NORWOOD FINANCIAL CORP. Forward-Looking Statements
This Quarterly Report on Form 10-Q may include certain forward-looking statements based on current management expectations. Such forward-looking statements may be identified by reference to a future period or periods or by the use of forward-looking terminology, such as "may", "will", "believe", "expect", "estimate", "anticipate", "continue", or similar terms or variations on those terms, or the negative of those terms. The actual results of the Company could differ materially from those management expectations. This includes statements regarding general economic conditions, public health crisis such as the governmental, social and economic effects of the novel coronavirus, legislative and regulatory changes, monetary and fiscal policies of the federal government, changes in tax policies, rates and regulations of federal, state and local tax authorities and failure to integrate or profitably operate acquired businesses. Additional potential factors include changes in interest rates, the rate of inflation, deposit flows, cost of funds, demand for loan products and financial services, competition and changes in the quality or composition of loan and investment portfolios of the Company. Other factors that could cause future results to vary from current management expectations include changes in accounting principles, policies or guidelines, and other economic, competitive, governmental and technological factors affecting the Company's operations, markets, products, services and prices. Further description of the risks and uncertainties to the business are included in the Company's other filings with theSecurities and Exchange Commission . 30 -------------------------------------------------------------------------------- In addition, the COVID-19 pandemic has had, and may continue to have, an adverse impact on the Company and the communities it serves. Given its ongoing and dynamic nature, it is difficult to predict the full impact of the COVID-19 pandemic on our business. The extent of such impact will depend on future developments, which are highly uncertain, including whether the coronavirus can continue to be controlled and abated. As the result of the COVID-19 pandemic and the related adverse local and national economic consequences, we could be subject to any of the following risks, any of which could have a material, adverse effect on our business, financial condition, liquidity, and results of operations: the demand for our products and services may decline, making it difficult to grow assets and income; if the economy worsens, loan delinquencies, problem assets, and foreclosures may increase, resulting in increased charges and reduced income; collateral for loans, especially real estate, may decline in value, which could cause loan losses to increase; our allowance for credit losses may increase if borrowers experience financial difficulties, which will adversely affect our net income; the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us; due to a decline in our stock price or other factors, goodwill may become impaired and be required to be written down; and our cyber security risks are increased as the result of an increase in the number of employees working remotely. The majority of the assets and liabilities of a financial institution are monetary in nature, and therefore, differ greatly from most commercial and industrial companies that have significant investments in fixed assets or inventories. However, inflation does have an impact on the Company, particularly with respect to the growth of total assets and noninterest expenses, which tend to rise during periods of general inflation. Risks also exist due to supply and demand imbalances, employment shortages, the interest rate environment, and geopolitical tensions. It is reasonably foreseeable that estimates made in the financial statements could be materially and adversely impacted in the near term as a result of these conditions, including expected credit losses on loans and the fair value of financial instruments that are carried at fair value. Except as required by applicable law or regulation, the Company does not undertake, and specifically disclaims any obligation, to release publicly the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of the statements or to reflect the occurrence of anticipated or unanticipated events.
Critical Accounting Policies
Note 2 to the Company's consolidated financial statements for the fiscal year endedDecember 31, 2021 (included in Item 8 of the Annual Report on Form 10-K for the fiscal year endedDecember 31, 2021 ) lists significant accounting policies used in the development and presentation of its financial statements. This discussion and analysis, the significant accounting policies, and other financial statement disclosures identify and address key variables and other qualitative and quantitative factors that are necessary for an understanding and evaluation of the Company and its results of operations. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the valuation of deferred tax assets, the fair value of financial instruments, the determination of other-than-temporary impairment on securities and the determination of goodwill impairment. Please refer to the discussion of the allowance for loan losses calculation under "Loans" in the "Changes in Financial Condition" section. The Company uses the modified prospective transition method to account for stock options. Under this method companies are required to record compensation expense, based on the fair value of options over the vesting period. Restricted shares vest over a five-year period. The product of the number of shares granted and the grant date market price of the Company's common stock determines the fair value of restricted stock. Deferred income taxes reflect temporary differences in the recognition of the revenue and expenses for tax reporting and financial statement purposes, principally because certain items are recognized in different periods for financial reporting and tax return purposes. Although realization is not assured, the Company believes that it is more likely than not that all deferred tax assets will be realized. The fair value of financial instruments is based upon quoted market prices, when available. For those instances where a quoted price is not available, fair values are based upon observable market based parameters as well as unobservable parameters. Any such valuation is applied consistently over time.
Management determines the appropriate classification of debt securities at the time of purchase and re-evaluates such designation as of each Consolidated Balance Sheet date.
Declines in the fair value of available for sale securities below their cost
that are deemed to be other than temporary are reflected in earnings as realized
losses. In estimating other-than-temporary impairment losses, the Company
considers (1) the length of time and the extent to which the fair value has been
less than cost, (2) the financial condition and near-term prospects of the
issuer, and (3) the intent of the Company to not sell the securities and whether
it is more likely than not that it will not have to sell the
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securities before recovery of their cost basis. The Company believes that all
unrealized losses on securities at June 30, 2022 and December 31, 2021 represent
temporary impairment of the securities, related to changes in interest rates.
In connection with acquisitions, the Company recorded goodwill in the amount of
$29.3 million , representing the excess of amounts paid over the fair value of
net assets of the institutions acquired in purchase transactions, at its fair
value at the date of acquisition. Goodwill is tested and deemed impaired when
the carrying value of goodwill exceeds its implied fair value. The value of the
goodwill can change in the future. We expect the value of the goodwill to
decrease if there is a significant decrease in the franchise value of the
Company or the Bank. If an impairment loss is determined in the future, we will
reflect the loss as an expense for the period in which the impairment is
determined, leading to a reduction of our net income for that period by the
amount of the impairment loss.
Changes in Financial Condition
General
Total assets as ofJune 30, 2022 were$2.066 billion compared to$2.069 billion as ofDecember 31, 2021 . The decrease was due primarily to a$105.9 million decrease in interest-bearing deposits with banks. Interest-bearing balances with banks decreased as overnight liquidity was utilized to fund growth in loans and securities, and to pay off long-term borrowings. The decrease was partially offset by a 34.1 million increase in securities available for sale, and a$49.4 million increase in loans receivable.
Securities
The fair value of securities available for sale as ofJune 30, 2022 was$440.9 million compared to$406.8 million as ofDecember 31, 2021 . The increase in the securities portfolio is the result of purchases executed to invest excess liquidity and to provide pledging for public deposits. The Company has securities in an unrealized loss position. In management's opinion, the unrealized losses reflect changes in interest rates subsequent to the acquisition of specific securities. Management believes that the unrealized losses on all holdings represent temporary impairment of the securities, as the Company has the intent and ability to hold these investments until maturity or market price recovery. Loans
Loans receivable totaled
The allowance for loan losses totaled$17,017,000 as ofJune 30, 2022 , and represented 1.21% of total loans outstanding, compared to$16,442,000 , or 1.21% of total loans outstanding, atDecember 31, 2021 . The Company had net charge-offs for the six months endedJune 30, 2022 of$25,000 , compared to$810,000 in the corresponding period in 2021. The Company's management assesses the adequacy of the allowance for loan losses on a quarterly basis. The process includes an analysis of the risks inherent in the loan portfolio. It includes an analysis of impaired loans and a historical review of credit losses by loan type. Other factors considered include concentration of credit in specific industries, economic and industry conditions, trends in delinquencies and loan classifications, and loan growth. In addition, management has included qualitative factors during 2022 which are specifically related to the economic impact of the COVID-19 pandemic. Management considers the allowance for loan losses adequate atJune 30, 2022 based on the Company's criteria. However, there can be no assurance that the allowance for loan losses will be adequate to cover significant losses, if any, which might be incurred in the future. As ofJune 30, 2022 , non-performing loans totaled$672,000 or 0.05% of total loans compared to$734,000 , or 0.05%, of total loans atDecember 31, 2021 . AtJune 30, 2022 , non-performing assets totaled$1,018,000 , or 0.05%, of total assets, compared to$2,476,000 , or 0.12%, of total assets atDecember 31, 2021 . The decrease in non-performing assets during the six month period endedJune 30, 2022 , was due to sales of properties included in foreclosed real estate. 32
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The following table sets forth information regarding non-performing loans and foreclosed real estate at the dates indicated:
(dollars in thousands) June 30, 2022 December 31, 2021 Loans accounted for on a non-accrual basis: Real Estate Residential $ 456 $ 469 Commercial 49 103 Agricultural - - Construction - - Commercial and financial loans 13
16
Other agricultural loans -
-
Consumer loans to individuals 154
55
Total non-accrual loans 672
643
Accruing loans which are contractually past due 90 days or more - 91 Total non-performing loans 672 734 Foreclosed real estate 346 1,742 Total non-performing assets $ 1,018 $ 2,476 Purchased credit impaired loans (a) $ 6,631 $ 8,304 Allowance for loans losses$ 17,017 $ 16,442 Coverage of non-performing loans (a) (b) 2,532% % 2,240% % Non-performing loans to total loans(a) 0.05 % 0.05 % Non-performing loans to total assets(a) 0.03 % 0.03 % Non-performing assets to total assets(a) 0.05 %
0.12 %
(a) Purchased impaired loans are loans obtained in acquisition transactions that as of the acquisition date were specifically identified as displaying signs of credit deterioration and for which the Company did not expect to collect all contractually required principal and interest payments. Those loans were impaired at the date of acquisition, were recorded at estimated fair value and were generally delinquent in payments. The Company estimated the timing and amount of expected cash flows in excess of the estimated fair value and established an accretable discount on the acquisition date relating to these impaired loans that is recognized in interest income.
(b) For loans acquired with specific evidence of deterioration in credit quality, a specific credit fair value adjustment is established at the date of acquisition and will not impact the allowance for loan losses unless actual losses exceed the established fair value adjustment.
Deposits
During the six-month period ended
The following table sets forth deposit balances as of the dates indicated:
(dollars in thousands)
440,652
Interest-bearing demand 248,298 196,786
Money market deposit accounts 314,457 309,439
Savings 300,932 281,214
Time deposits <$250,000 282,381 271,464
Time deposits >$250,000 210,771 257,238
Total $ 1,799,830 $ 1,756,793
Borrowings
Other borrowings as of June 30, 2022 , totaled $4.4 million compared to
$30.0 million as of December 31, 2021 . The decrease reflects the early payoff of
$21.1 million Federal Home Loan Bank term borrowings. A prepayment fee of $3,000
was
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recognized in other expense during the six months ended
Other borrowings consisted of the following:
(dollars in thousands) June 30, 2022 December 31, 2021
Notes with the FHLB:
Amortizing fixed rate borrowing due March 2022 at 1.75% $ - $ 227
Amortizing fixed rate borrowing due August 2022 at 1.94% - 1,364
Amortizing fixed rate borrowing due October 2022 at 1.88% - 1,386
Amortizing fixed rate borrowing due October 2023 at 3.24% 2,827 3,856
Amortizing fixed rate borrowing due December 2023 at 3.22% 1,585 2,097
Fixed rate term borrowing due December 2023 at 1.95% - 10,000
Amortizing fixed rate borrowing due December 2023 at 1.73% - 5,190
Amortizing fixed rate borrowing due April 2024 at 0.91% - 5,878
$ 4,412 $ 29,998
Stockholders' Equity and Capital Ratios
As ofJune 30, 2022 , stockholders' equity totaled$173.8 million , compared to$205.3 million as ofDecember 31, 2021 . The net change in stockholders' equity included$14.0 million of net income, which was partially offset by$4.6 million of dividends declared. In addition, total equity decreased$40.0 million due to a decrease in the fair value of securities in the available for sale portfolio, net of tax. This decrease in fair value is the result of a change in interest rates and spreads, which may impact the value of the securities. Because of interest rate volatility, the Company's accumulated other comprehensive income could materially fluctuate for each interim and year-end period. A comparison of the Company's consolidated regulatory capital ratios is as follows: June 30, 2022 December 31, 2021 Tier 1 Capital (To average assets) 8.93% 8.51% Tier 1 Capital (To risk-weighted assets) 12.34% 12.49% Common Equity Tier 1 Capital (To risk-weighted assets) 12.34% 12.49% Total Capital (To risk-weighted assets) 13.49% 13.66% EffectiveJanuary 1, 2015 , the Company and the Bank became subject to new regulatory capital rules, which, among other things, impose a new common equity Tier 1 minimum capital requirement (4.5% of risk-weighted assets), set the minimum leverage ratio for all banking organizations at a uniform 4% of total assets, increase the minimum Tier 1 capital to risk-based assets requirement (from 4% to 6% of risk-weighted assets) and assign a higher risk weight (150%) to exposures that are more than 90 days past due or are on nonaccrual status and to certain commercial real estate facilities that finance the acquisition, development or construction of real property. The new rules also require unrealized gains and losses on certain "available-for-sale" securities holdings to be included for purposes of calculating regulatory capital requirements unless a one-time opt out is exercised which the Company and the Bank have done. The final rule limits a banking organization's dividends, stock repurchases and other capital distributions, and certain discretionary bonus payments to executive officers, if the banking organization does not hold a "capital conservation buffer" consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets above regulatory minimum risk-based requirements. The capital conservation buffer requirement was phased in beginningJanuary 1, 2016 and endingJanuary 1, 2019 , when the full capital conservation buffer requirement became effective. The Company and the Bank are in compliance with their respective new capital requirements, including the capital conservation buffer, as ofJune 30, 2022 . Liquidity As ofJune 30, 2022 , the Company had cash and cash equivalents of$109.7 million in the form of cash, due from banks and short-term deposits with other institutions. In addition, the Company had total securities available for sale of$440.9 million which could be used for liquidity needs. Total liquidity of$550.5 million as ofJune 30, 2022 , represents 26.6% of total assets compared to$613.5 million and 29.7% of total assets as ofDecember 31, 2021 . The Company also monitors other liquidity measures, all of which 34
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were within the Company's policy guidelines as of
Capital Resources
The Company has a line of credit commitment fromAtlantic Community Bankers Bank for$7,000,000 which expiresJune 30, 2023 . There were no borrowings under this line as ofJune 30, 2022 andDecember 31, 2021 .
The Company has a line of credit commitment available which has no stated
expiration date from PNC Bank for
The Company has a line of credit commitment available which has no stated
expiration date from
The Bank's maximum borrowing capacity with theFederal Home Loan Bank was approximately$640,650,000 as ofJune 30, 2022 , of which$4,412,000 was outstanding in the form of borrowings as ofJune 30, 2022 . As ofDecember 31, 2021 , the maximum borrowing capacity was$607,092,000 , of which$29,998,000 of borrowings was outstanding as ofDecember 31, 2021 . Additionally, as ofJune 30, 2022 , the Bank had secured Letters of Credit from theFederal Home Loan Bank in the amount of$104,050,000 as collateral for specific municipal deposits. These Letters of Credit reduce the availability under the maximum borrowing capacity. As ofDecember 31, 2021 , there was$127,850,000 outstanding in the form of Letters of Credit. Advances and Letters of Credit from theFederal Home Loan Bank are secured by qualifying assets of the Bank. Non-GAAP Financial Measures This report contains or references fully taxable-equivalent (fte) interest income and net interest income, which are non-GAAP financial measures. Interest income (fte) and net interest income (fte) are derived from GAAP interest income and net interest income using an assumed tax rate of 21%. We believe the presentation of interest income (fte) and net interest income (fte) ensures comparability of interest income and net interest income arising from both taxable and tax-exempt sources and is consistent with industry practice. Interest income (fte) and Net interest income (fte) is reconciled to GAAP interest income and net interest income on page 38. Fully taxable equivalent interest income and net interest income is also reflected in the table on page 39. Although the Company believes that these non-GAAP financial measures enhance investors' understanding of our business and performance, these non-GAAP financial measures should not be considered an alternative to GAAP measures. ? 35
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Results of Operations
Consolidated Average Balance Sheets with Resultant Interest and Rates
(Tax-Equivalent Basis, Three Months Ended June 30,
dollars in thousands) 2022 2021
Average Average Average Average
Balance Interest Rate Balance Interest Rate
(2) (1) (3) (2) (1) (3)
Assets
Interest-earning assets:
Interest-bearing deposits
with banks $ 86,793 $ 182 0.84% $ 176,530 $ 59 0.13%
Securities available for
sale:
Taxable 404,764 1,739 1.72 247,611 966 1.56
Tax-exempt (1) 80,002 580 2.90 64,084 494 3.08
Total securities available
for sale (1) 484,766 2,319 1.91 311,695 1,460 1.87
Loans receivable (1) (4)
(5) 1,385,679 15,780 4.56 1,401,890 16,208 4.62
Total interest-earning
assets 1,957,238 18,281 3.74 1,890,115 17,727 3.75
Non-interest earning
assets:
Cash and due from banks 24,720 22,455
Allowance for loan losses (16,802)
(15,143)
Other assets 78,339
114,023
Total non-interest earning assets 86,257 121,335 Total Assets$ 2,043,495 $ 2,011,450 Liabilities and Stockholders' Equity Interest-bearing liabilities: Interest-bearing demand and money market$ 539,946 $ 226 0.17$ 461,221 $ 214 0.19 Savings 306,086 52 0.07 266,832 41 0.06 Time 481,885 805 0.67 532,939 950 0.71 Total interest-bearing deposits 1,327,917 1,083 0.33 1,260,992 1,205 0.38 Short-term borrowings 68,901 60 0.35 77,592 73 0.38 Other borrowings 8,836 56 2.54 37,787 186 1.98 Total interest-bearing liabilities 1,405,654 1,199 0.34 1,376,371 1,464 0.43 Non-interest bearing liabilities: Demand deposits 440,996 421,499 Other liabilities 15,801 14,459 Total non-interest bearing liabilities 456,797 435,958 Stockholders' equity 181,044 199,121 Total Liabilities and Stockholders' Equity$ 2,043,495 $ 2,011,450
Net interest income/spread (tax equivalent basis) 17,082 3.40% 16,263 3.32% Tax-equivalent basis adjustment (188) (210) Net interest income$ 16,894 $ 16,053 Net interest margin (tax equivalent basis) 3.49% 3.44%
(1)Interest and yields are presented on a tax-equivalent basis using a marginal tax rate of 21%.
(2)Average balances have been calculated based on daily balances.
(3)Annualized
(4)Loan balances include non-accrual loans and are net of unearned income.
(5)Loan yields include the effect of amortization of deferred fees, net of costs.
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Rate/Volume Analysis. The following table shows the fully taxable equivalent
effect of changes in volumes and rates on interest income and interest expense.
Increase/(Decrease)
Three months ended June 30, 2022 Compared to
Three months ended June 30, 2021
Variance due to
Volume Rate Net
(dollars in thousands)
Interest-earning assets:
Interest-bearing deposits with banks $ (104) $ 227 $ 123
Securities available for sale:
Taxable 624 149 773
Tax-exempt securities 120 (34) 86
Total securities 744 115 859
Loans receivable (201) (227) (428)
Total interest-earning assets 439 115 554
Interest-bearing liabilities:
Interest-bearing demand and money market 36 (24) 12
Savings 5 6 11
Time (93) (52) (145)
Total interest-bearing deposits (52) (70) (122)
Short-term borrowings (8) (5) (13)
Other borrowings (144) 14 (130)
Total interest-bearing liabilities (204) (61) (265)
Net interest income (tax-equivalent basis) $ 643 $
176
Changes in net interest income that could not be specifically identified as either a rate or volume change were allocated proportionately to changes in volume and changes in rate.
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Comparison of Operating Results for the Three Months Ended
General For the three months endedJune 30, 2022 , net income totaled$6,855,000 compared to$5,755,000 earned in the similar period in 2021. The increase in net income for the three months endedJune 30, 2022 was due primarily to an$841,000 increase in net interest income and a$1,200,000 decrease in the provision for loan losses. Earnings per share for the three-months endedJune 30, 2022 were$0.84 per share for basic shares and fully diluted shares, compared to$0.70 per share for basic shares and for fully diluted shares for the three months endedJune 30, 2021 . The resulting annualized return on average assets and annualized return on average equity for the three months endedJune 30, 2022 were 1.35% and 15.19%, respectively, compared to 1.15% and 11.59%, respectively, for the same period in 2021.
The following table sets forth changes in net income:
(dollars in thousands) Three months
ended
June 30, 2022 to June 30, 2021
Net income three months ended June 30, 2021 $ 5,755
Change due to:
Net interest income 841
Provision for loan losses 1,200
Net gains on sales of securities and loans (109)
Service charges and fees
(57)
Earnings and proceeds on bank-owned life insurance
255
Other income
213
Salaries and employee benefits
(669)
Occupancy, furniture and equipment (20) All other expenses (291) Income tax expense (263) Net income three months ended June 30, 2022 $ 6,855 Net Interest Income Net interest income on a fully taxable equivalent basis (fte) for the three months endedJune 30, 2022 totaled$17,082,000 which was$819,000 higher than the comparable period in 2021. The increase in net interest income was due primarily to an$859,000 increase in interest income (fte) on securities due to purchases of securities. The fte net interest spread and net interest margin were 3.40% and 3.49%, respectively, for the three months endedJune 30, 2022 compared to 3.32% and 3.44%, respectively, for the same period in 2021. See "Non-GAAP Financial Measures" described above on page 37. For the three-months endedJune 30, 2022 , interest income (fte) totaled$18,281,000 with a yield on average earning assets of 3.74% compared to$17,727,000 and 3.75% for the 2021 period. Average loans decreased$16.2 million during the three-months endedJune 30, 2022 , over the comparable period of 2021, while average securities increased$173.1 million . Average earning assets totaled$1.957 billion for the three months endedJune 30, 2022 , an increase of$67.1 million over the average for the same period in 2021. See "Non-GAAP Financial Measures" described above on page 37. Interest expense for the three months endedJune 30, 2022 totaled$1,199,000 at an average cost of 0.34% compared to$1,464,000 and 0.43%, respectively, for the same period in 2021. The decrease in interest expense during the three-months endedJune 30, 2022 reflects the overall lower level of market interest rates. The average cost of time deposits, which is the most significant component of funding costs, decreased 0.04% compared to the same three-month period of last year. Provision for Loan Losses The Company's provision for loan losses for the three months endedJune 30, 2022 was$300,000 , compared to$1,500,000 for the three months endedJune 30, 2021 . The decreased provision reflects a reduction in certain qualitative factors related to the COVID-19 pandemic. The Company makes provisions for loan losses in an amount necessary to maintain the allowance for loan losses at an acceptable level. The Company recorded a net recovery of$57,000 for the quarter endedJune 30, 2022 , compared to a net charge-off of$669,000 for the similar period in 2021. AtJune 30, 2022 , the allowance for loan losses represented 1.21% of loans receivable. Additionally, the allowance for loan losses represented 2,532% of non-performing loans, excluding loans acquired with credit quality deterioration. 38
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Other Income
Other income totaled$2,489,000 for the three months endedJune 30, 2022 , compared to$2,187,000 for the same period in 2021. The increase was due primarily to a$255,000 increase in earnings and proceeds on bank-owned life insurance policies, and an$180,000 increase in other income. Gains on sales of loans decreased$109,000 , while all other categories of other income decreased$24,000 , net. Other Expense Other expense for the three months endedJune 30, 2022 totaled$10,472,000 which was$980,000 higher than the same period of 2021, due primarily to a$669,000 increase in salaries and employee benefits costs.
Income Tax Expense
Income tax expense totaled$1,756,000 for an effective tax rate of 20.4% for the three months endedJune 30, 2022 compared to$1,493,000 for an effective tax rate of 20.6% for the three months endedJune 30, 2021 . The decrease in the effective tax rate in the 2022 period reflects the increased level of tax-exempt income related to bank-owned life insurance. 39
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Results of Operations
Consolidated Average Balance Sheets with Resultant Interest and Rates
(Tax-Equivalent Basis, Six Months Ended June 30,
dollars in thousands) 2022 2021
Average Average Average Average
Balance Interest Rate Balance Interest Rate
(2) (1) (3) (2) (1) (3)
Assets
Interest-earning assets:
Interest bearing deposits
with banks $ 127,175 $ 260 0.41% $ 146,574 $ 102 0.14%
Securities available for
sale:
Taxable 384,364 3,205 1.67 219,807 1,735 1.58
Tax-exempt (1) 77,556 1,122 2.89 58,934 928 3.15
Total securities available
for sale (1) 461,920 4,327 1.87 278,741 2,663 1.91
Loans receivable (1) (4)
(5) 1,370,534 31,223 4.56 1,410,160 32,468 4.60
Total interest-earning
assets 1,959,629 35,810 3.65 1,835,475 35,233 3.84
Non-interest earning
assets:
Cash and due from banks 24,001 21,698
Allowance for loan losses (16,688)
(14,509)
Other assets 91,031
114,954
Total non-interest earning assets 98,344 122,143 Total Assets$ 2,057,973 $ 1,957,618 Liabilities and Stockholders' Equity Interest-bearing liabilities: Interest-bearing demand and money market$ 530,451 $ 428 0.16$ 442,601 $ 434 0.20 Savings 307,221 115 0.07 256,803 76 0.06 Time 491,079 1,599 0.65 533,068 1,949 0.73 Total interest-bearing deposits 1,328,751 2,142 0.32 1,232,472 2,459 0.40 Short-term borrowings 65,724 108 0.33 70,971 142 0.40 Other borrowings 18,567 195 2.10 39,330 388 1.97 Total interest-bearing liabilities 1,413,042 2,445 0.35 1,342,773 2,989 0.45 Non-interest bearing liabilities: Demand deposits 437,430 402,024 Other liabilities 15,411 14,634 Total non-interest bearing liabilities 452,841 416,658 Stockholders' equity 192,090 198,187 Total Liabilities and Stockholders' Equity$ 2,057,973 $ 1,957,618
Net interest income/spread (tax equivalent basis) 33,365 3.30% 32,244 3.39% Tax-equivalent basis adjustment (370) (415) Net interest income$ 32,995 $ 31,829 Net interest margin (tax equivalent basis) 3.41% 3.51%
(1)Interest and yields are presented on a tax-equivalent basis using a marginal tax rate of 21%.
(2)Average balances have been calculated based on daily balances.
(3)Annualized
(4)Loan balances include non-accrual loans and are net of unearned income.
(5)Loan yields include the effect of amortization of deferred fees, net of costs.
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Rate/Volume Analysis. The following table shows the fully taxable equivalent
effect of changes in volumes and rates on interest income and interest expense.
Increase/(Decrease)
Six months ended June 30, 2022 Compared to
Six months ended June 30, 2021
Variance due to
Volume Rate Net
(dollars in thousands)
Interest-earning assets:
Interest-bearing deposits with banks $ (35) $ 193 $ 158
Securities available for sale:
Taxable 1,306 164 1,470
Tax-exempt securities 288 (94) 194
Total securities 1,594 70 1,664
Loans receivable (954) (291) (1,245)
Total interest-earning assets 605 (28) 577
Interest-bearing liabilities: Interest-bearing demand and money market 82 (88) (6) Savings 21 18 39 Time (143) (207) (350) Total interest-bearing deposits (40) (277) (317) Short-term borrowings (10) (24) (34) Other borrowings (206) 13 (193) Total interest-bearing liabilities (256) (288)
(544)
Net interest income (tax-equivalent basis) $ 861$ 260 $ 1,121 41
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Comparison of Operating Results for the Six Months Ended
General For the six months endedJune 30, 2022 , net income totaled$13,983,000 compared to$11,296,000 earned in the similar period in 2021. The increase in net income for the six months endedJune 30, 2022 was due primarily to a$1,166,000 increase in net interest income, a$1,652,000 increase in other income, and a$2,400,000 decrease in the provision for loan losses. Earnings per share for the six-months endedJune 30, 2022 were$1.71 per share for basic shares and fully diluted shares, compared to$1.38 per share for basic shares and for fully diluted shares for the six months endedJune 30, 2021 . The resulting annualized return on average assets and annualized return on average equity for the six months endedJune 30, 2022 were 1.37% and 14.68%, respectively, compared to 1.16% and 11.49%, respectively, for the same period in 2021.
The following table sets forth changes in net income:
(dollars in thousands) Six months
ended
June 30, 2022 to June 30, 2021
Net income six months ended June 30, 2021 $ 11,296
Change due to:
Net interest income 1,166
Provision for loan losses 2,400
Service charges and fees 164
Net gains on sales of securities and loans (159)
Net gains on sales of foreclosed real estate owned
427
Earnings and proceeds on bank-owned life insurance
57
Other income
1,163
Salaries and employee benefits
(1,146)
Occupancy, furniture and equipment (107) Data processing related (129) Professional fees (98) All other expenses (206) Income tax expense (845) Net income six months ended June 30, 2022 $ 13,983 Net Interest Income Net interest income on a fully taxable equivalent basis (fte) for the six months endedJune 30, 2022 totaled$33,365,000 which was$1,121,000 higher than the comparable period in 2021. The increase in net interest income was due primarily to a$1,664,000 increase in interest income (fte) on securities due to purchases of securities. The fte net interest spread and net interest margin were 3.30% and 3.41%, respectively, for the six months endedJune 30, 2022 compared to 3.39% and 3.51%, respectively, for the same period in 2021. See "Non-GAAP Financial Measures" described above on page 37. For the six-months endedJune 30, 2022 , interest income (fte) totaled$35,810,000 with a yield on average earning assets of 3.65% compared to$35,233,000 and 3.84% for the 2021 period. Average loans decreased$39.6 million during the six-months endedJune 30, 2022 , over the comparable period of 2021, while average securities increased$183.2 million . Average earning assets totaled$1.960 billion for the six months endedJune 30, 2022 , an increase of$124.2 million over the average for the same period in 2021. See "Non-GAAP Financial Measures" described above on page 37. Interest expense for the six months endedJune 30, 2022 totaled$2,445,000 at an average cost of 0.35% compared to$2,989,000 and 0.45%, respectively, for the same period in 2021. The decrease in interest expense during the six-months endedJune 30, 2022 reflects the repricing of higher cost certificates to current market interest rates at maturity. The average cost of time deposits, which is the most significant component of funding costs, decreased 0.08% compared to the same six-month period of last year.
Provision for Loan Losses
The Company's provision for loan losses for the six months endedJune 30, 2022 was$600,000 , compared to$3,000,000 for the six months endedJune 30, 2021 . The decreased provision reflects a reduction in certain qualitative factors related to the COVID-19 pandemic. The Company makes provisions for loan losses in an amount necessary to maintain the allowance for loan losses at an 42 -------------------------------------------------------------------------------- acceptable level. The Company recorded a net charge-off of$25,000 for the six months endedJune 30, 2022 , compared to a net charge-off of$810,000 for the same period in 2021. AtJune 30, 2022 , the allowance for loan losses represented 1.21% of loans receivable. Additionally, the allowance for loan losses represented 2,532% of non-performing loans, excluding loans acquired with credit quality deterioration. Other Income Other income totaled$5,828,000 for the six months endedJune 30, 2022 , compared to$4,176,000 for the same period in 2021. The increase was due primarily to$954,000 of income recognized on previously acquired purchased impaired loans that were carried at a discount, and a$427,000 gain on the sale of a property carried in foreclosed real estate owned. All other categories of other income increased$137,000 , net. Other Expense
Other expense for the six months ended
Income Tax Expense
Income tax expense totaled$3,610,000 for an effective tax rate of 20.5% for the six months endedJune 30, 2022 compared to$2,765,000 for an effective tax rate of 19.7% for the six months endedJune 30, 2021 . The increase in the effective tax rate in the 2022 period reflects the increased level of taxable income. ? 43
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