What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-11-09 compared with 2022-08-09 · 117 added, 111 removed, 357 unchanged (39% of the section changed)

36 unchanged sentences

It is intended to complement the unaudited consolidated financial statements and notes thereto appearing elsewhere in this Form 10-Q and should be read in conjunction therewith.

The detailed discussion focuses on our consolidated financial condition as of June 30, 2022, compared to the financial condition as of December 31, 2021 and the consolidated results of operations for the six months ended June 30, 2022 compared to the six months ended June 30, 2021.

The detailed discussion focuses on our consolidated financial condition as of September 30, 2022, compared to the consolidated financial condition as of December 31, 2021 and the consolidated results of operations for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021.

Our results of operations depend primarily on our net interest income.

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Three Months Ended

Six Months Ended

June 30, June 30,

Nine Months Ended

September 30, September 30,

2022 2021 2022 2021

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Adjustment to FTE Basis

31 41 105 131

Interest Income (FTE) (Non-GAAP)

16 unchanged sentences

Allowance for loan losses to total loans, excluding PPP loans, is a non-GAAP measure that serves as a useful measurement to evaluate the allowance for loan losses without the impact of SBA guaranteed loans.

September 30,

2022 December 31, 2021

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We believe this non-GAAP measure serves as a useful tool to help evaluate the strength and discipline of the Company's capital management strategies and as an additional, conservative measure of the Company’s total value.

September 30,

2022 December 31, 2021

7 unchanged sentences

Consolidated Statements of Financial Condition Analysis

Total assets decreased $39.0 million, or 2.7%, to $1.39 billion at June 30, 2022, compared to $1.43 billion at December 31, 2021.

Total assets increased $441,000, or 0.03%, to $1.43 billion at both September 30, 2022 and December 31, 2021.

Cash and Securities

• Cash and due from banks decreased $38.6 million, or 32.2%, to $81.1 million at June 30, 2022, compared to $119.7 million at December 31, 2021.

The change is primarily due to a decrease in deposits as further described below in the Liabilities section.

• Securities decreased $11.5 million, or 5.1%, to $213.5 million at June 30, 2022, compared to $225.0 million at December 31, 2021.

• Cash and due from banks increased $3.1 million, or 2.6%, to $122.8 million at September 30, 2022, compared to $119.7 million at December 31, 2021.

The change is primarily due to an increase in deposits as further described below in the Liabilities section.

• Securities decreased $31.1 million, or 13.8%, to $193.8 million at September 30, 2022, compared to $225.0 million at December 31, 2021.

Current period activity included $26.8 million of purchases, and $24.9 million of pay downs.

The purchases were made to earn a higher yield on excess cash.

In addition, there was a $21.0 million decrease in the market value of the debt securities portfolio, primarily due to the increase in market interest rates, and a $206,000 loss in market value in the equity securities portfolio, which is primarily comprised of bank stocks.

In addition, there was a $32.8 million decrease in the market value of the debt securities portfolio, primarily due to the increase in market interest rates, and a $252,000 decline in market value in the equity securities portfolio, which is primarily comprised of bank stocks.

Payroll Protection Program (“PPP”) Update

• PPP loans decreased $20.7 million to $3.9 million at June 30, 2022 compared to $24.5 million at December 31, 2021.

• $144,000 of net PPP loan origination fees were unearned at June 30, 2022 compared to $678,000 at December 31, 2021.

$130,000 of net PPP loan origination fees were earned in the three months ended June 30, 2022 compared to $404,000 for the three months ended March 31, 2022.

• PPP loans decreased $23.8 million to $768,000 at September 30, 2022 compared to $24.5 million at December 31, 2021 as a result of forgiveness and repayments.

• $27,000 of net PPP loan origination fees were unearned at September 30, 2022 compared to $678,000 at December 31, 2021.

$117,000 of net PPP loan origination fees were earned in the three months ended September 30, 2022 compared to $130,000 for the three months ended June 30, 2022.

Loans, Allowance for Loan Losses and Credit Quality

• Total loans held for investment increased $7.2 million, or 0.70%, to $1.03 billion at June 30, 2022 compared to $1.02 billion at December 31, 2021.

• Total loans held for investment increased $22.1 million, or 2.17%, to $1.04 billion at September 30, 2022 compared to $1.02 billion at December 31, 2021.

Excluding the net decline of $23.8 million in PPP loans in the current period, loans increased $45.9 million.

• The allowance for loan losses was $12.8 million at June 30, 2022 and $11.6 million at December 31, 2021.

As a result, the allowance for loan losses to total loans was 1.25% at June 30, 2022 compared to 1.13% at December 31, 2021.

The allowance for loan losses to total loans, excluding PPP loans, was 1.25% at June 30, 2022 compared to 1.16% at December 31, 2021.

• The allowance for loan losses was $12.9 million at September 30, 2022 and $11.6 million at December 31, 2021.

As a result, the allowance for loan losses to total loans was 1.23% at September 30, 2022 compared to 1.13% at December 31, 2021.

The allowance for loan losses to total loans, excluding PPP loans, was 1.23% at September 30, 2022 compared to 1.16% at December 31, 2021.

The change in the allowance for loan losses was primarily due to adjustments to historical loss factors and changes in qualitative factors in particular economic and industry conditions since December 31, 2021.

• Net charge-offs for the three months ended June 30, 2022 were $2.5 million, or 1.01% of average loans on an annualized basis.

Net recoveries for the three months ended June 30, 2021 were $19,000, or 0.01% of average loans on an annualized basis.

Net charge-offs for the six months ended June 30, 2022 were $2.5 million, or 0.50% of average loans on an annualized basis.

Net charge-offs for the six months ended June 30, 2021 were $27,000, or 0.01% of average loans on an annualized basis.

• Nonperforming loans, which includes nonaccrual loans, accruing loans past due 90 days or more, and accruing loans that are considered troubled debt restructurings, were $5.8 million at June 30, 2022 compared to $7.3 million at December 31, 2021.

Nonperforming loans to total loans ratio was 0.57% at June 30, 2022 compared to 0.71% at December 31, 2021.

• Intangible Assets decreased $891,000, or 17.0%, to $4.4 million at June 30, 2022 compared to $5.3 million at December 31, 2021 primarily due to amortization expense recognized during the period.

• Net recoveries for the three months ended September 30, 2022 were $21,000, or 0.01% of average loans on an annualized basis.

Net recoveries for the three months ended September 30, 2021 were $37,000, or 0.01% of average loans on an annualized basis.

Net charge-offs for the nine months ended September 30, 2022 were $2.5 million, or 0.33% of average loans on an annualized basis.

Net recoveries for the nine months ended September 30, 2021 were $10,000, and has an immaterial effect on ratios for the period.

• Nonperforming loans, which includes nonaccrual loans, accruing loans past due 90 days or more, and accruing loans that are considered troubled debt restructurings, were $5.9 million at September 30, 2022 compared to $7.3 million at December 31, 2021.

Current nonperforming loans to total loans ratio was 0.56% compared to 0.71% at December 31, 2021.

• Intangible Assets decreased $1.3 million, or 24.6%, to $4.0 million at September 30, 2022 compared to $5.3 million at December 31, 2021 primarily due to amortization expense recognized during the period.

• Accrued interest receivable and other assets increased $8.8 million, or 68.4%;

to $18.8 million at June 30, 2022, compared to $12.9 million at December 31, 2021.

This change was primarily driven by deferred taxes as a result of the increase in market interest rates conditions and the decrease in the market value of the securities portfolio.

Total liabilities decreased $19.7 million, or 1.5%, to $1.27 billion at June 30, 2022 compared to $1.29 billion at December 31, 2021.

• Total deposits decreased $11.4 million to $1.22 billion as of June 30, 2022 compared to $1.23 billion at December 31, 2021, an annualized decrease of 1.9%.

Interest-bearing demand deposits and time deposits decreased $7.2 million and

$11.5 million, respectively, partially offset by increases in noninterest bearing demand deposits and savings accounts by $3.4 million and $10.7 million, respectively.

• Short-term borrowings decreased $7.1 million, or 18.1%, to $32.2 million at June 30, 2022, compared to $39.3 million at December 31, 2021.

At June 30, 2022 and December 31, 2021, short-term borrowings were comprised entirely of securities sold under agreements to repurchase, which are related to business deposit customers whose funds, above designated target balances, are transferred into an overnight interest-earning investment account by purchasing securities from the Bank’s investment portfolio under an agreement to repurchase.

to $21.7 million at September 30, 2022, compared to $12.9 million at December 31, 2021.

This change was primarily driven by deferred taxes as a result of the increase in market interest rates conditions and the corresponding decrease in the market value of the mostly fixed rate securities portfolio.

Total liabilities increased $26.9 million, or 2.1%, to $1.32 billion at September 30, 2022 compared to $1.29 billion at December 31, 2021.

• Total deposits increased $49.2 million to $1.28 billion as of September 30, 2022 compared to $1.23 billion at December 31, 2021, an annualized increase of 5.3%.

Interest-bearing and non interest-bearing demand deposits increased $26.2 million and $15.8 million, respectively, partially offset by a decrease in time deposits of $15.8 million.

Average total deposits increased $15.4 million, primarily in both interest-bearing and non interest -bearing demand deposits for the three months ended September 30, 2022 compared to the three months ended June 30, 2022.

• Short-term borrowings decreased $21.2 million, or 53.9%, to $18.1 million at September 30, 2022, compared to $39.3 million at December 31, 2021.

At September 30, 2022 and December 31, 2021, short-term borrowings were comprised entirely of securities sold under agreements to repurchase, which are related to business deposit customers whose funds, above designated target balances, are transferred into an overnight interest-earning investment account by purchasing securities from the Bank’s investment portfolio under an agreement to repurchase.

A portion of this decrease is due to accounts that were being transitioned into other deposit products and account for most of the interest-bearing demand deposit increase.

Stockholders’ Equity

Stockholders’ equity decreased $19.4 million, or 14.6%, to $113.8 million at June 30, 2022, compared to $133.1 million at December 31, 2021.

Stockholders’ equity decreased $26.4 million, or 19.8%, to $106.7 million at September 30, 2022, compared to $133.1 million at December 31, 2021.

On February 15, 2022, the Company completed its stock repurchase program that was implemented on June 10, 2021.

On April 21, 2022, a new $10 million repurchase program was authorized, with the Company repurchasing 27,439 shares at an average price of $22.06 per share during the second quarter.

• Net income was $3.2 million for the six months ended June 30, 2022.

• Accumulated other comprehensive loss decreased $16.5 million primarily due to the effect of market interest rate increases on the Company’s debt securities.

On April 21, 2022, a new $10 million repurchase program was authorized, with the Company repurchasing 57,710 shares at an average price of $22.51 per share since the inception of the plan.

• Net income was $7.1 million for the nine months ended September 30, 2022.

• Accumulated other comprehensive loss increased $25.7 million primarily due to the effect of market interest rate increases on the fair value of the Company’s debt securities.

• In total, the Company has repurchased $4.7 million since December 31, 2021

• The Company declared and paid $3.7 million in dividends to common stockholders in the current period.

• Book value per share (GAAP) was $22.18 at June 30, 2022 compared to $25.31 at December 31, 2021, a decrease of $3.13.

• Book value per share (GAAP) was $20.94 at September 30, 2022 compared to $25.31 at December 31, 2021, a decrease of $4.37.

Tangible book value per share (Non-GAAP) decreased $4.20, or 18.7%, to $18.25 compared to $22.45 at December 31, 2021.

Refer to Explanation of Use of Non-GAAP Financial Measures in this Report.

Consolidated Results of Operations for the Three Months Ended June 30, 2022 and 2021

Net income was $118,000 for the three months ended June 30, 2022, an increase of $341,000 compared to net loss of $223,000 for the three months ended June 30, 2021.

Consolidated Results of Operations for the Three Months Ended September 30, 2022 and 2021

Net income was $3.9 million for the three months ended September 30, 2022, an increase of $1.9 million compared to net income of $2.0 million for the three months ended September 30, 2021.

Net Interest and Dividend Income.

Net interest and dividend income increased $229,000, or 2.3%, to $10.2 million for the three months ended June 30, 2022 compared to $9.9 million for the three months ended June 30, 2021.

Net interest margin (GAAP) increased to 3.12% for the three months ended June 30, 2022 compared to 2.84% for the three months ended June 30, 2021.

Net interest margin (FTE) (Non-GAAP) increased 28 basis points (bps) to 3.13% for the three months ended June 30, 2022 compared to 2.85% for the three months ended June 30, 2021.

Net interest and dividend income increased $1.0 million, or 10.0%, to $11.0 million for the three months ended September 30, 2022 compared to $10.0 million for the three months ended September 30, 2021.

Net interest margin (GAAP) increased to 3.29% for the three months ended September 30, 2022 compared to 2.88% for the three months ended September 30, 2021.

Net interest margin (FTE) (Non-GAAP) increased 41 basis points (bps) to 3.30% for the three months ended September 30, 2022 compared to 2.89% for the three months ended September 30, 2021.

Interest and Dividend Income

• Interest and dividend income increased $138,000, or 1.3%, to $11.0 million for the three months ended June 30, 2022 compared to $10.8 million the three months ended June 30, 2021.

◦ Interest income on loans decreased $203,000, or 2.0%, to $9.7 million for the three months ended June 30, 2022 compared to $9.9 million for the three months ended June 30, 2021.

The average balance of loans decreased $9.0 million to $1.01 billion from $1.02 billion and the average yield decreased 5 bps to 3.88% compared to 3.93%.

◦ Interest and fee income on PPP loans was $144,000 for the three months ended June 30, 2022 and contributed 4 bps to loan yield, compared to $636,000 for the three months ended June 30, 2021, which contributed 3 bps to loan yield.

◦ The impact of the accretion of the credit mark on acquired loan portfolios was $75,000 for the three months ended June 30, 2022 compared to $153,000 for the three months ended June 30, 2021, or 3 bps in the current period compared to 6 bps in the prior period.

◦ Interest income on taxable investment securities increased $353,000, or 55.6%, to $988,000 for the three months ended June 30, 2022 compared to $635,000 for the three months ended June 30, 2021 driven by a $103.6 million increase in average balance partially offset by a 31 bps decrease in average yield.

• Net interest margin (GAAP) increased to 3.29% for the three months ended September 30, 2022 compared to 2.88% for the three months ended September 30, 2021.

Fully Tax Equivalent (“FTE”) Net interest margin (Non-GAAP) increased 41 bps to 3.30% for the three months ended September 30, 2022 compared to 2.89% for the three months ended September 30, 2021.

• Interest and dividend income increased $1.5 million, or 13.9%, to $12.3 million for the three months ended September 30, 2022 compared to $10.8 million the three months ended September 30, 2021.

◦ Interest income on loans increased $1.1 million, or 11.3%, to $10.8 million for the three months ended September 30, 2022 compared to $9.7 million for the three months ended September 30, 2021.

The average balance of loans increased $19.9 million to $1.02 billion from $1.00 billion and the average yield increased 35 bps to 4.20% compared to 3.85%.

◦ Interest and fee income on PPP loans was $123,000 for the three months ended September 30, 2022 and contributed 4 bps to loan yield, compared to $484,000 for the three months ended September 30, 2021, which contributed 4 bps to loan yield.

◦ The impact of the accretion of the credit mark on acquired loan portfolios was $47,000 for the three months ended September 30, 2022 compared to $94,000 for the three months ended September 30, 2021, or 2 bps in the current period compared to 4 bps in the prior period.

◦ Interest income on taxable investment securities increased $142,000, or 16.8%, to $985,000 for the three months ended September 30, 2022 compared to $843,000 for the three months ended September 30, 2021 driven by a $24.3 million increase in average balance coupled with a 6 bps increased in average yield.

Interest Expense

• Interest expense decreased $91,000, or 10.3%, to $795,000 for the three months ended June 30, 2022 compared to $886,000 for the three months ended June 30, 2021.

◦ Interest expense on deposits decreased $223,000, or 27.0%, to $604,000 for the three months ended June 30, 2022 compared to $827,000 for the three months ended June 30, 2021.

While average interest-earning deposit balances decreased $74.5 million, or 8%, from $900.1 million as of June 30, 2021 compared to $825.6 million as of June 30, 2022, controlling the deposit cost structure combined with non-renewal or repricing of higher-cost time deposit resulted in a 8 bps, or 21.7%, decrease in average cost compared to the three months ended June 30, 2021.

• Interest expense increased $496,000, or 63.9%, to $1.3 million for the three months ended September 30, 2022 compared to $776,000 for the three months ended September 30, 2021.

◦ Interest expense on deposits increased $364,000, or 50.9%, to $1.1 million for the three months ended September 30, 2022 compared to $715,000 for the three months ended September 30, 2021.

While average interest-earning deposit balances decreased $51.7 million, or 5.8%, to $842.4 million as of September 30, 2022 compared to $894.0 million as of September 30, 2021 , rising interest rates led to the repricing of higher-cost demand and money market deposits and resulted in a 19 bps, or 59.9%, increase in average cost compared to the three months ended September 30, 2021.

In addition, the average balance of time deposits and the related average cost decreased $45.2 million and 11 bps, respectively.

These decreases are partially offset by a 9 bps increase in interest-bearing demand deposit average cost as well as an increase in average other borrowings of $11.6 million or 193.5% to $17.6 million as of June 30, 2022 compared to $6.0 million as of June 30, 2021, which was driven by an increase in subordinated debt balance.

These decreases are partially offset by an increase in average other borrowings of $11.6 million or 193.7% to $17.6 million as of September 30, 2022 compared to $6.0 million as of September 30, 2021, which was driven by an increase in subordinated debt balance.

Average Balances and Yields .

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The yields and costs for the periods indicated are derived by dividing annualized income or expense by the average balances of assets or liabilities, respectively, for the periods presented.

Three Months Ended June 30,

Three Months Ended September 30,

Balance Interest

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The total column represents the sum of the prior columns.

Three Months Ended June 30, 2022

Three Months Ended June 30, 2021

(Decrease) Increase Due to

Three Months Ended September 30, 2022

Three Months Ended September 30, 2021

Increase (Decrease) Due to

Volume Rate Total

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Marketable Equity Securities — 2 2

Cash at Other Banks (89) 375 286

Other Interest-Earning Assets (10) 6 (4)

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Provision for Loan Losses.

There was $3.8 million provision for loan losses for the three months ended June 30, 2022 compared with a recovery of $1.2 million for the three months ended June 30, 2021.

The increased provision for loan losses was primarily due to a provision for a single loan charge-of f of $2.7 million (pre-tax) with respect to a commercial and industrial loan.

As previously reported, the charge-off relates to a borrower which is ceasing operations and carried a $3.5 million revolving line of credit which had an outstanding balance of $2.7 million.

The remaining increase to the provision was a result of adjustments made to historical loss factors and changes in qualitative factors in particular economic and industry conditions between the three months ended June 30, 2022 and three months ended June 30, 2021.

There was no provision for loan losses for the three months ended September 30, 2022 or September 30, 2021.

Noninterest Income .

Noninterest income decreased $114,000, or 5.1%, to $2.1 million for the three months ended June 30, 2022, compared to $2.2 million for the three months ended June 30, 2021.

The decrease was largely due to a $210,000 reduction in securities gains due to a decline of $199,000 in the market value of equity securities, comprised mainly of bank stocks, partially offset by a $160,000 increase in insurance commissions.

The increase in insurance commissions was primarily driven by contingency income which resulted from the higher than lock-in amounts received and core business including commercial and personal insurance lines.

In addition, net gain on sale of loans decreased $31,000 as there were no loans sold during the three months ended June 30, 2022.

Noninterest income increased $541,000, or 24.6%, to $2.7 million for the three months ended September 30, 2022, compared to $2.2 million for the three months ended September 30, 2021.

The increase was largely due to a gain of $439,000 on the disposal of fixed assets during the three months ended September 30, 2022 due to the sale of the land and buildings of the former Pioneer and Bellaire bank branches.

During the quarter, the Bank also recorded a $174,000 increase in insurance commissions.

The increase in insurance commissions was primarily driven by contingency income which resulted from the higher lock-in amounts received and core business including commercial and personal insurance lines.

In addition, net gain on sale of loans decreased $49,000 as there were no loans sold during the three months ended September 30, 2022.

Noninterest Expense.

Noninterest expense decreased $5.3 million, or 38.7%, to $8.4 million for the three months ended June 30, 2022 compared to $13.7 million for the three months ended June 30, 2021, compared to $8.7 million for the three months ended March 31, 2022.

The primary drivers were decreases of $2.3 million and $1.2 million related to the writedown of fixed assets and intangible impairment associated with branch consolidation and sale initiatives in 2021, respectively.

In addition, salaries and benefits decreased $537,000 and occupancy decreased $248,000, primarily related to the reduction of footprint and related headcount resulting from the consolidation and sale of branches during 2021.

Contracted services decreased $402,000 to

$348,000 for the three months ended June 30, 2022 compared to $750,000 for the three months ended June 30, 2021.

Noninterest expense decreased $946,000, or 9.7%, to $8.8 million for the three months ended September 30, 2022 compared to $9.8 million for the three months ended September 30, 2021.

Salaries and benefits decreased $48,000 and contracted services decreased $1.2 million to $288,000 for the three months ended September 30, 2022 compared to $1.4 million for the three months ended September 30, 2021.

This was a result of branch optimization initiatives completed in the prior year.

These decreases were partially offset by an increase in occupancy expenses of $153,000.

Income Taxes.

Income tax benefit was $44,000 for the three months ended June 30, 2022 compared to income tax benefit of $146,000 for the three months ended June 30, 2021.

This change was primarily driven by pre-tax income of $74,000 for the three months ended June 30, 2022 compared to pre-tax loss of $369,000 for the three months ended June 30, 2021, due to expenses incurred from the branch consolidation efforts in the three months ended June 30, 2021 which were not incurred in the three months ended June 30, 2022

Results of Operations for the Six Months Ended June 30, 2022 and 2021

Net income was $3.2 million for the six months ended June 30, 2022, an increase of $543,000 compared to net income of $2.6 million for the six months ended June 30, 2021.

Income tax expense was $998,000 for the three months ended September 30, 2022 compared to $452,000 for the three months ended September 30, 2021.

This change was primarily driven by an increase in pre-tax income of $4.9 million for the three months ended September 30, 2022 compared to $2.4 million for the three months ended September 30, 2021.

Results of Operations for the Nine Months Ended September 30, 2022 and 2021

Net income was $7.1 million for the nine months ended September 30, 2022, an increase of $2.5 million compared to $4.6 million for the nine months ended September 30, 2021.

Net Interest and Dividend Income.

Net interest and dividend income increased $145,000, or 0.7% to $20.1 million for the six months ended June 30, 2022 compared to $19.9 million for the six months ended June 30, 2021.

Net interest margin (Non-GAAP FTE) increased 16 bps to 3.11% for the six months ended June 30, 2022 compared to 2.95% the six months ended June 30, 2021.

Net interest margin (GAAP) increased to 3.10% for the six months ended June 30, 2022 compared to 2.94% for the six months ended June 30, 2021.

Net interest and dividend income increased $1.1 million, or 3.8% to $31.1 million for the nine months ended September 30, 2022 compared to $29.9 million for the nine months ended September 30, 2021.

Net interest margin (Non-GAAP FTE) increased 25 bps to 3.18% for the nine months ended September 30, 2022 compared to 2.93% the nine months ended September 30, 2021.

Net interest margin (GAAP) increased to 3.17% for the nine months ended September 30, 2022 compared to 2.92% for the nine months ended September 30, 2021.

Interest and Dividend Income

• Interest and dividend income decreased $234,000, or 1.1%, to $21.6 million for the six months ended June 30, 2022 compared to $21.8 million for the six months ended June 30, 2021.

◦ Interest income on loans decreased $798,000 or 4.0% to $19.3 million during the six months ended June 30, 2022 compared to $20.1 million for the six months ended June 30, 2021.

Average loans decreased $15.8 million, and the loan yield for the six months ended June 30, 2022 decreased 10 bps to 3.86% compared to 3.96% for the six months ended June 30, 2021.

◦ Interest and fee income on PPP loans was $589,000 for the six months ended June 30, 2022 and contributed 8 bps to loan yield, compared to $1.3 million for the six months ended June 30, 2021, which contributed loan yield 4 bps in the prior period.

◦ The impact of the accretion of the credit mark on acquired loan portfolios was $130,000 for the six months ended June 30, 2022 compared to $291,000 for the six months ended June 30, 2021, or 3 bps in the current period compared to 5 bps in the prior period.

◦ Interest income on taxable investment securities increased $612,000, or 47.8%, to $1.9 million for the six months ended June 30, 2022 compared to $1.3 million for the six months ended June 30, 2021 driven by a $98.4 million increased in average taxable investment securities balance and partially offset by a 37 bps decrease in average yield.

• Interest and dividend income increased $1.3 million, or 3.9%, to $33.9 million for the nine months ended September 30, 2022 compared to $32.6 million for the nine months ended September 30, 2021.

◦ Interest income on loans increased $298,000 or 1.0% to $30.1 million during the nine months ended September 30, 2022 compared to $29.8 million for the nine months ended September 30, 2021.

Average loans decreased $3.8 million, while the loan yield for the nine months ended September 30, 2022 increased 6 bps to 3.98% compared to 3.92% for the nine months ended September 30, 2021.

◦ Interest and fee income on PPP loans was $712,000 for the nine months ended September 30, 2022 and contributed 7 bps to loan yield, compared to $1.8 million for the nine months ended September 30, 2021, which contributed loan yield 3 bps in the prior period.

◦ The impact of the accretion of the credit mark on acquired loan portfolios was $178,000 for the nine months ended September 30, 2022 compared to $385,000 for the nine months ended September 30, 2021, or 2 bps in the current period compared to 4 bps in the prior period.

◦ Interest income on taxable investment securities increased $754,000, or 35.5%, to $2.9 million for the nine months ended September 30, 2022 compared to $2.1 million for the nine months ended September 30, 2021 driven by a $73.4 million increased in average taxable investment securities balance and partially offset by a 17 bps decrease in average yield.

Interest Expense

• Interest expense decreased $379,000, or 20.0%, to $1.5 million for the six months ended June 30, 2022 compared to $1.9 million for the six months ended June 30, 2021.

◦ Interest expense on deposits decreased $640,000, or 36.1%, to $1.1 million for the six months ended June 30, 2022 compared to $1.8 million for the six months ended June 30, 2021.

While average interest-bearing deposits decreased $56.6 million, controlling the deposit cost structure combined with non-renewal or repricing of higher-cost time deposit resulted in a resulted in a 13 bps decrease in average cost compared to the six months ended June 30, 2021.

• Interest expense increased $119,000, or 4.5%, to $2.8 million for the nine months ended September 30, 2022 compared to $2.7 million for the nine months ended September 30, 2021.

◦ Interest expense on deposits decreased $275,000, or 11.0%, to $2.2 million for the nine months ended September 30, 2022 compared to $2.5 million for the nine months ended September 30, 2021.

While average interest-bearing deposits decreased $55.0 million, rising interest rates led to the repricing of higher-cost demand and money market deposits resulted in a 2 bps decrease in average cost compared to the nine months ended September 30, 2021.

In addition, the average balance of time deposits and the related average cost decreased $50.0 million and 22 bps, respectively.

These decreases are partially offset by a 2 bps increase in interest-bearing demand deposit average cost as well as an increase in average other borrowings of $11.0 million or 166.9% to $17.6 million as of June 30, 2022 compared to $6.6 million as of June 30, 2021, which was driven by an increase in subordinated debt balance.

These decreases are partially offset by an 18 bps increase in interest-bearing demand deposit average cost as well as an increase in average other borrowings of $11.2 million or 175.4% to $17.6 million as of September 30, 2022 compared to $6.4 million as of September 30, 2021, which was driven by an increase in subordinated debt balance.

Average Balances and Yields.

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The yields and costs for the periods indicated are derived by dividing annualized income or expense by the average balances of assets or liabilities, respectively, for the periods presented.

Six Months Ended June 30,

Nine Months Ended September 30,

Balance Interest

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PPP Loans $ 7,503 $ 712 12.69 $ 51,579 $ 1,797 4.66

(1) Annualized based on three months ended results.

(1) Annualized based on nine months ended results.

(2) Net of the allowance for loan losses and includes nonaccrual loans with a zero yield and Loans Held for Sale if applicable.

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The total column represents the sum of the prior columns.

Six Months Ended June 30, 2022

Six Months Ended June 30, 2021

Nine Months Ended September 30, 2022

Nine Months Ended September 30, 2021

Increase (Decrease) Due to

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Marketable Equity Securities 1 — 1

Cash at Other Banks (260) 551 291

Other Interest-Earning Assets (24) (2) (26)

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Provision for Loan Losses.

The provision for loan losses was $3.8 million for the six months ended June 30, 2022, compared to a $1.2 million recovery for the six months ended June 30, 2021.The increased provision for loan losses was primarily due to a provision for a single loan charge-of f of $2.7 million (pre-tax) with respect to a commercial and industrial loan.

The provision for loan losses was $3.8 million for the nine months ended September 30, 2022, compared to a $1.2 million recovery for the nine months ended September 30, 2021.The increased provision for loan losses was primarily due to a provision for a single loan charge-of f of $2.7 million (pre-tax) with respect to a commercial and industrial loan.

As previously reported, the charge-off relates to a borrower which is ceasing operations and carried a $3.5 million revolving line of credit which had an outstanding balance of $2.7 million.

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Noninterest Income.

Noninterest income decreased $675,000, or 12.5%, to $4.7 million for the six months ended June 30, 2022, compared to $5.4 million for the six months ended June 30, 2021.

The decrease was primarily due to the net loss on securities of $206,000 for the six months ended June 30, 2022 compared to net gain on securities of $458,000 for the six months ended June 30, 2021, which was largely due to a decline of $439,000 in the market value of equity securities, comprised mainly of bank stocks.

In addition, net gain on sales of loans decreased $117,000 as there were no loans sold during for the six months ended June 30, 2022 compared to $117,000 for the six months ended June 30, 2021.

These changes are partially offset by an increase of $363,000, or 12.9%, in insurance commissions to $3.2 million for the six months ended June 30, 2022, compared to $2.8 million for the six months ended June 30, 2021 due to higher than lock-in amounts received and core business including commercial and personal insurance lines.

Noninterest income decreased $132,000, or 1.7%, to $7.5 million for the nine months ended September 30, 2022, compared to $7.6 million for the nine months ended September 30, 2021.

The decrease was primarily due to the net loss on equity securities of $252,000 for the nine months ended September 30, 2022 compared to net gain of $482,000 for the nine months ended September 30, 2021, which was largely due to a decline of $503,000 in the market value of equity securities, comprised mainly of bank stocks.

In addition, net gain on sales of loans decreased $166,000 as there were no loans sold during for the nine months ended September 30, 2022 compared to $166,000 for the nine months ended September 30, 2021.

These changes are partially offset by an increase of $537,000, or 13.4%, in insurance commissions to $4.5 million for the nine months ended September 30, 2022, compared to $4.0 million for the nine months ended September 30, 2021 due to higher lock-in amounts received and core business including commercial and personal insurance lines.

During the quarter, the Bank also recorded a $431,000 gain on the disposal of fixed assets during the nine months ended September 30, 2022 due to the sale of the land and buildings of the former Pioneer and Bellaire bank branches.

Noninterest Expense.

Noninterest expense decreased $6.1 million, or 26.2%, to $17.1 million for the six months ended June 30, 2022 compared to $23.1 million for the six months ended June 30, 2021.

Noninterest expense decreased $7.0 million, or 21.3%, to $25.9 million for the nine months ended September 30, 2022 compared to $32.9 million for the nine months ended September 30, 2021.

The primary drivers were decreases of $1.2 million and $2.3 million as previously noted related to the writedown of fixed assets and intangible impairment associated with branch consolidation and sale initiatives in 2021, respectively.

In addition, salaries and benefits decreased $866,000 and occupancy decreased $272,000, primarily related to the reduction of footprint and related headcount resulting from the consolidation and sale of branches during 2021.

Contracted services decreased $502,000 to $935,000 for the six months ended June 30, 2022 compared

to $1.4 million for the six months ended June 30, 2021.

In addition, salaries and benefits decreased

$914,000 and occupancy decreased $119,000, primarily related to the reduction of footprint and related headcount resulting from the consolidation and sale of branches during 2021.

Contracted services decreased $1.7 million to $1.2 million for the nine months ended September 30, 2022 compared to $2.9 million for the nine months ended September 30, 2021.

This was a result of branch optimization initiatives completed in the prior year.

Income Taxes.

Income tax expense decreased $6,000 to $759,000 for the six months ended June 30, 2022 compared to $765,000 for the six months ended June 30, 2021.

The lack of significant change between the periods is consistent with the lack of significant change in pre-tax income, as pre-tax income was $3.9 million for the six months ended June 30, 2022 compared to pre-tax income of $3.4 million for the six months ended June 30, 2021.

Income tax expense increased $540,000 to $1.76 million for the nine months ended September 30, 2022 compared to $1.22 million for the nine months ended September 30, 2021.

The change between the periods is consistent with the change in pre-tax income, as pre-tax income was $8.9 million for the nine months ended September 30, 2022 compared to pre-tax income of $5.8 million for the nine months ended September 30, 2021.

Off-Balance Sheet Arrangements.

Other than loan commitments and standby and performance letters of credit, we do not have any off-balance sheet arrangements that have or are reasonably likely to have a significant current or future effect on our financial condition, revenues, expenses, results of operations, liquidity, capital expenditures, or capital resources that are material to investors.

Refer to Note 7 in the Notes to Consolidated Financial Statements of this report for a summary of commitments outstanding as of June 30, 2022 and December 31, 2021.

Refer to Note 7 in the Notes to Consolidated Financial Statements of this report for a summary of commitments outstanding as of September 30, 2022 and December 31, 2021.

Liquidity and Capital Management

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Excess liquid assets are invested generally in interest-earning deposits with other banks and short- and intermediate-term securities.

The Company believes that it had sufficient liquidity at June 30, 2022 to satisfy its short- and long-term liquidity needs.

The Company’s most liquid assets are cash and due from banks, which totaled $81.1 million at June 30, 2022.

The Company believes that it had sufficient liquidity at September 30, 2022 to satisfy its short- and long-term liquidity needs.

The Company’s most liquid assets are cash and due from banks, which totaled $122.8 million at September 30, 2022.

The levels of these assets depend on our operating, financing, lending and investing activities during any given period.

Unpledged securities, which provide an additional source of liquidity, totaled $18.2 million at June 30, 2022.

In addition, at June 30, 2022, the Company had the ability to borrow up to $440.1 million from the FHLB of Pittsburgh, of which $434.4 million is available.

The Company also has the ability to borrow up to $106.2 million million from the FRB through its Borrower-In-Custody line of credit agreement and the Company also maintains multiple line of credit arrangements with various unaffiliated banks totaling $50.0 million as of both June 30, 2022 and December 31, 2021.

At June 30, 2022, $72.9 million, or 58.2% of total time deposits mature within one year.

Unpledged securities, which provide an additional source of liquidity, totaled $14.2 million at September 30, 2022.

In addition, at September 30, 2022, the Company had the ability to borrow up to $440.8 million from the FHLB of Pittsburgh, of which $429.1 million is available.

The Company also has the ability to borrow up to $105.5 million million from the FRB through its Borrower-In-Custody line of credit agreement and the Company also maintains multiple line of credit arrangements with various unaffiliated banks totaling $50.0 million as of both September 30, 2022 and December 31, 2021.

At September 30, 2022, $76.9 million, or 63.6% of total time deposits mature within one year.

If these time deposits do not remain with the Company, the Company will be required to seek other sources of funds.

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The Bank’s ability to pay dividends to CB Financial is subject to regulatory limitations.

At June 30, 2022, CB Financial (on an unconsolidated, stand-alone basis) had liquid assets of $17.2 million.

At September 30, 2022, CB Financial (on an unconsolidated, stand-alone basis) had liquid assets of $16.6 million.

The ability to pay future dividends or conduct stock repurchases may be limited under applicable banking regulations and regulatory policies due to expected losses for future periods and/or the inability to upstream funds from the Bank to the Company as a result of lower income or regulatory capital levels.

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Failure to meet minimum capital requirements can result in certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's consolidated financial statements.

Under capital adequacy guidelines and the regulatory framework for prompt corrective action, each must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices.

regulatory accounting practices.

The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

Under the Regulatory Capital Rules, in order to avoid limitations on capital distributions (including dividend payments and certain discretionary bonus payments to executive officers), a banking organization must hold a capital conservation buffer comprised of common equity Tier I capital above its minimum risk-based capital requirements in an amount greater than 2.5% of total risk-weighted assets.

At June 30, 2022 and December 31, 2021, the Bank was categorized as “well capitalized” under the regulatory framework for prompt corrective action.

At June 30, 2022, the Bank's capital ratios were not affected by loans modified in accordance with Section 4013 of the CARES Act.

At September 30, 2022 and December 31, 2021, the Bank was categorized as “well capitalized” under the regulatory framework for prompt corrective action.

At September 30, 2022, the Bank's capital ratios were not affected by loans modified in accordance with Section 4013 of the CARES Act.

In addition, PPP loans received a zero-percent risk weight under the regulatory capital rules regardless of whether they were pledged as collateral to the Federal Reserve Bank's PPP lending facility, but were included in the Bank's leverage ratio requirement due to the Bank not pledging the loans as collateral to the PPP lending facility.

The following table presents the Bank’s regulatory capital amounts and ratios, as well as the minimum amounts and ratios required to be well capitalized as of the dates indicated.

June 30, 2022 December 31, 2021

September 30, 2022 December 31, 2021

Amount Ratio Amount Ratio

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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