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Item 2. Management’s Discussion and Analysis

2023-08-11 compared with 2023-05-12 · 203 added, 79 removed, 228 unchanged (55% of the section changed)

32 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 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.

The detailed discussion focuses on our consolidated financial condition as of June 30, 2023, compared to the consolidated financial condition as of December 31, 2022 and the consolidated results of operations for the three and six months ended June 30, 2023 compared to the three and six months ended June 30, 2022.

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

11 unchanged sentences

Non-GAAP adjusted items impacting the Company's financial performance are identified to assist investors in providing a complete understanding of factors and trends affecting the Company’s business and in analyzing the Company’s operating results on the same basis as that applied by management.

Although we believe that these non-GAAP financial measures enhance the understanding of our business and performance, they should not be considered an alternative to GAAP or considered to be more important than financial results determined in accordance with GAAP, nor are they necessarily comparable with non-GAAP measures which may be presented by other companies.

Although we believe that these non-GAAP financial measures enhance the understanding of our business and performance, they should not be considered an alternative to GAAP or considered to be more important than financial results determined in accordance with GAAP, nor are they necessarily comparable with similar non-GAAP measures which may be presented by other companies.

Where non-GAAP financial measures are used, the comparable GAAP financial measure, as well as the reconciliation to the comparable GAAP financial measure, can be found herein.

4 unchanged sentences

Three Months Ended

Six Months Ended

June 30, June 30,

2023 2022 2023 2022

(Dollars in thousands)

9 unchanged sentences

Adjustment to FTE Basis

0.01 0.01 0.01 0.01

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

2.79 3.01 2.96 3.01

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 3.13 3.41 3.11

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

9 unchanged sentences

Consolidated Statements of Financial Condition Analysis

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.

Total assets increased $23.8 million, or 1.7%, to $1.43 billion at June 30, 2023 compared to $1.41 billion at December 31, 2022.

Cash and Securities

• 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.

• Cash and due from banks decreased $25.6 million, or 24.7%, to $78.1 million at June 30, 2023, compared to $103.7 million at December 31, 2022, due to loan growth.

• Securities decreased $8.6 million, or 4.5%, to $181.4 million at June 30, 2023, compared to $190.1 million at December 31, 2022.

The securities balance was primarily impacted by $8.1 million of repayments on mortgage-backed and collateralized mortgage obligation securities and a $332,000 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.

• Total loans increased $51.3 million, or 4.9%, to $1.10 billion at June 30, 2023 compared to $1.05 billion at December 31, 2022.

Loan growth was driven by increases in commercial and industrial loans, commercial real estate and residential mortgages of $32.2 million, $21.8 million, and $7.8 million, respectively, partially offset by a decrease in consumer loans of $12.1 million.

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 ACL - Loans was $10.7 million at June 30, 2023 and $12.8 million at December 31, 2022.

As a result, the ACL - Loans to total loans was 0.97% at June 30, 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 $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.

• Net charge-offs for the three months ended June 30, 2023 were $96,000, or 0.04% of average loans on an annualized basis.

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 primarily due to the aforementioned $2.7 million charge-off of a commercial and industrial loan.

Net recoveries for the six months ended June 30, 2023 were $660,000 primarily due to recoveries totaling $750,000 related to the prior year charged-off loan.

Net charge-offs for the six months ended June 30, 2022 were $2.5 million.

• Nonperforming loans, which includes nonaccrual loans and accruing loans past due 90 days or more, were $4.1 million at June 30, 2023 compared to $5.8 million at December 31, 2022.

The decrease of $1.7 million was due to ten loans totaling $1.7 million being moved from nonaccrual to accrual status during the current period.

Nonperforming loans to total loans ratio was 0.37% at June 30, 2023 compared to 0.55% at December 31, 2022.

• Intangible assets decreased $891,000, or 25.6%, to $2.6 million at June 30, 2023 compared to $3.5 million at December 31, 2022 primarily due to amortization expense recognized during the period.

• Accrued interest and other assets increased $5.6 million, or 26.8%, to $26.7 million at June 30, 2023, compared to $21.1 million at December 31, 2022 due to the sale of a $2.0 million syndicated loan which was sold but not yet settled at the end of the period, and increases in accounts receivable for Exchange Underwriters, income taxes receivable and BOLI death benefit claims receivable $853,000, $761,000 and $664,000.

Total liabilities increased $17.4 million, or 1.3%, to $1.32 billion at June 30, 2023 compared to $1.30 billion at December 31, 2022.

• Total deposits decreased $5.2 million to $1.26 billion as of June 30, 2023 compared to $1.27 billion at December 31, 2022.

Interest-bearing demand deposits increased $62.8 million and time deposits increased $60.4 million, while non interest-bearing demand deposits decreased $74.3 million, money market deposits decreased $23.3 million and savings deposits decreased $30.8 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 while higher time deposits resulted from the offering of a higher-rate certificate of deposit product.

FDIC insured deposits totaled approximately 61.1% of total deposits while an additional 16.5% of deposits were collateralized with investment securities at June 30, 2023.

• Long-term borrowings increased $20.0 million, or 136.6%, to $34.7 million at June 30, 2023, compared to $14.6 million at December 31, 2022.

During the second quarter, the Bank entered into $20.0 million of FHLB advances for a term of 24 months at 4.92%, the proceeds of which were utilized to match fund originations within the Bank's commercial and industrial loan portfolio.

• Short-term borrowings decreased $8.1 million, or 100.0%, as there were no short-term borrowings at June 30, 2023, compared to $8.1 million at December 31, 2022.

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

These accounts 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.

• Accrued interest payable and other liabilities increased $10.6 million, or 139.8%, to $18.2 million at June 30, 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 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.

Stockholders’ equity increased $6.4 million, or 5.8%, to $116.6 million at June 30, 2023, compared to $110.2 million at December 31, 2022.

• Net income was $6.9 million for the six months ended June 30, 2023.

• The Company declared and paid $2.6 million in dividends to common stockholders in the current period.

• The Company's January 1, 2023 adoption of CECL resulted in a $2.1 million positive adjustment to stockholders' equity, net of tax.

• On April 21, 2022, a $10.0 million repurchase program was authorized, with the Company repurchasing 74,656 shares at an average price of $22.38 per share since the inception of the plan.

In total, the Company repurchased $274,000 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 $22.90 at March 31, 2023 compared to $21.60 at December 31, 2022, an increase of $1.30.

The plan expired May 1, 2023.

• Book value per share (GAAP) was $22.81 at June 30, 2023 compared to $21.60 at December 31, 2022, an increase of $1.21.

Tangible book value per share (Non-GAAP) increased $1.39, or 7.3%, to $20.39 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 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.

Consolidated Results of Operations for the Three Months Ended June 30, 2023 and 2022

Net income was $2.8 million for the three months ended June 30, 2023, an increase of $2.6 million compared to net income of $118,000 for the three months ended June 30, 2022.

Net Interest and Dividend Income.

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.

Net interest and dividend income increased $1.0 million, or 9.4%, to $11.1 million for the three months ended June 30, 2023 compared to $10.2 million for the three months ended June 30, 2022.

Net interest margin (GAAP) increased to 3.29% for the three months ended June 30, 2023 compared to 3.12% for the three months ended June 30, 2022.

Fully Tax Equivalent (FTE) net interest margin (Non-GAAP) increased 17 basis points (bps) to 3.30% for the three months ended June 30, 2023 compared to 3.13% for the three months ended June 30, 2022.

Interest and Dividend Income

• 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.

• Interest and dividend income increased $4.2 million, or 38.7%, to $15.2 million for the three months ended June 30, 2023 compared to $11.0 million the three months ended June 30, 2022.

◦ Interest income on loans increased $3.7 million, or 37.9%, to $13.4 million for the three months ended June 30, 2023 compared to $9.7 million for the three months ended June 30, 2022.

The average balance of loans increased $71.5 million to $1.08 billion from $1.01 billion, generating $724,000 of additional interest income on loans, and the average yield increased 112 bps to 5.00% compared to 3.88% causing a $3.0 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 income on interest-earning deposits at other banks increased $599,000, to $721,000 for the three months ended June 30, 2023 compared to $122,000 for the three months ended June 30, 2022 as the average yield increased 443 bps, partially offset by a decrease of $1.9 million in average balances.

The increase in the average yield was the result of the Federal Reserve Board's interest rate increases.

Interest Expense

• 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.

• Interest expense increased $3.3 million, or 413.6%, to $4.1 million for the three months ended June 30, 2023 compared to $795,000 for the three months ended June 30, 2022.

◦ Interest expense on deposits increased $3.2 million, or 536.1%, to $3.8 million for the three months ended June 30, 2023 compared to $604,000 for the three months ended June 30, 2022.

Rising market interest rates led to the repricing of interest-bearing demand and money market deposits and a shift in deposits from non interest-bearing to interest-bearing demand and time deposits and resulted in a 137 bps, or 466.9%, increase in the average cost of interest-bearing deposits compared to the three months ended June 30, 2022.

This accounted for a $3.2 million increase in interest expense.

Additionally, interest-bearing deposit balances increased $104.5 million, or 12.7%, to $930.1 million as of June 30, 2023 compared to $825.6 million as of June 30, 2022, accounting for a $70,000 increase in interest expense.

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 March 31,

Three Months Ended June 30,

Balance Interest

10 unchanged sentences

Equity Securities 2,693 25 3.71 2,693 20 2.97

Interest Bearing Deposits at Banks 74,555 805 4.32 59,296 33 0.22

Interest-Earning Deposits at Banks 54,466 721 5.30 56,379 122 0.87

Other Interest-Earning Assets 2,783 39 5.62 3,235 38 4.71

5 unchanged sentences

Interest-Bearing Demand Deposits $ 354,497 1,582 1.79 % $ 260,655 111 0.17 %

Savings 242,298 37 0.06 243,786 19 0.03

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

Savings Accounts 225,175 53 0.09 248,356 20 0.03

Money Market Accounts 194,565 1,033 2.13 188,804 61 0.13

Time Deposits 155,867 1,174 3.02 127,832 412 1.29

1 unchanged sentence

Short-Term Borrowings 480 3 2.51 34,135 18 0.21

Securities Sold Under Agreements to Repurchase 1,344 2 0.60 37,884 19 0.20

Other Borrowings 21,026 238 4.54 17,611 173 3.94

31 unchanged sentences

The total column represents the sum of the prior columns.

Three Months Ended March 31, 2023

Three Months Ended March 31, 2022

Three Months Ended June 30, 2023

Three Months Ended June 30, 2022

Increase (Decrease) Due to

13 unchanged sentences

Short-Term Borrowings (34) 19 (15)

Securities Sold Under Agreements to Repurchase (30) 13 (17)

Other Borrowings 37 28 65

4 unchanged sentences

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.

The provision for credit losses recorded for the three months ended June 30, 2023 was $432,000 and was required primarily due to loan growth coupled with a modeled slowdown in loan prepayment speeds.

This compared to $3.8 million in provision for credit losses recorded for the three months ended June 30, 2022, primarily due to the charge-off of a $2.7 million commercial and industrial loan to a borrower that ceased operations.

Noninterest Income .

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 income increased $164,000, or 7.8%, to $2.3 million for the three months ended June 30, 2023, compared to $2.1 million for the three months ended June 30, 2022.

This increase was primarily related to a $142,000 increase in commercial and personal insurance commissions and a decrease in net losses on securities of $99,000.

Noninterest Expense.

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

Noninterest expense increased $1.1 million, or 13.0%, to $9.5 million for the three months ended June 30, 2023 compared to $8.4 million for the three months ended June 30, 2022.

Salaries and benefits increased $692,000, or 15.2%, to $5.2 million primarily due to merit increases, revenue producing staff additions and associated $160,000 of recruiting costs, and $80,000 of severance costs related to the discontinuation of indirect automobile lending.

Data processing expense increased $272,000, or 61.0%, to $718,000, due to increased ongoing costs related to the fourth quarter 2022 core conversion and equipment expense increased $101,000 or 55.5%, to $283,000, due to costs associated with the implementation of new interactive teller machines.

Income Taxes.

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.

Income tax expense was $699,000 for the three months ended June 30, 2023 compared to and income tax benefit of $44,000 for the three months ended June 30, 2022.

This change was primarily driven by an increase in pre-tax income to $3.5 million for the three months ended June 30, 2023 compared to $74,000 for the three months ended June 30, 2022.

Results of Operations for the Six Months Ended June 30, 2023 and 2022

Net income was $6.9 million for the six months ended June 30, 2023, an increase of $3.8 million compared to $3.2 million for the six months ended June 30, 2022.

Net Interest and Dividend Income.

Net interest and dividend income increased $2.6 million, or 13.2% to $22.7 million for the six months ended June 30, 2023 compared to $20.1 million for the six months ended June 30, 2022.

Net interest margin (GAAP) increased to 3.40% for the six months ended June 30, 2023 compared to 3.10% for the six months ended June 30, 2022.

Net interest margin (Non-GAAP FTE) increased 30 bps to 3.41% for the six months ended June 30, 2023 compared to 3.11% the six months ended June 30, 2022.

Interest and Dividend Income

• Interest and dividend income increased $7.9 million, or 36.5%, to $29.4 million for the six months ended June 30, 2023 compared to $21.6 million for the six months ended June 30, 2022.

◦ Interest income on loans increased $6.5 million or 33.8% to $25.8 million during the six months ended June 30, 2023 compared to $19.3 million for the six months ended June 30, 2022.

Average loans increased $51.6 million, while the loan yield for the six months ended June 30, 2023 increased 106 bps to 4.92% compared to 3.86% for the six months ended June 30, 2022.

◦ Interest income on interest-earning deposits at other banks increased $1.4 million, to $1.5 million for the six months ended June 30, 2023 compared to $156,000 for the six months ended June 30, 2022 as the average yield increased 420 bps, and average balances increased $6.6 million.

The increase in the average yield was the result of the Federal Reserve Board's interest rate increases.

Interest Expense

• Interest expense increased $5.2 million, or 344.3%, to $6.7 million for the six months ended June 30, 2023 compared to $1.5 million for the six months ended June 30, 2022.

◦ Interest expense on deposits increased $5.2 million, or 459.6%, to $6.3 million for the six months ended June 30, 2023 compared to $1.1 million for the six months ended June 30, 2022.

Rising market interest rates led to the repricing of interest-bearing demand and money market deposits and a shift in deposits from non interest-bearing to interest-bearing demand and time deposits and resulted in a 113 bps increase in average cost of interest-bearing deposits compared to the six months ended June 30, 2022.

This accounted for a $5.1 million increase in interest expense.

Additionally, interest-bearing deposits increased $76.1 million, or 9.1%, accounting for a $115,000 increase in interest expense.

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.

Six Months Ended June 30,

Balance Interest

Dividends Yield/

Balance Interest

Dividends Yield/

(Dollars in thousands) (Unaudited)

Interest-Earning Assets:

Loans, Net (2)

$ 1,060,092 $ 25,840 4.92 % $ 1,008,539 $ 19,322 3.86 %

Debt Securities

Taxable 211,213 1,914 1.81 222,144 1,893 1.70

Tax Exempt 6,225 105 3.37 9,649 156 3.23

Equity Securities 2,693 49 3.64 2,693 42 3.12

Interest-Earning Deposits at Banks 64,455 1,526 4.74 57,829 156 0.54

Other Interest-Earning Assets 2,709 79 5.88 3,358 76 4.56

Total Interest-Earning Assets 1,347,387 29,513 4.42 1,304,212 21,645 3.35

Noninterest-Earning Assets 50,159 103,201

Total Assets $ 1,397,546 $ 1,407,413

Liabilities and Stockholders' Equity:

Interest-Bearing Liabilities:

Interest-Bearing Demand Deposits $ 344,965 2,773 1.62 % $ 268,585 160 0.12 %

Savings Accounts 233,689 90 0.08 246,084 38 0.03

Money Market Accounts 203,952 1,972 1.95 190,605 102 0.11

Time Deposits 128,659 1,511 2.37 129,914 834 1.29

Total Interest-Bearing Deposits 911,265 6,346 1.40 835,188 1,134 0.27

Short-Term Borrowings 910 5 1.11 36,000 37 0.21

Other Borrowings 17,850 393 4.44 17,608 347 3.97

Total Interest-Bearing Liabilities 930,025 6,744 1.46 888,796 1,518 0.34

Noninterest-Bearing Demand Deposits 344,203 388,103

Other Liabilities 6,959 6,468

Total Liabilities 1,281,187 1,283,367

Stockholders' Equity 116,359 124,046

Total Liabilities and Stockholders' Equity $ 1,397,546 $ 1,407,413

Net Interest Income (FTE) (Non-GAAP) (3)

$ 22,769 $ 20,127

Net Interest Rate Spread (FTE) (Non-GAAP) (3)(5)

2.96 % 3.01 %

Net Interest-Earning Assets (4)

$ 417,362 $ 415,416

Net Interest Margin (GAAP) (6)

Net Interest Margin (FTE) (Non-GAAP) (3)(6)

Return on Average Assets (1)

Return on Average Equity (1)

Average Equity to Average Assets 8.33 8.81

Average Interest-Earning Assets to Average Interest-Bearing Liabilities 144.88 146.74

PPP Loans $ 69 $ 4 11.69 $ 10,085 $ 589 11.78

(1) Annualized based on six months ended results.

(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.

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

(5) 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.

(6) 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%.

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.

Six Months Ended June 30, 2023

Six Months Ended June 30, 2022

Increase (Decrease) Due to

Volume Rate Total

(Dollars in thousands) (Unaudited)

Interest and Dividend Income:

Loans, net $ 989 $ 5,529 $ 6,518

Debt Securities:

Taxable (98) 119 21

Exempt From Federal Tax (58) 7 (51)

Equity Securities — 7 7

Cash at Other Banks 19 1,351 1,370

Other Interest-Earning Assets (17) 20 3

Total Interest-Earning Assets 835 7,033 7,868

Interest Expense:

Deposits 115 5,097 5,212

Short-Term Borrowings (65) 33 (32)

Other Borrowings 4 42 46

Total Interest-Bearing Liabilities 54 5,172 5,226

Change in Net Interest and Dividend Income $ 781 $ 1,861 $ 2,642

Provision for Credit Losses.

The provision for credit losses was $572,000 for the six months ended June 30, 2023, and $3.8 million for the six months ended June 30, 2022.The increased provision for credit losses for the six months ended June 30, 2022 was primarily due to a provision for a single loan charge-of f of $2.7 million with respect to a commercial and industrial loan to a borrower who ceased operations.

Noninterest Income.

Noninterest income increased $362,000, or 7.7%, to $5.1 million for the six months ended June 30, 2023, compared to $4.7 million for the six months ended June 30, 2022.

This increase was primarily related to a $303,000 increase in net gains of bank-owned life insurance claims resulting from two death claims and an increase of $267,000, or 8.4%, in insurance commissions to $3.4 million for the six months ended June 30, 2023, compared to $3.2 million for the six months ended June 30, 2022 due to higher lock-in amounts received and core business including commercial and personal insurance lines.

Conversely, service fees decreased $193,000, or 17.8%, to $892,000 for six months ended June 30, 2023, compared to $1.1 million for the six months ended June 30, 2022 and the net loss on equity securities increased to $332,000 for the six months ended June 30, 2023 compared to $206,000 for the six months ended June 30, 2022, which was due to a decline of $126,000 in the market value of equity securities, comprised mainly of bank stocks.

Noninterest Expense.

Noninterest expense increased $1.5 million, or 8.6%, to $18.5 million for the six months ended June 30, 2023 compared to $17.1 million for the six months ended June 30, 2022.

Salaries and benefits increased $1.2 million primarily due to revenue producing staffing additions, recruiting costs and severance related to the discontinuation of indirect automobile lending.

Data processing expense increased $644,000 due to increased ongoing costs related to the fourth quarter 2022 core conversion and equipment expense increased $109,000 due to costs associated with the implementation of new interactive teller machines.

Conversely, contracted services decreased $354,000 due primarily to costs associated with project management of strategic initiatives during 2022.

Income Taxes.

Income tax expense increased $1.1 million to $1.8 million for the six months ended June 30, 2023 compared to $759,000 for the six months ended June 30, 2022.

The change between the periods is consistent with the change in pre-tax income, as pre-tax income was $8.7 million for the six months ended June 30, 2023 compared to pre-tax income of $3.9 million for the six months ended June 30, 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 March 31, 2023 and December 31, 2022.

Refer to Note 6 in the Notes to Consolidated Financial Statements of this report for a summary of commitments outstanding as of June 30, 2023 and December 31, 2022.

Liquidity and Capital Management

4 unchanged sentences

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 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 Company believes that it had sufficient liquidity at June 30, 2023 to satisfy its short- and long-term liquidity needs.

The Company’s most liquid assets are cash and due from banks, which totaled $78.1 million at June 30, 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 $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.

Unpledged securities, which provide an additional source of liquidity, totaled $10.1 million at June 30, 2023.

In addition, at June 30, 2023, the Company had the ability to borrow up to $466.1 million from the FHLB of Pittsburgh, of which $444.1 million is available.

The Company also has the ability to borrow up to $115.9 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, 2023 and December 31, 2022, currently these credit arrangements have remained unused.

At June 30, 2023, $79.1 million, or 46.7% 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.

2 unchanged sentences

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;

The Bank's current deposit portfolio is 61.1% insured by the FDIC, and with additional coverage of 16.5% from the Bank's investment securities;

of the total deposits held at the Bank only 22.4% are uninsured.

7 unchanged sentences

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

At March 31, 2023, CB Financial (on an unconsolidated, stand-alone basis) had liquid assets of $16.6 million.

At June 30, 2023, CB Financial (on an unconsolidated, stand-alone basis) had liquid assets of $16.0 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.

4 unchanged sentences

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

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.

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

At June 30, 2023.

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.

March 31, 2023 December 31, 2022

June 30, 2023 December 31, 2022

Amount Ratio Amount Ratio

17 unchanged sentences

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