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 Secured Overnight Financing Rate (“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 the FOMC’s recent action taken at their last three scheduled meetings of 2024 to reduce the Fed Funds Target Rate range by an aggregate of 100 bps from 5.25% - 5.50% to 4.25% - 4.50% coupled with current rate forecasts that imply that the FOMC is unlikely to increase the Fed Funds Target Rate during 2025, 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 - (continued)
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, 2024 December 31, 2023
Change in Interest Rate (basis points) % Change in Pretax Net Interest Income % Change in Pretax Net Interest Income
200 1.9% (1.1)%
100 1.1% (0.3)%
-100 2.1% 2.4%
-200 4.6% 4.4%
-300 6.8% 5.6%
-400 6.6% 6.7%
The results from the earnings simulation imply that the Company’s balance sheet is slightly liability sensitive balance sheet at December 31, 2024 and December 31, 2023. The above table indicates that, in a rising interest rate environment, the Company is positioned to have a small 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, the Company is positioned to have a slightly more advantageous increase in net interest income for the same reasons discussed above. The liability sensitive position at December 31, 2024 is due to a variety of factors which include 1) higher than market rate unfunded loan commitments that were originated during 2024 with fixed rates that are assumed to draw down, or convert to funded loan balances during the next twelve months, 2) shortening maturities of the time deposit portfolio due to shorter term time deposit promotional campaigns in response to the recent inverted yield curve, and 3) more aggressive non maturing deposit betas utilized in a rates down environment versus a rates up environment based on bank specific non maturing deposit rate beta assumptions observed during the most recent rate cycle.
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 the FOMC’s recent action taken at their last three scheduled meetings of 2024 to reduce the Fed Funds Target Rate range by 100 bps from 5.25% - 5.50% to 4.25% - 4.50% coupled with current rate forecasts that imply that the FOMC is unlikely to increase the Fed Funds Target Rate during 2025, 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.
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, 2024 December 31, 2023
Change in Interest Rate (basis points) % Change in Economic Value of Equity % Change in Economic Value of Equity
200 (8.3) % (4.7) %
100 (3.3) % (1.8) %
-100 2.4 % 0.9 %
-200 3.8 % 0.5 %
-300 2.9 % (2.7) %
-400 (1.9) % (10.9) %
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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
77
Report of Crowe LLP, Independent Registered Public Accounting Firm (PCAOB ID 173 ), on Consolidated Financial Statements and Effectiveness of Internal Controls Over Financial Reporting
125
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - (continued)
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands Except per Share Data) December 31,
2024 December 31,
2023
ASSETS
Cash and Due From Banks, including Interest-Bearing Deposits of $ 91,563 at December 31, 2024 and $ 14,853 at December 31, 2023
$ 131,171 $ 54,529
Securities Available-for-Sale, at Fair Value (amortized cost of $ 800,741 and $ 870,546 , respectively)
718,400 779,003
Equity Securities 10,041 —
Portfolio Loans 3,624,826 3,505,910
Allowance for Credit Losses ( 75,600 ) ( 97,052 )
Portfolio Loans, net 3,549,226 3,408,858
Bank Premises and Equipment, net 74,329 73,707
Other Real Estate Owned, net 659 2,463
Federal Home Loan Bank Stock, at Cost 6,487 21,626
Bank Owned Life Insurance 59,588 58,115
Other Assets 109,288 114,238
Total Assets $ 4,659,189 $ 4,512,539
LIABILITIES
Deposits:
Noninterest-Bearing Demand $ 634,436 $ 685,218
Interest-Bearing Demand 726,947 481,506
Money Market 512,162 513,664
Savings 355,506 454,876
Certificates of Deposit 1,924,370 1,586,651
Total Deposits 4,153,421 3,721,915
Federal Home Loan Bank Borrowings 70,000 393,400
Reserve for Unfunded Loan Commitments 3,186 3,193
Other Liabilities 48,269 42,788
Total Liabilities 4,274,876 4,161,296
Commitment and Contingencies - see NOTE 18.
SHAREHOLDERS’ EQUITY
Common Stock, Par Value $ 1.00 Per Share, Authorized 100,000,000 Shares;
Outstanding - 23,069,175 shares at December 31, 2024, and
22,956,304 shares at December 31, 2023
23,069 22,957
Additional Paid-in Capital 92,159 90,642
Retained Earnings 333,606 309,083
Accumulated Other Comprehensive Loss ( 64,521 ) ( 71,439 )
Total Shareholders’ Equity 384,313 351,243
Total Liabilities and Shareholders’ Equity $ 4,659,189 $ 4,512,539
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) 2024 2023 2022
INTEREST INCOME
Loans, including fees
Taxable $ 186,001 $ 159,317 $ 135,055
Non-Taxable 2,648 3,143 3,609
Investment Securities
Taxable 29,510 30,804 20,330
Non-Taxable 269 634 693
Federal Reserve Bank Excess Reserves 2,204 1,002 312
Interest on Bank Deposits 85 64 29
Dividend Income 1,012 1,456 154
Total Interest Income 221,729 196,420 160,182
Interest Expense
Interest Expense on Deposits 95,431 52,628 18,616
Interest Expense on Federal Funds Purchased — 368 188
Interest on Other Borrowings 11,841 21,114 1,450
Total Interest Expense 107,272 74,110 20,254
NET INTEREST INCOME 114,457 122,310 139,928
(Recovery) Provision for Credit Losses ( 5,039 ) 5,500 2,419
(Recovery) Provision for Unfunded Commitments ( 7 ) 901 509
Net Interest Income After (Recovery) Provision for Credit Losses 119,503 115,909 137,000
NONINTEREST INCOME
Gains (Losses) on Sales of Securities, net 68 ( 1,521 ) 46
Service Charges, Commissions and Fees 7,393 7,155 7,168
Debit Card Interchange Fees 7,843 7,828 7,427
Insurance Commissions 3,685 1,945 1,961
Bank Owned Life Insurance Income 1,473 1,381 1,357
Commercial Loan Swap Fee Income — 139 774
Other 906 1,351 2,985
Total Noninterest Income 21,368 18,278 21,718
NONINTEREST EXPENSE
Salaries and Employee Benefits 57,908 55,856 52,399
Occupancy Expense, net 15,608 14,028 13,527
FDIC Insurance Expense 6,200 4,904 2,015
Other Taxes 3,559 3,292 3,319
Advertising Expense 2,540 1,693 1,434
Telephone Expense 1,393 1,842 1,781
Professional and Legal Fees 5,675 6,210 5,818
Data Processing 4,919 3,920 4,051
Debit Card Expense 3,423 2,875 2,750
Tax Credit Amortization — — 621
Other 8,777 10,846 9,286
Total Noninterest Expense 110,002 105,466 97,001
Income Before Income Taxes 30,869 28,721 61,717
Income Tax Provision 6,346 5,337 11,599
Net Income $ 24,523 $ 23,384 $ 50,118
Earnings per Common Share:
Basic Earnings per Common Share $ 1.06 $ 1.00 $ 2.03
Diluted Earnings per Common Share $ 1.06 $ 1.00 $ 2.03
Average Shares Outstanding-Basic 22,817,149 23,240,543 24,595,789
Average Shares Outstanding-Diluted 22,817,149 23,240,543 24,595,789
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) 2024 2023 2022
Net Income $ 24,523 $ 23,384 $ 50,118
Other Comprehensive Income (Loss):
Net Unrealized Gains (Losses) on Securities Available-for-Sale:
Net Unrealized Gains (Losses) Arising during the Period 9,270 16,370 ( 111,542 )
Reclassification Adjustment for (Gains) Losses included in Net Income ( 68 ) 1,521 ( 46 )
Tax Effect ( 2,284 ) ( 3,714 ) 24,270
Net Unrealized Gains (Losses) Recognized in Other Comprehensive Income (Loss) 6,918 14,177 ( 87,318 )
Other Comprehensive Income (Loss): 6,918 14,177 ( 87,318 )
Comprehensive Income (Loss) $ 31,441 $ 37,561 $ ( 37,200 )
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, 2022 $ 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
Net Income — — 24,523 — 24,523
Other Comprehensive Income, Net of Tax — — — 6,918 6,918
Forfeiture of Restricted Stock ( 15,244 shares)
( 16 ) ( 107 ) — — ( 123 )
Issuance of Restricted Stock ( 128,115 shares)
128 ( 128 ) — — —
Recognition of Restricted Stock Compensation Expense — 1,752 — — 1,752
Balance December 31, 2024 $ 23,069 $ 92,159 $ 333,606 $ ( 64,521 ) $ 384,313
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) 2024 2023 2022
OPERATING ACTIVITIES
Net Income $ 24,523 $ 23,384 $ 50,118
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities
(Recovery) Provision for Credit Losses, including (Recovery) Provision for Unfunded Commitments ( 5,046 ) 6,401 2,928
Origination of Loans Held-for-Sale ( 8,953 ) ( 6,758 ) ( 8,047 )
Proceeds From Loans Held-for-Sale 9,091 6,867 10,184
Depreciation/Amortization of Bank Premises and Equipment 7,055 6,248 6,063
Provision for Deferred Taxes 2,689 368 3,630
Net Amortization of Securities 3,592 6,354 5,749
Tax Credit Amortization 517 2,101 621
Gains on Sales of Loans Held-for-Sale ( 138 ) ( 109 ) ( 396 )
(Gains) Losses on Sales of Securities, net ( 68 ) 1,521 ( 46 )
Unrealized Gain on Equity Securities ( 41 ) — —
Commercial Loan Swap Derivative Loss (Income) 12 219 ( 605 )
Increase in the Value of Life Insurance Contracts ( 1,473 ) ( 1,381 ) ( 1,357 )
Balance Sheet Hedge Fair Value Adjustment 125 — —
Recognition of Restricted Stock Compensation Expense 1,752 1,561 1,314
Decrease (Increase) in Other Assets 1,614 ( 3,849 ) ( 2,914 )
Increase in Other Liabilities 1,687 3,803 3,549
Net Cash Provided By Operating Activities 36,938 46,730 70,791
INVESTING ACTIVITIES
Securities Available-for-Sale:
Proceeds from Sales 17,953 43,323 19,777
Proceeds from Maturities, Redemptions, and Pay-downs 63,454 48,901 84,693
Purchases ( 15,126 ) ( 24,938 ) ( 135,634 )
Purchase of Equity Securities ( 10,000 ) — —
Purchase of Bank Premises and Equipment, Net ( 8,133 ) ( 9,798 ) ( 5,890 )
Proceeds from Sales of Bank Premises and Equipment, net — — 408
Redemption (Purchase) of Federal Home Loan Bank Stock, net 15,139 ( 11,886 ) ( 7,388 )
Loan Originations, net ( 135,888 ) ( 359,407 ) ( 342,877 )
Proceeds from Sales and Payments of Other Real Estate Owned 4,199 6,794 4,840
Net Cash Used In Investing Activities ( 68,402 ) ( 307,011 ) ( 382,071 )
FINANCING ACTIVITIES
Net Change in Demand, Money Markets and Savings Accounts 93,787 ( 235,748 ) 14,649
Increase (Decrease) in Certificates of Deposits 337,719 325,125 ( 82,792 )
Proceeds from Federal Home Loan Bank Borrowings 1,870,000 3,441,685 300,550
Repayments on Federal Home Loan Bank Borrowings ( 2,193,400 ) ( 3,228,835 ) ( 127,000 )
(Repayments) Proceeds from Federal Funds Purchased, net — ( 17,870 ) 17,870
Repurchase of Common Stock — ( 16,416 ) ( 42,927 )
Net Cash Provided By Financing Activities 108,106 267,941 80,350
Net Increase (Decrease) in Cash and Cash Equivalents 76,642 7,660 ( 230,930 )
Cash and Cash Equivalents at Beginning of Period 54,529 46,869 277,799
Cash and Cash Equivalents at End of Period $ 131,171 $ 54,529 $ 46,869
See accompanying notes to audited Consolidated Financial Statements.
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