HOWARD BA The following is a discussion of our consolidated financial condition as ofSeptember 30, 2021 , as compared toDecember 31, 2020 , and our results of operations for the nine and three month periods endedSeptember 30, 2021 andSeptember 30, 2020 . This discussion and analysis should be read in conjunction with our unaudited Condensed Consolidated Financial Statements and related notes as well as the financial and statistical data appearing elsewhere in this report and in our Annual Report on Form 10-K for the year endedDecember 31, 2020 . Historical results of operations and the percentage relationships among any amounts included, and any trends that may appear, may not indicate results of operations for any future periods. We have made, and will continue to make, various forward-looking statements with respect to financial, business and economic matters. Comments that are not historical facts are considered forward-looking statements that involve inherent risks and uncertainties. Actual results may differ materially from those contained in these forward-looking statements. For additional information regarding our cautionary disclosures, see "Cautionary Note Regarding Forward-Looking Statements" at the beginning of this report. In this report, unless the context suggests otherwise, references to the "Company" refer toHoward Bancorp, Inc. and references to "we," "us," and "our" mean the combined business of the Company andHoward Bank and its wholly-owned subsidiaries (the "Bank").
Overview
Howard Bancorp, Inc. is the holding company forHoward Bank .Howard Bank was formed in 2004.Howard Bank's business has consisted primarily of originating both commercial and real estate loans secured by property in our market area. We are headquartered inBaltimore, Maryland . We consider our primary market area to be theGreater Baltimore - Washington Metropolitan Area . We engage in a general commercial banking business, making various types of loans and accepting deposits. We market our financial services primarily to small- and medium-sized businesses and their owners, professionals and executives, and high-net-worth individuals. Our loans are primarily funded by core deposits of customers in our market. Recent Developments
OnJuly 12, 2021 , the Company and F.N.B. Corporation ("F.N.B."), the parent company ofFirst National Bank of Pennsylvania , entered into an Agreement and Plan of Merger, pursuant to which the Company will merge with and into F.N.B. As a result of the merger, the separate corporate existence of the Company will cease and F.N.B. will continue as the surviving corporation (the "Merger"). Immediately after the Merger is completed, the Bank will merge with and intoFirst National Bank of Pennsylvania , a national association, withFirst National Bank of Pennsylvania being the surviving entity. Subject to the terms and conditions of the Merger Agreement and in connection with the Merger, holders of Company common stock will have the right to receive shares of F.N.B. common stock at a fixed exchange ratio of 1.80 shares of F.N.B. common stock for each share of Company common stock, plus cash in lieu of any fractional shares. The Merger, which remains subject to the approval of the Company's stockholders and satisfaction of customary closing conditions, is expected to be completed in early 2022. 33 COVID-19 Pandemic Our business, financial condition and results of operations have been and may continue to be affected by the COVID-19 pandemic ("COVID-19" or "pandemic"). The pandemic and related restrictive measures taken by governments, businesses and individuals to contain the spread of the virus caused unprecedented uncertainty, volatility and disruption in financial markets and in governmental, commercial and consumer activity inthe United States and globally, including our local markets. As these restrictive measures have eased, theU.S. economy continues to recover and, with the broad availability and distribution of COVID-19 vaccines, we anticipate continued improvements in commercial and consumer activity, our local economy, and theU.S. economy. OnJuly 1, 2021 , theState of Maryland lifted its state of emergency. Like much of the nation,Maryland experienced an increase in COVID-19 cases and the case rate per 100,000 people during the third quarter of 2021; as a result,Baltimore City and certain other local jurisdictions reimposed indoor mask mandates in response. However, this setback in COVID-19 progress does not appear to have had a significant adverse impact on the local economic recovery. The setback in COVID-19 progress during the third quarter of 2021 is cause for concern and continued future uncertainty. Meanwhile, the trends in the unemployment rate and initial unemployment claims are positive. The fact that the state ofMaryland did not reimpose the state of emergency in the third quarter of 2021, despite the rising COVID-19 metrics, has keptMaryland businesses open with limited local-level restrictions. While the unemployment rate and initial unemployment claims are still above pre-pandemic levels,Maryland employers, like much of the nation, are facing the challenge of finding workers, with COVID-19 safety concerns, wages, and childcare availability key factors. Inflation concerns and the debt ceiling political battle inWashington are also potential headwinds to a full recovery. While there are reasons for optimism, we recognize that some of our customers continue to experience varying degrees of financial distress, which we expect to continue into 2022. Commercial activity continues to improve, but has not yet returned to the levels existing before the outbreak of the pandemic, which may result in our borrowers' inability to meet their loan obligations. Economic pressures and uncertainties related to the pandemic have also resulted in changes in consumer spending behaviors, which may negatively impact the demand for loans and other services we offer. In addition, our loan portfolio includes customers in industries such as hotels, restaurants and caterers, arts / entertainment / recreation, and retail commercial real estate, all of which have been significantly impacted by the pandemic. We recognize that these industries may take longer to fully recover as some consumers may be hesitant to return to full social interaction or may change their spending habits on a more permanent basis as a result of the pandemic. We continue to monitor these customers closely. In addition, market interest rates declined significantly due to the pandemic, with the 10-yearTreasury bond falling to a low of 0.52% inAugust 2020 . This rate steadily increased from its low to a high of 1.73% atMarch 31, 2021 ; since that time, the rate has declined to 1.52% atSeptember 30, 2021 . Additionally, inMarch 2020 , theFederal Open Market Committee reduced the targeted federal funds interest rate range to 0% - 0.25%; this low rate was still in effect as ofSeptember 30, 2021 . A continuing low interest rate environment could have, possibly materially, an adverse effect on our business, financial condition, and results of operations. The ultimate extent of the impact of the pandemic on our business, financial condition and results of operations is currently uncertain and will depend on various developments and other factors, including the effect of governmental and private sector initiatives, the ability to reach a sufficient vaccination rate to achieve herd immunity, whether such vaccinations will be effective against any resurgence of the virus, including new strains such as the Delta variant, and the ability of customers and businesses to return to, and remain in, their pre-pandemic routines. In addition, it is reasonably possible that certain significant estimates made in our financial statements could be materially and adversely affected in the near term as a result of these conditions. 34
Lending Operations and Accommodations to Borrowers
We actively participated in theSmall Business Administration's ("SBA") Paycheck Protection Program ("PPP") established under the Coronavirus Aid, Relief and Economic Security Act ("CARES" Act), as amended and extended. Lending under the PPP commenced onApril 3, 2020 and the SBA notified lenders that PPP funds were exhausted on or aroundApril 16, 2020 . OnApril 24, 2020 , additional funds were allocated to the PPP and were available throughAugust 8, 2020 . An additional stimulus package, approved onDecember 27, 2020 , authorized additional PPP funds. While the PPP program ended onMay 31, 2021 , we continue to assist our customers through the loan forgiveness process. We originated$201.0 million of PPP loans in 2020, consisting of 1,062 loans with an average loan size of$189 thousand . During the third quarter of 2021, 168 of these loans, with an aggregate principal balance of$39.6 million , were forgiven. Of the PPP loans we originated in 2020, 1,055 loans with an aggregate principal balance of$192.3 million had been forgiven or repaid by borrowers throughSeptember 30, 2021 , representing 99.3% of the number of PPP loans originated in 2020 and 95.7% of PPP principal balances originated in 2020.
Seven PPP loans originated in 2020 totaling
After the relaunch of the program by the SBA onJanuary 19, 2021 and prior to the end of the program onMay 31, 2021 , we originated$100.5 million of additional PPP loans, consisting of 591 loans with an average loan size of$170 thousand . During the third quarter of 2021, 191 of these loans, with an aggregate principal balance of$24.6 million , were forgiven. Of the PPP loans we originated in 2021, 227 loans with an aggregate principal balance of$27.0 million had been forgiven throughSeptember 30, 2021 , representing 38.4% of the number of PPP loans originated in 2021 and 26.9% of PPP principal balances originated in 2021. AtSeptember 30, 2021 , 364 PPP loans originated in 2021, with an aggregate principal balance of$73.5 million , were still outstanding. We received processing fees from the SBA for the PPP loans originated in 2020 totaling$6.7 million , which were deferred. In addition, we deferred$782 thousand of origination costs attributable to the 2020 PPP originations. We also received processing fees from the SBA for the PPP loans originated in 2021 totaling$4.2 million , which were deferred. In addition, we also deferred$547 thousand of origination costs attributable to the PPP loans originated in 2021. The net deferred fees originally recorded from both 2020 and 2021 PPP originations, totaling$9.6 million , are being accreted as a yield adjustment over the contractual term of the underlying PPP loans, with accretion accelerated upon loan forgiveness. During the life of the PPP program, we originated a total of 1,653 PPP loans with an aggregate principal balance of$301.5 million . As ofSeptember 30, 2021 , 1,282 of these loans, with an aggregate principal balance of$219.4 million , have been either forgiven or repaid by borrowers. AtSeptember 30, 2021 , PPP loans totaled$79.9 million , consisting of 371 PPP loans, with an aggregate principal balance of$82.1 million , less$2.2 million of unaccreted net deferred fees. Included in theSeptember 30, 2021 balance are two loans, with an aggregate principal balance of$451 thousand , which were not fully forgiven and are now amortizing PPP loans. Loans funded through the PPP program are fully guaranteed by theU.S. Government and we expect that substantially all of the remaining loans will ultimately be forgiven by the SBA in accordance with the terms of the program. PPP lending generated pretax income of$1.6 million , or$0.06 after tax per share, in the third quarter of 2021, and$5.4 million , or$0.21 after tax per share, for the nine months endedSeptember 30, 2021 . By comparison, PPP lending generated pretax income of$3.8 million , or$0.16 after tax per share, in the entire year 2020, with$1.1 million , or$0.04 after tax per share, in the third quarter of 2020, and$2.1 million , or$0.08 after tax per share, for the nine months endedSeptember 30, 2020 . In response to the pandemic, we also established client assistance programs, including offering loan modifications, on a case by case basis, in the form of payment deferrals, to both commercial and retail customers as discussed in the "Nonperforming and Problem Assets; COVID-19 Loan Deferrals" section of this Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A"). The CARES Act permits financial institutions to suspend requirements under GAAP for certain loan modifications to borrowers affected by the pandemic that would otherwise be characterized as troubled debt restructurings ("TDR"s). These COVID-19 payment deferrals, if not effective in mitigating the effect of the pandemic on our customers, may adversely affect our business and results of operations in the future. 35
Impact on Our Results of Operation and Financial Condition
We continue to monitor the impact of COVID-19 on our results of operation and financial condition. While the pandemic did not have a significant impact on our financial condition during the year endedDecember 31, 2020 or the nine months endedSeptember 30, 2021 , in the form of significant incurred losses or any communications from our borrowers that significant losses were imminent, we nevertheless determined it prudent to increase our allowance for loan and lease losses (the "allowance") by$7.9 million sinceDecember 31, 2019 (the last balance sheet date before the pandemic began), related to changes in qualitative factors, primarily as a result of the abrupt slowdown in commercial economic activity related to COVID-19, as well as the dramatic rise in the unemployment rate in our market area. Our allowance may also be materially impacted in future periods by COVID-19. In addition, due to the pandemic and the related economic fallout during the first half of 2020, including most specifically, declining stock prices at both the Company and peer banks, theFederal Reserve's significant reduction in interest rates, and other business and market considerations, we performed an interim goodwill impairment analysis as ofJune 30, 2020 . Based on this analysis, the estimated fair value of the Company was less than book value, resulting in a$34.5 million impairment charge, recorded in noninterest expense, in the second quarter of 2020. This was a non-cash charge to earnings and had no impact on our regulatory capital ratios, cash flows, or liquidity position. As ofSeptember 30, 2021 , all of our capital ratios were in excess of all regulatory requirements. While we believe that we have sufficient capital to withstand an extended economic recession resulting from the pandemic, our reported and regulatory capital ratios could be adversely impacted by potential future loan and lease losses.
Use of Non-GAAP Financial Measures and Related Reconciliations
This report contains references to financial measures that are not defined in
GAAP. Such non-GAAP financial measures include the presentation of our tangible
book value per share, portfolio loans, and portfolio loan-related asset quality
ratios.
Management believes that the presentation of these non-GAAP financial measures
(a) provides important supplemental information that contributes to a proper
understanding of our operating performance and provides a meaningful comparison
to our peers, (b) enables a more complete understanding of factors and trends
affecting our business, and (c) allows investors to evaluate our performance in
a manner similar to management, the financial services industry, bank stock
analysts, and bank regulators. Management uses non-GAAP measures as follows: in
the preparation of our operating budgets, monthly financial performance
reporting, and in our presentation to investors of our performance. However,
non-GAAP financial measures have a number of limitations. Limitations associated
with non-GAAP financial measures include the risk that persons might disagree as
to the appropriateness of items comprising these measures and that different
companies might calculate these measures differently. These disclosures should
not be considered in isolation or as an alternative to our GAAP results. A
reconciliation of non-GAAP financial measures to the most directly comparable
GAAP financial measures is presented below.
Certain information in this report is presented with respect to "portfolio
loans," a non-GAAP financial measure defined as total loans and leases, but
excluding PPP loans. Portfolio loans is calculated by subtracting PPP loans (net
of unamortized deferred fees and origination costs) from total loans and leases.
We also provide certain asset quality ratios such as nonperforming loans and the
allowance for loan and lease losses as a percentage of portfolio loans. We
believe that the presentation of portfolio loans and the related asset quality
measures provide additional useful information for purposes of evaluating our
results of operations and financial condition, since the PPP loans are 100%
guaranteed, were not subject to traditional loan underwriting standards, and a
substantial portion of these loans are expected to be forgiven and repaid by the
SBA within the next twelve months.
We also present "tangible book value per common share." We believe that this
measure is consistent with the treatment by bank regulatory agencies, which
exclude intangible assets from the calculation of risk-based capital ratios.
Accordingly, we believe that this non-GAAP financial measure provides
information that is important to investors and that is useful in understanding
our capital position and ratios. In addition, tangible book value per share is
the key metric used by bank analysts in evaluating bank stock price performance.
Tangible book value per common share is calculated by dividing tangible common
stockholders' equity by total common shares outstanding. Tangible common
stockholders' equity is calculated by subtracting goodwill and our net core
deposit intangible from total stockholders' equity.
36
The tables below provide a reconciliation of these non-GAAP financial measures with financial measures defined under GAAP:
Tangible Book Value per Common Share
September 30, December 31, September 30, Sep 2021 vs Dec 2020
(in thousands, except share data) 2021 2020 2020 $ Change % Change
Total stockholders' equity (GAAP)
4.6 %
Subtract:
Goodwill 31,449 31,449 31,449 - - Core deposit intangible, net of deferred tax liability 3,072 4,393 4,863 (1,321) (30.1) Total subtractions 34,521 35,842 36,312$ (1,321) (3.7) Tangible common stockholders' equity (non-GAAP)$ 273,656 $ 258,790 $ 253,188 $ 14,866 5.7 % Total common shares outstanding at end of period 18,811,876 18,744,710 18,742,300 67,166 0.4
Book value per common share (GAAP) $ 16.38
4.2 %
Tangible book value per common
share (non-GAAP) $ 14.55 $ 13.81 $ 13.51 $ 0.74 5.4 %
Portfolio Loans and Related Asset Quality Ratios
September 30, December 31, September 30, Sep 2021 vs Dec 2020
(in thousands) 2021 2020 2020 $ Change % Change
Total loans and leases (GAAP)$ 1,903,255 $
1,865,961
79,918 167,639 196,375 (87,721) (52.3)
Total portfolio loans (non-GAAP) $ 1,823,337 $ 1,698,322 $ 1,688,030 $ 125,015 7.4 %
Nonperforming loans $ 15,942 $ 19,430 $ 16,984
As a % of:
Total loans and leases (GAAP) 0.84 % 1.04 % 0.90 %
Portfolio loans (non-GAAP) 0.87 1.14 1.01
Allowance for loan and lease losses $ 18,353 $ 19,162 $ 17,657
As a % of:
Total loans and leases (GAAP) 0.96 % 1.03 % 0.94 %
Portfolio loans (non-GAAP) 1.01 1.13 1.05
37
Financial Highlights
Financial highlights during the nine and three months ended
We reported net income of
the nine months ended
? million, or a loss of
impairment charge, which was not tax deductible, of
We reported net income of
? the third quarter of 2021 compared to net income of
diluted common share, in the third quarter of 2020.
Our allowance was 0.96% of total loans and leases and 1.01% of portfolio loans
(a non-GAAP financial measure - refer to the section "Use of Non-GAAP Financial
? Measures and Related Reconciliations" for additional detail) at
2021, compared to 1.03% of total loans and leases and 1.13% of portfolio loans
at
No provision for credit losses was recorded during the third quarter of 2021,
? compared to
credit losses for the first nine months of 2021 was
Our net interest margin was 3.38% in the first nine months of 2021, an increase
of 15 basis points ("bp") from the first nine months of 2020, with 14 bp of the
? increase attributable to the impact of PPP loans. For the third quarter of
2021, our net interest margin was 3.32%, an increase of 17 bp from the third
quarter of 2020, with 21 bp of the increase attributable to the impact of PPP
loans.
? Total assets were
Total loans and leases were
million from
? 30, 2021, an increase of
declined by
loans down$62.7 million partially offset by a$23.5 million increase in portfolio loans.
Total deposits were
? from
decline in brokered and other non-customer deposits of$121.0 million .
Our return on average assets ("ROA") and return on average equity ("ROE") were
1.04% and 8.86%, respectively, for the first nine months of 2021 compared to
? negative ratios for the first nine months of 2020 due to the impact of the
goodwill impairment charge. Our ROA and ROE were 0.98% and 8.16%, respectively,
for the third quarter of 2021 compared to 0.73% and 6.34%, respectively for the
third quarter of 2020.
? We remained "well capitalized" by all regulatory measures at
2021.
Our book value per common share was
? of
of
in accumulated other comprehensive income ("AOCI") of $0.39 per share.
38
Our tangible book value per common share (a non-GAAP financial measure - refer
to the "Use of Non-GAAP Financial Measures and Related Reconciliations" for
additional detail) was
?
the after tax effect of core deposit intangible amortization of
for the first nine months of 2021 partially offset by the decrease in AOCI of
$0.39 per share. Critical Accounting Policies Our accounting and financial reporting policies conform to GAAP and general practice within the banking industry. These policies require management to exercise significant judgment or discretion or make significant assumptions and estimates based on the information available that have, or could have, a material impact on the carrying value of certain assets or on income. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the periods presented. In reviewing and understanding financial information for us, you are encouraged to read and understand the significant accounting policies used in preparing our financial statements. Certain accounting measurements inherently have a greater reliance on the use of estimates, assumptions and judgments and, as such, have a greater possibility of producing results that could be materially different than originally reported. The accounting policies we view as requiring the most significant estimates, our critical accounting policies, are those relating to the allowance for loan and lease losses, the valuation of goodwill and other intangible assets, and income taxes. These critical accounting policies and the significant assumptions and estimates made by management related to them are more fully described in "Management's Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies" in our Annual Report on Form 10-K for the year endedDecember 31, 2020 . Our significant accounting policies are discussed in the "Notes to Consolidated Financial Statements - Note 1: Summary of Significant Accounting Policies" in our Annual Report on Form 10-K for the year endedDecember 31, 2020 . There have been no material changes to the significant accounting policies or critical accounting policies as described in the Annual Report on Form 10-K for the year endedDecember 31, 2020 . Disclosures regarding the effects of new accounting pronouncements are included in Note
1 of this report. Financial Condition
A comparison between
General Total assets decreased$10.7 million , or 0.4%, to$2.53 billion atSeptember 30, 2021 compared to$2.54 billion atDecember 31, 2020 , driven primarily by decreases in interest-bearing deposits with banks, securities available for sale, and securities held to maturity totaling$45.3 million . Partially offsetting these decreases was growth in total loans and leases of$37.3 million , with$125.0 million of this growth in portfolio loans, which excludes PPP loans (a non-GAAP financial measure - refer to the "Use of Non-GAAP Financial Measures and Related Reconciliations" for additional detail), while PPP loans decreased by$87.7 million . Our primary source of funds for making loans and investments is our deposits. Total deposits decreased by$34.0 million , driven primarily by a$121.0 million decrease in brokered and other non-customer deposits, partially offset by an$87.0 million increase in customer deposits. Borrowings increased by$12.2 million , primarily as a result of an increase of$12.0 million inFederal Home Loan Bank of Atlanta ("FHLB") borrowings. Total stockholders' equity increased by$13.5 million due primarily to net income of$20.0 million partially offset by a decrease of$7.4 million in AOCI. 39Investment Securities
The following table sets forth the composition of our investment securities portfolio at the dates indicated.
(in thousands) September 30, 2021 December 31, 2020 2021 vs. 2020
Amortized Estimated Amortized Estimated $ Change in
Cost Fair Value Cost Fair Value Fair Value % Change
Available for sale
U.S. Government
Agencies $ 41,245 $ 41,923 $ 48,297 $ 49,605 $ (7,682) (15.5) %
Mortgage-backed 299,536 296,257 310,289 316,672 (20,415) (6.4)
Other investments 9,007 9,268 9,008 9,120 148 1.6
$ 349,788 $ 347,448 $ 367,594 $ 375,397 $ (27,949) (7.4) %
Held to maturity
Corporate debentures $ 4,000 $ 4,059 $ 7,250 $ 7,235 $ (3,176) (43.9) % Available for sale Our available for sale securities are reported at fair value. At bothSeptember 30, 2021 andDecember 31, 2020 , we heldU.S. agency debentures, mortgage backed securities ("MBS"), and corporate debentures. This portfolio is used primarily to provide sufficient liquidity to fund our loans and provide funds for withdrawals of deposits. In addition, this portfolio is used as collateral for borrowings and as a source of earnings. AtSeptember 30, 2021 andDecember 31, 2020 ,$230.7 million and$226.2 million in fair value of available for sale securities, respectively, were pledged as collateral. These securities were pledged at theFederal Reserve Bank of Richmond ("FRB") Discount Window as well as for commercial customer overnight securities sold under agreement to repurchase ("repurchase agreements") and deposits of local government entities that require pledged collateral as a condition of maintaining these deposit accounts. Available for sale securities were$347.4 million atSeptember 30, 2021 , a decrease of$27.9 million , or 7.4% fromDecember 31, 2020 . Available for sale securities, at amortized cost, were$349.8 million atSeptember 30, 2021 , a$17.8 million decrease fromDecember 31, 2020 . Net unrealized losses were$2.3 million atSeptember 30, 2021 , which represents a decline of$10.1 million when compared to net unrealized gains of$7.8 million atDecember 31, 2020 , with the decrease in value due to higher intermediate and long-term treasury rates in 2021. Our available for sale securities portfolio contained 63 securities with unrealized losses of$5.4 million atSeptember 30, 2021 , and 11 securities with unrealized losses of$58 thousand atDecember 31, 2020 . Changes in the fair value of these securities resulted primarily from interest rate fluctuations. We neither intend to sell these securities nor is it more likely than not that we would be required to sell these securities before their anticipated recovery. Furthermore, we believe the collection of the investment and related interest is probable. Based on this analysis, we do not consider any of the unrealized losses to be other-than-temporary impairment. Note 2 to our Condensed Consolidated Financial Statements provides more detail concerning the composition of our portfolio and our process for evaluating the portfolio for other-than-temporary impairment.
Held to maturity
Held to maturity securities are reported at amortized cost. The only investments that we have classified as held to maturity are certain corporate debentures. These investments are intended to be held until maturity. There were no held to maturity securities in an unrealized loss position atSeptember 30, 2021 , compared to three securities in an unrealized loss position totaling$32 thousand atDecember 31, 2020 . Based on our analysis of these securities atDecember 31, 2020 , we did not consider the unrealized losses to be other-than-temporary impairment. We had three held to maturity securities totaling$3.3 million called in the first nine months of 2021. Note 2 to our Condensed Consolidated Financial Statements provides more detail concerning the composition of our portfolio and our process for evaluating the portfolio for other-than-temporary impairment. 40
We held an investment in stock of the FHLB atSeptember 30, 2021 andDecember 31, 2020 of$9.2 million and$10.6 million , respectively. This investment is required for continued FHLB membership and is based partially upon the amount of borrowings outstanding from the FHLB. This FHLB stock is carried at cost which approximates fair value. Loan and Lease Portfolio
Total loans and leases (hereinafter referred to as "loans") increased$37.3 million , or 2.0%, to$1.90 billion atSeptember 30, 2021 from$1.87 billion atDecember 31, 2020 . AtSeptember 30, 2021 , PPP loans totaled$79.9 million , an$87.7 million decrease fromDecember 31, 2020 . We originated$100.5 million of PPP loans during the first nine months of 2021 while PPP loans forgiven or repaid by borrowers totaled$189.2 million during the first nine months of 2021. Our portfolio loans, which exclude PPP loans (a non-GAAP financial measure - refer to the "Use of Non-GAAP Financial Measures and Related Reconciliations" section for additional detail), increased by$125.0 million , or 7.4%, to$1.82 billion atSeptember 30, 2021 from$1.70 billion atDecember 31, 2020 . The$125.0 million increase in portfolio loans was primarily driven by growth in commercial real estate loans ("CRE"), residential real estate first lien loans ("residential mortgage"), commercial loans and leases ("C&I"), and consumer loans. Loan originations and purchases of$373.9 million during the first nine months of 2021 were partially offset by$255.2 million in loan maturities, payoffs, partial paydowns, and lower line utilization. Residential first lien mortgage loans were up$53.4 million , or 14.0%, with secondary market loan purchases of$136.3 million partially offset by$86.9 million of prepayments. C&I loans were up$17.5 million , or 5.2%, CRE loans were up$30.0 million , or 4.1%, and consumer loans were up$24.1 million , or 37.6%, reflecting continued success in some niche lending activities.
The following table sets forth the composition of our loan portfolio at the dates indicated.
September 30, 2021 December 31, 2020
% of % of %(in thousands) Total Total Total Total
$ Change Change Real estate Construction and land$ 124,967 6.6 %$ 116,675 6.3 %$ 8,292 7.1 % Residential - first lien 434,273 22.8 380,865 20.4 53,408 14.0 Residential - junior lien 51,350 2.7 60,002 3.2 (8,652) (14.4) Total residential real estate 485,623 25.5 440,867 23.6 44,756 10.2 Commercial - owner occupied 254,093 13.4 251,061 13.5 3,032 1.2 Commercial - non-owner occupied 518,947 27.2 491,630 26.3 27,317 5.6 Total commercial real estate 773,040 40.6 742,691 39.8 30,349 4.1 Total real estate
loans 1,383,630 72.7 1,300,233 69.7
83,397 6.4
Commercial loans and
leases (1) 351,618 18.5 334,086 17.9 17,532 5.2
Consumer 88,089 4.6 64,003 3.4 24,086 37.6
Total portfolio loans(2) 1,823,337 95.8 1,698,322 91.0 125,015 7.4 Paycheck protection program (PPP) loans 79,918 4.2 167,639 9.0 (87,721) (52.3) Total loans and leases$ 1,903,255 100.0 %$ 1,865,961 100.0 %
$ 37,294 2.0 %
(1) Includes equipment financing leases of
2021 and
(2) Denotes a non-GAAP measure - refer to the section "Use of Non-GAAP Financial
Measures and Related Reconciliations" for additional detail
Interest-Bearing Deposits with Banks
Interest-bearing deposits with banks, primarily with theFederal Reserve Bank of Richmond , were$51.1 million atSeptember 30, 2021 , a decrease of$14.1 million from$65.2 million atDecember 31, 2020 . Since theBoard of Governors of theFederal Reserve System reduced the reserve requirement to zero percent inMarch 2020 due to COVID-19, we continue to actively manage our interest-bearing deposits with banks at levels lower than they were prior to the pandemic. 41 Deposits Total deposits were$1.94 billion atSeptember 30, 2021 , a$34.0 million , or 1.7%, decrease from$1.98 billion atDecember 31, 2020 . Customer deposits, which excludes brokered and other non-customer deposits, were up$87.0 million , or 5.1%, atSeptember 30, 2021 , compared toDecember 31, 2020 . Low-cost, non-maturity deposits increased by$112.9 million , or 7.6%, atSeptember 30, 2021 , compared toDecember 31, 2020 .$98.0 million of the non-maturity deposit growth was in transaction accounts (noninterest-bearing demand and interest-bearing checking), with$106.5 million of the transaction account growth in noninterest-bearing demand deposits. The increase in non-maturity deposits was partially offset by the continued managed decline in customer CD balances, down$55.8 million , or 23.8%, atSeptember 30, 2021 , compared toDecember 31, 2020 . We continue to manage for lower retention rates on maturing CDs with substantially higher rates than current market rates. Our strategy is to not offer above-market renewal rates on non-transactional, non-relationship deposits. Brokered and other non-customer deposits were$158.2 million atSeptember 30, 2021 , a decrease of$121.0 million when compared to$279.2 million atDecember 31, 2020 . Non-customer deposits remain our lowest-cost incremental funding source.
The following table sets forth the distribution of total deposits, by account type, at the dates indicated.
September 30, 2021 December 31, 2020
% of % of
(in thousands) Amount Total Amount Total $ Change % ChangeNoninterest-bearing demand$ 783,326 40.4 %$ 676,801 34.2 %$ 106,525 15.7 % Interest-bearing checking 206,165 10.6 214,717 11.1 (8,552) (4.0) Total transaction accounts 989,491 51.0
891,518 45.3 97,973 11.0 Money market accounts 435,386 22.4 439,510 22.2 (4,124) (0.9) Savings 178,915 9.2 159,914 8.1 19,001 11.9 Total nonmaturity deposits 1,603,792 82.6 1,490,942 75.6 112,850 7.6 Certificates of deposit$250 and over 35,539 1.8 51,918 2.6 (16,379) (31.5) Certificates of deposit under$250 302,087 15.6 432,554 21.8 (130,467) (30.2) Total certificates of deposit 337,626 17.4
484,472 24.4 (146,846) (30.3) Total deposits$ 1,941,418 100.0 %$ 1,975,414 100.0 %$ (33,996) (1.7) % By deposit source: Customer deposits$ 1,783,255 91.9 %$ 1,696,260 85.9 %$ 86,995 5.1 % Brokered and other non-customer deposits 158,163 8.1 279,154 14.1 (120,991) (43.3) Total deposits$ 1,941,418 100.0 %$ 1,975,414 100.0 %$ (33,996) (1.7) % FHLB Advances Our primary source of non-deposit funding is FHLB advances. We use a variety of term structures in order to manage liquidity and interest rate risk. FHLB advances were$212.0 million atSeptember 30, 2021 , an increase of$12.0 million fromDecember 31, 2020 . As ofSeptember 30, 2021 ,$200.0 million of FHLB advances have maturities beyond one year.
Stockholders' Equity
Total stockholders' equity was$308.2 million atSeptember 30, 2021 , a$13.5 million increase from$294.6 million atDecember 31, 2020 . The increase in stockholders' equity was primarily the result of net income of$20.0 million for the first nine months of 2021, partially offset by a$7.4 million decrease in AOCI, which represents the after tax impact of changes in the fair value of available-for-sale securities. The decline in the fair value of available-for-sale securities was the result of the increase in intermediate and long-term treasury yields fromDecember 31, 2020 toSeptember 30, 2021 . Book value per common share was$16.38 atSeptember 30, 2021 , an increase of$0.66 per share sinceDecember 31, 2020 , with diluted EPS of$1.06 for the first nine months of 2021 partially offset by a decrease in AOCI of$0.39 per share. 42
Tangible stockholders' equity (a non-GAAP financial measure - refer to the "Use of Non-GAAP Financial Measures and Related Reconciliations" section for additional detail), which deducts goodwill and other intangible assets (net of any applicable deferred tax liabilities), was$273.7 million atSeptember 30, 2021 . This compares to$258.8 million atDecember 31, 2020 , with the$14.9 million increase primarily due to net income of$20.0 million for the first nine months of 2021 and the$1.3 million after tax effect of core deposit intangible amortization, partially offset by the decrease in AOCI of$7.4 million . Tangible book value per common share (a non-GAAP financial measure - refer to the "Use of Non-GAAP Financial Measures and Related Reconciliations" section for additional detail), which divides tangible stockholders' equity by the number of shares outstanding, was$14.55 per share atSeptember 30, 2021 , an increase of$0.74 per share sinceDecember 31, 2020 . The increase is attributable to diluted EPS of$1.06 per share for the first nine months of 2021 and the after tax effect of core deposit intangible amortization of$0.07 per share partially offset by a decrease in AOCI of$0.39 per share.
Results of Operations
A comparison of the nine months ended
We reported net income of$20.0 million , or$1.07 per basic and$1.06 per diluted common share, for the nine months endedSeptember 30, 2021 , compared to a net loss of$21.5 million , or a loss of$1.14 per both basic and diluted common share, for the nine months endedSeptember 30, 2020 . Net income increased by$41.5 million , or$2.21 per basic and$2.20 per diluted common share, in the first nine months of 2021 when compared to the first nine months of 2020, primarily as a result of the following:
The first nine months of 2020 included a goodwill impairment charge, which was
? not tax deductible, of
share in 2021), recorded in the second quarter of 2020.
A
2021 when compared to the first nine months of 2020 (an EPS increase of
? after tax per share in 2021); the provision for credit losses in the first nine
months of 2020 was significantly higher as we increased our allowance for loan
and lease losses in response to the initial impacts of the pandemic.
PPP loan pretax income of
? compared to
second quarter of 2020.
The first nine months of 2020 included
? attributable to the departure of our former CFO (an EPS increase of
tax per share in 2021), recorded in the first quarter of 2020; there was no
comparable item in the first nine months of 2021.
The first nine months of 2020 included a
? EPS increase of
quarter of 2020; there was no comparable item in the first nine months of 2021.
The first nine months of 2020 included a
? FHLB advances (an EPS increase of
in the second quarter of 2020; there was no comparable item in the first nine
months of 2021.
Pretax income growth from our ongoing business activities of
? the first nine months of 2021 when compared to the first nine months of 2020
(an increase in 2021 of$0.11 after tax per share). 43
These items were partially offset by the following:
The first nine months of 2020 included an income tax benefit of
? (an EPS decrease of
2020, resulting from a net operating loss carryback provision in the CARES Act;
there was no comparable item in the first nine months of 2021.
The first nine months of 2020 included
? decrease of
in the first nine months of 2021.
The first nine months of 2020 included
? decrease of
activities, which were concluded in the first six months of 2020.
The first nine months of 2021 included
? resulting from our proposed merger with F.N.B., which was announced on
2021 (an EPS decrease of
in the first nine months of 2020.
Net Interest Income
Net interest income for the first nine months of 2021 was$59.7 million , an increase of$5.7 million from the first nine months of 2020. Our net interest margin was 3.38% for the first nine months of 2021, an increase of 15 bp from 3.23% for the first nine months of 2020. Average earning assets for the first nine months of 2021 were$2.36 billion , an increase of$132.3 million , or 5.9%, from the first nine months of 2020. Total interest income decreased by$893 thousand in the first nine months of 2021, compared to the like period in 2020, resulting from the 27 bp decrease in the yield on our average earning assets, which more than offset the benefit attributable to the growth in average earning assets. Our average interest-bearing liabilities for the first nine months of 2021 were$1.49 billion , a decrease of$64.7 million , or 4.2%, from the first nine months of 2020. Total interest expense decreased by$6.6 million in the first nine months of 2021, when compared to the like period in 2020, as the average rate paid on our interest-bearing liabilities decreased by 55 bp and average interest bearing liabilities decreased by$64.7 million . The net accretion of fair value adjustments on acquired loans added 10 bp to our net interest margin and 14 bp to our average yield on loans in the first nine months of 2021, an increase of 2 bp and 3 bp, respectively, from the first nine months of 2020. We expect the impact of this net accretion to decrease in future periods. PPP loans, with an average yield of 4.78% and an interest spread (net of an assumed funding cost at 0.35%) of 4.43%, increased our net interest margin by 8 bp in the first nine months of 2021; this compared to an average yield of 2.52% and an interest spread (net of an assumed funding cost at 0.35%) of 2.17%, which decreased our net interest margin by 6 bp in the first nine months of 2020. 44 Interest Income Interest income decreased by$893 thousand , or 1.4%, to$63.8 million for the first nine months of 2021 compared to$64.7 million for the first nine months of 2020. Interest income on loans and leases increased by$260 thousand , or 0.4%, while average loans increased by$78.5 million , or 4.3%, to$1.92 billion in the first nine months of 2021 compared to the first nine months of 2020. The average yield on loans was 4.11% in the first nine months of 2021, down 15 bp from 4.26% for the first nine months of 2020, primarily driven by the lower interest rate environment. PPP loan interest income was$5.7 million in the first nine months of 2021 compared to$2.1 million in the first nine months of 2020; the PPP program began in the second quarter of 2020. Included in PPP loan interest income for the first nine months of 2021 was$3.3 million attributable to accelerated recognition of net unaccreted deferred fees upon loan forgiveness; there was no loan forgiveness in the first nine months of 2020. PPP loans increased our average loan yield by 6 bp in the first nine months of 2021 but decreased our average loan yield by 11 bp in the first nine months of 2020. The average yield on available for sale securities decreased by 65 bp to 1.54% in the first nine months of 2021, as securities purchases were at substantially lower market rates. The average balance of available for sale securities increased by$84.2 million , or 29.3%, in the first nine months of 2021, compared to the first nine months of 2020, with$112.3 million of this increase in our MBS portfolio, partially offset by a decrease inU.S. government agencies of$31.6 million . The average yield on our interest-bearing deposits in banks fell 38 bp to 0.10% in the first nine months of 2021, compared to the same period in 2020, reflective of the significant decline in market rates of interest.
Interest Expense
Interest expense decreased by$6.6 million , or 61.8%, to$4.1 million for the first nine months of 2021, compared to$10.7 million for the same period in 2020. The average rate on our interest-bearing liabilities decreased by 55 bp to 0.37% for the first nine months of 2021 compared to the first nine months of 2020. Interest expense on deposits decreased by$5.9 million for the first nine months of 2021 compared to the first nine months of 2020; our average interest-bearing deposits increased by$18.5 million while the average rate on interest-bearing deposits decreased by 65 bp. We lowered the interest rates paid on interest-bearing deposits in response to the lower prevailing competitive market rates starting in lateFebruary 2020 , with the full impact of those rate reductions expected to be reflected in future periods as maturing time deposits reprice at lower market interest rates. In addition, our interest expense on FHLB advances decreased by$687 thousand and the average balance decreased by$74.5 million in the first nine months of 2021 compared to the first nine months of 2020. The average rate paid on FHLB advances, at 0.87% for the first nine months of 2021, decreased by 9 bp when compared to the same
period in 2020.
45
Average Balances, Yields and Rates
The following table sets forth average balances, annualized yields and rates,
and certain other information for the periods indicated. No tax-equivalent
yield adjustments were made, as the effect thereof was not material. All
average balances are daily average balances. Nonaccrual loans were included in
the computation of average balances, and have been reflected in the table as
loans carrying a zero yield. The yields set forth below include the effect of
deferred fees, discounts and premiums that are amortized or accreted to interest
income or expense as well as any amortization and accretion of fair value
adjustments.
Nine Months Ended September 30,
2021 2020
Average Income Yield Average Income Yield Change
(dollars in thousands) Balance / Expense / Rate Balance / Expense / Rate Prior Yr
Earning assets
Loans and leases: (1)
Commercial loans and leases $ 351,184 $ 9,538 3.63 % $ 365,596 $ 11,281 4.12 % (0.49) %
Commercial real estate 754,105 25,705 4.56 696,083 25,091 4.81 (0.26)
Construction and land 119,344 3,363 3.77 129,798 3,938 4.05 (0.29)
Residential real estate 455,529 12,370 3.63 487,586 14,575 3.99 (0.36)
Consumer 77,767 2,211 3.80 47,011 1,621 4.60 (0.80)
Total portfolio loans 1,757,929 53,187 4.05 1,726,074 56,506 4.37 (0.33) Paycheck Protection Program loans
159,746 5,715 4.78 113,070 2,136 2.52 2.26
Total loans and leases 1,917,675 58,902 4.11 1,839,144 58,642 4.26 (0.15)
Securities available for
sale: (2)
U.S Gov agencies 45,184 814 2.41 76,822 1,555 2.70 (0.29)
Mortgage-backed 316,945 3,056 1.29 204,686 2,865 1.87 (0.58)
Corporate debentures 9,237 419 6.07 5,655 284 6.71 (0.64)
Total available for sale
securities 371,366 4,289 1.54 287,163 4,704 2.19 (0.64) Securities held to maturity: (2)
5,723 246 5.75 7,580 331 5.84 (0.09)
FHLB Atlanta stock, at cost 9,483 282 3.98 13,979 533 5.09 (1.12)
Interest bearing deposit in
banks 54,750 39 0.10 72,267 262 0.48 (0.39)
Loans held for sale - - - 6,572 179 3.64 (3.64)
Total earning assets 2,358,997 63,758 3.61 % 2,226,705 64,651 3.88 % (0.26) % Cash and due from banks
11,128 13,806
Bank premises and equipment, net 40,584 42,497 Goodwill 31,449 54,240 Core deposit intangible 4,958 7,525 Other assets 143,171 143,750 Less: allowance for credit losses (18,593) (13,535) Total assets$ 2,571,694 $ 2,474,988 Interest-bearing liabilities Deposits: Interest-bearing demand accounts$ 218,880 57 0.04 %$ 186,799 $ 250 0.18 % (0.14) % Money market 437,608 222 0.07 373,588 1,308 0.47 (0.40) Savings 177,946 41 0.03 141,516 97 0.09 (0.06) Time deposits 410,900 1,113 0.36 524,955 5,652 1.44 (1.08) Total interest-bearing deposits 1,245,334 1,433 0.15 1,226,858 7,307 0.80 (0.64) Borrowings: FHLB advances 204,658 1,328 0.87 279,140 2,015 0.96 (0.10) Fed funds and other borrowings 12,347 3 0.03 21,372 52 0.32 (0.28) Subordinated debt 28,591 1,337 6.25 28,307 1,360 6.42 (0.17) Total borrowings 245,596 2,668 1.45 328,819 3,427 1.39 0.06
Total interest-bearing funds 1,490,930 4,101 0.37 %
1,555,677 10,734 0.92 % (0.55) % Noninterest-bearing deposits 756,423
582,348
Other liabilities 22,107 29,470
Total liabilities 2,269,460 2,167,495
Stockholders' equity 302,234 307,493
Total liabilities & equity $ 2,571,694 $ 2,474,988
Net interest income $ 59,657 $ 53,917
Net interest rate spread (3) 3.24 % 2.96 %
Effect of noninterest-bearing
funds 0.14 0.27
Net interest margin on
earning assets (4) 3.38 % 3.23 %
46
Loan fee income is included in the interest income calculation, and (1) nonaccrual loans are included in the average loan balance; they have been
reflected as loans carrying a zero yield.
(2) Available for sale securities are presented at fair value, held to maturity
securities are presented at amortized cost.
(3) Net interest rate spread represents the difference between the yield on
average earning assets and the cost of average interest-bearing liabilities.
(4) Net interest margin represents net interest income divided by average total
earning assets.
Rate/Volume Analysis
The following table presents the effects of changing rates and volumes on our
net interest income for the periods indicated. The rate column shows the
effects attributable to changes in rate (changes in rate multiplied by prior
volume). The volume column shows the effects attributable to changes in volume
(changes in volume multiplied by prior rate) as well as any impact of number of
days and mix.
47
The total of the changes set forth in the rate and volume columns are presented
in the total column.
Nine Months Ended September 30,
2021 vs. 2020
Due to variances in
(in thousands) Total Rates Volumes
Effect on interest income on earning assets:
Loans and leases:
Commercial loans and leases $ (1,743) $ (889) $ (854)
Commercial real estate 614 (889) 1,503
Construction and land (575) (184) (392)
Residential real estate (2,205) (876) (1,329)
Consumer 590 (186) 777Total interest on portfolio loans (3,320) (3,024) (295) Paycheck Protection Program (PPP) 3,579 1,268 2,312 Total interest on loans and leases 260 (1,757) 2,016 Securities available for sale: U.S. Gov agencies (741) (112) (629) Mortgage-backed 191 (589) 780 Corporate debentures 135 (18) 153
Total interest on available for sale securities (414)
(719) 305 Securities held to maturity (85) (4) (81) FHLB Atlanta stock, at cost (251) (77) (174)
Interest bearing deposit in banks (223)
(139) (84) Loans held for sale (179) (119) (60) Total interest income (892) (2,815) 1,922 Effect on interest expense on interest-bearing liabilities: Deposits: Interest-bearing demand accounts (193)
(133) (59) Money market (1,086) (741) (345) Savings (56) (43) (13) Time deposits (4,539) (2,801) (1,738) Total interest on deposits (5,874) (3,718) (2,156) Borrowings: FHLB advances (687) (134) (553)
Fed funds and other borrowings (49) (30) (19) Subordinated debt (23) (24) 0 Total interest on borrowings (760) (188) (572) Total interest expense (6,634) (3,906) (2,728) Effect on net interest income$ 5,741 $
1,091$ 4,651
Provision for Credit Losses
We recorded a provision for credit losses of$1.0 million for the first nine months of 2021, compared to$8.1 million for the first nine months of 2020, a decrease of$7.1 million . The higher provision for credit losses in the first nine months of 2020 reflected the rapidly changing economic environment and uncertainty resulting from the pandemic. Included in the$8.1 million provision for credit losses for the first nine months of 2020 was$320 thousand attributable to our reserve for unfunded commitments. For the first nine months of 2021, the provision for credit losses, net of net charge-offs of$1.8 million , resulted in a decrease in the allowance of$809 thousand . For the first nine months of 2020, the provision for credit losses attributable to loan and lease losses of$7.8 million , net of net charge-offs of$569 thousand , resulted in an increase in the allowance of$7.3 million . Our allowance is more fully discussed in the sections entitled "Nonperforming and Problem Assets; COVID-19 Related Loan Deferrals" and "Allowance for Loan and Lease Losses" of this MD&A. 48 Noninterest Income
The following table presents the major categories of noninterest income for the
nine months ended
Nine Months Ended
September 30,
(in thousands) 2021 2020 $ Change % ChangeService charges on deposit accounts$ 1,912 $ 1,581 $ 331 20.9 % Realized and unrealized gains on mortgage banking activity - 1,036 (1,036) (100.0) Gain on the sale of securities - 3,044 (3,044) (100.0) Income from bank owned life insurance 1,266 1,327 (61) (4.6) Loan related fees and service charges 793 1,120 (327) (29.2) Other operating income 2,595 2,106 489 23.2 Total noninterest income$ 6,566 $ 10,214 $ (3,648) (35.7) %
Noninterest income was$6.6 million for the nine months endedSeptember 30, 2021 , a decrease of$3.6 million , or 35.7%, compared to$10.2 million for the same period in 2020. The primary drivers of this decrease in the first nine months of 2021 were a$3.0 million decrease in gains on the sale of securities and a$1.4 million decrease in noninterest income attributable to our former mortgage banking activities. The noninterest income from our former mortgage banking activities, consisting of$1.0 million of realized and unrealized gains on mortgage banking activity and$389 thousand in loan related fees and service charges, was all recorded in the first quarter of 2020. There was no noninterest income from either securities gains or our former mortgage banking activities in the first nine months of 2021. Noninterest income other than from securities gains and from mortgage banking activities for the first nine months of 2021 increased by$821 thousand , or 14.3%, from the first nine months of 2020. Service charges on deposit accounts, which consist of account activity fees such as nonsufficient funds ("NSF") and overdraft fees in addition to other standard deposit fees, increased$331 thousand in the first nine months of 2021, compared to the first nine months of 2020. Our standard deposit fees were up$476 thousand in the first nine months of 2021, due primarily to the implementation of a new fee-based checking product set in the first quarter of 2021. Partially offsetting the growth in standard deposit fees, NSF and overdraft fees were down$145 thousand from the first nine months of 2020, with a portion of this reduction representing accommodations to COVID-19 impacted customers in the current economic environment and higher liquidity maintained by other customers. Loan related fees and service charges were$793 thousand in the first nine months of 2021, a decrease of$327 thousand from the first nine months of 2020. Loan related fees and service charges, other than from our former mortgage banking activities for the first nine months of 2020, increased by$62 thousand , or 8.5%, when compared to the first nine months of 2020, due to increased lending activity. The first nine months of 2020 included an interest rate swap arrangement fee of$197 thousand , while there were no interest rate swap fees in the first nine months of 2021. Other operating income, which consists mainly of non-depository account fees such as interchange, wire, merchant card and ATM services, increased$489 thousand in the first nine months of 2021 compared to the first nine months of 2020. The primary driver was a$419 thousand increase in interchange fees, as consumer spending and card utilization increased from the first nine months 2020, when spending and card utilization were adversely impacted by the initial drop in economic activity due to the pandemic. 49 Noninterest Expense
The following table presents the major categories of noninterest expense for the
nine months ended
Nine Months Ended
September 30,
(in thousands) 2021 2020 $ Change % Change
Compensation and benefits $ 20,813 $ 21,836 $ (1,023) (4.7) %
Occupancy and equipment 3,872 3,576 296 8.3Marketing and business development 1,071 1,092
(21) (1.9) Professional fees 2,148 2,183 (35) (1.6) Data processing fees 2,799 2,673 126 4.7 FDIC assessment 618 780 (162) (20.8) Other real estate owned 127 461 (334) (72.5) Loan production expense 554 907 (353) (38.9)
Amortization of core deposit intangible 1,780 2,038
(258) (12.7) Merger-related expense 880 - 880 100.0 Other operating expense 3,292 4,850 (1,558) (32.1) Total noninterest expense before goodwill impairment 37,954 40,396 (2,442) (6.0) Goodwill impairment - 34,500 (34,500) (100.0) Total noninterest expense$ 37,954 $ 74,896 $ (36,942) (49.3) %
Noninterest expenses were$38.0 million for the first nine months of 2021, a decrease of$36.9 million , or 49.3%, compared to$74.9 million for the first nine months of 2020. The decrease was primary attributable to the$34.5 million goodwill impairment charge recorded in the second quarter of 2020; there was no additional goodwill impairment charge in the first nine months of 2021. In addition, noninterest expenses attributable to our former mortgage banking activities were$1.4 million in the first nine months of 2020, primarily consisting of$928 thousand in compensation and benefits expense,$259 thousand in loan production expense, and$251 thousand in all other expense categories. There were no noninterest expenses from our former mortgage banking activities in the first nine months of 2021. Noninterest expenses in the first nine months of 2021, other than from the goodwill impairment charge and our former mortgage banking activities, decreased by$1.0 million , or 2.6%, from the first nine months of 2020. Compensation and benefits expense is typically the largest component of our noninterest expense. Compensation and benefits expense other than from our former mortgage banking activities decreased by$95 thousand , or 0.5%, in the first nine months of 2021, compared to the same period in 2020. The first nine months of 2020 included$698 thousand of additional compensation expense attributable to the departure of our former CFO, recorded in the first quarter of 2020. Occupancy and equipment expense increased by$296 thousand in the first nine months of 2021, compared to the first nine months of 2020. The first nine months of 2021 included$152 thousand of non-capitalizable branch renovation costs, a higher level of ongoing incremental expenses associated with COVID-19 deep cleaning efforts, and a higher level of snow removal expenses when compared to the first nine months of 2020, partially offset by a reduction in rental expenses as a result of our branch closures in early 2021. In addition, the first nine months of 2020 included$224 thousand of branch closing cost accrual reversals related to a favorable lease termination. OurFDIC assessment expense was$618 thousand for the first nine months of 2021, a$162 thousand , or 20.8% decrease from the same period in 2020. The decrease was due primarily to a lower assessment rate, as the second and third quarter 2020 assessment rates were higher due to the impact of the goodwill impairment charge on the assessment calculation. Other real estate owned ("OREO") expense decreased by$334 thousand in the first nine months of 2021. Losses on OREO dispositions in the first nine months of 2021 were$66 thousand , a$43 thousand decrease from the comparable period in 2020. Increases in OREO valuation allowances were$38 thousand in the first nine months of 2021, a$219 thousand decrease from the comparable period in 2020. In addition, the lower level of OREO resulted in a$72 thousand reduction in OREO expenses for the first nine months of 2021 compared to the same period in 2020. 50 We recorded$880 thousand of merger-related expenses (primarily for a fairness opinion and legal) resulting from our proposed merger with F.N.B., which was announced onJuly 13, 2021 ; there was no comparable item in the first nine months of 2020. Other operating expense decreased by$1.6 million in the first nine months of 2021. Other operating expense consists mainly of a variety of general expenses such as telephone and data lines, supplies and postage, courier services, general insurance, director fees, and miscellaneous losses. Included in other operating expense for the first nine months of 2020 was a$1.0 million litigation accrual stemming from certain mortgages originated byFirst Mariner Bank before its merger withHoward Bank ,$224 thousand in prepayment penalties on FHLB advances, and$403 thousand of additional expenses that were the result of the reevaluation of certain expense accruals in the first quarter of 2020.
Income Tax Expense
For the first nine months of 2021, we recorded an income tax expense of$7.3 million compared to an income tax expense of$2.6 million in the first nine months of 2020. The first nine months of 2020 was favorably impacted by certain provisions of the CARES Act that was signed into law onMarch 27, 2020 . The CARES Act permits corporate taxpayers to recover prior period taxes paid by carrying back net operating losses incurred in tax years ending afterDecember 31, 2017 to tax years ending up to five years earlier. As a result, we were able to carryback the 2018 tax net operating loss of$9.1 million to tax years 2013-2015. The$1.2 million carryback tax benefit we recognized represented the difference between the current federal statutory tax rate of 21% and the 34% statutory federal tax rate applicable during the carryback years. Our effective tax rate for the first nine months of 2021 was 26.6% compared to an effective tax rate of -13.5% for the first nine months of 2020; outside the impact of the$34.5 million non-deductible goodwill impairment charge and the$1.2 million benefit from the CARES Act, the effective tax rate for the first nine months of 2020 would have been 24.6%.
A comparison of the three months ended
We reported net income of$6.4 million , or$0.34 per both basic and diluted common share, for the three months endedSeptember 30, 2021 , compared to net income for the three months endedSeptember 30, 2020 of$4.6 million , or$0.25 per both basic and diluted common share. Net income increased by$1.8 million , or$0.09 per both basic and diluted common share, in the third quarter of 2021 when compared to the third quarter of 2020, primarily as a result of the following:
No provision for credit losses was recorded in the third quarter of 2021,
? compared to a
2020 (an increase in 2021 of
PPP loan pretax income of
? thousand higher than the
quarter of 2020 (an increase in 2021 of
Pretax income growth from our ongoing business activities of
? the third quarter of 2021 when compared to the third quarter of 2020 (an
increase in 2021 of
These items were partially offset by the following:
The third quarter of 2021 included
? resulting from our proposed merger with F.N.B., which was announced on
2021 (a decrease in 2021 of
item in the third quarter of 2020.
Net Interest Income
Net interest income for the third quarter of 2021 was$19.9 million , an increase of$1.6 million from the third quarter of 2020. Our net interest margin was 3.32% for the third quarter of 2021, an increase of 17 bp from 3.15% for the third quarter of 2020. Average earning assets for the third quarter of 2021 were$2.38 billion , an increase of$71.3 million , or 3.1%, from the third quarter of 2020. Total interest income increased by$190 thousand in the third quarter of 2021, compared to the like period in 2020, with the benefit attributable to the growth in average earning assets more than offsetting the 9 bp decrease in the yield on our average earning assets. 51 Our average interest-bearing liabilities for the third quarter of 2021 were$1.46 billion , a decrease of$88.1 million , or 5.7%, from the third quarter of 2020. Total interest expense decreased by$1.4 million in the third quarter of 2021, when compared to the like period in 2020, as the average rate paid on our interest-bearing liabilities decreased by 35 bp and the average balance declined by$88.1 million . The net accretion of fair value adjustments on acquired loans added 7 bp to our net interest margin and 9 bp to our average yield on loans in the third quarter of 2021, a decrease of 3 bp and 5 bp, respectively, from the third quarter of 2020. We expect the impact of this net accretion to decrease in future periods. PPP loans, with an average yield of 5.95% and an interest spread (net of an assumed funding cost at 0.35%) of 5.60%, increased our net interest margin by 12 bp in the third quarter of 2021; this compared to an average yield of 2.52% and an interest spread (net of an assumed funding cost at 0.35%) of 2.17%, which decreased our net interest margin by 9 bp in the third quarter
of 2020. Interest Income Interest income increased by$190 thousand , or 0.9%, to$21.1 million for the third quarter of 2021 compared to$21.0 million for the third quarter of 2020. Interest income on loans and leases increased by$408 thousand , or 2.1%, while average loans increased by$40.1 million , or 2.1%, to$1.92 billion in the third quarter of 2021 compared to the third quarter of 2020. The average yield on loans was 4.03% in the third quarter of 2021, down 1 bp from 4.04% for the third quarter of 2020, as the benefit of accelerated recognition of net unaccreted deferred fees on PPP loans due to PPP loan forgiveness repayments substantially offset a 31 bp decrease in the average yield on portfolio loans. PPP loan interest income was$1.7 million on average balances of$115.7 million in the third quarter of 2021 compared to$1.2 million on average balances of$195.6 million in the third quarter of 2020. Included in PPP loan interest income in the third quarter of 2021 was$1.2 million attributable to accelerated recognition of net unaccreted deferred fees upon loan forgiveness; there was no loan forgiveness in the third quarter of 2020. PPP loans increased our average loan yield in the third quarter of 2021 by 12 bp while reducing our loan yield in the third quarter of 2020 by 18 bp, resulting in a 30 bp increase in the average yield on total loans in the third quarter of 2021 compared to the third quarter of 2020. The average yield on available for sale securities decreased by 18 bp to 1.57% in the third quarter of 2021, as purchases were at substantially lower market rates. The average balance of available for sale securities increased by$4.5 million , or 1.2%, in the third quarter of 2021, compared to the third quarter of 2020, with$38.4 million of this increase in our MBS portfolio partially offset by a decrease of$37.3 million inU.S. government agencies. Interest Expense Interest expense decreased by$1.4 million , or 53.2%, to$1.3 million for the third quarter of 2021, compared to$2.7 million for the same period in 2020. The average rate on our interest-bearing liabilities decreased by 35 bp to 0.34% for the third quarter of 2021 compared to the third quarter of 2020. Interest expense on deposits decreased by$1.4 million for the third quarter of 2021 compared to the third quarter of 2020; our average interest-bearing deposits decreased by$569 thousand while the average rate on interest-bearing deposits decreased by 44 bp. We lowered the interest rates paid on interest-bearing deposits in response to the lower prevailing competitive market rates starting in lateFebruary 2020 , with the full impact of those rate reductions expected to be reflected in future periods as maturing time deposits reprice at lower market interest rates. In addition, our interest expense on FHLB advances decreased by$39 thousand and the average balance of FHLB advances decreased by$60.7 million in the third quarter of 2021 compared to the third quarter of 2020. The average rate paid on FHLB advances, at 0.88% for the third quarter of 2021, increased by 14 bp when compared to the same period in 2020. This increase was the result of a lower balance of low rate, short-term FHLB advances in the third quarter of 2021 when compared to the same period in 2020. 52
Average Balances, Yields and Rates
The following table sets forth average balances, annualized yields and rates,
and certain other information for the periods indicated. No tax-equivalent
yield adjustments were made, as the effect thereof was not material. All
average balances are daily average balances. Nonaccrual loans were included in
the computation of average balances, and have been reflected in the table as
loans carrying a zero yield. The yields set forth below include the effect of
deferred fees, discounts and premiums that are amortized or accreted to interest
income or expense as well as any amortization and accretion of fair value
adjustments.
Three Months Ended September 30,
2021 2020
Average Income Yield Average Income Yield Change
(dollars in thousands) Balance / Expense / Rate Balance / Expense / Rate Prior Yr
Earning assets
Loans and leases: (1)Commercial loans and leases$ 349,679 $ 3,182
3.61 %$ 343,991 $ 3,247 3.76 % (0.14) % Commercial real estate 769,850 8,621 4.44 702,633 8,502 4.81 (0.37) Construction and land 122,024 1,137 3.70 125,059 1,188 3.78 (0.08) Residential real estate 476,215 4,049 3.37 463,874 4,382 3.76 (0.38) Consumer 87,501 806 3.65 49,722 565 4.52 (0.87) Total portfolio loans 1,805,269 17,795
3.91 1,685,279 17,884 4.22 (0.31) Paycheck Protection Program loans
115,743 1,737 5.95 195,588 1,240 2.52 3.43 Total loans and leases
1,921,012 19,532 4.03 1,880,867 19,124 4.04 (0.01)
Securities available for sale: (2)
U.S Gov agencies 42,111 252 2.37 79,391 531 2.66 (0.29)
Mortgage-backed 310,900 1,038 1.32 272,495 942 1.38 (0.05)
Corporate debentures 9,264 140 6.00 5,932 100 6.71 (0.71)Total available for sale securities 362,275 1,430
1.57 357,818 1,573 1.75 (0.18) Securities held to maturity: (2)
4,696 69 5.83 7,250 106 5.83 0.00
FHLB Atlanta stock, at cost 8,774 83 3.75 13,221 140 4.21 (0.46)
Interest bearing deposit in banks 79,756 27 0.13 46,049 8 0.07 0.07 Total earning assets 2,376,513 21,141 3.53 % 2,305,205 20,951 3.62 % (0.09) % Cash and due from banks 12,000 11,772
Bank premises and equipment, net 40,176
42,376
Goodwill 31,449 31,449
Core deposit intangible 4,369 6,840
Other assets 141,346 143,566Less: allowance for credit losses (18,298)
(16,435)
Total assets $ 2,587,555 $ 2,524,773
Interest-bearing liabilities
Deposits:Interest-bearing demand accounts$ 211,387 17
0.03 %$ 190,272 $ 36 0.08 % (0.04) % Money market 441,738 72 0.06 386,189 261 0.27 (0.20) Savings 181,231 14 0.03 149,973 27 0.07 (0.04) Time deposits 385,336 260
0.27 493,827 1,390 1.12 (0.85) Total interest-bearing deposits
1,219,692 363 0.12 1,220,261 1,714 0.56 (0.44) Borrowings: FHLB advances
200,130 444 0.88 260,807 483 0.74 0.14
Fed funds and other borrowings 13,304 1 0.03 40,492 35 0.34 Subordinated debt 28,709 446 6.16 28,356 447 6.27 (0.11) Total borrowings 242,143 891 1.46 329,655 965 1.17 0.29
Total interest-bearing funds 1,461,835 1,254
0.34 % 1,549,916 2,679 0.69 % (0.35) % Noninterest-bearing deposits
795,364 649,525
Other liabilities 21,298 36,605
Total liabilities 2,278,497 2,236,046
Stockholders' equity 309,058 288,727
Total liabilities & equity $ 2,587,555 $ 2,524,773
Net interest income $ 19,887 $ 18,272 Net interest rate spread (3) 3.19 % 2.93 % Effect of noninterest-bearing funds 0.13 0.22 Net interest margin on earning assets (4)
3.32 % 3.15 %
53
Loan fee income is included in the interest income calculation, and (1) nonaccrual loans are included in the average loan balance; they have been
reflected as loans carrying a zero yield.
(2) Available for sale securities are presented at fair value, held to maturity
securities are presented at amortized cost.
(3) Net interest rate spread represents the difference between the yield on
average earning assets and the cost of average interest-bearing liabilities.
(4) Net interest margin represents net interest income divided by average total
earning assets.
Rate/Volume Analysis
The following table presents the effects of changing rates and volumes on our
net interest income for the periods indicated. The rate column shows the effects
attributable to changes in rate (changes in rate multiplied by prior volume).
The volume column shows the effects attributable to changes in volume (changes
in volume multiplied by prior rate) as well as any impact of number of days
and
mix.
54
The total of the changes set forth in the rate and volume columns are presented
in the total column.
Three Months Ended September 30,
2021 vs. 2020
Due to variances in
(in thousands) Total Rates Volumes
Effect on interest income on earning assets:
Loans and leases:
Commercial loans and leases $ (65) $ (124) $ 59
Commercial real estate 119 (650) 769
Construction and land (51) (26) (25)
Residential real estate (333) (445) 112
Consumer 241 (107) 348Total interest on portfolio loans (89) (1,352) 1,263 Paycheck Protection Program (PPP) 497 1,674 (1,177) Total interest on loans and leases 408 322 87 Securities available for sale: U.S. Gov agencies (279) (57) (222) Mortgage-backed 96 (34) 130 Corporate debentures 40 (11) 51
Total interest on available for sale securities (143)
(102) (41) Securities held to maturity (37) 0 (37) FHLB Atlanta stock, at cost (57) (15) (42)
Interest bearing deposit in banks 19 7 12 Total interest income 190
212 (22)
Effect on interest expense on interest-bearing liabilities: Deposits: Interest-bearing demand accounts (19)
(21) 2 Money market (189) (197) 8 Savings (13) (15) 2 Time deposits (1,130) (1,049) (81) Total interest on deposits (1,351) (1,282) (69) Borrowings: FHLB advances (39) 93 (132)
Fed funds and other borrowings (34) (32) (2) Subordinated debt (1) (8) 7 Total interest on borrowings (74) 54 (128) Total interest expense (1,425) (1,228) (197) Effect on net interest income$ 1,615 $
1,440$ 175 Provision for Credit Losses No provision for credit losses was recorded in the third quarter of 2021 compared to a$1.7 million provision in the third quarter of 2020. The higher provision for credit losses in the third quarter 2020 reflected the changing economic environment and uncertainty resulting from the pandemic. Third quarter of 2021 net loan loss recoveries of$65 thousand resulted in a$65 thousand increase in the allowance atSeptember 30, 2021 . The third quarter of 2020 provision for credit losses included$320 thousand attributable to our reserve for unfunded commitments, with the remaining$1.4 million attributable to loan and lease losses. For the third quarter of 2020, the$1.4 million portion of the provision for credit losses attributable to loan and lease losses, net of net charge-offs of$79 thousand , resulted in an increase in the allowance of$1.3 million . Our allowance is more fully discussed in the sections entitled "Nonperforming and Problem Assets; COVID-19 Related Loan Deferrals" and "Allowance for Loan and Lease Losses" of this MD&A. 55 Noninterest Income
The following table presents the major categories of noninterest income for the
three months ended
Three Months Ended
September 30,
(in thousands) 2021 2020 $ Change % Change
Service charges on deposit accounts $ 719 $ 506 $ 213 42.1 %
Income from bank owned life insurance 421 441 (20) (4.5)
Loan related fees and service charges 225 365 (140) (38.4)
Other operating income 779 777 2 0.3
Total noninterest income $ 2,144 $ 2,089 $ 55 2.6 %
Noninterest income was $2.1 million for the three months ended September 30,
2021 , an increase of $55 thousand , or 2.6%, compared to $2.1 million for the
same period in 2020. The primary driver of this increase was a $213 thousand
increase in service charges on deposit accounts, partially offset by a decrease
of $140 thousand in loan related fees.
Service charges on deposit accounts, which consist of account activity fees such
as nonsufficient funds ("NSF") and overdraft fees in addition to other standard
deposit fees, increased $213 thousand in the third quarter of 2021, compared to
the third quarter of 2020. Our standard deposit fees were up $198 thousand in
the third quarter of 2021 due primarily to the implementation of a new fee-based
checking product set in the first quarter of 2021. In addition, NSF and
overdraft fees were up $15 thousand from the third quarter of 2020.
Loan related fees and service charges were $225 thousand in the third quarter of
2021, a decrease of $140 thousand from the third quarter of 2020. Loan related
fees and service charges in the third quarter of 2020 included a $197 thousand
interest rate swap arrangement fee; there were no interest rate swap
arrangement fees in the third quarter of 2021. Excluding swap arrangement fees,
all other loan related fees and service charges increased by $57 thousand , or
33.9%, due to a higher level of loan activity in 2021.
Noninterest Expense
The following table presents the major categories of noninterest expense for the
three months ended
Three Months Ended
September 30,
(in thousands) 2021 2020 $ Change % Change
Compensation and benefits $ 6,748 $ 7,136 $ (388) (5.4) %
Occupancy and equipment 1,229 1,301 (72) (5.5)Marketing and business development 433 189
244 129.1
Professional fees 605 823 (218) (26.5)
Data processing fees 933 897 36 4.0
FDIC assessment 152 358 (206) (57.5)
Other real estate owned 87 115 (28) (24.3)
Loan production expense 219 247 (28) (11.3)Amortization of core deposit intangible 571 659
(88) (13.4)
Merger-related expense 880 - 880 100.0
Other operating expense 1,458 984 474 48.2
Total noninterest expense $ 13,315 $ 12,709 $ 606 4.8
56
Noninterest expenses were $13.3 million for the third quarter of 2021, an
increase of $606 thousand , or 4.8%, compared to $12.7 million for the third
quarter of 2020. The increase was primary attributable to the $880 thousand in
merger-related expenses recorded in the third quarter of 2021. Excluding
merger-related expenses, noninterest expenses decreased by $274 thousand , or
2.2%, in the third quarter of 2021 compared to the third quarter of 2020.
Compensation and benefits expense is typically the largest component of our
noninterest expense. Compensation and benefits expense decreased by $388
thousand , or 5.4%, in the third quarter of 2021, compared to the same period in
2020. The lower level of compensation and benefits expense was due primarily to
staff attrition resulting from the pending merger.
Professional fees decreased by $218 thousand in the third quarter of 2021,
compared to the same period in 2020. The lower level of professional fees was
due primarily to lower legal fees (outside of merger-related legal fees), down
$34 thousand , and the impact of cancellation of certain professional services
activities due to the pending merger.
Our marketing and business development expenses increased by
OurFDIC assessment expense was$152 thousand in the third quarter of 2021, a$206 thousand , or 57.5%, decrease from the same period in 2020. The decrease was due primarily to a lower assessment rate, as the third quarter 2020 assessment rate was higher due to the impact of the goodwill impairment charge on the assessment calculation. OREO expenses decreased by$28 thousand in the third quarter of 2021, primarily due to the lower level of OREO that resulted in a$26 thousand reduction in OREO expenses for the third quarter of 2021 compared to the same period in 2020. Third quarter 2021 losses on OREO dispositions of$41 thousand and an increase in a valuation allowance of$38 thousand compared to losses on OREO dispositions of$81 thousand in the third quarter of 2020. We recorded$880 thousand of merger-related expenses (primarily for a fairness opinion and legal fees) resulting from our proposed merger with F.N.B., which was announced onJuly 13, 2021 ; there was no comparable item in the third quarter of 2020.
Other operating expense increased by
Other operating expense consists mainly of a variety of general expenses such as telephone and data lines, supplies and postage, courier services, general insurance, director fees, and miscellaneous losses. The increase was primarily attributable to a$400 thousand increase in our accrued liability for pending or threatened litigation in the third quarter of 2021.
Income Tax Expense
For the third quarter of 2021, we recorded an income tax expense of$2.4 million compared to$1.4 million in the third quarter of 2020. Our effective tax rate for the third quarter of 2021 was 27.0%, compared to an effective tax rate of 22.6% for the third quarter of 2020.
Nonperforming and Problem Assets; COVID - Related Loan Deferrals
We perform reviews of all delinquent loans and our loan officers contact customers to attempt to resolve potential credit issues in a timely manner.
Loans are placed on nonaccrual status when payment of principal or interest is
90 days or more past due and the value of the collateral securing the loan, if
any, is less than the outstanding balance of the loan. Loans are also placed on
nonaccrual status if we have serious doubt about further collectability of
principal or interest on the loan, even though the loan is currently performing.
When loans are placed on a nonaccrual status, unpaid accrued interest is fully
reversed, and subsequent income, if any, is recognized only to the extent
received. The loan may be returned to accrual status if the loan is brought
current, has performed in accordance with the contractual terms for a reasonable
period of time, and ultimate collectability of the total contractual principal
and interest is no longer in doubt.
57
Under GAAP we are required to account for certain loan modifications or
restructurings as troubled debt restructurings ("TDRs"). In general, the
modification or restructuring of a debt constitutes a TDR if we, for economic or
legal reasons related to the borrower's financial difficulties, grant a
concession, such as a reduction in the effective interest rate, to the borrower
that we would not otherwise consider. However, all debt restructurings or loan
modifications for a borrower do not necessarily constitute troubled debt
restructurings. We believe loan modifications will potentially result in a lower
level of loan losses and loan collection costs than if we proceeded immediately
through the foreclosure process with these borrowers.
The CARES Act, as extended by certain provisions of the Consolidated
Appropriations Act, 2021, permits banks to suspend requirements under GAAP for
loan modifications to borrowers affected by COVID-19 that may otherwise be
characterized as TDRs and suspend any determination related thereto if (i) the
borrower was not more than 30 days past due as of December 31, 2019 , (ii) the
modifications are related to COVID-19, and (iii) the modification occurs between
March 1, 2020 and the earlier of 60 days after the date of termination of the
national emergency or January 1, 2022 . Federal bank regulatory authorities also
issued guidance to encourage banks to make loan modifications for borrowers
affected by COVID-19 and confirmed in working with the staff of the FASB that
short-term modifications made on a good faith basis in response to COVID-19 to
borrowers who were current prior to any relief are not TDRs.
58
Our level of COVID-19-related loan deferrals, after a large decline from their
2020 peak through December 31, 2020 , have continued to decline. As of September
30, 2021 , a total of $25.6 million of loans, representing 1.3% of total loans
and 1.4% of portfolio loans, were performing under some form of deferral or
other payment relief. By comparison, a total of $56.1 million of loans,
representing 3.0% of total loans and 3.3% of portfolio loans, were performing
under some form of deferral or other payment relief as of December 31, 2020 .
Included in total deferrals at September 30, 2021 are second deferrals
(including deferrals where the cumulative inception to date deferral is greater
than six months) of $13.1 million . Principal only deferrals represent 99.9% of
total deferrals. We expect that the level of COVID-19 related deferrals will
continue to decline in future periods.The table below sets forth the amounts and
categories of our nonperforming assets, which consist of nonaccrual loans,
troubled debt restructurings and OREO (which includes real estate acquired
through, or in lieu of, foreclosure), at the dates indicated.
September 30, December 31,
(in thousands) 2021 2020
Non-accrual loans:
Real estate loans:
Construction and land $ 242 $ 581
Residential - first lien 8,773 12,635
Residential - junior lien 1,544 1,250
Commercial owner occupied 302 416
Commercial non-owner occupied 3,298 528
Commercial and leases 558 2,508
Total non-accrual loans 14,717 17,918
Accruing troubled debt restructured loans:
Residential real estate - first lien 1,223 1,153
Commercial and leases 2 359 Total accruing troubled debt restructured loans 1,225
1,512
Total nonperforming loans 15,942 19,430
Other real estate owned:
Land 239 648
Residential - first lien 95 95
Total other real estate owned 334 743
Total nonperforming assets $ 16,276 $ 20,173
Ratios:Nonperforming loans to total loans and leases 0.84 % 1.04 % Nonperforming loans to portfolio loans (1) 0.87 % 1.14 % Nonperforming assets to total assets 0.64 %
0.79 %
Loans past due 90 days still accruing:
Real estate loans:
Residential - first lien $ 31 $ 34
Commercial owner occupied - 83
Commercial and leases - 251
$ 31 $ 368
(1) Denotes a non-GAAP measure; refer to the section "Use of Non-GAAP Financial
Measures and Related Reconciliations" for additional detail
59
Nonperforming Loans
Government fiscal stimulus and relief programs appear to have delayed, and
possibly mitigated, any materially adverse financial impact to our loan
portfolio resulting from the pandemic. Despite these measures, however, we
believe our credit metrics could worsen and loan losses could ultimately
materialize. Any potential loan losses will be contingent upon a number of
factors beyond our control, such as the ability to reach a sufficient
vaccination rate to achieve herd immunity, whether such vaccinations will be
effective against any resurgence of the virus, including new strains such as the
Delta variant, and the ability of customers and businesses to return to, and
remain in, their pre-pandemic routines.
Nonperforming loans ("NPLs") were $15.9 million , or 0.84% of total loans and
0.87% of portfolio loans, at September 30, 2021 compared to $19.4 million , or
1.04% of total loans and 1.14% of portfolio loans, at December 31, 2020 . The
$3.5 million decrease in NPLs was the result of $1.3 million in payoffs and $2.2
million of charge-offs in the first nine months of 2021. $677 thousand of the
charge-offs in the first nine months of 2021 were attributable to the partial
charge-off of loans to one borrower where we had recorded a specific allocation
of the allowance for loan and lease losses of $894 thousand at December 31,
2020 .
Included in nonaccrual loans at September 30, 2021 are two TDRs with a carrying
balance totaling $304 thousand that were not performing in accordance with their
modified terms, and the accrual of interest had ceased. In addition, there were
five TDRs totaling $1.2 million that were performing in accordance with their
modified terms at September 30, 2021 . During the nine months ended September 30,
2021 , we reported a new $103 thousand residential real estate TDR, downgraded to
nonperforming a $224 thousand commercial loan TDR that previously had been
performing in accordance with its modified terms, and fully charged-off a $413
thousand nonperforming commercial loan TDR.
The composition of our nonperforming loans at
Nonaccrual Loans:
? Two construction and land loans, one with a fair value of
process of foreclosure
? 45 residential first lien loans, four with an aggregate fair value of
million in the process of foreclosure
? 34 residential junior lien loans
? Two commercial real estate owner-occupied loans
? Nine commercial real estate non-owner occupied loans, (including six that were
placed on nonaccrual in the second quarter 2021)
? Two commercial loans.
Accruing Troubled Debt Restructured Loans:
? Four residential real estate loans
? One commercial loan
Nonperforming Assets
Nonperforming assets ("NPAs") consist of NPLs and other real estate owned
("OREO"). Our NPAs were $16.3 million , or 0.64% of total assets, at September
30, 2021 compared to $20.2 million , or 0.79% of total assets, at December 31,
2020 . The $3.9 million decrease in NPAs since December 31, 2020 was primarily
the result of the $3.5 million decrease in NPLs. NPAs represented 0.85% of total
loans and OREO at September 30, 2021 , compared to 1.08% at December 31, 2020 .
Other Real Estate Owned
Real estate we acquire as a result of foreclosure is classified as OREO. When a
property is acquired as a result of foreclosure, it is recorded at fair value
less the anticipated cost to sell at the date of foreclosure. If there is a
subsequent change in the value of OREO, we record a valuation allowance to
adjust the carrying value of the real estate to its current fair value less
estimated disposal costs. Costs relating to holding such real estate are
expensed in the current period while costs relating to improving such real
estate are capitalized up to the property's net realizable value until a
saleable condition is reached. Costs in excess of the property's net realizable
value would be expensed in the current period.
60
Our OREO totaled $334 thousand at September 30, 2021 , a $409 thousand decrease
from $743 thousand at December 31, 2020 . Net increases in OREO valuation
allowances, included in noninterest expense, were $38 thousand and $257 thousand
for the first nine months of 2021 and 2020, respectively. The increases in
valuation allowances were recorded since the then current appraised value of
OREO properties, less estimated cost to sell, was insufficient to cover the
recorded OREO amount. In addition, we sold two parcels of land with a total
carrying balance of $370 thousand in the first nine months of 2021, recording a
$66 thousand loss on the sales. There were no additions to OREO during the first
nine months of 2021.
OREO at
? Several parcels of unimproved land
? Two residential 1-4 family properties
Allowance for Loan and Lease Losses
Our allowance atSeptember 30, 2021 was$18.4 million , a decrease of$809 thousand from$19.2 million atDecember 31, 2020 . Net charge-offs of$1.8 million in the first nine months of 2021 were partially offset by the provision for credit losses of$1.0 million in the first nine months of 2021. Net charge-offs represented 0.13% of average loans (annualized); this compares to net charge-offs of$569 thousand , or 0.04% of average loans (annualized) in the first nine months of 2020. Included in the first nine months of 2021 net charge-offs was$677 thousand attributable to one loan relationship where we had established an$894 thousand specific allocation of the allowance as ofDecember 31, 2020 . There were no specific allocations of the allowance atSeptember 30, 2021 . Because the Company is a smaller reporting company underSEC rules, the allowance was determined under the incurred loss model. The$18.4 million allowance atSeptember 30, 2021 represented 0.96% of total loans, 1.01% of portfolio loans, and 115.1% of NPLs. By comparison, the$19.2 million allowance atDecember 31, 2020 represented 1.03% of total loans, 1.13% of portfolio loans, and 98.6% of NPLs. 61
The following table sets forth activity in our allowance for loan and lease losses for the periods indicated:
Nine Months Ended Year Ended
(in thousands) September 30, 2021 December 31, 2020
Balance at beginning of year $ 19,162 $ 10,401
Charge-offs:
Real estate
Residential first lien loans (615) (43)
Residential junior lien loans (45) (41)Commercial owner occupied loans (1) (44) Commercial non-owner occupied loans - (37) Commercial loans and leases (1,388)
(698)
Consumer loans (120) (187)
Total charge-offs (2,169) (1,050)
Recoveries:
Real estateResidential first lien loans 130 25 Residential junior lien loans 16 75 Commercial owner occupied loans 8 - Commercial non-owner occupied loans 25 2 Commercial loans and leases 169
182
Consumer loans 12 2
Total recoveries 360 286
Net charge-offs (1,809) (764)Provision for credit losses (1) 1,000
9,525
Balance at end of period $ 18,353 $
19,162
Allowance as a % of total loans and leases 0.96 % 1.03 % Allowance as a % of portfolio loans (2) 1.01 1.13 Allowance as a % of nonperforming loans 115.12
98.62
Net charge-offs to average total loans and leases 0.13 0.04 Provision for credit losses to average total loans and leases 0.07 0.51
(1) Portion attributable to loan and lease losses
(2) Denotes a non-GAAP measure - refer to the section "Use of Non-GAAP Financial
Measures and Related Reconciliations" for additional detail
COVID-19 and Our Evaluation of the Allowance
TheSeptember 30, 2021 allowance includes our quarterly reassessment of the impact of COVID-19 on the national and local economies and the impact on various categories of our loan portfolio. Management's methodology for the evaluation of COVID-19's impact on the allowance, which is essentially unchanged sinceSeptember 30, 2020 , identified the following qualitative factors for further review:
changes in international, national, regional, and local economic and business
? conditions and developments that affect the collectability of the portfolio,
including the condition of various market segments;
? the existence and effect of any concentrations of credit, and changes in the
level of such concentrations;
? changes in the value of underlying collateral for collateral-dependent loans;
and
? changes in the volume and severity of past due, nonaccrual, and adversely
classified loans.
62
While our allowance of $18.4 million at September 30, 2021 was down $809
thousand from December 31, 2020 , it had increased by $8.0 million from December
31, 2019 , the last balance sheet date before the pandemic began, with cumulative
provisions for credit losses attributable to the allowance of $10.5 million from
December 31, 2019 to September 30, 2021 , partially offset by cumulative net
charge-offs of $2.6 million during the same period. The allowance as a
percentage of total loans increased from a pre-COVID level of 0.60% at December
31, 2019 to 1.03% of total loans and 1.13% of portfolio loans at December 31,
2020 before decreasing to 0.96% of total loans and 1.01% of portfolio loans at
September 30, 2021 . The $8.0 million increase in the allowance from the December
31, 2019 pre-COVID level to September 30, 2021 was primarily attributable to the
qualitative factors noted above and portfolio loan growth, partially offset by
the impact of lower historical loss rates.
Our evaluation of the existence and effect of any concentrations of credit, and
changes in the level of such concentrations, has focused on the identification
of our exposure to industry segments that may potentially be the most highly
impacted by the pandemic. The following table identifies those industry segments
within our loan portfolio that we believe may potentially be most highly
impacted by COVID-19. All balances are as of September 30, 2021 ; note that the
column "Initial SBA PPP Loan Relief" presents the total balance of PPP loans
received by our borrowers in each of the identified loan segments during the PPP
program. The potentially highly impacted loan segments total $334.2 million , or
17.6% of total loans, at September 30, 2021 . However, the table presents each of
these loan segments as a percentage of portfolio loans, which we believe is a
more meaningful measure of our potentially highly impacted loan concentration.
The definition of our potentially highly impacted ("PHI") loan segments has
remained unchanged throughout the pandemic.
At September 30, 2021
As % of As % of Balance As % of Initial SBA As % of
(in millions) Loan Portfolio Total Credit Total Credit with Loan PPP Loan Loan
Loan Category Balance Loans (1) Exposure (2) Exposure Deferrals Category Relief Category
CRE - retail $ 98.2 5.4 % $ 99.7 4.0 % $ - - $ - -
Hotels 61.8 3.4 % 71.6 3.0 % - - 3.9 6.3 %
CRE - residential rental 30.4 1.7 % 30.4 1.3 % - - - -
Nursing and residential care 40.6 2.2 % 45.1 1.9 % 10.6 26.1 2.8 6.9 %
Retail trade 37.3 2.0 % 62.0 2.6 % - - 17.6 47.2 %
Restaurants and caterers 22.2 1.2 % 26.4 1.1 % - - 30.1 135.6 %
Religious and similar
organizations 28.5 1.6 % 30.6 1.3 % - - 7.6 26.7 %
Arts, entertainment, and
recreation 15.2 0.8 % 16.6 0.7 % 2.3 15.1 % 6.0 39.5 %
Total - selected categories $ 334.2 18.3 % $ 382.4 15.9 % $ 12.9 3.9 % $ 68.0 20.3 %
(1) A non-GAAP financial measure - refer to the section "Use of Non-GAAP
Financial Measures and Related Reconciliation" for additional detail
(2) Includes unused lines of credit, unfunded commitments, and letters of credit
The PHI breakdown, by loan portfolio segment, atSeptember 30, 2021 is as follows: (in millions) As % of As % of Loan As % of Portfolio Total PHI Loan Portfolio Segment Balance Total Loans Loans (1) Loans Commercial real estate - non-owner occupied$ 196.3 10.3 % 10.7 % 58.7 % Commercial real estate - owner occupied 66.1 3.5 %
3.6 % 19.8 %
Construction and land 35.7 1.9 % 2.0 % 10.7 %
Commercial loans and leases 34.5 1.8 % 1.9 % 10.3 %
Other 1.6 0.1 % 0.1 % 0.5 %
Total $ 334.2 17.6 % 18.3 % 100.0 %
We will continue to closely monitor portfolio conditions and reevaluate the
adequacy of the allowance. While our ongoing active management of the
portfolio, government fiscal stimulus, COVID-19 related payment deferrals, and
PPP loan assistance have reduced the short-term risk in our loan portfolio and
traditional lagging indicators of delinquencies and nonperforming loans remain
historically modest, we believe there still is the potential for additional risk
rating downgrades and an increase in charge-offs in future periods.
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Credit Risk Management and Allowance Methodology
We provide for loan and lease losses (hereinafter referred to as "loan losses") based upon the consistent application of our documented allowance methodology.
All loan losses are charged to the allowance and all recoveries are credited to it. Additions to the allowance are provided by charges to income based on various factors that, in our judgment, deserve current recognition in estimating probable losses. We regularly review the loan portfolio and make provisions for credit losses in order to maintain the allowance in accordance with GAAP. In accordance with accounting guidance for business combinations, there was no allowance brought forward on any acquired loans in our acquisitions. For acquired performing loans, credit discounts representing the principal losses expected over the life of the loan are a component of the initial fair value and the discount is accreted to interest income over the life of the loan. Subsequent to the purchase date, the method used to evaluate the sufficiency of the credit discount is similar to originated loans, and if necessary, additional reserves are recognized in the allowance. We recorded acquired credit impaired loans in our acquisitions net of purchase accounting adjustments. Subsequent to the acquisition date, we continue to monitor cash flows on a quarterly basis, to determine the performance of each acquired credit impaired loan in comparison to our initial performance expectations. Subsequent decreases in the present value of expected cash flows will be recorded as an increase in the allowance through a provision for credit losses. Subsequent significant increases in cash flows result in a reversal of the provision for credit losses to the extent of prior provisions or a reclassification of amount from non-accretable difference to accretable yield, with a positive impact on the accretion of interest income in future periods. The allowance consists of two components - specific and general allowances:
Specific allowances may be established for loans classified as Substandard or
Doubtful. For loans classified as impaired, the allowance is established when
the net realizable value (collateral value less costs to sell) of the impaired
loan is lower than the carrying amount of the loan. The amount of impairment 1) provided for as a specific allowance is represented by the deficiency, if any,
between the underlying collateral value and the carrying value of the loan.
Impaired loans for which the estimated fair value of the loan, or the loan's
observable market price or the fair value of the underlying collateral, if the
loan is collateral dependent, exceeds the carrying value of the loan are not
considered in establishing specific allowances; and
General allowances established for loan losses on a portfolio basis for loans
that do not meet the definition of impaired loans. The portfolio is grouped
into similar risk characteristics, primarily loan type and regulatory
classification. We apply an estimated loss rate to each loan group. The loss 2) rates applied are based upon our loss experience adjusted, as appropriate, for
the qualitative factors discussed below. This evaluation is inherently
subjective, as it requires material estimates that may be susceptible to
significant revisions based upon changes in economic and real estate market
conditions.
The allowance is maintained at a level to provide for loan losses that are probable and can be reasonably estimated. Our periodic evaluation of the adequacy of the allowance is based on past credit loss experience, known and inherent losses in the portfolio, adverse situations that may affect the borrower's ability to repay, the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant change, including the amounts and timing of future cash flows expected to be received on impaired
loans.
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A loan is considered past due or delinquent when a contractual payment is not
paid on the day it is due. A loan is considered impaired when, based on current
information and events, it is probable that we will be unable to collect the
scheduled payments of principal or interest when due according to the
contractual terms of the loan agreement. Factors considered by management in
determining impairment include payment status, collateral value and the
probability of collecting scheduled principal and interest payments when due.
Loans that experience insignificant payment delays and payment shortfalls
generally are not classified as impaired. We determine the significance of
payment delays and payment shortfalls on a case-by-case basis, taking into
consideration all of the circumstances surrounding the loan and the borrower,
including the length of the delay, the reasons for the delay, the borrower's
prior payment record and the amount of the shortfall in relation to the
principal and interest owed. The impairment of a loan may be measured based on
the present value of expected future cash flows discounted at the loan's
effective interest rate, or the fair value of the collateral if repayment is
expected to be provided by the collateral. Generally, our impairment on such
loans is measured by reference to the fair value of the collateral. Interest
income on impaired loans is recognized on the cash basis.
Our loan policies state that after all collection efforts have been exhausted,
and the loan is deemed to be a loss, then the remaining loan balance will be
charged off against the allowance. All loans are evaluated for loss potential
once it has been determined by our Watch Committee that the likelihood of
repayment is in doubt. When a loan is past due for at least 90 days or a
deterioration in debt service coverage ratio, guarantor liquidity, or
loan-to-value ratio has occurred that would cause concern regarding the
likelihood of the full repayment of principal and interest, and the loan is
deemed not to be well secured, the loan is moved to nonaccrual status and a
specific reserve is established if the net realizable value is less than the
principal value of the loan balance(s). Once the actual loss value has been
determined, this amount is charged off against the allowance. Each loss is
evaluated on its specific facts regarding the appropriate timing to recognize
the loss.
The adjustments to historical loss experience are based on our evaluation of several qualitative factors, including:
? changes in lending policies, procedures, and practices;
changes in international, national, state and local economic and business
? conditions and developments that affect the collectability of the portfolio,
including the condition of various market segments;
? changes in the nature and volume of the loan portfolio;
? changes in the experience, ability and depth of the lending staff;
? changes in the volume and severity of past due, nonaccrual, and adversely
classified loans;
? changes in the quality of our loan review system;
? changes in the value of underlying collateral for collateral-dependent loans;
? the existence of any concentrations of credit, and changes in the level of such
concentrations;
? the effect of other external factors such as competition and legal and
regulatory requirements; and
? any other factors that management considers relevant to the quality or
performance of the loan portfolio.
We evaluate the allowance based upon the combined total of the specific and general components. Generally when the loan portfolio increases, absent other factors, the allowance methodology results in a higher dollar amount of estimated probable losses than would be the case without the increase.
Generally when the loan portfolio decreases, absent other factors, the allowance methodology results in a lower dollar amount of estimated probable losses than would be the case without the decrease.
Commercial and commercial real estate loans generally have greater credit risks
compared to the one- to four-family residential mortgage loans in our loan
portfolio, as they typically involve larger loan balances concentrated with
single borrowers or groups of related borrowers. In addition, the payment
experience on loans secured by income-producing properties typically depends on
the successful operation of the related business and thus may be subject to a
greater extent to adverse conditions in the real estate market and in the
general economy. Actual loan and lease losses may be significantly more than
the allowance we have established, which could have a material negative effect
on our financial results.
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Generally, we underwrite commercial loans based on cash flow and business history and receive personal guarantees from the borrowers where appropriate.
We generally underwrite commercial real estate loans and residential real estate loans at a loan-to-value ratio of 85% or less at origination. In the event that a loan becomes significantly past due, we will conduct visual inspections of collateral properties and/or review publicly available information, such as online databases, to ascertain property values. We will also obtain formal appraisals on a regular basis even if we are not considering liquidation of the property to repay a loan. It is our practice to obtain updated appraisals if there is a material change in market conditions or if we become aware of new or additional facts that indicate a potential material reduction in the value of any individual property collateral. For impaired loans, we utilize the appraised value or present value of expected cash flows in determining the appropriate specific allowance attributable to the loan. In addition, changes in the appraised value of multiple properties securing our loans may result in an increase or decrease in our general allowance as an adjustment to our historical loss experience due to qualitative and environmental factors, as described above. Nonperforming loans are evaluated at the time the loan is identified as impaired, on a case by case basis, and reported at the lower of cost or net realizable value. Net realizable value is measured based on the value of the collateral securing the loan, less estimated costs to sell. The value of real estate collateral is determined based on an appraisal by qualified licensed appraisers hired by us. Appraised values may be discounted based on management's historical experience, changes in market conditions from the time of valuation, and/or management's expertise and knowledge of the client and client's business. The difference between the appraised value and the principal balance of the loan will determine the specific allowance valuation required for the loan, if any. Nonperforming loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly. We evaluate the loan portfolio on at least a quarterly basis, more frequently if conditions warrant, and the allowance is adjusted accordingly. While we use the best information available to make evaluations, future adjustments to the allowance may be necessary if conditions differ substantially from the information used in making the evaluations. In addition, as an integral part of their examination process, theMaryland Office of the Commissioner of Financial Regulation ("the Commissioner") and theFDIC will periodically review the allowance. The Commissioner and theFDIC may require us to recognize additions to the allowance based on their analysis of information available to them at the time of their examination. 66
Allocation of Allowance for Loan and Lease Losses
The following table sets forth the allocation of the allowance by loan category and the allowance within each category as a percent of loans in each category at the dates indicated. The allowance allocated to each category is not necessarily indicative of future losses in any particular category and does not restrict the use of the allowance to absorb losses in other categories. Loans funded through the PPP program are fully guaranteed by theU.S. government and we anticipate that substantially all of the remaining loans will ultimately be forgiven by the SBA in accordance with the terms of the program. Therefore, no allowance is attributable to this loan portfolio segment. September 30, 2021 December 31, 2020 Allowance Allowance (in thousands) Amount Ratio Amount Ratio Real estate loans: Construction and land loans$ 1,213 0.97 %$ 1,349 1.16 % Residential first lien loans 2,588 0.60 2,309 0.61 Residential junior lien loans 400 0.78 832 1.39 Commercial owner occupied loans 2,157 0.85 2,207 0.88 Commercial non-owner occupied loans 7,653 1.47 7,156 1.46 Total real estate loans 14,011 1.01 13,853 1.07 Commercial loans and leases 3,217 0.91 4,131 1.24 Consumer loans 1,125 1.28 1,178 1.84 Total portfolio loans (1) 18,353 1.01 19,162 1.13
Paycheck Protection Program (PPP) loans - -
- - Total loans and leases$ 18,353 0.96 %$ 19,162 1.03 %
(1) Denotes a non-GAAP measure - refer to the section "Use of Non-GAAP Financial
Measures and Related Reconciliations" for additional detail
Liquidity and Capital Resources
Liquidity is the ability to meet current and future financial obligations. Our
primary sources of funds consist of deposit inflows, loan repayments, advances
from the FHLB, and the sale of securities available for sale. While maturities
and scheduled amortization of loans and securities are predictable sources of
funds, deposit flows and loan prepayments are greatly influenced by general
interest rates, economic conditions and competition. Our management
Asset/Liability Committee ("ALCO") is responsible for establishing and
monitoring our liquidity targets and strategies in order to ensure that
sufficient liquidity exists for meeting the borrowing needs and deposit
withdrawals of our customers as well as unanticipated contingencies. We believe
that we have enough sources of liquidity to satisfy our short- and long-term
liquidity needs as of September 30, 2021 and December 31, 2020 .
We regularly monitor and adjust our investments in liquid assets based upon our assessment of:
? Expected loan demand
? Expected deposit flows and borrowing maturities
? Yields available on interest-bearing deposits with banks and securities
? The objectives of our asset/liability management program
The most liquid of all assets are cash and cash equivalents. The level of these
assets is dependent on our operating, financing, lending and investing
activities during any given period. At
Our cash flows are derived from operating activities, investing activities and
financing activities as reported in our statements of cash flows included in our
unaudited Condensed Consolidated Financial Statements.
67
Our total commitments to extend credit and available credit lines are discussed
in the "Commitments and Off-Balance Sheet Arrangements" section of this MD&A,
including a table presenting our comparative exposure at September 30, 2021 and
December 31, 2020 .
CDs maturing within one year at September 30, 2021 totaled $242.2 million , or
71.7% of total CDs and 12.5% of total deposits; by comparison, CDs maturing
within one year at December 31, 2020 totaled $416.1 million , or 85.9% of total
CDs and 21.1% of total deposits. If we do not retain these deposits, we may be
required to seek other sources of funds, including loan and securities sales and
FHLB advances. Based on current market conditions, approximately 16% of our
$116.5 million in customer CDs with maturities of one year or less are at
significantly higher rates than current market rates for both customer CDs and
other funding sources. As a result, we do not expect to retain some portion of
our customer CDs with maturities of one year or less as of September 30, 2021 .
Our primary investing activity is originating loans. During the nine months
ended September 30, 2021 and September 30, 2020 , cash used to fund net loan
growth was $37.9 million and $138.5 million , respectively. Portfolio loans
accounted for $125.0 million of the net loan growth while PPP loans declined by
$87.7 million in the first nine months of 2021. Our secondary investing
activity is in investment securities, primarily available for sale securities.
During the first nine months of 2021, securities maturities / calls / paydowns
totaling $75.6 million were partially offset by $54.6 million of securities
purchases. In the first nine months of 2020, we purchased $303.5 million of
securities which were partially offset by $145.5 million of securities
maturities / calls / paydowns.
Financing activities consist primarily of activity in deposit accounts and FHLB
advances. We experienced a net decrease of $34.0 million in cash provided from
deposits during the first nine months of 2021, with customer deposit growth of
$87.0 million more than offset by a $121.0 million reduction in the level of our
brokered and other non-customer deposits. This compares to a net increase in
deposits of $258.4 million for the nine months of 2020, with customer deposits
up $164.7 million while brokered and other non-customer deposits increased by
$93.7 million . Customer deposit flows are affected by the overall level of
interest rates, the interest rates and products offered by us and our local
competitors, and by other factors, including the pandemic which caused
significant growth in deposit balances held by both households and businesses.
Liquidity management is both a daily and long-term function of business
management. If we require funds beyond our ability to generate them internally,
borrowing agreements exist with the FHLB, which can provide an additional source
of funds. FHLB advances increased to $212.0 million at September 30, 2021
compared to $200.0 million at December 31, 2020 . At September 30, 2021 , we had
an available line of credit for $649.7 million at the FHLB, with borrowings
limited to a total of $457.4 million based on pledged collateral. At December
31, 2020 , we had an available line of credit for $639.7 million at the FHLB,
with borrowings limited to a total of $475.0 million based on pledged
collateral.
The Bank is subject to various regulatory capital requirements, including a
risk-based capital measure. The risk-based capital guidelines include both a
definition of capital and a framework for calculating risk-weighted assets by
assigning balance sheet assets and off-balance sheet items to broad risk
categories. At September 30, 2021 and December 31, 2020 , we exceeded all
regulatory capital requirements and are considered "well capitalized" under
regulatory guidelines.
Commitments and Off-Balance Sheet Arrangements
We are party to financial instruments with off-balance sheet risk in the normal
course of business to meet the financial needs of our customers. These
financial instruments are limited to commitments to originate loans and involve,
to varying degrees, elements of credit, interest rate, and liquidity risk. We
do not believe these represent unusual risks, and management does not anticipate
any losses that would have a material effect on us.
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Outstanding loan commitments and lines of credit at the dates indicated were as
follows:
(in thousands) September 30, 2021 December 31, 2020
Unfunded loan commitments $ 119,736 $ 147,603
Unused lines of credit 447,142 407,722
Letters of credit 13,283 14,707
Total commitments to extend credit and available credit lines $ 580,161 $ 570,032 Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. We generally require collateral to support financial instruments with credit risk on the same basis as we do for balance sheet instruments. We generally base the collateral required on the credit evaluation of the counterparty. Commitments generally have interest rates at current market rates, expiration dates or other termination clauses and may require payment of a fee. Available credit lines represent the unused portion of lines of credit previously extended and available to the customer so long as there is no violation of any contractual condition. These lines generally have variable interest rates. Since we expect many of the commitments to expire without being drawn upon, and since it is unlikely that all customers will draw upon their lines of credit in full at any one time, the total commitment amount or line of credit amount does not necessarily represent future cash requirements. We evaluate each customer's credit-worthiness on a case-by-case basis. Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. The credit risk involved in these financial instruments is essentially the same as that involved in extending loan facilities to customers. Our reserve for potential credit losses related to these commitments, recorded in other liabilities on the unaudited Condensed Consolidated Balance Sheets, was$320 thousand at bothSeptember 30, 2021 andDecember 31, 2020 .
Impact of Inflation and Changing Prices
Our financial statements and related notes have been prepared in accordance with GAAP. GAAP generally requires the measurement of financial position and operating results in terms of historical dollars without consideration of changes in the relative purchasing power of money over time due to inflation.
The impact of inflation is reflected in the increased cost of our operations.
Unlike industrial companies, our assets and liabilities are primarily monetary in nature. As a result, changes in market interest rates have a greater impact on performance than the effects of inflation.
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