ITEM 2: MANAGEMENT’S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Overview.
We strive to remain a leader in meeting
the financial service needs of our local community, and to provide quality service to the individuals and businesses in the market
areas that we have served since 1853. Historically, we have been a community-oriented provider of traditional banking products
and services to business organizations and individuals, including products such as residential and commercial loans, consumer loans
and a variety of deposit products. We meet the needs of our local community through a community-based and service-oriented approach
to banking.
We have adopted a growth-oriented strategy
that has focused on increasing commercial lending. Our strategy also calls for increasing deposit relationships and broadening
our product lines and services. We believe that this business strategy is best for our long-term success and viability, and complements
our existing commitment to high-quality customer service.
In connection with our overall growth strategy,
we seek to:
| ● | Grow the Company’s commercial loan
portfolio and related commercial deposits by targeting businesses in our primary market area of Hampden County and Hampshire County
in western Massachusetts and Hartford and Tolland Counties in northern Connecticut to increase the net interest margin and loan
income; |
| ● | Supplement the commercial portfolio by
growing the residential real estate portfolio to diversify the loan portfolio and deepen customer relationships; |
| ● | Focus on expanding our retail banking
deposit franchise and increase the number of households served within our designated market area; |
| ● | Invest in people, systems and technology
to grow revenue, improve efficiency and enhance the overall customer experience; |
| ● | Grow revenues, increase tangible book
value per share, continue to pay competitive dividends to shareholders and utilize the Company’s stock repurchase plan to
leverage our capital and enhance franchise value; and |
| ● | Consider
growth through acquisitions. We may pursue expansion opportunities in existing or adjacent strategic locations with companies
that add complementary products to our existing business and at terms that add value to our existing shareholders. |
You should read the following financial
results for the three and six months ended June 30, 2022 in the context of this strategy.
| ● | Net income was $5.5 million, or $0.25
per diluted share, for the three months ended June 30, 2022, compared to $5.7 million, or $0.24 per diluted share, for the same
period in 2021. For the six months ended June 30, 2022, net income was $10.9 million, or $0.49 per diluted share, as compared to
net income of $11.4 million, or $0.47 per diluted share, for the same period in 2021. |
| ● | The provision for loan losses was $300,000
for the three months ended June 30, 2022, compared to a credit of $1.2 million for the same period in 2021. The provision for loan
losses was a credit of $125,000 for the six months ended June 30, 2022, compared to a credit of $1.1 million for the same period
in 2021. During the three and six months ended June 30, 2021, the Company reduced its qualitative factors related to the impact
of the COVID-19 pandemic and other economic trends used in the Company’s allowance. |
| ● | Net interest income increased $1.6 million,
or 8.9%, to $19.4 million, for the three months ended June 30, 2022, from $17.8 million for the three months ended June 30, 2021.
The net interest margin was 3.24% for the three months ended June 30, 2022, compared to 3.06% for the three months ended June 30,
2021. The net interest margin, on a tax-equivalent basis, was 3.26% for the three months ended June 30, 2022, compared to 3.08%
for the three months ended June 30, 2021. During the six months ended June 30, 2022, net interest income increased $2.3 million,
or 6.3%, to $38.1 million, compared to $35.8 million for the six months ended June 30, 2021. The net interest margin for the six
months ended June 30, 2022 was 3.21%, compared to 3.15% during the six months ended June 30, 2021. The net interest margin, on
a tax-equivalent basis, was 3.23% for the six months ended June 30, 2022, compared to 3.17% for the six months ended June 30, 2021. |
CRITICAL ACCOUNTING POLICIES.
Our consolidated financial statements are
prepared in accordance with U.S. GAAP and practices within the banking industry. Application of these principles requires management
to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes.
These estimates, assumptions, and judgments are based on information available as of the date of the financial statements; accordingly,
as this information changes, the financial statements could reflect different estimates, assumptions, and judgments. Actual results
could differ from those estimates.
Critical accounting estimates are necessary
in the application of certain accounting policies and procedures, and are particularly susceptible to significant change. Critical
accounting policies are defined as those that are reflective of significant judgments and uncertainties, and could potentially
result in materially different results under different assumptions and conditions. There have been no material changes to our critical
accounting policies during the six months ended June 30, 2022. For additional information on our critical accounting policies,
please refer to the information contained in Note 1 of the accompanying unaudited consolidated financial statements and Note 1
of the consolidated financial statements included in our 2021 Annual Report.
RECENT DEVELOPMENTS: CORONAVIRUS PANDEMIC
RESPONSE AND ACTIONS.
The Company continues to monitor COVID-19’s
impact on its business and customers, however, the extent to which COVID-19 will continue to impact its results and operations
will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity
and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact, and the direct and indirect economic
effects of the pandemic and containment measures.
Our business is dependent upon the willingness
and ability of our employees and customers to conduct banking and other financial transactions. The COVID-19 global public health
crisis and the resulting “stay-at-home” orders resulted in widespread volatility, severe disruptions in the U.S. economy
at large, and for small businesses in particular, deterioration in household, business, economic and market conditions.
Paycheck Protection Program.
As a Preferred Lender with the Small Business
Administration (“SBA”), the Company was in a position to react quickly to the PPP component of the March 27, 2020 $2.2
trillion fiscal stimulus bill known as the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) launched
by the U.S. Department of the Treasury and the SBA. An eligible business was able to apply for a PPP loan up to the lesser of:
(1) 2.5 times its average monthly “payroll costs,” or (2) $10.0 million. PPP loans have: (a) an interest rate of 1.0%,
(b) a two-year loan term to maturity, subsequently extended to a five-year loan term maturity for loans granted on or after June
5, 2020 and (c) principal and interest payments deferred from six months to ten months from the date of disbursement. The SBA will
guarantee 100% of the PPP loans made to eligible borrowers. The entire principal amount of the borrower’s PPP loan, including
any accrued interest, is eligible to be reduced by the loan forgiveness amount under the PPP so long as employee and compensation
levels of the business are maintained and 60% of the loan proceeds are used for payroll expenses, with the remaining 40% of the
loan proceeds used for other qualifying expenses. As of June 30, 2022, the Company received funding approval from the SBA for 2,146
applications totaling $302.2 million. As of June 30, 2022, the Company processed 2,128 PPP loan forgiveness applications totaling
$299.6 million. Total PPP loans decreased $22.7 million, or 89.6%, from $25.3 million at December 31, 2021 to $2.6 million at June
30, 2022.
During the three months ended June 30,
2022, the Company recognized $129,000 in PPP loan origination fee income and PPP interest income (“PPP income”), compared
to $1.6 million during the three months ended June 30, 2021. As of June 30, 2022, the Company had $133,000 in remaining deferred
PPP loan processing fees.
The table below breaks out the PPP income
recognized for the periods indicated:
| |
For the Three Months Ended | |
| |
| | |
| | |
| | |
| | |
| |
| |
June 30, 2022 | | |
March 31, 2022 | | |
December 31, 2021 | | |
September 30, 2021 | | |
June 30, 2021 | |
| |
($ in thousands) | |
| |
| |
PPP origination fee income | |
$ | 122 | | |
$ | 526 | | |
$ | 868 | | |
$ | 1,556 | | |
$ | 1,240 | |
PPP interest income | |
| 7 | | |
| 36 | | |
| 105 | | |
| 201 | | |
| 387 | |
Total PPP Income | |
$ | 129 | | |
$ | 562 | | |
$ | 973 | | |
$ | 1,757 | | |
$ | 1,627 | |
Loan Modifications/Troubled Debt Restructurings.
The banking regulatory agencies, through
an Interagency Statement dated April 7, 2020, have encouraged financial institutions to work “prudently” with borrowers
who request loan modifications or deferrals as a result of the economic impacts of COVID-19. Pursuant to Section 4013 of the CARES
Act, loans less than 30 days past due as of December 31, 2019 will be considered current for COVID-19 modifications. Financial
institutions can then suspend the requirements under U.S. GAAP for loan modifications related to COVID-19 that would otherwise
be categorized as a TDR, and suspend any determination of a loan modified as a result of COVID-19 as being a TDR, including the
requirement to determine impairment for accounting under U.S. GAAP. The Company has adopted this policy election to address COVID-19
loan modification requests that have been received from the earlier of either January 1, 2022 or the 60th day after
the end of the COVID-19 national emergency.
The Company implemented a modification
deferral program under the CARES Act, which allowed residential, commercial and consumer borrowers who were adversely affected
by the COVID-19 pandemic, to defer loan payments for a set period of time. As of June 30, 2022, the Company had one remaining commercial
real estate loan, with an outstanding principal balance of $9.0 million, and one residential loan with an outstanding principal
balance of $123,000, under CARES Act modification. The commercial real estate borrower was granted a principal deferral, while
the residential borrower was granted full payment deferral under the Company’s modification deferral program.
Allowance for Loan Losses.
In determining the allowance for loan losses,
the Company considers quantitative loss factors and a number of qualitative factors, such as underwriting policies, current economic
conditions, delinquency statistics, the adequacy of the underlying collateral and the financial strength of the borrower. The ongoing
COVID-19 pandemic could cause us to experience higher credit losses in our lending portfolio, reduce demand for our products and
services and other negative impacts on our financial position, results of operations and prospects. As of June 30, 2022, the Company’s
delinquency and nonperforming assets have not been materially impacted by the COVID-19 pandemic, and therefore, have not resulted
in material credit losses within the lending portfolio.
The Company is continuing to monitor COVID-19’s
impact on its business and its customers, however, the extent to which COVID-19 will further impact its results and operations
will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity
and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact and the direct and indirect economic
effects of the pandemic and containment measures.
COMPARISON OF FINANCIAL CONDITION AT
JUNE 30, 2022 AND DECEMBER 31, 2021
At June 30, 2022, total assets were $2.6
billion, an increase of $38.9 million, or 1.5%, from December 31, 2021. During the six months ended June 30, 2022, cash and cash
equivalents decreased $55.9 million, or 54.1%, to $47.5 million, investment securities decreased $22.3 million, or 5.2%, to $406.2
million and total loans increased $111.0 million, or 6.0%, to $2.0 billion.
At June 30, 2022, the Company’s available-for-sale
securities portfolio decreased $33.4 million, or 17.2%, from $194.4 million at December 31, 2021 to $160.9 million at June 30,
2022. The held-to-maturity securities portfolio, recorded at amortized cost, increased $11.5 million, or 5.2%, from $222.3 million
at December 31, 2021 to $233.8 million at June 30, 2022. The marketable equity securities portfolio decreased $443,000, or 3.7%,
from $11.9 million at December 31, 2021 to $11.5 million at June 30, 2022. The primary objective of the investment portfolio is
to provide liquidity and maximize income while preserving the safety of principal.
At June 30, 2022, total loans were $2.0
billion, an increase of $111.0 million, or 6.0%, from December 31, 2021. Excluding PPP loans, total loans increased $133.7 million,
or 7.3%, driven by an increase in commercial real estate loans of $94.9 million, or 9.7%, partially offset by a decrease in total
commercial and industrial loans of $8.8 million, or 3.9%. Excluding a decrease in PPP loans of $22.7 million, or 89.6%, from December
31, 2021, commercial and industrial loans increased $13.9 million, or 6.9%, at June 30, 2022. Residential real estate loans, which
include home equity loans, increased $24.2 million, or 3.7%. In accordance with the Company’s asset/liability management
strategy, at June 30, 2022, the Company serviced $82.5 million in loans sold to the secondary market, compared to $88.2 million
at December 31, 2021. Servicing rights will continue to be retained on all loans written and sold to the secondary market. All
loans where the payments are 90 days or more in arrears as of the closing date of each month are placed on nonaccrual status. If
all nonaccrual loans had been performing in accordance with their terms, we would have earned additional interest income of $102,000
and $153,000 for the six months ended June 30, 2022 and 2021, respectively.
Management continues to remain attentive
to any signs of deterioration in borrowers’ financial conditions and is proactive in taking the appropriate steps to mitigate
risk. At June 30, 2022, nonperforming loans totaled $4.1 million, or 0.21% of total loans, compared to $5.0 million, or 0.27% of
total loans, at December 31, 2021. At June 30, 2022, there were no loans 90 or more days past due and still accruing interest.
Nonperforming assets to total assets was 0.16% at June 30, 2022, compared to 0.20% at December 31, 2021. The allowance for loan
losses as a percentage of total loans was 0.99% at June 30, 2022, compared to 1.06% at December 31, 2021. At June 30, 2022, the
allowance for loan losses as a percentage of nonperforming loans was 476.5%, compared to 398.6%, at December 31, 2021
At June 30, 2022, total deposits were $2.3
billion, an increase of $45.1 million, or 2.0%, from December 31, 2021, primarily due to an increase in core deposits of $96.7
million, or 5.2%. Core deposits, which the Company defines as all deposits except time deposits, increased from $1.9 billion, or
82.2% of total deposits, at December 31, 2021, to $2.0 billion, or 84.8% of total deposits, at June 30, 2022. Non-interest-bearing
deposits increased $6.3 million, or 1.0%, to $647.6 million, interest-bearing checking accounts increased $8.3 million, or 5.7%,
to $154.0 million, savings accounts increased $9.1 million, or 4.2%, to $226.7 million, and money market accounts increased $72.9
million, or 8.6%, to $923.2 million. Time deposits decreased $51.6 million, or 12.8%, from $402.0 million at December 31, 2021
to $350.4 million at June 30, 2022. The Company did not have any brokered deposits at June 30, 2022 or December 31, 2021.
At June 30, 2022, total borrowings increased
$3.5 million, or 15.7%, from $22.3 million at December 31, 2021, to $25.8 million. Other borrowings increased $3.5 million, or
129.6%, to $6.2 million and subordinated debt outstanding totaled $19.7 million at June 30, 2022 and $19.6 million at December
31, 2021.
At June 30, 2022, shareholders’ equity
was $215.3 million, or 8.4% of total assets, compared to $223.7 million, or 8.8% of total assets, at December 31, 2021. The decrease
in shareholders’ equity reflects $3.7 million for the repurchase of the Company’s common stock, the payment of regular
cash dividends of $2.7 million and an increase in accumulated other comprehensive loss of $14.4 million, partially offset by net
income of $10.9 million. Total shares outstanding as of June 30, 2022 were 22,465,991.
The Company’s book value per share
was $9.58 at June 30, 2022 compared to $9.87 at December 31, 2021, while tangible book value per share, a non-GAAP financial measure,
decreased $0.29, or 3.1%, from $9.21 at December 31, 2021 to $8.92 at June 30, 2022. During the six months ended June 30, 2022,
the change in AOCI reduced the tangible book value per share by $0.64 as of June 30, 2022, primarily due to the
impact of higher interest rates on the fair value of available-for-sale securities. Tangible book value is a non-GAAP measure.
See “Explanation of Use of Non-GAAP Financial Measurements” for the related tangible book value calculation and a reconciliation
of GAAP to non-GAAP financial measures.
The Company’s regulatory capital
ratios remain in compliance with regulatory “well capitalized” requirements and internal target minimal levels. At
June 30, 2022, the Company’s Tier 1 leverage, common equity tier 1 capital, and total risk-based capital ratios were 8.9%,
11.7%, and 13.7%, respectively, and the Bank’s Tier 1 leverage, common equity tier 1 capital, and total risk-based capital
ratios were 9.1%, 12.0%, and 13.0%, respectively, compared with regulatory “well capitalized” minimums of 5.00%, 6.5%,
and 10.00%, respectively.
On April 27, 2021, the Board of Directors
authorized a stock repurchase plan (the “2021 Plan”) under which the Company is authorized to repurchase up to 2.4
million shares of common stock, or 10% of its outstanding common stock. During the three months ended June 30, 2022, the Company
repurchased 293,173 shares of common stock under the 2021 Plan. During the six months ended June 30, 2022, the Company repurchased
405,847 shares of common stock under the 2021 Plan. At June 30, 2022, there were 271,472 shares of common stock available for repurchase
under the 2021 Plan. On July 26, 2022, the Board of Directors authorized a stock repurchase plan (the “2022 Plan”),
pursuant to which the Company may repurchase up to 1.1 million shares of common stock, or approximately 5.0%, of the Company’s
outstanding shares of common stock, upon the completion of the 2021 Plan.
The shares repurchased under the 2021 and
2022 Plans will be purchased from time to time at prevailing market prices, through open market or privately negotiated transactions,
or otherwise, depending upon market conditions. There is no guarantee as to the exact number, or value, of shares that will be
repurchased by the Company, and the Company may discontinue repurchases at any time that management determines additional repurchases
are not warranted. The timing and amount of additional share repurchases under the 2021 Plan will depend on a number of factors,
including the Company’s stock price performance, ongoing capital planning considerations, general market conditions, and
applicable legal requirements.
Although the Company has historically paid
quarterly dividends on its common stock and currently intends to continue to pay such dividends, the Company’s ability to
pay such dividends depends on a number of factors, including restrictions under federal laws and regulations on the Company’s
ability to pay dividends, and as a result, there can be no assurance that dividends will continue to be paid in the future.
COMPARISON OF OPERATING RESULTS FOR
THE THREE MONTHS ENDED JUNE 30, 2022 AND JUNE 30, 2021
General.
The Company reported net income of $5.5
million, or $0.25 per diluted share, for the three months ended June 30, 2022, compared to net income of $5.7 million, or $0.24
per diluted share, for the three months ended June 30, 2021. Return on average assets and return on average equity was 0.87% and
10.22%, respectively, for the three months ended June 30, 2022, as compared to 0.92% and 10.16%, respectively, for the three months
ended June 30, 2021.
Net Interest and Dividend Income.
The following tables set forth the information
relating to our average balance and net interest income for the three months ended June 30, 2022 and 2021, and reflect the average
yield on interest-earning assets and average cost of interest-bearing liabilities for the periods indicated. Yields and costs are
derived by dividing interest income by the average balance of interest-earning assets and interest expense by the average balance
of interest-bearing liabilities for the periods shown. The interest rate spread is the difference between the total average yield
on interest-earning assets and the cost of interest-bearing liabilities. Net interest margin represents tax-equivalent net interest
and dividend income as a percentage of average interest-earning assets. Average balances are derived from actual daily balances
over the periods indicated. Interest income includes fees earned when the real estate loans are prepaid or refinanced. For analytical
purposes, the interest earned on tax-exempt assets is adjusted to a tax-equivalent basis to recognize the income tax savings which
facilitates comparison between taxable and tax-exempt assets.
| |
Three Months Ended June 30, | |
| |
2022 | | |
2021 | |
| |
Average | | |
| | |
Average Yield/ | | |
Average | | |
| | |
Average Yield/ | |
| |
Balance | | |
Interest(8) | | |
Cost(9) | | |
Balance | | |
Interest(8) | | |
Cost(9) | |
| |
(Dollars in thousands) | |
ASSETS: | |
| | |
| | |
| | |
| | |
| | |
| |
Interest-earning assets | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Loans(1)(2) | |
$ | 1,949,464 | | |
$ | 18,624 | | |
| 3.83 | % | |
$ | 1,911,323 | | |
$ | 18,425 | | |
| 3.87 | % |
Securities(2) | |
| 414,226 | | |
| 2,068 | | |
| 2.00 | | |
| 293,991 | | |
| 1,278 | | |
| 1.74 | |
Other investments - at cost | |
| 9,892 | | |
| 30 | | |
| 1.22 | | |
| 10,114 | | |
| 28 | | |
| 1.11 | |
Short-term investments(3) | |
| 24,944 | | |
| 48 | | |
| 0.77 | | |
| 114,883 | | |
| 26 | | |
| 0.09 | |
Total interest-earning assets | |
| 2,398,526 | | |
| 20,770 | | |
| 3.47 | | |
| 2,330,311 | | |
| 19,757 | | |
| 3.40 | |
Total non-interest-earning assets | |
| 153,939 | | |
| | | |
| | | |
| 147,545 | | |
| | | |
| | |
Total assets | |
$ | 2,552,465 | | |
| | | |
| | | |
$ | 2,477,856 | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
LIABILITIES AND EQUITY: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Interest-bearing liabilities | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Interest-bearing checking accounts | |
$ | 137,984 | | |
$ | 105 | | |
| 0.31 | % | |
$ | 100,455 | | |
$ | 92 | | |
| 0.37 | % |
Savings accounts | |
| 224,487 | | |
| 48 | | |
| 0.09 | | |
| 206,302 | | |
| 47 | | |
| 0.09 | |
Money market accounts | |
| 910,801 | | |
| 549 | | |
| 0.24 | | |
| 766,378 | | |
| 650 | | |
| 0.34 | |
Time deposit accounts | |
| 365,383 | | |
| 288 | | |
| 0.32 | | |
| 487,712 | | |
| 677 | | |
| 0.56 | |
Total interest-bearing deposits | |
| 1,638,655 | | |
| 990 | | |
| 0.24 | | |
| 1,560,847 | | |
| 1,466 | | |
| 0.38 | |
Short-term borrowings and long-term debt | |
| 25,829 | | |
| 264 | | |
| 4.10 | | |
| 54,459 | | |
| 382 | | |
| 2.81 | |
Interest-bearing liabilities | |
| 1,664,484 | | |
| 1,254 | | |
| 0.30 | | |
| 1,615,306 | | |
| 1,848 | | |
| 0.46 | |
Non-interest-bearing deposits | |
| 635,678 | | |
| | | |
| | | |
| 603,270 | | |
| | | |
| | |
Other non-interest-bearing liabilities | |
| 35,076 | | |
| | | |
| | | |
| 36,043 | | |
| | | |
| | |
Total non-interest-bearing liabilities | |
| 670,754 | | |
| | | |
| | | |
| 639,313 | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total liabilities | |
| 2,335,238 | | |
| | | |
| | | |
| 2,254,619 | | |
| | | |
| | |
Total equity | |
| 217,227 | | |
| | | |
| | | |
| 223,237 | | |
| | | |
| | |
Total liabilities and equity | |
$ | 2,552,465 | | |
| | | |
| | | |
$ | 2,477,856 | | |
| | | |
| | |
Less: Tax-equivalent adjustment(2) | |
| | | |
| (124 | ) | |
| | | |
| | | |
| (105 | ) | |
| | |
Net interest and dividend income | |
| | | |
$ | 19,392 | | |
| | | |
| | | |
$ | 17,804 | | |
| | |
Net interest rate spread(4) | |
| | | |
| | | |
| 3.15 | % | |
| | | |
| | | |
| 2.92 | % |
Net interest rate spread, on a tax equivalent basis(5) | |
| | | |
| | | |
| 3.17 | % | |
| | | |
| | | |
| 2.94 | % |
Net interest margin(6) | |
| | | |
| | | |
| 3.24 | % | |
| | | |
| | | |
| 3.06 | % |
Net interest margin, on a tax equivalent basis(7) | |
| | | |
| | | |
| 3.26 | % | |
| | | |
| | | |
| 3.08 | % |
Ratio of average interest-earning | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
assets to average interest-bearing liabilities | |
| | | |
| | | |
| 144.10 | % | |
| | | |
| | | |
| 144.26 | % |
| (1) | Loans, including nonaccrual loans, are net of deferred loan origination costs and unadvanced funds. |
| (2) | Loan and securities income are presented on a tax-equivalent basis using a tax rate of 21%. The
tax-equivalent adjustment is deducted from tax-equivalent net interest and dividend income to agree to the amount reported on the
consolidated statements of net income. |
| (3) | Short-term investments include federal funds sold. |
| (4) | Net interest rate spread represents the difference between the weighted average yield on interest-earning
assets and the weighted average cost of interest-bearing liabilities. |
| (5) | Net interest rate spread, on a tax-equivalent basis, represents the difference between the tax-equivalent
weighted average yield on interest-earning assets and the tax-equivalent weighted average cost of interest-bearing liabilities. |
| (6) | Net interest margin represents net interest and dividend income as a percentage of average interest-earning
assets. |
| (7) | Net interest margin, on a tax-equivalent basis, represents tax-equivalent net interest and dividend
income as a percentage of average interest-earning assets. |
| (8) | Acquired loans, time deposits and borrowings are recorded at fair value at the time of acquisition.
The fair value marks on the loans, time deposits and borrowings acquired accrete and amortize into net interest income over time.
For the three months ended June 30, 2022 and June 30, 2021, the loan accretion income and interest expense reduction on time deposits
and borrowings increased (decreased) net interest income $64,000, and $(33,000), respectively. Excluding these items, net interest
margin, on a tax-equivalent basis, for the three months ended June 30, 2022 and June 30, 2021 was 3.25%, and 3.09%, respectively. |
Rate/Volume Analysis.
The following table shows
how changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities have affected
our interest and dividend income and interest expense during the periods indicated. Information is provided in each category with
respect to: (1) interest income changes attributable to changes in volume (changes in volume multiplied by prior rate); (2) interest
income changes attributable to changes in rate (changes in rate multiplied by prior volume); and (3) the net change.
The changes attributable
to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due
to rate.
| |
Three Months Ended June 30, 2022 compared to Three Months Ended
June 30, 2021 | |
| |
Increase (Decrease) Due to | | |
| |
| |
Volume | | |
Rate | | |
Net | |
| |
(In thousands) | |
Interest-earning assets | |
| |
Loans (1) | |
$ | 369 | | |
$ | (170 | ) | |
$ | 199 | |
Securities (1) | |
| 523 | | |
| 267 | | |
| 790 | |
Other investments - at cost | |
| (1 | ) | |
| 3 | | |
| 2 | |
Short-term investments | |
| (20 | ) | |
| 42 | | |
| 22 | |
Total interest-earning assets | |
| 871 | | |
| 142 | | |
| 1,013 | |
| |
| | | |
| | | |
| | |
Interest-bearing liabilities | |
| | | |
| | | |
| | |
Interest-bearing checking accounts | |
| 34 | | |
| (21 | ) | |
| 13 | |
Savings accounts | |
| 4 | | |
| (3 | ) | |
| 1 | |
Money market accounts | |
| 122 | | |
| (223 | ) | |
| (101 | ) |
Time deposit accounts | |
| (170 | ) | |
| (219 | ) | |
| (389 | ) |
Short-term borrowing and long-time debt | |
| (201 | ) | |
| 83 | | |
| (118 | ) |
Total interest-bearing liabilities | |
| (211 | ) | |
| (383 | ) | |
| (594 | ) |
Change in net interest and dividend income (1) | |
$ | 1,082 | | |
$ | 525 | | |
$ | 1,607 | |
| (1) | Securities, loan income and change in net interest and dividend income are presented on a tax-equivalent basis using a tax
rate of 21%. The tax-equivalent adjustment is deducted from tax-equivalent net interest income. |
Net interest income increased $1.6 million,
or 8.9%, to $19.4 million, for the three months ended June 30, 2022, from $17.8 million for the three months ended June 30, 2021.
The increase was due to an increase in interest and dividend income of $994,000, or 5.1%, and a decrease in interest expense of
$594,000, or 32.2%. Interest expense on deposits decreased $476,000, or 32.5%, and interest expense on borrowings decreased $118,000,
or 30.9%. For the three months ended June 30, 2022, net interest income included $129,000 in PPP income, compared to $1.6 million
for the three months ended June 30, 2021. Excluding PPP income, net interest income increased $3.1 million, or 19.1%, primarily
due to an increase in interest and dividend income of $2.5 million, or 13.8%.
The net interest margin was 3.24% for the
three months ended June 30, 2022, compared to 3.06% for the three months ended June 30, 2021. The net interest margin, on a tax-equivalent
basis, was 3.26% for the three months ended June 30, 2022, compared to 3.08% for the three months ended June 30, 2021. The increase
in the net interest margin was due to an increase in average loans outstanding of $38.1 million, or 2.0%, from the three months
ended June 30, 2021, compared to the three months ended June 30, 2022.
The average yield on interest-earning assets
increased seven basis points from 3.40% for the three months ended June 30, 2021 to 3.47% for the three months ended June 30, 2022.
During the three months ended June 30, 2022, the average cost of funds, including non-interest-bearing demand accounts and borrowings,
decreased 11 basis points, from 0.33% for the three months ended June 30, 2021 to 0.22% for the three months ended June 30, 2022.
The average cost of core deposits, which include non-interest-bearing demand accounts, decreased four basis points, from 0.19%
for the three months ended June 30, 2021 to 0.15% for the three months ended June 30, 2022. The average cost of time deposits decreased
24 basis points from 0.56% for the three months ended June 30, 2021 to 0.32% for the three months ended June 30, 2022. The average
cost of borrowings increased 129 basis points during the same period due to the full quarter impact of the $20.0 million in subordinated
debt issued on April 19, 2021. For the three months ended June 30, 2022, average demand deposits, an interest-free source of funds,
increased $32.4 million, or 5.4%, to $635.7 million, or 28.0% of total average deposits, from $603.3 million, or 27.9% of total
average deposits for the three months ended June 30, 2021.
During the three months ended June 30,
2022, average interest-earning assets increased $68.2 million, or 2.9%, to $2.4 billion compared to the three months ended June
30, 2021, primarily due to an increase in average securities of $120.0 million, or 39.5%, and an increase in average loans of $38.1
million, or 2.0%, partially offset by a decrease in short-term investments of $89.9 million, or 78.3%. Excluding average PPP loans,
average interest-earning assets increased $220.7 million, or 10.2%, and average loans increased $190.7 million, or 10.9%, from
the three months ended June 30, 2021 to the three months ended June 30, 2022.
Provision for Loan Losses.
The provision for loan losses is reviewed
by management based upon our evaluation of then-existing economic and business conditions affecting our key lending areas and other
conditions, such as new loan products, credit quality trends (including trends in nonperforming loans expected to result from existing
conditions), collateral values, loan volumes and concentrations, specific industry conditions within portfolio segments that existed
as of the balance sheet date and the impact that such conditions were believed to have had on the collectability of the loan portfolio.
The amount of the provision for loan losses
during the three months ended June 30, 2022 was based on the changes that occurred in the loan portfolio during that same period.
The Company recorded a provision for loan losses of $300,000 for three months ended June 30, 2022, compared to a credit for loan
losses of $1.2 million for the three months ended June 30, 2021. The increase in the provision for loan losses was due to strong
organic loan growth during the second quarter of 2022. The Company recorded net charge-offs of $48,000 for the three months ended
June 30, 2022, as compared to net charge-offs of $157,000 for the three months ended June 30, 2021. Management continues to assess
the exposure of the Company’s loan portfolio to the COVID-19 pandemic related factors, economic trends and their potential
effect on asset quality.
Although we believe that we have established
and maintained the allowance for loan losses at adequate levels, future adjustments may be necessary if economic, real estate and
other conditions differ substantially from the current operating environment. If the COVID-19 pandemic has an adverse effect on
the ability of our borrowers to satisfy their obligations to us, the demand for our loans or our other products and services, other
aspects of our business operations, or on financial markets, real estate markets, or economic growth, this could, depending on
the extent of the loan defaults, materially and adversely affect our liquidity and financial condition and our results of operations
could be materially and adversely affected.
Non-interest Income.
Non-interest income increased $332,000,
or 13.8%, to $2.7 million for the three months ended June 30, 2022, from $2.4 million for the three months ended June 30, 2021.
During the three months ended June 30, 2022, service charges and fees on deposits increased $271,000, or 13.1%, primarily due to
the $177,000, or 19.1%, increase in ATM and debit card interchange income from increased card-based transaction usage across our
checking account base. Other income from loan-level swap fees on commercial loans increased $21,000 from the three months ended
June 30, 2021 to the three months ended June 30, 2022. Income from bank-owned life insurance decreased $42,000, or 8.4%, from the
three months ended June 30, 2021 to the three months ended June 30, 2022. During the three months ended June 30, 2021, mortgage
banking income from the sale of fixed rate residential real estate loans totaled $242,000. The Company did not sell any loans to
the secondary market during the three months ended June 30, 2022. The Company reported a gain of $141,000 on non-marketable equity
investments and reported an unrealized loss on marketable equity securities of $225,000, during the three months ended June 30,
2022, compared to unrealized gains on marketable equity securities of $6,000 during the three months ended June 30, 2021. The Company
also reported realized losses on the sale of securities of $12,000 during the three months ended June 30, 2021. Gains and losses
from the investment portfolio vary from quarter to quarter based on market conditions, as well as the related yield curve and valuation
changes.
During the three months ended June 30,
2021, the Company recognized a loss on interest rate swap termination of $402,000 representing the unamortized portion of a $3.4
million loss associated with the previous termination of a $32.5 million interest rate swap on March 16, 2016. The unamortized
portion of the loss was previously reported in accumulated other comprehensive income and amortized through interest expense, however,
as the previously hedged item was discontinued, the Company accelerated the remaining unamortized loss.
Non-interest Expense.
For the three months ended June 30, 2022,
non-interest expense increased $759,000, or 5.6%, to $14.4 million from $13.7 million, for the three months ended June 30, 2021.
The increase in non-interest expense was partially due to an increase in salaries and benefits of $263,000, or 3.3%, due to normal
annual salary increases. Other non-interest expense increased $260,000, or 12.2%, professional fees increased $130,000, or 22.1%,
occupancy expense increased $78,000, or 7.1%, advertising expense increased $65,000, or 18.7%, furniture and equipment expense
increased $26,000, or 5.1%, and FDIC insurance expense increased $9,000, or 4.0%. During the same period, data processing expense
decreased $27,000, or 3.6%. During the three months ended June 30, 2021, the Company prepaid $32.5 million of FHLB borrowings resulting
in a loss of $45,000. For the three months ended June 30, 2022, the adjusted efficiency ratio, a non-GAAP financial measure, was
65.0%, compared to 66.1% for the three months ended June 30, 2021. The adjusted efficiency ratio is a non-GAAP measure. See “Explanation
of Use of Non-GAAP Financial Measurements” for the related efficiency ratio calculation and a reconciliation of GAAP to non-GAAP
financial measures.
Income Taxes.
Income tax expense for the three months
ended June 30, 2022 was $1.9 million, representing an effective tax rate of 25.2%, compared to $2.1 million, representing an effective
tax rate of 27.0%, for three months ended June 30, 2021.
COMPARISON OF OPERATING RESULTS FOR
THE SIX MONTHS ENDED JUNE 30, 2022 AND JUNE 30, 2021
General.
For the six months ended June 30, 2022,
the Company reported net income of $10.9 million, or $0.49 per diluted share, compared to $11.4 million, or $0.47 per diluted share,
for the six months ended June 30, 2021. Return on average assets and return on average equity were 0.86% and 9.93% for the six
months ended June 30, 2022, respectively, compared to 0.95% and 10.25% for the six months ended June 30, 2021, respectively.
Net Interest and Dividend Income.
The following tables set forth the information
relating to our average balance and net interest income for the six months ended June 30, 2022 and 2021, and reflect the average
yield on interest-earning assets and average cost of interest-bearing liabilities for the periods indicated. Yields and costs are
derived by dividing interest income by the average balance of interest-earning assets and interest expense by the average balance
of interest-bearing liabilities for the periods shown. The interest rate spread is the difference between the total average yield
on interest-earning assets and the cost of interest-bearing liabilities. Net interest margin represents tax-equivalent net interest
and dividend income as a percentage of average interest-earning assets. Average balances are derived from actual daily balances
over the periods indicated. Interest income includes fees earned when the real estate loans are prepaid or refinanced. For analytical
purposes, the interest earned on tax-exempt assets is adjusted to a tax-equivalent basis to recognize the income tax savings which
facilitates comparison between taxable and tax-exempt assets.
| |
Six Months Ended June 30, | |
| |
2022 | | |
2021 | |
| |
Average | | |
| | |
Average Yield/ | | |
Average | | |
| | |
Average Yield/ | |
| |
Balance | | |
Interest(8) | | |
Cost(9) | | |
Balance | | |
Interest(8) | | |
Cost(9) | |
| |
(Dollars in thousands) | |
ASSETS: | |
| | |
| | |
| | |
| | |
| | |
| |
Interest-earning assets | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Loans(1)(2) | |
$ | 1,922,318 | | |
$ | 36,691 | | |
| 3.85 | % | |
$ | 1,917,366 | | |
$ | 37,648 | | |
| 3.96 | % |
Securities(2) | |
| 418,806 | | |
| 4,018 | | |
| 1.94 | | |
| 260,845 | | |
| 2,131 | | |
| 1.65 | |
Other investments - at cost | |
| 10,241 | | |
| 55 | | |
| 1.08 | | |
| 9,889 | | |
| 63 | | |
| 1.28 | |
Short-term investments(3) | |
| 40,899 | | |
| 69 | | |
| 0.34 | | |
| 104,999 | | |
| 50 | | |
| 0.10 | |
Total interest-earning assets | |
| 2,392,264 | | |
| 40,833 | | |
| 3.44 | | |
| 2,293,099 | | |
| 39,892 | | |
| 3.51 | |
Total non-interest-earning assets | |
| 148,815 | | |
| | | |
| | | |
| 146,709 | | |
| | | |
| | |
Total assets | |
$ | 2,541,079 | | |
| | | |
| | | |
$ | 2,439,808 | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
LIABILITIES AND EQUITY: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Interest-bearing liabilities | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Interest-bearing checking accounts | |
$ | 135,104 | | |
| 200 | | |
| 0.30 | | |
$ | 95,507 | | |
| 198 | | |
| 0.42 | |
Savings accounts | |
| 221,484 | | |
| 83 | | |
| 0.08 | | |
| 196,812 | | |
| 83 | | |
| 0.09 | |
Money market accounts | |
| 894,687 | | |
| 1,070 | | |
| 0.24 | | |
| 721,270 | | |
| 1,303 | | |
| 0.36 | |
Time deposit accounts | |
| 377,158 | | |
| 629 | | |
| 0.34 | | |
| 527,188 | | |
| 1,616 | | |
| 0.62 | |
Total interest-bearing deposits | |
| 1,628,433 | | |
| 1,982 | | |
| 0.25 | | |
| 1,540,777 | | |
| 3,200 | | |
| 0.42 | |
Short-term borrowings and long-term debt | |
| 24,164 | | |
| 517 | | |
| 4.31 | | |
| 53,569 | | |
| 655 | | |
| 2.47 | |
Interest-bearing liabilities | |
| 1,652,597 | | |
| 2,499 | | |
| 0.30 | | |
| 1,594,346 | | |
| 3,855 | | |
| 0.49 | |
Non-interest-bearing deposits | |
| 634,387 | | |
| | | |
| | | |
| 582,541 | | |
| | | |
| | |
Other non-interest-bearing liabilities | |
| 33,721 | | |
| | | |
| | | |
| 37,829 | | |
| | | |
| | |
Total non-interest-bearing liabilities | |
| 668,108 | | |
| | | |
| | | |
| 620,370 | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total liabilities | |
| 2,320,705 | | |
| | | |
| | | |
| 2,214,716 | | |
| | | |
| | |
Total equity | |
| 220,374 | | |
| | | |
| | | |
| 225,092 | | |
| | | |
| | |
Total liabilities and equity | |
$ | 2,541,079 | | |
| | | |
| | | |
$ | 2,439,808 | | |
| | | |
| | |
Less: Tax-equivalent adjustment(2) | |
| | | |
| (244 | ) | |
| | | |
| | | |
| (207 | ) | |
| | |
Net interest and dividend income | |
| | | |
$ | 38,090 | | |
| | | |
| | | |
$ | 35,830 | | |
| | |
Net interest rate spread(4) | |
| | | |
| | | |
| 3.12 | % | |
| | | |
| | | |
| 3.00 | % |
Net interest rate spread, on a tax equivalent basis(5) | |
| | | |
| | | |
| 3.14 | % | |
| | | |
| | | |
| 3.02 | % |
Net interest margin(6) | |
| | | |
| | | |
| 3.21 | % | |
| | | |
| | | |
| 3.15 | % |
Net interest margin, on a tax equivalent basis(7) | |
| | | |
| | | |
| 3.23 | % | |
| | | |
| | | |
| 3.17 | % |
Ratio of average interest-earning | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
assets to average interest-bearing liabilities | |
| | | |
| | | |
| 144.76 | % | |
| | | |
| | | |
| 143.83 | % |
| (1) | Loans, including nonaccrual loans, are net of deferred loan origination costs and unadvanced funds. |
| (2) | Loan and securities income are presented on a tax-equivalent basis using a tax rate of 21%. The
tax-equivalent adjustment is deducted from tax-equivalent net interest and dividend income to agree to the amount reported on the
consolidated statements of net income. |
| (3) | Short-term investments include federal funds sold. |
| (4) | Net interest rate spread represents the difference between the weighted average yield on interest-earning
assets and the weighted average cost of interest-bearing liabilities. |
| (5) | Net interest rate spread, on a tax-equivalent basis, represents the difference between the tax-equivalent
weighted average yield on interest-earning assets and the tax-equivalent weighted average cost of interest-bearing liabilities. |
| (6) | Net interest margin represents net interest and dividend income as a percentage of average interest-earning
assets. |
| (7) | Net interest margin, on a tax-equivalent basis, represents tax-equivalent net interest and dividend
income as a percentage of average interest-earning assets. |
| (8) | Acquired loans, time deposits and borrowings are recorded at fair value at the time of acquisition.
The fair value marks on the loans, time deposits and borrowings acquired accrete and amortize into net interest income over time.
For the six months ended June 30, 2022 and June 30, 2021, the loan accretion income and interest expense reduction on time deposits
and borrowings increased (decreased) net interest income $103,000 and $(78,000), respectively. Excluding these items, net interest
margin, on a tax-equivalent basis, for the six months ended June 30, 2022 and June 30, 2021 was 3.22% and 3.18%, respectively. |
Rate/Volume Analysis.
The following table shows
how changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities have affected
our interest and dividend income and interest expense during the periods indicated. Information is provided in each category with
respect to: (1) interest income changes attributable to changes in volume (changes in volume multiplied by prior rate); (2) interest
income changes attributable to changes in rate (changes in rate multiplied by prior volume); and (3) the net change.
The changes attributable
to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due
to rate.
| |
Six Months Ended June 30, 2022 compared to Six Months Ended June 30, 2021 | |
| |
Increase (Decrease) Due to | | |
| |
| |
Volume | | |
Rate | | |
Net | |
| |
(In thousands) | |
Interest-earning assets | |
| |
Loans (1) | |
$ | 97 | | |
$ | (1,055 | ) | |
$ | (958 | ) |
Securities (1) | |
| 1,290 | | |
| 598 | | |
| 1,888 | |
Other investments - at cost | |
| 2 | | |
| (10 | ) | |
| (8 | ) |
Short-term investments | |
| (31 | ) | |
| 50 | | |
| 19 | |
Total interest-earning assets | |
| 1,358 | | |
| (417 | ) | |
| 941 | |
| |
| | | |
| | | |
| | |
Interest-bearing liabilities | |
| | | |
| | | |
| | |
Interest-bearing checking accounts | |
| 82 | | |
| (80 | ) | |
| 2 | |
Savings accounts | |
| 10 | | |
| (10 | ) | |
| — | |
Money market accounts | |
| 313 | | |
| (546 | ) | |
| (233 | ) |
Time deposit accounts | |
| (460 | ) | |
| (527 | ) | |
| (987 | ) |
Short-term borrowing and long-term debt | |
| (360 | ) | |
| 222 | | |
| (138 | ) |
Total interest-bearing liabilities | |
| (415 | ) | |
| (941 | ) | |
| (1,356 | ) |
Change in net interest and dividend income | |
$ | 1,773 | | |
$ | 524 | | |
$ | 2,297 | |
| (1) | Securities, loan income and change in net interest and
dividend income are presented on a tax-equivalent basis using a tax rate of 21%. The tax-equivalent adjustment is deducted from
tax-equivalent net interest income. |
During the six months ended June 30, 2022,
net interest income increased $2.3 million, or 6.3%, to $38.1 million, compared to $35.8 million for the six months ended June
30, 2021. The increase in net interest income was due to a decrease in interest expense of $1.4 million, or 35.2%, and an increase
in interest and dividend income of $904,000, or 2.3%. The decrease in interest expense was due to a decrease in interest expense
on deposits of $1.2 million, or 38.1%, and a decrease of $138,000, or 21.1%, in interest expense on borrowings. For the six months
ended June 30, 2022, interest and dividend income included $691,000 in PPP income, compared to $4.0 million during the six months
ended June 30, 2021. Excluding PPP income, net interest income increased $5.6 million, or 17.6%, for the same period.
The net interest margin for the six months
ended June 30, 2022 was 3.21%, compared to 3.15% during the six months ended June 30, 2021. The net interest margin, on a tax-equivalent
basis, was 3.23% for the six months ended June 30, 2022, compared to 3.17% for the six months ended June 30, 2021. Excluding the
PPP income, the net interest margin increased from 3.01% for the six months ended June 30, 2021 to 3.16% for the six months ended
June 30, 2022.
The average yield on interest-earning assets
decreased seven basis points from 3.51% for the six months ended June 30, 2021 to 3.44% for the six months ended June 30, 2022.
During the six months ended June 30, 2022, the average cost of funds, including non-interest-bearing demand accounts and borrowings,
decreased 14 basis points from 0.36% for the six months ended June 30, 2021 to 0.22% for the six months ended June 30, 2022. For
the six months ended June 30, 2022, the average cost of core deposits, including non-interest-bearing demand deposits, decreased
six basis points from 0.20% for the six months ended June 30, 2021 to 0.14% for the six months ended June 30, 2022. The average
cost of time deposits decreased 28 basis points from 0.62% for the six months ended June 30, 2021 to 0.34% during the same period
in 2022. The average cost of borrowings, which include FHLB advances and subordinated debt, increased 184 basis points from 2.47%
for the six months ended June 30, 2021 to 4.31% for the six months ended June 30, 2022. For the six months ended June 30, 2022,
average demand deposits, an interest-free source of funds, increased $51.8 million, or 8.9%, from $582.5 million, or 27.4% of total
average deposits, for the six months ended June 30, 2021, to $634.4 million, or 28.0% of total average deposits.
During the six months ended June 30, 2022,
average interest-earning assets increased $99.2 million, or 4.3%, to $2.4 billion. The increase in average interest-earning assets
was due to an increase in average loans of $5.0 million, or 0.3%, as well as an increase in average securities of $158.3 million,
or 58.5%. Both were partially offset by a decrease of $64.1 million, or 61.1%, in short-term investments. Excluding average PPP
loans, average interest-earning assets increased $251.2 million, or 11.8%, and average loans increased $157.0 million, or 8.9%.
Provision for Loan Losses.
For the six months ended June 30, 2022,
the credit for loan losses decreased $1.0 million, or 88.9%, from $1.1 million for the six months ended June 30, 2021 to $125,000
for the six months ended June 30, 2022. During the six months ended June 30, 2021, the Company adjusted its qualitative factors
related to the impact of the COVID-19 pandemic and other economic trends used in the Company’s allowance calculation, which
resulted in a credit for loan losses of $1.1 million. The Company recorded net charge-offs of $102,000 for the six months ended
June 30, 2022, as compared to net charge-offs of $162,000 for the six months ended June 30, 2021.
Although we believe that we have established
and maintained the allowance for loan losses at adequate levels, future adjustments may be necessary if economic, real estate and
other conditions differ substantially from the current operating environment. If the COVID-19 pandemic has an adverse effect on
the ability of our borrowers to satisfy their obligations to us, the demand for our loans or our other products and services, other
aspects of our business operations, or on financial markets, real estate markets, or economic growth, this could, depending on
the extent of the loan defaults, materially and adversely affect our liquidity and financial condition and our results of operations
could be materially and adversely affected.
Non-interest Income.
For the six months ended June 30, 2022,
non-interest income was $5.1 million, compared to $5.4 million for the six months ended June 30, 2021. During the same period,
service charges and fees increased $562,000, or 14.2%. Other income from loan-level swap fees on commercial loans decreased $37,000,
or 63.8%, and income from bank-owned life insurance decreased $35,000, or 3.7%. Mortgage banking income was $469,000 for the six
months ended June 30, 2021 due to the sale of fixed rate residential real estate loans to the secondary market. The Company sold
$17.6 million of low coupon residential real estate loans to the secondary market during the six months ended June 30, 2021, compared
to $277,000 during the six months ended June 30, 2022.
During the six months ended June 30, 2022,
the Company reported unrealized losses on marketable equity securities of $501,000, compared to unrealized losses of $83,000 during
the six months ended June 30, 2021. During the six months ended June 30, 2022, the Company also reported realized losses on the
sale of securities of $4,000, compared to realized losses of $74,000 on the sale of securities during the six months ended June
30, 2021. The Company reported a gain of $141,000 on non-marketable equity investments during the six months ended June 30, 2022,
compared to $546,000 during the six months ended June 30, 2021. Gains and losses from the investment portfolio vary from quarter
to quarter based on market conditions, as well as the related yield curve and valuation changes.
During the six months ended June 30, 2021,
the Company recognized a loss on interest rate swap termination of $402,000 representing the unamortized portion of a $3.4 million
loss associated with the previous termination of a $32.5 million interest rate swap on March 16, 2016. The unamortized portion
of the loss was previously reported in accumulated other comprehensive income and amortized through interest expense, however,
as the previously hedged item was discontinued, the Company accelerated the remaining unamortized loss.
Non-interest Expense.
For the six months ended June 30, 2022,
non-interest expense increased $1.9 million, or 7.0%, to $28.9 million, compared to $27.0 million for the six months ended June
30, 2021. The increase in non-interest expense was primarily due to an increase in salaries and employee benefits of $739,000,
or 4.7%, due to normal annual salary increases as well as higher compensation incentive costs to support overall franchise growth.
The increase in salary related expenses was also partially due to a decrease of $279,000 in deferred direct origination costs associated
with Round 3 of PPP loans. The origination costs were recorded against salary expense during the six months ended June 30, 2021.
Other non-interest expense increased $702,000,
or 17.5%, professional fees increased $163,000, or 14.4%, occupancy expense increased $152,000, or 6.4%, advertising expense increased
$126,000, or 18.4%, furniture and equipment expense increased $79,000, or 7.9%, data processing expenses decreased $25,000, or
1.7%, and FDIC insurance expense decreased $3,000, or 0.6%. During the six months ended June 30, 2021, the Company prepaid $32.5
million of FHLB borrowings resulting in a loss of $45,000. For the six months ended June 30, 2022, the adjusted efficiency ratio,
a non-GAAP financial measure, was 66.4%, compared to 65.3% for the six months ended June 30, 2021. The adjusted efficiency ratio
is a non-GAAP measure. See “Explanation of Use of Non-GAAP Financial Measurements” for the related efficiency ratio
calculation and a reconciliation of GAAP to non-GAAP financial measures.
Income Taxes.
Income tax expense for the six months ended
June 30, 2022 was $3.6 million, representing an effective tax rate of 24.7%, compared to $3.9 million, representing an effective
tax rate of 25.5%, for six months ended June 30, 2021.
Explanation of Use of Non-GAAP Financial
Measurements.
We believe that it is common practice in
the banking industry to present interest income and related yield information on tax-exempt loans and securities on a tax-equivalent
basis, as well as presenting tangible book value per share and adjusted efficiency ratio, and that such information is useful to
investors because it facilitates comparisons among financial institutions. However, the adjustment of interest income and yields
on tax-exempt loans and securities to a tax-equivalent amount, as well as the presentation of tangible book value per share and
adjusted efficiency ratio, may be considered to include financial information that is not in compliance with GAAP. A reconciliation
from GAAP to non-GAAP is provided below.
| |
Three Months Ended | | |
Six Months Ended | |
| |
June 30, 2022 | | |
June 30, 2021 | | |
June 30, 2022 | | |
June 30, 2021 | |
| |
(In thousands) | |
| |
| | |
| | |
| | |
| |
Loans (no tax adjustment) | |
$ | 18,500 | | |
$ | 18,321 | | |
$ | 36,447 | | |
$ | 37,441 | |
Tax-equivalent adjustment (1) | |
| 124 | | |
| 104 | | |
| 244 | | |
| 207 | |
Loans (tax-equivalent basis) | |
$ | 18,624 | | |
$ | 18,425 | | |
$ | 36,691 | | |
$ | 37,648 | |
| |
| | | |
| | | |
| | | |
| | |
Securities (no tax adjustment) | |
$ | 2,068 | | |
$ | 1,277 | | |
$ | 4,018 | | |
$ | 2,131 | |
Tax-equivalent adjustment (1) | |
| — | | |
| 1 | | |
| — | | |
| — | |
Securities (tax-equivalent basis) | |
$ | 2,068 | | |
$ | 1,278 | | |
$ | 4,018 | | |
$ | 2,131 | |
| |
| | | |
| | | |
| | | |
| | |
Net interest income (no tax adjustment) | |
$ | 19,392 | | |
$ | 17,804 | | |
$ | 38,090 | | |
$ | 35,830 | |
Tax-equivalent adjustment (1) | |
| 124 | | |
| 105 | | |
| 244 | | |
| 207 | |
Net interest income (tax-equivalent basis) | |
$ | 19,516 | | |
$ | 17,909 | | |
$ | 38,334 | | |
$ | 36,037 | |
| |
Three Months Ended | | |
Six Months Ended | |
| |
June 30, 2022 | | |
June 30, 2021 | | |
June 30, 2022 | | |
June 30, 2021 | |
| |
(In thousands) | |
| |
| | |
| | |
| | |
| |
Loans (no tax adjustment) | |
| 3.81 | % | |
| 3.84 | % | |
| 3.82 | % | |
| 3.94 | % |
Loans (tax-equivalent basis) | |
| 3.83 | % | |
| 3.87 | % | |
| 3.85 | % | |
| 3.96 | % |
Securities (no tax adjustment) | |
| 2.00 | % | |
| 1.74 | % | |
| 1.94 | % | |
| 1.65 | % |
Securities (tax-equivalent basis) | |
| 2.00 | % | |
| 1.74 | % | |
| 1.94 | % | |
| 1.65 | % |
| |
| | | |
| | | |
| | | |
| | |
Interest rate spread (no tax adjustment) | |
| 3.15 | % | |
| 2.92 | % | |
| 3.12 | % | |
| 3.00 | % |
Net interest margin (no tax adjustment) | |
| 3.24 | % | |
| 3.06 | % | |
| 3.21 | % | |
| 3.15 | % |
Net interest margin (tax-equivalent) | |
| 3.26 | % | |
| 3.08 | % | |
| 3.23 | % | |
| 3.17 | % |
| |
| | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | |
Net interest income (no tax adjustment) | |
$ | 19,392 | | |
$ | 17,804 | | |
$ | 38,090 | | |
$ | 35,830 | |
Less: | |
| | | |
| | | |
| | | |
| | |
Purchase accounting adjustments | |
| 64 | | |
| (33 | ) | |
| 103 | | |
| (78 | ) |
Prepayment penalties and fees | |
| 26 | | |
| 117 | | |
| 48 | | |
| 152 | |
PPP fee income | |
| 129 | | |
| 1,627 | | |
| 691 | | |
| 4,038 | |
Adjusted net interest income (non-GAAP) | |
$ | 19,173 | | |
$ | 16,093 | | |
$ | 37,248 | | |
$ | 31,718 | |
| |
| | | |
| | | |
| | | |
| | |
Average interest-earning assets | |
$ | 2,398,526 | | |
$ | 2,330,311 | | |
$ | 2,392,264 | | |
$ | 2,293,099 | |
Average interest-earnings asset, excluding average PPP loans | |
$ | 2,395,463 | | |
$ | 2,174,716 | | |
$ | 2,383,226 | | |
$ | 2,132,050 | |
| |
| | | |
| | | |
| | | |
| | |
Adjusted net interest margin, excluding purchase accounting adjustments, PPP fee income, prepayment penalties and average PPP loans (non-GAAP) | |
| 3.21 | % | |
| 2.97 | % | |
| 3.16 | % | |
| 2.99 | % |
| |
| | | |
| | | |
| | | |
| | |
Book Value per Share (GAAP) | |
$ | 9.58 | | |
$ | 9.29 | | |
$ | 9.58 | | |
$ | 9.29 | |
Non-GAAP adjustments: | |
| | | |
| | | |
| | | |
| | |
Goodwill | |
| (0.55 | ) | |
| (0.52 | ) | |
| (0.55 | ) | |
| (0.52 | ) |
| |
| | | |
| | | |
| | | |
| | |
Core deposit intangible | |
| (0.11 | ) | |
| (0.11 | ) | |
| (0.11 | ) | |
| (0.11 | ) |
Tangible Book Value per Share (non-GAAP) | |
$ | 8.92 | | |
$ | 8.66 | | |
$ | 8.92 | | |
$ | 8.66 | |
| |
| | | |
| | | |
| | | |
| | |
Income Before Income Taxes (GAAP) | |
$ | 7,400 | | |
$ | 7,739 | | |
$ | 14,415 | | |
$ | 15,367 | |
| |
| | | |
| | | |
| | | |
| | |
Provision (credit) for loan losses | |
| 300 | | |
| (1,200 | ) | |
| (125 | ) | |
| (1,125 | ) |
Income Before Taxes and Provision (non-GAAP) | |
$ | 7,700 | | |
$ | 6,539 | | |
$ | 14,290 | | |
$ | 14,242 | |
| |
| | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | |
Non-interest Expense (GAAP) | |
$ | 14,433 | | |
$ | 13,674 | | |
$ | 28,889 | | |
$ | 27,001 | |
Non-GAAP adjustments: | |
| | | |
| | | |
| | | |
| | |
Loss on prepayment of borrowings | |
| — | | |
| (45 | ) | |
| — | | |
| (45 | ) |
Non-interest Expense for Efficiency Ratio (non-GAAP) | |
$ | 14,433 | | |
$ | 13,629 | | |
$ | 28,889 | | |
$ | 26,956 | |
| |
Three Months Ended | | |
Six Months Ended | |
| |
June 30, 2022 | | |
June 30, 2021 | | |
June 30, 2022 | | |
June 30, 2021 | |
| |
(In thousands) | |
| |
| | |
| | |
| | |
| |
Net Interest Income (GAAP) | |
$ | 19,392 | | |
$ | 17,804 | | |
$ | 38,090 | | |
$ | 35,830 | |
| |
| | | |
| | | |
| | | |
| | |
Non-interest Income (GAAP) | |
$ | 2,741 | | |
$ | 2,409 | | |
$ | 5,089 | | |
$ | 5,413 | |
Non-GAAP adjustments: | |
| | | |
| | | |
| | | |
| | |
Loss on securities, net | |
| — | | |
| 12 | | |
| 4 | | |
| 74 | |
Unrealized loss (gain) on marketable equity securities | |
| 225 | | |
| (6 | ) | |
| 501 | | |
| 83 | |
Loss on interest rate swap termination | |
| — | | |
| 402 | | |
| — | | |
| 402 | |
Gain on non-marketable equity investments | |
| (141 | ) | |
| — | | |
| (141 | ) | |
| (546 | ) |
Non-interest Income for Adjusted Efficiency Ratio
(non-GAAP) | |
$ | 2,825 | | |
$ | 2,817 | | |
$ | 5,453 | | |
$ | 5,426 | |
Total Revenue for Adjusted Efficiency Ratio (non-GAAP) | |
$ | 22,217 | | |
$ | 20,621 | | |
$ | 43,543 | | |
$ | 41,256 | |
| |
| | | |
| | | |
| | | |
| | |
Efficiency Ratio (GAAP) | |
| 65.21 | % | |
| 67.65 | % | |
| 66.91 | % | |
| 65.47 | % |
| |
| | | |
| | | |
| | | |
| | |
Adjusted Efficiency Ratio (Non-interest Expense (GAAP)/Total Revenue for Adjusted Efficiency Ratio (non-GAAP)) | |
| 64.96 | % | |
| 66.09 | % | |
| 66.35 | % | |
| 65.34 | % |
| (1) | The tax equivalent adjustment is based upon a 21% tax
rate. |
Liquidity and Capital
Resources.
The term “liquidity” refers
to our ability to generate adequate amounts of cash to fund loan originations, loan purchases, deposit withdrawals and operating
expenses. Our primary sources of liquidity are deposits, scheduled amortization and prepayments of loan principal and mortgage-backed
securities, maturities and calls of investment securities and funds provided by our operations. We also can borrow funds from the
FHLB based on eligible collateral of loans and securities. Our material cash commitments include funding loan originations, fulfilling
contractual obligations with third-party service providers, maintaining operating leases for certain of our Bank properties and
satisfying repayment of our long-term debt obligations.
Primary Sources of Liquidity
At June 30, 2022 and December 31, 2021,
outstanding borrowings from the FHLB were $1.4 million and $2.7 million, respectively. At June 30, 2022, we had $473.2 million
in available borrowing capacity with the FHLB. We have the ability to increase our borrowing capacity with the FHLB by pledging
investment securities or additional loans.
In addition, we have available lines of
credit of $15.0 million and $50.0 million with other correspondent banks. Interest rates on these lines are determined and reset
on a daily basis by each respective bank. At June 30, 2022 and December 31, 2021, we did not have an outstanding balance under
either of these lines of credit. In addition, we may enter into reverse repurchase agreements with approved broker-dealers. Reverse
repurchase agreements are agreements that allow us to borrow money using our securities as collateral.
We also have outstanding at any time, a
significant number of commitments to extend credit and provide financial guarantees to third parties. These arrangements are subject
to strict credit control assessments. Guarantees specify limits to our obligations. Because many commitments and almost all guarantees
expire without being funded in whole or in part, the contract amounts are not estimates of future cash flows. We are also obligated
under agreements with the FHLB to repay borrowed funds and are obligated under leases for certain of our branches and equipment.
Maturing investment securities are a relatively
predictable source of funds. However, deposit flows, calls of securities and prepayments of loans and mortgage-backed securities
are strongly influenced by interest rates, general and local economic conditions and competition in the marketplace. These factors
reduce the predictability of the timing of these sources of funds.
The Company’s primary activities
are the origination of commercial real estate loans, commercial and industrial loans and residential real estate loans, as well
as and the purchase of mortgage-backed and other investment securities. During the six months ended June 30, 2022 and 2021, we
originated $207.2 million and $236.5 million in loans, respectively. We purchased securities totaling $24.8 million for the six
months ended June 30, 2022 and $174.0 million for the six months ended June 30, 2021. At June 30, 2022, the Company had approximately
$179.2 million in loan commitments and letters of credit to borrowers and approximately $323.3 million in available home equity
and other unadvanced lines of credit.
Deposit in flows and out flows are affected
by the level of interest rates, the products and interest rates offered by competitors and by other factors. At June 30, 2022,
time deposit accounts scheduled to mature within one year totaled $296.0 million. Based on the Company’s deposit retention
experience and current pricing strategy, we anticipate that a significant portion of these time deposits will remain on deposit.
We monitor our liquidity position frequently and anticipate that it will have sufficient funds to meet our current funding commitments
for the next 12 months and beyond.
Material Cash Commitments
The Company entered into a long-term contractual
obligation with a vendor for use of its core provider and ancillary services beginning in 2016. Total remaining contractual obligations
outstanding with this vendor as of June 30, 2022 were estimated to be $12.0 million, with $4.5 million expected to be paid within
one year and the remaining $7.5 million to be paid within the next five years. Further, the Company has operating leases for certain
of its banking offices and ATMs. Our leases have remaining lease terms of less than one year to seventeen years, some of which
include options to extend the leases for additional five-year terms up to fifteen years. Lease liabilities totaled $9.7 million
as of June 30, 2022. Principal payments expected to be made on our lease liabilities during the twelve months ended June 30, 2023
are $1.3 million. The remaining lease liability payments totaled $8.4 million and are expected to be made after June 30, 2023.
In addition, the Company completed an offering
of $20 million in aggregate principal amount of its Notes to certain qualified institutional buyers in a private placement transaction
on April 20, 2021. For more information on the Notes, refer to the information contained in Note 9 “Subordinated Debt”
of the unaudited consolidated financial statements included above.
We do not anticipate
any material capital expenditures during the rest of 2022, except in pursuance of the Company’s strategic initiatives. The
Company does not have any balloon or other payments due on any long-term obligations or any off-balance sheet items other than
the commitments and unused lines of credit noted above.
At June 30, 2022, we
exceeded each of the applicable regulatory capital requirements. As of June 30, 2022, the most recent notification from the Office
of Comptroller of the Currency categorized the Bank as “well-capitalized” under the regulatory framework for prompt
corrective action. To be categorized as “well-capitalized,” the Bank must maintain minimum total risk-based, Tier 1
risk-based, Common Equity Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the following table. There are no conditions
or events since that notification that management believes would change our category.
| |
Actual | | |
Minimum For Capital Adequacy Purpose | | |
Minimum To Be Well Capitalized | |
| |
Amount | | |
Ratio | | |
Amount | | |
Ratio | | |
Amount | | |
Ratio | |
| |
(Dollars in thousands) | |
June 30, 2022 | |
| | |
| | |
| | |
| | |
| | |
| |
Total Capital (to Risk Weighted Assets): | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Consolidated | |
$ | 267,084 | | |
| 13.69 | % | |
$ | 156,026 | | |
| 8.00 | % | |
| N/A | | |
| N/A | |
Bank | |
| 252,707 | | |
| 12.98 | | |
| 155,750 | | |
| 8.00 | | |
$ | 194,687 | | |
| 10.00 | % |
Tier 1 Capital (to Risk Weighted Assets): | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Consolidated | |
| 227,871 | | |
| 11.68 | | |
| 117,019 | | |
| 6.00 | | |
| N/A | | |
| N/A | |
Bank | |
| 233,147 | | |
| 11.98 | | |
| 116,812 | | |
| 6.00 | | |
| 155,750 | | |
| 8.00 | |
Common Equity Tier 1 Capital (to Risk Weighted Assets) | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Consolidated | |
| 227,871 | | |
| 11.68 | | |
| 87,764 | | |
| 4.50 | | |
| N/A | | |
| N/A | |
Bank | |
| 233,147 | | |
| 11.98 | | |
| 87,609 | | |
| 4.50 | | |
| 126,547 | | |
| 6.50 | |
Tier 1 Leverage Ratio (to Adjusted Average Assets): | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Consolidated | |
| 227,871 | | |
| 8.91 | | |
| 102,350 | | |
| 4.00 | | |
| N/A | | |
| N/A | |
Bank | |
| 233,147 | | |
| 9.13 | | |
| 102,182 | | |
| 4.00 | | |
| 127,728 | | |
| 5.00 | |
December 31, 2021 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total Capital (to Risk Weighted Assets): | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Consolidated | |
$ | 261,093 | | |
| 14.27 | % | |
$ | 146,347 | | |
| 8.00 | % | |
| N/A | | |
| N/A | |
Bank | |
| 243,788 | | |
| 13.35 | | |
| 146,135 | | |
| 8.00 | | |
$ | 182,669 | | |
| 10.00 | |
Tier 1 Capital (to Risk Weighted Assets): | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Consolidated | |
| 221,673 | | |
| 12.12 | | |
| 109,761 | | |
| 6.00 | | |
| N/A | | |
| N/A | |
Bank | |
| 224,001 | | |
| 12.26 | | |
| 109,601 | | |
| 6.00 | | |
| 146,135 | | |
| 8.00 | |
Common Equity Tier 1 Capital (to Risk Weighted Assets): | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Consolidated | |
| 221,673 | | |
| 12.12 | | |
| 82,320 | | |
| 4.50 | | |
| N/A | | |
| N/A | |
Bank | |
| 224,001 | | |
| 12.26 | | |
| 82,201 | | |
| 4.50 | | |
| 118,735 | | |
| 6.50 | |
Tier 1 Leverage Ratio (to Adjusted Average Assets): | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Consolidated | |
| 221,673 | | |
| 8.75 | | |
| 101,320 | | |
| 4.00 | | |
| N/A | | |
| N/A | |
Bank | |
| 224,001 | | |
| 8.86 | | |
| 101,101 | | |
| 4.00 | | |
| 126,377 | | |
| 5.00 | |
We also have outstanding, at any time,
a significant number of commitments to extend credit and provide financial guarantees to third parties. These arrangements are
subject to strict credit control assessments. Guarantees specify limits to our obligations. Because many commitments and almost
all guarantees expire without being funded in whole or in part, the contract amounts are not estimates of future cash flows.
OFF-BALANCE SHEET ARRANGEMENTS.
The Company does not have any off-balance
sheet arrangements, other than noted above under Material Cash Commitments, that have or are reasonably likely to have a current
or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources that is material to investors.