F & M BANK CORP. Forward-Looking Statements
Certain information contained in this report may include "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act. These forward-looking statements are generally identified by phrases such as "we expect," "we believe" or words of similar import. Such forward-looking statements are subject to known and unknown risks including, but not limited to:
· Changes in the quality or composition of our loan or investment portfolios,
including adverse developments in borrower industries, declines in real
estate values in our markets, or in the repayment ability of individual
borrowers or issuers; · The strength of the economy in our market area, as well as general economic,
market, or business conditions;
· An insufficient allowance for loan losses as a result of inaccurate
assumptions;· Our ability to maintain our "well-capitalized" regulatory status; · Changes in the interest rates affecting our deposits, loans and investment
portfolio;
· Changes in our competitive position, competitive actions by other financial
institutions, financial technology firms and others, the competitive nature
of the financial services industry and our ability to compete effectively in
our banking markets;
· Our ability to manage growth;
· Our potential growth, including our entrance or expansion into new markets,
the need for sufficient capital to support that growth, difficulties or
disruptions expanding into new markets or integrating the operations of
acquired branches or business, and the inability to obtain the expected
benefits of such growth;
· Our exposure to operational risk;
· Our ability to raise capital as needed by our business;
· Changes in laws, regulations and the policies of federal or state regulators
and agencies; · The effect of changes in accounting policies and practices, as may be adopted
from time to time by bank regulatory agencies, the
Accounting Oversight Board, the FASB, or other accounting standards setting
bodies;
· Geopolitical conditions, including acts or threats of terrorism,
international hostilities, or actions taken by the
in response to acts or threats of terrorism and/or military conflicts, which
could impact business and economic conditions in the
cyber-crime;
· Other factors identified in reports the Company files with the
to time; and
· Other circumstances, many of which are beyond our control.
Although the Company believes that our expectations with respect to the
forward-looking statements are based upon reliable assumptions within the bounds
of our knowledge of our business and operations, there can be no assurance that
our actual results, performance or achievements will not differ materially from
any future results, performance or achievements expressed or implied by such
forward-looking statements.
The following discussion provides information about the major components of the results of operations and financial condition, liquidity and capital resources ofF & M Bank Corp. and its subsidiaries. This discussion and analysis should be read in conjunction with the Consolidated Financial Statements and the Notes to the Consolidated Financial Statements presented in Item 8, Financial Statements and Supplementary Information, of this Form 10-K. Lending Policies Credit Policies The principal risk associated with each of the segments of loans in our portfolio is the creditworthiness of our borrowers. Within each segment, such risk is increased or decreased, depending on prevailing economic conditions. To manage the risk, theBank Credit Administration Department supervises that the underwriting process follows the written policies and procedures approved by the Board of Directors. The loan policy gives loan amount approval limits to individual loan officers based on their position and level of experience and to our loan committees based on the size of the lending relationship. The risk associated with real estate and construction loans, commercial loans and consumer loans varies, based on market employment levels, fluctuations in the value of real estate and other conditions that affect the ability of borrowers to repay indebtedness. The risk associated with real estate construction loans varies, based on the supply and demand for the type of real estate under construction. 20 Table of Contents The Bank has a loan review process to monitor and manage the portfolio, identify concentrations and credit deterioration, establish loss exposure and to assess compliance with the loan policy. The Bank uses a management loan committee and a directors' loan committee to approve loans. The management loan committee is comprised of members of senior management, credit administration and senior lenders; the directors' loan committee is comprised of any six directors. Both committees approve new, renewed and or modified loans that exceed officer loan authorities. The directors' loan committee also reviews any changes to the lending policies, which are then approved by the Board of Directors. Loans Held for Sale
The Bank makes fixed rate mortgage loans with terms of typically fifteen or thirty years through its subsidiary F&M Mortgage. These loans are funded by F&M Mortgage utilizing a line of credit at the Bank until sold to investors in the secondary market or transferred to the Bank and held in the loan portfolio.
Construction and Development Lending
The Bank makes construction loans, primarily residential, and land acquisition and development loans. The residential construction loans are secured by residential houses under construction and the underlying land for which the loan was obtained. The land acquisition and development loans are secured by the land for which the loan was obtained. The average life of a construction loan is approximately 12 months, and it is typically re-priced as the prime rate of interest changes. Construction lending entails significant additional risks, compared with residential mortgage lending. Construction loans often involve larger loan balances concentrated with single borrowers or groups of related borrowers. Another risk involved in construction lending is attributable to the fact that loan funds are advanced upon the security of the land or home under construction, which value is estimated prior to the completion of construction. Thus, it is more difficult to evaluate accurately the total loan funds required to complete a project and related loan-to-value ratios. To mitigate the risks associated with construction lending, loan amounts are limited to 75% to 90% of appraised value, in addition to analyzing the creditworthiness of the borrower. In addition, a first lien on the property is obtained as security for construction loans and typically require personal guarantees from the borrower's principal owners.
Commercial Real Estate Lending
Commercial real estate loans are secured by various types of commercial real estate in our market area, including multi-family residential buildings, commercial buildings and offices, shopping centers and churches. Commercial real estate lending entails significant additional risks, compared with residential mortgage lending. Commercial real estate loans typically involve larger loan balances concentrated with single borrowers or groups of related borrowers. Additionally, the payment experience on loans secured by income producing properties is typically dependent on the successful operation of a business or a real estate project and thus may be subject, to a greater extent, to adverse conditions in the real estate market or in the economy in general. The Bank's commercial real estate loan underwriting criteria require an examination of debt service coverage ratios and the borrower's creditworthiness, prior credit history and reputation; as well as an evaluation of the location of the property securing the loan and personal guarantees or endorsements of the borrower's principal owners.
Commercial & Industry -
Business loans generally have a higher degree of risk than residential mortgage loans but have higher yields. To manage these risks, the Bank obtains appropriate collateral and personal guarantees from the borrower's principal owners and monitor the financial condition of business borrowers. Residential mortgage loans generally are made based on the borrower's ability to repay from employment and other income and are secured by real estate whose value tends to be readily ascertainable. In contrast, business loans typically are made based on the borrower's ability to make repayment from cash flow from its business and are secured by business assets, such as real estate, accounts receivable, equipment and inventory. As a result, the availability of funds for the repayment of business loans is substantially dependent on the success of the business itself. Furthermore, the collateral for business loans may depreciate over time and generally cannot be appraised with as much precision as residential real estate. Consumer Lending
The Bank offers various consumer loans, including personal loans, automobile loans, deposit account loans, installment and demand loans, and home equity loans.
21
Table of Contents
The underwriting standards for consumer loans include a determination of the
applicant's payment history on other debts and an assessment of their ability to
meet existing obligations and payments on the proposed loan. The stability of
the applicant's monthly income may be determined by verification of gross
monthly income from primary employment and additionally from any verifiable
secondary income. Although creditworthiness of the applicant is of primary
consideration, the underwriting process also includes an analysis of the value
of the security in relation to the proposed loan amount. For home equity lines
of credit and loans the Bank requires title insurance, hazard insurance and, if
required, flood insurance.
Residential Mortgage Lending
The Bank makes residential mortgage loans for the purchase or refinance of existing loans with loan to value limits generally ranging between 80% and 90% depending on the age of the property, borrower's income and credit worthiness. Loans that are retained in our portfolio generally carry adjustable rates that can change every one, three or five years, based on amortization periods of
twenty to thirty years. Dealer Finance Division The Bank opened a loan production office inSeptember 2012 , which specializes in providing automobile financing through a network of automobile dealers. The Dealer Finance Division is staffed with officers that have extensive experience in Dealer Finance and serves the automobile finance needs for customers of dealers throughout the existing geographic footprint of the Bank. Approximately fifty-three dealers have active contracts to originate loans on behalf of the Bank in accordance with bank policies. Critical Accounting Policies General The Company's financial statements are prepared in accordance with accounting principles generally accepted inthe United States of America ("GAAP"). The financial information contained within the statements is, to a significant extent, financial information that is based on measures of the financial effects of transactions and events that have already occurred. The Company's financial position and results of operations are affected by management's application of accounting policies, including estimates, assumptions and judgments made to arrive at the carrying value of assets and liabilities and amounts reported for revenues, expenses and related disclosures. Different assumptions in the application of these policies could result in material changes in the Company's consolidated financial position and/or results of operations. In addition, GAAP itself may change from one previously acceptable method to another method. Although the economics of these transactions would be the same, the timing of events that would impact these transactions could change. Following is a summary of the Company's significant accounting policies that are highly dependent on estimates, assumptions and judgments. Allowance for Loan Losses The allowance for loan losses is an estimate of the losses that may be sustained in the loan portfolio. The allowance is based on two basic principles of accounting: (i) ASC 450 "Contingencies", which requires that losses be accrued when they are probable of occurring and estimable and (ii) ASC 310, "Receivables", which requires that losses be accrued based on the differences between the value of collateral, present value of future cash flows or values that are observable in the secondary market and the loan balance. The Company's allowance for loan losses is the accumulation of various components that are calculated based on independent methodologies. All components of the allowance represent an estimation performed pursuant to either ASC 450 or ASC 310. Management's estimate of each ASC 450 component is based on certain observable data that management believes are most reflective of the underlying credit losses being estimated. This evaluation includes credit quality trends; collateral values; loan volumes; economic conditions, borrower and industry concentrations; changes in the experience and depths of lending management and staff; effects of any concentrations of credit; the findings of internal credit quality assessments, results from external bank regulatory examinations and third-party loan reviews. These factors, as well as historical losses and current economic and business conditions, are used in developing estimated loss factors used in the calculations. 22 Table of Contents Allowances for loan losses are determined by applying estimated loss factors to the portfolio based on management's evaluation and "risk grading" of the loan portfolio. Specific allowances, if required, are typically provided on all impaired loans in excess of a defined loan size threshold that are classified in the Substandard or Doubtful risk grades and on all troubled debt restructurings. The specific reserves are determined on a loan-by-loan basis based on management's evaluation of the Company's exposure for each credit, given the current payment status of the loan, the value of any underlying collateral or future discounted cash flows. While management uses the best information available to establish the allowance for loan and lease losses, future adjustments to the allowance may be necessary if economic conditions change or, if required by regulators, based upon information available to them at the time of their examinations. Such adjustments to original estimates, as necessary, are made in the period in which these factors and other relevant considerations indicate that loss levels may vary from previous estimates. Fair Value The estimate of fair value involves the use of (1) quoted prices for identical instruments traded in active markets, (2) quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques using significant assumptions that are observable in the market or (3) model-based techniques that use significant assumptions not observable in the market. When observable market prices and parameters are not fully available, management's judgment is necessary to arrive at fair value including estimates of current market participant expectations of future cash flows, risk premiums, among other things. Additionally, significant judgment may be required to determine whether certain assets measured at fair value are classified within the fair value hierarchy as Level 2 or Level 3. The estimation process and the potential materiality of the amounts involved result in this item being identified as
critical. Pension Obligations
The accounting guidance for the measurement and recognition of obligations and
expense related to pension plans generally applies the concept that the cost of
benefits provided during retirement should be recognized over the employees'
active working life. Inherent in this concept is the requirement to use various
actuarial assumptions to predict and measure costs and obligations many years
prior to the settlement date. Major actuarial assumptions that require
significant management judgment and have a material impact on the measurement of
benefits expense and accumulated benefit obligation include discount rates,
expected return on assets, mortality rates, and projected salary increases,
among others. Changes in assumptions or judgments related to any of these
variables could result in significant volatility in the Company's financial
condition and results of operations. As a result, accounting for the Company's
pension expense and obligation is considered a significant estimate. The
estimation process and the potential materiality of the amounts involved result
in this item being identified as critical. See "Pension Plans" in Note 1 and
"Funding Policy " in Note 12 for additional information about the plan.
23
Table of Contents
Five Year Summary of Selected Financial Data
(Dollars and shares in thousands, except per share data)
2022 2021 2020 2019 20186
Income Statement Data:
Interest and Dividend
Income $ 42,184 $ 35,576 $ 36,792 $ 38,210 $ 36,377
Interest Expense 7,245 4,302 5,728 6,818 4,832
Net Interest Income 34,939 31,274 31,064 31,392 31,545
Provision for
(Recovery of) Loan
Losses 866 (2,821 ) 3,300 7,405 2,930
Net Interest Income
After Provision for
(Recovery of) Loan
Losses 34,073 34,095 27,764 23,987 28,615
Noninterest Income 10,451 12,167 13,103 10,759 8,770
Low-income housing
partnership losses (817 ) (861 ) (893 ) (839 ) (767 )
Noninterest Expenses 34,909 33,340 29,939 29,518 26,744
Income before income
taxes 8,798 12,061 10,035 4,389 9,874
Income Tax Expense
(Benefit) 480 1,323 1,142 (250 ) 1,041
Net income
attributable to
noncontrolling
interest - - (105 ) (130 ) (10 )
Net Income
attributable to F & M
Bank Corp. $ 8,318 $ 10,738 $ 8,788 $ 4,509 $ 8,823
Per Common Share Data:
Net Income - basic $ 2.41 $ 3.25 $ 2.66 $ 1.32 $ 2.60
Net Income - diluted 2.41 3.12 2.56 1.30 2.45
Dividends Declared 1.04 1.04 1.04 1.02 1.20
Book Value per Common
Share 20.48 29.42 28.43 27.11 26.68
Balance Sheet Data:
Assets $ 1,245,902 $ 1,219,342 $ 966,930 $ 813,999 $ 779,743
Loans Held for
Investment 743,604 662,421 661,329 603,425 638,799
Loans Held for Sale 1,373 4,887 58,679 66,798 55,910
Securities 403,537 413,217 117,898 18,015 21,844
Deposits 1,083,377 1,080,295 818,582 641,709 591,325
Short-Term Debt 70,000 - - 10,000 40,116
Long-Term Debt 6,890 21,772 33,202 53,201 40,218
Stockholders' Equity 70,792 100,456 95,629 91,575 91,401
Average Common Shares
Outstanding - basic 3,449 3,245 3,200 3,189 3,238
Average Common Shares
Outstanding - diluted 3,449 3,442 3,429 3,460 3,596
Financial Ratios:
Return on Average
Assets1 0.72 % 0.98 % 0.95 % 0.57 % 1.15 %
Return on Average
Equity1 8.53 % 10.84 % 9.46 % 4.93 % 9.67 %
Net Interest Margin 3.03 % 3.00 % 3.61 % 4.33 % 4.65 %
Efficiency Ratio 2 77.81 % 75.44 % 67.51 % 69.03 % 66.04 %
Dividend Payout Ratio
- Common 43.15 % 32.00 % 39.10 % 77.27 % 46.15 %
Capital and Credit
Quality Ratios:
Average Equity to
Average Assets1 8.49 % 9.05 % 10.08 % 11.48 % 11.90 %
Allowance for Loan
Losses to Loans3 1.07 % 1.17 % 1.58 % 1.39 % 0.82 %
Nonperforming Loans to
Total Assets4 0.18 % 0.45 % 0.68 % 0.70 % 1.31 %
Nonperforming Assets
to Total Assets5 0.18 % 0.45 % 0.68 % 0.89 % 1.62 %
Net Charge-offs to
Total Loans3 0.09 % (.01 )% 0.18 % 0.71 % 0.58 %
1 Ratios are primarily based on daily average balances. 2 The Efficiency Ratio equals noninterest expenses divided by the sum of tax
equivalent net interest income and noninterest income. Noninterest income
excludes gains (losses) on securities transactions and low-income housing
partnership losses. Noninterest expense excludes amortization of intangibles.
3 Calculated based on Loans Held for Investment, excludes Loans Held for Sale.
4 Calculated based on 90 day past due loans and non-accrual loans to Total
Assets.
5 Calculated based on 90 day past due loans, non-accrual loans and OREO toTotal Assets. 6 The 2018 financial information has been adjusted to reflect the correction of
a prior period error.
24
Table of Contents
Overview
The Company's net income for 2022 totaled $8.3 million or $2.41 per common share
(basic), a decrease of 22.54% from $10.7 million , or $3.25 per share (basic), in
2021. Return on average equity decreased in 2022 to 8.53% from 10.84% in 2021,
and the return on average assets decreased from 0.98% in 2021 to 0.72% in 2022.
The Company's net income per share (dilutive) totaled $2.41 in 2022, a decrease
from $3.12 in 2021.
At year-end 2022, the Company had total assets of
Changes in Net Income per Common Share (Basic)
2022 2021
to 2021 to 2020
Prior Year Net Income Per Common Share (Basic)
1.06 0.06
Provision for loan losses (1.07 ) 1.89
Noninterest income, excluding securities gains (0.91 ) (0.08 ) Security gains
0.42 (0.16 )
Noninterest expenses (0.45 ) (1.05 )
Income taxes 0.24 (0.06 )
Effect of preferred stock dividend 0.06 0.02
Change in average shares outstanding (0.19 ) (0.03 )
Total Change (0.84 ) 0.59
Net Income Per Common Share (Basic) $ 2.41 $ 3.25
Net Interest Income
The largest source of operating revenue for the Company is net interest income,
which is calculated as the difference between the interest earned on earning
assets and the interest expense paid on interest bearing liabilities. Net
interest income increased 11.72% from 2021 to 2022 following an increase of
0.68% from 2020 to 2021. The net interest margin is the net interest income
expressed as a percentage of interest earning assets. Changes in the volume and
mix of interest earning assets and interest-bearing liabilities, along with
their yields and rates, have a significant impact on the level of net interest
income. Tax-equivalent net interest income for 2022 was $35.1 million
representing an increase of $3.7 million or 11.78% over the prior year. A 0.74%
increase in 2021 versus 2020 resulted in total tax-equivalent net interest
income of $31.4 million for 2021.
In this discussion and in the tabular analysis of net interest income
performance, entitled "Consolidated Average Balances, Yields and Rates," the
interest earned on tax exempt loans and investment securities has been adjusted
to reflect the amount that would have been earned had these investments been
subject to normal income taxation. This is referred to as tax-equivalent net
interest income. For a reconciliation of tax-equivalent net interest income to
the most comparable GAAP measures, see the accompanying table.
Tax-equivalent income on earning assets increased $6.6 million in 2022 compared
to 2021. Loans held for investment, expressed as a percentage of total earning
assets, decreased in 2022 to 59.26% as compared to 63.77% in 2021. During 2022,
yields on earning assets increased 24 basis points (BP) and the average cost of
interest-bearing liabilities increased 26BP. Both are a result of the rising
interest rate environment experienced in 2022.
25
Table of Contents
The following table provides detail on the components of tax-equivalent net interest income (dollars in thousands):
GAAP Financial Measurements: 2022 2021 Interest Income - Loans$ 34,374 $ 32,560 Interest Income - Securities and Other Interest-Earnings Assets 7,810
3,016
Interest Expense - Deposits 5,735
3,336
Interest Expense - Other Borrowings 1,510
966
Total Net Interest Income 34,939
31,274
Non-GAAP Financial Measurements:
Add: Tax Benefit on Tax-Exempt Interest Income -
143 110
Total Tax Benefit on Tax-Exempt Interest Income 143
110
Tax-Equivalent Net Interest Income$ 35,082
$ 31,384 Interest Income Tax-equivalent net interest income increased$3.7 million or 11.78% in 2022, after increasing 0.73% or$230 thousand in 2021. Overall, the yield on earning assets increased 0.24%, from 3.41% to 3.65%. Average loans held for investment increased during 2022, with average loans outstanding increasing$19.4 million to$686.5 million . Average commercial loans increased 3.25%, real estate loans decreased 1.16%, and consumer installment loans increased 12.25% on average. Average investment securities increased 88.59%, with average securities outstanding increasing from$236.3 million to$445.6 million . Interest income and fees on loans were$1.9 million higher and income from cash and securities was$4.8 million higher due to higher rates on variable rate loans, the$19.4 million in loan growth in 2022, and higher investment average balances due to purchases in 2021 and early 2022. Interest Expense
Interest expense increased$2.9 million or 68.41% during 2022. Higher rates on interest bearing deposits, specifically money market accounts, coupled with interest paid on short-term borrowings increased the Bank's interest expense. The average cost of funds of 0.86% increased 26 basis points compared to 2021, which followed a decrease of 34 basis points in 2021. Average interest-bearing liabilities increased$130.9 million or 18.28% in 2022. Interest expense on deposits increased 71.94% due to average interest-bearing deposits increasing 17.58% and a rising rate environment. Interest expense on borrowings increased 53.31% as average debt increased 32.04%. Changes in the cost of funds attributable to rate and volume variances are reflected in a following table. The following analysis reveals an increase in the net interest margin to 3.03% in 2022 from 3.00% in 2021, due to changes in balance sheet mix during the year and increases in interest rates in earning assets and interest-bearing liabilities. The average balance of the investment portfolio has grown significantly as deposits were invested in securities in the beginning of 2022. Investment purchases stopped as theFederal Reserve began raising interest rates to flatten the economy and the overall rate environment increased considerably. 26 Table of Contents
Consolidated Average Balances, Yields and Rates (dollars in thousands)1
2022 2021
Balance Interest Rate Balance Interest Rate
ASSETS
Loans2
Commercial $ 254,506 $ 12,437 4.89 % $ 246,495 $ 11,667 4.73 %
Real estate 295,524 13,733 4.65 % 298,983 13,506 4.52 %
Consumer 136,495 8,149 5.97 % 121,604 7,277 5.98 %
Loans held for
investment4 686,524 34,319 5.00 % 667,082 32,450 4.86 %
Loans held for sale 3,130 106 3.39 % 3,844 186 4.84 %
Investment securities3
Fully taxable 433,242 7,278 1.68 % 228,287 2,739 1.20 %
Partially taxable - - -% 125 1 0.80 %
Tax exempt 12,365 434 3.51 % 7,868 168 2.14 %
Total investment
securities 445,607 7,712 1.73 % 236,280 2,908 1.23 %
Interest bearing
deposits in banks 1,390 37 2.66 % 2,184 3 0.14 %
Federal funds sold 21,763 153 0.70 % 136,705 139 0.10 %
Total Earning Assets 1,158,414 42,327 3.65 % 1,046,095 35,686 3.41 %
Allowance for loan
losses (7,677 ) (9,000 )
Nonearning assets 83,604 57,474
Total Assets $ 1,234,341 $ 1,094,569
LIABILITIES AND
STOCKHOLDERS' EQUITY
Deposits
Demand -interest
bearing $ 183,882 $ 868 0.47 % $ 147,008 $ 280 0.19 %
Savings 502,913 3,904 0.78 % 410,769 1,689 0.41 %
Time deposits 121,585 963 0.79 % 129,760 1,367 1.05 %
Total interest-bearing
deposits 808,380 5,735 0.71 % 687,537 3,336 0.49 %
Federal funds -% purchased 883 28 3.17 % - - Shortterm debt 25,241 732 2.90 % - - -% Long-term debt 12,748 750 5.88 % 28,770 966 3.36 % Total interest-bearing liabilities 847,252 7,245 0.86 %
716,307 4,302 0.60 %
Noninterest bearing deposits 292,252 263,911 Other liabilities 15,457 15,258 Total liabilities 1,154,960 995,476 Stockholders' equity 79,381
99,093
Total liabilities and stockholders' equity$ 1,234,341 $ 1,094,569 Net interest earnings$ 35,082 $ 31,384 Net yield on interest earning assets (NIM) 3.03 % 3.00 % 1 Income and yields are presented on a tax-equivalent basis using the applicable federal income tax rate of 21%. 2 Interest income on loans includes loan fees. 3 Average balance information is reflective of historical cost and has not been adjusted for changes in market value. 4 Includes nonaccrual loans. 27 Table of Contents The following table (dollars in thousands) illustrates the effect of changes in interest income and interest expense, on a tax equivalent basis, and distinguishes between the changes resulting from the increases or decreases in the outstanding balances of interest-earning assets and interest-bearing liabilities (volume), and the changes resulting from increases or decreases in average interest rates on such assets and liabilities (rate). Changes related to both volume and rate have been allocated proportionally. 2022 Compared to 2021 Increase (Decrease) Due to Change Increase in Average: Or Volume Rate (Decrease) Interest income Loans held for investment$ 945 $ 924 $ 1,869 Loans held for sale (35 ) (45 ) (80 ) Investment securities Fully taxable 2,459 2,080 4,539 Partially taxable (1 ) - (1 ) Tax exempt 96 170 266
Interest bearing deposits in banks (1 ) 35 34
Federal funds sold (115 ) 129 14 Total Interest Income 3,348 3,293 6,641 Interest expense Deposits Demand - interest bearing 70 518 588 Savings 378 1,837 2,215 Time deposits (86 ) (317 ) (403 ) Federal funds purchased 28 - 28 Short-term debt 731 - 731 Long-term debt (538 ) 322 (216 ) Total Interest Expense 583 2,360 2,943 Net Interest Income$ 2,765 $ 933 $ 3,698 Noninterest Income
Noninterest income decreased 14.79%, or$1.7 million , in 2022. Noninterest income, excluding securities gains and losses, declined on a year-to-year basis from$11.8 million for 2021 to$8.7 million in 2022. As the mortgage industry slowed due to rising interest rates, mortgage banking income declined from$4.6 million in 2021 to$1.8 million for 2022. For 2023, the Bank is expanding the presence of mortgage loan originators in newer markets, offering variable rate products which are held in the loan portfolio rather than sold on the secondary market, and continuing to support the growth and utilization of our title and wealth management divisions. Net investment securities losses increased from$525 thousand in 2021 to$2.9 million in 2022. InOctober 2022 ,Infinex Financial Holdings, Inc. ("Infinex"), the holding company forInfinex Investments, Inc. , a broker dealer through which the Bank provides wealth management services to its customers, was acquired byAdvisor Group, Inc. As a result, the Company recorded a one-time gain of$3.8 million with respect to the Company's share of ownership in Infinex. Noninterest Expense
Noninterest expenses increased from$33.3 million in 2021 to$34.9 million in 2022, a 4.71% increase. Expenses increased primarily in the areas of salaries and benefits ($1.5 million ), telecommunication and data processing expense ($276 thousand ), and ATM and check card fees ($195 thousand ). The salary increase was due, in part, to a minimum wage increase implemented by the Company inAugust 2022 . 28 Table of Contents Total noninterest expense as a percentage of average assets totaled 2.83% and 3.05% in 2022 and 2021, respectively. Peer group averages (as reported in the most recent Uniform Bank Performance Report) were 2.35% for 2022 and 2.40%
for 2021. Balance Sheet
Total assets increased 2.18% during the year to
The
increase was fueled by strong growth in net loans held for investment that increased$81.2 million . Cash and cash equivalents decreased$53.2 million as excess funds were used to fund loan growth. The AFS security portfolio had purchases of$108.1 million that were offset by sales and maturities of$47.7 million , amortization, accretion and paydowns of$23.2 million , and a decrease in the fair value of$48.9 million , which resulted in a decrease of$11.8 million . Average earning assets increased$112.3 million or 10.74% to$1.16 billion for 2022, due largely to the growth in loans held for investment and investment securities. Average interest-bearing liabilities increased$130.9 million or 18.28%, as deposits and short-term debt increased. The Company continues to utilize its assets well, with 93.85% of average assets consisting of earning assets.Investment Securities
Total securities decreased$9.7 million or 2.34% in 2022 to$403.4 million atDecember 31, 2022 from$413.2 million atDecember 31, 2021 . Average balances in investment securities increased 88.59% in 2022 to$445.6 million . At year end, 38.47% of average earning assets of the Company were held as investment securities compared to 22.59% at year-end 2021. All of the investment securities are unpledged. Management strives to match the types and maturities of securities owned to balance projected liquidity needs, interest rate sensitivity and to maximize earnings through a portfolio bearing low credit risk. Portfolio yields averaged 1.73% for 2022, compared to 1.23% in 2021; this is due volume and rate increases in 2022.
There were no Other Than Temporary Impairments ("OTTI") write-downs in 2022 or
2021. There were $525 thousand in realized security losses on sales of
securities in 2021. In 2022, the Company recorded a one-time gain of $3.8
million on the acquisition of Infinex by Advisor Group, Inc and took the
opportunity to sell low yielding securities for a realized loss of $2.9 million
to offset the gain.
Maturities and weighted average yields of securities at December 31, 2022 are
presented in the table below (dollars in thousands). Amounts are shown by
contractual maturity; expected maturities will differ as issuers may have the
right to call or prepay obligations. Maturities of other investments are not
readily determinable due to the nature of the investment; see Note 2 to the
Consolidated Financial Statements for a description of these investments.
Less One to Five to Over
Than one Year Five Years Ten Years Ten Years
Amount Yield1 Amount Yield1 Amount Yield1 Amount Yield1 Total Yield1
Debt Securities Available for Sale:
U.S. Treasuries $ 4,821 0.50 % $ 18,991 1.50 % $ 12,831 0.99 % $ - $ 36,643 1.19 %
U.S. Government
sponsored
enterprises 9,599 0.75 % 98,754 1.20 % 21,395 1.42 % - 129,748 1.20 %
Securities
issued by
States &
political
subdivisions of
the U.S. 4,783 0.88 % 17,466 1.49 % 6,169 2.42 % 13,780 3.11 % 42,198 2.09 % Mortgage-backed obligations of federal agencies - - 16,068 0.94 % 20,617 0.24 % 120,190 2.16 % 156,875 1.78 % Corporate debt securities - - - - 26,631 4.01 % - - 26,631 4.01 % Total$ 19,203 0.72 %$ 151,279 1.24 %$ 87,643 1.94 %$ 133,970 2.26 %$ 392,095 1.72 % Debt Securities Held to Maturity: U.S. Treasury & Agency$ 125 0.82 % $ - $ - $ -$ 125 0.82 % Total$ 125 0.82 % $ - $ - $ -$ 125 0.82 %
1Tax equivalent yield to the lower of call or maturity date. On securities without a call date, it is the stated yield.
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Table of Contents
Loan Portfolio
Loans held for investment, net of deferred fees and costs, totaled $743.6
million at December 31, 2022 compared with $662.4 million at December 31, 2021 .
Commercial and 1-to-4 family consumer real estate loans represent the Company's
largest categories at December 31, 2022 . The largest areas of growth in 2022
occurred in the Commercial & Industrial -non-real estate, commercial real
estate, farmland, and real estate portfolios. The Company is committed to solid
growth by originating soundly underwritten loans to qualified borrowers. Nearly
70% of the commercial portfolio is comprised of adjustable interest rate loans.
When interest rates fluctuate, these loans will reprice accordingly, giving
customers an advantage when rates trend down and providing protection for the
Bank if rates trend up.
The following table shows the maturity of loans and leases, outstanding as of
1 Year or 1-5 5-15 After 15
less Years Years Years Total
Construction/Land
Development $ 32,736 $ 22,189 $ 12,519 $ 1,227 $ 68,671
Farmland 30,043 14,333 28,556 1,390 74,322
Real Estate 25,236 67,973 55,115 4,957 153,281
Multi-Family 2,113 2,254 5,255 - 9,622
Commercial Real Estate 72,663 70,312 52,099 89 195,163
Home Equity - closed end 1,102 1,784 1,821 - 4,707
Home Equity - open end 1,697 7,635 37,477 119 46,928
Commercial & Industrial -
Non-Real Estate 3,080 20,972 32,573 - 56,625
Consumer 880 4,919 689 - 6,488
Dealer Finance 2,212 42,798 80,115 - 125,125
Credit Cards 3,242 - - - 3,242
Less: Deferred loan fees,
net of costs - - - - (570 )
Total $ 175,004 $ 255,169 $ 306,219 $ 7,782 $ 743,604
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At
1-5 5-15 After 15
Years Years Years Total
Construction/Land Development Outstanding with fixed interest rates$ 5,719 $ 2,953 $ 380 $ 9,052 Outstanding with adjustable rates 16,470 9,566 847 26,883Total Construction /Land Development 22,189 12,519 1,227 35,935 Farmland Outstanding with fixed interest rates$ 403 $ 6,747 $ 421 $ 7,571 Outstanding with adjustable rates 13,930 21,809 969 36,708 Total Farmland 14,333 28,556 1,390 44,279 Real Estate Outstanding with fixed interest rates$ 464 $ 1,316 $ 3,122 $ 4,902 Outstanding with adjustable rates 67,509 53,799 1,835 123,143Total Real Estate 67,973 55,115 4,957 128,045 Multi-Family Outstanding with fixed interest rates$ 1,592 $ - $ -$ 1,592 Outstanding with adjustable rates 662 5,255 - 5,917 Total Multi-Family 2,254 5,255 - 7,509Commercial Real Estate Outstanding with fixed interest rates$ 9,151 $ 6,441 $ -$ 15,592 Outstanding with adjustable rates 61,161 45,658 89 106,908Total Commercial Real Estate 70,312 52,099 89 122,500 Home Equity - closed end Outstanding with fixed interest rates$ 238 $ 1,579 $ -$ 1,817 Outstanding with adjustable rates 1,546 242 - 1,788 Total Home Equity - closed end 1,784 1,821 - 3,605 Home Equity - open end Outstanding with fixed interest rates $ - $ - $ - $ - Outstanding with adjustable rates 7,635 37,477 119 45,231 Total Home Equity - open end 7,635 37,477 119 45,231 Commercial & Industrial - Non-Real Estate Outstanding with fixed interest rates$ 6,460 $ 13,343 $ -$ 19,803 Outstanding with adjustable rates 14,512 19,230 - 33,742 Total Commercial & Industrial - Non-Real Estate 20,972 32,573 - 53,545 Consumer Outstanding with fixed interest rates$ 4,529 $ 680 $ -$ 5,209 Outstanding with adjustable rates 390 9 - 399 Total Consumer 4,919 689 - 5,608 Dealer Finance Outstanding with fixed interest rates$ 42,798 $ 80,115 $ -$ 122,913 Outstanding with adjustable rates - - - - Total Dealer Finance 42,798 80,115
- 122,913
Total outstanding with fixed interest rates$ 71,354 $ 113,174 $ 3,923 $ 188,451 Total outstanding with adjustable interest rates$ 183,815 $ 193,045 $ 3,859 $ 380,719 Total$ 255,169 $ 306,219 $ 7,782 $ 569,170 Asset Quality Management evaluates the loan portfolio considering national and local economic trends, changes in the nature and volume of the portfolio, changes in underlying collateral values and trends in past due, nonperforming and criticized loans. During 2022, the Bank experienced strong overall growth in the loan portfolio with improvements in nonperforming and criticized loans. Loans past due 30-89 days and on accrual increased, while loans greater than 90 days and on accrual decreased. 31 Table of Contents
Nonperforming Loans and Past Due Loans
AtDecember 31, 2022 , the Company experienced a decrease of$3.2 million in nonperforming assets compared toDecember 31, 2021 . Past due loans on accrual increased from$4.0 million atDecember 31, 2021 to$6.1 million atDecember 31, 2022 . Of the$6.1 million total past due loans still accruing interest,$465 thousand or 0.06% of the total loans held for investment were loans past due 90 days or more atDecember 31, 2022 , compared to$643 thousand or 0.10% atDecember 31, 2021 . Approximately 83.91% of the nonperforming assets are secured by real estate and were in the process of collection. The Bank believes that adequate specific reserves have been established on impaired loans and continues to actively work with its customers to effect payment. As ofDecember 31, 2022 and 2021, the Company holds$0 of real estate acquired through foreclosure.
A summary of credit ratios for nonaccrual loans is as follows (dollars in thousands):
2022 2021
Allowance for loan losses $ 7,936 $ 7,748
Nonaccrual loans $ 2,224 $ 5,465
Nonperforming loans $ 2,262 $ 5,508
Total Loans $ 743,604 $ 662,421
Allowance for loan losses to Total Loans 1.07 % 1.17 %
Nonaccrual Loans to Total Loans 0.30 % 0.83 %
Allowance for loan losses to Nonaccrual loans 356.83 % 141.77 %
Net Charge-offs
For the year endedDecember 31, 2022 , net charge-offs of loans totaled$678 thousand or 0.09% of loans held for investment, compared to net loan recoveries of$94 thousand or (0.01%) for the year endedDecember 31, 2021 . Charge-offs occur primarily in the dealer finance segment of the portfolio. As stated in the most recently available Uniform Bank Performance Report, peer group loss averages were 0.04% in both 2022 and 2021. Allowance for Loan Losses AtDecember 31, 2022 , the allowance for loan losses was$7.9 million or 1.07% of total loans held for investment, compared to an allowance of$7.7 million or 1.17% of total loans atDecember 31, 2021 . Provision for Loan Losses The provision for loan losses totaled$866 thousand in 2022 compared to a recovery of provision of$2.8 million for 2021. The increased provision in 2022 reflected the$81.2 million growth in the loan portfolio and higher qualitative reserves due to the increase in prime rate over the course of the year and the potential for softening real estate collateral values. Management believes that the allowance for loan losses is sufficient to provide for the incurred losses in the loan portfolio. 32 Table of Contents
The following is a summary of the Allowance for loan losses by category at
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
2022 2021
Percentage of Percentage of
Loans in Each Loans in Each
Balance Category Balance Category
Construction/Land
Development $ 1,018 12.83 % $ 977 12.61 %
Farmland 570 7.18 % 448 5.78 %
Real Estate 1,388 17.49 % 1,162 15.00 %
Multi-Family 71 0.89 % 29 0.38 %
Commercial Real Estate 2,015 25.39 % 2,205 28.46 %
Home Equity - closed end 38 0.48 % 41 0.53 %
Home Equity - open end 445 5.61 % 407 5.25 %
Commercial & Industrial
- Non-Real Estate 450 5.67 % 288 3.72 %
Consumer 81 1.02 % 520 6.71 %
Dealer Finance 1,792 22.58 % 1,601 20.66 %
Credit Cards 68 0.86 % 70 0.90 %
Total $ 7,936 100.00 % $ 7,748 100.00 %
A summary of the activity in the allowance for loan losses follows (dollars in
thousands):
2022 2021Allowance, beginning of period$ 7,748 $ 10,475 Provision (Recovery) charged to expenses 866
(2,821 ) Charge-offs: Construction/land development - - Farmland - - Real Estate (17 ) - Multi-family - - Commercial Real Estate - - Home Equity - closed end - - Home Equity - open end (84 ) -
Commercial & Industrial -Non-Real Estate (46 )
(40 )
Consumer (153 ) (33 )
Dealer Finance (1,280 ) (1,038 )
Credit Cards (66 ) (54 )
Total charge-offs (1,646 ) (1,165 )
Recoveries:
Construction/land development - 307
Farmland - -
Real Estate - 76
Multi-family - -
Commercial Real Estate - 19
Home Equity - closed end - -
Home Equity - open end 130 13Commercial & Industrial -Non-Real Estate 49
37
Consumer 84 24
Dealer Finance 691 754
Credit Cards 14 29
Total recoveries 968 1,259
Net (charge-offs) recoveries (678 ) 94
Allowance, end of period $ 7,936 $ 7,748
Ratio of net charge-offs (recoveries) to loans held for
investment:
Construction/land development -% (0.05 )%
Farmland -% -%
Real Estate -% (0.01 )%
Multi-family -% - %
Commercial Real Estate -% - %
Home Equity - closed end -% - %
Home Equity - open end (0.01 )% - %Commercial & Industrial -Non-Real Estate -%
- %
Consumer 0.01 % - %
Dealer Finance 0.08 % 0.04 %
Credit Cards 0.01 % - %
Total 0.09 % (0.01 )%
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Table of Contents
Deposits
Core deposits are the Company's primary source of funding. Demand deposits, money market accounts, savings accounts, and time deposits provide a source of fee income and opportunities to build customer relationships.
The following table shows the composition of deposits as of
December 31, 2022 December 31, 2021
% of total % of total
Balance deposits Balance deposits
Noninterest-bearing demand $ 293,596 27.1 % $ 280,993 26.0 %
Interest Checking 176,677 16.3 % 191,969 17.8 %
Savings Accounts 493,912 45.6 % 483,476 44.8 %
Time Deposits 119,192 11.0 % 123,857 11.5 %
Total deposits $ 1,083,377 $ 1,080,295
As market rates and competition for deposits increased in 2022, total deposits
increased by $3.1 million . Noninterest-bearing demand deposits increased by
$12.6 million ; these are generally viewed as the most favorable form of low-cost
deposit for a financial institution. The Bank offers an attractive, competitive
rate on their money market accounts.
The average deposit balances and average rates paid for 2022 and 2021 were as follows (dollars in thousands):
December 31, 2022 December 31, 2021
Average Balance Rate Average Balance Rate
Noninterest-bearing $ 292,252 - $ 263,911 -
Interest-bearing:
Interest Checking $ 183,882 0.47 % $ 147,008 0.19 %
Savings Accounts 502,913 0.78 % 410,769 0.41 %
Time Deposits 121,585 0.79 % 129,760 1.05 %
Total interest-bearing
deposits 808,380 0.71 % 687,537 0.49 %
Total average deposits $ 1,100,632 0.64 % $ 951,448 0.35 %
The maturity distribution of time deposits of
2022 2021
Maturing in:
3 months or less $ - $ -
Over 3 months through 6 months 592 3,206
Over 6 months through 12 months 8,553 257
Over 12 months 3,523 8,910
$ 12,668 $ 12,373
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Table of Contents
Total uninsured deposits in excess of
Borrowings Short-term debt totaled$70.0 million atDecember 31, 2022 , and consisted ofFederal Home Loan Bank ("FHLB") advances which were used to fund loan growth. Long-term debt dropped from$21.8 million atDecember 31, 2021 to$6.9 million atDecember 31, 2022 due to the mid-year redemption of$5.0 million of its subordinated debt and maturity of a$10.0 million long-term FHLB advance. The balance of$6.9 million onDecember 31, 2022 , consists solely of the remaining subordinated debt. See Note 9 "Short-Term Debt" and Note 10 "Long-Term Debt" to the Consolidated Financial Statements for a discussion of the rates, terms, and conversion features on these advances. Stockholders' Equity Total Stockholders' Equity declined by$29.7 million to$70.8 million due to higher Accumulated Other Comprehensive Loss ("AOCL") resulting from the unrealized loss on the bond portfolio. This was partially offset by net income of$8.3 million and an annual pension adjustment to AOCL of$3.7 million . Excluding the change in AOCL, Stockholders' Equity increased in 2022 by$5.3 million . Market Risk Management
Market risk is the sensitivity of a financial institution's earnings or the
economic value of its capital to adverse changes in interest rates, exchange
rates, and equity prices. The Company's primary component of market risk is
interest rate volatility. Interest rate fluctuations impact the amount of
interest income and expense the Bank pays or receives on the majority of their
assets. Rapid changes in short-term interest rates may lead to volatility in net
interest income resulting in additional interest rate risk to the extent that
imbalances exist between the maturities or repricing of interest-bearing
liabilities and interest earning assets.
The Company manages interest rate risk through an asset and liability committee
("ALCO") composed of members of its Board of Directors and executive management.
The ALCO is responsible for monitoring and managing the Company's interest rate
risk and establishing policies to monitor and limit exposure to this risk. The
Company's Board of Directors reviews and approves the guidelines established by
ALCO.
Management uses simulation analysis to measure the sensitivity of net interest
income to changes in interest rates. The model calculates an earnings estimate
based on current and projected balances and rates. This method is subject to the
accuracy of the assumptions that underlie the process, but it provides an
additional analysis of the sensitivity of the earnings to changes in interest
rates to static gap analysis. Assumptions used in the model rates are derived
from historical trends, peer analysis, and management's outlook, and include
loans and deposit growth rates and projected yields and rates. All maturities,
calls, and prepayments in the securities portfolio are assumed to be reinvested
in like instruments. Mortgage loans and mortgage-backed securities prepayment
assumptions are based on industry estimates of prepayment speeds for portfolios
with similar coupon ranges and seasoning. Different interest rate scenarios and
yield curves are used to measure the sensitivity of earnings to changing
interest rates. Interest rates on different assets and liability accounts move
differently when the prime rate changes and is reflected in different rate
scenarios.
The following table represents interest rate sensitivity on the Company's net interest income using different rate scenarios:
Change in Prime Rate % Change in Net Interest Income
+ 300 basis points 17.8 %
+ 200 basis points 12.6 %
+ 100 basis points 6.6 %
- 100 basis points -7.6 %
Market value simulation is used to calculate the estimated fair value of assets
and liabilities over different interest rate environments. Market values are
calculated based on discounted cash flow analysis. The net market value is the
market value of all assets minus the market value of all liabilities. The change
in net market value over different rate environments is an indication of the
longer term repricing risk in the balance sheet. The same assumptions are used
in the market value simulation as in the earnings simulation.
35
Table of Contents
The following table reflects the change in net market value over different rate environments:
Change in Prime Rate % Change in Net Market Value (in thousands)
+ 300 basis points -$ 7,477 + 200 basis points -$ 5,992 + 100 basis points -$ 4,366 - 100 basis points $ 948 Prudent balance sheet management requires processes that monitor and protect the Company against unanticipated or significant changes in the level of market interest rates. Net interest income stability should be maintained in changing rate environments by ensuring that interest rate risk is kept to an acceptable level. The ability to reprice our interest-sensitive assets and liabilities over various time intervals is of critical importance. The Company uses a variety of traditional and on-balance-sheet tools to manage our interest rate risk. Gap analysis, which monitors the "gap" between interest-sensitive assets and liabilities, is one such tool. In addition, we use simulation modeling to forecast future balance sheet and income statement behavior. By studying the effects on net interest income of rising, stable, and falling interest rate scenarios, the Company can position itself to take advantage of anticipated interest rate movement, and protect us from unanticipated rate movements, by understanding the dynamic nature of our balance sheet components. An asset-sensitive balance sheet structure implies that assets, such as loans and securities, will reprice faster than liabilities; consequently, net interest income should be positively affected in an increasing interest rate environment. Conversely, a liability-sensitive balance sheet structure implies that liabilities, such as deposits, will reprice faster than assets; consequently, net interest income should be positively affected in a decreasing interest rate environment. AtDecember 31, 2022 , the Company had$399.9 million in assets repricing than liabilities subject to repricing in one year. This is a one-day position that is continually changing and is not necessarily indicative of
our position at any other time. Liquidity Liquidity represents an institution's ability to meet present and future financial obligations through either the sale or maturity of existing assets or the acquisition of additional funds through liability management. Liquid assets include cash, interest-bearing deposits with banks, money market investments, federal funds sold, LHFS, and securities and loans maturing or re-pricing within one year. Additional sources of liquidity available to the Company include its capacity to borrow additional funds when necessary through federal funds lines with several correspondent banks, a line of credit with the FHLB, the purchase of brokered certificates of deposit, corporate line of credit with a large correspondent bank, and debt and capital issuances. Management believes the Company's current overall liquidity is sufficient to satisfy its depositors' requirements and to meet its customers' credit needs. The Company closely monitors changes in the industry and market conditions that may impact the Company's liquidity. Beginning in 2020 and in much of 2021, the Company saw increased liquidity due to higher customer deposit balances related to government stimulus programs in response to the COVID-19 pandemic; however, in 2022, as expected, the Company saw these elevated levels of customer deposits begin to decline. The Company may use other means of borrowings or other liquidity sources to fund any liquidity needs based on declines in deposit balances. The Company is also closely tracking the potential impacts on the Company's liquidity of declines in fair value of the Company's securities portfolio due to rising market interest rates. As ofDecember 31, 2022 , liquid assets totaled$54.2 million or 4.3% of total assets, and liquid earning assets totaled$36.1 million or 2.9% of total earning assets. Asset liquidity is also provided by managing loan and securities maturities and cash flows. As ofDecember 31, 2022 , approximately$36.8 million or 9.11% of total securities are scheduled to be paid down within one year based on contractual terms. The Bank has a Funding and Liquidity Risk Management policy that limits the amount of short-term and long-term alternative funding to no more than 25% of total assets.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not Applicable
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