Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
General
Management’s discussion and analysis of financial condition and results of operations at March 31, 2023 and December 31, 2022 and for the three months ended March 31, 2023 and 2022 is intended to assist in understanding the financial condition and results of operations of the Company. The information contained in this section should be read in conjunction with the unaudited consolidated financial statements and the notes thereto appearing in Part I, Item 1, of this report on Form 10-Q.
Cautionary Note Regarding Forward-Looking Statements
This report contains forward-looking statements, which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “assume,” “plan,” “seek,” “expect,” “will,” “may,” “should,” “indicate,” “would,” “contemplate,” “continue,” “target” and words of similar meaning. These forward-looking statements include, but are not limited to:
•statements of our goals, intentions and expectations;
•statements regarding our business plans, prospects, growth and operating strategies;
•statements regarding the quality of our loan and investment portfolios; and
•estimates of our risks and future costs and benefits.
These forward-looking statements are based on our current beliefs and expectations and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. Accordingly, you should not place undue reliance on such statements. We are under no duty to and do not take any obligation to update any forward-looking statements after the date of this report.
The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:
•general economic conditions, either nationally or in our market areas, that are worse than expected;
•changes in the level and direction of loan delinquencies and write-offs and changes in estimates of the adequacy of the allowance for credit losses;
•our ability to access cost-effective funding;
•changes in liquidity, including the size and composition of our deposit portfolio and the percentage of uninsured deposits in the portfolio;
•fluctuations in real estate values and both residential and commercial real estate market conditions;
•demand for loans and deposits in our market area;
•our ability to implement and change our business strategies;
•competition among depository and other financial institutions, including with respect to service charges and fees;
•inflation and changes in the interest rate environment that reduce our margins and yields, our mortgage banking revenues, the fair value of financial instruments or our level of loan originations, or increase the level of defaults, losses and prepayments on loans we have made and make;
•adverse changes in the securities or secondary mortgage markets;
•changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements;
•the effects of any Federal government shutdown;
•changes in the quality or composition of our loan or investment portfolios;
•technological changes that may be more difficult or expensive than expected;
•failure or breaches of our IT security systems;
24
•the inability of third-party providers to perform as expected;
•our ability to manage market risk, credit risk and operational risk in the current economic environment;
•our ability to introduce new products and services, enter new markets successfully and capitalize on growth opportunities;
•our ability to successfully integrate into our operations any assets, liabilities, customers, systems and management personnel we may acquire and our ability to realize related revenue synergies and cost savings within expected time frames, and any goodwill charges related thereto;
•changes in consumer spending, borrowing and savings habits;
•changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission or the Public Company Accounting Oversight Board;
•our ability to retain key employees;
•the effects of global or national war, conflict or acts of terrorism;
•risks related to the COVID-19 pandemic or any other pandemic;
•our compensation expense associated with equity allocated or awarded to our employees; and
•changes in the financial condition, results of operations or future prospects of issuers of securities that we own.
Because of these and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements.
Summary of Significant Accounting Policies
A summary of our accounting policies is described in Note 1 of the Notes to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022. There have been no material changes to our significant accounting policies as described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 under “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Comparison of Financial Condition at March 31, 2023 and December 31, 2022
Total assets increased $141.0 million, or 17.8%, to $932.3 million at March 31, 2023 from $791.3 million at December 31, 2022, due primarily to an increase in cash and cash equivalents.
Cash and cash equivalents increased $110.6 million, or 420.1%, to $136.9 million at March 31, 2023 from $26.3 million at December 31, 2022 primarily due to cash received from an increase in deposits as well as an increase in Federal Home Loan Bank advances.
Net loans increased $15.3 million, or 2.4%, to $652.2 million at March 31, 2023 from $636.9 million at December 31, 2022. Non-owner-occupied real estate loans increased $11.6 million, or 8.6%, to $147.4 million at March 31, 2023 from $135.7 million at December 31, 2022. There were no other material changes in any of our loan categories during the quarter.
Total investment securities increased $12.4 million, or 17.3%, to $85.3 million at March 31, 2023, from $72.7 million at December 31, 2022, as we continued to invest in securities in an effort to increase yield.
25
Total deposits increased $93.6 million, or 14.3%, to $750.8 million at March 31, 2023 from $657.2 million at December 31, 2022, reflecting an increase in certificates of deposit. Certificates of deposit increased $116.2 million, or 92.2%, to $242.2 million at March 31, 2023 from $126.0 million at December 31, 2022. This was partially offset by a decrease in non-time deposits of $22.5 million, or 4.25%, as customers increased deposits in higher-yielding accounts during the current interest rate environment. The certificates of deposits increase included brokered deposits totaling $85.6 million with an average life of three years and an average interest rate of 5.07%. The loan-to-deposit ratio at March 31, 2023 was 86.9%, as compared to 96.9% at December 31, 2022.
We had $55.0 million of FHLB advance and no other borrowings at March 31, 2023, compared to $10.0 million of Federal Home Loan Bank advances at December 31, 2022. We increased borrowings during the first quarter of 2023 to increase our liquidity position in response to recent market turmoil resulting from the closures of Signature Bank and Silicon Valley Bank.
Stockholders’ equity increased by $1.2 million, or 1.0% to $118.3 million at March 31, 2023 compared to $117.1 million at December 31, 2022, primarily due to net income of $1.7 million during the first quarter of 2023, partially offset by a decrease in additional paid in capital from the repurchase of 59,715 shares of our common stock totaling $867,000 at an average price per share of $14.46.
26
Average Balance Sheets
The following tables set forth average balance sheets, average annualized yields and costs, and certain other information for the periods indicated. No tax-equivalent yield adjustments have been made, as the effects would be immaterial. All average balances are monthly average balances. Non-accrual loans were included in the computation of average balances. The yields set forth below include the effect of deferred fees, discounts, and premiums that are amortized or accreted to interest income or interest expense.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31, |
|
|
|
2023 |
|
|
2022 |
|
|
|
Average Outstanding Balance |
|
|
Interest |
|
|
Average Yield/Rate |
|
|
Average Outstanding Balance |
|
|
Interest |
|
|
Average Yield/Rate |
|
|
|
(Dollars in thousands) |
|
Interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans |
|
$ |
651,750 |
|
|
$ |
8,291 |
|
|
|
5.16 |
% |
|
$ |
586,762 |
|
|
$ |
6,996 |
|
|
|
4.84 |
% |
Investment securities held-to-maturity |
|
|
32,898 |
|
|
|
503 |
|
|
|
6.20 |
% |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Investment securities available-for-sale |
|
|
48,844 |
|
|
|
411 |
|
|
|
3.41 |
% |
|
|
48,648 |
|
|
|
260 |
|
|
|
2.14 |
% |
Interest-earning deposits and federal funds |
|
|
45,758 |
|
|
|
488 |
|
|
|
4.32 |
% |
|
|
48,231 |
|
|
|
17 |
|
|
|
0.14 |
% |
Other investments |
|
|
2,643 |
|
|
|
35 |
|
|
|
5.39 |
% |
|
|
1,000 |
|
|
|
6 |
|
|
|
2.33 |
% |
Total interest-earning assets |
|
|
781,893 |
|
|
|
9,728 |
|
|
|
5.05 |
% |
|
|
684,641 |
|
|
|
7,279 |
|
|
|
4.25 |
% |
Non-interest-earning assets |
|
|
51,044 |
|
|
|
|
|
|
|
|
|
62,343 |
|
|
|
|
|
|
|
Total assets |
|
$ |
832,937 |
|
|
|
|
|
|
|
|
$ |
746,984 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing checking accounts |
|
$ |
91,856 |
|
|
$ |
45 |
|
|
|
0.20 |
% |
|
$ |
96,273 |
|
|
$ |
42 |
|
|
|
0.17 |
% |
Money market accounts |
|
|
139,495 |
|
|
|
661 |
|
|
|
1.92 |
% |
|
|
144,455 |
|
|
|
88 |
|
|
|
0.25 |
% |
Savings accounts |
|
|
95,897 |
|
|
|
552 |
|
|
|
2.34 |
% |
|
|
86,195 |
|
|
|
83 |
|
|
|
0.38 |
% |
Certificates of deposit |
|
|
149,058 |
|
|
|
1,056 |
|
|
|
2.87 |
% |
|
|
94,465 |
|
|
|
290 |
|
|
|
1.23 |
% |
Total interest-bearing deposits |
|
|
476,306 |
|
|
|
2,314 |
|
|
|
1.97 |
% |
|
|
421,388 |
|
|
|
503 |
|
|
|
0.48 |
% |
FHLB advances and other borrowings |
|
|
46,723 |
|
|
|
516 |
|
|
|
4.48 |
% |
|
|
8,821 |
|
|
|
(975 |
) |
|
|
(44.20 |
)% |
Total interest-bearing liabilities |
|
|
523,029 |
|
|
|
2,830 |
|
|
|
2.19 |
% |
|
|
430,209 |
|
|
|
(472 |
) |
|
|
(0.44 |
)% |
Non-interest-bearing liabilities |
|
|
191,659 |
|
|
|
|
|
|
|
|
|
195,024 |
|
|
|
|
|
|
|
Total liabilities |
|
|
714,688 |
|
|
|
|
|
|
|
|
|
625,233 |
|
|
|
|
|
|
|
Total stockholders' equity |
|
|
118,249 |
|
|
|
|
|
|
|
|
|
121,751 |
|
|
|
|
|
|
|
Total liabilities and stockholders' equity |
|
$ |
832,937 |
|
|
|
|
|
|
|
|
$ |
746,984 |
|
|
|
|
|
|
|
Net interest rate spread (1) |
|
|
|
|
|
|
|
|
2.86 |
% |
|
|
|
|
|
|
|
|
4.69 |
% |
Net interest income |
|
|
|
|
$ |
6,898 |
|
|
|
|
|
|
|
|
$ |
7,751 |
|
|
|
|
Net interest margin (2) |
|
|
|
|
|
|
|
|
3.58 |
% |
|
|
|
|
|
|
|
|
4.53 |
% |
(1) Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average rate of interest-bearing liabilities.
(2) Net interest margin represents net interest income divided by average total interest-earning assets.
Rate/Volume Analysis
The following table presents the effects of changing rates and volumes on our net interest income for the periods indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The total column represents the sum of the prior columns. For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately based on the changes due to rate and the changes due to volume.
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2023 vs. 2022 |
|
|
|
Increase (Decrease) Due to |
|
|
Total |
|
|
|
|
|
|
|
|
|
Increase |
|
|
|
Volume |
|
|
Rate |
|
|
(Decrease) |
|
|
|
(In thousands) |
|
|
|
|
|
|
|
Interest-earning assets: |
|
|
|
|
|
|
|
|
|
Loans |
|
$ |
1,254 |
|
|
$ |
41 |
|
|
$ |
1,295 |
|
Investment securities held-to-maturity |
|
|
474 |
|
|
|
29 |
|
|
|
503 |
|
Investment securities available-for-sale |
|
|
37 |
|
|
|
114 |
|
|
|
151 |
|
Interest-earning deposits and federal funds |
|
|
(1,892 |
) |
|
|
2,363 |
|
|
|
471 |
|
Other investments |
|
|
27 |
|
|
|
2 |
|
|
|
29 |
|
Total interest-earning assets |
|
|
(100 |
) |
|
|
2,549 |
|
|
|
2,449 |
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
Interest-bearing checking accounts |
|
|
(34 |
) |
|
|
37 |
|
|
|
3 |
|
Market rate checking accounts |
|
|
(2,771 |
) |
|
|
3,344 |
|
|
|
573 |
|
Savings accounts |
|
|
393 |
|
|
|
76 |
|
|
|
469 |
|
Certificates of deposit |
|
|
734 |
|
|
|
32 |
|
|
|
766 |
|
Total interest-bearing deposits |
|
|
(1,678 |
) |
|
|
3,489 |
|
|
|
1,811 |
|
FHLB advances |
|
|
925 |
|
|
|
566 |
|
|
|
1,491 |
|
Total interest-bearing liabilities |
|
|
(753 |
) |
|
|
4,055 |
|
|
|
3,302 |
|
|
|
|
|
|
|
|
|
|
|
Change in net interest income |
|
$ |
653 |
|
|
$ |
(1,506 |
) |
|
$ |
(853 |
) |
|
|
|
|
|
|
|
|
|
|
Comparison of Operating Results for the Three Months Ended March 31, 2023 and 2022
General. Net income was $1.7 million for the three months ended March 31, 2023 compared to $1.8 million for the three months ended March 31, 2022. The decrease was caused by an increase in deposit interest expense offset by an increase in interest income and decreases in noninterest expenses.
Interest Income. Interest income increased $2.4 million, or 33.6%, to $9.7 million for the three months ended March 31, 2023 from $7.3 million for the three months ended March 31, 2022. The increase was due to increases in all categories of interest-earning assets. Interest income on loans increased $1.3 million, or 18.5%, to $8.3 million for the three months ended March 31, 2023 from $7.0 million for the three months ended March 31, 2022. Our average balance of loans increased by $65.0 million, or 11.1%, to $651.8 million for the three months ended March 31, 2023 from $586.8 million for the three months ended March 31, 2022. The average balance of loans increased due to steady loan demand. The average yield on loans increased 32 basis points to 5.16% for the current quarter, as compared to 4.84% for the prior year period, due to the continued changes in the interest rate environment.
Interest income on securities, excluding FHLB stock, increased $654,000 to $914,000 for the three months ended March 31, 2023 from $260,000 for the three months ended March 31, 2022. The average balance of held-to-maturity securities was $33.0 million for the three months ended March 31, 2023 compared to zero for the three months ended March 31, 2022, as we began to classify some new purchases as held-to-maturity. We also experienced an increase in interest income on interest-earning deposits and federal funds to $488,000 for the three months ended March 31, 2023 from $17,000 for the three months ended March 31, 2022, as the yields we received on these funds increased to 4.32% from 0.14% due to the continued changes in the interest rate environment.
28
Interest Expense. Interest expense increased $3.3 million to $2.8 million for the three months ended March 31, 2023, compared to negative $472,000 for the three months ended March 31, 2022, due to our repaying acquired FHLB borrowings, recognizing $1.0 million in accretion from the fair value adjustments on acquired advances in the previous period and an increasing interest rate environment in the current period.
We recognized increases in all categories of interest-bearing liabilities. Interest expense on deposits increased to $2.3 million for the three months ended March 31, 2023 from $503,000 for the three months ended March 31, 2022. The largest increase was in interest expense on certificates of deposit, which increased $766,000 to $1.1 million for the three months ended March 31, 2023. The average rate we paid on certificates of deposit increased 164 basis points to 2.87% for the three months ended March 31, 2023 from 1.23% for the three months ended March 31, 2022, due to the continued changes in the interest rate environment. In addition, the average balance of certificates of deposit increased $54.6 million, or 57.8%, to $149.1 million for the three months ended March 31, 2023 from $94.5 million for the three months ended March 31, 2022, as customers increased deposits in higher-yielding accounts during the current interest rate environment. We also experienced increases in interest expense on money market accounts, $573,000 to $661,000 for the quarter ended March 31, 2023 and savings accounts, $469,000 to $552,000 for the quarter ended March 31, 2023, due to increases in the rates we paid on these accounts of 167 basis points and 196 basis points, respectively.
Interest expense on borrowings increased to $516,000 for the three months ended March 31, 2023 from ($975,000) for the three months ended March 31, 2022. We recognized gain on the repayment of FHLB advances during the quarter ended March 31, 2022, and we increased borrowings during the quarter ended March 31, 2023 during the first quarter of 2023 to increase our liquidity position in response to recent market turmoil resulting from the closures of Signature Bank and Silicon Valley Bank.
Net Interest Income. Net interest income decreased $853,000, or 11.0%, to $6.9 million for the three months ended March 31, 2023 compared to $7.8 million for the three months ended March 31, 2022. Our net interest rate spread decreased to 2.85% for the three months ended March 31, 2023 from 4.69% for the three months ended March 31, 2022, and our net interest margin decreased to 3.58% for the three months ended March 31, 2023 from 4.53% for the three months ended March 31, 2022 as the rates we paid on interest-bearing liabilities increased faster than the yields we earned on our interest-earning assets, and as we paid off FHLB advances and recognized $1.0 million in accretion from fair value adjustments during the quarter ended March 31, 2022. Our average net interest-earning assets increased to $258.9 million for the three months ended March 31, 2023 compared to $254.4 million for the three months ended March 31, 2022.
Provision for Credit Losses. The provisions for credit losses consists of provisions for credit losses for loans and unfunded loan commitments, as well as held-to-maturity securities.
Provisions for credit losses for loans are charged to operations to establish an allowance for credit losses at a level necessary to absorb known and inherent losses in our loan portfolio that are both probable and reasonably estimable at the date of the consolidated financial statements. In evaluating the level of the allowance for credit losses for loans, management analyzes several qualitative loan portfolio risk factors including, but not limited to, management’s ongoing review and grading of loans, facts and issues related to specific loans, historical loan loss and delinquency experience, trends in past due and non-accrual loans, existing risk characteristics of specific loans or loan pools, the fair value of underlying collateral, current economic conditions and other qualitative and quantitative factors which could affect potential credit losses.
Provisions for credit losses for unfunded commitments are charged to operations to establish an allowance for credit losses for contractual obligations to extend credit. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life. The estimate is influenced by historical loss experience, adjusted for current risk characteristics, and economic factors.
Provisions for credit losses for held-to-maturity securities are also charged to operations to establish an allowance on a collective basis by major security type. The estimate of expected credit losses for held-to-maturity securities considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. See “—Summary of Significant Accounting Policies” for additional information.
After an evaluation of these factors, we recorded a provision for credit losses of $7,000 for the three months ended March 31, 2023($3,000 was a release of provision related to allowance for unfunded commitment and $10,000 in provision for HTM securities), compared to a provision of $250,000 for the three months ended March 31, 2022. Our allowance for credit losses was $9.2 million at March 31, 2023 compared to $9.3 million at December 31, 2022 and $8.8 million at March 31, 2022. The allowance for credit losses to total loans was 1.40% at March 31, 2023 compared to 1.46% at December 31, 2022 and March 31, 2022. This reduces the overall allowance for credit loss to total loans percentage. The allowance for credit losses to non-performing loans was 145.49% at March 31,
29
2023 compared to 138.80% at December 31, 2022 and 138.94% at March 31, 2022. Net charge-offs were $91,000 for the three months ended March 31, 2023, compared to net loan recoveries of $62,000 for the year ended December 31, 2022.
To the best of our knowledge, we have recorded all credit losses that are both probable and reasonable to estimate at March 31, 2023. However, future changes in the factors described above, including, but not limited to, actual loss experience with respect to our loan portfolio, could result in material increases in our provision for credit losses. In addition, the Office of the Comptroller of the Currency, as an integral part of its examination process, periodically reviews our allowance for credit losses, and as a result of such reviews, we may have to adjust our allowance for credit losses. However, regulatory agencies are not directly involved in the process of establishing the allowance for credit losses as the process is our responsibility and any increase or decrease in the allowance is the responsibility of management.
Non-interest Income. Non-interest income decreased $43,000, or 7.2%, to $552,000 for the three months ended March 31, 2023 from $595,000 for the three months ended March 31, 2022, as a result of a decrease in mortgage fee income.
Non-interest Expenses. Non-interest expenses information is as follows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31 |
|
|
Change |
|
|
|
2023 |
|
|
2022 |
|
|
Amount |
|
|
Percent |
|
|
|
(Dollars in thousands) |
|
Salaries and employee benefits |
|
$ |
3,004 |
|
|
$ |
3,008 |
|
|
$ |
(4 |
) |
|
|
(0.1 |
)% |
Occupancy |
|
|
644 |
|
|
|
582 |
|
|
|
62 |
|
|
|
10.6 |
% |
Advertising |
|
|
97 |
|
|
|
80 |
|
|
|
17 |
|
|
|
21.8 |
% |
Data processing |
|
|
493 |
|
|
|
494 |
|
|
|
(1 |
) |
|
|
(0.1 |
)% |
FHLB prepayment penalties |
|
|
— |
|
|
|
647 |
|
|
|
(647 |
) |
|
|
(100.0 |
)% |
Other |
|
|
956 |
|
|
|
947 |
|
|
|
9 |
|
|
|
1.0 |
% |
Total non-interest expenses |
|
$ |
5,194 |
|
|
$ |
5,758 |
|
|
$ |
(564 |
) |
|
|
(9.8 |
)% |
Operating expenses decreased $564,000, or 9.8%, and were $5.2 million for the three months ended March 31, 2023, compared to $5.8 million for the three months ended March 31, 2022, due primarily to payment of FHLB prepayment penalties in the previous period. We incurred FHLB prepayment penalties as we repaid FHLB advances in the first quarter of 2022, but recognized $1.0 million of fair value adjustments in making such repayments.
Income Tax Expense. We recorded income tax expense of $527,000 for the three months ended March 31, 2023 compared to $547,000 for the three months ended March 31, 2022. The effective tax rate was 23.4% for each period.
Management of Market Risk
General. Our most significant form of market risk is interest rate risk because, as a financial institution, the majority of our assets and liabilities are sensitive to changes in interest rates. Therefore, a principal part of our operations is to manage interest rate risk and limit the exposure of our financial condition and results of operations to changes in market interest rates. Our Asset/Liability Management Committee is responsible for evaluating the interest rate risk inherent in our assets and liabilities, for determining the level of risk that is appropriate, given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the policy and guidelines approved by our board of directors. We currently utilize a third-party modeling program, prepared on a quarterly basis, to evaluate our sensitivity to changing interest rates, given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the guidelines approved by the board of directors.
We have sought to manage our interest rate risk in order to minimize the exposure of our earnings and capital to changes in interest rates. We have implemented the following strategies to manage our interest rate risk:
•limiting our reliance on non-core/wholesale funding sources;
•growing our volume of transaction deposit accounts;
•increasing our investment securities portfolio, with an average maturity of less than 15 years;
•diversifying our loan portfolio by adding more commercial-related loans and consumer loans, which typically have shorter maturities and/or balloon payments; and
•continuing to price our one-to-four family residential real estate loan products in a way that encourages borrowers to select our balloon loans as opposed to longer-term, fixed-rate loans.
30
By following these strategies, we believe that we are better positioned to react to increases in market interest rates. In addition, we originate adjustable-rate, one-to-four-family residential real estate loans and home equity loans and lines of credit, which are originated with adjustable interest rates.
We do not engage in hedging activities, such as engaging in futures, options or swap transactions, or investing in high-risk mortgage derivatives, such as collateralized mortgage obligation residual interests, real estate mortgage investment conduit residual interests or stripped mortgage-backed securities.
Net Interest Income. We analyze our sensitivity to changes in interest rates through a net interest income model. Net interest income is the difference between the interest income we earn on our interest-earning assets, such as loans and securities, and the interest we pay on our interest-bearing liabilities, such as deposits and borrowings. We estimate what our net interest income would be for a 12-month period. We then calculate what the net interest income would be for the same period under the assumptions that the United States Treasury yield curve increases or decreases instantaneously by 200 and 400 basis point increments, with changes in interest rates representing immediate and permanent, parallel shifts in the yield curve. A basis point equals one-hundredth of one percent, and 100 basis points equals one percent. An increase in interest rates from 3% to 4% would mean, for example, a 100 basis point increase in the “Change in Interest Rates” column below.
The table below sets forth, as of March 31, 2023, the calculation of the estimated changes in our net interest income that would result from the designated immediate changes in the United States Treasury yield curve.
|
|
|
|
|
|
|
|
|
Change in Interest Rates (basis points) (1) |
|
Net Interest Income Year 1 Forecast |
|
|
Year 1 Change from Level |
|
|
|
(Dollars in thousands) |
|
|
|
|
+400 |
|
$ |
32,521 |
|
|
|
6.98 |
% |
+200 |
|
|
31,527 |
|
|
|
3.71 |
% |
Level |
|
|
30,400 |
|
|
— |
|
-200 |
|
|
27,718 |
|
|
|
(8.82 |
)% |
-400 |
|
|
24,222 |
|
|
|
(20.32 |
)% |
(1) Assumes an immediate uniform change in interest rates at all maturities.
The table above indicates that at March 31, 2023, in the event of an instantaneous parallel 200 basis point increase in interest rates, we would have experienced a 3.71% increase in net interest income, and in the event of an instantaneous 200 basis point decrease in interest rates, we would have experienced a 8.82% decrease in net interest income. At March 31, 2022, in the event of an instantaneous parallel 200 basis point increase in interest rates, we would have experienced a 1.67% decrease in net interest income, and in the event of an instantaneous 200 basis point decrease in interest rates, we would have experienced a 4.99% decrease in net interest income.
Certain shortcomings are inherent in the methodologies used in the above interest rate risk measurement. Modeling changes require making certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. In this regard, the net interest income table presented assumes that the composition of our interest-sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration or repricing of specific assets and liabilities. Accordingly, although the net interest income table provides an indication of our interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on net interest income and will differ from actual results. Furthermore, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Additionally, certain assets, such as adjustable-rate loans, have features that restrict changes in interest rates both on a short-term basis and over the life of the asset.
Interest rate risk calculations also may not reflect the fair values of financial instruments. For example, decreases in market interest rates can increase the fair values of our loans, deposits and borrowings.
31
Liquidity and Capital Resources
Liquidity describes our ability to meet the financial obligations that arise in the ordinary course of business. Liquidity is primarily needed to meet the borrowing and deposit withdrawal requirements of our customers and to fund current and planned expenditures. Our primary sources of funds are deposits, principal and interest payments on loans and securities, proceeds from the sale of loans, and proceeds from maturities of securities. We also have the ability to borrow from the Federal Home Loan Bank of Atlanta. At March 31, 2023, we had a $198.0 million line of credit with the Federal Home Loan Bank of Atlanta, with advances of $55.0 million outstanding and a $12.5 million letter of credit outstanding, and we had a $5.0 million unsecured federal funds line of credit, a $7.5 million unsecured federal funds line of credit and a $20.0 million unsecured federal funds line of credit. We also have a line of $71.7 million with the Federal Reserve Bank of Atlanta Discount Window secured by $105.3 million in loans. No amount was outstanding on the unsecured lines of credit or the Discount Window at March 31, 2023.
While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions, and competition. Our most liquid assets are cash and short-term investments including interest-bearing demand deposits. The levels of these assets are dependent on our operating, financing, lending, and investing activities during any given period.
Our cash flows are comprised of three primary classifications: cash flows from operating activities, investing activities, and financing activities. Net cash provided by operating activities was $2.0 million for the three months ended March 31, 2023, compared to $3.9 million for the three months ended March 31, 2022. Net cash used in investing activities was $29.2 million for the three months ended March 31, 2023, compared to $17.1 million for the three months ended March 31, 2022. Net cash used in investing activities typically consists primarily of disbursements for loan originations and purchases of investment securities. Net cash provided by financing activities, which consists primarily of activity in deposit accounts and proceeds/repayments of FHLB advances, and a stock repurchase program, was $137.8 million for the three months ended March 31, 2023 which included repaying $20.0 million of FHLB borrowings, borrowing $65.0 million in FHLB advances and repurchasing stock of $867,000, compared to net cash used in financing activities of $28.7 million for the three months ended March 31, 2022, which included repaying $58.0 million of FHLB borrowings, borrowing $20.0 million in FHLB advances and repurchasing stock of $3.9 million.
We are committed to maintaining a strong liquidity position. During the three months ended March 31, 2023, in order to further enhance liquidity, we increased brokered deposits by $85.6 million and FHLB borrowings by $45.0 million. We monitor our liquidity position on a daily basis. We anticipate that we will have sufficient funds to meet our current funding commitments. Based on our deposit retention experience and current pricing strategy, we anticipate that a significant portion of maturing time deposits will be retained.
At March 31, 2023, we exceeded all of our regulatory capital requirements and the Bank is categorized as “well capitalized.” Management is not aware of any conditions or events since the most recent notification that would change our category. The Bank’s actual capital amounts and ratios for March 31, 2023 and December 31, 2022 are presented in the table below (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For Capital |
|
|
To Be Well Capitalized |
|
|
|
|
|
|
|
|
|
Adequacy |
|
|
Under Prompt Corrective |
|
|
|
Actual |
|
|
Purposes |
|
|
Action Provisions |
|
|
|
Amount |
|
|
Ratio |
|
|
Amount |
|
|
Ratio |
|
|
Amount |
|
|
Ratio |
|
As of March 31, 2023: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Equity Tier 1 (to Risk Weighted Assets) |
|
$ |
89,112 |
|
|
|
11.60 |
% |
|
$ |
34,555 |
|
|
|
4.50 |
% |
|
$ |
49,913 |
|
|
|
6.50 |
% |
Total Capital (to Risk Weighted Assets) |
|
|
98,714 |
|
|
|
12.86 |
% |
|
|
61,432 |
|
|
|
8.00 |
% |
|
|
76,790 |
|
|
|
10.00 |
% |
Tier I Capital (to Risk Weighted Assets) |
|
|
89,112 |
|
|
|
11.60 |
% |
|
|
46,074 |
|
|
|
6.00 |
% |
|
|
61,432 |
|
|
|
8.00 |
% |
Tier I Capital (to Average Assets) |
|
|
89,112 |
|
|
|
10.85 |
% |
|
|
32,866 |
|
|
|
4.00 |
% |
|
|
41,083 |
|
|
|
5.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2022: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Equity Tier 1 (to Risk Weighted Assets) |
|
$ |
87,397 |
|
|
|
11.86 |
% |
|
$ |
33,170 |
|
|
|
4.50 |
% |
|
$ |
47,913 |
|
|
|
6.50 |
% |
Total Capital (to Risk Weighted Assets) |
|
|
96,612 |
|
|
|
13.11 |
% |
|
|
58,970 |
|
|
|
8.00 |
% |
|
|
73,712 |
|
|
|
10.00 |
% |
Tier I Capital (to Risk Weighted Assets) |
|
|
87,397 |
|
|
|
11.86 |
% |
|
|
44,227 |
|
|
|
6.00 |
% |
|
|
58,970 |
|
|
|
8.00 |
% |
Tier I Capital (to Average Assets) |
|
|
87,397 |
|
|
|
10.97 |
% |
|
|
31,865 |
|
|
|
4.00 |
% |
|
|
39,832 |
|
|
|
5.00 |
% |
Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
Commitments. As a financial services provider, we routinely are a party to various financial instruments with off-balance-sheet risks, such as commitments to extend credit and unused lines of credit. While these contractual obligations represent our future cash
32
requirements, a significant portion of commitments to extend credit may expire without being drawn upon. Such commitments are subject to the same credit policies and approval process accorded to loans we make. At March 31, 2023, we had outstanding commitments to originate loans of $83.3 million. We anticipate that we will have sufficient funds available to meet our current lending commitments. Time deposits that are scheduled to mature in less than one year from March 31, 2023 totaled $81.8 million. Management expects that a substantial portion of the maturing time deposits will be renewed. However, if a substantial portion of these deposits is not retained, we may utilize FHLB advances or raise interest rates on deposits to attract new accounts, which may result in higher levels of interest expense.
Contractual Obligations. In the ordinary course of our operations, we enter into certain contractual obligations. Such obligations include data processing services, operating leases for premises and equipment, agreements with respect to borrowed funds and deposit liabilities.