Companies: 10,793     total market cap: $134.285 T
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Home Bancorp
HBCP
#7249
Rank
$0.48 B
Marketcap
๐Ÿ‡บ๐Ÿ‡ธ United States
Country
$61.39
Share price
-0.62%
Change (1 day)
47.96%
Change (1 year)
๐Ÿฆ Banks๐Ÿ’ณ Financial services
Categories
  1. Home Bancorp
  2. Quarterly Reports (10-Q)
  3. Financial Year FY2022 Q3

Home Bancorp - 10-Q quarterly report FY2022 Q3


Text size:
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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
or
☐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)
 
Louisiana71-1051785
(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 classTrading symbol(s)Name of each exchange on which registered
Common StockHBCP
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.
38
Item 3.
54
Item 4.
54
PART II - OTHER INFORMATION
Item 1.
55
Item 1A.
55
Item 2.
55
Item 3.
56
Item 4.
56
Item 5.
56
Item 6.
56
57

i

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

ii

HOME BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)(Audited)
(dollars in thousands)September 30, 2022December 31, 2021
Assets
Cash and cash equivalents$150,556 $601,443 
Interest-bearing deposits in banks349 349 
Investment securities available for sale, at fair value492,758 327,632 
Investment securities held to maturity (fair values of $1,066 and $2,132, respectively)
1,080 2,102 
Mortgage loans held for sale169 1,104 
Loans, net of unearned income2,303,279 1,840,093 
Allowance for loan losses(27,351)(21,089)
Total loans, net of unearned income and allowance for loan losses2,275,928 1,819,004 
Office properties and equipment, net43,685 43,542 
Cash surrender value of bank-owned life insurance46,019 40,361 
Goodwill and core deposit intangibles87,839 61,949 
Accrued interest receivable and other assets69,283 40,758 
Total Assets$3,167,666 $2,938,244 
Liabilities
Deposits:
Noninterest-bearing$921,089 $766,385 
Interest-bearing1,817,335 1,769,464 
Total Deposits2,738,424 2,535,849 
Other borrowings5,539 5,539 
Subordinated debt, net of issuance cost53,958 — 
Long-term Federal Home Loan Bank advances24,816 26,046 
Accrued interest payable and other liabilities28,273 18,907 
Total Liabilities2,851,010 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 earnings197,553 188,515 
Accumulated other comprehensive (loss) income(42,854)744 
Total Shareholders’ Equity316,656 351,903 
Total Liabilities and Shareholders’ Equity$3,167,666 $2,938,244 
 The accompanying Notes are an integral part of these Consolidated Financial Statements.
1

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)2022202120222021
Interest Income
Loans, including fees$29,859 $27,045 $79,834 $77,362 
Investment securities:
Taxable interest2,812 1,108 6,576 3,069 
Tax-exempt interest
146 81 338 262 
Other investments and deposits1,447 189 2,587 421 
Total interest income34,264 28,423 89,335 81,114 
Interest Expense
Deposits1,270 1,120 3,266 4,256 
Other borrowings 53 53 160 159 
Subordinated debt expense859 — 859 — 
Long-term Federal Home Loan Bank advances105 116 321 360 
Total interest expense2,287 1,289 4,606 4,775 
Net interest income31,977 27,134 84,729 76,339 
Provision (reversal) for loan losses1,696 (2,385)5,502 (7,513)
Net interest income after provision (reversal) for loan losses30,281 29,519 79,227 83,852 
Noninterest Income
Service fees and charges1,300 1,260 3,722 3,478 
Bank card fees1,623 1,519 4,713 4,416 
Gain on sale of loans, net78 415 641 2,142 
Income from bank-owned life insurance231 1,938 658 2,384 
Gain (loss) on sale of assets, net18 (3)17 (460)
Other income224 254 795 777 
Total noninterest income3,474 5,383 10,546 12,737 
Noninterest Expense
Compensation and benefits12,128 9,809 34,870 29,160 
Occupancy2,297 1,717 6,454 5,146 
Marketing and advertising658 399 1,713 838 
Data processing and communication2,284 2,118 7,012 6,263 
Professional services331 234 1,348 685 
Forms, printing and supplies185 158 584 480 
Franchise and shares tax633 360 1,415 1,079 
Regulatory fees467 301 1,611 986 
Foreclosed assets and ORE, net101 74 493 298 
Amortization of acquisition intangible453 291 1,159 884 
Provision for credit losses on unfunded commitments146 — 448 375 
Other expenses1,040 970 3,621 2,771 
Total noninterest expense20,723 16,431 60,728 48,965 
Income before income tax expense13,032 18,471 29,045 47,624 
Income tax expense2,598 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.
2

HOME BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended
September 30,		Nine Months Ended
September 30,
(dollars in thousands)2022202120222021
Net Income$10,434 $15,059 $23,296 $38,383 
Other Comprehensive Loss
Unrealized losses on available for sale investment securities(25,149)(1,897)(58,980)(5,201)
Unrealized gains on cash flow hedges1,297 55 3,793 974 
Tax effect5,009 387 11,589 887 
Other comprehensive loss, net of taxes(18,843)(1,455)(43,598)(3,340)
Comprehensive (Loss) Income$(8,409)$13,604 $(20,302)$35,043 
 The accompanying Notes are an integral part of these Consolidated Financial Statements.
3


HOME BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Unaudited)
(dollars in thousands, except per share data)Common stockAdditional Paid-in capitalUnallocated Common Stock Held by ESOPUnallocated Common Stock Held by RRPRetained EarningsAccumulated Other Comprehensive Income (Loss)Total
Balance, June 30, 2021$87 $165,296 $(2,589)$(15)$171,644 $3,389 $337,812 
Net income15,059 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 allocation269 90 359 
Share-based compensation cost235 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 income10,434 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 allocation309 89 398 
Share-based compensation cost159 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.
4

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 income38,383 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 allocation849 268 1,117 
Share-based compensation cost595 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 income23,296 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 allocation933 268 1,201 
Share-based compensation cost496 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.
5

HOME BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 For the Nine Months Ended
September 30,
(dollars in thousands)20222021
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 losses5,502 (7,513)
Depreciation2,538 2,301 
Amortization and accretion of purchase accounting valuations and intangibles3,020 2,762 
Federal Home Loan Bank stock dividends(22)(11)
Net amortization of discount on investments871 1,484 
Amortization of subordinated debt issuance cost60 — 
Gain on loans sold, net(641)(2,142)
Proceeds, including principal payments, from loans held for sale64,755 165,995 
Originations of loans held for sale(63,179)(157,770)
(Gain) loss on sale of assets, net(17)460 
Non-cash compensation1,697 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 liabilities9,085 793 
Net cash provided by operating activities36,675 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 sale44,692 64,278 
Proceeds from maturities, prepayments and calls on securities held to maturity1,000 800 
Proceeds from sales of securities available for sale— 5,068 
(Increase) decrease in loans, net(151,039)99,621 
Proceeds from sale of foreclosed assets2,557 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 equipment73 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 cost53,898 — 
Proceeds from exercise of stock options182 80 
Issuance of stock under incentive plans, net243 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, beginning601,443 187,952 
Cash and cash equivalents, ending$150,556 $413,694 
The accompanying Notes are an integral part of these Consolidated Financial Statements.
6

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.


7

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 AcquiredFair Value AdjustmentsAs recorded by Home Bancorp
Assets
Cash and cash equivalents$48,741 $— $48,741 
Investment securities33,679 (268)(a)33,411 
Loans320,050 (2,558)(b)317,492 
Repossessed assets950 (246)(c)704 
Office properties and equipment, net1,663 (116)(d)1,547 
Core deposit intangible— 4,597 (e)4,597 
Other assets9,687 (1,688)(f)7,999 
Total assets acquired$414,770 $(279)$414,491 
Liabilities
Noninterest-bearing deposits$97,668 — $97,668 
Interest-bearing deposits269,301 1,022 (g)270,323 
Other liabilities3,873 215 (h)4,088 
Total liabilities assumed$370,842 $1,237 $372,079 
Excess of assets acquired over liabilities assumed42,412 
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.
8

(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 acquisition1,415 
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)20222021
Net interest income$89,764 $91,007 
Noninterest income11,450 15,024 
Noninterest expense64,263 60,522 
Net income24,845 41,887 
Earnings per share - basic$3.07 $4.98 
Earnings per share - diluted3.05 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.
9

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 CostGross Unrealized GainsGross Unrealized LossesFair Value
September 30, 2022   
Available for sale:
U.S. agency mortgage-backed$361,235 $7 $42,025 $319,217 
Collateralized mortgage obligations95,699 — 5,163 90,536 
Municipal bonds67,629 2 10,726 56,905 
U.S. government agency20,849 2 1,238 19,613 
Corporate bonds6,979 — 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 CostGross Unrealized GainsGross Unrealized LossesFair Value
December 31, 2021   
Available for sale:
U.S. agency mortgage-backed$234,720 $1,793 $2,740 $233,773 
Collateralized mortgage obligations31,356 557 1 31,912 
Municipal bonds51,094 402 777 50,719 
U.S. government agency5,615 8 9 5,614 
Corporate bonds5,500 114 — 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 


10

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 LessAfter One Year through Five YearsAfter Five Years through Ten YearsAfter Ten YearsTotal
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 bonds500 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 LessAfter One Year through Five YearsAfter Five Years through Ten YearsAfter Ten YearsTotal
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 bonds500 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.

11

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 YearOver 1 YearTotal
September 30, 2022Fair ValueUnrealized LossesFair ValueUnrealized LossesFair ValueUnrealized Losses
Available for sale:
U.S. agency mortgage-backed$221,881 $22,585 $96,763 $19,440 $318,644 $42,025 
Collateralized mortgage obligations89,820 5,160 698 3 90,518 5,163 
Municipal bonds36,410 4,846 19,493 5,880 55,903 10,726 
U.S. government agency17,862 1,232 666 6 18,528 1,238 
Corporate bonds3,301 178 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 YearOver 1 YearTotal
December 31, 2021Fair ValueUnrealized LossesFair ValueUnrealized LossesFair ValueUnrealized Losses
Available for sale:
U.S. agency mortgage-backed$158,908 $2,382 $11,575 $358 $170,483 $2,740 
Collateralized mortgage obligations254 1 988 — 1,242 1 
Municipal bonds29,047 719 1,228 58 30,275 777 
U.S. government agency— — 1,001 9 1,001 9 
Corporate bonds3,499 — — — 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.

12

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/ABBB/BB/BTotal
September 30, 2022
Held to maturity:
Municipal bonds$1,080 $— $1,080 
Credit Ratings
(dollars in thousands)AAA/AA/ABBB/BB/BTotal
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)2022202120222021
Numerator:
Net income available to common shareholders$10,434 $15,059 $23,296 $38,383 
Denominator:
Weighted average common shares outstanding8,089 8,354 8,162 8,413 
Effect of dilutive securities:
Restricted stock11 12 14 12 
Stock options38 40 43 35 
Weighted average common shares outstanding – assuming dilution8,138 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.
13

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.

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
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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, 2022December 31, 2021
Real estate loans:
One- to four-family first mortgage
$376,028 $350,843 
Home equity loans and lines60,624 60,312 
Commercial real estate1,086,656 801,624 
Construction and land328,753 259,652 
Multi-family residential97,212 90,518 
Total real estate loans1,949,273 1,562,949 
Other loans:
Commercial and industrial320,900 244,123 
Consumer33,106 33,021 
Total other loans354,006 277,144 
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.




















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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 EvaluatedIndividually EvaluatedTotal
Allowance for credit losses:
One- to four-family first mortgage
$2,293 $32 $2,325 
Home equity loans and lines500 — 500 
Commercial real estate12,504 1,193 13,697 
Construction and land4,973 — 4,973 
Multi-family residential498 — 498 
Commercial and industrial4,523 188 4,711 
Consumer647 — 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 lines60,624 — 60,624 
Commercial real estate1,075,964 10,692 1,086,656 
Construction and land328,753 — 328,753 
Multi-family residential97,212 — 97,212 
Commercial and industrial320,656 244 320,900 
Consumer33,020 86 33,106 
Total loans$2,292,145 $11,134 $2,303,279 

 December 31, 2021
(dollars in thousands)Collectively EvaluatedIndividually EvaluatedTotal
Allowance for credit losses:
One- to four-family first mortgage
$1,944 $— $1,944 
Home equity loans and lines508 — 508 
Commercial real estate10,207 247 10,454 
Construction and land3,572 — 3,572 
Multi-family residential457 — 457 
Commercial and industrial3,095 425 3,520 
Consumer634 — 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 
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 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 lines60,312 — 60,312 
Commercial real estate797,751 3,873 801,624 
Construction and land259,652 — 259,652 
Multi-family residential90,518 — 90,518 
Commercial and industrial243,379 744 244,123 
Consumer33,021 — 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.

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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-offsRecoveriesProvision (Reversal)Ending
Balance
Allowance for credit losses:
One- to four-family first mortgage
$1,944 $— $— $6 $375 $2,325 
Home equity loans and lines508 — — 7 (15)500 
Commercial real estate10,454 1,220 (270)— 2,293 13,697 
Construction and land3,572 — — — 1,401 4,973 
Multi-family residential457 — — — 41 498 
Commercial and industrial3,520 195 (750)468 1,278 4,711 
Consumer634 — (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 BalanceCharge-offsRecoveriesProvision (Reversal)Ending Balance
Allowance for credit losses:
One- to four-family first mortgage
$3,065 $(176)$13 $(757)$2,145 
Home equity loans and lines676 (6)6 (155)521 
Commercial real estate18,851 (1,024)— (4,500)13,327 
Construction and land4,155 — 63 (590)3,628 
Multi-family residential1,077 — — (450)627 
Commercial and industrial4,276 (522)307 (811)3,250 
Consumer863 (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.
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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)20222021202020192018PriorRevolving LoansRevolving Loans Converted to Term LoansTotal
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 Mention150 189 — — — 358 — 500 1,197 
Substandard277 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 Mention1,118 — 350 585 — 351 751 — 3,155 
Substandard101 — 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 Mention184 533 — — — — — — 717 
Substandard87 — 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 
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September 30, 2022
Term Loans by Origination Year
(dollars in thousands)20222021202020192018PriorRevolving LoansRevolving Loans Converted to Term LoansTotal
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 Mention941 — 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 Mention2,393 722 628 585 3,319 709 1,905 500 10,761 
Substandard465 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 

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December 31, 2021
Term Loans by Origination Year
(dollars in thousands)20212020201920182017PriorRevolving LoansRevolving Loans Converted to Term LoansTotal
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 
Substandard437 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 Mention575 — — — — — — — 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 
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December 31, 2021
Term Loans by Origination Year
(dollars in thousands)20212020201920182017PriorRevolving LoansRevolving Loans Converted to Term LoansTotal
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 
Substandard16 — — — 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 Mention575 — — — 1,841 737 267 — 3,420 
Substandard453 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 

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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.

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Age analysis of past due loans as of the dates indicated are as follows.
 September 30, 2022
(dollars in thousands)30-59 Days Past Due60-89 Days Past DueGreater Than 90 Days Past DueTotal Past DueCurrent LoansTotal 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 estate154 — 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 loans1,656 205 624 2,485 1,500,939 1,503,424 
Other loans:
Commercial and industrial95 490 236 821 280,852 281,673 
Consumer187 20 190 397 28,817 29,214 
Total other loans282 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 lines23 — — 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 loans1,175 387 1,176 2,738 443,111 445,849 
Other loans:
Commercial and industrial309 294 — 603 38,624 39,227 
Consumer47 — 35 82 3,810 3,892 
Total other loans356 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 lines23 — — 23 60,601 60,624 
Commercial real estate154 — 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 loans2,831 592 1,800 5,223 1,944,050 1,949,273 
Other loans:
Commercial and industrial404 784 236 1,424 319,476 320,900 
Consumer234 20 225 479 32,627 33,106 
Total other loans638 804 461 1,903 352,103 354,006 
Total loans$3,469 $1,396 $2,261 $7,126 $2,296,153 $2,303,279 
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 December 31, 2021
(dollars in thousands)30-59 Days Past Due60-89 Days Past DueGreater Than 90 Days Past DueTotal Past DueCurrent LoansTotal 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 estate438 — 4,854 5,292 682,323 687,615 
Construction and land428 — — 428 249,802 250,230 
Multi-family residential— — — — 87,316 87,316 
Total real estate loans2,133 266 6,005 8,404 1,322,882 1,331,286 
Other loans:
Commercial and industrial51 31 271 353 232,569 232,922 
Consumer289 — 25 314 29,247 29,561 
Total other loans340 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 lines141 — — 141 11,610 11,751 
Commercial real estate54 — 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 loans1,428 428 3,702 5,558 226,105 231,663 
Other loans:
Commercial and industrial81 — 430 511 10,690 11,201 
Consumer53 3 21 77 3,383 3,460 
Total other loans134 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 lines141 — — 141 60,171 60,312 
Commercial real estate492 — 6,993 7,485 794,139 801,624 
Construction and land428 — 241 669 258,983 259,652 
Multi-family residential— — — — 90,518 90,518 
Total real estate loans3,561 694 9,707 13,962 1,548,987 1,562,949 
Other loans:
Commercial and industrial132 31 701 864 243,259 244,123 
Consumer342 3 46 391 32,630 33,021 
Total other loans474 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.
25

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

September 30, 2022
(dollars in thousands)With Related AllowanceWithout Related AllowanceTotal
Nonaccrual loans(1):
One- to four-family first mortgage
$2,463 $— $2,463 
Home equity loans and lines34 — 34 
Commercial real estate10,304 3,031 13,335 
Construction and land327 — 327 
Multi-family residential— — — 
Commercial and industrial352 16 368 
Consumer467 86 553 
Total$13,947 $3,133 $17,080 
December 31, 2021
(dollars in thousands)With Related AllowanceWithout Related AllowanceTotal
Nonaccrual loans(1):
One- to four-family first mortgage
$3,575 $— $3,575 
Home equity loans and lines38 — 38 
Commercial real estate8,315 116 8,431 
Construction and land258 — 258 
Multi-family residential— — — 
Commercial and industrial743 20 763 
Consumer204 — 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.

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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)LoansACL
One- to four-family first mortgage
$112 $32 
Home equity loans and lines— — 
Commercial real estate10,692 1,193 
Construction and land— — 
Multi-family residential— — 
Commercial and industrial244 188 
Consumer86 — 
Total$11,134 $1,413 
December 31, 2021
(dollars in thousands)LoansACL
One- to four-family first mortgage
$— $— 
Home equity loans and lines— — 
Commercial real estate3,873 247 
Construction and land— — 
Multi-family residential— — 
Commercial and industrial744 425 
Consumer— — 
Total$4,617 $672 

27

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.

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The following table summarizes information pertaining to TDRs modified during the periods indicated.
 Nine Months Ended September 30,
 20222021
(dollars in thousands)Number of ContractsPre-modification Outstanding Recorded InvestmentPost-modification Outstanding Recorded InvestmentNumber of ContractsPre-modification Outstanding Recorded InvestmentPost-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 estate2 407 344 2 479 445 
Construction and land— — — — — — 
Multi-family residential— — — — — — 
Commercial and industrial1 7 7 2 2,397 2,308 
Other consumer1 19 16 1 5 2 
Total10 $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.
29

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 AmountFair ValueNotional AmountFair 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 AmountFair ValueNotional AmountFair 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.
30

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 OCILocation of Gain Reclassified from AOCI into IncomeAmount of Gain Reclassified from AOCI into Income
(dollars in thousands)TotalIncluded ComponentTotalIncluded 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 OCILocation of Gain Reclassified from AOCI into IncomeAmount of Gain Reclassified from AOCI into Income
(dollars in thousands)TotalIncluded ComponentTotalIncluded 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 OCILocation of Loss Reclassified from AOCI into IncomeAmount of Loss Reclassified from AOCI into Income
(dollars in thousands)TotalIncluded ComponentTotalIncluded 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 OCILocation of Loss Reclassified from AOCI into IncomeAmount of Loss Reclassified from AOCI into Income
(dollars in thousands)TotalIncluded ComponentTotalIncluded 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.
31

(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 agreementsOther noninterest income$6 $73 
(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 agreementsOther noninterest income$6 $26 

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.
32

•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.


33

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, 2022Level 1Level 2Level 3
Assets
Available for sale securities:
U.S. agency mortgage-backed$319,217 $— $319,217 $— 
Collateralized mortgage obligations90,536 — 90,536 — 
Municipal bonds56,905 — 56,905 — 
U.S. government agency19,613 — 19,613 — 
Corporate bonds6,487 — 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, 2021Level 1Level 2Level 3
Assets
Available for sale securities:
U.S. agency mortgage-backed$233,773 $— $233,773 $— 
Collateralized mortgage obligations31,912 — 31,912 — 
Municipal bonds50,719 — 50,719 — 
U.S. government agency5,614 — 5,614 — 
Corporate bonds5,614 — 5,614 — 
Total$327,632 $— $327,632 $— 
Derivative assets$1,589 $— $1,589 $— 
Total$329,221 $— $329,221 $— 
Liabilities
Derivative liabilities$43 $— $43 $— 


34

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, 2022Level 1Level 2Level 3
Assets
Loans individually evaluated$9,721 $— $— $9,721 
Foreclosed assets and ORE390 — — 390 
Total$10,111 $— $— $10,111 
  Fair Value Measurements Using
(dollars in thousands)December 31, 2021Level 1Level 2Level 3
Assets
Loans individually evaluated$3,945 $— $— $3,945 
Foreclosed assets and ORE1,189 — — 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 ValueValuation TechniqueUnobservable InputsRange of DiscountsWeighted Average Discount
September 30, 2022
Loans individually evaluated$9,721 Third party appraisals and discounted cash flowsCollateral values, market discounts and estimated costs to sell
0% - 83%
13%
Foreclosed assets and ORE$390 Third party appraisals, sales contracts, broker price opinionsCollateral values, market discounts and estimated costs to sell
0% - 27%
6%
(dollars in thousands)Fair ValueValuation TechniqueUnobservable InputsRange of
Discounts		Weighted Average Discount
December 31, 2021
Loans individually evaluated$3,945 Third party appraisals and discounted cash flowsCollateral values, market discounts and estimated costs to sell
0% - 100%
15%
Foreclosed assets and ORE$1,189 Third party appraisals, sales contracts, broker price opinionsCollateral values, market discounts and estimated costs to sell
6% - 16%
12%
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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 AmountTotalLevel 1Level 2Level 3
Financial Assets
Cash and cash equivalents$150,556 $150,556 $150,556 $— $— 
Interest-bearing deposits in banks349 349 349 — — 
Investment securities available for sale492,758 492,758 — 492,758 — 
Investment securities held to maturity1,080 1,066 — 1,066 — 
Mortgage loans held for sale169 169 — 169 — 
Loans, net2,275,928 2,174,834 — 2,165,113 9,721 
Cash surrender value of BOLI46,019 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 borrowings5,539 4,890 — 4,890 — 
Subordinated debt53,958 52,299 — 52,299 — 
Long-term FHLB advances24,816 23,571 — 23,571 — 
Derivative liabilities(1)
10 10 — 10 — 
36

  Fair Value Measurements at December 31, 2021
(dollars in thousands)Carrying AmountTotalLevel 1Level 2Level 3
Financial Assets
Cash and cash equivalents$601,443 $601,443 $601,443 $— $— 
Interest-bearing deposits in banks349 349 349 — — 
Investment securities available for sale327,632 327,632 — 327,632 — 
Investment securities held to maturity2,102 2,132 — 2,132 — 
Mortgage loans held for sale1,104 1,104 — 1,104 — 
Loans, net1,819,004 1,834,023 — 1,830,078 3,945 
Cash surrender value of BOLI40,361 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 borrowings5,539 5,860 — 5,860 — 
Long-term FHLB advances26,046 26,263 — 26,263 — 
Derivative liabilities(1)
43 43 — 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.
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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:

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•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.
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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, 2022December 31, 2021Increase/(Decrease)
Real estate loans:
One-to four-family first mortgage
$376,028 $350,843 $25,185 7.2 %
Home equity loans and lines60,624 60,312 312 0.5 
Commercial real estate1,086,656 801,624 285,032 35.6 
Construction and land328,753 259,652 69,101 26.6 
Multi-family residential97,212 90,518 6,694 7.4 
Total real estate loans1,949,273 1,562,949 386,324 24.7 %
Other loans:
Commercial and industrial320,900 244,123 76,777 31.5 
Consumer33,106 33,021 85 0.3 
Total other loans354,006 277,144 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.

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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.

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 investmentAllowance for Loan LossesAllowance to Total Loans
Loans Individually Evaluated
One- to four-family first mortgage
$112 $32 28.57 %
Home equity loans and lines— — — 
Commercial real estate10,692 1,193 11.16 
Construction and land— — — 
Multi-family residential— — — 
Commercial and industrial244 188 77.05 
Consumer86 — — 
Total$11,134 $1,413 12.69 %
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December 31, 2021
(dollars in thousands)Recorded investmentAllowance for Loan LossesAllowance to Total Loans
Loans Individually Evaluated
One- to four-family first mortgage
$— $— — %
Home equity loans and lines— — — 
Commercial real estate3,873 247 6.38 
Construction and land— — — 
Multi-family residential— — — 
Commercial and industrial744 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, 2022December 31, 2021Increase/(Decrease)
Special Mention Loans
One- to four-family first mortgage
$1,197 $369 $828 224.4 %
Home equity loans and lines— — — — 
Commercial real estate3,155 2,207 948 43.0 
Construction and land717 575 142 24.7 
Multi-family residential3,312 — 3,312 — 
Commercial and industrial2,380 267 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.

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(dollars in thousands)September 30, 2022December 31, 2021Increase/(Decrease)
Substandard Loans
One- to four-family first mortgage
$3,018 $3,828 $(810)(21.2)%
Home equity loans and lines33 37 (4)(10.8)
Commercial real estate13,748 9,837 3,911 39.8 
Construction and land324 247 77 31.2 
Multi-family residential77 — 77 — 
Commercial and industrial2,314 3,395 (1,081)(31.8)
Consumer546 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.
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 September 30, 2022December 31, 2021
(dollars in thousands)Originated
Acquired(1)
TotalOriginated
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 estate3,145 10,190 13,335 5,316 3,115 8,431 
Construction and land151 176 327 — 258 258 
Multi-family residential— — — — — — 
Other loans:
Commercial and industrial253 115 368 291 472 763 
Consumer217 336 553 158 46 204 
Total nonaccrual loans4,281 12,799 17,080 7,233 6,036 13,269 
Accruing loans 90 days or more past due3 — 3 6 — 6 
Total nonperforming loans 
4,284 12,799 17,083 7,239 6,036 13,275 
Foreclosed assets and ORE14 376 390 1,109 80 1,189 
Total nonperforming assets4,298 13,175 17,473 8,348 6,116 14,464 
Performing troubled debt restructurings4,686 879 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 loans0.74 %0.72 %
Nonperforming loans to total assets0.54 %0.45 %
Nonperforming assets to total assets0.55 %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.
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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 SaleHeld to Maturity
Balance, December 31, 2021$327,632 $2,102 
Purchases236,236 — 
Acquired from Texan Bank, at fair value33,411 — 
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, 2022December 31, 2021Increase/(Decrease)
Demand deposit$921,089 $766,385 $154,704 20.2 %
Savings325,594 285,728 39,866 14.0 
Money market452,474 371,478 80,996 21.8 
NOW686,592 792,919 (106,327)(13.4)
Certificates of deposit352,675 319,339 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.

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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.
 ActualMinimum Capital Required – Basel III Fully Phased-InTo Be Well Capitalized Under Prompt Corrective Action Provisions
(dollars in thousands)AmountRatioAmountRatioAmountRatio
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 capital309,547 12.49 210,606 8.50 198,217 8.00 
Total risk-based capital338,210 13.65 260,160 10.50 247,771 10.00 
Tier 1 leverage capital309,547 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,
46

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
+3002.5%
+2001.8%
+1000.9%
-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.
47

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, 2022December 31, 2021
Standby letters of credit$6,674 $5,075 
Available portion of lines of credit356,464 320,611 
Undisbursed portion of loans in process179,917 142,048 
Commitments to originate loans218,874 153,487 

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
48

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,
 20222021
(dollars in thousands)Average BalanceInterestAverage Yield/RateAverage BalanceInterestAverage Yield/Rate
Interest-earning assets:
Loans receivable(1)
$2,265,846 $29,859 5.17 %$1,896,808 $27,045 5.60 %
Investment securities
Taxable504,241 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 securities532,300 2,958 2.25 278,450 1,189 1.74 
Other interest-earning assets262,127 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 assets205,634 192,372 
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 deposit371,925 394 0.42 332,916 515 0.61 
Total interest-bearing deposits1,894,275 1,270 0.27 1,645,047 1,120 0.27 
Other borrowings5,539 53 3.80 5,539 53 3.80 
Subordinated debt53,943 859 6.37 — — — 
Short-term FHLB advances— — — — — — 
49

 Three Months Ended September 30,
 20222021
(dollars in thousands)Average BalanceInterestAverage Yield/RateAverage BalanceInterestAverage Yield/Rate
Long term FHLB advances24,977 105 1.68 27,011 116 1.72 
Total interest-bearing liabilities1,978,734 $2,287 0.46 1,677,597 $1,289 0.31 
Noninterest-bearing liabilities952,120 736,567 
Total liabilities2,930,854 2,414,164 
Shareholders’ equity335,053 342,189 
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,
 20222021
(dollars in thousands)Average BalanceInterestAverage Yield/RateAverage BalanceInterestAverage Yield/Rate
Interest-earning assets:
Loans receivable(1)
$2,107,871 $79,834 5.01 %$1,949,004 $77,362 5.25 %
Investment securities
Taxable433,270 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 securities456,595 6,914 2.05 272,276 3,331 1.67 
Other interest-earning assets414,122 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 assets202,022 189,256 
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 deposit365,584 1,187 0.43 342,167 1,928 0.75 
Total interest-bearing deposits1,888,617 3,266 0.23 1,631,926 4,256 0.35 
Other borrowings5,624 160 3.80 5,594 159 3.81 
Subordinated debt18,436 859 6.22 — — — 
Short-term FHLB advances— — — — — — 
Long term FHLB advances25,396 321 1.69 27,706 360 1.73 
Total interest-bearing liabilities1,938,073 $4,606 0.32 1,665,226 $4,775 0.38 
Noninterest-bearing liabilities902,920 707,117 
Total liabilities2,840,993 2,372,343 
Shareholders’ equity339,617 334,426 
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 %
50

(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 ToChange Attributable To
(dollars in thousands)RateVolumeIncrease/ (Decrease)RateVolumeIncrease/ (Decrease)
Interest income:
Loans receivable$(1,698)$4,512 $2,814 $56 $2,416 $2,472 
Investment securities518 1,251 1,769 1,548 2,035 3,583 
Other interest-earning assets1,638 (380)1,258 1,296 870 2,166 
Total interest income458 5,383 5,841 2,900 5,321 8,221 
Interest expense:
Savings, checking and money market accounts169 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

51

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.


52

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, 2022December 31, 2021
Total loans$2,303,279 $1,840,093 
Less: PPP loans7,094 43,637 
Less: Friendswood loan portfolio318,907 
Total loans excluding PPP loans$1,977,278 $1,796,456 
Allowance for loan losses to total loans1.19 %1.15 %
Less: PPP loans— 0.02 
Non-GAAP allowance for loan losses to total loans1.19 %1.17 %

Results of Operations
Three Months Ended
September 30,		Nine Months Ended
September 30,
(dollars in thousands)2022202120222021
Reported loan income$29,859 $27,045 $79,834 $77,362 
Less: PPP loan income132 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 loans9,431 144,626 18,660 203,506 
Average total loans excluding PPP loans$2,256,415 $1,752,182 $2,089,211 $1,745,498 
Loan yield5.17 %5.60 %5.01 %5.25 %
Impact of PPP loans— (0.60)(0.04)(0.22)
Loan yield excluding PPP loans5.17 %5.00 %4.97 %5.03 %
Net interest margin4.11 %4.16 %3.77 %4.01 %
Impact of PPP loans— (0.52)(0.04)(0.27)
Net interest margin excluding PPP loans4.11 %3.64 %3.73 %3.74 %

53

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.

54

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.
PeriodTotal Number of Shares PurchasedAverage Price Paid per ShareTotal 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 
Total77,021 $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.
55

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.    DescriptionLocation
4.1Indenture, 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
Filed herewith
31.2
Filed herewith
32.0
Filed herewith
101.INSXBRL Instance Document
101.SCHXBRL Taxonomy Extension Schema Document
101.CALXBRL Taxonomy Extension Calculation Linkbase Document
101.DEFXBRL Taxonomy Extension Definitions Linkbase Document
101.LABXBRL Taxonomy Extension Label Linkbase Document
101.PREXBRL Taxonomy Extension Presentation Linkbase Document
104Cover page Interactive Data File (embedded within the Inline XBRL document)

56

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, 2022By:/s/ John W. Bordelon
John W. Bordelon
Chairman of the Board, President and Chief Executive Officer
November 4, 2022By:/s/ David T. Kirkley
David T. Kirkley
Senior Executive Vice President and Chief Financial Officer
November 4, 2022By:/s/ Mary H. Hopkins
Mary H. Hopkins
Home Bank, N. A. Senior Vice President and Director of Financial Management

57

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