LINKBANCORP, INC. This discussion and analysis reflects the Company's audited consolidated financial statements and other relevant statistical data and is intended to enhance your understanding of the Company's consolidated financial condition and results of operations. This Management's Discussion and Analysis is presented in the following sections: • Partners Merger • Completion ofGratz Merger •
Completion of Initial Public Offering
• Overview and Strategy • Recent Market Conditions •
Comparison of Financial Condition at
•
Comparison of Operating Results for the Year Ended
•
Liquidity, Commitments, and Capital Resources
•
Off-Balance Sheet Arrangements
•
Critical Accounting Estimates
•
Recently Issued Accounting Standards
Partners Merger
OnFebruary 22, 2023 ,LINKBANCORP and Partners Bancorp entered into the Merger Agreement that provides that Partners Bancorp will merge with and intoLINKBANCORP , withLINKBANCORP as the surviving corporation (the "Partners Merger"). Partners Bancorp shareholders will receive 1.15 shares ofLINKBANCORP common stock for each Partners Bancorp share they own. Following the Partners Merger, Partners Bancorp's two bank subsidiaries,The Bank of Delmarva andVirginia Partners Bank , will merge with and intoLINKBANK , withLINKBANK remaining as the surviving bank (the "Bank Mergers"). The completion of the Partners Merger and the Bank Mergers is subject to customary closing conditions, including approval by bothLINKBANCORP and Partners Bancorp shareholders and the receipt of regulatory approvals. The Partners Merger is expected to close in the third quarter of 2023. In connection with the announcement of the Partners Merger,LINKBANCORP completed a private placement of$10.0 million with certain directors ofLINKBANCORP as well as other accredited investors.
Completion of
OnSeptember 18, 2021 ,LINKBANCORP completed its merger withGNB Financial Services, Inc. (the "Gratz Merger"), withLINKBANCORP as the surviving corporation. Immediately following the Gratz Merger,LINKBANK , a wholly-owned subsidiary ofLINKBANCORP , merged with and intoThe Gratz Bank , a wholly-owned subsidiary of GNBF, withThe Gratz Bank as the surviving bank. EffectiveNovember 4, 2022 ,The Gratz Bank legally changed its name and began to operate under one brand under the nameLINKBANK . As described in Note 2. "Merger" in the Notes to the Audited Consolidated Financial Statements, the Gratz Merger has been accounted for as a reverse acquisition and, accordingly, the historical financial information of the Company for all periods prior toSeptember 18, 2021 is that of GNBF and Subsidiaries. For all periods beginning onSeptember 18, 2021 and thereafter, the financial information is that of the combined company. See Note 2. "Merger" in the Notes to the Audited Consolidated Financial Statements for further information.
Completion of Initial Public Offering
InSeptember 2022 , the Company completed its initial public offering ("IPO") whereby it issued and sold 5,101,205 shares of common stock at a public offering price of$7.50 per share. The Company received net proceeds of$34.7 million after deducting underwriting discounts and commissions of$2.5 million and other offering expenses of$1.1 million . The Company plans to use the proceeds to support the Bank's current growth, its future growth initiatives, and for general corporate purposes. The Company's common stock now trades on the Nasdaq Capital Market under the symbol "LNKB."
Overview and Strategy
The Company's core strategy is to further its mission of "positively impacting
lives" through community banking by building strong relationships that bring
value to its customers, employees, the communities it serves and its
shareholders. In pursuing this mission, the Company specifically desires to
invest in the development of strong future leaders for the banking industry and
our communities, to
33
--------------------------------------------------------------------------------contribute to economically and socially flourishing communities, and to demonstrate the continued viability and integral role of community banking for our economic and social development.
The Company operates primarily through its sole subsidiary,LINKBANK (the "Bank"), which provides traditional lending, deposit gathering and cash services to retail customers, small businesses and nonprofit organizations. The Bank focuses its lending activities on small businesses, targeted to create a diverse loan portfolio in relation to its underlying collateral and different business segments with unique cash flow generation and varied interest rate sensitivity. The Bank offers a full suite of deposit products and cash management services focused on the small business and nonprofit segments. Our revenues consist primarily of interest income earned on loans and investments. Interest income is partially offset by interest expense incurred on deposits, borrowings and other interest-bearing liabilities. Net interest income is affected by the balances of interest-earning assets and interest-bearing liabilities and their relative interest rates. Net interest income is typically further reduced by a provision for loan losses. Non-interest income also contributes to our operating results, consisting of service charges on deposit accounts, earnings on bank-owned life insurance, revenue from the sale of residential mortgage loans to the secondary market and related servicing fees and gains on sales of securities. Non-interest expenses, which include salaries and employee benefits, occupancy and equipment costs, data processing, professional fees,FDIC insurance and other general and administrative expenses, are the Company's primary expenditures incurred as a result of operations. Financial institutions, in general, are significantly affected by economic conditions, competition, and the monetary and fiscal policies of the federal government. Lending activities are influenced by the demand for and supply of housing and commercial real estate, competition among lenders, interest rate conditions, and funds availability. Our operations and lending are concentrated inSouth Central Pennsylvania inDauphin ,Chester ,Cumberland ,Lancaster ,Northumberland , andSchuylkill Counties, and are influenced by local economic conditions. Deposit balances and cost of funds are influenced by prevailing market rates on competing investments, customer preferences, and levels of personal income and savings in our primary market area. Operations are also significantly impacted by government policies and actions of regulatory authorities. Future changes in applicable law, regulations or government policies may materially impact the Company.
Recent Market Conditions
The Company's financial condition and performance are all highly dependent on the business environment in the market area in which we operate and inthe United States as a whole. During the first quarter of 2020, there was an outbreak of a novel strain of coronavirus (COVID-19) which spread to numerous countries around the world, includingthe United States , while becoming a global pandemic. As the spread of COVID-19 increased during the first and second quarters of 2020, federal, state, and local governments implemented various restrictive measures such as quarantines, restrictions on travel, school closings, "stay at home" rules and restrictions on certain business operations. These restrictions were lifted as people had begun to gain access to vaccines during the fourth quarter of 2020. Throughout the first half of 2021, the COVID-19 pandemic continued to negatively affect our economy but started to wane towards the end of the second quarter only to see a national resurgence in cases duringJuly 2021 andDecember 2021 as a result of variant strains of COVID-19. Primarily throughout 2020, the aforementioned restrictions had adversely affected the economy on a national, state, and local level, including the geographical areas in which the Company operates. As we progressed through 2021, especially during the second half of 2021, our economy benefited from reduced business and travel restrictions as the national and local impact of COVID-19 lessened. The impact of COVID-19 has continued to decrease throughout 2022, with even fewer restrictions and an increasing demand for travel. The US GDP expanded by 2.1% in 2022, slowing from a 5.9% expansion in 2021 as the economy returned to a more normal pace of growth after pandemic-related disruptions in the previous two years. In 2022, the positive contributions came from consumer spending, exports, private inventory investment, and nonresidential fixed investment that were partly offset by decreases in residential fixed investment and federal government spending. 2022 was in many ways another year of upheaval not seen in decades. The impact of the COVID-19 pandemic may be fading, however challenges to the macroeconomic environment continue to persist for example, continuing global supply-chain disruptions, global central bank tightening, and geopolitical concerns such as the ongoingRussia -Ukraine war. These challenges can be coupled with internal matters affecting companies, such as employee retention, employee working arrangements, and cost management related to inflation at 40-year highs. In response to four-decade-high inflation, theFederal Reserve raised its key benchmark rate by 425 basis points during 2022. CPI inflation reached 9.1% inJune 2022 , before slowing to 6.5% near the end of the year. The Russian invasion ofUkraine elevated commodity prices and exacerbated global supply chain problems in the first six months of the year. By the end of the year, while headline inflation momentum was slowing, core service inflation was not, suggesting the Fed's inflation fight is not yet over. The labor market showed remarkable resilience in 2022, remaining historically tight even in the face of high inflation and rising interest rates. Job growth slowed throughout 2022 but remains very strong by pre-pandemic standards. Robust job gains and elevated wage pressures kept consumer spending high, underpinning stubborn service inflation. 34 -------------------------------------------------------------------------------- Mortgage rates rose on Fed tightening, reaching 7.1% inOctober 2022 before falling to 6.3% at year-end. Rising mortgage rates and elevated pandemic driven house prices caused home sales to fall significantly in 2022. Nonetheless, pent-up demand for new homes and other consumer products such as automobiles kept aggregate spending relatively high. The S&P 500 fell 19.4% during 2022 and the 10-year UST yield rose 237 basis points. The increase in bond yields have caused large unrealized losses and negative effects on equity through accumulated other comprehensive income ("AOCI") as the banking industry has an estimated$310 billion of negative AOCI. Deposits and liquid assets declined for the first time since 2019 while the cost of funding increased. Declining liquidity in a period of rising rates could have an impact on earnings and capital if a bank needs to liquidate securities. DuringMarch 2023 , theFDIC placed bothSilicon Valley Bank and Signature Bank under receivership marking the second and third largest bank failures inU.S. history. These failures underscore the importance of proper risk management programs and liquidity planning within the banking industry. The heightened focus on liquidity across the banking industry will continue to add to the already increasing competition for deposits as a source of core balance sheet funding, which is expected to cause the cost of funds at banks to continue to rise in the near term. Should financial institutions experience shortfalls in core funding, alternative sources of liquidity would most likely cause a further increase in funding costs, placing additional pressure on overall bank profitability across the sector.
Comparison of Financial Condition at
Total assets atDecember 31, 2022 , were$1.16 billion , an increase of$230.9 million , or 24.8%, from$932.8 million atDecember 31, 2021 . The increase in total assets was primarily due to the increases in loans receivable of$213.1 million , from$714.8 million atDecember 31, 2021 to$927.9 million atDecember 31, 2022 and securities held to maturity of$31.8 million , from zero atDecember 31, 2021 to$31.8 million atDecember 31, 2022 . These increases were offset by a decrease in securities available for sale of$25.0 million . Cash and cash equivalents increased$7.4 million , or 32.9%, from$22.6 million atDecember 31, 2021 to$30.0 million atDecember 31, 2022 . The increase was primarily due to: Primary Cash Inflows •
Cash provided by operating activities of
•
Net increase in deposits of
•
Proceeds from the IPO of
•
Proceeds from the issuance of subordinated debt of
•
Net cash from investment securities (sales, calls, maturities, and principal
repayments) of
•
Proceeds from redemption of certificates of deposits with other banks of
Primary Cash Outflows
•
Net increase in loans receivable of
•
Purchase of investment securities held to maturity of
•
Payment of dividends of
Securities available-for-sale decreased by$25.0 million , or 24.1%, to$78.8 million atDecember 31, 2022 from$103.8 million atDecember 31, 2021 . The decrease was primarily due to return of principal of$11.9 million and the changes in fair value. The securities available-for-sale portfolio had a net unrealized loss of$8.1 million atDecember 31, 2022 compared with a net unrealized gain of$2.3 million atDecember 31, 2021 . Also contributing to the decrease in securities available-for-sale were proceeds from calls and maturities of$1.2 million , and proceeds from sales of$513 thousand . The proceeds from available-for-sale securities sales and the net return of principal repayments were reinvested in 2022 into investment securities classified as held to maturity.
The following table summarizes the maturity distribution schedule with
corresponding weighted-average yields of securities available for sale and
held-to-maturity as of
35
--------------------------------------------------------------------------------basis using a tax rate of 21%. Mortgage-backed securities are included in maturity categories based on their contractual maturity date. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations.
Within 1 Year 1-5 Years 5-10 Years After 10 Years Total
Weighted Weighted Weighted Weighted Weighted
Average Average Average Average Average
(in thousands) Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
Available for Sale:
Small Business
Administration loan pools $ - - $ - - $ 519 3.73% $ 324 1.82% $ 843 3.00%
Obligations of state and
political subdivisions 50 3.00% 5,792 2.90% 11,635 2.94% 22,692 3.44% 40,169 3.22%
Mortgage-backed securities
in government-sponsored
entities - - 663 2.03% 9,734 1.58% 27,404 1.54% 37,801 1.56%
$ 50 3.00% $ 6,455 2.81% $ 21,888 2.35% $ 50,420 2.38% $ 78,813 2.41%
Held to Maturity:
Corporate debentures $ - - $ 3,000 4.38% $ 11,993 5.02% $ - - $ 14,993 4.89%
Structured mortgage-backed
securities - - - - - - 16,829 4.14% 16,829 4.14% Total $ - -$ 3,000 4.38%$ 11,993 5.02%$ 16,829 4.14%$ 31,822 4.49%
In 2022, the Company purchased investment securities classified as held to
maturity of
Net loans receivable increased during the year endedDecember 31, 2022 as shown in the table below: December 31, December 31, (dollars in thousands) 2022 2021 Change % Agriculture loans$ 15,591 $ 9,341 $ 6,250 66.91 % Commercial loans 103,874 98,604 5,270 5.34 Paycheck Protection Program ("PPP") loans 881 23,774 (22,893 ) (96.29 ) Commercial real estate loans 540,914 338,749 202,165 59.68 Residential real estate loans 250,832 231,302 19,530 8.44 Consumer loans 10,057 7,087 2,970 41.91 Municipal loans 5,466 6,182 (716 ) (11.58 ) Total Loans 927,615 715,039 212,576 29.73 Deferred costs (fees) 256 (223 ) 479 (214.80 )
Allowance for loan losses (4,666 ) (3,152 ) (1,514 ) 48.03 Net Loans$ 923,205 $ 711,664 $ 211,541 29.72 %
The majority of the loan growth in net loans resulted from a
36
--------------------------------------------------------------------------------
The following table presents the maturity distribution of our loan portfolio at
December 31, 2022 . The table further presents the breakdown of our loans between
those loans that earn interest at a fixed interest rate and those loans that
earn an interest rate that currently fluctuates in accordance with changes to a
specific interest rate index.
Due in One After One After Five After Total due
Year or but Within but Within Fifteen after One
(In Thousands) Less Five Years Fifteen Years Years Year Total
Agriculture loans $ 567 $ 1,164 $ 7,539 $ 6,322 $ 15,025 $ 15,591
Commercial loans 12,591 28,939 16,172 46,172 91,283 103,874
Paycheck Protection - 881 - - 881 881
Program ("PPP") loans
Commercial real 16,411 89,376 386,314 48,813 524,503 540,914
estate loans
Residential real 11,063 60,917 93,872 84,980 239,769 250,832
estate loans
Consumer and other 111 556 8,983 407 9,946 10,057
loans
Municipal loans 223 859 2,685 1,699 5,243 5,466
Total $ 40,966 $ 182,692 $ 515,565 $ 188,393 $ 886,650 $ 927,615
Loans with fixed
interest rates
Agriculture loans $ 89 $ 734 $ 6,862 $ - $ 7,596 $ 7,685
Commercial loans 504 23,649 10,378 607 34,634 35,138
Paycheck Protection - 881 - - 881 881
Program ("PPP") loans
Commercial real 2,828 48,712 166,141 10,953 225,806 228,634
estate loans
Residential real 6,433 28,748 41,567 21,078 91,393 97,826
estate loans
Consumer and other 62 523 2,434 407 3,364 3,426
loans
Municipal loans 223 483 2,455 - 2,938 3,161
Total $ 10,139 $ 103,730 $ 229,837 $ 33,045 $ 366,612 $ 376,751
Loans with floating
interest rates
Agriculture loans $ 478 $ 430 $ 677 $ 6,322 $ 7,429 $ 7,906
Commercial loans 12,087 5,290 5,794 45,565 56,649 68,736
Paycheck Protection - - - - - -
Program ("PPP") loans
Commercial real 13,583 40,664 220,173 37,860 298,697 312,280
estate loans
Residential real 4,630 32,169 52,305 63,902 148,376 153,006
estate loans
Consumer and other 49 33 6,549 - 6,582 6,631
loans
Municipal loans - 376 230 1,699 2,305 2,305
Total $ 30,827 $ 78,962 $ 285,728 $ 155,348 $ 520,038 $ 550,864
37--------------------------------------------------------------------------------
Non-accrual loans are presented in the table below. Also see Note 6 - Allowance for Loan Losses in the accompanying notes to the consolidated financial statements included elsewhere in this report.
December 31, 2022 December 31, 2021
Non-Accrual Loans Non-Accrual Loans
Percent of Percent of
Loans in Loans in
(In Thousands) Total Loans Amount Category Total Loans Amount Category
Agriculture loans $ 15,591 $ - - $ 9,341 $ - -
Commercial loans 103,874 35 0.03 % 98,604 39 0.04 %
Paycheck Protection Program 881 - - 23,774 - -
("PPP") loans
Commercial real estate 540,914 231 0.04 % 338,749 144 0.04 %
loans
Residential real estate 250,832 1,652 0.66 % 231,302 449 0.19 %
loans
Consumer and other loans 10,057 - - 7,087 2 0.03 %
Municipal loans 5,466 - - 6,182 - -
Total $ 927,615 $ 1,918 0.21 % $ 715,039 $ 634 0.09 %
Excluding PPP loans $ 926,734 $ 1,918 0.21 % $ 691,265 $ 634 0.09 %
Allowance for credit losses $ 4,666 $ 3,152
on loans
Ratio of allowance for loan
losses to total loans 0.50 % 0.44 %
Ratio of non-accrual loans
to total loans 0.21 % 0.09 %
Ratio of allowance for loan
losses to non-accrual loans 243.27 % 497.16 %
The table below provides an allocation of the allowance for loan losses by loan
category at
Ratio of
Allowance
Amount of Percent of Loans in Allocated to
Allowance Each Category to Total Loans in Each
(In Thousands) Allocated Loans Total Loans Category
December 31, 2022
Agriculture loans $ 33 1.68 % $ 15,591 0.21 %
Commercial loans 583 11.20 % 103,874 0.56 %
Paycheck Protection - 0.09 % 881 -
Program ("PPP") loans
Commercial real estate 2,462 58.31 % 540,914 0.46 %
loans
Residential real estate 1,536 27.04 % 250,832 0.61 %
loans
Consumer and other loans 40 1.08 % 10,057 0.40 %
Municipal loans 12 0.59 % 5,466 0.22 %
Unallocated Allowance -
Total $ 4,666 100.00 % $ 927,615 0.50 %
December 31, 2021
Agriculture loans $ 23 1.31 % $ 9,341 0.25 %
Commercial loans 582 13.79 % 98,604 0.59 %
Paycheck Protection - 3.32 % 23,774 -
Program ("PPP") loans
Commercial real estate 799 47.37 % 338,749 0.24 %
loans
Residential real estate 1,634 32.35 % 231,302 0.71 %
loans
Consumer and other loans 22 0.99 % 7,087 0.31 %
Municipal loans 15 0.86 % 6,182 0.24 %
Unallocated Allowance 77
Total $ 3,152 100.00 % $ 715,039 0.44 %
The allowance for loan losses increased $1.5 million from $3.2 million at
December 31, 2021 to $4.7 million at December 31, 2022 . The primary driver of
the increased allowance for loan losses was a provision for loan losses
recognized during the year ended December 31, 2022 of $1.3 million , and net
recoveries of $224 thousand . The increase in the allowance for loan losses
during 2022 when compared to 2021 can be attributed to a few factors. Management
noted that the Company experienced an overall increase in criticized loans,
defined as loans rated as Special Mention and Substandard, which increased $1.2
million from December 31, 2021 to December 31, 2022 . Additionally, management
noted that the balance of loans greater than 60 days past due increased $839
thousand at December 31, 2022 when compared to December 31, 2021 . Finally,
management noted that total loans increased $212.6 million at
38
--------------------------------------------------------------------------------
December 31, 2022 when compared to December 31, 2021 , which adds an inherent
increased risk of loss based on our allowance methodology. All of these factors
contributed to the need to increase the allowance for loan losses at December
31, 2022 when compared to December 31, 2021 . One item that did not materially
contribute to an increase in the allowance for loan losses was the $1.3 million
increase in non-accrual loans at December 31, 2022 when compared to December 31,
2021 . These loans were individually assessed for impairment and those impairment
tests showed the need for a specific reserve of only $20 thousand . Not included
in the table above is the remaining unamortized credit fair value adjustment on
loans acquired through the Gratz Merger which totaled $5.0 million at December
31, 2022 .
Asset quality remained strong at December 31, 2022 with non-performing assets,
which is defined as non-accrual loans, loans delinquent greater than 90 days and
still accruing interest, and other real estate owned, was $2.7 million or 0.29%
of total gross loans. This is compared to $1.8 million of non-performing assets
at December 31, 2021 , which equated to 0.25% of gross loans. Additionally, to
compare our allowance for loan losses as a percentage of our gross loans
outstanding, the Company also considers the credit fair value adjustment that
was made to the loans acquired through the Gratz Merger, which totaled $5.0
million and $7.1 million at December 31, 2022 and 2021, respectively, in order
to capture a truer picture of our overall coverage related to potential loan
losses. Our allowance for loan losses and our credit fair value adjustment
totaled $9.7 million and $10.2 million at December 31, 2022 and 2021,
respectively, and represented 1.04% and 1.41% of our total gross loans,
respectively.
Additional information related to the provision for loan losses and net (charge-offs) recoveries is presented in the table below. Also see Note 6 - Allowance for Loan Losses in the accompanying notes to the consolidated financial statements included elsewhere in this report.
Ratio of Annualized
Provision Net (Charge-Offs)
Expense Net (Charge-Offs) Recoveries to
(In Thousands) (Benefit) Recoveries Average Loans Average Loans
2022
Agriculture loans $ 10 $ - $ 10,946 0.00 %
Commercial loans (30 ) 31 96,517 0.03
Paycheck Protection Program - - 7,740 -
("PPP") loans
Commercial real estate loans 1,663 - 430,235 -
Residential real estate loans (292 ) 194 245,505 0.08
Consumer and other loans 19 (1 ) 8,824 (0.01 )
Municipal loans (3 ) - 5,812 -
Unallocated (77 ) - -
Total $ 1,290 $ 224 $ 805,580 0.03 %
Excluding PPP loans $ 1,290 $ 224 $ 797,840 0.03 %
2021
Agriculture loans $ (97 ) $ - $ 9,386 0.00 %
Commercial loans 294 (2 ) 43,102 (0.00 )
Paycheck Protection Program - - 6,523 -
("PPP") loans
Commercial real estate loans 503 (18 ) 119,217 (0.02 )
Residential real estate loans 197 (265 ) 181,494 (0.15 )
Consumer and other loans (13 ) - 3,550 -
Municipal loans (3 ) - 6,577 -
Unallocated (233 ) - -
Total $ 648 $ (285 ) $ 369,849 (0.08 )%
Excluding PPP loans $ 648 $ (285 ) $ 363,326 (0.08 )%
Total deposits grew by $175.1 million or 22.7%, from $771.7 million at December
31, 2021 to $946.8 million at December 31, 2022 . Changes in the deposit types
are presented in the table below:
December 31, December 31,
(in thousands) 2022 2021 Change %
Demand, noninterest-bearing $ 192,773 $ 129,243 $ 63,530 49.2 %
Demand, interest-bearing 254,478 256,258 (1,780 ) (0.7 )
Money market and savings 228,048 205,843 22,205 10.8
Time deposits, $250,000 and over 45,616 56,266 (10,650 ) (18.9 )
Time deposits, other 225,857 124,055 101,802 82.1
Total deposits $ 946,772 $ 771,665 $ 175,107 22.7 %
39-------------------------------------------------------------------------------- Of the increase in total deposits of$175.1 million , brokered deposits of$70.0 million are included within time deposits, other, atDecember 31, 2022 , compared to$0 atDecember 31, 2021 . These brokered deposits mature in 2023. Management utilizes brokered deposits as a supplement to core deposit funding from time to time and does not consider brokered deposits to be a primary source of funding.
The table below presents the daily average balances by deposit type and weighted
average rates paid thereon for the years ended
December 31, 2022 December 31, 2021
(In Thousands) Average Balance Average Rate Paid Average Balance Average Rate Paid
Demand, noninterest-bearing $ 173,938 0.00 % $ 99,747 0.00 %
Demand, interest-bearing 271,681 0.63 % 175,133 0.59 %
Money market and savings 229,979 0.83 % 112,511 0.18 %
Time deposits, other 205,636 0.83 % 110,928 0.77 %
Total Deposits $ 881,234 0.61 % $ 498,319 0.42 %
The Company has deposits that exceed the FDIC insurance limit of $250,000 of
$408.4 million and $317.2 million at December 31, 2022 and 2021, respectively.
Total uninsured deposits is calculated based on regulatory reporting
requirements and reflects the portion of any deposit of a customer at an insured
depository institution that exceeds the applicable FDIC insurance coverage for
that depositor at that institution and amounts in any other uninsured investment
or deposit accounts that are classified as deposits and not subject to any
federal or state deposit insurance regime. As of December 31, 2022 , the total
uninsured deposits includes $36.8 million of municipal deposits that exceed the
FDIC insurance limits. These municipal deposits are fully secured with pledged
securities from our available for sale securities portfolio. At December 31,
2022 , the scheduled maturities of time deposits that meet or exceed the FDIC
insurance limit or otherwise uninsured were as follows:
December 31,
(In Thousands) 2022
Due within 3 months or less $ 617
Due after 3 months and within 6 months 564
Due after 6 months and within 12 months 34,828
Due after 12 months 9,607
$ 45,616
At December 31, 2022 and 2021, other borrowings consisted of $0 and $19.8
million in borrowings under the Paycheck Protection Program Liquidity Facility
("PPPLF"), which were assumed as part of the Gratz Merger. The PPPLF was a
program designated to facilitate lending by financial institutions to small
businesses under the PPP provision of the CARES Act. At December 31, 2022 , other
borrowings consisted of $20.9 million in short-term FHLB Advances, scheduled to
mature in 2023.
Subordinated debt with a fair value of $20.7 million was assumed as part of the
Gratz Merger. These notes bear interest at a fixed interest rate of 5.0% per
year for five years and then float at an index tied to the Secured Overnight
Finance Rate ("SOFR"). The notes have a term of ten years, with a maturity date
of October 1, 2030 . The notes are redeemable at the option of the Company, in
whole or in part, subject to any required regulatory approvals after five years.
Additionally, on April 8, 2022 , LINKBANCORP issued subordinated debt with a
carrying value of $20.0 million . These notes bear interest at a fixed annual
rate of 4.50% per year up to April 15, 2027 and then float to an index tied to
the three-month SOFR, plus 203 basis points. Subject to limited exceptions, the
Company cannot redeem the notes before the fifth anniversary of the issuance
date. The balance of subordinated debt was $40.5 million and $20.7 million at
December 31, 2022 and 2021, respectively.
Total shareholders' equity increased by $28.9 million , or 26.4%, from $109.6
million at December 31, 2021 , to $138.6 million at December 31, 2022 . The
increase was primarily attributable to net proceeds from the IPO of $34.7
million and net income of $5.6 million . This addition to equity was partially
offset by dividends paid of $3.3 million and other comprehensive loss of $8.2
million which was due to the increase in market interest rates.
Comparison of Results of Operations for the Years Ended
General: Net income was$5.6 million for the year endedDecember 31, 2022 , or$0.49 per diluted share, an increase of$5.3 million compared to net income of$289 thousand , or$0.04 per diluted share, for the year endedDecember 31, 2021 . Net income for the year endedDecember 31, 2022 reflected the results of the combined company following the completion of the Gratz Merger onSeptember 18, 2021 whereas net income for the year endedDecember 31, 2021 reflected the results of GNBF for the period fromJanuary 1, 2021 throughSeptember 17, 2021 and the results of the combined company following the completion of the Gratz Merger onSeptember 18, 2021 throughDecember 31, 2021 . 40 -------------------------------------------------------------------------------- The increase in net income for the year endedDecember 31, 2022 as compared to the prior year was the result of an increase in interest and dividend income of$21.8 million , and an increase in noninterest income of$818 thousand . These were partially offset by an increase in interest expense of$4.9 million , an increase in the provision for loan losses of$642 thousand , and an increase in noninterest expense of$10.3 million .
Analysis of Net Interest Income
Net interest income represents the difference between the interest the Company
earns on its interest-earning assets, such as loans and investment securities,
and the expense the Company pays on interest-bearing liabilities, such as
deposits and borrowings. Net interest income depends on both the volume of our
interest-earning assets and interest-bearing liabilities and the interest rates
the Company earns or pays on them.
Average Balances, Interest and Average Yields: The following table sets forth
certain information relating to average balance sheets and reflects the average
annualized yield on interest-earning assets and average annualized cost of
interest-bearing liabilities, interest earned and interest paid for the years
indicated. Such yields and costs are derived by dividing income or expense by
the average balance of interest-earning assets or interest-bearing liabilities,
respectively, for the years presented. Average balances are derived from daily
balances over the years indicated. The average balances for loans are net of
allowance for loan losses, but include non-accrual loans. The loan yields
include net amortization of certain deferred fees and costs that are considered
adjustments to yields, but were not material adjustments to the yields. Yields
on earning assets are shown on a fully taxable-equivalent basis assuming a tax
rate of 21%.
For the Year Ended December 31,
2022 2021
(Dollars in Interest
thousands) Avg Bal (2) Yield/Rate Avg Bal Interest (2) Yield/Rate
Int. Earn. Cash $ 56,783 $ 533 0.94 % $ 35,279 $ 381 1.08 %
Securities
Taxable (1) 78,629 2,175 2.77 % 73,960 939 1.27 %
Tax-Exempt 40,388 1,468 3.63 % 44,719 1,585 3.54 %
Total Securities 119,017 3,643 3.06 % 118,679 2,524 2.13 %
Total Cash Equiv. and
Investments 175,800 4,176 2.38 % 153,958 2,905 1.89 %
Total Loans (3) 795,908 36,396 4.57 % 369,849 15,924 4.31 %
Total
Interest-Earning
Assets 971,708 40,572 4.18 % 523,807 18,829 3.59 %
Other Assets 88,485 46,615
Total Assets $ 1,060,193 $ 570,422
Interest bearing
demand $ 271,681 $ 1,713 0.63 % $ 175,133 $ 1,034 0.59 %
Money market demand 229,979 1,911 0.83 % 112,511 198 0.18 %
Time deposits 205,636 1,713 0.83 % 110,928 859 0.77 %
Total Borrowings 55,980 1,942 3.47 % 14,881 299 2.01 %
Total
Interest-Bearing
Liabilities 763,276 7,279 0.95 % 413,453 2,390 0.58 %
Non Int Bearing
Deposits 173,938 99,747
Total Cost of Funds $ 937,214 $ 7,279 0.78 % $ 513,200 $ 2,390 0.47 %
Other Liabilities 15,806 5,965
Total Liabilities $ 953,020 $ 519,165
Shareholders' Equity $ 107,173 $ 51,257
Total Liabilities &
Shareholders' Equity $ 1,060,193 $ 570,422
Net Interest
Income/Spread (FTE) 33,293 3.22 % 16,439 3.01 %
Tax-Equivalent Basis
Adjustment (308 ) (333 )
Net Interest Income $ 32,985 $ 16,106
Net Interest Margin 3.39 % 3.07 %
(1) Taxable income on securities includes income from available for sale securities and income from certificates of deposits with
other banks.
(2) Income stated on a tax equivalent basis which is non-GAAP and is reconciled to GAAP at the bottom of the table.
(3) Includes the balances of nonaccrual loans.
41
--------------------------------------------------------------------------------Rate/Volume Analysis
The following table reflects the sensitivity of the Company's interest income
and interest expense to changes in volume and in yields on interest-earning
assets and costs of interest-bearing liabilities during the years indicated.
Year Ended December 31, 2022 vs. 2021
Increase (Decrease) Due To:
(Dollars in thousands) Rate Volume Net
Interest Income:
Int. Earn. Cash $ (79 ) $ 231 $ 152
Securities
Taxable 1,179 57 1,236
Tax-Exempt 36 (153 ) (117 )
Total Securities 1,215 (96 ) 1,119
Total Loans 2,069 18,403 20,472
Total Interest-Earning Assets 3,205 18,538 21,743
Interest Expense:
Interest bearing demand 109 570 679
Money market demand 1,502 211 1,713
Time deposits 123 731 854
Total Borrowings 817 826 1,643
Total Interest-Bearing Liabilities 2,551 2,338 4,889
Change in Net Interest Income $ 654 $ 16,200 $ 16,854
Net Interest Income: Net interest income before provision for loan losses
increased by $16.9 million , or 104.8%, to $33.0 million for the year ended
December 31, 2022 , compared to $16.1 million for the year ended December 31,
2021 . This increase can be mostly attributed to an increase in interest income
resulting from a higher average balance in loans as a result of the completion
of the Gratz Merger, as well as a 59 basis points increase in the average yield
on interest-earning assets. This increase was partially offset by an increase in
interest expense resulting from increased average rates paid on interest-bearing
liabilities as a result of the rising interest rate environment and an increase
in the average balance of deposits as a result of the completion of the Gratz
Merger. The net interest margin increased 32 basis points to 3.39% for the year
ended December 31, 2022 from 3.07% for the year ended December 31, 2021 . Given
the overall interest rate and economic environment, the Company expects to
experience net interest margin compression during the upcoming year.
Interest Income: Interest income increased to $40.3 million for the year ended
December 31, 2022 , compared with $18.5 million for the year ended December 31,
2021 primarily due to an increase in interest income on loans as a result of the
growth in average loans, following the completion of the Gratz Merger. The
growth in the average balance of interest earning assets which increased $447.9
million to $971.7 million for the year ended December 31, 2022 compared to
$523.8 million for the year ended December 31, 2021 contributed $18.6 million in
growth of interest income. The average balance of loans increased $426.1 million
during the year ended December 31, 2022 as compared to the prior year primarily
as a result of the loan growth that the Company achieved since the closing of
the Gratz Merger. This growth included an increase in average yield on interest
earning assets which increased 59 basis points from 3.59% for the year ended
December 31, 2021 to 4.18% for the year ended December 31, 2022 . In general, the
Company began to experience an increase in rates on interest earning assets as a
result of the Federal Reserve's decisions in 2022 that increased the Fed Funds
target rate from 0% to 0.25% at the beginning of 2022 to 4.25% to 4.50% at
December 31, 2022 . These rate increases coupled with new loan originations in
2022 resulted in the higher average yield on loans compared to 2021.
Interest Expense: Interest expense increased by $4.9 million or 204.6% to $7.3
million for the year ended December 31, 2022 , compared to $2.4 million for the
year ended December 31, 2021 . The increase in interest expense was due to the
increase in the average rates paid on interest bearing liabilities, which
increased 37 basis points from 0.58% for the year ended December 31, 2021 to
0.95% for the year ended December 31, 2022 primarily as a result of the increase
in rates of our money market demand deposits and borrowings. This increase in
rates was also impacted by an increase in the average balances of interest
bearing liabilities, which increased $349.8 million to $763.3 million for the
year ended December 31, 2022 compared to $413.5 million for the year ended
December 31, 2021 as a result of the increase in the average balance of our
deposits and borrowings. The increase in the rates paid on interest-bearing
liabilities during 2022 was directly correlated to the increase in the Federal
Reserve's benchmark borrowing rate which increased a total of 425 basis points
during 2022. Management expects that the current economic environment will
continue to increase competition for deposits, which may create additional
upward pressure on the Company's cost of funds in the coming quarters.
Provision for Loan Losses: The provision for loan losses increased by
42
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during 2022 can be attributed to a few factors. The Company experienced an
overall increase in criticized loans, defined as loans rated as Special Mention
and Substandard, which increased $1.2 million from December 31, 2021 to December
31, 2022 . Additionally, management noted that the balance of loans greater than
60 days past due increased $839 thousand at December 31, 2022 when compared to
December 31, 2021 . Finally, total loans increased $212.6 million at December 31,
2022 when compared to December 31, 2021 , which adds an inherent increased risk
of loss based on our allowance methodology. All of these factors contributed to
the need to increase the allowance for loan losses through provisioning at
December 31, 2022 when compared to December 31, 2021 . One item that did not
materially contribute to an increase in the provision for loan losses was the
$1.3 million increase in non-accrual loans at December 31, 2022 when compared to
December 31, 2021 . These loans were individually assessed for impairment and
those impairment tests showed the need for a specific reserve of only $20
thousand .
The Company completes a comprehensive quarterly evaluation to determine its provision for loan losses. The evaluation reflects analyses of individual borrowers and historical loss experience, and changes in net loan balances, supplemented as necessary by credit judgment that considers observable trends, conditions, and other relevant environmental and economic factors.
Refer to Note 6 of the Notes to the Consolidated Financial Statements for additional details on the provision for loan losses.
Non-interest Income: Non-interest income increased by$818 thousand to$3.0 million for the year endedDecember 31, 2022 , from the$2.1 million recognized during 2021. The increase was primarily due to an increase in gain on sale of loans of$437 thousand , and an increase in earnings on bank owned life insurance of$244 thousand for the year endedDecember 31, 2022 compared to 2021. Non-interest Expenses: Non-interest expenses increased$10.3 million or 59.1%, from$17.5 million for the year endedDecember 31, 2021 , to$27.8 million for the year endedDecember 31, 2022 . The increase was primarily due to the full-year impact of the Gratz Merger, resulting in increases in (1) salaries and employee benefits of$9.2 million due to increased employee headcount from the combined company and also due to an increase in employees to facilitate loan growth and foster deposit relationships, (2) equipment and data processing of$1.6 million , and (3)FDIC insurance of$409 thousand , and (4) other expenses of$593 thousand . These increases were offset by a decrease of$3.6 million in merger & system conversion related expenses, from$4.6 million for the year endedDecember 31, 2021 to$973 thousand for the year endedDecember 31, 2022 . Income Tax Benefit/Expense: Income tax expense for the year endedDecember 31, 2022 totaled$1.2 million compared to income tax benefit of$189 thousand for 2021 as a result of an increase in income before income tax expense. The income tax expense recognized for the year endedDecember 31, 2022 was the direct result of our net income adjusted for tax free income and non-deductible expenses. We recognized income tax expense for the year endedDecember 31, 2022 at an effective tax rate of 17.9% which is less than our statutory tax rate of 21%.
Liquidity, Commitments, and Capital Resources
The Company's liquidity, represented by cash and due from banks, is a product of our operating, investing and financing activities. The Company's primary sources of funds are deposits, principal repayments of securities and outstanding loans, and funds provided from operations. In addition, the Company invests excess funds in short-term interest-earnings assets such as overnight deposits orU.S. agency securities, which provide liquidity to meet lending requirements. While scheduled payments from the amortization of loans and securities and short-term investments are relatively predictable sources of funds, general interest rates, economic conditions and competition greatly influence deposit flows and repayments on loans and mortgage-backed securities. The Company strives to maintain sufficient liquidity to fund operations, loan demand and to satisfy fluctuations in deposit levels. The Company is required to have enough investments that qualify as liquid assets in order to maintain sufficient liquidity to ensure safe and sound banking operations. Liquidity may increase or decrease depending upon the availability of funds and comparative yields on investments in relation to the return on loans. Our attempts to maintain adequate but not excessive liquidity, and liquidity management is both a daily and long-term function of the Company's business management. We manages our liquidity in accordance with a board of directors-approved asset liability policy, which is administered by the Company's asset-liability committee ("ALCO"). ALCO reports interest rate sensitivity, liquidity, capital and investment-related matters on a quarterly basis to the Company's board of directors. The Company reviews cash flow projections regularly and updates them in order to maintain liquid assets at levels believed to meet the requirements of normal operations, including loan commitments and potential deposit outflows from maturing certificates of deposit and savings withdrawals. Certificates of deposit due within one year ofDecember 31, 2022 totaled$206.2 million , or 76% of our certificates of deposit, and 22% of total deposits. Of these certificates of deposits,$70 million are brokered deposits. If these deposits do not remain with us, we will be required to seek other sources of funds, including other deposits and FHLB advances. Depending on market conditions, we may be required to pay higher rates on such deposits or borrowings than we currently pay. We believe, however, based on past experience that a significant portion of such deposits will remain with us. We have the ability to 43 -------------------------------------------------------------------------------- attract and retain deposits by adjusting the interest rates offered. While deposits are the Company's primary source of funds, when needed the Company is also able to generate cash through borrowings from theFederal Home Loan Bank of Pittsburgh ("FHLB"). AtDecember 31, 2022 , the Company had remaining available capacity with FHLB, subject to certain collateral restrictions, of approximately$301.4 million . There were$20.9 million in short-term FHLB advances outstanding atDecember 31, 2022 . In addition to our available borrowing capacity at the FHLB, the Company has bank-level lines of credit with multiple financial institutions that provide an available$51.0 million of additional liquidity atDecember 31, 2022 . During the first quarter of 2023, the Company also established$8.3 million of available credit at theFederal Reserve Bank's Discount Window. Consistent with the Company's goals to operate as a sound and profitable financial institution, the Company actively seeks to maintain the Bank's status as a well-capitalized institution in accordance with regulatory standards. As ofDecember 31, 2022 and 2021, the Bank met the capital requirements to be considered "well capitalized." See Note 17 within the Notes to the Consolidated Financial Statements for more information regarding our capital resources.
Off-Balance Sheet Arrangements and Contractual Obligations
See Note 18 within the Notes to the Consolidated Financial Statements beginning for more information regarding the Company's off-balance sheet arrangements.
For disclosures of the Company's future obligations under operating leases, please see Note 8 within the Notes to the Consolidated Financial Statements. For disclosures of the Company's contractual obligations related to certificates of deposits, please see Note 10 within the Notes to the Consolidated Financial Statements.
Critical Accounting Estimates
It is management's opinion that accounting estimates covering certain aspects of the Company's business have more significance than others due to the relative importance of those areas to overall performance, or the level of subjectivity required in making such estimate, which have a material impact on the carrying value of certain assets and liabilities. The judgments and assumptions used by management are based on historical experience and other factors, which are believed to be reasonable under the circumstances. The more significant areas in which the Company's management applies critical assumptions and estimates include the following: Allowance for loan losses: The loan portfolio is the biggest asset on the Company's balance sheet. The allowance for loan losses represents management's estimate of probable incurred losses in the loan portfolio at the balance sheet date. A provision for loan losses is recorded to adjust the level of the allowance for loan losses as deemed necessary by management. The allowance for loan losses consists of general, allocated, and unallocated components. In estimating losses inherent in the loan portfolio for the general component, assumptions and judgment are applied related to estimated losses on pools of homogeneous loans based on the Company's historical loss experience, peer loss experience, consideration of current economic trends and conditions, industry trends, portfolio trends, borrower specific data, and other qualitative and quantitative factors, all of which may be subject to significant change. The allocated component relates to loans that are classified as impaired. Generally, our impaired loans are collateral-dependent and impairment is measured through the collateral method. When the measurement of the impaired loan is less than the recorded investment in the loan, the impairment is recorded through the allowance for loan losses. Loans acquired at a discount, that is, in part, attributable to credit quality, are initially recorded at fair value with no carry-over of an acquired entity's previously established allowance for loan losses. Cash flows expected at acquisition, in excess of estimated fair value, are recognized as interest income over the remaining lives of the loans. Subsequent decreases in the expected principal cash flows require the Company to evaluate the need for additions to the allowance for loan losses. Subsequent improvements in expected cash flows result, first, in the recovery of any applicable allowance for loan losses and, then, in the recognition of additional interest income over the remaining lives of the loans. Changes in the circumstances considered when determining management's estimates and assumptions could result in changes to those estimates and assumptions and also in adjustment of the allowance for loan losses, or, in the case of loans acquired at a discount, increases in interest income in future periods. Business Combinations: The Company accounts for acquisitions under the acquisition method of accounting. Assets acquired and liabilities assumed in a business combination are recorded at their estimated fair value on their purchase date. As provided for under accounting principles generally accepted inthe United States of America , management has up to 12 months following the date of the acquisition to finalize the fair values of acquired assets and assumed liabilities. Management finalized the fair values of acquired assets and assumed liabilities within this 12-month period and management considers such values to be the Day 1 Fair Values for the acquisition transactions. In particular, the valuation of acquired loans involves significant estimates, assumptions and judgment based on information available as of the acquisition date. Loans acquired in a business combination transaction are evaluated either individually or in pools of loans with similar characteristics; including consideration of a credit component. A number of factors are considered in determining the estimated fair value of purchased loans including, among other things, the remaining life of the acquired 44
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loans, estimated prepayments, estimated loss ratios, estimated value of the underlying collateral, estimated holding periods, contractual interest rates compared to market interest rates, and net present value of cash flows expected to be received.
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