Insight.
We strive to remain a leader in meeting the financial service needs of the 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 real estate loans, commercial and industrial 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 continues to focus on increasing commercial lending and residential lending. Our strategy also calls for increasing deposit relationships, specifically core deposits, 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.
As part of our overall growth strategy, we seek to:
? Develop the Company’s commercial loan portfolio and related commercial deposits by
targeting businesses in our core market of
county in the west
? Complete the commercial portfolio by developing residential real estate
portfolio to diversify the loan portfolio and deepen client relationships;
? Focus on expanding our retail banking deposit franchise and increasing the number
households served in our designated market area;
? Invest in people, systems and technology to increase revenue and improve efficiency
and improve the overall customer experience;
? Grow revenue, increase book value and tangible book value per share, continue
pay competitive dividends to shareholders and use Company stock
buyout plan to leverage our capital and increase franchise value; and
? Consider growth through acquisitions. We may seek expansion opportunities in
existing or adjacent strategic locations with businesses adding
products to our existing business and on terms that add value to our
shareholders.
You should read the following financial results for the three months ended
? The net income was
finished
the same period in 2021.
? Provision for loan losses decreased
losses of
loan losses of
recorded net allocations of
compared to the net imputations of
2021. The decrease in the provision compared to the comparative periods reflects
management’s current assessment of the impact of the COVID-19 pandemic on
Bank's loan portfolio.
? Net interest income increased
three months completed
finished
in charge of the interests of
decrease in interest expense on deposits.
31
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 three months ended March 31, 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: RESPONSE AND ACTIONS TO THE CORONAVIRUS PANDEMIC.
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 theU.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 theSmall Business Administration ("SBA"), the Company was in a position to react quickly to the PPP component of theMarch 27, 2020 $2.2 trillion fiscal stimulus bill known as the Coronavirus Aid, Relief and Economic Security Act (the "CARES Act") launched by theU.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 afterJune 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 ofMarch 31, 2022 , the Company received funding approval from the SBA for 2,146 applications totaling$302.2 million . As ofMarch 31, 2022 , the Company processed 2,093 PPP loan forgiveness applications totaling$296.1 million . Total PPP loans decreased$19.3 million , or 76.3%, from$25.3 million atDecember 31, 2021 to$6.1 million at March
31, 2022. During the three months endedMarch 31, 2022 , the Company recognized$562,000 in PPP income, compared to$2.4 million during the three months endedMarch 31, 2021 . As ofMarch 31, 2022 , the Company had$255,000 in remaining deferred
PPP
loan processing fees.
32
The table below breaks out the PPP income recognized for the periods noted:
For the Three Months Ended
September 30,
March 31, 2022 December 31, 2021 2021 June 30, 2021 March 31, 2021
($ in thousands)
PPP origination fee income $ 526 $ 868
$ 1,556 $ 1,240 $ 1,999 PPP interest income 36 105 201 387 412 Total PPP Income $ 562 $ 973 $ 1,757 $ 1,627 $ 2,411
Distressed loan modifications/restructurings.
The banking regulatory agencies, through an Interagency Statement datedApril 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 ofDecember 31, 2019 will be considered current for COVID-19 modifications. Financial institutions can then suspend the requirements underU.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 underU.S. GAAP. The Company has adopted this policy election to address COVID-19 loan modification requests that have been received from the earlier of eitherJanuary 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 ofMarch 31, 2022 , the Company had two remaining commercial real estate loans, with an outstanding principal balance of$12.1 million , under CARES Act modification. The two borrowers were granted a principal deferral under the Company's modification deferral program, but continue to make their interest and real estate tax payments. There were no outstanding deferrals related to residential and consumer loans under CARES modification as ofMarch 31, 2022 . 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 ofMarch 31, 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 THE FINANCIAL SITUATION AT
AtMarch 31, 2022 , total assets were$2.6 billion , an increase of$17.0 million , or 0.7%, fromDecember 31, 2021 . During the three months endedMarch 31, 2022 , cash and cash equivalents decreased$40.6 million , or 39.2%, to$62.9 million , investment securities decreased$5.4 million , or 1.3%, to$423.1 million and total loans, excluding PPP loans, increased$80.8 million , or 4.4%, to$1.9 billion . AtMarch 31, 2022 , the Company's available-for-sale securities portfolio decreased$20.4 million , or 10.5%, from$194.4 million atDecember 31, 2021 to$173.9 million atMarch 31, 2022 . The held-to-maturity securities portfolio, recorded at amortized cost, increased$15.3 million , or 6.9%, from$222.3 million atDecember 31, 2021 to$237.6 million atMarch 31, 2022 . The Company allocated a portion of its excess liquidity to the investment portfolio as an alternative to cash and cash equivalents. This shift from overnight investments to held-to-maturity securities will assist the Company with managing the yield on interest-earning assets in the low interest rate environment that we are experiencing while providing ongoing cash flows from payments and pay downs. The primary objective of the investment portfolio is to provide liquidity and maximize income while preserving the safety of principal. 33 AtMarch 31, 2022 , total loans were$1.9 billion , an increase of$61.6 million , or 3.3%, fromDecember 31, 2021 . Excluding PPP loans, total loans increased$80.8 million , or 4.4%, driven by an increase in commercial real estate loans of$59.5 million , or 6.1%, partially offset by a decrease in total commercial and industrial loans of$10.7 million , or 4.7%. Excluding a decrease of$19.3 million in PPP loans fromDecember 31, 2021 , commercial and industrial loans increased$8.6 million , or 4.2%, atMarch 31, 2022 . Residential real estate loans, which include home equity loans, increased$12.4 million , or 1.9%. In accordance with the Company's asset/liability management strategy, during the three months endedMarch 31, 2022 , the Company sold$277,000 of fixed rate, low coupon residential real estate loans to the secondary market. As ofMarch 31, 2022 , the Company serviced$85.5 million in loans sold to the secondary market, compared to$88.2 million atDecember 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$60,000 and$80,000 for the three months endedMarch 31 ,
2022 and 2021, respectively. AtMarch 31, 2022 , nonperforming loans totaled$4.0 million , or 0.21% of total loans, compared to$5.0 million , or 0.27% of total loans, atDecember 31, 2021 . AtMarch 31, 2022 , there were no loans 90 or more days past due and still accruing interest. Nonperforming assets to total assets, was 0.16% atMarch 31, 2022 , compared to 0.20% atDecember 31, 2021 . The allowance for loan losses as a percentage of total loans, was 1.00% atMarch 31, 2022 , compared to 1.06% atDecember 31, 2021 . AtMarch 31, 2022 , the allowance for loan losses as a percentage of nonperforming loans was 484.2%, compared to 398.6%, atDecember 31, 2021 . A summary of our past due and nonaccrual loans by class are listed in Note 5 of the accompanying unaudited consolidated financial statements. AtMarch 31, 2022 , total deposits were$2.3 billion , an increase of$21.3 million , or 0.9%, fromDecember 31, 2021 , primarily due to an increase in core deposits of$44.2 million , or 2.4%. Core deposits, which the Company defines as all deposits except time deposits, increased to$1.9 billion and were 83.4% and 82.2% of total deposits atMarch 31, 2022 andDecember 31, 2021 , respectively. Non-interest-bearing deposits decreased$11.1 million , or 1.7%, to$630.2 million , interest-bearing checking accounts decreased$6.4 million , or 4.4%, to$139.3 million , savings accounts increased$7.0 million , or 3.2%, to$224.6 million , and money market accounts increased$54.7 million , or 6.4%, to$905.1 million . Time deposits decreased$23.0 million , or 5.7%, from$402.0 million atDecember 31, 2021 to$379.0 million atMarch 31, 2022 . The Company did not have any brokered deposits atMarch 31, 2022 orDecember 31, 2021 . AtMarch 31, 2022 , total borrowings decreased$1.0 million , or 4.5%, from$22.3 million atDecember 31, 2021 , to$21.3 million . FHLB advances decreased$1.0 million , or 36.5%, to$1.7 million and subordinated debt outstanding totaled$19.6 million atMarch 31, 2022 and atDecember 31, 2021 . AtMarch 31, 2022 , shareholders' equity was$219.1 million , or 8.6% of total assets, compared to$223.7 million , or 8.8% of total assets, atDecember 31, 2021 . The decrease in shareholders' equity reflects$1.2 million for the repurchase of the Company's common stock, the payment of regular cash dividends of$1.3 million and an increase in accumulated other comprehensive loss of$8.4 million , partially offset by net income of$5.3 million . Total shares outstanding as ofMarch 31, 2022 were 22,742,189. The Company's book value per share was$9.63 atMarch 31, 2022 compared to$9.87 atDecember 31, 2021 , while tangible book value per share, a non-GAAP financial measurement, decreased$0.24 , or 2.6%, from$9.21 atDecember 31, 2021 to$8.97 atMarch 31, 2022 . AOCI reduced the tangible book value per common share by$0.37 as ofMarch 31, 2022 , primarily due to the impact of higher interest rates on the fair value of available-for-sale securities. As ofMarch 31, 2022 , the Company's and the Bank's regulatory capital ratios continued to exceed the levels required to be considered "well-capitalized" under federal banking regulations. See "Explanation of Use of Non-GAAP Financial Measurements" for more information regarding our uses of non-GAAP financial measurements. 34 The Company's regulatory capital ratios remain in compliance with regulatory "well capitalized" requirements and internal target minimal levels. AtMarch 31, 2022 , the Company's Tier 1 leverage, common equity tier 1 capital, and total risk-based capital ratios were 8.9%, 11.9%, and 14.0%, respectively, and the Bank's Tier 1 leverage, common equity tier 1 capital, and total risk-based capital ratios were 9.1%, 12.1%, and 13.1%, respectively, compared with regulatory "well capitalized" minimums of 5.00%, 6.5%, and 10.00%, respectively.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED
General. Net income was$5.3 million , or$0.24 per diluted share, for the three months endedMarch 31, 2022 , compared to$5.8 million , or$0.24 per diluted share, for the same period in 2021. Net interest income was$18.7 million and$18.0 million for the three months endedMarch 31, 2022 and 2021, respectively.
Net interest and dividend income.
The following tables set forth the information relating to our average balance and net interest income for the three months endedMarch 31, 2022 and 2021, and reflect the average yield on interest-earning assets and average cost of interest-bearing liabilities for the periods indicated. Yields and costs are derived by dividing annualized interest income by the average balance of interest-earning assets and annualized interest expense by the average balance of interest-bearing liabilities for the periods shown. The interest rate spread is the difference between the total average yield on interest-earning assets and the cost of interest-bearing liabilities. Net interest margin represents tax-equivalent net interest and dividend income as a percentage of average interest-earning assets. Average balances are derived from actual daily balances over the periods indicated. Interest income includes fees earned when the real estate loans are prepaid or refinanced. For analytical purposes, the interest earned on tax-exempt assets is adjusted to a tax-equivalent basis to recognize the income tax savings which facilitates comparison between taxable and tax-exempt assets. 35 Three Months Ended March 31, 2022 2021 Average Average Yield/ Average Average Yield/ Balance Interest Cost Balance Interest Cost (Dollars in thousands) ASSETS: Interest-earning assets Loans(1)(2)$ 1,894,870 $ 18,067 3.87 %$ 1,923,477 $ 19,220 4.05 % Securities(2) 423,437 1,950 1.87 227,330 854 1.52 Other investments - at cost 10,595 25 0.96 9,663 35 1.47 Short-term investments(3) 57,030 21 0.15 95,004 24 0.10 Total interest-earning assets 2,385,932 20,063 3.41 2,255,474 20,133 3.62 Total non-interest-earning assets 143,635 144,588 Total assets$ 2,529,567 $ 2,400,062 LIABILITIES AND EQUITY: Interest-bearing liabilities Interest-bearing checking accounts$ 132,192 95 0.29 %$ 90,503 $ 105 0.47 % Savings accounts 218,448 36 0.07 187,217 37 0.08 Money market accounts 878,393 521 0.24 675,662 653 0.39 Time deposits 389,063 340 0.35 567,102 939 0.67 Total interest-bearing deposits 1,618,096 992 0.25 1,520,484 1,734 0.46 Short-term borrowings and long-term debt 21,975 253 4.67 52,670 273 2.10 Interest-bearing liabilities 1,640,071 1,245 0.31 1,573,154 2,007 0.52
Not bearing interest
deposits 633,082
561 581
Other
not bearing interest
liabilities 32,857
38,360
Total
not bearing interest
liabilities 665,939 599,941 Total liabilities 2,306,010 2,173,095 Total equity 223,557 226,967 Total liabilities and equity$ 2,529,567 $ 2,400,062 Less: Tax-equivalent adjustment(2) (120 ) (100 ) Net interest and dividend income$ 18,698 $ 18,026 Net interest rate spread(4) 3.08 % 3.08 % Net interest rate spread, on a tax equivalent basis(5) 3.10 % 3.10 % Net interest margin(6) 3.18 % 3.24 % Net interest margin, on a tax equivalent basis(7) 3.20 % 3.26 % Ratio of average interest-earning assets to average interest-bearing liabilities 145.48 % 143.37 %
(1) Loans, including outstanding loans, are net of deferred loan origination fees
and non-advanced funds.
(2) Income from loans and securities is presented on an equivalent basis
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) The net interest rate spread represents the difference between the interest rate
average yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities.
(5) The net interest rate difference, on a tax equivalent basis, represents
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
percentage of average interest-earning assets.
(7) Net interest margin, on a tax equivalent basis, represents
interest and dividend income as a percentage of average interest income
assets. See "Explanation of Use of Non-GAAP Financial Measurements".
36
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 March
31 2022 over three months
Ended March 31, 2021
Increase (Decrease) Due to
Volume Rate Net
Interest-earning assets (In thousands)
Loans (1) $ (286 ) $ (867 ) $ (1,153 )
Securities (1) 737 359 1,096
Other investments - at cost 3 (13 ) (10 ) Short-term investments (10 ) 7 (3 ) Total interest-earning assets 444 (514 ) (70 ) Interest-bearing liabilities
Interest-bearing checking accounts 48
(58 ) (10 ) Savings accounts 6 (7 ) (1 ) Money market accounts 196 (328 ) (132 ) Time deposits (295 ) (304 ) (599 )
Short-term borrowing and long-time debt (159 ) 139 (20 ) Total interest-bearing liabilities (204 ) (558 ) (762 ) Change in net interest and dividend income (1) $ 648 $
44 $ 692
(1) Securities, loan income and the 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 $672,000 , or 3.7%, to $18.7 million for the three
months ended March 31, 2022 , from $18.0 million for the three months ended March
31, 2021 . The increase in net interest income was due to a decrease in interest
expense of $762,000 , or 38.0%, primary due to a $742,000 , or 42.8%, decrease in
interest expense on deposits. Excluding PPP income, interest income increased
$1.8 million , or 10.0%, from the three months ended March 31, 2021 to the three
months ended March 31, 2022 primarily due to higher investment and loan income.
Net interest income for the three months ended March 31, 2022 included PPP
income of $562,000 , compared to $2.4 million for the three months ended March
31, 2021 . During the three months ended March 31, 2022 interest income included
$39,000 in positive purchase accounting adjustments, compared to $45,000 in
negative purchase accounting adjustments during the three months ended March 31,
2021 . Net interest income as adjusted for the preceding items increased $2.4
million , or 15.6%, from $15.7 million during the three months ended March 31,
2021 , to $18.1 million during the three months ended March 31, 2022 .
The net interest margin was 3.18% for the three months ended March 31, 2022 ,
compared to 3.24%, for the three months ended March 31, 2021 . The net interest
margin, on a tax-equivalent basis, was 3.20% for the three months ended March
31, 2022 , compared to 3.26% for the three months ended March 31, 2021 . Excluding
the adjustments discussed above, the net interest margin increased six basis
points from 3.04% for the three months ended March 31, 2021 to 3.10% for the
three months ended March 31, 2022 . The Company's net interest margin was
positively impacted by higher average balances for loans and securities and a
decrease in lower yielding interest-earning assets.
37
The loan yield decreased 19 basis points from 4.03% for the three months ended
March 31, 2021 to 3.84% for the three months ended March 31, 2022 . Excluding PPP
loans and purchase accounting adjustments, the average loan yield decreased 13
basis points from 3.87% for the three months ended March 31, 2021 to 3.74% for
the three months ended March 31, 2022 . The average yield on interest-earning
assets decreased 21 basis points from 3.60% for the three months ended March 31,
2021 to 3.39% for the three months ended March 31, 2022 .
During the three months ended March 31, 2022 , average interest-earning assets
increased $130.5 million , or 5.8%, to $2.4 billion compared to the three months
ended March 31, 2021 . The increase was primarily due to an increase in average
securities of $197.0 million , or 83.1%. Excluding the $151 million decrease in
average PPP loans, average loans increased $122.9 million , or 7.0%, from the
three months ended March 31, 2021 to the three months ended March 31, 2022 .
Total average loans, excluding average PPP loans, were 78.8% of total average
interest-earning assets for the three months ended March 31, 2022 , compared to
77.9% for the three months ended March 31, 2021 .
During the three months ended March 31, 2022 , the average cost of funds,
including non-interest bearing demand accounts and borrowings, decreased 16
basis points, from 0.38% for the three months ended March 31, 2021 to 0.22% for
the three months ended March 31, 2022 . The average cost of core deposits,
including non-interest bearing demand deposits, decreased 7 basis points from
0.21% for the three months ended March 31, 2021 to 0.14% for the three months
ended March 31, 2022 . The average cost of time deposits decreased 32 basis
points from 0.67% for the three months ended March 31, 2021 to 0.35% for the
three months ended March 31, 2022 , while the average cost of borrowings
increased from 2.10% for the three months ended March 31, 2021 to 4.67% for the
three months ended March 31, 2022 . Average demand deposits, an interest-free
source of funds, increased $71.5 million , or 12.7%, from $561.6 million , or
27.0% of total average deposits, for the three months ended March 31, 2021 to
$633.1 million , or 28.1%, of total average deposits, for the three months ended
March 31, 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 provision for loan losses decreased $500,000 , from a provision for loan
losses of $75,000 for the three months ended March 31, 2021 to a credit for loan
losses of $425,000 for the three months ended March 31, 2022 . The Company
recorded net charge-offs of $54,000 for the three months ended March 31, 2022 ,
as compared to net charge-offs of $5,000 for the three months ended March 31,
2021 . The decrease in the provision versus comparative periods reflected
management's current assessment of the impact of the COVID-19 pandemic on the
Bank's loan portfolio. Management continues to assess the exposure of the
Company's loan portfolio to the COVID-19 pandemic, economic trends and their
potential effect on asset quality. As of March 31, 2022 , the Company's
delinquencies and nonperforming assets had not been materially impacted by
the COVID-19 pandemic. 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 decreased$656,000 , or 21.8%, to$2.3 million for the three months endedMarch 31, 2022 , from$3.0 million for the three months endedMarch 31, 2021 . The three months endedMarch 31, 2021 , included a gain on non-marketable equity investments of$546,000 . Service charges and fees on deposits increased$291,000 , or 15.5%, and income from bank-owned life insurance increased$7,000 , or 1.6%, from$441,000 for the three months endedMarch 31, 2021 to$448,000 , for the three months endedMarch 31, 2022 . Income from mortgage banking activities decreased$225,000 , or 99.1%, and other income decreased$54,000 . During the three months endedMarch 31, 2022 , unrealized losses on marketable equity securities were$276,000 , compared to unrealized losses of$89,000 during the three months endedMarch 31, 2021 . During the three months endedMarch 31, 2022 , the Company reported realized losses on the sale of securities of$4,000 , compared to realized losses of$62,000 during the three months endedMarch 31, 2021 . 38 Non-Interest Expense. For the three months endedMarch 31, 2022 , non-interest expense increased$1.1 million , or 8.5%, to$14.5 million from$13.3 million , for the three months endedMarch 31, 2021 . Salaries and employee benefits expense increased$638,000 , or 8.4%, to$8.2 million , primarily due to annual merit increases and benefit costs. Other non-interest expense increased$280,000 , or 13.7%, occupancy expense increased$74,000 , or 5.7%, furniture and equipment increased$53,000 , or 10.8%, professional fees increased$33,000 , or 6.1%, advertising expenses increased$61,000 , or 18.0%, and data processing related expenses increased$2,000 , or 0.3%.FDIC insurance expense decreased$12,000 , or 4.0%. The efficiency ratio was 68.7% for the three months endedMarch 31, 2022 , compared to 63.4% for the three months endedMarch 31, 2021 . The adjusted efficiency ratio, a non-GAAP financial measure, was 67.8% for the three months endedMarch 31, 2022 , compared to 64.6% for the three months endedMarch 31, 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 endedMarch 31, 2022 was$1.7 million , or an effective tax rate of 24.2%, compared to$1.8 million , or an effective tax rate of 24.1%, for the three months endedMarch 31, 2021 .
Explanation of the use of non-GAAP financial measures.
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.
39
Three Months Ended
March 31, 2022 December 31, 2021 March 31, 2021
(Dollars in thousands)
Average Yield Average Yield Average Yield
Loans (no tax adjustment) $ 17,947 3.84 % $ 18,089 3.88 % $ 19,120 4.03 %
Tax-equivalent adjustment (1) 120 108 100 Loans (tax-equivalent basis)$ 18,067 3.87 %$ 18,197 3.90 %$ 19,220 4.05 % Securities (no tax adjustment)$ 1,950 1.87 %$ 1,763 $ 854 1.52 % Tax-equivalent adjustment (1) - 1 - Securities (tax-equivalent basis)$ 1,950 1.87 %$ 1,764 1.74 %$ 854 1.52 % Net interest income (no tax adjustment)$ 18,698 $ 18,582 $ 18,026 Tax-equivalent adjustment (1) 120
109 100 Net interest income (tax-equivalent basis)$ 18,818 $ 18,691 $ 18,126 Interest rate spread (no tax adjustment) 3.08 % 2.97 % 3.08 % Net interest margin (no tax adjustment) 3.18 % 3.08 % 3.24 % Net interest margin (tax-equivalent) 3.20 % 3.10 % 3.26 % Net interest income (no tax adjustment)$ 18,698 $ 18,582 $ 18,026 Less: Purchase accounting adjustments 39 (31 ) (45 ) Prepayment penalties and fees 21 21 35 PPP fee income 562 973 2,411 Adjusted net interest income (non-GAAP)$ 18,076 $ 17,619 $ 15,625 Average interest-earning assets$ 2,385,932 $ 2,394,397 $ 2,255,474 Average interest-earnings asset, excluding average PPP loans$ 2,370,852 $ 2,352,858 $ 2,088,910 Adjusted net interest margin, excluding purchase accounting adjustments, PPP fee income, prepayment penalties and average PPP loans (non-GAAP) 3.10 % 2.97 % 3.04 % Book Value per Share (GAAP)$ 9.63 $ 9.87 $ 9.07 Non-GAAP adjustments: Goodwill (0.55 ) (0.55 ) (0.51 ) Core deposit intangible (0.11 ) (0.11 ) (0.12 ) Tangible Book Value per Share (non-GAAP)$ 8.97 $ 9.21 $ 8.44 Income Before Income Taxes (GAAP)$ 7,015 $ 8,215 $ 7,628 (Credit) provision for loan losses (425 ) 300 75 Income Before Taxes and Provision (non-GAAP)$ 6,590 $ 8,515 $ 7,703 40 Three Months Ended March 31, December 31, March 31, 2022 2021 2021 (Dollars in thousands) Efficiency Ratio: Non-interest Expense (GAAP)$ 14,456 $ 13,923 $ 13,327 Net Interest Income (GAAP)$ 18,698 $ 18,582 $ 18,026 Non-interest Income (GAAP)$ 2,348 $ 3,856 $ 3,004 Non-GAAP adjustments: Bank-owned life insurance death benefit - (555 ) - Loss on securities, net 4 - 62 Unrealized loss on marketable equity securities 276 96 89 Gain on non-marketable equity investments - (352 ) (546 ) Non-interest Income for Adjusted Efficiency Ratio (non-GAAP)$ 2,628 $ 3,045 $ 2,609 Total Revenue for Adjusted Efficiency Ratio (non-GAAP)$ 21,326 $ 21,627 $ 20,635 Efficiency Ratio (GAAP) 68.69 % 62.05 % 63.37 % Adjusted Efficiency Ratio (Non-interest Expense (GAAP)/Total Revenue for Adjusted Efficiency Ratio (non-GAAP)) 67.79 % 64.38 % 64.58 %
(1) The tax equivalent adjustment is based on a tax rate of 21%.
Cash 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 AtMarch 31, 2022 andDecember 31, 2021 , outstanding borrowings from the FHLB were$1.7 million and$2.7 million , respectively. AtMarch 31, 2022 , we had$464.1 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. AtMarch 31, 2022 andDecember 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. 41 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 three months endedMarch 31, 2022 and 2021, we originated$149.4 million and$108.3 million in loans, respectively. We purchased securities totaling$20.6 million for the three months endedMarch 31, 2022 and$79.8 million for the three months endedMarch 31, 2021 . AtMarch 31, 2022 , the Company had approximately$206.8 million in loan commitments and letters of credit to borrowers and approximately$320.8 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. AtMarch 31, 2022 , time deposit accounts scheduled to mature within one year totaled$330.7 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 ofMarch 31, 2022 were estimated to be$13.1 million , with$4.5 million expected to be paid within one year and the remaining$8.6 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$10.1 million as ofMarch 31, 2022 . Principal payments expected to be made on our lease liabilities during the twelve months endedMarch 31, 2023 are$1.4 million . The remaining lease liability payments totaled$8.7 million and are expected to be made afterMarch 31, 2023 . In addition, the Company completed an offering of$20 million in aggregate principal amount of its 4.875% fixed-to-floating rate subordinated Notes to certain qualified institutional buyers in a private placement transaction onApril 20, 2021 . Unless earlier redeemed, the Notes mature onMay 1, 2031 . The Notes will bear interest from the initial issue date to, but excluding,May 1, 2026 , or the earlier redemption date, at a fixed rate of 4.875% per annum, payable quarterly in arrears onMay 1 ,August 1 ,November 1 andFebruary 1 of each year, beginningAugust 1, 2021 , and from and includingMay 1, 2026 , but excluding the maturity date or earlier redemption date, equal to the benchmark rate, which is the 90-day average secured overnight financing rate, plus 412 basis points, determined on the determination date of the applicable interest period, payable quarterly in arrears onMay 1 ,August 1 ,November 1 andFebruary 1 of each year. The Company may also redeem the Notes, in whole or in part, on or afterMay 1, 2026 , and at any time upon the occurrence of certain events, subject in each case to the approval of theBoard of Governors of theFederal Reserve .
We do not anticipate any material capital expenditures during the calendar year 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. AtMarch 31, 2022 , we exceeded each of the applicable regulatory capital requirements. As ofMarch 31, 2022 , the most recent notification from theOffice 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. 42 Minimum For Capital Adequacy Actual Purpose Minimum To Be Well Capitalized Amount Ratio Amount Ratio Amount Ratio (Dollars in thousands) March 31, 2022 Total Capital (to Risk Weighted Assets): Consolidated$ 264,483 13.97 %$ 151,486 8.00 % N/A N/A Bank 247,643 13.09 151,340 8.00$ 189,175 10.00 % Tier 1 Capital (to Risk Weighted Assets): Consolidated 225,532 11.91 113,614 6.00 N/A N/A Bank 228,335 12.07 113,505 6.00 151,340 8.00 Common Equity Tier 1 Capital (to Risk Weighted Assets) Consolidated 225,532 11.91 85,211 4.50 N/A N/A Bank 228,335 12.07 85,129 4.50 122,964 6.50 Tier 1 Leverage Ratio (to Adjusted Average Assets): Consolidated 225,532 8.94 100,931 4.00 N/A N/A Bank 228,335 9.07 100,720 4.00 125,900 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.
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