What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2023-11-08 compared with 2023-08-09 · 123 added, 120 removed, 378 unchanged (39% of the section changed)

28 unchanged sentences

Earnings and Performance Overview

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.

For the three months ended September 30, 2023, net interest income was $22.7 million, a decrease of $1.9 million or 7.8% when compared to the same period in 2022.

For the nine months ended September 30, 2023, net interest income was $72.2 million, an increase of $4.3 million or 6% when compared to the same period in 2022.

The decrease in net interest income for the three months ended September 30, 2023 was primarily attributable to an increase in interest expense partially offset by an increase in interest on loans due to higher overall loan yields.

The increase in net interest income for the nine months ended September 30, 2023 was primarily attributable to an increase in interest and fees on loans due to loan growth and higher overall loan yields partially offset by an increase in interest expense.

Net income available to common shareholders was $9.8 million, or $1.25 per diluted share, and $9.2 million, or $1.18 per diluted share, for the three months ended September 30, 2023 and 2022, respectively.

Net income available to common shareholders was $28.1 million, or $3.58 per diluted share, and $29.4 million, or $3.75 per diluted share, for the nine months ended September 30, 2023 and 2022, respectively.

The increase in net income for the quarter ended 2023 was primarily due to the credit for credit losses, partially offset by an increase in noninterest expense, and the aforementioned decrease in revenues.

The decrease in net income for nine months ended 2023 was due to an increase in noninterest expense partially offset by the af orementioned increase in revenues.

Returns on average shareholders' equity and average assets for the three months ended September 30, 2023 were 15.19% and 1.19%, respectively, compared to 15.73% and 1.47%, respectively, for the three months ended September 30, 2022.

Returns on average shareholders' equity and average assets for the nine months ended September 30, 2023 were 15.16% and 1.16%, respectively, compared to 17.94% and 1.59%, respectively, for the nine months ended September 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 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.

FTE net interest income for the three months ended September 30, 2023 and 2022 was $22.7 million and $24.7 million, respectively.

FTE net interest income for the nine months ended September 30, 2023 and 2022 was $72.4 million and $68.1 million, respectively.

FTE interest in come for the three months ended September 30, 2023 increased by $18.6 million, or 62.5%, to $48.3 million, compared to FTE interest income for the three months ended September 30, 2022.

FTE interest income for the nine months ended September 30, 2023 increased by $60.7 million, or 77.3%, to $139.2 million, compared to FTE interest income for the nine months ended September 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 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.

Interest expense for the three months ended September 30, 2023 increased by $20.5 million compared to interest expense for the three months ended September 30, 2022.

Interest expense for the nine months ended September 30, 2023 increased by $56.4 million compared to interest expense for the nine months ended September 30, 2022.

The increase in interest expense for the three and nine months ended September 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 and six months ended June 30, 2023 and 2022.

For the Quarter Ended

June 30, 2023 June 30, 2022

September 30, 2023 September 30, 2022

Balance Interest Yield/

33 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 $51 thousand and $50 thousand for the three months ended June 30, 2023 and 2022, respectively.

(2) The adjustment for securities and loans taxable equivalency amounted to $52 thousand and $49 thousand for the three months ended September 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

For the Nine Months Ended

September 30, 2023 September 30, 2022

Balance Interest Yield/

33 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 $102 thousand and $98 thousand for the six

months ended June 30, 2023 and 2022 , respectively.

(2) The adjustment for securities and loans taxable equivalency amounted to $154 thousand and $148 thousand for the

nine months ended September 30, 2023 and 2022 , respectively.

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

7 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 June 30, 2023 vs 2022

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

Three Months Ended September 30, 2023 vs 2022

Increase (Decrease) Nine Months Ended September 30, 2023 vs 2022

Increase (Decrease)

20 unchanged sentences

Change in net interest income $ 7,530 $ (9,437) $ (1,907) $ 21,541 $ (17,245) $ 4,296

Provision for Credit Losses

The provision for credit losses is based on management’s periodic assessment of the adequacy of our ACL-Loans and ACL-Unfunded Commitments which, in turn, is based on interrelated factors such as the composition of our loan portfolio and its inherent risk characteristics, the level of nonperforming loans and net charge-offs, both current and historic, local economic and credit conditions, the direction of real estate values, and regulatory guidelines.

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 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").

(Credit) provision for Credit Losses

The (credit) provision for credit losses is based on management’s periodic assessment of the adequacy of our ACL-Loans and ACL-Unfunded Commitments which, in turn, is based on interrelated factors such as the composition of our loan portfolio and its inherent risk characteristics, the level of nonperforming loans and net charge-offs, both current and historic, local economic and credit conditions, the direction of real estate values, and regulatory guidelines.

The (credit) 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 credit for credit losses for the three months ended September 30, 2023 was $1.6 million compared to a provision for credit losses of $2.4 million for the three months ended September 30, 2022.

The provision for credit losses for the nine months ended September 30, 2023 was $1.8 million compared to a credit for credit losses of $1.2 million for the nine months ended September 30, 2022.

The reduction for three months ended September 30, 2023 was primarily due to a revision in the CECL methodology given further refinement of the Company's loan portfolio segmentation for insurance premium loans.

The increase in provision for credit losses for the nine months ended September 30, 2023 was primarily driven by loan growth and forward looking CECL macroeconomic factors.

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

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.

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, and income earned on bank-owned life insurance.

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

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

Three Months Ended

June 30, Change

September 30, Change

(Dollars in thousands) 2023 2022 $ %

Gains and fees from sales of loans $ 725 $ 608 $ 117 19.2 %

Gains (losses) and fees from sales of loans $ 237 $ (15) $ 252 Favorable

Bank-owned life insurance 303 271 32 11.8

Service charges and fees 294 240 54 22.5

Other 23 30 (7) (23.3)

Other (48) (94) 46 Favorable

Total noninterest income $ 786 $ 402 $ 384 95.5 %

Six Months Ended

June 30, Change

Nine Months Ended

September 30, Change

(Dollars in thousands) 2023 2022 $ %

4 unchanged sentences

Total noninterest income $ 3,713 $ 2,512 $ 1,201 47.8 %

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 income increased by $0.4 million to $0.8 million for the three months ended September 30, 2023 compared to the three months ended September 30, 2022.

Noninterest income increased by $1.2 million to $3.7 million for the nine months ended September 30, 2023 compared to the nine months ended September 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 nine months ended 2023.

Noninterest Expense

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

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

Three Months Ended

June 30, Change

September 30, Change

(Dollars in thousands) 2023 2022 $ %

8 unchanged sentences

Total noninterest expense $ 12,205 $ 11,031 $ 1,174 10.6 %

Six Months Ended

June 30, Change

Nine Months Ended

September 30, Change

(Dollars in thousands) 2023 2022 $ %

8 unchanged sentences

Total noninterest expense $ 37,537 $ 31,892 $ 5,645 17.7 %

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 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.

Noninterest expense increased by $1.2 million to $12.2 million for the three months ended September 30, 2023 compared to the three months ended September 30, 2022.

Noninterest expense increased by $5.6 million to $37.5 million for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022.

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

FDIC insurance expense totaled $1.0 million for the three months ended September 30, 2023, an increase of $0.8 million when compared to the same period in 2022.

FDIC insurance expense totaled $3.1 million for the nine months ended September 30, 2023, an increase of $2.4 million when compared to the same period in 2022.

The increase in FDIC insurance expense is attributed to the balance sheet growth and composition as well as an increase in FDIC insurance rates.

Salaries and employee benefits expense totaled $18.5 million for the nine months ended September 30, 2023, an increase of $2.3 million when compared to the same period in 2022.

The increase in salaries and employee benefits expense was driven by an increase in average full time equivalent employees from 139 at September 30, 2023 compared to 131 for the same period in 2022.

In addition, salaries and employee benefits expense increased due to one-time severance costs.

Income tax expense for the three months ended September 30, 2023 and 2022 totaled $3.1 million and $2.4 million, respectively.

The effective tax rates for the three months ended September 30, 2023 and 2022 were 23.9% and 20.9%, respectively.

Income tax expense for the nine months ended September 30, 2023 and 2022 totaled $8.4 million and $8.0 million, respectively.

The effective tax rates for the nine months ended September 30, 2023 and 2022 were 23.1% and 21.3%, respectively.

Financial Condition

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.

Assets totaled $3.2 billion at September 30, 2023 a decrease of $2.7 million or 0.1% compared to December 31, 2022.

Gross loans totaled $2.8 billion at September 30, 2023, an increase of $94.7 million or 3.5% compared to December 31, 2022.

Deposits totaled $2.8 billion at September 30, 2023, a decrease of $32.2 million, or 1.1% compared to December 31, 2022.

Shareholders’ equity totaled $257.9 million as of September 30, 2023, an increase of $19.4 million compared to December 31, 2022, primarily a result of net income of $28.1 million for the nine months ended September 30, 2023.

The increase was partially offset by the Day 1 CECL adoption of $4.9 million, dividends paid of $4.7 million, and a $1.3 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 $0.9 million and fair value marks related to hedge positions involving interest rate swaps of $0.7 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 $1.4 million partially offset by fair value marks related to hedge positions involving interest rate swaps of $0.1 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 $2.8 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.

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

Total gross loans increased $94.7 million as of September 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 June 30, 2023 At December 31, 2022 Change

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

Real estate loans:

27 unchanged sentences

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

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

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

Nonaccrual loans:

4 unchanged sentences

Construction 9,382 9,382

Consumer 7,917 —

Total nonaccrual loans 27,957 16,441

6 unchanged sentences

Total past due loans to total gross loans 1.44 % 0.60 %

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.

Nonperforming assets totaled $28.0 million and represented 0.86% of total assets at September 30, 2023, compared to $16.4 million and 0.51% of total assets at December 31, 2022.

Nonaccrual loans totaled $28.0 million at September 30, 2023 and $16.4 million at December 31, 2022.

Nonaccrual loans increased primarily due to three distinct loans:

• One Consumer (insurance premium) loan of $7.9 million.

As of October 4, 2023, the loan balance has been reduced to $3.9 million.

The Bank holds collateral for the remaining balance, worth approximately two times the outstanding amount.

• Two Commercial business loans totaling $5.5 million, of which approximately 82% is guaranteed by the U.S.

Government (SBA).

There was no Other Real Estate Owned ("OREO") at September 30, 2023 or December 31, 2022.

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

14 unchanged sentences

Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

(Dollars in thousands) 2023 2022 2023 2022

10 unchanged sentences

Total recoveries 55 21 103 112

Net (charge-offs) recoveries 18 77 (428) 87

Provision for credit losses - loans 2,678 (1,445) 3,612 (1,216)

Net recoveries (charge-offs) 23 13 (405) 100

(Credit) provision for credit losses - loans (1,433) 2,381 2,179 1,165

Balance at end of period $ 29,284 $ 18,167 $ 29,284 $ 18,167

1 unchanged sentence

ACL-Loans to total gross loans 1.06 % 0.79 % 1.06 % 0.79 %

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.

At September 30, 2023, our ACL-Loans was $29.3 million and represented 1.06% 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 June 30, 2023 At December 31, 2022

At September 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 $ 29,248 100.00 % $ 22,431 100.00 %

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.

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

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

ACL- Unfunded Commitments

3 unchanged sentences

Investment Securities

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.

At September 30, 2023, the carrying value of our investment securities portfolio totaled $115.8 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 September 30, 2023 was $12.2 million and included gross unrealized gains of $10.0 thousand.

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

June 30, 2023 December 31, 2022

September 30, 2023 December 31, 2022

(Dollars in thousands) Amount Percent Amount Percent

5 unchanged sentences

Total deposits $ 2,768,626 100.00 % $ 2,800,818 100.00 %

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.

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

Total deposits were $2.8 billion at September 30, 2023, a decrease of $32.2 million, from the balance at December 31, 2022.

Brokered certificates of deposits totaled $911.1 million at September 30, 2023 and $976.5 million at December 31, 2022.

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

Brokered money market accounts totaled $40.2 million at September 30, 2023 and $50.1 million at December 31, 2022.

As of September 30, 2023, our FDIC insured deposits were $1,970.3 million, or 71% of total deposits.

Additionally, $118.8 million of deposits are insured by standby letters of credit with the Federal Home Loan Bank of Boston, or 4% of total deposits.

At September 30, 2023 and December 31, 2022, time deposits with a denomination of $100 thousand or more, including CDARS and brokered deposits, totaled $1,229.9 million and $1,157.2 million, respectively, maturing during the periods indicated in the table below:

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

Within 3 months $ 391,376 $ 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 June 30, 2023 and December 31, 2022, respectively.

Total FHLB advances were $90.0 million at September 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 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

At September 30, 2023, the Bank had pledged $956.0 million of eligi ble loans as collateral to support borrowing capacity at the FHLB of Boston.

As of September 30, 2023, the Bank had immediate availability to borrow an additional $362.1 million based on qualified collateral.

At September 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"), and Atlantic Community Bankers Bank ("ACBB").

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

September 30, 2023

Total Letter or Line of Credit Total Outstanding

5 unchanged sentences

ACBB 12,000 —

Texas Capital Bank 10,000 —

Total $ 1,537,802 $ 228,899

11 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 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.

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

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, and ACBB, the brokered deposit market and national CD listing services.

Capital Resources

The increase was partially offset by the Day 1 CECL adoption of $4.9 million, dividends paid of $4.7 million, and a $1.3 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 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%.

At September 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 September 30, 2023, the Bank’s ratio of Common Equity Tier 1 capital to risk-weighted assets was 10.82%, total capital to risk-weighted assets was 11.86%, Tier 1 capital to risk-weighted assets was 10.82% and Tier 1 capital to average assets was 9.60%.

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.

24 unchanged sentences

12% for a 200 basis point shift;

and 18% for a 300 basis point shift.

and 18% for a 300 basis point

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 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:

As of September 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 September 30, 2023 and December 31, 2022:

Parallel Ramp Estimated Percent Change in Net Interest Income

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

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

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

-100 3.10 % 2.20 %

2 unchanged sentences

+300 (10.20) (8.90)

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

The net interest income at risk simulation results indicate that, as of September 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) June 30, 2023 December 31, 2022

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

-100 3.80 % 2.30 %

3 unchanged sentences

While ALCO reviews and updates simulation assumptions and also periodically back-tests the simulation results to ensure that the assumptions are reasonable and current, income simulation may not always prove to be an accurate indicator of interest rate risk or future net interest margin.

Over time, the repricing, maturity and prepayment characteristics of financial instruments and the composition of our balance sheet may change to a different degree than estimated.

Over time, the repricing, maturity and prepayment characteristics of financial instruments and

the composition of our balance sheet may change to a different degree than estimated.

ALCO recognizes that deposit balances could shift into higher yielding alternatives as market rates change.

7 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