What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2023-05-04 compared with 2022-11-07 · 349 added, 393 removed, 394 unchanged (65% 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 quarters ended March 31, 2022 and June 30, 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, 2022, filed with the SEC on March 7, 2023 (“2022 10-K”), and in Item 1A of this Form 10-Q, and the following:

• conditions in the financial markets and economic conditions generally;

• reputational risk, new legislation, regulations or policy changes as a result of recent volatility in the banking sector;

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

4 unchanged sentences

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

• the sufficiency of loan allowances;

• the sufficiency of the allowance for credit losses;

• changes in the fair value or ratings downgrades of our securities;

22 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 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.

The following discussion sets forth management’s discussion and analysis of our consolidated financial condition as of March 31, 2023, and our consolidated results of operations for the three months ended March 31, 2023, compared to the same periods in the prior fiscal year for the three months ended March 31, 2022.

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 2022 10-K.

6 unchanged sentences

In addition to the policies included in Note 1, “Nature of Business and Summary of Significant Accounting Policies,” to the Consolidated Financial Statements included as an exhibit in our annual report on our 2022 10-K, our critical accounting estimates are as follows:

Allowance for Loan Losses.

We maintain an allowance for loan losses to absorb probable and inherent losses in our loan portfolio.

The allowance is based on ongoing, quarterly assessments of the estimated probable incurred losses in our loan portfolio.

Allowance for Credit Losses

We adopted ASU 2016-13, Financial Instruments-Credit Losses (Topic 326), “Measurement of Credit Losses on Financial Instruments” through a cumulative-effect adjustment on January 1, 2023.

We have selected a loss estimation methodology, utilizing a third-party model.

See also Notes 1 and 3 to the unaudited consolidated financial statements for further discussion of our adoption of ASU 2016-13.

Allowance for Credit Losses – Held-to-Maturity Securities.

Currently, all of the Company’s held-to-maturity securities are backed by governments or government agencies, for which the risk of credit loss is minimal.

Accordingly, the Company does not record an allowance for credit losses on held-to-maturity securities.

Allowance for Credit Losses - Loans - We maintain an allowance for credit losses to absorb probable and inherent losses in our loan portfolio.

The allowance is based on ongoing, quarterly assessments of the estimated lifetime losses in our loan portfolio.

In evaluating the level of the allowance for loan loss, we consider the types of loans and the amount of loans in our loan portfolio, historical loss experience, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, prevailing economic conditions and other relevant factors determined by management.

We follow all applicable regulatory guidance, including the “Interagency Policy Statement on the Allowance for Loan and Lease Losses,” issued by the Federal Financial Institutions Examination Council (FFIEC).

We believe that the Bank’s Allowance for Loan Losses Policy conforms to all applicable regulatory requirements.

However, based on periodic examinations by regulators, the amount of the allowance for loan losses recorded during a particular period may be adjusted.

Our determination of the allowance for loan losses is based on (1) specific allowances for specifically identified and evaluated impaired loans and their corresponding estimated loss based on likelihood of default, payment history, and net realizable value of underlying collateral.

Specific allocations for collateral dependent loans are based on fair value of the underlying collateral relative to the unpaid principal balance of individually impaired loans.

We follow all applicable regulatory guidance, including the “Interagency Policy Statement on Allowances for Credit losses,” issued by the Office of the Comptroller of the Currency, Department of the Treasury, Federal Deposit Insurance Corporation, and National Credit Union Administration.

We believe that the Bank’s Allowance for Credit Losses Policy conforms to all applicable regulatory requirements.

However, based on periodic examinations by regulators, the amount of the allowance for credit losses recorded during a particular period may be adjusted.

Our determination of the allowance for credit losses - loans is based on (1) an individual allowance for specifically identified and evaluated loans that management has determined have unique risk characteristics.

For these loans the estimated loss is based on likelihood of default, payment history, and net realizable value of underlying collateral.

Specific allocations for collateral dependent loans are based on the fair value of the underlying collateral relative to the amortized cost of the loans.

For loans that are not collateral dependent, the specific allocation is based on the present value of expected future cash flows discounted at the loan’s original effective interest rate through the repayment period;

and (2) a general allowance on loans not specifically identified in (1) above, based on historical loss ratios, which are adjusted for qualitative and general economic factors.

We continue to refine our allowance for loan losses methodology, with an increased emphasis on historical performance adjusted for applicable economic and qualitative factors.

Assessing the allowance for loan losses is inherently subjective as it requires making material estimates, including the amount, and timing of future cash flows expected to be received on impaired loans, any of which estimates may be susceptible to significant change.

and (2) a collective allowance for loans not specifically identified in (1) above.

The allowance for these loans is estimated by pooling loans with a similar risk profile and calculating a collective loss rate using the pool’s risk drivers, historical loss experience, and reasonable and supportable future economic forecasts to project lifetime losses.

This collectively estimated loss is adjusted for qualitative factors.

Assessing the allowance for credit losses - loans is inherently subjective as it requires making material estimates, including the amount, and timing of future cash flows expected to be received on impaired loans, any of which estimates may be susceptible to significant change.

In our opinion, the allowance, when taken as a whole, reflects estimated probable loan losses in our loan portfolio.

We will adopt ASU 2016-13, Financial Instruments-Credit Losses (Topic 326), “Measurement of Credit Losses on Financial Instruments” through a cumulative-effect adjustment on January 1, 2023.

We have selected a loss estimation methodology, utilizing a third-party model, and are currently finalizing our process for model utilization.

The impact of adoption on our financial condition and results of operations cannot yet be definitively determined due to the sensitivity of the model to various inputs and changing economic forecasts.

Allowance for Credit Losses – Unfunded Commitments.

The Company estimates expected credit losses over the contractual period for which the Company is exposed to credit risk, via a contractual obligation to extend credit, unless the

obligation is unconditionally cancellable by the Company.

The allowance for credit losses - unfunded commitments on off-balance sheet exposures is included in other liabilities on the March 31, 2023, consolidated balance sheet.

We account for goodwill and other intangible assets in accordance with ASC Topic 350, “Intangibles - Goodwill and Other.” The Company records the excess of the cost of acquired entities over the fair value of identifiable tangible and intangible assets acquired, less liabilities assumed, as goodwill.

3 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 September 30, 2022, which is related to its banking activities.

The Company has one reporting unit as of March 31, 2023, 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, 2022.

The Company has monitored events and conditions since December 31, 2022, and has determined that no triggering event has occurred that would require goodwill to be tested for impairment.

Fair Value Measurements and Valuation Methodologies.

11 unchanged sentences

Amounts provided for income tax expenses are based on income reported for financial statement purposes and do not necessarily represent amounts currently payable under tax laws.

The amounts provided for income taxes is also impacted by the Company’s investment in a New Markets Tax Credit.

With the adoption of ASU 2023-02 on January 1, 2023, amortization of the investment will now be recognized in the period of and proportional to recognition of the related tax credit and included in provision for income taxes.

Deferred income tax assets and liabilities, which arise principally from temporary differences between the amounts reported in the financial statements and the tax basis of certain assets and liabilities, are included in the amounts provided for income taxes.

5 unchanged sentences

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

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

As of March 31, 2023, management does not believe a valuation allowance related to the realizability of its deferred tax assets is necessary.

STATEMENT OF OPERATIONS ANALYSIS

6 unchanged sentences

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, 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;

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

and 4) lower liability costs.

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;

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.

The narrative below discusses net interest income, interest rate spread, and net interest margin for the three-month periods ended March 31, 2023, and March 31, 2022, respectively.

Net interest income was $12.8 million for the three months ended March 31, 2023, compared to $13.2 million for the three months ended March 31, 2022.

Net interest income for the three months ended March 31, 2023, decreased from the same period one year ago due to:

1) higher deposit and borrowing balances and costs;

2) a reduction in the accretion on purchased loans;

and 3) a $0.3 million reduction in the accretion of deferred fees related to SBA Paycheck Protection Program (“SBA PPP”) loans.

This was partially offset by:

1) positive loan volume variance due to growth in loans outstanding and 2) increases in loan and investment yields due to both contractual repricing and higher coupons on new loans in excess of portfolio yield.

The net interest margin for the three-month period ended March 31, 2023, was 3.02%, compared to 3.25% for the three-month period ended March 31, 2022.

The net interest margin decrease was due to:

1) higher deposit costs due to strategic increases in deposit rates to maintain a strong deposit base and customers moving from lower cost savings and money market accounts to higher yielding certificate accounts;

2) a 6-basis point decrease in SBA PPP deferred loan fee accretion in loan yields;

and 3) a 5-basis point decrease in accretion on purchased loans.

This was partially offset by increases in loan and investment yields due to contractual repricings and rates on new loans and investments exceeding the portfolio as a whole.

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, 2022, and September 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-month periods ended March 31, 2023, and March 31, 2022.

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 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

Expense Average

Rate (1) Average

Balance Interest

Expense Average

Average interest earning assets:

Cash and cash equivalents $ 11,043 $ 60 2.16 % $ 111,192 $ 50 0.18 %

Loans 1,370,897 15,937 4.61 % 1,192,636 14,537 4.84 %

Interest-bearing deposits 1,079 7 2.57 % 1,512 8 2.10 %

Investment securities (1) 274,868 1,768 2.57 % 303,325 1,412 1.85 %

Other investments 14,910 187 4.98 % 14,961 168 4.46 %

Total interest earning assets (1) $ 1,672,797 $ 17,959 4.26 % $ 1,623,626 $ 16,175 3.95 %

Average interest-bearing liabilities:

Savings accounts $ 227,985 $ 204 0.36 % $ 216,304 $ 95 0.17 %

Demand deposits 413,033 575 0.55 % 392,080 280 0.28 %

Money market 331,469 519 0.62 % 276,582 193 0.28 %

CD’s 136,624 335 0.97 % 207,494 682 1.30 %

IRA’s 34,446 48 0.55 % 39,525 104 1.04 %

Total deposits $ 1,143,557 $ 1,681 0.58 % $ 1,131,985 $ 1,354 0.47 %

FHLB Advances and other borrowings 192,338 1,821 3.76 % 169,891 1,133 2.65 %

Total interest-bearing liabilities $ 1,335,895 $ 3,502 1.04 % $ 1,301,876 $ 2,487 0.76 %

Net interest income $ 14,457 $ 13,688

Interest rate spread 3.22 % 3.19 %

Net interest margin (1) 3.43 % 3.34 %

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

(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, 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)

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

Three months ended March 31, 2023 compared to the three months ended March 31, 2022:

Three months ended March 31, 2023

Three months ended March 31, 2022

Balance Interest

15 unchanged sentences

CD’s 255,567 1,438 2.28 % 189,185 540 1.16 %

IRA’s 35,729 175 0.65 % 40,119 355 1.18 %

Total deposits $ 1,165,081 $ 4,348 1.51 % $ 1,132,721 $ 1,068 0.38 %

6 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 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.

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, 2023, and March 31, 2022.

The FTE adjustment to net interest income included in the rate calculations totaled $0 and $1 thousand for the three months ended March 31, 2023, and March 31, 2022, respectively.

Rate/Volume Analysis.

3 unchanged sentences

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

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:

For the three months ended March 31, 2023, compared to the same period in 2022, the loan volume increased due to strong organic growth.

The increase in certificate volumes is due to CD growth, with some of this growth moving from money market accounts.

Investment securities volume decreases for the three months ended March 31, 2023, compared to the three months ended March 31, 2022, 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 September 30, 2022 compared to the three months ended September 30, 2021.

Increase (decrease) due to

Volume Rate Net

Interest income:

Cash and cash equivalents $ (270) $ 280 $ 10

Loans 2,099 (699) 1,400

Interest-bearing deposits (3) 2 (1)

Investment securities (144) 500 356

Other investments (1) 20 19

Total interest earning assets 1,681 103 1,784

Interest expense:

Savings accounts 5 104 109

Demand deposits 16 279 295

Money market accounts 44 282 326

CD’s (193) (154) (347)

IRA’s (12) (44) (56)

Total deposits (140) 467 327

FHLB Advances and other borrowings 163 525 688

Total interest bearing liabilities 23 992 1,015

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

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

Three months ended March 31, 2023 compared to the three months ended March 31, 2022.

Increase (decrease) due to

12 unchanged sentences

CD’s 228 670 898

IRA’s (35) (145) (180)

Total deposits 212 3,068 3,280

2 unchanged sentences

Net interest income $ 354 $ (726) $ (372)

Provision for Loan Losses.

We determine our provision for loan losses (“provision”) based on our desire to provide an adequate allowance for loan losses (“ALL”) to reflect probable and inherent credit losses in our loan portfolio.

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 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.

Provision for Credit Losses.

We determine our provision for credit losses (“provision”) based on our desire to provide an adequate allowance for credit losses (“ACL”) to reflect estimated lifetime losses in our loan portfolio and estimated losses on our unfunded commitments.

We use a third-party model to collectively evaluate and estimate the ACL on loans and unfunded commitments on a pooled basis.

The model pools loans and commitments with similar characteristics and calculates an estimated loss rate for the pool based on identified risk drivers.

These risk drivers vary with loan type.

Projections about future economic conditions and the effect they could have on future losses are inherent in the model.

Loans with uniquely identified circumstances and risks are individually evaluated.

Lifetime losses on these loans are estimated based on the loans’ individual characteristics.

Total provision for credit losses for the three months ended March 31, 2023, was $0.05 million, compared to no provision for the three months ended March 31, 2022.

The current year’s provision is primarily the result of growth in the loan portfolio, minimal net charge offs of $0.02 million, partially offset by reductions in special mention and substandard loans and a reduction in unfunded commitments.

Based on loan growth and changes in economic conditions, the provision would have been $0.35 million in the first quarter of 2023.

However, payments on criticized assets decreased computed reserves, reducing the provision.

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.

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.

In addition, a decline in the quality of our loan portfolio as a result of general economic conditions, factors affecting particular borrowers or our market areas, or otherwise, could all affect the adequacy of our ALL.

If there are significant charge-offs against the ALL, or we otherwise determine that the ALL is inadequate, we will need to record an additional provision in the future.

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

Management believes that the provision recorded for the current year’s 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 ACL.

If there are significant charge-offs against the ACL, or we otherwise determine that the ACL is inadequate, we will need to record an additional provision in the future.

Non-interest Income .

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

The following table reflects the various components of non-interest income for the three- month periods ended March 31, 2023 and 2022, respectively.

Three months ended March 31,

2023 2022 % Change

Non-interest Income:

4 unchanged sentences

Loan fees and service charges 80 92 (13.04) %

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

Net gains (losses) on investment securities 56 (37) N/M

Other 253 198 27.78 %

Total non-interest income $ 2,292 $ 2,713 (15.52) %

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 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.

Loan servicing income decreased due to reduced capitalization of mortgage servicing rights resulting from lower mortgage loan origination volume in the three-month period ended March 31, 2023, compared to the same prior year period, along with lower mortgage servicing income due to servicing a smaller portfolio.

Gain on sale of loans decreased in the current three-month period ended March 31, 2023, compared to the three months ended March 31, 2022, due to lower mortgage loan origination volumes.

The change in net gains (losses) on investment securities between the three months ended March 31, 2023, and the three months ended March 31, 2022, is primarily due to the change in valuations of equity securities.

There were no sales of securities in either 2023 or 2022.

Non-interest Expense.

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

The following table reflects the various components of non-interest expense for the three-month periods ended March 31, 2023 and 2022, respectively.

Three months ended March 31,

2023 2022 % Change

Non-interest Expense:

3 unchanged sentences

Amortization of intangible assets 204 399 (48.87) %

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

Mortgage servicing rights expense, net 158 (327) N/M

Advertising, marketing and public relations 136 212 (35.85) %

2 unchanged sentences

Gains on repossessed assets, net (29) (7) (314.29) %

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

New market tax credit depletion — 163 N/M

Other 725 647 12.06 %

1 unchanged sentence

Non-interest expense (annualized) / Average assets 2.25 % 2.24 % 0.45 %

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.

Data processing expense for the three months ended March 31, 2023, increased from the three months ended March 31, 2022, due to larger asset size and the impact of inflationary cost increases.

Amortization of intangible assets for three months ended March 31, 2023, decreased from the three months ended March 31, 2022, as intangible assets related to certain acquisitions have been fully amortized.

Mortgage servicing rights expense, net increased for the three months ended March 31, 2023, compared to the comparable prior year period.

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 $566 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.

Advertising, marketing and public relations expense decreased for the three months ended March 31, 2023, compared to the prior year period, while yearly expenses are expected to be approximately equal.

The timing of related spending will be more heavily weighted in the last three quarters of 2023 than it was in 2022.

The FDIC insurance premium increased for the three-month period ended March 31, 2023, from the comparable prior year period due to an increase in the FDIC assessment rate.

This was partially offset by 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 March 31, 2023, from the comparable prior year period due to an increase in the use of outside professionals as projects needing outside professionals increased.

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 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.

Based on accounting guidance at the time of investment, the related non-tax-deductible asset depletion would have occurred over a 5-year period in lockstep with the recognition of the tax credit.

In March of 2023, FASB issued ASU 2023-02, which allows for proportional amortization of tax credit investments that meet certain criteria.

We have determined that our New Market Tax Credit investment meets the criteria of ASU 2023-02 and have chosen to early adopt using the modified retrospective approach as of January 1, 2023.

Under ASU 2023-02, the amortization of the investment is now included in income tax expense.

The increase in other expenses during the three months ended March 31, 2023, from the comparable prior year period is largely related to costs related to expenses to support new products and product expansion.

Income Taxes.

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.

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

Income tax expense was $1.3 million for the three months ended March 31, 2023, compared to $1.5 million for the three months ended March 31, 2022.

The effective tax rate was 25.5% for the three-month period ended March 31, 2023, compared to 24.2% for the comparable prior year period.

The higher effective tax rate is due to the impact of the New Market Tax Credit investment depletion, now being included in income tax expense, partially offset by the impact of lower pre-tax income.

BALANCE SHEET ANALYSIS

Cash and Cash Equivalents.

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.

Our cash balances increased $29.7 million to $65.1 million compared to $35.4 million at December 31, 2022, as we increased our interest-bearing cash deposits at the Federal Reserve by $30 million at March 31, 2023.

Investment Securities.

1 unchanged sentence

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 $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 $18.4 million in the first three quarters of 2022, to $20.4 million.

Securities available for sale, which represent the majority of our investment portfolio, were $173.4 million at March 31, 2023, compared with $166.0 million at December 31, 2022.

The increase in the available for sale portfolio is primarily due to the purchase of $11 million, primarily floating-rate SBA backed pass-through securities, and a reduction in the unrealized loss of $1.5 million arising during the period, partially offset by principal repayments.

Securities held to maturity decreased to $95.3 million at March 31, 2023, compared to $96.4 million at December 31, 2022.

This decrease was due to principal repayments.

The unrealized loss on the held to maturity portfolio decreased by $1.5 million in the first quarter of 2023, to $18.1 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

September 30, 2022

March 31, 2023

government agency obligations $ 25,213 $ 25,182

5 unchanged sentences

government agency obligations $ 18,373 $ 18,313

Obligations of states and political subdivisions 140 140

Mortgage-backed securities 97,458 78,610

4 unchanged sentences

Held to maturity securities Amortized

September 30, 2022

March 31, 2023

Obligations of states and political subdivisions $ 600 $ 555

6 unchanged sentences

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

September 30, 2022 December 31, 2021

March 31, 2023 December 31, 2022

Available for sale securities Amortized

8 unchanged sentences

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

September 30, 2022 December 31, 2021

March 31, 2023 December 31, 2022

Held to maturity securities Amortized

1 unchanged sentence

government agency $ 94,701 $ 76,628 $ 95,779 $ 76,233

AA — — 4,000 4,000

A 600 555 600 546

Total $ 95,301 $ 77,183 $ 96,379 $ 76,779

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.

At March 31, 2023, the Bank has pledged mortgage-backed securities with a carrying value of $30.4 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 March 31, 2023, the Bank has pledged U.S.

Government Agency securities with a carrying value of $2.2 million and mortgage-backed securities with a carrying value of $2.1 million as collateral against specific municipal deposits.

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.

As of March 31, 2023, the Bank also has mortgage-backed securities with a carrying value of $0.1 million pledged as collateral to the Federal Home Loan Bank of Des Moines.

At December 31, 2022, the Bank has pledged certain of its mortgage-backed securities with a carrying value of $5.4 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, 2022, the Bank also has mortgage-backed securities with a carrying value of $0.1 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 $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 September 30, 2022, and December 31, 2021:

September 30, 2022 December 31, 2021

Total loans outstanding, net of deferred loan fees and costs and unamortized discount on acquired loans, increased by $9.2 million, to $1.42 billion as of March 31, 2023, from $1.41 billion at December 31, 2022.

The following table reflects the composition, of our loan portfolio at March 31, 2023, and December 31, 2022:

March 31, 2023 December 31, 2022

Amount Percent Amount Percent

17 unchanged sentences

Total C&I/Agricultural operating and Consumer installment Loans 171,131 12.1 % 182,205 12.8 %

Gross loans before C&I SBA PPP loans 1,380,399 100.4 % 1,308,290 99.8 %

SBA PPP loans — — % 8,755 0.7 %

Gross loans $ 1,425,159 100.3 % $ 1,416,135 100.3 %

2 unchanged sentences

Total loans (net of unearned income and deferred expense) 1,420,955 100.0 % 1,411,784 100.0 %

Allowance for loan losses (17,442) (16,913)

Allowance for credit losses (22,679) (17,939)

Total loans receivable, net $ 1,398,276 $ 1,393,845

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

2020 Originations 2021 Originations Total

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

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

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

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

Allowance for Loan Losses.

The loan portfolio is our primary asset subject to credit risk.

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 provision for loan losses.

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

We attempt to control, monitor, and minimize credit risk through the use of prudent lending standards, a thorough review of potential borrowers prior to lending and ongoing and timely review of payment performance.

Asset quality administration, including early identification of loans performing in a substandard manner, as well as timely and active resolution of problems, further enhances management of credit risk and minimization of loan losses.

Any losses that occur and that are charged off against the ALL are periodically reviewed with specific efforts focused on achieving maximum recovery of both principal and interest.

At least quarterly, we review the adequacy of the ALL.

Based on an estimate computed pursuant to the requirements of ASC 450-10, “Accounting for Contingencies” and ASC 310-10, “Accounting by Creditors for Impairment of a Loan”, the analysis of the ALL consists of three components:

(i) specific credit allocation established for expected losses relating to specific impaired loans for which the recorded investment in the loan exceeds its fair value;

(ii) general portfolio allocation based on historical loan loss experience for significant loan categories;

and (iii) general portfolio allocation based on qualitative factors such as economic conditions and other relevant factors specific to the markets in which we operate.

We continue to refine our ALL methodology by introducing a greater level of granularity to our loan portfolio.

We currently segregate loans into pools based on common risk characteristics for purposes of determining the ALL.

The additional segmentation of the portfolio is intended to provide a more effective basis for the determination of qualitative factors affecting our ALL.

In addition, management continually evaluates our ALL methodology to assess whether modifications in our methodology are appropriate in light of underwriting practices, market conditions, identifiable trends, regulatory pronouncements or other factors.

We believe that any modifications or changes to the ALL methodology would be to enhance the ALL.

However, any such modifications could result in materially different ALL levels in future periods.

The specific credit allocation for the ALL is based on a regular analysis of all loans that are considered impaired.

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, 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;

and (3) $14.1 million of substandard non-TDR, non-PCI loans.

The $29.7 million total of loans individually evaluated for impairment includes $6.9 million of performing TDR loans.

At December 31, 2021, the Company individually evaluated loans for impairment with a recorded investment of $31.7 million, consisting of (1) $11.2 million PCI loans, with a carrying amount of $10.6 million;

(2) $9.9 million TDR loans, net of TDR PCI loans;

and (3) $11.3 million of substandard non-TDR, non-PCI loans.

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

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 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

Allowance for Credit Losses.

The allowance for credit losses (“ACL”) is is a valuation allowance for current expected credit losses in the Company’s loan portfolio as of the balance sheet date.

In determining the allowance, the company estimates credit losses over the loan’s entire contractual term, adjusted for expected prepayments when appropriate.

The allowance estimate considers qualitative and quantitative relevant information from internal and external sources relating to historical loss experience;

known and inherent risks in our portfolio;

information about specific borrowers’ ability to repay;

estimated collateral values;

current economic conditions;

reasonable and supportable forecasts for future conditions;

and other relevant factors determined by management.

To ensure that the ACL is maintained at an adequate level, a detailed analysis is performed on a quarterly basis and an appropriate provision is made to adjust the allowance.

The entire ACL balance is available for any loan that, in management’s judgment, should be charged off.

The determination of the ACL requires significant judgement to estimate credit losses.

The ACL on loans is measured collectively on a pooled basis when similar risk characteristics exist, and on an individual basis when management determines that the loan does not share similar risk characteristics with other loans.

The ACL on loans collectively evaluated is measured using the loss rate model.

The Company categorizes its loan portfolio into four segments based on similar risk characteristics.

Loans within each segment are pooled based on individual loan characteristics.

Aggregated risk drivers are then calculated at a pool level.

Risk drivers are identified attributes that have proven to be predictive of loan loss rates and vary based on loan segment and type.

A loss rate is calculated and applied to the pool utilizing a model that combines the pool’s risk drivers, historical loss experience, and reasonable and supportable future economic forecasts to project lifetime losses.

The loss rate is then combined with the loan’s balance and contractual maturity, adjusted for expected prepayments, to determine expected future losses.

Future and supportable economic forecasts are based on national economic conditions and their reversion to the mean is implicit in the model and generally occurs over a period of two years.

Qualitative adjustments are made to the allowance calculated on collectively evaluated loans to incorporate factors not included in the model.

Qualitative factors include but are not limited to, lending policies and procedures, the experience and ability of lending and other staff, the volume and severity of problem credits, quality of the loan review system, and other external factors.

Loans that exhibit different risk characteristics from the pool are individually evaluated for impairment.

Loans can be identified for individual evaluation for a variety of reasons including delinquency, nonaccrual status, risk rating and loan modification.

Accruing loans that exhibit different risk characteristics from their pool may also be within scope.

On these loans, an allowance may be established so that the loan is reported, net, at the lower of (a) its amortized cost;

(b) the present value of the loan’s estimated future cash flows using the loan’s existing rate;

or (c) at the fair value of any loan collateral, less estimated disposal costs, if the loan is collateral dependent.

Collateral dependency is determined using the practical expedient when:

1) the borrower is experiencing financial difficulty;

and 2) repayment is expected to be provided substantially through the sale or operation of the collateral.

In addition, various regulatory agencies periodically review the ACL.

These agencies may require the company to make additions to the ACL or may require that certain loan balances be charged off or downgraded into classified loan categories when the agencies’s evaluation differs from management’s evaluation based on their judgments of collectability from the information available to them at the time of examination.

On January 1, 2023, the Company adopted Accounting Standards Update (“ASU”) 2016-13, Financial Instruments using the modified retrospective method.

This adoption resulted in a $4.7 million increase in the ACL on loans (“ACL - Loans”) and established a $1.5 million ACL on unfunded commitments (“ACL - Unfunded Commitments”).

The increase in transition ACL is primarily due to the interaction of change from an incurred loss model to a lifetime loss model and the duration of our portfolio.

Since transition, the ACL- Loans modestly increased $0.03 million to $22.7 million at March 31, 2023, representing 1.60% of loans receivable.

The allowance for loan losses, prior to the ASU 2016-13 transition, was $17.9 million at December 31, 2022, representing 1.27% of loans receivable.

The increase in the ACL - Loans, was due to a provision of $0.06 million, partially offset by net loan charge-offs.

The ACL - Unfunded Commitments, established under ASU 2016-13, was $1.5 million at March 31, 2023.

During the three months ended March 31, 2023, the ACL - Unfunded Commitments decreased $0.01 million due to a reduction in commitments.

Allowance for Credit Losses - Loans Roll Forward

(in thousands, except ratios)

September 30,

March 31, 2023 and Three Months Ended December 31, 2022 and Three Months Ended March 31, 2022 and Three Months Ended

Allowance for Credit Losses (“ACL”)

ACL - Loans, at beginning of period $ 17,939 $ 17,217 $ 16,913

Cumulative effect of ASU 2016-13 adoption 4,706 — —

Loans charged off:

Commercial/Agricultural real estate (32) — (35)

C&I/Agricultural operating — (36) (63)

Residential mortgage (14) — (12)

Consumer installment (11) (14) (9)

Total loans charged off (57) (50) (119)

Recoveries of loans previously charged off:

Commercial/Agricultural real estate 3 62 3

C&I/Agricultural operating 15 8 10

Residential mortgage 4 — 1

Consumer installment 12 2 10

Total recoveries of loans previously charged off:

Net loans charged off (“NCOs”) (23) 22 (95)

Additions to ACL - Loans via provision for credit losses charged to operations 57 700 —

ACL - Loans, at end of period $ 22,679 $ 17,939 $ 16,818

Average outstanding loan balance $ 1,421,096 $ 1,399,244 $ 1,304,141

NCOs (annualized) to average loans 0.01 % (0.01) % 0.03 %

Allowance for Credit Losses - Loans Activity by Segment

(in thousands, except ratios)

Commercial/Agricultural Real Estate C&I/Agricultural operating Residential Mortgage Consumer Installment Unallocated Total

Three months ended March 31, 2023

Allowance for Credit Losses - Loans:

ACL - Loans, at beginning of period $ 14,085 $ 2,318 $ 599 $ 129 $ 808 $ 17,939

Cumulative effect of ASU 2016-13 adoption 4,510 (331) 1,119 216 (808) 4,706

Charge-offs (32) — (14) (11) — (57)

Recoveries 3 15 4 12 — 34

Additions to ACL - Loans via provision for credit losses charged to operations (70) (154) 292 (11) — 57

ACL - Loans, at end of period $ 18,496 $ 1,848 $ 2,000 $ 335 $ — $ 22,679

Allowance for Credit Losses - Loans to Percentage

(in thousands, except ratios)

2023 December 31,

Loans, end of period $ 1,420,955 $ 1,411,784

SBA PPP loans, net of deferred fees — (8,457)

Loans, net of SBA PPP loans and deferred fees $ 1,375,876 $ 1,302,506

Allowance for loan losses $ 17,217 $ 16,913

ALL to loans net of SBA PPP loans and deferred fees 1.25 % 1.30 %

ALL to loans, end of period 1.25 % 1.29 %

All of the nine factors identified in the FFIEC’s Interagency Policy Statement on the Allowance for Loan and Lease Losses are taken into account in determining the ALL.

The impact of the factors in general categories are subject to change;

thus, the allocations are management’s estimate of the loan loss categories in which the probable and inherent loss has occurred as of the date of our assessment.

Of the nine factors, we believe the following have the greatest impact on our customers’ ability to repay loans and our ability to recover potential losses through collateral sales:

(1) lending policies and procedures;

(2) economic and business conditions;

and (3) the value of the underlying collateral.

As loan balances and estimated losses in a particular loan type decrease or increase and as the factors and resulting allocations are monitored by management, changes in the risk profile of the various parts of the loan portfolio may be reflected in the allocated allowance.

The general component covers non-impaired loans and is based on historical loss experience adjusted for these and other qualitative factors.

In addition, management continues to refine the ALL estimation process as new information becomes available.

These refinements could also cause increases or decreases in the ALL.

See Provision for loan losses in the Consolidated Statements of Operations (unaudited) for further details.

The unallocated portion of the ALL is intended to account for imprecision in the estimation process or relevant current information that may not have been considered in the process.

ACL - Loans $ 22,679 $ 17,939

ACL - Loans to loans, end of period 1.60 % 1.27 %

Allowance for Credit Losses - Unfunded Commitments:

(in thousands)

In addition to the ACL - Loans, the Company has established an ACL - Unfunded Commitments of $1,530 at March 31, 2023 and $0 at December 31, 2022, classified in other liabilities on the consolidated balance sheets.

March 31, 2023 and Three Months Ended December 31, 2022 and Three Months Ended

ACL - Unfunded commitments - beginning of period $ — $ —

Cumulative effect of ASU 2016-13 adoption 1,537 —

Reductions to ACL - Unfunded commitments via provision for credit losses charged to operations (7) —

ACL - Unfunded commitments - end of period $ 1,530 $ —

Nonperforming Loans, Potential Problem Loans and Foreclosed Properties.

8 unchanged sentences

If collection is in doubt, cash receipts on non-accrual loans are used to reduce principal rather than being recorded as interest income.

A TDR typically involves the granting of some concession to the borrower involving a loan modification, such as modifying the payment schedule or making interest rate changes.

TDR loans may involve loans that have had a charge-off taken against the loan to reduce the carrying amount of the loan to fair market value as determined pursuant to ASC 310-10.

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

The Company adopted ASU 2022-02 on January 1, 2023, which eliminated special accounting rules for TDRs.

Prior to the elimination of the special accounting rules, TDR loans were accounted for under ASC 310-40.

A TDR typically involved the granting of some concession to the borrower involving a loan modification, such as modifying the payment schedule or making interest rate changes.

TDR loans may have involved loans that had a charge-off taken against the loan to reduce the carrying amount of the loan to fair market value as determined pursuant to ASC 310-10.

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 ACL for the periods then ended:

March 31, 2023 and Three Months Then Ended (1) December 31, 2022 and Twelve Months Then Ended (2)

Nonperforming assets:

13 unchanged sentences

Total nonperforming assets (“NPAs”) $ 11,747 $ 12,721

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

Accruing TDRs $ 6,910 $ 7,984

Nonaccrual TDRs $ 2,426 $ 4,539

Average outstanding loan balance $ 1,421,096 $ 1,351,052

1 unchanged sentence

Total assets, end of period $ 1,860,720 $ 1,816,386

ALL, at beginning of period $ 16,913 $ 17,043

ACL - Loans, at beginning of period $ 17,939 $ 16,913

Cumulative effect of ASU 2016-13 adoption 4,706 —

Loans charged off:

11 unchanged sentences

Net loans charged off (“NCOs”) (23) (449)

Additions to ALL via provision for loan losses charged to operations 775 —

ALL, at end of period $ 17,217 $ 16,913

Additions to ACL - loans via provision for credit losses charged to operations 57 1,475

ACL - Loans, at end of period $ 22,679 $ 17,939

ALL to NCOs (annualized) 24,313.40 % 3,995.32 %

3 unchanged sentences

NPAs to total assets 0.63 % 0.70 %

The following table shows the detail of non-performing assets by originated and acquired portfolios:

Nonperforming Originated / Acquired Assets

(in thousands, except ratios)

September 30, 2022 December 31, 2021

Nonperforming assets:

Originated nonperforming assets:

Nonaccrual loans $ 8,294 $ 6,448

Accruing loans past due 90 days or more 169 63

Total originated nonperforming loans (“NPL”) 8,463 6,511

Other real estate owned (“OREO”) — —

Other collateral owned — 2

Total originated nonperforming assets (“NPAs”) $ 8,463 $ 6,513

Acquired nonperforming assets:

Nonaccrual loans $ 2,478 $ 5,217

Accruing loans past due 90 days or more 79 97

Total acquired nonperforming loans (“NPL”) 2,557 5,314

Other real estate owned (“OREO”) 1,584 1,406

Other collateral owned — —

Total acquired nonperforming assets (“NPAs”) $ 4,141 $ 6,720

Total nonperforming assets (“NPAs”) $ 12,604 $ 13,233

Loans, end of period $ 1,375,876 $ 1,310,963

Total assets, end of period $ 1,780,202 $ 1,739,628

Originated NPLs to total loans 0.61 % 0.50 %

Acquired NPLs to total loans 0.19 % 0.41 %

Originated NPAs to total assets 0.48 % 0.37 %

Acquired NPAs to total assets 0.23 % 0.39 %

(1) Loan balances are stated at amortized cost.

(2) Loan balances are stated at the unpaid principal balance of the loan.

Nonaccrual Loans Roll Forward:

Quarter Ended

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

March 31, 2023 December 31, 2022 September 30, 2022 June 30,

2022 March 31, 2022

Balance, beginning of period $ 11,204 $ 10,772 $ 10,434 $ 11,858 $ 11,665

8 unchanged sentences

Balance, end of period $ 10,410 $ 11,204 $ 10,772 $ 10,434 $ 11,858

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 $2.4 million at September 30, 2022, from $4.5 million at December 31, 2021.

September 30, 2022 December 31, 2021

Modifications Recorded

Investment Number of

Nonaccrual loans decreased by $0.7 million at March 31, 2023, from $11.2 million December 31, 2022.

As seen above, this is largely due to payments received with only modest new additions.

Nonperforming assets decreased to $11.7 million or 0.63% of total assets at March 31, 2023, compared to $12.7 million, or 0.70% of total assets at December 31, 2022.

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

Below is a summary of loan modifications made to borrowers experiencing financial difficulty during the three months ended March 31, 2023.

Term Extension

Loan Class Amortized Cost Basis at

March 31, 2023 % of Total Class of Financing Receivables

Commercial real estate $ 5,359 0.74 %

Commercial and industrial $ 25 0.02 %

Residential mortgage $ 38 0.03 %

Other-Than-Insignificant Payment Delay

Loan Class Amortized Cost Basis at

March 31, 2023 % of Total Class of Financing Receivables

Other consumer $ 22 0.33 %

Included in the nonaccrual loans roll forward table above, for periods prior to the January 1, 2023 adoption of ASU 2022-02 are nonaccrual TDR loans.

Nonaccrual TDR loans were $2.6 million at December 31, 2022.

December 31, 2022

Modifications Recorded

6 unchanged sentences

Total loans 51 $ 5,171

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.

Accruing troubled debt restructurings were $5.2 million at December 31, 2022.

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.

One is a commercial real estate loan 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.

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.

The loan was categorized as special mention at June 30, 2022, and was paid off in the first quarter of 2023.

The decrease in substandard loan balances from December 31, 2022 is due to a decrease in non-performing loans along with the receipt of payments.

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

In addition to our discussion of criticized, special mention, and substandard loans above, we are disclosing the following information about our loans to certain industries.

As of March 31, 2023, hotel loans totaled $92 million with a weighted average LTV of 56% and average size of $3.4 million.

Restaurant loans totaled $48 million, at March 31, 2023.

The weighted-average LTV percentage on these restaurant loans was 54% and the average loan size was $689 thousand.

Approximately $35.0 million of restaurant loans are to franchise quick-service restaurants.

At March 31, 2023 we have $45 million of office loans with a weighted average LTV of 65% and average loan size of $626 thousand.

The office properties are not located in large cities.

(in thousands)

(Loan balance at unpaid principal balance) March 31,

2023 December 31,

2022 September 30,

1 unchanged sentence

2022 March 31,

2022 December 31,

2021 September 30,

Special mention loan balances $ 6,636 $ 12,170 $ 20,178 $ 17,274 $ 1,849

1 unchanged sentence

Criticized loans, end of period $ 22,075 $ 29,489 $ 40,405 $ 37,954 $ 26,671

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.

Performance year to date and bookings show good progress.

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

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

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 $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 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.

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 $1.21 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 approximately $100 thousand per year;

however, large balance payoffs, as seen in 2022, 2021 and 2020, would accelerate this accretion.

Fiscal years ending December 31, Purchase Accounting Accretable Difference

Mortgage Servicing Rights.

7 unchanged sentences

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 $5.8 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

The fair market value of the Company’s MSR asset decreased from $5.7 million at December 31, 2022, to $5.5 million at March 31, 2023, primarily due to a reduction in size of the servicing portfolio as principal repayments exceeded new servicing rights.

At March 31, 2023 and December 31, 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 March 31, 2023, and December 31, 2022, were $513.8 million and $523.7 million, respectively.

The fair market value of the Company’s MSR asset as a percentage of its servicing portfolio at March 31, 2023 and December 31, 2022, was 1.07% and 1.08%, respectively.

From a month-end perspective, deposits remained stable.

From March 7, 2023 to March 31, 2023, a period closely monitored for unusual withdrawal activity, balances remained stable.

Deposit composition changed during the quarter ended March 31, 2023, as both business and retail depositors sought higher yields on deposit accounts.

For the quarter, retail deposits remained stable, with customers returning to higher yielding certificates with money moving from money market and savings accounts to certificate accounts.

In January 2023, commercial non-interest bearing deposits fell as commercial customers decreased their cash balances to support the needs of their businesses.

Modest brokered deposit growth supplemented deposit growth, with $10 million of brokered money market growth and $14.5 million of brokered certificate growth.

Consumer, commercial and government deposits have been stable since January 31, 2023 and since the two large coastal bank failures in early March.

There are no material customer or industry concentrations.

A decrease in deposits during January occurred as commercial customers decreased their cash balances to support the needs of their businesses.

March 31, 2023 February 28, 2023 January 31, 2023 December 31, 2022

Consumer deposits $ 786,614 $ 784,162 $ 779,476 $ 805,598

Commercial deposits 391,534 388,770 385,071 405,733

Public deposits 194,683 193,213 195,115 173,548

Brokered deposits 63,962 53,963 39,841 39,841

Total deposits $ 1,436,793 $ 1,420,108 $ 1,399,503 $ 1,424,720

At March 31, 2023 our deposit portfolio composition was 55% consumer, 27% commercial, 14% public and 4% brokered deposits.

At December 31, 2022 our deposit portfolio composition was 57% consumer, 28% commercial, 12% public and 3% brokered deposits.

March 31, 2023 December 31, 2022

Non-interest bearing demand deposits $ 247,735 $ 284,722

4 unchanged sentences

Total deposits $ 1,436,793 $ 1,424,720

Uninsured and uncollateralized deposits were $252.7 million, or 18% of total deposits, at March 31, 2023 and $298.8 million, or 21% of total deposits, at December 31, 2022.

Uninsured deposits at March 31, 2023 were $413.5 million, or 29% of total deposits, and $441.2 million, or 31% of total deposits at December 31, 2022, with the difference from the above sentence being fully secured government deposits.

On-balance sheet liquidity, collateralized borrowing and uncommitted federal funds availability was $517.4 million, or 205% of uninsured and uncollateralized deposits at March 31, 2023.

At December 31, 2022 on-balance sheet liquidity, collateralized borrowing and uncommitted federal funds availability was $570.0 million, or 191% of uninsured and uncollateralized deposits.

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, 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

A summary of Federal Home Loan Bank (FHLB) advances and other borrowings at March 31, 2023 and December 31, 2022 is as follows:

March 31, 2023 December 31, 2022

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

Federal Home Loan Bank advances (1), (2), (3) 2023 $ 157,000 1.43 % 4.92 % 2023 $ 117,000 1.43 % 4.31 %

1 unchanged sentence

2025 5,000 1.45 % 1.45 % 2025 5,000 1.45 % 1.45 %

2025 5,000 1.45 % 1.45 % 5,000 1.45 % 1.45 %

2029 — — % — % 42,500 1.00 % 1.13 %

2030 — — % — % 12,500 0.52 % 0.86 %

Subtotal 102,530 111,530

Unamortized discount on acquired notes — (3)

Federal Home Loan Bank advances, net $ 102,530 $ 111,527

Federal Home Loan Bank advances $ 182,530 $ 142,530

Senior Notes (4) 2034 $ 18,083 6.75 % 7.25 % 2034 $ 23,250 3.00 % 6.75 %

2 unchanged sentences

$ 50,000 $ 50,000

$ 50,000 $ 30,000

Unamortized debt issuance costs (783) (841)

1 unchanged sentence

Totals $ 249,830 $ 214,939

(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.

(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 $1,017,535 and $984,878 at March 31, 2023 and December 31, 2022, respectively.

At March 31, 2023, the Bank’s available and unused portion under the FHLB borrowing arrangement was approximately $213,372 compared to $256,773 as of December 31, 2022.

(2) Maximum month-end borrowed amounts outstanding under this borrowing agreement were $182,530 and $157,530, during the three months ended March 31, 2023 and the twelve months ended December 31, 2022, respectively.

(3) The weighted-average interest rate on FHLB borrowings maturing within twelve months as of March 31, 2023 and December 31, 2022 were 4.55% and 4.09%, respectively.

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

(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.

(a) A term note, which was subsequently refinanced in March 2022 and modified in February of 2023, requiring quarterly interest-only payments through March 2027, 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%.

1 unchanged sentence

(5) Subordinated notes resulted from the following:

(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.

(a) 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.

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.

1 unchanged sentence

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

(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.

(b) 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.

1 unchanged sentence

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

FHLB advances decreased $9.0 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.

$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.

FHLB advances increased $40.0 million to $182.5 million as of March 31, 2023, compared to $142.5 million as of December 31, 2022.

The increase is due to loan growth, as well as the Bank’s desire to manage it’s liquidity and increase cash on hand in response to recent events.

The Bank had $47 million of FHLB advances maturing overnight as of March 31, 2023.

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, 2022, is approximately $278.0 million.

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

The Bank’s current unused borrowing capacity, supported by loan collateral as of March 31, 2023, is approximately $213.4 million.

At March 31, 2023 and December 31 2022, the Bank had the ability to borrow $19.9 million and $4.1 million from the Federal Reserve Bank of Minneapolis.

The ability to borrow is based on mortgage-backed securities pledged with a carrying value of $30.4 million and $5.4 million as of March 31, 2023 and December 31, 2022, respectively.

There were no Federal Reserve borrowings outstanding on these as of March 31, 2023 or December 31, 2022.

In addition, The Bank has been approved to obtain funding from the Federal Reserve’s new Bank Term Funding Program (“BTFP”).

As of March 31, 2023, the Bank has not borrowed from this facility and has not pledged any collateral to this facility.

The Bank maintains two unsecured federal funds purchased lines of credit with banking partners which total $30 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.

There were no borrowings outstanding on these lines of credit as of March 31, 2023, or December 31, 2022.

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

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

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.

At March 31, 2023, the Bank has pledged $1.02 billion of loans to secure the current FHLB outstanding advances and letters of credit and to provide the unused borrowing capacity, compared to $0.98 billion of loans pledged at December 31, 2022.

Stockholders’ Equity.

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

Total stockholders’ equity was $164.6 million at March 31, 2023, compared to $167.1 million at December 31, 2022.

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.

1) the $4.4 million cumulative effect adjustment from the adoption of ASU 2016-13;

and 2) the payment of the annual cash dividend paid in February to common stockholders of $0.29 per share or $3.0 million.

These reductions to equity were partially offset by:

1) net income of $3.7 million;

2) a reduction in the unrealized loss on available for sale securities of $1.1 million;

and 3) the $0.1 million cumulative effect adjustment from the adoption of ASU 2023-02.

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

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.

No shares were repurchased under this program in the first quarter of 2023.

The Company is authorized to repurchase an additional 243 thousand shares under this July 2021 share repurchase program.

Liquidity and Asset / Liability Management .

Our primary sources of funds are deposits;

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

and borrowings.

We use our sources of funds primarily to meet ongoing commitments, to pay non-renewing, maturing certificates of deposit and savings withdrawals, and to fund loan commitments.

We have enhanced our liquidity monitoring and updated what we consider to be sources of on-balance sheet cash.

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

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.

Liquidity management refers to our ability to ensure cash is available in a timely manner to meet loan demand, depositors’ needs, and meet other financial obligations as they become due without undue cost, risk, or disruption to normal operating activities.

We manage and monitor our short-term and long-term liquidity positions and needs through a regular review of maturity profiles, funding sources, and loan and deposit forecasts to minimize funding risk.

A key metric we monitor is our liquidity ratio, calculated as cash and securities portfolio divided by total assets.

At March 31, 2023, our liquidity ratio increased to 13.7% percent from 13.0% at December 31, 2022.

This was largely due to an increase in interest-bearing cash.

Consumer, commercial and government deposits have been stable since January 31, 2023 and since the two large coastal bank failures in early March.

There are no material customer or industry concentrations.

A decrease in deposits during January occurred as commercial customers decreased their cash balances to support the needs of their businesses.

At March 31, 2023 our deposit portfolio composition was 55% consumer, 27% commercial, 14% public and 4% brokered deposits.

At December 31, 2022 our deposit portfolio composition was 57% consumer, 28% commercial, 12% public and 3% brokered deposits.

Uninsured and uncollateralized deposits were $252.7 million, or 18% of total deposits, at March 31, 2023 and $298.8 million, or 21% of total deposits, at December 31, 2022.

Uninsured deposits alone at March 31, 2023 were $413.5 million, or 29% of total deposits, and $441.2 million, or 31% of total deposits at December 31, 2022, with the difference being fully secured government deposits.

On-balance sheet liquidity, collateralized borrowing and uncommitted federal funds availability was $517.4 million, or 205% of uninsured and uncollateralized deposits at March 31, 2023.

At December 31, 2022 on-balance sheet liquidity, collateralized borrowing and uncommitted federal funds availability was $570.0 million, or 191% of uninsured and uncollateralized deposits.

Our primary sources of funds are deposits, amortization, prepayments and maturities on the investment and loan portfolios and funds provided from operations.

We use our sources of funds primarily to meet ongoing commitments, to pay maturing certificates of deposit and savings withdrawals, and to fund loan commitments.

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 greatly influenced by general interest rates, economic conditions and competition.

Although $171.1 million of our $274.8 million (62%) CD portfolio will mature within the next 12 months, we have historically retained a majority of our maturing CD’s.

However, due to strategic pricing decisions regarding rate matching and branch closures, our retention rate decreased in 2022 and may remain at lower than historical levels in 2023 based on management’s current pricing strategy, which reflects the Bank’s current strong on-balance sheet liquidity ratio.

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.

In our present interest rate environment, and based on maturing yields, this is intended to also reduce our cost of funds.

We maintain access to additional sources of funds including FHLB borrowings and lines of credit with the Federal Reserve Bank and correspondent banks.

We maintain access to additional sources of funds including FHLB borrowings and lines of credit with the Federal Reserve Bank, and our correspondent banks.

We utilize FHLB borrowings to leverage our capital base, to provide funds for our lending and investment activities, and to manage our interest rate risk.

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, 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 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.

Management believes that our liquidity is adequate.

To management’s knowledge, there are no known events or uncertainties that will result, or are likely to reasonably result, in a material increase or decrease in our liquidity.

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

Currently, we have approximately $213.4 million available to borrow under this arrangement, supported by loan collateral as of March 31, 2023.

We also had borrowing capacity of $19.9 million at the Federal Reserve Bank and have been approved to access the Bank Term Funding Program (“BTFP”) if the need should arise.

The bank maintains $30 million of uncommitted federal funds purchased lines with correspondent banks as part of our contingency funding plan.

In addition, the Company has a $5.0 million revolving line of credit which is available as needed for general liquidity purposes.

While the Bank does not have formal brokered certificate lines of credit with counter parties at March 31, 2023, we believe that the Bank could access this market, which provides an additional potential source of liquidity as evidenced by third and fourth quarter 2022 and first quarter of 2023 new brokered deposits.

See Note 7, “Federal Home Loan Bank and Other Borrowings” of “Notes to Consolidated Financial Statements” which are included in Part I, Item 1, “Financial Statements and Supplementary Data” of this Form 10-Q, for further detail.

In reviewing the adequacy of our 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.

Management believes that our liquidity is adequate, and to management’s knowledge, there are no known events or uncertainties that will result or are likely to reasonably result in a material increase or decrease in our liquidity.

Off-Balance Sheet Liabilities .

Some of our financial instruments have off-balance sheet risk.

In the ordinary course of business, the Bank has entered into off-balance sheet financial instruments, issued to meet customer financial needs.

Such financial instruments are recorded in the financial statements when they become payable.

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

As of March 31, 2023, the Company had approximately $234.8 million in unused loan commitments, compared to approximately $243.0 million in unused commitments as of December 31, 2022.

In addition, there are $4.4 million of commitments for contributions of capital to an SBIC and an investment company at March 31, 2023.

These commitments totaled $4.7 million at December 31, 2022.

Capital Resources.

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.

As of March 31, 2023, and December 31, 2022, 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:

4 unchanged sentences

Amount Ratio Amount Ratio Amount Ratio

As of September 30, 2022 (Unaudited)

As of March 31, 2023 (Unaudited)

Total capital (to risk weighted assets) $ 226,873 14.6 % $ 124,595 > = 8.0 % $ 155,744 > = 10.0 %

7 unchanged sentences

Tier 1 leverage ratio (to adjusted total assets) 203,422 11.5 % 70,610 > = 4.0 % 88,262 > = 5.0 %

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.

At March 31, 2023, and December 31, 2022, 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, 2022 (Unaudited)

As of March 31, 2023 (Unaudited)

Total capital (to risk weighted assets) $ 220,131 14.1 % $ 124,595 > = 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