Interest Expense. Interest expense decreased $303,000, or 8.1%, to
$3.4 million for the year ended December 31, 2022 compared to $3.7 million for the year ended December 31, 2021, due primarily to a $539,000 decrease on interest paid on deposits, partially offset by a $225,000 increase on
interest paid on subordinated debentures.
The decrease in interest expense on deposits was due to a 12 basis point decrease in the
average rate, offset by a $25.9 million increase in the average balance of interest-bearing deposits to $527.8 million at December 31, 2022, offset by. The average rate on interest-bearing deposits was 0.26% for the year ended
December 31, 2022 as we delayed increasing deposit rates until the fourth quarter of 2022.
Interest expense on subordinated
debentures increased $255,000, or 14.1%, to $2.1 million for the year ended December 31, 2022 compared to $1.8 million for the year ended December 31, 2021. The average rate on subordinated debentures increased 67 basis points to
5.58% for the year ended December 31, 2022 compared to 4.91% for the year ended December 31, 2021, due to increases in market interest rates. Interest expense on Federal Home Loan Bank advances decreased $19,000 to $11,000 for the year
ended December 31, 2022 due to a decrease in the average balance from $3.1 million for the year ended December 31, 2021 to $296,000 for the year ended December 31, 2022, offset by a 281 basis point increase in the average rate
paid on borrowings from 0.98% for the year ended December 31, 2021 to 3.79% for the year ended December 31, 2022.
Net
Interest Income. Net interest income increased $4.3 million, or 16.7%, to $29.9 million for the year ended December 31, 2022 from $25.6 million for the year ended December 31, 2021, as a result of a $4.0 million
increase in interest income and a $303,000 decrease in interest expense. Our interest rate spread increased 39 basis points to 3.75% for the year ended December 31, 2022, compared to 3.37% for the year ended December 31, 2021, while our
net interest margin increased 37 basis points to 3.91% for the year ended December 31, 2022 compared to 3.54% for the year ended December 31, 2021.
Provision for Loan Losses. Provisions for loan losses are charged to operations to establish an allowance for loan 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 loan losses, management
analyzes several qualitative loan portfolio risk factors including, but not limited to, managements 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. See Summary of Critical Accounting Policies and Critical Accounting Estimates for additional information.
We recorded provisions for loan losses of $1.0 million and $575,000 for the years ended December 31, 2022 and 2021, respectively.
The increase in the provision for loan losses for the year ended December 31, 2022 was primarily due to growth trends in various segments of our loan portfolio and increases related to economic factors. Our allowance for loan losses was
$3.8 million at December 31, 2022 compared to $2.7 million at December 31, 2021. The ratio of our allowance for loan losses to total loans was 0.57% at December 31, 2022 compared to 0.45% at December 31, 2021, while the
allowance for loan losses to non-performing loans was 64.8% at December 31, 2022 compared to 32.3% at December 31, 2021. We had charge-offs of
$56,000 and $165,000 for the year ended December 31, 2022.
The allowance for loan losses at December 31, 2022 was to cover losses in the non-acquired loan
portfolio ($432.0 million or 64.8% of gross loans.) The remaining balances of the loan portfolios acquired via the acquisitions of Vigilant Federal Savings Bank ($4.4 million), Kopernik Bank ($41.3 million), Madison Bank ($41.7 million), 1880
Bank ($117.5 million) and NASB ($30.0 million) have accretable and non-accretable credit marks that were assigned to these portfolios at acquisition. Each quarter, these acquired portfolios are analyzed in the
same manner as the legacy portfolio to measure the adequacy of the general (accretable) credit marks to cover potential losses. The accretable marks amortize into interest income each month based on loan paydowns in those portfolios. The non-accretable marks are assigned to specific PCI loans identified at acquisition and will be utilized if a charge-off is required. The NASB portfolio was only assigned an
accretable credit mark at acquisition. Acquisition credit marks totaled $3.8 million at December 31, 2022.
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