What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-05-12 compared with 2022-11-09 · 89 added, 256 removed, 218 unchanged (61% of the section changed)

9 unchanged sentences

• General and local economic conditions;

• The scope and duration of economic contraction as a result of the COVID-19 pandemic and its effects on the Company’s business and that of the Company’s customers;

• Government action in response to the COVID-19 pandemic and its effects on the Company's business and that of the Company's customers;

• Our ability to realize the expected cost savings and other efficiencies related to our branch optimization and operational efficiency initiatives;

10 unchanged sentences

• Other factors disclosed in the Company’s periodic reports as filed with the Securities and Exchange Commission.

Many of these risks and uncertainties have been elevated by and may continue to be elevated by the COVID-19 pandemic.

The ability to predict the impact of the ongoing COVID-19 pandemic on the Company’s future operating results with any precision is difficult and depends on many factors beyond our control.

These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.

9 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 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.

The detailed discussion focuses on our consolidated financial condition as of March 31, 2023, compared to the consolidated financial condition as of December 31, 2022 and the consolidated results of operations for the three months ended March 31, 2023 compared to the three months ended March 31, 2022.

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

18 unchanged sentences

Three Months Ended

Nine Months Ended

September 30, September 30,

2022 2021 2022 2021

(Dollars in thousands)

1 unchanged sentence

Adjustment to FTE Basis

31 41 105 131

Interest Income (FTE) (Non-GAAP)

6 unchanged sentences

Adjustment to FTE Basis

0.01 0.01 0.01 0.01

Net Interest Rate Spread (FTE) (Non-GAAP)

3.11 2.78 3.04 2.81

Net Interest Margin (GAAP)

1 unchanged sentence

Adjustment to FTE Basis

0.01 0.01 0.01 0.01

Net Interest Margin (FTE) (Non-GAAP)

3.30 2.89 3.18 2.93

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

(Dollars in thousands)

Allowance for Loan Losses (Numerator) $ 12,854 $ 11,582

Total Loans 1,042,942 $ 1,020,796

PPP Loans (768) (24,523)

Total Loans, Excluding PPP Loans (Non-GAAP) (Denominator) $ 1,042,174 $ 996,273

Allowance for Loan Losses to Total Loans (GAAP) 1.23 % 1.13 %

Allowance for Loan Losses to Total Loans, Excluding PPP Loans (Non-GAAP) 1.23 % 1.16 %

Tangible book value per common share is a non-GAAP measure calculated based on tangible common equity divided by period-end common shares outstanding.

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,

2023 December 31, 2022

7 unchanged sentences

Consolidated Statements of Financial Condition Analysis

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

Total assets increased $21.8 million, or 1.5%, to $1.43 billion at March 31, 2023 compared to $1.41 billion at December 31, 2022.

Cash and Securities

• 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 $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 $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 $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 $12.9 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 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.

• Cash and due from banks decreased $155,000, or 0.1%, to $103.5 million at March 31, 2023, compared to $103.7 million at December 31, 2022.

• Securities decreased $1.0 million, or 0.5%, to $189.0 million at March 31, 2023, compared to $190.1 million at December 31, 2022.

The securities balance was primarily impacted by $3.4 million of repayments on mortgage-backed and collateralized mortgage obligation securities and a $232,000 decrease in the market val ue in the equity securities portfolio, which is primarily comprised of bank stocks.

These decreases were partially offset by a $2.6 million increase in the market value of the debt securities portfolio.

Loans, Allowance for Credit Losses ("ACL") and Credit Quality

• Total loans increased $22.0 million, or 2.1%, to $1.07 billion at March 31, 2023 compared to $1.05 billion at December 31, 2022.

Loan growth was driven by increases in commercial real estate, commercial and industrial loans and residential mortgages of $16.0 million, $9.5 million, and $2.1 million, respectively, partially offset by decreases in construction real estate and consumer loans of $5.4 million and $846,000, respectively.

Growth in commercial and industrial loans included the purchase of $8.9 million of syndicated loans.

• The ACL - Loans was $10.3 million at March 31, 2023 and $12.8 million at December 31, 2022.

As a result, the ACL - Loans to total loans was 0.96% at March 31, 2023 compared to 1.22% at December 31, 2022.

The change in the ACL -Loans was primarily due to the Company's adoption of CECL.

Contributing to the change in ACL - Loans was a prior year charge-off of $2.7 million and qualitative factors that significantly impacted the incurred loss model driven by historical activity compared to the newly adopted CECL methodology that is centered around using a forecast approach.

At adoption, the Company decreased its ACL - Loans by $3.4 million.

• Net recoveries for the three months ended March 31, 2023 were $756,000, or 0.29% of average loans on an annualized basis.

This is due to recoveries totaling $750,000 related to the prior year commercial and industrial charged-off loan for $2.7 million.

Net recoveries for the three months ended March 31, 2022 were $13,000, or 0.01% of average loans on an annualized basis.

• Nonperforming loans, which includes nonaccrual loans and accruing loans past due 90 days or more, were $5.4 million at March 31, 2023 compared to $5.8 million at December 31, 2022.

The decrease of $386,000 was due to the Company's adoption of CECL removing the trouble debt restructured (TDR) designation for loans previously identified as a TDR but performing for approximately $1.8 million, mainly offset by a $1.4 million commercial real estate loan relationship that moved to non-accrual in the current period.

Current nonperforming loans to total loans ratio was 0.51% compared to 0.55% at December 31, 2022.

• 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 $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.

• Intangible assets decreased $445,000, or 11.4%, to $3.1 million at March 31, 2023 compared to $3.5 million at December 31, 2022 primarily due to amortization expense recognized during the period.

Total liabilities increased $14.7 million, or 1.1%, to $1.31 billion at March 31, 2023 compared to $1.30 billion at December 31, 2022.

• Total deposits increased $13.0 million to $1.28 billion as of March 31, 2023 compared to $1.27 billion at December 31, 2022, an annualized increase of 4.1% .

Interest-bearing demand deposits increased $47.2 million and time deposits increased $21.3 million, while non interest-bearing demand deposits decreased $39.5 million and savings deposits decreased $13.1 million.

The increase in interest-bearing demand deposits is primarily the result of higher interest rates attracting more customers and/or additional deposits from existing customers.

FDIC insured deposits totaled approximately 62.9% of total deposits at March 31, 2023.

• Short-term borrowings decreased $7.9 million, or 98.5%, to $121,000 at March 31, 2023, compared to $8.1 million at December 31, 2022.

At March 31, 2023 and December 31, 2022, short-term borrowings were comprised entirely of securities sold under agreements to repurchase.

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

Accrued Interest Payable and Other Liabilities

• Accrued interest payable and other liabilities increased $9.6 million, or 127.2%, to $17.2 million at March 31, 2023, compared to $7.6 million at December 31, 2022 primarily due to the purchase of $8.9 million of syndicated loans which were unfunded at the end of the period.

Stockholders’ Equity

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 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

Stockholders’ equity increased $7.0 million, or 6.4%, to $117.2 million at March 31, 2023, compared to $110.2 million at December 31, 2022.

• Net income was $4.2 million for the three months ended March 31, 2023.

• Accumulated other comprehensive loss decreased $2.0 million primarily due to the effect of changes in market interest rates on the fair value of the Company’s debt securities.

• On April 21, 2022, a $10.0 million repurchase program was authorized, with the Company repurchasing 67,864 shares at an average price of $22.45 per share since the inception of the plan.

In total, the Company repurchased $130,000 of common stock since December 31, 2022.

• The Company declared and paid $1.3 million in dividends to common stockholders in the current period.

• 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.

• Book value per share (GAAP) was $22.90 at March 31, 2023 compared to $21.60 at December 31, 2022, an increase of $1.30.

Tangible book value per share (Non-GAAP) increased $1.40, or 7.4%, to $20.40 compared to $19.00 at December 31, 2022.

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

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.

Consolidated Results of Operations for the Three Months Ended March 31, 2023 and 2022

Net income was $4.2 million for the three months ended March 31, 2023, an increase of $1.1 million compared to net income of $3.0 million for the three months ended March 31, 2022.

Net Interest and Dividend Income.

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.

Net interest and dividend income increased $1.7 million, or 17.1%, to $11.6 million for the three months ended March 31, 2023 compared to $9.9 million for the three months ended March 31, 2022.

Net interest margin (GAAP) increased to 3.51% for the three months ended March 31, 2023 compared to 3.08% for the three months ended March 31, 2022.

Fully Tax Equivalent (FTE) net interest margin (Non-GAAP) increased 42 basis points (bps) to 3.52% for the three months ended March 31, 2023 compared to 3.10% for the three months ended March 31, 2022.

Interest and Dividend Income

• 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 and dividend income increased $3.6 million, or 34.2%, to $14.2 million for the three months ended March 31, 2023 compared to $10.6 million the three months ended March 31, 2022.

◦ Interest income on loans increased $2.8 million, or 29.5%, to $12.4 million for the three months ended March 31, 2023 compared to $9.6 million for the three months ended March 31, 2022.

The average balance of loans increased $31.4 million to $1.04 billion from $1.01 billion, generating $311,000 of additional interest income on loans, and the average yield increased 98 bps to 4.83% compared to 3.85% causing a $2.5 million increase in interest income on loans.

◦ Interest and fee income on PPP loans was $445,000 for the three months ended March 31, 2022, which contributed 13 bps to loan yield while the current year quarter was not materially impacted by PPP loan-related interest and fee income.

◦ The impact of the accretion of the credit mark on acquired loan portfolios was $61,000 for the three months ended March 31, 2023 compared to $56,000 for the three months ended March 31, 2022, or 2 bps in the current and prior period.

◦ Interest income on taxable investment securities increased $59,000, or 6.5%, to $964,000 for the three months ended March 31, 2023 compared to $905,000 for the three months ended March 31, 2022 as the average yield increased 13 bps, partially offset by a $2.7 million decrease in the average balance.

◦ Interest income on interest bearing deposits at other banks increased $772,000, to $805,000 for the three months ended March 31, 2023 compared to $33,000 for the three months ended March 31, 2022 as average balances increased $15.3 million and the average yield increased 410 bps.

Higher cash balances were maintained as a result of increased deposits while the increase in the average yield was the result of market interest rate increases.

Interest Expense

• 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 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.

• Interest expense increased $1.9 million, or 268.0%, to $2.7 million for the three months ended March 31, 2023 compared to $723,000 for the three months ended March 31, 2022.

◦ Interest expense on deposits increased $2.0 million, or 372.5%, to $2.5 million for the three months ended March 31, 2023 compared to $530,000 for the three months ended March 31, 2022.

Average interest-earning deposit balances increased $47.4 million, or 5.6%, to $892.2 million as of March 31, 2023 compared to $844.8 million as of March 31, 2022, and rising interest rates led to the repricing of demand and money market deposits and resulted in a 89 bps, or 349.8%, increase in average cost compared to the three months ended March 31, 2022.

Partially offsetting this increase, the average balance of time deposits and the related average cost decreased $30.9 million and 5 bps, respectively.

Average Balances and Yields .

5 unchanged sentences

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 September 30,

Three Months Ended March 31,

Balance Interest

18 unchanged sentences

Interest-Bearing Demand Deposits $ 335,327 1,191 1.44 % $ 276,603 48 0.07 %

$ 278,412 393 0.56 % $ 275,411 48 0.07 %

251,148 20 0.03 251,801 21 0.03

Savings 242,298 37 0.06 243,786 19 0.03

Money Market 213,443 939 1.78 192,425 41 0.09

189,371 269 0.56 198,167 55 0.11

Time Deposits 101,147 337 1.35 132,015 422 1.30

123,438 397 1.28 168,654 591 1.39

Total Interest-Bearing Deposits 892,215 2,504 1.14 844,829 530 0.25

842,369 1,079 0.51 894,033 715 0.32

Short-Term Borrowings

21 unchanged sentences

(1) Annualized based on three 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.

(3) Includes Deposits Held for Sale that were sold in December 2021.

(4) Refer to Explanation and Use of Non-GAAP Financial Measures in this filing for the calculation of the measure and reconciliation to the most comparable GAAP measure.

(5) Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.

(6) Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities.

(7) Net interest margin represents annualized net interest income divided by average total interest-earning assets.

Rate/Volume Analysis .

The following table presents the effects of changing rates and volumes on our net interest income for the periods indicated.

FTE yield adjustments have been made for tax exempt loan and securities income utilizing a marginal federal income tax rate of 21.0%.

The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate).

The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume).

For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately based on the changes due to rate and the changes due to volume.

The total column represents the sum of the prior columns.

Three Months Ended September 30, 2022

Three Months Ended September 30, 2021

Increase (Decrease) Due to

Volume Rate Total

(Dollars in thousands) (Unaudited)

Interest and Dividend Income:

Loans, net $ 192 $ 901 $ 1,093

Debt Securities:

Taxable 111 31 142

Exempt From Federal Tax (28) — (28)

Marketable Equity Securities — 2 2

Cash at Other Banks (89) 375 286

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

Total Interest-Earning Assets 176 1,315 1,491

Interest Expense:

Deposits (41) 405 364

Short-Term Borrowings:

Securities Sold Under Agreements to Repurchase (8) 2 (6)

Other Borrowings 104 34 138

Total Interest-Bearing Liabilities 55 441 496

Change in Net Interest and Dividend Income $ 121 $ 874 $ 995

Provision for Loan Losses.

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

Noninterest Income .

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 $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 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 $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 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 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 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.

The following table presents information regarding average balances of assets and liabilities, the total dollar amounts of interest income and dividends from average interest-earning assets, the total dollar amounts of interest expense on average interest-bearing liabilities, and the resulting average yields and costs.

Average balances are derived from daily balances over the periods indicated.

The yields set forth below include the effect of deferred fees, discounts, and premiums that are amortized or accreted to interest income or interest expense.

FTE yield adjustments have been made for tax exempt loan and securities interest income utilizing a marginal federal income tax rate of 21% for the periods presented.

As such, amounts will not

agree to income as reported in the consolidated financial statements.

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.

Nine Months Ended September 30,

Balance Interest

Dividends Yield/

Balance Interest

Dividends Yield/

(Dollars in thousands) (Unaudited)

Interest-Earning Assets:

Loans, Net (2)

$ 1,013,871 $ 30,157 3.98 % $ 1,017,632 $ 29,872 3.92 %

Debt Securities

Taxable 222,132 2,878 1.73 148,718 2,124 1.90

Tax Exempt 9,093 218 3.20 12,284 282 3.06

Marketable Equity Securities 2,693 64 3.17 2,645 63 3.18

Interest Bearing Deposits at Other Banks 61,213 534 1.16 187,093 243 0.17

Other Interest-Earning Assets 3,165 115 4.86 3,820 141 4.93

Total Interest-Earning Assets 1,312,167 33,966 3.46 1,372,192 32,725 3.19

Noninterest-Earning Assets 91,607 87,863

Total Assets $ 1,403,774 $ 1,460,055

Liabilities and Stockholders' Equity:

Interest-Bearing Liabilities:

Interest-Bearing Demand Deposits (3)

$ 271,897 554 0.27 % $ 270,136 181 0.09 %

247,790 58 0.03 246,340 78 0.04

Money Market (3)

190,189 371 0.26 198,408 223 0.15

Time Deposits (3)

127,732 1,231 1.29 177,690 2,007 1.51

Total Interest-Bearing Deposits (3)

837,608 2,214 0.35 892,574 2,489 0.37

ST Borrowings

Securities Sold Under Agreements to Repurchase 33,553 56 0.22 43,745 72 0.22

Other Borrowings 17,612 522 3.96 6,396 112 2.34

Total Interest-Bearing Liabilities 888,773 2,792 0.42 942,715 2,673 0.38

Noninterest-Bearing Demand Deposits 388,964 374,865

Other Liabilities 5,177 8,293

Total Liabilities 1,282,914 1,325,873

Stockholders' Equity 120,860 134,182

Total Liabilities and Stockholders' Equity $ 1,403,774 $ 1,460,055

Net Interest Income (FTE) (Non-GAAP) (4)

$ 31,174 $ 30,052

Net Interest Rate Spread (FTE) (Non-GAAP) (4)(6)

3.04 % 2.81 %

Net Interest-Earning Assets (5)

$ 423,394 $ 429,477

Net Interest Margin (GAAP) (7)

Net Interest Margin (FTE) (Non-GAAP) (4)(7)

Return on Average Assets (1)

Return on Average Equity (1)

Average Equity to Average Assets 8.61 9.19

Average Interest-Earning Assets to Average Interest-Bearing Liabilities 147.64 145.56

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

(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.

(3) Includes Deposits Held for Sale that were sold in December 2021.

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

(3) Refer to Explanation and Use of Non-GAAP Financial Measures in this filing for the calculation of the measure and reconciliation to the most comparable GAAP measure.

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The total column represents the sum of the prior columns.

Nine Months Ended September 30, 2022

Nine Months Ended September 30, 2021

Three Months Ended March 31, 2023

Three Months Ended March 31, 2022

Increase (Decrease) Due to

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Exempt From Federal Tax (33) 1 (32)

Marketable Equity Securities 1 — 1

Equity Securities — 2 2

Cash at Other Banks 19 753 772

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Change in Net Interest and Dividend Income $ 318 $ 1,363 $ 1,681

Provision for Loan Losses.

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.

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.

Provision for Credit Losses.

Effective January 1, 2023, the Company adopted ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments”, which replaced the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (CECL) methodology.

The provision for credit losses in the first quarter of 2023 was calculated using CECL and resulted in an $80,000 provision for credit losses recorded for the three months ended March 31, 2023 compared to no provision for credit losses recorded for the three months ended March 31, 2022.

Noninterest Income .

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 income increased $197,000, or 7.5%, to $2.8 million for the three months ended March 31, 2023, compared to $2.6 million for the three months ended March 31, 2022.

This increase was primarily related to a $302,000 increase in net gains on bank-owned life insurance claims resulting from two death claims and an increase of $124,000 in insurance commissions primarily driven by contingency income which resulted from the timing of lock-in amounts received and core business including commercial and personal insurance lines.

These increases were partially offset by an increase in net losses on securities of $225,000.

Noninterest Expense.

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

$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.

Noninterest expense increased $372,000, or 4.3%, to $9.0 million for the three months ended March 31, 2023 compared to $8.7 million for the three months ended March 31, 2022.

Salaries and benefits increased $514,000, or 11.3%, to $5.1 million primarily due to merit increases and staffing additions, while data processing expense increased $372,000, or 76.7%, to $857,000, due to increased ongoing costs related to the fourth quarter 2022 core conversion.

Conversely, contracted services decreased $440,000 to $147,000 for the three months ended March 31, 2023 compared to $587,000 for the three months ended March 31, 2022

Income Taxes.

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.

Income tax expense was $1.1 million for the three months ended March 31, 2023 compared to $803,000 for the three months ended March 31, 2022.

This change was primarily driven by an increase in pre-tax income to $5.3 million for the three months ended March 31, 2023 compared to $3.9 million for the three months ended March 31, 2022.

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 September 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 March 31, 2023 and December 31, 2022.

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 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 Company believes that it had sufficient liquidity at March 31, 2023 to satisfy its short- and long-term liquidity needs.

The Company’s most liquid assets are cash and due from banks, which totaled $103.5 million at March 31, 2023.

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 $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.

Unpledged securities, which provide an additional source of liquidity, totaled $16.1 million at March 31, 2023.

In addition, at March 31, 2023, the Company had the ability to borrow up to $449.7 million from the FHLB of Pittsburgh, of which $447.8 million is available.

The Company also has the ability to borrow up to $120.7 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 March 31, 2023 and December 31, 2022, currently these credit arrangements have remained unused.

At March 31, 2023, $70.7 million, or 54.2% 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 Company has the ability to attract and retain deposits by adjusting the interest rates offered.

The Bank's current deposit portfolio is 62.9% uninsured by the FDIC, and with additional coverage of 12.7% from the Bank's investment securities;

of the total deposits held at the Bank only 24.4% are uninsured.

We are committed to maintaining a strong liquidity position;

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

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

At March 31, 2023, 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.

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 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.

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 March 31, 2023 and December 31, 2022, the Bank was categorized as “well capitalized” under the regulatory framework for prompt corrective action.

At March 31, 2023, the Bank's capital ratios were not affected by loans modified in accordance with Section 4013 of the CARES Act.

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.

September 30, 2022 December 31, 2021

March 31, 2023 December 31, 2022

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