HBCP 10-Q Quarterly Report Sept. 30, 2022

HOME BANCORP, INC.

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hbcp-20220930

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


☒			Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended: September 30, 2022


☐			Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to

Commission File Number: 001-34190

HOME BANCORP, INC.

(Exact name of Registrant as specified in its charter)


Louisiana			71-1051785
(State or Other Jurisdiction of Incorporation or Organization)			(I.R.S. Employer Identification Number)
503 Kaliste Saloom Road , Lafayette , Louisiana			70508
(Address of Principal Executive Offices)			(Zip Code)

Registrant’s telephone number, including area code: ( 337 ) 237-1960

Not Applicable

(Former Name, Former Address and Former Fiscal Year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Exchange Act:


Title of each class	Trading symbol(s)	Name of each exchange on which registered
Common Stock	HBCP	NASDAQ Stock Market

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☐

Accelerated filer

☒

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

At November 2, 2022, the registrant had 8,281,634 shares of common stock, $0.01 par value, outstanding.

HOME BANCORP, INC. and SUBSIDIARY

TABLE OF CONTENTS



PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited)	Page
	Consolidated Statements of Financial Condition	1
	Consolidated Statements of Income	2
	Consolidated Statements of Comprehensive Income	3
	Consolidated Statements of Changes in Shareholders’ Equity	4
	Consolidated Statements of Cash Flows	6
	Notes to Unaudited Consolidated Financial Statements	7
Item 2.	Management 's Discussion and Analysis of Financial Condition and Results of Operations	38
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	54
Item 4.	Controls and Procedures	54
PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	55
Item 1A.	Risk Factors	55
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	55
Item 3.	Defaults Upon Senior Securities	56
Item 4.	Mine Safety Disclosures	56
Item 5.	Other Information	56
Item 6.	Exhibits	56
SIGNATURES		57

HOME BANCORP, INC. and SUBSIDIARY

GLOSSARY OF DEFINED TERMS

Below is a listing of certain acronyms, abbreviations and defined terms, among others, used throughout this Quarterly Report on Form 10-Q, including in "Item 1. Financial Statements" and "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations." The terms "we," "our" or "us" refer to Home Bancorp, Inc. and its consolidated subsidiaries, unless the context otherwise requires.


ACL	–	Allowance for credit losses
ALL	–	Allowance for loan losses
AOCI	–	Accumulated other comprehensive income
ASC	–	Accounting Standards Codification
ASU	–	Accounting Standards Update
Bank	–	Home Bank, N. A., a wholly-owned subsidiary of the Company
BOLI	–	Bank-owned life insurance
bps	–	basis points, 100 basis points being equal to 1.0%
C&D	–	Construction and land
C&I	–	Commercial and industrial
CARES Act	–	Coronavirus Aid, Relief, and Economic Security Act
CECL	–	Current expected credit losses
Company	–	Home Bancorp, Inc., a Louisiana corporation and the holding company for Home Bank, N. A.
COVID-19	–	The novel coronavirus
CRE	–	Commercial real estate
EPS	–	Earnings per common share
FASB	–	Financial Accounting Standards Board
FHLB	–	Federal Home Loan Bank
GAAP	–	Generally Accepted Accounting Principles
LTV	–	Loan-to-value
NPA(s)	–	Nonperforming asset(s)
OCI	–	Other comprehensive income
ORE	–	Other real estate
PCD	–	Purchased credit deteriorated
PCI	–	Purchased credit impaired
PPP	–	Paycheck Protection Program
SBA	–	U.S. Small Business Association
SEC	–	U.S. Securities and Exchange Commission
TDR	–	Troubled debt restructuring
TE	–	Taxable equivalent
U.S.	–	United States

HOME BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION


	(Unaudited)		(Audited)
(dollars in thousands)	September 30, 2022		December 31, 2021
Assets
Cash and cash equivalents	$	150,556	$	601,443
Interest-bearing deposits in banks	349		349
Investment securities available for sale, at fair value	492,758		327,632
Investment securities held to maturity (fair values of $ 1,066 and $ 2,132 , respectively)	1,080		2,102
Mortgage loans held for sale	169		1,104
Loans, net of unearned income	2,303,279		1,840,093
Allowance for loan losses	( 27,351 )		( 21,089 )
Total loans, net of unearned income and allowance for loan losses	2,275,928		1,819,004
Office properties and equipment, net	43,685		43,542
Cash surrender value of bank-owned life insurance	46,019		40,361
Goodwill and core deposit intangibles	87,839		61,949
Accrued interest receivable and other assets	69,283		40,758
Total Assets	$	3,167,666	$	2,938,244
Liabilities
Deposits:
Noninterest-bearing	$	921,089	$	766,385
Interest-bearing	1,817,335		1,769,464
Total Deposits	2,738,424		2,535,849
Other borrowings	5,539		5,539
Subordinated debt, net of issuance cost	53,958		—
Long-term Federal Home Loan Bank advances	24,816		26,046
Accrued interest payable and other liabilities	28,273		18,907
Total Liabilities	2,851,010		2,586,341
Shareholders’ Equity
Preferred stock, $ 0.01 par value - 10,000,000 shares authorized; none issued	—		—
Common stock, $ 0.01 par value - 40,000,000 shares authorized; 8,273,334 and 8,526,907 shares issued and outstanding, respectively	83		85
Additional paid-in capital	164,024		164,982
Unallocated common stock held by:
Employee Stock Ownership Plan (ESOP)	( 2,142 )		( 2,410 )
Recognition and Retention Plan (RRP)	( 8 )		( 13 )
Retained earnings	197,553		188,515
Accumulated other comprehensive (loss) income	( 42,854 )		744
Total Shareholders’ Equity	316,656		351,903
Total Liabilities and Shareholders’ Equity	$	3,167,666	$	2,938,244

The accompanying Notes are an integral part of these Consolidated Financial Statements.

HOME BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
(dollars in thousands, except per share data)	2022		2021		2022		2021
Interest Income
Loans, including fees	$	29,859	$	27,045	$	79,834	$	77,362
Investment securities:
Taxable interest	2,812		1,108		6,576		3,069
Tax-exempt interest	146		81		338		262
Other investments and deposits	1,447		189		2,587		421
Total interest income	34,264		28,423		89,335		81,114
Interest Expense
Deposits	1,270		1,120		3,266		4,256
Other borrowings	53		53		160		159
Subordinated debt expense	859		—		859		—

Long-term Federal Home Loan Bank advances	105		116		321		360
Total interest expense	2,287		1,289		4,606		4,775
Net interest income	31,977		27,134		84,729		76,339
Provision (reversal) for loan losses	1,696		( 2,385 )		5,502		( 7,513 )
Net interest income after provision (reversal) for loan losses	30,281		29,519		79,227		83,852
Noninterest Income
Service fees and charges	1,300		1,260		3,722		3,478
Bank card fees	1,623		1,519		4,713		4,416
Gain on sale of loans, net	78		415		641		2,142
Income from bank-owned life insurance	231		1,938		658		2,384
Gain (loss) on sale of assets, net	18		( 3 )		17		( 460 )
Other income	224		254		795		777
Total noninterest income	3,474		5,383		10,546		12,737
Noninterest Expense
Compensation and benefits	12,128		9,809		34,870		29,160
Occupancy	2,297		1,717		6,454		5,146
Marketing and advertising	658		399		1,713		838
Data processing and communication	2,284		2,118		7,012		6,263
Professional services	331		234		1,348		685
Forms, printing and supplies	185		158		584		480
Franchise and shares tax	633		360		1,415		1,079
Regulatory fees	467		301		1,611		986
Foreclosed assets and ORE, net	101		74		493		298
Amortization of acquisition intangible	453		291		1,159		884
Provision for credit losses on unfunded commitments	146		—		448		375
Other expenses	1,040		970		3,621		2,771
Total noninterest expense	20,723		16,431		60,728		48,965
Income before income tax expense	13,032		18,471		29,045		47,624
Income tax expense	2,598		3,412		5,749		9,241
Net Income	$	10,434	$	15,059	$	23,296	$	38,383
Earnings per share:
Basic	$	1.29	$	1.80	$	2.86	$	4.56
Diluted	$	1.28	$	1.79	$	2.84	$	4.54
Cash dividends declared per common share	$	0.23	$	0.23	$	0.69	$	0.68

The accompanying Notes are an integral part of these Consolidated Financial Statements.

HOME BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
(dollars in thousands)	2022		2021		2022		2021
Net Income	$	10,434	$	15,059	$	23,296	$	38,383
Other Comprehensive Loss
Unrealized losses on available for sale investment securities	( 25,149 )		( 1,897 )		( 58,980 )		( 5,201 )
Unrealized gains on cash flow hedges	1,297		55		3,793		974
Tax effect	5,009		387		11,589		887
Other comprehensive loss, net of taxes	( 18,843 )		( 1,455 )		( 43,598 )		( 3,340 )
Comprehensive (Loss) Income	$	( 8,409 )	$	13,604	$	( 20,302 )	$	35,043

The accompanying Notes are an integral part of these Consolidated Financial Statements.

HOME BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)


(dollars in thousands, except per share data)	Common stock		Additional Paid-in capital		Unallocated Common Stock Held by ESOP		Unallocated Common Stock Held by RRP		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Total
Balance, June 30, 2021	$	87	$	165,296	$	( 2,589 )	$	( 15 )	$	171,644	$	3,389	$	337,812
Net income									15,059				15,059
Other comprehensive loss											( 1,455 )		( 1,455 )
Purchase of Company’s common stock at cost, 159,762 shares	( 2 )		( 1,596 )						( 4,386 )				( 5,984 )
Cash dividends declared, $ 0.23 per share									( 1,988 )				( 1,988 )
Common Stock issued under incentive plans, net of shares surrendered in payment, including tax benefit, 3,549 shares	—		87						( 2 )				85
Exercise of stock options	—		26										26
RRP shares released for allocation			( 1 )				1						—
ESOP shares released for allocation			269		90								359
Share-based compensation cost			235										235
Balance, September 30, 2021	$	85	$	164,316	$	( 2,499 )	$	( 14 )	$	180,327	$	1,934	$	344,149
Balance, June 30, 2022	$	84	$	164,177	$	( 2,231 )	$	( 9 )	$	191,114	$	( 24,011 )	$	329,124
Net income									10,434				10,434
Other comprehensive loss											( 18,843 )		( 18,843 )
Purchase of Company’s common stock at cost, 77,021 shares	( 1 )		( 770 )						( 2,084 )				( 2,855 )
Cash dividends declared, $ 0.23 per share									( 1,910 )				( 1,910 )
Common Stock issued under incentive plans, net of shares surrendered in payment, including tax benefit, 3,260 shares	—		97						( 1 )				96
Exercise of stock options	—		53										53
RRP shares released for allocation			( 1 )				1						—
ESOP shares released for allocation			309		89								398
Share-based compensation cost			159										159
Balance, September 30, 2022	$	83	$	164,024	$	( 2,142 )	$	( 8 )	$	197,553	$	( 42,854 )	$	316,656

The accompanying Notes are an integral part of these Consolidated Financial Statements.

HOME BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY - CONTINUED

(Unaudited)


(dollars in thousands, except per share data)	Common stock		Additional Paid-in capital		Unallocated Common Stock Held by ESOP		Unallocated Common Stock Held by RRP		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Total
Balance, December 31, 2020	$	87	$	164,988	$	( 2,767 )	$	( 22 )	$	154,282	$	5,274	$	321,842

Net income									38,383				38,383
Other comprehensive loss											( 3,340 )		( 3,340 )
Purchase of Company’s common stock at cost, 243,497 shares	( 2 )		( 2,433 )						( 6,363 )				( 8,798 )
Cash dividends declared, $ 0.68 per share									( 5,906 )				( 5,906 )
Common Stock issued under incentive plans, net of shares surrendered in payment, including tax benefit, 22,273 shares	—		245						( 69 )				176
Exercise of stock options	—		80										80
RRP shares released for allocation			( 8 )				8						—
ESOP shares released for allocation			849		268								1,117
Share-based compensation cost			595										595
Balance, September 30, 2021	$	85	$	164,316	$	( 2,499 )	$	( 14 )	$	180,327	$	1,934	$	344,149
Balance, December 31, 2021	$	85	$	164,982	$	( 2,410 )	$	( 13 )	$	188,515	$	744	$	351,903
Net income									23,296				23,296
Other comprehensive loss											( 43,598 )		( 43,598 )
Purchase of Company’s common stock at cost, 287,035 shares	( 2 )		( 2,868 )						( 8,407 )				( 11,277 )
Cash dividends declared, $ 0.69 per share									( 5,790 )				( 5,790 )
Common Stock issued under incentive plans, net of shares surrendered in payment, including tax benefit, 22,837 shares			304						( 61 )				243
Exercise of stock options	—		182										182
RRP shares released for allocation			( 5 )				5						—
ESOP shares released for allocation			933		268								1,201
Share-based compensation cost			496										496
Balance, September 30, 2022	$	83	$	164,024	$	( 2,142 )	$	( 8 )	$	197,553	$	( 42,854 )	$	316,656

The accompanying Notes are an integral part of these Consolidated Financial Statements.

HOME BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	For the Nine Months Ended September 30,
(dollars in thousands)	2022		2021
Cash flows from operating activities:
Net income	$	23,296	$	38,383
Adjustments to reconcile net income to net cash provided by operating activities:
Provision (reversal) for loan losses	5,502		( 7,513 )
Depreciation	2,538		2,301
Amortization and accretion of purchase accounting valuations and intangibles	3,020		2,762

Federal Home Loan Bank stock dividends	( 22 )		( 11 )
Net amortization of discount on investments	871		1,484
Amortization of subordinated debt issuance cost	60		—
Gain on loans sold, net	( 641 )		( 2,142 )
Proceeds, including principal payments, from loans held for sale	64,755		165,995
Originations of loans held for sale	( 63,179 )		( 157,770 )
(Gain) loss on sale of assets, net	( 17 )		460
Non-cash compensation	1,697		1,712
Deferred income tax (benefit) expense	( 425 )		1,747
Increase in accrued interest receivable and other assets	( 9,207 )		( 3,612 )
Increase in cash surrender value of bank-owned life insurance	( 658 )		( 667 )
Increase in accrued interest payable and other liabilities	9,085		793
Net cash provided by operating activities	36,675		43,922
Cash flows from investing activities:
Purchases of securities available for sale	( 236,236 )		( 125,380 )
Proceeds from maturities, prepayments and calls on securities available for sale	44,692		64,278
Proceeds from maturities, prepayments and calls on securities held to maturity	1,000		800
Proceeds from sales of securities available for sale	—		5,068
(Increase) decrease in loans, net	( 151,039 )		99,621

Proceeds from sale of foreclosed assets	2,557		2,274
Purchases of office properties and equipment	( 1,904 )		( 1,998 )
Net cash disbursed in sale of banking center	( 11,182 )		—
Net cash disbursed in business combination	( 16,123 )		—
Purchase of bank-owned life insurance	( 5,000 )		—
Proceeds from bank-owned life insurance	—		1,717
Proceeds from sale of office properties and equipment	73		400

Net cash (used in) provided by investing activities	( 373,162 )		46,780
Cash flows from financing activities:
(Decrease) increase in deposits, net	( 150,411 )		151,896
Borrowings on Federal Home Loan Bank advances	—		—
Repayments of Federal Home Loan Bank advances	( 1,245 )		( 2,408 )
Proceeds from issuance of subordinated debt, net of issuance cost	53,898		—
Proceeds from exercise of stock options	182		80
Issuance of stock under incentive plans, net	243		176
Dividends paid to shareholders	( 5,790 )		( 5,906 )
Purchase of Company’s common stock	( 11,277 )		( 8,798 )
Net cash (used in) provided by financing activities	( 114,400 )		135,040
Net change in cash and cash equivalents	( 450,887 )		225,742
Cash and cash equivalents, beginning	601,443		187,952
Cash and cash equivalents, ending	$	150,556	$	413,694

The accompanying Notes are an integral part of these Consolidated Financial Statements.

HOME BANCORP, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation

The accompanying unaudited consolidated financial statements of the Company were prepared in accordance with instructions for Form 10-Q and Regulation S-X and do not include information or footnotes necessary for a complete presentation of financial condition, results of operations, comprehensive income, changes in shareholders’ equity and cash flows in conformity with accounting principles generally accepted in the United States of America. However, in the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the financial statements have been included. Certain reclassifications have been made to prior period balances to conform to the current period presentation. The results of operations for the three and nine months ended September 30, 2022 and 2021 are not necessarily indicative of the results which may be expected for the entire fiscal year. These statements should be read in conjunction with the Consolidated Financial Statements and notes thereto included in the Company’s Annual Report on Form 10-K filed with the SEC for the year ended December 31, 2021.

Critical Accounting Policies and Estimates

Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties and could reflect materially different results under different assumptions and conditions. Methodologies the Company uses when applying critical accounting policies and developing critical accounting estimates are included in its Annual Report on Form 10-K for the year ended December 31, 2021.

There have been no material changes from the critical accounting policies previously disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2021. In preparing its financial statements, the Company is required to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Reclassifications

Certain reclassifications have been made to prior period balances to conform to the current period presentation.

2. Recent Accounting Pronouncements

Issued but Not Yet Adopted Accounting Standards

Accounting Standard Update (“ASU”) ASU 2022-01, “Derivatives and Hedging (Topic 815)” (“ASU 2022-01”) clarifies the guidance in ASC 815 on fair value hedge accounting of interest rate risk for portfolios and financial assets. Among other things, the amended guidance established the “last-of-layer” method for making the fair value hedge accounting for these portfolios more accessible and renamed that method the “portfolio layer” method. ASU 2022-01 is effective January 1, 2023 and is not expected to have a significant impact on our consolidated financial statements.

ASU 2022-02, “Financial Instruments - Credit Losses (Topic 326)” (“ASU 2022-02”) eliminates the guidance on troubled debt restructurings and requires entities to evaluate all loan modifications to determine if they result in a new loan or a continuation of the existing loan. ASU 2022-02 also requires that entities disclose current-period gross charge-offs by year of origination for loans and leases. ASU 2022-02 is effective January 1, 2023 and is not expected to have a significant impact on our financial statement disclosures.

ASU 2022-03, "Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions" was issued to improve fair value guidance for equity securities subject to contractual sale restrictions. These amendments clarify that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. The amendments also clarify that an entity cannot, as a separate unit of account, recognize and measure a contractual sale restriction. The amendments also require additional disclosures for equity securities subject to contractual sale restrictions. These amendments are effective for fiscal years beginning after December 15, 2023, and are not expected to have a significant impact on our financial statement disclosures.

3. Acquisition Activity

On March 26, 2022, the Company completed the acquisition of Friendswood Capital Corporation (“Friendswood”), the former holding company of Texan Bank, N. A. (“Texan Bank”) of Houston, Texas. Shareholders of Friendswood received $ 15.34 per share in cash, yielding an aggregate purchase price of $ 64,864,000 .

The acquisition was accounted for under the purchase method of accounting in accordance with ASC 805, Business Combinations. In accordance with ASC 805, the Company recorded goodwill totaling $ 22,452,000 from the acquisition as a result of consideration transferred over net assets acquired. Both the assets acquired and liabilities assumed were recorded at their respective acquisition date fair values. Identifiable intangible assets, including core deposit intangible assets, were recorded at fair value.

The fair value estimates of the Friendswood assets and liabilities are preliminary and require management to make estimates about discount rates, expected cash flows, market conditions, and other future events that are highly subjective in nature and are subject to refinement for a one year period after the date of the acquisition. Under current accounting principles, the Company’s estimates of fair values may be adjusted for a period of up to one year from the acquisition date.

The assets acquired and liabilities assumed, as well as the adjustments to record the assets and liabilities at fair value, are presented in the following table as of March 26, 2022.


(dollars in thousands)	As Acquired		Fair Value Adjustments			As recorded by Home Bancorp
Assets
Cash and cash equivalents	$	48,741	$	—		$	48,741
Investment securities	33,679		( 268 )		(a)	33,411
Loans	320,050		( 2,558 )		(b)	317,492
Repossessed assets	950		( 246 )		(c)	704
Office properties and equipment, net	1,663		( 116 )		(d)	1,547
Core deposit intangible	—		4,597		(e)	4,597
Other assets	9,687		( 1,688 )		(f)	7,999
Total assets acquired	$	414,770	$	( 279 )		$	414,491
Liabilities
Noninterest-bearing deposits	$	97,668	—			$	97,668
Interest-bearing deposits	269,301		1,022		(g)	270,323
Other liabilities	3,873		215		(h)	4,088
Total liabilities assumed	$	370,842	$	1,237		$	372,079
Excess of assets acquired over liabilities assumed						42,412
Cash consideration paid						( 64,864 )
Total goodwill recorded						$	22,452

(a) The adjustment represents the market value adjustments on Friendswood's investment securities based on their interest rate risk and credit risk.

(b) The adjustment to reflect the fair value of loans includes:

• Adjustment of $ 3.0 million to reflect the removal of Friendswood's allowance for loan losses, net of the allowance for credit losses on PCD loans at the acquisition date, in accordance with ASC 805.

• Net discount of $ 5.5 million for all remaining loans determined not to be within the scope of ASC 310-30 which totaled $ 309.8 million. In determining the fair value of the loans which were not within the scope of ASC 310-30, the acquired loan portfolio was evaluated based on risk characteristics and other credit and market criteria to determine credit quality and interest adjustments to the fair value of the loans acquired. The acquired loan balance was reduced by the net amount of the credit quality and interest adjustments in determining the fair value of the loans.

(c) The adjustment represents the write-down of the book value of Friendswood's repossessed assets to their estimated fair value, as adjusted for estimated costs to sell.

(d) The adjustment represents the write-down of the book value of Friendswood’s office properties and equipment to their estimated fair value at the acquisition date.

(e) The adjustment represents the value of the core deposit base assumed in the acquisition. The core deposit asset was recorded as an identifiable intangible asset and will be amortized on an accelerated basis over the estimated life of the deposit base of 10 years.

(f) The adjustment is to record the deferred tax asset on the transaction and the estimated fair value on other assets.

(g) Adjustment to reflect the fair value of certificates of deposit acquired based on current interest rates for similar instruments. The adjustment will be recognized using a level yield amortization method based on maturities of the deposit liabilities.

(h) Adjustment to reflect the fair value of liabilities at the acquisition date.

The Company acquired loans at the acquisition date of Friendswood with more than significant deterioration of credit quality since origination (purchased credit deteriorated loans or "PCD" loans). The carrying amount of these loans at acquisition was as follows:


(in thousands)	Acquisition Date of March 26, 2022
Purchase price of PCD loans at acquisition	$	10,228
Allowance for credit losses on PCD loans at acquisition	1,415
Par value of PCD acquired loans at acquisition	$	11,643

The following pro forma information for the nine months ended September 30, 2022 and 2021 reflects the Company’s estimated consolidated results of operations as if the acquisition of Friendswood occurred at January 1, 2021, unadjusted for potential cost savings. Merger-related costs for the nine months ended September 30, 2022 and 2021 were approximately $ 1,971,000 and $ 299,000 , respectively, and have been excluded from the pro-forma information presented below.


(dollars in thousands except per share information)	2022		2021
Net interest income	$	89,764	$	91,007
Noninterest income	11,450		15,024
Noninterest expense	64,263		60,522
Net income	24,845		41,887
Earnings per share - basic	$	3.07	$	4.98
Earnings per share - diluted	3.05		4.95

The selected pro forma financial information presented above is for illustrative purposes only and is not necessarily indicative of the financial results of the combined companies had the acquisition actually been completed at the beginning of the periods presented, nor does it indicate future results for any other interim or full-year period.

4. Investment Securities

The following tables summarize the Company’s available for sale and held to maturity investment securities at September 30, 2022 and December 31, 2021.


(dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
September 30, 2022
Available for sale:
U.S. agency mortgage-backed	$	361,235	$	7	$	42,025	$	319,217
Collateralized mortgage obligations	95,699		—		5,163		90,536
Municipal bonds	67,629		2		10,726		56,905
U.S. government agency	20,849		2		1,238		19,613
Corporate bonds	6,979		—		492		6,487
Total available for sale	$	552,391	$	11	$	59,644	$	492,758
Held to maturity:
Municipal bonds	$	1,080	$	—	$	14	$	1,066
Total held to maturity	$	1,080	$	—	$	14	$	1,066


(dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
December 31, 2021
Available for sale:
U.S. agency mortgage-backed	$	234,720	$	1,793	$	2,740	$	233,773
Collateralized mortgage obligations	31,356		557		1		31,912
Municipal bonds	51,094		402		777		50,719
U.S. government agency	5,615		8		9		5,614
Corporate bonds	5,500		114		—		5,614
Total available for sale	$	328,285	$	2,874	$	3,527	$	327,632
Held to maturity:
Municipal bonds	$	2,102	$	30	$	—	$	2,132
Total held to maturity	$	2,102	$	30	$	—	$	2,132

The estimated fair value and amortized cost by contractual maturity of the Company’s investment securities as of September 30, 2022 are shown in the following tables. Securities are classified according to their contractual maturities without consideration of principal amortization, potential prepayments or call options. The expected maturity of a security may differ from its contractual maturity because of prepayments or the exercise of call options. Accordingly, actual maturities may differ from contractual maturities.


(dollars in thousands)	One Year or Less		After One Year through Five Years		After Five Years through Ten Years		After Ten Years		Total
Fair Value
Available for sale:
U.S. agency mortgage-backed	$	4,104	$	38,846	$	121,211	$	155,056	$	319,217
Collateralized mortgage obligations	—		50,855		16,609		23,072		90,536
Municipal bonds	500		5,330		21,401		29,674		56,905
U.S. government agency	—		5,971		13,292		350		19,613
Corporate bonds	—		—		6,487		—		6,487
Total available for sale	$	4,604	$	101,002	$	179,000	$	208,152	$	492,758
Held to maturity:
Municipal bonds	$	—	$	1,066	$	—	$	—	$	1,066
Total held to maturity	$	—	$	1,066	$	—	$	—	$	1,066

(dollars in thousands)	One Year or Less		After One Year through Five Years		After Five Years through Ten Years		After Ten Years		Total
Amortized Cost
Available for sale:
U.S. agency mortgage-backed	$	4,126	$	41,683	$	135,526	$	179,900	$	361,235
Collateralized mortgage obligations	—		53,238		18,154		24,307		95,699
Municipal bonds	500		5,407		24,284		37,438		67,629
U.S. government agency	—		6,083		14,414		352		20,849
Corporate bonds	—		—		6,979		—		6,979
Total available for sale	$	4,626	$	106,411	$	199,357	$	241,997	$	552,391
Held to maturity:
Municipal bonds	$	—	$	1,080	$	—	$	—	$	1,080
Total held to maturity	$	—	$	1,080	$	—	$	—	$	1,080

Management evaluates securities for impairment from credit losses at least quarterly, and more frequently when economic and market conditions warrant such evaluations. Consideration is given to numerous factors including, but not limited to, the extent to which the fair value is less than the amortized cost basis; adverse conditions causing changes in the financial condition of the issuer of the security or underlying loan guarantors; changes to the rating of the security by a rating agency; and the Company’s intent to sell a security or whether it is more likely than not the Company will be required to sell the security before the recovery of its amortized cost, which may extend to maturity.

The Company performs a process to determine whether the decline in the fair value of securities has resulted from credit losses or other factors. This process involves evaluating each security for impairment by monitoring credit performance, collateral type, collateral geography, bond credit support, loan-to-value ratios, credit scores, loss severity levels, pricing levels, downgrades by rating agencies, cash flow projections and other factors as indicators of potential credit issues. If this evaluation indicates the existence of credit losses, the Company compares the present value of cash flows expected to be collected from the security with the amortized cost basis. If the present value of expected cash flows is less than the amortized cost basis, an ACL is recorded, limited by the amount that the fair value of the security is less than its amortized cost.

The Company's investment securities with unrealized losses, aggregated by type and length of time that individual securities have been in a continuous loss position, are summarized in the following tables.


(dollars in thousands)	Less Than 1 Year				Over 1 Year				Total
September 30, 2022	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Available for sale:
U.S. agency mortgage-backed	$	221,881	$	22,585	$	96,763	$	19,440	$	318,644	$	42,025
Collateralized mortgage obligations	89,820		5,160		698		3		90,518		5,163
Municipal bonds	36,410		4,846		19,493		5,880		55,903		10,726
U.S. government agency	17,862		1,232		666		6		18,528		1,238
Corporate bonds	3,301		178		3,186		314		6,487		492
Total available for sale	$	369,274	$	34,001	$	120,806	$	25,643	$	490,080	$	59,644
Held to maturity:
Municipal bonds	$	1,066	$	14	$	—	$	—	$	1,066	$	14
Total held to maturity	$	1,066	$	14	$	—	$	—	$	1,066	$	14


(dollars in thousands)	Less Than 1 Year				Over 1 Year				Total
December 31, 2021	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Available for sale:
U.S. agency mortgage-backed	$	158,908	$	2,382	$	11,575	$	358	$	170,483	$	2,740
Collateralized mortgage obligations	254		1		988		—		1,242		1
Municipal bonds	29,047		719		1,228		58		30,275		777
U.S. government agency	—		—		1,001		9		1,001		9
Corporate bonds	3,499		—		—		—		3,499		—
Total available for sale	$	191,708	$	3,102	$	14,792	$	425	$	206,500	$	3,527
Held to maturity:
Municipal bonds	$	—	$	—	$	—	$	—	$	—	$	—
Total held to maturity	$	—	$	—	$	—	$	—	$	—	$	—

At September 30, 2022, 324 of the Company’s debt securities had unrealized losses totaling 10.8 % of the individual securities’ amortized cost basis and 10.8 % of the Company’s total amortized cost basis of the investment securities portfolio. At such date, 51 of the 324 securities had been in a continuous loss position for over 12 months. Management has determined that the declines in the fair value of these securities were not attributable to credit losses. As a result, no ACL was recorded for available for sale investment securities at September 30, 2022.

At September 30, 2022, it was determined that no ACL was required for the Company's held-to-maturity investment securities. The Company monitors credit quality of debt securities held-to-maturity through the use of credit ratings. The following tables present the amortized cost of the Company's held-to-maturity securities by credit quality rating at September 30, 2022 and December 31, 2021.


	Credit Ratings
(dollars in thousands)	AAA/AA/A		BBB/BB/B		Total
September 30, 2022
Held to maturity:
Municipal bonds	$	1,080	$	—	$	1,080


	Credit Ratings
(dollars in thousands)	AAA/AA/A		BBB/BB/B		Total
December 31, 2021
Held to maturity:
Municipal bonds	$	2,102	$	—	$	2,102

Accrued interest receivable on the Company's investment securities was $ 1,548,000 and $ 942,000 at September 30, 2022 and December 31, 2021, respectively. These amounts are recorded in accrued interest receivable and other assets on the Consolidated Statements of Financial Condition.

At September 30, 2022 and December 31, 2021, the Company had $ 182,022,000 and $ 156,492,000 , respectively, of securities pledged to secure public deposits.

5. Earnings Per Share

Earnings per common share was computed based on the following:


	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands, except per share data)	2022		2021		2022		2021
Numerator:
Net income available to common shareholders	$	10,434	$	15,059	$	23,296	$	38,383
Denominator:
Weighted average common shares outstanding	8,089		8,354		8,162		8,413
Effect of dilutive securities:
Restricted stock	11		12		14		12
Stock options	38		40		43		35
Weighted average common shares outstanding – assuming dilution	8,138		8,406		8,219		8,460
Basic earnings per common share	$	1.29	$	1.80	$	2.86	$	4.56
Diluted earnings per common share	$	1.28	$	1.79	$	2.84	$	4.54

Options for 75,789 and 106,190 shares of common stock were not included in the computation of diluted EPS for the three months ended September 30, 2022 and 2021, respectively, because the effect of those shares was anti-dilutive. For the nine months ended September 30, 2022 and 2021, options on 66,866 and 98,262 , respectively, shares of common stock were not included in the computation of diluted EPS because the effect of these shares was anti-dilutive.

6. Credit Quality and Allowance for Credit Losses

The following briefly describes the distinction between originated and acquired loans and certain significant accounting policies.

Loans

Loans are reported at the principal balance outstanding net of unearned income and fair value discounts, if applicable. Interest on loans and the accretion of unearned income are computed in a manner that approximates a level yield on recorded principal. Interest on loans is recorded as income is earned. The accrual of interest is discontinued when it is probable the borrower will not be able to meet payment obligations as they become due. It is our policy, with certain limited exceptions, to discontinue accruing interest and reverse any interest accrued on any loan which is 90 days or more past due. Interest income is not accrued on these loans until the borrower’s financial condition and payment record demonstrate an ability to service the debt. If it is determined that all or part of a loan is uncollectible, the potion of the loan deemed uncollectible is charged to the allowance for credit losses.

Originated vs. Acquired Loans

"Originated loans" are loans that were originated for investment by the Company. Loans that were acquired as a result of business combinations are referred to as “acquired loans” and are recorded at their estimated fair value on the acquisition date. The Company's acquired loans purchased prior to the adoption of ASC Topic 326 on January 1, 2020 were initially classified as either purchased credit impaired (“PCI”) loans (i.e., loans that reflect credit deterioration since origination and for which it was probable at acquisition that the Company would be unable to collect all contractually required payments) or purchased non-impaired loans (i.e., “performing acquired loans”). The Company estimated the fair value of PCI loans based on the amount and timing of expected principal, interest and other cash flows for each loan. The excess of the loan’s contractual principal and interest payments over all cash flows expected to be collected at acquisition was considered an amount that should not be accreted. These credit discounts (“nonaccretable marks”) were included in the determination of the initial fair value for acquired loans; therefore, no allowance for credit losses was recorded at the acquisition date. Differences between the estimated fair values and expected cash flows of acquired loans at the acquisition date that were not credit-based (“accretable marks”) were subsequently accreted to interest income over the estimated life of the loans. Subsequent to the acquisition date for PCI loans, increases in cash flows over those expected at the acquisition date resulted in a move of the discount from nonaccretable to accretable, while decreases in expected cash flows after the acquisition date were recognized through the provision for credit losses.

Subsequent to January 1, 2020, acquired loans that have evidence of more-than-insignificant deterioration in credit quality since origination are considered purchased credit deteriorated (“PCD”) loans. At acquisition, an estimate of expected credit losses is made for PCD loans. This initial allowance for credit losses is allocated to individual PCD loans and added to the purchase price or acquisition date fair value to establish the initial amortized cost basis of the PCD loans. Any difference between the unpaid principal balance of PCD loans and the amortized cost basis is considered to relate to noncredit factors, resulting in a discount or premium that is amortized to interest income. For acquired loans not deemed PCD loans at acquisition, the difference between the initial fair value mark and the unpaid principal balance are recognized in interest income over the estimated life of the loans. In addition, an initial allowance for expected credit losses is estimated and recorded as provision expense at the acquisition date. The subsequent measurement of expected credit losses for all acquired loans is the same as the subsequent measurement of expected credit losses for originated loans.

Allowance for Credit Losses

Due to the adoption of ASC Topic 326 on January 1, 2020, management maintains, based on current and forecasted information, an allowance for credit losses ("ACL") that reflects a current estimate of expected credit losses ("CECL") for the estimated life of the loan portfolio at reporting periods subsequent to the adoption date.

The ACL, which equals the sum of the ALL and the ACL on unfunded lending commitments, is established through provisions for credit losses. Management recalculates the ACL at least quarterly to reassess the estimate of credit losses for the total portfolio at the relevant reporting date. Under ASC Topic 326, the ACL is measured on a pool basis when similar risk characteristics exist. For each pool of loans, management also evaluates and applies qualitative adjustments to the calculated ACL based on several factors, including, but not limited to, changes in current and expected future economic conditions, changes in industry experience and industry loan concentrations, changes in the volume and severity of nonperforming assets, changes in lending policies and personnel and changes in the competitive and regulatory environment of the banking industry. Loans that do not share similar risk characteristics are individually evaluated and are excluded from the pooled loan analysis.

different conditions or assumptions. Federal regulatory agencies, as an integral part of their examination process, periodically review our ACL. Such agencies may require management to make additional provisions for estimated losses based upon judgments different from those of management.

We continue to monitor and modify our ACL as conditions warrant. No assurance can be given that our level of ACL will cover all of the losses on our loans or that future adjustments to the ACL will not be necessary if economic and other conditions differ substantially from the conditions used by management to determine the current level of the ACL.

The Company’s loans, net of unearned income, consisted of the following as of the dates indicated.


(dollars in thousands)	September 30, 2022		December 31, 2021
Real estate loans:
One- to four-family first mortgage	$	376,028	$	350,843
Home equity loans and lines	60,624		60,312
Commercial real estate	1,086,656		801,624
Construction and land	328,753		259,652
Multi-family residential	97,212		90,518
Total real estate loans	1,949,273		1,562,949
Other loans:
Commercial and industrial	320,900		244,123
Consumer	33,106		33,021
Total other loans	354,006		277,144
Total loans	$	2,303,279	$	1,840,093

Loans increased during the first quarter of 2022 with the addition of Friendswood's loan portfolio, which amounted to $ 317.5 million on March 26, 2022 (the date of acquisition). The net investment in PPP loans, which is included in commercial and industrial loans, was $ 7,094,000 and $ 43,637,000 at September 30, 2022 and December 31, 2021, respectively.

The net discount on the Company’s acquired loans was $ 7,616,000 and $ 4,289,000 at September 30, 2022 and December 31, 2021, respectively. In addition, loan balances as of September 30, 2022 and December 31, 2021 are reported net of unearned income of $ 4,244,000 and $ 4,924,000 , respectively. Unearned income at September 30, 2022 and December 31, 2021 included PPP deferred lender fees of $ 103,000 and $ 1,301,000 , respectively.

Accrued interest receivable on the Company's loans was $ 7,742,000 and $ 6,496,000 at September 30, 2022 and December 31, 2021, respectively, and is excluded from the estimate of the ACL. Those amounts are recorded in accrued interest receivable and other assets on the Consolidated Statements of Financial Condition.

Allowance for Credit Losses

The ACL, which includes the ALL and the ACL on unfunded lending commitments, and recorded investment in loans as of the dates indicated are as follows.


	September 30, 2022
(dollars in thousands)	Collectively Evaluated		Individually Evaluated		Total
Allowance for credit losses:
One- to four-family first mortgage	$	2,293	$	32	$	2,325
Home equity loans and lines	500		—		500
Commercial real estate	12,504		1,193		13,697
Construction and land	4,973		—		4,973
Multi-family residential	498		—		498
Commercial and industrial	4,523		188		4,711
Consumer	647		—		647
Total allowance for loan losses	$	25,938	$	1,413	$	27,351

Unfunded lending commitments (1)	$	2,263	$	—	$	2,263
Total allowance for credit losses	$	28,201	$	1,413	$	29,614


	September 30, 2022
(dollars in thousands)	Collectively Evaluated		Individually Evaluated (2)		Total
Loans:
One- to four-family first mortgage	$	375,916	$	112	$	376,028
Home equity loans and lines	60,624		—		60,624
Commercial real estate	1,075,964		10,692		1,086,656
Construction and land	328,753		—		328,753
Multi-family residential	97,212		—		97,212
Commercial and industrial	320,656		244		320,900
Consumer	33,020		86		33,106
Total loans	$	2,292,145	$	11,134	$	2,303,279


	December 31, 2021
(dollars in thousands)	Collectively Evaluated		Individually Evaluated		Total
Allowance for credit losses:
One- to four-family first mortgage	$	1,944	$	—	$	1,944
Home equity loans and lines	508		—		508
Commercial real estate	10,207		247		10,454
Construction and land	3,572		—		3,572
Multi-family residential	457		—		457
Commercial and industrial	3,095		425		3,520
Consumer	634		—		634
Total allowance for loan losses	$	20,417	$	672	$	21,089

Unfunded lending commitments (1)	$	1,815	$	—	$	1,815
Total allowance for credit losses	$	22,232	$	672	$	22,904


	December 31, 2021
(dollars in thousands)	Collectively Evaluated		Individually Evaluated (2)		Total
Loans:
One- to four-family first mortgage	$	350,843	$	—	$	350,843
Home equity loans and lines	60,312		—		60,312
Commercial real estate	797,751		3,873		801,624
Construction and land	259,652		—		259,652
Multi-family residential	90,518		—		90,518
Commercial and industrial	243,379		744		244,123
Consumer	33,021		—		33,021
Total loans	$	1,835,476	$	4,617	$	1,840,093

(1) The ACL on unfunded lending commitments is recorded within accrued interest payable and other liabilities on the Consolidated Statements of Financial Condition.

(2) Three and zero PCD loans were individually evaluated at September 30, 2022 and December 31, 2021, respectively.

A summary of activity in the ACL for the nine months ended September 30, 2022 and September 30, 2021 follows.


	Nine Months Ended September 30, 2022
(dollars in thousands)	Beginning Balance		Allowance for Acquired PCD Loans (1)		Charge-offs		Recoveries		Provision (Reversal)		Ending Balance
Allowance for credit losses:
One- to four-family first mortgage	$	1,944	$	—	$	—	$	6	$	375	$	2,325
Home equity loans and lines	508		—		—		7		( 15 )		500
Commercial real estate	10,454		1,220		( 270 )		—		2,293		13,697
Construction and land	3,572		—		—		—		1,401		4,973
Multi-family residential	457		—		—		—		41		498
Commercial and industrial	3,520		195		( 750 )		468		1,278		4,711
Consumer	634		—		( 240 )		124		129		647
Total allowance for loan losses	$	21,089	$	1,415	$	( 1,260 )	$	605	$	5,502	$	27,351

Unfunded lending commitments	$	1,815	$	—	$	—	$	—	$	448	$	2,263
Total allowance for credit losses	$	22,904	$	1,415	$	( 1,260 )	$	605	$	5,950	$	29,614


	Nine Months Ended September 30, 2021
(dollars in thousands)	Beginning Balance		Charge-offs		Recoveries		Provision (Reversal)		Ending Balance
Allowance for credit losses:
One- to four-family first mortgage	$	3,065	$	( 176 )	$	13	$	( 757 )	$	2,145
Home equity loans and lines	676		( 6 )		6		( 155 )		521
Commercial real estate	18,851		( 1,024 )		—		( 4,500 )		13,327
Construction and land	4,155		—		63		( 590 )		3,628
Multi-family residential	1,077		—		—		( 450 )		627
Commercial and industrial	4,276		( 522 )		307		( 811 )		3,250
Consumer	863		( 79 )		117		( 250 )		651
Total allowance for loan losses	$	32,963	$	( 1,807 )	$	506	$	( 7,513 )	$	24,149

Unfunded lending commitments	$	1,425	$	—	$	—	$	375	$	1,800
Total allowance for credit losses	$	34,388	$	( 1,807 )	$	506	$	( 7,138 )	$	25,949

(1) On January 1, 2020 the Company adopted ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which introduced a new model known as CECL.

Credit Quality

The following tables present the Company’s loan portfolio by credit quality classification and origination year as of September 30, 2022 and December 31, 2021.


	September 30, 2022
	Term Loans by Origination Year
(dollars in thousands)	2022		2021		2020		2019		2018		Prior		Revolving Loans		Revolving Loans Converted to Term Loans		Total
One- to four-family first mortgage:
Pass	$	79,286	$	80,482	$	39,464	$	35,406	$	27,804	$	99,681	$	7,975	$	1,715	$	371,813
Special Mention	150		189		—		—		—		358		—		500		1,197
Substandard	277		29		392		93		172		2,055		—		—		3,018
Doubtful	—		—		—		—		—		—		—		—		—
Total one- to four-family first mortgages	$	79,713	$	80,700	$	39,856	$	35,499	$	27,976	$	102,094	$	7,975	$	2,215	$	376,028
Home equity loans and lines:
Pass	$	1,460	$	1,554	$	804	$	1,165	$	633	$	3,579	$	51,264	$	132	$	60,591
Special Mention	—		—		—		—		—		—		—		—		—
Substandard	—		—		—		—		—		33		—		—		33
Doubtful	—		—		—		—		—		—		—		—		—
Total home equity loans and lines	$	1,460	$	1,554	$	804	$	1,165	$	633	$	3,612	$	51,264	$	132	$	60,624
Commercial real estate:
Pass	$	232,390	$	273,789	$	206,929	$	156,285	$	68,110	$	102,580	$	29,227	$	443	$	1,069,753
Special Mention	1,118		—		350		585		—		351		751		—		3,155
Substandard	101		—		170		5,476		534		7,467		—		—		13,748
Doubtful	—		—		—		—		—		—		—		—		—
Total commercial real estate loans	$	233,609	$	273,789	$	207,449	$	162,346	$	68,644	$	110,398	$	29,978	$	443	$	1,086,656
Construction and land:
Pass	$	119,984	$	141,095	$	32,738	$	20,991	$	3,671	$	3,602	$	4,013	$	1,618	$	327,712
Special Mention	184		533		—		—		—		—		—		—		717
Substandard	87		—		151		—		—		86		—		—		324
Doubtful	—		—		—		—		—		—		—		—		—
Total construction and land loans	$	120,255	$	141,628	$	32,889	$	20,991	$	3,671	$	3,688	$	4,013	$	1,618	$	328,753


	September 30, 2022
	Term Loans by Origination Year
(dollars in thousands)	2022		2021		2020		2019		2018		Prior		Revolving Loans		Revolving Loans Converted to Term Loans		Total
Multi-family residential:
Pass	$	25,111	$	20,687	$	26,163	$	13,207	$	2,269	$	3,351	$	176	$	2,859	$	93,823
Special Mention	—		—		—		—		3,312		—		—		—		3,312
Substandard	—		—		—		—		77		—		—		—		77
Doubtful	—		—		—		—		—		—		—		—		—
Total multi-family residential loans	$	25,111	$	20,687	$	26,163	$	13,207	$	5,658	$	3,351	$	176	$	2,859	$	97,212
Commercial and industrial:
Pass	$	81,508	$	53,550	$	17,678	$	11,214	$	12,140	$	3,337	$	136,107	$	672	$	316,206
Special Mention	941		—		278		—		7		—		1,154		—		2,380
Substandard	—		—		1,946		—		—		17		325		26		2,314
Doubtful	—		—		—		—		—		—		—		—		—
Total commercial and industrial loans	$	82,449	$	53,550	$	19,902	$	11,214	$	12,147	$	3,354	$	137,586	$	698	$	320,900
Consumer:
Pass	$	6,165	$	2,573	$	1,759	$	733	$	173	$	13,643	$	7,509	$	5	$	32,560
Special Mention	—		—		—		—		—		—		—		—		—
Substandard	—		312		—		—		—		234		—		—		546
Doubtful	—		—		—		—		—		—		—		—		—
Total consumer loans	$	6,165	$	2,885	$	1,759	$	733	$	173	$	13,877	$	7,509	$	5	$	33,106
Total loans:
Pass	$	545,904	$	573,730	$	325,535	$	239,001	$	114,800	$	229,773	$	236,271	$	7,444	$	2,272,458
Special Mention	2,393		722		628		585		3,319		709		1,905		500		10,761
Substandard	465		341		2,659		5,569		783		9,892		325		26		20,060
Doubtful	—		—		—		—		—		—		—		—		—
Total loans	$	548,762	$	574,793	$	328,822	$	245,155	$	118,902	$	240,374	$	238,501	$	7,970	$	2,303,279


	December 31, 2021
	Term Loans by Origination Year
(dollars in thousands)	2021		2020		2019		2018		2017		Prior		Revolving Loans		Revolving Loans Converted to Term Loans		Total
One- to four-family first mortgage:
Pass	$	77,865	$	44,152	$	45,542	$	34,301	$	35,048	$	96,975	$	12,412	$	351	$	346,646
Special Mention	—		—		—		—		—		369		—		—		369
Substandard	—		347		716		266		463		2,036		—		—		3,828
Doubtful	—		—		—		—		—		—		—		—		—
Total one- to four-family first mortgages	$	77,865	$	44,499	$	46,258	$	34,567	$	35,511	$	99,380	$	12,412	$	351	$	350,843
Home equity loans and lines:
Pass	$	1,688	$	873	$	1,114	$	919	$	816	$	3,567	$	50,323	$	975	$	60,275
Special Mention	—		—		—		—		—		—		—		—		—
Substandard	—		—		—		—		37		—		—		—		37
Doubtful	—		—		—		—		—		—		—		—		—
Total home equity loans and lines	$	1,688	$	873	$	1,114	$	919	$	853	$	3,567	$	50,323	$	975	$	60,312
Commercial real estate:
Pass	$	226,989	$	193,637	$	142,045	$	68,949	$	73,555	$	59,396	$	23,310	$	1,699	$	789,580
Special Mention	—		—		—		—		1,841		366		—		—		2,207
Substandard	437		821		381		1,741		306		5,991		—		160		9,837
Doubtful	—		—		—		—		—		—		—		—		—
Total commercial real estate loans	$	227,426	$	194,458	$	142,426	$	70,690	$	75,702	$	65,753	$	23,310	$	1,859	$	801,624
Construction and land:
Pass	$	148,054	$	50,062	$	48,432	$	4,832	$	2,867	$	1,738	$	2,845	$	—	$	258,830
Special Mention	575		—		—		—		—		—		—		—		575
Substandard	—		—		—		—		5		242		—		—		247
Doubtful	—		—		—		—		—		—		—		—		—
Total construction and land loans	$	148,629	$	50,062	$	48,432	$	4,832	$	2,872	$	1,980	$	2,845	$	—	$	259,652


	December 31, 2021
	Term Loans by Origination Year
(dollars in thousands)	2021		2020		2019		2018		2017		Prior		Revolving Loans		Revolving Loans Converted to Term Loans		Total
Multi-family residential:
Pass	$	31,236	$	31,805	$	14,467	$	6,363	$	2,588	$	2,762	$	1,297	$	—	$	90,518
Special Mention	—		—		—		—		—		—		—		—		—
Substandard	—		—		—		—		—		—		—		—		—
Doubtful	—		—		—		—		—		—		—		—		—
Total multi-family residential loans	$	31,236	$	31,805	$	14,467	$	6,363	$	2,588	$	2,762	$	1,297	$	—	$	90,518
Commercial and industrial:
Pass	$	82,765	$	32,465	$	14,794	$	8,737	$	3,066	$	1,690	$	96,648	$	296	$	240,461
Special Mention	—		—		—		—		—		—		267		—		267
Substandard	—		2,013		—		417		5		18		942		—		3,395
Doubtful	—		—		—		—		—		—		—		—		—
Total commercial and industrial loans	$	82,765	$	34,478	$	14,794	$	9,154	$	3,071	$	1,708	$	97,857	$	296	$	244,123
Consumer:
Pass	$	5,472	$	2,627	$	1,211	$	411	$	1,041	$	15,530	$	6,488	$	37	$	32,817
Special Mention	—		—		—		—		—		2		—		—		2
Substandard	16		—		—		—		7		179		—		—		202
Doubtful	—		—		—		—		—		—		—		—		—
Total consumer loans	$	5,488	$	2,627	$	1,211	$	411	$	1,048	$	15,711	$	6,488	$	37	$	33,021
Total loans:
Pass	$	574,069	$	355,621	$	267,605	$	124,512	$	118,981	$	181,658	$	193,323	$	3,358	$	1,819,127
Special Mention	575		—		—		—		1,841		737		267		—		3,420
Substandard	453		3,181		1,097		2,424		823		8,466		942		160		17,546
Doubtful	—		—		—		—		—		—		—		—		—
Total loans	$	575,097	$	358,802	$	268,702	$	126,936	$	121,645	$	190,861	$	194,532	$	3,518	$	1,840,093

The above classifications follow regulatory guidelines and can generally be described as follows:

• Pass loans are of satisfactory quality.

• Special mention loans have an existing weakness that could cause future impairment, including the deterioration of financial ratios, past due status, questionable management capabilities and possible reduction in the collateral values.

• Substandard loans have an existing specific and well-defined weakness that may include poor liquidity and deterioration of financial performance. Such loans may be past due and related deposit accounts experiencing overdrafts. Immediate corrective action is necessary.

• Doubtful loans have specific weaknesses that are severe enough to make collection or liquidation in full highly questionable and improbable.

In addition, residential loans are classified using an inter-agency regulatory methodology that incorporates, among other factors, the extent of delinquencies and loan-to-value ratios. These classifications were the most current available as of the dates indicated and were generally updated within the quarter.

Age analysis of past due loans as of the dates indicated are as follows.


	September 30, 2022
(dollars in thousands)	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days Past Due		Total Past Due		Current Loans		Total Loans
Originated loans:
Real estate loans:
One- to four-family first mortgage	$	1,502	$	205	$	446	$	2,153	$	280,343	$	282,496
Home equity loans and lines	—		—		—		—		51,635		51,635
Commercial real estate	154		—		27		181		789,988		790,169
Construction and land	—		—		151		151		288,952		289,103
Multi-family residential	—		—		—		—		90,021		90,021
Total real estate loans	1,656		205		624		2,485		1,500,939		1,503,424
Other loans:
Commercial and industrial	95		490		236		821		280,852		281,673
Consumer	187		20		190		397		28,817		29,214
Total other loans	282		510		426		1,218		309,669		310,887
Total originated loans	$	1,938	$	715	$	1,050	$	3,703	$	1,810,608	$	1,814,311
Acquired loans:
Real estate loans:
One- to four-family first mortgage	$	1,152	$	387	$	408	$	1,947	$	91,585	$	93,532
Home equity loans and lines	23		—		—		23		8,966		8,989
Commercial real estate	—		—		629		629		295,858		296,487
Construction and land	—		—		139		139		39,511		39,650
Multi-family residential	—		—		—		—		7,191		7,191
Total real estate loans	1,175		387		1,176		2,738		443,111		445,849
Other loans:
Commercial and industrial	309		294		—		603		38,624		39,227
Consumer	47		—		35		82		3,810		3,892
Total other loans	356		294		35		685		42,434		43,119
Total acquired loans	$	1,531	$	681	$	1,211	$	3,423	$	485,545	$	488,968
Total loans:
Real estate loans:
One- to four-family first mortgage	$	2,654	$	592	$	854	$	4,100	$	371,928	$	376,028
Home equity loans and lines	23		—		—		23		60,601		60,624
Commercial real estate	154		—		656		810		1,085,846		1,086,656
Construction and land	—		—		290		290		328,463		328,753
Multi-family residential	—		—		—		—		97,212		97,212
Total real estate loans	2,831		592		1,800		5,223		1,944,050		1,949,273
Other loans:
Commercial and industrial	404		784		236		1,424		319,476		320,900
Consumer	234		20		225		479		32,627		33,106
Total other loans	638		804		461		1,903		352,103		354,006
Total loans	$	3,469	$	1,396	$	2,261	$	7,126	$	2,296,153	$	2,303,279


	December 31, 2021
(dollars in thousands)	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days Past Due		Total Past Due		Current Loans		Total Loans
Originated loans:
Real estate loans:
One- to four-family first mortgage	$	1,267	$	266	$	1,151	$	2,684	$	254,880	$	257,564
Home equity loans and lines	—		—		—		—		48,561		48,561
Commercial real estate	438		—		4,854		5,292		682,323		687,615
Construction and land	428		—		—		428		249,802		250,230
Multi-family residential	—		—		—		—		87,316		87,316
Total real estate loans	2,133		266		6,005		8,404		1,322,882		1,331,286
Other loans:
Commercial and industrial	51		31		271		353		232,569		232,922
Consumer	289		—		25		314		29,247		29,561
Total other loans	340		31		296		667		261,816		262,483
Total originated loans	$	2,473	$	297	$	6,301	$	9,071	$	1,584,698	$	1,593,769
Acquired loans:
Real estate loans:
One- to four-family first mortgage	$	1,233	$	428	$	1,322	$	2,983	$	90,296	$	93,279
Home equity loans and lines	141		—		—		141		11,610		11,751
Commercial real estate	54		—		2,139		2,193		111,816		114,009
Construction and land	—		—		241		241		9,181		9,422
Multi-family residential	—		—		—		—		3,202		3,202
Total real estate loans	1,428		428		3,702		5,558		226,105		231,663
Other loans:
Commercial and industrial	81		—		430		511		10,690		11,201
Consumer	53		3		21		77		3,383		3,460
Total other loans	134		3		451		588		14,073		14,661
Total acquired loans	$	1,562	$	431	$	4,153	$	6,146	$	240,178	$	246,324
Total loans:
Real estate loans:
One- to four-family first mortgage	$	2,500	$	694	$	2,473	$	5,667	$	345,176	$	350,843
Home equity loans and lines	141		—		—		141		60,171		60,312
Commercial real estate	492		—		6,993		7,485		794,139		801,624
Construction and land	428		—		241		669		258,983		259,652
Multi-family residential	—		—		—		—		90,518		90,518
Total real estate loans	3,561		694		9,707		13,962		1,548,987		1,562,949
Other loans:
Commercial and industrial	132		31		701		864		243,259		244,123
Consumer	342		3		46		391		32,630		33,021
Total other loans	474		34		747		1,255		275,889		277,144
Total loans	$	4,035	$	728	$	10,454	$	15,217	$	1,824,876	$	1,840,093

There were $ 3,000 and $ 6,000 of loans greater than 90 days past due and accruing at September 30, 2022 and December 31, 2021, respectively.

The following tables summarize information pertaining to nonaccrual loans as of dates indicated.


	September 30, 2022
(dollars in thousands)		With Related Allowance		Without Related Allowance		Total
Nonaccrual loans (1) :
One- to four-family first mortgage		$	2,463	$	—	$	2,463
Home equity loans and lines		34		—		34
Commercial real estate		10,304		3,031		13,335
Construction and land		327		—		327
Multi-family residential		—		—		—
Commercial and industrial		352		16		368
Consumer		467		86		553
Total		$	13,947	$	3,133	$	17,080

	December 31, 2021
(dollars in thousands)		With Related Allowance		Without Related Allowance		Total
Nonaccrual loans (1) :
One- to four-family first mortgage		$	3,575	$	—	$	3,575
Home equity loans and lines		38		—		38
Commercial real estate		8,315		116		8,431
Construction and land		258		—		258
Multi-family residential		—		—		—
Commercial and industrial		743		20		763
Consumer		204		—		204
Total		$	13,133	$	136	$	13,269

(1) Nonaccrual acquired loans include PCD loans of $ 7,693,000 at September 30, 2022. There were no nonaccrual acquired PCD loans at December 31, 2021.

All interest accrued but not received for loans placed on nonaccrual status is reversed against interest income. All payments received while on nonaccrual status are applied against the principal balance of nonaccrual loans. The Company does not recognize interest income while loans are on nonaccrual status.

Collateral Dependent Loans

The Company held loans that were individually evaluated for credit losses at September 30, 2022 and December 31, 2021 for which the repayment, on the basis of our assessment at the reporting date, is expected to be provided substantially through the operation or sale of the collateral and the borrower is experiencing financial difficulty. The ACL for these collateral-dependent loans is primarily based on the fair value of the underlying collateral at the reporting date. The following describes the types of collateral that secure collateral dependent loans:

• One- to four-family first mortgages are primarily secured by first liens on residential real estate.

• Home equity loans and lines are primarily secured by first and junior liens on residential real estate.

• Commercial real estate loans are primarily secured by office and industrial buildings, warehouses, retail shopping facilities and various special purpose properties, including hotels and restaurants.

• Construction and land loans are primarily secured by residential and commercial properties, which are under construction and/or redevelopment, and by raw land.

• Commercial and industrial loans considered collateral dependent are primarily secured by accounts receivable, inventory and equipment.

The tables below summarize collateral dependent loans and the related ACL at September 30, 2022 and December 31, 2021.


	September 30, 2022
(dollars in thousands)	Loans		ACL
One- to four-family first mortgage	$	112	$	32
Home equity loans and lines	—		—
Commercial real estate	10,692		1,193
Construction and land	—		—
Multi-family residential	—		—
Commercial and industrial	244		188
Consumer	86		—
Total	$	11,134	$	1,413

	December 31, 2021
(dollars in thousands)	Loans		ACL
One- to four-family first mortgage	$	—	$	—
Home equity loans and lines	—		—
Commercial real estate	3,873		247
Construction and land	—		—
Multi-family residential	—		—
Commercial and industrial	744		425
Consumer	—		—
Total	$	4,617	$	672

Foreclosed Assets and ORE

Foreclosed assets and ORE include real property and other assets that have been acquired as a result of foreclosure, and real property no longer used in the Bank's business. Foreclosed assets and ORE totaled $ 390,000 and $ 1,189,000 at September 30, 2022 and December 31, 2021, respectively. These amounts are recorded in accrued interest receivable and other assets on the Consolidated Statements of Financial Condition.

The carrying amount of foreclosed residential real estate properties held at September 30, 2022 and December 31, 2021 totaled $ 147,000 and $ 136,000 , respectively. Loans secured by single family residential real estate that were in the process of foreclosure at September 30, 2022 and December 31, 2021 totaled $ 314,000 and $ 505,000 , respectively.

Foreclosed assets and ORE included certain bank buildings that meet the criteria to be classified as assets held for sale. The carrying value of these assets totaled $ 423,000 at December 31, 2021. During the nine months ended September 30, 2022, the Company sold the asset held for sale at the recorded carrying value of $ 423,000 at December 31, 2021.

Troubled Debt Restructurings

During the course of its lending operations, the Company periodically grants concessions to its customers in an attempt to protect as much of its investment as possible and to minimize risk of loss. These concessions may include restructuring the terms of a customer loan to alleviate the burden of the customer’s near-term cash requirements. Loans are TDRs when the Company agrees to restructure a loan to a borrower who is experiencing financial difficulties in a manner that is deemed to be a “concession”. The Company defines a concession as a modification of existing terms granted to a borrower for economic or legal reasons related to the borrower’s financial difficulties that the Company would otherwise not consider. The concession either is granted through an agreement with the customer or is imposed by a court or by law. Concessions include modifying original loan terms to reduce or defer cash payments required as part of the loan agreement, including but not limited to:

• a reduction of the stated interest rate for the remaining original life of the debt,

• an extension of the maturity date or dates at an interest rate lower than the current market rate for new debt with similar risk characteristics,

• a reduction of the face amount or maturity amount of the debt or

• a reduction of accrued interest receivable on the debt.

In its determination of whether the customer is experiencing financial difficulties, the Company considers numerous indicators, including, but not limited to:

• whether the customer is currently in default on its existing loan, or is in an economic position where it is probable the customer will be in default on its loan in the foreseeable future without a modification,

• whether the customer has declared or is in the process of declaring bankruptcy,

• whether there is substantial doubt about the customer’s ability to continue as a going concern,

• whether, based on its projections of the customer’s current capabilities, the Company believes the customer’s future cash flows will be insufficient to service the debt, including interest, in accordance with the contractual terms of the existing agreement for the foreseeable future and

• whether, without modification, the customer cannot obtain sufficient funds from other sources at an effective interest rate equal to the current market rate for similar debt for a non-troubled debtor.

If the Company concludes that both a concession has been granted and the concession was granted to a customer experiencing financial difficulties, the Company identifies the loan as a TDR. At least quarterly, the Company evaluates larger commercial TDRs (i.e., TDRs with balances of $ 500,000 or greater) to determine if the assets should be individually evaluated for credit losses. The ACL for loans that are individually evaluated is based on a comparison of the recorded investment in the loan with either the expected cash flows discounted using the loan’s original effective interest rate, observable market price for the loan or the fair value of the collateral underlying certain collateral-dependent loans. Residential, consumer and smaller balance commercial TDRs are included in the Company's pooled-loan analysis to calculate the ACL and, generally, do not have a material impact on the overall ACL.

The following table summarizes information pertaining to TDRs modified during the periods indicated.


	Nine Months Ended September 30,
	2022					2021
(dollars in thousands)	Number of Contracts	Pre-modification Outstanding Recorded Investment		Post-modification Outstanding Recorded Investment		Number of Contracts	Pre-modification Outstanding Recorded Investment		Post-modification Outstanding Recorded Investment
Troubled debt restructurings:
One- to four-family first mortgage	6	$	1,185	$	1,142	2	$	77	$	74
Home equity loans and lines	—	—		—		—	—		—
Commercial real estate	2	407		344		2	479		445
Construction and land	—	—		—		—	—		—
Multi-family residential	—	—		—		—	—		—
Commercial and industrial	1	7		7		2	2,397		2,308
Other consumer	1	19		16		1	5		2
Total	10	$	1,618	$	1,509	7	$	2,958	$	2,829

None of the the loans modified during the nine months ended September 30, 2022 defaulted during the same period.

One commercial real estate loan totaling $ 342,000 , two one- to four-family first mortgage loans totaling $ 73,000 , and one commercial and industrial loan totaling $ 304,000 were modified during the nine months ended September 30, 2021 and defaulted within twelve months of modification. The defaults did not have a significant impact on our allowance for credit losses at September 30, 2021.

7. Derivatives and Hedging Activities

Risk Management Objective of Using Derivatives

The Company is exposed to certain risk arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its assets and liabilities and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates.

The Company’s existing credit derivatives result from loan participation arrangements, therefore, are not used to manage interest rate risk in the Company’s assets or liabilities. The Company occasionally enters into credit risk participation agreements with counterparty banks to accept a portion of the credit risk related to interest rate swaps. The agreements, which are typically executed in conjunction with a participation in a loan with the same customer, allow customers to execute an interest rate swap with one bank while allowing for the distribution of the credit risk among participating members. Collateral used to support the credit risk for the underlying lending relationship is also available to offset the risk of credit risk participations and customer derivative positions.

Cash Flow Hedges of Interest Rate Risk

The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. As part of its efforts to accomplish this objective, the Company entered into certain interest rate swap agreements as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. Such derivatives were used to hedge the variable cash flows associated with existing variable rate liabilities.

For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in Accumulated Other Comprehensive Income and subsequently reclassified into interest expense in the same period(s) during which the hedged transaction affects earnings. Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable rate liabilities.

During the next twelve months, the Company estimates that an additional $ 1,554,000 will be reclassified as additional interest income.

Non-designated Hedges

The Company’s existing credit derivatives result from participations in interest rate swaps provided by external lenders as part of loan participation arrangements, therefore, are not used to manage interest rate risk in the Company’s assets or liabilities. Derivatives not designated as hedges are not speculative and result from a service the Company provides to certain lenders which participate in loans. For derivative instruments that are not designated as hedging instruments, changes in the fair value of the derivatives are recognized in earnings immediately.

Fair Values of Derivative Instruments

The tables below present the fair value of the Company’s derivative financial instruments as well as their classification on the Consolidated Statement of Financial Condition as of September 30, 2022 and December 31, 2021.


	September 30, 2022
	Derivative Assets (1)				Derivative Liabilities (1)
(dollars in thousands)	Notional Amount		Fair Value		Notional Amount		Fair Value
Derivatives designated as hedging instruments:
Interest rate swaps - variable rate liabilities	$	40,000	$	5,462	$	—	$	—

Derivatives not designated as hedging instruments:
Risk participation agreements	—		—		10,000		10

Netting adjustments			—				—


Net derivative amounts			$	5,462			$	10

	December 31, 2021
	Derivative Assets (1)				Derivative Liabilities (1)
(dollars in thousands)	Notional Amount		Fair Value		Notional Amount		Fair Value
Derivatives designated as hedging instruments:
Interest rate swaps - variable rate liabilities	$	40,000	$	1,589	$	—	$	—

Derivatives not designated as hedging instruments:
Risk participation agreements	—		—		10,000		43

Netting adjustments			—				—


Net derivative amounts			$	1,589			$	43

(1) Derivative assets and liabilities are reported at fair value in accrued interest receivable and other assets and accrued interest payable and other liabilities, respectively, in the Consolidated Statements of Financial Condition.

At September 30, 2022 and December 31, 2021, accumulated unrealized gains, net of taxes, on derivative instruments totaled $ 4,256,000 and $ 1,259,000 , respectively.

Effect of Cash Flow Hedge Accounting on Accumulated Other Comprehensive Income and the Consolidated Statements of Income

The tables below present the effect of cash flow hedge accounting on Accumulated Other Comprehensive Income and the Consolidated Statements of Income as of September 30, 2022 and September 30, 2021.


	Three Months Ended September 30, 2022
	Amount of Gain Recognized in OCI				Location of Gain Reclassified from AOCI into Income	Amount of Gain Reclassified from AOCI into Income
(dollars in thousands)	Total		Included Component			Total		Included Component
Derivatives in cash flows hedging relationships:
Interest rate swaps - variable rate liabilities	$	1,490	$	1,490	Interest income	$	193	$	193


	Nine Months Ended September 30, 2022

	Amount of Gain Recognized in OCI				Location of Gain Reclassified from AOCI into Income	Amount of Gain Reclassified from AOCI into Income
(dollars in thousands)	Total		Included Component			Total		Included Component
Derivatives in cash flows hedging relationships:
Interest rate swaps - variable rate liabilities	$	4,024	$	4,024	Interest income	$	231	$	231


	Three Months Ended September 30, 2021
	Amount of Gain Recognized in OCI				Location of Loss Reclassified from AOCI into Income	Amount of Loss Reclassified from AOCI into Income
(dollars in thousands)	Total		Included Component			Total		Included Component
Derivatives in cash flows hedging relationships:
Interest rate swaps - variable rate liabilities	$	39	$	39	Interest expense	$	( 16 )	$	( 16 )


	Nine Months Ended September 30, 2021
	Amount of Gain Recognized in OCI				Location of Loss Reclassified from AOCI into Income	Amount of Loss Reclassified from AOCI into Income
(dollars in thousands)	Total		Included Component			Total		Included Component
Derivatives in cash flows hedging relationships:
Interest rate swaps - variable rate liabilities	$	926	$	926	Interest expense	$	( 48 )	$	( 48 )

Effect of Derivatives Not Designated as Hedging Instruments on the Consolidated Statements of Income

The table below presents the effect of the Company’s derivative financial instruments that are not designated as hedging instruments on the Consolidated Statements of Income as of September 30, 2022.

(dollars in thousands)

Location of Income Recognized on Non-designated Hedges

Three Months Ended September 30, 2022

Nine Months Ended September 30, 2022

Effects of non-designated hedges

Risk participation agreements

Other noninterest income

(dollars in thousands)

Location of Income Recognized on Non-designated Hedges

Three months ended September 30, 2021

Nine months ended September 30, 2021

Effects of non-designated hedges

Risk participation agreements

Other noninterest income

At and during the three and nine months ended September 30, 2021, the Company was not a party to derivative contracts not designated as hedging instruments.

Credit-risk-related Contingent Features

The Company has agreements with each of its derivative counterparties that contain a provision to the effect that, if the Company (either) defaults (or is capable of being declared in default) on any of its indebtedness, then the Company could also be declared in default on its derivative obligations.

The Company has agreements with certain of its derivative counterparties that contain a provision to the effect that, if the Company fails to maintain its status as a well or adequately capitalized institution, then the Company could be required to post additional collateral.

As of September 30, 2022, there were no derivatives with credit-risk-related contingent features in a net liability position. Such derivatives are measured at fair value, which includes accrued interest but excludes any adjustment for nonperformance risk. If the Company had breached any provisions at September 30, 2022, it would not have been required to settle any obligations under the agreements since the termination value was $ 0 .

8. Long Term Debt

On June 30, 2022, the Company issued $ 55,000,000 in aggregate principal amount of its 5.75 % Fixed-to-Floating Rate Subordinated Notes (the "Notes") due 2032. The Notes were issued at a price equal to 100 % of the aggregate principal amount. The Notes have a stated maturity date of June 30, 2032 and will bear interest at a fixed rate of 5.75 % per year from and including the issue date to but excluding June 30, 2027. From June 30, 2027, the Notes will bear interest at a floating rate equal to the then current three-month term secured overnight financing rate (“SOFR”), plus 282 basis points. The Notes may be redeemed by the Company, in whole or in part, on or after June 30, 2027. The Notes are intended to qualify as Tier 2 capital for regulatory purposes.

The carrying value of subordinated debt was $ 53,958,000 at September 30, 2022. The subordinated debt was recorded net of issuance costs of $ 1,102,000 at September 30, 2022, which is being amortized using the straight-line method over five years .

9. Fair Value Measurements and Disclosures

The Company utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The Company groups assets and liabilities measured or disclosed at fair value in three levels as required by ASC 820, Fair Value Measurements and Disclosures . Under this guidance, fair value should be based on the assumptions market participants would use when pricing the asset or liability and establishes a fair value hierarchy that prioritizes the inputs used to develop those assumptions and measure fair value. The hierarchy requires companies to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels used to measure fair value are as follows:

• Level 1 – Quoted prices in active markets for identical assets or liabilities.

• Level 2 – Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

• Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

An asset’s or liability’s categorization within the fair value hierarchy is based upon the lowest level that is significant to the fair value measurement. Management reviews and updates the fair value hierarchy classifications of the Company’s assets and liabilities quarterly.

Recurring Basis

Investment Securities Available for Sale

Fair values of investment securities available for sale are primarily measured using information from a third-party pricing service. This pricing service provides pricing information by utilizing pricing models supported with market data information. Standard inputs include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, benchmark securities bids, offers and other reference data from market research publications. If quoted prices are available in an active market, investment securities are classified as Level 1 measurements. If quoted prices are not available in an active market, fair values are estimated primarily by the use of pricing models. Level 2 investment securities are primarily comprised of mortgage-backed securities issued by government agencies and U.S. government-sponsored enterprises. In certain cases, where there is limited or less transparent information provided by the Company’s third-party pricing service, fair value is estimated by the use of secondary pricing services or through the use of non-binding third-party broker quotes. Investment securities are classified within Level 3 when little or no market activity supports the fair value.

Management primarily identifies investment securities which may have traded in illiquid or inactive markets, by identifying instances of a significant decrease in the volume and frequency of trades, relative to historical levels, as well as instances of a significant widening of the bid-ask spread in the brokered markets. Investment securities that are deemed to have been trading in illiquid or inactive markets may require the use of significant unobservable inputs. For example, management may use quoted prices for similar investment securities in the absence of a liquid and active market for the investment securities being valued. As of September 30, 2022, management did not make adjustments to prices provided by the third-party pricing service as a result of illiquid or inactive markets.

Derivative Assets and Liabilities

Derivative assets and liabilities are reported at fair value in accrued interest receivable and other assets and accrued interest payable and other liabilities, respectively, in the Consolidated Statements of Financial Condition. The fair value of these derivative financial instruments is obtained from a third-party pricing service that uses widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. The analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. The Company has determined that its derivative valuations are classified in Level 2 of the fair vale hierarchy.

The following tables present the balances of assets measured for fair value on a recurring basis as of September 30, 2022 and December 31, 2021.


(dollars in thousands)	September 30, 2022		Level 1		Level 2		Level 3
Assets
Available for sale securities:
U.S. agency mortgage-backed	$	319,217	$	—	$	319,217	$	—
Collateralized mortgage obligations	90,536		—		90,536		—
Municipal bonds	56,905		—		56,905		—
U.S. government agency	19,613		—		19,613		—
Corporate bonds	6,487		—		6,487		—
Total	$	492,758	$	—	$	492,758	$	—

Derivative assets	$	5,462	$	—	$	5,462	$	—
Total	$	498,220	$	—	$	498,220	$	—

Liabilities
Derivative liabilities	$	10	$	—	$	10	$	—


(dollars in thousands)	December 31, 2021		Level 1		Level 2		Level 3
Assets
Available for sale securities:
U.S. agency mortgage-backed	$	233,773	$	—	$	233,773	$	—
Collateralized mortgage obligations	31,912		—		31,912		—
Municipal bonds	50,719		—		50,719		—
U.S. government agency	5,614		—		5,614		—
Corporate bonds	5,614		—		5,614		—
Total	$	327,632	$	—	$	327,632	$	—

Derivative assets	$	1,589	$	—	$	1,589	$	—
Total	$	329,221	$	—	$	329,221	$	—

Liabilities
Derivative liabilities	$	43	$	—	$	43	$	—

Nonrecurring Basis

The Company records loans individually evaluated for credit losses at fair value on a nonrecurring basis. Fair value is measured at the fair value of the collateral for collateral-dependent loans. For non-collateral-dependent loans, fair value is measured by present valuing expected future cash flows. Loans individually evaluated are classified as Level 3 assets when measured using appraisals from third parties of the collateral less any prior liens and when there is no observable market price.

Foreclosed assets and ORE are also recorded at fair value on a nonrecurring basis. Foreclosed assets are initially recorded at fair value less estimated costs to sell. ORE is recorded at the lower of its net book value or fair value at the date of transfer to ORE. The fair value of foreclosed assets and ORE is based on property appraisals and an analysis of similar properties available. As such, the Company classifies foreclosed and ORE assets as Level 3 assets.

The Company has segregated all financial assets that are measured at fair value on a nonrecurring basis into the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value at the measurement date as reflected in the table below.


			Fair Value Measurements Using
(dollars in thousands)	September 30, 2022		Level 1		Level 2		Level 3
Assets
Loans individually evaluated	$	9,721	$	—	$	—	$	9,721
Foreclosed assets and ORE	390		—		—		390
Total	$	10,111	$	—	$	—	$	10,111

			Fair Value Measurements Using
(dollars in thousands)	December 31, 2021		Level 1		Level 2		Level 3
Assets
Loans individually evaluated	$	3,945	$	—	$	—	$	3,945
Foreclosed assets and ORE	1,189		—		—		1,189
Total	$	5,134	$	—	$	—	$	5,134

The following table shows significant unobservable inputs used in the fair value measurement of Level 3 assets.

(dollars in thousands)

Fair Value

Valuation Technique

Unobservable Inputs

Range of Discounts

Weighted Average Discount

September 30, 2022

Loans individually evaluated

9,721

Third party appraisals and discounted cash flows

Collateral values, market discounts and estimated costs to sell

0 % - 83 %

13 %

Foreclosed assets and ORE

390

Third party appraisals, sales contracts, broker price opinions

Collateral values, market discounts and estimated costs to sell

0 % - 27 %

6 %

(dollars in thousands)

Fair Value

Valuation Technique

Unobservable Inputs

Range of
Discounts

Weighted Average Discount

December 31, 2021

Loans individually evaluated

3,945

Third party appraisals and discounted cash flows

Collateral values, market discounts and estimated costs to sell

0 % - 100 %

15 %

Foreclosed assets and ORE

1,189

Third party appraisals, sales contracts, broker price opinions

Collateral values, market discounts and estimated costs to sell

6 % - 16 %

12 %

ASC 820, Fair Value Measurements and Disclosures , requires the disclosure of each class of financial instruments for which it is practicable to estimate. The fair value of a financial instrument is the current amount that would be exchanged between willing parties, other than in a forced liquidation. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. ASC 820 excludes certain financial instruments and all non-financial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.

Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial statements. These estimates are subjective in nature, involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

Fair value estimates included herein are based on existing on- and off-balance-sheet financial instruments without attempting to estimate the value of anticipated future business and the fair value of assets and liabilities that are not required to be recorded or disclosed at fair value like premises and equipment. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.

Methods and assumptions used to estimate fair value of each class of financial instruments for which it is practicable to estimate fair value are described in the Company's Annual Report on Form 10-K for the year ended December 31, 2021. The fair value of subordinated debt is estimated based on current market rates on similar debt in the market. The Company classifies this debt in Level 2 of the fair value table. There have been no other material changes from the fair value estimate methods and assumptions previously disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2021.

The following table presents estimated fair values of the Company’s financial instruments as of the dates indicated.


			Fair Value Measurements at September 30, 2022
(dollars in thousands)	Carrying Amount		Total		Level 1		Level 2		Level 3
Financial Assets
Cash and cash equivalents	$	150,556	$	150,556	$	150,556	$	—	$	—
Interest-bearing deposits in banks	349		349		349		—		—
Investment securities available for sale	492,758		492,758		—		492,758		—
Investment securities held to maturity	1,080		1,066		—		1,066		—
Mortgage loans held for sale	169		169		—		169		—
Loans, net	2,275,928		2,174,834		—		2,165,113		9,721
Cash surrender value of BOLI	46,019		46,019		46,019		—		—
Derivative assets (1)	5,462		5,462		—		5,462		—
Financial Liabilities
Deposits	$	2,738,424	$	2,725,412	$	—	$	2,725,412	$	—
Other borrowings	5,539		4,890		—		4,890		—
Subordinated debt	53,958		52,299		—		52,299		—
Long-term FHLB advances	24,816		23,571		—		23,571		—
Derivative liabilities (1)	10		10		—		10		—



			Fair Value Measurements at December 31, 2021
(dollars in thousands)	Carrying Amount		Total		Level 1		Level 2		Level 3
Financial Assets
Cash and cash equivalents	$	601,443	$	601,443	$	601,443	$	—	$	—
Interest-bearing deposits in banks	349		349		349		—		—
Investment securities available for sale	327,632		327,632		—		327,632		—
Investment securities held to maturity	2,102		2,132		—		2,132		—
Mortgage loans held for sale	1,104		1,104		—		1,104		—
Loans, net	1,819,004		1,834,023		—		1,830,078		3,945
Cash surrender value of BOLI	40,361		40,361		40,361		—		—
Derivative assets (1)	1,589		1,589		—		1,589		—
Financial Liabilities
Deposits	$	2,535,849	$	2,533,951	$	—	$	2,533,951	$	—
Other borrowings	5,539		5,860		—		5,860		—
Long-term FHLB advances	26,046		26,263		—		26,263		—
Derivative liabilities (1)	43		43		—		43		—


Item 2.			Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The purpose of this discussion and analysis is to focus on significant changes in the financial condition of the Company and the Bank from December 31, 2021 through September 30, 2022 and on its results of operations for the three and nine months ended September 30, 2022 and 2021. This discussion and analysis is intended to highlight and supplement information presented elsewhere in this quarterly report on Form 10-Q, particularly the consolidated financial statements and related notes appearing in Item 1.

Forward-Looking Statements

To the extent that statements in this Form 10-Q relate to future plans, objectives, financial results or performance of the Company or Bank, these statements are deemed to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements, which are based on management’s current information, estimates and assumptions and the current economic environment, are generally identified by the use of words such as “plan”, “believe”, “expect”, “intend”, “anticipate”, “estimate”, “project” or similar expressions, or by future or conditional terms such as “will”, “would”, “should”, “could”, “may”, “likely”, “probably”, or “possibly”. The Company’s or the Bank’s actual strategies and results in future periods may differ materially from those currently expected due to various risks and uncertainties. Certain risks, uncertainties and other factors, including those set forth under the heading “Risk Factors” in the Company’s Annual Report on Form 10-K filed with the SEC for the year ended December 31, 2021 and any subsequent Quarterly Report on Form 10-Q or Current Report on Form 8-K, may cause actual results to differ materially from the results discussed in the forward-looking statements appearing in this discussion and analysis and may include factors such as, but not limited to, credit quality and risk, the COVID-19 pandemic, industry and technological changes, cyber incidents or other failures, disruptions or security breaches, interest rates, commercial and residential real estate values, economic and market conditions in the United States or internationally, fund availability, accounting estimates and risk management processes, the transition away from the London Interbank Offered Rate (LIBOR), legislative and regulatory changes, business strategy execution, key personnel, competition, mortgage markets, fraud, environmental liability and severe weather, natural disasters, acts of war or terrorism or other external events. The Company undertakes no obligation to update these forward-looking statements to reflect events or circumstances that occur after the date on which such statements were made.

Non-GAAP Financial Measures

Management's Discussion and Analysis of Financial Condition and Results of Operations contains financial information determined by methods other than in accordance with generally accepted accounting principles (“GAAP”). The Company's management uses this non-GAAP financial information in its analysis of the Company's performance. In this Item 2, information is included which excludes PPP loans, the effect of PPP loans on income and the effect of acquired loans on the provision for loan losses. Management believes the presentation of this non-GAAP financial information provides useful information that is helpful to a full understanding of the Company’s financial position and operating results. This non-GAAP financial information should not be viewed as a substitute for financial information determined in accordance with GAAP, nor is it necessarily comparable to non-GAAP financial information presented by other companies. A reconciliation on non-GAAP information included herein to GAAP is presented at the end of this item under the heading "Reconciliation of Non-GAAP Measures".

EXECUTIVE OVERVIEW

The Company reported net income for the third quarter of 2022 of $10.4 million, or $1.28 diluted EPS, down $4.6 million compared to the third quarter of 2021. Net income for the third quarter of 2021 totaled $15.1 million, or $1.79 diluted EPS. The third quarter of 2022 includes merger expenses related to the acquisition of Friendswood Capital Corporation (“Friendswood”) totaling $41,000, net of taxes. The third quarter of 2021 includes a non-taxable BOLI benefit totaling $1.7 million following the death of a former employee.

For the nine months ended September 30, 2022, the Company reported net income $23.3 million, or $2.84 diluted EPS, down $15.1 million from $38.4 million, or $4.54 diluted EPS, reported for the nine months ended September 30, 2021. The nine months ended September 30, 2022 includes merger expenses related to the acquisition of Friendswood totaling $1.6 million, net of taxes, compared to a net loss on the sale of a banking center totaling $361,000, net of taxes, and a non-taxable BOLI benefit following the death of a former employee totaling $1.7 million for the nine months ended September 30, 2021.

Key components of the Company’s performance during the three and nine months ended September 30, 2022 include:

• Assets increased $229.4 million, or 7.8%, from December 31, 2021 to $3.2 billion at September 30, 2022.

• Total loans were $2.3 billion at September 30, 2022, up $463.2 million, or 25.2%, from December 31, 2021. The loan growth resulted primarily from the addition of Friendswood's loan portfolio, which amounted to $317.5 million on March 26, 2022 (the date of acquisition).

• PPP loans totaled $7.1 million at September 30, 2022, down $36.5 million, or 83.7%, from December 31, 2021.

• During the three and nine months ended September 30, 2022, the Company provisioned $1.7 million and $5.5 million, respectively, to the allowance for loan losses, primarily due to the acquisition of Friendswood's loan portfolio and loan growth. During the three and nine months ended September 30, 2021, the Company recorded a reversal to the allowance for loan losses of $2.4 million and $7.5 million, respectively.

• The ALL totaled $27.4 million, or 1.19% of total loans, at September 30, 2022 compared to $21.1 million, or 1.15% of total loans, at December 31, 2021. Excluding PPP loans, the ratio of the ALL to total loans was 1.19% and 1.17% at September 30, 2022 and December 31, 2021, respectively.

• Nonperforming assets increased $3.0 million, or 20.8%, from $14.5 million, or 0.49% of total assets, at December 31, 2021 to $17.5 million, or 0.55% of total assets, at September 30, 2022. The increase in NPAs was primarily due to NPAs acquired from Friendswood, which amounted to $10.2 million on March 26, 2022 (the date of acquisition), which was partially offset by paydowns and improvements in credit quality of loans.

• Total deposits increased $202.6 million, or 8.0%, from $2.5 billion at December 31, 2021 to $2.7 billion at September 30, 2022. The increase was primarily from the addition of Friendswood''s deposits, which amounted to $368.0 million on March 26, 2022 (the date of acquisition), which was partially offset by a $40.6 million decline in public funds and a $53.1 million decline in surge deposits related to three current customers.

• The Company issued $55.0 million in aggregate principal amount of its 5.75% Fixed-to-Floating Rate Subordinated Notes (the "Notes") due 2032. The Notes were issued at a price equal to 100% of the aggregate principal amount. The carrying value of subordinated debt was $54.0 million at September 30, 2022. The subordinated debt was recorded net of issuance costs of $1.1 million at September 30, 2022.

• The net interest margin was 4.11% and 3.77% for the three and nine months ended September 30, 2022, respectively, down 5 bps and down 24 bps, from the three and nine months ended September 30, 2021, respectively. Excluding the impact of PPP loans, the net interest margin was 4.11% and 3.73% for the three and nine months ended September 30, 2022, respectively, compared to 3.64% and 3.74% for the three and nine months ended September 30, 2021, respectively.

• The average rate paid on total interest-bearing deposits was 0.27% for the third quarter of 2022, which was unchanged from the third quarter of 2021. For the nine months ended September 30, 2022, the average rate paid on total interest-bearing deposits was 0.23%, down 12 bps from the nine months ended September 30, 2021.

• Total interest expense for the third quarter of 2022 was up $998,000, or 77.4%, compared to the third quarter of 2021. For the nine months ended September 30, 2022, total interest expense was down $169,000, or 3.5%, from the comparable period in 2021.

• Noninterest income for the third quarter of 2022 was down $1.9 million, or 35.5%, compared to the third quarter of 2021, primarily due to the receipt in the third quarter of 2021 of a non-taxable BOLI benefit totaling $1.7 million following the death of a former employee. For the nine months ended September 30, 2022, noninterest income was down $2.2 million, or 17.2%, from the comparable period in 2021 primarily due to the absence of the $1.7 million BOLI benefit received in the third quarter of 2021 and a decrease in gains on the sale of loans (down $1.5 million), partially offset by a difference of $477,000 in the gain/loss on the sale of assets.

• Noninterest expense for the third quarter of 2022 was up $4.3 million, or 26.1%, compared to the third quarter of 2021. For the nine months ended September 30, 2022, noninterest expense was up $11.8 million, or 24.0%, from the comparable period in 2021. Noninterest expense includes merger-related expenses, which totaled $60,000 (pre-tax) and $2.0 million (pre-tax) for the three and nine months ended September 30, 2022, respectively. The increase in noninterest expense related primarily to the Friendswood acquisition and the attendant growth of the Company’s employee base as well as the resulting higher occupancy expense, regulatory fees, and data processing costs.

FINANCIAL CONDITION

Loans, Allowance for Credit Losses and Asset Quality

Loans

Total loans at September 30, 2022 were $2.3 billion, up $463.2 million, or 25.2%, from December 31, 2021. The loan growth resulted primarily from the addition of Friendswood's loan portfolio, which amounted to $317.5 million on March 26, 2022 (the date of acquisition). PPP loans, included in commercial and industrial loans, totaled $7.1 million at September 30, 2022, down $36.5 million, or 83.7%, from December 31, 2021. Excluding PPP loans and Friendswood''s acquired loan portfolio, organic loans increased $180.8 million, or 10.1%, from December 31, 2021.

The following table summarizes the composition of the Company’s loan portfolio as of the dates indicated.


(dollars in thousands)	September 30, 2022		December 31, 2021		Increase/(Decrease)
Real estate loans:
One-to four-family first mortgage	$	376,028	$	350,843	$	25,185	7.2	%
Home equity loans and lines	60,624		60,312		312		0.5
Commercial real estate	1,086,656		801,624		285,032		35.6
Construction and land	328,753		259,652		69,101		26.6
Multi-family residential	97,212		90,518		6,694		7.4
Total real estate loans	1,949,273		1,562,949		386,324		24.7	%
Other loans:
Commercial and industrial	320,900		244,123		76,777		31.5
Consumer	33,106		33,021		85		0.3
Total other loans	354,006		277,144		76,862		27.7
Total loans	$	2,303,279	$	1,840,093	$	463,186	25.2	%

Allowance for Credit Losses

Due to the adoption of ASC Topic 326 on January 1, 2020, management maintains, based on current and forecasted information, an ACL that reflects a current estimate of expected credit losses ("CECL") for the estimated life of the loan portfolio at reporting periods subsequent to the adoption date.

The ACL which equals the sum of the ALL and the ACL on unfunded lending commitments, is established through provisions for credit losses. Management recalculates the ACL at least quarterly to reassess the estimate of credit losses for the total portfolio at the relevant reporting date. Under ASC Topic 326, the ACL is measured on a pool basis when similar risk characteristics exist. For each pool of loans, management also evaluates and applies qualitative adjustments to the calculated ACL based on several factors, including, but not limited to, changes in current and expected future economic conditions, changes in industry experience and industry loan concentrations, changes in the volume and severity of nonperforming assets, changes in lending policies and personnel and changes in the competitive and regulatory environment of the banking industry. Loans that do not share similar risk characteristics are individually evaluated and are excluded from the pooled loan analysis.

The ACL policy described above is supplemented by periodic reviews and validations performed by independent loan reviewers. The results of the reviews are reported to the Audit Committee of the Board of Directors. The establishment of the ACL is significantly affected by management judgment. There is likelihood that different amounts would be reported under different conditions or assumptions. Federal regulatory agencies, as an integral part of their examination process, periodically review our ACL. Such agencies may require management to make additional provisions for estimated losses based upon judgments different from those of management.

At September 30, 2022, the ALL totaled $27.4 million, or 1.19% of total loans, up $6.3 million from $21.1 million, or 1.15% of total loans, at December 31, 2021. During the nine months ended September 30, 2022, the Company provisioned $5.5 million of the allowance loan losses primarily due to the acquisition of Friendswood and loan growth. Net loan charge-offs totaled $655,000 for the nine months ended September 30, 2022.

Asset Quality

One of management’s key objectives has been, and continues to be, maintaining a high level of asset quality. In addition to maintaining credit standards for new loan originations, we proactively monitor loans and collection and workout processes of delinquent or problem loans. When a borrower fails to make a scheduled payment, we attempt to cure the deficiency by making personal contact with the borrower. Initial contacts are generally made within 10 days after the date payment is due. In most cases, deficiencies are promptly resolved. If the delinquency continues, late charges are assessed and additional efforts are made to collect the deficiency. All loans which are designated as “special mention,” classified or which are delinquent 90 days or more are reported to the Board of Directors of the Bank monthly. For loans where the collection of principal or interest payments is doubtful, the accrual of interest income ceases. It is our policy, with certain limited exceptions, to discontinue accruing interest and reverse any interest accrued on any loan which is 90 days or more past due. On occasion, this action may be taken earlier if the financial condition of the borrower raises significant concern with regard to their ability to service the debt in accordance with the terms of the loan agreement. Interest income is not accrued on these loans until the borrower’s financial condition and payment record demonstrate an ability to service the debt.

Under our allowance policy, credit losses are measured on a pool basis when similar risk characteristics exist. Loans that do not share similar risk characteristics are individually evaluated for credit losses and are excluded from the pooled loan analysis. At least quarterly, management evaluates the loan portfolio to determine which loans should be individually evaluated for credit losses. Management's evaluation involves an analysis of larger (i.e., loans with balances of $500,000 or greater) commercial real estate loans, multi-family residential loans, construction and land loans and commercial and industrial loans. Third party property valuations are obtained at the time of origination for real estate secured loans. When a determination is made that a loan has deteriorated to the point of becoming a problem loan, updated valuations may be ordered to determine if a short-fall exists, which may lead to a recommendation for partial charge off or appropriate allowance allocation. Property valuations are ordered through, and are reviewed by, an appraisal officer at the Bank. The Company typically orders an “as is” valuation for collateral property if a loan is in a criticized loan classification. Loans individually evaluated for credit losses are reported to the Board of Directors monthly.

At September 30, 2022 and December 31, 2021, loans individually evaluated for credit losses were $11.1 million and $4.6 million, respectively. Total loans individually evaluated for credit losses at September 30, 2022 included $7.7 million of acquired loans, of which three loans were acquired with deteriorated credit quality in the Friendswood acquisition. At December 31, 2021, loans individually evaluated for credit losses included $1.1 million of acquired loans, of which none were acquired with deteriorated credit quality.

The following tables provide a summary of loans individually evaluated for credit losses as of the dates indicated.


	September 30, 2022
(dollars in thousands)	Recorded investment		Allowance for Loan Losses		Allowance to Total Loans
Loans Individually Evaluated
One- to four-family first mortgage	$	112	$	32	28.57	%
Home equity loans and lines	—		—		—
Commercial real estate	10,692		1,193		11.16
Construction and land	—		—		—
Multi-family residential	—		—		—
Commercial and industrial	244		188		77.05
Consumer	86		—		—
Total	$	11,134	$	1,413	12.69	%


	December 31, 2021
(dollars in thousands)	Recorded investment		Allowance for Loan Losses		Allowance to Total Loans
Loans Individually Evaluated
One- to four-family first mortgage	$	—	$	—	—	%
Home equity loans and lines	—		—		—
Commercial real estate	3,873		247		6.38
Construction and land	—		—		—
Multi-family residential	—		—		—
Commercial and industrial	744		425		57.12
Consumer	—		—		—
Total	$	4,617	$	672	14.55	%

Federal regulations and our policies require that we utilize an internal asset classification system as a means of reporting problem and potential problem assets. We have incorporated an internal asset classification system, substantially consistent with Federal banking regulations, as a part of our credit monitoring system. Federal banking regulations set forth a classification scheme for problem and potential problem assets as “substandard,” “doubtful” or “loss” assets. An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. “Substandard” assets include those characterized by the “distinct possibility” that the insured institution will sustain “some loss” if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard” with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions and values, “highly questionable and improbable.” Assets classified as “loss” are those considered “uncollectible” and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted.

At September 30, 2022 and December 31, 2021, loans classified as substandard totaled $20.1 million and $17.5 million, respectively. There were no assets classified as doubtful at either date. For additional information, refer to Note 6 to the Consolidated Financial Statements. The $2.5 million, or 14.3%, increase in substandard loans at September 30, 2022 compared to December 31, 2021 was due primarily to substandard commercial real estate loans acquired from Friendswood, which amounted to $7.7 million at September 30, 2022, partially offset by loan payoffs and improvements in loans.

The following tables provide a summary of loans classified as special mention and substandard as of the dates indicated.


(dollars in thousands)	September 30, 2022		December 31, 2021		Increase/(Decrease)
Special Mention Loans
One- to four-family first mortgage	$	1,197	$	369	$	828	224.4	%
Home equity loans and lines	—		—		—		—
Commercial real estate	3,155		2,207		948		43.0
Construction and land	717		575		142		24.7
Multi-family residential	3,312		—		3,312		—
Commercial and industrial	2,380		267		2,113		791.4
Consumer	—		2		(2)		(100.0)
Total special mention loans	$	10,761	$	3,420	$	7,341	214.6	%

Special mention loans increased $7.3 million from December 31, 2021 to September 30, 2022 primarily due to downgrades of pass loans to a special mention rating.


(dollars in thousands)	September 30, 2022		December 31, 2021		Increase/(Decrease)
Substandard Loans
One- to four-family first mortgage	$	3,018	$	3,828	$	(810)	(21.2)	%
Home equity loans and lines	33		37		(4)		(10.8)
Commercial real estate	13,748		9,837		3,911		39.8
Construction and land	324		247		77		31.2
Multi-family residential	77		—		77		—
Commercial and industrial	2,314		3,395		(1,081)		(31.8)
Consumer	546		202		344		170.3
Total substandard loans	$	20,060	$	17,546	$	2,514	14.3	%

A bank’s determination as to the classification of its assets and the amount of its valuation allowances is subject to review by Federal bank regulators which can order the establishment of additional general or specific loss allowances. The Federal banking agencies have adopted an interagency policy statement on the allowance for loan and lease losses. The policy statement provides guidance for financial institutions on both the responsibilities of management for the assessment and establishment of allowances and guidance for banking agency examiners to use in determining the adequacy of general valuation guidelines. Generally, the policy statement recommends that institutions have effective systems and controls to identify, monitor and address asset quality problems; that management analyze all significant factors that affect the collectability of the portfolio in a reasonable manner; and that management establish acceptable allowance evaluation processes that meet the objectives set forth in the policy statement. Due to the adoption of ASC Topic 326 on January 1, 2020, management maintains, based on current and forecasted information, an ACL that reflects a current estimate of expected credit losses for the estimated life of the loan portfolio at reporting periods subsequent to the adoption date. For all reporting periods, actual losses are uncertain and dependent upon future events and, as such, further additions to the level of ACL may become necessary.

The following table sets forth the composition of the Company’s nonperforming assets and performing troubled debt restructurings as of the dates indicated.


	September 30, 2022							December 31, 2021
(dollars in thousands)	Originated		Acquired (1)		Total			Originated		Acquired (1)		Total
Nonaccrual loans (2) :
Real estate loans:
One- to four-family first mortgage	$	515	$	1,948	$	2,463		$	1,468	$	2,107	$	3,575
Home equity loans and lines	—		34		34			—		38		38
Commercial real estate	3,145		10,190		13,335			5,316		3,115		8,431
Construction and land	151		176		327			—		258		258
Multi-family residential	—		—		—			—		—		—
Other loans:
Commercial and industrial	253		115		368			291		472		763
Consumer	217		336		553			158		46		204
Total nonaccrual loans	4,281		12,799		17,080			7,233		6,036		13,269
Accruing loans 90 days or more past due	3		—		3			6		—		6
Total nonperforming loans	4,284		12,799		17,083			7,239		6,036		13,275
Foreclosed assets and ORE	14		376		390			1,109		80		1,189
Total nonperforming assets	4,298		13,175		17,473			8,348		6,116		14,464
Performing troubled debt restructurings	4,686		879		5,565			3,867		1,096		4,963
Total nonperforming assets and troubled debt restructurings	$	8,984	$	14,054	$	23,038		$	12,215	$	7,212	$	19,427

Nonperforming loans to total loans					0.74		%					0.72		%
Nonperforming loans to total assets					0.54		%					0.45		%
Nonperforming assets to total assets					0.55		%					0.49		%

(1) Nonaccrual acquired loans include PCD loans of $7.7 million at September 30, 2022. There were no nonaccrual acquired PCD loans at December 31, 2021.

(2) Nonaccrual loans include originated restructured loans placed on nonaccrual totaling $3.3 million and $3.7 million at September 30, 2022 and December 31, 2021, respectively. Acquired restructured loans placed on nonaccrual totaled $4.7 million and $3.5 million at September 30, 2022 and December 31, 2021, respectively.

Foreclosed assets and ORE includes real property and other assets that have been acquired as a result of foreclosure, and real property no longer used in the Bank's business. Foreclosed assets and ORE are classified as such until sold or disposed. Foreclosed assets are recorded at fair value less estimated selling costs based on third party property valuations which are obtained at the time the asset is repossessed and periodically until the property is liquidated. ORE is recorded at the lower of its net book value or fair value at the date of transfer to ORE. Foreclosed assets and ORE holding costs are charged to expense. Gains and losses on the sale of foreclosed assets and ORE are charged to operations, as incurred. Costs associated with acquiring and improving a foreclosed property or ORE are capitalized to the extent that the carrying value does not exceed fair value less estimated selling costs.

Investment Securities

The Company’s investment securities portfolio totaled $493.8 million as of September 30, 2022, an increase of $164.1 million, or 49.8%, from December 31, 2021. At September 30, 2022, the Company had a net unrealized loss on its available for sale investment securities portfolio of $59.6 million, compared to a net unrealized loss of $653,000 at December 31, 2021.

The following table summarizes activity in the Company’s investment securities portfolio during the nine months ended September 30, 2022.


(dollars in thousands)	Available for Sale		Held to Maturity
Balance, December 31, 2021	$	327,632	$	2,102
Purchases	236,236		—
Acquired from Texan Bank, at fair value	33,411		—
Sales	—		—
Principal maturities, prepayments and calls	(44,692)		(1,000)
Amortization of premiums and accretion of discounts	(849)		(22)
Decrease in market value	(58,980)		—
Balance, September 30, 2022	$	492,758	$	1,080

Funding Sources

Deposits

Deposits totaled $2.7 billion at September 30, 2022, an increase of $202.6 million, or 8.0%, compared to December 31, 2021. The increase was primarily from the addition of Texan Bank's deposits, which amounted to $368.0 million on March 26, 2022 (the date of acquisition), which was partially offset by a $40.6 million decline in public funds and a $53.1 million decline in surge deposits related to three current customers. The following table summarizes the changes in the Company’s deposits from December 31, 2021 to September 30, 2022.


(dollars in thousands)	September 30, 2022		December 31, 2021		Increase/(Decrease)
Demand deposit	$	921,089	$	766,385	$	154,704	20.2	%
Savings	325,594		285,728		39,866		14.0
Money market	452,474		371,478		80,996		21.8
NOW	686,592		792,919		(106,327)		(13.4)
Certificates of deposit	352,675		319,339		33,336		10.4
Total deposits	$	2,738,424	$	2,535,849	$	202,575	8.0	%

The average rate paid on interest-bearing deposits was 0.27% for the third quarter of 2022, which remained unchanged compared to the third quarter of 2021.

At September 30, 2022, certificates of deposit maturing within the next 12 months totaled $274.7 million.

Subordinated Debt

On June 30, 2022, The Company issued $55.0 million in aggregate principal amount of its 5.75% Fixed-to-Floating Rate Subordinated Notes due 2032. The Notes were issued at a price equal to 100% of the aggregate principal amount. The Notes have a stated maturity date of June 30, 2032 and bear interest at a fixed rate of 5.75% per year from and including the issue date to but excluding June 30, 2027. From June 30, 2027, the Notes will bear interest at a floating rate equal to the then current three-month term secured overnight financing rate (“SOFR”), plus 282 basis points. The Notes may be redeemed by the Company, in whole or in part, on or after June 30, 2027. The Notes are intended to qualify as Tier 2 capital for regulatory purposes.

The carrying value of subordinated debt was $54.0 million at September 30, 2022. The subordinated debt was recorded net of issuance costs of $1.1 million at September 30, 2022.

Federal Home Loan Bank Advances

The average balance of total FHLB advances was $25.0 million for the third quarter of 2022, down $2.0 million compared to the third quarter of 2021. For the nine months ended September 30, 2022, the average balance of total FHLB advances was $25.4 million, down $2.3 million compared to the nine months ended September 30, 2021. Average total FHLB advances decreased over the comparable periods primarily due to paydowns during the 2022 periods.

At September 30, 2022 and December 31, 2021, the Company had $24.8 million and $26.0 million in total outstanding FHLB advances, respectively, and $1.1 billion and $810.4 million in additional FHLB advances available, respectively.

Shareholders’ Equity

Total shareholders’ equity decreased $35.2 million, or 10.0%, from $351.9 million at December 31, 2021 to $316.7 million at September 30, 2022. Shareholders' equity decreased primarily due to an other comprehensive loss of $43.6 million, share repurchases of $11.3 million and cash dividends of $5.8 million, which were partially offset by net income of $23.3 million during the nine months ended September 30, 2022. Other comprehensive loss primarily reflects the market value of the Company's available for sale securities declining $59.0 million due primarily to the rising interest rate environment during the nine months ended September 30, 2022.

At September 30, 2022, the Bank had regulatory capital amounts that were well in excess of regulatory requirements. The following table presents actual and required capital ratios for the Bank under the Basel III Capital Rules. The minimum required capital amounts presented include the minimum required capital levels as of September 30, 2022 based on the required capital levels as of January 1, 2019 when the Basel III Capital Rules were fully phased-in. Capital levels required to be considered well capitalized are based upon prompt corrective action regulations, as amended to reflect the changes under the Basel III Capital Rules.


	Actual				Minimum Capital Required – Basel III Fully Phased-In				To Be Well Capitalized Under Prompt Corrective Action Provisions
(dollars in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio
Bank:
Common equity Tier 1 capital (to risk-weighted assets)	$	309,547	12.49	%	$	173,440	7.00	%	$	161,051	6.50	%
Tier 1 risk-based capital	309,547		12.49		210,606		8.50		198,217		8.00
Total risk-based capital	338,210		13.65		260,160		10.50		247,771		10.00
Tier 1 leverage capital	309,547		9.76		126,844		4.00		158,555		5.00

LIQUIDITY AND ASSET/LIABILITY MANAGEMENT

Liquidity Management

Liquidity management encompasses our ability to ensure that funds are available to meet the cash flow requirements of depositors and borrowers, while also ensuring adequate cash flow exists to meet the Company’s needs, including operating, strategic and capital. The Company develops its liquidity management strategies as part of its overall asset/liability management process. Our primary sources of funds are from deposits, amortization of loans, loan prepayments and the maturity of loans, investment securities and other investments, and other funds provided from operations. While scheduled payments from the amortization of loans and investment securities and maturing investment securities are relatively predictable sources of funds, deposit flows and loan prepayments can be greatly influenced by general interest rates, economic conditions and competition. The Company also maintains excess funds in short-term, interest-bearing assets that provide additional liquidity.

The Company uses its liquidity to fund existing and future loan commitments, to fund maturing certificates of deposit and demand deposit withdrawals, to invest in other interest-earning assets and to meet operating expenses. At September 30, 2022,

certificates of deposit maturing within the next 12 months totaled $274.7 million. Based upon historical experience, the Company anticipates that a significant portion of the maturing certificates of deposit will be redeposited with us.

In addition to cash flow from loan and securities payments and prepayments as well as from sales of securities available for sale, the Company has significant borrowing capacity available to fund liquidity needs. In recent years, the Company has utilized borrowings as a cost efficient addition to deposits as a source of funds. Borrowings consist of advances from the FHLB of Dallas, of which the Company is a member. Under terms of the collateral agreement with the FHLB, the Company pledges residential mortgage loans and investment securities as well as the Company’s stock in the FHLB as collateral for such advances. For the nine months ended September 30, 2022, the average balance of outstanding FHLB advances was $25.4 million. At September 30, 2022, the Company had $24.8 million in total outstanding FHLB advances and had $1.1 billion in additional FHLB advances available.

Asset/Liability Management

The objective of asset/liability management is to implement strategies for the funding and deployment of the Company’s financial resources that are expected to maximize soundness and profitability over time at acceptable levels of risk. Interest rate sensitivity is the potential impact of changing rate environments on both net interest income and cash flows. The Company measures its interest rate sensitivity over the near term primarily by running net interest income simulations. Our interest rate sensitivity also is monitored by management through the use of a model which generates estimates of the change in its net interest income over a range of interest rate scenarios. Based on the Company’s interest rate risk model, the table below sets forth the results of immediate and sustained changes in interest rates as of September 30, 2022.


Shift in Interest Rates (in bps)						% Change in Projected Net Interest Income
+300						2.5%
+200						1.8%
+100						0.9%
-100						(3.3)%

The actual impact of changes in interest rates will depend on many factors. These factors include the Company’s ability to achieve expected growth in earning assets and maintain a desired mix of earning assets and interest-bearing liabilities, the actual timing of asset and liability repricing, the magnitude of interest rate changes and corresponding movement in interest rate spreads and the level of success of asset/liability management strategies.

During the second quarter of 2020, the Company entered into certain interest rate swap agreements as part of its interest rate risk management strategy. The Company’s objectives in using interest rate derivatives are to manage its exposure to interest rate movements. During 2022 and 2021, such derivatives were used to hedge the variable cost associated with existing variable rate liabilities. Refer to Note 7 of the Consolidated Financial Statements for more information on the effects of the derivative financial instruments on the consolidated financial statements.

To meet the financing needs of its customers, the Company issues financial instruments which represent conditional obligations that are not recognized, wholly or in part, in the statements of financial condition. These financial instruments include commitments to extend credit and standby letters of credit. Such instruments expose the Company to varying degrees of credit and interest rate risk in much the same way as funded loans. The same credit policies are used in these commitments as for on-balance sheet instruments. At September 30, 2022 and December 31, 2021, the Company's allowance for credit losses on unfunded commitments totaled $2.3 million and $1.8 million, respectively.

The following table summarizes our outstanding commitments to originate loans and to advance additional amounts pursuant to outstanding letters of credit, lines of credit and undisbursed construction loans as of the periods indicated.


	Contract Amount
(dollars in thousands)	September 30, 2022		December 31, 2021
Standby letters of credit	$	6,674	$	5,075
Available portion of lines of credit	356,464		320,611
Undisbursed portion of loans in process	179,917		142,048
Commitments to originate loans	218,874		153,487

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to be drawn upon, the total commitment amounts generally represent future cash requirements.

Unfunded commitments under commercial lines of credit, revolving credit lines and overdraft protection agreements are commitments for possible future extensions of credit to existing customers. These lines of credit usually do not contain a specified maturity date and may not be drawn upon to the total extent to which the Company is committed.

The Company is subject to certain claims and litigation arising in the ordinary course of business. In the opinion of management, after consultation with legal counsel, the ultimate disposition of these matters is not expected to have a material effect on the financial condition or results of operations of the Company.

RESULTS OF OPERATIONS

Net income for the third quarter of 2022 was $10.4 million, down $4.6 million compared to the third quarter of 2021. Diluted EPS for the third quarter of 2022 was $1.28, down $0.51 compared to the third quarter of 2021.

Net income for the nine months ended September 30, 2022 was $23.3 million, down $15.1 million, compared to the nine months ended September 30, 2021. Diluted EPS for the nine months ended September 30, 2022 was $2.84, down $1.70 compared to the nine months ended September 30, 2021.

The net income for the three and nine months ended September 30, 2022 and 2021 was significantly impacted by the acquisition of Friendswood's loan portfolio, the change in our estimate of the allowance for loan losses over the comparable periods and the recognition of PPP lender fees. During the three and nine months ended September 30, 2022, the Company provisioned $1.7 million and $5.5 million, respectively, to the allowance for loan losses primarily due to loan growth and the acquisition of Friendswood. During the three and nine months ended September 30, 2021, the Company reversed $2.4 million and $7.5 million, respectively, from the allowance for loan losses. The Company recognized $108,000 and $1.2 million of deferred PPP lender fees during the three and nine months ended September 30, 2022, respectively, compared to $4.4 million and $9.4 million, respectively, during the comparable periods in 2021.

Net Interest Income

Net interest income is the difference between the interest income earned on interest-earning assets, such as loans and investment securities, and the interest expense paid on interest-bearing liabilities, such as deposits and borrowings. The Company’s net interest income is largely determined by our net interest spread, which is the difference between the average yield earned on interest-earning assets and the average rate paid on interest-bearing liabilities, and the relative amounts of interest-earning assets and interest-bearing liabilities. The Company’s tax-equivalent net interest spread was 3.95% and 4.05% for the quarters ended September 30, 2022 and 2021, respectively, and 3.65% and 3.89% for the nine months ended September 30, 2022 and 2021, respectively.

Net interest income totaled $32.0 million for the third quarter of 2022, up $4.8 million, or 17.8%, compared to the third quarter of 2021. For the nine months ended September 30, 2022, net interest income totaled $84.7 million, up $8.4 million, or 11.0%, compared to the nine months ended September 30, 2021.

Loan income from deferred PPP lender fees totaled $108,000 for the third quarter of 2022, down $4.3 million, or 97.5%, compared to the third quarter of 2021. For the nine months ended September 30, 2022, loan income from PPP lender fees

totaled $1.2 million, down $8.2 million from the comparable period in 2021. Unrecognized PPP lender fees totaled $103,000 at September 30, 2022.

The Company’s tax-equivalent net interest margin, which is net interest income as a percentage of average interest-earning assets, was 4.11% and 4.16% for the quarters ended September 30, 2022 and 2021, respectively. For the same periods, the average loan yield was 5.17% and 5.60%, respectively. PPP loans did not significantly impact the net interest margin and the average loan yield during the third quarter of 2022. During the third quarter of 2021, PPP loans increased the net interest margin by 52 bps and increased the average loan yield by 60 bps. Excluding the impact of PPP loans, the net interest margin and the average loan yield increased by 47 and 17 bps, respectively, over the comparable quarters.

The net interest margin for the nine months ended September 30, 2022 and 2021 was 3.77% and 4.01%, respectively. For the same periods, the average loan yield was 5.01% and 5.25%, respectively. PPP loans increased the the net interest margin by four bps and the average loan yield by four bps during the nine months ended September 30, 2022. During the nine months ended September 30, 2021, PPP loans increased the net interest margin by 27 bps and the average loan yield by 22 bps. Excluding the impact of PPP loans, the net interest margin and the average loan yield decreased by one and six bps, respectively, over the comparable year-to-date periods.

Average PPP loans were $9.4 million and $144.6 million for the third quarters of 2022 and 2021, respectively. For the nine months ended September 30, 2022 and 2021, average PPP loans were $18.7 million and $203.5 million, respectively.

Acquired loan discount accretion included in interest income totaled $847,000 and $556,000 for the quarters ended September 30, 2022 and 2021, respectively. For the nine months ended September 30, 2022 and 2021, acquired loan discount accretion included in interest income totaled $2.2 million and $1.9 million, respectively.

The following tables set forth, for the periods indicated, information regarding (i) the total dollar amount of interest income of the Company from interest-earning assets and the resultant average yields; (ii) the total dollar amount of interest expense on interest-bearing liabilities and the resultant average rate; (iii) net interest income; (iv) net interest spread; and (v) net interest margin. Information is based on average monthly balances during the indicated periods. Taxable equivalent yields are calculated using a marginal tax rate of 21%.


	Three Months Ended September 30,
	2022						2021
(dollars in thousands)	Average Balance		Interest		Average Yield/Rate		Average Balance		Interest		Average Yield/Rate
Interest-earning assets:
Loans receivable (1)	$	2,265,846	$	29,859	5.17	%	$	1,896,808	$	27,045	5.60	%
Investment securities
Taxable	504,241		2,812		2.23		259,282		1,108		1.71
Tax-exempt (TE)	28,059		146		2.64		19,168		81		2.13
Total investment securities	532,300		2,958		2.25		278,450		1,189		1.74
Other interest-earning assets	262,127		1,447		2.19		388,723		189		0.19
Total interest-earning assets (TE)	3,060,273		$	34,264	4.41		2,563,981		$	28,423	4.36
Noninterest-earning assets	205,634						192,372
Total assets	$	3,265,907					$	2,756,353
Interest-bearing liabilities:
Deposits:
Savings, checking and money market	$	1,522,350	$	876	0.23	%	$	1,312,131	$	605	0.18	%
Certificates of deposit	371,925		394		0.42		332,916		515		0.61
Total interest-bearing deposits	1,894,275		1,270		0.27		1,645,047		1,120		0.27
Other borrowings	5,539		53		3.80		5,539		53		3.80
Subordinated debt	53,943		859		6.37		—		—		—
Short-term FHLB advances	—		—		—		—		—		—


	Three Months Ended September 30,
	2022						2021
(dollars in thousands)	Average Balance		Interest		Average Yield/Rate		Average Balance		Interest		Average Yield/Rate
Long term FHLB advances	24,977		105		1.68		27,011		116		1.72
Total interest-bearing liabilities	1,978,734		$	2,287	0.46		1,677,597		$	1,289	0.31
Noninterest-bearing liabilities	952,120						736,567
Total liabilities	2,930,854						2,414,164
Shareholders’ equity	335,053						342,189
Total liabilities and shareholders' equity	$	3,265,907					$	2,756,353
Net interest-earning assets	$	1,081,539					$	886,384
Net interest spread (TE)			$	31,977	3.95	%			$	27,134	4.05	%
Net interest margin (TE)					4.11	%					4.16	%

(1) Nonperforming loans are included in the respective average loan balances, net of deferred fees, discounts and loans in process.


	Nine Months Ended September 30,
	2022						2021
(dollars in thousands)	Average Balance		Interest		Average Yield/Rate		Average Balance		Interest		Average Yield/Rate
Interest-earning assets:
Loans receivable (1)	$	2,107,871	$	79,834	5.01	%	$	1,949,004	$	77,362	5.25	%
Investment securities
Taxable	433,270		6,576		2.02		252,309		3,069		1.62
Tax-exempt (TE)	23,325		338		2.45		19,967		262		2.22
Total investment securities	456,595		6,914		2.05		272,276		3,331		1.67
Other interest-earning assets	414,122		2,587		0.84		296,233		421		0.19
Total interest-earning assets (TE)	2,978,588		$	89,335	3.97		2,517,513		$	81,114	4.27
Noninterest-earning assets	202,022						189,256
Total assets	$	3,180,610					$	2,706,769
Interest-bearing liabilities:
Deposits:
Savings, checking and money market	$	1,523,033	$	2,079	0.18	%	$	1,289,759	$	2,328	0.24	%
Certificates of deposit	365,584		1,187		0.43		342,167		1,928		0.75
Total interest-bearing deposits	1,888,617		3,266		0.23		1,631,926		4,256		0.35
Other borrowings	5,624		160		3.80		5,594		159		3.81
Subordinated debt	18,436		859		6.22		—		—		—
Short-term FHLB advances	—		—		—		—		—		—
Long term FHLB advances	25,396		321		1.69		27,706		360		1.73
Total interest-bearing liabilities	1,938,073		$	4,606	0.32		1,665,226		$	4,775	0.38
Noninterest-bearing liabilities	902,920						707,117
Total liabilities	2,840,993						2,372,343
Shareholders’ equity	339,617						334,426
Total liabilities and shareholders' equity	$	3,180,610					$	2,706,769
Net interest-earning assets	$	1,040,515					$	852,287
Net interest spread (TE)			$	84,729	3.65	%			$	76,339	3.89	%
Net interest margin (TE)					3.77	%					4.01	%

(1) Nonperforming loans are included in the respective average loan balances, net of deferred fees, discounts and loans in process.

The following table displays the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities. The table distinguishes between (i) changes attributable to volume (changes in average volume between periods times prior year rate), (ii) changes attributable to rate (changes in average rate between periods times prior year volume) and (iii) total increase (decrease).


	Three Months Ended September 30,						Nine Months Ended September 30,
	2022 Compared to 2021						2022 Compared to 2021
	Change Attributable To						Change Attributable To
(dollars in thousands)	Rate		Volume		Increase/ (Decrease)		Rate		Volume		Increase/ (Decrease)
Interest income:
Loans receivable	$	(1,698)	$	4,512	$	2,814	$	56	$	2,416	$	2,472
Investment securities	518		1,251		1,769		1,548		2,035		3,583
Other interest-earning assets	1,638		(380)		1,258		1,296		870		2,166
Total interest income	458		5,383		5,841		2,900		5,321		8,221
Interest expense:
Savings, checking and money market accounts	169		102		271		(287)		38		(249)
Certificates of deposit	(171)		50		(121)		(530)		(211)		(741)
Other borrowings	—		—		—		—		1		1
Subordinated debt	—		859		859		—		859		859
FHLB advances	(2)		(9)		(11)		(16)		(23)		(39)
Total interest expense	(4)		1,002		998		(833)		664		(169)
Increase (decrease) in net interest income	$	462	$	4,381	$	4,843	$	3,733	$	4,657	$	8,390

Noninterest Income

Noninterest income for the third quarter of 2022 totaled $3.5 million, down $1.9 million, or 35.5%, from $5.4 million earned for the same period in 2021. Noninterest income for the nine months ended September 30, 2022 totaled $10.5 million, down $2.2 million, or 17.2%, from $12.7 million earned for the same period in 2021.

Gains on the sale of loans for the third quarter of 2022 were down $337,000, or 81.2%, from the comparable period in 2021. The origination of mortgage loans held for sale continued declining in the third quarter of 2022 reflecting, in part, the rising interest rate environment. For the nine months ended September 30, 2022, gains on the sale of loans were down $1.5 million or 70.1% from the comparable period in 2021.

The net gain on the sale of assets totaled $18,000 and $17,000 for the three and nine months ended September 30, 2022. This was up $21,000 and $477,000, respectively, from the net losses recorded for three and nine months ended September 30, 2021. During the second quarter of 2021, the Company sold and leased back one of its Mississippi branch locations. The sale transferred control to the buyer-lessor and all losses were recognized at the time of the sale.

Income from service fees and charges for the third quarter of 2022 was up $40,000, or 3.2%, from the third quarter of 2021. For the nine months ended September 30, 2022, income from service fees and charges was up $244,000, or 7.0%. The change in income from service fees and charges over the three and nine month periods was primarily due to the change in income from overdraft fees on deposit accounts.

Income from bank-owned life insurance for the third quarter of 2022 was down $1.7 million. or 88.1%, from the third quarter of 2021 and down $1.7 million. or 72.4%, from the nine months ended September 2021 due to a non-taxable BOLI benefit totaling $1.7 million we recognized following the death of a former employee in the third quarter of 2021.

Income from bank card fees for the three and nine months ended September 30, 2022 was up $104,000, or 6.8% and $297,000, or 6.7%, respectively, from the comparable period in 2021 primarily due to increased transaction activity by our cardholders.

Noninterest Expense

Noninterest expense for the third quarter of 2022 totaled $20.7 million, up $4.3 million, or 26.1%, from the third quarter of 2021. Noninterest expense for the third quarter of 2022 includes merger-related expenses totaling $60,000 (pre-tax). The increase in noninterest expense related primarily to the Friendswood acquisition and the attendant growth of the Company’s employee base as well as the resultant higher occupancy expense and data processing costs.

Noninterest expense for the nine months ended September 30, 2022 totaled $60.7 million, up $11.8 million, or 24.0%, from the same period in 2021. Noninterest expense includes merger-related expenses for the Friendswood acquisition totaling $2.0 million (pre-tax) for the nine months ended September 30, 2022. Other noninterest expense for the nine months ended September 30, 2022 was up $850,000, or 30.7%, from the comparable period in 2021 primarily due to charge offs related to fraud on deposit accounts. The increase in noninterest expense for the comparable period related primarily to the Friendswood acquisition and the attendant growth of the Company’s employee base as well as the resultant higher occupancy expense and data processing costs.

Income Taxes

Income tax expense for the three and nine months ended September 30, 2022 totaled $2.6 million and $5.7 million, respectively, compared to $3.4 million and $9.2 million for the three and nine months ended September 30, 2021, respectively. The decrease in income tax expense over the comparable periods were primarily due to decreases in taxable earnings.

The Company's effective tax rates for the third quarters of 2022 and 2021 were 19.9% and 18.5%, respectively. The effective tax rate decreased over the comparable three-month periods primarily due to an increase in non-taxable earnings from bank-owned life insurance during 2021. For the nine months ended September 30, 2022 and 2021, the Company's effective tax rates were 19.8% and 19.4%, respectively.

CRITICAL ACCOUNTING ESTIMATES

SEC guidance requires disclosure of “critical accounting estimates.” The SEC defines “critical accounting estimates” as those estimates made in accordance with generally accepted accounting principles that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on the financial condition or results of operations of the registrant.

We follow financial accounting and reporting policies that are in accordance with accounting principles generally accepted in the United States. Our accounting policies are discussed in detail in Note 1 - Basis of Presentation in the accompanying notes to the consolidated financial statements included elsewhere in this report and in our 2021 Annual Report on Form 10-K. Not all significant accounting policies require management to make difficult, subjective or complex judgments. However, management believes the policy noted below meets the SEC’s definition of a critical accounting policy.

Allowance for Credit Losses

Management considers the policies related to the allowance for credit losses as the most critical to the financial statement presentation. The total allowance for credit losses includes activity related to allowances calculated in accordance with Accounting Standards Codification 326, Credit Losses. The allowance for credit losses is established through a provision for credit losses charged to current earnings. The amount maintained in the allowance reflects management’s continuing evaluation of the credit losses expected to be recognized over the life of the loans in our portfolio. The allowance for credit losses on loans is a valuation account that is deducted from the loans' amortized cost basis to present the net amount expected to be collected on the loans. For purposes of determining the allowance for credit losses, the loan portfolio is segregated by product types in order to recognize differing risk profiles among categories. Loans that do not share risk characteristics are evaluated on an individual basis and are not included in the collective evaluation. Management estimates the allowance balance using relevant available information from internal and external sources relating to past events, current conditions and reasonable and supportable forecasts. Adjustments to historical loss information are made to incorporate our reasonable and supportable forecast of future losses at the portfolio segment level, as well as any necessary qualitative adjustments, including, but not limited to, changes in current and expected future economic conditions, changes in industry experience and industry loan concentrations, changes in the volume and severity of nonperforming assets, changes in lending policies and personnel and changes in the competitive and regulatory environment of the banking industry. Loans that do not share similar risk characteristics are individually evaluated and are excluded from the pooled loan analysis.

Reconciliation of Non-GAAP Measures

The following table provides a reconciliation of Non-GAAP financial measures used herein to GAAP reporting. For further information, see "Non-GAAP Financial Measures" on page 38 .

Financial Condition


(dollars in thousands)	September 30, 2022			December 31, 2021
Total loans	$	2,303,279		$	1,840,093
Less: PPP loans	7,094			43,637
Less: Friendswood loan portfolio	318,907
Total loans excluding PPP loans	$	1,977,278		$	1,796,456

Allowance for loan losses to total loans	1.19		%	1.15		%
Less: PPP loans	—			0.02
Non-GAAP allowance for loan losses to total loans	1.19		%	1.17		%

Results of Operations


	Three Months Ended September 30,						Nine Months Ended September 30,
(dollars in thousands)	2022			2021			2022			2021
Reported loan income	$	29,859		$	27,045		$	79,834		$	77,362
Less: PPP loan income	132			4,742			1,333			11,007
Loan income excluding PPP loan income	$	29,727		$	22,303		$	78,501		$	66,355

Provision (reversal) for loan losses	$	1,696		$	(2,385)		$	5,502		$	(7,513)
Less: CECL impact for acquisition	—			—			3,802			—
Provision reversal for organic loans	$	1,696		$	(2,385)		$	1,700		$	(7,513)

Average total loans	$	2,265,846		$	1,896,808		$	2,107,871		$	1,949,004
Less: average PPP loans	9,431			144,626			18,660			203,506
Average total loans excluding PPP loans	$	2,256,415		$	1,752,182		$	2,089,211		$	1,745,498

Loan yield	5.17		%	5.60		%	5.01		%	5.25		%
Impact of PPP loans	—			(0.60)			(0.04)			(0.22)
Loan yield excluding PPP loans	5.17		%	5.00		%	4.97		%	5.03		%

Net interest margin	4.11		%	4.16		%	3.77		%	4.01		%
Impact of PPP loans	—			(0.52)			(0.04)			(0.27)
Net interest margin excluding PPP loans	4.11		%	3.64		%	3.73		%	3.74		%


Item 3.			Quantitative and Qualitative Disclosures About Market Risk.

Quantitative and qualitative disclosures about market risk are presented in the Company’s Annual Report on Form 10-K filed with the SEC for the year ended December 31, 2021, under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Asset/Liability Management and Market Risk”. Additional information at September 30, 2022 is included herein under Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Asset/Liability Management”.


Item 4.			Controls and Procedures.

Our management evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and regulations and are operating in an effective manner.

No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15(d)-15(f) under the Securities Exchange Act of 1934) occurred during the third quarter of 2022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION


Item 1.			Legal Proceedings .

Not applicable.


Item 1A.			Risk Factors .

There have been no material changes from the risk factors previously disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2021 filed with the Securities and Exchange Commission.


Item 2.			Unregistered Sales of Equity Securities and the Use of Proceeds .

The Company’s purchases of its common stock made during the quarter ended September 30, 2022 consisted of stock repurchases under the Company’s approved plans and are set forth in the following table.


Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares that May Yet be Purchased Under the Plan or Programs (1)
July 1 – July 31, 2022	35,451	$	35.68	35,451	238,603
August 1 – August 31, 2022	5,160	38.60		5,160	233,443
September 1 – September 30, 2022	36,410	38.18		36,410	197,033
Total	77,021	$	37.06	77,021	197,033

(1) On October 26, 2021, the Company announced the approval of a new repurchase program (the “2021 Repurchase Plan”). Under the 2021 Repurchase Plan, the Company may purchase up to an additional 430,000 shares, or approximately 5% of the Company’s outstanding common stock. Share repurchases under the 2021 Repurchase Plan commenced upon completion of the Company’s 2020 Repurchase Plan.


Item 3.			Defaults Upon Senior Securities .

None.


Item 4.			Mine Safety Disclosures .

None.


Item 5.			Other Information .

None.


Item 6.			Exhibits and Financial Statement Schedules .

No.

Description

Location

4.1

Indenture, dated June 30, 2022, by and between Home Bancorp, Inc. and UMB Bank, National Association, as trustee.

(incorporated by reference from the like-numbered exhibit included in Home Bancorp’s Current Report on Form 8-K, dated as of June 30, 2022 and filed July 1, 2022 (SEC File No. 001-34190))

31.1

Rule 13(a)-14(a) Certification of the Chief Executive Officer

Filed herewith

31.2

Rule 13(a)-14(a) Certification of the Chief Financial Officer

Filed herewith

32.0

Section 1350 Certification

Filed herewith

101.INS

XBRL Instance Document

101.SCH

XBRL Taxonomy Extension Schema Document

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

XBRL Taxonomy Extension Definitions Linkbase Document

101.LAB

XBRL Taxonomy Extension Label Linkbase Document

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document

104

Cover page Interactive Data File (embedded within the Inline XBRL document)

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

HOME BANCORP, INC.

November 4, 2022

By:

/s/ John W. Bordelon

John W. Bordelon

Chairman of the Board, President and Chief Executive Officer

November 4, 2022

By:

/s/ David T. Kirkley

David T. Kirkley

Senior Executive Vice President and Chief Financial Officer

November 4, 2022

By:

/s/ Mary H. Hopkins

Mary H. Hopkins

Home Bank, N. A. Senior Vice President and Director of Financial Management

TABLE OF CONTENTS

Item 2. Management S Discussion and Analysis Of Financial Condition and Results Of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk Item 4. Controls and Procedures Part II. Other Information Item 1. Legal Proceedings Item 1A. Risk Factors Item 2. Unregistered Sales Of Equity Securities and The Use Of Proceeds Item 3. Defaults Upon Senior Securities Item 4. Mine Safety Disclosures Item 5. Other Information Item 6. Exhibits and Financial Statement Schedules

Exhibits

31.1 Rule 13(a)-14(a) Certification of the Chief Executive Officer Filed herewith 31.2 Rule 13(a)-14(a) Certification of the Chief Financial Officer Filed herewith 32.0 Section1350 Certification Filed herewith

HBCP 10-Q Quarter ended Sept. 30, 2022

Exhibits