Purse Ho
Forward-looking statements
This report contains certain forward-looking statements regarding the financial condition, results of operations, plans, objectives, future performance and activities of
•statements that are not historical in nature, and •statements preceded, followed by or that include the words believes, expects, may, will, should, might, anticipates, estimates, intends, expects, hopes or similar expressions.
Forward-looking statements are not guarantees of future performance or results. They involve risks, uncertainties and assumptions. Actual results may differ materially from those contemplated by the forward-looking statements due to, among others, the following factors: •competitive pressures among financial services companies may increase significantly, •changes in the interest rate environment may reduce interest margins, •general economic conditions, either nationally or inMissouri , may be less favorable than expected and may adversely affect the quality of our loans and other assets, •increases in non-performing assets in the Company's loan portfolios and adverse economic conditions may necessitate increases to our provisions for loan losses, •costs or difficulties related to any integration of any business of the Company and its acquisition targets may be greater than expected, •legislative, regulatory or tax law changes may adversely affect the business in which the Company and its subsidiaries are engaged, •changes may occur in the securities markets, and •the COVID-19 pandemic, or other external events may adversely affect the Company. We have described under the caption Risk Factors in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2021 , and in other reports filed with theSEC from time to time, additional factors that could cause actual results to be materially different from those described in the forward-looking statements. Other factors that have not been identified in this report could also have this effect. You are cautioned not to put undue reliance on any forward-looking statement, which speak only as of the date they were made. Except as required by law, the Company undertakes no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events, or changes in its business, results of operations or financial condition over time. 33 --------------------------------------------------------------------------------
Insight
Crucial to the Company's community banking strategy is growth in its commercial banking services, retail mortgage lending and retail banking services. Through the branch network of its subsidiary bank,Hawthorn Bank (the Bank), the Company, with$1.7 billion in assets atMarch 31, 2022 , provides a broad range of commercial and personal banking services. The Bank's specialties include commercial banking for small and mid-sized businesses, including equipment, operating, commercial real estate,Small Business Administration (SBA) loans, and personal banking services including real estate mortgage lending, installment and consumer loans, certificates of deposit, individual retirement and other time deposit accounts, checking accounts, savings accounts, and money market accounts. Other financial services that the Company provides include trust services that include estate planning, investment and asset management services and a comprehensive suite of cash management services. The geographic areas in which the Company provides products and services include theMissouri communities in and surroundingJefferson City ,Columbia ,Clinton ,Warsaw ,Springfield ,St. Louis , and the greaterKansas City metropolitan area. The Company's primary source of revenue is net interest income derived primarily from lending and deposit taking activities. Much of the Company's business is commercial, commercial real estate development, and residential mortgage lending. The Company's income from mortgage brokerage activities is directly dependent on mortgage rates and the level of home purchases and refinancing activity. The success of the Company's growth strategy depends primarily on the ability of the Bank to generate an increasing level of loans and deposits at acceptable risk levels and on acceptable terms without significant increases in non-interest expenses relative to revenues generated. The Company's financial performance also depends, in part, on its ability to manage various portfolios and to successfully introduce additional financial products and services by expanding new and existing customer relationships, utilizing improved technology, and enhancing customer satisfaction. Furthermore, the success of the Company's growth strategy depends on its ability to maintain sufficient regulatory capital levels during periods in which general economic conditions are unfavorable and despite economic conditions being beyond its control. The Bank is a full-service bank conducting a general banking business, offering its customers checking and savings accounts, debit cards, certificates of deposit, safety deposit boxes and a wide range of lending services, including commercial and industrial loans, residential real estate loans, single payment personal loans, installment loans and credit card accounts. In addition, the Bank provides trust services. The deposit accounts of the Bank are insured by theFederal Deposit Insurance Corporation (FDIC) to the extent provided by law. The operations of the Bank are supervised and regulated by theFDIC and theMissouri Division of Finance . Periodic examinations of the Bank are conducted by representatives of theFDIC and theMissouri Division of Finance . Such regulations, supervision and examinations are principally for the benefit of depositors, rather than for the benefit of shareholders. The Company is subject to supervision and examination by theBoard of Governors of theFederal Reserve System .
Significant developments and transactions
The item listed below materially affects the comparability of our results of operations for the three months endedMarch 31, 2022 and 2021, and our financial condition as ofMarch 31, 2022 andDecember 31, 2021 , and may affect the comparability of financial information we report in future fiscal periods.
Covid-19 pandemic
The Coronavirus Disease 2019 (COVID-19) pandemic (the pandemic) has impacted the Company and may continue to do so, as uncertainty remains about the duration of the pandemic and the timing and strength of the global and national economic recovery. In conjunction with our efforts to support clients affected by the pandemic, the Company has cumulatively originated$136.0 million in loans under the Paycheck Protection Program (PPP) with amounts outstanding of$2.3 million and$8.4 million atMarch 31, 2022 andDecember 31, 2021 , respectively. For more information on PPP loans, see Note 2 - Loans and Allowance for Loan Losses in the Notes to Consolidated Financial Statements (unaudited). The future direct and indirect impact of the pandemic on our businesses, results of operations and financial condition remains uncertain. Should current economic conditions deteriorate or if the pandemic worsens due to various factors, including through the spread of more easily communicable variants of COVID-19, such conditions could have an adverse effect on our businesses and results of operations and could adversely affect our financial condition. 34 --------------------------------------------------------------------------------
CRITICAL ACCOUNTING METHODS
The following accounting policies are considered most critical to the understanding of the Company's financial condition and results of operations. These critical accounting policies require management's most difficult, subjective and complex judgments about matters that are inherently uncertain. Because these estimates and judgments are based on current circumstances, they may change over time or prove to be inaccurate based on actual experiences. In the event that different assumptions or conditions were to prevail, and depending upon the severity of such changes, the possibility of a materially different financial condition and/or results of operations could reasonably be expected. The impact and any associated risks related to the critical accounting policies on the business operations are discussed throughout Management's Discussion and Analysis of Financial Condition and Results of Operations, where such policies affect the reported and expected financial results.
Allowance for loan losses
Management has identified the accounting policy related to the allowance for loan losses as critical to the understanding of the Company's results of operations, since the application of this policy requires significant management assumptions and estimates that could result in materially different amounts to be reported if conditions or underlying circumstances were to change. Further discussion of the methodology used in establishing the allowance and the impact of any associated risks related to these policies on the Company's business operations is provided in Note 1 - Summary of Significant Accounting Policies and is also discussed in the Lending and Credit Management section below. Many of the loans are deemed collateral dependent for purposes of the measurement of the impairment loss, thus the fair value of the underlying collateral and sensitivity of such fair values due to changing market conditions, supply and demand, condition of the collateral and other factors can be volatile over periods of time. Such volatility can have an impact on the financial performance of the Company. 35 --------------------------------------------------------------------------------
Summary
The Company has prepared all of the consolidated financial information in this report in accordance withU.S. GAAP. In preparing the consolidated financial statements in accordance withU.S. GAAP, the Company makes estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. There can be no assurances that actual results will not differ from those estimates. As of and
for the three months ended
December 31, (Dollars in thousands, except per share data) March 31, 2022 2021 March 31, 2021 Net interest income$ 14,145 $ 15,103 $ 14,390 (Release of) provision for loan losses (2,500) (2,400) - Non-interest income 3,726 3,675 4,572 Investment securities (losses) gains, net (4) 9 14 Non-interest expense 12,227 13,474 11,780 Income before income taxes 8,140 7,713 7,196 Income tax expense 1,531 1,723 1,357 Net income $ 6,609$ 5,990 $ 5,839 Basic earnings per share $ 1.00$ 0.90 $ 0.88 Diluted earnings per share $ 1.00$ 0.90 $ 0.88 Cash dividends paid on common stock $ 993 $ 992 $ 842 Book value per share $ 20.35$ 22.51 $ 19.75 Market price per share $ 25.28$ 25.94 $ 20.47 Return on average total assets 1.51% 1.35% 1.38% Return on average stockholders' equity 18.41% 16.70% 18.03% Average stockholders' equity to total assets 8.22% 8.10% 7.64% Efficiency ratio (1) 68.42% 71.75% 62.12% Net interest spread 3.36% 3.52% 3.44% Net interest margin 3.50% 3.67% 3.61% Stockholders' equity to assets 7.74% 8.13% 7.55% Total risk-based capital ratio 14.66% 14.79% 14.80% Tier 1 risk-based capital ratio 13.44% 13.59% 13.21% Common equity Tier 1 capital 10.36% 10.22% 9.93% Tier 1 leverage ratio (2) 10.99% 11.01% 10.22% Asset Quality Net-charge-offs (recoveries) $ 124$ (375) $ (248) Non-performing loans$ 17,099 $ 25,473 $ 34,233 Classified assets$ 104,073 $ 108,322 $ 145,794 Non-performing loans to total loans 1.28% 1.96% 2.68% Non-performing assets to total assets 1.55% 1.97% 2.68% Allowance for loan losses to total loans 1.07% 1.30% 1.44% (1)Efficiency ratio is calculated as non-interest expense as a percentage of revenue. Total revenue is calculated as net interest income plus non-interest income.
(2) The Tier 1 leverage ratio is calculated by dividing the Tier 1 capital by the average total consolidated assets
36
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Highlights of operating results:
Consolidated net income of$6.6 million for the first quarter 2022, an increase of$0.6 million compared to the fourth quarter 2021 ("linked quarter") and an increase of$0.8 million from the first quarter 2021 (the "prior year quarter"). Earnings per diluted share ("EPS") was$1.00 for the first quarter 2022 compared to$0.90 and$0.88 for the linked quarter and prior year quarter, respectively. For the first quarter 2022, the return on average assets was 1.51%, the return on average stockholders' equity was 18.41%, and the efficiency ratio was 68.4%. Net interest income of$14.1 million for the first quarter 2022, decreased$1.0 million from the linked quarter, and decreased$0.2 million from the prior year quarter. Net interest margin, on a fully taxable equivalent basis ("FTE") basis, was 3.50% for the first quarter, a decrease from 3.67% for the linked quarter, and a decrease from 3.61% for the prior year quarter. These changes are discussed in greater detail under the Average Balance Sheet Data and Rate and Volume Analysis section below. Non-interest income for the first quarter 2022 was$3.7 million , an increase of$0.1 million , or 1.4%, from the linked quarter, and a decrease of$0.8 million , or 18.5%, from the prior year quarter. The change in the current quarter compared to the prior year quarter is primarily due to the decrease in the gain on sale of real estate mortgages of$1.6 million , or 64.0%. These changes are discussed in greater detail under the Non-interest Income and Expense section below. Non-interest expense for the first quarter 2022 was$12.2 million , a decrease of$1.2 million , or 9.3%, from the linked quarter, and an increase of$0.4 million , or 3.8%, from the prior year quarter. The change in the current quarter compared to the linked quarter is primarily due to the decrease in legal fees expenses resulting from the recognition of final settlement of a legal matter in the fourth quarter of 2021. These changes are discussed in greater detail under the Non-interest Income and Expense section below.
Balance sheet highlights:
Loans - Loans held for investment increased by$31.8 million , or 2.4%, equal to$1.3 billion as ofMarch 31, 2022 as compared to the end of the linked quarter. Year-over-year, loans held for investment grew$57.7 million , or 4.5%, from$1.3 billion as ofMarch 31, 2021 . Asset quality - Non-performing loans totaled$17.1 million atMarch 31, 2022 , a decrease of$8.4 million from$25.5 million at the end of the linked quarter, and a decrease of$17.1 million from$34.2 million at the end of the prior year quarter. The reduction in non-performing loans in the current quarter, as compared to the linked quarter and prior year quarter is primarily due to several large non-accrual loans returning to accrual status described in more detail below. The allowance for loan losses to total loans was 1.07% atMarch 31, 2022 , compared to 1.30% atDecember 31, 2021 and 1.44% atMarch 31, 2021 . These changes are discussed in greater detail under the Lending and Credit Management section below. Deposits - Total deposits decreased by$60.7 million , or 4.0%, equal to$1.5 billion as ofMarch 31, 2022 as compared to the end of the linked quarter. Year-over-year deposits grew$62.2 million , or 4.5%, from$1.4 billion as ofMarch 31, 2021 . Capital - Total shareholder's equity was$134.4 million and the common equity to assets ratio was 7.74% atMarch 31, 2022 as compared to 8.13% and 7.55% at the end of the linked quarter and the prior year quarter, respectively. Regulatory capital ratios remain "well-capitalized", with tier 1 leverage ratio of 10.99% and a total risk-based capital ratio of 14.66% atMarch 31, 2022 .
Average balance sheet data
Net interest income is the largest source of revenue resulting from the Company's lending, investing, borrowing, and deposit gathering activities. It is affected by both changes in the level of interest rates and changes in the amounts and mix of interest earning assets and interest-bearing liabilities. The following table presents average balance sheet data, net interest income, average yields of earning assets, average costs of interest-bearing liabilities, net interest spread and net interest margin on a fully taxable equivalent basis for each of the three month periods endedMarch 31, 2022 and 2021, respectively. The average balances used in this table and other statistical data were calculated using average daily balances. 37 --------------------------------------------------------------------------------
Three Months EndedMarch 31, 2022 2021 Interest Income/ Interest Income/ (Dollars in thousands) Average Balance
Expense (1) Rate Earned/ Paid (1) Average Balance Expense (1) Rate Earned/ Paid (1) ASSETS Loans: (2) (3) Commercial $ 220,888 $ 2,832 5.20% $ 257,623 $ 4,159 6.55% Real estate construction - residential 23,455 256 4.43 33,492 394 4.77 Real estate construction - commercial 95,935 996 4.21 78,578 878 4.53 Real estate mortgage - residential 281,824 2,832 4.08 260,040 2,841 4.43 Real estate mortgage - commercial 670,713 6,938 4.20 621,877 6,600 4.30 Installment and other consumer 22,342 206 3.74 25,992 265 4.13 Total loans $ 1,315,157 $ 14,060 4.34% $ 1,277,602 $ 15,137 4.81% Loans held for sale 2,288 20 3.55 5,500 25 1.84 Investment securities: U.S. Treasury 4,010 5 0.51 3,006 8 1.08U.S. government and federal agency obligations 27,371 89 1.32 38,605 146 1.53 Obligations of states and political subdivisions 126,577 1,020 3.27 61,456 452 2.98 Mortgage-backed securities 132,922 510 1.56 101,101 338 1.36 Other debt securities 13,456 156 4.70 11,539 143 5.03 Total investment securities 304,336 1,780 2.37 215,707 1,087 2.04 Other investment securities 5,412 75 5.62 5,982 83 5.63 Federal funds sold 6,232 1 0.07 20,276 4 0.08 Interest bearing deposits in other financial institutions 70,824 60 0.34 129,048 98 0.31 Total interest earning assets $ 1,704,249 $ 15,996 3.81% $ 1,654,115 $ 16,434 4.03% All other assets 83,294 84,407 Allowance for loan losses (16,926) (18,466) Total assets $ 1,770,617 $ 1,720,056 LIABILITIES AND STOCKHOLDERS' EQUITY NOW accounts $ 176,648 $ 15 0.03% $ 142,735 $ 12 0.03% Savings 265,542 187 0.29 231,311 138 0.24 Interest checking 29,398 28 0.39 61,522 76 0.50 Money market 289,140 86 0.12 279,234 83 0.12 Time deposits 260,628 389 0.61 267,047 671 1.02 Total interest bearing deposits $ 1,021,356 $ 705 0.28% $ 981,849 $ 980 0.40% Federal funds purchased and securities sold under agreements to repurchase 13,792 10 0.29 41,507 26 0.25Federal Home Loan Bank advances and other borrowings 77,397 252 1.32 98,152 396 1.64 Subordinated notes 49,486 324 2.66 49,486 310 2.54 Total borrowings 140,675 586 1.69 189,145 732 1.57
Total interest bearing liabilities $ 1,162,031
1,291 0.45% $ 1,170,994 $ 1,712 0.59% Demand deposits 449,175 399,429 Other liabilities 13,849 18,275 Total liabilities $ 1,625,055 $ 1,588,698 Stockholders' equity 145,562 131,358 Total liabilities and stockholders' equity $ 1,770,617 $ 1,720,056 Net interest income (FTE) $ 14,705 $ 14,722 Net interest spread 3.36% 3.44% Net interest margin 3.50% 3.61% (1)Interest income and yields are presented on a fully taxable equivalent basis using the federal statutory income tax rate of 21%, net of nondeductible interest expense, for the three months endedMarch 31, 2022 and 2021. Such adjustments totaled$0.6 million and$0.3 million for the three months endedMarch 31, 2022 and 2021, respectively. (2)Non-accruing loans are included in the average amounts outstanding. (3)Fees and costs on loans are included in interest income ($0.3 million and$1.5 million of PPP fees were included in commercial loan income for the three months endedMarch 31, 2022 and 2021, respectively). 38 --------------------------------------------------------------------------------
Rate and volume analysis
The following table summarizes the changes in net interest income on a fully taxable equivalent basis, by major category of interest earning assets and interest-bearing liabilities, identifying changes related to volumes and rates for the three months endedMarch 31, 2022 compared to the three months endedMarch 31, 2021 . The change in interest due to the combined rate/volume variance has been allocated to rate and volume changes in proportion to the absolute dollar amounts of change in each. Three Months Ended March 31, 2022 vs. 2021 Change due to Average (In thousands) Total Change Volume Average Rate
Interest income on a fully taxable equivalent basis: (1) Loans: (2) (3) Commercial
Building construction – residential
(138) (111) (27) Real estate construction - commercial 118 183 (65) Real estate mortgage - residential (9) 228 (237) Real estate mortgage - commercial 338 509 (171) Installment and other consumer (59) (35) (24) Loans held for sale (5) (20) 15 Investment securities: U.S. Treasury (3) 2 (5) U.S. government and federal agency obligations (57) (38) (19) Obligations of states and political subdivisions 568 521 47 Mortgage-backed securities 172 117 55 Other debt securities 13 23 (10) Other investment securities (8) (8) - Federal funds sold (3) (2) (1) Interest bearing deposits in other financial institutions (38) (48) 10 Total interest income$ (438) $ 778 $ (1,216) Interest expense: Savings 3 3 - NOW accounts 49 22 27 Interest checking (48) (33) (15) Money market 3 3 - Time deposits (282) (16) (266)
Fed Funds Purchased and Securities Sold Under Repurchase Agreements
(16) (19) 3 Federal Home Loan Bank advances and other borrowings (144) (75) (69) Subordinated notes 14 - 14 Total interest expense
Net interest income on a fully taxable equivalent basis
$ (17)
(1)Interest income and yields are presented on a fully taxable equivalent basis using the federal statutory income tax rate of 21%, net of nondeductible interest expense, for the three months endedMarch 31, 2022 and 2021. Such adjustments totaled$0.6 million and$0.3 million for the three months endedMarch 31, 2022 and 2021, respectively. (2)Non-accruing loans are included in the average amounts outstanding. (3)Fees and costs on loans are included in interest income ($0.3 million and$1.5 million of PPP fees were included in commercial loan income for the three months endedMarch 31, 2022 and 2021, respectively). 39 -------------------------------------------------------------------------------- Financial results for the quarter endedMarch 31, 2022 compared to the quarter endedMarch 31, 2021 reflected a decrease in net interest income, on a tax equivalent basis, of$17,000 , or 0.1%. Measured as a percentage of average earning assets, the net interest margin (expressed on a fully taxable equivalent basis) decreased to 3.50% for the quarter endedMarch 31, 2022 compared to 3.61% for the quarter endedMarch 31, 2021 . Net interest income and net interest margin decreased primarily due to a decrease in PPP fees and interest income in the three month comparative periods. The Company earned$0.3 million in PPP income for the three months endedMarch 31, 2022 compared to$1.5 million for the three months endedMarch 31, 2021 .
Average interest-earning assets increased
Total interest income (expressed on a fully taxable equivalent basis) was$16.0 million for the three months endedMarch 31, 2022 compared to$16.4 million for the three months endedMarch 31, 2021 . The Company's rates earned on interest earning assets were 3.81% for the three months endedMarch 31, 2022 compared to 4.03% for the three months endedMarch 31, 2021 . Interest income on loans held for investment was$14.1 million for the three months endedMarch 31, 2022 compared to$15.1 million for the three months endedMarch 31, 2021 . Average loans outstanding increased$37.6 million , or 2.9%, to$1.32 billion for the quarter endedMarch 31, 2022 compared to$1.28 billion for the quarter endedMarch 31, 2021 . The average yield on loans decreased to 4.34% for the quarter endedMarch 31, 2022 compared to 4.81% for the quarter endedMarch 31, 2021 . See the Lending and Credit Management section for further discussion of changes in the composition of the lending portfolio. Interest income on available-for-sale securities was$1.8 million for the three months endedMarch 31, 2022 compared to$1.1 million for the three months endedMarch 31, 2021 . Average securities increased$88.6 million , or 41.1%, to$304.3 million for the quarter endedMarch 31, 2022 compared to$215.7 million for the quarter endedMarch 31, 2021 . The average yield on securities increased to 2.37% for the quarter endedMarch 31, 2022 compared to 2.04% for the quarter endedMarch 31, 2021 . See the Liquidity Management section for further discussion. Total interest expense decreased to$1.3 million for the three months endedMarch 31, 2022 compared to$1.7 million for the three months endedMarch 31, 2021 . The Company's rates paid on interest bearing liabilities were 0.45% for the three months endedMarch 31, 2022 compared to 0.59% for the three months endedMarch 31, 2021 . See the Liquidity Management section for further discussion.
Interest expense on deposits decreased to
Average interest-bearing deposits increased$39.5 million , or 4.0%, to$1.02 billion for the quarter endedMarch 31, 2022 compared to$0.98 billion for the quarter endedMarch 31, 2021 . The average cost of deposits decreased to 0.28% for the quarter endedMarch 31, 2022 compared to 0.40% for the quarter endedMarch 31, 2021 .
Interest charges on borrowings decreased to
Average borrowings decreased to$140.7 million for the quarter endedMarch 31, 2022 compared to$189.1 million for the quarter endedMarch 31, 2021 . The average cost of borrowings increased to 1.69% for the quarter endedMarch 31, 2022 compared to 1.57% for the quarter endedMarch 31, 2021 . The increase in cost of funds primarily resulted from higher market interest rates. 40 --------------------------------------------------------------------------------
Non-interest income and expenses
Non-interest income for the periods indicated was as follows:
Three Months Ended
March 31,
(Dollars in thousands) 2022 2021 $ Change % Change
Non-interest income
Service charges and other fees $ 793 $ 739 $ 54 7.3 %
Bank card income and fees 961 860 101 11.7 %
Trust department income 340 294 46 15.6 %
Real estate servicing fees, net 231 73 158 216.4 %
Gain on sales of mortgage loans, net 888 2,469 (1,581) (64.0) %
Other 513 137 376 274.5 %
Total non-interest income $ 3,726 $ 4,572 $ (846) (18.5) %
Non-interest income as a % of total revenue *
20.8% 24.1%
*Total revenue is calculated as net interest income plus non-interest income. Total non-interest income decreased$0.8 million , or 18.5%, to$3.7 million for the quarter endedMarch 31, 2022 compared to$4.6 million for the quarter endedMarch 31, 2021 . The decrease was primarily due to the decrease in gain on sale of real estate mortgages due to lower volumes of real estate mortgage loans sold as further discussed below.
Increase in property management fees, net of the change in the valuation of mortgage management rights (MSR)
Mortgage loan servicing fees earned on loans sold were$0.3 million for the three months endedMarch 31, 2022 compared to$0.2 million for the three months endedMarch 31, 2021 . The current quarter's MSR valuation increased$31,000 from the linked quarter primarily due to an increase in market rates. The Company was servicing$261.5 million of mortgage loans atMarch 31, 2022 compared to$270.0 million and$288.9 million atDecember 31, 2021 andMarch 31, 2021 , respectively. Gain on sales of mortgage loans decreased$1.6 million to$0.9 million for the quarter endedMarch 31, 2022 compared to$2.5 million for the quarter endedMarch 31, 2021 . The Company sold$29.1 million of loans for the three months endedMarch 31, 2022 compared to$66.3 million for the three months endedMarch 31, 2021 . Loans sold to the secondary market slowed after strong sales during the first six months of 2021. Other Income increased$0.4 million to$0.5 million for the quarter endedMarch 31, 2022 compared to$0.1 million for the quarter endedMarch 31, 2021 . The increase primarily resulted from mortgage banking derivative income, interest component of net pension cost, and income received from theMissouri Department of Transportation related to a land easement. During the fourth quarter of 2021 the Company elected to record the fair value of derivatives related to interest rate lock commitments and mandatory commitments and the related changes due to volume and rates through non-interest income and non-interest expense. The following table presents the gross realized gains and losses from sales and calls of available-for-sale securities, as well as gains and losses on equity securities from fair value adjustments which have been recognized in earnings: Three Months Ended March 31, (in thousands) 2022 2021 Investment securities (losses) gains, net Available-for-sale securities: Gross realized gains $ - $ 2 Gross realized losses - - Other-than-temporary impairment recognized - - Other investment securities: Fair value adjustments, net (4) 12 Investment securities (losses) gains, net $ (4) $ 14 41 --------------------------------------------------------------------------------
Non-interest expenses for the periods indicated were as follows:
Three Months
Completed in March
31, (Dollars in thousands) 2022 2021 $ Change % Change Non-interest expense Salaries$ 5,156 $ 5,342 $ (187) (3.5) % Employee benefits 1,730 1,804 (73) (4.1) Occupancy expense, net 786 771 15 1.9 Furniture and equipment expense 755 744 11 1.5 Processing, network and bank card expense 1,142 1,007 135 13.4 Legal, examination, and professional fees 440 404 36 8.9 Advertising and promotion 293 243 50 20.6 Postage, printing, and supplies 190 204 (14) (6.9) Loan expense 145 174 (29) (16.7) Other 1,590 1,087 503 46.3 Total non-interest expense$ 12,227 $ 11,780 $ 447 3.8 % Efficiency ratio* 68.4 % 62.1 % Number of full-time equivalent employees
306 304
*The efficiency ratio is calculated as non-interest expense as a percentage of revenue. Total income is net interest income plus non-interest income.
Total non-interest expense increased
Salaries decreased$0.2 million , or 3.5%, to$5.2 million for the quarter endedMarch 31, 2022 compared to$5.3 million for the quarter endedMarch 31, 2021 primarily due to reduced commissions based on loan volume. See Gains on sales of mortgage loans discussion above. Employee benefits decreased$0.1 million , or 4.1%, to$1.7 million for the quarter endedMarch 31, 2022 compared to$1.8 million for the quarter endedMarch 31, 2021 . The decreases were primarily due to a decrease in 401(k) plan contributions partially offset by an increase in medical premiums and pension cost due to lower annual discount rate assumptions compared to the prior year's annual assumptions. Processing, network, and bank card expense increased$0.1 million , or 13.4%, to$1.1 million for the quarter endedMarch 31, 2022 compared to$1.0 million for the quarter endedMarch 31, 2021 . These increases were primarily related to increases in debit card processing and ATM interchange expenses, partially offset by decreases in network and processing expenses. Other non-interest expense increased$0.5 million , or 46.3%, to$1.6 million for the quarter endedMarch 31, 2022 compared to$1.1 million for the quarter endedMarch 31, 2021 . The increases were primarily related to mortgage banking derivative expense, telephone, travel, donations and software expense, partially offset by a decrease inFDIC insurance assessments. During the fourth quarter of 2021 the Company elected to record the fair value of derivatives related to interest rate lock commitments and mandatory commitments and the related changes due to volume and rates through non-interest income and non-interest expense.
Income taxes
Income taxes as a percentage of earnings before income taxes, as presented in the consolidated financial statements, were 18.8% for the three months ended
The decrease in the effective tax rate for the three months endedMarch 31, 2022 compared to the three months endedMarch 31, 2021 was primarily attributable to the increase in earnings and an increase in state taxes attributed to elevated earnings partially offset by the benefit recorded pertaining to the historical tax credit. The effective tax rate for each of the three months endedMarch 31, 2022 and 2021, respectively, is lower than theU.S. federal statutory rate of 21% primarily due to tax-free revenues. 42 -------------------------------------------------------------------------------- Included in the effective tax rate for the quarter endedMarch 31, 2022 is a$13,000 benefit associated with a historic tax credit investment. The investment is expected to generate a$321,000 tax benefit over the life of the project and is being recognized under the deferral method of accounting.
Loan and credit management
Interest earned on the loan portfolio is a primary source of interest income for the Company. Net loans represented 76.0% of total assets as ofMarch 31, 2022 compared to 70.2% as ofDecember 31, 2021 . Lending activities are conducted pursuant to an established loan policy approved by the Bank's Board of Directors. The Bank's credit review process is overseen by regional loan committees with established loan approval limits. In addition, a senior loan committee reviews all credit relationships in aggregate over an established dollar amount. The senior loan committee meets weekly and is comprised of senior managers of the Bank.
The main classifications within the Company’s portfolio of loans held for investment purposes at the dates indicated are as follows:
March 31, 2022 December 31, 2021
(Dollars in thousands) Amount % of Loans Amount % of Loans
Commercial, financial, and agricultural
(a) $ 221,015 16.6 % $ 217,214 16.7 %
Real estate construction - residential 21,515 1.6 27,920 2.1
Real estate construction - commercial 103,478 7.8 91,369 7.0
Real estate mortgage - residential 287,879 21.6 279,346 21.5
Real estate mortgage - commercial 677,539 50.8 663,256 50.9
Installment and other consumer 22,497 1.7 23,028 1.8
Total loans held for investment $ 1,333,923 100.0 % $ 1,302,133 100.0 %
(a) Includes
The Company extends credit to its local community markets through traditional real estate mortgage products. The Company does not participate in extending credit to sub-prime residential real estate markets. The Company does not lend funds for transactions defined as "highly leveraged" by bank regulatory authorities or for foreign loans. Additionally, the Company does not have any concentrations of loans exceeding 10% of total loans that are not otherwise disclosed in the loan portfolio composition table. The Company does not have any interest-earning assets that would have been included in non-accrual, past due, or restructured loans if such assets were loans. The Company generally does not retain long-term fixed rate residential mortgage loans in its portfolio. Fixed rate loans conforming to standards required by the secondary market are offered to qualified borrowers but are not funded until the Company has a non-recourse purchase commitment from the secondary market at a predetermined price. During the three months endedMarch 31, 2022 , the Company sold approximately$29.1 million of loans to investors compared to$66.3 million for the three months endedMarch 31, 2021 . AtMarch 31, 2022 , the Company was servicing approximately$261.5 million of loans sold to the secondary market compared to$270.0 million atDecember 31, 2021 , and$288.9 million atMarch 31, 2021 .
Loan Portfolio Risk Elements
Management, the senior loan committee, and internal loan review, formally review all loans in excess of certain dollar amounts (periodically established) at least annually. Loans in excess of$2.0 million in aggregate and all adversely classified credits identified by management are reviewed by the senior loan committee. In addition, all other loans are reviewed on a risk weighted selection process. The senior loan committee reviews and reports to the Board of Directors, at scheduled meetings: past due, classified, and watch list loans in order to classify or reclassify loans as loans requiring attention, substandard, doubtful, or loss. During this review, management also determines which loans should be considered impaired. Management follows the guidance provided in theFinancial Accounting Standards Board's (FASB) ASC Topic 310-10-35 in identifying and measuring loan impairment. If management determines that it is probable that all amounts due on a loan will not be collected under the original terms of the loan agreement, the loan is considered impaired. These loans are evaluated individually for impairment, and in conjunction with current economic conditions and loss experience, specific reserves are estimated as further discussed below. Loans not individually evaluated are aggregated and reserves are recorded using a consistent methodology that considers historical loan loss experience by loan type, 43 -------------------------------------------------------------------------------- delinquencies, current economic conditions, loan risk ratings and industry concentration. Management believes, but there can be no assurance, that these procedures keep management informed of potential problem loans. Based upon these procedures, both the allowance and provision for loan losses are adjusted to maintain the allowance at a level considered necessary by management to provide for probable losses inherent in the loan portfolio.
Non-performing assets
The following table summarizes the non-performing assets on the dates indicated:
March 31, December 31,
(Dollars in thousands) 2022 2021
Non-accrual loans:
Commercial, financial, and agricultural $ 136 $ 153
Real estate construction - commercial 100 105
Real estate mortgage - residential 1,258 1,129
Real estate mortgage - commercial 15,477 24,029
Installment and other consumer 125 43
Total $ 17,096 $ 25,459
Contractually past due loans – 90 days or more past due and still outstanding:
Real estate mortgage - residential $ - $ 14 Installment and other consumer 3 - Total $ 3 $ 14 Total non-performing loans (a) 17,099 25,473 Other real estate owned and repossessed assets 9,758 10,525 Total non-performing assets $ 26,857 $ 35,998 Loans held for investment$ 1,333,923 $ 1,302,133 Allowance for loan losses to loans 1.07 % 1.30 % Non-accrual loans to total loans 1.28 % 1.96 % Non-performing loans to loans (a) 1.28 % 1.96 % Non-performing assets to loans (b) 2.01 % 2.76 % Non-performing assets to assets (b) 1.55 % 1.97 % Allowance for loan losses to non-accrual loans 83.52 % 66.39 % Allowance for loan losses to non-performing loans 83.51 % 66.36 % (a)Non-performing loans include loans 90 days past due and accruing, non-accrual loans, and non-performing TDRs included in non-accrual loans and 90 days past due. (b)Non-performing assets include non-performing loans and other real estate owned and repossessed assets.
Total non-performing assets were
Total non-accrual loans atMarch 31, 2022 decreased$8.4 million , or 32.8%, to$17.1 million compared to$25.5 million atDecember 31, 2021 . There were$3,000 in loans past due 90 days and still accruing interest atMarch 31, 2022 compared to$14,000 atDecember 31, 2021 . Other real estate and repossessed assets were$9.8 million and$10.5 million atMarch 31, 2022 andDecember 31, 2021 , respectively. During the three months endedMarch 31, 2022 there were no additions to other real estate owned compared to$30,000 of non-accrual loans, net of charge-offs taken, during the three months endedMarch 31, 2021 . During the first quarter endedMarch 31, 2022 , an additional$52,000 charge-off was recorded related to a property that moved into other real estate owned at the end of the fourth quarter of 2021. As ofMarch 31, 2022 , approximately$21.9 million of loans classified as substandard, which include performing TDRs, and not included in the non-performing asset table, were identified as potential problem loans having more than normal risk which raised doubts as to the ability of the borrower to comply with present loan repayment terms, compared to$13.8 44 -------------------------------------------------------------------------------- million atDecember 31, 2021 . Management believes the allowance for loan losses was sufficient to cover the risks and probable losses related to such loans atMarch 31, 2022 andDecember 31, 2021 , respectively.
The following table summarizes the Company’s ToRs on the dates indicated:
March 31, 2022 December 31, 2021
Number of Specific Number of Specific
(Dollars in thousands) contracts Recorded Investment Reserves contracts Recorded Investment Reserves
Performing TDRs
Commercial, financial and
agricultural 2 $ 183 $ 23 2 $ 188 $ 24
Real estate mortgage - residential 5 1,170 46 6 1,262 56
Real estate mortgage - commercial 2 323 38 2 328 38
Installment and other consumer 2 15 2 2 17 2
Total performing TDRs 11 $ 1,691 $ 109 12 $ 1,795 $ 120
Non-performing TDRs
Real estate mortgage - residential 5 $ 551 $ 70 5 $ 561 $ 39
Total non-performing TDRs 5 $ 551 $ 70 5 $ 561 $ 39
Total TDRs 16 $ 2,242 $ 179 17 $ 2,356 $ 159
At March 31, 2022 , loans classified as TDRs totaled $2.2 million , with $0.2
million of specific reserves, compared to $2.4 million of loans classified as
TDRs, with $0.2 million of specific reserves at December 31, 2021 .
Non-performing loans, included $0.6 million of loans classified as TDRs at
March 31, 2022 compared to $0.6 million at December 31, 2021 . Both performing
and non-performing TDRs are considered impaired loans. When an individual loan
is determined to be a TDR, the amount of impairment is based upon the present
value of expected future cash flows discounted at the loan's effective interest
rate or the fair value of the underlying collateral less applicable selling
costs if the loan is collateral dependent. The net decrease in total TDRs from
December 31, 2021 to March 31, 2022 was primarily due to $115,000 of payments
received on TDRs.
Allowance for loan losses and provision
Allowance for loan losses
The following table is a summary of the allocation of the allowance for loan
losses:
March 31, 2022 December 31, 2021
% of loans in % of loans in
each category to each category to
(In thousands) Amount total loans Amount total loans
Allocation of allowance for loan losses at end of
period:
Commercial, financial, and agricultural $ 2,830 16.6 % $ 2,717 16.7 %
Real estate construction - residential 60 1.6 137 2.1
Real estate construction - commercial 664 7.8 588 7.0
Real estate mortgage - residential 2,578 21.6 2,482 21.5
Real estate mortgage - commercial 7,692 50.8 10,662 50.9
Installment and other consumer 273 1.7 256 1.8
Unallocated 182 - 61 -
Total $ 14,279 100.0 % $ 16,903 100.0 %
The allowance for loan losses was $14.3 million , or 1.07%, of loans outstanding
at March 31, 2022 compared to $16.9 million , or 1.30%, of loans outstanding at
December 31, 2021 . The ratio of the allowance for loan losses to non-performing
loans was 83.51% at March 31, 2022 , compared to 66.36% at December 31, 2021 .
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The following table is a summary of the general and specific allocations of the
allowance for loan losses:
March 31,
(In thousands) 2022 December 31, 2021
Allocation of allowance for loan losses:
Individually evaluated for impairment - specific reserves $ 317 $ 3,044
Collectively evaluated for impairment - general reserves 13,962 13,859
Total $ 14,279 $ 16,903
The specific reserve component applies to loans evaluated individually for
impairment. The net carrying value of impaired loans is generally based on the
fair values of collateral obtained through independent appraisals and/or
internal evaluations, or by discounting the total expected future cash flows.
Once the impairment amount is calculated, a specific reserve allocation is
recorded. At March 31, 2022 , $0.3 million of the Company's ALL was allocated to
impaired loans totaling approximately $18.8 million compared to $3.0 million of
the Company's ALL allocated to impaired loans totaling approximately $27.3
million at December 31, 2021 . Management determined that $16.1 million , or 86%,
of total impaired loans required no reserve allocation at March 31, 2022
compared to $16.6 million , or 61%, at December 31, 2021 , primarily due to
adequate collateral values, acceptable payment history and adequate cash flow
ability.
The incurred loss component of the general reserve, or loans collectively
evaluated for impairment, is determined by applying loss rates to pools of loans
by asset type. Loans not individually evaluated are aggregated by risk
characteristics and reserves are recorded using a consistent methodology that
considers historical loan loss experience by loan type. The look-back period
begins with loss history in the first quarter 2012 as the starting point through
the current quarter and it will continue to include this starting point going
forward. Management determined that the look-back period should be expanded
until a loss producing downturn is recognized. This would be accomplished by
allowing the look-back period to shift forward by eliminating the earliest loss
period and replenishing it with losses from the most recent period. The
look-back period is consistently evaluated for relevance given the current facts
and circumstances.
These historical loss rates for each risk group are used as the starting point
to determine loss rates for measurement purposes. The historical loan loss rates
are multiplied by loss emergence periods (LEP) which represent the estimated
time period between a borrower first experiencing financial difficulty and the
recognition of a loss.
The Company's methodology includes qualitative risk factors that allow
management to adjust its estimates of losses based on the most recent
information available and to address other limitations in the quantitative
component that is based on historical loss rates. Such risk factors are
generally reviewed and updated quarterly, as appropriate, and are adjusted to
reflect changes in national and local economic conditions and developments, the
nature, volume and terms of loans in the portfolio, including changes in volume
and severity of past due loans, the volume of non-accrual loans, and the volume
and severity of adversely classified or graded loans, loan concentrations,
assessment of trends in collateral values, assessment of changes in the quality
of the Company's internal loan review department, and changes in lending
policies and procedures, including underwriting standards and collections,
charge-off and recovery practices.
The specific and general reserve allocations represent management's best
estimate of probable losses inherent in the loan portfolio at the evaluation
date. Although the ALL is comprised of specific and general allocations, the
entire ALL is available to absorb any credit losses.
The changes in the allowance for loan losses from December 31, 2021 to March 31,
2022 primarily resulted from transitioning loans impacted by COVID-19 from
non-accrual status back to performing status. This transition was made according
to the Company's established internal loan policies regarding loan performance
as well as consultation with industry experts. This transition back to
performing status also reduced specific reserves based on the attributes of the
individual loan collateral, to the general allocations method described above.
The Company continues to monitor the risks associated with its non-performing
loans.
Provision
The Company recorded a negative provision charge for loan losses of
46 --------------------------------------------------------------------------------
the economic outlook as the economy began to recover from the effects of the COVID-19 pandemic suffered throughout 2020.
The following table summarizes loan loss experience for the periods indicated:
Three Months Ended March 31,
2022 2021
Net (Recoveries) Net (Recoveries)
Net Charge-offs Charge-offs / Net Charge-offs Charge-offs /
(Dollars in thousands) (Recoveries) Average Loans Average Loans (Recoveries) Average Loans Average Loans
Commercial, financial, and
agricultural $ 15 $ 220,888 0.01 % $ (122) $ 257,623 (0.05) %
Real estate construction -
residential - 23,455 - (13) 33,492 (0.04)
Real estate construction -
commercial - 95,935 - - 78,578 -
Real estate mortgage -
residential (3) 281,824 - (168) 260,040 (0.06)
Real estate mortgage -
commercial 73 670,713 0.01 23 621,877 -
Installment and other consumer 39 22,342 0.17 32 25,992 0.12
Total $ 124 $ 1,315,157 0.01 % $ (248) $ 1,277,602 (0.02) %
Net loan write-offs (recoveries)
The Company’s net charges were
Loans held for sale
The Company designates certain long-term fixed rate personal real estate loans as held for sale. In the fourth quarter of 2021, the Company elected the fair value option for all newly originated long-term personal real estate loans held for sale. As ofDecember 31, 2021 , all loans held for sale were carried at fair value. The loans are primarily sold to Freddie Mac, Fannie Mae, andPennyMac and other various secondary market investors. AtMarch 31, 2022 , the carrying amount of these loans was$0.9 million compared to$2.2 million atDecember 31, 2021 .
Cash and capital resources
Cash management
The role of liquidity management is to ensure funds are available to meet depositors' withdrawal and borrowers' credit demands while at the same time maximizing profitability. This is accomplished by balancing changes in demand for funds with changes in the supply of those funds. Liquidity to meet these demands is provided by maturing assets, short-term liquid assets that can be converted to cash and the ability to attract funds from external sources, principally depositors. Due to the nature of services offered by the Company, management prefers to focus on transaction accounts and full service relationships with customers as the primary sources of funding. The Company's Asset/Liability Committee (ALCO), primarily made up of senior management, has direct oversight responsibility for the Company's liquidity position and profile. A combination of daily, weekly, and monthly reports provided to management detail the following: internal liquidity metrics, composition and level of the liquid asset portfolio, timing differences in short-term cash flow obligations, available pricing and market access to the financial markets for capital, and exposure to contingent draws on the Company's liquidity. The Company has a number of sources of funds to meet liquidity needs on a daily basis. The Company's most liquid assets are comprised of available-for-sale investment securities, not including other debt securities, federal funds sold, and excess reserves held at theFederal Reserve . 47 -------------------------------------------------------------------------------- (In thousands) March 31, 2022 December 31, 2021 Federal funds sold $ 419 $
7,122
Other interest-bearing deposits 27,552
135,500
Certificates of deposit in other banks 4,701
5,193
Available-for-sale investment securities 286,754 310,870 Total$ 319,426 $ 458,685 Federal funds sold and resale agreements normally have overnight maturities and are used for general daily liquidity purposes. The fair value of the available-for-sale investment portfolio was$286.8 million atMarch 31, 2022 and included an unrealized net loss of$24.3 million . The portfolio includes projected maturities and mortgage-backed securities pay-downs of approximately$5.5 million over the next twelve months, which offer resources to meet either new loan demand or reductions in the Company's borrowings. The Company pledges portions of its investment securities portfolio to secure public fund deposits, federal funds purchase lines, securities sold under agreements to repurchase, borrowing capacity at theFederal Reserve Bank , and for other purposes as required or permitted by law. AtMarch 31, 2022 andDecember 31, 2021 , the Company's unpledged securities in the available-for-sale portfolio totaled approximately$97.3 million and$35.5 million , respectively.
The total investment securities pledged for these purposes were as follows:
December 31,
(In thousands) March 31, 2022 2021
Marketable securities pledged to guarantee:
$ 9,448$ 10,778 Federal funds purchased and securities sold under agreements to repurchase 6,448 28,769 Other deposits 173,592 235,829 Total pledged, at fair value$ 189,488 $ 275,376 Liquidity is available from the Company's base of core customer deposits, defined as demand, interest checking, savings, money market deposit accounts, and time deposits less than$250,000 , less all brokered deposits under$250,000 . AtMarch 31, 2022 , such deposits totaled$1.4 billion and represented 92.8% of the Company's total deposits. These core deposits are normally less volatile and are often tied to other products of the Company through long lasting relationships.
Basic deposits at
(In thousands) March 31, 2022 December 31, 2021 Core deposit base: Non-interest bearing demand$ 450,225 $ 453,066 Interest checking 277,988 357,825 Savings and money market 453,967 440,331 Other time deposits 168,568 175,827 Total$ 1,350,748 $ 1,427,049 Estimated uninsured deposits totaled$430.4 million , including$84.7 million of certificates of deposit, atMarch 31, 2022 , compared to$513.5 million , including$69.1 million of certificates of deposit, atDecember 31, 2021 . The Company had brokered deposits totaling$20.2 million and$20.2 million atMarch 31, 2022 andDecember 31, 2021 , respectively. Other components of liquidity are the level of borrowings from third-party sources and the availability of future credit. The Company's outside borrowings are comprised of securities sold under agreements to repurchase,Federal Home Loan Bank advances, and subordinated notes. Federal funds purchased are overnight borrowings obtained mainly from upstream correspondent banks with which the Company maintains approved credit lines. As ofMarch 31, 2022 , under agreements 48 -------------------------------------------------------------------------------- with these unaffiliated banks, the Bank may borrow up to$60.0 million in federal funds on an unsecured basis and$8.9 million on a secured basis. There were no federal funds purchased outstanding atMarch 31, 2022 . Securities sold under agreements to repurchase are generally borrowed overnight and are secured by a portion of the Company's investment portfolio. AtMarch 31, 2022 , there were$5.5 million in repurchase agreements. The Company may periodically borrow additional short-term funds from theFederal Reserve Bank through the discount window, although no such borrowings were outstanding atMarch 31, 2022 . The Bank is a member of theFederal Home Loan Bank of Des Moines (FHLB) and has access to credit products of the FHLB. As ofMarch 31, 2022 , the Bank had$77.4 million in outstanding borrowings with the FHLB. In addition, the Company has$49.5 million in outstanding subordinated notes issued to wholly-owned grantor trusts, funded by preferred securities issued by the trusts. Borrowings outstanding atMarch 31, 2022 andDecember 31, 2021 were as follows: December 31, (In thousands) March 31, 2022 2021 Borrowings:
Fed Funds Purchased and Securities Sold Under Repurchase Agreements
$ 5,514$ 23,829 Federal Home Loan Bank advances 77,357 77,418 Subordinated notes 49,486 49,486 Total$ 132,357 $ 150,733 The Company pledges certain assets, including loans and investment securities to theFederal Reserve Bank , FHLB, and other correspondent banks as security to establish lines of credit and borrow from these entities. Based on the type and value of collateral pledged, the FHLB establishes a collateral value from which the Company may draw advances against this collateral. This collateral is also used to enable the FHLB to issue letters of credit in favor of public fund depositors of the Company. TheFederal Reserve Bank also establishes a collateral value of assets pledged to support borrowings from the discount window.
The following table reflects the collateral value of pledged assets, borrowings and outstanding letters of credit, in addition to the estimated future funding capacity available to the Company as follows:
March 31, 2022 December 31, 2021
Federal Funds Federal Funds
(In thousands) FHLB Federal Reserve Bank Purchased Lines Total FHLB Federal Reserve Bank Purchased Lines Total
Advance equivalent $ 278,761 $ 8,947 $ 60,000 $ 347,708 $ 273,479 $ 10,384 $ 60,000 $ 343,863
Letters of credit - - - - (31,000) - - (31,000)
Advances outstanding (77,357) - - (77,357) (77,418) - - (77,418)
Total available $ 201,404 $ 8,947 $ 60,000 $ 270,351 $ 165,061 $ 10,384 $ 60,000 $ 235,445
At March 31, 2022 , loans of $567.4 million were pledged to the Federal Home Loan
Bank as collateral for borrowings and letters of credit. At March 31, 2022 ,
investments with a market value of $9.4 million were pledged to secure federal
funds purchase lines and borrowing capacity at the Federal Reserve Bank .
Based upon the above, management believes the Company has more than adequate
liquidity, both on balance sheet and through the additional funding capacity
with the FHLB, the Federal Reserve Bank and Federal funds purchased lines to
meet future anticipated needs in both the short and long-term.
49
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Sources and uses of funds
Cash and cash equivalents were$50.5 million atMarch 31, 2022 compared to$159.9 million atDecember 31, 2021 . The$109.4 million decrease resulted from changes in the various cash flows produced by operating, investing, and financing activities of the Company, as shown in the accompanying consolidated statement of cash flows for the three months endedMarch 31, 2022 . Cash flow provided from operating activities consists mainly of net income adjusted for certain non-cash items. Operating activities provided cash flow of$4.4 million for the three months endedMarch 31, 2022 . Investing activities consisting mainly of purchases, sales and maturities of available-for-sale securities, and changes in the level of the loan portfolio used total cash of$33.1 million during the three months endedMarch 31, 2022 . The cash outflow primarily consisted of a net increase in loans held for investment of$31.8 million and$14.6 million in purchases of investment securities partially offset by$13.5 million from maturities and calls and sales of investment securities. Financing activities used total cash of$80.7 million during the three months endedMarch 31, 2022 , resulting primarily from a$66.2 million decrease in interest-bearing transaction accounts and a$18.3 million decrease in securities sold under agreements to repurchase. The decrease in interest-bearing accounts was due primarily to reductions in deposits for public funds customers, resulting from the distribution of prior year tax collections. In the normal course of business, the Company enters into certain forms of off-balance sheet transactions, including unfunded loan commitments and letters of credit. These transactions are managed through the Company's various risk management processes. Management considers both on-balance sheet and off-balance sheet transactions in its evaluation of the Company's liquidity. The Company had$418.5 million in unused loan commitments and standby letters of credit as ofMarch 31, 2022 . Although the Company's current liquidity resources are adequate to fund this commitment level, the nature of these commitments is such that the likelihood of such a funding demand is very low. The Company is a legal entity, separate and distinct from the Bank, which must provide its own liquidity to meet its operating needs. The Company's ongoing liquidity needs primarily include funding its operating expenses, paying cash dividends to its shareholders and, to a lesser extent, repurchasing its shares of common stock. The Company paid cash dividends to its shareholders totaling approximately$1.0 million and$0.8 million for the three months endedMarch 31, 2022 and 2021, respectively. A large portion of the Company's liquidity is obtained from the Bank in the form of dividends. The Bank declared and paid$3.5 million and$4.5 million in dividends to the Company during the three months endedMarch 31, 2022 and 2021, respectively. AtMarch 31, 2022 andDecember 31, 2021 , the Company had cash and cash equivalents totaling$4.1 million and$1.8 million , respectively. Subject to declaration by the Company's Board of Directors, the Company expects to continue paying quarterly cash dividends as a part of its current capital allocation strategy. Future dividends will be subject to the determination, declaration and discretion of the Company's Board of Directors and compliance with applicable regulatory capital requirements. The Company's 2019 Repurchase Plan was amended during the second quarter 2021 to authorize the purchase of up to an additional$5.0 million in market value of the Company's common stock. Management was given discretion to determine the number and pricing of the shares to be purchased, as well as the timing of any such purchases. During the first quarter 2022, the Company repurchased 23,536 common shares at an average cost of$25.75 per share totaling$0.6 million . The repurchases under these authorizations may be effectuated in the open market, by block purchase, in privately negotiated transactions, or through other transactions managed by broker-dealers, or any combination thereof. No time limit was set for the completion of these authorized share repurchases. As ofMarch 31, 2022 ,$4.4 million remained available for the repurchase of shares pursuant to the share repurchase authorizations. The Company may continue to repurchase shares under its share repurchase authorizations, but the amount and timing of such repurchases will be dependent on a number of factors, including the price of its common stock and other cash flow needs. There is no assurance that the Company will repurchase up to the full amount remaining under its share repurchase authorizations. 50
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capital management
The Company and the Bank are subject to various regulatory capital requirements administered by federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company's consolidated financial statements. Under capital adequacy guidelines, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification of the Company and the Bank are subject to qualitative judgments by the regulators about components, risk-weightings, and other factors. The Basel III regulatory capital framework (the "Basel III Capital Rules") adopted byU.S. federal regulatory authorities, among other things, (i) establishes the capital measure called "Common Equity Tier 1" ("CET1"), (ii) specifies that Tier 1 capital consist of CET1 and "Additional Tier 1 Capital" instruments meeting stated requirements, (iii) requires that most deductions/adjustments to regulatory capital measures be made to CET1 and not to other components of capital and (iv) defines the scope of the deductions/adjustments to the capital measures. Additionally, the Basel III Capital Rules require that the Company maintain a 2.5% capital conservation buffer with respect to each of CET1, Tier 1 and total capital to risk-weighted assets, which provides for capital levels that exceed the minimum risk-based capital adequacy requirements. A financial institution with a conservation buffer of less than the required amount is subject to limitations on capital distributions, including dividend payments and stock repurchases, and certain discretionary bonus payments to executive officers. Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios of CET1, Tier 1 and total capital to risk-weighted assets, and of Tier 1 capital to average assets, each as defined in the regulations. Management believes, as ofMarch 31, 2022 , that the Company and the Bank meet all capital adequacy requirements to which they are subject. Financial institutions are categorized as well capitalized or adequately capitalized, based on minimum total risk-based, Tier 1 risk-based, CET1 and Tier 1 leverage ratios. As shown in the table below, the Company's capital ratios exceeded the regulatory definition of adequately capitalized as ofMarch 31, 2022 andDecember 31, 2021 . Based upon the information in its most recently filed call report, the Bank met the capital ratios necessary to be well-capitalized. The regulatory authorities can apply changes in classification of assets and such changes may retroactively subject the Company to changes in capital ratios. Any such change could reduce one or more capital ratios below well-capitalized status. In addition, a change may result in imposition of additional assessments by theFDIC or could result in regulatory actions that could have a material effect on our condition and results of operations. In addition, bank holding companies generally are required to maintain a Tier 1 leverage ratio of at least 4%. Because the Bank had less than$15.0 billion in total consolidated assets as ofDecember 31, 2009 , the Company is allowed to continue to classify its trust preferred securities, all of which were issued prior toMay 19, 2010 , as Tier 1 capital. 51 -------------------------------------------------------------------------------- Under the Basel III requirements, atMarch 31, 2022 andDecember 31, 2021 , the Company met all capital adequacy requirements and had regulatory capital ratios in excess of the levels established for well-capitalized institutions, as shown in the following table as of periods indicated: Minimum Capital Required - Basel III Required to be
Well considered-
Actual Fully Phased-In Capitalized (Dollars in thousands) Amount Ratio Amount Ratio Amount
Report
March 31, 2022 Total Capital (to risk-weighted assets): Company$ 213,114 14.66 %$ 152,691 10.50 % $ - N.A% Bank 211,027 14.52 % 152,575 10.50 % 145,309 10.00 % Tier 1 Capital (to risk-weighted assets): Company$ 195,471 13.44 %$ 123,607 8.50 % $ - N.A% Bank 196,588 13.53 % 123,513 8.50 % 116,248 8.00 % Common Equity Tier 1 Capital (to risk-weighted assets): Company$ 150,675 10.36 %$ 101,794 7.00 % $ - N.A% Bank 196,588 13.53 % 101,717 7.00 % 94,451 6.50 % Tier 1 leverage ratio (to adjusted average assets): Company$ 195,471 10.99 %$ 71,122 4.00 % $ - N.A% Bank 196,588 11.12 % 70,747 4.00 % 88,434 5.00 % December 31, 2021 Total Capital (to risk-weighted assets): Company$ 210,726 14.79 %$ 149,640 10.50 % $ - N.A% Bank 210,148 14.78 % 149,339 10.50 % 142,228 10.00 % Tier 1 Capital (to risk-weighted assets): Company$ 193,663 13.59 %$ 121,137 8.50 % $ - N.A% Bank 193,085 13.58 % 120,894 8.50 % 113,782 8.00 % Common Equity Tier 1 Capital (to risk-weighted assets): Company$ 145,663 10.22 %$ 99,760 7.00 % $ - N.A% Bank 193,085 13.58 % 99,559 7.00 % 92,448 6.50 % Tier 1 leverage ratio: Company$ 193,663 11.01 %$ 70,342 4.00% $ - N.A% Bank 193,085 11.04 % 69,959 4.00 % 87,449 5.00 % 52
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