ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion compares the Company’s financial condition at December 31, 2022 to its financial condition at December 31, 2021 and the results of operations for the years ended December 31, 2022 and 2021. This discussion should be read in conjunction with the Consolidated Financial Statements and the Notes thereto appearing in Item 8 of Part II of this Annual Report on Form 10-K.
Forward-Looking Statements
Certain statements in this Annual Report on Form 10-K may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are statements that include, without limitation, projections, predictions, expectations, or beliefs about future events or results that are not statements of historical fact. Such forward-looking statements are based on various assumptions as of the time they are made, and are inherently subject to known and unknown risks, uncertainties, and other factors, some of which cannot be predicted or quantified, that may cause actual results, performance or achievements to be materially different from those expressed or implied by such forward-looking statements. Forward-looking statements are often accompanied by words that convey projected future events or outcomes such as “anticipate,” “contemplate,” “expect,” “believe,” “estimate,” “foresee,” “plan,” “project,” “predict,” “anticipate,” “intend,” “indicate,” “likely,” “target,” “will,” “may,” “view,” “opportunity,” “potential,” or words of similar meaning or other statements concerning opinions or judgment of the Company and its management about future events. Although the Company believes that its expectations with respect to forward-looking statements are based upon reasonable assumptions within the bounds of its existing knowledge of its business and operations, there can be no assurance that actual results, performance, or achievements of, or trends affecting, the Company will not differ materially from any projected future results, performance, achievements or trends expressed or implied by such forward-looking statements. Actual future results, performance, achievements or trends may differ materially from historical results or those anticipated depending on a variety of factors, including, but not limited to:
the occurrence of any event, change or other circumstances that could give rise to the right of one or both of the parties to terminate the LINK Merger Agreement between the Company and LINK;
the outcome of any legal proceedings that may be instituted against the Company or LINK;
the possibility that the proposed transaction will not close when expected or at all because required regulatory, shareholder or other approvals are not received or other conditions to the closing are not satisfied on a timely basis or at all, or are obtained subject to conditions that are not anticipated (and the risk that required regulatory approvals may result in the imposition of conditions that could adversely affect the combined company or the expected benefits of the proposed transaction);
the ability of the Company and LINK to meet expectations regarding the timing, completion and accounting and tax treatments of the proposed transaction;
the risk that any announcements relating to the proposed transaction could have adverse effects on the market price of the common stock of either or both parties to the proposed transaction;
the possibility that the anticipated benefits of the proposed transaction will not be realized when expected or at all, including as a result of the impact of, or problems arising from, the integration of the two companies or as a result of the strength of the economy and competitive factors in the areas where the Company and LINK do business;
certain restrictions during the pendency of the proposed transaction that may impact the parties’ ability to pursue certain business opportunities or strategic transactions;
the possibility that the transaction may be more expensive to complete than anticipated, including as a result of unexpected factors or events;
diversion of management’s attention from ongoing business operations and opportunities;
the possibility that the parties may be unable to achieve expected synergies and operating efficiencies in the merger within the expected timeframes or at all and to successfully integrate the Company’s operations and those of LINK, which may be more difficult, time-consuming or costly than expected;
revenues following the proposed transaction may be lower than expected;
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the Company’s and LINK’s success in executing their respective business plans and strategies and managing the risks involved in the foregoing;
the dilution caused by LINK’s issuance of additional shares of its capital stock in connection with the proposed transaction;
effects of the announcement, pendency or completion of the proposed transaction on the ability of the Company and LINK to retain customers and retain and hire key personnel and maintain relationships with their suppliers, and on their operating results and businesses generally;
potential adverse consequences related to the Termination Agreement with OCFC;
changes in interest rates, such as volatility in yields on U.S. Treasury bonds and increases or volatility in mortgage rates, and the impacts on macroeconomic conditions, customer and client spending and saving behaviors, the Company’s funding costs and the Company’s loan and investment securities portfolios;
monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve, and the effect of these policies on interest rates and business in our markets;
general business conditions, as well as conditions within the financial markets, including the impact thereon of unusual and infrequently occurring events, such as weather-related disasters, terrorist acts, geopolitical conflicts (such as the military conflict between Russia and Ukraine) or public health events (such as the COVID-19 pandemic), and of governmental and societal responses thereto;
general economic conditions, in the United States generally and particularly in the markets in which the Company operates and which its loans are concentrated, including the effects of declines in real estate values, increases in unemployment levels and inflation, recession and slowdowns in economic growth;
changes in the value of securities held in the Company’s investment portfolios;
changes in the quality or composition of the loan portfolios and the value of the collateral securing those loans;
changes in the level of net charge-offs on loans and the adequacy of our allowance for credit losses;
demand for loan products;
deposit flows;
the strength of the Company’s counterparties;
competition from both banks and non-banks;
demand for financial services in the Company’s market areas;
reliance on third parties for key services;
changes in the commercial and residential real estate markets;
cyber threats, attacks or events;
expansion of Delmarva’s and Partners’ product offerings;
changes in accounting principles, standards, rules and interpretations, and elections by the Company thereunder, and the related impact on the Company’s financial statements, including the implementation of CECL;
potential claims, damages, and fines related to litigation or government actions;
the effects of the COVID-19 pandemic, the severity and duration of the pandemic, the uncertainty regarding new variants of COVID-19 that may emerge, the distribution and efficacy of vaccines, and the heightened impact it has on many of the risks described herein;
any indirect exposure related to the closings of SVB, Signature Bank and Silvergate Bank and their impact on the broader market through other customers, suppliers and partners or that the conditions which resulted in the liquidity concerns with SVB, Signature Bank and Silvergate Bank may also adversely impact, directly or indirectly, other financial institutions and market participants with which Partners has commercial or deposit relationships with;
legislative or regulatory changes and requirements;
the discontinuation of London Interbank Offered Rate (“LIBOR”) and its impact on the financial markets, and the Company’s ability to manage operational, legal and compliance risks related to the discontinuation of LIBOR and implementation of one or more alternative reference rates; and
other factors, many of which are beyond the control of the Company.
These factors should not be considered exhaustive and should be read together with other cautionary statements that are included in this Annual Report on Form 10-K including those discussed in Item 1A. “Risk Factors.” All of the
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forward-looking statements made in this Annual Report are expressly qualified by the cautionary statements contained or referred to in this Annual Report. The actual results or developments anticipated may not be realized or, even if substantially realized, they may not have the expected consequences to or effects on the Company or its businesses or operations. Readers are cautioned not to place undue reliance on the forward-looking statements contained in this Annual Report. Forward-looking statements speak only as of the date they are made and the Company does not undertake any obligation to update, revise, or clarify these forward-looking statements whether as a result of new information, future events or otherwise.
Overview
The Company, a bank holding corporation, through its wholly owned subsidiaries, Delmarva and Partners, each of which are commercial banking corporations, engages in general commercial banking operations, with nineteen branches throughout Wicomico, Charles, Anne Arundel, and Worcester Counties in Maryland, Sussex County in Delaware, Camden and Burlington Counties in New Jersey, the cities of Fredericksburg and Reston, Virginia, and Spotsylvania County, Virginia.
The Company derives the majority of its income from interest received on our loans and investment securities. The primary source of funding for making these loans and purchasing investment securities are deposits and secondarily, borrowings. Consequently, one of the key measures of the Company’s success is the amount of net interest income, or the difference between the income on interest earning assets, such as loans and investment securities, and the expense on interest bearing liabilities, such as deposits and borrowings. The resulting ratio of that difference as a percentage of average interest earning assets represents the net interest margin. Another key measure is the spread between the yield earned on interest earning assets and the rate paid on interest bearing liabilities, which is called the net interest spread. In addition to earning interest on loans and investment securities, the Company earns income through fees and other charges to customers. Also included is a discussion of the various components of this noninterest income, as well as of noninterest expense.
There are risks inherent in all loans, so the Company maintains an allowance for credit losses to absorb probable losses on existing loans that may become uncollectible. The Company maintains this allowance for credit losses by charging a provision for credit losses as needed against our operating earnings for each period. The Company has included a detailed discussion of this process, as well as several tables describing its allowance for credit losses.
On February 22, 2023, the Company and LINK, parent company of LINKBANK, announced that they have entered into the LINK Merger Agreement pursuant to which the Company will merge into LINK, with LINK surviving, and following which Delmarva and Partners will each successively merge with and into LINKBANK, with LINKBANK surviving. Upon completion of the transaction, the Company’s shareholders will own approximately 56% and LINK shareholders, inclusive of shares issued in a concurrent private placement of common stock by LINK, will own approximately 44% of the combined company. The mergers are subject to receiving the requisite approval of the Company’s and LINK’s stockholders, receipt of all required regulatory approvals, and fulfillment of other customary closing conditions.
Also, on November 9, 2022, the Company and OCFC entered into the Termination Agreement pursuant to which, among other things, the parties mutually agreed to terminate the OCFC Merger Agreement entered into on November 4, 2021 and transactions completed thereby. Each party will bear its own costs and expenses in connection with the terminated transaction, and neither party will pay a termination fee in connection with the termination of the OCFC Merger Agreement. The Termination Agreement also mutually released the parties from any claims of liability to one another relating to the OCFC Merger Agreement and the terminated transaction.
The Company believes that it is well-positioned to be successful in its banking markets, including the highly competitive Greater Washington market. The Company’s financial performance generally, and in particular the ability of its borrowers to repay their loans, the value of collateral securing those loans, as well as demand for loans and other products and services the Company offers, is highly dependent on the business environment in the Company’s primary markets where the Company operates and in the United States as a whole.
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The ongoing COVID-19 pandemic has severely disrupted supply chains and adversely affected production, demand, sales and employee productivity across a range of industries, and previously resulted in orders directing the closing or limited operation of certain businesses and restrictions on public gatherings. These events affected the Company’s operations during fiscal year 2021 and 2022, and, along with economic uncertainties caused by geopolitical conflicts such as the war in Ukraine, the closings of SVB, Signature Bank and Silvergate Bank by bank regulators and other events, are expected to impact the Company’s financial results continuing on into 2023.
Please refer to the “Provision and Allowance for Credit Losses” section of this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for more information related to payment deferrals, concentrations in higher risk industries, and the impact on the allowance for credit losses.
The following discussion and analysis also identifies significant factors that have affected the Company's financial position and operating results during the periods included in the consolidated financial statements accompanying this report. You are encouraged to read this section in conjunction with the Company’s audited consolidated financial statements and the notes thereto included in Item 8 in this Annual Report on Form 10-K, and the other statistical and financial information included in this Form 10-K.
Critical Accounting Policies and Estimates
Certain critical accounting policies affect significant judgments and estimates used in the preparation of the Company's consolidated financial statements. These significant accounting policies are described in the notes to the consolidated financial statements included in Item 8 in this Annual Report on Form 10-K. The accounting principles the Company follows and the methods of applying these principles conform to accounting principles generally accepted in the United States of America (“U.S. GAAP”) and general banking industry practices. The Company's most critical accounting policy relates to the determination of the allowance for credit losses, which reflects the estimated losses resulting from the inability of borrowers to make loan payments. The determination of the adequacy of the allowance for credit losses involves significant judgment and complexity and is based on many factors. If the financial condition of our borrowers were to deteriorate, resulting in an impairment of their ability to make payments, the estimates would be updated and additional provisions for credit losses may be required. Note 3, “Loans, Allowance for Credit Losses and Impaired Loans”, to the notes of the consolidated financial statements.
Another of the Company’s critical accounting policies, with the acquisitions of Liberty Bell Bank (“Liberty”) in 2018 and Partners in 2019, relates to the valuation of goodwill and intangible assets. The Company accounted for the merger between the Company and Liberty in 2018 (the “Liberty Merger “) and the Partners Share Exchange in accordance with Accounting Standards Codification (“ASC”) Topic No. 805, which requires the use of the acquisition method of accounting. Under this method, assets acquired, including intangible assets, and liabilities assumed, are recorded at their fair value. Determination of fair value involves estimates based on internal valuations of discounted cash flow analyses performed, third party valuations, or other valuation techniques that involve subjective assumptions. Additionally, the term of the useful lives and appropriate amortization periods of intangible assets is subjective. Resulting goodwill from the Liberty Merger and the Partners Share Exchange, which totaled approximately $5.2 million and $4.4 million, respectively, under the acquisition method of accounting represents the excess of the purchase price over the fair value of net assets acquired. Goodwill is not amortized, but is evaluated for impairment annually or more frequently if deemed necessary. If the fair value of an asset exceeds the carrying amount of the asset, no charge to goodwill is made. If the carrying amount exceeds the fair value of the asset, goodwill will be adjusted through a charge to earnings, which is limited to the amount of goodwill allocated to that reporting unit. In evaluating the goodwill on its consolidated balance sheet for impairment after the consummation date of the Liberty Merger and the Partners Share Exchange, the Company will first assess qualitative factors to determine whether it is more likely than not that the fair value of our acquired assets is less than the carrying amount of the acquired assets, as allowed under ASU 2017-04. After making the assessment based on several factors, which will include, but is not limited to, the current economic environment, the economic outlook in our markets, our financial performance and common stock value as compared to our peers, we will determine if it is more likely than not that the fair value of our assets is greater than their carrying amount and, accordingly, will determine whether impairment of goodwill should be recorded as a charge to earnings in years subsequent to the Liberty Merger and the Partners Share Exchange. This assessment was performed during the fourth quarter of 2022, and resulted in no impairment of goodwill. Depending on the severity of the economic consequences of the COVID-19 pandemic and recent bank closures by federal regulators, and their impact on the
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Company, management may determine that goodwill is required to be evaluated for impairment due to the presence of a triggering event, which may have a negative impact on the Company’s results of operations.
In addition to the Company’s policies related to the valuation of goodwill, intangible assets and other acquisition accounting adjustments, ongoing accounting for acquired loans is considered a critical accounting policy. Acquired loans are classified as either purchased credit impaired (“PCI”) loans or purchased performing loans and are recorded at fair value on the date of acquisition. PCI loans are those for which there is evidence of credit deterioration since origination and for which it is probable at the date of acquisition that the Company will not collect all contractually required principal and interest payments. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the “nonaccretable difference.” Any excess of cash flows expected at acquisition over the estimated fair value is referred to as the “accretable yield” and is recognized as interest income over the remaining life of the loan when there is a reasonable expectation about the amount and timing of such cash flows. Periodically, we evaluate our estimate of cash flows expected to be collected on PCI loans. Estimates of cash flows for PCI loans require significant judgment. Subsequent decreases to the expected cash flows will generally result in a provision for credit losses resulting in an increase to the allowance for credit losses. Subsequent significant increases in cash flows may result in a reversal of post-acquisition provision for credit losses or a transfer from nonaccretable difference to accretable yield that increases interest income over the remaining life of the loan, or pool(s) of loans. The Company accounts for purchased performing loans using the contractual cash flows method of recognizing discount accretion based on the acquired loans’ contractual cash flows. Purchased performing loans are recorded at fair value, including a credit discount. The fair value discount is accreted as an adjustment to yield over the estimated lives of the loans. There is no allowance for credit losses established at the acquisition date for purchased performing loans, but a provision for credit losses may be required for any deterioration in these loans in future periods. The Company evaluates purchased performing loans quarterly for deterioration and records any required additional provision for credit losses.
Another critical accounting policy relates to deferred tax assets and liabilities. The Company records deferred tax assets and deferred tax liabilities for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Future tax benefits, such as net operating loss carry forwards available from the Liberty Merger, are recognized to the extent that realization of such benefits is more likely than not. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the assets and liabilities are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income tax expense in the period that includes the enactment date. In the event the future tax consequences of differences between the financial reporting bases and the tax bases of our assets and liabilities results in deferred tax assets, an evaluation of the probability of being able to realize the future benefits indicated by such assets is required. A valuation allowance is provided when it is more likely than not that a portion or the full amount of the deferred tax asset will not be realized. In assessing the ability to realize the deferred tax assets, management considers the scheduled reversals of deferred tax liabilities, projected future taxable income, and tax planning strategies. Such a deferred tax liability will only be recognized when it becomes apparent that those temporary differences will reverse in the foreseeable future. A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than fifty (50) percent more likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded.
Results of Operations
Net income attributable to the Company for the year ended December 31, 2022 totaled $13.6 million, or $0.76 per basic and diluted share, as compared to $7.4 million, or $0.42 per basic and diluted share, for the year ended December 31, 2021, a $6.2 million or 83.7% increase.
The Company’s results of operations for the twelve months ended December 31, 2022 were directly impacted by the following:
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Positive Impacts:
An increase in net interest income due primarily to lower average balances of and rates paid on interest-bearing deposits, a decrease in average borrowings balances, an increase in average loan balances, an increase in yields earned on average cash and cash equivalents balances, and an increase in average investment securities balances and yields earned, which were partially offset by lower average balances of cash and cash equivalents, lower loan yields due to lower net loan fees earned related to the forgiveness of loans originated and funded under the Paycheck Protection Program (“PPP”) of the Small Business Administration, and an increase in rates paid on average borrowings balances;
A higher net interest margin (tax equivalent basis);
A significantly lower provision for credit losses due to the current economic environment and the milder impact of the COVID-19 pandemic compared to December 31, 2021, which was partially offset by organic loan growth;
Lower expenses associated with the Company’s terminated merger with OCFC, including recording no accelerated stock-based compensation expense during the twelve months ended December 31, 2022 as compared to recording $896 thousand in accelerated stock-based compensation expense during the same period of 2021 related to the accelerated vesting of restricted stock awards, which accelerated vesting was subject to the prior approval of the Company and was not contingent on the closing of the merger, and incurring $1.4 million in merger related expenses during the twelve months ended December 31, 2022 as compared to $979 thousand during the same period of 2021; and
Recording gains on other real estate owned as compared to losses for the same period of 2021.
Negative Impacts:
Recording losses on sales and calls of investment securities as compared to gains for the same period of 2021;
Reduced operating results from Partners’ majority owned subsidiary JMC and lower mortgage division fees at Delmarva;
Recording losses on sales of other assets as compared to gains for the same period of 2021; and
Expenses associated with Partners’ new key hires and expansion into the Greater Washington market, including opening its new full-service branch and commercial banking office in Reston, Virginia during the third quarter of 2021, and Delmarva opening its new full-service branch at 26th Street in Ocean City, Maryland during the second quarter of 2021.
For the twelve months ended December 31, 2022, the Company’s return on average assets, return on average equity and efficiency ratio were 0.82%, 10.04% and 68.16%, respectively, as compared to 0.46%, 5.44% and 76.95%, respectively, for the same period in 2021.
The increase in net income attributable to the Company for the twelve months ended December 31, 2022, as compared to the same period in 2021, was driven by an increase in net interest income, a lower provision for credit losses, and lower other expenses, and was partially offset by a decrease in other income and higher federal and state income taxes.
Financial Condition
Total assets as of December 31, 2022 were $1.57 billion, a decrease of $70.4 million, or 4.3%, from December 31, 2021. The key driver of this change was a decrease in cash and cash equivalents, which was partially offset by increases in investment securities available for sale, at fair value, and total loans held for investment. Changes in key balance sheet components as of December 31, 2022 compared to December 31, 2021 were as follows:
Interest bearing deposits in other financial institutions as of December 31, 2022 were $103.9 million, a decrease of $194.0 million, or 65.1%, from December 31, 2021. Key drivers of this change were an increase in investment securities available for sale, at fair value, and total loan growth outpacing total deposit growth;
Federal funds sold as of December 31, 2022 were $23.0 million, a decrease of $5.0 million, or 18.0%, from December 31, 2021. Key drivers of this change were the aforementioned items noted in the analysis of interest bearing deposits in other financial institutions;
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Investment securities available for sale, at fair value as of December 31, 2022 were $133.7 million, an increase of $11.6 million, or 9.5%, from December 31, 2021. Key drivers of this change were management of the investment securities portfolio in light of the Company’s liquidity needs, which was partially offset by two higher yielding investment securities being called, and an increase in unrealized losses on the investment securities available for sale portfolio as a result of increases in market interest rates ;
Loans, net of unamortized discounts on acquired loans of $1.7 million as of December 31, 2022 were $1.23 billion, an increase of $115.7 million, or 10.4%, from December 31, 2021. The key driver of this change was an increase in organic growth, including growth of approximately $68.9 million in loans related to Partners’ expansion into the Greater Washington market, which was partially offset by forgiveness payments received of approximately $8.2 million under round two of the PPP. As of December 31, 2022, there were no loans under the PPP that were still outstanding;
Total deposits as of December 31, 2022 were $1.34 billion, a decrease of $103.3 million, or 7.2%, from December 31, 2021. Key drivers of this change were scheduled maturities of time deposits that were not replaced and significant outflows related to competitive pressures in the higher interest rate environment, which were partially offset by organic growth as a result of our continued focus on total relationship banking and Partners’ expansion into the Greater Washington market;
Total borrowings as of December 31, 2022 were $84.6 million, an increase of $35.4 million, or 71.9%, from December 31, 2021. The key driver of this change was an increase in short-term borrowings with the FHLB due to the aforementioned items noted in the analysis of total deposits, which was partially offset by a decrease in long-term borrowings with the FHLB resulting from maturities and payoffs of borrowings that were not replaced and scheduled principal curtailments, and a decrease in Partners’ majority owned subsidiary JMC’s warehouse line of credit with another financial institution; and
Total stockholders’ equity as of December 31, 2022 was $139.3 million, a decrease of $2.0 million, or 1.4%, from December 31, 2021. Key drivers of this change were an increase in accumulated other comprehensive (loss), net of tax, and cash dividends paid to shareholders, which were partially offset by the net income attributable to the Company for the twelve months ended December 31, 2022, the proceeds from stock option exercises, and stock-based compensation expense related to restricted stock awards.
Delmarva's Tier 1 leverage capital ratio was 9.3% at December 31, 2022 as compared to 8.1% at December 31, 2021. At December 31, 2022, Delmarva's Tier 1 risk weighted capital ratio and total risk weighted capital ratio were 12.1% and 13.4%, respectively, as compared to a Tier 1 risk weighted capital ratio and total risk weighted capital ratio of 11.6% and 12.9%, respectively, at December 31, 2021.
Partners’ Tier 1 leverage capital ratio was 8.9% at December 31, 2022 as compared to 8.5% at December 31, 2021. At December 31, 2022, Partners’ Tier 1 risk weighted capital ratio and total risk weighted capital ratio were 10.5% and 11.3%, respectively, as compared to a Tier 1 risk weighted capital ratio and total risk weighted capital ratio of 11.3% and 12.0%, respectively, at December 31, 2021.
As of December 31, 2022, all of the capital ratios of Delmarva and Partners continue to exceed regulatory requirements, with total risk-based capital substantially above well-capitalized regulatory requirements.
See “Capital” below for additional information about Delmarva’s and Partners’ capital ratios and requirements.
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At December 31, 2022, nonperforming assets totaled $2.2 million, a decrease from December 31, 2021 balances of $9.8 million. The primary drivers of this decrease were decreases in nonaccrual loans and other real estate owned, net (“OREO”), which were partially offset by an increase in loans past due 90 days or more and still accruing interest. Nonaccrual loans totaled approximately $2.2 million at December 31, 2022, as compared to $9.0 million at December 31, 2021. Loans past due 90 days or more and still accruing interest totaled $45 thousand at December 31, 2022, as compared to $0 at December 31, 2021. OREO, net as of December 31, 2022 totaled $0, as compared to $837 thousand at December 31, 2021. Nonperforming loans as a percentage of total assets was 0.14% at December 31, 2022, as compared to 0.54% at December 31, 2021. Nonperforming assets to total assets as of December 31, 2022 was 0.14%, as compared to 0.60% at December 31, 2021. Loans classified as troubled debt restructurings (“TDRs”) totaled $3.4 million at December 31, 2022, as compared to $7.9 million at December 31, 2021, representing a decrease of $4.5 million during the twelve months ended December 31, 2022. Of this decrease, approximately $1.1 million was due to five loan relationships that are no longer considered to be TDRs due to the restructuring of the loans subsequent to them initially being classified as a TDR. At the time of the subsequent restructurings, the borrowers were not experiencing financial difficulties and, under the terms of the subsequent restructuring agreements, no concessions have been granted to the borrowers. In addition, during 2022, one loan relationship that was classified as a TDR was paid down and the remaining balance was charged-off, reducing the balance in total by approximately $2.9 million, which was partially offset by one loan relationship in the amount of approximately $48 thousand being classified as a TDR during the second quarter of 2022. The remaining decrease was the result of loan relationships classified as TDRs that were paid down or paid off.
Net charge-offs were $1.7 million, or 0.14% of average total loans, for the twelve months ended December 31, 2022, as compared to $870 thousand, or 0.08% of average total loans, for the same period of 2021. The allowance for credit losses to total loans ratio was 1.16% at December 31, 2022, as compared to 1.31% at December 31, 2021. In addition to the allowance for credit losses, as of December 31, 2022 and December 31, 2021, the Company had $1.7 million and $2.3 million, respectively, in unamortized discounts on acquired loans related to the acquisitions of Liberty and Partners. This discount is amortized over the life of the remaining loans.
Summary of Return on Equity and Assets
Year Ended
Year Ended
December 31,
December 31,
Yield on earning assets
Return on average assets
Return on average equity
Average equity to average assets
Earnings Analysis
The Company's primary source of revenue is interest income and fees, which it earns by lending and investing the funds which are held on deposit. Because loans generally earn higher rates of interest than investment securities, the Company seeks to deploy as much of its deposit funds as possible in the form of loans to individuals, businesses, and other organizations. To ensure sufficient liquidity, the Company also maintains a portion of its deposits in cash and cash equivalents, government securities, interest bearing deposits in other financial institutions, and overnight loans of excess reserves (known as “Federal Funds Sold”) to correspondent banks. The revenue which the Company earns (prior to deducting its overhead expenses) is essentially a function of the amount of the Company's loans and deposits, as well as the profit margin (“interest spread”) and fee income which can be generated on these amounts.
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Net income attributable to the Company was $13.6 million and $7.4 million for the years ended December 31, 2022 and 2021, respectively, as reported in its audited consolidated financial statements. The following discussion should be read in conjunction with the Company's audited consolidated financial statements and the notes to the audited consolidated financial statements included in Item 8 of this Annual Report on Form 10-K.
The following is a summary of the results of operations and financial condition of the Company at and for the periods and at the dates indicated, respectively:
Year Ended
December 31,
Results of operations:
(Dollars in Thousands, except per share data)
Net interest income
Provision for credit losses
Provision for income taxes
Noninterest income
Noninterest expense
Total income
Total expenses
Net income
Net income attributable to Partners Bancorp
Basic earnings per share
Diluted earnings per share
December 31,
Financial condition at year end:
(Dollars in Thousands, except per share data)
Total assets
Loans receivable, net
Investment securities, available for sale
Federal funds sold
Demand and NOW deposits
Savings, money market, and time deposits
Stockholders' equity
Tangible common equity per share
Interest Income and Expense – Years Ended December 31, 2022 and 2021
Net Interest Income and Net Interest Margin
The largest component of net income for the Company is net interest income, which is the difference between the income earned on assets, such as loans and investment securities, and interest paid on liabilities, such as deposits and borrowings, used to support such assets. Net interest income is determined by the rates earned on the Company's interest-earning assets and the rates paid on its interest-bearing liabilities, the relative amounts of interest-earning assets and interest-bearing liabilities, and the degree of mismatch and the maturity and repricing characteristics of its interest-earning assets and interest-bearing liabilities.
Net interest income during the twelve months ended December 31, 2022 increased by $9.6 million, or 20.6%, when compared to the twelve months ended December 31, 2021. The Company’s net interest margin (tax equivalent basis) increased to 3.51%, representing an increase of 46 basis points for the twelve months ended December 31, 2022 as compared to the same period in 2021. The increase in the net interest margin (tax equivalent basis) was primarily due to higher average balances of loans, higher average balances of and yields earned on investment securities, higher yields earned on average interest bearing deposits in other financial institutions and federal funds sold, and lower average balances of and rates paid on average interest-bearing liabilities, which were partially offset by a decrease in the yields earned on average loans, and lower average balances of interest bearing deposits in other financial institutions and
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federal funds sold. Total interest income increased by $7.3 million, or 13.2%, for the twelve months ended December 31, 2022, while total interest expense decreased by $2.3 million, or 25.3%, both as compared to the same period in 2021. The most significant factors impacting net interest income during the twelve months ended December 31, 2022 were as follows:
Positive Impacts:
Increases in average loan balances, primarily due to organic loan growth, which was partially offset by the forgiveness of loans originated and funded under the PPP;
Increases in average investment securities balances and higher investment securities yields, primarily due to management of the investment securities portfolio in light of the Company’s liquidity needs, lower accelerated pre-payments on mortgage-backed investment securities and higher interest rates over the comparable periods, partially offset by calls on higher yielding investment securities in the previously low interest rate environment;
Decrease in average interest bearing deposits in other financial institutions and federal funds sold, primarily due to loan growth outpacing deposit growth and higher investment securities balances, and higher yields on each due to higher interest rates over the comparable periods;
Decrease in average interest-bearing deposit balances and lower rates paid, primarily due to scheduled maturities of time deposits that were not replaced and competitive pressures in the higher interest rate environment, partially offset by organic deposit growth in interest bearing demand, money market and savings accounts, and lower rates paid on average interest bearing demand, money market, savings and time deposits; and
Decrease in average borrowings balances, primarily due to a decrease in the average balance of FHLB advances resulting from maturities and payoffs of borrowings that were not replaced and scheduled principal curtailments, a decrease in average borrowings at the Federal Reserve Bank Discount Window under the PPP Liquidity Facility in which the loans under the PPP originated by the Company were previously pledged as collateral, the early redemption of $2.0 million in subordinated notes payable, net, in early July 2021, and offset by higher rates paid. The increase in average rates paid was primarily due to the decreases in the average balances of FHLB advances and borrowings at the Federal Reserve Bank Discount Window under the PPP Liquidity Facility, both of which were lower cost interest-bearing liabilities, partially offset by the early redemption of subordinated notes payable, which was a higher cost interest-bearing liability.
Negative Impacts:
Lower loan yields, primarily due to lower net loan fees earned related to the forgiveness of loans originated and funded under the PPP and pay-offs of higher yielding fixed rate loans, which were partially offset by repricing of variable rate loans and higher average yields on new loan originations.
Loans
Average loan balances increased by $82.5 million, or 7.6%, and average yields earned decreased by 0.11% to 4.74% for the twelve months ended December 31, 2022, as compared to the same period in 2021. The increase in average loan balances was primarily due to organic loan growth, including growth in average loan balances of approximately $57.0 million related to Partners’ expansion into the Greater Washington market, which was partially offset by the forgiveness of loans originated and funded under the PPP. The decrease in average yields earned was primarily due to lower net loan fees earned related to the forgiveness of loans originated and funded under the PPP and pay-offs of higher yielding fixed rate loans, which were partially offset by the repricing of variable rate loans and higher average yields on new loan originations. Total average loans were 73.2% of total average interest-earning assets for the twelve months ended December 31, 2022, compared to 71.2% for the twelve months ended December 31, 2021.
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Investment securities
Average total investment securities balances increased by $17.7 million, or 13.6%, and average yields earned increased by 0.39% to 2.28% for the twelve months ended December 31, 2022, as compared to the same period in 2021. The increases in average total investment securities balances and average yields earned was primarily due to management of the investment securities portfolio in light of the Company’s liquidity needs, lower accelerated pre-payments on mortgage-backed investment securities and higher interest rates over the comparable periods, partially offset by calls on higher yielding investment securities in the previously low interest rate environment. During the twelve months ended December 31, 2021, accelerated pre-payments on mortgage-backed investment securities caused the premiums paid on these investment securities to be amortized into expense on an accelerated basis thereby reducing income and yield earned. Total average investment securities were 9.2% of total average interest-earning assets for the twelve months ended December 31, 2022, compared to 8.5% for the twelve months ended December 31, 2021.
Interest-bearing deposits
Average total interest-bearing deposit balances decreased by $8.3 million, or 0.9%, and average rates paid decreased by 0.21% to 0.52% for the twelve months ended December 31, 2022, as compared to the same period in 2021, primarily due to scheduled maturities of time deposits that were not replaced and competitive pressures in the higher interest rate environment, partially offset by organic deposit growth, including average growth of approximately $18.4 million in interest-bearing deposits related to Partners’ expansion into the Greater Washington market, and a decrease in the average rate paid on interest bearing demand, money market, savings and time deposits.
Borrowings
Average total borrowings decreased by $10.3 million, or 17.6%, and average rates paid increased by 0.31% to 4.04% for the twelve months ended December 31, 2022, as compared to the same period in 2021. The decrease in average total borrowings balances was primarily due to a decrease in the average balance of FHLB advances resulting from maturities and payoffs of borrowings that were not replaced and scheduled principal curtailments, a decrease in average borrowings at the Federal Reserve Bank Discount Window under the PPP Liquidity Facility in which the loans under the PPP originated by the Company were previously pledged as collateral, and the early redemption of $2.0 million in subordinated notes payable, net, in early July 2021. The increase in average rates paid was primarily due to the decreases in the average balances of FHLB advances and borrowings at the Federal Reserve Bank Discount Window under the PPP Liquidity Facility, which were lower cost interest-bearing liabilities, partially offset by the early redemption of subordinated notes payable, which was a higher cost interest-bearing liability.
Interest earned on assets and interest paid on liabilities is significantly influenced by market factors, specifically interest rate targets established by the Federal Reserve.
The Federal Open Markets Committee (“FOMC”) raised Federal Funds target rates by 25 basis points in March 2022, which was the first increase since December 2018. Subsequent to this, the FOMC raised Federal Funds target rates by 50 basis points in May 2022, 75 basis points in June 2022, 75 basis points in July 2022, 75 basis points in September 2022, 75 basis points in November 2022, 50 basis points in December 2022, 25 basis points in January 2023, and 25 basis points in March 2023. These increases were done in an effort to address increasing inflation without negatively impacting economic growth. The FOMC currently projects a continued path of rate increases, with rate increases targeted at future FOMC meetings in 2023. The FOMC’s current Federal Funds target rate range is 4.75% to 5.00%. As a result, long-term interest rates have increased. The Company anticipates that the current and projected interest rate environment will lead to an expanded net interest margin for the Company. In general, the Company believes interest rate increases lead to improved net interest margins whereas interest rate decreases result in correspondingly lower net interest margins.
The following table depicts, for the periods indicated, certain information related to the average balance sheet and average yields earned on assets and average costs paid on liabilities for the Company. Such yields and costs are derived by dividing income or expense by the average balance of the corresponding assets or liabilities. Average balances have been derived from daily averages.
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Year Ended
Year Ended
December 31, 2022
December 31, 2021
(Dollars in Thousands)
Average
Interest/
Average
Interest/
(Unaudited)
Balance
Expense
Yield/Rate
Balance
Expense
Yield/Rate
Assets
Cash & Due From Banks
Interest Bearing Deposits From Banks
Taxable Securities (1)
Tax‑exempt Securities (2)
Total Investment Securities (1) (2)
Federal Funds Sold
Loans: (3)
Commercial and Industrial (4)
Real Estate (4)
Consumer (4)
Keyline Equity (4)
Visa Credit Card
State and Political
Keyline Credit
Other Loans
Total Loans (2)
Allowance For Credit Losses
Unamortized Discounts on Acquired Loans
Total Loans, Net
Other Assets
Total Assets/Interest Income
Liabilities and Stockholders' Equity
Deposits In Domestic Offices
Non‑interest Bearing Demand
Interest Bearing Demand
Money Market Accounts
Savings Accounts
All Time Deposits
Total Interest Bearing Deposits
Total Deposits
Borrowings
Notes Payable
Lease Liability
Other Liabilities
Stockholders' Equity
Total Liabilities & Equity/Interest Expense
Earning Assets/Interest Income (2)
Interest Bearing Liabilities/Interest Expense
Net interest income
Net Yield on Interest Earning Assets
Earning Assets/Interest Expense
Net Interest Spread (2)
Net Interest Margin (2)
Yields on securities available-for-sale have been calculated on the basis of historical cost and do not give effect to changes in the fair value of those securities, which is reflected as a component of stockholders’ equity.
Presented on a taxable-equivalent basis using the statutory income tax rate of 21.0% for 2022 and 2021. Taxable equivalent adjustments of $193 thousand and $11 thousand are included in the calculation of tax exempt income for investment interest income and loan interest income, respectively for the year ended December 31, 2022 and $229 thousand and $9 thousand, respectively for the year ended December 31, 2021.
Loans placed on nonaccrual are included in average balances.
Yields do not include the average balance of the fair value adjustment for pools of non-credit impaired loans acquired or discounts on credit impaired loans acquired.
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The level of net interest income is affected primarily by variations in the volume and mix of these interest-earning assets and interest-bearing liabilities, as well as changes in interest rates. The following table shows the effect that these factors had on the interest earned from the Company's interest-earning assets and interest paid on its interest-bearing liabilities for the year ended December 31, 2022 versus 2021.
Rate and Volume Analysis
Year Ended December 31, 2022 Versus December 31, 2021
(Dollars in Thousands)
Increase (Decrease) Due to
Volume
Yield/Rate
Net
Earning Assets
Loans (1)
Investment securities
Taxable
Exempt from Federal income tax
Federal funds sold
Other interest income
Total interest income
Interest Bearing Liabilities
Interest bearing deposits
Notes payable and leases
Funds purchased
Total Interest Expense
Net Interest Income
Nonaccrual loans are included in average balances and do not have a material effect on the average yield.
Interest Sensitivity. The Company monitors and manages the pricing and maturity of its assets and liabilities in order to diminish the potential adverse impact that changes in interest rates could have on its net interest income. The Company also performs asset/liability modeling to assess the impact varying interest rates and balance sheet mix assumptions will have on net interest income. Interest rate sensitivity can be managed by repricing assets or liabilities, selling investment securities available for sale, replacing an asset or liability at maturity, or adjusting the interest rate during the life of an asset or liability. Managing the amount of assets and liabilities repricing in the same time interval helps to hedge the risk and minimize the impact on net interest income of rising or falling interest rates. The Company evaluates interest sensitivity risk and then formulates guidelines regarding asset generation and repricing, funding sources and pricing, and off-balance sheet commitments in order to decrease interest rate sensitivity risk.
At December 31, 2022, the Company was asset sensitive within the one-year time frame when looking at a repricing gap analysis. The cumulative gap, in an unchanged interest rate environment, as a percentage of total assets up to one year is 13.7%. A positive gap indicates more assets than liabilities are repricing within the indicated time frame. Management believes there is more upside potential than downside risk and, based on the current and projected interest rate environment, management expects to see net interest income rise in the future.
Provision and Allowance for Credit Losses
The Company has developed policies and procedures for evaluating the overall quality of its credit portfolio and for timely identifying potential problem loans. Management's judgment as to the adequacy of the allowance for credit losses is based upon a number of assumptions about future events which it believes to be reasonable, but which may not prove to be accurate. Thus, there can be no assurance that loan charge-offs in future periods will not exceed the allowance for credit losses or that additional increases in the allowance for credit losses will not be required.
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The Company's allowance for credit losses consists of two parts. The first part is determined in accordance with authoritative guidance issued by the Financial Accounting Standards Board (“FASB”) regarding the allowance for credit losses. The Company's determination of this part of the allowance for credit losses is based upon quantitative and qualitative factors. A loan loss history based upon the prior three years is utilized in determining the appropriate allowance for credit losses. Historical loss factors are determined by criticized and uncriticized loans by loan type. These historical loss factors are applied to the loans by loan type to determine an indicated allowance for credit losses. The historical loss factors may also be modified based upon other qualitative factors including, but not limited to, local and national economic conditions, trends of delinquent loans, changes in lending policies and underwriting standards, concentrations, and management's knowledge of the loan portfolio.
The second part of the allowance for credit losses is determined in accordance with guidance issued by the FASB regarding impaired loans. A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis. Impaired loans not deemed collateral dependent are analyzed according to the ultimate repayment source, whether that is cash flow from the borrower, guarantor or some other source of repayment. Impaired loans are deemed collateral dependent if in the Company's opinion the ultimate source of repayment will be generated from the liquidation of collateral.
The sum of the two parts constitutes management's best estimate of an appropriate allowance for credit losses. When the estimated allowance for credit losses is determined, it is presented to the Company's Board of Directors for review and approval on a quarterly basis.
At December 31, 2022, the Company's allowance for credit losses was $14.3 million, or 1.16% of total outstanding loans. At December 31, 2021, the allowance for credit losses was $14.7 million, or 1.31% of total outstanding loans. The Company's provision for credit losses was $1.3 million for the year ended December 31, 2022, as compared to $2.3 million for the year ended December 31, 2021. The decrease in the provision for credit losses during the twelve months ended December 31, 2022, as compared to the same period of 2021, was primarily due to a reduction of qualitative adjustment factors that had previously been increased in the allowance for credit losses related to the COVID-19 pandemic and the uncertainty in the economic environment, and the reversal of a specific reserve on one loan relationship due to a large principal curtailment and improved performance, which were partially offset by higher net charge-offs, loans acquired in the Partners acquisition that have converted from acquired to originated status, and organic loan growth. The provision for credit losses during the twelve months ended December 31, 2022, as well as the allowance for credit losses as of December 31, 2022, represents management’s best estimate of the impact of current economic trends, including the impact of the COVID-19 pandemic, on the ability of the Company’s borrowers to repay their loans. Management continues to carefully assess the exposure of the Company’s loan portfolio to COVID-19 pandemic related factors, economic trends and their potential effect on asset quality. As of December 31, 2022, the Company’s delinquencies and nonperforming assets had not been materially impacted by the COVID-19 pandemic. In addition, as of December 31, 2022, all of the loan balances that were approved by the Company, on a consolidated basis, for loan payment deferrals or payments of interest only have either resumed regular payments or have been paid off.
The Company discontinues accrual of interest on loans when management believes, after considering economic and business conditions and collection efforts that a borrower's financial condition is such that the collection of interest is doubtful. Generally, the Company will place a delinquent loan in nonaccrual status when the loan becomes 90 days or more past due. At the time a loan is placed in nonaccrual status, all interest which has been accrued on the loan but remains unpaid is reversed and deducted from earnings as a reduction of reported interest income. No additional interest is accrued on the loan balance until the collection of both principal and interest becomes reasonably certain.
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The following tables illustrate the Company's past due and nonaccrual loans at December 31, 2022 and 2021:
Past Due and Nonaccrual Loans
(Dollars in Thousands)
At December 31, 2022 and 2021
30 - 89 Days
Greater than 90 Days
Total
December 31, 2022
Past Due
Past Due
Past Due
NonAccrual
Real Estate Mortgage
Construction and land development
Residential real estate
Nonresidential
Home equity loans
Commercial
Consumer and other loans
TOTAL
30 - 89 Days
Greater than 90 Days
Total
December 31, 2021
Past Due
Past Due
Past Due
NonAccrual
Real Estate Mortgage
Construction and land development
Residential real estate
Nonresidential
Home equity loans
Commercial
Consumer and other loans
TOTAL
Total nonaccrual loans at December 31, 2022 were $2.2 million, which reflects a decrease of $6.8 million from $9.0 million at December 31, 2021. Management believes the relationships on nonaccrual were adequately reserved at December 31, 2022. TDRs not past due or on nonaccrual at December 31, 2022 amounted to $2.3 million, as compared to $3.9 million at December 31, 2021. This decrease was primarily due to five loan relationships that no longer met the definition of a TDR and pay-downs of principal loan balances during 2022. There was also one loan with a balance of $172 thousand at December 31, 2022 that was classified as nonaccrual during 2022. Total TDRs decreased $4.5 million to $3.4 million at December 31, 2022, compared to $7.9 million at December 31, 2021. Of this decrease, approximately $1.1 million was due to five loan relationships that are no longer considered to be TDRs due to the restructuring of the loans subsequent to them initially being classified as a TDR. At the time of the subsequent restructurings, the borrowers were not experiencing financial difficulties and, under the terms of the subsequent restructuring agreements, no concessions have been granted to the borrowers. In addition, during 2022, one loan relationship that was classified as a TDR was paid down and the remaining balance was charged-off, reducing the balance in total by approximately $2.9 million, which was partially offset by one loan relationship in the amount of approximately $48 thousand being classified as a TDR during the second quarter of 2022. The remaining decrease was the result of loan relationships classified as TDRs that were paid down or paid off.
Nonperforming assets, defined as nonaccrual loans, loans past due 90 days or more and accruing, and OREO, net, at December 31, 2022 were $2.2 million compared to $9.8 million at December 31, 2021. The Company's ratio of nonperforming assets to total assets was 0.14% at December 31, 2022 compared to 0.60% at December 31, 2021. As noted above, there was a decrease in nonaccrual loans during the year ended December 31, 2022. OREO, net decreased during the year ended December 31, 2022 by $837 thousand. There were two properties with aggregate values of $837 thousand that were sold at a gain of $7 thousand during the first quarter of 2022.
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It is likely that the COVID-19 pandemic and the economic disruption related to it as well as the uncertainty in the macroeconomic environment due to higher market interest rates, inflation and the possibility of a recession will continue to negatively impact the Company’s financial position and results of operations during the year ending December 31, 2023.
The following tables provide additional information on the Company's nonperforming assets at December 31, 2022 and 2021.
Nonperforming Assets
(Dollars in thousands)
December 31,
December 31,
Nonperforming assets:
Nonaccrual loans
Loans past due 90 days or more and accruing
Total nonperforming loans (NPLs)
Other real estate owned (OREO)
Total nonperforming assets (NPAs)
Performing TDR's and TDR's 30-89 days past due
NPLs/Total Assets
NPAs/Total Assets
NPAs and TDRs/Total Assets
Allowance for credit losses/Nonaccrual Loans
Allowance for credit losses/NPLs
Nonaccrual loans to total loans outstanding
Nonperforming Loans by Type
(Dollars in thousands)
December 31,
December 31,
Real Estate Mortgage
Construction and land development
Residential real estate
Nonresidential
Home equity loans
Commercial
Consumer and other loans
Total
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The following table provides data related to loan balances and the allowance for credit losses for the years ended December 31, 2022 and 2021.
Allowance for Credit Losses Data
(Dollars in Thousands)
At December 31, 2022 and 2021
December 31,
December 31,
Average loans outstanding
Total loans outstanding
Total nonaccrual loans
Net loans charged off
Provision for credit losses
Allowance for credit losses
Allowance as a percentage of total loans outstanding
Net loans charged off to average loans outstanding
Nonaccrual loans as a percentage of total loans outstanding
Allowance as a percentage of nonaccrual loans outstanding
The following table represents the activity of the allowance for credit losses for the years ended December 31, 2022 and 2021 by loan type:
Allowance for Credit Losses and Recorded Investments in Loans
(Dollars in Thousands)
At December 31, 2022 and 2021
December 31, 2022
Real Estate Mortgage
Construction
and Land
Residential
Consumer
Development
Real Estate
Nonresidential
Home Equity
Commercial
and Other
Unallocated
Total
Beginning Balance
Charge-offs
Recoveries
Provision (recovery)
Ending Balance
December 31, 2021
Real Estate Mortgage
Construction
and Land
Residential
Consumer
Development
Real Estate
Nonresidential
Home Equity
Commercial
and Other
Unallocated
Total
Beginning Balance
Charge-offs
Recoveries
Provision (recovery)
Ending Balance
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The following table provides information related to the allocation of the allowance for credit losses by loan category, the related loan balance for each category, and the percentage of loan balance to total loans by category:
Allocation of the Allowance for Credit Losses
At December 31, 2022 and 2021
(Dollars in thousands)
December 31,
December 31,
Percent
Percent
Loan
Total
Loan
Total
Balances
Allocation
Loans
Balances
Allocation
Loans
Real Estate Mortgage
Construction and land development
Residential real estate
Nonresidential
Home equity loans
Commercial
Consumer and other loans
Unallocated
Additional information related to net charge-offs (recoveries) is presented in the tables below.
December 31,
December 31,
Net
Net
Net
Net
Charge-Offs
Average
Charge-Off
Charge-Offs
Average
Charge-Off
Dollars in thousands
(Recoveries)
Loans
Ratio
(Recoveries)
Loans
Ratio
Year Ended
Real Estate Mortgage
Construction and land development
Residential real estate
Nonresidential
Home equity loans
Commercial
Consumer and other loans
Total Loans Receivable
Noninterest Income
Noninterest Income. The Company's primary source of noninterest income is service charges on deposit accounts, mortgage banking income and other income. Sources of other noninterest income include ATM and credit card fees, debit card income, safe deposit box income, earnings on bank owned life insurance policies and investment fees and commissions.
Noninterest income for the twelve months ended December 31, 2022 decreased by $3.1 million, or 37.5%, when compared to the twelve months ended December 31, 2021. Key changes in the components of noninterest income for the twelve months ended December 31, 2022, as compared to the same period in 2021, are as follows:
Service charges on deposit accounts increased by $178 thousand, or 22.0%, due primarily to increases in overdraft fees as a result of the easing of restrictions and the lifting of lockdowns in the Company’s markets of operation and Partners no longer automatically waiving overdraft fees which was previously done in an
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effort to provide all necessary financial support and services to its customers and communities, both as related to the ongoing COVID-19 pandemic as compared to the same period of 2021;
(Losses) gains on sales and calls of investment securities decreased by $33 thousand, or 119.4%, due primarily to Partners recording losses of $5 thousand on sales or calls of investment securities during the twelve months ended December 31, 2022, as compared to recording gains of $25 thousand on sales or calls of investment securities during the same period of 2021. In addition, during the twelve months ended December 31, 2021, Delmarva recorded gains of $3 thousand on sales or calls of investment securities, as compared to recording no gains on sales or calls of investment securities during the same period of 2022;
Mortgage banking income, net decreased by $2.5 million, or 67.3%, due primarily to Partners’ majority owned subsidiary JMC having a lower volume of loan closings as compared to the same period in 2021;
(Losses) gains on disposal of other assets, net decreased by $27 thousand, or 1,944.1%, as a result of Delmarva recording losses of $26 thousand on the disposal of certain assets in connection with the closing of its North Ocean City, Maryland branch during the fourth quarter of 2022, as compared to Delmarva recording a gain of $1 thousand on the sale of its VISA credit card portfolio during the first quarter of 2021; and
Impairment loss on restricted stock increased from zero to $1 thousand, due primarily to Partners recording the final write-down of its investment in Maryland Financial Bank, which had been going through an orderly liquidation;
Other income decreased by $708 thousand, or 19.0%, due primarily to lower mortgage division fees at Delmarva, Partners recording lower fees from its participation in a loan hedging program with a correspondent bank, and decreases in ATM fees and debit card income, which were partially offset by Delmarva recording higher earnings on bank owned life insurance policies due to additional purchases made in 2021.
Noninterest Expense
Noninterest Expense . Noninterest expense includes all expenses with the exception of those paid for interest on deposits and borrowings. Significant expense items included in this component are salaries and employee benefits, premises and equipment and other operating expenses.
Noninterest expense for the twelve months ended December 31, 2022 decreased by $436 thousand, or 1.0%, when compared to the twelve months ended December 31, 2021. Key changes in the components of noninterest expense for the twelve months ended December 31, 2022, as compared to the same period in 2021, are as follows:
Salaries and employee benefits decreased by $889 thousand, or 3.8%, primarily due to recording no accelerated stock-based compensation expense during the twelve months ended December 31, 2022 as compared to recording $896 thousand in accelerated stock-based compensation expense during the same period of 2021 related to the accelerated vesting of restricted stock awards, which accelerated vesting was subject to the prior approval of the Company and was not contingent on the closing of the merger with OCFC, decreases related to staffing changes and a decrease in commissions expense paid due to the decrease in mortgage banking income from Partners’ majority owned subsidiary JMC, which were partially offset by merit increases and higher expenses related to payroll taxes, benefit costs, and bonus accruals. In addition, salaries and employee benefits increased due to Partners’ new key hires and expansion into the Greater Washington market and Delmarva opening its new full-service branch at 26 th Street in Ocean City, Maryland;
Premises and equipment increased by $568 thousand, or 11.1%, primarily due to increases related to Delmarva opening its new full-service branch at 26 th Street in Ocean City, Maryland during the second quarter of 2021 and Partners opening its new full-service branch and commercial banking office in Reston, Virginia during the third quarter of 2021, and higher expenses related to repairs and maintenance, software
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amortization and maintenance contracts, which were partially offset by lower expenses related to Partners’ majority owned subsidiary JMC, building security and purchased software, the cost of which did not qualify for capitalization;
(Gains) losses and operating expenses on other real estate owned, net increased by $179 thousand, or 105.6%, primarily due to valuation adjustments being recorded on properties during the twelve months ended December 31, 2021 as compared to no valuation adjustments being recorded during the same period of 2022, and lower expenses related to other real estate owned;
Amortization of core deposit intangible decreased by $80 thousand, or 13.3%, primarily due to lower amortization related to the $2.7 million and $1.5 million, respectively, in core deposit intangibles recognized in the Partners and Liberty acquisitions;
Merger related expenses increased by $421 thousand, or 43.0%, primarily due to higher legal fees and other costs associated with the terminated merger with OCFC; and
Other expenses decreased by $277 thousand, or 2.3%, primarily due to lower expenses related to professional services, stationery, printing and supplies, director fees, correspondent bank services, legal, and other, which were partially offset by higher expenses related to postage and delivery, FDIC insurance assessments, marketing, ATM, and audit and related professional fees.
The following table sets forth the primary components of other operating expenses for the periods indicated:
Other Operating Expenses
(Dollars in Thousands)
December 31,
Professional services
Stationary, printing and supplies
Postage and delivery
FDIC assessment
State bank assessment
Directors fees and expenses
Marketing
Correspondent bank services
ATM expenses
Telephones and mobile devices
Membership dues and fees
Legal fees
Audit and related professional fees
Insurance
Listing fees
Other
Income Taxes
The provision for income taxes was $4.5 million during the year ended December 31, 2022, compared to the provision for income taxes of $2.2 million during the year ended December 31, 2021, an increase of $2.3 million or 100.8%. This increase was due primarily to higher consolidated income before taxes, higher merger related expenses, which are typically non-deductible, and lower earnings on tax-exempt income, primarily tax-exempt investment securities. For the twelve months ended December 31, 2022, the Company’s effective tax rate was approximately 24.9% as compared to 23.3% for the same period in 2021.
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Partners is not subject to Virginia state income tax, but instead pays Virginia franchise tax. The Virginia franchise tax paid by Partners is recorded in the “Other operating expenses” line item on the Consolidated Statements of Income for the twelve months ended December 31, 2022 and 2021.
Financial Condition
Interest Earning Assets
Loans. Loans typically provide higher yields than the other types of interest earning assets, and thus one of the Company's goals is to increase loan balances. Management attempts to control and counterbalance the inherent credit and liquidity risks associated with the higher loan yields without sacrificing asset quality to achieve its asset mix goals. Total gross loans, excluding unamortized discounts on acquired loans, averaged $1.17 billion and $1.09 billion during the years ended December 31, 2022 and 2021, respectively.
The following table shows the composition of the loan portfolio by category:
Composition of Loan Portfolio by Category
(Dollars in Thousands)
As of December 31, 2022 and 2021
December 31,
December 31,
Real Estate Mortgage
Construction and land development
Residential real estate
Nonresidential
Home equity loans
Commercial
Consumer and other loans
Less: Allowance for credit losses
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The following table sets forth the repricing characteristics and sensitivity to interest rate changes of the Company's loan portfolio, including unamortized discounts on acquired loans at December 31, 2022.
Loan Maturities and Interest Rate Sensitivity
At December 31, 2022
(Dollars in thousands)
Between
Between
One Year
One and
Five and
After
December 31, 2022
or Less
Five Years
Fifteen Years
Fifteen Years
Total
Real Estate Mortgage
Construction and land development
Residential real estate
Nonresidential
Home equity loans
Commercial
Consumer and other loans
Total loans receivable
Fixed-rate loans:
Real Estate Mortgage
Construction and land development
Residential real estate
Nonresidential
Home equity loans
Commercial
Consumer and other loans
Total fixed-rate loans
Floating-rate loans:
Real Estate Mortgage
Construction and land development
Residential real estate
Nonresidential
Home equity loans
Commercial
Consumer and other loans
Total floating-rate loans
At December 31, 2022, real estate mortgage loans included $334.3 million of owner-occupied non-farm, non-residential loans, and $319.3 million of other non-farm, non-residential loans, which is 30.4% and 29.0% of real estate mortgage loans, respectively. By comparison, at December 31, 2021, real estate mortgage loans included $287.4 million of owner-occupied non-farm, non-residential loans, and $313.8 million of other non-farm, non-residential loans, which is 29.3% and 32.0% of real estate mortgage loans, respectively. This represents an increase at December 31, 2022 of $47.0 million and $5.5 million, or 16.3% and 1.8%, in owner-occupied non-farm, non-residential loans and other non-farm, non-residential loans, respectively.
At December 31, 2022, real estate mortgage loans included $117.3 million of construction and land development loans, and $52.3 million of multi-family residential loans, which is 10.7% and 4.8% of real estate mortgage loans, respectively. By comparison, at December 31, 2021, real estate mortgage loans included $107.9 million of construction and land development loans, and $24.4 million of multi-family residential loans, which is 11.0% and 2.5% of real estate mortgage loans, respectively. This represents an increase at December 31, 2022 of $9.4 million and $27.9 million, or 8.7% and 114.3%, in construction and land development loans and multi-family residential loans, respectively.
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Commercial real estate loans, excluding owner-occupied non-farm, non-residential loans, were 273.9% of total risk-based capital at December 31, 2022, as compared to 267.9% at December 31, 2021. Construction and land development loans were 65.7% of total risk-based capital at December 31, 2022, as compared to 64.8% at December 31, 2021.
At December 31, 2022, real estate mortgage loans included home equity loans of $31.4 million and residential real estate loans of $229.9 million, compared to $30.4 million and $201.2 million at December 31, 2021, respectively. Home equity loans increased $1.1 million, or 3.5%, during the year ended December 31, 2022, while residential real estate loans increased $28.7 million, or 14.2%, during the year ended December 31, 2022. At December 31, 2022, commercial loans were $128.6 million, compared to $130.9 million at December 31, 2021, a decrease of $2.4 million, or 1.8%, during the year ended December 31, 2022.
The overall increase in loans from the year ended December 31, 2021 to December 31, 2022 was due primarily to an increase in organic growth, including growth of approximately $68.9 million in loans related to Partners’ expansion into the Greater Washington market, which was partially offset by forgiveness payments received of approximately $8.2 million under round two of the PPP. As of December 31, 2022, there were no loans under the PPP that were still outstanding.
Investment Securities. The investment securities portfolio is a significant component of the Company's total interest-earning assets. Total investment securities averaged $147.5 million during the year ended December 31, 2022 as compared to $129.8 million for the year ended December 31, 2021. This represented 9.2% and 8.5% of total average interest-earning assets for the years ended December 31, 2022 and 2021, respectively. This increase was primarily due to management of the investment securities portfolio in light of the Company’s liquidity needs and lower accelerated pre-payments on mortgage-backed investment securities, partially offset by calls on higher yielding investment securities in the low interest rate environment during 2021. During the twelve months ended December 31, 2021, accelerated pre-payments on mortgage-backed investment securities caused the premiums paid on these investment securities to be amortized into expense on an accelerated basis thereby reducing income and yield earned.
During the year ended December 31, 2022, the Company’s investment securities portfolio was negatively impacted by unrealized losses in the market value of investment securities available for sale as a result of increases in market interest rates. The Company believes that further increases in market interest rates will likely result in higher unrealized losses in the market value of the investment securities available for sale portfolio. The Company expects to recover its investment in debt securities through scheduled payments of principal and interest, and unrealized losses are not expected to affect the earnings or regulatory capital of the Company.
The Company classifies all of its investment securities as available for sale. This classification requires that investment securities be recorded at their fair value with any difference between the fair value and amortized cost (the purchase price adjusted by any discount accretion or premium amortization) reported as a component of stockholders’ equity (accumulated other comprehensive income (loss)), net of deferred taxes. At December 31, 2022 and 2021, investment securities available for sale, at fair value totaled $133.7 million and $122.0 million, respectively. Investment securities available for sale, at fair value increased by $11.7 million, or 9.5%, during the year ended December 31, 2022. This increase was primarily due to management of the investment securities portfolio in light of the Company’s liquidity needs, which was partially offset by two higher yielding investment securities being called, and an increase in unrealized losses on the investment securities available for sale portfolio. The Company attempts to maintain an investment securities portfolio of high quality, highly liquid investments with returns competitive with short-term U.S. Treasury or agency obligations. This objective is particularly important as the Company focuses on growing its loan portfolio. The Company primarily invests in securities of U.S. Government agencies, municipals, and corporate obligations. At December 31, 2022 and 2021 there were no issuers, other than the U.S. Government and its agencies, whose securities owned by the Company had a book or fair value exceeding 10% of the Company's stockholders' equity.
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The following table summarizes the amortized cost and fair value of investment securities available for sale for the dates indicated:
Amortized Cost and Fair Value of Investment Securities
(Dollars in Thousands)
As of December 31, 2022 and 2021
December 31, 2022
Gross
Gross
Amortized
Percentage
Unrealized
Unrealized
Fair
Cost
of Total
Gains
Losses
Value
Obligations of U.S. Government agencies and corporations
Obligations of States and political subdivisions
Mortgage-backed securities
Subordinated debt investments
December 31, 2021
Gross
Gross
Amortized
Percentage
Unrealized
Unrealized
Fair
Cost
of Total
Gains
Losses
Value
Obligations of U.S. Government agencies and corporations
Obligations of States and political subdivisions
Mortgage-backed securities
Subordinated debt investments
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The following table sets forth the fair value and weighted average yields by maturity category of the investment securities available for sale portfolio as of December 31, 2022. Weighted-average yields have been computed on a fully taxable-equivalent basis using a tax rate of 21%. Mortgage-backed securities are included in maturity categories based on their stated maturity date. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations.
Fair Value and Weighted Average Yields of Investment Securities by Maturity
(Dollars in Thousands)
As of December 31, 2022
December 31, 2022
Within 1 Year
1-5 Years
5-10 years
After 10 Years
Total
Weighted
Weighted
Weighted
Weighted
Weighted
Fair
Average
Fair
Average
Fair
Average
Fair
Average
Fair
Average
Value
Yield
Value
Yield
Value
Yield
Value
Yield
Value
Yield
Obligations of U.S. Government agencies and corporations
Obligations of States and political subdivisions
Mortgage-backed securities
Subordinated debt investments
In addition, the Company holds stock in various correspondent banks as well as the Federal Reserve. The balance of these securities was $6.5 million and $4.9 million at December 31, 2022 and 2021, respectively, an increase of $1.6 million, or 33.7%, for the year ended December 31, 2022.
Due to the increase in longer term interest rates and ongoing volatility in the securities markets during the year ended December 31, 2022, the net unrealized losses in the Company’s investment securities available for sale portfolio increased from December 31, 2021 by approximately $17.5 million, or 3,655.7%, to $17.0 million at December 31, 2022.
Subsequent interest rate fluctuations could have an adverse effect on our investment securities available for sale portfolio by increasing reinvestment risk and reducing our ability to achieve our targeted investment returns.
Interest Bearing Liabilities
Deposits. Average total deposits increased from $1.39 billion to $1.47 billion, an increase of $72.5 million, or 5.2%, for the year ended December 31, 2022 over the average total deposits for the year ended December 31, 2021. This increase was primarily due to organic deposit growth, including average growth of approximately $51.7 million in deposits related to Partners’ expansion into the Greater Washington market, which was partially offset by scheduled maturities of time deposits that were not replaced and competitive pressures in the higher interest rate environment. At December 31, 2022, total deposits were $1.34 billion as compared to $1.44 billion at December 31, 2021, a decrease of $103.3 million, or 7.2%. This decrease was primarily driven by scheduled maturities of time deposits that were not replaced and significant outflows related to competitive pressures in the higher interest rate environment, which were partially offset by organic growth as a result of our continued focus on total relationship banking and Partners’ expansion into the Greater Washington market. Non-interest bearing demand deposits increased to $528.8 million at December 31, 2022, a $34.9 million, or 7.1%, increase from $493.9 million in non-interest bearing demand deposits at December 31, 2021, due primarily to the aforementioned items above.
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The following table sets forth the deposits of the Company by category for the period indicated:
Deposits by Category
(Dollars in Thousands)
As of December 31, 2022 and 2021
December 31,
Percentage
December 31,
Percentage
of Deposits
of Deposits
Noninterest bearing demand deposits
Interest bearing deposits:
Money market, NOW, and savings accounts
Certificates of deposit, $250 thousand or more
Other certificates of deposit
Total interest bearing deposits
Total
The Company's loan-to-deposit ratio was 92.0% at December 31, 2022 as compared to 77.4% at December 31, 2021. Core deposits, which exclude certificates of deposit of $250 thousand or more, provide a relatively stable funding source for the Company's loan portfolio and other interest earning assets. The Company's core deposits were $1.28 billion at December 31, 2022, a decrease of $80.4 million, or 5.9%, from $1.36 billion at December 31, 2021, and excluded $59.2 million and $83.3 million in certificates of deposit of $250 thousand or more as of those dates, respectively. Management anticipates that a stable base of deposits will be the Company's primary source of funding to meet both its short-term and long-term liquidity needs in the future, and, therefore, feels that presenting core deposits provides valuable information to investors.
The following table provides a summary of the Company's maturity distribution for certificates of deposit at the dates indicated:
Maturities of Certificates of Deposit
(Dollars in Thousands)
As of December 31, 2022
December 31,
December 31,
Three months or less
Over three months through six months
Over six months through twelve months
Over twelve months
Total
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The following table provides a summary of the Company's maturity distribution for certificates of deposit of greater than $250 thousand at the dates indicated:
Maturities of Certificates of Deposit Greater than $250 Thousand
(Dollars in Thousands)
As of December 31, 2022
December 31,
December 31,
Three months or less
Over three months through six months
Over six months through twelve months
Over twelve months
Total
Borrowings. Borrowings at December 31, 2022 and 2021 consist primarily of short-term and long-term borrowings with the FHLB, subordinated notes payable, net, and other borrowings.
At December 31, 2022, short-term borrowings with the FHLB were $42.0 million as compared to $0 at December 31, 2021, an increase of $42.0 million, or 100.0%. This increase was primarily due to the aforementioned items noted in the analysis of total deposits.
At December 31, 2022, long- term borrowings with the FHLB were $19.8 million as compared to $26.3 million at December 31, 2021, a decrease of $6.5 million, or 24.8%. This decrease was primarily due to maturities and payoffs of borrowings that were not replaced and scheduled principal curtailments. These borrowings are collateralized by a blanket lien on the first mortgage loans in the amount of the outstanding borrowings, FHLB capital stock, and amounts on deposit with the FHLB.
At December 31, 2022 and 2021, subordinated notes payable, net, were $22.2 million.
At December 31, 2022, other borrowings were $613 thousand as compared to $755 thousand at December 31, 2021, a decrease of $142 thousand, or 18.8%. Partners majority owned subsidiary, JMC, has a warehouse line of credit with another financial institution in the amount of $3.0 million, of which $0 and $120 thousand were outstanding as of December 31, 2022 and 2021, respectively. In addition to the decrease in JMC’s warehouse line of credit, there was a decrease on Partners’ note payable on 410 William Street, Fredericksburg, Virginia, primarily due to scheduled principal curtailments, partially offset by the amortization of the related discount on the note payable.
See Note 8 – Borrowings and Notes Payable of the audited consolidated financial statements for the year ended December 31, 2022 for additional information on the Company’s subordinated notes payable, net, Partners’ note payable, and JMC’s warehouse line of credit.
Average total borrowings decreased by $10.3 million, or 17.6%, and average rates paid increased by 0.31% to 4.04% for the twelve months ended December 31, 2022, as compared to the same period in 2021. The decrease in average total borrowings balances was primarily due to a decrease in the average balance of FHLB advances resulting from maturities and payoffs of borrowings that were not replaced and scheduled principal curtailments, a decrease in average borrowings at the Federal Reserve Bank Discount Window under the PPP Liquidity Facility in which the loans under the PPP originated by the Company were previously pledged as collateral, and the early redemption of $2.0 million in subordinated notes payable, net, in early July 2021. The increase in average rates paid was primarily due to the decreases in the average balances of FHLB advances and borrowings at the Federal Reserve Bank Discount Window under the PPP Liquidity Facility, which were lower cost interest-bearing liabilities, partially offset by the early redemption of subordinated notes payable, which was a higher cost interest-bearing liability.
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Capital
Total stockholders’ equity as of December 31, 2022 was $139.3 million, a decrease of $2.0 million, or 1.4%, from December 31, 2021. Key drivers of this change were an increase in accumulated other comprehensive (loss), net of tax, and cash dividends paid to shareholders, which were partially offset by the net income attributable to the Company for the twelve months ended December 31, 2022, the proceeds from stock option exercises, and stock-based compensation expense related to restricted stock awards.
The Federal Reserve and other bank regulatory agencies require bank holding companies and financial institutions to maintain capital at adequate levels based on a percentage of assets and off-balance sheet exposures, adjusted for risk weights ranging from 0% to 100%. The following table presents actual and required capital ratios as of December 31, 2022 and December 31, 2021 for Delmarva and Partners under Basel III Capital Rules. The minimum required capital amounts presented include the minimum required capital levels as of December 31, 2022 based on the phase-in provisions of the Basel III Capital Rules and the minimum required capital levels as of January 1, 2019 when the Basel III Capital Rules were fully phased-in. Capital levels required for an institution to be considered well capitalized are based upon prompt corrective action regulations, as amended to reflect the changes under the Basel III Capital Rules. A more in depth discussion of regulatory capital requirements is included in Note 16 of the audited consolidated financial statements included at Item 8 to this Annual Report on Form 10-K.
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Capital Components
At December 31, 2022 and 2021
(Dollars in Thousands)
To Be Well
Capitalized
For Capital
Under Prompt
Adequacy
Corrective Action
Actual
Purposes
Provisions
Amount
Ratio
Amount
Ratio
Amount
Ratio
As of December 31, 2022
Total Capital Ratio
(To Risk Weighted Assets)
The Bank of Delmarva
Virginia Partners Bank
Tier 1 Capital Ratio
(To Risk Weighted Assets)
The Bank of Delmarva
Virginia Partners Bank
Common Equity Tier 1 Ratio
(To Risk Weighted Assets)
The Bank of Delmarva
Virginia Partners Bank
Tier 1 Leverage Ratio
(To Average Assets)
The Bank of Delmarva
Virginia Partners Bank
To Be Well
Capitalized
For Capital
Under Prompt
Adequacy
Corrective Action
Actual
Purposes
Provisions
Amount
Ratio
Amount
Ratio
Amount
Ratio
As of December 31, 2021
Total Capital Ratio
(To Risk Weighted Assets)
The Bank of Delmarva
Virginia Partners Bank
Tier 1 Capital Ratio
(To Risk Weighted Assets)
The Bank of Delmarva
Virginia Partners Bank
Common Equity Tier 1 Ratio
(To Risk Weighted Assets)
The Bank of Delmarva
Virginia Partners Bank
Tier 1 Leverage Ratio
(To Average Assets)
The Bank of Delmarva
Virginia Partners Bank
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Liquidity Management
Liquidity management involves monitoring the Company's sources and uses of funds in order to meet its day-to-day cash flow requirements while maximizing profits. Liquidity represents the ability of a company to convert assets into cash or cash equivalents without significant loss and to raise additional funds by increasing liabilities. Liquidity management is made more complicated because different balance sheet components are subject to varying degrees of management control. For example, the timing of maturities of the available for sale investment securities portfolio is very predictable and subject to a high degree of control at the time investment decisions are made; however, net deposit inflows and outflows are far less predictable and are not subject to the same degree of control. Asset liquidity is provided by cash and assets which are readily marketable, which can be pledged, or which will mature in the near future. Liability liquidity is provided by access to core funding sources, principally the ability to generate customer deposits in the Company's market area. The Company's cash and cash equivalents position, which includes funds in cash and due from banks, interest bearing deposits in other financial institutions, and federal funds sold, averaged $296.3 million during the year ended December 31, 2022 and totaled $141.6 million at December 31, 2022, as compared to an average of $326.9 million during the year ended December 31, 2021 and a year-end position of $338.8 million at December 31, 2021. Also, the Company has available advances from the FHLB. Advances available are generally based upon the amount of qualified first mortgage loans which can be used for collateral. At December 31, 2022, advances available totaled approximately $412.0 million of which $61.8 million had been drawn, or used for letters of credit. Management regularly reviews the liquidity position of the Company and has implemented internal policies which establish guidelines for sources of asset-based liquidity and limit the total amount of purchased funds used to support the balance sheet and funding from non-core sources. Subject to certain aggregation rules, FDIC deposit insurance covers the funds in deposit accounts up to at least $250 thousand.
