What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2023-08-10 compared with 2023-05-15 · 260 added, 158 removed, 440 unchanged (49% of the section changed)

19 unchanged sentences

• 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.

2 unchanged sentences

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 $1.9 billion in assets at March 31, 2023, provides a broad range of commercial and personal banking services.

Through the branch network of its subsidiary bank, Hawthorn Bank (the Bank), the Company, with $1.9 billion in assets at June 30, 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.

28 unchanged sentences

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.

GAAP) and the rules of the SEC.

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

2 unchanged sentences

The Three Months Ended

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

(In thousands, except per share data) June 30, 2023 March 31, 2023 June 30, 2022

Net interest income $ 14,202 $ 13,948 $ 14,561

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

Provision for credit losses on loans & unfunded commitments — 680 1,200

Non-interest income 1,596 3,182 3,648

9 unchanged sentences

Net interest margin 3.19% 3.16% 3.64%

Six Months Ended

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

Net interest income $ 28,150 $ 28,706

Provision for (release of) loan losses 680 (1,300)

Non-interest income 4,778 7,374

Investment securities (losses) gains, net 15 (13)

Non-interest expense 25,202 23,767

Income before income taxes 7,061 13,600

Income tax expense 1,241 2,502

Net income $ 5,820 $ 11,098

Basic earnings per share $ 0.83 $ 1.57

Diluted earnings per share $ 0.83 $ 1.57

Efficiency ratio (1) 76.54% 65.87%

Net interest spread 2.55% 3.41%

Net interest margin 3.17% 3.57%

(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

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

As of and for the Three Months Ended For the Six Months Ended

(Dollars in thousands, except per share data) June 30, 2023 March 31, 2023 June 30, 2022 June 30, 2023 June 30, 2022

Key Financial Ratios

17 unchanged sentences

Non-performing assets to total assets 0.54% 1.47% 1.51%

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

Allowance for loan losses to total loans 1.42% 1.43% 1.08%

(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 $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 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.

Consolidated net income of $2.5 million for the second quarter 2023 decreased $0.7 million, or 22.1%, compared to the first quarter 2023 ("linked quarter") and decreased $1.9 million, or 43.2%, from the second quarter 2022 (the "prior year quarter").

Earnings per diluted share were $0.36 for the second quarter 2023 compared to $0.47 and $0.64 for the linked quarter and prior year quarter, respectively.

For the second quarter 2023, the return on average assets was 0.54%, the return on average stockholders’ equity was 7.99%, and the efficiency ratio was 80.5%.

Consolidated net income of $5.8 million, or $0.83 per diluted share, for the six months ended June 30, 2023 decreased $5.3 million, or 47.6%, compared to $11.1 million, or $1.57 per diluted share, for the six months ended June 30, 2022.

For the six months ended June 30, 2023, the return on average assets was 0.62%, the return on average stockholders’ equity was 9.07%, and the efficiency ratio was 76.5%.

Net interest income of $14.2 million for the second quarter 2023, increased $0.3 million from the linked quarter, and decreased $0.4 million from the prior year quarter.

Net interest margin, on a fully taxable equivalent ("FTE") basis, was 3.19% for the second quarter, compared to 3.16% and 3.64% for the linked quarter and the prior year quarter, respectively.

Net interest income of $28.2 million for the six months ended June 30, 2023 decreased $0.6 million compared to $28.7 million for the six months ended June 30, 2022.

Net interest margin, on a fully taxable equivalent basis, was 3.17% for the six months ended June 30, 2023, a decrease from 3.57% for the six months ended June 30, 2022.

The change to net interest margin on a fully taxable equivalent basis is discussed in greater detail under the Average Balance Sheet Data and Rate and Volume Analysis sections below.

Non-interest income for the second quarter 2023 was $1.6 million, a decrease of $1.6 million, or 49.8%, from the linked quarter, and a decrease of $2.1 million, or 56.3%, from the prior year quarter.

The change in the current quarter compared to the prior year quarter is primarily due to the recognition of a $1.8 million write-down on a foreclosed property in other real estate owned based on a current appraisal.

Non-interest income of $4.8 million for the six months ended June 30, 2023 decreased $2.6 million, or 35.2%, compared to $7.4 million for the six months ended June 30, 2022.

The decrease is primarily due to the recognition of a $1.8 million write-down in the second quarter 2023 on a foreclosed property in other real estate owned based on a current appraisal and a $0.5 million decrease in the gain on sale of real estate mortgages.

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

Non-interest expense for the second quarter 2023 was $12.7 million, an increase of $0.2 million, or 2.0%, from the linked quarter, and an increase of $1.2 million, or 10.3%, from the prior year quarter.

Non-interest expense for the six months ended June 30, 2023 was $25.2 million, an increase of $1.4 million, or 6.0%, from the six months ended June 30, 2022.

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

Balance Sheet Highlights:

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.

Cash and cash equivalents – Cash and cash equivalents decreased $9.1 million, or 27.0%, to $24.6 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 $3.6 million, or 12.7%, from $28.2 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.

See the Liquidity Management section for further discussion.

Loans – Loans held for investment increased by $21.1 million, or 1.4%, to $1.6 billion as of June 30, 2023 as compared to the end of the linked quarter.

Year-over-year, loans held for investment increased $135.4 million, or 9.5%, from $1.4 billion as of June 30, 2022.

Asset quality – Non-performing loans totaled $3.8 million at June 30, 2023, a decrease of $15.8 million from $19.6 million at the end of the linked quarter, and a decrease of $14.0 million from $17.8 million at the end of the prior year quarter.

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

The allowance for credit losses to total loans was 1.42% at June 30, 2023, compared to the allowance for loan losses to total loans of 1.02% at December 31, 2022 and 1.08% at June 30, 2022.

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

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.

Deposit s – Total deposits decreased $64.7 million, or 4.0%, to $1.5 billion as of June 30, 2023 as compared to the end of the linked quarter.

Year-over-year deposits increased $12.5 million, or 0.8%, from $1.5 billion as of June 30, 2022.

Federal Home Loan Bank advances and other borrowings – FHLB advances and other borrowings increased $71.3 million, or 76.6%, to $164.3 million as of June 30, 2023 as compared to the end of the linked quarter.

Year-over-year FHLB advances and other borrowing increased $96.3 million, or 141.6%, from $68.0 million as of June 30, 2022.

The Company utilized funding capacity with the FHLB to meet its short-term liquidity needs.

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.

Total stockholders' equity was $126.5 million and the common equity to assets ratio was 6.65% at June 30, 2023 as compared to 6.77% and 6.93% 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 10.46% and a total risk-based capital ratio of 13.99% at June 30, 2023.

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 FTE basis for each of the three month ended March 31, 2023 and 2022, 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 fully taxable equivalent basis for each of the three and six month periods ended June 30, 2023 and 2022, respectively.

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

Three Months Ended March 31,

Three Months Ended June 30,

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

19 unchanged sentences

All other assets 92,153 86,488

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

Allowance for loan losses (22,160) (14,383)

Total assets $ 1,895,775 $ 1,739,119

19 unchanged sentences

Net interest margin 3.19% 3.64%

(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.

Such adjustments totaled $0.3 million and $0.6 million for the three months ended June 30, 2023 and 2022, respectively.

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

Six Months Ended June 30, 2023

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

Commercial $ 231,271 $ 6,941 6.05% $ 226,569 $ 5,648 5.03%

Real estate construction - residential 43,185 1,487 6.94 23,311 532 4.60

Real estate construction - commercial 142,093 3,687 5.23 101,872 2,161 4.28

Real estate mortgage - residential 364,886 9,339 5.16 289,011 5,891 4.11

Real estate mortgage - commercial 733,666 17,203 4.73 676,350 14,135 4.21

Installment and other consumer 22,849 483 4.26 22,605 408 3.64

Total loans $ 1,537,950 $ 39,140 5.13% $ 1,339,718 $ 28,775 4.33%

Loans held for sale 2,559 60 4.73 1,983 46 4.68

Investment securities:

Treasury 4,153 81 3.93 4,073 16 0.79

government and federal agency obligations 25,360 202 1.61 26,640 184 1.39

Obligations of states and political subdivisions 110,996 1,773 3.22 121,814 2,113 3.50

Mortgage-backed securities 103,084 1,051 2.06 125,476 1,010 1.62

Other debt securities 11,957 344 5.80 13,233 313 4.77

Total investment securities 255,550 3,451 2.72 291,236 3,636 2.52

Other investment securities 6,660 200 6.06 5,429 141 5.24

Federal funds sold 56 1 3.60 3,423 5 0.29

Interest bearing deposits in other financial institutions 27,425 640 4.71 43,740 102 0.47

Total interest earning assets $ 1,830,200 $ 43,492 4.79% $ 1,685,529 $ 32,705 3.91%

All other assets 89,709 84,900

Allowance for loan losses (18,989) (15,648)

Total assets $ 1,900,920 $ 1,754,781

LIABILITIES AND STOCKHOLDERS' EQUITY

Savings $ 169,627 $ 30 0.04% $ 178,726 $ 30 0.03%

NOW accounts 202,995 1,021 1.01 266,497 550 0.42

Interest checking 161,072 3,489 4.37 27,601 81 0.59

Money market 304,104 2,955 1.96 291,207 232 0.16

Time deposits 329,916 4,034 2.47 254,033 714 0.57

Total interest bearing deposits $ 1,167,714 $ 11,529 1.99% $ 1,018,064 $ 1,607 0.32%

Federal funds purchased and securities sold under agreements to repurchase 5,214 45 1.74 10,149 19 0.38

Federal Home Loan Bank advances and other borrowings 104,734 1,355 2.61 76,795 501 1.32

Subordinated notes 49,486 1,781 7.26 49,486 745 3.04

Total borrowings 159,434 3,181 4.02 136,430 1,265 1.87

Total interest bearing liabilities $ 1,327,148 $ 14,710 2.24% $ 1,154,494 $ 2,872 0.50%

Demand deposits 431,795 451,273

Other liabilities 12,611 11,976

Total liabilities $ 1,771,554 $ 1,617,743

Stockholders' equity 129,366 137,038

Total liabilities and stockholders' equity $ 1,900,920 $ 1,754,781

Net interest income (FTE) $ 28,782 $ 29,833

Net interest spread 2.55% 3.41%

Net interest margin 3.17% 3.57%

(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 the six months ended June 30, 2023 and 2022.

Such adjustments totaled $0.6 million and $1.1 million for the six months ended June 30, 2023 and 2022, respectively.

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

Rate and Volume Analysis

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 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 six months ended June 30, 2023 compared to the three and six months ended June 30, 2022, respectively.

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 March 31,

Change due to

(in thousands) Total Change Average Volume Average Rate

Three Months Ended June 30, Six Months Ended June 30,

2022 2023 vs.

Change due to Change due to

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

Interest income on a fully taxable equivalent basis:

27 unchanged sentences

Net interest income on a fully taxable equivalent basis $ (627) $ 1,147 $ (1,774) $ (1,051) $ 2,459 $ (3,510)

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.

(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 the three and six months ended June 30, 2023 and 2022, respectively.

Such adjustments totaled $0.3 million and $0.6 million for the three and six months ended June 30, 2023, respectively, compared to $0.6 million and $1.1 million for the three and six months ended June 30, 2022, respectively.

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

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.

Financial results for the quarter ended June 30, 2023 compared to the quarter ended June 30, 2022 reflected a decrease in net interest income, on a fully taxable equivalent basis, of $0.6 million, or 4.1%, and financial results for the six months ended June 30, 2023 compared to the six months ended June 30, 2022 reflected a decrease of $1.1 million, or 3.5%.

Measured as a percentage of average earning assets, the net interest margin (expressed on a fully taxable equivalent basis) decreased to 3.19% for the quarter ended June 30, 2023 compared to 3.64% for the quarter ended June 30, 2022, and decreased to 3.17% for the six months ended June 30, 2023 compared to 3.57% for the six months ended June 30, 2022.

While interest income on a fully taxable equivalent basis increased $5.5 million in the current quarter compared to the prior year quarter, and increased $10.8 million for the six months ended June 30, 2023 compared to the six months ended June 30, 2022, interest expense increased $6.1 million and $11.8 million for the three and six months ended June 30, 2023, respectively, resulting in a decrease in net interest income on a fully taxable equivalent basis.

Average interest-earning assets increased $158.8 million, or 9.5%, to $1.83 billion for the quarter ended June 30, 2023 compared to $1.67 billion for the quarter ended June 30, 2022, and average interest-bearing liabilities increased $175.9 million, or 15.3%, to $1.32 billion for the quarter ended June 30, 2023 compared to $1.15 billion for the quarter ended June 30, 2022.

Average interest-earning assets increased $144.7 million, or 8.6%, to $1.83 billion for the six months ended June 30, 2023 compared to $1.69 billion for the six months ended June 30, 2022, and average interest-bearing liabilities increased $172.7 million, or 15.0%, to $1.33 billion for the six months ended June 30, 2023 compared to $1.15 billion for the six months ended June 30, 2022.

Total interest income (expressed on a fully taxable equivalent basis) was $22.2 million and $43.5 million for the three and six months ended June 30, 2023, respectively, compared to $16.7 million and $32.7 million for the three and six months ended June 30, 2022, respectively.

The Company’s rates earned on interest earning assets were 4.88% and 4.79% for the three and six months ended June 30, 2023, respectively, compared to 4.02% and 3.91% for the three and six months ended June 30, 2022, respectively.

Interest income on loans held for investment was $20.2 million and $39.1 million for the three and six months ended June 30, 2023, respectively, compared to $14.7 million and $28.8 million for the three and six months ended June 30, 2022, respectively.

Average loans outstanding increased $189.5 million, or 13.9%, to $1.55 billion for the quarter ended June 30, 2023 compared to $1.36 billion for the quarter ended June 30, 2022.

The average yield on loans increased to 5.23% for the quarter ended June 30, 2023 compared to 4.33% for the quarter ended June 30, 2022.

Average loans outstanding increased $198.2 million, or 14.8%, to $1.54 billion for the six months ended June 30, 2023 compared to $1.34 billion for the six months ended June 30, 2022.

The average yield on loans increased to 5.13% for the six months ended June 30, 2023 compared to 4.33% for the six months ended June 30, 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 $1.7 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.

Interest income on available-for-sale securities was $1.7 million and $3.5 million for the three and six months ended June 30, 2023, respectively, compared to $1.9 million and $3.6 million for the three and six months ended June 30, 2022, respectively.

Average securities decreased $22.2 million, or 8.0%, to $256.1 million for the quarter ended June 30, 2023 compared to $278.3 million for the quarter ended June 30, 2022.

The average yield on securities increased to 2.71% for the quarter ended June 30, 2023 compared to 2.67% for the quarter ended June 30, 2022.

Average securities decreased $35.7 million, or 12.3%, to $255.6 million for the six months ended June 30, 2023 compared to $291.2 million for the six months ended June 30, 2022.

The average yield on securities increased to 2.72% for the six months ended June 30, 2023 compared to 2.52% for the six months ended June 30, 2022.

See the Liquidity Management section for further discussion.

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.

Total interest expense increased to $7.7 million and $14.7 million for the three and six months ended June 30, 2023, respectively, compared to $1.6 million and $2.9 million for the three and six months ended June 30, 2022, respectively.

The Company’s rates paid on interest bearing liabilities were 2.34% and 2.24% for the three and six months ended June 30,

2023, respectively, compared to 0.55% and 0.50% for the three and six months ended June 30, 2022, respectively.

See the Liquidity Management section for further discussion.

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.

Interest expense on deposits increased to $6.0 million and $11.5 million for the three and six months ended June 30, 2023, respectively, compared to $0.9 million and $1.6 million for the three and six months ended June 30, 2022, respectively.

Average interest-bearing deposits increased $140.8 million, or 13.9%, to $1.16 billion for the quarter ended June 30, 2023 compared to $1.01 billion for the quarter ended June 30, 2022.

The average cost of deposits increased to 2.07% for the quarter ended June 30, 2023 compared to 0.36% for the quarter ended June 30, 2022.

Average interest-bearing deposits increased $149.7 million, or 14.7%, to $1.17 billion for the six months ended June 30, 2023 compared to $1.02 billion for the six months ended June 30, 2022.

The average cost of deposits increased to 1.99% for the six months ended June 30, 2023 compared to 0.32% for the six months ended June 30, 2022.

Interest expense on borrowings increased to $1.7 million and $3.2 million for the three and six months ended June 30, 2023, respectively, compared to $0.7 million and $1.3 million for the three and six months ended June 30, 2022, respectively.

Average borrowings increased $35.1 million, or 26.5%, to $167.3 million for the quarter ended June 30, 2023 compared to $132.2 million for the quarter ended June 30, 2022.

The average cost of borrowings increased to 4.19% for the quarter ended June 30, 2023 compared to 2.06% for the quarter ended June 30, 2022.

Average borrowings increased $23.0 million, or 16.9%, to $159.4 million for the six months ended June 30, 2023 compared to $136.4 million for the six months ended June 30, 2022.

The Company utilized funding capacity with the FHLB to meet its short-term liquidity needs.

The average cost of borrowings increased to 4.02% for the six months ended June 30, 2023 compared to 1.87% for the six months ended June 30, 2022.

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

1 unchanged sentence

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

Three Months Ended March 31,

(Dollars in thousands) 2023 2022 $ Change % Change

Non-interest income

Three Months Ended June 30, Six Months Ended June 30,

(Dollars in thousands) 2023 2022 $ Change % Change 2023 2022 $ Change % Change

Service charges and other fees $ 737 $ 835 $ (98) (11.7) % $ 1,420 $ 1,628 $ (208) (12.8) %

3 unchanged sentences

Gain on sales of mortgage loans, net 667 806 (139) (17.2) % 1,162 1,695 (533) (31.4) %

(Provision for) release of other real estate owned (1,831) 28 (1,859) NM (1,831) 28 (1,859) NM

Other 603 372 231 62.1 % 1,182 885 297 33.6 %

2 unchanged sentences

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

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) 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 $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.

NM = not meaningful

Total non-interest income decreased $2.1 million, or 56.3%, to $1.6 million for the second quarter ended June 30, 2023 compared to $3.6 million for the second quarter ended June 30, 2022, and decreased $2.6 million, or 35.2%, to $4.8 million for the six months ended June 30, 2023 compared to $7.4 million for the six months ended June 30, 2022.

The decrease was primarily due to the recognition of a $1.8 million write-down on a foreclosed property in other real estate owned based on a current appraisal and a decrease in the gain on sale of real estate mortgages.

Real estate servicing fees, net of the change in valuation of mortgage servicing rights (MSRs) decreased to $0.1 million for the quarter ended June 30, 2023 compared to $0.2 million for the quarter ended June 30, 2022, and decreased to $0.3 million for the six months ended June 30, 2023 compared to $0.5 million for the six months ended June 30, 2022.

The Company was servicing $231.1 million of mortgage loans at June 30, 2023 compared to $240.5 million and $252.3 million at December 31, 2022 and June 30, 2022, respectively.

Gain on sales of mortgage loans decreased $0.1 million to $0.7 million for the second quarter ended June 30, 2023 compared to $0.8 million for the second quarter ended June 30, 2022, and decreased $0.5 million to $1.2 million for the six months ended June 30, 2023 compared to $1.7 million for the six months ended June 30, 2022.

The decrease in mortgage banking income, consisting of net gains on loan origination and sales activities, is primarily a result of the continued depressed residential mortgage environment, with increasing rates, reducing refinancing and new-purchase volumes.

With the depressed mortgage environment, margins are compressed due to competition within the marketplace .

The Company sold $26.9 million and $47.2 million of loans for the three and six months ended June 30, 2023, respectively, compared to $25.7 million and $54.7 million for the three and six months ended June 30, 2022, respectively.

Investment Security Gains (Losses)

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 were recognized in earnings:

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

(in thousands) 2023 2022 2023 2022

Investment securities gains (losses), net

Available-for-sale securities:

Gross realized gains $ — $ — $ — $ —

5 unchanged sentences

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

Three Months Ended March 31,

(Dollars in thousands) 2023 2022 $ Change % Change

Non-interest expense

Three Months Ended June 30, Six Months Ended June 30,

(Dollars in thousands) 2023 2022 $ Change % Change 2023 2022 $ Change % Change

Salaries $ 5,560 $ 5,008 $ 552 11.0% $ 11,044 $ 10,163 $ 881 8.7%

13 unchanged sentences

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

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.

Total non-interest expense increased $1.2 million to $12.7 million for the quarter ended June 30, 2023 compared to $11.5 million for the quarter ended June 30, 2022 and increased $1.4 million to $25.2 million for the six months ended June 30, 2023 compared to $23.8 million for the six months ended June 30, 2022.

Salaries increased $0.6 million, or 11.0%, to $5.6 million for the quarter ended June 30, 2023 compared to $5.0 million for the quarter ended June 30, 2022, and increased $0.9 million, or 8.7%, to $11.0 million for the six months ended June 30,

2023 compared to $10.2 million for the six months ended June 30, 2022.

The increase was primarily due to annual merit increases and an increase in full-time equivalent employees.

Employee benefits decreased $0.3 million, or 19.8%, to $1.3 million for the quarter ended June 30, 2023 compared to $1.6 million for the quarter ended June 30, 2022, and decreased $0.5 million, or 15.8%, to $2.8 million for the six months ended June 30, 2023 compared to $3.3 million for the six months ended June 30, 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.

Loan expense increased $0.1 million, or 52.2%, to $0.2 million for the quarter ended June 30, 2023 compared to $0.2 million for the quarter ended June 30, 2022, and increased $0.3 million, or 105.9%, to $0.6 million for the six months ended June 30, 2023 compared to $0.3 million for the six months ended June 30, 2022.

The increase was primarily due to recognition of an adjustment to an unearned dealers reserve related to prior years activity in the first quarter of 2023.

Other non-interest expense increased $0.6 million, or 54.1%, to $1.8 million for the quarter ended June 30, 2023 compared to $1.2 million for the quarter ended June 30, 2022, and increased $0.4 million, or 13.7%, to $3.2 million for the six months ended June 30, 2023 compared to $2.8 million for the six months ended June 30, 2022.

The increase was primarily related to the increase in the FDIC assessment, director fees, insurance, and correspondent bank fees, partially offset by the change in the fair value adjustment for mortgage banking derivatives.

Income taxes as a percentage of earnings before income taxes as reported in the consolidated financial statements were 17.2% and 17.6% for the three and six months ended June 30, 2023, respectively, compared to 17.8% and 18.4% for the three and six months ended June 30, 2022, respectively.

The decrease in the effective tax rate for the three and six months ended June 30, 2023 compared to the three and six months ended June 30, 2022 was primarily attributable to the decrease in earnings, an increase in tax-exempt income and additional expense for tax planning initiatives.

The effective tax rate for each of the three and six months ended June 30, 2023 and 2022, respectively, 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 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.

Included in the effective tax rate is a $13,000 and $26,000 benefit associated with a historic tax credit investment for the three and six months ended June 30, 2023, respectively.

The investment is expected to generate a $0.3 million tax benefit over the life of the project and is being recognized under the deferral method of accounting.

Lending and Credit Management

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

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

Net loans represented 81.1% of total assets as of June 30, 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.

2 unchanged sentences

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 were as follows:

March 31, 2023 December 31, 2022

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

June 30, 2023 December 31, 2022

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

17 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 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.

During the six months ended June 30, 2023, the Company sold approximately $47.2 million of loans to investors compared to $54.7 million for the six months ended June 30, 2022.

At June 30, 2023, the Company was servicing approximately $231.1 million of loans sold to the secondary market compared to $240.5 million at December 31, 2022, and $252.3 million at June 30, 2022.

Risk Elements of the Loan Portfolio

28 unchanged sentences

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

March 31, December 31,

June 30, December 31,

(Dollars in thousands) 2023 2022

1 unchanged sentence

Commercial, financial, and agricultural $ 162 $ 121

Real estate construction − residential 94 —

Real estate construction − commercial 78 87

21 unchanged sentences

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

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.

Total non-performing assets were $10.3 million, or 0.66% of total loans, at June 30, 2023 compared to $27.5 million, or 1.81% of total loans, at December 31, 2022.

Total non-accrual loans at June 30, 2023 decreased $14.9 million, or 79.5%, to $3.8 million compared to $18.7 million at December 31, 2022 primarily due to three large non-accrual loan relationships returning to accruing status.

There were $7,000 in loans past due 90 days and still accruing interest at June 30, 2023 compared to $1,000 at December 31, 2022.

Other real estate and repossessed assets were $6.4 million and $8.8 million at June 30, 2023 and December 31, 2022, respectively.

During the six months ended June 30, 2023, there were $44,000 of non-accrual loans, net of charge-offs taken, added to other real estate owned and repossessed assets.

During the six months ended June 30, 2022, an additional $52,000 charge-off was recorded related to a property that moved into other real estate owned.

As of June 30, 2023, approximately $26.3 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 $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 June 30, 2023 and December 31, 2022, respectively.

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

1 unchanged sentence

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.

The adoption of the standard resulted in an increase to the allowance for credit losses of $5.8 million and a 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

June 30, 2023 December 31, 2022

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

Allocation of allowance for credit losses at end of period:

7 unchanged sentences

Total $ 22,236 100.0 % $ 15,588 100.0 %

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,

The allowance for credit losses was $22.2 million, or 1.42%, of loans outstanding at June 30, 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 578.01% at June 30, 2023, compared to the allowance for loan losses of 83.35% at December 31, 2022.

Provision for (Release of) Credit Losses / Loan Losses

Three Months Ended June 30, Six Months Ended June 30,

(In thousands) 2023 2022 2023 2022

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

Provision for (release of) credit / loan losses on loans, respectively $ 165 $ 1,200 $ 815 $ (1,300)

Provision for available-for-sale securities — — — —

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

Provision for (release of) credit losses for off-balance sheet commitments (165) — (135) —

Total Provision for (release of) credit losses $ — $ 1,200 $ 680 $ (1,300)

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.

No net provision for credit losses was recognized for the three months ended June 30, 2023 and the Company recognized a $0.7 million provision for credit losses for the six months ended June 30, 2023, compared to a $1.2 million provision for loan losses for the three months ended June 30, 2022 and a $1.3 million release of provision for loan losses for the six months ended June 30, 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,

Three Months Ended June 30,

(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

10 unchanged sentences

Total $ (92) $ 1,553,486 (0.01) % $ 126 $ 1,364,008 0.01 %

Six Months Ended June 30,

(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 $ (131) $ 231,271 (0.06) % $ 24 $ 226,569 0.01 %

Real estate construction − residential

— 43,185 — — 23,311 —

Real estate construction − commercial

— 142,093 — — 101,872 —

Real estate mortgage − residential

(4) 364,886 — (23) 289,011 (0.01)

Real estate mortgage − commercial

24 733,666 — 175 676,350 0.03

Installment and other consumer 71 22,849 0.31 74 22,605 0.33

Total $ (40) $ 1,537,950 — % $ 250 $ 1,339,718 0.02 %

Net Loan Charge-Offs (Recoveries)

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.

The Company’s net recoveries were $0.1 million and $40,000 for the three and six months ended June 30, 2023, respectively, compared to net charge-offs of $0.1 million and $0.3 million for the three and six months ended June 30, 2022, respectively.

Loans Held for Sale

2 unchanged sentences

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

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

At June 30, 2023, the carrying amount of these loans was $2.1 million compared to $0.6 million at December 31, 2022.

Liquidity and Capital Resources

2 unchanged sentences

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.

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.

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.

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.

3 unchanged sentences

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) March 31, 2023 December 31, 2022

(in thousands) June 30, 2023 December 31, 2022

Federal funds sold $ 115 $ 46

4 unchanged sentences

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 $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 fair value of the available-for-sale investment portfolio was $251.6 million at June 30, 2023 and included an unrealized net loss of $44.7 million.

The portfolio includes projected maturities and mortgage-backed securities pay-downs of approximately $10.6 million over the next twelve 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 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.

At June 30, 2023 and December 31, 2022, the Company’s unpledged securities in the available-for-sale portfolio totaled approximately $131.1 million and $139.2 million, respectively.

Total investment securities pledged for these purposes were as follows:

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

(in thousands) June 30, 2023 December 31, 2022

Investment securities pledged for the purpose of securing:

4 unchanged sentences

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

At June 30, 2023, such deposits totaled $1.4 billion and represented 90.8% 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 March 31, 2023 and December 31, 2022 were as follows:

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

Core deposits at June 30, 2023 and December 31, 2022 were as follows:

(in thousands) June 30, 2023 December 31, 2022

Core deposit base:

4 unchanged sentences

Total $ 1,401,180 $ 1,497,085

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.

Estimated uninsured deposits totaled $359.4 million, including $112.9 million of certificates of deposit, at June 30, 2023, compared to $420.3 million, including $94.9 million of certificates of deposit, at December 31, 2022.

The Company had brokered deposits totaling $29.2 million and $40.1 million at June 30, 2023 and December 31, 2022, respectively.

Included within in the uninsured deposits at June 30, 2023 and December 31, 2022 are public funds deposits greater than $250,000 which are collateralized by the Company totaling $104.3 million and $111.6 million, respectively.

The estimated uninsured and uncollateralized deposits ratio to total deposits at June 30, 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, advances from the Federal Home Loan Bank (FHLB) 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), 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 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.

As of June 30, 2023, under agreements with these unaffiliated banks, the Bank may borrow up to $35.0 million in federal funds on an unsecured basis and $8.2 million on a secured basis.

There were no federal funds purchased outstanding at June 30, 2023.

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

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.

At June 30, 2023, there were $5.5 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 June 30, 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.

As of June 30, 2023, the Bank had $164.3 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 March 31, 2023 and December 31, 2022 were as follows:

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

Borrowings outstanding at June 30, 2023 and December 31, 2022 were as follows:

(in thousands) June 30, 2023 December 31, 2022

Federal funds purchased and securities sold under agreements to repurchase $ 5,503 $ 5,187

7 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:

March 31, 2023 December 31, 2022

June 30, 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 $ 216,635 $ 8,172 $ 35,000 $ 259,807 $ 209,891 $ 8,058 $ 60,000 $ 277,949

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.

At June 30, 2023, loans of $651.6 million were pledged to the FHLB as collateral for borrowings and letters of credit.

At June 30, 2023, investments with a market value of $8.7 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 liquidity needs in both the short and long-term.

Sources and Uses of Funds

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 and cash equivalents were $24.6 million at June 30, 2023 compared to $83.7 million at December 31, 2022.

The $59.1 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 six months ended June 30, 2023.

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

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.

Operating activities provided cash flow of $7.8 million for the six months ended June 30, 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 $42.3 million during the six months ended June 30, 2023.

The cash outflow primarily consisted of a net increase in loans held for investment of $41.8 million and $17.8 million in purchases of investment securities and FHLB stock, partially offset by $8.9 million from maturities and calls and sales of investment securities and FHLB stock.

Financing activities used total cash of $24.5 million during the six months ended June 30, 2023, resulting primarily from a $127.0 million decrease in demand deposits and interest-bearing transaction accounts.

These decreases were partially offset by a $38.2 million increase in time deposits.

The Company utilized funding capacity with the FHLB by drawing advances of $230.1 million and repaying $163.8 million to meet its short-term liquidity needs during the year.

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.

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

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

The Company had $401.4 million in unused loan commitments and standby letters of credit as of June 30, 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.

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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 $1.2 million and $1.0 million for the three months ended March 31, 2023 and 2022, respectively.

The Company paid cash dividends to its shareholders totaling approximately $2.3 million and $2.0 million for the six months ended June 30, 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 $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.

The Bank declared and paid $3.0 million and $7.5 million in dividends to the Company during the six months ended June 30, 2023 and 2022, respectively.

At June 30, 2023 and December 31, 2022, the Company had cash and cash equivalents totaling $2.4 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.

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

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.

The Company did not repurchase any shares during the three months ended June 30, 2023.

As of June 30, 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.

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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:

Under the Basel III Rules, at June 30, 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

March 31, 2023

June 30, 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