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What changed in Oak Valley Bancorp's 10-K — 2022 vs 2023

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Paragraph-level year-over-year comparison of Oak Valley Bancorp's 2022 and 2023 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2023 report.

+287 added−272 removedSource: 10-K (2024-04-01) vs 10-K (2023-03-29)

Top changes in Oak Valley Bancorp's 2023 10-K

287 paragraphs added · 272 removed · 216 edited across 5 sections

Item 1. Business

Business — how the company describes what it does

45 edited+15 added−7 removed166 unchanged
Biggest changeThe Bank’s operations are also subject to federal laws applicable to credit transactions, and consumer protection statutes and regulations, such as the: ● Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers; ● Home Mortgage Disclosure Act, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves; ● Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit; ● Fair Credit Reporting Act, governing the use and provision of information to credit reporting agencies; ● Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies; ● Truth in Savings Act; and ● rules and regulations of the various federal agencies charged with the responsibility of implementing such federal laws. 17 Table of Contents The operations of the Bank are also subject to the: ● Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records; ● Electronic Funds Transfer Act and Regulation E promulgated thereunder, which govern automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services; ● Check Clearing for the 21st Century Act, which gives “substitute checks,” such as digital check images and copies made from that image, the same legal standing as the original paper check; and ● The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, as amended (the “USA Patriot Act”), which requires financial institutions to, among other things, establish broadened anti-money laundering compliance programs, and due diligence policies and controls to ensure the detection and reporting of money laundering.
Biggest changeThe operations of the Bank are also subject to the: ● Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records; ● Electronic Funds Transfer Act and Regulation E promulgated thereunder, which govern automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services; ● Check Clearing for the 21st Century Act, which gives “substitute checks,” such as digital check images and copies made from that image, the same legal standing as the original paper check; and ● The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, as amended (the “USA Patriot Act”), which requires financial institutions to, among other things, establish broadened anti-money laundering compliance programs, and due diligence policies and controls to ensure the detection and reporting of money laundering.
We attempt to reduce the exposure to such risks through the direct approval of all consumer loans by: ● reviewing each loan request and renewal individually, ● using a dual signature system of approval, ● strictly adhering to written credit policies, and ● performing external independent credit review. 7 Table of Contents Deposit Activities and Other Sources of Funds Our primary sources of funds are deposits and loan repayments.
We attempt to reduce the exposure to such risks through the direct approval of all consumer loans by: ● reviewing each loan request and renewal individually, ● using a dual signature system of approval, ● strictly adhering to written credit policies, and ● performing external independent credit review. 7 Table of Contents Deposit Activities Our primary sources of funds are deposits and loan repayments.
These laws and regulations require financial institutions to assist U.S. government agencies in detecting and preventing money laundering and other illegal acts by maintaining policies, procedures and controls designed to detect and report money laundering, terrorist financing, and other suspicious activity. ● Limitations on the amount of loans to one borrower and its affiliates and to executive officers and directors. ● Limitations on transactions with affiliates. ● Restrictions on the nature and amount of any investments in, and ability to underwrite certain securities. ● Requirements for opening of branches intra- and interstate. 12 Table of Contents ● Fair lending and truth in lending laws to ensure equal access to credit and to protect consumers in credit transactions. ● Provisions of the Gramm-Leach Bliley Act of 1999 (“GLBA”) and other federal and state laws dealing with privacy for nonpublic personal information of customers.
These laws and regulations require financial institutions to assist U.S. government agencies in detecting and preventing money laundering and other illegal acts by maintaining policies, procedures and controls designed to detect and report money laundering, terrorist financing, and other suspicious activity. ● Limitations on the amount of loans to one borrower and its affiliates and to executive officers and directors. ● Limitations on transactions with affiliates. ● Restrictions on the nature and amount of any investments in, and ability to underwrite certain securities. ● Requirements for opening of branches intra- and interstate. ● Fair lending and truth in lending laws to ensure equal access to credit and to protect consumers in credit transactions. ● Provisions of the Gramm-Leach Bliley Act of 1999 (“GLBA”) and other federal and state laws dealing with privacy for nonpublic personal information of customers.
Since opening the doors of our main Oakdale branch in 1991, our network of branches have been expanded geographically. As of December 31, 2022, we maintained eighteen full-service branch offices (in addition to our corporate headquarters) located in the cities of Oakdale, Sonora, Modesto, Bridgeport, Mammoth Lakes, Bishop, Escalon, Patterson, Turlock, Ripon, Stockton, Manteca, Tracy, Sacramento, and Roseville in California.
Since opening the doors of our main Oakdale branch in 1991, our network of branches have been expanded geographically. As of December 31, 2023, we maintained eighteen full-service branch offices (in addition to our corporate headquarters) located in the cities of Oakdale, Sonora, Modesto, Bridgeport, Mammoth Lakes, Bishop, Escalon, Patterson, Turlock, Ripon, Stockton, Manteca, Tracy, Sacramento, and Roseville in California.
The Company and the Bank held no investment positions at December 31, 2022 or 2021 that were subject to the final rule. Therefore, while these new rules may require us to conduct certain internal analysis and reporting, we believe that they will not require any material changes in our operations or business.
The Company and the Bank held no investment positions at December 31, 2023 or 2022 that were subject to the final rule. Therefore, while these new rules may require us to conduct certain internal analysis and reporting, we believe that they will not require any material changes in our operations or business.
Legal lending limits are calculated in conformance with California law, which prohibits a bank from lending to any one individual or entity or its related interests an aggregate amount which exceeds 15% of primary capital plus the allowance for loan losses on an unsecured basis, plus an additional 10% on a secured basis.
Legal lending limits are calculated in conformance with California law, which prohibits a bank from lending to any one individual or entity or its related interests an aggregate amount which exceeds 15% of primary capital plus the allowance for credit losses on an unsecured basis, plus an additional 10% on a secured basis.
Checking accounts are generally non-interest and interest bearing accounts, respectively, and may include service fees based on activity and balances. Federal Home Loan Bank Borrowings. To supplement our deposits as a source of funds for lending or investment, we borrow funds in the form of advances from the Federal Home Loan Bank (“FHLB”).
Checking accounts are generally non-interest and interest-bearing accounts, respectively, and may include service fees based on activity and balances. Other Sources of Funds Federal Home Loan Bank Borrowings. To supplement our deposits as a source of funds for lending or investment, we borrow funds in the form of advances from the Federal Home Loan Bank (“FHLB”).
No customer accounts for more than 10 percent of revenues for the Company or the Bank. Primary Market Area We conduct business from our main office in Oakdale, a city of approximately 23,500 residents located in Stanislaus County, California.
No customer accounts for more than 10 percent of revenues for the Company or the Bank. Primary Market Area We conduct business from our main office in Oakdale, a city of approximately 23,000 residents located in Stanislaus County, California.
In the event that the intended distribution from the Bank to the Company exceeds the restriction in the Financial Code, advance approval from the FRB is required. Management anticipates that there will be sufficient earnings at the Bank level to provide dividends to the Company to meet its cash requirements for 2023.
In the event that the intended distribution from the Bank to the Company exceeds the restriction in the Financial Code, advance approval from the FRB is required. Management anticipates that there will be sufficient earnings at the Bank level to provide dividends to the Company to meet its cash requirements for 2024.
The banking business in California generally, and in our primary service area, specifically, is competitive with respect to both loans and deposits and is dominated by a relatively small number of major banks, which have many offices operating over wide geographic areas. These include Wells Fargo Bank, Bank of America, JP Morgan Chase Bank and Bank of the West.
The banking business in California generally, and in our primary service area, specifically, is competitive with respect to both loans and deposits and is dominated by a relatively small number of major banks, which have many offices operating over wide geographic areas. These include Wells Fargo Bank, Bank of America, JP Morgan Chase Bank, U.S.
These guidelines prohibit excessive compensation as an unsafe and unsound practice and describe compensation as excessive when the amounts paid are unreasonable or disproportionate to the services performed by an executive officer, employee, director, or principal stockholder. 15 Table of Contents In October 2022, the SEC adopted final rules implementing the incentive-based compensation recovery (“clawback”) provisions of the Dodd-Frank Act.
These guidelines prohibit excessive compensation as an unsafe and unsound practice and describe compensation as excessive when the amounts paid are unreasonable or disproportionate to the services performed by an executive officer, employee, director, or principal stockholder. In October 2022, the SEC adopted final rules implementing the incentive-based compensation recovery (“clawback”) provisions of the Dodd-Frank Act.
Nasdaq has also adopted corporate governance rules, which are intended to allow shareholders and investors to more easily and efficiently monitor the performance of companies and their directors. Finally, the Company is subject to the provisions of the California General Corporation Law, while the Bank is also subject to the Financial Code provisions.
Nasdaq has also adopted corporate governance rules, which are intended to allow shareholders and investors to more easily and efficiently monitor the performance of companies and their directors. 18 Table of Contents Finally, the Company is subject to the provisions of the California General Corporation Law, while the Bank is also subject to the Financial Code provisions.
The Company and the Bank are each subject to supervision and regulation by a number of federal and state agencies and regulatory bodies, as outlined below. The Company is subject to regulation under the Bank Holding Company Act of 1956, as amended (“BHCA”).
The Company and the Bank are each subject to supervision and regulation by a number of federal and state agencies and regulatory bodies, as outlined below. 10 Table of Contents The Company is subject to regulation under the Bank Holding Company Act of 1956, as amended (“BHCA”).
There can be no assurance that the Bank will maintain its competitive position against current and potential competitors, especially those with greater resources than the Bank. The four largest competing banks had 121 total branches and deposits averaged approximately $321 million per office as of June 30, 2022 within the Bank’s primary service area.
There can be no assurance that the Bank will maintain its competitive position against current and potential competitors, especially those with greater resources than the Bank. The four largest competing banks had 136 total branches and deposits averaged approximately $501 million per office as of June 30, 2023 within the Bank’s primary service area.
We compete for deposits and loans principally with these banks, as well as with savings and loan associations, thrift and loan associations, credit unions, mortgage companies, insurance companies, offerors of money market accounts and other lending institutions.
Bank, BMO Harris Bank and Citibank. We compete for deposits and loans principally with these banks, as well as with savings and loan associations, thrift and loan associations, credit unions, mortgage companies, insurance companies, offerors of money market accounts and other lending institutions.
We offer commercial real estate loans to finance the acquisition of new or the refinancing of existing commercial properties, such as office buildings, industrial buildings, warehouses, hotels, shopping centers, automotive industry facilities and multiple dwellings. As of December 31, 2022, consumer and commercial real estate loans constituted 89% of our loan portfolio, of which 96% were commercial real estate loans.
We offer commercial real estate loans to finance the acquisition of new or the refinancing of existing commercial properties, such as office buildings, industrial buildings, warehouses, hotels, shopping centers, automotive industry facilities and multiple dwellings. As of December 31, 2023, consumer and commercial real estate loans constituted 90% of our loan portfolio, of which 97% were commercial real estate loans.
Historical data suggests that the Bank continues to maintain strong loan-to-value which has served as a cushion against precipitous reductions in real estate values during economic downturns. Non-owner occupied commercial real estate comprises 62.6% of the Bank’s total commercial real estate commitments, as of December 31, 2022.
Historical data suggests that the Bank continues to maintain strong loan-to-value which has served as a cushion against precipitous reductions in real estate values during economic downturns. Non-owner occupied commercial real estate comprises 67.0% of the Bank’s total commercial real estate commitments, as of December 31, 2023.
However, approximately 89% of our loan portfolio held for investment as of December 31, 2022 consisted of real estate-related loans, including construction loans, mini-perm loans, real estate mortgage loans and commercial loans secured by real estate.
However, approximately 90% of our loan portfolio held for investment as of December 31, 2023 consisted of real estate-related loans, including construction loans, mini-perm loans, real estate mortgage loans and commercial loans secured by real estate.
These loans require joint approval from two of the following officers: Chief Executive Officer, President, Chief Credit Officer, Senior Lending Officer or Credit Administrator. As of December 31, 2022, the Bank’s authorized legal lending limits were $19.9 million for unsecured loans plus an additional $13.3 million for specific secured loans.
These loans require joint approval from two of the following officers: Chief Executive Officer, President, Chief Credit Officer, Senior Lending Officer or Credit Administrator. As of December 31, 2023, the Bank’s authorized legal lending limits were $29.0 million for unsecured loans plus an additional $19.3 million for specific secured loans.
The portfolio is stratified by owner classification (either owner-occupied or non-owner occupied), product type, geography and size. As of December 31, 2022, the aggregate loan-to-value of the entire commercial real estate portfolio was 47.3%, based on the most recent appraisals as of the time of origination or renewal.
The portfolio is stratified by owner classification (either owner-occupied or non-owner occupied), product type, geography and size. As of December 31, 2023, the aggregate loan-to-value of the entire commercial real estate portfolio was 46.0%, based on the most recent appraisals as of the time of origination or renewal.
Under the USA Patriot Act, financial institutions are subject to prohibitions against specified financial transactions and account relationships as well as enhanced due diligence and “know your customer” standards in their dealings with high risk customers, foreign financial institutions, and foreign individuals and entities.
Under the USA Patriot Act, financial institutions are subject to prohibitions against specified financial transactions and account relationships as well as enhanced due diligence and “know your customer” standards in their dealings with high risk customers, foreign financial institutions, and foreign individuals and entities. We have extensive controls to comply with these requirements.
In addition, the concentration of our operations in Central California exposes us to greater risk than other banking companies with a wider geographic base in the event of catastrophes, such as earthquakes, fires and floods in this region. Employees As of December 31, 2022, we had 207 employees (174 full-time employees and 33 part-time employees).
In addition, the concentration of our operations in Central California exposes us to greater risk than other banking companies with a wider geographic base in the event of catastrophes, such as earthquakes, fires and floods in this region. Employees As of December 31, 2023, we had 230 employees (198 full-time employees and 32 part-time employees).
As of December 31, 2022, we owned $4,482,000 in FHLB stock. Advances from the Federal Home Loan Bank are typically secured by our entire real estate loan portfolio, which includes residential and commercial loans. As of December 31, 2022, our borrowing limit with the Federal Home Loan Bank was approximately $322 million.
As of December 31, 2023, we owned $5,202,000 in FHLB stock. Advances from the Federal Home Loan Bank are typically secured by our entire real estate loan portfolio, which includes residential and commercial loans. As of December 31, 2023, our borrowing limit with the Federal Home Loan Bank was approximately $333 million.
The Bank’s primary capital plus allowance for loan losses as of December 31, 2022 totaled $132.9 million. We seek to mitigate the risks inherent in our loan portfolio by adhering to certain underwriting practices.
The Bank’s primary capital plus allowance for credit losses as of December 31, 2023 totaled $193.0 million. We seek to mitigate the risks inherent in our loan portfolio by adhering to certain underwriting practices.
Our portfolio diversity in terms of both product types and geographic distribution, combined with strong debt coverage ratios, a low aggregate loan-to-value and a reasonable percentage of owner-occupied properties, significantly mitigate the risks associated with excessive commercial real estate concentration.
Our portfolio diversity in terms of both product types and geographic distribution, combined with strong debt coverage ratios, a low aggregate loan-to-value and a reasonable percentage of owner-occupied properties, mitigate the risks associated with excessive commercial real estate concentration. These elements contribute strength to our overall real estate portfolio in the event of any weakness in the real estate market.
The Federal Reserve Board is the primary federal regulator of state member banks. The Bank is also subject to regulation by the FDIC, which insures the Bank’s deposits as permitted by law.
As a California-state chartered bank, the Bank is subject to primary supervision, examination and regulation by the DFPI and the Federal Reserve Board. The Federal Reserve Board is the primary federal regulator of state member banks. The Bank is also subject to regulation by the FDIC, which insures the Bank’s deposits as permitted by law.
Such institutions are also subject to a temporary surcharge required by the Dodd-Frank Act. As required by the Dodd-Frank Act, deposit insurance premiums are assessed on the amount of an institution’s total assets minus its Tier 1 capital. Smaller institutions are assessed by a method using supervisory ratings and financial ratios.
As required by the Dodd-Frank Act, deposit insurance premiums are assessed on the amount of an institution’s total assets minus its Tier 1 capital. Smaller institutions are assessed by a method using supervisory ratings and financial ratios. Community Reinvestment Act We are subject to certain requirements and reporting obligations involving the CRA.
As of June 30, 2022, our primary service areas contained 256 banking offices, with approximately $62.4 billion in total deposits. As of June 30, 2022, we had total deposits of approximately $1.9 billion, which represented approximately 3.0% of the total deposits in the Bank’s primary service area.
As of June 30, 2023, our primary service areas contained 279 banking offices, with approximately $91.4 billion in total deposits. As of June 30, 2023, we had total deposits of approximately $1.7 billion, which represented approximately 1.8% of the total deposits in the Bank’s primary service area.
Community Reinvestment Act We are subject to certain requirements and reporting obligations involving the CRA. The CRA generally requires federal banking agencies to evaluate the record of financial institutions in meeting the credit needs of local communities, including low and moderate-income neighborhoods.
The CRA generally requires federal banking agencies to evaluate the record of financial institutions in meeting the credit needs of local communities, including low and moderate-income neighborhoods.
The Dodd-Frank Wall Street Reform and Consumer Protection Act The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”), enacted in 2010 has broadly affected the financial services industry by creating resolution authorities, requiring ongoing stress testing of capital, mandating higher capital and liquidity requirements, increasing regulation of executive and incentive-based compensation and requiring numerous other provisions aimed at strengthening the sound operation of the financial services sector depending, in part, on the size of the financial institution.
The following discussion is not meant to cover all applicable rules and regulations and it is qualified in its entirety by reference to such laws, rules and regulations which may change from time to time. 12 Table of Contents The Dodd-Frank Wall Street Reform and Consumer Protection Act The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”), enacted in 2010 has broadly affected the financial services industry by creating resolution authorities, requiring ongoing stress testing of capital, mandating higher capital and liquidity requirements, increasing regulation of executive and incentive-based compensation and requiring numerous other provisions aimed at strengthening the sound operation of the financial services sector depending, in part, on the size of the financial institution.
The loan-to-value on the non-owner occupied CRE segment was 48.1%, as of December 31, 2022. The highest concentration by product type is CRE Office, which comprised 24.8% of total CRE loan commitments, as of December 31, 2022.
The loan-to-value on the non-owner occupied CRE segment was 47.9%, as of December 31, 2023. The highest concentration by product type is CRE Retail, which comprised 22.7% of total CRE loan commitments, as of December 31, 2023.
We are required to have an information security program to safeguard the confidentiality and security of customer information and to ensure proper disposal. Customers must be notified when unauthorized disclosure involves sensitive customer information that may be misused. Data privacy and data security are areas of increasing state legislative focus.
Customers must be notified when unauthorized disclosure involves sensitive customer information that may be misused. Data privacy and data security are areas of increasing state legislative focus.
As insurer, the FDIC imposes deposit insurance premiums and is authorized to conduct examinations of and to require reporting by FDIC-insured institutions. The FDIC assesses deposit insurance premiums quarterly on each FDIC-insured institution based on annualized rates. Each institution with $10 billion or more in assets is assessed under a scorecard method using supervisory ratings, financial ratios and other factors.
The FDIC assesses deposit insurance premiums quarterly on each FDIC-insured institution based on annualized rates. Each institution with $10 billion or more in assets is assessed under a scorecard method using supervisory ratings, financial ratios and other factors. Such institutions are also subject to a temporary surcharge required by the Dodd-Frank Act.
These commercial loans include business lines of credit and commercial term loans to finance operations, to provide working capital or for specific purposes, such as to finance the purchase of assets, equipment or inventory.
Commercial Business Lending. We offer commercial loans to sole proprietorships, partnerships and corporations, with an emphasis on the real estate related industry. These commercial loans include business lines of credit and commercial term loans to finance operations, to provide working capital or for specific purposes, such as to finance the purchase of assets, equipment or inventory.
Anti-Money Laundering Regulations A series of banking laws and regulations beginning with the Bank Secrecy Act in 1970 require banks to prevent, detect, and report illicit or illegal financial activities to the federal government to prevent money laundering, international drug trafficking, and terrorism.
We are currently evaluating the impact of the modified CRA regulations, but do not anticipate any resulting material impact to its operations or compliance objectives. 16 Table of Contents Anti-Money Laundering Regulations A series of banking laws and regulations beginning with the Bank Secrecy Act in 1970 require banks to prevent, detect, and report illicit or illegal financial activities to the federal government to prevent money laundering, international drug trafficking, and terrorism.
Many states have also recently implemented or modified their data breach notification and data privacy requirements. Other Consumer Protection Laws and Regulations Bank regulatory agencies are increasingly focusing on compliance with consumer protection laws and regulations. Interest and other charges collected or contracted for by the Bank are subject to state usury laws and federal laws concerning interest rates.
Many states have also recently implemented or modified their data breach notification and data privacy requirements. 17 Table of Contents Other Consumer Protection Laws and Regulations Bank regulatory agencies are increasingly focusing on compliance with consumer protection laws and regulations.
If we ever become subject to significant environmental liabilities, our business, financial condition, liquidity and results of operations could be materially and adversely affected. 18 Table of Contents Other Pending and Proposed Legislation Other legislative and regulatory initiatives which could affect us and the banking industry, in general, are pending and additional initiatives may be proposed or introduced before the United States Congress, the California legislature and other governmental bodies in the future.
Other Pending and Proposed Legislation Other legislative and regulatory initiatives which could affect us and the banking industry, in general, are pending and additional initiatives may be proposed or introduced before the United States Congress, the California legislature and other governmental bodies in the future.
Under the Federal Reserve Board’s regulations, a bank holding company is required to serve as a source of financial and managerial strength to its subsidiary banks.
Under the Federal Reserve Board’s regulations, a bank holding company is required to serve as a source of financial and managerial strength to its subsidiary banks. The BHCA regulates the activities of holding companies including acquisitions, mergers, and consolidations and, together with the Gramm-Leach Bliley Act of 1999, the scope of allowable banking activities.
Compensation Federal banking agencies have issued joint guidance on incentive compensation designed to ensure that the incentive compensation policies of banking organizations such as the Company are consistent with the safety and soundness of the organization and its subsidiary banks.
If an institution fails to meet these standards, the appropriate federal banking agency may require the institution to submit a compliance plan and institute enforcement proceedings, if an acceptable compliance plan is not submitted. 15 Table of Contents Compensation Federal banking agencies have issued joint guidance on incentive compensation designed to ensure that the incentive compensation policies of banking organizations such as the Company are consistent with the safety and soundness of the organization and its subsidiary banks.
We are subject to such standards, as well as standards for notifying consumers in the event of a security breach. We must disclose our privacy policy to consumers and permit consumers to “opt out” of having certain personal financial information disclosed to unaffiliated third parties.
We must disclose our privacy policy to consumers and permit consumers to “opt out” of having certain personal financial information disclosed to unaffiliated third parties. We are required to have an information security program to safeguard the confidentiality and security of customer information and to ensure proper disposal.
The GLBA generally prohibits disclosure of consumer information to non-affiliated third parties unless the consumer has been given the opportunity to object and has not objected to such disclosure. Financial institutions are further required to disclose their privacy policies to consumers annually. The GLBA also directs federal regulators to prescribe standards for the security of consumer information.
Privacy, Data Security and Cybersecurity The GLBA of 1999 imposed requirements on financial institutions with respect to consumer privacy. The GLBA generally prohibits disclosure of consumer information to non-affiliated third parties unless the consumer has been given the opportunity to object and has not objected to such disclosure.
In general, the standards are designed to assist the federal banking agencies in identifying and addressing problems at insured depository institutions before capital becomes impaired. If an institution fails to meet these standards, the appropriate federal banking agency may require the institution to submit a compliance plan and institute enforcement proceedings, if an acceptable compliance plan is not submitted.
In general, the standards are designed to assist the federal banking agencies in identifying and addressing problems at insured depository institutions before capital becomes impaired.
Following the issuance of final rules by the Nasdaq market, the Company will review the rules and take the necessary actions required to comply. Deposit Insurance and FDIC Insurance Assessments Our deposits are insured by the FDIC to the maximum amount permitted by law, which is currently $250,000 per depositor.
Deposit Insurance and FDIC Insurance Assessments Our deposits are insured by the FDIC to the maximum amount permitted by law, which is currently $250,000 per depositor. As insurer, the FDIC imposes deposit insurance premiums and is authorized to conduct examinations of and to require reporting by FDIC-insured institutions.
The SEC proposed rules in March 2022 that, if adopted, would mandate public disclosure of material cybersecurity incidents within four business days of determining that such an incident has occurred. Recently, several states have adopted regulations requiring certain financial institutions to implement cybersecurity programs and providing detailed requirements with respect to these programs, including data encryption requirements.
Recently, several states have adopted regulations requiring certain financial institutions to implement cybersecurity programs and providing detailed requirements with respect to these programs, including data encryption requirements.
Dividends The payment of cash dividends by the Bank to the Company is subject to restrictions set forth in the Financial Code.
However, the proposed rules generally apply only to large banking organizations with total assets of $100 billion or more, and hence, would not be applicable to the Company. Dividends The payment of cash dividends by the Bank to the Company is subject to restrictions set forth in the Financial Code.
Removed
These elements contribute strength to our overall real estate portfolio in the event of any weakness in the real estate market. Commercial Business Lending. We offer commercial loans to sole proprietorships, partnerships and corporations, with an emphasis on the real estate related industry.
Added
Proposed new rules for U.S. implementation of capital requirements under Basel IV rules, more recently referred to as the Basel III "Endgame", were issued by the U.S. federal banking agencies on July 27, 2023. These proposed rules include broad-based changes to the risk-weighting framework for various credit exposures and operational risk capital requirements.
Removed
The BHCA regulates the activities of holding companies including acquisitions, mergers, and consolidations and, together with the Gramm-Leach Bliley Act of 1999, the scope of allowable banking activities. 10 Table of Contents As a California-state chartered bank, the Bank is subject to primary supervision, examination and regulation by the DFPI and the Federal Reserve Board.
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In June 2023, the SEC approved the Nasdaq Stock Market and the New York Stock Exchange’s proposed clawback listing standards. Listed companies were required to adopt their clawback policy no later than December 1, 2023.The Company has adopted a Nasdaq compliant clawback policy which is included as an exhibit to this Annual Report on Form 10-K.
Removed
The following discussion is not meant to cover all applicable rules and regulations and it is qualified in its entirety by reference to such laws, rules and regulations which may change from time to time.
Added
On October 24, 2023, the federal bank regulatory agencies jointly issued a final rule to modernize CRA regulations consistent with the following key goals: (1) to encourage banks to expand access to credit, investment, and banking services in low to moderate income communities; (2) to adapt to changes in the banking industry, including internet and mobile banking and the growth of non-branch delivery systems; (3) to provide greater clarity and consistency in the application of the CRA regulations, including adoption of a new metrics-based approach to evaluating bank retail lending and community development financing; and (4) to tailor CRA evaluations and data collection to bank size and type, recognizing differences in bank size and business models may impact CRA evaluations and qualifying activities.
Removed
The SEC’s final rules became effective on January 27, 2023, and the Nasdaq Stock Market released its proposed clawback listing standards on February 22, 2023. The Nasdaq proposal is subject to a 21-day public comment period, but the SEC requires that the Nasdaq final rules become effective by November 28, 2023.
Added
Most of the final CRA rule’s requirements will be applicable beginning January 1, 2026, with certain requirements, including the data reporting requirements, applicable as of January 1, 2027.
Removed
A listed issuer will then have 60 days to adopt a clawback policy that is compliant with the new SEC rules and Nasdaq listing standards. It is anticipated that most registrants will have until early 2024 to adopt and implement or adjust their policies as applicable.
Added
Financial institutions are further required to disclose their privacy policies to consumers annually. The GLBA also directs federal regulators to prescribe standards for the security of consumer information. We are subject to such standards, as well as standards for notifying consumers in the event of a security breach.
Removed
The agencies’ stated goal of the joint proposal is to “update CRA regulations to strengthen the achievement of the statute’s purpose; adapt to changes in the banking industry, including the expanded role of mobile and online banking; provide greater clarity and consistency in the application of the regulations; tailor performance standards to account for differences in bank size and business models and local conditions; tailor data collection and reporting requirements and use existing data whenever possible; promote transparency and public engagement; confirm that CRA and fair lending responsibilities are mutually reinforcing; and create a consistent regulatory approach that applies to banks regulated by all three agencies.” Until the agencies announce a final rule, it is unclear to what extent the rulemaking will create an additional compliance burden on the Company, and otherwise affect its lending, investment, retail branching, and other activities.
Added
The SEC recently issued a Cybersecurity Risk Management, Strategy, Governance, and Incident Disclosure rule, which became effective in December of 2023, and which requires that a registered company file a Form 8-K to disclose the occurrence of a material cybersecurity incident within four business days of determining that such an incident has occurred.
Removed
We have extensive controls to comply with these requirements. 16 Table of Contents Privacy, Data Security and Cybersecurity The GLBA of 1999 imposed requirements on financial institutions with respect to consumer privacy.
Added
The rule also requires that a registered company include certain information regarding its information security program as part of its annual Form 10-K filing, including a discussion of its processes for assessing, identifying, and managing material risks from cybersecurity threats and a description of oversight and management of cybersecurity threats at the board and management levels.
Added
Interest and other charges collected or contracted for by the Bank are subject to state usury laws and federal laws concerning interest rates.
Added
The Bank’s operations are also subject to federal laws applicable to credit transactions, and consumer protection statutes and regulations, such as the: ● Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers; ● Home Mortgage Disclosure Act, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves; ● Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit; ● Fair Credit Reporting Act, governing the use and provision of information to credit reporting agencies; ● Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies; ● Truth in Savings Act; and ● rules and regulations of the various federal agencies charged with the responsibility of implementing such federal laws.
Added
If we ever become subject to significant environmental liabilities, our business, financial condition, liquidity and results of operations could be materially and adversely affected. Climate-related Developments Climate change and the risks it may pose to financial institutions is an area of increased focus by the federal and state legislative bodies and regulators, including the federal banking agencies.
Added
In the future, new regulations or guidance may be issued, or other regulatory or supervisory actions may be taken, in this area by the federal banking agencies or other regulatory agencies, or new statutory requirements may be adopted.
Added
For example, the federal banking agencies have issued principles for climate-related financial risk management, which are designed to support the identification and management of climate-related financial risks at regulated institutions with more than $100 billion in total consolidated assets.
Added
Recently, on March 6, 2024, the SEC adopted new rules that require public companies to disclose substantial information about the material impacts of climate-related risks on their business, financial condition, and governance.
Added
These new rules require disclosure of a range of climate-related matters, including: (i) any material climate-related risks and their impacts on the registrant’s business strategy, results of operations, and financial condition, as well as on the registrant’s outlook and business model, (b) any activities, plans, or processes to mitigate, adapt to, or manage material climate-related risks, including the use of transition plans, scenario analyses, or internal carbon prices, (c) Any board oversight and management role in assessing and managing material climate-related risks, (d) any targets or goals that have materially affected or are reasonably likely to materially affect the registrant’s business, results of operations, or financial condition, and (e) the financial statement effects of severe weather events and other natural conditions, including costs and losses.
Added
Compliance dates will be phased-in among different classes of registrants, with most disclosure and financial statement rules taking effect for smaller reporting companies beginning on fiscal year 2027.

Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

48 edited+27 added−5 removed148 unchanged
Biggest changeIf we foreclose on a commercial real estate loan, our holding period for the collateral typically is longer than for residential mortgage loans because there are fewer potential purchasers of the collateral. Additionally, commercial real estate loans generally have relatively large balances to single borrowers or groups of related borrowers.
Biggest changeSuch balloon payments may require the borrower to either sell or refinance the underlying property in order to make the payment, which may increase the risk of default or non-payment. 23 Table of Contents If we foreclose on a commercial real estate loan, our holding period for the collateral typically is longer than for residential mortgage loans because there are fewer potential purchasers of the collateral.
The determination of the appropriate level of the allowance for loan losses inherently involves a high degree of subjectivity and requires us to make various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans.
The determination of the appropriate level of the allowance for credit losses inherently involves a high degree of subjectivity and requires us to make various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans.
Any increases in the provision for loan losses will result in a decrease in net income and may have a material adverse effect on our financial condition and results of operations. Our underwriting practices may not protect us against losses in our loan portfolio.
Any increases in the provision for credit losses will result in a decrease in net income and may have a material adverse effect on our financial condition and results of operations. Our underwriting practices may not protect us against losses in our loan portfolio.
In determining the amount of the allowance for loan losses, we review our loans and the loss and delinquency experience, and evaluate economic conditions and make significant estimates of current credit risks and future trends, all of which may undergo material changes.
In determining the amount of the allowance for credit losses, we review our loans and the loss and delinquency experience, and evaluate economic conditions and make significant estimates of current credit risks and future trends, all of which may undergo material changes.
A successful challenge to our performance under the fair lending laws and regulations could adversely impact our rating under the CRA and result in a wide variety of sanctions, including the required payment of damages and civil money penalties, injunctive relief, imposition of restrictions on merger and acquisition activity and restrictions on expansion activity, which could negatively impact our reputation, business, financial condition and results of operations. 28 Table of Contents Non-compliance with the USA Patriot Act, Bank Secrecy Act, or other laws and regulations could result in fines or sanctions or operating restrictions.
A successful challenge to our performance under the fair lending laws and regulations could adversely impact our rating under the CRA and result in a wide variety of sanctions, including the required payment of damages and civil money penalties, injunctive relief, imposition of restrictions on merger and acquisition activity and restrictions on expansion activity, which could negatively impact our reputation, business, financial condition and results of operations. 29 Table of Contents Non-compliance with the USA Patriot Act, Bank Secrecy Act, or other laws and regulations could result in fines or sanctions or operating restrictions.
If our estimates are incorrect, the allowance for loan losses may not be sufficient to cover losses inherent in our loan portfolio, resulting in the need for additions to our allowance through an increase in the provision for loan losses.
If our estimates are incorrect, the allowance for credit losses may not be sufficient to cover losses inherent in our loan portfolio, resulting in the need for additions to our allowance through an increase in the provision for credit losses.
Such volatility and disruption can reach unprecedented levels, resulting in downward pressure on stock prices and credit availability for certain issuers without regard to their underlying financial strength. A significant decline in our stock price could result in substantial losses for individual stockholders and could lead to costly and disruptive securities litigation. 31 Table of Contents
Such volatility and disruption can reach unprecedented levels, resulting in downward pressure on stock prices and credit availability for certain issuers without regard to their underlying financial strength. A significant decline in our stock price could result in substantial losses for individual stockholders and could lead to costly and disruptive securities litigation. 32 Table of Contents
In addition, bank regulatory agencies periodically review our allowance for loan losses and may require an increase in the provision for loan losses or the recognition of further charge-offs (which will in turn also require an increase in the provision for loan losses if the charge-offs exceed the allowance for loan losses), based on judgments different than that of management.
In addition, bank regulatory agencies periodically review our allowance for credit losses and may require an increase in the provision for credit losses or the recognition of further charge-offs (which will in turn also require an increase in the provision for credit losses if the charge-offs exceed the allowance for credit losses), based on judgments different than that of management.
Deterioration in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside of our control, may require an increase in the allowance for loan losses.
Deterioration in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside of our control, may require an increase in the allowance for credit losses.
The assessment of qualitative factors at the most recent Measurement Date (December 31, 2022), indicated that it was not more likely than not that impairment existed; as a result, no further testing was performed.
The assessment of qualitative factors at the most recent Measurement Date (December 31, 2023), indicated that it was not more likely than not that impairment existed; as a result, no further testing was performed.
These assumptions, judgments and estimates are drawn from historical experience and various other factors that we believe are reasonable under the circumstances as of the date of the consolidated financial statements. Actual results could differ materially from our estimates, and such differences could significantly impact our financial results. General Risks We depend on our key employees.
These assumptions, judgments and estimates are drawn from historical experience and various other factors that we believe are reasonable under the circumstances as of the date of the consolidated financial statements. Actual results could differ materially from our estimates, and such differences could significantly impact our financial results. 30 Table of Contents General Risks We depend on our key employees.
Negative publicity regarding our business, employees, or customers, with or without merit, may result in the loss of customers, investors and employees, costly litigation, a decline in revenues and increased governmental oversight. Liquidity risk could impair our ability to fund operations and jeopardize our financial condition. Liquidity is essential to our business.
Negative publicity regarding our business, employees, or customers, with or without merit, may result in the loss of customers, investors and employees, costly litigation, a decline in revenues and increased governmental oversight. 25 Table of Contents Liquidity risk could impair our ability to fund operations and jeopardize our financial condition. Liquidity is essential to our business.
Additionally, a decline in real estate values could adversely affect our portfolio of commercial real estate loans and could result in a decline in the origination of such loans. 22 Table of Contents Our commercial real estate loans involve higher principal amounts than other loans and repayment of these loans may be dependent on factors outside our control or the control of our borrowers.
Additionally, a decline in real estate values could adversely affect our portfolio of commercial real estate loans and could result in a decline in the origination of such loans. Our commercial real estate loans involve higher principal amounts than other loans and repayment of these loans may be dependent on factors outside our control or the control of our borrowers.
Any of these occurrences could have a material adverse effect on our financial condition and results of operations. We rely on communications, information, operating and financial control systems technology from third party service providers, and we may suffer an interruption in those systems.
Any of these occurrences could have a material adverse effect on our financial condition and results of operations. 27 Table of Contents We rely on communications, information, operating and financial control systems technology from third party service providers, and we may suffer an interruption in those systems.
At December 31, 2022, the Company had a net deferred tax asset of $17.1 million. For additional information, see Note 10 to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K. We may experience future goodwill impairment.
At December 31, 2023, the Company had a net deferred tax asset of $13.2 million. For additional information, see Note 10 to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K. We may experience future goodwill impairment.
At December 31, 2022, we held bank owned life insurance (“BOLI”) on certain key and former employees and executives and our directors, with a cash surrender value of $30,218,000.
At December 31, 2023, we held bank owned life insurance (“BOLI”) on certain key and former employees and executives and our directors, with a cash surrender value of $31,506,000.
Additionally, there is no guarantee that the U.S. Department of Treasury, FDIC and Federal Reserve Board will provide access to uninsured funds in the future in the event of the closure of other banks or financial institutions, or that they would do so in a timely fashion.
Department of Treasury, FDIC and Federal Reserve Board will provide access to uninsured funds in the future in the event of the closure of other banks or financial institutions, or that they would do so in a timely fashion.
We do not have control over these analysts. If one or more of the analysts who cover us downgrade our stock or change their opinion of our shares or publish inaccurate or unfavorable research about our business, our stock price would likely decline.
If one or more of the analysts who cover us downgrade our stock or change their opinion of our shares or publish inaccurate or unfavorable research about our business, our stock price would likely decline.
Inflation and rapid increases in interest rates have led to a decline in the trading value of previously issued government securities with interest rates below current market interest rates. Although the U.S.
Inflation and rapid increases in interest rates have led to a decline in the trading value of previously issued government securities with interest rates below current market interest rates. Additionally, there is no guarantee that the U.S.
Accordingly, if we make any errors in judgment in the collectability of our commercial real estate loans, any resulting charge-offs may be larger on a per loan basis than those incurred with our residential or consumer loan portfolios.
Additionally, commercial real estate loans generally have relatively large balances to single borrowers or groups of related borrowers. Accordingly, if we make any errors in judgment in the collectability of our commercial real estate loans, any resulting charge-offs may be larger on a per loan basis than those incurred with our residential or consumer loan portfolios.
Every loan carries a certain risk that it will not be repaid in accordance with its terms or that any underlying collateral will not be sufficient to assure repayment.
Lending money is a substantial part of our business. Every loan carries a certain risk that it will not be repaid in accordance with its terms or that any underlying collateral will not be sufficient to assure repayment.
These initiatives often place significant demands on a limited number of employees with subject matter expertise and management and may involve significant costs to implement as well as increase operational risk as employees learn to process transactions under new systems. The failure to properly execute on these strategic initiatives could adversely impact our business and results of operations.
These initiatives often place significant demands on a limited number of employees with subject matter expertise and management and may involve significant costs to implement as well as increase operational risk as employees learn to process transactions under new systems.
As of December 31, 2022, consumer and commercial real estate loans constituted 89% of our loan portfolio, of which 96% were commercial real estate loans.
As of December 31, 2023, consumer and commercial real estate loans constituted 90% of our loan portfolio, of which 97% were commercial real estate loans.
There are substantial risks and uncertainties associated with these efforts, particularly in instances where the markets are not fully developed. In developing and marketing new lines of business and/or new products and services, we may invest significant time and resources.
From time to time, we may seek to implement new lines of business or offer new products and services within existing lines of business. There are substantial risks and uncertainties associated with these efforts, particularly in instances where the markets are not fully developed.
If securities or industry analysts do not publish research or reports about our business, or if they publish negative reports about our business, our stock price and trading volume could decline. The trading market for our common stock may be influenced by the research and reports that securities or industry analysts publish about us or our business.
The trading market for our common stock may be influenced by the research and reports that securities or industry analysts publish about us or our business. We do not have control over these analysts.
Strong competition within our market areas may limit our growth and profitability. Competition in the banking and financial services industry is intense. In our market areas, we compete with commercial banks, savings institutions, mortgage brokerage firms, credit unions, finance companies, mutual funds, insurance companies, and brokerage and investment banking firms operating locally and elsewhere.
In our market areas, we compete with commercial banks, savings institutions, mortgage brokerage firms, credit unions, finance companies, mutual funds, insurance companies, and brokerage and investment banking firms operating locally and elsewhere.
This risk is affected by, among other things: • cash flow of the borrower and/or the project being financed; • in the case of a collateralized loan, the changes and uncertainties as to the future value of the collateral; • the credit history of a particular borrower; • changes in economic and industry conditions; and • the duration of the loan. 21 Table of Contents We maintain an allowance for loan losses which we believe is appropriate to provide for probable incurred losses inherent in our loan portfolio.
This risk is affected by, among other things: • cash flow of the borrower and/or the project being financed; • in the case of a collateralized loan, the changes and uncertainties as to the future value of the collateral; • the credit history of a particular borrower; • changes in economic and industry conditions; and • the duration of the loan.
These regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities, including the ability to impose increased capital requirements and restrictions on a bank’s operations, to reclassify assets, to determine the adequacy of a bank’s allowance for loan losses and to set the level of deposit insurance premiums assessed.
These regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities, including the ability to impose increased capital requirements and restrictions on a bank’s operations, to reclassify assets, to determine the adequacy of a bank’s allowance for credit losses and to set the level of deposit insurance premiums assessed. 28 Table of Contents Congress, state legislatures and federal and state agencies continually review banking, lending and other laws, regulations and policies for possible changes.
As a public company, we are required to maintain internal control over financial reporting and to report any material weaknesses in such internal controls. We have evaluated and tested our internal controls in order to allow management to report on our internal controls, as required by Section 404 of the Sarbanes-Oxley Act of 2002.
We have evaluated and tested our internal controls in order to allow management to report on our internal controls, as required by Section 404 of the Sarbanes-Oxley Act of 2002.
Any of these impacts, or any other impacts resulting from the factors described above or other related or similar factors, could have material adverse effect on our liquidity and our current and/or projected business operations and financial condition and results of operations.
Any of these impacts, or any other impacts resulting from the factors described above or other related or similar factors, could have material adverse effect on our liquidity and our current and/or projected business operations and financial condition and results of operations. Recent bank failures have created significant market volatility, regulatory uncertainty, and decreased confidence in the U.S. banking system.
Any perceived uncertainties as to our future direction or strategy arising from activist stockholder initiatives could also cause increased reputational, operational, financial, regulatory and other risks, harm our ability to raise new capital, or adversely affect the market price or increase the volatility of our securities. 30 Table of Contents If we fail to maintain proper and effective internal controls, our ability to produce accurate and timely financial statements could be impaired and investors ’ views of us could be harmed.
Any perceived uncertainties as to our future direction or strategy arising from activist stockholder initiatives could also cause increased reputational, operational, financial, regulatory and other risks, harm our ability to raise new capital, or adversely affect the market price or increase the volatility of our securities.
The amount of this allowance is determined by our management through a periodic review and consideration of several factors, including, but not limited to: • an ongoing review of the quality, size and diversity of the loan portfolio; • evaluation of non-performing loans; • historical default and loss experience; • historical recovery experience; • existing economic conditions; • risk characteristics of the various classifications of loans; and • the amount and quality of collateral, including guarantees, securing the loans.
The amount of this allowance is determined by our management through a periodic review and consideration of several factors, including, but not limited to: • an ongoing review of the quality, size and diversity of the loan portfolio; • evaluation of non-performing loans; • historical default and loss experience; • historical recovery experience; • existing economic conditions; • reasonable and supportable forecasts that affect the collectability of reported amounts; • risk characteristics of the various classifications of loans; and • the amount and quality of collateral, including guarantees, securing the loans. 22 Table of Contents If actual losses on our loans exceed our estimates used to establish our allowance for credit losses, our business, financial condition and profitability may suffer.
If our enterprise risk framework is ineffective, either because it fails to keep pace with changes in the financial markets, regulatory requirements, our businesses, our counterparties, clients or service providers or for other reasons, we could incur losses, suffer reputational damage or find ourselves out of compliance with applicable regulatory or contractual mandates. 24 Table of Contents An important aspect of our enterprise risk management framework is creating a risk culture in which all employees fully understand that there is risk in every aspect of our business and the importance of managing risk as it relates to their job functions.
If our enterprise risk framework is ineffective, either because it fails to keep pace with changes in the financial markets, regulatory requirements, our businesses, our counterparties, clients or service providers or for other reasons, we could incur losses, suffer reputational damage or find ourselves out of compliance with applicable regulatory or contractual mandates.
Communications and information systems are essential to the conduct of our business, as we use such systems to manage our customer relationships, our general ledger and virtually all other aspects of our business.
Technology Risks Our security measures may not be sufficient to mitigate the risk of a cyber-attack or cyber theft. Communications and information systems are essential to the conduct of our business, as we use such systems to manage our customer relationships, our general ledger and virtually all other aspects of our business.
No assurance can be given that the Company will not record an impairment loss on goodwill in the future and any such impairment loss could have a material adverse effect on our results of operations and financial condition. 29 Table of Contents In preparing our financial statements we make certain assumptions, judgments and estimates that affect amounts reported in our consolidated financial statements, which, if not accurate, may significantly impact our financial results.
No assurance can be given that the Company will not record an impairment loss on goodwill in the future and any such impairment loss could have a material adverse effect on our results of operations and financial condition.
Congress, state legislatures and federal and state agencies continually review banking, lending and other laws, regulations and policies for possible changes. Any change in such regulation and oversight, whether in the form of regulatory policy, new regulations or legislation, that applies to us or additional deposit insurance premiums could have a material adverse impact on our operations.
Any change in such regulation and oversight, whether in the form of regulatory policy, new regulations or legislation, that applies to us or additional deposit insurance premiums could have a material adverse impact on our operations. Because our business is highly regulated, the laws and applicable regulations are subject to frequent change.
The Dodd-Frank Act provides for various capital requirements and new restrictions on financial institutions and their holding companies. These changes may result in additional restrictions on investments and other activities. Regulations under the Dodd-Frank Act significantly impact our operations, and we expect to continue to face increased regulation.
The Dodd-Frank Act and supporting regulations could have a material adverse effect on us. The Dodd-Frank Act provides for various capital requirements and new restrictions on financial institutions and their holding companies. These changes may result in additional restrictions on investments and other activities.
Adverse financial market and economic conditions can exert downward pressure on stock prices, security prices, and credit availability for certain issuers without regard to their underlying financial strength. The volatility resulting and economic disruption from the failures of SVB and Signature Bank has particularly impacted the price of securities issued by financial institutions.
Adverse financial market and economic conditions can exert downward pressure on stock prices, security prices, and credit availability for certain issuers without regard to their underlying financial strength.
Changes in policies of the FRB are beyond our control and the impact of changes in those policies on our activities and results of operations can be difficult to predict. 27 Table of Contents The Company and the Bank are heavily regulated.
Changes in policies of the FRB are beyond our control and the impact of changes in those policies on our activities and results of operations can be difficult to predict. The Company and the Bank are heavily regulated. This regulation is to protect depositors, federal deposit insurance funds and the banking system as a whole, and not stockholders.
We may be required to expend significant additional resources to continue to modify or enhance our information security infrastructure or to investigate and remediate any information security vulnerabilities in response to continuing information systems security threats. 26 Table of Contents The occurrence of any systems failure or interruption could damage our reputation and result in a loss of customers and business, could subject us to additional regulatory scrutiny, or could expose us to legal liability.
The occurrence of any systems failure or interruption could damage our reputation and result in a loss of customers and business, could subject us to additional regulatory scrutiny, or could expose us to legal liability.
We also could be adversely affected to the extent such an agreement is not renewed by the third-party vendor or is renewed on terms less favorable to us. 25 Table of Contents Our holding company relies on dividends from the Bank for substantially all of its income and the net proceeds of capital raising transactions are currently the primary source of funds for cash dividends to our preferred and common stockholders.
Our holding company relies on dividends from the Bank for substantially all of its income and the net proceeds of capital raising transactions are currently the primary source of funds for cash dividends to our preferred and common stockholders.
A control system, no matter how well designed and operated, is based upon certain assumptions and can provide only reasonable assurance that the objectives of the control system will be met.
A control system, no matter how well designed and operated, is based upon certain assumptions and can provide only reasonable assurance that the objectives of the control system will be met. 31 Table of Contents If securities or industry analysts do not publish research or reports about our business, or if they publish negative reports about our business, our stock price and trading volume could decline.
If we cannot raise additional capital when needed, our ability to further expand our operations could be materially impaired and our financial condition and liquidity could be materially and adversely affected. Technology Risks Our security measures may not be sufficient to mitigate the risk of a cyber-attack or cyber theft.
If we cannot raise additional capital when needed, our ability to further expand our operations could be materially impaired and our financial condition and liquidity could be materially and adversely affected. 26 Table of Contents Climate change manifesting as physical or transition risks could adversely affect our operations, businesses and customers.
Such changes could subject us to additional costs, limit the types of financial services and products we may offer and/or increase the ability of non-banks to offer competing financial services and products, among other things. The Dodd-Frank Act and supporting regulations could have a material adverse effect on us.
Any new laws, rules and regulations could make compliance more difficult or expensive or otherwise adversely affect our business, financial condition or growth prospects. Such changes could subject us to additional costs, limit the types of financial services and products we may offer and/or increase the ability of non-banks to offer competing financial services and products, among other things.
In a rapidly changing interest rate environment, we may not be able to manage our interest rate risk effectively, which would adversely impact our financial condition and results of operations. 23 Table of Contents If interest rates decline, our net interest income could be reduced if interest rates on interest-earning assets such as loans, investment securities and cash balances, decrease more quickly than interest paid on interest-bearing liabilities, such as deposits.
In a rapidly changing interest rate environment, we may not be able to manage our interest rate risk effectively, which would adversely impact our financial condition and results of operations.
Threats to information security also exist in the processing of customer information through various other vendors and their personnel.
Threats to information security also exist in the processing of customer information through various other vendors and their personnel. We may be required to expend significant additional resources to continue to modify or enhance our information security infrastructure or to investigate and remediate any information security vulnerabilities in response to continuing information systems security threats.
There are risks associated with our lending activities and our allowance for loan losses may prove to be insufficient to absorb actual incurred losses in our loan portfolio. Lending money is a substantial part of our business.
Further, unless and until U.S. political, credit and financial market conditions have been sufficiently resolved or stabilized, it may increase our future borrowing costs. There are risks associated with our lending activities and our allowance for credit losses may prove to be insufficient to absorb actual incurred losses in our loan portfolio.
New lines of business, new products and services, or strategic project initiatives may subject us to additional risks. From time to time, we may seek to implement new lines of business or offer new products and services within existing lines of business.
In developing and marketing new lines of business and/or new products and services, we may invest significant time and resources.
Removed
Department of Treasury, FDIC and Federal Reserve Board have announced a program to provide up to $25 billion of loans to financial institutions secured by certain of such government securities held by financial institutions to mitigate the risk of potential losses on the sale of such instruments, widespread demands for customer withdrawals or other liquidity needs of financial institutions for immediate liquidity may exceed the capacity of such program.
Added
The failures of Silicon Valley Bank and Signature Bank in March 2023, followed by the failure of First Republic Bank in May 2023, have caused significant market volatility, regulatory uncertainty, and decreased confidence in the U.S. banking system.
Removed
If actual losses on our loans exceed our estimates used to establish our allowance for loan losses, our business, financial condition and profitability may suffer.
Added
These bank failures occurred during a period of rapidly rising interest rates which, among other things, has resulted in unrealized losses in longer duration securities and more competition for bank deposits, and may increase the risk of a potential economic recession in the United States.
Removed
Such balloon payments may require the borrower to either sell or refinance the underlying property in order to make the payment, which may increase the risk of default or non-payment.
Added
The failure of other financial institutions may cause deposit outflows as customers spread deposits among several different banks so as to maximize their amount of FDIC insurance, move deposits to banks deemed "too big to fail" or remove deposits from the U.S. financial system entirely.
Removed
This regulation is to protect depositors, federal deposit insurance funds and the banking system as a whole, and not stockholders.
Added
Given such an environment, we may experience more deposit volatility as customers react to adverse events or market speculation involving financial institutions. Inability to access short-term funding or the loss of client deposits could increase our cost of funding, limit access to capital markets or negatively impact our overall liquidity or capitalization.
Removed
Because our business is highly regulated, the laws and applicable regulations are subject to frequent change. Any new laws, rules and regulations could make compliance more difficult or expensive or otherwise adversely affect our business, financial condition or growth prospects.
Added
Ratings agencies have also reacted to recent events by issuing updated ratings and assessments. On April 21, 2023, Moody’s lowered the macro profile of the U.S. banking system reflecting general concern around the banking industry as a whole.
Added
Our ratings are subject to further adjustments based on a number of factors, including our financial strength and ability to generate earnings as well as factors not entirely within our control, such as conditions affecting the financial services industry generally. 21 Table of Contents In response to the bank failures, the United States government may adopt a variety of measures and new regulations designed to strengthen capital levels, liquidity standards, and risk management practices and otherwise restore confidence in financial institutions.
Added
Any reforms, if adopted, could have a significant impact on banks and bank holding companies. The premiums of the FDIC’s deposit insurance program are expected to increase, and banking regulators have signaled further review of regulatory requirements and the potential for changes to laws or regulations governing banks and bank holding companies.
Added
Changes resulting from these events could include increased regulatory oversight, higher capital requirements or changes in the way regulatory capital is calculated, and the impositions of additional restrictions through regulatory changes or supervisory or enforcement activities, each of which could have a material impact on our business.
Added
The failure to address the federal debt ceiling in a timely manner, downgrades of the U.S. credit rating and uncertain credit and financial market conditions may affect the stability of securities issued or guaranteed by the federal government, which may affect the valuation or liquidity of our investment securities portfolio and increase future borrowing costs.
Added
Recent federal budget deficit concerns and political conflict over legislation to raise the U.S. government’s debt limit have increased the possibility of a default by the U.S. government on its debt obligations, related credit-rating downgrades, or an economic recession in the United States.
Added
As a result of uncertain political, credit and financial market conditions, including the potential consequences of the federal government defaulting on its obligations for a period of time due to federal debt ceiling limitations or other unresolved political issues, investments in financial instruments issued or guaranteed by the federal government pose credit default and liquidity risks.
Added
Given that future deterioration in the U.S. credit and financial markets is a possibility, losses or significant deterioration in the fair value of our U.S. government issued or guaranteed investments may occur.
Added
Downgrades to the U.S. credit rating could affect the stability of securities issued or guaranteed by the federal government and the valuation or liquidity of our portfolio of such investment securities, and could result in our counterparties requiring additional collateral for our borrowings.
Added
We maintain an allowance for credit losses which we believe is appropriate to provide for current expected credit losses inherent in our loan portfolio.
Added
If interest rates decline, our net interest income could be reduced if interest rates on interest-earning assets such as loans, investment securities and cash balances, decrease more quickly than interest paid on interest-bearing liabilities, such as deposits. New lines of business, new products and services, or strategic project initiatives may subject us to additional risks.
Added
The failure to properly execute on these strategic initiatives could adversely impact our business and results of operations. 24 Table of Contents Strong competition within our market areas may limit our growth and profitability. Competition in the banking and financial services industry is intense.
Added
An important aspect of our enterprise risk management framework is creating a risk culture in which all employees fully understand that there is risk in every aspect of our business and the importance of managing risk as it relates to their job functions.
Added
We also could be adversely affected to the extent such an agreement is not renewed by the third-party vendor or is renewed on terms less favorable to us.
Added
There is an increasing concern over the risks of climate change and related environmental sustainability matters. The physical risks of climate change include discrete events, such as flooding and wildfires, and longer term shifts in climate patterns, such as extreme heat, sea level rise, and more frequent and prolonged drought.
Added
Such events could disrupt the Company’s operations or those of its clients or third parties on which it relies, including through direct damage to assets and indirect impacts from supply chain disruption and market volatility. Additionally, transitioning to a low carbon economy may entail extensive policy, legal, technology, and market initiatives.
Added
Transition risks, including changes in consumer preferences and additional regulatory requirements or taxes, could increase expenses and undermine business strategies.
Added
In addition, Company’s reputation and client relationships may be damaged as a result of practices related to climate change, including its involvement, or its clients’ involvement, in certain industries or projects associated with causing or exacerbating climate change, as well as any decisions the Company makes to continue to conduct or change its activities in response to considerations relating to climate change, including the setting of climate-related goals, commitments and targets.
Added
As climate risk is interconnected with all key risk types, the Company is advancing its processes to embed climate risk considerations into risk management strategies such as market, credit and operational risks; however, because the timing and severity of climate change may not be predictable, risk management strategies may not be effective in mitigating climate risk exposure.
Added
The rapid evolution and increased adoption of artificial intelligence technologies have also given rise to additional vulnerabilities and potential entry points for cyber threats.
Added
Regulations under the Dodd-Frank Act significantly impact our operations, and we expect to continue to face increased regulation.
Added
In preparing our financial statements we make certain assumptions, judgments and estimates that affect amounts reported in our consolidated financial statements, which, if not accurate, may significantly impact our financial results.
Added
If we fail to maintain proper and effective internal controls, our ability to produce accurate and timely financial statements could be impaired and investors ’ views of us could be harmed. As a public company, we are required to maintain internal control over financial reporting and to report any material weaknesses in such internal controls.

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

1 edited+1 added−0 removed13 unchanged
Biggest changeTrading Symbol and Holders of Common Stock Our common stock is traded on the Nasdaq Capital Market under the symbol “OVLY.” On February 28, 2023, there were approximately 373 shareholders of record of the common stock and 8,281,783 outstanding shares of common stock.
Biggest changeTrading Symbol and Holders of Common Stock Our common stock is traded on the Nasdaq Capital Market under the symbol “OVLY.” On February 29, 2024, there were approximately 360 shareholders of record of the common stock and 8,359,556 outstanding shares of common stock.
Added
Share Repurchases The Company has no repurchase plans or programs with respect to its common stock or equity securities in place and therefore there were no repurchased shares during the quarter ended December 31, 2023.

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

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Biggest changeWe believe the following were key indicators of our performance during 2022: ● Total assets increased to $1.97 billion at the end of 2022, an increase of 0.2%, from $1.96 billion at the end of 2021. ● Total deposits increased to $1.814 billion at the end of 2022, an increase of 0.4%, from $1.807 billion at the end of 2021. ● Total net loans increased to $905 million at the end of 2022, an increase of 6.7%, from $848 million at the end of 2021. ● Net interest income increased to $60.1 million in 2022, an increase of $11.2 million or 23.0%, compared to $48.8 million in 2021, mainly as a result of rising interest rates and growth of our loan and investment portfolios. ● Changes in total assets, deposits, loans and net interest income as described above were impacted by PPP loans, which had outstanding balances of $2 million and $31 million, as of December 31, 2022 and 2022, respectively. ● Reversal of loan loss provisions totaling $1,350,000 and $635,000 were recorded in 2022 and 2021, respectively, mainly due to credit quality improvements and the reversal of $1.1 million in 2022 of a qualitative adjustment in the loan loss reserve corresponding to the COVID-19 pandemic that was originally recorded during 2020. ● The ratio of total non-performing loans to total loans remained at 0.00% as of December 31, 2022 and 2021. ● Total noninterest income increased to $5.6 million in 2022, an increase of 2.7%, from $5.4 million in 2021, which is mainly due to increases in debit card transaction fee income. ● Total noninterest expense increased from $33.2 million in 2021 to $37.3 million in 2022, primarily due to staffing increases and general operating costs necessary to support the growing loan and deposit portfolios. ● Provision from income taxes increased by $1.4 million to $6.8 million in 2022, due to higher pre-tax income.
Biggest changeWe believe the following were key indicators of our performance during 2023: ● Total assets decreased to $1.84 billion at the end of 2023, a decrease of 6.4%, from $1.97 billion at the end of 2022. ● Total deposits decreased to $1.65 billion at the end of 2023, a decrease of 9.0%, from $1.81 billion at the end of 2022. ● Total net loans increased to $1.00 billion at the end of 2023, an increase of 11.0%, from $905 million at the end of 2022. ● Net interest income increased to $75.8 million in 2023, an increase of $15.7 million or 26.2%, compared to $60.1 million in 2022, mainly as a result of rising interest rates and growth of our loan portfolio. ● Provisions for credit losses of $970,000 and a reversal of credit loss provisions totaling $1,350,000 were recorded in 2023 and 2022, respectively.
The Company maintains the allowance for loan losses at a level that it considers to be adequate to provide for credit losses inherent in its loan portfolio.
The Company maintains the allowance for credit losses at a level that it considers to be adequate to provide for credit losses inherent in its loan portfolio.
Diversification, low loan-to-values, strong credit quality and enhanced credit monitoring contribute to a reduction in the portfolio’s overall risk in recent years and help to offset the various inherent credit risks. We continue to monitor the impact of the economic environment, and adjustments to the provision for loan loss will be made accordingly.
Diversification, low loan-to-values, strong credit quality and enhanced credit monitoring contribute to a reduction in the portfolio’s overall risk in recent years and help to offset the various inherent credit risks. We continue to monitor the impact of the economic environment, and adjustments to the provision for credit loss will be made accordingly.
Provision for Loan Losses Credit risk is inherent in the business of making loans. The Company establishes an allowance for loan losses through charges to earnings, which are shown in the consolidated statements of income as the provision for loan losses. Specifically identifiable and quantifiable losses are promptly charged off against the allowance.
Provision for credit losses Credit risk is inherent in the business of making loans. The Company establishes an allowance for credit losses through charges to earnings, which are shown in the consolidated statements of income as the provision for credit losses. Specifically identifiable and quantifiable losses are promptly charged off against the allowance.
In 2020, the FOMC decreased the Federal funds rate by 0.50% and 1.00% on two occasions in March resulting in a range of 0.00% to 0.25% as of December 31, 2020 and 2021. In 2022, the FOMC raised the federal funds rate seven times by an aggregate of 4.00% for 2022.
In 2020, the FOMC decreased the Federal funds rate by 0.50% and 1.00% on two occasions in March resulting in a range of 0.00% to 0.25% as of December 31, 2020 and 2021. In 2022, the FOMC raised the federal funds rate seven times by an aggregate of 4.00%.
The charges made for the outstanding loan portfolio are credited to the allowance for loan losses, whereas charges for off-balance sheet items are credited to the reserve for off-balance sheet items, which is presented as a component of other liabilities. The provision for loan losses is discussed in the section entitled “Provision for Loan Losses” above.
The charges made for the outstanding loan portfolio are credited to the allowance for credit losses, whereas charges for off-balance sheet items are credited to the reserve for off-balance sheet items, which is presented as a component of other liabilities. The provision for credit losses is discussed in the section entitled “Provision for credit losses” above.
Those factors are, in turn, affected by general economic conditions and other factors beyond our control, such as federal economic policies, the general supply of money in the economy, legislative tax policies, governmental budgetary matters, and the actions of the Federal Reserve Board. 38 Table of Contents For a detailed analysis of interest income and interest expense, see the “Average Balance Sheets” and the “Rate/Volume Analysis” below.
Those factors are, in turn, affected by general economic conditions and other factors beyond our control, such as federal economic policies, the general supply of money in the economy, legislative tax policies, governmental budgetary matters, and the actions of the Federal Reserve Board. 39 Table of Contents For a detailed analysis of interest income and interest expense, see the “Average Balance Sheets” and the “Rate/Volume Analysis” below.
Because of uncertainties inherent in estimating the appropriate level of the allowance for loan losses, actual results may differ from management’s estimate of credit losses and the related allowance.
Because of uncertainties inherent in estimating the appropriate level of the allowance for credit losses, actual results may differ from management’s estimate of credit losses and the related allowance.
FHLB Borrowings Although deposits are the primary source of funds for our lending and investment activities and for general business purposes, we may obtain advances from the FHLB as an alternative to retail deposit funds. We had no outstanding balances as of December 31, 2022 and 2021. The average balance of FHLB advances outstanding in 2022 and 2021 was $0.
FHLB Borrowings Although deposits are the primary source of funds for our lending and investment activities and for general business purposes, we may obtain advances from the FHLB as an alternative to retail deposit funds. We had no outstanding balances as of December 31, 2023 and 2022. The average balance of FHLB advances outstanding in 2023 and 2022 was $0.
In addition, the Company had lines of credit with its correspondent banks to purchase overnight federal funds totaling $70 million at December 31, 2022 and 2021. No advances were made on these lines of credit as of December 31, 2022 and 2021. The Company’s liquidity depends primarily on dividends paid to it as the sole shareholder of the Bank.
In addition, the Company had lines of credit with its correspondent banks to purchase overnight federal funds totaling $70 million at December 31, 2023 and 2022. No advances were made on these lines of credit as of December 31, 2023 and 2022. The Company’s liquidity depends primarily on dividends paid to it as the sole shareholder of the Bank.
MANAGEMENT ’ S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of financial condition as of December 31, 2022 and 2021 and results of operations for each of the years in the two-year period ended December 31, 2022 should be read in conjunction with our consolidated financial statements and related notes thereto, included in this report.
MANAGEMENT ’ S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of financial condition as of December 31, 2023 and 2022 and results of operations for each of the years in the two-year period ended December 31, 2022 should be read in conjunction with our consolidated financial statements and related notes thereto, included in this report.
The disparity between the effective tax rates for 2022 as compared to 2021 is primarily due to tax credits from low-income housing projects as well as tax-free income on municipal securities and loans that comprised a larger proportion of pre-tax income in 2022 as compared to 2021.
The disparity between the effective tax rates for 2023 as compared to 2022 is primarily due to tax credits from low-income housing projects as well as tax-free income on municipal securities and loans that comprised a larger proportion of pre-tax income in 2022 as compared to 2023.
(See “Description of Business-Regulation and Supervision-Capital Adequacy Requirements” in this report for exact definitions and regulatory capital requirements.) As of December 31, 2022, we were qualified as a “well capitalized institution” under the regulatory framework for prompt corrective action.
(See “Description of Business-Regulation and Supervision-Capital Adequacy Requirements” in this report for exact definitions and regulatory capital requirements.) As of December 31, 2023, we were qualified as a “well capitalized institution” under the regulatory framework for prompt corrective action.
The yields are calculated using a weighted average method based on the investment security balances as of December 31, 2022. Securities are reported at the earliest possible call, repricing or maturity date.
The yields are calculated using a weighted average method based on the investment security balances as of December 31, 2023. Securities are reported at the earliest possible call, repricing or maturity date.
If FOMC were to cut rates in 2023 or thereafter, we expect this would have a negative impact on our net interest income, due to repricing of interest-bearing cash balances, existing loans and investment securities. 40 Table of Contents Rate/Volume Analysis The following table below sets forth certain information regarding changes in interest income and interest expense of the Company for the periods indicated.
If FOMC were to cut rates in 2024 or thereafter, we expect this would have a negative impact on our net interest income, due to repricing of interest-bearing cash balances, existing loans and investment securities. 41 Table of Contents Rate/Volume Analysis The following table below sets forth certain information regarding changes in interest income and interest expense of the Company for the periods indicated.
For more information on our capital resources and capital adequacy requirements, see Note 19 to the Consolidated Financial Statements in Item 8 of this report. 55 Table of Contents
For more information on our capital resources and capital adequacy requirements, see Note 19 to the Consolidated Financial Statements in Item 8 of this report. 56 Table of Contents
For 2023, management remains focused on the above challenges and opportunities and other factors affecting the business similar to the factors driving the 2022 results as discussed in this section.
For 2024, management remains focused on the above challenges and opportunities and other factors affecting the business similar to the factors driving the 2023 results as discussed in this section.
See “Liquidity Management” below for the details on the FHLB borrowings program. 53 Table of Contents Deferred Compensation Obligations We maintain a nonqualified, unfunded deferred compensation plan for certain key management personnel. Under this plan, participating employees may defer compensation, which will entitle them to receive certain payments upon retirement, death, or disability.
See “Liquidity Management” below for the details on the FHLB borrowings program. Deferred Compensation Obligations We maintain a nonqualified, unfunded deferred compensation plan for certain key management personnel. Under this plan, participating employees may defer compensation, which will entitle them to receive certain payments upon retirement, death, or disability.
Also, retained earnings was reduced by the common stock dividend payments totaling $2.5 million during 2022. As of December 31, 2022, we had no material commitments for capital expenditures. We are subject to various regulatory capital requirements administered by federal banking agencies.
Also, retained earnings was reduced by the common stock dividend payments totaling $2.6 million during 2023. As of December 31, 2023, we had no material commitments for capital expenditures. We are subject to various regulatory capital requirements administered by federal banking agencies.
We currently maintain eighteen full-service offices. We intend to continue our growth strategy in future years through the opening of additional branches and loan production offices as our needs and resources permit. 34 Table of Contents 2023 Outlook As we begin our strategic business plan for 2023, we remained focused on relationship-based expansion throughout our market area.
We currently maintain eighteen full-service offices. We intend to continue our growth strategy in future years through the opening of additional branches and loan production offices as our needs and resources permit. 2024 Outlook As we begin our strategic business plan for 2024, we remained focused on relationship-based expansion throughout our market area.
Cash Equivalents and Interest-bearing Deposits in other Financial Institutions The Company holds federal funds sold, unpledged available-for-sale securities and salable government guaranteed loans to help meet liquidity requirements and provide temporary holdings until the funds can be otherwise deployed or invested. As of December 31, 2022, and 2021, we had $13,830,000 and $42,935,000, respectively, in federal funds sold.
Cash Equivalents and Interest-bearing Deposits in other Financial Institutions The Company holds federal funds sold, unpledged available-for-sale securities and salable government guaranteed loans to help meet liquidity requirements and provide temporary holdings until the funds can be otherwise deployed or invested. As of December 31, 2023, and 2022, we had $36,500,000 and $13,830,000, respectively, in federal funds sold.
The carrying values of available-for-sale investment securities are adjusted for unrealized gains or losses as a valuation allowance and any gain or loss is reported on an after-tax basis as a component of other comprehensive income. Total investment securities as a percentage of total assets increased to 26.9% as of December 31, 2022 compared to 13.6% at December 31, 2021.
The carrying values of available-for-sale investment securities are adjusted for unrealized gains or losses as a valuation allowance and any gain or loss is reported on an after-tax basis as a component of other comprehensive income. Total investment securities as a percentage of total assets increased to 28.3% as of December 31, 2023 compared to 26.9% at December 31, 2022.
The assessment of qualitative factors at the most recent Measurement Date (December 31, 2022), indicated that it was not more likely than not that impairment existed; as a result, no further testing was performed. 35 Table of Contents Allowance for Loan Losses Credit risk is inherent in the business of lending and making commercial loans.
The assessment of qualitative factors at the most recent Measurement Date (December 31, 2023), indicated that it was not more likely than not that impairment existed; as a result, no further testing was performed. Allowance for credit losses Credit risk is inherent in the business of lending and making commercial loans.
During 2018 and 2022, we committed to invest $5 million and $10.5 million, respectively, in low-income housing tax credit funds (“LIHTC”) to promote our participation in CRA activities, which had unfunded commitments of $10,154,000 and $895,000 as of December 31, 2022 and 2021, respectively.
During 2018 and 2022, we committed to invest $5 million and $10.5 million, respectively, in low-income housing tax credit funds (“LIHTC”) to promote our participation in CRA activities, which had unfunded commitments of $9,782,000 and $10,154,000 as of December 31, 2023 and 2022, respectively.
The FHLB determines limitations on the amounts of advances by assigning a percentage to each eligible loan category that will count towards the borrowing capacity. As of December 31, 2022 and 2021, the Company had no FHLB advances outstanding and had sufficient collateral to borrow an additional $322.4 million and $368.5 million, respectively.
The FHLB determines limitations on the amounts of advances by assigning a percentage to each eligible loan category that will count towards the borrowing capacity. As of December 31, 2023 and 2022, the Company had no FHLB advances outstanding and had sufficient collateral to borrow an additional $333.1 million and $322.4 million, respectively.
The balance of our allowance for loan losses is management's best estimate of the probable losses inherent in the portfolio. The ultimate adequacy of the allowance is dependent upon a variety of factors beyond our control, including the real estate market, changes in interest rate and economic and political environments.
The balance of our allowance for credit losses is management's best estimate of the current expected credit losses inherent in the portfolio. The ultimate adequacy of the allowance is dependent upon a variety of factors beyond our control, including the real estate market, changes in interest rate and economic and political environments.
The net interest margin expansion the Company recognized in 2022, is due to the factors discussed above but could reverse and result in interest margin compression if rate indexes on assets were to fall, and/or: 1) deposit interest rates increase due to customer demand, or competitive pressure from peer banks, 2) competition in the lending market restrict significant increases in new loan rates, and 3) deposit growth out-paces loan growth as recognized in recent years, resulting in higher interest-bearing cash balances, which offer a lower yields than loans and investments.
The net interest margin expansion the Company recognized in 2023, is due to the factors discussed above but could reverse and result in interest margin compression if rate indexes on assets were to fall, and/or: 1) deposit interest rates continue to increase due to customer demand, or competitive pressure from peer banks, 2) competition in the lending market restrict significant increases in new loan rates, and 3) deposit growth out-paces loan growth as recognized in recent years, resulting in higher interest-bearing cash balances, which would offer lower yields than loans and investments depending if the FOMC were to cut the Federal Funds rate.
Earnings on the cash surrender value of life insurance recognized an increase of $30,000 in 2022 compared to 2021, due to higher yields earned on certain life insurance policies. Mortgage commissions have decreased by $79,000 for the year 2022, as compared to 2021, as a result of the decreased demand for home purchases and refinancing.
Earnings on the cash surrender value of life insurance recognized an increase of $39,000 in 2023 compared to 2022, due to higher yields earned on certain life insurance policies. Mortgage commissions have decreased by $53,000 for the year 2023, as compared to 2022, as a result of the decreased demand for home purchases and refinancing.
These items, as well as other factors, contributed to the increase in net income for 2022 to $22.9 million from $16.3 million in 2021, which translates into $2.79 per diluted share in 2022 as compared to $2.00 per diluted share in 2021. Over the past several years, our network of branches and loan production offices have expanded geographically.
These items, as well as other factors, contributed to the increase in net income for 2023 to $30.8 million from $22.9 million in 2022, which translates into $3.75 per diluted share in 2023 as compared to $2.79 per diluted share in 2022. Over the past several years, our network of branches and loan production offices have expanded geographically.
During 2022, the Company recognized net loan recoveries of $80,000 as compared to $76,000 in 2021. Management reviews these conditions with our senior credit officers.
During 2023, the Company recognized net loan recoveries of $112,000 as compared to $80,000 in 2022. Management reviews these conditions with our senior credit officers.
The average rate paid on time deposits in denominations of over $250,000 was 0.27% and 0.31% for the years ended December 31, 2022 and 2021, respectively.
The average rate paid on time deposits in denominations of over $250,000 was 1.35% and 0.27% for the years ended December 31, 2023 and 2022, respectively.
Currently, all of our investment securities are classified as available-for-sale, except for one mutual fund classified as an equity security. 44 Table of Contents The fair value of the equity security was $2,990,000 and $3,391,000 at December 31, 2022 and December 31, 2021, respectively.
Currently, all of our investment securities are classified as available-for-sale, except for one mutual fund classified as an equity security. 45 Table of Contents The fair value of the equity security was $3,132,000 and $2,990,000 at December 31, 2023 and December 31, 2022, respectively.
Service charge income increased to $1,596,000 in 2022 compared to $1,287,000 for 2021, due to an increase in overdraft fees and the number of checking accounts.
Service charge income increased to $1,813,000 in 2023 compared to $1,596,000 for 2022, due to an increase in overdraft fees and the number of checking accounts.
Based on the current conditions of the loan portfolio, management believes that the $9,468,000 allowance for loan losses at December 31, 2022 is adequate to absorb losses inherent in our loan portfolio. No assurance can be given, however, that adverse economic conditions or other circumstances will not result in increased losses in the portfolio.
Based on the current conditions of the loan portfolio, management believes that the $10,896,000 allowance for credit losses at December 31, 2023 is adequate to absorb losses inherent in our loan portfolio. No assurance can be given, however, that adverse economic conditions or other circumstances will not result in increased losses in the portfolio.
The table below shows an analysis of construction and land loans by type and location. Non-owner-occupied land loans of $8.7 million as of December 31, 2022 included loans for lands specified for commercial development of $6.9 million and for residential development of $1.8 million, the majority of which are located in Stanislaus County.
The table below shows an analysis of construction and land loans by type and location. Non-owner-occupied land loans of $12.5 million as of December 31, 2023 included loans for lands specified for commercial development of $10.7 million and for residential development of $1.8 million, the majority of which are located in Stanislaus County.
Net interest spread and net interest margin were 3.27% and 3.32%, respectively, for the year ended December 31, 2022, compared to 2.99% and 3.04%, respectively, for the year ended December 31, 2021. This upward trend is mainly due to the FOMC rate hikes that begin in March 2022, resulting in an increase in earning asset yields, as described below.
Net interest spread and net interest margin were 4.14% and 4.33%, respectively, for the year ended December 31, 2023, compared to 3.27% and 3.32%, respectively, for the year ended December 31, 2022. This upward trend is mainly due to the FOMC rate hikes that begin in March 2022, resulting in an increase in earning asset yields, as described below.
All earning asset yields benefited from these increases, especially our interest-bearing cash accounts that receive the full impact of those increases. These cash balances averaged $516 million in 2022, representing over 25% of total average assets.
All earning asset yields benefited from these increases, especially our interest-bearing cash accounts that receive the full impact of those increases. These cash balances averaged $302 million in 2023, representing over 16% of total average assets.
The strong credit quality has resulted in net loan recoveries of $80,000 and $76,000 in 2022 and 2021, respectively. 41 Table of Contents The Company will continue to monitor the adequacy of the allowance for loan losses and make additions to the allowance in accordance with the analysis referred to above.
The strong credit quality has resulted in net loan recoveries of $112,000 and $80,000 in 2023 and 2022, respectively. The Company will continue to monitor the adequacy of the allowance for credit losses and make additions to the allowance in accordance with the analysis referred to above.
Four of our clients carry deposit balances of more than 1% of our total deposits, none of which had a deposit balance of more than 3% of total deposits at December 31, 2022. The Company had no brokered deposits as of December 31, 2022 and 2021.
Five of our clients carry deposit balances of more than 1% of our total deposits, one of which had a deposit balance of more than 3% of total deposits at December 31, 2023. The Company had no brokered deposits as of December 31, 2023 and 2022.
However, management remains committed to cost-control and efficiency, and we expect to keep these increases to a minimum relative to growth. 43 Table of Contents Provision for Income Taxes We reported a provision for income taxes of $6,787,000 and $5,340,000 for the years 2022 and 2021, respectively.
However, management remains committed to cost-control and efficiency, and we expect to keep these increases to a minimum relative to growth. 44 Table of Contents Provision for Income Taxes We reported a provision for income taxes of $9,458,000 and $6,787,000 for the years 2023 and 2022, respectively.
Our earning asset yield increased 28 basis points in 2022 compared to 2021. The FOMC increased the federal funds target rate from a range of 0% to 0.25% at the beginning of 2022, to 4.25% to 4.50% by the end of the year.
Our earning asset yield increased 122 basis points in 2023 compared to 2022. The FOMC increased the federal funds target rate from a range of 0% to 0.25% at the beginning of 2022, to 4.25% to 4.50% by the end of the year. The FOMC approved additional rate hikes in 2023 to a range of 5.25% to 5.50%.
The effective income tax rate on income from continuing operations was 22.9% for the year ended December 31, 2022, compared to 24.6% for the year 2021.
The effective income tax rate on income from continuing operations was 23.5% for the year ended December 31, 2023, compared to 22.9% for the year 2022.
Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled using the liability method. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.
Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled using the liability method.
The total unrealized loss on debt securities that were in a loss position for greater than 12 continuous months was $18,306,000 with an aggregate fair value of $76,760,000.
The total unrealized loss on debt securities that were in a loss position for greater than 12 continuous months was $29,679,000 with an aggregate fair value of $336,756,000.
The increase in net income for the year ended December 31, 2022 was primarily due to an increase of $11,241,000 in net interest income, mainly from the positive impact of FOMC interest rate hikes and the growth of our loan and investment portfolios.
The increase in net income for the year ended December 31, 2023 was primarily due to an increase of $15,726,000 in net interest income, mainly from the positive impact of FOMC interest rate hikes and the growth of our loan portfolio.
The primary other earning assets held by the Company as of December 31, 2022 and 2021, includes the cash surrender value of the BOLI policies, Federal Home Loan Bank stock and Federal Reserve Bank stock. During 2021, we purchased 17 new life insurance policies on certain employees for a total investment of $3.4 million.
The primary other earning assets held by the Company as of December 31, 2023 and 2022, includes the cash surrender value of the BOLI policies, Federal Home Loan Bank stock and Federal Reserve Bank stock. During 2023, we purchased one new life insurance policy on a director for a total investment of $500,000.
In February 2023, the FOMC raised the the Federal funds rate by 0.25% resulting in a range of 4.50% to 4.75%.
In 2023, the FOMC raised the Federal funds rate four times by 0.25% resulting in a range of 5.25% to 5.50%.
As a result of management’s analysis, a range of the potential amount of the allowance for loan losses is determined. The Company recorded provision for loan loss reversals totaling $1,350,000 and $635,000 during the years ended December 31, 2022 and 2021, respectively.
As a result of management’s analysis, a range of the potential amount of the allowance for credit losses is determined. 42 Table of Contents The Company recorded provision for credit loss of $970,000 and a reversal totaling $1,350,000 during the years ended December 31, 2023 and 2022, respectively.
Consistent with ASU 2016-01, equity securities are carried at fair value with the changes in fair value recognized in the consolidated statement of income. Accordingly, the Company recognized unrealized losses of $475,000 and $99,000 during the years ended December 31, 2022 and 2021, respectively.
Consistent with ASU 2016-01, equity securities are carried at fair value with the changes in fair value recognized in the consolidated statement of income. Accordingly, the Company recognized an unrealized gain of $41,000 during the year ended December 31, 2023, and an unrealized loss of $475,000 during the year ended December 31, 2022.
For this purpose, we maintain a portion of our funds in cash and cash equivalents, loans and securities available for sale. Our liquid assets at December 31, 2022 and 2021 totaled approximately $509.5 million and $858.2 million, respectively.
For this purpose, we maintain a portion of our funds in cash and cash equivalents, loans and securities available for sale. Our liquid assets at December 31, 2023 and 2022 totaled approximately $489.0 million and $754.9 million, respectively.
As of December 31, 2022, $242,023,000 of the investment securities were pledged to secure public deposits. As of December 31, 2022, the total unrealized loss on debt securities that were in a loss position for less than 12 continuous months was $26,374,000 with an aggregate fair value of $369,614,000.
As of December 31, 2023, $288,199,000 of the investment securities were pledged to secure public deposits. As of December 31, 2023, the total unrealized loss on debt securities that were in a loss position for less than 12 continuous months was $465,000 with an aggregate fair value of $52,079,000.
Changes in volume resulted in an increase in net interest income (on a FTE basis) of $4,235,000 for the year of 2022 compared to the year 2021, and changes in interest rates and the mix resulted in an increase in net interest income (on a FTE basis) of $8,200,000 for the year 2022 versus the year 2021.
Changes in volume resulted in an increase in net interest income (on a FTE basis) of $2,186,000 for the year of 2023 compared to the year 2022, and changes in interest rates and the mix resulted in an increase in net interest income (on a FTE basis) of $13,848,000 for the year 2023 versus the year 2022.
The average deposits for the year ended December 31, 2022 increased $215,870,000 or 13.5% to $1,816,847,000 compared to $1,600,977,000 at December 31, 2021. Deposit data analysis has resulted in an estimate of $922,778,000 in uninsured deposits, representing the balance that is not covered by FDIC insurance limits as of December 31, 2022. Deposits are the Company’s primary source of funds.
The average deposits for the year ended December 31, 2023 decreased $108,026,000 or 5.9% to $1,708,821,000 compared to $1,816,847,000 at December 31, 2022. Deposit data analysis has resulted in an estimate of $768,103,000 in uninsured deposits, representing the balance that is not covered by FDIC insurance limits as of December 31, 2023. Deposits are the Company’s primary source of funds.
Due to strategic emphasis by management, core deposits (based on a definition provided by FDIC’s Uniform Bank Performance Report) increased by $1,756,000 or 0.1% in 2022 to $1,790,161,000 at December 31, 2022. The percentage of core deposits to total deposits decreased slightly to 98.7% at December 31, 2022 as compared to 99.0% at December 31, 2021.
Due to strategic emphasis by management, core deposits (based on a definition provided by FDIC’s Uniform Bank Performance Report) decreased by $168,025,000 or 9.4% in 2023 to $1,622,136,000 at December 31, 2023. The percentage of core deposits to total deposits decreased slightly to 98.3% at December 31, 2023 as compared to 98.7% at December 31, 2022.
Debit card transaction fee income increased to $1,734,000 in 2022 as compared to $1,693,000 in 2021, as a result of the increase in the aggregate number of transaction deposit accounts and corresponding service fee income, and a spending trend shifting to debit cards payments in recent years.
Debit card transaction fee income increased to $1,773,000 in 2023 as compared to $1,734,000 in 2022, as a result of the increase in the aggregate number of transaction deposit accounts and corresponding service fee income.
Management anticipates that noninterest expense should continue to increase as we continue to grow, and management believes the Company’s administration as currently set up is scalable to handle future deposit growth.
Some of these included audit expenses, software license fees and ATM processing expenses. Management anticipates that noninterest expense should continue to increase as we continue to grow, and management believes the Company’s administration as currently set up is scalable to handle future deposit growth.
Potentially, the most volatile deposits in a financial institution are jumbo certificates of deposit, meaning time deposits with balances that equal or exceed $250,000, as customers with balances of that magnitude are typically more rate-sensitive than customers with smaller balances. 52 Table of Contents The following tables summarize the distribution of average daily deposits and the average daily rates paid for the periods indicated: Distribution of Average Daily Deposits Average Deposits 2022 2021 Average Average Average Average (Dollars in Thousands) Balance Rate Balance Rate Demand $ 1,190,665 0.04 % $ 1,062,890 0.04 % Money market 417,896 0.12 % 358,037 0.11 % Savings 167,582 0.05 % 140,999 0.05 % Time deposits $250,000 and under 23,365 0.25 % 21,987 0.28 % Time deposits over $250,000 17,339 0.27 % 17,064 0.31 % Total deposits $ 1,816,847 0.06 % $ 1,600,977 0.06 % The scheduled maturities of our time deposits in denominations of more than $250,000 at December 31, 2022 are as follows: Maturities of Time Deposits over $250,000 (Dollars in Thousands) Three months or less $ 9,583 Over three months through six months 3,063 Over six months through twelve months 1,825 Over twelve months 1,002 Total $ 15,473 Because our client base is comprised primarily of commercial and industrial accounts, individual account balances are generally higher than those of consumer-oriented banks.
Potentially, the most volatile deposits in a financial institution are jumbo certificates of deposit, meaning time deposits with balances that equal or exceed $250,000, as customers with balances of that magnitude are typically more rate-sensitive than customers with smaller balances. 53 Table of Contents The following tables summarize the distribution of average daily deposits and the average daily rates paid for the periods indicated: Distribution of Average Daily Deposits Average Deposits 2023 2022 Average Average Average Average (Dollars in Thousands) Balance Rate Balance Rate Demand $ 1,146,198 0.12 % $ 1,190,665 0.04 % Money market 374,828 0.72 % 417,896 0.12 % Savings 147,181 0.13 % 167,582 0.05 % Time deposits $250,000 and under 24,172 1.55 % 23,365 0.25 % Time deposits over $250,000 16,443 1.35 % 17,339 0.27 % Total deposits $ 1,708,822 0.28 % $ 1,816,847 0.06 % The scheduled maturities of our time deposits in denominations of more than $250,000 at December 31, 2023 are as follows: Maturities of Time Deposits over $250,000 (Dollars in Thousands) Three months or less $ 5,443 Over three months through six months 3,835 Over six months through twelve months 10,450 Over twelve months 2,395 Total $ 22,123 Because our client base is comprised primarily of commercial and industrial accounts, individual account balances are generally higher than those of consumer-oriented banks.
Management recognizes that assessments could increase further depending on deposit growth throughout the remainder of 2023, as the FDIC assessment rates are applied to average quarterly total liabilities as the primary basis.
Management recognizes that assessments could increase further depending on deposit growth throughout the remainder of 2024, as the FDIC assessment rates are applied to average quarterly total liabilities as the primary basis, and based on FDIC’s discretion to increase the base assessment rate as needed to replenish the Deposit Insurance Fund.
(4) Represents net interest income as a percentage of average interest-earning assets. 39 Table of Contents Net interest income, on a fully tax equivalent basis (“FTE”), increased $12,435,000 or 24.9% to $62,308,000 for the year ended December 31, 2022, compared to $49,873,000 in 2021.
(4) Represents net interest income as a percentage of average interest-earning assets. 40 Table of Contents Net interest income, on a fully tax equivalent basis (“FTE”), increased $16,034,000 or 25.7% to $78,342,000 for the year ended December 31, 2023, compared to $62,308,000 in 2022.
The Company continues to evaluate its deposit product offerings with the intention of continuing to expand its offerings to the consumer and business depositors. 42 Table of Contents Noninterest Expense The following table sets forth a summary of noninterest expenses for the periods indicated: (in thousands) For the Year Ended December 31, 2022 2021 Year-Over-Year Amount % Amount % $ Change % Change Salaries and employee benefits $ 23,045 61.8 % $ 20,210 60.7 % $ 2,835 14.0 % Occupancy expenses 4,151 11.1 % 3,972 12.0 % 179 4.5 % Data processing fees 2,343 6.3 % 2,117 6.4 % 226 10.7 % Regulatory assessments (FDIC & DFPI) 927 2.5 % 649 2.0 % 278 42.8 % Other operating expenses 6,842 18.3 % 6,271 18.9 % 571 9.1 % Total non-interest expense $ 37,308 100.0 % $ 33,219 100.0 % $ 4,089 12.3 % Average assets $ 1,962,622 $ 1,753,797 Noninterest expenses as a % of average assets 1.9 % 1.9 % Noninterest expense was $37,308,000 for the year ended December 31, 2022, an increase of $4,089,000 or 12.3% compared to $33,219,000 for the year ended 2021.
The Company continues to evaluate its deposit product offerings with the intention of continuing to expand its offerings to the consumer and business depositors. 43 Table of Contents Noninterest Expense The following table sets forth a summary of noninterest expenses for the periods indicated: (in thousands) For the Year Ended December 31, 2023 2022 Year-Over-Year Amount % Amount % $ Change % Change Salaries and employee benefits $ 26,109 63.4 % $ 23,045 61.8 % $ 3,064 13.3 % Occupancy expenses 4,541 11.0 % 4,151 11.1 % 390 9.4 % Data processing fees 2,729 6.6 % 2,343 6.3 % 386 16.5 % Regulatory assessments (FDIC & DFPI) 1,020 2.5 % 927 2.5 % 93 10.0 % Other operating expenses 6,758 16.5 % 6,842 18.3 % (84 ) -1.2 % Total non-interest expense $ 41,157 100.0 % $ 37,308 100.0 % $ 3,849 10.3 % Average assets $ 1,879,465 $ 1,962,622 Noninterest expenses as a % of average assets 2.2 % 1.9 % Noninterest expense was $41,157,000 for the year ended December 31, 2023, an increase of $3,849,000 or 10.3% compared to $37,308,000 for the year ended 2022.
We are currently not aware of any trends or demands, commitments, events or uncertainties that will result in or that are reasonably likely to result in our liquidity increasing or decreasing in any material way that will impact our capital needs during or beyond the next 12 months. 54 Table of Contents The following tables summarizes short- and long-term material cash requirements as of December 31, 2022, which we believe that we will be able to fund these obligations through cash generated from our operations and available alternative sources of funds (dollars in thousands): Less than 1 year 1-3 years 3-5 years More than 5 years Total Operating lease obligations $ 1,489 $ 2,495 $ 1,696 $ 3,654 $ 9,334 Supplemental retirement plans 100 220 502 4,591 5,413 Time deposit maturities 30,854 9,027 305 - 40,186 Total $ 32,443 $ 11,742 $ 2,503 $ 8,245 $ 54,933 Capital Resources and Capital Adequacy Requirements In the past two years, our primary source of capital has been internally generated operating income through retained earnings.
We are currently not aware of any trends or demands, commitments, events or uncertainties that will result in or that are reasonably likely to result in our liquidity increasing or decreasing in any material way that will impact our capital needs during or beyond the next 12 months. 55 Table of Contents The following tables summarizes short- and long-term material cash requirements as of December 31, 2023, which we believe that we will be able to fund these obligations through cash generated from our operations and available alternative sources of funds (dollars in thousands): Less than 1 year 1-3 years 3-5 years More than 5 years Total Operating lease obligations $ 1,400 $ 2,279 $ 1,692 $ 2,892 $ 8,263 Supplemental retirement plans 62 220 502 10,665 11,449 Time deposit maturities 49,275 5,967 279 0 55,521 Total $ 50,737 $ 8,466 $ 2,473 $ 13,557 $ 75,233 Capital Resources and Capital Adequacy Requirements In the past two years, our primary source of capital has been internally generated operating income through retained earnings.
Our loan loss provision for each period is dependent upon many factors, including loan growth, net charge-offs, changes in the composition of the loans, delinquencies, management's assessment of the quality of the loans, the valuation of problem loans and the general economic conditions in our market area.
The allowance for credit losses is an estimate dependent upon many factors, including loan growth, net charge-offs, changes in the composition of the loans, qualitative factors, the valuation of problem loans and the general economic conditions in our market area.
For detailed information on our use of fair value measurements and our related valuation methodologies, see Note 14 to the Consolidated Financial Statements in Item 8 of this report.
For detailed information on our use of fair value measurements and our related valuation methodologies, see Note 14 to the Consolidated Financial Statements in Item 8 of this report. Recently Issued Accounting Standards See Note 1 to the Consolidated Financial Statements in Item 8 of this report. Results of Operations The Company earns income from two primary sources.
The balances of other earning assets as of December 31, 2022 and December 31, 2021 were as follows: (Dollars in Thousands) December 31, 2022 December 31, 2021 BOLI $ 30,218 $ 29,469 LIHTCs $ 13,627 $ 3,739 Small business private equity partnership $ 955 $ 620 Federal Reserve Bank Stock $ 755 $ 755 Federal Home Loan Bank Stock $ 4,482 $ 4,739 Deposits and Other Sources of Funds Deposits Total deposits at December 31, 2022 and 2021 were $1,814,297,000 and $1,806,966,000, respectively, representing an increase of $7,331,000 or 0.4% in 2022.
The balances of other earning assets as of December 31, 2023 and December 31, 2022 were as follows: (Dollars in Thousands) December 31, 2023 December 31, 2022 BOLI $ 31,506 $ 30,218 LIHTCs $ 12,655 $ 13,627 Small business private equity partnership $ 1,029 $ 955 Federal Reserve Bank Stock $ 755 $ 755 Federal Home Loan Bank Stock $ 5,202 $ 4,482 Deposits and Other Sources of Funds Deposits Total deposits at December 31, 2023 and 2022 were $1,650,534 and $1,814,297,000, respectively, representing a decrease of $163,763,000 or 9.0% in 2023.
Our liquidity level measured as the percentage of liquid assets to total assets was 25.9% and 43.7% as of December 31, 2022, and 2021, respectively.
Our liquidity level measured as the percentage of liquid assets to total assets was 26.5% and 38.4% as of December 31, 2023, and 2022, respectively.
As of December 31, 2022, we had approximately $1.97 billion in total assets, $0.92 billion in total gross loans, and $1.81 billion in total deposits.
As of December 31, 2023, we had approximately $1.84 billion in total assets, $1.02 billion in total gross loans, and $1.65 billion in total deposits.
Investment balances, including cash equivalents and interest-bearing deposits in other financial institutions, are subject to change over time based on our asset/liability funding needs and interest rate risk management objectives.
Investment Activities Investments are a key source of interest income. Management of our investment portfolio is set in accordance with strategies developed and overseen by our Investment Committee. Investment balances, including cash equivalents and interest-bearing deposits in other financial institutions, are subject to change over time based on our asset/liability funding needs and interest rate risk management objectives.
Such charges are not only made for the outstanding loan portfolio, but also for off-balance sheet items, such as commitments to extend credits or letters of credit.
Allowance for credit losses In anticipation of credit risk inherent in our lending business, we set aside allowances through charges to earnings. Such charges are not only made for the outstanding loan portfolio, but also for off-balance sheet items, such as commitments to extend credits or letters of credit.
Noninterest Income The following table sets forth a summary of noninterest income for the periods indicated: (in thousands) For the Year Ended December 31, 2022 2021 Year-Over-Year Amount % Amount % $ Change % Change Service charges on deposits $ 1,596 28.6 % $ 1,287 23.7 % $ 309 24.0 % Debit card transaction fee income 1,734 31.1 % 1,693 31.2 % 41 2.4 % Earnings on cash surrender value of life insurance 749 13.4 % 719 13.3 % 30 4.2 % Mortgage commissions 73 1.3 % 152 2.8 % (79 ) -52.0 % Gains on calls of available-for-sale securities 0 0.0 % 154 2.8 % (154 ) -100.0 % Other income 1,419 25.6 % 1,421 26.2 % (2 ) -0.1 % Total non-interest income $ 5,571 100.0 % $ 5,426 100.0 % $ 145 2.7 % Average assets $ 1,962,622 $ 1,753,797 Noninterest expenses as a % of average assets 0.3 % 0.3 % Noninterest income was $5,571,000 for the year ended December 31, 2022, compared to $5,426,000 for the year 2021.
Noninterest Income The following table sets forth a summary of noninterest income for the periods indicated: (in thousands) For the Year Ended December 31, 2023 2022 Year-Over-Year Amount % Amount % $ Change % Change Service charges on deposits $ 1,813 27.3 % $ 1,596 28.6 % $ 217 13.6 % Debit card transaction fee income 1,773 26.7 % 1,734 31.1 % 39 2.2 % Earnings on cash surrender value of life insurance 788 11.9 % 749 13.4 % 39 5.2 % Mortgage commissions 20 0.3 % 73 1.3 % (53 ) -72.6 % Gain on sales and calls of available-for-sale securities 156 2.4 % 0 0.0 % 156 0.0 % Other income 2,081 31.4 % 1,419 25.6 % 662 46.7 % Total non-interest income $ 6,631 100.0 % $ 5,571 100.0 % $ 1,060 19.0 % Average assets $ 1,879,465 1,962,622 Noninterest expenses as a % of average assets 0.4 % 0.3 % Noninterest income was $6,631,000 for the year ended December 31, 2023, compared to $5,571,000 for the year 2022.
Securities available for sale, derivatives, and loans held for sale, if any, are recorded at fair value on a recurring basis. Additionally, from time to time, we may be required to record certain assets at fair value on a non-recurring basis, such as certain impaired loans held for investment and securities held to maturity that are other-than-temporarily impaired.
Additionally, from time to time, we may be required to record certain assets at fair value on a non-recurring basis, such as certain impaired loans held for investment and securities held to maturity that are other-than-temporarily impaired. These non-recurring fair value adjustments typically involve write-downs of individual assets due to application of lower-of-cost or market accounting.
Highlights of the financial results are presented in the following table: As of and for the years ended December 31, (Dollars in thousands, except per share data) 2022 2021 For the period: Net income available to common shareholders $ 22,902 $ 16,337 Net income per common share: Basic $ 2.80 $ 2.01 Diluted $ 2.79 $ 2.00 Return on average common equity 18.21 % 11.96 % Return on average assets 1.17 % 0.93 % Common stock dividend payout ratio of earnings during the period 10.75 % 14.50 % Efficiency ratio 54.29 % 59.43 % At period end: Book value per common share $ 15.33 $ 17.31 Total assets $ 1,968,346 $ 1,964,478 Total gross loans $ 915,758 $ 860,037 Total deposits $ 1,814,297 $ 1,806,966 Net loan-to-deposit ratio 49.88 % 46.92 % Net Interest Income and Net Interest Margin Our primary source of revenue is net interest income, which is the difference between interest and fees derived from earning assets and interest paid on liabilities obtained to fund those assets.
Non-interest expense increased by $3,849,000 associated with staffing and general operating overhead increases to support the growth of our loan and deposit portfolios. 38 Table of Contents Highlights of the financial results are presented in the following table: As of and for the years ended December 31, (Dollars in thousands, except per share data) 2023 2022 For the period: Net income available to common shareholders $ 30,848 $ 22,902 Net income per common share: Basic $ 3.76 $ 2.80 Diluted $ 3.75 $ 2.79 Return on average common equity 21.87 % 18.21 % Return on average assets 1.64 % 1.17 % Common stock dividend payout ratio of earnings during the period 8.53 % 10.75 % Efficiency ratio 48.81 % 54.29 % At period end: Book value per common share $ 20.03 $ 15.33 Total assets $ 1,842,422 $ 1,968,346 Total gross loans $ 1,016,579 $ 915,758 Total deposits $ 1,650,534 $ 1,814,297 Net loan-to-deposit ratio 60.85 % 49.88 % Net Interest Income and Net Interest Margin Our primary source of revenue is net interest income, which is the difference between interest and fees derived from earning assets and interest paid on liabilities obtained to fund those assets.
No assurance of the level of predicted credit losses can be given with any certainty. Income Taxes Deferred income taxes are provided for the temporary differences between the financial reporting basis and the tax basis of our assets and liabilities.
Income Taxes Deferred income taxes are provided for the temporary differences between the financial reporting basis and the tax basis of our assets and liabilities.
Since our deposit growth strategy emphasizes core deposit growth, we have avoided relying on brokered deposits as a consistent source of funds. The Company had no brokered deposits as of December 31, 2022 and 2021.
Additional sources of liquidity may include institutional deposits, advances from the FHLB and other short-term borrowings, such as federal funds purchased. Since our deposit growth strategy emphasizes core deposit growth, we have avoided relying on brokered deposits as a consistent source of funds. The Company had no brokered deposits as of December 31, 2023 and 2022.
The decrease was due to other comprehensive loss of $36.9 million, net of income taxes, due to the negative effect that rising treasury yields had on the unrealized market value adjustment of our available-for-sale investment portfolio during 2022, which was offset by net income of $22.9 million recorded to retained earnings.
The increase was due to net income of $30.8 million recorded to retained earnings and other comprehensive gains of $11.6 million, net of income taxes, due to the positive effect that treasury yields had on the unrealized market value adjustment of our available-for-sale investment portfolio during 2023.
The increase to the third component of the allowance for loan losses reflected such evaluation. 50 Table of Contents The table below summarizes, for the periods indicated, loan balances at the end of each period, the daily averages during the period, changes in the allowance for loan losses arising from loans charged off, recoveries on loans previously charged off, additions to the allowance and certain ratios related to the allowance for loan losses: Allowance for Loan Losses December 31, December 31, (Dollars in thousands) 2022 2021 Balances: Average total loans outstanding during period $ 888,135 $ 944,477 Total loans outstanding at end of period $ 915,758 $ 860,037 Net loan recoveries $ 80 $ 76 (Reversal) provision for loan losses $ (1,350 ) $ (635 ) Allowance for loan losses at end of period $ 9,468 $ 10,738 Ratios: Net loan recoveries to average total loans 0.01 % 0.01 % Allowance for loan losses to total loans at end of period 1.03 % 1.25 % Net loan recoveries to allowance for loan losses at end of period 0.84 % 0.71 % Net loan recoveries to provision for loan losses NA NA Nonperforming loans as a percentage of total loans 0.00 % 0.00 % Allowance for loan losses as a percentage of nonperforming loans NA NA The table below summarizes the allowance for loan loss balance by type of loan balance at the end of each period (See “Loan Portfolio” above for a description of each type of loan balance): Allocation of the Allowance for Loan Losses (Dollars in thousands) December 31, 2022 December 31, 2021 Amount % of Allowance for Loan Losses Amount % of Allowance for Loan Losses Applicable to: Commercial real estate $ 8,373 88.4 % $ 9,404 87.6 % Commercial and Industrial 612 6.5 % 711 6.6 % Consumer 5 0.1 % 6 0.1 % Consumer Residential 306 3.2 % 327 3.0 % Agriculture 172 1.8 % 290 2.7 % Total Allowance $ 9,468 100.0 % $ 10,738 100.0 % 51 Table of Contents Other Earning Assets For various business purposes, we make investments in earning assets other than the interest-earning securities and loans discussed above.
Furthermore, consumer loan accounts are charged-off automatically based on regulatory requirements. 51 Table of Contents The table below summarizes, for the periods indicated, loan balances at the end of each period, the daily averages during the period, changes in the allowance for credit losses arising from loans charged off, recoveries on loans previously charged off, additions to the allowance and certain ratios related to the allowance for credit losses: Allowance for Credit Losses December 31, December 31, (Dollars in thousands) 2023 2022 Balances: Average total loans outstanding during period $ 949,429 $ 888,135 Total loans outstanding at end of period $ 1,016,579 $ 915,758 Net loan recoveries $ 112 $ 80 Provision for (Reversal of) credit losses $ 970 $ (1,350 ) Allowance for credit losses at end of period $ 10,896 $ 9,468 Ratios: Net loan recoveries to average total loans 0.01 % 0.01 % Allowance for credit losses to total loans at end of period 1.07 % 1.03 % Nonperforming loans as a percentage of total loans 0.00 % 0.00 % Allowance for credit losses as a percentage of nonperforming loans NA NA The table below summarizes the allowance for credit loss balance by type of loan balance at the end of each period (See “Loan Portfolio” above for a description of each type of loan balance): Allocation of the Allowance for Credit Losses (Dollars in thousands) December 31, 2023 December 31, 2022 Amount % of Allowance for Loan Losses Amount % of Allowance for Loan Losses Applicable to: Commercial real estate Construction & land $ 1,227 11.3 % $ 1,055 11.1 % Multi-family 667 6.1 % 479 5.1 % Owner occupied 1,805 16.6 % 1,798 19.0 % Non-owner occupied 4,805 44.0 % 4,211 44.4 % Farmland 1,468 13.5 % 830 8.8 % Commercial and Industrial 650 6.0 % 612 6.5 % Consumer 227 2.1 % 311 3.3 % Agriculture 47 0.4 % 172 1.8 % Total Allowance $ 10,896 100.0 % $ 9,468 100.0 % 52 Table of Contents Other Earning Assets For various business purposes, we make investments in earning assets other than the interest-earning securities and loans discussed above.
Accounting for our allowance for loan losses involves significant judgment and assumptions by management and is based on historical data and management’s view of the current economic environment. At least on a quarterly basis, our management reviews the methodology and adequacy of allowance for loan losses and reports its assessment to the Board of Directors for its review and approval.
At least on a quarterly basis, our management reviews the methodology and adequacy of allowance for credit losses and reports its assessment to the Board of Directors for its review and approval.
Fair Value Measurements We use fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. We base our fair values on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
We base our fair values on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Securities available for sale, derivatives, and loans held for sale, if any, are recorded at fair value on a recurring basis.
The Company did not have any nonperforming loans as of December 31, 2022 and 2021. 48 Table of Contents The Company held no OREO properties as of December 31, 2022.
The Company did not have any nonperforming loans as of December 31, 2023 and 2022. 49 Table of Contents The Company held no OREO properties as of December 31, 2023 and 2022. Accordingly, the Company had zero non-performing assets recorded on the balance sheet as of December 31, 2023 and 2022.
Net loans increased by $57,188,000, investments increased $264,148,000, bank premises and equipment decreased $122,000, interest receivable and other assets increased $30,628,000, while cash and cash equivalents decreased $348,634,000 for the year ended December 31, 2022 as compared to December 31, 2021.
Net loans increased by $99,242,000, investments decreased $9,218,000, bank premises and equipment increased $565,000, interest receivable and other assets decreased $4,651,000 while cash and cash equivalents decreased $213,065,000 for the year ended December 31, 2023 as compared to December 31, 2022.
Loans gross of the allowance for loan losses and deferred fees were $915,758,000 as of December 31, 2022, compared to $860,037,000 as of December 31, 2021, an increase of $55,721,000 or 6.5%.
Loans gross of the allowance for credit losses and deferred fees were $1,016,579,000 as of December 31, 2023, compared to $915,758,000 as of December 31, 2022, an increase of $100,821,000 or 11.0%.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risk — interest-rate, FX, commodity exposure

7 edited+1 added−0 removed22 unchanged
Biggest changeInterest Rate Management Market risk arises from changes in interest rates, exchange rates, commodity prices and equity prices. The Company's market risk exposure is primarily that of interest rate risk, and it has established policies and procedures to monitor and limit earnings and balance sheet exposure to changes in interest rates.
Biggest changeInterest Rate Management Market risk is the risk of a loss in earnings or economic value that arises from adverse changes or movements in market rates and prices, such as interest rates or credit spreads. The Company's market risk exposure is primarily that of interest rate risk inherent in its lending, investing, and deposit taking activities.
The Company has generally been able to control its exposure to changing interest rates by maintaining a high percentage of variable rate earning assets and a vast majority of its deposits are non-maturing that reprice only at management’s discretion based on competition in the banking industry and liquidity needs of the Company.
The Company has generally been able to control its exposure to changing interest rates by maintaining a relatively high percentage of variable rate earning assets and a vast majority of its deposits are non-maturing that reprice only at management’s discretion based on competition in the banking industry and liquidity needs of the Company.
The principal objective of interest rate risk management (often referred to as "asset/liability management") is to manage the financial components of the Company in a manner that should optimize the risk/reward equation for earnings and capital in relation to changing interest rates. The Company's exposure to market risk is reviewed on a regular basis by the Asset/Liability Committee.
The principal objective of interest rate risk management (often referred to as "asset/liability management") is to manage the financial components of the Company in a manner that should optimize the risk/reward equation for earnings and capital in relation to changing interest rates. The Company's exposure to market risk is reviewed on a regular basis by the Investment Committee.
These rate projections can be shocked (an immediate and parallel change in all base rates, up or down) and ramped (an incremental increase or decrease in rates over a specified time period), based on current trends and econometric models or stable economic conditions (unchanged from current actual levels). 56 Table of Contents Asset sensitivity indicates that in a rising interest rate environment the Company's net interest income would increase and in a decreasing interest rate environment the Company's net interest income would decrease.
These rate projections can be shocked (an immediate and parallel change in all base rates, up or down) and ramped (an incremental increase or decrease in rates over a specified time period), based on current trends and econometric models or stable economic conditions (unchanged from current actual levels). 57 Table of Contents Asset sensitivity indicates that in a rising interest rate environment the Company's net interest income would increase and in a decreasing interest rate environment the Company's net interest income would decrease.
Liability sensitivity indicates that in a rising interest rate environment a Company's net interest income would decrease and in a decreasing interest rate environment the Company's net interest income would increase. For all of 2022, we were "asset-sensitive" meaning we expect our net interest income to increase as market rates increase and to decrease as market rates decrease.
Liability sensitivity indicates that in a rising interest rate environment a Company's net interest income would decrease and in a decreasing interest rate environment the Company's net interest income would increase. For all of 2023, we were "asset-sensitive" meaning we expect our net interest income to increase as market rates increase and to decrease as market rates decrease.
Our business is generally not seasonal. 57 Table of Contents
Our business is generally not seasonal. 58 Table of Contents
The relative level of asset sensitivity as of December 31, 2022 has decreased from 2021 primarily due to a decrease in interest-bearing cash balances that have floating rates. In the decreasing interest rate environments, we show a decline in net interest income as interest-bearing assets re-price lower while deposits remain at or near their floors.
The relative level of asset sensitivity as of December 31, 2023 has decreased from 2022 primarily due to a decrease in interest-bearing cash balances that have floating rates. In the decreasing interest rate environments, we show a decline in net interest income as interest-bearing assets re-price lower while deposits reach their floors and cannot be reduced further.
Added
The core banking activities of lending and deposit-taking expose the Company to interest rate risk, which occurs when assets and liabilities re-price at different times and by different amounts as interest rates change. The Company has established policies and procedures to monitor and limit earnings and balance sheet exposure to changes in interest rates.

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