…..PROVISION FOR LOAN LOSSES…..The Company recorded a $175,000 provision expense for loan losses in the first quarter of 2020 as compared to a $400,000 provision recovery in the first quarter of 2019, which represents a net unfavorable shift of $575,000. The 2020 provision expense reflects the loan growth experienced since last year along with management’s decision to strengthen certain qualitative factors within our allowance of loan losses calculation due to the economic uncertainty caused by the COVID-19 pandemic. While future losses are possible due to the COVID-19 pandemic, losses were not incurred as of March 31, 2020 which is why the provision for the period isn’t higher. The Company’s asset quality continues to remain strong as evidenced by low levels of loan delinquency, net loan charge-offs and non-performing assets. The Company experienced net loan charge-offs of $120,000, or 0.06% of total loans, in the 2020 first quarter compared to net loan charge-offs of $164,000, or 0.08% of total loans, in the first quarter of 2019. Non-performing assets totaled $2.2 million, or only 0.26% of total loans, at March 31, 2020. In summary, the allowance for loan losses provided 416% coverage of non-performing assets, and was 1.06% of total loans, at March 31, 2020, compared to 397% coverage of non-performing assets, and 1.05% of total loans, at December 31, 2019.
…..NON-INTEREST INCOME….. Non-interest income for the first quarter of 2020 totaled $3.8 million and increased $227,000, or 6.3%, from the first quarter 2019 performance. Factors contributing to this higher level of non-interest income for the quarter included:
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a $175,000 increase in income from residential mortgage loan sales into the secondary market due to the strong level of residential mortgage loan production in the first quarter of 2020. Correspondingly there was an $82,000 increase in mortgage related fee income;
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a $161,000 decrease in other income as the Company recognized a gain in 2019 on the sale of equity shares from a previous acquisition and no such gain was recognized in 2020;
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a $158,000 increase in wealth management fees due to management’s effective execution of managing client accounts and an improved equity market which positively impacted market values for assets under management in the first two months of the first quarter of 2020. The late first quarter 2020 negative impact to the equity market from the COVID-19 pandemic and the pandemic’s impact on the Company’s wealth management fees will be more evident in this year’s second quarter financial results.
…..NON-INTEREST EXPENSE….. Non-interest expense for the first quarter of 2020 totaled $10.6 million and increased by $340,000, or 3.3%, from the prior year’s first quarter. Factors contributing to the higher level of non-interest expense for the quarter included:
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a $403,000 increase in salaries & benefits expense due to pension expense increasing by $188,000, or 53.0% between years. This significant increase to pension expense results from the unfavorable impact that the lower interest rate environment has on the discount rates that are used to revalue the defined benefit pension obligation each year. In addition, the higher salaries & benefits expense is also due to increased health care costs, greater incentive compensation as a result of increased residential mortgage loan production, and increased salaries expense. The higher salaries expense reflects annual merit increases and the addition of several employees to address management succession planning;
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a $94,000 decrease in other expense resulted from the Company recognizing a reduction in the unfunded commitment reserve;
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a $54,000 decrease in FDIC insurance expense due to the application of the remaining portion of the credit from the Small Bank Assessment Credit regulation; and
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a $47,000 increase in occupancy and equipment expense primarily reflects higher depreciation costs.
…..INCOME TAX EXPENSE….. The Company recorded an income tax expense of $366,000, or an effective tax rate of 20.6%, in the first quarter of 2020. This compares to an income tax expense of $491,000, or an effective tax rate of 20.7%, for the first quarter of 2019.