What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-08-09 compared with 2023-05-10 · 179 added, 105 removed, 319 unchanged (47% of the section changed)

13 unchanged sentences

Our primary source of funding for our loans is deposits.

Our largest expenses are interest on these deposits and salaries and related employee benefits.

Our largest expenses are interest on deposits and salaries and related employee benefits.

We measure our performance primarily through our net interest margin, efficiency ratio, ratio of ACL-Loans to total loans, return on average assets and return on average equity, among other metrics, while maintaining appropriate regulatory leverage and risk-based capital ratios.

2 unchanged sentences

We aim to do this through:

• Responsive, client-centric products and services and a community focus;

• Responsive, client-centric products and services;

• Organic growth and strategic acquisitions when market opportunities present themselves;

7 unchanged sentences

Earnings and Performance Overview

For the three months ended March 31, 2023, net interest income was $25.5 million, an increase of $6.0 million or 30.9% when compared to the same period in 2022.

The increase in net interest income for the three months ended March 31, 2023 was primarily due to an increase in interest and fees on loans due to loan growth and higher overall loan yields.

Loan interest income totaled $39.7 million for the three months ended March 31, 2023, compared to $21.4 million for the three months ended March 31, 2022.

The increase in interest income for the three months ended March 31, 2023 was partially offset by an increase in interest expense on deposits, resulting from an increase in rates necessary to remain competitive in the current economic environment.

Noninterest income increased $0.6 million to $1.5 million for the three months ended March 31, 2023 compared to the same period in 2022.

The increase in noninterest income was driven by SBA loan sales for the three months ended March 31, 2023 when compared to the same period in 2022.

Net income available to common shareholders was $10.4 million, or $1.33 per diluted share, and $8.2 million, or $1.04 per diluted share, for the three months ended March 31, 2023 and 2022, respectively.

The increase in net income was a direct result of the aforementioned increases in revenues.

In addition, the increase in net income was partially offset by an increase in the provision for credit losses and an increase in noninterest expense for the quarter ended March 31, 2023.

Returns on average shareholders' equity and average assets for the three months ended March 31, 2023 were 17.48% and 1.30%, respectively, compared to 16.05% and 1.35%, respectively, for the three months ended March 31, 2022.

For the three months ended June 30, 2023, net interest income was $24.0 million, an increase of $0.2 million or 0.7% when compared to the same period in 2022.

For the six months ended June 30, 2023, net interest income was $49.5 million, an increase of $6.2 million or 14% when compared to the same period in 2022.

The increase in net interest income for the three and six months ended June 30, 2023 was primarily due to an increase in interest and fees on loans due to loan growth and higher overall loan yields.

Loan interest income totaled $42.5 million for the three months ended June 30, 2023, compared to $25.1 million for the three months ended June 30, 2022.

The increase in interest income for the three and six months ended June 30, 2023 was partially offset by an increase in interest expense on deposits, resulting from an increase in rates necessary to remain competitive in the current economic environment.

Noninterest income increased $0.2 million to $1.4 million for the three months ended June 30, 2023 compared to the same period in 2022.

Noninterest income increased $0.8 million to $2.9 million for the six months ended June 30, 2023 compared to the same period in 2022.The increase in noninterest income was driven by SBA loan sales for the three and six months ended June 30, 2023 when compared to the same period in 2022.

Net income available to common shareholders was $8.0 million, or $1.02 per diluted share, and $12.0 million, or $1.55 per diluted share, for the three months ended June 30, 2023 and 2022, respectively.

Net income available to common shareholders was $18.4 million, or $2.34 per diluted share, and $20.2 million, or $2.58 per diluted share, for the six months ended June 30, 2023 and 2022, respectively .

The decrease in net income for the three and six months ended 2023 was primarily due to an increase in the provision for credit losses and an increase in noninterest expense, primarily due to increased FDIC insurance expense, and an increase in salary and employee benefits expense, mainly due to severance costs.

The decrease was partially offset by a direct result of the aforementioned increases in revenues.

Returns on average shareholders' equity and average assets for the three months ended June 30, 2023 were 12.91% and 0.99%, respectively, compared to 22.09% and 1.96%, respectively, for the three months ended June 30, 2022.

Returns on average shareholders' equity and average assets for the six months ended June 30, 2023 were 15.15% and 1.14%, respectively, compared to 19.16% and 1.65% , respectively, for the six months ended June 30, 2022.

Results of Operations

7 unchanged sentences

Premium amortization and discount accretion are included in the respective interest income and interest expense amounts.

FTE net interest income for the three months ended March 31, 2023 and 2022 was $25.6 million and $19.6 million, respectively.

FTE interest income for the three months ended March 31, 2023 increased by $22.0 million, or 98.4%, to $44.3 million, compared to FTE interest income for the three months ended March 31, 2022.

FTE net interest income for the three months ended June 30, 2023 and 2022 was $24.1 million and $23.9 million, respectively.

FTE net interest income for the six months ended June 30, 2023 and 2022 was $49.6 million and $43.4 million, respectively.

FTE interest income for the three months ended June 30, 2023 increased by $20.2 million, or 76.6%, to $46.7 million, compared to FTE interest income for the three months ended June 30, 2022.

FTE interest income for the six months ended June 30, 2023 increased by $42.1 million, or 86.6%, to $90.9 million, compared to FTE interest income for the six months ended June 30, 2022.

This increase was due to an increase in interest and fees on loans due to loan growth and higher overall loan yields.

Interest expense for the three months ended March 31, 2023 increased by $16.0 million compared to interest expense for the three months ended March 31, 2022.

The increase in interest expense for the three months ended March 31, 2023 was driven by an increase in interest expense on deposits, resulting from an increase in rates on interest bearing deposits.

Interest expense for the three months ended June 30, 2023 increased by $20.0 million compared to interest expense for the three months ended June 30, 2022.

Interest expense for the six months ended June 30, 2023 increased by $35.9 million compared to interest expense for the six months ended June 30, 2022.

The increase in interest expense for the three and six months ended June 30, 2023 was driven by an increase in interest expense on deposits, resulting from an increase in rates on interest bearing deposits.

Distribution of Assets, Liabilities and Shareholders’ Equity;

Interest Rates and Interest Differential

The following table presents the average balances and yields earned on interest earning assets and average balances and weighted average rates paid on our funding liabilities for the three months ended March 31, 2023 and 2022.

Three Months Ended March 31,

(Dollars in thousands) Average Balance Interest Yield / Rate (4)

Average Balance Interest Yield / Rate (4)

For the Quarter Ended

June 30, 2023 June 30, 2022

Balance Interest Yield/

Cash and Fed funds sold $ 227,777 $ 3,023 5.32 % $ 247,013 $ 449 0.73 %

31 unchanged sentences

(1) Average balances and yields for securities are based on amortized cost.

(2) The adjustment for securities and loans taxable equivalency amounted to $50 thousand and $49 thousand for the three months ended March 31, 2023 and 2022, respectively.

(2) The adjustment for securities and loans taxable equivalency amounted to $51 thousand and $50 thousand for the three months ended June 30, 2023 and 2022, respectively.

(3) Annualized net interest income as a percentage of earning assets.

(4) Yields are calculated using the contractual day count convention for each respective product type.

For the Six Months Ended

June 30, 2023 June 30, 2022

Balance Interest Yield/

Cash and Fed funds sold $ 271,328 $ 6,590 4.90 % $ 296,239 $ 603 0.41 %

Securities (1)

129,225 1,912 2.96 115,452 1,563 2.71

Commercial real estate 1,926,852 52,125 5.38 1,393,836 32,273 4.61

Residential real estate 58,207 1,286 4.42 70,125 1,224 3.49

Construction 186,684 6,651 7.09 104,176 2,971 5.67

Commercial business 549,963 21,394 7.74 388,249 9,954 5.10

Consumer 23,971 749 6.30 5,666 147 5.25

Total loans 2,745,677 82,205 5.95 1,962,052 46,569 4.72

Federal Home Loan Bank stock 5,442 193 7.14 3,051 29 1.94

Total earning assets 3,151,672 $ 90,900 5.74 % 2,376,794 $ 48,764 4.08 %

Other assets 90,427 89,866

Total assets 3,242,099 $ 2,466,660

Liabilities and shareholders' equity:

Interest bearing liabilities:

NOW $ 95,494 $ 81 0.17 % $ 124,361 $ 106 0.17 %

Money market 905,021 14,468 3.22 950,131 2,326 0.49

Savings 124,387 1,586 2.57 196,400 204 0.21

Time 1,275,417 21,675 3.43 452,676 1,553 0.69

Total interest bearing deposits 2,400,319 37,810 3.18 1,723,568 4,189 0.49

Borrowed Money 162,215 3,454 4.24 84,770 1,144 2.68

Total interest bearing liabilities 2,562,534 $ 41,264 3.25 % 1,808,338 $ 5,333 0.59 %

Noninterest bearing deposits 389,608 406,707

Other liabilities 45,494 38,683

Total liabilities 2,997,636 2,253,728

Shareholders' equity 244,463 212,932

Total liabilities and shareholders' equity $ 3,242,099 $ 2,466,660

Net interest income (2)

$ 49,636 $ 43,431

Interest rate spread 2.49 % 3.49 %

Net interest margin (3)

3.15 % 3.65 %

(1) Average balances and yields for securities are based on amortized cost.

(2) The adjustment for securities and loans taxable equivalency amounted to $102 thousand and $98 thousand for the six

months ended June 30, 2023 and 2022 , respectively.

(3) Annualized net interest income as a percentage of earning assets.

(4) Yields are calculated using the contractual day count convention for each respective product type.

Effect of changes in interest rates and volume of average earning assets and average interest bearing liabilities

5 unchanged sentences

Changes attributable to both volume and rate have been allocated proportionately based on the relationship of the absolute dollar amount of change in each.

Three Months Ended March 31, 2023 vs 2022

Three Months Ended June 30, 2023 vs 2022

Increase (Decrease) Six Months Ended June 30, 2023 vs 2022

Increase (Decrease)

(In thousands) Volume Rate Total

(In thousands) Volume Rate Total Volume Rate Total

Interest and dividend income:

21 unchanged sentences

The provision for credit losses is charged against earnings in order to maintain our ACL-Loans and ACL-Unfunded Commitments and reflects management’s best estimate of probable losses inherent in our loan portfolio as of the balance sheet date.

The provision for credit losses for the three months ended March 31, 2023 was $0.8 million compared to a provision for credit losses of $0.2 million for the three months ended March 31, 2022.

The provision for credit losses for the three months ended June 30, 2023 was $2.6 million compared to a credit for credit losses of $1.4 million for the three months ended June 30, 2022 .

The provision for credit losses for the six months ended June 30, 2023 was $3.4 million compared to a credit for credit losses of $1.2 million for the six months ended June 30, 2022.

On January 1, 2023, the Company adopted ASC 326 Financial Instruments - Credit Losses ("CECL").

Upon adoption of CECL, the Company recorded a one-time cumulative effect, pre-tax adjustment $5.1 million to the ACL-Loans and a corresponding net of tax adjustment to beginning retained earnings.

The Company also recorded a one-time cumulative effect, pre-tax adjustment of $ 1.3 million to the ACL-Unfunded commitments (which is reflected in Accrued expenses and other liabilities on the Consolidated Balance Sheets) and a corresponding net of tax adjustment to beginning retained earnings.

The Company also recorded a one-time cumulative effect, pre-tax adjustment of $1.3 million to the ACL-Unfunded commitments (which is reflected in Accrued expenses and other liabilities on the

Consolidated Balance Sheets) and a corresponding net of tax adjustment to beginning retained earnings.

The provision for the three and six months ended 2023 are mainly attributable to macroeconomic factors.

Noninterest Income

Noninterest income is a component of our revenue and is comprised primarily of fees generated from deposit relationships with our clients, fees generated from sales and referrals of loans, income earned on bank-owned life insurance and gains on sales of investment securities.

The following tables compare noninterest income for the three months ended March 31, 2023 and 2022:

The following tables compare noninterest income for the three and six months ended June 30, 2023 and 2022:

Three Months Ended

March 31, Change

June 30, Change

(Dollars in thousands) 2023 2022 $ %

4 unchanged sentences

Total noninterest income $ 1,401 $ 1,152 $ 249 21.6 %

Noninterest income increased by $0.6 million to $1.5 million for the three months ended March 31, 2023 compared to the three months ended March 31, 2022.

The increase in noninterest income was driven by an increase in SBA loan sales during the first quarter of 2023.

Six Months Ended

June 30, Change

(Dollars in thousands) 2023 2022 $ %

Gains and fees from sales of loans $ 1,656 $ 1,239 $ 417 33.7 %

Bank-owned life insurance 573 525 48 9.1

Service charges and fees 647 489 158 32.3

Other 51 (143) 194 Favorable

Total noninterest income $ 2,927 $ 2,110 $ 817 38.7 %

Noninterest income increased by $0.2 million to $1.4 million for the three months ended June 30, 2023 compared to the three months ended June 30, 2022.

Noninterest income increased by $0.8 million to $2.9 million for the six months ended June 30, 2023 compared to the six months ended June 30, 2022.

The increase in noninterest income was driven by an increase in SBA loan sales and increases in service charges and fees for the three and six months ended 2023.

Noninterest Expense

The following table compares noninterest expense for the three months ended March 31, 2023 and 2022:

The following table compares noninterest expense for the three and six months ended June 30, 2023 and 2022:

Three Months Ended

March 31, Change

June 30, Change

(Dollars in thousands) 2023 2022 $ %

8 unchanged sentences

Total noninterest expense $ 12,641 $ 10,936 $ 1,705 15.6 %

Noninterest expense increased by $2.8 million to $12.7 million for the three months ended March 31, 2023 compared to the three months ended March 31, 2022.

The increase in noninterest expense was primarily driven by an increase in salaries and employee benefits expense, professional services expense, and FDIC insurance.

Salaries and employee benefits expense totaled $6.1 million for the three months ended March 31, 2023, an increase of $1.1 million when compared to the same period in 2022.

The increase in salaries and employee benefits expense was driven by an increase in full time equivalent employees, with full time equivalent employees totaling 135 for the three months ended March 31, 2023 compared to 126 for the same period in 2022.

The increase in salaries and employee benefits expense was also due to lower loan originations, which reduced the amount of the Bank's ability to defer expenses.

Professional services expense totaled $1.3 million for the three months ended March 31, 2023, an increase of $0.3 million when compared to the same period in 2022.

The increase in professional services expense was primarily driven by consulting fees.

FDIC insurance expense totaled $1.1 million for the quarter ended March 31, 2023, an increase of $0.8 million when compared to the same period in 2022.

Six Months Ended

June 30, Change

(Dollars in thousands) 2023 2022 $ %

Salaries and employee benefits $ 12,471 $ 10,373 $ 2,098 20.2 %

Occupancy and equipment 4,288 4,343 (55) (1.3)

Professional services 2,014 1,981 33 1.7

Data processing 1,400 1,343 57 4.2

Director fees 845 691 154 22.3

FDIC insurance 2,112 485 1,627 335.5

Marketing 328 152 176 115.8

Other 1,874 1,493 381 25.5

Total noninterest expense $ 25,332 $ 20,861 $ 4,471 21.4 %

Noninterest expense increased by $1.7 million to $12.6 million for the three months ended June 30, 2023 compared to the three months ended June 30, 2022.

Noninterest expense increased by $4.5 million to $25.3 million for the six months ended June 30, 2023 compared to the six months ended June 30, 2022.

The increase in noninterest expense was primarily driven by an increase in salaries and employee benefits expense and FDIC insurance expense.

Salaries and employee benefits expense totaled $6.4 million for the three months ended June 30, 2023, an increase of $1.0 million when compared to the same period in 2022.

Salaries and employee benefits expense totaled $12.5 million for the six months ended June 30, 2023, an increase of $2.1 million when compared to the same period in 2022.

The increase in salaries and employee benefits expense was driven by an increase in full time equivalent employees, with full time equivalent employees totaling 141 at June 30, 2023 compared to 132 for the same period in 2022.

The increase in salaries and employee benefits expense was also due to one-time severance costs and lower loan originations, which reduces the Bank's ability to defer expenses.

FDIC insurance expense totaled $1.1 million for the three months ended June 30, 2023, an increase of $0.8 million when compared to the same period in 2022.

FDIC insurance expense totaled $2.1 million for the six months ended June 30, 2023, an increase of $1.6 million when compared to the same period in 2022.

The increase in FDIC insurance expense is attributed to the overall balance sheet growth, increased use of brokered deposits, and an increase in FDIC insurance rates.

Income tax expense for the three months ended March 31, 2023 and 2022 totaled $3.2 million and $2.1 million, respectively.

The effective tax rates for the three months ended March 31, 2023 and 2022 were 23.4% and 20.4%, respectively.

Income tax expense for the three months ended June 30, 2023 and 2022 totaled $2.2 million and $3.5 million, respectively.

The effective tax rates for the three months ended June 30, 2023 and 2022 were 21.5% and 22.4%, respectively.

Income tax expense for the six months ended June 30, 2023 and 2022 totaled $5.4 million and $5.6 million, respectively.

The effective tax rates for the six months ended June 30, 2023 and 2022 were 22.6% and 21.6%, respectively.

Financial Condition

Assets totaled $3.25 billion at March 31, 2023 and remained flat compared to December 31, 2022.

Gross loans totaled $2.8 billion at March 31, 2023, an increase of $83.8 million or 3.1% compared to December 31, 2022.

Deposits totaled $2.8 billion at March 31, 2023, and remained flat compared to December 31, 2022.

Total shareholders’ equity at March 31, 2023 and December 31, 2022 was $242.3 million and $238.5 million, respectively.

The increase in shareholders' equity was primarily driven by net income of $10.4 million for the three months ended March 31, 2023.

Assets totaled $3.3 billion at June 30, 2023 and remained flat compared to December 31, 2022.

Gross loans totaled $2.8 billion at June 30, 2023, an increase of $98.2 million or 3.7% compared to December 31, 2022.

Deposits totaled $2.8 billion at June 30, 2023, and decreased $12.0 million or $0.4% compared to December 31, 2022.

Shar eholders’ equity totaled $248.8 million as of June 30, 2023, an increase of $10.3 million compared to December 31, 2022, primarily a result of net income of $18.4 million for the six months ended June 30, 2023.

The increase was partially offset by the Day 1 CECL adoption of $4.9 million, dividends paid of $3.1 million, and a $1.5 million unfavorable impact to accumulated other comprehensive income.

The unfavorable impact to accumulated other comprehensive income was driven by fair value marks on the Company's Available for sale investment securities portfolio of $6.1 million partially offset by fair value marks related to hedge positions involving interest rate swaps of $5.0 million.

The unfavorable impact to accumulated other comprehensive income was driven by fair value marks on the Company's Available for sale investment securities portfolio of $0.9 million and fair value marks related to hedge positions involving interest rate swaps of $0.7 million.

The Company's interest rate swaps are used to hedge interest rate risk.

3 unchanged sentences

Our loan portfolio is the largest category of our earning assets.

Total loans before deferred loan fees and the ACL-Loans were $2.76 billion at March 31, 2023 and $2.68 billion at December 31, 2022.

Total gross loans increased $83.8 million as of March 31, 2023 compared to the year ended December 31, 2022.

Total loans before deferred loan fees and the ACL-Loans were $2.8 billion at June 30, 2023 and $2.7 billion at December 31, 2022.

Total gross loans increased $98.2 million as of June 30, 2023 compared to the year ended December 31, 2022.

The following table compares the composition of our loan portfolio for the dates indicated:

(In thousands) At March 31, 2023 At December 31, 2022 Change

(In thousands) At June 30, 2023 At December 31, 2022 Change

Real estate loans:

12 unchanged sentences

In addition, our Board of Directors receives information concerning asset quality measurements and trends on a monthly basis.

While we continue to adhere to prudent underwriting standards, our loan portfolio is not immune to potential negative consequences as a result of general economic weakness, such as a prolonged downturn in the housing market on a national scale.

Decreases in real estate values could adversely affect the value of property used as collateral for loans.

1 unchanged sentence

The Company has established credit policies applicable to each type of lending activity in which it engages.

The Company evaluates the creditworthiness of each client and extends credit of up to 85% of the market value of the collateral, depending on the borrower's creditworthiness and the type of collateral.

The borrower’s ability to service the debt is monitored on an ongoing basis.

The Company evaluates the creditworthiness of each client and extends credit of up to 80% of the market value of the collateral, (85% maximum for owner occupied commercial real estate), depending on the client's creditworthiness and the type of collateral.

The client’s ability to service the debt is monitored on an ongoing basis.

Real estate is the primary form of collateral.

Other important forms of collateral are business assets, time deposits and marketable securities.

While collateral provides assurance as a secondary source of repayment, the Company ordinarily requires the primary source of repayment for commercial loans, to be based on the borrower’s ability to generate continuing cash flows.

In the fourth quarter of 2017 management made the strategic decision to no longer originate residential mortgage loans.

As of the beginning of the third quarter of 2019, the Company no longer offered home equity loans or lines of credit.

While collateral provides assurance as a secondary source of repayment, the Company ordinarily requires the primary source of repayment for commercial loans to be based on the client’s ability to generate continuing cash flows.

The Company does not provide first or second consumer mortgage loans secured by residential properties but has a small legacy portfolio which continues to amortize, pay off due to the sale of the collateral, or refinance away from the Company.

Credit risk management involves a partnership between our relationship managers and our credit approval, portfolio management, credit administration and collections departments.

3 unchanged sentences

The following table presents nonperforming assets and additional asset quality data for the dates indicated:

(In thousands) At March 31, 2023 At December 31, 2022

(In thousands) At June 30, 2023 At December 31, 2022

Nonaccrual loans:

12 unchanged sentences

Total past due loans to total gross loans 1.30 % 0.60 %

Nonperforming assets totaled $14.3 million and represented 0.44% of total assets at March 31, 2023, compared to $16.4 million and 0.51% of total assets at December 31, 2022.

Nonaccrual loans totaled $14.3 million at March 31, 2023 and $16.4 million at December 31, 2022.

Past due loans increased to $26.1 million, or 0.94% of total loans, as of March 31, 2023, compared to $16.1 million, or 0.60% of total loans, as of December 31, 2022.

Of the March 31, 2023 past due loans, $10.0 million of loans

were between 31 - 33 days past due and have subsequently become current.

As of April 19, 2023, past due loans were $18.6 million or 0.67% of total loans.

Nonperforming assets totaled $15.5 million and represented 0.48% of total assets at June 30, 2023, compared to $16.4 million and 0.51% of total assets at December 31, 2022.

Nonaccrual loans totaled $15.5 million at June 30, 2023 and $16.4 million at December 31, 2022.

There was no other real estate owned at June 30, 2023 or December 31, 2022.

Past due loans increased to $36.0 million, or 1.30% of total loans, as of June 30, 2023, compared to $16.1 million, or 0.60% of total loans, as of December 31, 2022.

Of the June 30, 2023 past due loans, $9.3 million of loans were between 31 - 33 days past due and have subsequently become current.

We evaluate the adequacy of the ACL-Loans based on "forward looking" expected losses.

3 unchanged sentences

Loss estimates for specified problem loans are also detailed.

All of the factors considered in the analysis of the adequacy of the ACL may be subject to change.

All of the factors considered in the analysis of the adequacy of the ACL-Loans may be subject to change.

We estimate losses on specific loans, or groups of loans, where the probable loss can be identified and reasonably determined.

8 unchanged sentences

Three Months Ended

June 30, Six Months Ended

(Dollars in thousands) 2023 2022 2023 2022

8 unchanged sentences

Commercial business 32 — 33 13

Consumer 11 — 15 1

Total recoveries 43 77 48 91

4 unchanged sentences

ACL-Loans to total gross loans 1.11 % 0.77 % 1.11 % 0.77 %

At March 31, 2023, our ACL-Loans was $28.0 million and represented 1.01% of total gross loans, compared to $22.4 million, or 0.84% of total gross loans, at December 31, 2022.

At June 30, 2023, our ACL-Loans was $30.7 million and represented 1.11% of total gross loans, compared to $22.4 million, or 0.84% of total gross loans, at December 31, 2022.

The following table presents the allocation of the ACL-Loans balance and the related allocation percentage of these loans across the total loan portfolio:

At March 31, 2023 At December 31, 2022

At June 30, 2023 At December 31, 2022

(Dollars in thousands) ACL-Loans Loans as Percent of Total Loan Portfolio ACL-Loans Loans as Percent of Total Loan Portfolio

5 unchanged sentences

Total ACL-Loans $ 30,694 100.00 % $ 22,431 100.00 %

The allocation of the ACL-Loans at March 31, 2023 reflects our assessment of credit risk and probable loss within each portfolio.

We believe that the level of the ACL-Loans at March 31, 2023 is appropriate to cover probable losses.

The allocation of the ACL-Loans at June 30, 2023 reflects our assessment of credit risk and probable loss within each portfolio.

We believe that the level of the ACL-Loans at June 30, 2023 is appropriate to cover probable losses.

ACL- Unfunded Commitments

The ACL-Unfunded Commitments provides "forward looking" losses inherent with funding the unused portion of legal commitments to lend.

The ACL-Unfunded Commitments provision is based on "forward looking" losses inherent with funding the unused portion of legal commitments to lend.

The reserve for unfunded credit commitments is included within other liabilities in the accompanying Consolidated Balance Sheets.

1 unchanged sentence

Investment Securities

At March 31, 2023, the carrying value of our investment securities portfolio totaled $121.1 million and represented 3.7% of total assets, compared to $121.6 million, or 3.7% of total assets, at December 31, 2022.

The net unrealized loss position on our investment portfolio at March 31, 2023 was $8.0 million and included gross unrealized gains of $0.6 million.

At June 30, 2023, the carrying value of our investment securities portfolio totaled $117.8 million and represented 3.6% of total assets, compared to $121.6 million, or 3.7% of total assets, at December 31, 2022.

The net unrealized loss position on our investment portfolio at June 30, 2023 was $10.3 million and included gross unrealized gains of $0.4 million.

The net unrealized loss position on our investment portfolio at December 31, 2022 was $9.2 million and included gross unrealized gains of $0.3 million.

Deposit Activities and Other Sources of Funds

March 31, 2023 December 31, 2022

June 30, 2023 December 31, 2022

(Dollars in thousands) Amount Percent Amount Percent

5 unchanged sentences

Total deposits $ 2,788,863 100.00 % $ 2,800,818 100.00 %

Total deposits were $2.8 billion at March 31, 2023, a decrease of $2.5 million, from the balance at December 31, 2022.

Brokered certificates of deposits totaled $994.4 million at March 31, 2023 and $976.5 million at December 31, 2022.

There were no certificates of deposits from national listing services at March 31, 2023 or December 31, 2022.

Brokered money market accounts totaled $32.2 million at March 31, 2023 and $50.1 million at December 31, 2022.

Brokered deposits represent

brokered certificates of deposit, brokered money market accounts, one way buy Certificate of Deposit Account Registry Service (CDARS), and one way buy Insured Cash Sweep (ICS).

As of March 31, 2023, our insured deposits were $2,050.5 million, or 73% of total deposits.

Total deposits were $2.8 billion at June 30, 2023, a decrease of $12.0 million, from the balance at December 31, 2022.

Brokered certificates of deposits totaled $918.1 million at June 30, 2023 and $976.5 million at December 31, 2022.

There were no certificates of deposits from national listing services at June 30, 2023 or December 31, 2022.

Brokered money market accounts totaled $50.6 million at June 30, 2023 and $50.1 million at December 31, 2022.

Brokered deposits represent brokered certificates of deposit, brokered money market accounts, one way buy Certificate of Deposit Account Registry Service (CDARS), and one way buy Insured Cash Sweep (ICS).

As of June 30, 2023, our insured deposits were 2,105.1, or 75% of total deposits.

Insured deposits are comprised of $1,984.7 million of FDIC-insured deposits, or 71% of total deposits, and $120.4 million of deposits insured by standby letters of credit with the Federal Home Loan Bank of Boston, or 4% of total deposits.

Of the $747.8 million deposits that are uninsured, approximately $50 million are deposits held as collateral on loans made by the Bank and required, per loan documentation, to remain at the Bank.

At March 31, 2023 and December 31, 2022, time deposits with a denomination of $100 thousand or more, including CDARS and other brokered deposits, totaled $1,251.2 million and $1,157.2 million, respectively, maturing during the periods indicated in the table below:

(Dollars in thousands) March 31, 2023 December 31, 2022

At June 30, 2023 and December 31, 2022, time deposits with a denomination of $100 thousand or more, including CDARS and brokered deposits, totaled $1,222.6 million and $1,157.2 million, respectively, maturing during the periods indicated in the table below:

(Dollars in thousands) June 30, 2023 December 31, 2022

Within 3 months $ 325,183 $ 251,036

4 unchanged sentences

We utilize advances from the Federal Home Loan Bank of Boston, or FHLB, as part of our overall funding strategy and to meet short-term liquidity needs, and to a lesser degree, manage interest rate risk arising from the difference in asset and liability maturities.

Total FHLB advances were $90.0 million at March 31, 2023 and December 31, 2022, respectively.

Total FHLB advances were $90.0 million at June 30, 2023 and December 31, 2022, respectively.

The Bank has additional borrowing capacity at the FHLB up to a certain percentage of the value of qualified collateral.

In accordance with agreements with the FHLB, the qualified collateral must be free and clear of liens, pledges and encumbrances.

At March 31, 2023, the Bank had pledged $898.2 million of eligible loans as collateral to support borrowing capacity at the FHLB of Boston.

As of March 31, 2023, the Bank had immediate availability to borrow an additional $362.3 million based on qualified collateral.

At March 31, 2023 , the Bank had a secured borrowing line with the FRB, a letter of credit with the FHLB, and unsecured lines of credit with Atlantic Community Bankers Bank, Zions Bank and Texas Capital Bank.

The total borrowing line, letter, or line of credit and the amount outstanding at March 31, 2023 is summarized below:

March 31, 2023

At June 30, 2023, the Bank had pledged $998.8 million of eligible loans as collateral to support borrowing capacity at the FHLB of Boston.

As of June 30, 2023, the Bank had immediate availability to borrow an additional $385.4 million based on qualified collateral.

At June 30, 2023 , the Bank had a secured borrowing line with the FRB, a letter of credit with the FHLB, and unsecured lines of credit with Zions Bank, Pacific Coast Bankers Bank ("PCBB"), Atlantic Community Bankers Bank ("ACBB"), and Texas Capital Bank.

The total borrowing line, letter, or line of credit and the amount outstanding at June 30, 2023 is summarized below:

June 30, 2023

Total Letter or Line of Credit Total Outstanding

2 unchanged sentences

FHLB 614,307 228,901

Atlantic Community Bankers Bank 12,000 —

Zion Bank 45,000 —

Zions Bank 45,000 —

PCBB 38,000 —

ACBB 12,000 —

Texas Capital Bank 10,000 —

12 unchanged sentences

We employ a stress testing methodology to estimate needs for contingent funding that could result from unexpected outflows of funds in excess of “business as usual” cash flows.

The Bank has established unsecured borrowing capacity with the Atlantic Community Bankers Bank (ACBB) (formerly Bankers’ Bank Northeast), Zion’s Bank and Texas Capital Bank and also maintains additional collateralized borrowing capacity with the FRB and the FHLB in excess of levels used in the ordinary course of business.

Our sources of liquidity include cash, unpledged investment securities, borrowings from the FRB, FHLB, lines of credit from ACBB, Zion's Bank and Texas Capital Bank, the brokered deposit market and national CD listing services.

The Bank has established unsecured borrowing capacity with Zions Bank, PCBB, ACBB (formerly Bankers’ Bank Northeast), and Texas Capital Bank.

The Bank also maintains additional collateralized borrowing capacity with the FRB and the FHLB in excess of levels used in the ordinary course of business.

Our sources of liquidity include cash, unpledged investment securities, borrowings from the FRB, FHLB, lines of credit from Zions Bank, PCBB, ACBB, Texas Capital Bank, the brokered deposit market and national CD listing services.

Capital Resources

Shareholde rs’ equity totaled $242.3 million as of March 31, 2023, an increase of $3.8 million compared to December 31, 2022, primarily a result of net income of $10.4 million for the three months ended March 31, 2023.

The increase was partially offset by the Day 1 CECL adoption of $4.9 million, dividends paid of $3.1 million, and a $1.5 million unfavorable impact to accumulated other comprehensive income.

The Company's interest rate swaps are used to hedge interest rate risk.

1 unchanged sentence

Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements.

At March 31, 2023, the Bank met all capital adequacy requirements to which it was subject and exceeded the regulatory minimum capital levels to be considered well-capitalized under the regulatory framework for prompt corrective action.

At March 31, 2023, the Bank’s ratio of Common Equity Tier 1 capital to risk-weighted assets was 10.17%, total capital to risk-weighted assets was 11.16%, Tier 1 capital to risk-weighted assets was 10.17% and Tier 1 capital to average assets was 9.22%.

At June 30, 2023, the Bank met all capital adequacy requirements to which it was subject and exceeded the regulatory minimum capital levels to be considered well-capitalized under the regulatory framework for prompt corrective action.

At June 30, 2023, the Bank’s ratio of Common Equity Tier 1 capital to risk-weighted assets was 10.34%, total capital to risk-weighted assets was 11.41%, Tier 1 capital to risk-weighted assets was 10.34% and Tier 1 capital to average assets was 9.41%.

Under the current guidelines, banking organizations must have a minimum total risk-based capital ratio of 8.0%, a minimum Tier 1 risk-based capital ratio of 6.0%, a minimum common equity Tier 1 risk-based capital ratio of 4.5%, and a minimum leverage ratio of 4.0% in order to be "adequately capitalized." In addition to these requirements, banking organizations must maintain a capital conservation buffer consisting of common Tier 1 equity in an amount above the minimum risk-based capital requirements for “adequately capitalized” institutions equal to 2.5% of total risk-weighted assets, resulting in a requirement for the Company and the Bank to effectively maintain common equity Tier 1, Tier 1 and total capital ratios of 7.0%, 8.5% and 10.5%, respectively.

21 unchanged sentences

Simulation analysis involves projecting a future balance sheet structure and interest income and expense under the various rate scenarios.

Internal policy regarding internal rate risk simulations currently specifies that for instantaneous parallel shifts of the yield curve, estimated net interest income at risk for the subsequent one-year period

should not decline by more than:

6% for a 100 basis point shift;

2 unchanged sentences

Per Company policy, the Bank should not be outside these limits for twelve consecutive months unless the Bank's forecasted capital ratios are considered to be "well capitalized".

As of March 31, 2023, the Bank has met all minimum regulatory capital requirements to be considered "well capitalized".

The following tables set forth the estimated percentage change in our net interest income at risk over one-year simulation periods beginning March 31, 2023 and December 31, 2022:

As of June 30, 2023, the Bank has met all minimum regulatory capital requirements to be considered "well capitalized".

The following tables set forth the estimated percentage change in our net interest income at risk over one-year simulation periods beginning June 30, 2023 and December 31, 2022:

Parallel Ramp Estimated Percent Change in Net Interest Income

Rate Changes (basis points) March 31, 2023 December 31, 2022

Rate Changes (basis points) June 30, 2023 December 31, 2022

-100 1.20 % 2.20 %

1 unchanged sentence

Parallel Shock Estimated Percent Change in Net Interest Income

Rate Changes (basis points) March 31, 2023 December 31, 2022

Rate Changes (basis points) June 30, 2023 December 31, 2022

-100 2.50 % 2.20 %

2 unchanged sentences

+300 (8.60) (8.90)

The net interest income at risk simulation results indicate that, as of March 31, 2023, we remain liability sensitive.

The net interest income at risk simulation results indicate that, as of June 30, 2023, we remain liability sensitive.

The liability sensitivity is due to the fact that there are more liabilities than assets subject to repricing as market rates change.

10 unchanged sentences

Estimated Percent Change in Economic Value of Equity ("EVE")

Rate Changes (basis points) March 31, 2023 December 31, 2022

Rate Changes (basis points) June 30, 2023 December 31, 2022

-100 2.90 % 2.30 %

13 unchanged sentences

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis