What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-08-08 compared with 2022-05-09 · 150 added, 91 removed, 342 unchanged (41% of the section changed)

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and the success of the Company at managing the risks involved in the foregoing.

The COVID-19 pandemic has had, and may continue to have, an adverse impact on the Company and the communities it serves.

Given its ongoing and dynamic nature, it is difficult to predict the full impact of the COVID-19 pandemic on our business.

The extent of such impact will depend on future developments, which are highly uncertain, including whether the coronavirus can continue to 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 the economy worsens, 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 credit 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;

due to a decline in our stock price or other factors, goodwill may become impaired and be required to be written down;

and our cyber security risks are increased as the result of an increase in the number of employees working remotely.

The majority of the assets and liabilities of a financial institution are monetary in nature, and therefore, differ greatly from most commercial and industrial companies that have significant investments in fixed assets or inventories.

However, inflation does have an impact on the Company, particularly with respect to the growth of total assets and noninterest expenses, which tend to rise during periods of general inflation.

Risks also exist due to supply and demand imbalances, employment shortages, the interest rate environment, and geopolitical tensions.

It is reasonably foreseeable that estimates made in the financial statements could be materially and adversely impacted in the near term as a result of these conditions, including expected credit losses on loans and the fair value of financial instruments that are carried at fair value.

The Company cautions that the foregoing list of important factors is not exclusive.

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

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 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.

The COVID-19 pandemic and its impact on the economy have led to actions including the enactment of the Coronavirus Aid, Relief and Economic Security Act, including the establishment of the PPP administered by the Small Business Administration (“SBA”).

Under the PPP, small businesses and other entities and individuals can apply for loans from existing SBA lenders and other approved regulated lenders that enroll in the program, subject to numerous limitations and eligibility criteria.

We are participating as a lender in the PPP.

Since the initiation of the PPP, several banks have been subject to litigation or threatened litigation regarding the process and procedures that such banks used in processing applications for the PPP.

We may be exposed to the risk of litigation, from both clients and non-clients that approached us regarding PPP loans.

If any such litigation is filed or threatened against us and is not resolved in a manner favorable to us, it may result in significant cost or adversely affect our reputation.

Any financial liability, litigation costs or reputational damage caused by PPP-related litigation could have a material adverse impact on our business, financial position, results of operations and prospects.

At June 30, 2022, we had total assets of $1.99 billion, and total equity of $249.1 million.

Net income available to common shareholders for the three and six months ended June 30, 2022 was $10.7 million and $20.8 million, respectively.

Results of Operations

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.

Three Months Ended June 30, 2022 Compared to Three Months Ended June 30, 2021

Our net income available to common shareholders for the second quarter of 2022 decreased $19.0 thousand, or 0.2%, to $10.7 million, compared to $10.8 million for the same period last year.

Earnings per share were $0.90 per basic common share and $0.88 per diluted common share for the second quarter of 2022 compared to $0.90 per basic common share and $0.89 per diluted common share for the same period last year.

The decrease in net income available to common shareholders primarily resulted from a $109.0 thousand decrease in net interest income, and a $350.0 thousand increase in the provision for loan loss, partially offset by a $420.0 thousand increase in non-interest income.

Net Interest Income :

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 $0.9 million decrease in interest income, primarily due to a reduction in interest and fees on loans of $1.0 million.

Our net interest income decreased $109.0 thousand, or 0.6%, to $18.0 million for the second quarter of 2022 compared to $18.1 million for the second quarter of 2021.

The decrease in net interest income was primarily due to a decrease of $861.0 thousand in interest income, driven by a decrease of $1.6 million on interest and fees on loans, partially offset by a $734.0 thousand increase on interest earned on cash held at the Federal Reserve Bank ("FRB") due to an increase in market interest rates.

For the three months ended June 30, 2022, total interest expense decreased $752.0 thousand as compared to the second quarter of 2021, primarily due to a reduction in outstanding deposit balances, which reduced interest expense by $663.0 thousand, as well as a decrease of $89.0 thousand in interest on borrowings due to lower outstanding balances.

Provision for loan losses :

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 the three months ended June 30, 2022, the provision for loan losses increased $350.0 thousand, compared to zero for the three months ended June 30, 2021.

The increase in the provision was primarily due to an increase in loan balances.

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 $2.1 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.

Our non-interest income was $2.5 million for the three months ended June 30, 2022, an increase of $420.0 thousand, compared to $2.1 million for the three months ended June 30, 2021.

The increase is primarily attributable to an increase in gain on sale of OREO assets of $209.0 thousand, an increase in loan fees of $110.0 thousand, and an increase in service fees on

deposit accounts of $101.0 thousand.

Please refer to Note 9.

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Non-interest Expense :

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%.

Our non-interest expense decreased $9.0 thousand to $5.7 million for the three months ended June 30, 2022, from $5.7 million for the three months ended June 30, 2021.

The decrease is primarily driven by a $348.0 thousand decrease in professional fees, $56.0 thousand decrease in OREO expense, and a $52.0 thousand decrease in FDIC insurance and other assessments, partially offset by a $433.0 thousand increase in other operating expense.

Income tax expense was $3.7 million on income before taxes of $14.4 million for the three months ended June 30, 2022, resulting in an effective tax rate of 25.6%, compared to income tax expense of $3.6 million on income before taxes of $14.5 million for the same period of 2021, resulting in an effective tax rate of 25.1%.

Six Months Ended June 30, 2022 Compared to Six Months Ended June 30, 2021

Our net income available to common shareholders for the six months ended June 30, 2022 increased $643.0 thousand, or 3.2%, to $20.8 million compared to $20.2 million for the six months ended June 30, 2021.

Earnings per share were $1.75 per basic common share and $1.71 per diluted common share for the six months ended June 30, 2022 compared to $1.70 per basic common share and $1.67 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 total interest expense of $2.0 million, and a decrease in the provision for loan losses of $150.0 thousand, partially offset by a decrease in total interest income $1.8 million.

Net interest income :

Our net interest income increased $185.0 thousand, or 0.5%, to $35.1 million for the six months ended June 30, 2022, compared to $34.9 million for the same period last year.

Interest income for the six months ended June 30, 2022, decreased to $40.1 million, a decrease of $1.8 million, or 4.3%, from $41.9 million for the same period of 2021.

The decrease in interest income was primarily due to a decrease in interest and fees on loans of $2.6 million, partially offset by an increase in interest earned on FRB deposits of $861.0 thousand, attributed to an increase in market interest rates.

Interest expense decreased $2.0 million for the year to date June 30, 2022, compared to the same period in 2021, primarily due to the decrease in outstanding deposit balances, primarily driven by a decrease in time deposits of $175.5 million, which resulted in a decrease of $1.6 million, as well as a decrease of $321.0 thousand on interest on borrowings, due primarily to a decrease in outstanding balance.

Provision for loan losses :

The provision for loan losses was $350.0 thousand for the six months ended June 30, 2022 compared to the provision for loan losses of $500.0 thousand for the six months ended June 30, 2021.

The $150.0 thousand 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 June 30, 2021, compared to an increase in provision due to an increase in outstanding loan balances for the six months ended June 30, 2022.

Non-interest income :

Our non-interest income was $4.6 million for the six months ended June 30, 2022, an increase of $261.0 thousand, or 6.0%, compared to $4.3 million for the same period last year.

The increase is primarily attributable to an increase in gain on the sale of OREO assets of $277.0 thousand, an increase in other income of $163.0 thousand, and an increase in other loan fees of $121.0 thousand, partially offset by a decrease in service fees on deposit accounts of $195.0 thousand.

Fee income for the six months ended June 30, 2022 from commercial deposit accounts of depositors who do business in the cannabis-related industry totaled $2.3 million, compared to $2.8 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 decreased $99.0 thousand to $11.4 million for the six months ended June 30, 2022, from $11.5 million for the six months ended June 30, 2021.

The decrease was primarily due to an decrease in professional fees of $650.0 thousand, attributable to a reduction in consulting fees associated with our BSA remediation efforts, partially offset by an increase in other operating expense of $474.0 thousand, primarily driven by increases in Pennsylvania shares tax and loan workout expense.

Income tax expense was $7.1 million on income before taxes of $27.9 million for the six months ended June 30, 2022, resulting in an effective tax rate of 25.4%, compared to income tax expense of $6.9 million on income before taxes of $27.2 million for the same period of 2021, resulting in an effective tax rate of 25.3%.

Net Interest Income

Net interest income is the interest earned on investment securities, loans and other interest-earning assets minus the interest paid on deposits, short-term borrowings and long-term debt.

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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 March 31,

For the Three Months Ended June 30,

Balance Interest

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Expense Yield/

(Dollars in thousands, except percentages)

(Dollars in thousands)

Loans** $ 1,516,120 $ 19,458 5.15 % $ 1,534,206 $ 21,053 5.50 %

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* Includes balances of FHLB and ACCBB stock.

** The average balance of loans includes loans on nonaccrual.

For the Six Months Ended June 30,

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

(Dollars in thousands)

Loans** $ 1,492,635 $ 38,656 5.22 % $ 1,547,566 $ 41,291 5.38 %

Investment securities* 27,201 371 2.75 % 25,342 382 3.06 %

Interest bearing deposits 480,878 1,115 0.47 % 491,865 256 0.10 %

Total interest-earning assets 2,000,714 40,142 4.05 % 2,064,773 41,929 4.10 %

Other assets 78,633 75,542

Allowance for loan losses (30,016) (30,063)

Total assets $ 2,049,331 $ 2,110,252

Liabilities and Shareholders’ Equity

Interest bearing deposits:

Checking $ 97,969 $ 195 0.40 % $ 70,985 $ 160 0.45 %

Money markets 357,026 971 0.55 % 312,739 1,093 0.70 %

Savings 194,968 339 0.35 % 131,155 336 0.52 %

Time deposits 537,081 2,090 0.78 % 636,888 3,554 1.13 %

Brokered certificates of deposit 9,019 55 1.23 % 45,582 156 0.69 %

Total interest-bearing deposits 1,196,063 3,650 0.62 % 1,197,349 5,299 0.89 %

Borrowings 120,922 1,418 2.36 % 184,045 1,739 1.91 %

Total interest-bearing liabilities 1,316,985 5,068 0.78 % 1,381,394 7,038 1.02 %

Non-interest bearing deposits 477,188 502,186

Other liabilities 13,306 15,899

Total non-interest bearing liabilities 490,494 518,085

Equity 241,852 210,773

Total liabilities and shareholders’ equity $ 2,049,331 $ 2,110,252

Net interest income $ 35,074 $ 34,891

Interest rate spread 3.27 % 3.08 %

Net interest margin 3.54 % 3.41 %

** Includes balances of FHLB and ACCBB stock.

** The average balance of loans includes loans on nonaccrual.

Financial Condition

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.

At June 30, 2022, the Company’s total assets were $1.99 billion, a decrease of $146.1 million, or 6.8%, from December 31, 2021.

The decrease in total assets was primarily attributable to a decrease in cash and cash equivalents of $203.3 million, partially offset by 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.

Loans increased $63.3 million at June 30, 2022, primarily due to increases in loan balances classified as residential 1-4 family and commercial non-owner occupied real estate mortgage loans, compared to the balances at December 31, 2021.

Total liabilities were $1.74 billion at June 30, 2022.

This represented a $162.8 million, or 8.6%, 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 :

The decrease in total liabilities was primarily due to a decrease in total deposits, which decreased $162.1 million, or 9.2%, to $1.61 billion at June 30, 2022, from $1.77 billion at December 31, 2021.

Total equity was $249.1 million and $232.4 million at June 30, 2022 and December 31, 2021, respectively, an increase of $16.8 million from December 31, 2021.

The following table presents certain key condensed balance sheet data as of June 30, 2022 and December 31, 2021 :

2022 December 31,

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Cash and cash equivalents

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.

Cash and cash equivalents decreased $203.3 million to $393.2 million at June 30, 2022 from $596.6 million at December 31, 2021, a decrease of 34.1%.

The decrease was primarily due to cash withdrawn from deposits, and the funding of loans.

Investment 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%.

Total investment securities decreased to $20.6 million at June 30, 2022, from $23.3 million at December 31, 2021, a decrease of $2.6 million or 11.3%.

The decrease was attributed to normal pay downs of $2.0 million and a decrease in the fair market valuation of $0.7 million.

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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 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.

Since the beginning of the loan program through June 30, 2022, the Bank has originated approximately $117.8 million of SBA PPP loans, and had $4.4 million of such loans outstanding as of June 30, 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 March 31, 2022 or at December 31, 2021.

We had no loans held for sale at June 30, 2022 or at December 31, 2021.

Loans receivable :

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

Loans receivable increased to $1.55 billion at June 30, 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

Loans receivable, excluding loans held for sale, as of June 30, 2022 and December 31, 2021, consisted of the following:

June 30, 2022 December 31, 2021

Amount Percentage of Loans to total

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Total Loans $ 1,548,133 100.0 % $ 1,484,847 100.0 %

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%.

At June 30, 2022, total deposits decreased to $1.61 billion from $1.77 billion at December 31, 2021, a decrease of $162.1 million, or 9.2%.

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,

June 30, December 31,

(Dollars in thousands)

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Total deposits $ 1,606,306 $ 1,768,410

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.

Total borrowings were $121.0 million at June 30, 2022 and $120.9 million at December 31, 2021.

Total equity increased to $249.1 million at June 30, 2022 from $232.4 million at December 31, 2021, an increase of $16.8 million, or 7.2%, 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 March 31, 2022, our cash position was $503.8 million.

At June 30, 2022, our cash position was $393.2 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 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.

As of June 30, 2022, the Company had lines of credit with the FHLBNY of $603.5 million, of which $78.2 million was outstanding, and an additional $60.0 million from two letters of credit for securing public funds.

The remaining borrowing capacity was $465.3 million at June 30, 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 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.

At June 30, 2022, the Company's investment securities portfolio classified as available for sale was $10.9 million.

We had outstanding loan commitments of $140.2 million at June 30, 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 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 following is a discussion of our cash flows for the six months ended June 30, 2022 and 2021.

Cash provided by operating activities was $21.9 million in the six months ended June 30, 2022, compared to $18.9 million for the same period in the prior year.

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

Cash used in investing activities was $59.4 million in the six months ended June 30, 2022, compared to cash provided by investing activities of $50.2 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.

Cash used in financing activities was $165.8 million in the six months ended June 30, 2022, compared to cash provided by financing activities of $3.1 million in the same period of last year.

The current year included $162.1 million of cash outflows from the decrease in deposits.

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We also use other means to manage our capital.

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.

Total equity increased $16.8 million at June 30, 2022, from December 31, 2021, primarily from the Company’s net income of $20.8 million for the period, net of common and preferred stock dividends of $3.8 million.

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

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

Prompt corrective action provisions are not applicable to bank holding companies.

Prompt corrective action

provisions are not applicable to bank holding companies.

Failure to meet minimum capital requirements can result in regulatory actions.

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

At June 30, 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 March 31, 2022:

The following table presents the tier 1 regulatory capital leverage ratios of the Company and the Bank at June 30, 2022:

Amount Ratio Amount Ratio

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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 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.

At June 30, 2022, the allowance for loan losses was $30.4 million, as compared to $29.8 million at December 31, 2021.

The ratio of the allowance for loan losses to total loans was 1.97% and 2.01% at June 30, 2022 and December 31, 2021, respectively.

The ratio of the allowance for loan losses to non-performing assets increased to 786.6% at June 30, 2022, compared to 500.6% at December 31, 2021.

During the six month periods ended June 30, 2022 and 2021, the Company charged off zero and $153,000, respectively, and recovered $253,000 and $23,000, respectively.

Specific allowances for loan losses have been established in the amount of $146.0 thousand at June 30, 2022, as compared to $591.0 thousand on impaired loans at December 31, 2021.

We have established reserves for all losses that we believe are both probable and reasonably estimable at June 30, 2022 and December 31, 2021.

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

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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 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.

We recorded a loan loss provision of $350.0 thousand during the three months ended June 30, 2022, compared to zero during the three months ended June 30, 2021.

The increase was primarily due to the increase in outstanding loan balances at June 30, 2022.

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

Three Months Ended March 31,

Six Months Ended June 30,

(Dollars in thousands)

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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 $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.

Delinquent loans totaled $18.5 million, or 1.2% of total loans at June 30, 2022, an increase of $13.8 million from December 31, 2021.

At June 30, 2022, loans 30 to 89 days delinquent totaled $14.6 million, an increase of $14.2 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

Loans delinquent 90 days or more and not accruing interest totaled $3.9 million or 0.3% of total loans at June 30, 2022, a decrease of $437.0 thousand 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

The two largest nonperforming loan relationships as of June 30, 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 June 30, 2022.

June 30, 2022 30-59

Accruing (NPL) Greater

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

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.

At June 30, 2022 and December 31, 2021, we had $9.5 million and $10.3 million, respectively, of loans deemed impaired.

Impaired loans at June 30, 2022 and December 31, 2021 included $5.6 million and $6.0 million, respectively, of TDR loans.

Troubled Debt Restructurings

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.

We reported performing TDR loans (not reported as non-accrual loans) of $5.6 million and $6.0 million, respectively, at June 30, 2022 and December 31, 2021.

We had nonperforming TDR loans of zero at June 30, 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 six months ended June 30, 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 March 31, 2022 was zero, compared to $124,000 at March 31, 2021.

OREO at June 30, 2022 was zero, compared to $1.7 million at June 30, 2021.

An analysis of OREO activity is as follows:

For the three months ended

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

At June 30, 2022 and December 31, 2021, unused commitments to extend credit amounted to approximately $140.2 million and $117.7 million, respectively.

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

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

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

At the June 30, 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 March 31, 2022, such contractual obligations were primarily comprised of deposits, secured and unsecured borrowings, interest payments, operating leases and commitments to originating loans.

At June 30, 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

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Fair Value Estimates:

The ASC 820 - Fair Value Measurements defines fair value as a market-based measurement and is the price that would be received to sell a financial asset or paid to transfer a financial liability in an orderly transaction between market participants at the measurement date.

ASC 820 - Fair Value Measurements defines fair value as a market-based measurement and is the price that would be received to sell a financial asset or paid to transfer a financial liability in an orderly transaction between market participants at the measurement date.

We classify fair value measurements of financial instruments based on the three-level fair value hierarchy in the accounting standards.

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We may also have a small amount of SBA loans recorded at fair value, which represents the face value of the guaranteed portion of the SBA loans pending settlement.

Other real estate owned ("OREO") is recorded at fair value on a non-recurring basis and is based on the values of independent third-party full appraisals, less costs to sell (a range of 5% to 10%).

OREO is recorded at fair value on a non-recurring basis and is based on the values of independent third-party full appraisals, less costs to sell (a range of 5% to 10%).

Appraisals are updated every 12 months or sooner if we have identified possible further deterioration in value.

13 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