Partners Bancorp Reports Results of Operations for the Second Quarter 2023

SALISBURY, Md., July 31, 2023 (GLOBE NEWSWIRE) -- Partners Bancorp ( PTRS) (the “Company”), the parent company of The Bank of Delmarva (“Delmarva”), Seaford, Delaware, and Virginia Partners Bank (“Virginia Partners”), Fredericksburg, Virginia, reported net income attributable to the Company of $3.8 million, or $0.21 per diluted share, for the three months ended June 30, 2023, a $585 thousand or 18.4% increase when compared to net income attributable to the Company of $3.2 million, or $0.18 per diluted share, for the same period in 2022. For the six months ended June 30, 2023, the Company reported net income attributable to the Company of $7.1 million, or $0.39 per diluted share, a $1.8 million or 34.1% increase when compared to net income attributable to the Company of $5.3 million, or $0.29 per diluted share, for the same period in 2022.

As previously disclosed, on February 22, 2023, the Company and LINKBANCORP, Inc. (“LINK”) ( LNKB), parent company of LINKBANK, announced that they have entered into a definitive agreement and plan of merger pursuant to which the Company will merge into LINK, with LINK surviving, and following which Delmarva and Virginia Partners will each successively merge with and into LINKBANK, with LINKBANK surviving. Upon completion of the transaction, the Company’s shareholders will own approximately 56% and LINK shareholders, inclusive of shares issued in a concurrent private placement of common stock by LINK, will own approximately 44% of the combined company. The mergers remain subject to receipt of all required regulatory approvals and fulfillment of other customary closing conditions.

John W. Breda, the Company’s President and Chief Executive Officer, commented, “Despite the impact of significant merger related expenses related to the pending merger with LINK, I am pleased with our operating results for the first six months of 2023. During the first half of 2023, the Company generated loan growth of 3.6%, and finished the period maintaining strong asset quality. While the Company’s net interest margin for the second quarter of 2023 improved by 0.84% compared to the same period of 2022, we experienced a decline of 0.11% when compared to the first quarter of 2023. The Company’s total deposits decreased by 1.6% as compared to December 31, 2022, representing minimal deposit outflow in the first half of 2023. As expected, given the continued impact of rising market interest rates, competition for deposits, increased borrowing costs, and negative banking industry developments during the first six months of 2023, the Company experienced an increase in its overall cost of funds during the second quarter of 2023 by 0.68% when compared to the same period of 2022, and by 0.31% when compared to the first quarter of 2023. Despite these negative factors and banking industry developments, the Company remains well capitalized and its liquidity position and balance sheet remain strong.”

Breda continued, “As previously disclosed, during the second quarter of 2023 we announced the receipt of the requisite approval of each of the Company’s and LINK’s stockholders related to our pending merger with LINK. With this milestone, we are one step closer to creating a partnership that will benefit all stakeholders, including the communities we serve. We are excited about what the future holds for the combined company.”

Also as previously disclosed, on July 26, 2023, the Company’s board of directors declared a cash dividend of $0.04 per share, which is payable on August 17, 2023, to holders of record of its common stock as of the close of business on August 10, 2023.

Effective January 1, 2023, the Company adopted Accounting Standards Update (“ASU”) 2016-13 “ASU 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which replaced the prior incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (or the “CECL Standard”).

The Company’s results for reporting periods beginning after January 1, 2023 are presented under the CECL Standard while prior period amounts continue to be reported in accordance with previously applicable accounting guidance.

The Company’s results of operations for the three months ended June 30, 2023 were directly impacted by the following:

Positive Impacts:

• An increase in net interest income due primarily to increases in average loan and investment securities balances and higher yields earned on each, an increase in the yields earned on average cash and cash equivalents balances, and a decrease in average interest-bearing deposit balances, which were partially offset by a decrease in average cash and cash equivalents balances, higher rates paid on average interest-bearing deposit balances, an increase in average borrowings balances and higher rates paid, and lower net loan fees earned related to the forgiveness of loans originated and funded under the Paycheck Protection Program (“PPP”) of the Small Business Administration;
• A higher net interest margin (tax equivalent basis);
• Recording a lower provision for credit losses due to changes in the assessment of economic factors, and for June 30, 2023, more favorable views on the downside risks to the economic forecast compared to March 31, 2023, and lower net charge-offs, which were partially offset by organic loan growth and a higher required reserve on unfunded credit commitments; and
• Recording no impairment loss on restricted stock during the three months ended June 30, 2023.

Negative Impacts:

• Reduced operating results from Virginia Partners’ majority owned subsidiary Johnson Mortgage Company, LLC and lower mortgage division fees at Delmarva;
• Recording no gains or operating expenses on other real estate owned, net during the three months ended June 30, 2023; and
• Incurring $428 thousand in merger related expenses during the three months ended June 30, 2023 in connection with the Company’s pending merger with LINK, as compared to $157 thousand during the same period of 2022 in connection with the Company’s terminated merger with OceanFirst Financial Corp. (“OceanFirst”).
  

The Company’s results of operations for the six months ended June 30, 2023 were directly impacted by the following:

Positive Impacts:

• An increase in net interest income due primarily to increases in average loan and investment securities balances and higher yields earned on each, an increase in the yields earned on average cash and cash equivalents balances, and a decrease in average interest-bearing deposit balances, which were partially offset by a decrease in average cash and cash equivalents balances, higher rates paid on average interest-bearing deposit balances, an increase in average borrowings balances and higher rates paid, and lower net loan fees earned related to the forgiveness of loans originated and funded under the PPP of the Small Business Administration;
• A higher net interest margin (tax equivalent basis); and
• Recording no impairment loss on restricted stock during the six months ended June 30, 2023.
  

Negative Impacts:

• Recording a higher provision for credit losses due to changes in the assessment of economic factors, and for June 30, 2023, less favorable views on the downside risks to the economic forecast compared to January 1, 2023, and organic loan growth, which were partially offset by lower net charge-offs and a lower required reserve on unfunded credit commitments;
• Reduced operating results from Virginia Partners’ majority owned subsidiary Johnson Mortgage Company, LLC and lower mortgage division fees at Delmarva;
• Recording no gains or operating expenses on other real estate owned, net during the six months ended June 30, 2023; and
• Incurring $1.5 million in merger related expenses during the six months ended June 30, 2023 in connection with the Company’s pending merger with LINK, as compared to $553 thousand during the same period of 2022 in connection with the Company’s terminated merger with OceanFirst.

For the three months ended June 30, 2023, the Company’s annualized return on average assets, annualized return on average equity and efficiency ratio were 0.98%, 10.71% and 68.22%, respectively, as compared to 0.76%, 9.51% and 68.89%, respectively, for the same period in 2022.

For the six months ended June 30, 2023, the Company’s annualized return on average assets, annualized return on average equity and efficiency ratio were 0.93%, 10.20% and 69.43%, respectively, as compared to 0.64%, 7.82% and 73.45%, respectively, for the same period in 2022.

The increase in net income attributable to the Company for the three months ended June 30, 2023, as compared to the same period in 2022, was driven by an increase in net interest income and a lower provision for credit losses, which were partially offset by a decrease in other income, an increase in other expenses, and higher federal and state income taxes.

The increase in net income attributable to the Company for the six months ended June 30, 2023, as compared to the same period in 2022, was driven by an increase in net interest income, which was partially offset by a higher provision for credit losses, a decrease in other income, an increase in other expenses, and higher federal and state income taxes.

Interest Income and Expense – Three Months Ended June 30, 2023 and 2022

Net interest income and net interest margin

Net interest income in the second quarter of 2023 increased by $2.0 million, or 15.1%, when compared to the second quarter of 2022. The Company’s net interest margin (tax equivalent basis) increased to 4.03%, representing an increase of 84 basis points for the three months ended June 30, 2023 as compared to the same period in 2022. The increase in the net interest margin (tax equivalent basis) was primarily due to higher average balances of and yields earned on loans and investment securities, higher yields earned on average interest-bearing deposits in other financial institutions and federal funds sold, and lower average balances of interest-bearing liabilities, which were partially offset by lower average balances of interest-bearing deposits in other financial institutions and federal funds sold, and higher rates paid on average interest-bearing liabilities. Total interest income increased by $4.3 million, or 29.6%, for the three months ended June 30, 2023, while total interest expense increased by $2.4 million, or 143.9%, both as compared to the same period in 2022.

The most significant factors impacting net interest income during the three month period ended June 30, 2023 were as follows:

Positive Impacts:

• Increases in average loan balances, primarily due to organic loan growth, and higher loan yields, primarily due to repricing of variable rate loans, higher average yields on new loan originations, and pay-offs of lower yielding fixed rate loans, which were partially offset by lower net loan fees earned related to the forgiveness of loans originated and funded under the PPP;
• Increases in average investment securities balances and higher investment securities yields, primarily due to management of the investment securities portfolio in light of the Company’s liquidity needs and higher interest rates over the comparable periods; and
• Higher yields earned on average interest-bearing deposits in other financial institutions and federal funds sold, primarily due to higher interest rates over the comparable periods.
  

Negative Impacts:

• Decrease in average interest-bearing deposits in other financial institutions and federal funds sold, primarily due to loan growth outpacing deposit growth, deposit outflows due to competitive pressures in the higher interest rate environment and the negative banking industry developments associated with multiple high-profile bank failures during the first six months of 2023, and higher investment securities balances;
• Decrease in average interest-bearing deposit balances and higher rates paid, primarily due to scheduled maturities of time deposits that were not replaced and deposit outflows due to competitive pressures in the higher interest rate environment and the negative banking industry developments associated with multiple high-profile bank failures during the first six months of 2023, which were partially offset by organic deposit growth; and
• Increase in average borrowings balances and higher rates paid, primarily due to an increase in the average balance of short-term Federal Home Loan Bank advances due to the aforementioned decrease in average interest-bearing deposit balances. The increase in the average balance of short-term Federal Home Loan Bank advances was partially offset by a decrease in the average balance of long-term Federal Home Loan Bank advances resulting from maturities and payoffs of borrowings that were not replaced and scheduled principal curtailments.
  

Loans

Average loan balances increased by $108.0 million, or 9.3%, and average yields earned increased by 0.84% to 5.43% for the three months ended June 30, 2023, as compared to the same period in 2022. The increase in average loan balances was primarily due to organic loan growth, including growth in average loan balances of approximately $50.8 million related to Virginia Partners’ expansion into the Greater Washington market, which was partially offset by the forgiveness of loans originated and funded under the PPP. The increase in average yields earned was primarily due to repricing of variable rate loans, higher average yields on new loan originations, and pay-offs of lower yielding fixed rate loans, which were partially offset by lower net loan fees earned related to the forgiveness of loans originated and funded under the PPP. Total average loans were 85.3% of total average interest-earning assets for the three months ended June 30, 2023, compared to 71.0% for the three months ended June 30, 2022.

Investment securities

Average total investment securities balances increased by $6.9 million, or 4.7%, and average yields earned increased by 0.44% to 2.64% for the three months ended June 30, 2023, as compared to the same period in 2022. The increases in average total investment securities balances and average yields earned was primarily due to management of the investment securities portfolio in light of the Company’s liquidity needs and higher interest rates over the comparable periods. Total average investment securities were 10.4% of total average interest-earning assets for the three months ended June 30, 2023, compared to 9.0% for the three months ended June 30, 2022.

Interest-bearing deposits

Average total interest-bearing deposit balances decreased by $115.8 million, or 12.6%, and average rates paid increased by 1.08% to 1.57% for the three months ended June 30, 2023, as compared to the same period in 2022, primarily due to scheduled maturities of time deposits that were not replaced and deposit outflows due to competitive pressures in the higher interest rate environment and the negative banking industry developments associated with multiple high-profile bank failures during the first six months of 2023, partially offset by organic deposit growth, including average growth of approximately $17.2 million in interest-bearing deposits related to Virginia Partners’ expansion into the Greater Washington market.

Borrowings

Average total borrowings increased by $22.9 million, or 46.6%, and average rates paid increased by 0.47% to 4.49% for the three months ended June 30, 2023, as compared to the same period in 2022. The increase in average total borrowings balances and rates paid was primarily due to an increase in the average balance of short-term Federal Home Loan Bank advances due to the aforementioned decrease in average interest-bearing deposit balances, which was partially offset by a decrease in the average balance of long-term Federal Home Loan Bank advances resulting from maturities and payoffs of borrowings that were not replaced and scheduled principal curtailments.

Interest Income and Expense – Six Months Ended June 30, 2023 and 2022

Net interest income and net interest margin

Net interest income during the first six months of 2023 increased by $5.2 million, or 21.0%, when compared to the first six months of 2022. The Company’s net interest margin (tax equivalent basis) increased to 4.09%, representing an increase of 98 basis points for the six months ended June 30, 2023 as compared to the same period in 2022. The increase in the net interest margin (tax equivalent basis) was primarily due to higher average balances of and yields earned on loans and investment securities, higher yields earned on average interest-bearing deposits in other financial institutions and federal funds sold, and lower average balances of interest-bearing liabilities, which were partially offset by lower average balances of interest-bearing deposits in other financial institutions and federal funds sold, and higher rates paid on average interest-bearing liabilities. Total interest income increased by $8.6 million, or 30.7%, for the six months ended June 30, 2023, while total interest expense increased by $3.4 million, or 101.3%, both as compared to the same period in 2022.

The most significant factors impacting net interest income during the six months ended June 30, 2023 were as follows:

Positive Impacts:

• Increases in average loan balances, primarily due to organic loan growth, and higher loan yields, primarily due to repricing of variable rate loans, higher average yields on new loan originations, and pay-offs of lower yielding fixed rate loans, which were partially offset by lower net loan fees earned related to the forgiveness of loans originated and funded under the PPP;
• Increases in average investment securities balances and higher investment securities yields, primarily due to management of the investment securities portfolio in light of the Company’s liquidity needs and higher interest rates over the comparable periods; and
• Higher yields earned on average interest-bearing deposits in other financial institutions and federal funds sold, primarily due to higher interest rates over the comparable periods.
  

Negative Impacts:

• Decrease in average interest-bearing deposits in other financial institutions and federal funds sold, primarily due to loan growth outpacing deposit growth, deposit outflows due to competitive pressures in the higher interest rate environment and the negative banking industry developments associated with multiple high-profile bank failures during the first six months of 2023, and higher investment securities balances;
• Decrease in average interest-bearing deposit balances and higher rates paid, primarily due to scheduled maturities of time deposits that were not replaced and deposit outflows due to competitive pressures in the higher interest rate environment and the negative banking industry developments associated with multiple high-profile bank failures during the first six months of 2023, which were partially offset by organic deposit growth; and
• Increase in average borrowings balances and higher rates paid, primarily due to an increase in the average balance of short-term Federal Home Loan Bank advances due to the aforementioned decrease in average interest-bearing deposit balances. The increase in the average balance of short-term Federal Home Loan Bank advances was partially offset by a decrease in the average balance of long-term Federal Home Loan Bank advances resulting from maturities and payoffs of borrowings that were not replaced and scheduled principal curtailments.
  

Loans

Average loan balances increased by $110.3 million, or 9.6%, and average yields earned increased by 0.74% to 5.34% for the six months ended June 30, 2023, as compared to the same period in 2022. The increase in average loan balances was primarily due to organic loan growth, including growth in average loan balances of approximately $57.0 million related to Virginia Partners’ expansion into the Greater Washington market, which was partially offset by the forgiveness of loans originated and funded under the PPP. The increase in average yields earned was primarily due to repricing of variable rate loans, higher average yields on new loan originations, and pay-offs of lower yielding fixed rate loans, which were partially offset by lower net loan fees earned related to the forgiveness of loans originated and funded under the PPP. Total average loans were 84.5% of total average interest-earning assets for the six months ended June 30, 2023, compared to 71.0% for the six months ended June 30, 2022.

Investment securities

Average total investment securities balances increased by $13.4 million, or 9.5%, and average yields earned increased by 0.49% to 2.63% for the six months ended June 30, 2023, as compared to the same period in 2022. The increases in average total investment securities balances and average yields earned was primarily due to management of the investment securities portfolio in light of the Company’s liquidity needs and higher interest rates over the comparable periods. Total average investment securities were 10.4% of total average interest-earning assets for the six months ended June 30, 2023, compared to 8.7% for the six months ended June 30, 2022.

Interest-bearing deposits

Average total interest-bearing deposit balances decreased by $128.0 million, or 13.8%, and average rates paid increased by 0.78% to 1.29% for the six months ended June 30, 2023, as compared to the same period in 2022, primarily due to scheduled maturities of time deposits that were not replaced and deposit outflows due to competitive pressures in the higher interest rate environment and the negative banking industry developments associated with multiple high-profile bank failures during the first six months of 2023, partially offset by organic deposit growth, including average growth of approximately $11.6 million in interest-bearing deposits related to Virginia Partners’ expansion into the Greater Washington market.

Borrowings

Average total borrowings increased by $25.4 million, or 51.7%, and average rates paid increased by 0.44% to 4.47% for the six months ended June 30, 2023, as compared to the same period in 2022. The increase in average total borrowings balances and rates paid was primarily due to an increase in the average balance of short-term Federal Home Loan Bank advances due to the aforementioned decrease in average interest-bearing deposit balances, which was partially offset by a decrease in the average balance of long-term Federal Home Loan Bank advances resulting from maturities and payoffs of borrowings that were not replaced and scheduled principal curtailments.

Provision for Credit Losses

The provision for credit losses in the second quarter of 2023 was $93 thousand, a decrease of $226 thousand, or 70.8%, when compared to the provision for credit losses of $319 thousand in the second quarter of 2022. The decrease in the provision for credit losses during the three months ended June 30, 2023, as compared to the same period of 2022, was primarily due to changes in the assessment of economic factors, and for June 30, 2023, more favorable views on the downside risks to the economic forecast compared to March 31, 2023, and lower net charge-offs, which were partially offset by organic loan growth and a higher required reserve on unfunded credit commitments. The provision for credit losses during the first six months of 2023 was $394 thousand, an increase of $10 thousand, or 2.5%, when compared to the provision for credit losses of $384 thousand during the first six months of 2022. The increase in the provision for credit losses during the six months ended June 30, 2023, as compared to the same period of 2022, was primarily due to changes in the assessment of economic factors, and for June 30, 2023, less favorable views on the downside risks to the economic forecast compared to January 1, 2023, and organic loan growth, which were partially offset by lower net charge-offs and a lower required reserve on unfunded credit commitments.

The provision for credit losses during the three and six months ended June 30, 2023, as well as the allowance for credit losses as of June 30, 2023, represents management’s best estimate of the impact of current economic trends, forecasts of a potential recession in the U.S. and recent negative banking industry developments associated with multiple high-profile bank failures, on the ability of the Company’s borrowers to repay their loans. Management continues to carefully assess the exposure of the Company’s loan portfolio to economic trends, such as forecasts of a potential recession and the aforementioned recent banking industry developments, and their potential effects on asset quality. As of June 30, 2023, the Company’s delinquencies and nonperforming assets had not been materially impacted by any of the aforementioned factors, trends, forecasts or developments.

Other Income

Other income in the second quarter of 2023 decreased by $378 thousand, or 26.0%, when compared to the second quarter of 2022. Key changes in the components of other income for the three months ended June 30, 2023, as compared to the same period in 2022, are as follows:

• Service charges on deposit accounts increased by $13 thousand, or 5.1%, due primarily to increases in overdraft fees and savings account service charges;
• Impairment loss on restricted stock decreased by $1 thousand, or 100.0%, due primarily to Virginia Partners recording the final write-down of its investment in Maryland Financial Bank, which had been going through an orderly liquidation, during the second quarter of 2022. There was no impairment loss on restricted stock for the same period of 2023;
• Mortgage banking income decreased by $323 thousand, or 75.7%, due primarily to Virginia Partners’ majority owned subsidiary Johnson Mortgage Company, LLC having a lower volume of loan closings as compared to the same period in 2022; and
• Other income decreased by $69 thousand, or 8.8%, due primarily to decreases in safe deposit box rentals, debit card income and other noninterest income, and lower mortgage division fees at Delmarva, which were partially offset by increases in bank owned life insurance.

Other income for the six months ended June 30, 2023 decreased by $445 thousand, or 16.2%, when compared to the six months ended June 30, 2022. Key changes in the components of other income for the six months ended June 30, 2023, as compared to the same period in 2022, are as follows:

• Service charges on deposit accounts increased by $37 thousand, or 7.9%, due primarily to increases in overdraft fees and savings account service charges;
• Impairment loss on restricted stock decreased by $1 thousand, or 100.0%, due primarily to Virginia Partners recording the final write-down of its investment in Maryland Financial Bank, which had been going through an orderly liquidation, during the second quarter of 2022. There was no impairment loss on restricted stock for the same period of 2023;
• Mortgage banking income decreased by $362 thousand, or 50.5%, due primarily to Virginia Partners’ majority owned subsidiary Johnson Mortgage Company, LLC having a lower volume of loan closings as compared to the same period in 2022; and
• Other income decreased by $120 thousand, or 7.7%, due primarily to decreases in safe deposit box rentals, debit card income and other noninterest income, and lower mortgage division fees at Delmarva, which were partially offset by increases in bank owned life insurance.

Other Expenses

Other expenses in the second quarter of 2023 increased by $978 thousand, or 9.9%, when compared to the second quarter of 2022. Key changes in the components of other expenses for the three months ended June 30, 2023, as compared to the same period in 2022, are as follows:

• Salaries and employee benefits increased by $345 thousand, or 6.3%, primarily due to increases related to staffing changes and merit increases, higher expenses related to benefit costs, payroll taxes and bonus accruals, and a lower impact from deferred loan origination costs, which were partially offset by a decrease in commissions expense paid due to the decrease in mortgage banking income from Virginia Partners’ majority owned subsidiary Johnson Mortgage Company, LLC and lower mortgage division fees at Delmarva;
• Premises and equipment decreased by $26 thousand, or 1.8%, primarily due to lower expenses related to depreciation, leases and repairs and maintenance, which were partially offset by higher expenses related to software amortization, real estate taxes, maintenance contracts and utilities;
• Amortization of core deposit intangible decreased by $13 thousand, or 10.0%, primarily due to lower amortization related to the $2.7 million and $1.5 million, respectively, in core deposit intangibles recognized in the Virginia Partners and Liberty Bell Bank acquisitions;
• (Gains) and operating expenses on other real estate owned, net decreased by $2 thousand, or 100.0%, primarily due to no gains on sales or expenses being recorded during the second quarter of 2023, as compared to gains on sales and expenses being recorded during the second quarter of 2022;
• Merger related expenses increased by $271 thousand, or 173.0%, primarily due to higher legal fees and other costs associated with the pending merger with LINK during the second quarter of 2023, as compared to the legal fees and other costs in the second quarter of 2022 associated with the merger with OceanFirst, that was subsequently terminated in the fourth quarter of 2022; and
• Other expenses increased by $398 thousand, or 14.6%, primarily due to higher expenses related to professional services, ATMs, legal fees, audit and related professional fees, and other.

Other expenses for the six months ended June 30, 2023 increased by $2.2 million, or 10.8%, when compared to the six months ended June 30, 2022. Key changes in the components of other expenses for the six months ended June 30, 2023, as compared to the same period in 2022, are as follows:

• Salaries and employee benefits increased by $774 thousand, or 7.0%, primarily due to increases related to staffing changes and merit increases, higher expenses related to benefit costs, payroll taxes and bonus accruals, and a lower impact from deferred loan origination costs, which were partially offset by a decrease in commissions expense paid due to the decrease in mortgage banking income from Virginia Partners’ majority owned subsidiary Johnson Mortgage Company, LLC and lower mortgage division fees at Delmarva;
• Premises and equipment decreased by $104 thousand, or 3.6%, primarily due to lower expenses related to depreciation, leases, repairs and maintenance and purchased equipment and furniture, the cost of which did not qualify for capitalization, which were partially offset by higher expenses related to software amortization, real estate taxes, maintenance contracts and utilities;
• Amortization of core deposit intangible decreased by $26 thousand, or 9.9%, primarily due to lower amortization related to the $2.7 million and $1.5 million, respectively, in core deposit intangibles recognized in the Virginia Partners and Liberty Bell Bank acquisitions;
• (Gains) and operating expenses on other real estate owned, net decreased by $10 thousand, or 100.0%, primarily due to no gains on sales or expenses being recorded during the first six months of 2023, as compared to gains on sales and expenses being recorded during the first six months of 2022;
• Merger related expenses increased by $907 thousand, or 164.2%, primarily due to higher legal fees and other costs associated with the pending merger with LINK during the first six months of 2023, as compared to the legal fees and other costs in the first six months of 2022 associated with the merger with OceanFirst, that was subsequently terminated in the fourth quarter of 2022; and
• Other expenses increased by $641 thousand, or 11.6%, primarily due to higher expenses related to professional services, ATMs, legal fees, and audit and related professional fees, which were partially offset by lower expenses related to FDIC insurance assessments.

Federal and State Income Taxes

Federal and state income taxes for the three months ended June 30, 2023 increased by $325 thousand, or 35.1%, when compared to the three months ended June 30, 2022. This increase was due primarily to higher consolidated income before taxes and higher merger related expenses, which are typically non-deductible. For the three months ended June 30, 2023, the Company’s effective tax rate was approximately 24.9% as compared to 22.5% for the same period in 2022.

Federal and state income taxes for the six months ended June 30, 2023 increased by $815 thousand, or 50.2%, when compared to the six months ended June 30, 2022. This increase was due primarily to higher consolidated income before taxes and higher merger related expenses, which are typically non-deductible. For the six months ended June 30, 2023, the Company’s effective tax rate was approximately 25.6% as compared to 23.5% for the same period in 2022.

Virginia Partners is not subject to Virginia state income tax, but instead pays Virginia franchise tax. The Virginia franchise tax paid by Virginia Partners is recorded in the “Other expenses” line item on the Consolidated Statements of Income for the three and six months ended June 30, 2023 and 2022.

Balance Sheet

Changes in key balance sheet components as of June 30, 2023 compared to December 31, 2022 were as follows:

• Total assets as of June 30, 2023 were $1.55 billion, a decrease of $26.2 million, or 1.7%, from December 31, 2022. Key drivers of this change were decreases in cash and cash equivalents and investment securities available for sale, at fair value, which were partially offset by an increase in total loans held for investment;
• Interest-bearing deposits in other financial institutions as of June 30, 2023 were $43.1 million, a decrease of $60.8 million, or 58.5%, from December 31, 2022. Key drivers of this change were loan growth outpacing deposit growth, deposit outflows due to competitive pressures in the higher interest rate environment and the negative banking industry developments associated with multiple high-profile bank failures during the first six months of 2023, and a decrease in short-term borrowings with the Federal Home Loan Bank;
• Federal funds sold as of June 30, 2023 were $17.5 million, a decrease of $5.5 million, or 24.0%, from December 31, 2022. Key drivers of this change were the aforementioned items noted in the analysis of interest-bearing deposits in other financial institutions;
• Investment securities available for sale, at fair value as of June 30, 2023 were $129.3 million, a decrease of $4.4 million, or 3.3%, from December 31, 2022. Key drivers of this change were scheduled payments of principal and an increase in unrealized losses on the investment securities available for sale portfolio as a result of increases in market interest rates;
• Loans, net of unamortized discounts on acquired loans of $1.4 million as of June 30, 2023 were $1.28 billion, an increase of $44.9 million, or 3.6%, from December 31, 2022. The key driver of this change was an increase in organic growth, including growth of approximately $11.5 million in loans related to Virginia Partners’ expansion into the Greater Washington market;
• Total deposits as of June 30, 2023 were $1.32 billion, a decrease of $21.1 million, or 1.6%, from December 31, 2022. Key drivers of this change were deposit outflows due to competitive pressures in the higher interest rate environment and the negative banking industry developments associated with multiple high-profile bank failures during the first six months of 2023, partially offset by organic growth in time deposits;
• Total borrowings as of June 30, 2023 were $73.7 million, a decrease of $10.9 million, or 12.9%, from December 31, 2022. The key driver of this change was a decrease in short-term borrowings with the Federal Home Loan Bank; and
• Total stockholders’ equity as of June 30, 2023 was $143.3 million, an increase of $4.0 million, or 2.9%, from December 31, 2022. Key drivers of this change were the net income attributable to the Company for the six months ended June 30, 2023, the proceeds from stock option exercises, and stock-based compensation expense related to restricted stock awards, which were partially offset by a decrease to retained earnings, net of tax, related to the adoption of the CECL Standard, an increase in accumulated other comprehensive (loss), net of tax, and cash dividends paid to shareholders.

Changes in key balance sheet components as of June 30, 2023 compared to June 30, 2022 were as follows:

• Total assets as of June 30, 2023 were $1.55 billion, a decrease of $141.8 million, or 8.4%, from June 30, 2022. Key drivers of this change were decreases in cash and cash equivalents and investment securities available for sale, at fair value, which were partially offset by an increase in total loans held for investment;
• Interest-bearing deposits in other financial institutions as of June 30, 2023 were $43.1 million, a decrease of $232.4 million, or 84.3%, from June 30, 2022. Key drivers of this change were loan growth outpacing deposit growth, deposit outflows due to competitive pressures in the higher interest rate environment and the negative banking industry developments associated with multiple high-profile bank failures during the first six months of 2023, and a decrease in long-term borrowings with the Federal Home Loan Bank, which were partially offset by a decrease in investment securities available for sale, at fair value, and an increase in short-term borrowings with the Federal Home Loan Bank;
• Federal funds sold as of June 30, 2023 were $17.5 million, a decrease of $7.3 million, or 29.3%, from June 30, 2022. Key drivers of this change were the aforementioned items noted in the analysis of interest-bearing deposits in other financial institutions;
• Investment securities available for sale, at fair value as of June 30, 2023 were $129.3 million, a decrease of $6.2 million, or 4.5%, from June 30, 2022. Key drivers of this change were scheduled payments of principal and an increase in unrealized losses on the investment securities available for sale portfolio as a result of increases in market interest rates;
• Loans, net of unamortized discounts on acquired loans of $1.4 million as of June 30, 2023 were $1.28 billion, an increase of $108.3 million, or 9.3%, from June 30, 2022. The key driver of this change was an increase in organic growth, including growth of approximately $49.9 million in loans related to Virginia Partners’ expansion into the Greater Washington market, which was partially offset by forgiveness payments received of approximately $247 thousand under round two of the PPP. As of June 30, 2023, there were no loans under the PPP that were still outstanding;
• Total deposits as of June 30, 2023 were $1.32 billion, a decrease of $176.9 million, or 11.8%, from June 30, 2022. Key drivers of this change were scheduled maturities of time deposits that were not replaced, deposit outflows due to competitive pressures in the higher interest rate environment and the negative banking industry developments associated with multiple high-profile bank failures during the first six months of 2023, partially offset by organic growth as a result of our continued focus on total relationship banking and Virginia Partners’ expansion into the Greater Washington market;
• Total borrowings as of June 30, 2023 were $73.7 million, an increase of $24.6 million, or 50.0%, from June 30, 2022. The key driver of this change was an increase in short-term borrowings with the Federal Home Loan Bank due to the aforementioned items noted in the analysis of total deposits, which was partially offset by a decrease in long-term borrowings with the Federal Home Loan Bank resulting from maturities and payoffs of borrowings that were not replaced and scheduled principal curtailments, and a decrease in Virginia Partners’ majority owned subsidiary Johnson Mortgage Company, LLC’s warehouse line of credit with another financial institution; and
• Total stockholders’ equity as of June 30, 2023 was $143.3 million, an increase of $8.5 million, or 6.3%, from June 30, 2022. Key drivers of this change were the net income attributable to the Company for the period July 1, 2022 through June 30, 2023, the proceeds from stock option exercises, and stock-based compensation expense related to restricted stock awards, which were partially offset by an increase in accumulated other comprehensive (loss), net of tax, a decrease to retained earnings, net of tax, related to the adoption of the CECL Standard, and cash dividends paid to shareholders.

As of June 30, 2023, all of the capital ratios of Delmarva and Virginia Partners continue to exceed regulatory requirements, with total risk-based capital substantially above well-capitalized regulatory requirements.

Asset Quality

The asset quality measures depicted below continue to reflect the Company’s efforts to prudently charge-off loans as losses are identified and maintain an appropriate allowance for credit losses.

The following table depicts the net (recovery) charge-off activity for the three and six months ended June 30, 2023 and 2022:

The following table depicts the level of the allowance for credit losses as of June 30, 2023, December 31, 2022 and June 30, 2022:

The following table depicts the unamortized discounts on acquired loans related to the acquisitions of Liberty Bell Bank and Virginia Partners:

The following table depicts the level of nonperforming assets as of June 30, 2023, December 31, 2022 and June 30, 2022: