(EDGAR Online via COMTEX) -- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward Looking Statements Statements contained in this Quarterly Report on Form 10-Q (this "Report") that are not historical facts or that discuss our expectations, beliefs or views regarding our future operations or future financial performance, or financial or other trends in our business or in the markets in which we operate, and our future plans, including the credit exposure of certain loan products and other components of our business that could be impacted by the COVID-19 pandemic, constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. Often, they include words such as "believe," "expect," "anticipate," "intend," "plan," "estimate," "project," "forecast," or words of similar meaning, or future or conditional verbs such as "will," "would," "should," "could," or "may." The information contained in such forward-looking statements is based on current information available to us and on assumptions that we make about future economic and market conditions and other events over which we do not have control. In addition, our business and the markets in which we operate are subject to a number of risks and uncertainties. Such risks and uncertainties, and the occurrence of events in the future or changes in circumstances that had not been anticipated, could cause our financial condition or actual operating results in the future to differ materially from our expected financial condition or operating results that are set forth in the forward-looking statements contained in this Report and could, therefore, also affect the price performance of our shares. In addition to the risk of incurring loan losses and provision for loan losses, which is an inherent risk of the banking business, these risks and uncertainties include, but are not limited to, the following: deteriorating economic conditions and macroeconomic factors such as unemployment rates and the volume of bankruptcies, as well as changes in monetary, fiscal or tax policy to address the impact of COVID-19, any of which could cause us to incur additional loan losses and adversely affect our results of operations in the future; the risk that the credit quality of our borrowers declines; potential declines in the value of the collateral for secured loans; the risk that steps we have taken to strengthen our overall credit administration are not effective; the risk of a recession in the United States economy, and domestic or international economic conditions, which could cause us to incur additional loan losses and adversely affect our results of operations in the future; the risk that our interest margins and, therefore, our net interest income will be adversely affected by changes in prevailing interest rates; the risk that we will not succeed in further reducing our remaining nonperforming assets, in which event we would face the prospect of further loan charge-offs and write-downs of other real estate owned and would continue to incur expenses associated with the management and disposition of those assets; the risk that we will not be able to manage our interest rate risks effectively, in which event our operating results could be harmed; the prospect of changes in government regulation of banking and other financial services organizations, which could impact our costs of doing business and restrict our ability to take advantage of business and growth opportunities; the risk that our efforts to develop a robust commercial banking platform may not succeed; and the risk that we may be unable to realize our expected level of increasing deposit inflows. Many of the foregoing risks and uncertainties are, and will be, exacerbated by the COVID-19 pandemic and any worsening of the global business and economic environment as a result. Readers of this Report are encouraged to review the additional information regarding these and other risks and uncertainties to which our business is subject that is contained in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2019 (the "2019 Form 10-K") that we filed with the Securities and Exchange Commission ("SEC") on March 9, 2020, as such information may be updated from time to time in subsequent Quarterly Reports on Form 10-Q that we file with the SEC. We urge you to read those risk factors in conjunction with your review of the following discussion and analysis of our results of operations for the three and nine months ended, and our financial condition at, September 30, 2020. Due to the risks and uncertainties we face, readers are cautioned not to place undue reliance on the forward-looking statements contained in this Report, which speak only as of the date of this Report, or to make predictions about future performance based solely on historical financial performance. We also disclaim any obligation to update forward-looking statements contained in this Report as a result of new information, future events or otherwise, except as may otherwise be required by law.
Results of Operations Operating Results for the Three and Nine Months Ended September 30, 2020 and 2019 Our operating results for the three and nine months ended September 30, 2020, compared to the same period in September 30, 2019, were as follows: Three Months Ended September Nine Months Ended September 30, 2020 vs. 2019 30, 2020 vs. 2019 2020 2019 % Change 2020 2019 % Change (Dollars in thousands) Interest income $ 16,016 $ 16,767 (4.5) % $ 46,364 $ 49,399 (6.1) % Interest expense 1,762 4,024 (56.2) % 7,320 12,387 (40.9) % Provision for loan and lease losses - 2,100 N/A 9,050 5,400 67.6 % Noninterest income 2,245 1,342 67.3 % 4,510 4,219 6.9 % Noninterest expense 9,275 9,697 (4.4) % 27,925 28,388 (1.6) % Income tax expense 2,138 658 224.9 % 1,948 2,204 (11.6) % Net income (loss) 5,086 1,630 212.0 % 4,631 5,239 (11.6) %
Nine Months Ended September 30, 2020 and 2019 Total interest income decreased 6.1% to $46.4 million for the nine months ended September 30, 2020 from $49.4 million for the nine months ended September 30, 2019. This was primarily due to a $3.5 million, or 79.9%, decrease in interest income on short-term investments for the nine months ended September 30, 2020 as compared to the same prior year period. During the nine months ended September 30, 2020 and 2019, interest income on loans was $44.8 million and $44.2 million, respectively, yielding 4.77% and 5.46% on average loan balances of $1.25 billion and $1.08 billion, respectively. The increase in the average loan balances is primarily attributable to the execution of PPP during the nine months ended September 30, 2020. Loan interest income increased despite the decrease in yield as a result of fee income from PPP loans included in interest income. The decrease in average short-term investment and loan yield is primarily attributable to the Federal Reserve Board cutting short-term interest rates by 225 basis points throughout the course of the year from August 1, 2019 through
Nine Months Ended September 30, 2020 and 2019 Total interest expense decreased 40.9% to $7.3 million for the nine months ended September 30, 2020 from $12.4 million for the nine months ended September 30, 2019. The decrease was primarily due to a decrease in our cost of funds from 1.89% at September 30, 2019 to 1.10% at September 30, 2020, partially offset by an increase in the average balance of interest-bearing liabilities of $874.0 million at September 30, 2019 to $887.3 million at September 30, 2020, which consisted of deposits, borrowings and junior subordinated debentures. Our cost of funds decreased as a result of the actions of the Federal Reserve Board to cut short-term interest rates by 75 basis points throughout the year 2019 and 150 basis points during the first quarter of 2020 in response to the outbreak of COVID. The increase in our average balance of interest-bearing liabilities is primarily the result of an increase in our FHLB. Interest expense on our certificates of deposit for the nine months ended September 30, 2020 and 2019 was $4.1 million and $4.4 million, respectively, with a cost of funds of 2.11% and 2.21% on average balances of $258.5 million and $264.6 million, respectively.
Three Months Ended September 30, 2020 2019 Interest Average Interest Average Average Earned/ Yield/ Average Earned/ Yield/ Balance Paid Rate Balance Paid Rate (Dollars in thousands) Interest-earning assets Short-term investments(1) $ 349,716 $ 94 0.11 % $ 263,219 $ 1,465 2.21 % Securities available for sale and stock(2) 34,852 222 2.53 % 35,105 257 2.90 % Loans(3) 1,312,502 15,700 4.76 % 1,097,646 15,045 5.44 % Total interest-earning assets 1,697,070 16,016 3.75 % 1,395,970 16,767 4.77 % Noninterest-earning assets Cash and due from banks 19,058 16,551 All other assets 23,443 25,295 Total assets $ 1,739,571 $ 1,437,816 Interest-bearing liabilities: Interest-bearing checking accounts $ 110,934 $ 28 0.10 % $ 111,614 $ 163 0.58 % Money market and savings accounts 417,123 357 0.34 % 432,397 1,904 1.75 % Certificates of deposit 239,219 1,131 1.88 % 259,830 1,562 2.39 % Other borrowings 73,419 115 0.62 % 28,804 177 2.44 % Junior subordinated debentures 17,527 131 2.97 % 17,527 218 4.93 % Total interest bearing liabilities 858,222 1,762 0.82 % 850,172 4,024 1.88 % Noninterest bearing liabilities Demand deposits 709,391 421,524 Accrued expenses and other liabilities 19,123 17,739 Shareholders' equity 152,835 148,381 Total liabilities and shareholders' equity $ 1,739,571 $ 1,437,816 Net interest income $ 14,254 $ 12,743 Net interest income/spread 2.93 % 2.89 % Net interest margin 3.34 % 3.62 %
(1)Short-term investments consist of Federal Funds sold and interest bearing deposits that we maintain at other financial institutions.
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Nine Months Ended September 30, 2020 2019 Interest Average Interest Average Average Earned/ Yield/ Average Earned/ Yield/ Balance Paid Rate Balance Paid Rate (Dollars in thousands) Interest-earning assets Short-term investments(1) $ 297,636 $ 894 0.40 % $ 253,058 $ 4,439 2.35 % Securities available for sale and stock(2) 35,231 693 2.63 % 37,047 808 2.92 % Loans(3) 1,253,805 44,777 4.77 % 1,080,278 44,152 5.46 % Total interest-earning assets 1,586,672 46,364 3.90 % 1,370,383 49,399 4.82 % Noninterest-earning assets Cash and due from banks 17,490 15,741 All other assets 25,540 26,845 Total assets $ 1,629,702 $ 1,412,969 . . .
Nov 06, 2020
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