Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 contains safe harbor provisions regarding forward-looking statements. When used in this discussion, the words “believes,” “anticipates,” “contemplates,” “expects,” and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties which could cause actual results to differ materially from those projected. Those risks and uncertainties include:
possible future impairment of intangible assets
our ability to effectively manage future growth
loan losses in excess of our allowance
the impact of the COVID-19 pandemic on us
risk of litigation from participation in the PPP loan program
risks inherent in the COVID-19 loan forbearance programs under the CARES Act
risks inherent in commercial lending
real estate collateral which is subject to declines in value
potential other-than-temporary impairments
soundness of other financial institutions
interest rate risks
potential liquidity risk
deposits acquired through competitive bidding
availability of capital
regional economic factors
loss of senior officers
comparatively low legal lending limits
risks of new capital requirements
potential impact of Tax Cuts and Jobs Act
limited market for the Company’s stock
restrictions on ability to pay dividends
common stock may lose value
insider ownership
issuing additional shares may dilute ownership
competitive environment
certain anti-takeover provisions
extensive and complex governmental regulation and associated cost
cybersecurity
The Company undertakes no obligation to publicly release the results of any revisions to those forward-looking statements which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
Critical Accounting Policies
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.
Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the valuation of deferred tax assets, the fair value of financial instruments, the determination of other-than-
37
temporary impairment on securities and the determination of goodwill impairment. Please refer to the discussion of the allowance for loan losses calculation under “Loans” in the “Changes in Financial Condition” section.
The Company uses the modified prospective transition method to account for stock options. Under this method companies are required to record compensation expense, based on the fair value of options over the vesting period. Restricted shares vest over a five-year period. The product of the number of shares granted and the grant date market price of the Company’s common stock determines the fair value of restricted stock.
Deferred income taxes reflect temporary differences in the recognition of the revenue and expenses for tax reporting and financial statement purposes, principally because certain items are recognized in different periods for financial reporting and tax return purposes. Although realization is not assured, the Company believes that it is more likely than not that all deferred tax assets will be realized.
The fair value of financial instruments is based upon quoted market prices, when available. For those instances where a quoted price is not available, fair values are based upon observable market based parameters as well as unobservable parameters. Any such valuation is applied consistently over time.
Management determines the appropriate classification of debt securities at the time of purchase and re-evaluates such designation as of each Consolidated Balance Sheet date.
Declines in the fair value of available for sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses. 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 June 30, 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. Goodwill is tested and deemed impaired when the carrying value of goodwill exceeds its implied fair value. The value of the goodwill can change in the future. We expect the value of the goodwill to decrease if there is a significant decrease in the franchise value of the Company or the Bank. If an impairment loss is determined in the future, we will reflect the loss as an expense for the period in which the impairment is determined, leading to a reduction of our net income for that period by the amount of the impairment loss.
Changes in Financial Condition
General
Total assets as of June 30, 2021 were $2.026 billion compared to $1.852 billion as of December 31, 2020. The increase was due primarily to a $107.0 million increase in securities available-for-sale and a $78.1 million increase in interest-bearing deposits with banks. Both increases resulted from deposit growth related to economic stimulus programs.
Securities
The fair value of securities available for sale as of June 30, 2021 was $333.6 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:
June 30, 2021
December 31, 2020
(dollars in thousands)
Amount
% of portfolio
Amount
% of portfolio
U.S. Treasury securities
$
10,112
3.0
%
$
—
—
%
U.S. Government agencies
11,141
3.3
3,969
1.8
States and political subdivisions
108,286
32.5
73,091
32.3
Corporate obligations
—
—
3,032
1.3
Mortgage-backed securities-
government sponsored entities
204,097
61.2
146,494
64.6
Total
$
333,636
100.0
%
$
226,586
100.0
%
38
The Company has securities in an unrealized loss position. In management’s opinion, the unrealized losses reflect changes in interest rates subsequent to the acquisition of specific securities. 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
Loans receivable totaled $1.387 billion at June 30, 2021 compared to $1.411 billion as of December 31, 2020. The $24.1 million decrease recorded during the first six months of 2021 includes a $20.8 million reduction in PPP loans due to loan forgiveness. Organic loan growth for the six-month period ended June 30, 2021 resulted in a $3.3 million reduction in total loans. Commercial real estate loans increased $18.8 million during the six-month period ended June 30, 2021, but this was offset by limited growth or reductions in other loan categories. The Company also sold $7.3 million of residential mortgage loans during the six-month period ended June 30, 2021.
The allowance for loan losses totaled $15,340,000 as of June 30, 2021, and represented 1.11% 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 six months ended June 30, 2021 of $810,000 compared to $197,000 in the corresponding period in 2020. The Company’s management assesses the adequacy of the allowance for loan losses on a quarterly basis. The process includes an analysis of the risks inherent in the loan portfolio. It includes an analysis of impaired loans and a historical review of credit losses by loan type. Other factors considered include concentration of credit in specific industries, economic and industry conditions, trends in delinquencies and loan classifications, and loan growth. 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 June 30, 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, which might be incurred in the future.
As of June 30, 2021, non-performing loans totaled $3,940,000 or 0.28% of total loans compared to $3,391,000, or 0.24%, of total loans at December 31, 2020. At June 30, 2021, non-performing assets totaled $4,784,000 million, or 0.24%, of total assets, compared to $4,356,000, 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)
June 30, 2021
December 31, 2020
Loans accounted for on a non-accrual basis:
Real Estate
Residential
$
486
$
571
Commercial
1,118
1,674
Agricultural
676
676
Construction
—
—
Commercial and financial loans
1,169
22
Other agricultural loans
308
263
Consumer loans to individuals
183
185
Total non-accrual loans *
3,940
3,391
Accruing loans which are contractually
past due 90 days or more
—
—
Total non-performing loans
3,940
3,391
Foreclosed real estate
844
965
Total non-performing assets
$
4,784
$
4,356
Purchased credit impaired loans (a)
$
8,398
$
9,281
Allowance for loans losses
$
15,340
$
13,150
Coverage of non-performing loans (a) (b)
389%
%
388%
%
Non-performing loans to total loans(a)
0.28
%
0.24
%
Non-performing loans to total assets(a)
0.19
%
0.18
%
Non-performing assets to total assets(a)
0.24
%
0.24
%
*Includes non-accrual TDRs of $0 as of June 30, 2021 and $75,000 as of December 31, 2020. There were no accruing TDRs as of June 30, 2021 or as of December 31, 2020.
39
(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. Those loans were impaired at the date of acquisition, were recorded at estimated fair value and were generally delinquent in payments. The Company estimated the timing and amount of expected cash flows in excess of the estimated fair value and established an accretable discount on the acquisition date relating to these impaired loans that is recognized in interest income.
(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.
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 $274.3 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 June 30, 2021, twelve loans with an outstanding balance of $1.0 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.
Deposits
During the six-month period ended June 30, 2021, total deposits increased $153.6 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)
June 30, 2021
December 31, 2020
Non-interest bearing demand
$
435,824
$
359,559
Interest-bearing demand
184,265
149,692
Money market deposit accounts
291,224
259,974
Savings
266,800
232,329
Time deposits <$100,000
169,894
180,316
Time deposits >$100,000
340,934
353,515
Total
$
1,688,941
$
1,535,385
Borrowings
Other borrowings as of June 30, 2021, totaled $36.3 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 $20.3 million due to a $20.3 million increase in repurchase agreements.
Other borrowings consisted of the following:
(dollars in thousands)
June 30, 2021
December 31, 2020
Notes with the FHLB:
Amortizing fixed rate borrowing due March 2022 at 1.748%
$
679
$
1,126
Amortizing fixed rate borrowing due August 2022 at 1.94%
2,375
3,376
Amortizing fixed rate borrowing due October 2022 at 1.88%
2,207
3,021
Amortizing fixed rate borrowing due October 2023 at 3.24%
4,868
5,865
Amortizing fixed rate borrowing due December 2023 at 3.22%
2,601
3,096
Fixed rate term borrowing due December 2023 at 1.95%
10,000
10,000
Amortizing fixed rate borrowing due December 2023 at 1.73%
6,408
7,616
Amortizing fixed rate borrowing due April 2024 at 0.91%
7,121
8,359
$
36,259
$
42,459
40
Stockholders’ Equity and Capital Ratios
As of June 30, 2021, stockholders’ equity totaled $200.5 million, compared to $194.8 million as of December 31, 2020. The net change in stockholders’ equity included $11.3 million of net income, which was partially offset by $4.3 million of dividends declared. In addition, total equity decreased $1.6 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:
June 30, 2021
December 31, 2020
Tier 1 Capital
(To average assets)
8.41%
8.71%
Tier 1 Capital
(To risk-weighted assets)
12.06%
11.65%
Common Equity Tier 1 Capital
(To risk-weighted assets)
12.06%
11.65%
Total Capital
(To risk-weighted assets)
13.17%
12.62%
Effective January 1, 2015, the Company and the Bank became subject to new regulatory capital rules, which, among other things, impose a new common equity Tier 1 minimum capital requirement (4.5% of risk-weighted assets), set the minimum leverage ratio for all banking organizations at a uniform 4% of total assets, increase the minimum Tier 1 capital to risk-based assets requirement (from 4% to 6% of risk-weighted assets) and assign a higher risk weight (150%) to exposures that are more than 90 days past due or are on nonaccrual status and to certain commercial real estate facilities that finance the acquisition, development or construction of real property. The new rules also require unrealized gains and losses on certain “available-for-sale” securities holdings to be included for purposes of calculating regulatory capital requirements unless a one-time opt out is exercised which the Company and the Bank have done. The final rule limits a banking organization’s dividends, stock repurchases and other capital distributions, and certain discretionary bonus payments to executive officers, if the banking organization does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets above regulatory minimum risk-based requirements. 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 June 30, 2021.
Liquidity
As of June 30, 2021, the Company had cash and cash equivalents of $205.2 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 $333.6 million which could be used for liquidity needs. This totals $538.8 million of liquidity and represents 26.6% 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 June 30, 2021 and December 31, 2020. Based upon these measures, the Company believes its liquidity is adequate.
Capital Resources
The Company has a line of credit commitment from Atlantic Community Bankers Bank for $7,000,000 which expires June 30, 2022. There were no borrowings under this line as of June 30, 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 June 30, 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 June 30, 2021 and December 31, 2020.
The Bank’s maximum borrowing capacity with the Federal Home Loan Bank was approximately $586,850,000 as of June 30, 2021, of which $36,259,000 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 June 30, 2021, the Bank had secured Letters of Credit from the Federal Home Loan Bank in the amount of $169,916,000 as collateral for specific municipal deposits.
41
These Letters of Credit reduce the availability under the maximum borrowing capacity. There was $165,500,000 outstanding in the form of Letters of Credit as of December 31, 2020. Advances and Letters of Credit from the Federal Home Loan Bank are secured by qualifying assets of the Bank.
Non-GAAP Financial Measures
This report contains or references fully taxable-equivalent (fte) interest income and net interest income, which are non-GAAP financial measures. Interest income (fte) and net interest income (fte) are derived from GAAP interest income and net interest income using an assumed tax rate of 21%. 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 44 and 48. Fully taxable equivalent interest income and net interest income is also reflected in the tables on pages 45 and 49. 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.
42
Results of Operations
NORWOOD FINANCIAL CORP
Consolidated Average Balance Sheets with Resultant Interest and Rates
(Tax-Equivalent Basis,
Three Months Ended June 30,
dollars in thousands)
2021
2020
Average
Average
Average
Average
Balance
Interest
Rate
Balance
Interest
Rate
(2)
(1)
(3)
(2)
(1)
(3)
Assets
Interest-earning assets:
Interest-bearing deposits with banks
$
176,530
$
59
0.13%
$
71,626
$
19
0.11%
Securities available for sale:
Taxable
247,611
966
1.56
139,431
701
2.01
Tax-exempt (1)
64,084
494
3.08
54,264
458
3.38
Total securities available for sale (1)
311,695
1,460
1.87
193,695
1,159
2.39
Loans receivable (1) (4) (5)
1,401,890
16,208
4.62
977,358
10,892
4.46
Total interest-earning assets
1,890,115
17,727
3.75
1,242,679
12,070
3.89
Non-interest earning assets:
Cash and due from banks
22,455
15,493
Allowance for loan losses
(15,143)
(9,566)
Other assets
114,023
87,953
Total non-interest earning assets
121,335
93,880
Total Assets
$
2,011,450
$
1,336,559
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Interest-bearing demand and money market
$
461,221
$
214
0.19
$
245,096
$
126
0.21
Savings
266,832
41
0.06
187,236
25
0.05
Time
532,939
950
0.71
371,847
1,479
1.59
Total interest-bearing deposits
1,260,992
1,205
0.38
804,179
1,630
0.81
Short-term borrowings
77,592
73
0.38
61,415
73
0.48
Other borrowings
37,787
186
1.98
54,666
279
2.04
Total interest-bearing liabilities
1,376,371
1,464
0.43
920,260
1,982
0.86
Non-interest bearing liabilities:
Demand deposits
421,499
255,671
Other liabilities
14,459
17,156
Total non-interest bearing liabilities
435,958
272,827
Stockholders' equity
199,121
143,472
Total Liabilities and Stockholders' Equity
$
2,011,450
$
1,336,559
Net interest income/spread (tax equivalent basis)
16,263
3.32%
10,088
3.03%
Tax-equivalent basis adjustment
(210)
(221)
Net interest income
$
16,053
$
9,867
Net interest margin (tax equivalent basis)
3.44%
3.25%
(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.
43
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)
Three months ended June 30, 2021 Compared to
Three months ended June 30, 2020
Variance due to
Volume
Rate
Net
(dollars in thousands)
Interest-earning assets:
Interest-bearing deposits with banks
$
32
$
8
$
40
Securities available for sale:
Taxable
495
(230)
265
Tax-exempt securities
81
(45)
36
Total securities
576
(275)
301
Loans receivable
4,770
546
5,316
Total interest-earning assets
5,378
279
5,657
Interest-bearing liabilities:
Interest-bearing demand and money market
109
(21)
88
Savings
10
6
16
Time
355
(884)
(529)
Total interest-bearing deposits
474
(899)
(425)
Short-term borrowings
17
(17)
—
Other borrowings
(87)
(6)
(93)
Total interest-bearing liabilities
404
(922)
(518)
Net interest income (tax-equivalent basis)
$
4,974
$
1,201
$
6,175
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.
44
Comparison of Operating Results for the Three Months Ended June 30, 2021 to June 30, 2020
General
For the three months ended June 30, 2021, net income totaled $5,755,000 compared to $1,488,000 earned in the similar period in 2020. The increase in net income for the three months ended June 30, 2021 was due primarily to a $6,186,000 increase in net interest income which reflects the benefits realized from the acquisition of UpState. This increase was partially offset by a $200,000 increase in the provision for loan losses and a $1.4 million increase in other operating expenses. Earnings per share for the three-months ended June 30, 2021 were $0.70 per share for basic shares and fully diluted shares compared to $0.24 per share for basic shares and fully diluted shares for the three months ended June 30, 2020. The resulting annualized return on average assets and annualized return on average equity for the three months ended June 30, 2021 were 1.15% and 11.59%, respectively, compared to 0.45% and 4.17%, respectively, for the same period in 2020.
The following table sets forth changes in net income:
(dollars in thousands)
Three months ended
June 30, 2021 to June 30, 2020
Net income three months ended June 30, 2020
$
1,488
Change due to:
Net interest income
6,186
Provision for loan losses
(200)
Net gains on sales of securities and loans
44
Service charges and fees
695
Other income
56
Salaries and employee benefits
(1,882)
Occupancy, furniture and equipment
(280)
Data processing related
(96)
FDIC insurance assessment
(112)
Professional fees
(118)
Merger related
1,597
All other expenses
(509)
Income tax expense
(1,114)
Net income three months ended June 30, 2021
$
5,755
Net Interest Income
Net interest income on a fully taxable equivalent basis (fte) for the three months ended June 30, 2021 totaled $16,263,000 which was $6,175,000 higher than the comparable period in 2020. The increase in net interest income was due primarily to a $5,316,000 increase in interest income (fte) on loans acquired in the acquisition of UpState. The fte net interest spread and net interest margin were 3.32% and 3.44%, respectively, for the three months ended June 30, 2021 compared to 3.03% and 3.25%, respectively, for the same period in 2020. The increase in the net interest spread reflects the growth in average interest-earning assets. See “Non-GAAP Financial Measures” above.
For the three-months ended June 30, 2021, interest income (fte) totaled $17,727,000 with a yield on average earning assets of 3.75% compared to $12,070,000 and 3.89% for the 2020 period. Average loans increased $424.5 million during the three-months ended June 30, 2021, over the comparable period of 2020, while average securities increased $118.0 million. Average earning assets totaled $1.890 billion for the three months ended June 30, 2021, an increase of $647.4 million over the average for the same period in 2020. All increases reflect asset 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 June 30, 2021 totaled $1,464,000 at an average cost of 0.43% compared to $1,982,000 and 0.86% for the same period in 2020. The decrease in interest expense during the three-months ended June 30, 2021 reflects the overall lower level of interest rates. The average cost of time deposits, which is the most significant component of funding costs, decreased 0.88% during the three months ended June 30, 2021.
Provision for Loan Losses
The Company’s provision for loan losses for the three months ended June 30, 2021 was $1,500,000, compared to $1,300,000 for the three months ended June 30, 2020. The increased provision includes the increased risk related to the economic impact of the
45
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 $669,000 for the quarter ended June 30, 2021, compared to $76,000 for the similar period in 2020. At June 30, 2021, the allowance for loan losses represented 1.11% of loans receivable. Additionally, the allowance for loan losses represented 389% of non-performing loans, excluding loans acquired with credit quality deterioration.
Other Income
Other income totaled $2,187,000 for the three months ended June 30, 2021, compared to $1,392,000 for the same period in 2020. The increase was due primarily to a $695,000 increase in service charges and fees. Net gains on the sale of loans totaled $109,000 for the three months ended June 30, 2021 compared to $65,000 in the three months ended June 30, 2020.
Other Expense
Other expense for the three months ended June 30, 2021 totaled $9,492,000, which was $1,400,000 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 $1,493,000 for an effective tax rate of 20.6% for the three months ended June 30, 2021 compared to $379,000 for an effective tax rate of 20.3% for the three months ended June 30, 2020. The increase in the effective tax rate in the 2021 period reflects the increased level of taxable income.
46
Results of Operations
NORWOOD FINANCIAL CORP
Consolidated Average Balance Sheets with Resultant Interest and Rates
(Tax-Equivalent Basis,
Six Months Ended June 30,
dollars in thousands)
2021
2020
Average
Average
Average
Average
Balance
Interest
Rate
Balance
Interest
Rate
(2)
(1)
(3)
(2)
(1)
(3)
Assets
Interest-earning assets:
Interest bearing deposits with banks
$
146,574
$
102
0.14%
$
38,121
$
25
0.13%
Securities available for sale:
Taxable
219,807
1,735
1.58
142,922
1,496
2.09
Tax-exempt (1)
58,934
928
3.15
57,256
944
3.30
Total securities available for sale (1)
278,741
2,663
1.91
200,178
2,440
2.44
Loans receivable (1) (4) (5)
1,410,160
32,468
4.60
952,272
21,711
4.56
Total interest-earning assets
1,835,475
35,233
3.84
1,190,571
24,176
4.06
Non-interest earning assets:
Cash and due from banks
21,698
15,108
Allowance for loan losses
(14,509)
(9,084)
Other assets
114,954
86,737
Total non-interest earning assets
122,143
92,761
Total Assets
$
1,957,618
$
1,283,332
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Interest-bearing demand and money market
$
442,601
$
434
0.20
$
235,864
$
276
0.23
Savings
256,803
76
0.06
176,870
47
0.05
Time
533,068
1,949
0.73
371,851
3,097
1.67
Total interest-bearing deposits
1,232,472
2,459
0.40
784,585
3,420
0.87
Short-term borrowings
70,971
142
0.40
53,153
184
0.69
Other borrowings
39,330
388
1.97
54,244
581
2.14
Total interest-bearing liabilities
1,342,773
2,989
0.45
891,982
4,185
0.94
Non-interest bearing liabilities:
Demand deposits
402,024
232,579
Other liabilities
14,634
16,554
Total non-interest bearing liabilities
416,658
249,133
Stockholders' equity
198,187
142,217
Total Liabilities and Stockholders' Equity
$
1,957,618
$
1,283,332
Net interest income/spread (tax equivalent basis)
32,244
3.39%
19,991
3.12%
Tax-equivalent basis adjustment
(415)
(459)
Net interest income
$
31,829
$
19,532
Net interest margin (tax equivalent basis)
3.51%
3.36%
(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.
47
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)
Six months ended June 30, 2021 Compared to
Six months ended June 30, 2020
Variance due to
Volume
Rate
Net
(dollars in thousands)
Interest-earning assets:
Interest-bearing deposits with banks
$
71
$
6
$
77
Securities available for sale:
Taxable
707
(468)
239
Tax-exempt securities
27
(43)
(16)
Total securities
734
(511)
223
Loans receivable
10,476
281
10,757
Total interest-earning assets
11,281
(224)
11,057
Interest-bearing liabilities:
Interest-bearing demand and money market
220
(62)
158
Savings
19
10
29
Time
732
(1,880)
(1,148)
Total interest-bearing deposits
971
(1,932)
(961)
Short-term borrowings
42
(84)
(42)
Other borrowings
(158)
(35)
(193)
Total interest-bearing liabilities
855
(2,051)
(1,196)
Net interest income (tax-equivalent basis)
$
10,426
$
1,827
$
12,253
Comparison of Operating Results for the Six Months Ended June 30, 2021 to June 30, 2020
General
For the six months ended June 30, 2021, net income totaled $11,296,000 compared to $4,567,000 earned in the same period in 2020. The increase in net income for the six months ended June 30, 2021 was due primarily to a $12,297,000 million increase in net interest income which reflects the benefits realized from the acquisition of UpState. This increase was partially offset by a $1,000,000 increase in the provision for loan losses and a $3.8 million increase in other operating expenses. Earnings per share for the six months ended June 30, 2021 were $1.38 per share for basic shares and for fully diluted shares compared to $0.73 per share for basic shares and fully diluted shares for the six months ended June 30, 2020. The resulting annualized return on average assets and annualized return on average equity for the six months ended June 30, 2021 were 1.16% and 11.49%, respectively, compared to 0.72% and 6.46%, respectively, for the same period in 2020.
48
The following table sets forth changes in net income:
(dollars in thousands)
Six months ended
June 30, 2021 to June 30, 2020
Net income six months ended June 30, 2020
$
4,567
Change due to:
Net interest income
12,297
Provision for loan losses
(1,000)
Service charges and fees
881
Net gains on sales
—
Earnings and proceeds on bank-owned life insurance
148
Other income
100
Salaries and employee benefits
(3,060)
Occupancy, furniture and equipment
(531)
Data processing related
(263)
Professional fees
(440)
FDIC insurance assessment
(293)
Merger related
1,597
All other expenses
(802)
Income tax expense
(1,905)
Net income six months ended June 30, 2021
$
11,296
Net Interest Income
Net interest income on a fully taxable equivalent basis (fte) for the six months ended June 30, 2021 totaled $32,244,000 which was $12,253,000 higher than the comparable period in 2020. The increase in net interest income was due primarily to a $10,757,000 increase in interest income (fte) on loans resulting from the acquisition of UpState. The fte net interest spread and net interest margin were 3.39% and 3.51%, respectively, for the six months ended June 30, 2021 compared to 3.12% and 3.36%, respectively, for the same period in 2020. The increase in the net interest spread reflects the growth in average interest-earning assets. See “Non-GAAP Financial Measures” above.
For the six-months ended June 30, 2021, interest income (fte) totaled $35,233,000 with a yield on average earning assets of 3.84% compared to $24,176,000 and 4.06% for the 2020 period. Average loans increased $457.9 million during the six-months ended June 30, 2021, over the comparable period of 2020, while average securities increased $78.6 million. Average earning assets totaled $1.835 billion for the six months ended June 30, 2021, an increase of $644.9 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 six months ended June 30, 2021 totaled $2,989,000 at an average cost of 0.45% compared to $4,185,000 and 0.94% for the same period in 2020. The decrease in average cost during the 2021 quarter reflects the overall lower level of market interest rates. The average cost of time deposits, which is the most significant component of funding, decreased 0.94% during the period.
Provision for Loan Losses
The Company’s provision for loan losses for the six months ended June 30, 2021 was $3,000,000, compared to $2,000,000 for the six months ended June 30, 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 $810,000 for the six months ended June 30, 2021, compared to $197,000 for the similar period in 2020. At June 30, 2021, the allowance for loan losses represented 1.11% of loans receivable. Additionally, the allowance for loan losses represented 389% of non-performing loans, excluding loans acquired with credit quality deterioration.
Other Income
Other income totaled $4,176,000 for the six months ended June 30, 2021, compared to $3,047,000 for the same period in 2020. The increase was due primarily to an $881,000 increase in service charges and fees. Net gains from the sale of securities totaled $21,000 for the six-months ended June 30, 2021, compared to $38,000 in the six-months ended June 30, 2020. Net gains on the sale of loans totaled $138,000 for the six-months ended June 30, 2021 compared to $121,000 in the six-months ended June 30, 2020.
49
Income Tax Expense
Income tax expense totaled $2,765,000 for an effective tax rate of 19.7% for the six months ended June 30, 2021 compared to $860,000 for an effective tax rate of 15.8% for the six months ended June 30, 2020. The increase in the effective tax rate in the 2021 period reflects the increased level of taxable income.
50
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.