What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-05-09 compared with 2021-11-08 · 89 added, 160 removed, 344 unchanged (42% of the section changed)

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We intend that this information facilitate your understanding and assessment of significant changes and trends related to our financial condition and results of operations.

You should read this section in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the year ended December 31, 2020.

We are a bank holding company and are headquartered in Washington Township, New Jersey.

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The Company's non-interest expense primarily consists of employee compensation, administration, and other operating expenses.

At September 30, 2021, we had total assets of $2.16 billion, and total equity of $225.7 million.

Net income available to common shareholders for the three and nine months ended September 30, 2021 was $10.5 million and $30.7 million, respectively.

At March 31, 2022, we had total assets of $2.05 billion, and total equity of $240.3 million.

Net income available to common shareholders for the three months ended March 31, 2022 was $10.1 million.

The Global Outbreak of the COVID-19 Coronavirus

The COVID-19 pandemic has adversely affected, and may continue to adversely affect, local, national and global economic activity and the Company.

The spread of the outbreak has caused significant disruptions to the U.S.

economy, significant reductions in the targeted federal funds rate and has disrupted banking and other financial activity in the areas in which the Company operates.

The extent of the ongoing pandemic's impact will depend on future developments, which are highly uncertain, including when the coronavirus can be controlled and abated.

As the result of the COVID-19 pandemic and the related adverse local and national economic consequences, we could be subject to any of the following risks, any of which could have a material, adverse effect on our business, financial condition, liquidity, and results of operations:

the demand for our products and services may decline, making it difficult to grow assets and income;

if high levels of unemployment continue for an extended period of time, loan delinquencies, problem assets, and foreclosures may increase, resulting in increased charges and reduced income;

collateral for loans, especially real estate, may decline in value, which could cause loan losses to increase;

our allowance for loan losses may increase if borrowers experience financial difficulties, which will adversely affect our net income;

the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us;

as the result of the decline in the Federal Reserve Board’s target federal funds rate to near 0%, the yield on our assets may decline to a greater extent than the decline in our cost of interest-bearing liabilities, reducing our net interest margin and spread and reducing net income.

The extent to which the COVID-19 pandemic will continue to impact the Company’s business, financial condition and results of operations in future periods will depend on future developments, including the scope and duration of the pandemic, the efficacy and adoption of COVID-19 vaccines and actions taken by governmental authorities and other third parties in response to the pandemic, as well as further actions the Company may take as may be required by government authorities or that the Company determines is in the best interests of its employees and clients.

There is no certainty that such measures will be sufficient to mitigate the risks posed by the pandemic.

The COVID-19 pandemic is continuing to have an adverse impact on the Company, its customers and the communities it serves.

Given its ongoing and dynamic nature, it is difficult to predict the full impact of the COVID-19 outbreak on the business of the Company, its customers, employees and third-party service providers.

The extent of such impact will depend on future developments, which are highly uncertain, including whether the pandemic can be controlled and abated.

Additionally, the responses of various governmental and nongovernmental authorities to curtail business and consumer activities in an effort to mitigate the pandemic will have material long-term effects on the Company and its customers which are difficult to quantify in the near-term or long-term.

As a participating lender in the SBA Paycheck Protection Program (“PPP”), we are subject to additional risks of litigation from our customers or other parties regarding our processing of loans for the PPP which could have a significant adverse impact on our business, financial position, results of operations, and prospects.

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Results of Operations

Three Months Ended September 30, 2021 Compared to Three Months Ended September 30, 2020

Our net income available to common shareholders for the third quarter of 2021 increased $4.0 million, or 60.6%, to $10.5 million, compared to $6.5 million for the same period last year.

Earnings per share were $0.88 per basic common share and $0.87 per diluted common share for the third quarter of 2021 compared to $0.55 per basic common share and $0.55 per diluted common share for the same period last year.

The increase in net income available to common shareholders primarily resulted from a $2.3 million decrease in interest paid on deposits and borrowings, a $2.4 million decrease in the provision for loan losses, and an increase in service fees on deposit accounts of $0.8 million, partially offset by an increase in non-interest expense of $0.6 million, and an increase in income tax expense of $1.4 million.

Three Months Ended March 31, 2022 Compared to Three Months Ended March 31, 2021

Our net income available to common shareholders for the first quarter of 2022 increased $0.7 million, or 7.0%, to $10.1 million, compared to $9.4 million for the same period last year.

Earnings per share were $0.85 per basic common share and $0.83 per diluted common share for the first quarter of 2022 compared to $0.79 per basic common share and $0.78 per diluted common share for the same period last year.

The increase in net income available to common shareholders primarily resulted from a $1.2 million decrease in interest paid on deposits and borrowings and a $0.5 million decrease in the provision for loan losses, partially offset by a decrease in interest income of $0.9 million.

Net Interest Income :

Our net interest income increased $2.0 million, or 13.2%, to $17.5 million for the third quarter of 2021 compared to $15.4 million for the third quarter of 2020.

Our net interest income increased $0.3 million, or 1.7%, to $17.1 million for the first quarter of 2022 compared to $16.8 million for the first quarter of 2021.

The increase in net interest income was primarily due to a decrease of $1.2 million in total interest expense, driven by a reduction in interest rates on deposits which reduced interest expense by $1.0 million, as well as a decrease of $0.2 million in interest on borrowings due to lower outstanding balances.

This increase in net

interest income was partially offset by a $0.3 million decrease in interest income, primarily due to a reduction in interest and fees on loans of $0.3 million.

This increase in net interest income was partially offset by a $0.9 million decrease in interest income, primarily due to a reduction in interest and fees on loans of $1.0 million.

Provision for loan losses :

For the three months ended September 30, 2021, the provision for loan losses decreased to zero, compared to $2.4 million for the three months ended September 30, 2020.

The decrease in the provision was primarily due to lower loan growth over the third quarter of 2021, as well as the prior year consideration of the potential impact of the COVID-19 pandemic.

For the three months ended March 31, 2022, the provision for loan losses decreased to zero, compared to $0.5 million for the three months ended March 31, 2021.

The decrease in the provision was primarily due to the prior year consideration of the potential impact of the COVID-19 pandemic.

For more information about our provision and allowance for loan and lease losses and our loss experience, see “Financial Condition-Allowance for Loan and Lease Losses” below and Note 4 - Loans And Allowance For Loan Losses to the unaudited consolidated financial statements.

Non-interest Income :

Our non-interest income was $2.2 million for the three months ended September 30, 2021, an increase of $1.5 million, compared to $0.7 million for the same period last year.

The increase is primarily attributable to an increase in service fees from deposit accounts attributable to our cannabis-related businesses.

Our non-interest income was $2.1 million for the three months ended March 31, 2022, a decrease of $0.2 million, compared to $2.2 million for the same period last year.

The decrease is primarily attributable to a decrease in service fees from deposit accounts attributable to our cannabis-related businesses of $0.3 million, net of an increase in other income of $0.1 million.

Please refer to Note 9.

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Non-interest Expense :

Our non-interest expense increased $0.6 million to $5.4 million for the three months ended September 30, 2021, from $4.8 million for the three months ended September 30, 2020.

The increase was primarily due to an increase in professional fees related to our BSA remediation efforts and various other expense categories as a result of the growth of the Company.

Income tax expense was $3.7 million on income before taxes of $14.2 million for the three months ended September 30, 2021, resulting in an effective tax rate of 26.0%, compared to income tax expense of $2.3 million on income before taxes of $8.9 million for the same period of 2020, resulting in an effective tax rate of 25.8%.

Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30, 2020

Our net income available to common shareholders for the nine months ended September 30, 2021 increased $10.4 million, or 51.3%, to $30.7 million compared to $20.3 million for the nine months ended September 30, 2020.

Earnings per share were $2.58 per basic common share and $2.53 per diluted common share for the nine months ended September 30, 2021 compared to $1.71 per basic common share and $1.69 per diluted common share for the same period last year.

The increase in net income available to common shareholders primarily resulted from a decrease in interest paid on deposits of $6.7 million, a decrease in the provision for loan losses of $5.3 million, and an increase in non-interest income of $3.9 million, partially offset by a decrease in interest earned on deposits with banks of $0.6 million, higher non-interest expense of $2.4 million, and higher taxes of $3.4 million.

Net interest income :

Our net interest income increased $6.8 million, or 15.0%, to $52.4 million for the nine months ended September 30, 2021, compared to $45.5 million for the same period last year.

Interest income for the nine months ended September 30, 2021, decreased to $62.5 million, a decrease of $0.4 million, or 0.6%, from $62.9 million for the same period of 2020.

The decrease in interest income was primarily due to a decrease in interest earned on Federal Reserve Bank deposits of $0.6 million, as the Federal Reserve Board reduced interest rates in response to the COVID-19 pandemic, as well as a decrease in interest on investments of $0.2 million, partially offset by an increase in interest and fees on loans of $0.5 million.

Interest expense decreased $7.2 million for the year to date September 30, 2021, compared to the same period in 2020, primarily due to reductions in market interest rates.

Provision for loan losses :

The provision for loan losses was $0.5 million for the nine months ended September 30, 2021 compared to the provision for loan losses of $5.8 million for the same period last year.

The $5.3 million decrease in the provision was primarily due to an increase in qualitative factors resulting from the economic uncertainty attributed to the COVID-19 pandemic and the impact on the credit quality on our borrowers as of September 30, 2020.

Non-interest income :

Our non-interest income was $6.5 million for the nine months ended September 30, 2021, an increase of $3.8 million, or 143.1%, compared to $2.7 million for the same period last year.

The increase is primarily attributable to an increase in service fees on deposit accounts.

Fee income for the nine months ended September 30, 2021 from commercial deposit accounts of depositors who do business in the cannabis-related industry totaled $3.7 million, compared to $1.4 million for the same period last year.

Fee income is included in service fees on deposit accounts in the accompanying consolidated statements of income.

Please refer to Note 9.

Commitments And Contingencies to the unaudited consolidated financial statements.

Non-interest expense:

Our non-interest expense increased $2.4 million to $16.9 million for the nine months ended September 30, 2021, from $14.6 million for the nine months ended September 30, 2020.

The increase was primarily due to an increase in professional fees related to our BSA remediation efforts and various other expense categories as a result of the growth of the Company.

Income tax expense was $10.6 million on income before taxes of $41.5 million for the nine months ended September 30, 2021, resulting in an effective tax rate of 25.5%, compared to income tax expense of $7.2 million on income before taxes of $27.8 million for the same period of 2020, resulting in an effective tax rate of 25.8%.

Our non-interest expense decreased $0.1 million to $5.7 million for the three months ended March 31, 2022, from $5.8 million for the three months ended March 31, 2021.

The decrease was primarily due to a decrease in professional fees related to our BSA remediation efforts of $0.3 million, partially offset by an increase in occupancy and equipment expense of $0.1 million.

Income tax expense was $3.4 million on income before taxes of $13.5 million for the three months ended March 31, 2022, resulting in an effective tax rate of 25.2%, compared to income tax expense of $3.2 million on income before taxes of $12.8 million for the same period of 2021, resulting in an effective tax rate of 25.4%.

Net Interest Income

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The following tables presents the average daily balances of assets, liabilities and equity and the respective interest earned or paid on interest-earning assets and interest-bearing liabilities, as well as average annualized rates, for the periods indicated.

For the Three Months Ended September 30,

For the Three Months Ended March 31,

Balance Interest

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* Includes balances of FHLB and ACCBB stock.

For the Nine Months Ended September 30,

Average Balance Interest Income/ Expense Yield/ Cost Average Balance Interest Income/ Expense Yield/ Cost

(Dollars in thousands, except percentages)

Loans $ 1,528,020 $ 61,502 5.38 % $ 1,511,770 $ 60,988 5.39 %

Investment securities* 24,917 552 2.96 % 33,027 797 3.22 %

Interest bearing deposits 502,218 453 0.12 % 301,726 1,088 0.48 %

Total interest-earning assets 2,055,155 62,507 4.07 % 1,846,523 62,873 4.55 %

Other assets 76,767 70,045

Allowance for loan losses (30,067) (24,002)

Total assets $ 2,101,855 $ 1,892,566

Liabilities and Shareholders’ Equity

Interest bearing deposits:

Checking $ 71,055 $ 238 0.45 % $ 61,347 $ 247 0.54 %

Money markets 315,762 1,630 0.69 % 269,046 3,035 1.51 %

Savings 138,853 511 0.49 % 147,472 555 0.50 %

Time deposits 641,191 5,078 1.06 % 555,214 8,787 2.11 %

Brokered certificates of deposit 40,484 197 0.65 % 138,376 1,751 1.69 %

Total interest-bearing deposits 1,207,345 7,654 0.85 % 1,171,455 14,375 1.64 %

Borrowings 168,114 2,482 1.97 % 198,832 2,968 1.99 %

Total interest-bearing liabilities 1,375,459 10,136 0.99 % 1,370,287 17,343 1.69 %

Non-interest bearing deposits 496,367 320,207

Other liabilities 15,223 13,037

Total non-interest bearing liabilities 511,590 333,244

Equity 214,806 189,035

Total liabilities and shareholders’ equity $ 2,101,855 $ 1,892,566

Net interest income $ 52,371 $ 45,530

Interest rate spread 3.08 % 2.86 %

Net interest margin 3.41 % 3.29 %

Financial Condition

At September 30, 2021, the Company’s total assets were $2.16 billion, an increase of $77.3 million, or 3.7%, from December 31, 2020.

The increase in total assets was primarily attributable to an increase in cash of $165.2 million, and an increase in investment securities of $3.5 million, partially offset by a decrease in loans of $92.0 million.

The increase in cash and cash equivalents was primarily due to cash received from the increase in deposits and the payoff of loans, partially offset by the payoff of Federal Reserve Bank advances, and reduction in FHLB borrowings.

Loans decreased $92.0 million at September 30, 2021, primarily due to decreases in PPP loan balances classified as commercial loans and residential mortgage loan portfolios, compared to the balances at December 31, 2020.

Total liabilities were $1.93 billion at September 30, 2021.

This represented an $54.2 million, or 2.9%, increase from $1.88 billion at December 31, 2020.

The increase in total liabilities was primarily due to an increase in total deposits, which increased $188.8 million, or 11.9%, to $1.78 billion at September 30, 2021 from $1.59 billion at December 31, 2020.

The increase in total deposits was partially offset by $90.0 million repayment in advances from the Federal Reserve Bank for the SBA PPP loan facility, as well as $43.5 million reduction in Federal Home Loan Bank borrowings.

Total equity was $225.7 million and $202.6 million at September 30, 2021 and December 31, 2020, respectively, an increase of $23.1 million from December 31, 2020.

The following table presents certain key condensed balance sheet data as of September 30, 2021 and December 31, 2020 :

September 30,

At March 31, 2022, the Company’s total assets were $2.05 billion, a decrease of $82.3 million, or 3.9%, from December 31, 2021.

The decrease in total assets was primarily attributable to a decrease in cash and cash equivalents of $92.7 million as well as an increase in loans receivable.

The decrease in cash and cash equivalents was primarily due to cash withdrawn from deposits.

Loans increased $11.0 million at March 31, 2022, primarily due to increases in loan balances classified as commercial non-onwer occupied real estate mortgage loans, compared to the balances at December 31, 2021.

Total liabilities were $1.81 billion at March 31, 2022.

This represented a $90.2 million, or 4.7%, decrease, from $1.90 billion at December 31, 2021.

The decrease in total liabilities was primarily due to a decrease in total deposits, which decreased $91.2 million, or 5.2%, to $1.68 billion at March 31, 2022, from $1.77 billion at December 31, 2021.

Total equity was $240.3 million and $232.4 million at March 31, 2022 and December 31, 2021, respectively, an increase of $7.9 million from December 31, 2021.

The following table presents certain key condensed balance sheet data as of March 31, 2022 and December 31, 2021 :

2022 December 31,

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Investment securities 21,707 23,269

Loans held for sale — 200

Loans, net of unearned income 1,495,839 1,484,847

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Subordinated debt 42,779 42,732

FRB advances — 90,026

Total liabilities 1,813,912 1,904,084

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Cash and cash equivalents

Cash and cash equivalents increased $165.2 million to $623.8 million at September 30, 2021 from $458.6 million at December 31, 2020, an increase of 36.0%.

The increase was primarily due to cash received from an increase in deposits and a decrease in loans, net of reductions in Federal Reserve Bank advances and FHLBNY borrowings.

Cash and cash equivalents decreased $92.7 million to $503.8 million at March 31, 2022 from $596.6 million at December 31, 2021, a decrease of 15.5%.

The decrease was primarily due to cash withdrawn from deposits.

Investment securities

Total investment securities increased to $24.6 million at September 30, 2021, from $21.1 million at December 31, 2020, an increase of $3.5 million or 16.7%.

The increase was primarily due to the purchase of $8.7 million of securities, partially offset by normal pay downs of $5.2 million of mortgage-backed securities.

Total investment securities decreased to $21.7 million at March 31, 2022, from $23.3 million at December 31, 2021, a decrease of $1.6 million or 6.7%.

The decrease was attributed to normal pay downs of $1.0 million and a decrease in the fair market valuation of $0.6 million.

For detailed information on the composition and maturity distribution of our investment portfolio, see NOTE 3 - Investment Securities in the notes to the unaudited consolidated financial statements.

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Beginning in April 2020, the Company has been lending to small business through the SBA PPP loan program, which is a loan designed by the Federal government to provide a direct incentive for small businesses to keep their workers on the payroll during the COVID-19 pandemic.

Since the beginning of the loan program through September 30, 2021, the Bank has originated approximately $117.8 million of SBA PPP loans, and had $37.0 million of such loans outstanding as of September 30, 2021.

During the early second quarter of 2020, we established loan deferment and relief programs that are intended to provide an immediate and appropriate level of financial relief for the individuals and businesses experiencing hardship as a result of the COVID-19 pandemic.

The program provides three types of deferrals of monthly loan payments for three months with one time renewal option to certain qualified borrowers.

It also requires that the borrowers were current on payments at the time of the modification.

The majority of the deferrals recorded under this program are no longer in the deferral period as of September 30, 2021.

Since the beginning of the loan program through March 31, 2022, the Bank has originated approximately $117.8 million of SBA PPP loans, and had $10.0 million of such loans outstanding as of March 31, 2022.

Loans held for sale ("HFS") :

Loans held for sale are comprised of SBA loans originated for sale.

We had no loans held for sale at September 30, 2021 compared to $0.2 million loans held for sale at December 31, 2020.

We had no loans held for sale at March 31, 2022 or at December 31, 2021.

Loans receivable :

Loans receivable decreased to $1.47 billion at September 30, 2021 from $1.57 billion at December 31, 2020.

T he decrease was primarily due to decreases in the commercial and industrial, residential - multifamily, and construction loan portfolios.

Loans receivable, excluding loans held for sale, as of September 30, 2021 and December 31, 2020, consisted of the following:

September 30, 2021 December 31, 2020

Loans receivable increased to $1.50 billion at March 31, 2022 from $1.48 billion at December 31, 2021.

T he increase was primarily due to increases in the commercial - owner occupied, commercial - non-owner occupied, and residential - 1 to 4 family portfolio's.

Loans receivable, excluding loans held for sale, as of March 31, 2022 and December 31, 2021, consisted of the following:

March 31, 2022 December 31, 2021

Amount Percentage of Loans to total

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Total Loans $ 1,495,839 100.0 % $ 1,484,847 100.0 %

At September 30, 2021, total deposits increased to $1.78 billion from $1.59 billion at December 31, 2020, an increase of $188.8 million, or 11.9%.

Deposits growth was primarily due to an increase in non-interest bearing demand deposits and an increase in interest bearing savings accounts.

September 30, December 31,

At March 31, 2022, total deposits decreased to $1.68 billion from $1.77 billion at December 31, 2021, a decrease of $91.2 million, or 5.2%.

The decrease in deposits was primarily due to a decrease in non-interest bearing demand deposits and a decrease in time deposit accounts.

March 31, December 31,

(Dollars in thousands)

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Total deposits $ 1,677,210 $ 1,768,410

Total borrowings were $133.8 million at September 30, 2021, a decrease of $133.4 million from December 31, 2020, primarily due to the repayment of advances from the Federal Reserve for the SBA PPP loan facility, as well as the reduction of FHLBNY advances.

Total equity increased to $225.7 million at September 30, 2021 from $202.6 million at December 31, 2020, an increase of $23.1 million, or 11.4%, primarily due to the retention of earnings from the period.

Total borrowings were $120.9 million at March 31, 2022 and December 31, 2021, respectively.

Total equity increased to $240.3 million at March 31, 2022 from $232.4 million at December 31, 2021, an increase of $7.9 million, or 3.4%, primarily due to the retention of earnings from the period.

Liquidity and Capital Resources

Liquidity is a measure of our ability to generate cash to support asset growth, meet deposit withdrawals, satisfy other contractual obligations, and otherwise operate on an ongoing basis.

At September 30, 2021, our cash position was $623.8 million.

At March 31, 2022, our cash position was $503.8 million.

We invest cash that is in excess of our immediate operating needs primarily in our interest-bearing account at the Federal Reserve.

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While deposit accounts comprise the vast majority of our funding needs, we maintain secured borrowing lines with the FHLBNY.

As of September 30, 2021, the Company had lines of credit with the FHLBNY of $578.8 million, of which $91.2 million was outstanding, and an additional $40.0 million from a letter of credit for securing public funds.

The remaining borrowing capacity was $447.6 million at September 30, 2021.

As of March 31, 2022, the Company had lines of credit with the FHLBNY of $593.4 million, of which $78.2 million was outstanding, and an additional $50.0 million from a letter of credit for securing public funds.

The remaining borrowing capacity was $465.2 million at March 31, 2022.

Our investment portfolio primarily consists of mortgage-backed available for sale securities issued by US government agencies and government sponsored entities.

These available for sale securities are readily marketable and are available to meet our additional liquidity needs.

At September 30, 2021, the Company's investment securities portfolio classified as available for sale was $14.7 million.

We had outstanding loan commitments of $120.9 million at September 30, 2021.

At March 31, 2022, the Company's investment securities portfolio classified as available for sale was $11.8 million.

We had outstanding loan commitments of $125.5 million at March 31, 2022.

Our loan commitments are normally originated with the full amount of collateral.

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The funding requirements for such commitments occur on a measured basis over time and would be funded by normal deposit growth.

The following is a discussion of our cash flows for the nine months ended September 30, 2021 and 2020.

Cash provided by operating activities was $29.5 million in the nine months ended September 30, 2021, compared to $22.5 million for the same period in the prior year.

The increase in operating cash flow was primarily due to the increase in net income.

Cash provided by investing activities was $88.3 million in the nine months ended September 30, 2021, compared to cash used of $145.4 million in the same period last year.

The increase in cash provided in the investing activities was primarily due to the cash inflow from the reduction in loans during the period.

Cash provided by financing activities was $47.4 million in the nine months ended September 30, 2021, compared to cash from financing of $374.0 million in the same period of last year.

The current year included $188.8 million of cash inflows from deposit growth, partially offset by $90.0 million repayment of FRB advances from the PPP liquidity facility, as well as $43.5 million reduction in FHLBNY advances, and $7.6 million of dividend payments.

The following is a discussion of our cash flows for the three months ended March 31, 2022 and 2021.

Cash provided by operating activities was $8.7 million in the three months ended March 31, 2022, compared to $11.1 million for the same period in the prior year.

The decrease in operating cash flow was primarily due to the increase in accrued interest receivable and decrease in accrued interest payable, net of the increase in net income.

Cash used in investing activities was $8.4 million in the three months ended March 31, 2022, compared to cash provided by investing activities of $21.6 million in the same period last year.

The decrease in cash provided in the investing activities was primarily due to the cash outflow from the increase in loans during the period.

Cash used in financing activities was $93.0 million in the three months ended March 31, 2022, compared to cash from financing of $13.2 million in the same period of last year.

The current year included $91.2 million of cash outflows from the decrease in deposits.

Capital Adequacy

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We also use other means to manage our capital.

Total equity increased $23.1 million at September 30, 2021, from December 31, 2020, primarily from the Company’s net income of $30.7 million for the period, net of common and preferred stock dividends of $7.6 million.

Total equity increased $7.9 million at March 31, 2022, from December 31, 2021, primarily from the Company’s net income of $10.1 million for the period, net of common and preferred stock dividends of $1.9 million.

Banks and bank holding companies are subject to various regulatory capital requirements administered by federal banking agencies.

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Under the capital rules issued by the Federal Banking agencies, which became effective in January 2015, the Company and the Bank elected to exclude the effects of certain Accumulated Other Comprehensive Income (“AOCI”) items from its regulatory capital calculation.

At September 30, 2021, the Bank and the Company were both considered “well capitalized”.

At March 31, 2022, the Bank and the Company were both considered “well capitalized”.

In November 2019, Federal bank regulatory agencies finalized a rule that simplifies capital requirements for community banks by allowing them to optionally adopt a simple leverage ratio to measure capital adequacy, which removes requirements for calculating and reporting risk-based capital ratios for a qualifying community bank that have less than $10 billion in total consolidated assets, limited amounts of off-balance-sheet exposures and trading assets and liabilities, and a leverage ratio greater than 9 percent.

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The transition rule also maintains a two-quarter grace period for a qualifying community banking organization whose leverage ratio falls no more than 100 basis points below the applicable community bank leverage ratio requirement.

The following table presents the tier 1 regulatory capital leverage ratios of the Company and the Bank at September 30, 2021:

The following table presents the tier 1 regulatory capital leverage ratios of the Company and the Bank at March 31, 2022:

Amount Ratio Amount Ratio

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Tier 1 leverage $ 253,870 12.21 % $ 282,651 13.60 %

* Excluded exposures pledged as collateral to the PPPL Facility from the total leverage exposure, average total consolidated assets according to Regulatory Capital Rule-Rule “ Paycheck Protection Program Lending Facility and Paycheck Protection Program Loans”.

Also, in July 2020, we issued $30 million in ten-year, fixed-to-floating rate subordinated notes due 2030 to certain qualified institutional buyers and accredited investors.

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Refer to Note 4 - Loans and Allowance for Loan and Lease Losses in the notes to the unaudited consolidated financial statements for further discussion on management's methodology for estimating the allowance for loan losses.

At September 30, 2021, the allowance for loan losses was $29.8 million, as compared to $29.7 million at December 31, 2020.

The ratio of the allowance for loan losses to total loans was 2.02% and 1.90% at September 30, 2021 and December 31, 2020, respectively.

The ratio of the allowance for loan losses to non-performing assets increased to 484.6% at September 30, 2021, compared to 334.9% at December 31, 2020.

During the nine months ended September 30, 2021 the Company charged down two commercial loans in the aggregate amount of $378,776, and one residential loan in the amount of $48,616, and charged down loans of $54,000 during the same period in 2020.

During the nine months ended September 30, 2021 and September 30, 2020, the

Company recovered $68,000 and $35,000, respectively.

Specific allowances for loan losses have been established in the amount of $0.6 million at September 30, 2021, as compared to $1.0 million on impaired loans at December 31, 2020.

We have established reserves for all losses that we believe are both probable and reasonably estimable at September 30, 2021 and December 31, 2020.

At March 31, 2022, the allowance for loan losses was $30.0 million, as compared to $29.8 million at December 31, 2021.

The ratio of the allowance for loan losses to total loans was 2.00% and 2.01% at March 31, 2022 and December 31, 2021, respectively.

The ratio of the allowance for loan losses to non-performing assets increased to 766.8% at March 31, 2022, compared to 500.6% at December 31, 2021.

During the three month periods ended March 31, 2022 and 2021, the Company did not charge off any loans, and recovered $136,000 and $12,000, respectively.

Specific allowances for loan losses have been established in the amount of $0.2 million at March 31, 2022, as compared to $0.6 million on impaired loans at December 31, 2021.

We have established reserves for all losses that we believe are both probable and reasonably estimable at March 31, 2022 and December 31, 2021.

There can be no assurance, however, that further additions to the allowance will not be required in future periods.

1 unchanged sentence

Accordingly, the Company did not estimate its loan allowance according to the expected credit loss methodology.

We recorded a loan loss provision of zero during the three months ended September 30, 2021, compared to $2.4 million during the three months ended September 30, 2020.

The decrease was primarily due to the increase in qualitative factors made in 2020 as a result of economic uncertainty associated with the COVID-19 pandemic, as well as lower than expected loan growth during the quarter ended September 30, 2021.

We recorded a loan loss provision of zero during the three months ended March 31, 2022, compared to $0.5 million during the three months ended March 31, 2021.

The decrease was primarily due to the increase in qualitative factors made in 2021 as a result of economic uncertainty associated with the COVID-19 pandemic.

The table below presents changes in the Company’s allowance for loan losses for the periods indicated.

Nine Months Ended September 30,

Three Months Ended March 31,

(Dollars in thousands)

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Loans are placed on non-accrual status when, in management's opinion, the borrower may be unable to meet payment obligations as they become due, as well as when a loan is 90 days past due, unless the loan is well secured and in the process of collection, as required by regulatory provisions.

be placed on non-accrual status regardless of whether or not such loans are considered past due.

Loans may be placed on non-accrual status regardless of whether or not such loans are considered past due.

When interest accrual is discontinued, all unpaid accrued interest is reversed.

1 unchanged sentence

Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Delinquent loans totaled $4.7 million, or 0.3% of total loans at September 30, 2021, a decrease of $6.8 million from December 31, 2020.

At September 30, 2021, loans 30 to 89 days delinquent totaled $0.26 million, a decrease of $2.5 million from December 31, 2020.

Loans delinquent 90 days or more and not accruing interest totaled $4.4 million or 0.3% of total loans at September 30, 2021, a decrease of $4.3 million from $8.7 million, or 0.6% of total loans, at December 31, 2020.

The two largest nonperforming loan relationships as of September 30, 2021 were a $1.2 million owner occupied commercial real estate loan and a $1.1 million non-owner occupied commercial land loan.

The table below presents an age analysis of past due loans by loan class and the percentage of the nonperforming loans to total loans at September 30, 2021.

September 30, 2021 30-59

Delinquent loans totaled $18.4 million, or 1.2% of total loans at March 31, 2022, an increase of $13.6 million from December 31, 2021.

At March 31, 2022, loans 30 to 89 days delinquent totaled $14.5 million, an increase of $14.0 million from December 31, 2021.

The increase in loans 30 to 89 days delinquent is driven by two, commercial real estate non-occupied loans.

The Company is working closely with the borrowers to remediate the delinquency of these loans.

Loans delinquent 90 days or more and not accruing interest totaled $3.9 million or 0.3% of total loans at March 31, 2022, a decrease of $0.4 million from $4.3 million, or

0.3% of total loans, at December 31, 2021.

The two largest nonperforming loan relationships as of March 31, 2022 were a $1.2 million owner occupied commercial real estate loan and a $1.1 million construction loan.

The table below presents an age analysis of past due loans by loan class and the percentage of the nonperforming loans to total loans at March 31, 2022.

March 31, 2022 30-59

Accruing (NPL) Greater

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Impaired loans include nonperforming loans and TDRs, regardless of nonperforming status.

At September 30, 2021 and December 31, 2020, we had $10.5 million and $22.7 million, respectively, of loans deemed impaired.

Impaired loans at September 30, 2021 and December 31, 2020 included $6.1 million and $14.2 million, respectively, of TDR loans.

At March 31, 2022 and December 31, 2021, we had $9.8 million and $10.3 million, respectively, of loans deemed impaired.

Impaired loans at March 31, 2022 and December 31, 2021 included $5.9 million and $6.0 million, respectively, of TDR loans.

Troubled Debt Restructurings

We reported performing TDR loans (not reported as non-accrual loans) of $6.1 million and $13.9 million, respectively, at September 30, 2021 and December 31, 2020.

We had nonperforming TDR loans of zero and $274,000 at September 30, 2021 and December 31, 2020, respectively.

There were no new loans modified as a TDR and no additional commitments to lend additional funds to debtors whose loans have been modified as a TDR for the three and nine months ended September 30, 2021 and the year ended December 31, 2020.

We reported performing TDR loans (not reported as non-accrual loans) of $5.9 million and $6.0 million, respectively, at March 31, 2022 and December 31, 2021.

We had nonperforming TDR loans of zero at March 31, 2022 and December 31, 2021, respectively.

There were no new loans modified as a TDR and no additional commitments to lend additional funds to debtors whose loans have been modified as a TDR for the three months ended March 31, 2022.

Under the Interagency Statement issued by Federal banking agencies, financial institutions generally do not need to categorize COVID-19-related modifications as TDRs.

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Other Real Estate Owned (OREO)

OREO at September 30, 2021 was $1.8 million, compared to $0.1 million at December 31, 2020.

OREO at March 31, 2022 was zero, compared to $124,000 at March 31, 2021.

An analysis of OREO activity is as follows:

For the nine months ended

September 30,

For the three months ended

(Dollars in thousands)

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These commitments generally have fixed expiration dates, may require payment of a fee, and contain termination clauses in the event the customer’s credit quality deteriorates.

At September 30, 2021 and December 31, 2020, unused commitments to extend credit amounted to approximately $120.9 million and $144.6 million, respectively.

At March 31, 2022 and December 31, 2021, unused commitments to extend credit amounted to approximately $125.5 million and $144.6 million, respectively.

Management believes that off-balance sheet risk is not material to the results of operations or financial condition.

1 unchanged sentence

The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.

At the September 30, 2021 and December 31, 2020, standby letters of credit with customers were $1.7 million and $1.7 million, respectively.

At the March 31, 2022 and December 31, 2021, standby letters of credit with customers were $1.5 million and $1.5 million, respectively.

We have adequate resources to fund all unfunded commitments to the extent required and meet all contractual obligations as they come due.

At September 30, 2021, such contractual obligations were primarily comprised of deposits, secured and unsecured borrowings, interest payments, operating leases and commitments to originating loans.

At March 31, 2022, such contractual obligations were primarily comprised of deposits, secured and unsecured borrowings, interest payments, operating leases and commitments to originating loans.

Critical Accounting Policies

44 unchanged sentences

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