What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-05-09 compared with 2022-11-04 · 157 added, 254 removed, 222 unchanged (65% of the section changed)

17 unchanged sentences

In addition, local economic conditions can impact the credit risk of our loan portfolio, in that (1) local employers may be required to eliminate employment positions of individual borrowers, and (2) small businesses and commercial borrowers may experience a downturn in their operating performance and become unable to make timely payments on their loans.

Management evaluates these factors in estimating the allowance for loan and lease losses (“ALLL”, “allowance for loan losses”, or “allowance”) and changes in these economic factors could result in increases or decreases to the provision for loan losses.

COVID-19 has adversely affected, and may continue to adversely affect economic activity globally, nationally and locally.

Following the COVID-19 outbreak in December 2019 and January 2020, market interest rates declined significantly, with the 10-year Treasury bond falling below 1.00% on March 3, 2020 for the first time.

Such events generally had an adverse effect on business and consumer confidence and the Company and its customers.

On March 3, 2020, the Federal Reserve Federal Open Market Committee (“FOMC”) reduced the target federal funds rate by 50 basis points to a range of 1.00% to 1.25%.

Subsequently on March 16, 2020, the FOMC further reduced the target federal funds rate by an additional 100 basis points to a range of 0.00% to 0.25%.

These reductions in interest rates and other effects of the COVID-19 pandemic had an adverse effect on the Company’s financial condition and results of operations.

Management evaluates these factors in estimating the allowance for credit losses (“ACL”, “allowance for credit losses”, or “allowance”) and changes in these economic factors could result in increases or decreases to the provision for loan losses.

Prior to the occurrence of the COVID-19 pandemic, economic conditions, while not as robust as the economic conditions during the period from 2004 to 2007, had stabilized such that businesses in our market area were growing and investing again.

The uncertainty expressed in the local, national and international markets through the primary economic indicators of activity were previously sufficiently stable to allow for reasonable economic growth in our markets.

Subsequently, continuing supply-chain disruption and rising inflation has caused the FOMC to increase the target federal funds rate by 300 basis points in 2022 to a range of 3.00% to 3.25% at October 31, 2022.

Subsequently, continuing supply-chain disruption and rising inflation has caused the Federal Reserve Federal Open Market Committee (“FOMC”) to increase the target federal funds rate 475 basis points since March 1, 2022 to a range of 4.75% to 5.00% at December 31, 2022.

Although we are unable to control the external factors that influence our business, by maintaining high levels of balance sheet liquidity, managing our interest rate exposures and by actively monitoring asset quality, we seek to minimize the potentially adverse risks of unforeseen and unfavorable economic trends.

15 unchanged sentences

A more complete description of the Company’s significant accounting policies can be found in Note 1 of the Notes to Consolidated Financial Statements in the Company’s 2022 Annual Report to Shareholders which is Appendix A to the Proxy Statement for the 2023 Annual Meeting of Shareholders.

The allowance for loan losses reflects management’s assessment and estimate of the risks associated with extending credit and its evaluation of the quality of the loan portfolio.

The Bank periodically analyzes the loan portfolio in an effort to review asset quality and to establish an allowance for loan losses that management believes will be adequate in light of anticipated risks and loan losses.

There have been no significant changes to the application of significant accounting policies since December 31, 2022, except for the adoption of ASC 326 noted in Note 1 above.

The allowance for credit losses reflects management’s assessment and estimate of the risks associated with extending credit and its evaluation of the quality of the loan portfolio.

The Bank periodically analyzes the loan portfolio in an effort to review asset quality and to establish an allowance credit losses that management believes will be adequate in light of anticipated risks and loan losses.

Many of the Company’s assets and liabilities are recorded using various techniques that require significant judgment as to recoverability.

The collectability of loans is reflected through the Company’s estimate of the allowance for loan losses.

The collectability of loans is reflected through the Company’s estimate of the allowance for credit losses.

The Company performs periodic and systematic detailed reviews of its lending portfolio to assess overall collectability.

10 unchanged sentences

Results of Operations

Net earnings were $5.3 million or $0.96 per share and $0.93 per diluted share for the three months ended September 30, 2022, as compared to $3.4 million or $0.61 per share and $0.59 per diluted share for the prior year period.

The increase in third quarter net earnings is primarily the result of an increase in net interest income and an increase in non-interest income, which were partially offset by an increase in the provision for loan losses and an increase in non-interest expense, compared to the prior year period, as discussed below.

The annualized return on average assets was 1.25% for the three months ended September 30, 2022, compared to 0.83% for the same period one year ago, and annualized return on average shareholders’ equity was 18.42% for the three months ended September 30, 2022, compared to 9.30% for the same period one year ago.

Year-to-date net earnings as of September 30, 2022 were $12.0 million or $2.18 per share and $2.11 per diluted share for the nine months ended September 30, 2022, as compared to $12.1 million or $2.16 per share and $2.10 per diluted share for the prior year period.

The decrease in year-to-date net earnings is primarily attributable to an increase in non-interest expense and an increase in the provision for loan losses, which were partially offset by an increase in net interest income and an increase in non-interest income compared to the prior year period, as discussed below.

The annualized return on average assets was 0.96% for the nine months ended September 30, 2022, compared to 1.05 % for the same period one year ago, and annualized return on average shareholders’ equity was 12.53% for the nine months ended September 30, 2022, compared to 11.04% for the same period one year ago.

Net earnings were $3.2 million or $0.58 per share and $0.56 per diluted share for the three months ended March 31, 2023, as compared to $3.5 million or $0.63 per share and $0.61 per diluted share for the prior year period.

The decrease in first quarter net earnings is primarily the result of a decrease in non-interest income, an increase in non-interest expense and an increase in the provision for credit losses, which were partially offset by an increase in net interest income, compared to the prior year period, as discussed below.

The annualized return on average assets was 0.81% for the three months ended March 31, 2023, compared to 0.85% for the same period one year ago, and annualized return on average shareholders’ equity was 11.78% for the three months ended March 31, 2023, compared to 10.10% for the same period one year ago.

Net Interest Income.

2 unchanged sentences

Net interest margin is calculated by dividing tax-equivalent net interest income by average interest-earning assets, and represents the Company’s net yield on its interest-earning assets.

Net interest income was $13.8 million for the three months ended September 30, 2022, compared to $10.6 million for the three months ended September 30, 2021.

The increase in net interest income is due to a $3.2 million increase in interest income and a $43,000 decrease in interest expense.

Net interest income was $14.3 million for the three months ended March 31, 2023, compared to $10.7 million for the three months ended March 31, 2022.

The increase in net interest income is due to a $5.5 million increase in interest income, partially offset by a $1.8 million increase in interest expense.

The increase in interest income is due to a $3.1 million increase in interest income and fees on loans, a $272,000 increase in interest income on balances due from banks and a $2.1 million increase in interest income on investment securities.

The increase in interest income and fees on loans is primarily due to an increase in total loans and rate increases by the Federal Reserve, partially offset by a $600,000 decrease in fee income on SBA PPP loans.

The increase in interest income on balances due from banks is primarily due to rate increases by the Federal Reserve.

The increase in interest income on investment securities is primarily due to additional securities purchased with additional cash resulting from an increase in deposits combined with higher yields on securities purchased during the second and third quarters of 2022.

The decrease in interest expense is primarily due to a decrease in rates paid on interest-bearing liabilities

Interest income was $14.6 million for the three months ended September 30, 2022, compared to $11.4 million for the three months ended September 30, 2021.

The increase in interest income on balances due from banks is primarily due to rate increases by the Federal Reserve The increase in interest income on investment securities is primarily due to higher yields on securities purchased after March 31, 2022.

The increase in interest expense is primarily due to an increase in rates paid on interest-bearing liabilities.

Interest income was $16.8 million for the three months ended March 31, 2023, compared to $11.3 million for the three months ended March 31, 2022.

The increase in interest income on balances due from banks is primarily due to rate increases by the Federal Reserve.

The Bank recognized $54,000 and $489,000 of PPP loan fee income for the three months ended September 30, 2022 and the three months ended September 30, 2021, respectively.

During the three months ended September 30, 2022, average loans were $971.6 million, an increase of $82.1 million from average loans of $889.5 million for the three months ended September 30, 2021.

During the three months ended September 30, 2022, average PPP loans were $739,000, a reduction of $29.9 million from average PPP loans of $30.7 million for the three months ended September 30, 2021.

During the three months ended September 30, 2022, average investment securities available for sale were $490.6 million, an increase of $111.8 million from average investment securities available for sale of $378.8 million for the three months ended September 30, 2021.

The average yield on loans for the three months ended September 30, 2022 and 2021 was 4.51% and 4.37%, respectively.

The average yield on investment securities available for sale was 2.23% and 1.70% for the three months ended September 30, 2022 and 2021, respectively.

The average yield on earning assets was 3.59% and 2.98% for the three months ended September 30, 2022 and 2021, respectively.

Interest expense was $818,000 for the three months ended September 30, 2022, compared to $861,000 for the three months ended September 30, 2021.

The decrease in interest expense is primarily due to a decrease in rates paid on interest-bearing liabilities.

During the three months ended September 30, 2022, average interest-bearing non-maturity deposits were $843.8 million, an increase of $55.8 million from average interest-bearing non-maturity deposits of $788.0 million for the three months ended September 30, 2021.

During the three months ended September 30, 2022, average certificates of deposit were $99.9 million, a reduction of $3.9 million from average certificates of deposit of $103.8 million for the three months ended September 30, 2021.

The average rate paid on interest-bearing checking and savings accounts was 0.23% and 0.29% for the three months ended September 30, 2022 and 2021, respectively.

The average rate paid on certificates of deposit was 0.53% for the three months ended September 30, 2022, compared to 0.69% for the same period one year ago.

The average rate paid on interest-bearing liabilities was 0.33% for the three months ended September 30, 2022, compared to 0.36% for the same period one year ago.

The following table sets forth for each category of interest-earning assets and interest-bearing liabilities, the average amounts outstanding, the interest incurred on such amounts and the average rate earned or incurred for the three months ended September 30, 2022 and 2021.

The Bank recognized zero and $600,000 of PPP loan fee income for the three months ended March 31, 2023 and the three months ended March 31, 2022, respectively.

During the three months ended March 31, 2023, average loans were $1.0 billion, an increase of $152.0 million from average loans of $885.2 million for the three months ended March 31, 2022.

During the three months ended March 31, 2023, average PPP loans were zero, compared to average PPP loans of $12.3 million for the three months ended March 31, 2022.

During the three months ended March 31, 2023, average investment securities available for sale were $476.3 million, an increase of $63.0 million from average investment securities available for sale of $413.3 million for the three months ended March 31, 2022.

The average yield on loans for the three months ended March 31, 2023 and 2022 was 5.04% and 4.46%, respectively.

The average yield on investment securities available for sale was 2.98% and 1.49% for the three months ended March 31, 2023 and 2022, respectively.

The average yield on earning assets was 4.41% and 2.96% for the three months ended March 31, 2023 and 2022, respectively.

Interest expense was $2.5 million for the three months ended March 31, 2023, compared to $663,000 for the three months ended March 31, 2022.

The increase in interest expense is primarily due to an increase in rates paid on interest-bearing liabilities and an increase in certificates of deposit.

During the three months ended March 31, 2023, average interest-bearing non-maturity deposits were $775.1 million, a decrease of $24.2 million from average interest-bearing non-maturity deposits of $799.3 million for the three months ended March 31, 2022.

During the three months ended March 31, 2023, average certificates of deposit were $118.8 million, an increase of $18.4 million from average certificates of deposit of $100.4 million for the three months ended March 31, 2022.

The average rate paid on interest-bearing checking and savings accounts was 0.78% and 0.20% for the three months ended March 31, 2023 and 2022, respectively.

The average rate paid on certificates of deposit was 1.76% for the three months ended March 31, 2023, compared to 0.59% for the same period one year ago.

The average rate paid on interest-bearing liabilities was 1.05% for the three months ended March 31, 2023, compared to 0.28% for the same period one year ago.

The table also sets forth the average rate earned on total interest-earning assets, the average rate paid on total interest-bearing liabilities, and the net yield on total average interest-earning assets for the same periods.

Yield information does not give effect to changes in fair value that are reflected as a component of shareholders’ equity.

Yields and interest income on tax-exempt investments for the three months ended September 30, 2022 and 2021 have been adjusted to a tax equivalent basis using an effective tax rate of 22.98% for securities that are both federal and state tax exempt and an effective tax rate of 20.48% for federal tax-exempt securities.

Yields and interest income on tax-exempt investments for the three months ended March 31, 2023 and 2022 have been adjusted to a tax equivalent basis using an effective tax rate of 22.98% for securities that are both federal and state tax exempt and an effective tax rate of 20.48% for federal tax-exempt securities.

Non-accrual loans and the interest income that was recorded on non-accrual loans, if any, are included in the yield calculations for loans in all periods reported.

4 unchanged sentences

Three months ended

September 30, 2022

September 30, 2021

March 31, 2023

March 31, 2022

(Dollars in thousands)

5 unchanged sentences

Investments - nontaxable*

Due from banks

Total interest-earning assets

1 unchanged sentence

Cash and due from banks

Allowance for loan losses

Allowance for credit losses

Interest-bearing liabilities:

16 unchanged sentences

A tax rate of 2.50% was used to calculate the tax equivalent yield on these securities in 2023 and 2022.

Year-to-date net interest income as of September 30, 2022 was $35.8 million for the nine months ended September 30, 2022, compared to $33.3 million for the nine months ended September 30, 2021.

The increase in net interest income is due to a $2.1 million increase in interest income and a $393,000 decrease in interest expense.

The increase in interest income is primarily due to a $1.5 million increase in interest income on investment securities and a $1.3 million increase in interest income on balances due from banks, which were partially offset by a $747,000 decrease in interest income and fees on loans.

The increase in interest income on balances due from banks is primarily due to rate increases by the Federal Reserve.

The decrease in interest income and fees on loans is primarily due to a decrease in fee income on SBA PPP loans.

The decrease in interest expense is primarily due to a decrease in rates paid on interest-bearing liabilities.

Interest income was $37.9 million for the nine months ended September 30, 2022, compared to $35.9 million for the nine months ended September 30, 2021.

The increase in net interest income is due to a $2.1 million increase in interest income and a $393,000 decrease in interest expense.

The increase in interest income on balances due from banks is primarily due to rate increases by the Federal Reserve.

The decrease in interest income and fees on loans is primarily due to a decrease in fee income on SBA PPP loans, which offset the increase in interest income resulting from rate increases by the Federal Reserve.

The Bank recognized $948,000 and $3.0 million of PPP loan fee income for the nine months ended September 30, 2022 and the nine months ended September 30, 2021, respectively.

During the nine months ended September 30, 2022, average loans were $925.2 million, an increase of $7.7 million from average loans of $917.5 million for the nine months ended September 30, 2021.

During the nine months ended September 30, 2022, average PPP loans were $9.1 million, a decrease of $41.6 million from average PPP loans of $50.7 million for the nine months ended September 30, 2021.

During the nine months ended September 30, 2022, average investment securities available for sale were $453.4 million, an increase of $123.4 million from average investment securities available for sale of $330.0 million for the nine months ended September 30, 2021.

The average yield on loans for the nine months ended September 30, 2022 and 2021 was 4.44% and 4.59%, respectively.

The average yield on investment securities available for sale was 1.75% and 1.81% for the nine months ended September 30, 2022 and 2021, respectively.

The average yield on earning assets was 3.20% and 3.31% for the nine months ended September 30, 2022 and 2021, respectively.

Interest expense was $2.1 million for the nine months ended September 30, 2022, compared to $2.5 million for the nine months ended September 30, 2021.

The decrease in interest expense is primarily due to a decrease in rates paid on interest-bearing liabilities.

During the nine months ended September 30, 2022, average interest-bearing non-maturity deposits were $822.3 million, an increase of $90.3 million from average interest-bearing non-maturity deposits of $732.0 million for the nine months ended September 30, 2021.

During the nine months ended September 30, 2022, average certificates of deposit were $100.6 million, a decrease of $5.5 million from average certificates of deposit of $106.1 million for the nine months ended September 30, 2021.

The average rate paid on interest-bearing checking and savings accounts was 0.21% and 0.30% for the nine months ended September 30, 2022 and 2021, respectively.

The average rate paid on certificates of deposit was 0.56% for the nine months ended September 30, 2022, compared to 0.74% for the same period one year ago.

The average rate paid on interest-bearing liabilities was 0.29% for the nine months ended September 30, 2022, compared to 0.38% for the same period one year ago.

Yield information does not give effect to changes in fair value that are reflected as a component of shareholders’ equity.

Yields and interest income on tax-exempt investments for the nine months ended September 30, 2022 and 2021 have been adjusted to a tax equivalent basis using an effective tax rate of 22.98% for securities that are both federal and state tax exempt and an effective tax rate of 20.48% for federal tax-exempt securities.

Non-accrual loans and the interest income that was recorded on non-accrual loans, if any, are included in the yield calculations for loans in all periods reported.

The Company believes the presentation of net interest income on a tax-equivalent basis provides comparability of net interest income from both taxable and tax-exempt sources and facilitates comparability within the industry.

Although the Company believes these non-GAAP financial measures enhance investors’ understanding of its business and performance, these non-GAAP financial measures should not be considered an alternative to GAAP.

The reconciliations of these non-GAAP financial measures to their most directly comparable GAAP financial measures are presented below.

Nine months ended

September 30, 2022

September 30, 2021

(Dollars in thousands)

Average Balance

Interest-earning assets:

Loans receivable

Investments - taxable

Investments - nontaxable*

Total interest-earning assets

Non-interest earning assets:

Cash and due from banks

Allowance for loan losses

Interest-bearing liabilities:

Interest-bearing demand, MMDA & savings deposits

Time deposits

Trust preferred securities

Total interest-bearing liabilities

Non-interest bearing liabilities and shareholders' equity:

Demand deposits

Other liabilities

Shareholders' equity

Total liabilities and shareholders' equity

Net interest spread

Net yield on interest-earning assets

Taxable equivalent adjustment

Investment securities

Net interest income

*Includes U.S.

Government agency securities that are non-taxable for state income tax purposes of $13.5 million in 2022 and $12.1 million in 2021.

A tax rate of 2.50% was used to calculate the tax equivalent yield on these securities in 2022 and 2021.

Changes in interest income and interest expense can result from variances in both volume and rates.

1 unchanged sentence

The changes in net interest income due to both volume and rate changes have been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the changes in each.

Three months ended September 30, 2022 compared to three months ended September 30, 2021

Nine months ended September 30, 2022 compared to nine months ended September 30, 2021

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

Three months ended March 31, 2022 compared to three months ended March 31, 2021

(Dollars in thousands)

9 unchanged sentences

Investments - nontaxable

Due from banks

Total interest income

Interest expense:

NOW, MMDA & savings deposits

Interest-bearing demand,

MMDA & savings deposits

Time deposits

2 unchanged sentences

Net interest income

Provision for Loan Losses.

The provision for loan losses for the three months ended September 30, 2022 was $408,000, compared to a recovery of $182,000 for the three months ended September 30, 2021.

The increase in the provision for loan losses is primarily attributable to an increase in reserves due to a net increase in the volume of loans in the general reserve pool.

The recovery of provision for loan losses for the three months ended September 30, 2021 was primarily attributable to a decrease in reserves on loans with payment modifications made as a result of the COVID-19 pandemic and a decrease in reserves in the general reserve pool.

There were no loans with modifications as a result of the COVID-19 pandemic at September 30, 2022 and December 31, 2021.

The provision for loan losses for the nine months ended September 30, 2022 was $889,000, compared to a recovery of $863,000 for the nine months ended September 30, 2021.

The increase in the provision for loan losses is primarily attributable to an increase in reserves due to a net increase in the volume of loans in the general reserve pool.

The recovery of provision for loan losses for the nine months ended September 30, 2021 was primarily attributable to a decrease in reserves on loans with payment modifications made as a result of the COVID-19 pandemic and a decrease in reserves in the general reserve pool.

Provision for Credit Losses.

The provision for credit losses for the three months ended March 31, 2023 was $224,000, compared to $71,000 for the three months ended March 31, 2022.

The increase in the provision for credit losses is primarily attributable to an increase in loan balances and qualitative adjustments for economic conditions and other factors.

The provision for credit losses for the three months ended March 31, 2023 includes a $203,000 credit to the provision on unfunded commitments primarily due to a reduction in unfunded commitments from December 31, 2022 to March 31, 2023.

Non-Interest Income.

Total non-interest income was $6.8 million for the three months ended September 30, 2022, compared to $6.0 million for the three months ended September 30, 2021.

The increase in non-interest income is primarily attributable to a $757,000 increase in appraisal management fee income due to an increase in appraisal volume and a $435,000 increase in service charge income, primarily due to service charge changes implemented in March 2022, which were partially offset by a $457,000 decrease in mortgage banking income due to a decrease in mortgage loan volume and additional mortgage loans being retained in the Bank’s portfolio.

Non-interest income was $21.2 million for the nine months ended September 30, 2022, compared to $18.0 million for the nine months ended September 30, 2021.

The increase in non-interest income is primarily attributable to a $3.9 million increase in appraisal management fee income due to an increase in appraisal volume and a $1.1 million increase in service charge income, primarily due to service charge changes implemented in March 2022, which were partially offset by a $1.8 million decrease in mortgage banking income due to a decrease in mortgage loan volume and additional mortgage loans being retained in the Bank’s portfolio.

Total non-interest income was $3.6 million for the three months ended March 31, 2023, compared to $7.0 million for the three months ended March 31, 2022.

The decrease in non-interest income is primarily attributable to a $2.5 million net loss on the sale of securities and a $1.4 million decrease in appraisal management fee income due to a decrease in appraisal volume.

The securities sale transaction was executed in January and February 2023 to reduce risk in the investment portfolio provided by favorable conditions that had developed for municipal securities in the first quarter of 2023, and to provide the Bank with more flexibility to support loan growth and reduce the need for other borrowings.

Non-Interest Expense.

Total non-interest expense was $13.5 million for the three months ended September 30, 2022, compared to $12.6 million for the three months ended September 30, 2021.

The increase in non-interest expense is primarily attributable to a $595,000 increase in appraisal management fee expense due to an increase in appraisal volume, a $123,000 increase in salaries and employee benefits expense primarily due to an increase in insurance costs and a $218,000 increase in other non-interest expenses.

Non-interest expense was $41.0 million for the nine months ended September 30, 2022, compared to $37.0 million for the nine months ended September 30, 2021.

The increase in non-interest expense is primarily attributable to a $3.0 million increase in appraisal management fee expense due to an increase in appraisal volume and a $566,000 increase in salaries and employee benefits expense primarily due to an increase in insurance costs and a $340,000 increase in other non-interest expenses.

Total non-interest expense was $13.7 million for the three months ended March 31, 2023, compared to $13.3 million for the three months ended March 31, 2022.

The increase in non-interest expense is primarily attributable to a $651,000 increase in salaries and employee benefits expense primarily due to a reduction in loan origination costs due to lower loan demand and an increase in supplemental retirement plan expense and a $687,000 increase in other non-interest expenses primarily due to an increase in deferred compensation expense, which were partially offset by a $1.1 million decrease in appraisal management fee expense due to a decrease in appraisal volume.

Income Taxes.

Income tax expense was $1.4 million for the three months ended September 30, 2022, compared to $824,000 for the three months ended September 30, 2021.

The effective tax rate was 21.06% for the three months ended September 30, 2022, compared to 19.55% for the three months ended September 30, 2021.

Income tax expense was $3.1 million for the nine months ended September 30, 2022 and 2021.

The effective tax rate was 20.40% for the nine months ended September 30, 2022, compared to 20.17% for the nine months ended September 30, 2021.

Income tax expense was $851,000 for the three months ended March 31, 2023, compared to $848,000 for the three months ended March 31, 2022.

The effective tax rate was 21.15% for the three months ended March 31, 2023, compared to 19.72% for the three months ended March 31, 2022.

The increase in the effective tax rate is primarily due to a reduction in non-taxable investments.

Analysis of Financial Condition

Investment Securities.

Available for sale securities were $444.4 million as of September 30, 2022, compared to $406.5 million as of December 31, 2021.

Average investment securities available for sale for the nine months ended September 30, 2022 were $490.6 million, compared to $349.6 million for the year ended December 31, 2021.

Total loans were $1.0 billion as of September 30, 2022, compared to $884.9 million as of December 31, 2021.

The increase in loans was achieved despite a $17.9 million reduction in PPP loans during the nine months ended September 30, 2022.

The Bank had $103,000 and $18.0 million in PPP loans at September 30, 2022 and December 31, 2021, respectively.

Average loans represented 58% and 61% of average earning assets for the nine months ended September 30, 2022 and the year ended December 31, 2021, respectively.

The Bank had $975,000 and $3.6 million in mortgage loans held for sale as of September 30, 2022 and December 31, 2021, respectively.

Available for sale securities were $399.1 million as of March 31, 2023, compared to $445.4 million as of December 31, 2022.

Average investment securities available for sale for the three months ended March 31, 2023 were $476.3 million, compared to $467.5 million for the year ended December 31, 2022.

Total loans were $1.1 billion as of March 31, 2023, compared to $1.0 billion as of December 31, 2022.

Average loans represented 67% and 59% of average earning assets for the three months ended March 31, 2023 and the year ended December 31, 2022, respectively.

The Bank had $417,000 and $211,000 in mortgage loans held for sale as of March 31, 2023 and December 31, 2022, respectively.

Although the Bank has a diversified loan portfolio, a substantial portion of the loan portfolio is collateralized by real estate, which is dependent upon the real estate market.

Real estate mortgage loans include both commercial and residential mortgage loans.

At September 30, 2022, the Bank had $97.7 million in residential mortgage loans, $97.4 million in home equity loans and $596.4 million in commercial mortgage loans, which include $460.1 million secured by commercial property and $136.3 million secured by residential property.

Residential mortgage loans at September 30, 2022 include $20.5 million in non-traditional mortgage loans from the former Banco division of the Bank.

At March 31, 2023, the Bank had $104.0 million in residential mortgage loans, $102.1 million in home equity loans and $614.7 million in commercial mortgage loans, which include $476.0 million secured by commercial property and $138.7 million secured by residential property.

Residential mortgage loans at March 31, 2023 include $19.4 million in non-traditional mortgage loans from the former Banco division of the Bank.

At December 31, 2022, the Bank had $101.5 million in residential mortgage loans, $101.1 million in home equity loans and $610.0 million in commercial mortgage loans, which include $472.3 million secured by commercial property and $137.7 million secured by residential property.

1 unchanged sentence

All residential mortgage loans are originated as fully amortizing loans, with no negative amortization

Past due TDR loans and non-accrual TDR loans totaled $2.4 million and $2.2 million at September 30, 2022 and December 31, 2021, respectively.

The terms of these loans have been renegotiated to provide a concession to original terms, including a reduction in principal or interest as a result of the deteriorating financial position of the borrower.

There were no performing loans classified as TDR loans at September 30, 2022 and December 31, 2021.

There were no new TDR modifications during the three and nine months ended September 30, 2022 and 2021.

Allowance for Loan Losses (ALLL).

The allowance for loan losses reflects management’s assessment and estimate of the risks associated with extending credit and its evaluation of the quality of the loan portfolio.

Allowance for Credit Losses (ACL).

The allowance for credit losses reflects management’s assessment and estimate of the risks associated with extending credit and its evaluation of the quality of the loan portfolio.

The Bank periodically analyzes the loan portfolio in an effort to review asset quality and to establish an allowance that management believes will be adequate in light of anticipated risks and loan losses.

In assessing the adequacy of the allowance, size, quality and risk of loans in the portfolio are reviewed.

Other factors considered are:

the Bank’s loan loss experience;

the amount of past due and non-performing loans;

specific known risks;

the status and amount of other past due and non-performing assets;

underlying estimated values of collateral securing loans;

current and anticipated economic conditions (including those arising out of the COVID-19 pandemic);

other factors which management believes affect the allowance for potential credit losses.

The allowance for credit losses on loans is a valuation account that is deducted from the loans' amortized cost basis to present the net amount expected to be collected on the loans.

Loans are charged off against the allowance when management believes the uncollectibility of a loan balance is confirmed.

Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off.

Accrued interest receivable is excluded from the estimate of credit losses.

The allowance for credit losses represents management’s estimate of lifetime credit losses inherent in loans as of March 31, 2023.

The allowance for credit losses is estimated by management using relevant available information, from both internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts.

The Company measures expected credit losses for loans on a pooled basis when similar risk characteristics exist.

The Company calculates the allowance for credit losses using a Weighted Average Remaining Maturity methodology.

Additionally, the allowance for credit losses calculation includes subjective adjustments for qualitative risk factors that are likely to cause estimated credit losses to differ from historical experience.

These qualitative adjustments may increase or reduce reserve levels and include adjustments for:

local, state and national economic outlook;

levels and trends of delinquencies;

trends in volume, mix and size of loans;

seasoning of the loan portfolio;

experience of staff;

concentrations of credit;

and interest rate risk.

Loans that do not share risk characteristics are evaluated on an individual basis.

When management determines that foreclosure is probable and the borrower is experiencing financial difficulty, the expected credit losses are based on the fair value of collateral at the reporting dated unadjusted for selling costs as appropriate.

The Company did not have any loans evaluated on an individual basis at March 31, 2023.

Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit issued to meet customer financing needs.

The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for off-balance sheet loan commitments is represented by the contractual amount of those instruments.

Such financial instruments are recorded when they are funded.

The Company records an allowance for credit losses on off-balance sheet credit exposures, unless the commitments to extend credit are unconditionally cancelable.

The allowance for credit losses on off-balance sheet credit exposures is estimated by loan segment at each balance sheet date under the current expected credit loss model using the same methodologies as portfolio loans, taking into consideration the likelihood that funding will occur as well as any third-party guarantees.

The allowance for unfunded commitments is included in other liabilities on the Company’s consolidated balance sheets.

Management uses several measures to assess and monitor the credit risks in the loan portfolio, including a loan grading system that begins upon loan origination and continues until the loan is collected or collectability becomes doubtful.

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Any issues regarding the risk assessments are addressed by the Bank’s senior credit administrators and factored into management’s decision to originate or renew the loan.

The Board of Directors of the Bank (“Bank Board”) reviews, on a monthly basis, an analysis of the Bank’s reserves relative to the range of reserves estimated by the Bank’s Credit Administration.

The Bank Board reviews, on a monthly basis, an analysis of the Bank’s reserves relative to the range of reserves estimated by the Bank’s Credit Administration.

As an additional measure, the Bank engages an independent third party to review the underwriting, documentation and risk grading analyses.

This independent third party reviews and evaluates loan relationships greater than or equal to $1.5 million as well as a periodic sample of commercial relationships with exposures below $1.5 million, excluding loans in default, and loans in process of litigation or liquidation.

The third party’s evaluation and report is shared with management and the Bank Board.

The third party’s evaluation and report is shared with management and the board of directors of the Bank (“Bank Board”).

Management considers certain commercial loans with weak credit risk grades to be individually impaired and measures such impairment based upon available cash flows and the value of the collateral.

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This continual grading process is used to monitor the credit quality of the loan portfolio and to assist management in estimating the allowance.

The provision for loan losses charged or credited to earnings is based upon management’s judgment of the amount necessary to maintain the allowance at a level appropriate to absorb probable incurred losses in the loan portfolio at the balance sheet date.

The provision for credit losses charged or credited to earnings is based upon management’s judgment of the amount necessary to maintain the allowance at a level appropriate to absorb probable incurred losses in the loan portfolio at the balance sheet date.

The amount each quarter is dependent upon many factors, including growth and changes in the composition of the loan portfolio, net charge-offs, delinquencies, management’s assessment of loan portfolio quality, the value of collateral, and other macro-economic factors and trends.

The evaluation of these factors is performed quarterly by management through an analysis of the appropriateness of the allowance.

The allowance is comprised of three components:

specific reserves, general reserves and unallocated reserves.

After a loan has been identified as impaired, management measures impairment.

When the measure of the impaired loan is less than the recorded investment in the loan, the amount of the impairment is recorded as a specific reserve.

These specific reserves are determined on an individual loan basis based on management’s current evaluation of the Bank’s loss exposure for each credit, given the appraised value of any underlying collateral.

Loans for which specific reserves are provided are excluded from the general allowance calculations as described below.

The general allowance reflects reserves established under GAAP for collective loan impairment.

These reserves are based upon historical net charge-offs using the greater of the last two, three, four, or five years’ loss experience.

This charge-off experience may be adjusted to reflect the effects of current conditions.

The Bank considers information derived from its loan risk ratings and external data related to industry and general economic trends in establishing reserves.

Qualitative factors applied in the Bank’s ALLL model include the impact to the economy from the COVID-19 pandemic and reserves on loans with payment modifications as a result of the COVID-19 pandemic.

At September 30, 2022 and December 31, 2021, there were no loans with existing modifications as a result of the COVID-19 pandemic.

At September 30, 2022, the Bank continues to maintain a pool of loans that were previously modified as a result of the COVID-19 pandemic.

The loan balances associated with those loans that were previously modified as a result of the COVID-19 pandemic related modifications have been grouped into their own pool within the Bank’s ALLL model as management considers that they have a higher risk profile, and a higher reserve rate has been applied to this pool.

Loans included in this pool totaled $74.0 million and $88.7 million at September 30, 2022 and December 31, 2021, respectively.

The unallocated allowance is determined through management’s assessment of probable losses that are in the portfolio but are not adequately captured by the other two components of the allowance, including consideration of current economic and business conditions and regulatory requirements.

The unallocated allowance also reflects management’s acknowledgement of the imprecision and subjectivity that underlie the modeling of credit risk.

Due to the subjectivity involved in determining the overall allowance, including the unallocated portion, the unallocated portion may fluctuate from period to period based on management’s evaluation of the factors affecting the assumptions used in calculating the allowance.

There were no significant changes in the estimation methods or fundamental assumptions used in the evaluation of the allowance for the three and nine months ended September 30, 2022 as compared to the three and nine months ended September 30, 2021.

Revisions, estimates and assumptions may be made in any period in which the supporting factors indicate that loss levels may vary from the previous estimates.

Effective December 31, 2012, certain mortgage loans from the former Banco division of the Bank were analyzed separately from other single-family residential loans in the Bank’s loan portfolio.

Since the adoption of CECL on January 1, 2023, the allowance for credit losses represents management’s estimate of credit losses for the remaining estimated life of the Bank’s financial assets, including loan receivables and some off-balance sheet credit exposures.

Estimating the amount of the allowance for credit losses requires significant judgment and the use of estimates related to historical experience, current conditions, reasonable and supportable forecasts, and the value of collateral on collateral-dependent loans.

The loan portfolio also represents the largest asset type on our consolidated balance sheet.

Loan losses are charged against the allowance, while recoveries of amounts previously charged off are credited to the allowance.

A provision for credit losses is charged to operations based on management’s periodic evaluation of the factors previously mentioned, as well as other pertinent factors.

There are many factors affecting the allowance for credit losses;

some are quantitative while others require qualitative judgment.

Although management believes its process for determining the allowance adequately considers all the potential factors that could potentially result in credit losses, the process includes subjective elements and is susceptible to significant change.

To the extent actual outcomes differ from management estimates, additional provision for credit losses could be required that could adversely affect our earnings or financial position in future periods.

Beginning December 31, 2012, certain mortgage loans from the former Banco division of the Bank were analyzed separately from other single-family residential loans in the Bank’s loan portfolio.

These loans are first mortgage loans made to the Latino market, primarily in Mecklenburg, North Carolina and surrounding counties.

These loans are non-traditional mortgages in that the customer normally did not have a credit history, so all credit information was accumulated by the loan officers.

PPP loans are excluded from the allowance as PPP loans are 100 percent guaranteed by the SBA.

Various regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowance.

Such agencies may require adjustments to the allowance based on their judgments of information available to them at the time of their examinations.

Management believes it has established the allowance for credit losses pursuant to GAAP, and has taken into account the views of its regulators and the current economic environment.

Management believes it has established the allowance for credit losses pursuant to CECL, and has taken into account the views of its regulators and the current economic environment.

Management considers the allowance adequate to cover the estimated losses inherent in the Bank’s loan portfolio as of the date of the financial statements.

Although management uses the best information available to make evaluations, significant future additions to the allowance may be necessary based on changes in economic and other conditions, thus adversely affecting the operating results of the Company.

Percentage of Loans

By Risk Grade

Risk Grade 1 (Excellent Quality)

Risk Grade 2 (High Quality)

Risk Grade 3 (Good Quality)

Risk Grade 4 (Management Attention)

Risk Grade 5 (Watch)

Risk Grade 6 (Substandard)

Risk Grade 7 (Doubtful)

Risk Grade 8 (Loss)

At September 30, 2022, including non-accrual loans, there were no relationships exceeding $1.0 million in the Watch and Substandard risk grades.

Non-performing Assets.

Non-performing assets totaled $3.7 million at September 30, 2022 or 0.22% of total assets, compared to $3.2 million or 0.20% of total assets at December 31, 2021.

Non-accrual loans were $3.7 million at September 30, 2022 and $3.2 million at December 31, 2021.

As a percentage of total loans outstanding, non-accrual loans were 0.37% at September 30, 2022 and December 31, 2021, respectively.

Non-performing assets include $3.7 million in commercial and residential mortgage loans and $19,000 in other loans at September 30, 2022, compared to $3.2 million in commercial and residential mortgage loans, $51,000 in other loans at December 31, 2021.

The Bank had no loans 90 days past due and still accruing at September 30, 2022 and December 31, 2021.

The Bank had no other real estate owned at September 30, 2022 and December 31, 2021.

Total deposits at September 30, 2022 were $1.5 billion compared to $1.4 billion at December 31, 2021.

Core deposits, a non-GAAP measure, which include demand deposits, savings accounts and non-brokered certificates of deposits of denominations less than $250,000, amounted to $1.5 billion and $1.4 billion at September 30, 2022 and December 31, 2021, respectively.

Non-performing assets were $3.6 million or 0.23% of total assets at March 31, 2023, compared to $3.7 million or 0.23% of total assets at December 31, 2022.

Non-accrual loans were $3.6 million at March 31, 2023 and $3.7 million at December 31, 2022.

As a percentage of total loans outstanding, non-accrual loans were 0.35% and 0.36% at March 31, 2023 and December 31, 2022, respectively.

Non-performing assets include $3.6 million in commercial and residential mortgage loans and $3,000 in other loans at March 31, 2023, compared to $3.7 million in commercial and residential mortgage loans and $8,000 in other loans at December 31, 2022.

The Bank had no loans 90 days past due and still accruing at March 31, 2023 and December 31, 2022.

The Bank had no other real estate owned at March 31, 2023 and December 31, 2022.

Total deposits were $1.4 billion at March 31, 2023 and December 31, 2022.

Core deposits, a non-GAAP measure, which include noninterest-bearing demand deposits, NOW, MMDA, savings and non-brokered certificates of deposit of denominations of $250,000 or less, were $1.3 billion and $1.4 billion at March 31, 2023 and December 31, 2022, respectively.

Management believes it is useful to calculate and present core deposits because of the positive impact this low cost funding source provides to the Bank’s funding base.

Certificates of deposit in amounts of more than $250,000 totaled $67.6 million at March 31, 2023, compared to $31.0 million at December 31, 2022.

Other time deposits totaled $100.7 million at March 31, 2023, compared to $67.0 million at December 31, 2022.

The increases in certificates of deposit in amounts of $250,000 or more and other time deposits are primarily due to promotional rates offered on select certificates of deposit products during the first quarter of 2023.

Estimated uninsured deposits totaled $407.8 million, or 28.85% of total deposits, at March 31, 2023, compared to $439.8 million, or 30.64% of total deposits, at December 31, 2022.

Uninsured amounts are estimated based on the portion of account balances in excess of FDIC insurance limits.

The Bank did not have any significant deposit concentrations at March 31, 2023.

Borrowed Funds.

There were no FHLB borrowings outstanding at September 30, 2022 and December 31, 2021.

Securities sold under agreements to repurchase were $38.0 million at September 30, 2022 and December 31, 2021.

There were no FHLB borrowings outstanding at March 31, 2023 and December 31, 2022.

Securities sold under agreements to repurchase were $39.5 million at March 31, 2023, compared to $47.7 million at December 31, 2022.

Junior Subordinated Debentures (related to Trust Preferred Securities).

Junior subordinated debentures were $15.5 million at September 30, 2022 and December 31, 2021.

In June 2006, the Company formed a wholly owned Delaware statutory trust, PEBK Capital Trust II (“PEBK Trust II”), which issued $20.0 million of guaranteed preferred beneficial interests in the Company’s junior subordinated deferrable interest debentures.

Junior subordinated debentures were $15.5 million at March 31, 2023 and December 31, 2022.

In June 2006, the Company formed a second wholly owned Delaware statutory trust, PEBK Capital Trust II (“PEBK Trust II”), which issued $20.0 million of guaranteed preferred beneficial interests in the Company’s junior subordinated deferrable interest debentures.

All of the common securities of PEBK Trust II are owned by the Company.

The proceeds from the issuance of the common securities and the trust preferred securities were used by PEBK Trust II to purchase $20.6 million of junior subordinated debentures of the Company.

The proceeds received by the Company from the sale of the junior subordinated debentures were used to repay the trust preferred securities issued in December 2001 by PEBK Capital Trust, a wholly owned Delaware statutory trust of the Company, and for general purposes.

The proceeds received by the Company from the sale of the junior subordinated debentures were used to repay in December 2006 the trust preferred securities issued in December 2001 by PEBK Capital Trust, a wholly owned Delaware statutory trust of the Company, and for general purposes.

The debentures represent the sole assets of PEBK Trust II.

PEBK Trust II is not included in the consolidated financial statements.

The Company redeemed $5.0 million of outstanding trust preferred securities in 2019.

The trust preferred securities issued by PEBK Trust II accrue and pay interest quarterly at a floating rate of three-month LIBOR plus 163 basis points.

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The overnight, one-month, three-month, nine-month, and 12-month USD LIBOR rates will continue to be published through June 30, 2023.

Management has reviewed the implications of the Adjustable Interest Rate Act (LIBOR Act) enacted in March 2022 and the related Federal Reserve regulations with legal counsel, and is currently working with the trustee to complete required updates prior to June 30, 2023.

Asset Liability and Interest Rate Risk Management.

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Rate sensitive liabilities include interest-bearing checking accounts, money market deposit accounts, savings accounts, time deposits and borrowed funds.

Average rate sensitive assets for the nine months ended September 30, 2022 totaled $1.6 billion, exceeding average rate sensitive liabilities of $976.4 million by $619.1 million.

Average rate sensitive assets for the three months ended March 31, 2023 totaled $1.5 billion, exceeding average rate sensitive liabilities of $951.6 million by $597.4 million.

The Company has an overall interest rate risk management strategy that incorporates the use of derivative instruments to minimize significant unplanned fluctuations in earnings that are caused by interest rate volatility.

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The Company minimizes the credit risk in derivative instruments by entering into transactions with high-quality counterparties that are reviewed periodically by the Company.

The Company did not have any interest rate derivatives outstanding as of September 30, 2022.

The Company did not have any interest rate derivatives outstanding as of March 31, 2023.

Included in the rate sensitive assets are $183.4 million in variable rate loans indexed to prime rate subject to immediate repricing upon changes by the FOMC.

The Company utilizes interest rate floors on certain variable rate loans to protect against downward movements in the prime rate.

At September 30, 2022, the Company had $110.8 million in loans with interest rate floors.

At March 31, 2023, the Company had $112.3 million in loans with interest rate floors.

The floors were in effect on $8,000 of these loans.

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In addition, the Company’s liquidity is affected by off-balance sheet commitments to lend in the form of unfunded commitments to extend credit and standby letters of credit.

As of September 30, 2022, such unfunded commitments to extend credit were $373.9 million, while commitments in the form of standby letters of credit totaled $5.5 million.

As of March 31, 2023, such unfunded commitments to extend credit were $376.9 million, while commitments in the form of standby letters of credit totaled $4.4 million.

As of December 31, 2022, such unfunded commitments to extend credit were $382.7 million, while commitments in the form of standby letters of credit totaled $4.4 million.

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The Bank considers these to be a stable portion of the Bank’s liability mix and the result of on-going consumer and commercial banking relationships.

As of September 30, 2022, the Bank’s core deposits, a non-GAAP measure, totaled $1.5 billion, or 97.99% of total deposits.

As of March 31, 2023, the Bank’s core deposits, a non-GAAP measure, totaled $1.4 billion, or 96.33% of total deposits.

As of December 31, 2022, the Bank’s core deposits totaled $1.4 billion, or 97.84% of total deposits.

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The Bank’s wholesale funding includes FHLB borrowings, FRB borrowings, brokered deposits, internet certificates of deposit and certificates of deposit issued to the State of North Carolina.

The Bank’s ratio of wholesale funding to total assets was 0.91% and 0.68% as of September 30, 2022 and December 31, 2021, respectively.

The Bank’s ratio of wholesale funding to total assets was 1.29% and 0.92% as of March 31, 2023 and December 31, 2022, respectively.

The Bank has a line of credit with the FHLB equal to 20% of the Bank’s total assets.

There were no FHLB borrowings outstanding at September 30, 2022 and December 31, 2021.

At September 30, 2022, the carrying value of loans pledged as collateral to the FHLB totaled $143.4 million compared to $137.4 million at December 31, 2021.

The remaining availability under the line of credit with the FHLB was $88.2 million at September 30, 2022 compared to $90.9 million at December 31, 2021.

The Bank had no borrowings from the FRB at September 30, 2022 or December 31, 2021.

There were no FHLB borrowings outstanding at March 31, 2023 and December 31, 2022.

At March 31, 2023, the carrying value of loans pledged as collateral to the FHLB totaled $195.1 million compared to $149.4 million at December 31, 2022.

The remaining availability under the line of credit with the FHLB was $124.4 million at March 31, 2023 compared to $86.5 million at December 31, 2022.

The Bank had no borrowings from the FRB at March 31, 2023 or December 31, 2022.

FRB borrowings are collateralized by a blanket assignment on all qualifying loans that the Bank owns which are not pledged to the FHLB.

At September 30, 2022, the carrying value of loans pledged as collateral to the FRB totaled $565.1 million compared to $475.2 million at December 31, 2021.

Availability under the line of credit with the FRB was $427.2 million and $346.20 million at September 30, 2022 and December 31, 2021, respectively.

The Bank also had the ability to borrow up to $110.5 million for the purchase of overnight federal funds from five correspondent financial institutions as of September 30, 2022.

The liquidity ratio for the Bank, which is defined as net cash, interest-bearing deposits, federal funds sold and certain investment securities, as a percentage of net deposits and short-term liabilities was 34.62% at September 30, 2022 and 43.28% at December 31, 2021.

The minimum required liquidity ratio as defined in the Bank’s Asset/Liability and Interest Rate Risk Management Policy was 10% at September 30, 2022 and December 31, 2021.

At March 31, 2023, the carrying value of loans pledged as collateral to the FRB totaled $594.1 million compared to $585.0 million at December 31, 2022.

Availability under the line of credit with the FRB was $449.2 million and $445.1 million at March 31, 2023 and December 31, 2022, respectively.

The Bank has completed the necessary steps in order to access the FRB’s Bank Term Funding Program (“BTFP”), should it wish to do so at any time in the future.

The Bank has not pledged any collateral to the BTFP as of March 31, 2023.

The Bank also had the ability to borrow up to $90.5 million for the purchase of overnight federal funds from four correspondent financial institutions as of March 31, 2023.

The liquidity ratio for the Bank, which is defined as net cash, interest-bearing deposits, federal funds sold and certain investment securities, as a percentage of net deposits and short-term liabilities was 28.23% at March 31, 2023 and 30.32% at December 31, 2022.

The minimum required liquidity ratio as defined in the Bank’s Asset/Liability and Interest Rate Risk Management Policy was 10% at March 31, 2023 and December 31, 2022.

Contractual Obligations and Off-Balance Sheet Arrangements.

The Company’s contractual obligations and other commitments as of September 30, 2022 and December 31, 2021 are summarized in the table below.

The Company’s contractual obligations include junior subordinated debentures, as well as certain payments under current lease agreements.

Other commitments include commitments to extend credit.

Because not all of these commitments to extend credit will be drawn upon, the actual cash requirements are likely to be significantly less than the amounts reported for other commitments below.

(Dollars in thousands)

September 30, 2022

December 31, 2021

Contractual Cash Obligations

Junior subordinated debentures

Operating lease obligations

Other Commitments

Commitments to extend credit

Standby letters of credit and financial guarantees written

SBIC Investments

Income tax credits

Capital Resources.

Shareholders’ equity was $103.9 million, or 6.78% of total assets, at September 30, 2022, compared to $142.4 million, or 8.77% of total assets, at December 31, 2021.

The decrease in shareholders’ equity is primarily due to an increase in the unrealized loss on investment securities available for sale due to rate changes from December 31, 2021 to September 30, 2022.

Annualized return on average equity for the nine months ended September 30, 2022 was 12.53%, compared to 11.04% for the nine months ended September 30, 2021.

Total cash dividends paid on common stock were $3.9 million and $2.8 million for the nine months ended September 30, 2022 and 2021, respectively.

In February of 2022, the Board of Directors authorized a stock repurchase program, whereby up to $2.0 million may be allocated to repurchase the Company’s common stock.

Shareholders’ equity was $114.8 million, or 7.16% of total assets, at March 31, 2023, compared to 105.2 million, or 6.49% of total assets, at December 31, 2022.

The increase in shareholders’ equity is primarily due to a decrease in the unrealized loss on investment securities available for sale due to rate changes between December 31, 2022 and March 31, 2023.

Annualized return on average equity for the three months ended March 31, 2023 was 11.78%, compared to 10.10% for the three months ended March 31, 2022.

Total cash dividends paid on common stock were $1.9 million for the three months ended March 31, 2023 and 2022.

In March of 2023, the Board of Directors authorized a stock repurchase program, whereby up to $2.0 million may be allocated to repurchase the Company’s common stock.

Any purchases under the Company’s stock repurchase program may be made periodically as permitted by securities laws and other legal requirements in the open market or in privately-negotiated transactions.

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The stock repurchase program may be suspended at any time or from time-to-time without prior notice.

The Company has repurchased approximately $594,000, or 22,000 shares of its common stock, under this stock repurchase program as of September 30, 2022.

The Company had not repurchased any shares of its common stock, under this stock repurchase program as of March 31, 2023.

In 2013, the FRB approved its final rule on the Basel III capital standards, which implement changes to the regulatory capital framework for banking organizations.

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Tier 1 capital is generally defined as shareholders’ equity and trust preferred securities less all intangible assets and goodwill.

Tier 1 capital includes $15.0 million in trust preferred securities at September 30, 2022 and December 31, 2021.

The Company’s Tier 1 capital ratio was 13.39% and 15.43% at September 30, 2022 and December 31, 2021, respectively.

Tier 1 capital includes $15.0 million in trust preferred securities at March 31, 2023 and December 31, 2022.

The Company’s Tier 1 capital ratio was 13.34% and 13.21% at March 31, 2023 and December 31, 2022, respectively.

Total risk-based capital is defined as Tier 1 capital plus supplementary capital.

Supplementary capital, or Tier 2 capital, consists of the Company’s allowance for loan losses, not exceeding 1.25% of the Company’s risk-weighted assets.

Supplementary capital, or Tier 2 capital, consists of the Company’s allowance for credit losses, not exceeding 1.25% of the Company’s risk-weighted assets.

Total risk-based capital ratio is therefore defined as the ratio of total capital (Tier 1 capital and Tier 2 capital) to risk-weighted assets.

The Company’s total risk-based capital ratio was 14.20% and 16.35% at September 30, 2022 and December 31, 2021, respectively.

The Company’s total risk-based capital ratio was 14.27% and 14.04% at March 31, 2023 and December 31, 2022, respectively.

The Company’s common equity Tier 1 capital consists of common stock and retained earnings.

The Company’s common equity Tier 1 capital ratio was 12.17% and 13.96% at September 30, 2022 and December 31, 2021, respectively.

The Company’s common equity Tier 1 capital ratio was 12.15% and 12.03% at March 31, 2023 and December 31, 2022, respectively.

Financial institutions are also required to maintain a leverage ratio of Tier 1 capital to total average assets of 4.0% or greater.

The Company’s Tier 1 leverage capital ratio was 9.58% and 9.64% at September 30, 2022 and December 31, 2021, respectively.

The Bank’s Tier 1 risk-based capital ratio was 13.27% and 15.27% at September 30, 2022 and December 31, 2021, respectively.

The total risk-based capital ratio for the Bank was 14.08% and 16.19% at September 30, 2022 and December 31, 2021, respectively.

The Bank’s common equity Tier 1 capital ratio was 13.27% and 15.27% at September 30, 2022 and December 31, 2021, respectively.

The Bank’s Tier 1 leverage capital ratio was 9.43% and 9.50% at September 30, 2022 and December 31, 2021, respectively.

The Company’s Tier 1 leverage capital ratio was 10.27% and 9.82% at March 31, 2023 and December 31, 2022, respectively.

The Bank’s Tier 1 risk-based capital ratio was 13.24% and 13.10% at March 31, 2023 and December 31, 2022, respectively.

The total risk-based capital ratio for the Bank was 14.17% and 13.93% at March 31, 2023 and December 31, 2022, respectively.

The Bank’s common equity Tier 1 capital ratio was 13.24% and 13.10% at March 31, 2023 and December 31, 2022, respectively.

The Bank’s Tier 1 leverage capital ratio was 10.12% and 9.68% at March 31, 2023 and December 31, 2022, respectively.

A bank is considered to be “well capitalized” if it has a total risk-based capital ratio of 10.0% or greater, a Tier 1 risk-based capital ratio of 8.0% or greater, a common equity Tier 1 capital ratio of 6.5% or greater and a leverage ratio of 5.0% or greater.

Based upon these guidelines, the Bank was considered to be “well capitalized” at September 30, 2022.

Based upon these guidelines, the Bank was considered to be “well capitalized” at March 31, 2023.

Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes in the Quantitative and Qualitative Disclosures About Market Risk from those previously disclosed in Item 7A of Part II of the Company’s Annual Report on Form 10-K, filed with the SEC on March 18, 2022.

Not applicable

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