What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-05-14 compared with 2020-11-06 · 130 added, 224 removed, 237 unchanged (60% of the section changed)

23 unchanged sentences

If one or more of the factors affecting our forward-looking information and statements proves incorrect, then our actual results, performance or achievements could differ materially from those expressed in, or implied by, forward-looking information and statements contained in this Quarterly Report on Form 10-Q and other reports and registration statements filed by us with the Securities and Exchange Commission (“SEC”).

For information on the factors that could cause actual results to differ from the expectations stated in the forward- looking statements, see “Risk Factors” under Part I, Item 1A of our 2019 Form 10-K in addition to Part II, Item 1A - Risk Factors of this Quarterly Report on Form 10-Q and other reports as filed with the SEC.

For information on the factors that could cause actual results to differ from the expectations stated in the forward- looking statements, see “Risk Factors” under Part I, Item 1A of our 2020 Form 10-K and other reports as filed with the SEC.

Any forward-looking statement speaks only as of the date of this report, and we do not undertake any obligation to publicly update or review any forward-looking statement, whether because of new information, future developments or otherwise, except as required by law.

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It is the parent company of Shore United Bank.

The Bank operates 22 full-service branches in Baltimore County, Howard County, Kent County, Queen Anne’s County, Talbot County, Caroline County, Dorchester County and Wicomico County in Maryland, Kent County, Delaware and Accomack County, Virginia.

The Bank operates 22 full-service branches in Baltimore County, Howard County, Kent County, Queen Anne’s County, Talbot County, Caroline County, Dorchester County and Worcester County in Maryland, Kent County, Delaware and Accomack County, Virginia.

The Company engages in trust and wealth management services through Wye Financial Partners, a division of Shore United Bank.

4 unchanged sentences

COVID-19 Pandemic

The outbreak of COVID-19, which was declared a pandemic by the World Health Organization on March 11, 2020, has led to adverse impacts on economic conditions and created uncertainty in financial markets.

The outbreak of COVID-19 has led to adverse impacts on economic conditions and created uncertainty in financial markets.

Correspondingly, in early March 2020, the Company began preparing for potential disruptions and government limitations of activity in the markets in which we serve.

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Loans under the PPP do not require any collateral or personal guarantees, as such, these loans are included in the Company’s commercial loans segment.

Through August 8, 2020, our team was able to process 1,488 PPP loans for approximately $126.7 million in the first and second rounds of the program, which has allowed us to further strengthen and deepen our client relationships, while positively impacting thousands of individuals.

The first round of PPP lending resulted in 1,488 loans for $126.7 million, of which 387 loans have been forgiven for $52.2 million as of March 31, 2021.

The second round of PPP lending which began in 2021, resulted in 660 loans for $54.8 million.

As of March 31, 2021, the Company had 1,761 PPP loans totaling $129.1 million that were outstanding, inclusive of loans issued during both the first and second rounds of the PPP.

This has allowed us to further strengthen and deepen our client relationships, while positively impacting thousands of individuals.

We are also closely monitoring the credit quality of the loan portfolio and monitor lines of credit draws for deviation from normal activity to improve loan performance and reduce credit risk.

Short-term Modifications for Borrowers

In keeping with regulatory guidance to work with borrowers during this unprecedented situation and as outlined in Section 4013 of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), the Company is providing modifications where appropriate, including interest only payments or payment deferrals for clients that could be adversely affected by

the COVID-19 pandemic.

Section 4013 of the CARES Act also addressed COVID-19 related modifications and specified that such modifications made on loans that were current as of December 31, 2019 are not TDRs.

In accordance with interagency guidance issued in April 2020, these short-term modifications made to a borrower affected by the COVID-19 pandemic and governmental shutdown orders, such as payment deferrals, fee waivers and extensions of repayment terms, do not need to be identified as TDRs if the loans were current at the time a modification plan was implemented.

For the nine months ended September 30, 2020, the Company had executed principal and/or interest deferrals on outstanding loan balances of $221.1 million, of which only $12.9 million, or 0.91% of the total portfolio remained on deferral as of September 30, 2020.

where appropriate, including interest only payments or payment deferrals for clients that could be adversely affected by the COVID-19 pandemic.

Section 4013 of the CARES Act addressed COVID-19 related modifications and specified that such modifications made on loans that were current as of December 31, 2019 are not TDRs.

In accordance with interagency guidance issued in April 2020, short-term modifications made to borrowers affected by the COVID-19 pandemic and governmental shutdown orders, such as payment deferrals, fee waivers and extensions of repayment terms, do not need to be identified as TDRs if the loans were current at the time a modification plan was implemented.

For the three months ended March 31, 2021, the Company had executed principal and/or interest deferrals on outstanding loan balances of $221.1 million, of which only $16.1 million, or 1.10% of the total portfolio remained on deferral as of March 31, 2021.

Loans Modified

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(Dollars in thousands)

September 30, 2020

March 31, 2021

(6 months or less)

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Credit Card, Overdrafts and Other

We are vigilantly monitoring our liquidity position on an ongoing basis as the circumstances surrounding the pandemic continue to evolve.

We are vigilantly monitoring our liquidity position on an ongoing basis.

The Company has several available sources of on and off-balance sheet liquidity.

Currently, the Company has not needed to tap into these available liquidity sources due to payment deferrals by customers, funding of PPP loans, or organic loan growth.

The potential for increased reliance on available liquidity sources may be required based on the effects of the pandemic and their impact on the level of deposits and other factors.

Additional discussion on our liquidity as of the report date is reflected in the “Liquidity and Capital Resources” section of management’s discussion and analysis.

Share Repurchases

We reinstated our common stock repurchase program on September 1, 2020.

During the third quarter of 2020, we repurchased 288,400 shares of the Company’s common stock at an average cost of $10.56 per share or $3.1 million in the aggregate.

At the present time all share repurchases have been suspended due to the current status of our merger with Severn.

Once the merger is consummated, the Company intends to resume its current share buyback program in which $546 thousand remains available.

The Board of directors and management will re-evaluate the need for an additional stock repurchase program once the current plan is exhausted or expires.

Dividends and Capital

We currently expect to maintain our quarterly cash dividend based on our strong capital position.

At September 30, 2020, the Bank exceeded all the capital requirements to which it was subject, and based on the most recent notification from its primary federal regulator is considered to be well-capitalized.

At March 31, 2021, the Bank exceeded all the capital requirements to which it was subject, and based on the most recent notification from its primary federal regulator is considered to be well-capitalized.

There are no conditions or events since that notification that management believes would change the Bank’s classification.

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The allowance for credit losses represents management’s estimate of credit losses inherent in the loan portfolio as of the balance sheet date.

Determining the amount of the allowance for credit losses is considered a critical accounting estimate because it requires significant judgment and the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on pools of similar loans based on historical loss experience, and consideration of current economic trends and conditions, all of which may be susceptible to significant change.

Determining the amount of the allowance for credit losses is considered a critical accounting estimate because it requires significant judgment and the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on pools of similar loans based on historical loss experience, and consideration of current economic trends and conditions and other factors, all of which may be susceptible to significant change.

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

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Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired.

Other intangible assets represent purchased assets that also lack physical substance but can be distinguished from goodwill because of contractual or other legal rights or because the asset is capable of being sold or exchanged either on its own or in combination with a related contract, asset or liability.

Goodwill and other intangible assets are required to be recorded at fair value at inception.

Determining fair value is subjective, requiring the use of estimates, assumptions and management judgment.

Goodwill is tested at least annually for impairment, usually during the fourth quarter, or on an interim basis if circumstances dictate.

Intangible assets that have finite lives are amortized over their estimated useful lives and also are subject to impairment testing.

Impairment testing requires a qualitative assessment or that the fair value of each of the Company’s reporting units be compared to the carrying amount of its net assets, including goodwill.

If the fair value of a reporting unit is less than book value, an expense may be required to write down the related goodwill to record an impairment loss.

As of September 30, 2020, the Company had only one banking reporting unit.

The Company reported net income of $3.4 million for the third quarter of 2020, or diluted income per common share of $0.27, compared to net income of $4.2 million, or diluted income per common share of $0.33, for the third quarter of 2019.

For the second quarter of 2020, the Company reported net income of $5.3 million, or diluted income per common share of $0.43.

When comparing net income for the third quarter of 2020 to the third quarter of 2019, the decrease was due to an increase in noninterest expense of $447 thousand, coupled with an increase in provision for credit losses of $1.3 million, partially offset by an increase in net interest income of $603 thousand.

When comparing net income from continuing operations for the third quarter of 2020 to the second quarter of 2020, the decrease was primarily due to an increase in noninterest expenses of $2.2 million.

Net interest income increased $252 thousand in the third quarter when compared to the second quarter, which was more than offset by an increase in provision for credit losses of $500 thousand and a decrease in noninterest income of $188 thousand.

For the first nine months of 2020, the Company reported net income of $11.8 million, or diluted income per common share of $0.95, compared to net income of $12.3 million, or diluted income per common share of $0.95, for the first nine months of 2019.

When comparing net income from continuing operations for the first nine months of 2020 to the first nine months of 2019, the decrease was primarily due to increases in the provision for credit losses of $2.4 million and noninterest expenses of $131 thousand, partially offset by higher net interest income of $1.5 million and noninterest income of $376 thousand.

As of March 31, 2021, the Company had only one banking reporting unit.

The Company reported net income of $4.0 million for the first quarter of 2021, or diluted income per common share of $0.34, compared to net income of $3.1 million, or diluted income per common share of $0.25, for the first quarter of 2020.

For the fourth quarter of 2020, the Company reported net income of $3.9 million, or diluted income per common share of $0.32.

When comparing net income for the first quarter of 2021 to the first quarter of 2020, the increase was due to increases in net interest income of $1.3 million and noninterest income of $205 thousand, partially offset by an increase in noninterest expense of $150 thousand.

When comparing net income for the first quarter of 2021 to the fourth quarter of 2020, the increase was primarily due to a decrease in the provision for credit losses of $625 thousand, partially offset by a decrease in noninterest income of $490 thousand.

RESULTS OF OPERATIONS

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Tax-equivalent net interest income is net interest income adjusted for the tax-favored status of income from certain loans and investments.

As shown in the table below, tax-equivalent net interest income was $13.3 million for the third quarter of 2020 and $12.7 million for the third quarter of 2019.

Tax-equivalent net interest income was $13.1 million for the second quarter of 2020.

The increase in net interest income for the third quarter of 2020 when compared to the third quarter of 2019 was due to lower interest expenses on interest bearing deposits of $819 thousand, or 35.8% and the elimination of short and long-term advances from the Federal Home Loan Bank (“FHLB“) which reduced interest expense by a combined $220 thousand.

These improvements to net interest income were partially offset by decreases in interest income on taxable investment securities of $140 thousand, or 16.1%, and interest-bearing deposits with other banks of $190 thousand, or 85.2%.

Net interest income increased for the third quarter of 2020 when compared to the second quarter of 2020 due to increases in the average balances in loans of $32.4 million, taxable investment securities of $28.1 million and interest-bearing deposits with other banks of $69.8 million.

These increases in the average balances on earning assets contributed $304 thousand to interest income over the second quarter, despite a decline in the weighted average yield on these assets of 26 basis points (bps).

In addition, the weighted average rate paid on interest-bearing deposits declined by 8bps in the third quarter when compared to the second quarter, reducing interest expense by $87 thousand.

However, this decline was more than offset by the $148 thousand of additional interest expense related to subordinated debt issued during the third quarter.

As shown in the table below, tax-equivalent net interest income was $13.8 million for the first quarter of

2021 and $12.6 million for the first quarter of 2020.

Tax-equivalent net interest income was $13.8 million for the fourth quarter of 2020.

The increase in net interest income when comparing the first quarter of 2021 to the first quarter of 2020, was the result of higher interest and fees on loans and income from investment securities, coupled with a decrease in interest expense.

Net interest income remained flat for the first quarter of 2021 when compared to the fourth quarter of 2020 due to less interest income on loans, offset by lower rates paid on interest-bearing deposits.

Net interest margin is tax-equivalent net interest income (annualized) divided by average earning assets.

The net interest margin for the third quarter of 2020 was 3.17%, which was a decrease of 35bps when compared to 3.52% for the third quarter of 2019 and a decrease of 24bps when compared to 3.41% for the second quarter of 2020.

The decline in net interest margin in the third quarter of 2020 when compared to the second quarter of 2020 and the third quarter of 2019, was significantly impacted by excess liquidity of approximately $100 million, which has yet to be fully invested.

This excess liquidity was due to deposit inflows related to customers retaining PPP loan proceeds, customers improving their liquidity position by participating in our deferred loan program and the result of new business and municipal relationships acquired during 2020.

Without this excess liquidity, the margin for the third quarter would have been 3.37%.

The net interest margin for the first quarter of 2021 was 3.00%, which was a decrease of 48bps when compared to 3.48% for the first quarter of 2020 and a decrease of 8bps when compared to 3.08% for the fourth quarter of 2020.

The decline in net interest margin in the first quarter of 2021 when compared to the fourth quarter of 2020 and the first quarter of 2020, was significantly impacted by excess liquidity of approximately $100 million, which has yet to be fully invested.

Without this excess liquidity the margin for the first quarter of 2021 would have been 3.17%.

Interest Income

On a tax-equivalent basis, interest income decreased $302 thousand, or 2.0%, for the third quarter of 2020 when compared to the third quarter of 2019.

The decrease was due to a decrease in the average yield on interest-bearing deposits with other banks of 203bps resulting from Federal Reserve interest rate cuts during 2020 and decreases in both the average balance and average yield of taxable investment securities of $19.3 million, or 12.4%, and 10bps, respectively.

The average balance of loans increased $171.3 million, or 13.9%, between the comparable periods and the average yield on loans decreased 53bps, which was the direct result of adding 1,488 PPP loans with an average yield of 2.00%.

On a tax-equivalent basis, interest income increased $305 thousand, or 2.1%, for the third quarter of 2020 when compared to the second quarter of 2020.

The increase was primarily due to increases in the average balance of loans of $32.4 million, or 2.4%, and the average balance of investment securities of $28.1 million, or 14.4%, despite the decrease in the average yield on these earning assets of a combined 31bps.

The average balance on interest-bearing deposits increased $69.8 million, or 200.0%, while the average yield also increased 3bps, resulting in an additional $22 thousand in interest income.

The significant volume increases in total deposits was the result of deposit inflows previously stated above.

On a tax-equivalent basis, interest income increased $658 thousand, or 4.5%, for the first quarter of 2021 when compared to the first quarter of 2020.

The increase was the result of higher interest and fees on loans and income from investment securities.

The primary driver for the increase in interest income on loans was the result of higher average volume of loans of $187 million, which included PPP lending.

The average balance of investment securities increased $98.4 million, providing $212 thousand of additional income, despite a decrease in the average yield of 59bps.

On a tax-equivalent basis, interest income decreased $148 thousand, or 1.0%, for the first quarter of 2021 when compared to the fourth quarter of 2020.

The decrease in interest and fees on loans was primarily due to loan interest recoveries from problem assets experienced in the fourth quarter of 2020, which was absent in the first quarter of 2021, and resulted in a 2bps decline in the average yield on loans.

Interest Expense

Interest expense decreased $895 thousand, or 35.6%, when comparing the third quarter of 2020 to the third quarter of 2019.

The decrease was a direct result of lower interest expenses paid on interest-bearing deposits of $819 thousand and the elimination of short and long-term advances from FHLB borrowings of $220 thousand.

The average rate paid on interest-bearing deposits decreased 44bps, partially offset by the addition of subordinated debt issued during the third quarter of 2020, which added $148 thousand of interest expense.

Interest expense decreased $624 thousand, or 28.8%, when comparing the first quarter of 2021 to the first quarter of 2020.

The decrease in interest expense from the first quarter of 2020 was a result of the decrease in the average rate paid on interest-bearing deposits of 46bps, as well as, the elimination of long-term advances from FHLB which had an average balance of $15 million.

These decreases in interest expense, were partially offset by the issuance of subordinated debt in the third quarter of 2020 which added $359 thousand of additional expense for the first quarter of 2021.

The average balance of noninterest-bearing deposits increased $165.1 million, or 46.8%, between the comparable quarters.

Interest expense increased $55 thousand, or 3.5%, when comparing the third quarter of 2020 to the second quarter of 2020.

The increase in interest expense was mainly due to the addition of subordinated debt issued in the third quarter, which added $148 thousand of interest expense, partially offset by the decrease of $87 thousand in interest expense on interest-bearing deposits and the payoff of long-term advances from FHLB borrowings.

The average balance of noninterest-bearing deposits increased $38.3 million, or 9.1%, when compared to the second quarter of 2020.

The payoff of long-term advances from FHLB borrowings matured in April of 2020 which carried a rate of 2.82%.

Due to the excess liquidity position of the Bank there was no need to renew these borrowings.

The following tables present the distribution of the average consolidated balance sheets, interest income/expense, and annualized yields earned and rates paid for the three months ended September 30, 2020 and 2019.

Interest expense decreased $185 thousand, or 10.7%, when comparing the first quarter of 2021 to the fourth quarter of 2020.

The decrease in interest expense on deposits was due to an 8bps decline in the average rate paid on interest-bearing deposits, specifically time deposits that matured and renewed during the first quarter of 2021.

For Three Months Ended

September 30, 2020

September 30, 2019

(Dollars in thousands)

Earning assets

Loans (2), (3)

Investment securities:

Interest-bearing deposits

Total earning assets

Cash and due from banks

Allowance for credit losses

Interest-bearing liabilities

Demand deposits

Money market and savings deposits

Brokered Deposits

Certificates of deposit $100,000 or more

Other time deposits

Interest-bearing deposits

Securities sold under retail repurchase agreements and federal funds purchased

Advances from FHLB - short-term

Advances from FHLB - long-term

Subordinated debt

Total interest-bearing liabilities

Noninterest-bearing deposits

Other liabilities

Stockholders’ equity

Total liabilities and stockholders’ equity

Net interest spread

Net interest margin

Tax-equivalent adjustment

(1) All amounts are reported on a tax-equivalent basis computed using the statutory federal income tax rate of 21.0%, exclusive of nondeductible interest expense.

(2) Average loan balances include nonaccrual loans.

(3) Interest income on loans includes amortized loan fees, net of costs, and accretion of discounts on acquired loans, which are included in the yield calculations.

Net Interest Income

Tax-equivalent net interest income increased $1.5 million, or 3.9%, during the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019.

The increase in net interest income was due to decreases in interest expenses on interest-bearing deposits of $1.4 million, or 21.0% and short and long-term advances from FHLB borrowings of $679 thousand, or 85.3%, partially offset by the addition of subordinated debt issued in the third quarter of 2020, which added $148 thousand of interest expense.

Also offsetting the cost savings in interest expenses was a decrease in the average yield on earning assets of 43bps.

This resulted in a net interest margin of 3.35% for the nine months ended September 30, 2020 compared to 3.56% for the nine months ended September 30, 2019.

Interest Income

On a tax-equivalent basis, interest income decreased $433 thousand, or 1.0%, for the nine months ended September 30, 2020 when compared to the nine months ended September 30, 2019.

The decrease was primarily due to a decline in the average balance of taxable investment securities of $35.5 million, or 22.2%, and the lower average yield on interest-bearing deposits with other banks of 192bps.

The average balance of loans increased $128.7 million, or 10.6%, while the average yield declined 39bps, in part due to the funding of 1,488 PPP loans during the second and third quarters of 2020 which had an average yield of 2.00%.

Interest Expense

Interest expense decreased $1.9 million, or 26.1%, when comparing the nine months ended September 30, 2020 to the nine months ended September 30, 2019.

The decrease in interest expense was due to a decline in the rates paid on interest-bearing deposits of 30bps and the payoff of short and long-term advances from FHLB borrowings of $32.8 million, or 86.2%.

The payoff of long-term advances from FHLB borrowings matured in April of 2020 which carried a rate of 2.82%.

Due to the excess liquidity position of the Bank there was no need to renew these borrowings.

The decreases in both short and long-term advances from FHLB borrowings, were partially offset by the addition of subordinated debt issued in the third quarter of 2020 of $25 million and an increase in the average balance of noninterest-bearing deposits of $68.7 million, or 20.1%.

The following tables present the distribution of the average consolidated balance sheets, interest income/expense, and annualized yields earned and rates paid for the nine months ended September 30, 2020 and 2019.

For Nine Months Ended

September 30, 2020

September 30, 2019

March 31, 2021

March 31, 2020

(Dollars in thousands)

9 unchanged sentences

Money market and savings deposits

Brokered Deposits

Certificates of deposit $100,000 or more

1 unchanged sentence

Interest-bearing deposits

Securities sold under retail repurchase agreements and federal funds purchased

Advances from FHLB - short-term

Securities sold under retail repurchase agreements and short-term FHLB advances

Advances from FHLB - long-term

8 unchanged sentences

Tax-equivalent adjustment

________________________________________

(1) All amounts are reported on a tax-equivalent basis computed using the statutory federal income tax rate of 21.0%, exclusive of nondeductible interest expense.

(2) Average loan balances include nonaccrual loans.

Interest income on loans includes amortized loan fees, net of costs, and accretion of discounts on acquired loans, which are included in the yield calculations.

(3) Interest income on loans includes accreted loan fees, net of costs and accretion of discounts on acquired loans, which are included in the yield calculations.

Noninterest Income

Total noninterest income for the third quarter of 2020 increased $52 thousand, or 2.1%, when compared to the third quarter of 2019.

The increase from the third quarter of 2019 was mainly due to additional income from BOLI purchased late in 2019 and other bank and loan fees, partially offset by lower service charges on deposit accounts.

Noninterest income decreased $188 thousand, or 6.8%, when compared to the second quarter of 2020 primarily due to the sale of available for sale investment securities at a gain of $347 thousand in the second quarter.

Absent the sale of these securities, noninterest income would have increased $159 thousand, or 6.6%, for the third quarter of 2020, which was primarily the result of increases in loan fee income and service charges on deposit accounts.

Total noninterest income from continuing operations for the nine months ended September 30, 2020 increased $376 thousand, or 5.1%, when compared to the same period in 2019.

The increase in noninterest income primarily consisted of increases in BOLI income, gains on sales of available for sale securities and other bank services, partially offset by a decrease in service charges on deposit accounts which was primarily due to the effect of COVID-19 on activity.

Total noninterest income for the first quarter of 2021 increased $205 thousand, or 8.7%, when compared to the first quarter of 2020.

The increase from the first quarter of 2020 was mainly due to additional income from BOLI contracts of $141 thousand and additional bank service fees of $219 thousand, partially offset by a decrease in service charges on deposit accounts of $192 thousand.

Noninterest income decreased $490 thousand, or 16.1%, when compared to the fourth quarter of 2020 primarily due to the absence of swap fee income on loans originated during the fourth quarter of 2020 of $350 thousand and a decrease in service charges on deposits accounts of $108 thousand.

Noninterest Expense

Total noninterest expense from continuing operations for the third quarter of 2020 increased $447 thousand, or 4.8%, when compared to the third quarter of 2019 and increased $2.2 million, or 28.3%, when compared to the second quarter of 2020.

The increase in noninterest expenses when compared to the third quarter of 2019 was primarily due to higher salaries and wages, employee benefits and data processing fees, partially offset by decreases in other real estate owned expenses and other loan expenses.

The increases in employee benefit expense and data processing fees when compared to 2019, are the result of higher health insurance claims and the increase level of new deposit and loan relationships in 2020.

The increase in noninterest expense when compared to the second quarter of 2020 was primarily related to higher salaries and wages, due to the significant volume of PPP loans originated in the second quarter which resulted in heightened deferrals of direct origination costs during the second quarter of 2020.

The deferred origination costs are being amortized over the lives of the related PPP loans and will be accelerated upon forgiveness or repayment.

Total noninterest expense from continuing operations for the nine months ended September 30, 2020 increased $131 thousand, or less than 1%, when compared to the same period in 2019.

The increase was a result of higher costs related to employee benefits and higher data processing fees, which were almost entirely offset by decreases in salaries and wages due to the deferral of direct origination costs related to the origination of PPP loans, FDIC insurance premiums, other real estate owned expenses, and other loan related expenses.

The deferred costs for salaries and wages are being recognized over the lives of the related loans as previously mentioned.

Total noninterest expense for the first quarter of 2021 increased $150 thousand, or 1.4%, when compared to the first quarter of 2020 and decreased $57 thousand, or less than 1%, when compared to the fourth quarter of 2020.

The increase in noninterest expenses when compared to the first quarter of 2020 was primarily due to higher employee benefits, occupancy expense, data processing fees and FDIC insurance premium expense, partially offset by a decrease in salaries and wages and legal and professional expenses.

The decrease in noninterest expense when compared to the fourth quarter of 2020 was primarily related to lower salaries and wages and legal and professional fees, partially offset by higher employee benefit costs.

The decrease in salaries and wages were attributed to the deferral of costs associated with originating the second round of PPP loans.

The increase in employee benefits was the result of higher medical insurance claims.

Provision for Credit Losses

The provision for credit losses was $1.5 million for the third quarter of 2020, $200 thousand for the third quarter of 2019 and $1.0 million for the second quarter of 2020.

The ratio of the allowance for credit losses to period-end loans was 0.90% at September 30, 2020.

Excluding PPP loans, the ratio of the allowance for credit losses to period-end loans was 0.98% at September 30, 2020, higher than both the 0.85% at September 30, 2019 and the 0.86% at June 30, 2020.

The primary drivers of the increased percentage of the allowance to total loans, excluding PPP loans, and the increase in provision for loan losses as compared to both the prior periods were the new and elevated qualitative factors within the allowance model related to economic conditions and the COVID-19 pandemic.

The Company reported net recoveries in the third quarter of 2020 of $187 thousand, compared to net charge-offs of $67 thousand for the third quarter of 2019 and $288 thousand for the second quarter of 2020.

The provision for credit losses for the nine months ended September 30, 2020 and 2019 was $2.9 million and $500 thousand, respectively, while net charge-offs were $580 thousand and $405 thousand, respectively.

The increase in provision for credit losses was the result of new and elevated qualitative factors within the allowance model related to economic conditions and the COVID-19 pandemic.

Excluding PPP loans, the ratio of the allowance for credit losses to period-end loans increased to 0.98% at September 30, 2020 from 0.84% at December 31, 2019.

As previously discussed, this ratio increased primarily due to the addition of qualitative factors in the analysis of the allowance for loan losses.

The ratio of annualized net charge-offs to average loans was 0.06% for the first nine months of 2020 and 0.04% for the first nine months of 2019.

Management will continue to evaluate the adequacy of the allowance for credit losses as more economic data becomes available and the risk profile of the portfolio is more clearly defined.

The Company reported income tax expense from continuing operations of $1.1 million for the third quarter of 2020, $1.4 million for the third quarter of 2019 and $1.8 million for the second quarter of 2020.

Income tax expense decreased when compared to the third quarter of 2019 and the second quarter of 2020 due to lower pre-tax earnings.

The effective tax rate on continuing operations for the third and second quarter of 2020 was 25.2%.

The effective tax rate for the third quarter

of 2019 was 25.1%.

Income taxes from continuing operations for the nine months ended September 30, 2020 as compared to the nine months ended September 30, 2019 decreased $214 thousand or 5.1%, due to a decrease in pre-tax income.

The provision for credit losses was $425 thousand for the first quarter of 2021, $350 thousand for the first quarter of 2020 and $1.1 million for the fourth quarter of 2020.

The ratio of the allowance for credit losses to period-end loans was 0.98% at March 31, 2021.

Excluding PPP loans, the ratio of the allowance for credit losses to period-end loans was 1.07% at March 31, 2021, higher than both the 1.04% at December 31, 2020 and the 0.81% at March 31, 2020.

The primary drivers of the increased percentage of the allowance to total loans, excluding PPP loans, as compared to March 31, 2020, were elevated qualitative factors within the allowance model related to economic conditions and the COVID-19 pandemic.

The allowance percentage, excluding PPP loans, increased only slightly in the first quarter of 2021 as compared to December 31, 2020, reflecting the Company’s ongoing evaluation of the risk of probable losses inherent in the portfolio and the consideration of factors, both positive and negative, which have impacted the portfolio since year end.

The decrease in provision for credit losses when compared to the fourth quarter of 2020 was the result of a decline in historical losses and minimal loan growth.

The Company reported no net charge offs or recoveries in the first quarter of 2021, compared to net recoveries of $61 thousand for the fourth quarter of 2020 and net charge-offs of $479 thousand for the first quarter of 2020.

The Company reported income tax expense of $1.4 million for the first quarter of 2021, $1.1 million for the first quarter of 2020 and $1.3 million for the fourth quarter of 2020.

Income tax expense increased when compared to the first quarter of 2020 and the fourth quarter of 2020 due to higher pre-tax earnings.

The effective tax rate for the first quarter of 2021 was 26.4% and was 25.3% for the fourth quarter of 2020.

The effective tax rate for the first quarter of 2020 was 25.2%.

ANALYSIS OF FINANCIAL CONDITION

Loans totaled $1.424 billion at September 30, 2020 and $1.249 billion at December 31, 2019, an increase of $175.3 million, or 14.0%.

The increase was primarily due to the origination of 1,488 PPP loans totaling $126.7 million.

Excluding PPP loans, organic growth for the first nine months of 2020 was $48.6 million, which consisted of increases in commercial real estate loans of $43.1 million, consumer loans of $9.8 million and construction loans of $6.2 million, partially offset by decreases in residential real estate loans of $366 thousand and commercial loans, excluding PPP loans, of $10.1 million.

Loans included deferred fees, net of deferred costs, of $12 thousand and discounts on acquired loans of $825 thousand at September 30, 2020, compared to deferred costs, net of deferred fees, of $1.8 million and discounts on acquired loans of $1.1 million at December 31, 2019.

Loans totaled $1.462 billion at March 31, 2021 and $1.454 billion at December 31, 2020, an increase of $7.3 million, or less than 1%.

The increase was primarily due to the origination of 660 round two PPP loans totaling $54.8 million, almost entirely offset by forgiveness of round one PPP loans of $52.2 million.

Excluding PPP loans, organic growth for the first three months of 2021 was $4.7 million, which was hampered by an uncharacteristic level of payoffs experienced during the quarter.

The loan pipeline remains very strong and is still expected to produce double-digit annualized loan growth for 2021, despite the recent payoffs in the first quarter.

Loans included deferred fees, net of deferred costs, of $751 thousand and discounts on acquired loans of $677 thousand at March 31, 2021, compared to deferred costs, net of deferred fees, of $622 thousand and discounts on acquired loans of $754 thousand at December 31, 2020.

We do not engage in foreign or subprime lending activities.

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Our loan portfolio has a commercial real estate loan concentration, which is generally defined as a combination of certain construction and commercial real estate loans.

Construction loans were $106.0 million, or 7.4% of total loans, at September 30, 2020 and $99.8 million, or 8.0% of total loans, at December 31, 2019.

Commercial real estate loans were $629.6 million, or 44.2% of total loans, at September 30, 2020, compared to $586.6 million, or 47.0% of total loans, at December 31, 2019.

Construction loans were $116.0 million, or 7.9% of total loans, at March 31, 2021 and $106.8 million, or 7.3% of total loans, at December 31, 2020.

Commercial real estate loans were $641.2 million, or 43.9% of total loans, at March 31, 2021, compared to $661.2 million, or 45.5% of total loans, at December 31, 2020.

The federal banking regulators have issued guidance for those institutions which are deemed to have concentrations in commercial real estate lending.

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The Company, like many community banks, has a concentration in commercial real estate loans, and the Company has experienced significant growth in its commercial real estate portfolio in recent years.

At September 30, 2020, non-owner-occupied commercial real estate loans (including construction, land and land development loans) represented 291.2% of total risk-based capital.

At March 31, 2021, non-owner-occupied commercial real estate loans (including construction, land and land development loans) represented 303.2% of total risk-based capital.

At such time, construction, land and land development loans represented 58.0% of total risk-based capital.

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Management evaluates the adequacy of the allowance for credit losses at least quarterly and adjusts the provision for credit losses based on this analysis.

The evaluation of the adequacy of the allowance for credit losses is based primarily on a risk rating system of individual loans, as well as on a collective evaluation of smaller balance homogenous loans, each grouped

by loan type.

Each loan type is assigned allowance factors based on criteria such as past credit loss experience, local economic and industry trends, and other measures which may impact collectability.

Please refer to the discussion above under the caption “Critical Accounting Policies” for an overview of the underlying methodology management employs to maintain the allowance.

The allowance for credit losses was $12.8 million at September 30, 2020, $10.4 million at September 30, 2019 and $11.1 million at June 30, 2020.

Net recoveries for the third quarter of 2020 were $187 thousand, compared to net charge-offs of $67 thousand for the third quarter of 2019 and $288 thousand for the second quarter of 2020.

The ratio of annualized net recoveries to average loans was 0.05% for the third quarter of 2020, compared to annualized net charge-offs of 0.02% for the third quarter of 2019 and 0.08% for the second quarter of 2020.

Net charge-offs were $580 thousand for the nine months ended September 30, 2020, compared to $405 thousand for the nine months ended September 30, 2019.

The ratio of net charge-offs to average loans was 0.06% and 0.04% for the nine months ended September 30, 2020 and September 30, 2019, respectively.

The allowance for credit losses was $14.3 million at March 31, 2021, $10.4 million at March 31, 2020 and $13.9 million at December 31, 2020.

There were no net charge-offs or recoveries for the first quarter of 2021, compared to net charge-offs of $479 thousand for the first quarter of 2020 and net recoveries of $61 thousand for the fourth quarter of 2020.

The ratio of annualized net recoveries to average loans was 0% for the first quarter of 2021, compared to annualized net charge-offs of 0.15% for the first quarter of 2020 and (0.02)% for the fourth quarter of 2020.

Management remains focused on its efforts to dispose of problem loans and to prudently charge-off nonperforming loans to enable the Company to continue to improve its overall credit quality.

The allowance for credit losses as a percentage of period-end loans was 0.90% at September 30, 2020, 0.85% at September 30, 2019 and 0.84% at December 31, 2019.

Excluding PPP loans, the ratio of the allowance for credit losses to period-end loans was 0.98% at September 30, 2020, higher than both the 0.85% and 0.84% at September 30, 2019 and December 31, 2019.

The increase in the percentage of the allowance to total loans at September 30, 2020, compared to September 30, 2019 and December 31, 2019, was primarily due to new and elevated qualitative factors within the allowance model related to economic conditions and the COVID-19 pandemic.

Management currently believes that the provision for credit losses and the resulting allowance were adequate to provide for probable losses inherent in our loan portfolio at September 30, 2020.

However, management will continue to evaluate the adequacy of the allowance for credit losses as more economic data becomes available and as the impact of the COVID 19 pandemic on the Company’s portfolio becomes known.

Increases in unemployment, declines in consumer confidence, and a reluctance on the part of businesses to invest in and expand their operations, among other things, may result in additional weakness in economic conditions, place financial strain on our borrowers and ultimately impact the credit quality of our loan portfolio.

As a result, we may experience increases in the level of past due, nonaccrual and classified loans, as well as higher net charge-offs.

Deterioration in credit quality in conjunction with weakness in current and expected economic conditions, may require us to record additional provisions for credit losses in excess of historical levels.

The following table presents a summary of the activity in the allowance for credit losses at or for the three and nine months ended September 30, 2020 and 2019.

At or for Three Months Ended

At or for Nine Months Ended

September 30,

The allowance for credit losses as a percentage of period-end loans was 0.98% at March 31, 2021, 0.81% at March 31, 2020 and 0.95% at December 31, 2020.

Excluding PPP loans, the ratio of the allowance for credit losses to period-end loans was 1.07% at March 31, 2021, higher than both the 0.81% and 1.04% at March 31, 2020 and December 31, 2020, respectively.

The increase in the percentage of the allowance to total loans at March 31, 2021, compared to March 31, 2020 and December 31, 2020, was primarily due to elevated qualitative factors within the allowance model primarily related to economic conditions and the COVID-19 pandemic.

Management currently believes that the provision for credit losses and the resulting allowance were adequate to provide for probable losses inherent in our loan portfolio at March 31, 2021.

The following table presents a summary of the activity in the allowance for credit losses at or for the three months ended March 31, 2021 and 2020.

For the Three Months Ended March 31,

Percentage of net

(annualized) to

average loans

Net (charge-offs)

(Dollars in thousands)

Allowance balance - beginning of period

Residential real estate

Commercial real estate

during the year

Residential real estate

Commercial real estate

Net recoveries (charge-offs)

Provision for credit losses

Allowance balance - end of period

Average loans outstanding during the period

Net (recoveries) charge-offs (annualized) as a percentage of average loans outstanding during the period

Allowance for credit losses at period end as a percentage of total period end loans (1)

Allowance for credit losses at period end as a percentage of average loans (2)

(1) At September 30, 2020, the loan balances used to calculate the ratio include PPP loans of $126.7 million.

Allowance for credit losses at period end as a percentage of period end nonaccrual loans

(1) At March 31, 2021, the loan balances used to calculate the ratio include PPP loans of $129.1 million.

Excluding PPP loans, the ratio is 1.07%.

(2) At March 31, 2021, the loan balances used to calculate the ratio include PPP loans of $131.9 million.

Excluding PPP loans, the ratio is 1.09%.

Nonperforming Assets and Accruing TDRs

As shown in the following table, nonperforming assets decreased $3.6 million to $8.4 million at September 30, 2020 from $12.0 million at December 31, 2019, primarily due to a decrease in nonaccrual loans of $3.6 million, or 34.2%.

Accruing TDRs decreased $234 thousand to $7.3 million at September 30, 2020 from $7.5 million at December 31, 2019.

Additionally, other real estate owned decreased $36 thousand, or 48.6%, when compared to December 31, 2019.

The decrease in nonaccrual loans was due to three loan relationships with commercial real estate customers with nonaccrual loans of approximately $3.5 million, for which the Bank received payoffs during the third quarter of 2020, resulting in net recoveries for the period.

The decrease in accruing TDRs was due to normal payments.

The ratio of nonaccrual loans and accruing TDRs to total loans decreased to 1.00% at September 30, 2020 from 1.45% at December 31, 2019.

As shown in the following table, nonperforming assets remained relatively unchanged at March 31, 2021 from the $6.3 million at December 31, 2020.

Despite the balance of nonperforming assets being similar for both the first quarter of 2021 and the fourth quarter of 2020, the composition of these assets was in contrast.

When comparing nonperforming assets at March 31, 2021 to December 31, 2020, total nonaccrual loans decreased $575 thousand, or 10.5%, and loans 90 days past due and still accruing increased $384 thousand, or 47.8%.

Accruing troubled debt restructurings (“TDRs”) decreased $541 thousand, or 7.7%, over the same time period.

Other real estate owned properties increased to $205 thousand at March 31, 2021 from $0 at December 31, 2020 and $38 thousand at March 31, 2020.

The ratio of nonaccrual loans and accruing TDRs to total loans decreased to 0.78% at March 31, 2021 from 0.86% at December 31, 2020.

The Company continues to focus on the resolution of its nonperforming and problem assets.

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charging-off loans;

transferring loans to other

real estate owned;

transferring loans to other real estate owned;

aggressively marketing other real estate owned.

The reduction of nonperforming and problem assets is and will continue to be a high priority for the Company.

The following table summarizes our nonperforming assets and accruing TDRs at September 30, 2020 and December 31, 2019.

The following table summarizes our nonperforming assets and accruing TDRs at March 31, 2021 and December 31, 2020.

(Dollars in thousands)

September 30, 2020

March 31, 2021

December 31, 2020

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Nonaccrual loans

Residential real estate

Commercial real estate

Total nonaccrual loans

Loans 90 days or more past due and still accruing

Residential real estate

Commercial real estate

Total loans 90 days or more past due and still accruing

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Total nonperforming assets

Accruing TDRs

Residential real estate

Commercial real estate

Total accruing TDRs

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Investment securities available for sale are stated at estimated fair value based on quoted prices.

They represent securities which may be sold as part of the asset/liability management strategy or in response to changing

interest rates.

They represent securities which may be sold as part of the asset/liability management strategy or in response to changing interest rates.

Net unrealized holding gains and losses on these securities are reported net of related income taxes as accumulated other comprehensive income (loss), a separate component of stockholders’ equity.

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We have the intent and current ability to hold such securities until maturity.

At September 30, 2020, 87.3% of the portfolio of debt securities was classified as available for sale and 12.7% was classified as held to maturity, compared to 93.5% and 6.5% respectively, at December 31, 2019.

At March 31, 2021, 49.8% of the portfolio of debt securities was classified as available for sale and 50.2% was classified as held to maturity, compared to 68.0% and 32.0% respectively, at December 31, 2020.

See Note 3 – “Investment Securities”, in the Notes to Consolidated Financial Statements for additional details on the composition of our investment portfolio.

Investment securities including restricted stock totaled $164.5 million at September 30, 2020, a $27.4 million, or 20.0%, increase since December 31, 2019.

The increase was primarily due to the purchases of available for sale securities of $60.5 million and held to maturity securities of $11.6 million, partially offset by proceeds from maturities and sales of these securities of $46.5 million, during 2020.

Due to the excess liquidity experienced in 2020, the Company strategically purchased short duration available for sale securities and subordinated debt of other banks which earn significantly higher average yields than interest-bearing deposits with other banks.

Investment securities including restricted stock totaled $254.6 million at March 31, 2021, a $44.3 million, or 21.1%, increase since December 31, 2020.

The increase was primarily due to the purchases of held to maturity securities of $61.4 million, partially offset by proceeds from maturities and sales of available for sale securities of $14.2 million, during 2021.

Due to the excess liquidity experienced in 2020 and 2021, the Company strategically purchased short duration available for sale securities and subordinated debt of other banks which earn significantly higher average yields than interest-bearing deposits with other banks.

As loan demand begins to strengthen, the Company will redeploy proceeds and excess liquidity to fund loan growth.

At September 30, 2020, 82.3% of the securities available for sale were mortgage-backed and 17.7% were U.S.

At March 31, 2021, 85.4% of the securities available for sale were mortgage-backed and 14.6% were U.S.

Government agencies, compared to 83.1% and 16.9%, respectively, at year-end 2020.

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Government agencies or government-sponsored agencies.

Total deposits at September 30, 2020 amounted to $1.59 billion, an increase of $252.8 million, or 18.8%, when compared to the level at December 31, 2019.

Total deposits at March 31, 2021 amounted to $1.80 billion, an increase of $99.9 million, or 5.9%, when compared to the level at December 31, 2020.

The increase in total deposits consisted of increases in interest-bearing deposits of $75.2 million and noninterest-bearing deposits of $24.7 million.

The growth in interest-bearing deposits was represented by increases in interest-bearing checking accounts of $109.5 million and savings and money market accounts of $37.3 million, partially offset by a decrease in other time deposits of $2.7 million.

The overall increase in deposits can be attributed to a combination of factors which include, customers retaining PPP loan proceeds, customers improving their liquidity position by participating in our deferred loan program and the result of new business and municipal relationships acquired during 2020.

The growth in interest-bearing deposits was represented by increases in savings and money market accounts of $113.2 million and other time deposits of $2.7 million, partially offset by a decrease in interest-bearing checking accounts of $40.6 million.

The significant movement within deposit accounts continues to be impacted by direct government stimulus payments to our customers.

Short-Term Borrowings

Short-term borrowings consisted of securities sold under agreements to repurchase, which decreased by $207 thousand, or 16.9%, to $1.0 million at September 30, 2020 when compared to December 31, 2019.

Short-term borrowings consisted of securities sold under agreements to repurchase, which increased by $2.5 million, or 233.4%, to $3.5 million at March 31, 2021 when compared to December 31, 2020.

Securities sold under agreements to repurchase are issued in conjunction with cash management services for commercial depositors.

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Short-term advances are defined as those with original maturities of one year or less.

At September 30, 2020 and December 31, 2019, the Company had no outstanding short-term advances with FHLB.

At March 31, 2021 and December 31, 2020, the Company had no outstanding short-term or long-term advances with FHLB.

Long-Term Debt

The Company uses long-term borrowings to meet longer term liquidity needs, specifically to fund loan growth when liquidity from deposit growth is not sufficient.

During the third quarter of 2020, the Company sold and issued $25.0 million in aggregate principal amount of 5.375% Fixed-to-Floating Rate Subordinated Notes due September 1, 2030.

The amount of outstanding long-term borrowings at December 31, 2019 consisted of long-term advances from FHLB borrowings of $15.0 million, which carried an interest rate of 2.82%.

These advances were paid off in April of 2020.

On August 25, 2020, the Company entered into Subordinated Note Purchase Agreements with certain Purchasers pursuant to which the Company issued and sold $25.0 million in aggregate principal amount with an initial interest rate of 5.375% Fixed-to-Floating Rate Subordinated Notes due September 1, 2030.

Liquidity and Capital Resources

We derive liquidity through increased customer deposits, non-reinvestment of the cash flow from the investment portfolio, loan repayments, borrowings and income from earning assets.

As seen in the Consolidated Statements of Cash Flows in the Financial Statements, the net increase in cash and cash equivalents was $61.5 million for the first nine months of 2020 compared to an increase of $36.1 million for the first nine months of 2019.

The increase in cash and cash equivalents in

2020 was mainly due to the significant increase in deposits, the direct result of PPP loan proceeds deposited to and remaining in these accounts as of September 30, 2020.

As seen in the Consolidated Statements of Cash Flows in the Financial Statements, the net increase in cash and cash equivalents was $40.2 million for the first three months of 2021 compared to an increase of $1.3 million for the first three months of 2020.

The increase in cash and cash equivalents in 2021 was mainly due to the significant increase in deposits, the direct result of customer stimulus deposited to and remaining in these accounts as of March 31, 2021.

The Company expects these funds to be utilized over the coming months, which may or may not result in a decline in deposit balances.

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The Bank is also a member of the FHLB, which provides another source of liquidity.

Through the FHLB, the Bank had collateral pledged of approximately $313.8 million and $270.1 million at September 30, 2020 and December 31, 2019, respectively.

Through the FHLB, the Bank had collateral pledged of approximately $314.3 million and $316.7 million at March 31, 2021 and December 31, 2020, respectively.

The Bank has pledged, under a blanket lien, all qualifying residential and commercial real estate loans under borrowing agreements with the FHLB.

Total stockholders’ equity increased $6.1 million to $198.9 million at September 30, 2020 when compared to December 31, 2019 primarily due to the current year’s retained earnings and a positive change in accumulated other comprehensive income of $1.7 million, or 819.8%, partially offset by dividends paid during the first nine months of 2020 and the repurchase of common stock in the third quarter of 2020.

Total stockholders’ equity increased $1.1 million to $196.1 million at March 31, 2021 when compared to December 31, 2020 primarily due to the current year’s retained earnings, partially offset by dividends paid during the three months ended March 31, 2021 and the change in fair value of available-for-sale securities recorded in accumulated other comprehensive income.

On September 17, 2019, the FDIC finalized a rule that introduces an optional simplified measure of capital adequacy for qualifying community banking organizations (i.e., the community bank leverage ratio (“CBLR”) framework), as required by the Economic Growth, Regulatory Relief and Consumer Protection Act.

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On April 6, 2020, in a joint statement, the FDIC, Federal Reserve and the Office of Comptroller of the Currency (“OCC”), issued two interim final rules regarding temporary changes to the CBLR framework to implement provisions of the CARES Act.

Under the interim final rules, the community bank leverage ratio will be reduced to 8% beginning in the second quarter and for the remainder of calendar year 2020, 8.5% for calendar year 2021, and 9% thereafter.

Under the interim final rules, the community bank leverage ratio was reduced to 8% beginning in the second quarter and for the remainder of calendar year 2020, 8.5% for calendar year 2021, and 9% thereafter.

In order to qualify for the CBLR framework, a community banking organization must have a tier 1 leverage ratio of greater than 8%, less than $10 billion in total consolidated assets, and limited amounts of off-balance-sheet exposures and trading assets and liabilities.

A qualifying community banking organization that opts into the CBLR framework and meets all requirements under the framework will be considered to have met the well-capitalized ratio requirements under the Prompt Corrective Action regulations and will not be required to report or calculate risk-based capital.

The CBLR framework was available for banks to use in their March 31, 2020 Call Report.

The Bank did not opt into the CBLR framework in the first, second or third quarter of 2020.

The Company has not opted-in to the CBLR framework.

Under final Federal Reserve and FDIC approved rules implementing the Basel Committee on Banking Supervision’s capital guidelines for U.S.

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The phase-in period for the final rules became effective for the Bank on January 1, 2015, with full compliance with all of the final rules’ requirements phased in over a multi-year schedule, which was fully phased in on January 1, 2019.

As of September 30, 2020, the Bank’s capital levels remained characterized as “well-capitalized” under the rules.

The following tables present the applicable capital ratios as of September 30, 2020 and December 31, 2019.

As of March 31, 2021, the Bank’s capital levels remained characterized as “well-capitalized” under the rules.

The following tables present the applicable capital ratios as of March 31, 2021 and December 31, 2020.

Common Equity

September 30, 2020

March 31, 2021

capital ratio

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis