EXHIBIT 99.2
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September 30, 2021 | QUARTERLY REPORT |
Dear Shareholder:
We commented in our second quarter letter that we had reached somewhat of a turning point in the COVID-19 pandemic and during the third quarter economic activity returned to pre-pandemic levels as measured by U.S. gross domestic product. The numbers tell a positive story in the face of ongoing supply chain disruptions and labor force challenges, as well as the unresolved debate in Congress regarding infrastructure and additional spending. Stresses in the economy have produced inflation that now appears to be more than transitory and market rates increased as the Federal Reserve signaled it may begin to tighten monetary policy sooner than previously anticipated. The possibility of higher interest rates is a mixed bag for the equity markets, although bank stocks generally benefit from upward rate movements and a steeper yield curve.
Third quarter business activity at C&N continued a solid trend as commercial lending pipelines picked up, residential mortgage production remained above long-term averages, and assets under management of $1.18 billion in our wealth management business were essentially unchanged. C&N has a very strong liquidity position, so we are focused on generating additional core deposit relationships and managing the overall cost of funds while our teams work to increase loans outstanding as the economy normalizes. We gained traction in this effort as net loans outstanding excluding PPP loans on September 30, 2021 increased $25 million from June 30, 2021 levels. PPP loan forgiveness totaled $48 million during the quarter and we expect that most of the remaining PPP balances of $63 million will be forgiven during the fourth quarter 2021 or early 2022.
Earnings for the third quarter 2021 were $7.4 million, or $.47 per share compared to $2.8 million, or $.18 per share during the third quarter of 2020. After adjusting for merger related expenses, net income for the second quarter of 2020 was $7.9 million, or $.50 per share. The Covenant acquisition continues to impact C&N’s profile and performance metrics when compared to last year. Net interest income for the third quarter of $19.46 million was $177,000 higher than 2020 despite a $113.7 million reduction in average loans outstanding. The net interest margin was 3.59% for the quarter compared to 3.57% a year earlier. The ongoing low interest rate environment, and higher than normal average balance of lower-yielding deposits with the Federal Reserve and other banks, continue to put pressure on the net interest margin.
The provision for loan losses was $1,530,000 in the third quarter compared to $1,941,000 in the third quarter of 2020. In each of these quarters, the provision was impacted by a charge-off on one commercial loan. Overall, C&N’s credit metrics have remained stable throughout the pandemic as reflected in past due, non-performing loans, and troubled debt restructuring (TDR) balances. As of September 30, 2021, no loans remain in deferral status to support clients impacted by COVID-19.
Noninterest income for the third quarter of 2021 was $6.3 million, a decrease of $611,000 from the third quarter 2020 total. While revenue from loan servicing, wealth management, deposit service charges and interchange fees increased, they were more than offset by a reduction in net gains from sale of loans due to lower volumes and a decrease in income from life insurance.
Noninterest expenses, excluding merger related costs, of $15.4 million increased $698,000 during the third quarter 2021 compared to a year earlier. Salaries and employee benefits costs related to the Covenant acquisition, as well as other lending, information technology and administrative staff additions needed to accommodate growth, were the primary drivers of this increase.
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Earnings for the nine months ended September 30, 2021 were $23.25 million, or $1.46 per share, compared to $12.45 million, or $.86 per share in 2020. Excluding merger related expenses, net income for the first nine months of 2020 would be $18.44 million, or $1.27 per share. Similar to the quarterly comparisions, the impact of the Covenant acquisition is evident in assessing performance through three quarters of this year compared to 2020 including the growth in net interest income and noninterest expenses. For the nine months ended September 30, 2021, noninterest income was up $1.7 million from the total for the first nine months of 2020, reflecting growth in loan servicing fees, trust revenue and interchange revenue, while net gains from sales of mortgage loans declined. The provision for loan losses of $2.53 million for the nine months ended September 30, 2021 was $760,000 lower than the comparable amount for the first nine months of 2020 as charges related to specific loans were lower in the current year.
C&N continues to perform at a high level and sustain the company’s risk profile, a consistent story from quarter to quarter. This consistency results from our ongoing mission to create value for our customers, communities, and C&N team members. And it has produced a capacity to seek continued growth that will create value for our shareholders. Leveraging our capital while meeting our internal guidelines and all regulatory requirements to be considered well capitalized remains an ongoing focus.
As announced in March, C&N amended its existing stock repurchase program to authorize the repurchase of up to 1,000,000 shares, or 6.25% of the issued and outstanding shares as of February 18, 2021. In the third quarter of 2021, 230,404 shares were repurchased at a total cost of $5,707,000, or an average price of $24.77 per share. Cumulatively through September 30, 2021, 292,100 shares have been repurchased for a total cost of $7,238,000 at an average price of $24.78 per share. Activating the repurchase program allows management to manage total capital and shares outstanding to support growth in return on equity and earnings per share which are ultimately key drivers of our stock price.
Another key to supporting shareholder value is C&N’s cash dividend. Consistent with the second quarter payout, the Board declared a regular quarterly cash dividend of $.28 per share payable to shareholders of record on November 1, 2021, payable November 12, 2021. On an annualized basis, the dividend yield is 4.39% based on the September 30, 2021 market price of $25.26.
In closing, I want to express my appreciation and respect for the C&N Team and their efforts to build relationships and create value through serving our customers and communities throughout 2021. We have faced challenging times throughout our bank’s long history and challenges always reveal the character of a team. These times have been uniquely difficult and complex, and I remain proud of this group’s persistent response and capacity to turn adversity into opportunity. Their efforts are positioning C&N to create greater long-term value for you, our shareholders.
Thank you for your ongoing support!
J. Bradley Scovill
President and CEO
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CONDENSED, CONSOLIDATED EARNINGS INFORMATION
(Dollars In Thousands, Except Per Share Data) (Unaudited)
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| 3RD |
| 3RD |
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| | QUARTER | | QUARTER | | | | | |
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| | 2021 | | 2020 | | | | | |
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| | (Current) | | (Prior Year) | | $ Incr. (Decr.) | | % Incr. (Decr.) |
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Interest and Dividend Income | | $ | 21,073 | | $ | 21,751 | | $ | (678) |
| (3.12) | % |
Interest Expense | |
| 1,614 | |
| 2,469 | |
| (855) |
| (34.63) | % |
Net Interest Income | |
| 19,459 | |
| 19,282 | |
| 177 |
| 0.92 | % |
Provision for Loan Losses | |
| 1,530 | |
| 1,941 | |
| (411) |
| (21.17) | % |
Net Interest Income After Provision for Loan Losses | |
| 17,929 | |
| 17,341 | |
| 588 |
| 3.39 | % |
Noninterest Income | |
| 6,359 | |
| 6,970 | |
| (611) |
| (8.77) | % |
Net Gains on Available-for-sale Debt Securities | |
| 23 | |
| 25 | |
| (2) |
| (8.00) | % |
Merger-Related Expenses | |
| 0 | |
| 6,402 | |
| (6,402) |
| (100.00) | % |
Other Noninterest Expenses | |
| 15,346 | |
| 14,648 | |
| 698 |
| 4.77 | % |
Income Before Income Tax Provision | |
| 8,965 | |
| 3,286 | |
| 5,679 |
| 172.82 | % |
Income Tax Provision | |
| 1,566 | |
| 438 | |
| 1,128 |
| 257.53 | % |
Net Income | | $ | 7,399 | | $ | 2,848 | | $ | 4,551 |
| 159.80 | % |
Net Income Attributable to Common Shares (1) | | $ | 7,336 | | $ | 2,830 | | $ | 4,506 |
| 159.22 | % |
PER COMMON SHARE DATA: | |
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Net Income - Basic | | $ | 0.47 | | $ | 0.18 | | $ | 0.29 |
| 161.11 | % |
Net Income - Diluted | | $ | 0.47 | | $ | 0.18 | | $ | 0.29 |
| 161.11 | % |
Dividend Per Share | | $ | 0.28 | | $ | 0.27 | | $ | 0.01 |
| 3.70 | % |
Number of Shares Used in Computation - Basic | |
| 15,703,932 | |
| 15,778,391 | |
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Number of Shares Used in Computation - Diluted | |
| 15,710,345 | |
| 15,779,721 | |
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CONDENSED, CONSOLIDATED EARNINGS INFORMATION
(Dollars In Thousands, Except Per Share Data) (Unaudited)
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| | NINE MONTHS ENDED | | | | | |
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| | September 30, | | | | | |
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| | 2021 | | 2020 | | | | | |
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| (Current) |
| (Prior Year) |
| $ Incr. (Decr.) |
| % Incr. (Decr.) |
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Interest and Dividend Income | | $ | 63,255 | | $ | 55,301 | | $ | 7,954 |
| 14.38 | % |
Interest Expense | |
| 5,032 | |
| 7,491 | |
| (2,459) |
| (32.83) | % |
Net Interest Income | |
| 58,223 | |
| 47,810 | |
| 10,413 |
| 21.78 | % |
Provision for Loan Losses | |
| 2,533 | |
| 3,293 | |
| (760) |
| (23.08) | % |
Net Interest Income After Provision for Loan Losses | |
| 55,690 | |
| 44,517 | |
| 11,173 |
| 25.10 | % |
Noninterest Income | |
| 19,441 | |
| 17,779 | |
| 1,662 |
| 9.35 | % |
Net Gains on Available-for-sale Debt Securities | |
| 25 | |
| 25 | |
| 0 |
| 0.00 | % |
Merger-Related Expenses | |
| 0 | |
| 7,526 | |
| (7,526) |
| (100.00) | % |
Other Noninterest Expenses | |
| 46,454 | |
| 39,834 | |
| 6,620 |
| 16.62 | % |
Income Before Income Tax Provision | |
| 28,702 | |
| 14,961 | |
| 13,741 |
| 91.85 | % |
Income Tax Provision | |
| 5,456 | |
| 2,509 | |
| 2,947 |
| 117.46 | % |
Net Income | | $ | 23,246 | | $ | 12,452 | | $ | 10,794 |
| 86.68 | % |
Net Income Attributable to Common Shares (1) | | $ | 23,057 | | $ | 12,378 | | $ | 10,679 |
| 86.27 | % |
PER COMMON SHARE DATA: | |
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Net Income - Basic | | $ | 1.46 | | $ | 0.86 | | $ | 0.60 |
| 69.77 | % |
Net Income - Diluted | | $ | 1.46 | | $ | 0.86 | | $ | 0.60 |
| 69.77 | % |
Dividend Per Share | | $ | 0.83 | | $ | 0.81 | | $ | 0.02 |
| 2.47 | % |
Number of Shares Used in Computation - Basic | |
| 15,806,897 | |
| 14,388,797 | |
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Number of Shares Used in Computation - Diluted | |
| 15,813,129 | |
| 14,393,429 | |
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(1) | Basic and diluted net income per common share are determined based on net income less earnings allocated to nonvested restricted shares with nonforfeitable dividends. |
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CONDENSED, CONSOLIDATED BALANCE SHEET DATA
(Dollars In Thousands) (Unaudited)
| | | | | | | | | | | | |
| | September 30, | | September 30, | | September 30, 2021 vs 2020 |
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| 2021 |
| 2020 |
| $ Incr. (Decr.) |
| % Incr. (Decr.) |
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ASSETS | | | | | | | | | | | | |
Cash & Due from Banks | | $ | 198,995 | | $ | 174,478 | | $ | 24,517 |
| 14.05 | % |
Available-for-sale Debt Securities | |
| 437,857 | |
| 340,545 | |
| 97,312 |
| 28.58 | % |
Loans, Net | |
| 1,563,008 | |
| 1,680,617 | |
| (117,609) |
| (7.00) | % |
Bank-Owned Life Insurance | | | 30,530 | | | 29,942 | | | 588 | | 1.96 | % |
Bank Premises and Equipment, Net | | | 20,526 | | | 21,504 | | | (978) | | (4.55) | % |
Intangible Assets | |
| 55,955 | |
| 56,585 | |
| (630) |
| (1.11) | % |
Other Assets | |
| 48,025 | |
| 49,122 | |
| (1,097) |
| (2.23) | % |
TOTAL ASSETS | | $ | 2,354,896 | | $ | 2,352,793 | | $ | 2,103 |
| 0.09 | % |
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LIABILITIES | |
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Deposits | | $ | 1,940,141 | | $ | 1,871,514 | | $ | 68,627 |
| 3.67 | % |
Borrowed Funds - Federal Home Loan Bank and Repurchase Agreements | |
| 40,555 | |
| 143,657 | |
| (103,102) |
| (71.77) | % |
Senior Notes, Net | | | 14,685 | | | 0 | | | 14,685 |
| | % |
Subordinated Debt, Net | |
| 32,988 | |
| 16,572 | |
| 16,416 |
| 99.06 | % |
Other Liabilities | |
| 27,125 | |
| 24,734 | |
| 2,391 |
| 9.67 | % |
TOTAL LIABILITIES | |
| 2,055,494 | |
| 2,056,477 | |
| (983) |
| (0.05) | % |
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STOCKHOLDERS' EQUITY | |
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Common Stockholders' Equity, Excluding Accumulated | |
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Other Comprehensive Income | |
| 292,997 | |
| 284,707 | |
| 8,290 |
| 2.91 | % |
Accumulated Other Comprehensive Income: | |
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Net Unrealized Gains on Available-for-sale Debt Securities | |
| 6,300 | |
| 11,376 | |
| (5,076) |
| (44.62) | % |
Defined Benefit Plans | |
| 105 | |
| 233 | |
| (128) |
| (54.94) | % |
TOTAL STOCKHOLDERS' EQUITY | |
| 299,402 | |
| 296,316 | |
| 3,086 |
| 1.04 | % |
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY | | $ | 2,354,896 | | $ | 2,352,793 | | $ | 2,103 |
| 0.09 | % |
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