This section presents management's perspective on the financial condition and results of operations ofInvestar Holding Corporation (the "Company," "we," "our," or "us") and its wholly-owned subsidiary,Investar Bank , National Association (the "Bank"). The following discussion and analysis should be read in conjunction with the Company's consolidated financial statements and related notes and other supplemental information included herein. Certain risks, uncertainties and other factors, including those set forth under Item 1A. Risk Factors in Part I, and elsewhere in this Annual Report on Form 10-K, may cause actual results to differ materially from those projected results discussed in the forward-looking statement appearing in this discussion and analysis.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This annual report on Form 10-K, both in Management's Discussion and Analysis of Financial Condition and Results of Operations, and elsewhere, contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These forward-looking statements include statements relating to our projected growth, anticipated future financial performance, changes in our allowance for loan or credit losses including due to the adoption of ASU 2016-13, anticipated future credit quality and our potential ability to achieve performance and strategic goals, as well as statements relating to the anticipated effects of these factors on our business, financial condition and results of operations. These statements can typically be identified through the use of words or phrases such as "may," "should," "could," "predict," "potential," "believe," "think," "will likely result," "expect," "continue," "will," "anticipate," "seek," "estimate," "intend," "plan," "projection," "would" and "outlook," or the negative version of those words or other comparable words or phrases of a future or forward-looking nature. Our forward-looking statements contained herein are based on assumptions and estimates that management believes to be reasonable in light of the information available at this time. However, many of these statements are inherently uncertain and beyond our control and could be affected by many factors. Factors that could have a material effect on our business, financial condition, results of operations, cash flows and future growth prospects can be found in Item 1A. Risk Factors. These factors include, but are not limited to, the following, any one or more of which could materially affect the outcome of future events:
• the significant risks and uncertainties for our business, results of operations
and financial condition, as well as our regulatory capital and liquidity ratios
and other regulatory requirements caused by business and economic conditions
generally and in the financial services industry in particular, whether
nationally, regionally or in the markets in which we operate, including risks
and uncertainties caused by the ongoing COVID-19 pandemic, potential continued
higher inflation and interest rates, supply and labor constraints, the war in
the statutory debt limit;
• our ability to achieve organic loan and deposit growth, and the composition of
that growth;
• changes (or the lack of changes) in interest rates, yield curves and interest
rate spread relationships that affect our loan and deposit pricing, including
potential continued increases in interest rates in 2023;
our ability to identify and enter into agreements to combine with attractive • acquisition partners, finance acquisitions, complete acquisitions after
definitive agreements are entered into, and successfully integrate and grow
acquired operations;
the estimated 20% to 30% increase in our allowance for loan losses in the first
quarter of 2023 and corresponding decrease in retained earnings of the
• after-tax amount, resulting from our adoption on
2016-13, and inaccuracy of the assumptions and estimates we make in
establishing reserves for credit losses and other estimates;
changes in the quality or composition of our loan portfolio, including adverse • developments in borrower industries or in the repayment ability of individual
borrowers;
changes in the quality and composition of, and changes in unrealized losses in, • our investment portfolio, including whether we may have to sell securities
before their recovery of amortized cost basis and realize losses;
• the extent of continuing client demand for the high level of personalized
service that is a key element of our banking approach as well as our ability to
execute our strategy generally;
• our dependence on our management team, and our ability to attract and retain
qualified personnel;
cessation of the one-week and two-month
financial products and contracts, including, but not limited to, hedging
products, debt obligations, investments and loans;
• the concentration of our business within our geographic areas of operation in
Louisiana ,Texas andAlabama ; 29
--------------------------------------------------------------------------------
Table of Contents
• concentration of credit exposure;
• any deterioration in asset quality and higher loan charge-offs, and the time
and effort necessary to resolve problem assets;
• a reduction in liquidity, including as a result of a reduction in the amount of
deposits we hold or other sources of liquidity; • ongoing disruptions in the oil and gas industry due to the significant
fluctuations in the price of oil and natural gas; • data processing system failures and errors; • cyberattacks and other security breaches;
• potential impairment of our goodwill and other intangible assets;
• our potential growth, including our entrance or expansion into new markets, and
the need for sufficient capital to support that growth;
• the impact of litigation and other legal proceedings to which we become
subject;
• competitive pressures in the commercial finance, retail banking, mortgage
lending and consumer finance industries, as well as the financial resources of,
and products offered by, competitors;
• the impact of changes in laws and regulations applicable to us, including
banking, securities and tax laws and regulations and accounting standards, as
well as changes in the interpretation of such laws and regulations by our
regulators;
• changes in the scope and costs of
• governmental monetary and fiscal policies, including the potential for the
2023;
• hurricanes, tropical storms, tropical depressions, floods, winter storms,
tornadoes, and other adverse weather events, all of which have affected our
market areas from time to time; other natural disasters; oil spills and other
man-made disasters; acts of terrorism, an outbreak or intensifying of
hostilities including the war in
calamities, acts of God and other matters beyond our control; and
• other circumstances, many of which are beyond our control.
The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements included herein. If one or more events related to these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from what we anticipate. Accordingly, you should not place undue reliance on any such forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made, and we do not undertake any obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise. New factors emerge from time to time, and it is not possible for us to predict which will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. We qualify all of our forward-looking statements by these cautionary statements. 30
--------------------------------------------------------------------------------
Table of Contents Overview Through our wholly-owned subsidiaryInvestar Bank , National Association, we provide full banking services, excluding trust services, tailored primarily to meet the needs of individuals, professionals, and small to medium-sized businesses. Our primary areas of operation are southLouisiana (approximately 76% of our total deposits as ofDecember 31, 2022 ), includingBaton Rouge ,New Orleans ,Lafayette ,Lake Charles , and their surrounding areas; southeastTexas , primarilyHouston and its surrounding area andAlabama , includingYork andOxford and their surrounding areas. Our Bank commenced operations in 2006 and we completed our initial public offering inJuly 2014 . OnJuly 1, 2019 , the Bank changed from aLouisiana state bank charter to a national bank charter and its name changed toInvestar Bank , National Association. Our strategy includes organic growth through high quality loans and growth through acquisitions, including whole-bank acquisitions and strategic branch acquisitions. We currently operate 29 full service branches comprised of 21 full service branches inLouisiana , two full service branches inTexas , and six full service branches inAlabama . We have completed seven whole-bank acquisitions since 2011 and regularly review acquisition opportunities. In addition to our branches acquired through acquisitions, during our last three fiscal years, we opened two de novo branch locations. We closed five branches during our last three fiscal years as we continued to evaluate opportunities to improve our branch network efficiency, leverage our digital initiatives and further reduce costs. Four of the branches had been acquired, and the closures involved anticipated synergies that resulted in significant cost savings. In 2022, we sold these five former branch locations and three tracts of land that were being held for future branch locations. OnJanuary 27, 2023 , we completed our previously announced sale of certain assets, deposits and other liabilities associated with ourAlice, Texas andVictoria, Texas branch locations toFirst Community Bank in order to focus more on our core markets. Of the Bank's entire branch network, these two locations were geographically the most distant from ourLouisiana headquarters. Our principal business is lending to and accepting deposits from individuals and small to medium-sized businesses in our areas of operation. We generate our income principally from interest on loans and, to a lesser extent, our securities investments, as well as from fees charged in connection with our various loan and deposit services. Our principal expenses are interest expense on interest-bearing customer deposits and borrowings, salaries and employee benefits, occupancy costs, data processing and other operating expenses. We measure our performance through our net interest margin, return on average assets, and return on average equity, among other metrics, while seeking to maintain appropriate regulatory leverage and risk-based capital ratios. 31
--------------------------------------------------------------------------------
Table of Contents
For certain GAAP performance measures, see "Certain Performance Indicators" below. We also monitor changes in our tangible equity, tangible assets, tangible book value per share, and our efficiency ratio, shown in the section "Certain Performance Indicators: Non-GAAP Financial Measures" below.
Certain Performance Indicators
As of and for the years ended December 31, (In thousands, except share data) 2022 2021(1) 2020(1) 2019(1) 2018 Financial Information Total assets$ 2,753,807 $ 2,513,203 $ 2,321,181 $ 2,148,916 $ 1,786,469 Total stockholders' equity 215,782 242,598 243,284 241,976 182,262 Net interest income 89,785 83,814 73,534 64,818 57,370 Net income 35,709 8,000 13,889 16,839 13,606 Diluted earnings per share 3.50 0.76 1.27 1.66 1.39 Performance Ratios Return on average assets 1.37 % 0.31 % 0.61 % 0.85 % 0.81 % Return on average equity 15.63 3.22 5.77 8.21 7.68 Net interest margin 3.67 3.53 3.49 3.51 3.61 Dividend payout ratio 10.31 40.26 19.69 13.55 12.09 Capital Ratios Total equity to total assets 7.84 % 9.65 %
10.48 % 11.26 % 10.20 % Tangible equity to tangible assets(2) 6.37 8.04 9.22 9.96 9.20
(1) Certain performance indicators includes the effect of acquisitions from the
date of each acquisition. On
Bank, by merger with and into the Bank. On
acquired
2020, the Bank acquired two branches from
2021, the Company acquired
subsidiaryCheaha Bank , by merger with and into the Company and Bank, respectively. (2) Non-GAAP financial measure. See reconciliation below.
Certain Performance Indicators: Non-GAAP Financial Measures
Our accounting and reporting policies conform to accounting principles generally accepted inthe United States , or GAAP, and the prevailing practices in the banking industry. However, we also evaluate our performance based on certain additional metrics. The efficiency ratio, tangible book value per share, and the ratio of tangible equity to tangible assets are not financial measures recognized under GAAP and, therefore, are considered non-GAAP financial measures. 32
--------------------------------------------------------------------------------
Table of Contents
Our management, banking regulators, financial analysts and investors use these non-GAAP financial measures to compare the capital adequacy of banking organizations with significant amounts of preferred equity and/or goodwill or other intangible assets, which typically stem from the use of the purchase accounting method of accounting for mergers and acquisitions. Tangible equity, tangible assets, tangible book value per share or related measures should not be considered in isolation or as a substitute for total stockholders' equity, total assets, book value per share or any other measure calculated in accordance with GAAP. Moreover, the manner in which we calculate tangible equity, tangible assets, tangible book value per share and any other related measures may differ from that of other companies reporting measures with similar names. The following table reconciles, as of the dates set forth below, stockholders' equity (on a GAAP basis) to tangible equity and total assets (on a GAAP basis) to tangible assets and calculates both our tangible book value per share and efficiency ratio (dollars in thousands). As of and for the years ended December 31, 2022 2021 2020 2019 2018 Total stockholders' equity - GAAP$ 215,782 $ 242,598 $ 243,284 $ 241,976 $ 182,262 Adjustments: Goodwill 40,088 40,088 28,144 26,132 17,424 Core deposit intangible 2,959 3,848 3,988 4,803 2,263 Trademark intangible 100 100 100 100 100 Tangible equity$ 172,635 $ 198,562 $ 211,052 $ 210,941 $ 162,475 Total assets - GAAP$ 2,753,807 $ 2,513,203 $ 2,321,181 $ 2,148,916 $ 1,786,469 Adjustments: Goodwill 40,088 40,088 28,144 26,132 17,424 Core deposit intangible 2,959 3,848 3,988 4,803 2,263 Trademark intangible 100 100 100 100 100 Tangible assets$ 2,710,660 $ 2,469,167 $
2,288,949
Total shares outstanding 9,901,847 10,343,494 10,608,869 11,228,775 9,484,219 Book value per share$ 21.79 $ 23.45 $ 22.93 $ 21.55 $ 19.22 Effect of adjustments (4.36 ) (4.25 ) (3.04 ) (2.76 ) (2.09 ) Tangible book value per share$ 17.43 $ 19.20 $ 19.89 $ 18.79 $ 17.13 Total equity to total assets 7.84 % 9.65 % 10.48 % 11.26 % 10.20 % Effect of adjustments (1.47 ) (1.61 ) (1.26 ) (1.30 ) (1.00 ) Tangible equity to tangible assets 6.37 % 8.04 % 9.22 % 9.96 % 9.20 % Efficiency ratio(1) Noninterest expense$ 60,865 $ 63,062 $ 57,131 $ 48,168 $ 41,882 Net interest income 89,785 83,814 73,534 64,818 57,370 Noninterest income 18,350 12,042 12,096 6,216 4,318 Efficiency ratio 56.29 % 65.79 % 66.72 % 67.81 % 67.89 %
(1) Calculated as noninterest expense divided by the sum of net interest income
(before provision for loan losses) and noninterest income. Critical Accounting Estimates The preparation of our consolidated financial statements in accordance with GAAP requires us to make estimates and judgments that affect our reported amounts of assets, liabilities, income and expenses and related disclosure of contingent assets and liabilities. Although independent third parties are often engaged to assist us in the estimation process, management evaluates the results, challenges assumptions used and considers other factors which could impact these estimates. Actual results may differ from these estimates under different assumptions or conditions. For more detailed information about our accounting policies, please refer to Note 1. Summary of Significant Accounting Policies, in the Notes to Consolidated Financial Statements contained in Item 8. Financial Statements and Supplementary Data. The following discussion presents our critical accounting estimates, which are those estimates made in accordance with GAAP that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on our financial condition or results of operations. We believe that the judgments, estimates and assumptions that we use in the preparation of our consolidated financial statements are appropriate. 33
--------------------------------------------------------------------------------
Table of Contents
Allowance for Loan Losses. One of the accounting policies most important to the presentation of our financial statements relates to the allowance for loan losses and the related provision for loan losses. The allowance for loan losses is established as losses are estimated through a provision for loan losses charged to earnings. ThroughDecember 31, 2022 , the allowance for loan losses is based on the amount that management believes will be adequate to absorb probable losses inherent in the loan portfolio based on, among other things, evaluations of the collectability of loans and prior loan loss experience. The evaluations take into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, and current economic conditions that may affect borrowers' ability to pay. Another component of the allowance is losses on loans assessed as impaired underFinancial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 310, Receivables ("ASC 310"). The balance of the loans determined to be impaired under ASC 310 and the related allowance is included in management's estimation and analysis of the allowance for loan losses. Allowances for impaired loans are generally determined based on collateral values or the present value of estimated cash flows. The determination of the appropriate level of the allowance is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. We have an established methodology to determine the adequacy of the allowance for loan losses that assesses the risks and losses inherent in our portfolio and portfolio segments. We have an internally developed model that requires significant judgment to determine the estimation method that fits the credit risk characteristics of the loans in our portfolio and portfolio segments. Qualitative and environmental factors that may not be directly reflected in quantitative estimates include: asset quality trends, changes in loan concentrations, new products and process changes, changes and pressures from competition, changes in lending policies and underwriting practices, trends in the nature and volume of the loan portfolio, and national and regional economic trends. Changes in these factors are considered in determining changes in the allowance for loan losses. The impact of these factors on our qualitative assessment of the allowance for loan losses can change from period to period based on management's assessment of the extent to which these factors are already reflected in historic loss rates. The uncertainty inherent in the estimation process is also considered in evaluating the allowance for loan losses. InJune 2016 , theFinancial Accounting Standards Board ("FASB") issued a new accounting standard (Accounting Standards Update "ASU" 2016-13), referred to as the Current Expected Credit Loss ("CECL") standard, which became effective for us, as a smaller reporting company, onJanuary 1, 2023 . The CECL standard changes the manner in which we account for our allowance for loan losses. Please refer to Note 1. Summary of Significant Accounting Policies - Recent Accounting Pronouncements, in the Notes to Consolidated Financial Statements contained in Item 8. Financial Statements and Supplementary Data for additional discussion. Acquisition Accounting. We account for our acquisitions under ASC Topic 805,Business Combinations("ASC 805"), which requires the use of the purchase method of accounting. All identifiable assets acquired, including loans, are recorded at fair value (which is discussed below). The excess purchase price over the fair value of net assets acquired is recorded as goodwill. If the fair value of the net assets acquired exceeds the purchase price, a bargain purchase gain is recognized. Because the fair value measurements incorporate assumptions regarding credit risk, no allowance for loan losses related to the acquired loans is recorded on the acquisition date. The fair value measurements of acquired loans are based on estimates related to expected prepayments and the amount and timing of undiscounted expected principal, interest and other cash flows. The fair value adjustment is amortized over the life of the loan using the effective interest method. ThroughDecember 31, 2022 , the Company accounts for acquired impaired loans under ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality ("ASC 310-30"). An acquired loan is considered impaired when there is evidence of credit deterioration since origination and it is probable at the date of acquisition that we will be unable to collect all contractually required payments. ASC 310-30 prohibits the carryover of an allowance for loan losses for acquired impaired loans. Over the life of the acquired loans, we continually estimate the cash flows expected to be collected on individual loans or on pools of loans sharing common risk characteristics. As of the end of each fiscal quarter, we evaluate the present value of the acquired loans using the effective interest rates. For any increases in cash flows expected to be collected, we adjust the amount of accretable yield recognized on a prospective basis over the loan's or pool's remaining life, while we recognize a provision for loan loss in the consolidated statement of operations if the cash flows expected to be collected have decreased. InJune 2016 , FASB issued a new accounting standard (ASU 2016-13), referred to as the Current Expected Credit Loss ("CECL") standard, which became effective for us, as a smaller reporting company, onJanuary 1, 2023 . The CECL standard changes the manner in which we account for credit losses on purchased financial assets with credit deterioration. Please refer to Note 1. Summary of Significant Accounting Policies - Recent Accounting Pronouncements, in the Notes to Consolidated Financial Statements contained in Item 8. Financial Statements and Supplementary Data for additional discussion.
Overview of Financial Condition and Results of Operations
We recognized record annual net income in 2022. Net income for the year endedDecember 31, 2022 totaled$35.7 million , or$3.50 per diluted share, compared to$8.0 million , or$0.76 per diluted share, for the year endedDecember 31, 2021 . This represents a$27.7 million , or a 346.4%, increase in net income. Net income increased primarily due to the decrease in provision for loan losses as a result of the$21.6 million impairment charge recorded on one of the Company's loan relationships connected with Hurricane Ida in the third quarter of 2021. Noninterest income increased$6.3 million , which was driven by a$6.2 million increase in swap termination fee income and$1.4 million in income from insurance proceeds, partially offset by a$2.3 million decrease in gain on call or sale of investment securities. There was a$6.0 million increase in net interest income driven by a$5.8 million increase in interest on investment securities and a$3.1 million increase in interest and fees on loans partially offset by a$3.0 million increase in interest expense driven by a 17 basis point increase in our cost of funds. AtDecember 31, 2022 , the Company and the Bank each were in compliance with all regulatory capital requirements, and the Bank was considered "well-capitalized" under prompt corrective action regulations.
Additional key components of the Company's performance during the year ended
• Total assets grew to
9.6% from$2.5 billion atDecember 31, 2021 .
• Total loans, net of allowance for loan losses at
atDecember 31, 2021 . • Total deposits were$2.1 billion atDecember 31, 2022 , a decrease of
2021. Noninterest-bearing deposits decreased$4.7 million , or 0.8%, to$580.7 million compared to$585.5 million atDecember 31, 2021 .
• Net interest income for the year ended
increase of
ended
earned on interest-earning assets partially offset by an increase in the rates
paid on interest-bearing liabilities. We experienced pressure on our net
interest margin later in 2022 as interest rates rose during the year and we
raised rates offered on deposits and incurred higher costs on our borrowings.
• Our total stockholders' equity decreased to
2022 compared to
increase in accumulated other comprehensive loss due to a decrease in the fair
value of the Bank's available for sale securities portfolio, partially offset
by net income for fiscal year 2022.
• Credit quality metrics improved as nonperforming loans were 0.54% of total
loans atDecember 31, 2022 compared to 1.58% atDecember 31, 2021 . 34
--------------------------------------------------------------------------------
Table of Contents
Certain Events That Affect Year-over-Year Comparability
Rising Inflation and Interest Rates. Inflation reached a near 40-year high in late 2021, driven in large part by economic recovery from the ongoing COVID-19 pandemic, and continued to be high during 2022 and into 2023. In response, theFederal Reserve raised interest rates seven times during 2022. During the entirety of 2021, the federal funds target rate was 0% to 0.25%, and it remained at that rate untilMarch 2022 . TheFederal Reserve made the following changes to the federal funds target rate in 2022:
- On
- On
- On
- On
- On
- On
- On
TheFederal Reserve increased the target rate again onFebruary 1, 2023 to 4.50% to 4.75% and one or more further increases are expected during the remainder of 2023. Hurricane Ida. OnAugust 29, 2021 , Hurricane Ida hit theLouisiana coast as a category 4 hurricane. Though Hurricane Ida did not cause significant physical damage to our branch locations, the storm devastated some of our market areas. The Company set up programs to help employees and customers experiencing financial difficulty as a result of the hurricane, including a deferral program discussed further in Discussion and Analysis of Financial Condition - Loans - Loan Deferral Program below. Additionally, the Company recorded an impairment charge of$21.6 million in the third quarter of 2021 related to a lending relationship with related borrowers (collectively, the "Borrower") consisting of multiple loans that are secured by various types of collateral, including real estate, inventory, and equipment. As a result of Hurricane Ida's impact on the Borrower's business operations, some of the collateral securing the loan relationship, including real estate, inventory, and equipment, experienced a significant reduction in value. COVID-19 Pandemic. InMarch 2020 , COVID-19 was declared a pandemic by theWorld Health Organization . Our business has remained open through the pandemic, although it was significantly disrupted in the early stages of the pandemic as we adjusted to various and changing government and voluntary restrictions on activities. The pandemic generally slowed business lending activity from the level we would otherwise have expected, particularly in 2020, except for our participation in the PPP, and created excess liquidity in the market, contributing to increases in our noninterest and interest-bearing demand deposits, and in money market deposit accounts and savings accounts in 2021. We took actions to protect our customers and employees throughout the pandemic, including increasing our remote banking and working options. We recorded an increased provision for loan losses during 2020 as a result of the impact of the pandemic. Market conditions generally improved during 2021 and 2022 compared to 2020, as vaccines became available and government restrictions lessened. For additional information, see Item 1A. Risk Factors, Risks Related to our Business, "The ongoing COVID-19 pandemic, or a similar health crisis, may adversely affect our business, employees, borrowers, depositors, counterparties and third-party service providers." Acquisitions. OnFebruary 21, 2020 , the Bank completed the acquisition and assumption of certain assets, deposits and other liabilities associated with theAlice andVictoria, Texas branch locations ofPlainsCapital Bank , a wholly-owned subsidiary of Hilltop Holdings Inc., for an aggregate cash consideration of approximately$11.2 million . The Bank acquired approximately$45.3 million in loans and$37.0 million in deposits. In addition, the Bank acquired substantially all the fixed assets at the branch locations and assumed the leases for the branch facilities. The Company recorded a core deposit intangible and goodwill of$0.2 million and$0.5 million , respectively, related to the acquisition. OnJanuary 27, 2023 , we completed our previously announced sale of certain assets, deposits and other liabilities associated with these branch locations in order to focus more on our core markets. OnApril 1, 2021 , the Company completed its acquisition ofCheaha Financial Group, Inc. ("Cheaha") and its wholly-owned subsidiary,Cheaha Bank , anAlabama state bank headquartered inOxford, Alabama . All of the issued and outstanding shares of Cheaha were converted into aggregate cash merger consideration of$41.1 million . On the date of the acquisition, Cheaha had total assets with a fair value of$240.8 million , including$120.4 million in loans, assumed$207.0 million in deposits, and served the residents ofCalhoun County, Alabama through four branch locations. The Company recorded a core deposit intangible and goodwill of$0.8 million and$11.9 million , respectively, related to the acquisition of Cheaha. Branches. We closed one branch location inZachary, Louisiana in 2020. We closed one branch location inPrairieville, Louisiana inApril 2021 and one branch location inDickinson, Texas inOctober 2021 . We closed one branch location inBaton Rouge, Louisiana and one branch location inWestlake, Louisiana inMay 2022 . We do not expect to open de novo branches during the remainder of 2023. We sold the land and buildings relating to these five locations during 2022. During 2022, we also sold three tracts of land that were held for future branch locations. We plan to consolidate an additional branch located in ourLouisiana market in 2023. We continue to evaluate opportunities to reduce our physical branch footprint and further improve efficiency through digital initiatives. During the last three fiscal years, we have opened two de novo branch locations, both inLouisiana , in addition to the branches we acquired through our acquisition activity. Subordinated Debt Issuance and Redemption. InApril 2022 , we completed a private placement of$20.0 million in aggregate principal amount of our 5.125% Fixed-to-Floating Subordinated Notes due 2032 (the "2032 Notes"). InJune 2022 , we used the majority of the proceeds to redeem$18.6 million of our 2017 issuance of 6.00% Fixed-to-Floating Rate Subordinated Notes due 2027 (the "2027 Notes"). We utilized the remaining proceeds for share repurchases and for general corporate purposes.
Discussion and Analysis of Financial Condition
Total assets were
35
--------------------------------------------------------------------------------
Table of Contents Loans General. Loans, excluding loans held for sale, constitute our most significant asset, comprising 76% and 74%, of our total assets atDecember 31, 2022 and 2021, respectively. Loans increased$232.8 million , or 12.4%, to$2.1 billion atDecember 31, 2022 from$1.9 billion atDecember 31, 2021 . Beginning in the second quarter of 2020, the Bank has participated as a lender in the PPP as established by the CARES Act. AtDecember 31, 2022 , the balance, net of repayments, of the Bank's PPP loans originated was$1.7 million , compared to$23.3 million atDecember 31, 2021 , and is included in the commercial and industrial loan portfolio. Eighty-seven percent of the total number of PPP loans we have originated have principal balances of$150,000 or less. AtDecember 31, 2022 , approximately99% of the total balance of PPP loans originated have been forgiven by the SBA or paid off by the customer. The table below sets forth the balance of loans outstanding by loan type as of the dates presented, and the percentage of each loan type to total loans (dollars in thousands). December 31, 2022 2021 Percentage of Percentage of Amount Total Loans Amount Total Loans Mortgage loans on real estate Construction and development$ 201,633 9.6 %$ 203,204 10.9 % 1-4 Family 401,377 19.1 364,307 19.4 Multifamily 81,812 3.9 59,570 3.2 Farmland 12,877 0.6 20,128 1.1 Commercial real estate Owner-occupied 445,148 21.1 460,205 24.6 Nonowner-occupied 513,095 24.4 436,172 23.3 Commercial and industrial 435,093 20.7 310,831 16.6 Consumer 13,732 0.6 17,595 0.9 Total loans 2,104,767 100 % 1,872,012 100 % Loans held for sale - 620 Total gross loans$ 2,104,767 $ 1,872,632 AtDecember 31, 2022 , the Company's total business lending portfolio, which consists of loans secured by owner-occupied commercial real estate properties and commercial and industrial loans, was$880.2 million , an increase of$109.2 million , or 14.2%, compared to the business lending portfolio of$771.0 million atDecember 31, 2021 . The increase in the business lending portfolio as ofDecember 31, 2022 is primarily driven by increased loan production, particularly in public finance loans, by our Commercial and Industrial Division, partially offset by the forgiveness of PPP loans and a decrease in owner-occupied commercial real estate loans.
Nonowner-occupied loans totaled
Our focus on a relationship-driven banking strategy and hiring of experienced commercial lenders are the primary reasons we experienced our largest organic loan growth in the commercial and industrial loan portfolio. We have increased our emphasis on originating commercial and industrial and commercial real estate loans. Loan Concentrations. Loan concentrations are considered to exist when there are amounts loaned to multiple borrowers engaged in similar activities that would cause them to be similarly impacted by economic or other conditions. AtDecember 31, 2022 andDecember 31, 2021 , we had no concentrations of loans exceeding 10% of total loans other than loans in the categories listed in the table above. 36
--------------------------------------------------------------------------------
Table of Contents
The following table sets forth loans outstanding atDecember 31, 2022 , excluding loans held for sale, which, based on remaining scheduled repayments of principal, are due in the periods indicated, as well as the amount of loans with fixed and variable rates in each maturity range. Loans with balloon payments and longer amortizations are often repriced and extended beyond the initial maturity when credit conditions remain satisfactory. Demand loans, loans having no stated schedule of repayments and no stated maturity, and overdrafts are reported below as due in one year or less. After One After Five After Ten One Year or Year Through Years Through Years Through After Fifteen (dollars in thousands) Less Five Years Ten Years Fifteen Years Years Total Mortgage loans on real estate: Construction and development$ 97,765 $ 50,271 $ 29,689 $ 10,229 $ 13,679 $ 201,633 1-4 Family 50,523 73,898 58,875 26,143 191,938 401,377 Multifamily 6,603 61,411 12,237 443 1,118 81,812 Farmland 5,826 4,839 2,212 - - 12,877 Commercial real estate Owner-occupied 27,834 90,097 204,710 113,557 8,950 445,148 Nonowner-occupied 31,938 269,193 174,003 37,743 218 513,095 Commercial and industrial 169,481 91,399 103,855 62,287 8,071 435,093 Consumer 3,058 8,864 1,294 348 168 13,732 Total loans$ 393,028 $ 649,972 $ 586,875 $ 250,750 $ 224,142 $ 2,104,767 Loans with fixed rates: Mortgage loans on real estate: Construction and development$ 12,195 $ 49,723 $ 29,689 $ 10,229 $ 13,679 $ 115,515 1-4 Family 14,451 66,799 58,875 26,143 191,938 358,206 Multifamily 6,303 58,263 5,552 443 1,118 71,679 Farmland 2,860 3,638 2,212 - - 8,710 Commercial real estate Owner-occupied 19,772 75,244 162,832 92,636 2,237 352,721 Nonowner-occupied 24,373 249,642 141,039 18,813 218 434,085 Commercial and industrial 40,315 62,914 103,855 62,287 8,071 277,442 Consumer 2,323 8,864 1,294 348 168 12,997 Total loans with fixed rates$ 122,592 $ 575,087 $ 505,348 $ 210,899 $ 217,429 $ 1,631,355 Loans with variable rates: Mortgage loans on real estate: Construction and development$ 85,570 $ 548 $ - $ - $ -$ 86,118 1-4 Family 36,072 7,099 - - - 43,171 Multifamily 300 3,148 6,685 - - 10,133 Farmland 2,966 1,201 - - - 4,167 Commercial real estate Owner-occupied 8,062 14,853 41,878 20,921 6,713 92,427 Nonowner-occupied 7,565 19,551 32,964 18,930 - 79,010 Commercial and industrial 129,166 28,485 - - - 157,651 Consumer 735 - - - - 735 Total loans with variable rates$ 270,436 $ 74,885 $ 81,527 $ 39,851 $ 6,713$ 473,412 Loan Deferral Program. In response to the COVID-19 pandemic, beginning in the first quarter of 2020, the Bank offered short-term modifications to borrowers impacted by the pandemicwho were current and otherwise not past due. These included short-term modifications of 90 days or less, in the form of deferrals of payment of principal and interest, principal only, or interest only, and fee waivers. As 90-day loan deferrals have expired, most affected customers have returned to their regular payment schedules. In accordance with applicable law and regulatory guidance adopted in response to the pandemic, we have not accounted for such loans as troubled debt restructurings ("TDRs"), nor have we designated them as past due or nonaccrual. The Bank ceased offering loan deferrals related to COVID-19 during the fourth quarter of 2021. AtDecember 31, 2022 , no loans remained on deferral, compared to less than$0.2 million atDecember 31, 2021 . The Bank also instituted a 90-day deferral program for eligible customerswho were impacted by Hurricane Ida beginning in the third quarter of 2021. The Bank has provided payment deferrals on approximately$50.0 million of loans. AtDecember 31, 2022 , no loans remained on deferral, compared to approximately$2.4 million , or 0.1% of the total loan portfolio, remaining on a 90-day deferral plan related to Hurricane Ida atDecember 31, 2021 . 37
--------------------------------------------------------------------------------
Table of ContentsInvestment Securities We purchase investment securities primarily to provide a source for meeting liquidity needs, with return on investment as a secondary consideration. We also use investment securities as collateral for certain deposits and other types of borrowings. Investment securities represented 15% of our total assets and totaled$413.5 million atDecember 31, 2022 , an increase of$47.7 million , or 13.0%, from$365.8 million atDecember 31, 2021 . The increase in investment securities atDecember 31, 2022 compared toDecember 31, 2021 resulted from purchases of multiple investment types in our current portfolio, primarily mortgage-backed securities. The table below shows the carrying value of our investment securities portfolio by investment type and the percentage that such investment type comprises of our entire portfolio as of the dates indicated (dollars in thousands). December 31, 2022 2021 Percentage of Percentage of Balance Portfolio Balance Portfolio Obligations of theU.S Treasury andU.S. government agencies and corporations$ 29,805 7.2 %$ 21,268 5.8 % Obligations of state and political subdivisions 23,916 5.8 39,495 10.8 Corporate bonds 29,942 7.2 27,667 7.6 Residential mortgage-backed securities 254,618 61.6 203,249 55.6 Commercial mortgage-backed securities 75,191 18.2 74,085 20.2 Total investment securities$ 413,472 100 %$ 365,764 100 % The investment portfolio consists of available for sale and held to maturity securities. We do not hold any investments classified as trading. We classify debt securities as held to maturity if management has the positive intent and ability to hold the securities to maturity. Held to maturity securities are stated at amortized cost. Securities not classified as held to maturity are classified as available for sale and are stated at fair value. The carrying values of the Company's available for sale securities are adjusted for unrealized gains or losses as valuation allowances, and any gains or losses are reported on an after-tax basis as a component of other comprehensive loss. Any expected credit loss due to the inability to collect all amounts due according to the security's contractual terms is recognized as a charge against earnings. Any remaining unrealized loss related to other factors would be recognized in other comprehensive loss, net of taxes. Please refer to Note 1. Summary of Significant Accounting Policies - Recent Accounting Pronouncements, in the Notes to Consolidated Financial Statements contained in Item 8. Financial Statements and Supplementary Data for information regarding our adoption, effectiveJanuary 1, 2023 , of ASU 2016-13, which will impact how we account for our securities portfolio. Typically, our investment securities are available for sale. There were no purchases of held to maturity securities during the years endedDecember 31, 2022 and 2021. In the year endedDecember 31, 2022 , we purchased$181.6 million of investment securities, compared to purchases of$255.5 million during the year endedDecember 31, 2021 . Mortgage-backed securities represented 84% and 73% of the available for sale securities we purchased in 2022 and 2021, respectively. Of the remaining securities purchased in 2022 and 2021, 9%, and 18%, respectively, wereU.S. Treasury andU.S. government agencies and corporations securities, 5% and 4%, respectively were corporate bonds, and 2% and 5%, respectively, were municipal securities. We only purchase corporate bonds that are investment grade securities issued by seasoned corporations. Due in large part to higher interest rates and market volatility during 2022, atDecember 31, 2022 , unrealized losses in our investment portfolio totaled$62.5 million . 38
--------------------------------------------------------------------------------
Table of Contents
The table below sets forth the stated maturities and weighted average yields of our investment debt securities based on the amortized cost of our investment portfolio as ofDecember 31, 2022 (dollars in thousands). After One Year After Five Years One Year or Less Through Five Years Through Ten Years After Ten Years Amount Yield Amount Yield Amount Yield Amount Yield Held to maturity: Obligations of states and political subdivisions$ 915 5.88 %$ 960 5.88 %$ 3,663 3.59 % $ - - % Residential mortgage-backed securities - - - - - - 2,767 3.06 Available for sale: Obligations of theU.S Treasury and U.S. government agencies and corporations 490 2.92 14,999 3.53 14,881 4.84 - - Obligations of states and political subdivisions 342 3.14 1,573 2.56 10,257 2.41 8,926 2.77 Corporate bonds 250 5.37 12,176
3.65 17,051 4.25 4,000 2.69 Residential mortgage-backed securities
- - - - 6,349 2.78 292,518 2.26 Commercial mortgage-backed securities - - 3,704 2.72 3,555 2.82 76,245 3.07$ 1,997 $ 33,412 $ 55,756 $ 384,456 The maturity of mortgage-backed securities reflects scheduled repayments based upon the contractual maturities of the securities. Weighted average yields on tax-exempt obligations have been computed on a fully tax equivalent basis assuming a federal tax rate of 21%. Premises and Equipment Bank premises and equipment decreased$8.5 million , or 14.6%, to$49.6 million atDecember 31, 2022 from$58.1 million atDecember 31, 2021 . The decrease was attributable to the closure of two branches inLouisiana and the sale of three tracts of land that were being held as future branch locations, which decreased bank premises and equipment by$3.2 million and$3.5 million , respectively. Bank premises and equipment increased$1.8 million , or 3.2%, to$58.1 million atDecember 31, 2021 from$56.3 million atDecember 31, 2020 . The increase was attributable to the acquisition of four branch locations inCalhoun County, Alabama as a result of our acquisition of Cheaha which increased bank premises and equipment by$5.4 million , and was partially offset by the closure of two branches, one inLouisiana and one inTexas , which decreased bank premises and equipment by$2.3 million .
Deferred Tax Asset/Liability
AtDecember 31, 2022 , the net deferred tax asset was$16.4 million , compared to net deferred tax assets of$2.2 million and$1.4 million atDecember 31, 2021 and 2020, respectively. The increase in the deferred tax asset atDecember 31, 2022 compared toDecember 31, 2021 was primarily driven by a decrease in the fair value of the Bank's available for sale securities portfolio. The increase in the deferred tax asset atDecember 31, 2021 compared toDecember 31, 2020 was primarily driven by the deferred compensation agreements acquired from Cheaha inApril 2021 and a timing difference in recognizing payroll tax expenses. The Bank acquired net operating loss carryforwards as a result of acquisitions. AtDecember 31, 2022 , we held approximately$0.1 million and$0.8 million in net operating loss carryforwards that expire in 2033 and 2039, respectively.U.S. tax law imposes annual limitations under Internal Revenue Code Section 382 on the amount of net operating loss carryforwards that may be used to offset federal taxable income. Under these laws, we may apply up to approximately$0.6 million to offset our taxable income each year. In addition to this limitation, our ability to utilize net operating loss carryforwards depends upon the Company generating taxable income. Given the substantial amount of time before our net operating loss carryforwards begin to expire, we currently expect to utilize these net operating loss carryforwards in full before their expiration. 39
--------------------------------------------------------------------------------
Table of Contents Deposits The following table sets forth the composition of our deposits and the percentage of each deposit type to total deposits atDecember 31, 2022 and 2021 (dollars in thousands). December 31, 2022 2021 Percentage of Percentage of Total Total Amount Deposits Amount Deposits Noninterest-bearing demand deposits$ 580,741 27.9 %$ 585,465 27.6 % Interest-bearing demand deposits 565,598 27.1 650,868 30.7 Money market deposit accounts 208,596 10.0 255,501 12.1 Savings accounts 155,176 7.5 180,837 8.5 Time deposits 572,254 27.5 447,595 21.1 Total deposits$ 2,082,365 100 %$ 2,120,266 100 % Total deposits were$2.08 billion atDecember 31, 2022 , a decrease of$37.9 million , or 1.8%, from total deposits of$2.12 billion atDecember 31, 2021 . The increase in time deposits compared toDecember 31, 2021 is due to increased rates offered to remain competitive in our markets, as we adjusted our strategy in response to the rising interest rate environment after running off higher yielding time deposits through the end of the second quarter of 2022. The decreases in the remaining categories compared toDecember 31, 2021 are primarily driven by customers drawing down on their existing deposit accounts. During 2021, we experienced large increases in both noninterest and interest-bearing demand deposits, and in money market deposit accounts and savings accounts, primarily driven by reduced spending by consumer and business customers related to the COVID-19 pandemic, and increases in PPP borrowers' deposit accounts. The Company had no brokered demand deposits atDecember 31, 2022 and 2021. Prior toDecember 31, 2021 , the Bank utilized brokered demand deposits to satisfy the borrowings under its interest rate swap agreements due to more favorable pricing. In the third quarter of 2021, we voluntarily terminated multiple swap agreements, the borrowings for which matured inOctober 2021 . During 2022, we voluntarily terminated our remaining interest rate swap agreements. Estimated uninsured deposits were$701.1 million and$719.8 million atDecember 31, 2022 and 2021, respectively. The estimates are based on the same methodologies and assumptions used for our regulatory reporting requirements. The insured deposit data for 2022 and 2021 does not reflect an evaluation of all of the account ownership category distinctions that would determine the availability of deposit insurance to individual accounts based onFDIC regulations.
The following table shows scheduled maturities of time deposits in excess of the
December 31, Time remaining until maturity: 2022 2021 Three months or less$ 63,006 $ 21,644 Over three months through six months 13,610 16,490 Over six months through twelve months 58,672 25,024 Over twelve months 14,228 14,211 Total$ 149,516 $ 77,369 40
--------------------------------------------------------------------------------
Table of Contents Borrowings Total borrowings include securities sold under agreements to repurchase, federal funds purchased, advances from theFederal Home Loan Bank ("FHLB"), unsecured lines of credit withFirst National Bankers Bank ("FNBB") andThe Independent Bankers Bank ("TIB") totaling$60.0 million , subordinated debt issued in 2019 and 2022, and junior subordinated debentures assumed through acquisitions. Our advances from the FHLB were$387.0 million atDecember 31, 2022 , an increase of$308.5 million from FHLB advances of$78.5 million atDecember 31, 2021 . FHLB advances are used to fund increased loan and investment activity that is not funded by deposits or other borrowings. We had no outstanding balances drawn on the unsecured lines of credit atDecember 31, 2022 or 2021. We had no securities sold under agreements to repurchase atDecember 31, 2022 compared to$5.8 million atDecember 31, 2021 . Junior subordinated debt of$8.5 million and$8.4 million atDecember 31, 2022 and 2021, respectively, represents the junior subordinated debentures that we assumed in connection with our acquisitions of Cheaha in 2021,BOJ Bancshares, Inc. in 2017 ("BOJ"), andFirst Community Bank in 2013.
The average balances and cost of short-term borrowings for the years
ended
Average Balances Cost of Short-term Borrowings December 31, December 31, 2022 2021 2020 2022 2021 2020 Federal funds purchased and other short-term borrowings$ 132,703 $ 3,242 $ 60,243 3.08 % 0.20 % 1.15 % Securities sold under agreements to repurchase 1,489 6,081 5,080 0.15 0.21 0.30 Total short-term borrowings$ 134,192 $ 9,323 $ 65,323 3.05 % 0.20 % 1.09 % 2032 Notes. OnApril 6, 2022 , we entered into a Subordinated Note Purchase Agreement with certain institutional accredited investors and qualified institutional buyers (the "Purchasers") under which we issued$20.0 million in aggregate principal amount of our 2032 Notes to the Purchasers at a price equal to 100% of the aggregate principal amount of the 2032 Notes. The 2032 Notes were issued under an indenture, datedApril 6, 2022 (the "Indenture"), by and among the Company andUMB Bank, National Association , as trustee. The 2032 Notes have a stated maturity date ofApril 15, 2032 and will bear interest at a fixed rate of 5.125% per year from and includingApril 6, 2022 to but excludingApril 15, 2027 or earlier redemption date. FromApril 15, 2027 to but excluding the stated maturity date or earlier redemption date, the 2032 Notes will bear interest a floating rate equal to the then current three-month term secured overnight financing rate ("SOFR"), plus 277 basis points. As provided in the 2032 Notes, the interest rate on the 2032 Notes during the applicable floating rate period may be determined based on a rate other than three-month term SOFR. The 2032 Notes may be redeemed, in whole or in part, on or afterApril 15, 2027 or, in whole but not in part, under certain other limited circumstances set forth in the Indenture. Any redemption we made would be at a redemption price equal to 100% of the principal balance being redeemed, together with any accrued and unpaid interest to the date of redemption. Principal and interest on the 2032 Notes are subject to acceleration only in limited circumstances in the case of certain bankruptcy and insolvency-related events. The 2032 Notes are the unsecured, subordinated obligations of the Company and rank junior in right of payment to our current and future senior indebtedness and to our obligations to our general creditors. The 2032 Notes are intended to qualify as Tier 2 capital for regulatory purposes.
We used the majority of the net proceeds to redeem our 2027 Notes in
2029 Notes. OnNovember 12, 2019 , the Company issued$25.0 million in aggregate principal amount of its 5.125% Fixed-to-Floating Rate Subordinated 2029 Notes due 2029 ("2029 Notes") at 100% of their face amount in a private placement to certain institutional and other accredited investors. The 2029 Notes have a maturity date ofDecember 30, 2029 . From and including the date of issuance to, but excludingDecember 30, 2024 , the 2029 Notes will bear interest at an initial fixed rate of 5.125% per annum, payable semi-annually in arrears. From and includingDecember 30, 2024 and thereafter, the 2029 Notes will bear interest at a floating rate equal to the then-current three-month LIBOR as calculated on each applicable date of determination, or an alternative rate determined in accordance with the terms of the 2029 Notes if the three-month LIBOR cannot be determined, plus 3.490%, payable quarterly in arrears. The Company may redeem the 2029 Notes, in whole or in part, on or afterDecember 30, 2024 or, in whole but not in part, under certain limited circumstances set forth in the 2029 Notes. Any redemption by the Company would be at a redemption price equal to 100% of the principal balance being redeemed, together with any accrued and unpaid interest to the date of redemption. Principal and interest on the 2029 Notes are not subject to acceleration, except upon certain bankruptcy-related events. The 2029 Notes are unsecured, subordinated obligations of the Company and rank junior in right of payment to the Company's current and future senior indebtedness and to the Company's obligations to its general creditors. The 2029 Notes are obligations of the Company only and are not obligations of, and are not guaranteed by, any of the Company's subsidiaries. The 2029 Notes are structured to qualify as Tier 2 capital for regulatory capital purposes. 2027 Notes. OnMarch 24, 2017 , the Company issued$18.6 million in aggregate principal amount of its 2027 Notes dueMarch 20, 2027 at 100% of the aggregate principal amount of the 2027 Notes. From and including the date of issuance, but excludingMarch 30, 2022 , the 2027 Notes bore interest at an initial fixed rate of 6.00% per annum, payable semi-annually. From and includingMarch 30, 2022 and thereafter, the 2027 Notes bore interest at a floating rate equal to the then-current three-month LIBOR (but not less than zero) as calculated on each applicable date of determination, plus 3.945%, payable quarterly. The Company could, beginning with the interest payment date ofMarch 30, 2022 , and on any interest payment date thereafter, redeem the 2027 Notes, in whole or in part, at a redemption price equal to 100% of the principal amount of the 2027 Notes to be redeemed plus accrued and unpaid interest to but excluding the date of redemption. The 2027 Notes were structured to qualify as Tier 2 capital for regulatory capital purposes. InJune 2022 , we redeemed the 2027 Notes in full in accordance with their terms at a redemption price equal to 100% of the outstanding principal balance plus accrued and unpaid interest up to but excluding theJune 30, 2022 redemption date ("Redemption Date") . The aggregate redemption price, excluding accrued interest, totaled$18.6 million . Interest on the 2027 Notes no longer accrued on or after the Redemption Date. Stockholders' Equity Stockholders' equity was$215.8 million atDecember 31, 2022 , a decrease of$26.8 million , or 11.1%, compared toDecember 31, 2021 . The decrease in stockholders' equity is primarily attributable to an increase in accumulated other comprehensive loss due to a decrease in the fair value of the Bank's AFS securities portfolio, partially offset by net income for fiscal year 2022. 41
--------------------------------------------------------------------------------
Table of Contents Results of Operations Performance Summary 2022 vs. 2021. For the year endedDecember 31, 2022 , net income was$35.7 million , or$3.54 per basic common share and$3.50 per diluted common share, compared to net income of$8.0 million , or$0.77 per basic common share and$0.76 per diluted common share, for the year endedDecember 31, 2021 . The primary driver of the increase in net income is related to a decrease in provision for loan losses due to the$21.6 million impairment charge recorded during the third quarter of 2021 as a result of Hurricane Ida. As shown on the consolidated statement of income for the year endedDecember 31, 2022 , a provision for loan losses of$2.9 million was recorded, compared to a provision for loan losses of$22.9 million for the year endedDecember 31, 2021 . We had record annual net income in 2022 primarily as a result of increases in interest income and noninterest income as well as a decrease in noninterest expense compared to 2021. Return on average assets increased to 1.37% for the year endedDecember 31, 2022 from 0.31% for the year endedDecember 31, 2021 . Return on average equity was 15.63% for the year endedDecember 31, 2022 compared to 3.22% for the year endedDecember 31, 2021 . The increase in both return on average assets and return on average equity is mainly attributable to the$27.7 million increase in net income. 2021 vs. 2020. For the year endedDecember 31, 2021 , net income was$8.0 million , or$0.77 per basic common share and$0.76 per diluted common share, compared to net income of$13.9 million , or$1.27 per basic and diluted common share, for the year endedDecember 31, 2020 . The primary drivers of the decrease in net income are related to an increase in provision for loan losses due to the$21.6 million impairment charge recorded during the third quarter of 2021 as a result of Hurricane Ida, along with increases in salaries and benefits expense, other operating expenses, and acquisition expenses primarily related to our organic growth and acquisition activity. As shown on the consolidated statement of income for the year endedDecember 31, 2021 , a provision for loan losses of$22.9 million was recorded, compared to a provision for loan losses of$11.2 million for the year endedDecember 31, 2020 . We had record quarterly net income in each quarter of 2021 other than the third quarter, as market conditions improved and our cost of funds decreased compared to 2020. Return on average assets decreased to 0.31% for the year endedDecember 31, 2021 from 0.61% for the year endedDecember 31, 2020 . Return on average equity was 3.22% for the year endedDecember 31, 2021 compared to 5.77% for the year endedDecember 31, 2020 . The decrease in both return on average assets and return on average equity is mainly attributable to the$5.9 million decrease in net income.
Net Interest Income and Net Interest Margin
Net interest income, our principal source of earnings, is the difference between the interest income generated by earning assets and the total interest cost of the deposits and borrowings obtained to fund those assets. Factors affecting the level of net interest income include the volume of earning assets and interest-bearing liabilities, yields earned on loans and investments and rates paid on deposits and other borrowings, the level of nonperforming loans, the amount of noninterest-bearing liabilities supporting earning assets, and the interest rate environment. The primary factors affecting net interest margin are changes in interest rates, competition, and the shape of the interest rate yield curve. TheFederal Reserve Board sets various benchmark rates, including the federal funds rate, and thereby influences the general market rates of interest, including the deposit and loan rates offered by financial institutions. OnMarch 3, 2020 , theFederal Reserve lowered the federal funds target rate to 1.00% to 1.25%, which theFederal Reserve stated was in response to the evolving risks to economic activity posed by the coronavirus. In a measure aimed at lessening the economic impact of COVID-19, theFederal Reserve reduced the federal funds target rate to 0% to 0.25% onMarch 16, 2020 , where it remained untilMarch 2022 when theFederal Reserve began increasing the federal funds target rate a total of seven times during 2022 to 4.25% to 4.50% as discussed in Certain Events That Affect Year-over-Year Comparability - Rising Inflation and Interest Rates. 2022 vs. 2021. Net interest income increased 7.1% to$89.8 million for the year endedDecember 31, 2022 from$83.8 million for the same period in 2021. Net interest margin was 3.67% for the year endedDecember 31, 2022 , an increase of 14 basis points from 3.53% for the year endedDecember 31, 2021 . The increase in net interest income resulted primarily from increases in both the volume of interest-earning assets and the yield earned on those assets, primarily in our investment securities portfolio and to a lesser extent our loan portfolio, and a decrease in the volume of interest-bearing liabilities, partially offset by an increase in the rates paid on interest-bearing liabilities. For the year endedDecember 31, 2022 , average loans and average investment securities increased approximately$35.2 million and$165.3 million , respectively, while average interest-bearing deposits decreased approximately$110.1 million . The increase in average loans is primarily driven by organic growth, and the increase in average investment securities is driven by purchases of investment securities. The decrease in the average balance of interest-bearing deposits was driven by a decrease in the average balance of brokered demand deposits due to the timing of terminations of our interest rate swap agreements and a decrease in the average balance of time deposits due to management's strategy to run off higher yielding time deposits through the end of the second quarter of 2022. Average short-term borrowings increased approximately$124.9 million compared to the same period in 2021 as we utilized advances from the FHLB to fund loan growth and investment activity. Our yield on interest-earning assets increased as did our rate paid on interest-bearing liabilities primarily as a result of the overall increase in prevailing interest rates. Although our net interest margin increased from 2021 to 2022, we experienced margin pressure later in 2022. During 2022, as we raised rates offered on deposits and incurred higher costs on our borrowings, comparing the three months endedDecember 30, 2021 and the three months endedDecember 31, 2022 , respectively, our yield on interest-earning assets increased from 3.95% to 4.57% while the cost of our total interest-bearing liabilities increased from 0.52% to 1.45%, producing a seven basis point decrease in our net interest margin from 3.57% to 3.50%. We may experience additional pressure on our net interest margin during 2023 if our cost of funds increases faster than the yield on our interest-earning assets. 42
--------------------------------------------------------------------------------
Table of Contents
Interest income was$104.6 million for the year endedDecember 31, 2022 compared to$95.5 million for the same period in 2021. Loan interest income made up substantially all of our interest income for the years endedDecember 31, 2022 and 2021, although interest on investment securities contributed 9.8% of interest income for the year endedDecember 31, 2022 compared to 4.7% for the same period in 2021. Interest on our commercial real estate loans, commercial and industrial loans, and 1-4 family residential real estate loans constituted the three largest components of our loan interest income for the years endedDecember 31, 2022 and 2021 at 84% and 83% of total interest income on loans, respectively. The overall yield on interest-earning assets increased 26 basis points to 4.28% for the year endedDecember 31, 2022 compared to 4.02% for the same period in 2021. The loan portfolio yielded 4.82% for the year endedDecember 31, 2022 compared to 4.74% for the year endedDecember 31, 2021 . The increase in yield on our loan portfolio was driven primarily by higher yields on commercial real estate loans and 1-4 family residential real estate loans. In addition, the yield on the investment portfolio was 2.23% for the year endedDecember 31, 2022 compared to 1.52% for the year endedDecember 31, 2021 . Interest expense was$14.8 million for the year endedDecember 31, 2022 , an increase of$3.1 million compared to interest expense of$11.7 million for the year endedDecember 31, 2021 . The increase in interest expense is primarily attributable to the increase in the rates paid for interest-bearing liabilities, primarily short-term borrowings, partially offset by the decrease in the volume of interest-bearing liabilities for the year endedDecember 31, 2022 compared toDecember 31, 2021 . For the year endedDecember 31, 2022 , the cost of short-term borrowings increased 285 basis points to 3.05% due to an increase in the federal funds target rate. As previously discussed, the federal funds target rate increased from 0% to 0.25% to 4.25% to 4.50% during 2022, which affects the rate the Company pays for immediately available overnight funds, long-term borrowings, and deposits. For the year endedDecember 31, 2022 , the cost of interest-bearing deposits decreased four basis points to 0.42% and the cost of interest-bearing liabilities increased 17 basis points to 0.84% compared to the same period in 2021. 2021 vs. 2020. For a detailed discussion of our net interest income and net interest margin performance for 2021 compared to 2020, see our annual report on Form 10-K for the year endedDecember 31, 2021 , Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations - Net Interest Income and Net Interest Margin -2021 vs. 2020, and - Volume/Rate Analysis. Average Balances and Yields. The following table sets forth average balance sheet data, including all major categories of interest-earning assets and interest-bearing liabilities, together with the interest earned or paid and the average yield or rate paid on each such category as of and for the years endedDecember 31, 2022 , 2021 and 2020. Averages presented below are daily averages (dollars in thousands).
As of and for the years ended
2022 2021 2020 Interest Interest Interest Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/ Balance Expense(1) Rate(1) Balance Expense(1) Rate(1) Balance Expense(1) Rate(1) Assets Interest-earning assets: Loans$ 1,937,255 $ 93,373 4.82 %$ 1,902,070 $ 90,230 4.74 %$ 1,786,302 $ 87,365 4.89 % Securities: Taxable 442,767 9,796 2.21 275,963 3,948 1.43 255,405 4,927 1.93 Tax-exempt 18,746 482 2.57 20,259 552 2.73 25,024 686 2.74 Interest-earning balances with banks 45,542 918 2.02 176,349 812 0.46 42,852 816 1.90 Total interest-earning assets 2,444,310 104,569 4.28 2,374,641 95,542 4.02 2,109,583 93,794 4.45 Cash and due from banks 34,327 39,262 27,768 Intangible assets 43,588 41,299 32,190 Other assets 103,711 138,096 119,994 Allowance for loan losses (22,093 ) (20,704 ) (15,272 ) Total assets$ 2,603,843 $ 2,572,594 $ 2,274,263 Liabilities and stockholders' equity Interest-bearing liabilities: Deposits: Interest-bearing demand deposits$ 900,405 $ 2,411 0.27 %$ 858,660 $ 2,398 0.28 %$ 612,000 $ 3,535 0.58 % Brokered demand deposits 1,773 7 0.42 77,432 715 0.92 20,308 177 0.87 Savings deposits 173,460 79 0.05 168,194 247 0.15 129,211 401 0.31 Time deposits 427,498 3,753 0.88 508,954 4,127 0.81 640,549 11,263 1.76 Total interest-bearing deposits 1,503,136 6,250 0.42 1,613,240 7,487 0.46 1,402,068 15,376 1.10 Short-term borrowings(2) 134,192 4,093 3.05 9,323 19 0.20 65,323 710 1.09 Long-term debt 127,288 4,441 3.49 129,318 4,222 3.26 128,163 4,174 3.26 Total interest-bearing liabilities 1,764,616 14,784 0.84 1,751,881 11,728 0.67 1,595,554 20,260 1.27 Noninterest-bearing demand deposits 600,286 553,083 418,240 Other liabilities 10,425 18,852 19,805 Stockholders' equity 228,516 248,778 240,664 Total liabilities and stockholders' equity$ 2,603,843 $ 2,572,594 $ 2,274,263 Net interest income/net interest margin$ 89,785 3.67 %
$ 83,814 3.53 %$ 73,534 3.49 %
(1) Interest income and net interest margin are expressed as a percentage of
average interest-earning assets outstanding for the indicated periods.
Interest expense is expressed as a percentage of average interest-bearing
liabilities for the indicated periods. (2) For additional information, see Discussion and Analysis of Financial Condition - Borrowings. Nonaccrual loans were included in the computation of average loan balances but carry a zero yield. The yields include the effect of loan fees of$3.6 million ,$3.0 million and$2.4 million for the years endedDecember 31, 2022 , 2021 and 2020, respectively, and discounts and premiums that are amortized or accreted to interest income or expense. 43
--------------------------------------------------------------------------------
Table of Contents
Volume/Rate Analysis. The following tables set forth a summary of the changes in interest earned and interest paid resulting from changes in volume and rates for the year endedDecember 31, 2022 compared to the year endedDecember 31, 2021 and the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 (dollars in thousands). Year ended December 31, 2022 vs. Year ended December 31, 2021 Volume Rate Net(1) Interest income: Loans$ 1,669 $ 1,474 $ 3,143 Securities: Taxable 2,386 3,462 5,848 Tax-exempt (41 ) (29 ) (70 ) Interest-earning balances with banks (602 ) 708
106
Total interest-earning assets 3,412 5,615
9,027
Interest expense: Interest-bearing demand deposits 117 (104 ) 13 Brokered demand deposits (699 ) (9 ) (708 ) Savings deposits 8 (176 ) (168 ) Time deposits (661 ) 287 (374 ) Short-term borrowings 255 3,819 4,074 Long-term debt (66 ) 285 219 Total interest-bearing liabilities (1,046 ) 4,102
3,056
Change in net interest income$ 4,458 $ 1,513 $ 5,971 Year ended December 31, 2021 vs. Year ended December 31, 2020 Volume Rate Net(1) Interest income: Loans$ 5,662 $ (2,797 ) $ 2,865 Securities: Taxable 397 (1,376 ) (979 ) Tax-exempt (131 ) (3 ) (134 ) Interest-earning balances with banks 2,540 (2,544 ) (4 ) Total interest-earning assets 8,468 (6,720 )
1,748
Interest expense: Interest-bearing demand deposits 1,425 (2,562 ) (1,137 ) Brokered demand deposits 496 42 538 Savings deposits 121 (275 ) (154 ) Time deposits (2,314 ) (4,822 ) (7,136 ) Short-term borrowings (609 ) (82 ) (691 ) Long-term debt 38 10 48 Total interest-bearing liabilities (843 ) (7,689 )
(8,532 )
Change in net interest income
(1) Changes in interest due to both volume and rate have been allocated on a
pro-rata basis using the absolute ratio value of amounts calculated. Noninterest Income Noninterest income includes, among other things, service charges on deposit accounts, gain on call or sale of investment securities, gains and losses on sales or dispositions of fixed assets and other real estate owned, swap termination fee income, servicing fees and fee income on serviced loans, interchange fees, income from bank owned life insurance, changes in the fair value of equity securities, and income from insurance proceeds. We expect to continue to develop new products that generate noninterest income, and enhance our existing products, in order to diversify our revenue sources. 2022 vs. 2021. Total noninterest income increased$6.3 million , or 52.4%, to$18.4 million for the year endedDecember 31, 2022 compared to$12.0 million for the year endedDecember 31, 2021 . The increase is primarily due to a$6.2 million increase in swap termination fee income, a$1.4 million increase in income from insurance proceeds, and a$0.7 million increase in service charges on deposit accounts, which were partially offset by$2.3 million decrease in gain on call or sale of investment securities. Service charges on deposit accounts include maintenance fees on accounts, account enhancement charges for additional deposit account features, per item charges, overdraft fees, and treasury management charges. Service charges on deposit accounts increased 27.6% to$3.1 million for the year endedDecember 31, 2022 compared to$2.4 million for the same period in 2021. There was de minimis gain on call or sale of investment securities for the year endedDecember 31, 2022 compared to$2.3 million for the same period in 2021. We did not sell securities during the year endedDecember 31, 2022 compared to sales of$137.8 million during the year endedDecember 31, 2021 . Loss on sale or disposition of fixed assets for the year endedDecember 31, 2022 decreased to$0.3 million from$0.4 million for the year endedDecember 31, 2021 . During 2022, a loss on sale or disposition of fixed assets of$0.5 million was recorded as a result of the Bank closing two branches inLouisiana , which was partially offset by a gain on sale or disposition of fixed assets as a result of the sale of three tracts of land that were being held for future branch locations. During 2021, the loss on sale or disposition of fixed assets was recorded when the Bank reclassified two branch locations that were closed in 2021, totaling$1.9 million , to other real estate owned. Swap termination fee income increased to$8.1 million for the year endedDecember 31, 2022 , compared to$1.8 million for the year endedDecember 31, 2021 . Swap termination fee income was recorded when we voluntarily terminated a number of our interest rate swap agreements during the first and second quarters of 2022 and at the end of the third quarter of 2021. 44
--------------------------------------------------------------------------------
Table of Contents
There was de minimis gain on sale of loans for the year endedDecember 31, 2022 , compared to$0.2 million for the year endedDecember 31, 2021 . When the Bank acquired Cheaha onApril 1, 2021 , it acquired a secondary mortgage loan group that originates mortgage loans for sale. Servicing fees and fee income on serviced loans decreased$0.1 million , or 63.7%, to$0.1 million , for the year endedDecember 31, 2022 . This decrease is a result of the Bank exiting the indirect auto loan origination business at the end of 2015. Since the Bank did not originate auto loans for sale during the years endedDecember 31, 2022 and 2021, the servicing portfolio, which experienced regularly scheduled paydowns, was not replaced with new loans. We expect servicing fees and fee income on serviced loans to decrease over time until all serviced loans are paid off. Interchange fees, which are fees earned on the usage of the Bank's credit and debit cards, increased$0.1 million , or 6.0%, to$2.0 million for year endedDecember 31, 2022 from$1.9 million for the year endedDecember 31, 2021 . The increase in interchange fees can primarily be attributed to the increase in the volume of debit and credit card transactions. Income from bank owned life insurance increased$0.2 million to$1.3 million for the year endedDecember 31, 2022 from$1.1 million for the year endedDecember 31, 2021 . This increase reflects increased interest earned on the Company's bank owned life insurance policies. Income from insurance proceeds totaled$1.4 million for the year endedDecember 31, 2022 . Nontaxable income related to an insurance policy for the former chief financial officer of the Company and the Bank of$1.4 million was recorded during the fourth quarter of 2022. Other operating income includes, among other things, credit card, ATM and wire fees, derivative fee income, changes in the net asset value of other investments and rental income. The$0.5 million increase in other operating income for the year endedDecember 31, 2022 is primarily attributable to a$0.3 million increase in the net asset value of other investments, which represents unrealized net gains on investments inSmall Business Investment Company qualified funds and other investment funds, a$0.1 million increase in derivative fee income, and a$0.1 million increase in credit card fees compared to the year endedDecember 31, 2021 . 2021 vs. 2020. For a detailed discussion of our noninterest income for 2021 compared to 2020, see Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations - Noninterest Income - 2021 vs. 2020 in our annual report on Form 10-K for the year endedDecember 31, 2021 . Noninterest Expense Noninterest expense includes salaries and employee benefits and other costs associated with the conduct of our operations. We are committed to managing our costs within the framework of our operating strategy. However, since we are focused on growth both organically and through acquisition, we expect our expenses to increase as we grow. Our goal is to create synergies promptly after completing an acquisition, as this is important to our earnings success. 2022 vs. 2021. Total noninterest expense was$60.9 million for the year endedDecember 31, 2022 , a decrease of$2.2 million , or 3.5%, from$63.1 million for the year endedDecember 31, 2021 . This decrease was primarily driven by the decreases in salaries and employee benefits, acquisition expense, and depreciation and amortization. Salaries and employee benefits decreased$0.6 million , or 1.6%, to$35.0 million for the year endedDecember 31, 2022 , compared to$35.5 million for the year endedDecember 31, 2021 . The decrease in salaries and employee benefits is mainly attributable to a decrease in health insurance claims and an increase in the employee retention credit ("ERC"), partially offset by an increase in severance due to the separation agreement with the former chief financial officer of the Company and the Bank. Included in salaries and employee benefits for the years endedDecember 31, 2022 and 2021 are$2.3 million and$1.9 million , respectively, of ERCs which were recognized as credits to payroll taxes. Please refer to Note 1. Summary of Significant Accounting Policies - Employee Retention Credit, in the Notes to Consolidated Financial Statements contained in Item 8. Financial Statements and Supplementary Data for additional discussion regarding the ERCs. As ofDecember 31, 2022 , we had 331 full-time and seven part-time employees, compared to 339 full-time and four part-time employees as ofDecember 31, 2021 .
Depreciation and amortization decreased
Data processing increased$0.5 million , or 15.7%, to$3.6 million for the year endedDecember 31, 2022 from$3.1 million for the same period in 2021. The increase is mainly attributable to the Bank's investments in multiple technology enhancements for our customers as well as an increase in customers due to organic growth and growth from the acquisition of Cheaha inApril 2021 . We did not incur any acquisition expense for the year endedDecember 31, 2022 , compared to$2.4 million for the year endedDecember 31, 2021 . We did not complete any acquisitions in 2022. For the year endedDecember 31, 2021 , acquisition expense resulted from costs related to the acquisition of Cheaha inApril 2021 . Occupancy expense increased$0.2 million , or 5.9% to$2.9 million for the year endedDecember 31, 2022 from$2.8 million for the year endedDecember 31, 2021 . This increase is primarily attributable to increases in utilities and real property taxes for our branch facilities, including the additional four branch locations acquired as part of the acquisition of Cheaha inApril 2021 . 45
--------------------------------------------------------------------------------
Table of Contents
Other operating expenses include security, business development,FDIC and OCC assessments, bank shares and property taxes, collection and repossession, charitable contributions, repair and maintenance costs, personnel training and development, filing fees, and other costs related to the operation of our business. Other operating expenses increased$0.3 million , or 2.5%, to$12.7 million for the year endedDecember 31, 2022 from$12.4 million for the year endedDecember 31, 2021 . The increase in other operating expenses was primarily due to an increase in collection and repossession expenses, the majority of which is related to one impaired loan relationship impacted by Hurricane Ida, partially offset by decreases in provision for unfunded loan commitments and telephone expense. 2021 vs. 2020. For a detailed discussion of our noninterest expense for 2021 compared to 2020, see Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations - Noninterest Expense - 2021 vs. 2020 in our annual report on Form 10-K for the year endedDecember 31, 2021 . Income Tax Expense Income tax expense for the years endedDecember 31, 2022 , 2021 and 2020 was$8.6 million ,$1.9 million , and$3.5 million , respectively. The effective tax rates for the years endedDecember 31, 2022 , 2021 and 2020 were 19.5%, 19.3%, and 19.9%, respectively. The effective tax rate differs from the statutory rate of 21% primarily due to nontaxable income from insurance proceeds and tax-exempt interest income earned on certain loans, investment securities and bank owned life insurance. Risk Management The primary risks associated with our operations are credit, interest rate and liquidity risk. Higher inflation also presents risks. Credit, inflation and interest rate risk are discussed below, while liquidity risk is discussed in this section under the heading Liquidity and Capital Resources below.
Credit Risk and the Allowance for Loan Losses
General. The risk of loss should a borrower default on a loan is inherent in any lending activity. Our portfolio and related credit risk are monitored and managed on an ongoing basis by our risk management department, the board of directors' loan committee and the full board of directors. We utilize a ten point risk-rating system, which assigns a risk grade to each borrower based on a number of quantitative and qualitative factors associated with a loan transaction. The risk grade categorizes the loan into one of five risk categories, based on information about the ability of borrowers to service the debt. The information includes, among other factors, current financial information about the borrower, historical payment experience, credit documentation, public information and current economic trends. These categories assist management in monitoring our credit quality. The following describes each of the risk categories, which are consistent with the definitions used in guidance promulgated by federal banking regulators:
• Pass (Loan grades 1-6)-Loans not meeting the criteria below are considered
pass. These loans have high credit characteristics and financial strength. The
borrowers at least generate profits and cash flow that are in line with peer
and industry standards and have debt service coverage ratios above loan
covenants and our policy guidelines. For some of these loans, a guaranty from
a financially capable party mitigates characteristics of the borrower that
might otherwise result in a lower grade.
• Special Mention (grade 7)-Loans classified as special mention possess some
credit deficiencies that need to be corrected to avoid a greater risk of
default in the future. For example, financial ratios relating to the borrower
may have deteriorated. Often, a special mention categorization is temporary
while certain factors are analyzed or matters addressed before the loan is re-categorized as either pass or substandard.
• Substandard (grade 8)-Loans classified as substandard are inadequately
protected by the current net worth and paying capacity of the borrower or the
liquidation value of any collateral. If deficiencies are not addressed, it is
likely that this category of loan will result in the Bank incurring a loss.
Where a borrower has been unable to adjust to industry or general economic
conditions, the borrower's loan is often categorized as substandard.
• Doubtful (grade 9)-Doubtful loans are substandard loans with one or more
additional negative factors that makes full collection of amounts outstanding,
either through repayment or liquidation of collateral, highly questionable and
improbable. 46
--------------------------------------------------------------------------------
Table of Contents
• Loss (grade 10)-Loans classified as loss have deteriorated to such a point
that it is not practicable to defer writing off the loan. For these loans, all
efforts to remediate the loan's negative characteristics have failed and the
value of the collateral, if any, has severely deteriorated relative to the
amount outstanding. Although some value may be recovered on such a loan, it is
not significant in relation to the amount borrowed. AtDecember 31, 2022 andDecember 31, 2021 , there were no loans classified as loss, while there were$0.2 million and$0.7 million , respectively, of loans classified as doubtful,$15.0 million and$46.8 million , respectively, of loans classified as substandard, and$12.8 million and$7.3 million , respectively, of loans classified as special mention as of such dates. Of our aggregate$28.0 million and$54.8 million doubtful, substandard and special mention loans atDecember 31, 2022 andDecember 31, 2021 , respectively,$4.7 million and$8.6 million , respectively, were acquired and marked to fair value at the time of their acquisition. An independent loan review is conducted annually, whether internally or externally, on at least 40% of commercial loans utilizing a risk-based approach designed to maximize the effectiveness of the review. Internal loan review is independent of the loan underwriting and approval process. In addition, credit analysts periodically review certain commercial loans to identify negative financial trends related to any one borrower, any related groups of borrowers or an industry. All loans not categorized as pass are put on an internal watch list, with quarterly reports to the board of directors. In addition, a written status report is maintained by our special assets division for all commercial loans categorized as substandard or worse. We use this information in connection with our collection efforts. If our collection efforts are unsuccessful, collateral securing loans may be repossessed and sold or, for loans secured by real estate, foreclosure proceedings initiated. The collateral is sold at public auction for fair market value (based upon recent appraisals), with fees associated with the foreclosure being deducted from the sales price. The purchase price is applied to the outstanding loan balance. If the loan balance is greater than the sales proceeds, the deficient balance is charged-off. Allowance for Loan Losses. ThroughDecember 31, 2022 , the allowance for loan losses is an amount that management believes will be adequate to absorb probable losses inherent in the entire loan portfolio. The appropriate level of the allowance is based on an ongoing analysis of the loan portfolio and represents an amount that management deems adequate to provide for inherent losses, including collective impairment as recognized under ASC Topic 450, Contingencies. Collective impairment is calculated based on loans grouped by grade. Another component of the allowance is losses on loans assessed as impaired under ASC 310. The balance of these loans and their related allowance is included in management's estimation and analysis of the allowance for loan losses. Other considerations in establishing the allowance for loan losses include the nature and volume of the loan portfolio, overall portfolio quality, historical loan loss, review of specific problem loans, and current economic conditions that may affect the borrower's ability to pay, as well as trends within each of these factors. The allowance for loan losses is established after input from management as well as our risk management department and our special assets committee. We evaluate the adequacy of the allowance for loan losses on a quarterly basis. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. The allowance for loan losses was$24.4 million atDecember 31, 2022 , an increase compared to$20.9 million atDecember 31, 2021 and$20.4 million atDecember 31, 2020 . The primary reason for the increase in the allowance for loan losses atDecember 31, 2022 and 2021 compared toDecember 31, 2020 is increased loan loss provisioning to reflect our organic loan growth. Please refer to Note 1. Summary of Significant Accounting Policies - Recent Accounting Pronouncements, in the Notes to Consolidated Financial Statements contained in Item 8. Financial Statements and Supplementary Data for information regarding our adoption, effectiveJanuary 1, 2023 , of ASU 2016-13, which will impact how we account for our loan allowance and for loans acquired with more than insignificant impairment. A loan is considered impaired when, based on current information and events, it is probable that we will be unable to collect the scheduled payments of principal and interest when due according to the contractual terms of the loan agreement. Determination of impairment is treated the same across all classes of loans. Impairment is measured on a loan-by-loan basis for, among others, all loans of$500,000 or greater, nonaccrual loans and a sample of loans between$250,000 and$500,000 . When we identify a loan as impaired, we measure the extent of the impairment based on the present value of expected future cash flows, discounted at the loan's effective interest rate, except when the sole (remaining) source of repayment for the loans is the operation or liquidation of the collateral. In these cases when foreclosure is probable, we use the current fair value of the collateral, less selling costs, instead of discounted cash flows. For real estate collateral, the fair value of the collateral is based upon a recent appraisal by a qualified and licensed appraiser. If we determine that the value of the impaired loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs and unamortized premiums or discounts), we recognize impairment through an allowance estimate or a charge-off recorded against the allowance. When the ultimate collectability of the total principal of an impaired loan is in doubt and the loan is on nonaccrual, all payments are applied to principal, under the cost recovery method. When the ultimate collectability of the total principal of an impaired loan is not in doubt and the loan is on nonaccrual, contractual interest is credited to interest income when received, under the cash basis method. 47
--------------------------------------------------------------------------------
Table of Contents
Impaired loans atDecember 31, 2022 , which include all TDRs and nonaccrual loans individually evaluated for impairment for purposes of determining the allowance for loan losses, were$10.4 million compared to$32.8 million atDecember 31, 2021 , and$19.2 million atDecember 31, 2020 . AtDecember 31, 2022 andDecember 31, 2021 ,$0.3 million and$0.6 million , respectively, of the allowance for loan losses were specifically allocated to impaired loans, while$0.2 million of the allowance was specifically allocated to such loans atDecember 31, 2020 . The decrease in impaired loans atDecember 31, 2022 compared toDecember 31, 2021 was driven by a large paydown on the loan relationship for which we recorded a$21.6 million impairment in 2021, as discussed in Certain Events That Affect Year-over-Year Comparability - Hurricane Ida. Many of the loans comprising the total relationship were placed on nonaccrual following the impairment. The provision for loan losses is a charge to income in an amount that management believes is necessary to maintain an adequate allowance for loan losses. The provision is based on management's regular evaluation of current economic conditions in our specific markets as well as regionally and nationally, changes in the character and size of the loan portfolio, underlying collateral values securing loans, and other factors which deserve recognition in estimating loan losses. For the years endedDecember 31, 2022 , 2021 and 2020, the provision for loan losses was$2.9 million ,$22.9 million , and$11.2 million , respectively. The provision for loan losses for the year endedDecember 31, 2022 reflects provisioning related to our organic loan growth. The provision for loan losses for the year endedDecember 31, 2021 includes a$21.6 million impairment charge related to one loan relationship impacted by Hurricane Ida, as discussed in Certain Events That Affect Year-over-Year Comparability - Hurricane Ida. Additional provision for loan losses was recorded in the year endedDecember 31, 2020 primarily as a result of the deterioration of market conditions which were adversely affected by the COVID-19 pandemic. Acquired loans that are accounted for under ASC 310-30 were marked to market on the date we acquired the loans to values which, in management's opinion, reflected the estimated future cash flows, based on the facts and circumstances surrounding each respective loan at the date of acquisition. If future cash flows are not reasonably estimable, the Company accounts for the acquired loans using the cash basis method. We continually monitor these loans as part of our normal credit review and monitoring procedures for changes in the estimated future cash flows. ASC 310-30 does not permit carry over or recognition of an allowance for loan losses. We did not increase the allowance for loan losses for loans accounted for under ASC 310-30 during 2022 or 2021. In 2020, one acquired loan accounted for under ASC 310-30 required a specific reserve of$0.2 million , which was charged to provision for loan losses.
The following table presents the allocation of the allowance for loan losses by loan category as of the dates indicated (dollars in thousands).
December 31, 2022 2021 2020 % of Loans % of Loans % of Loans in each in each in each Category Category Category Allowance for to Total Allowance for to Total Allowance for to Total Loan Losses Loans Loan Losses Loans Loan Losses Loans Mortgage loans on real estate: Construction and development$ 2,555 9.6 %$ 2,347 10.9 %$ 2,375 11.1 % 1-4 Family 3,917 19.1 3,337 19.4 3,370 18.2 Multifamily 999 3.9 673 3.2 589 3.3 Farmland 113 0.6 383 1.1 435 1.4 Commercial real estate 10,718 45.5 9,354 47.9 8,496 43.7 Commercial and industrial 5,743 20.7 4,411 16.6 4,558 21.2 Consumer 319 0.6 354 0.9 540 1.1 Total$ 24,364 100 %$ 20,859 100 %$ 20,363 100 %
The following table presents the amount of the allowance for loan losses allocated to each loan category as a percentage of total loans as of the dates indicated (dollars in thousands).
December 31, 2022 2021 2020 Mortgage loans on real estate: Construction and development 0.12 % 0.12 % 0.13 % 1-4 Family 0.18 0.18 0.18 Multifamily 0.05 0.04 0.03 Farmland 0.01 0.02 0.02 Commercial real estate 0.51 0.50 0.46 Commercial and industrial 0.27 0.23 0.25 Consumer 0.02 0.02 0.02 Total 1.16 % 1.11 % 1.09 % 48
--------------------------------------------------------------------------------
Table of Contents
As discussed above, the balance in the allowance for loan losses is principally influenced by the provision for loan losses and by net loan loss experience. Additions to the allowance are charged to the provision for loan losses. Losses are charged to the allowance as incurred and recoveries on losses previously charged to the allowance are credited to the allowance at the time recovery is collected.
The table below reflects the activity in the allowance for loan losses and key ratios for the periods indicated (dollars in thousands).
Years ended December 31, 2022 2021 2020 Allowance at beginning of period$ 20,859 $ 20,363 $ 10,700 Provision for loan losses 2,922 22,885 11,160 Net recoveries (charge-offs) 583 (22,389 ) (1,497 ) Allowance at end of period$ 24,364 $ 20,859 $ 20,363 Total loans - period end 2,104,767 1,872,012 1,860,318 Nonaccrual loans - period end 9,986 29,495 13,506 Key Ratios: Allowance for loan losses to total loans - period end 1.16 % 1.11 % 1.09 % Allowance for loan losses to nonaccrual loans - period end 244 % 71 % 151 %
Nonaccrual loans to total loans - period end 0.47 % 1.58 % 0.73 %
The allowance for loan losses to total loans increased to 1.16% atDecember 31, 2022 compared to 1.11% atDecember 31, 2021 while the allowance for loan losses to nonaccrual loans ratio increased to 244% atDecember 31, 2022 from 71% atDecember 31, 2021 . The increase in the allowance for loan losses to total loans atDecember 31, 2022 is primarily due to the increase in the allowance for loan losses compared toDecember 31, 2021 . The increase in the allowance for loan losses to nonaccrual loans is due to the decrease in nonaccrual loans primarily due to large paydowns on one loan relationship impacted by Hurricane Ida. Nonaccrual loans were$10.0 million , or 0.47% of total loans, atDecember 31, 2022 , a decrease of$19.5 million compared to$29.5 million , or 1.58% of total loans, atDecember 31, 2021 .
The following table presents the allocation of net (charge offs) recoveries by loan category for the periods indicated (dollars in thousands).
Years ended December 31, 2022 2021 2020 Ratio of Net Ratio of Net Charge-offs Ratio ofNet Net (Charge-offs) Charge-offs to Net (Charge-offs) to Average Net (Charge-offs) Charge-offs to Recoveries Average Balance Average Loans Recoveries Average Balance Loans Recoveries Average Balance Average Loans Mortgage loans on real estate: Construction and development $ 48 $ 210,160 (0.02 )% $ (247 ) $ 211,230 0.12 % $ 47 $ 193,764 (0.02 )% 1-4 Family 103 380,481 (0.03 ) (156 ) 354,748 0.04 (99 ) 327,521 0.03 Multifamily - 56,665 - - 60,327 - - 58,664 - Farmland 13 15,837 (0.08 ) (13 ) 23,128 0.06 - 27,821 - Commercial real estate 33 901,422
(0.00 ) (10,274 ) 869,098 1.18 (43 ) 785,431 0.01 Commercial and industrial 535 357,837 (0.15 ) (11,641 ) 362,483 3.21 (1,145 ) 368,239 0.31 Consumer (149 ) 14,853 1.00 (58 ) 21,056 0.28 (257 ) 24,862 1.03 Total $ 583$ 1,937,255 (0.03 )% $ (22,389 )$ 1,902,070 1.18
% $ (1,497 )$ 1,786,302 0.08 % Charge-offs reflect the realization of losses in the portfolio that were recognized previously through the provision for loan losses. Net recoveries for the year endedDecember 31, 2022 were$0.6 million , or 0.03% of the average loan balance. Net charge-offs for the years endedDecember 31, 2021 and 2020 were$22.4 million and$1.5 million respectively, equal to 1.18% and 0.08%, of the average loan balance for the respective periods. Net recoveries for the year endedDecember 31, 2022 , were primarily driven by one$0.9 million recovery on a commercial and industrial loan relationship. The net recoveries in 2022 compared to the net charge-offs in 2021 was primarily due to charge-offs of$21.6 million in the third quarter of 2021 due to the impairment charge related to one loan relationship impacted by Hurricane Ida. Commercial and industrial loans and commercial real estate loans were the categories affected. For the year endedDecember 31, 2020 , the largest category of charge-offs was commercial and industrial loans. 49
--------------------------------------------------------------------------------
Table of Contents
Management believes the allowance for loan losses atDecember 31, 2022 was sufficient to provide adequate protection against losses in our portfolio based on the accounting standards in effect at the time. However, there can be no assurance that this allowance will prove to be adequate over time to cover ultimate losses in connection with our loans. This allowance may prove to be inadequate due to the scope and duration of the COVID-19 pandemic and its continued influence on the economy, higher inflation and interest rates than anticipated, other unanticipated adverse changes in the economy, or discrete events adversely affecting specific customers or industries. Our results of operations and financial condition could be materially adversely affected to the extent that the allowance is insufficient to cover such changes or events. EffectiveJanuary 1, 2023 , we adopted ASU 2016-13, which uses a Current Expected Credit Loss ("CECL") accounting standard for the loan allowance. The CECL methodology requires that lifetime "expected credit losses" be recorded at the time the financial asset is originated or acquired, and be adjusted each period for changes in expected lifetime credit losses. The CECL methodology replaces multiple prior impairment models underU.S. GAAP that generally required that a loss be "incurred" before it was recognized, and represents a significant change from priorU.S. GAAP. Please refer to Note 1. Summary of Significant Accounting Policies - Recent Accounting Pronouncements, in the Notes to Consolidated Financial Statements contained in Item 8. Financial Statements and Supplementary Data for information regarding our adoption, effectiveJanuary 1, 2023 , of ASU 2016-13, which will impact how we account for our loan allowance and for loans acquired with more than insignificant impairment. Nonperforming assets and restructured loans. Nonperforming assets consist of nonperforming loans and other real estate owned. Nonperforming loans are those on which the accrual of interest has stopped or loans which are contractually 90 days past due on which interest continues to accrue. Loans are ordinarily placed on nonaccrual when a loan is specifically determined to be impaired or when principal and interest is delinquent for 90 days or more. Additionally, management may elect to continue the accrual when the estimated net available value of collateral is sufficient to cover the principal balance and accrued interest. It is our policy to discontinue the accrual of interest income on any loan for which we have reasonable doubt as to the payment of interest or principal. A loan may be returned to accrual status when all the principal and interest amounts contractually due are brought current and future principal and interest amounts contractually due are reasonably assured, which is typically evidenced by a sustained period of repayment performance by the borrower. Another category of assets which contributes to our credit risk is TDRs, or restructured loans. A restructured loan is a loan for which a concession that is not insignificant has been granted to the borrower due to a deterioration of the borrower's financial condition and which is performing in accordance with the new terms. Such concessions may include reduction in interest rates, deferral of interest or principal payments, principal forgiveness and other actions intended to minimize the economic loss and to avoid foreclosure or repossession of the collateral. We strive to identify borrowers in financial difficulty early and work with them to modify their loans to more affordable terms before such loan reaches nonaccrual status. In evaluating whether to restructure a loan, management analyzes the long-term financial condition of the borrower, including guarantor and collateral support, to determine whether the proposed concessions will increase the likelihood of repayment of principal and interest. Restructured loans that are not performing in accordance with their restructured terms that are either contractually 90 days past due or placed on nonaccrual status are reported as nonperforming loans. There were 20 credits classified as TDRs atDecember 31, 2022 that totaled approximately$3.0 million , compared to 29 credits totaling$10.5 million atDecember 31, 2021 . Twelve of the restructured loans were considered TDRs due to modification of terms through adjustments to maturity, four of the restructured loans were considered TDRs due to a reduction in the interest rate to a rate lower than the current market rate, three restructured loans were considered TDRs due to principal payment forbearance paying interest only for a specified period of time, and one restructured loan was considered a TDR due to principal and interest payment forbearance. AtDecember 31, 2022 and 2021, none of the TDRs were in default of their modified terms and included in nonaccrual loans. AtDecember 31, 2022 and 2021, there were no available balances on loans classified as TDRs that the Company was committed to lend. The Company individually evaluates each TDR for allowance purposes, primarily based on collateral value, and excludes these loans from the loan population that is collectively evaluated for impairment. 50
--------------------------------------------------------------------------------
Table of Contents
Other Real Estate Owned. Other real estate owned consists of properties acquired through foreclosure or acceptance of a deed in lieu of foreclosure, as well as any properties owned by the Company that are not intended to be used to carry out its operations. These properties are carried at the lower of cost or fair market value based on appraised value less estimated selling costs. Losses arising at the time of foreclosure of properties are charged against the allowance for loan losses. Other real estate owned with a cost basis of$5.8 million and$0.9 million was sold during the years endedDecember 31, 2022 and 2021, respectively, resulting in a net gain of$9,000 and a net loss of$5,000 for the respective periods, compared to a cost basis of$0.1 million and a net gain of$12,000 for the year endedDecember 31, 2020 .
The following table provides details of our other real estate owned as of the dates indicated (dollars in thousands).
December 31, 2022 December 31, 2021 1-4 Family $ 682 $ 168 Commercial real estate - 2,485 Total other real estate owned $ 682 $ 2,653
Changes in our other real estate owned are summarized in the table below for the periods indicated (dollars in thousands).
Year ended Year ended December 31, 2022 December 31, 2021 Balance, beginning of period $ 2,653 $ 663 Additions 3,327 1,023 Transfers from bank premises and equipment 525 1,850 Sales of other real estate owned (5,823 ) (883 ) Balance, end of period $ 682 $ 2,653 Please refer to Note 5. Other Real Estate Owned, in the Notes to Consolidated Financial Statements contained in Item 8. Financial Statements and Supplementary Data for additional information. Impact of Inflation. Inflation reached a near 40-year high in late 2021 primarily due to effects of the ongoing pandemic and continued rising throughJune 2022 . SinceJune 2022 , the rate of inflation has decelerated; however, it has remained at historically high levels throughMarch 2023 . When the rate of inflation accelerates, there is an erosion of consumer and customer purchasing power. Accordingly, this could impact our business by reducing our tolerance for extending credit, and our customer's desire to obtain credit, or causing us to incur additional provisions for loan losses resulting from a possible increased default rate. Inflation may lead to lower loan re-financings. Inflation may also increase the costs of goods and services we purchase, including the costs of salaries and benefits. In response to higher inflation, theFederal Reserve increased the federal funds target rate during 2022 as discussed in Certain Events That Affect Year-over-Year Comparability - Rising Inflation and Interest Rates. InFebruary 2023 , theFederal Reserve increased the federal funds target rate by 25 basis points to 4.50% to 4.75%, and one or more further increases are expected during the remainder of 2023. For additional information, see Interest Rate Risk below, and Item 1A. Risk Factors - Risks Related to our Business - Changes in interest rates could have an adverse effect on our profitability and Inflation and rising prices may continue to adversely affect our results of operations and financial condition. Interest Rate Risk Market risk is the risk of loss from adverse changes in market prices and rates. Since the majority of our assets and liabilities are monetary in nature, our market risk arises primarily from interest rate risk inherent in our lending and deposit activities. A sudden and substantial change in interest rates may adversely impact our earnings and profitability because the interest rates borne by assets and liabilities do not change at the same speed, to the same extent, or on the same basis. Accordingly, our ability to proactively structure the volume and mix of our assets and liabilities to address anticipated changes in interest rates, as well as to react quickly to such fluctuations, can significantly impact our financial results. To that end, management actively monitors and manages our interest rate risk exposure. The Asset/Liability Committee ("ALCO") has been authorized by the board of directors to implement our asset/liability management policy, which establishes guidelines with respect to our exposure to interest rate fluctuations, liquidity, loan limits as a percentage of funding sources, exposure to correspondent banks and brokers and reliance on non-core deposits. The goal of the policy is to enable us to maximize our interest income and maintain our net interest margin without exposing the Bank to excessive interest rate risk, credit risk and liquidity risk. Within that framework, the ALCO monitors our interest rate sensitivity and makes decisions relating to our asset/liability composition. Net interest income simulation is the Bank's primary tool for benchmarking near term earnings exposure. Given the ALCO's objective to understand the potential risk/volatility embedded within the current mix of assets and liabilities, standard rate scenario simulations assume total assets remain static (i.e. no growth). The Bank may also use a standard gap report in its interest rate risk management process. The primary use for the gap report is to provide supporting detailed information to the ALCO's discussion. The Bank has particular concerns with the utility of the gap report as a risk management tool because of difficulties in relating gap directly to changes in net interest income. Hence, the income simulation is the key indicator for earnings-at-risk since it expressly measures what the gap report attempts to estimate. Short term interest rate risk management tactics are decided by the ALCO where risk exposures exist out into the 1 to 2-year horizon. Tactics are formulated and presented to the ALCO for discussion, modification, and/or approval. Such tactics may include asset and liability acquisitions of appropriate maturities in the cash market, loan and deposit product/pricing strategy modification, and derivatives hedging activities to the extent such activity is authorized by the board of directors. 51
--------------------------------------------------------------------------------
Table of Contents
Since the impact of rate changes due to mismatched balance sheet positions in the short-term can quickly and materially affect the current year's income statement, they require constant monitoring and management.
Within the gap position that management directs, we attempt to structure our assets and liabilities to minimize the risk of either a rising or falling interest rate environment. We manage our gap position for time horizons of one month, two months, three months, four to six months, seven to twelve months, 13-24 months, 25-36 months, 37-60 months and more than 60 months. The goal of our asset/liability management is for the Bank to maintain a net interest income at risk in an up or down 100 basis point environment at less than (5)%. AtDecember 31, 2022 , the Bank was within the policy guidelines for asset/liability management.
The following table depicts the estimated impact on net interest income of immediate changes in interest rates at the specified levels for the periods presented.
As ofDecember 31, 2022 Estimated Changes in Interest Rates Increase/Decrease in (in basis points) Net Interest Income(1) +300 (11.7 )% +200 (7.9 )% +100 (3.7 )% -100 2.1 %
(1) The percentage change in this column represents the projected net interest
income for 12 months on a flat balance sheet in a stable interest rate environment versus the projected net interest income in the various rate scenarios. The computation of the prospective effects of hypothetical interest rate changes requires numerous assumptions regarding characteristics of new business and the behavior of existing positions. These business assumptions are based upon our experience, business plans and published industry experience. Key assumptions include asset prepayment speeds, competitive factors, the relative price sensitivity of certain assets and liabilities, and the expected life of non-maturity deposits. However, there are a number of factors that influence the effect of interest rate fluctuations on us which are difficult to measure and predict. For example, a rapid drop in interest rates might cause our loans to repay at a more rapid pace and certain mortgage-related investments to prepay more quickly than projected. This could mitigate some of the benefits of falling rates as are expected when we are in a negatively-gapped position. Conversely, a rapid rise in rates could give us an opportunity to increase our margins and stifle the rate of repayment on our mortgage-related loans which would increase our returns. As a result, because these assumptions are inherently uncertain, actual results will differ from simulated results.
Liquidity and Capital Resources
Liquidity. Liquidity is a measure of the ability to fund loan commitments and meet deposit maturities and withdrawals in a timely and cost-effective way. Cash flow requirements can be met by generating net income, attracting new deposits, converting assets to cash or borrowing funds. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit outflows, loan prepayments, and borrowings are greatly influenced by general interest rates, economic conditions, and the competitive environment in which we operate. To minimize funding risks, we closely monitor our liquidity position through periodic reviews of maturity profiles, yield and rate behaviors, and loan and deposit forecasts. Excess short-term liquidity is usually invested in overnight federal funds sold. Our core deposits, which are deposits excluding time deposits greater than$250,000 and deposits of municipalities and other political entities, are our most stable source of liquidity to meet our cash flow needs due to the nature of the long-term relationships generally established with our customers. Maintaining the ability to acquire these funds as needed in a variety of markets, and within ALCO compliance targets, is essential to ensuring our liquidity. AtDecember 31, 2022 and 2021, 70% and 81% of our total assets, respectively, were funded by core deposits. Our investment portfolio is another alternative for meeting our cash flow requirements. Investment securities generate cash flow through principal payments and maturities, and they generally have readily available markets that allow for their conversion to cash. Some securities are pledged to secure certain deposit types or short-term borrowings (such as FHLB advances), which impacts their liquidity. AtDecember 31, 2022 , securities with a carrying value of$165.7 million were pledged to secure deposits or borrowings, compared to$118.2 million in pledged securities atDecember 31, 2021 . 52
--------------------------------------------------------------------------------
Table of Contents
Other sources available for meeting liquidity needs include advances from the FHLB, repurchase agreements and other borrowings. FHLB advances are primarily used to match-fund fixed rate loans in order to minimize interest rate risk and also may be used to meet day to day liquidity needs, particularly if the prevailing interest rate on an FHLB advance compares favorably to the rates that we would be required to pay to attract deposits. AtDecember 31, 2022 , the balance of our outstanding advances with the FHLB was$387.0 million , an increase from$78.5 million atDecember 31, 2021 . The total amount of the remaining credit available to us from the FHLB atDecember 31, 2022 was$533.1 million . AtDecember 31, 2022 , our FHLB borrowings were collateralized by approximately$930.1 million of the Company's loan portfolio and$0.6 million of the Company's investment securities. Repurchase agreements are contracts for the sale of securities which we own with a corresponding agreement to repurchase those securities at an agreed upon price and date. Our policies limit the use of repurchase agreements to those collateralized byU.S. Treasury andU.S. agency securities. We had no repurchase agreements outstanding atDecember 31, 2022 , compared to$5.8 million atDecember 31, 2021 . We maintain unsecured lines of credit with FNBB and TIB totaling$60.0 million . These lines of credit are federal funds lines of credit and are used for overnight borrowing only. There were no outstanding balances on our unsecured lines of credit atDecember 31, 2022 or 2021. In addition, atDecember 31, 2022 and 2021 we had$45.0 million and$43.6 million in aggregate principal amount of subordinated debt outstanding, respectively. For additional information, see Note 11.Subordinated Debt Securities in the Notes to Consolidated Financial Statements contained in Item 8. Financial Statements and Supplementary Data and see Discussion and Analysis of Financial Condition - Borrowings above. Our liquidity strategy is focused on using the least costly funds available to us in the context of our balance sheet composition and interest rate risk position. Accordingly, we target growth of noninterest-bearing deposits. Although we cannot directly control the types of deposit instruments our customers choose, we can influence those choices with the interest rates and deposit specials we offer. During the years endedDecember 31, 2022 and 2021, due to more favorable pricing, we used brokered demand deposits to satisfy borrowings under certain interest rate swap agreements that we voluntary terminated. AtDecember 31, 2022 and 2021, we held no brokered demand deposits. We also hold QwickRate® deposits, included in our time deposit balances, to address liquidity needs when rates on such deposits compare favorably with deposit rates in our markets. AtDecember 31, 2022 , we held$26.5 million of QwickRate® deposits, a decrease compared to$63.8 million atDecember 31, 2021 . The following table presents, by type, our funding sources, which consist of total average deposits and borrowed funds, as a percentage of total funds and the total cost of each funding source for the years endedDecember 31, 2022 and 2021. Percentage of Total Average Deposits and Borrowed Funds Cost of Funds Years ended December 31, Years ended December 31, 2022 2021 2022 2021 Noninterest-bearing demand 26 % 24 % - % - % Interest-bearing demand 38 37 0.27 0.28 Brokered demand deposits - 3 0.42 0.92 Savings deposits 7 7 0.05 0.15 Time deposits 18 22 0.88 0.81 Short-term borrowings 6 1 3.05 0.20 Borrowed funds 5 6 3.49 3.26 Total deposits and borrowed funds 100 % 100 % 0.63 % 0.51 % Capital Management. Our primary sources of capital include retained earnings, capital obtained through acquisitions and proceeds from the sale of our capital stock and subordinated debt. We may issue capital stock and debt securities from time to time to fund acquisitions and support our organic growth. InApril 2022 , we completed a private placement of$20.0 million in aggregate principal amount of our 2032 Notes, which are structured to quality as Tier 2 capital for regulatory purposes, and used the majority of the proceeds to redeem$18.6 million of our 2027 Notes inJune 2022 . During 2019, we issued$25.0 million of our 2029 Notes, which are structured to qualify as Tier 2 capital for regulatory capital purposes. For additional information see Discussion and Analysis of Financial Condition - Borrowings. 53
--------------------------------------------------------------------------------
Table of Contents
In 2019, we issued 1,290,323 shares of common stock for net proceeds of$28.5 million and 763,849 shares of common stock in connection with our acquisition ofMainland Bank . We issued 799,559 shares of common stock in connection with our acquisition ofBOJ in 2017. During 2022, we paid$3.6 million in dividends, compared to$3.1 million in 2021 and$2.7 million in 2020. Our board of directors has authorized a share repurchase program and during 2022 we paid$10.5 million to repurchase our shares, compared to$6.9 million in 2021 and$11.1 million in 2020. OnApril 21, 2022 andSeptember 21, 2022 , the board of directors approved an additional 400,000 shares and 300,000 shares, respectively, of the Company's common stock for repurchase. AtDecember 31, 2022 , we had 386,714 shares of our common stock remaining authorized for repurchase under the program. For additional information, see Notes 11 and 14 to our consolidated financial statements. We are subject to restrictions on dividends under applicable banking laws and regulations. Please refer to the discussion under the heading "Supervision and Regulation - Dividends" in Item 1. Business, for more information. We are also subject to additional legal and contractual restrictions on dividends. Please refer to the discussion under the heading "Dividend Policy" in Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases ofEquity Securities and under the heading "Common Stock - Dividend Restrictions" in Note 14. Stockholders' Equity in the Notes to Consolidated Financial Statements contained in Item 8. Financial Statements and Supplementary Data. We are subject to various regulatory capital requirements administered by theFederal Reserve and the OCC. These requirements are described in greater detail under the heading "Supervision and Regulation - Regulatory Capital Requirements" of Item 1. Business. Those guidelines specify capital tiers, which include the following classifications: Tier 1 Common Equity Tier 1 Total Ratio of Leverage Tier 1 Capital Capital Capital Tangible to Capital Tiers(1) Ratio Ratio Ratio Ratio Total Asset Well capitalized 5% or 6.5% or above 8% or 10% or above above above Adequately 4% or 4.5% or above 6% or 8% or capitalized above above above Undercapitalized Less than Less than 4.5% Less than Less than 4% 6% 8% Significantly Less than Less than 3% Less than Less than undercapitalized 3% 4% 6% Critically 2% or less undercapitalized
(1) In order to be well capitalized or adequately capitalized, a bank must
satisfy each of the required ratios in the table. In order to be
undercapitalized or significantly undercapitalized, a bank would need to fall
below just one of the relevant ratio thresholds in the table. In order to be
well capitalized, the Bank cannot be subject to any written agreement or
order requiring it to maintain a specific level of capital for any capital
measure.
The Company and the Bank each were in compliance with all regulatory capital
requirements as of
54
--------------------------------------------------------------------------------
Table of Contents
The following table presents the actual capital amounts and regulatory capital ratios for the Company and the Bank as of the dates presented (dollars in thousands).
Minimum Capital Requirement to be
Actual
Well Capitalized
Amount Ratio Amount RatioDecember 31, 2022 Investar Holding Corporation : Tier 1 capital to average assets (leverage)$ 231,048 8.53 % $ - - %
Tier 1 common equity to risk-weighted assets 221,548 9.79
- - Tier 1 capital to risk-weighted assets 231,048 10.21 - - Total capital to risk-weighted assets 300,009 13.25 - -Investar Bank : Tier 1 capital to average assets (leverage) 267,603 9.89 135,344 5.00
Tier 1 common equity to risk-weighted assets 267,603 11.83
147,044 6.50 Tier 1 capital to risk-weighted assets 267,603 11.83 180,977 8.00 Total capital to risk-weighted assets 292,339 12.92 226,221 10.00 December 31, 2021Investar Holding Corporation : Tier 1 capital to average assets (leverage)$ 206,899 8.12 % $ - - %
Tier 1 common equity to risk-weighted assets 197,399 9.45
- - Tier 1 capital to risk-weighted assets 206,899 9.90 - - Total capital to risk-weighted assets 271,416 12.99 - -Investar Bank : Tier 1 capital to average assets (leverage) 244,541 9.60 127,313 5.00
Tier 1 common equity to risk-weighted assets 244,541 11.72
135,651 6.50 Tier 1 capital to risk-weighted assets 244,541 11.72 166,956 8.00 Total capital to risk-weighted assets 266,069 12.75 208,694 10.00 Swap Contracts. The Bank historically has entered into interest rate swap contracts, some of which are forward starting, to manage exposure against the variability in the expected future cash flows (future interest payments) attributable to changes in the 1-month LIBOR associated with the forecasted issuances of 1-month fixed rate debt arising from a rollover strategy. An interest rate swap is an agreement whereby one party agrees to pay a fixed rate of interest on a notional principal amount in exchange for receiving a floating rate of interest on the same notional amount for a predetermined period of time, from a second party. AtDecember 31, 2022 the Company had no current or forward starting interest rate swap agreements. AtDecember 31, 2021 the Company had no current interest rate swap agreements, and forward starting interest rate swap agreements with a total notional amount of$115.0 million , all of which were designated as cash flow hedges. During the year endedDecember 31, 2022 , the Company voluntarily terminated its remaining interest rate swap agreements with a total notional amount of$115.0 million in response to market conditions. During year endedDecember 31, 2021 , the Company voluntarily terminated interest rate swap agreements with a total notional amount of$150.0 million in response to market conditions and as a result of excess liquidity. For years endedDecember 31, 2022 , andDecember 31, 2021 , unrealized gains of$6.4 million and$1.4 million , respectively, net of tax expenses of$1.7 million and$0.4 million , respectively, were reclassified from "Accumulated other comprehensive (loss) income" and recorded as "Swap termination fee income" in noninterest income in the accompanying consolidated statements of income. For the year endedDecember 31, 2022 , a gain of$4.3 million , net of a$1.2 million tax expense, was recognized in "Other comprehensive loss" in the accompanying consolidated statements of comprehensive (loss) income for the change in fair value of the interest rate swap contracts. For the years endedDecember 31, 2021 andDecember 31, 2020 , a gain of$5.3 million , net of a$1.4 million tax expense, and a loss of$2.3 million net of a$0.6 million tax benefit, respectively, was recognized in "Other comprehensive loss" in the accompanying consolidated statements of comprehensive (loss) income for the change in fair value of the interest rate swap contracts. 55
--------------------------------------------------------------------------------
Table of Contents
The Company also enters into interest rate swap contracts that allow commercial loan customers to effectively convert a variable-rate commercial loan agreement to a fixed-rate commercial loan agreement. Under these agreements, the Company enters into a variable-rate loan agreement with a customer in addition to an interest rate swap agreement, which serves to effectively swap the customer's variable-rate loan into a fixed-rate loan. The Company then enters into a corresponding swap agreement with a third party in order to economically hedge its exposure through the customer agreement. The interest rate swaps with both the customers and third parties are not designated as hedges under FASB ASC Topic 815, Derivatives and Hedging, and are marked to market through earnings. As the interest rate swaps are structured to offset each other, changes to the underlying benchmark interest rates considered in the valuation of these instruments do not result in an impact to earnings; however, there may be fair value adjustments related to credit quality variations between counterparties, which may impact earnings as required by FASB ASC Topic 820, Fair Value Measurements. The Company did not recognize any gains or losses in other income resulting from fair value adjustments during the years endedDecember 31, 2022 and 2021. Unfunded Commitments. The Bank enters into loan commitments and standby letters of credit in the normal course of its business. Loan commitments are made to meet the financing needs of our customers, while standby letters of credit commit the Bank to make payments on behalf of customers when certain specified future events occur. The credit risks associated with loan commitments and standby letters of credit are essentially the same as those involved in making loans to our customers. Accordingly, our normal credit policies apply to these arrangements. Collateral (e.g., securities, receivables, inventory, equipment, etc.) is obtained based on management's credit assessment of the customer. The credit risk associated with these commitments is evaluated in a manner similar to the allowance for loan losses. The reserve for unfunded loan commitments is included in "Accrued taxes and other liabilities" in the accompanying consolidated balance sheets. AtDecember 31, 2022 and 2021, the reserve for unfunded loan commitments was$0.4 million and$0.7 million , respectively. Loan commitments and standby letters of credit do not necessarily represent future cash requirements, in that while the customer typically has the ability to draw upon these commitments at any time, these commitments often expire without being drawn upon in full or at all. Virtually all of our standby letters of credit expire within one year. Our unfunded loan commitments and standby letters of credit outstanding are summarized below as of the dates indicated (dollars in thousands). December 31, 2022 December 31, 2021 Commitments to extend credit: Loan commitments $ 333,040 $ 349,701 Standby letters of credit 11,379 18,259
The Company closely monitors the amount of remaining future commitments to borrowers in light of prevailing economic conditions and adjusts these commitments as necessary. The Company will continue this process as new commitments are entered into or existing commitments are renewed.
Additionally, at
For each of the years endedDecember 31, 2022 and 2021, we engaged in no off-balance sheet transactions reasonably likely to have a material effect on our financial condition, results of operations, or cash flows currently or in the future. 56
--------------------------------------------------------------------------------
Table of Contents Lease Obligations. The Company's primary leasing activities relate to certain real estate leases entered into in support of the Company's branch operations. The Company's branch locations operated under lease agreements have all been designated as operating leases. The Company does not lease equipment under operating leases, nor does it have leases designated as finance leases. The following table presents, as ofDecember 31, 2022 , contractually obligated lease payments due under non-cancelable operating leases by payment date (dollars in thousands). Less than one year$ 595 One year to three years 991 Three years to five years 680 Over five years 1,012 Total$ 3,278 OnJanuary 27, 2023 , we completed the previously announced sale of certain assets, deposits and other liabilities associated with theAlice andVictoria, Texas branch locations toFirst Community Bank . Upon the completion of the sale, we recorded$0.3 million of occupancy expense to terminate the remaining$0.5 million of contractually obligated lease payments due under non-cancelable operating leases.
© Edgar Online, source