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Item 2. Management’s Discussion and Analysis

2023-11-13 compared with 2023-08-11 · 104 added, 98 removed, 333 unchanged (38% 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 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.

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

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

Net interest income is the difference between the interest income we earn on our interest-earning assets and the interest we pay on our interest-bearing liabilities.

Our results of operations also are affected by our provisions for loan losses, noninterest income and noninterest expense.

Our results of operations also are affected by our provision for credit losses, noninterest income and noninterest expense.

Noninterest income consists primarily of fees and service charges on deposit accounts, insurance commissions, income from bank-owned life insurance and other income.

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Three Months Ended

Six Months Ended

June 30, June 30,

Nine Months Ended

September 30, September 30,

2023 2022 2023 2022

2 unchanged sentences

Adjustment to FTE Basis

43 31 111 105

Interest Income (FTE) (Non-GAAP)

17 unchanged sentences

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

Total assets decreased $9.4 million, or 0.7%, to $1.40 billion at September 30, 2023 compared to $1.41 billion at December 31, 2022.

Cash and Securities

• 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.

• Cash and due from banks decreased $51.1 million, or 49.3%, to $52.6 million at September 30, 2023, compared to $103.7 million at December 31, 2022, due to loan growth.

• Securities decreased $17.2 million, or 9.0%, to $172.9 million at September 30, 2023, compared to $190.1 million at December 31, 2022.

The securities balance was primarily impacted by $12.4 million of repayments on mortgage-backed and collateralized mortgage obligation securities and a $369,000 decrease in the market val ue of the equity securities portfolio, which is primarily comprised of bank stocks.

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

• 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.

• Total loans increased $52.6 million, or 5.0%, to $1.10 billion at September 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 loans and residential mortgage loans of $30.8 million, $30.1 million, and $15.8 million, respectively, partially offset by a decrease in consumer loans of $24.4 million.

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

• 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 decrease in consumer loans resulted from a reduction in indirect automobile loan production due to rising market interest rates and the discontinuation of this product offering as of June 30, 2023.

• The ACL - Loans was $10.8 million at September 30, 2023 and $12.8 million at December 31, 2022.

As a result, the ACL - Loans to total loans was 0.98% at September 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.

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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.

• 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.

• Net charge-offs for the three months ended September 30, 2023 were $109,000, or 0.04% of average loans on an annualized basis.

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 nine months ended September 30, 2023 were $551,000 primarily due to recoveries totaling $750,000 related to the aforementioned prior year charged-off loan.

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

• Nonperforming loans, which include nonaccrual loans and accruing loans past due 90 days or more, were $3.3 million at September 30, 2023 compared to $5.8 million at December 31, 2022.

The decrease of $2.5 million was due to ten loans totaling $1.7 million transferred from nonaccrual to accrual status during the current period and the repayment of a $1.6 million commercial real estate loan that was previously on nonaccrual status.

Partially offsetting these favorable movements, a $757,000 commercial real estate loan moved to nonaccrual status during the period.

Nonperforming loans to total loans ratio was 0.30% at September 30, 2023 compared to 0.55% at December 31, 2022.

• Intangible assets decreased $1.3 million, or 37.0%, to $2.2 million at September 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 $5.5 million or 26.0%, to $26.7 million at September 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 September 30, 2023, and increases in prepaid expenses and accrued interest receivable of $1.2 million and $600,000.

Total liabilities decreased $14.1 million, or 1.1%, to $1.28 billion at September 30, 2023 compared to $1.30 billion at December 31, 2022.

• Total deposits decreased $32.2 million to $1.24 billion as of September 30, 2023 compared to $1.27 billion at December 31, 2022.

Noninterest-bearing demand deposits decreased $85.3 million, savings deposits decreased $40.9 million and money market deposits decreased $19.9 million, while interest-bearing demand deposits increased $45.6 million and time deposits increased $68.3 million,.

The increase in interest-bearing demand deposits was 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 60.5% of total deposits while an additional 16.9% of deposits were collateralized with investment securities at September 30, 2023.

• Long-term borrowings increased $20.0 million, or 136.6%, to $34.7 million at September 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% per annum, 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 September 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.

1 unchanged sentence

Accrued Interest Payable and Other Liabilities

• 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.

• Accrued interest payable and other liabilities increased $6.1 million, or 80.5%, to $13.7 million at September 30, 2023, compared to $7.6 million at December 31, 2022 primarily due to the purchase of $3.9 million of syndicated loans which were unfunded at the end of the period and a $1.1 million increase in accrued interest payable on certificate accounts.

Stockholders’ Equity

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.

Stockholders’ equity increased $4.7 million, or 4.3%, to $114.8 million at September 30, 2023, compared to $110.2 million at December 31, 2022.

• Net income was $9.6 million for the nine months ended September 30, 2023.

• The Company declared and paid $3.8 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.

• 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 program.

In total, the Company repurchased $274,000 of common stock since December 31, 2022.

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.

The program expired May 1, 2023.

• Book value per share (GAAP) was $22.43 at September 30, 2023 compared to $21.60 at December 31, 2022, an increase of $0.83.

Tangible book value per share (Non-GAAP) increased $1.10, or 5.8%, to $20.10 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 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.

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

Net income was $2.7 million for the three months ended September 30, 2023, a decrease of $1.3 million compared to net income of $3.9 million for the three months ended September 30, 2022.

Net Interest and Dividend Income.

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.

Net interest and dividend income decreased $298,000, or 2.7%, to $10.7 million for the three months ended September 30, 2023 compared to $11.0 million for the three months ended September 30, 2022.

Net interest margin (GAAP) decreased to 3.13% for the three months ended September 30, 2023 compared to 3.29% for the three months ended September 30, 2022.

Fully Tax Equivalent (FTE) net interest margin (Non-GAAP) decreased 16 basis points (bps) to 3.14% for the three months ended September 30, 2023 compared to 3.30% for the three months ended September 30, 2022.

Interest and Dividend Income

• 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 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.

• Interest and dividend income increased $3.6 million, or 29.2%, to $15.9 million for the three months ended September 30, 2023 compared to $12.3 million the three months ended September 30, 2022.

◦ Interest income on loans increased $3.2 million, or 29.9%, to $14.0 million for the three months ended September 30, 2023 compared to $10.8 million for the three months ended September 30, 2022.

The average balance of loans increased $64.3 million to $1.09 billion from $1.02 billion, generating $729,000 of additional interest income on loans, and the average yield increased 93 bps to 5.13% compared to 4.20% resulting in a $2.5 million increase in interest income on loans.

◦ Interest income on interest-earning deposits at other banks increased $372,000, to $750,000 for the three months ended September 30, 2023 compared to $378,000 for the three months ended September 30, 2022 as the average yield increased 347 bps, partially offset by a decrease of $15.2 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 $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.

• Interest expense increased $3.9 million, or 305.4%, to $5.2 million for the three months ended September 30, 2023 compared to $1.3 million for the three months ended September 30, 2022.

◦ Interest expense on deposits increased $3.7 million, or 340.2%, to $4.8 million for the three months ended September 30, 2023 compared to $1.1 million for the three months ended September 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 150 bps, or 295.2%, increase in the average cost of interest-bearing deposits compared to the three months ended September 30, 2022.

This accounted for a $3.5 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.

Additionally, interest-bearing deposit balances increased $95.4 million, or 11.3%, to $937.8 million as of September 30, 2023 compared to $842.4 million as of September 30, 2022, accounting for a $138,000 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 June 30,

Three Months Ended September 30,

Balance Interest

44 unchanged sentences

(1) Annualized based on three 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.

(2) Net of the allowance for credit losses and includes nonaccrual loans with a zero yield.

(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.

9 unchanged sentences

The total column represents the sum of the prior columns.

Three Months Ended June 30, 2023

Three Months Ended June 30, 2022

Three Months Ended September 30, 2023

Three Months Ended September 30, 2022

Increase (Decrease) Due to

19 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 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.

The provision for credit losses recorded for the three months ended September 30, 2023 was $406,000 and was required primarily due to changes in qualitative factors coupled with a modeled slowdown in loan prepayment speeds.

This compared to no provision for credit losses recorded for the three months ended September 30, 2022.

Noninterest Income .

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 income decreased $327,000, or 11.9%, to $2.4 million for the three months ended September 30, 2023, compared to $2.7 million for the three months ended September 30, 2022.

This decrease was primarily related to a $439,000 decrease in net gain on disposal of fixed assets as compared to the prior period which included gains from the sale of assets of two closed branch locations.

Noninterest Expense.

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.

Noninterest expense increased $660,000, or 7.5%, to $9.5 million for the three months ended September 30, 2023 compared to $8.8 million for the three months ended September 30, 2022.

Salaries and benefits increased $630,000, or 13.3%, to $5.4 million primarily due to merit increases and revenue producing staff additions.

Data processing expense increased $174,000, or 32.2%, to $714,000, due to increased ongoing costs related to the fourth quarter 2022 core conversion and equipment expense increased $95,000 or 55.9%, to $265,000, due to costs associated with the implementation and operation of new interactive teller machines.

Income Taxes.

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.

Income tax expense was $564,000 for the three months ended September 30, 2023 compared to $998,000 for the three months ended September 30, 2022.

This change was primarily driven by an decrease in pre-tax income to $3.2 million for the three months ended September 30, 2023 compared to $4.9 million for the three months ended September 30, 2022 and a $117,000 income tax refund received during three months ended September 30, 2023.

Results of Operations for the Nine Months Ended September 30, 2023 and 2022

Net income was $9.6 million for the nine months ended September 30, 2023, an increase of $2.5 million compared to $7.1 million for the nine months ended September 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.

Net interest and dividend income increased $2.4 million, or 7.6% to $33.4 million for the nine months ended September 30, 2023 compared to $31.1 million for the nine months ended September 30, 2022.

Net interest margin (GAAP) increased to 3.31% for the nine months ended September 30, 2023 compared to 3.17% for the nine months ended September 30, 2022.

Net interest margin (Non-GAAP FTE) increased 14 bps to 3.32% for the nine months ended September 30, 2023 compared to 3.18% the nine months ended September 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.

• Interest and dividend income increased $11.5 million, or 33.8%, to $45.3 million for the nine months ended September 30, 2023 compared to $33.9 million for the nine months ended September 30, 2022.

◦ Interest income on loans increased $9.7 million or 32.4% to $39.8 million during the nine months ended September 30, 2023 compared to $30.1 million for the nine months ended September 30, 2022.

Average loans increased $55.9 million, while the loan yield for the nine months ended September 30, 2023 increased 101 bps to 4.99% compared to 3.98% for the nine months ended September 30, 2022.

◦ Interest income on interest-earning deposits at other banks increased $1.7 million, to $2.3 million for the nine months ended September 30, 2023 compared to $534,000 for the nine months ended September 30, 2022 as the average yield increased 386 bps, while average balances decreased $739,000.

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.

• Interest expense increased $9.1 million, or 326.3%, to $11.9 million for the nine months ended September 30, 2023 compared to $2.8 million for the nine months ended September 30, 2022.

◦ Interest expense on deposits increased $8.9 million, or 401.2%, to $11.1 million for the nine months ended September 30, 2023 compared to $2.2 million for the nine months ended September 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 126 bps increase in average cost of interest-bearing deposits compared to the nine months ended September 30, 2022.

This accounted for a $8.7 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.

Additionally, average interest-bearing deposits increased $82.6 million, or 9.9%, accounting for a $232,000 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.

Six Months Ended June 30,

Nine Months Ended September 30,

Balance Interest

43 unchanged sentences

PPP Loans $ 54 $ 5 12.38 $ 7,503 $ 712 12.69

(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.

(1) Annualized based on nine months ended results.

(2) Net of the allowance for credit losses and includes nonaccrual loans with a zero yield.

(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.

9 unchanged sentences

The total column represents the sum of the prior columns.

Six Months Ended June 30, 2023

Six Months Ended June 30, 2022

Nine Months Ended September 30, 2023

Nine Months Ended September 30, 2022

Increase (Decrease) Due to

17 unchanged sentences

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.

The provision for credit losses was $917,000 for the nine months ended September 30, 2023, and $3.8 million for the nine months ended September 30, 2022.

The increased provision for credit losses for the nine months ended September 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 income increased $34,000, or 0.5%, to $7.49 million for the nine months ended September 30, 2023, compared to $7.46 million for the nine months ended September 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 $335,000, or 7.4%, in insurance commissions to $4.9 million for the nine months ended September 30, 2023, compared to $4.5 million for the nine months ended September 30, 2022 due to higher lock-in amounts received and core business including commercial and personal insurance lines.

Partially offsetting these increases, net gain on disposal of fixed assets decreased $420,000, or 97.4%, to $11,000 for the nine months ended September 30, 2023, compared to $431,000 for the nine months ended September 30, 2022 due to a $439,000 gain resulting from the sale of assets of two closed branch locations recorded during the nine months ended September 30, 2022.

Additionally, service fees decreased $270,000, or 16.6%, to $1.4 million for nine months ended September 30, 2023, compared to $1.6 million for the nine months ended September 30, 2022 and the net loss on equity securities increased to $369,000 for the nine months ended September 30, 2023 compared to $252,000 for the nine months ended September 30, 2022, which was due to a decline of $117,000 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.

Noninterest expense increased $2.1 million, or 8.2%, to $28.0 million for the nine months ended September 30, 2023 compared to $25.9 million for the nine months ended September 30, 2022.

Salaries and benefits increased $1.8 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.

Data processing expense increased $818,000 due to increased ongoing costs related to the fourth quarter 2022 core conversion and equipment expense increased $205,000 due to costs associated with the implementation and operation of new interactive teller machines.

Conversely, contracted services decreased $355,000 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.

Income tax expense increased $635,000 to $2.4 million for the nine months ended September 30, 2023 compared to $1.8 million for the nine months ended September 30, 2022.

The change between the periods is consistent with the change in pre-tax income, as pre-tax income was $12.0 million for the nine months ended September 30, 2023 compared to pre-tax income of $8.9 million for the nine months ended September 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 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.

Refer to Note 6 in the Notes to Consolidated Financial Statements of this report for a summary of commitments outstanding as of September 30, 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 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 Company believes that it had sufficient liquidity at September 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 $52.6 million at September 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 $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.

Unpledged securities, which provide an additional source of liquidity, totaled $20.8 million at September 30, 2023.

In addition, at September 30, 2023, the Company had the ability to borrow up to $467.9 million from the FHLB of Pittsburgh, of which $415.3 million is available.

The Company also has the ability to borrow up to $109.2 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, 2023 and December 31, 2022, currently these credit arrangements have remained unused.

At September 30, 2023, $83.4 million, or 47.0% 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, 2023, CB Financial (on an unconsolidated, stand-alone basis) had liquid assets of $16.0 million.

At September 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.

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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.

At September 30, 2023 and December 31, 2022, the Bank was categorized as “well capitalized” under the regulatory framework for prompt corrective action.

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, 2023 December 31, 2022

September 30, 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