What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-08-04 compared with 2022-05-05 · 341 added, 212 removed, 463 unchanged (54% of the section changed)

13 unchanged sentences

● the risk of unfavorable economic conditions in the Company’s market areas;

● risks associated with the current national emergency with respect to COVID-19 and its variants, including the impact that national, state, and local responses, including limitations on business and personal activity as well as any stimulus or relief efforts have on customers’ continued ability to repay loans.;

● risks associated with fluctuations in interest rates;

● risks associated with inflation;

● risks associated with inflation (including efforts by the Board of Governors of the Federal Reserve to control the same);

● liquidity risks, including the ability to effectively manage the additional liquidity from the significant increase in deposits during the COVID-19 pandemic including managing the potential loss of a portion of such deposits;

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● the success of acquisitions or branch expansions, closures or consolidations;

● risks associated with the multitude of current and prospective laws and regulations to which the Company is and will be subject.

● risks associated with the multitude of or changes to current and prospective laws and regulations, and related interpretations, to which the Company is and will be subject.

Risk factors that could cause actual results to differ materially from results that might be implied by forward-looking statements include the risk factors detailed in the Company’s Form 10-K for the fiscal year ended December 31, 2021 and in Item 1A, herein.

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RESULTS OF OPERATIONS SUMMARY

First Quarter 2022 compared to First Quarter 2021

First quarter 2022 net income was $7.4 million, or $0.49 per diluted share, compared to $11.1 million, or $0.72 per diluted share in the first quarter of 2021.

The Company’s annualized return on average equity was 8.64% and annualized return on average assets was 0.88% for the quarter ended March 31, 2022, compared to 12.94% and 1.40%, respectively, for the same quarter in 2021.

The primary drivers behind the variance in first quarter net income are as follows:

● Net interest income decreased by $3.8 million mostly due to a 67 bps decline in the yield on earning assets and a shift in mix due to higher levels of average cash invested overnight with the Federal Reserve Bank and lower average loan balances.

In addition, there was a $0.4 million unfavorable increase in interest expense due to the issuance of subordinated debt during the third quarter of 2021.

● A $0.6 million provision for credit losses on loans and leases as compared to a provision for loan and lease losses of $0.3 million in the same quarter in 2021.

This unfavorable impact was attributed to higher charge-offs partially offset by a reduction in the pooled allowance under the new current expected credit losses (“CECL”) methodology implemented on January 1, 2022.

● Noninterest income decreased $0.8 million or 11% primarily due to a $1.2 million decrease in the change in the annual valuation change of restricted equity investments, as well as BOLI fluctuations associated with deferred compensation plans for $1.2 million.

These negative variances were partially offset by a $1.0 million gain on the sale of investment securities in an effort to rebalance the portfolio by selling longer duration and higher price volatility securities as a hedge against rising interest rates, due to likely persistent inflationary pressures in the near-intermediate term environment.

Service charges on customer deposit accounts declined by $0.1 million, or 4%, to $3.0 million in the first quarter of 2022 as compared to the fourth quarter of 2021.

This same income was $0.3 million higher in the first quarter of 2022 as compared to the first quarter of 2021 due to higher transaction based fees, including analysis fee income.

● Total noninterest expense had a favorable decline of $0.2 million, or 1%, in the first quarter of 2022 as compared to the first quarter of 2021.

Lower occupancy and legal expenses, partially offset by higher salaries and benefits were the primary drivers.

Second Quarter 2022 compared to Second Quarter 2021

Second quarter 2022 net income was $9.2 million, or $0.61 per diluted share, compared to $11.7 million, or $0.76 per diluted share in the second quarter of 2021.

The Company’s annualized return on average equity was 11.68% and annualized return on average assets was 1.07% for the quarter ended June 30, 2022, compared to 13.29% and 1.42%, respectively, for the same quarter in 2021.

The primary drivers behind the variance in second quarter net income are as follows:

● Net interest income decreased $0.6 million, or 2%, due primarily to a $0.4 million increase in interest expense from the issuance of subordinated debt during the third quarter of 2021 and higher cost of funds on interest-bearing liabilities due to the recent increases in the prime interest rate.

● The provision for credit losses on loans and leases was $2.5 million under the new current expected credit losses (“CECL”) methodology, as compared to a $2.1 million benefit under the incurred loss model in the same quarter of 2021, for a net increase of $4.6 million.

This is driven primarily from the replacement of allowance due to $4.1 million in net loan charge offs during the second quarter of 2022.

● Noninterest income increased $3.8 million, primarily due to a $3.2 million gain on sale of other assets, $0.4 million in life insurance proceeds, a $0.2 million recovery on an acquired loan, and a $1.0 million recovery of prior year legal expenses, partially offset by a $1.4 million negative variance in Corporate Owned Life Insurance with income linked to the Company’s nonqualified deferred compensation plan.

● Total noninterest expense increased $1.9 million, or 9%, in the second quarter of 2022 as compared to the second quarter of 2021.

Higher salaries and benefits costs accounted for $1.3 million of the increase as we added new lending teams, and $0.8 million of the increase was due to higher other expenses, mostly for the accrual of restitution payments to customers charged nonsufficient fund fees for representments in the past five years and $0.3 million in postage and mailing costs associated with new disclosure agreements which detail updated service charges on returned items and overdraft fees.

First Half 2022 compared to First Half 2021

Net income for the first half of 2022 was $16.6 million, or $1.10 per diluted share, compared to $22.8 million, or $1.48 per diluted share for the same period in 2021.

The Company’s annualized return on average equity was 10.10% and annualized return on average assets was 0.98% for the six months ended June 30, 2022, compared to a return on equity of 13.11% and return on assets of 1.41% for the six months ended June 30, 2021.

The primary drivers behind the variance in year-to-date net income are as follows:

● The provision for credit losses on loans and leases was $3.1 million, an increase of $5.0 million, due to a change from the incurred loss method to the current expected credit loss method, coupled with higher charge-offs in 2022 on two loan relationships.

● Net interest income decreased by $4.4 million, or 8%, due mostly to the change in mix of interest earning assets with average loan balances increasing and investments increasing.

In addition, the cost of interest-bearing liabilities was higher due to increases in index rates on certain floating rate liabilities.

● Noninterest income increased $3.1 million, or 23%, for the same reasons as noted above in the quarterly comparison, combined with a $1.0 million gain on the sale of investment securities, and a $2.6 million negative variance in BOLI income tied to our nonqualified deferred compensation plan.

● Noninterest expense increased $1.8 million, or 4% for the same reasons as outlined in the quarterly comparison above.

FINANCIAL CONDITION SUMMARY

March 31, 2022 relative to December 31, 2021

The Company’s assets totaled $3.4 billion at March 31, 2022 unchanged from December 31, 2021.

The following provides a summary of key balance sheet changes during the first three months of 2022:

● Investment securities increased 5% to $1.0 billion from $973.3 million at December 31, 2021, primarily due to purchases of collateralized loan obligations.

● Gross loan balances remained relatively flat during the first quarter of 2022 with an overall 0.3% change.

The net change did have some offsetting components with the larger fluctuations being a $44.0 million decline in mortgage warehouse line utilization, a $25.8 million decrease in non-owner occupied commercial real estate, and a $16.8 million of decrease in PPP loans.

These declines were mostly offset by a $109.4 million increase in 1-4 family mortgage loans due to purchases of high-quality jumbo mortgage loans.

● Deposits totaled $2.9 billion at March 31,2022, representing a year-to-date increase of $83.4 million, or 3%.

The growth in deposits came primarily from core transaction and savings accounts.

● Total shareholders’ equity of $325.7 million at March 31, 2022 reflects a decrease of $36.8 million, or 10%, relative to year-end 2021 due to net income of $7.4 million, offset by a $3.5 million dividend paid to shareholders, $4.9 million in share repurchases, a $28.9 million unfavorable swing in other comprehensive income/loss due principally to changes in investment securities' fair value, and a $7.3 million cumulative effect adjustment for the implementation of ASC 326.

June 30, 2022 relative to December 31, 2021

The Company’s assets totaled $3.4 billion at June 30, 2022 unchanged from December 31, 2021.

The following provides a summary of key balance sheet changes during the first six months of 2022:

● The Company’s balance of cash and cash equivalents declined by $95.7 million, or 37% from December 31, 2021.

The overall increase in cash balances was due primarily to increases in investment securities and loans and leases during the first half 2022.

● Investment securities were $1.0 billion at June 30, 2022, an increase of $52.3 million, or 5% from December 31, 2021.

The Company purchased $158.2 million in various government agency sponsored mortgage-backed securities, agency securities, municipal securities, corporate bonds and collateralized mortgage obligations.

On April 1, 2022, the Company transferred $162.1 million of “available-for-sale” investment securities to “held-to-maturity”.

The securities were transferred at fair market value on the date of transfer.

The transfer was initiated to partially insulate other comprehensive income and equity from changes in interest rates.

This transfer had no

impact on net income, and future price changes on these securities due to changes in interest rates will not affect capital.

● Gross loans increased $32.9 million due predominantly to the purchase of high quality jumbo single family mortgage loan pool purchases.

This increase was offset by reductions in almost all loan categories as loan maturities and payoffs exceeded the increases in loan production for the first six months of 2022.

● Deposits increased by $69.4 million, or 2%.

The growth in deposits came primarily from noninterest-bearing or low-cost transaction and savings accounts, while higher-cost time deposits increased $5.9 million.

Total shareholders’ equity of $299.0 million at June 30, 2022 reflects a decrease of $63.4 million, or 18%, relative to year-end 2021, due to the addition of $16.6 million in net income, offset by a $61.6 million unfavorable swing in accumulated other comprehensive income/loss due principally to changes in investment securities’ fair value, a one-time adjustment from the implementation of CECL on January 1, 2022 for $7.3 million, $4.9 million in share repurchases and net of $7.0 million in dividends paid.

The remaining difference is related to stock options exercised and restricted stock compensation recognized during the quarter.

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● Starting in April 2020, the Company took actions to mitigate the impact on credit losses including permitting short-term payment deferrals to current customers, as well as providing bridge loans and SBA Paycheck Protection Program (PPP) loans.

The Company had no loans remaining on deferral, which were modified under the CARES Act, as amended.

The Company had no loans remaining on deferral, which were modified under the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, as amended.

● The uncertainty of national and local economic conditions had an impact on our provision for credit losses in early 2022 and on our provision for loan and lease losses in 2021.

1 unchanged sentence

● The Company expects that net interest income may continue to be adversely impacted given pressure on the net interest margin as a result of the current interest rate environment.

Although the FOMC raised the fed funds rate by 25 bps on March 16, 2022, the overall rate environment is still at historical lows.

Although the FOMC has raised the fed funds rate three times in the first half of 2022;

25 basis points on March 16, 2022, 50 basis points on May 4, 2022 and 75 basis points on June 16, 2022, the overall rate environment is still relatively low.

The FOMC has indicated potential future increases to the overnight fed funds rate but uncertainty as to when and at what rate this may occur still remains.

These lower rates have impacted our net interest margin.

Our net interest margin for the three months ended March 31, 2022, was 3.21%, compared to a net interest margin of 3.93% for the same period in 2021.

Additional liquidity from significant deposit growth in 2021 and the first three months of 2022, coupled with lower loan balances has negatively impacted our net interest margin.

This additional liquidity was mostly deployed in overnight funding resulting in $194.8 million in average overnight cash during the first quarter of 2022.

This overnight funding earned an average rate of 19 basis points, for the first quarter ending March 31, 2022.

Our net interest margin for the six months ended June 30, 2022, was 3.31%, compared to a net interest margin of 3.76% for the same period in 2021.

Additional liquidity from significant deposit growth in 2021 and the first six months of 2022, coupled with lower loan balances has negatively impacted our net interest margin.

This additional liquidity was mostly deployed in overnight funding resulting in $170.4 million in average overnight cash during the first half of 2022.

This overnight funding earned an average rate of 43 basis points, for the first six months ending June

In addition, the Company had $1.0 billion in investment securities at average tax effective yield 207 basis points lower than that of current loan yields.

● The COVID-19 pandemic has not adversely affected our capital or financial resources as of March 31, 2022.

During the first three months of 2022, total shareholders’ equity decreased by $36.8 million, or 10%, to $325.7 million.

The Company earned $7.4 million in net income in the first three months of 2022, but had a $28.9 million decrease in accumulated other comprehensive income as a result of decreases in the value of our investment portfolio due to an uptick in interest rates.

● The COVID-19 pandemic has not adversely affected our capital or financial resources as of June 30, 2022.

During the first half of 2022, total shareholders’ equity decreased by $63.4 million, or 18%, to $299.0 million.

The Company earned $16.6 million in net income in the first six months of 2022, but had a $61.6 million decrease in accumulated other comprehensive income as a result of decreases in the value of our investment portfolio due to an uptick in interest rates.

If interest rates continue to rise, this component of equity would be expected to further decline.

The Company also paid dividends of $3.5 million and repurchased shares of stock for $4.9 million during the first quarter of 2022.

On April 22, 2022, the Company declared a twenty-three cent per share dividend to be paid on May 12, 2022.

The Company also paid dividends of $7.0 million and repurchased shares of stock for $4.9 million during the first half of 2022.

On July 21, 2022, the Company declared a twenty-three cent per share dividend to be paid on August 15, 2022.

Although presently not expected, if the Company were to incur significant credit losses as a result of COVID-19’s impact on our customers’ ability to repay loans, capital could be adversely impacted.

8 unchanged sentences

● As a financial institution providing essential services, the Company expects continued demand for loans and deposits.

In addition, mortgage warehouse utilization that resulted from the low rate environment is expected to remain at a lower levels.

In addition, strong mortgage warehouse utilization that resulted from the low rate refinance environment of 2020 and 2021 is not expected to return in 2022 and hence our loans outstanding in this sector remain at lower levels.

Further, it is expected that SBA PPP loans will continue to be forgiven, with the remainder expected to be forgiven in 2022.

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NET INTEREST INCOME AND NET INTEREST MARGIN

Net interest income decreased $3.8 million to $24.8 million, for the first quarter of 2022 over the first quarter of 2021.

For the first quarter of 2022 as compared to the same quarter in 2021, average loan balances decreased $415.3 million, or 18%, primarily due to $181.6 million, or a 75% decrease in the utilization of mortgage warehouse lines, a $126.0 million, or 7% decrease in real estate secured loans, and a $94.5 million, or 49% decrease in commercial loans, mostly from the forgiveness of SBA PPP loans.

Ag production loans were also down $12.2 million or 26%.

The average yield on the overall loan portfolio decreased 21 basis points, while there was a 8 bps unfavorable increase in the cost of interest-bearing liabilities for the first quarter of 2022 as compared to the same quarter in 2021.

Net interest income decreased $0.6 million to $26.6 million, for the second quarter of 2022 over the second quarter of 2021 and decreased $4.4 million, or 8% to $51.3 million for the first six months of 2022 relative to the same period in 2021.

For the second quarter of 2022 as compared to the same quarter in 2021, average loan balances decreased $173.0 million, or 8%, primarily due to decreases in commercial loans of $86.0 million, or 52%, a $13.5 million, or 31% decrease in agricultural production loans, and a $92.5 million, or 65%, decrease in the utilization of mortgage warehouse lines.

These decreases were partially offset by an $18.8 million, or 1% increase in real estate loans.

The yield on the loan and lease portfolio was 26 basis points lower in the second quarter of 2022 as compared to the same period in 2021.

Average investment balances also increased $290.6 million with a 79 basis point increase in yield, mostly due to a $388.9 million increase in average collateralized loan obligation balances which have variable rates, which helped

alleviate some of the negative pressure on our net interest margin.

Adding to the pressure on our net interest margin, was a 13 basis points unfavorable increase in the cost of interest-bearing liabilities in the second quarter of 2022 as compared to the second quarter of 2021.

For the first half of 2022 as compared to the same period in 2021, average loan balances decreased $293.5 million or 13%.

All categories of loans decreased with the primary decrease in commercial loans for $90.3 million and a $136.8 million decline in mortgage warehouse line utilization.

There was a 24 basis points decrease in loan yield for the first half of 2022 as compared to the same period in 2021.

Average investment balances increased $451.0 million yielding 28 basis points higher for the same period, which helped offset the negative loan yield variances.

Adding to the unfavorable decrease in yield was an 11 basis point decrease in the yield on interest bearing liabilities, driven by the recent increases in the prime interest rate.

The level of net interest income we recognize in any given period depends on a combination of factors including the average volume and yield for interest earning assets, the average volume and cost of interest-bearing liabilities, and the mix of products which comprise the Company’s earning assets, deposits, and other interest-bearing liabilities.

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For the three months ended

March 31, 2022

March 31, 2021

June 30, 2022

June 30, 2021

Rate/Yield (2)

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Loan fees have been included in the calculation of interest income.

Net loan fees and loan acquisition FMV amortization were $0.4 million and $1.4 million for the quarters ended March 31, 2022 and 2021, respectively.

Net loan fees and loan acquisition FMV amortization were $0.4 million and $1.0 million for the quarters ended June 30, 2022 and 2021, respectively.

(4) Non-accrual loans have been included in total loans for purposes of computing total earning assets.

(5) Net interest margin represents net interest income as a percentage of average interest earning assets.

Average Balances and Rates

(Dollars in Thousands, Unaudited)

For the six months ended

June 30, 2022

June 30, 2021

Rate/Yield (2)

Interest-earning due from banks

Total investments

Loans and leases:

Mortgage warehouse lines

Total loans and leases

Total interest earning assets (4)

Other earning assets

Non-earning assets

Liabilities and shareholders' equity

Interest bearing deposits:

Demand deposits

Savings accounts

Time Deposits

Brokered deposits

Total interest bearing deposits

Borrowed funds:

Federal funds purchased

Repurchase agreements

Short term borrowings

Long-term debt

Subordinated debentures

Total borrowed funds

Total interest bearing liabilities

Demand deposits - noninterest bearing

Other liabilities

Shareholders' equity

Total liabilities and shareholders' equity

Interest income/interest earning assets

Interest expense/interest earning assets

Net interest income and margin (5)

(1) Average balances are obtained from the best available daily or monthly data and are net of deferred fees and related direct costs.

(2) Yields and net interest margin have been computed on a tax equivalent basis utilizing a 21% effective tax rate.

(3) Loans are gross of the allowance for possible loan losses.

Loan fees have been included in the calculation of interest income.

Net loan fees and loan acquisition FMV amortization were $0.8 million and $2.4 million for the six months ended June 30, 2022 and 2021, respectively.

(4) Non-accrual loans have been included in total loans for purposes of computing total earning assets.

(5) Net interest margin represents net interest income as a percentage of average interest-earning assets.

The Volume and Rate Variances table below sets forth the dollar difference for the comparative periods in interest earned or paid for each major category of interest earning assets and interest-bearing liabilities, and the amount of such change attributable to fluctuations in average balances (volume) or differences in average interest rates.

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(dollars in thousands, unaudited)

Three months ended March 31,

Three months ended June 30,

Six months ended June 30,

2022 over 2021

Increase (decrease) due to

Federal funds sold/due from time

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(1) Subtotals are a sum of the categories above and are not recalculated on the portfolio totals.

The volume variance calculated for the first three months of 2022 relative to the first three months of 2021 was an unfavorable $2.0 million due to lower average balances of interest earning assets, resulting from a decrease in all categories of loans, partially offset by an increase in investment balances.

The volume variance calculated for the second quarter of 2022 relative to the second quarter of 2021 was a favorable $0.1 million;

although average balances of interest earning assets were flat, we had an increase in investment securities, offset by a decrease in almost all categories of loans.

There was an unfavorable rate variance of $0.7 million for the comparative quarters since the weighted average yield on interest earning assets decreased by 11 basis points and the weighted average cost of interest-bearing liabilities increased by 13 basis points.

There was also an

unfavorable mix variance of $0.3 million primarily from the issuance of subordinated debentures issued at 3.25% in September of 2021.

The rate variance was negatively impacted by the following factors:

high average balances of cash and due from banks earning on average 19 bps, new loans and investments having lower yields overall, including low-yielding purchased 1-4 SFD mortgage loans.

Increased costs on interest bearing liabilities also had a negative impact on the variance primarily from the issuance of subordinated debt mentioned above.

The Company’s net interest margin for the first quarter of 2022 was 3.21%, as compared to 3.93% for the first quarter of 2021.

At March 31, 2022, approximately 7% of our total portfolio, or $142.6 million, consists of variable rate loans.

There was also an unfavorable mix

variance of $0.02 million primarily from the issuance of variable rate subordinated debentures issued in September of 2021.

The $0.7 million negative rate variance was impacted by the following factors:

relatively high average balances of cash and due from banks earning on average 74 bps, new loans and investments having lower yields overall, including low-yielding purchased 1-4 SFD mortgage loans.

Increased costs on interest bearing liabilities also had a negative impact on the variance primarily from two Federal Reserve fed funds rate increases in the second quarter of 2022 for a total of 125 basis points, and the issuance of subordinated debt mentioned above.

The Company’s net interest margin for the second quarter of 2022 was 3.40%, as compared to 3.60% for the second quarter of 2021.

The volume variance calculated for the first six months of 2022 relative to the first six months of 2021 reflects an unfavorable variance of $1.3 million, an unfavorable rate variance of $2.4 million, and an unfavorable mix variance of $0.7 million.

There was a decline in loan balances, partially offset by an increase in investment securities.

Interest bearing liabilities were relatively flat with an 11 basis point increase in cost, primarily from three Federal Reserve fed funds interest rate increases totaling 150 basis points and the issuance of variable rate subordinated debentures issued in September 2021.

The Company’s net interest margin for the first half of 2022 was 3.31%, as compared to 3.76% in the first half of 2021.

At June 30, 2022, approximately 8% of our total portfolio, or $122.7 million, consists of variable rate loans.

Of these variable rate loans, approximately $34.0 million have floors.

At March 31, 2022, our outstanding fixed rate loans represented 28% of our loan portfolio.

The remaining 65% of our loan portfolio at March 31, 2022 consists of adjustable-rate loans;

78% of these loans (approximately $1.0 billion) will not begin adjusting for at least another 3 years, but up to 10 years.

At June 30, 2022, our outstanding fixed rate loans represented 26% of our loan portfolio.

The remaining 66% of our loan portfolio at June 30, 2022 consists of adjustable-rate loans;

74% of these loans (approximately $930.9 million) will not begin adjusting for at least another 3 years, but up to 10 years.

These loans are typically adjustable every five years after the initial adjustment.

Approximately $47.8 million of these adjustable-rate loans have the ability to reprice next quarter.

Cash balances for the quarterly comparisons have increased and have a negative impact on our net interest margin since cash balances earn considerably lower yields than other earning assets.

Average cash and due from banks was $194.8 million, an increase of $118.3 million for the first quarter of 2021.

Overall average investment securities increased by $494.9 million for the first quarter of March 31, 2022 as compared to March 31, 2021.

For the quarter ending March 31, 2022 over the same period for 2021, average non-taxable securities increased $67.6 million and taxable securities increased $427.3 million.

The overall investment portfolio had a tax-equivalent yield of 2.22% at March 31, 2022, with an average life of 6.21 years.

Interest expense was $1.3 million in the first quarter of 2022, an increase of $0.4 million, or 47%, compared to the first quarter of 2021.

The increase in interest expense for the quarter is primarily attributable to the issuance of subordinated debentures in September of 2021 at 3.25%.

The average cost of interest-bearing deposits decreased by 1 basis point to 13 basis points for the first quarter of 2022 compared to the first quarter of 2021, while the average cost of borrowed funds increased 43 basis points for the first quarter of 2022 as compared to the same period in 2021.

Non-interest bearing demand deposits increased $116.6 million or 12% for the first quarter of 2022 as compared to the first quarter of 2021.

Approximately $54.3 million of these adjustable-rate loans have the ability to reprice next quarter, which will have a positive impact on earnings.

Cash balances for the quarter and year-to-date comparisons have decreased and having less of a negative impact on our net interest margin since cash balances earn considerably lower yields than other earning assets.

Average cash and due from banks was $146.3 million, a decrease of $162.2 million, or 53% for the second quarter of 2022, and was $22.7 million lower, or 12% for the first half of 2022 as compared to the same period in 2021.

Overall average investment securities increased by $452.7 million for the second quarter of June 30, 2022 as compared to June 30, 2021, and increased by $473.7 million for the first half of 2022.

For the quarter ending June 30, 2022 over the same period for 2021, average non-taxable securities increased $40.7 million and taxable securities increased $412.0 million.

For the first half of 2022 over the same period in 2021, average non-taxable securities increased $46.7 million and taxable securities increased $427.0 million.

The overall investment portfolio had a tax-equivalent yield of 2.65% at June 30, 2022, with an average life of 7.55 years.

Interest expense was $1.6 million for the second quarter of 2022, an increase of $0.7 million, or 80%, compared to the second quarter of 2021, and increased $1.1 million or 63% for the first six-months of 2022 as compared to the same period in 2021.

The increase in interest expense for the quarter is primarily attributable to the increase in the cost of time deposits tied to prime interest rate increases, while the year-to-date comparison included the increase in the cost of time deposits as well as the issuance of subordinated debentures in September of 2021 at a variable rate.

The average cost of interest-bearing deposits increased by 4 basis points to 18 basis points for the second quarter of 2022 compared to the second quarter of 2021, and by 2 basis points to 16 basis points for the first six-months of 2022 as compared to the same period in 2021.

The average cost of borrowed funds increased 52 basis points for the second quarter of 2022 as compared to the same period in 2021 and by 47 basis points for the first six-months of 2022 as compared to the first six-months of 2021.

Non-interest bearing demand deposits increased $80.1 million or 8% for the second quarter of 2022 as compared to the second quarter of 2021, and increased by $98.2 million or 10% for the first half of 2022 as compared to the first half of 2021.

PROVISION FOR CREDIT LOSSES ON LOANS AND LEASES

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The Company sets aside an allowance for credit losses on loans and leases, a contra-asset account, through periodic charges to earnings which are reflected in the income statement as the provision for credit losses on loans and leases.

The Company recorded an expense related to a credit loss provision for loans and leases of $0.6 million in the first quarter of 2022 relative to a provision for loan and lease losses of $0.3 million in the first quarter of 2021.

The higher provision for credit losses in the first quarter of 2022 over the same quarter in 2021, was primarily due to the impact of a $1.8 million in net charge-offs in the first quarter of 2022, partially offset by a decrease in the allowance for credit losses for loans evaluated on a pool basis.

The increase in net charge-offs in the first quarter of 2022 was primarily related to a single loan relationship that defaulted in late March 2022 upon the discovery of new information.

No additional allowance was booked for this loan individually evaluated for expected losses.

The first quarter of 2022 decrease in the allowance for credit losses evaluated on a pooled basis was primarily due to a decline in the qualitative factors resulting from improvements in regional economic factors.

Specifically identifiable and quantifiable credit losses are immediately charged off against the allowance, with subsequent recoveries reflected as an increase to the allowance.

The Company recorded net charge-offs of $1.8 million in the first quarter of 2022 as compared to net recoveries of $0.3 million for the comparative period of 2021.

The Company recorded an expense related to a credit loss provision for loans and leases of $2.5 million in the second quarter of 2022 relative to a provision for loan and lease losses benefit of $2.1 million in the second quarter of 2021, and a year-to-date credit loss provision for loans and leases of $3.1 million in 2022 as compared to a $1.9 million loan and lease loss provision benefit in 2021.

The higher provision for credit losses in the second quarter of 2022 over the same quarter in 2021, was primarily due to the impact of the change in reserve methodology from the incurred loss method to the current expected credit loss method combined with $2.3 million in net charge-offs in the second quarter of 2022 from a single office building loan relationship that was sold at a discount due to an increased risk of default that would have likely led to a prolonged collection period.

For the first six months of 2022 compared to the same period in 2021 the $5.0 million increase in provision for credit losses on loans and leases is due to the change in reserve methodology along with the impact of $4.1 million in net charge offs for the first six months of 2022.

The first half of 2022 was not only impacted by the loan relationship as mentioned above in the quarterly discussion but also by a charge-off on a single dairy loan relationship that defaulted in March 2022.

Specifically identifiable and quantifiable loan losses are immediately charged off against the allowance, with subsequent recoveries reflected as an increase to the allowance.

The Company recorded net charge-offs of $2.3 million in the second quarter of 2022 as compared to net recoveries of $0.2 million for the comparative period of 2021.

For the first six months of 2022, net charge-offs were $4.1 million as compared to $0.5 million in net recoveries for the same period of 2021.

The allowance for credit losses on loans and leases is at a level that, in Management’s judgment, is adequate to absorb probable credit losses on loans related to individually identified loans as well as probable incurred credit losses in the remaining loan portfolio.

1 unchanged sentence

NONINTEREST INCOME AND NONINTEREST EXPENSE

The following table provides details on the Company’s noninterest income and noninterest expense for the three and nine month periods ended March 31, 2022 and 2021:

The following table provides details on the Company’s noninterest income and noninterest expense for the three- and six-month periods ended June 30, 2022 and 2021:

Noninterest Income/Expense

(dollars in thousands, unaudited)

For the three months ended March 31,

For the three months ended June 30,

For the six months ended June 30,

Noninterest income:

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Legal & accounting

Acquisition costs

Other professional service

8 unchanged sentences

Noninterest Income:

Total noninterest income reflected a decrease of $0.8 million, or 11%, for the quarter ended March 31, 2022 as compared to the same quarter in 2021 due mostly to lower BOLI income and a decrease in the fair market value adjustment for an equity investment, partially offset by a gain on the sale of investment securities.

Service charges on deposit accounts increased by $0.3 million or 10%, for the quarterly comparison.

The variance was primarily due to increases in overdraft fees and analysis fees on treasury management customers.

Other service charges and fees increased $0.2 million or 9% for the first quarter of 2022 as compared to the same period in 2021 mainly due to an increase in debit card interchange fees from higher usage.

Gains of the sales of securities were $1.0 million for the first quarter of 2022.

There were no sales in the comparable quarter of 2021.

The sale in the first quarter of 2022 was a strategic effort to rebalance the portfolio by selling longer duration and higher price volatility securities as a hedge against rising interest rates, due to likely persistent inflationary pressures in the near-intermediate term environment.

BOLI income decreased by $1.2 million for the first quarter of 2022 as compared to the first quarter of 2021.

The variance is due mostly to fluctuations in underlying values of assets in the specific account BOLI policies that are designed to have similar assets to those in the deferred compensation plans.

Thus, the lower quarterly values in BOLI policies are offset by lower deferred compensation expense reflected primarily in director fees expense.

At March 31, 2022, there was $43.5 million in BOLI policies and $10.1 million in separate account BOLI policies associated with the deferred compensation plans.

In the “other” category of noninterest income the Company reflected a $1.1 million decrease in the first quarter of 2022 as compared to the first quarter of 2021.

The quarterly comparison includes a $1.2 million change in the valuation adjustment of the Company’s equity investment in Pacific Coast Bankers’ Bank.

The valuation of restricted stock held by the Company is required under FASB ASU 2016-01.

This stock is related to an equity investment in Pacific Coast Bankers’ Bank and is adjusted when financial information and an updated valuation report becomes available, generally in the late first quarter of each year.

Total noninterest income increased by $3.8 million, or 58%, for the quarter ended June 30, 2022 as compared to the same quarter in 2021 and increased $3.1 million, or 23% for the comparable year-to-date periods.

Service charges on customer deposit account income increased by $0.5 million, or 18%, to $3.2 million in the second quarter of 2022 as compared to the second quarter of 2021.

This service charge income was $0.8 million higher, or 14% in the first six months of 2022, as compared to the same period in 2021.

These increases in the quarterly and year-to-date comparisons are primarily a result of increased analysis fees and overdraft income.

Overdraft fees and returned check charges increased $0.2 million to $1.4 million for the second quarter of 2022, and increased $0.4 million to $2.7 million for the first six months of 2022.

Effective in the third quarter of 2022, the Company made several changes to its NSF fees (i.e.

returned item) and overdraft fees for customers.

In particular, NSF fees will no longer be charged, and overdraft fees will be limited to 4 per day and no continuous overdraft fee will be charged.

In addition, the amount of overdraft privilege (i.e.

the amount to which the Company will pay overdrafts for customers) was increased by $250.

Although the exact impact of these changes is unknown, the combination of eliminating NSF fees and increasing overdraft privilege is not expected to have a material impact on overall overdraft income.

Other service charges and fees decreased $0.2 million or 5% for the second quarter of 2022 as compared to the same period in 2021, and increased $0.1 million for the first half of 2022 as compared to the same periods in 2021.

The unfavorable variance for the quarterly comparison is mostly due to lower miscellaneous loan fees while the increase for the year to date comparison is mainly due to an increase in debit card interchange fees from higher usage.

There were no gains of the sales of securities for the second quarter of 2022 or 2021, but there was a $1.0 million gain on the sale of securities for the first half of 2022 with no sales in the comparable year-to-date period of 2021.

The sale in the first half of 2022 was a strategic effort to rebalance the portfolio by selling longer duration and higher price volatility securities as a hedge against rising interest rates, due to likely persistent inflationary pressures in the near-intermediate term environment.

BOLI income decreased by $1.4 million for the second quarter of 2022 as compared to the second quarter of 2021.

At June 30, 2022, there was $42.9 million in traditional BOLI policies and $9.3 million in separate account corporate owned life insurance policies associated with the deferred compensation plans.

Investments in the separate account variable life insurance policies are invested in a similar proportionate mix of asset classes that our deferred compensation participants have elected, with the exception of participant elections in a fixed income account.

Such election by plan participants in the fixed income account is ignored which creates greater volatility of the corporate owned life insurance asset value as compared to the related liability balance for deferred compensation.

More specifically, the specific account life insurance policies are designed to hold similar assets to the deemed investments in the director and employee deferred compensation plans.

Directors and officers are allowed to make a deemed investment in a fixed income account designed to mirror the crediting rate on one of the life insurance policies.

However, the amount of deferred compensation elected to attributed to the fixed income account significantly exceeds the amount of life insurance invested in a similar fixed income account.

As the life insurance funding does not closely match the deferred compensation deemed investments, fluctuations occur in earnings of the life insurance plan as compared to the related expense of the deferred compensation plan.

If earnings on the life insurance plan are negative, it creates a scenario where the negative income is not tax deductible and has an unfavorable impact on the Company’s tax rate.

This occurred in 2022 as the lower quarterly values in the life insurance policies were only partially offset by lower deferred compensation expense reflected primarily in director fees expense.

For the first half of 2022 as compared to the same period in 2021 life insurance income was $2.6 million lower and the related deferred compensation was $1.8 million lower.

In the “other” category of noninterest income the Company reflected a $4.9 million increase in the second quarter of 2022 as compared to the second quarter of 2021, and a $3.8 million increase in the first half of 2022 as compared to the same period in 2021.

The quarterly and year-to-date comparison includes non-recurring gains resulting from the sale of Visa B stock of $2.6 million and a small business investment company fund investment of $0.6 million, as well as $0.4

million in life insurance proceeds, a $1.0 million recovery of prior year legal expenses, and a $0.2 million gain from a recovery on an acquired loan.

Noninterest Expense:

Total noninterest expense had a favorable decline of $0.1 million in the first quarter of 2022 as compared to the first quarter of 2021.

The tax-equivalent efficiency ratio was 67.08% in the first quarter of 2022 as compared to 56.43% in the same quarter of 2021.

Total noninterest expense increased by $1.9 million, or 9%, in the second quarter of 2022 relative to the second quarter of 2021, and by $1.8 million, or 4%, in the first six months of 2022 as compared to the first six months of 2021.

The tax-equivalent efficiency ratio was 59.19% in the second quarter of 2022 as compared to 58.79% in the same quarter of 2021, and was 62.70% for the first half of 2022 as compared to 57.58% for the first half of 2021.

The efficiency ratio represents total noninterest expense divided by the sum of fully tax-equivalent net interest and noninterest income;

the provision for credit losses on loans and leases and investment gains/losses are excluded from the equation.

The ratio spiked higher in the first three months of 2022 despite lower noninterest expense because the denominator of the equation, net interest income and noninterest income was lower during the same period, mainly due to lower interest earning assets.

Salaries and benefits were $0.7 million higher in the first quarter of 2022 as compared to the first quarter of 2021.

The increase in the year-over-year quarterly comparison is due to several factors, including merit increases for employees due to annual performance evaluations during the period, higher payroll taxes in the first quarter, and the strategic hiring of lending and management staff.

Overall full-time equivalent employees were 484 at March 31, 2022 as compared to 508 at March 31, 2021.

Occupancy expense was $0.2 million lower for the first quarter of 2022 as compared to the same quarter last year.

We closed five branch facilities in the second quarter of 2021 which impacted the decrease for the year over year quarterly comparison.

Further, other noninterest expense categories were $0.7 million lower for the first quarter 2022 as compared to the first quarter in 2021.

The principal decreases were in loan services costs mostly from the write up of the provision for credit losses on unfunded commitments for $0.1 million, a favorable variance in foreclosed asset costs for $0.1 million as all but one OREO property was sold in 2021, thus our carrying costs have decreased and a $0.8 million decrease in professional services costs.

The positive variance in professional services costs came mostly from a decrease in directors deferred compensation expense which is linked to the fluctuations in BOLI income.

Salaries and Benefits were $1.3 million, or 13%, higher in the second quarter of 2022 as compared to the second quarter of 2021 and $2.0 million, or 9% higher for the first six months of 2022 compared to the same period in 2021.

The reason for this increase is primarily due to increased salary expense due to the strategic hiring of lending and management staff for both the quarterly and year-to-date comparisons.

Overall full-time equivalent employees were 504 at June 30, 2022 as compared to 486 at June 30, 2021.

Occupancy expenses were $0.2 million lower for the second quarter of 2022 as compared to the same quarter in 2021 and $0.4 million lower for the first half of 2022 as compared to the first half of 2021.

The primary reason for this decrease was from a decrease in premises depreciation due to the sale of a branch building which was closed in the third quarter of 2021.

Other noninterest expense increased $0.8 million, or 11% for the second quarter 2022 as compared to the second quarter in 2021, and increased $0.2 million, or 2% for the first half of 2022 as compared to the same period in 2021.

The variance for the second quarter of 2022 compared to the same period in 2021 was driven by a $0.7 million accrual for restitution payments to customers charged nonsufficient fund fees in the past five years for representments.

This accrual was established after the FDIC published a change in its position in how such representments are characterized for regulatory purposes.

The Company also incurred higher costs of $0.3 million associated with postage and mailing of new account agreements to customers as well as higher professional fees associated with this matter.

Beginning in the third quarter of 2022, the Company will no longer charge customers for returned item fees, commonly referred to as nonsufficient fund fees.

In addition, the Company increased overdraft privilege for both commercial and consumer customers, but will limit the number of daily overdraft fees to four per day (previously five per day) and will no longer charge a fee for continuous overdrafts (previously a $35 charge after the 10 th consecutive day an account is in an overdraft position).

These changes to our nonsufficient fund fees, overdraft fees and overdraft privilege program are not expected to have a material impact on deposit fee income.

In addition, there was a $0.4 million increase in recruitment costs associated with new lending teams and management staff.

For the quarterly and year-to-date comparisons decreases in deferred compensation expense for directors, which is linked to the changes in life insurance income partially offset the increases.

PROVISION FOR INCOME TAXES

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Our tax credits consist primarily of those generated by investments in low-income housing tax credit funds.

The Company's provision for income taxes was 27.0% of pre-tax income in the first quarter of 2022 relative to 25.5% in the first quarter of 2021.

The increase in effective tax rate in the first quarter of 2022 is due to tax credits and tax-exempt income representing a smaller percentage of total taxable income.

The Company's provision for income taxes was 26.3% of pre-tax income in the second quarter of 2022 relative to 25.3% in the second quarter of 2021, and 26.6% of pre-tax income for the first half of 2022 relative to 25.4% for the same period in 2021.

The increase in effective tax rate for both the quarterly and year-to-date comparisons is due to the volatility in the Corporate Owned Life Insurance asset value associated with our non-qualified deferred compensation plans.

second quarter and first half of 2022, the investments associated with the non-qualified deferred compensation plans declined in value, resulting in a non-deductible expense as compared to an increase in value generating non-taxable income for the second quarter, and first half of 2021.

BALANCE SHEET ANALYSIS

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and 5) they can provide partially tax exempt income.

The investment portfolio is reflected on the balance sheet as investment securities and totaled $1.03 billion, or 30% of total assets at March 31, 2022, and $973.3 million, or 29% of total assets at December 31, 2021.

In addition, within the Cash and Due from Banks account on the balance sheet was $186.4 million of surplus interest earning balances in our Federal Reserve Bank account at March 31, 2022, as compared to $193.2 million at December 31, 2021.

The investment portfolio is reflected on the balance sheet as investment securities and totaled $1.03 billion, or 30% of total assets at June 30, 2022, and $973.3 million, or 29% of total assets at December 31, 2021.

The increase was primarily due to purchases of $215.3 million to deploy cash into interest earning assets and to provide Balance Sheet diversification.

In addition, within the Cash and Due from Banks account on the balance sheet was $79.8 million of surplus interest earning balances in our Federal Reserve Bank account at June 30, 2022, as compared to $193.2 million at December 31, 2021.

Surplus balances in our Federal Reserve Bank account and fed funds sold to correspondent banks typically represent the temporary investment of excess liquidity.

The Company carries investments at their fair market values.

We currently have the intent and ability to hold our investment securities to maturity, but the securities are all marketable and are classified as “available for sale” to allow maximum flexibility with regard to interest rate risk and liquidity management.

The expected average duration was 3.0 years at March 31, 2022, as compared to an average effective duration of 3.2 years at year-end 2021.

The following table sets forth the amortized cost and fair market value of Company’s investment portfolio by investment type as of the dates noted:

The Company carries “available for sale” investments at their fair market values and “held to maturity” investments at amortized cost.

We currently have the intent and ability to hold our investment securities to maturity, but the securities are all marketable.

The expected average duration was 3.2 years at June 30, 2022, and at year-end 2021.

In the second quarter of 2022 the Company transferred $162.1 million of “available for sale” investments to “held to maturity”.

Those securities were transferred at fair market value on the date of the transfer.

The transfer was initiated to reduce the effect of potential future rate increases on the available-for-sale portfolio, mark-to-market, other comprehensive income and equity.

See Note 9, Investment Securities for additional information.

The following table sets forth the carrying amount for available-for-sale securities, at fair value, and held-to-maturity securities, at amortized cost, net of the allowance for credit losses of the Company’s investment portfolio by investment type as of the dates noted:

Investment Portfolio

(dollars in thousands, unaudited)

March 31, 2022

June 30, 2022

December 31, 2021

Carrying Amount

Available for sale

4 unchanged sentences

Collateralized loan obligations

Total available for sale

Held to maturity

government agencies

Mortgage-backed securities

State and political subdivisions

Total held to maturity

Total securities

The net unrealized loss on our investment portfolio, or the amount by which amortized cost exceeded aggregate fair market values, was $25.1 million at March 31, 2022, a $41.0 million swing relative to the net unrealized gain of $15.9 million at December 31, 2021.

The change was caused by increased long-term market interest rates on fixed-rate bond values.

Since the declines in market values were primarily attributable to changes in interest rates and volatility in the financial markets and not a result of an expected credit loss, no allowance for credit losses was recorded as of March 31, 2022.

Municipal bond balances comprise 28% of our total securities portfolio (fair value) at March 31, 2022, and 31% at December 31, 2021.

Municipal bonds purchased have strong underlying ratings, and we review all municipal bonds in our portfolio every quarter for potential impairment.

The corporate bonds purchased in the first three months 2022 and throughout 2021 are exclusively subordinated debentures of bank holding companies.

These bonds were subject to a credit review by the credit administration department prior to their purchase and are subject to quarterly potential impairment reviews.

The purchases of collateralized loan obligations (“CLOs”) are exclusively AAA and AA rated tranches.

Each purchase is subject to a credit, concentration, and structure review by the credit administration department prior to their purchase and are subject to quarterly potential impairment reviews.

The AAA and AA-rated CLO purchases were primarily a balance sheet diversification strategy to utilize available liquidity without adding duration.

In addition to providing asset class diversification given the high level of real estate backed earning assets on the balance sheet, these floating rate CLOs are more asset sensitive which complements the longer-term fixed-rate earning assets.

Investment securities that were pledged as collateral for borrowings and/or potential borrowings from the Federal Home Loan Bank and the Federal Reserve Bank, customer repurchase agreements, and other purposes as required or permitted by law totaled $160.7 million at March 31, 2022 and $167.2 million at December 31, 2021, leaving $864.3 million in unpledged debt securities at March 31, 2022 and $806.1 million at December 31, 2021.

Securities that were pledged in excess of actual pledging needs and were thus available for liquidity purposes, if needed, totaled $40.4 million at March 31, 2022 and $47.0 million at December 31, 2021.

Investment securities that were pledged as collateral for borrowings and/or potential borrowings from the Federal Home Loan Bank and the Federal Reserve Bank, customer repurchase agreements, and other purposes as required or permitted by law totaled $169.2 million at June 30, 2022 and $167.2 million at December 31, 2021, leaving $842.1 million in unpledged debt securities at June 30, 2022 and $806.1 million at December 31, 2021.

Securities that were pledged in excess of actual pledging needs and were thus available for liquidity purposes, if needed, totaled $38.2 million at June 30, 2022 and $47.0 million at December 31, 2021.

LOAN AND LEASE PORTFOLIO

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The balances in the table are before deferred or unamortized loan origination, extension, or commitment fees, and deferred origination costs.

While not reflected in the loan totals and not currently comprising a

material segment of our lending activities, the Company also occasionally originates and sells, or participates out portions of, loans to non-affiliated investors.

While not reflected in the loan totals and not currently comprising a material segment of our lending activities, the Company also occasionally originates and sells, or participates out portions of, loans to non-affiliated investors.

Loan and Lease Distribution

(dollars in thousands, unaudited)

March 31, 2022

June 30, 2022

December 31, 2021

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Total loans and leases, net

Gross loans and leases at $2.0 billion, remained relatively flat during the first quarter of 2022 with an overall 0.3% change.

The net change did have some offsetting components with the larger fluctuations being a $44.0 million decline on mortgage warehouse line utilization.

There was also a $25.8 million decrease in non-owner occupied commercial real estate, and a $16.8 million of decrease in Small Business Administration’s Paycheck Protection Program (“PPP”) loans.

These declines were mostly offset by a $109.4 million increase in 1-4 family mortgage loans due to purchases of high-quality jumbo mortgage loans designed as a bridge to organic loan growth as the Bank’s core pipeline continues to improve with the recent hiring of loan teams which will further diversify the loan portfolio by specializing in various categories of agricultural real estate and agricultural production loans.

The Company’s regulatory commercial real estate concentration ratio decreased to 234% at March 31, 2022 as compared to 248% at December 31, 2021.

Regarding line utilization, unused commitments, excluding mortgage warehouse and consumer overdraft lines, were $224.4 million at March 31, 2022, compared to $242.3 million at December 31, 2021.

Total utilization excluding mortgage warehouse and consumer overdraft lines was 61% at March 31, 2022, compared to 61% at December 31, 2021.

Mortgage warehouse utilization was 16% at March 31, 2022, as compared to 28% at December 31, 2021.

Utilization of mortgage warehouse lines in the future could be impacted by fluctuations in interest rates, seasonality, and other factors affecting home purchasing or refinancing demand including economic uncertainty.

Gross loans and leases at $2.0 billion, increased $32.9 million during the first half of 2022 with an overall 2% change.

The increase in gross loan balances as compared to December 31, 2021 was primarily a result of an increase in 1-4 family residential real estate loans, mostly from the purchase of $173.1 million in high quality jumbo mortgage loans designed as a bridge to organic growth, and a $12.8 million organic increase in multi-family residential loans.

Organic loan production for the first half of 2022 was $142.1 million, a 61% increase, as compared to $88.3 million for the comparative period in 2021, as the new lending teams hired earlier in the year have been gaining traction in our market.

Counterbalancing these positive variances were loan paydowns, charge-offs and maturities resulting in net declines in many categories even with higher loan production.

In particular, there was a $20.4 million net decrease in construction loans, a $9.9 million net decline in commercial real estate loans, a $37.0 million net reduction in commercial and industrial loans, a $43.0 million unfavorable change in mortgage warehouse line utilization, and a $10.2 million net decline in agricultural loans.

Further, SBA PPP loan forgiveness resulted in a $23.6 million decline in loan balances, included in the commercial and industrial variance noted above.

The following table presents a roll forward of the Company’s gross loan balances for each of the periods noted:

LOAN ROLLFORWARD

(Dollars in Thousands, Unaudited)

For the three months ended:

For the six months ended:

June 30, 2022

March 31, 2022

June 30, 2021

June 30, 2022

June 30, 2021

Gross loans beginning balance

New credit extended

Loan purchases

Changes in line of credit utilization

Change in mortgage warehouse

Pay-downs, maturities, charge-offs and amortization (1)

Gross loans ending balance

Deferred costs and (fees), net

Loans, net of deferred costs and (fees)

The Company’s regulatory commercial real estate concentration ratio decreased to 238% at June 30, 2022 as compared to 248% at December 31, 2021.

Unused commitments, excluding mortgage warehouse and overdraft lines, were $199.4 million at June 30, 2022, compared to $242.3 million at December 31, 2021.

Total line utilization, excluding mortgage warehouse and consumer overdraft lines, was 61.2% at June 30, 2022 and 61.0% at December 31, 2021.

Mortgage warehouse utilization declined significantly to 12% at June 30, 2022, as compared to 28% at December 31, 2021.

It should be noted that approximately $278.0 million of the mortgage warehouse lines were moved to repurchase agreement lines that provide stronger credit protection to the Company, as well as more favorable regulatory capital treatment as these repurchase lines are not considered off-balance sheet commitments.

As expected, PPP loans continue to decline as borrowers receive forgiveness on these loans.

There were 160 loans for $15.0 million outstanding at March 31, 2022, compared to 438 loans for $31.8 million at December 31, 2021.

There were 107 loans for $8.2 million outstanding at June 30, 2022, compared to 438 loans for $31.8 million at December 31, 2021.

NONPERFORMING ASSETS

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(dollars in thousands, unaudited)

March 31, 2022

June 30, 2022

December 31, 2021

March 31, 2021

June 30, 2021

NON-ACCRUAL LOANS:

Other construction/land

1-4 family - closed-end

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(1) Performing TDRs are not included in nonperforming loans above, nor are they included in the numerators used to calculate the ratios disclosed in this table.

Total nonperforming assets increased by $25.9 million, to $30.6 million during the first three months of 2022, primarily as a result of one relationship in the dairy industry consisting of four separate loans.

These loans were written down by $1.96 million in the first quarter of 2022 and no further allowance for credit losses was deemed necessary on these loans.

The Company's ratio of nonperforming loans to gross loans increased to 1.54% at March 31, 2022 from 0.23% at December 31, 2021;

due primarily to the loan relationship downgrade previously mentioned.

Total nonperforming assets increased by $25.1 million, to $29.7 million during the first half of 2022, primarily as a result of a downgrade in the first quarter of 2022, consisting of one relationship in the dairy industry comprising four separate loans.

These loans were written down by $1.96 million and no further allowance for credit losses was deemed necessary on these loans.

The Company's ratio of nonperforming loans to gross loans increased to 1.47% at June 30, 2022 from 0.23% at December 31, 2021.

All of the Company's nonperforming assets are periodically reviewed and are either well-reserved based on current loss expectations or are carried at the fair value of the underlying collateral, net of expected disposition costs.

As shown in the table, we also had $4.6 million in loans classified as performing TDRs on which we were still accruing interest as of March 31, 2022, a decrease of $0.3 million, or 7%, relative to December 31, 2021.

Foreclosed assets had a carrying value of $0.1 million at March 31, 2022 and December 31, 2021 comprised of one property classified as OREO.

As shown in the table, we also had $4.7 million in loans classified as performing TDRs on which we were still accruing interest as of June 30, 2022, a decrease of $0.2 million, or 4%, relative to December 31, 2021.

Foreclosed assets had a carrying value of $0.002 million at June 30, 2022 and $0.1 million December 31, 2021 comprised of one property classified as OREO.

The property was written down to fair value less disposition costs in the second quarter of 2022 and subsequently sold in the third quarter of 2022.

All foreclosed assets are periodically evaluated and written down to their fair value less expected disposition costs, if lower than the then-current carrying value.

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Collection efforts are continuously pursued for all nonperforming loans, but we cannot provide assurance that they will be resolved in a timely manner or that nonperforming balances will not increase.

The Company had $3.0 million in loans past due 30-59 days at March 31, 2022.

The Company had $5.3 million in loans past due 30-59 days at June 30, 2022.

This is an increase of $3.1 million over the balance at December 31, 2021.

All of these past due loans are under management supervision and every effort is being taken to assist the borrowers and manage credit risk in this regard.

As described above, the Company provided loan modifications to certain customers and took advantage of either Section 4013 of the CARES Act or the April 7, 2020 Interagency Statement, which provides that such modifications do not result in treatment of such loan as a TDR.

Since April 2020, the Company modified approximately $426 million of its loans under this guidance.

For the Company, these modifications typically provided a deferral of both principal and interest for 180 days.

Interest continues to accrue during the deferral period.

At the end of the deferral period, for term loans, payments will be applied to accrued interest first and after the accrued interest is paid in full, the loan will be re-amortized with the maturity extended.

For lines of credit, the borrower must repay the accrued interest at the end of the deferral period or take out a second credit facility to repay the accrued interest.

As of March 31, 2022, there were no loans remaining on deferral with the Company.

ALLOWANCE FOR CREDIT LOSSES – LOANS AND LEASES RECEIVABLE

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Upon implementation the Company recorded a $10.4 million increase in the allowance for credit losses, which included a $0.9 million reserve for unfunded commitments as an adjustment to equity, net of deferred taxes.

The Company's allowance for credit losses on loans and leases was $22.5 million at March 31, 2022, as compared to $14.3 million at December 31, 2021, and $18.3 million at March 31, 2021.

The $8.3 million increase in the allowance for credit losses on loan and leases during the first quarter of 2022 is due to a $9.5 million one-time adjustment from the implementation of CECL on January 1, 2022, a $0.6 million provision for credit losses on loan and leases, and net loan charge-offs of $1.8 million.

The allowance was 1.14% of total loans at March 31, 2022, 0.72% of total loans at December 31, 2021, and 0.80% of total loans at March 31, 2021.

Management's detailed analysis indicates that the Company's allowance for credit losses on loan and leases should be sufficient to cover credit losses for the life of the loan and leases outstanding as of March 31, 2022, but no assurance can be given that the Company will not experience substantial future losses relative to the size of the loan and lease loss allowance.

A separate allowance of $1.0 million for potential credit losses inherent in unused commitments is included in other liabilities at March 31, 2022, as compared to $0.2 million at December 31, 2021.

As mentioned previously a $0.9 million one-time adjustment was recorded to the reserve for unfunded commitments on January 1, 2022 upon the implementation of CECL.

The Company's allowance for credit losses on loans and leases was $22.8 million at June 30, 2022, as compared to $14.3 million at December 31, 2021, and $16.4 million at June 30, 2021.

The $8.5 million increase in the allowance for credit losses on loans and leases during the first half of 2022 is due to a $9.5 million one-time adjustment from the implementation of CECL on January 1, 2022, a $3.1 million provision for credit losses on loans and leases, and net loan charge-offs of $4.1 million.

The allowance was 1.13% of gross loans at June 30, 2022, 0.72% of gross loans at December 31, 2021, and 0.77% of total loans at June 30, 2021.

Management's detailed analysis indicates that the Company's allowance for credit losses on loans and leases should be sufficient to cover credit losses for the life of the loans and leases outstanding as of June 30, 2022, but no assurance can be given that the Company will not experience substantial future losses relative to the size of the loan and lease loss allowance.

A separate allowance of $0.9 million for potential credit losses inherent in unused commitments is included in other liabilities at June 30, 2022, as compared to $0.2 million at December 31, 2021.

As mentioned previously a $0.9 million

one-time adjustment was recorded to the reserve for unfunded commitments on January 1, 2022 upon the implementation of CECL.

The following table summarizes activity in the credit allowance for losses on loans and leases for the noted periods:

36 unchanged sentences

(1) Average balances are obtained from the best available daily or monthly data and are net of deferred fees and related direct costs.

The Company’s credit allowance for losses on loans and leases at March 31, 2022 represents Management’s best estimate of expected losses in the loan portfolio as of that date, but no assurance can be given that the Company will not experience substantial losses relative to the size of the allowance.

The Company’s credit allowance for losses on loans and leases at June 30, 2022 represents Management’s best estimate of expected losses in the loan portfolio as of that date, but no assurance can be given that the Company will not experience substantial losses relative to the size of the allowance.

Furthermore, fluctuations in credit quality, changes in economic conditions, updated accounting or regulatory requirements, and/or other factors could induce us to augment or reduce the allowance.

2 unchanged sentences

It is unlikely that all unused commitments will ultimately be drawn down.

Unused commitments to extend credit, which included standby letters of credit, totaled $582 million at March 31, 2022 and $561 million at December 31, 2021, representing approximately 29% of gross loans outstanding at March 31, 2022 and 28% at December 31, 2021.

Unused commitments to extend credit, which included standby letters of credit, totaled $513 million at June 30, 2022 and $561 million at December 31, 2021, representing approximately 25% of gross loans outstanding at June 30, 2022 and 28% at December 31, 2021.

The decrease in unused commitments is due in large part to the decrease in loan balances with unfunded commitments.

The Company also had undrawn letters of credit issued to customers totaling $3.6 million at March 31, 2022 and December 31, 2021.

The effect on the Company’s revenues, expenses, cash flows and liquidity from the unused portion of commitments to provide credit cannot be reasonably predicted because there is no guarantee that the lines of credit will ever be used.

The Company also had undrawn letters of credit issued to customers totaling $3.6 million at June 30, 2022 and December 31, 2021.

The effect on the Company’s

revenues, expenses, cash flows and liquidity from the unused portion of commitments to provide credit cannot be reasonably predicted because there is no guarantee that the lines of credit will ever be used.

However, the “Liquidity” section in this Form 10-Q outlines resources available to draw upon should we be required to fund a significant portion of unused commitments.

In addition to unused commitments to provide credit, the Company is utilizing a $125 million letter of credit issued by the Federal Home Loan Bank on the Company’s behalf as security for certain local agency deposits which totaled $78.3 million at March 31, 2022.

That letter of credit is backed by loans that are pledged to the FHLB by the Company.

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If a “long” position is prevalent, we could let brokered deposits or other wholesale borrowings roll off as they mature, or we might invest excess liquidity into investments or loans, subject to the bank’s risk tolerances.

The Company’s balance of non-earning cash and due from banks was $66.0 million at March 31, 2022 relative to $63.1 million at December 31, 2021.

The Company’s balance of non-earning cash and due from banks was $82.1 million at June 30, 2022 relative to $63.1 million at December 31, 2021.

Foreclosed assets are discussed above in the section titled “Nonperforming Assets.”

Net premises and equipment decreased by $0.3 million during the first three months of 2022, to $23.2 million.

This decline was primarily a result of normal depreciation during the quarter net of new purchases.

Goodwill was $27.4 million at March 31, 2022, unchanged during the first three months of 2022.

Net premises and equipment decreased by $0.6 million during the first half of 2022, to $22.9 million.

This decline was primarily a result of normal depreciation, net of new purchases.

Goodwill was $27.4 million at June 30, 2022, unchanged during the first half of 2022.

Goodwill is tested for impairment annually, unless events and circumstances exist which indicate that an impairment test should be performed.

A Goodwill impairment test was last performed during the fourth quarter 2021 and determined that no impairment existed.

There have been no triggering events in the first three months of 2022 that would require the Company to perform a Goodwill impairment test, however the Company will continue to monitor its Goodwill for potential impairment.

Bank-owned life insurance, with a balance of $53.6 million at March 31, 2022, is discussed in detail above in the “Noninterest Income and Noninterest Expense” section.

There have been no triggering events in the first six months of 2022 that would require the Company to perform a Goodwill impairment test, however the Company will continue to monitor its Goodwill for potential impairment.

Bank-owned life insurance, with a balance of $52.2 million at June 30, 2022, is discussed in detail above in the “Noninterest Income and Noninterest Expense” section.

DEPOSITS AND INTEREST BEARING LIABILITIES

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(dollars in thousands, unaudited)

March 31, 2022

June 30, 2022

December 31, 2021

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Brokered deposits

Deposit balances reflect net growth of $83.4 million, or 3%, during the first three months of 2022.

Time deposits were $293.7 million at March 31, 2022 as compared to $293.9 million at December 31, 2021.

Brokered deposits were unchanged at $60.0 million at March 31, 2022 from December 31, 2021.

Non-maturity deposit growth of $83.6 million for the first three months of 2022 was primarily the result of increases in balances of existing customers as the total number of customers was relatively unchanged.

Deposit balances reflect net growth of $69.4 million, or 2%, during the first half of 2022.

Time deposits were $299.8 million at June 30, 2022 as compared to $293.9 million at December 31, 2021.

Brokered deposits were unchanged at $60.0 million at June 30, 2022 from December 31, 2021.

Non-maturity deposit growth of $63.5 million for the first half of 2022 was primarily the result of increases in balances of existing customers as the total number of customers was relatively unchanged.

Management is of the opinion that a relatively high level of core customer deposits is one of the Company’s key strengths, and we continue to strive for core deposit retention and growth.

In particular, the Company’s ratio of noninterest-bearing deposits to total deposits was 38.6% at March 31, 2022 as compared to 39.0% at December 31, 2021.

In particular, the Company’s ratio of noninterest-bearing deposits to total deposits was 39.3% at June 30, 2022 as compared to 39.0% at December 31, 2021.

OTHER INTEREST-BEARING LIABILITIES

The Company’s non-deposit borrowings may, at any given time, include fed funds purchased from correspondent banks, borrowings from the Federal Home Loan Bank, advances from the Federal Reserve Bank, securities sold under agreements to repurchase, and/or junior subordinated debentures.

The Company uses short-term FHLB advances and fed funds purchased on uncommitted lines to support liquidity needs created by seasonal deposit flows, to temporarily

satisfy funding needs from increased loan demand, and for other short-term purposes.

The Company uses short-term FHLB advances and fed funds purchased on uncommitted lines to support liquidity needs created by seasonal deposit flows, to temporarily satisfy funding needs from increased loan demand, and for other short-term purposes.

The FHLB line is committed, but the amount of available credit depends on the level of pledged collateral.

Total non-deposit interest-bearing liabilities increased by $0.9 million, during the first three months of 2022 primarily due to an increase in customer repurchase agreements.

Repurchase agreements totaled $107.8 million at March 31,2022 relative to a balance of $106.9 million at year-end 2021.

Total non-deposit interest-bearing liabilities increased by $11.2 million, during the first half of 2022 primarily due to an increase in customer repurchase agreements.

Repurchase agreements totaled $118.0 million at June 30, 2022 relative to a balance of $106.9 million at year-end 2021.

Repurchase agreements represent “sweep accounts”, where certain customers have elected to have their commercial deposit balances above a specified threshold transferred at the close of each business day into non-deposit investments accounts.

The balance in the investment account is used to have the customer purchase securities or a perfected interest in specifically identified pledged securities from the bank, which are then repurchased by the bank from the customer the next business day.

The Company had Long term debt totaling $49.2 million and $49.1 million at March 31, 2022 and December 31, 2021, respectively, in the form of 3.25% fixed – floating subordinated debt with a ten-year maturity and junior subordinated debentures totaling $35.3 million at both March 31, 2022 and December 31, 2021, in the form of long-term borrowings from trust subsidiaries formed specifically to issue trust preferred securities.

The Company had Long term debt totaling $49.2 million and $49.1 million at June 30, 2022 and December 31, 2021, respectively, in the form of 3.25% fixed – floating subordinated debt with a ten-year maturity and junior subordinated debentures totaling $35.4 million at June 30, 2022 and $35.3 million at December 31, 2021, in the form of long-term borrowings from trust subsidiaries formed specifically to issue trust preferred securities.

OTHER NONINTEREST BEARING LIABILITIES

Other liabilities are principally comprised of operating lease right-of-use liabilities, accrued interest payable, other accrued but unpaid expenses, and certain clearing amounts.

The Company’s balance of other liabilities was $36.0 million at March 31, 2022 as compared to $35.6 million at December 31, 2021.

The Company’s balance of other liabilities was $43.1 million at June 30, 2022 as compared to $35.4 million at December 31, 2021, an increase of $7.8 million or 22%.

The increase was primarily driven by the Company’s investment commitment in a $2.0 million low income housing tax credit fund and $5.0 million investment commitment in a FinTech Fund.

LIQUIDITY AND MARKET RISK MANAGEMENT

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To meet these short-term needs, we can borrow overnight funds from other financial institutions, draw advances via Federal Home Loan Bank lines of credit, or solicit brokered deposits if customer deposits are not immediately obtainable from local sources.

At March 31, 2022 and December 31, 2021, the Company had the following sources of primary and secondary liquidity (dollars in thousands):

At June 30, 2022 and December 31, 2021, the Company had the following sources of primary and secondary liquidity (dollars in thousands):

Primary and secondary liquidity sources

March 31, 2022

June 30, 2022

December 31, 2021

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In addition to the above sources, the Company could obtain brokered deposits, obtain deposits via deposit listing services, or offer higher rate time deposits within our market.

Cash and cash equivalents during the first three months of 2022, declined $4.0 million due to increases in investment securities.

Utilization of remaining excess liquidity is expected to come from a combination of new loans, including loan purchases, and new investment purchases.

Cash and cash equivalents during the first half of 2022, declined $95.7 million due to increases in investment securities and loans and leases.

Utilization of remaining excess liquidity is expected to come from a combination of new organic loan originations, and new investment purchases, mostly in the form of collateralization loan obligations.

In addition, it is possible that a portion of the deposits built-up during the COVID-19 pandemic could be withdrawn by customers.

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The Company has a higher level of actual balance sheet liquidity than might otherwise be the case, since we utilize a letter of credit from the FHLB rather than investment securities for certain pledging requirements.

That letter of credit, which is backed by loans pledged to the FHLB by the Company, totaled $125 million at March 31, 2022 and December 31, 2021.

That letter of credit, which is backed by loans pledged to the FHLB by the Company, totaled $125 million at June 30, 2022 and December 31, 2021.

Other sources of liquidity include the brokered deposit market, deposit listing services, and the ability to offer local time-deposit campaigns.

Management is of the opinion that available investments and other potentially liquid assets, along with standby funding sources it has arranged, are more than sufficient to meet the Company’s current and anticipated short-term liquidity needs and that its liquidity has not been adversely impacted by COVID-19.

The Company’s primary liquidity ratio and net loans to deposits were 40.43% and 69.19%, respectively, at March 31, 2022, as compared to internal policy guidelines of “greater than 15%” and “less than 95%.” Ratios and sub-limits for the various components comprising wholesale funding, which were all well within policy guidelines at March 31, 2022, are also periodically reviewed by Management and the Board.

Management is of the opinion that available investments and other potentially liquid

assets, along with standby funding sources it has arranged, are more than sufficient to meet the Company’s current and anticipated short-term liquidity needs and that its liquidity has not been adversely impacted by COVID-19.

The Company’s primary liquidity ratio and net loans to deposits were 36.56% and 70.11%, respectively, at June 30, 2022, as compared to internal policy guidelines of “greater than 15%” and “less than 95%.” Ratios and sub-limits for the various components comprising wholesale funding, which were all well within policy guidelines at June 30, 2022, are also periodically reviewed by Management and the Board.

The Company has been able to maintain a robust liquidity position in recent periods, but no assurance can be provided that our liquidity position will continue at current strong levels.

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Its primary source of funds is dividends from the Bank since the holding company does not conduct regular banking operations.

As of March 31, 2022, the holding company maintained a cash balance of $11.6 million.

As of June 30, 2022, the holding company maintained a cash balance of $7.5 million.

Management anticipates that the holding company has sufficient liquidity to meet its funding requirements for the foreseeable future.

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The principal objective of interest rate risk management is to manage the financial components of the Company’s balance sheet in a manner that will optimize the risk/reward equation for earnings and capital under a variety of interest rate scenarios.

The Company reclassified $162.1 million of securities that have the highest level of volatility to changes in interest rates from available-for-sale to held-to-maturity to mitigate the impact on tangible capital.

To identify areas of potential exposure to interest rate changes, we utilize commercially available modeling software to perform monthly earnings simulations and calculate the Company’s market value of portfolio equity under varying interest rate scenarios.

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Those scenarios may be supplemented, reduced in number, or otherwise adjusted as determined by Management to provide the most meaningful simulations considering economic conditions and expectations at the time.

Given the current near zero interest rate environment it is unlikely that rates could decline much further beyond the downward shock of 100 basis points, therefore the downward shock scenarios of 200, 300, and 400 basis points are temporarily being suspended after concurrence by the Company’s Board of Directors.

The downward shock scenarios of 200 300 and 400 basis points were temporarily suspended in the second quarter of 2020 after concurrence by the Company’s Board of Directors, due to the fact that in these down scenarios, projected interest rates would be near or below zero.

At the June 2022 Finance & Sustainability Committee Meeting, Management reinstituted the down 200 scenario, due to the Federal Open Market Committee increasing rates by 150 basis points during the quarter.

Pursuant to policy guidelines, we generally attempt to limit the projected decline in net interest income relative to the stable rate scenario to no more than 5% for a 100 basis point (bp) interest rate shock, 10% for a 200 bp shock, 15% for a 300 bp shock, and 20% for a 400 bp shock.

The Company had the following estimated net interest income sensitivity profiles over one-year, without factoring in any potential negative impact on spreads resulting from competitive pressures or credit quality deterioration:

March 31, 2022

March 31, 2021

June 30, 2022

June 30, 2021

Immediate change in Interest Rates (basis points)

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$ Change in Net Interest Income

For the periods ending March 31, 2022 and March 31, 2021, management believes that the Company was asset sensitive, with net income increasing in a rising rate environment in all scenarios but declining considerably in the down shocks.

The change in the magnitude of the Company’s asset sensitivity based on its interest rate risk model at March 31, 2022 as compared to March 31, 2021, is due primarily to the change in the structure of the balance sheet with the addition of $392.4 million in variable rate collateralized loan obligations and cash on hand of $253.5 million.

In the up 400 basis point shock scenario, expected net interest income over the next twelve months increases $14.3 million, or 13%, to $122.05 million at March 31, 2022 compared to a 7.2% increase or $7.7 million for the same period in 2021.

Over the next twelve months, $253.5 million in surplus cash is projected to decline due to expected core loan growth as our pipelines begin to increase with the addition of several loan teams and the opening of the Templeton LPO mentioned earlier.

For the periods ending June 30, 2022 and June 30, 2021, management believes that the Company was asset sensitive, with net income increasing in a rising rate environment in all scenarios but declining in the down shocks.

The Company’s asset sensitivity based on its interest rate risk model at June 30, 2022 as compared to June 30, 2021, is similar.

In the up 400 basis point shock scenario, expected net interest income over the next twelve months increases $11.6 million, or 10%, to $132.7 million at June 30, 2022 compared to an 11% increase or $11.6 million for the same period in 2021.

Over the next twelve months, $161.9 million in surplus cash is projected to decline due to expected core loan growth as our pipelines begin to increase, and a redeployment of excess cash into variable rate investment vehicles such as collateralized loan obligations.

Further, a portion of the significant increase in deposits during the COVID-19 pandemic could be withdrawn by customers.

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Although the cost of interest-bearing liabilities will also increase in a rate shock, the deposit betas utilized in the interest rate model mitigate the magnitude of a deposit rate increase.

If there was an immediate downward adjustment, it is anticipated that interest income would decline.

The reason for the drop in net interest income is because many deposit products are at or below their modeled floors of 0.15% or 0.20 % and cannot be re-priced lower, while non-floored interest earning assets such as loans and securities can theoretically still be re-priced lower in a falling rate environment.

Due to the historically low current rate environment, we view any material interest rate reductions as unlikely in the near term.

The change in net interest income is similar for the up 100, 200, 300, and 400 basis point scenarios.

If there were an immediate and sustained upward adjustment of 100 basis points in interest rates, all else being equal, net interest income over the next 12 months is projected to improve by $3.9 million, or 3%, relative to a stable interest rate scenario, with the favorable variance increasing marginally as interest rates rise higher.

If there was an immediate downward adjustment of 100 basis points in interest rates, net interest income would drop $8.3 million or a negative variance of 7%.

The change in net interest income in the down 200 basis point scenario is a decrease of $19.3 million or 16%.

The reason for the drop in net interest income in the down 200 basis points scenario over the 100 basis point scenario is that many of the deposit products reach their floors and cannot be repriced lower while, non-floored interest earning assets such as loans and securities can theoretically still be re-priced lower in a falling rate environment.

The potential percentage drop in net interest income in the “down 200 basis points” interest rate scenario exceeds our internal policy guidelines, and we will continue to monitor our interest rate risk profile and implement remedial changes if deemed appropriate.

The percentage drop in net interest income exceeding internal policy guidelines will most likely continue until interest rates return to historically higher levels.

If there was an immediate downward adjustment of 100 basis points in interest rates, net interest income would drop $8.3 million or a negative variance of 8%.

The reason for the drop in net interest income is, most deposit products are at their floors of 0.10% and cannot be re-priced lower, while non-floored interest earning assets such as loans and securities can theoretically still be re-priced lower in a falling rate environment.

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The modeled economic value (or “fair value”) of financial instruments on the Company’s balance sheet will also vary under the interest rate scenarios previously discussed.

The difference between the projected fair value of the Company’s financial assets and the fair value of its financial liabilities is referred to as the economic value of equity (“EVE”), and changes in EVE under different interest rate scenarios are effectively a gauge of the Company’s longer-term exposure to

interest rate fluctuations.

The difference between the projected fair value of the Company’s

financial assets and the fair value of its financial liabilities is referred to as the economic value of equity (“EVE”), and changes in EVE under different interest rate scenarios are effectively a gauge of the Company’s longer-term exposure to interest rate fluctuations.

Fair values for financial instruments are estimated by discounting projected cash flows (principal and interest) at anticipated replacement interest rates for each account type, while the fair value of non-financial accounts is assumed to equal their book value for all rate scenarios.

An economic value simulation is a static measure utilizing balance sheet accounts at a given point in time, and the measurement can change substantially over time, as is evident in the tables below for the periods ending March 31, 2022 and 2021, respectively, as the Company’s balance sheet evolves and interest rate and yield curve assumptions are updated.

An economic value simulation is a static measure utilizing balance sheet accounts at a given point in time, and the measurement can change substantially over time, as is evident in the tables below for the periods ending June 30, 2022 and 2021, respectively, as the Company’s balance sheet evolves and interest rate and yield curve assumptions are updated.

The change in economic value under different interest rate scenarios depends on the characteristics of each class of financial instrument, including stated interest rates or spreads relative to current or projected market-level interest rates or spreads, the likelihood of principal prepayments, whether contractual interest rates are fixed or floating, and the average remaining time to maturity.

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In our economic value simulations, estimated prepayments are factored in for financial instruments with stated maturity dates, and decay rates for non-maturity deposits are projected based on historical patterns and Management’s best estimates.

Our EVE decreased in the past twelve months due to asset composition changes.

The tables below show estimated changes in the Company’s EVE as modeled under different interest rate scenarios relative to a base case of current interest rates:

March 31, 2022

March 31, 2021

Our EVE increased in the past twelve months primarily driven by an increase in deposits and an increase in deposit values.

The tables below show estimated changes in the Company’s EVE as modeled under different interest rate scenarios relative to the base case:

June 30, 2022

June 30, 2021

Immediate change in Interest Rates (basis points)

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$ Change in Fair Value of Equity

The table shows that our EVE is modeled to deteriorate in moderate declining rate scenarios but should benefit from a parallel shift upward in the yield curve.

The table shows that our EVE is modeled to deteriorate in declining rate scenarios but should benefit from a parallel shift upward in the yield curve.

The rate of increase in EVE accelerates the higher interest rates rise.

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Furthermore, while not as extreme as the variances produced by increasing non-maturity deposit decay rates, EVE also displays a relatively high level of sensitivity to unfavorable changes in deposit rate betas in rising interest rate scenarios.

The potential percentage drop in EVE in the “down 100 and 200 basis points” interest rate scenario exceeds our internal policy guidelines, and we will continue to monitor our interest rate risk profile and implement remedial changes if deemed appropriate.

The percentage drop in EVE exceeding internal policy guidelines will most likely continue until interest rates and deposit rates return to historically higher levels.

CAPITAL RESOURCES

The Company had total shareholders’ equity of $325.7 million at March 31, 2022, comprised of $111.7 million in common stock, $4.3 million in additional paid-in capital, $227.4 million in retained earnings, and accumulated other comprehensive loss of $17.7 million.

The Company had total shareholders’ equity of $299.0 million at June 30, 2022, comprised of $111.7 million in common stock, $4.6 million in additional paid-in capital, $233.2 million in retained earnings, and accumulated other

comprehensive loss of $50.4 million.

At the end of 2021, total shareholders’ equity was $362.5 million.

The decrease in equity during the first quarter of 2022 is due to net income of $7.4 million, offset by a $3.5 million dividend paid to shareholders, $4.9 million in share repurchases, a $28.9 million unfavorable swing in other comprehensive income/loss due principally to changes in investment securities' fair value and a $7.3 million decrease in retained earnings due to the cumulative effect of a change in accounting principal from the implementation of CECL, topic 326.

The decrease in equity during the first half of 2022 is due to net income of $16.6 million, offset by a $7.0 million dividend paid to shareholders, $4.9 million in share repurchases, a $61.6 million unfavorable swing in other comprehensive income/loss due principally to changes in investment securities' fair value and a $7.3 million decrease in retained earnings due to the cumulative effect of a change in accounting principal from the implementation of CECL, topic 326.

The remaining difference is related to stock options exercised and restricted stock compensation recognized during the quarter.

The Company’s strong liquidity position enabled the transfer of $162.1 million of “available-for-sale” investment securities to “held-to-maturity” classification effective April 1, 2022.

The transfer was initiated to reduce the effect of future rate increases on the available-for-sale portfolio, mark-to-market adjustments, comprehensive income and equity.

The Company approved a new share repurchase program (the 2021 Share Repurchase Plan) on October 21, 2021 and authorized one million shares to be repurchased under this plan.

The previous 2003 Share Repurchase Plan was cancelled and the 268,301 shares remaining in that plan were incorporated into the 2021 Share Repurchase Plan.

were 182,562 shares repurchased in the first quarter of 2022, with 630,000 shares remaining to be repurchased under the 2021 Share Repurchase Plan.

There were 182,562 shares repurchased in the first half of 2022, with 630,000 shares remaining to be repurchased under the 2021 Share Repurchase Plan.

The Company uses a variety of measures to evaluate its capital adequacy, including the leverage ratio which is calculated separately for the Company and the Bank.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis