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Item 2. Management’s Discussion and Analysis

2023-04-28 compared with 2022-10-28 · 373 added, 468 removed, 341 unchanged (71% of the section changed)

19 unchanged sentences

These risk factors and uncertainties should be carefully considered by our stockholders and potential investors.

See Part I, Item 1A — Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2021 for discussion relating to risk factors impacting us.

See Part I, Item 1A — Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2022 and Part II, Item 1A — Risk Factors below for discussion relating to risk factors impacting us.

Investors should not place undue reliance on any such forward-looking statements, which speak only as of the date made.

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Within business banking, we offer commercial lending, asset-based lending, accounts receivable financing, equipment financing, floorplan financing, vendor financing, SBA lending and servicing, treasury management services, and company retirement plans.

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

Our private wealth management services include trust and estate administration, financial planning, investment management, and private banking for executives and owners of our business banking clients and others.

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.

Our operating philosophy is predicated on deep client relationships within our commercial bank markets and extensive expertise within our nationwide specialized lending business lines, combined with the efficiency of centralized administrative functions, such as information technology, loan and deposit operations, finance and accounting, credit administration, compliance, marketing, and human resources.

Our operating model is predicated on deep client relationships, financial expertise, and an efficient, centralized administration function delivering best in class client satisfaction.

Our focused model allows experienced staff to provide the level of financial expertise needed to develop and maintain long-term relationships with our clients.

Financial Performance Summary

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.

• 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 as of and for the three months ended March 31, 2023 include:

• Net income available to common shareholders totaled $8.8 million, or diluted earnings per share of $1.05, for the three months ended March 31, 2023, compared to $8.7 million, or diluted earnings per share of $1.02, for the same period in 2022.

• Annualized return on average assets (“ROA”) for the three months ended March 31, 2023 measured 1.17% compared to 1.30% for the same period in 2022.

• Return on average common equity (“ROACE”) is defined as net income available to common shareholders divided by average equity less average preferred stock, if any.

ROACE was 13.96% for the three months ended March 31, 2023, compared to 14.70% for the same period in 2022.

• Pre-tax, pre-provision (“PTPP”) adjusted earnings, which excludes certain one-time and discrete items, and PTPP ROA were $13.3 million and 1.79%, respectively, for the three months ended March 31, 2023, increasing $3.4 million and 30 basis points from the same period in 2022.

• Fees in lieu of interest, defined as prepayment fees, asset-based loan fees, non-accrual interest, and loan fee amortization, totaled $651,000 for the three months ended March 31, 2023, compared to $1.3 million for the same period in 2022.

• Net interest margin was 3.86% for the three months ended March 31, 2023 compared to 3.39% for the same period in 2022.

Adjusted net interest margin, which excludes certain one-time and volatile items, was 3.74% for the three months ended March 31, 2023, up from 3.22% for the same period in 2022.

• Top line revenue, defined as net interest income plus non-interest income, totaled $35.1 million for the three months ended March 31, 2023, up $6.3 million, or 21.9% from the same period in 2022.

• Effective tax rate was 23.82% for the three months ended March 31, 2023 compared to 20.03% for the same period in 2022.

• Provision for credit losses was an expense of $1.6 million for the three months ended March 31, 2023 compared to a benefit of $855,000 for the same period in 2022.

• Total assets at March 31, 2023 increased $187.8 million, or 25.2% annualized, to $3.164 billion from $2.977 billion at December 31, 2022.

• Period-end gross loans and leases receivable increased $96.1 million, or 15.7% annualized, to $2.539 billion as of March 31, 2023 compared to $2.443 billion as of December 31, 2022.

Average gross loans and leases of $2.481 billion increased $236.6 million, or 10.5%, for the three months ended March 31, 2023, compared to $2.245 billion for the same period in 2022.

• Non-performing assets were $3.5 million and 0.11% of total assets as of March 31, 2023, compared to $3.8 million and 0.13% of total assets as of December 31, 2022.

• The allowance for credit losses, including reserve for unfunded credit commitments, increased $3.3 million compared to December 31, 2022.

The allowance for credit losses increased to 1.08% of total loans, compared to 0.99% at December 31, 2022.

• Period-end in-market deposits at March 31, 2023 increased $88.8 million, or 18.1% annualized, to $2.055 billion from $1.966 billion as of December 31, 2022.

Average in-market deposits of $2.001 billion increased $68.0 million, or 3.5%, for the three months ended March 31, 2023, compared to $1.933 billion for the same period in 2022.

• Private wealth and trust assets under management and administration increased by $144.1 million, or 22.6% annualized, to $2.804 billion at March 31, 2023, compared to $2.660 billion at December 31, 2022.

Assets under management and administration decreased $29.9 million compared to the same period in 2022.

Private wealth management service fees decreased $187,000, or 6.6%, for the three months ended March 31, 2023, compared to the three months ended March 31, 2022.

Response to Banking Liquidity Events

Two bank failures occurring in March 2023 prompted industry concern regarding bank deposit funding, liquidity sources, and capital adequacy.

In addition to an increased focus on client relationships, management has reviewed deposit composition, sources of liquidity, and securities and capital.

As the Bank focuses on commercial banking clientele, the client deposit balances are naturally larger in size than those of peer banks with retail banking operations.

Thus, the Bank has long offered extended deposit insurance products to protect clients’ operating business assets, beyond the FDIC limit.

As of March 31, 2023, the Corporation had the following deposit composition and depositor insurance status:

Deposit composition

(in thousands) March 31,

2023 December 31,

2022 September 30,

2022 June 30,

2022 March 31,

Non-interest-bearing transaction accounts

$ 471,904 $ 537,107 $ 564,141 $ 544,507 $ 600,987

Interest-bearing transaction accounts

612,500 576,601 461,883 466,785 539,492

Money market accounts 662,157 698,505 742,545 731,718 806,917

Certificates of deposit 308,191 153,757 160,655 114,000 63,977

Wholesale deposits 422,088 202,236 158,321 12,321 12,321

Total deposits $ 2,476,840 $ 2,168,206 $ 2,087,545 $ 1,869,331 $ 2,023,694

Uninsured deposits 941,375 951,739 1,007,935 935,101 1,099,505

Uninsured deposits as a percent of total deposits 38.0 % 43.9 % 48.3 % 50.0 % 54.3 %

Extended deposit insurance (1)

567,390 495,621 439,092 461,372 470,140

(1) Included in interest-bearing transaction accounts and certificates of deposit balances above.

Management regularly reviews all primary and secondary sources of liquidity in preparation for any unforeseen funding needs, such as potential fallout from recent market events.

These are prioritized based on available capacity, term flexibility, and cost.

At March 31, 2023, the Company’s liquidity position included record in-market deposits of $2.055 billion, up $88.8 million over prior quarter, and total deposits of $2.477 billion.

As detailed below, readily available liquidity of $656.6 million at March 31, 2023 is also up compared to $449.6 million at December 31, 2022.

Management has not accessed the Federal Reserve’s Bank Term Funding Program as of March 31, 2023.

Sources of liquidity

(in thousands) March 31,

2023 December 31,

2022 September 30,

2022 June 30,

2022 March 31,

Short-term investments $ 159,859 $ 76,871 $ 86,707 $ 56,233 $ 75,514

Collateral value of unencumbered pledged loans 296,393 184,415 289,513 174,315 361,487

Market value of unencumbered securities 200,332 188,353 173,013 182,429 201,896

Readily available liquidity 656,584 449,639 549,233 412,977 638,897

Fed fund lines 45,000 45,000 45,000 45,000 45,000

Excess brokered CD capacity 1

1,027,869 1,162,241 1,100,369 1,112,386 1,275,931

Total liquidity $ 1,729,453 $ 1,656,880 $ 1,694,602 $ 1,570,363 $ 1,959,828

Uninsured deposits 941,375 951,739 1,007,935 935,101 1,099,505

(1) Bank internal policy limits brokered CDs to 50% of total bank funding when combined with FHLB advances.

The Bank is required by federal regulation to maintain sufficient liquidity to ensure safe and sound operations.

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.

Securities and Capital

The Bank holds $248.5 million in its investment securities portfolio which is 7.9% of our total assets, with a total portfolio mark-to-market (“MTM”) adjustment of 9% as of March 31, 2023.

Further, the Corporation has grown tangible book value by 12.2% over the past twelve months.

Modeling in the full MTM adjustments on our balance sheet produced a similarly strong capital result as of March 31, 2023;

fully-marked tangible common equity to tangible assets (“TCE”) totaled 7.56%, compared to our reported ratio of 7.69%, both of which fall within management’s target TCE range of 7.5%-8.5%.

The Company’s capital ratios continued to exceed the highest required regulatory benchmark levels.

Capital ratios remain strong with the voluntary inclusion of mark-to-market adjustments on the full balance sheet.

Capital Ratios

As of and for the Three Months Ended

2023 December 31,

2022 September 30,

2022 June 30,

2022 March 31,

Total capital to risk-weighted assets 11.04 % 11.26 % 11.66 % 11.56 % 11.87 %

Tier I capital to risk-weighted assets 9.01 % 9.20 % 9.48 % 9.34 % 9.27 %

Common equity tier I capital to risk-weighted assets 8.61 % 8.79 % 9.04 % 8.90 % 8.81 %

Tier I capital to adjusted assets 9.00 % 9.17 % 9.34 % 9.19 % 9.09 %

Tangible common equity to tangible assets (TCE ratio) 7.69 % 7.98 % 8.06 % 8.16 % 8.14 %

Adjusted TCE ratio 7.56 % 7.86 % 8.18 % 8.25 % 8.09 %

Results of Operations

Top Line Revenue

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 $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%.

Top line revenue, comprised of net interest income and non-interest income, increased $6.3 million, or 21.9%, for the three months ended March 31, 2023, compared to the same period in 2022, due to a 24.6% and 13.9% increase in net interest income and non-interest income, respectively.

The increase in net interest income was driven by an increase in net interest margin and average loans and leases outstanding.

The increase in non-interest income was due to an increase in commercial loan swap fee income, loan fee income, and income from investments in mezzanine funds, partially offset by a reduction in gains on the sale of SBA loans, service charges on deposits, and trust fee income.

The components of top line revenue were as follows:

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

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

For the Three Months Ended March 31,

2023 2022 $ Change % Change

(Dollars in Thousands)

3 unchanged sentences

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

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.

ROA for the three months ended March 31, 2023 decreased to 1.17%, compared to 1.30% for the three months ended March 31, 2022.

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

We consider ROA a critical metric to measure the profitability of our organization and how efficiently our assets are deployed.

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.

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.

ROACE for the three months ended March 31, 2023 was 13.96%, compared to 14.47% for the three months ended March 31, 2022.

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

We view ROACE 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.

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.

Efficiency ratio measured 62.02% for the three months ended March 31, 2023, compared to 65.55% for the three ended March 31, 2022.

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 repossessed assets, 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.

PTPP adjusted earnings for three months ended March 31, 2023 was $13.3 million, compared to $9.9 million for the three months ended March 31, 2022.

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 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.

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

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 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

(Dollars in Thousands)

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 7 6 1 NM 27 7 20 NM

Amortization of other intangible assets

— 7 (7) NM — 23 (23) NM

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

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

Total operating expense $ 19,925 $ 18,546 $ 1,379 7.4 $ 58,497 $ 53,928 $ 4,569 8.5

Net interest income $ 25,884 $ 21,223 $ 4,661 22.0 $ 70,971 $ 63,738 $ 7,233 11.3

Total non-interest income 8,197 7,015 1,182 16.8 22,455 20,531 1,924 9.4

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

Adjusted non-interest income 8,197 7,015 1,182 16.8 $ 22,455 $ 20,502 $ 1,953 9.5

Total operating revenue $ 34,081 $ 28,238 $ 5,843 20.7 $ 93,426 $ 84,240 $ 9,186 10.9

Efficiency ratio 58.46 % 65.68 % 62.61 % 64.02 %

Pre-tax, pre-provision adjusted earnings $ 14,156 $ 9,692 $ 4,464 46.1 $ 34,929 $ 30,312 $ 4,617 15.2

Average total assets $ 2,758,961 $ 2,608,198 $ 150,763 5.8 2,714,309 2,602,347 111,962 4.3

Pre-tax, pre-provision adjusted return on average assets 2.05 % 1.49 % 1.72 % 1.55 %

NM = Not Meaningful

PPP loans, related fees, and interest income had a material impact on the prior period comparisons in the table above.

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 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

For the Three Months Ended March 31,

2023 2022 $ Change % Change

(Dollars in Thousands)

Total non-interest expense $ 21,767 $ 18,823 $ 2,944 15.6%

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 96 (69) 165 (239.1) 134 45 89 NM

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

Total operating expense $ 19,925 $ 18,546 $ 1,379 7.4 $ 58,497 $ 53,928 $ 4,569 8.5

Net loss on repossessed assets 6 12 (6) (50.0)

SBA recourse provision (18) (76) 58 (76.3)

Total operating expense (a) $ 21,779 $ 18,887 $ 2,892 15.3

Net interest income $ 26,705 $ 21,426 $ 5,279 24.6

PPP interest income 11 221 (210) (95.0) 92 1,391 (1,299) (93.4)

PPP loan fee amortization 61 1,666 (1,605) (96.3) 506 6,419 (5,913) (92.1)

Adjusted net interest income 25,812 19,336 6,476 33.5 70,373 55,928 14,445 25.8

Total non-interest income 8,410 7,386 1,024 13.9

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

Adjusted non-interest income 8,197 7,015 1,182 16.8 22,455 20,502 1,953 9.5

Adjusted operating revenue $ 34,009 $ 26,351 $ 7,658 29.1 $ 92,828 $ 76,430 $ 16,398 21.5

Operating revenue (b) $ 35,115 $ 28,812 $ 6,303 21.9

Efficiency ratio 62.02 % 65.55 %

Pre-tax, pre-provision adjusted earnings $ 14,084 $ 7,805 $ 6,279 80.4 $ 34,331 $ 22,502 $ 11,829 52.6

Pre-tax, pre-provision adjusted earnings (b-a) $ 13,336 $ 9,925 $ 3,411 34.4

Average total assets $ 2,984,600 $ 2,666,241 $ 318,359 11.9

Average PPP loans, net 4,505 87,517 (83,012) (94.9) 12,303 185,741 (173,438) (93.4)

Adjusted average total assets $ 2,754,456 $ 2,520,681 $ 233,775 9.3 $ 2,702,006 $ 2,416,606 $ 285,400 11.8

Pre-tax, pre-provision adjusted return on average assets 1.79 % 1.49 %

NM = Not Meaningful

Excluding the impact of PPP in periods of comparison, we believe the Corporation will generate positive operating leverage on an annual basis and progress towards enhancing the long-term efficiency ratio at a measured pace as we focus on strategic initiatives directed toward revenue growth, process improvement, and automation.

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.

We believe the Corporation will generate positive operating leverage on an annual basis and progress towards enhancing the long-term efficiency ratio at a measured pace as we focus on strategic initiatives directed toward revenue growth, process improvement, and automation.

The Corporation’s recent improvement during the period of comparison is principally due to the rising interest rate environment and related expansion of net interest margin.

Net Interest Income

1 unchanged sentence

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 nine months ended September 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 months ended March 31, 2023 compared to the same period in 2022.

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

2022 Compared to 2021 2022 Compared to 2021

Rate Volume Net Rate Volume Net

Increase (Decrease) for the Three Months Ended March 31,

2023 Compared to 2022

Rate Volume Net

(In Thousands)

4 unchanged sentences

5,589 2,678 8,267

Direct financing leases (1)

(10) (37) (47) 5 (152) (147)

Consumer and other loans (1)

23 54 77 19 146 165

Total loans and leases receivable 13,541 3,201 16,742

13 unchanged sentences

Other borrowings 10 (45) (35)

(33) 132 99 (133) 538 405

Junior subordinated notes (2)

3 unchanged sentences

Net change in net interest income $ 3,918 $ 1,361 $ 5,279

(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 nine months ended September 30, 2022 included $236,000 in accelerated amortization of debt issuance costs

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 nine months ended September 30, 2022 and 2021.

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

(2) The rate column for the three months ended March 31, 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 September 30,

Balance Interest Average

Yield/Rate (4)

Balance Interest Average

Yield/Rate (4)

(Dollars in Thousands)

Interest-earning assets

Commercial real estate and other mortgage loans (1)

$ 1,486,530 $ 17,280 4.65 % $ 1,388,236 $ 13,090 3.77 %

Commercial and industrial loans (1)

765,440 12,266 6.41 680,563 9,259 5.44

Direct financing leases (1)

15,093 160 4.24 18,611 207 4.45

Consumer and other loans (1)

49,558 468 3.78 43,689 391 3.58

Total loans and leases receivable (1)

2,316,621 30,174 5.21 2,131,099 22,947 4.31

Mortgage-related securities (2)

168,433 915 2.17 154,372 659 1.71

Other investment securities (3)

51,812 250 1.93 45,196 196 1.73

FHLB and FRB stock 18,167 289 6.36 13,279 167 5.03

Short-term investments 27,912 158 2.26 116,621 45 0.15

Total interest-earning assets 2,582,945 31,786 4.92 2,460,567 24,014 3.90

Non-interest-earning assets 176,016 147,631

Total assets $ 2,758,961 $ 2,608,198

Interest-bearing liabilities

Transaction accounts $ 486,704 1,005 0.83 $ 509,089 251 0.20

Money market accounts 746,227 1,610 0.86 703,460 306 0.17

Certificates of deposit 113,529 340 1.20 42,370 71 0.67

Wholesale deposits 36,702 226 2.46 89,135 206 0.92

Total interest-bearing deposits 1,383,162 3,181 0.92 1,344,054 834 0.25

FHLB advances 432,528 2,173 2.01 381,061 1,228 1.29

Other borrowings 42,800 548 5.12 32,630 449 5.50

Junior subordinated notes — — — 10,070 280 11.12

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

Non-interest-bearing demand deposit accounts

584,535 556,029

Other non-interest-bearing liabilities 60,705 59,865

Total liabilities 2,503,730 2,383,709

Stockholders’ equity 255,231 224,489

Total liabilities and stockholders’ equity

$ 2,758,961 $ 2,608,198

Net interest income $ 25,884 $ 21,223

Interest rate spread 3.65 % 3.27 %

Net interest-earning assets $ 724,455 $ 692,752

Net interest margin 4.01 % 3.45 %

Average interest-earning assets to average interest-bearing liabilities

138.98 % 139.19 %

Return on average assets (4)

Return on average equity (4)

Average equity to average assets 9.25 8.61

Non-interest expense to average assets (4)

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

Interest income related to non-accrual loans and leases is recognized when collected.

Interest income includes net loan fees in lieu of interest.

(2) Includes amortized cost basis of assets available-for-sale and held-to-maturity.

(3) Yields on tax-exempt municipal securities are not presented on a tax-equivalent basis in this table.

(4) Represents annualized yields/rates.

For the Nine Months Ended September 30,

For the Three Months Ended March 31,

Balance Interest Average

8 unchanged sentences

916,457 17,557 7.66 734,904 9,290 5.06

Direct financing leases (1)

15,714 526 4.46 20,242 673 4.43

Consumer and other loans (1)

39 unchanged sentences

Non-interest expense to average assets (4)

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

Interest income related to non-accrual loans and leases is recognized when collected.

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

Interest income related to non-performing loans and leases is recognized when collected.

Interest income includes net loan fees in lieu of interest.

2 unchanged sentences

(4) Represents annualized yields/rates.

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

(5) The rate column for the three months ended March 31, 2022 included $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)

For the Three Months Ended March 31,

Asset and Liability Beta Analysis Average Yield/Rate (4)

Increase (Decrease)

7 unchanged sentences

5.99 % 3.63 % 2.36 %

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)

Total in-market deposits (e)

2.09 % 0.13 % 1.96 %

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

Total bank funding (f)

2.30 % 0.31 % 1.99 %

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

Net interest margin (g)

3.86 % 3.39 % 0.47 %

Interest-bearing deposits (f)/(h)

Adjusted net interest margin (h)

3.74 % 3.22 % 0.52 %

Interest-bearing liabilities (g)/(h)

Effective fed funds rate (3)(i)

4.51 % 0.09 % 4.42 %

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

Beta Calculations:

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

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

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

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

Total in-market deposits (e)/(i)

Total bank funding( 2)(f)/(i)

Net interest margin (g)/(i)

Adjusted net interest margin (h)/(i)

(1) Excluding fees in lieu of interest.

(2) Total bank funding represents total deposits plus FHLB advances.

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

1 unchanged sentence

(4) 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.

Comparison of Net Interest Income for the Three Months Ended March 31, 2023 and 2022

Net interest income increased $5.3 million, or 24.6%, during the three months ended March 31, 2023, compared to the three months ended March 31, 2022.

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.

The change in the rate paid on interest-bearing liabilities compared to the change in short-term market rates is commonly referred to as a beta.

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

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.

Fees in lieu of interest, which can vary from quarter to quarter, totaled $651,000 for the three months ended March 31, 2023, compared to $1.3 million for the same period in 2022.

Excluding fees in lieu of interest, net interest income for the three months ended March 31, 2023 increased $5.7 million, or 27.9%.

Average gross loans and leases for the three months ended March 31, 2023 increased $236.6 million, or 10.5%, compared to the three months ended March 31, 2022.

The yield on average loans and leases for the three months ended March 31, 2023 was 6.42%, compared to 4.11% for the three months ended March 31, 2022.

Excluding the impact of loan fees in lieu of interest, the yield on average loans and leases for the three months ended March 31, 2023 was 6.31%, compared to 3.88% for the three months ended March 31, 2022.

The yield on average interest-earning assets for the three months ended March 31, 2023 measured 6.09%, compared to 3.84% for the three months ended March 31, 2022.

Excluding loan fees in lieu of interest, the yield on average interest-earning assets for the three months ended March 31, 2023 was 5.99%, compared to 3.63% for the three months ended March 31, 2022.

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 425 basis points over the period of comparison, as well as the reinvestment of cash flows from the securities and fixed-rate loan portfolios in a rising rate environment.

The daily average effective federal funds rate for the three months ended March 31, 2023 increased 442 basis points, compared to the same period in 2022.

This equates to an interest-earning asset beta of 53.3% for the three months ended March 31, 2023.

The rate paid on average interest-bearing in-market deposits for the three months ended March 31, 2023 increased to 2.78%, from 0.19% for the three months ended March 31, 2022.

The average rate paid on total interest-bearing liabilities for the three months ended March 31, 2023 increased to 2.89%, from 0.62% for the three months ended March 31, 2022.

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 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;

The average rates paid increased due to the increase in short-term market rates and the replacement of maturing wholesale funds at higher fixed rates.

This equates to an interest-bearing liability beta of 51.4% for the three months ended March 31, 2023.

Net interest margin increased to 3.86% for the three months ended March 31, 2023, compared to 3.39% for the three months ended March 31, 2022.

The primary driver of improved net interest margin was the aforementioned increase in earning asset yields, partially offset by corresponding increase in funding costs.

Adjusted net interest margin measured 3.74% for the three months ended March 31, 2023, compared to 3.22% for the three months ended March 31, 2022.

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

Management believes its success in growing in-market deposits, disciplined loan pricing, and increased production in existing higher-yielding commercial lending products will allow the Corporation to achieve a net interest margin that supports our long-term profitability goals.

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 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.

Provision for Loan and Lease Losses

We determine our provision for loan and lease losses pursuant to our allowance for loan and lease loss methodology, which is based on the magnitude of current and historical net charge-offs recorded throughout the established look-back period, the evaluation of several qualitative factors for each portfolio category, and the amount of specific reserves established for impaired loans that present collateral shortfall positions.

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 $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 addition, 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.

Provision for Credit Losses

We determine our provision for credit losses pursuant to our allowance for credit loss methodology, which was updated on January 1, 2023, for the adoption of ASC 326.

It is based on a reasonable and supportable forecast as well as considerations for composition, risk, and performance indicators in our credit portfolio.

Refer to Allowance for Credit Losses , below, for further information regarding our allowance for credit loss methodology.

The Corporation recognized a $1.6 million provision expense for the three months ended March 31, 2023, compared to a benefit of $855,000 for the three months ended March 31, 2022.

The provision expense for the three months ended March 31, 2023 was primarily due to an increase of $979,000 related to loan growth and a $474,000 increase in the reserve due to modest deterioration in forecasted economic conditions over the four quarter forecast period.

The following table shows the components of the provision for credit losses for the three months ended March 31, 2023 compared to the same periods in 2022.

For the Three Months Ended March 31,

(In Thousands)

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)

Change in qualitative factor changes $ 9 $ (416)

Change in quantitative factor changes 474 (206)

Charge-offs 166 22

Recoveries (107) (210)

Change in specific reserves on impaired loans, net 447 (451) 196 (2,111)

Change in reserves on individually evaluated loans, net (36) (280)

Change due to loan growth, net 979 235

Total provision for loan and lease losses $ 12 $ (2,269) $ (4,569) $ (5,295)

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 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.

Change in unfunded credit commitment reserves $ 76 $ —

Total provision for credit losses $ 1,561 $ (855)

The addition of specific reserves on individually evaluated 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 credit 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 credit losses to maintain the allowance for credit losses at a level deemed appropriate by management.

This amount is net of the release of any specific reserve that may have already been provided.

Change in the inherent risk of the portfolio is primarily influenced by the overall growth in gross loans and leases and an analysis of loans previously charged off, as well as movement of existing loans and leases in and out of an impaired loan classification where a specific evaluation of a particular credit may be required rather than the application of a general reserve loss rate.

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 Nine Months Ended September 30, 2022 and 2021

Comparison of Non-Interest Income for the Three Months Ended March 31, 2023 and 2022

Non-Interest Income

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.

Non-interest income increased $1.0 million, or 13.9%, to $8.4 million for the three months ended March 31, 2023 compared to $7.4 million for the same period in 2022.

The increase in total non-interest income for the three months ended March 31, 2023 was due to increases in other non-interest income, driven by mezzanine fund investment income, loan fee income, and commercial loan swap fee income.

These favorable variances were partially offset by a decrease in private wealth management services fee income, services charges on deposits, and gains on 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 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.

Total non-interest income accounted for 23.9% of total revenues for the three months ended March 31, 2023, compared to 25.6% for the three months ended March 31, 2022.

The components of non-interest income were as follows:

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

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

For the Three Months Ended March 31,

2023 2022 $ Change % Change

(Dollars in Thousands)

6 unchanged sentences

366 349 17 4.9

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

Swap fees 341 — 341 NM 1,038 684 354 51.8

Swap fees 557 225 332 147.6

Other non-interest income 2,872 1,735 1,137 65.5

3 unchanged sentences

(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 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 service fees decreased $187,000, or 6.6%, for the three months ended March 31, 2023, compared to the same period in 2022.

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 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.

As of March 31, 2023, private wealth and trust assets under management and administration totaled $2.804 billion, decreasing $29.9 million, or 1.1%, compared to $2.834 billion as of March 31, 2022, 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 $1.1 million, or 65.5%, for the three months ended March 31, 2023, respectively, compared to the same period in 2022.

The increase for the three months ended March 31, 2023 was primarily due to strong returns from the Corporation’s investments in mezzanine funds.

Commercial loan interest rate swap fee income increased $332,000, or 147.6%, for the three months ended March 31, 2023, compared to the same period in 2022.

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

1 unchanged sentence

The execution of these transactions generates swap fee income.

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.

The aggregate amortizing notional value of interest rate swaps with various borrowers was $787.8 million as of March 31, 2023, compared to $744.2 million and $626.8 million as of December 31, 2022 and March 31, 2022, respectively.

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 $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

Service charges on deposits decreased $317,000, or 31.7%, for the three months ended March 31, 2023, compared to the same period in 2022.

The decrease was driven by an increase in the earnings credit rate which was adjusted with the rising rate environment.

Treasury management business development efforts remain robust as gross analyzed service charges, net of waived fees, increased 17.6%, or $211,000, to $1.4 million for the three months ended March 31, 2023, compared to the same period in 2022.

Management believes growth in gross analyzed service charges is a strong indicator of success for the Corporation given the direct correlation to adding and expanding core business relationships.

Loan fees increased $151,000, or 23.2%, for the three months ended March 31, 2023, compared to the same period in 2022.

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

Gain on sale of SBA loans decreased $109,000, or 18.6%, for the three months ended March 31, 2023, compared to the same period in 2022.

Premiums on the sale and notional value of SBA loans sold decreased compared to prior year quarter, as the Corporation elected to hold a higher number of SBA loans on its balance sheet in the current interest rate environment.

Comparison of Non-Interest Expense for the Three Months Ended March 31, 2023 and 2022

Non-Interest Expense

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.

Non-interest expense for the three months ended March 31, 2023 increased by $2.9 million, or 15.6%, compared to the same period in 2022.

Operating expense, which excludes certain one-time and discrete items as defined in the Efficiency Ratio table above, increased $2.9 million, or 15.3%, for the three months ended March 31, 2023, compared to the same period in 2022.

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

The components of non-interest expense were as follows :

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

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

For the Three Months Ended March 31,

2023 2022 $ Change % Change

(Dollars in Thousands)

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Full-time equivalent employees

335 307 335 307

(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 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.

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.

Compensation expense for the three months ended March 31, 2023 increased $2.3 million, or 16.6%, compared to the three months ended March 31, 2022.

The increase reflects above historical annual merit and market increases, reflecting wage inflation, payroll taxes paid in the quarter on a record annual cash bonus earned in 2022, and an expanded workforce.

Successful hiring efforts to secure talent resulted in average full-time equivalent employees for the three months ended March 31, 2023 increasing to 340, up 9.7%, compared to 310 for the three months ended March 31, 2022.

Professional fees increased $173,000, or 14.8%, for the three months ended March 31, 2023, compared to the three months ended March 31, 2022.

The increase was primarily due to an increase in the use of professional staffing services and costs associated with an office relocation.

Marketing expense increased $128,000, or 25.6%, for the three months ended March 31, 2023, compared to the three months ended March 31, 2022.

The increase during the three months ended March 31, 2023 was primarily due to an increase in business development efforts and advertising projects related to our expanded sales force and national footprint.

Computer software expense increased $101,000, or 9.3%, for the three months ended March 31, 2023, compared to the three months ended March 31, 2022.

The increase during the three months ended March 31, 2023 was primarily due to continued investments in existing technologies commensurate with the Corporation’s expanded headcount and overall balance sheet growth.

Income tax expense totaled $2.8 million for the three months ended March 31, 2023 compared to $2.2 million for the three months ended March 31, 2022.

Income tax expense included a $149,000 net benefit from a tax credit investment, no tax credits were recognized in the prior year quarter.

The effective tax rate for the three months ended March 31, 2023 was 23.82% compared to 20.03% for the same period in 2022.

For 2023, the Corporation expects to report an effective tax rate between 21%-22%, 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 $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.

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, dividends paid to common stockholders, and stock repurchased.

Total assets increased by $187.8 million, or 6.3%, to $3.164 billion as of March 31, 2023 compared to $2.977 billion at December 31, 2022.

The increase in total assets was primarily driven by an increase in cash, loans and leases receivable, and available-for-sale securities.

Total liabilities increased by $181.9 million, or 6.7%, to $2.898 billion at March 31, 2023 compared to $2.716 billion at December 31, 2022.

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

Total stockholders’ equity increased by $5.9 million, or 2.3%, to $266.6 million at March 31, 2023 compared to $260.6 million at December 31, 2022.

The increase in total stockholders’ equity was due to retention of earnings and unrealized gains on available-for-sale securities, partially offset by dividends paid to common stockholders, stock repurchased, and cumulative change in accounting principal for ASC 326.

Cash and Cash Equivalents

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

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.

Cash and due from banks increased $303,000 to $26.1 million at March 31, 2023.

Short-term investments increased by $83.0 million to $159.9 million at March 31, 2023 from $76.9 million at December 31, 2022 as management held excess cash at the FRB in response to the banking industry liquidity events during the quarter.

Please see the section entitled Response to Banking Liquidity Events above for additional information.

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 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.

As of March 31, 2023 and December 31, 2022, interest-bearing deposits held at the FRB were $158.9 million and $76.5 million, respectively.

The increase in cash held at the FRB is primarily due to management’s response to the banking industry liquidity events during first quarter 2023.

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 $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.

Total securities, including available-for-sale and held-to-maturity, increased by $23.8 million, or 10.6%, to $248.5 million, or 7.9% of total assets at March 31, 2023 compared to $224.7 million, or 7.5% of total assets at December 31, 2022.

During the three months ended March 31, 2023 the Corporation recognized unrealized gains of $3.8 million before income taxes through other comprehensive income, compared to unrealized losses of $12.5 million for the same period in 2022.

The unrealized losses in the prior year period were solely driven by the increase in interest rates.

As of March 31, 2023 and December 31, 2022, our overall securities portfolio, including available-for-sale securities and held-to-maturity securities, had an estimated weighted-average expected maturity of 5.9 years and 6.3 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 September 30, 2022.

We did not recognize any credit losses in the securities portfolio as of March 31, 2023.

Loans and Leases Receivable

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 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.

Period-end loans and leases receivable, net of allowance for credit losses, increased by $94.4 million, or 15.6% annualized to $2.513 billion at March 31, 2023 from $2.419 billion at December 31, 2022 driven by commercial loan growth, partially offset by a decrease in commercial real estate loans.

Due to the adoption of ASC 326, the current quarter included a change to our portfolio segmentation.

The balances as of March 31, 2023 reflect reclassifications of $43 million to commercial and industrial from commercial real estate and $7 million from consumer and other to commercial real estate.

Including the reclassification impact of adopting ASC 326 in the prior period of comparison, C&I loans increased $66.2 million, or 29.5% annualized, to $963.3 million.

The increase was due to growth across the majority of the Bank’s C&I products and geographies.

Management does not believe this level of C&I loan growth is sustainable and expects growth to moderate to lower double-digit levels in subsequent quarters.

Including the reclassification impact of adopting ASC 326 in the prior period of comparison, total commercial real estate (“CRE”) loans increased $22.5 million, or 6.0% annualized, to $1.529 billion.

The increase was due to growth across the majority of the Bank’s C&I products and geographies.

Management does not believe this level of C&I loan growth is sustainable and expects growth to moderate to lower double-digit levels in subsequent quarters.

Including the reclassification impact of adopting ASC 326 in the prior period of comparison, CRE loans represented 60.2% and 61.7% of our total loans as of March 31, 2023 and December 31, 2022, respectively.

The decline in CRE concentration in the period of comparison is the result of management’s success in expanding the Bank’s various C&I products across both its local and national footprints.

As of March 31, 2023, 15.3% of the CRE loans were owner-occupied CRE, compared to 15.2% as of December 31, 2022.

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.

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

We will continue to actively pursue C&I loans across the Corporation as this segment of our loan and lease portfolio provides an attractive yield commensurate with an appropriate level of credit risk and creates opportunities for in-market deposit, treasury management, and private wealth management relationships which generate additional fee revenue.

We continue to actively pursue C&I loans across the Corporation as this segment of our loan and lease portfolio provides an attractive yield commensurate with an appropriate level of credit risk and creates opportunities for in-market deposit, treasury management, and private wealth management relationships which generate additional fee revenue.

Underwriting of new credit is primarily through approval from a serial sign-off or committee process and is a key component of our operating philosophy.

Business development officers have no individual lending authority limits.

We make every reasonable effort to ensure that there is appropriate collateral or a government guarantee at the time of origination to protect our interest in the related loan or lease.

Business development officers have no individual lending authority.

To monitor the ongoing credit quality of our loans and leases, each credit is evaluated for proper risk rating using a nine grade risk rating system at the time of origination, subsequent renewal, evaluation of updated financial information from our borrowers, or as other circumstances dictate.

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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 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.

As of March 31, 2023, total period-end deposits increased by $308.6 million to $2.477 billion from $2.168 billion at December 31, 2022, primarily due to a $219.9 million and $154.4 million increase in wholesale deposits and certificate of deposit accounts, partially offset by a decrease in non-interest-bearing transaction accounts of $65.2 million.

The large increase in wholesale deposits is primarily driven by a shift from FHLB advances to wholesale deposits to manage interest rate risk and increase excess liquidity.

Please see the section entitled Response to Banking Liquidity Events above for additional information on the increase in liquidity as of March 31, 2023.

Total period-end in-market deposits increased $88.8 million, or 18.1% annualized, to $2.055 billion, compared to $1.966 billion.

Growth in interest-bearing transaction accounts and certificates of deposits, driven by client movement into extended insurance products, was partially offset by a seasonal decrease in non-interest-bearing transaction accounts and money market accounts.

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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Our strategic efforts remain focused on adding in-market deposit relationships.

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 $1.921 billion for the nine months ended September 30, 2022 compared to $1.756 billion for the nine months ended September 30, 2021.

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 variability 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 $2.001 billion for the three months ended March 31, 2023 compared to $1.933 billion for the three months ended March 31, 2022.

FHLB Advances and Other Borrowings

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.

Management used a portion of the proceeds during the second quarter of 2022 to redeem $9.1 million of subordinated notes bearing a fixed interest rate of 6.00%.

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 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.

As of March 31, 2023, FHLB advances and other borrowings decreased by $114.9 million, or 25.2%, to $341.9 million from $456.8 million at December 31, 2022.

As deposit balances have increased, we have been able to reduce our usage of FHLB advances.

We have strategically reduced our usage of FHLB advances in favor of wholesale deposits to increase the Bank’s readily available liquidity.

We will continue to utilize FHLB advances and wholesale deposits to manage interest rate risk, liquidity, and contingency funding.

As of March 31, 2023, the Corporation had no other borrowings.

As of December 31, 2022, the Corporation had other borrowings of $6.1 million which consisted of sold loans which were accounted for as a secured borrowing because they did not qualify for true sale accounting.

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 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.

The proceeds were used to redeem $10.1 million of junior subordinated notes in the first quarter of 2022.

The Corporation has 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”) outstanding as of March 31, 2023 and December 31, 2022 .

The Corporation expects to pay dividends on the Series A Preferred Stock when and if declared by its Board, at a fixed rate of 7.0% per annum, payable quarterly, in arrears, on March 15, June 15, September 15 and December 15 of each year up to, but excluding, March 15, 2027.

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

During the three months ended March 31, 2023, the Corporation paid $219,000 in preferred cash dividends with respect to the Series A Preferred Stock.

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 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.

As of March 31, 2023, the aggregate amortizing notional value of interest rate swaps with various commercial borrowers was approximately $787.8 million, compared to $744.2 million as of December 31, 2022.

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

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

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.

As of March 31, 2023, the commercial borrower swaps were reported on the Consolidated Balance Sheet as a derivative liability of $49.0 million compared to a derivative asset and liability of $1.0 million and $61.4 million, respectively, as of December 31, 2022.

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 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.

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 $45.8 million as of March 31, 2023, compared to a net derivative liability of $60.4 million as of December 31, 2022.

The gross amount of dealer counterparty swaps as of March 31, 2023, without regard to the enforceable master netting agreement, was a gross derivative asset of $49.0 million, compared to a gross derivative liability of $1.0 million and gross derivative asset of $61.4 million as of December 31, 2022.

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

As of March 31, 2023, the aggregate notional value of interest rate swaps designated as cash flow hedges was $106.4 million.

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

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.

A pre-tax unrealized loss of $1.4 million was recognized in other comprehensive income for the three months ended March 31, 2023, 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 September 30, 2022, the aggregate notional value of interest rate swaps designated as fair value hedges was $12.5 million.

As of March 31, 2023, 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 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.

A pre-tax unrealized loss of $175,000 was recognized in other comprehensive income for the three months ended March 31, 2023, 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.

Asset Quality

Impaired Assets

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

September 30,

Non-performing Assets

Total non-performing assets consisted of the following at March 31, 2023 and December 31, 2022, respectively:

2023 December 31,

(Dollars in Thousands)

Non-accrual loans and leases

Non-performing loans and leases

Commercial real estate:

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Commercial real estate - non-owner occupied — —

Land development — —

Construction — —

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1-4 family 28 30

Total non-accrual commercial real estate 32 687

Total non-performing commercial real estate 28 30

Commercial and industrial 3,384 3,629

Direct financing leases, net 61 99

Consumer and other — —

Home equity and second mortgages — —

Total non-accrual consumer and other loans — —

Total non-accrual loans and leases 3,645 6,358

Foreclosed properties, net 151 164

Total non-performing loans and leases 3,412 3,659

Repossessed assets, net 89 95

Total non-performing assets 3,501 3,754

Performing troubled debt restructurings 172 217

Total impaired assets $ 3,968 $ 6,739

Total non-accrual loans and leases to gross loans and leases 0.16 % 0.28 %

Total non-performing assets to gross loans and leases plus foreclosed properties, net

Total non-performing assets to total assets 0.13 0.25

Allowance for loan and lease losses to gross loans and leases 1.04 1.09

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

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,

Total non-accrual loans and leases to gross loans and leases 0.16 % 0.29 %

Total non-performing assets to gross loans and leases plus foreclosed properties, net

Total non-performing loans and leases to gross loans and leases 0.13 % 0.15 %

Total non-performing assets to gross loans and leases plus repossessed assets, net 0.14 0.15

Total non-performing assets to total assets 0.11 0.13

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

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 0.16% 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.

Allowance for credit losses to gross loans and leases 1.08 0.99

Allowance for credit losses to non-performing loans and leases 807.44 662.20

Non-performing loans decreased $247,000, or 6.8%, to $3.4 million at March 31, 2023, compared to $3.7 million at December 31, 2022.

The decrease in non-performing loans was principally due to loan payoffs, loans returning to accrual status, and $166,000 of charge-offs.

The Corporation’s non-performing loans as a percentage of total gross loans and leases measured 0.13% and 0.15% at March 31, 2023 and December 31, 2022, 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 0.13% 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.

Non-performing assets as a percentage of total assets was 0.11% and 0.13% at March 31, 2023 and December 31, 2022, respectively.

As of March 31, 2023 and December 31, 2022, the payment performance of our loans and leases did not point to any new areas of concern, as approximately 99.87% and 99.85%, respectively, 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 – Loans and Allowance for Credit Losses of the Consolidated Financial Statements.

As we continue to actively monitor the credit quality of our loan and lease portfolios, we may identify additional loans and leases for which the borrowers or lessees are having difficulties making the required principal and interest payments based upon factors including, but not limited to, the inability to sell the underlying collateral, inadequate cash flow from the operations of the underlying businesses, liquidation events, or bankruptcy filings.

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 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.

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

As of March 31, 2023, 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 placed on non-accrual status and individually evaluated for reserve requirement.

Cash received while a loan or a lease is on non-accrual status is generally applied solely against the outstanding principal.

If collectability of the contractual principal and interest is not in doubt, payments received may be applied to both interest due on a cash basis and principal.

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

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

The following represents additional information regarding our non-performing loans and leases:

As of and for the Three Months Ended March 31, As of and for the

Year Ended December 31,

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(In Thousands)

Impaired loans and leases with no impairment reserves required

$ 1,028 $ 4,985 $ 4,419

Impaired loans and leases with impairment reserves required

2,789 2,501 2,156

Total impaired loans and leases 3,817 7,486 6,575

Impairment reserve (included in allowance for loan and lease losses)

1,701 1,570 1,505

Net impaired loans and leases $ 2,116 $ 5,916 $ 5,070

Average impaired loans and leases $ 5,532 $ 16,700 $ 14,260

Foregone interest income attributable to impaired loans and leases

$ 312 $ 1,002 $ 1,104

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 $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 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 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;

however, the measurement of impairment on loans and leases may not always result in a specific reserve included in the allowance for loan and lease losses.

Individually evaluated loans and leases with no specific reserves required $ 1,037 $ 4,082 $ 1,067

Individually evaluated loans and leases with specific reserves required 2,375 1,536 2,592

Total individually evaluated loans and leases 3,412 5,618 3,659

Specific reserves (included in allowance for credit losses) 1,622 1,225 1,650

Net non-performing loans and leases $ 1,790 $ 4,393 $ 2,009

Average non-performing loans and leases $ 3,536 $ 6,195 $ 4,899

Foregone interest income attributable to non-performing loans and leases $ 78 $ 105 $ 400

Interest income recognized on non-performing loans and leases 40 28 1,436

Net foregone interest income on non-performing loans and leases $ 38 $ 77 $ (1,036)

Allowance for Credit Losses

The allowance for credit losses, including unfunded commitment reserves, increased $3.3 million, or 13.70%, to $27.6 million as of March 31, 2023 from $24.2 million as of December 31, 2022.

The allowance for credit losses as a percentage of gross loans and leases improved to 1.08% as of March 31, 2023 from 0.99% as of December 31, 2022.

The increase in allowance for credit losses as a percent of gross loans and leases was principally due to recognition of reserves on unfunded credit commitments under a new accounting principal (ASC 326) and forecasted deterioration of economic conditions used in the estimate.

Subjective factors were updated for the changes to portfolio segment under the new standard.

See Note 1 — Nature of Operations and Summary of Significant Accounting Policies for additional details on the adoption of ASC 326 and management’s estimation model.

During the three months ended March 31, 2023, we recorded net charge-offs on individually evaluated loans and leases of $59,000, comprised of $166,000 of charge-offs and $107,000 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.

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

As of March 31, 2023 and December 31, 2022, our ratio of allowance for credit losses to total non-performing loans and leases was 807.44% and 662.20%, respectively.

This ratio increased primarily due to increase in reserve estimate for collectively evaluated loans and the continuation of a low level of non-performing loans and leases.

As discussed above, the adoption of ASC 326 includes the use of a reasonable and supportable forecast.

The model utilized captures the increased likelihood of a recession which adds to reserves in advance of the observance of specific negative credit indicators in the loan portfolio.

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

however, the evaluation of non-performing loans and leases may not always result in a specific reserve included in the allowance for credit losses.

As part of the underwriting process, as well as our ongoing monitoring efforts, we try to ensure that we have sufficient collateral to protect our interest in the related loan or lease.

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Management is proactive in recording charge-offs to bring loans to their net realizable value in situations where it is determined with certainty that we will not recover the entire amount of our principal.

This practice may lead to a lower allowance for loan and lease loss to non-accrual loans and leases ratio as compared to our peers or industry expectations.

As asset quality strengthens, our allowance for loan and lease losses is measured more through general characteristics, including historical loss experience, of our portfolio rather than through specific identification and we would therefore expect this ratio to rise.

This practice may lead to a lower allowance for credit loss to non-performing loans and leases ratio as compared to our peers or industry expectations.

As asset quality strengthens, our allowance for credit losses is measured more through collective characteristics of our portfolio rather than through specific identification and we would therefore expect this ratio to rise.

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 September 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.

First, we evaluate loans and leases for potential impairment classification.

We analyze each loan and lease identified as impaired on an individual basis to determine a specific reserve based upon the estimated value of the underlying collateral for collateral-dependent loans, or alternatively, the present value of expected cash flows.

For each segment of loans and leases that has not been individually evaluated, management segregates the Bank’s loss factors into a quantitative general reserve component based on historical loss rates throughout the defined look back period.

The quantitative general reserve component also considers an estimate of the historical loss emergence period, which is the period of time between the event that triggers the loss to the charge-off of that loss.

The methodology also focuses on evaluation of several qualitative factors for each portfolio category, including but not limited to:

management’s ongoing review and grading of the loan and lease portfolios, consideration of delinquency experience, changes in the size of the loan and lease portfolios, existing economic conditions, level of loans and leases subject to more frequent review by management, changes in underlying collateral, concentrations of loans to specific industries, and other qualitative factors that could affect credit losses.

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 September 30, 2022 are collateral dependent.

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

First, we evaluate loans and leases for non-performing classification.

We analyze each loan and lease identified as non-performing on an individual basis to determine a specific reserve based upon the estimated value of the underlying collateral for collateral-dependent loans, or alternatively, the present value of expected cash flows.

All loans not evaluated individually are evaluated collectively as part of a portfolio segment or portfolio segment and class.

These collective evaluations utilized a reasonable and supportable forecast which includes projections of credit losses based on one of two established methods:

discounted cash flow or weighted average remaining maturity.

Each model includes a set of assumptions which are evaluated not less than annually by management.

Further, the methodology also focuses on evaluation of several qualitative factors for each portfolio segment or portfolio segment and class, including but not limited to:

product growth rates, management’s ongoing review and grading of the loan and lease portfolios, consideration of delinquency experience, changes in the size of the loan and lease portfolios, level of loans and leases subject to more frequent review by management, changes in underlying collateral, concentrations in specific industries, and other qualitative factors that could affect credit losses.

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 credit loss reserve to bring the loan or lease to its net realizable value.

Many of the impaired loans as of March 31, 2023 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 1.04% 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.

In addition, various federal and state regulatory agencies review the allowance for loan and lease losses.

As a result of our review process, we have concluded an appropriate allowance for credit losses for the existing loan and lease portfolio was $27.6 million, or 1.08% of gross loans and leases, at March 31, 2023.

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

In addition, various federal and state regulatory agencies review the allowance for credit losses.

These agencies could require certain loan and lease balances to be classified differently or charged off when their credit evaluations differ from those of management, based on their judgments about information available to them at the time of their examination.

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

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

2022 2021 2022 2021

A summary of the activity in the allowance for credit losses follows:

As of and for the Three Months Ended March 31,

(Dollars in Thousands)

Allowance at beginning of period $ 24,230 $ 24,336

Impact of adoption of ASC 326 1,818 —

Commercial real estate:

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Commercial real estate — non-owner occupied

Construction and land development — — — —

Construction — —

Multi-family — —

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Commercial and industrial (166) (22)

Direct financing leases — — — —

Consumer and other:

Home equity and second mortgages — — — —

Other (21) (1) (21) (25)

Consumer and other loans — —

Total charge-offs (166) (22)

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Commercial real estate — non-owner occupied

— 1,431 1 1,431

Construction and land development — — — 2,078

Construction — —

Multi-family — —

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Commercial and industrial 95 84

Direct financing leases — — — —

Consumer and other:

Home equity and second mortgages — — — 1

Other 8 5 27 6

Consumer and other loans 11 10

Total recoveries 107 210

Net recoveries (59) 188

Provision for loan and lease losses 12 (2,269) (4,569) (5,295)

Provision for credit losses 1,561 (855)

Allowance at end of period $ 27,550 $ 23,669

Allowance for loan losses $ 26,140 $ 23,669

Allowance for unfunded credit commitments 1,410 —

Total ACL $ 27,550 $ 23,669

Annualized net recoveries as a percent of average gross loans and leases 0.01 % (0.03) %

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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 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 principal liquidity requirements at March 31, 2023 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 March 31, 2023, 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.

The Bank maintains liquidity by obtaining funds from several sources.

The Bank’s primary source of funds are principal and interest payments on loans receivable and mortgage-related securities, deposits, and other borrowings, such as federal funds, and FHLB advances.

The Bank’s primary sources of funds are principal and interest payments on loans receivable and mortgage-related securities, deposits, and other borrowings, such as federal funds, and FHLB advances.

The scheduled payments of loans and mortgage-related securities are generally a predictable source of funds.

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

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

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.

As described in the Response to Banking Liquidity Events section above, our readily accessible liquidity increased quarter over quarter.

At March 31, 2023 and December 31, 2022, the Bank had $158.9 million and $76.5 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 $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.

We had $729.6 million of outstanding wholesale funds at March 31, 2023, compared to $618.6 million of wholesale funds as of December 31, 2022, which represented 26.2% and 23.9%, 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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In addition, the administrative costs associated with wholesale funds are considerably lower than those that would be incurred to administer a similar level of local deposits with a similar maturity structure.

Wholesale funds are also stable as each issuance has a structured maturity date and may only be redeemed in certain limited circumstances.

During the time frames necessary to accumulate wholesale funds in an orderly manner, we will use short-term FHLB advances to meet our temporary funding needs.

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 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.

As described in the Response to Banking Liquidity Events section above, period-end in-market deposits increased as of March 31, 2023, compared to December 31, 2022.

The decline in transaction and money market 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 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.

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

The Bank was in compliance with its policy limits as of March 31, 2023.

The Bank was able to access the wholesale funding market as needed at rates and terms comparable to market standards during the quarter ended March 31, 2023.

of maturities could be funded through readily accessible 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 March 31, 2023, 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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The Corporation has filed a shelf registration with the Securities and Exchange Commission that would allow the Corporation to offer and sell, from time to time and in one or more offerings, up to $75.0 million in aggregate initial offering price of common and preferred stock, debt securities, warrants, subscription rights, units, or depository shares, or any combination thereof.

The Bank is required by federal regulation to maintain sufficient liquidity to ensure safe and sound operations.

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 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.

During the three months ended March 31, 2023, operating activities resulted in a net cash inflow of $9.9 million, which included net income of $9.0 million.

Net cash used by investing activities for the three months ended March 31, 2023 was $116.3 million primarily due to net loan disbursements, investments made in securities available for sale, and additional investments in federal home loan bank stock and federal reserve bank stock.

Net cash provided by financing activities was $189.7 million for the three months ended March 31, 2023 primarily due to a net increase in deposits, partially offset by the repayment of FHLB advances.

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 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.

As of March 31, 2023, 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, 2022.

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

Quantitative and Qualitative Disclosures about Market Risk

Not applicable.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis