FIRST COMMUNITY BANKSHARES, INC.
Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") is intended to help the reader understand our financial
condition, changes in financial condition, and results of operations. MD&A
contains forward-looking statements and should be read in conjunction with our
consolidated financial statements, accompanying notes, and other financial
information included in this report. Unless the context suggests otherwise, the
terms "First Community," "Company," "we," "our," and "us" refer to First
Community Bankshares, Inc. and its subsidiaries as a consolidated entity.
Executive Overview
First Community Bankshares, Inc. (the "Company") is a financial holding company,
headquartered in Bluefield, Virginia , that provides banking products and
services through its wholly owned subsidiary First Community Bank (the "Bank"),
a Virginia chartered bank institution. As of December 31, 2022 , the Bank
operated 48 branches in Virginia , West Virginia , North Carolina and Tennessee .
Our primary source of earnings is net interest income, the difference between
interest earned on assets and interest paid on liabilities, which is
supplemented by fees for services, commissions on sales, and various deposit
service charges. We fund our lending and investing activities primarily through
the retail deposit operations of our branch banking network supplemented by
retail and wholesale repurchase agreements and Federal Home Loan Bank ("FHLB")
borrowings. We invest our funds primarily in loans to retail and commercial
customers and various investment securities.
The Bank offers trust management, estate administration, and investment advisory
services through its Trust Division and wholly owned subsidiary First Community
Wealth Management ("FCWM"). The Trust Division manages inter vivos trusts and
trusts under will, develops and administers employee benefit and individual
retirement plans, and manages and settles estates. Fiduciary fees for these
services are charged on a schedule related to the size, nature, and complexity
of the account. Revenues consist primarily of commissions on assets under
management and investment advisory fees. As of December 31, 2022 , the Trust
Division and FCWM managed and administered $1.28 billion in combined assets
under various fee-based arrangements as fiduciary or agent.
The Company had no acquisition and divestiture activity during 2020 or 2021.
The Company completed the sale of its Emporia, Virginia branch to Benchmark
Community Bank on September 16, 2022 , which resulted in a gain of $1.66
million . In addition, on November 17, 2022 , the Company entered into an
Agreement and Plan of Merger with Surrey Bancorp, a North Carolina corporation
headquartered in Mt. Airy, North Carolina . Upon completion of the transaction,
the Company is expected to have total consolidated assets in excess of $3.6
billion . The transaction is expected to be consummated in the second quarter of
2023. For additional information, see Note 2, "Acquisitions and Divestitures,"
to the Consolidated Financial Statements in Item 8 of this report.
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Table of Contents
Critical Accounting Policies
Our consolidated financial statements are prepared in conformity with generally
accepted accounting principles ("GAAP") in the U.S. and prevailing practices in
the banking industry. Our accounting policies, as presented in Note 1, "Basis of
Presentation and Signficant Accounting Policies," to the Consolidated Financial
Statements in Item 8 of this report are fundamental in understanding MD&A and
the disclosures presented in Item 8, "Financial Statements and Supplementary
Data," of this report. Management may be required to make significant estimates
and assumptions that have a material impact on our financial condition or
operating performance. Due to the level of subjectivity and the susceptibility
of such matters to change, actual results could differ significantly from
management's assumptions and estimates. Based on the valuation techniques used
and the sensitivity of financial statement amounts to the methods, assumptions,
and estimates used, we have identified the allowance for loan losses and
goodwill as the accounting areas that require the most subjective or complex
judgments or are the most susceptible to change.
Allowance for Credit Losses or "ACL"
The ACL reflects management's estimate of losses that will result from the inability of our borrowers to make required loan payments. Management uses a systematic methodology to determine its ACL for loans held for investment and certain off-balance-sheet credit exposures. Management considers the effects of past events, current conditions, and reasonable and supportable forecasts on the collectability of the loan portfolio. The Company's estimate of its ACL involves a high degree of judgment; therefore, management's process for determining expected credit losses may result in a range of expected credit losses. It is possible that others, given the same information, may at any point in time reach a different reasonable conclusion. The Company's ACL recorded in the balance sheet reflects management's best estimate of expected credit losses. The Company recognizes in net income the amount needed to adjust the ACL for management's current estimate of expected credit losses. See Note 1 - "Basis of Presentation - Significant Accounting Policies" in this Annual Report on Form 10-K for further detailed descriptions of our estimation process and methodology related to the ACL. See also Note 6 - "Allowance for Credit Losses" in this Annual Report on Form 10-K, "Allowance for Credit Losses" in this MD&A. Periods prior to theJanuary 1, 2021 , adoption of ASU 2016-13 follow prior accounting guidance for estimated loan losses and are not comparable. The Company uses a number of economic variables to estimate the allowance for credit losses, with the most significant driver being a forecast of the national unemployment rate. In theDecember 31, 2022 , estimate, the Company assumed an unemployment forecast range of 3.9% to 4.8%, which is slightly higher than the range of 4.1% to 3.6% utilized in theDecember 31, 2021 , estimate. Based on a sensitivity analysis as ofDecember 31, 2022 , an increase of 1% in the unemployment forecast would result in an increase in the allowance for credit losses of approximately 11.0%. 20
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Table of ContentsGoodwill Goodwill is tested for impairment annually, onOctober 31st , or more frequently if events or circumstances indicate there may be impairment. We have one reporting unit, Community Banking. If we elect to perform a qualitative assessment, we evaluate factors such as macroeconomic conditions, industry and market considerations, overall financial performance, changes in stock price, and progress towards stated objectives in determining if it is more likely than not that the fair value of our reporting unit is less than its carrying amount. If we conclude that it is more likely than not that the fair value of our reporting unit is less than its carrying amount, a quantitative test is performed; otherwise, no further testing is required. The quantitative test consists of comparing the fair value of our reporting unit to its carrying amount, including goodwill. If the fair value of our reporting unit is greater than its book value, no goodwill impairment exists. If the carrying amount of our reporting unit is greater than its calculated fair value, a goodwill impairment charge is recognized for the difference. We performed a quantitative assessment for the annual test onOctober 31, 2022 , which resulted in no goodwill impairment. For additional information, see Note 8, "Goodwill and Other Intangible Assets," to the Consolidated Financial Statements in Item 8 of this report. Non-GAAP Financial Measures In addition to financial statements prepared in accordance with GAAP, we use certain non-GAAP financial measures that provide useful information for financial and operational decision making, evaluating trends, and comparing financial results to other financial institutions. The non-GAAP financial measures presented in this report include certain financial measures presented on a fully taxable equivalent ("FTE") basis. While we believe certain non-GAAP financial measures enhance the understanding of our business and performance, they are supplemental and not a substitute for, or more important than, financial measures prepared in accordance with GAAP and may not be comparable to those reported by other financial institutions. The reconciliations of non-GAAP to GAAP measures are presented below. We believe FTE basis is the preferred industry measurement of net interest income and provides better comparability between taxable and tax exempt amounts. We use this non-GAAP financial measure to monitor net interest income performance and to manage the composition of our balance sheet. FTE basis adjusts for the tax benefits of income from certain tax exempt loans and investments using the federal statutory income tax rate of 21%. The following table reconciles net interest income and margin, as presented in our consolidated statements of income, to net interest income on a FTE basis for the periods indicated: Year Ended December 31, 2022 2021 2020
(Amounts in thousands)
Net interest income, GAAP
451 439 647
Net interest income, FTE
Net interest margin, GAAP 3.90 % 3.65 % 4.27 % FTE adjustment(1)
0.02 % 0.02 % 0.02 %
Net interest margin, FTE 3.92 % 3.67 % 4.29 %
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(1) FTE basis of 21%.
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Table of Contents Performance Overview
Highlights of our results of operations in 2022, and financial condition as of
? Annual net income for 2022 of
share, was a decrease of
decrease in diluted earnings per share compared to 2021. The decrease is
primarily attributable to an increase of
credit losses offset by an increase in net interest income of
? Net interest income increased
securities increased
deposits in banks increased
increase in overnight rates. Interest and fees on loans also increased, with
an increase of
loan growth of
is primarily attributable to a decrease in the cost of time deposits.
? The provision for credit losses of
million compared to the recovery of provision of
The
increase was attributable to growth of the loan portfolio throughout 2022 and
an economic forecast that projects higher unemployment rates and weaker
macroeconomic trends. The prior year included recoveries of pandemic-related
provisioning.
? Net interest margin was 3.92%, which was a 25 basis point increase from 3.67%
reported in 2021. The yield on earning assets increased 21 basis points,
primarily driven by increased earnings on deposits in banks.
? The cost of interest-bearing deposits declined 6 basis points to 0.09%,
primarily driven by a decrease in the cost of time deposits.
? Return on average assets was 1.45% for the year while return on average equity
was 11.04%.
Salaries and employee benefits increased
2021. During the first quarter of 2022, the Company implemented annualized
? wage increases of approximately
initiative to enhance
minimum wage.
On September, 16, 2022, the Company completed the sale of First Community
? Bank's
million was realized from the sale.
? The Company's loan portfolio increased by
2022. Loan demand and originations were strong in all categories, including
construction, commercial real estate, residential mortgage, and consumer
loans.
Non-performing loans to total loans was 0.70% of total loans. Net charge-offs
? for the year ended
annualized average loans, compared to net charge-offs of
0.18% of annualized average loans, for the same period in 2021.
? The allowance for credit losses to total loans was 1.27% at
2022.
During the fourth quarter of 2022, the Company announced the planned
? acquisition of
acquisition will strengthen the Company's presence in western
and add approximately $500 million in assets.
During 2022, the Company repurchased 706,117 common shares for $21.31
? million. Share repurchases have been curtailed due to the announced
acquisition of Surrey Bancorp.
? Book value per share at
from the same period of 2021.
Results of Operations
Net Income
The following table presents the changes in net income and related information
for the periods indicated:
2022 Compared to 2021 2021 Compared to 2020
Year Ended December 31, Increase % Increase %
(Amounts in thousands,
except per share data) 2022 2021 2020 (Decrease) Change (Decrease) Change
Net income $ 46,662 $ 51,168 $ 35,926 $ (4,506 ) (8.81 )% $ 15,242 42.43 %
Basic earnings per
common share 2.82 2.95 2.02 (0.13 ) (4.41 )% 0.93 46.04 %
Diluted earnings per
common share 2.82 2.94 2.02 (0.12 ) (4.08 )% 0.92 45.54 %
Return on average assets 1.45 % 1.63 % 1.24 % (0.18 )% (11.04 )%
0.39 % 31.45 %
Return on average common
equity 11.04 % 11.96 % 8.54 % (0.92 )% (7.69 )% 3.42 % 40.05 %
2022 Compared to 2021. Pre-tax income decreased $6.37 million , or 9.58%,
primarily due to an increase of $15.04 million in provision for credit losses
offset by an increase in net interest income of $10.19 million . The increase in
provision for credit losses of $15.04 million was attributable to a return to
normalized provisions that include forecasts for higher unemployment rates and
weaker macroeconomic trends as compared with prior year recoveries of
pandemic-related provisioning. The increase in net interest income of $10.19
million was primarily due to increases in both interest on securities and
interest and fees on loans. The increases were primarily driven by significant
growth in both portfolios. Interest on deposits in banks increased as well and
was primarily driven by rate increases in the FOMC's target federal funds rate
throughout 2022.
2021 Compared to 2020. Pre-tax income increased $20.42 million , or 44.27%,
primarily due to a reversal of $8.47 million in the allowance for credit losses
in 2021 compared to $12.67 million in provision recorded in 2020. The decrease
in credit loss provisioning increased pre-tax income $21.14 million and is
primarily due to significantly improved economic forecasts in the 2021, as well
as strong credit quality metrics, versus 2020 provisioning driven by the
pandemic. The increase was offset by a decrease in net interest income of $6.10
million , or 5.62%, driven by the low interest rate environment, as well as a
$3.33 million decrease in accretion on acquired loans. Income tax expense
increased $5.17 million from 2020 primarily as a result of the increase in
pre-tax income.
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Table of Contents
Net Interest Income
Net interest income, our largest contributor to earnings, is analyzed on a fully
taxable equivalent ("FTE") basis, a non-GAAP financial measure. For additional
information, see "Non-GAAP Financial Measures" above. The following table
presents the consolidated average balance sheets and net interest analysis on a
FTE basis for the dates indicated:
Year Ended December 31,
2022 2021 2020
Average Average Average
Yield/ Yield/ Yield/
(Amounts in thousands) Average Balance Interest(1)
Rate(1) Average Balance Interest(1) Rate(1) Average Balance Interest(1) Rate(1)
Assets
Earning assets
Loans(2)(3) $ 2,298,503 $ 104,830 4.56 % $ 2,153,099 $ 102,996 4.78 % $ 2,142,637 $ 110,619 5.16 %
Securities available for sale 256,221 6,172 2.41 % 81,049 2,008 2.48 % 105,005 3,259 3.10 %
Interest-bearing deposits 330,785 3,767 1.14 % 570,040 745 0.13 % 296,495 805 0.27 %
Total earning assets 2,885,509 $ 114,769 3.98 % 2,804,188 $ 105,749 3.77 % 2,544,137 $ 114,683 4.51 %
Other assets 328,635 330,640 348,150
Total assets $ 3,214,144 $ 3,134,828 $ 2,892,287
Liabilities and stockholders' equity
Interest-bearing deposits
Demand deposits $ 683,502 $ 112 0.02 % $ 646,999 $ 127 0.02 % $ 556,279 $ 311 0.06 %
Savings deposits 880,171 306 0.03 % 816,845 281 0.03 % 711,831 902 0.13 %
Time deposits 322,158 1,235 0.38 % 387,249 2,427 0.63 % 456,755 4,247 0.93 %
Total interest-bearing deposits 1,885,831 1,653 0.09 % 1,851,093 2,835 0.15 % 1,724,865 5,460 0.32 %
Borrowings
Retail repurchase agreements 2,239 2 0.07 % 1,194 1 0.07 % 1,145 3 0.28 %
FHLB advances and other borrowings - - - % - - - % 36 1 2.23 %
Total borrowings 2,239 2 0.07 % 1,194 1 0.07 % 1,181 4 0.34 %
Total interest-bearing liabilities 1,888,070 1,655 0.09 % 1,852,287 2,836 0.15 % 1,726,046 5,464 0.32 %
Noninterest-bearing demand deposits 864,224 816,638 707,623
Other liabilities 39,363 38,151 37,826
Total liabilities 2,791,657 2,707,076 2,471,495
Stockholders' equity 422,487 427,752 420,792
Total liabilities and equity $ 3,214,144 $ 3,134,828 Net interest income, FTE(1)$ 113,114 $ 102,913 $ 109,219 Net interest rate spread, FTE(1) 3.89 % 3.62 % 4.19 % Net interest margin, FTE(1) 3.92 % 3.67 % 4.29 %
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(1) FTE basis based on the federal statutory rate of 21%. (2) Nonaccrual loans are included in average balances; however, no
related interest income is recognized during the period of
nonaccrual.
(3) Interest on loans include non-cash purchase accounting accretion
of $2.62 million in 2022, $4.66 million in 2021, and
$7.99 million in 2020.
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Table of Contents
The following table presents the impact to net interest income on a FTE basis
due to changes in volume (average volume times the prior year's average rate),
rate (average rate times the prior year's average volume), and rate/volume
(average volume times the change in average rate), for the periods indicated:
Year Ended Year Ended
December 31, 2022 Compared to 2021 December 31, 2021 Compared to 2020
Dollar Increase (Decrease) due to Dollar Increase (Decrease) due to
Rate/ Rate/
(Amounts in thousands) Volume Rate Volume Total Volume Rate Volume Total
Interest earned on(1):
Loans $ 6,956 $ (4,798 ) $ (324 ) $ 1,834
4,340 (56 ) (120 ) 4,164 (744 ) (657 ) 150 (1,251 )
Interest-bearing
deposits with other
banks (313 ) 5,747 (2,412 ) 3,022 715 (388 ) (387 ) (60 )
Total interest-earning
assets 10,983 893 (2,856 ) 9,020 511 (9,168 ) (277 ) (8,934 )
Interest paid on(1):
Demand deposits 7 (21 ) (1 ) (15 ) 51 (202 ) (33 ) (184 )
Savings deposits 22 3 - 25 133 (657 ) (97 ) (621 )
Time deposits (408 ) (942 ) 158 (1,192 ) (646 ) (1,384 ) 210 (1,820 )
Retail repurchase
agreements - - 1 1 - (1 ) (1 ) (2 )
Wholesale repurchase
agreements - - - - - - - -
FHLB advances and other
borrowings - - - - (1 ) - - (1 )
Total interest-bearing
liabilities (379 ) (960 ) 158 (1,181 ) (463 ) (2,244 ) 79 (2,628 )
Change in net interestincome(1)$ 11,362 $ 1,853 $ (3,014 ) $ 10,201 $ 974 $ (6,924 ) $ (356 ) $ (6,306 )
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(1) FTE basis based on the federal statutory rate of 21%.
2022 Compared to 2021. Net interest income comprised 75.19% of total net interest and noninterest income in 2022 compared to 74.92% in 2021. Net interest income increased$10.19 million , or 9.94%, and increased$10.20 million , or 9.91%, on a FTE basis. The FTE net interest margin increased 25 basis points and the FTE net interest spread increased 27 basis points. The increase in net interest margin was primarily driven by an increase in yield on earning assets of 21 basis points, specifically, interest on deposits in banks. The increased yield on interest on deposits in banks was primarily driven by rate increases in theFOMC's target federal funds rate throughout 2022. Average earning assets increased$81.32 million , or 2.90%, primarily due to an increase in average securities available for sale of$175.17 million , or 216.13%, and average loans of$145.40 million , or 6.75%. The increases were offset by a decrease in average interest-bearing deposits in banks of$239.26 million , or 41.97%. The yield on earning assets increased 21 basis points primarily due to an increase in yield on interest on deposits in banks of 101 basis points to 1.14% compared to 0.13% in 2021. The increase in yield was primarily driven by rate increases in theFOMC's target federal funds rate throughout 2022. The average loan to deposit ratio increased to 83.58% from 80.71% in 2021. Non-cash accretion income related to PCD loans decreased$2.04 million , or 43.77%, to$2.62 million due to reduced balances in the PCD portfolios. The impact of non-cash purchase accounting accretion income on the FTE net interest margin was 9 basis points compared to 17 basis points in the prior year. Average interest-bearing liabilities, which consist of interest-bearing deposits and borrowings, increased$35.78 million , or 1.93%, primarily due to an increase in average interest-bearing deposits. The yield on interest-bearing liabilities decreased 6 basis points. Average interest-bearing deposits increased$34.74 million , or 1.88%, with increases of$63.33 million , or 7.75%, in average savings deposits,$36.50 million , or 5.64%, in average interest-bearing demand deposits, offset by a decrease of$65.09 million , or 16.81%, in average time deposits. 2021 Compared to 2020. Net interest income comprised 74.92% of total net interest and noninterest income in 2021 compared to 78.45% in 2020. Net interest income decreased$6.10 million , or 5.62%, and decreased$6.31 million , or 5.77%, on a FTE basis. The FTE net interest margin decreased 62 basis points and the FTE net interest spread decreased 57 basis points. The decrease in the net interest margin and the net interest spread are primarily attributable to the current historically low interest rate environment as well as a decrease in purchase accounting accretion from acquired loans. Average earning assets increased$260.05 million , or 10.22%, primarily due to an increase in average interest-bearing deposits and average loans offset by a decrease in average debt securities. The yield on earning assets decreased 74 basis points as the yields decreased primarily due to the historically low rate environment. Average loans increased$10.46 million , or 0.49%, and the average loan to deposit ratio decreased to 80.71% from 88.08% in 2020. Non-cash accretion income related to PCD loans decreased$3.33 million , or 41.73%, to$4.66 million due to reduced balances in the PCD portfolios. The impact of non-cash purchase accounting accretion income on the FTE net interest margin was 17 basis points compared to 31 basis points in the prior year. Average interest-bearing liabilities, which consist of interest-bearing deposits and borrowings, increased$126.24 million , or 7.31%, primarily due to an increase in average interest-bearing deposits. The yield on interest-bearing liabilities decreased 17 basis points. Average interest-bearing deposits increased$126.23 million , or 7.32%, with increases of$105.01 million , or 14.75%, in average savings deposits,$90.72 million , or 16.31%, in average interest-bearing demand deposits, offset by a decrease of$69.51 million , or 15.22%, in average time deposits. 24
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Table of Contents Provision for Credit Losses 2022 Compared to 2021. The provision charged to operations increased$15.04 million , or 177.58%. The increase was attributable to growth of the loan portfolio throughout 2022 and an economic forecast that projects higher unemployment rates and weaker macroeconomic trends. The prior year included recoveries of pandemic-related provisioning. 2021 Compared to 2020. The provision charged to operations decreased$21.14 million , or 166.87%. The decrease was primarily due to significantly improved economic forecasts in 2021, as well as strong credit quality metrics, versus prior year provisioning driven by the pandemic. The most significant forecast variable in our allowance model is unemployment. The forecast used forDecember 31, 2021 , ranged from 4.1% to 3.6%. That forecast was much stronger than that used forJanuary 1, 2021 , that ranged from 6.6% to 5.6% over the forecast period. Noninterest Income
The following table presents the components of, and changes in, noninterest income for the periods indicated:
2022 Compared to 2021 2021 Compared to 2020
Year Ended December 31, Increase % Increase %
2022 2021 2020
(Decrease) Change (Decrease) Change
(Amounts in thousands)
Wealth management
0.05 % $ 436 12.76 %
Service charges on
deposits 14,213 13,446 13,019 767 5.70 % 427 3.28 %
Other service charges
and fees 12,308 12,422 10,333 (114 ) -0.92 % 2,089 20.22 %
Net gain on sale of
securities - - 385 - - (385 ) -100.00 %
Net FDIC indemnification
asset amortization - (1,226 ) (1,690 ) 1,226 -100.00 % 464 -27.46 %
Gain on divestiture 1,658 - - 1,658 - - -
Other operating income 5,148 5,806 4,369 (658 ) -11.33 % 1,437 32.89 %
Total noninterest income
8.40 % $ 4,468 14.98 %
2022 Compared to 2021. Noninterest income comprised24.81% of total net interest
and noninterest income in 2022 compared to 25.08% in 2021. Noninterest income
increased $2.88 million , or 8.40%, primarily due to the $1.66 million gain
recognized from the sale of the Company's Emporia Virginia branch to Benchmark
Community Bank in the third quarter of 2022. Also contributing to the increase
was $1.23 million in net FDIC indemnification asset amortization recognized in
2021, as the asset became fully amortized in 2021. Service charges on deposits
increased $767 thousand , or 5.70%, and is attributable to increased customer
activity compared to the activity levels experienced during the pandemic
lock-downs. Other operating income decreased $658 thousand , or 11.33%, and is
primarily attributable to the 2021 recovered amount of $1.00 million of an
acquired loan from a failed bank acquisition that had been written down prior to
acquisition.
2021 Compared to 2020. Noninterest income comprised 25.08% of total net interest
and noninterest income in 2021 compared to 21.55% in 2020. Noninterest income
increased $4.47 million , or 14.98%, primarily due to an increase in other
service charges of $2.09 million , or 20.22%, due primarily to an increase in net
interchange income of $1.90 million , compared to 2020. In addition, a recovered
amount of $1.00 million was received and recorded in other operating income
during the second quarter of 2021 for the recovery of an acquired loan from a
failed bank acquisition that had been written down prior to acquisition.
Additional increases occurred in wealth management income and service charges on
deposits of $436 thousand and $427 thousand , respectively.
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Table of Contents Noninterest Expense
The following table presents the components of, and changes in, noninterest expense for the periods indicated:
2022 Compared to 2021 2021 Compared to 2020
Year Ended December 31, Increase % Increase %
2022 2021 2020 (Decrease) Change (Decrease) Change(Amounts in thousands) Salaries and employee benefits$ 47,183 $ 44,239 44,005$ 2,944 6.65 %$ 234 0.53 % Occupancy expense 4,818 4,913 5,043 (95 ) -1.93 % (130 ) -2.58 % Furniture and equipment expense 6,001 5,627 5,558 374 6.65 % 69 1.24 % Service fees 7,606 6,324 5,665 1,282 20.27 % 659 11.63 % Advertising and public relations 2,409 2,076 1,951 333 16.04 % 125 6.41 % Professional fees 1,303 1,524 1,224 (221 ) -14.50 % 300 24.51 % Amortization of intangibles 1,446 1,446 1,450 - 0.00 % (4 ) -0.28 % FDIC premiums and assessments 1,126 832 426 294 35.34 % 406 95.31 % Merger expense 596 - 1,893 596 - (1,893 ) -100.00 % Divestiture expense 153 - - 153 - - - Other operating expense 10,475 11,737 12,410 (1,262 ) -10.75 % (673 ) -5.42 %
Total noninterest expense
5.59 % $ (907 ) -1.14 %
2022 Compared to 2021. Noninterest expense increased $4.40 million , or 5.59%.
The increase was primarily due to an increase in salaries and employee benefits
of $2.94 million , or 6.65%, and service fees of $1.28 million , or 20.27%. The
increase in salaries and benefits is due to wage increases implemented in the
first quarter of 2022 as part of the Company's strategic initiative to enhance
Human Capital Management , which included an increased minimum wage. Service
fees increased due to an increase in core processing expense. In addition, the
Company recorded merger and divestiture expenses related to the announced Surrey
Bancorp acquisition and the divestiture of the Company's Emporia Virginia branch
of $596 thousand and $153 thousand , respectively. These increases to expense
were offset primarily by a decrease in other operating expense of $1.26 million ,
or 10.75%. The decrease is primarily attributable to the 2021 write-down of
bank property of $781 thousand .
2021 Compared to 2020. Noninterest expense decreased $907 thousand , or 1.14%.
The decrease was primarily due to residual merger expenses of $1.89 million
recognized in the first quarter of 2020. In addition, other operating expense
decreased $673 thousand . These decreases were offset by increases in other
service fees, FDIC premiums and assessments, professional fees and salaries and
employee benefits of $659 thousand , $406 thousand , $300 thousand , and $234
thousand , respectively.
Income Tax Expense
The Company's effective tax rate, income tax as a percent of pre-tax income, may
vary significantly from the statutory rate due to permanent differences and
available tax credits. Permanent differences are income and expense items
excluded by law in the calculation of taxable income. The Company's most
significant permanent differences generally include interest income on municipal
securities and increases in the cash surrender value of life insurance
policies.
2022 Compared to 2021. Income tax expense decreased
2021 Compared to 2020. Income tax expense increased
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Table of Contents Financial Condition Total assets as ofDecember 31, 2022 , decreased$58.95 million , or 1.85%, to$3.14 billion from$3.19 billion as ofDecember 31, 2021 . The decrease is primarily due to the decrease in deposits of$50.58 million , or 1.85%, that is primarily attributable to the divestiture of$61.05 million in deposits in theEmporia branch sale.. Within assets, there was an increase in loans and securities$234.63 million , or 10.83%, and$224.06 million , or 293.68%, respectively.Investment Securities Our investment securities are used to generate interest income through the deployment of excess funds, to fund loan demand or deposit liquidation, to pledge as collateral where required, and to make selective investments for Community Reinvestment Act purposes. The composition of our investment portfolio changes from time to time as we consider our liquidity needs, interest rate expectations, asset/liability management strategies, and capital requirements. Available-for-sale debt securities as ofDecember 31, 2022 , increased$224.06 million , or 293.68%, compared toDecember 31, 2021 . The increase was primarily attributable to purchases of$269.34 million offset by maturities, prepayments, and calls of$25.75 million . The market value of debt securities available for sale as a percentage of amortized cost was 93.82% as ofDecember 31, 2022 , compared to 100.02% as ofDecember 31, 2021 . There were no held-to-maturity debt securities as ofDecember 31, 2022 , or 2021. The following table provides information about our investment portfolio as of the dates indicated: December 31, 2022 2021 (Amounts in years) Average life 4.61 4.74 Average duration 2.84 2.99 There were no holdings of any one issuer, other than theU.S. government and its agencies, in an amount greater than 10% of our total consolidated shareholders' equity as ofDecember 31, 2022 or 2021. 27
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Management evaluates securities for impairment where there has been a decline in fair value below the amortized cost basis of a security to determine whether there is a credit loss associated with the decline in fair value on at least a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Credit losses are calculated individually, rather than collectively, using a discounted cash flow method, whereby Management compares the present value of expected cash flows with the amortized cost basis of the security. The credit loss component would be recognized through the provision for credit losses and the creation of an allowance for credit losses. Consideration is given to (1) the financial condition and near-term prospects of the issuer including looking at default and delinquency rates, (2) the outlook for receiving the contractual cash flows of the investments, (3) the length of time and the extent to which the fair value has been less than cost, (4) our intent and ability to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value or for a debt security whether it is more-likely-than-not that we will be required to sell the debt security prior to recovering its fair value, (5) the anticipated outlook for changes in the general level of interest rates, (6) credit ratings, (7) third party guarantees, and (8) collateral values. In analyzing an issuer's financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, the results of reviews of the issuer's financial condition, and the issuer's anticipated ability to pay the contractual cash flows of the investments. All of theU.S. Treasury and Agency-Backed Securities have the full faith and credit backing of the United State Government or one of its agencies. Municipal securities and all other securities that do not have a zero expected credit loss are evaluated quarterly to determine whether there is a credit loss associated with a decline in fair value. Based on the application of the new standard, and that all debt securities available for sale in an unrealized loss position as ofDecember 31, 2022 , continue to perform as scheduled, we do not believe that a provision for credit losses is necessary in 2022. We recognized no impairment charges in earnings associated with debt securities in 2021. For additional information, see Note 1, "Basis of Presentation and Significant Accounting Policies," and Note 3, "Debt Securities ," to the Consolidated Financial Statements in Item 8, of this report. Loans Held for Investment Loans held for investment, our largest component of interest income, are grouped into commercial, consumer real estate, and consumer and other loan segments. Each segment is divided into various loan classes based on collateral or purpose. The general characteristics of each loan segment are as follows:
? Commercial loans - This segment consists of loans to small and mid-size
industrial, commercial, and service companies. Commercial real estate projects
represent a variety of sectors of the commercial real estate market, including
single family and apartment lessors, commercial real estate lessors, and
hotel/motel operators. Commercial loan underwriting guidelines require that
comprehensive reviews and independent evaluations be performed on credits
exceeding predefined size limits. Updates to these loan reviews are done
periodically or annually depending on the size of the loan relationship.
? Consumer real estate loans - This segment consists of largely of loans to
individuals within our market footprint for home equity loans and lines of
credit and for the purpose of financing residential properties. Residential
real estate loan underwriting guidelines require that borrowers meet certain
credit, income, and collateral standards at origination.
? Consumer and other loans - This segment consists of loans to individuals
within our market footprint that include, but are not limited to, automobile,
credit cards, personal lines of credit, boats, mobile homes, and other
consumer goods. Consumer loan underwriting guidelines require that borrowers
meet certain credit, income, and collateral standards at origination.
Total loans held for investment, net of unearned income, as of December 31,
2022 , increased $234.63 million , or 10.83%, compared to December 31, 2021 . We
had no foreign loans or loan concentrations to any single borrower or industry,
which are not otherwise disclosed as a category of loans that represented 10% or
more of outstanding loans, as of December 31, 2022 or 2021. For additional
information, see Note 4, "Loans," to the Consolidated Financial Statements in
Item 8 of this report.
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The following table presents the maturities and rate sensitivities of the loan
portfolio as of
Due After One Due After
Due in One Year Through Five Through Due After
(Amounts in thousands) Year or Less Five Years Fifteen Years Fifteen Years Total
Commercial loans
Construction, development, and
other land(1) $ 21,048 $ 9,763 $ 46,970 $ 39,393 $ 117,174
Commercial and industrial 22,002 60,351 48,237 19,838 150,428
Multi-family residential 6,068 34,593 63,374 43,991 148,026
Single family non-owner
occupied 3,974 12,474 70,492 119,181 206,121
Non-farm, non-residential 24,786 115,786 351,089 296,042 787,703
Agricultural 997 7,104 3,931 - 12,032
Farmland 1,938 1,983 5,528 2,330 11,779
Total commercial loans 80,813 242,054 589,621 520,775 1,433,263
Consumer real estate loans
Home equity lines 5,674 12,032 48,759 9,177 75,642
Single family owner occupied 2,093 16,995 176,553 538,899 734,540
Owner occupied construction 11 70 530 9,755 10,366
Total consumer real estate
loans 7,778 29,097 225,842 557,831 820,548
Consumer and other loans
Consumer loans 4,177 98,023 40,514 1,868 144,582
Other 1,804 - - - 1,804
Total consumer and other loans 5,981 98,023 40,514 1,868 146,386
Total loans $ 94,572 $ 369,174 $ 855,977 $ 1,080,474 $ 2,400,197
Rate sensitivities
Predetermined interest rate $ 54,227 $ 331,815 $ 607,511 $ 667,584 $ 1,661,137
Floating or adjustable interest
rate 40,342 37,360 248,467 412,891 739,060
Total loans $ 94,569 $ 369,175 $ 855,978 $ 1,080,475 $ 2,400,197 --------------------------------------------------------------------------------
(1) Construction loans include construction to permanent loans that have not yet
converted to principal and interest payments.
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Risk Elements
We seek to mitigate credit risk by following specific underwriting practices and
by ongoing monitoring of our loan portfolio. Our underwriting practices include
the analysis of borrowers' prior credit histories, financial statements, tax
returns, and cash flow projections; valuation of collateral based on independent
appraisers' reports; and verification of liquid assets. We believe our
underwriting criteria are appropriate for the various loan types we offer;
however, losses may occur that exceed the reserves established in our allowance
for loan losses. The Company has a loan review function independent of credit
administration that performs a risk-based review of a sample of loans and loan
relationships in the Company's commercial portfolio, and conducts analytical
review of credit quality on the Company's non-commercial portfolios.
Nonperforming assets consist of nonaccrual loans, accrual loans contractually
past due 90 days or more, unseasoned troubled debt restructurings ("TDRs"), and
other real estate owned ("OREO"). Ongoing activity in the classification and
categories of nonperforming loans include collections on delinquencies,
foreclosures, loan restructurings, and movements into or out of the
nonperforming classification due to changing economic conditions, borrower
financial capacity, or resolution efforts. Loans acquired with credit
deterioration, with a discount, continue to accrue interest based on expected
cash flows; therefore, PCD loans are not generally considered nonaccrual. For
additional information, see Note 5, "Credit Quality," to the Consolidated
Financial Statements in Item 8 of this report.
The following table presents the components of nonperforming assets and related information as of the periods indicated:
December 31,
(Amounts in thousands) 2022 2021 2020 2019 2018
Nonperforming
Nonaccrual loans $ 15,208 $ 20,768 $ 22,003 $ 16,357 $ 19,905
Accruing loans past due 90 days or
more 142 87 295 144 58
TDRs(1) 1,346 1,367 187 720 161
Total non-covered nonperforming
loans 16,696 22,222 22,485 17,221 20,124
OREO 703 1,015 2,083 3,969 3,838
Total nonperforming assets $ 17,399 $ 23,237 $ 24,568 $ 21,190 $ 23,962
Additional Information
Total TDRs(2) 7,112 8,652 10,248 6,575 6,427
Gross interest income that would
have been recorded under the
original terms of restructured and
nonperforming loans 883 1,129 1,586 1,068 1,175
Actual interest income recorded on
restructured and nonperforming loans 388 422 473 277 264
Total ratios Nonperforming loans to total loans 0.70 % 1.03 % 1.03 % 0.81 % 1.13 % Nonperforming assets to total assets 0.55 % 0.73 % 0.82 % 0.76 % 1.07 % Allowance for credit losses to nonperforming loans 183.01 % 125.36 % 116.44 % 106.99 % 90.77 % Allowance for credit losses to total loans 1.27 % 1.29 % 1.20 % 0.87 % 1.03 %
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(1) TDRs restructured within the past six months and nonperforming TDRs exclude
nonaccrual TDRs of
nonaccrual loans.
(2) Total accruing TDRs exclude nonaccrual TDRs of $1.32 million ,
ended December 31, 2022 . They are included in nonaccrual loans.
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Nonperforming assets as ofDecember 31, 2022 , decreased$5.84 million , or 25.12%, fromDecember 31, 2021 , primarily due to a decrease of$5.56 million , or 26.77%, in nonaccrual loans, and a decrease of$312 thousand , or 30.74%, in OREO. OREO, which is carried at the lesser of estimated net realizable value or cost, consisted of 11 properties with an average holding period of 10 months as ofDecember 31, 2022 . The net loss on the sale of OREO was$453 thousand in 2022,$231 thousand in 2021, and$316 thousand in 2020. The following table presents the changes in OREO during the periods indicated: Year Ended December 31, 2022 2021 (Amounts in thousands) Beginning balance$ 1,015 $ 2,083 Additions 705 1,283 Disposals (533 ) (2,063 ) Valuation adjustments (484 ) (288 ) Ending balance$ 703 $ 1,015 As ofDecember 31, 2022 , nonaccrual loans were largely attributed to single family owner occupied (57.98%), consumer (15.81%), and non-farm, non-residential (11.65%) loans. Certain loans included in the nonaccrual category have been written down to estimated realizable value or assigned specific reserves in the allowance for credit losses based on management's estimate of loss at ultimate resolution. When restructuring loans for borrowers experiencing financial difficulty, we generally make concessions in interest rates, loan terms, or amortization terms. Certain TDRs are classified as nonperforming when modified and are returned to performing status after six months of satisfactory payment performance; however, these loans remain identified as individually evaluated until full payment or other satisfaction of the obligations occurs. Accruing TDRs as ofDecember 31, 2022 , decreased$1.54 million , or 17.80%, to$7.11 million fromDecember 31, 2021 . Nonperforming accruing TDRs as ofDecember 31, 2022 , decreased$21 thousand , or 1.53%, to$1.35 million fromDecember 31, 2021 . Nonperforming accruing TDRs as a percent of total accruing TDRs totaled 18.93% as ofDecember 31, 2022 , compared to 15.81% as ofDecember 31, 2021 . There were no specific reserves on TDRs as ofDecember 31, 2022 , orDecember 31, 2021 . The CARES Act included a provision allowing banks to not apply the guidance on accounting for troubled debt restructurings to loan modifications, such as extensions or deferrals, related to COVID-19 made betweenMarch 1, 2020 , andDecember 31, 2021 . The relief could only be applied to modifications for borrowers that were not more than 30 days past due as ofDecember 31, 2019 . The Company elected to adopt this provision of the CARES Act. ThroughDecember 31, 2022 , we had modified a total of loans for$482.40 million related to COVID-19 relief. Those modifications were generally short-term payment deferrals and are not considered TDRs based on the CARES Act. Our policy is to downgrade commercial loans modified for COVID-19 to special mention, which caused the significant increase in loans in that rating. Subsequent upgrade or downgrade will be on a case by case basis. The Company has upgraded these loans back to pass once the modification period has ended and timely contractual payments resume. Further downgrade would be based on a number of factors, including but not limited to additional modifications, payment performance and current underwriting. As ofDecember 31, 2022 , current COVID-19 loan deferrals stood at$1.02 million , down from$2.92 million atDecember 31, 2021 . Delinquent loans, comprised of loans 30 days or more past due and nonaccrual loans, totaled$29.68 million as ofDecember 31, 2022 , a decrease of$3.42 million , or 10.33%, compared to$33.10 million as ofDecember 31, 2021 . Delinquent loans as a percent of total loans totaled 1.24% as ofDecember 31, 2022 , which includes past due loans 0.63% and nonaccrual loans 0.61%, compared to 1.53% as ofDecember 31, 2021 .
Allowance for Credit Losses (ACL)
The ACL reflects management's estimate of losses that will result from the
inability of our borrowers to make required loan payments. Management uses a
systematic methodology to determine its ACL for loans held for investment and
certain off-balance-sheet credit exposures. The ACL is a valuation account that
is deducted from the amortized cost basis to present the net amount expected to
be collected on the loan portfolio. Management considers the effects of past
events, current conditions, and reasonable and supportable forecasts on the
collectability of the loan portfolio. The Company's estimate of its ACL involves
a high degree of judgment; therefore, management's process for determining
expected credit losses may result in a range of expected credit losses. It is
possible that others, given the same information, may at any point in time reach
a different reasonable conclusion. The Company's ACL recorded in the balance
sheet reflects management's best estimate of expected credit losses. The Company
recognizes in net income the amount needed to adjust the ACL for management's
current estimate of expected credit losses. The Company's measurement of credit
losses policy adheres to GAAP as well as interagency guidance. The Company's ACL
is calculated using collectively evaluated and individually evaluated loans.
For collectively evaluated loans, the Company in general uses two modeling
approaches to estimate expected credit losses. The Company projects the
contractual run-off of its portfolio at the segment level and incorporates a
prepayment assumption in order to estimate exposure at default. Financial assets
that have been individually evaluated can be returned to a pool for purposes of
estimating the expected credit loss insofar as their credit profile improves and
that the repayment terms were not considered to be unique to the asset.
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In addition to its own loss experience, management also includes peer bank historical loss experience in its assessment of expected credit losses to determine the ACL. The Company utilized call report data to measure historical credit loss experience with similar risk characteristics within the segments. For the majority of segment models for collectively evaluated loans, the Company incorporated at least one macroeconomic driver either using a statistical regression modeling methodology or simple loss rate modeling methodology. Included in its systematic methodology to determine its ACL for loans held for investment and certain off-balance-sheet credit exposures, management considers the need to qualitatively adjust expected credit losses for information not already captured in the loss estimation process. These qualitative adjustments either increase or decrease the quantitative model estimation (i.e. formulaic model results). Each period, the Company considers qualitative factors that are relevant within the qualitative framework. For further discussion of our Allowance for Credit Losses - See Note 1 - "Basis of Presentation - Significant Accounting Policies". With the adoption of ASU 2016-13 effectiveJanuary 1, 2021 , the Company changed its method for calculating it allowance for loan losses from an incurred loss method to a life of loan method. See Note 1 - "Basis of Presentation and Significant Accounting Policies" for further details. As ofDecember 31, 2022 , the balance of the ACL for loans was$30.56 million , or 1.27%% of total loans. The ACL atDecember 31, 2022 , increased$2.70 million from the balance of$27.86 million recordedDecember 31, 2021 . This increase included a provision of$6.57 million and net charge-offs for the twelve months of$3.87 million . The increase in provision for the twelve months endedDecember 31 , 2022,was attributable to growth of the loan portfolio throughout 2022 and an economic forecast that projects higher unemployment rates and weaker macroeconomic trends. The prior year included recoveries of pandemic-related provisioning. AtDecember 31, 2022 , the Company also had an allowance for unfunded commitments of$1.20 million which was recorded in Other Liabilities on the Balance Sheet. During 2022, the provision for credit losses on unfunded commitments was$517 thousand which was recorded in other expense on the Statement of Income. The Company did not have an allowance for credit losses or record a provision for credit losses on investment securities or other financial assets during 2022. Management considered the allowance adequate as ofDecember 31, 2022 ; however, no assurance can be made that additions to the allowance will not be required in future periods. For additional information, see "Allowance for Credit Losses or ("ACL")" in the "Critical Accounting Policies" section above and Note 6, "Allowance for Loan Losses," to the Consolidated Financial Statements in Item 8 of this report.
The following table presents net charge-offs, by loan class, and the ratio to average loans during the periods indicated:
December 31,
2022 2021 2020
Ratio of Net Ratio of Net Ratio of Net
(charge-offs) (charge-offs) (charge-offs)
Net (charge-offs) recoveries to Net (charge-offs) recoveries to Net (charge-offs) recoveries to
(Amounts in thousands) recoveries Average Loans average loans recoveries Average Loans average loans recoveries Average Loans average loans
Commercial loans
Construction, development, and
other land $ 56 $ 88,204 0.06 % $ (108 ) $ 47,285 -0.23 % $ (83 ) $ 44,493 -0.19 %
Commercial and industrial 844 169,101 0.50 % (639 ) 173,206 -0.37 % (679 ) 188,475 -0.36 %
Multi-family residential 105 124,229 0.08 % 302 102,175 0.30 % (256 ) 109,611 -0.23 %
Single family non-owner occupied 186 193,455 0.10 % 58 185,752 0.03 % (405 ) 173,431 -0.23 %
Non-farm, non-residential 848 754,518 0.11 % (696 ) 724,444 -0.10 % (555 ) 746,127 -0.07 %
Agricultural (70 ) 10,407 -0.67 % (157 ) 9,441 -1.66 % (149 ) 10,683 -1.39 %
Farmland 38 12,290 0.31 % (56 ) 16,799 -0.33 % (12 ) 22,422 -0.05 %
Total commercial loans 2,007 1,352,204 0.15 % (1,296 ) 1,259,102 -0.10 % (2,139 ) 1,295,242 -0.17 %
Consumer real estate loans
Home equity lines 67 72,511 0.09 % 397 82,861 0.48 % 117 103,289 0.11 %
Single family owner occupied 13 702,384 0.00 % 132 657,741 0.02 % (271 ) 610,532 -0.04 %
Owner occupied construction - 23,898 0.00 % - 27,529 0.00 % - 20,918 0.00 %
Total consumer real estate loans 80 798,793 0.01 % 529 768,131 0.07 % (154 ) 734,739 0.07 %
Consumer and other loans
Consumer loans (5,960 ) 147,506 -4.04 % (2,193 ) 125,866 -1.74 % (2,618 ) 118,504 -2.21 %
Total $ (3,873 ) $ 2,298,503 -0.17 % $ (2,960 ) $ 2,153,099 0.14 % $ (4,911 ) $ 2,148,485 -0.23 %
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The following table presents the allowance for loan losses, by loan class, as of
the dates indicated:
December 31,
2022 2021
Percentage of Percentage of
(Amounts in thousands) Balance Total Allowance Balance Total Allowance
Commercial loans
Construction, development, and other land $ 3,197 4.88 % $ 759 2.72 %
Commercial and industrial 2,561 6.27 % 1,480 5.31 %
Multi-family residential 853 6.17 % 863 3.10 %
Single family non-owner occupied 2,169 8.59 % 2,586 9.28 %
Non-farm, non-residential 8,117 32.82 % 8,877 31.87 %
Agricultural 198 0.50 % 5 0.02 %
Farmland 118 0.49 % 205 0.74 %
Consumer real estate loans
Home equity lines 1,053 3.15 % 677 2.43 %
Single family owner occupied 7,744 30.61 % 9,172 32.92 %
Owner occupied construction 134 0.43 % 123 0.44 %
Consumer and other loans
Consumer loans 4,412 6.09 % 3,111 11.17 %
Total allowance $ 30,556 100.00 % $ 27,858 100.00 %
Deposits
Total deposits as of December 31, 2022 , decreased $50.58 million , or 1.85%,
compared to December 31, 2021 . Total deposits divested in the Emporia Branch
Sale to Benchmark totaled $61.05 million . The divested deposits were composed
of $18.38 million in demand, $28.46 million in interest-bearing demand, $11.52
million in savings, and $2.69 million in time deposits. Excluding the effect of
the branch sale, deposits increased $10.47 million . The increase is comprised
of increases of $47.77 million in non-interest bearing demand and $31.55 million
in interest bearing demand. The increases were primarily offset by a decrease
in time deposits of $68.84 million . We had no deposit concentrations to any
single customer or industry that represented 10% or more of outstanding deposits
as of December 31, 2022 or 2021.
The following schedule presents the contractual maturities of time deposits of
(Amounts in thousands) Three months or less$ 2,406 Over three through six months 1,160 Over six through twelve months 3,754 Over twelve months 7,894$ 15,214 Borrowings Total borrowings as ofDecember 31, 2022 , increased$338 thousand , or 22.01%, compared toDecember 31, 2021 . Total borrowings for 2022 were comprised entirely of short-term borrowings, which consist of retail repurchase agreements. The weighted average rate of 0.07% as ofDecember 31, 2022 , remained the same as the weighted average rate ofDecember 31, 2021 . 33
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Liquidity and Capital Resources
Liquidity
Liquidity is a measure of our ability to meet current and future cash flow needs
as they become due. The liquidity of a financial institution reflects its
ability to meet loan requests, to accommodate possible outflows in deposits and
to take advantage of interest rate market opportunities. The ability of a
financial institution to meet its current financial obligations is a function of
its balance sheet structure that draws together all sources and uses of
liquidity. The objective of our liquidity management is to manage cash flow and
liquidity reserves so that they are adequate to fund our operations and to meet
obligations and other commitments on a timely basis and at a reasonable cost. We
seek to achieve this objective and ensure that funding needs are met by
maintaining an appropriate level of liquid funds through asset/liability
management, which includes managing the mix and time to maturity of financial
assets and financial liabilities on our balance sheet.
Poor or inadequate liquidity risk management may result in a funding deficit
that could have a material impact on our operations. We maintain a liquidity
risk management policy and contingency funding policy ("Liquidity Plan") to
detect potential liquidity issues and protect our depositors, creditors, and
shareholders. The Liquidity Plan includes various internal and external
indicators that are reviewed on a recurring basis by our Asset/Liability
Management Committee ("ALCO") of the Board of Directors. ALCO reviews liquidity
risk exposure and policies related to liquidity management; ensures that systems
and internal controls are consistent with liquidity policies; and provides
accurate reports about liquidity needs, sources, and compliance. The Liquidity
Plan involves ongoing monitoring and estimation of potentially credit sensitive
liabilities and the sources and amounts of balance sheet and external liquidity
available to replace outflows during a funding crisis. The liquidity model
incorporates various funding crisis scenarios and a specific action plan is
formulated, and activated, when a financial shock that affects our normal
funding activities is identified. Generally, the plan will reflect a strategy of
replacing liability outflows with alternative liabilities, rather than balance
sheet asset liquidity, to the extent that significant premiums can be avoided.
If alternative liabilities are not available, outflows will be met through
liquidation of balance sheet assets, including unpledged securities. As of
December 31, 2022 , management is not aware of any events that are reasonably
likely to have a material adverse effect on our liquidity, capital resources or
operations. In addition, management is not aware of any regulatory
recommendations regarding liquidity that would have a material adverse effect on
the Company.
In the ordinary course of business we have entered into contractual obligations
and have made other commitments to make future payments. Refer to the
accompanying notes to the Consolidated Financial Statements in Item 8 of this
report for the expected timing of such payments as of December 31, 2022 . These
include payments related to (i) operating leases (Note - 7 Premises, Equipment,
and Leases ), (ii) time deposits with stated maturity dates (Note 9 - Deposits),
and (iii) commitments to extend credit and standby letters of credit (Note - 19
Litigation, Commitments, and Contingencies).
As a financial holding company, the Company's primary source of liquidity is
dividends received from the Bank, which are subject to certain regulatory
limitations. Other sources of liquidity include cash, investment securities, and
borrowings. As of December 31, 2022 , the Company's cash reserves and short-term
investment securities totaled $16.99 million and $17.31 million , respectively.
The Company's cash reserves and investments provide adequate working capital to
meet obligations and projected dividends to shareholders for the next twelve
months.
In addition to cash on hand and deposits with other financial institutions, we
rely on customer deposits, cash flows from loans and investment securities, and
lines of credit from the FHLB and the Federal Reserve Bank ("FRB") Discount
Window to meet potential liquidity demands. These sources of liquidity are
immediately available to satisfy deposit withdrawals, customer credit needs, and
our operations. Secondary sources of liquidity include approved lines of credit
with correspondent banks and unpledged available-for-sale securities. As of
December 31, 2022 , our unencumbered cash totaled $170.85 million , unused
borrowing capacity from the FHLB totaled $405.81 million , available credit from
the FRB Discount Window totaled $6.08 million , available lines from
correspondent banks totaled $90.00 million , and unpledged available-for-sale
securities totaled $277.92 million .
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Table of Contents Capital Resources We are committed to effectively managing our capital to protect our depositors, creditors, and shareholders. Failure to meet certain capital requirements may result in actions by regulatory agencies that could have a material impact on our operations. Total stockholders' equity as ofDecember 31, 2022 , decreased$5.79 million , or 1.35%, to$421.99 million from$427.78 million as ofDecember 31, 2021 . The Company earned$46.66 million , which was offset by repurchasing 706,117 shares of our common stock totaling$21.31 million and dividends on our common stock of$18.52 million . Our book value per common share increased$0.67 to$26.01 as ofDecember 31, 2022 , from$25.34 as ofDecember 31, 2021 .
Capital Adequacy Requirements
Risk-based capital guidelines, issued by state and federal banking agencies, include balance sheet assets and off-balance sheet arrangements weighted by the risks inherent in the specific asset type. Our current risk-based capital requirements are based on the international capital standards known asBasel III. Our current minimum required capital ratios are as follows:
? 4.5% Common Equity Tier 1 capital to risk-weighted assets (effectively 7.00%
including the capital conservation buffer)
? 6.0% Tier 1 capital to risk-weighted assets (effectively 8.50% including the
capital conservation buffer)
? 8.0% Total capital to risk-weighted assets (effectively 10.50% including the
capital conservation buffer)
? 4.0% Tier 1 capital to average consolidated assets ("Tier 1 leverage ratio")
The following table presents our capital ratios as of the dates indicated:
December 31,
2022 2021 2020The Company Common equity Tier 1 ratio 13.37 % 14.39 % 14.28 % Tier 1 risk-based capital ratio 13.37 % 14.39 % 14.28 % Total risk-based capital ratio 14.62 % 15.65 % 15.53 % Tier 1 leverage ratio
10.17 % 9.65 % 10.24 %
The Bank Common equity Tier 1 ratio 11.69 % 13.37 % 13.57 % Tier 1 risk-based capital ratio 11.69 % 13.37 % 13.57 % Total risk-based capital ratio 12.94 % 14.62 % 14.82 % Tier 1 leverage ratio
8.79 % 8.94 % 9.73 %
As of December 31, 2022 , we continued to meet all capital adequacy requirements
and were classified as well-capitalized under the regulatory framework for
prompt corrective action. Management believes there have been no conditions or
events since those notifications that would change the Bank's classification.
Additionally, our capital ratios were in excess of the minimum standards under
the Basel III capital rules on a fully phased-in basis, as of December 31, 2022 .
For additional information, see "Capital Requirements" in Part I, Item 1 and
Note 20, "Regulatory Requirements and Restrictions," to the Consolidated
Financial Statements in Item 8 of this report.
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Market Risk and Interest Rate Sensitivity
Market risk represents the risk of loss due to adverse changes in current and future cash flows, fair values, earnings, or capital due to movements in interest rates and other factors. Our profitability is largely dependent upon net interest income, which is subject to variation due to changes in the interest rate environment and unbalanced repricing opportunities. We are subject to interest rate risk when interest-earning assets and interest-bearing liabilities reprice at differing times, when underlying rates change at different levels or in varying degrees, when there is an unequal change in the spread between two or more rates for different maturities, and when embedded options, if any, are exercised. ALCO reviews our mix of assets and liabilities with the goal of limiting exposure to interest rate risk, ensuring adequate liquidity, and coordinating sources and uses of funds while maintaining an acceptable level of net interest income given the current interest rate environment. ALCO is also responsible for overseeing the formulation and implementation of policies and strategies to improve balance sheet positioning and mitigate the effect of interest rate changes. In order to manage our exposure to interest rate risk, we periodically review internal and third-party simulation models that project net interest income at risk, which measures the impact of different interest rate scenarios on net interest income, and the economic value of equity at risk, which measures potential long-term risk in the balance sheet by valuing our assets and liabilities at fair value under different interest rate scenarios. Simulation results show the existence and severity of interest rate risk in each scenario based on our current balance sheet position, assumptions about changes in the volume and mix of interest-earning assets and interest-bearing liabilities, and estimated yields earned on assets and rates paid on liabilities. The simulation model provides the best tool available to us and the industry for managing interest rate risk; however, the model cannot precisely predict the impact of fluctuations in interest rates on net interest income due to the use of significant estimates and assumptions. Actual results will differ from simulated results due to the timing, magnitude, and frequency of interest rate changes; changes in market conditions and customer behavior; and changes in our strategies that management might undertake in response to a sudden and sustained rate shock. During 2022, theFederal Open Market Committee increased the benchmark federal funds rate at a range of 425 basis points. The following table presents the sensitivity of net interest income from immediate and sustained rate shocks in various interest rate scenarios over a twelve-month period for the periods indicated. The level of benchmark interest rates at year-end 2021, rendered a complete downward shock of 200 basis points meaningless; accordingly, a downward rate scenarios is only presented for the current period. In the downward rate shock presented, benchmark interest rates were assumed at levels with floors near 0%. The following table presents the sensitivity of net interest income from immediate and sustained rate shocks in various interest rate scenarios over a twelve-month period for the periods indicated. Year Ended December 31, 2022 2021 Change in Change in Net Net Interest Interest Increase (Decrease) in Basis Points Income Percent Change Income Percent Change (Dollars in thousands) 400$ 1,043 0.8 % N/A N/A 300 631 0.5 % 14,960 14.9 % 200 214 0.2 % 10,303 10.3 % 100 79 0.6 % 5,502 5.5 % (100) (5,644 ) -4.5 % (6,285 ) -6.3 % (200) (12,849 ) -10.4 % N/A N/A We have established policy limits for tolerance of interest rate risk in various interest rate scenarios and exposure limits to changes in the economic value of equity. As ofDecember 31, 2022 , we feel our exposure to interest rate risk was adequately mitigated for the scenarios presented.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
The information required in this item is incorporated by reference to "Market Risk and Interest Rate Sensitivity" in Item 7 of this report.
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