CALIFORNIA BANCORP The following discussion and analysis of our financial condition and results of operations should be read together with our Consolidated Financial Statements and accompanying notes presented elsewhere in this Report. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those set forth under Item 1A "Risk Factors" and elsewhere in this Report. Please see the "Forward Looking Information" immediately preceding Part I of this Report.
Critical Accounting Policies
Our consolidated financial statements are prepared in accordance with GAAP and with general practices within the financial services industry. Application of these principles requires management to make complex and subjective estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under current circumstances. These assumptions form the basis for our judgments about the carrying values of assets and liabilities that are not readily available from independent, objective sources. We evaluate our estimates on an ongoing basis. Use of alternative assumptions may have resulted in significantly different estimates. Actual results may differ from these estimates.
Allowance for Loan Losses
Credit risk is inherent in the business of extending loans to borrowers. Due to this risk, the Company must maintain an allowance for loan losses that management believes is adequate to absorb estimated probable losses
-37---------------------------------------------------------------------------------
Table of Contents
on existing loans that may become uncollectible. This reserve is established through a provision for loan losses that is recorded to expense. Loans are charged against the reserve when management believes with certainty that the loan balance will not be collectible. Any cash received on previously charged-off amounts is recorded as a recovery to the reserve. The Company formally re-evaluates and establishes the appropriate level of the allowance for loan losses on a quarterly basis. The allowance for loan losses consists of specific and general reserves. The specific reserve relates to loans that are individually classified as impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Loans for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings (TDRs) and also classified as impaired. When a loan is considered to be impaired, the amount of impairment is measured based on the fair value of the collateral (less costs to sell) if the loan is collateral dependent, or on the present value of expected future cash flows or values that are observable on the secondary market if the loan is not collateral dependent. The general reserve relates to all non-impaired loans. In determining the general reserve, management applies quantitative and qualitative factors to each segment of the loan portfolio. Quantitative factors primarily include the Company's historical delinquency and loss experience. For segments of the loan portfolio where the Company has no significant prior loss experience, management uses quantifiable observable industry data to determine the amount of potential loss to include in the reserve. Qualitative factors supplement the quantitative factors applied to each segment of the loan portfolio and include: levels of and trends in delinquencies and impaired loans (including TDRs); levels of and trends in charge-offs and recoveries; migration of loans to the classification of special mention, substandard, or doubtful; trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures, and practices; experience, ability, and depth of lending management and other relevant staff; national and local economic trends and conditions; industry conditions; and effects of changes in credit concentration. While management uses the best information available to make its evaluation, future adjustments to the allowance for loan losses may be necessary if there are significant changes in economic or other conditions that affect the current risk profile of the loan portfolio.
Other Significant Accounting Policies
Our most significant accounting policies are described in Note 1 to our audited financial statements for the year endedDecember 31, 2022 , included elsewhere in this Report.
Non-GAAP Financial Measures
Some of the financial measures discussed in this Report are considered non-GAAP financial measures. In accordance withSEC rules, we classify a financial measure as being a non-GAAP financial measure if that financial measure excludes or includes amounts, or is subject to adjustments that have the effect of excluding or including amounts, from the most directly comparable measure calculated and presented in accordance with generally accepted accounting principles. We believe that non-GAAP financial measures provide useful information to management and investors that is supplementary to our statements of financial condition, results of income and cash flows computed in accordance with GAAP. However, we acknowledge that our non-GAAP financial measures have limitations. As such, you should not view this disclosure as a substitute for results determined in accordance with GAAP, and it is not necessarily comparable to non-GAAP financial measures that other banking companies use. Other banking companies may use names similar to those we use for the non-GAAP financial measures we disclose, but may calculate them differently. You should understand how we and other companies each calculate their non-GAAP financial measures when making comparisons. -38-
--------------------------------------------------------------------------------
Table of Contents
The following table reflects the details of the non-GAAP financial measures the Company has included in this Report.
December 31 ,December 31 , (Dollars in thousands) 2022
2021
Allowance for loan loss as a percentage of outstanding loans, excluding PPP loans: Allowance for loan loss$ 17,005 $ 14,081 Gross loans$ 1,593,421 $ 1,376,649 Less: PPP loans 2,358 72,527 Gross loans, net of PPP loans$ 1,591,063 $ 1,304,122 Allowance for loan loss as a percentage of outstanding loans, excluding PPP loans 1.07 % 1.08 % Results of Operations: Overview For the years endedDecember 31, 2022 and 2021, net income was$21.1 million and$13.4 million , respectively. The increase of$7.7 million , or 58%, was primarily attributable to an increase in net interest income of 16.2 million and increase in non-interest income of$3.2 million , partially offset by an increase in the provision for credit losses of$3.8 million , an increase in non-interest expense of$4.2 million and an increase in income tax expense of$3.7 million .
Net Interest Income and Margin
Net interest income, the difference between interest earned on loans and investments and interest paid on deposits and borrowings is the principal component of the Company's earnings. Net interest income is affected by changes in the nature and volume of earning assets and interest-bearing liabilities held during the quarter, the rates earned on such assets and the rates paid on interest bearing liabilities. Net interest income for the year endedDecember 31, 2022 , was$70.9 million , an increase of$16.2 million , or 30% over$54.7 million for the year endedDecember 31, 2021 . The increase in net interest income was primarily attributable to an increase in interest income as the result of a more favorable mix of earning assets combined with higher yields on those assets and the acceleration of an unamortized discount totaling$1.4 million related to the repayment of previously purchased loans, partially offset by a$3.8 million reduction in the amortization of net fees received on Paycheck Protection Program ("PPP") loans funded under the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"). For the year endedDecember 31, 2022 average total interest-earning assets were$1.87 billion compared to$1.89 billion for the year endedDecember 31, 2021 . The yield on average earning assets increased 116 basis points to 4.40% for the year endedDecember 31, 2022 from 3.24% for the year endedDecember 31, 2021 . The yield on total average gross loans in the year endedDecember 31, 2022 was 4.96%, representing an increase of 67 basis points compared to 4.29% for the same period one year earlier. For the year endedDecember 31, 2022 , the yield on average investment securities increased 6 basis points to 2.90% from 2.84% for the year endedDecember 31, 2021 . For the year endedDecember 31, 2022 , average loans increased$127.0 million from the year endedDecember 31, 2021 , while average deposit balances decreased$14.9 million for the same period. As a result, the average loan to deposit ratio for the year endedDecember 31, 2022 was 90.69% compared to 82.25% for the same period in the prior year.
Of the
-39---------------------------------------------------------------------------------
Table of Contents
result of organic growth. These increases were primarily offset by a decrease in
lower yielding average SBA loans of
Of the$14.9 million decrease in average total deposit balances year over year,$54.2 million was attributable to a decrease in money market and savings accounts, offset by an increase in total demand deposits of$8.9 million and an increase in time deposits of$30.4 million . The cost of interest-bearing deposits was 0.87% for the year endedDecember 31, 2022 compared to 0.48% for the same period one year earlier. In addition, the overall cost of average total deposit balances increased by 20 basis points to 0.47% for the year endedDecember 31, 2022 compared to 0.27% for the year endedDecember 31, 2021 .
As a result, the net interest margin increased by 90 basis points to 3.79% for
the year ended
The following table shows the composition of average earning assets and average funding sources, average yields and rates, and the net interest margin for the years endedDecember 31, 2022 and 2021. Twelve
months ended
2022 2021
Yields Interest Yields Interest
Average or Income/ Average or Income/
(Dollars in thousands) Balance Rates Expense Balance Rates Expense
ASSETS
Interest earning assets:
Loans (1) $ 1,495,981 4.96 % $ 74,240 $ 1,368,960 4.29 % $ 58,677
Federal funds sold 220,084 1.60 % 3,519 450,898 0.13 % 587
Investment securities 155,748 2.90 % 4,519 71,376 2.84 % 2,029
Total interest earning assets 1,871,813 4.40 % 82,278 1,891,234 3.24 % 61,293
Noninterest-earning assets:
Cash and due from banks 19,838 17,642
All other assets (2) 61,517 60,008
TOTAL $ 1,953,168 $ 1,968,884
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Deposits:
Demand $ 40,054 0.08 % 31 $ 35,623 0.11 % $ 38
Money market and savings 651,429 0.70 % 4,544 705,621 0.51 % 3,627
Time 205,681 1.57 % 3,235 175,240 0.43 % 753
Other 121,464 2.88 % 3,496 139,011 1.54 % 2,145
Total interest-bearing liabilities 1,018,628 1.11 % 11,306 1,055,495 0.62 % 6,563
Noninterest-bearing liabilities: Demand deposits 752,348 747,868 Accrued expenses and other liabilities 21,256 21,363 Shareholders' equity 160,936 144,158 TOTAL$ 1,953,168 $ 1,968,884 Net interest income and margin (3) 3.79 %$ 70,972 2.89 %$ 54,730
(1) Nonperforming loans are included in average loan balances. No adjustment has
been made for these loans in the calculation of yields. Interest income on
loans includes amortization of net deferred loan fees of
$3.4 million , respectively. -40-
--------------------------------------------------------------------------------
Table of Contents
(2) Other noninterest-earning assets includes the allowance for loan losses of
(3) Net interest margin is net interest income divided by total interest-earning
assets.
The following table shows the effect of the interest differential of volume and rate changes for the years endedDecember 31, 2022 and 2021. The change in interest due to both rate and volume has been allocated in proportion to the relationship of absolute dollar amounts of change in each. For the Years Ended December 31, 2022 vs. 2021 Increase (Decrease) Due to Change in: Average Average Net (Dollars in thousands) Volume Rate Change Interest income: Loans$ 6,304 $ 9,259 $ 15,563 Federal funds sold (3,691 ) 6,623 2,932 Investment securities 2,448 42 2,490 Interest expense: Deposits Demand 3 (10 ) (7 ) Money market and savings (378 ) 1,295 917 Time 479 2,003 2,482 Borrowings (505 ) 1,856 1,351 Net interest income$ 5,462 $ 10,780 $ 16,242 Interest Income Interest income increased by$21.0 million in for the year endedDecember 31, 2022 compared to the same period of 2021 as a result of a more favorable mix of average earning assets combined with a rising rate environment. The increase in interest earned on our loan portfolio of$15.6 million for year endedDecember 31, 2022 compared to the same period of 2021 was comprised of$6.3 million attributable to an approximate$127.0 million increase in average loans outstanding and$9.3 million attributable to the increase in the yield earned on loans to 4.96% from 4.29%.
Interest Expense
Interest expense increased by$4.7 million during the year endedDecember 31, 2022 compared to the same period of 2021, primarily due to a rising rate environment. The average rate paid on interest-bearing liabilities for the year endedDecember 31, 2022 compared to the same period one year earlier increased 49 basis points to 1.11% from 0.62%.
Provision for Loan Losses
We made provisions for loan losses of$3.8 million and$4,000 for the years endedDecember 31, 2022 and 2021, respectively. The increase in the provision for loan losses was primarily attributable to the growth of the loan portfolio. The Company recorded net loan charge-offs of$851,000 in the year endedDecember 31, 2022 compared to net loan charge-offs of$34,000 during the same period of 2021. The allowance for loan loss as a percent of outstanding loans was 1.07% atDecember 31, 2022 and 1.02% atDecember 31, 2021 . The reserve percentage excluding PPP loans, which are guaranteed by the SBA, was 1.07% atDecember 31, 2022 compared to 1.08% atDecember 31, 2021 (see discussion in "Management's Discussion and Analysis of Financial Condition and Results of Operations - Non-GAAP Financial Measures"). See further discussion of the Provision for Loan Losses and Allowance for Loan losses in "Financial Condition - Allowance for Loan Losses". -41-
--------------------------------------------------------------------------------
Table of Contents
Non-interest Income
The following table reflects the major components of the Company's non-interest
income for the years ended
For the Years Ended
December 31, Increase (Decrease)
(Dollars in thousands) 2022 2021 Amount Percent
Service charges and other fees
52 % Gain on sale of SBA loans 1,393 - 1,393 100 % Earnings on BOLI 665 650 15 2 % Other 403 301 102 34 % Total non-interest income$ 7,374 $ 4,173 $ 3,201 77 % Non-interest income increased by$3.2 million or 77% for the year endedDecember 31, 2022 compared to the same period of 2021. The increase was primarily attributable to$1.7 million of increased service charges and loan related fees and a gain of$1.4 million recognized on the sale of a portion of our solar loan portfolio. Non-interest Expense
The following table reflects the major components of the Company's non-interest
expense for the years ended
For the Years Ended
December 31, Increase (Decrease)
(Dollars in thousands) 2022 2021 Amount Percent
Salaries and benefits $ 29,097 $ 26,031 $ 3,066 12 %
Premises and equipment 5,093 5,098 (5 ) 0 %
Professional fees 2,179 1,986 193 10 %
Data processing 2,647 1,934 713 37 %
Other 5,649 5,388 261 5 %
Total non-interest expense
10 %
During the year endedDecember 31, 2022 , non-interest expenses increased by$4.2 million or 10% to$44.6 million compared to$40.4 million in the same period of 2021. Excluding the capitalized loan origination costs that are included in salaries and benefits, non-interest expense was$48.8 million for the twelve months endedDecember 31, 2022 and$46.0 million for the same period in 2021, representing an increase of$2.8 million , or 6%. Salaries and benefits for the twelve months endedDecember 31, 2022 were$29.1 million , representing an increase of$3.1 million , or 12%, compared to$26.0 million for the twelve months endedDecember 31, 2021 . The increase in salaries and benefits expense was primarily due to investments to support the continued growth of the business combined with a reduction in capitalized loan origination costs.
For the years ended
Provision for Income Taxes
Income tax expense was$8.8 million for the year endedDecember 31, 2022 which compared to$5.1 million for the same period one year earlier. The effective tax rates for those time periods were 29.4% and 27.9%, respectively. -42-
--------------------------------------------------------------------------------
Table of Contents Financial Condition: Overview Total assets of the Company were$2.04 billion as ofDecember 31, 2022 compared to$2.01 billion as ofDecember 31, 2021 . The increase in total assets was primarily due to strong loan growth, partially offset by decreased liquidity resulting from the outflow of deposits related to the forgiveness of PPP loans along with the payoff of other borrowings.
Loan Portfolio
Our loan portfolio consists almost entirely of loans to customers who have a full banking relationship with us. Gross loan balances increased by$216.8 million fromDecember 31, 2021 toDecember 31, 2022 , primarily due to organic growth in the commercial and industrial and real estate other loan portfolios, partially offset by a reduction in SBA loans due to PPP loan forgiveness and a reduction in the other loan portfolio as a result of the Company selling a portion of its residential solar loan portfolio. The loan portfolio atDecember 31, 2022 was comprised of approximately 40% of commercial and industrial loans compared to 34% atDecember 31, 2021 . In addition, commercial real estate loans comprised 57% of our loans atDecember 31, 2022 compared to 54% atDecember 31, 2021 . A substantial percentage of the commercial real estate loans are considered owner-occupied loans. Our loans are generated by our relationship managers and executives. Our senior management is actively involved in the lending, underwriting, and collateral valuation processes. Higher dollar loans or loan commitments are also approved through a bank loan committee comprised of executives and outside board members.
The following table reflects the composition of the Company's loan portfolio and
their percentage distribution at
December 31, December 31,
(Dollars in thousands) 2022 2021
Commercial and industrial 634,535 474,281
Real estate-other 848,241 697,212
Real estate-construction and land 63,730 43,194
SBA 7,220 81,403
Other 39,695 80,559
Total loans, gross 1,593,421 1,376,649
Deferred loan origination costs, net 2,040 1,688
Allowance for loan losses (17,005 ) (14,081 )
Total loans, net 1,578,456 1,364,256
Commercial and industrial 40 % 34 %
Real estate-other 53 % 51 %
Real estate-construction and land 4 % 3 %
SBA 1 % 6 %
Other 2 % 6 %
Total loans, gross 100 % 100 %
The following table shows the maturity distribution for total loans outstanding
as of December 31, 2022 . The maturity distribution is grouped by remaining
scheduled principal payments that are due within one year, after one but within
five years, after five years but within fifteen years, or after fifteen years.
The principal balances of loans are indicated by both fixed and variable rate
categories.
-43-
--------------------------------------------------------------------------------
Table of Contents
Over One Over Five
Due in One Year But Years But
Year Or Less Than Less Than Over
(Dollars in thousands) Less Five Years Fifteen Years Fifteen Years Total
Commercial and industrial $ 203,692 $ 293,633 $ 137,210 $ - $ 634,535
Real estate-other 37,064 372,114 427,604 11,459 848,241
Real estate-construction and land 44,748 11,294 7,688 - 63,730
SBA 966 2,350 3,077 827 7,220
Other 1,298 2,142 36,255 - 39,695
Total loans, gross $ 287,768 $ 681,533 $ 611,834 $ 12,286 $ 1,593,421
Loans With
Fixed Variable
(Dollars in thousands) Rates (1) Rates Total
Commercial and industrial $ 187,873 $ 446,662 $ 634,535
Real estate-other 557,433 290,808 848,241
Real estate-construction and land 6,000 57,730 63,730
SBA 2,358 4,862 7,220
Other 39,496 199 39,695
Total loans, gross $ 793,160 $ 800,261 $ 1,593,421 (1) Excludes variable rate loans on floors
Nonperforming Assets
Nonperforming assets are comprised of loans on nonaccrual status, loans 90 days or more past due and still accruing interest, and other real estate owned. We had no loans 90 days or more past due and still accruing interest and no other real estate owned atDecember 31, 2022 . A loan is placed on nonaccrual status if there is concern that principal and interest may not be fully collected or if the loan has been past due for a period of 90 days or more, unless the obligation is both well secured and in process of legal collection. When loans are placed on nonaccrual status, all interest previously accrued but not collected is reversed against current period interest income. Income on nonaccrual loans is subsequently recognized only to the extent that cash is received and the loan's principal balance is deemed collectible. Loans are returned to accrual status when they are brought current with respect to principal and interest payments and future payments are reasonably assured. Loans in which the borrower is encountering financial difficulties and we have modified the terms of the original loan are evaluated for impairment and classified as TDR loans.
The following table presents information regarding the Company's nonperforming
and restructured loans at
December 31, December 31,
(Dollars in thousands) 2022 2021
Nonaccrual loans $ 1,250 $ 232
Loans over 90 days past due and still accruing - -
Total nonperforming loans 1,250 232
Foreclosed assets - -
Total nonperforming assets $ 1,250 $ 232
Performing TDR's $ - $ -
Nonperforming loans / gross loans 0.08 % 0.02 %
Allowance for loan losses / nonperforming loans 1360.40 % 6069.40 %
-44-
--------------------------------------------------------------------------------
Table of Contents
Allowance for Loan Losses
Our allowance for loan losses is maintained at a level management believes is adequate to account for probable incurred credit losses in the loan portfolio as of the reporting date. We determine the allowance based on a quarterly evaluation of risk. That evaluation gives consideration to the nature of the loan portfolio, historical loss experience, known and inherent risks in the portfolio, the estimated value of any underlying collateral, adverse situations that may affect a borrower's ability to repay, current economic and environmental conditions and risk assessments assigned to each loan as a result of our ongoing reviews of the loan portfolio. This process involves a considerable degree of judgment and subjectivity. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance. Such agencies may require the Bank to recognize additions to the allowance based on judgments different from those of management. Our allowance is established through charges to the provision for loan losses. Loans, or portions of loans, deemed to be uncollectible are charged against the allowance. Recoveries of previously charged-off amounts are credited to our allowance for loan losses. The allowance is decreased by the reversal of prior provisions when the total allowance balance is deemed excessive for the risks inherent in the portfolio. The allowance for loan losses balance is neither indicative of the specific amounts of future charge-offs that may occur, nor is it an indicator of any future loss trends.
The following table provides information on the activity within the allowance for loan losses as of and for the periods indicated.
Commercial Real Estate
and Real Estate Construction
(Dollars in thousands) Industrial Other and Land SBA Other Total
Year ended
December 31, 2022
Beginning balance $ 8,552 $ 4,524 $ 681
2,717 798 203 25 32 3,775
Charge-offs (650 ) - - (202 ) - (852 )
Recoveries 1 - - - - 1
Ending balance $ 10,620 $ 5,322 $ 884 $ 132 $ 47 $ 17,005
Net recoveries (charge-offs) gross loans -0.10 % 0.00 % 0.00 % -2.80 % 0.00 % -0.05 %
Year ended
December 31, 2021
Beginning balance $ 8,923 $ 3,877 $ 681 $ 604 $ 26 $ 14,111
Provision for loan losses (615 ) 647 - (17 ) (11 ) 4
Charge-offs - - - (278 ) - (278 )
Recoveries 244 - - - - 244
Ending balance $ 8,552 $ 4,524 $ 681 $ 309 $ 15 $ 14,081
Net recoveries (charge-offs) gross loans 0.05 % 0.00 % 0.00 % -0.34 % 0.00 % 0.00 %
The provision for loan losses of $3.8 million for the year ended December 31,
2022 was primarily the result of growth in our core loan portfolio along with
continued qualitative assessments of the general macroeconomic environment.
Investment Portfolio
Our investment portfolio is comprised of debt securities. We use two
classifications for our investment portfolio: available-for-sale (AFS) and
held-to-maturity (HTM). Securities that we have the positive intent and ability
to hold to maturity are classified as "held-to-maturity securities" and reported
at amortized cost. Securities not classified as held-to-maturity securities are
classified as "investment securities available-for-sale" and reported at fair
value.
-45-
--------------------------------------------------------------------------------
Table of Contents
During the first quarter of 2022, the Company re-designated certain securities previously classified as available for sale to the held to maturity classification. The securities re-designated consisted of mortgage backed securities and government agencies with a total carrying value of$49.9 million atDecember 31, 2021 . At the time of re-designation the securities included$281,000 of pretax unrealized losses in other comprehensive income which is being amortized over the remaining life of the securities in a manner consistent with the amortization of a premium or discount. Our investments provide a source of liquidity as they can be pledged to support borrowed funds or can be liquidated to generate cash proceeds. The investment portfolio is also a significant resource to us in managing interest rate risk, as the maturity and interest rate characteristics of this asset class can be readily changed to match changes in the loan and deposit portfolios. The majority of our available-for-sale investment portfolio is comprised of mortgage-backed securities (MBSs) that are either issued or guaranteed byU.S. government agencies or government-sponsored enterprises (GSEs) and corporate bonds.
The following table reflects the amortized cost and fair market values for the
total portfolio for each of the categories of investments in our securities
portfolio as of
Gross Gross
Unrealized / Unrealized / Estimated
Amortized Unrecognized Unrecognized Fair
(Dollars in thousands) Cost Gains Losses Value
At December 31, 2022 :
Mortgage backed securities $ 18,629 $ 26 $ (897 ) $ 17,758
Government agencies 29,809 - (1,043 ) 28,766
Corporate bonds 430 58 - 488
Total available for sale securities
$ (1,940 ) $ 47,012 Mortgage backed securities$ 61,363 $ -$ (7,647 ) $ 53,716 Government agencies 3,083 - (627 ) 2,456 Corporate bonds 44,420 30 (3,739 ) 40,711
Total held to maturity securities
$ (12,013 ) $ 96,883 AtDecember 31, 2021 : Mortgage backed securities$ 29,943 $ 325 $ (320 )$ 29,948 Government agencies 3,093 - (100 ) 2,993 Corporate bonds 41,725 694 (468 ) 41,951
Total available for sale securities
$ (888 )$ 74,892 Mortgage backed securities$ 22,772 $ - $ (140 )$ 22,632 Corporate bonds 5,614 - (30 ) 5,584
Total held to maturity securities
$ (170 )$ 28,216 Deposits
Our deposits are generated through core customer relationships, related predominantly to business relationships. Many of our business customers maintain high levels of liquid balances in their demand deposit accounts and use the Bank's treasury management services.
AtDecember 31, 2022 , approximately 45% of our deposits were in noninterest-bearing demand deposits. The balance of our deposits atDecember 31, 2022 were held in interest-bearing demand, savings and money market accounts and time deposits. Approximately 40% of total deposits were held in interest-bearing demand, savings and money market deposit accounts atDecember 31, 2022 , which provide our customers with interest and liquidity. Time deposits comprised the remaining 15% of our deposits atDecember 31, 2022 . -46-
--------------------------------------------------------------------------------
Table of Contents
Information concerning average balances and rates paid on deposits by deposit type for the past two fiscal years is contained in the Distribution, Yield and Rate Analysis of Net Income table located in the previous section titled "Results of Operations-Net Interest Income and Net Interest Margin".
The following table provides a comparative distribution of our deposits by outstanding balance as well as by percentage of total deposits at the dates indicated.
(Dollars in thousands) Balance % of Total
At
45 %
Demand interest-bearing 37,815 2 %
Money market and savings 671,016 38 %
Time 271,238 15 %
Total deposits $ 1,791,740 100 %
At December 31, 2021 :
Demand noninterest-bearing $ 771,205 46 %
Demand interest-bearing 37,250 2 %
Money market and savings 717,480 43 %
Time 154,203 9 %
Total deposits $ 1,680,138 100 %
Liquidity
Our primary source of funding is deposits from our core banking relationships.
The majority of the Bank's deposits are transaction accounts or money market
accounts that are payable on demand. A small number of customers represent a
large portion of the Bank's deposits, as evidenced by the fact that
approximately 17% of deposits were represented by the 10 largest depositors as
of December 31, 2022 . We strive to manage our liquidity in a manner that enables
us to meet expected and unexpected liquidity needs under both normal and adverse
conditions. The Bank maintains significant on-balance sheet and off-balance
liquidity sources, including a marketable securities portfolio and borrowing
capacity through various secured and unsecured sources.
Interest Rate Risk Management
We measure our interest rate sensitivity through the use of a simulation model. The model incorporates the contractual cash flows and re-pricing characteristics from each financial instrument, as well as certain management assumptions. The model also captures the estimated impacts of optionality and duration and their expected change due to changes in interest rates and the shape of the yield curve. We manage our interest rate risk through established policies and procedures. We measure both the potential short term change in earnings and the long term change in market value of equity on a quarterly basis. Both measurements use immediate rate shocks that assume parallel shifts in interest rates up and down the yield curve in 100 basis point increments. There are eight scenarios comprised of rate changes up or down to 400 basis points. We have established policy thresholds for each of these eight scenarios. In the current interest rate environment, however, we do not consider a decrease in interest rates that is greater than 25 basis points. The impact on earnings for one year and the change in market value of equity are limited to a change of no more than (7.5)% for rate changes of 100 basis points, no more than (15.0)% for changes of 200 basis points, no more than (20.0)% for rate changes of 300 basis points, and no more than (25.0)% for rate change of 400 basis points. The objective of these various simulation scenarios is to optimize the risk/reward equation for our future earnings and capital. Based upon the results of these various simulations and evaluations, we are positioned to be moderately asset sensitive, with earnings increasing in a rising rate environment. The following table sets forth the estimated changes on the Company's annual net interest income that would result from the designated instantaneous parallel shift in interest rates noted, as ofDecember 31, 2022 . -47-
--------------------------------------------------------------------------------
Table of Contents
Estimated Percent
Net Interest Change
(Dollars in thousands) Income From Actual
Change in interest rates (basis points):
+300 $ 96,816 2.7 %
+200 $ 96,164 2.0 %
+100 $ 95,194 0.9 %
-100 $ 93,257 -1.1 %
-200 $ 92,088 -2.4 %
Capital Resources
We are subject to various regulatory capital requirements administered by
federal and state banking regulators. Our capital management consists of
providing equity to support our current operations and future growth. Failure to
meet minimum regulatory capital requirements may result in mandatory and
possible additional discretionary actions by regulators that, if undertaken,
could have a direct material effect on our financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
we must meet specific capital guidelines that involve quantitative measures of
our assets, liabilities and off-balance sheet items as calculated under
regulatory accounting policies. As of December 31, 2022 and 2021, we were in
compliance with all applicable regulatory capital requirements, including the
capital conservation buffer, and the Bank's capital ratios exceeded the minimums
necessary to be considered ''well-capitalized'' for purposes of the FDIC's
prompt corrective action regulations. At December 31, 2022 , the capital
conservation buffer was 3.40%.
At December 31, 2022 , the Bank had a Tier 1 risk based capital ratio of 10.54%,
a total capital to risk-weighted assets ratio of 11.40%, and a leverage ratio of
10.23%. At December 31, 2021 , the Bank had a Tier 1 risk based capital ratio of
11.38%, a total capital to risk-weighted assets ratio of 12.25%, and a leverage
ratio of 9.51%.
© Edgar Online, source
