What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-11-10 compared with 2022-08-08 · 111 added, 149 removed, 343 unchanged (43% of the section changed)

56 unchanged sentences

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

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.

At September 30, 2022, we had total assets of $1.92 billion, and total equity of $257.3 million.

Net income available to common shareholders for the three and nine months ended September 30, 2022 was $10.5 million and $31.3 million, respectively.

Results of Operations

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.

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

Our net income available to common shareholders for the third quarter of 2022 increased $39.0 thousand, or 0.4%, to $10.53 million, compared to $10.49 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 2022 compared to $0.88 per basic common share and $0.87 per diluted common share for the same period last year.

The increase in net income available to common shareholders primarily resulted from a $1.8 million increase in net interest income, partially offset by a $600.0 thousand increase in provision for loan loss, a $167.0 thousand decrease in non-interest income, and a $864.0 thousand increase in non-interest expense.

Net Interest Income :

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.

Our net interest income increased $1.8 million, or 10.4%, to $19.3 million for the third quarter of 2022 compared to $17.5 million for the third quarter of 2021.

The increase in net interest income was primarily due to an increase of $1.8 million in interest income, driven by an increase of $643.0 thousand on interest and fees on loans, and a $1.1 million increase on interest on deposits with banks.

The increase in interest and fees on loans was driven by the increase in outstanding loan balance during the quarter ended September 30, 2022.

The increase in interest on deposits with banks is due to an 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 September 30, 2022, total interest expense decreased $57.0 thousand as compared to the second quarter of 2021, primarily due to a reduction in outstanding deposit balances, which reduced interest expense by $71.0 thousand.

Provision for loan losses :

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.

For the three months ended September 30, 2022, the provision for loan losses increased $600.0 thousand, compared to zero for the three months ended September 30, 2021.

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

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Non-interest Income :

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.

Commitments And Contingencies in the notes to the unaudited consolidated financial statements for our banking services to customers who do business in the cannabis industry.

Our non-interest income was $2.0 million for the three months ended September 30, 2022, a decrease of $167.0 thousand, compared to $2.2 million for the three months ended September 30, 2021.

The decrease is primarily attributable to a decrease in service fees on deposit account of $217.0 thousand, primarily attributed to our cannabis banking deposit accounts.

Non-interest Expense :

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.

Our non-interest expense increased $864.0 thousand to $6.3 million for the three months ended September 30, 2022, from $5.4 million for the three months ended September 30, 2021.

The increase is primarily driven by a $538.0 thousand increase in compensation and benefits, a $456.0 thousand increase in other operating expense, and a $242.0 thousand increase in OREO expense, partially offset by a $419.0 thousand decrease in professional services.

The increase in compensation and benefits was mainly driven by an increase in pension costs as well as an increase in salaries.

The increase in other operating expense was primarily driven by an increase in the Pennsylvania shares tax, other loan expenses, and director fees.

The decrease in professional services was attributed to the prior year remediation efforts related to our Bank Secrecy Act (BSA) compliance.

Income tax expense was $3.9 million on income before taxes of $14.4 million for the three months ended September 30, 2022, resulting in an effective tax rate of 27.0%, compared to income tax expense of $3.7 million on income before taxes of $14.2 million for the same period of 2021, resulting in an effective tax rate of 26.0%.

Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30, 2021

Our net income available to common shareholders for the nine months ended September 30, 2022 increased $683.0 thousand, or 2.2%, to $31.3 million compared to $30.7 million for the nine months ended September 30, 2021.

Earnings per share were $2.63 per basic common share and $2.58 per diluted common share for the nine months ended September 30, 2022 compared to $2.58 per basic common share and $2.53 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 $2.1 million, partially offset by an increase in the provision for loan losses of $450.0 thousand, and an increase in non-interest expense of $765.0 thousand.

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.

Our net interest income increased $2.0 million, or 3.9%, to $54.4 million for the nine months ended September 30, 2022, compared to $52.4 million for the same period last year.

Interest income for the nine months ended September 30, 2022, decreased $27.0 thousand to $62.48 million, or 0.04%, from $62.51 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 $2.0 million, partially offset by an increase in interest earned on FRB deposits of $1.9 million, attributed to an increase in market interest rates.

Interest expense decreased $2.1 million for the year to date September 30, 2022, compared to the same period in 2021, primarily due to the decrease in outstanding deposit balances, resulting from a decrease in time deposits of $150.9 million, which resulted in a decrease of $2.1 million, as well as a decrease of $307.0 thousand on interest on borrowings, due primarily to a decrease in the amount of borrowings outstanding.

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.

The provision for loan losses was $950.0 thousand for the nine months ended September 30, 2022 compared to the provision for loan losses of $500.0 thousand for the nine months ended September 30, 2021.

The $450.0 thousand increase in the provision was primarily due to an increase in outstanding 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 $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.

Our non-interest income was $6.6 million for the nine months ended September 30, 2022, an increase of $53.0 thousand, or 0.8%, compared to $6.5 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 loan fees of $140.0 thousand, and an increase in other income of $134.0 thousand, partially offset by a decrease in service fees on deposit accounts of $411.0 thousand.

Fee income for the nine months ended September 30, 2022 from commercial deposit accounts of depositors who do business in the cannabis-related industry totaled $3.4 million, compared to $3.8 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%.

Our non-interest expense increased $765.0 thousand to $17.7 million for the nine months ended September 30, 2022, from $16.9 million for the nine months ended September 30, 2021.

The increase was primarily due to an increase in other operating expense of $931.0 thousand, an increase in compensation and benefits of $604.0 thousand, and an increase in OREO expense of $205.0 thousand, partially offset by a decrease in professional services of $1.1 million.

The increase in other operating expense was primarily driven by a $573.0 thousand increase in Pennsylvania shares tax, and a $233.0 thousand increase in other loan expense.

The increase in compensation and benefits was primarily due to a $573.0 thousand increase in salaries, and a $309.0 thousand increase in pension cost, partially offset by a $374.0 thousand increase in deferred loan origination expenses.

The decrease in professional services was mainly due to the prior year remediation efforts related to our Bank Secrecy Act (BSA) compliance.

Income tax expense was $11.0 million on income before taxes of $42.4 million for the nine months ended September 30, 2022, resulting in an effective tax rate of 25.9%, compared to income tax expense of $10.6 million on income before taxes of $41.5 million for the same period of 2021, resulting in an effective tax rate of 25.5%.

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 June 30,

For the Three Months Ended September 30,

Balance Interest

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Net interest margin 4.06 % 3.41 %

* Includes balances of FHLB and ACCBB stock.

* The average balance of loans includes loans on nonaccrual.

For the Six Months Ended June 30,

** Includes balances of FHLB and ACBB stock.

For the Nine Months Ended September 30,

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

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Net interest margin 3.71 % 3.41 %

** Includes balances of FHLB and ACCBB stock.

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

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

** Includes balances of FHLB and ACBB stock.

Financial Condition

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.

At September 30, 2022, the Company’s total assets were $1.92 billion, a decrease of $213.2 million, or 10.0%, from December 31, 2021.

The decrease in total assets was primarily attributable to a decrease in cash and cash equivalents of $403.2 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 $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.

The decrease in cash and cash equivalents was primarily due to cash withdrawn from deposits, as well as an increase in loans receivable.

Loans increased $194.5 million at September 30, 2022, primarily due to increases in loan balances classified as residential 1-4 family, commercial non-owner occupied real estate mortgage loans, and 1-4 family construction, compared to the balances at December 31, 2021.

Total liabilities were $1.67 billion at September 30, 2022.

This represented a $238.2 million, or 12.5%, 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 $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 :

The decrease in total liabilities was primarily due to a decrease in total deposits, which decreased $233.2 million, or 13.2%, to $1.54 billion at September 30, 2022, from $1.77 billion at December 31, 2021.

The decrease in deposits was attributed to a decrease in non-interest demand deposits of $160.0 million, and time deposits of $77.0 million, partially offset by an increase in savings deposits of $9.8 million.

Total equity was $257.3 million and $232.4 million at September 30, 2022 and December 31, 2021, respectively, an increase of $25.0 million from December 31, 2021.

The increase was primarily due to the retention of earnings, partially offset by the payment of $6.0 million of cash dividends.

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

September 30,

2022 December 31,

2021 Change % Change

(Dollars in thousands)

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Cash and cash equivalents

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%.

Cash and cash equivalents decreased $403.2 million to $193.3 million at September 30, 2022 from $596.6 million at December 31, 2021, a decrease of 67.6%.

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

Investment securities

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%.

Total investment securities decreased to $19.4 million at September 30, 2022, from $23.3 million at December 31, 2021, a decrease of $3.9 million or 16.8%.

The decrease was attributed to normal pay downs of $2.7 million and a decrease in the fair market valuation of $1.2 million.

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In addition, we have a small consumer loan portfolio which provides loans to individual borrowers.

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 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 June 30, 2022 or at December 31, 2021.

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

Loans receivable :

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 June 30, 2022 and December 31, 2021, consisted of the following:

June 30, 2022 December 31, 2021

Loans receivable increased to $1.68 billion at September 30, 2022 from $1.48 billion at December 31, 2021.

T he increase was primarily due to increases in the residential - 1 to 4 family, commercial - non-owner occupied, and construction portfolio's, partially offset by a decrease in commercial and industrial due to the payoff of SBA PPP loans of $24.9 million.

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

September 30, 2022 December 31, 2021

Amount Percentage of Loans to total

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Total Loans $ 1,679,357 100.0 % $ 1,484,847 100.0 %

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%.

At September 30, 2022, total deposits decreased to $1.54 billion from $1.77 billion at December 31, 2021, a decrease of $233.2 million, or 13.2%.

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

June 30, December 31,

The decrease in non-interest bearing demand deposits was mainly driven by withdrawals from our cannabis related deposits.

The decrease in time deposits was mainly driven by maturities of certificates of deposit.

September 30, December 31,

(Dollars in thousands)

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Total deposits $ 1,535,229 $ 1,768,410

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.

Total borrowings were $116.0 million at September 30, 2022 and $120.9 million at December 31, 2021.

The decrease in borrowings is due to the paydown of a $5.0 million Federal Home Loan Bank ("FHLB") advance.

Total equity increased to $257.3 million at September 30, 2022 from $232.4 million at December 31, 2021, an increase of $25.0 million, or 10.7%, primarily due to the retention of earnings from the period, partially offset by the payment of $6.0 million of cash dividends.

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

At September 30, 2022, our cash position was $193.3 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 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.

As of September 30, 2022, the Company had lines of credit with the FHLBNY of $641.7 million, of which $73.2 million was outstanding, and an additional $50.0 million from a letter of credit for securing public funds.

The remaining borrowing capacity was $518.6 million at September 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 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.

At September 30, 2022, the Company's investment securities portfolio classified as available for sale was $9.8 million.

We had outstanding loan commitments of $176.5 million at September 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 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 following is a discussion of our cash flows for the nine months ended September 30, 2022 and 2021.

Cash provided by operating activities was $34.3 million in the nine months ended September 30, 2022, compared to $29.5 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 and other assets, and increase in net income.

Cash used in investing activities was $191.6 million in the nine months ended September 30, 2022, compared to cash provided by investing activities of $88.3 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 $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.

Cash used in financing activities was $245.9 million in the nine months ended September 30, 2022, compared to cash provided by financing activities of $47.4 million in the same period of last year.

The current year included $233.2 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 $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.

Total equity increased $25.0 million at September 30, 2022, from December 31, 2021, primarily from the Company’s net income of $31.4 million for the period, net of common and preferred stock dividends of $6.0 million.

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

Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank and the Company must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance sheet items, as calculated under the regulatory accounting practices.

Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank and the

Company must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance sheet items, as calculated under the regulatory accounting practices.

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 June 30, 2022, the Bank and the Company were both considered “well capitalized”.

At September 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 June 30, 2022:

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

Amount Ratio Amount Ratio

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A borrower’s ability to repay can be adversely affected by economic and personal financial changes as well as other factors.

Likewise, changes in market conditions and other external factors can affect collateral valuations.

Likewise, changes in market conditions and other external

factors can affect collateral valuations.

We adjust our financial assessments to reflect changes in the financial condition, cash flow, risk profile or outlook of a borrower.

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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 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.

At September 30, 2022, the allowance for loan losses was $31.0 million, as compared to $29.8 million at December 31, 2021.

The ratio of the allowance for loan losses to total loans was 1.85% and 2.01% at September 30, 2022 and December 31, 2021, respectively.

The ratio of the allowance for loan losses to non-performing assets decreased to 164.5% at September 30, 2022, compared to 500.6% at December 31, 2021.

During the nine month periods ended September 30, 2022 and 2021, the Company charged off $66,150 and $427,400, respectively, and recovered $260,000 and $68,000, respectively.

Specific allowances for loan losses have been established in the amount of $149.0 thousand at September 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 September 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 $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.

Six Months Ended June 30,

(Dollars in thousands)

Balance at the beginning of the period $ 29,845 $ 29,698

Commercial and Industrial — —

Construction — —

Real Estate Mortgage:

Commercial – Owner Occupied — —

Commercial – Non-owner Occupied — (153)

Residential – 1 to 4 Family — —

Residential – Multifamily — —

Total charge - offs — (153)

Commercial and Industrial 8 12

Construction 100 —

Real Estate Mortgage:

Commercial – Owner Occupied 5 11

Commercial – Non-owner Occupied — —

Residential – 1 to 4 Family 134 —

Residential – Multifamily 6 —

Total recoveries 253 23

Net charge-offs (recoveries) 253 (130)

Provisions for loan losses 350 500

Balance at the end of the period $ 30,448 $ 30,068

We recorded a loan loss provision of $600.0 thousand during the three months ended September 30, 2022, compared to zero during the three months ended September 30, 2021.

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

Loan Delinquencies and Nonperforming Assets:

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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 $18.5 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 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 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

Accruing Current Total

Loans NPL to Loan Type %

(Dollars in thousands except ratios)

Commercial and Industrial $ — $ 91 $ 158 $ — $ 35,490 $ 35,739 0.44 %

Construction — — 1,139 — 145,667 146,806 0.78 %

Real Estate Mortgage:

Commercial – Owner Occupied — — 1,016 — 127,766 128,782 0.79 %

Commercial – Non-owner Occupied — 14,380 1,328 — 309,427 325,135 0.41 %

Residential – 1 to 4 Family — 93 230 — 826,181 826,504 0.03 %

Residential – Multifamily — — — — 77,797 77,797 — %

Consumer — 70 — — 7,300 7,370 — %

Total Loans $ — $ 14,634 $ 3,871 $ — $ 1,529,628 $ 1,548,133 0.25 %

Delinquent loans totaled $17.0 million, or 1.0% of total loans at September 30, 2022, an increase of $12.3 million from December 31, 2021.

At September 30, 2022, loans 30 to 89 days delinquent totaled $85.0 thousand, a decrease of $345.0 thousand from December 31, 2021.

The decrease in loans 30 to 89 days delinquent is driven by two, commercial real estate non-occupied loans that migrated to non-accrual during the quarter ended September 30, 2022.

Loans delinquent 90 days or more and not accruing interest totaled $16.9 million or 1.0% of total loans at September 30, 2022, an increase of $12.6 million from $4.3 million, or 0.3% of total loans, at December 31, 2021.

The two largest nonperforming loan relationships as of September 30, 2022 were a $10.9 million and a $3.4 million owner occupied commercial real estate loan.

Impaired Loans

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

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.

At September 30, 2022 and December 31, 2021, we had $22.5 million and $10.3 million, respectively, of loans deemed impaired.

Impaired loans at September 30, 2022 and December 31, 2021 included $5.5 million and $6.0 million, respectively, of TDR loans.

Troubled Debt Restructurings

We reported performing TDR loans (not reported as non-accrual loans) of $5.6 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.

We reported performing TDR loans (not reported as non-accrual loans) of $5.5 million and $6.0 million, respectively, at September 30, 2022 and December 31, 2021.

We had nonperforming TDR loans of zero at September 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 nine months ended September 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 June 30, 2022 was zero, compared to $1.7 million at June 30, 2021.

An analysis of OREO activity is as follows:

For the six months ended

(Dollars in thousands)

Balance at beginning of period $ 1,654 $ 139

Real estate acquired in settlement of loans 71 1,709

Sales of OREO, net (1,606) (194)

Valuation adjustment (119) —

Balance at end of period $ — $ 1,654

OREO at September 30, 2022 was $1.9 million, compared to $1.8 million at September 30, 2021.

Off-Balance Sheet Arrangement and Contractual Obligations

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

At September 30, 2022 and December 31, 2021, unused commitments to extend credit amounted to approximately $176.5 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 June 30, 2022 and December 31, 2021, standby letters of credit with customers were $1.5 million and $1.5 million, respectively.

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

At September 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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The allowance calculation and determination process is dependent on the use of key assumptions.

Key reserve assumptions and estimation processes react to and are influenced by observed changes in loan portfolio performance experience, the financial strength of the borrower, projected industry outlook, and economic conditions.

Key reserve assumptions and estimation processes react to and are influenced

by observed changes in loan portfolio performance experience, the financial strength of the borrower, projected industry outlook, and economic conditions.

The process of determining the level of the allowance for loan and lease losses requires a high degree of judgment.

27 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