General
Critical Accounting Policies
The Company's financial condition and results of operations are sensitive to accounting measurements and estimates of matters that are inherently uncertain. When applying accounting policies in areas that are subjective in nature, the Company must use its best judgment to arrive at the carrying value of certain assets. One of the most critical accounting policies applied by the Company is related to the valuation of its loan portfolio and deferred income to valuation allowance.
A variety of estimates impact the carrying value of the Company’s loan portfolio
including the calculation of the allowance for loan losses, valuation of
underlying collateral, the timing of loan charge-offs and the amount and
amortization of loan fees and deferred origination costs.
The calculation of the allowance for loan losses is a complex process containing estimates which are inherently subjective and susceptible to significant revision as current information becomes available. The allowance is established and maintained at a level management believes is adequate to cover losses resulting from the inability of borrowers to make required payments on loans. Estimates for loan losses are determined by analyzing risks associated with specific loans and the loan portfolio, current trends in delinquencies and charge-offs, the views of the Company's regulators, changes in the size and composition of the loan portfolio and peer comparisons. The analysis also requires consideration of the economic climate and direction, changes in the economic and interest rate environment which may impact a borrower's ability to pay, legislation impacting the banking industry and economic conditions specific to the counties the Bank serves in the State of Florida. Because the calculation of the allowance for loan losses relies on the Company's estimates and judgments relating to inherently uncertain events, results may differ from management's estimates.
The allowance for loan losses is also discussed as part of “Loan Portfolio,
Asset Quality and Allowance for Loan Losses” and in Note 3 of Notes to the
consolidated financial statements. The Company’s significant accounting policies
are discussed in Note 1 of Notes to the consolidated financial statements.
During the year ended December 31, 2021, the Company assessed its earnings history and trend over the past year and its estimate of future earnings. In 2021, the Company determined that it was more likely than not that the deferred tax assets would be realized in the near term. Accordingly, in 2021, the valuation allowance in the amount of $4 million that has been previously recorded against the net deferred tax asset for the amount not expected to be realized in the future was fully reversed. 14 Regulation and Legislation As a state-chartered commercial bank, the Bank is subject to extensive regulation by the Florida Office of Financial Regulation, or Florida OFR, and the FDIC. The Bank files reports with the Florida OFR and the FDIC concerning its activities and financial condition, in addition to obtaining regulatory approvals prior to entering into certain transactions such as mergers with or acquisitions of other financial institutions. Periodic examinations are performed by the Florida OFR and the FDIC to monitor the Bank's compliance with the various regulatory requirements. The Company is also subject to regulation and examination by the Federal Reserve Board of Governors.
Loan Portfolio, Asset Quality and Allowance for Loan Losses
The Bank's primary business is making business loans. This activity may subject
the Bank to potential loan losses, the magnitude of which depends on a variety
of economic factors affecting borrowers which are beyond its control. As of
December 31, 2022 and 2021 the Bank did not have any impaired loans.
The following table sets forth the composition of the Bank's loan portfolio
(dollars in thousands):
At December 31,
2022 2021 2020
% of % of % of
Amount Total Amount Total Amount Total
Residential real estate $ 50,354 11 % $ 32,583 13 % $ 28,997 20 %
Multi-family real estate 69,555 14 48,592 19 19,210 13
Commercial real estate 310,695 64 129,468 51 74,398 46
Land and construction 17,286 4 3,772 2 4,750 3
Commercial 5,165 1 14,157 6 21,849 14
Consumer 30,323 6 22,827 9 5,715 4
Total loans $ 483,378 100 % $ 251,399 100 % $ 154,919 100 %
Deduct:
Net deferred loan fees (367 ) (422 ) (544 )
Allowance for loan losses (5,793 ) (3,075 ) (1,906 )
Loans, net $ 477,218 $ 247,902 $ 152,469
The following table sets forth the activity in the allowance for loan losses (in
thousands):
Year Ended December 31,
2022 2021 2020
Beginning balance $ 3,075 $ 1,906 $ 2,009
Provision for loan losses 3,466 1,173 1,020
Loans charged off (901 ) (277 ) (1,184 )
Recoveries 153 273 61
Ending balance $ 5,793 $ 3,075 $ 1,906
The allowance for loan losses represents management's estimate of probable incurred losses inherent in the existing loan portfolio. The allowance for loan losses is increased by the provision for loan losses charged to earnings and reduced by loans charged off, net of recoveries. The allowance for loan losses represented 1.20% and 1.22% of the total loans outstanding at December 31,
2022
and 2021, respectively.
15
The Bank evaluates the allowance for loan losses on a regular basis. The
allowance for loan losses is determined based on a periodic review of several
factors: reviews and evaluation of individual loans, historical loan loss
experiences, the nature and volume of the loan portfolio, adverse situations
that may affect the borrower's ability to repay, estimated value of any
underlying collateral and current economic conditions. This evaluation is
inherently subjective as it requires estimates that are susceptible to
significant revision as more information becomes available.
The allowance consists of two components. The first component consists of
amounts specifically reserved ("specific allowance") for specific loans
identified as impaired, as defined by FASB Accounting Standards Codification No.
310 ("ASC 310"). Impaired loans are those loans that management has estimated
will not be repaid as agreed upon. The Bank measures impairment on a loan by
loan basis for all of its loans by either the present value of expected future
cash flows discounted at the loan's effective interest rate, the loan's
obtainable market price, or the fair value of the collateral if the loan is
collateral-dependent. A loan may be impaired (i.e. not expected to be repaid as
agreed), but may be sufficiently collateralized such that the Bank expects to
recover all principal and interest eventually, and therefore no specific reserve
is warranted.
The second component is a general reserve ("general allowance") on all of the
Bank's loans, other than those identified as impaired. The Bank groups these
loans into categories with similar characteristics and then applies a loss
factor to each group which is derived from the Bank's historical loss experience
for that category adjusted for qualitative factors such as economic conditions
and other trends or uncertainties that could affect management's estimate of
probable loss. The aggregate of these two components results in the Bank's total
allowance for loan losses.
The following table sets forth the Bank's allowance for loan losses by loan type
(dollars in thousands):
At December 31,
2022 2021 2020
% of % of % of
Total Total Total
Amount Loans Amount Loans Amount Loans
Residential real estate $ 768 11 % $ 482 13 % $ 463 20 %
Multi-family real estate 748 14 535 19 253 13
Commercial real estate 3,262 64 1535 51 884 46
Land and construction 173 4 32 2 52 3
Commercial 277 1 74 6 103 14
Consumer 565 6 417 9 151 4
Total allowance for loan losses $ 5,793 100 % $ 3,075 100 % $ 1,906 100 %
Allowance for loan losses as a percentage of total loans outstanding 1.20 % 1.22 % 1.23 % 16
The following summarizes the amount of impaired loans (in thousands):
At December 31,
2022 2021 2020
Unpaid Unpaid Unpaid
Recorded Principal Related Recorded Principal Related Recorded
Principal Related
Investment Balance Allowance Investment Balance Allowance Investment Balance Allowance
With no related allowance recorded:
Commercial real estate $ - $ - $
- $ - $ - $ - $ 2,193 $ 2,193 $ -
Commercial - - - - - - - - -
With an allowance recorded:
Residential real estate - - - - - - - - -
Commercial real estate - - - - - - - - -
Commercial - - - - - - - - -
Total:
Residential real estate $ - $ - $ - $ - $ - $ - $ - $ - $ -
Commercial real estate $ - $ - $ - $ - $ - $ - $ 2,193 $ 2,193 $ -
Commercial $ - $ - $ - $ - $ - $ - $ - $ - $ -
Total $ - $ - $ - $ - $ - $ - $ 2,193 $ 2,193 $ -
During 2022, 2021, and 2020, the average recorded investment in impaired loans
and interest income recognized and received on impaired loans were as follows
(in thousands):
Year Ended December 31,
2022 2021 2020
Average investment in impaired loans $ - $ 658 $ 3,344 Interest income recognized on impaired loans $ - $ 7 $ 96 Interest income received on a cash basis on impaired loans $ - $ 7 $ 89
Liquidity and Capital Resources
Liquidity represents an institution’s ability to meet current and future
obligations through liquidation or maturity of existing assets or the
acquisition of additional liabilities. The Bank’s ability to respond to the
needs of depositors and borrowers and to benefit from investment opportunities
is facilitated through liquidity management.
The Bank's primary sources of cash during the year ended December 31, 2022, were
payments of principal and interest on loans made by the Bank to third parties,
payments of principal and interest on debt securities held by the Bank and
deposits made by third parties at the Bank. Cash was used primarily to fund
loans and repay Federal Home Loan Bank of Atlanta ("FHLB") advances. The Bank
adjusts rates on its deposits to attract or retain deposits as needed. The Bank
primarily obtains deposits from its market area.
The Bank may borrow funds from other financial institutions. The Bank is a
member of the FHLB, which allows it to borrow funds under a pre-arranged line of
credit. As of December 31, 2022, the Bank had $10 million in borrowings
outstanding from the FHLB of Atlanta to facilitate lending and manage its asset
and liability structure, and remaining credit availability with the FHLB of
$125.7 million. At December 31, 2022, the Bank also had lines of credit
amounting to $19.5 million with five correspondent banks to purchase federal
funds.
17
Debt Securities
The Bank's securities portfolio is comprised of SBA pool securities,
mortgage-backed securities, taxable municipal securities and collateralized
mortgage obligations. The securities portfolio is categorized as either
"held-to-maturity" or "available for sale." Debt securities held-to-maturity
represent those securities which the Bank has the positive intent and ability to
hold to maturity. These debt securities are carried at amortized cost. Debt
securities available for sale represent those investments which may be sold for
various reasons including changes in interest rates and liquidity
considerations. These debt securities are reported at fair market value and
unrealized gains and losses are excluded from earnings and reported in other
comprehensive loss.
The following table sets forth the amortized cost and fair value of the Bank’s
debt securities portfolio (in thousands):
Amortized Cost Fair Value
At December 31, 2022:
Held-to-maturity:
Collateralized mortgage obligations $ 475 $ 440
Mortgage-backed Securities 65 64
Total $ 540 $ 504
Available for sale:
SBA Pool Securities $ 834 $ 817
Collacteralized mortgage obligation 145 130
Taxable municipal securities 16,729 11,620
Mortgage-backed Securities. 15,180 12,535
Total $ 32,888 $ 25,102
At December 31, 2021:
Held-to-maturity:
Collateralized mortgage obligations $ 854 $ 882
Mortgage-backed Securities 186 189
Total $ 1,040 $ 1,071
Available for sale:
SBA Pool Securities $ 1,097 $ 1,072
Collateralized mortgage obligations 210 217
Taxable municipal securities 16,766 16,426
Mortgage-backed Securities. 17,137 16,679
Total $ 35,210 $ 34,394
18
The following table sets forth, by maturity distribution, certain information
pertaining to the debt securities portfolio at amortized cost (dollars in
thousands):
After One
Year
Through Five After Ten
Years Years Total Yield
At December 31, 2022:
Collateralized mortgage obligation $ - $ 620 $
620 2.29 %
Mortgage-backed securities - 15,245 15,245 2.04 %
Taxable municipal securities - 16,729 16,729 2.17 %
SBA pool securities - 834 834 4.54 %
$ - $ 33,428 $ 33,428
At December 31, 2021:
Collateralized mortgage obligation - $ 1,064 $ 1,064 0.52 %
Mortgage-backed securities $ - 17,323 17,323 1.57 %
Taxable municipal securities - 16,766 16,766 2.16 %
SBA pool securities - 1,097 1,097 0.26 %
$ - $ 36,250 $ 36,250
Expected maturities of these debt securities will differ from contractual
maturities because borrowers have the right to call or repay obligations with or
without call or prepayment penalties.
Market Risk
Market risk is the risk of loss from adverse changes in market prices and rates. The Bank's market risk arises primarily from interest-rate risk inherent in its lending and deposit-taking activities. The Bank does not engage in securities trading or hedging activities and does not invest in interest-rate derivatives or enter into interest rate swaps. The Bank may utilize financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. The measurement of market risk associated with financial instruments is meaningful only when all related and offsetting on- and off-balance-sheet transactions are aggregated, and the resulting net positions are identified. Disclosures about the fair value of financial instruments, which reflect changes in market prices and rates, can be found in Note 8 of notes to consolidated financial statements. The Bank's primary objective in managing interest-rate risk is to minimize the potential adverse impact of changes in interest rates on its net interest income and capital, while adjusting its asset-liability structure to obtain the maximum yield-cost spread on that structure. The Bank actively monitors and manages its interest-rate risk exposure by managing its asset and liability structure. However, a sudden and substantial increase in interest rates may adversely impact its earnings, to the extent that the interest-earning assets and interest-bearing liabilities do not change or reprice at the same speed, to the same extent, or on the same basis. The Bank uses modeling techniques to simulate changes in net interest income under various rate scenarios. Important elements of these techniques include the mix of floating versus fixed-rate assets and liabilities, and the scheduled, as well as expected, repricing and maturing volumes and rates of the existing balance sheet.
Asset Liability Management
As part of its asset and liability management, the Bank has emphasized
establishing and implementing internal asset-liability decision processes, as
well as control procedures to aid in managing its earnings. Management believes
that these processes and procedures provide us with better capital planning,
asset mix and volume controls, loan-pricing guidelines, and deposit
interest-rate guidelines, which should result in tighter controls and less
exposure to interest-rate risk.
19
The matching of assets and liabilities may be analyzed by examining the extent
to which such assets and liabilities are "interest rate sensitive" and by
monitoring an institution's interest rate sensitivity "gap." An asset or
liability is said to be interest rate sensitive within a specific time period if
it will mature or reprice within that time period. The interest-rate sensitivity
gap is defined as the difference between interest-earning assets and
interest-bearing liabilities maturing or repricing within a given time period.
The gap ratio is computed as the amount of rate sensitive assets less the amount
of rate sensitive liabilities divided by total assets. A gap is considered
positive when the amount of interest-rate sensitive assets exceeds interest-rate
sensitive liabilities. A gap is considered negative when the amount of
interest-rate sensitive liabilities exceeds interest-rate sensitive assets.
During a period of rising interest rates, a negative gap would adversely affect
net interest income, while a positive gap would result in an increase in net
interest income. During a period of falling interest rates, a negative gap would
result in an increase in net interest income, while a positive gap would
adversely affect net interest income.
In order to minimize the potential for adverse effects of material and prolonged
increases in interest rates on the results of operations, the Bank's management
continues to monitor its assets and liabilities to better match the maturities
and repricing terms of its interest-earning assets and interest-bearing
liabilities. The Bank's policies emphasize the origination of adjustable-rate
loans, building a stable core deposit base and, to the extent possible, matching
deposit maturities with loan repricing timeframes or maturities.
The following table sets forth certain information related to the Bank's
interest-earning assets and interest-bearing liabilities at December 31, 2022,
that are estimated to mature or are scheduled to reprice within the period shown
(dollars in thousands):
Gap Maturity / Repricing Schedule
More than
More than Five Years
One Year and Less
One and Less than Over
Year than Five Fifteen Fifteen
or Less Years Years Years Total
Loans (1):
Residential real estate
loans $ 2,087 $ 38,580 $ 9,600 $ 87 $ 50,354
Multi-family real estate
loans 701 65,755 3,099 - 69,555
Commercial real estate loans 14,870 255,340 40,485 - 310,695
Land and construction - 13,688 3,598 - 17,286
Commercial 2,809 1,797 - 559 5,165
Consumer 892 21,683 - 7,748 30,323
Total loans 21,359 396,843 56,782 8,394 483,378
Securities (2) 816 - 5,632 19,194 25,642
Interest-bearing deposits in
banks 52,048 - - - 52,048
Federal Home Loan Bank stock 600 - - - 600
Total rate-sensitive assets 74,823 396,843 62,414 27,588 561,668
Deposit accounts (3):
Money-market deposits 60,020 - - - 60,020
Interest-bearing checking
deposits 47,224 - - - 47,224
Savings deposits 1,482 - - - 1,482
Time deposits 223,840 16,140 - - 239,980
Total deposits 332,566 16,140 - - 348,706
Federal Home Loan Bank
advances - 10,000 - - 10,000
Total rate-sensitive
liabilities 332,566 26,140 - - 358,706
GAP (repricing differences) $ (257,743 ) $ 370,703 $ 62,414 $ 27,588 $ 202,962
Cumulative GAP $ (257,743 ) $ 112,960 $ 175,374 $ 202,962
Cumulative GAP/total assets (44 )% 19 % 30 % 35 %
1 In preparing the table above, adjustable-rate loans are included in the period
in which the interest rates are next scheduled to adjust rather than in the
period in which the loans mature. Fixed-rate loans are scheduled, including
repayment, according to their maturities.
2 Securities are scheduled through the repricing date.
3 Money-market, interest-bearing checking and savings deposits are regarded as
readily accessible withdrawable accounts. Time deposits are scheduled through
the maturity dates.
20
The following table sets forth loan maturities by type of loan at December 31,
2022 (in thousands):
After One
One Year or But Within After Five
Less Five Years Years Total
Residential real estate $ - $ 6,916 $ 43,438 $ 50,354
Multi-family real estate - 2,635 66,920 69,555
Commercial real estate 2,802 44,001 263,892 310,695
Land and construction - 1,529 15,757 17,286
Commercial 2,635 1,871 659 5,165
Consumer 772 21,684 7,867 30,323
Total $ 6,209 $ 78,636 $ 398,533 $ 483,378
The following table sets forth the maturity or repricing of loans by interest
type at December 31, 2022 (in thousands):
After One But
One Year or Within Five After Five
Less Years Years Total
Fixed interest rate $ 3,574 $ 43,216 $ 45,730 $ 92,520
Variable interest rate 2,635 35,420 352,803 390,858
Total $ 6,209 $ 78,636 $ 398,533 $ 483,378
Scheduled contractual principal repayments of loans do not reflect the actual
life of such assets. The average life of loans is substantially less than their
average contractual terms due to prepayments. In addition, due-on-sale clauses
on loans generally give us the right to declare a conventional loan immediately
due and payable in the event, among other things, that the borrower sells real
property subject to a mortgage and the loan is not repaid. The average life of
mortgage loans tends to increase, however, when current mortgage loan rates are
substantially higher than rates on existing mortgage loans and, conversely,
decrease when rates on existing mortgages are substantially higher than current
mortgage rates.
Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
The Company is party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, unused lines of credit, and standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest-rate risk in excess of the amounts recognized in the consolidated balance sheet. The contractual amounts of those instruments reflect the extent of the Company's involvement in particular classes of financial instruments.
The Company’s exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit is
represented by the contractual amount of those instruments. The Company uses the
same credit policies in making commitments as it does for on-balance-sheet
instruments.
21 Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed-expiration dates or other termination clauses and may require payment of a fee. Since certain commitments expire without being drawn upon, the total committed amounts do not necessarily represent future cash requirements. The Company evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary in order to extend credit, is based on management's credit evaluation of the counterparty.
A summary of the contractual amounts of the Company’s financial instruments with
off-balance sheet risk at December 31, 2022 follows (in thousands):
Commitments to extend credit $ 15,447
Unused lines of credit $ 17,400
Standby letters of credit $ 4,313
The following is a summary of the Company’s on-balance sheet contractual
obligations at December 31, 2022 (in thousands):
Payments Due by Period
More
Less 1-3 3-5 Than 5
Contractual Obligations Total Than 1 Year Years Years Years
Federal Home Loan Bank advances $ 10,000 $ - $ 10,000
$ - $ - Operating lease liabilities 2,480 264 546 602 1,068 Total $ 12,480 $ 264 10,546 602 1,068 Deposits Deposits traditionally are the primary source of funds for the Company's use in lending, making investments and meeting liquidity demands. The Company has focused on raising time deposits primarily within its market area, which is the area of Broward, Miami-Dade, Palm Beach, Martin, and St. Lucie counties. However, the Company offers a variety of deposit products, which are promoted within its market area. Deposits increased $215.4 million in 2022. The increase in deposit balances primarily consisted of an increase of $35.1 million in noninterest-bearing commercial demand deposits and an increase of $226.7 million in time deposits. These increases were partially offset by a decrease of $46.4 million in Savings, NOW and money-market deposits. The increase in time deposits consisted of $165 million in deposits sourced through an online listing service and $61.7 million in deposits from competitive offerings at our branch offices.
The following table displays the distribution of the Company’s deposits at
December 31, 2022 and 2021 (in thousands):
2022 2021
% of % of
Amount Deposits Amount Deposits
Noninterest-bearing demand deposits 159,193 31.3 % $ 124,119 42.4
Interest-bearing demand deposits 47,224 9.3 33,083 11.3
Money-market deposits 60,020 11.8 121,083 41.4
Savings 1,482 0.3 936 0.3
Subtotal $ 267,919 52.7 % $ 279,221 95.4 %
Time deposits:
0.00% - 0.99% 2,618 0.5 $ 10,295 3.5
1.00% - 1.99% 5,660 1.2 2,183 0.8
2.00% - 2.99% 231,702 45.6 758 0.3
Total time deposits (1) 239,980 47.3 13,236 4.6
Total deposits $ 507,899 100 % $ 292,457 100 %
(1) Includes Individual Retirement Accounts (IRA’s) totaling $1,537,000 and
$1,207,000 at December 31, 2022 and 2021, respectively, all of which are in
the form of time deposits.
22
Time Deposits of $250,000 or more, or Jumbo Time Deposits, are generally
considered a more unpredictable source of funds. The following table sets forth
the Company’s maturity distribution of time deposits of $250,000 or more at
December 31, 2022 and 2021 (in thousands):
At December 31,
2022 2021
Due three months or less $ - $ 583
Due more than three months to six months – 787
More than six months to one year
44,680 320 One to five years 2,656 - Total $ 47,336 $ 1,690
Analysis of Results of Operations
The Company's profitability depends to a large extent on net interest income,
which is the difference between the interest received on earning assets, such as
loans and securities, and the interest paid on interest-bearing liabilities,
principally deposits and borrowings. Net interest income is determined by the
difference between yields earned on interest-earning assets and rates paid on
interest-bearing liabilities ("interest-rate spread") and the relative amounts
of interest-earning assets and interest-bearing liabilities. The Company's
interest-rate spread is affected by regulatory, economic, and competitive
factors that influence interest rates, loan demand, and deposit flows. The
Company's results of operations are also affected by the provision for loan
losses, operating expenses such as salaries and employee benefits, occupancy and
other operating expenses including income taxes, and noninterest income such as
loan prepayment fees.
The following table sets forth, for the periods indicated, information regarding
(i) the total dollar amount of interest income from interest-earning assets and
the resultant average yield; (ii) the total dollar amount of interest expense on
interest-bearing liabilities and the resultant average cost; (iii) net interest
income; (iv) interest rate spread; and (v) net interest margin. Average balances
are based on average daily balances (dollars in thousands):
Year Ended December 31,
2022 2021
Interest Average Interest Average
Average And Yield/ Average And Yield/
Balance Dividends Rate Balance Dividends Rate
Interest-earning assets:
Loans $ 354,521 17,952 5.1 % $ 191,561 9,756 5.1 %
Securities 29,263 649 2.2 % 30,075 488 1.6 %
Other interest-earning assets
(1) 64,989 1,281 2.0 % 42,399 145 0.3 %
Total interest-earning
assets/interest income 448,773 19,882 4.4 % 264,035 10,389 3.9 %
Cash and due from banks 16,430 19,169
Premises and equipment 867 3,045
Other assets 4,480 3,762
Total assets 470,550 $ 290,011
Interest-bearing liabilities:
Savings, NOW and money-market
deposits 152,588 669 0.4 % $ 129,792 533 0.4 %
Time deposits 83,324 2,565 3.1 % 16,970 118 0.7 %
Borrowings (4) 39,152 812 2.1 % 20,271 334 1.7 %
Total interest-bearing
liabilities/interest expense 275,064 4,046 1.5 % 167,033 985 0.6 %
Noninterest-bearing demand
deposits 145,670 93,758
Other liabilities 3,014 1,690
Stockholders' equity 46,802 27,530
Total liabilities and
stockholders' equity $ 470,550 $ 290,011
Net interest income 15,836 9,404
Interest rate spread (2) 2.96 % 3.3 %
Net interest margin (3) 3.53 % 3.6 %
Ratio of average
interest-earning assets to
average interest- bearing
liabilities 1.63 1.58
1 Includes interest-earning deposits with banks, Federal funds sold and Federal
Home Loan Bank stock dividends. 2 Interest rate spread represents the difference between average yield on
interest-earning assets and the average cost of interest-bearing liabilities.
3 Net interest margin is net interest income divided by average interest-earning
assets.
4 Includes Federal Home Loan Bank advances.
23
Rate/Volume Analysis
The following tables set forth certain information regarding changes in interest
income and interest expense for the periods indicated. For each category of
interest-earning assets and interest-bearing liabilities, information is
provided on changes attributable to (1) changes in rate (change in rate
multiplied by prior volume), (2) changes in volume (change in volume multiplied
by prior rate) and (3) changes in rate-volume (change in rate multiplied by
change in volume) (in thousands):
Year Ended December 31,
2022 versus 2021
Increases (Decreases) Due to Change In:
Rate Volume Rate/Volume Total
Interest-earning assets:
Loans $ (56 ) $ 8,299 $ (48 ) $ 8,195
Securities 179 (13 ) (5 ) 161
Other interest-earning assets 691 77 368 1,136
Total interest-earning assets 814 8,363 315 9,492
Interest-bearing liabilities:
Savings, NOW and money-market 35 94 6 135
Time deposits 405 460 1,582 2,447
Other 63 349 66 478
Total interest-bearing liabilities 503 903
1,654 3,060 Net interest income $ 311 $ 7,460 $ (1,339 ) $ 6,432
Financial Condition as of December 31, 2022 Compared to December 31, 2021
The Company's total assets at December 31, 2022, were $585.2 million, an increase of $233.3 million from December 31, 2021. The increase of $233.3 million in total assets primarily consisted of increases of $12.9 million in cash and cash equivalents, and $229.3 million in net loans offset by a $9.2 million reduction in debt securities available for sale due to principal paydowns and unrealized losses during the year. The Company experienced growth across the various loan types due to new organic originations. The net increase in loans resulted from $21.0 million in multi-family real estate loans, $181.2 million in commercial real estate loans and $17.8 million in residential real estate loans. The growth experienced in the loan portfolio is due to the implementation of our relationship based banking model and the success of our lenders in competing for new business in a highly competitive South Florida area. The Company's total liabilities at December 31, 2022, were $522.6 million, an increase of $209.3 million from December 31, 2021. The increase of $209.3 million in total liabilities was mainly due to an increase of $215.4 million in total deposits and a decrease of $8.0 million in Federal Home Loan Bank advances. The Company's total stockholders' equity at December 31, 2022, was $62.6 million, an increase of $24.1 million. The increase of $24.1 was principally due to the Company's issuance of shares of Series B Participating Preferred Stock for an aggregate amount of $15.0 million, issuance of common stock for an aggregate amount of $9.9 million and net income of $4.0 million, offset by an increase in unrealized loss on debt securities of $5.2 million.
At December 31, 2022, the Bank had a Tier 1 leverage ratio of 11.29%.
24
Results of Operations for Year Ended December 31, 2022 Compared to Year Ended
December 31, 2021
Years Ended December 31, Increase / (Decrease)
(dollars in thousands) 2022 2021 Amount Percentage
Total interest income $ 19,882 $ 10,389 $ 9,493 91 %
Total interest expense 4,046 985 3,061 311 %
Net interest income 15,836 9,404 6,432 68 %
Provision for loan losses 3,466 1,173 2,293 195 % Net interest income after provision for loan losses 12,370 8,231 4,139 50 % Total noninterest income 2,960 1,774 1,186 67 % Total noninterest expenses 9,938 6,936 3,002 43 % Net earnings before income taxes (benefit) 5,392 3,069 2,323 76 % Income taxes expense (benefit) 1,369 (3,227 ) 4,596 142 % Net earnings $ 4,023 $ 6,296 $ (2,273 ) (36 )% Net earnings per share - Basic and diluted $ 0.68 $ 1.61 Net earnings. The Company had net earnings of $4.0 million for the year ended December 31, 2022 compared to a net earnings of $6.3 million for the year ended December 31, 2021. The Company recorded a provision for loan losses amounting to $3,446,000 during year ended December 31, 2022, which was largely due to the growth in the loan portfolio of $229.3 million. The Company recorded a provision for loan losses amounting to $1,173,000 during the year ended December 31, 2021. Interest Income. Interest income increased by $9.5 million to $19.9 million for the year ended December 31, 2022 from $10.4 million for the year ended December 31, 2021, primarily due to an increase in loan volume. Interest Expense. Interest expense on deposits and borrowings increased by $3.1 million to $4 million for the year ended December 31, 2022 compared to the prior year. The increase in interest expense was caused by increased in interest rates paid on deposits and borrowings offset by volume increases in deposits and borrowings. Provision for Loan Losses. The provision for losses during the year ended December 31, 2022 amounted to $3,446,000. The provision for loan losses is charged to earnings in order to bring the total allowance for loan losses to a level deemed appropriate by management to absorb losses inherent in the portfolio. Management's periodic evaluation of the adequacy of the allowance is based upon historical experience, the volume and type of lending conducted by us, adverse situations that may affect the borrower's ability to repay, estimated value of the underlying collateral, loans identified as impaired, general economic conditions, particularly as they relate to our market areas, and other factors related to the estimated collectability of our loan portfolio. The allowance for loan losses totaled $5.8 million or 1.20% of loans outstanding at December 31, 2022, compared to $3.1 million or 1.22% of loans outstanding at December 31, 2021. Noninterest Income. Total noninterest income increased by $1,186,000 for the year ended December 31, 2022, from $1,774,000 for the year ended December 31, 2021. The increase is primarily related to service charges on deposit payment transactions. Noninterest Expenses. Total noninterest expenses increased by $3,002,000 to $9.9 million for the year ended December 31, 2022, compared to $6.9 million for the year ended December 31, 2021. The increase is primarily due to an increase of $1.8 million in salaries and employee benefits during the year ended December 31, 2022. The headcount of full-time equivalent employees increased from 38 to 48. Further, data processing and regulatory assessments and related costs increased $0.5 million and $0.7 million, respectively, during the year ended December 31, 2022. The increase in noninterest expenses is directly attributable to the growth of the Bank. Income taxes (benefit). The Company recorded income tax expense of $1,369,000 for the year ended December 31, 2022 compared to an income tax benefit of $3,227,000 for the year ended December 31, 2021. The income tax benefit was the result of the reversal of a valuation allowance that had previously been recognized.
Impact of Inflation and Changing Prices
The consolidated financial statements and related data presented herein have been prepared in accordance with accounting principles generally accepted in the United States of America, which requires the measurement of financial position and operating results in terms of historical dollars, without considering changes in the relative purchasing power of money over time due to inflation. Unlike most industrial companies, substantially all of the Bank's assets and liabilities are monetary in nature. As a result, interest rates have a more significant impact on its performance than the effects of general levels of inflation. However, inflation affects financial institutions by increasing their cost of goods and services purchased, as well as the cost of salaries and benefits, occupancy expense, and similar items. Inflation and related increases in interest rates generally decrease the market value of investments and loans held and may adversely affect liquidity, earnings, and stockholders' equity. Loan originations and re-financings tend to slow as interest rates increase. As a general principle, higher, interest rates are likely to reduce the Company's earnings.
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