PATRIOT NATIONAL BANCORP, INC. "SAFE HARBOR" STATEMENT UNDER PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This Quarterly Report on Form 10-Q contains statements that relate to future events and expectations and, as such, constitute forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995. Certain statements, other than purely historical information, including estimates, projections, statements relating to our strategies, outlook, business and financial prospects, business plans, objectives, and expected operating results, and the assumptions upon which those statements are based, are "forward-looking statements." These forward-looking statements generally are identified by the words "believes," "project," "expects," "anticipates," "estimates," "intends," "strategy," "plan," "may," "will," "would," "will be," "will continue," "will likely result," and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. Forward-looking statements are not guarantees of future performance. Although Patriot believes that the expectations reflected in any forward-looking statements are based on reasonable assumptions, these expectations may not be attained and it is possible that actual results may differ materially from those indicated by these forward-looking statements due to a variety of risks, uncertainties and changes in circumstances, many of which are beyond Patriot's control. Many possible events or factors could affect Patriot's future financial results and performance and could cause the actual results, performance or achievements of Patriot to differ materially from any anticipated results expressed or implied by such forward-looking statements. Such risks and uncertainties include, among others: (1) changes in prevailing interest rates which would affect the interest earned on the Company's interest earning assets and the interest paid on its interest bearing liabilities;
(2) the timing of re-pricing of the Company's interest earning assets and interest bearing liabilities;
(3) the effect of changes in governmental monetary policy;
(4) the effect of changes in regulations applicable to the Company and the Bank and the conduct of its business;
(5) changes in competition among financial service companies, including possible further encroachment of non-banks on services traditionally provided by banks;
(6) the ability of competitors that are larger than the Company to provide products and services which it is impracticable for the Company to provide;
(7) the state of the economy and real estate values in the Company's market areas, and the consequent effect on the quality of the Company's loans;
(8) demand for loans and deposits in our market area;
(9) recent governmental initiatives that are expected to have a profound effect on the financial services industry and could dramatically change the competitive environment of the Company;
(10) other legislative or regulatory changes, including those related to
residential mortgages, changes in accounting standards, and
(11) the application of generally accepted accounting principles in
(12) the fact that one period of reported results may not be indicative of future periods;
(13) the state of the economy in the greaterNew York metropolitan area and its particular effect on the Company's customers, vendors and communities and other such factors, including risk factors, as may be described in the Company's other filings with theSecurities and Exchange Commission (the "SEC");
(14) political, social, legal and economic instability, civil unrest, war, catastrophic events, acts of terrorism;
(15) widespread outbreaks of infectious diseases, including the ongoing novel coronavirus (COVID-19) outbreak;
(16) changes in the level and direction of loan delinquencies and write-offs and changes in estimates of the adequacy of the allowance for loan losses;
(17) our ability to access cost-effective funding;
(18) our ability to implement and change our business strategies;
(19) changes in the quality or composition of our loan or investment portfolios;
(20) technological changes that may be more difficult or expensive than expected;
(21) our ability to manage market risk, credit risk and operational risk in the current economic environment;
(22) our ability to enter new markets successfully and capitalize on growth opportunities;
(23) changes in consumer spending, borrowing and savings habits;
(24) our ability to retain key employees; and
(25) our compensation expense associated with equity allocated or awarded to our employees.
41
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The risks and uncertainties included here are not exhaustive. In addition to
those included herein further information concerning our business, including
additional factors that could materially affect our financial results, is
included in our other filings with the SEC , including our Annual Report on Form
10-K for the year ended December 31, 2021 . Further, it is not possible to assess
the effect of all risk factors on our businesses or the extent to which any
factor, or combination of factors, may cause actual results to differ materially
from those contained in any forward-looking statements. Given these risks and
uncertainties, investors should not place undue reliance on forward-looking
statements as a prediction of actual results. In addition, we disclaim any
obligation to update any forward-looking statements to reflect events or
circumstances that occur after the date of this report.
CRITICAL ACCOUNTING POLICIES
The preparation of consolidated financial statements in accordance with U.S.
GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenues and expenses, and to disclose
contingent assets and liabilities. Actual results could differ from those
estimates. Management has identified the accounting for the allowance for loan
and lease losses, the analysis and valuation of its investment securities, the
valuation of deferred tax assets, the impairment of goodwill, the valuation of
derivatives, and the valuation of servicing assets as certain of the Company's
most critical accounting policies and estimates in that they are important to
the portrayal of the Company's financial condition and results of operations.
They require management's most subjective and complex judgment as a result of
the need to make estimates about the effect of matters that are inherently
uncertain. Refer to the 2021 Form 10-K for additional information.
Summary
The Company reported net income for the second quarter of 2022 of $1.3 million
($0.32 basic and diluted earnings per share), compared to a net income of $1.0
million ($0.26 basic and diluted earnings per share) for the second quarter of
2021. For the six months ended June 30, 2022 , net income was $2.1 million ($0.52
basic and diluted earnings per share), compared to a net income of $1.9 million
($0.48 basic and $0.47 diluted earnings per share) for the six months ended June
30, 2021 . The prior year results included the recognition of a non-recurring
employee retention tax credit ("ERC") of $1.1 million and $2.0 million for the
three and six months ended June 30, 2021 , respectively, while no ERC was
recognized in the first half of 2022.
The Bank continued to show improved net interest margins and deposit growth. The
prepaid debit card program continues to be a low-cost funding source for the
Bank and has increased substantially to $166.7 million as of June 30, 2022 from
$50.0 million acquired in July 2020 . The portfolio growth provides a substantial
improvement to the Bank's net interest margin and overall funding costs.
42
--------------------------------------------------------------------------------Financial Condition As ofJune 30, 2022 , total assets increased$100.7 million to$1.0 billion , as compared to$948.5 million atDecember 31, 2021 , primarily due to the increase in net loans which increased from$729.6 million atDecember 31, 2021 , to$849.2 million atJune 30, 2022 . Total deposits increased from$748.6 million atDecember 31, 2021 , to$846.8 million atJune 30, 2022 . Cash and Cash Equivalents Cash and cash equivalents decreased$9.5 million , from$47.0 million atDecember 31, 2021 to$37.5 million atJune 30, 2022 . The decrease in 2022 was primarily due to cash used for loan origination of$138.4 million and purchase of loans of$98.7 million , which was partially offset by$116.0 million paydown of loans and increase in deposits of$98.2 million . Investments
The following table is a summary of the Company's available-for-sale securities portfolio, at fair value, at the dates shown:
(In thousands) June 30, December 31,
Increase / (Decrease)
2022 2021 ($) (%)
U. S. Government agency and
mortgage-backed securities $ 54,085 $ 66,629 $ (12,544 ) -18.83 %
Corporate bonds 15,644 16,921 (1,277 ) -7.55 %
Subordinated notes 1,921 4,626 (2,705 ) -58.47 %
SBA loan pools 4,822 5,603 (781 ) -13.94 %
Municipal bonds 499 562 (63 ) -11.21 %
Total available-for-sale securities, at
fair value 76,971 94,341 (17,370 ) -18.41 %
Other investments, at cost 4,450 4,450 - 0.00 %
$ 81,421 $ 98,791 $ (17,370 ) -17.58 %
Total investments decreased by $17.4 million , from $98.8 million at December 31,
2021 to $81.4 million at June 30, 2022 . The decrease in 2022 was primarily
attributable to the net unrealized loss of $13.0 million for the
available-for-sale securities, associated with rising market interest rates.
There were no sales of available-for-sale securities in the three and six months
ended June 30, 2022 . During the three and six months ended June 30, 2021 , the
Bank sold $20.8 million available for sale securities and recognized a net gain
of $93,000 .
Loans held for investment
The following table provides the composition of the Company's loan held for
investment portfolio as of
(In thousands) June 30, 2022 December 31, 2021
Amount % Amount %
Loan portfolio segment:
Commercial Real Estate $ 448,884 52.26 % $ 365,247 49.38 %
Residential Real Estate 138,739 16.15 % 158,591 21.45 %
Commercial and Industrial 133,281 15.51 % 122,810 16.61 %
Consumer and Other 122,858 14.30 % 59,364 8.03 %
Construction 12,221 1.42 % 21,781 2.95 %
Construction to permanent - CRE 3,124 0.36 % 11,695 1.58 %
Loans receivable, gross 859,107 100.00 % 739,488 100.00 %
Allowance for loan losses (9,929 ) (9,905 )
Loans receivable, net $ 849,178 $ 729,583
43-------------------------------------------------------------------------------- The Company's gross loan portfolio increased$119.6 million , from$739.5 million atDecember 31, 2021 to$859.1 million atJune 30, 2022 . The increase in loans was primarily attributable to$138.4 million of new loan origination and$98.7 million in purchases of loans receivable which was partially offset by$117.0 million paydown of the loans. SBA loans held for investment were included in the commercial real estate loans and commercial and industrial loan classifications above. As ofJune 30, 2022 andDecember 31, 2021 , SBA loans included in the commercial and industrial loan were$19.2 million and$17.4 million , respectively. SBA loans included in the commercial real estate loans were$10.9 million and$9.7 million , respectively. AtJune 30, 2022 , the net loan to deposit ratio was 100% and the net loan to total assets ratio was 81%. AtDecember 31, 2021 , these ratios were 97% and 77%, respectively.
Allowance for Loan and Lease Losses
The allowance for loan and lease losses was unchanged at$9.9 million as ofJune 30, 2022 andDecember 31, 2021 . Based upon the overall assessment and evaluation of the loan portfolio atJune 30, 2022 , management believes$9.9 million in the allowance for loan and lease losses, which represented 1.16% of gross loans outstanding, is adequate under prevailing economic conditions to absorb existing losses in the loan portfolio, and a provision for loan losses of$275,000 was recorded for the three and six months endedJune 30, 2022 . The following table provides detail of activity in the allowance for loan and lease losses: Three Months Ended June 30, Six Month Ended June 30, (In thousands) 2022 2021 2022 2021 Balance at beginning of the period$ 9,737 $ 10,426 $ 9,905 $ 10,584 Charge-offs: Commercial Real Estate - (9 ) - (51 ) Residential Real Estate - - - (3 ) Commercial and Industrial - - (68 ) (209 ) Consumer and Other (100 ) (2 ) (147 ) (20 ) Construction - (69 ) (70 ) (69 ) Total charge-offs (100 ) (80 ) (285 ) (352 ) Recoveries: Residential Real Estate - - 1 - Commercial and Industrial 11 12 26 24 Consumer and Other 6 4 7 106 Total recoveries 17 16 34 130 Net charge-offs (83 ) (64 ) (251 ) (222 ) Provision charged to earnings 275 - 275 - Balance at end of the period$ 9,929 $ 10,362 $ 9,929 $ 10,362 Ratios: Net charge-offs to average loans (0.011 )% (0.009 )% (0.032 )% (0.032 )% Allowance for loan losses to total loans 1.16 % 1.54 % 1.16 % 1.54 % 44
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The following table provides an allocation of allowance for loan and lease losses by portfolio segment:
(In thousands) June 30, 2022 December 31, 2021
Percent of Percent of
loans loans
in each in each
Allowance for category category
loan to total Allowance for loan to total
Allowance for loan and lease losses losses loans losses loans
Commercial Real Estate $ 4,980 52.26 % $ 5,063 49.38 %
Residential Real Estate 1,395 16.15 % 1,700 21.45 %
Commercial and Industrial 2,316 15.51 % 2,532 16.61 %
Consumer and Other 1,063 14.30 % 253 8.03 %
Construction 58 1.42 % 78 2.95 %
Construction to permanent - CRE 15 0.36 % 41 1.58 %
Unallocated 102 N/A 238 N/A
Total $ 9,929 100.00 % $ 9,905 100.00 %
Non-performing Assets
The following table presents non-performing assets as of June 30, 2022 and
December 31, 2021 :
(In thousands)
June 30, 2022 December 31, 2021
Non-accruing loans:
Commercial Real Estate $ 15,366 $ 15,704
Residential Real Estate 3,087 3,148
Commercial and Industrial 4,726 4,101
Consumer and Other 145 142
Total non-accruing loans 23,324 23,095
Loans past due over 90 days and still accruing - 2
Total nonperforming assets $ 23,324 $ 23,097
Nonperforming assets to total assets 2.22 % 2.44 % Nonperforming loans to total loans, net 2.75 % 3.17 % As ofJune 30, 2022 , the$23.3 million of non-accrual loans was comprised of 32 borrowers, for which a specific reserve of$2.9 million was established. Four TDR loans of total$9.7 million were included in the non-accrual loans. For collateral dependent loans, the Bank has obtained appraisal reports from independent licensed appraisal firms and discounted those values based on the Bank's experience selling OREO properties and for estimated selling costs to determine estimated impairment. For cash flow dependent loans, the Bank determined the reserve based on the present value of expected future cash flows discounted at the loan's effective interest rate. Non-accrual loans are included in the impaired loans. As ofDecember 31, 2021 , the$23.1 million of non-accrual loans was comprised of 30 borrowers, for which a specific reserve of$2.3 million was established. Three TDR loans of total$9.7 million were included in the non-accrual loans as ofDecember 31, 2021 . Loans held for sale SBA loans held for sale totaled$7.6 million and$3.1 million as ofJune 30, 2022 andDecember 31, 2021 , respectively. SBA loans held for sale represent the guaranteed portion of SBA loans and are reflected at the lower of aggregate cost or market value. SBA loans held for sale atJune 30, 2022 , consisted of$4.3 million SBA commercial real estate and$3.3 million SBA commercial and industrial loans, respectively. SBA loans held for sale atDecember 31, 2021 , consisted of$2.6 million SBA commercial and industrial loans and$562,000 SBA commercial real estate, respectively. 45 --------------------------------------------------------------------------------
Goodwill
The Company completed its acquisition of Prime Bank in
The Company did not perform an interim goodwill test for the six months ended
Deferred Taxes Deferred tax assets were$14.9 million and$12.1 million atJune 30, 2022 andDecember 31, 2021 , respectively. Deferred tax assets consist predominately of state net operating losses, capitalized costs and allowances for loan losses. The effective tax rate for the three and six months endedJune 30, 2022 was 27.3%, and 27.6%, respectively, compared to the effective tax rate of 27.3% and 27.2% for the three and six months endedJune 30, 2021 , respectively. The Company's effective rates for both periods were affected primarily by states taxes and non-deductible expenses.
Patriot anticipates utilizing the state net operating loss carry forwards to reduce income taxes otherwise payable on current and future years taxable income.
Patriot evaluates its ability to realize its net deferred tax assets on a quarterly basis. In doing so, management considers all available evidence, both positive and negative, to determine whether it is more likely than not that the deferred tax assets will be realized. In addition, management assesses tax attributes including available tax planning strategies and state net operating loss carry-forwards that do not begin to expire until the year of 2030. As ofDecember 31, 2021 , after weighing both positive and negative evidence, Patriot fully reversed the valuation allowance of$1.9 million recorded in 2020. No valuation allowance was recorded as ofJune 30, 2022 . The Company will continue to evaluate its ability to realize its net deferred tax assets. If future evidence suggests that it is more likely than not that additional deferred tax assets will not be realized, the valuation allowance will be adjusted. Deposits The following table is a summary of the Company's deposits at the dates shown: (In thousands) Increase/(Decrease) June 30, 2022 December 31, 2021 $ % Non-interest bearing: Non-interest bearing$ 137,320 $ 127,420$ 9,900 7.77 % Prepaid DDA 133,845 99,293 34,552 34.80 % Total non-interest bearing 271,165 226,713 44,452 19.61 % Interest bearing: Negotiable order of withdrawal accounts 35,973 34,741 1,232 3.55 % Savings 99,686 109,744 (10,058 ) (9.16 )% Money market 151,212 113,428 37,784 33.31 % Money market - prepaid deposits 32,891 51,090 (18,199 ) (35.62 )% Certificates of deposit, less than$250,000 169,690 142,246 27,444 19.29 % Certificates of deposit,$250,000 or greater 51,491 53,584 (2,093 ) (3.91 )% Brokered deposits 34,675 17,016 17,659 103.78 % Total Interest bearing 575,618 521,849 53,769 10.30 % Total Deposits$ 846,783 $ 748,562$ 98,221 13.12 %
The Bank has expanded its deposit and funding mix over the past year, while reducing its aggregate cost of funds.
46
--------------------------------------------------------------------------------Borrowings Total borrowings were$130.6 million and$120.7 million as ofJune 30, 2022 andDecember 31, 2021 , respectively. Borrowings consist primarily of FHLB advances, senior notes, subordinated notes, junior subordinated debentures and a note payable. The senior notes, subordinated notes and junior subordinated debentures contain affirmative covenants that require the Company to maintain its and its subsidiaries' legal entity and tax status, pay its income tax obligations on a timely basis, and comply withSEC andFDIC reporting requirements.
The Company is a member of theFederal Home Loan Bank of Boston ("FHLB-B"). Borrowings from the FHLB-B are limited to a percentage of the value of qualified collateral, as defined on the FHLB-B Statement of Products Policy. Qualified collateral, as defined, primarily consists of mortgage-backed securities and loans receivable that are required to be free and clear of liens and encumbrances, and may not be pledged for any other purposes. FHLB-B advances are structured to facilitate the Bank's management of its balance sheet and liquidity requirements. Outstanding advances from the FHLB-B increased from$90.0 million atDecember 31, 2021 to$100.0 million atJune 30, 2022 .
At
AtJune 30, 2022 , collateral for FHLB-B borrowings consisted of a mixture of real estate loans and securities with book value of$267.2 million . Remaining unused borrowing capacity under this line totaled$77.3 million atJune 30, 2022 .
In addition, Patriot has a
Interest expense incurred for the three and six months endedJune 30, 2022 were$747,000 and$1.5 million , respectively. For the three and six months endedJune 30, 2021 , interest expense were$741,000 and$1.5 million , respectively.
Patriot has entered into unsecured federal funds sweep and federal funds line of credit facility agreements with certain correspondent banks. Borrowings available under the agreements totaled$5 million atJune 30, 2022 and$5 million atDecember 31, 2021 . The purpose of the agreements is to provide a credit facility intended to satisfy overnight federal account balance requirements and to provide for daily settlement of FRB, Automated Clearing House (ACH), and other clearinghouse transactions.
There was no outstanding balance under the agreements at
Other Borrowing Patriot has pledged eligible loans as collateral to support borrowing capacity at theFederal Reserve Bank of New York's ("FRBNY"). As ofJune 30, 2022 , the book value of the pledged loans totaled$20.6 million with a collateral value of$14.6 million . There was no outstanding balance under the FRBNY Borrower-in-Custody program atJune 30, 2022 . 47 --------------------------------------------------------------------------------
Senior notes OnDecember 22, 2016 , the Company issued$12 million of senior notes bearing interest at 7% per annum (the "Senior Notes"). OnNovember 17, 2021 , the original maturity date of the Senior Notes was extended fromDecember 22, 2021 toJune 30, 2022 . In connection with the issuance of the Senior Notes, the Company incurred$374,000 of costs, which are being amortized over the term of the Senior Notes to recognize a constant rate of interest expense. AtJune 30, 2022 andDecember 31, 2021 , the debt issuance costs were fully amortized. OnJune 22, 2022 , the Company amended and restated the Senior Notes. The maturity date of the Senior Notes was further extended toDecember 31, 2022 , and the interest rate increases from (i) 7% to 7.25% fromJuly 1, 2022 untilSeptember 30, 2022 and (ii) from 7.25% to 7.50% thereafter. The Senior Notes can be repaid at any time without penalty. The Senior Notes are unsecured, rank equally with all other senior obligations of the Company, are not redeemable nor may they be put to the Company by the holders of the notes, and require no payment of principal until maturity. For the three and six months endedJune 30, 2022 , the Company recognized interest expense of$210,000 and$420,000 , respectively. For the three and six months endedJune 30, 2021 , the Company recognized interest expense of$228,000 and$457,000 , respectively. Subordinated notes OnJune 29, 2018 , the Company entered into certain subordinated note purchase agreements with two institutional accredited investors and completed a private placement of$10 million of fixed-to-floating rate subordinated notes with the maturity date ofSeptember 30, 2028 (the "Subordinated Notes") pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended, and Rule 506(b) of Regulation D promulgated thereunder. The Subordinated Notes initially bears interest at 6.25% per annum, from and includingJune 29, 2018 , to but excluding,June 30, 2023 , payable semi-annually in arrears. From and includingJune 30, 2023 , until but excludingJune 30, 2028 or an early redemption date, the interest rate shall reset quarterly to an interest rate per annum equal to the then current three-month LIBOR (but not less than zero) plus 332.5 basis points, payable quarterly in arrears. The Company may, at its option, beginning onJune 30, 2023 and on any scheduled interest payment date thereafter, redeem the Subordinated Notes. In connection with the issuance of the Subordinated Notes, the Company incurred$291,000 of debt issuance costs, which are being amortized over the term of the Subordinated Notes to recognize a constant rate of interest expense. AtJune 30, 2022 andDecember 31, 2021 ,$175,000 and$189,000 of unamortized debt issuance costs were deducted from the face amount of the Subordinated Notes included in the consolidated balance sheet, respectively. For the three and six months endedJune 30, 2022 , the Company recognized interest expense of$165,000 and$328,000 , respectively. For the three and six months endedJune 30, 2021 , the Company recognized interest expense of$165,000 and$328,000 , respectively.
Junior subordinated debt owed to unconsolidated trust
In 2003, the Patriot National Statutory Trust I ("the Trust"), which has no
independent assets and is wholly-owned by the Company, issued $8.0 million of
trust preferred securities. The proceeds, net of a $240,000 placement fee, were
invested in junior subordinated debentures issued by the Company, which invested
the proceeds in the Bank. The Bank used the proceeds to fund its operations.
Trust preferred securities currently qualify for up to 25% of the Company's
The junior subordinated debentures are unsecured obligations of the Company. The
debentures are subordinate and junior in right of payment to all present and
future senior indebtedness of the Company. In addition to its obligations under
the junior subordinated debentures and in conjunction with the Trust, the
Company issued an unconditional guarantee of the trust preferred securities.
48-------------------------------------------------------------------------------- The junior subordinated debentures bear interest at three-month LIBOR plus 3.15% (5.34% atJune 30, 2022 ) and mature onMarch 26, 2033 , at which time the principal amount borrowed will be due. The placement fee of$240,000 is amortized and included as a component of the periodic interest expense on the junior subordinated debentures, in order to produce a constant rate of interest expense. As ofJune 30, 2022 andDecember 31, 2021 , the unamortized placement fee deducted from the face amount of the junior subordinated debt owed to the unconsolidated trust amounted to$125,000 and$129,000 , respectively, and accrued interest on the junior subordinated debentures was$6,000 and$4,000 , respectively. For the three and six months endedJune 30, 2022 , the Company recognized interest expense of$86,000 and$157,000 , respectively. For the three and six months endedJune 30, 2021 , the Company recognized interest expense of$70,000 and$140,000 , respectively.
At its option, exercisable on a quarterly basis, the Company may redeem the junior subordinated debentures from the Trust, which would then redeem the trust preferred securities.
Note Payable InSeptember 2015 , the Bank purchased the property in which itsFairfield, Connecticut branch is located for approximately$2.0 million , a property it had been leasing until that date. The purchase price was primarily satisfied by issuing the seller a$2.0 million , nine-year, promissory note bearing interest at a fixed rate of 1.75% per annum. As ofJune 30, 2022 andDecember 31, 2021 , the note had a balance outstanding of$689,000 and$791,000 , respectively. The note matures inAugust 2024 and requires a balloon payment of approximately$234,000 at that time. The note is secured by a first Mortgage Deed and Security Agreement on the purchased property.
For the three and six months ended
Derivatives As ofJune 30, 2022 , Patriot had entered into four interest rate swaps ("swaps"). Two swaps are with a loan customer to provide a facility to mitigate the fluctuations in the variable rate on the respective loan. The other two swaps are with an outside third party. The customer interest rate swaps are matched in offsetting terms to the third party interest rate swaps. The swaps are reported at fair value in other assets or other liabilities on the consolidated balance sheets. Patriot's swaps are derivatives, but are not designated as hedging instruments, thus any net gain or loss resulting from changes in the fair value is recognized in other noninterest income. The Company recognized no gain on the swaps for the three and six months endedJune 30, 2022 and 2021, respectively. During the second quarter of 2021, Patriot entered into a receive fixed/pay variable interest rate swap, which was designated as a cash flow hedge. During the three and six month endedJune 30, 2021 , the Company recognized$85,000 of accumulated other comprehensive income that was reclassified into interest income included in interest and fees on loans on the consolidated statements of operations. The cash flow hedge interest rate swap contract was terminated inAugust 2021 . Therefore, no interest income was recognized during the three and six months endedJune 30, 2022 .
Further discussion of the fair value of derivatives is set forth in Note 8 to the consolidated financial statements.
Equity
Equity decreased
Off-Balance Sheet Commitments
The Company's off-balance sheet commitments, which primarily consist of
commitments to lend, increased
49
--------------------------------------------------------------------------------Average Balances
The following tables present daily average balance sheets, interest income,
interest expense and the corresponding yields earned and rates paid for the
three and six months ended
(In thousands) Three Months ended June 30,
2022 2021
Average Average
Balance Interest Yield Balance Interest Yield
ASSETS
Interest Earning Assets:
Loans $ 819,532 $ 9,044 4.43 % $ 680,710 $ 7,267 4.28 %
Investments 91,622 575 2.51 % 94,548 477 2.02 %
Cash equivalents and other 34,862 68 0.78 % 69,647 23 0.13 %
Total interest earning
assets 946,016 9,687 4.11 % 844,905 7,767 3.69 %
Cash and due from banks 6,904 2,946
Allowance for loan losses (9,695 ) (10,432 )
OREO - 1,216
Other assets 67,246 60,601
Total Assets $ 1,010,471 $ 899,236
Liabilities
Interest bearing
liabilities:
Deposits $ 576,310 $ 757 0.53 % $ 522,219 $ 623 0.48 %
Borrowings 91,868 747 3.26 % 90,061 741 3.30 %
Senior notes 12,000 210 7.00 % 11,953 228 7.63 %
Subordinated debt 17,942 251 5.61 % 17,905 233 5.22 %
Note Payable and other 703 2 1.14 % 905 4 1.77 %
Total interest bearing
liabilities 698,823 1,967 1.13 % 643,043 1,829 1.14 %
Demand deposits 239,082 184,131
Other liabilities 10,707 7,398
Total Liabilities 948,612 834,572
Shareholders' equity 61,859 64,664
Total Liabilities and
Shareholders' Equity $ 1,010,471 $ 899,236
Net interest income $ 7,720 $ 5,938
Interest margin 3.27 % 2.82 %
Interest spread 2.98 % 2.55 %
50--------------------------------------------------------------------------------
(In thousands) Six Months ended June 30,
2022 2021
Average Average
Balance Interest Yield Balance Interest Yield
ASSETS
Interest Earning Assets:
Loans $ 784,091 $ 16,708 4.30 % $ 691,564 $ 15,010 4.38 %
Investments 97,441 1,210 2.48 % 78,270 821 2.10 %
Cash equivalents and other 37,282 89 0.48 % 67,873 47 0.14 %
Total interest earning
assets 918,814 18,007 3.95 % 837,707 15,878 3.82 %
Cash and due from banks 7,584 2,910
Allowance for loan losses (9,788 ) (10,541 )
OREO - 1,392
Other assets 67,880 60,796
Total Assets $ 984,490 $ 892,264
Liabilities
Interest bearing
liabilities:
Deposits $ 552,734 $ 1,166 0.43 % $ 525,872 $ 1,408 0.54 %
Borrowings 93,542 1,484 3.20 % 90,417 1,474 3.29 %
Senior notes 12,000 420 7.00 % 11,944 457 7.65 %
Subordinated debt 17,938 485 5.45 % 17,900 467 5.26 %
Note Payable and other 730 6 1.66 % 931 8 1.73 %
Total interest bearing
liabilities 676,944 3,561 1.06 % 647,064 3,814 1.19 %
Demand deposits 233,111 172,922
Other liabilities 10,305 7,821
Total Liabilities 920,360 827,807
Shareholders' equity 64,130 64,457
Total Liabilities and
Shareholders' Equity $ 984,490 $ 892,264
Net interest income $ 14,446 $ 12,064
Interest margin 3.17 % 2.90 %
Interest spread 2.89 % 2.63 %
51-------------------------------------------------------------------------------- The following table presents the change in interest-earning assets and interest-bearing liabilities by major category and the related change in the interest income earned and interest expense incurred thereon attributable to the change in transactional volume in the financial instruments and the rates of interest applicable thereto, comparing the three and six months endedJune 30, 2022 and 2021. Three Months ended June 30, Six Months ended June 30, 2022 compared to 2021 2022 compared to 2021 (In thousands) Increase/(Decrease) Increase/(Decrease) Volume Rate Total Volume Rate Total Interest Earning Assets: Loans$ 1,231 $ 546 $ 1,777 $ 1,669 $ 29 $ 1,698 Investments (14 ) 112 98 204 185 389 Cash equivalents and other (11 ) 56 45 (21 ) 63 42 Total interest earning assets 1,206 714 1,920 1,852 277 2,129 Interest bearing liabilities: Deposit 181 (47 ) 134 147 (389 ) (242 ) Borrowings 15 (9 ) 6 51 (41 ) 10 Senior notes 1 (19 ) (18 ) 2 (39 ) (37 ) Subordinated debt - 18 18 - 18 18 Note payable and other (2 ) - (2 ) (2 ) - (2 ) Total interest bearing liabilities 195 (57 ) 138 198 (451 ) (253 ) Net interest income$ 1,011 $ 771 $ 1,782 $ 1,654 $ 728 $ 2,382 RESULTS OF OPERATIONS For the three months endedJune 30, 2022 , interest income and dividend income was$9.7 million , which increased$1.9 million or 24.7% as compared to$7.8 million for the quarter endedJune 30, 2021 . Total interest expense was$2.0 million , which increased$138,000 or 7.5% as compared to$1.8 million for the quarter endedJune 30, 2021 . Net interest income was$7.7 million for the quarter endedJune 30, 2022 , which increased$1.8 million or 30.0% from$5.9 million for the quarter endedJune 30, 2021 . For the six months endedJune 30, 2022 , interest income and dividend income was$18.0 million , which increased$2.1 million or 13.4% as compared to$15.9 million for the six months endedJune 30, 2021 . Total interest expense was$3.6 million , which decreased$253,000 or 6.6% as compared to$3.8 million for the six months endedJune 30, 2021 . Net interest income was$14.4 million for the six months endedJune 30, 2022 , which increased$2.4 million or 19.7% from$12.1 million for the six months endedJune 30, 2021 . The increase in 2022 was primarily due to increase in average loan balances partially offset by an increase in average deposits balances. The net interest margin showed continued improvement, with an increase to 3.27% for the quarter endedJune 30, 2022 , compared with 2.82% for the second quarter of 2021. For the six months endedJune 30, 2022 , the net interest margin increased to 3.17%, compared to 2.90% for the six months endedJune 30, 2021 . Provision for Loan Losses For the three and six months endedJune 30, 2022 , a provision for loan losses of$275,000 was recorded, compared to zero provision for loan losses for the three and six months endedJune 30, 2021 . 52 --------------------------------------------------------------------------------
Non-interest income Non-interest income for the three and six months endedJune 30, 2022 was$798,000 and$1.6 million , respectively, as compared to$753,000 and$1.2 million for the three and six months endedJune 30, 2021 , respectively. The increases were primarily attributable to increased gains on sales of SBA loans along with higher non-interest income from the prepaid card program in the first half of 2022. Non-interest expense Non-interest expense for the three and six months endedJune 30, 2022 increased to$6.5 million and$12.9 million , respectively, as compared to$5.3 million and$10.7 million for the three and six months endedJune 30, 2021 . The non-interest expense in the first half of 2021 included an ERC of$2.0 million , while no ERC was recognized in the first half of 2022. Provision for income taxes The Company reported provision for income taxes of$476,000 and$787,000 for the three and six months endedJune 30, 2022 , respectively, as compared to a provision for income taxes of$383,000 and$702,000 for the three and six months endedJune 30, 2021 , respectively. Liquidity The Company's balance sheet liquidity to total assets ratio was 8.7% atJune 30, 2022 , compared to 11.4% atDecember 31, 2021 . Liquidity including readily available off-balance sheet funding sources was 18.2% atJune 30, 2022 , compared to 21.7% atDecember 31, 2021 . The following categories of assets are considered balance sheet liquidity: cash and due from banks, federal funds sold (if any), short-term investments (if any), loans held for sale, and unpledged available-for-sale securities. In addition, off balance sheet funding sources include collateral based borrowing available from the FHLB, correspondent bank borrowing lines, and brokered deposits subject to internal limitations. Liquidity is a measure of the Company's ability to generate adequate cash to meet its financial obligations. The principal cash requirements of a financial institution are to cover downward fluctuations in deposit accounts. Management believes the Company's liquid assets provide sufficient coverage to satisfy loan demand, cover potential fluctuations in deposit accounts, and to meet other anticipated operational cash requirements. Management manages its capital resources by seeking to maintain a capital structure that will ensure an adequate level of capital to support anticipated asset growth and absorb potential losses while effectively leveraging capital to enhance profitability and return to shareholders. Dividends have not been paid to shareholders since 2020, but may resume in future periods.
The primary source of liquidity at the Company is returns of capital from the Bank. These capital returns are subject to OCC approval and are needed periodically to provide funds needed to service debt payments at the Company.
Capital InSeptember 2019 , the community bank leverage ratio (CBLR) framework was jointly issued by theFDIC , OCC and FRB. The final rule gives qualifying community banks the option to use a simplified measure of capital adequacy instead of risk based capital, beginning with theirMarch 31, 2020 Call Report. Under the final rule a community bank may qualify for the CBLR framework if it has a Tier 1 leverage ratio of greater than 9%, less than$10 billion in total consolidated assets, and limited amounts of off-balance sheet exposures and trading assets and liabilities. InSeptember 2021 , the Bank adopted the CBLR framework. The Bank's Tier 1 leverage ratio as ofJune 30, 2022 andDecember 31, 2021 was 9.44% and 9.86%, respectively, which is above the well-capitalized required level of 9.0%.
Management continuously assesses the adequacy of the Bank's capital with the goal to maintain a "well capitalized" classification.
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--------------------------------------------------------------------------------IMPACT OF INFLATION AND CHANGING PRICES
The Company's consolidated financial statements have been prepared in terms of historical dollars, without considering changes in the relative purchasing power of money over time due to inflation. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institution's performance than the effect of general levels of inflation. Interest rates do not necessarily move in the same direction or with the same magnitude as the prices of goods and services. Notwithstanding this, inflation can directly affect the value of loan collateral, in particular, real estate. Inflation, deflation or disinflation could significantly affect the Company's earnings in future periods.
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