Item 7A. Quantitative and Qualitative Disclosures About Market Risk
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk
Market risk is defined as the degree to which changes in interest rates, foreign exchange rates, commodity prices, or equity prices can adversely affect a financial institution’s earnings or capital. For financial institutions, market risk primarily reflects exposures to changes in interest rates. Interest rate fluctuations affect earnings by changing net interest income and other interest-sensitive income and expense levels. Interest rate changes affect capital by changing the net present value of a financial institution’s future cash flows, and the cash flows themselves, as rates change. Accepting this risk is a normal part of banking and can be an important source of profitability and enhancement of shareholder value. However, excessive interest rate risk can threaten a financial institution’s earnings, capital, liquidity, and solvency. Our sensitivity to changes in interest rate movements is continually monitored by the ALCO.
The ALCO utilizes an asset liability model (“ALM”) to monitor and manage market risk through net interest income simulation for various rate shock scenarios and economic value of equity (“EVE”), simulation for various rate shock scenarios. The rate shock scenarios used in the ALM span over multiple time horizons and yield curve shapes and include parallel and non-parallel shifts to ensure the ALCO can mitigate future earnings and market value fluctuations due to changes in market interest rates.
Within the context of the ALM, net interest income rate shock simulations explicitly measure the exposure to earnings from changes in market rates of interest over a defined time horizon. These robust simulations include assumptions of how the balance sheet will react in different rate environments including loan prepayment speeds, the average life of non-maturing deposits, and how sensitive each interest-earning asset and interest-bearing liability is to changes in the market rates (betas). Under simulation analysis, our current financial position is combined with assumptions regarding future business to calculate net interest income under various hypothetical rate scenarios. Reviewing these various measures provides us with a more comprehensive view of our interest rate risk profile.
Net interest income rate shock simulation results are compared to a base case to provide an estimate of the impact that market rate changes may have on 12 months and 24 months of pretax net interest income. The base case and rate shock analyses are performed on a static and growth balance sheet. A static balance sheet is a no-growth balance sheet in which all maturing and/or repricing cash flows are reinvested in the same product at the existing product spread. Rate shock analyses assume an immediate parallel shift in market interest rates and also include management assumptions regarding the impact of interest rate changes on non-maturity deposit products (noninterest-bearing demand, interest-bearing demand, money market, and savings) and changes in the prepayment behavior of loans and securities with optionality. Our policy guidelines limit the change in pretax net interest income over a 12-month horizon using rate shocks of +/- 100, 200, 300, and 400 basis points. We have temporarily suspended the -200, -300, and -400 basis point rate shock analyses. Due to the low interest rate environment, we believe the impact to net interest income when evaluating the -200, -300, and -400 basis point rate shock scenarios do not provide meaningful insight into our interest rate risk position.
To monitor interest rate risk beyond the 24-month time horizon of rate shocks, we also perform EVE analyses. EVE represents the present value of all asset cash flows minus the present value of all liability cash flows. EVE rate change results are compared to a base case to determine the impact that market rate changes may have on our EVE. As with rate shock analysis, EVE analyses incorporate management assumptions regarding prepayment behavior of fixed rate loans and securities with optionality and the behavior and value of non-maturity deposit products. Our policy guidelines limit the change in EVE given changes in rates of +/- 100, 200, 300, and 400 basis points. We have also temporarily suspended the EVE -200, -300, and -400 basis point scenarios in 2021 and 2020 due to the low interest rate environment.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - (continued)
The following tables reflect the net interest income rate shock analyses and EVE analyses results for the periods presented utilizing a forecasted static balance sheet over the next twelve months. All percentage changes presented are within prescribed ranges set by management.
December 31, 2021 December 31, 2020
Change in Interest Rate
(basis points) % Change in Pretax
Net Interest Income % Change in Economic
Value of Equity % Change in Pretax
Net Interest Income % Change in Economic
Value of Equity
400 43.6 % 24.6 % 39.6 % 20.1 %
300 33.1 % 20.6 % 30.7 % 17.5 %
200 22.5 % 15.4 % 21.1 % 13.8 %
100 11.4 % 8.6 % 10.7 % 8.1 %
-100 (2.4) % (7.0) % (2.4) % (3.1) %
The results from the net interest income rate shock analysis are consistent with having an asset sensitive balance sheet when adjusted for repricing correlations (betas). The above table indicates that in a rising interest rate environment, the Company is positioned to have increased pretax net interest income for the same asset base due to the balance sheet composition, related maturity structures, and repricing correlations to market interest rates for assets and liabilities. Conversely, in a declining interest rate environment, we are positioned to have decreased pretax net interest income for the same reasons discussed above.
In addition to rate shocks and EVE analyses, sensitivity analyses are performed to help us identify which model assumptions are critical and cause the greatest impact on pretax net interest income. Sensitivity analyses include changing prepayment behavior of loans and securities with optionality, repricing correlations, and the impact of interest rate changes on non-maturity deposit products (decay rates).
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated Financial Statements
Consolidated Balance Sheets
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Consolidated Statements of Income (Loss)
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Consolidated Statements of Comprehensive Income (Loss)
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Consolidated Statements of Changes in Shareholders’ Equity
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Consolidated Statements of Cash Flows
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Notes to Consolidated Financial Statements
70
Report of Crowe LLP, Independent Registered Public Accounting Firm (PCAOB ID 173 ) , on Consolidated Financial Statements and Effectiveness of Internal Controls Over Financial Reporting
116
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - (continued)
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands Except Per Share Data) December 31,
2021 December 31,
2020
ASSETS
Cash and Due From Banks $ 36,698 $ 38,535
Interest-Bearing Deposits in Other Financial Institutions 64,905 39,954
Federal Reserve Bank Excess Reserves 176,196 163,453
Total Cash and Cash Equivalents 277,799 241,942
Securities Available-for-Sale, at Fair Value 922,400 778,679
Loans Held-for-Sale 228 25,437
Loans Held-for-Sale in Connection with Sale of Bank Branches, at the lower of cost or fair value — 9,835
Portfolio Loans 2,812,129 2,947,170
Allowance for Credit Losses ( 95,939 ) ( 54,074 )
Portfolio Loans, net 2,716,190 2,893,096
Bank Premises and Equipment, net 75,297 85,307
Bank Premises and Equipment Held-for-Sale, net — 2,293
Other Real Estate Owned, net 10,916 15,722
Federal Home Loan Bank Stock, at Cost 2,352 5,093
Bank Owned Life Insurance 55,378 53,997
Other Assets 73,186 67,778
Total Assets $ 4,133,746 $ 4,179,179
LIABILITIES
Deposits:
Noninterest-Bearing Demand $ 747,909 $ 699,229
Interest-Bearing Demand 452,644 366,201
Money Market 463,056 294,229
Savings 690,549 625,482
Certificates of Deposit 1,344,318 1,614,770
Deposits Held for Assumption in Connection with Sale of Bank Branches — 84,717
Total Deposits 3,698,476 3,684,628
Federal Home Loan Bank Borrowings 7,000 35,000
Other Liabilities 20,674 19,377
Total Liabilities 3,726,150 3,739,005
SHAREHOLDERS' EQUITY
Common Stock, Par Value $ 1.00 Per Share, Authorized 100,000,000 Shares;
26,430,919 Outstanding at December 31, 2021 and 26,385,041 at December 31, 2020
26,431 26,385
Additional Paid-in-Capital 143,988 143,457
Retained Earnings 235,475 254,611
Accumulated Other Comprehensive Income 1,702 15,721
Total Shareholders' Equity 407,596 440,174
Total Liabilities and Shareholders' Equity $ 4,133,746 $ 4,179,179
See accompanying notes to audited Consolidated Financial Statements.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - (continued)
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
Years Ended December 31,
(Dollars in Thousands except, Per Share Data) 2021 2020 2019
INTEREST INCOME
Loans, including fees
Taxable $ 115,448 $ 117,226 $ 126,939
Non-Taxable 4,733 7,694 9,603
Investment Securities
Taxable 12,442 14,263 17,826
Non-Taxable 882 1,238 1,858
FRB Excess Reserves 169 224 1,484
Interest on Bank Deposits 102 78 1,266
Dividend Income 121 218 144
Total Interest Income 133,897 140,941 159,120
Interest Expense
Interest Expense on Deposits 22,246 35,391 46,656
Interest Expense on Federal Funds Purchased — 1 —
Interest on Other Borrowings 468 434 117
Total Interest Expense 22,714 35,826 46,773
NET INTEREST INCOME 111,183 105,115 112,347
Provision for Credit Losses 3,350 18,006 3,404
Provision for Unfunded Commitments ( 1,269 ) — —
Net Interest Income After Provision for Credit Losses 109,102 87,109 108,943
NONINTEREST INCOME
Gain on Sales of Securities, net 6,869 6,882 2,205
Service Charges, Commissions and Fees 6,662 4,668 4,962
Debit Card Interchange Fees 7,226 5,857 5,160
Insurance Commissions 1,901 1,728 1,225
Bank Owned Life Insurance Income 1,380 1,400 1,436
Other Real Estate Owned Income 90 340 689
Commercial Loan Swap Fee Income 2,416 4,051 —
Other 2,337 1,654 1,193
Total Noninterest Income 28,881 26,580 16,870
NONINTEREST EXPENSE
Salaries and Employee Benefits 54,157 52,390 52,879
Occupancy Expense, net 13,556 13,369 11,785
FDIC Insurance Expense 2,157 2,313 1,270
Other Taxes 3,129 3,151 2,847
Advertising Expense 952 1,633 1,445
Telephone Expense 2,208 2,303 2,202
Professional and Legal Fees 5,255 5,006 4,507
Data Processing 3,758 2,648 2,267
Losses on Sales and Write-downs of Other Real Estate Owned, net 3,622 1,435 4,732
Losses on Sales and Write-downs of Bank Premises, net 231 99 188
Debit Card Expense 2,777 2,565 2,753
Tax Credit Amortization 1,708 1,088 2,265
Unfunded Loan Commitment Expense — ( 252 ) 121
Other Real Estate Owned Expense 407 657 525
Goodwill Impairment Expense — 62,192 —
Other 8,368 8,178 8,243
Total Noninterest Expense 102,285 158,775 98,029
Income (Loss) Before Income Taxes 35,698 ( 45,086 ) 27,784
Income Tax Provision 4,108 772 1,209
Net Income (Loss) $ 31,590 $ ( 45,858 ) $ 26,575
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - (continued)
Earnings (Loss) per Common Share:
Basic Earnings (Loss) per Common Share $ 1.19 $ ( 1.74 ) $ 1.01
Diluted Earnings (Loss) per Common Share $ 1.19 $ ( 1.74 ) $ 1.01
Average Shares Outstanding-Basic 26,342,729 26,379,774 26,258,576
Average Shares Outstanding-Diluted 26,342,729 26,379,774 26,258,576
See accompanying notes to audited Consolidated Financial Statements.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - (continued)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Years Ended December 31,
(Dollars in Thousands) 2021 2020 2019
Net Income (Loss) $ 31,590 $ ( 45,858 ) $ 26,575
Other Comprehensive (Loss) Income:
Net Unrealized (Losses) Gains on Securities Available-for-Sale:
Net Unrealized (Losses) Gains Arising during the Period ( 10,877 ) 26,621 15,108
Reclassification Adjustment for Gains included in Net Income (Loss) ( 6,869 ) ( 6,882 ) ( 2,205 )
Tax Effect 3,727 ( 4,145 ) ( 2,710 )
Net Unrealized (Losses) Gains Recognized in Other Comprehensive (Loss) Income ( 14,019 ) 15,594 10,193
Other Comprehensive (Loss) Income: ( 14,019 ) 15,594 10,193
Comprehensive Income (Loss) $ 17,571 $ ( 30,264 ) $ 36,768
See accompanying notes to audited Consolidated Financial Statements.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - (continued)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Years Ended December 31,
(Dollars in Thousands) Common Stock Additional Paid-in
Capital Retained Earnings Accumulated Other
Comprehensive Income
(Loss) Total Shareholder's
Equity
Balance January 1, 2019 $ 26,270 $ 142,175 $ 277,583 $ ( 10,066 ) $ 435,962
Net Income — — 26,575 — 26,575
Other Comprehensive Income, Net of Tax — — — 10,193 10,193
Issuance of Restricted Stock ( 64,458 shares)
64 ( 64 ) ) — — —
Recognition of Restricted Stock Compensation Expense — 381 — — 381
Balance December 31, 2019 $ 26,334 $ 142,492 $ 304,158 $ 127 $ 473,111
Net Loss — — ( 45,858 ) — ( 45,858 )
Other Comprehensive Income, Net of Tax — — — 15,594 15,594
Dividends Declared ($ 0.14 per share)
— — ( 3,689 ) ) — ( 3,689 )
Forfeiture of Restricted Stock ( 4,344 shares)
( 4 ) ) 4 — — —
Issuance of Restricted Stock ( 55,156 shares)
55 ( 55 ) ) — — —
Recognition of Restricted Stock Compensation Expense — 1,016 — — 1,016
Balance December 31, 2020 $ 26,385 $ 143,457 $ 254,611 $ 15,721 $ 440,174
Net Income — — 31,590 ) — 31,590
Other Comprehensive Loss, Net of Tax — — — ( 14,019 ) ( 14,019 )
Cumulative Effect For Adoption of Credit Losses — — ( 50,726 ) ) — ( 50,726 )
Repurchase of Common Stock ( 30,407 shares)
( 30 ) ( 433 ) — — ( 463 )
Forfeiture of Restricted Stock ( 6,205 shares)
( 6 ) ) 6 — — —
Issuance of Restricted Stock ( 82,490 shares)
82 ( 82 ) — — —
Recognition of Restricted Stock Compensation Expense — 1,040 — — 1,040
Balance December 31, 2021 $ 26,431 $ 143,988 $ 235,475 $ 1,702 $ 407,596
See accompanying notes to audited Consolidated Financial Statements.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - (continued)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
(Dollars in Thousands) 2021 2020 2019
OPERATING ACTIVITIES
Net Income (Loss) $ 31,590 $ ( 45,858 ) $ 26,575
Adjustments to Reconcile Net Income (Loss) to Net Cash Provided by Operating Activities
Provision for Credit Losses, including Provision for Unfunded Commitments 2,081 18,006 3,404
Goodwill Impairment — 62,192 —
Origination of Loans Held-for-Sale ( 480,372 ) ( 800,053 ) ( 329,932 )
Proceeds From Loans Held-for-Sale 505,946 794,592 312,891
Depreciation/Amortization of Bank Premises and Equipment 6,229 6,142 5,335
Provision (Benefit) for Deferred Taxes 3,114 ( 1,627 ) ( 76 )
Net Amortization of Securities 4,798 3,441 3,953
Tax Credit Amortization 1,708 1,088 2,265
Gains on Sales of Mortgage Loans Held-for-Sale ( 365 ) ( 262 ) ( 114 )
Gains on Sales of Securities, net ( 6,869 ) ( 6,882 ) ( 2,205 )
Write-downs of Other Real Estate Owned 3,472 1,483 4,457
Losses (Gains) on Sales of Other Real Estate Owned, Net 150 ( 48 ) 275
Losses on Sales and Write-downs of Bank Premises 231 99 188
Premiums on Branch Sales ( 506 ) — —
Increase in the Value of Life Insurance Contracts ( 1,380 ) ( 1,400 ) ( 1,436 )
Recognition of Restricted Stock Compensation Expense 1,040 1,016 381
Decrease (Increase) in Other Assets 9,346 ( 22,591 ) 10,094
(Decrease) Increase in Other Liabilities ( 2,675 ) ( 1,634 ) 2,231
Net Cash Provided By Operating Activities 77,538 7,704 38,286
INVESTING ACTIVITIES
Securities Available-for-Sale:
Proceeds from Sales 197,056 188,169 390,548
Proceeds from Maturities, Redemptions, and Pay-downs 110,196 78,852 198,154
Purchases ( 466,648 ) ( 277,644 ) ( 534,136 )
Purchase of Bank Premises and Equipment, Net ( 8,484 ) ( 10,120 ) ( 8,453 )
Proceeds from Sales of Bank Premises and Equipment, net — — 1,135
Net Cash Paid in Branch Sales ( 73,923 ) — —
Proceeds from Sale of Portfolio Loans 52,320 — —
Redemption (Purchase) of Federal Home Loan Bank Stock 2,741 ( 980 ) ( 4,113 )
Loan Originations and Payments, net 67,131 ( 75,688 ) ( 185,117 )
Other Real Estate Owned Improvements — ( 19 ) —
Proceeds from Sales and Payments of Other Real Estate Owned 13,256 4,162 12,621
Net Cash Used In Investing Activities ( 106,355 ) ( 93,268 ) ( 129,361 )
FINANCING ACTIVITIES
Net Change in Demand, Money Markets and Savings Accounts 369,730 469,507 50,459
Decrease in Certificates of Deposits ( 276,899 ) ( 289,124 ) ( 137,395 )
(Repayments) Proceeds from Federal Home Loan Bank Borrowings ( 28,000 ) 25,000 10,000
Stock Repurchase Plan Settlements ( 157 ) — —
Cash Dividends Paid — ( 3,689 ) —
Net Cash Provided By (Used In) Financing Activities 64,674 201,694 ( 76,936 )
Net Increase (Decrease) in Cash and Cash Equivalents 35,857 116,130 ( 168,011 )
Cash and Cash Equivalents at Beginning of Period 241,942 125,812 293,823
Cash and Cash Equivalents at End of Period $ 277,799 $ 241,942 $ 125,812
See accompanying notes to audited Consolidated Financial Statements.
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