What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-11-09 compared with 2023-08-10 · 161 added, 166 removed, 534 unchanged (38% of the section changed)

14 unchanged sentences

• credit and market risks relating to increasing inflation,

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

• economic or other disruptions caused by acts of terrorism, war or other conflicts, including the Russia-Ukraine conflict, natural disasters, such as hurricanes, freezes, flooding and other man-made disasters, such as oil spills or power outages, health emergencies, epidemics or pandemics, climate changes or other catastrophic events,

• 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),

• technological changes, including potential cyber-security incidents and other disruptions, or innovations to the financial services industry, including as a result of the increased telework environment,

• 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

5 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 June 30, 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 September 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.

8 unchanged sentences

Furthermore, the success of the Company’s growth strategy depends on its ability to maintain sufficient regulatory capital levels during periods in which general economic conditions are unfavorable and despite economic conditions being beyond its control.

The Bank is a full-service bank that conducts a general banking business, offering its customers checking and savings accounts, debit cards, certificates of deposit, safety deposit boxes and a wide range of lending services, including commercial and industrial loans, residential real estate loans, single-payment personal loans, installment loans and credit card accounts.

The Bank is a full-service bank that conducts a general banking business, offering its customers checking and savings accounts, debit cards, certificates of deposit, safety deposit boxes and a wide range of lending services, including commercial, financial and agricultural loans, residential real estate loans, single-payment personal loans, installment loans and credit card accounts.

In addition, the Bank provides trust services.

22 unchanged sentences

The Three Months Ended

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

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

Net interest income $ 15,147 $ 14,202 $ 15,067

1 unchanged sentence

Non-interest income 606 1,596 3,485

Investment securities gains (losses), net 7 8 (9)

Investment securities gains, net 3 7 1

Non-interest expense 12,569 12,725 12,195

5 unchanged sentences

Efficiency ratio (1) 79.79% 80.55% 65.73%

Net interest spread 2.54% 2.57% 3.47%

Net interest margin 3.35% 3.19% 3.56%

Six Months Ended

Nine Months Ended

September 30,

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

Net interest income $ 43,297 $ 43,773

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

Provision for (release of) credit losses on loans & unfunded commitments 790 (1,000)

Non-interest income 5,384 10,859

7 unchanged sentences

Efficiency ratio (1) 77.59% 65.83%

Net interest spread 2.55% 3.41%

Net interest margin 3.23% 3.57%

1 unchanged sentence

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

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

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

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

Key financial ratios

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Results of Operations Highlights:

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.

Consolidated net income of $2.6 million for the third quarter 2023 increased $0.03 million, or 1.2%, compared to the second quarter 2023 ("linked quarter") and decreased $2.3 million, or 47.7%, from the third quarter 2022 (the "prior year quarter").

Earnings per diluted share was consistent at $0.36 for each of the third quarter 2023 and linked quarter compared to $0.70 for the prior year quarter.

For the third quarter 2023, the return on average assets was 0.54%, the return on average stockholders’ equity was 8.05%, and the efficiency ratio was 79.8%.

Consolidated net income of $8.4 million, or $1.19 per diluted share, for the nine months ended September 30, 2023 decreased $7.6 million, or 47.6%, compared to $16.0 million, or $2.27 per diluted share, for the nine months ended September 30, 2022.

For the nine months ended September 30, 2023, the return on average assets was 0.59%, the return on average stockholders’ equity was 8.73%, and the efficiency ratio was 77.6%.

Net interest income of $15.1 million for the third quarter 2023, increased $0.9 million from the linked quarter, and increased $0.1 million from the prior year quarter.

Net interest margin, on a fully taxable equivalent ("FTE") basis, was 3.35% for the third quarter compared to 3.19% and 3.56% for the linked quarter and the prior year quarter, respectively.

Net interest income of $43.3 million for the nine months ended September 30, 2023 decreased $0.5 million compared to $43.8 million for the nine months ended September 30, 2022.

Net interest margin, on a fully taxable equivalent basis, was 3.23% for the nine months ended September 30, 2023, a decrease from 3.57% for the nine months ended September 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.

Non-interest income for the third quarter 2023 was $0.6 million, a decrease of $1.0 million, or 62.0%, from the linked quarter, and a decrease of $2.9 million, or 82.6%, 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 $2.8 million valuation allowance on property in other real estate owned.

Non-interest income of $5.4 million for the nine months ended September 30, 2023 decreased $5.5 million, or 50.4%, compared to $10.9 million for the nine months ended September 30, 2022.

The decrease is primarily due to the recognition of a $4.6 million valuation allowance in the second and third quarter 2023 on property in other real estate owned, a decrease in real estate servicing fees, and the gains on sales 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.

Non-interest expense for the third quarter 2023 was $12.6 million, a decrease of $0.2 million, or 1.2%, from the linked quarter, and an increase of $0.4 million, or 3.1%, from the prior year quarter.

Non-interest expense for the nine months ended September 30, 2023 was $37.8 million, an increase of $1.8 million, or 5.0%, from the nine months ended September 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 $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.

Cash and cash equivalents – Cash and cash equivalents increased $3.2 million, or 13.0%, to $27.9 million at the end of the current quarter compared to the end of the linked quarter.

Year-over-year, cash and cash equivalents decreased $13.5 million, or 32.7%, from $41.4 million at the end of the prior-year quarter.

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.

Loans – Loans held for investment decreased by $6.2 million, or 0.4%, to $1.6 billion as of September 30, 2023 compared to the end of the linked quarter.

Year-over-year, loans held for investment increased $65.0 million, or 4.4%, from $1.5 billion as of September 30, 2022.

The yield earned on average loans held for investment was 5.67%, on an FTE basis, for the third quarter 2023 compared to 5.23% for the linked quarter and 4.51% for the prior year quarter.

Asset quality – Non-performing loans remained steady at $3.8 million at September 30, 2023 and at the end of the linked quarter, compared to $17.3 million at the end of the prior year quarter.

The decrease 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 accruing status.

The allowance for credit losses to total loans was 1.44% at September 30, 2023, compared to the allowance for loan losses to total loans of 1.02% at December 31, 2022 and 1.04% at September 30, 2022.

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

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.

Deposit s – Total deposits increased $37.1 million, or 2.4%, to $1.6 billion as of September 30, 2023 compared to the end of the linked quarter.

Year-over-year deposits decreased $12.4 million, or 0.8%, from $1.6 billion as of September 30, 2022.

The yield earned on average deposits was 2.32%, on an FTE basis, for the third quarter 2023 compared to 2.07% for the linked quarter and 0.73% for the prior year quarter.

Federal Home Loan Bank advances and other borrowings – FHLB advances and other borrowings decreased $52.3 million, or 31.8%, to $112.0 million as of September 30, 2023 compared to the end of the linked quarter.

Year-over-year FHLB advances and other borrowing increased $39.0 million, or 53.4%, from $73.0 million as of September 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 $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.

Total stockholders' equity was $118.4 million and the common equity to assets ratio was 6.30% at September 30, 2023 compared to 6.65% and 6.25% 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 14.20% at September 30, 2023.

Average Balance Sheet Data

1 unchanged sentence

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 six month periods ended June 30, 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 nine month periods ended September 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 June 30,

Three Months Ended September 30,

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

41 unchanged sentences

Net interest margin 3.35% 3.56%

(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 June 30, 2023 and 2022..

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

Such adjustments totaled $0.2 million and $0.5 million for the three months ended September 30, 2023 and 2022, respectively.

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

Six Months Ended June 30, 2023

Nine Months Ended September 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)

41 unchanged sentences

Net interest margin 3.23% 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.

(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 nine months ended September 30, 2023 and 2022.

Such adjustments totaled $0.9 million and $1.6 million for the nine months ended September 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 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 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, 2023 compared to the three and nine months ended September 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 June 30, Six Months Ended June 30,

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

2022 2023 vs.

30 unchanged sentences

Net interest income on a fully taxable equivalent basis $ (193) $ (219) $ 26 $ (1,245) $ 1,777 $ (3,022)

(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.

(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 nine months ended September 30, 2023 and 2022, respectively.

Such adjustments totaled $0.2 million and $0.9 million for the three and nine months ended September 30, 2023, respectively, compared to $0.5 million and $1.6 million for the three and nine months ended September 30, 2022, respectively.

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

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.

Financial results for the quarter ended September 30, 2023 compared to the quarter ended September 30, 2022 reflected a decrease in net interest income, on a fully taxable equivalent basis, of $0.2 million, or 1.2%, and financial results for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 reflected a decrease of $1.2 million, or 2.7%.

Measured as a percentage of average earning assets, the net interest margin (expressed on a fully taxable equivalent basis) decreased to 3.35% for the quarter ended September 30, 2023 compared to 3.56% for the quarter ended September 30, 2022, and decreased to 3.23% for the nine months ended September 30, 2023 compared to 3.57% for the nine months ended September 30, 2022.

The increase in margin for the third quarter of 2023 compared to the linked quarter was due to $0.6 million of interest accreted into income on three loans returning to accruing status in June 2023, representing approximately 14 basis points.

Interest income on a fully taxable equivalent basis increased $5.7 million in the current quarter compared to the prior year quarter, and increased $16.5 million for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022, while interest expense increased $5.9 million and $17.8 million for the three and nine months ended September 30, 2023, respectively, resulting in a decrease in net interest income on an FTE basis.

Average interest-earning assets increased $87.4 million, or 5.0%, to $1.82 billion for the quarter ended September 30, 2023 compared to $1.74 billion for the quarter ended September 30, 2022, and average interest-bearing liabilities increased $117.0 million, or 9.7%, to $1.32 billion for the quarter ended September 30, 2023 compared to $1.21 billion for the quarter ended September 30, 2022.

Average interest-earning assets increased $125.4 million, or 7.4%, to $1.83 billion for the nine months ended September 30, 2023 compared to $1.70 billion for the nine months ended September 30, 2022, and average interest-bearing liabilities increased $153.9 million, or 13.1%, to $1.33 billion for the nine months ended September 30, 2023 compared to $1.17 billion for the nine months ended September 30, 2022.

Total interest income (expressed on a fully taxable equivalent basis) was $24.1 million and $67.6 million for the three and nine months ended September 30, 2023, respectively, compared to $18.4 million and $51.1 million for the three and nine months ended September 30, 2022, respectively.

The Company’s rates earned on interest earning assets were 5.25% and 4.95% for the three and nine months ended September 30, 2023, respectively, compared to 4.21% and 4.01% for the three and nine months ended September 30, 2022, respectively.

Interest income on loans held for investment was $22.2 million and $61.3 million for the three and nine months ended September 30, 2023, respectively, compared to $16.5 million and $45.2 million for the three and nine months ended September 30, 2022, respectively.

Average loans outstanding increased $107.9 million, or 7.5%, to $1.55 billion for the quarter ended September 30, 2023 compared to $1.45 billion for the quarter ended September 30, 2022.

The average yield on loans increased to 5.67% for the quarter ended September 30, 2023 compared to 4.51% for the quarter ended September 30, 2022.

The increase in yield was due to $0.6 million of interest accreted into income on three loans returning to accruing status in June 2023, representing approximately 16 basis points.

Average loans outstanding increased $167.8 million, or 12.2%, to $1.54 billion for the nine months ended September 30, 2023 compared to $1.38 billion for the nine months ended September 30, 2022.

The average yield on loans increased to 5.31% for the nine months ended September 30, 2023 compared to 4.40% for the nine months ended September 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 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.

Interest income on available-for-sale securities was $1.7 million and $5.1 million for the three and nine months ended September 30, 2023, respectively, compared to $1.8 million and $5.4 million for the three and nine months ended September 30, 2022, respectively.

Average securities decreased $19.2 million, or 7.2%, to $247.2 million for the quarter ended September 30, 2023 compared to $266.4 million for the quarter ended September 30, 2022.

The average yield on securities decreased to 2.66% for the quarter ended September 30, 2023 compared to 2.67% for the quarter ended September 30, 2022.

Average securities decreased $30.1 million, or 10.7%, to $252.7 million for the nine months ended September 30, 2023 compared to $282.8 million for the nine months ended September 30, 2022.

The average yield on securities increased to

2.70% for the nine months ended September 30, 2023 compared to 2.57% for the nine months ended September 30, 2022.

See the Liquidity Management section for further discussion.

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.

Total interest expense increased to $8.7 million and $23.5 million for the three and nine months ended September 30, 2023, respectively, compared to $2.8 million and $5.7 million for the three and nine months ended September 30, 2022, respectively.

The Company’s rates paid on interest bearing liabilities were 2.62% and 2.36% for the three and nine months ended September 30, 2023, respectively, compared to 0.93% and 0.65% for the three and nine months ended September 30, 2022, respectively.

See the Liquidity Management section for further discussion.

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.

Interest expense on deposits increased to $6.6 million and $18.2 million for the three and nine months ended September 30, 2023, respectively, compared to $2.0 million and $3.6 million for the three and nine months ended September 30, 2022, respectively.

Average interest-bearing deposits increased $62.5 million, or 5.8%, to $1.14 billion for the quarter ended September 30, 2023 compared to $1.08 billion for the quarter ended September 30, 2022.

The average cost of deposits increased to 2.32% for the quarter ended September 30, 2023 compared to 0.73% for the quarter ended September 30, 2022.

Average interest-bearing deposits increased $120.3 million, or 11.6%, to $1.16 billion for the nine months ended September 30, 2023 compared to $1.04 billion for the nine months ended September 30, 2022.

The average cost of deposits increased to 2.10% for the nine months ended September 30, 2023 compared to 0.46% for the nine months ended September 30, 2022.

Interest expense on borrowings increased to $2.1 million and $5.3 million for the three and nine months ended September 30, 2023, respectively, compared to $0.9 million and $2.1 million for the three and nine months ended September 30, 2022, respectively.

Average borrowings increased $54.5 million, or 41.6%, to $185.4 million for the quarter ended September 30, 2023 compared to $130.9 million for the quarter ended September 30, 2022.

The average cost of borrowings increased to 4.50% for the quarter ended September 30, 2023 compared to 2.61% for the quarter ended September 30, 2022.

Average borrowings increased $33.6 million, or 25.0%, to $168.2 million for the nine months ended September 30, 2023 compared to $134.6 million for the nine months ended September 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 average cost of borrowings increased to 4.20% for the nine months ended September 30, 2023 compared to 2.11% for the nine months ended September 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 June 30, Six Months Ended June 30,

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

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

4 unchanged sentences

Gain on sales of mortgage loans, net 851 628 223 35.5 % 2,014 2,322 (308) (13.3) %

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

Losses (gains) on other real estate owned, net (2,809) — (2,809) NM (4,592) 30 (4,622) NM

Other 367 464 (97) (20.9) % 1,501 1,346 155 11.5 %

3 unchanged sentences

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.

Total non-interest income decreased $2.9 million, or 82.6%, to $0.6 million for the third quarter ended September 30, 2023 compared to $3.5 million for the third quarter ended September 30, 2022, and decreased $5.5 million, or 50.4%, to $5.4 million for the nine months ended September 30, 2023 compared to $10.9 million for the nine months ended September 30, 2022.

The Company recognized a $2.8 million and $4.6 million valuation allowance for other real estate owned in the quarter and nine months ended September 30, 2023, respectively.

Real estate servicing fees, net of the change in valuation of mortgage servicing rights (MSRs) decreased to $0.1 million for the quarter ended September 30, 2023 compared to $0.4 million for the quarter ended September 30, 2022, and decreased to $0.4 million for the nine months ended September 30, 2023 compared to $0.9 million for the nine months ended September 30, 2022.

The Company was servicing $226.3 million of mortgage loans at September 30, 2023 compared to $240.5 million and $247.6 million at December 31, 2022 and September 30, 2022, respectively.

Gain on sales of mortgage loans increased to $0.9 million for the third quarter ended September 30, 2023 compared to $0.6 million for the third quarter ended September 30, 2022, and decreased to $2.0 million for the nine months ended September 30, 2023 compared to $2.3 million for the nine months ended September 30, 2022.

The Company sold $37.2 million and $84.4 million of loans for the three and nine months ended September 30, 2023, respectively, compared to $21.4 million and $76.1 million for the three and nine months ended September 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 June 30, Six Months Ended June 30,

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

(in thousands) 2023 2022 2023 2022

6 unchanged sentences

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

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

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

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

14 unchanged sentences

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

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.

Total non-interest expense increased $0.4 million to $12.6 million for the quarter ended September 30, 2023 compared to $12.2 million for the quarter ended September 30, 2022 and increased $1.8 million to $37.8 million for the nine months ended September 30, 2023 compared to $36.0 million for the nine months ended September 30, 2022.

Salaries increased $0.5 million, or 11.0%, to $5.7 million for the quarter ended September 30, 2023 compared to $5.2 million for the quarter ended September 30, 2022, and increased $1.5 million, or 9.5%, to $16.8 million for the nine months ended September 30, 2023 compared to $15.3 million for the nine months ended September 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 $0.1 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.

Employee benefits decreased $0.2 million, or 12.0%, to $1.4 million for the quarter ended September 30, 2023 compared to $1.6 million for the quarter ended September 30, 2022, and decreased $0.7 million, or 14.6%, to $4.2 million for the nine months ended September 30, 2023 compared to $4.9 million for the nine months ended September 30, 2022.

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

Loan expense increased $0.02 million, or 19.5%, to $0.1 million for the quarter ended September 30, 2023 compared to $0.1 million for the quarter ended September 30, 2022, and increased $0.4 million, or 81.0%, to $0.8 million for the nine months ended September 30, 2023 compared to $0.4 million for the nine months ended September 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.

Income taxes as a percentage of earnings before income taxes as reported in the consolidated financial statements were 16.2% and 17.1% for the three and nine months ended September 30, 2023, respectively, compared to 18.7% and 18.5% for the three and nine months ended September 30, 2022, respectively.

The decrease in the effective tax rate for the three and nine months ended September 30, 2023 compared to the three and nine months ended September 30, 2022 was primarily attributable to the decrease in earnings, an increase in tax-exempt income and a return to provision adjustment resulting in a net benefit related to the 2022 tax return.

The effective tax rate for each of the three and nine months ended September 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 and $26,000 benefit associated with a historic tax credit investment for the three and six months ended June 30, 2023, respectively.

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, 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.

1 unchanged sentence

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

Net loans represented 81.1% of total assets as of June 30, 2023 compared to 78.3% as of December 31, 2022.

Net loans represented 81.7% of total assets as of September 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.

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 the aggregate over an established dollar amount.

In addition, a senior loan committee reviews all credit relationships in 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:

June 30, 2023 December 31, 2022

September 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 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.

During the nine months ended September 30, 2023, the Company sold approximately $84.4 million of loans to investors compared to $76.1 million for the nine months ended September 30, 2022.

At September 30, 2023, the Company was servicing approximately $226.3 million of loans sold to the secondary market compared to $240.5 million at December 31, 2022, and $247.6 million at September 30, 2022.

Risk Elements of the Loan Portfolio

28 unchanged sentences

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

June 30, December 31,

September 30, December 31,

(Dollars in thousands) 2023 2022

1 unchanged sentence

Commercial, financial, and agricultural $ 88 $ 121

Real estate construction − residential 94 —

Real estate construction − commercial 74 87

4 unchanged sentences

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

Real estate mortgage − residential $ 31 $ —

Installment and other consumer 6 1

15 unchanged sentences

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

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.

Total non-performing assets were $7.4 million, or 0.48% of total loans, at September 30, 2023 compared to $27.5 million, or 1.81% of total loans, at December 31, 2022.

Total non-accrual loans at September 30, 2023 decreased $14.9 million, or 79.6%, 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.

were $37,000 in loans past due 90 days and still accruing interest at September 30, 2023 compared to $1,000 at December 31, 2022.

Other real estate and repossessed assets were $3.6 million and $8.8 million at September 30, 2023 and December 31, 2022, respectively.

During the nine months ended September 30, 2023, there were $44,000 of non-accrual loans, net of charge-offs taken, added to other real estate owned and repossessed assets compared to $3,000 during the nine months ended September 30, 2022.

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

4 unchanged sentences

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

June 30, 2023 December 31, 2022

September 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

8 unchanged sentences

Total $ 22,462 100.0 % $ 15,588 100.0 %

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.

The allowance for credit losses was $22.5 million, or 1.44%, of loans outstanding at September 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 583.88% at September 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,

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

(In thousands) 2023 2022 2023 2022

3 unchanged sentences

Total Provision for (release of) credit losses $ 110 $ 300 $ 790 $ (1,000)

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 Company recognized a provision for credit losses of $0.1 million and $0.8 million for the three and nine months ended September 30, 2023, respectively, compared to a $0.3 million provision and a $1.0 million release of provision for loan losses for the three and nine months ended September 30, 2022, respectively.

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 June 30,

Three Months Ended September 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 $ 74 $ 1,554,699 — % $ 148 $ 1,446,755 0.01 %

Six Months Ended June 30,

Nine Months Ended September 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

11 unchanged sentences

Net Loan Charge-Offs (Recoveries)

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.

The Company’s net charge-offs were $0.1 million and $34,000 for the three and nine months ended September 30, 2023, respectively, compared to net charge-offs of $0.1 million and $0.4 million for the three and nine months ended September 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 June 30, 2023, the carrying amount of these loans was $2.1 million compared to $0.6 million at December 31, 2022.

At September 30, 2023, the carrying amount of these loans was $3.0 million compared to $0.6 million at December 31, 2022.

Liquidity and Capital Resources

10 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) June 30, 2023 December 31, 2022

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

Federal funds sold $ — $ 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 $251.6 million at June 30, 2023 and included an unrealized net loss of $44.7 million.

The fair value of the available-for-sale investment portfolio was $233.5 million at September 30, 2023 and included an unrealized net loss of $56.5 million.

The portfolio includes projected maturities and mortgage-backed securities pay-downs of approximately $9.1 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 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.

At September 30, 2023 and December 31, 2022, the Company’s unpledged securities in the available-for-sale portfolio totaled approximately $116.1 million and $139.2 million, respectively.

Total investment securities pledged for these purposes were as follows:

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

(in thousands) September 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 June 30, 2023, such deposits totaled $1.4 billion and represented 90.8% of the Company’s total deposits.

At September 30, 2023, such deposits totaled $1.4 billion and represented 90.0% 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 June 30, 2023 and December 31, 2022 were as follows:

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

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

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

Core deposit base:

4 unchanged sentences

Total $ 1,422,625 $ 1,497,085

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.

Estimated uninsured deposits totaled $358.7 million, including $115.2 million of certificates of deposit, at September 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 $42.5 million and $40.1 million at September 30, 2023 and December 31, 2022, respectively.

Included in the uninsured deposits at September 30, 2023 and December 31, 2022 are public fund deposits greater than $250,000, which are collateralized by the Company totaling $96.6 million and $111.6 million, respectively.

The estimated uninsured and uncollateralized deposits ratio to total deposits at September 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.

1 unchanged sentence

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

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.

As of September 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 $7.5 million on a secured basis.

There were no federal funds purchased outstanding at September 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 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.

At September 30, 2023, there were $6.2 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, 2023.

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

As of June 30, 2023, the Bank had $164.3 million in outstanding borrowings with the FHLB.

As of September 30, 2023, the Bank had $112.0 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 June 30, 2023 and December 31, 2022 were as follows:

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

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

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

Federal funds purchased and securities sold under agreements to repurchase $ 6,196 $ 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:

June 30, 2023 December 31, 2022

September 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 $ 304,521 $ 7,532 $ 35,000 $ 347,053 $ 209,891 $ 8,058 $ 60,000 $ 277,949

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.

At September 30, 2023, loans of $719.9 million were pledged to the FHLB as collateral for borrowings and letters of credit.

At September 30, 2023, 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 liquidity needs in both the short and long-term.

Sources and Uses of Funds

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 and cash equivalents were $27.9 million at September 30, 2023 compared to $83.7 million at December 31, 2022.

The $55.8 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, 2023.

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

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.

Operating activities provided cash flow of $12.3 million for the nine months ended September 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 $28.0 million during the nine months ended September 30, 2023.

The cash outflow primarily consisted of a net increase in loans held for investment of $35.5 million and $9.5 million in purchases of investment securities, partially offset by $15.9 million from maturities and calls of investment securities.

Financing activities used total cash of $40.2 million during the nine months ended September 30, 2023, resulting primarily from a $149.3 million decrease in demand deposits and interest-bearing transaction accounts.

These decreases were partially offset by a $97.6 million increase in time deposits.

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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 $401.4 million in unused loan commitments and standby letters of credit as of June 30, 2023.

The Company had $339.8 million in unused loan commitments and standby letters of credit as of September 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 $2.3 million and $2.0 million for the six months ended June 30, 2023 and 2022, respectively.

The Company paid cash dividends to its shareholders totaling approximately $3.5 million and $3.1 million for the nine months ended September 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 $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.

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 Bank declared and paid $9.0 million in dividends to the Company during each of the nine months ended September 30, 2023 and 2022, respectively.

At September 30, 2023 and December 31, 2022, the Company had cash and cash equivalents totaling $5.9 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

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.

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 June 30, 2023.

As of June 30, 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 September 30, 2023.

As of September 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 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:

Under the Basel III Rules, at September 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

June 30, 2023

September 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