LIMESTONE BANCORP, INC. This item analyzes the Company's financial condition, change in financial condition and results of operations. It should be read in conjunction with the unaudited consolidated financial statements and accompanying notes presented in Part I, Item 1 of this report.
Preliminary Note Concerning Forward-Looking Statements
This report contains statements about the future expectations, activities and events that constitute forward-looking statements. Forward-looking statements express the Company's beliefs, assumptions and expectations of its future financial and operating performance and growth plans, taking into account information currently available to us. These statements are not statements of historical fact. The words "believe," "may," "should," "anticipate," "estimate," "expect," "intend," "objective," "seek," "plan," "strive" or similar words, or the negatives of these words, identify forward-looking statements. Forward-looking statements involve risks and uncertainties that may cause the Company's actual results to differ materially from the expectations of future results management expressed or implied in any forward-looking statements. These risks and uncertainties can be difficult to predict and may be beyond the Company's control. Factors that could contribute to differences in the Company's results include, but are not limited to:
? the impact of the novel coronavirus disease 2019 ("COVID-19") pandemic and the
economic and financial disruptions and instabilities that have followed it;
? deterioration in the financial condition of borrowers resulting in significant
increases in loan losses and provisions for those losses;
? changes in inflation and efforts to control it;
? changes in the interest rate environment, which may reduce the Company's
margins or impact the value of securities, loans, deposits and other financial
instruments;
? changes in loan underwriting, credit review or loss reserve policiesassociated with economic conditions, examination conclusions, or regulatory
developments;
? general economic or business conditions, either nationally, regionally or
locally in the communities the Bank serves, may be worse than expected,
resulting in, among other things, a deterioration in credit quality or a
reduced demand for credit;
? the results of regulatory examinations;
? any matter that would cause the Bank to conclude that there was impairment of
any asset, including intangible assets;
? the continued service of key management personnel, the Company's ability to
attract, motivate and retain qualified employees;
? factors that increase the competitive pressure among depository and other
financial institutions, including product and pricing pressures and the
ability of the Company's competitors with greater financial resources to
develop and introduce products and services that enable them to compete more
successfully;
? inability to comply with regulatory capital requirements and to secure any
required regulatory approvals for capital actions;
? failure in or breach of operational or security systems or infrastructure, or
those of third-party vendors and other service providers, including as a
result of cyber-attacks;
? legislative or regulatory developments, including changes in laws concerning
taxes, banking, securities, insurance and other aspects of the financial
services industry;
? risks related to the pending Merger with Peoples Bancorp, including risks if
the Company is unable to complete the Merger due to the failure of the
Company's shareholders or Peoples' shareholders to approve the Merger
Agreement, the failure to satisfy other conditions to completion of the
Merger, including receipt of required regulatory and other approvals, the
failure of the proposed Merger to close for any other reason, the diversion of
management's attention from ongoing business operations and opportunities due
to the Merger, and the effect of the announcement of the Merger on the
Company's customer and employee relationships and operating results;
? fiscal and governmental policies of
? other risks and uncertainties reported from time to time in the Company's
filings with the
Item 1A "Risk Factors" of this report, as well as Part I Item 1A "Risk
Factors" of the Company's Annual Report on Form 10-K for the year ended
December 31, 2021 .
Forward-looking statements are not guarantees of performance or results. A
forward-looking statement may include the assumptions or bases underlying the
forward-looking statement. Management has made assumptions and bases in good
faith and believe they are reasonable. However, estimates based on such
assumptions or bases frequently differ from actual results, and the differences
can be material. The forward-looking statements included in this report speak
only as of the date of the report. Management does not intend to update these
statements unless required by applicable laws.
Cautionary Statement
The statements in this quarterly report regarding the Company's Merger Agreement
with Peoples are qualified by the detailed terms and conditions of the Merger
Agreement, which is Exhibit 2.1 to this report. The Merger Agreement is the
contractual document that establishes and governs the legal relations of the
Company and Peoples with respect to the Merger and is not intended to be, and
should not be relied on as, a source of factual, business or operational
information about either the Company or Peoples. The representations,
warranties, covenants and agreements made by the parties to the Merger Agreement
are made as of specific dates and are qualified and limited, including by
information in disclosure schedules that the parties exchanged in connection
with the execution of such Merger Agreement. Moreover, certain of the
representations and warranties are subject to a contractual standard of
materiality that may be different from what may be viewed as material to an
investor. Representations and warranties may be used as a tool to allocate risks
between the parties to the Merger Agreement, including where the parties do not
have complete knowledge of all facts. The Merger Agreement should not be read
alone, but should instead be read in conjunction with the other information
regarding Peoples, the Company, their respective affiliates or their respective
businesses, the Merger Agreement and the Merger that will be contained in, or
incorporated by reference into, the Registration Statement on Form S-4 to be
filed by Peoples that will include a proxy statement of the Company and Peoples
and a prospectus of Peoples, as well as in the Forms 10-K, Forms 10-Q and other
filings that each of Peoples and the Company make with the SEC . INVESTORS ARE
URGED TO READ THE REGISTRATION STATEMENT AND THE CORRESPONDING PROXY
STATEMENT/PROSPECTUS REGARDING THE MERGER WHEN IT BECOMES AVAILABLE, AS WELL AS
ANY OTHER RELEVANT DOCUMENTS FILED WITH THE SEC , TOGETHER WITH ALL AMENDMENTS
AND SUPPLEMENTS TO THOSE DOCUMENTS, AS THEY WILL CONTAIN IMPORTANT INFORMATION.
Investors and security holders may obtain a free copy of these documents (when
available) through the website maintained by the SEC at www.sec.gov or by
accessing Peoples' website (http://www.peoplesbancorp.com) under the tab
"Investor Relations" and then under the heading "SEC Filings." and the Company's
website (https://www.limestonebank.com) under the tab "About Us - Investor
Relations" and then under the tab "Documents - SEC Filings." Shareholders of the
Company also will be able to obtain copies of the proxy statement/prospectus and
the filings with the SEC that will be incorporated by reference in the proxy
statement/prospectus, without charge, by directing a request to Phil W.
Barnhouse , Chief Financial Officer, Limestone Bancorp, Inc. , 2500 Eastpoint
Parkway , Louisville, Kentucky 40223-4156, telephone 502-499-4800.
This quarterly report is not intended to and shall not constitute an offer to
sell or the solicitation of an offer to buy securities. This quarterly report is
also not a solicitation of any vote in connection with the Merger. No offer of
securities or solicitation will be made except by means of a prospectus meeting
the requirements of Section 10 of the Securities Act of 1933, as amended.
31--------------------------------------------------------------------------------
Table of Contents Overview Organized in 1988,Limestone Bancorp, Inc. (the Company) is a bank holding company headquartered inLouisville, Kentucky . The Company's common stock is traded on Nasdaq's Capital Market under the symbol LMST. The Company operatesLimestone Bank, Inc. (the Bank), the thirteenth largest bank domiciled in theCommonwealth of Kentucky based on total assets. The Bank operates banking offices in 14 counties inKentucky . The Bank's markets include metropolitanLouisville inJefferson County and the surrounding counties ofBullitt andHenry . The Bank serves south central, southern, and westernKentucky from banking centers inBarren ,Butler ,Daviess ,Edmonson ,Green ,Hardin ,Hart ,Ohio , andWarren counties. The Bank also has banking centers inLexington, Kentucky , the second largest city in the state, andFrankfort, Kentucky , the state capital. The Bank is a traditional community bank with a wide range of personal and business banking products and services. As ofSeptember 30, 2022 , the Company had total assets of$1.49 billion , total loans of$1.13 billion , total deposits of$1.22 billion and stockholders' equity of$128.4 million . OnOctober 24, 2022 , the Company entered into an Agreement and Plan of Merger ("Merger Agreement") with Peoples Bancorp, Inc. ("Peoples"). The Merger Agreement provides for a business combination whereby the Company will merge with and into Peoples (the "Merger"), with Peoples as the surviving corporation in the Merger. Under the terms and subject to the conditions of the Merger Agreement, at the effective time of the Merger (the "Effective Time"), each share of the Company's common stock, issued and outstanding immediately prior to the Effective Time (except for Dissenting Shares, as provided for in the Merger Agreement), will be converted, in accordance with the procedures set forth in the Merger Agreement, into 0.90 of common shares, no par value, of Peoples. Upon the terms and subject to the conditions set forth in the Merger Agreement, the Merger is expected to close in the second quarter of 2023. In conjunction with the Merger Agreement discussed above, the Company, with the unanimous approval of the Board of Directors, terminated its Tax Benefit Preservation Plan onOctober 24, 2022 . The Tax Benefit Preservation Plan was originally put in place in 2015 and designed to preserve the benefits of the Company's substantial tax assets. Restrictions on transfer designed to protect the Company's tax assets remain in effect under the Company's Articles of Incorporation, as approved by shareholders. The Company reported net income of$5.8 million , or$0.76 per basic and diluted common share, and$13.4 million , or$1.76 per basic and diluted common share, for the three and nine months endedSeptember 30, 2022 , compared with net income of$4.3 million , or$0.57 per basic and diluted common share, and$11.5 million , or$1.51 per basic and diluted common share, for the same periods of 2021.
Highlights for the nine months ended
? Average loans receivable increased approximately
Program ("PPP") loans averaged
months of 2022 and 2021, respectively.
? Net interest margin increased three basis points to 3.56% in the first nine
months of 2022 compared with 3.53% in the first nine months of 2021. The
2022, 50 basis points on
basis points on
During the second and third quarters of 2022, the Bank's fed funds sold,
floating rate investment securities, loans with variable rate pricing
features, and new loan originations benefitted from the upward movement in
short-term rates and are expected to continue to benefit as rates continue to
rise. The cost of interest-bearing liabilities has also been impacted to a
lesser extent but is also expected to continue to increase as short-term
interest rates continue to rise.
? The yield on earning assets increased to 4.05% for the first nine months of
2022, compared to 4.00% for the first nine months of 2021. The yield on
earning assets for the first nine months of 2021 was significantly impacted by
2022. During the first nine months of 2022, PPP fees represented approximately
one basis point of earning asset yield and net interest margin, compared to 27
basis points for the first nine months of 2021. The reduction in PPP fee
income was offset by an increase in interest revenue due to an increase in
average loans between periods. The increase in average loans resulted in an
increase in interest revenue volume of approximately
months ended
revenue attributable to rates of
between periods, as compared with the nine months ended
? The cost of interest-bearing liabilities increased from 0.62% in the first
nine months of 2021 to 0.66% in the first nine months of 2022 as a result of
increases in short-term interest rates during 2022.
? Net loan recoveries were
compared to net loan charge-offs of
2021. During the third quarter of 2022, the Bank received a payoff of
million on a nonaccrual commercial real estate loan resulting in a recovery of
$1.5 million .
? A negative provision for loan losses of
in the third quarter and first nine months of 2022, respectively, compared to
a provision for loan losses of
the first nine months of 2021, respectively. The 2022 negative loan loss
provisions were primarily attributable to the significant recovery recognized
during the third quarter and its impact on the historical loss percentages,
offset by the additional reserve required by the growth trends within the
portfolio during the period. The 2021 loan loss provisions were attributable
to growth trends within the portfolio and net loan charge-offs impacting
historical loss percentages during the period.
? Loans past due 30-59 days decreased from
past due and nonaccrual loans decreased to
from $3.9 million at December 31, 2021 .
? Deposits were
at
during the first nine months of 2022 to
from
increased
accounts decreased
32
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Table of Contents
? On
shareholders of record as of the close of business on
Application of Critical Accounting Policies
Management continually reviews accounting policies and financial information disclosures. The Company's more significant accounting policies that require the use of estimates and judgments in preparing the financial statements are summarized in "Application of Critical Accounting Policies" in Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operation of the Company's Annual Report on Form 10-K for the calendar year endedDecember 31, 2021 . Management has discussed the development, selection, and application of the Company's critical accounting policies with its Audit Committee. During the first nine months of 2022, there were no material changes in the critical accounting policies and assumptions. Results of Operations The following table summarizes components of income and expense and the change in those components for the three months endedSeptember 30, 2022 , compared with the same period of 2021: For the Three Months Change from Ended September 30, Prior Period 2022 2021 Amount Percent (dollars in thousands) Gross interest income$ 15,121 $ 12,975 $ 2,146 16.5 % Gross interest expense 2,209 1,354 855 63.1 Net interest income 12,912 11,621 1,291 11.1 Provision (negative provision) for loan losses (1,250 ) 300 (1,550 ) (516.7 ) Non-interest income 2,228 2,436 (208 ) (8.5 ) Non-interest expense 8,697 8,050 647 8.0 Net income before taxes 7,693 5,707 1,986 34.8 Income tax expense 1,880 1,366 514 37.6 Net income 5,813 4,341 1,472 33.9 Net income for the three months endedSeptember 30, 2022 totaled$5.8 million , compared with$4.3 million for the comparable period of 2021. Net interest income increased$2.1 million from the 2021 third quarter primarily as a result of an increase in average loans as compared to the prior period. A negative provision for loan losses of$1.3 million was recorded in the third quarter of 2022, as compared to a provision for loan losses of$300,000 in the third quarter of 2021. The 2022 negative loan loss provision was primarily attributable to the significant recovery recognized during the third quarter and its impact on the historical loss percentages, offset by the additional reserve required by the growth trends within the portfolio during the period. The 2021 loan loss provision was attributable to growth trends within the portfolio and net loan charge-offs impacting historical loss percentages during the period. Non-interest income decreased$208,000 from$2.4 million in the third quarter of 2021 to$2.2 million for the third quarter of 2022. The third quarter of 2021 included a$465,000 gain on the call of a corporate bond from the Bank's available for sale securities portfolio. Service charges on deposit accounts increased$165,000 as compared to the third quarter of 2021 due to an increase in transaction volumes. Non-interest expense increased$647,000 from$8.1 million in the third quarter of 2021 to$8.7 million in the third quarter of 2022. Salaries and benefits expense increased$377,000 from the third quarter of 2021 as a result of the inflationary impact on talent acquisition and the administration of annual salary adjustments, increased health care utilization costs, and a modest increase in performance-based incentive compensation. Other non-interest expense increased$214,000 from the third quarter of 2021 primarily related to an increase in losses associated with demand deposit charge-offs and fraudulent check and debit card activity during the period. The following table summarizes components of income and expense and the change in those components for the nine months endedSeptember 30, 2022 , compared with the same period of 2021: For the Nine Months Change from Ended September 30, Prior Period 2022 2021 Amount Percent (dollars in thousands) Gross interest income$ 40,670 $ 37,601 $ 3,069 8.2 % Gross interest expense 4,964 4,386 578 13.2 Net interest income 35,706 33,215 2,491 7.5 Provision (negative provision) for loan losses (50 ) 650 (700 ) (107.7 ) Non-interest income 6,722 6,455 267 4.1 Non-interest expense 24,895 23,988 907 3.8 Net income before taxes 17,583 15,032 2,551 17.0 Income tax expense 4,155 3,568 587 16.5 Net income 13,428 11,464 1,964 17.1 Net income for the nine months endedSeptember 30, 2022 totaled$13.4 million , compared with net income of$11.5 million for the comparable period of 2021. Net interest income increased$2.5 million from the first nine months of 2021 as a result of an increase in average loans and average investment securities. A negative provision for loan losses of$50,000 was recorded in the first nine months of 2022, as compared to$650,000 provision for loan losses in the first nine months of 2021. The 2022 negative loan loss provision was primarily attributable to the significant recovery recognized during the third quarter and its impact on the historical loss percentages, offset by the additional reserve required by the growth trends within the portfolio during the period. The 2021 loan loss provision was attributable to growth trends within the portfolio and net loan charge-offs impacting historical loss percentages during the period. 33
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Table of Contents
Non-interest income increased by$267,000 to$6.7 million from$6.5 million in the first nine months of 2021. The increase was primarily due to an increase in services charges on deposit accounts of$421,000 due to an increase in transaction volumes, as well as a$179,000 increase in bank owned life insurance income due to additional policies being purchased inMarch 2022 . Non-interest income for the first nine months of 2022 also included a$163,000 gain on sale of premises held for sale from the first quarter of 2022, while the first nine months of 2021 included a$191,000 gain on sale of OREO from the second quarter of 2021, as well as a$465,000 gain on the call of a corporate bond from the third quarter of 2021. Non-interest expense increased$907,000 from$24.0 million in the first nine months of 2021 to$24.9 million in the first nine months of 2022. The increase was primarily due to an increase of$643,000 in salaries and benefits as discussed above, and a$328,000 increase in other non-interest expense primarily related to losses associated with demand deposit charge-offs and fraudulent check and debit card activity during the period. Net Interest Income - Net interest income was$12.9 million for the three months endedSeptember 30, 2022 , an increase of$1.3 million , or 11.1%, compared with$11.6 million for the same period in 2021. Net interest spread and margin were 3.52% and 3.73%, respectively, for the third quarter of 2022, compared with 3.47% and 3.61%, respectively, for the third quarter of 2021. TheFederal Reserve increased the fed funds target by 25 basis points onMarch 16, 2022 , 50 basis points onMay 4, 2022 , 75 basis points onJune 15, 2022 , 75 basis points onJuly 26, 2022 , and 75 basis points onSeptember 20, 2022 . During the second and third quarters of 2022, the Bank's fed funds sold, floating rate investment securities, loans with variable rate pricing features, and new loan originations benefitted from the upward movement in short-term rates and are expected to continue to benefit as rates continue to rise. The cost of interest-bearing liabilities has also been impacted to a lesser extent but is also expected to continue to increase as short-term interest rates continue to rise. The yield on earning assets increased to 4.37% for the third quarter of 2022, as compared to 4.03% in the third quarter of 2021. Average interest-earning assets were$1.38 billion for the third quarter of 2022, compared with$1.28 billion for the third quarter of 2021, a 7.4% increase. Average loans increased approximately$143.9 million and average investment securities increased$7.4 million , while average lower yielding fed funds sold decreased$56.2 million for the third quarter of 2022, compared with the third quarter of 2021. PPP loans averaged$157,000 and$12.6 million for the third quarter of 2022 and 2021, respectively. The increase in average loans resulted in an increase in interest revenue volume of approximately$1.7 million for the quarter endedSeptember 30, 2022 , which was partially offset by a decrease in interest revenue attributable to rates of$117,000 due primarily to lower PPP fees between periods, as compared with the third quarter of 2021. Total interest income increased 16.5%, or$2.1 million , for the third quarter of 2022 compared to the third quarter of 2021. Loan fee income can meaningfully impact net interest income, loan yields, and net interest margin. The amount of loan fee income included in total interest income was$279,000 and$1.5 million for the quarters endedSeptember 30, 2022 andSeptember 30, 2021 , respectively. This represents eight basis points and 48 basis points of yield on earning assets and net interest margin for the third quarter endedSeptember 30, 2022 and 2021, respectively. Loan fee income for the third quarter of 2022 did not include any fees earned on PPP loans, compared to$1.4 million in the third quarter of 2021, which represented 43 basis points of earning asset yield and net interest margin for the third quarter of 2021. The cost of interest-bearing liabilities increased to 0.85% for the third quarter of 2022, as compared to 0.56% for the third quarter of 2021. While deposit mix has continued to improve as compared to the prior year third quarter, the cost of interest-bearing liabilities was impacted by recent increases in short-term interest rates. Future short-term rate increases are expected to further impact the cost of interest-bearing liabilities. Average interest-bearing liabilities increased by 7.9% to$1.03 billion for the third quarter of 2022, as compared to$954.0 million for the third quarter of 2021 primarily due to an increase of$42.2 million in average FHLB advances and a$32.9 million increase in average interest-bearing deposits. Total interest expense increased by 63.1% to$2.2 million for the third quarter of 2022 as compared to$1.4 million for the third quarter of 2021. Net interest income was$35.7 million for the nine months endedSeptember 30, 2022 , an increase of$2.5 million , or 7.5%, compared with$33.2 million for the same period in 2021. Net interest spread and margin were 3.39% and 3.56%, respectively, for the first nine months of 2022, compared with 3.38% and 3.53%, respectively, for the first nine months of 2021. The yield on earning assets increased to 4.05% for the first nine months of 2022, as compared to 4.00% in the first nine months of 2021. Average interest-earning assets increased approximately$84.8 million for the nine months endedSeptember 30, 2022 , compared with the first nine months of 2021. Average loans for the first nine months of 2022 increased approximately$100.0 million and average investment securities increased$30.8 million , while average lower yielding fed funds sold decreased$45.4 million compared with the first nine months of 2021. PPP loans averaged$340,000 and$19.4 million for the first nine months of 2022 and 2021, respectively. The increase in average loans resulted in an increase in interest revenue volume of approximately$3.4 million for nine months endedSeptember 30, 2022 , which was offset by a decrease in interest revenue attributable to rates of$1.4 million due primarily to lower PPP fees between periods, as compared with the nine months endedSeptember 30, 2021 . The increase in average investment securities also resulted in$565,000 in additional interest income as compared to the prior period. Total interest income increased 8.2%, or$3.1 million , for the first nine months of 2022 compared to the first nine months of 2021. The amount of loan fee income included in total interest income was$776,000 and$3.3 million for the nine months endedSeptember 30, 2022 and 2021, respectively. This represents eight basis points and 35 basis points of yield on earning assets and net interest margin for the nine months endedSeptember 30, 2022 and 2021, respectively. Loan fee income included PPP fees of$45,000 and$2.5 million for the nine months endedSeptember 30, 2022 and 2021, respectively, which represents approximately one basis point and 27 basis points of earning asset yield and net interest margin for those nine-month periods, respectively. The cost of interest-bearing liabilities increased to 0.66% for the first nine months of 2022, as compared to 0.62% for the first nine months of 2021. While deposit mix has continued to improve as compared to the prior year, the cost of interest-bearing liabilities was impacted by the recent increases in short-term interest rates and is expected to continue to increase as short-term interest rates continue to rise. Average interest-bearing liabilities increased by$58.3 million for the nine months endedSeptember 30, 2022 compared with the first nine months of 2021 primarily due to a$94.3 million increase in average money market accounts, offset by a decrease of$67.4 million in average certificate of deposits. Total interest expense increased by 13.2% to$5.0 million for the nine months endedSeptember 30, 2022 as compared to$4.4 million for the first nine months of 2021. 34
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Table of Contents Average Balance Sheets
The following table presents the average balance sheets for the three-month
periods ended
Three Months Ended September 30,
2022 2021
Average Interest Average Average Interest Average
Balance Earned/Paid Yield/Cost Balance Earned/Paid Yield/Cost
(dollars in thousands)
ASSETS
Interest-earning assets:
Loan receivables (1)(2) $ 1,096,478 $ 13,179 4.77 % $ 952,567 $ 11,565 4.82 %
Securities
Taxable 219,410 1,592 2.88 213,173 1,183 2.20
Tax-exempt 29,615 166 2.96 28,464 168 3.12
FHLB stock 4,718 63 5.30 5,247 28 2.12
Federal funds sold and
other 28,550 121 1.68 84,737 31 0.15
Total interest-earning
assets 1,378,771 15,121 4.37 % 1,284,188 12,975 4.03 %
Less: Allowance for loan
losses (12,915 ) (12,659 )
Non-interest earning
assets 85,791 97,843
Total assets $ 1,451,647 $ 1,369,372
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing
liabilities:
Certificates of deposit
and other time deposits $ 251,608 $ 381 0.60 % $ 290,062 $ 384 0.53 %
NOW and money market
deposits 510,914 729 0.57 436,146 322 0.29
Savings accounts 158,380 132 0.33 161,799 106 0.26
FHLB advances 62,229 354 2.26 20,000 39 0.77
Junior subordinated
debentures 21,000 239 4.52 21,000 128 2.42
Subordinated capital notes 25,000 374 5.94 25,000 375 5.95
Total interest-bearing
liabilities 1,029,131 2,209 0.85 % 954,007 1,354 0.56 %
Non-interest-bearing
liabilities:
Non-interest-bearing
deposits 282,196 278,778
Other liabilities 10,974 10,031
Total liabilities 1,322,301 1,242,816
Stockholders' equity 129,346 126,556
Total liabilities and
stockholders' equity $ 1,451,647 $ 1,369,372
Net interest income $ 12,912 $ 11,621
Net interest spread 3.52 % 3.47 %
Net interest margin 3.73 % 3.61 %
--------------------------------------------------------------------------------
(1) Includes loan fees in both interest income and the calculation of yield on
loans.
(2) Loan fee income included no PPP fees in the three months ended
2022 and $1.4 million , or 43 basis points, in the three months ended
September 30, 2021 .
35--------------------------------------------------------------------------------
Table of Contents
The following table presents the average balance sheets for the nine-month
periods ended
Nine Months Ended September 30,
2022 2021
Average Interest Average Average Interest Average
Balance Earned/Paid Yield/Cost Balance Earned/Paid Yield/Cost
(dollars in thousands)
ASSETS
Interest-earning assets:
Loan receivables (1)(2) $ 1,059,609 $ 35,537 4.48 % $ 959,571 $ 33,573 4.68 %
Securities
Taxable 223,648 4,338 2.59 197,318 3,402 2.31
Tax-exempt 29,906 495 2.95 25,476 476 3.33
FHLB stock 4,982 127 3.41 5,619 87 2.07
Federal funds sold and
other 30,234 173 0.77 75,600 63 0.11
Total interest-earning
assets 1,348,379 40,670 4.05 % 1,263,584 37,601 4.00 %
Less: Allowance for loan
losses (12,291 ) (12,620 )
Non-interest earning
assets 89,330 98,339
Total assets $ 1,425,418 $ 1,349,303
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing
liabilities:
Certificates of deposit
and other time deposits $ 256,320 $ 999 0.52 % $ 323,748 $ 1,451 0.60 %
NOW and money market
deposits 499,568 1,471 0.39 405,238 961 0.32
Savings accounts 162,864 320 0.26 155,364 343 0.30
FHLB advances 44,103 502 1.52 20,203 115 0.76
Junior subordinated
debentures 21,000 546 3.48 21,000 390 2.48
Subordinated capital notes 25,000 1,126 6.02 25,000 1,126 6.02
Total interest-bearing
liabilities 1,008,855 4,964 0.66 % 950,553 4,386 0.62 %
Non-interest-bearing
liabilities:
Non-interest-bearing
deposits 276,829 268,217
Other liabilities 10,317 8,632
Total liabilities 1,296,001 1,227,402
Stockholders' equity 129,417 121,901
Total liabilities and
stockholders' equity $ 1,425,418 $ 1,349,303
Net interest income $ 35,706 $ 33,215
Net interest spread 3.39 % 3.38 %
Net interest margin 3.56 % 3.53 %
--------------------------------------------------------------------------------
(1) Includes loan fees in both interest income and the calculation of yield on
loans.
(2) Loan fee income included PPP fees of
point, for the nine months ended
basis points, for the nine months ended September 30, 2021 .
36--------------------------------------------------------------------------------
Table of Contents
Rate/Volume Analysis
The table below sets forth certain information regarding changes in interest
income and interest expense for the periods indicated. For each category of
interest-earning assets and interest-bearing liabilities, information is
provided on changes attributable to (1) changes in rate (changes in rate
multiplied by old volume); (2) changes in volume (changes in volume multiplied
by old rate); and (3) changes in rate-volume (change in rate multiplied by
change in volume). Changes in rate-volume are proportionately allocated between
rate and volume variance.
Three Months Ended September 30, Nine Months Ended September 30,
2022 vs. 2021 2022 vs. 2021
Increase (decrease) Increase (decrease)
due to change in due to change in
Net Net
Rate Volume Change
Rate Volume Change
(in thousands)
Interest-earning
assets:
Loan receivables $ (117 ) $ 1,731 $ 1,614 $ (1,432 ) $ 3,396 $ 1,964
Securities 365 42 407 390 565 955
FHLB stock 38 (3 ) 35 51 (11 ) 40
Federal funds sold
and other 124 (34 ) 90 169 (59 ) 110
Total increase
(decrease) in
interest income 410 1,736 2,146 (822 ) 3,891 3,069
Interest-bearing
liabilities:
Certificates of
deposit and other
time deposits 51 (54 ) (3 ) (174 ) (278 ) (452 )
NOW and money market
accounts 344 63 407 259 251 510
Savings accounts 28 (2 ) 26 (39 ) 16 (23 )
FHLB advances 150 165 315 177 210 387
Junior subordinated
debentures 111 - 111 156 - 156
Subordinated capital
notes (1 ) - (1 ) - - -
Total increase
(decrease) in
interest expense 683 172 855 379 199 578
Increase (decrease)
in net interest
income $ (273 ) $ 1,564 $ 1,291 $ (1,201 ) $ 3,692 $ 2,491
Non-Interest Income - The following table presents the major categories of
non-interest income for the three and nine months ended September 30, 2022 and
2021:
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
2022 2021 2022 2021
(dollars in thousands)
Service charges on deposit accounts
1,061 1,044 3,151 3,077
Income from bank owned life insurance 148 112 599 420
Net gain on sale of other real estate
owned - - - 191
Gain (loss) on sales and calls of
securities, net - 465 (3 ) 460
Gain on sale of premises held for sale - - 163 -
Other 271 232 740 656
Total non-interest income $ 2,228 $ 2,436 $ 6,722 $ 6,455
Non-interest income for the third quarter of 2022 decreased by $208,000 , or
8.5%, compared with the third quarter of 2021. The third quarter of 2021
included a $465,000 gain on the call of a corporate bond from the Bank's
available for sale securities portfolio. Compared to the third quarter of 2021,
service charges on deposit accounts increased $165,000 due to an increase in
transaction volumes.
For the nine months ended September 30, 2022 , non-interest income increased by
$267,000 , or 4.1%, to $6.7 million compared with $6.5 million for the same
period of 2021. The increase was primarily due to an increase in services
charges on deposit accounts of $421,000 due to an increase in transaction
volumes, as well as a $179,000 increase in bank owned life insurance income due
to additional policies being purchased in March 2022 . Non-interest income for
the first nine months of 2022 also included a $163,000 gain on sale of premises
held for sale from the first quarter of 2022, while the first nine months of
2021 included a $191,000 gain on sale of OREO from the second quarter of 2021,
as well as, a $465,000 gain on the call of a corporate bond from the third
quarter of 2021.
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Table of Contents
Non-interest Expense - The following table presents the major categories of non-interest expense for the three and nine months endedSeptember 30, 2022 and 2021: For the Three Months For the Nine Months Ended September 30, Ended September 30, 2022 2021 2022 2021 (dollars in thousands) Salary and employee benefits$ 4,959 $ 4,582 $ 14,174 $ 13,531 Occupancy and equipment 1,134 1,024 3,218 3,063 Deposit account related expenses 571 545 1,692 1,592 Data processing expense 402 378 1,191 1,133 Professional fees 206 219 663 701 Marketing expense 159 200 464 561 FDIC insurance 90 90 270 315 Deposit tax 99 90 297 270 Communications expense 108 153 293 520 Insurance expense 104 105 318 324 Postage and delivery 156 169 469 460 Other 709 495 1,846 1,518 Total non-interest expense$ 8,697 $ 8,050 $ 24,895 $ 23,988 Non-interest expense for the third quarter endedSeptember 30, 2022 increased$647,000 , or 8.0%, compared with the third quarter of 2021. Salaries and benefits expense increased$377,000 from the third quarter of 2021 as a result of the inflationary impact on talent acquisition and the administration of annual salary adjustments, increased health care utilization costs, and a modest increase in performance-based incentive compensation. Other non-interest expense increased$214,000 from the third quarter of 2021 primarily related to an increase in losses associated with demand deposit charge-offs and fraudulent check and debit card activity during the period. For the nine months endedSeptember 30, 2022 , non-interest expense increased$907,000 , or 3.8% to$24.9 million compared with$24.0 million for the first nine months of 2021. The increase was primarily due to an increase of$643,000 in salaries and benefits as discussed above, and a$328,000 increase in other non-interest expense primarily related to losses associated with demand deposit charge-offs and fraudulent check and debit card activity during the period.
Income Tax Expense - Effective tax rates differ from the federal statutory rate of 21% applied to income before income taxes due to the following:
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