LINKBANCORP, INC. This discussion and analysis reflects the Company's consolidated financial statement and other relevant statistical data and is intended to enhance your understanding of the Company's consolidated financial condition and results of operations. This Management's Discussion and Analysis is presented in the following sections: • Overview and Strategy • Comparison of Financial Condition atJune 30, 2021 andDecember 31, 2020
• Comparison of Operating Results for the Three Months Ended
2021 and 2020
• Comparison of Operating Results for the Six Months Ended
and 2020
• Liquidity, Commitments, and Capital Resources
• Off-Balance
Sheet Arrangements
• Critical Accounting Policies
• Recently Issued Accounting Standards
Forward Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, which can be identified by the use of words
such as "estimate," "project," "believe," "intend," "anticipate," "plan,"
"seek," "expect" or words of similar meaning, or future or conditional verbs,
such as "will," "would," "should," "could," or "may." A forward-looking
statement is neither a prediction nor a guarantee of future events. These
forward-looking statements include, but are not limited to:
• statements of our goals, intentions and expectations;
• statements regarding our business plans, prospects, growth and
operating strategies;
• statements regarding the quality of our loan and investment portfolios; and
• estimates of our risks and future costs and benefits.
These forward-looking statements are based on current beliefs and expectations
of our management and are inherently subject to significant business, economic
and competitive uncertainties and contingencies, many of which are beyond our
control. In addition, these forward-looking statements are subject to
assumptions with respect to future business strategies and decisions that are
subject to change.
The following factors, among others, could cause actual results to differ
materially from the anticipated results or other expectations expressed in the
forward-looking statements:
• risks and uncertainties related to the Coronavirus Disease 2019
("COVID-19") pandemic and resulting governmental and societal
response;
• risks that COVID-19 may adversely impact our customers and lead to a
long-term economic recession and continuing a severe disruption in the
U.S. economy, and could potentially create business continuity issues for us;
• general economic conditions, either nationally or in our market area,
that are worse than expected;
• competition within our market area that is stronger than expected;
• changes in the level and direction of loan delinquencies and
charge-offs and changes in estimates of the adequacy of the allowance
for loan losses;
• our ability to access cost-effective funding;
• fluctuations in real estate values and both residential and commercial
real estate market conditions;
• demand for loans and deposits in our market area;
• our ability to continue to implement our business strategies;
• competition among depository and other financial institutions;
• inflation and changes in market interest rates that reduce our margins
and yields, reduce the fair value of financial instruments or reduce
our volume of loan originations, or increase the level of defaults,
losses and prepayments on loans we have made and make, whether held in
portfolio or sold in the secondary market;
• adverse changes in the securities markets;
• changes in laws or government regulations or policies affecting
financial institutions, including changes in regulatory fees and
capital requirements;
• our ability to manage market risk, credit risk and operational risk;
• our ability to enter new markets successfully and capitalize on growth
opportunities;
• the imposition of tariffs or other domestic or international
governmental polices impacting the value of the products of our
borrowers;
• our ability to successfully integrate into our operations GNB's
assets, liabilities or systems we acquired, as well as new management
personnel or customers, and our ability to realize related revenue
synergies and cost savings within expected time frames and any
goodwill charges related thereto;
• changes in consumer spending, borrowing and savings habits;
• our ability to maintain our reputation;
• our ability to prevent or mitigate fraudulent activity;
• changes in accounting policies and practices, as may be adopted by the
bank regulatory agencies, the Financial Accounting Standards Board ,
the Securities and Exchange Commission or the Public Company
Accounting Oversight Board ;
• our ability to retain key employees;
• our ability to evaluate the amount and timing of recognition of future
tax assets and liabilities;
• our compensation expense associated with equity benefits allocated or
awarded to our employees; and
• changes in the financial condition, results of operations or future
prospects of issuers of securities that we own.
Because of these and other uncertainties, our actual future results may be
materially different from the results indicated by these forward-looking
statements. We disclaim any obligation to revise or update any forward-looking
statements contained in this Quarterly Report on Form 10-Q to reflect future
events or developments.
Overview and Strategy
The Company's core strategy is to further its mission of "positively impacting
lives" through community banking by building strong relationships that bring
value to its customers, employees, the communities it serves and its
shareholders. In pursuing this mission, the Company specifically desires to
invest in the development of strong future leaders for the banking industry and
our communities, to contribute to economically and socially flourishing
communities, and to demonstrate the continued viability and integral role of
community banking for our economic and social development.
The Company operates primarily through its sole subsidiary, LINKBANK . LINKBANK
provides traditional lending, deposit gathering and cash services to retail
customers, small businesses and nonprofit organizations. LINKBANK focuses its
lending activities on small businesses, targeted to create a diverse loan
portfolio in relation to its underlying collateral and different business
segments with unique cash flow generation and varied interest rate sensitivity.
LINKBANK offers a full suite of deposit products and cash management services
focused on the small business and nonprofit segments.
Our revenues consist primarily of interest income earned on loans and
investments. Interest income is partially offset by interest expense incurred on
deposits, borrowings and other interest-bearing liabilities. Net interest income
is affected by the balances of interest-earning assets and interest-bearing
liabilities and their relative interest rates. Net interest income is typically
further reduced by a provision for loan losses.
Non-interest
income also contributes to our operating results, consisting of service charges
on deposit accounts and earnings on bank-owned life insurance.
Non-interest
expenses, which include salaries and employee benefits, occupancy and equipment
costs, data processing, professional services, advertising and other general and
administrative expenses, are the Company's primary expenditures incurred as a
result of operations.
Financial institutions, in general, are significantly affected by economic
conditions, competition, and the monetary and fiscal policies of the federal
government. Lending activities are influenced by the demand for and supply of
housing and commercial real estate, competition among lenders, interest rate
conditions, and funds availability. Our operations and lending are concentrated
in South Central Pennsylvania in Dauphin , Cumberland , Lancaster , and Chester
Counties, and are influenced by local economic conditions. Deposit balances and
cost of funds are influenced by prevailing market rates on competing
investments, customer preferences, and levels of personal income and savings in
our primary market area. Operations are also significantly impacted by
government policies and actions of regulatory authorities. Future changes in
applicable law, regulations or government policies may materially impact the
Company.
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Table of Contents
Recent Market Conditions
The Company's financial condition and performance are all highly dependent on
the business environment in the market area in which we operate and in the
United States as a whole. During the first quarter of 2020, there was an
outbreak of a novel strain of coronavirus (COVID-19) which spread to numerous
countries around the world, including the United States , while becoming a global
pandemic. As the spread of COVID-19 increased during the first and second
quarters of 2020, federal, state, and local governments implemented various
restrictive measures such as quarantines, restrictions on travel, school
closings, "stay at home" rules and restrictions on certain business operations.
These restrictions have slowly been lifted as people had begun to gain access to
vaccines during the fourth quarter of 2020. Throughout the first half of 2021,
the COVID pandemic continued to negatively affect our economy but started to
wane towards the end of the second quarter only to see a national resurgence in
cases during July 2021 as a result of variant strains of COVID. All of these
restrictions had adversely affected and will likely continue to adversely affect
the economy on a national, state, and local level, including the geographical
areas in which the Company operates.
Overall, real GDP decreased by 3.5% for 2020 as compared to an increase of 2.2%
in 2019. As a result of the global pandemic, market interest rates have declined
significantly during 2020 with the 10-year Treasury bond falling from a high
yield of 1.88% on January 2, 2020 to a low of .52% on August 4, 2020 . During the
second quarter of 2021 U.S. GDP grew at an annualized rate of 6.5%, however that
lagged behind current expected growth rates and unemployment data lagged
expectations, as well, indicating that the U.S. economic recovery continues to
be slower than expected. Additionally, at the beginning of 2020 the Federal
Reserve had set the target range for the Fed Funds rate at 1.50% to 1.75% and by
March 31, 2020 , the Fed Funds target range had been reduced to 0% to 0.25%. The
Fed Funds rate has been left unchanged through the remainder of 2020 and the
first half of 2021. Expectations are mixed regarding when the Federal Reserve
will begin to increase the Fed Funds rate from its current level. The low
interest rate environment and other effects of the COVID-19 pandemic may
adversely affect the Company's financial condition and results of operations in
future periods. It is unknown how long the adverse conditions associated with
the COVID-19 pandemic will last and what the complete financial effect will be
to the Company. 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.
Comparison of Financial Condition at June 30, 2021 and December 31, 2020
Total assets at June 30, 2021 , were $464.4 million , an increase of
$40.3 million , or 9.5%, from $424.1 million at December 31, 2020 . The increase
in total assets was primarily due to the net increase in loans receivable of
$86.2 million , an increase in cash and cash equivalents of $22.4 million , and an
increase in the deferred tax asset of $2.9 million as a result of the reversal
of LINK's valuation allowance during the first quarter of 2021. This increase
was partially offset by the maturity of a $75.0 million short-term investment
security held at December 31, 2020 that matured during January 2021 .
Cash and cash equivalents increased $22.4 million or 249.4% from $9.0 million at
December 31, 2020 to $31.4 million at June 30, 2021 . The increase was primarily
due to:
Primary Cash Inflows
• Net increase in deposits of $89.0 million ;
• Proceeds from maturities of and repayments on investment securities of
$75.7 million ; and
• Proceeds from redemption of restricted investments in bank stocks of
$2.9 million Primary Cash Outflows • Cash used in operations of$604 thousand ; • Repayments of borrowings of$55.9 million ; • Net increase in loans receivable of$86.9 million • Purchases of premises and equipment of$508 thousand ; and • Purchase of restricted investments in bank stocks of$1.3 million
Securities
available-for-sale
decreased by$75.8 million or 95.7% to$3.4 million atJune 30, 2021 from$79.2 million atDecember 31, 2020 . The decrease was due to a maturity in holdings ofU.S. treasury securities of$75.0 million duringJanuary 2021 and the normal principal paydowns of our investments in residential mortgage backed securities. 42
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Table of Contents Net loans receivable increased during the six months endedJune 30, 2021 as shown in the table below: June 30, December 31, (dollars in thousands) 2021 2020 Change % Commercial and industrial$ 129,835 $ 101,370 $ 28,465 28.08 % Construction and land development 25,177 20,935 4,242 20.26 % Real estate - commercial 193,488 145,800 47,688 32.71 % Real estate - residential 41,891 37,302 4,589 12.30 % Real estate - home equity 21,987 20,218 1,769 8.75 % Consumer 3,429 2,622 807 30.78 % Total Loans 415,807 328,247 87,560 26.68 % Deferred (fees) costs (1,580 ) (856 ) (724 ) 84.58 % Allowance for loan losses (4,800 ) (4,177 ) (623 ) 14.92 % Net Loans$ 409,427 $ 323,214 86,213 26.67 % Included in the loan growth totals above are balances on loans originated as part of the SBA Paycheck Protection Program ("PPP") under the CARES Act. During the year endedDecember 31, 2020 , the Company originated 533 PPP loans with original principal balances of$86.1 million for its customers. During the first half of 2021, the Company originated 328 PPP loans with original principal balances of$51.9 million . AtJune 30, 2021 the outstanding balance on PPP loans was$63.4 million compared to$41.0 million atDecember 31, 2020 . The balance of PPP loans is included in the balance of commercial and industrial loans in the table above. In association with the PPP loan originations, the Company recorded fees that have been deferred and will amortize over the life of the loans. As customers complete the loan forgiveness process with the SBA, any unamortized deferred fees will be recognized as an adjustment to interest income. The Company recognized$856,000 and$1.4 million in PPP fees as part of interest income for the three months endedJune 30, 2021 and 2020, respectively. The Company recognized$1.4 million in PPP fees as part of interest income for both the six months endedJune 30, 2021 and 2020. During 2020, our customers had requested 82 loan payment deferrals or payments of interest only on loans totaling$53.7 million . In accordance with Section 4013 of the CARES Act and the interagency guidance issued onApril 7, 2020 , these short-term deferrals are not considered troubled debt restructurings. As ofJune 30, 2021 , the Company has 9 loan relationships totaling$17.7 million that remain on a CARES Act modification. The Company's investment in restricted bank stock decreased$1.6 million , from$2.6 million atDecember 31, 2020 to$1.0 million atJune 30, 2021 due to redemptions of FHLB stock in conjunction with LINK's repayment of FHLB borrowings during the first half of 2021. 43 -------------------------------------------------------------------------------- Table of Contents Deposits grew by$89.0 million or 31.4%, from a total of$283.1 million atDecember 31, 2020 to$372.1 million atJune 30, 2021 . Changes in the deposit types are presented in the table below: June 30, December 31, (dollars in thousands) 2021 2020 Change % Demand, noninterest-bearing$ 74,303 $ 42,374 $ 31,929 75.4 % Demand, interest-bearing 31,666 15,883 15,783 99.4 % Money market and savings 132,412 81,756 50,656 62.0 % Time deposits,$250,000 and over 45,214 47,112 (1,898 ) (4.0 %) Time deposits, other 88,458 95,929 (7,471 ) (7.8 %) Total deposits$ 372,053 $ 283,054 $ 88,999 31.4 % Included in the time deposits balance above were brokered time deposits with a balance of$20.0 million , and$25.0 million as ofJune 30, 2021 andDecember 31, 2020 , respectively. AtJune 30, 2021 , other borrowings consist of$20.0 million in FHLB fixed rate advances, which have maturities from 2023 through 2025, and$3.1 million in borrowings under the Paycheck Protection Program Liquidity Facility ("PPPLF"). The PPPLF is a program designated to facilitate lending by financial institutions to small businesses under the PPP provision of the CARES Act. AtDecember 31, 2020 , other borrowings consisted of$20.0 million in FHLB fixed rate advances and$17.3 million in PPPLF borrowings. Total shareholders' equity increased by$3.1 million , or 7.8%, from$40.3 million atDecember 31, 2020 , to$43.5 million atJune 30, 2021 . The increase is primarily attributable to net income for the six months endedJune 30, 2021 of$3.2 million . Comparison of Results of Operations for the Three Months EndedJune 30, 2021 and 2020 General: Net income was$402 thousand for the three months endedJune 30, 2021 , or$0.08 per diluted share, a decrease in income of$37 thousand , or 8.4%, compared to net income of$439 thousand , or$0.09 per diluted share, for the three months endedJune 30, 2020 . Net income for the three months endedJune 30, 2021 , reflected an increase in net interest income before provision of$777 thousand , and an increase in non-interest income of$39 thousand . These increases in income were partially offset by an increase in the provision for loan losses of$295 thousand , an increase in noninterest expenses of$505 thousand , and an increase in income tax expense of$53 thousand . Net Interest Income: Net interest income before provision for loan losses increased by$777 thousand , or 26.5%, to$3.7 million for the three months endedJune 30, 2021 , compared to$2.9 million for the three months endedJune 30, 2020 . The provision for loan losses increased by$295 thousand from$115 thousand for the three months endedJune 30, 2020 to$410 thousand for the same period in 2021. Interest Income: Interest income increased to$4.4 million for the three months endedJune 30, 2021 , compared with$3.9 million for the year three monthsJune 30, 2020 . The average yield on the earning assets decreased 71 basis points on an annualized basis from 4.83% for the three months endedJune 30, 2020 to 4.12% for the three months endedJune 30, 2021 . This decrease in rates was more than offset by the growth in average balance of earning assets which increased$107.0 million to$428.0 million for the three months endedJune 30, 2021 compared to$321.0 million for the comparable period in 2020. In general, the Company experienced a decrease in most all rates on earning assets as a result of theFederal Reserve decreasing the range for the Fed Funds target rate to 0% to 0.25% as ofMarch 31, 2020 . This rate reduction along with increased competition for loan originations has resulted in new loans originated sinceJune 30, 2020 , generally, earning a lower percentage of interest compared to the loan portfolio existing atJune 30, 2020 . Interest Expense: Interest expense decreased by$246 thousand or 26.3% to$688 thousand for the three months endedJune 30, 2021 , compared to$934 thousand for the three months endedJune 30, 2020 . The decrease in interest expense was primarily due to the decrease in rates paid on interest bearing liabilities, which decreased 65 basis 44 -------------------------------------------------------------------------------- Table of Contents points on an annualized basis from 1.47% for the three months endedJune 30, 2020 to 0.82% for the three months endedJune 30, 2021 . This decrease in rates was partially offset by an increase in average balances of interest bearing liabilities, which increased$80.8 million to$336.2 million for the three months endedJune 30, 2021 compared to$255.4 million for the comparative period in 2020. While the aforementioned lower rate environment has helped the Company reduce overall cost of funds, the evolution of our business has also played a role in this reduction of cost. As the Company continues to grow and mature, we have been able to continue to foster customer relationships that grow core deposits and decrease its reliance upon higher cost time deposits. As a result, the average balance in money market demand deposits grew by$68.1 million for the three months endedJune 30, 2021 compared to the same period in 2020, while reducing the interest rate on these deposits by 23 basis points over that same period. Additionally, the average balance of noninterest bearing deposits grew by$19.3 million for the three months endedJune 30, 2021 compared to the same period in 2020. Provision for Loan Losses: The provision for loan losses increased by$295 thousand from$115 thousand for the three months endedJune 30, 2020 to$410 thousand for the three months endedJune 30, 2021 . During the three months endedMarch 31, 2020 , management adjusted certain qualitative factors in the calculation of its provision for loan losses to account for the uncertain impact of COVID-19 on economic conditions and borrowers' ability to repay loans, resulting in an increased provision during the first quarter of 2020. During the second quarter of 2020, the Company began its participation in PPP through the SBA, which generated the large majority of the loan growth during the second quarter of 2020. Taking all these factors into account, the Company recorded a provision for loan losses of$115 thousand for the second quarter of 2020. The provision for the second quarter of 2021 of$410 thousand is the result of our normal allowance for loan loss process which considers current quarter loan growth as well as the risk ratings of loans within its loan portfolio among other factors. The current economic outlook for theU.S. economy appears to continue its recovery from the negative impact caused by the global pandemic. Despite this continued recovery, management noted that certain aspects of the recovery such as unemployment data, has shown a lag to expectation, indicating that the recovery is occurring slower than initially anticipated. As such, the Company has not reduced its loss factors related to the COVID-19 pandemic during the three months endedJune 30, 2021 . The Company completes a comprehensive quarterly evaluation to determine its provision for loan losses. The evaluation reflects analyses of individual borrowers and historical loss experience, and changes in net loan balances, supplemented as necessary by credit judgment that considers observable trends, conditions, and other relevant environmental and economic factors. Refer to Note 4 of the Notes to the Consolidated Financial Statement for additional details on the provision for loan losses. Non-interest Income: Non-interest income increased by$39 thousand to$159 thousand for the three months endedJune 30, 2021 , from the$120 thousand recognized during the same period of 2020. The increase was the result of growth in fee income and service charges on deposit accounts for the three months endedJune 30, 2021 compared to the same period in 2020. Non-interest Expenses: Non-interest expenses increased$505 thousand or 20.2%, from$2.5 million for the three months endedJune 30, 2020 , to$3.0 million for the three months endedJune 30, 2021 . The increase was largely due to: (1) an increase of$201 thousand in compensation and employee benefit expenses primarily due to increased employee headcount, and annual salary increases and incentives; and (2)$129 thousand of merger expenses incurred in conjunction with our merger with GNB Financial Services, Inc. Analysis of Net Interest Income Net interest income represents the difference between the interest the Company earns on its interest-earning assets, such as loans and investment securities, and the expense the Company pays on interest-bearing liabilities, such as deposits and borrowings. Net interest income depends on both the volume of our interest-earning assets and interest-bearing liabilities and the interest rates the Company earns or pays on them. Average Balances, Interest and Average Yields: The following table sets forth certain information relating to average balance sheets and reflects the average annualized yield on interest-earning assets and average annualized cost of interest- 45 -------------------------------------------------------------------------------- Table of Contents bearing liabilities, interest earned and interest paid for the periods indicated. Such yields and costs are derived by dividing income or expense by the average balance of interest-earning assets or interest-bearing liabilities, respectively, for the periods presented. Average balances are derived from daily balances over the periods indicated. The average balances for loans are net of allowance for loan losses, but include non-accrual loans. The loan yields include net amortization of certain deferred fees and costs that are considered adjustments to yields. For the
Three Months Ended
2021 2020
(Dollars in thousands) Avg Bal Interest Yield/Rate Avg Bal Interest Yield/Rate
Int. Earn. Cash $ 20,796 $ 4 0.09 % $ 44,078 $ 11 0.10 %
Investments 3,617 26 2.91 % 10,083 41 1.64 %
Total Cash Equiv. and Investments 24,413 31 0.51 % 54,161 52 0.39 %
Total Loans 403,568 4,367 4.34 % 266,875 3,815 5.73 %
Total Earning Assets 427,981 4,398 4.12 % 321,035 3,867 4.83 %
Other Assets 17,199 7,979
Total Assets $ 445,180 $ 329,015
Interest bearing demand $ 22,205 $ 9 0.16 % $ 9,207 $ 4 0.17 %
Money market demand 129,606 108 0.34 % 61,514 88 0.57 %
Time deposits 125,590 248 0.79 % 113,544 740 2.61 %
Total Borrowings 58,754 323 2.20 % 71,111 102 0.58 %
Total Interest-Bearing Liabilities 336,153 688 0.82 % 255,376 934 1.47 %
Non Int Bearing Deposits 57,821 38,565
Total Cost of Funds $ 393,974 $ 688 0.70 % $ 293,942 $ 934 1.27 %
Other Liabilities 7,867 861
Total Liabilities $ 401,842 $ 294,803
Equity $ 43,338 $ 34,211
Total Liabilities & Equity $ 445,180 $ 329,015
Net Interest Income $ 3,710 $ 2,933
Net Interest Spread 3.42 % 3.56 %
Net Interest Margin 3.48 % 3.66 %
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Table of Contents
Rate/Volume Analysis
The following table reflects the sensitivity of the Company's interest income
and interest expense to changes in volume and in yields on interest-earning
assets and costs of interest-bearing liabilities during the periods indicated.
Three Months Ended
June 30, 2021 vs. 2020
Increase (Decrease) Due To:
(Dollars in thousands) Rate Volume Net
Interest Income:
Int. Earn. Cash $ (1 ) $ (6 ) $ (7 )
Investments 11 (26 ) (15 )
Total Loans (1,124 ) 1,677 553
Total Earning Assets (1,114 ) 1,645 531
Interest Expense:
Interest bearing demand (1 ) 6 5
Money market demand (77 ) 97 20
Time deposits (571 ) 79 (492 )
Total Borrowings 239 (18 ) 221
Total Interest-Bearing Liabilities (410 ) 164 (246 )
Change in Net Interest Income $
(704 )
Comparison of Results of Operations for the Six Months EndedJune 30, 2021 and 2020 General: Net income was$3.2 million for the six months endedJune 30, 2021 , or$0.60 per diluted share, an increase in income of$5.3 million , compared to net loss of$2.2 million , or$(0.47) per diluted share, for the six months endedJune 30, 2020 . Net income for the six months endedJune 30, 2021 , reflected an increase in net interest income before provision of$2.5 million , a decrease in provision for loan losses of$1.4 million , an increase in non-interest income of$72 thousand , and an increase in income tax benefit of$3.0 million . These increases in income were partially offset by an increase in noninterest expenses of$1.7 million . Net Interest Income: Net interest income before provision for loan losses increased by$2.5 million , or 58.7%, to$6.8 million for the six months endedJune 30, 2021 , compared to$4.3 million for the six months endedJune 30, 2020 . The provision for loan losses decreased by$1.4 million from$2.1 million for the six months endedJune 30, 2020 to$617 thousand for the same period in 2021. Interest Income: Interest income increased to$8.2 million for the six months endedJune 30, 2021 , compared with$6.2 million for the year six monthsJune 30, 2020 . The average yield on the earning assets decreased 51 basis points on an annualized basis from 4.53% for the six months endedJune 30, 2020 to 4.02% for the six months endedJune 30, 2021 . This decrease in rates was more than offset by the growth in average balance of earning assets which increased$134.5 million to$409.1 million for the six months endedJune 30, 2021 compared to$274.6 million for the comparable period in 2020. In general, the Company experienced a decrease in most all rates on earning assets as a result of theFederal Reserve decreasing the range for the Fed Funds target rate to 0% to 0.25% as ofMarch 31, 2020 . This rate reduction along with increased competition for loan originations has resulted in new loans originated sinceJune 30, 2020 , generally, earning a lower percentage of interest compared to the loan portfolio existing atJune 30, 2020 . 47 -------------------------------------------------------------------------------- Table of Contents Interest Expense: Interest expense decreased by$532 thousand or 27.9% to$1.4 million for the six months endedJune 30, 2021 , compared to$1.9 million for the six months endedJune 30, 2020 . The decrease in interest expense was primarily due to the decrease in rates paid on interest bearing liabilities, which decreased 87 basis points on an annualized basis from 1.73% for the six months endedJune 30, 2020 to 0.86% for the six months endedJune 30, 2021 . This decrease in rates was partially offset by an increase in average balances of interest bearing liabilities, which increased$98.5 million to$320.1 million for the six months endedJune 30, 2021 compared to$221.6 million for the comparative period in 2020. While the aforementioned lower interest rate environment has helped the Company reduce overall cost of funds, the evolution of our business has also played a role in this reduction of cost. As the Company continues to grow and mature, we have been able to continue to foster customer relationships that grow core deposits and decrease its reliance upon higher cost time deposits. As a result, the average balance in money market demand deposits grew by$54.8 million for the six months endedJune 30, 2021 compared to the same period in 2020, while reducing the interest rate on these deposits by 64 basis points over that same period. Additionally, the average balance of noninterest bearing deposits grew by$28.2 million for the six months endedJune 30, 2021 compared to the same period in 2020. Provision for Loan Losses: The provision for loan losses decreased by$1.4 million from$2.1million for the six months endedJune 30, 2020 to$617 thousand for the six months endedJune 30, 2021 . During the six months endedJune 30, 2020 , management adjusted certain qualitative factors in the calculation of its provision for loan losses to account for the uncertain impact of COVID-19 on economic conditions and borrowers' ability to repay loans, resulting in an increased provision during the first half of 2020. The provision for the first six months of 2021 of$617 thousand is the result of our normal allowance for loan loss process which considers current quarter loan growth as well as the risk ratings of loans within its loan portfolio among other factors. The current economic outlook for theU.S. economy appears to continue its recovery from the negative impact caused by the global pandemic. Despite this continued recovery, management noted that certain aspects of the recovery such as unemployment data, has shown a lag to expectation, indicating that the recovery is occurring slower than initially anticipated. As such, the Company has not reduced its loss factors related to the COVID-19 pandemic during the six months endedJune 30, 2021 . The Company completes a comprehensive quarterly evaluation to determine its provision for loan losses. The evaluation reflects analyses of individual borrowers and historical loss experience, and changes in net loan balances, supplemented as necessary by credit judgment that considers observable trends, conditions, and other relevant environmental and economic factors. Refer to Note 4 of the Notes to the Consolidated Financial Statement for additional details on the provision for loan losses. Non-interest Income: Non-interest income increased by$72 thousand to$269 thousand for the six months endedJune 30, 2021 , from the$197 thousand recognized during the same period of 2020. The increase was the result of growth in fee income and service charges on deposit accounts for the six months endedJune 30, 2021 compared to the same period 2020. Non-interest Expenses: Non-interest expenses increased$1.7 million or 36.4%, from$4.6 million for the six months endedJune 30, 2020 , to$6.2 million for the six months endedJune 30, 2021 . The increase was largely due to: (1) an increase of$809 thousand in compensation and employee benefit expenses primarily due to increased employee headcount, and annual salary increases and incentives; and (2)$560 thousand of merger expenses incurred in conjunction with our merger with GNB Financial Services, Inc. Income Tax Benefit: Income tax benefit for the six months endedJune 30, 2021 totaled$3.0 million compared to$0 for the same period in 2020. During the first quarter of 2021, the Company determined based on its recent results of operations over the previous six months coupled with its forecasted net income over the next 36 months, that it is more likely than not that the Company will be able to fully recognize its deferred tax asset prior to the end of its useful life. Please refer to Note 8 to the Consolidated Financial Statements as ofJune 30, 2021 for further discussion of our evaluation. Resultantly, atMarch 31, 2021 , the Company fully reversed the deferred tax asset valuation allowance that had been previously recorded. This reversal along with the recording of current income tax expense, resulted in an income tax benefit for the first half of 2021. In the comparable period of 2020, the Company had recorded a full valuation allowance against its deferred tax asset given its history of operating losses and uncertainty surrounding its ability to generate future net income, resulting in no income tax expense or benefit. 48 -------------------------------------------------------------------------------- Table of Contents Analysis of Net Interest Income Net interest income represents the difference between the interest the Company earns on its interest-earning assets, such as loans and investment securities, and the expense the Company pays on interest-bearing liabilities, such as deposits and borrowings. Net interest income depends on both the volume of our interest-earning assets and interest-bearing liabilities and the interest rates the Company earns or pays on them. Average Balances, Interest and Average Yields: The following table sets forth certain information relating to average balance sheets and reflects the average annualized yield on interest-earning assets and average annualized cost of interest-bearing liabilities, interest earned and interest paid for the periods indicated. Such yields and costs are derived by dividing income or expense by the average balance of interest-earning assets or interest-bearing liabilities, respectively, for the periods presented. Average balances are derived from daily balances over the periods indicated. The average balances for loans are net of allowance for loan losses, but include non-accrual loans. The loan yields include net amortization of certain deferred fees and costs that are considered adjustments to yields. For the Six Months Ended June 30, 2021 2020 (Dollars in thousands) Avg Bal Interest Yield/Rate Avg Bal Interest Yield/Rate Int. Earn. Cash$ 23,920 $ 11 0.09 %$ 40,617 $ 123 0.61 % Investments 5,495 55 2.01 % 8,900 78 1.76 % Total Cash Equiv. and Investments 29,415 66 0.45 % 49,517 201 0.82 % Total Loans 379,713 8,097 4.30 % 225,101 5,981 5.34 % Total Earning Assets 409,128 8,163 4.02 % 274,618 6,182 4.53 % Other Assets 12,822 9,640 Total Assets$ 421,950 $ 284,258 Interest bearing demand$ 21,267 $ 17 0.16 %$ 8,263 $ 8 0.21 % Money market demand 116,845 202 0.35 % 62,049 305 0.99 % Time deposits 124,681 564 0.91 % 114,284 1,488 2.62 % Total Borrowings 57,276 589 2.08 % 37,005 103 0.56 % Total Interest-Bearing Liabilities 320,069 1,372 0.86 % 221,601 1,904 1.73 % Non Int Bearing Deposits 54,648 26,433 Total Cost of Funds$ 374,717 $ 1,372 0.74 %$ 248,034 $ 1,904 1.54 % Other Liabilities 4,546 844 Total Liabilities$ 379,263 $ 248,878 Equity$ 42,687 $ 35,380 Total Liabilities & Equity$ 421,950 $ 284,258 Net Interest Income$ 6,791 $ 4,278 Net Interest Spread 3.29 % 2.98 % Net Interest Margin 3.35 % 3.13 % 49
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Table of Contents
Rate/Volume Analysis
The following table reflects the sensitivity of the Company's interest income
and interest expense to changes in volume and in yields on interest-earning
assets and costs of interest-bearing liabilities during the periods indicated.
Six Months Ended
June 30, 2021 vs. 2020
Increase (Decrease) Due To:
(Dollars in thousands) Rate Volume Net
Interest Income:
Int. Earn. Cash $ (62 ) $ (51 ) $ (113 )
Investments 7 (30 ) (23 )
Total Loans (2,023 ) 4,140 2,117
Total Earning Assets (2,078 ) 4,059 1,981
Interest Expense:
Interest bearing demand (5 ) 13 8
Money market demand (370 ) 267 (103 )
Time deposits (1,054 ) 131 (923 )
Total Borrowings 431 55 486
Total Interest-Bearing Liabilities (998 ) 466 (532 )
Change in Net Interest Income $
(1,080 )
Liquidity, Commitments, and Capital Resources The Company's liquidity, represented by cash and due from banks, is a product of our operating, investing and financing activities. The Company's primary sources of funds are deposits, principal repayments of securities and outstanding loans, and funds provided from operations. In addition, the Company invests excess funds in short-term interest-earnings assets such as overnight deposits orU.S. agency securities, which provide liquidity to meet lending requirements. While scheduled payments from the amortization of loans and securities and short-term investments are relatively predictable sources of funds, general interest rates, economic conditions and competition greatly influence deposit flows and repayments on loans and mortgage-backed securities. The Company strives to maintain sufficient liquidity to fund operations, loan demand and to satisfy fluctuations in deposit levels. The Company is required to have enough investments that qualify as liquid assets in order to maintain sufficient liquidity to ensure safe and sound banking operations. Liquidity may increase or decrease depending upon the availability of funds and comparative yields on investments in relation to the return on loans. Our attempts to maintain adequate but not excessive liquidity, and liquidity management is both a daily and long-term function of the Company's business management. We manages our liquidity in accordance with a board of directors-approved asset liability policy, which is administered by the Company's asset-liability committee ("ALCO"). ALCO reports interest rate sensitivity, liquidity, capital and investment-related matters on a quarterly basis to the Company's board of directors. The Company reviews cash flow projections regularly and updates them in order to maintain liquid assets at levels believed to meet the requirements of normal operations, including loan commitments and potential deposit outflows from maturing certificates of deposit and savings withdrawals. Certificates of deposit due within one year ofJune 30, 2021 , totaled$109.8 million , or 82.1% of our certificates of deposit, and 29.5% of total deposits. If these deposits do not remain with us, we will be required to seek other sources of funds, including other deposits and FHLB advances. Depending on market conditions, we may be required to pay higher rates on such deposits or borrowings than we currently pay. We believe, however, based on past experience that a significant portion of such deposits will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered. While deposits are the Company's primary source of funds, when needed the Companyis also able to generate cash through borrowings from theFederal Home Loan Bank of Pittsburgh ("FHLB"). AtJune 30, 2021 , the Company had remaining available capacity with FHLB, subject to certain collateral restrictions, of$132.8 million . 50 -------------------------------------------------------------------------------- Table of Contents Consistent with the Company's goals to operate as a sound and profitable financial institution, the Company actively seeks to maintain its status as a well-capitalized institution in accordance with regulatory standards. As ofJune 30, 2021 andDecember 31, 2020 , the Company met the capital requirements to be considered "well capitalized." See Note 12 within the Notes to the Consolidated Financial Statements for more information regarding our capital resources. Off-Balance Sheet Arrangements and Contractual Obligations See Note 10 within the Notes to the Consolidated Financial Statements beginning for more information regarding the Company's off-balance sheet arrangements. For disclosures of the Company's future obligations under operating leases, please see Note 11 within the Notes to the Consolidated Financial Statements. For disclosures of the Company's contractual obligations related to certificates of deposits, please see Note 5 within the Notes to the Consolidated Financial Statements. Critical Accounting Policies It is management's opinion that accounting estimates covering certain aspects of the Company's business have more significance than others due to the relative importance of those areas to overall performance, or the level of subjectivity required in making such estimates. See Note 1 of the Notes to the Consolidated Financial Statements for our accounting policies. Recently Issued Accounting Standards Recently issued accounting standards are included in Note 1 of the Notes to the Consolidated Financial Statements. Item
3. Quantitative and Qualitative Disclosure About Market Risk Not required for smaller reporting companies. Item
4. Controls and Procedures Evaluation of Disclosure Controls and ProceduresThe Company's management, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as ofJune 30, 2021 . Based upon that evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this Report on Form 10-Q, the Company's disclosure controls and procedures were effective. Changes in Internal Control Over Financial Reportin g There were no changes in the Company's internal control over financial reporting that occurred during the quarter endedJune 30, 2021 , that materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
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