What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-05-15 compared with 2022-11-10 · 224 added, 356 removed, 374 unchanged (61% of the section changed)

10 unchanged sentences

• general economic conditions, either nationally or in Missouri, may be less favorable than expected and may adversely affect the quality of our loans and other assets,

• increases in non-performing assets in the Company’s loan portfolios and adverse economic conditions may necessitate increases to our provisions for loan losses,

• increases in non-performing assets in the Company’s loan portfolios and adverse economic conditions may necessitate increases to our provisions for credit losses,

• costs or difficulties related to any integration of any business of the Company and its acquisition targets may be greater than expected,

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• credit and market risks relating to increasing inflation,

• changes may occur in the securities markets, and

• the COVID-19 pandemic, or any resurgence thereof, or other external events may adversely affect the Company.

We have described additional factors that could cause actual results to be materially different from those described in the forward-looking statements under the caption Risk Factors in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, and in other reports filed with the SEC from time to time.

• the effects of the COVID-19 pandemic, or any resurgence thereof, or other external events may adversely affect the Company,

• changes may occur in the securities markets,

• changes in the level and direction of loan delinquencies and write-offs and changes in estimates of the adequacy of the allowance for credit losses, including after implementation of the credit impairment model for Current Expected Credit Losses (CECL),

• the continued use, availability, and reliability of the London Interbank Offered Rate (LIBOR) and the risks related to the transition from LIBOR to any alternate reference rate we may use, and

• our ability to maintain sufficient liquidity, primarily through deposits, in light of recent events in the banking industry.

We have described additional factors that could cause actual results to be materially different from those described in the forward-looking statements under the caption Risk Factors in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, and in other reports filed with the Securities Exchange Commission (SEC) from time to time.

Other factors that have not been identified in this report could also have this effect.

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Crucial to the Company’s community banking strategy is growth in its commercial banking services, retail mortgage lending and retail banking services.

Through the branch network of its subsidiary bank, Hawthorn Bank (the Bank), the Company, with $1.8 billion in assets at September 30, 2022, provides a broad range of commercial and personal banking services.

The Bank’s specialties include commercial banking for small and mid-sized businesses, including equipment, operating, commercial real estate, Small Business Administration (SBA) loans, and personal banking services including real estate mortgage lending, installment and consumer loans, certificates of deposit, individual retirement and other time deposit accounts, checking accounts, savings accounts, and money market accounts.

Through the branch network of its subsidiary bank, Hawthorn Bank (the Bank), the Company, with $1.9 billion in assets at March 31, 2023, provides a broad range of commercial and personal banking services.

The Bank’s specialties include commercial banking for small and mid-sized businesses, including equipment, operating, commercial real estate, Small Business Administration loans, and personal banking services including real estate mortgage lending, installment and consumer loans, certificates of deposit, individual retirement and other time deposit accounts, checking accounts, savings accounts, and money market accounts.

Other financial services that the Company provides include trust services that include estate planning, investment and asset management services and a comprehensive suite of cash management services.

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The impact and any associated risks related to the critical accounting policies on the business operations are discussed throughout Management’s Discussion and Analysis of Financial Condition and Results of Operations , where such policies affect the reported and expected financial results.

Allowance for Loan Losses

Management has identified the accounting policy related to the allowance for loan losses as critical to the understanding of the Company’s results of operations, since the application of this policy requires significant management assumptions and estimates that could result in materially different amounts to be reported if conditions or underlying circumstances were to change.

Further discussion of the methodology used in establishing the allowance and the impact of any associated risks related to these policies on the Company’s business operations is provided in Note 1 - Summary of Significant Accounting Policies and is also discussed in the Lending and Credit Management section below.

Many of the loans are deemed collateral dependent for purposes of the measurement of the impairment loss, thus the fair value of the underlying collateral and sensitivity of such fair values due to changing market conditions, supply and demand, condition of the collateral and other factors can be volatile over periods of time.

Allowance for Credit Losses

Management has identified the accounting policy related to the allowance for credit losses as critical to the understanding of the Company’s results of operations, since the application of this policy requires significant management assumptions and estimates that could result in materially different amounts to be reported if conditions or underlying circumstances were to change.

Further discussion of the methodology used in establishing the allowance for credit losses and the impact of any associated risks related to these policies and estimates on the Company’s business operations is provided in Note 1 - Summary of Significant Accounting Policies and is also discussed in the Lending and Credit Management section below.

Many of the loans are deemed collateral-dependent for purposes of the measurement of expected losses, thus the fair value of the underlying collateral and sensitivity of such fair values due to changing market conditions, supply and demand, condition of the collateral and other factors can be volatile over periods of time.

Such volatility can have an impact on the financial performance of the Company.

Executive Summary

The Company has prepared all of the consolidated financial information in this report in accordance with U.S.

The Company has prepared all of the consolidated financial information in this report in accordance with United States (U.S.) generally accepted accounting principles (U.S.

In preparing the consolidated financial statements in accordance with U.S.

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The Three Months Ended

(Dollars in thousands, except per share data) September 30, 2022 June 30, 2022 September 30, 2021

(Dollars in thousands, except per share data) March 31, 2023 December 31, 2022 March 31, 2022

Net interest income $ 13,948 $ 14,990 $ 14,145

Provision for loan losses 300 1,200 300

Provision for (release of) credit losses on loans & unfunded commitments 680 100 (2,500)

Non-interest income 3,182 3,119 3,726

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Net interest margin 3.16% 3.43% 3.50%

Nine Months Ended

September 30,

(Dollars in thousands, except per share data) 2022 2021

Net interest income $ 43,773 $ 43,442

(Release of) provision for loan losses (1,000) 700

Non-interest income 10,859 13,010

Investment securities (losses) gains, net (12) 140

Non-interest expense 35,962 35,391

Income before income taxes 19,658 20,501

Income tax expense 3,633 3,974

Net income $ 16,025 $ 16,527

Basic earnings per share $ 2.36 $ 2.40

Diluted earnings per share $ 2.36 $ 2.40

Efficiency ratio (1) 65.83% 62.69%

Net interest spread 3.36% 3.43%

Net interest margin 3.57% 3.60%

(1) Efficiency ratio is calculated as non-interest expense as a percentage of revenue.

Total revenue is calculated as net interest income plus non-interest income.

The Three Months Ended As of and for the Nine months ended

September 30, 2022 June 30, 2022 September 30, 2021 September 30, 2022 September 30, 2021

The Three Months Ended

March 31, 2023 December 31, 2022 March 31, 2022

Key Financial Ratios

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Non-performing assets to total assets 1.47% 1.43% 1.55%

Allowance for loan losses to total loans 1.04% 1.08% 1.48%

Allowance for credit and loan losses to total loans 1.43% 1.02% 1.07%

(1) Tier 1 leverage ratio is calculated by dividing Tier 1 capital by average total consolidated assets

Results of Operations Highlights:

Consolidated net income of $4.9 million for the third quarter 2022 increased $0.4 million, or 9.8%, compared to the second quarter 2022 ("linked quarter") and decreased $0.9 million, or 15.0%, from the third quarter 2021 (the "prior year quarter").

Earnings per diluted share were $0.73 for the third quarter 2022 compared to $0.66 and $0.84 for the linked quarter and prior year quarter, respectively.

For the third quarter 2022, the return on average assets was 1.08%, the return on average stockholders’ equity was 15.30%, and the efficiency ratio was 65.7%.

Consolidated net income of $16.0 million, or $2.36 per diluted share, for the nine months ended September 30, 2022 decreased $0.5 million, or 3.0%, compared to $16.5 million, or $2.40 per diluted share, for the nine months ended September 30, 2021.

For the nine months ended September 30, 2022, the return on average assets was 1.21%, the return on average stockholders’ equity was 16.00%, and the efficiency ratio was 65.8%.

Net interest income of $15.1 million for the third quarter 2022 increased $0.5 million from the linked quarter, and decreased $0.3 million from the prior year quarter.

Net interest margin, on a fully taxable equivalent basis ("FTE") basis, was 3.56% for the third quarter, a decrease from 3.64% and 3.78% for the linked quarter and the prior year quarter, respectively.

Net interest income of $43.8 million for the nine months ended September 30, 2022 increased $0.3 million compared to $43.4 million for the nine months ended September 30, 2021.

Net interest margin, on a fully taxable equivalent basis ("FTE") basis, was 3.57% for the nine months ended September 30, 2022, a decrease from 3.60% for the nine months ended September 30, 2021.

Consolidated net income of $3.3 million for the first quarter of 2023 (current quarter) decreased $1.5 million, or 30.8%, compared to the fourth quarter of 2022 (linked quarter) and decreased $3.3 million, or 50.5%, from the first quarter of 2022 (the prior-year quarter).

Earnings per diluted share were $0.48 for the current quarter compared to $0.70 and $0.97 for the linked quarter and prior-year quarter, respectively.

For the current quarter, the return on average assets was 0.70%, the return on average stockholders’ equity was 10.14%, and the efficiency ratio was 72.8%.

Net interest income of $13.9 million for the first quarter 2023, decreased $1.0 million from the linked quarter, and decreased $0.2 million from the prior year quarter.

Net interest margin, on a fully taxable equivalent basis (FTE) basis, was 3.16% for the first quarter, a decrease from 3.43% and 3.50% for the linked quarter and the prior year quarter, respectively.

These changes are discussed in greater detail under the Average Balance Sheet Data and Rate and Volume Analysis section below.

Non-interest income for the third quarter 2022 was $3.5 million, a decrease of $0.2 million, or 4.5%, from the linked quarter, and a decrease of $0.3 million, or 7.7%, from the prior year quarter.

The change in the current quarter compared to

the prior year quarter was primarily due to the decrease in the gain on sale of real estate mortgages of $0.7 million, or 54.1%.

Non-interest income of $10.9 million for the nine months ended September 30, 2022 decreased $2.2 million, or 16.5%, compared to $13.0 million for the nine months ended September 30, 2021.

The change was primarily due to the decrease in the gain on sale of real estate mortgages of $3.6 million, or 60.5%.

These changes are discussed in greater detail under the Non-interest Income and Expense section below.

Non-interest expense for the third quarter 2022 was $12.2 million, an increase of $0.7 million, or 5.7%, from the linked quarter, and an increase of $0.4 million, or 3.6%, from the prior year quarter.

The change in the current quarter compared to the linked quarter was primarily due to the increase in salary and benefits expenses, processing, network, and bankcard expense, and advertising and promotion expenses.

Non-interest expense for the nine months ended September 30, 2022 was $36.0 million, an increase of $0.6 million, or 1.6%, from the nine months ended September 30, 2021.

The change was primarily due to the new software maintenance agreements and the change in the fair value adjustment for mortgage banking derivatives, partially offset by a decrease in salary and benefits and loan expense.

These changes are discussed in greater detail under the Non-interest Income and Expense section below.

Non-interest income for the current quarter was $3.2 million, an increase of $0.1 million, or 2.0%, from the linked quarter, and a decrease of $0.5 million, or 14.6%, from the prior-year quarter.

The change in the current quarter compared to the prior-year quarter was primarily due to the decrease in the gain on sale of real estate mortgages of $0.4 million, or 44.1%.

Non-interest expense for the current quarter was $12.5 million, a decrease of $0.1 million, or 0.8%, from the linked quarter, and an increase of $0.3 million, or 2.1%, from the prior-year quarter.

Balance Sheet Highlights:

Loans – Loans held for investment increased by $64.2 million, or 4.5%, equal to $1.5 billion as of September 30, 2022 as compared to the end of the linked quarter.

Year-over-year, loans held for investment grew $209.2 million, or 16.3%, from $1.3 billion as of September 30, 2021.

Asset quality – Non-performing loans totaled $17.3 million at September 30, 2022, a decrease of $0.5 million from $17.8 million at the end of the linked quarter, and a decrease of $15.5 million from $32.8 million at the end of the prior year quarter.

The reduction in non-performing loans in the current quarter as compared to the prior year quarter was primarily due to three large non-accrual loan relationships returning to accrual status.

The allowance for loan losses to total loans was 1.04% at September 30, 2022, compared to 1.30% at December 31, 2021 and 1.48% at September 30, 2021.

Cash and cash equivalents – Cash and cash equivalents decreased by $49.9 million, or 59.7%, to $33.8 million at the end of the current quarter as compared to the end of the linked quarter.

Year-over-year, cash and cash equivalents decreased $16.7 million, or 33.1%, from $50.5 million at the end of the prior-year quarter.

See Liquidity Management for further discussion.

Loans – Loans held for investment increased by $20.8 million, or 1.4%, to $1.5 billion at the end of the current quarter as compared to the end of the linked quarter.

Year-over-year, loans held for investment increased $208.2 million, or 15.6%, from $1.3 billion at the end of the prior-year quarter.

Asset quality – Non-performing loans totaled $19.6 million at the end of the current quarter, an increase of $0.9 million from $18.7 million at the end of the linked quarter, and an increase of $2.5 million from $17.1 million at the end of the prior-year quarter.

The increase in non-performing loans in the current quarter as compared to the prior-year quarter was primarily due to four large non-accrual loan relationships.

The allowance for credit losses to total loans was 1.43% at March 31, 2023, compared to the allowance for loan losses to total loans of 1.02% at December 31, 2022 and 1.07% at March 31, 2022.

These changes are discussed in greater detail under the Lending and Credit Management section below.

Deposit s – Total deposits increased by $62.0 million, or 4.0%, equal to $1.6 billion as of September 30, 2022 as compared to the end of the linked quarter.

Year-over-year deposits grew $181.7 million, or 12.9%, from $1.4 billion as of September 30, 2021.

Capital – Total shareholder’s equity was $115.4 million and the common equity to assets ratio was 6.25% at September 30, 2022 as compared to 6.93% and 8.00% at the end of the linked quarter and the prior year quarter, respectively.

Regulatory capital ratios remain “well-capitalized,” with a tier 1 leverage ratio of 10.60% and a total risk-based capital ratio of 13.84% at September 30, 2022.

Deposit s – Total deposits decreased by $24.1 million, or 1.5%, equal to $1.6 billion at the end of the current quarter as compared to the end of the linked quarter.

Year-over-year deposits increased $151.9 million, or 10.4%, from $1.5 billion as of the end of the prior-year quarter.

Capital – On January 1, 2023, the Company adopted Accounting Standard Update (ASU) 2016-13 and recorded a one-time cumulative effect adjustment to retained earnings totaling $5.6 million.

Total stockholders' equity was $128.4 million and the common equity to assets ratio was 6.77% at the end of the current quarter as compared to 6.62% and 7.74% at the end of the linked quarter and the prior-year quarter, respectively.

Regulatory capital ratios remain “well-capitalized”, with a tier 1 leverage ratio of 10.43% and a total risk-based capital ratio of 13.81% at the end of the current quarter.

Average Balance Sheet Data

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It is affected both by changes in the level of interest rates and changes in the amounts and mix of interest-earning assets and interest-bearing liabilities.

The following table presents average balance sheet data, net interest income, average yields of earning assets, average costs of interest-bearing liabilities, net interest spread and net interest margin on a fully taxable equivalent basis for each of the three and nine month periods ended September 30, 2022 and 2021, respectively.

The following table presents average balance sheet data, net interest income, average yields of earning assets, average costs of interest-bearing liabilities, net interest spread and net interest margin on a FTE basis for each of the three month ended March 31, 2023 and 2022, respectively.

The average balances used in this table and other statistical data were calculated using average daily balances.

Three Months Ended September 30, 2022

(Dollars in thousands) Average Balance Interest Income/ Expense (1) Rate Earned/ Paid (1) Average Balance Interest Income/ Expense (1) Rate Earned/ Paid (1)

Commercial $ 245,877 $ 3,211 5.18% $ 247,564 $ 4,575 7.33%

Real estate construction - residential 24,249 333 5.45 35,358 453 5.08

Real estate construction - commercial 127,594 1,522 4.73 75,081 885 4.68

Real estate mortgage - residential 323,158 3,581 4.40 270,464 2,863 4.20

Real estate mortgage - commercial 702,139 7,597 4.29 633,238 6,590 4.13

Installment and other consumer 23,738 206 3.44 24,363 242 3.94

Total loans $ 1,446,755 $ 16,450 4.51% $ 1,286,068 $ 15,608 4.81%

Loans held for sale 1,560 23 5.85 3,092 24 3.08

Investment securities:

Treasury 3,586 12 1.33 3,033 4 0.52

government and federal agency obligations 25,440 87 1.36 20,819 75 1.43

Obligations of states and political subdivisions 113,003 1,040 3.65 114,804 868 3.00

Mortgage-backed securities 111,616 493 1.75 130,659 443 1.35

Other debt securities 12,781 163 5.06 10,608 128 4.79

Total investment securities 266,426 1,795 2.67 279,923 1,518 2.15

Other investment securities 5,431 64 4.68 6,010 81 5.35

Federal funds sold 46 — — 6,829 1 0.06

Interest bearing deposits in other financial institutions 15,462 76 1.95 84,825 78 0.36

Total interest earning assets $ 1,735,680 $ 18,408 4.21% $ 1,666,747 $ 17,310 4.12%

All other assets 88,159 84,269

Allowance for loan losses (15,431) (18,801)

Total assets $ 1,808,408 $ 1,732,215

LIABILITIES AND STOCKHOLDERS' EQUITY

Savings $ 182,364 $ 16 0.03% $ 161,308 $ 14 0.03%

NOW accounts 268,780 646 0.95 225,351 130 0.23

Interest checking 47,788 264 2.19 37,391 45 0.48

Money market 302,773 456 0.60 281,425 91 0.13

Time deposits 273,550 584 0.85 252,731 437 0.69

Total interest bearing deposits $ 1,075,255 $ 1,966 0.73% $ 958,206 $ 717 0.30%

Federal funds purchased and securities sold under agreements to repurchase 6,181 13 0.84 29,753 19 0.25

Federal Home Loan Bank advances and other borrowings 75,262 277 1.46 93,533 383 1.62

Subordinated notes 49,486 570 4.57 49,486 305 2.45

Total borrowings 130,929 860 2.61 172,772 707 1.62

Total interest bearing liabilities $ 1,206,184 $ 2,826 0.93% $ 1,130,978 $ 1,424 0.50%

Demand deposits 464,377 445,062

Other liabilities 10,100 16,723

Total liabilities $ 1,680,661 $ 1,592,763

Stockholders' equity 127,747 139,452

Total liabilities and stockholders' equity $ 1,808,408 $ 1,732,215

Net interest income (FTE) $ 15,582 $ 15,886

Net interest spread 3.28% 3.62%

Net interest margin 3.56% 3.78%

(1) Interest income and yields are presented on a fully taxable equivalent basis using the federal statutory income tax rate of 21%, net of nondeductible interest expense, for the three months ended September 30, 2022 and 2021.

Such adjustments totaled $0.5 million and $0.5 million for the three months ended September 30, 2022 and 2021, respectively.

(2) Non-accruing loans are included in the average amounts outstanding.

(3) Fees and costs on loans are included in interest income ($20,000 and $2.0 million of PPP fees were included in commercial loan income for the three months ended September 30, 2022 and 2021, respectively)

Nine Months Ended September 30, 2022

Three Months Ended March 31,

(Dollars in thousands) Average Balance Interest Income/ Expense (1) Rate Earned/ Paid (1) Average Balance Interest Income/ Expense (1) Rate Earned/ Paid (1)

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All other assets 87,239 83,294

Allowance for loan losses (15,575) (18,579)

Allowance for credit losses (15,783) (16,926)

Total assets $ 1,906,123 $ 1,770,617

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Net interest margin 3.16% 3.50%

Such adjustments totaled $1.6 million and $1.3 million for the nine months ended September 30, 2022 and 2021, respectively.

(1) Interest income and yields are presented on a FTE basis using the federal statutory income tax rate of 21%, net of nondeductible interest expense, for both the three months ended March 31, 2023 and 2022.

Such adjustments totaled $0.3 million and $0.6 million for the three months ended March 31, 2023 and 2022, respectively.

(2) Non-accruing loans are included in the average amounts outstanding.

(3) Fees and costs on loans are included in interest income ($0.4 million and $4.0 million of PPP fees were included in commercial loan income for the nine months ended September 30, 2022 and 2021, respectively).

Rate and Volume Analysis

The following table summarizes the changes in net interest income on a fully taxable equivalent basis, by major category of interest-earning assets and interest-bearing liabilities, identifying changes related to volumes and rates for the three and nine months ended September 30, 2022 compared to the three and nine months ended September 30, 2021.

The following table summarizes the changes in net interest income on a FTE basis, by major category of interest-earning assets and interest-bearing liabilities, identifying changes related to volumes and rates for the three months ended March 31, 2023 compared to the three months ended March 31, 2022.

The change in interest due to the combined rate/volume variance has been allocated to rate and volume changes in proportion to the absolute dollar amounts of change in each.

Three Months Ended September 30, Nine Months Ended September 30,

2021 2022 vs.

Change due to Change due to

(in thousands) Total Change Average Volume Average Rate Total Change Average Volume Average Rate

Three Months Ended March 31,

Change due to

(in thousands) Total Change Average Volume Average Rate

Interest income on a fully taxable equivalent basis:

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Net interest income on a fully taxable equivalent basis $ (424) $ 1,368 $ (1,792)

Such adjustments totaled $0.5 million and $1.6 million for the three and nine months ended September 30, 2022 compared to $0.5 million and $1.3 million for the three and nine months ended September 30, 2021, respectively.

Such adjustments totaled $0.3 million for the three months ended March 31, 2023 compared to $0.6 million for the three months ended March 31, 2022.

(2) Non-accruing loans are included in the average amounts outstanding.

(3) Fees and costs on loans are included in interest income ($20,000 and $0.4 million of PPP fees were included in commercial loan income for the three and nine months ended September 30, 2022 compared to $2.0 million and $4.0 million for the nine months ended September 30, 2021, respectively).

Financial results for the quarter ended September 30, 2022 compared to the quarter ended September 30, 2021 reflected a decrease in net interest income, on a tax equivalent basis, of $0.3 million, or 1.9%, and the financial results for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021 reflected an increase of $0.7 million, or 1.6%.

Measured as a percentage of average earning assets, the net interest margin (expressed on a fully taxable equivalent basis) decreased to 3.56% for the quarter ended September 30, 2022 compared to 3.78% for the quarter ended September 30, 2021, and decreased to 3.57% for the nine months ended September 30, 2022 compared to 3.60% for the nine months ended September 30, 2021.

Driving the decrease in net interest income in the quarter compared to the prior year quarter was higher interest expense for interest bearing liabilities, partially offset by higher interest income resulting from growth in loans of 12.5%.

The significant loan growth more than offset the reduction in PPP fee income of $2.0 million from the prior year quarter.

Driving the increase in net interest income for the current year compared to the prior year, on a year-to-date basis, was higher interest income resulting from growth in loans of 7.5%, and investment securities portfolio of 12.5%, partially offset by higher interest expense for interest bearing liabilities and a reduction of PPP fee income of $3.7 million.

Average interest-earning assets increased $68.9 million, or 4.1%, to $1.74 billion for the quarter ended September 30, 2022 compared to $1.67 billion for the quarter ended September 30, 2021, and average interest-bearing liabilities increased $75.2 million, or 6.6%, to $1.21 billion for the quarter ended September 30, 2022 compared to $1.13 billion for the quarter ended September 30, 2021.

Average interest-earning assets increased $41.9 million, or 2.5%, to $1.70 billion for the nine months ended September 30, 2022 compared to $1.66 billion for the nine months ended September 30, 2021, and average interest-bearing liabilities increased $23.5 million, or 2.0%, to $1.17 billion for the nine months ended September 30, 2022 compared to $1.15 billion for the nine months ended September 30, 2021.

Total interest income (expressed on a fully taxable equivalent basis) was $18.4 million and $51.1 million for the three and nine months ended September 30, 2022, respectively, compared to $17.3 million and $49.3 million for the three and nine months ended September 30, 2021, respectively.

The Company’s rates earned on interest earning assets were 4.21% and 4.01% for the three and nine months ended September 30, 2022, respectively, compared to 4.12% and 3.97% for the three and nine months ended September 30, 2021, respectively.

Interest income on loans held for investment was $16.5 million and $45.2 million for the three and nine months ended September 30, 2022, respectively, compared to $15.6 million and $44.8 million for the three and nine months ended September 30, 2021, respectively.

Average loans outstanding increased $160.7 million, or 12.5%, to $1.45 billion for the quarter ended September 30, 2022 compared to $1.29 billion for the quarter ended September 30, 2021.

The average yield on loans decreased to 4.51% for the quarter ended September 30, 2022 compared to 4.81% for the quarter ended September 30, 2021.

Average loans outstanding increased $96.0 million, or 7.5%, to $1.38 billion for the nine months ended September 30, 2022 compared to $1.28 billion for the nine months ended September 30, 2021.

The average yield on loans decreased to 4.40% for the nine months ended September 30, 2022 compared to 4.68% for the nine months ended September 30, 2021.

Financial results for the three months ended March 31, 2023 compared to the three months ended March 31, 2022 reflected a decrease in net interest income, on a tax equivalent basis, of $0.4 million, or 2.9%.

Measured as a percentage of average earning assets, the net interest margin (expressed on a FTE basis) decreased to 3.16% for the three months ended March 31, 2023 compared to 3.50% for the three months ended March 31, 2022.

While interest income increased $5.3 million in the current quarter compared to the prior year quarter, which was driven primarily by higher yields on interest-earning assets and growth in loans, interest expense increased $5.7 million resulting in a $0.4 million decrease in net interest income.

Average interest-earning assets increased $130.4 million, or 7.7%, to $1.83 billion for the three months ended March 31, 2023 compared to $1.70 billion for the three months ended March 31, 2022, and average interest-bearing liabilities increased $169.3 million, or 14.6%, to $1.33 billion for the three months ended March 31, 2023 compared to $1.16 billion for the three months ended March 31, 2022.

Total interest income (expressed on a FTE basis) was $21.3 million for the three months ended March 31, 2023 compared to $16.0 million for the three months ended March 31, 2022.

The Company’s rates earned on interest-earning assets were 4.70% for the three months ended March 31, 2023 compared to 3.81% for the three months ended March 31, 2022.

Interest income on loans held for investment was $18.9 million for the three months ended March 31, 2023 compared to $14.1 million for the three months ended March 31, 2022.

Average loans outstanding increased $207.1 million, or 15.7%, to $1.52 billion for the three months ended March 31, 2023 compared to $1.32 billion for the three months ended March 31, 2022.

The average yield on loans increased to 5.03% for the three months ended March 31, 2023 compared to 4.34% for the three months ended March 31, 2022.

See the Lending and Credit Management section for further discussion of changes in the composition of the lending portfolio.

Interest income on available-for-sale securities was $1.8 million and $5.4 million for the three and nine months ended September 30, 2022, respectively, compared to $1.5 million and $4.0 million for the three and nine months ended September 30, 2021, respectively.

Average securities decreased $13.5 million, or 4.8%, to $266.4 million for the quarter ended September 30, 2022 compared to $279.9 million for the quarter ended September 30, 2021.

The average yield on securities increased to 2.67% for the quarter ended September 30, 2022 compared to 2.15% for the quarter ended September 30, 2021.

See the Liquidity Management section for further discussion.

Average securities increased $31.4 million, or 12.5%, to $282.9 million for the nine months ended September 30, 2022 compared to $251.4 million for the nine months ended September 30, 2021.

The average yield on securities increased to

2.57% for the nine months ended September 30, 2022 compared to 2.10% for the nine months ended September 30, 2021.

Interest income on available-for-sale securities was $1.7 million for the three months ended March 31, 2023 compared to $1.8 million for the three months ended March 31, 2022.

Average securities decreased $49.3 million, or 16.2%, to $255.0 million for the three months ended March 31, 2023 compared to $304.3 million for the three months ended March 31, 2022.

The average yield on securities increased to 2.73% for the three months ended March 31, 2023 compared to 2.37% for the three months ended March 31, 2022.

See the Liquidity Management section for further discussion.

Total interest expense increased to $2.8 million for the quarter ended September 30, 2022 compared to $1.4 million for the quarter ended September 30, 2021, and increased to $5.7 million for the nine months ended September 30, 2022 compared to $4.6 million for the nine months ended September 30, 2021.

The Company’s rates paid on interest bearing-liabilities were 0.93% and 0.65% for the three and nine months ended September 30, 2022, respectively, compared to 0.50% and 0.54% for the three and nine months ended September 30, 2021, respectively.

Total interest expense increased to $7.0 million for the three months ended March 31, 2023 compared to $1.3 million for the three months ended March 31, 2022.

The Company’s rates paid on interest-bearing liabilities were 2.13% for the three months ended March 31, 2023 compared to 0.45% for the three months ended March 31, 2022.

See the Liquidity Management section for further discussion.

Interest expense on deposits increased to $2.0 million for the quarter ended September 30, 2022 compared to $0.7 million for the quarter ended September 30, 2021, and increased to $3.6 million for the nine months ended September 30, 2022 compared to $2.5 million for the nine months ended September 30, 2021.

Average interest-bearing deposits increased $117.0 million, or 12.2%, to $1.08 billion for the quarter ended September 30, 2022 compared to $0.96 billion for the quarter ended September 30, 2021.

The average cost of deposits increased to 0.73% for the quarter ended September 30, 2022 compared to 0.30% for the quarter ended September 30, 2021.

Average interest-bearing deposits increased $72.7 million, or 7.5%, to $1.04 billion for the nine months ended September 30, 2022 compared to $0.96 billion for the nine months ended September 30, 2021.

The average cost of deposits increased to 0.46% for the nine months ended September 30, 2022 compared to 0.34% for the nine months ended September 30, 2021.

Interest expense on borrowings increased to $0.9 million for the quarter ended September 30, 2022 compared to $0.7 million for the quarter ended September 30, 2021, and decreased to $2.1 million for the nine months ended September 30, 2022 compared to $2.2 million for the nine months ended September 30, 2021.

Average borrowings decreased to $130.9 million for the quarter ended September 30, 2022 compared to $172.8 million for the quarter ended September 30, 2021.

The average cost of borrowings increased to 2.61% for the quarter ended September 30, 2022 compared to 1.62% for the quarter ended September 30, 2021.

The increase in cost of funds primarily resulted from higher market interest rates.

Average borrowings decreased to $134.6 million for the nine months ended September 30, 2022 compared to $183.8 million for the nine months ended September 30, 2021.

The average cost of borrowings increased to 2.11% for the nine months ended September 30, 2022 compared to 1.57% for the nine months ended September 30, 2021.

Interest expense on deposits increased to $5.6 million for the three months ended March 31, 2023 compared to $0.7 million for the three months ended March 31, 2022.

Average interest-bearing deposits increased $158.6 million, or 15.5%, to $1.18 billion for the three months ended March 31, 2023 compared to $1.02 billion for the three months ended March 31, 2022.

The average cost of deposits increased to 1.91% for the three months ended March 31, 2023 compared to 0.28% for the three months ended March 31, 2022.

Interest expense on borrowings increased $1.4 million for the three months ended March 31, 2023 compared to $0.6 million for the three months ended March 31, 2022.

Average borrowings increased to $151.5 million for the three months ended March 31, 2023 compared to $140.7 million for the three months ended March 31, 2022.

The average cost of borrowings increased to 3.84% for the three months ended March 31, 2023 compared to 1.69% for the three months ended March 31, 2022.

The increase in cost of funds primarily resulted from higher market interest rates.

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Non-interest income for the periods indicated was as follows:

Three Months Ended September 30, Nine Months Ended September 30,

(Dollars in thousands) 2022 2021 $ Change % Change 2022 2021 $ Change % Change

Three Months Ended March 31,

(Dollars in thousands) 2023 2022 $ Change % Change

Non-interest income

8 unchanged sentences

* Total revenue is calculated as net interest income plus non-interest income.

Total non-interest income decreased $0.3 million, or 7.7%, to $3.5 million for the third quarter ended September 30, 2022 compared to $3.8 million for the third quarter ended September 30, 2021, and decreased $2.2 million, or 16.5%, to $10.9 million for the nine months ended September 30, 2022 compared to $13.0 million for the nine months ended September 30, 2021.

Total non-interest income decreased $0.5 million, or 14.6%, to $3.2 million for the three months ended March 31, 2023 compared to $3.7 million for the three months ended March 31, 2022.

The decrease was primarily due to the decrease in gain on sale of real estate mortgages due to lower volumes of real estate mortgage loans sold as further discussed below.

Real estate servicing fees, net of the change in valuation of mortgage servicing rights (MSRs) increased to $0.4 million for the quarter ended September 30, 2022 compared to $0.1 million for the quarter ended September 30, 2021, and increased to $0.9 million for the nine months ended September 30, 2022 compared to $0.5 million for the nine months ended September 30, 2021.

Mortgage loan servicing fees earned on loans sold were $0.2 million and $0.7 million for the three and nine months ended September 30, 2022, respectively, compared to $0.2 million and $0.6 million for the three and nine months ended September 30, 2021, respectively.

The current quarter's MSR valuation increased $155,000 and $186,000 from the end of the linked quarter and December 31, 2021, respectively, primarily due to an increase in market rates.

Real estate servicing fees, net of the change in valuation of mortgage servicing rights (MSRs) remained relatively flat at $0.2 million for the quarter ended March 31, 2023 compared to the quarter ended March 31, 2022.

Mortgage loan servicing fees earned on loans sold were $0.2 million for the three months ended March 31, 2023, compared to $0.3 million for the three months ended March 31, 2022.

The current quarter's MSR valuation increased $29,000 from December 31, 2022 primarily due to an increase in market rates.

Mortgage rates have increased significantly to over 6.0% for a new thirty-year conforming mortgage.

The Company was servicing $247.6 million of mortgage loans at September 30, 2022 compared to $270.0 million and $277.1 million at December 31, 2021 and September 30, 2021, respectively.

Gain on sales of mortgage loans decreased $0.7 million to $0.6 million for the third quarter ended September 30, 2022 compared to $1.4 million for the third quarter ended September 30, 2021, and decreased $3.6 million to $2.3 million for the nine months ended September 30, 2022 compared to $5.9 million for the nine months ended September 30, 2021.

The Company sold $21.4 million and $76.1 million of loans for the three and nine months ended September 30, 2022, respectively, compared to $39.1 million and $167.3 million for the three and nine months ended September 30, 2021, respectively.

Loans sold to the secondary market slowed after strong sales during the first nine months of 2021.

Other Income increased $0.3 million to $0.5 million for the quarter ended September 30, 2022 compared to $0.2 million for the quarter ended September 30, 2021, and increased $0.9 million to $1.4 million for the nine months ended September 30, 2022 compared to $0.5 million for the nine months ended September 30, 2021.

The increase primarily resulted from mortgage banking derivative income, interest component of net pension cost, net gain on sale of property in other real estate owned, and income received from the Missouri Department of Transportation related to a land easement.

The following table presents the gross realized gains and losses from sales and calls of available-for-sale securities, as well as gains and losses on equity securities from fair value adjustments which have been recognized in earnings:

Three Months Ended September 30, Nine Months Ended September 30,

The Company was servicing $235.2 million of mortgage loans at March 31, 2023 compared to $240.5 million and $261.5 million at December 31, 2022 and March 31, 2022, respectively.

Gain on sales of mortgage loans decreased $0.4 million to $0.5 million for the three months ended March 31, 2023 compared to $0.9 million for the three months ended March 31, 2022.

The Company sold $20.2 million of loans for the three months ended March 31, 2023, compared to $29.1 million for the three months ended March 31, 2022.

Three Months Ended March 31,

(in thousands) 2023 2022

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Non-interest expense for the periods indicated was as follows:

Three Months Ended September 30, Nine Months Ended September 30,

(Dollars in thousands) 2022 2021 $ Change % Change 2022 2021 $ Change % Change

Three Months Ended March 31,

(Dollars in thousands) 2023 2022 $ Change % Change

Non-interest expense

14 unchanged sentences

Total revenue is calculated as net interest income plus non-interest income.

Total non-interest expense increased $0.4 million to $12.2 million for the quarter ended September 30, 2022 compared to $11.8 million for the quarter ended September 30, 2021, and increased $0.6 million to $36.0 million for the nine months ended September 30, 2022 compared to $35.4 million for the nine months ended September 30, 2021.

Salaries increased $0.2 million, or 4.0%, to $5.2 million for the quarter ended September 30, 2022 compared to $5.0 million for the quarter ended September 30, 2021, and decreased $0.1 million, or 0.9%, to $15.3 million for the nine months ended September 30, 2022 compared to $15.4 million for the nine months ended September 30, 2021.

The decrease for the nine months ended September 30, 2022 was primarily due to reduced commissions based on lower loan volume.

See Gains on sales of mortgage loans discussion above.

Employee benefits decreased $0.1 million, or 6.7%, to $1.6 million for the quarter ended September 30, 2022 compared to $1.7 million for the quarter ended September 30, 2021, and decreased $0.4 million, or 7.2%, to $4.9 million for the nine months ended September 30, 2022 compared to $5.3 million for the nine months ended September 30, 2021.

The decreases were primarily due to a decrease in 401(k) plan contributions, medical premiums, and pension cost due to lower annual discount rate assumptions compared to the prior year's annual assumptions.

Other non-interest expense increased $0.3 million, or 27.4%, to $1.4 million for the quarter ended September 30, 2022 compared to $1.1 million for the quarter ended September 30, 2021, and increased $0.9 million, or 27.8%, to $4.2 million for the nine months ended September 30, 2022 compared to $3.3 million for the nine months ended September 30, 2021.

The increases were primarily related to the change in the fair value adjustment for mortgage banking derivatives, insurance expense, telephone, and software expense related to network upgrades and maintenance agreements.

Income taxes as a percentage of earnings before income taxes as reported in the consolidated financial statements were 18.7% and 18.5% for the three and nine months ended September 30, 2022, respectively, compared to 19.6% and 19.4% for the three and nine months ended September 30, 2021, respectively.

The decrease in the effective tax rate for the three months ended September 30, 2022 compared to the three months ended September 30, 2021 was primarily attributable to the decrease in earnings and the benefit recorded pertaining to the historical tax credit.

The decrease in the effective tax rate for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021 was primarily attributable to the decrease in earnings and the benefit recorded pertaining to the historical tax credit.

The effective tax rate for each of the three and nine months ended September 30, 2022 and 2021, respectively, is lower than the U.S.

Total non-interest expense increased $0.3 million to $12.5 million for the three months ended March 31, 2023 compared to $12.2 million for the three months ended March 31, 2022.

Salaries increased $0.3 million, or 6.4%, to $5.5 million for the three months ended March 31, 2023 compared to $5.2 million for the three months ended March 31, 2022.

The increase was primarily due to annual merit increases.

Employee benefits decreased $0.2 million, or 12.2%, to $1.5 million for the three months ended March 31, 2023 compared to $1.7 million for the three months ended March 31, 2022.

The decrease was primarily due to a decrease in 401(k) plan contributions, medical premiums, and pension cost due to higher annual discount rate assumptions compared to the prior year's annual assumptions.

Loan expense increased $0.2 million, or 165.5%, to $0.4 million for the three months ended March 31, 2023 compared to $0.1 million for the three months ended March 31, 2022.

The increase was primarily due to recognition of adjustment to dealers reserve that was related to prior years' activity.

Other non-interest expense decreased $0.3 million, or 16.3%, to $1.3 million for the three months ended March 31, 2023 compared to $1.6 million for the three months ended March 31, 2022.

The decreases were primarily related to the change in the fair value adjustment for mortgage banking derivatives, telephone, and software expense related to network upgrades and maintenance agreements.

Income taxes as a percentage of earnings before income taxes as reported in the consolidated financial statements were 17.8% for the three months ended March 31, 2023 compared to 18.8% for the three months ended March 31, 2022.

The decrease in the effective tax rate for the three months ended March 31, 2023 compared to the three months ended March 31, 2022 was primarily attributable to the decrease in earnings,and an increase in tax-exempt income and additional tax planning initiatives.

The effective tax rate for each of the three months ended March 31, 2023 and 2022 is lower than the U.S.

federal statutory rate of 21%, primarily due to tax-free revenues.

Included in the effective tax rate is a $13,000 and $40,000 benefit associated with a historic tax credit investment for the three and nine months ended September 30, 2022, respectively.

Included in the effective tax rate is a $13,000 benefit associated with a historic tax credit investment for the three months ended March 31, 2023.

The investment is expected to generate a $331,000 tax benefit over the life of the project and is being recognized under the deferral method of accounting.

1 unchanged sentence

Interest earned on the loan portfolio is a primary source of interest income for the Company.

Net loans represented 79.9% of total assets as of September 30, 2022 compared to 70.2% as of December 31, 2021.

Net loans represented 80.2% of total assets as of March 31, 2023 compared to 78.3% as of December 31, 2022.

Lending activities are conducted pursuant to an established loan policy approved by the Bank’s Board of Directors.

The Bank’s credit review process is overseen by regional loan committees with established loan approval limits.

In addition, a senior loan committee reviews all credit relationships in aggregate over an established dollar amount.

In addition, a senior loan committee reviews all credit relationships in the aggregate over an established dollar amount.

The senior loan committee meets weekly and is comprised of senior managers of the Bank.

Major classifications within the Company’s held for investment loan portfolio as of the dates indicated is as follows:

September 30, 2022 December 31, 2021

Major classifications within the Company’s held-for-investment loan portfolio as of the dates indicated were as follows:

March 31, 2023 December 31, 2022

(Dollars in thousands) Amount % of Loans Amount % of Loans

Commercial, financial, and agricultural (a) $ 248,913 16.7 % $ 217,214 16.7 %

Commercial, financial, and agricultural $ 227,992 14.8 % $ 244,549 16.1 %

Real estate construction − residential

8 unchanged sentences

Total loans held for investment $ 1,542,074 100.0 % $ 1,521,252 100.0 %

(a) Includes $0.6 million and $8.4 million of SBA PPP loans, net as of September 30, 2022 and December 31, 2021, respectively.

The Company extends credit to its local community markets through traditional real estate mortgage products.

5 unchanged sentences

Fixed-rate loans conforming to standards required by the secondary market are offered to qualified borrowers but are not funded until the Company has a non-recourse purchase commitment from the secondary market at a predetermined price.

During the nine months ended September 30, 2022, the Company sold approximately $76.1 million of loans to investors compared to $167.3 million for the nine months ended September 30, 2021.

At September 30, 2022, the Company was servicing approximately $247.6 million of loans sold to the secondary market compared to $270.0 million at December 31, 2021, and $277.1 million at September 30, 2021.

During the three months ended March 31, 2023, the Company sold approximately $20.2 million of loans to investors compared to $29.1 million for the three months ended March 31, 2022.

At March 31, 2023, the Company was servicing approximately $235.2 million of loans sold to the secondary market compared to $240.5 million at December 31, 2022, and $261.5 million at March 31, 2022.

Risk Elements of the Loan Portfolio

Management, the senior loan committee, and internal loan review, formally review all loans in excess of certain dollar amounts (periodically established) at least annually.

Loans in excess of $2.0 million in aggregate and all adversely classified credits identified by management are reviewed by the senior loan committee.

Management, internal loan review and the senior loan committee formally review all loans in excess of certain dollar amounts (periodically established) at least annually.

Loans in excess of $2.0 million in the aggregate and all adversely classified credits identified by management are reviewed by the senior loan committee.

In addition, all other loans are reviewed on a risk weighted selection process.

1 unchanged sentence

past due, classified, and watch list loans in order to classify or reclassify loans as loans requiring attention, substandard, doubtful, or loss.

During this review, management also determines which loans should be considered impaired.

Management follows the guidance provided in the Financial Accounting Standards Board's (FASB) ASC Topic 310-10-35 in identifying and measuring loan impairment.

If management determines that it is probable that all amounts due on a loan will not be collected under the original terms of the loan agreement, the loan is considered impaired.

These loans are evaluated individually for impairment, and in conjunction with current economic conditions and loss experience, specific reserves are estimated as further discussed below.

Loans not individually evaluated are aggregated and reserves are recorded using a consistent methodology that considers historical loan loss experience by loan type,

delinquencies, current economic conditions, loan risk ratings and industry concentration.

During this review, management will evaluate individual loans for expected credit losses when those loans do not share similar risk characteristics with loans evaluated using a collective (pooled) basis.

Management follows the guidance provided in the Financial Accounting Standards Board's (FASB) Accounting Standards Codification (ASC) Topic 326-20-30-2.

If management determines that it is probable that all amounts due on a loan will not be collected under the original terms of the loan agreement, the loan is individually analyzed and in conjunction with current economic conditions and loss experience, reserves are estimated as further discussed below.

Loans not individually evaluated are aggregated and collectively analyzed.

Under ASC 326-20-30-2 and ASC 326-20-55-5, the Company should aggregate financial assets based on similar risk characteristics.

Management determined that segmenting loans not individually analyzed by the federal call report codes represents the most prudent way to consolidate loans by their associated risk qualities.

General reserves are recorded for collectively analyzed loans using a consistent methodology.

Two different models are used for calculating the general reserve.

The Discounted Cash Flow model considers quantitative peer group historic loss experience, forecasts over the estimated life of the loan pools, industry data, and qualitative or environmental factors, such as:

lending policies and procedures;

economic conditions;

the nature, volume and terms of the portfolio;

lending staff and management;

past due loans;

the loan review system;

collateral values;

concentrations of credit;

and external factors.

The Remaining Life model applies a long-term average loss rate calculated using peer data that is adjusted for qualitative or environmental factors such as those previously noted.

The model used depends on the loan portfolio segment.

Management believes, but there can be no assurance, that these procedures keep management informed of potential problem loans.

Based upon these procedures, both the allowance and provision for loan losses are adjusted to maintain the allowance at a level considered necessary by management to provide for probable losses inherent in the loan portfolio.

Based upon these procedures, both the allowance and provision for credit losses are adjusted to maintain the allowance at a level considered necessary by management to provide for expected losses inherent in the loan portfolio.

Non-Performing Assets

The following table summarizes non-performing assets at the dates indicated:

September 30, December 31,

March 31, December 31,

(Dollars in thousands) 2023 2022

Non-accrual loans:

Non-accrual loans (c):

Commercial, financial, and agricultural $ 166 $ 121

5 unchanged sentences

Loans contractually past - due 90 days or more and still accruing:

Real estate mortgage − residential $ — $ 14

Installment and other consumer $ 1 $ 1

Total $ 1 $ 1

3 unchanged sentences

Loans held for investment $ 1,542,074 $ 1,521,252

Allowance for loan losses to loans 1.04 % 1.30 %

Allowance for credit losses on loans 21,979 15,588

Restructured loans accruing 1,571 1,661

Allowance for credit and loan losses to loans, respectively 1.43 % 1.02 %

Non-accrual loans to total loans 1.27 % 1.23 %

2 unchanged sentences

Non-performing assets to assets (b) 1.47 % 1.43 %

Allowance for loan losses to non-accrual loans 89.38 % 66.39 %

Allowance for loan losses to non-performing loans 89.38 % 66.36 %

Allowance for credit and loan losses to non-accrual loans, respectively 112.15 % 83.36 %

Allowance for credit and loan losses to non-performing loans, respectively 112.14 % 83.35 %

(a) Non-performing loans include loans 90 days past due and accruing, non-accrual loans, and non-performing TDRs included in non-accrual loans and 90 days past due.

(b) Non-performing assets include non-performing loans and other real estate owned and repossessed assets.

Total non-performing assets were $26.6 million, or 1.78% of total loans, at September 30, 2022 compared to $36.0 million, or 2.76% of total loans, at December 31, 2021.

Total non-accrual loans at September 30, 2022 decreased $8.1 million, or 31.9%, to $17.3 million compared to $25.5 million at December 31, 2021.

There were no loans past due 90 days and still accruing interest at September 30, 2022 compared to $14,000 at December 31, 2021.

Other real estate and repossessed assets were $9.2 million and $10.5 million at September 30, 2022 and December 31, 2021, respectively.

During the nine months ended September 30, 2022, there were $3,000 of non-accrual loans, net of charge-offs taken, added to other real estate owned and repossessed assets compared to $142,000 during the nine months ended September 30, 2021.

As of September 30, 2022, approximately $14.7 million of loans classified as substandard, which include performing TDRs, and were not included in the non-performing asset table, were identified as potential problem loans having more than normal risk which raised doubts as to the ability of the borrower to comply with present loan repayment terms, compared to $13.8 million at December 31, 2021.

Management believes the allowance for loan losses was sufficient to cover the risks and probable losses related to such loans at September 30, 2022 and December 31, 2021, respectively.

The following table summarizes the Company’s TDRs at the dates indicated:

September 30, 2022 December 31, 2021

(Dollars in thousands) Number of contracts Recorded Investment Specific Reserves Number of contracts Recorded Investment Specific Reserves

Performing TDRs

Commercial, financial and agricultural 3 $ 177 $ 23 2 $ 188 $ 24

Real estate mortgage − residential

5 1,098 53 6 1,262 56

Real estate mortgage − commercial

2 313 53 2 328 38

Installment and other consumer 0 — — 2 17 2

Total performing TDRs 10 $ 1,588 $ 129 12 $ 1,795 $ 120

Non-performing TDRs

Real estate mortgage − residential

5 $ 330 $ 42 5 $ 561 $ 39

Total non-performing TDRs 5 $ 330 $ 42 5 $ 561 $ 39

Total TDRs 15 $ 1,918 $ 171 17 $ 2,356 $ 159

At September 30, 2022, loans classified as TDRs totaled $1.9 million, with $0.2 million of specific reserves, compared to $2.4 million of loans classified as TDRs, with $0.2 million of specific reserves, at December 31, 2021.

Non-performing loans, included $0.3 million of loans classified as TDRs at September 30, 2022 compared to $0.6 million at December 31, 2021.

Both performing and non-performing TDRs are considered impaired loans.

When an individual loan is determined to be a TDR, the amount of impairment is based upon the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the underlying collateral less applicable selling costs if the loan is collateral dependent.

The net decrease in total TDRs from December 31, 2021 to September 30, 2022 was primarily due to $439,000 of payments received on TDRs.

Allowance for Loan Losses and Provision

Allowance for Loan Losses

The following table is a summary of the allocation of the allowance for loan losses:

September 30, 2022 December 31, 2021

Total non-performing assets were $27.8 million, or 1.81% of total loans, at March 31, 2023 compared to $27.5 million, or 1.81% of total loans, at December 31, 2022.

Total non-accrual loans at March 31, 2023 increased $0.9 million, or 4.8%, to $19.6 million compared to $18.7 million at December 31, 2022.

There were $1,000 in loans past due 90 days and still accruing interest at both March 31, 2023 and

December 31, 2022.

Other real estate and repossessed assets were $8.2 million and $8.8 million at March 31, 2023 and December 31, 2022, respectively.

During the three months ended March 31, 2023, there were no non-accrual loans, net of charge-offs taken, added to other real estate owned and repossessed assets.

During the three months ended March 31, 2022, an additional $0.1 million charge-off was recorded related to a property that moved into other real estate owned at the end of the fourth quarter of 2021.

As of March 31, 2023, approximately $10.7 million of loans classified as substandard, which include accruing restructured loans, and were not included in the non-performing asset table, were identified as potential problem loans having more than normal risk which raised doubts as to the ability of the borrower to comply with present loan repayment terms, compared to $12.8 million at December 31, 2022.

Management believes the allowance for credit losses was sufficient to cover the risks and expected / probable losses related to such loans at March 31, 2023 and December 31, 2022, respectively.

Provision and Allowance for Credit Losses on Loans and Liability for Unfunded Commitments

Allowance for Credit Losses

On January 1, 2023, the Company adopted ASU 2016-13, Financial Instruments - Credit Losses (Topic 326) which provides for the CECL credit loss model.

The adoption of the standard resulted in an increase to the allowance for credit losses of $5.8 million and a new liability for unfunded commitments totaling $1.3 million.

These one-time cumulative adjustments resulted in a $5.6 million tax-effected decrease to retained earnings.

The following table is a summary of the allocation of the allowance for credit losses:

March 31, 2023 December 31, 2022

(in thousands) Amount % of loans in each category to total loans Amount % of loans in each category to total loans

Allocation of allowance for loan losses at end of period:

Allocation of allowance for credit losses at end of period:

Commercial, financial, and agricultural $ 1,921 14.8 % $ 2,735 16.1 %

6 unchanged sentences

Total $ 21,979 100.0 % $ 15,588 100.0 %

The allowance for loan losses was $15.5 million, or 1.04%, of loans outstanding at September 30, 2022 compared to $16.9 million, or 1.30%, of loans outstanding at December 31, 2021.

The ratio of the allowance for loan losses to non-performing loans was 89.38% at September 30, 2022, compared to 66.36% at December 31, 2021.

The following table is a summary of the general and specific allocations of the allowance for loan losses:

(in thousands) September 30, 2022 December 31, 2021

Allocation of allowance for loan losses:

Individually evaluated for impairment − specific reserves

$ 302 $ 3,044

Collectively evaluated for impairment − general reserves

15,203 13,859

Total $ 15,505 $ 16,903

The specific reserve component applies to loans evaluated individually for impairment.

The net carrying value of impaired loans is generally based on the fair values of collateral obtained through independent appraisals and/or internal evaluations, or by discounting the total expected future cash flows.

Once the impairment amount is calculated, a specific reserve allocation is recorded.

At September 30, 2022, $0.3 million of the Company’s ALL was allocated to impaired loans totaling approximately $18.9 million compared to $3.0 million of the Company’s ALL allocated to impaired loans totaling approximately $27.3 million at December 31, 2021.

Management determined that $15.9 million, or 84%, of total impaired loans required no reserve allocation at September 30, 2022 compared to $16.6 million, or 61%, at December 31, 2021, primarily due to adequate collateral values , acceptable payment history and adequate cash flow ability.

The incurred loss component of the general reserve, or loans collectively evaluated for impairment, is determined by applying loss rates to pools of loans by asset type.

Loans not individually evaluated are aggregated by risk characteristics and reserves are recorded using a consistent methodology that considers historical loan loss experience by loan type.

The look-back period begins with loss history in the first quarter 2012 as the starting point through the current quarter and it will continue to include this starting point going forward.

Management determined that the look-back period should be expanded until a loss-producing downturn is recognized.

This would be accomplished by allowing the look-back period to shift forward by eliminating the earliest loss period and replenishing it with losses from the most recent period.

The look-back period is consistently evaluated for relevance given the current facts and circumstances.

These historical loss rates for each risk group are used as the starting point to determine loss rates for measurement purposes.

The historical loan loss rates are multiplied by loss emergence periods (LEP) which represent the estimated time period between a borrower first experiencing financial difficulty and the recognition of a loss.

The Company’s methodology includes qualitative risk factors that allow management to adjust its estimates of losses based on the most recent information available and to address other limitations in the quantitative component based on historical loss rates.

Such risk factors are generally reviewed and updated quarterly, as appropriate, and are adjusted to reflect changes in national and local economic conditions and developments, the nature, volume and terms of loans in the portfolio, including changes in volume and severity of past due loans, the volume of non-accrual loans, and the volume and severity of adversely classified or graded loans, loan concentrations, assessment of trends in collateral values, assessment of changes in the quality of the Company’s internal loan review department, and changes in lending policies and procedures, including underwriting standards and collections, charge-off and recovery practices.

The specific and general reserve allocations represent management’s best estimate of probable losses inherent in the loan portfolio at the evaluation date.

Although the ALL is comprised of specific and general allocations, the entire ALL is available to absorb any credit losses.

The decrease in the allowance for loan losses from December 31, 2021 as compared to September 30, 2022 primarily resulted from one large non-accrual loan relationship impacted by COVID-19 that returned to performing status.

This transition was made according to the Company’s established internal loan policies regarding loan performance as well as consultation with industry experts.

This transition back to performing status also reduced specific reserves based on the attributes of the individual loan collateral, to the general allocations method described above.

The Company continues to monitor the risks associated with its non-performing loans.

Partially offsetting this decrease in the allowance for loan losses was an increase in the reserve due to the significant loan growth that occurred during the first nine months of 2022.

The Company recognized a provision expense and a negative provision expense for loan losses of $0.3 million and $1.0 million for the three and nine months ended September 30, 2022, respectively, compared to $0.3 million and $0.7 million provision expense for the three and nine months ended September 30, 2021, respectively.

The negative provision

expense primarily resulted from the release of specific reserves totaling $2.8 million in the first quarter of 2022 due to returning the balances related to one loan relationship to accrual from non-accrual status.

The following table summarizes loan loss experience for the periods indicated:

Three Months Ended September 30, 2022

(Dollars in thousands) Net Charge-offs (Recoveries) Average Loans Net (Recoveries) Charge-offs / Average Loans Net Charge-offs (Recoveries) Average Loans Net (Recoveries) Charge-offs / Average Loans

Commercial, financial, and agricultural $ 33 $ 245,877 0.01 % $ 26 $ 247,564 0.01 %

Real estate construction − residential

— 24,249 — — 35,358 —

Real estate construction − commercial

— 127,594 — — 75,081 —

Real estate mortgage − residential

(4) 323,158 — 10 270,464 —

Real estate mortgage − commercial

(6) 702,139 — 14 633,238 —

Installment and other consumer 125 23,738 0.53 56 24,363 0.23

Total $ 148 $ 1,446,755 0.01 % $ 106 $ 1,286,068 0.01 %

Nine Months Ended September 30,

The allowance for credit losses was $22.0 million, or 1.43%, of loans outstanding at March 31, 2023 compared to $15.6 million, or 1.02%, of loans outstanding at December 31, 2022.

The ratio of the allowance for credit losses to non-performing loans was 112.14% at March 31, 2023, compared to the allowance for loan losses of 83.35% at December 31, 2022.

Provision for (Release of) Credit Losses

Three Months Ended March 31,

(In thousands) 2023 2022

Provision for (release of) credit losses on loans $ 650 $ (2,500)

Provision for available-for-sale securities — —

Provision for credit losses for off-balance sheet commitments 30 —

Total Provision for (release of) credit losses $ 680 $ (2,500)

The Company recognized a provision for credit losses of $0.7 million for the three months ended March 31, 2023, compared to a release of provision for loan losses of $2.5 million for the three months ended March 31, 2022.

The release of provision expense primarily resulted from the release of specific reserves totaling $2.8 million in the first quarter of 2022 due to returning the balances related to one loan relationship to accrual status from non-accrual status.

The following table summarizes credit loss experience for the periods indicated:

Three Months Ended March 31,

(Dollars in thousands) Net Charge-offs (Recoveries) Average Loans Net (Recoveries) Charge-offs / Average Loans Net Charge-offs (Recoveries) Average Loans Net (Recoveries) Charge-offs / Average Loans

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Net Loan Charge-Offs (Recoveries)

The Company’s net charge-offs were $0.1 million, or 0.01% of average loans, for the quarter ended September 30, 2022 compared to $0.1 million, or 0.01% of average loans, for the quarter ended September 30, 2021, and net charge-offs were $0.4 million, or 0.03% of average loans, for the nine months ended September 30, 2022 compared to net recoveries of $0.1 million, or (0.01)% of average loans, for the nine months ended September 30, 2021.

The Company’s net charge-offs were $0.1 million, for the three months ended March 31, 2023 compared to $0.1 million, or 0.01% of average loans, for the three months ended March 31, 2022.

Loans Held for Sale

The Company designates certain long-term fixed rate personal real estate loans as held for sale.

In the fourth quarter of 2021, the Company elected the fair value option for all newly originated long-term personal real estate loans held for sale.

As of December 31, 2021, all loans held for sale were carried at fair value.

These loans are initially measured at fair value under the fair value option election with subsequent changes in fair value recognized in mortgage banking income.

The loans are primarily sold to Freddie Mac, Fannie Mae, and PennyMac and other various secondary market investors.

At September 30, 2022, the carrying amount of these loans was $0.9 million compared to $2.2 million at December 31, 2021.

At March 31, 2023, the carrying amount of these loans was $1.8 million compared to $0.6 million at December 31, 2022.

Liquidity and Capital Resources

Liquidity Management

The role of liquidity management is to ensure funds are available to meet depositors’ withdrawal and borrowers’ credit demands while at the same time maximizing profitability.

The role of liquidity management is to ensure that funds are available to meet depositors’ withdrawal and borrowers’ credit demands while at the same time maximizing profitability.

This is accomplished by balancing changes in demand for funds with changes in the supply of those funds.

Liquidity to meet these demands is provided by maturing assets, short-term liquid assets that can be converted to cash and the ability to attract funds from external sources, principally depositors.

Due to the nature of services offered by the Company, management prefers to focus on transaction accounts and full service relationships with customers as the primary sources of funding.

to the nature of services offered by the Company, management prefers to focus on transaction accounts and full-service relationships with customers as the primary sources of funding.

The Company’s Asset/Liability Committee (ALCO), primarily made up of senior management, has direct oversight responsibility for the Company’s liquidity position and profile.

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The Company’s most liquid assets are comprised of available-for-sale investment securities, not including other debt securities, federal funds sold, and excess reserves held at the Federal Reserve.

(in thousands) September 30, 2022 December 31, 2021

(in thousands) March 31, 2023 December 31, 2022

Federal funds sold $ 47 $ 46

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Federal funds sold and resale agreements normally have overnight maturities and are used for general daily liquidity purposes.

The fair value of the available-for-sale investment portfolio was $245.2 million at September 30, 2022 and included an unrealized net loss of $54.5 million.

The portfolio includes projected maturities and mortgage-backed securities pay-downs of approximately $5.7 million over the next twelve months, which offer resources to meet either new loan demand or reductions in the Company’s borrowings.

The fair value of the available-for-sale investment portfolio was $259.7 million at March 31, 2023 and included an unrealized net loss of $40.7 million.

The portfolio includes projected maturities and mortgage-backed securities pay-downs of approximately $10.3 million over the next 12 months, which offer resources to meet either new loan demand or reductions in the Company’s borrowings.

The Company pledges portions of its investment securities portfolio to secure public fund deposits, federal funds purchase lines, securities sold under agreements to repurchase, borrowing capacity at the Federal Reserve Bank, and for other purposes as required or permitted by law.

At September 30, 2022 and December 31, 2021, the Company’s unpledged securities in the available-for-sale portfolio totaled approximately $76.1 million and $35.5 million, respectively.

At March 31, 2023 and December 31, 2022, the Company’s unpledged securities in the available-for-sale portfolio totaled approximately $54.4 million and $139.2 million, respectively.

Total investment securities pledged for these purposes were as follows:

(in thousands) September 30, 2022 December 31, 2021

(in thousands) March 31, 2023 December 31, 2022

Investment securities pledged for the purpose of securing:

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Liquidity is available from the Company’s base of core customer deposits, defined as demand, interest checking, savings, money market deposit accounts, and time deposits less than $250,000, less all brokered deposits under $250,000.

At September 30, 2022, such deposits totaled $1.4 billion and represented 90.8% of the Company’s total deposits.

At March 31, 2023, such deposits totaled $1.4 billion and represented 86.6% of the Company’s total deposits.

These core deposits are normally less volatile and are often tied to other products of the Company through long-lasting relationships.

Core deposits at September 30, 2022 and December 31, 2021 were as follows:

(in thousands) September 30, 2022 December 31, 2021

Core deposits at March 31, 2023 and December 31, 2022 were as follows:

(in thousands) March 31, 2023 December 31, 2022

Core deposit base:

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Total $ 1,392,639 $ 1,497,084

Estimated uninsured deposits totaled $538.5 million, including $110.9 million of certificates of deposit, at September 30, 2022, compared to $513.5 million, including $69.1 million of certificates of deposit, at December 31, 2021.

The Company had brokered deposits totaling $36.1 million and $20.2 million at September 30, 2022 and December 31, 2021, respectively.

Estimated uninsured deposits totaled $463.7 million, including $175.3 million of certificates of deposit, at March 31, 2023, compared to $420.3 million, including $94.9 million of certificates of deposit, at December 31, 2022.

The Company had brokered deposits totaling $40.1 million at both March 31, 2023 and December 31, 2022.

Included within in the uninsured deposits at March 31, 2023 and December 31, 2022 are public funds deposits greater than $250,000 which are collateralized by the Company totaling $183.3 million and $111.6 million, respectively.

The estimated uninsured and uncollateralized deposits ratio to total deposits at March 31, 2023 and December 31, 2022 was 17% and 19%, respectively.

Other components of liquidity are the level of borrowings from third-party sources and the availability of future credit.

The Company’s outside borrowings are comprised of securities sold under agreements to repurchase, Federal Home Loan Bank advances, and subordinated notes.

The Company’s outside borrowings are comprised of securities sold under agreements to repurchase, advances from the Federal Home Loan Bank (FHLB) advances, and subordinated notes.

Federal funds purchased are overnight borrowings obtained mainly from upstream correspondent banks with which the Company maintains approved credit lines.

As of September 30, 2022, under agreements with these unaffiliated banks, the Bank may borrow up to $60.0 million in federal funds on an unsecured basis and $7.6 million on a secured basis.

There were no federal funds purchased outstanding at September 30, 2022.

As of March 31, 2023, under agreements with these unaffiliated banks, the Bank may borrow up to $35.0 million in federal funds on an unsecured basis and $8.3 million on a secured basis.

There were no federal funds purchased outstanding at March 31, 2023.

Securities sold under agreements to repurchase are generally borrowed overnight and are secured by a portion of the Company’s investment portfolio.

At September 30, 2022, there were $5.9 million in repurchase agreements.

The Company may periodically borrow additional short-term funds from the Federal Reserve Bank through the discount window, although no such borrowings were outstanding at September 30, 2022.

The Bank is a member of the Federal Home Loan Bank of Des Moines (FHLB) and has access to credit products of the FHLB.

As of September 30, 2022, the Bank had $73.0 million in outstanding borrowings with the FHLB.

At March 31, 2023, there were $5.1 million in repurchase agreements.

The Company may periodically borrow additional short-term funds from the Federal Reserve Bank through the discount window, although no such borrowings were outstanding at March 31, 2023.

The Bank is a member of the FHLB and has access to credit products of the FHLB.

As of March 31, 2023, the Bank had $93.0 million in outstanding borrowings with the FHLB.

In addition, the Company has $49.5 million in outstanding subordinated notes issued to wholly owned grantor trusts, funded by preferred securities issued by the trusts.

Borrowings outstanding at September 30, 2022 and December 31, 2021 were as follows:

(in thousands) September 30, 2022 December 31, 2021

Borrowings outstanding at March 31, 2023 and December 31, 2022 were as follows:

(in thousands) March 31, 2023 December 31, 2022

Federal funds purchased and securities sold under agreements to repurchase $ 5,115 $ 5,187

2 unchanged sentences

Total $ 147,601 $ 152,673

The Company pledges certain assets, including loans and investment securities to the Federal Reserve Bank, FHLB, and other correspondent banks as security to establish lines of credit and borrow from these entities.

Based on the type and value of collateral pledged, the FHLB establishes a collateral value from which the Company may draw advances against this collateral.

2 unchanged sentences

The following table reflects collateral value of assets pledged, borrowings, and letters of credit outstanding, in addition to the estimated future funding capacity available to the Company as follows:

September 30, 2022 December 31, 2021

March 31, 2023 December 31, 2022

(in thousands) FHLB Federal Reserve Bank Federal Funds Purchased Lines Total FHLB Federal Reserve Bank Federal Funds Purchased Lines Total

3 unchanged sentences

Total available $ 257,625 $ 8,334 $ 35,000 $ 300,959 $ 209,891 $ 8,058 $ 60,000 $ 277,949

At September 30, 2022, loans of $636.5 million were pledged to the Federal Home Loan Bank as collateral for borrowings and letters of credit.

At September 30, 2022, investments with a market value of $8.0 million were pledged to secure federal funds purchase lines and borrowing capacity at the Federal Reserve Bank.

Based upon the above, management believes the Company has more than adequate liquidity, both on balance sheet and through the additional funding capacity with the FHLB, the Federal Reserve Bank and Federal funds purchased lines to meet future anticipated needs in both the short and long-term.

At March 31, 2023, loans of $598.1 million were pledged to the FHLB as collateral for borrowings and letters of credit.

At March 31, 2023, investments with a market value of $8.8 million were pledged to secure federal funds purchase lines and borrowing capacity at the Federal Reserve Bank.

Sources and Uses of Funds

Cash and cash equivalents were $41.4 million at September 30, 2022 compared to $159.9 million at December 31, 2021.

The $118.5 million decrease resulted from changes in the various cash flows produced by operating, investing, and financing activities of the Company, as shown in the accompanying consolidated statement of cash flows for the nine months ended September 30, 2022.

Cash and cash equivalents were $33.8 million at March 31, 2023 compared to $83.7 million at December 31, 2022.

The $49.9 million decrease resulted from changes in the various cash flows produced by operating, investing, and financing activities of the Company, as shown in the accompanying consolidated statement of cash flows for the three months ended March 31, 2023.

Cash flow provided from operating activities consists mainly of net income adjusted for certain non-cash items.

Operating activities provided cash flow of $14.2 million for the nine months ended September 30, 2022.

Investing activities, consisting mainly of purchases, sales and maturities of available-for-sale securities, and changes in the level of the loan portfolio, used total cash of $180.3 million during the nine months ended September 30, 2022.

The cash outflow primarily consisted of a net increase in loans held for investment of $190.2 million and $17.3 million in purchases of investment securities partially offset by $27.0 million from maturities and calls and sales of investment securities.

Financing activities provided total cash of $47.6 million during the nine months ended September 30, 2022, resulting primarily from a $76.0 million increase in demand deposits, interest-bearing transaction accounts and time deposits.

These increases were partially offset by a $17.9 million decrease in securities sold under agreements to repurchase.

Operating activities provided cash flow of $3.4 million for the three months ended March 31, 2023.

Investing activities, consisting mainly of purchases, sales and maturities of available-for-sale securities, and changes in the level of the loan portfolio, used total cash of $23.1 million during the three months ended March 31, 2023.

The cash outflow primarily consisted of a net increase in loans held for investment of $20.9 million and $8.5 million in purchases of investment securities, partially offset by $5.0 million from maturities, calls and sales of investment securities.

Financing activities used total cash of $30.3 million during the three months ended March 31, 2023, resulting primarily from a $115.4 million decrease in demand deposits and interest-bearing transaction accounts.

These decreases were partially offset by a $91.4 million increase in time deposits.

In the normal course of business, the Company enters into certain forms of off-balance sheet transactions, including unfunded loan commitments and letters of credit.

1 unchanged sentence

Management considers both on-balance sheet and off-balance sheet transactions in its evaluation of the Company’s liquidity.

The Company had $426.3 million in unused loan commitments and standby letters of credit as of September 30, 2022.

The Company had $417.6 million in unused loan commitments and standby letters of credit as of March 31, 2023.

Although the Company’s current liquidity resources are adequate to fund this commitment level, the nature of these commitments is such that the likelihood of such a funding demand is very low.

1 unchanged sentence

The Company’s ongoing liquidity needs primarily include funding its operating expenses, paying cash dividends to its shareholders and, to a lesser extent, repurchasing its shares of common stock.

The Company paid cash dividends to its shareholders totaling approximately $3.1 million and $2.6 million for the nine months ended September 30, 2022 and 2021, respectively.

The Company paid cash dividends to its shareholders totaling approximately $1.2 million and $1.0 million for the three months ended March 31, 2023 and 2022, respectively.

A large portion of the Company’s liquidity is obtained from the Bank in the form of dividends.

The Bank declared and paid $9.0 million and $6.5 million in dividends to the Company during the nine months ended September 30, 2022 and 2021, respectively.

At September 30, 2022 and December 31, 2021, the Company had cash and cash equivalents totaling $3.1 million and $1.8 million, respectively.

The Bank declared and paid $1.5 million and $3.5 million in dividends to the Company during the three months ended March 31, 2023 and 2022, respectively.

At March 31, 2023 and December 31, 2022, the Company had cash and cash equivalents totaling $2.8 million and $2.5 million, respectively.

Subject to declaration by the Company's Board of Directors, the Company expects to continue paying quarterly cash dividends as a part of its current capital allocation strategy.

Future dividends will be subject to the determination, declaration and discretion of the Company's Board of Directors and compliance with applicable regulatory capital requirements.

The Company's 2019 Repurchase Plan was amended during the second quarter 2021 to authorize the purchase of up to an additional $5.0 million in market value of the Company's common stock.

Management was given discretion to determine the number and pricing of the shares to be purchased, as well as the timing of any such purchases.

The Company repurchased 108,724 common shares under the plan during the nine months ended September 30, 2022, at an average cost of $26.60 per share totaling $2.9 million.

The repurchases under these authorizations may be effectuated in the open market, by block purchase, in privately negotiated transactions, or through other transactions managed by broker-dealers, or any combination thereof.

No time limit was set for the completion of these authorized share repurchases.

As of September 30, 2022, $2.1 million remained available for the repurchase of shares pursuant to the share repurchase authorizations.

The Company may continue to repurchase shares under its share repurchase authorizations, but the amount and timing of such repurchases will be dependent on a number of factors, including the price of its common stock and other cash flow needs.

There is no assurance that the Company will repurchase up to the full amount remaining under its share repurchase authorizations.

Pursuant to the Company's 2019 Repurchase Plan, management is given discretion to determine the number and pricing of the shares to be purchased, as well as the timing of any such purchases.

The Company did not repurchase any shares during the three months ended March 31, 2023.

As of March 31, 2023, $2.1 million remained available for share repurchases pursuant to the plan.

Repurchases under the plan may be effectuated in the open market, by block purchase, in privately negotiated transactions, or through other transactions managed by broker-dealers, or any combination thereof.

No time limit was set for completion of share repurchases under the plan.

Capital Management

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The capital amounts and classification of the Company and the Bank are subject to qualitative judgments by the regulators about components, risk-weightings, and other factors.

The Basel III regulatory capital framework (the "Basel III Capital Rules") adopted by U.S.

federal regulatory authorities, among other things, (i) establishes the capital measure called "Common Equity Tier 1" ("CET1"), (ii) specifies that Tier 1 capital consist of CET1 and "Additional Tier 1 Capital" instruments meeting stated requirements, (iii) requires that most deductions/adjustments to regulatory capital measures be made to CET1 and not to other components of capital and (iv) defines the scope of the deductions/adjustments to the capital measures.

Additionally, the Basel III Capital Rules require that the Company maintain a 2.5% capital conservation buffer with respect to each of CET1, Tier 1 and total capital to risk-weighted assets, which provides for capital levels that exceed the minimum risk-based capital adequacy requirements.

A financial institution with a conservation buffer of less than the required amount is subject to limitations on capital distributions, including dividend payments and stock repurchases, and certain discretionary bonus payments to executive officers.

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios of CET1, Tier 1 and total capital to risk-weighted assets, and of Tier 1 capital to average assets, each as defined in the regulations.

Management believes, as of September 30, 2022, that the Company and the Bank meet all capital adequacy requirements to which they are subject.

Financial institutions are categorized as well capitalized or adequately capitalized, based on minimum total risk-based, Tier 1 risk-based, CET1 and Tier 1 leverage ratios.

As shown in the table below, the Company’s capital ratios exceeded the regulatory definition of adequately capitalized as of September 30, 2022 and December 31, 2021.

Based upon the information in its most recently filed call report, the Bank met the capital ratios necessary to be well-capitalized.

The regulatory authorities can apply changes in classification of assets and such changes may retroactively subject the Company to changes in capital ratios.

Any such change could reduce one or more capital ratios below well-capitalized status.

In addition, a change may result in imposition of additional assessments by the FDIC or could result in regulatory actions that could have a material effect on our condition and results of operations.

In July 2013, the federal banking agencies issued final rules to implement the Basel III regulatory capital reforms and changes required by the Dodd-Frank Act (the "Basel III Rules").

The phase-in period for the Company began on January 1, 2015.

The Federal Reserve System's capital adequacy guidelines require that bank holding companies maintain a common equity Tier 1 risk-based capital ratio equal to at least 4.5% of its risk-weighted assets, a Tier 1 risk-based capital ratio equal to at least 6% of its risk-weighted assets and a total risk-based capital ratio equal to at least 8% of its risk-weighted assets.

In addition, bank holding companies generally are required to maintain a Tier 1 leverage ratio of at least 4%.

Because the Bank had less than $15.0 billion in total consolidated assets as of December 31, 2009, the Company is allowed to continue to classify its trust preferred securities, all of which were issued prior to May 19, 2010, as Tier 1 capital.

Under the Basel III requirements, at September 30, 2022 and December 31, 2021, the Company met all capital adequacy requirements and had regulatory capital ratios in excess of the levels established for well-capitalized institutions, as shown in the following table as of periods indicated:

In addition to the higher requirements, the Basel III Rules established that bank holding companies are required to maintain a common equity Tier 1 capital conservation buffer of at least 2.5% of risk-weighted assets over and above the minimum risk-based capital requirements.

Institutions that do not maintain the required capital buffer will become subject to progressively more stringent limitations on the percentage of earnings that can be paid out in dividends or used for stock repurchases and on the payment of discretionary bonuses to senior executive management.

The capital conservation buffer requirement was phased in over four years beginning in 2016.

On January 1, 2016, the first phase of the requirement went into effect at 0.625% of risk-weighted assets, and increased each subsequent year by an additional 0.625 percentage points, to reach its final level of 2.5% of risk-weighted assets on January 1, 2019.

At December 31, 2019, the capital conservation buffer requirement of 2.5% effectively raised the minimum required risk-based capital ratios to 7% common equity Tier 1 capital, 8.5% Tier 1 capital and 10.5% total capital on a fully phased-in basis.

Because the Bank had less than $15.0 billion in total consolidated assets as of December 31, 2009, the Company is allowed to continue its trust preferred securities, all of which were issued prior to May 19, 2010, as Tier 1 capital.

Under the Basel III Rules, at March 31, 2023 and December 31, 2022, the Company met all capital adequacy requirements and had regulatory capital ratios in excess of the levels established for well-capitalized institutions, as shown in the following table as of periods indicated:

Actual Minimum Capital Required - Basel III Fully Phased-In Required to be Considered Well- Capitalized

(Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio

September 30, 2022

March 31, 2023

Total Capital (to risk-weighted assets):

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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