NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business
Home Bancorp, Inc., a Louisiana corporation (the “Company”), is the parent holding company for Home Bank, N.A. (the "Bank"). The Bank is a national bank and wholly owned subsidiary of the Company. The Company and Bank are headquartered in Lafayette, Louisiana. As of December 31, 2022, the Company was a bank holding company. The Bank established HB Investment Fund I, LLC and HB Investment Fund II, LLC, as wholly-owned subsidiaries of the Bank to invest in New Markets Tax Credits (“NMTC”) and Federal Tax Credits ("FTC") in our market areas.
In 2010, the Bank expanded into the Northshore (of Lake Pontchartrain) region through a Federal Deposit Insurance Corporation (“FDIC”) assisted acquisition of certain assets and liabilities of the former Statewide Bank. In July 2011, the Bank expanded into the Greater New Orleans region through its acquisition of GS Financial Corporation, the former holding company of Guaranty Savings Bank. In February 2014, the Bank expanded into west Mississippi through its acquisition of Britton & Koontz Capital Corporation, the holding company for Britton & Koontz Bank, N.A. of Natchez, Mississippi. In September 2015, the Bank expanded its presence in the Greater New Orleans region through the acquisition of Louisiana Bancorp, Inc., the former holding company of Bank of New Orleans of Metairie, Louisiana. In December 2017, the Bank expanded its presence in the Acadiana market through the acquisition of St. Martin Bancshares (“SMB”), the former holding company of St. Martin Bank & Trust Company of St. Martinville, Louisiana. In March 2022, the Bank expanded into the Houston, Texas region through the acquisition of Friendswood Capital Corporation ("Friendswood"), the former holding company of Texan Bank, N.A. ("Texan Bank") of Houston, Texas. As of December 31, 2022, the Bank conducted business from 43 banking offices in the Acadiana, Northshore, Baton Rouge, Greater New Orleans, Natchez and Houston regions of south Louisiana, west Mississippi, and east Texas.
The Bank is primarily engaged in attracting deposits from the general public and using those funds to invest in loans and investment securities. The Bank’s principal sources of funds are customer deposits, repayments of loans, repayments of investments and funds borrowed from outside sources such as the Federal Home Loan Bank (“FHLB”) of Dallas. The Bank derives its income principally from interest earned on loans and investment securities and, to a lesser extent, from fees received in connection with the origination of loans, service charges on deposit accounts and for other services. The Bank’s primary expenses are general operating expenses and interest expense on deposits and borrowings.
The Company’s primary banking regulator is the Board of Governors of the Federal Reserve System (the”Federal Reserve”). The Bank’s primary regulator is the Office of the Comptroller of the Currency (“OCC”). Its deposits are insured to the maximum amount permissible under federal law by the FDIC.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company, the Bank, HB Investment Fund I, LLC and HB Investment Fund II, LLC. All significant intercompany balances and transactions have been eliminated in consolidation.
Subsequent Events
The Company has evaluated subsequent events for potential recognition and disclosure through the date of filing for this Annual Report on Form 10-K with the U.S. Securities and Exchange Commission..
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term include, but are not limited to, the determination of the allowance for credit losses, income taxes, the valuation of foreclosed assets and other real estate ("ORE"), goodwill and other intangible assets, acquisition accounting valuations and valuation of share-based compensation.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash on hand, due from banks and interest-bearing deposits with the FHLB. The Company considers all highly liquid debt instruments with original maturities of three months or less (excluding interest-bearing deposits in banks) to be cash equivalents.
The Bank may be required to maintain cash reserves with the Federal Reserve Bank. The requirement is dependent upon the Bank’s cash on hand or noninterest-bearing balances. There was no reserve requirement as of December 31, 2022 or 2021.
Investment Securities
The Company follows the guidance under the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 320, Investments – Debt and Equity Securities. This standard addresses the accounting and reporting for investments in equity securities that have readily determinable fair values and for all investments in debt securities. Under the topic, investment securities, which the Company both positively intends and has the ability to hold to maturity, are classified as held to maturity and carried at amortized cost.
Investment securities that are acquired with the intention of being resold in the near term are classified as trading securities under ASC 320 and are carried at fair value, with unrealized holding gains and losses recognized in current earnings. The Company did not hold any securities for trading purposes at, or during the years ended, December 31, 2022 or 2021.
Securities not meeting the criteria of either trading securities or held to maturity are classified as available for sale and are carried at fair value. Unrealized holding gains and losses for these securities are recognized, net of related income tax effects, in the Consolidated Statements of Comprehensive (Loss) Income.
Interest income earned on securities either held to maturity or available for sale is included in current earnings, including the amortization of premiums and the accretion of discounts using the interest method. Amortization of premiums and accretion of discounts are recognized in interest income using the effective interest method. Premiums that exceed the amount repayable by the issuer at the next call date are amortized to the next call date. Other premiums and discounts are amortized (accreted) over the estimated lives of the securities. The gain or loss realized on the sale of securities classified as available for sale or held to maturity, as determined using the specific identification method for determining the cost of the securities sold, is computed with reference to its amortized cost and is also included in current earnings.
On January 1, 2020, the Company adopted ASC 326, Financial Instruments - Credit Losses, which introduced a new model known as CECL. ASC 326 requires expected credit related losses for available for sale debt securities to be recorded through an allowance for credit losses, while non-credit related losses or declines in fair value continue to be recognized through other comprehensive income ("OCI"). Under the new guidance, the Company is also required to evaluate held to maturity debt securities for expected credit losses.
We evaluate our investment securities portfolio for credit-related impairment at least quarterly, and more frequently when economic and market conditions warrant such evaluations. Consideration is given to numerous factors including, but not limited to, the extent to which the fair value is less than the amortized cost basis; adverse conditions causing changes in the financial condition of the issuer of the security or underlying loan guarantors; changes to the rating of the security by a rating agency; and the Company’s intent to sell a security or whether it is more likely than not the Company will be required to sell the security before the recovery of its amortized cost, which may extend to maturity.
The Company performs a process to determine whether declines in the fair value of securities has resulted from credit losses or other factors. This process involves evaluating each security for impairment by monitoring credit performance, collateral type, collateral geography, bond credit support, loan-to-value ratios, credit scores, loss severity levels, pricing levels, downgrades by rating agencies, cash flow projections and other factors as indicators of potential credit issues. If this evaluation indicates the existence of credit losses, the Company compares the present value of cash flows expected to be collected from the security with the amortized cost basis. If the present value of expected cash flows is less than the amortized cost basis, an allowance for credit losses is recorded, limited by the amount that the fair value of the security is less than its amortized cost. Subsequent changes in the allowance for credit losses on securities are recorded with a corresponding provision for credit losses on the Consolidated Statement of Income. If the Company intends to sell the debt security or it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis, the security is written down to fair value against the allowance for credit losses, with any additional impairment reported on the Consolidated Statement of Income. The Company applies the practical expedient that permits the exclusion of the accrued interest receivable balance from amortized cost basis of financing receivables.
Loans Held for Sale
The Company sells mortgage loans and loan participations for an amount equal to the principal amount of loans or participations with yields to investors based upon current market rates. Realized gains and losses related to loan sales are included in noninterest income.
The Company allocates the cost to acquire or originate a mortgage loan between the loan and the right to service the loan if it intends to sell or securitize the loan and retain servicing rights. In addition, the Company periodically assesses capitalized mortgage servicing rights for impairment based on the fair value of such rights. To the extent that temporary impairment exists, write-downs are recognized in current earnings as an adjustment to the corresponding valuation allowance. Permanent impairment is recognized through a write-down of the asset with a corresponding reduction in the valuation allowance. For purposes of performing its impairment evaluation, the portfolio is stratified on the basis of certain risk characteristics, including loan type and interest rates. Capitalized servicing rights are amortized over the period of, and in proportion to, estimated net servicing income, which considers appropriate prepayment assumptions.
For financial reporting purposes, the Company classifies a portion of its loans as “Mortgage loans held for sale”. Included in this category are loans which the Company has the current intent to sell and loans which are available to be sold in the event that the Company determines that loans should be sold to support the Company’s investment and liquidity objectives, as well as to support its overall asset and liability management strategies. Loans included in this category for which the Company has the current intention to sell are recorded at the lower of aggregate cost or fair value. As of December 31, 2022 and 2021, the Company had $98,000 and $1,104,000, respectively, in loans classified as “Mortgage loans held for sale.”
Loans
The following describes the distinction between originated and acquired loans and certain significant accounting policies relevant to each category.
Originated Loans
Originated loans are carried net of discounts on loan originations and are amortized using the level yield interest method over the remaining contractual life of the loan. Nonrefundable loan origination fees, net of direct loan origination costs, are deferred and recognized over the life of the loan as an adjustment of yield using the interest method.
Interest on loans receivable is accrued as earned using the interest method over the life of the loan. Interest on loans deemed uncollectible is excluded from income. The accrual of interest is discontinued and reversed against current income, with certain limited exceptions, once loans become more than 90 days past due or earlier if conditions warrant. The past due status of loans is determined based on the contractual terms. When a loan is placed on nonaccrual status, previously accrued and uncollected interest is charged against interest income on loans. Interest payments are applied to reduce the principal balance on nonaccrual loans. Loans are returned to accrual status when all past due payments are received in full and future payments are probable.
Third party property valuations are obtained at the time of origination for real estate secured loans. When a determination is made that a loan has deteriorated to the point of being deemed a criticized or classified loan, updated valuations may be ordered to help determine if there is impairment, which may lead to a recommendation for partial charge off or appropriate allowance allocation. Property valuations are ordered through, and reviewed by, the Company’s Appraisal and Review Department. The Company typically orders an “as is” valuation for collateral property if the loan is in a criticized loan classification.
Loans, or portions of loans, are charged off in the period that such loans, or portions thereof, are deemed uncollectible. The collectability of individual loans is determined through an estimate of the fair value of the underlying collateral and/or assessment of the financial condition and repayment capacity of the borrower.
Acquired Loans
Acquired loans at December 31, 2022 and 2021 are those associated with our acquisitions of Statewide Bank, GS Financial Corporation, Britton & Koontz Capital Corporation, Louisiana Bancorp, Inc., SMB, and Friendswood. These loans were recorded at estimated fair value at the acquisition date with no carryover of the related allowance for loan losses. The acquired loans were segregated between those considered to be performing and those with evidence of credit deterioration (purchased credit impaired or “PCI” for loans acquired prior to January 1, 2020), and then further segregated into loan pools designed to facilitate the development of expected cash flows. The fair value estimate for each pool of acquired performing and PCI loans was based on the estimate of expected cash flows, both principal and interest, from that pool, discounted at
prevailing market interest rates. The difference between the fair value of an acquired loan pool and the contractual amounts due at the acquisition date (the “fair value discount”) is accreted into income over the estimated life of the pool.
On January 1, 2020, the Company adopted ASC 326, Financial Instruments - Credit Losses, which introduced a new model known as CECL and amended the accounting guidance for purchased financial assets.
For reporting periods beginning on and after January 1, 2020 and the adoption of ASC 326:
Management estimates the allowance for credit losses for acquired loans under the same methodology as originated loans. Changes in the allowance for credit losses for acquired loans are recognized through the provision for loan losses and the provision for credit losses on unfunded lending commitments.
ASC 326 replaced the guidance for PCI loans with the concept of purchased credit deteriorated ("PCD"). For reporting periods beginning on and after January 1, 2020, PCI loans have been re-classified as PCD loans. For PCD loans, the Company applied the guidance under ASC 326 using the prospective transition approach. As a result, the Company adjusted the amortized cost basis of the PCD loans to reclassify $996,000 of purchase discount to the allowance for loan losses on January 1, 2020. The Company applied the guidance under ASC 326 using the modified retrospective approach for all non-PCD assets, which resulted in an increase in the ACL and a corresponding decrease to retained earnings at the adoption date.
PCD loans, under prior accounting policies, were excluded from nonperforming loans because they continued to earn interest income from the accretable yield at the pool level regardless of their status as past due or otherwise not in compliance with their contractual terms. With the adoption of ASC 326, the pools were discontinued and performance is based on contractual terms for individual loans.
Allowance for Credit Losses
On January 1, 2020, the Company adopted ASC 326, Financial Instruments - Credit Losses. The new standard significantly changed the impairment model for most financial assets that are measured at amortized cost, including off-balance sheet credit exposures, from an incurred loss model to an expected loss model.
Changes in the allowance for credit losses, which includes the allowance for loan losses and the reserve for unfunded lending commitments, are charged to current operations. Loans that are determined to be uncollectible are charged-off against the allowance for loan losses once that determination is made.
While management uses available information to make allowance evaluations, adjustments to the allowance may be necessary based on changes in economic and other conditions or changes in accounting guidance. The OCC, as an integral part of its examination processes, periodically reviews the allowance for credit losses. The OCC may require the recognition of adjustments to the allowance for credit losses based on its judgment of information available to it as of the time of its examinations. To the extent the OCC’s estimates differ from management’s estimates, additional provisions to the allowance for credit losses may be required as of the time of its examination. As part of the Bank’s risk management program, an independent review is performed on the loan portfolio, which supplements management’s assessment of the loan portfolio and the allowance for credit losses. The result of the independent review is reported directly to the Audit Committee of the Board of Directors.
Under ASC 326, the allowance for credit losses ("ACL") is measured on a pool basis when similar risk characteristics exist and is maintained at an amount which management believes is a current estimate of the expected credit losses for the full life of the relevant pool of loans and related unfunded lending commitments. The Company applies the practical expedient that permits the exclusion of the accrued interest receivable balance from amortized cost basis of financing receivables when measuring credit losses under CECL. The Company's CECL calculation estimates loan losses using the discounted cash flow method for all loan pools, except for the Company's credit card portfolio. Loan losses for the credit card portfolio are estimated using the remaining life method due to the limited complexity and size of this portfolio. The discounted cash flow analysis uses loan-level term information (e.g., maturity date, payment amount, interest rate, etc.) and pool-level assumptions (e.g., default rates, prepayment speeds, etc.) to produce expected future cash flows for the full life of every loan in the pool. The expected future cash flows are discounted and results are then aggregated to produce a net present value of the pool and ultimately the ACL requirement for the pool. The remaining life method applies a loss rate to a given pool of loans over the estimated remaining life of the given pool. The remaining life of the pool is based on historical data. The loss rates computed for each pool and expected pool-level funding rates are applied to the related unfunded lending commitments to calculate an ACL on unfunded amounts. For each pool of loans, management also evaluates and applies qualitative adjustments to the calculated ACL based on several factors, including, but not limited to, changes in current and expected future economic conditions, changes in industry experience and loan concentrations, changes in the volume and severity of nonperforming assets, changes in lending policies and personnel and changes in the competitive and regulatory environment of the banking
industry. During 2022, 2021 and 2020, the ongoing effects of COVID-19 on the U.S. economy have been an additional consideration when measuring the ACL.
Loans that do not share similar risk characteristics are individually evaluated and are excluded from the pooled loan analysis. Individually analyzed loans generally include larger (i.e., loans with balances of $500,000 or greater) commercial real estate loans, multi-family residential loans, construction and land loans, commercial and industrial loans and other loans as deemed appropriate by management for which it is probable that all amounts due under the contractual terms of the loan will not be collected. The ACL for loans that are individually evaluated is based on a comparison of the recorded investment in the loan with either the expected cash flows discounted using the loan’s original effective interest rate, observable market price for the loan or the estimated fair value of the collateral underlying certain collateral-dependent loans.
The Company has identified the following portfolio segments based on the risk characteristics described in the table for its pooled loan analysis under ASC 326:
| | | | | | | | |
Loan Pool | | Risk Characteristics |
One- to four-family first mortgage | | This category consists of loans secured by first liens on residential real estate. The performance of these loans may be adversely affected by, among other factors, unemployment rates, local residential real estate market conditions and the interest rate environment. Generally, these loans are for longer terms than home equity loans and lines. |
Home equity loans and lines | | This category consists of loans secured by first and junior liens on residential real estate. The performance of these loans may be adversely affected by, among other factors, unemployment rates, local residential real estate market conditions and the interest rate environment. |
Commercial real estate ("CRE") | | This category consists of loans primarily secured by office and industrial buildings, warehouses, retail shopping facilities and various special purpose properties, including hotels and restaurants. The performance of CRE loans may be adversely affected by, among other factors, conditions specific to the relevant industry, the real estate market for the property type and geographic region where the property or borrower is located. |
Construction and land ("C&D") | | This category consists of loans to finance the ground-up construction and/or improvement of residential and commercial properties and loans secured by land. The performance of C&D loans is generally dependent upon the successful completion of improvements and/or land development for the end user, the sale of the property to a third party, or a secondary source of cash flow from the owners. The successful completion of planned improvements and development may be adversely affected by changes in the estimated property value upon completion of construction, projected costs and other conditions leading to project delays. |
Multi-family residential | | This category consists of loans secured by apartment or residential buildings with five or more units used to accommodate households on a temporary or permanent basis. The performance of multi-family loans is generally dependent on the receipt of rental income from the tenants who occupy the subject property. The occupancy rate of the subject property and the ability of the tenants to pay rent may be adversely affected by the location of the subject property and local economic conditions. |
Commercial and industrial ("C&I") | | This category consists of secured and unsecured loans to purchase capital equipment, agriculture operating loans and other business loans for working capital and operating purposes. Secured loans are primarily secured by accounts receivable, inventory and other business assets. The performance of C&I loans may be adversely affected by, among other factors, conditions specific to the relevant industry, fluctuations in the value of the collateral and individual performance factors related to the borrower. |
Consumer | | This category consists of loans to individuals for household, family and other personal use. The performance of these loans may be adversely affected by national and local economic conditions, unemployment rates and other factors affecting the borrower's income available to service the debt. |
Credit cards | | This category consists of unsecured revolving lines of credit for personal and commercial use. Credit card loans are generally smaller in size and are less complex relative to larger loan categories. Due to their unsecured nature, historical loss rates for credit card loans are generally higher than the loss rates on loans secured by real estate. |
Office Properties and Equipment
Office properties and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method with rates based on the estimated useful lives of the individual assets, which range from three to 40 years. Expenditures which substantially increase the useful lives of existing property and equipment are capitalized while routine expenditures for repairs and maintenance are expensed as incurred.
Operating Leases
On January 1, 2019, the Company adopted the amended provisions under ASC 842, Leases. Under the amended guidance, the Company recognizes lease assets and liabilities for both operating and capital leases. For lessees, lease assets represent the right-of-use ("ROU") leased assets for the relevant lease term and lease liabilities that represent the obligation to make lease payments. The Company has made an accounting policy election not to recognize short-term lease assets and liabilities (less than a 12 month term) or immaterial equipment leases in its balance sheets; instead, the Company recognizes the lease expense on a straight-line basis over the life of the lease. At December 31, 2022 and 2021, the Company's right-of-use assets, net of amortization, were $9,021,000 and $5,256,000, respectively. The Company's lease liabilities were $9,322,000 and $5,457,000 at December 31, 2022 and 2021, respectively. The Company reports its right-of-use assets and liabilities within accrued interest receivable and other assets and accrued interest payable and other liabilities, respectively, on the Consolidated Statements of Financial Condition. The ROU asset and lease liability are recognized at lease commencement based on the present value of the remaining lease payments, considering a discount rate that represents the Company's incremental borrowing rate. Operating lease expense is recognized on a straight-line basis over the lease term and is recognized in occupancy expense Consolidated Statements of Income. See Note 7 for additional information and disclosures on operating leases. Cash Surrender Value of Bank-Owned Life Insurance
Life insurance contracts represent single premium life insurance contracts on the lives of certain officers of the Bank. The Bank is the beneficiary of these policies. These contracts are reported at their cash surrender value and changes in the cash surrender value are included in noninterest income.
Intangible Assets
Intangible assets consist of goodwill, core deposit intangibles and mortgage servicing rights. Goodwill and core deposit intangibles are presented together on the Consolidated Statements of Financial Condition. Mortgage servicing rights were recorded in accrued interest receivable and other assets on the Consolidated Statements of Financial Condition. Goodwill represents the excess purchase price over the fair value of net assets acquired in business acquisitions. Goodwill is not amortized but rather is evaluated for impairment at least annually. Core deposit intangibles represent the estimated value related to customer deposit relationships assumed in the Company’s acquisitions. Core deposit intangibles are being amortized over nine to 15 years. Core deposit intangibles are evaluated for impairment at least annually. Mortgage servicing rights represent servicing assets related to mortgage loans sold and serviced at fair value. Mortgage servicing rights were amortized over a maximum of 10 years using an accelerated method.
Foreclosed Assets and ORE
Foreclosed assets and ORE includes real property and other assets that have been acquired as a result of foreclosure, and real property no longer used in the Bank's business. Foreclosed assets are recorded at fair value less estimated selling costs at the date acquired or upon receiving new property valuations. Write-downs from cost to fair value at the date of foreclosure are charged against the allowance for credit losses. ORE is recorded at the lower of its net book value or fair value at the date of transfer to ORE. Costs relating to the development and improvement of foreclosed assets and ORE are capitalized, and costs relating to holding and maintaining foreclosed assets and ORE are expensed. Valuations are performed periodically and a charge to operations is recorded if the carrying value of a property exceeds its fair value less selling costs. Generally, the Company appraises foreclosed assets and ORE at the time of foreclosure or transfer to ORE and at least every 12 months following the foreclosure or transfer to ORE. When the foreclosed property is sold, a gain or loss is recognized on the sale for the difference between the sales proceeds and the carrying amount of the property. Financed sales of foreclosed property are accounted for in accordance with ASC 610, Subtopic 20, Gains and losses from the derecognition of nonfinancial assets. The Company had $461,000 and $1,189,000 of foreclosed assets and ORE as of December 31, 2022 and 2021, respectively. Foreclosed assets and ORE are recorded in accrued interest receivable and other assets on the Consolidated Statements of Financial Condition.
Derivatives and Hedging Activities
As required by ASC 815, the Company records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. The Company may enter into derivative contracts that are intended to economically hedge certain of its risk, even though hedge accounting does not apply or the Company elects not to apply hedge accounting.
In accordance with the FASB’s fair value measurement guidance (in ASU 2011-04), the Company made an accounting policy election to measure the credit risk of its derivative financial instruments that are subject to master netting agreements on a net basis by counterparty portfolio.
Other Investments
Other investments are carried at cost and consist of Federal Reserve Bank ("FRB") stock, FHLB stock, First National Bankers Bank ("FNBB") stock, qualified investments under the Community Reinvestment Act ("CRA"), an investment in a Small Business Investment Company ("SBIC"), and a New Market Tax Credit ("NMTC") investment. The Company's other investments are not held for sale and do not have readily determinable fair values. As a member of the FRB and the FHLB, the Company is required to hold stock in the FRB and the FHLB. The FRB stock may not be sold or pledged as collateral. The FHLB stock is pledged as collateral for outstanding FHLB advances and its transfer is substantially restricted. The Company's CRA investments include investments in funds and membership shares that fund community development in low- and moderate-income areas. The Company's SBIC investment is guaranteed by the Small Business Association. Other investments totaled $22,026,000 and $15,004,000 as of December 31, 2022 and 2021, respectively. Other investments are reported in accrued interest receivable and other assets on the Consolidated Statements of Financial Condition.
Shareholders’ Equity
Pursuant to applicable provisions of the Louisiana Business Corporation Act, shares reacquired by the Company are to be treated as authorized but unissued shares. For the years ended December 31, 2022, 2021 and 2020, the cost of shares repurchased by the Company has been allocated to common stock, additional paid-in capital, and retained earnings.
Transfer of Financial Assets
Transfers of financial assets are accounted for as sales when control over the assets has been relinquished. Control over transferred assets is deemed to be surrendered when the assets have been isolated from the Company, the transferee obtains the right, free of conditions that constrain it from taking advantage of that right, to pledge or exchange the transferred assets and the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before maturity.
Salary Continuation Agreements
The Company records the expense associated with its salary continuation agreements over the service periods of the persons covered under these agreements.
Revenue Recognition
In addition to lending and related activities, the Company offers various services to customers that generate revenue, certain of which are governed by ASC 606, Revenue from Contracts with Customers. The Company's services that fall within the scope of ASC 606 are presented within noninterest income and include service charges and fees, brokerage fees, and other transaction-based fees. Revenue is recognized when the transactions occur or as services are performed over primarily monthly or quarterly periods. Payment is typically received in the period the transactions occur. Fees may be fixed or, where applicable, based on a percentage of transaction size.
Income Taxes
The Company accounts for income taxes under the liability method. Deferred tax assets and liabilities are recorded for the 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 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 of a change in tax rates on deferred tax assets and liabilities is recognized in income taxes during 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 the Company’s assets and liabilities result in deferred tax assets, an evaluation of the probability of being able to realize the future benefits indicated by such asset is required. A valuation allowance is provided for the portion of the deferred tax asset when it is more likely than not that some or all of the deferred tax asset will not be realized. In assessing the realizability of the deferred tax assets, management considers the scheduled reversals of deferred tax liabilities, projected future taxable earnings and tax planning strategies.
The income tax benefit or expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities.
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 presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50 percent likely of being realized on examination. For tax positions not meeting the more likely than not test, no tax benefit is recorded.
The Company recognizes interest and penalties accrued related to unrecognized tax benefits, if applicable, in noninterest expense. During the years ended December 31, 2022, 2021 and 2020, the Company did not recognize any interest or penalties in its financial statements and did not record an accrued liability for interest or penalty payments.
Investments that generate investment tax credits are accounted for under the deferral method. Under the deferral method, the allowable investment credit is recognized as a reduction in income tax expense over the life of the acquired investment.
Stock-based Compensation Plans
The Company has issued stock options under the 2009 Stock Option Plan and the 2014 Equity Incentive Plan to directors, officers and other key employees. The Company had not issued stock options under the 2021 Equity Incentive Plan as of December 31, 2022. In accordance with the requirements of ASC 718, Compensation – Stock Compensation, the Company has adopted a fair value based method of accounting for employee stock compensation plans, whereby compensation cost is measured as of the grant date based on the fair value of the award and is recognized over the service period, which is usually the vesting period.
The Company has issued restricted stock under the 2009 Recognition and Retention Plan and restricted stock units under the 2014 Equity Incentive Plan and 2021 Equity Incentive Plan to directors, officers and other key employees. Awards under the plans may not be sold or otherwise transferred until certain restrictions have lapsed. The unearned compensation related to these awards is amortized to compensation expense over the service period, which is usually the vesting period. The total share-based compensation expense for these awards is determined based on the market price of the Company’s common stock as of the date of grant applied to the total number of shares granted and is amortized over the vesting period.
Earnings Per Share
Earnings per share represents income available to common shareholders divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance.
Comprehensive (Loss) Income
GAAP generally requires that recognized revenues, expenses, gains and losses be included in net earnings. Although certain changes in assets and liabilities, such as unrealized gains and losses on available for sale securities and cash flow hedges, are reported as a separate component of the equity section of the balance sheets, such items, along with net earnings, are components of comprehensive (loss) income. The tax effect for unrealized losses and gains on investment securities and cash flow hedges was a $10,646,000 benefit, a $1,204,000 benefit and a $1,218,000 expense for the periods ending December 31,
2022, 2021 and 2020, respectively. Comprehensive (loss) income is reflected in the Consolidated Statements of Comprehensive (Loss) Income.
Loss Contingency Disclosure
Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there are such matters that will have a material effect on the financial statements.
Reclassifications
Certain reclassifications have been made to prior period balances to conform to the current period presentation.
Recent Accounting Pronouncements
Accounting Standards Adopted in 2022
There were no applicable accounting pronouncements adopted by the Company in 2022.
Issued but Not Yet Adopted Accounting Standards
ASU 2022-01, “Derivatives and Hedging (Topic 815): Fair Value Hedging - Portfolio Layer Method.” Under prior guidance, entities can apply the last-of-layer hedging method to hedge the exposure of a closed portfolio of prepayable financial assets to fair value changes due to changes in interest rates for a portion of the portfolio that is not expected to be affected by prepayments, defaults, and other events affecting the timing and amount of cash flows. ASU 2022-01 expands the last-of-layer method, which permits only one hedge layer, to allow multiple hedged layers of a single closed portfolio. To reflect that expansion, the last-of-layer method is renamed the portfolio layer method. ASU 2022-01 also (i) expands the scope of the portfolio layer method to include non-prepayable financial assets, (ii) specifies eligible hedging instruments in a single-layer hedge, (iii) provides additional guidance on the accounting for and disclosure of hedge basis adjustments under the portfolio layer method and (iv) specifies how hedge basis adjustments should be considered when determining credit losses for the assets included in the closed portfolio. ASU 2022-01 is effective for fiscal years and interim periods after December, 15, 2022. The adoption of ASU 2022-01 is not expected to have a significant impact on our financial statements.
ASU 2022-02, “Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures.” ASU 2022-02 eliminates the accounting guidance for troubled debt restructurings in Accounting Standards Codification (“ASC”) Subtopic 310-40, Receivables - Troubled Debt Restructurings by Creditors, while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. Additionally, ASU 2022-02 requires entities to disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases within the scope of ASC Subtopic 3126-20, Financial Instruments - Credit Losses - Measured at Amortized Cost. ASU 2022-02 is effective for fiscal years and interim periods after December, 15, 2022. The adoption of ASU 2022-02 is not expected to have a significant impact on our financial statements.
ASU 2022-03, “Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions.” ASU 2022-03 clarifies that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. ASU 2022-03 also clarifies that an entity cannot, as a separate unit of account, recognize and measure a contractual sale restriction and requires certain new disclosures for equity securities subject to contractual sale restrictions. ASU 2022-03 is effective for fiscal years and interim periods after December, 15, 2023, though early adoption is permitted. The adoption of ASU 2022-03 is not expected to have a significant impact on our financial statements.
ASU No. 2022-06, “Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848.” ASU 2022-06 extends the period of time preparers can utilize the reference rate reform relief guidance provided by ASU 2020-04 and ASU 2021-01, which are discussed above. ASU 2022-06, which was effective upon issuance, defers the sunset date of this prior guidance from December 31, 2022 to December 31, 2024, after which entities will no longer be permitted to apply the relief guidance in Topic 848. The adoption of ASU 2022-06 did not significantly impact our financial statements.
3. Acquisition Activity
The Company has completed six acquisitions since 2010. The following table is a summary of the Company's acquisition activity as recorded:
SUMMARY OF ACQUISITION ACTIVITY | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(dollars in thousands) |
Acquisition | | Acquisition Date | | Total Assets | | Total Loans | | Goodwill | | Core Deposit Intangible | | Total Deposits |
Statewide Bank | | 3/12/2010 | | $ | 188,026 | | | $ | 110,415 | | | $ | 560 | | | $ | 1,429 | | | $ | 206,925 | |
GS Financial Corporation | | 7/15/2011 | | 256,677 | | | 182,440 | | | 296 | | | 859 | | | 193,518 | |
Britton & Koontz Capital Corporation | | 2/14/2014 | | 298,930 | | | 161,581 | | | 43 | | | 3,030 | | | 216,600 | |
Louisiana Bancorp, Inc. | | 9/15/2015 | | 352,897 | | | 281,583 | | | 8,454 | | | 1,586 | | | 208,670 | |
St. Martin Bancshares, Inc. | | 12/6/2017 | | 592,852 | | | 439,872 | | | 49,135 | | | 6,766 | | | 533,497 | |
Friendswood Capital Corporation | | 3/26/2022 | | 413,919 | | | 317,492 | | | 23,029 | | | 4,597 | | | 367,991 | |
Total Acquisitions | | | | $ | 2,103,301 | | | $ | 1,493,383 | | | $ | 81,517 | | | $ | 18,267 | | | $ | 1,727,201 | |
Loans acquired with deteriorated credit quality were accounted for under ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality, prior to the adoption of ASC 326. On January 1, 2020, the Company adopted ASC 326, Financial Instruments - Credit Losses, which amended the accounting model for purchased financial assets and replaced the guidance for PCI financial assets with the concept of PCD financial assets.
On March 26, 2022, the Company completed the acquisition of Friendswood Capital Corporation (“Friendswood”), the former holding company of Texan Bank, N. A. (“Texan Bank”) of Houston, Texas. Shareholders of Friendswood received $15.34 per share in cash, yielding an aggregate purchase price of $64,864,000.
The Friendswood acquisition was accounted for under the purchase method of accounting in accordance with ASC 805, Business Combinations. In accordance with ASC 805, the Company recorded goodwill totaling $23,029,000 from the acquisition as a result of consideration transferred over net assets acquired. Both the assets acquired and liabilities assumed were recorded at their respective acquisition date fair values. Identifiable intangible assets, including core deposit intangible assets, were recorded at fair value.
The fair value estimates of the Friendswood assets and liabilities require management to make estimates about discount rates, expected cash flows, market conditions, and other future events that are highly subjective in nature and are subject to refinement for a one year period after the date of the acquisition. Under current accounting principles, the Company’s estimates of fair values may be adjusted for a period of up to one year from the acquisition date.
The assets acquired and liabilities assumed in the Friendswood acquisition, as well as the adjustments to record the assets and liabilities at fair value, are presented in the following table as of March 26, 2022:
| | | | | | | | | | | | | | | | | | | | |
(dollars in thousands) | As Acquired | | Fair Value Adjustments | | | As recorded by Home Bancorp |
Assets | | | | | | |
Cash and cash equivalents | $ | 48,741 | | | $ | — | | | | $ | 48,741 | |
Investment securities | 33,679 | | | (268) | | (a) | | 33,411 | |
Loans | 320,050 | | | (2,558) | | (b) | | 317,492 | |
Repossessed assets | 950 | | | (246) | | (c) | | 704 | |
Office properties and equipment, net | 1,663 | | | (116) | | (d) | | 1,547 | |
Core deposit intangible | — | | | 4,597 | | (e) | | 4,597 | |
Other assets | 9,687 | | | (2,260) | | (f) | | 7,427 | |
Total assets acquired | $ | 414,770 | | | $ | (851) | | | | $ | 413,919 | |
Liabilities | | | | | | |
Noninterest-bearing deposits | $ | 97,668 | | | $ | — | | | | $ | 97,668 | |
Interest-bearing deposits | 269,301 | | | 1,022 | | (g) | | 270,323 | |
Other liabilities | 3,873 | | | 220 | | (h) | | 4,093 | |
Total liabilities assumed | $ | 370,842 | | | $ | 1,242 | | | | $ | 372,084 | |
Excess of assets acquired over liabilities assumed | | | | | | 41,835 | |
Cash consideration paid | | | | | | (64,864) | |
Total goodwill recorded | | | | | | $ | 23,029 | |
(a) The adjustment represents the market value adjustments on Friendswood's investment securities based on their interest rate risk and credit risk.
(b) The adjustment to reflect the fair value of loans includes:
•Adjustment of $3.0 million to reflect the removal of Friendswood's allowance for loan losses, net of the allowance for credit losses on PCD loans at the acquisition date, in accordance with ASC 805.
•Net discount of $5.5 million for all non-PCD loans which totaled $309.8 million. In determining the fair value of non-PCD loans, the acquired loan portfolio was evaluated based on risk characteristics and other credit and market criteria to determine credit quality and interest adjustments to the fair value of the loans acquired. The acquired loan balance was reduced by the net amount of the credit quality and interest adjustments in determining the fair value of the loans.
(c) The adjustment represents the write-down of the book value of Friendswood's repossessed assets to their estimated fair value, as adjusted for estimated costs to sell.
(d) The adjustment represents the write-down of the book value of Friendswood’s office properties and equipment to their estimated fair value at the acquisition date.
(e) The adjustment represents the value of the core deposit base assumed in the acquisition. The core deposit asset was recorded as an identifiable intangible asset and is being be amortized on an accelerated basis over the estimated life of the deposit base of 10 years.
(f) The adjustment is to record the deferred tax asset on the transaction and the estimated fair value on other assets.
(g) Adjustment to reflect the fair value of certificates of deposit acquired based on the interest rates as of the acquisition date for similar instruments. The adjustment is being recognized using a level yield amortization method based on maturities of the deposit liabilities.
(h) Adjustment to reflect the fair value of liabilities at the acquisition date.
The Company acquired loans at the acquisition date of Friendswood with more than significant deterioration of credit quality since origination PCD loans. The carrying amount of these loans at acquisition was as follows:
| | | | | | | | |
(in thousands) | | Acquisition Date of March 26, 2022 |
Purchase price of PCD loans at acquisition | | $ | 8,813 | |
Allowance for credit losses on PCD loans at acquisition | | 1,415 | |
Par value of PCD acquired loans at acquisition | | 10,228 | |
The following pro forma information for the years ended December 31, 2022 and 2021 reflects the Company’s estimated consolidated results of operations as if the acquisition of Friendswood occurred at January 1, 2021, unadjusted for potential cost savings. Merger-related costs for the years December 31, 2022 and 2021 were approximately $1,971,000 and $299,000, respectively, and have been excluded from the pro-forma information presented below.
| | | | | | | | | | | | | | |
(dollars in thousands except per share information) | | 2022 | | 2021 |
Net interest income | | $ | 122,893 | | | $ | 120,421 | |
Noninterest income | | 14,789 | | | 19,705 | |
Noninterest expense | | 85,423 | | | 82,853 | |
Net income | | 35,368 | | | 53,273 | |
Earnings per share - basic | | $ | 4.35 | | | $ | 6.36 | |
Earnings per share - diluted | | $ | 4.32 | | | $ | 6.32 | |
The selected pro forma financial information presented above is for illustrative purposes only and is not necessarily indicative of the financial results of the combined companies had the acquisition actually been completed at the beginning of the periods presented, nor does it indicate future results for any other interim or full-year period.
4. Investment Securities
The following table summarizes the Company’s available for sale and held to maturity investment securities at December 31, 2022 and 2021.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(dollars in thousands) | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
December 31, 2022 | | | | | | Less Than 1 Year | | Over 1 Year | | |
Available for sale: | | | | | | | | | | |
U.S. agency mortgage-backed | | $ | 355,014 | | | $ | 63 | | | $ | 14,828 | | | $ | 23,417 | | | $ | 316,832 | |
Collateralized mortgage obligations | | 91,217 | | | 1 | | | 4,860 | | | 13 | | | 86,345 | |
Municipal bonds | | 67,476 | | | 50 | | | 3,245 | | | 6,656 | | | 57,625 | |
U.S. government agency | | 20,600 | | | — | | | 1,259 | | | 8 | | | 19,333 | |
Corporate bonds | | 6,980 | | | — | | | 247 | | | 350 | | | 6,383 | |
Total available for sale | | $ | 541,287 | | | $ | 114 | | | $ | 24,439 | | | $ | 30,444 | | | $ | 486,518 | |
Held to maturity: | | | | | | | | | | |
Municipal bonds | | $ | 1,075 | | | $ | — | | | $ | 3 | | | $ | — | | | $ | 1,072 | |
Total held to maturity | | $ | 1,075 | | | $ | — | | | $ | 3 | | | $ | — | | | $ | 1,072 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(dollars in thousands) | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
December 31, 2021 | | | | | | Less Than 1 Year | | Over 1 Year | | |
Available for sale: | | | | | | | | | | |
U.S. agency mortgage-backed | | $ | 234,720 | | | $ | 1,793 | | | $ | 2,382 | | | $ | 358 | | | $ | 233,773 | |
Collateralized mortgage obligations | | 31,356 | | | 557 | | | 1 | | | — | | | 31,912 | |
Municipal bonds | | 51,094 | | | 402 | | | 719 | | | 58 | | | 50,719 | |
U.S. government agency | | 5,615 | | | 8 | | | — | | | 9 | | | 5,614 | |
Corporate bonds | | 5,500 | | | 114 | | | — | | | — | | | $ | 5,614 | |
Total available for sale | | $ | 328,285 | | | $ | 2,874 | | | $ | 3,102 | | | $ | 425 | | | $ | 327,632 | |
Held to maturity: | | | | | | | | | | |
Municipal bonds | | $ | 2,102 | | | $ | 30 | | | $ | — | | | $ | — | | | $ | 2,132 | |
Total held to maturity | | $ | 2,102 | | | $ | 30 | | | $ | — | | | $ | — | | | $ | 2,132 | |
Management evaluates securities for impairment from credit losses at least quarterly, and more frequently when economic and market conditions warrant such evaluations. Consideration is given to numerous factors including, but not limited to, the extent to which the fair value is less than the amortized cost basis; adverse conditions causing changes in the financial condition of the issuer of the security or underlying loan guarantors; changes to the rating of the security by a rating agency; and the Company’s intent to sell a security or whether it is more likely than not the Company will be required to sell the security before the recovery of its amortized cost, which may extend to maturity.
The Company performs a process to determine whether the decline in the fair value of securities has resulted from credit losses or other factors. This process involves evaluating each security for impairment by monitoring credit performance, collateral type, collateral geography, bond credit support, loan-to-value ratios, credit scores, loss severity levels, pricing levels, downgrades by rating agencies, cash flow projections and other factors as indicators of potential credit issues. If this evaluation indicates the existence of credit losses, the Company compares the present value of cash flows expected to be collected from the security with the amortized cost basis. If the present value of expected cash flows is less than the amortized cost basis, an ACL is recorded, limited by the amount that the fair value of the security is less than its amortized cost.
The Company's investment securities with unrealized losses, aggregated by type and length of time that individual securities have been in a continuous loss position, are summarized in the following tables.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(dollars in thousands) | | Less Than 1 Year | | Over 1 Year | | Total |
December 31, 2022 | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
Available for sale: | | | | | | | | | | | |
U.S. agency mortgage-backed | | $ | 184,896 | | | $ | 14,828 | | | $ | 129,248 | | | $ | 23,417 | | | $ | 314,144 | | | $ | 38,245 | |
Collateralized mortgage obligations | | 85,715 | | | 4,860 | | | 620 | | | 13 | | | 86,335 | | | 4,873 | |
Municipal bonds | | 28,710 | | | 3,245 | | | 24,100 | | | 6,656 | | | 52,810 | | | 9,901 | |
U.S. government agency | | 18,718 | | | 1,259 | | | 615 | | | 8 | | | 19,333 | | | 1,267 | |
Corporate bonds | | 3,233 | | | 247 | | | 3,150 | | | 350 | | | 6,383 | | | 597 | |
Total available for sale | | $ | 321,272 | | | $ | 24,439 | | | $ | 157,733 | | | $ | 30,444 | | | $ | 479,005 | | | $ | 54,883 | |
Held to maturity: | | | | | | | | | | | | |
Municipal bonds | | $ | 1,072 | | | $ | 3 | | | $ | — | | | $ | — | | | $ | 1,072 | | | $ | 3 | |
Total held to maturity | | $ | 1,072 | | | $ | 3 | | | $ | — | | | $ | — | | | $ | 1,072 | | | $ | 3 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(dollars in thousands) | | Less Than 1 Year | | Over 1 Year | | Total |
December 31, 2021 | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
Available for sale: | | | | | | | | | | | |
U.S. agency mortgage-backed | | $ | 158,908 | | | $ | 2,382 | | | $ | 11,575 | | | $ | 358 | | | $ | 170,483 | | | $ | 2,740 | |
Collateralized mortgage obligations | | 254 | | | 1 | | | 988 | | | — | | | 1,242 | | | 1 | |
Municipal bonds | | 29,047 | | | 719 | | | 1,228 | | | 58 | | | 30,275 | | | 777 | |
U.S. government agency | | — | | | — | | | 1,001 | | | 9 | | | 1,001 | | | 9 | |
Corporate bonds | | 3,499 | | | — | | | — | | | — | | | 3,499 | | | — | |
Total available for sale | | $ | 191,708 | | | $ | 3,102 | | | $ | 14,792 | | | $ | 425 | | | $ | 206,500 | | | $ | 3,527 | |
Held to maturity: | | | | | | | | | | | | |
Municipal bonds | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Total held to maturity | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
At December 31, 2022, 324 of the Company’s debt securities had unrealized losses totaling 10.3% of the individual securities’ amortized cost basis and 10.1% of the Company’s total amortized cost basis of the investment securities portfolio. At such date, 63 of the 324 securities had been in a continuous loss position for over 12 months. Management has determined that the declines in the fair value of these securities were not attributable to credit losses. As a result, no ACL was recorded for available for sale investment securities at December 31, 2022.
At December 31, 2022 and December 31, 2021, it was determined that no ACL was required for the Company's held to maturity investment securities. The Company monitors credit quality of debt securities held to maturity through the use of credit ratings. The following tables present the amortized cost of the Company's held to maturity securities by credit quality rating at December 31, 2022 and December 31, 2021.
| | | | | | | | | | | | | | | | | | | | |
| | Credit Ratings | | |
(dollars in thousands) | | AAA/AA/A | | BBB/BB/B | | Total |
December 31, 2022 | | | | | | |
Held to maturity: | | | | | | |
Municipal bonds | | $ | 1,075 | | | $ | — | | | $ | 1,075 | |
| | | | | | | | | | | | | | | | | | | | |
| | Credit Ratings | | |
(dollars in thousands) | | AAA/AA/A | | BBB/BB/B | | Total |
December 31, 2021 | | | | | | |
Held to maturity: | | | | | | |
Municipal bonds | | $ | 2,102 | | | $ | — | | | $ | 2,102 | |
The amortized cost and estimated fair value by maturity of the Company’s investment securities as of December 31, 2022 are shown in the following tables. Securities are classified according to their contractual maturities without consideration of principal amortization, potential prepayments or call options. The expected maturity of a security may differ from its contractual maturity because of the exercise of call options and potential paydowns. Accordingly, actual maturities may differ from contractual maturities.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(dollars in thousands) | | One Year or Less | | After One Year through Five Years | | After Five Years through Ten Years | | After Ten Years | | Total |
Fair Value | | | | | | | | | | |
Available for sale: | | | | | | | | | | |
U.S. agency mortgage-backed | | $ | 6,648 | | | $ | 52,243 | | | $ | 107,194 | | | $ | 150,747 | | | $ | 316,832 | |
Collateralized mortgage obligations | | — | | | 59,640 | | | 4,782 | | | 21,923 | | | 86,345 | |
Municipal bonds | | 2,191 | | | 5,331 | | | 22,383 | | | 27,720 | | | 57,625 | |
U.S. government agency | | — | | | 6,063 | | | 12,945 | | | 325 | | | 19,333 | |
Corporate bonds | | — | | | — | | | 6,383 | | | — | | | 6,383 | |
Total securities available for sale | | $ | 8,839 | | | $ | 123,277 | | | $ | 153,687 | | | $ | 200,715 | | | $ | 486,518 | |
Held to maturity: | | | | | | | | | | |
Municipal bonds | | $ | — | | | $ | 1,072 | | | $ | — | | | $ | — | | | $ | 1,072 | |
Total securities held to maturity | | $ | — | | | $ | 1,072 | | | $ | — | | | $ | — | | | $ | 1,072 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(dollars in thousands) | | One Year or Less | | After One Year through Five Years | | After Five Years through Ten Years | | After Ten Years | | Total |
Amortized Cost | | | | | | | | | | |
Available for sale: | | | | | | | | | | |
U.S. agency mortgage-backed | | $ | 6,754 | | | $ | 56,502 | | | $ | 118,815 | | | $ | 172,943 | | | $ | 355,014 | |
Collateralized mortgage obligations | | — | | | 62,556 | | | 5,493 | | | 23,168 | | | 91,217 | |
Municipal bonds | | 2,219 | | | 5,559 | | | 25,154 | | | 34,544 | | | 67,476 | |
U.S. government agency | | — | | | 6,182 | | | 14,089 | | | 329 | | | 20,600 | |
Corporate bonds | | — | | | — | | | 6,980 | | | — | | | 6,980 | |
Total securities available for sale | | $ | 8,973 | | | $ | 130,799 | | | $ | 170,531 | | | $ | 230,984 | | | $ | 541,287 | |
Held to maturity: | | | | | | | | | | |
Municipal bonds | | $ | — | | | $ | 1,075 | | | $ | — | | | $ | — | | | $ | 1,075 | |
Total securities held to maturity | | $ | — | | | $ | 1,075 | | | $ | — | | | $ | — | | | $ | 1,075 | |
For the year ended December 31, 2022, the Company recorded no gross gains and losses related to the sale of investment securities. For the year ended December 31, 2021, gross gains and losses recorded related to the sale of investment securities were $5,300 and $5,200, respectively. For the year ended December 31, 2020, the Company recorded no gross gains or losses related to the sale of investment securities.
As of December 31, 2022 and 2021, the Company had accrued interest receivable for investment securities of $1,798,000 and $942,000, respectively. These amounts are recorded in accrued interest receivable and other assets on the Consolidated Statements of Financial Condition.
As of December 31, 2022 and 2021, the Company had $170,036,000 and $161,388,000, respectively, of securities pledged to secure public deposits.
5. Loans
The Company’s loans, net of unearned income, consisted of the following as of December 31 of the years indicated.
| | | | | | | | | | | | | | |
(dollars in thousands) | | 2022 | | 2021 |
Real estate loans: | | | | |
One- to four-family first mortgage | | $ | 389,616 | | | $ | 350,843 | |
Home equity loans and lines | | 61,863 | | | 60,312 | |
Commercial real estate | | 1,152,537 | | | 801,624 | |
Construction and land | | 313,175 | | | 259,652 | |
Multi-family residential | | 100,588 | | | 90,518 | |
Total real estate loans | | 2,017,779 | | | 1,562,949 | |
Other loans: | | | | |
Commercial and industrial | | 377,894 | | | 244,123 | |
Consumer | | 35,077 | | | 33,021 | |
Total other loans | | 412,971 | | | 277,144 | |
Total loans | | $ | 2,430,750 | | | $ | 1,840,093 | |
In January 2022, the Bank sold its former branch office in Vicksburg, Mississippi, and transferred approximately $2.8 million in loans from that office. The net discount on the Company’s acquired loans was $6,866,000 and $4,289,000 at December 31, 2022 and 2021, respectively. In addition, loan balances as of December 31, 2022 and 2021 are reported net of unearned income of $4,580,000 and $4,924,000, respectively. Unearned income at December 31, 2022 and December 31, 2021 included $94,000 and $1,301,000 of deferred lender fees related to PPP loans, respectively. The total recorded investment in PPP loans was $6,692,000 and $43,637,000 at December 31, 2022 and 2021, respectively, which is included in commercial and industrial loans.
Accrued interest receivable on the Company's loans was $9,520,000 and $6,496,000 at December 31, 2022 and 2021, respectively, and is excluded from the estimate of the ACL. These amounts are recorded in accrued interest receivable and other assets on the Consolidated Statements of Financial Condition.
A summary of activity in the ACL for the years ended December 31, 2022, 2021 and 2020 follows.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, 2022 |
(dollars in thousands) | | Beginning Balance | | Allowance for Acquired PCD Loans(1) | | Charge-offs | | Recoveries | | Provision | | Ending Balance |
Allowance for credit losses: | | | | | | | | | | | | |
One- to four-family first mortgage | | $ | 1,944 | | | $ | — | | | $ | (80) | | | $ | 39 | | | $ | 980 | | | $ | 2,883 | |
Home equity loans and lines | | 508 | | | — | | | — | | | 14 | | | 102 | | | 624 | |
Commercial real estate | | 10,454 | | | 1,220 | | | (270) | | | — | | | 2,410 | | | 13,814 | |
Construction and land | | 3,572 | | | — | | | — | | | — | | | 1,108 | | | 4,680 | |
Multi-family residential | | 457 | | | — | | | — | | | — | | | 115 | | | 572 | |
Commercial and industrial | | 3,520 | | | 195 | | | (792) | | | 509 | | | 2,592 | | | 6,024 | |
Consumer | | 634 | | | — | | | (256) | | | 142 | | | 182 | | | 702 | |
Total allowance for loan losses | | $ | 21,089 | | | $ | 1,415 | | | $ | (1,398) | | | $ | 704 | | | $ | 7,489 | | | $ | 29,299 | |
| | | | | | | | | | | | |
Unfunded lending commitments | | 1,815 | | | — | | | — | | | — | | | 278 | | | 2,093 | |
Total allowance for credit losses | | $ | 22,904 | | | $ | 1,415 | | | $ | (1,398) | | | $ | 704 | | | $ | 7,767 | | | $ | 31,392 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, 2021 |
(dollars in thousands) | | Beginning Balance | | | | Charge-offs | | Recoveries | | Provision (Reversal) | | Ending Balance |
Allowance for credit losses: | | | | | | | | | | | | |
One- to four-family first mortgage | | $ | 3,065 | | | | | $ | (176) | | | $ | 45 | | | $ | (990) | | | $ | 1,944 | |
Home equity loans and lines | | 676 | | | | | (6) | | | 25 | | | (187) | | | 508 | |
Commercial real estate | | 18,851 | | | | | (1,337) | | | — | | | (7,060) | | | 10,454 | |
Construction and land | | 4,155 | | | | | — | | | 63 | | | (646) | | | 3,572 | |
Multi-family residential | | 1,077 | | | | | — | | | — | | | (620) | | | 457 | |
Commercial and industrial | | 4,276 | | | | | (599) | | | 313 | | | (470) | | | 3,520 | |
Consumer | | 863 | | | | | (187) | | | 146 | | | (188) | | | 634 | |
Total allowance for loan losses | | $ | 32,963 | | | | | $ | (2,305) | | | $ | 592 | | | $ | (10,161) | | | $ | 21,089 | |
| | | | | | | | | | | | |
Unfunded lending commitments | | 1,425 | | | | | — | | | — | | | 390 | | | 1,815 | |
Total allowance for credit losses | | $ | 34,388 | | | | | $ | (2,305) | | | $ | 592 | | | $ | (9,771) | | | $ | 22,904 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, 2020 |
(dollars in thousands) | | Beginning Balance | | ASC 326 Adoption Impact(1) | | Charge-offs | | Recoveries | | Provision (Reversal) | | Ending Balance |
Allowance for credit losses: | | | | | | | | | | | | |
One- to four-family first mortgage | | $ | 2,715 | | | $ | 986 | | | $ | (99) | | | $ | 13 | | | $ | (550) | | | $ | 3,065 | |
Home equity loans and lines | | 1,084 | | | (1) | | | (575) | | | 16 | | | 152 | | | 676 | |
Commercial real estate | | 6,541 | | | 1,974 | | | (5) | | | 55 | | | 10,286 | | | 18,851 | |
Construction and land | | 2,670 | | | 519 | | | (688) | | | — | | | 1,654 | | | 4,155 | |
Multi-family residential | | 572 | | | (245) | | | — | | | — | | | 750 | | | 1,077 | |
Commercial and industrial | | 3,694 | | | 1,243 | | | (984) | | | 106 | | | 217 | | | 4,276 | |
Consumer | | 592 | | | 157 | | | (250) | | | 145 | | | 219 | | | 863 | |
Total allowance for loan losses | | $ | 17,868 | | | $ | 4,633 | | | $ | (2,601) | | | $ | 335 | | | $ | 12,728 | | | $ | 32,963 | |
| | | | | | | | | | | | |
Unfunded lending commitments | | — | | | 1,425 | | | — | | | — | | | — | | | 1,425 | |
Total allowance for credit losses | | $ | 17,868 | | | $ | 6,058 | | | $ | (2,601) | | | $ | 335 | | | $ | 12,728 | | | $ | 34,388 | |
(1)On January 1, 2020, the Company adopted ASC 326, Financial Instruments - Credit Losses, which introduced a new model known as CECL. Refer to Note 2 for more information on the adoption of ASC 326.
The ACL, which includes the ALL and the ACL on unfunded lending commitments, and recorded investment in loans as of the dates indicated are as follows.
| | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2022 |
(dollars in thousands) | | Collectively Evaluated | | Individually Evaluated | | Total |
Allowance for credit losses: | | | | | | |
One- to four-family first mortgage | | $ | 2,883 | | | $ | — | | | $ | 2,883 | |
Home equity loans and lines | | 624 | | | — | | | 624 | |
Commercial real estate | | 13,264 | | | 550 | | | 13,814 | |
Construction and land | | 4,680 | | | — | | | 4,680 | |
Multi-family residential | | 572 | | | — | | | 572 | |
Commercial and industrial | | 5,853 | | | 171 | | | 6,024 | |
Consumer | | 702 | | | — | | | 702 | |
Total allowance for loan losses | | $ | 28,578 | | | $ | 721 | | | $ | 29,299 | |
| | | | | | |
Unfunded lending commitments(1) | | $ | 2,093 | | | $ | — | | | $ | 2,093 | |
Total allowance for credit losses | | $ | 30,671 | | | $ | 721 | | | $ | 31,392 | |
| | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2022 |
(dollars in thousands) | | Collectively Evaluated | | Individually Evaluated(2) | | Total |
Loans: | | | | | | |
One- to four-family first mortgage | | $ | 389,616 | | | $ | — | | | $ | 389,616 | |
Home equity loans and lines | | 61,863 | | | — | | | 61,863 | |
Commercial real estate | | 1,147,794 | | | 4,743 | | | 1,152,537 | |
Construction and land | | 313,175 | | | — | | | 313,175 | |
Multi-family residential | | 100,588 | | | — | | | 100,588 | |
Commercial and industrial | | 377,690 | | | 204 | | | 377,894 | |
Consumer | | 34,991 | | | 86 | | | 35,077 | |
Total loans | | $ | 2,425,717 | | | $ | 5,033 | | | $ | 2,430,750 | |
| | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2021 |
(dollars in thousands) | | Collectively Evaluated | | Individually Evaluated | | | | Total |
Allowance for credit losses: | | | | | | | | |
One- to four-family first mortgage | | $ | 1,944 | | | $ | — | | | | | $ | 1,944 | |
Home equity loans and lines | | 508 | | | — | | | | | 508 | |
Commercial real estate | | 10,207 | | | 247 | | | | | 10,454 | |
Construction and land | | 3,572 | | | — | | | | | 3,572 | |
Multi-family residential | | 457 | | | — | | | | | 457 | |
Commercial and industrial | | 3,095 | | | 425 | | | | | 3,520 | |
Consumer | | 634 | | | — | | | | | 634 | |
Total allowance for loan losses | | $ | 20,417 | | | $ | 672 | | | | | $ | 21,089 | |
| | | | | | | | |
Unfunded lending commitments(3) | | $ | 1,815 | | | $ | — | | | | | $ | 1,815 | |
Total allowance for credit losses | | $ | 22,232 | | | $ | 672 | | | | | $ | 22,904 | |
| | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2021 |
(dollars in thousands) | | Collectively Evaluated | | Individually Evaluated(2) | | | | Total |
Loans: | | | | | | | | |
One- to four-family first mortgage | | $ | 350,843 | | | $ | — | | | | | $ | 350,843 | |
Home equity loans and lines | | 60,312 | | | — | | | | | 60,312 | |
Commercial real estate | | 797,751 | | | 3,873 | | | | | 801,624 | |
Construction and land | | 259,652 | | | — | | | | | 259,652 | |
Multi-family residential | | 90,518 | | | — | | | | | 90,518 | |
Commercial and industrial | | 243,379 | | | 744 | | | | | 244,123 | |
Consumer | | 33,021 | | | — | | | | | 33,021 | |
Total loans | | $ | 1,835,476 | | | $ | 4,617 | | | | | $ | 1,840,093 | |
(1)At December 31, 2022, $2.1 million of the ACL related to noncancellable unfunded lending commitments of $520.7 million. The ACL on unfunded lending commitments is recorded within accrued interest payable and other liabilities on the Consolidated Statements of Financial Condition.
(2)PCD loans individually evaluated totaled $1.5 million and none at December 31, 2022 and December 31, 2021, respectively.
(3)At December 31, 2021, $1.8 million of the ACL related to noncancellable unfunded lending commitments of $434.6 million. The ACL on unfunded lending commitments is recorded within accrued interest payable and other liabilities on the Consolidated Statements of Financial Condition.
Although the Company has a diversified loan portfolio, a substantial portion of the loan portfolio is collateralized by improved and unimproved real estate and is dependent, in part, on values in the real estate market.
The following table presents the Company’s loan portfolio by credit quality classification and origination year as of December 31, 2022.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Term Loans by Origination Year | | | | | | |
(dollars in thousands) | | 2022 | | 2021 | | 2020 | | 2019 | | 2018 | | Prior | | Revolving Loans | | Revolving Loans Converted to Term Loans | | Total |
One- to four-family first mortgage: | | | | | | | | | | | | | | | | | | |
Pass | | $ | 107,546 | | | $ | 78,744 | | | $ | 37,876 | | | $ | 34,114 | | | $ | 26,455 | | | $ | 94,729 | | | $ | 5,387 | | | $ | 348 | | | $ | 385,199 | |
Special Mention | | 150 | | | 189 | | | — | | | — | | | — | | | 355 | | | — | | | 500 | | | 1,194 | |
Substandard | | 272 | | | 56 | | | 368 | | | 145 | | | 372 | | | 2,010 | | | — | | | — | | | 3,223 | |
Doubtful | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total one- to four-family first mortgages | | $ | 107,968 | | | $ | 78,989 | | | $ | 38,244 | | | $ | 34,259 | | | $ | 26,827 | | | $ | 97,094 | | | $ | 5,387 | | | $ | 848 | | | $ | 389,616 | |
| | | | | | | | | | | | | | | | | | |
Home equity loans and lines: | | | | | | | | | | | | | | | | | | |
Pass | | $ | 1,898 | | | $ | 1,453 | | | $ | 783 | | | $ | 1,142 | | | $ | 604 | | | $ | 3,453 | | | $ | 51,502 | | | $ | 995 | | | $ | 61,830 | |
Special Mention | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Substandard | | — | | | — | | | — | | | — | | | — | | | 33 | | | — | | | — | | | 33 | |
Doubtful | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total home equity loans and lines | | $ | 1,898 | | | $ | 1,453 | | | $ | 783 | | | $ | 1,142 | | | $ | 604 | | | $ | 3,486 | | | $ | 51,502 | | | $ | 995 | | | $ | 61,863 | |
| | | | | | | | | | | | | | | | | | |
Commercial real estate: | | | | | | | | | | | | | | | | | | |
Pass | | $ | 292,894 | | | $ | 279,397 | | | $ | 210,983 | | | $ | 159,169 | | | $ | 64,554 | | | $ | 95,083 | | | $ | 35,918 | | | $ | 586 | | | $ | 1,138,584 | |
Special Mention | | — | | | 179 | | | 345 | | | — | | | — | | | — | | | — | | | — | | | 524 | |
Substandard | | 97 | | | — | | | 167 | | | 5,579 | | | 294 | | | 7,292 | | | — | | | — | | | 13,429 | |
Doubtful | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total commercial real estate loans | | $ | 292,991 | | | $ | 279,576 | | | $ | 211,495 | | | $ | 164,748 | | | $ | 64,848 | | | $ | 102,375 | | | $ | 35,918 | | | $ | 586 | | | $ | 1,152,537 | |
| | | | | | | | | | | | | | | | | | |
Construction and land: | | | | | | | | | | | | | | | | | | |
Pass | | $ | 170,744 | | | $ | 101,321 | | | $ | 19,620 | | | $ | 8,912 | | | $ | 2,534 | | | $ | 2,716 | | | $ | 4,434 | | | $ | 1,727 | | | $ | 312,008 | |
Special Mention | | — | | | 520 | | | — | | | — | | | — | | | — | | | — | | | — | | | 520 | |
Substandard | | 417 | | | — | | | 152 | | | — | | | — | | | 78 | | | — | | | — | | | 647 | |
Doubtful | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total construction and land loans | | $ | 171,161 | | | $ | 101,841 | | | $ | 19,772 | | | $ | 8,912 | | | $ | 2,534 | | | $ | 2,794 | | | $ | 4,434 | | | $ | 1,727 | | | $ | 313,175 | |
| | | | | | | | | | | | | | | | | | |
Multi-family residential: | | | | | | | | | | | | | | | | | | |
Pass | | $ | 33,822 | | | $ | 15,775 | | | $ | 25,661 | | | $ | 13,070 | | | $ | 2,241 | | | $ | 2,491 | | | $ | 1,302 | | | $ | 2,840 | | | $ | 97,202 | |
Special Mention | | — | | | — | | | — | | | — | | | 3,312 | | | — | | | — | | | — | | | 3,312 | |
Substandard | | — | | | — | | | — | | | — | | | 74 | | | — | | | — | | | — | | | 74 | |
Doubtful | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total multi-family residential loans | | $ | 33,822 | | | $ | 15,775 | | | $ | 25,661 | | | $ | 13,070 | | | $ | 5,627 | | | $ | 2,491 | | | $ | 1,302 | | | $ | 2,840 | | | $ | 100,588 | |
| | | | | | | | | | | | | | | | | | |
Commercial and industrial: | | | | | | | | | | | | | | | | | | |
Pass | | $ | 108,464 | | | $ | 50,850 | | | $ | 16,043 | | | $ | 8,599 | | | $ | 11,203 | | | $ | 2,759 | | | $ | 174,145 | | | $ | 712 | | | $ | 372,775 | |
Special Mention | | 338 | | | — | | | — | | | — | | | 7 | | | — | | | 1,188 | | | — | | | 1,533 | |
Substandard | | 590 | | | — | | | 2,317 | | | 8 | | | — | | | 293 | | | 328 | | | 50 | | | 3,586 | |
Doubtful | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total commercial and industrial loans | | $ | 109,392 | | | $ | 50,850 | | | $ | 18,360 | | | $ | 8,607 | | | $ | 11,210 | | | $ | 3,052 | | | $ | 175,661 | | | $ | 762 | | | $ | 377,894 | |
| | | | | | | | | | | | | | | | | | |
Consumer: | | | | | | | | | | | | | | | | | | |
Pass | | $ | 10,012 | | | $ | 2,048 | | | $ | 1,577 | | | $ | 536 | | | $ | 136 | | | $ | 12,785 | | | $ | 7,420 | | | $ | 29 | | | $ | 34,543 | |
Special Mention | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Substandard | | 9 | | | 298 | | | — | | | — | | | — | | | 227 | | | — | | | — | | | 534 | |
Doubtful | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total consumer loans | | $ | 10,021 | | | $ | 2,346 | | | $ | 1,577 | | | $ | 536 | | | $ | 136 | | | $ | 13,012 | | | $ | 7,420 | | | $ | 29 | | | $ | 35,077 | |
| | | | | | | | | | | | | | | | | | |
Total loans: | | | | | | | | | | | | | | | | | | |
Pass | | $ | 725,380 | | | $ | 529,588 | | | $ | 312,543 | | | $ | 225,542 | | | $ | 107,727 | | | $ | 214,016 | | | $ | 280,108 | | | $ | 7,237 | | | $ | 2,402,141 | |
Special Mention | | 488 | | | 888 | | | 345 | | | — | | | 3,319 | | | 355 | | | 1,188 | | | 500 | | | 7,083 | |
Substandard | | 1,385 | | | 354 | | | 3,004 | | | 5,732 | | | 740 | | | 9,933 | | | 328 | | | 50 | | | 21,526 | |
Doubtful | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total loans | | $ | 727,253 | | | $ | 530,830 | | | $ | 315,892 | | | $ | 231,274 | | | $ | 111,786 | | | $ | 224,304 | | | $ | 281,624 | | | $ | 7,787 | | | $ | 2,430,750 | |
The following table presents the Company’s loan portfolio by credit quality classification and origination year as of December 31, 2021.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Term Loans by Origination Year | | | | | | |
(dollars in thousands) | | 2021 | | 2020 | | 2019 | | 2018 | | 2017 | | Prior | | Revolving Loans | | Revolving Loans Converted to Term Loans | | Total |
One- to four-family first mortgage: | | | | | | | | | | | | | | | | | | |
Pass | | $ | 77,865 | | | $ | 44,152 | | | $ | 45,542 | | | $ | 34,301 | | | $ | 35,048 | | | $ | 96,975 | | | $ | 12,412 | | | $ | 351 | | | $ | 346,646 | |
Special Mention | | — | | | — | | | — | | | — | | | — | | | 369 | | | — | | | — | | | 369 | |
Substandard | | — | | | 347 | | | 716 | | | 266 | | | 463 | | | 2,036 | | | — | | | — | | | 3,828 | |
Doubtful | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total one- to four-family first mortgages | | $ | 77,865 | | | $ | 44,499 | | | $ | 46,258 | | | $ | 34,567 | | | $ | 35,511 | | | $ | 99,380 | | | $ | 12,412 | | | $ | 351 | | | $ | 350,843 | |
| | | | | | | | | | | | | | | | | | |
Home equity loans and lines: | | | | | | | | | | | | | | | | | | |
Pass | | $ | 1,688 | | | $ | 873 | | | $ | 1,114 | | | $ | 919 | | | $ | 816 | | | $ | 3,567 | | | $ | 50,323 | | | $ | 975 | | | $ | 60,275 | |
Special Mention | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Substandard | | — | | | — | | | — | | | — | | | 37 | | | — | | | — | | | — | | | 37 | |
Doubtful | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total home equity loans and lines | | $ | 1,688 | | | $ | 873 | | | $ | 1,114 | | | $ | 919 | | | $ | 853 | | | $ | 3,567 | | | $ | 50,323 | | | $ | 975 | | | $ | 60,312 | |
| | | | | | | | | | | | | | | | | | |
Commercial real estate: | | | | | | | | | | | | | | | | | | |
Pass | | $ | 226,989 | | | $ | 193,637 | | | $ | 142,045 | | | $ | 68,949 | | | $ | 73,555 | | | $ | 59,396 | | | $ | 23,310 | | | $ | 1,699 | | | $ | 789,580 | |
Special Mention | | — | | | — | | | — | | | — | | | 1,841 | | | 366 | | | — | | | — | | | 2,207 | |
Substandard | | 437 | | | 821 | | | 381 | | | 1,741 | | | 306 | | | 5,991 | | | — | | | 160 | | | 9,837 | |
Doubtful | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total commercial real estate loans | | $ | 227,426 | | | $ | 194,458 | | | $ | 142,426 | | | $ | 70,690 | | | $ | 75,702 | | | $ | 65,753 | | | $ | 23,310 | | | $ | 1,859 | | | $ | 801,624 | |
| | | | | | | | | | | | | | | | | | |
Construction and land: | | | | | | | | | | | | | | | | | | |
Pass | | $ | 148,054 | | | $ | 50,062 | | | $ | 48,432 | | | $ | 4,832 | | | $ | 2,867 | | | $ | 1,738 | | | $ | 2,845 | | | $ | — | | | $ | 258,830 | |
Special Mention | | 575 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 575 | |
Substandard | | — | | | — | | | — | | | — | | | 5 | | | 242 | | | — | | | — | | | 247 | |
Doubtful | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total construction and land loans | | $ | 148,629 | | | $ | 50,062 | | | $ | 48,432 | | | $ | 4,832 | | | $ | 2,872 | | | $ | 1,980 | | | $ | 2,845 | | | $ | — | | | $ | 259,652 | |
| | | | | | | | | | | | | | | | | | |
Multi-family residential: | | | | | | | | | | | | | | | | | | |
Pass | | $ | 31,236 | | | $ | 31,805 | | | $ | 14,467 | | | $ | 6,363 | | | $ | 2,588 | | | $ | 2,762 | | | $ | 1,297 | | | $ | — | | | $ | 90,518 | |
Special Mention | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Substandard | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Doubtful | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total multi-family residential loans | | $ | 31,236 | | | $ | 31,805 | | | $ | 14,467 | | | $ | 6,363 | | | $ | 2,588 | | | $ | 2,762 | | | $ | 1,297 | | | $ | — | | | $ | 90,518 | |
| | | | | | | | | | | | | | | | | | |
Commercial and industrial: | | | | | | | | | | | | | | | | | | |
Pass | | $ | 82,765 | | | $ | 32,465 | | | $ | 14,794 | | | $ | 8,737 | | | $ | 3,066 | | | $ | 1,690 | | | $ | 96,648 | | | $ | 296 | | | $ | 240,461 | |
Special Mention | | — | | | — | | | — | | | — | | | — | | | — | | | 267 | | | — | | | 267 | |
Substandard | | — | | | 2,013 | | | — | | | 417 | | | 5 | | | 18 | | | 942 | | | — | | | 3,395 | |
Doubtful | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total commercial and industrial loans | | $ | 82,765 | | | $ | 34,478 | | | $ | 14,794 | | | $ | 9,154 | | | $ | 3,071 | | | $ | 1,708 | | | $ | 97,857 | | | $ | 296 | | | $ | 244,123 | |
| | | | | | | | | | | | | | | | | | |
Consumer: | | | | | | | | | | | | | | | | | | |
Pass | | $ | 5,472 | | | $ | 2,627 | | | $ | 1,211 | | | $ | 411 | | | $ | 1,041 | | | $ | 15,530 | | | $ | 6,488 | | | $ | 37 | | | $ | 32,817 | |
Special Mention | | — | | | — | | | — | | | — | | | — | | | 2 | | | — | | | — | | | 2 | |
Substandard | | 16 | | | — | | | — | | | — | | | 7 | | | 179 | | | — | | | — | | | 202 | |
Doubtful | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total consumer loans | | $ | 5,488 | | | $ | 2,627 | | | $ | 1,211 | | | $ | 411 | | | $ | 1,048 | | | $ | 15,711 | | | $ | 6,488 | | | $ | 37 | | | $ | 33,021 | |
| | | | | | | | | | | | | | | | | | |
Total loans: | | | | | | | | | | | | | | | | | | |
Pass | | $ | 574,069 | | | $ | 355,621 | | | $ | 267,605 | | | $ | 124,512 | | | $ | 118,981 | | | $ | 181,658 | | | $ | 193,323 | | | $ | 3,358 | | | $ | 1,819,127 | |
Special Mention | | 575 | | | — | | | — | | | — | | | 1,841 | | | 737 | | | 267 | | | — | | | 3,420 | |
Substandard | | 453 | | | 3,181 | | | 1,097 | | | 2,424 | | | 823 | | | 8,466 | | | 942 | | | 160 | | | 17,546 | |
Doubtful | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total loans | | $ | 575,097 | | | $ | 358,802 | | | $ | 268,702 | | | $ | 126,936 | | | $ | 121,645 | | | $ | 190,861 | | | $ | 194,532 | | | $ | 3,518 | | | $ | 1,840,093 | |
Age analysis of past due loans, as of the dates indicated, is as follows.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2022 |
(dollars in thousands) | | 30-59 Days Past Due | | 60-89 Days Past Due | | Greater Than 90 Days Past Due | | Total Past Due | | Current Loans | | Total Loans |
Originated loans: | | | | | | | | | | | | |
Real estate loans: | | | | | | | | | | | | |
One- to four-family first mortgage | | $ | 490 | | | $ | 147 | | | $ | 646 | | | $ | 1,283 | | | $ | 298,547 | | | $ | 299,830 | |
Home equity loans and lines | | 40 | | | — | | | — | | | 40 | | | 52,950 | | | 52,990 | |
Commercial real estate | | 3,210 | | | 179 | | | 27 | | | 3,416 | | | 853,096 | | | 856,512 | |
Construction and land | | 345 | | | 160 | | | 147 | | | 652 | | | 284,740 | | | 285,392 | |
Multi-family residential | | — | | | — | | | — | | | — | | | 96,400 | | | 96,400 | |
Total real estate loans | | 4,085 | | | 486 | | | 820 | | | 5,391 | | | 1,585,733 | | | 1,591,124 | |
Other loans: | | | | | | | | | | | | |
Commercial and industrial | | 152 | | | — | | | 210 | | | 362 | | | 338,418 | | | 338,780 | |
Consumer | | 264 | | | 7 | | | 191 | | | 462 | | | 31,059 | | | 31,521 | |
Total other loans | | 416 | | | 7 | | | 401 | | | 824 | | | 369,477 | | | 370,301 | |
Total originated loans | | $ | 4,501 | | | $ | 493 | | | $ | 1,221 | | | $ | 6,215 | | | $ | 1,955,210 | | | $ | 1,961,425 | |
Acquired loans: | | | | | | | | | | | | |
Real estate loans: | | | | | | | | | | | | |
One- to four-family first mortgage | | $ | 1,591 | | | $ | 136 | | | $ | 519 | | | $ | 2,246 | | | $ | 87,540 | | | $ | 89,786 | |
Home equity loans and lines | | 116 | | | — | | | 1 | | | 117 | | | 8,756 | | | 8,873 | |
Commercial real estate | | 294 | | | — | | | 566 | | | 860 | | | 295,165 | | | 296,025 | |
Construction and land | | — | | | — | | | 132 | | | 132 | | | 27,651 | | | 27,783 | |
Multi-family residential | | — | | | — | | | — | | | — | | | 4,188 | | | 4,188 | |
Total real estate loans | | 2,001 | | | 136 | | | 1,218 | | | 3,355 | | | 423,300 | | | 426,655 | |
Other loans: | | | | | | | | | | | | |
Commercial and industrial | | — | | | 225 | | | 38 | | | 263 | | | 38,851 | | | 39,114 | |
Consumer | | 41 | | | 3 | | | 21 | | | 65 | | | 3,491 | | | 3,556 | |
Total other loans | | 41 | | | 228 | | | 59 | | | 328 | | | 42,342 | | | 42,670 | |
Total acquired loans | | $ | 2,042 | | | $ | 364 | | | $ | 1,277 | | | $ | 3,683 | | | $ | 465,642 | | | $ | 469,325 | |
Total loans: | | | | | | | | | | | | |
Real estate loans: | | | | | | | | | | | | |
One- to four-family first mortgage | | $ | 2,081 | | | $ | 283 | | | $ | 1,165 | | | $ | 3,529 | | | $ | 386,087 | | | $ | 389,616 | |
Home equity loans and lines | | 156 | | | — | | | 1 | | | 157 | | | 61,706 | | | 61,863 | |
Commercial real estate | | 3,504 | | | 179 | | | 593 | | | 4,276 | | | 1,148,261 | | | 1,152,537 | |
Construction and land | | 345 | | | 160 | | | 279 | | | 784 | | | 312,391 | | | 313,175 | |
Multi-family residential | | — | | | — | | | — | | | — | | | 100,588 | | | 100,588 | |
Total real estate loans | | 6,086 | | | 622 | | | 2,038 | | | 8,746 | | | 2,009,033 | | | 2,017,779 | |
Other loans: | | | | | | | | | | | | |
Commercial and industrial | | 152 | | | 225 | | | 248 | | | 625 | | | 377,269 | | | 377,894 | |
Consumer | | 305 | | | 10 | | | 212 | | | 527 | | | 34,550 | | | 35,077 | |
Total other loans | | 457 | | | 235 | | | 460 | | | 1,152 | | | 411,819 | | | 412,971 | |
Total loans | | $ | 6,543 | | | $ | 857 | | | $ | 2,498 | | | $ | 9,898 | | | $ | 2,420,852 | | | $ | 2,430,750 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 |
(dollars in thousands) | | 30-59 Days Past Due | | 60-89 Days Past Due | | Greater Than 90 Days Past Due | | Total Past Due | | Current Loans | | Total Loans |
Originated loans: | | | | | | | | | | | | |
Real estate loans: | | | | | | | | | | | | |
One- to four-family first mortgage | | $ | 1,267 | | | $ | 266 | | | $ | 1,151 | | | $ | 2,684 | | | $ | 254,880 | | | $ | 257,564 | |
Home equity loans and lines | | — | | | — | | | — | | | — | | | 48,561 | | | 48,561 | |
Commercial real estate | | 438 | | | — | | | 4,854 | | | 5,292 | | | 682,323 | | | 687,615 | |
Construction and land | | 428 | | | — | | | — | | | 428 | | | 249,802 | | | 250,230 | |
Multi-family residential | | — | | | — | | | — | | | — | | | 87,316 | | | 87,316 | |
Total real estate loans | | 2,133 | | | 266 | | | 6,005 | | | 8,404 | | | 1,322,882 | | | 1,331,286 | |
Other loans: | | | | | | | | | | | | |
Commercial and industrial | | 51 | | | 31 | | | 271 | | | 353 | | | 232,569 | | | 232,922 | |
Consumer | | 289 | | | — | | | 25 | | | 314 | | | 29,247 | | | 29,561 | |
Total other loans | | 340 | | | 31 | | | 296 | | | 667 | | | 261,816 | | | 262,483 | |
Total originated loans | | $ | 2,473 | | | $ | 297 | | | $ | 6,301 | | | $ | 9,071 | | | $ | 1,584,698 | | | $ | 1,593,769 | |
Acquired loans: | | | | | | | | | | | | |
Real estate loans: | | | | | | | | | | | | |
One- to four-family first mortgage | | $ | 1,233 | | | $ | 428 | | | $ | 1,322 | | | $ | 2,983 | | | $ | 90,296 | | | $ | 93,279 | |
Home equity loans and lines | | 141 | | | — | | | — | | | 141 | | | 11,610 | | | 11,751 | |
Commercial real estate | | 54 | | | — | | | 2,139 | | | 2,193 | | | 111,816 | | | 114,009 | |
Construction and land | | — | | | — | | | 241 | | | 241 | | | 9,181 | | | 9,422 | |
Multi-family residential | | — | | | — | | | — | | | — | | | 3,202 | | | 3,202 | |
Total real estate loans | | 1,428 | | | 428 | | | 3,702 | | | 5,558 | | | 226,105 | | | 231,663 | |
Other loans: | | | | | | | | | | | | |
Commercial and industrial | | 81 | | | — | | | 430 | | | 511 | | | 10,690 | | | 11,201 | |
Consumer | | 53 | | | 3 | | | 21 | | | 77 | | | 3,383 | | | 3,460 | |
Total other loans | | 134 | | | 3 | | | 451 | | | 588 | | | 14,073 | | | 14,661 | |
Total acquired loans | | $ | 1,562 | | | $ | 431 | | | $ | 4,153 | | | $ | 6,146 | | | $ | 240,178 | | | $ | 246,324 | |
Total loans: | | | | | | | | | | | | |
Real estate loans: | | | | | | | | | | | | |
One- to four-family first mortgage | | $ | 2,500 | | | $ | 694 | | | $ | 2,473 | | | $ | 5,667 | | | $ | 345,176 | | | $ | 350,843 | |
Home equity loans and lines | | 141 | | | — | | | — | | | 141 | | | 60,171 | | | 60,312 | |
Commercial real estate | | 492 | | | — | | | 6,993 | | | 7,485 | | | 794,139 | | | 801,624 | |
Construction and land | | 428 | | | — | | | 241 | | | 669 | | | 258,983 | | | 259,652 | |
Multi-family residential | | — | | | — | | | — | | | — | | | 90,518 | | | 90,518 | |
Total real estate loans | | 3,561 | | | 694 | | | 9,707 | | | 13,962 | | | 1,548,987 | | | 1,562,949 | |
Other loans: | | | | | | | | | | | | |
Commercial and industrial | | 132 | | | 31 | | | 701 | | | 864 | | | 243,259 | | | 244,123 | |
Consumer | | 342 | | | 3 | | | 46 | | | 391 | | | 32,630 | | | 33,021 | |
Total other loans | | 474 | | | 34 | | | 747 | | | 1,255 | | | 275,889 | | | 277,144 | |
Total loans | | $ | 4,035 | | | $ | 728 | | | $ | 10,454 | | | $ | 15,217 | | | $ | 1,824,876 | | | $ | 1,840,093 | |
Loans greater than 90 days past due and accruing interest were $2,000 and $6,000 at December 31, 2022 and December 31, 2021, respectively.
The Company reviews its significant nonaccrual loans (i.e., loans with balances of $500,000 or greater) for specific impairment in accordance with its allowance for credit loss methodology. If it is determined that it is probable that all amounts due will not be collected when other credit quality indicators are considered, the loan is considered impaired and the Company individually evaluates those loans to determine the expected credit losses. The following table summarizes information pertaining to nonaccrual loans as of dates indicated.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2022 | | December 31, 2021 |
(dollars in thousands) | | Total | | Without Related Allowance | | Total | | Without Related Allowance |
Nonaccrual loans(1): | | | | | | | | |
One- to four-family first mortgage | | $ | 2,300 | | | $ | — | | | $ | 3,575 | | | $ | — | |
Home equity loans and lines | | 34 | | | — | | | 38 | | | — | |
Commercial real estate | | 6,945 | | | 2,914 | | | 8,431 | | | 116 | |
Construction and land | | 315 | | | — | | | 258 | | | — | |
Multi-family residential | | — | | | — | | | — | | | — | |
Commercial and industrial | | 378 | | | 13 | | | 763 | | | 20 | |
Consumer | | 541 | | | 86 | | | 204 | | | — | |
Total | | $ | 10,513 | | | $ | 3,013 | | | $ | 13,269 | | | $ | 136 | |
(1)Nonaccrual acquired loans include PCD loans of $1,530,000 at December 31, 2022. There were no nonaccrual acquired PCD loans at December 31, 2021.
All interest accrued but not received for loans placed on nonaccrual status is reversed against interest income. All payments received while on nonaccrual status are applied against the principal balance of nonaccrual loans. The Company does not recognize interest income while loans are on nonaccrual status.
As of December 31, 2022, the Company was not committed to lend additional funds to any customer whose loan was individually evaluated for impairment.
Collateral Dependent Loans
The Company held loans that were individually evaluated for impairment at December 31, 2022 and 2021 for which the repayments, on the basis of our assessment at the reporting date, were expected to be provided substantially through the operation or sale of the collateral and the borrower was experiencing financial difficulty. The ACL for these collateral-dependent loans is primarily based on the fair value of the underlying collateral at the reporting date. The following describes the types of collateral that secure collateral dependent loans:
•One- to four-family first mortgages are primarily secured by first liens on residential real estate.
•Home equity loans and lines are primarily secured by first and junior liens on residential real estate.
•Commercial real estate loans are primarily secured by office and industrial buildings, warehouses, retail shopping facilities and various special purpose properties, including hotels and restaurants.
•Construction and land loans are primarily secured by residential and commercial properties, which are under construction and/or redevelopment, and by raw land.
•Commercial and industrial loans considered collateral dependent are primarily secured by accounts receivable, inventory and equipment.
The table below summarizes collateral dependent loans and the related ACL as of the periods indicated for which the borrower was experiencing financial difficulty.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2022 | | December 31, 2021 |
(dollars in thousands) | | Loans | | ACL | | Loans | | ACL |
One- to four-family first mortgage | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Home equity loans and lines | | — | | | — | | | — | | | — | |
Commercial real estate | | 4,743 | | | 550 | | | 3,873 | | | 247 | |
Construction and land | | — | | | — | | | — | | | — | |
Multi-family residential | | — | | | — | | | — | | | — | |
Commercial and industrial | | 204 | | | 171 | | | 744 | | | 425 | |
Consumer | | 86 | | | — | | | — | | | — | |
Total | | $ | 5,033 | | | $ | 721 | | | $ | 4,617 | | | $ | 672 | |
Foreclosed Assets and ORE
Foreclosed assets and ORE include real property and other assets that have been acquired as a result of foreclosure, and real property no longer used in the Bank's business. Foreclosed assets and ORE totaled $461,000 and $1,189,000 at December 31, 2022 and December 31, 2021, respectively. These amounts are recorded in accrued interest receivable and other assets on the Consolidated Statements of Financial Condition.
The carrying amount of foreclosed residential real estate properties held at December 31, 2022 and December 31, 2021 totaled $231,000 and $136,000, respectively. Loans secured by single family residential real estate that were in the process of foreclosure at December 31, 2022 and December 31, 2021 totaled $179,000 and $505,000, respectively.
Foreclosed assets and ORE included certain bank buildings that meet the criteria to be classified as assets held for sale. The carrying value of these assets totaled $423,000 at December 31, 2021. During the year ended December 31, 2022, the Company sold the asset held for sale at the recorded carrying value of $423,000.
Troubled Debt Restructurings
During the course of its lending operations, the Company periodically grants concessions to its customers in an attempt to protect as much of its investment as possible and to minimize risk of loss. These concessions may include restructuring the terms of a customer loan to alleviate the burden of the customer’s near-term cash requirements. Loans are TDRs when the Company agrees to restructure a loan to a borrower who is experiencing financial difficulties in a manner that is deemed to be a “concession”. The Company defines a concession as a modification of existing terms granted to a borrower for economic or legal reasons related to the borrower’s financial difficulties that the Company would otherwise not consider. The concession
either is granted through an agreement with the customer or is imposed by a court or by law. Concessions include modifying original loan terms to reduce or defer cash payments required as part of the loan agreement, including but not limited to:
•a reduction of the stated interest rate for the remaining original life of the debt,
•an extension of the maturity date or dates at an interest rate lower than the current market rate for new debt with similar risk characteristics,
•a reduction of the face amount or maturity amount of the debt or
•a reduction of accrued interest receivable on the debt.
In its determination of whether the customer is experiencing financial difficulties, the Company considers numerous indicators, including, but not limited to:
•whether the customer is currently in default on its existing loan, or is in an economic position where it is probable the customer will be in default on its loan in the foreseeable future without a modification,
•whether the customer has declared or is in the process of declaring bankruptcy,
•whether there is substantial doubt about the customer’s ability to continue as a going concern,
•whether, based on its projections of the customer’s current capabilities, the Company believes the customer’s future cash flows will be insufficient to service the debt, including interest, in accordance with the contractual terms of the existing agreement for the foreseeable future and
•whether, without modification, the customer cannot obtain sufficient funds from other sources at an effective interest rate equal to the current market rate for similar debt for a non-troubled debtor.
If the Company concludes that both a concession has been granted and the concession was granted to a customer experiencing financial difficulties, the Company identifies the loan as a TDR. The ACL for loans that are individually evaluated is based on a comparison of the recorded investment in the loan with either the expected cash flows discounted using the loan’s original effective interest rate, observable market price for the loan or the fair value of the collateral underlying certain collateral-dependent loans. Residential, consumer and smaller balance commercial TDRs are included in the Company's pooled-loan analysis to calculate the ACL and, generally, do not have a material impact on the overall ACL.
A summary of information pertaining to loans modified as of the periods indicated is as follows.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31 |
| | 2022 | | 2021 |
(dollars in thousands) | | Number of Contracts | | Pre-modification Outstanding Recorded Investment | | Post-modification Outstanding Recorded Investment | | Number of Contracts | | Pre-modification Outstanding Recorded Investment | | Post-modification Outstanding Recorded Investment |
Troubled debt restructurings: | | | | | | | | | | | | |
One- to four-family first mortgage | | 6 | | | $ | 1,196 | | | $ | 1,188 | | | 2 | | | $ | 77 | | | $ | 73 | |
Home equity loans and lines | | — | | | — | | | — | | | — | | | — | | | — | |
Commercial real estate | | 3 | | | 428 | | | 415 | | | 3 | | | 520 | | | 478 | |
Construction and land | | — | | | — | | | — | | | — | | | — | | | — | |
Multi-family residential | | — | | | — | | | — | | | — | | | — | | | — | |
Commercial and industrial | | 1 | | | 7 | | | 7 | | | 2 | | | 2,397 | | | 2,245 | |
Consumer | | 1 | | | 19 | | | 15 | | | 1 | | | 6 | | | 1 | |
Total | | 11 | | | $ | 1,650 | | | $ | 1,625 | | | 8 | | | $ | 3,000 | | | $ | 2,797 | |
As of December 31, 2022 and 2021, the Company had no unfunded commitments to borrowers whose loan terms had been modified through troubled debt restructurings.
None of the the loans modified during the year ended December 31, 2022 defaulted during the same period.
One commercial real estate loan totaling $342,000 and, two one- to four-family first mortgage loans totaling $73,000 were modified during the year ended December 31, 2021 and defaulted within twelve months of modification. The defaults did not have a significant impact on our allowance for loan losses at December 31, 2021.
6. Loan Servicing
Mortgage loans sold to and serviced for others are not included in the accompanying statements of financial condition. The unpaid principal balances of these loans as of December 31 of the years indicated are summarized as follows:
| | | | | | | | | | | | | | |
(dollars in thousands) | | 2022 | | 2021 |
Mortgage loans sold to Federal Home Loan Mortgage Corporation without recourse | | $ | 1,465 | | | $ | 1,798 | |
Mortgage loans sold to Federal National Mortgage Association without recourse | | 43,059 | | | 54,429 | |
Mortgage loans sold to Federal Home Loan Bank without recourse | | 151 | | | 169 | |
Total, end of period | | $ | 44,675 | | | $ | 56,396 | |
The Company recorded servicing assets related to mortgage loans sold and serviced at fair value and amortized the associated servicing assets over the period of estimated net servicing income associated with each loan. Changes in the carrying value of servicing assets are recorded in service fees and charges on the Consolidated Statements of Income. The Company no longer retains servicing rights for mortgage loans sold. Activity related to servicing assets for the years ended December 31, 2022, 2021 and 2020 is summarized as follows.
| | | | | | | | | | | | | | | | | | | | |
(dollars in thousands) | | 2022 | | 2021 | | 2020 |
Balance, beginning of period | | $ | — | | | $ | — | | | $ | 161 | |
Amortization | | — | | | — | | | (161) | |
Balance, end of period | | — | | | — | | | — | |
Fair value, end of period | | $ | — | | | $ | — | | | $ | — | |
Custodial and escrow account balances maintained in connection with the foregoing loan servicing arrangements were $1,036,000 and $1,078,000 as of December 31, 2022 and 2021, respectively.
7. Office Properties and Equipment
Office properties and equipment consisted of the following at December 31 of the years indicated.
| | | | | | | | | | | | | | |
(dollars in thousands) | | 2022 | | 2021 |
Land | | $ | 13,709 | | | $ | 13,919 | |
Buildings and improvements | | 37,732 | | | 36,323 | |
Furniture and equipment | | 18,189 | | | 16,486 | |
Total office properties and equipment | | 69,630 | | | 66,728 | |
Less accumulated depreciation | | 26,070 | | | 23,186 | |
Total office properties and equipment, net | | $ | 43,560 | | | $ | 43,542 | |
Depreciation expense for the years ended December 31, 2022, 2021 and 2020 was $3,464,000, $3,084,000 and $3,063,000, respectively.
The Company determined that certain buildings met the criteria to be classified as assets held for sale. The carrying values of such assets were $0 and $423,000 at December 31, 2022 and 2021, respectively, and are reported as foreclosed assets and ORE. Foreclosed assets and ORE are recorded within accrued interest receivable and other assets in the Statements of Financial Condition as of December 31, 2022 and 2021. For more information on the Company's policy on foreclosed assets and ORE, refer to Note 2, Summary of Significant Accounting Policies. The Company leases space under non-cancelable operating leases agreements for certain bank branch facilities with remaining lease terms of 1 to 13 years. Certain lease arrangements contain extension options which typically range from 5 to 10 years at the fair market rental rates. The lease and asset liability considers renewal options when they are reasonably certain of being exercised. Refer to Note 2, Summary of Significant Accounting Policies.
The following table summarizes net lease cost and selected other information related to operating leases at December 31 of the years indicated.
| | | | | | | | | | | | | | | | | | | | |
(dollars in thousands) | | 2022 | | 2021 | | 2020 |
Net lease cost: | | | | | | |
Operating lease cost | | $ | 1,197 | | | $ | 513 | | | $ | 483 | |
Variable lease cost | | — | | | — | | | — | |
Net lease cost | | $ | 1,197 | | | $ | 513 | | | $ | 483 | |
| | | | | | |
Selected other operating lease information | | | | | | |
Weighted average remaining lease term (years) | | 6.7 | | 9.3 | | 9.6 |
Weighted average discount rate | | 5.7% | | 5.9% | | 6.9% |
The following table summarizes the maturity of remaining lease liabilities.
| | | | | |
Years Ending December 31, | (dollars in thousands) |
2023 | $ | 1,320 | |
2024 | 1,206 | |
2025 | 877 | |
2026 | 890 | |
2027 | 904 | |
Thereafter | 9,967 | |
Total future minimum lease payments | 15,164 | |
Less: amount representing interest | (5,842) | |
Present value of net future minimum lease payments | $ | 9,322 | |
8. Goodwill and Intangibles
Goodwill and other intangible assets are presented in the table below. Changes in carrying amount of the Company’s goodwill and core deposit intangible (“CDI”) for the years ended December 31, 2022, 2021 and 2020 were as follows. | | | | | | | | | | | | | | |
(dollars in thousands) | | Goodwill | | CDI |
Balance, December 31, 2019 | | $ | 58,488 | | | $ | 5,984 | |
| | | | |
Amortization of intangibles | | — | | | (1,360) | |
Balance, December 31, 2020 | | 58,488 | | | 4,624 | |
Amortization of intangibles | | — | | | (1,163) | |
Balance, December 31, 2021 | | 58,488 | | | 3,461 | |
Friendswood acquisition | | 23,029 | | | 4,597 | |
Amortization of intangibles | | — | | | (1,602) | |
Balance, December 31, 2022 | | $ | 81,517 | | | $ | 6,456 | |
The weighted-average amortization period for CDI acquired is 11 years. The Company completed its annual impairment test of goodwill and other intangible assets as of December 31, 2022. The evaluation did not indicate impairment on its goodwill or other intangible assets.
Estimated future amortization expense for CDI remaining at December 31, 2022, was as follows.
| | | | | | | | |
(dollars in thousands) | | Amount |
2023 | | $ | 1,571 | |
2024 | | 1,328 | |
2025 | | 1,087 | |
2026 | | 851 | |
2027 | | 618 | |
Thereafter | | 1,001 | |
Total CDI | | $ | 6,456 | |
| | |
9. Deposits
The Company’s deposits consisted of the following major classifications as of December 31 of the years indicated.
| | | | | | | | | | | | | | |
(dollars in thousands) | | 2022 | | 2021 |
Demand deposit accounts | | $ | 904,301 | | | $ | 766,385 | |
Savings | | 305,871 | | | 285,728 | |
Money market accounts | | 423,990 | | | 371,478 | |
NOW accounts | | 663,574 | | | 792,919 | |
Certificates of deposit | | 335,445 | | | 319,339 | |
Total deposits | | $ | 2,633,181 | | | $ | 2,535,849 | |
As of December 31, 2022, the scheduled maturities of the Company’s certificates of deposit were as follows.
| | | | | | | | |
(dollars in thousands) | | Amount |
2023 | | $ | 259,051 | |
2024 | | 56,710 | |
2025 | | 8,328 | |
2026 | | 5,689 | |
2027 | | 3,506 | |
Thereafter | | 2,161 | |
Total certificates of deposit | | $ | 335,445 | |
In January 2022, the Bank sold its former branch office in Vicksburg, Mississippi, and transferred approximately $14.7 million in deposit liabilities from that office. The amount of our total uninsured deposits (that is, deposits in excess of the FDIC insurance limit) was $830,932,000 and $820,000,000 at December 31, 2022 and December 31, 2021, respectively. As of December 31, 2022 and 2021, the aggregate amount of certificates of deposit with balances of $250,000 or more was $69,442,000 and $63,221,000, respectively.
10. Other Borrowings
Other borrowings at December 31, 2022 and 2021 included a $5,539,000 note payable with a rate of 3.83% on the Company’s investment in a new market tax credit entity. The note payable is a 20-year leverage loan with interest-only payments for the first seven years. The note was originated in October 2018.
11. Subordinated Debt
On June 30, 2022, the Company issued $55,000,000 in aggregate principal amount of its 5.75% Fixed-to-Floating Rate Subordinated Notes (the "Notes") due 2032. The Notes were issued at a price equal to 100% of the aggregate principal amount. The Notes have a stated maturity date of June 30, 2032 and bear interest at a fixed rate of 5.75% per year from and including the issue date to but excluding June 30, 2027. From June 30, 2027, the Notes bear interest at a floating rate equal to the then current three-month term secured overnight financing rate (“SOFR”), plus 282 basis points. The Notes may be redeemed by the Company, in whole or in part, on or after June 30, 2027. The Notes are intended to qualify as Tier 2 capital for regulatory purposes.
The carrying value of subordinated debt was $54,013,000 at December 31, 2022. The subordinated debt was recorded net of issuance costs of $1,107,000 at December 31, 2022, which is being amortized using the straight-line method over five years.
12. Short-term FHLB Advances
As of December 31, 2022 and 2021, the Company had short-term FHLB advances of $155,000,000 and $0, respectively. For the years ended December 31, 2022 and 2021, the average volume of short-term FHLB advances carried by the Company was $7,976,000 and $0, respectively.
Collateral for short and long-term FHLB advances is secured through a blanket lien evidenced by the Company’s pledge of first mortgage collateral, demand deposit accounts, capital stock and certain other assets pursuant to the “Advances, Collateral Pledge and Security Agreement.” Under this collateral pledge agreement, the Bank must meet all statutory and regulatory capital standards and must meet all FHLB credit underwriting standards. Management believes that the Bank was in compliance with all such requirements as of December 31, 2022 and 2021.
As of December 31, 2022 and 2021, the Company had $937,439,000 and $810,448,000, respectively, of additional FHLB advances available based on collateral pledged. As of December 31, 2022 and 2021, the Company had $1,032,745,000 and $818,764,000, respectively, of loans pledged through the Company’s blanket lien.
13. Long-term FHLB Advances
As of December 31, 2022 and 2021, the Company’s long-term FHLB advances totaled $21,213,000 and $26,046,000, respectively. The following table summarizes long-term advances as of December 31, 2022.
| | | | | | | | | | | | | | |
(dollars in thousands) | | Amount | | Weighted Average Rate |
Fixed rate advances maturing in: | | | | |
2023 | | $ | 3,012 | | | 1.36 | % |
2024 | | 4,176 | | | 1.73 | |
2025 | | 10,609 | | | 1.60 | |
2026 | | 3,416 | | | 1.61 | |
| | | | |
| | | | |
Total long-term FHLB advances | | $ | 21,213 | | | 1.59 | % |
14. Derivatives and Hedging Activities
Risk Management Objective of Using Derivatives
The Company is exposed to certain risk arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its assets and liabilities and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates.
The Company’s existing credit derivatives result from loan participation arrangements, therefore, are not used to manage interest rate risk in the Company’s assets or liabilities. The Company occasionally enters into credit risk participation agreements with counterparty banks to accept a portion of the credit risk related to interest rate swaps. The agreements, which are typically executed in conjunction with a participation in a loan with the same customer, allow customers to execute an interest rate swap with one bank while allowing for the distribution of the credit risk among participating members. Collateral used to support the credit risk for the underlying lending relationship is also available to offset the risk of credit risk participations and customer derivative positions.
Cash Flow Hedges of Interest Rate Risk
The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. As part of its efforts to accomplish this objective, during the second quarter of 2020, the Company entered into certain interest rate swap agreements as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. During 2022 and 2021, such derivatives were used to hedge the variable cash flows associated with existing variable rate liabilities.
For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in Accumulated Other Comprehensive Income and subsequently reclassified into interest expense in the same period(s) during which the hedged transaction affects earnings. Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable rate liabilities. During the next twelve months, the Company estimates that an additional $1,771,000 will be reclassified as additional interest income.
Non-designated Hedges
The Company’s existing credit derivatives result from participations in interest rate swaps provided by external lenders as part of loan participation arrangements, therefore, are not used to manage interest rate risk in the Company’s assets or liabilities. Derivatives not designated as hedges are not speculative and result from a service the Company provides to certain lenders which participate in loans. For derivative instruments that are not designated as hedging instruments, changes in the fair value of the derivatives are recognized in earnings immediately.
Fair Values of Derivative Instruments
The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the Consolidated Statement of Financial Condition.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2022 | | December 31, 2021 |
| | Derivative Assets(1) | | Derivative Liabilities(1) | | Derivative Assets(1) | | Derivative Liabilities(1) |
(dollars in thousands) | | Notional Amount | | Fair Value | | Notional Amount | | Fair Value | | Notional Amount | | Fair Value | | Notional Amount | | Fair Value |
Derivatives designated as hedging instruments: | | | | | | | | | | | | | | | | |
Interest rate swaps - variable rate liabilities | | $ | 40,000 | | | $ | 5,144 | | | $ | — | | | $ | — | | | $ | 40,000 | | | $ | 1,589 | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | | |
Derivatives not designated as hedging instruments: | | | | | | | | | | | | | | | | |
Risk participation agreements | | — | | | — | | | 12,036 | | | 9 | | | — | | | — | | | 10,000 | | | 43 | |
| | | | | | | | | | | | | | | | |
Netting adjustments | | | | — | | | | | — | | | | | — | | | | | — | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Net derivative amounts | | | | $ | 5,144 | | | | | $ | 9 | | | | | $ | 1,589 | | | | | $ | 43 | |
(1)Derivative assets and liabilities are reported at fair value in accrued interest receivable and other assets and accrued interest payable and other liabilities, respectively, in the Consolidated Statements of Financial Condition.
At December 31, 2022 and 2021, accumulated unrealized gains, net of taxes, on derivative instruments totaled $3,961,000 and $1,259,000, respectively.
Effect of Cash Flow Hedge Accounting on Accumulated Other Comprehensive Income
The following tables below presents the effect of cash flow hedge accounting on Accumulated Other Comprehensive (Loss) Income as of December 31, 2022 and 2021.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2022 |
| | Amount of Gain Recognized in OCI | | Location of Gain Reclassified from AOCI into Income | | Amount of Gain Reclassified from AOCI into Income |
(dollars in thousands) | | Total | | Included Component | | | Total | | Included Component |
Derivatives in cash flows hedging relationships: | | | | | | | | | | |
Interest rate swaps - variable rate liabilities | | $ | 3,991 | | | $ | 3,991 | | | Interest income | | $ | 572 | | | $ | 572 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, 2021 |
| | Amount of Gain Recognized in OCI | | Location of Gain Reclassified from AOCI into Income | | Amount of Loss Reclassified from AOCI into Income |
(dollars in thousands) | | Total | | Included Component | | | Total | | Included Component |
Derivatives in cash flows hedging relationships: | | | | | | | | | | |
Interest rate swaps - variable rate liabilities | | $ | 1,310 | | | $ | 1,310 | | | Interest expense | | $ | (64) | | | $ | (64) | |
Effect of Cash Flow Hedge Accounting on the Consolidated Statements of Income
The following tables below presents the effect of the Company’s derivative financial instruments on the Consolidated Statements of Income as of December 31, 2022 and 2021.
| | | | | | | | | | | | | | |
(dollars in thousands) | | Location of Gain Reclassified from AOCI into Income | | For the Year Ended December 31, 2022 |
Effects of cash flow hedging | | | | |
Interest rate swaps - variable rate liabilities | | Interest income | | $ | 572 | |
| | | | | | | | | | | | | | |
(dollars in thousands) | | Location of Loss Reclassified from AOCI into Income | | For the Year Ended December 31, 2021 |
Effects of cash flow hedging | | | | |
Interest rate swaps - variable rate liabilities | | Interest expense | | $ | (64) | |
Effect of Derivatives Not Designated as Hedging Instruments on the Consolidated Statements of Income
The table below presents the effect of the Company’s derivative financial instruments that are not designated as hedging instruments on the Consolidated Statements of Income as of December 31, 2022 and 2021.
| | | | | | | | | | | | | | |
(dollars in thousands) | | Location of Income Recognized on Non-designated Hedges | | For the Year Ended December 31, 2022 |
Effects of non-designated hedges | | | | |
Risk participation agreements | | Other noninterest income | | $ | 74 | |
| | | | | | | | | | | | | | |
(dollars in thousands) | | Location of Income Recognized on Non-designated Hedges | | For the Year Ended December 31, 2021 |
Effects of non-designated hedges | | | | |
Risk participation agreements | | Other noninterest income | | $ | 16 | |
Credit-risk-related Contingent Features
The Company has agreements with each of its derivative counterparties that contain a provision where if the Company (either) defaults (or is capable of being declared in default) on any of its indebtedness, then the Company could also be declared in default on its derivative obligations.
The Company has agreements with certain of its derivative counterparties that contain a provision where if the Company fails to maintain its status as a well or adequately capitalized institution, then the Company could be required to post additional collateral.
As of December 31, 2022, there were no derivatives with credit-risk-related contingent features in a net liability position. Such derivatives are measured at fair value, which includes accrued interest but excludes any adjustment for nonperformance risk. If the Company had breached any provisions at December 31, 2022, it would not have been required to settle any obligations under the agreements since the termination value was $0.
15. Income Taxes
The Company files federal income tax returns on a calendar year basis. Income tax expense for the years indicated is summarized as follows:
| | | | | | | | | | | | | | | | | | | | |
(dollars in thousands) | | 2022 | | 2021 | | 2020 |
Current | | $ | 9,792 | | | $ | 9,754 | | | $ | 8,030 | |
Deferred | | (882) | | | 2,544 | | | (1,588) | |
NMTC | | (480) | | | (480) | | | (400) | |
Total income tax expense | | $ | 8,430 | | | $ | 11,818 | | | $ | 6,042 | |
The components of the Company’s net deferred tax asset, which is included in accrued interest receivable and other assets in the accompanying Statement of Financial Condition at December 31 of the years indicated are as follows:
| | | | | | | | | | | | | | |
(dollars in thousands) | | 2022 | | 2021 |
Deferred tax assets: | | | | |
Provision for loan losses | | $ | 6,581 | | | $ | 4,810 | |
Discount on purchased loans | | 1,277 | | | 584 | |
Salary continuation plan | | 676 | | | 678 | |
Mortgage servicing rights | | 47 | | | 64 | |
Deferred compensation | | 5 | | | 5 | |
Stock-based compensation | | 262 | | | 220 | |
Unrealized loss on securities available for sale | | 11,501 | | | 137 | |
Net operating loss acquired | | 499 | | | — | |
| | | | |
| | | | | | | | | | | | | | |
(dollars in thousands) | | 2022 | | 2021 |
Other | | 382 | | | 83 | |
Deferred tax assets | | $ | 21,230 | | | $ | 6,581 | |
Deferred tax liabilities: | | | | |
FHLB stock dividends | | $ | (78) | | | $ | (67) | |
Accumulated depreciation | | (3,362) | | | (3,369) | |
Intangible assets | | (1,123) | | | (439) | |
| | | | |
| | | | |
Derivatives | | (1,053) | | | (335) | |
NMTC | | (130) | | | (101) | |
Other | | (46) | | | (23) | |
Deferred tax liabilities | | (5,792) | | | (4,334) | |
Net deferred tax asset | | $ | 15,438 | | | $ | 2,247 | |
For the years ended December 31, 2022, 2021 and 2020, the Company’s provision for federal income taxes differed from the amount computed by applying the federal income tax statutory rate of 21% on income from operations as indicated in the following analysis:
| | | | | | | | | | | | | | | | | | | | |
(dollars in thousands) | | 2022 | | 2021 | | 2020 |
Federal tax based on statutory rate | | $ | 8,994 | | | $ | 12,773 | | | $ | 6,544 | |
State tax based on statutory rate | | 151 | | | 97 | | | 42 | |
(Decrease) increase resulting from: | | | | | | |
NMTC | | (480) | | | (480) | | | (400) | |
Effect of tax-exempt income | | (276) | | | (196) | | | (136) | |
Changes in the cash surrender value of bank owned life insurance | | (192) | | | (547) | | | (209) | |
Nondeductible merger-related expenses | | 41 | | | 30 | | | — | |
Nondeductible share based compensation expense | | 188 | | | 180 | | | 162 | |
Exercise of stock options | | (37) | | | (23) | | | (8) | |
Other | | 41 | | | (16) | | | 47 | |
Income tax expense | | $ | 8,430 | | | $ | 11,818 | | | $ | 6,042 | |
Effective tax rate | | 19.8 | % | | 19.6 | % | | 19.6 | % |
Retained earnings as of December 31, 2022 and 2021, included $5,837,000 for which no deferred federal income tax liability has been recognized. This amount represents an allocation of income to bad debt deductions for tax purposes only. Reductions of amounts so allocated for purposes other than bad debt losses would create income for tax purposes only, which would be subject to the then-current federal statutory income tax rate. The unrecorded deferred income tax liability on the above amount was $1,985,000 as of December 31, 2022 and 2021. Current accounting standards do not require the accrual of this deferred tax amount to be recorded unless it is probable that the reserve (for tax purposes) will be significantly depleted by loan losses deductible for tax purposes in the future. Based on current estimates of losses within the Company’s loan portfolio, accrual of the deferred tax liability associated with this reserve was not required as of December 31, 2022 and 2021.
16. Commitments
Standby letters of credit represent commitments by the Bank to meet the obligations of certain customers if called upon. The Bank normally secures its outstanding standby letters of credit with deposits from the customer. Additionally, in the normal course of business, there were various other commitments and contingent liabilities which are not reflected in the financial statements. Loan commitments are single-purpose commitments to lend which will be funded and reduced according to specified repayment schedules. Most of these commitments have maturities of less than one year.
The following table summarizes our outstanding commitments to originate loans and to advance additional amounts pursuant to outstanding letters of credit, lines of credit, and the undisbursed portion of construction loans as of December 31 of the years indicated.
| | | | | | | | | | | | | | |
| | Contract Amount |
(dollars in thousands) | | 2022 | | 2021 |
Standby letters of credit | | $ | 6,969 | | | $ | 5,075 | |
Available portion of lines of credit | | 367,167 | | | 320,611 | |
Undisbursed portion of loans in process | | 194,182 | | | 142,048 | |
Commitments to originate loans | | 164,682 | | | 153,487 | |
The Bank uses the same credit policies in making commitments as it does for on-balance-sheet instruments. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management’s credit evaluation of the customer. Collateral held varies but may include certificates of deposit, property, plant and equipment and income-producing properties. There are no commitments which present an unusual risk to the Bank, and no material losses are anticipated as a result of these transactions.
17. Regulatory Matters
The Bank is subject to regulatory capital requirements administered by the OCC. 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 financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of its assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
In July 2013, the Federal bank regulatory agencies issued a final rule that revised their risk-based capital requirements and the method for calculating components of capital and of computing risk-weighted assets to make them consistent with agreements that were reached by the Basel Committee on Banking Supervision and certain provisions of the Dodd-Frank Act. The rule established a common equity Tier 1 minimum capital requirement, increased the minimum capital ratios and assigned a higher risk weight to certain assets based on the risk associated with these assets. The final rule also included a capital conservation buffer which was phased in over a five-year period until it reached 2.5% on January 1, 2019.
Dividends paid by the Bank are the primary source of funds available to the Company. Banking regulations limit the amount of dividends that may be paid without prior approval of the regulatory authorities.
Quantitative measures established by regulation to ensure capital adequacy requires the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 risk-based capital (as defined) to average assets and risk-weighted assets (as defined). Management believes, as of December 31, 2022 and 2021, that the Bank met all capital adequacy requirements to which it was subject.
As of December 31, 2022 and 2021, the most recent notification from the OCC categorized the Bank as “well capitalized” under the OCC regulatory classification framework. To be categorized as “well capitalized,” the Bank must maintain minimum Total risk-based, Tier 1 risk-based, Tier 1 leverage and common equity Tier 1 ratios as set forth in the following table. There are no conditions or events since that notification that management believes have changed the Bank’s category.
The following tables present actual and required capital ratios for the the Bank under the Basel III Capital Rules. The minimum required capital amounts presented include the minimum required capital levels as of December 31, 2022 and 2021 based on the phase-in provisions of the Basel III Capital Rules as of January 1, 2019 when the Basel III Capital Rules were fully phased-in. Capital levels required to be considered well capitalized are based upon prompt corrective action regulations, as amended to reflect the changes under the Basel III Capital Rules.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Actual | | Minimum Capital Required – Basel III Fully Phased-In | | To Be Well Capitalized Under Prompt Corrective Action Provisions |
(dollars in thousands) | | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio |
December 31, 2022 | | | | | | | | | | | | |
Company: | | | | | | | | | | | | |
Tier 1 risk-based capital | | $ | 281,288 | | | 10.85 | % | | $ | 220,269 | | | 8.50 | % | | N/A | | N/A |
Total risk-based capital | | 366,243 | | | 14.13 | | | 272,096 | | | 10.50 | | | N/A | | N/A |
Tier 1 leverage capital | | 281,288 | | | 9.12 | | | 123,428 | | | 4.00 | | | N/A | | N/A |
| | | | | | | | | | | | |
Bank: | | | | | | | | | | | | |
Common equity Tier 1 capital | | $ | 321,245 | | | 12.43 | % | | $ | 180,892 | | | 7.00 | % | | $ | 167,971 | | | 6.50 | % |
Tier 1 risk-based capital | | 321,245 | | | 12.43 | | | 219,654 | | | 8.50 | | | 206,733 | | | 8.00 | |
Total risk-based capital | | 352,187 | | | 13.63 | | | 271,337 | | | 10.50 | | | 258,417 | | | 10.00 | |
Tier 1 leverage capital | | 321,245 | | | 10.43 | | | 123,150 | | | 4.00 | | | 153,937 | | | 5.00 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Actual | | Minimum Capital Required – Basel III Fully Phased-In | | To Be Well Capitalized Under Prompt Corrective Action Provisions |
(dollars in thousands) | | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio |
December 31, 2021 | | | | | | | | | | | | |
Bank: | | | | | | | | | | | | |
Common equity Tier 1 capital | | $ | 280,788 | | | 14.66 | % | | $ | 134,089 | | | 7.00 | % | | $ | 124,511 | | | 6.50 | % |
Tier 1 risk-based capital | | 280,788 | | | 14.66 | | | 162,822 | | | 8.50 | | | 153,245 | | | 8.00 | |
Total risk-based capital | | 303,692 | | | 15.85 | | | 201,134 | | | 10.50 | | | 191,556 | | | 10.00 | |
Tier 1 leverage capital | | 280,788 | | | 9.77 | | | 114,932 | | | 4.00 | | | 143,666 | | | 5.00 | |
18. Benefit Plans
401(k) and Profit Sharing Plan
The Company’s 401(k) defined contribution plan allows its participants to contribute up to 75% of their pretax earnings on a tax-deferred basis up to the statutory limit. The Company’s matching contributions are equal to 100% of the employee’s contributions up to 2%, plus 50% of the employees’ contributions over 2% but not over 6% of the employee’s pay. For the years ended December 31, 2022, 2021 and 2020, the Company made contributions of $1,255,000, $974,000 and $964,000, respectively, in connection with the plan, which is included in compensation and benefits expense in the accompanying Consolidated Statements of Income.
Employee Stock Ownership Plan
In 2008, the Company established an employee stock ownership plan (“ESOP”) for the benefit of all eligible employees of the Company. The leveraged ESOP is accounted for in accordance with the requirements of ASC 718, Compensation – Stock Compensation.
Employees of the Bank who have been employed for a six month period and who have attained age 21 are eligible to participate in the ESOP. It is anticipated that contributions will be made to the ESOP in amounts necessary to amortize the debt to the Company over a period of 20 years.
Under ASC 718, unearned ESOP shares are not considered outstanding and are shown as a reduction of shareholders’ equity as unearned compensation. Dividends on unallocated ESOP shares are considered to be compensation expense. The Company recognizes compensation cost equal to the fair value of the ESOP shares during the periods in which they are committed to be released. To the extent that the fair value of the Company’s ESOP shares differs from the cost of such shares, the differential is credited to shareholders’ equity. The Company receives a tax deduction equal to the cost of the
shares released. As the loan is internally leveraged, the loan receivable from the ESOP to the Company is not reported as an asset nor is the debt of the ESOP shown as a Company liability.
Compensation cost related to the ESOP was $1,096,000, $1,052,000 and $726,000 for the years ended December 31, 2022, 2021 and 2020, respectively. The fair value of the unearned ESOP shares, using the closing quoted market price per share as of year-end, was approximately $8,219,000 and $10,005,000 as of December 31, 2022 and 2021, respectively. A summary of the ESOP share allocation as of December 31, 2022 and 2021 follows.
| | | | | | | | | | | | | | |
| | 2022 | | 2021 |
Shares allocated, beginning of year | | 336,226 | | | 318,021 | |
Shares allocated during the year | | 35,708 | | | 35,708 | |
Shares distributed during the year | | (10,739) | | | (17,503) | |
Allocated shares held by ESOP trust as of year end | | 361,195 | | | 336,226 | |
Unallocated shares | | 205,318 | | | 241,026 | |
Total ESOP shares | | 566,513 | | | 577,252 | |
Salary Continuation Agreements
As a supplement to its 401(k) retirement plan, the Bank has entered into nonqualified salary continuation agreements with four executive officers of the Bank. The Bank's 2007 salary continuation agreement with its Chief Executive Officer (“CEO”) provides that the executive will receive a stated annual benefit for a period of ten years upon retirement from the Bank. Benefits under the 2007 agreement vested over ten years, with 100% of this benefit having vested in 2017. Also, effective May 20, 2019, the Bank entered into a new salary continuation agreement with its CEO, which will provide the CEO with an additional stated annual benefit for a period of ten years upon his retirement after attaining age 65. The CEO is 100% vested in his normal retirement benefit under the 2019 agreement. In the event of early retirement, the Bank will pay the CEO his vested benefits, in a lump sum on the first day of the month following the separation from service.
On May 23, 2022, the Bank amended the salary continuation agreement with its Chief Risk Officer ("CRO"). The agreement provides that the executive will be entitled to a stated annual benefit, distributed monthly, for a period of ten years upon retirement from the Bank after attaining age 65. Benefits under the agreement became fully vested in August 2019. In the event of early retirement, the Bank shall pay the executive his vested benefits in 120 equal monthly installments upon attaining age 65. In the event of a separation from service within 24 months following a change in control of the Bank prior to reaching age 65, the Bank shall pay the executive officer an amount equal to the greater of (i) his accrued benefits as of the end of the year immediately preceding the separation from service or (ii) a stated amount. This amount will be paid in a lump sum on the first day of the month following the separation from service.
On May 23, 2022 the Bank also amended the salary continuation agreement with its Chief Operations Officer ("COO"). The agreement provides that the COO will be entitled to a stated annual benefit, distributed monthly, for a period of ten years upon retirement from the Bank after attaining age 65. The retirement benefits vest over a period of ten years or until the executive officer reaches age 65. In the event of early retirement, the Bank will pay the executive officer his vested benefits in a lump sum on the first day of the month following the separation from service. In the event of a separation from service within 24 months following a change in control of the Bank prior to reaching age 65, the Bank shall pay the executive officer an amount equal to the greater of (i) his accrued benefits as of the end of the year immediately preceding the separation from service or (ii) a stated amount. This amount will be paid in a lump sum on the first day of the month following the separation from service.
On May 23, 2022, the Bank entered into a salary continuation agreement with its Chief Financial Officer ("CFO"). The agreement provides that the CFO will be entitled to a stated annual benefit, distributed monthly, for a period of ten years upon retirement from the Bank after attaining age 65. The retirement benefits vest over a period of ten years or until the executive officer reaches age 65. In the event of early retirement, the Bank will pay the executive officer his vested benefits in a lump sum on the first day of the month following the separation from service. If the executive has a separation from service within 24 months following a change in control of the Bank prior to reaching age 65, the Bank shall pay the executive officer an amount equal to the greater of (i) his accrued benefits as of the end of the year immediately preceding the separation from service or (ii) a stated amount. This amount will be paid in a lump sum on the first day of the month following the separation from service.
Britton & Koontz Capital Corporation had two salary continuation agreements funded in the amount of $465,000 at the time of acquisition in February 2014. Former executives of Britton & Koontz Capital Corporation or their beneficiaries are being paid over 15 years from the time of acquisition in February 2014. Louisiana Bancorp, Inc. also had two salary continuation
agreements funded in the amount of $1,200,000 at the time of acquisition in September 2015. The Bank will pay former executives of Louisiana Bancorp, Inc. or their beneficiary within 10 years subsequent to the time of the acquisition in September 2015. SMB had a salary continuation agreement for an executive officer related to its acquisition of American Bank in 2007. The former executive of American Bank or his beneficiaries are being paid $358,000 over 14 years from the time of the SMB acquisition in December 2017.
The Company had an outstanding liability totaling $3,220,000 and $3,229,000 as of December 31, 2022 and 2021, respectively, in connection with the agreements, which is included in accrued interest payable and other liabilities in the accompanying statements of financial condition.
19. Stock-based Payment Arrangements
The Company’s shareholders approved the 2009 Stock Option Plan (the “SOP”) and the 2009 Recognition and Retention Plan (the “RRP”) on May 12, 2009 to provide incentives and awards for directors, officers, and other key employees of the Company and its subsidiary. A maximum of 892,687 shares of Company common stock were reserved for issuance upon the exercise of options granted under the SOP. A total of 357,075 shares of the Company’s outstanding common stock, or 4% of total shares outstanding at the time the RRP was implemented, were approved for restricted stock awards under the RRP. The SOP and RRP expired February 2019. Expiration of the SOP and RRP did not affect any unvested options or awards granted. On May 6, 2014, the Company’s shareholders approved the 2014 Equity Incentive Plan (the “2014 Plan”). The 2014 Plan authorizes the granting of stock options, restricted stock units and other awards to directors, officers and other key employees. The aggregate number of shares of our common stock reserved and available for issuance pursuant to awards granted under the 2014 Plan is 350,000. On May 5, 2021, the Company’s shareholders approved the 2021 Equity Incentive Plan (the “2021 Plan”). The 2021 Plan authorizes the granting of stock options, restricted stock units and other awards to directors, officers and other key employees. The aggregate number of shares of our common stock reserved and available for issuance pursuant to awards granted under the 2021 Plan is 435,000. These plans are administered by a committee appointed by the Board of Directors, which selects persons eligible to receive awards and determines the number of shares and/or options subject to each award, the terms, conditions and other provisions of the awards. In accordance with ASC 718, the Company adopted a fair value based method of accounting for employee stock compensation plans, whereby compensation cost is measured as of the grant date based on the fair value of the award and is recognized over the service period, which is usually the vesting period.
Stock Option Plans
The Company has issued stock options under the SOP and the 2014 Plan to directors, officers and other key employees. The option exercise price cannot be less than the fair value of the underlying common stock as of the date of the option grant and the maximum option term cannot exceed ten years. All stock options granted have been issued with vesting periods of five years with accelerated vesting provided under certain circumstances. As of December 31, 2022, options to acquire an aggregate of 181,383 shares were outstanding under the SOP and the 2014 Plan.
The fair value of each option granted is estimated on the grant date using the Black-Scholes option pricing model. This model requires management to make certain assumptions, including the expected life of the option, the risk-free rate of interest, the expected volatility and the expected dividend yield. The following weighted-average assumptions were used for option awards issued during the years ended December 31:
| | | | | | | | | | | |
| 2022 | 2021 | 2020 |
Expected dividends | 2.24% | 2.50% | 3.95% |
Expected volatility | 34.34% | 33.77% | 24.65% |
Risk-free interest rate | 1.8% | 1.2% | 7.0% |
Expected term (in years) | 6.5 | 6.5 | 6.5 |
As of December 31, 2022, there was $358,000 of unrecognized compensation cost related to stock options which is expected to be recognized over a period of 2.9 years.
For the years ended December 31, 2022, 2021 and 2020, the Company recognized $187,000, $220,000 and $216,000, respectively, in compensation cost related to stock options, which is included in compensation and benefits expense in the accompanying consolidated statements of income.
The following table represents stock option activity for the years indicated.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Options | | Number of Options | | Weighted-Average Exercise Price | | Weighted-Average Grant Date Fair Value | | Weighted-Average Remaining Contractual Term (Years) |
Outstanding as of December 31, 2019 | | 180,585 | | | $ | 30.33 | | | $ | 6.57 | | | |
Granted | | 35,850 | | | 22.34 | | | 3.03 | | | |
Exercised | | (4,625) | | | 21.33 | | | 5.30 | | | |
Forfeited | | (7,270) | | | 29.47 | | | 5.58 | | | |
Outstanding as of December 31, 2020 | | 204,540 | | | $ | 29.17 | | | $ | 6.02 | | | 6.2 |
Granted | | 37,970 | | | 36.84 | | | 9.58 | | | |
Exercised | | (19,941) | | | 24.72 | | | 5.20 | | | |
Forfeited | | (8,712) | | | 34.35 | | | 6.98 | | | |
Outstanding as of December 31, 2021 | | 213,857 | | | $ | 30.73 | | | $ | 6.69 | | | 6.0 |
Granted | | 3,800 | | | 41.15 | | | 11.72 | | | |
Exercised | | (35,794) | | | 22.00 | | | 5.85 | | | |
Forfeited | | (480) | | | 45.12 | | | 10.43 | | | |
Outstanding as of December 31, 2022 | | 181,383 | | | $ | 32.64 | | | $ | 6.95 | | | 5.7 |
Exercisable as of December 31, 2020 | | 113,988 | | | $ | 27.07 | | | $ | 6.16 | | | 4.8 |
Exercisable as of December 31, 2021 | | 125,601 | | | $ | 28.66 | | | $ | 6.28 | | | 4.5 |
Exercisable as of December 31, 2022 | | 116,239 | | | $ | 32.03 | | | $ | 6.64 | | | 4.7 |
Restricted Stock Plans
The Company has issued restricted stock under the RRP to directors, officers and other key employees. During 2009, the Company purchased in the open market all shares required to fund the RRP at an average cost of $11.81 per share. As of December 31, 2022, the cost of such shares held by the RRP totaled $7,000, which is included in the Company’s unallocated common stock held by the RRP in the consolidated statements of financial condition. Under the 2014 Plan, the Company may issue restricted stock units, restricted stock awards, options and other awards.
Awards under the RRP, 2014 and the 2021 Plan may not be sold or otherwise transferred until certain restrictions have lapsed. The unearned compensation related to these awards is amortized to compensation expense over the 5-year vesting period. The total share-based compensation expense for these awards is determined based on the market price of the Company’s common stock as of the date of grant applied to the total number of shares granted and is amortized over the vesting period. As of December 31, 2022, unearned share-based compensation associated with these awards totaled $2,088,000.
For the years ended December 31, 2022, 2021 and 2020, the Company recognized $625,000, $549,000 and $573,000, respectively, in compensation cost related to restricted stock and restricted stock units, which is included in compensation and benefits expense in the accompanying consolidated statements of income.
The following table represents unvested restricted stock activity for the years indicated.
| | | | | | | | | | | | | | |
Restricted Stock | | Number of Shares | | Weighted-Average Grant Date Fair Value |
Balance, December 31, 2019 | | 51,478 | | | $ | 35.73 | |
Granted | | 17,305 | | | 22.19 | |
Forfeited | | (5,183) | | | 33.06 | |
Released | | (19,247) | | | 32.77 | |
Balance, December 31, 2020 | | 44,353 | | | $ | 32.04 | |
Granted | | 21,365 | | | 36.90 | |
Forfeited | | (3,937) | | | 32.76 | |
Released | | (15,574) | | | 32.95 | |
Balance, December 31, 2021 | | 46,207 | | | $ | 33.93 | |
Granted | | 42,495 | | | 35.32 | |
Forfeited | | — | | | — | |
Released | | (14,640) | | | 34.67 | |
Balance, December 31, 2022 | | 74,062 | | | $ | 34.58 | |
20. Earnings Per Share
Earnings per common share was computed based on the following:
| | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
(dollars in thousands, except per share data) | | 2022 | | 2021 | | 2020 |
Numerator: | | | | | | |
Income applicable to common shares | | $ | 34,072 | | | $ | 48,621 | | | $ | 24,765 | |
Denominator: | | | | | | |
Weighted average common shares outstanding | | 8,139 | | | 8,379 | | | 8,674 | |
Effect of dilutive securities: | | | | | | |
Restricted stock | | 13 | | | 12 | | | 9 | |
Stock options | | 42 | | | 37 | | | 21 | |
Weighted average common shares outstanding - assuming dilution | | 8,194 | | | 8,428 | | | 8,704 | |
Earnings per common share | | $ | 4.19 | | | $ | 5.80 | | | $ | 2.86 | |
Earnings per common share - assuming dilution | | $ | 4.16 | | | $ | 5.77 | | | $ | 2.85 | |
Options on 77,655, 97,836 and 134,714 shares of common stock were not included in computing diluted earnings per share for the years ended December 31, 2022, 2021 and 2020, respectively, because the effect of these shares was anti-dilutive.
21. Related Party Transactions
Certain directors and officers of the Company are customers of the Company. Loan transactions with directors, officers and employees are made on the same terms as those prevailing at the time for comparable loans to other persons. A summary of related party loan activity during 2022 and 2021 follows.
| | | | | | | | | | | |
(dollars in thousands) | | 2022 | 2021 |
Balance, beginning of year | | $ | 9,727 | | $ | 8,355 | |
New loans | | 2,760 | | 1,954 | |
Change in related parties, net | | — | | 2,202 | |
Repayments, net | | (1,770) | | (2,784) | |
Balance, end of year | | $ | 10,717 | | $ | 9,727 | |
None of the related party loans were identified as impaired or exceeded 5% of shareholders’ equity for the years ended 2022 or 2021.
Related party deposits totaled $7,778,000 and $11,794,000 as of December 31, 2022 and 2021, respectively.
22. Fair Value Measurements and Disclosures
The Company values its financial assets and liabilities measured at fair value in three levels as required by ASC 820, Fair Value Measurements and Disclosures. Under this guidance, fair value should be based on the assumptions market participants would use when pricing the asset or liability and establishes a fair value hierarchy that prioritizes the inputs used to develop those assumptions and measure fair value. The hierarchy requires companies to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:
•Level 1 – Quoted prices in active markets for identical assets or liabilities.
•Level 2 – Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
•Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies, and similar techniques that use significant unobservable inputs.
An asset’s or liability’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Management reviews and updates the fair value hierarchy classifications of the Company’s assets and liabilities quarterly.
Recurring Basis
Investment Securities Available for Sale
Fair values of investment securities available for sale are primarily measured using information from a third-party pricing service. This pricing service provides pricing information by utilizing evaluated pricing models supported with market data information. Standard inputs include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, benchmark securities, bids, offers, and reference data from market research publications. If quoted prices are available in an active market, investment securities are classified as Level 1 measurements. If quoted prices are not available in an active market, fair values were estimated primarily by the use of pricing models. Level 2 investment securities were primarily comprised of mortgage-backed securities issued by government agencies and U.S. government-sponsored enterprises. In certain cases, where there is limited or less transparent information provided by the Company’s third-party pricing service, fair value is estimated by the use of secondary pricing services or through the use of non-binding third-party broker quotes. Investment securities are classified within Level 3 when little or no market activity supports the fair value.
Management primarily identifies investment securities which may have traded in illiquid or inactive markets by identifying instances of a significant decrease in the volume and frequency of trades, relative to historical levels, as well as instances of a significant widening of the bid-ask spread in the brokered markets. Investment securities that are deemed to have been trading in illiquid or inactive markets may require the use of significant unobservable inputs. For example, management may use quoted prices for similar investment securities in the absence of a liquid and active market for the investment securities being valued. As of December 31, 2022, management did not make adjustments to prices provided by the third-party pricing service as a result of illiquid or inactive markets.
Derivative Assets and Liabilities
The fair value of these derivative financial instruments is obtained from a third-party pricing service that uses widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. The analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. The Company has determined that its derivative valuations are classified in Level 2 of the fair value hierarchy.
The following tables present the balances of assets and liabilities measured on a recurring basis as of December 31, 2022 and 2021 aggregated by the level in the fair value hierarchy in which these measurements fall.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(dollars in thousands) | | December 31, 2022 | | Level 1 | | Level 2 | | Level 3 |
Assets | | | | | | | | |
Available for sale securities: | | | | | | | | |
U.S. agency mortgage-backed | | $ | 316,832 | | | $ | — | | | $ | 316,832 | | | $ | — | |
Collateralized mortgage obligations | | 86,345 | | | — | | | 86,345 | | | — | |
Municipal bonds | | 57,625 | | | — | | | 57,625 | | | — | |
U.S. government agency | | 19,333 | | | — | | | 19,333 | | | — | |
Corporate bonds | | 6,383 | | | — | | | 6,383 | | | — | |
Total available for sale securities | | $ | 486,518 | | | $ | — | | | $ | 486,518 | | | $ | — | |
| | | | | | | | |
Derivative assets(1) | | $ | 5,144 | | | $ | — | | | $ | 5,144 | | | $ | — | |
Total | | $ | 491,662 | | | $ | — | | | $ | 491,662 | | | $ | — | |
| | | | | | | | |
Liabilities | | | | | | | | |
Derivative liabilities(1) | | $ | 9 | | | $ | — | | | $ | 9 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(dollars in thousands) | | December 31, 2021 | | Level 1 | | Level 2 | | Level 3 |
Assets | | | | | | | | |
Available for sale securities: | | | | | | | | |
U.S. agency mortgage-backed | | $ | 233,773 | | | $ | — | | | $ | 233,773 | | | $ | — | |
Collateralized mortgage obligations | | 31,912 | | | — | | | 31,912 | | | — | |
Municipal bonds | | 50,719 | | | — | | | 50,719 | | | — | |
U.S. government agency | | 5,614 | | | — | | | 5,614 | | | — | |
Corporate bonds | | 5,614 | | | — | | | 5,614 | | | — | |
Total available for sale securities | | $ | 327,632 | | | $ | — | | | $ | 327,632 | | | $ | — | |
| | | | | | | | |
Derivative assets(1) | | $ | 1,589 | | | $ | — | | | $ | 1,589 | | | $ | — | |
Total | | $ | 329,221 | | | $ | — | | | $ | 329,221 | | | $ | — | |
| | | | | | | | |
Liabilities | | | | | | | | |
Derivative liabilities(1) | | $ | 43 | | | $ | — | | | $ | 43 | | | $ | — | |
(1)For more information, refer to Note 14. Nonrecurring Basis
The Company records loans individually evaluated for impairment at fair value on a nonrecurring basis. A loan is considered impaired if it is probable the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Fair value is measured at the fair value of the collateral for collateral-dependent loans. For non-collateral-dependent loans, fair value is measured by present valuing expected future cash flows. Impaired loans are classified as Level 3 assets when measured using appraisals from third parties of the collateral less any prior liens and when there is no observable market price.
Foreclosed assets and ORE are also recorded at fair value on a nonrecurring basis. Foreclosed assets are initially recorded at fair value less estimated costs to sell. ORE is recorded at the lower of its net book value or fair value at the date of transfer to ORE. The fair value of foreclosed assets and ORE is based on property appraisals and an analysis of similar properties available. As such, the Company classifies foreclosed and ORE assets as Level 3 assets.
The Company has segregated all financial assets and liabilities that are measured at fair value on a nonrecurring basis into the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value at the measurement date in the tables below.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Fair Value Measurements Using |
(dollars in thousands) | | December 31, 2022 | | Level 1 | | Level 2 | | Level 3 |
Assets | | | | | | | | |
Loans individually evaluated for impairment | | $ | 4,312 | | | $ | — | | | $ | — | | | $ | 4,312 | |
Foreclosed assets and ORE | | 461 | | | — | | | — | | | 461 | |
Total | | $ | 4,773 | | | $ | — | | | $ | — | | | $ | 4,773 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Fair Value Measurements Using |
(dollars in thousands) | | December 31, 2021 | | Level 1 | | Level 2 | | Level 3 |
Assets | | | | | | | | |
Loans individually evaluated for impairment | | $ | 3,945 | | | $ | — | | | $ | — | | | $ | 3,945 | |
Foreclosed assets and ORE | | 1,189 | | | — | | | — | | | 1,189 | |
Total | | $ | 5,134 | | | $ | — | | | $ | — | | | $ | 5,134 | |
The following tables show significant unobservable inputs used in the fair value measurement of Level 3 assets. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(dollars in thousands) | | Fair Value | | Valuation Technique | | Unobservable Inputs | | Range of Discounts | | Weighted Average Discount |
As of December 31, 2022 |
Loans individually evaluated for impairment | | $ | 4,312 | | | Third party appraisals and discounted cash flows | | Collateral values, market discounts and estimated costs to sell | | 0% - 89% | | 14 | % |
Foreclosed assets and ORE | | $ | 461 | | | Third party appraisals, sales contracts, broker price opinions | | Collateral values, market discounts and estimated costs to sell | | 6% - 31% | | 16 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(dollars in thousands) | | Fair Value | | Valuation Technique | | Unobservable Inputs | | Range of Discounts | | Weighted Average Discount |
As of December 31, 2021 |
Loans individually evaluated for impairment | | $ | 3,945 | | | Third party appraisals and discounted cash flows | | Collateral values, market discounts and estimated costs to sell | | 0% - 100% | | 15 | % |
Foreclosed assets and ORE | | $ | 1,189 | | | Third party appraisals, sales contracts, broker price opinions | | Collateral values, market discounts and estimated costs to sell | | 6% - 16% | | 12 | % |
ASC 820, Fair Value Measurements and Disclosures, requires the disclosure of each class of financial instruments for which it is practicable to estimate. The fair value of a financial instrument is the current amount that would be exchanged between willing parties, other than in a forced liquidation. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. ASC 820 excludes certain financial instruments and all non-financial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial statement element. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
Fair value estimates included herein are based on existing on- and off-balance-sheet financial instruments without attempting to estimate the value of anticipated future business and the fair value of assets and liabilities that are not required to be recorded or disclosed at fair value like premises and equipment. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:
•The carrying value of cash and cash equivalents and interest-bearing deposits in banks approximate their fair value.
•The fair value for investment securities is determined from quoted market prices when available. If a quoted market price is not available, fair value is estimated using third party pricing services or quoted market prices of securities with similar characteristics.
•The carrying value of mortgage loans held for sale approximates their fair value.
•The fair value of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturity.
•The cash surrender value of BOLI approximates its fair value.
•The fair value of customer deposits, excluding certificates of deposit, is the amount payable on demand. The fair value of fixed-maturity certificates of deposit is estimated by discounting the future cash flows using the rates currently offered for deposits of similar remaining maturities.
•The fair value of subordinated debt is estimated based on current market rates on similar debt in the market.
•The fair value of other borrowings and FHLB advances is estimated by discounting the future cash flows using the rates currently offered for borrowings of similar maturities.
•The fair value of derivative assets and liabilities are obtained from a third-party pricing service that uses the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts).
The fair value of off-balance sheet financial instruments as of December 31, 2022 and 2021 was immaterial.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Fair Value Measurements at December 31, 2022 |
(dollars in thousands) | | Carrying Amount | | Total | | Level 1 | | Level 2 | | Level 3 |
Financial Assets | | | | | | | | | | |
Cash and cash equivalents | | $ | 87,401 | | | $ | 87,401 | | | $ | 87,401 | | | $ | — | | | $ | — | |
Interest-bearing deposits in banks | | 349 | | | 349 | | | 349 | | | — | | | — | |
Investment securities available for sale | | 486,518 | | | 486,518 | | | — | | | 486,518 | | | — | |
Investment securities held to maturity | | 1,075 | | | 1,072 | | | — | | | 1,072 | | | — | |
Mortgage loans held for sale | | 98 | | | 98 | | | — | | | 98 | | | — | |
Loans, net | | 2,401,451 | | | 2,326,104 | | | — | | | 2,321,792 | | | 4,312 | |
Cash surrender value of BOLI | | 46,276 | | | 46,276 | | | 46,276 | | | — | | — | |
Derivative assets(1) | | 5,144 | | | 5,144 | | | — | | | 5,144 | | | — | |
Financial Liabilities | | | | | | | | | | |
Deposits | | $ | 2,633,181 | | | $ | 2,620,577 | | | $ | 2,297,736 | | | $ | 322,841 | | | $ | — | |
Other borrowings | | 5,539 | | | 5,388 | | | — | | | 5,388 | | | — | |
Subordinated debt, net of issuance cost | | 54,013 | | | 51,287 | | | — | | | 51,287 | | | — | |
Short-term FHLB advances | | 155,000 | | | 155,000 | | | 155,000 | | | — | | | — | |
Long-term FHLB advances | | 21,213 | | | 20,019 | | | — | | | 20,019 | | | — | |
Derivative liabilities(1) | | 9 | | | 9 | | | — | | | 9 | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Fair value Measurements at December 31, 2021 |
(dollars in thousands) | | Carrying Amount | | Total | | Level 1 | | Level 2 | | Level 3 |
Financial Assets | | | | | | | | | | |
Cash and cash equivalents | | $ | 601,443 | | | $ | 601,443 | | | $ | 601,443 | | | $ | — | | | $ | — | |
Interest-bearing deposits in banks | | 349 | | | 349 | | | 349 | | | — | | | — | |
Investment securities available for sale | | 327,632 | | | 327,632 | | | — | | | 327,632 | | | — | |
Investment securities held to maturity | | 2,102 | | | 2,132 | | | — | | | 2,132 | | | — | |
Mortgage loans held for sale | | 1,104 | | | 1,104 | | | — | | | 1,104 | | | — | |
Loans, net | | 1,819,004 | | | 1,834,023 | | | — | | | 1,830,078 | | | 3,945 | |
Cash surrender value of BOLI | | 40,361 | | | 40,361 | | | 40,361 | | | — | | | — | |
Derivative assets(1) | | 1,589 | | | 1,589 | | | — | | | 1,589 | | | — | |
Financial Liabilities | | | | | | | | | | |
Deposits | | $ | 2,535,849 | | | $ | 2,533,951 | | | $ | 2,216,510 | | | $ | 317,441 | | | $ | — | |
Other borrowings | | 5,539 | | | 5,860 | | | — | | | 5,860 | | | — | |
Long-term FHLB advances | | 26,046 | | | 26,263 | | | — | | | 26,263 | | | — | |
Derivative liabilities(1) | | 43 | | | 43 | | | — | | | 43 | | | — | |
(1)Derivative assets and liabilities are reported at fair value in accrued interest receivable and other assets and accrued interest payable and other liabilities, respectively, in the Consolidated Statements of Financial Condition.
23. Condensed Parent Company Only Financial Statements
Condensed financial statements of Home Bancorp, Inc. (parent company only) are shown below. The parent company has no significant operating activities.
Condensed Balance Sheets
December 31, 2022 and 2021
| | | | | | | | | | | | | | |
(dollars in thousands) | | 2022 | | 2021 |
Assets | | | | |
Cash in bank | | $ | 6,443 | | | $ | 2,043 | |
Investment in subsidiary | | 369,911 | | | 343,481 | |
Other assets | | 7,649 | | | 6,424 | |
Total assets | | $ | 384,003 | | | $ | 351,948 | |
Liabilities | | | | |
Subordinated debt, net of issuance cost | | $ | 54,013 | | | $ | — | |
Other liabilities | | 36 | | | 45 | |
Total liabilities | | $ | 54,049 | | | $ | 45 | |
Shareholders’ equity | | 329,954 | | | 351,903 | |
Total liabilities and shareholders’ equity | | $ | 384,003 | | | $ | 351,948 | |
Condensed Statements of Income
For the Years Ended December 31, 2022, 2021 and 2020
| | | | | | | | | | | | | | | | | | | | |
(dollars in thousands) | | 2022 | | 2021 | | 2020 |
Operating income | | | | | | |
Interest income | | $ | — | | | $ | — | | | $ | — | |
Dividend from subsidiary | | 74,576 | | | 15,000 | | | 18,200 | |
Total operating income | | 74,576 | | | 15,000 | | | 18,200 | |
Operating expenses | | | | | | |
Other expenses | | 289 | | | 183 | | | 234 | |
Total operating expenses | | 289 | | | 183 | | | 234 | |
Interest expense | | | | | | |
Subordinated debt expense | | 1,710 | | | — | | | — | |
Total interest expense | | 1,710 | | | — | | | — | |
Income before income tax benefit and equity in undistributed earnings of subsidiary | | 72,577 | | | 14,817 | | | 17,966 | |
Income tax benefit | | 420 | | | 38 | | | 49 | |
Income before equity in undistributed earnings of subsidiary | | 72,997 | | | 14,855 | | | 18,015 | |
Undistributed earnings of subsidiary | | (38,925) | | | 33,766 | | | 6,750 | |
Net income | | $ | 34,072 | | | $ | 48,621 | | | $ | 24,765 | |
Condensed Statements of Cash Flows
For the Years Ended December 31, 2022, 2021 and 2020
| | | | | | | | | | | | | | | | | | | | |
(dollars in thousands) | | 2022 | | 2021 | | 2020 |
Cash flows from operating activities | | | | | | |
Net income | | $ | 34,072 | | | $ | 48,621 | | | $ | 24,765 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | |
Non-cash compensation | | 1,629 | | | 1,585 | | | 1,261 | |
Amortization of subordinated debt issuance cost | | 120 | | | — | | | — | |
Increase in accrued interest receivable and other assets | | (1,225) | | | (1,058) | | | (753) | |
Undistributed earnings in subsidiary | | 38,925 | | | (33,766) | | | (6,750) | |
(Decrease) increase in accrued expenses and other liabilities | | (9) | | | (3) | | | 24 | |
Net cash provided by operating activities | | 73,512 | | | 15,379 | | | 18,547 | |
Cash flows from investing activities | | | | | | |
Net cash paid in acquisitions | | (64,593) | | | — | | | — | |
Investment in subsidiaries | | (40,000) | | | — | | | — | |
Net cash used in investing activities | | (104,593) | | | — | | | — | |
Cash flows from financing activities | | | | | | |
Proceeds from exercise of stock options | | 375 | | | 80 | | | 30 | |
Proceeds from issuance of subordinated debt, net of issuance cost | | 53,892 | | | — | | | — | |
Payment of dividends on common stock | | (7,777) | | | (7,867) | | | (7,903) | |
Issuance of stock under incentive plan | | 324 | | | 303 | | | (13) | |
Purchase of Company’s common stock | | (11,333) | | | (8,900) | | | (14,013) | |
Net cash provided by (used in) financing activities | | 35,481 | | | (16,384) | | | (21,899) | |
Net change in cash and cash equivalents | | 4,400 | | | (1,005) | | | (3,352) | |
Cash and cash equivalents at beginning of year | | 2,043 | | | 3,048 | | | 6,400 | |
Cash and cash equivalents at end of year | | $ | 6,443 | | | $ | 2,043 | | | $ | 3,048 | |
24. Consolidated Quarterly Results of Operations (unaudited)
During the fourth quarter of 2020, we revised our estimate of losses on unfunded lending commitments. As a result, certain reclassifications have been made to prior period results to allow for comparability across quarterly periods during 2020. Refer to Note 2 for more information.
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(dollars in thousands, except per share data) | | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter |
Year Ended December 31, 2022 | | | | | | | | |
Total interest income | | $ | 24,566 | | | $ | 30,505 | | | $ | 34,264 | | | $ | 36,595 | |
Total interest expense | | 1,055 | | | 1,264 | | | 2,287 | | | 3,309 | |
Net interest income | | 23,511 | | | 29,241 | | | 31,977 | | | 33,286 | |
Provision for loan losses | | 3,215 | | | 591 | | | 1,696 | | | 1,987 | |
Net interest income after provision for loan losses | | 20,296 | | | 28,650 | | | 30,281 | | | 31,299 | |
Noninterest income | | 3,386 | | | 3,686 | | | 3,474 | | | 3,339 | |
Noninterest expense | | 18,240 | | | 21,765 | | | 20,723 | | | 21,181 | |
Income before income taxes | | 5,442 | | | 10,571 | | | 13,032 | | | 13,457 | |
Income tax expense | | 1,041 | | | 2,110 | | | 2,598 | | | 2,681 | |
Net income | | $ | 4,401 | | | $ | 8,461 | | | $ | 10,434 | | | $ | 10,776 | |
Earnings per share – basic | | $ | 0.53 | | | $ | 1.04 | | | $ | 1.29 | | | $ | 1.33 | |
Earnings per share – diluted | | $ | 0.53 | | | $ | 1.03 | | | $ | 1.28 | | | $ | 1.32 | |
| | | | | | | | |
(dollars in thousands, except per share data) | | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter |
Year Ended December 31, 2021 | | | | | | | | |
Total interest income | | $ | 26,928 | | | $ | 25,763 | | | $ | 28,423 | | | $ | 25,788 | |
Total interest expense | | 1,833 | | | 1,653 | | | 1,289 | | | 1,138 | |
Net interest income | | 25,095 | | | 24,110 | | | 27,134 | | | 24,650 | |
Provision for loan losses | | (1,703) | | | (3,425) | | | (2,385) | | | (2,648) | |
Net interest income after provision for loan losses | | 26,798 | | | 27,535 | | | 29,519 | | | 27,298 | |
Noninterest income | | 4,060 | | | 3,294 | | | 5,383 | | | 3,534 | |
Noninterest expense | | 15,966 | | | 16,568 | | | 16,431 | | | 18,017 | |
Income before income taxes | | 14,892 | | | 14,261 | | | 18,471 | | | 12,815 | |
Income tax expense | | 2,964 | | | 2,865 | | | 3,412 | | | 2,577 | |
Net income | | $ | 11,928 | | | $ | 11,396 | | | $ | 15,059 | | | $ | 10,238 | |
Earnings per share – basic | | $ | 1.41 | | | $ | 1.35 | | | $ | 1.80 | | | $ | 1.24 | |
Earnings per share – diluted | | $ | 1.41 | | | $ | 1.34 | | | $ | 1.79 | | | $ | 1.23 | |
| | | | | | | | |
(dollars in thousands, except per share data) | | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter |
Year Ended December 31, 2020 | | | | | | | | |
Total interest income | | $ | 25,249 | | | $ | 25,670 | | | $ | 25,842 | | | $ | 27,368 | |
Total interest expense | | 3,926 | | | 3,253 | | | 2,570 | | | 2,169 | |
Net interest income | | 21,323 | | | 22,417 | | | 23,272 | | | 25,199 | |
Provision for loan losses | | 6,257 | | | 6,471 | | | — | | | — | |
Net interest income after provision for loan losses | | 15,066 | | | 15,946 | | | 23,272 | | | 25,199 | |
Noninterest income | | 3,358 | | | 3,103 | | | 3,794 | | | 4,050 | |
Noninterest expense | | 15,416 | | | 15,453 | | | 16,116 | | | 15,996 | |
Income before income taxes | | 3,008 | | | 3,596 | | | 10,950 | | | 13,253 | |
Income tax expense | | 526 | | | 675 | | | 2,168 | | | 2,673 | |
Net income | | $ | 2,482 | | | $ | 2,921 | | | $ | 8,782 | | | $ | 10,580 | |
Earnings per share – basic | | $ | 0.27 | | | $ | 0.33 | | | $ | 1.01 | | | $ | 1.25 | |
Earnings per share – diluted | | $ | 0.27 | | | $ | 0.33 | | | $ | 1.01 | | | $ | 1.24 | |