What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-05-04 compared with 2021-11-08 · 177 added, 269 removed, 518 unchanged (46% of the section changed)

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Such forward-looking statements are inherently subject to many uncertainties in the Company’s operations and business environment.

Factors that could affect actual results or outcomes include the matters described under the caption “Risk Factors” in Item 1A of our annual report on Form 10-K for the year ended December 31, 2020, filed with the SEC on March 8, 2021 (“2020 10-K”), the matters described in “Risk Factors” in Item 1A of our Form 10Q for the quarters ended March 31, 2021 and June 30, 2021, and in Item 1A of this Form 10-Q, and the following:

Factors that could affect actual results or outcomes include the matters described under the caption “Risk Factors” in Item 1A of our annual report on Form 10-K for the year ended December 31, 2021, filed with the SEC on March 2, 2022 (“2021 10-K”), the matters described in “Risk Factors” in Item 1A of this Form 10-Q, and the following:

• conditions in the financial markets and economic conditions generally;

• adverse impacts to the Company or Bank arising from the COVID-19 pandemic;

• acts of terrorism and political or military actions by the United States or other governments;

• the possibility of a deterioration in the residential real estate markets;

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• lending risk;

• the impact of changing long-term interest rates on the fair market value of the Company’s mortgage servicing rights (MSR );

• higher lending risks associated with our commercial and agricultural banking activities;

• the sufficiency of loan allowances;

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• competitive pressures among depository and other financial institutions;

• disintermediation risk;

• our ability to maintain our reputation;

• our ability to realize the benefits of net deferred tax assets;

• our ability to maintain or increase our market share;

• acts of terrorism and political or military actions by the United States or other governments;

• legislative or regulatory changes or actions, or significant litigation, adversely affecting the Company or Bank;

• increases in FDIC insurance premiums or special assessments by the FDIC;

• disintermediation risk;

• our ability to realize the benefits of net deferred tax assets;

• our inability to obtain needed liquidity;

• our ability to successfully execute our acquisition growth strategy;

• risks posed by acquisitions and other expansion opportunities, including difficulties and delays in integrating the acquired business operations or fully realizing the cost savings and other benefits;

• our ability to raise capital needed to fund growth or meet regulatory requirements;

• the possibility that our internal controls and procedures could fail or be circumvented;

• our ability to attract and retain key personnel;

• our ability to keep pace with technological change;

• prevalence of fraud and other financial crimes;

• cybersecurity risks;

• changes in federal or state tax laws;

• changes in accounting principles, policies or guidelines and their impact on financial performance;

• the possibility that our internal controls and procedures could fail or be circumvented;

• our ability to successfully execute our acquisition growth strategy;

• restrictions on our ability to pay dividends;

• the potential volatility of our stock price;

• accounting standards for loan losses;

• legislative or regulatory changes or actions, or significant litigation, adversely affecting the Company or Bank;

• public company reporting obligations;

• changes in federal or state tax laws;

• changes in accounting principles, policies or guidelines and their impact on financial performance.

Stockholders, potential investors and other readers are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements.

The forward-looking statements made herein are only made as of the date of this filing and the Company undertakes no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances occurring after the date of this report.

The following discussion sets forth management’s discussion and analysis of our consolidated financial condition as of September 30, 2021, and our consolidated results of operations for the three and nine months ended September 30, 2021, compared to the same period in the prior fiscal year for the three and nine months ended September 30, 2020.

The following discussion sets forth management’s discussion and analysis of our consolidated financial condition as of March 31, 2022, and our consolidated results of operations for the three months ended March 31, 2022, compared to the same period in the prior fiscal year for the three months ended March 31, 2021.

This discussion should be read in conjunction with the interim consolidated financial statements and the condensed notes thereto included with this report and with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the financial statements and notes related thereto included in our 2021 10-K.

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The Company does not amortize goodwill, but reviews goodwill for impairment at a reporting unit level on an annual basis, or when events or changes in circumstances indicate that the carrying amounts may be impaired.

A reporting unit is

defined as any distinct, separately identifiable component of the Company’s one operating segment for which complete, discrete financial information is available and reviewed regularly by the segment’s management.

The Company has one reporting unit as of September 30, 2021, which is related to its banking activities.

A reporting unit is defined as any distinct, separately identifiable component of the Company’s one operating segment for which complete,

discrete financial information is available and reviewed regularly by the segment’s management.

The Company has one reporting unit as of March 31, 2022, which is related to its banking activities.

The Company performed the required goodwill impairment test and determined that goodwill was not impaired as of December 31, 2021.

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The assessment of tax assets and liabilities involves the use of estimates, assumptions, interpretations, and judgments concerning certain accounting pronouncements and application of specific provisions of federal and state tax codes.

There can be no assurance that future events, such as court decisions or positions of federal and state taxing authorities, will not differ from management’s current assessment, the impact of which could be material to our consolidated results of our operations and reported earnings.

We believe that the deferred tax assets and liabilities are adequate and properly recorded in the accompanying consolidated financial statements.

As of September 30, 2021, management does not believe a valuation allowance related to the realizability of its deferred tax assets is necessary.

As of March 31, 2022, management does not believe a valuation allowance related to the realizability of its deferred tax assets is necessary.

STATEMENT OF OPERATIONS ANALYSIS

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Net interest margin currently exceeds interest rate spread because non-interest-bearing sources of funds (“net free funds”), principally demand deposits and stockholders’ equity, also support interest earning assets.

The narrative below discusses net interest income, interest rate spread, and net interest margin for the three and nine-month periods ended September 30, 2021, and September 30, 2020, respectively.

Net interest income was $13.7 million for the three months ended September 30, 2021, and $39.3 million for the nine months ended September 30, 2021, compared to $11.9 million for the three months ended September 30, 2020 and $36.9 million for the nine months ended September 30, 2020.

For the three and nine months ended September 30, 2021, net interest income benefited from:

1) the accretion of $1.9 million and $4.9 million, respectively, of deferred fees related to the SBA Paycheck Protection Program (“SBA PPP”) loans, compared to $0.6 and $1.1 million for the three and nine months ended September 30, 2020, respectively;

2) lower liability costs;

and 3) organic loan growth from September 30, 2020.

Net interest income for the three and nine months ended September 30, 2021 was negatively impacted by:

1) lower accretion associated with reductions in purchased credit impaired loans;

2) the impact of Federal Reserve actions to offset the impact of the pandemic in March 2020, during which it lowered overnight interest rates by 125 basis points in 6 days;

and 3) market reactions to decreasing longer-term interest rates on loans, investments, and cash and cash equivalent security yields.

The net interest margin for the three-month period ended September 30, 2021, was 3.34%, compared to 3.11% for the three-month period ended September 30, 2020.

The net interest margin increased due to:

1) a 29 basis point increase in SBA PPP deferred loan fee accretion and 2) 37 basis points of lower deposit costs in the three months ended September 30, 2021, compared to the three months ended September 2020.

These increases were partially offset by decreases in net interest margin largely due to:

1) the impact of higher cash and cash equivalent balances, which decreased the interest margin percentage by 10 basis points;

2) 1 basis point of lower accretion associated with reductions in purchased credit impaired loans;

and 3) market reactions to decreasing longer-term interest rates and the related impact on yields on loans, investments and cash and cash equivalent security yields.

The net interest margin for the nine-month period ended September 30, 2021, was 3.29%, compared to 3.36% for the nine-month period ended September 30, 2020.

The decrease in net interest margin was largely due to:

1) 12 basis points of lower accretion associated with reductions in purchased credit impaired loans;

2) the impact of higher cash and cash equivalent balances, which decreased the interest margin percentage by 15 basis points;

3) the impact of Federal Reserve actions to offset the impact of the pandemic in March 2020, during which it lowered overnight interest rates by 125 basis points in 6 days;

and 4) market reactions to lower yields on new originations of loans, purchases of investments and reduced yields on cash and cash equivalents.

These decreases were partially offset by lower deposit rates due to management action to reduce interest rates on deposits and a 34 basis point increase in loans due to higher SBA PPP deferred loan fee accretion.

The narrative below discusses net interest income, interest rate spread, and net interest margin for the three-month periods ended March 31, 2022, and March 31, 2021, respectively.

Net interest income was $13.2 million for the three months ended March 31, 2022, compared to $12.8 million for the three months ended March 31, 2021.

Net interest income for the three months ended March 31, 2022, increased from the same period one year ago due to:

1) both the organic loan and investment growth from March 31, 2021;

2) the increase in loans as a percentage of total interest-earning assets, partially due to lower levels of low-yielding cash and cash equivalent;

and 3) lower liability costs.

This was partially offset by a $1.5 million dollar decrease in the accretion of deferred fees related to SBA Paycheck Protection Program (“SBA PPP”) loans for the quarter ended March 31, 2022, compared to the prior year quarter.

The net interest margin for the three-month period ended March 31, 2022, was 3.25%, compared to 3.31% for the three-month period ended March 31, 2021.

The net interest margin decrease was due to a 36-basis point decrease in SBA PPP deferred loan fee accretion in loan yields, partially offset by 1) the positive impact of investing lower yield cash into investment securities, 2) lower liability costs, and 3) the favorable impact of lower yielding deposits increasing as a percentage of interest-bearing liabilities.

Average Balances, Net Interest Income, Yields Earned and Rates Paid.

The following net interest income analysis table presents interest income from average interest earning assets, expressed in dollars and yields, and interest expense on average interest-bearing liabilities, expressed in dollars and rates on a tax equivalent basis.

Shown below is the weighted average tax equivalent yield on interest earning assets, rates paid on interest-bearing liabilities and the resultant spread at or during the three- and nine-month periods ended September 30, 2021, and September 30, 2020.

Shown below is the weighted average tax equivalent yield on interest earning assets, rates paid on interest-bearing liabilities and the resultant spread at or during the three-month periods ended March 31, 2022, and March 31, 2021.

Non-accruing loans have been included in the table as loans carrying a zero yield.

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(Dollar amounts in thousands)

Three months ended September 30, 2021 compared to the three months ended September 30, 2020:

Three months ended September 30, 2021 Three months ended September 30, 2020

Balance Interest

Expense Average

Rate (1) Average

Balance Interest

Expense Average

Average interest earning assets:

Cash and cash equivalents $ 111,192 $ 50 0.18 % $ 77,774 $ 18 0.09 %

Loans 1,192,636 14,537 4.84 % 1,258,224 14,154 4.48 %

Interest-bearing deposits 1,512 8 2.10 % 3,752 23 2.44 %

Investment securities (1) 303,325 1,412 1.85 % 166,622 846 2.02 %

Other investments 14,961 168 4.46 % 15,145 177 4.65 %

Total interest earning assets (1) $ 1,623,626 $ 16,175 3.95 % $ 1,521,517 $ 15,218 3.98 %

Average interest-bearing liabilities:

Savings accounts $ 216,304 $ 95 0.17 % $ 183,381 $ 98 0.21 %

Demand deposits 392,080 280 0.28 % 285,993 231 0.32 %

Money market 276,582 193 0.28 % 255,160 280 0.44 %

CD’s 207,494 682 1.30 % 297,691 1,469 1.96 %

IRA’s 39,525 104 1.04 % 41,852 177 1.68 %

Total deposits $ 1,131,985 $ 1,354 0.47 % $ 1,064,077 $ 2,255 0.84 %

FHLB Advances and other borrowings 169,891 1,133 2.65 % 173,758 1,054 2.41 %

Total interest-bearing liabilities $ 1,301,876 $ 2,487 0.76 % $ 1,237,835 $ 3,309 1.06 %

Net interest income $ 13,688 $ 11,909

Interest rate spread 3.19 % 2.92 %

Net interest margin (1) 3.34 % 3.11 %

Average interest earning assets to average interest-bearing liabilities 1.25 1.23

(1) Fully taxable equivalent (FTE).

The average yield on tax exempt securities is computed on a tax equivalent basis using a tax rate of 21.0% for the quarters ended September 30, 2021 and September 30, 2020.

The FTE adjustment to net interest income included in the rate calculations totaled $1 and $0 thousand for the three months ended September 30, 2021 and September 30, 2020, respectively.

NET INTEREST INCOME ANALYSIS ON A TAX EQUIVALENT BASIS

(Dollar amounts in thousands)

Nine months ended September 30, 2021 compared to the nine months ended September 30, 2020:

Nine months ended September 30, 2021 Nine months ended September 30, 2020

Three months ended March 31, 2022 compared to the three months ended March 31, 2021:

Three months ended March 31, 2022 Three months ended March 31, 2021

Balance Interest

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(1) Fully taxable equivalent (FTE).

The average yield on tax exempt securities is computed on a tax equivalent basis using a tax rate of 21.0% for the nine months ended September 30, 2021 and September 30, 2020.

The FTE adjustment to net interest income included in the rate calculations totaled $3 and $1 thousand for the nine months ended September 30, 2021 and September 30, 2020, respectively.

The average yield on tax exempt securities is computed on a tax equivalent basis using a tax rate of 21.0% for the quarters ended March 31, 2022 and March 31, 2021.

The FTE adjustment to net interest income included in the rate calculations totaled $1 thousand for both the three months ended March 31, 2022 and March 31, 2021, respectively.

Rate/Volume Analysis.

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and (2) changes in rate, which are changes in average interest rates multiplied by the prior period volume (i.e., holding the initial balance constant).

Rate changes have been discussed previously.

For the three and nine months ended September 30, 2021, compared to the same periods in 2020, the loan volume decrease is primarily due to reductions in SBA PPP loans, partially offset by the impact of organic loan growth.

Rate changes have been discussed previously in the net interest income section above.

For the three months ended March 31, 2022, compared to the same periods in 2021, the loan volume increased due to strong organic growth.

Investment securities volume increases are due to an increase in portfolio balances, largely due to purchases of mortgage-backed securities.

The decrease in certificate volumes is due to planned runoff of brokered CDs and to a lesser extent, retail CDs, partially offset by growth in non-maturity deposits.

The decrease in certificate volumes is due to CD shrinkage.

RATE / VOLUME ANALYSIS

(Dollar amounts in thousands)

Three months ended September 30, 2021 compared to the three months ended September 30, 2020.

Increase (decrease) due to

Volume Rate Net

Interest income:

Cash and cash equivalents $ 10 $ 22 $ 32

Loans (764) 1,147 383

Interest-bearing deposits (12) (3) (15)

Investment securities 646 (80) 566

Other investments (2) (7) (9)

Total interest earning assets (122) 1,079 957

Interest expense:

Savings accounts 16 (19) (3)

Demand deposits 79 (30) 49

Money market accounts 22 (109) (87)

CD’s (362) (425) (787)

IRA’s (9) (64) (73)

Total deposits (254) (647) (901)

FHLB Advances and other borrowings (24) 103 79

Total interest bearing liabilities (278) (544) (822)

Net interest income $ 156 $ 1,623 $ 1,779

Nine months ended September 30, 2021 compared to the nine months ended September 30, 2020.

Three months ended March 31, 2022 compared to the three months ended March 31, 2021.

Increase (decrease) due to

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We continue to monitor adverse general economic conditions that could affect our commercial and agricultural portfolios in the future.

Total provision for loan losses for both the three and nine months ended September 30, 2021, was $0.

The ALL and related need for provision for loan losses for both the three and nine months ended September 30, 2021, was positively impacted by reductions in both the second and third quarter in the allocation of the allowance for loan losses for general economic conditions and the impact of lower loan deferral balances associated with Section 4013 of the Cares Act, which offset increases.

These positive impacts were offset by the allocation of the allowance for loan losses due to loan growth, increases in specific reserve and modest net loan charge offs.

Total provision for loan losses for both the three months ended March 31, 2022, and March 31, 2021, was $0.

The ALL and related need for provision for loan losses for the three months ended March 31, 2022, was positively impacted by reductions in the allocation of the allowance for loan losses for general economic conditions utilizing a Q-factor and the impact of lower loan deferral balances associated with Section 4013 of the Cares Act.

These positive impacts offset increases in specific reserve and modest net loan charge offs.

Note that in discussing ALL allocations, the entire ALL balance is available for any loan that, in management’s judgment, should be charged off.

The provision for loans losses for the three and nine months ended September 30, 2020, of $1.50 million and $5.25 million, respectively, was due to loan growth, the impact of net charge-offs and increase in Q-Factors due to uncertain market conditions.

Pandemic-related adverse economic impacts, including various “Stay-at-Home Orders”, were beginning to result in temporary business closures, reduced operating capacity and uncertainty regarding potential future revenue and cash flows for certain businesses, including bank borrowers.

Management believes that the provision recorded for the current year three and nine-month periods is adequate in view of the present condition of our loan portfolio and the sufficiency of collateral supporting our non-performing loans.

The ALL and related need for no provision was due to loan shrinkage and low net charge-offs.

Management believes that the provision recorded for the current year three-month period is adequate in view of the present condition of our loan portfolio and the sufficiency of collateral supporting our non-performing loans.

We continually monitor non-performing loan relationships and will adjust our provision, as necessary, if changing facts and circumstances require a change in the ALL.

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Non-interest Income .

The following table reflects the various components of non-interest income for the three and nine month periods ended September 30, 2021 and 2020, respectively.

Three months ended September 30, Nine months ended September 30,

2021 2020 % Change 2021 2020 % Change

The following table reflects the various components of non-interest income for the three month periods ended March 31, 2022 and 2021, respectively.

Three months ended March 31,

2022 2021 % Change

Non-interest Income:

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Loan fees and service charges 92 278 (66.91) %

Insurance commission income — — N/M — 474 N/M

Net gains (losses) on investment securities (37) 235 N/M

Net gain on sale of acquired business lines — 180 N/M — 432 N/M

Settlement proceeds — — N/M — 131 N/M

Other 198 247 (19.84) %

Total non-interest income $ 2,713 $ 4,176 (35.03) %

Service charges on deposit accounts increased modestly to $463 for the three months ended September 30, 2021, from $431 for the prior year quarter due to higher customer spending activity during the quarter.

For the nine months ended September 30, 2021, service charges decreased to $1,256, compared to $1,336 in the comparable prior year period, due to higher average deposit balances.

Interchange income increased to $600 and $1,776 for the three and nine months ended September 30, 2021, compared to $556 and $1,509, respectively, for the similar prior year periods.

Customer spending activity increased due to a stronger general economy, as our regional economies benefited from lower unemployment and were less impacted by business shutdowns as a result of the pandemic.

Loan servicing income decreased with reduced capitalization of mortgage servicing rights due to lower mortgage loan origination fees in the three- and nine-month periods ended September 30, 2021.

Gain on sale of loans decreased in the current three-month period ended September 30, 2021, compared to September 30, 2020, due to lower mortgage loan origination volumes, partially offset by a modest increase on the gain on sale of SBA loans.

For the nine-month period ended September 30, 2021, gain on sale of loans decreased $454 thousand largely due to lower mortgage loan origination volumes, partially offset by gains on sale of SBA and FSA loans.

The change in loan fees and service charges for the three and nine months ended September 30, 2021, is largely due to decreases in commercial loan customer activity.

The decrease in insurance commission income is due to the sale of the Wells Insurance Agency in June 2020.

The net gains on investment securities in the three- and nine-month periods ended September 30, 2021, is largely due to unrealized gains on equity securities with readily determinable fair value recorded in the first quarter of 2021, a net realized $36 gain on sale of trust-preferred security in the second quarter of 2021, and a $42 net gain on the sale of trust-preferred securities and bank subordinated debt realized in the third quarter of 2021.

In 2020, the gains in the nine-month period ended September 30, 2020, were due to the sale of $10.8 million of fixed-rate mortgage-backed securities (“MBS”) in the first quarter of 2020 and unrealized gain on equity security valuations in the second quarter of 2020.

In the third quarter of 2020, the bank recognized a $180 gain on the sale of a previously acquired wealth management business.

Non-interest income for the nine-months ended September 30, 2020, also included the $252 gain on sale of Wells Insurance Agency in June 2020.

During the quarter ended June 30, 2020, the Company recognized $131 of non-interest income related to a private mortgage-backed security claim.

The $131 distribution represented a supplement to the proceeds received in March, 2017 from this security, previously owned by the Bank, and sold in 2011.

Service charges on deposit accounts increased modestly to $488 for the three months ended March 31, 2022, from $398 for the prior year quarter due to higher customer spending activity during the quarter.

Loan servicing income decreased with reduced capitalization of mortgage servicing rights due to lower mortgage loan origination fees in the three-month period ended March 31, 2022.

Gain on sale of loans decreased in the current three-month period ended March 31, 2022, compared to March 31, 2021, due to lower mortgage loan origination volumes, partially offset by a modest increase on the gain on sale of SBA loans.

The change in loan fees and service charges for the three ended March 31, 2022, is largely due to decreases in commercial loan-related customer activity

The change in net gains (losses) on investment securities between the three-month period ended March 31, 2022 and the three-month period ended March 31, 2021, is primarily due to the corresponding change in unrealized gains/losses on equity securities with readily determinable fair value.

Non-interest Expense.

The following table reflects the various components of non-interest expense for the three- and nine-month periods ended September 30, 2021 and 2020, respectively.

Three months ended September 30, Nine months ended September 30,

2021 2020 % Change 2021 2020 % Change

The following table reflects the various components of non-interest expense for the three-month periods ended March 31, 2022 and 2021, respectively.

Three months ended March 31,

2022 2021 % Change

Non-interest Expense:

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Gains on repossessed assets, net (7) (117) 94.02 %

New market tax credit depletion 163 — NM

Other 647 572 13.11 %

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Non-interest expense (annualized) / Average assets 2.24 % 2.29 % (2.17) %

Compensation expense for the three-month period ended September 30, 2021, was higher than the comparable prior year period primarily due to higher incentive compensation based on performance metrics, including items such as net income and loan growth which more than offset lower variable mortgage production compensation.

Compensation expense for the nine-month period ended September 30, 2021, was lower than the comparable prior year period due to:

1) lower variable mortgage production compensation related to lower mortgage loan origination activity;

2) lower compensation due to fewer FTEs, including those related to the sale of Wells Insurance Agency in June of 2020;

and 3) the closure of three branches in November 2020, partially offset by higher accrued incentive compensation as discussed above.

Data processing expense increases from the prior year quarter and year-to- date periods were due primarily to the impact of larger loan and deposit balances, and the impact of additional costs for new products offered to our customers.

Mortgage servicing rights expense, net, decreased during the three and nine months ended September 30, 2021, compared to the comparable prior year periods.

This decrease is primarily due to the reversal of previously recognized impairment charges of $1.3 million, resulting largely from the impact of lower future forecasted prepayment rates.

30% of this impairment reversal occurred in the third quarter of 2021 and 70% in the first quarter of 2021.

The Bank recorded MSR impairment charges of $0.3 million and $1.4 million for the three- and nine-month periods ended September 30, 2020, respectively.

The remaining change is due to higher amortization in 2021.

Advertising, marketing and public relations expense decreased in both the three- and nine-month periods ended September 30, 2021, from the same periods in 2020 largely due to the pandemic related charitable contributions made in the second and third quarters of 2020 to local non-profit organizations.

The FDIC insurance premium decreased during the three months ended September 30, 2021, and nine-months ended September 30, 2021, from the comparable prior year periods due to the impact of increased capital ratios, stronger earnings performance and lower levels of non-performing assets, which more than offset the impact of a larger asset base.

The Bank also realized a $56 thousand FDIC insurance credit in the first quarter of 2020.

Other expenses for the three- and nine-month periods ended September 30, 2021, decreased from the comparable prior year periods, largely due to lower loan origination and collection expenses, recognized in the similar periods in 2020.

Compensation expense for the three-month period ended March 31, 2022, was lower than the comparable prior year period due to 1) lower variable mortgage production compensation related to lower mortgage loan origination activity;

and 2) lower incentive compensation based on performance metrics, including items such as net income and loan growth.

Net mortgage servicing rights expense increased during the three months ended March 31, 2022, compared to the comparable prior year period.

This increase is primarily due to the reversal of previously recognized impairment charges of $1.3 million in 2021, resulting largely from the impact of lower future forecasted prepayment rates.

Approximately 30% of this impairment reversal occurred in the third quarter of 2021 and 70% in the first quarter of 2021.

The FDIC insurance premium decreased during the three months ended March 31, 2022, from the comparable prior year period due to the favorable impact of increased bank capital ratios.

Professional services costs decreased due to the need for fewer outside professionals.

Net gains on repossessed assets decreased due to fewer and lower value repossessed property sales resulting in lower corresponding gains on sale.

In the first quarter of 2022, the bank invested $4.1 million in a New Market Tax Credit.

The related non-tax-deductible asset depletion will occur over a 5-year period in lockstep with the recognition of the tax credit.

Income Taxes.

Income tax expense was $1.8 million and $5.5 million for the three and nine months ended September 30, 2021, respectively, compared to $1.3 million and $3.3 million for the three and nine months ended September 30, 2020.

The effective tax rate was 26.7% and 26.5% for the three and nine-month periods ended September 30, 2021 compared to 26.7% and 26.5% for the comparable prior year periods.

Income tax expense was $1.5 million for the three months ended March 31, 2022, compared to $1.9 million for the three months March 31, 2021.

The effective tax rate was 24.2% for the three-month period ended March 31, 2022, compared to 26.1% for the comparable prior year period.

The lower effective tax rate is due to the impact of the New Markets Tax Credit.

The lower tax expense is due to both the lower effective tax rate and lower pre-tax income.

BALANCE SHEET ANALYSIS

Cash and Cash Equivalents.

This balance increased $36.7 million in the first quarter of 2022 as the net cash increase resulting from deposit growth and loan shrinkage was not yet fully invested in our securities portfolios.

Investment Securities.

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Our investment portfolio is comprised of securities available for sale and securities held to maturity.

Securities available for sale, which represent the majority of our investment portfolio, were $234.4 million at September 30, 2021, compared with $144.2 million at December 31, 2020.

The increase in the available for sale portfolio is due to purchases of mortgage-backed securities and corporate debt securities, which consisted of bank holding company-issued subordinated debt.

The Bank sold $7.2 million of trust preferred securities and bank subordinated debt at a gain of $42 in the third quarter of 2021.

Securities held to maturity increased to $67.7 million at September 30, 2021, compared to $43.6 million at December 31, 2020.

This increase was largely due to the purchase of agency mortgage-backed securities.

Securities available for sale, which represent the majority of our investment portfolio, were $187.9 million at March 31, 2022, compared with $203.1 million at December 31, 2021.

The decrease in the available for sale portfolio is due to unrealized losses of $9.8 million and principal repayments.

Securities held to maturity increased to $104.9 million at March 31, 2022, compared to $71.1 million at December 31, 2021.

This increase was largely due to the purchase of agency mortgage-backed securities, net of repayments.

The unrealized loss on this portfolio increased by $7.0 million in the quarter.

The amortized cost and market values of our available for sale securities by asset categories as of the dates indicated below were as follows:

Available for sale securities Amortized

September 30, 2021

March 31, 2022

government agency obligations $ 23,686 $ 23,881

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Corporate asset-backed securities 33,011 32,527

Trust preferred securities 8,841 9,240

Totals $ 197,507 $ 187,905

5 unchanged sentences

Corporate asset-backed securities 33,902 33,908

Trust preferred securities 16,297 16,448

Totals $ 202,846 $ 203,068

1 unchanged sentence

Held to maturity securities Amortized

September 30, 2021

March 31, 2022

Obligations of states and political subdivisions $ 4,600 $ 4,568

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The composition of our available for sale portfolios by credit rating as of the dates indicated below was as follows:

September 30, 2021 December 31, 2020

March 31, 2022 December 31, 2021

Available for sale securities Amortized

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The composition of our held to maturity portfolio by credit rating as of the dates indicated was as follows:

September 30, 2021 December 31, 2020

March 31, 2022 December 31, 2021

Held to maturity securities Amortized

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Total $ 104,894 $ 95,975 $ 71,141 $ 69,177

As of September 30, 2021, the Bank has pledged U.S.

Government Agency securities with a carrying value $0.5 million and mortgage-backed securities with a carrying value of $3.6 million as collateral against specific municipal deposits.

At September 30, 2021, the Bank has pledged mortgage-backed securities with a carrying value of $0.9 million as collateral against a borrowing line of credit with the Federal Reserve Bank.

However, as of September 30, 2021, there were no borrowings outstanding on this Federal Reserve Bank line of credit.

As of September 30, 2021, the Bank also has mortgage-backed securities with a carrying value of $0.3 million pledged as collateral to the Federal Home Loan Bank of Des Moines.

At December 31, 2020, the Bank has pledged certain of its mortgage-backed securities with a carrying value of $1.2 million as collateral to secure a line of credit with the Federal Reserve Bank.

As of December 31, 2020, there were no borrowings outstanding on this Federal Reserve Bank line of credit.

As of March 31, 2022, the Bank has pledged U.S.

Government Agency securities with a carrying value of $3.6 million and mortgage-backed securities with a carrying value of $2.6 million as collateral against specific municipal deposits.

At March 31, 2022, the Bank has pledged mortgage-backed securities with a carrying value of $5.8 million as collateral against a borrowing line of credit with the Federal Reserve Bank.

However, as of March 31, 2022, there were no borrowings outstanding on this Federal Reserve Bank line of credit.

As of March 31, 2022, the Bank also has mortgage-backed securities with a carrying value of $0.2 million pledged as collateral to the Federal Home Loan Bank of Des Moines.

As of December 31, 2021, the Bank has pledged certain of its U.S.

Government Agency securities with a carrying value of $3.9 million and mortgage-backed securities with a carrying value of $2.9 million as collateral against specific municipal deposits.

At December 31, 2021, the Bank has pledged certain of its mortgage-backed securities with a carrying value of $0.8 million as collateral to secure a line of credit with the Federal Reserve Bank.

However, as of December 31, 2021, there were no borrowings outstanding on this Federal Reserve Bank line of credit.

As of December 31, 2021, the Bank also has mortgage-backed securities with a carrying value of $0.3 million pledged as collateral to the Federal Home Loan Bank of Des Moines.

Total loans outstanding, net of deferred loan fees and costs and unamortized discount on acquired loans, increased by $11.1 million, to $1.25 billion as of September 30, 2021, from $1.24 billion at December 31, 2020.

The originated loan portfolio before SBA PPP loans increased $171.1 million in the nine month period.

This increase included the repayment of $5.5 million of draws on a line of credit originated the last business day of December and repaid on the first business day of January.

Total SBA PPP loans decreased $92.4 million due to debt forgiveness of $148.3 million, offset by strong new SBA PPP second round loan originations of $55.9 million.

Total loans outstanding, net of deferred loan fees and costs and unamortized discount on acquired loans, decreased by $20.8 million, to $1.29 billion as of March 31, 2022, from $1.31 billion at December 31, 2021.

The originated loan portfolio, before SBA PPP loans, decreased $1.1 million in the three-month period.

We experienced approximately $27 million of loan payoffs in the originated loan portfolio during the quarter ended March 31, 2022, that we expected to be received in the fourth quarter of 2021.

Total SBA PPP loans decreased $6.7 million, entirely due to debt forgiveness.

Acquired loans decreased by $13.6 million.

The following table reflects the composition, or mix of our loan portfolio at September 30, 2021 and December 31, 2020:

September 30, 2021 December 31, 2020

The following table reflects the composition, or mix, of our loan portfolio at March 31, 2022, and December 31, 2021:

March 31, 2022 December 31, 2021

Amount Percent Amount Percent

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Total loans receivable, net $ 1,273,358 $ 1,294,050

The following table summarizes SBA PPP loans by origination year at September 30, 2021:

The following table summarizes SBA PPP loans by origination year at March 31, 2022:

2020 Originations 2021 Originations Total

Balance Net Deferred Fee Income Balance Net Deferred Fee Income Balance Net Deferred Fee Income

SBA PPP loans, December 31, 2020 $ 123,702 $ 2,991 $ — $ — $ 123,702 $ 2,991

2021 SBA PPP loan originations — — 47,467 1,770 47,467 1,770

2021 SBA PPP loan forgiveness and fee accretion (52,238) (1,750) — — (52,238) (1,750)

SBA PPP loans, March 31, 2021 71,464 1,241 47,467 1,770 118,931 3,011

SBA PPP loans, January 1, 2021 $ 123,702 $ 2,991 $ — $ — $ 123,702 $ 2,991

2021 SBA PPP loan originations — — 55,854 3,494 55,854 3,494

2021 SBA PPP loan forgiveness and fee accretion (121,574) (2,987) (49,227) (3,201) (170,801) (6,188)

SBA PPP loans, June 30, 2021 21,407 308 53,518 $ 3,109 74,925 3,417

2021 SBA PPP loan originations — — 64 9 64 9

SBA PPP loans, December 31, 2021 2,128 4 6,627 293 8,755 297

2022 SBA PPP loan forgiveness and fee accretion (886) (3) (5,798) (255) (6,684) (258)

SBA PPP loans, September 30, 2021 $ 3,121 $ 29 $ 28,180 $ 1,519 $ 31,301 $ 1,548

SBA PPP loans, March 31, 2022 $ 1,242 $ 1 $ 829 $ 38 $ 2,071 $ 39

Allowance for Loan Losses.

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In compliance with ASC 310-10, the fair value of the loan is determined based on either the present value of expected cash flows discounted at the loan’s effective interest rate, the market price of the loan, or, if the loan is collateral dependent, the fair value of the underlying collateral less the expected cost of sale for such collateral.

At September 30, 2021, the Company individually evaluated loans for impairment with a recorded investment of $37.2 million, consisting of (1) $11.5 million purchased credit impaired (“PCI”) loans, with a carrying amount of $10.8 million;

At March 31, 2022, the Company individually evaluated loans for impairment with a recorded investment of $33.7 million, consisting of (1) $10.7 million purchased credit impaired (“PCI”) loans, with a carrying amount of $10.2 million;

(2) $6.7 million TDR loans, net of TDR PCI loans;

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The $31.7 million total of loans individually evaluated for impairment includes $8.0 million of performing TDR loans.

At September 30, 2021, and December 31, 2020, we had 258 and 325 loans individually evaluated for impairment, respectively, all secured by real estate or personal property.

Of the originated loans individually evaluated for impairment, there were 9 loans where the estimated fair value was less than their book value (i.e., we deemed impairment to exist) totaling $9.3 million for which $1.4 million in specific ALL was recorded as of September 30, 2021.

The allowance for loan losses modestly decreased to $16.8 million at September 30, 2021, representing 1.38% of loans receivable, less the 100% SBA guaranteed PPP loans.

At March 31, 2022, and December 31, 2021, we had 237 and 235 loans individually evaluated for impairment, respectively, all secured by real estate or personal property.

Of the originated loans individually evaluated for impairment, there were 13 loans where the estimated fair value was less than their book value (i.e., we deemed impairment to exist) totaling $7.2 million for which $1.7 million in specific ALL was recorded as of March 31, 2022.

The allowance for loan losses modestly decreased $0.1 million to $16.8 million at March 31, 2022, representing 1.31% of loans receivable, less the 100% SBA guaranteed PPP loans.

A portion of the current loan portfolio includes loans purchased through whole bank acquisitions in recent years resulting in purchased credit impairments which are not included in the allowance for loan losses.

As the originated portfolio grows and the acquired portfolio shrinks, the percentage of originated loans to total loans grows, as does the overall percentage of the allowance to total loans.

The allowance for loan losses was $17.0 million at December 31, 2020, representing 1.53% of loans receivable, less the 100% SBA guaranteed PPP loans.

The decrease in the allowance at September 30, 2021, was due to modest loan charge-offs.

The allowance for loan losses was

$16.9 million at December 31, 2021, representing 1.30% of loans receivable, less the 100% SBA guaranteed PPP loans.

The decrease in the allowance at March 31, 2022, was due to modest loan charge-offs.

Allowance for Loan Losses to Loans, net of SBA PPP Loans

(in thousands, except ratios)

September 30,

2022 December 31,

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The following table identifies the various components of nonperforming assets and other balance sheet information as of the dates indicated below and changes in the ALL for the periods then ended:

September 30, 2021 and Nine Months Then Ended December 31, 2020 and Twelve Months Then Ended

March 31, 2022 and Three Months Then Ended December 31, 2021 and Twelve Months Then Ended

Nonperforming assets:

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Agricultural real estate 3,454 3,490

Construction and land development 129 —

Commercial and industrial 284 298

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(in thousands, except ratios)

September 30, 2021 December 31, 2020 September 30, 2020

March 31, 2022 December 31, 2021

Nonperforming assets:

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Acquired NPAs to total assets 0.37 % 0.39 %

Nonperforming assets increased by $0.6 million to $12.1 million at September 30, 2021 from December 31, 2020.

This increase is largely due to a $4.5 million commercial real estate loan secured by a senior living facility, partially offset by reductions in acquired non-performing loans.

Nonperforming assets increased by $0.4 million to $13.6 million at March 31, 2022 from December 31, 2021.

This increase is largely due to an increase in accruing loans past due 90 days or more.

Refer to the “Allowance for Loan Losses” and “Nonperforming Loans, Potential Problem Loans and Foreclosed Properties” sections above for more information related to nonperforming loans.

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Quarter Ended

September 30, 2021 June 30, 2021 March 31, 2021 December 31, 2020 September 30, 2020

March 31, 2022 December 31, 2021 September 30, 2021 June 30, 2021 March 31, 2021

Balance, beginning of period $ 11,665 $ 11,706 $ 8,075 $ 8,678 $ 10,747

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Balance, end of period $ 11,858 $ 11,665 $ 11,706 $ 8,075 $ 8,678

Nonaccrual TDR loans decreased to $4.3 million at September 30, 2021 from $6.7 million at December 31, 2020.

September 30, 2021 December 31, 2020 September 30, 2020

Modifications Recorded

Investment Number of

Nonaccrual TDR loans increased to $4.6 million at March 31, 2022 from $4.5 million at December 31, 2021.

Accruing troubled debt restructurings decreased $2.4 million to $5.6 million largely due to the payoff of a $3.5 million loan, partially offset by modest additions.

March 31, 2022 December 31, 2021

Modifications Recorded

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Total loans 52 $ 5,645 56 $ 7,984

Classified assets decreased to $27.1 million at September 30, 2021, from $28.5 million at December 31, 2020, largely due to the reduction in accruing substandard loans, partially offset by the modest increase in nonperforming assets, which are substandard assets.

Nonperforming assets increased to $12.1 million or 0.69% of total assets at September 30, 2021 compared to $11.5 million or 0.70% of total assets at December 31, 2020.

Included in nonperforming assets at September 30, 2021 are $5.4 million of nonperforming assets acquired during recent whole-bank acquisitions.

The table below shows a summary of criticized loans for the past five quarters.

Substandard loans, largely due to reductions in non-performing loans, have decreased each quarter, except for the current quarter ended September 30, 2021.

This increase was largely due to a $4.5 million commercial real estate loan secured by a senior living facility, as noted above.

Special mention loans increased during the first and second quarters in 2021 due to a single hotel loan.

Due to improving cash flow, this hotel loan was rated a pass loan during the quarter ended September 30, 2021.

Classified assets increased to $24.8 million at March 31, 2022, from $22.8 million at December 31, 2021, largely due to the new classification of $3.8 million in five agricultural relationships, with residential non-performing loans (nonaccrual and ninety days delinquent) and other smaller relationships offsetting the payoff of a substandard accruing troubled debt restructuring of $3.5 million.

Nonperforming assets increased to $13.6 million or 0.77% of total assets at March 31, 2022 compared to $13.2 million, or 0.76% of total assets at December 31, 2021.

Included in nonperforming assets at March 31, 2022, are $6.6 million of nonperforming assets acquired during recent whole-bank acquisitions.

The table below shows a summary of criticized loans for the past five quarters, with the decrease largely due to decreases in special mention loans.

See Note 3, “Loans, Allowance for Loan Losses and Impaired Loans” for additional information.

(in thousands)

2022 December 31,

2021 September 30,

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2021 March 31,

2021 December 31,

2020 September 30,

Special mention loan balances $ 1,849 $ 4,536 $ 2,548 $ 12,308 $ 13,659

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Hotels and restaurants represent our portfolio’s two industry sectors most directly and adversely affected by the recent pandemic and related government actions.

These sector loans totaled approximately $109 million and $41 million, respectively, at September 30, 2021.

These sector loans totaled approximately $96 million and $47 million, respectively, at March 31, 2022.

The weighted-average loan-to-value percentage and debt service coverage ratio on these hotel industry

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Approximately $33.8 million of restaurant sector loans are to franchise quick-service restaurants.

As of September 30, 2021, the Bank had $20.6 million of remaining loan modifications, due to pandemic-related borrower requests.

Hotel industry sector loans represent approximately $19.2 million of the approved deferrals at September 30, 2021 and represented the only remaining commercial loan deferrals.

Approximately $6.0 million of the hotel modifications are scheduled to resume their regular principal and interest payments in the fourth quarter, with the remaining loan scheduled to resume their regular payment in the first quarter of 2022.

The hotel modifications were third deferrals under the CARES ACT.

With this third deferral, the customer will make interest only payments which were funded by deposits made with the Bank at the time of modification.

As of March 31, 2022, the Bank had $0.4 million of remaining residential mortgage loan modifications, due to pandemic-related borrower requests.

As of March 31, 2022, all previously deferred commercial loans have exited deferral status.

While the Company has no indication that any of the modified credits are specifically impaired, additional risk and uncertainty inherent in the current pandemic-affected environment have been considered.

See “Allowance for Loan Losses” section above for discussion of pandemic-related qualitative factor, and related provision for loan losses.

Accretable difference:

The table below shows scheduled accretion by year for the accretable difference recognized due to fair value purchase accounting on recent whole bank acquisitions.

In addition, the Company has $1.65 million of accretable discount from purchased impaired loans with the original non-accretable discount transferred to accretable discount.

The scheduled accretion on this balance is estimated to be $100 thousand per year;

however, large balance payoffs, as seen in 2021 and 2020, would accelerate this accretion.

Fiscal years ending December 31, Purchase Accounting Accretable Difference

Mortgage Servicing Rights.

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Although management believes that the assumptions used to evaluate the MSRs for impairment are reasonable, future adjustment may be necessary if future economic conditions differ substantially from the economic assumptions used to determine the value of MSRs.

The fair market value of the Company’s MSR asset increased from $3.3 million at December 31, 2020, to $4.2 million at September 30, 2021, primarily due to higher future forecasted interest rates and resulting lower forecasted prepayment.

As a result, $1.3 million of previously recorded impairments on the MSR asset was reversed during the nine-month period ended September 30, 2021.

The unpaid balances of one- to four-family residential real estate loans serviced for others as of September 30, 2021, and December 31, 2020, were $557.1 million and $553.7 million, respectively.

The fair market value of the Company’s MSR asset as a percentage of its servicing portfolio at September 30, 2021, and December 31, 2020, was 0.75% and 0.59%, respectively.

Deposits increased $113.1 million to $1.41 billion at September 30, 2021, from $1.30 billion at December 31, 2020.

This growth is due to non-maturity deposit growth, split between both retail and commercial deposits.

The fair market value of the Company’s MSR asset increased from $4.3 million at December 31, 2021, to $5.3 million at March 31, 2022, primarily due to higher future forecasted interest rates and resulting lower forecasted prepayments.

As a result, $0.6 million of previously recorded impairments on the MSR asset was reversed during the three-month period ended March 31, 2022.

At March 31, 2022, the Company had no MSR impairment, or related valuation allowance.

The unpaid balances of one- to four-family residential real estate loans serviced for others as of March 31, 2022, and December 31, 2021, were $552.2 million and $556.1 million, respectively.

The fair market value of the Company’s MSR asset as a percentage of its servicing portfolio at March 31, 2022, and December 31, 2021, was 0.95% and 0.78%, respectively.

Deposits increased $40.7 million to $1.43 billion at March 31, 2022, from $1.39 billion at December 31, 2021.

The increase was due in part to seasonal factors related to taxes and two large retail and one large commercial deposit.

These large deposits totaling $19 million are approximately evenly split between retail and commercial deposits and are expected to decrease substantially over the next three quarters.

This growth was partially offset by retail certificates of deposit decreasing by $30.0 million, as the Company chose not to match higher rate local retail certificate competition.

Some of the decrease in retail certificates has moved to money markets.

The following is a summary of deposits by type at September 30, 2021 and December 31, 2020, respectively:

September 30, 2021 December 31, 2020

The following is a summary of deposits by type at March 31, 2022 and December 31, 2021, respectively:

March 31, 2022 December 31, 2021

Non-interest bearing demand deposits $ 269,481 $ 276,631

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Total deposits $ 1,428,223 $ 1,387,535

Brokered deposits included above:

$ 2,520 $ 2,516

Federal Home Loan Bank (FHLB) advances (borrowings) and Other Borrowings.

A summary of Federal Home Loan Bank (FHLB) advances and other borrowings at September 30, 2021 and December 31, 2020 is as follows:

September 30, 2021 December 31, 2020

A summary of Federal Home Loan Bank (FHLB) advances and other borrowings at March 31, 2022 and December 31, 2021 is as follows:

March 31, 2022 December 31, 2021

Stated Maturity Amount Range of Stated Rates Amount Range of Stated Rates

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2030 12,500 0.52 % 0.86 % 12,500 0.52 % 0.86 %

Subtotal 85,530 111,530

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2032 35,000 4.75 % 4.75 % — — % — %

$ 65,000 $ 30,000

Unamortized debt issuance costs (1,188) (430)

1 unchanged sentence

Totals $ 172,592 $ 169,953

(1) The FHLB advances bear fixed rates, require interest-only monthly payments, and are collateralized by a blanket lien on pre-qualifying first mortgages, home equity lines, multi-family loans and certain other loans which had a pledged balance of $782,715 and $723,862 at September 30, 2021 and December 31, 2020, respectively.

At September 30, 2021, the Bank’s available and unused portion under the FHLB borrowing arrangement was approximately $162,875 compared to $118,391 as of December 31, 2020.

(2) Maximum month-end borrowed amounts outstanding under this borrowing agreement were $123,530 and $162,530, during the nine months ended September 30, 2021 and the twelve months ended December 31, 2020, respectively.

(3) The weighted-average interest rates on FHLB borrowings maturing within twelve months as of September 30, 2021 and December 31, 2020 were 2.45% and 1.02%, respectively.

(4) FHLB term notes totaling $55,000, with various maturity dates in 2029 and 2030, can be called or replaced by the FHLB on a quarterly basis.

(1) The FHLB advances bear fixed rates, require interest-only monthly payments, and are collateralized by a blanket lien on pre-qualifying first mortgages, home equity lines, multi-family loans and certain other loans which had a pledged balance of $931,498 and $861,900 at March 31, 2022 and December 31, 2021, respectively.

At March 31, 2022, the Bank’s available and unused portion under the FHLB borrowing arrangement was approximately $240,412 compared to $204,271 as of December 31, 2021.

(2) Maximum month-end borrowed amounts outstanding under this borrowing agreement were $111,530 and $123,530, during the three months ended March 31, 2022 and the twelve months ended December 31, 2021, respectively.

(3) There are no FHLB borrowings maturing within twelve months of March 31, 2022.

The weighted-average interest rate on FHLB borrowings maturing within twelve months as of and December 31, 2021 was 2.45%.

(4) FHLB term notes totaling $55,000 can be called or replaced by the FHLB on a quarterly basis, and if not called, will mature at various dates in 2029 and 2030.

(5) Senior notes, entered into by the Company in June 2019 consist of the following:

(a) A term note, which was subsequently refinanced in October 2020, requiring quarterly interest-only payments through June 2022, and quarterly principal and interest payments thereafter.

Interest is variable, based on US Prime rate with a floor rate of 3.25%.

(a) A term note, which was subsequently refinanced in March 2022, requiring quarterly interest-only payments through March 2025, and quarterly principal and interest payments thereafter.

Interest is variable, based on US Prime rate minus 75 basis points with a floor rate of 3.00%.

(b) A $5,000 line of credit, maturing in August 2022, that remains undrawn upon.

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In August 2022, they convert to a three-month LIBOR plus 4.90% rate, and the interest rate will reset quarterly thereafter.

The note is callable by the Bank when, and anytime after, the floating rate is initially set.

Interest-only payments are due quarterly.

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In September 2025, the fixed interest rate will be reset quarterly to equal the three-month term Secured Overnight Financing Rate plus 591 basis points.

The note is callable by the Bank when, and anytime after, the floating rate is initially set.

Interest-only payments are due semi-annually each year during the fixed interest period and quarterly during the floating interest period.

FHLB advances decreased $12.0 million to $111.5 million as of September 30, 2021, compared to $123.5 million as of December 31, 2020.

(c) The Company’s Subordinated Note Purchase Agreement entered into with certain purchasers in March 2022, which bears a fixed interest rate of 4.75% for five years.

In April 2027, the fixed interest rate will be reset quarterly to equal the three-month term Secured Overnight Financing Rate plus 329 basis points.

The note is callable by the Bank when, and anytime after, the floating rate is initially set.

Interest-only payments are due semi-annually each year during the fixed interest period and quarterly during the floating interest period.

FHLB advances decreased $26.0 million to $85.5 million as of March 31, 2022, compared to $111.5 million as of December 31, 2021.

The Bank terminated $15.0 million of advances in the quarter ended March 31, 2022, incurring a $0.002 million prepayment penalty, as we modestly reduced excess liquidity.

In the second quarter of 2021, a $4 million advance matured.

In addition, $11 million of FHLB advances matured in the quarter and were not replaced.

The Bank has an irrevocable Standby Letter of Credit Master Reimbursement Agreement with the Federal Home Loan Bank.

This irrevocable standby letter of credit (“LOC”) is supported by loan collateral as an alternative to directly pledging investment securities on behalf of a municipal customer as collateral for their interest-bearing deposit balances.

The Bank’s current unused borrowing capacity, supported by loan collateral as of September 30, 2021, is approximately $162.9 million.

The Bank’s origination of SBA PPP loans allowed the Bank to gain access to the Federal Reserve’s PPPLF facility, whereby the Bank could pledge SBA PPP loans, by date of origination, up to the contractual maturity of the Bank’s SBA PPP loans with no collateral haircut.

This FRB PPPLF program expired on July 30, 2021.

Due to the program expiration and the strong growth in non-maturity deposits discussed above, the Bank had no outstanding borrowings under this facility at, or at any time during the quarters ended September 30, 2021, or December 31, 2020, respectively or nine months ended September 30, 2021.

In July 2021, the Bank pledged these SBA PPP loans to the FHLB.

At both September 30, 2021 and December 31, 2020, the Bank had $55 million of 10-year, three-month callable advances.

The Bank’s current unused borrowing capacity, supported by loan collateral as of March 31, 2022, is approximately $240.4 million.

At both March 31, 2022 and December 31, 2021, the Bank had $55 million of 10-year, three-month callable advances.

See Note 7, “Federal Home Loan Bank and Federal Reserve Bank Advances and Other Borrowings” for more information.

At September 30, 2021, the Bank has pledged $782.7 million of loans to secure the current FHLB outstanding advances and letters of credit and to provide the unused borrowing capacity, compared to $723.9 million of loans pledged at December 31, 2020.

At March 31, 2022, the Bank has pledged $931.5 million of loans to secure the current FHLB outstanding advances and letters of credit and to provide the unused borrowing capacity, compared to $861.9 million of loans pledged at December 31, 2021.

Stockholders’ Equity.

Total stockholders’ equity was $165.9 million at September 30, 2021, compared to $160.6 million at December 31, 2020.

The increase in stockholder’s equity was due to the Company’s net income of $15.2 million.

This increase was partially offset by:

1) the repurchase of approximately 604 thousand shares of its common stock, which reduced equity by $7.7 million;

2) the payment of the annual cash dividend paid in February to common stockholders of $0.23 per share or $2.5 million;

and 3) a decrease in the unrealized gain on available for sale securities of $0.26 million.

Total stockholders’ equity was $165.5 million at March 31, 2022, compared to $170.9 million at December 31, 2021.

The decrease in stockholder’s equity was attributable to 1) the $7.1 million decrease in accumulated other comprehensive income, as the previously unrealized gain on available for sale securities of $0.16 million transitioned to a $6.96 million unrealized loss;

2) the payment of the annual cash dividend paid in February to common stockholders of $0.26 per share or $2.7 million, and 3) the repurchase of approximately 18 thousand shares of the Company’s common stock, which reduced equity by $0.3 million.

This was partially offset by net income of $4.7 million.

The Company repurchased all remaining authorized shares of the Company’s stock under the November 2020 share repurchase program during the three months ended September 30, 2021.

On July 23, 2021, the Board of Directors adopted a new share repurchase program.

Under this new share repurchase program, approximately 144 thousand shares, were repurchased during the quarter ended September 30, 2021.

Under this new share repurchase program, approximately eighteen thousand shares, were repurchased during the quarter ended March 31, 2022.

The Company is authorized to repurchase an additional 354 thousand shares under this July 2021 share repurchase program.

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Our primary sources of funds are deposits;

amortization, prepayments and maturities of outstanding loans;

short-term investments;

contractual amortization, prepayments, and maturities of outstanding loans and investment securities;

and borrowings.

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We consider our interest-bearing cash and unpledged investment securities to be our sources of on-balance sheet liquidity.

At September 30, 2021, our on-balance sheet liquidity ratio was 20.7%.

While scheduled payments from the amortization of loans and maturing short-term investments are relatively predictable sources of funds, deposit flows and loan prepayments are

influenced by factors partially outside of the Bank’s control, including general interest rates, economic conditions and competition.

Although $198.4 million of our $225.5 million (87.99%) September 30, 2021 CD portfolio matures within the next 12 months, we have historically retained a majority of our maturing CDs.

At March 31, 2022, our on-balance sheet liquidity ratio was 18.7%.

While scheduled payments from the amortization of loans and investment securities and maturing short-term investments are relatively predictable sources of funds, deposit flows and loan prepayments are influenced by factors partially outside of the Bank’s control, including general interest rates, economic conditions and competition.

Although $149.6 million of our $173.0 million (86.49%) March 31, 2022, CD portfolio matures within the next 12 months, we have historically retained a majority of our maturing CDs.

Due to strategic pricing decisions regarding rate matching based on currently liquidity levels, our retention rate may decrease in the future, although some deposits may be retained and moved to money market accounts.

At September 30, 2021, the Bank had approximately $47.2 million of certificate of deposit accounts maturing in the fourth quarter of 2021, with a weighted average cost of approximately 0.8%, and approximately $155.7 million of certificate of deposit accounts maturing in 2022, with a weighted average cost of approximately 1.5%.

Approximately 80% of the 2022 maturities occur in the first half of 2022.

The approximate weighted average cost of new certificates in the first three quarter of 2021 was below 0.50%.

At March 31, 2022, the Bank had approximately $72.5

million of certificate of deposit accounts maturing in the second quarter of 2022, with a weighted average cost of approximately 1.50%, and approximately $56.3 million of certificate of deposit accounts maturing in the second half of 2022.

Through new deposit product offerings to our branch and commercial customers, we are currently attempting to strengthen customer relationships to attract additional non-rate sensitive deposits.

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Our borrowing arrangement with the FHLB calls for pledging certain qualified real estate loans and borrowing up to 75% of the value of those loans, not to exceed 35% of the Bank’s total assets.

As of September 30, 2021, we had approximately $162.9 million available under this arrangement, supported by loan collateral, as compared to $118.4 million at December 31, 2020.

In the quarter ended June 30, 2020, the Bank’s origination of SBA PPP loans allowed the Bank to gain access to the Federal Reserve’s PPPLF facility, whereby the Bank could pledge SBA PPP loans, by date of origination, up to the contractual maturity of the Bank’s SBA PPP loans with no collateral haircut.

This FRB PPPLF program expired on July 30, 2021.

In July 2021, the Bank pledged these SBA PPP loans to the FHLB.

As of March 31, 2022, we had approximately $240.4 million available under this arrangement, supported by loan collateral, as compared to $204.2 million at December 31, 2021.

In July 2021, the Bank pledged the remaining SBA PPP loans to the FHLB.

As the SBA PPP loans are forgiven, the collateral will reduce and our borrowing capacity under this facility will be reduced.

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These instruments include unused commitments for lines of credit, overdraft protection lines of credit and home equity lines of credit, as well as commitments to extend credit.

As of September 30, 2021, the Company had $320.1 million in unused commitments, compared to $247.3 million in unused commitments as of December 31, 2020.

As of March 31, 2022, the Company had $288.0 million in unused commitments, compared to $271.0 million in unused commitments as of December 31, 2021.

Capital Resources.

As of September 30, 2021, as shown in the table below, the Bank’s Tier 1 and Risk-based capital levels exceeded levels necessary to be considered “Well Capitalized” under Prompt Corrective Action provisions.

As of March 31, 2022 and December 31, 2021, as shown in the table below, the Bank’s Tier 1 and Risk-based capital levels exceeded levels necessary to be considered “Well Capitalized” under Prompt Corrective Action provisions.

Below are the amounts and ratios for our capital levels as of the dates noted below for the Bank:

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Amount Ratio Amount Ratio Amount Ratio

As of September 30, 2021 (Unaudited)

As of March 31, 2022 (Unaudited)

Total capital (to risk weighted assets) $ 207,760 14.9 % $ 111,180 > = 8.0 % $ 138,975 > = 10.0 %

7 unchanged sentences

Tier 1 leverage ratio (to adjusted total assets) 170,870 10.0 % 68,323 > = 4.0 % 85,403 > = 5.0 %

At September 30, 2021, the Bank was categorized as “Well Capitalized” under Prompt Corrective Action Provisions, as determined by the OCC, our primary regulator.

At March 31, 2022 and December 31, 2021, the Bank was categorized as “Well Capitalized” under Prompt Corrective Action Provisions, as determined by the OCC, our primary regulator.

Below are the amounts and ratios for our capital levels as of the dates noted below for the Company:

1 unchanged sentence

Amount Ratio Amount Ratio

As of September 30, 2021 (Unaudited)

As of March 31, 2022 (Unaudited)

Total capital (to risk weighted assets) $ 219,277 15.8 % $ 111,180 > = 8.0 %

8 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