What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-08-03 compared with 2023-05-04 · 266 added, 183 removed, 560 unchanged (44% of the section changed)

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

Factors that could affect actual results or outcomes include the matters described under the caption “Risk Factors” in Item 1A of our annual report on Form 10-K for the year ended December 31, 2022, filed with the SEC on March 7, 2023 (“2022 10-K”), 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”), the matters described in “Risk Factors” in Item 1A for the quarter ended March 31, 2023 and in Item 1A of this Form 10-Q, and the following:

• conditions in the financial markets and economic conditions generally;

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• the potential volatility of our stock price;

• accounting standards for loan losses;

• accounting standards for credit losses;

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

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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 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.

The following discussion sets forth management’s discussion and analysis of our consolidated financial condition as of June 30, 2023, and our consolidated results of operations for the three and six months ended June 30, 2023, compared to the same periods in the prior fiscal year for the three and six months ended June 30, 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.

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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.

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

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

The Company has one reporting unit as of March 31, 2023, which is related to its banking activities.

The Company has one reporting unit as of June 30, 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.

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loans, investment securities, goodwill, core deposit intangible assets and deferred tax assets, among others.

Specific assumptions, estimates and judgments utilized by management are discussed in detail herein in management’s discussion and analysis of financial condition and results of operations and in notes 1, 2, 3, 4 and 10 of Condensed Notes to Consolidated Financial Statements.

Specific assumptions, estimates and judgments utilized by management are discussed in detail herein in management’s discussion and analysis of the Company’s balance sheet and statement of operations and in notes 1, 2, 3, 4 and 10 of Condensed Notes to Consolidated Financial Statements.

Income Taxes.

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.

The amounts provided for income taxes are 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.

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

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

As of June 30, 2023, management does not believe a valuation allowance related to the realizability of its deferred tax assets is necessary.

STATEMENT OF OPERATIONS ANALYSIS

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

The narrative below discusses net interest income, interest rate spread, and net interest margin for the three-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.

The narrative below discusses net interest income, interest rate spread, and net interest margin for the three and six-month periods ended June 30, 2023, and June 30, 2022, respectively.

Net interest income was $11.7 million and $24.5 million for the three and six months ended June 30, 2023, respectively, compared to $14.3 million and $27.4 million for the three and six months ended June 30, 2022, respectively.

Net interest income for the three months ended June 30, 2023, decreased from the same period one year ago due to:

1) higher deposit and borrowing balances and costs and 2) a $0.5 million reduction in the accretion on purchased 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 for the three-month period ended June 30, 2023, was 2.72%, compared to 3.46% for the three-month period ended June 30, 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;

2) the impact of higher short-term interest rates which increased FHLB advance and other borrowing costs;

and 3) a 13-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.

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

Net interest income for the six months ended June 30, 2023, decreased from the same period one year ago due to:

1) higher deposit and borrowing balances and related costs;

2) $0.8 million reduction in the accretion on purchased loans;

and 3) $0.3 million of lower SBA PPP accretion, as the last SBA PPP loan was repaid in second quarter 2022.

This was partially offset by:

The net interest margin for the six-month period ended June 30, 2023, was 2.88%, compared to 3.35% for the six-month period ended June 30, 2022.

The net interest margin decrease was due to:

1) higher deposit and FHLB borrowing costs;

2) an 8- basis point decrease in accretion on purchased loans;

3) a 3-basis point decrease on SBA PPP accretion;

and 4) the impact of additional interest expense of the subordinated debt issued in March 2022.

These decreases were partially offset by increases in loan and investment yields due to both contractual repricing and higher coupons on new loans and investments in excess of portfolio yield.

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-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.

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(Dollar amounts in thousands)

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

Three months ended June 30, 2023 compared to the three months ended June 30, 2022:

Three months ended June 30, 2023

Three months ended June 30, 2022

Balance Interest

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(1) Fully taxable equivalent (FTE).

The average yield on tax exempt securities is computed on a tax equivalent basis using a tax rate of 21.0% for the quarters ended 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.

The average yield on tax exempt securities is computed on a tax equivalent basis using a tax rate of 21.0% for the quarters ended June 30, 2023, and June 30, 2022.

The FTE adjustment to net interest income included in the rate calculations totaled $0 and $0 thousand for the three months ended June 30, 2023, and June 30, 2022, respectively.

NET INTEREST INCOME ANALYSIS ON A TAX EQUIVALENT BASIS

(Dollar amounts in thousands)

Six months ended June 30, 2023 compared to the six months ended June 30, 2022:

Six months ended June 30, 2023 Six months ended June 30, 2022

Balance Interest

Expense Average

Rate (1) Average

Balance Interest

Expense Average

Average interest earning assets:

Cash and cash equivalents $ 17,931 $ 467 5.25 % $ 30,174 $ 56 0.37 %

Loans 1,412,870 35,086 5.01 % 1,316,469 28,660 4.39 %

Interest-bearing deposits 126 1 1.6 % 1,510 15 2.00 %

Investment securities (1) 266,224 4,385 3.32 % 286,789 3,009 2.10 %

Other investments 16,923 511 6.09 % 15,112 339 4.52 %

Total interest earning assets (1) $ 1,714,074 $ 40,450 4.76 % $ 1,650,054 $ 32,079 3.92 %

Average interest bearing liabilities:

Savings accounts $ 213,106 $ 776 0.73 % $ 237,464 $ 231 0.20 %

Demand deposits 378,450 3,183 1.7 % 410,678 470 0.23 %

Money market 299,393 2,870 1.93 % 311,524 492 0.32 %

CD’s 270,819 3,681 2.74 % 174,300 860 0.99 %

Total deposits $ 1,161,768 $ 10,510 1.82 % $ 1,133,966 $ 2,053 0.37 %

FHLB Advances and other borrowings 229,825 5,459 4.79 % 176,139 2,592 2.97 %

Total interest bearing liabilities $ 1,391,593 $ 15,969 2.31 % $ 1,310,105 $ 4,645 0.71 %

Net interest income $ 24,481 $ 27,434

Interest rate spread 2.45 % 3.21 %

Net interest margin (1) 2.88 % 3.35 %

Average interest earning assets to average interest bearing liabilities 1.23 1.26

(1) Fully taxable equivalent (FTE).

The average yield on tax exempt securities is computed on a tax equivalent basis using a tax rate of 21.0% for the six months ended June 30, 2023 and June 30, 2022.

The FTE adjustment to net interest income included in the rate calculations totaled $0 and $1 thousand for the six-month periods ended June 30, 2023 and June 30, 2022, respectively.

Rate/Volume Analysis.

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

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

For the three and six months ended June 30, 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 decreases for the three and six months ended June 30, 2023, compared to the three and six months ended June 30, 2022, are primarily due to:

1) principal repayments and sales, net of purchases and 2) unrealized losses in the available for sale securities portfolio.

RATE / VOLUME ANALYSIS

(Dollar amounts in thousands)

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

Three months ended June 30, 2023 compared to the three months ended June 30, 2022.

Increase (decrease) due to

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Net interest income $ 130 $ (2,711) $ (2,581)

Six months ended June 30, 2023 compared to the six months ended June 30, 2022.

Increase (decrease) due to

Volume Rate Net

Interest income:

Cash and cash equivalents $ (37) $ 448 $ 411

Loans 2,195 4,231 6,426

Interest-bearing deposits (11) (3) (14)

Investment securities (229) 1,605 1,376

Other investments 44 128 172

Total interest earning assets 1,962 6,409 8,371

Interest expense:

Savings accounts (26) 571 545

Demand deposits (40) 2,753 2,713

Money market accounts (20) 2,398 2,378

CD’s 617 2,204 2,821

Total deposits 531 7,926 8,457

FHLB Advances and other borrowings 924 1,943 2,867

Total interest bearing liabilities 1,455 9,869 11,324

Net interest income $ 507 $ (3,460) $ (2,953)

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 determine our provision for credit losses (“provision”) based on our desire to provide an adequate Allowance for Credit Losses (“ACL”) - Loans to reflect estimated lifetime losses in our loan portfolio and ACL - Unfunded commitments to reflect estimated losses on our unfunded commitments to lend.

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

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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.

Total provision for credit losses for the three months ended June 30, 2023, was $0.45 million, compared to $0.40 million for the three months ended June 30, 2022.

The total provision for credit losses for the 6-month period ending June 30, 2023 was $0.5 million, compared to $0.4 million for the same period in the prior year.

The current year’s provision is primarily the result of growth in the loan portfolio, partially offset by minimal net recoveries of $0.03 million and reductions in reserves on individually evaluated loans.

Based on loan growth and changes in economic conditions, the provision would have been $1.4 million in the second quarter of 2023.

This was offset by a reduction in specific reserves of $0.95 million with reduction approximately evenly split between payoffs of nonaccrual loans and improvement in the collateral position on substandard and nonaccruals.

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, with the impact of higher interest rates and the impact of an inverted yield forecast in our third-party model of economic condition to result in economic slowdown.

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.

Management believes that the provision recorded for the current year’s three and six-month periods 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.

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Non-interest Income .

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

The following table reflects the various components of non-interest income for the three and six- month periods ended June 30, 2023 and 2022, respectively.

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

2023 2022 % Change 2023 2022 % Change

Non-interest Income:

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Loan fees and service charges 88 141 (37.59) % 168 233 (27.90) %

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

Net gains (losses) on investment securities 10 (75) N/M 66 (112) N/M

Other 333 196 69.90 % 586 394 48.73 %

Total non-interest income $ 2,913 $ 2,372 22.81 % $ 5,205 $ 5,085 2.36 %

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.

Loan servicing income decreased due to reduced capitalization of mortgage servicing rights resulting from lower mortgage loan origination volume in both the three and six-month periods ended June 30, 2023, compared to the same prior year periods, along with lower mortgage servicing income due to servicing a smaller portfolio.

Gain on sale of loans increased in the current three-month period ended June 30, 2023, compared to the three months ended June 30, 2022, due to increased SBA gains, modestly offset by lower mortgage gains.

For the six months ended June 30, 2023, compared June 30, 2022, increased SBA gains more that offset lower mortgage gains.

Loan fees and services charges are lower for the three and six-month periods ended June 30, 2023, compared to the same periods in 2022 due to lower customer activity .

The change in net gains (losses) on investment securities between the three and six months ended June 30, 2023, and the three and six months ended June 30, 2022, is primarily due to the change in valuations of equity securities and a small gain on the sale of available for sale securities in the second quarter of 2023 .

Non-interest Expense.

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

The following table reflects the various components of non-interest expense for the three and six-month periods ended June 30, 2023 and 2022, respectively.

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

2023 2022 % Change 2023 2022 % Change

Non-interest Expense:

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Amortization of intangible assets 193 399 (51.63) % 397 798 (50.25) %

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

Mortgage servicing rights expense, net 148 195 (24.10) % 306 (132) (331.82) %

Advertising, marketing and public relations 151 250 (39.60) % 287 462 (37.88) %

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Gains on repossessed assets, net (9) (2) (350.00) % (38) (9) (322.22) %

New market tax credit depletion — 163 N/M

New market tax credit depletion — 162 N/M — 325 N/M

Other 715 625 14.40 % 1,440 1,272 13.21 %

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Non-interest expense (annualized) / Average assets 2.14 % 2.38 % (9.96) % 2.20 % 2.31 % (5.98) %

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.

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.

Amortization of intangible assets for three and six months ended June 30, 2023, decreased from the same prior year periods, as intangible assets related to certain acquisitions have been fully amortized.

Mortgage servicing rights expense, net decreased for the three months ended June 30, 2023, compared to the comparable prior year period due to lower forecasted prepayments and the impact of a lower balance of loans serviced for others.

Amortization expense increased for the six-month period ended June 30, 2023 due to the impact of a $566 thousand of impairment reversal recorded in the comparable prior year period, partially offset by lower amortization due to lower forecasted prepayments and the impact of a lower balance of loans serviced for others.

Advertising, marketing and public relations expense decreased for the three and six months ended June 30, 2023, compared to the prior year periods, as the timing of related spending is expected to be more heavily weighted more toward the last half of 2023 such that 2023 and 2022 yearly expenses are expected to be approximately equal .

The FDIC insurance premium increased for the three and six-month period ended June 30, 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.

Professional services costs decreased during the three months ended June 30, 2023, from the comparable prior year period due to a decrease in the use of outside professionals as projects needing outside professionals decreased.

For the six-month period ended June 30, 2023, professional services costs increased due to slightly higher professional services costs in the first quarter of 2023 compared to first quarter 2022, partially offset by the second quarter decrease in 2023.

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

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.

Based on the applicable 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.

We determined that our New Market Tax Credit investment met the criteria of ASU 2023-02 and chose 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.

The increase in other expenses during the three and six months ended June 30, 2023, from the comparable prior year periods is largely related to costs related to expenses to support new products and product expansion.

Income Taxes.

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.

Income tax expense was $1.1 and $2.4 million for the three and six months ended June 30, 2023, respectively, compared to $1.4 and $2.9 million for the three and six months ended June 30, 2022.

The effective tax rate was 25.5% for the three and six-month periods ended June 30, 2023, compared to 24.4% and 24.3% for the comparable prior year periods.

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.

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Cash and Cash Equivalents.

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.

Our cash balances increased $7.6 million to $43.0 million compared to $35.4 million at December 31, 2022, as we increased our interest-bearing cash deposits at the Federal Reserve by $12.4 million at June 30, 2023, compared to December 31, 2022.

Investment Securities.

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

Securities available for sale, which represent the majority of our investment portfolio, were $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.

Securities available for sale, which represent the majority of our investment portfolio, were $161.1 million at June 30, 2023, compared with $166.0 million at December 31, 2022.

The decrease in the available for sale portfolio is primarily due to the sale of $5.1 million of floating-rate SBA backed pass-through securities, principal repayments and an increase in the unrealized loss of $1.7 million arising during the period, partially offset by the purchases of $11.0 million of primarily floating rate SBA backed pass-through securities.

Securities held to maturity decreased to $93.8 million at June 30, 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 unrealized loss on the held to maturity portfolio decreased by $0.5 million in the first half of 2023, to $19.1 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

March 31, 2023

June 30, 2023

government agency obligations $ 18,820 $ 18,703

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Held to maturity securities Amortized

March 31, 2023

June 30, 2023

Obligations of states and political subdivisions $ 600 $ 551

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

March 31, 2023 December 31, 2022

June 30, 2023 December 31, 2022

Available for sale securities Amortized

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

March 31, 2023 December 31, 2022

June 30, 2023 December 31, 2022

Held to maturity securities Amortized

3 unchanged sentences

Total $ 93,800 $ 74,681 $ 96,379 $ 76,779

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.

At June 30, 2023, the Bank has pledged mortgage-backed securities with a carrying value of $30.0 million as collateral against a borrowing line of credit with the Federal Reserve Bank with no borrowings outstanding on this line of credit.

As of June 30, 2023, the Bank has pledged U.S.

Government Agency securities with a carrying value of $2.0 million and mortgage-backed securities with a carrying value of $2.2 million as collateral against specific municipal deposits.

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.

As of December 31, 2022, the Bank has pledged certain of its U.S.

As of June 30, 2023, the Bank also has mortgage-backed securities with a carrying value of $0.2 million pledged as collateral to the Federal Home Loan Bank of Des Moines.

At December 31, 2022, the Bank had 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.

As of December 31, 2022, the Bank had pledged certain of its U.S.

Government Agency securities with a carrying value of $2.6 million and mortgage-backed securities with a carrying value of $2.2 million as collateral against specific municipal deposits.

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 $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

As of December 31, 2022, the Bank also had 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 $13.2 million, to $1.42 billion as of June 30, 2023, from $1.41 billion at December 31, 2022.

The following table reflects the composition, of our loan portfolio at June 30, 2023, and December 31, 2022:

June 30, 2023 December 31, 2022

Amount Percent Amount Percent

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Total loans receivable, net $ 1,401,824 $ 1,393,845

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.

Allowance for Credit Losses - Loans.

The Allowance for Credit Losses - Loans (“ACL”) is a valuation allowance for expected future 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.

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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 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.

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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.

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.

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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.

The Allowance for Credit Losses - unfunded commitments is a liability for expected future credit losses on the Company’s commitments to lend.

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 consolidated balance sheet.

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

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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.

Since transition, the ACL- Loans modestly increased $0.5 million to $23.2 million at June 30, 2023, representing 1.63% 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.

The increase in the ACL - Loans, was due to a provision of $0.5 million and a small amount of net recoveries.

The ACL - Unfunded Commitments, established under ASU 2016-13, was $1.5 million at June 30, 2023.

During the six months ended June 30, 2023, the ACL - Unfunded Commitments increased $0.01 million due to an increase in projected loss rates.

Allowance for Credit Losses - Loans Roll Forward

(in thousands, except ratios)

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

June 30, 2023 and Three Months Ended March 31, 2023 and Three Months Ended December 31, 2022 and Twelve Months Ended

Allowance for Credit Losses (“ACL”)

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Total recoveries of loans previously charged off:

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

Net loan recoveries/(charge-offs) (“NCOs”) 49 (23) (449)

Additions to ACL - Loans via provision for credit losses charged to operations 436 57 1,475

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

Three months ended March 31, 2023

Three months ended June 30, 2023

Allowance for Credit Losses - Loans:

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

Charge-offs (14) — (10) (16) — (40)

Recoveries 27 16 36 10 — 89

Additions to ACL - Loans via provision for credit losses charged to operations 424 (406) 426 (8) — 436

ACL - Loans, at end of period $ 18,933 $ 1,458 $ 2,452 $ 321 $ — $ 23,164

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

Six months ended June 30, 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

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(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

In addition to the ACL - Loans, the Company has established an ACL - Unfunded Commitments of $1.5 million at June 30, 2023 and $0 at December 31, 2022, classified in other liabilities on the consolidated balance sheets.

June 30, 2023 and Three Months Ended June 30, 2023 and Six Months Ended

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

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

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

Increases to ACL - Unfunded commitments via provision for credit losses charged to operations 14 7

ACL - Unfunded commitments - end of period $ 1,544 $ 1,544

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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.

A TDR typically involved granting 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)

June 30, 2023 and Six Months Then Ended (1) December 31, 2022 and Twelve Months Then Ended (2)

Nonperforming assets:

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Total recoveries of loans previously charged off:

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

Net loan recoveries/(charge-offs) (“NCOs”) 26 (449)

Additions to ACL - loans via provision for credit losses charged to operations 493 1,475

ACL - Loans, at end of period $ 23,164 $ 17,939

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

ACL-Loans to NCOs (annualized) (44,180.02) % 3,995.32 %

NCOs (annualized) to average loans — % 0.03 %

ALL to total loans 1.60 % 1.27 %

ACL-Loans to total loans 1.63 % 1.27 %

ACL-Loans to nonaccrual loans 147.89 % 160.11 %

Nonaccrual loans to total loans 1.10 % 0.79 %

NPLs to total loans 1.13 % 0.81 %

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

2022 March 31, 2022

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

Additions 7,826 154 1,039 257 1,918

Acquired nonaccrual loans — — — — —

Charge offs (23) (49) (37) (4) (437)

5 unchanged sentences

Balance, end of period $ 15,663 $ 10,410 $ 11,204 $ 10,772 $ 10,434

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.

Nonaccrual loans increased by $4.5 million at June 30, 2023, from $11.2 million at December 31, 2022, largely due to adding a $5.4 million hotel loan from special mention to substandard in the second quarter of 2023, partially offset by payments received.

Nonperforming assets increased to $17.4 million or 0.95% of total assets at June 30, 2023, compared to $12.7 million, or 0.70% of total assets at December 31, 2022 due to increases in nonaccrual loans.

Refer to the “Allowance for Credit Losses - Loans” 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 six months ended June 30, 2023.

Term Extension

Loan Class Amortized Cost Basis at

March 31, 2023 % of Total Class of Financing Receivables

June 30, 2023 % of Total Class of Financing Receivables

Commercial real estate $ 5,337 0.73 %

Commercial and industrial $ 8 0.01 %

Agricultural operating $ 179 0.73 %

Residential mortgage $ 37 0.03 %

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Loan Class Amortized Cost Basis at

March 31, 2023 % of Total Class of Financing Receivables

June 30, 2023 % of Total Class of Financing Receivables

Residential mortgage $ 69 0.06 %

Other consumer $ 22 0.34 %

10 unchanged sentences

Total loans 51 $ 5,171

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 (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.

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 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.

The table below shows a summary of criticized loans, split by special mention and substandard for the past five quarters.

A $5.4 million commercial real estate loan secured by a hotel (50% LTV at origination) was included in special mention at March 31, 2023, and in the second quarter of 2023 this loan was moved to substandard.

A $10.4 million fully secured working capital C&I loan was included in special mention at June 30, 2022.

In the third quarter of 2022, this C&I loan balance increased by $2.4 million due to a draw on a secured line of credit.

In the fourth quarter of 2022, repayments were made on this C&I loan and in the first quarter of 2023, this C&I loan was paid off.

In the second quarter of 2023, a loan relationship of approximately $9 million was added to special mention.

Since the issuance of our earnings press release on July 24, 2023, a separate relationship of approximately $9 million was also added to special mention.

The increase in substandard loan balances in the June 2023 quarter is due to the hotel loan mentioned above moving from special mention to substandard.

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.

In addition to our discussion of criticized, special mention, and substandard loans above, the following information provides further insights about our loans to certain industries.

As of June 30, 2023, hotel loans totaled $91 million with a weighted average LTV of 56% and average balance of $3.4 million.

Restaurant loans totaled $51 million, at June 30, 2023.

The weighted-average LTV percentage on these restaurant loans was 51% and the average loan balance was $702 thousand.

Approximately $37 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.

At June 30, 2023 we have $45 million of office loans with a weighted average LTV of 66% and average loan balance of $618 thousand.

98% of the related office properties are located outside of large cities.

(in thousands)

(Loan balance at unpaid principal balance) March 31,

(Loan balance at unpaid principal balance) June 30,

2023 March 31,

2023 December 31,

1 unchanged sentence

2022 June 30,

2022 March 31,

Special mention loan balances $ 20,507 $ 6,636 $ 12,170 $ 20,178 $ 17,274

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

The fair market value of the Company’s MSR asset 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.

The fair market value of the Company’s MSR asset remained stable at $5.7 million at both December 31, 2022, and June 30, 2023 as a higher fair value percentage offset the lower balance of loans serviced.

At June 30, 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 June 30, 2023, and December 31, 2022, were $503.0 million and $523.7 million, respectively.

The fair market value of the Company’s MSR asset as a percentage of its servicing portfolio at June 30, 2023, and December 31, 2022, was 1.13% and 1.08%, respectively.

From a quarter-end perspective, deposits have grown since both December 31, 2022 and March 31, 2023.

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.

Deposit composition changed during the six months ended June 30, 2023, as both business and retail depositors sought higher yields on deposit accounts.

For the six months ended June 30, 2023, retail deposits decreased slightly, with customers returning to higher yielding certificates with their 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.

These commercial deposits have modestly recovered at June 30, 2023.

Modest brokered deposit growth supplemented deposit growth, with $54.3 million of brokered certificate net growth and $3.2 million new growth of brokered money market accounts.

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.

There are no material customer or industry deposit 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

2023 March 31,

2023 December 31,

Consumer deposits $ 790,404 $ 786,614 $ 805,598

3 unchanged sentences

Total deposits $ 1,464,682 $ 1,436,793 $ 1,424,720

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

At June 30, 2023 our deposit portfolio composition was 54% consumer, 27% commercial, 12% public and 7% 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

2023 March 31,

2023 December 31, 2022

Non-interest bearing demand deposits $ 261,876 $ 247,735 $ 284,722

4 unchanged sentences

Total deposits $ 1,464,682 $ 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.

Uninsured and uncollateralized deposits were $268.1 million, or 18% of total deposits, at June 30, 2023 and $298.8 million, or 21% of total deposits, at December 31, 2022.

Uninsured deposits at June 30, 2023 were $413.0 million, or 28% 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 totaled $611.1 million, or 228% of uninsured and uncollateralized deposits at June 30, 2023.

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

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

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

June 30, 2023 December 31, 2022

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

2 unchanged sentences

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

2028 15,000 3.57 % 3.59 %

Federal Home Loan Bank advances $ 122,530 $ 142,530

6 unchanged sentences

Totals $ 189,887 $ 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 $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.

(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 $1,040.5 million and $984.9 million at June 30, 2023 and December 31, 2022, respectively.

At June 30, 2023, the Bank’s available and unused portion under the FHLB borrowing arrangement was approximately $294.4 million compared to $256.8 million as of December 31, 2022.

(2) Maximum month-end borrowed amounts outstanding under this borrowing agreement were $217.5 million and $157.5 million, during the six months ended June 30, 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 June 30, 2023 and December 31, 2022 were 4.58% and 4.09%, respectively.

(4) FHLB term notes totaling $15.0 million, with 2028 maturity dates, are callable once by the FHLB in December of 2023.

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

1 unchanged sentence

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

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

(b) A $5.0 million line of credit, maturing August 1, 2023, that remains undrawn upon.

This line was renewed effective August 1, 2023 and will mature August 1, 2024.

(6) Subordinated notes resulted from the following:

7 unchanged sentences

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

FHLB advances 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.

FHLB advances decreased $20.0 million to $122.5 million as of June 30, 2023, compared to $142.5 million as of December 31, 2022.

The decrease is a result of decreased funding needs due to increases in deposits partially offset by loan growth, as well as the Bank’s desire to manage its liquidity and increase cash on hand in response to recent events.

At June 30, 2023, short-term FHLB advances consisted of $47 million maturing overnight and an additional $30 million of short-term advances maturing in July 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 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.

The Bank’s current unused borrowing capacity, supported by loan collateral as of June 30, 2023, is approximately $294.4 million.

At June 30, 2023 and December 31 2022, the Bank had the ability to borrow $23.9 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 $30.0 million and $5.4 million as of June 30, 2023 and December 31, 2022, respectively.

There were no related Federal Reserve borrowings outstanding as of June 30, 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.

As of June 30, 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 $70 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 March 31, 2023, or December 31, 2022.

There were no borrowings outstanding on these lines of credit as of June 30, 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 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.

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

At June 30, 2023, the Bank has pledged $1.04 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 $164.6 million at March 31, 2023, compared to $167.1 million at December 31, 2022.

Total stockholders’ equity was $165.6 million at June 30, 2023, compared to $167.1 million at December 31, 2022.

The decrease in stockholder’s equity was attributable to:

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.

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

and 3) an increase in the unrealized loss on available for sale securities of $1.2 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.

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.

1) net income of $6.9 million and 2) the $0.1 million cumulative effect adjustment from the adoption of ASU 2023-02.

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

Approximately 14 thousand shares were repurchased under this program in the second quarter of 2023.

There were no shares repurchased during the first quarter of 2023.

As of June 30, 2023, an additional 229 thousand shares remain available for repurchase.

Liquidity and Asset / Liability Management .

1 unchanged sentence

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.

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

At June 30, 2023, our on-balance sheet liquidity ratio decreased to 12.2% percent from 13.0% at December 31, 2022.

This was largely due to an increase in pledges of held-to-maturity securities and reductions in the value of available-for-sale securities, partially offset by increases 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.

There are no material customer or industry deposit 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 June 30, 2023 our deposit portfolio composition was 54% consumer, 27% commercial, 12% public and 7% 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.

Uninsured and uncollateralized deposits were $268.1 million, or 18% of total deposits, at June 30, 2023 and $298.8 million, or 21% of total deposits, at December 31, 2022.

Uninsured deposits alone at June 30, 2023 were $413.0 million, or 28% 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 $611.1 million, or 228% of uninsured and uncollateralized deposits at June 30, 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.

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Although $271.2 million of our $349.3 million (78%) 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.

However, due to strategic pricing decisions regarding rate matching and branch closures, our retention rate decreased in 2021 and early 2022.

Since June of 2022, we strategically increased deposit pricing, which resulted in modest growth in certificates.

Retail non-maturity interest-bearing accounts have increased at approximately the same rate as the certificate accounts, as our customers have moved to higher-yielding certificates and spent money.

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.

However, this is challenging in the current competitive environment.

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

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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.

Currently, we have approximately $294.4 million available to borrow under this arrangement, supported by loan collateral as of June 30, 2023.

We also had borrowing capacity of $23.9 million at the Federal Reserve Bank and have been approved to access the Bank Term Funding Program (“BTFP”) if the need should arise.

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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.

While the Bank does not have formal brokered certificate lines of credit with counter parties at June 30, 2023, we believe that the Bank could access this market, which provides an additional potential source of liquidity, as evidenced by access to this market during the past four quarters.

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.

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

As of 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.

As of June 30, 2023, the Company had approximately $278.2 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 June 30, 2023.

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

Capital Resources.

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.

As of June 30, 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:

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Amount Ratio Amount Ratio Amount Ratio

As of March 31, 2023 (Unaudited)

As of June 30, 2023 (Unaudited)

Total capital (to risk weighted assets) $ 230,053 14.7 % $ 125,304 > = 8.0 % $ 156,630 > = 10.0 %

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

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.

At June 30, 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:

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Amount Ratio Amount Ratio

As of March 31, 2023 (Unaudited)

As of June 30, 2023 (Unaudited)

Total capital (to risk weighted assets) $ 223,802 14.3 % $ 125,304 > = 8.0 %

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis