WESTERN NEW ENGLAND BANCORP, INC. Overview.
We strive to remain a leader in meeting the financial service needs of our local community, and to provide quality service to the individuals and businesses in the market areas that we have served since 1853. Historically, we have been a community-oriented provider of traditional banking products and services to business organizations and individuals, including products such as residential and commercial loans, consumer loans and a variety of deposit products. We meet the needs of our local community through a community-based and service-oriented approach to banking. We have adopted a growth-oriented strategy that has focused on increasing commercial lending. Our strategy also calls for increasing deposit relationships and broadening our product lines and services. We believe that this business strategy is best for our long-term success and viability, and complements our existing commitment to high-quality customer service.
In connection with our overall growth strategy, we seek to:
? Grow the Company's commercial loan portfolio and related commercial deposits by
targeting businesses in our primary market area of
County in western
? Supplement the commercial portfolio by growing the residential real estate
portfolio to diversify the loan portfolio and deepen customer relationships;
? Focus on expanding our retail banking deposit franchise and increase the number
of households served within our designated market area;
? Invest in people, systems and technology to grow revenue, improve efficiency
and enhance the overall customer experience;
? Grow revenues, increase tangible book value per share, continue to pay
competitive dividends to shareholders and utilize the Company's stock
repurchase plan to leverage our capital and enhance franchise value; and
? Consider growth through acquisitions. We may pursue expansion opportunities in
existing or adjacent strategic locations with companies that add complementary
products to our existing business and at terms that add value to our existing
shareholders.
You should read the following financial results for the three and six months
ended
? Net income was
ended
the same period in 2021. For the six months ended
million, or
? The provision for loan losses was
2022, compared to a credit of
provision for loan losses was a credit of
2021. During the three and six months ended
its qualitative factors related to the impact of the COVID-19 pandemic and
other economic trends used in the Company's allowance.
? Net interest income increased
three months ended
net interest margin, on a tax-equivalent basis, was 3.26% for the three months
ended
2021. During the six months ended
months ended
2021. The net interest margin, on a tax-equivalent basis, was 3.23% for the six
months ended
2021.
31
CRITICAL ACCOUNTING POLICIES.
Our consolidated financial statements are prepared in accordance withU.S. GAAP and practices within the banking industry. Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions, and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates, assumptions, and judgments. Actual results could differ from those estimates. Critical accounting estimates are necessary in the application of certain accounting policies and procedures, and are particularly susceptible to significant change. Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and could potentially result in materially different results under different assumptions and conditions. There have been no material changes to our critical accounting policies during the six months endedJune 30, 2022 . For additional information on our critical accounting policies, please refer to the information contained in Note 1 of the accompanying unaudited consolidated financial statements and Note 1 of the consolidated financial statements included in our 2021 Annual Report.
RECENT DEVELOPMENTS: CORONAVIRUS PANDEMIC RESPONSE AND ACTIONS.
The Company continues to monitor COVID-19's impact on its business and customers, however, the extent to which COVID-19 will continue to impact its results and operations will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact, and the direct and indirect economic effects of the pandemic and containment measures. Our business is dependent upon the willingness and ability of our employees and customers to conduct banking and other financial transactions. The COVID-19 global public health crisis and the resulting "stay-at-home" orders resulted in widespread volatility, severe disruptions in 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 ofJune 30, 2022 , the Company received funding approval from the SBA for 2,146 applications totaling$302.2 million . As ofJune 30, 2022 , the Company processed 2,128 PPP loan forgiveness applications totaling$299.6 million . Total PPP loans decreased$22.7 million , or 89.6%, from$25.3 million atDecember 31, 2021 to$2.6 million atJune 30, 2022 . 32 During the three months endedJune 30, 2022 , the Company recognized$129,000 in PPP loan origination fee income and PPP interest income ("PPP income"), compared to$1.6 million during the three months endedJune 30, 2021 . As ofJune 30, 2022 , the Company had$133,000 in remaining deferred PPP loan processing fees. The table below breaks out the PPP income recognized for the periods indicated: For the Three Months Ended September June 30, 2022 March 31, 2022 December 31, 2021 30, 2021 June 30, 2021 ($ in thousands)
PPP origination fee income $ 122 $ 526 $
868 $ 1,556 $ 1,240
PPP interest income 7 36 105 201 387
Total PPP Income $ 129 $ 562 $ 973 $ 1,757 $ 1,627
Loan Modifications/Troubled Debt Restructurings.
The banking regulatory agencies, through an Interagency Statement 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 ofJune 30, 2022 , the Company had one remaining commercial real estate loan, with an outstanding principal balance of$9.0 million , and one residential loan with an outstanding principal balance of$123,000 , under CARES Act modification. The commercial real estate borrower was granted a principal deferral, while the residential borrower was granted full payment deferral under the Company's modification deferral program. Allowance for Loan Losses. In determining the allowance for loan losses, the Company considers quantitative loss factors and a number of qualitative factors, such as underwriting policies, current economic conditions, delinquency statistics, the adequacy of the underlying collateral and the financial strength of the borrower. The ongoing COVID-19 pandemic could cause us to experience higher credit losses in our lending portfolio, reduce demand for our products and services and other negative impacts on our financial position, results of operations and prospects. As ofJune 30, 2022 , the Company's delinquency and nonperforming assets have not been materially impacted by the COVID-19 pandemic, and therefore, have not resulted in material credit losses within the lending portfolio. The Company is continuing to monitor COVID-19's impact on its business and its customers, however, the extent to which COVID-19 will further impact its results and operations will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact and the direct and indirect economic effects of the pandemic and
containment measures.
33
COMPARISON OF FINANCIAL CONDITION AT
AtJune 30, 2022 , total assets were$2.6 billion , an increase of$38.9 million , or 1.5%, fromDecember 31, 2021 . During the six months endedJune 30, 2022 , cash and cash equivalents decreased$55.9 million , or 54.1%, to$47.5 million , investment securities decreased$22.3 million , or 5.2%, to$406.2 million and total loans increased$111.0 million , or 6.0%, to$2.0 billion . AtJune 30, 2022 , the Company's available-for-sale securities portfolio decreased$33.4 million , or 17.2%, from$194.4 million atDecember 31, 2021 to$160.9 million atJune 30, 2022 . The held-to-maturity securities portfolio, recorded at amortized cost, increased$11.5 million , or 5.2%, from$222.3 million atDecember 31, 2021 to$233.8 million atJune 30, 2022 . The marketable equity securities portfolio decreased$443,000 , or 3.7%, from$11.9 million atDecember 31, 2021 to$11.5 million atJune 30, 2022 . The primary objective of the investment portfolio is to provide liquidity and maximize income while preserving the safety of principal. AtJune 30, 2022 , total loans were$2.0 billion , an increase of$111.0 million , or 6.0%, fromDecember 31, 2021 . Excluding PPP loans, total loans increased$133.7 million , or 7.3%, driven by an increase in commercial real estate loans of$94.9 million , or 9.7%, partially offset by a decrease in total commercial and industrial loans of$8.8 million , or 3.9%. Excluding a decrease in PPP loans of$22.7 million , or 89.6%, fromDecember 31, 2021 , commercial and industrial loans increased$13.9 million , or 6.9%, atJune 30, 2022 . Residential real estate loans, which include home equity loans, increased$24.2 million , or 3.7%. In accordance with the Company's asset/liability management strategy, atJune 30, 2022 , the Company serviced$82.5 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$102,000 and$153,000 for the six months endedJune 30 ,
2022 and 2021, respectively. Management continues to remain attentive to any signs of deterioration in borrowers' financial conditions and is proactive in taking the appropriate steps to mitigate risk. AtJune 30, 2022 , nonperforming loans totaled$4.1 million , or 0.21% of total loans, compared to$5.0 million , or 0.27% of total loans, atDecember 31, 2021 . AtJune 30, 2022 , there were no loans 90 or more days past due and still accruing interest. Nonperforming assets to total assets was 0.16% atJune 30, 2022 , compared to 0.20% atDecember 31, 2021 . The allowance for loan losses as a percentage of total loans was 0.99% atJune 30, 2022 , compared to 1.06% atDecember 31, 2021 . AtJune 30, 2022 , the allowance for loan losses as a percentage of nonperforming loans was 476.5%, compared to 398.6%, atDecember 31, 2021 AtJune 30, 2022 , total deposits were$2.3 billion , an increase of$45.1 million , or 2.0%, fromDecember 31, 2021 , primarily due to an increase in core deposits of$96.7 million , or 5.2%. Core deposits, which the Company defines as all deposits except time deposits, increased from$1.9 billion , or 82.2% of total deposits, atDecember 31, 2021 , to$2.0 billion , or 84.8% of total deposits, atJune 30, 2022 . Non-interest-bearing deposits increased$6.3 million , or 1.0%, to$647.6 million , interest-bearing checking accounts increased$8.3 million , or 5.7%, to$154.0 million , savings accounts increased$9.1 million , or 4.2%, to$226.7 million , and money market accounts increased$72.9 million , or 8.6%, to$923.2 million . Time deposits decreased$51.6 million , or 12.8%, from$402.0 million atDecember 31, 2021 to$350.4 million atJune 30, 2022 . The Company did not have any brokered deposits atJune 30, 2022 orDecember 31, 2021 . AtJune 30, 2022 , total borrowings increased$3.5 million , or 15.7%, from$22.3 million atDecember 31, 2021 , to$25.8 million . Other borrowings increased$3.5 million , or 129.6%, to$6.2 million and subordinated debt outstanding totaled$19.7 million atJune 30, 2022 and$19.6 million atDecember 31, 2021 . AtJune 30, 2022 , shareholders' equity was$215.3 million , or 8.4% of total assets, compared to$223.7 million , or 8.8% of total assets, atDecember 31, 2021 . The decrease in shareholders' equity reflects$3.7 million for the repurchase of the Company's common stock, the payment of regular cash dividends of$2.7 million and an increase in accumulated other comprehensive loss of$14.4 million , partially offset by net income of$10.9 million . Total shares outstanding as ofJune 30, 2022 were 22,465,991. The Company's book value per share was$9.58 atJune 30, 2022 compared to$9.87 atDecember 31, 2021 , while tangible book value per share, a non-GAAP financial measure, decreased$0.29 , or 3.1%, from$9.21 atDecember 31, 2021 to$8.92 atJune 30, 2022 . During the six months endedJune 30, 2022 , the change in AOCI reduced the tangible book value per share by$0.64 as ofJune 30, 2022 , primarily due to the impact of higher interest rates on the fair value of available-for-sale securities. Tangible book value is a non-GAAP measure. See "Explanation of Use of Non-GAAP Financial Measurements" for the related tangible book value calculation and a reconciliation of GAAP to non-GAAP financial measures. 34 The Company's regulatory capital ratios remain in compliance with regulatory "well capitalized" requirements and internal target minimal levels. AtJune 30, 2022 , the Company's Tier 1 leverage, common equity tier 1 capital, and total risk-based capital ratios were 8.9%, 11.7%, and 13.7%, respectively, and the Bank's Tier 1 leverage, common equity tier 1 capital, and total risk-based capital ratios were 9.1%, 12.0%, and 13.0%, respectively, compared with regulatory "well capitalized" minimums of 5.00%, 6.5%, and 10.00%, respectively. OnApril 27, 2021 , the Board of Directors authorized a stock repurchase plan (the "2021 Plan") under which the Company is authorized to repurchase up to 2.4 million shares of common stock, or 10% of its outstanding common stock. During the three months endedJune 30, 2022 , the Company repurchased 293,173 shares of common stock under the 2021 Plan. During the six months endedJune 30, 2022 , the Company repurchased 405,847 shares of common stock under the 2021 Plan. AtJune 30, 2022 , there were 271,472 shares of common stock available for repurchase under the 2021 Plan. OnJuly 26, 2022 , the Board of Directors authorized a stock repurchase plan (the "2022 Plan"), pursuant to which the Company may repurchase up to 1.1 million shares of common stock, or approximately 5.0%, of the Company's outstanding shares of common stock, upon the completion of the 2021 Plan.
The shares repurchased under the 2021 and 2022 Plans will be purchased from time to time at prevailing market prices, through open market or privately negotiated transactions, or otherwise, depending upon market conditions. There is no guarantee as to the exact number, or value, of shares that will be repurchased by the Company, and the Company may discontinue repurchases at any time that management determines additional repurchases are not warranted. The timing and amount of additional share repurchases under the 2021 Plan will depend on a number of factors, including the Company's stock price performance, ongoing capital planning considerations, general market conditions, and applicable
legal requirements. Although the Company has historically paid quarterly dividends on its common stock and currently intends to continue to pay such dividends, the Company's ability to pay such dividends depends on a number of factors, including restrictions under federal laws and regulations on the Company's ability to pay dividends, and as a result, there can be no assurance that dividends will continue to be paid in the future.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED
General. The Company reported net income of$5.5 million , or$0.25 per diluted share, for the three months endedJune 30, 2022 , compared to net income of$5.7 million , or$0.24 per diluted share, for the three months endedJune 30, 2021 . Return on average assets and return on average equity was 0.87% and 10.22%, respectively, for the three months endedJune 30, 2022 , as compared to 0.92% and 10.16%, respectively, for the three months endedJune 30, 2021 .
Net Interest and Dividend Income.
The following tables set forth the information relating to our average balance and net interest income for the three months endedJune 30, 2022 and 2021, and reflect the average yield on interest-earning assets and average cost of interest-bearing liabilities for the periods indicated. Yields and costs are derived by dividing interest income by the average balance of interest-earning assets and interest expense by the average balance of interest-bearing liabilities for the periods shown. The interest rate spread is the difference between the total average yield on interest-earning assets and the cost of interest-bearing liabilities. Net interest margin represents tax-equivalent net interest and dividend income as a percentage of average interest-earning assets. Average balances are derived from actual daily balances over the periods indicated. Interest income includes fees earned when the real estate loans are prepaid or refinanced. For analytical purposes, the interest earned on tax-exempt assets is adjusted to a tax-equivalent basis to recognize the income tax savings which facilitates comparison between taxable and tax-exempt assets. 35 Three Months Ended June 30, 2022 2021 Average Average Yield/ Average Average Yield/ Balance Interest(8) Cost(9) Balance Interest(8) Cost(9) (Dollars in thousands) ASSETS: Interest-earning assets Loans(1)(2)$ 1,949,464 $ 18,624 3.83 %$ 1,911,323 $ 18,425 3.87 % Securities(2) 414,226 2,068 2.00 293,991 1,278 1.74
Other investments - at cost 9,892 30 1.22 10,114 28 1.11 Short-term investments(3) 24,944 48 0.77 114,883 26 0.09 Total interest-earning
assets 2,398,526 20,770 3.47 2,330,311 19,757 3.40
Total
non-interest-earning
assets 153,939 147,545 Total assets$ 2,552,465 $ 2,477,856 LIABILITIES AND EQUITY: Interest-bearing liabilities Interest-bearing checking accounts$ 137,984 $ 105 0.31 %$ 100,455 $ 92 0.37 % Savings accounts 224,487 48 0.09 206,302 47 0.09 Money market accounts 910,801 549 0.24 766,378 650 0.34 Time deposit accounts 365,383 288 0.32 487,712 677 0.56 Total interest-bearing deposits 1,638,655 990 0.24 1,560,847 1,466 0.38 Short-term borrowings and long-term debt 25,829 264 4.10 54,459 382 2.81 Interest-bearing liabilities 1,664,484 1,254 0.30 1,615,306 1,848 0.46 Non-interest-bearing deposits 635,678 603,270 Other non-interest-bearing liabilities 35,076 36,043 Total non-interest-bearing liabilities 670,754 639,313 Total liabilities 2,335,238 2,254,619 Total equity 217,227 223,237 Total liabilities and equity$ 2,552,465 $ 2,477,856 Less: Tax-equivalent adjustment(2) (124 ) (105 ) Net interest and dividend income$ 19,392 $ 17,804 Net interest rate spread(4) 3.15 % 2.92 % Net interest rate spread, on a tax equivalent basis(5) 3.17 % 2.94 % Net interest margin(6) 3.24 % 3.06 % Net interest margin, on a tax equivalent basis(7) 3.26 % 3.08 % Ratio of average interest-earning assets to average interest-bearing liabilities 144.10 % 144.26 %
(1) Loans, including nonaccrual loans, are net of deferred loan origination costs
and unadvanced funds.
(2) Loan and securities income are presented on a tax-equivalent basis using a
tax rate of 21%. The tax-equivalent adjustment is deducted from
tax-equivalent net interest and dividend income to agree to the amount
reported on the consolidated statements of net income.
(3) Short-term investments include federal funds sold.
(4) Net interest rate spread represents the difference between the weighted
average yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities.
(5) Net interest rate spread, on a tax-equivalent basis, represents the
difference between the tax-equivalent weighted average yield on
interest-earning assets and the tax-equivalent weighted average cost of
interest-bearing liabilities.
(6) Net interest margin represents net interest and dividend income as a
percentage of average interest-earning assets.
(7) Net interest margin, on a tax-equivalent basis, represents tax-equivalent net
interest and dividend income as a percentage of average interest-earning
assets.
(8) Acquired loans, time deposits and borrowings are recorded at fair value at
the time of acquisition. The fair value marks on the loans, time deposits and
borrowings acquired accrete and amortize into net interest income over time.
For the three months ended
accretion income and interest expense reduction on time deposits and
borrowings increased (decreased) net interest income
respectively. Excluding these items, net interest margin, on a tax-equivalent
basis, for the three months ended
and 3.09%, respectively.
(9) Annualized.
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 June30, 2022 compared to Three Months
Ended
June 30, 2021
Increase (Decrease) Due to
Volume Rate Net
(In thousands)
Interest-earning assets
Loans (1) $ 369 $ (170 ) $ 199
Securities (1) 523 267 790
Other investments - at cost (1 ) 3 2
Short-term investments (20 ) 42 22Total interest-earning assets 871 142 1,013 Interest-bearing liabilities Interest-bearing checking accounts 34
(21 ) 13
Savings accounts 4 (3 ) 1
Money market accounts 122 (223 ) (101 )
Time deposit accounts (170 ) (219 ) (389 )Short-term borrowing and long-time debt (201 ) 83 (118 ) Total interest-bearing liabilities (211 ) (383 ) (594 )
Change in net interest and dividend income (1)
525 $ 1,607 (1) Securities, loan income and change in net interest and dividend income are
presented on a tax-equivalent basis using a tax rate of 21%. The
tax-equivalent adjustment is deducted from tax-equivalent net interest
income.
Net interest income increased$1.6 million , or 8.9%, to$19.4 million , for the three months endedJune 30, 2022 , from$17.8 million for the three months endedJune 30, 2021 . The increase was due to an increase in interest and dividend income of$994,000 , or 5.1%, and a decrease in interest expense of$594,000 , or 32.2%. Interest expense on deposits decreased$476,000 , or 32.5%, and interest expense on borrowings decreased$118,000 , or 30.9%. For the three months endedJune 30, 2022 , net interest income included$129,000 in PPP income, compared to$1.6 million for the three months endedJune 30, 2021 . Excluding PPP income, net interest income increased$3.1 million , or 19.1%, primarily due to an increase in interest and dividend income of$2.5 million , or 13.8%. The net interest margin was 3.24% for the three months endedJune 30, 2022 , compared to 3.06% for the three months endedJune 30, 2021 . The net interest margin, on a tax-equivalent basis, was 3.26% for the three months endedJune 30, 2022 , compared to 3.08% for the three months endedJune 30, 2021 . The increase in the net interest margin was due to an increase in average loans outstanding of$38.1 million , or 2.0%, from the three months endedJune 30, 2021 , compared to the three months endedJune 30, 2022 . The average yield on interest-earning assets increased seven basis points from 3.40% for the three months endedJune 30, 2021 to 3.47% for the three months endedJune 30, 2022 . During the three months endedJune 30, 2022 , the average cost of funds, including non-interest-bearing demand accounts and borrowings, decreased 11 basis points, from 0.33% for the three months endedJune 30, 2021 to 0.22% for the three months endedJune 30, 2022 . The average cost of core deposits, which include non-interest-bearing demand accounts, decreased four basis points, from 0.19% for the three months endedJune 30, 2021 to 0.15% for the three months endedJune 30, 2022 . The average cost of time deposits decreased 24 basis points from 0.56% for the three months endedJune 30, 2021 to 0.32% for the three months endedJune 30, 2022 . The average cost of borrowings increased 129 basis points during the same period due to the full quarter impact of the$20.0 million in subordinated debt issued onApril 19, 2021 . For the three months endedJune 30, 2022 , average demand deposits, an interest-free source of funds, increased$32.4 million , or 5.4%, to$635.7 million , or 28.0% of total average deposits, from$603.3 million , or 27.9% of total average deposits for the three months endedJune 30, 2021 . 37 During the three months endedJune 30, 2022 , average interest-earning assets increased$68.2 million , or 2.9%, to$2.4 billion compared to the three months endedJune 30, 2021 , primarily due to an increase in average securities of$120.0 million , or 39.5%, and an increase in average loans of$38.1 million , or 2.0%, partially offset by a decrease in short-term investments of$89.9 million , or 78.3%. Excluding average PPP loans, average interest-earning assets increased$220.7 million , or 10.2%, and average loans increased$190.7 million , or 10.9%, from the three months endedJune 30, 2021 to the three months endedJune 30, 2022 .
Provision for Loan Losses.
The provision for loan losses is reviewed by management based upon our evaluation of then-existing economic and business conditions affecting our key lending areas and other conditions, such as new loan products, credit quality trends (including trends in nonperforming loans expected to result from existing conditions), collateral values, loan volumes and concentrations, specific industry conditions within portfolio segments that existed as of the balance sheet date and the impact that such conditions were believed to have had on the collectability of the loan portfolio. The amount of the provision for loan losses during the three months endedJune 30, 2022 was based on the changes that occurred in the loan portfolio during that same period. The Company recorded a provision for loan losses of$300,000 for three months endedJune 30, 2022 , compared to a credit for loan losses of$1.2 million for the three months endedJune 30, 2021 . The increase in the provision for loan losses was due to strong organic loan growth during the second quarter of 2022. The Company recorded net charge-offs of$48,000 for the three months endedJune 30, 2022 , as compared to net charge-offs of$157,000 for the three months endedJune 30, 2021 . Management continues to assess the exposure of the Company's loan portfolio to the COVID-19 pandemic related factors, economic trends and their potential effect on asset quality. Although we believe that we have established and maintained the allowance for loan losses at adequate levels, future adjustments may be necessary if economic, real estate and other conditions differ substantially from the current operating environment. If the COVID-19 pandemic has an adverse effect on the ability of our borrowers to satisfy their obligations to us, the demand for our loans or our other products and services, other aspects of our business operations, or on financial markets, real estate markets, or economic growth, this could, depending on the extent of the loan defaults, materially and adversely affect our liquidity and financial condition and our results of operations could be materially and adversely affected. Non-interest Income. Non-interest income increased$332,000 , or 13.8%, to$2.7 million for the three months endedJune 30, 2022 , from$2.4 million for the three months endedJune 30, 2021 . During the three months endedJune 30, 2022 , service charges and fees on deposits increased$271,000 , or 13.1%, primarily due to the$177,000 , or 19.1%, increase in ATM and debit card interchange income from increased card-based transaction usage across our checking account base. Other income from loan-level swap fees on commercial loans increased$21,000 from the three months endedJune 30, 2021 to the three months endedJune 30, 2022 . Income from bank-owned life insurance decreased$42,000 , or 8.4%, from the three months endedJune 30, 2021 to the three months endedJune 30, 2022 . During the three months endedJune 30, 2021 , mortgage banking income from the sale of fixed rate residential real estate loans totaled$242,000 . The Company did not sell any loans to the secondary market during the three months endedJune 30, 2022 . The Company reported a gain of$141,000 on non-marketable equity investments and reported an unrealized loss on marketable equity securities of$225,000 , during the three months endedJune 30, 2022 , compared to unrealized gains on marketable equity securities of$6,000 during the three months endedJune 30, 2021 . The Company also reported realized losses on the sale of securities of$12,000 during the three months endedJune 30, 2021 . Gains and losses from the investment portfolio vary from quarter to quarter based on market conditions, as well as the related yield curve and valuation changes. 38
During the three months endedJune 30, 2021 , the Company recognized a loss on interest rate swap termination of$402,000 representing the unamortized portion of a$3.4 million loss associated with the previous termination of a$32.5 million interest rate swap onMarch 16, 2016 . The unamortized portion of the loss was previously reported in accumulated other comprehensive income and amortized through interest expense, however, as the previously hedged item was discontinued, the Company accelerated the remaining unamortized loss. Non-interest Expense. For the three months endedJune 30, 2022 , non-interest expense increased$759,000 , or 5.6%, to$14.4 million from$13.7 million , for the three months endedJune 30, 2021 . The increase in non-interest expense was partially due to an increase in salaries and benefits of$263,000 , or 3.3%, due to normal annual salary increases. Other non-interest expense increased$260,000 , or 12.2%, professional fees increased$130,000 , or 22.1%, occupancy expense increased$78,000 , or 7.1%, advertising expense increased$65,000 , or 18.7%, furniture and equipment expense increased$26,000 , or 5.1%, andFDIC insurance expense increased$9,000 , or 4.0%. During the same period, data processing expense decreased$27,000 , or 3.6%. During the three months endedJune 30, 2021 , the Company prepaid$32.5 million of FHLB borrowings resulting in a loss of$45,000 . For the three months endedJune 30, 2022 , the adjusted efficiency ratio, a non-GAAP financial measure, was 65.0%, compared to 66.1% for the three months endedJune 30, 2021 . The adjusted efficiency ratio is a non-GAAP measure. See "Explanation of Use of Non-GAAP Financial Measurements" for the related efficiency ratio calculation and a reconciliation of GAAP to non-GAAP financial measures. Income Taxes. Income tax expense for the three months endedJune 30, 2022 was$1.9 million , representing an effective tax rate of 25.2%, compared to$2.1 million , representing an effective tax rate of 27.0%, for three months endedJune 30, 2021 .
COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED
General. For the six months endedJune 30, 2022 , the Company reported net income of$10.9 million , or$0.49 per diluted share, compared to$11.4 million , or$0.47 per diluted share, for the six months endedJune 30, 2021 . Return on average assets and return on average equity were 0.86% and 9.93% for the six months endedJune 30, 2022 , respectively, compared to 0.95% and 10.25% for the six months endedJune 30, 2021 , respectively.
Net Interest and Dividend Income.
The following tables set forth the information relating to our average balance and net interest income for the six months endedJune 30, 2022 and 2021, and reflect the average yield on interest-earning assets and average cost of interest-bearing liabilities for the periods indicated. Yields and costs are derived by dividing interest income by the average balance of interest-earning assets and interest expense by the average balance of interest-bearing liabilities for the periods shown. The interest rate spread is the difference between the total average yield on interest-earning assets and the cost of interest-bearing liabilities. Net interest margin represents tax-equivalent net interest and dividend income as a percentage of average interest-earning assets. Average balances are derived from actual daily balances over the periods indicated. Interest income includes fees earned when the real estate loans are prepaid or refinanced. For analytical purposes, the interest earned on tax-exempt assets is adjusted to a tax-equivalent basis to recognize the income tax savings which facilitates comparison between taxable and tax-exempt assets. 39 Six Months Ended June 30, 2022 2021 Average Average Yield/ Average Average Yield/ Balance Interest(8) Cost(9) Balance Interest(8) Cost(9) (Dollars in thousands) ASSETS: Interest-earning assets Loans(1)(2)$ 1,922,318 $ 36,691 3.85 %$ 1,917,366 $ 37,648 3.96 % Securities(2) 418,806 4,018 1.94 260,845 2,131 1.65
Other investments - at cost 10,241 55 1.08 9,889 63 1.28 Short-term investments(3) 40,899 69 0.34 104,999 50 0.10 Total interest-earning
assets 2,392,264 40,833 3.44 2,293,099 39,892 3.51
Total
non-interest-earning
assets 148,815 146,709 Total assets$ 2,541,079 $ 2,439,808 LIABILITIES AND EQUITY: Interest-bearing liabilities Interest-bearing checking accounts$ 135,104 200 0.30$ 95,507 198 0.42 Savings accounts 221,484 83 0.08 196,812 83 0.09 Money market accounts 894,687 1,070 0.24 721,270 1,303 0.36 Time deposit accounts 377,158 629 0.34 527,188 1,616 0.62 Total interest-bearing deposits 1,628,433 1,982 0.25 1,540,777 3,200 0.42 Short-term borrowings and long-term debt 24,164 517 4.31 53,569 655 2.47 Interest-bearing liabilities 1,652,597 2,499 0.30 1,594,346 3,855 0.49 Non-interest-bearing deposits 634,387 582,541 Other non-interest-bearing liabilities 33,721 37,829 Total non-interest-bearing liabilities 668,108 620,370 Total liabilities 2,320,705 2,214,716 Total equity 220,374 225,092 Total liabilities and equity$ 2,541,079 $ 2,439,808 Less: Tax-equivalent adjustment(2) (244 ) (207 ) Net interest and dividend income$ 38,090 $ 35,830 Net interest rate spread(4) 3.12 % 3.00 % Net interest rate spread, on a tax equivalent basis(5) 3.14 % 3.02 % Net interest margin(6) 3.21 % 3.15 % Net interest margin, on a tax equivalent basis(7) 3.23 % 3.17 % Ratio of average interest-earning assets to average interest-bearing liabilities 144.76 % 143.83 %
(1) Loans, including nonaccrual loans, are net of deferred loan origination costs
and unadvanced funds.
(2) Loan and securities income are presented on a tax-equivalent basis using a
tax rate of 21%. The tax-equivalent adjustment is deducted from
tax-equivalent net interest and dividend income to agree to the amount
reported on the consolidated statements of net income.
(3) Short-term investments include federal funds sold.
(4) Net interest rate spread represents the difference between the weighted
average yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities.
(5) Net interest rate spread, on a tax-equivalent basis, represents the
difference between the tax-equivalent weighted average yield on
interest-earning assets and the tax-equivalent weighted average cost of
interest-bearing liabilities.
(6) Net interest margin represents net interest and dividend income as a
percentage of average interest-earning assets.
(7) Net interest margin, on a tax-equivalent basis, represents tax-equivalent net
interest and dividend income as a percentage of average interest-earning
assets.
(8) Acquired loans, time deposits and borrowings are recorded at fair value at
the time of acquisition. The fair value marks on the loans, time deposits and
borrowings acquired accrete and amortize into net interest income over time.
For the six months ended
income and interest expense reduction on time deposits and borrowings
increased (decreased) net interest income
respectively. Excluding these items, net interest margin, on a tax-equivalent
basis, for the six months ended June 30, 2022 and June 30, 2021 was 3.22% and
3.18%, respectively.
(9) Annualized.
40
Rate/Volume Analysis.
The following table shows how changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities have affected our interest and dividend income and interest expense during the periods indicated. Information is provided in each category with respect to: (1) interest income changes attributable to changes in volume (changes in volume multiplied by prior rate); (2) interest income changes attributable to changes in rate (changes in rate multiplied by prior volume); and (3) the net change. The changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due
to
rate.
Six Months Ended June 30, 2022 compared to
Six Months Ended June 30, 2021
Increase (Decrease) Due to
Volume Rate Net
(In thousands)
Interest-earning assets
Loans (1) $ 97 $ (1,055 ) $ (958 )
Securities (1) 1,290 598 1,888
Other investments - at cost 2 (10 ) (8 )
Short-term investments (31 ) 50 19
Total interest-earning assets 1,358 (417 ) 941
Interest-bearing liabilitiesInterest-bearing checking accounts 82
(80 ) 2 Savings accounts 10 (10 ) - Money market accounts 313 (546 ) (233 ) Time deposit accounts (460 ) (527 ) (987 )
Short-term borrowing and long-term debt (360 ) 222 (138 ) Total interest-bearing liabilities (415 ) (941 ) (1,356 )
Change in net interest and dividend income
524$ 2,297
(1) Securities, loan income and change in net interest and dividend income are
presented on a tax-equivalent basis using a tax rate of 21%. The
tax-equivalent adjustment is deducted from tax-equivalent net interest
income.
During the six months ended June 30, 2022 , net interest income increased $2.3
million , or 6.3%, to $38.1 million , compared to $35.8 million for the six months
ended June 30, 2021 . The increase in net interest income was due to a decrease
in interest expense of $1.4 million , or 35.2%, and an increase in interest and
dividend income of $904,000 , or 2.3%. The decrease in interest expense was due
to a decrease in interest expense on deposits of $1.2 million , or 38.1%, and a
decrease of $138,000 , or 21.1%, in interest expense on borrowings. For the six
months ended June 30, 2022 , interest and dividend income included $691,000 in
PPP income, compared to $4.0 million during the six months ended June 30, 2021 .
Excluding PPP income, net interest income increased $5.6 million , or 17.6%,for the same period. The net interest margin for the six months endedJune 30, 2022 was 3.21%, compared to 3.15% during the six months endedJune 30, 2021 . The net interest margin, on a tax-equivalent basis, was 3.23% for the six months endedJune 30, 2022 , compared to 3.17% for the six months endedJune 30, 2021 . Excluding the PPP income, the net interest margin increased from 3.01% for the six months endedJune 30, 2021 to 3.16% for the six months endedJune 30, 2022 . The average yield on interest-earning assets decreased seven basis points from 3.51% for the six months endedJune 30, 2021 to 3.44% for the six months endedJune 30, 2022 . During the six months endedJune 30, 2022 , the average cost of funds, including non-interest-bearing demand accounts and borrowings, decreased 14 basis points from 0.36% for the six months endedJune 30, 2021 to 0.22% for the six months endedJune 30, 2022 . For the six months endedJune 30, 2022 , the average cost of core deposits, including non-interest-bearing demand deposits, decreased six basis points from 0.20% for the six months endedJune 30, 2021 to 0.14% for the six months endedJune 30, 2022 . The average cost of time deposits decreased 28 basis points from 0.62% for the six months endedJune 30, 2021 to 0.34% during the same period in 2022. The average cost of borrowings, which include FHLB advances and subordinated debt, increased 184 basis points from 2.47% for the six months endedJune 30, 2021 to 4.31% for the six months endedJune 30, 2022 . For the six months endedJune 30, 2022 , average demand deposits, an interest-free source of funds, increased$51.8 million , or 8.9%, from$582.5 million , or 27.4% of total average deposits, for the six months endedJune 30, 2021 , to$634.4 million , or 28.0% of total average deposits. 41
During the six months endedJune 30, 2022 , average interest-earning assets increased$99.2 million , or 4.3%, to$2.4 billion . The increase in average interest-earning assets was due to an increase in average loans of$5.0 million , or 0.3%, as well as an increase in average securities of$158.3 million , or 58.5%. Both were partially offset by a decrease of$64.1 million , or 61.1%, in short-term investments. Excluding average PPP loans, average interest-earning assets increased$251.2 million , or 11.8%, and average loans increased$157.0 million , or 8.9%. Provision for Loan Losses. For the six months endedJune 30, 2022 , the credit for loan losses decreased$1.0 million , or 88.9%, from$1.1 million for the six months endedJune 30, 2021 to$125,000 for the six months endedJune 30, 2022 . During the six months endedJune 30, 2021 , the Company adjusted its qualitative factors related to the impact of the COVID-19 pandemic and other economic trends used in the Company's allowance calculation, which resulted in a credit for loan losses of$1.1 million . The Company recorded net charge-offs of$102,000 for the six months endedJune 30, 2022 , as compared to net charge-offs of$162,000 for the six months endedJune 30, 2021 . Although we believe that we have established and maintained the allowance for loan losses at adequate levels, future adjustments may be necessary if economic, real estate and other conditions differ substantially from the current operating environment. If the COVID-19 pandemic has an adverse effect on the ability of our borrowers to satisfy their obligations to us, the demand for our loans or our other products and services, other aspects of our business operations, or on financial markets, real estate markets, or economic growth, this could, depending on the extent of the loan defaults, materially and adversely affect our liquidity and financial condition and our results of operations could be materially and adversely affected. Non-interest Income. For the six months endedJune 30, 2022 , non-interest income was$5.1 million , compared to$5.4 million for the six months endedJune 30, 2021 . During the same period, service charges and fees increased$562,000 , or 14.2%. Other income from loan-level swap fees on commercial loans decreased$37,000 , or 63.8%, and income from bank-owned life insurance decreased$35,000 , or 3.7%. Mortgage banking income was$469,000 for the six months endedJune 30, 2021 due to the sale of fixed rate residential real estate loans to the secondary market. The Company sold$17.6 million of low coupon residential real estate loans to the secondary market during the six months endedJune 30, 2021 , compared to$277,000 during the six months endedJune 30, 2022 . During the six months endedJune 30, 2022 , the Company reported unrealized losses on marketable equity securities of$501,000 , compared to unrealized losses of$83,000 during the six months endedJune 30, 2021 . During the six months endedJune 30, 2022 , the Company also reported realized losses on the sale of securities of$4,000 , compared to realized losses of$74,000 on the sale of securities during the six months endedJune 30, 2021 . The Company reported a gain of$141,000 on non-marketable equity investments during the six months endedJune 30, 2022 , compared to$546,000 during the six months endedJune 30, 2021 . Gains and losses from the investment portfolio vary from quarter to quarter based on market conditions, as well as the related yield curve and valuation changes. During the six months endedJune 30, 2021 , the Company recognized a loss on interest rate swap termination of$402,000 representing the unamortized portion of a$3.4 million loss associated with the previous termination of a$32.5 million interest rate swap onMarch 16, 2016 . The unamortized portion of the loss was previously reported in accumulated other comprehensive income and amortized through interest expense, however, as the previously hedged item was discontinued, the Company accelerated the remaining unamortized loss. 42 Non-interest Expense.
For the six months endedJune 30, 2022 , non-interest expense increased$1.9 million , or 7.0%, to$28.9 million , compared to$27.0 million for the six months endedJune 30, 2021 . The increase in non-interest expense was primarily due to an increase in salaries and employee benefits of$739,000 , or 4.7%, due to normal annual salary increases as well as higher compensation incentive costs to support overall franchise growth. The increase in salary related expenses was also partially due to a decrease of$279,000 in deferred direct origination costs associated with Round 3 of PPP loans. The origination costs were recorded against salary expense during the six months endedJune 30, 2021 . Other non-interest expense increased$702,000 , or 17.5%, professional fees increased$163,000 , or 14.4%, occupancy expense increased$152,000 , or 6.4%, advertising expense increased$126,000 , or 18.4%, furniture and equipment expense increased$79,000 , or 7.9%, data processing expenses decreased$25,000 , or 1.7%, andFDIC insurance expense decreased$3,000 , or 0.6%. During the six months endedJune 30, 2021 , the Company prepaid$32.5 million of FHLB borrowings resulting in a loss of$45,000 . For the six months endedJune 30, 2022 , the adjusted efficiency ratio, a non-GAAP financial measure, was 66.4%, compared to 65.3% for the six months endedJune 30, 2021 . The adjusted efficiency ratio is a non-GAAP measure. See "Explanation of Use of Non-GAAP Financial Measurements" for the related efficiency ratio calculation and a reconciliation of GAAP to non-GAAP financial measures. Income Taxes.
Income tax expense for the six months ended
Explanation of Use of Non-GAAP Financial Measurements.
We believe that it is common practice in the banking industry to present interest income and related yield information on tax-exempt loans and securities on a tax-equivalent basis, as well as presenting tangible book value per share and adjusted efficiency ratio, and that such information is useful to investors because it facilitates comparisons among financial institutions. However, the adjustment of interest income and yields on tax-exempt loans and securities to a tax-equivalent amount, as well as the presentation of tangible book value per share and adjusted efficiency ratio, may be considered to include financial information that is not in compliance with GAAP. A reconciliation from GAAP
to
non-GAAP is provided below.
Three Months Ended Six Months Ended
June 30, 2022 June 30, 2021 June 30, 2022 June 30, 2021
(In thousands)
Loans (no tax adjustment)
124 104 244 207
Loans (tax-equivalent basis)
Securities (no tax adjustment) $ 2,068 $ 1,277 $ 4,018 $ 2,131 Tax-equivalent adjustment (1)
- 1 - -
Securities (tax-equivalent
basis) $ 2,068 $ 1,278 $ 4,018 $ 2,131
Net interest income (no tax
adjustment) $ 19,392 $ 17,804 $ 38,090 $ 35,830 Tax-equivalent adjustment (1) 124 105
244 207
Net interest income
(tax-equivalent basis) $ 19,516 $ 17,909 $ 38,334 $ 36,037
43
Three Months Ended Six Months Ended
June 30, 2022 June 30, 2021 June 30, 2022 June 30, 2021
(In thousands)
Loans (no tax adjustment) 3.81 % 3.84 % 3.82 % 3.94 %Loans (tax-equivalent basis) 3.83 % 3.87 % 3.85 % 3.96 % Securities (no tax adjustment) 2.00 % 1.74 %
1.94 % 1.65 %
Securities (tax-equivalent
basis) 2.00 % 1.74 % 1.94 % 1.65 %
Interest rate spread (no tax
adjustment) 3.15 % 2.92 % 3.12 % 3.00 %
Net interest margin (no tax
adjustment) 3.24 % 3.06 % 3.21 % 3.15 %
Net interest margin
(tax-equivalent) 3.26 % 3.08 % 3.23 % 3.17 %
Net interest income (no tax
adjustment) $ 19,392 $ 17,804 $ 38,090 $ 35,830
Less:
Purchase accounting adjustments 64 (33 ) 103 (78 )
Prepayment penalties and fees 26 117 48 152
PPP fee income 129 1,627 691 4,038
Adjusted net interest income
(non-GAAP) $ 19,173 $ 16,093 Average interest-earning assets$ 2,398,526 $ 2,330,311 $ 2,392,264 $ 2,293,099 Average interest-earnings asset, excluding average PPP loans$ 2,395,463 $ 2,174,716 $ 2,383,226 $ 2,132,050 Adjusted net interest margin, excluding purchase accounting adjustments, PPP fee income, prepayment penalties and average PPP loans (non-GAAP) 3.21 % 2.97 % 3.16 % 2.99 % Book Value per Share (GAAP) $ 9.58 $ 9.29 $ 9.58 $ 9.29 Non-GAAP adjustments: Goodwill (0.55 ) (0.52 ) (0.55 ) (0.52 ) Core deposit intangible (0.11 ) (0.11 ) (0.11 ) (0.11 )
Tangible Book Value per Share (non-GAAP) $ 8.92 $ 8.66 $ 8.92 $ 8.66 Income Before Income Taxes (GAAP) $ 7,400 $ 7,739
Provision (credit) for loan losses 300 (1,200 ) (125 ) (1,125 ) Income Before Taxes and Provision (non-GAAP) $ 7,700 $ 6,539$ 14,290 $ 14,242
Non-interest Expense (GAAP)$ 14,433 $ 13,674 $ 28,889 $ 27,001 Non-GAAP adjustments: Loss on prepayment of borrowings - (45 ) - (45 ) Non-interest Expense for Efficiency Ratio (non-GAAP)$ 14,433 $ 13,629 $ 28,889 $ 26,956 44 Three Months Ended Six Months Ended June 30, 2022 June 30, 2021 June 30, 2022 June 30, 2021 (In thousands) Net Interest Income (GAAP)$ 19,392 $ 17,804 $ 38,090 $ 35,830 Non-interest Income (GAAP) $ 2,741 $ 2,409 $ 5,089 $ 5,413 Non-GAAP adjustments: Loss on securities, net - 12 4 74 Unrealized loss (gain) on
marketable equity securities 225 (6 ) 501 83 Loss on interest rate swap termination - 402 - 402 Gain on non-marketable equity investments (141 ) - (141 ) (546 ) Non-interest Income for Adjusted Efficiency Ratio (non-GAAP) $ 2,825 $ 2,817 $ 5,453 $ 5,426 Total Revenue for Adjusted Efficiency Ratio (non-GAAP)$ 22,217 $ 20,621 $ 43,543 $ 41,256 Efficiency Ratio (GAAP) 65.21 % 67.65 % 66.91 % 65.47 % Adjusted Efficiency Ratio (Non-interest Expense (GAAP)/Total Revenue for Adjusted Efficiency Ratio (non-GAAP)) 64.96 % 66.09 % 66.35 % 65.34 %
(1) The tax equivalent adjustment is based upon a 21% tax rate.
Liquidity and Capital Resources.
The term "liquidity" refers to our ability to generate adequate amounts of cash to fund loan originations, loan purchases, deposit withdrawals and operating expenses. Our primary sources of liquidity are deposits, scheduled amortization and prepayments of loan principal and mortgage-backed securities, maturities and calls of investment securities and funds provided by our operations. We also can borrow funds from the FHLB based on eligible collateral of loans and securities. Our material cash commitments include funding loan originations, fulfilling contractual obligations with third-party service providers, maintaining operating leases for certain of our Bank properties and satisfying repayment of our long-term debt obligations.
Primary Sources of Liquidity
AtJune 30, 2022 andDecember 31, 2021 , outstanding borrowings from the FHLB were$1.4 million and$2.7 million , respectively. AtJune 30, 2022 , we had$473.2 million in available borrowing capacity with the FHLB. We have the ability to increase our borrowing capacity with the FHLB by pledging investment securities or additional loans. In addition, we have available lines of credit of$15.0 million and$50.0 million with other correspondent banks. Interest rates on these lines are determined and reset on a daily basis by each respective bank. AtJune 30, 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. 45 The Company's primary activities are the origination of commercial real estate loans, commercial and industrial loans and residential real estate loans, as well as and the purchase of mortgage-backed and other investment securities. During the six months endedJune 30, 2022 and 2021, we originated$207.2 million and$236.5 million in loans, respectively. We purchased securities totaling$24.8 million for the six months endedJune 30, 2022 and$174.0 million for the six months endedJune 30, 2021 . AtJune 30, 2022 , the Company had approximately$179.2 million in loan commitments and letters of credit to borrowers and approximately$323.3 million in available home equity and other unadvanced
lines of credit.
Deposit in flows and out flows are affected by the level of interest rates, the products and interest rates offered by competitors and by other factors. AtJune 30, 2022 , time deposit accounts scheduled to mature within one year totaled$296.0 million . Based on the Company's deposit retention experience and current pricing strategy, we anticipate that a significant portion of these time deposits will remain on deposit. We monitor our liquidity position frequently and anticipate that it will have sufficient funds to meet our current funding commitments for the next 12 months and beyond. Material Cash Commitments The Company entered into a long-term contractual obligation with a vendor for use of its core provider and ancillary services beginning in 2016. Total remaining contractual obligations outstanding with this vendor as ofJune 30, 2022 were estimated to be$12.0 million , with$4.5 million expected to be paid within one year and the remaining$7.5 million to be paid within the next five years. Further, the Company has operating leases for certain of its banking offices and ATMs. Our leases have remaining lease terms of less than one year to seventeen years, some of which include options to extend the leases for additional five-year terms up to fifteen years. Lease liabilities totaled$9.7 million as ofJune 30, 2022 . Principal payments expected to be made on our lease liabilities during the twelve months endedJune 30, 2023 are$1.3 million . The remaining lease liability payments totaled$8.4 million and are expected to
be made afterJune 30, 2023 .
In addition, the Company completed an offering of$20 million in aggregate principal amount of its Notes to certain qualified institutional buyers in a private placement transaction onApril 20, 2021 . For more information on the Notes, refer to the information contained in Note 9 "Subordinated Debt" of the unaudited consolidated financial statements included above. We do not anticipate any material capital expenditures during the rest of 2022, except in pursuance of the Company's strategic initiatives. The Company does not have any balloon or other payments due on any long-term obligations or any off-balance sheet items other than the commitments and unused lines of credit noted above. AtJune 30, 2022 , we exceeded each of the applicable regulatory capital requirements. As ofJune 30, 2022 , the most recent notification from theOffice of Comptroller of the Currency categorized the Bank as "well-capitalized" under the regulatory framework for prompt corrective action. To be categorized as "well-capitalized," the Bank must maintain minimum total risk-based, Tier 1 risk-based, Common Equity Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the following table. There are no conditions or events since that notification that management believes would change our category. 46 Minimum For Capital Adequacy Actual Purpose Minimum To Be Well Capitalized Amount Ratio Amount Ratio Amount Ratio (Dollars in thousands) June 30, 2022 Total Capital (to Risk Weighted Assets): Consolidated$ 267,084 13.69 %$ 156,026 8.00 % N/A N/A Bank 252,707 12.98 155,750 8.00$ 194,687 10.00 % Tier 1 Capital (to Risk Weighted Assets): Consolidated 227,871 11.68 117,019 6.00 N/A N/A Bank 233,147 11.98 116,812 6.00 155,750 8.00 Common Equity Tier 1 Capital (to Risk Weighted Assets) Consolidated 227,871 11.68 87,764 4.50 N/A N/A Bank 233,147 11.98 87,609 4.50 126,547 6.50 Tier 1 Leverage Ratio (to Adjusted Average Assets): Consolidated 227,871 8.91 102,350 4.00 N/A N/A Bank 233,147 9.13 102,182 4.00 127,728 5.00 December 31, 2021 Total Capital (to Risk Weighted Assets): Consolidated$ 261,093 14.27 %$ 146,347 8.00 % N/A N/A Bank 243,788 13.35 146,135 8.00$ 182,669 10.00 Tier 1 Capital (to Risk Weighted Assets): Consolidated 221,673 12.12 109,761 6.00 N/A N/A Bank 224,001 12.26 109,601 6.00 146,135 8.00 Common Equity Tier 1 Capital (to Risk Weighted Assets): Consolidated 221,673 12.12 82,320 4.50 N/A N/A Bank 224,001 12.26 82,201 4.50 118,735 6.50 Tier 1 Leverage Ratio (to Adjusted Average Assets): Consolidated 221,673 8.75 101,320 4.00 N/A N/A Bank 224,001 8.86 101,101 4.00 126,377 5.00
We also have outstanding, at any time, a significant number of commitments to extend credit and provide financial guarantees to third parties. These arrangements are subject to strict credit control assessments. Guarantees specify limits to our obligations. Because many commitments and almost all guarantees expire without being funded in whole or in part, the contract amounts are not estimates of future cash flows.
OFF-BALANCE SHEET ARRANGEMENTS.
The Company does not have any off-balance sheet arrangements, other than noted above under Material Cash Commitments, that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
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