What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-05-10 compared with 2023-11-13 · 87 added, 218 removed, 219 unchanged (58% of the section changed)

29 unchanged sentences

The Bank is a community-oriented institution offering residential and commercial real estate loans, commercial and industrial loans, and consumer loans as well as a variety of deposit products for individuals and businesses in its market area.

Property and casualty, commercial liability, surety and other insurance products are offered through Exchange Underwriters, Inc., the Bank’s wholly owned subsidiary that is a full-service, independent insurance agency located in Washington County.

The following discussion and analysis is presented to assist in the understanding and evaluation of our consolidated financial condition and results of operations.

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, 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.

The detailed discussion focuses on our consolidated financial condition as of March 31, 2024, compared to the consolidated financial condition as of December 31, 2023 and the consolidated results of operations for the three months ended March 31, 2024 compared to the three months ended March 31, 2023.

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 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.

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, income from bank-owned life insurance and other income.

Noninterest expense consists primarily of expenses related to salaries and employee benefits, occupancy and equipment, data processing, contracted services, legal and professional fees, advertising, deposit and general insurance and other expenses.

14 unchanged sentences

Three Months Ended

Nine Months Ended

September 30, September 30,

2023 2022 2023 2022

(Dollars in thousands)

1 unchanged sentence

Adjustment to FTE Basis

43 31 111 105

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)

2.55 3.11 2.81 3.04

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)

3.14 3.30 3.32 3.18

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,

2024 December 31, 2023

7 unchanged sentences

Consolidated Statements of Financial Condition Analysis

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.

Total assets increased $17.0 million, or 1.2%, to $1.47 billion at March 31, 2024 compared to $1.46 billion at December 31, 2023.

Cash and Securities

• 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.

• Cash and due from banks increased $5.5 million, or 8.0%, to $73.7 million at March 31, 2024, compared to $68.2 million at December 31, 2023.

• Securities increased $25.2 million, or 12.2%, to $232.3 million at March 31, 2024, compared to $207.1 million at December 31, 2023.

The securities balance was primarily impacted by the purchase of $29.8 million of collateralized loan obligation securities, partially offset by $3.1 million of repayments on amortizing securities .

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

• 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.

• Total loans decreased $14.1 million, or 1.3%, to $1.10 billion at March 31, 2024 compared to $1.11 billion at December 31, 2023.

This was driven by decreases in consumer loans and commercial and industrial loans of $11.1 million and $8.0 million, respectively, partially offset by increases in commercial real estate loans, other loans and construction loans of $3.3 million, $1.4 million and $1.2 million, respectively.

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.

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

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 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.

These accounts were transitioned into other deposit products and account for a portion of the interest-bearing demand deposit increase.

This portfolio is expected to continue to decline as resources are allocated and production efforts are focused on more profitable commercial products.

The decrease in commercial and industrial loans was primarily due to the prepayment of a $20.0 million line of credit and a $5.0 million syndicated national credit.

• The allowance for credit losses (ACL) was $9.6 million at March 31, 2024 and $9.7 million at December 31, 2023.

As a result, the ACL to total loans was 0.87% at March 31, 2024 and December 31, 2023.

The provision for credit losses recorded for the three months ended March 31, 2024 was a net recovery of $37,000.

The provision for credit losses - loans was a recovery of $143,000 and was primarily due to a decrease in loan balances while the provision for credit losses - unfunded commitments was $106,000 and was due to an increase in qualitative factors.

• Net recoveries for the three months ended March 31, 2024 were $18,000.

Net recoveries for the three months ended March 31, 2023 were $756,000, or 0.29% of average loans on an annualized basis primarily due to recoveries totaling $750,000 related to a prior year $2.7 million charged-off commercial and industrial loan.

• Nonperforming loans, which includes nonaccrual loans and accruing loans past due 90 days or more, were $2.2 million at March 31, 2024 and December 31, 2023.

Nonperforming loans to total loans ratio was 0.20% at March 31, 2024 and December 31, 2023.

Total liabilities increased $15.2 million, or 1.2%, to $1.33 billion at March 31, 2024 compared to $1.32 billion at December 31, 2023.

• Total deposits decreased $4.7 million to $1.262 billion as of March 31, 2024 compared to $1.267 billion at December 31, 2023.

Non interest-bearing demand deposits decreased $2.6 million, interest-bearing demand deposits decreased $39.9 million and savings deposits decreased $4.5 million, while money market deposits increased $7.3 million and time deposits increased $35.0 million.

Deposit changes were primarily the result of cyclical fluctuations in municipal deposits and the current interest rate environment causing a shift in deposit products to higher priced time deposits.

Additionally, the Bank added $13.0 million of brokered certificates of deposit during the period.

Brokered certificates of deposit totaled $42.0 million as of March 31, 2024 compared to $29.0 million at December 31, 2023, all mature within three months and were utilized to fund the purchase of floating rate collateralized loan obligation securities.

At March 31, 2024, FDIC insured deposits totaled approximately 63.1% of total deposits while an additional 15.0% of deposits were collateralized with investment securities.

Accrued Interest Payable and Other Liabilities

• 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.

• Accrued interest payable and other liabilities increased $19.9 million, or 138.0%, to $34.3 million at March 31, 2024, compared to $14.4 million at December 31, 2023 primarily due to the purchase of $10.6 million of syndicated loans which were unfunded at the end of the period and $10.1 million of securities which were unsettled at the end of the period.

Stockholders’ Equity

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 program.

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

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.

Stockholders’ equity increased $1.8 million, or 1.3%, to $141.6 million at March 31, 2024, compared to $139.8 million at December 31, 2023.

The key factor positively impacting stockholders’ equity was $4.2 million of net income for the current period, partially offset by a $1.3 million increase in accumulated other comprehensive loss and the payment of $1.3 million in dividends since December 31, 2023.

Book value per share (GAAP) was $27.53 at March 31, 2024 compared to $27.32 at December 31, 2023, an increase of $0.21.

Tangible book value per share (Non-GAAP) increased $0.29, or 1.1%, to $25.52 compared to $25.23 at December 31, 2023.

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

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.

Consolidated Results of Operations for the Three Months Ended March 31, 2024 and 2023

Net income was $4.20 million for the three months ended March 31, 2024, an increase of $40,000 compared to net income of $4.16 million for the three months ended March 31, 2023.

Net Interest and Dividend Income.

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.

Net interest and dividend income increased $8,000, or 0.1%, to $11.59 million for the three months ended March 31, 2024 compared to $11.58 million for the three months ended March 31, 2023.

Net interest margin (GAAP) decreased to 3.36% for the three months ended March 31, 2024 compared to 3.51% for the three months ended March 31, 2023.

Fully Tax Equivalent (FTE) net interest margin (Non-GAAP) decreased 15 basis points (bps) to 3.37% for the three months ended March 31, 2024 compared to 3.52% for the three months ended March 31, 2023.

Interest and Dividend Income

• 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 and dividend income increased $3.7 million, or 26.3%, to $18.0 million for the three months ended March 31, 2024 compared to $14.2 million the three months ended March 31, 2023.

◦ Interest income on loans increased $2.5 million, or 19.9%, to $14.8 million for the three months ended March 31, 2024 compared to $12.4 million for the three months ended March 31, 2023.

The average yield on loans increased 67 bps to 5.50% compared to 4.83% resulting in a $1.8 million increase in interest income on loans.

The average balance of loans increased $47.3 million to $1.09 billion from $1.04 billion, generating $694,000 of additional interest income on loans.

The increase in loan yield has been driven by a reduction in lower yielding consumer loans due to the discontinuation of the indirect automobile loan product with the redeployment of those funds into higher yielding commercial loan products.

◦ Interest income on taxable investment securities increased $1.3 million, or 138.9%, to $2.3 million for the three months ended March 31, 2024 compared to $964,000 for the three months ended March 31, 2023 driven by a 210 bp increase in average yield coupled with a $22.6 million increase in average balances.

The increase in the average yield was the result of the Bank implementing a balance sheet repositioning strategy of its portfolio of available-for-sale securities during the fourth quarter of 2023.

The Bank sold $69.3 million in market value of its lower yielding U.S.

government agency, mortgage-backed and municipal securities with an average yield of 1.89% and purchased $69.3 million of higher yielding mortgage-backed and collateralized mortgage obligation securities with an average yield of 5.49%.

◦ Interest income on interest-earning deposits at other banks decreased $72,000, to $733,000 for the three months ended March 31, 2024 compared to $805,000 for the three months ended March 31, 2023 driven by a $14.3 million decrease in average balances, partially offset by a 58 bp increase in the average yield.

Interest Expense

• 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.

• Interest expense increased $3.7 million, or 140.3%, to $6.4 million for the three months ended March 31, 2024 compared to $2.7 million for the three months ended March 31, 2023.

◦ Interest expense on deposits increased $3.5 million, or 139.3%, to $6.0 million for the three months ended March 31, 2024 compared to $2.5 million for the three months ended March 31, 2023.

Rising market interest rates led to the repricing of interest-bearing demand and money market deposits and a shift in deposits from noninterest-bearing to interest-bearing demand and time deposits which resulted in a 132 bp, or 116.0%, increase in the average cost of interest-bearing deposits compared to the three months ended March 31, 2023.

This accounted for a $3.2 million 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.

Additionally, interest-bearing deposit balances increased $86.1 million, or 9.6%, to $978.3 million as of March 31, 2024 compared to $892.2 million as of March 31, 2023, accounting for a $298,000 increase in interest expense.

◦ Interest expense on borrowed funds increased $247,000, or 157.3%, to $404,000 for the three months ended March 31, 2024 compared to $157,000 for the three months ended March 31, 2023.

The average balance of borrowed funds increased $18.7 million due to $20.0 million of FHLB long-term advances added during the second quarter of 2023.

The increase in the average balance accounted 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.

Three Months Ended September 30,

Three Months Ended March 31,

Balance Interest

18 unchanged sentences

Interest-Bearing Demand Deposits $ 334,880 1,794 2.15 % $ 335,327 1,191 1.44 %

Savings Accounts 212,909 54 0.10 251,148 20 0.03

Money Market Accounts 203,867 1,514 2.99 213,443 939 1.78

Time Deposits 173,832 1,552 3.54 123,438 397 1.28

Total Interest-Bearing Deposits 937,750 4,750 2.01 842,369 1,079 0.51

Short-Term Borrowings — — — 28,738 19 0.26

Other Borrowings 34,662 407 4.66 17,621 174 3.92

Total Interest-Bearing Liabilities 972,412 5,157 2.10 888,728 1,272 0.57

Noninterest-Bearing Demand Deposits 312,016 390,658

Other Liabilities 9,025 2,636

Total Liabilities 1,293,453 1,282,022

Stockholders' Equity 117,435 114,592

Total Liabilities and Stockholders' Equity $ 1,410,888 $ 1,396,614

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

$ 10,760 $ 11,046

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

2.55 % 3.11 %

Net Interest-Earning Assets (4)

$ 385,767 $ 439,090

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 8.32 8.20

Average Interest-Earning Assets to Average Interest-Bearing Liabilities 139.67 149.41

PPP Loans $ 24 $ 1 16.53 $ 2,424 $ 123 20.13

(1) Annualized based on three 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.

(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 21.0%.

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, 2023

Three Months Ended September 30, 2022

Increase (Decrease) Due to

Volume Rate Total

(Dollars in thousands) (Unaudited)

Interest and Dividend Income:

Loans, net $ 729 $ 2,519 $ 3,248

Debt Securities:

Taxable (83) 38 (45)

Exempt From Federal Tax (16) 6 (10)

Equity Securities — 4 4

Cash at Other Banks (107) 479 372

Other Interest-Earning Assets 8 22 30

Total Interest-Earning Assets 531 3,068 3,599

Interest Expense:

Deposits 138 3,533 3,671

Short-Term Borrowings (10) (9) (19)

Other Borrowings 195 38 233

Total Interest-Bearing Liabilities 323 3,562 3,885

Change in Net Interest and Dividend Income $ 208 $ (494) $ (286)

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 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 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 $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 $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 $2.4 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 $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 $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, average interest-bearing deposits increased $82.6 million, or 9.9%, accounting for a $232,000 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.

Nine Months Ended September 30,

Balance Interest

Dividends Yield/

Balance Interest

Dividends Yield/

(Dollars in thousands) (Unaudited)

Interest-Earning Assets:

Loans, Net (2)

$ 1,069,729 $ 39,924 4.99 % $ 1,013,871 $ 30,157 3.98 %

Debt Securities

Taxable 209,069 2,853 1.82 222,132 2,878 1.73

Tax Exempt 6,154 157 3.40 9,093 218 3.20

Equity Securities 2,693 74 3.66 2,693 64 3.17

Interest-Earning Deposits at Banks 60,474 2,276 5.02 61,213 534 1.16

Other Interest-Earning Assets 2,905 148 6.81 3,165 115 4.86

Total Interest-Earning Assets 1,351,024 45,432 4.50 1,312,167 33,966 3.46

Noninterest-Earning Assets 51,018 91,607

Total Assets $ 1,402,042 $ 1,403,774

Liabilities and Stockholders' Equity:

Interest-Bearing Liabilities:

Interest-Bearing Demand Deposits $ 351,379 4,776 1.82 % $ 271,897 554 0.27 %

Savings Accounts 191,444 59 0.12 242,298 37 0.06

Money Market Accounts 198,243 3,113 2.10 190,189 371 0.26

Time Deposits 248,118 2,624 4.25 101,147 337 1.35

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Noninterest-Bearing Demand Deposits 278,691 362,343

Total Funding and Cost of Funds 1,291,682 1.99 1,270,543 0.85

Other Liabilities 11,441 2,953

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Average Interest-Earning Assets to Average Interest-Bearing Liabilities 137.07 147.38

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

(1) Annualized based on nine months ended results.

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

(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.

(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, 2023

Nine Months Ended September 30, 2022

Three Months Ended March 31, 2024

Three Months Ended March 31, 2023

Increase (Decrease) Due to

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Provision for Credit Losses.

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.

The provision for credit losses recorded for the three months ended March 31, 2024 was a net recovery of $37,000.

This compared to an $80,000 provision for credit losses recorded for the three months ended March 31, 2023.

Noninterest Income .

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 income decreased $894,000, or 31.8%, to $1.9 million for the three months ended March 31, 2024, compared to $2.8 million for the three months ended March 31, 2023.

This decrease resulted primarily from a $1.9 million decrease in insurance commissions as no income was recognized for the three months ended March 31, 2024 due to the December 2023 sale of EU, compared to a full quarter of income recognized for the three months ended March 31, 2023.

This decrease was partially offset by net increases in gains on bank-owned life insurance and gains on the disposal of premises and equipment of $613,000 and $263,000, respectively.

The gain on bank owned life insurance was $915,000 resulting from one death claim during the three months ended March 31, 2024 compared to $302,000 resulting from two death claims during the three months ended March 31, 2023.

The gain on the disposal of premises and equipment was $274,000 resulting from the sale of one branch office building during the three months ended March 31, 2024 compared to $11,000 for the three months ended March 31, 2023.

Noninterest Expense.

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 $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.

Noninterest expense decreased $600,000, or 6.6%, to $8.4 million for the three months ended March 31, 2024 compared to $9.0 million for the three months ended March 31, 2023.

Salaries and benefits decreased $503,000, or 9.9%, to $4.6 million primarily due to no expense related to EU recognized for the three months ended March 31, 2024 due to the December 2023 sale, compared to $864,000 of expense recognized for the three months ended March 31, 2023, partially offset by merit increases and revenue producing staff additions.

Data processing expense decreased $165,000 due to additional expenses realized during the three months ended March 31, 2023 related to a 2022 data processing conversion.

Other noninterest expense decreased $164,000 and intangible amortization decreased $104,000 primarily due to EU expenses of $108,000 and $47,000, respectively, realized during the three months ended March 31, 2023.

Partially offsetting these decreases, contracted services, advertising, occupancy and equipment expenses increased $134,000, $50,000, $48,000 and $46,000, respectively.

Income Taxes.

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.

Income tax expense was $920,000 for the three months ended March 31, 2024 compared to $1.1 million for the three months ended March 31, 2023.

This change was primarily driven by a decrease in pre-tax income to $5.1 million for the three months ended March 31, 2024 compared to $5.3 million for the three months ended March 31, 2023.

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 September 30, 2023 and December 31, 2022.

Refer to Note 7 in the Notes to Consolidated Financial Statements of this report for a summary of commitments outstanding as of March 31, 2024 and December 31, 2023.

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, 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 Company believes that it had sufficient liquidity at March 31, 2024 to satisfy its short- and long-term liquidity needs.

The Company’s most liquid assets are cash and due from banks, which totaled $73.7 million at March 31, 2024.

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 $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.

Unpledged securities, which provide an additional source of liquidity, totaled $66.5 million at March 31, 2024.

In addition, at March 31, 2024, the Company had the ability to borrow up to $482.0 million from the FHLB of Pittsburgh, of which $460.0 million is available.

The Company also has the ability to borrow up to $97.8 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, 2024 and December 31, 2023, currently these credit arrangements have remained unused.

At March 31, 2024, $201.5 million, or 75.9% 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 60.5% insured by the FDIC, and with additional coverage of 16.9% from the Bank's investment securities;

At March 31, 2024, the Bank's current deposit portfolio is 63.1% insured by the FDIC, and with additional coverage of 15.0% from the Bank's investment securities;

of the total deposits held at the Bank only 21.9% are uninsured.

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

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

At March 31, 2024, CB Financial (on an unconsolidated, stand-alone basis) had liquid assets of $16.8 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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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, 2023 and December 31, 2022, the Bank was categorized as “well capitalized” under the regulatory framework for prompt corrective action.

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, 2024 and December 31, 2023, 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.

September 30, 2023 December 31, 2022

March 31, 2024 December 31, 2023

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