What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-08-12 compared with 2022-05-06 · 195 added, 87 removed, 199 unchanged (59% of the section changed)

1 unchanged sentence

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.

This Quarterly Report on Form 10-Q may include certain forward-looking statements based on current management expectations.

Such forward-looking statements may be identified by reference to a future period or periods or by the use of forward-looking terminology, such as “may”, “will”, “believe”, “expect”, “estimate”, “anticipate”, “continue”, or similar terms or variations on those terms, or the negative of those terms.

The actual results of the Company could differ materially from those management expectations.

This includes statements regarding general economic conditions, public health crisis such as the governmental, social and economic effects of the novel coronavirus, legislative and regulatory changes, monetary and fiscal policies of the federal government, changes in tax policies, rates and regulations of federal, state and local tax authorities and failure to integrate or profitably operate acquired businesses.

Additional potential factors include changes in interest rates, the rate of inflation, deposit flows, cost of funds, demand for loan products and financial services, competition and changes in the quality or composition of loan and investment portfolios of the Company.

Other factors that could cause future results to vary from current management expectations include changes in accounting principles, policies or guidelines, and other economic, competitive, governmental and technological factors affecting the Company’s operations, markets, products, services and prices.

Further description of the risks and uncertainties to the business are included in the Company’s other filings with the Securities and Exchange Commission.

In addition, the COVID-19 pandemic has had, and may continue to have, an adverse impact on the Company and the communities it serves.

Given its ongoing and dynamic nature, it is difficult to predict the full impact of the COVID-19 pandemic on our business.

The extent of such impact will depend on future developments, which are highly uncertain, including whether the coronavirus can continue to be controlled and abated.

As the result of the COVID-19 pandemic and the related adverse local and national economic consequences, we could be subject to any of the following risks, any of which could have a material, adverse effect on our business, financial condition, liquidity, and results of operations:

the demand for our products and services may decline, making it difficult to grow assets and income;

if the economy worsens, loan delinquencies, problem assets, and foreclosures may increase, resulting in increased charges and reduced income;

collateral for loans, especially real estate, may decline in value, which could cause loan losses to increase;

our allowance for credit losses may increase if borrowers experience financial difficulties, which will adversely affect our net income;

the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us;

due to a decline in our stock price or other factors, goodwill may become impaired and be required to be written down;

and our cyber security risks are increased as the result of an increase in the number of employees working remotely.

The majority of the assets and liabilities of a financial institution are monetary in nature, and therefore, differ greatly from most commercial and industrial companies that have significant investments in fixed assets or inventories.

However, inflation does have an impact on the Company, particularly with respect to the growth of total assets and noninterest expenses, which tend to rise during periods of general inflation.

Risks also exist due to supply and demand imbalances, employment shortages, the interest rate environment, and geopolitical tensions.

It is reasonably foreseeable that estimates made in the financial statements could be materially and adversely impacted in the near term as a result of these conditions, including expected credit losses on loans and the fair value of financial instruments that are carried at fair value.

Except as required by applicable law or regulation, the Company does not undertake, and specifically disclaims any obligation, to release publicly the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of the statements or to reflect the occurrence of anticipated or unanticipated events.

Critical Accounting Policies

14 unchanged sentences

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 March 31, 2022 and December 31, 2021 represent temporary impairment of the securities, related to changes in interest rates.

securities before recovery of their cost basis.

The Company believes that all unrealized losses on securities at June 30, 2022 and December 31, 2021 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 March 31, 2022 were $2.078 billion compared to $2.069 billion as of December 31, 2021.

The increase was due primarily to a $28.1 million increase in securities available-for-sale and a $16.7 million increase in loans receivable.

The increases were funded with $25.0 million of deposit growth.

The fair value of securities available for sale as of March 31, 2022 was $434.9 million compared to $406.8 million as of December 31, 2021.

Total assets as of June 30, 2022 were $2.066 billion compared to $2.069 billion as of December 31, 2021.

The decrease was due primarily to a $105.9 million decrease in interest-bearing deposits with banks.

Interest-bearing balances with banks decreased as overnight liquidity was utilized to fund growth in loans and securities, and to pay off long-term borrowings.

The decrease was partially offset by a 34.1 million increase in securities available for sale, and a $49.4 million increase in loans receivable.

The fair value of securities available for sale as of June 30, 2022 was $440.9 million compared to $406.8 million as of December 31, 2021.

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

2 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 $1.372 billion at March 31, 2022 compared to $1.355 billion as of December 31, 2021.

The $16.7 million increase recorded during the first three months of 2022 was due primarily to a $12.9 million increase in commercial real estate loans.

The allowance for loan losses totaled $16,660,000 as of March 31, 2022, and represented 1.21% of total loans outstanding, compared to $16,442,000, or 1.21% of total loans outstanding, at December 31, 2021.

The Company had net charge-offs for the three months ended March 31, 2022 of $82,000 compared to $141,000 in the corresponding period in 2021.

Loans receivable totaled $1.404 billion at June 30, 2022 compared to $1.355 billion as of December 31, 2021.

The $49.4 million increase in loans receivable during the six months ended June 30, 2022 was due to a $16.7 million increase in commercial real estate loans, a $16.1 million increase in residential mortgage loans, and a $13.6 million increase in consumer loans.

The allowance for loan losses totaled $17,017,000 as of June 30, 2022, and represented 1.21% of total loans outstanding, compared to $16,442,000, or 1.21% of total loans outstanding, at December 31, 2021.

The Company had net charge-offs for the six months ended June 30, 2022 of $25,000, compared to $810,000 in the corresponding period in 2021.

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 2022 which are specifically related to the economic impact of the COVID-19 pandemic.

Management considers the allowance adequate at March 31, 2022 based on the Company’s criteria.

Management considers the allowance for loan losses adequate at June 30, 2022 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 March 31, 2022, non-performing loans totaled $708,000 or 0.05% of total loans compared to $643,000, or 0.05%, of total loans at December 31, 2021.

At March 31, 2022, non-performing assets totaled $1,298,000, or 0.06%, of total assets, compared to $2,385,000, or 0.12%, of total assets at December 31, 2021.

As of June 30, 2022, non-performing loans totaled $672,000 or 0.05% of total loans compared to $734,000, or 0.05%, of total loans at December 31, 2021.

At June 30, 2022, non-performing assets totaled $1,018,000, or 0.05%, of total assets, compared to $2,476,000, or 0.12%, of total assets at December 31, 2021.

The decrease in non-performing assets during the six month period ended June 30, 2022, was due to sales of properties included in foreclosed real estate.

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

(dollars in thousands)

March 31, 2022

June 30, 2022

December 31, 2021

19 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 three-month period ended March 31, 2022, total deposits increased $25.0 million due primarily to growth in municipal relationships.

During the six-month period ended June 30, 2022, total deposits increased $43.0 million due primarily to growth in interest-bearing demand deposits.

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

(dollars in thousands)

March 31, 2022

June 30, 2022

December 31, 2021

4 unchanged sentences

Time deposits >$250,000

Other borrowings as of March 31, 2022, totaled $26.8 million compared to $30.0 million as of December 31, 2021.

Other borrowings as of June 30, 2022, totaled $4.4 million compared to $30.0 million as of December 31, 2021.

The decrease reflects the early payoff of $21.1 million Federal Home Loan Bank term borrowings.

A prepayment fee of $3,000 was

recognized in other expense during the six months ended June 30, 2022.

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

1 unchanged sentence

(dollars in thousands)

March 31, 2022

June 30, 2022

December 31, 2021

9 unchanged sentences

Stockholders’ Equity and Capital Ratios

As of March 31, 2022, stockholders’ equity totaled $186.8 million, compared to $205.3 million as of December 31, 2021.

As of June 30, 2022, stockholders’ equity totaled $173.8 million, compared to $205.3 million as of December 31, 2021.

The net change in stockholders’ equity included $14.0 million of net income, which was partially offset by $4.6 million of dividends declared.

3 unchanged sentences

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

March 31, 2022

June 30, 2022

December 31, 2021

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 March 31, 2022.

As of March 31, 2022, the Company had cash and cash equivalents of $166.0 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 June 30, 2022.

As of June 30, 2022, the Company had cash and cash equivalents of $109.7 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 $440.9 million which could be used for liquidity needs.

Total liquidity of $600.9 million as of March 31, 2022, represents 28.9% of total assets compared to $613.5 million and 29.7% of total assets as of December 31, 2021.

The Company also monitors other liquidity measures, all of which were within the Company’s policy guidelines as of March 31, 2022 and December 31, 2021.

Total liquidity of $550.5 million as of June 30, 2022, represents 26.6% of total assets compared to $613.5 million and 29.7% of total assets as of December 31, 2021.

The Company also monitors other liquidity measures, all of which

were within the Company’s policy guidelines as of June 30, 2022 and December 31, 2021.

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, 2023.

There were no borrowings under this line as of March 31, 2022 and December 31, 2021.

There were no borrowings under this line as of June 30, 2022 and December 31, 2021.

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 March 31, 2022 and December 31, 2021.

There were no borrowings under this line as of June 30, 2022 and December 31, 2021.

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 March 31, 2022 and December 31, 2021.

The Bank’s maximum borrowing capacity with the Federal Home Loan Bank was approximately $617,532,000 as of March 31, 2022, of which $26,844,000 was outstanding in the form of borrowings as of March 31, 2022.

There were no borrowings under this line as of June 30, 2022 and December 31, 2021.

The Bank’s maximum borrowing capacity with the Federal Home Loan Bank was approximately $640,650,000 as of June 30, 2022, of which $4,412,000 was outstanding in the form of borrowings as of June 30, 2022.

As of December 31, 2021, the maximum borrowing capacity was $607,092,000, of which $29,998,000 of borrowings was outstanding as of December 31, 2021.

Additionally, as of March 31, 2022, the Bank had secured Letters of Credit from the Federal Home Loan Bank in the amount of $122,802,000 as collateral for specific municipal deposits.

Additionally, as of June 30, 2022, the Bank had secured Letters of Credit from the Federal Home Loan Bank in the amount of $104,050,000 as collateral for specific municipal deposits.

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

12 unchanged sentences

(Tax-Equivalent Basis,

Three Months Ended March 31,

Three Months Ended June 30,

dollars in thousands)

35 unchanged sentences

Increase/(Decrease)

Three months ended March 31, 2022 Compared to

Three months ended March 31, 2021

Three months ended June 30, 2022 Compared to

Three months ended June 30, 2021

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 March 31, 2022 to March 31, 2021

For the three months ended March 31, 2022, net income totaled $7,128,000 compared to $5,542,000 earned in the similar period in 2021.

The increase in net income for the three months ended March 31, 2022 was due primarily to a $1,346,000 increase in other income and a $1,200,000 decrease in the provision for loan losses.

Earnings per share for the three-months ended March 31, 2022 were $0.87 per share for basic shares and fully diluted shares, compared to $0.68 per share for basic shares and $0.67 per share for fully diluted shares for the three months ended March 31, 2021.

The resulting annualized return on average assets and annualized return on average equity for the three months ended March 31, 2022 were 1.39% and 14.22%, respectively, compared to 1.18% and 11.39%, respectively, for the same period in 2021.

Comparison of Operating Results for the Three Months Ended June 30, 2022 to June 30, 2021

For the three months ended June 30, 2022, net income totaled $6,855,000 compared to $5,755,000 earned in the similar period in 2021.

The increase in net income for the three months ended June 30, 2022 was due primarily to an $841,000 increase in net interest income and a $1,200,000 decrease in the provision for loan losses.

Earnings per share for the three-months ended June 30, 2022 were $0.84 per share for basic shares and fully diluted shares, compared to $0.70 per share for basic shares and for fully diluted shares for the three months ended June 30, 2021.

The resulting annualized return on average assets and annualized return on average equity for the three months ended June 30, 2022 were 1.35% and 15.19%, respectively, compared to 1.15% and 11.59%, respectively, for the same period in 2021.

The following table sets forth changes in net income:

1 unchanged sentence

Three months ended

March 31, 2022 to March 31, 2021

Net income three months ended March 31, 2021

June 30, 2022 to June 30, 2021

Net income three months ended June 30, 2021

Change due to:

2 unchanged sentences

Net gains on sales of securities and loans

Net gains on sales of foreclosed real estate owned

Service charges and fees

4 unchanged sentences

Income tax expense

Net income three months ended March 31, 2022

Net income three months ended June 30, 2022

Net Interest Income

Net interest income on a fully taxable equivalent basis (fte) for the three months ended March 31, 2022 totaled $16,283,000 which was $302,000 higher than the comparable period in 2021.

Net interest income on a fully taxable equivalent basis (fte) for the three months ended June 30, 2022 totaled $17,082,000 which was $819,000 higher than the comparable period in 2021.

The increase in net interest income was due primarily to an $859,000 increase in interest income (fte) on securities due to purchases of securities.

The fte net interest spread and net interest margin were 3.22% and 3.32%, respectively, for the three months ended March 31, 2022 compared to 3.46% and 3.59%, respectively, for the same period in 2021.

The fte net interest spread and net interest margin were 3.40% and 3.49%, respectively, for the three months ended June 30, 2022 compared to 3.32% and 3.44%, respectively, for the same period in 2021.

See “Non-GAAP Financial Measures” described above on page 37.

For the three-months ended March 31, 2022, interest income (fte) totaled $17,529,000 with a yield on average earning assets of 3.57% compared to $17,506,000 and 3.93% for the 2021 period.

Average loans decreased $63.3 million during the three-months ended March 31, 2022, over the comparable period of 2021, while average securities increased $193.4 million.

Average earning assets totaled $1.962 billion for the three months ended March 31, 2022, an increase of $181.6 million over the average for the same period in 2021.

For the three-months ended June 30, 2022, interest income (fte) totaled $18,281,000 with a yield on average earning assets of 3.74% compared to $17,727,000 and 3.75% for the 2021 period.

Average loans decreased $16.2 million during the three-months ended June 30, 2022, over the comparable period of 2021, while average securities increased $173.1 million.

Average earning assets totaled $1.957 billion for the three months ended June 30, 2022, an increase of $67.1 million over the average for the same period in 2021.

See “Non-GAAP Financial Measures” described above on page 37.

Interest expense for the three months ended March 31, 2022 totaled $1,246,000 at an average cost of 0.35% compared to $1,525,000 and 0.47%, respectively, for the same period in 2021.

The decrease in interest expense during the three-months ended March 31, 2022 reflects the overall lower level of market interest rates.

Interest expense for the three months ended June 30, 2022 totaled $1,199,000 at an average cost of 0.34% compared to $1,464,000 and 0.43%, respectively, for the same period in 2021.

The decrease in interest expense during the three-months ended June 30, 2022 reflects the overall lower level of market interest rates.

The average cost of time deposits, which is the most significant component of funding costs, decreased 0.04% compared to the same three-month period of last year.

Provision for Loan Losses

The Company’s provision for loan losses for the three months ended March 31, 2022 was $300,000, compared to $1,500,000 for the three months ended March 31, 2021.

The Company’s provision for loan losses for the three months ended June 30, 2022 was $300,000, compared to $1,500,000 for the three months ended June 30, 2021.

The decreased provision reflects a reduction in certain qualitative factors related to 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.

The Company recorded a net charge-off of $82,000 for the quarter ended March 31, 2022, compared to a net charge-off of $141,000 for the similar period in 2021.

At March 31, 2022, the allowance for loan losses represented 1.21% of loans receivable.

The Company recorded a net recovery of $57,000 for the quarter ended June 30, 2022, compared to a net charge-off of $669,000 for the similar period in 2021.

At June 30, 2022, the allowance for loan losses represented 1.21% of loans receivable.

Additionally, the allowance for loan losses represented 2,532% of non-performing loans, excluding loans acquired with credit quality deterioration.

Other income totaled $3,338,000 for the three months ended March 31, 2022, compared to $1,992,000 for the same period in 2021.

Other income totaled $2,489,000 for the three months ended June 30, 2022, compared to $2,187,000 for the same period in 2021.

The increase was due primarily to a $255,000 increase in earnings and proceeds on bank-owned life insurance policies, and an $180,000 increase in other income.

Gains on sales of loans decreased $109,000, while all other categories of other income decreased $24,000, net.

Other Expense

Other expense for the three months ended June 30, 2022 totaled $10,472,000 which was $980,000 higher than the same period of 2021, due primarily to a $669,000 increase in salaries and employee benefits costs.

Income Tax Expense

Income tax expense totaled $1,756,000 for an effective tax rate of 20.4% for the three months ended June 30, 2022 compared to $1,493,000 for an effective tax rate of 20.6% for the three months ended June 30, 2021.

The decrease in the effective tax rate in the 2022 period reflects the increased level of tax-exempt income related to bank-owned life insurance.

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)

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)

Six months ended June 30, 2022 Compared to

Six months ended June 30, 2021

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 Six Months Ended June 30, 2022 to June 30, 2021

For the six months ended June 30, 2022, net income totaled $13,983,000 compared to $11,296,000 earned in the similar period in 2021.

The increase in net income for the six months ended June 30, 2022 was due primarily to a $1,166,000 increase in net interest income, a $1,652,000 increase in other income, and a $2,400,000 decrease in the provision for loan losses.

Earnings per share for the six-months ended June 30, 2022 were $1.71 per share for basic shares and fully diluted shares, compared to $1.38 per share for basic shares and for fully diluted shares for the six months ended June 30, 2021.

The resulting annualized return on average assets and annualized return on average equity for the six months ended June 30, 2022 were 1.37% and 14.68%, respectively, compared to 1.16% and 11.49%, respectively, for the same period in 2021.

The following table sets forth changes in net income:

(dollars in thousands)

Six months ended

June 30, 2022 to June 30, 2021

Net income six months ended June 30, 2021

Change due to:

Net interest income

Provision for loan losses

Service charges and fees

Net gains on sales of securities and loans

Net gains on sales of foreclosed real estate owned

Earnings and proceeds on bank-owned life insurance

Salaries and employee benefits

Occupancy, furniture and equipment

Data processing related

Professional fees

All other expenses

Income tax expense

Net income six months ended June 30, 2022

Net Interest Income

Net interest income on a fully taxable equivalent basis (fte) for the six months ended June 30, 2022 totaled $33,365,000 which was $1,121,000 higher than the comparable period in 2021.

The increase in net interest income was due primarily to a $1,664,000 increase in interest income (fte) on securities due to purchases of securities.

The fte net interest spread and net interest margin were 3.30% and 3.41%, respectively, for the six months ended June 30, 2022 compared to 3.39% and 3.51%, respectively, for the same period in 2021.

See “Non-GAAP Financial Measures” described above on page 37.

For the six-months ended June 30, 2022, interest income (fte) totaled $35,810,000 with a yield on average earning assets of 3.65% compared to $35,233,000 and 3.84% for the 2021 period.

Average loans decreased $39.6 million during the six-months ended June 30, 2022, over the comparable period of 2021, while average securities increased $183.2 million.

Average earning assets totaled $1.960 billion for the six months ended June 30, 2022, an increase of $124.2 million over the average for the same period in 2021.

See “Non-GAAP Financial Measures” described above on page 37.

Interest expense for the six months ended June 30, 2022 totaled $2,445,000 at an average cost of 0.35% compared to $2,989,000 and 0.45%, respectively, for the same period in 2021.

The decrease in interest expense during the six-months ended June 30, 2022 reflects the repricing of higher cost certificates to current market interest rates at maturity.

The average cost of time deposits, which is the most significant component of funding costs, decreased 0.08% compared to the same six-month period of last year.

Provision for Loan Losses

The Company’s provision for loan losses for the six months ended June 30, 2022 was $600,000, compared to $3,000,000 for the six months ended June 30, 2021.

The decreased provision reflects a reduction in certain qualitative factors related to 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.

The Company recorded a net charge-off of $25,000 for the six months ended June 30, 2022, compared to a net charge-off of $810,000 for the same period in 2021.

At June 30, 2022, the allowance for loan losses represented 1.21% of loans receivable.

Additionally, the allowance for loan losses represented 2,532% of non-performing loans, excluding loans acquired with credit quality deterioration.

Other income totaled $5,828,000 for the six months ended June 30, 2022, compared to $4,176,000 for the same period in 2021.

The increase was due primarily to $954,000 of income recognized on previously acquired purchased impaired loans that were carried at a discount, and a $427,000 gain on the sale of a property carried in foreclosed real estate owned.

1 unchanged sentence

Other Expense

Other expense for the three months ended March 31, 2022 totaled $10,157,000, which was $702,000 higher than the same period of 2021, due primarily to a $478,000 increase in salaries and employee benefits costs.

Other expense for the six months ended June 30, 2022 totaled $20,630,000, which was $1,686,000 higher than the same period of 2021, due primarily to a $1,146,000 increase in salaries and employee benefits costs.

Income Tax Expense

Income tax expense totaled $1,854,000 for an effective tax rate of 20.7% for the three months ended March 31, 2022 compared to $1,271,000 for an effective tax rate of 18.7% for the three months ended March 31, 2021.

Income tax expense totaled $3,610,000 for an effective tax rate of 20.5% for the six months ended June 30, 2022 compared to $2,765,000 for an effective tax rate of 19.7% for the six months ended June 30, 2021.

The increase in the effective tax rate in the 2022 period reflects the increased level of taxable income.

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What changed 10-Q

Item 2. Management’s Discussion and Analysis