 |
| | |
2024 |
| | |
2025 |
| | |
2026 |
| | |
Thereafter |
| | |
Total | $ | | |
19
Note 6— Income Taxes
The Company files income tax returns in the U.S. federal jurisdiction, the Commonwealth of Virginia, the District of Columbia, the State of Maryland, the State of North Carolina and the State of West Virginia. With few exceptions, the Company is no longer subject to U.S. federal, state and local income tax examinations by tax authorities for years prior to 2018.
The following table summarizes the Company’s provision for income taxes charged to operations for the six months ended June 30, 2022 and June 30, 2021, respectively.
(Dollars in thousands) |
| June 30, 2022 |
| June 30, 2021 | ||
Current tax expense | $ | | $ | | ||
Deferred tax expense (benefit) |
| |
| ( | ||
Total Income Tax Expense | $ | | $ | | ||
The following table presents the factors driving the difference between the amount of income tax determined by applying the statutory federal income tax rate to income before income taxes and the amount of income tax expense reflected in the Consolidated Statements of Income for the six months ended June 30, 2022 and June 30, 2021, respectively.
(Dollars in thousands) |
| June 30, 2022 |
| June 30, 2021 | ||
Computed “expected” tax expense | $ | | $ | | ||
Increase (decrease) in income taxes resulting from: |
|
|
|
| ||
Bank-owned life insurance |
| ( |
| ( | ||
Tax-exempt interest income |
| ( |
| ( | ||
State income taxes, net of federal benefit |
| |
| | ||
Excess tax benefit on share-based compensation |
| ( |
| ( | ||
Other, net |
| ( |
| | ||
Total | $ | | $ | | ||
Note 7— Commitments and Contingencies
The Company is party to financial instruments with off balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit and financial guarantees. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. The contract or notional amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit and financial guarantees written is represented by the contractual notional amount of those instruments.
The Company uses the same credit policies in making commitments and conditional obligations as it does for on balance sheet instruments. The Company does not anticipate any material losses as a result of these transactions.
The following table summarizes the contract or notional amount of the Company’s exposure to off-balance sheet risk as of June 30, 2022 and December 31, 2021.
(Dollars in thousands) |
| June 30, 2022 |
| December 31, 2021 | ||
Commitments to extend credit | $ | | $ | | ||
Standby letters of credit | $ | | $ | | ||
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary upon extension of credit, is based on management’s credit evaluation of the counterparty. Collateral held
20
varies but may include accounts receivable, inventory, property and equipment, income-producing commercial properties, and other real estate properties.
Unfunded commitments under lines of credit are commitments for possible future extensions of credit to existing customers. Those lines of credit may not be drawn upon to the total extent to which the Company is committed.
Standby letters of credit written are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.
Note 8— Fair Value Measurements
Determination of Fair Value
The Company determines the fair values of its financial instruments based on the fair value hierarchy established by ASC Topic 820 – Fair Value Measurement, which defines fair value as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market and in an orderly transaction between market participants on the measurement date.
The fair value measurements and disclosures topic specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions.
Fair Value Hierarchy
In accordance with this guidance, the Company groups its assets and liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.
Level 1 - Valuation is based on quoted prices in active markets for identical assets and liabilities that the reporting entity has the ability to access at the measurement date. Level 1 assets and liabilities generally include debt and equity securities that are traded in an active exchange market. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.
Level 2 - Valuation is based on inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. The valuation may be based on quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability.
Level 3 - Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which determination of fair value requires significant management judgment or estimation.
A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
Assets Measured at Fair Value on a Recurring Basis
In accordance with ASC Topic 820, the following describes the valuation techniques used by the Company to measure certain financial assets recorded at fair value on a recurring basis in the financial statements.
21
Securities Available-for-sale and Equity Securities
Securities available-for-sale and equity securities with readily determinable fair values are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when available (Level 1). If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data (Level 2). If the inputs used to provide the evaluation for certain securities are unobservable and/or there is little, if any, market activity then the security would fall to the lowest level of the hierarchy (Level 3).
The Company’s investment portfolio is primarily valued using fair value measurements that are considered to be Level 2. The Company has contracted with a third party portfolio accounting service vendor for valuation of its portfolio of debt securities. The vendor’s primary source for security valuation is ICE Data Services, which evaluates securities based on market data. ICE Data Services utilizes evaluated pricing models that vary by asset class and include available trade, bid, and other market information. Generally, the methodology includes broker quotes, proprietary models, vast descriptive terms and conditions databases, as well as extensive quality control programs.
The vendor utilizes proprietary valuation matrices for valuing all municipals securities. The initial curves for determining the price, movement, and yield relationships within the municipal matrices are derived from industry benchmark curves or sourced from a municipal trading desk. The securities are further broken down according to issuer, credit support, state of issuance and rating to incorporate additional spreads to the industry benchmark curves.
22
The following tables summarize the fair value of assets measured at fair value on a recurring basis as of June 30, 2022 and December 31, 2021.
Fair Value Measurements at June 30, 2022 Using | ||||||||||||
Quoted Prices in | Significant | |||||||||||
Active Markets for | Significant Other | Unobservable | ||||||||||
Balance as of | Identical Assets | Observable Inputs | Inputs | |||||||||
(Dollars in thousands) |
| June 30, 2022 |
| (Level 1) |
| (Level 2) |
| (Level 3) | ||||
Assets: |
|
|
|
|
|
|
|
| ||||
Securities available-for-sale: |
|
|
|
|
|
|
|
| ||||
U.S. Treasuries | $ | | $ | — | $ | | $ | — | ||||
U.S. government and federal agencies |
| |
| — |
| |
| — | ||||
Corporate bonds |
| |
| — |
| |
| — | ||||
Collateralized mortgage obligations |
| |
| — |
| |
| — | ||||
Tax-exempt municipal |
| |
| — |
| |
| — | ||||
Taxable municipal |
| |
| — |
| |
| — | ||||
Mortgage-backed |
| |
| — |
| |
| — | ||||
Equity securities, at fair value |
| |
| |
| — |
| — | ||||
Total assets at fair value | $ | | $ | | $ | | $ | — | ||||
Fair Value Measurements at December 31, 2021 Using | ||||||||||||
| Quoted Prices in |
|
| Significant | ||||||||
Active Markets for | Significant Other | Unobservable | ||||||||||
Balance as of | Identical Assets | Observable Inputs | Inputs | |||||||||
(Dollars in thousands) |
| December 31, 2021 | (Level 1) | (Level 2) | (Level 3) | |||||||
Assets: |
|
|
|
| ||||||||
Securities available-for-sale: |
|
|
|
|
|
|
| |||||
U.S. Treasuries | $ | | $ | — | $ | | $ | — | ||||
U.S. government and federal agencies | |
| — |
| |
| — | |||||
Corporate bonds |
| |
| — |
| |
| — | ||||
Collateralized mortgage obligations |
| |
| — |
| |
| — | ||||
Tax-exempt municipal |
| |
| — |
| |
| — | ||||
Taxable municipal |
| |
| — |
| |
| — | ||||
Mortgage-backed |
| |
| — |
| |
| — | ||||
Equity securities, at fair value |
| |
| |
| — |
| — | ||||
Total assets at fair value | $ | | $ | | $ | | $ | — | ||||
Assets Measured at Fair Value on a Nonrecurring Basis
Under certain circumstances, the Company makes adjustments to fair value for assets and liabilities although they are not measured at fair value on an ongoing basis. The following describes the valuation techniques used by the Company to measure certain assets recorded at fair value on a nonrecurring basis in the financial statements:
Impaired Loans
Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreements will not be collected when due. The measurement of loss associated with impaired loans can be based on either the observable market price of the loan or the fair value of the collateral. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The vast majority of the Company’s collateral is real estate. The value of real estate collateral is determined utilizing a market valuation approach based on an appraisal, of one year or less, conducted by an independent, licensed appraiser using observable market data (Level 2). However, if the collateral is a house or building in the process of construction or if an appraisal of the property is more than one-year-old and not solely based on observable market comparables or management determines the fair value of the collateral is further impaired below the appraised value, then a Level 3 valuation is considered to measure the fair value. The value of business equipment is based upon an outside appraisal, of one year or less, if deemed significant, or the net book value on the applicable business’s financial statements if not
23
considered significant using observable market data. Likewise, values for inventory and accounts receivables collateral are based on financial statement balances or aging reports (Level 3). Any fair value adjustments are recorded in the period incurred as provision for loan losses on the Consolidated Statements of Income. The Company had
Other Real Estate Owned
OREO is carried at the lower of cost or fair value less selling costs. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value using observable market data, the Company records the property as Level 2. When an appraised value using observable market data is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the property as Level 3 valuation. Any fair value adjustments are recorded in the period incurred and expensed against current earnings. The Company had
The following tables present the carrying value and estimated fair value, including the level within the fair value hierarchy, of the Company’s financial instruments as of June 30, 2022 and December 31, 2021.
| Fair Value Measurements at June 30, 2022 Using | ||||||||||||||
|
| Quoted Prices in |
|
|
| ||||||||||
Active Markets | Significant | ||||||||||||||
Carrying Value | for Identical | Significant Other | Unobservable | Fair Value as of | |||||||||||
as of June 30, | Assets | Observable Inputs | Inputs | June 30, | |||||||||||
(Dollars in thousands) | 2022 | (Level 1) | (Level 2) | (Level 3) | 2022 | ||||||||||
Assets: |
|
|
|
|
|
|
|
|
| ||||||
Cash and cash equivalents | $ | | $ | | $ | — | $ | — | $ | | |||||
Securities: |
|
|
|
|
|
|
|
|
|
| |||||
Available-for-sale |
| |
| — |
| |
| — |
| | |||||
Held-to-maturity |
| |
| — |
| |
| — |
| | |||||
Equity securities, at fair value |
| |
| |
| — |
| — |
| | |||||
Restricted securities, at cost | | — | | — | | ||||||||||
Loans, net of unearned income |
| |
| — |
| — |
| |
| | |||||
Bank owned life insurance |
| |
| — |
| |
| — |
| | |||||
Accrued interest receivable |
| |
| — |
| |
| — |
| | |||||
Liabilities: |
|
|
|
|
|
|
|
|
|
| |||||
Deposits | $ | | $ | — | $ | | $ | — | $ | | |||||
Subordinated debt |
| |
| — |
| — |
| |
| | |||||
Accrued interest payable |
| |
| — |
| |
| — |
| | |||||
24
| Fair Value Measurements at December 31, 2021 Using | ||||||||||||||
|
| Quoted Prices in |
|
|
| ||||||||||
Active Markets | Significant | ||||||||||||||
Carrying Value | for Identical | Significant Other | Unobservable | Fair Value as of | |||||||||||
as of December | Assets | Observable Inputs | Inputs | December 31, | |||||||||||
(Dollars in thousands) | 31, 2021 | (Level 1) | (Level 2) | (Level 3) | 2021 | ||||||||||
Assets: |
|
|
|
|
|
|
|
|
| ||||||
Cash and cash equivalents | $ | | $ | | $ | — | $ | — | $ | | |||||
Securities: |
|
|
|
|
|
|
|
|
|
| |||||
Available-for-sale |
| |
| — |
| |
| — |
| | |||||
Held-to-maturity | | — |
| |
| — |
| | |||||||
Equity securities, at fair value |
| |
| |
| — |
| — |
| | |||||
Restricted securities, at cost | | — | | — | | ||||||||||
Loans, net of unearned income |
| |
| — |
| — |
| |
| | |||||
Bank owned life insurance |
| |
| — |
| |
| — |
| | |||||
Accrued interest receivable |
| |
| — |
| |
| — |
| | |||||
Liabilities: |
|
|
|
|
|
|
|
|
|
| |||||
Deposits | $ | | $ | — | $ | | $ | — | $ | | |||||
FHLB advances |
| |
| — |
| |
| — |
| | |||||
Subordinated debt |
| |
| — |
| — |
| |
| | |||||
Accrued interest payable |
| |
| — |
| |
| — |
| | |||||
Note 9— Earnings per Common Share
Earnings per common share is calculated in accordance with ASC 260 - Earnings Per Share, which provides that unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method.
Under the two-class method, basic earnings per common share is computed by dividing net earnings allocated to common stock by the weighted-average number of voting common shares outstanding during the applicable period, excluding outstanding participating securities. Diluted earnings per common share is computed using the weighted-average number of shares determined for the basic earnings per common share computation plus the dilutive effect of stock compensation using the treasury stock method.
25
The following table summarizes the computation of earnings per share for the three and six months ended June 30, 2022 and June 30, 2021.
Three months ended | Six months ended | ||||||||||||
June 30, | June 30, | ||||||||||||
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| |||||
Earnings per common share - basic: |
|
|
|
|
|
|
| ||||||
Income available to common shareholders (in thousands): |
|
|
|
|
|
|
| ||||||
Net income | $ | | $ | | $ | | $ | | |||||
Less: Income attributable to unvested restricted stock awards |
| ( |
| ( |
| ( |
| ( | |||||
Net income available to common shareholders | $ | | $ | | $ | | $ | | |||||
Weighted average shares outstanding: |
|
|
|
|
|
|
|
| |||||
Common shares outstanding, including unvested restricted stock |
| |
| |
| |
| | |||||
Less: Unvested restricted stock |
| ( |
| ( |
| ( |
| ( | |||||
Weighted-average common shares outstanding - basic |
| |
| |
| |
| | |||||
Earnings per common share - basic | $ | | $ | | $ | | $ | | |||||
Earnings per common share - diluted: |
|
|
|
|
|
|
|
| |||||
Income available to common shareholders (in thousands): |
|
|
|
|
|
|
|
| |||||
Net income | $ | | $ | | $ | | $ | | |||||
Less: Income attributable to unvested restricted stock awards |
| ( |
| ( |
| ( |
| ( | |||||
Net income available to common shareholders | $ | | $ | | $ | | $ | | |||||
Weighted average shares outstanding: |
|
|
|
|
|
|
|
| |||||
Common shares outstanding, including unvested restricted stock |
| |
| |
| |
| | |||||
Less: Unvested restricted stock |
| ( |
| ( |
| ( |
| ( | |||||
Plus: Effect of dilutive options |
| |
| |
| |
| | |||||
Weighted-average common shares outstanding - diluted |
| |
| |
| |
| | |||||
Earnings per common share - diluted | $ | | $ | | $ | | $ | | |||||
Outstanding options to purchase common stock were considered in the computation of diluted earnings per share for the periods presented. All stock options outstanding as of June 30, 2022 were included in computing diluted earnings per share for the three and six month periods ended June 30, 2022, as
Note 10— Stock Based Compensation Plan
The Company’s share-based compensation plan, approved by stockholders and effective April 28, 2015 (the “2015 Plan”), provides for the grant of share-based awards in the form of incentive stock options, non-incentive stock options, restricted stock and restricted stock units to directors and employees. The Company has reserved
The Company’s previous share-based compensation plan, the 2006 Stock Option Plan (the “2006 Plan”), provided for the grant of share-based awards in the form of incentive stock options and non-incentive stock options to directors and employees. As amended, the 2006 Plan provided for awards of up to
26
To date, options granted under the 2015 Plan typically vest over
The table below provides a summary of the stock options activity for the six months ended June 30, 2022.
June 30, 2022 | ||||||||
Weighted Average | Aggregate Intrinsic | |||||||
| Shares |
| Exercise Price |
| Value | |||
Outstanding at January 1, 2022 |
| | $ | |
|
| ||
Granted |
| — |
| — |
|
| ||
Exercised |
| ( |
| |
|
| ||
Forfeited or expired |
| ( |
| |
|
| ||
Outstanding at June 30, 2022 |
| |
| | $ | | ||
Exercisable at June 30, 2022 |
| | $ | | $ | | ||
The aggregate intrinsic value of stock options in the table above represents the total amount by which the current market value of the underlying stock exceeds the exercise price of the option that would have been received by the Company had all option holders exercised their options on June 30, 2022. The intrinsic value of options exercised was $
The table below provides a summary of the stock options outstanding and exercisable as of June 30, 2022.
| June 30, 2022 | |||||||
Options Outstanding | Options Exercisable | |||||||
Weighted Average | Weighted Average | |||||||
Remaining | Remaining | |||||||
Number | Contractual Life | Number | Contractual Life | |||||
Exercise Prices |
| Outstanding |
| in Years |
| Exercisable |
| in Years |
$ |
| |
|
| |
| ||
$ |
| |
|
| |
| ||
$ |
| |
|
| |
| ||
$ |
| |
|
| |
| ||
Total |
| |
|
| |
| ||
There were
Share-based compensation expense applicable to the Company’s share-based compensation plans for stock options was $
The Company does
The table below provides a summary of the restricted stock awards granted under the 2015 plan for the six months ended June 30, 2022.
June 30, 2022 | |||||
Weighted Average | |||||
| Shares |
| Grant Date Fair Value | ||
Nonvested at January 1, 2022 |
| | $ | | |
Granted |
| |
| | |
Vested |
| ( |
| | |
Forfeited |
| ( |
| | |
Nonvested at June 30, 2022 |
| | | ||
27
Compensation expense for restricted stock grants is recognized over the vesting period of the awards based on the fair value of the Company’s voting common stock at issue date. The fair value of the stock was determined using the closing stock price on the day of grant. The restricted stock grants vest over to
Share-based compensation expense applicable to the Company’s share-based compensation plans for restricted stock grants was $
Share-based compensation expense applicable to the Company’s share-based compensation plans for restricted stock grants was $
Unrecognized share-based compensation expense related to nonvested restricted stock grants amounted to $
Note 11— Regulatory Capital
The Company is a bank holding company with less than $3 billion in assets and does not (i) have significant off balance sheet exposure, (ii) engage in significant non-banking activities, or (iii) have a material amount of securities registered under the Securities Exchange Act of 1934, as amended. As a result, the Company qualifies as a small bank holding company under the Federal Reserve’s Small Bank Holding Company Policy Statement and is currently not subject to consolidated regulatory capital requirements.
The Bank is subject to capital adequacy standards adopted by the Federal Reserve, including the capital rules that implemented the Basel III regulatory capital reforms developed by the Basel Committee on Banking Supervision. Failure to meet minimum capital requirements can initiate certain mandatory – possibly additional discretionary – actions by regulators that, if undertaken, could have a direct material effect on the financial statements. Under capital adequacy guidelines, the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Management believes that the Bank met all capital adequacy requirements to which it was subject as of June 30, 2022 and December 31, 2021.
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital to risk-weighted assets, common equity Tier 1 to risk-weighted assets, and Tier 1 capital to average assets.
In addition to the minimum regulatory capital required for capital adequacy purposes, the Bank is required to maintain a minimum capital conservation buffer above those minimums in the form of common equity. The capital conservation buffer, which was phased in ratably over a four year period beginning January 1, 2016, is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of common equity Tier 1 to risk-weighted assets above the minimum but below the conservation buffer will face constraints on dividends, equity repurchases, and discretionary compensation paid to certain officers, based on the amount of the shortfall. The capital conservation buffer was
As of June 30, 2022, the most recent notification from the Federal Reserve Bank of Richmond categorized the Bank as “well capitalized” under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the institution must maintain minimum total risk-based, common equity Tier 1, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table below. There are no conditions or events since the notification that management believes have changed the Bank’s category.
28
The table below provides a summary of the Company’s capital ratios as of June 30, 2022 and December 31, 2021.
Minimum To Be Well Capitalized |
| |||||||||||||||
Actual | Minimum Capital Requirement(1) | Under Prompt Corrective Action |
| |||||||||||||
(Dollars in thousands) |
| Amount |
| Ratio |
| Amount |
| Ratio |
| Amount |
| Ratio |
| |||
As of June 30, 2022 |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total capital (to risk weighted assets) | $ | |
| | % | $ | |
| | % | $ | |
| | % | |
Tier 1 capital (to risk weighted assets) |
| |
| | % |
| |
| | % |
| |
| | % | |
Common equity tier 1 capital (to risk weighted assets) |
| |
| | % |
| |
| | % |
| |
| | % | |
Tier 1 capital (to average assets) |
| |
| | % |
| |
| | % |
| |
| | % | |
As of December 31, 2021 |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total capital (to risk weighted assets) | $ | |
| | % | $ | |
| | % | $ | |
| | % | |
Tier 1 capital (to risk weighted assets) |
| |
| | % |
| |
| | % |
| |
| | % | |
Common equity tier 1 capital (to risk weighted assets) |
| |
| | % |
| |
| | % |
| |
| | % | |
Tier 1 capital (to average assets) |
| |
| | % |
| |
| | % |
| |
| | % | |
(1)Including Capital Conservation Buffer
Note 12— Revenue
Certain of the Company’s non-interest revenue streams are derived from short-term contacts associated with services provided to deposit account holders as well as other ancillary services, which are accounted for in accordance with ASC 606 – Revenue Recognition. For most of these revenue streams, the duration of the contract does not extend beyond the services performed. Due to the short duration of most customer contracts that generate non-interest income, no significant judgments must be made in the determination of the amount and timing of revenue recognized.
The following table shows the components of non-interest income for the three and six months ended June 30, 2022 and June 30, 2021.
Three months ended | Six months ended | |||||||||||
June 30, | June 30, | |||||||||||
(Dollars in thousands) |
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Service charges on deposit accounts (1) |
|
|
|
|
|
|
| |||||
Overdrawn account fees | $ | | $ | | $ | | $ | | ||||
Account service fees |
| |
| |
| |
| | ||||
Other service charges and fees (1) |
|
|
|
|
|
|
|
| ||||
Interchange income |
| |
| |
| |
| | ||||
Other charges and fees |
| |
| |
| |
| | ||||
Bank owned life insurance |
| |
| |
| |
| | ||||
Gains on securities |
| — |
| — |
| — |
| | ||||
Net gains (losses) on premises and equipment (1) |
| — |
| — |
| ( |
| — | ||||
Insurance commissions (1) |
| |
| |
| |
| | ||||
Other operating income (loss) (2) |
| ( |
| |
| ( |
| | ||||
Total non-interest income | $ | | $ | | $ | | $ | | ||||
(1) | Income within the scope of ASC 606 – Revenue Recognition. |
(2) | Includes other operating income (loss) within the scope of ASC 606 – Revenue Recognition amounting to $ |
29
Recognition amounting to $
A description of the Company’s revenue streams accounted for under ASC 606 follows:
Service charges on deposit accounts
Service charges on deposit accounts consist of overdrawn account fees and account service fees. Overdrawn account fees are recognized at the point in time that the overdraft occurs. Account service fees consist primarily of account analysis and other maintenance fees and are earned over the course of a month, representing the period over which the Company satisfies the performance obligation. Payment for service charges on deposit accounts is received immediately or in the following month through a direct charge to customers’ accounts.
Other service charges and fees
Other service charges and fees are primarily comprised of interchange income and other charges and fees. Interchange income is earned whenever the Company’s debit and credit cards are processed through card payment networks such as Visa. Other charges and fees include revenue from processing wire transfers, cashier’s checks, and other transaction based services. The Company’s performance obligation for these charges and fees are largely satisfied, and related revenue recognized, when the services are rendered or upon completion. Payment is typically received immediately or in the following month.
Net gains (losses) on premises and equipment
The Company records a gain or loss on the disposition of premises and equipment when control of the property transfers or is involuntarily converted to a monetary asset (e.g., insurance proceeds). This income is reflected in other operating income on the Company’s Consolidated Statements of Income.
Insurance commissions
The Company performs the function of an insurance intermediary by introducing the policyholder and insurer and is compensated in the form of a commission for placement of an insurance policy based on a percentage of premiums issued and maintained during the period. Revenue is recognized when received.
Note 13— Other Operating Expenses
The following table shows the components of other operating expenses for the three and six months ended June 30, 2022 and June 30, 2021.
Three months ended | Six months ended | |||||||||||
June 30, | June 30, | |||||||||||
(Dollars in thousands) |
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Advertising expense | $ | | $ | | $ | | $ | | ||||
Data processing |
| |
| |
| |
| | ||||
FDIC insurance |
| |
| |
| |
| | ||||
Professional fees |
| |
| |
| |
| | ||||
State franchise tax |
| |
| |
| |
| | ||||
Director costs |
| |
| |
| |
| | ||||
Other operating expenses |
| |
| |
| |
| | ||||
Total other operating expenses | $ | | $ | | $ | | $ | | ||||
30
Note 14— Accumulated Other Comprehensive Income (Loss)
The following table presents the changes in accumulated other comprehensive income (loss), by category, net of tax for the six months ended June 30, 2022 and June 30, 2021.
June 30, 2022 | |||||||||
Unrealized Gains on | |||||||||
Securities Transferred from | |||||||||
Unrealized Gain (Loss) on | Available-for-sale to | Accumulated Other | |||||||
(Dollars in thousands) |
| Available-for-sale Securities |
| Held-to-maturity |
| Comprehensive Income (Loss) | |||
Beginning balance, January 1, 2022 | $ | ( | $ | | $ | ( | |||
Net change during the period |
| ( |
| ( |
| ( | |||
Ending balance, June 30, 2022 | $ | ( | $ | | $ | ( | |||
| June 30, 2021 | ||||||||
Unrealized Gains on | |||||||||
Securities Transferred from | |||||||||
Unrealized Gain (Loss) on | Available-for-sale to | Accumulated Other | |||||||
(Dollars in thousands) |
| Available-for-sale Securities |
| Held-to-maturity |
| Comprehensive Income (Loss) | |||
Beginning balance, January 1, 2021 | $ | | $ | — | $ | | |||
Net change during the period |
| ( |
| — |
| ( | |||
Ending balance, June 30, 2021 | $ | | $ | — | $ | | |||
The Company did not have any items reclassified out of accumulated other comprehensive income (loss) to net income during the six months ended June 30, 2022 or the three months ended June 30, 2021. Items reclassified out of accumulated other comprehensive income (loss) to net income during the six months ended June 30, 2021 consisted of a net gain on the call of a security classified as available-for-sale. The gain on this transaction totaled $
31
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of the consolidated financial condition and results of operations of the Company and its subsidiary should be read in conjunction with the consolidated financial statements and related notes presented in Item 1, Financial Statements, of this Form 10-Q. Historical results of operations and the percentage relationships among any amounts included, and any trends that may appear, may not indicate results of operations or trends in operations for any future periods.
Cautionary Note on Forward-Looking Statements
In addition to historical information, this Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that are based on certain assumptions and describe future plans, strategies and expectations of the Company. These forward-looking statements are generally identified by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project,” “will,” “should,” “may,” “view,” “opportunity,” “potential,” or similar expressions. Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. These forward-looking statements are based on our beliefs and assumptions and on the information available to us at the time that these disclosures were prepared, and involve known and unknown risks, uncertainties and other factors that may cause our actual results to differ materially from any future results expressed or implied by such forward-looking statements. Although we believe the expectations reflected in such forward-looking statements are reasonable, we can give no assurance such expectations will prove to have been correct. Should any known or unknown risks and uncertainties develop into actual events, those developments could have material adverse effects on our business, financial condition and results of operations. Factors that could have a material adverse effect on the operations of the Company and its subsidiary include, but are not limited to, the following:
| ● | the impacts of the COVID-19 pandemic and the associated efforts to limit the spread of the virus; |
| ● | deteriorating economic conditions, either nationally or in our market area, including higher unemployment and lower real estate values; |
| ● | the concentration of our business in the Washington, D.C. metropolitan area and the effect of changes in the economic, political and environmental conditions on this market; |
| ● | inflation and changes in interest rates that may reduce our margins or reduce the fair value of financial instruments; |
| ● | adverse changes in the securities markets; |
| ● | changes in the financial condition or future prospects of issuers of securities that we own; |
| ● | changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory structure and in regulatory fees and capital requirements; |
| ● | changes in the monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Board of Governors of the Federal Reserve System (the “Federal Reserve”); |
| ● | geopolitical conditions, including acts or threats of terrorism and/or military conflicts, or actions taken by the U.S. or other governments in response to acts or threats of terrorism and/or military conflicts, negatively impacting business and economic conditions in the U.S. and abroad; |
| ● | results of examination of us by our regulators, including the possibility that our regulators may require us to increase our allowance for loan losses or to write-down assets or take similar actions; |
| ● | changes in accounting policies and practices; |
| ● | our ability to successfully capitalize on growth opportunities; |
32
| ● | additional risks related to new lines of business, products, product enhancements or services; |
| ● | increased competition with other financial institutions and fintech companies; |
| ● | changes in consumer spending, borrowing and savings habits; |
| ● | our ability to retain key employees; |
| ● | changes in our financial condition or results of operations that reduce capital; |
| ● | adequacy of our allowance for loan losses; |
| ● | deterioration of our asset quality; |
| ● | future performance of our loan portfolio with respect to recently originated loans; |
| ● | the level of prepayments on loans and mortgage-backed securities; |
| ● | the effectiveness of our internal controls over financial reporting and our ability to remediate any future material weakness in our internal controls over financial reporting; |
| ● | liquidity, interest rate and operational risks associated with our business; |
| ● | implications of our status as a smaller reporting company and as an emerging growth company; and |
| ● | other factors discussed in Item 1A. Risk Factors in the registration statement on Form 10 filed with the Securities and Exchange Commission. |
These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. We do not undertake, and specifically disclaim any obligation, to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. All written or oral forward-looking statements attributable to us are expressly qualified in their entirety by this cautionary note.
Overview
We are a bank holding company headquartered in Reston, Virginia primarily serving the Washington, D.C. metropolitan area. The material business operations of our organization are performed through the Bank. As a result, the discussion and analysis within this section primarily relate to activities conducted at the Bank.
As with most community banks, the Bank derives a significant portion of its income from interest received on loans and investments. The Bank’s primary source of funding is deposits, both interest-bearing and non-interest-bearing. To account for credit risk inherent in all loans, the Bank maintains an allowance for loan losses to absorb probable losses on existing loans that may become uncollectible. The Bank establishes and maintains this allowance by recording a provision for loan losses against earnings. In addition to net interest income, the Bank also generates income through service charges on deposits, insurance commission income, income from bank owned life insurance, and merchant services fee income. In order to maintain its operations, the Bank incurs various operating expenses which are further described within the “Results of Operations” later in this section.
As of June 30, 2022, the Company had total consolidated assets of $2.32 billion, total loans net of unearned income of $1.69 billion, total deposits of $2.04 billion and total shareholders’ equity of $207.5 million.
33
Critical Accounting Policies and Estimates
The Company’s accounting and reporting policies conform to GAAP, as well as general practices within the banking industry. Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions, and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements may reflect different estimates, assumptions, and judgments. Certain policies inherently rely more extensively on the use of estimates, assumptions, and judgments and as such may have a greater possibility of producing results that could be materially different than originally reported.
The following is a discussion of the critical accounting policy and significant estimate that require us to make complex and subjective judgments. Additional information about this policy can be found in Note 1 of our consolidated financial statements included in Item 13 of our Registration Statement on Form 10.
Allowance for Loan Losses
The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged off when management believes the collectability of a loan balance is unlikely, which reduces the allowance. Loans are generally written down to the estimated net realizable value of the underlying collateral when the loan is 180 days past due. Subsequent recoveries, if any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans by segment in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
The allowance consists of specific, general and unallocated components. The specific component relates to loans that are classified as impaired. For such loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers nonimpaired loans and is based on historical loss experience adjusted for qualitative factors. Qualitative factors used for each segment include an analysis of the levels of and trends in delinquencies, nonaccrual loans, and watch list loans; trends in concentrations, volume and term of loans; effects of any changes in lending policies and practices; experience, ability, and depth of management; national and local economic trends and conditions; and any other factor, as deemed appropriate. An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial, construction, and commercial mortgage loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.
Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer loans for impairment disclosures unless the loan has been modified in a troubled debt restructuring.
34
Selected Financial Data
The following table contains selected historical consolidated financial data as of the dates and for the periods shown. The selected balance sheet data as of June 30, 2022 and 2021 and the selected income statement data for the three and six months ended June 30, 2022 and 2021 have been derived from our consolidated financial statements.
As of or for the Three Months Ended | As of or for the Six Months Ended | |||||||||||||
(Dollars in thousands, except per share data) |
| June 30, 2022 |
| June 30, 2021 |
|
| June 30, 2022 |
| June 30, 2021 |
| ||||
Balance Sheet Data: | ||||||||||||||
Loans, net of unearned income | $ | 1,692,652 | $ | 1,567,112 | $ | 1,692,652 | $ | 1,567,112 | ||||||
Allowance for loan losses |
| (20,031) |
| (19,381) |
| (20,031) |
| (19,381) | ||||||
Total assets |
| 2,316,374 |
| 2,065,895 |
| 2,316,374 |
| 2,065,895 | ||||||
Deposits |
| 2,043,741 |
| 1,815,032 |
| 2,043,741 |
| 1,815,032 | ||||||
Shareholders’ equity |
| 207,530 |
| 195,246 |
| 207,530 |
| 195,246 | ||||||
Asset Quality Data: |
|
|
|
|
|
|
|
| ||||||
Net (charge-offs) recoveries to average total loans, net of unearned income (annualized) |
| 0.00 | % |
| 0.02 | % |
| 0.00 | % |
| 0.01 | % | ||
Allowance for loan losses to nonperforming loans |
| NM |
| NM |
| NM |
| NM | ||||||
Allowance for loan losses to total gross loans net of unearned income(1) |
| 1.18 | % |
| 1.24 | % |
| 1.18 | % |
| 1.24 | % | ||
Non-performing assets to total assets |
| 0.00 | % |
| 0.00 | % |
| 0.00 | % |
| 0.00 | % | ||
Non-performing loans to total loans |
| 0.00 | % |
| 0.00 | % |
| 0.00 | % |
| 0.00 | % | ||
Capital Ratios: |
|
|
|
|
|
|
|
| ||||||
Total risk-based capital ratio (Bank level) |
| 15.1 | % |
| 15.0 | % |
| 15.1 | % |
| 15.0 | % | ||
Tier 1 risk-based capital ratio (Bank level) |
| 14.0 | % |
| 13.8 | % |
| 14.0 | % |
| 13.8 | % | ||
Leverage ratio (Bank level) |
| 11.0 | % |
| 10.7 | % |
| 11.0 | % |
| 10.7 | % | ||
Common equity tier 1 ratio (Bank level) |
| 14.0 | % |
| 13.8 | % |
| 14.0 | % |
| 13.8 | % | ||
Equity-to-total assets ratio |
| 9.0 | % |
| 9.5 | % |
| 9.0 | % |
| 9.5 | % | ||
Income Statement Data: |
|
|
|
|
|
|
|
| ||||||
Interest and dividend income | $ | 19,555 | $ | 18,627 | $ | 39,300 | $ | 37,374 | ||||||
Interest expense |
| 2,247 |
| 2,136 |
| 4,076 |
| 4,601 | ||||||
Net interest income | $ | 17,308 | $ | 16,491 | $ | 35,224 | $ | 32,773 | ||||||
Provision for loan losses |
| — |
| 90 |
| — |
| 2,455 | ||||||
Non-interest income |
| 109 |
| 417 |
| 523 |
| 881 | ||||||
Non-interest expense |
| 7,681 |
| 9,067 |
| 16,467 |
| 16,960 | ||||||
Income before taxes | $ | 9,736 | $ | 7,751 | $ | 19,280 | $ | 14,239 | ||||||
Income tax expense |
| 1,854 |
| 1,672 |
| 3,724 |
| 3,086 | ||||||
Net income | $ | 7,882 | $ | 6,079 | $ | 15,556 | $ | 11,153 | ||||||
Per Share Data and Shares Outstanding: |
|
|
|
|
|
|
|
| ||||||
Weighted average common shares (basic) |
| 13,932,256 |
| 13,572,779 |
| 13,858,057 |
| 13,565,320 | ||||||
Weighted average common shares (diluted) |
| 14,085,160 |
| 13,868,147 |
| 14,042,205 |
| 13,852,936 | ||||||
Common shares outstanding |
| 14,026,589 |
| 13,639,173 |
| 14,026,589 |
| 13,639,173 | ||||||
Earnings per share, basic | $ | 0.56 | $ | 0.45 | $ | 1.11 | $ | 0.82 | ||||||
Earnings per share, diluted | $ | 0.56 | $ | 0.44 | $ | 1.10 | $ | 0.80 | ||||||
Book value | $ | 14.80 | $ | 14.32 | $ | 14.80 | $ | 14.32 | ||||||
Performance Ratios: |
|
|
|
|
|
|
|
| ||||||
Return on average assets (ROAA)(2) |
| 1.41 | % |
| 1.20 | % |
| 1.41 | % |
| 1.13 | % | ||
Return on average equity (ROAE)(3) |
| 15.28 | % |
| 12.64 | % |
| 15.02 | % |
| 11.78 | % | ||
Net interest margin(4) |
| 3.16 | % |
| 3.32 | % |
| 3.25 | % |
| 3.38 | % | ||
Efficiency ratio |
| 44.1 | % |
| 53.6 | % |
| 46.1 | % |
| 50.4 | % | ||
35
NM – Not meaningful
(1) | Excluding PPP loan balances, the allowance for loan losses as a percentage of gross loans, net of unearned income was 1.18% and 1.30% at June 30, 2022 and June 30, 2021, respectively. |
(2) | ROAA is calculated by dividing year-to-date net income annualized by year-to-date average assets. |
(3) | ROAE is calculated by dividing year-to-date net income annualized by year-to-date average equity. |
(4) | Net interest margin for all periods presented are reported on a tax-equivalent basis using the federal statutory tax rate of 21%. |
Results of Operations – Six Months Ended June 30, 2022 and June 30, 2021
Overview
Net income for the six months ended June 30, 2022 increased $4.4 million or 39.5% to $15.6 million compared to $11.2 million for the six months ended June 30, 2021. Diluted earnings per share increased $0.30 or 37.5% to $1.10 for the six months ended June 30, 2022, compared to diluted earnings per share of $0.80 for the six months ended June 30, 2021.
Net interest income for the six months ended June 30, 2022 increased $2.5 million or 7.5% compared to the six months ended June 30, 2021. Balance sheet growth, improved funding composition, and downward repricing of our funding base resulted in an increase in net interest income of 7.5% for the six months ended June 30, 2022 when compared to the six months ended June 30, 2021.
The Company did not record a provision for loan losses for the six months ended June 30, 2022, compared to a $2.5 million provision for the six months ended June 30, 2021. The decrease in the provision for loan losses as compared to the same period in 2021 primarily reflects changes in the Company’s evaluation of environmental factors impacting the Company’s loan portfolio during 2022. During 2021, the environmental or qualitative factor allocations within the allowance for loan losses were adjusted to account for the risks to certain industry subgroups and portfolio segments within our portfolio as a result of the continuing COVID-19 pandemic. The decrease in the provision for loan losses primarily reflects an estimated decrease in uncertainty as it relates to the estimated impact of the COVID-19 pandemic on the Company’s loan portfolio and the broader economy, as well as improvement in risk ratings within the portfolio, offset only in part by the Company’s consideration of other economic factors, such as inflation. Additional discussion of the provision for loan losses is included below under the heading Provision Expense and Allowance for Loan Losses.
Non-interest income decreased $358 thousand or 40.6% during the six months ended June 30, 2022 compared to the six months ended June 30, 2021. The decrease in non-interest income was primarily due to mark-to-market adjustments of $(490) thousand resulting from a reduction in value of investments related to the Company’s nonqualified deferred compensation plan. Additionally, during the six months ended June 30, 2021, the Company realized a $10 thousand gain on the call of a security. Excluding the impacts of the mark-to-market adjustments and gain on call, non-interest income increased $142 thousand or 18.4% primarily due to increases in insurance commissions, service charges and fees on deposit accounts, and interchange and other fee income.
Non-interest expense decreased $493 thousand or 2.9% during the six months ended June 30, 2022 compared to the six months ended June 30, 2021. The decrease in non-interest expense was primarily due to non-recurring legal and professional fees incurred in 2021 and decreases in FDIC insurance fees due to lower insurance premiums. These decreases were partially offset by an increase in state franchise taxes as a result of an increase in the Bank’s equity year-over-year.
The ROAA for the six months ended June 30, 2022 and 2021 was 1.41% and 1.13%, respectively. The ROAE for the six months ended June 30, 2022 and 2021 was 15.02% and 11.78%, respectively.
Net Interest Income and Net Interest Margin
Net interest income is the excess of interest earned on loans and investments over the interest paid on deposits and borrowings, and is the Company’s primary revenue source. Net interest income is affected by overall balance sheet growth, changes in interest rates and changes in the mix of investments, loans, deposits and borrowings. The Company’s interest-earning assets include loans, investment securities and interest-bearing deposits in other banks, while our interest-bearing liabilities include interest-bearing deposits and
36
borrowings. Net interest margin represents the difference between interest received and interest paid as a percentage of average total interest-earning assets. Management seeks to maximize net interest income without exposing the Company to an excessive level of interest rate risk through management’s asset and liability management policies. Interest rate risk is managed by monitoring the pricing, maturity, and repricing options of all classes of interest-bearing assets and liabilities. Management expects net interest income and net interest margin to fluctuate based on changes in interest rates and changes in the amount and composition of the Company’s interest-earning assets and interest-bearing liabilities.
The following table presents the average balance for each principal balance sheet category, and the amount of interest income or expense associated with that category, as well as corresponding average yields earned and rates paid for the six months ended June 30, 2022 and 2021.
Average Balance Sheets and Interest Rates on Interest-Earning Assets and Interest-Bearing Liabilities
June 30, 2022 | June 30, 2021 |
| |||||||||||||||
|
| Interest Income / |
| Average |
|
| Interest Income / |
| Average |
| |||||||
(Dollars in thousands) | Average Balance | Expense | Rate | Average Balance | Expense | Rate |
| ||||||||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
| |||||
Securities: |
|
|
|
|
|
|
|
|
|
|
|
| |||||
Taxable | $ | 407,341 |
| $ | 3,397 |
| 1.68 | % | $ | 213,585 |
| $ | 1,892 |
| 1.79 | % | |
Tax-exempt(1) |
| 5,004 |
| 76 |
| 3.06 | % |
| 5,052 |
| 77 |
| 3.07 | % | |||
Total securities | $ | 412,345 | $ | 3,473 |
| 1.70 | % | $ | 218,637 | $ | 1,969 |
| 1.82 | % | |||
Loans, net of unearned income(2): |
|
|
|
|
|
|
|
|
|
|
| ||||||
Taxable |
| 1,611,916 |
| 35,209 |
| 4.40 | % |
| 1,570,969 |
| 35,001 |
| 4.49 | % | |||
Tax-exempt(1) |
| 19,367 |
| 391 |
| 4.07 | % |
| 18,090 |
| 427 |
| 4.76 | % | |||
Total loans, net of unearned income | $ | 1,631,283 | $ | 35,600 |
| 4.40 | % | $ | 1,589,059 | $ | 35,428 |
| 4.50 | % | |||
Interest-bearing deposits in other banks | $ | 150,734 | $ | 325 |
| 0.43 | % | $ | 152,203 | $ | 83 |
| 0.11 | % | |||
Total interest-earning assets | $ | 2,194,362 | $ | 39,398 |
| 3.62 | % | $ | 1,959,899 | $ | 37,480 |
| 3.86 | % | |||
Total non-interest earning assets |
| 33,830 |
|
|
| 31,029 |
|
|
|
| |||||||
Total assets | $ | 2,228,192 |
|
| $ | 1,990,928 |
|
|
|
| |||||||
Liabilities Shareholders’ Equity: |
|
|
|
|
|
|
|
|
|
|
|
| |||||
Interest-bearing deposits |
|
|
|
|
|
|
|
|
|
|
|
| |||||
NOW accounts | $ | 323,546 | $ | 424 |
| 0.26 | % | $ | 244,952 | $ | 392 |
| 0.32 | % | |||
Money market accounts |
| 395,532 |
| 789 |
| 0.40 | % |
| 336,528 | 630 |
| 0.38 | % | ||||
Savings accounts |
| 111,312 |
| 177 |
| 0.32 | % |
| 71,307 | 135 |
| 0.38 | % | ||||
Time deposits |
| 635,359 |
| 1,631 |
| 0.52 | % |
| 670,014 | 2,638 |
| 0.79 | % | ||||
Total interest-bearing deposits | $ | 1,465,749 | $ | 3,021 |
| 0.42 | % | $ | 1,322,801 | $ | 3,795 |
| 0.58 | % | |||
Subordinated debt |
| 27,007 |
| 1,013 |
| 7.56 | % |
| 24,690 |
| 743 |
| 6.07 | % | |||
Other borrowed funds |
| 12,453 |
| 42 |
| 0.68 | % |
| 18,757 |
| 63 |
| 0.68 | % | |||
Total interest-bearing liabilities | $ | 1,505,209 | $ | 4,076 |
| 0.55 | % | $ | 1,366,248 | $ | 4,601 |
| 0.68 | % | |||
Demand deposits |
| 497,899 |
|
|
| 421,349 |
|
|
|
| |||||||
Other liabilities |
| 16,161 |
|
|
| 12,364 |
|
|
|
| |||||||
Total liabilities | $ | 2,019,269 |
|
| $ | 1,799,961 |
|
|
|
| |||||||
Shareholders’ equity | $ | 208,923 |
|
| $ | 190,967 |
|
|
|
| |||||||
Total liabilities and shareholders’ equity | $ | 2,228,192 |
|
| $ | 1,990,928 |
|
|
|
| |||||||
Net interest spread | 3.07 | % |
|
|
|
|
| 3.18 | % | ||||||||
Net interest income and margin | $ | 35,322 | 3.25 | % | $ | 32,879 | 3.38 | % | |||||||||
(1) | Income and yields for all periods presented are reported on a tax-equivalent basis using the federal statutory tax rate of 21%. |
(2) | The Company did not have any loans on non-accrual as of June 30, 2022 or June 30, 2021. |
Net interest margin as presented above is calculated by dividing tax-equivalent net interest income by total average earning assets. Net interest income, on a tax equivalent basis, is a financial measure that the Company believes provides a more accurate picture of the
37
interest margin for comparative purposes. Tax-equivalent net interest income is calculated by adding the tax benefit on certain securities and loans, whose interest is tax-exempt, to total interest income then subtracting total interest expense. The following table, “Tax-Equivalent Net Interest Income,” reconciles net interest income to tax-equivalent net interest income, which is a non-GAAP measure.
Tax-Equivalent Net Interest Income
Six months ended | ||||||
June 30, | ||||||
(Dollars in thousands) |
| 2022 |
| 2021 | ||
GAAP Financial Measurements: |
|
|
| |||
Interest Income - Loans | $ | 35,518 | $ | 35,338 | ||
Interest Income - Securities and Other Interest-Earning Assets |
| 3,782 |
| 2,036 | ||
Interest Expense - Deposits |
| 3,021 |
| 3,795 | ||
Interest Expense - Borrowings |
| 1,055 |
| 806 | ||
Total Net Interest Income | $ | 35,224 | $ | 32,773 | ||
Non-GAAP Financial Measurements: |
|
|
|
| ||
Add: Tax Benefit on Tax-Exempt Interest Income - Loans |
| 82 |
| 90 | ||
Add: Tax Benefit on Tax-Exempt Interest Income - Securities |
| 16 |
| 16 | ||
Total Tax Benefit on Tax-Exempt Interest Income (1) | $ | 98 | $ | 106 | ||
Tax-Equivalent Net Interest Income | $ | 35,322 | $ | 32,879 | ||
(1) | Tax benefit was calculated using the federal statutory tax rate of 21%. |
Net interest income increased $2.4 million or 7.4% on a fully tax-equivalent basis for the six months ended June 30, 2022, compared to the six months ended June 30, 2021. The increase in net interest income was driven by an increase in the average balance of interest-earning assets coupled with a decrease in cost of interest-bearing liabilities year-over-year.
On a fully tax-equivalent basis, the net interest margin was 3.25% for the six months ended June 30, 2022, compared to 3.38% for the six months ended June 30, 2021. The decline in net interest margin was primarily due to a lower yield on fixed rate investments and lower yields on the Company’s loan portfolio. The decrease was partially offset by a decrease in cost of interest-bearing liabilities of 0.13% from 0.68% for the six months ended June 30, 2021 to 0.55% for the six months ended June 30, 2022. The decrease in interest-bearing liabilities was primarily due to a 0.16% reduction in the cost of interest-bearing deposits as a result of the repricing of the Company’s time deposits, partially offset by the accelerated amortization of $208 thousand in deferred issuance costs associated with our 2017 notes and incremental interest expense of $62 thousand associated with our 5.25% fixed-to-floating rate subordinated note (“2022 note”) issued in June 2022 that was recognized during the six months ended June 30, 2022. On July 15, 2022, the Company used the proceeds from the 2022 note issuance to redeem the 2017 notes.
Excluding the interest expense and average balance impacts of the accelerated amortization on our 2017 notes and the interest expense on our 2022 note, the tax-equivalent net interest margin was 3.27% for the six months ended June 30, 2022 compared to 3.25% and the cost of interest-bearing liabilities was 0.51% for the six months ended June 30, 2022 compared to 0.55%.
The loan portfolio’s yield for the six months ended June 30, 2022 was 4.40% compared to 4.50% for the six months ended June 30, 2021. The decrease was primarily attributable to a higher weighted average yield on loans originated before June 30, 2021 compared to loans originated subsequent to June 30, 2021.
The investment securities portfolio’s yield for the six months ended June 30, 2022 was 1.70% compared to 1.82% for the six months ended June 30, 2021. The decrease of 0.12% was primarily due to lower yields on investment securities purchased during the second half of 2021.
The following table presents the effects of changing rates and volumes on net interest income for the periods indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The net column represents the sum of the prior columns. For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated to volume.
38
Rate/Volume Analysis
For the Six Months Ended June 30, | |||||||||
2022 and 2021 | |||||||||
Increase | |||||||||
(Decrease) Due to | |||||||||
(Dollars in thousands) |
| Volume |
| Rate |
| Total Increase (Decrease) | |||
Interest-earning Assets: |
|
|
|
|
|
| |||
Securities: |
|
|
|
|
|
| |||
Taxable | $ | 1,626 | $ | (121) | $ | 1,505 | |||
Tax-exempt(1) |
| (1) |
| — |
| (1) | |||
Total securities | $ | 1,625 | $ | (121) | $ | 1,504 | |||
Loans, net of unearned income: |
|
|
|
|
|
| |||
Taxable |
| 886 |
| (678) |
| 208 | |||
Tax-exempt(1) |
| 26 | (62) |
| (36) | ||||
Total loans, net of unearned income(2) | $ | 912 | $ | (740) | $ | 172 | |||
Interest-bearing deposits in other banks | $ | (4) | $ | 246 | $ | 242 | |||
Total interest-earning assets | $ | 2,533 | $ | (615) | $ | 1,918 | |||
Interest-bearing Liabilities: |
|
|
|
|
|
| |||
Interest-bearing deposits: |
|
|
|
|
|
| |||
NOW accounts | $ | 106 | $ | (74) | $ | 32 | |||
Money market accounts |
| 88 |
| 71 |
| 159 | |||
Savings accounts |
| 63 |
| (21) |
| 42 | |||
Time deposits |
| (124) |
| (883) |
| (1,007) | |||
Total interest-bearing deposits | $ | 133 | $ | (907) | $ | (774) | |||
Federal funds purchased |
| — |
| — |
| — | |||
Subordinated debt |
| 87 |
| 183 |
| 270 | |||
Other borrowed funds |
| (21) |
| — |
| (21) | |||
Total interest-bearing liabilities | $ | 199 | $ | (724) | $ | (525) | |||
Change in net interest income | $ | 2,334 | $ | 109 | $ | 2,443 | |||
(1) | Income and yields for all periods presented are reported on a tax-equivalent basis using the federal statutory tax rate of 21%. |
(2)The Company did not have any loans on non-accrual as of June 30, 2022 or June 30, 2021.
Interest Income
Interest income increased by $1.9 million or 5.1% to $39.4 million on a fully tax-equivalent basis for the six months ended June 30, 2022 compared to $37.5 million for the six months ended June 30, 2021, primarily due to an increase in volume in average earning assets, and in particular an increase in volume in the loans portfolio and investment securities.
The increase in interest income as a result of volume in the loan portfolio was primarily due to higher origination volume in the commercial real estate and residential real estate portfolios subsequent to June 30, 2021.
In addition to the increase in interest earned on loans, fully tax-equivalent interest income also increased by approximately $1.5 million as a result of volume growth in investment securities. Average investment securities increased approximately $193.7 million between the six months ended June 30, 2022 and 2021. The increase in investment securities was funded primarily by PPP loan payoffs and deposit growth.
Interest Expense
Interest expense decreased by $525 thousand or 11.4% to $4.1 million for the six months ended June 30, 2022 compared to $4.6 million for the six months ended June 30, 2021, primarily due to the repricing of existing certificates of deposit and the decline in rates offered on savings deposits. Our overall cost of interest-bearing deposits was 0.42% for the six months ended June 30, 2022 compared to 0.58%
39
for the six months ended June 30, 2021 as the decrease in cost of average interest-bearing deposits offset the growth in average interest-bearing demand deposits. Average non-interest bearing demand deposits of $497.9 million for the six months ended June 30, 2022 represented 25.3% of total average deposits compared to $421.3 million for the six months ended June 30, 2021 or 24.2% of total average deposits, further contributing to the decrease in our total cost of funds as a result of changes in our overall funding composition. Our ability to manage the cost of our deposit funding is partially dependent on our ability to continue to attract non-interest-bearing demand deposits as part of a business banking relationship with our customers.
Provision Expense and Allowance for Loan Losses
The Company maintains an allowance for loan losses that represents management’s best estimate of probable losses inherent in the loan portfolio as of each balance sheet date. Both the amount of the provision, which is charged to earnings, and the level of the allowance for loan losses are impacted by many factors, including general, industry-specific, and geographic-specific economic conditions, current and historical credit losses, conditions specific to individual borrowers, the value of collateral underlying secured loans, among other factors. The Company is not required to implement the new CECL standard until January 1, 2023, and until adoption, the Company has and will continue to account for its allowance for losses using an incurred loss model.
The Company did not record a provision for loan losses for the six months ended June 30, 2022, compared to $2.5 million for the same period of 2021. The decrease in the provision for loan losses as compared to the same period in 2021 primarily reflects changes in the Company’s evaluation of environmental factors impacting the Company’s loan portfolio during 2022. During 2021, the environmental or qualitative factor allocations within the allowance for loan losses were adjusted to account for the risks to certain industry subgroups and portfolio segments within our portfolio as a result of the continuing COVID-19 pandemic. The decrease in the provision for loan losses primarily reflects an estimated decrease in uncertainty as it relates to the estimated impact of the COVID-19 pandemic on the Company’s loan portfolio and the broader economy, as well as improvement in risk ratings within the portfolio, offset only in part by the Company’s consideration of other economic factors, such as inflation. The allowance for loan losses was $20.0 million as of June 30, 2022 and December 31, 2021. The allowance for loan losses as a percent of total gross loans net of unearned income as of June 30, 2022 and December 31, 2021 was 1.18% and 1.20%, respectively. The Company does not maintain an allowance on PPP loan balances, as they are 100% guaranteed by the SBA. Excluding PPP loan balances, the allowance for loan losses as a percentage of gross loans, net of unearned income was 1.18% and 1.25% at June 30, 2022 and December 31, 2021, respectively.
See “Asset Quality” section below for additional information on the credit quality of the loan portfolio.
Non-interest Income
The Company’s recurring sources of non-interest income consist primarily of bank owned life insurance income, service charges on deposit accounts and insurance commissions. Generally speaking, loan fees are included in interest income on the loan portfolio and not reported as non-interest income.
40
The following table summarizes non-interest income for the six months ended June 30, 2022 and June 30, 2021.
Six months ended | ||||||
June 30, | ||||||
(Dollars in thousands) |
| 2022 |
| 2021 | ||
Service charges on deposit accounts | ||||||
Overdrawn account fees | $ | 41 | $ | 31 | ||
Account service fees |
| 120 |
| 87 | ||
Other service charges and fees |
|
|
|
| ||
Interchange income |
| 198 |
| 178 | ||
Other charges and fees |
| 96 |
| 42 | ||
Bank owned life insurance |
| 190 |
| 207 | ||
Gains on securities |
| — |
| 10 | ||
Net losses on premises and equipment |
| (1) |
| — | ||
Insurance commissions |
| 265 |
| 177 | ||
Other operating income (loss) |
| (386) |
| 149 | ||
Total non-interest income | $ | 523 | $ | 881 | ||
Non-interest income decreased $358 thousand or 40.6% during the six months ended June 30, 2022 compared to the six months ended June 30, 2021. The decrease in non-interest income was primarily due to the year-over-year change in mark-to-market adjustments of $(490) thousand resulting from a reduction in value of investments related to the Company’s nonqualified deferred compensation plan. Additionally, during the six months ended June 30, 2021, the Company realized a $10 thousand gain on the call of a security. Excluding the impacts of the mark-to-market adjustments and gain on call, non-interest income increased $142 thousand or 18.4% primarily due to increases in insurance commissions, service charges and fees on deposit accounts, and interchange and other fee income.
Non-interest Expense
Generally, non-interest expense is composed of all employee expenses and costs associated with operating our facilities, obtaining and retaining customer relationships and providing banking services. The largest component of non-interest expense is salaries and employee benefits. Non-interest expense also includes operational expenses, such as occupancy and equipment expenses, data processing expenses, professional fees, advertising expenses and other general and administrative expenses, including FDIC assessments, and Virginia state franchise taxes.
The following table summarizes non-interest expense for the the six months ended June 30, 2022 and June 30, 2021.
Six months ended | ||||||
June 30, | ||||||
(Dollars in thousands) |
| 2022 |
| 2021 | ||
Salaries and employee benefits expense | $ | 10,682 | $ | 10,669 | ||
Occupancy expense of premises |
| 975 |
| 1,021 | ||
Furniture and equipment expenses |
| 666 |
| 700 | ||
Advertising expense |
| 100 |
| 210 | ||
Data processing |
| 928 |
| 751 | ||
FDIC insurance |
| 270 |
| 487 | ||
Professional fees |
| 571 |
| 898 | ||
State franchise tax |
| 1,047 |
| 926 | ||
Bank insurance |
| 90 |
| 85 | ||
Vendor services |
| 301 |
| 293 | ||
Supplies, printing, and postage |
| 61 |
| 94 | ||
Director costs |
| 415 |
| 390 | ||
Other operating expenses |
| 361 |
| 436 | ||
Total non-interest expense | $ | 16,467 | $ | 16,960 | ||
Non-interest expense for the six months ended June 30, 2022 decreased $493 thousand or 2.9% to $16.5 million compared to $17.0 million for the six months ended June 30, 2021 primarily due to a decrease in professional fees of $327 thousand, a decrease in FDIC
41
insurance fees of $217 thousand and a decrease in advertising expense of $110. These decreases were partially offset by an increase in data processing expense of $177 thousand and state franchise taxes of $121 thousand.
The decrease in professional fees was primarily due to non-recurring legal and professional fees incurred in 2021. The decrease in FDIC insurance fees was primarily due to lower insurance premiums. The decrease in advertising expenses was primarily due to lower marketing vendor related expenses during the six months ended June 30, 2022 compared to the six months ended June 30, 2021.
The increase in data processing fees was primarily due to new investments in technology solutions to support our operations. The increase in state franchise taxes was due to an increase in the Bank’s equity as that is the basis the Commonwealth of Virginia uses to assess taxes on banking institutions.
Income Taxes
Income tax expense increased $638 thousand or 20.7% to $3.7 million for the six months ended June 30, 2022 compared to $3.1 million for the six months ended June 30, 2021. Our effective tax rate for the six months ended June 30, 2022 was 19.3%, compared to 21.7% for the same period ended June 30, 2021. The decrease in our effective tax rate was primarily due to tax benefits realized in connection with the exercise of certain nonqualified stock options during the six months ended June 30, 2022.
Results of Operations – Three Months Ended June 30, 2022 and June 30, 2021
Overview
Net income increased $1.8 million or 29.7% to $7.9 million for the three months ended June 30, 2022, compared to net income of $6.1 million for the three months ended June 30, 2021. Diluted earnings per share increased $0.12 or 27.3% to $0.56 for the three months ended June 30, 2022, compared to diluted earnings per share of $0.44 for the three months ended June 30, 2021.
Net interest income increased $817 thousand to $17.3 million for the three months ended June 30, 2022, compared to $16.5 million for the three months ended June 30, 2021. Balance sheet growth, improved funding composition, and downward repricing of our funding base resulted in an increase in net interest income of 5.0% for the three months ended June 30, 2022 when compared to the three months ended June 30, 2021.
The Company did not record a provision for loan losses for the three months ended June 30, 2022, compared to $90 thousand for the same period of 2021. Additional discussion of the provision for loan losses is included below under the heading Provision Expense.
Non-interest income for the three months ended June 30, 2022 decreased $308 thousand or 73.9% to $109 thousand compared to $417 thousand for the three months ended June 30, 2021 The decrease in non-interest income was primarily due to mark-to-market adjustments of $(339) thousand resulting from a reduction in value of investments related to the Company’s nonqualified deferred compensation plan. Excluding the impact of the mark-to-market adjustments, non-interest income increased $31 thousand or 8.9% primarily due to increases in service charges and fees on deposit accounts, interchange and other fee income, and insurance commissions.
Non-interest expense for the three months ended June 30, 2022 decreased $1.4 million or 15.3% to $7.7 million compared to $9.1 million for the three months ended June 30, 2021. The decrease in non-interest expense was primarily due to a decrease in salaries and employee benefits of $1.0 million or 18.0% driven primarily by a decrease in incentive compensation accruals as well as lower employee benefit expenses and favorable changes in the Company’s nonqualified deferred compensation obligations. Incentive compensation accruals can fluctuate materially from quarter to quarter, based upon the Company’s financial performance and conditions measured against, among other evaluation criteria, our strategic plan and budget. At the end of each year, the ultimate determination of the incentive compensation is approved by the Board of Directors. During the three months ended March 31, 2022, incentive compensation accruals were closely aligned with that of the practical culmination of our PPP lending initiative.
The ROAA for the three months ended June 30, 2022 and 2021 was 1.41% and 1.20%, respectively. The ROAE for the three months ended June 30, 2022 and 2021 was 15.28% and 12.64%, respectively.
42
Net Interest Income and Net Interest Margin
The following table presents the average balance for each principal balance sheet category, and the amount of interest income or expense associated with that category, as well as corresponding average yields earned and rates paid for the three months ended June 30, 2022 and 2021.
Average Balance Sheets and Interest Rates on Interest-Earning Assets and Interest-Bearing Liabilities
June 30, 2022 | June 30, 2021 |
| |||||||||||||||
|
| Interest Income / |
| Average |
|
| Interest Income / |
| Average |
| |||||||
(Dollars in thousands) | Average Balance | Expense | Rate | Average Balance | Expense | Rate |
| ||||||||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
| |||||
Securities: |
|
|
|
|
|
|
|
|
|
|
|
| |||||
Taxable | $ | 442,686 |
| $ | 1,957 |
| 1.77 | % | $ | 251,654 |
| $ | 1,059 |
| 1.69 | % | |
Tax-exempt(1) |
| 5,002 |
| 38 |
| 3.05 | % |
| 5,017 |
| 38 |
| 3.04 | % | |||
Total securities | $ | 447,688 | $ | 1,995 |
| 1.79 | % | $ | 256,671 | $ | 1,097 |
| 1.71 | % | |||
Loans, net of unearned income(2): |
|
|
|
|
|
|
|
|
|
|
| ||||||
Taxable |
| 1,622,666 |
| 17,180 |
| 4.25 | % |
| 1,577,125 |
| 17,295 |
| 4.40 | % | |||
Tax-exempt(1) |
| 19,248 |
| 195 |
| 4.06 | % |
| 25,000 |
| 259 |
| 4.16 | % | |||
Total loans, net of unearned income | $ | 1,641,914 | $ | 17,375 |
| 4.24 | % | $ | 1,602,125 | $ | 17,554 |
| 4.39 | % | |||
Interest-bearing deposits in other banks | $ | 115,107 | $ | 234 |
| 0.82 | % | $ | 137,759 | $ | 39 |
| 0.11 | % | |||
Total interest-earning assets | $ | 2,204,709 | $ | 19,604 |
| 3.57 | % | $ | 1,996,555 | $ | 18,690 |
| 3.75 | % | |||
Total non-interest earning assets |
| 35,410 |
|
|
| 30,809 |
|
|
|
| |||||||
Total assets | $ | 2,240,119 |
|
| $ | 2,027,364 |
|
|
|
| |||||||
Liabilities Shareholders’ Equity: |
|
|
|
|
|
|
|
|
|
|
|
| |||||
Interest-bearing deposits |
|
|
|
|
|
|
|
|
|
|
|
| |||||
NOW accounts | $ | 322,255 | $ | 222 |
| 0.28 | % | $ | 250,845 | $ | 194 |
| 0.31 | % | |||
Money market accounts |
| 398,641 |
| 439 |
| 0.44 | % |
| 337,752 | 314 |
| 0.37 | % | ||||
Savings accounts |
| 114,216 |
| 89 |
| 0.31 | % |
| 75,321 | 70 |
| 0.37 | % | ||||
Time deposits |
| 633,273 |
| 948 |
| 0.60 | % |
| 674,969 | 1,157 |
| 0.69 | % | ||||
Total interest-bearing deposits | $ | 1,468,385 | $ | 1,698 |
| 0.46 | % | $ | 1,338,887 | $ | 1,735 |
| 0.52 | % | |||
Subordinated debt |
| 29,222 |
| 537 |
| 7.37 | % |
| 24,696 |
| 371 |
| 6.03 | % | |||
Other borrowed funds |
| 6,967 |
| 12 |
| 0.69 | % |
| 18,000 |
| 30 |
| 0.67 | % | |||
Total interest-bearing liabilities | $ | 1,504,574 | $ | 2,247 |
| 0.60 | % | $ | 1,381,583 | $ | 2,136 |
| 0.62 | % | |||
Demand deposits |
| 511,846 |
|
|
| 439,356 |
|
|
|
| |||||||
Other liabilities |
| 16,732 |
|
|
| 13,507 |
|
|
|
| |||||||
Total liabilities | $ | 2,033,152 |
|
| $ | 1,834,446 |
|
|
|
| |||||||
Shareholders’ equity | $ | 206,967 |
|
| $ | 192,918 |
|
|
|
| |||||||
Total liabilities and shareholders’ equity | $ | 2,240,119 |
|
| $ | 2,027,364 |
|
|
|
| |||||||
Net interest spread | 2.97 | % |
|
|
|
|
| 3.13 | % | ||||||||
Net interest income and margin | $ | 17,357 | 3.16 | % | $ | 16,554 | 3.32 | % | |||||||||
(1) | Income and yields for all periods presented are reported on a tax-equivalent basis using the federal statutory tax rate of 21%. |
(2) | The Company did not have any loans on non-accrual as of June 30, 2022 or June 30, 2021. |
Net interest margin as presented above is calculated by dividing tax-equivalent net interest income by total average earning assets. Net interest income, on a tax equivalent basis, is a financial measure that the Company believes provides a more accurate picture of the interest margin for comparative purposes. Tax-equivalent net interest income is calculated by adding the tax benefit on certain securities and loans, whose interest is tax-exempt, to total interest income then subtracting total interest expense. The following table, “Tax-Equivalent Net Interest Income,” reconciles net interest income to tax-equivalent net interest income, which is a non-GAAP measure.
43
Tax-Equivalent Net Interest Income
Three months ended | ||||||
June 30, | ||||||
(Dollars in thousands) |
| 2022 |
| 2021 | ||
GAAP Financial Measurements: |
|
|
|
| ||
Interest Income - Loans | $ | 17,334 | $ | 17,499 | ||
Interest Income - Securities and Other Interest-Earning Assets |
| 2,221 |
| 1,128 | ||
Interest Expense - Deposits |
| 1,698 |
| 1,735 | ||
Interest Expense - Borrowings |
| 549 |
| 401 | ||
Total Net Interest Income | $ | 17,308 | $ | 16,491 | ||
Non-GAAP Financial Measurements: |
|
|
|
| ||
Add: Tax Benefit on Tax-Exempt Interest Income - Loans |
| 41 |
| 55 | ||
Add: Tax Benefit on Tax-Exempt Interest Income - Securities |
| 8 |
| 8 | ||
Total Tax Benefit on Tax-Exempt Interest Income (1) | $ | 49 | $ | 63 | ||
Tax-Equivalent Net Interest Income | $ | 17,357 | $ | 16,554 | ||
(1) | Tax benefit was calculated using the federal statutory tax rate of 21%. |
Net interest income increased $803 thousand or 4.9% on a fully tax-equivalent basis for the three months ended June 30, 2022, compared to the three months ended June 30, 2021. The increase in net interest income was driven by an increase in the average balance of interest-earning assets coupled with a decrease in cost of interest-bearing liabilities year-over-year.
On a fully tax-equivalent basis, the net interest margin was 3.16% for the three months ended June 30, 2022, compared to 3.32% for the three months ended June 30, 2021. The decline in net interest margin was primarily due to lower yields on on the Company’s loan portfolio. The decrease was partially offset by a decrease in cost of interest-bearing liabilities of 0.02% from 0.62% for the three months ended June 30, 2021 to 0.60% for the three months ended June 30, 2022. The decrease in interest-bearing liabilities was primarily due to a 0.06% reduction in the cost of interest-bearing deposits as a result of the repricing of the Company’s time deposits, partially offset by the accelerated amortization of $104 thousand in deferred issuance costs associated with our 2017 notes and incremental interest expense of $62 thousand associated with our 2022 note recognized during the three months ended June 30, 2022.
Excluding the interest expense and average balance impacts of the accelerated amortization on our 2017 notes and the interest expense on our 2022 note, the tax-equivalent net interest margin was 3.19% for the three months ended June 30, 2022 compared to 3.16% and the cost of interest-bearing liabilities decreased was 0.56% for the three months ended June 30, 2022 compared to 0.60%.
The loan portfolio’s yield for the three months ended June 30, 2022 was 4.24% compared to 4.39% for the three months ended June 30, 2021. The decrease was primarily attributable to a decrease in yield on the Company’s commercial real estate portfolio due to lower yields on newly originated loans subsequent to June 30, 2021 when compared to yields on outstanding loans as of June 30, 2021.
The investment securities portfolio’s yield for the three months ended June 30, 2022 was 1.79% compared to 1.71% for the three months ended June 30, 2021. The increase of 0.08% was primarily due to higher yields on investment securities purchased during the second quarter of 2022 when compared to the yields on securities owned as of June 30, 2021.
The following table presents the effects of changing rates and volumes on net interest income for the periods indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The net column represents the sum of the prior columns. For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated to volume.
44
Rate/Volume Analysis
For the Three Months Ended June 30, | |||||||||
2022 and 2021 | |||||||||
Increase | |||||||||
(Decrease) Due to | |||||||||
(Dollars in thousands) |
| Volume |
| Rate |
| Total Increase (Decrease) | |||
Interest-earning Assets: |
|
|
|
|
|
| |||
Securities: |
|
|
|
|
|
| |||
Taxable | $ | 848 | $ | 50 | $ | 898 | |||
Tax-exempt(1) |
| — |
| — |
| — | |||
Total securities | $ | 848 | $ | 50 | $ | 898 | |||
Loans, net of unearned income: |
|
|
|
|
|
| |||
Taxable |
| 482 |
| (597) |
| (115) | |||
Tax-exempt(1) |
| (59) | (5) |
| (64) | ||||
Total loans, net of unearned income(2) | $ | 423 | $ | (602) | $ | (179) | |||
Interest-bearing deposits in other banks | $ | (41) | $ | 236 | $ | 195 | |||
Total interest-earning assets | $ | 1,230 | $ | (316) | $ | 914 | |||
Interest-bearing Liabilities: |
|
|
|
|
|
| |||
Interest-bearing deposits: |
|
|
|
|
|
| |||
NOW accounts | $ | 50 | $ | (22) | $ | 28 | |||
Money market accounts |
| 52 |
| 73 |
| 125 | |||
Savings accounts |
| 30 |
| (11) |
| 19 | |||
Time deposits |
| (76) |
| (133) |
| (209) | |||
Total interest-bearing deposits | $ | 56 | $ | (93) | $ | (37) | |||
Federal funds purchased |
| — |
| — |
| — | |||
Subordinated debt |
| 83 |
| 83 |
| 166 | |||
Other borrowed funds |
| (18) |
| — |
| (18) | |||
Total interest-bearing liabilities | $ | 121 | $ | (10) | $ | 111 | |||
Change in net interest income | $ | 1,109 | $ | (306) | $ | 803 | |||
(1) | Income and yields for all periods presented are reported on a tax-equivalent basis using the federal statutory tax rate of 21%. |
(2)The Company did not have any loans on non-accrual as of June 30, 2022 or June 30, 2021.
Interest Income
Interest income increased by $914 thousand or 4.9% to $19.6 million on a fully tax-equivalent basis for the three months ended June 30, 2022 compared to $18.7 million for the three months ended June 30, 2021, primarily due to an increase in volume in average earning assets, and in particular an increase in volume in investment securities, coupled with an increase in rates on investment securities and interest-bearing deposits in other banks.
Fully tax-equivalent interest income on securities increased by approximately $898 thousand as a result of volume growth and rate increases in investment securities. Average investment securities increased approximately $191.0 million between the three months ended June 30, 2022 and 2021. The increase in investment securities was funded primarily by PPP loan payoffs and deposit growth.
The increase in rates on investment securities and interest-bearing deposits in other banks was primarily attributable to an increase in benchmark interest rates market throughout the first half of 2022.
The increase interest income was partially offset by a decrease in interest income on the loans portfolio as a result of a decrease in rates. The decrease was primarily due to lower yields on newly originated loans subsequent to June 30, 2021 within the Company’s commercial real estate portfolio when compared to yields on outstanding loans as of June 30, 2021.
45
Interest Expense
Interest expense increased by $111 thousand or 5.2% to $2.2 million for the three months ended June 30, 2022 compared to $2.1 million for the three months ended June 30, 2021, primarily due to the accelerated amortization of $104 thousand in deferred issuance costs associated with our 2017 notes and incremental interest expense of $62 thousand associated with our 2022 note recognized during the three months ended June 30, 2022. Excluding the impacts of the accelerated amortization with our 2017 notes and incremental interest expense on our 2022 note, interest expense decreased $55 thousand or 2.6%, primarily due to a decrease in the cost of deposits. Our overall cost of interest-bearing deposits was 0.46% for the three months ended June 30, 2022 compared to 0.52% for the three months ended June 30, 2021, as the decrease in cost of average interest-bearing deposits offset the growth in average interest-bearing demand deposits. Average non-interest bearing demand deposits of $511.8 million at June 30, 2022 represented 25.8% of total average deposits compared to $439.4 million at June 30, 2021 or 24.7% of total average deposits, further contributing to the decrease in our total cost of funds as a result of changes in our overall funding composition. Our ability to manage the cost of our deposit funding is partially dependent on our ability to continue to attract non-interest-bearing demand deposits as part of a business banking relationship with our customers.
Provision Expense
The Company did not record a provision for loan losses for the three months ended June 30, 2022, compared to $90 thousand for the same period of 2021. The provision recorded during the second quarter of 2021 related to a charge-off for a loan that the Bank sold as part of a portfolio management strategy.
See “Asset Quality” section below for additional information on the credit quality of the loan portfolio.
Non-interest Income
The following table summarizes non-interest income for the three months ended June 30, 2022 and June 30, 2021.
Three months ended | ||||||
June 30, | ||||||
(Dollars in thousands) |
| 2022 |
| 2021 | ||
Service charges on deposit accounts | ||||||
Overdrawn account fees | $ | 22 | $ | 16 | ||
Account service fees |
| 62 |
| 44 | ||
Other service charges and fees |
|
|
|
| ||
Interchange income |
| 105 |
| 94 | ||
Other charges and fees |
| 52 |
| 22 | ||
Bank owned life insurance |
| 95 |
| 100 | ||
Insurance commissions |
| 44 |
| 22 | ||
Other operating income (loss) |
| (271) |
| 119 | ||
Total non-interest income | $ | 109 | $ | 417 | ||
Non-interest income for the three months ended June 30, 2022 decreased $308 thousand or 73.9% to $109 thousand compared to $417 thousand for the three months ended June 30, 2021. The decrease in non-interest income was primarily due to the year-over-year change in mark-to-market adjustments of $(339) thousand resulting from a reduction in value of investments related to the Company’s nonqualified deferred compensation plan. Excluding the impact of the mark-to-market adjustments, non-interest income increased $31 thousand or 8.9% primarily due to increases in service charges and fees on deposit accounts, interchange and other fee income, and insurance commissions.
46
Non-interest Expense
The following table summarizes non-interest expense for the three months ended June 30, 2022 and June 30, 2021.
Three months ended | ||||||
June 30, | ||||||
(Dollars in thousands) |
| 2022 |
| 2021 | ||
Salaries and employee benefits expense | $ | 4,655 | $ | 5,680 | ||
Occupancy expense of premises |
| 482 |
| 514 | ||
Furniture and equipment expenses |
| 341 |
| 378 | ||
Advertising expense |
| 61 |
| 110 | ||
Data processing |
| 490 |
| 344 | ||
FDIC insurance |
| 140 |
| 263 | ||
Professional fees |
| 297 |
| 661 | ||
State franchise tax |
| 523 |
| 462 | ||
Bank insurance |
| 45 |
| 42 | ||
Vendor services |
| 149 |
| 148 | ||
Supplies, printing, and postage |
| 40 |
| 42 | ||
Director costs |
| 203 |
| 202 | ||
Other operating expenses |
| 255 |
| 221 | ||
Total non-interest expense | $ | 7,681 | $ | 9,067 | ||
Non-interest expense for the three months ended June 30, 2022 decreased $1.4 million or 15.3% to $7.7 million compared to $9.1 million for the three months ended June 30, 2021 primarily as a result of decreases in salaries and employee benefit expenses of $1.0 million, professional fees of $364 thousand, and FDIC insurance fees of $123 thousand. These increases were partially offset by increases in data processing fees of $146 thousand and state franchise taxes of $61 thousand.
The decrease in salaries and employee benefits was primarily related to a decrease in accrued incentive compensation tied to the Company’s performance as well as lower employee benefit expenses and favorable changes in the Company’s nonqualified deferred compensation obligations. Incentive compensation accruals can fluctuate from quarter to quarter, based upon the Company’s financial performance and conditions measured against, among other evaluation criteria, our strategic plan and budget. At the end of each year, the ultimate determination of the incentive compensation is approved by the Board of Directors. During the three months ended March 31, 2022, incentive compensation accruals were closely aligned with that of the practical culmination of our PPP lending initiative. The decrease in professional fees was primarily due to non-recurring legal and professional fees incurred in the second quarter of 2021. The decrease in FDIC insurance fees was primarily due to lower insurance premiums.
The increase in data processing fees was primarily due to investments in technology solutions to support our operations. The increase in state franchise taxes was due to an increase in the Bank’s equity as that is the basis the Commonwealth of Virginia uses to assess taxes on banking institutions.
Income Taxes
Income tax expense increased $182 thousand or 10.9% to $1.9 million for the three months ended June 30, 2022 compared to $1.7 million for the three months ended June 30, 2021. Our effective tax rate for the three months ended June 30, 2022 was 19.0%, compared to 21.6% for the same period ended June 30, 2021. The decrease in our effective tax rate was primarily due to tax benefits realized in connection with the exercise of certain nonqualified stock options in the current quarter.
Discussion and Analysis of Financial Condition
Assets, Liabilities, and Shareholders’ Equity
The Company’s total assets increased $167.1 million or 7.8% to $2.32 billion at June 30, 2022 compared to $2.15 billion at December 31, 2021. The increase in total assets was primarily due to an increase in the Company’s primarily fixed income investment portfolio of $122.6 million and an increase in loans, net of unearned income of $26.2 million.
47
The Company’s total liabilities increased $168.0 million or 8.7% to $2.11 billion at June 30, 2022 compared to $1.94 billion at December 31, 2021. The increase in total liabilities was primarily attributable to an increase in total deposits of $162.2 million as a result of growth in interest-bearning and non-interest bearing deposits, as well as an increase in subordinated debt of $24.8 million as a result of the 2022 note issuance. The increase in total liabilities was partially offset by an $18 million decrease in Federal Home Loan Bank (“FHLB”) advances as a result of the FHLB calling outstanding advances during the six months ended June 30, 2022.
The Company’s total shareholders’ equity decreased $940 thousand or 0.5% to $207.5 million at June 30, 2022 compared to $208.5 million at December 31, 2021. The decrease in total shareholders’ equity was primarily due to an increase in the net unrealized loss on the Company’s available-for-sale investement portfolio and the one-time special divided declared during the first quarter of 2022. The decrease was partially offset by an increase in retained earnings attributable to net income during the year and an increase in additional paid-in capital due to stock option exercises. Total common shares outstanding increased from 13,745,598, including 75,826 shares relating to unvested stock awards, at December 31, 2021, to 14,026,589, including 58,536 shares relating to unvested stock awards, at June 30, 2022.
Investment Securities
The Company maintains a primarily fixed income investment securities portfolio that had a total carrying value of $467.4 million at June 30, 2022 and $344.8 million at December 31, 2021. The investment portfolio is used as a source of liquidity, interest income, and credit risk diversification, as well as to manage rate sensitivity and provide collateral for secured public funds. Investment securities are classified as available-for-sale or held-to-maturity based on management’s investment strategy and management’s assessment of the intent and ability to hold the securities until maturity. Investment securities that we may sell prior to maturity in response to changes in management’s investment strategy, liquidity needs, interest rate risk profile or for other reasons are classified as available-for-sale. The Company also had restricted stock and equity securities within its investment securities portfolio with total carrying values of $4.4 million and $2.1 million, respectively, as of June 30, 2022 and $5.0 million and $1.9 million, respectively, as of December 31, 2021.
The Company purchased $174.4 million of investment securities during the six months ended June 30, 2022, which were comprised of $120.5 million of mortgage-backed securities, $32.3 million of U.S. Treasuries, $10.9 million of collateralized mortgage obligation securities, $8.7 million of U.S. government and federal agency securities, and $2.0 million of corporate bonds. The Company had $30.7 million in maturities, calls and principal repayments on securities during the six months ended June 30, 2022, which was comprised of $17.2 million of mortgage-backed securities, $7.7 million of collateralized mortgage obligation securities, and $5.8 million of U.S. government and federal agency securities.
48
The following table summarizes the amortized cost and fair value of the Company’s fixed income investment portfolio as of June 30, 2022 and December 31, 2021, respectively.
June 30, 2022 |
| December 31, 2021 | ||||||||||
Amortized | Fair | Amortized | Fair | |||||||||
(Dollars in thousands) |
| Cost |
| Value |
| Cost |
| Value | ||||
Held-to-maturity |
|
|
|
|
|
|
|
| ||||
U.S Treasuries | $ | 6,001 | $ | 5,350 | $ | 6,000 | $ | 5,850 | ||||
U.S. government and federal agencies |
| 35,630 |
| 31,385 |
| 35,720 |
| 34,994 | ||||
Collateralized mortgage obligations |
| 22,930 |
| 19,910 |
| 25,606 |
| 25,072 | ||||
Taxable municipal |
| 6,081 |
| 5,071 |
| 6,089 |
| 5,895 | ||||
Mortgage-backed |
| 31,623 |
| 27,146 |
| 32,094 |
| 31,447 | ||||
Total Held-to-maturity Securities | $ | 102,265 | $ | 88,862 | $ | 105,509 | $ | 103,258 | ||||
Available-for-sale |
|
|
|
|
|
|
|
| ||||
U.S Treasuries | $ | 63,331 | $ | 60,463 | $ | 30,954 | $ | 30,543 | ||||
U.S. government and federal agencies |
| 37,685 |
| 35,076 |
| 34,803 |
| 34,537 | ||||
Corporate bonds |
| 3,000 |
| 2,868 |
| 1,000 |
| 1,031 | ||||
Collateralized mortgage obligations |
| 45,425 |
| 41,303 |
| 39,596 |
| 39,049 | ||||
Tax-exempt municipal |
| 5,000 |
| 4,595 |
| 5,007 |
| 5,262 | ||||
Taxable municipal |
| 1,650 |
| 1,635 |
| 1,653 |
| 1,685 | ||||
Mortgage-backed |
| 230,862 |
| 219,194 |
| 127,287 |
| 127,193 | ||||
Total Available-for-sale Securities | $ | 386,953 | $ | 365,134 | $ | 240,300 | $ | 239,300 | ||||
In the prevailing rate environments as of June 30, 2022 and December 31, 2021, the Company’s investment portfolio had an estimated weighted average remaining life of approximately 4.8 years and 4.5 years, respectively.
The following table summarizes the maturity composition of our fixed income investment securities as of June 30, 2022, including the weighted average yield of each maturity band. Maturities are based on the final contractual payment date, and do not reflect the effect of scheduled principal repayments, prepayments, or early redemptions that may occur. The weighted-average yield below represents the effective yield for the investment securities and is calculated based on the amortized cost of each security.
| June 30, 2022 |
| |||||||
Amortized | Fair | Weighted-Average |
| ||||||
(Dollars in thousands) |
| Cost |
| Value |
| Yield |
| ||
Held-to-maturity |
|
|
|
|
|
| |||
Due in one year or less | $ | — | $ | — |
| — | |||
Due after one year through five years |
| — |
| — |
| — | |||
Due after five years through ten years |
| 43,292 |
| 38,219 |
| 1.12 | % | ||
Due after ten years |
| 58,973 |
| 50,643 |
| 1.39 | % | ||
Total Held-to-maturity Securities | $ | 102,265 | $ | 88,862 |
| 1.28 | % | ||
Available-for-sale |
|
|
|
|
|
| |||
Due in one year or less | $ | 1,062 | $ | 1,062 |
| 2.39 | % | ||
Due after one year through five years |
| 93,701 |
| 89,714 |
| 1.79 | % | ||
Due after five years through ten years |
| 154,748 |
| 148,717 |
| 2.09 | % | ||
Due after ten years |
| 137,442 |
| 125,641 |
| 1.74 | % | ||
Total Available-for-sale Securities | $ | 386,953 | $ | 365,134 |
| 1.89 | % | ||
Loan Portfolio
Gross loans, net of unearned income, increased $26.2 million or 1.6% to $1.69 billion as of June 30, 2022 compared to $1.67 billion as of December 31, 2021. Excluding PPP loans, gross loans held for investment net of unearned income increased $93.5 million or 5.9% from December 31, 2021 to June 30, 2022. PPP loans held for investment net of unearned income totaled $216 thousand at June 30, 2022, a decrease from $67.7 million at December 31, 2021.
49
The following table presents the Company’s composition of loans held for investment, net of deferred fees and costs, in dollar amounts and as a percentage of total gross loans as of June 30, 2022 and December 31, 2021.
| June 30, 2022 |
| December 31, 2021 |
| |||||||
(Dollars in thousands) |
| Amount |
| Percent |
| Amount |
| Percent |
| ||
Real Estate Loans: |
|
|
|
|
|
|
| ||||
Commercial | $ | 1,083,194 |
| 64.10 | % | $ | 968,442 |
| 58.15 | % | |
Construction and land development |
| 189,644 |
| 11.22 | % |
| 231,090 |
| 13.87 | % | |
Residential |
| 368,370 |
| 21.80 | % |
| 342,491 |
| 20.56 | % | |
Commercial - Non Real Estate: |
|
|
|
|
|
|
|
| |||
Commercial loans(1) |
| 47,878 |
| 2.84 | % |
| 122,945 |
| 7.38 | % | |
Consumer - Non-Real Estate: |
|
|
|
|
|
|
|
| |||
Consumer loans |
| 651 |
| 0.04 | % |
| 586 |
| 0.04 | % | |
Total Gross Loans | $ | 1,689,737 |
| 100.00 | % | $ | 1,665,554 |
| 100.00 | % | |
Allowance for loan losses |
| (20,031) |
| (20,032) |
|
| |||||
Net deferred loan costs |
| 2,915 |
| 915 |
|
| |||||
Total net loans | $ | 1,672,621 | $ | 1,646,437 |
|
| |||||
| (1) | Includes gross PPP loans of $224 thousand and $69.6 million as of June 30, 2022 and December 31, 2021, respectively. |
The following table summarizes the contractual maturities of the loans as of June 30, 2022 by loan type. Maturities are based on the final contractual payment date, and do not reflect the effect of scheduled principal repayments, prepayments, or early redemptions that may occur. The table also summarizes the fixed and floating rate composition of loans held for investment for contractual maturities greater than one year.
| June 30, 2022 | ||||||||||||||
|
| After 1 |
| After 5 |
|
| |||||||||
Year | years | Maturing | |||||||||||||
Within 1 | Within 5 | Within 15 | After 15 | ||||||||||||
(Dollars in thousands) | Year | Years | Years | Years | Total | ||||||||||
Real Estate Loans: |
|
|
|
|
|
|
|
|
| ||||||
Residential | $ | 7,241 | $ | 40,128 | $ | 38,137 | $ | 282,864 | $ | 368,370 | |||||
Commercial |
| 52,147 |
| 207,342 | 810,823 | 12,882 |
| 1,083,194 | |||||||
Construction and land development |
| 130,278 |
| 45,158 | 11,136 | 3,072 |
| 189,644 | |||||||
Commercial - Non-Real Estate: |
| — |
| — | — | — |
|
| |||||||
Commercial loans |
| 14,811 |
| 23,609 | 7,305 | 2,153 |
| 47,878 | |||||||
Consumer - Non-Real Estate: |
|
|
| ||||||||||||
Consumer loans |
| 204 |
| 426 | — | 21 |
| 651 | |||||||
Total Gross Loans | $ | 204,681 | $ | 316,663 | $ | 867,401 | $ | 300,992 | $ | 1,689,737 | |||||
For Maturities Over One Year: |
|
|
|
|
|
|
|
|
|
| |||||
Floating rate loans | $ | 117,481 | $ | 300,211 | $ | 288,249 | $ | 705,941 | |||||||
Fixed rate loans |
| 199,182 | 567,190 | 12,743 |
| 779,115 | |||||||||
$ | 316,663 | $ | 867,401 | $ | 300,992 | $ | 1,485,056 | ||||||||
Asset Quality
The Company maintains policies and procedures to promote sound underwriting and mitigate credit risk. The Chief Banking Officer in conjunction with the Chief Credit Officer are responsible for establishing credit risk policies and procedures, including underwriting and hold guidelines and credit approval authority, and monitoring credit exposure and performance of the Company’s lending-related transactions.
The Company’s asset quality remained strong through the second quarter of 2022. The Company did not have any nonperforming assets, which includes nonperforming loans and OREO, as of June 30, 2022 or December 31, 2021. As a result, the Company did not have any
50
nonperforming loans, which consists of loans that are 90 days or more past due or loans placed on nonaccrual as of June 30, 2022 or December 31, 2021.
The Company did not have any nonaccrual loans as of June 30, 2022 or December 31, 2021 nor were there any loans placed on nonaccrual during those periods. A loan is placed on nonaccrual status when (i) the Company is advised by the borrower that scheduled principal or interest payments cannot be met, (ii) when management’s best judgment indicates that payment in full of principal and interest can no longer be expected, or (iii) when any such loan or obligation becomes delinquent for 90 days, unless it is both well-secured and in the process of collection. As a result, the Company did not have any interest income that would have been recognized on nonaccrual loans for the three months ended June 30, 2022 or the three months ended June 30, 2021.
The Company may, for economic or legal reasons related to a borrower’s financial condition, grant a concession to the borrower that it would not otherwise consider, which results in the related loan being classified as a TDR. All modifications are evaluated by management on a loan-by-loan basis to determine whether the loan modification constitutes a TDR. Total TDRs were $536 thousand and $549 thousand as of June 30, 2022 and December 31, 2021, respectively, and were performing in accordance with their modified terms as of those dates.
The following table summarizes the Company’s asset quality as of June 30, 2022 and December 31, 2021.
(Dollars in thousands) |
| June 30, 2022 |
| December 31, 2021 |
| ||
Nonaccrual loans | $ | — | $ | — | |||
Loans past due 90 days and accruing interest |
| — |
| — | |||
Other real estate owned and repossessed assets |
| — |
| — | |||
Total nonperforming assets | $ | — | $ | — | |||
Allowance for loan losses to nonperforming assets |
| NM |
| NM | |||
Nonaccrual loans to gross loans |
| 0.00 | % |
| 0.00 | % | |
Nonperforming assets to period end loans and OREO |
| 0.00 | % |
| 0.00 | % | |
NM – Not meaningful
Allowance for Loan Losses
Refer to the discussion in the “Critical Accounting Policies and Estimates” section above for management’s approach to estimating the allowance for loan losses.
The Company recorded net charged-off loans of $1 thousand during the six months ended June 30, 2022 compared to $91 thousand for the six months ended June 30, 2021. The Company did not record any net charged-off loans during the three months ended June 30, 2022 compared to $90 thousand for the three months ended June 30, 2021. The allowance for loan losses was $20.0 million as of June 30, 2022 and December 31, 2021. The allowance for loan losses as a percentage of total gross loans net of unearned income as of June 30, 2022 and December 31, 2021 was 1.18% and 1.20%, respectively. The Company does not maintain an allowance on PPP loan balances, as they are 100% guaranteed by the SBA. Excluding PPP loan balances, the allowance for loan losses as a percentage of gross loans, net of unearned income was 1.18% and 1.25% at June 30, 2022 and December 31, 2021, respectively. The decrease in the allowance to outstanding loans, net of unearned income, was primarily due to improvement in risk ratings and net changes in other qualitative adjustments.
51
The following table summarizes the Company’s loan loss experience by loan portfolio for the three months ended June 30, 2022 and June 30, 2021.
June 30, 2022 | June 30, 2021 |
| ||||||||||
Net | Net | Net | Net |
| ||||||||
(charge-offs) | (charge-off) | (charge-offs) | (charge-off) |
| ||||||||
(Dollars in thousands) |
| recoveries |
| recovery rate (1) |
| recoveries |
| recovery rate (1) |
| |||
Real estate loans: |
|
|
|
|
|
|
|
| ||||
Commercial | $ | — |
| — | $ | (90) |
| (0.02) | % | |||
Construction and land development |
| — |
| — |
| — |
| — | ||||
Residential |
| — |
| — |
| — |
| — | ||||
Commercial loans |
| — |
| — |
| — |
| — | ||||
Consumer loans |
| — |
| — |
| — |
| — | ||||
Total | $ | — | $ | (90) |
|
| ||||||
Average loans outstanding during the period | $ | 1,641,914 | $ | 1,602,125 |
|
| ||||||
Allowance coverage ratio (2) |
|
| 1.18 | % |
|
|
| 1.24 | % | |||
Total net (charge-off) recovery rate (1) |
|
| — |
|
|
| (0.02) | % | ||||
Allowance to nonaccrual loans ratio(3) |
|
| NM |
|
|
| NM | |||||
NM – Not meaningful
(1) | The net (charge-off) recovery rate is calculated by dividing annualized total net (charge-offs) recoveries during the period by average gross loans outstanding during the period. |
(2) | The allowance coverage ratio is calculated by dividing the allowance for loan losses at the end of the period by gross loans, net of unearned income at the end of the period. |
(3) | The allowance to nonaccrual loans ratio is calculated by dividing the allowance for loan losses at the end of the period by nonaccrual loans at the end of the period. |
The following table summarizes the Company’s loan loss experience by loan portfolio for the six months ended June 30, 2022 and June 30, 2021.
June 30, 2022 | June 30, 2021 |
| ||||||||||
Net | Net | Net | Net |
| ||||||||
(charge-offs) | (charge-off) | (charge-offs) | (charge-off) |
| ||||||||
(Dollars in thousands) |
| recoveries |
| recovery rate (1) |
| recoveries |
| recovery rate (1) |
| |||
Real estate loans: |
|
|
|
|
|
|
|
| ||||
Commercial | $ | (1) |
| (0.00) | % | $ | (90) |
| (0.01) | % | ||
Construction and land development |
| — |
| — |
| — |
| — | ||||
Residential |
| — |
| — |
| — |
| — | ||||
Commercial loans |
| — |
| — |
| (1) |
| (0.00) | % | |||
Consumer loans |
| — |
| — |
| — |
| — | ||||
Total | $ | (1) | $ | (91) |
|
| ||||||
Average loans outstanding during the period | $ | 1,631,283 | $ | 1,589,059 |
|
| ||||||
Allowance coverage ratio (2) |
|
| 1.18 | % |
|
|
| 1.24 | % | |||
Total net (charge-off) recovery rate (1) |
|
| (0.00) | % |
|
|
| (0.01) | % | |||
Allowance to nonaccrual loans ratio(3) |
|
| NM |
|
|
| NM | |||||
NM – Not meaningful
(1) | The net (charge-off) recovery rate is calculated by dividing annualized total net (charge-offs) recoveries during the period by average gross loans outstanding during the period. |
52
(2) | The allowance coverage ratio is calculated by dividing the allowance for loan losses at the end of the period by gross loans, net of unearned income at the end of the period. |
(3) | The allowance to nonaccrual loans ratio is calculated by dividing the allowance for loan losses at the end of the period by nonaccrual loans at the end of the period. |
The following table summarizes the allowance for loan losses by portfolio with a comparison of the percentage composition in relation to total allowance for loan losses and total loans as of June 30, 2022 and December 31, 2021.
| June 30, 2022 |
| ||||||
Allowance | Percent of Allowance | Percent of Loans in |
| |||||
for Loan | in Each Category to | Each Category to Total |
| |||||
(Dollars in thousands) | Losses | Total Allocated Allowance | Loans |
| ||||
Real Estate Loans: |
|
|
|
|
| |||
Commercial | $ | 13,671 |
| 69.12 | % | 64.10 | % | |
Construction and land development |
| 2,801 |
| 14.16 | % | 11.22 | % | |
Residential |
| 2,660 |
| 13.45 | % | 21.80 | % | |
Commercial - Non-Real Estate: |
|
|
|
|
|
| ||
Commercial loans |
| 639 |
| 3.23 | % | 2.84 | % | |
Consumer - Non-Real Estate: |
|
|
|
|
|
| ||
Consumer loans |
| 7 |
| 0.04 | % | 0.04 | % | |
Unallocated |
| 253 |
| — |
| — | ||
Total | $ | 20,031 |
| 100.00 | % | 100.00 | % | |
December 31, 2021 |
| |||||||
| Allowance |
| Percent of Allowance |
| Percent of Loans in |
| ||
for Loan | in Each Category to | Each Category to Total |
| |||||
(Dollars in thousands) | Losses | Total Allocated Allowance | Loans |
| ||||
Real Estate Loans: |
|
|
|
|
|
| ||
Commercial | $ | 13,091 |
| 67.48 | % | 58.15 | % | |
Construction and land development |
| 2,824 |
| 14.56 | % | 13.87 | % | |
Residential |
| 2,769 |
| 14.27 | % | 20.56 | % | |
Commercial - Non-Real Estate: |
|
|
|
|
|
| ||
Commercial loans |
| 711 |
| 3.66 | % | 7.38 | % | |
Consumer - Non-Real Estate: |
|
|
|
|
|
| ||
Consumer loans |
| 5 |
| 0.03 | % | 0.04 | % | |
Unallocated |
| 632 |
| — |
| — | ||
Total | $ | 20,032 |
| 100.00 | % | 100.00 | % | |
Management believes that the allowance for loan losses is adequate to absorb credit losses inherent in the portfolio as of June 30, 2022. There can be no assurance, however, that adjustments to the provision for loan losses will not be required in the future. Changes in the economic assumptions underlying management’s estimates and judgments; adverse developments in the economy, on a national basis or in the Company’s market area; or changes in the circumstances of particular borrowers are criteria that could change and make adjustments to the provision for loan losses necessary.
Deposits
Total deposits increased $162.2 million or 8.6% to $2.04 billion as of June 30, 2022 compared to $1.88 billion as of December 31, 2021.
Non-interest bearing demand deposits increased $23.4 million or 4.8% to $512.3 million as of June 30, 2022 compared to $488.8 million at December 31, 2021. Non-interest bearing demand deposits represented 25.1% and 26.0% of total deposits at June 30, 2022 and December 31, 2021, respectively.
53
Interest-bearing deposits, which include NOW accounts, regular savings accounts, money market accounts, and time deposits, increased $138.7 million or 10.0% to $1.53 billion as of June 30, 2022 compared to $1.39 billion as of December 31, 2021. Interest-bearing deposits represented 74.9% and 74.0% of total deposits at June 30, 2022 and December 31, 2021, respectively.
The Company focuses on funding asset growth with deposit accounts, with an emphasis on core deposit growth, as its primary source of deposits. Core deposits consist of checking accounts, NOW accounts, money market accounts, regular savings accounts, time deposits, reciprocal IntraFi Demand® deposits, IntraFi Money Market® deposits and IntraFi CD® deposits. Core deposits totaled $1.74 billion or 85.1% of total deposits and $1.64 billion or 86.3% of total deposits at June 30, 2022 and December 31, 2021, respectively.
The following table sets forth the average balances of deposits and the average interest rates paid for the three months ended June 30, 2022 and 2021.
June 30, 2022 | June 30, 2021 |
| |||||||||
| Average |
|
| Average |
|
| |||||
(Dollars in thousands) | Amount | Rate | Amount | Rate |
| ||||||
Non-interest bearing | $ | 511,846 |
| $ | 439,356 |
|
| ||||
Interest bearing: |
|
|
|
|
|
|
| ||||
NOW accounts |
| 322,255 | 0.28 | % | 250,845 |
| 0.31 | % | |||
Money market accounts |
| 398,641 | 0.44 | % | 337,752 |
| 0.37 | % | |||
Savings accounts |
| 114,216 | 0.31 | % | 75,321 |
| 0.37 | % | |||
Time deposits |
| 633,273 | 0.60 | % | 674,969 |
| 0.69 | % | |||
Total interest-bearing |
| 1,468,385 | 0.46 | % | 1,338,887 |
| 0.52 | % | |||
Total | $ | 1,980,231 |
| $ | 1,778,243 |
|
| ||||
The following table sets forth the average balances of deposits and the average interest rates paid for the six months ended June 30, 2022 and 2021.
June 30, 2022 | June 30, 2021 |
| |||||||||
| Average |
|
| Average |
|
| |||||
(Dollars in thousands) | Amount | Rate | Amount | Rate |
| ||||||
Non-interest bearing | $ | 497,899 |
| $ | 421,349 |
|
| ||||
Interest bearing: |
|
|
|
|
|
|
| ||||
NOW accounts |
| 323,546 | 0.26 | % | 244,952 |
| 0.32 | % | |||
Money market accounts |
| 395,532 | 0.40 | % | 336,528 |
| 0.38 | % | |||
Savings accounts |
| 111,312 | 0.32 | % | 71,307 |
| 0.38 | % | |||
Time deposits |
| 635,359 | 0.52 | % | 670,014 |
| 0.79 | % | |||
Total interest-bearing |
| 1,465,749 | 0.42 | % | 1,322,801 |
| 0.58 | % | |||
Total | $ | 1,963,648 |
| $ | 1,744,150 |
|
| ||||
The following table sets forth the maturity ranges of certificates of deposit with balances of $250,000 or more as of June 30, 2022.
June 30, 2022 | ||||||
(Dollars in thousands) |
| Total |
| Uninsured | ||
Three months or less | $ | 49,682 | $ | 39,182 | ||
Over three through 6 months |
| 111,683 |
| 86,433 | ||
Over 6 through 12 months |
| 32,376 |
| 19,376 | ||
Over 12 months |
| 64,920 |
| 48,670 | ||
Total | $ | 258,661 | $ | 193,661 | ||
The Company had estimated total uninsured deposits of $1.07 billion and $1.01 billion as of June 30, 2022, and December 31, 2021, respectively.
54
Capital Resources
The Company is a bank holding company with less than $3 billion in assets and does not (i) have significant off balance sheet exposure, (ii) engage in significant non-banking activities, or (iii) have a material amount of securities registered under the Exchange Act. As a result, the Company qualifies as a small bank holding company under the Federal Reserve’s Small Bank Holding Company Policy Statement and is currently not subject to consolidated regulatory capital requirements.
The Bank is subject to capital adequacy standards adopted by the Federal Reserve, including the capital rules that implemented the Basel III regulatory capital reforms developed by the Basel Committee on Banking Supervision.
The rules adopted by the Federal Reserve require the Bank to maintain the following minimum capital ratios: (i) a ratio of common equity Tier 1 to risk-weighted assets of 4.5%, plus a 2.5% capital conservation buffer, resulting in a minimum ratio of common equity Tier 1 to risk-weighted assets of 7.0%, (ii) a ratio of Tier 1 capital to risk-weighted assets of 6.0%, plus the 2.5% capital conservation buffer, resulting in a minimum Tier 1 capital ratio of 8.5%, (iii) a ratio of total risk-based capital to risk-weighted assets of 8.0%, plus the 2.5% capital conservation buffer, resulting in a minimum total risk-based capital ratio of 10.5%, and (iv) a leverage ratio of 4.0%, calculated as the ratio of Tier 1 capital to average assets. The capital conservation buffer, which was phased in ratably over a four year period beginning January 1, 2016, is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of common equity Tier 1 to risk-weighted assets above the minimum but below the conservation buffer will face constraints on dividends, equity repurchases, and discretionary compensation paid to certain officers, based on the amount of the shortfall. As of June 30, 2022 and December 31, 2021, ratios of the Bank were in excess of the fully phased-in requirements.
The Basel III capital reforms also integrated the new capital requirements into the prompt corrective action provisions under Section 38 of the Federal Deposit Insurance Act. The Federal Reserve’s final rules (i) introduced a common equity Tier 1 capital ratio requirement at each level (other than critically undercapitalized), with the required ratio being 6.5% for well capitalized status, (ii) increased the minimum Tier 1 capital ratio requirement for each category, with the minimum ratio for well capitalized status being 8.0%, and (iii) eliminated the provision that provided that a bank with a composite supervisory rating of 1 may have a 3.0% Tier 1 leverage ratio and still be well capitalized. The minimum total capital to risk-weighted assets ratio (10.0%) and minimum leverage ratio (5.0%) for well capitalized status were unchanged by the final rules. As of June 30, 2022 and Decemmber 31, 2021, the most recent notification from the Federal Reserve Bank of Richmond (“Reserve Bank”) categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since the notification that management believes have changed the Bank’s category.
The federal banking agencies adopted rules to identify which credit loss allowances under the CECL model are eligible for inclusion in regulatory capital and to provide banking organizations the option to phase in over a three-year transition period ending January 1, 2026 the day-one adverse effects on regulatory capital that may result from the adoption of the CECL model (“CECL Transition Election”). The Company is required to implement the CECL model as of January 1, 2023 and we intend to make the CECL Transition Election effective in the first quarter of 2023. We currently expect our adoption of this guidance will result in an increase to our allowance for credit losses on financial instruments due to the requirement to record expected losses over the remaining contractual lives of our financial instruments; however, the actual impact will depend on the characteristics of our financial instruments, economic conditions, and our economic and loss forecasts at the adoption date. As a result, the adoption of CECL may have an adverse effect on our regulatory capital.
Note 11 to the Consolidated Financial Statements, included in Item 1 of this Form 10-Q, contains additional discussion and analysis regarding the Company and Bank’s regulatory capital requirements.
Shareholders’ equity decreased $940 thousand or 0.5% to $207.5 million as of June 30, 2022 compared to $208.5 million as of December 31, 2021. The decrease in shareholders’ equity was primarily attributable to a $(16.5) million other comprehensive loss during the period as a result of changes in fair value in the Company’s available-for-sale investment portfolio caused by rising interest rates and dividends declared of $2.8 million. The decrease was partially offset by net income of $15.6 million and an increase in common stock and additional paid-in capital of $2.6 million due to option exercises.
In August of 2021, the Company’s Board of Directors approved a share repurchase program whereby the Company was authorized to repurchase up to 675,000 shares of its outstanding common stock, or 4.8% of outstanding shares as of June 30, 2022. The stock
55
repurchase program will expire on August 31, 2022 or earlier if all the authorized shares have been repurchased. The Company has not repurchased any of its outstanding common stock under the program as of June 30, 2022.
Liquidity
Liquidity reflects a financial institution’s ability to fund assets and meet current and future financial obligations. Liquidity is essential in all banks to meet customer withdrawals, compensate for balance sheet fluctuations, and provide funds for growth. Monitoring and managing both liquidity measurements is critical in developing prudent and effective balance sheet management. Management conducts liquidity stress testing on a quarterly basis to prepare for unexpected adverse scenarios and contemporaneously develops mitigating strategies to reduce losses in the event of an economic downturn.
The Company’s principal source of liquidity and funding is its deposit base. The level of deposits necessary to support the Company’s lending and investment activities is determined through monitoring loan demand. Liquidity needs are also met with cash and cash equivalents and unencumbered securities classified as available-for-sale. Liquid assets totaled $422.5 million as of June 30, 2022 compared to $299.3 million at December 31, 2021. These amounts represented 18.2% and 16.8% of total assets as of June 30, 2022 and December 31, 2021, respectively.
In addition to the liquidity provided by balance sheet cash flows, the Company supplements its liquidity with additional sources such as credit lines with the FHLB, the Reserve Bank and other correspondent banks. Specifically, the Company has pledged a portion of its commercial real estate and residential real estate loan portfolios to the FHLB and the Reserve Bank. Based on collateral pledged as of June 30, 2022, the total FHLB available borrowing capacity was $373.9 million. Additional borrowing capacity with the Reserve Bank was approximately $28.9 million as of June 30, 2022. Undrawn lines of credit with other correspondent banks totaled $105.0 million at June 30, 2022.
Liquidity is a core pillar of the Company’s operations. Conditions may arise in the future that could negatively impact the Company’s future liquidity position resulting in funding mismatches. These include market constraints on the ability to convert assets into cash or accessing sources of funds (i.e., market liquidity) and contingent liquidity events. Changes in economic conditions or exposure to credit, market, operational, legal, and reputation risks also can affect a bank’s liquidity. Management maintains that the Company has a strong liquidity position, any of the factors referenced above could materially impact that in the future.
Off-Balance Sheet Arrangements
The Company enters into certain off-balance sheet arrangements in the normal course of business to meet the financing needs of its customers. These off-balance sheet arrangements include commitments to extend credit, standby letters of credit and financial guarantees which would impact the Company’s liquidity and capital resources to the extent customers accept and or use these commitments. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. With the exception of these off-balance sheet arrangements, the Company has no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources, that is material to investors. For further information, see Note 7 to the Consolidated Financial Statements, included in Item 1 of this Form 10-Q, for further discussion of the nature, business purpose and elements of risk involved with these off-balance sheet arrangements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not required for smaller reporting companies.
56
Item 4. Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of June 30, 2022. Based on their evaluation of the Company’s disclosure controls and procedures, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures designed to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and regulations are designed and operating in an effective manner.
No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15(d)-15(f) under the Exchange Act) occurred during the second fiscal quarter of 2022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
57
PART II — OTHER INFORMATION
Item 1. Legal Proceedings
In the ordinary course of our operations, the Company and its subsidiary are parties to various claims and lawsuits. Currently, we are not party to any material legal proceedings, and no such proceedings are, to management’s knowledge, threatened against us. Although the ultimate outcome of legal proceedings cannot be ascertained at this time, it is the opinion of management that the liabilities (if any) resulting from such legal proceedings will not have a material adverse effect on the Company’s business, including its consolidated financial position, results of operations, or cash flows.
Item 1A. Risk Factors
There have been no material changes in the risk factors that were disclosed in Item 1A, under the caption “Risk Factors” in our Registration Statement on Form 10 as amended, which we filed with the SEC on April 18, 2022.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not Applicable.
Item 5. Other Information
None.
Item 6. Exhibits
Exhibit No. |
| Description |
4.1 | ||
10.1 | ||
31.1† | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2† | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32.1† | ||
101.INS† | XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | |
58
101.SCH† | XBRL Taxonomy Extension Schema Document | |
101.CAL† | XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF† | XBRL Taxonomy Extension Definition Linkbase Document | |
101.LAB† | XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE† | XBRL Taxonomy Extension Presentation Linkbase Document | |
104† | Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101) |
†Filed herewith.
59
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: August 10, 2022
JOHN MARSHALL BANCORP, INC. | ||
By: | /s/ Christopher W. Bergstrom | |
Name: | Christopher W. Bergstrom | |
Title: | President, Chief Executive Officer | |
(Principal Executive Officer) | ||
By: | /s/ Kent D. Carstater | |
Name: | Kent D. Carstater | |
Title: | Executive Vice President, Chief Financial Officer | |
(Principal Financial Officer) | ||