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 arises primarily from interest rate risk inherent in lending, investment, and deposit-taking activities. Interest rate risk can arise from timing differences in the repricing and maturities of interest-earning assets and interest-bearing liabilities (repricing risk), changes in the expected maturities of assets and liabilities arising from embedded options, such as borrowers’ ability to prepay home mortgage loans at any time, depositors’ ability to redeem certificates of deposit before maturity (option risk), changes in the shape of the yield curve, where interest rates increase or decrease in a non-parallel fashion (yield curve risk), and changes in spread relationships between different yield curves, such as U.S. Treasuries and SOFR (basis risk).
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. The Company’s ALCO is responsible for the reviewing the interest rate sensitivity position of the institution, establishing policies to monitor and limit exposure to this type of risk, and employing strategies to ensure our asset-liability structure produces the maximum yield-cost spread available based on current market conditions. The Company’s Investment / Interest Rate Risk Committee, a committee of the Board of Directors, reviews and approves the policies established by ALCO.
Earnings Simulation Modeling
The ALCO uses an asset liability model (“ALM”) to forecast earning simulations that measure the sensitivity of net interest income to changes in interest rates. The ALM calculates an earnings estimate based on current and projected balances and rates. This method is subject to the accuracy of the assumptions that support the ALM process. The ALCO derives the assumptions used in the ALM from historical trends and management’s outlook, including expected loan growth, loan prepayment rates, deposit growth rates, changes to deposit product betas and non-maturity deposit decay rates, and projected yields and rates. The ALM assumes that all maturities, calls, and prepayments in the securities portfolio are reinvested in like instruments. These assumptions may not be realized and unanticipated events and circumstances may also occur that cause the assumptions to be inaccurate. The ALM also does not take into account any future actions management may take to mitigate the impact of unforeseen interest rate changes. A sensitivity analysis for deposit betas, deposit decay rates and loan prepayment speeds is performed at least annually within the ALM to help ALCO better understand the impact of these critical assumptions on the ALM results. The ALCO reviews the assumptions of the ALM at least quarterly and periodically adjusts them when deemed appropriate.
The ALCO also uses different interest rate scenarios and shifts in yield curve shapes to measure the sensitivity of earnings to various interest rate environments. Interest rates on unique asset and liability accounts move differently when the short-term market rate changes. These differences are reflected in the different rate scenarios utilized by the ALM. For earning simulations, our policy guidelines limit the change in net interest income over a 12-month and 24-month horizon using rate shocks of +/- 100, 200, 300, 400 basis points and for non-parallel yield curve shift scenarios. We have temporarily suspended the + 300 and + 400 basis point rate shock analyses. Due to FOMC’s slowing future rate increase projections coupled with the recent increase in the Fed Funds Target Rate of 5.25% since March 17, 2022, we believe the impact to net interest income when evaluating the + 300 and +400 basis point rate shock scenarios do not provide meaningful insight into our interest rate risk position nor does it project a probable interest rate environment for the foreseeable future.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following tables reflect the earnings simulation 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 ALCO.
December 31, 2023 December 31, 2022
Change in Interest Rate (basis points) % Change in Pretax Net Interest Income % Change in Pretax Net Interest Income
200 (1.1)% 7.7%
100 (0.3)% 4.1%
-100 2.4% (5.1)%
-200 4.4% (10.7)%
-300 5.6% (17.3)%
-400 6.7% (23.5)%
The results from the earnings simulation imply that the Company’s balance sheet has shifted from an asset sensitive balance sheet at December 31, 2022 to a slightly liability sensitive balance sheet when at December 31, 2023. The above table indicates that, in a rising interest rate environment, the Company is positioned to have a minimum increase in net interest income for the same asset and liability mix due to the balance sheet composition, related maturity structures, and repricing correlations to market interest rates for assets and liabilities. However, in a declining interest rate environment, we are positioned to have a slightly more advantageous increase in net interest income for the same reasons discussed above.
Based on the ALM results presented above for the quarters ending December 31, 2023 and December 31, 2022, the Company’s balance sheet is slightly liability sensitive at December 31, 2023 versus assets sensitive at December 31, 2022. This migration from asset sensitivity to slightly liability sensitivity is due to 1) lower yielding, floating rate excess cash positions held in federal reserve bank and interest-bearing deposits in other financial institutions, that are more sensitive to future market interest rate changes which were deployed into higher yielding, fixed and variable rate securities and portfolio loans that are less sensitive to future market interest rate changes, 2) the addition of the Company’s largest lending relationship, with an aggregate principal amount of $301.9 million being placed on nonaccrual status as of June 30, 2023, 3) shortening maturities of the time deposit portfolio due to shorter term time deposit promotional campaigns related to the inverted yield curve, and 4) the recent shifts in the shape of the yield curve between the two periods presented above.
Economic Value of Equity Modeling
Economic value of equity simulation is used to calculate the estimated fair value of assets and liabilities over different interest rate environments. The ALM calculates the economic value of equity based on discounted cash flow analysis. The net economic value of equity is the economic value of all assets minus the economic value of all liabilities. The change in net economic value of equity over different rate environments is an indication of the longer-term earnings capability of the balance sheet. The Company uses the same assumptions in the economic value of equity simulation model as in the earnings simulation model. The economic value of equity simulation model uses instantaneous rate shocks to the balance sheet. For economic value of equity simulation, our policy guidelines limit the change in economic value of equity given changes in rates of +/- 100, 200, 300, 400 basis points and for non-parallel yield curve shift scenarios. We have temporarily suspended the + 300 and + 400 basis point rate shock analyses. Due to FOMC’s slowing future rate increase projections coupled with the recent increase in the Fed Funds Target Rate of 5.25% since March 17, 2022, we believe the impact to net interest income when evaluating the + 300 and +400 basis point rate shock scenarios do not provide meaningful insight into our interest rate risk position nor does it project a probable interest rate environment for the foreseeable future.
Results for the economic value of equity modeling are driven primarily by the shape of the underlying yield curves and option-adjusted spreads used to discount the projected cash flows of assets and liabilities, and the assumed life span of the assets and liabilities being discounted.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - (continued)
The following tables reflect the economic value of equity analyses results for the periods presented. All percentage changes presented are within prescribed ranges set by management.
December 31, 2023 December 31, 2022
Change in Interest Rate (basis points) % Change in Economic Value of Equity % Change in Economic Value of Equity
200 (4.7)% (0.2)%
100 (1.8)% 0.8%
-100 0.9% (3.4)%
-200 0.5% (8.5)%
-300 (2.7)% (16.0)%
-400 (10.9)% (28.0)%
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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
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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
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Report of Crowe LLP, Independent Registered Public Accounting Firm (PCAOB ID 173 ), on Consolidated Financial Statements and Effectiveness of Internal Controls Over Financial Reporting
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - (continued)
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands Except per Share Data) December 31,
2023 December 31,
2022
ASSETS
Cash and Due From Banks, including Interest-Bearing Deposits of $ 14,853 at December 31, 2023 and $ 4,505 at December 31, 2022
$ 54,529 $ 46,869
Securities Available-for-Sale, at Fair Value (amortized cost of $ 870,546 and $ 945,707 , respectively)
779,003 836,273
Loans Held-for-Sale — —
Portfolio Loans 3,505,910 3,148,913
Allowance for Credit Losses ( 97,052 ) ( 93,852 )
Portfolio Loans, net 3,408,858 3,055,061
Bank Premises and Equipment, net 73,707 72,114
Other Real Estate Owned, net 2,463 8,393
Federal Home Loan Bank Stock, at Cost 21,626 9,740
Bank Owned Life Insurance 58,115 56,734
Other Assets 114,238 119,335
Total Assets $ 4,512,539 $ 4,204,519
LIABILITIES
Deposits:
Noninterest-Bearing Demand $ 685,218 $ 705,539
Interest-Bearing Demand 481,506 496,948
Money Market 513,664 484,238
Savings 454,876 684,287
Certificates of Deposit 1,586,651 1,261,526
Total Deposits 3,721,915 3,632,538
Federal Home Loan Bank Borrowings 393,400 180,550
Federal Funds Purchased — 17,870
Reserve for Unfunded Loan Commitments 3,193 2,292
Other Liabilities 42,788 42,642
Total Liabilities 4,161,296 3,875,892
Commitment and Contingencies - see N OTE 18.
SHAREHOLDERS’ EQUITY
Common Stock, Par Value $ 1.00 Per Share, Authorized 100,000,000 Shares;
Outstanding - 22,956,304 shares at December 31, 2023, and
23,956,772 shares at December 31, 2022
22,957 23,957
Additional Paid-in Capital 90,642 104,693
Retained Earnings 309,083 285,593
Accumulated Other Comprehensive Loss ( 71,439 ) ( 85,616 )
Total Shareholders’ Equity 351,243 328,627
Total Liabilities and Shareholders’ Equity $ 4,512,539 $ 4,204,519
See accompanying notes to audited Consolidated Financial Statements.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - (continued)
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31,
(Dollars in Thousands Except per Share Data) 2023 2022 2021
INTEREST INCOME
Loans, including fees
Taxable $ 159,317 $ 135,055 $ 115,448
Non-Taxable 3,143 3,609 4,733
Investment Securities
Taxable 30,804 20,330 12,442
Non-Taxable 634 693 882
Federal Reserve Bank Excess Reserves 1,002 312 169
Interest on Bank Deposits 64 29 102
Dividend Income 1,456 154 121
Total Interest Income 196,420 160,182 133,897
Interest Expense
Interest Expense on Deposits 52,628 18,616 22,246
Interest Expense on Federal Funds Purchased 368 188 —
Interest on Other Borrowings 21,114 1,450 468
Total Interest Expense 74,110 20,254 22,714
NET INTEREST INCOME 122,310 139,928 111,183
Provision for Credit Losses 5,500 2,419 3,350
Provision (Recovery) for Unfunded Commitments 901 509 ( 1,269 )
Net Interest Income After Provision (Recovery) for Credit Losses 115,909 137,000 109,102
NONINTEREST INCOME
(Losses) Gains on Sales of Securities, net ( 1,521 ) 46 6,869
Service Charges, Commissions and Fees 7,155 7,168 6,662
Debit Card Interchange Fees 7,828 7,427 7,226
Insurance Commissions 1,945 1,961 1,901
Bank Owned Life Insurance Income 1,381 1,357 1,380
Gains on Sales and Write-downs of Bank Premises, net — 73 —
Commercial Loan Swap Fee Income 139 774 2,416
Other 1,351 2,912 2,427
Total Noninterest Income 18,278 21,718 28,881
NONINTEREST EXPENSE
Salaries and Employee Benefits 55,856 52,399 54,157
Occupancy Expense, net 14,028 13,527 13,556
FDIC Insurance Expense 4,904 2,015 2,157
Other Taxes 3,282 3,319 3,129
Advertising Expense 1,693 1,434 952
Telephone Expense 1,842 1,781 2,208
Professional and Legal Fees 6,210 5,818 5,255
Data Processing 3,920 4,051 3,758
Losses on Sales and Write-downs of Other Real Estate Owned, net 1,100 432 3,622
Debit Card Expense 2,875 2,750 2,777
Tax Credit Amortization — 621 1,708
Other 9,756 8,854 9,006
Total Noninterest Expense 105,466 97,001 102,285
Income Before Income Taxes 28,721 61,717 35,698
Income Tax Provision 5,337 11,599 4,108
Net Income $ 23,384 $ 50,118 $ 31,590
Earnings per Common Share:
Basic Earnings per Common Share $ 1.00 $ 2.03 $ 1.19
Diluted Earnings per Common Share $ 1.00 $ 2.03 $ 1.19
Average Shares Outstanding-Basic 23,240,543 24,595,789 26,342,729
Average Shares Outstanding-Diluted 23,240,543 24,595,789 26,342,729
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) 2023 2022 2021
Net Income $ 23,384 $ 50,118 $ 31,590
Other Comprehensive Income (Loss):
Net Unrealized Gains (Losses) on Securities Available-for-Sale:
Net Unrealized Gains (Losses) Arising during the Period 16,370 ( 111,542 ) ( 10,877 )
Reclassification Adjustment for Losses (Gains) included in Net Income 1,521 ( 46 ) ( 6,869 )
Tax Effect ( 3,714 ) 24,270 3,727
Net Unrealized Gains (Losses) Recognized in Other Comprehensive Income (Loss) 14,177 ( 87,318 ) ( 14,019 )
Other Comprehensive Income (Loss): 14,177 ( 87,318 ) ( 14,019 )
Comprehensive Income (Loss) $ 37,561 $ ( 37,200 ) $ 17,571
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 at December 31, 2020 $ 26,385 $ 143,457 $ 254,611 $ 15,721 $ 440,174
Cumulative Effect of the Adoption of ASU 2016-13 — — ( 50,726 ) — ( 50,726 )
Balance January 1, 2021 $ 26,385 $ 143,457 $ 203,885 $ 15,721 $ 389,448
Net Income — — 31,590 — 31,590
Other Comprehensive Loss, Net of Tax — — — ( 14,019 ) ( 14,019 )
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
Net Income — — 50,118 — 50,118
Other Comprehensive Loss, Net of Tax — — — ( 87,318 ) ( 87,318 )
Repurchase of Common Stock ( 2,587,361 shares)
( 2,587 ) ( 40,340 ) — — ( 42,927 )
Forfeiture of Restricted Stock ( 14,141 shares)
( 14 ) ( 142 ) — — ( 156 )
Issuance of Restricted Stock ( 127,355 shares)
127 ( 127 ) — — —
Recognition of Restricted Stock Compensation Expense — 1,314 — — 1,314
Balance December 31, 2022 $ 23,957 $ 104,693 $ 285,593 $ ( 85,616 ) $ 328,627
Cumulative Effect of the Adoption of ASU 2023-02 — — 106 — 106
Balance at January 1, 2023 23,957 104,693 285,699 ( 85,616 ) 328,733
Net Income — — 23,384 — 23,384
Other Comprehensive Income, Net of Tax — — — 14,177 14,177
1% Excise Tax on Stock Buybacks — ( 153 ) — — ( 153 )
Repurchase of Common Stock ( 1,132,232 shares)
( 1,132 ) ( 15,284 ) — — ( 16,416 )
Forfeiture of Restricted Stock ( 5,333 shares)
( 5 ) ( 38 ) — — ( 43 )
Issuance of Restricted Stock ( 137,097 shares)
137 ( 137 ) — — —
Recognition of Restricted Stock Compensation Expense — 1,561 — — 1,561
Balance December 31, 2023 $ 22,957 $ 90,642 $ 309,083 $ ( 71,439 ) $ 351,243
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) 2023 2022 2021
OPERATING ACTIVITIES
Net Income $ 23,384 $ 50,118 $ 31,590
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities
Provision for Credit Losses, including Provision (Recovery) for Unfunded Commitments 6,401 2,928 2,081
Origination of Loans Held-for-Sale ( 6,758 ) ( 8,047 ) ( 480,372 )
Proceeds From Loans Held-for-Sale 6,867 10,184 505,946
Depreciation/Amortization of Bank Premises and Equipment 6,248 6,063 6,229
Provision for Deferred Taxes 884 3,630 3,114
Net Amortization of Securities 6,354 5,749 4,798
Tax Credit Amortization 2,101 621 1,708
Gains on Sales of Loans Held-for-Sale ( 109 ) ( 396 ) ( 365 )
Losses (Gains) on Sales of Securities, net 1,521 ( 46 ) ( 6,869 )
Write-downs of Other Real Estate Owned 1,117 741 3,472
(Gains) Losses on Sales of Other Real Estate Owned, net ( 17 ) ( 309 ) 150
Losses (Gains) on Sales and Write-downs of Bank Premises, net — ( 73 ) —
Commercial Loan Swap Derivative Income 219 ( 605 ) ( 89 )
Premiums on Branch Sales — — ( 506 )
Increase in the Value of Life Insurance Contracts ( 1,381 ) ( 1,357 ) ( 1,380 )
Recognition of Restricted Stock Compensation Expense 1,561 1,314 1,040
(Increase) Decrease in Other Assets ( 5,465 ) ( 3,273 ) 8,592
Increase (Decrease) in Other Liabilities 3,803 3,549 ( 1,601 )
Net Cash Provided By Operating Activities 46,730 70,791 77,538
INVESTING ACTIVITIES
Securities Available-for-Sale:
Proceeds from Sales 43,323 19,777 197,056
Proceeds from Maturities, Redemptions, and Pay-downs 48,901 84,693 110,196
Purchases ( 24,938 ) ( 135,634 ) ( 466,648 )
Purchase of Bank Premises and Equipment, Net ( 9,798 ) ( 5,890 ) ( 8,484 )
Proceeds from Sales of Bank Premises and Equipment, net — 408 —
Net Cash Paid in Branch Sales — — ( 73,923 )
Proceeds from Sale of Portfolio Loans — — 52,320
(Purchase) Redemption of Federal Home Loan Bank Stock, net ( 11,886 ) ( 7,388 ) 2,741
Loan (Originations) and Payments, net ( 359,407 ) ( 342,877 ) 67,131
Proceeds from Sales and Payments of Other Real Estate Owned 6,794 4,840 13,256
Net Cash Used In Investing Activities ( 307,011 ) ( 382,071 ) ( 106,355 )
FINANCING ACTIVITIES
Net Change in Demand, Money Markets and Savings Accounts ( 235,748 ) 14,649 369,730
Increase (Decrease) in Certificates of Deposits 325,125 ( 82,792 ) ( 276,899 )
Proceeds (Repayments) from Federal Home Loan Bank Borrowings, net 212,850 173,550 ( 28,000 )
(Repayments) Proceeds from Federal Funds Purchased, net ( 17,870 ) 17,870 —
Repurchase of Common Stock ( 16,416 ) ( 42,927 ) ( 157 )
Net Cash Provided By Financing Activities 267,941 80,350 64,674
Net Increase (Decrease) in Cash and Cash Equivalents 7,660 ( 230,930 ) 35,857
Cash and Cash Equivalents at Beginning of Period 46,869 277,799 241,942
Cash and Cash Equivalents at End of Period $ 54,529 $ 46,869 $ 277,799
See accompanying notes to audited Consolidated Financial Statements.
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