What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-11-10 compared with 2022-08-11 · 149 added, 135 removed, 460 unchanged (38% of the section changed)

6 unchanged sentences

Forward-looking statements do not represent historical facts, but are statements about management’s beliefs, plans and objectives about the future, as well as its assumptions and judgments concerning such beliefs, plans and objectives.

These statements are evidenced by terms such as "anticipate,"

These statements are

evidenced by terms such as "anticipate,"

"estimate,"

4 unchanged sentences

and similar expressions.

Although these statements reflect management’s good faith beliefs and projections, they are not guarantees of future performance and they may not

Although these statements reflect management’s good faith beliefs and projections, they are not guarantees of future performance and they may not prove true.

The beliefs, plans and objectives on which forward-looking statements are based involve risks and uncertainties that could cause actual results to differ materially from those addressed in the forward-looking statements.

6 unchanged sentences

In addition, the Bank owns 99.9% of the limited partnership interests in Liberty Mews Limited Partnership, a Maryland limited partnership formed for the purpose of acquiring, developing and operating low-income housing units in Garrett County, Maryland, and a 99.9% non-voting membership interest in MCC FUBT Fund, LC, an Ohio limited liability company formed for the purpose of acquiring, developing and operating low-income housing units in Allegany County, Maryland.

At June 30, 2022, the Corporation’s total assets were $1.8 billion, net loans were $1.2 billion, and deposits were $1.5 billion.

Shareholders’ equity at June 30, 2022 was $132.9 million.

At September 30, 2022, the Corporation’s total assets were $1.8 billion, net loans were $1.3 billion, and deposits were $1.5 billion.

Shareholders’ equity at September 30, 2022 was $132.0 million.

The Corporation maintains an Internet site at www.mybank.com on which it makes available, free of charge, its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to the foregoing as soon as reasonably practicable after these reports are electronically filed with, or furnished to, the SEC.

SELECTED FINANCIAL DATA

The following table sets forth certain selected financial data for the six month periods ended June 30, 2022 and 2021 and is qualified in its entirety by the detailed information and unaudited financial statements, including the notes thereto, included elsewhere in this quarterly report.

As of the six months ended

The following table sets forth certain selected financial data for the nine month periods ended September 30, 2022 and 2021 and is qualified in its entirety by the detailed information and unaudited financial statements, including the notes thereto, included elsewhere in this quarterly report.

As of the nine months ended

September 30,

Per Share Data

7 unchanged sentences

Return on Average Assets (a) (1) - as reported

Settlement expenses, net of income tax

Settlement and FHLB expenses, net of income tax

Adjusted Return on Average Assets (a) (1) (non-GAAP)

Return on Average Equity (a) (1) - as reported

Settlement expenses, net of income tax

Income tax effect of adjustment

Settlement and FHLB expenses, net of income tax

Adjusted Return on Average Equity (a) (1) (non-GAAP)

5 unchanged sentences

Consolidated Tier 1 Capital (to average assets)

(1) See reconciliation of this non-GAAP financial measure provided elsewhere herein associated with settlement expenses incurred during the first quarter of 2021.

(1) See reconciliation of this non-GAAP financial measure provided elsewhere herein associated with settlement and FHLB expenses incurred during the first and third quarters of 2021.

(a) Annualized

RESULTS OF OPERATIONS

Consolidated net income was $11.1 million for the first six months of 2022 compared to $7.8 million for the first six months of 2021.

Basic and diluted net income per share for the first six months of 2022 were both $1.68, compared to basic and diluted net income per share of $1.15 for the first six months of 2021.

The year over year increase was primarily driven by a $2.3 million increase in net interest income;

of which, $1.9 million resulted from the decrease in interest expense as costs of funds decreased by approximately 55%.

Additionally, comparative year-to-date income increased due to the $3.3 million in litigation settlement expense recognized in 2021.

Consolidated net income was $5.4 million for the second quarter of 2022, or $0.82 per diluted share, compared to $4.4 million, or $0.66 per diluted share, for the second quarter of 2021.

The increase in net income year over year was driven by an increase in net interest income of $1.2 million and reduced operating expenses of $0.4 million, offset by an increase in provision expense of $0.1 million, reduced other operating income, and a decrease of $0.3 million in gains from sales of mortgages.

Additionally, we experienced a decrease in gains from sales of available for sale investments and recognized an expense of $0.2 million in expense related to Other Real Estate Owned (“OREO”) in the second quarter 2022 compared to a gain on sale of OREO of $0.2 million in the second quarter of 2021.

The OREO expenses were attributable to one development project as we continue to work with the participation group to market and sell the commercial parcels.

Comparing the six months ended June 30, 2022 to the six months ended June 30, 2021, net interest income, on a non-GAAP, fully taxable equivalent (“FTE”) basis, increased by $2.3 million.

Consolidated net income was $18.1 million for the first nine months of 2022 compared to $12.2 million for the first nine months of 2021.

The year-over-year increase was primarily due to a $3.8 million increase in net interest income as a result of a $1.7 million increase in interest income and a $2.2 million decrease in interest expense.

Additionally, non-interest expense decreased significantly due to our payment of $3.3 million in litigation settlement expenses during the first quarter of 2021 and a $2.4 million FHLB prepayment penalty for the early repayment of debt recognized in the third quarter of 2021.

Consolidated net income was $6.9 million for the third quarter of 2022, or $1.04 per diluted share, compared to $4.4 million, or $0.66 per diluted share, for the third quarter of 2021.

The year over year increase in net income was driven by an increase in net interest income of $1.5 million and reduced operating expenses of $2.7 million primarily offset by the $2.4 million FHLB prepayment penalty in the third quarter of 2021, offset by an decrease in credit to provision expense of $0.5 million, reduced other operating income, and a decrease of $0.1 million in gains from sales of mortgages.

Comparing the nine months ended September 30, 2022, to the nine months ended September 30, 2021, net interest income, on a non-GAAP, fully taxable equivalent (“FTE”) basis, increased by $3.8 million.

Interest income increased by $1.6 million and interest expense decreased by $2.2 million.

Interest income during the first six months of 2021 included $2.0 million in fees related to Paycheck Protection Program (“PPP”) loan forgiveness that were recognized during that period compared to $0.1 million for the six months ended June 30, 2022.

The yield on earning assets increased 10 basis points to 3.66% during the six months of 2022 compared to 3.56% during the same period of 2021, which correlated to the rising interest rate environment and new loans booked at higher rates.

Interest expense on deposits decreased $1.3 million while the average balances decreased $10.2 million and interest on long-term borrowings decreased $0.7 million relating to the prepayment of $70.0 million of Federal Home Loan Bank (“FHLB”) advances in the third quarter of 2021.

Interest income for the 2021 period included $3.2 million in fees related to PPP loan forgiveness.

The yield on earning assets increased 14 basis points to 3.74% in 2022 compared to 3.60% in 2021 in correlation with the rising interest rate environment and new loans booked at higher rates.

Interest expense on deposits decreased $1.4 million while the average balance of deposits increased $5.0 million and interest on long-term borrowings decreased $0.8 million related to the prepayment of $70.0 million of Federal Home Loan Bank (“FHLB”) advances in the third quarter of 2021.

The decreased interest expense resulted in an overall decrease of 25 basis points on interest bearing liabilities.

To date, we have not experienced significant pressure on deposit pricing, but we expect to experience increasing rates the remainder of this year given the recent moves by the Federal Reserve.

The net interest margin for the six months ended June 30, 2022 was 3.46% compared to 3.13% for the six months ended June 30, 2021.

Net interest income, on a non-GAAP, FTE basis, increased by $1.2 million for the second quarter 2022 when compared to the second quarter of 2021.

This increase was driven by an increase of $0.3 million in interest income related to an overall increase of 15 basis points on interest earning assets despite a decline in average balances of $33.8 million.

Interest income on loans decreased $0.2 million due primarily to a reduction of fees related to PPP loan forgiveness recognized during 2021.

Investment income increased $0.6 million due to an increase in average balances related to the deployment of excess cash balances to purchase investment securities late in the fourth quarter of 2021 and early in the first quarter of 2022.

The reduction of $1.1 million in interest expense resulted from the lowering of deposit rates throughout 2021, the decline of $73.3 million of average balances in the higher cost CD portfolio and the prepayment of $70.0 million of FHLB advances in 2021.

The net interest margin for the second quarter of 2022 was 3.52%, compared to 3.15% for the second quarter of 2021.

Non-interest income for the six months ended June 30, 2022 decreased by approximately $0.8 million when compared to the same period of 2021.

This decrease was primarily due to the decrease in net gains on sales of residential mortgage loans of $0.8 million as refinance activity has slowed considerably in correlation with rising mortgage interest rates and due to management’s strategic decision to book new mortgage loans at higher rates to our in-house portfolio.

Other operating income, including gains, for the second quarter of 2022 decreased by approximately $0.3 million when compared with the same period of 2021.

Gains on sales of mortgage loans decreased by approximately $0.3 million related to the diminished refinance activity due to the rising interest rate environment and management’s strategic decision to book new mortgage loans at higher rates to our in-house portfolio.

Net gains on sales of investments decreased by approximately $0.2 million, which was partially offset by the increase of service charges on deposit accounts by approximately $0.1 million.

For the six months ended June 30, 2022, non-interest expenses decreased by $2.3 million in 2022 when compared to the six months ended June 30, 2021.

This decrease was attributable to the one-time litigation settlement expense of $3.3 million, and $1.2 million in legal expenses that were recognized in 2021 along with a $0.2 million reduction in telephone expense and a $0.2 million decline in investor relations costs.

These decreases were partially offset by year-over-year increases in salaries and employee benefits of $1.2 million, which was partially related to the reduction of employee wages associated with deferred loan costs and increases of $0.3 million in equipment expenses, $0.9 million in OREO expenses and $0.2 million in miscellaneous other expenses.

Other operating expenses decreased by $0.4 million when comparing the second quarter of 2022 to the second quarter of 2021.

This decrease was driven by a decrease in legal and professional fees of approximately $0.9 million and investor relations expense of approximately $0.2 million, which were partially offset by an increase in salaries and employee benefits of approximately $0.3 million and net OREO expenses of approximately $0.4 million.

The increase in OREO expenses was driven by expenses

attributable to one development project as we continue to work with the participation group to market and sell the commercial parcels and gains on sales of properties in 2021 that resulted in a net credit.

The provision for loan losses was $0.6 million for both the second quarter of 2022 and the second quarter of 2021.

The provision expense recorded in the second quarter of 2022 was attributable primarily to loan portfolio growth during the quarter and changes in the qualitative factors, particularly related to the current economic outlook.

Net charge-offs of $179,000 were recorded for the quarter ended June 30, 2022, compared to net charge offs of $67,000 for 2021.

The ratio of the ALL to loans outstanding was 1.28% at June 30, 2022, compared to 1.29% at March 31, 2022 and 1.38% at December 31, 2021.

The effective income tax rates as a percentage of income for the six months ended June 30, 2022 and June 30, 2021 were 24.5% and 25.2%, respectively.

The reduced tax rate for the six months ended June 30, 2022 when compared to the six months ended June 30, 2021 was related to an increased benefit at the holding company related to the fair value costs associated with the executive long term incentive plan payouts, and state tax treatment of the litigation settlement expenses.

The new low-income housing tax credit investment in 2021 is expected to begin generating tax credits in 2022 and should provide increased tax credits beginning in 2023 and beyond for the term of the tax credit.

We anticipate increased margin pressure in the remaining quarter of 2022 due to increasing deposit pricing demands in our market areas.

The net interest margin for the nine months ended September 30, 2022, was 3.53% compared to 3.21% for the nine months ended September 30, 2021.

Net interest income, on a non-GAAP, FTE basis, increased by $1.5 million for the third quarter of 2022 when compared to the third quarter of 2021.

This increase was driven by an increase of $1.3 million in interest income from an overall increase in yield of 22 basis points on interest earning assets and an increase in average balances of $36.8 million.

Interest income on loans increased $0.4 million due primarily to continued growth in our commercial loan portfolio, increased rates on new loans booked and adjustable-rate loans repricing related to the current rising rate environment.

Investment income increased $0.7 million primarily due to an increase in average balances of $70.3 million and an increase of 44 basis points in yield related to the deployment of excess cash balances to purchase investment securities late in the fourth quarter of 2021 and early in the first quarter of 2022.

The reduction of $0.2 million in interest expense was driven primarily by the decline of $49.9 million of average balances in the higher cost CD portfolio and the prepayment of $70.0 million of FHLB advances in 2021.

The net interest margin for the third quarter of 2022 was 3.66%, compared to 3.38% for the third quarter of 2021.

Non-interest income for the nine months ended September 30, 2022 decreased by approximately $0.1 million when compared to the same period of 2021.

This decrease was primarily due to the decrease in net gains from the sale of residential mortgage loans of $1.0 million as refinance activity has slowed considerably and due to management’s strategic decision to book new mortgage loans at higher rates to our in-house portfolio.

Other operating income, including gains, for the third quarter of 2022 increased by approximately $0.1 million when compared to the same period of 2021.

Increased net gains on investments of $0.1 million, debit card income of $0.2 million and brokerage commissions and service charges of $0.1 million were offset by reductions on gains on the sale of mortgage loans of $0.1 million due to management’s decision to book loans to the portfolio in light of the rising interest rate environment Trust department income also decreased $0.2 million as a result of the volatile market and the impact of the rising rate environment on the market value of the assets under management.

Assets under management in the trust department were $1.3 billion at September 30, 2022.

For the nine months ended September 30, 2022, non-interest expenses decreased by $5.0 million when compared to the nine months ended September 30, 2021.

This decrease was primarily attributable to the one-time litigation settlement expense of $3.3 million recorded in the first quarter of 2021, and $2.4 million in prepayment penalties that were recognized in 2021.

The decrease from these one-time expenses was partially offset by a $1.7 million increase in salaries and employee benefits as a result of increased incentives of $1.3 million, stock compensation expense of $0.1 million and reduced deferred loan costs of $0.8 million, which were partially offset by reductions in life and health and pension related expenses.

Operating expenses decreased by $2.7 million when comparing the third quarter of 2022 to the third quarter of 2021.

This decrease was driven largely by a decrease of $2.4 million of expense for prepayment penalties related to the repayment of $70.0 million in FHLB debt in 2021 and a reduction of legal expenses of $0.8 million related to the reimbursement of certain litigation expenses in 2021.

These decreases were partially offset by an increase of $0.4 million in salaries and employee benefits from increased incentives, part-time salaries and stock compensation expense, partially offset by decreases in 401(k) plan expense.

The provision for loan losses was a credit of $0.1 million for the third quarter of 2022 compared to a credit of $0.6 million for the third quarter of 2021.

The credit to the provision expense recorded in the third quarter of 2022 was primarily attributable to the continuation of payments of loans previously modified due to uncertainties related to COVID-19.

Net charge-offs of $88,000 were recorded for the quarter ended September 30, 2022, compared to net recoveries of $0.4 million for 2021.

The ratio of the ALL to loans outstanding was 1.22% at September 30, 2022, compared to 1.28% at June 30, 2022 and 1.38% at December 31, 2021.

The effective income tax rates as a percentage of income for the nine months ended September 30, 2022 and September 30, 2021 were 25.8% and 24.9%, respectively.

The increased tax rate for the nine months ended September 30, 2022, when compared to the nine months ended September 30, 2021, was primarily related to state tax treatment of litigation settlement expenses in 2021.

A new low-income housing tax credit investment in 2021 is expected to begin generating tax credits during the fourth quarter of 2022 and should provide increased tax credits beginning in 2023 and beyond for the term of the tax credit.

Non-GAAP Financial Measures

2 unchanged sentences

The following table presents a reconciliation of net income and basic and diluted earnings per share (as reported) to adjusted net income and adjusted basic and diluted earnings per share:

Six months ended June 30,

Three months ended June 30,

Nine months ended September 30,

Three months ended September 30,

(in thousands, except for per share amount)

9 unchanged sentences

Return on Average Assets (1) - as reported

Settlement expenses, net of income tax effect

Settlement, FHLB and contribution expenses, and insurance reimbursement income, net of income tax effect

Adjusted Return on Average Assets (1) (non-GAAP)

Return on Average Equity (1) - as reported

Settlement expenses, net of income tax effect

Settlement, FHLB and contribution expenses, and insurance reimbursement income, net of income tax effect

Adjusted Return on Average Equity (1) (non-GAAP)

4 unchanged sentences

This is a non-GAAP disclosure and management believes it is not materially different than the corresponding GAAP disclosure.

The tables below summarizes net interest income for the six and three month periods ended June 30, 2022 and 2021.

The tables below summarizes net interest income for the nine and three month periods ended September 30, 2022 and 2021.

Non-GAAP - FTE

Six Months Ended

Nine Months Ended

September 30,

(dollars in thousands)

5 unchanged sentences

Three Months Ended

September 30,

(dollars in thousands)

3 unchanged sentences

Net interest margin %

The following tables set forth the average balances, net interest income and expense, and average yields and rates of our interest-earning assets and interest-bearing liabilities for the six and three month periods ended June 30, 2022 and 2021:

Six Months Ended

The following tables set forth the average balances, net interest income and expense, and average yields and rates of our interest-earning assets and interest-bearing liabilities for the nine and three month periods ended September 30, 2022 and 2021:

Nine Months Ended

September 30,

(dollars in thousands)

24 unchanged sentences

(3) The average yields on investments are based on amortized cost.

Comparing the six months ended June 30, 2022 to the six months ended June 30, 2021, net interest income, on a non-GAAP, FTE basis, increased by $2.3 million.

Comparing the nine months ended September 30, 2022 to the nine months ended September 30, 2021, net interest income, on a non-GAAP, FTE basis, increased by $3.8 million.

Interest income increased by $1.7 million and interest expense decreased by $2.2 million.

Interest income for the first six months of 2021 included $2.0 million in fees related to PPP loan forgiveness that were recognized during that period compared to $0.1 million for the six months ended June 30, 2022.

The yield on earning assets increased 10 basis points to 3.66% in 2022 compared to 3.56% in 2021 in correlation with the rising interest rate environment and new loans booked at higher rates.

Interest income for the 2021 period included $3.2 million in fees related to PPP loan forgiveness.

The yield on earning assets increased 14 basis points to 3.74% in the 2022 period compared to 3.60% in the 2021 period in correlation with the rising interest rate environment and new loans booked at higher rates.

The decreased interest expense resulted in an overall decrease of 25 basis points on interest bearing liabilities.

To date, we have not experienced significant pressure on deposit pricing, but we expect to experience increasing rates the remainder of this year given the recent moves by the Federal Reserve.

The net interest margin for the six months ended June 30, 2022 was 3.46% compared to 3.13% for the six months ended June 30, 2021.

We anticipate increased margin pressure in the fourth quarter of 2022 due to increasing deposit pricing demands in our market areas.

The net interest margin for the nine months ended September 30, 2022, was 3.53% compared to 3.21% for the nine months ended September 30, 2021.

Three Months Ended

September 30,

(dollars in thousands)

24 unchanged sentences

(3) The average yields on investments are based on amortized cost.

Net interest income, on a non-GAAP, FTE basis, increased by $1.2 million for the second quarter 2022 when compared to the second quarter of 2021.

Interest income on loans decreased $0.2 million due primarily to a reduction of fees related to PPP loan forgiveness recognized during 2021.

The net interest margin for the second quarter of 2022 was 3.52%, compared to 3.15% for the second quarter of 2021.

The following table sets forth an analysis of volume and rate changes in interest income and interest expense for our average interest-earning assets and average interest-bearing liabilities for the six and three month periods ended June 30, 2022 and 2021:

For the Six months ended June 30, 2022

compared to the Six months ended June 30, 2021

Net interest income, on a non-GAAP, FTE basis, increased by $1.5 million for the third quarter of 2022 when compared to the third quarter of 2021.

The net interest margin for the third quarter of 2022 was 3.66% compared to 3.38% for the third quarter of 2021.

The following table sets forth an analysis of volume and rate changes in interest income and interest expense for our average interest-earning assets and average interest-bearing liabilities for the nine and three month periods ended September 30, 2022 and 2021:

For the Nine months ended September 30, 2022

compared to the Nine months ended September 30, 2021

(in thousands and tax equivalent basis)

15 unchanged sentences

Net interest income

For the Three months ended June 30, 2022 compared to the Three months ended June 30, 2021

For the Three months ended September 30, 2022 compared to the Three months ended September 30, 2021

(in thousands and tax equivalent basis)

18 unchanged sentences

Specific allocations have been made for impaired loans where management has determined that the collateral supporting the loans is not adequate to cover the loan balance, and the qualitative factors affecting the ALL have been adjusted based on the current economic environment and the characteristics of the loan portfolio.

The composition of other operating income for the six and three month periods ended June 30, 2022 and 2021 is illustrated in the following table:

The composition of other operating income for the nine and three month periods ended September 30, 2022 and 2021 is illustrated in the following table:

Income as % of

2 unchanged sentences

Total Other Income

Six Months Ended

Nine Months Ended

Three Months Ended

September 30,

(in thousands)

6 unchanged sentences

Other Operating Expenses

The composition of other operating expenses for the six and three month periods ended June 30, 2022 and 2021 is illustrated in the following table:

The composition of other operating expenses for the nine and three month periods ended September 30, 2022 and 2021 is illustrated in the following table:

Expense as % of

2 unchanged sentences

Total Other Operating Expenses

Six Months Ended

Nine Months Ended

Three Months Ended

September 30,

(in thousands)

9 unchanged sentences

Settlement expense

FHLB prepayment penalty

Contributions

7 unchanged sentences

Balance Sheet Overview

Total assets at June 30, 2022 were $1.8 billion, representing a $7.9 million decrease since March 31, 2022 and a $22.6 million increase since December 31, 2021.

During the second quarter of 2022, cash and interest-bearing deposits in other banks decreased by $54.5 million, the investment portfolio decreased by $11.8 million and gross loans increased by $52.2 million.

Total assets at September 30, 2022 were $1.8 billion, representing a $51.2 million increase since June 30, 2022 and a $73.8 million increase since December 31, 2021.

During the third quarter of 2022, cash and interest-bearing deposits in other banks increased by $9.1 million, the investment portfolio decreased by $7.0 million and gross loans increased by $44.3 million.

Other assets including deferred taxes, premises and equipment and accrued interest receivable also increased collectively by $4.7 million.

Total liabilities at June 30, 2022 were $1.6 billion, representing a $3.7 million decrease since March 31, 2022 and a $31.6 million increase since December 31, 2021.

The increase in total liabilities was also attributable to the change in the market value of the pension plan assets of $9.4 million since December 31, 2021.

This decrease is related to the increasing rate environment and market volatility resulting in a pension plan liability of $4.6 million at June 30, 2022 compared to a pension plan asset of $4.8 million at December 31, 2021.

Total deposits decreased by $23.2 million since March 31, 2022 and increased by $15.0 million since December 31, 2021.

The decline in deposits during the second quarter is primarily attributable to reduced money market balances associated with one local municipality.

Short term borrowings increased $12.2 million since December 31, 2021, driven by $18.9 million in overnight borrowings, which were offset by a decrease in other short-term borrowings of $7.9 million during the quarter.

The increase in overnight borrowings at June 30, 2022 was primarily driven by the strong loan growth coupled with the decline in deposit balances during the second quarter and the timing difference associated with an expected loan pay-off.

Management plans to bring approximately $50.0 million in trust department money market accounts which had been placed off-balance sheet in 2021, back on-balance sheet in the third quarter.

Total liabilities at September 30, 2022 were $1.7 billion, representing a $52.0 million increase since June 30, 2022 and a $83.7 million increase since December 31, 2021.

Total deposits increased by $26.8 million since June 30, 2022 and increased by $41.8 million since December 31, 2021.

The increase in deposits during the third quarter was primarily attributable to management’s decision to bring approximately $50.0 million in trust department money market accounts back on-balance sheet as well as an increase in municipal deposit balances, which was partially offset by a $53.3 million reduction in non-interest-bearing deposits during the quarter.

This decrease resulted from local businesses utilizing cash balances for large asset purchases as well as re-allocations of funds into higher yielding investment alternatives.

Short term borrowings increased $32.0 million since December

31, 2021, driven by $20.0 million in overnight borrowings and an increase in our overnight investments Treasury product of $12.0 million during the quarter.

The increase in overnight borrowings at September 30, 2022 was primarily driven by the strong loan growth and a timing delay of the receipt of deposit funding from a sale of a large local business.

These funds were received shortly after quarter end and were subsequently used to repay the $20.0 million in overnight borrowings in full.

Loan Portfolio

1 unchanged sentence

(dollars in thousands)

June 30, 2022

September 30, 2022

December 31, 2021

3 unchanged sentences

Residential mortgage

*Includes $0.8 million of PPP loans at June 30, 2022 and $7.7 million at December 31, 2021

Outstanding gross loans of $1.2 billion at June 30, 2022 reflected growth of $79.9 million for the first six months of 2022 and growth of $52.2 million for the second quarter of 2022.

*Includes $0.4 million of PPP loans at September 30, 2022 and $7.7 million at December 31, 2021

Outstanding gross loans of $1.3 billion at September 30, 2022 reflected growth of $124.2 million for the first nine months of 2022 and growth of $44.3 million for the third quarter of 2022.

Since December 31, 2021, commercial real estate (“CRE”) loans increased by $63.7 million, acquisition and development (“A&D”) loans decreased by $45.0 million and commercial and industrial loans increased by $88.0 million.

The growth in the commercial real estate and commercial and industrial portfolios is a result of expansion of relationships with existing clients as well as new commercial clients.

The growth in the CRE and commercial and industrial portfolios resulted from the of expansion of relationships with existing clients as well as new commercial clients.

Residential mortgage loans increased $22.4 million related to the diminished refinance activity due to the rising interest rate environment and management’s strategic decision to book new mortgage loans at higher rates to our in-house portfolio.

The consumer loan portfolio decreased by $4.9 million due to amortization of the existing portfolio offsetting new production.

New commercial loan production for the three months ended June 30, 2022 was approximately $103.4 million.

At June 30, 2022, unfunded, committed commercial construction loans totaled approximately $34.9 million.

Commercial amortization and payoffs were approximately $47.7 million through June 30, 2022.

New consumer mortgage loan production for the second quarter of 2022 was approximately $15.1 million with most of this production being comprised of in-house mortgages.

The pipeline in-house, portfolio loans as of June 30, 2022 consisted of $13.5 million.

Production levels have slowed for residential mortgages as compared to the second quarter of 2021 because of the increasing interest rates for the first six months of 2022.

Non-accrual loans totaled $2.1 million at June 30, 2022 compared to $2.5 million at December 31, 2021.

The decrease in non-accrual balances at June 30, 2022 was primarily related to $0.2 million of principal pay-downs of residential mortgage and home equity loans.

New commercial loan production for the three months ended September 30, 2022, was approximately $114.2 million.

At September 30, 2022, unfunded, committed commercial construction loans totaled approximately $41.1 million.

Commercial amortization and payoffs were approximately $95.5 million through September 30, 2022.

New consumer mortgage loan production for the third quarter of 2022 was approximately $30.0 million with most of this production being comprised of in-house mortgages.

The pipeline of in-house, portfolio loans as of September 30, 2022 consisted of $16.1 million.

Production levels have slowed for residential mortgages when compared to the third quarter of 2021 because of the increasing interest rates for the first nine months of 2022.

Non-accrual loans totaled $1.9 million at September 30, 2022 compared to $2.5 million at December 31, 2021.

The decrease in non-accrual balances at September 30, 2022 was primarily related to $0.6 million of principal pay-downs of residential mortgage and home equity loans and the movement of $0.2 million in acquisition and development loans to other real estate owned.

Risk Elements of Loan Portfolio

2 unchanged sentences

(dollars in thousands)

September 30,

Non-accrual loans:

5 unchanged sentences

Accruing Loans Past Due 90 days or more:

Commercial real estate

Residential mortgage

14 unchanged sentences

Allowance for loan losses to non-performing assets (as %)

Performing loans considered to be impaired (including performing troubled debt restructurings, or TDRs), as defined and identified by management, amounted to $3.1 million at June 30, 2022 and $3.0 million at December 31, 2021.

Performing loans considered to be impaired (including performing troubled debt restructurings, or TDRs), as defined and identified by management, amounted to $3.1 million at September 30, 2022 and $3.0 million at December 31, 2021.

Loans are identified as impaired when, based on current information and events, management determines that we will be unable to collect all amounts due according to contractual terms.

2 unchanged sentences

Specific allocations have been made where management believes there is insufficient collateral to repay the loan balance if liquidated and there is no secondary source of repayment available.

The following table presents the details of impaired loans that are TDRs by class at June 30, 2022 and December 31, 2021:

June 30, 2022

The following table presents the details of impaired loans that are TDRs by class at September 30, 2022 and December 31, 2021:

September 30, 2022

December 31, 2021

22 unchanged sentences

Total non-accrual

The level of TDRs was $3.2 million at June 30, 2022 compared to $3.4 million at December 31, 2021, with a slight reduction due to payments made during the first six months of 2022.

There were no new TDRs during the first six months of 2022.

The level of TDRs was $3.1 million at September 30, 2022 compared to $3.3 million at December 31, 2021, with a slight reduction due to payments made during the first nine months of 2022.

There were no new TDRs during the first nine months of 2022.

Allowance and Provision for Loan Losses

6 unchanged sentences

This estimate is computed in a manner similar to the methodology described above, adjusted for the probability of actually funding the commitment.

The ALL decreased to $15.7 million at June 30, 2022 compared to $16.0 million at December 31, 2021.

The ratio of year-to-date net charge offs to average loans for the six months ending June 30, 2022 was an annualized 0.07%, compared to net charge offs to average loans of 0.01% for 2021.

The ALL decreased to $15.5 million at September 30, 2022 compared to $16.0 million at December 31, 2021.

The ratio of year-to-date net charge offs to average loans for the nine months ending September 30, 2022 was an annualized 0.06%, compared to net recoveries to average loans of 0.04% for the same period of 2021.

Our special assets team continues to aggressively collect on charged-off loans.

The ALL at June 30, 2022 is adequate to provide for probable credit losses inherent in our loan portfolio.

Management believes that the ALL at September 30, 2022 is adequate to provide for probable credit losses inherent in our loan portfolio.

Amounts that will be recorded for the provision for loan losses in future periods will depend upon trends in the loan balances, including the composition of the loan portfolio, changes in loan quality and loss experience trends, potential recoveries on previously charged-off loans and changes in other qualitative factors.

Management also applies interest rate risk, collateral value and debt service sensitivity analyses to the Commercial real estate loan portfolio and obtains new appraisals on specific loans under defined parameters to assist in the determination of the periodic provision for loan losses.

The following table presents a summary of the activity in the ALL for the six months ended June 30:

The following table presents a summary of the activity in the ALL for the nine months ended September 30:

(dollars in thousands)

Balance, January 1

Commercial real estate

Acquisition and development

16 unchanged sentences

Investment Securities

At June 30, 2022, the total amortized cost basis of the available-for-sale investment portfolio was $149.7 million, compared to a fair value of $132.9 million.

At September 30, 2022, the total amortized cost basis of the available-for-sale investment portfolio was $151.9 million, compared to a fair value of $128.0 million.

Unrealized gains and losses on securities available-for-sale are reflected in accumulated other comprehensive loss, a component of shareholders’ equity.

1 unchanged sentence

The following table presents the composition of our securities portfolio at amortized cost and fair values at the dates indicated:

June 30, 2022

September 30, 2022

December 31, 2021

17 unchanged sentences

Total fair value of investment securities available for sale decreased by $158.7 million since December 31, 2021 due to the transfer of investments from available-for-sale to held to maturity in the first quarter 2022.

At June 30, 2022, the securities classified as available-for-sale included a net unrealized loss of $16.9 million, which represents the difference between the fair value and amortized cost of securities in the portfolio.

The Corporation reassessed classification of certain investments and effective February 1, 2022, the Corporation transferred $139.0 million of callable agencies, obligation of state and political subdivisions, and collateralized mortgage obligations from available for sale to held to maturity securities.

At September 30, 2022, the securities classified as available-for-sale included a net unrealized loss of $23.9 million, which represents the difference between the fair value and amortized cost of securities in the portfolio.

The Corporation reassessed the classification of certain investments and effective February 1, 2022, the Corporation transferred $139.0 million of callable agencies, obligation of state and political subdivisions, and collateralized mortgage obligations from available for sale to held to maturity securities.

The transfer occurred at fair value.

8 unchanged sentences

These Level 3 instruments are valued based on both observable and unobservable inputs derived from the best available data, some of which is internally developed, and considers risk premiums that a market participant would require.

Approximately $116.6 million of the available-for-sale portfolio was valued using Level 2 pricing and had net unrealized losses of $14.5 million at June 30, 2022.

Approximately $112.2 million of the available for sale portfolio was valued using Level 2 pricing and had net unrealized losses of $21.1 million at September 30, 2022.

The remaining $15.9 million of the securities available for sale represents the entire collateralized debt obligation (“CDO”) portfolio, which was valued using significant unobservable inputs (Level 3 assets).

The $2.8 million in net unrealized losses associated with this portfolio relates to nine pooled trust preferred securities that comprise the CDO portfolio.

Net unrealized losses of $1.4 million represent non-credit related OTTI charges on seven of the securities, while $1.0 million of unrealized losses relates to two securities which have had no credit related OTTI.

Net unrealized losses of $1.7 million represent non-credit related other than temporary impairment (“OTTI”) charges on seven of the securities, while $1.1 million of unrealized losses relates to two securities which have had no credit related OTTI.

The following table presents the composition of our deposits at the dates indicated:

(dollars in thousands)

June 30, 2022

September 30, 2022

December 31, 2021

4 unchanged sentences

Total Deposits

Total deposits at June 30, 2022 increased $15.0 million when compared to deposits at December 31, 2021.

Non-interest-bearing deposits increased $26.1 million primarily related to the new commercial business gained during 2022.

Interest bearing demand deposits increased $71.4 million.

Traditional savings accounts increased $15.6 million.

Money market balances decreased $69.8 million driven by one local municipality opting to move their funds to a state-sponsored deposit account that offers a higher yield as well as a movement of balances to the trust department for higher rates, while maintaining the customer relationship.

Time deposits decreased $28.3 million related to maturing time deposits moving into other deposit products.

Total deposits at September 30, 2022 increased $41.7 million when compared to deposits at December 31, 2021.

Non-interest-bearing deposits decreased $27.2 million, primarily due to deposit relationships moving deposits off-balance sheet to higher yielding deposit products.

Interest bearing demand deposits increased $75.9 million and traditional savings accounts increased $18.9 million.

Money market balances increased $13.0 million, driven primarily by management’s decision to bring trust department money market accounts back on-balance sheet in the third quarter, offset by the outflow of municipal balances into a higher rate state funding facility.

Time deposits decreased $38.9 million related to maturing balances moving to more liquid accounts in anticipation of rising deposit rates as well as municipal funds moving to higher yielding alternatives.

Borrowed Funds

1 unchanged sentence

(in thousands)

Fed Funds Purchased, weighted average interest rate of 1.75% at June 30, 2022

September 30,

Fed Funds Purchased, weighted average interest rate of 3.25% at September 30, 2022

Securities sold under agreements to repurchase

2 unchanged sentences

Total long-term borrowings

Short-term borrowings increased $12.2 million since December 31, 2021, driven by $18.9 million in overnight borrowings, which were offset by a decrease in other short-term borrowings of $6.7 million during the six months related to our Treasury Management customers utilizing their funds.

Short term borrowings increased $32.0 million since December 31, 2021, driven by $20.0 million in overnight borrowings and an increase in our overnight investments Treasury product of $12.0 million during the third quarter of 2022.

The increase in overnight borrowings at September 30, 2022 was primarily driven by the strong loan growth and a timing delay of the receipt of deposit funding from a large customer driven transaction.

These funds were received shortly after quarter end and subsequently were repaid the $20.0 million in overnight borrowings in full.

Liquidity Management

5 unchanged sentences

We actively manage our liquidity position through regular meetings of a sub-committee of executive management, known as the Treasury Team, which looks forward 12 months at 30-day intervals.

The measurement is based upon the projection of funds sold or purchased position, along with ratios and trends developed to measure dependence on purchased funds and core growth.

The measurement is based upon the projection of funds

sold or purchased position, along with ratios and trends developed to measure dependence on purchased funds and core growth.

Monthly reviews by management and quarterly reviews by the Asset and Liability Committee under prescribed policies and procedures are designed to ensure that we will maintain adequate levels of available funds.

23 unchanged sentences

A negative gap position would benefit us during a period of declining interest rates.

At June 30, 2022, we were asset sensitive.

At September 30, 2022, we were asset sensitive.

Our interest rate risk management goals are:

5 unchanged sentences

To manage interest sensitivity risk, management formulates guidelines regarding asset generation and pricing, funding sources and pricing, and off-balance sheet commitments.

These guidelines are based on management’s outlook regarding future

interest rate movements, the state of the regional and national economy, and other financial and business risk factors.

These guidelines are based on management’s outlook regarding future interest rate movements, the state of the regional and national economy, and other financial and business risk factors.

Management uses computer simulations to measure the effect on net interest income of various interest rate scenarios.

14 unchanged sentences

They do not necessarily indicate the long-term prospects or economic value of the institution.

Based on the simulation analysis performed at June 30, 2022 and December 31, 2021, management estimated the following changes in net interest income, assuming the indicated rate changes:

Based on the simulation analysis performed at September 30, 2022 and December 31, 2021, management estimated the following changes in net interest income, assuming the indicated rate changes:

(Dollars in thousands)

September 30,

+400 basis points

3 unchanged sentences

-100 basis points

-200 basis points

This estimate is based on assumptions that may be affected by unforeseeable changes in the general interest rate environment and any number of unforeseeable factors.

13 unchanged sentences

To the extent that deposits are not adequate to fund our capital requirements, we can rely on the funding sources identified above under the heading “Liquidity Management”.

At June 30, 2022, the Bank had $111.1 million available through unsecured lines of credit with correspondent banks, and approximately $189.8 million available through the FHLB.

At September 30, 2022, the Bank had $110.0 million available through unsecured lines of credit with correspondent banks, $7.4 million available through a secured line of credit with the Fed Discount Window and approximately $179.3 million available through the FHLB.

Management is not aware of any demands, commitments, events or uncertainties that are likely to materially affect our ability to meet our future capital requirements.

1 unchanged sentence

These regulations are used to evaluate capital adequacy and require an analysis of an institution’s asset risk profile and off-balance sheet exposures, such as unused loan commitments and stand-by letters of credit.

Based on capital ratios at June 30, 2022, the Bank was considered to be well-capitalized.

Based on capital ratios at September 30, 2022, the Bank was considered to be well-capitalized.

The following table presents the Bank’s capital ratios as of the dates indicated:

September 30,

Total Capital (to risk-weighted assets)

10 unchanged sentences

Among these obligations are FHLB advances and junior subordinated debentures, operating lease agreements for banking and subsidiaries’ offices and for data processing and telecommunications equipment.

Comparing June 30, 2022 to December 31, 2021, short-term borrowings increased $12.2 million, driven by $18.9 million in overnight borrowings, which were offset by a decrease in other short-term borrowings of $6.7 million during the period related to our Treasury Management customers utilizing their funds.

Comparing September 30, 2022 to December 31, 2021, short-term borrowings increased $32.0 million, driven by $20.0 million in overnight borrowings and an increase of $12.0 million during the period related to our overnight investments Treasury product.

Loan commitments are made to accommodate the financial needs of our customers.

4 unchanged sentences

(in thousands)

September 30,

Residential Mortgage - home equity

2 unchanged sentences

Standby letters of credit

The increase of $10.0 million in commitments at June 30, 2022 when compared to December 31, 2021 was due to new business in construction commitments in the residential mortgage and commercial portfolios.

The increase of $31.0 million in commitments at September 30, 2022 when compared to December 31, 2021 was due to new business in construction commitments in the residential mortgage and commercial portfolios.

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