What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-10-28 compared with 2022-07-29 · 275 added, 223 removed, 534 unchanged (48% of the section changed)

33 unchanged sentences

Our private wealth services for executives and individuals include trust and estate administration, financial planning, investment management, consumer lending, and private banking.

For other financial institutions, our bank consulting experts provide investment portfolio administrative services, asset liability management services, and asset liability management process validation.

Our bank consulting experts provide investment portfolio administrative services, asset liability management services, and asset liability management process validation for other financial institutions.

We do not utilize a branch network to attract retail clients.

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Financial Performance Summary

Results as of and for the three and six months ended June 30, 2022 include:

• Net income available to common shareholders totaled $11.0 million, or diluted earnings per share of $1.29, for the three months ended June 30, 2022, compared to $8.2 million, or diluted earnings per share of $0.95, for the same period in 2021.

Net income available to common shareholders totaled $19.6 million, or diluted earnings per share of $2.31, for the six months ended June 30, 2022, compared to $18.0 million, or diluted earnings per share of $2.08, for the same period in 2021.

• Annualized return on average assets (“ROA”) and annualized return on average common equity (“ROCE”) for the three months ended June 30, 2022 measured 1.61% and 18.79%, respectively, compared to 1.26% and 15.09% for the same period in 2021.

Annualized ROA and annualized ROCE for the six months ended June 30, 2022 measured 1.46% and 16.74%, respectively, compared to 1.38% and 16.75% for the same period in 2021.

• Pre-tax, pre-provision adjusted earnings, which excludes certain one-time and discrete items, totaled $10.8 million for the three months ended June 30, 2022, increasing $835,000, or 8.3%, from the same period in 2021.

Pre-tax, pre-provision adjusted ROA was 1.60% for the three months ended June 30, 2022, compared to 1.53% for the same period in 2021.

Excluding PPP interest and fee income, pre-tax, pre-provision adjusted earnings totaled $10.6 million for the three months ended June 30, 2022, up $3.7 million, or 53.8%, from the same period in 2021.

Pre-tax, pre-provision adjusted ROA, excluding the impact of PPP, was 1.57% for the three months ended June 30, 2022, compared to 1.15% for the same period in 2021.

• Pre-tax, pre-provision adjusted earnings totaled $20.8 million for the six months ended June 30, 2022, up $153,000, or 0.7%, from the same period in 2021.

Pre-tax, pre-provision adjusted ROA was 1.54% for the six months ended June 30, 2022, compared to 1.59% for the same period in 2021.

Excluding PPP interest and fee income, pre-tax, pre-provision adjusted earnings totaled $20.2 million for the six months ended June 30, 2022, up $5.6 million, or 37.8%, from the same period in 2021.

Pre-tax, pre-provision adjusted ROA, excluding the impact of PPP, was 1.51% for the six months ended June 30, 2022, compared to 1.24% for the same period in 2021.

• Fees in lieu of interest, defined as prepayment fees, asset-based loan fees, non-accrual interest, and loan fee amortization, totaled $1.9 million for the three months ended June 30, 2022 compared to $3.5 million for the three months ended June 30, 2021.

PPP fee income, included in loan fee amortization, was $196,000 for the three months ended June 30, 2022 compared to $2.5 million for the same period in 2021.

• Fees in lieu of interest totaled $3.2 million for the six months ended June 30, 2022, compared to $6.6 million for the six months ended June 30, 2021.

PPP fee income, included in loan fee amortization, was $445,000 for the six months ended June 30, 2022 compared to $4.8 million for the same period in 2021.

• Net interest margin was 3.71% for the three months ended June 30, 2022 compared to 3.49% for the same period in 2021.

Adjusted net interest margin, which excludes certain one-time and volatile items, was 3.45% for the three months ended June 30, 2022 up from 3.20% for the same period in 2021.

Net interest margin was 3.55% for the six months ended June 30, 2022 compared to 3.46% for the same period in 2021.

Adjusted net interest margin, which excludes certain one-time and volatile items, was 3.35% for the six months ended June 30, 2022 up from 3.20% for the same period in 2021.

• Top line revenue, defined as net interest income plus non-interest income, totaled $30.5 million for the three months ended June 30, 2022, up $2.6 million, or 9.1% from the same period in 2021.

Excluding PPP interest income and fees, top line revenue increased $5.4 million, up 21.9% from the same period in 2021.

Top line revenue totaled $59.3 million for the six months ended June 30, 2022, up $3.3 million, or 5.9% from the same period in 2021.

Excluding PPP interest income and fees, top line revenue increased $8.7 million, up 17.4% from the same period in 2021.

• Provision for loan and lease losses was a benefit of $3.7 million for the three months ended June 30, 2022 compared to a benefit of $958,000 for the same period in 2021.

Provision for loan and lease losses was a benefit of $4.6 million for the six months ended June 30, 2022 compared to a benefit of $3.0 million for the same period in 2021.

• Total assets at June 30, 2022 increased $124.1 million, or 9.4% annualized, to $2.777 billion from $2.653 billion at December 31, 2021.

• Period-end gross loans and leases receivable increased $50.1 million, or 4.5% annualized, to $2.291 billion as of June 30, 2022 compared to $2.241 billion as of December 31, 2021.

Average gross loans and leases of $2.259 billion increased $55.6 million, or 2.5%, for the six months ended June 30, 2022, compared to $2.203 billion for the same period in 2021.

• Period-end gross loans and leases receivable, excluding PPP loans, at June 30, 2022 increased $69.7 million, or 6.3% annualized, to $2.283 billion from $2.213 billion as of December 31, 2021.

Average gross loans and leases, excluding net PPP loans, of $2.243 billion increased $275.0 million, or 14.0%, for the six months ended June 30, 2022, compared to $1.968 billion for the same period in 2021.

• Period-end gross PPP loans and PPP deferred processing fees were $8.3 million and $113,000, respectively, at June 30, 2022 compared to $27.9 million and $557,000 at December 31, 2021.

Average PPP loans, net of deferred processing fees, were $16.3 million for the six months ended June 30, 2022 compared to $235.7 million for the same period in 2021.

• Non-performing assets were $5.7 million and 0.21% of total assets as of June 30, 2022, compared to $6.5 million and 0.25% of total assets as of December 31, 2021.

• The allowance for loan and lease losses decreased $232,000, or 1.0%, compared to December 31, 2021.

Results as of and for the three and nine months ended September 30, 2022 include:

• Net income available to common shareholders totaled $10.6 million, or diluted earnings per share of $1.25, for the three months ended September 30, 2022, compared to $9.2 million, or diluted earnings per share of $1.07, for the same period in 2021.

Net income available to common shareholders totaled $30.2 million, or diluted earnings per share of $3.57, for the nine months ended September 30, 2022, compared to $27.2 million, or diluted earnings per share of $3.15, for the same period in 2021.

• Annualized return on average assets (“ROA”) and annualized return on average equity (“ROAE”) for the three months ended September 30, 2022 measured 1.57% and 16.97%, respectively, compared to 1.41% and 16.39% for the same period in 2021.

Annualized ROA and annualized ROAE for the nine months ended September 30, 2022 measured 1.49% and 16.59%, respectively, compared to 1.39% and 16.63% for the same period in 2021.

• Return on average tangible common equity (“ROATCE”), which is defined as net income less earnings allocated to participating shares and preferred stock dividends, if any, divided by average equity reduced by intangible assets and average preferred stock, if any.

ROATCE was 17.88% and 17.40% for the three and nine months ended September 30, 2022, respectively, compared to 16.85% and 17.12% for the same periods in 2021.

• Pre-tax, pre-provision (“PTPP”) adjusted earnings, which excludes certain one-time and discrete items, and PTPP ROA were $14.2 million and 2.05%, respectively, for the three months ended September 30, 2022, increasing $4.5 million and 56 basis points (“bps”), from the same period in 2021.

Excluding PPP interest and fee income, PTPP adjusted earnings and ROA were $14.1 million and 2.05%, respectively, for the three months ended September 30, 2022, up $6.3 million and 81 bps from the same period in 2021.

• PTPP adjusted earnings and ROA totaled $34.9 million and 1.72%, respectively, for the nine months ended September 30, 2022, up $4.6 million and 17 bps from the same period in 2021.

Excluding PPP interest and fee income, PTPP adjusted earnings and ROA were $34.3 million and 1.69%, respectively, for the nine months ended September 30, 2022, increasing $11.8 million and 45 bps from the same period in 2021.

• Fees in lieu of interest, defined as prepayment fees, asset-based loan fees, non-accrual interest, and loan fee amortization, totaled $807,000 and $4.0 million for the three and nine months ended September 30, 2022, respectively, compared to $2.8 million and $9.5 million for the same periods in 2021.

PPP fee income, included in loan fee amortization, was $61,000 and $506,000for the three and nine months ended September 30, 2022, respectively, compared to $1.7 million and $6.4 million for the same periods in 2021.

• Net interest margin was 4.01% for the three months ended September 30, 2022 compared to 3.45% for the same period in 2021.

Adjusted net interest margin, which excludes certain one-time and volatile items, was 3.89% for the three months ended September 30, 2022 up from 3.22% for the same period in 2021.

Net interest margin and adjusted net interest margin were 3.71% and 3.53%, respectively, for the nine months ended September 30, 2022 compared to 3.46% and 3.21%, respectively, for the same period in 2021.

• Top line revenue, defined as net interest income plus non-interest income, totaled $34.1 million and $93.4 million for the three and nine months ended September 30, 2022, up $5.8 million and $9.2 million, or 20.7% and 10.9% from the same period in 2021, respectively.

Excluding PPP interest income and fees, top line revenue for the three and nine

months ended September 30, 2022 increased $7.7 million and $16.4 million, up 29.1% and 21.4% from the same period in 2021, respectively.

• Effective tax rate was 22.64% for the nine months ended September 30, 2022 compared to 23.61% for the same period in 2021.

The nine months ended September 30, 2022 included a $155,000 benefit from a low income housing tax credit investment, while the same period in 2021 did not include any tax credit benefit.

• Provision for loan and lease losses was an expense of $12,000 for the three months ended September 30, 2022 compared to a benefit of $2.3 million for the same period in 2021.

Provision for loan and lease losses was a benefit of $4.6 million for the nine months ended September 30, 2022 compared to a benefit of $5.3 million for the same period in 2021.

• Total assets at September 30, 2022 increased $197.9 million, or 9.9% annualized, to $2.851 billion from $2.653 billion at December 31, 2021.

• Period-end gross loans and leases receivable increased $90.2 million, or 5.4% annualized, to $2.331 billion as of September 30, 2022 compared to $2.241 billion as of December 31, 2021.

Average gross loans and leases of $2.278 billion increased $99.4 million, or 6.1% annualized, for the nine months ended September 30, 2022, compared to $2.179 billion for the same period in 2021.

• Period-end gross loans and leases receivable, excluding PPP loans, at September 30, 2022 increased $115.7 million, or 7.0% annualized, to $2.329 billion from $2.213 billion as of December 31, 2021.

Average gross loans and leases, excluding net PPP loans, of $2.266 billion increased $272.8 million, or 13.7%, for the nine months ended September 30, 2022, compared to $1.993 billion for the same period in 2021.

• Period-end gross PPP loans and PPP deferred processing fees were $2.4 million and $52,000, respectively, at September 30, 2022 compared to $27.9 million and $557,000 at December 31, 2021.

Average PPP loans, net of deferred processing fees, were $12.3 million for the nine months ended September 30, 2022 compared to $185.7 million for the same period in 2021.

• Non-performing assets were $3.8 million and 0.13% of total assets as of September 30, 2022, compared to $6.5 million and 0.25% of total assets as of December 31, 2021.

• The allowance for loan and lease losses decreased $193,000, or 1.1% annualized, compared to December 31, 2021.

The allowance for loan and lease losses decreased to 1.04% of total loans, compared to 1.09% at December 31, 2021.

Excluding net PPP loans, the allowance for loan and lease losses decreased to 1.06% of total loans as of June 30, 2022, compared to 1.10% as of December 31, 2021.

• Period-end in-market deposits at June 30, 2022 decreased $71.3 million, or 3.7%, to $1.857 billion from $1.928 billion as of December 31, 2021.

Average in-market deposits of $1.917 billion increased $187.8 million, or 10.9%, for the six months ended June 30, 2022, compared to $1.729 billion for the same period in 2021.

• Private wealth and trust assets under management and administration decreased by $280.3 million, or 9.9%, to $2.554 billion at June 30, 2022, compared to $2.921 billion at December 31, 2021.

Private wealth management service fees increased $108,000, or 3.9%, and $542,000, or 10.5%, for the three and six months ended June 30, 2022, compared to the three and six months ended June 30, 2021.

• Period-end in-market deposits at September 30, 2022 increased $939,000 to $1.929 billion from $1.928 billion as of December 31, 2021.

Average in-market deposits of $1.921 billion increased $165.0 million, or 9.4%, for the nine months ended September 30, 2022, compared to $1.756 billion for the same period in 2021.

• Private wealth and trust assets under management and administration decreased by $428.1 million, or 19.5% annualized, to $2.493 billion at September 30, 2022, compared to $2.921 billion at December 31, 2021.

Private wealth management service fees decreased $141,000, or 5.1%, but increased $401,000, or 5.1%, for the three and nine months ended September 30, 2022, respectively, compared to the three and nine months ended September 30, 2021, respectively.

Results of Operations

Top Line Revenue

Top line revenue, comprised of net interest income and non-interest income, increased $2.6 million, or 9.1%, for the three months ended June 30, 2022, compared to the same period in 2021, due to a 9% increase in net interest income and non-interest income.

The increase in net interest income, driven by an increase in average loans and leases outstanding, was partially offset by a decrease in PPP interest and fees of $2.9 million.

Top line revenue, comprised of net interest income and non-interest income, increased $5.8 million, or 20.7%, for the three months ended September 30, 2022, compared to the same period in 2021, due to a 22.0% and 16.8% increase in net interest income and non-interest income, respectively.

The increase in net interest income, driven by an increase in net interest margin and average loans and leases outstanding, was partially offset by a decrease in PPP interest and fees of $1.8 million.

Excluding PPP interest and fees, top line revenue grew 29.1%.

The increase in non-interest income was due to an increase in commercial loan swap fee income, private wealth fee income, loan fee income, and services charges on deposits, partially offset by a reduction in gains on the sale of SBA loans.

Top line revenue increased $3.3 million, or 5.9%, for the six months ended June 30, 2022, compared to the same period in 2021, due to a 6% increase in net interest income and non-interest income, combined with a benefit from above-average returns from the Corporation’s investments in mezzanine funds.

Top line revenue increased $9.2 million, or 10.9%, for the nine months ended September 30, 2022, compared to the same period in 2021, primarily due to a 11.3% increase in net interest income combined with a benefit from above-average returns from the Corporation’s investments in mezzanine funds.

Excluding PPP interest and fees, top line revenue grew 21.4%.

The components of top line revenue were as follows:

For the Three Months Ended June 30, For the Six Months Ended June 30,

For the Three Months Ended September 30, For the Nine Months Ended September 30,

2022 2021 $ Change % Change 2022 2021 $ Change % Change

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Annualized Return on Average Assets and Annualized Return on Average Common Equity

ROA for the three and six months ended June 30, 2022 increased to 1.61% and 1.46%, respectively, compared to 1.26% and 1.38% for the three and six months ended June 30, 2021, respectively.

The increase in ROA was due to an increase in top line revenue and increase in loan loss provision benefit, partially offset by an increase in operating expenses.

ROA for the three and nine months ended September 30, 2022 increased to 1.57% and 1.49%, respectively, compared to 1.41% and 1.39% for the three and nine months ended September 30, 2021, respectively.

The increase in ROA was due to an increase in top line revenue, partially offset by an increase in loan loss provision and operating expenses.

Please refer to the operating results analysis below for further discussion on the reasons driving the increase in profitability.

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ROA also allows us to better benchmark our profitability to our peers without the need to consider different degrees of leverage which can ultimately influence return on equity measures.

ROCE for the three and six months ended June 30, 2022 was 18.79% and 16.74%, respectively, compared to 15.09% and 16.75% for the three and six months ended June 30, 2021, respectively.

The primary reason for the change in ROCE is consistent with the net income variance explanation as discussed under Return on Average Assets above.

We view ROCE as an important measurement for monitoring profitability and continue to focus on improving our return to our shareholders by enhancing the overall profitability of our client relationships, controlling our expenses, and minimizing our costs of credit.

ROAE for the three and nine months ended September 30, 2022 was 16.97% and 16.59%, respectively, compared to 16.39% and 16.63% for the three and nine months ended September 30, 2021, respectively.

The primary reason for the change in ROAE is consistent with the net income variance explanation as discussed under Return on Average Assets above.

We view ROAE as an important measurement for monitoring profitability and continue to focus on improving our return to our shareholders by enhancing the overall profitability of our client relationships, controlling our expenses, and minimizing our costs of credit.

Efficiency Ratio and Pre-Tax, Pre-Provision Adjusted Earnings

Efficiency ratio measured 58.46% and 62.61% for the three and nine months ended September 30, 2022, respectively, compared to 65.68% and 64.02% for the three and nine ended September 30, 2021, respectively.

Efficiency ratio is a non-GAAP measure representing operating expense, which is non-interest expense excluding the effects of the SBA recourse benefit or provision, impairment of tax credit investments, net gains or losses on foreclosed properties, amortization of other intangible assets, and other discrete items, if any, divided by operating revenue, which is equal to net interest income plus non-interest income less realized net gains or losses on securities, if any.

Pre-tax, pre-provision adjusted earnings is defined as operating revenue less operating expense.

PTPP adjusted earnings for three and nine months ended September 30, 2022 was $14.2 million and $34.9 million, respectively, compared to $9.7 million and $30.3 million for the three and nine ended September 30, 2021, respectively.

PTPP adjusted earnings is defined as operating revenue less operating expense.

In the judgment of the Corporation’s management, the adjustments made to non-interest expense and non-interest income allow investors and analysts to better assess the Corporation’s operating expenses in relation to its core operating revenue by removing the volatility associated with certain one-time items and other discrete items.

The pre-tax, pre-provision adjusted earnings allows management to benchmark performance of our model to our peers without the influence of the loan loss provision and tax considerations, which will ultimately influence other traditional financial measurements, including ROA and ROCE.

The PTPP adjusted earnings allows management to benchmark performance of our model to our peers without the influence of the loan loss provision and tax considerations, which will ultimately influence other traditional financial measurements, including ROA and ROAE.

The information provided below reconciles the efficiency ratio to its most comparable GAAP measure.

Please refer to the Non-Interest Income and Non-Interest Expense sections below for discussion on additional drivers of the year-over-year change in the efficiency ratio and pre-tax, pre-provision adjusted earnings.

For the Three Months Ended June 30, For the Six Months Ended June 30,

Please refer to the Non-Interest Income and Non-Interest Expense sections below for discussion on additional drivers of the year-over-year change in the efficiency ratio and PTPP adjusted earnings.

For the Three Months Ended September 30, For the Nine Months Ended September 30,

2022 2021 $ Change % Change 2022 2021 $ Change % Change

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Total non-interest expense $ 20,028 $ 18,490 $ 1,538 8.3% $ 58,307 $ 54,003 $ 4,304 8.0%

Net loss (gain) on foreclosed properties 8 (1) 9 NM 20 1 19 NM

Net loss on foreclosed properties 7 6 1 NM 27 7 20 NM

Amortization of other intangible assets

— 7 (7) NM — 23 (23) NM

SBA recourse provision 114 245 (131) (53.5) 38 115 (77) (67.0)

SBA recourse provision (benefit) 96 (69) 165 (239.1) 134 45 89 197.8

Tax credit investment impairment recovery — — — NM (351) — (351) NM

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As this economic stimulus was non-recurring, we believe these key performance indicators are a better indicator of current operating performance of the Corporation, excluding PPP loans and related fee and interest income.

The table below includes the efficiency ratio, and pre-tax, pre-provision adjusted earnings and return on average assets, excluding average net PPP loans, fee income, and interest income.

The improvement in efficiency and pre-tax, pre-provision profitability, excluding the impact of PPP loans, was primarily due to the aforementioned increase in net interest income driven by an increase in average loans and leases receivable.

For the Three Months Ended June 30, For the Six Months Ended June 30,

The table below includes the efficiency ratio, and PTPP adjusted earnings and return on average assets, excluding average net PPP loans, fee income, and interest income.

The improvement in efficiency and PTPP profitability, excluding the impact of PPP loans, was primarily due to the aforementioned increase in net interest income driven by an increase in average loans and leases receivable.

For the Three Months Ended September 30, For the Nine Months Ended September 30,

2022 2021 $ Change % Change 2022 2021 $ Change % Change

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Total non-interest expense $ 20,028 $ 18,490 $ 1,538 8.3% $ 58,307 $ 54,003 $ 4,304 8.0%

Net loss on foreclosed properties 8 (1) 9 NM 20 1 19 NM

Net loss on foreclosed properties 7 6 1 16.7 27 7 20 NM

Amortization of other intangible assets

— 7 (7) NM — 23 (23) NM

SBA recourse provision 114 245 (131) (53.5) 38 115 (77) (67.0)

SBA recourse provision 96 (69) 165 (239.1) 134 45 89 NM

Tax credit investment impairment recovery — — — NM (351) — (351) NM

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These initiatives include efforts to grow our existing specialized lending revenues, increase our commercial banking market share, and scale our private wealth management business.

The Corporation’s recent improvement in operating efficiency is principally due to the rising interest rate environment and related expansion of net interest margin.

Net Interest Income

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Net interest income is sensitive to changes in market rates of interest and the asset/liability management processes to prepare for and respond to such changes.

The following table provides information with respect to (1) the change in net interest income attributable to changes in rate (changes in rate multiplied by prior volume) and (2) the change in net interest income attributable to changes in volume (changes in volume multiplied by prior rate) for the three and six months ended June 30, 2022 compared to the same period in 2021.

The following table provides information with respect to (1) the change in net interest income attributable to changes in rate (changes in rate multiplied by prior volume) and (2) the change in net interest income attributable to changes in volume (changes in volume multiplied by prior rate) for the three and nine months ended September 30, 2022 compared to the same period in 2021.

The change in net interest income attributable to changes in rate and volume (changes in rate multiplied by changes in volume) has been allocated to the rate and volume changes in proportion to the relationship of the absolute dollar amounts of the change in each.

Increase (Decrease) for the Three Months Ended June 30, Increase (Decrease) for the Six Months Ended June 30,

Increase (Decrease) for the Three Months Ended September 30, Increase (Decrease) for the Nine Months Ended September 30,

2022 Compared to 2021 2022 Compared to 2021

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Other borrowings (2)

(33) 132 99 (133) 538 405

Junior subordinated notes (3)

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(1) The average balances of loans and leases include non-accrual loans and leases and loans held for sale.

(2) The rate column for the three and six months ended June 30, 2022 includes $12,000 and $248,000 in accelerated amortization of debt issuance costs, respectively.

The tables below show our average balances, interest, average yields/rates, net interest margin, and the spread between the combined average yields earned on interest-earning assets and average rates on interest-bearing liabilities for the three and six months ended June 30, 2022 and 2021.

(2) The rate column for the nine months ended September 30, 2022 included $236,000 in accelerated amortization of debt issuance costs

The average balances are derived from average daily balances.

For the Three Months Ended June 30,

For the Three Months Ended September 30,

Balance Interest Average

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Junior subordinated notes — — — 10,070 280 11.12

— — — 10,066 277 11.01

Total interest-bearing liabilities 1,858,490 5,902 1.27 1,767,815 2,791 0.63

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Return on average assets (4)

Return on average common equity (4)

Return on average equity (4)

Average equity to average assets 9.25 8.61

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(4) Represents annualized yields/rates.

(5) The calculation for the three months ended June 30, 2022 includes $12,000 in accelerated amortization of debt issuance costs.

For the Six Months Ended June 30,

For the Nine Months Ended September 30,

Balance Interest Average

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Return on average assets (4)

Return on average common equity (4)

Return on average equity (4)

Average equity to average assets 9.09 8.37

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(4) Represents annualized yields/rates.

(5) The calculation for the six months ended June 30, 2022 includes $248,000 in accelerated amortization of debt issuance costs.

Comparison of Net Interest Income for the Three and Six Months Ended June 30, 2022 and 2021

Net interest income increased $2.0 million, or 9.3%, and $2.6 million, or 6.0%, during the three and six months ended June 30, 2022, respectively, compared to the three and six months ended June 30, 2021.

The increase in net interest income reflected an increase in average gross loans and leases and an increase in net interest margin, partially offset by a reduction in fees in lieu of interest.

Fees in lieu of interest, which can vary from quarter to quarter, totaled $1.9 million and $3.2 million for the three and six months ended June 30, 2022, respectively, compared to $3.5 million and $6.6 million for the same periods in 2021.

Excluding fees in lieu of interest and interest income from PPP loans, net interest income for the three and six months ended June 30, 2022 increased $4.2 million, or 24.0%, and $7.1 million, or 20.5%, respectively.

Average gross loans and leases for the three and six months ended June 30, 2022 increased $49.6 million, or 2.2%, and $55.6 million, or 2.5%, respectively, compared to the three and six months ended June 30, 2021.

Excluding net PPP loans, average gross loans and leases for the three and six months ended June 30, 2022 increased $267.1 million, or 13.4%, and $275.0 million, or 14.0%, respectively, compared to the three and six months ended June 30, 2021.

Net interest margin increased to 3.71% and 3.55% for the three and six months ended June 30, 2022, respectively, compared to 3.49% and 3.46% for the three and six months ended June 30, 2021.

(5) The calculation for the nine months ended September 30, 2022 includes $236,000 in accelerated amortization of debt issuance costs.

The change in yield of the respective interest-earning asset or the rate paid on interest-bearing liability compared to the change in short-term market rates is commonly referred to as a beta.

The table below displays the beta calculations for loans and leases, total interest earning assets, in-market deposits, interest-bearing deposits and total interest-bearing liabilities for the three and nine months ended September 30, 2022 and 2021.

Additionally, adjusted total loans and leases and total interest-earning assets excludes the volatile impact of fees in lieu of interest.

For the Three Months Ended September 30, For the Nine Months Ended September 30,

2022 2021 2022 2021

Average Yield/Rate (3)

Increase (Decrease) Average Yield/Rate (3)

Average Yield/Rate (3)

Increase (Decrease)

Total loans and leases receivable (a)

5.21 % 4.31 % 0.90 % 4.62 % 4.24 % 0.38 %

Total interest-earning assets (b)

4.92 % 3.90 % 1.02 % 4.34 % 3.93 % 0.41 %

Adjusted total loans and leases receivable (1)(c)

5.08 % 3.89 % 1.19 % 4.40 % 3.91 % 0.49 %

Adjusted total interest-earning assets (1)(d)

4.80 % 3.53 % 1.27 % 4.14 % 3.61 % 0.53 %

Interest-bearing in-market deposits (e)

0.88 % 0.20 % 0.68 % 0.45 % 0.21 % 0.24 %

Interest-bearing deposits (f)

0.92 % 0.25 % 0.67 % 0.49 % 0.27 % 0.22 %

Interest-bearing liabilities (g)

1.27 % 0.63 % 0.64 % 0.87 % 0.64 % 0.23 %

Effective fed funds rate (2)(h)

2.18 % 0.09 % 2.09 % 1.03 % 0.08 % 0.95 %

Beta Calculations:

Total loans and leases receivable (a)/(h)

43.20 % 39.66 %

Total interest-earning assets (b)/(h)

48.74 % 42.77 %

Adjusted total loans and leases receivable (1)(c)/(h)

56.75 % 51.96 %

Adjusted total interest-earning assets (1)(d)/(h)

60.87 % 55.80 %

Interest-bearing in-market deposits (e)/(h)

32.43 % 24.94 %

Interest-bearing deposits (f)/(h)

32.14 % 22.48 %

Interest-bearing liabilities (g)/(h)

30.56 % 24.09 %

(1) Excluding average net PPP loans, PPP loan interest income, and fees in lieu of interest.

(2) Board of Governors of the Federal Reserve System (US), Effective Federal Funds Rates [DFF].

retrieved from FRED, Federal Reserve Bank of St.

(3) Represents annualized yields/rates.

Comparison of Net Interest Income for the Three and Nine Months Ended September 30, 2022 and 2021

Net interest income increased $4.7 million, or 22.0%, and $7.2 million, or 11.3%, during the three and nine months ended September 30, 2022, respectively, compared to the three and nine months ended September 30, 2021.

The increase in net interest income reflected an increase in net interest margin and increase in average gross loans and leases, partially offset by a reduction in fees in lieu of interest.

Fees in lieu of interest, which can vary from quarter to quarter, totaled $807,000 and $4.0 million for the three and nine months ended September 30, 2022, respectively, compared to $2.8 million and $9.5 million for the same periods in 2021.

PPP loan fees decreased $1.6 million and $5.9 million for the three and nine months ended September 30, 2022, respectively, and drove the decrease of fees in lieu of interest.

Excluding fees in lieu of interest and interest income from PPP loans, net interest income for the three and nine months ended September 30, 2022 increased $6.9 million, or 38.0%, and $14.0 million, or 26.5%, respectively.

Average gross loans and leases for the three and nine months ended September 30, 2022 increased $185.5 million, or 8.7%, and $99.4 million, or 4.6%, respectively, compared to the three and nine months ended September 30, 2021.

Excluding net PPP loans, average gross loans and leases for the three and nine months ended September 30, 2022 increased $268.5 million, or 13.1%, and $272.8 million, or 13.7%, respectively, compared to the three and nine months ended September 30, 2021.

Net interest margin increased to 4.01% and 3.71% for the three and nine months ended September 30, 2022, respectively, compared to 3.45% and 3.46% for the three and nine months ended September 30, 2021.

The primary driver of improved net interest margin was a low deposit beta and higher earning asset yields in the current rising rate environment.

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The Corporation uses the daily average effective federal funds rate for purposes of estimating interest-bearing liability betas.

Adjusted net interest margin measured 3.45% and 3.35% for the three and six months ended June 30, 2022, respectively, compared to 3.20% for both the three and six months ended June 30, 2021.

Adjusted net interest margin is a non-GAAP measure representing net interest income excluding the fees in lieu of interest and other recurring, but volatile, components of net interest margin divided by average interest-earning assets less average net PPP loans, if any, and other recurring, but volatile, components of average interest-earning assets.

The yield on average loans and leases for the three and six months ended June 30, 2022 was 4.52% and 4.32%, respectively, compared to 4.24% and 4.21% for the three and six months ended June 30, 2021.

Excluding the impact of loan fees in lieu of interest and PPP loan interest income, the yield on average loans and leases excluding net PPP loans for the three and six months ended June 30, 2022 was 4.21% and 4.06%, respectively, compared to 3.91% and 3.92% for the three and six months ended June 30, 2021.

Similarly, the yield on average interest-earning assets for the three and six months ended June 30, 2022 measured 4.24% and 4.04%, respectively, compared to 3.96% and 3.94% for the three and six months ended June 30, 2021.

Excluding loan fees in lieu of interest and the impact of PPP loans, the yield on average interest-earning assets for the three and six months ended June 30, 2022 was 3.96% and 3.81%, respectively, compared to 3.64% and 3.66% for the three and six months ended June 30, 2021.

The increase in yields was primarily due to rising rates on variable-rate loans, following the Federal Open Market Committee’s (“FOMC”) decision to raise the target Fed Funds rate 150 basis points during the first half of 2022, as well as the reinvestment of cash flows from the securities and fixed-rate loan portfolios in a rising rate environment.

The rate paid on average interest-bearing in-market deposits for the three and six months ended June 30, 2022 increased to 0.29% and 0.24%, respectively, from 0.21% and 0.22% for the three and six months ended June 30, 2021.

The average rate paid on total interest-bearing liabilities for the three and six months ended June 30, 2022 increased to 0.73% and 0.67%, respectively, from 0.65% for both the three and six months ended June 30, 2021.

Adjusted net interest margin measured 3.89% and 3.53% for the three and nine months ended September 30, 2022, respectively, compared to 3.22% and 3.21% for the three and nine months ended September 30, 2021, respectively.

Adjusted net interest margin is a non-GAAP measure representing net interest income excluding the impact of PPP loans, fees in lieu of interest, and other recurring, but volatile, components of net interest margin divided by average interest-earning assets less average net PPP loans, if any, and other recurring, but volatile, components of average interest-earning assets.

The yield on average loans and leases for the three and nine months ended September 30, 2022 was 5.21% and 4.62%, respectively, compared to 4.31% and 4.24% for the three and nine months ended September 30, 2021.

Excluding the impact of loan fees in lieu of interest and PPP loan interest income, the yield on average loans and leases excluding net PPP loans for the three and nine months ended September 30, 2022 was 5.08% and 4.40%, respectively, compared to 3.89% and 3.91% for the three and nine months ended September 30, 2021.

Similarly, the yield on average interest-earning assets for the three and nine months ended September 30, 2022 measured 4.92% and 4.34%, respectively, compared to 3.90% and 3.93% for the three and nine months ended September 30, 2021.

Excluding loan fees in lieu of interest and the impact of PPP loans, the yield on average interest-earning assets for the three and nine months ended September 30, 2022 was 4.80% and 4.14%, respectively, compared to 3.53% and 3.61% for the three and nine months ended September 30, 2021.

The increase in yields was primarily due to rising rates on variable-rate loans, following the Federal Open Market Committee’s (“FOMC”) decision to raise the target Fed Funds rate 300 basis points during the first three quarters of 2022, as well as the reinvestment of cash flows from the securities and fixed-rate loan portfolios in a rising rate environment.

The rate paid on average interest-bearing in-market deposits for the three and nine months ended September 30, 2022 increased to 0.88% and 0.45%, respectively, from 0.20% and 0.21% for the three and nine months ended September 30, 2021.

The average rate paid on total interest-bearing liabilities for the three and nine months ended September 30, 2022 increased to 1.27% and 0.87%, respectively, from 0.63% and 0.64% for the three and nine months ended September 30, 2021, respectively.

Total interest-bearing liabilities include interest-bearing deposits, federal funds purchased, FHLB advances, subordinated and junior subordinated notes payable, and other borrowings.

The average rates paid increased commensurate with the increase in short-term market rates and the renewal of maturing FHLB advances at higher fixed rates.

The daily average effective federal funds rate for the three and six months ended June 30, 2022 increased 70 and 38 basis points, respectively, compared to the same periods in 2021.

This equates to a beta of 11% and 5% for the three and six months ended June 30, 2022, respectively, on interest-bearing in-market deposits.

The average rates paid increased commensurate with the increase in short-term market rates and the replacement of maturing FHLB advances at higher fixed rates.

The daily average effective federal funds rate for the three and nine months ended September 30, 2022 increased 209 and 95 basis points, respectively, compared to the same periods in 2021.

This equates to a beta of 30.6% and 24.1% for the three and nine months ended September 30, 2022, respectively, on total interest-bearing liabilities.

The Bank ended the quarter positioned to benefit from rising rates, but the Bank anticipates net interest margin expansion to slow due to deposit betas rising with future federal fund rate increases.

Management believes its success in growing in-market deposit relationships, disciplined loan pricing, and increased production in existing higher-yielding specialized lending lines of business will allow the Corporation to maintain a net interest margin of at least 3.50%, on average, over the long-term;

however, the collection of loan fees in lieu of interest is an expected source of volatility to quarterly net interest income and net interest margin.

Net interest margin may also experience volatility due to events such as the collection of interest on loans previously in non-accrual status or the accumulation of significant short-term deposit inflows.

Net interest margin may also experience volatility due to events such as a rapidly changing rate environment, the collection of interest on loans previously in non-accrual status or the accumulation of significant short-term deposit inflows.

The Corporation continues to maintain an asset-sensitive balance sheet and ended the quarter appropriately positioned for net interest income to benefit from rising short-term interest rates.

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Refer to Allowance for Loan and Lease Losses , below, for further information regarding our allowance for loan and lease loss methodology.

The Corporation recognized a $3.7 million and $4.6 million provision benefit for the three and six months ended June 30, 2022, respectively, compared to a benefit of $1.0 million and $3.0 million for the three and six months ended June 30, 2021.

The provision benefit for the three months ended June 30, 2022 was primarily due to a net recovery of $4.2 million and a $185,000 reduction due to qualitative risk factor improvements, partially offset by a $527,000 increase in the general reserve due to loan growth.

The provision benefit for the six months ended June 30, 2022 was primarily due to a net recovery of $4.4 million, a $601,000 reduction due to qualitative risk factor improvements, and a $251,000 net decrease in specific reserves, partially offset by a $762,000 increase in the general reserve due to loan growth.

The net recovery for the three and six months ended June 30, 2022 included a $4.1 million principal recovery relating to a legacy SBA relationship originated in May 2016 and fully charged-off in December 2020.

The following table shows the components of the provision for loan and lease losses for the three and six months ended June 30, 2022 compared to the three months ended June 30, 2021.

For the Three Months Ended June 30, For the Six Months Ended June 30,

The Corporation recognized a $12,000 provision expense and $4.6 million provision benefit for the three and nine months ended September 30, 2022, respectively, compared to a benefit of $2.3 million and $5.3 million for the three and nine months ended September 30, 2021.

The provision expense for the three months ended September 30, 2022 was primarily due to an increase in the general reserve of $400,000 related to loan growth and a $447,000 net increase in specific reserves, partially offset by a $940,000 reduction in the general reserve from change in loss factors derived from historical look-back.

The provision benefit for the nine months ended September 30, 2022 was primarily due to a net recovery of $4.4 million, a $1.1 million historical loss factor improvement, and a $469,000 qualitative risk factor improvement, partially offset by a $196,000 increase in specific reserves.

The net recovery for the nine months ended September 30, 2022 included a $4.1 million principal recovery relating to a legacy SBA relationship originated in May 2016 and fully charged-off in December 2020.

The following table shows the components of the provision for loan and lease losses for the three and nine months ended September 30, 2022 compared to the same periods in 2021.

For the Three Months Ended September 30, For the Nine Months Ended September 30,

2022 2021 2022 2021

(In Thousands)

Change in general reserve due to subjective factor changes $ (185) $ (652) $ (601) $ 430

Change in general reserve due to qualitative factor changes $ 132 $ (51) $ (469) $ 379

Change in general reserve due to historical loss factor changes (940) (923) (1,082) (3,594)

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The addition of specific reserves on impaired loans represents new specific reserves established when collateral shortfalls or government guaranty deficiencies are present, while the release of specific reserves represents the reduction of previously established reserves that are no longer required.

Changes in the allowance for loan and lease losses due to subjective factor changes reflect management’s evaluation of the level of risk within the portfolio based upon several factors for each portfolio segment.

Changes in the allowance for loan and lease losses due to qualitative factor changes reflect management’s evaluation of the level of risk within the portfolio based upon several factors for each portfolio segment.

Charge-offs in excess of previously established specific reserves require an additional provision for loan and lease losses to maintain the allowance for loan and lease losses at a level deemed appropriate by management.

2 unchanged sentences

Refer to Asset Quality , below, for further information regarding the overall credit quality of our loan and lease portfolio.

Comparison of Non-Interest Income for the Three and Six Months Ended June 30, 2022 and 2021

Comparison of Non-Interest Income for the Three and Nine Months Ended September 30, 2022 and 2021

Non-Interest Income

Non-interest income increased $551,000, or 8.7%, to $6.9 million for the three months ended June 30, 2022 compared to $6.3 million for the same period in 2021.

The increase in total non-interest income for the three months ended June 30, 2022 was due to increases in private wealth management services fee income, loan fee income, service charges on deposits, and commercial loan swap fee income.

These favorable variances were partially offset by a decrease in gains on the sale of SBA loans.

Non-interest income for the six months ended June 30, 2022 increased $742,000, or 5.5%, to $14.3 million compared to $13.5 million for the same period in 2021.

The increase in total non-interest income for the six months ended June 30, 2022 reflected strong private wealth management services fee income, an increase in other non-interest income, led by mezzanine fund investment income, and an increase in commercial loan swap fee income, loan fee income, and service charges on deposits.

Non-interest income increased $1.2 million, or 16.8%, to $8.2 million for the three months ended September 30, 2022 compared to $7.0 million for the same period in 2021.

The increase in total non-interest income for the three months ended September 30, 2022 was due to increases in other non-interest income, driven by mezzanine fund investment income, loan fee income, service charges on deposits, and commercial loan swap fee income.

These favorable variances were partially offset by a decrease in private wealth management services fee income.

Non-interest income for the nine months ended September 30, 2022 increased $1.9 million, or 9.4%, to $22.5 million compared to $20.5 million for the same period in 2021.

The increase in total non-interest income for the nine months ended September 30, 2022 reflected strong private wealth management services fee income, an increase in other non-interest income, led by mezzanine fund investment income, and an increase in commercial loan swap fee income, loan fee income, and service charges on deposits.

These favorable variances were partially offset by a decrease in gains on the sale of SBA loans.

Management continues to focus on revenue growth from multiple non-interest income sources in order to maintain a diversified revenue stream through greater contributions from fee-based revenues.

Total non-interest income accounted for 22.5% and 24.0% of total revenues for the three and six months ended June 30, 2022, respectively, compared to 22.6% and 24.1% for the three and six months ended June 30, 2021.

Total non-interest income accounted for 24.1% and 24.0% of total revenues for the three and nine months ended September 30, 2022, respectively, compared to 24.8% and 24.4% for the three and nine months ended September 30, 2021.

The components of non-interest income were as follows:

For the Three Months Ended June 30, For the Six Months Ended June 30,

For the Three Months Ended September 30, For the Nine Months Ended September 30,

2022 2021 $ Change % Change 2022 2021 $ Change % Change

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Increase in cash surrender value of bank-owned life insurance

350 350 — NM 698 699 (1) (0.1)

359 357 2 0.6 1,057 1,056 1 0.1

Net gain (loss) on sale of securities — — — NM — 29 (29) NM

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(1) Fee income ratio is fee income, per the above table, divided by top line revenue (defined as net interest income plus non-interest income).

Private wealth management service fees increased $108,000, or 3.9%, and $542,000, or 10.5%, for the three and six months ended June 30, 2022, compared to the three and six months ended June 30, 2021.

Private wealth management service fees decreased $141,000, or 5.1%, but increased $401,000, or 5.1%, for the three and nine months ended September 30, 2022, compared to the same periods in 2021.

Private wealth management fee income is primarily driven by the amount of assets under management and administration, as well as the mix of business at different fee structures, and can be positively or negatively influenced by the timing and magnitude of volatility within the capital markets.

As of June 30, 2022, private wealth and trust assets under management and administration totaled $2.554 billion, decreasing $10.6 million, or 0.4%, compared to $2.564 billion as of June 30, 2021, as new client relationships and new money from existing clients was more than offset by the decline in market values.

Commercial loan interest rate swap fee income was $471,000 and $697,000 for the three and six months ended June 30, 2022, respectively, compared to no activity for the three months ended June 30, 2021 and $684,000 for the six months ended June 30, 2021.

As of September 30, 2022, private wealth and trust assets under management and administration totaled $2,492.6 million, decreasing $255.1 million, or 9.3%, compared to $2.748 billion as of September 30, 2021, as new client relationships and new money from existing clients was more than offset by the decline in market values.

Other non-interest income increased $806,000, or 53.4%, and $1.4 million, or 42.1% for the three and nine months ended September 30, 2022, respectively, compared to the same periods in 2021.

The increase for the three and nine months ended September 30, 2022 was primarily due to strong returns from the Corporation’s investments in mezzanine funds and gains recognized on end-of-term buyout agreements related to the Company’s equipment financing business line.

Commercial loan interest rate swap fee income increased $341,000 and $1.0 million, or 51.8%, for the three and nine months ended September 30, 2022, respectively, compared to the same periods in 2021.

We originate commercial real estate loans in which we offer clients a floating rate and an interest rate swap.

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The execution of these transactions generates swap fee income.

The aggregate amortizing notional value of interest rate swaps with various borrowers was $646.1 million as of June 30, 2022, compared to $637.0 million as of June 30, 2021.

The aggregate amortizing notional value of interest rate swaps with various borrowers was $666.2 million as of September 30, 2022, compared to $634.0 million as of September 30, 2021.

Interest rate swaps can be an attractive product for our commercial borrowers, although associated fee income can be variable from period to period based on loan activity and the interest rate environment in any given quarter.

Loan fees increased $128,000, or 22.5%, and $235,000, or 21.1%, for the three and six months ended June 30, 2022, respectively, compared to same periods in 2021.

The increase was due to an increase in conventional, SBA, and floorplan financing activity generating additional service fee income.

Service charges on deposits increased $100,000, or 10.6%, and $181,000, or 9.7%, for the three and six months ended June 30, 2022, respectively, compared to same periods in 2021.

The increase was due to an increase in new client relationships and the addition of new services to existing client relationships.

Other non-interest income increased $25,000, or 5.2%, and $545,000, or 32.1% for the three and six months ended June 30, 2022, respectively, compared to the same periods in 2021.

The increase for the six months ended June 30, 2022 was primarily due to above average returns from the Corporation’s investments in mezzanine funds.

Gain on sale of SBA loans for the three and six months ended June 30, 2022 decreased $252,000, or 20.9%, and $744,000, or 32.6%, respectively, compared to the same periods in 2021.

Comparison of Non-Interest Expense for the Three and Six Months Ended June 30, 2022 and 2021

Loan fees increased $101,000, or 14.2%, and $335,000, or 18.3%, for the three and nine months ended September 30, 2022, respectively, compared to the same periods in 2021.

The increase was due to an increase in equipment financing, floorplan financing, and conventional activity generating additional service fee income.

Service charges on deposits increased $62,000, or 6.5%, and $244,000, or 8.7%, for the three and nine months ended September 30, 2022, respectively, compared to the same periods in 2021.

The increase for the three and nine months ended September 30, 2022 was primarily due to an increase in average balances compared to the same periods from 2021.

Gain on sale of SBA loans for the three months ended September 30, 2022 remained relatively flat.

The gain on sale of SBA loans for the nine months ended September 30, 2022 decreased $733,000, or 24.4%,compared to the same periods in 2021.

Premiums on the sale of SBA loans decreased and was the primary factor for lower income for the nine months ended September 30, 2022.

Comparison of Non-Interest Expense for the Three and Nine Months Ended September 30, 2022 and 2021

Non-Interest Expense

Non-interest expense for the three and six months ended June 30, 2022 increased by $1.3 million, or 7.0%, and $2.8 million, or 7.8%, respectively, compared to the same periods in 2021.

Operating expense, which excludes certain one-time and discrete items as defined in the Efficiency Ratio table above, increased $1.8 million, or 9.8%, and $3.2 million, or 9.0%, for the three and six months ended June 30, 2022, respectively, compared to the same periods in 2021.

The increase in operating expense was primarily due to an increase in compensation, professional fees, and marketing expenses.

Non-interest expense for the three and nine months ended September 30, 2022 increased by $1.5 million, or 8.3%, and $4.3 million, or 8.0%, respectively, compared to the same periods in 2021.

Operating expense, which excludes certain one-time and discrete items as defined in the Efficiency Ratio table above, increased $1.4 million, or 7.4%, and $4.6 million, or 8.5%, for the three and nine months ended September 30, 2022, respectively, compared to the same periods in 2021.

The increase in operating expense was primarily due to an increase in compensation, and professional fees.

The components of non-interest expense were as follows :

For the Three Months Ended June 30, For the Six Months Ended June 30,

For the Three Months Ended September 30, For the Nine Months Ended September 30,

2022 2021 $ Change % Change 2022 2021 $ Change % Change

17 unchanged sentences

(1) Total operating expense represents total non-interest expense, adjusted to exclude the impact of discrete items as previously defined in the non-GAAP efficiency ratio calculation, above.

Compensation expense for the three and six months ended June 30, 2022 increased $765,000, or 5.8%, and $1.7 million, or 6.7%, respectively, compared to the three and six months ended June 30, 2021.

The increase reflects above average

annual merit and market increases, reflecting the competitive job market, as well as an increase in the annual cash incentive compensation bonus accrual related to performance and hiring to support the Bank’s growth plans.

Compensation expense for the three and nine months ended September 30, 2022 increased $1.5 million, or 11.0%, and $3.2 million, or 8.2%, respectively, compared to the three and nine months ended September 30, 2021.

The increase reflects above average annual merit and market increases, reflecting the competitive job market, as well as an increase in the annual cash incentive compensation bonus accrual related to performance, and increase in head count to support the Bank’s growth plans.

Management believes there will be upward pressure on compensation throughout the remainder of the year as the Bank continues to opportunistically invest in new talent and retain existing talent in the competitive market.

Average full-time equivalent employees for the three months ended June 30, 2022 increased to 321, up 2.89%, compared to 312 for the three months ended June 30, 2021.

Professional fees increased $385,000, or 42.2%, and $690,000, or 38.8%, for the three and six months ended June 30, 2022, respectively, compared to the three and six months ended June 30, 2021.

The increase was primarily due to an increase in recruiting expense, audit expenses, and a general increase in other professional consulting services for various projects.

Marketing expense increased $159,000, or 31.1%, and $268,000, or 29.7%, for the three and six months ended June 30, 2022, respectively, compared to the three and six months ended June 30, 2021.

The increase was primarily due to an increase in business development efforts as the Corporation returns to pre-pandemic spending levels.

Income tax expense totaled $5.8 million for the six months ended June 30, 2022 compared to an income tax expense of $5.6 million for the six months ended June 30, 2021.

The effective tax rate for the six months ended June 30, 2022 was 23.7% compared to 23.6% for the six months ended June 30, 2021.

For 2022, the Corporation expects to report an effective tax rate of approximately 23% as management intends to continue actively pursuing tax credit opportunities.

Employee-related benefit expenses, such as health insurance and payroll taxes, also contributed to the increase as a result of successful hiring efforts to secure talent.

Average full-time equivalent employees for the three months ended September 30, 2022 increased to 333, up 7.07%, compared to 311 for the three months ended September 30, 2021.

Professional fees increased $179,000, or 17.5%, and $868,000, or 31.0%, for the three and nine months ended September 30, 2022, respectively, compared to the three and nine months ended September 30, 2021.

The increase was primarily due to an increase in recruiting expense, audit expenses, legal expense, and a general increase in other professional consulting services for various projects.

Marketing expense decreased $29,000, or 5.1%, but increased $239,000, or 16.2%, for the three and nine months ended September 30, 2022, respectively, compared to the three and nine months ended September 30, 2021.

The increase during the nine months ended September 30, 2022 was primarily due to an increase in business development efforts as the Corporation returns to pre-pandemic spending levels.

Income tax expense totaled $9.0 million for the nine months ended September 30, 2022 compared to $8.4 million for the nine months ended September 30, 2021.

The income tax expense included a $155,000 net benefit from a low income housing tax credit investment, no tax credits were recognized in the prior year.

The effective tax rate for the nine months ended September 30, 2022 was 22.6% compared to 23.5% for the same period in 2021.

For 2022, the Corporation expects to report an effective tax rate less than 22.5%, as the Bank continues to receive the benefit from its tax credit investments.

Generally, the provision for income taxes is determined by applying an estimated annual effective income tax rate to income before taxes and adjusting for discrete items.

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Financial Condition

Total assets increased by $124.1 million, or 4.7%, to $2.777 billion as of June 30, 2022 compared to $2.653 billion at December 31, 2021.

The increase in total assets was primarily driven by an increase in cash and loans and leases receivable.

Total liabilities increased by $106.6 million, or 4.4%, to $2.527 billion at June 30, 2022 compared to $2.420 billion at December 31, 2021.

The increase in total liabilities was principally due to an increase in FHLB advances and subordinated debentures, partially offset by a decrease in deposits and payoff of junior subordinated debentures.

Total stockholders’ equity increased by $17.5 million, or 7.5%, to $249.9 million at June 30, 2022 compared to $232.4 million at December 31, 2021.

The increase in total stockholders’ equity was due to retention of earnings and issuance of preferred stock, partially offset by unrealized losses on available-for-sale securities and dividends paid to common stockholders.

Total assets increased by $197.9 million, or 7.5%, to $2.851 billion as of September 30, 2022 compared to $2.653 billion at December 31, 2021.

The increase in total assets was primarily driven by an increase in cash, loans and leases receivable, and an increase in other assets.

Total liabilities increased by $177.3 million, or 7.3%, to $2.598 billion at September 30, 2022 compared to $2.420 billion at December 31, 2021.

The increase in total liabilities was principally due to an increase in deposits and other liabilities.

Total stockholders’ equity increased by $20.6 million, or 8.9%, to $253.0 million at September 30, 2022 compared to $232.4 million at December 31, 2021.

Cash and Cash Equivalents

Cash and cash equivalents include short-term investments and cash and due from banks.

Cash and due from banks increased $29.6 million to $39.3 million at June 30, 2022 principally due to a routine temporary increase in cash related to client funds in-transit.

Short-term investments increased by $8.8 million to $56.2 million at June 30, 2022 from $47.4 million at December 31, 2021.

Cash and due from banks increased $14.6 million to $24.3 million at September 30, 2022 principally due to a routine temporary increase in cash related to client funds in-transit.

Short-term investments increased by $39.3 million to $86.7 million at September 30, 2022 from $47.4 million at December 31, 2021.

Our short-term investments primarily consist of interest-bearing deposits held at the FRB.

We value the safety and soundness provided by the FRB, and therefore, we incorporate short-term investments in our on-balance sheet liquidity program.

As of June 30, 2022 and December 31, 2021, interest-bearing deposits held at the FRB were $55.5 million and $47.0 million, respectively.

We value the safety and soundness provided by the FRB, and therefore, we incorporate short-term investments in our readily accessible liquidity program.

As of September 30, 2022 and December 31, 2021, interest-bearing deposits held at the FRB were $85.3 million and $47.0 million, respectively.

In general, the level of our cash and short-term investments will be influenced by the timing of deposit gathering, scheduled maturities of wholesale deposits, funding of loan and lease growth, and the level of our securities portfolio.

Please refer to the section entitled Liquidity and Capital Resources for further discussion.

Total securities, including available-for-sale and held-to-maturity, decreased by $2.8 million, or 1.3%, to $222.6 million, or 8.0% of total assets at June 30, 2022 compared to $225.4 million, or 8.5% of total assets at December 31, 2021.

During the six months ended June 30, 2022 the Corporation recognized unrealized losses of $19.7 million before income taxes through other comprehensive income, compared to unrealized losses of $1.6 million for the same period in 2021.

These unrealized losses are solely driven by the recent shift in interest rates.

As of June 30, 2022 and December 31, 2021, our overall securities portfolio, including available-for-sale securities and held-to-maturity securities, had an estimated weighted-average expected maturity of 6.3 years and 5.7 years, respectively.

Total securities, including available-for-sale and held-to-maturity, decreased by $15.4 million, or 6.8%, to $210.1 million, or 7.4% of total assets at September 30, 2022 compared to $225.4 million, or 8.5% of total assets at December 31, 2021.

During the nine months ended September 30, 2022 the Corporation recognized unrealized losses of $29.8 million before income taxes through other comprehensive income, compared to unrealized losses of $3.0 million for the same period in 2021.

These unrealized losses are solely driven by the recent increase in interest rates.

As of September 30, 2022 and December 31, 2021, our overall securities portfolio, including available-for-sale securities and held-to-maturity securities, had an estimated weighted-average expected maturity of 6.3 years and 5.7 years, respectively.

Our investment philosophy remains as stated in our most recent Annual Report on Form 10-K.

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On a quarterly basis, we validate the reasonableness of prices received from this source through independent verification, data integrity validation primarily through comparison of current price to an expectation-based analysis of movement in prices based upon the changes in the related yield curves, and other market factors.

No securities within our portfolio were deemed to be other-than-temporarily impaired as of June 30, 2022.

No securities within our portfolio were deemed to be other-than-temporarily impaired as of September 30, 2022.

Loans and Leases Receivable

Loans and leases receivable, net of allowance for loan and lease losses, increased by $50.9 million, or to $2.266 billion at June 30, 2022 from $2.215 billion at December 31, 2021 which was driven by commercial loan growth, partially offset by PPP loan forgiveness.

Loans and leases receivable, net of allowance for loan and lease losses and excluding net PPP loans, increased by $70.0 million to $2.258 billion at June 30, 2022 from $2.188 billion at December 31, 2021.

Loans and leases receivable, net of allowance for loan and lease losses, increased by $91.5 million, or to $2.307 billion at September 30, 2022 from $2.215 billion at December 31, 2021 which was driven by commercial loan growth, partially offset by PPP loan forgiveness.

Loans and leases receivable, net of allowance for loan and lease losses and excluding net PPP loans, increased by $110.6 million to $2.304 billion at September 30, 2022 from $2.188 billion at December 31, 2021.

Total commercial real estate (“CRE”) loans increased $30.3 million to $1.485 billion, up from $1.455 billion at December 31, 2021.

Owner occupied CRE and construction financing drove CRE loan growth as of June 30, 2022, increasing $22.8 million, and $24.1 million, respectively, from December 31, 2021, partially offset by a $5.7 million and $9.5 million decline in multi-family and non-owner occupied CRE loans, respectively.

There continues to be a concentration in CRE loans which represented 65.2% and 65.8% of our total loans, excluding net PPP loans, as of June 30, 2022 and December 31, 2021, respectively.

As of June 30, 2022, 17.4% of the CRE loans were owner-occupied CRE, compared to 16.2% as of December 31, 2021.

Owner occupied CRE and multi-family drove CRE loan growth as of September 30, 2022, increasing $30.4 million, and $12.7 million, respectively, from December 31, 2021, partially offset by a $17.8 million decline in construction loans.

There continues to be a concentration in CRE loans which represented 63.8% and 65.8% of our total loans, excluding net PPP loans, as of September 30, 2022 and December 31, 2021, respectively.

As of September 30, 2022, 17.9% of the CRE loans were owner-occupied CRE, compared to 16.2% as of December 31, 2021.

We consider owner-occupied CRE more characteristic of the Corporation’s C&I portfolio as, in general, the client’s primary source of repayment is the cash flow from the operating entity occupying the commercial real estate property.

Excluding PPP loans, C&I loans increased $83.6 million, to $786.6 million from $703.0 million at December 31, 2021.

Despite elevated payoffs during the first quarter of 2022, management believes timely prior-period investments in conventional and specialized commercial lending has positioned C&I lending for strong and sustainable growth in 2022 and beyond.

Including PPP loans, our C&I portfolio increased $58.2 million to $789.0 million from $730.8 million at December 31, 2021.

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The types of loans and leases we originate and the various risks associated with these originations remain consistent with information previously outlined in our most recent Annual Report on Form 10-K.

As of June 30, 2022, deposits decreased by $88.6 million to $1.869 billion from $1.958 billion at December 31, 2021, primarily due to a $108.5 million and $22.7 million decrease in transaction accounts and money market accounts, respectively, partially offset by a $59.9 million increase in certificates of deposit.

The decline in balances was due to movement of client deposits to investment alternatives, seasonality within the Bank’s municipality clients, tax payments, and normal course of business for continuing client relationships.

As of September 30, 2022, deposits increased by $129.6 million to $2.088 billion from $1.958 billion at December 31, 2021, primarily due to a $128.7 million and $106.6 million increase in wholesale deposits and certificate of deposit accounts, respectively, partially offset by a $93.8 million decrease in transaction accounts.

The increase in balances was due to movement of client deposits to term deposits earning a higher yield, and utilizing wholesale deposits, consistent with Management’s funding philosophy to manage interest rate risk with the most efficient and cost effective source of wholesale funds.

The decrease in transactional account was due to client deposit movement to alternative investments, and normal course of business for continuing client relationships.

Management believes the Bank’s deposit-centric sales strategy, led by treasury management sales, will contribute to a net increase in deposits annually;

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We measure the success of in-market deposit gathering efforts based on the number and average balances of our deposit accounts as compared to ending balances due to the volatility of some of our larger relationships.

The Bank’s average in-market deposits, consisting of all transaction accounts, money market accounts, and certificates of deposit, were $1.917 billion for the six months ended June 30, 2022 compared to $1.729 billion for the six months ended June 30, 2021.

The Bank’s average in-market deposits, consisting of all transaction accounts, money market accounts, and certificates of deposit, were $1.921 billion for the nine months ended September 30, 2022 compared to $1.756 billion for the nine months ended September 30, 2021.

FHLB Advances and Other Borrowings

As of June 30, 2022, FHLB advances and other borrowings increased by $193.2 million, or 47.9%, to $596.6 million from $403.5 million at December 31, 2021.

The FHLB advances were used to fund the seasonal decline of in-market deposits and to match-fund existing and new fixed-rate loan growth to mitigate interest risk.

As of June 30, 2022 and December 31, 2021, the Corporation had other borrowings of $8.3 million and $10.4 million respectively, which consisted of sold loans which were accounted for as a secured borrowing, because they did not qualify for true sale accounting, and borrowings associated with our investment in a community development entity.

As of September 30, 2022, FHLB advances and other borrowings increased by $16.8 million, or 4.2%, to $420.3 million from $403.5 million at December 31, 2021.

As in-market deposit balances have increased, we have been able to reduce our reliance on wholesale funding.

As previously mentioned, we will continue to utilize FHLB advances and wholesale deposits to manage interest rate risk, liquidity, and contingency funding.

As of September 30, 2022 and December 31, 2021, the Corporation had other borrowings of $8.2 million and $10.4 million respectively, which consisted of sold loans which were accounted for as a secured borrowing, because they did not qualify for true sale accounting.

On March 4, 2022, the Corporation completed a private placement of $20.0 million in new subordinated debt to one institutional investor.

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The remainder of the proceeds will be used for general corporate purposes, including to support the Bank’s growth strategy, and to fund the Corporation’s previously announced $5 million share repurchase plan.

The subordinated note bears a fixed interest rate of 3.50% with a maturity date of March 15, 2032 and has certain performance debt covenants of which the Corporation was in compliance as of June 30, 2022.

The Corporation may, at its option, redeem the note, in whole or part, at any time after the fifth anniversary of issuance.

The subordinated note bears a fixed interest rate of 3.50% with a maturity date of March 15, 2032 and has certain financial performance covenants with which the Corporation was in compliance as of September 30, 2022.

The Corporation may, at its option, redeem the note, in whole or part, after the fifth anniversary of issuance.

Consistent with our funding philosophy to manage interest rate risk, we will use the most efficient and cost effective source of wholesale funds.

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Preferred Stock

On March 4, 2022, the Corporation issued 12,500 shares, or $12.5 million in aggregate liquidation preference, of its 7.0% Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series A, par value $0.01 per share, with a liquidation preference of $1,000 per share (the “Series A Preferred Stock”) in a private placement to institutional investors.

On March 4, 2022, the Corporation issued 12,500 shares, or $12.5 million in aggregate liquidation preference, of 7.0% Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series A, par value $0.01 per share, with a liquidation preference of $1,000 per share (the “Series A Preferred Stock”) in a private placement to institutional investors.

The net proceeds received from the issuance of the Series A Preferred Stock were $12.0 million.

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For each dividend period from and including March 15, 2027, dividends will be paid at a floating rate of Three-Month Term SOFR plus a spread of 539 basis points per annum.

During the three months ended June 30, 2022, the Corporation paid $246,000 in preferred cash dividends.

During the three and nine months ended September 30, 2022, the Corporation paid $218,000 and $464,000 in preferred cash dividends, respectively.

The Series A Preferred Stock is perpetual and has no stated maturity.

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The Corporation’s derivative financial instruments, under which the Corporation is required to either receive cash from or pay cash to counterparties depending on changes in interest rates applied to notional amounts, are carried at fair value on the consolidated balance sheets.

As of June 30, 2022, the aggregate amortizing notional value of interest rate swaps with various commercial borrowers was approximately $646.1 million, compared to $640.6 million as of December 31, 2021.

As of September 30, 2022, the aggregate amortizing notional value of interest rate swaps with various commercial borrowers was approximately $666.2 million, compared to $640.6 million as of December 31, 2021.

We receive fixed rates and pay floating rates based upon designated benchmark interest rates on the swaps with commercial borrowers.

These swaps mature between May 2024 and March 2038.

These swaps mature between May 2024 and June 2039.

Commercial borrower swaps are completed independently with each borrower and are not subject to master netting arrangements.

As of June 30, 2022, the commercial borrower swaps were reported on the Consolidated Balance Sheet as a derivative asset of $3.2 million and as a derivative liability of $40.4 million compared to a derivative asset and liability of $26.3 million and $6.6 million, respectively, as of December 31, 2021.

As of September 30, 2022, the commercial borrower swaps were reported on the Consolidated Balance Sheet as a derivative liability of $66.2 million compared to a derivative asset and liability of $26.3 million and $6.6 million, respectively, as of December 31, 2021.

On the offsetting swap contracts with dealer counterparties, we pay fixed rates and receive floating rates based upon designated benchmark interest rates.

These interest rate swaps also have maturity dates between May 2024 and March 2038.

Dealer counterparty swaps are subject to master netting agreements among the contracts within our Bank and were reported on the Consolidated Balance Sheet as a net derivative asset of $37.1 million as of June 30, 2022, compared to a net derivative liability of $19.7 million as of December 31, 2021.

The gross amount of dealer counterparty swaps as of June 30, 2022, without regard to the enforceable master netting agreement, was a gross derivative liability of $3.2 million and a gross derivative asset of $40.4 million, compared to a gross derivative liability of $26.3 million and gross derivative asset of $6.6 million as of December 31, 2021.

These interest rate swaps also have maturity dates between May 2024 and June 2039.

Dealer counterparty swaps are subject to master netting agreements among the contracts within our Bank and were reported on the Consolidated Balance Sheet as a net derivative asset of $66.2 million as of September 30, 2022, compared to a net derivative liability of $19.7 million as of December 31, 2021.

The gross amount of dealer counterparty swaps as of September 30, 2022, without regard to the enforceable master netting agreement, was a gross derivative asset of $66.2 million, compared to a gross derivative liability of $26.3 million and gross derivative asset of $6.6 million as of December 31, 2021.

The Corporation also enters into interest rate swaps to manage interest rate risk and reduce the cost of match-funding certain long-term fixed rate loans.

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The change in the fair value of these hedging instruments is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged transactions affects earnings.

As of June 30, 2022, the aggregate notional value of interest rate swaps designated as cash flow hedges was $124.4 million.

As of September 30, 2022, the aggregate notional value of interest rate swaps designated as cash flow hedges was $124.4 million.

These interest rate swaps mature between December 2022 and March 2034.

A pre-tax unrealized gain of $1.7 million and $5.7 million was recognized in other comprehensive income for the three and six months ended June 30, 2022, respectively, and there was no ineffective portion of these hedges.

A pre-tax unrealized gain of $3.2 million and $8.9 million was recognized in other comprehensive income for the three and nine months ended September 30, 2022, respectively, and there was no ineffective portion of these hedges.

The Corporation also enters into interest rate swaps to mitigate market value volatility on certain long-term fixed securities.

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As of June 30, 2022, the aggregate notional value of interest rate swaps designated as fair value hedges was $12.5 million.

As of September 30, 2022, the aggregate notional value of interest rate swaps designated as fair value hedges was $12.5 million.

These interest rate swaps mature between February 2031 and October 2034.

A pre-tax unrealized loss of $376,000 was recognized in other comprehensive income for the six months ended June 30, 2022 and there was no ineffective portion of these hedges.

A pre-tax unrealized gain of $215,000 and $592,000 was recognized in other comprehensive income for the three and nine months ended September 30, 2022, respectively, and there was no ineffective portion of these hedges.

For further information and discussion of our derivatives, see Note 13 — Derivative Financial Instruments of the Consolidated Financial Statements.

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Impaired Assets

Total impaired assets consisted of the following at June 30, 2022 and December 31, 2021, respectively:

Total impaired assets consisted of the following at September 30, 2022 and December 31, 2021, respectively:

September 30,

2022 December 31,

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Allowance for loan and lease losses to non-accrual loans and leases 662.36 382.76

Net PPP loans outstanding as of June 30, 2022 and December 31, 2021, were $8.2 million and $27.3 million, respectively.

Net PPP loans outstanding as of September 30, 2022 and December 31, 2021, were $2.3 million and $27.3 million, respectively.

The following asset quality ratios exclude net PPP loans as they are fully guaranteed by the SBA:

September 30,

2022 December 31,

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Allowance for loan and lease losses to gross loans and leases 1.04 1.10

Non-accrual loans decreased $773,000, or 12.2%, to $5.6 million at June 30, 2022, compared to $6.4 million at December 31, 2021.

Non-accrual loans decreased $2.7 million, or 42.7%, to $3.6 million at September 30, 2022, compared to $6.4 million at December 31, 2021.

The decrease in non-accrual loans was principally due to loan payoffs, loans returning to accrual status, and $161,000 of charge-offs.

The Corporation’s non-accrual loans as a percentage of total gross loans and leases measured 0.24% and 0.28% at June 30, 2022 and December 31, 2021, respectively.

Non-accrual loans as a percentage of total gross loans and leases, excluding net PPP loans, was 0.24% and 0.29% at June 30, 2022 and December 31, 2021, respectively.

June 30, 2022 and December 31, 2021, $615,000 and $627,000 of non-accrual loans and leases were considered TDRs, respectively.

The Corporation’s non-accrual loans as a percentage of total gross loans and leases measured 0.16% and 0.28% at September 30, 2022 and December 31, 2021, respectively.

Non-accrual loans as a percentage of total gross loans and leases, excluding net PPP loans, was 0.16% and 0.29% at September 30, 2022 and December 31, 2021, respectively.

As of September 30, 2022 and December 31, 2021, $499,000 and $627,000 of non-accrual loans and leases were considered TDRs, respectively.

We use a wide variety of available metrics to assess the overall asset quality of the portfolio and no one metric is used independently to make a final conclusion as to the asset quality of the portfolio.

Non-performing assets as a percentage of total assets was 0.21% and 0.25% at June 30, 2022 and December 31, 2021, respectively.

As of June 30, 2022, the payment performance of our loans and leases did not point to any new areas of concern, as approximately 99.0% of the total portfolio was in a current payment status, compared to 99.8% as of December 31, 2021.

Non-performing assets as a percentage of total assets was 0.13% and 0.25% at September 30, 2022 and December 31, 2021, respectively.

As of September 30, 2022 and December 31, 2021, the payment performance of our loans and leases did not point to any new areas of concern, as approximately 99.8% of the total portfolio at the end of each period was in a current payment status.

We also monitor asset quality through our established categories as defined in Note 5 – Loan and Lease Receivables, Impaired Loans and Leases and Allowance for Loan and Lease Losses of the Consolidated Financial Statements.

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We are proactively working with our impaired loan borrowers to find meaningful solutions to difficult situations that are in the best interests of the Bank.

As of June 30, 2022, as well as in all previous reporting periods, there were no loans over 90 days past due and still accruing interest.

As of September 30, 2022, as well as in all previous reporting periods, there were no loans over 90 days past due and still accruing interest.

Loans and leases greater than 90 days past due are considered impaired and are placed on non-accrual status.

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The following represents additional information regarding our impaired loans and leases:

As of and for the Six Months Ended June 30, As of and for the

As of and for the Nine Months Ended September 30, As of and for the

Year Ended December 31,

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Interest income recognized on impaired loans and leases

1,057 164 454

Net foregone interest income on impaired loans and leases $ (745) $ 838 $ 650

Allowance for Loan and Lease Losses

The allowance for loan and lease losses decreased $232,000, or 1.0%, to $24.1 million as of June 30, 2022 from $24.3 million as of December 31, 2021.

The allowance for loan and lease losses as a percentage of gross loans and leases decreased to 1.05% as of June 30, 2022 from 1.09% as of December 31, 2021.

The allowance for loan and lease losses as a percentage of gross loans and leases, excluding net PPP loans, was 1.06% as of June 30, 2022 compared to 1.10% as of December 31, 2021.

The decrease in allowance for loan and lease losses as a percent of gross loans and leases was principally due to the net decrease in specific reserves and qualitative risk factor improvements.

These general and specific reserve releases were partially offset by an increase in general reserve commensurate with loan growth.

The allowance for loan and lease losses decreased $193,000, or 0.8%, to $24.1 million as of September 30, 2022 from $24.3 million as of December 31, 2021.

The allowance for loan and lease losses as a percentage of gross loans and leases improved to 1.04% as of September 30, 2022 from 1.09% as of December 31, 2021.

The allowance for loan and lease losses as a percentage of gross loans and leases, excluding net PPP loans, was 1.04% as of September 30, 2022 compared to 1.10% as of December 31, 2021.

The decrease in allowance for loan and lease losses as a percent of gross loans and leases was principally due to improvements in historical loss and qualitative risk factors.

The majority of loan segments experienced a reduction in historical loss factors as the look-back period continued to roll off the Corporation’s higher loss rates from the Great Recession.

These general reserve releases were partially offset by an increase in general reserve commensurate with loan growth and a net increase in specific reserves.

There have been no substantive changes to our methodology for estimating the appropriate level of allowance for loan and lease loss reserves from what was previously outlined in our most recent Annual Report on Form 10-K.

During the six months ended June 30, 2022, we recorded net recoveries on impaired loans and leases of $4.4 million, comprised of $107,000 of charge-offs and $4.5 million of recoveries.

During the nine months ended September 30, 2022, we recorded net recoveries on impaired loans and leases of $4.4 million, comprised of $161,000 of charge-offs and $4.5 million of recoveries.

While we likely will continue to experience some level of periodic charge-offs in the future as exit strategies are considered and executed, based on current economic conditions, management believes net charge-offs will remain at low levels in the near term.

Loans and leases with previously established specific reserves, however, may ultimately result in a charge-off under a variety of scenarios.

As of June 30, 2022 and December 31, 2021, our ratio of allowance for loan and lease losses to total non-accrual loans and leases was 431.58% and 382.76%, respectively.

This ratio increased primarily due to the substantial decrease in non-accrual loans and leases discussed above, in comparison to the decrease in the allowance for loan and leases losses.

As of September 30, 2022 and December 31, 2021, our ratio of allowance for loan and lease losses to total non-accrual loans and leases was 662.36% and 382.76%, respectively.

This ratio increased primarily due to the substantial decrease in non-accrual loans and leases discussed above, in comparison to the modest decrease in the allowance for loan and leases losses.

Impaired loans and leases exhibit weaknesses that inhibit repayment in compliance with the original terms of the note or lease;

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Conversely, if we identify further impaired loans, this ratio could fall if the impaired loans are adequately collateralized and therefore require no specific or general reserve.

Given our business practices and evaluation of our existing loan and lease portfolio, we believe this coverage ratio is appropriate for the probable losses inherent in our loan and lease portfolio as of June 30, 2022.

To determine the level and composition of the allowance for loan and lease losses, we break out the portfolio by segments with similar risk characteristics.

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When it is determined that we will not receive our entire contractual principal or the loss is confirmed, we record a charge against the allowance for loan and lease loss reserve to bring the loan or lease to its net realizable value.

Many of the impaired loans as of June 30, 2022 are collateral dependent.

Many of the impaired loans as of September 30, 2022 are collateral dependent.

It is typically part of our process to obtain appraisals on impaired loans and leases that are primarily secured by real estate or equipment at least annually, or more frequently as circumstances warrant.

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Foreclosure actions may have been initiated on certain of these commercial real estate and other mortgage loans.

As a result of our review process, we have concluded an appropriate allowance for loan and lease losses for the existing loan and lease portfolio was $24.1 million, or 1.05% of gross loans and leases, at June 30, 2022.

As a result of our review process, we have concluded an appropriate allowance for loan and lease losses for the existing loan and lease portfolio was $24.1 million, or 1.04% of gross loans and leases, at September 30, 2022.

However, given ongoing complexities with current workout situations and the uncertainty surrounding future economic conditions, further charge-offs, and increased provisions for loan and lease losses may be recorded if additional facts and circumstances lead us to a different conclusion.

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A summary of the activity in the allowance for loan and lease losses follows:

As of and for the Three Months Ended June 30, As of and for the Six Months Ended June 30,

As of and for the Three Months Ended September 30, As of and for the Nine Months Ended September 30,

2022 2021 2022 2021

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Commercial real estate — non-owner occupied

— 1,431 1 1,431

Construction and land development — — — 2,078

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Allowance at end of period $ 24,143 $ 24,676 $ 24,143 $ 24,676

Annualized net (recoveries) charge-offs as a percent of average gross loans and leases (0.73) % 0.42 % (0.39) % (0.02) %

Annualized net (recoveries) charge-offs as a percent of average gross loans and leases, excluding average net PPP loans (0.74) % 0.47 % (0.39) % (0.02) %

Annualized net recoveries as a percent of average gross loans and leases — % (0.24) % (0.26) % (0.09) %

Liquidity and Capital Resources

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While the Bank is subject to certain generally applicable regulatory limitations regarding its ability to pay dividends to the Corporation, we do not believe that the Corporation will be adversely affected by these dividend limitations.

The Corporation’s principal liquidity requirements at June 30, 2022 were the interest payments due on subordinated notes and cash dividends payable to both common and preferred stockholders.

The capital ratios of the Bank met all applicable regulatory capital adequacy requirements in effect on June 30, 2022, and continue to meet the heightened requirements imposed by Basel III, including the capital conservation buffer.

The Corporation’s principal liquidity requirements at September 30, 2022 were the interest payments due on subordinated notes and cash dividends payable to both common and preferred stockholders.

The capital ratios of the Bank met all applicable regulatory capital adequacy requirements in effect on September 30, 2022, and continue to meet the heightened requirements imposed by Basel III, including the capital conservation buffer.

The Corporation’s Board and management teams adhere to the appropriate regulatory guidelines on decisions which affect their capital positions, including but not limited to, decisions relating to the payment of dividends and increasing indebtedness.

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Deposit flows and loan prepayments, however, are greatly influenced by general interest rates, economic conditions, and competition.

We view on-balance sheet liquidity as a critical element to maintaining adequate liquidity to meet our cash and collateral obligations.

We define our on-balance sheet liquidity as the total of our short-term investments, our unencumbered securities available-for-sale, and our unencumbered pledged loans.

As of June 30, 2022 and December 31, 2021, our immediate on-balance sheet liquidity was $413.0 million and $529.5 million, respectively.

At June 30, 2022 and December 31, 2021, the Bank had $55.5 million and $47.0 million on deposit with the FRB recorded in short-term investments, respectively.

Any excess funds not used for loan funding or satisfying other cash obligations were maintained as part of our on-balance sheet liquidity in our interest-bearing accounts with the FRB, as we value the safety and soundness provided by the FRB.

We view readily accessible liquidity as a critical element to meet our cash and collateral obligations.

We define our readily accessible liquidity as the total of our short-term investments, our unencumbered securities available-for-sale, and our unencumbered pledged loans.

As of September 30, 2022 and December 31, 2021, our readily accessible liquidity was $549.2 million and $529.5 million, respectively.

At September 30, 2022 and December 31, 2021, the Bank had $85.3 million and $47.0 million on deposit with the FRB recorded in short-term investments, respectively.

Any excess funds not used for loan funding or satisfying other cash obligations were maintained as part of our readily accessible liquidity in our interest-bearing accounts with the FRB, as we value the safety and soundness provided by the FRB.

We plan to utilize excess liquidity to fund loan and lease portfolio growth, pay down maturing debt, allow run off of maturing wholesale certificates of deposit or invest in securities to maintain adequate liquidity at an improved margin.

We had $566.4 million of outstanding wholesale funds at June 30, 2022, compared to $398.4 million of wholesale funds as of December 31, 2021, which represented 23.4% and 17.1%, respectively, of ending balance total bank funding.

We had $536.1 million of outstanding wholesale funds at September 30, 2022, compared to $398.4 million of wholesale funds as of December 31, 2021, which represented 21.8% and 17.1%, respectively, of ending balance total bank funding.

Wholesale funds include FHLB advances, brokered certificates of deposit, and deposits gathered from internet listing services.

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The short-term FHLB advances will typically have terms of one week to one month to cover the overall expected funding demands.

Period-end in-market deposits decreased $71.3 million, or 3.7%, to $1.857 billion at June 30, 2022 from $1.928 billion at December 31, 2021.

The decline was due to movement of deposits to investment alternatives and to pay taxes, seasonality within the Bank’s municipality clients, and normal course of business for continuing client relationships.

The decline in in-market deposits was not the result of the loss of any significant client relationships, and we expect to continue to establish new client relationships and increase deposit balances with existing clients’ accounts.

Period-end in-market deposits remained relatively flat at $1.929 billion as of September 30, 2022, compared to December 31, 2021.

There was a shift of in-market deposit mix to term deposits at higher interest rates, which was partially offset by deposit movement from transaction accounts to alternative investment options and clients funding their normal course of business.

The decline in transaction accounts was not the result of the loss of any significant client relationships, and we expect to continue to establish new client relationships and increase transaction account balances with existing clients’ accounts.

Nonetheless, we will continue to use wholesale funds in specific maturity periods, typically three to five years, needed to effectively mitigate the interest rate risk measured through our asset/liability management process or in shorter time periods if in-market deposit balances decline.

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The Bank limits the percentage of wholesale funds to total bank funds in accordance with liquidity policies approved by its Board.

The Bank was in compliance with its policy limits as of June 30, 2022.

The Bank was able to access the wholesale funding market as needed at rates and terms comparable to market standards during the year ended June 30, 2022.

In the event that there is a disruption in the availability of wholesale funds at maturity, the Bank has managed the maturity structure, in compliance with our approved liquidity policy, so at least one year of maturities could be funded through on-balance sheet liquidity.

These potential funding sources include deposits maintained at the FRB or Federal Reserve Discount Window utilizing currently unencumbered securities and acceptable loans as collateral.

As of June 30, 2022, the available liquidity was in excess of the stated policy minimum.

The Bank was in compliance with its policy limits as of September 30, 2022.

The Bank was able to access the wholesale funding market as needed at rates and terms comparable to market standards during the year ended September 30, 2022.

These potential funding sources include deposits maintained

at the FRB or Federal Reserve Discount Window utilizing currently unencumbered securities and acceptable loans as collateral.

As of September 30, 2022, the available liquidity was in excess of the stated policy minimum.

We believe the Bank will also have access to the unused federal funds lines, cash flows from borrower repayments, and cash flows from security maturities.

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We believe that the Bank has sufficient liquidity to match the balance of net withdrawable deposits and short-term borrowings in light of present economic conditions and deposit flows.

During the six months ended June 30, 2022, operating activities resulted in a net cash inflow of $16.8 million, which included net income of $19.9 million, partially offset by a $4.6 million provision for loan and lease loss benefit.

Net cash used by investing activities for the six months ended June 30, 2022 was $79.4 million primarily due to investments made in securities available for sale, net loan disbursements, and a net increase in FHLB stock.

Net cash provided by financing activities was $101.0 million for the six months ended June 30, 2022 primarily due to a net increase in FHLB advances, partially offset by a net decrease in deposits.

During the nine months ended September 30, 2022, operating activities resulted in a net cash inflow of $31.4 million, which included net income of $30.7 million, partially offset by a $4.6 million provision for loan and lease loss benefit.

Net cash used by investing activities for the nine months ended September 30, 2022 was $117.0 million primarily due to net loan disbursements, investments made in securities available for sale, and low-income housing tax credit investments.

Net cash provided by financing activities was $139.5 million for the nine months ended September 30, 2022 primarily due to a net increase in deposits, net increase in FHLB advances, and the issuance of preferred stock.

Please refer to the Consolidated Statements of Cash Flows included in PART I., Item 1 for further details regarding significant sources of cash flow for the Corporation.

Contractual Obligations and Off-Balance Sheet Arrangements

As of June 30, 2022, there were no material changes to our contractual obligations and off-balance sheet arrangements disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021.

As of September 30, 2022, there were no material changes to our contractual obligations and off-balance sheet arrangements disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021.

We continue to believe that we have adequate capital and liquidity available from various sources to fund projected contractual obligations and commitments.

2 unchanged sentences

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What changed 10-Q

Item 2. Management’s Discussion and Analysis