PARS BANC The following discussion compares the Company's financial condition atDecember 31, 2022 to its financial condition atDecember 31, 2021 and the results of operations for the years endedDecember 31, 2022 and 2021. This discussion should be read in conjunction with the Consolidated Financial Statements and the Notes thereto appearing in Item 8 of Part II of this Annual Report on Form 10-K.
Forward-Looking Statements
Certain statements in this Annual Report on Form 10-K may constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are statements that include, without limitation, projections, predictions, expectations, or beliefs about future events or results that are not statements of historical fact. Such forward-looking statements are based on various assumptions as of the time they are made, and are inherently subject to known and unknown risks, uncertainties, and other factors, some of which cannot be predicted or quantified, that may cause actual results, performance or achievements to be materially different from those expressed or implied by such forward-looking statements. Forward-looking statements are often accompanied by words that convey projected future events or outcomes such as "anticipate," "contemplate," "expect," "believe," "estimate," "foresee," "plan," "project," "predict," "anticipate," "intend," "indicate," "likely," "target," "will," "may," "view," "opportunity," "potential," or words of similar meaning or other statements concerning opinions or judgment of the Company and its management about future events. Although the Company believes that its expectations with respect to forward-looking statements are based upon reasonable assumptions within the bounds of its existing knowledge of its business and operations, there can be no assurance that actual results, performance, or achievements of, or trends affecting, the Company will not differ materially from any projected future results, performance, achievements or trends expressed or implied by such forward-looking statements. Actual future results, performance, achievements or trends may differ materially from historical results or those anticipated depending on a variety of factors, including, but not limited to:
the occurrence of any event, change or other circumstances that could give rise
? to the right of one or both of the parties to terminate the LINK Merger
Agreement between the Company and LINK;
? the outcome of any legal proceedings that may be instituted against the Company
or LINK;
the possibility that the proposed transaction will not close when expected or
at all because required regulatory, shareholder or other approvals are not
received or other conditions to the closing are not satisfied on a timely basis
? or at all, or are obtained subject to conditions that are not anticipated (and
the risk that required regulatory approvals may result in the imposition of
conditions that could adversely affect the combined company or the expected
benefits of the proposed transaction);
? the ability of the Company and LINK to meet expectations regarding the timing,
completion and accounting and tax treatments of the proposed transaction;
the risk that any announcements relating to the proposed transaction could have
? adverse effects on the market price of the common stock of either or both
parties to the proposed transaction;
the possibility that the anticipated benefits of the proposed transaction will
not be realized when expected or at all, including as a result of the impact
? of, or problems arising from, the integration of the two companies or as a
result of the strength of the economy and competitive factors in the areas
where the Company and LINK do business?
certain restrictions during the pendency of the proposed transaction that may
? impact the parties' ability to pursue certain business opportunities or
strategic transactions;
? the possibility that the transaction may be more expensive to complete than
anticipated, including as a result of unexpected factors or events?
? diversion of management's attention from ongoing business operations and
opportunities?
the possibility that the parties may be unable to achieve expected synergies
? and operating efficiencies in the merger within the expected timeframes or at
all and to successfully integrate the Company's operations and those of LINK,
which may be more difficult, time-consuming or costly than expected;
? revenues following the proposed transaction may be lower than expected;
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? the Company's and LINK's success in executing their respective business plans
and strategies and managing the risks involved in the foregoing;
? the dilution caused by LINK's issuance of additional shares of its capital
stock in connection with the proposed transaction;
effects of the announcement, pendency or completion of the proposed transaction
? on the ability of the Company and LINK to retain customers and retain and hire
key personnel and maintain relationships with their suppliers, and on their
operating results and businesses generally;
? potential adverse consequences related to the Termination Agreement with OCFC;
changes in interest rates, such as volatility in yields on
? and increases or volatility in mortgage rates, and the impacts on macroeconomic
conditions, customer and client spending and saving behaviors, the Company's
funding costs and the Company's loan and investment securities portfolios;
monetary and fiscal policies of the
?
interest rates and business in our markets; general business conditions, as well as conditions within the financial
markets, including the impact thereon of unusual and infrequently occurring
? events, such as weather-related disasters, terrorist acts, geopolitical
conflicts (such as the military conflict between
health events (such as the COVID-19 pandemic), and of governmental and societal
responses thereto;
general economic conditions, in
? the markets in which the Company operates and which its loans are concentrated,
including the effects of declines in real estate values, increases in
unemployment levels and inflation, recession and slowdowns in economic growth;
? changes in the value of securities held in the Company's investment portfolios;
? changes in the quality or composition of the loan portfolios and the value of
the collateral securing those loans;
? changes in the level of net charge-offs on loans and the adequacy of our
allowance for credit losses;
? demand for loan products; ? deposit flows;
? the strength of the Company's counterparties;
? competition from both banks and non-banks;
? demand for financial services in the Company's market areas;
? reliance on third parties for key services;
? changes in the commercial and residential real estate markets;
? cyber threats, attacks or events;
? expansion of Delmarva's and Partners' product offerings;
changes in accounting principles, standards, rules and interpretations, and
? elections by the Company thereunder, and the related impact on the Company's
financial statements, including the implementation of CECL;
? potential claims, damages, and fines related to litigation or government
actions;
the effects of the COVID-19 pandemic, the severity and duration of the
? pandemic, the uncertainty regarding new variants of COVID-19 that may emerge,
the distribution and efficacy of vaccines, and the heightened impact it has on
many of the risks described herein; any indirect exposure related to the closings of SVB, Signature Bank and
? suppliers and partners or that the conditions which resulted in the liquidity
concerns with SVB, Signature Bank and
impact, directly or indirectly, other financial institutions and market
participants with which Partners has commercial or deposit relationships with;
? legislative or regulatory changes and requirements;
the discontinuation of London Interbank Offered Rate ("LIBOR") and its impact
? on the financial markets, and the Company's ability to manage operational,
legal and compliance risks related to the discontinuation of LIBOR and
implementation of one or more alternative reference rates; and
? other factors, many of which are beyond the control of the Company.
These factors should not be considered exhaustive and should be read together
with other cautionary statements that are included in this Annual Report on Form
10-K including those discussed in Item 1A. "Risk Factors." All of the
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forward-looking statements made in this Annual Report are expressly qualified by the cautionary statements contained or referred to in this Annual Report. The actual results or developments anticipated may not be realized or, even if substantially realized, they may not have the expected consequences to or effects on the Company or its businesses or operations. Readers are cautioned not to place undue reliance on the forward-looking statements contained in this Annual Report. Forward-looking statements speak only as of the date they are made and the Company does not undertake any obligation to update, revise, or clarify these forward-looking statements whether as a result of new information, future events or otherwise.
Overview
The Company, a bank holding corporation, through its wholly owned subsidiaries,Delmarva and Partners , each of which are commercial banking corporations, engages in general commercial banking operations, with nineteen branches throughoutWicomico ,Charles ,Anne Arundel , andWorcester Counties inMaryland ,Sussex County inDelaware ,Camden andBurlington Counties inNew Jersey , the cities ofFredericksburg andReston, Virginia , andSpotsylvania County, Virginia . The Company derives the majority of its income from interest received on our loans and investment securities. The primary source of funding for making these loans and purchasing investment securities are deposits and secondarily, borrowings. Consequently, one of the key measures of the Company's success is the amount of net interest income, or the difference between the income on interest earning assets, such as loans and investment securities, and the expense on interest bearing liabilities, such as deposits and borrowings. The resulting ratio of that difference as a percentage of average interest earning assets represents the net interest margin. Another key measure is the spread between the yield earned on interest earning assets and the rate paid on interest bearing liabilities, which is called the net interest spread. In addition to earning interest on loans and investment securities, the Company earns income through fees and other charges to customers. Also included is a discussion of the various components of this noninterest income, as well as of noninterest expense. There are risks inherent in all loans, so the Company maintains an allowance for credit losses to absorb probable losses on existing loans that may become uncollectible. The Company maintains this allowance for credit losses by charging a provision for credit losses as needed against our operating earnings for each period. The Company has included a detailed discussion of this process, as well as several tables describing its allowance for credit losses. OnFebruary 22, 2023 , the Company and LINK, parent company ofLINKBANK , announced that they have entered into the LINK Merger Agreement pursuant to which the Company will merge into LINK, with LINK surviving, and following whichDelmarva and Partners will each successively merge with and intoLINKBANK , withLINKBANK surviving. Upon completion of the transaction, the Company's shareholders will own approximately 56% and LINK shareholders, inclusive of shares issued in a concurrent private placement of common stock by LINK, will own approximately 44% of the combined company. The mergers are subject to receiving the requisite approval of the Company's and LINK's stockholders, receipt of all required regulatory approvals, and fulfillment of other customary closing conditions. Also, onNovember 9, 2022 , the Company and OCFC entered into the Termination Agreement pursuant to which, among other things, the parties mutually agreed to terminate the OCFC Merger Agreement entered into onNovember 4, 2021 and transactions completed thereby. Each party will bear its own costs and expenses in connection with the terminated transaction, and neither party will pay a termination fee in connection with the termination of the OCFC Merger Agreement. The Termination Agreement also mutually released the parties from any claims of liability to one another relating to the OCFC Merger Agreement and the terminated transaction. The Company believes that it is well-positioned to be successful in its banking markets, including the highly competitiveGreater Washington market. The Company's financial performance generally, and in particular the ability of its borrowers to repay their loans, the value of collateral securing those loans, as well as demand for loans and other products and services the Company offers, is highly dependent on the business environment in the Company's primary markets where the Company operates and inthe United States as a whole. 45
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The ongoing COVID-19 pandemic has severely disrupted supply chains and adversely affected production, demand, sales and employee productivity across a range of industries, and previously resulted in orders directing the closing or limited operation of certain businesses and restrictions on public gatherings. These events affected the Company's operations during fiscal year 2021 and 2022, and, along with economic uncertainties caused by geopolitical conflicts such as the war inUkraine , the closings of SVB, Signature Bank andSilvergate Bank by bank regulators and other events, are expected to impact the Company's financial results continuing on into 2023. Please refer to the "Provision and Allowance for Credit Losses" section of this "Management's Discussion and Analysis of Financial Condition and Results of Operations" for more information related to payment deferrals, concentrations in higher risk industries, and the impact on the allowance for credit losses. The following discussion and analysis also identifies significant factors that have affected the Company's financial position and operating results during the periods included in the consolidated financial statements accompanying this report. You are encouraged to read this section in conjunction with the Company's audited consolidated financial statements and the notes thereto included in Item 8 in this Annual Report on Form 10-K, and the other statistical and financial information included in this Form 10-K.
Critical Accounting Policies and Estimates
Certain critical accounting policies affect significant judgments and estimates used in the preparation of the Company's consolidated financial statements. These significant accounting policies are described in the notes to the consolidated financial statements included in Item 8 in this Annual Report on Form 10-K. The accounting principles the Company follows and the methods of applying these principles conform to accounting principles generally accepted inthe United States of America ("U.S. GAAP") and general banking industry practices. The Company's most critical accounting policy relates to the determination of the allowance for credit losses, which reflects the estimated losses resulting from the inability of borrowers to make loan payments. The determination of the adequacy of the allowance for credit losses involves significant judgment and complexity and is based on many factors. If the financial condition of our borrowers were to deteriorate, resulting in an impairment of their ability to make payments, the estimates would be updated and additional provisions for credit losses may be required. Note 3, "Loans, Allowance for Credit Losses and Impaired Loans", to the notes of the consolidated financial statements. Another of the Company's critical accounting policies, with the acquisitions ofLiberty Bell Bank ("Liberty") in 2018 and Partners in 2019, relates to the valuation of goodwill and intangible assets. The Company accounted for the merger between the Company and Liberty in 2018 (the "Liberty Merger ") and the Partners Share Exchange in accordance with Accounting Standards Codification ("ASC") Topic No. 805, which requires the use of the acquisition method of accounting. Under this method, assets acquired, including intangible assets, and liabilities assumed, are recorded at their fair value. Determination of fair value involves estimates based on internal valuations of discounted cash flow analyses performed, third party valuations, or other valuation techniques that involve subjective assumptions. Additionally, the term of the useful lives and appropriate amortization periods of intangible assets is subjective. Resulting goodwill from the Liberty Merger and the Partners Share Exchange, which totaled approximately$5.2 million and$4.4 million , respectively, under the acquisition method of accounting represents the excess of the purchase price over the fair value of net assets acquired.Goodwill is not amortized, but is evaluated for impairment annually or more frequently if deemed necessary. If the fair value of an asset exceeds the carrying amount of the asset, no charge to goodwill is made. If the carrying amount exceeds the fair value of the asset, goodwill will be adjusted through a charge to earnings, which is limited to the amount of goodwill allocated to that reporting unit. In evaluating the goodwill on its consolidated balance sheet for impairment after the consummation date of the Liberty Merger and the Partners Share Exchange, the Company will first assess qualitative factors to determine whether it is more likely than not that the fair value of our acquired assets is less than the carrying amount of the acquired assets, as allowed under ASU 2017-04. After making the assessment based on several factors, which will include, but is not limited to, the current economic environment, the economic outlook in our markets, our financial performance and common stock value as compared to our peers, we will determine if it is more likely than not that the fair value of our assets is greater than their carrying amount and, accordingly, will determine whether impairment of goodwill should be recorded as a charge to earnings in years subsequent to the Liberty Merger and the Partners Share Exchange. This assessment was performed during the fourth quarter of 2022, and resulted in no impairment of goodwill. Depending on the severity of the economic consequences of the COVID-19 pandemic and recent bank closures by federal regulators, and their impact on the 46
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Company, management may determine that goodwill is required to be evaluated for
impairment due to the presence of a triggering event, which may have a negative
impact on the Company's results of operations.
In addition to the Company's policies related to the valuation of goodwill,
intangible assets and other acquisition accounting adjustments, ongoing
accounting for acquired loans is considered a critical accounting policy.
Acquired loans are classified as either purchased credit impaired ("PCI") loans
or purchased performing loans and are recorded at fair value on the date of
acquisition. PCI loans are those for which there is evidence of credit
deterioration since origination and for which it is probable at the date of
acquisition that the Company will not collect all contractually required
principal and interest payments. The difference between contractually required
payments at acquisition and the cash flows expected to be collected at
acquisition is referred to as the "nonaccretable difference." Any excess of cash
flows expected at acquisition over the estimated fair value is referred to as
the "accretable yield" and is recognized as interest income over the remaining
life of the loan when there is a reasonable expectation about the amount and
timing of such cash flows. Periodically, we evaluate our estimate of cash flows
expected to be collected on PCI loans. Estimates of cash flows for PCI loans
require significant judgment. Subsequent decreases to the expected cash flows
will generally result in a provision for credit losses resulting in an increase
to the allowance for credit losses. Subsequent significant increases in cash
flows may result in a reversal of post-acquisition provision for credit losses
or a transfer from nonaccretable difference to accretable yield that increases
interest income over the remaining life of the loan, or pool(s) of loans. The
Company accounts for purchased performing loans using the contractual cash flows
method of recognizing discount accretion based on the acquired loans'
contractual cash flows. Purchased performing loans are recorded at fair value,
including a credit discount. The fair value discount is accreted as an
adjustment to yield over the estimated lives of the loans. There is no allowance
for credit losses established at the acquisition date for purchased performing
loans, but a provision for credit losses may be required for any deterioration
in these loans in future periods. The Company evaluates purchased performing
loans quarterly for deterioration and records any required additional provision
for credit losses.
Another critical accounting policy relates to deferred tax assets and
liabilities. The Company records deferred tax assets and deferred tax
liabilities for future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Future tax benefits, such as net operating loss
carry forwards available from the Liberty Merger, are recognized to the extent
that realization of such benefits is more likely than not. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which the assets and liabilities are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income tax expense in the period that
includes the enactment date. In the event the future tax consequences of
differences between the financial reporting bases and the tax bases of our
assets and liabilities results in deferred tax assets, an evaluation of the
probability of being able to realize the future benefits indicated by such
assets is required. A valuation allowance is provided when it is more likely
than not that a portion or the full amount of the deferred tax asset will not be
realized. In assessing the ability to realize the deferred tax assets,
management considers the scheduled reversals of deferred tax liabilities,
projected future taxable income, and tax planning strategies. Such a deferred
tax liability will only be recognized when it becomes apparent that those
temporary differences will reverse in the foreseeable future. A tax position is
recognized as a benefit only if it is "more likely than not" that the tax
position would be sustained in a tax examination, with a tax examination being
presumed to occur. The amount recognized is the largest amount of tax benefit
that is greater than fifty (50) percent more likely of being realized on
examination. For tax positions not meeting the "more likely than not" test,no tax benefit is recorded. Results of Operations
Net income attributable to the Company for the year ended
The Company's results of operations for the twelve months ended
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Positive Impacts:
An increase in net interest income due primarily to lower average balances of
and rates paid on interest-bearing deposits, a decrease in average borrowings
balances, an increase in average loan balances, an increase in yields earned on
average cash and cash equivalents balances, and an increase in average
? investment securities balances and yields earned, which were partially offset
by lower average balances of cash and cash equivalents, lower loan yields due
to lower net loan fees earned related to the forgiveness of loans originated
and funded under the Paycheck Protection Program ("PPP") of the Small Business
Administration, and an increase in rates paid on average borrowings balances;
? A higher net interest margin (tax equivalent basis);
A significantly lower provision for credit losses due to the current economic
? environment and the milder impact of the COVID-19 pandemic compared to December
31, 2021, which was partially offset by organic loan growth;
Lower expenses associated with the Company's terminated merger with OCFC,
including recording no accelerated stock-based compensation expense during the
twelve months ended
accelerated stock-based compensation expense during the same period of 2021
? related to the accelerated vesting of restricted stock awards, which
accelerated vesting was subject to the prior approval of the Company and was
not contingent on the closing of the merger, and incurring
merger related expenses during the twelve months ended
compared to
? Recording gains on other real estate owned as compared to losses for the same
period of 2021. Negative Impacts:
? Recording losses on sales and calls of investment securities as compared to
gains for the same period of 2021;
? Reduced operating results from Partners' majority owned subsidiary JMC and
lower mortgage division fees at Delmarva;
? Recording losses on sales of other assets as compared to gains for the same
period of 2021; and
Expenses associated with Partners' new key hires and expansion into the Greater
? banking office in
Delmarva opening its new full-service branch at
For the twelve months endedDecember 31, 2022 , the Company's return on average assets, return on average equity and efficiency ratio were 0.82%, 10.04% and 68.16%, respectively, as compared to 0.46%, 5.44% and 76.95%, respectively, for the same period in 2021. The increase in net income attributable to the Company for the twelve months endedDecember 31, 2022 , as compared to the same period in 2021, was driven by an increase in net interest income, a lower provision for credit losses, and lower other expenses, and was partially offset by a decrease in other income and higher federal and state income taxes.
Financial Condition
Total assets as ofDecember 31, 2022 were$1.57 billion , a decrease of$70.4 million , or 4.3%, fromDecember 31, 2021 . The key driver of this change was a decrease in cash and cash equivalents, which was partially offset by increases in investment securities available for sale, at fair value, and total loans held for investment. Changes in key balance sheet components as ofDecember 31, 2022 compared toDecember 31, 2021 were as follows:
Interest bearing deposits in other financial institutions as of
2022 were
? 31, 2021. Key drivers of this change were an increase in investment securities
available for sale, at fair value, and total loan growth outpacing total deposit growth;
Federal funds sold as of
?
were the aforementioned items noted in the analysis of interest bearing
deposits in other financial institutions;
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Investment securities available for sale, at fair value as of
were
2021. Key drivers of this change were management of the investment securities
? portfolio in light of the Company's liquidity needs, which was partially offset
by two higher yielding investment securities being called, and an increase in
unrealized losses on the investment securities available for sale portfolio as
a result of increases in market interest rates;
Loans, net of unamortized discounts on acquired loans of
from
? organic growth, including growth of approximately
related to Partners' expansion into the
partially offset by forgiveness payments received of approximately
under round two of the PPP. As of
the PPP that were still outstanding;
Total deposits as of
million, or 7.2%, from
scheduled maturities of time deposits that were not replaced and significant
? outflows related to competitive pressures in the higher interest rate
environment, which were partially offset by organic growth as a result of our
continued focus on total relationship banking and Partners' expansion into the
Total borrowings as of
was an increase in short-term borrowings with the FHLB due to the
? aforementioned items noted in the analysis of total deposits, which was
partially offset by a decrease in long-term borrowings with the FHLB resulting
from maturities and payoffs of borrowings that were not replaced and scheduled
principal curtailments, and a decrease in Partners' majority owned subsidiary
JMC's warehouse line of credit with another financial institution; and Total stockholders' equity as ofDecember 31, 2022 was$139.3 million , a
decrease of
change were an increase in accumulated other comprehensive (loss), net of tax,
? and cash dividends paid to shareholders, which were partially offset by the net
income attributable to the Company for the twelve months ended
2022, the proceeds from stock option exercises, and stock-based compensation
expense related to restricted stock awards.
Delmarva's Tier 1 leverage capital ratio was 9.3% atDecember 31, 2022 as compared to 8.1% atDecember 31, 2021 . AtDecember 31, 2022 , Delmarva's Tier 1 risk weighted capital ratio and total risk weighted capital ratio were 12.1% and 13.4%, respectively, as compared to a Tier 1 risk weighted capital ratio and total risk weighted capital ratio of 11.6% and 12.9%, respectively, atDecember 31, 2021 . Partners' Tier 1 leverage capital ratio was 8.9% atDecember 31, 2022 as compared to 8.5% atDecember 31, 2021 . AtDecember 31, 2022 , Partners' Tier 1 risk weighted capital ratio and total risk weighted capital ratio were 10.5% and 11.3%, respectively, as compared to a Tier 1 risk weighted capital ratio and total risk weighted capital ratio of 11.3% and 12.0%, respectively, atDecember 31, 2021 .
As of
See "Capital" below for additional information about Delmarva's and Partners' capital ratios and requirements.
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AtDecember 31, 2022 , nonperforming assets totaled$2.2 million , a decrease fromDecember 31, 2021 balances of$9.8 million . The primary drivers of this decrease were decreases in nonaccrual loans and other real estate owned, net ("OREO"), which were partially offset by an increase in loans past due 90 days or more and still accruing interest. Nonaccrual loans totaled approximately$2.2 million atDecember 31, 2022 , as compared to$9.0 million atDecember 31, 2021 . Loans past due 90 days or more and still accruing interest totaled$45 thousand atDecember 31, 2022 , as compared to$0 atDecember 31, 2021 . OREO, net as ofDecember 31, 2022 totaled$0 , as compared to$837 thousand atDecember 31, 2021 . Nonperforming loans as a percentage of total assets was 0.14% atDecember 31, 2022 , as compared to 0.54% atDecember 31, 2021 . Nonperforming assets to total assets as ofDecember 31, 2022 was 0.14%, as compared to 0.60% atDecember 31, 2021 . Loans classified as troubled debt restructurings ("TDRs") totaled$3.4 million atDecember 31, 2022 , as compared to$7.9 million atDecember 31, 2021 , representing a decrease of$4.5 million during the twelve months endedDecember 31, 2022 . Of this decrease, approximately$1.1 million was due to five loan relationships that are no longer considered to be TDRs due to the restructuring of the loans subsequent to them initially being classified as a TDR. At the time of the subsequent restructurings, the borrowers were not experiencing financial difficulties and, under the terms of the subsequent restructuring agreements, no concessions have been granted to the borrowers. In addition, during 2022, one loan relationship that was classified as a TDR was paid down and the remaining balance was charged-off, reducing the balance in total by approximately$2.9 million , which was partially offset by one loan relationship in the amount of approximately$48 thousand being classified as a TDR during the second quarter of 2022. The remaining decrease was the result of loan relationships classified as TDRs that were paid down or paid off. Net charge-offs were$1.7 million , or 0.14% of average total loans, for the twelve months endedDecember 31, 2022 , as compared to$870 thousand , or 0.08% of average total loans, for the same period of 2021. The allowance for credit losses to total loans ratio was 1.16% atDecember 31, 2022 , as compared to 1.31% atDecember 31, 2021 . In addition to the allowance for credit losses, as ofDecember 31, 2022 andDecember 31, 2021 , the Company had$1.7 million and$2.3 million , respectively, in unamortized discounts on acquired loans related to the acquisitions ofLiberty and Partners . This discount is amortized over the life of the remaining loans.
Summary of Return on Equity and Assets
Year Ended Year Ended
December 31, December 31,
2022 2021
Yield on earning assets 3.93 % 3.64 %
Return on average assets 0.82 % 0.46 %
Return on average equity 10.04 % 5.44 %Average equity to average assets 8.16 % 8.52 %
Earnings Analysis
The Company's primary source of revenue is interest income and fees, which it
earns by lending and investing the funds which are held on deposit. Because
loans generally earn higher rates of interest than investment securities, the
Company seeks to deploy as much of its deposit funds as possible in the form of
loans to individuals, businesses, and other organizations. To ensure sufficient
liquidity, the Company also maintains a portion of its deposits in cash and cash
equivalents, government securities, interest bearing deposits in other financial
institutions, and overnight loans of excess reserves (known as "Federal Funds
Sold") to correspondent banks. The revenue which the Company earns (prior to
deducting its overhead expenses) is essentially a function of the amount of the
Company's loans and deposits, as well as the profit margin ("interest spread")
and fee income which can be generated on these amounts.
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Net income attributable to the Company was$13.6 million and$7.4 million for the years endedDecember 31, 2022 and 2021, respectively, as reported in its audited consolidated financial statements. The following discussion should be read in conjunction with the Company's audited consolidated financial statements and the notes to the audited consolidated financial statements included in Item 8 of this Annual Report on Form 10-K. The following is a summary of the results of operations and financial condition of the Company at and for the periods and at the dates indicated, respectively: Year Ended December 31, Results of operations: 2022 2021 (Dollars in Thousands, except per share data) Net interest income$ 55,996 $ 46,430 Provision for credit losses 1,348 2,323 Provision for income taxes 4,512 2,247 Noninterest income 5,201 8,322 Noninterest expense 41,850 42,287 Total income 67,861 63,675 Total expenses 54,374 55,780 Net income 13,487 7,895 Net income attributable to Partners Bancorp 13,615 7,411 Basic earnings per share 0.758 0.417 Diluted earnings per share 0.757 0.416 December 31, Financial condition at year end: 2022 2021 (Dollars in Thousands, except per share data) Total assets$ 1,574,612 $ 1,644,979 Loans receivable, net 1,218,551 1,102,539 Investment securities, available for sale 133,657 122,021 Federal funds sold 22,990 28,040 Demand and NOW deposits 650,557 653,334 Savings, money market, and time deposits 689,048 789,542 Stockholders' equity 139,329 141,368 Tangible common equity per share 7.13 7.23
Interest Income and Expense - Years Ended
Net Interest Income and Net Interest Margin
The largest component of net income for the Company is net interest income, which is the difference between the income earned on assets, such as loans and investment securities, and interest paid on liabilities, such as deposits and borrowings, used to support such assets. Net interest income is determined by the rates earned on the Company's interest-earning assets and the rates paid on its interest-bearing liabilities, the relative amounts of interest-earning assets and interest-bearing liabilities, and the degree of mismatch and the maturity and repricing characteristics of its interest-earning assets and interest-bearing liabilities. Net interest income during the twelve months endedDecember 31, 2022 increased by$9.6 million , or 20.6%, when compared to the twelve months endedDecember 31, 2021 . The Company's net interest margin (tax equivalent basis) increased to 3.51%, representing an increase of 46 basis points for the twelve months endedDecember 31, 2022 as compared to the same period in 2021. The increase in the net interest margin (tax equivalent basis) was primarily due to higher average balances of loans, higher average balances of and yields earned on investment securities, higher yields earned on average interest bearing deposits in other financial institutions and federal funds sold, and lower average balances of and rates paid on average interest-bearing liabilities, which were partially offset by a decrease in the yields earned on average loans, and lower average balances of interest bearing deposits in other financial institutions and 51
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federal funds sold. Total interest income increased by
Positive Impacts:
Increases in average loan balances, primarily due to organic loan growth, which
? was partially offset by the forgiveness of loans originated and funded under
the PPP;
Increases in average investment securities balances and higher investment
securities yields, primarily due to management of the investment securities
? portfolio in light of the Company's liquidity needs, lower accelerated
pre-payments on mortgage-backed investment securities and higher interest rates
over the comparable periods, partially offset by calls on higher yielding
investment securities in the previously low interest rate environment;
Decrease in average interest bearing deposits in other financial institutions
? and federal funds sold, primarily due to loan growth outpacing deposit growth
and higher investment securities balances, and higher yields on each due to
higher interest rates over the comparable periods;
Decrease in average interest-bearing deposit balances and lower rates paid,
primarily due to scheduled maturities of time deposits that were not replaced
? and competitive pressures in the higher interest rate environment, partially
offset by organic deposit growth in interest bearing demand, money market and
savings accounts, and lower rates paid on average interest bearing demand,
money market, savings and time deposits; and
Decrease in average borrowings balances, primarily due to a decrease in the
average balance of FHLB advances resulting from maturities and payoffs of
borrowings that were not replaced and scheduled principal curtailments, a
decrease in average borrowings at the Federal Reserve Bank Discount Window
under the PPP Liquidity Facility in which the loans under the PPP originated by
the Company were previously pledged as collateral, the early redemption of
? million in subordinated notes payable, net, in early
higher rates paid. The increase in average rates paid was primarily due to the
decreases in the average balances of FHLB advances and borrowings at the
Federal Reserve Bank Discount Window under the PPP Liquidity Facility, both of
which were lower cost interest-bearing liabilities, partially offset by the
early redemption of subordinated notes payable, which was a higher cost
interest-bearing liability.
Negative Impacts:
Lower loan yields, primarily due to lower net loan fees earned related to the
? forgiveness of loans originated and funded under the PPP and pay-offs of higher
yielding fixed rate loans, which were partially offset by repricing of variable
rate loans and higher average yields on new loan originations.
Loans
Average loan balances increased by$82.5 million , or 7.6%, and average yields earned decreased by 0.11% to 4.74% for the twelve months endedDecember 31, 2022 , as compared to the same period in 2021. The increase in average loan balances was primarily due to organic loan growth, including growth in average loan balances of approximately$57.0 million related to Partners' expansion into theGreater Washington market, which was partially offset by the forgiveness of loans originated and funded under the PPP. The decrease in average yields earned was primarily due to lower net loan fees earned related to the forgiveness of loans originated and funded under the PPP and pay-offs of higher yielding fixed rate loans, which were partially offset by the repricing of variable rate loans and higher average yields on new loan originations. Total average loans were 73.2% of total average interest-earning assets for the twelve months endedDecember 31, 2022 , compared to 71.2% for the twelve months endedDecember 31, 2021 . 52 Table of Contents Investment securities
Average total investment securities balances increased by$17.7 million , or 13.6%, and average yields earned increased by 0.39% to 2.28% for the twelve months endedDecember 31, 2022 , as compared to the same period in 2021. The increases in average total investment securities balances and average yields earned was primarily due to management of the investment securities portfolio in light of the Company's liquidity needs, lower accelerated pre-payments on mortgage-backed investment securities and higher interest rates over the comparable periods, partially offset by calls on higher yielding investment securities in the previously low interest rate environment. During the twelve months endedDecember 31, 2021 , accelerated pre-payments on mortgage-backed investment securities caused the premiums paid on these investment securities to be amortized into expense on an accelerated basis thereby reducing income and yield earned. Total average investment securities were 9.2% of total average interest-earning assets for the twelve months endedDecember 31, 2022 , compared to 8.5% for the twelve months endedDecember 31, 2021 .
Interest-bearing deposits
Average total interest-bearing deposit balances decreased by$8.3 million , or 0.9%, and average rates paid decreased by 0.21% to 0.52% for the twelve months endedDecember 31, 2022 , as compared to the same period in 2021, primarily due to scheduled maturities of time deposits that were not replaced and competitive pressures in the higher interest rate environment, partially offset by organic deposit growth, including average growth of approximately$18.4 million in interest-bearing deposits related to Partners' expansion into theGreater Washington market, and a decrease in the average rate paid on interest bearing demand, money market, savings and time deposits.
Borrowings
Average total borrowings decreased by$10.3 million , or 17.6%, and average rates paid increased by 0.31% to 4.04% for the twelve months endedDecember 31, 2022 , as compared to the same period in 2021. The decrease in average total borrowings balances was primarily due to a decrease in the average balance of FHLB advances resulting from maturities and payoffs of borrowings that were not replaced and scheduled principal curtailments, a decrease in average borrowings at the Federal Reserve Bank Discount Window under the PPP Liquidity Facility in which the loans under the PPP originated by the Company were previously pledged as collateral, and the early redemption of$2.0 million in subordinated notes payable, net, in earlyJuly 2021 . The increase in average rates paid was primarily due to the decreases in the average balances of FHLB advances and borrowings at the Federal Reserve Bank Discount Window under the PPP Liquidity Facility, which were lower cost interest-bearing liabilities, partially offset by the early redemption of subordinated notes payable, which was a higher cost interest-bearing liability.
Interest earned on assets and interest paid on liabilities is significantly
influenced by market factors, specifically interest rate targets established by
the
The Federal Open Markets Committee ("FOMC") raised Federal Funds target rates by
25 basis points in March 2022 , which was the first increase since December 2018 .
Subsequent to this, the FOMC raised Federal Funds target rates by 50 basis
points in May 2022 , 75 basis points in June 2022 , 75 basis points in July 2022 ,
75 basis points in September 2022 , 75 basis points in November 2022 , 50 basis
points in December 2022 , 25 basis points in January 2023 , and 25 basis points in
March 2023 . These increases were done in an effort to address increasing
inflation without negatively impacting economic growth. The FOMC currently
projects a continued path of rate increases, with rate increases targeted at
future FOMC meetings in 2023. The FOMC's current Federal Funds target rate range
is 4.75% to 5.00%. As a result, long-term interest rates have increased. The
Company anticipates that the current and projected interest rate environment
will lead to an expanded net interest margin for the Company. In general, the
Company believes interest rate increases lead to improved net interest margins
whereas interest rate decreases result in correspondingly lower net interest
margins.
The following table depicts, for the periods indicated, certain information
related to the average balance sheet and average yields earned on assets and
average costs paid on liabilities for the Company. Such yields and costs are
derived by dividing income or expense by the average balance of the
corresponding assets or liabilities. Average balances have been derived from
daily averages.
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Year Ended Year Ended
December 31, 2022 December 31, 2021
(Dollars in Thousands) Average Interest/ Average Interest/
(Unaudited) Balance Expense Yield/Rate Balance Expense Yield/Rate
Assets
Cash & Due From Banks $ 15,783 $ - - % $ 16,608 $ - - %Interest Bearing Deposits From Banks 230,433 3,131 1.36 % 249,436 309 0.12 % Taxable Securities (1) 118,170 2,438
2.06 % 95,550 1,365 1.43 % Taxexempt Securities (2)
29,308
921 3.14 % 34,224 1,092 3.19 %
147,478 3,359 2.28 % 129,774 2,457 1.89 %
Federal Funds Sold 50,109 793 1.58 % 60,891 59 0.10 %
Loans: (3)
Commercial and Industrial (4) 135,444 7,176 5.30 % 155,584 9,179 5.90 %
Real Estate (4) 1,014,156 47,328 4.67 % 904,513 42,702 4.72 %
Consumer (4) 2,295 128 5.58 % 3,158 182 5.76 %
Keyline Equity (4) 17,251 865 5.01 % 17,147 616 3.59 %
Visa Credit Card - - - % 48 2 4.17 %
State and Political 883 44 4.98 % 804 42 5.22 %
Keyline Credit 121 29 23.97 % 127 29 22.83 %
Other Loans 1,431 11 0.77 % 7,688 14 0.18 %
Total Loans (2) 1,171,581 55,581 4.74 % 1,089,069 52,766 4.85 %
Allowance For Credit Losses 14,337 14,797Unamortized Discounts on Acquired Loans 1,964
3,241
Total Loans, Net 1,155,280 1,071,031
Other Assets 62,233 72,196
Total Assets/Interest Income $ 1,661,316 $ 62,864 $ 1,599,936 $ 55,591
Liabilities and Stockholders' Equity
Deposits In Domestic Offices
Noninterest Bearing Demand $ 563,778 $ - - % $ 482,914 $ - - %
Interest Bearing Demand 146,316 343 0.23 % 127,853 412 0.32 %
Money Market Accounts 278,431 605 0.22 % 239,339 655 0.27 %
Savings Accounts 148,665 226 0.15 % 128,039 201 0.16 %
All Time Deposits 328,514 3,4801.06 % 415,014 5,408 1.30 % Total Interest Bearing Deposits
901,926 4,654 0.52 % 910,245 6,676 0.73 %
Total Deposits 1,465,704 1,393,159
Borrowings 25,443 482 1.89 % 34,786 625 1.80 %
Notes Payable 22,815 1,470 6.44 % 23,771 1,560 6.56 %
Lease Liability 2,069 58 2.80 % 2,188 62 2.83 %
Other Liabilities 9,744 - 9,661 -
Stockholders' Equity 135,541 - 136,371 -Total Liabilities & Equity/Interest Expense$ 1,661,316 $ 6,664 $ 1,599,936 $ 8,923 Earning Assets/Interest Income (2)$ 1,599,601 $ 62,864
3.93 %
0.70 %
$ 56,200 $ 46,668 Net Yield on Interest Earning Assets 3.51 % 3.05 % Earning Assets/Interest Expense
0.42 % 0.58 %
Net Interest Spread (2) 3.23 % 2.72 %
Net Interest Margin (2) 3.51 % 3.05 %
Yields on securities available-for-sale have been calculated on the basis of (1) historical cost and do not give effect to changes in the fair value of those
securities, which is reflected as a component of stockholders' equity.
Presented on a taxable-equivalent basis using the statutory income tax rate
of 21.0% for 2022 and 2021. Taxable equivalent adjustments of
investment interest income and loan interest income, respectively for
the year ended December 31, 2022 and $229 thousand and $9 thousand ,
respectively for the year ended December 31, 2021 .
(3) Loans placed on nonaccrual are included in average balances.
Yields do not include the average balance of the fair value adjustment for (4) pools of non-credit impaired loans acquired or discounts on credit impaired
loans acquired.
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The level of net interest income is affected primarily by variations in the volume and mix of these interest-earning assets and interest-bearing liabilities, as well as changes in interest rates. The following table shows the effect that these factors had on the interest earned from the Company's interest-earning assets and interest paid on its interest-bearing liabilities for the year endedDecember 31, 2022 versus 2021. Rate and Volume Analysis Year Ended December 31, 2022 Versus December 31, 2021 (Dollars in Thousands) Increase (Decrease) Due to Volume Yield/Rate Net Earning Assets Loans (1)$ 3,999 $ (1,184) $ 2,815 Investment securities Taxable 323 750 1,073 Exempt from Federal income tax (157) (14) (171) Federal funds sold (10) 744 734 Other interest income (24) 2,846 2,822 Total interest income 4,131 3,142 7,273 Interest Bearing Liabilities Interest bearing deposits (61) (1,961) (2,022) Notes payable and leases (68) (26) (94) Funds purchased (167) 24 (143) Total Interest Expense (296) (1,963) (2,259) Net Interest Income$ 4,427 $ 5,105 $ 9,532
(1) Nonaccrual loans are included in average balances and do not have a material
effect on the average yield.
Interest Sensitivity. The Company monitors and manages the pricing and maturity of its assets and liabilities in order to diminish the potential adverse impact that changes in interest rates could have on its net interest income. The Company also performs asset/liability modeling to assess the impact varying interest rates and balance sheet mix assumptions will have on net interest income. Interest rate sensitivity can be managed by repricing assets or liabilities, selling investment securities available for sale, replacing an asset or liability at maturity, or adjusting the interest rate during the life of an asset or liability. Managing the amount of assets and liabilities repricing in the same time interval helps to hedge the risk and minimize the impact on net interest income of rising or falling interest rates. The Company evaluates interest sensitivity risk and then formulates guidelines regarding asset generation and repricing, funding sources and pricing, and off-balance sheet commitments in order to decrease interest rate sensitivity risk. AtDecember 31, 2022 , the Company was asset sensitive within the one-year time frame when looking at a repricing gap analysis. The cumulative gap, in an unchanged interest rate environment, as a percentage of total assets up to one year is 13.7%. A positive gap indicates more assets than liabilities are repricing within the indicated time frame. Management believes there is more upside potential than downside risk and, based on the current and projected interest rate environment, management expects to see net interest income rise in the future.
Provision and Allowance for Credit Losses
The Company has developed policies and procedures for evaluating the overall
quality of its credit portfolio and for timely identifying potential problem
loans. Management's judgment as to the adequacy of the allowance for credit
losses is based upon a number of assumptions about future events which it
believes to be reasonable, but which may not prove to be accurate. Thus, there
can be no assurance that loan charge-offs in future periods will not exceed the
allowance for credit losses or that additional increases in the allowance for
credit losses will not be required.
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The Company's allowance for credit losses consists of two parts. The first part is determined in accordance with authoritative guidance issued by theFinancial Accounting Standards Board ("FASB") regarding the allowance for credit losses. The Company's determination of this part of the allowance for credit losses is based upon quantitative and qualitative factors. A loan loss history based upon the prior three years is utilized in determining the appropriate allowance for credit losses. Historical loss factors are determined by criticized and uncriticized loans by loan type. These historical loss factors are applied to the loans by loan type to determine an indicated allowance for credit losses. The historical loss factors may also be modified based upon other qualitative factors including, but not limited to, local and national economic conditions, trends of delinquent loans, changes in lending policies and underwriting standards, concentrations, and management's knowledge of the loan portfolio. The second part of the allowance for credit losses is determined in accordance with guidance issued by the FASB regarding impaired loans. 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. Impaired loans not deemed collateral dependent are analyzed according to the ultimate repayment source, whether that is cash flow from the borrower, guarantor or some other source of repayment. Impaired loans are deemed collateral dependent if in the Company's opinion the ultimate source of repayment will be generated from the liquidation of collateral. The sum of the two parts constitutes management's best estimate of an appropriate allowance for credit losses. When the estimated allowance for credit losses is determined, it is presented to the Company's Board of Directors for review and approval on a quarterly basis. AtDecember 31, 2022 , the Company's allowance for credit losses was$14.3 million , or 1.16% of total outstanding loans. AtDecember 31, 2021 , the allowance for credit losses was$14.7 million , or 1.31% of total outstanding loans. The Company's provision for credit losses was$1.3 million for the year endedDecember 31, 2022 , as compared to$2.3 million for the year endedDecember 31, 2021 . The decrease in the provision for credit losses during the twelve months endedDecember 31, 2022 , as compared to the same period of 2021, was primarily due to a reduction of qualitative adjustment factors that had previously been increased in the allowance for credit losses related to the COVID-19 pandemic and the uncertainty in the economic environment, and the reversal of a specific reserve on one loan relationship due to a large principal curtailment and improved performance, which were partially offset by higher net charge-offs, loans acquired in the Partners acquisition that have converted from acquired to originated status, and organic loan growth. The provision for credit losses during the twelve months endedDecember 31, 2022 , as well as the allowance for credit losses as ofDecember 31, 2022 , represents management's best estimate of the impact of current economic trends, including the impact of the COVID-19 pandemic, on the ability of the Company's borrowers to repay their loans. Management continues to carefully assess the exposure of the Company's loan portfolio to COVID-19 pandemic related factors, economic trends and their potential effect on asset quality. As ofDecember 31, 2022 , the Company's delinquencies and nonperforming assets had not been materially impacted by the COVID-19 pandemic. In addition, as ofDecember 31, 2022 , all of the loan balances that were approved by the Company, on a consolidated basis, for loan payment deferrals or payments of interest only have either resumed regular payments or have been paid off. The Company discontinues accrual of interest on loans when management believes, after considering economic and business conditions and collection efforts that a borrower's financial condition is such that the collection of interest is doubtful. Generally, the Company will place a delinquent loan in nonaccrual status when the loan becomes 90 days or more past due. At the time a loan is placed in nonaccrual status, all interest which has been accrued on the loan but remains unpaid is reversed and deducted from earnings as a reduction of reported interest income. No additional interest is accrued on the loan balance until the collection of both principal and interest becomes reasonably certain. 56
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The following tables illustrate the Company's past due and nonaccrual loans at
Past Due and Nonaccrual Loans
(Dollars in Thousands)
At December 31, 2022 and 2021
30 - 89 Days Greater than 90 Days Total
December 31, 2022 Past Due Past Due Past Due NonAccrual
Real Estate Mortgage
Construction and land
development $ - $ 259 $ 259 $ 259
Residential real estate 1,174 51 1,225 1,263
Nonresidential 474 305 779 305
Home equity loans 54 45 99 -
Commercial - - - 327
Consumer and other loans 2 - 2 -
TOTAL $ 1,704 $ 660 $ 2,364 $ 2,154
30 - 89 Days Greater than 90 Days Total
December 31, 2021 Past Due Past Due Past Due NonAccrual
Real Estate Mortgage
Construction and land
development $ - $ 598 $ 598 $ 598
Residential real estate 903 361 1,264 1,293
Nonresidential - 2,915 2,915 6,486
Home equity loans 160 - 160 -
Commercial 46 77 123 584
Consumer and other loans 15 - 15 -
TOTAL $ 1,124 $ 3,951 $ 5,075 $ 8,961
Total nonaccrual loans at December 31, 2022 were $2.2 million , which reflects a
decrease of $6.8 million from $9.0 million at December 31, 2021 . Management
believes the relationships on nonaccrual were adequately reserved at
December 31, 2022 . TDRs not past due or on nonaccrual at December 31, 2022
amounted to $2.3 million , as compared to $3.9 million at December 31, 2021 .
This decrease was primarily due to five loan relationships that no longer met
the definition of a TDR and pay-downs of principal loan balances during 2022.
There was also one loan with a balance of $172 thousand at December 31, 2022
that was classified as nonaccrual during 2022. Total TDRs decreased $4.5 million
to $3.4 million at December 31, 2022 , compared to $7.9 million at December 31,
2021 . Of this decrease, approximately $1.1 million was due to five loan
relationships that are no longer considered to be TDRs due to the restructuring
of the loans subsequent to them initially being classified as a TDR. At the
time of the subsequent restructurings, the borrowers were not experiencing
financial difficulties and, under the terms of the subsequent restructuring
agreements, no concessions have been granted to the borrowers. In addition,
during 2022, one loan relationship that was classified as a TDR was paid down
and the remaining balance was charged-off, reducing the balance in total by
approximately $2.9 million , which was partially offset by one loan relationship
in the amount of approximately $48 thousand being classified as a TDR during the
second quarter of 2022. The remaining decrease was the result of loan
relationships classified as TDRs that were paid down or paid off.
Nonperforming assets, defined as nonaccrual loans, loans past due 90 days or
more and accruing, and OREO, net, at December 31, 2022 were $2.2 million
compared to $9.8 million at December 31, 2021 . The Company's ratio of
nonperforming assets to total assets was 0.14% at December 31, 2022 compared to
0.60% at December 31, 2021 . As noted above, there was a decrease in nonaccrual
loans during the year ended December 31, 2022 . OREO, net decreased during the
year ended December 31, 2022 by $837 thousand . There were two properties with
aggregate values of $837 thousand that were sold at a gain of $7 thousand during
the first quarter of 2022.
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It is likely that the COVID-19 pandemic and the economic disruption related to it as well as the uncertainty in the macroeconomic environment due to higher market interest rates, inflation and the possibility of a recession will continue to negatively impact the Company's financial position and results of operations during the year endingDecember 31, 2023 .
The following tables provide additional information on the Company's
nonperforming assets at
Nonperforming Assets
(Dollars in thousands)
December 31, December 31,
2022 2021
Nonperforming assets:
Nonaccrual loans $ 2,154 $ 8,961Loans past due 90 days or more and accruing 45
-
Total nonperforming loans (NPLs) $ 2,199 $
8,961
Other real estate owned (OREO) -
837
Total nonperforming assets (NPAs) $ 2,199 $
9,798
Performing TDR's and TDR's 30-89 days past due $ 2,333 $
3,922 NPLs/Total Assets 0.14 % 0.54 % NPAs/Total Assets 0.14 % 0.60 % NPAs and TDRs/Total Assets 0.29 % 0.83 %
Allowance for credit losses/Nonaccrual Loans 664.58 % 163.55 % Allowance for credit losses/NPLs 650.98 % 163.55 % Nonaccrual loans to total loans outstanding 0.18 %
0.81 %
Nonperforming Loans by Type
(Dollars in thousands)
December 31, December 31,
2022 2021
Real Estate Mortgage
Construction and land development $ 259 $ 598
Residential real estate 1,263 1,293
Nonresidential 305 6,486
Home equity loans 45 -
Commercial 327 584
Consumer and other loans - -
Total $ 2,199 $ 8,961
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The following table provides data related to loan balances and the allowance for
credit losses for the years ended
Allowance for Credit Losses Data
(Dollars in Thousands)
At December 31, 2022 and 2021
December 31, December 31,
2022 2021
Average loans outstanding $ 1,171,581 $ 1,089,069
Total loans outstanding 1,232,866 1,117,195
Total nonaccrual loans 2,154 8,961
Net loans charged off 1,689 870
Provision for credit losses 1,348 2,323
Allowance for credit losses 14,315 14,656Allowance as a percentage of total loans outstanding 1.2 % 1.3 % Net loans charged off to average loans outstanding 0.1 % 0.1 % Nonaccrual loans as a percentage of total loans outstanding 0.2 % 0.8 % Allowance as a percentage of nonaccrual loans outstanding 664.6 % 163.6 %
The following table represents the activity of the allowance for credit losses
for the years ended
Allowance for Credit Losses and Recorded Investments in Loans
(Dollars in Thousands)
At December 31, 2022 and 2021
December 31, 2022
Real Estate Mortgage
Construction
and Land Residential Consumer
Development Real Estate Nonresidential Home Equity Commercial and Other Unallocated Total
Beginning Balance $ 1,143 $ 1,893 $ 9,239 $ 212 $ 1,885 $ 36 $ 248 $ 14,656
Charge-offs (13) - (1,555) (27) (182) (72) - (1,849)
Recoveries 1 59 23 9 20 48 - 160
Provision (recovery) (51) 107 930 55 195 64 48 1,348
Ending Balance $ 1,080 $ 2,059 $ 8,637 $ 249 $ 1,918 $ 76 $ 296 $ 14,315
December 31, 2021
Real Estate Mortgage
Construction
and Land Residential Consumer
Development Real Estate Nonresidential Home Equity Commercial and Other Unallocated Total
Beginning Balance $ 903 $ 2,351 $ 7,584 $ 271 $ 1,943 $ 37 $ 114 $ 13,203
Charge-offs - (39) (692) (7) (184) (66) - (988)
Recoveries 1 23 53 3 16 22 - 118
Provision (recovery) 239 (442) 2,294 (55) 110 43 134 2,323
Ending Balance $ 1,143 $ 1,893 $ 9,239 $ 212 $ 1,885 $ 36 $ 248 $ 14,656
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The following table provides information related to the allocation of the allowance for credit losses by loan category, the related loan balance for each category, and the percentage of loan balance to total loans by category:
Allocation of the Allowance for Credit Losses
At December 31, 2022 and 2021
(Dollars in thousands)
December 31, December 31,
2022 2021
Percent Percent
of of
Loan Total Loan Total
Balances Allocation Loans Balances Allocation Loans
Real Estate Mortgage
Construction and land development $ 117,296 $ 1,080 10 % $ 107,983 $ 1,143 10 %
Residential real estate 229,904 2,059 19% 201,230 1,893 18 % Nonresidential 722,620 8,637 58 % 642,217 9,239 57 % Home equity loans 31,445 249 3 % 30,395 212 3 % Commercial 128,553 1,918 10 % 130,908 1,885 12 %
Consumer and other loans 3,048 76 - % 4,462 36 - %
Unallocated - 296 - % - 248 - %
$ 1,232,866 $ 14,315 100 % $ 1,117,195 $ 14,656 100 %
Additional information related to net charge-offs (recoveries) is presented in
the tables below.
December 31, December 31,
2022 2021
Net Net Net Net
Charge-Offs Average Charge-Off Charge-Offs Average Charge-Off
Dollars in thousands (Recoveries) Loans Ratio (Recoveries) Loans Ratio
Year Ended
Real Estate MortgageConstruction and land development $ 12$ 109,679
0.01 % $ (1)$ 91,780 (0.00) % Residential real estate (59) 221,458 (0.03) % 16 209,776 0.01 % Nonresidential 1,532 674,238 0.23 % 639 599,647 0.11 % Home equity loans 18 27,501 0.07 % 4 28,861 0.01 % Commercial 162 135,324 0.12 % 168 155,148 0.11 % Consumer and other loans 24 3,381 0.71 % 44 3,857 1.14 % Total Loans Receivable$ 1,689 $ 1,171,581
0.14 % $ 870
Noninterest Income
Noninterest Income. The Company's primary source of noninterest income is service charges on deposit accounts, mortgage banking income and other income. Sources of other noninterest income include ATM and credit card fees, debit card income, safe deposit box income, earnings on bank owned life insurance policies and investment fees and commissions. Noninterest income for the twelve months endedDecember 31, 2022 decreased by$3.1 million , or 37.5%, when compared to the twelve months endedDecember 31, 2021 . Key changes in the components of noninterest income for the twelve months endedDecember 31, 2022 , as compared to the same period in 2021, are as follows:
Service charges on deposit accounts increased by
primarily to increases in overdraft fees as a result of the easing of
? restrictions and the lifting of lockdowns in the Company's markets of operation
and Partners no longer automatically waiving overdraft fees which was
previously done in an
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effort to provide all necessary financial support and services to its customers
and communities, both as related to the ongoing COVID-19 pandemic as compared to
the same period of 2021;
(Losses) gains on sales and calls of investment securities decreased by
thousand, or 119.4%, due primarily to Partners recording losses of
on sales or calls of investment securities during the twelve months ended
? calls of investment securities during the same period of 2021. In addition,
during the twelve months ended
thousand on sales or calls of investment securities, as compared to recording
no gains on sales or calls of investment securities during the same period of
2022;
Mortgage banking income, net decreased by
? to Partners' majority owned subsidiary JMC having a lower volume of loan
closings as compared to the same period in 2021;
(Losses) gains on disposal of other assets, net decreased by
1,944.1%, as a result of Delmarva recording losses of
? disposal of certain assets in connection with the closing of its
City,
Delmarva recording a gain of
portfolio during the first quarter of 2021; and
Impairment loss on restricted stock increased from zero to
? primarily to Partners recording the final write-down of its investment in
Other income decreased by
mortgage division fees at Delmarva, Partners recording lower fees from its
? participation in a loan hedging program with a correspondent bank, and
decreases in ATM fees and debit card income, which were partially offset by
Delmarva recording higher earnings on bank owned life insurance policies due to
additional purchases made in 2021.
Noninterest Expense
Noninterest Expense. Noninterest expense includes all expenses with the exception of those paid for interest on deposits and borrowings. Significant expense items included in this component are salaries and employee benefits, premises and equipment and other operating expenses. Noninterest expense for the twelve months endedDecember 31, 2022 decreased by$436 thousand , or 1.0%, when compared to the twelve months endedDecember 31, 2021 . Key changes in the components of noninterest expense for the twelve months endedDecember 31, 2022 , as compared to the same period in 2021, are as follows:
Salaries and employee benefits decreased by
due to recording no accelerated stock-based compensation expense during the
twelve months ended
accelerated stock-based compensation expense during the same period of 2021
related to the accelerated vesting of restricted stock awards, which
accelerated vesting was subject to the prior approval of the Company and was
? not contingent on the closing of the merger with OCFC, decreases related to
staffing changes and a decrease in commissions expense paid due to the decrease
in mortgage banking income from Partners' majority owned subsidiary JMC, which
were partially offset by merit increases and higher expenses related to payroll
taxes, benefit costs, and bonus accruals. In addition, salaries and employee
benefits increased due to Partners' new key hires and expansion into the
Premises and equipment increased by
increases related to Delmarva opening its new full-service branch at 26th
? Street in
opening its new full-service branch and commercial banking office in
repairs and maintenance, software
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amortization and maintenance contracts, which were partially offset by lower
expenses related to Partners' majority owned subsidiary JMC, building security
and purchased software, the cost of which did not qualify for capitalization;
(Gains) losses and operating expenses on other real estate owned, net increased
by
? recorded on properties during the twelve months ended
compared to no valuation adjustments being recorded during the same period of
2022, and lower expenses related to other real estate owned;
Amortization of core deposit intangible decreased by
? primarily due to lower amortization related to the
million, respectively, in core deposit intangibles recognized in the Partners
and Liberty acquisitions;
Merger related expenses increased by
? higher legal fees and other costs associated with the terminated merger with
OCFC; and
Other expenses decreased by
expenses related to professional services, stationery, printing and supplies,
? director fees, correspondent bank services, legal, and other, which were
partially offset by higher expenses related to postage and delivery,
insurance assessments, marketing, ATM, and audit and related professional fees.
The following table sets forth the primary components of other operating expenses for the periods indicated:
Other Operating Expenses
(Dollars in Thousands)
December 31,
2022 2021
Professional services $ 727 $ 769
Stationary, printing and supplies 212 273
Postage and delivery 257 197
FDIC assessment 927 904
State bank assessment 60 66
Directors fees and expenses 693 742
Marketing 489 443
Correspondent bank services 101 122
ATM expenses 1,112 1,030
Telephones and mobile devices 816 806
Membership dues and fees 123 128
Legal fees 337 562
Audit and related professional fees 470 358
Insurance 265 267
Listing fees 59 58
Other 5,134 5,334
$ 11,782 $ 12,059
Income Taxes
The provision for income taxes was $4.5 million during the year ended December
31, 2022 , compared to the provision for income taxes of $2.2 million during the
year ended December 31, 2021 , an increase of $2.3 million or 100.8%. This
increase was due primarily to higher consolidated income before taxes, higher
merger related expenses, which are typically non-deductible, and lower earnings
on tax-exempt income, primarily tax-exempt investment securities. For the twelve
months ended December 31, 2022 , the Company's effective tax rate was
approximately 24.9% as compared to 23.3% for the same period in 2021.
62
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Partners is not subject toVirginia state income tax, but instead paysVirginia franchise tax. TheVirginia franchise tax paid by Partners is recorded in the "Other operating expenses" line item on the Consolidated Statements of Income for the twelve months endedDecember 31, 2022 and 2021.
Financial Condition
Interest Earning Assets
Loans. Loans typically provide higher yields than the other types of interest earning assets, and thus one of the Company's goals is to increase loan balances. Management attempts to control and counterbalance the inherent credit and liquidity risks associated with the higher loan yields without sacrificing asset quality to achieve its asset mix goals. Total gross loans, excluding unamortized discounts on acquired loans, averaged$1.17 billion and$1.09 billion during the years endedDecember 31, 2022 and 2021, respectively. The following table shows the composition of the loan portfolio by category: Composition of Loan Portfolio by Category (Dollars in Thousands) As of December 31, 2022 and 2021 December 31, December 31, 2022 2021 Real Estate Mortgage Construction and land development$ 117,296 $ 107,983 Residential real estate 229,904 201,230 Nonresidential 722,620 642,217 Home equity loans 31,445 30,395 Commercial 128,553 130,908 Consumer and other loans 3,048 4,462 1,232,866 1,117,195 Less: Allowance for credit losses (14,315) (14,656)$ 1,218,551 $ 1,102,539 63 Table of Contents The following table sets forth the repricing characteristics and sensitivity to interest rate changes of the Company's loan portfolio, including unamortized discounts on acquired loans atDecember 31, 2022 . Loan Maturities and Interest Rate Sensitivity At December 31, 2022 (Dollars in thousands) Between Between One Year One and Five and After December 31, 2022 or Less Five Years Fifteen Years Fifteen Years Total Real Estate Mortgage
Construction and land development$ 61,019 $ 32,515 $
16,984 $ 6,778$ 117,296 Residential real estate 41,739 126,515 38,495 23,155 229,904 Nonresidential 117,493 433,602 154,822 16,703 722,620 Home equity loans 18,867 4,293 4,799 3,486 31,445 Commercial 52,413 53,165 15,751 7,224 128,553 Consumer and other loans 693 1,050 673 632 3,048 Total loans receivable$ 292,224 $ 651,140 $ 231,524 $ 57,978 $ 1,232,866 Fixed-rate loans: Real Estate Mortgage
Construction and land development$ 27,788 $ 23,427 $
9,698 $ 5,559$ 66,472 Residential real estate 27,152 98,962 11,010 970 138,094 Nonresidential 99,198 393,455 100,666 7,124 600,443 Home equity loans - - - - - Commercial 10,552 48,927 15,654 564 75,697 Consumer and other loans 614 1,038 603 565 2,820 Total fixed-rate loans$ 165,304 $ 565,809 $ 137,631 $ 14,782 $ 883,526 Floating-rate loans: Real Estate Mortgage
Construction and land development$ 33,231 $ 9,088 $ 7,286 $ 1,219$ 50,824 Residential real estate 14,587 27,553 27,485 22,185 91,810 Nonresidential 18,295 40,147 54,156 9,579 122,177 Home equity loans 18,867 4,293 4,799 3,486 31,445 Commercial 41,861 4,238 97 6,660 52,856 Consumer and other loans 79 12 70 67 228 Total floating-rate loans$ 126,920 $ 85,331 $
93,893
AtDecember 31, 2022 , real estate mortgage loans included$334.3 million of owner-occupied non-farm, non-residential loans, and$319.3 million of other non-farm, non-residential loans, which is 30.4% and 29.0% of real estate mortgage loans, respectively. By comparison, atDecember 31, 2021 , real estate mortgage loans included$287.4 million of owner-occupied non-farm, non-residential loans, and$313.8 million of other non-farm, non-residential loans, which is 29.3% and 32.0% of real estate mortgage loans, respectively. This represents an increase atDecember 31, 2022 of$47.0 million and$5.5 million , or 16.3% and 1.8%, in owner-occupied non-farm, non-residential loans and other non-farm, non-residential loans, respectively. AtDecember 31, 2022 , real estate mortgage loans included$117.3 million of construction and land development loans, and$52.3 million of multi-family residential loans, which is 10.7% and 4.8% of real estate mortgage loans, respectively. By comparison, atDecember 31, 2021 , real estate mortgage loans included$107.9 million of construction and land development loans, and$24.4 million of multi-family residential loans, which is 11.0% and 2.5% of real estate mortgage loans, respectively. This represents an increase atDecember 31, 2022 of$9.4 million and$27.9 million , or 8.7% and 114.3%, in construction and land development loans and multi-family residential loans, respectively. 64
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Commercial real estate loans, excluding owner-occupied non-farm, non-residential loans, were 273.9% of total risk-based capital atDecember 31, 2022 , as compared to 267.9% atDecember 31, 2021 . Construction and land development loans were 65.7% of total risk-based capital atDecember 31, 2022 , as compared to 64.8% atDecember 31, 2021 . AtDecember 31, 2022 , real estate mortgage loans included home equity loans of$31.4 million and residential real estate loans of$229.9 million , compared to$30.4 million and$201.2 million atDecember 31, 2021 , respectively. Home equity loans increased$1.1 million , or 3.5%, during the year endedDecember 31, 2022 , while residential real estate loans increased$28.7 million , or 14.2%, during the year endedDecember 31, 2022 . AtDecember 31, 2022 , commercial loans were$128.6 million , compared to$130.9 million atDecember 31, 2021 , a decrease of$2.4 million , or 1.8%, during the year endedDecember 31, 2022 . The overall increase in loans from the year endedDecember 31, 2021 toDecember 31, 2022 was due primarily to an increase in organic growth, including growth of approximately$68.9 million in loans related to Partners' expansion into theGreater Washington market, which was partially offset by forgiveness payments received of approximately$8.2 million under round two of the PPP. As ofDecember 31, 2022 , there were no loans under the PPP that were still outstanding.Investment Securities . The investment securities portfolio is a significant component of the Company's total interest-earning assets. Total investment securities averaged$147.5 million during the year endedDecember 31, 2022 as compared to$129.8 million for the year endedDecember 31, 2021 . This represented 9.2% and 8.5% of total average interest-earning assets for the years endedDecember 31, 2022 and 2021, respectively. This increase was primarily due to management of the investment securities portfolio in light of the Company's liquidity needs and lower accelerated pre-payments on mortgage-backed investment securities, partially offset by calls on higher yielding investment securities in the low interest rate environment during 2021. During the twelve months endedDecember 31, 2021 , accelerated pre-payments on mortgage-backed investment securities caused the premiums paid on these investment securities to be amortized into expense on an accelerated basis thereby reducing income and yield earned. During the year endedDecember 31, 2022 , the Company's investment securities portfolio was negatively impacted by unrealized losses in the market value of investment securities available for sale as a result of increases in market interest rates. The Company believes that further increases in market interest rates will likely result in higher unrealized losses in the market value of the investment securities available for sale portfolio. The Company expects to recover its investment in debt securities through scheduled payments of principal and interest, and unrealized losses are not expected to affect the earnings or regulatory capital of the Company. The Company classifies all of its investment securities as available for sale. This classification requires that investment securities be recorded at their fair value with any difference between the fair value and amortized cost (the purchase price adjusted by any discount accretion or premium amortization) reported as a component of stockholders' equity (accumulated other comprehensive income (loss)), net of deferred taxes. AtDecember 31, 2022 and 2021, investment securities available for sale, at fair value totaled$133.7 million and$122.0 million , respectively. Investment securities available for sale, at fair value increased by$11.7 million , or 9.5%, during the year endedDecember 31, 2022 . This increase was primarily due to management of the investment securities portfolio in light of the Company's liquidity needs, which was partially offset by two higher yielding investment securities being called, and an increase in unrealized losses on the investment securities available for sale portfolio. The Company attempts to maintain an investment securities portfolio of high quality, highly liquid investments with returns competitive with short-termU.S. Treasury or agency obligations. This objective is particularly important as the Company focuses on growing its loan portfolio. The Company primarily invests in securities ofU.S. Government agencies, municipals, and corporate obligations. AtDecember 31, 2022 and 2021 there were no issuers, other than theU.S. Government and its agencies, whose securities owned by the Company had a book or fair value exceeding 10% of the Company's stockholders' equity. 65
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The following table summarizes the amortized cost and fair value of investment securities available for sale for the dates indicated:
Amortized Cost and Fair Value of Investment Securities
(Dollars in Thousands)
As of December 31, 2022 and 2021
December 31, 2022
Gross Gross
Amortized Percentage Unrealized Unrealized Fair
Cost of Total Gains Losses Value
Obligations of U.S. Government
agencies and corporations $ 17,115 11.4 % $ - $ 1,649 $ 15,466
Obligations of States and political
subdivisions 29,480 19.6 % 7 2,422 27,065
Mortgage-backed securities 101,626 67.4 % - 12,886 88,740
Subordinated debt investments 2,468 1.6 %
- 82 2,386
$ 150,689 100.0 % $ 7 $ 17,039 $ 133,657
December 31, 2021
Gross Gross
Amortized Percentage Unrealized Unrealized Fair
Cost of Total Gains Losses Value
Obligations of U.S. Government
agencies and corporations $ 6,547 5.4 % $ 46 $ 142 $ 6,451
Obligations of States and political
subdivisions 29,792 24.5 % 1,397 63 31,126
Mortgage-backed securities 83,213 68.5 % 279 1,089 82,403
Subordinated debt investments 1,990 1.6 %
51 - 2,041
$ 121,542 100.0 % $ 1,773 $ 1,294 $ 122,021
66
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The following table sets forth the fair value and weighted average yields by
maturity category of the investment securities available for sale portfolio as
of December 31, 2022 . Weighted-average yields have been computed on a fully
taxable-equivalent basis using a tax rate of 21%. Mortgage-backed securities are
included in maturity categories based on their stated maturity date. Expected
maturities may differ from contractual maturities because issuers may have the
right to call or prepay obligations.
Fair Value and Weighted Average Yields of Investment Securities by Maturity
(Dollars in Thousands)
As of December 31, 2022
December 31, 2022
Within 1 Year 1-5 Years 5-10 years After 10 Years Total
Weighted Weighted Weighted Weighted Weighted
Fair Average Fair Average Fair Average Fair Average Fair Average
Value Yield Value Yield Value Yield Value Yield Value Yield
Obligations of
U.S. Government
agencies and
corporations $ - - % $ 8,553 3.64 % $ 5,015 1.85 % $ 1,898 1.92 % $ 15,466 2.85 %
Obligations of
States and
political
subdivisions - - % 4,277 2.84 % 11,197 2.49 % 11,591 2.45 % 27,065 2.53 % Mortgage-backed securities
1 4.49 % 509 1.43 % 23,572 2.40 % 64,658 1.79 % 88,740 1.95 % Subordinated debt investments
- - % - - % 2,386 5.55 % - - % 2,386 5.55 %
$ 1 4.49 % $ 13,339 3.30 % $ 42,170 2.54 % $ 78,147 1.89 % $ 133,657 2.24 %
In addition, the Company holds stock in various correspondent banks as well as theFederal Reserve . The balance of these securities was$6.5 million and$4.9 million atDecember 31, 2022 and 2021, respectively, an increase of$1.6 million , or 33.7%, for the year endedDecember 31, 2022 . Due to the increase in longer term interest rates and ongoing volatility in the securities markets during the year endedDecember 31, 2022 , the net unrealized losses in the Company's investment securities available for sale portfolio increased fromDecember 31, 2021 by approximately$17.5 million , or 3,655.7%, to$17.0 million atDecember 31, 2022 .
Subsequent interest rate fluctuations could have an adverse effect on our investment securities available for sale portfolio by increasing reinvestment risk and reducing our ability to achieve our targeted investment returns.
Interest Bearing Liabilities
Deposits. Average total deposits increased from$1.39 billion to$1.47 billion , an increase of$72.5 million , or 5.2%, for the year endedDecember 31, 2022 over the average total deposits for the year endedDecember 31, 2021 . This increase was primarily due to organic deposit growth, including average growth of approximately$51.7 million in deposits related to Partners' expansion into theGreater Washington market, which was partially offset by scheduled maturities of time deposits that were not replaced and competitive pressures in the higher interest rate environment. AtDecember 31, 2022 , total deposits were$1.34 billion as compared to$1.44 billion atDecember 31, 2021 , a decrease of$103.3 million , or 7.2%. This decrease was primarily driven by scheduled maturities of time deposits that were not replaced and significant outflows related to competitive pressures in the higher interest rate environment, which were partially offset by organic growth as a result of our continued focus on total relationship banking and Partners' expansion into theGreater Washington market. Non-interest bearing demand deposits increased to$528.8 million atDecember 31, 2022 , a$34.9 million , or 7.1%, increase from$493.9 million in non-interest bearing demand deposits atDecember 31, 2021 , due primarily to the aforementioned items above. 67 Table of Contents The following table sets forth the deposits of the Company by category for the period indicated: Deposits by Category (Dollars in Thousands) As of December 31, 2022 and 2021 December 31, Percentage December 31, Percentage 2022 of Deposits 2021 of Deposits
Noninterest bearing demand deposits$ 528,770 39.47 %$ 493,913 34.23 % Interest bearing deposits: Money market, NOW, and savings accounts 553,325 41.31 % 569,707 39.48 % Certificates of deposit,$250 thousand or more 59,247 4.42 % 82,083 5.69 % Other certificates of deposit 198,263 14.80 % 297,173 20.60 % Total interest bearing deposits 810,835 60.53 %
948,963 65.77 %
Total $ 1,339,605 100.00 % $ 1,442,876 100.00 %
The Company's loan-to-deposit ratio was 92.0% at December 31, 2022 as compared
to 77.4% at December 31, 2021 . Core deposits, which exclude certificates of
deposit of $250 thousand or more, provide a relatively stable funding source for
the Company's loan portfolio and other interest earning assets. The Company's
core deposits were $1.28 billion at December 31, 2022 , a decrease of
$80.4 million , or 5.9%, from $1.36 billion at December 31, 2021 , and excluded
$59.2 million and $83.3 million in certificates of deposit of $250 thousand or
more as of those dates, respectively. Management anticipates that a stable base
of deposits will be the Company's primary source of funding to meet both its
short-term and long-term liquidity needs in the future, and, therefore, feels
that presenting core deposits provides valuable information to investors.
The following table provides a summary of the Company's maturity distribution for certificates of deposit at the dates indicated:
Maturities of Certificates of Deposit
(Dollars in Thousands)
As of December 31, 2022
December 31, December 31,
2022 2021
Three months or less $ 44,288 $ 46,845 Over three months through six months 36,283 64,574 Over six months through twelve months 79,260 129,517
Over twelve months 97,679 138,320 Total$ 257,510 $ 379,256 68 Table of Contents
The following table provides a summary of the Company's maturity distribution
for certificates of deposit of greater than
Maturities of Certificates of Deposit Greater than $250 Thousand
(Dollars in Thousands)
As of December 31, 2022
December 31, December 31,
2022 2021
Three months or less $ 5,977 $ 13,359 Over three months through six months 8,094 14,803 Over six months through twelve months 23,745 20,124 Over twelve months 21,431 33,797 Total$ 59,247 $ 82,083
Borrowings. Borrowings at
AtDecember 31, 2022 , short-term borrowings with the FHLB were$42.0 million as compared to$0 atDecember 31, 2021 , an increase of$42.0 million , or 100.0%. This increase was primarily due to the aforementioned items noted in the analysis of total deposits. AtDecember 31, 2022 , long-term borrowings with the FHLB were$19.8 million as compared to$26.3 million atDecember 31, 2021 , a decrease of$6.5 million , or 24.8%. This decrease was primarily due to maturities and payoffs of borrowings that were not replaced and scheduled principal curtailments. These borrowings are collateralized by a blanket lien on the first mortgage loans in the amount of the outstanding borrowings, FHLB capital stock, and amounts on deposit with the FHLB.
At
AtDecember 31, 2022 , other borrowings were$613 thousand as compared to$755 thousand at December 31, 2021, a decrease of$142 thousand , or 18.8%. Partners majority owned subsidiary, JMC, has a warehouse line of credit with another financial institution in the amount of$3.0 million , of which$0 and$120 thousand were outstanding as ofDecember 31, 2022 and 2021, respectively. In addition to the decrease in JMC's warehouse line of credit, there was a decrease on Partners' note payable on410 William Street ,Fredericksburg, Virginia , primarily due to scheduled principal curtailments, partially offset by the amortization of the related discount on the note payable. See Note 8 - Borrowings and Notes Payable of the audited consolidated financial statements for the year endedDecember 31, 2022 for additional information on the Company's subordinated notes payable, net, Partners' note payable, and JMC's warehouse line of credit. Average total borrowings decreased by$10.3 million , or 17.6%, and average rates paid increased by 0.31% to 4.04% for the twelve months endedDecember 31, 2022 , as compared to the same period in 2021. The decrease in average total borrowings balances was primarily due to a decrease in the average balance of FHLB advances resulting from maturities and payoffs of borrowings that were not replaced and scheduled principal curtailments, a decrease in average borrowings at the Federal Reserve Bank Discount Window under the PPP Liquidity Facility in which the loans under the PPP originated by the Company were previously pledged as collateral, and the early redemption of$2.0 million in subordinated notes payable, net, in earlyJuly 2021 . The increase in average rates paid was primarily due to the decreases in the average balances of FHLB advances and borrowings at the Federal Reserve Bank Discount Window under the PPP Liquidity Facility, which were lower cost interest-bearing liabilities, partially offset by the early redemption of subordinated notes payable, which was a higher cost interest-bearing liability. 69 Table of Contents Capital Total stockholders' equity as ofDecember 31, 2022 was$139.3 million , a decrease of$2.0 million , or 1.4%, fromDecember 31, 2021 . Key drivers of this change were an increase in accumulated other comprehensive (loss), net of tax, and cash dividends paid to shareholders, which were partially offset by the net income attributable to the Company for the twelve months endedDecember 31, 2022 , the proceeds from stock option exercises, and stock-based compensation expense related to restricted stock awards. TheFederal Reserve and other bank regulatory agencies require bank holding companies and financial institutions to maintain capital at adequate levels based on a percentage of assets and off-balance sheet exposures, adjusted for risk weights ranging from 0% to 100%. The following table presents actual and required capital ratios as ofDecember 31, 2022 andDecember 31, 2021 forDelmarva and Partners under Basel III Capital Rules. The minimum required capital amounts presented include the minimum required capital levels as ofDecember 31, 2022 based on the phase-in provisions of theBasel III Capital Rules and the minimum required capital levels as ofJanuary 1, 2019 when the Basel III Capital Rules were fully phased-in. Capital levels required for an institution to be considered well capitalized are based upon prompt corrective action regulations, as amended to reflect the changes under the Basel III Capital Rules. A more in depth discussion of regulatory capital requirements is included in Note 16 of the audited consolidated financial statements included at Item 8 to this Annual Report on Form 10-K. 70 Table of Contents Capital Components At December 31, 2022 and 2021 (Dollars in Thousands) To Be Well Capitalized For Capital Under Prompt Adequacy Corrective Action Actual Purposes Provisions Amount Ratio Amount Ratio Amount Ratio As ofDecember 31, 2022 Total Capital Ratio (To Risk Weighted Assets) The Bank of Delmarva 98,910 13.4 % 77,763 10.5 % 74,060 10.0 % Virginia Partners Bank 63,558 11.3 % 58,862 10.5 % 56,059 10.0 % Tier 1 Capital Ratio (To Risk Weighted Assets) The Bank of Delmarva 89,645 12.1 % 62,951 8.5 % 59,248 8.0 % Virginia Partners Bank 58,895 10.5 % 47,650 8.5 % 44,848 8.0 % Common Equity Tier 1 Ratio (To Risk Weighted Assets) The Bank of Delmarva 89,645 12.1 % 51,842 7.0 % 48,139 6.5 % Virginia Partners Bank 58,895 10.5 % 39,242 7.0 % 36,439 6.5 % Tier 1 Leverage Ratio (To Average Assets) The Bank of Delmarva 89,645 9.3 % 38,416 4.0 % 48,020 5.0 % Virginia Partners Bank 58,895 8.9 % 26,348 4.0 % 32,935 5.0 % To Be Well Capitalized For Capital Under Prompt Adequacy Corrective Action Actual Purposes Provisions Amount Ratio Amount Ratio Amount Ratio As ofDecember 31, 2021 Total Capital Ratio (To Risk Weighted Assets) The Bank of Delmarva 91,928 12.9 % 74,963 10.5 % 71,394 10.0 % Virginia Partners Bank 56,192 12.0 % 49,103 10.5 % 46,765 10.0 % Tier 1 Capital Ratio (To Risk Weighted Assets) The Bank of Delmarva 82,972 11.6 % 60,684 8.5 % 57,115 8.0 % Virginia Partners Bank 52,844 11.3 % 39,750 8.5 % 37,412 8.0 % Common Equity Tier 1 Ratio (To Risk Weighted Assets) The Bank of Delmarva 82,972 11.6 % 49,975 7.0 % 46,406 6.5 % Virginia Partners Bank 52,844 11.3 % 32,735 7.0 % 30,397 6.5 % Tier 1 Leverage Ratio (To Average Assets) The Bank of Delmarva 82,972 8.1 % 40,926 4.0 % 51,158 5.0 % Virginia Partners Bank 52,844 8.5 % 25,009 4.0 % 31,261 5.0 % 71 Table of Contents Liquidity Management
Liquidity management involves monitoring the Company's sources and uses of funds in order to meet its day-to-day cash flow requirements while maximizing profits. Liquidity represents the ability of a company to convert assets into cash or cash equivalents without significant loss and to raise additional funds by increasing liabilities. Liquidity management is made more complicated because different balance sheet components are subject to varying degrees of management control. For example, the timing of maturities of the available for sale investment securities portfolio is very predictable and subject to a high degree of control at the time investment decisions are made; however, net deposit inflows and outflows are far less predictable and are not subject to the same degree of control. Asset liquidity is provided by cash and assets which are readily marketable, which can be pledged, or which will mature in the near future. Liability liquidity is provided by access to core funding sources, principally the ability to generate customer deposits in the Company's market area. The Company's cash and cash equivalents position, which includes funds in cash and due from banks, interest bearing deposits in other financial institutions, and federal funds sold, averaged$296.3 million during the year endedDecember 31, 2022 and totaled$141.6 million atDecember 31, 2022 , as compared to an average of$326.9 million during the year endedDecember 31, 2021 and a year-end position of$338.8 million atDecember 31, 2021 . Also, the Company has available advances from the FHLB. Advances available are generally based upon the amount of qualified first mortgage loans which can be used for collateral. AtDecember 31, 2022 , advances available totaled approximately$412.0 million of which$61.8 million had been drawn, or used for letters of credit. Management regularly reviews the liquidity position of the Company and has implemented internal policies which establish guidelines for sources of asset-based liquidity and limit the total amount of purchased funds used to support the balance sheet and funding from non-core sources. Subject to certain aggregation rules,FDIC deposit insurance covers the funds in deposit accounts up to at least$250 thousand .
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