What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-11-07 compared with 2022-08-04 · 183 added, 164 removed, 604 unchanged (36% of the section changed)

5 unchanged sentences

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, 2021, filed with the SEC on March 2, 2022 (“2021 10-K”), the matters described in “Risk Factors” in Item 1A for the quarter ended March 31, 2022 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 for the quarters ended March 31, 2022 and June 30, 2022, and in Item 1A of this Form 10-Q, and the following:

• conditions in the financial markets and economic conditions generally;

30 unchanged sentences

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 June 30, 2022, and our consolidated results of operations for the three and six months ended June 30, 2022, compared to the same periods in the prior fiscal year for the three and six months ended June 30, 2021.

The following discussion sets forth management’s discussion and analysis of our consolidated financial condition as of September 30, 2022, and our consolidated results of operations for the three and nine months ended September 30, 2022, compared to the same periods in the prior fiscal year for the three and nine months ended September 30, 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.

28 unchanged sentences

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 June 30, 2022, which is related to its banking activities.

The Company has one reporting unit as of September 30, 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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We believe that the deferred tax assets and liabilities are adequate and properly recorded in the accompanying consolidated financial statements.

As of June 30, 2022, management does not believe a valuation allowance related to the realizability of its deferred tax assets is necessary.

As of September 30, 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 six-month periods ended June 30, 2022, and June 30, 2021, respectively.

Net interest income was $14.3 million for the three months ended June 30, 2022, and $27.4 million for the six months ended June 30, 2022, compared to $12.8 million for the three months ended June 30, 2021, and $25.6 million for the six months ended June 30, 2021.

Net interest income for the three and six months ended June 30, 2022, increased from the same period one year ago due to 1) both organic loan and investment growth from June 30, 2021;

The narrative below discusses net interest income, interest rate spread, and net interest margin for the three and nine-month periods ended September 30, 2022, and September 30, 2021, respectively.

Net interest income was $14.5 million for the three months ended September 30, 2022, and $41.9 million for the nine months ended September 30, 2022, compared to $13.7 million for the three months ended September 30, 2021, and $39.3 million for the nine months ended September 30, 2021.

Net interest income for the three and nine months ended September 30, 2022, increased from the same period one year ago due to:

1) both organic loan and investment growth from September 30, 2021;

2) the positive impact of nonaccrual loan payoffs and purchased loan credit impairment accretion;

1 unchanged sentence

and 4) lower liability costs.

This was partially offset by $1.3 million and $2.8 million decreases in the accretion of deferred fees related to SBA Paycheck Protection Program (“SBA PPP”) loans for the three and six months ended June 30, 2022, respectively, compared to the prior year periods.

The net interest margin for the three-month period ended June 30, 2022, was 3.46%, compared to 3.22% for the three-month period ended June 30, 2021.

The net interest margin increase was due to 1) the positive impact of nonaccrual loan payoffs with purchased loan credit impairment accretion and interest income recognition of 10bp;

2) increases in loan and investment yields due to both contractual repricing and higher coupons on new loans in excess of portfolio yield;

and 3) lower deposit costs, partially offset by 1) a 32-basis point decrease in SBA PPP deferred loan fee accretion in loan yields and 2) the impact of additional interest expense on the subordinated debt issued in March of 2022.

The net interest margin for the six-month period ended June 30, 2022, was 3.35%, compared to 3.26% for the six-month period ended June 30, 2021.

The net interest margin increase was due to 1) the positive impact of nonaccrual loan payoffs with purchased loan credit impairment accretion and interest income recognition of 5bp ;

This was partially offset by $1.9 million and $4.9 million decreases in the accretion of deferred fees related to SBA Paycheck Protection Program (“SBA PPP”) loans for the three and nine months ended September 30, 2022, respectively, compared to the prior year periods.

The net interest margin for the three-month period ended September 30, 2022, was 3.43%, compared to 3.34% for the three-month period ended September 30, 2021.

The net interest margin increase was due to:

1) increases in loan and investment yields due to both contractual repricing and higher coupons on new loans in excess of portfolio yield and 2) lower deposit costs, partially offset by:

1) a 46-basis point decrease in SBA PPP deferred loan fee accretion in loan yields and 2) the impact of additional interest expense on the subordinated debt issued in March of 2022 .

The net interest margin for the nine-month period ended September 30, 2022, was 3.38%, compared to 3.29% for the nine-month period ended September 30, 2021.

The net interest margin increase was due to:

1) increases in loan and investment yields due to both contractual repricing and higher coupons on new loans in excess of portfolio yield;

3) lower deposit costs and 4) the positive impact of investing lower yield cash into investment securities;

partially offset by a 35-basis point decrease in SBA PPP deferred loan fee accretion in loan yields and the impact of additional interest expense of the subordinated debt issued in March 2022.

2) the positive impact of nonaccrual loan payoffs with purchased loan credit impairment accretion and interest income recognition of 3 basis points;

3) lower deposit costs;

and 4) the positive impact of investing lower yield cash into investment securities.

This was partially offset by a 39-basis point decrease in SBA PPP deferred loan fee accretion and the impact of additional interest expense due to subordinated debt issued in March 2022.

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 six-month periods ended June 30, 2022, and June 30, 2021.

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, 2022, and September 30, 2021.

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

1 unchanged sentence

(Dollar amounts in thousands)

Three months ended June 30, 2022 compared to the three months ended June 30, 2021:

Three months ended June 30, 2022 Three months ended June 30, 2021

Three months ended September 30, 2022 compared to the three months ended September 30, 2021:

Three months ended September 30, 2022

Three months ended September 30, 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 quarters ended June 30, 2022 and June 30, 2021.

The FTE adjustment to net interest income included in the rate calculations totaled $0 and $1 thousand for the three months ended June 30, 2022 and June 30, 2021, 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 September 30, 2022, and September 30, 2021.

The FTE adjustment to net interest income included in the rate calculations totaled $0 and $1 thousand for the three months ended September 30, 2022, and September 30, 2021, respectively.

NET INTEREST INCOME ANALYSIS ON A TAX EQUIVALENT BASIS

(Dollar amounts in thousands)

Six months ended June 30, 2022 compared to the six months ended June 30, 2021:

Six months ended June 30, 2022 Six months ended June 30, 2021

Nine months ended September 30, 2022 compared to the nine months ended September 30, 2021:

Nine months ended September 30, 2022 Nine months ended September 30, 2021

Balance Interest

24 unchanged sentences

(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 six months ended June 30, 2022 and June 30, 2021.

The FTE adjustment to net interest income included in the rate calculations totaled $1 and $2 thousand for the six-month periods ended June 30, 2022 and June 30, 2021, respectively.

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, 2022, and September 30, 2021.

The FTE adjustment to net interest income included in the rate calculations totaled $1 and $3 thousand for the nine-month periods ended September 30, 2022, and September 30, 2021, respectively.

Rate/Volume Analysis.

The following tables presents the dollar amount of changes in interest income and interest expense for the components of interest earning assets and interest-bearing liabilities that are presented in the preceding table.

The following tables present the dollar amount of changes in interest income and interest expense for the components of interest earning assets and interest-bearing liabilities that are presented in the preceding table.

For each category of interest earning assets and interest-bearing liabilities, information is provided on changes attributable to:

(1) changes in volume, which are changes in the average outstanding balances multiplied by the prior period rate (i.e., holding the initial rate constant);

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).

1) changes in volume, which are changes in the average outstanding balances multiplied by the prior period rate (i.e., holding the initial rate constant) 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 in the net interest income section above.

For the three and six months ended June 30, 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.

For the three and nine months ended September 30, 2022, compared to the same periods in 2021, the loan volume increased due to strong organic growth.

The decrease in certificate volumes is due to CD shrinkage, with some of this decrease moving to money markets.

Investment securities volume decreases for the three months ended September 30, 2022, compared to the three months ended September 30, 2021, are primarily due to:

1) principal repayments and 2) unrealized losses in the available for sale securities portfolio, partially offset by purchases.

Investment securities volume increases for the nine months ended September 30, 2022, compared to the same period in the prior year are due to an increase in portfolio balances, largely due to purchases of mortgage-backed securities.

RATE / VOLUME ANALYSIS

(Dollar amounts in thousands)

Three months ended June 30, 2022 compared to the three months ended June 30, 2021.

Three months ended September 30, 2022 compared to the three months ended September 30, 2021.

Increase (decrease) due to

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Net interest income $ 1,658 $ (889) $ 769

Six months ended June 30, 2022 compared to the six months ended June 30, 2021.

Nine months ended September 30, 2022 compared to the nine months ended September 30, 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 six months ended June 30, 2022, was $0.4 million, compared to no provision for the three and six months ended June 30, 2021.

Based on loan growth alone, the provision would have been $0.950 million for the second quarter.

However, upgrades in the classification of substandard loans due to improving collateral positions and loan payoffs, with $0.55 million of specific reserves at March 31, 2022, partially offset the growth-related provision.

In addition, the majority of the second quarter charge-offs of $0.4 million had been provided for in previous quarters and the charge-offs reduced specific reserves.

There were no loan loss provisions for the quarters ended March 31, 2022, June 30, 2021, or March 31, 2021.

Total provision for loan losses for the three and nine months ended September 30, 2022, was $0.4 million and $0.8 million, respectively, compared to no provision for the three and nine months ended September 30, 2021.

Based on loan growth alone, the provision would have been $0.5 million for the third quarter and $0.95 million in the second quarter.

However, payments on, and improved collateral position on substandard loans reduced specific reserves, reducing the provision.

In addition, approximately $0.3 million of second quarter 2022 charge-offs had been provided for in previous quarters and the related charge-offs reduced second quarter 2022 specific reserves.

There were no loan loss provisions for the quarters ended March 31, 2022, September 30, 2021, June 30, 2021, or March 31, 2021.

Continued improving economic conditions in our markets, as evidenced by unemployment rates below the national average in our two largest population centers, have resulted in improving overall economic trends for businesses.

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 ALL and related need for no provision was due to loan shrinkage and low net charge-offs in the previous quarter.

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

Management believes that the provision recorded for the current year three and nine-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 six- month periods ended June 30, 2022 and 2021, respectively.

Three months ended June 30, Six months ended June 30,

The following table reflects the various components of non-interest income for the three and nine- month periods ended September 30, 2022 and 2021, respectively.

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

2022 2021 % Change 2022 2021 % Change

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Loan fees and service charges 267 118 126.27 % 500 547 (8.59) %

Net gains (losses) on investment securities (75) 37 N/M (112) 272 (141.18) %

Net gains (losses) on investment securities (55) 73 N/M (167) 344 N/M

Other 323 338 (4.44) % 717 801 (10.49) %

Total non-interest income $ 2,472 $ 3,448 (28.31) % $ 7,557 $ 11,415 (33.80) %

Service charges on deposit accounts increased to $482 for the three months ended June 30, 2022, from $395 for the prior year quarter.

For the six months ended June 30, 2022, service charges increased to $970, compared to $793 in the comparable prior year period.

Service charges on deposit accounts increased to $535 for the three months ended September 30, 2022, from $463 for the prior year quarter.

For the nine months ended September 30, 2022, service charges increased to $1,505, compared to $1,256 in the comparable prior year period.

The increase for both periods is due to higher customer spending activity.

Loan servicing income decreased with reduced capitalization of mortgage servicing rights due to lower mortgage loan origination fees in both the three and six-month periods ended June 30, 2022, compared to the same periods in the prior year.

Gain on sale of loans decreased in the current three and six-month periods ended June 30, 2022, compared to the three and six months ended June 30, 2021, due to lower mortgage loan origination volumes.

The change in loan fees and service charges for the three and six months ended June 30, 2022 and 2021, is largely due to decreases in commercial loan-related customer activity.

The change in net gains (losses) on investment securities between the three and six months ended June 30, 2022, and the three and six months ended June 30, 2021, respectively, is primarily due to unrealized losses on equity securities with readily determinable fair value in 2022 and modest realized gain on sale of available for sale securities in 2021.

The change in net gains (losses) on investment securities for the six-month periods ended June 30, 2022 and 2021, is primarily due to the corresponding changes in unrealized gains on equity securities with readily determinable fair value and to a lesser extent, the realized gain on sale of AFS securities in the second quarter of 2021.

Loan servicing income decreased with reduced capitalization of mortgage servicing rights due to lower mortgage loan origination volume in both the three and nine-month periods ended September 30, 2022, compared to the same periods in the prior year.

Gain on sale of loans decreased in the current three and nine-month periods ended September 30, 2022, compared to the three and nine months ended September 30, 2021, due to lower mortgage loan origination volumes.

The increase in loan fees and service charges for the three-month period ended September 30, 2022, compared to the three-month period ended September 30, 2021, is largely due to a loan prepayment on an acquired loan.

For the nine-month period September 30, 2022, the decrease in loan fees and service charges from the nine-month period ending September 30, 2021, is due to net decreases in commercial loan-related customer activity.

The change in net gains (losses) on investment securities between the three and nine months ended September 30, 2022, and the three and nine months ended September 30, 2021, respectively, is primarily due to:

1) net unrealized losses on equity securities with readily determinable fair value in 2022, compared to net unrealized gains on equity securities with readily determinable fair value in 2021 and 2) modest net realized gains on sale of available for sale securities in the second quarter of 2021 of $36 and third quarter of 2021 of $42 primarily due to sales of trust-preferred securities.

Non-interest Expense.

The following table reflects the various components of non-interest expense for the six-month periods ended June 30, 2022 and 2021, respectively.

Three months ended June 30, Six months ended June 30,

The following table reflects the various components of non-interest expense for the three and nine-month periods ended September 30, 2022 and 2021, respectively.

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

2022 2021 % Change 2022 2021 % Change

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Amortization of intangible assets 399 399 — % 1,197 1,197 — %

Mortgage servicing rights expense, net 195 441 (55.78) % (132) (9) NM

Mortgage servicing rights expense, net 197 37 432.43 % 65 28 132.14 %

Advertising, marketing and public relations 300 220 36.36 % 762 577 32.06 %

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Gains on repossessed assets, net (8) (3) (166.67) % (17) (149) 88.59 %

New market tax credit depletion 162 — NM 325 — NM

New market tax credit depletion 163 — N/M 488 — N/M

Other 1,014 578 75.43 % 2,286 1,714 33.37 %

1 unchanged sentence

Non-interest expense (annualized) / Average assets 2.51 % 2.34 % 7.36 % 2.38 % 2.34 % 1.71 %

Compensation expense for the three-month period ended June 30, 2022, was higher than the comparable prior year period primarily due to merit and benefit increases in late March of 2022, partially offset by lower variable mortgage compensation related to lower mortgage activity.

Compensation expense for the six-month period ended June 30, 2022, was lower than the comparable prior year periods due to lower variable mortgage production compensation related to lower mortgage loan origination activity, partially offset by the impact of the merit raise in 2022.

Net mortgage servicing rights expense decreased during the three months ended June 30, 2022, compared to the comparable prior year period as amortization expense decreased, resulting largely from the impact of lower future forecasted prepayment rates and the quarter ended June 30, 2021, had $23 thousand of impairment reversal.

Amortization expense decreased in the six months ended June 30, 2022, compared to the six months ended June 30, 2021, by $469 thousand.

This was partially offset by a decrease in MSR impairment reversals for the six months ended June 30, 2022, of $566 thousand, compared to the comparable prior year period reversal of $912 thousand.

The FDIC insurance premium increased during the three months ended June 30, 2022, from the comparable prior year periods due to an increase in the assessment base.

The FDIC insurance premium decreased during the six months ended June 30, 2022, from the comparable prior year periods due to the favorable impact of increased bank capital ratios.

Professional services costs decreased during the six months ended June 30, 2022, from the comparable prior year period due to the need for fewer outside professionals, primarily in the first quarter of 2022 compared to the first quarter of 2021, due to lower fees from our independent registered public accounting firm and other costs to prepare our Form 10-K.

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

Compensation expense for the three-month and nine-month periods ended September 30, 2022, were higher than the comparable prior year periods primarily due to merit and benefit increases in late March of 2022, partially offset by lower variable mortgage compensation related to lower mortgage activity.

Net mortgage servicing rights expense increased during the three and nine months ended September 30, 2022, compared to the comparable prior year periods.

While amortization expense decreased in the current three month period due to the impact of lower forecasted prepayments, this decrease was more than offset by $382 thousand of impairment reversal in the comparable prior year period.

Amortization expense decreased in the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021, by $691 thousand.

This was partially offset by a decrease in MSR impairment reversals for the nine months ended September 30, 2022, of $566 thousand, compared to the comparable prior year period reversal of $1,294 thousand.

The FDIC insurance premium decreased for the three-month and nine-month periods ended September 30, 2022, from the comparable prior year periods due to the favorable impact of increased bank capital ratios, largely due to both a $15 million capital injection following the Company’s subordinated debt issuance in March of 2022 and the impact of growth in the Bank’s retained earnings.

Professional services costs increased during the three months ended September 30, 2022, from the comparable prior year period due to the use of outside professionals who finished projects on behalf of the Company.

Despite the increase in the third quarter compared to the prior year third quarter, the current year nine-month period professional fees decreased compared to the same period in 2021.

This decrease was largely due to the need for fewer outside professionals and lower fees from our independent registered public accounting firm and other costs to prepare our Form 10-K in the first quarter of 2022 compared to the first quarter of 2021.

Net gains on repossessed assets decreased for the nine month period ended September 30, 2022, compared to the same period in 2021 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.

Based on current accounting guidance, the related non-tax-deductible asset depletion will occur over a 5-year period in lockstep with the recognition of the tax credit.

The Emerging Issues Task Force of the Financial Accounting Standards Board is in the process of reviewing this accounting and is expected to issue guidance that would change the depletion to seven years proportional with the tax credit.

The Emerging Issues Task Force of the Financial Accounting Standards Board has issued guidance that, if implemented in its current proposal, would change the depletion expense from equal to the tax credit until the asset is depleted, to being proportional with the new market tax credit recognized, which is seven years.

The increase in other expenses during the three and nine months ended September 30, 2022, from the comparable prior year periods is largely due to branch closure costs.

Income Taxes.

Income tax expense was $1.4 and $2.9 million for the three and six months ended June 30, 2022, respectively, compared to $1.7 and $3.7 million for the three and six months ended June 30, 2021.

The effective tax rate was 24.4% and 24.3% for the three and six-month periods ended June 30, 2022, compared to 26.8% and 26.4% for the comparable prior year periods.

Income tax expense was $1.3 and $4.2 million for the three and nine months ended September 30, 2022, respectively, compared to $1.8 and $5.5 million for the three and nine months ended September 30, 2021.

The effective tax rate was 24.3% for both the three and nine-month periods ended September 30, 2022, compared to 26.7% and 26.5% for the comparable prior year periods.

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

2 unchanged sentences

Cash and Cash Equivalents.

Our cash balances decreased $15.9 million to $31.7 million in the first half of 2022 as we deployed cash to support loan growth.

Our cash balances decreased $18.3 million to $29.4 million in the first three quarters of 2022 as we deployed cash to support loan growth.

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 $177.1 million at June 30, 2022, compared with $203.1 million at December 31, 2021.

The decrease in the available for sale portfolio is due to unrealized losses of $17.2 million and principal repayments, partially offset by purchases of corporate debt securities and mortgage-backed certificates.

Securities held to maturity increased to $99.2 million at June 30, 2022, compared to $71.1 million at December 31, 2021.

Securities available for sale, which represent the majority of our investment portfolio, were $167.8 million at September 30, 2022, compared with $203.1 million at December 31, 2021.

The decrease in the available for sale portfolio is due to unrealized losses of $24.0 million arising during the period and principal repayments, partially offset by purchases of corporate debt securities and mortgage-backed certificates.

Securities held to maturity increased to $97.6 million at September 30, 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 the held to maturity portfolio increased by $12.5 million in the first half of 2022, to $14.5 million.

The unrealized loss on the held to maturity portfolio increased by $18.4 million in the first three quarters of 2022, to $20.4 million.

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

June 30, 2022

September 30, 2022

government agency obligations $ 19,357 $ 19,314

Obligations of states and political subdivisions — —

Mortgage-backed securities 99,198 79,927

11 unchanged sentences

Held to maturity securities Amortized

June 30, 2022

September 30, 2022

Obligations of states and political subdivisions $ 600 $ 546

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

June 30, 2022 December 31, 2021

September 30, 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:

June 30, 2022 December 31, 2021

September 30, 2022 December 31, 2021

Held to maturity securities Amortized

4 unchanged sentences

Total $ 97,610 $ 77,233 $ 71,141 $ 69,177

At June 30, 2022, the Bank has pledged mortgage-backed securities with a carrying value of $5.6 million as collateral against a borrowing line of credit with the Federal Reserve Bank with no borrowings outstanding on this line of credit.

As of June 30, 2022, the Bank has pledged U.S.

At September 30, 2022, the Bank has pledged mortgage-backed securities with a carrying value of $5.5 million as collateral against a borrowing line of credit with the Federal Reserve Bank with no borrowings outstanding on this line of credit.

As of September 30, 2022, the Bank has pledged U.S.

Government Agency securities with a carrying value of $2.8 million and mortgage-backed securities with a carrying value of $2.3 million as collateral against specific municipal deposits.

As of June 30, 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 September 30, 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.

At December 31, 2021, the Bank has pledged certain of its mortgage-backed securities with a carrying value of $0.9 million as collateral to secure a line of credit with the Federal Reserve Bank with no borrowings outstanding on this line of credit.

2 unchanged sentences

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 $35.9 million, to $1.35 billion as of June 30, 2022, from $1.31 billion at December 31, 2021.

The originated loan portfolio, before SBA PPP loans, increased $67.3 million in the six-month period of 2022.

Total loans outstanding, net of deferred loan fees and costs and unamortized discount on acquired loans, increased by $64.9 million, to $1.38 billion as of September 30, 2022, from $1.31 billion at December 31, 2021.

The originated loan portfolio, before SBA PPP loans, increased $116.9 million in the nine-month period ended September 30, 2022.

Total SBA PPP loans decreased $8.8 million, entirely due to debt forgiveness.

Acquired loans decreased by $44.8 million.

The following table reflects the composition, or mix, of our loan portfolio at June 30, 2022, and December 31, 2021:

June 30, 2022 December 31, 2021

The following table reflects the composition, or mix, of our loan portfolio at September 30, 2022, and December 31, 2021:

September 30, 2022 December 31, 2021

Amount Percent Amount Percent

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Total loans receivable, net $ 1,358,434 $ 1,294,050

The following table summarizes SBA PPP loans by origination year at June 30, 2022:

The following table summarizes SBA PPP loans by origination year at September 30, 2022:

2020 Originations 2021 Originations Total

5 unchanged sentences

2022 SBA PPP loan forgiveness and fee accretion (2,128) (4) (6,627) (293) (8,755) (297)

SBA PPP loans, June 30, 2022 $ — $ — $ — $ — $ — $ —

SBA PPP loans, September 30, 2022 $ — $ — $ — $ — $ — $ —

Allowance for Loan Losses.

1 unchanged sentence

To address this credit risk, we maintain an ALL for probable and inherent credit losses through periodic charges to our earnings.

These charges are shown in our consolidated statements of operations as PLL.

These charges are shown in our consolidated statements of operations as provision for loan losses.

See “Provision for Loan Losses” earlier in this quarterly report.

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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 June 30, 2022, the Company individually evaluated loans for impairment with a recorded investment of $29.4 million, consisting of (1) $8.5 million purchased credit impaired (“PCI”) loans, with a carrying amount of $8.1 million;

At September 30, 2022, the Company individually evaluated loans for impairment with a recorded investment of $29.7 million, consisting of (1) $7.3 million purchased credit impaired (“PCI”) loans, with a carrying amount of $7.1 million;

(2) $8.5 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 June 30, 2022, and December 31, 2021, we had 201 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 43 loans where the estimated fair value was less than their book value (i.e., we deemed impairment to exist) totaling $5.5 million for which $0.26 million in specific ALL was recorded as of June 30, 2022.

The allowance for loan losses modestly decreased $0.1 million to $16.8 million at June 30, 2022, representing 1.25% of loans receivable.

At September 30, 2022, and December 31, 2021, we had $29.7 million and 192 loans individually evaluated for impairment, respectively, all secured by real estate or personal property.

Of the originated loans individually evaluated for impairment, there were 5 loans where the estimated fair value was less than their book value (i.e., we deemed impairment to exist) totaling $6.7 million for which $0.7 million in specific ALL was recorded as of September 30, 2022.

The allowance for loan losses modestly increased $0.3 million to $17.2 million at September 30, 2022, representing 1.25% of loans receivable.

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 $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 June 30, 2022, was due to net loan charge-offs, partially offset by a provision of $0.4 million.

Approximately $350 thousand of the charge-offs in the second quarter had specific reserves previously established, so there was no impact on the provision 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 $16.9 million at December 31, 2021, representing 1.30% of loans receivable, less the 100% SBA guaranteed PPP loans.

The increase in the allowance at September 30, 2022, was due to a provision of $0.8 million, partially offset by net loan charge-offs.

Approximately $0.3 million of the charge-offs in the second quarter had specific reserves previously established, so there was no impact on the provision for loan losses.

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:

June 30, 2022 and Six Months Then Ended December 31, 2021 and Twelve Months Then Ended

September 30, 2022 and Nine Months Then Ended December 31, 2021 and Twelve Months Then Ended

Nonperforming assets:

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Troubled Debt Restructurings (“TDRs”) $ 9,336 $ 12,523

Accruing TDR's $ 6,163 $ 7,984

Accruing TDRs $ 6,910 $ 7,984

Nonaccrual TDRs $ 2,426 $ 4,539

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(in thousands, except ratios)

June 30, 2022 December 31, 2021

September 30, 2022 December 31, 2021

Nonperforming assets:

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Quarter Ended

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

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

Balance, beginning of period $ 10,434 $ 11,858 $ 11,665 $ 11,706 $ 8,075

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Return to accrual status (117) — (51) (30) —

Repurchases of government guaranteed loans 517 — — — —

Payments received (288) (2,830) (461) (422) (1,202)

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Balance, end of period $ 10,772 $ 10,434 $ 11,858 $ 11,665 $ 11,706

Nonperforming loans decreased by $0.7 million to $11.1 million at June 30, 2022, from December 31, 2021.

This decrease is largely due to payoffs of acquired nonaccrual loans, partially offset by increases in originated nonaccrual loans and originated accruing loans past due 90 days or more.

Nonperforming assets decreased to $12.6 million or 0.71% of total assets at June 30, 2022, compared to $13.2 million, or 0.76% of total assets at December 31, 2021.

Included in nonperforming assets at June 30, 2022, are $4.1 million of nonperforming assets acquired during recent whole-bank acquisitions.

Nonperforming loans decreased by $0.8 million to $11.0 million at September 30, 2022, from December 31, 2021.

This decrease is largely due to payoffs of acquired nonaccrual loans, partially offset by increases in originated nonaccrual loans, the repurchase of a government guaranteed loan and increases in originated accruing loans past due 90 days or more.

Nonperforming assets decreased to $12.6 million or 0.71% of total assets at September 30, 2022, compared to $13.2 million, or 0.76% of total assets at December 31, 2021.

Included in nonperforming assets at September 30, 2022, are $4.1 million of nonperforming assets acquired during recent whole-bank acquisitions.

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.

Included in the above table are nonaccrual TDR loans.

Nonaccrual TDR loans decreased to $2.5 million at June 30, 2022, from $4.5 million at December 31, 2021.

June 30, 2022 December 31, 2021

Nonaccrual TDR loans decreased to $2.4 million at September 30, 2022, from $4.5 million at December 31, 2021.

September 30, 2022 December 31, 2021

Modifications Recorded

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Accruing troubled debt restructurings decreased $1.1 million to $6.9 million largely due to the payoff of a $3.3 million loan in the first quarter, partially offset by modest additions.

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.

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

In the second quarter of 2022, two loans became categorized as special mention.

One is a commercial real estate loan secured by a hotel and has rebounded more slowly from the pandemic due to reliance on seasonal events and company meetings.

Performance year to date and current bookings show good progress.

The second special mention loan is a $10.4 million fully secured working capital C&I loan.

Negotiations are ongoing with the borrower to improve the loan structure and performance of the business.

In the third quarter of 2022, this loan increased its outstanding balance by $2.4 million with a draw on a secured line of credit.

The loan was categorized as special mention at June 30, 2022 and is projected to decrease to June 2022 levels by mid-first quarter 2023.

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

(in thousands)

September 30,

2022 June 30,

2022 March 31,

1 unchanged sentence

2021 September 30,

2021 June 30,

Special mention loan balances $ 20,178 $ 17,274 $ 1,849 $ 4,536 $ 2,548

1 unchanged sentence

Criticized loans, end of period $ 40,405 $ 37,954 $ 26,671 $ 27,353 $ 29,685

Classified assets decreased to $20.7 million at June 30, 2022, from $22.8 million at December 31, 2021, largely due to non-accruing loan payoffs, along with the first quarter payoff of a substandard accruing troubled debt restructuring loan of $3.3 million partially offset by the new classification of $3.8 million of five agricultural relationships in the first quarter.

Special mention loans increased $15.4 million in the quarter, primarily due to the addition of two loans in the second quarter of 2022.

Classified assets decreased to $20.2 million at September 30, 2022, from $22.8 million at December 31, 2021, largely due to non-accruing loan payoffs, along with the first quarter payoff of a substandard accruing troubled debt restructuring loan of $3.3 million partially offset by the new classification of $3.8 million of five agricultural relationships in the first quarter.

Special mention loans increased $15.7 million in the first nine months of 2022, primarily due to the addition of two loans in the second quarter of 2022 and a draw on a line of credit on one of the loans in the third quarter.

One is a commercial real estate loan for $5.4 million secured by a hotel (50% LTV at origination) and has rebounded more slowly from the pandemic due to reliance on seasonal events and company meetings.

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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 $97 million and $48 million, respectively, at June 30, 2022.

The weighted-average loan-to-value percentage and debt service coverage ratio on these hotel industry sector loans were 61% and 2.6 times, respectively.

These sector loans totaled approximately $93 million and $48 million, respectively, at September 30, 2022.

The weighted-average loan-to-value percentage on these hotel industry sector loans was 57%.

Approximately $35.6 million of restaurant sector loans are to franchise quick-service restaurants.

As of June 30, 2022, the Bank had $0.4 million of remaining residential mortgage loan modifications, due to pandemic-related borrower requests.

As of June 30, 2022, all previously deferred commercial loans have exited deferral status.

As of September 30, 2022, the Bank had $0.2 million of remaining residential mortgage loan modifications, due to pandemic-related borrower requests.

As of September 30, 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.

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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 $4.3 million at December 31, 2021, to $5.5 million at June 30, 2022, primarily due to higher future forecasted interest rates and resulting lower forecasted prepayments.

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

At June 30, 2022, the Company did not have an MSR impairment, or related valuation allowance.

The unpaid balances of one- to four-family residential real estate loans serviced for others as of June 30, 2022, and December 31, 2021, were $544.7 million and $556.1 million, respectively.

The fair market value of the Company’s MSR asset as a percentage of its servicing portfolio at June 30, 2022, and December 31, 2021, was 1.01% and 0.78%, respectively.

Deposits increased $12.7 million to $1.40 billion at June 30, 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.

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 certificate of deposit account balances decreasing by $49.5 million from December 31, 2021, as the Company chose not to match higher rate local retail certificate competition.

In addition, some of the decrease in retail certificates has moved to money market accounts.

The following is a summary of deposits by type at June 30, 2022 and December 31, 2021, respectively:

June 30, 2022 December 31, 2021

The fair market value of the Company’s MSR asset increased from $4.3 million at December 31, 2021, to $5.8 million at September 30, 2022, primarily due to higher future forecasted interest rates and resulting lower forecasted prepayments.

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

At September 30, 2022, the Company did not have an MSR impairment, or related valuation allowance.

The unpaid balances of one- to four-family residential real estate loans serviced for others as of September 30, 2022, and December 31, 2021, were $531.8 million and $556.1 million, respectively.

The fair market value of the Company’s MSR asset as a percentage of its servicing portfolio at September 30, 2022, and December 31, 2021, was 1.09% and 0.78%, respectively.

Deposits increased $46.8 million to $1.43 billion at September 30, 2022, from $1.39 billion at December 31, 2021.

Retail certificate of deposit account balances decreased by $33.6 million from December 31, 2021, as the Company chose not to match higher rate local retail certificate competition in the first and second quarters of 2022.

Retail certificates have grown approximately $16 million since the low point in late second quarter of 2022.

In late third quarter of 2022, the Bank added $19.9 million of brokered CDs.

In addition, some of the decrease in retail certificates has moved to money market accounts, which increased almost $40 million from year-end.

The following is a summary of deposits by type at September 30, 2022 and December 31, 2021, respectively:

September 30, 2022 December 31, 2021

Non-interest bearing demand deposits $ 285,670 $ 276,631

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

A summary of Federal Home Loan Bank (FHLB) advances and other borrowings at June 30, 2022 and December 31, 2021 is as follows:

June 30, 2022 December 31, 2021

A summary of Federal Home Loan Bank (FHLB) advances and other borrowings at September 30, 2022 and December 31, 2021 is as follows:

September 30, 2022 December 31, 2021

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

16 unchanged sentences

Totals $ 174,881 $ 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 $920,774 and $861,900 at June 30, 2022 and December 31, 2021, respectively.

At June 30, 2022, the Bank’s available and unused portion under the FHLB borrowing arrangement was approximately $230,585 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 six months ended June 30, 2022 and the twelve months ended December 31, 2021, respectively.

(3) The weighted-average interest rate on FHLB borrowings maturing within twelve months as of June 30, 2022 and December 31, 2021 were 1.66% and 2.45%, respectively.

(4) At June 30, 2022, FHLB term notes totaling $27,500 can be called or replaced by the FHLB on a quarterly basis, and if not called, will mature at various dates in 2029.

At December 31, 2021, FHLB term notes totaling $55,000 could be called or replaced by the FHLB on a quarterly basis, and if not called, would mature at various dates in 2029 and 2030.

(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 $960,192 and $861,900 at September 30, 2022 and December 31, 2021, respectively.

At September 30, 2022, the Bank’s available and unused portion under the FHLB borrowing arrangement was approximately $277,959 compared to $204,271 as of December 31, 2021.

(2) Maximum month-end borrowed amounts outstanding under this borrowing agreement were $134,530 and $123,530, during the nine months ended September 30, 2022 and the twelve months ended December 31, 2021, respectively.

(3) The weighted-average interest rate on FHLB borrowings maturing within twelve months as of September 30, 2022 and December 31, 2021 were 3.11% and 2.45%, respectively.

(4) At September 30, 2022, no FHLB term notes can be called by the FHLB.

At December 31, 2021, FHLB term notes totaling $55,000 could be called by the FHLB on a quarterly basis, and if not called, would mature at various dates in 2029 and 2030.

These notes were called by the FHLB in 2022.

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

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(b) A $5,000 line of credit, maturing August 1, 2023, that remains undrawn upon.

The line was renewed on August 1, 2022 and will mature on August 1, 2023.

(6) Subordinated notes resulted from the following:

(a) The Company’s private sale in August 2017, which bears a fixed interest rate of 6.75% for five years.

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.

The company sent the required notice to the note holders in June 2022, and this subordinated note will be called and repaid in full on August 10, 2022.

(a) The Company’s private sale in August 2017, which bore a fixed interest rate of 6.75% for five years.

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

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

Interest-only payments were due quarterly.

The Company sent the required redemption notice to the note holders in June 2022, and this subordinated note was called and repaid in full on August 10, 2022.

(b) The Company’s Subordinated Note Purchase Agreement entered into with certain purchasers in August 2020, which bears a fixed interest rate of 6.00% for five years.

6 unchanged sentences

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

FHLB advances decreased $9.5 million to $102.0 million as of June 30, 2022, compared to $111.5 million as of December 31, 2021.

FHLB advances decreased $9.0 million to $102.5 million as of September 30, 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 quarter ended June 30, 2022, $27.5 million of FHLB advances were called by the FHLB.

The remaining callable term notes are expected to be called in the third quarter of 2022.

The Bank added a $5 million advance maturing in the second quarter of 2023 and the Bank had $34 million of FHLB advances maturing overnight.

$27.5 million of FHLB advances were called by the FHLB in each of the quarters ended June 30, 2022, and September 30, 2022.

The Bank added a $5 million advance maturing in the second quarter of 2023 and the Bank had $67 million of FHLB advances maturing overnight as of September 30, 2022.

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 June 30, 2022, is approximately $190.4 million.

The Bank’s current unused borrowing capacity, supported by loan collateral as of September 30, 2022, is approximately $278.0 million.

The Bank maintains three unsecured federal funds purchased lines of credit with banking partners which total $75 million.

These lines bear interest at the lender banks announced daily federal funds rate, mature daily, and are revocable at the discretion of the lending institution.

There were no borrowings outstanding on these lines of credit as of September 30, 2022, or December 31, 2021.

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

At June 30, 2022, the Bank has pledged $920.8 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.

At September 30, 2022, the Bank has pledged $960.2 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 $164.7 million at June 30, 2022, compared to $170.9 million at December 31, 2021.

The decrease in stockholder’s equity was attributable to 1) the $12.4 million decrease in accumulated other comprehensive income due to an increase in unrealized loss on available for sale securities;

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.

These reductions to equity were partially offset by net income of $9.1 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.

Total stockholders’ equity was $163.3 million at September 30, 2022, compared to $170.9 million at December 31, 2021.

The decrease in stockholder’s equity was attributable to:

1) the $17.4 million decrease in accumulated other comprehensive (loss) income due to an increase in unrealized loss on available for sale securities;

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 71 thousand shares of the Company’s common stock, which reduced equity by $1.0 million.

These reductions to equity were largely offset by net income of $13.1 million, and amortization of restricted stock of $0.6 million.

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

Under this new share repurchase program, no shares were repurchased during the current quarter and approximately eighteen thousand shares were repurchased during the six months ended June 30, 2022.

Under this new share repurchase program, fifty-three thousand shares were repurchased during the current quarter and approximately seventy-one thousand shares were repurchased during the nine months ended September 30, 2022.

The Company is authorized to repurchase an additional 301 thousand shares under this July 2021 share repurchase program.

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

At June 30, 2022, our on-balance sheet liquidity ratio was 14.7%.

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 $101.2 million of our $153.5 million (65.9%) June 30, 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 June 30, 2022, the Bank had approximately $65.1 million of certificate of deposit accounts maturing in the second half of 2022, with a weighted average cost of approximately 0.67%.

At September 30, 2022, our on-balance sheet liquidity ratio was 13.6%.

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 $93.8 million of our $189.1 million (49.6%) September 30, 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.

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 June 30, 2022, we had approximately $230.6 million available under this arrangement, supported by loan collateral, as compared to $204.2 million at December 31, 2021.

As of September 30, 2022, we had approximately $278.0 million available under this arrangement, supported by loan collateral, as compared to $204.2 million at December 31, 2021.

We maintain a line of credit with the Federal Reserve Bank which has a $1.0 million capacity, based on our current pledged collateral position.

Additionally, we have $25.0 million of uncommitted federal funds purchased lines of credit, as well as a $5.0 million revolving line of credit which is available as needed for general liquidity purposes.

Additionally, we have a $5.0 million revolving line of credit which is available as needed for general liquidity purposes.

We have $75 million of federal fund purchase lines of credit from other banks at September 30, 2022.

These lines are unsecured and are revocable at the discretion of the lending institution.

In reviewing our adequacy of liquidity, we review and evaluate historical financial information, including information regarding general economic conditions, current ratios, management goals and the resources available to meet our anticipated liquidity needs.

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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 June 30, 2022, the Company had $257.5 million in unused commitments, compared to $271.0 million in unused commitments as of December 31, 2021.

As of September 30, 2022, the Company had $265.1 million in unused commitments, compared to $271.0 million in unused commitments as of December 31, 2021.

Capital Resources.

As of June 30, 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.

As of September 30, 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 June 30, 2022 (Unaudited)

As of September 30, 2022 (Unaudited)

Total capital (to risk weighted assets) $ 219,988 14.4 % $ 122,333 > = 8.0 % $ 152,916 > = 10.0 %

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

At June 30, 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.

At September 30, 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 June 30, 2022 (Unaudited)

As of September 30, 2022 (Unaudited)

Total capital (to risk weighted assets) $ 213,594 14.0 % $ 122,333 > = 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