What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-05-07 compared with 2020-11-06 · 77 added, 192 removed, 234 unchanged (53% of the section changed)

35 unchanged sentences

Critical Accounting Policies

Note 2 to the Company’s consolidated financial statements for the year ended December 31, 2019 (incorporated by reference in Item 8 of the Annual Report on Form 10-K for the fiscal year ended December 31, 2019) lists significant accounting policies used in the development and presentation of its financial statements.

Note 2 to the Company’s consolidated financial statements for the year ended December 31, 2020 (included in Item 8 of the Annual Report on Form 10-K for the fiscal year ended December 31, 2020) lists significant accounting policies used in the development and presentation of its financial statements.

This discussion and analysis, the significant accounting policies, and other financial statement disclosures identify and address key variables and other qualitative and quantitative factors that are necessary for an understanding and evaluation of the Company and its results of operations.

14 unchanged sentences

In estimating other-than-temporary impairment losses, the Company considers (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent of the Company to not sell the securities and whether it is more likely than not that it will not have to sell the securities before recovery of their cost basis.

The Company believes that all unrealized losses on securities at September 30, 2020 and December 31, 2019 represent temporary impairment of the securities, related to changes in interest rates.

The Company believes that all unrealized losses on securities at March 31, 2021 and December 31, 2020 represent temporary impairment of the securities, related to changes in interest rates.

In connection with acquisitions, the Company recorded goodwill in the amount of $29.3 million, representing the excess of amounts paid over the fair value of net assets of the institutions acquired in purchase transactions, at its fair value at the date of acquisition.

4 unchanged sentences

Changes in Financial Condition

Total assets as of September 30, 2020 were $1.842 billion compared to $1.231 billion as of December 31, 2019.

The increase was due primarily to the $456.1 million of assets acquired in the UpState merger.

The increase in total assets and loans outstanding is also due in part to the Company’s participation in the PPP and other related economic stimulus programs.

The fair value of securities available for sale as of September 30, 2020 was $197.4 million compared to $210.2 million as of December 31, 2019.

The decrease in the securities portfolio is the result of sales, calls, maturities and principal reductions of securities with the proceeds utilized to fund loan growth.

Total assets as of March 31, 2021 were $2.010 billion compared to $1.852 billion as of December 31, 2020.

The increase was due primarily to a $97.8 million increase in interest-bearing deposits with banks resulting from deposit growth related to economic stimulus programs.

The fair value of securities available for sale as of March 31, 2021 was $275.2 million compared to $226.6 million as of December 31, 2020.

The increase in the securities portfolio is the result of purchases executed to invest excess liquidity and to provide pledging for public deposits.

The carrying value of the Company’s securities portfolio (Available-for Sale) consisted of the following:

September 30, 2020

March 31, 2021

December 31, 2020

2 unchanged sentences

% of portfolio

Government agencies

States and political subdivisions

5 unchanged sentences

Management believes that the unrealized losses on all holdings represent temporary impairment of the securities, as the Company has the intent and ability to hold these investments until maturity or market price recovery.

Loans receivable totaled $1.415 billion at September 30, 2020 compared to $924.6 million as of December 31, 2019.

The increase in loans receivable includes $402.2 million of loans acquired in the UpState merger.

The loan growth recorded during the first nine months of 2020 also includes $95.0 million of PPP loans.

Organic loan growth for the nine-month period ended September 30, 2020 was negatively impacted by the effects of the COVID-19 pandemic as social distancing constraints and business closures resulted in a significant slowing of new loan originations.

The allowance for loan losses totaled $11,674,000 as of September 30, 2020, and represented 0.83% of total loans outstanding, compared to $8.5 million, or 0.92% of total loans, at December 31, 2019.

The Company had net charge-offs for the nine months ended September 30, 2020 of $685,000 compared to $1,097,000 in the corresponding period in 2019.

Loans receivable totaled $1.422 billion at March 31, 2021 compared to $1.411 billion as of December 31, 2020.

The loan growth recorded during the first three months of 2021 includes a $24.2 million increase in PPP loans.

Organic loan growth for the three-month period ended March 31, 2021 was negatively impacted by the effects of the COVID-19 pandemic as social distancing constraints and business closures resulted in a significant slowing of new loan originations.

The allowance for loan losses totaled $14,509,000 as of March 31, 2021, and represented 1.02% of total loans outstanding, compared to $13,150,000, or 0.93% of total loans, at December 31, 2020.

The Company had net charge-offs for the three months ended March 31, 2021 of $141,000 compared to $121,000 in the corresponding period in 2020.

The Company’s management assesses the adequacy of the allowance for loan losses on a quarterly basis.

3 unchanged sentences

In addition, management has included qualitative factors during 2021 which are specifically related to the economic impact of the COVID-19 pandemic.

Management considers the allowance adequate at September 30, 2020 based on the Company’s criteria.

Management considers the allowance adequate at March 31, 2021 based on the Company’s criteria.

However, there can be no assurance that the allowance for loan losses will be adequate to cover significant losses, if any, that might be incurred in the future.

As of September 30, 2020, non-performing loans totaled $12.6 million, or 0.89% of total loans compared to $795,000, or 0.09%, of total loans at December 31, 2019.

The increase reflects loans acquired in the UpState merger.

At September 30, 2020, non-performing assets totaled $13.6 million, or 0.74%, of total assets, compared to $2.4 million, or 0.19%, of total assets at December 31, 2019.

As of March 31, 2021, non-performing loans totaled $3,198,000 or 0.22% of total loans compared to $3,391,000, or 0.24%, of total loans at December 31, 2020.

At March 31, 2021, non-performing assets totaled $4.0 million, or 0.20%, of total assets, compared to $4.4 million, or 0.24%, of total assets at December 31, 2020.

The following table sets forth information regarding non-performing loans and foreclosed real estate at the dates indicated:

(dollars in thousands)

September 30, 2020

March 31, 2021

December 31, 2020

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Non-performing assets to total assets(a)

*Includes non-accrual TDRs of $91,000 as of September 30, 2020 and $99,000 as of December 31, 2019.

There were no accruing TDRs as of September 30, 2020 or as of December 31, 2019.

*Includes non-accrual TDRs of $75,000 as of March 31, 2021 and $75,000 as of December 31, 2020.

There were no accruing TDRs as of March 31, 2021 or as of December 31, 2020.

(a) Purchased impaired loans are loans obtained in acquisition transactions that as of the acquisition date were specifically identified as displaying signs of credit deterioration and for which the Company did not expect to collect all contractually required principal and interest payments.

2 unchanged sentences

(b) For loans acquired with specific evidence of deterioration in credit quality, a specific credit fair value adjustment is established at the date of acquisition and will not impact the allowance for loan losses unless actual losses exceed the established fair value adjustment.

During the nine-months ended September 30, 2020, over 1,100 of our loan customers had requested loan payment deferrals or payments of interest only on loans totaling $273.4 million.

In accordance with interagency guidance issued in March 2020, these short-term deferrals are not considered troubled debt restructurings (“TDRs”) unless the borrower was previously experiencing financial difficulty.

Since the inception of the CARES Act, over 1,200 of our loan customers had requested loan payment deferrals or payments of interest only on loans totaling $274.2 million.

In accordance with interagency guidance and the CARES Act issued in March 2020, these short-term deferrals are not considered troubled debt restructurings (“TDRs”) unless the borrower was previously experiencing financial difficulty.

As of March 31, 2021, 111 loans with an outstanding balance of $41.8 million remain in forbearance.

In addition, the risk-rating on COVID-19 modified loans did not change, and these loans will not be considered past due until after the deferral period is over and scheduled payments resume.

The credit quality of these loans will be reevaluated after the deferral period ends.

During the nine-month period ended September 30, 2020, total deposits increased $558.4 million due primarily to the $414.1 million of deposits acquired in the UpState merger.

The increase during the 2020 period also includes the impact from the PPP and other economic stimulus programs.

During the three-month period ended March 31, 2021, total deposits increased $149.8 million due primarily to the impact from the PPP and other economic stimulus programs.

The following table sets forth deposit balances as of the dates indicated:

(dollars in thousands)

September 30, 2020

March 31, 2021

December 31, 2020

4 unchanged sentences

Time deposits >$100,000

Other borrowings as of September 30, 2020, totaled $46.4 million compared to $56.4 million as of December 31, 2019.

Short-term borrowings, which consist of securities sold under agreements to repurchase and overnight borrowings from the FHLB, increased $7.0 million due to a $38.8 million increase in repurchase agreements, which was partially offset by a $31.8 million reduction in overnight borrowings.

Other borrowings as of March 31, 2021, totaled $39.4 million compared to $42.5 million as of December 31, 2020.

Short-term borrowings, which consist of securities sold under agreements to repurchase and overnight borrowings from the FHLB, increased $9.6 million due to a $9.6 million increase in repurchase agreements.

Other borrowings consisted of the following:

(dollars in thousands)

September 30, 2020

March 31, 2021

December 31, 2020

Notes with the FHLB:

Fixed rate term borrowing due May 2020 at 1.85%

Amortizing fixed rate borrowing due June 2020 at 1.490%

Amortizing fixed rate borrowing due July 2020 at 2.77%

Amortizing fixed rate borrowing due December 2020 at 1.706%

Amortizing fixed rate borrowing due December 2020 at 3.06%

Amortizing fixed rate borrowing due March 2022 at 1.748%

7 unchanged sentences

Stockholders’ Equity and Capital Ratios

As of September 30, 2020, stockholders’ equity totaled $190.5 million, compared to $137.4 million as of December 31, 2019.

The net change in stockholders’ equity included $45.3 million resulting from the UpState merger and $9.6 million of net income, which was partially offset by $5.7 million of dividends declared.

In addition, total equity increased $3.5 million due to an increase in the fair value of securities in the available for sale portfolio, net of tax.

This increase in fair value is the result of a change in interest rates and spreads, which may impact the value of the securities.

As of March 31, 2021, stockholders’ equity totaled $195.1 million, compared to $194.8 million as of December 31, 2020.

The net change in stockholders’ equity included $5.5 million of net income, which was partially offset by $2.1 million of dividends declared.

In addition, total equity decreased $3.1 million due to a decrease in the fair value of securities in the available for sale portfolio, net of tax.

This decrease in fair value is the result of a change in interest rates and spreads, which may impact the value of the securities.

Because of interest rate volatility, the Company’s accumulated other comprehensive income could materially fluctuate for each interim and year-end period.

A comparison of the Company’s consolidated regulatory capital ratios is as follows:

September 30, 2020

March 31, 2021

December 31, 2020

11 unchanged sentences

The capital conservation buffer requirement was phased in beginning January 1, 2016 and ending January 1, 2019, when the full capital conservation buffer requirement became effective.

The Company and the Bank are in compliance with their respective new capital requirements, including the capital conservation buffer, as of September 30, 2020.

As of September 30, 2020, the Company had cash and cash equivalents of $124.4 million in the form of cash, due from banks and short-term deposits with other institutions.

The Company and the Bank are in compliance with their respective new capital requirements, including the capital conservation buffer, as of March 31, 2021.

As of March 31, 2021, the Company had cash and cash equivalents of $210.5 million in the form of cash, due from banks and short-term deposits with other institutions.

In addition, the Company had total securities available for sale of $275.2 million which could be used for liquidity needs.

This totals $485.7 million of liquidity and represents 24.2% of total assets compared to $338.3 million and 18.3% of total assets as of December 31, 2020.

The Company also monitors other liquidity measures, all of which were within the Company’s policy guidelines as of September 30, 2020 and December 31, 2019.

The Company also monitors other liquidity measures, all of which were within the Company’s policy guidelines as of March 31, 2021 and December 31, 2020.

Based upon these measures, the Company believes its liquidity is adequate.

1 unchanged sentence

The Company has a line of credit commitment from Atlantic Community Bankers Bank for $7,000,000 which expires June 30, 2021.

There were no borrowings under this line as of September 30, 2020 and December 31, 2019.

There were no borrowings under this line as of March 31, 2021 and December 31, 2020.

The Company has a line of credit commitment available which has no stated expiration date from PNC Bank for $16,000,000.

There were no borrowings under this line as of September 30, 2020 and December 31, 2019.

There were no borrowings under this line as of March 31, 2021 and December 31, 2020.

The Company has a line of credit commitment available which has no stated expiration date from Zions Bank for $17,000,000.

There were no borrowings under this line as of September 30, 2020 and December 31, 2019.

The Bank’s maximum borrowing capacity with the Federal Home Loan Bank was approximately $429,045,000 as of September 30, 2020, of which $46,437,000 was outstanding in the form of borrowings.

There were no borrowings under this line as of March 31, 2021 and December 31, 2020.

The Bank’s maximum borrowing capacity with the Federal Home Loan Bank was approximately $585,130,000 as of March 31, 2021, of which $39,366,000 was outstanding in the form of borrowings.

As of December 31, 2020, the maximum borrowing capacity was $686,360,000, of which $42,459,000 of borrowings was outstanding.

Additionally, as of September 30, 2020, the Bank had secured Letters of Credit from the Federal Home Loan Bank in the amount of $152.4 million as collateral for specific municipal deposits.

Additionally, as of March 31, 2021, the Bank had secured Letters of Credit from the Federal Home Loan Bank in the amount of $204,550,000 million as collateral for specific

municipal deposits.

These Letters of Credit reduce the availability under the maximum borrowing capacity.

5 unchanged sentences

We believe the presentation of interest income (fte) and net interest income (fte) ensures comparability of interest income and net interest income arising from both taxable and tax-exempt sources and is consistent with industry practice.

Interest income (fte) and Net interest income (fte) is reconciled to GAAP interest income and net interest income on pages 41 and 45.

Interest income (fte) and Net interest income (fte) is reconciled to GAAP interest income and net interest income on page 39.

Although the Company believes that these non-GAAP financial measures enhance investors’ understanding of our business and performance, these non-GAAP financial measures should not be considered an alternative to GAAP measures.

3 unchanged sentences

(Tax-Equivalent Basis,

Three Months Ended September 30,

Three Months Ended March 31,

dollars in thousands)

35 unchanged sentences

Increase/(Decrease)

Three months ended September 30, 2020 Compared to

Three months ended September 30, 2019

Three months ended March 31, 2021 Compared to

Three months ended March 31, 2020

Variance due to

15 unchanged sentences

Changes in net interest income that could not be specifically identified as either a rate or volume change were allocated proportionately to changes in volume and changes in rate.

Comparison of Operating Results for the Three Months Ended September 30, 2020 to September 30, 2019

For the three months ended September 30, 2020, net income totaled $4,999,000 compared to $3,907,000 earned in the similar period in 2019.

The increase in net income for the three months ended September 30, 2020 was due primarily to a $5,439,000 million improvement in net interest income which reflects the benefits realized from the merger of UpState.

This increase was partially offset by an increase in the provision for loan losses and $386,000 of merger related expenses.

Earnings per share for the three-months ended September 30, 2020 were $0.62 per share for basic shares and fully diluted shares compared to $0.62 per share for basic shares and fully diluted shares for the three months ended September 30, 2019.

The resulting annualized return on average assets and annualized return on average equity for the three months ended September 30, 2020 were 1.11% and 10.64%, respectively, compared to 1.27% and 11.56%, respectively, for the same period in 2019.

Comparison of Operating Results for the Three Months Ended March 31, 2021 to March 31, 2020

For the three months ended March 31, 2021, net income totaled $5,542,000 compared to $3,079,000 earned in the similar period in 2020.

The increase in net income for the three months ended March 31, 2021 was due primarily to a $6.1 million increase in net interest income which reflects the benefits realized from the acquisition of UpState.

This increase was partially offset by an $800,000 increase in the provision for loan losses and a $2.4 million increase in other operating expenses.

Earnings per share for the three-months ended March 31, 2021 were $0.68 per share for basic shares and $0.67 per share for fully diluted shares compared to $0.49 per share for basic shares and fully diluted shares for the three months ended March 31, 2020.

The resulting annualized return on average assets and annualized return on average equity for the three months ended March 31, 2021 were 1.18% and 11.39%, respectively, compared to 1.01% and 8.79%, respectively, for the same period in 2020.

The following table sets forth changes in net income:

1 unchanged sentence

Three months ended

September 30, 2020 to September 30, 2019

Net income three months ended September 30, 2019

March 31, 2021 to March 31, 2020

Net income three months ended March 31, 2020

Change due to:

1 unchanged sentence

Provision for loan losses

Net gains on sales

Net gains on sales of securities and loans

Earnings and proceeds on bank-owned life insurance policies

Salaries and employee benefits

2 unchanged sentences

FDIC insurance assessment

Merger related

Professional fees

All other expenses

Income tax expense

Net income three months ended September 30, 2020

Net income three months ended March 31, 2021

Net Interest Income

Net interest income on a fully taxable equivalent basis (fte) for the three months ended September 30, 2020 totaled $15,547,000 which was $5,414,000 higher than the comparable period in 2019.

Net interest income on a fully taxable equivalent basis (fte) for the three months ended March 31, 2021 totaled $15,981,000 which was $6,078,000 higher than the comparable period in 2020.

The increase in net interest income was due primarily to a $5,441,000 increase in interest income (fte) on loans resulting from the acquisition of UpState.

Tax-equivalent interest income was negatively impacted by a $283,000 decrease in securities income.

The fte net interest spread and net interest margin were 3.55% and 3.73%, respectively, for the three months ended September 30, 2020 compared to 3.35% and 3.60%, respectively, for the same period in 2019.

The fte net interest spread and net interest margin were 3.46% and 3.59%, respectively, for the three months ended March 31, 2021 compared to 3.23% and 3.48%, respectively, for the same period in 2020.

The increase in the net interest spread reflects the growth in average interest-earning assets.

For the three-months ended September 30, 2020, interest income (fte) totaled $17,526,000 with a yield on average earning assets of 4.20% compared to $12,301,000 and 4.37% for the 2019 period.

Average loans increased $493.2 million during the three-months ended September 30, 2020, over the comparable period of 2019, while average securities decreased $28.8 million as portfolio runoff was utilized to fund loan growth.

Average earning assets totaled $1.668 billion for the three months ended September 30, 2020, an increase of $542.2 million over the average for the same period in 2019.

All increases reflect growth resulting from the merger with UpState.

Interest expense for the three months ended September 30, 2020 totaled $1,979,000 at an average cost of 0.65% compared to $2,168,000 and 1.02% for the same period in 2019.

See “Non-GAAP Financial Measures” above.

For the three-months ended March 31, 2021, interest income (fte) totaled $17,506,000 with a yield on average earning assets of 3.93% compared to $12,106,000 and 4.25% for the 2020 period.

Average loans increased $491.3 million during the three-months ended March 31, 2021, over the comparable period of 2020, while average securities increased $38.8 million.

Average earning assets totaled $1.780 billion for the three months ended March 31, 2021, an increase of $642.0 million over the average for the same period in 2020.

All increases reflect growth resulting from the merger with UpState and growth in PPP loans.

See “Non-GAAP Financial Measures” above.

Interest expense for the three months ended March 31, 2021 totaled $1,525,000 at an average cost of 0.47% compared to $2,203,000 and 1.02% for the same period in 2020.

The decrease in average cost during the 2021 quarter reflects the overall lower level of interest rates.

1 unchanged sentence

Provision for Loan Losses

The Company’s provision for loan losses for the three months ended September 30, 2020 was $1,850,000 compared to $300,000 for the three months ended September 30, 2019.

The Company’s provision for loan losses for the three months ended March 31, 2021 was $1,500,000, compared to $700,000 for the three months ended March 31, 2020.

The increased provision includes the increased risk related to the economic impact of the COVID-19 pandemic.

The Company makes provisions for loan losses in an amount necessary to maintain the

allowance for loan losses at an acceptable level.

Net charge-offs were $488,000 for the quarter ended September 30, 2020, compared to $123,000 for the similar period in 2019.

At September 30, 2020, the allowance for loan losses represented 0.83% of loans receivable.

The Company makes provisions for loan losses in an amount necessary to maintain the allowance for loan

losses at an acceptable level.

Net charge-offs were $141,000 for the quarter ended March 31, 2021, compared to $121,000 for the similar period in 2020.

At March 31, 2021, the allowance for loan losses represented 1.02% of loans receivable.

Additionally, the allowance for loan losses represented 454% of non-performing loans, excluding loans acquired with credit quality deterioration.

Other income totaled $2,072,000 for the three months ended September 30, 2020, compared to $1,882,000 for the same period in 2019.

Other income totaled $1,989,000 for the three months ended March 31, 2021, compared to $1,654,000 for the same period in 2020.

The increase was due primarily to a $184,000 increase in service charges and fees.

Net gains from the sale of securities totaled $33,000 for the three-months ended September 30, 2020, compared to $169,000 in the three-months ended September 30, 2019.

Net gains on the sale of loans totaled $164,000 for the three-months ended September 30, 2020 compared to $15,000 in the three-months ended September 30, 2019.

Other Expense

Other expense for the three months ended September 30, 2020 totaled $9,380,000, which was $2,589,000 higher than the same period of 2019, due primarily to the $386,000 of merger related expenses and costs associated with the operation of four community offices acquired in the UpState merger.

Income Tax Expense

Income tax expense totaled $1,173,000 for an effective tax rate of 19.0% for the period ended September 30, 2020 compared to $775,000 for an effective tax rate of 16.6% for the similar period in 2019.

The increase in the effective tax rate in the 2020 period reflects the merger costs and the related tax-deductions.

Results of Operations

NORWOOD FINANCIAL CORP

Consolidated Average Balance Sheets with Resultant Interest and Rates

(Tax-Equivalent Basis,

Nine Months Ended September 30,

dollars in thousands)

Interest-earning assets:

Interest bearing deposits with banks

Securities available for sale:

Tax-exempt (1)

Total securities available for sale (1)

Loans receivable (1) (4) (5)

Total interest-earning assets

Non-interest earning assets:

Cash and due from banks

Allowance for loan losses

Total non-interest earning assets

Liabilities and Stockholders'

Interest-bearing liabilities:

Interest-bearing demand and money market

Total interest-bearing deposits

Short-term borrowings

Other borrowings

Total interest-bearing liabilities

Non-interest bearing liabilities:

Demand deposits

Other liabilities

Total non-interest bearing liabilities

Stockholders'

Total Liabilities and Stockholders'

Net interest income/spread (tax equivalent basis)

Tax-equivalent basis adjustment

Net interest income

Net interest margin (tax equivalent basis)

(1) Interest and yields are presented on a tax-equivalent basis using a marginal tax rate of 21%.

(2) Average balances have been calculated based on daily balances.

(3) Annualized

(4) Loan balances include non-accrual loans and are net of unearned income.

(5) Loan yields include the effect of amortization of deferred fees, net of costs.

Rate/Volume Analysis.

The following table shows the fully taxable equivalent effect of changes in volumes and rates on interest income and interest expense

Increase/(Decrease)

Nine months ended September 30, 2020 Compared to

Nine months ended September 30, 2019

Variance due to

(dollars in thousands)

Interest-earning assets:

Interest-bearing deposits with banks

Securities available for sale:

Tax-exempt securities

Total securities

Loans receivable

Total interest-earning assets

Interest-bearing liabilities:

Interest-bearing demand and money market

Total interest-bearing deposits

Short-term borrowings

Other borrowings

Total interest-bearing liabilities

Net interest income (tax-equivalent basis)

Comparison of Operating Results for the Nine Months Ended September 30, 2020 to September 30, 2019

For the nine months ended September 30, 2020, net income totaled $9,567,000 compared to $10,619,000 earned in the similar period in 2019.

The decrease in net income for the nine months ended September 30, 2020 was due primarily to a $2,800,000 increase in the provision for loan losses and $1,983,000 of merger related expenses.

Earnings per share for the current period were $1.39 per share for basic shares and fully diluted shares compared to $1.70 per share for basic shares and $1.68 per share for fully diluted shares for the nine months ended September 30, 2019.

The resulting annualized return on average assets and annualized return on average equity for the nine months ended September 30, 2020 were 0.88% and 8.13%, respectively, compared to 1.17% and 10.97%, respectively, for the similar period in 2019.

The following table sets forth changes in net income:

(dollars in thousands)

Nine months ended

September 30, 2020 to September 30, 2019

Net income nine months ended September 30, 2019

Change due to:

Net interest income

Provision for loan losses

Net gains on sales

Salaries and employee benefits

Occupancy, furniture and equipment

Data processing related

FDIC insurance assessment

Merger related

All other expenses

Income tax expense

Net income nine months ended September 30, 2020

Net Interest Income

Net interest income on a fully taxable equivalent basis (fte) for the nine months ended September 30, 2020 totaled $35,538,000 which was $5,992,000 higher than the comparable period in 2019.

The increase in net interest income was due primarily to a $6,678,000 increase in interest income (fte) on loans resulting from the merger with UpState.

Tax-equivalent interest income was negatively impacted by a $1,021,000 decrease in securities income.

The fte net interest spread and net interest margin were 3.30% and 3.51%, respectively, for the nine months ended September 30, 2020 compared to 3.26% and 3.51%, respectively, for the similar period in 2019.

The increase in the net interest spread reflects the growth in loans resulting from the UpState merger.

Interest income (fte) totaled $41,702,000 with a yield on average earning assets of 4.12% compared to $36,072,000 and 4.28% for the 2019 period.

Average loans increased $222.3 million over the comparable period of last year, while average securities decreased $42.2 million as portfolio runoff was utilized to fund loan growth.

Average earning assets totaled $1.351 billion for the nine months ended September 30, 2020, an increase of $228.0 million over the average for the similar period in 2019.

All increases reflect assets acquired from UpState.

Interest expense for the nine months ended September 30, 2020 totaled $6,164,000 at an average cost of 0.82% compared to $6,526,000 and 1.02% for the similar period in 2019.

The decrease in average cost reflects the overall lower level of interest rates.

The average cost of time deposits, which is the most significant component of funding, decreased to 1.42 % from 1.79% for the similar period in the prior year.

Provision for Loan Losses

The Company’s provision for loan losses for the nine months ended September 30, 2020 was $3,850,000 compared to $1,050,000 for the nine months ended September 30, 2019.

The increased provision includes the increased risk related to the economic impact of the COVID-19 pandemic.

The Company makes provisions for loan losses in an amount necessary to maintain the allowance for loan losses at an acceptable level.

Net charge-offs were $685,000 for the nine months ended September 30, 2020 compared to $1,097,000 for the similar period in 2019.

At September 30, 2020, the allowance for loan losses represented 0.83% of loans receivable.

Additionally, the allowance for loan losses represented 289% of non-performing loans, excluding loans acquired with credit quality deterioration.

Other income totaled $5,119,000 for the nine months ended September 30, 2020 compared to $5,083,000 for the similar period in 2019.

The increase was due primarily to a $79,000 increase related to fiduciary activities.

All other items included in other income decreased $43,000, net.

Net gains from the sale of securities totaled $71,000 for the nine-months ended September 30, 2020, compared to $233,000 in the nine-months ended September 30, 2019.

Net gains on the sale of loans totaled $285,000 for the nine-months ended September 30, 2020 compared to $125,000 in the nine-months ended September 30, 2019.

Net gains from the sale of securities totaled $21,000 for the three-months ended March 31, 2021, compared to $38,000 in the three-months ended March 31, 2020.

Net gains on the sale of loans totaled $29,000 for the three-months ended March 31, 2021 compared to $56,000 in the three-months ended March 31, 2020.

Other Expense

Other expense for the nine months ended September 30, 2020 totaled $24,531,000 which was $4,307,000 higher than the same period of 2019 due primarily to $1,983,00 of merger related expenses and costs associated with the operation of four community offices acquired in the UpState merger.

Other expense for the three months ended March 31, 2021 totaled $9,452,000, which was $2,393,000 higher than the same period of 2020, due primarily to the costs associated with the operation of four community offices acquired in the UpState merger.

Income Tax Expense

Income tax expense totaled $2,033,000 for an effective tax rate of 17.5% for the nine months ended September 30, 2020 compared to $1,963,000 for an effective tax rate of 15.6% for the similar period in 2019.

Income tax expense totaled $1,271,000 for an effective tax rate of 18.7% for the period ended March 31, 2021 compared to $481,000 for an effective tax rate of 13.5% for the similar period in 2020.

The increase in the effective tax rate in the 2021 period reflects the increased level of taxable income.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis