CORTLAND BANCORP CONDITION AND RESULTS OF OPERATIONS
CONSOLIDATED AVERAGE BALANCE SHEETS, YIELDS AND RATES (UNAUDITED)
(Fully taxable equivalent basis in thousands of dollars)
YEAR-TO-DATE AS OF
June 30, 2021 June 30, 2020
Average Average Average Average
Balance Interest Rate Balance Interest Rate
ASSETS
Interest earning
deposits $ 47,635 $ 26 0.11 % $ 30,933 $ 70 0.45 %
Investment securities
(1) (2) (3) 166,257 1,847 2.22 % 139,547 1,882 2.70 %
Loans (1) (2) (3) 527,452 11,972 4.56 % 515,887 11,824 4.59 %
Total
interest-earning
assets 741,344 $ 13,845 3.75 % 686,367 $ 13,776 4.02 %
Cash and due from
banks 7,995 7,509
Bank premises and
equipment 11,513 11,886
Other assets 43,344 38,544
Total
non-interest-earning
assets 62,852 57,939
Total assets $ 804,196 $ 744,306
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest-bearing
demand deposits $ 248,157 $ 301 0.24 % $ 217,123 $ 761 0.70 %
Savings 139,187 60 0.09 % 114,325 56 0.10 %
Time 83,652 479 1.15 % 134,793 1,162 1.73 %
Total
interest-bearing
deposits 470,996 840 0.36 % 466,241 1,979 0.85 %
Other borrowings 15,388 62 0.82 % 25,872 182 1.40 %
Subordinated debt 5,155 43 1.68 % 5,155 68 2.63 %
Total
interest-bearing
liabilities 491,539 $ 945 0.39 % 497,268 $ 2,229 0.90 %
Demand deposits 216,481 154,483
Other liabilities 14,241 15,778
Shareholders' equity 81,935 76,777
Total liabilities and
shareholders' equity $ 804,196 $ 744,306
Net interest income $ 12,900 $ 11,547
Net interest rate
spread (4) 3.36 % 3.12 %
Net interest margin
(5) 3.49 % 3.37 %
Ratio of
interest-earning
assets to
interest-bearing
liabilities 1.51 1.38
(1) Includes both taxable and tax-exempt loans and investment securities.
(2) The amounts are presented on a fully taxable equivalent basis using the
statutory rate of 21% in 2021 and 2020 and have been adjusted to reflect the
effect of disallowed interest expenses related to carrying tax-exempt assets.
The tax equivalent income adjustment for loans and investment securities was
(3) Average balance outstanding includes the average amount outstanding of all
non-accrual investment securities and loans. Investment securities consist of
average total principal adjusted for amortization of premium and accretion of
discount and includes both taxable and tax-exempt securities. Loans consist
of average total loans, including loans held for sale, less average unearned
income.
(4) Interest rate spread represents the difference between the yield on earning
assets and the rate paid on interest-bearing liabilities.
(5) Net interest margin is calculated by dividing net interest income by total
interest-earning assets.
28--------------------------------------------------------------------------------
CONSOLIDATED AVERAGE BALANCE SHEETS, YIELDS AND RATES (UNAUDITED)
(Fullytaxable equivalent basis in thousands of dollars)
QUARTER-TO-DATE AS OF
June 30, 2021 March 31, 2021 June 30, 2020
Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
ASSETS
Interest earning deposits $ 63,161 $ 16 0.10 % 0.12 % Investment securities (1) (2) (3) 170,770 931 2.18 % 161,695 916 2.27 % 144,125 955 2.64 % Loans (1) (2) (3) 513,067 5,824 4.55 % 541,996 6,148 4.57 % 525,913 5,768 4.39 % Total interest-earning assets 746,998$ 6,771 3.63 % 735,628$ 7,074 3.87 % 715,746$ 6,737 3.77 % Cash and due from banks 8,134 7,853 7,466 Bank premises and equipment 11,405 11,623 12,161 Other assets 41,843 44,863 39,431 Total non-interest-earning assets 61,382 64,339 59,058 Total assets$ 808,380 $ 799,967 $ 774,804 LIABILITIES AND SHAREHOLDERS' EQUITY Interest-bearing demand deposits$ 248,302 $ 143 0.23 %$ 248,010 $ 158 0.26 %$ 218,889 $ 331 0.61 % Savings 143,857 32 0.09 % 134,465 28 0.08 % 116,666 29 0.10 % Time 76,142 191 1.01 % 91,244 288 1.28 % 135,677 523 1.54 % Total interest-bearing deposits 468,301 366 0.31 % 473,719 474 0.41 % 471,232 883 0.75 % Other borrowings 12,696 24 0.76 % 18,112 38 0.85 % 29,723 94 1.26 % Subordinated debt 5,155 21 1.63 % 5,155 22 1.73 % 5,155 27 2.12 % Total interest-bearing liabilities 486,152$ 411 0.34 % 496,986$ 534 0.44 % 506,110$ 1,004 0.80 % Demand deposits 226,680 206,168 177,055 Other liabilities 13,278 15,217 17,679 Shareholders' equity 82,270 81,596 73,960 Total liabilities and shareholders' equity$ 808,380 $ 799,967 $ 774,804 Net interest income$ 6,360 $ 6,540 $ 5,733 Net interest rate spread (4) 3.29 % 3.43 % 2.97 % Net interest margin (5) 3.41 % 3.58 % 3.21 % Ratio of interest-earning assets to interest-bearing liabilities 1.54 1.48 1.41
(1) Includes both taxable and tax-exempt loans and investment securities.
(2) The amounts are presented on a fully taxable equivalent basis using the
statutory rate of 21% in 2021 and 2020 and have been adjusted to reflect the
effect of disallowed interest expenses related to carrying tax-exempt assets.
The tax equivalent income adjustment for loans and investment securities was
respectively, for
(3) Average balance outstanding includes the average amount outstanding of all
non-accrual investment securities and loans. Investment securities consist of
average total principal adjusted for amortization of premium and accretion of
discount and includes both taxable and tax-exempt securities. Loans consist
of average total loans, including loans held for sale, less average unearned
income.
(4) Interest rate spread represents the difference between the yield on earning
assets and the rate paid on interest-bearing liabilities.
(5) Net interest margin is calculated by dividing net interest income by total
interest-earning assets.
29
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SELECTED FINANCIAL DATA FOR THE QUARTER ENDED
(In thousands of dollars, except for ratios and per share amounts)
June 30, March 31, December 31, September 30, June 30,
Unaudited 2021 2021 2020 2020 2020SUMMARY OF OPERATIONS Total interest income$ 6,622 $ 6,932 $ 6,873 $ 6,671$ 6,618 Total interest expense (411 ) (534 ) (712 ) (868 ) (1,004 ) NET INTEREST INCOME (NII) 6,211 6,398 6,161 5,803 5,614 Provision for loan losses - - - (525 ) (450 ) NII after loss provision 6,211 6,398 6,161 5,278 5,164 Investment securities gains (15 ) 71 122 - 18 Mortgage banking gains 714 800 1,119 1,281 900 Other income 766 913 1,127 684 797 Total non-interest expense (5,382 ) (4,935 ) (5,195 ) (4,721 ) (4,578 ) Income before tax expense 2,294 3,247 3,334 2,522 2,301 Federal income tax expense 297 481 536 360 369 Net income$ 1,997 $ 2,766 $
2,798 $ 2,162
PER COMMON SHARE DATA (1) Earnings per share, basic and diluted$ 0.48 $ 0.66 $ 0.67 $ 0.51$ 0.47 Book value 19.55 19.25 19.18 18.51 17.94 Cash dividends declared per share 0.15 0.19 0.14 0.14 0.14 BALANCE SHEET DATA Assets$ 792,998 $ 791,705 $ 821,305 $ 811,625 $ 780,017 Investments 174,344 170,174 170,906 170,608 165,957 Loans 491,986 518,618 556,760 534,146 528,097 Allowance for loan losses 5,979 6,020 6,019 6,045 5,520 Deposits 677,633 680,311 700,510 680,640 648,417 Borrowings 18,052 16,948 24,643 37,243 39,483 Shareholders' equity 83,223 81,096 81,005 78,148 75,772 AVERAGE BALANCES Assets$ 808,380 $ 799,967 $ 801,923 $ 809,834 $ 774,804 Investments 170,770 161,695 167,133 161,975 144,125 Loans 508,978 535,597 541,319 530,704 521,447 Deposits 694,981 679,887 678,781 677,948 648,287 Borrowings 17,851 23,267 27,837 37,842 34,878 Shareholders' equity 82,270 81,596 78,733 77,048 73,960 ASSET QUALITY RATIOS Net (charge-offs) recoveries$ (41 ) $ 1 $ (26 ) $ -$ (17 ) Net (charge-offs) recoveries as a percentage of average total loans (0.03 )% - % (0.02 )% - % (0.01 )% Loans 30 days or more beyond their contractual due date as a percent of total loans 0.39 % 0.37 % 0.27 % 0.36 % 0.38 % Nonperforming loans$ 6,941 $ 7,876 $ 7,628 $ 7,746$ 7,918 Total nonperforming assets$ 6,941 $ 7,876 $ 7,628 $ 7,746$ 7,918 Nonperforming assets as a percentage of: Total assets 0.88 % 0.99 % 0.93 % 0.95 % 1.02 % Equity plus allowance for loan losses 7.78 9.04 8.77 9.20 9.74 Tier I capital 8.23 9.49 9.40 9.82 10.26 FINANCIAL RATIOS Return on average equity 9.71 % 13.56 % 14.22 % 11.22 % 10.45 % Return on average assets 0.99 1.38 1.40 1.07 1.00 Efficiency ratio 68.65 59.80 60.79 59.72 61.62 Effective tax rate 12.95 14.81 16.08 14.27 16.04 Net interest margin 3.41 3.58 3.40 3.17 3.21
(1) Basic earnings per common share are based on weighted average shares
outstanding. Diluted earnings per share is after consideration of common
stock equivalents. Cash dividends per common share are based on actual
dividends declared. Book value per common share is based on shares
outstanding at each period end.
30--------------------------------------------------------------------------------
Financial Review The following is management's discussion and analysis of the financial condition and results of operations ofCortland Bancorp (the Company). The discussion should be read in conjunction with the Consolidated Financial Statements and related notes and summary financial information included elsewhere in this quarterly report.
Note Regarding Forward-looking Statements
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. In addition to historical information, certain information included in this discussion and other material filed or to be filed by the Company with theSecurities and Exchange Commission (as well as information included in oral statements or other written statements made or to be made by the Company) may contain forward-looking statements that involve risks and uncertainties. The words "believes," "expects," "may," "will," "should," "projects," "contemplates," "anticipates," "forecasts," "intends," or similar terminology identify forward-looking statements. These statements reflect management's beliefs and assumptions, and are based on information currently available to management. Economic circumstances, the Company's operations and actual results could differ significantly from those discussed in any forward-looking statements. Some of the factors that could cause or contribute to such differences are changes in the economy and interest rates either nationally or in the Company's market area, including the impact of the impairment of securities; political actions, including failure of theUnited States Congress to raise the federal debt ceiling or the imposition of changes in the federal budget; changes in customer preferences and consumer behavior; increased competitive pressures or changes in either the nature or composition of competitors; changes in the legal and regulatory environment; changes in factors influencing liquidity, such as expectations regarding the rate of inflation or deflation, currency exchange rates, and other factors influencing market volatility; changes in assumptions underlying the establishment of reserves for possible loan losses, reserves for repurchase of mortgage loans sold and other estimates; and risks associated with other global economic activity caused by infectious disease outbreaks, including the recent outbreak of coronavirus, or COVID-19, and the significant impact that such outbreak has had and may have on our growth, operations, earnings and asset quality along with global political and financial factors. While actual results may differ significantly from the results discussed in the forward-looking statements, the Company undertakes no obligation to update publicly any forward-looking statement for any reason, even if new information becomes available. Recent Developments Business Combination OnJune 22, 2021 , the Company entered into an agreement and plan of merger with Farmers National Banc Corp ("Farmers"), whereinThe Cortland Savings and Banking Company will merge with and intoThe Farmers National Bank of Canfield , a wholly owned subsidiary of Farmers. This transaction is subject to receipt of Cortland shareholder approval and customary regulatory approvals and is expected to close during the fourth quarter of 2021. Pursuant to the terms of the Merger Agreement each common share, without par value, of Cortland shares issued and outstanding will have the right to receive, without interest,$28.00 in cash or 1.75 common shares of Farmers, without par value. Shares converted to Farmers common shares are limited to 75% of the number of Cortland common shares outstanding. Impact of COVID-19 Each item listed below materially affects the comparability of our results of operations for the three and six months endedJune 30, 2021 and 2020, and our financial condition as ofJune 30, 2021 andDecember 31, 2020 , and may affect the comparability of financial information we report in future fiscal periods. The progression of the COVID-19 pandemic inthe United States has had an adverse impact on our financial condition and results of operations as of and for the six months endedJune 30, 2021 , and can be expected to have a complex and significant adverse impact on the economy, the banking industry and our Company in future fiscal periods, all subject to a high degree of uncertainty. Effects on Our Market Areas. Our commercial and consumer banking products and services are offered primarily inOhio , where individual and governmental responses to the COVID-19 pandemic led to a broad curtailment of economic activity beginning inMarch 2020 . InOhio , the Governor ordered schools to close through the remainder of the school year and ordered many retail establishments to close and imposed limitations on gathering sizes throughMay 31, 2020 . The Bank remained open during these orders because banks have been identified as essential services, but serving its customers through its drive-ups and Video Teller Machines and in all of its branch offices by appointment only. Beginning in June, the Governor began opening up business in various phases in order to improve economic conditions. At that time, the Bank opened six of its thirteen branches but continued to operate only drive-up services at the others. All branches closed their lobbies again inNovember 2020 as the virus peaked again. Reopening occurred onFebruary 5, 2021 . Each state has experienced an increase in unemployment levels as a result of the curtailment of business activities, rising from an average of 4.1 percent inOhio inJanuary 2020 to an average of 17.6 percent inApril 2020 , according to theBureau of Labor Statistics . TheOhio unemployment rate inJune 2021 was 5.0%.
To date, many of the public health and economic effects of COVID-19 have been
concentrated in large cities, such as
31
--------------------------------------------------------------------------------
Policy and Regulatory Developments. Federal, state and local governments and
regulatory authorities have enacted and issued a range of policy responses to
the COVID-19 pandemic, including the following:
• The
0.50% on
range of 0.0 - 0.25%, and has maintained this range through
• On
Economic Security Act ("CARES Act") which established a
stimulus package, including cash payments to individuals, supplemental
unemployment insurance benefits and a
through the SBA, referred to as the paycheck protection program ("PPP"). Under
the PPP, small businesses, sole proprietorships, independent contractors and
self-employed individuals may apply for loans from existing SBA lenders and
other approved regulated lenders that enroll in the program, subject to
numerous limitations and eligibility criteria. The Bank is participating as a
lender in the PPP. On or about
the
additional
funds available for PPP loans beginning on
CARES Act provides financial institutions the option to temporarily suspend
certain requirements under GAAP related to TDRs for a limited period of time
to account for the effects of COVID-19.
• On
Statement on Loan Modifications and Reporting for Financial Institutions,
which, among other things, encouraged financial institutions to work prudently
with borrowers who are or may be unable to meet their contractual payment
obligations because of the effects of COVID-19, and stated that institutions
generally do not need to categorize COVID-19-related modifications as TDRs and
that the agencies will not direct supervised institutions to automatically
categorize all COVID-19 related loan modifications as TDRs.
• On
supporting small and midsized business, as well as state and local governments
impacted by COVID-19. The
Lending Program, which establishes two new loan facilities intended to
facilitate lending to small and midsized businesses: (1) the Main Street New
Loan Facility (MSNLF), and (2) the Main Street Expanded Loan Facility (MSELF).
MSNLF loans are unsecured term loans originated on or after
while MSELF loans are provided as upsized tranches of existing loans
originated before
to
employees or
confirm that they are seeking financial support because of COVID-19 and that
they will not use proceeds from the loan to pay off debt. The
also stated that it would provide additional funding to banks offering PPP
loans to struggling small businesses. Lenders participating in the PPP will be
able to exclude loans financed by the facility from their leverage ratio. In
addition, the
support state and local governments with up to
the
appropriated by the CARES Act. The facility will make short-term financing
available to cities with a population of more than one million or counties
with a population of greater than two million. The
both the size and scope its Primary and Secondary Market Corporate Credit
Facilities to support up to
issuers. This will allow companies that were investment grade before the onset
of COVID-19 but then subsequently downgraded after
access to the facility. Finally, the
Asset-Backed Securities Loan Facility will be scaled up in scope to include
the triple A-rated tranche of commercial mortgage-backed securities and newly
issued collateralized loan obligations. The size of the facility is
billion.
• On
allotting
and had until
Effects on Our Business. We currently expect that the COVID-19 pandemic and the specific developments referred to above could have a significant impact on our business. In particular, we anticipate that a significant portion of the Bank's borrowers in the hotel industry will continue to endure significant economic distress, which has caused, and may continue to cause, them to draw on their existing lines of credit and adversely affect their ability to repay existing indebtedness, and is expected to adversely impact the value of collateral. These developments, together with economic conditions generally, are also expected to impact our commercial real estate portfolio, particularly with respect to real estate with exposure to this industry and the value of certain collateral securing our loans. As a result, we anticipate that our financial condition, capital levels and results of operations could be adversely affected, as described in further detail below.
Our Response. We have taken numerous steps in response to the COVID-19 pandemic, including the following:
• We are actively working with loan customers to monitor loan modification
terms. (See below)
• We continue to promote our digital banking options through our website.
Customers are encouraged to utilize online and mobile banking tools, and our
customer service and retail departments are fully staffed and available to
assist customers remotely.
32--------------------------------------------------------------------------------
• We are a participating lender in the PPP. We believe it is our responsibility
as a community bank to assist the SBA in the distribution of funds authorized
under the CARES Act to our customers and communities, which we are carrying
out in a prudent and responsible manner. The Company approved 419 round one
PPP loans totaling
Administration has forgiven
with the remaining expected to be forgiven in the third quarter of 2021.
During the first quarter of 2021, the Company approved
small businesses in round two of the PPP loan program. Forgiveness of round
two loans is not expected until late 2021 or early 2022.
• No employees have been furloughed. Employees whose job responsibilities can be
effectively carried out remotely worked from home, but have now phased in
on-site.
Loan Modifications. As of June 30, 2021 , we had 6 commercial loans aggregating
$15.6 million predominantly in the hotel industry, deferring principal and/or
interest for periods ranging from 90 to 180 days. All of these loans were
performing in accordance with their terms prior to modification, are currently
performing, and are in conformance with the guidelines of the CARES Act. Since
April 2020 , 121 prior modifications aggregating $107 million have returned to
full payment status.
The effect of these modifications was captured in the evaluation of the
Allowance for Loan Losses. All of these loans are performing as of quarter end
and through this reporting; however, the future performance, specifically beyond
the term of the deferral, is uncertain. To recognize a credit allowance
commensurate with the existing risk, the Company assigned qualitative factors
onto each of the affected segmented balances for allowance purposes. Among the
data used to assign qualitative factors were the stress tests performed on each
of the five largest concentrations, the nature and length of the modifications,
and observations of the overall COVID impact to the specific industry including:
• Whether the business experienced closure or just a curtailment
• Any impact of existing or potential government aid to the business/industry
• The adaptability to alternative revenue production • Support of underlying collateral
These qualitative factors were based on current observations and could be materially different in future quarters. The longer the economy is operating in its current reduced capacity, the more severe the ultimate outcome is expected.
Liquidity and Capital Resources. As the stay-at-home orders played out inMarch 2020 , the company began a liquidity preservation mode. With the growing pandemic and all of the uncertainty of its affect on the economy, availability of future liquidity came into question. In lateMarch 2020 and earlyApril 2020 , the Company accessed several of its wholesale funding sources in the aggregate of$8 million to begin building liquidity for cautionary purposes. Also during this time period, theFederal Reserve announced the relaxation of the discount window standards, encouraging member banks to utilize this borrowing resource at any time. Additionally, theFederal Reserve created the Payroll Protection Program Liquidity Facility ("PPPLF") designed to directly fund the PPP loans made available to small businesses, essentially availing funding to the Company. In addition to these federally sponsored programs, theState of Ohio also made funds available through various programs. The Company did not find it necessary to utilize these programs to any material degree due to the significant deposit growth experienced in 2020. There are no balances outstanding in any of the programs. As of quarter-endJune 2021 , the Company has availability to its unused wholesale capacity by policy of$167 million . 33 --------------------------------------------------------------------------------
Analysis of Assets, Liabilities and Shareholders' Equity
Due to the seasonality of the loan and deposit balances in the year-end balance sheet, a comparison ofJune 30, 2020 is included in the analysis of assets and liabilities, in addition to the usual comparison toDecember 31, 2020 . The following table contains the loan and deposit balances referenced in the discussions: (Amounts in thousands) June 30, December 31, June 30, 2021 2020 2020 Loans: Commercial$ 80,864 $ 132,419 $ 122,608 Commercial real estate 301,910 317,537 296,690 Residential real estate 81,448 79,169 80,651 Consumer - home equity 24,205 24,062 24,300 Consumer - other 3,559 3,573 3,848 Total loans$ 491,986 $ 556,760 $ 528,097 Total earning assets$ 734,275 $ 760,922 $ 723,578 Total assets$ 792,998 $ 821,305 $ 780,017 Deposits:
Noninterest-bearing deposits
404,947 339,757
Time deposits 65,672 97,064 122,449
Total deposits $ 677,633 $ 700,510 $ 648,417
Total interest bearing liabilities
Earning assets are comprised of deposits at financial institutions, including theFederal Reserve Bank , investment securities and loans. Earning assets were$734.3 million atJune 30, 2021 , a decrease of 3.5% from theDecember 31, 2020 balance of$760.9 million . The decrease fromDecember 31, 2020 was mainly due to a decrease in loans of$64.8 million , an increase of$3.4 million in investment securities available-for-sale and an increase in interest-earning deposits of$38.0 million . Earning assets increased 1.5% from theJune 30, 2020 balance of$723.6 million , which was due mainly to an increase in interest-earning deposits of$39.5 million , an increase in investment securities available-for-sale of$8.4 million , and a decrease in loans of$36.1 million . Total assets of$793.0 million atJune 30, 2021 decreased by$28.3 million , or 3.4%, from the asset total of$821.3 million atDecember 31, 2020 , and increased$13.0 million , or 1.7%, from the asset total of$780.0 million atJune 30, 2020 . See below for further analysis of changes in loans. AtJune 30, 2021 , the investment securities available-for-sale portfolio was$171.3 million compared to$167.9 million atDecember 31, 2020 , an increase of$3.4 million , or 2.0%. Investment securities available-for-sale represented 23.3% of earning assets atJune 30, 2021 , compared to 22.1% atDecember 31, 2020 . As the Company manages its balance sheet for loan growth, asset mix, liquidity and current interest rates and interest rate forecasts, the investment portfolio is a primary source of liquidity and therefore can reflect variation in balances accordingly. The investment securities available-for-sale portfolio represented 25.3% and 24.0% of each deposit dollar atJune 30, 2021 andDecember 31, 2020 , respectively. The investment securities available-for-sale portfolio had net unrealized gains, net of tax, of$3.9 million atJune 30, 2021 and net unrealized gains, net of tax of$4.9 million atDecember 31, 2020 . The decrease in unrealized gains is reflective of the increase in certain interest rates during 2021 and its effect on securities valuation. Loans held for sale decreased by$3.4 million to$3.5 million atJune 30, 2021 from$6.9 million atDecember 31, 2020 , reflecting variation of the mortgage loan processing and origination activity. Total loans atJune 30, 2021 were$492.0 million compared to$556.8 million atDecember 31, 2020 , an 11.6% decrease, and$528.1 million atJune 30, 2020 , a 6.8% decrease. Year-end loan balances included 60-day or less term commercial loans totaling$24.1 million that closed in 2020 and were fully secured by segregated deposit accounts with the Bank, and matured in the first quarter of 2021. Excluding these seasonal loans atDecember 31, 2020 , total loans actually decreased$40.7 million , or 7.6% throughJune 30, 2021 essentially representing the PPP loan forgiveness. With falling interest rates, numerous commercial customers paid off loan balances to take advantage of capital markets. In the current and previous quarter, commercial loan payoffs totaled$19.9 million and$12.0 million , respectively. Additionally, efforts from the lending staff have shifted focus on servicing existing borrowers impacted by COVID-19 versus prospecting for new loans. Total gross loans as a percentage of earning assets stood at 67.0% as ofJune 30, 2021 , 73.2% as ofDecember 31, 2020 , and 73.0% as ofJune 30, 2020 . The total loan-to-deposit ratio was 72.6% atJune 30, 2021 , 79.5% atDecember 31, 2020 and 81.4%June 30, 2020 . 34 -------------------------------------------------------------------------------- The allowance for loan losses of$6.0 million atJune 30, 2021 andDecember 31, 2020 , and$5.1 million atJune 30, 2020 represented approximately 1.22% of outstanding loans atJune 30, 2021 , 1.08% atDecember 31, 2020 and 1.05% atJune 30, 2020 . Excluding the fully guaranteed PPP loans, the allowance was 1.29% of loans atJune 30, 2021 . The elevated level of the allowance is a reflection of the effect of the COVID-19 pandemic on the borrowers of the Company. See Analysis of Provision for Loan Losses. During the first six months, loan charge-offs were$92,000 in 2021 compared to$96,000 for the same period in 2020, while the recovery of previously charged-off loans amounted to$52,000 in 2021 and$101,000 in 2020. This resulted in net charge-offs of$40,000 in 2021 and net recoveries$5,000 in 2020, representing 2 basis points of average loans in 2021 and zero basis points of average loans in 2020. Charge-offs of specific problem loans, as well as for smaller balance homogeneous loans, are recorded periodically during the year. The number of loan accounts and the amount of charge-offs associated with account balances vary from period to period as loans are deemed uncollectible by management. Nonaccrual loans were$1.4 million atJune 30, 2021 ,$1.9 million atDecember 31, 2020 , and$2.1 million atJune 30, 2020 or 0.3%, 0.3% and 0.4%, respectively, of total loans. Bank-owned life insurance had a cash surrender value of$21.4 million atJune 30, 2021 and$21.2 million atDecember 31, 2020 , comprising approximately 23.7% and 24.3% of Tier 1 capital plus the allowance for loan losses forJune 30, 2021 andDecember 31, 2020 , respectively. Management may consider additional insurance purchases not to exceed a 25% capital guideline. Other assets decreased to$23.2 million atJune 30, 2021 from$23.8 million atDecember 31, 2020 . As ofJune 30, 2021 , a$4.8 million investment in partnership funds is included in other assets compared to$5.1 million atDecember 31, 2020 , with an offsetting$1.6 million and$2.3 million , respectively, atJune 30, 2021 andDecember 31, 2020 in other liabilities, which is the commitment to fund these affordable housing investments. A partnership investment of$8.5 million and$8.3 million into a privately managed pooled fund of small business administration loans is included in other assets atJune 30, 2021 and atDecember 31, 2020 , respectively. Both of these investments are intended to satisfy Community Reinvestment Act requirements. Also included in other assets is$2.6 million in fair value of commercial loan swaps atJune 30, 2021 and$4.0 million atDecember 31, 2020 with an equal amount in other liabilities. Noninterest-bearing deposits measured$222.5 million atJune 30, 2021 compared to$198.5 million atDecember 31, 2020 and$186.2 million atJune 30, 2020 . Much of the$24.0 million , or 12.1%, increase from year-end relates to government aid to our customers in the form of PPP loans to commercial customers and stimulus checks to consumers. Interest-bearing deposits decreased$46.9 million to$455.1 million atJune 30, 2021 from$502.0 million atDecember 31, 2020 and decreased$7.1 million from$462.2 million atJune 30, 2020 . The decrease in interest-bearing deposits from year end reflects segregated money market deposit accounts with the Bank which fully collateralized$24.1 million in 60-day or less term commercial loans that closed in 2020. The loans matured and the deposits withdrew in the first quarter of 2021. Absent the collateral deposits, interest-bearing deposits decreased$22.8 million , or 4.8%, during the first six months of 2021, most of which was wholesale deposits no longer needed.Federal Home Loan Bank advances and short-term borrowings decreased by$6.6 million to$12.9 million atJune 30, 2021 from$19.5 million atDecember 31, 2020 , reflecting the Company's early payoff of$6 million . Management continues to use short-term borrowings to bridge its current cash flow needs resulting in variations from period to period. Wholesale deposits, when cheaper than FHLB funds, are sometimes used in lieu of borrowings. Other liabilities measured$14.1 million atJune 30, 2021 and$15.1 million atDecember 31, 2020 . Included is the operating lease liability, the commitment to fund the affordable housing investments and fair value of swaps described above. The Company's total shareholders' equity measured$83.2 million atJune 30, 2021 and$81.0 million onDecember 31, 2020 . The Company's capital continues to meet the requirements to be deemed well-capitalized under all regulatory measures. Cash dividends of$0.34 per share were paid to shareholders in the first six months of 2021 compared to$0.33 in cash dividends paid in the first six months of 2020 (including a special dividend of$.05 in both periods). Cash dividends of$0.15 per share and$0.14 per share were paid to shareholders in the second quarters of 2021 and 2020. Capital Resources The Company and the Bank are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightings, and other factors, and the regulators can lower classifications in certain cases. Failure to meet various capital requirements can initiate regulatory action that could have a direct material effect on the financial statements. The prompt corrective action regulations provide five categories, including well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If a bank is only adequately capitalized, regulatory approval is required to, among other things, accept, renew or roll-over brokered deposits. If a bank is undercapitalized, capital distributions and growth and expansion are limited, and plans for capital restoration are required. 35
--------------------------------------------------------------------------------The Board of Governors of theFederal Reserve Board and theFDIC approved the final rules implementing theBasel Committee on Banking Supervision's capital guidelines forU.S. banks (commonly known as Basel III). Under the final rules, which began for the Company and the Bank onJanuary 1, 2015 and were subject to a phase-in period throughJanuary 1, 2019 , minimum requirements increased for both the quantity and quality of capital held by the Company and the Bank. The rules include a new common equity Tier 1 capital to risk-weighted assets ratio (CET1 ratio) of 4.5% and a capital conservation buffer of 2.5% of risk-weighted assets, which when fully phased-in, effectively results in a minimum CET1 ratio of 7.0%. Basel III raises the minimum ratio of Tier 1 capital to risk-weighted assets from 4.0% to 6.0% (which, with the capital conservation buffer, effectively results in a minimum Tier 1 capital ratio of 8.5% when fully phased-in), effectively results in a minimum total capital to risk-weighted assets ratio of 10.5% (with the capital conservation buffer fully phased-in), and requires a minimum leverage ratio of 4.0%. Basel III also makes changes to risk weights for certain assets and off-balance-sheet exposures. Management expects that the capital ratios for the Company and the Bank under Basel III will continue to exceed the well capitalized minimum capital requirements. InSeptember 2019 , consistent with Section 201 of the Regulatory Relief Act, theFederal Reserve Board , along with the other federal bank regulatory agencies, issued a final rule, effectiveJanuary 1, 2020 , that gives community banks, including the Company, the option to calculate a simple leverage ratio to measure capital adequacy, if the community banks meet certain requirements. Under the rule, a community bank is eligible to elect the Community Bank Leverage Ratio (CBLR) framework if it has less than$10 billion in total consolidated assets, limited amounts of certain trading assets and liabilities, limited amounts of off-balance sheet exposures and a leverage ratio greater than 9.0%. The final rule adopts tier 1 capital and the existing leverage ratio into the CBLR framework. The tier 1 numerator takes into account the modifications made in relation to the capital simplifications and current expected credit loss (CECL) methodology transitions rules as of the compliance dates of those rules. Qualifying institutions that elect to use the CBLR framework (each, aCBLR Bank ) and that maintain a leverage ratio of greater than 9.0% will be considered to have satisfied the risk based and leverage capital requirements in the regulatory agencies' generally applicable capital rules and to have met the well capitalized ratio requirements.Each CBLR Bank will not be required to calculate or report risk based capital. ACBLR Bank may opt out of the framework at any time, without restriction, by reverting to the generally applicable risk based capital rule. The Company did not elect the option of using the CBLR framework to measure capital adequacy as ofJune 30, 2021 . AtJune 30, 2021 andDecember 31, 2020 , actual capital levels and minimum required levels were: (Dollars in thousands) Minimum required To be well-capitalized under for capital adequacy prompt corrective action Actual purposes regulations June 30, 2021 Amount Ratio Amount Ratio Amount Ratio CET1 capital (to risk-weighted assets) Company$ 79,331 14.11 %$ 25,306 4.5 % N/A N/A Bank 76,110 13.61 % 25,156 4.5 %$ 36,337 6.5 % Tier 1 capital (to risk-weighted assets) Company 84,331 15.00 % 33,742 6.0 % N/A N/A Bank 76,110 13.61 % 33,542 6.0 % 44,722 8.0 % Total capital (to risk-weighted assets) Company 90,394 16.07 % 44,989 8.0 % N/A N/A Bank 88,173 15.77 % 44,722 8.0 % 55,903 10.0 % Tier 1 capital (to average assets) Company 84,331 10.49 % 32,147 4.0 % N/A N/A Bank 76,110 9.51 % 32,011 4.0 % 40,014 5.0 % 36
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(Dollars in thousands)
Minimum required To be well-capitalized under
for capital adequacy prompt corrective action
Actual purposes regulations
December 31, 2020 Amount Ratio Amount Ratio Amount Ratio
CET1 capital (to risk-weighted
assets)
Company $ 76,138 13.15 % $ 26,054 4.5 % N/A N/A
Bank 72,671 12.62 % 25,912 4.5 % $ 37,428 6.5 %
Tier 1 capital (to risk-weighted
assets)
Company 81,138 14.01 % 34,739 6.0 % N/A N/A
Bank 72,671 12.62 % 34,549 6.0 % 46,065 8.0 %
Total capital (to risk-weighted
assets)
Company 87,241 15.07 % 46,319 8.0 % N/A N/A
Bank 84,774 14.72 % 46,065 8.0 % 57,581 10.0 %
Tier 1 capital (to average
assets)
Company 81,138 10.20 % 31,816 4.0 % N/A N/A
Bank 72,671 9.18 % 31,679 4.0 % 39,599 5.0 %
The Company had
The Bank was categorized as "well capitalized" at
37--------------------------------------------------------------------------------
Analysis of Net Interest Income
(Amounts in thousands)
Three months ended Six Months Ended
June 30, June 30,
2021 2020 2021 2020
Net interest income $ 6,211 $ 5,614 $ 12,609 $ 11,319
Tax equivalent income adjustment for
investment securities 145 118 284 225
Tax equivalent income adjustment for
loans 4 1 7 3
Net interest income on a fully taxable
equivalent basis $ 6,360 $ 5,733 $ 12,900 $ 11,547
Interest and dividends on investment
securities $ 786 $ 837 $ 1,563 $ 1,657
Tax equivalent income adjustment for
investment securities 145 118 284 225
Investment securities income on a fully
taxable equivalent basis $ 931 $ 955 $ 1,847 $ 1,882
Interest and fees on loans $ 5,820 $ 5,767 $ 11,965 $ 11,821
Tax equivalent income adjustment for
loans 4 1 7 3
Loan income on a fully taxable
equivalent basis $ 5,824 $ 5,768 $ 11,972 $ 11,824 Six Months Ended
Net interest income, the principal source of the Company's earnings, is the amount by which interest and fees generated by interest-earning assets, primarily loans and investment securities, exceed the interest cost of deposits and borrowed funds. On a fully taxable equivalent basis, net interest income measured$12.9 million for the six months endedJune 30, 2021 and$11.5 million for the six months endedJune 30, 2020 . The resulting net interest margin was 3.49% forJune 30, 2021 and 3.37% forJune 30, 2020 . The increase in interest income, on a fully taxable equivalent basis, of$69,000 is the product of an 8.0% year-over-year increase in average earning assets and a 27 basis point decrease in yield. The decrease in interest expense of$1.3 million was a product of a 51 basis point decrease in rates paid and a 1.2% decrease in average interest-bearing liabilities. The net result was a 11.7% increase in net interest income on a fully taxable equivalent basis, and a 12 basis point increase in the Company's net interest margin on an asset base that grew 8.0%. On a fully taxable equivalent basis, income on investment securities decreased by$35,000 , or 1.9%. The average invested balances in these securities increased by$26.7 million , or 19.1%, from the levels of a year ago. The increase in the average balance of investment securities was accompanied by a 48 basis point decrease in the tax equivalent yield of the portfolio. The increase in balances is a result of investing excess liquidity relating to growing deposit balances from pandemic-related aid. These investment purchases were made in a lower interest rate environment, driving down the composite yield, but providing income on otherwise sterile funds. The Company will continue attempting to redeploy liquidity into loans which generate greater yields than securities, thus sacrificing securities balances when beneficial. On a fully taxable equivalent basis, income on loans increased by$148,000 , or 1.3%, for theJune 30, 2021 period compared to the same period in 2020. An$11.6 million increase in the average balance of the loan portfolio, or 2.2%, was accompanied by a 3 basis point decrease in the portfolio's tax equivalent yield. The three rate decreases in the latter half of 2019 by theFederal Open Market Committee (FOMC) aggregating to 75 basis points, in addition to the two rate reductions in the first quarter of 2020 for another 150 basis points has steadily pulled the offering rates of new loan production downward. Strong competition for good credits has also applied downward pressure on offering rates. Offsetting the effect of declining rates was the recognition of fees upon forgiveness of PPP loans, providing$890,000 of income in 2021. The commercial loan portfolio housed the majority of the net increase in balances mainly consisting of PPP loans. Other interest income decreased by$44,000 , or 62.9%, from the same period a year ago. The average balance of interest-earning deposits increased by$16.7 million , or 54.0%. The yield decreased by 34 basis points from 2020 to 2021, reflecting the aggregate net decreases in the federal funds rate. Management intends to remain fully invested, minimizing on-balance sheet liquidity, but mindful of the possible reversal of recent deposit growth. Average interest-bearing demand deposits and money market accounts increased by$31.0 million , or 14.3%, for the six months endedJune 30, 2021 compared to the same period of 2020, while average savings balances increased by$24.9 million , or 21.7%. The average rate paid on interest-bearing demand deposits and money market accounts decreased 46 basis points from 2020 to 2021 to 0.24%, reflecting the expiration of promotional specials offered during 2019 and 2020. The average rate paid on savings accounts was 0.09% and 0.10% for the six months endedJune 30, 2021 and 2020. The average balance of time deposit products decreased by$51.1 million , or 37.9%, as the average rate paid decreased by 58 basis points, from 1.73% to 1.15%. The current low-rate environment offers little opportunity for time deposit customers, resulting in a shift into demand accounts. Time deposits also include wholesale funds, generally brokered deposits, obtained at generally higher rates than in-market accounts. Brokered deposits are one of several borrowing sources, primarily used when rates therein are beneficial versus other sources. Due to higher customer deposits, brokered and other wholesale sources have been paid down as they mature. Average borrowings and subordinated debt decreased by$10.5 million or 33.8% while the average rate paid decreased by 58 basis points. As higher cost borrowings matured, the borrowings that remained were at lower rates, and the new borrowings were obtained at lower rates as well. Management continues to utilize short-term borrowings to bridge liquidity gaps, along with wholesale deposit alternatives. In the current low rate environment, wholesale and borrowing rates can reprice lower, while deposit rates may show modest decline. InOctober 2020 , the Company utilized a portion of its excess liquidity to pay off$8 million of advances from the FHLB and inMarch 2021 the Company again paid off$6 million in advances to utilize a portion of its excess liquidity. The average rate on the advances paid off inOctober 2020 was 2.62%, and 0.78% inMarch 2021 , both of which resulted in a reduction in the average cost of borrowings prospectively.
Three Months Ended
Net interest income, the principal source of the Company's earnings, is the amount by which interest and fees generated by interest-earning assets, primarily loans and investment securities, exceed the interest cost of deposits and borrowed funds. On a fully taxable equivalent basis, net interest income measured$6.4 million for the quarter endedJune 30, 2021 and$5.7 million for the quarter endedJune 30, 2020 . The resulting net interest margin was 3.41% forJune 30, 2021 and 3.21% forJune 30, 2020 . The increase in interest income, on a fully taxable equivalent basis, of$34,000 is the product of a 4.4% year-over-year increase in average earning assets and a 14 basis point decrease in yield. The decrease in interest expense of$593,000 was a product of a 46 basis point decrease in rates paid and a 3.9% decrease in average interest-bearing liabilities. The net result was a 10.9% increase in net interest income on a fully taxable equivalent basis, and a 20 basis point increase in the Company's net interest margin on an asset base that grew 4.4%. On a fully taxable equivalent basis, income on investment securities decreased by$24,000 , or 2.5%. The average invested balances in these securities increased by$26.6 million , or 18.5%, from the levels of a year ago. The increase in the average balance of investment securities was accompanied by a 46 basis point decrease in the tax equivalent yield of the portfolio. The increase in balances is a result of investing excess liquidity relating to growing deposit balances from pandemic-related aid. These investment purchases were made in a lower interest rate environment, driving down the composite yield, but providing income on otherwise sterile funds. The Company will continue attempting to redeploy liquidity into loans which generate greater yields than securities, thus sacrificing securities balances when beneficial. On a fully taxable equivalent basis, income on loans increased by$56,000 , or 1.0%, for theJune 30, 2021 period compared to the same period in 2020. A$12.8 million decrease in the average balance of the loan portfolio, or 2.4%, was accompanied by a 16 basis point increase in the portfolio's tax equivalent yield. The three rate decreases in the latter half of 2019 by theFederal Open Market Committee (FOMC) aggregating to 75 basis points, in addition to the two rate reductions in the first quarter of 2020 for another 150 basis points has steadily pulled the offering rates of new loan production downward. Strong competition for good credits has also applied downward pressure on offering rates. However, fees recognized on PPP loan forgiveness of$390,000 more than offset the effect of declining rates.
Other interest income increased by
Average interest-bearing demand deposits and money market accounts increased by$29.4 million , or 13.4%, for the quarter endedJune 30, 2021 compared to the same period of 2020, while average savings balances increased by$27.2 million , or 23.3%. The average rate paid on interest-bearing demand deposits and money market accounts decreased 38 basis points from 2020 to 2021 to 0.23%, reflecting the expiration of promotional specials offered during 2019 and 2020. The average rate paid on savings accounts was 0.09% and 0.10% for the quarters endedJune 30, 2021 and 2020. The average balance of time deposit products decreased by$59.5 million , or 43.9%, as the average rate paid decreased by 53 basis points, from 1.54% to 1.01%. The current low-rate environment offers little opportunity for time deposit customers, resulting in a shift into demand accounts. Time deposits also include wholesale funds, generally brokered deposits, obtained at generally higher rates than in-market accounts. Brokered deposits are one of several borrowing sources, primarily used when rates therein are beneficial versus other sources. Due to higher customer deposits, brokered and other wholesale sources have been paid down as they mature. 38 -------------------------------------------------------------------------------- Average borrowings and subordinated debt decreased by$17.0 million or 48.8% while the average rate paid decreased by 38 basis points. As higher cost borrowings matured, the borrowings that remained were at lower rates, and the new borrowings were obtained at lower rates as well . Management continues to utilize short-term borrowings to bridge liquidity gaps, along with wholesale deposit alternatives. In the current low rate environment, wholesale and borrowing rates can reprice lower, while deposit rates may show modest decline. InOctober 2020 , the Company utilized a portion of its excess liquidity to pay off$8 million of advances from the FHLB and inMarch 2021 the Company again paid off$6 million in advances to utilize a portion of its excess liquidity. The average rate on the advances paid off inOctober 2020 was 2.62%, and 0.78% inMarch 2021 , both of which resulted in a reduction in the average cost of borrowings prospectively.
Analysis of Provision for Loan Losses, Non-Interest Income, Non-Interest Expense
and Federal Income Tax - Six Months Ended
During the first six months of both 2021 and 2020, the amount charged to operations as a provision for loan losses was adjusted to account for charge-offs against the allowance, as well as changes in loan balances recorded in the portfolio, expected losses on specific problem loans and several qualitative factors, including factors specific to the local economy and to industries operating in the local market. The Company had allocated a portion of the allowance for a select few specific problem loans in 2021 and 2020, and has not experienced significant deterioration in any loan type other than the hotel industry, including the residential real estate portfolios or the commercial loan portfolio, and accordingly has not added any special provision for these loan types. All other past due loans, potential problem loans, as well as loans on non-accrual have all been stable. Over one-third of the hotel portfolio is currently deferring principle and/or interest payments under COVID-19 modifications. During 2020, the Company classified two of these credits totaling$9.4 million as substandard. With loan to values averaging 44%, the loans are not considered impaired, but have been allocated qualitative factors commensurate with the associated risk. There was no provision for loan losses for the six months endedJune 30, 2021 , compared to a$1.1 million provision for loan losses for the six months endedJune 30, 2020 . The decreased provision for the six months endedJune 30, 2021 , compared to the same time period in 2020, was due to the majority of COVID-related loan modifications returning to full payment status. Allocated reserves to these loans were essentially freed up for reallocation to segments still subject to risk uncertainty, specifically the hotel industry. We believe the provision for loan losses could increase in future periods based on our belief that the credit quality of our loan portfolio may decline and loan defaults could increase as a result of the unknown ongoing impact of the COVID-19 pandemic.
Total non-interest income increased by
For the first six months of 2021, fees for customer services increased by$13,000 , or 1.3%, from the same period a year ago, driven by more customer fee-driven transactions on deposit accounts. Mortgage banking gains increased by$18,000 in 2021 compared to 2020, reflective of the increase in refinances of existing loans resulting from the decline in interest rates. Earnings on bank-owned life insurance increased by$40,000 . Other sources of non-interest income increased by$11,000 from the same period a year ago. This latter income category is subject to fluctuation due to the non-recurring nature of some of the items. Total non-interest expenses in the first six months were$10.3 million in 2021 compared to$9.6 million in 2020, an increase of$759,000 or 7.9%. During the first six months of 2021, expenditures for salaries and employee benefits increased by$373,000 , or 7.1%, from the similar period a year ago, reflecting annual merit increases and incentive compensation. Occupancy and equipment decreased by$84,000 , reflecting the partial closure of branches due to the pandemic. Professional fees decreased by$147,000 . All other expense categories increased by$617,000 , which includes$263,000 in merger-related expenses. The effective tax rate for the first six months was 14.0% in 2021 and 14.8% in 2020, resulting in income tax expense of$778,000 in 2021 and$575,000 in 2020. The effective rate is affected by the current rate of profitability and tax-free components of the revenue stream. 39
-------------------------------------------------------------------------------- The provision for income taxes differs from the amount of income tax determined applying the applicableU.S. statutory federal income tax rate (21%) to pre-tax income as a result of the following differences: (Amounts in thousands) June 30, 2021 2020 Balance % Balance % Provision at statutory rate$ 1,164 21.0$ 814 21.0 Add (Deduct) tax effects of: Earnings on bank-owned life insurance-net (68 ) (1.2 ) (1 ) - Non-taxable interest income (242 ) (4.4 ) (204 ) (5.3 ) Low income housing tax credits (106 ) (1.9 ) (82 ) (2.1 ) Non-deductible expenses 30 0.5 48 1.2 Federal income tax expense$ 778 14.0$ 575 14.8
Analysis of Provision for Loan Losses, Non-Interest Income, Non-Interest Expense
and Federal Income Tax - Three Months Ended
During the second quarter of both 2021 and 2020, the amount charged to operations as a provision for loan losses was adjusted to account for charge-offs against the allowance, as well as changes in loan balances recorded in the portfolio, expected losses on specific problem loans and several qualitative factors, including factors specific to the local economy and to industries operating in the local market. The Company had allocated a portion of the allowance for a select few specific problem loans in 2021 and 2020, and has not experienced significant deterioration in any loan type other than the hotel industry, including the residential real estate portfolios or the commercial loan portfolio, and accordingly has not added any special provision for these loan types. All other past due loans, potential problem loans, as well as loans on non-accrual have all been stable. Over one-third of the hotel portfolio is currently deferring principle and/or interest payments under COVID-19 modifications. During 2020, the Company classified two of these credits totaling$9.4 million as substandard. With loan to values averaging 44%, the loans are not considered impaired, but have been allocated qualitative factors commensurate with the associated risk. There was no provision for loan losses for the three months endedJune 30, 2021 , compared to a$450,000 provision for loan losses for the three months endedJune 30, 2020 . The decreased provision for the three months endedJune 30, 2021 , compared to the same time period in 2020, was due to the majority of COVID-related loan modifications returning to full payment status. Allocated reserves to these loans were essentially freed up for reallocation to segments still subject to risk uncertainty, specifically the hotel industry. We believe the provision for loan losses could increase in future periods based on our belief that the credit quality of our loan portfolio may decline and loan defaults could increase as a result of the unknown ongoing impact of the COVID-19 pandemic. Total non-interest income decreased by$250,000 , or 14.6%, for the quarter endingJune 30, 2021 compared to the same quarter of 2020. Mortgage banking gains decreased to$714,000 in the second quarter of 2021 from$900,000 the same quarter of 2020, a decrease of$186,000 reflective of a tighter margin on loan sales on lower volume. Earnings on bank-owned life insurance increased by$20,000 . Other sources of non-interest income decreased by$84,000 from the same period a year ago. This latter income category is subject to fluctuation due to the non-recurring nature of some of the items. Total non-interest expenses in the second quarter were$5.4 million in 2021 and$4.6 million in 2020, an increase of 17.6%. During the second quarter of 2021, expenditures for salaries and employee benefits increased by$295,000 , or 12.0%, from the similar period a year ago, reflecting annual merit increases and incentive compensation. Full time equivalent employment averaged 151 during the second quarter of 2021 and 155 during the second quarter of 2020. All other expense categories increased by$509,000 , or 24.1%, in the aggregate. This latter category is subject to fluctuation due to the non-recurring nature of some of the items. Liquidity
The central role of the Company's liquidity management is to (1) ensure sufficient liquid funds to meet the normal transaction requirements of its customers, (2) take advantage of market opportunities requiring flexibility and speed, and (3) provide a cushion against unforeseen liquidity needs.
Liquidity risk arises from the possibility that the Company may not be able to satisfy current or future financial commitments or may become unduly reliant on alternative funding sources. The objective of liquidity management is to ensure the Company has the ability to fund balance sheet growth and meet deposit and debt obligations in a timely and cost-effective manner. Management monitors liquidity through a regular review of asset and liability maturities, funding sources, and loan and deposit forecasts. The Company maintains strategic and contingency liquidity plans to ensure sufficient available funding to satisfy requirements for balance sheet growth, proper management of capital markets funding sources and addressing unexpected liquidity requirements. Principal sources of liquidity available to the Company include assets considered relatively liquid, such as interest-bearing deposits in other banks, federal funds sold and, cash and due from banks, as well as cash flows from maturities and repayments of loans, investment securities and mortgage-backed securities. Principal repayments on mortgage-backed securities, collateralized mortgage obligations and small business administration pools, along with investment securities maturing or called amounted to$11.5 million in the first six months of 2021, which annualized represents 13.2% of the total combined portfolio, compared to$11.0 million , or 13.3%, of the portfolio a year ago. The current low interest rate environment generally increases prepayment speeds on mortgage-backed securities. A large portion of the investment portfolio is allocated to amortizing debt in order to provide cash flows to supplement loan growth. In order to address the concern ofFDIC insurance of larger depositors, the Bank is a member of the IntraFi Network, formerly known asPromontory Interfinancial Network which offered Certificate of Deposit Account Registry Service (CDARS ®) program and the Insured Cash Sweep (ICS) program. The CDARS ® product is now rebranded as IntraFi Funding and the ICS program is now renamed IntraFi Network Deposits. Through IntraFi Funding the Bank's customers can increase theirFDIC insurance by up to$50 million through reciprocal certificate of deposit accounts and likewise through IntraFi Network Deposits, they can accomplish the same through money market savings accounts. This is accomplished by the Bank entering into reciprocal depository relationships with other member banks. The individual customer's large deposit is broken into amounts below$250,000 and placed with other banks that are members of the network. The reciprocal member bank issues certificates of deposit or money market savings accounts in amounts that ensure that the entire deposit is eligible forFDIC insurance. The Bank can also execute "one-way buy" transactions wherein deposits are taken in on a non-reciprocal basis through a weekly bidding process. AtJune 30, 2021 , the Bank had$6.6 million of deposits in the IntraFi Funding program, of which none was executed as one-way buy transactions and the Bank had$13.2 million of deposits in the IntraFi Network Deposit money market program, of which none was executed as one-way buy transactions. Prospectively, for regulatory purposes, reciprocal IntraFi products are no longer considered a brokered deposit. Along with its liquid assets, the Bank has other sources of liquidity available to it which help to ensure that adequate funds are available as needed. These other sources include, but are not limited to, the ability to obtain deposits through the adjustment of interest rates, the purchasing of federal funds, correspondent bank lines of credit and access to the Federal Reserve Discount Window. The Bank is also a member of theFederal Home Loan Bank of Cincinnati , which provides its largest source of liquidity. AtJune 30, 2021 , the Bank had approximately$25.7 million available of collateral-based borrowing capacity at FHLB ofCincinnati , supplementing the$3.3 million of availability with the Federal Reserve Discount window. Additionally, the FHLB has committed a$38.8 million cash management line, of which nothing has been disbursed, subject to posting additional collateral. The Bank, by policy, has access to approximately 25% of total deposits in various forms of wholesale deposits that could be used as an additional source of liquidity. AtJune 30, 2021 , there was$2.5 million in outstanding balances in wholesale deposits including internet-based deposits, with access to an additional$166.9 million . The Company was also granted a total of$13.5 million in unsecured, discretionary Federal Funds lines of credit with correspondent banks with no funds drawn upon as ofJune 30, 2021 . Unpledged securities of$106.2 million are also available for borrowing under repurchase agreements or as additional collateral for FHLB lines of credit or to sell to generate liquidity. 40 -------------------------------------------------------------------------------- At the outset of the Pandemic, in response to the uncertainty surrounding the stay-at-home orders, business closures, and the potential negative effects to the economy, the Bank opted to begin increasing on-balance sheet liquidity in the event funds may be unavailable in the future. Simultaneously, in response to the COVID-19 pandemic, governmental agencies took several measures to avail liquidity to the banking industry. Among the key provisions are the following: Federal Reserve Bank Actions
• Lowered the primary borrowing rate through the discount window by 150 basis
points to 0.25% to enhance the role of the discount window for banks facing
potential funding pressures.
• Encouraged banks to utilize intraday credit extended by Reserve Banks on both
a collateralized and uncollateralized basis.
• Supports firms that choose to use their capital and liquidity buffers to lend
and undertake other supportive actions.
• Reduced the reserve requirement ratios to 0.0% effective
• Established the Paycheck Protection Program Liquidity Facility (PPPLF) to
extend credit to eligible financial institutions that originate Small Business
PPP loans, taking the loans as collateral at face value; established the rate
at 0.35%.
In addition to the Federal Reserve Bank's actions, the FHLB offered interest
free six-month advances for COVID-19 related liquidity needs, with normal
collateral posted up to $5 million per institution. The Treasurer of the State
of Ohio offered to open interest-bearing deposit accounts in Ohio banks at a
rate of .02% (currently), fully collateralized up to a six-month term. The
Company qualified for $17 million and entered into the six month program in July
2020 with the the six month term expiring in January 2021 . The Company
experienced significant deposit growth during the pandemic, which minimized
usage of these government-sponsored programs.
Based upon the accommodations described above, the Bank has substantial liquidity available, over and above normal channels, to address any future needs emanating from the current pandemic.
The Company has other more limited sources of liquidity. In addition to its existing liquid assets, it can raise funds in the securities market through debt or equity offerings or it can receive dividends from its bank subsidiary. Generally, the Bank may pay dividends without prior approval as long as the dividend is not more than the total of the current calendar year-to-date earnings plus any earnings from the previous two years not already paid out in dividends, as long as the Bank remains well-capitalized after the dividend payment. The amount available for dividends atJune 30, 2021 is$11.2 million . Future dividend payments by the Bank to the Company are based upon future earnings.The Holding Company had cash of$87,000 atJune 30, 2021 available to meet cash needs. It also held a$6.0 million note receivable, the cash flow from which approximates the debt service on the Junior Subordinated Debentures. Cash is generally used by the Holding Company to pay quarterly interest payments on the debentures, pay dividends to common shareholders, repurchase shares, and to fund operating expenses. Cash and cash equivalents totaled$73.3 million atJune 30, 2021 compared to$33.1 million atJune 30, 2020 and$36.1 million atDecember 31, 2020 The Company strives to be fully invested, minimizing on balance sheet liquidity, however, higher liquidity levels have been maintained during the Pandemic as a precautionary measure. 41
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The following table details the cash flow from operating activities for the six months ended:
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