ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cautionary Statement Regarding Forward-Looking Information
This Quarterly Report contains forward-looking statements, which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “plan,” “seek,” “expect,” “will,” “may,” “continue” and words of similar meaning. These forward-looking statements include, but are not limited to:
statements of our goals, intentions and expectations;
statements regarding our business plans, prospects, growth and operating strategies;
statements regarding the asset quality of our loan and investment portfolios; and
estimates of our risks and future costs and benefits.
These forward-looking statements are based on our current beliefs and expectations and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. You should not place undue reliance on such statements. We are under no duty to and do not take any obligation to update any forward-looking statements after the date of this Quarterly Report.
The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:
conditions relating to the COVID-19 or any other pandemic, including the severity and duration of the associated economic slowdown either nationally or in our market areas, that are worse than expected;
general economic conditions, either nationally or in our market areas, that are worse than expected;
changes in the level and direction of loan delinquencies and write-offs and changes in estimates of the adequacy of the allowance for loan losses;
our ability to access cost-effective funding;
fluctuations in real estate values and both residential and commercial real estate market conditions;
demand for loans and deposits in our market area;
our ability to implement and change our business strategies;
competition among depository and other financial institutions;
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Table of Contents
inflation and changes in the interest rate environment that reduce our margins and yields, our mortgage banking revenues, the fair value of financial instruments, including our mortgage servicing rights asset, or our level of loan originations, or increase the level of defaults, losses and prepayments on loans we have made and make;
adverse changes in the securities or secondary mortgage markets;
changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees, capital requirements and insurance premiums;
changes in the quality or composition of our loan or investment portfolios;
technological changes that may be more difficult or expensive than expected;
the inability of third-party providers to perform as expected;
a failure or breach of our operational or security systems or infrastructure, including cyberattacks;
our ability to manage market risk, credit risk and operational risk;
our ability to enter new markets successfully and capitalize on growth opportunities;
our ability to successfully integrate into our operations any assets, liabilities, customers, systems and management personnel we have acquired or may acquire and our ability to realize related revenue synergies and cost savings within expected time frames, and any goodwill charges related thereto;
changes in consumer spending, borrowing and savings habits;
changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission or the Public Company Accounting Oversight Board;
our ability to retain key employees;
our compensation expense associated with equity allocated or awarded to our employees; and
changes in the financial condition, results of operations or future prospects of issuers of securities that we own.
Comparison of Financial Condition at September 30, 2021 and December 31, 2020
Total assets increased $41.2 million, or 12.4%, to $372.6 million at September 30, 2021 from $331.4 million at December 31, 2020. The increase was due to capital raised as a result of the conversion and loan growth.
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Table of Contents
Cash and cash equivalents increased $29.4 million, or 48.7%, to $89.7 million at September 30, 2021 from $60.4 million at December 31, 2020. The increase was due to funds received in the conversion.
Gross loans held for investment increased $9.7 million, or 4.2%, to $244.1 million at September 30, 2021 from $234.3 million at December 31, 2020. The increase was primarily due to an increase in construction loans, which increased $8.5 million, or 155.0%, to $14.0 million at September 30, 2021 from $5.5 million at December 31, 2020. The increase was also due to an increase in one-to-four family loans, which increased $6.1 million, or 5.3%, to $120.9 million at September 30, 2021 from $114.8 million at December 31, 2020.
Securities available for sale increased $2.7 million or 14.5%, to $21.6 million at September 30, 2021 from $18.9 million at December 31, 2020. We invested a portion of deposits gathered during the nine months ended September 30, 2021 to invest in securities.
Total deposits increased $18.7 million, or 8.6%, to $235.6 million at September 30, 2021 from $217.0 million at December 31, 2020. We experienced increases in regular savings and other deposits of $11.7 million, or 28.1%, to $53.1 million at September 30, 2021 from $41.4 million at December 31, 2020, and in interest-bearing demand deposits of $19.4 million, or 27.8%, to $89.2 million at September 30, 2021 from $69.8 million at December 31, 2020. Noninterest bearing demand deposits increased $1.5 million or 10.8% to $15.9 million at September 30, 2021 from $14.4 million at December 31, 2020. The increases reflected customers depositing stimulus funds, changing spending habits and an increase in new accounts.
Borrowings decreased $20.0 million, or 37.4%, to $33.5 million of borrowings at September 30, 2021, from $53.5 million at December 31, 2020. We used a portion of the cash raised with the conversion and excess cash we received from non-offering deposits during the nine months ended September 30, 2021 to decrease our borrowings, and recognized a net gain of $84,000 for repaying $20.0 million of borrowings.
Stockholders’ equity increased $42.0 million, or 73.8%, to $98.8 million at September 30, 2021 from $56.9 million at December 31, 2020. The increase was mainly due to the funds received in the conversion. The increase also was due to the net income of $1.1 million for the nine months ended September 30, 2021, partially offset by a decrease in accumulated other income (unrealized gains on securities available for sale) of $197,000 for the nine months ended September 30, 2021.
Average Balance Sheets
The following tables sets forth average balance sheets, average yields and costs, and certain other information for the periods indicated. No tax-equivalent yield adjustments have been made, as the effects would be immaterial. All average balances are daily average balances. Nonaccrual loans were included in the computation of average balances. The yields set forth below include the effect of deferred fees, discounts, and premiums that are amortized or accreted to interest income or interest expense. Deferred loan fees totaled $113,000 and $332,000 as of September 30, 2021 and September 30, 2020, respectively. Loan balances exclude loans held for sale. Stockholders' equity (book value) per share at September 30, 2021 was $13.29. We had no intangible assets at September 30, 2021.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
|
Average
Outstanding
Balance
|
|
|
Interest
|
|
|
Average
Yield/Rate
(1)
|
|
|
Average
Outstanding
Balance
|
|
|
Interest
|
|
|
Average
Yield/Rate
(1)
|
|
|
|
(Dollars in thousands)
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans (excluding PPP loans)
|
|
$
|
240,926
|
|
|
$
|
3,017
|
|
|
|
5.01
|
%
|
|
$
|
234,004
|
|
|
$
|
3,278
|
|
|
|
5.60
|
%
|
PPP loans
|
|
|
2,802
|
|
|
|
128
|
|
|
|
18.27
|
%
|
|
|
9,859
|
|
|
|
67
|
|
|
|
2.72
|
%
|
Securities
|
|
|
21,138
|
|
|
|
119
|
|
|
|
2.25
|
%
|
|
|
20,109
|
|
|
|
118
|
|
|
|
2.35
|
%
|
Federal Home Loan Bank stock
|
|
|
1,421
|
|
|
|
15
|
|
|
|
4.22
|
%
|
|
|
2,640
|
|
|
|
31
|
|
|
|
4.70
|
%
|
Federal funds sold
|
|
|
83,140
|
|
|
|
27
|
|
|
|
0.13
|
%
|
|
|
40,171
|
|
|
|
8
|
|
|
|
0.08
|
%
|
Total interest-earning assets
|
|
|
349,427
|
|
|
|
3,306
|
|
|
|
3.78
|
%
|
|
|
306,783
|
|
|
|
3,502
|
|
|
|
4.57
|
%
|
Noninterest-earning assets
|
|
|
19,190
|
|
|
|
|
|
|
|
|
|
18,056
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
368,617
|
|
|
|
|
|
|
|
|
$
|
324,839
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand deposits
|
|
$
|
76,021
|
|
|
|
24
|
|
|
|
0.13
|
%
|
|
$
|
65,042
|
|
|
|
27
|
|
|
|
0.17
|
%
|
Regular savings and other deposits
|
|
|
52,184
|
|
|
|
25
|
|
|
|
0.19
|
%
|
|
|
36,777
|
|
|
|
20
|
|
|
|
0.22
|
%
|
Money market deposits
|
|
|
4,408
|
|
|
|
2
|
|
|
|
0.18
|
%
|
|
|
4,736
|
|
|
|
3
|
|
|
|
0.25
|
%
|
Certificates of deposit
|
|
|
83,037
|
|
|
|
219
|
|
|
|
1.05
|
%
|
|
|
89,566
|
|
|
|
356
|
|
|
|
1.59
|
%
|
Total interest-bearing deposits
|
|
|
215,650
|
|
|
|
270
|
|
|
|
0.50
|
%
|
|
|
196,121
|
|
|
|
406
|
|
|
|
0.83
|
%
|
Federal Home Loan Bank advances
and other borrowings
|
|
|
33,500
|
|
|
|
149
|
|
|
|
1.78
|
%
|
|
|
55,823
|
|
|
|
243
|
|
|
|
1.74
|
%
|
Total interest-bearing liabilities
|
|
|
249,150
|
|
|
|
419
|
|
|
|
0.67
|
%
|
|
|
251,944
|
|
|
|
649
|
|
|
|
1.03
|
%
|
Noninterest-bearing demand deposits
|
|
|
13,724
|
|
|
|
|
|
|
|
|
|
16,556
|
|
|
|
|
|
|
|
Other noninterest-bearing liabilities
|
|
|
7,415
|
|
|
|
|
|
|
|
|
|
1,455
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
270,289
|
|
|
|
|
|
|
|
|
|
269,955
|
|
|
|
|
|
|
|
Total shareholders’ equity
|
|
|
98,328
|
|
|
|
|
|
|
|
|
|
54,884
|
|
|
|
|
|
|
|
Total liabilities and shareholders’
equity
|
|
$
|
368,617
|
|
|
|
|
|
|
|
|
$
|
324,839
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
$
|
2,887
|
|
|
|
|
|
|
|
|
$
|
2,853
|
|
|
|
|
Net interest rate spread (2)
|
|
|
|
|
|
|
|
|
3.11
|
%
|
|
|
|
|
|
|
|
|
3.54
|
%
|
Net interest-earning assets (3)
|
|
$
|
100,277
|
|
|
|
|
|
|
|
|
$
|
54,839
|
|
|
|
|
|
|
|
Net interest margin (4)
|
|
|
|
|
|
|
|
|
3.30
|
%
|
|
|
|
|
|
|
|
|
3.72
|
%
|
Average interest-earning assets to
interest-bearing liabilities
|
|
|
1.38
|
|
|
|
|
|
|
|
|
|
1.22
|
|
|
|
|
|
|
|
(2)
Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average rate of interest-bearing liabilities.
(3)
Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.
(4)
Net interest margin represents net interest income divided by average total interest-earning assets.
40
Table of Contents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended September 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
|
Average
Outstanding
Balance
|
|
|
Interest
|
|
|
Average
Yield/Rate
(1)
|
|
|
Average
Outstanding
Balance
|
|
|
Interest
|
|
|
Average
Yield/Rate
(1)
|
|
|
|
(Dollars in thousands)
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans (excluding PPP loans)
|
|
$
|
236,719
|
|
|
$
|
9,258
|
|
|
|
5.21
|
%
|
|
$
|
242,261
|
|
|
$
|
9,865
|
|
|
|
5.43
|
%
|
PPP loans
|
|
|
3,420
|
|
|
|
314
|
|
|
|
12.24
|
%
|
|
|
6,545
|
|
|
|
158
|
|
|
|
3.22
|
%
|
Securities
|
|
|
19,966
|
|
|
|
335
|
|
|
|
2.24
|
%
|
|
|
20,808
|
|
|
|
418
|
|
|
|
2.68
|
%
|
Federal Home Loan Bank stock
|
|
|
1,819
|
|
|
|
50
|
|
|
|
3.67
|
%
|
|
|
2,703
|
|
|
|
103
|
|
|
|
5.08
|
%
|
Federal funds sold
|
|
|
66,517
|
|
|
|
61
|
|
|
|
0.12
|
%
|
|
|
26,692
|
|
|
|
35
|
|
|
|
0.17
|
%
|
Total interest-earning assets
|
|
|
328,441
|
|
|
|
10,018
|
|
|
|
4.07
|
%
|
|
|
299,009
|
|
|
|
10,579
|
|
|
|
4.72
|
%
|
Noninterest-earning assets
|
|
|
19,018
|
|
|
|
|
|
|
|
|
|
18,395
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
347,459
|
|
|
|
|
|
|
|
|
$
|
317,404
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand deposits
|
|
$
|
76,235
|
|
|
|
70
|
|
|
|
0.12
|
%
|
|
$
|
58,371
|
|
|
|
99
|
|
|
|
0.23
|
%
|
Regular savings and other deposits
|
|
|
48,812
|
|
|
|
69
|
|
|
|
0.19
|
%
|
|
|
34,158
|
|
|
|
65
|
|
|
|
0.25
|
%
|
Money market deposits
|
|
|
4,617
|
|
|
|
6
|
|
|
|
0.17
|
%
|
|
|
4,380
|
|
|
|
12
|
|
|
|
0.37
|
%
|
Certificates of deposit
|
|
|
84,734
|
|
|
|
714
|
|
|
|
1.12
|
%
|
|
|
92,352
|
|
|
|
1,162
|
|
|
|
1.68
|
%
|
Total interest-bearing deposits
|
|
|
214,398
|
|
|
|
859
|
|
|
|
0.53
|
%
|
|
|
189,261
|
|
|
|
1,338
|
|
|
|
0.94
|
%
|
Federal Home Loan Bank advances
and other borrowings
|
|
|
41,266
|
|
|
|
543
|
|
|
|
1.75
|
%
|
|
|
57,339
|
|
|
|
765
|
|
|
|
1.78
|
%
|
Total interest-bearing liabilities
|
|
|
255,664
|
|
|
|
1,402
|
|
|
|
0.73
|
%
|
|
|
246,600
|
|
|
|
2,103
|
|
|
|
1.14
|
%
|
Noninterest-bearing demand deposits
|
|
|
12,965
|
|
|
|
|
|
|
|
|
|
15,825
|
|
|
`
|
|
|
|
|
Other noninterest-bearing liabilities
|
|
|
8,728
|
|
|
|
|
|
|
|
|
|
1,319
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
277,357
|
|
|
|
|
|
|
|
|
|
263,744
|
|
|
|
|
|
|
|
Total shareholders’ equity
|
|
|
70,102
|
|
|
|
|
|
|
|
|
|
53,660
|
|
|
|
|
|
|
|
Total liabilities and shareholders’
equity
|
|
$
|
347,459
|
|
|
|
|
|
|
|
|
$
|
317,404
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
$
|
8,616
|
|
|
|
|
|
|
|
|
$
|
8,476
|
|
|
|
|
Net interest rate spread (2)
|
|
|
|
|
|
|
|
|
3.34
|
%
|
|
|
|
|
|
|
|
|
3.58
|
%
|
Net interest-earning assets (3)
|
|
$
|
72,777
|
|
|
|
|
|
|
|
|
$
|
52,409
|
|
|
|
|
|
|
|
Net interest margin (4)
|
|
|
|
|
|
|
|
|
3.50
|
%
|
|
|
|
|
|
|
|
|
3.78
|
%
|
Average interest-earning assets to
interest-bearing liabilities
|
|
|
|
|
|
1.28
|
|
|
|
|
|
|
|
|
|
1.21
|
|
|
|
|
(2)
Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average rate of interest-bearing liabilities.
(3)
Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.
(4)
Net interest margin represents net interest income divided by average total interest-earning assets.
41
Table of Contents
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months ended September 30, 2021 vs. 2020
|
|
|
|
|
|
Increase (Decrease) Due to
|
|
|
Total Increase
|
|
|
Volume
|
|
|
Rate
|
|
|
(Decrease)
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
Loans (excluding PPP loans)
|
$
|
(301
|
)
|
|
$
|
(306
|
)
|
|
$
|
(607
|
)
|
PPP Loans
|
|
(101
|
)
|
|
|
257
|
|
|
|
156
|
|
Securities
|
|
(23
|
)
|
|
|
(60
|
)
|
|
|
(83
|
)
|
Federal Home Loan Bank stock
|
|
(45
|
)
|
|
|
(8
|
)
|
|
|
(53
|
)
|
Federal funds sold
|
|
68
|
|
|
|
(42
|
)
|
|
|
26
|
|
Total interest-earning assets
|
|
(401
|
)
|
|
|
(160
|
)
|
|
|
(561
|
)
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
Interest-bearing demand Deposits
|
|
4,241
|
|
|
|
(4,270
|
)
|
|
|
(29
|
)
|
Regular savings and other deposits
|
|
3,664
|
|
|
|
(3,660
|
)
|
|
|
4
|
|
Money market deposits
|
|
88
|
|
|
|
(94
|
)
|
|
|
(6
|
)
|
Certificates of deposit
|
|
(128
|
)
|
|
|
(320
|
)
|
|
|
(448
|
)
|
Total interest-bearing deposits
|
|
236
|
|
|
|
(715
|
)
|
|
|
(479
|
)
|
Federal Home Loan Bank advances
|
|
(286
|
)
|
|
|
64
|
|
|
|
(222
|
)
|
Total interest bearing liabilities
|
|
(50
|
)
|
|
|
(651
|
)
|
|
|
(701
|
)
|
|
|
|
|
|
|
|
|
|
Change in net interest income
|
$
|
(352
|
)
|
|
$
|
492
|
|
|
$
|
140
|
|
Comparison of Operating Results for the Three months ended September 30, 2021 and 2020
General. Net loss was $(501,000) for the three months ended September 30, 2021, compared to net income of $731,000 for the three months ended September 30, 2020. We experienced loss due to the one-time pre-tax $1.6 million expense for the contribution of common stock and cash to the Foundation in the third quarter of 2021. Additionally, there was a decrease in interest income, partially offset by a decrease in interest expense, with the changes in interest income and interest expense primarily due to changes in market interest rates.
Interest Income. Interest income decreased $195,000, or 5.6%, to $3.3 million for three months ended September 30, 2021 from $3.5 million for the three months ended September 30, 2020. The decrease was due primarily to a decrease in interest income on loans (excluding PPP loans), which is our primary source of interest income. Interest income on loans (excluding PPP loans) decreased $261,000, or 8.0%, to $3.0 million for the three months ended September 30, 2021 from $3.3 million for the three months ended September 30, 2020. Our average balance of loans (excluding PPP loans) increased $6.9 million, or 3.0% for the three months ended September 30, 2021, to $240.1 million for three months ended September 30, 2021 from $234.0 million for the three months ended September 30, 2020. The increase is due to our decisions to retain longer-term, fixed-rate loans instead of selling them, and also due to commercial lending increasing due to the lowering of COVID-19 pandemic restrictions. Our weighted average yield on loans (excluding PPP loans) decreased 59 basis points to 5.01% for the three months ended September 30, 2021 compared to 5.60% for the three months ended September 30, 2020. We recognized $129,000 of interest income on PPP loans during the three months ended September 30, 2021, compared to $67,000 during the three months ended September 30, 2020.
Interest Expense. Interest expense decreased $230,000, or $35.4% to $419,000 for the three months ended September 30, 2021 compared to $649,000 for the three months ended
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September 30, 2020. These decreases are due to decreases in rates for deposits and borrowings as well a decrease in borrowings balances.
Interest expense on deposits decreased $136,000, or 33.5%, to $270,000 for the three months ended September 30, 2021 compared to $406,000 for the three months ended September 30, 2020. The decrease was due primarily to a decrease in interest expense on certificates of deposit. Interest expense on certificates of deposit decreased $137,000, or 38.5%, to $219,000 for the three months ended September 30, 2021, compared to $356,000 for the three months ended September 30, 2020. We experienced decreases in both the average balance of certificates of deposit ($6.5 million, or 7.3%) for the three months ended September 30, 2021 and 2020, and rates paid on certificates of deposit (54 basis points, to 1.05%) for the three months ended September 30, 2021 and 2020. We have allowed higher-rate certificates of deposit to run off during the current interest rate environment, and rates have decreased due to changes in market interest rates.
Interest expense on borrowings decreased $94,000, or 38.7%, to $149,000 for the three months ended September 30, 2021, compared to $243,000 for the three months ended September 30, 2020. The average balance of borrowings decreased $22.3 million, or 40.0% to $33.5 million for the three months ended September 30, 2021, compared to $55.8 million for the three months ended September 30, 2020. The average rate paid on borrowings increased four basis points to 1.78% for the three months ended September 30, 2021 compared to 1.74% for the three months ended September 30, 2020. The increase was due to paying off lower rate advancing in 2020 and 2021 in order to recognize a gain within non interest income.
Net Interest Income. Net interest income increased $34,000, or 1.2%, to $2.9 million for the three months ended September 30, 2021 from $2.8 million for the three months ended September 30, 2020. Our interest rate spread decreased 36 basis points to 3.18% for the three months ended September 30, 2021, compared to 3.54% for the three months ended September 30, 2020, while our interest margin decreased 35 basis points to 3.37% for the three months ended September 30, 2021 compared to 3.72% for the three months ended September 30, 2020.
Provision for Loan Losses. Provisions for loan losses are charged to operations to establish an allowance for loan losses at a level necessary to absorb known and inherent losses in our loan portfolio that are both probable and reasonably estimable at the date of the consolidated financial statements. In evaluating the level of the allowance for loan losses, management analyzes several qualitative loan portfolio risk factors including, but not limited to, management’s ongoing review and grading of loans, facts and issues related to specific loans, historical loan loss and delinquency experience, trends in past due and nonaccrual loans, existing risk characteristics of specific loans or loan pools, the fair value of underlying collateral, current economic conditions and other qualitative and quantitative factors which could affect potential credit losses.
After an evaluation of these factors, nothing was recorded in the provision for loan losses for the three months ended September 30, 2020 and 2021. Our allowance for loan losses was $2.4 million at September 30, 2021 compared to $2.4 million at December 31, 2020 and $2.3 million at September 30, 2020. The ratio of our allowance for loan losses to total loans was 0.98% at September 30, 2021 compared to 1.01% at December 31, 2020 and 0.98% at September 30, 2020, while the allowance for loan losses to non-performing loans was 1,642.1% at September 30, 2021 compared to 1,935.25% at December 31, 2020. We had $8,000 of charge-offs and $2,000 of recoveries for the three months ended September 30, 2021 compared no charge-offs or recoveries during the three months ended September 30, 2020.
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To the best of our knowledge, we have recorded all loan losses that are both probable and reasonable to estimate at September 30, 2021.
Non-interest Income. Non-interest income increased $26,000 to $389,000 for the three months ended September 30, 2021 from $363,000 for the three months ended September 30, 2020. The increase was due to an increase in service charges of deposit accounts offset by a decrease in gain on sale of mortgage loans, as we have not sold as many loans as we did in 2020, as described above.
Non-interest Expense. Non-interest expense increased $1.7 million, or 73.3%, to $4.0 million for the three months ended September 30, 2021 compared to $2.3 million for the three months ended September 30, 2020. The increase was primarily due to the one-time pre-tax $1.6 million expense for the contribution of common stock and cash to the Foundation in the third quarter of 2021. The additional increase was due to an increase in salaries and employee benefits expense, due to annual salary increases and rising benefits expense as well as stock-based compensation related to equity grants that began in August of 2020.
Income Tax Expense. We recognized income tax (benefit) expense of ($185,000) and $199,000 for the three months ended September 30, 2021 and 2020, respectively, resulting in effective rates of 27.0% and 21.4%, respectively. The change is due to the tax benefit of the contribution to the Foundation.
Comparison of Operating Results for the Nine months ended September 30, 2021 and 2020
General. Net income was $1.1 million for the nine months ended September 30, 2021, compared to $2.5 million for the nine months ended September 30, 2020. We experienced an increase in non-interest expense due to the one-time pre-tax $1.6 million expense for the contribution of common stock and cash to the Foundation in the third quarter of 2021. and a decrease in interest income, partially offset by a decrease in interest expense, with the changes in interest income and interest expense primarily due to changes in market interest rates.
Interest Income. Interest income decreased $561,000, or 5.3%, to $10.0 million for the nine months ended September 30, 2021 from $10.6 million for the nine months ended September 30, 2020. The decrease was due primarily to a decrease in interest income on loans (excluding PPP loans), which is our primary source of interest income. Interest income on loans (excluding PPP loans) decreased $607,000, or 6.2%, to $9.3 million for the nine months ended September 30, 2021 from $9.9 million for the nine months ended September 30, 2020. Our average balance of loans (excluding PPP loans) decreased $5.5 million, or 2.3%, to $236.7 million for the nine months ended September 30, 2021 from $242.2 million for the nine months ended September 30, 2020. Our weighted average yield on loans (excluding PPP loans) decreased 22 basis points to 5.21% for the nine months ended September 30, 2021 compared to 5.43% for the nine months ended September 30, 2020. The decreases are a reflection of the decreases in market interest rates. We recognized $314,000 of interest income on PPP loans during the nine months ended September 30, 2021, compared to $158,000 during the nine months ended September 30, 2020. Approximately $208,000 of the $314,000 was due to accelerated recognition of income from forgiveness and prepayment of the PPP loans.
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Interest Expense. Interest expense decreased $701,000, or 33.3%, to $1.4 million for the nine months ended September 30, 2021 compared to $2.1 million for the nine months ended September 30, 2020. These decreases are due to decreases in rates for deposits and borrowings as well a decrease in borrowings balances.
Interest expense on deposits decreased $479,000, or 35.8%, to $859,000 for the nine months ended September 30, 2021 compared to $1.3 million for the nine months ended September 30, 2020. The decrease was due primarily to a decrease in interest expense on certificates of deposit. Interest expense on certificates of deposit decreased $448,000, or 38.6%, to $714,000 for the nine months ended September 30, 2021 from $1.2 million for the nine months ended September 30, 2020. We experienced decreases in both the average balance of certificates of deposit ($7.6 million, or 8.2%) for the nine months ended September 30, 2021 and 2020, and rates paid on certificates of deposit (56 basis points, to 1.12%) for the nine months ended September 30, 2021 and 2020. We have allowed higher-rate certificates of deposit to run off during the current interest rate environment, and rates have decreased due to changes in market interest rates.
Interest expense on borrowings decreased $223,000, or 29.2%, to $542,000 for the nine months ended September 30, 2021 compared to $765,000 for the nine months ended September 30, 2020. The average rate paid on borrowings decreased three basis points to 1.75% for the nine months ended September 30, 2021 compared to 1.78% for the nine months ended September 30, 2020, reflecting decreases in market interest rates. In addition, the average balance of borrowings decreased $16.1 million, or 28.0%, to $41.3 million for the nine months ended September 30, 2021 compared to $57.3 million for the nine months ended September 30, 2020.
Net Interest Income. Net interest income increased $140,000, or 1.6%, to $8.6 million for the nine months ended September 30, 2021 from $8.5 million for the nine months ended September 30, 2020. The increase was due to the decrease in interest expense being greater than our decrease in interest income. Our interest rate spread decreased 34 basis points to 3.34% for the nine months ended September 30, 2021, compared to 3.58% for the nine months ended September 30, 2020, while our net interest margin decreased 28 basis points to 3.50% for the nine months ended September 30, 2021 compared to 3.78% for the nine months ended September 30, 2020.
Provision for Loan Losses. Provisions for loan losses are charged to operations to establish an allowance for loan losses at a level necessary to absorb known and inherent losses in our loan portfolio that are both probable and reasonably estimable at the date of the consolidated financial statements. In evaluating the level of the allowance for loan losses, management analyzes several qualitative loan portfolio risk factors including, but not limited to, management’s ongoing review and grading of loans, facts and issues related to specific loans, historical loan loss and delinquency experience, trends in past due and nonaccrual loans, existing risk characteristics of specific loans or loan pools, the fair value of underlying collateral, current economic conditions and other qualitative and quantitative factors which could affect potential credit losses. After an evaluation of these factors, $25,000 was recorded in the provision for loan losses for the nine months ended September 30, 2021, compared to $152,000 for the nine months ended September 30, 2020. Our qualitative factors have decline from September 30, 2021 compared to September 30, 2020 due to reduced uncertainty of the economy and COVID. We had $10,000 of
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charge-offs and $5,000 of recoveries for the nine months ended September 30, 2021 compared to $20,000 of charge-offs and no recoveries during the nine months ended September 30, 2020.
Non-interest Income. Non-interest income increased $126,000 to $1.2 million for the nine months ended September 30, 2021 from $1.1 million for the nine months ended September 30, 2020. We decreased our borrowings, and recognized a gain of $104,000 for repaying $10.0 million of borrowings during the nine months ended September 30, 2021. Additionally, the Bank recognized additional rental income of $56,000 in 2021 compared to the nine months ended September 30, 2020. ATM income also increased by $88,000. These increases were offset by the gain on sale of mortgage loans decreasing by $154,000, or 42.4%, as we sold $6.7 million of mortgage loans during the nine months ended September 30, 2021 compared to $13.0 million of such sales during the nine months ended September 30, 2020.
Non-interest Expense. Non-interest expense increased $2.2 million, or 34.5%, to $8.4 million for the nine months ended September 30, 2021 compared to $6.3 million for the nine months ended September 30, 2020. The increase was primarily due to the one-time pre-tax $1.6 million expense for the contribution of common stock and cash to the Foundation in the third quarter of 2021. Additionally, there was an increase due to the increase in salaries and employee benefits expense of $368,000, or 8.6%, to $4.7 million for the nine months ended September 30, 2021 compared to $4.3 million for the nine months ended September 30, 2020, due to annual salary increases and rising benefits expense as well as stock-based compensation related to equity grants.
Income Tax Expense. We recognized income tax expense of $252,000 and $674,000 for the nine months ended September 30, 2021 and 2020, respectively, resulting in effective rates of 18.2% and 21.4%, respectively. The change is due to the tax benefit of the contribution to the Foundation.
Liquidity and Capital Resources
Liquidity describes our ability to meet the financial obligations that arise in the ordinary course of business. Liquidity is primarily needed to meet the borrowing and deposit withdrawal requirements of our customers and to fund current and planned expenditures. Our primary sources of funds are deposits, principal and interest payments on loans and securities, proceeds from the sale of loans, and proceeds from maturities of securities. We also have the ability to borrow from the Federal Home Loan Bank of Atlanta. At September 30, 2021 and December 31, 2020, we had a $112.3 million and 97.3 million line of credit with the Federal Home Loan Bank of Atlanta, and had $33.5 million and $53.5 million outstanding as of those dates, respectively. In addition, at September 30, 2021, we had an unsecured federal funds line of credit of $10.0 million. No amount was outstanding on this line of credit at September 30, 2021.
While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions, and competition. Our most liquid assets are cash and short-term investments including interest-bearing demand deposits. The levels of these assets are dependent on our operating, financing, lending, and investing activities during any given period.
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Our cash flows are comprised of three primary classifications: cash flows from operating activities, investing activities, and financing activities. Net cash provided by operating activities was $594,000 million and $1.7 million for the nine months ended September 30, 2021 and 2020, respectively. Net cash provided by (used in) investing activities, which consists primarily of disbursements for loan originations and the purchase of investment securities and bank owned life insurance, offset by principal collections on loans, proceeds from the sale of securities and proceeds from maturing securities and pay downs on securities, was $(12.6 million) and $16.0 million for the nine months ended September 30, 2021 and 2020, respectively. Net cash provided by (used in) financing activities, consisting primarily of activity in deposit accounts and proceeds from Federal Home Loan Bank borrowings, offset by repayment of Federal Home Loan Bank borrowings, was $41.4 million and $24.4 million for the nine months ended September 30, 2021 and 2020, respectively.
We are committed to maintaining a strong liquidity position. We monitor our liquidity position on a daily basis. We anticipate that we will have sufficient funds to meet our current funding commitments. Based on our deposit retention experience and current pricing strategy, we anticipate that a significant portion of maturing time deposits will be retained.
At September 30, 2021, Cullman Savings Bank exceeded all of its regulatory capital requirements, and was categorized as well capitalized. Management is not aware of any conditions or events since the most recent notification that would change our category.
The net proceeds from the offering significantly increased our liquidity and capital resources. Over time, the initial level of liquidity will be reduced as net proceeds from the stock offering are used for general corporate purposes, including funding loans. Our financial condition and results of operations will be enhanced by the net proceeds from the offering, which will increase our net interest-earning assets and net interest income. However, due to the increase in equity resulting from the net proceeds raised in the offering, as well as other factors associated with the offering, our return on equity has been adversely affected following the offering.
Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
Commitments. As a financial services provider, we routinely are a party to various financial instruments with off-balance-sheet risks, such as commitments to extend credit and unused lines of credit. While these contractual obligations represent our future cash requirements, a significant portion of commitments to extend credit may expire without being drawn upon. Such commitments are subject to the same credit policies and approval process accorded to loans we make. At September 30, 2021, we had outstanding commitments to originate loans of $30.3 million. We anticipate that we will have sufficient funds available to meet our current lending commitments. Time deposits that are scheduled to mature in less than one year from September 30, 2021 totaled $47.5 million. Management expects that a substantial portion of the maturing time deposits will be retained. However, if a substantial portion of these deposits is not retained, we may utilize Federal Home Loan Bank advances or raise interest rates on deposits to attract new accounts, which may result in higher levels of interest expense.
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Contractual Obligations. In the ordinary course of our operations, we enter into certain contractual obligations. Such obligations include data processing services, operating leases for premises and equipment, agreements with respect to borrowed funds and deposit liabilities.