What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-08-09 compared with 2021-05-10 · 301 added, 154 removed, 438 unchanged (51% of the section changed)

21 unchanged sentences

Our public finance team provides a range of public and municipal lending and leasing products to government entities on a nationwide basis.

Our healthcare finance team was established in conjunction with our strategic partnership with Provide, Inc.

(formerly known as Lendeavor, Inc.), a San Francisco-based technology-enabled lender to healthcare practices, and provides lending on a nationwide basis for healthcare practice finance or acquisition, acquisition or refinancing of owner-occupied CRE and equipment purchases.

Our healthcare finance team was originally established in conjunction with our strategic partnership with Provide, Inc.

(formerly known as Lendeavor, Inc.), a San Francisco-based technology-enabled lender to healthcare practices, which provided lending on a nationwide basis for healthcare practice finance or acquisition, acquisition or refinancing of owner-occupied CRE and equipment purchases.

During the second quarter 2021, Provide announced that it had entered into an agreement to be acquired by a super-regional financial institution, which is expected to close in the third quarter 2021.

Subsequent to closing, we expect that the acquiring institution will retain most, if not all, of Provide’s loan origination activity and that our healthcare finance loan balances may to decline.

Our commercial deposits and treasury management team works with the other commercial teams to provide deposit products and treasury management services to our commercial and municipal lending customers as well as pursues commercial deposit opportunities in business segments where we have no credit relationships.

4 unchanged sentences

As this business scales up, we expect it will drive increased earnings and profitability in future periods.

In connection with our commitment to small businesses, during the second quarter 2021 we entered into a relationship with a fintech-oriented specialty lender that provides financing to franchisees in various industry segments.

Through this relationship, we expect to begin funding portfolio loans in the third quarter 2021 and expect to fund up to $100.0 million of loans over the next twelve months.

We also expect this relationship to provide SBA 7(a) loan opportunities to supplement our own origination efforts.

COVID-19 Pandemic

2 unchanged sentences

Most of our employees who worked remotely during the earlier stages of the pandemic have returned to the office.

We have implemented social distancing policies, require our employees to wear masks while at work and increased cleaning frequency and protocols at all Company locations.

Management continues to assess the evolving health and safety situations at local and regional levels.

2 unchanged sentences

Additionally, the low interest rate environment has driven residential mortgage rates to historically low levels, which continued to benefit our mortgage business.

In 2021, federal, state and local governments have continued to take additional steps to reopen and stimulate economies.

We are optimistic that the nationwide rollout of vaccinations coupled with elevated government spending will help mitigate any significant negative effects from the pandemic on our business and credit quality.

However, should economic conditions worsen to levels experienced in 2020, our business and credit quality could be adversely affected.

During 2021, federal, state and local governments have continued to take additional steps to reopen and stimulate economies.

We are optimistic that the combination of vaccinations and government stimulus programs will help mitigate any significant negative effects from the pandemic on our business and credit quality;

however, there is still significant uncertainty concerning the ongoing trajectory of the pandemic and the speed at which the national and local economies will recover.

extent to which COVID-19 will continue to impact our business will depend on numerous evolving factors and future developments that we are not able to predict, including the new Delta variant of COVID-19 (which appears to be the most transmissible variant to date), the effectiveness of continuing containment measures, including the speed of the ongoing vaccine distribution effort, the efficacy of the various vaccines, and how quickly and to what extent normal economic and operating conditions can resume.

Should economic conditions worsen to levels experienced in 2020, our business and credit quality could be adversely affected.

Results of Operations

During the first quarter 2021, net income was $10.5 million, or $1.05 per diluted share, compared to the first quarter 2020 net income of $6.0 million, or $0.62 per diluted share, representing an increase in net income of $4.4 million, or 73.6%.

The $4.4 million increase in net income in the first quarter 2021 compared to the first quarter 2020 was due primarily to an increase of $5.5 million, or 36.7%, in net interest income, an increase of $2.2 million, or 34.8%, in noninterest income and a $0.2 million, or 12.7%, decrease in provision for loan losses, partially offset by a $1.8 million, or 13.6%, increase in noninterest expense and an increase of $1.6 million, or 606.1%, in income tax expense.

During the first quarter 2021, return on average assets and return on average shareholders’ equity were 1.02% and 12.61%, respectively, compared to 0.59% and 7.78%, respectively, for the first quarter 2020.

Additionally, for the three months ended March 31, 2021, return on average tangible common equity was 12.79% compared to 7.90% for the three months ended March 31, 2020.

These profitability ratios improved during 2021 as net income growth of 73.6% outpaced total average balance sheet growth of 1.8%, as well as average shareholders’ equity growth of 8.0% and average tangible common equity growth of 8.1%.

During the second quarter 2021, net income was $13.1 million, or $1.31 per diluted share, compared to the second quarter 2020 net income of $3.9 million, or $0.40 per diluted share, representing an increase in net income of $9.2 million, or 233.1%.

During the six months ended June 30, 2021, net income was $23.5 million, or $2.36 per diluted share, compared to the six months ended June 30, 2020 net income of $10.0 million, or $1.02 per diluted share, representing an increase in net income of $13.6 million, or 136.6%.

The $9.2 million increase in net income for the second quarter 2021 compared to the second quarter 2020 was due primarily to an increase of $7.2 million, or 49.8%, in net interest income, an increase of $4.0 million, or 80.2%, in noninterest income and a decrease of $2.5 million, or 99.2%, in provision for loan losses, partially offset by increases of $2.6 million in income tax expense and $1.8 million, or 13.8%, in noninterest expense.

The $13.6 million increase in net income for the six months ended June 30, 2021 compared to the six months ended June 30, 2020 was due primarily to an increase of $12.7 million, or 43.1%, in net interest income, an increase of $6.2 million, or 55.0%, in noninterest income and a decrease of $2.7 million, or 67.2%, in provision for loan losses, partially offset by a $4.2 million increase in income tax expense and a $3.7 million, or 13.7%, increase in noninterest expense.

During the second quarter 2021, return on average assets (“ROAA”), return on average shareholders’ equity (“ROAE”), and return on average tangible common equity (“ROATCE”) were 1.25%, 14.88%, and 15.09%, respectively, compared to 0.37%, 5.15%, and 5.23%, respectively, for the second quarter 2020.

During the six months ended June 30, 2021, ROAA, ROAE, and ROATCE were 1.13%, 13.78%, and 13.97%, respectively, compared to 0.47%, 6.48%, and 6.58%, respectively, for the six months ended June 30, 2020.

During the second quarter of 2021, the Company recognized a $2.5 million pre-tax gain of sale of its corporate headquarters.

Excluding this item, adjusted net income for the second quarter of 2021 was $11.1 million, or $1.11 per diluted share, and adjusted net income for the six months ended June 30, 2021 was $21.6 million, or $2.16 per diluted share.

Additionally, for the second quarter of 2021, adjusted ROAA, adjusted ROAE and adjusted ROATCE were 1.06%, 12.62% and 12.79, respectively, while for the six months ended June 30, 2021 adjusted ROAA, adjusted ROAE and adjusted ROATCE were 1.04%, 12.62% and 12.79, respectively.

These profitability ratios improved in the 2021 periods compared to the 2020 periods, as increases in net income and adjusted net income outpaced asset growth, which was relatively flat.

Refer to the “Reconciliation of Non-GAAP Financial Measures” section of Part I, Item 2 of this report, Management’s Discussion and Analysis of Financial Condition and Results of Operations for additional information.

5 unchanged sentences

(dollars in thousands) Three Months Ended

March 31, 2021 December 31, 2020 March 31, 2020

June 30, 2021 March 31, 2021 June 30, 2020

Average Balance Interest /Dividends Yield /Cost Average Balance Interest /Dividends Yield /Cost Average Balance Interest /Dividends Yield /Cost

37 unchanged sentences

See “Reconciliation of Non-GAAP Financial Measures” for a reconciliation of this measure to its most directly comparable GAAP measure.

(dollars in thousands) Six Months Ended

June 30, 2021 June 30, 2020

Average Balance Interest /Dividends Yield /Cost Average Balance Interest /Dividends Yield /Cost

Interest-earning assets

Loans, including loans held-for-sale $ 3,047,560 $ 61,720 4.08 % $ 2,983,883 $ 60,138 4.05 %

Securities - taxable 476,049 3,700 1.57 % 545,997 6,895 2.54 %

Securities - non-taxable 85,581 540 1.27 % 98,254 1,029 2.11 %

Other earning assets 478,065 697 0.29 % 505,111 2,404 0.96 %

Total interest-earning assets 4,087,255 66,657 3.29 % 4,133,245 70,466 3.43 %

Allowance for loan losses (30,117) (22,724)

Noninterest-earning assets 133,074 104,532

Total assets $ 4,190,212 $ 4,215,053

Interest-bearing liabilities

Interest-bearing demand deposits $ 186,795 $ 276 0.30 % $ 130,206 $ 456 0.70 %

Regular savings accounts 50,950 89 0.35 % 33,774 170 1.01 %

Money market accounts 1,393,145 2,853 0.41 % 977,834 7,284 1.50 %

Certificates and brokered deposits 1,481,667 13,115 1.78 % 2,038,068 25,061 2.47 %

Total interest-bearing deposits 3,112,557 16,333 1.06 % 3,179,882 32,971 2.09 %

Other borrowed funds 584,268 8,192 2.83 % 584,504 8,051 2.77 %

Total interest-bearing liabilities 3,696,825 24,525 1.34 % 3,764,386 41,022 2.19 %

Noninterest-bearing deposits 94,506 67,107

Other noninterest-bearing liabilities 54,403 74,623

Total liabilities 3,845,734 3,906,116

Shareholders’ equity 344,478 308,937

Total liabilities and shareholders’ equity $ 4,190,212 $ 4,215,053

Net interest income $ 42,132 $ 29,444

Interest rate spread 1

1.95 % 1.24 %

Net interest margin 2

2.08 % 1.43 %

Net interest margin - FTE 3

2.21 % 1.58 %

1 Yield on total interest-earning assets minus cost of total interest-bearing liabilities.

2 Net interest income divided by total average interest-earning assets (annualized).

3 On an FTE basis assuming a 21% tax rate.

Net interest income is adjusted to reflect income from assets such as municipal loans and securities that are exempt from Federal income taxes.

This is to recognize the income tax savings that facilitates a comparison between taxable and tax-exempt assets.

The Company believes that it is a standard practice in the banking industry to present net interest margin and net interest income on a fully-taxable equivalent basis, as these measures provide useful information to make peer comparisons.

Net interest margin - FTE represents a non-GAAP financial measure.

See “Reconciliation of Non-GAAP Financial Measures” for a reconciliation of this measure to its most directly comparable GAAP measure.

Rate/Volume Analysis

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The change in interest not due solely to volume or rate has been allocated in proportion to the absolute dollar amounts of the change in each.

(dollars in thousands) Three Months Ended March 31, 2021 vs.

December 31, 2020 Due to Changes in Three Months Ended March 31, 2021 vs.

March 31, 2020 Due to Changes in

Volume Rate Net Volume Rate Net

(dollars in thousands) Three Months Ended June 30, 2021 vs.

March 31, 2021 Due to Changes in Three Months Ended June 30, 2021 vs.

June 30, 2020 Due to Changes in Six Months Ended June 30, 2021 vs.

June 30, 2020 Due to Changes in

Volume Rate Net Volume Rate Net Volume Rate Net

Interest income

9 unchanged sentences

(Decrease) increase in net interest income $ (1,166) $ 2,248 $ 1,082 $ 506 $ 6,675 $ 7,181 $ 825 $ 11,863 $ 12,688

Net interest income for the first quarter 2021 was $20.5 million, an increase of $5.5 million, or 36.7%, compared to $15.0 million for the first quarter 2020.

The increase in net interest income was the result of an $8.5 million, or 39.9%, decrease in total interest expense to $12.8 million for the first quarter 2021 from $21.2 million for the first quarter 2020.

The decrease in total interest expense was partially offset by a $3.0 million, or 8.2%, decrease in total interest income to $33.3 million for the first quarter 2021 from $36.2 million for the first quarter 2020.

The decrease in total interest income for the first quarter 2021 compared to the first quarter 2020 was due to decreases in interest earned on securities and other earning assets, but partially offset by an increase in interest earned on loans.

Net interest income for the second quarter 2021 was $21.6 million, an increase of $7.2 million, or 49.8%, compared to $14.4 million for the second quarter 2020.

The increase in net interest income was the result of an $8.0 million, or 40.5%, decrease in total interest expense to $11.8 million for the second quarter 2021 from $19.8 million for the second quarter 2020.

The decrease in total interest expense was partially offset by a $0.8 million, or 2.5%, decrease in total interest income to $33.4 million for the second quarter 2021 from $34.2 million for the second quarter 2020.

Net interest income for the six months ended June 30, 2021 was $42.1 million, an increase of $12.7 million, or 43.1%, compared to $29.4 million for the six months ended June 30, 2020.

The increase in net interest income was the result of a $16.5 million, or 40.2%, decrease in total interest expense to $24.5 million for the six months ended June 30, 2021 from $41.0 million for the six months ended June 30, 2020, partially offset by a $3.8 million, or 5.4%, decrease in total interest income to $66.7 million for the six months ended June 30, 2021 from $70.5 million for the six months ended June 30, 2020.

The decrease in total interest income for the second quarter 2021 compared to the second quarter 2020 was due to decreases in interest earned on securities and other earning assets, partially offset by an increase in interest earned on loans.

Interest income earned on securities decreased $1.6 million, or 41.6%, due to a decline of 76 basis points (“bps”) in the yield earned on securities, as well as a decrease of $82.9 million, or 12.6%, in the average balance of securities.

The decrease in the average balance of securities was driven primarily by prepayments and maturities in private label mortgage-backed securities and agency mortgage-backed securities and early redemptions and maturities in municipal securities.

Interest income earned on other earning assets declined $0.4 million, or 52.3%, due mainly to a 23 bp decline in the yield earned on these assets, as well as a decrease of $84.6 million, or 14.2%, in the average balance of other earning assets.

The decrease in the average balance of other earning assets was due primarily to lower cash balances.

Interest income earned on loans increased $1.1 million, or 3.7%, due primarily to an increase of 10 bps in the yield earned on average loan balances, as well as an increase of $26.6 million, or 0.9%, in average loan balances.

The increase in average loan balances was due primarily to growth in the healthcare finance, construction and small business lending portfolios, which included loans originated through the Paycheck Protection Program (“PPP”), partially offset by a decrease in the average balance of residential mortgage, single tenant lease financing, public finance and commercial, and industrial loan balances.

The decrease in total interest income for the six months ended June 30, 2021 compared to the six months ended June 30, 2020 was due primarily to a decrease of $82.6 million, or 12.8%, in the average balance of securities and the yield earned on the securities portfolio decreased 95 bps for the six months ended June 30, 2021 compared to the six months ended June 30, 2020.

Interest income earned on other earning assets declined $1.3 million, or 79.6%, due mainly to a 129 bp decline in the yield earned on these assets, partially offset by an increase of $30.1 million, or 7.2%, in the average balance of other earning assets.

The increase in the average balance of other earning assets was due primarily to higher cash balances driven by growth in the average balance of deposits.

Interest income earned on loans increased $0.5 million, or 1.6%, due primarily to an increase of $101.1 million, or 3.4%, in average loan balances, partially offset by a decline of 4 bps in the yield earned on average loan balances.

The increase in average loan balances was due primarily to growth in the healthcare finance, construction and small business lending portfolios, which included loans originated through the Paycheck Protection Program (“PPP”), but partially offset by a decrease in the average balance of single tenant lease financing, public finance and commercial, and industrial loan balances.

Overall, the yield on interest-earning assets for the first quarter 2021 declined 31 bps to 3.31% from 3.62% for the first quarter 2020.

The decline in the yield earned on interest-earning assets was due to the continued decrease in market interest rates from the year-ago period.

The average balance in other earning assets also decreased $27.0 million, or 5.4%, due primarily to lower cash balances.

These decreases were partially offset by an increase of $63.7 million, or 2.1%, in the average balance of loans, as well as an increase of 3 bps in the yield on loans.

Overall, the yield on interest-earning assets for the second quarter 2021 increased 2 bps to 3.26% from 3.24% for the second quarter 2020.

The yield on interest-earning assets for the six months ended June 30, 2021 declined 14 bps to 3.29% from 3.43% for the six months ended June 30, 2020.

The increase in the yield earned on interest-earning assets for the second quarter 2021 compared to the second quarter 2020 was due to a 10 bp increase in the yield earned on loans, partially offset by decreases of 76 bps in the yield earned on securities and 23 bps in other earning assets.

The decrease in the yield earned on interest-earning assets for the six months ended June 30, 2021 compared to the six months ended June 30, 2020 was due to decreases of 95 bps in the yield earned on securities and 67 bps in other earning assets, partially offset by a 3 bp increase in the yield earned on loans.

Interest rates began declining in 2020 following Federal Reserve interest rate cuts in March 2020 in response to the economic effects of COVID-19.

The decline in interest rates negatively impacted the yields earned on variable rate loans, new loan originations, and securities and cash balances throughout the first quarter 2021.

The decrease in total interest expense for the first quarter 2021 compared to the first quarter 2020 was due primarily to a decrease in interest expense related to certificates and brokered deposits and money market accounts.

The decline in market interest rates negatively impacted the yields earned on securities and cash balances during both the quarter and the six months ended June 30, 2021, in comparison to the same time periods in 2020.

The decrease in total interest expense for the second quarter 2021 compared to the second quarter 2020 was due to a decrease in interest expense related to interest-bearing deposits.

Interest expense on certificates and brokered deposits decreased $5.8 million, or 49.1%, due to a decline of 70 bps in the cost of these deposits, as well as a $562.8 million, or 28.0%, decrease in the average balance of these deposits.

The decrease in certificates and brokered

deposit balances was driven by the Company’s pricing strategy to reduce the level of these higher cost deposits.

The decrease in certificates and brokered deposit balances was driven by the Company’s pricing strategy to reduce the level of these higher cost deposits.

The decrease in interest expense related to money market accounts of $2.1 million, or 58.7%, was driven by a decline of 90 bps in the cost of these deposits, partially offset by an increase of $327.3 million, or 30.1%, in the average balance of these deposits.

Average money market balances increased from the year ago period due primarily to targeted digital marketing efforts to grow small business accounts, as well as consumers, small businesses and commercial clients increasing their cash balances due in part to the economic uncertainty resulting from COVID-19.

Overall, the cost of total interest-bearing liabilities for the first quarter 2021 declined 92 bps to 1.40% from 2.32% for the first quarter 2020.

Similar to asset yields, the declines in the cost of funds were due to the continued decrease in market interest rates from the year-ago period.

Average money market balances increased from the prior year period due primarily to targeted digital marketing efforts to grow small business accounts, as well as consumers, small businesses and commercial clients increasing their cash balances due in part to the economic uncertainty resulting from COVID-19.

The decrease in interest expense related to interest-bearing demand deposits and savings accounts was due primarily to decreases of 39 bps and 64 bps, respectively, partially offset by increases of $55.3 million, or 40.2%, and $18.6 million, or 50.0%, respectively, in the average balance of these deposits.

The decrease in total interest expense for the six months ended June 30, 2021 compared to the six months ended June 30, 2020, was driven primarily by a 103 bp decline in the cost of funds related to interest-bearing deposits and a decrease of $67.3 million, or 2.1%, in the average balance of interest-bearing deposits.

The decrease in the cost of interest-bearing deposits was due primarily to a $556.4 million, or 27.3%, decrease in average certificates and brokered deposits balances and a 69 bp decrease in the related cost of these deposits.

The decrease in interest expense related to money market accounts of $4.4 million, or 60.8%, was driven by a decline of 109 bps in the cost of these deposits, partially offset by an increase of $415.3 million, or 42.5%, in the average balance of these deposits.

Overall, the cost of total interest-bearing liabilities for the second quarter 2021 declined 79 bps to 1.28% from 2.07% for the second quarter 2020.

Additionally, the cost of total interest-bearing liabilities for the six months ended June 30, 2021 declined 85 bps to 1.34% from 2.19% for the six months ended June 30, 2020.

Similar to asset yields, declines in the cost of funds were due to the continued decrease in market interest rates from the prior year periods.

The sharp declines in both short- and long-term interest rates due to COVID-19 have allowed the Company to reprice all of its deposit products at lower rates.

Furthermore, a shift in the deposit composition from higher cost certificates and brokered deposits to lower cost money market accounts also contributed to the decline in the cost of deposit funding.

Net interest margin (“NIM”) was 2.04% for the first quarter 2021 compared to 1.50% for the first quarter 2020.

On a fully-taxable equivalent basis, NIM was 2.18% for the first quarter 2021 compared to 1.65% for the first quarter 2020.

The increase in net interest margin was due primarily to the 92 bp decrease in the cost of interest-bearing liabilities, but was partially offset by the 31 bp decrease in the yield on interest-earning assets.

The decline in the cost of interest-bearing liabilities and yield earned on interest-earning assets was due primarily to the continued decrease in market interest rates from the year-ago period.

Furthermore, a shift in the deposit composition from higher cost certificates and brokered deposits to lower cost non-maturity deposit accounts also contributed to the decline in the cost of deposit funding.

Net interest margin (“NIM”) was 2.11% for the second quarter 2021 compared to 1.37% for the second quarter 2020;

an increase of 74 bps.

On a fully-taxable equivalent (“FTE”) basis, NIM was 2.25% for the second quarter 2021 compared to 1.50% for the second quarter 2020;

an increase of 75 bps.

NIM was 2.08% for the six months ended June 30, 2021 compared to 1.43% for the six months ended June 30, 2020;

an increase of 65 bps.

FTE NIM was 2.21% for the six months ended June 30, 2021 compared to 1.58% for the six months ended June 30, 2020;

an increase of 63 bps.

The increase in second quarter 2021 NIM and FTE NIM compared to the second quarter 2020 reflects a decrease in the cost of funds while asset yields were up modestly.

The reductions in the cost of interest-bearing liabilities was due primarily to the continued decrease in market interest rates from the prior year period.

Interest rates declined significantly in 2020 following Federal Reserve interest rate cuts in March 2020 in response to the economic effects of COVID-19.

During this time, variable rate assets tied to market interest rates repriced faster than deposits.

However, as the pace of short-term market interest rate declines slowed over the course of 2020 and into 2021, the Company believes that yields on interest-earning assets have largely stabilized.

The increase in year-to-date June 2021 NIM and FTE NIM compared to year-to-date June 2020 reflects a decrease in the cost of funds, partially offset by a moderate decrease in interest-earning asset yields.

The decline in the cost of interest-bearing liabilities and the yield on interest-earning assets was due primarily to the continued decrease in market interest rates from the prior year period.

As the pace of the decline in short-term market interest rates has slowed, the Company believes that yields on interest-earning assets have largely stabilized.

Furthermore, the Company has approximately $779.0 million of certificates and brokered deposits with a weighted average cost of 1.35% that mature over the next twelve months.

As the weighted average of cost of these deposits is significantly higher than current new production costs, the Company expects the cost of deposit funding to continue to decline in 2021.

As the weighted average of cost of these deposits is significantly higher than current new production costs, the Company expects the cost of deposit funding to continue to decline during the second half of 2021.

Noninterest Income

The following table presents noninterest income for the last five completed fiscal quarters.

(in thousands) Three Months Ended

The following table presents noninterest income for the last five completed fiscal quarters and the six months ended June 30, 2021 and 2020.

(in thousands) Three Months Ended Six Months Ended

2021 March 31,

2021 December 31,

1 unchanged sentence

2020 June 30,

2020 March 31,

2020 June 30,

2021 June 30,

Service charges and fees $ 280 $ 266 $ 206 $ 224 $ 182 $ 546 $ 394

4 unchanged sentences

Gain on sale of securities — — — 98 — — 41

Gain on sale of premises and equipment 2,523 — — — — 2,523 —

Other 249 369 443 339 456 618 873

Total noninterest income $ 8,962 $ 8,375 $ 12,657 $ 12,495 $ 4,973 $ 17,337 $ 11,184

During the first quarter 2021, noninterest income was $8.4 million, representing an increase of $2.2 million, or 34.8%, compared to $6.2 million for the first quarter 2020.

The increase in noninterest income was due primarily to increases in revenue from mortgage banking activities and loan servicing revenue of $2.1 million and $0.2 million, respectively.

During the second quarter 2021, noninterest income was $9.0 million, representing an increase of $4.0 million, or 80.2%, compared to $5.0 million for the second quarter 2020.

The increase in noninterest income was due primarily to increases in revenue from gain on sale of premises and equipment and gain on sale of loans, partially offset by decreases in mortgage banking activities and other noninterest income.

The increase in gain on sale of premises and equipment was due to the Company completing the sale of its current headquarters.

The increase in gain on sale of loans was due an increase in the volume of U.S.

Small Business Administration 7(a) guaranteed loan sales and an increase in secondary market premiums during the second quarter 2021.

The decline in mortgage banking revenue in the second quarter of 2021 versus the second quarter of 2020 was due primarily to decreases in interest rate locks, sold loan volume and gain-on-sale margins.

The decrease in other noninterest income was due to various items, none of which were individually deemed significant.

During the six months ended June 30, 2021, noninterest income was $17.3 million, an increase of $6.2 million, or 55.0%, compared to $11.2 million for the six months ended June 30, 2020.

The increase in noninterest income was due primarily to increases in revenue from gain on sale of premises and equipment, gain on sale of loans, mortgage banking activities, and loan servicing revenue, which was partially offset by a decrease in other income.

The increase in gain on sale of premises and equipment was due to the Company completing the sale of its current headquarters.

The increase in gain on sale of loans was due to an increase in the volume of SBA 7(a) guaranteed loan sales and an increase in secondary market premiums during the six months ended June 30, 2021.

The increase in mortgage banking revenue was due mainly to higher gain-on-sale margins.

The increase in loan servicing revenue was due to an increase in the balance of the Company’s SBA 7(a) servicing portfolio.

The increase in loan servicing revenue was due to growth in the balance of the Company’s SBA 7(a) servicing

portfolio due to origination activity over the last twelve months.

The decrease in other noninterest income was due to various items, none of which were individually deemed significant.

Noninterest Expense

The following table presents noninterest expense for the last five completed fiscal quarters.

(in thousands) Three Months Ended

The following table presents noninterest expense for the last five completed fiscal quarters and the six months ended June 30, 2021 and 2020.

(in thousands) Three Months Ended Six Months Ended

2021 March 31,

2021 December 31,

1 unchanged sentence

2020 June 30,

2020 March 31,

2020 June 30,

2021 June 30,

Salaries and employee benefits $ 9,232 $ 9,492 $ 9,135 $ 9,533 $ 7,789 $ 18,724 $ 15,563

8 unchanged sentences

Total noninterest expense $ 15,075 $ 15,317 $ 14,513 $ 16,412 $ 13,244 $ 30,392 $ 26,730

Noninterest expense for the first quarter 2021 was $15.3 million, compared to $13.5 million for the first quarter 2020.

The increase of $1.8 million, or 13.6%, compared to the first quarter 2020 was due primarily to increases of $1.7 million in salaries and employee benefits and $0.3 million in marketing, advertising and promotion but partially offset by a $0.2 million decrease in consulting and professional fees.

The increase in salaries and employee benefits was due mainly to an increase in headcount, which includes the impact of personnel growth associated with the Company’s small business lending platform, as well as increased mortgage and small business lending incentive compensation.

The increase in marketing, advertising and promotion was due primarily to increased digital marketing initiatives related to deposits.

The decrease in consulting and professional services is primarily related to a decrease in routine legal costs.

Additionally, during the first quarter 2021, and reflected in other noninterest expense, the Company made a $0.3 million contribution to a foundation that supports not-for-profit organizations and community-based initiatives in Hamilton County, Indiana.

Income tax provision was $1.9 million for the first quarter 2021, resulting in an effective tax rate of 15.1%, compared to $0.3 million and an effective tax rate of 4.2% for the first quarter 2020.

The increase in income tax provision for the first quarter 2021 compared to the first quarter 2020 was due primarily to the increase in pre-tax earnings driven by increased net interest income, as well as a higher proportion of taxable revenue from mortgage banking.

Additionally, the lower income tax provision and effective tax rate during the year ago period was impacted by the passage of the CARES Act, which was signed into law on March 27, 2020, and provided the Company the ability to carryback certain federal net operating losses in the first quarter 2020.

Noninterest expense for the second quarter 2021 was $15.1 million, compared to $13.2 million for the second quarter 2020.

The increase of $1.8 million, or 13.8%, compared to the second quarter 2020 was due primarily to increases of $1.4 million in salaries and employee benefits and $0.5 million in marketing, advertising and promotion, partially offset by decreases of $0.2 million and $0.2 million in deposit insurance premium and other noninterest expense, respectively.

The increase in salaries and employee benefits was due mainly to an increase in headcount, which includes the impact of personnel growth associated with the Company’s small business lending platform, as well as increased small business lending incentive compensation for the second quarter 2021.

The increase in marketing, advertising and promotion was due primarily to higher mortgage lead generation costs and sponsorship initiatives.

The decrease in other expenses was due primarily to a $0.3 million charitable contribution the Company made in the second quarter 2020 to assist small businesses and nonprofits in addressing the economic challenges of the COVID-19 pandemic.

The decrease in deposit insurance premium is due primarily to a decrease in the balance of brokered deposits and a decrease in the overall size of the balance sheet, both of which positively impact the formula used to calculate deposit insurance expense.

Noninterest expense for the six months ended June 30, 2021 was $30.4 million, compared to $26.7 million for the six months ended June 30, 2020.

The increase of $3.7 million, or 13.7%, compared to the six months ended June 30, 2020 was due primarily to increases of $3.2 million in salaries and employee benefits and $0.8 million in marketing, advertising and promotion, partially offset by decreases of $0.2 million and $0.2 million in deposit insurance premium and other noninterest expense, respectively.

The increase in marketing, advertising and promotion was due primarily to higher mortgage lead generation costs and digital marketing initiatives.

The decrease in deposit insurance premium was due primarily to a decrease in the balance of brokered deposits and a decrease in the overall size of the balance sheet, both of which positively impact the formula used to calculate deposit insurance expense.

Income tax provision was $2.4 million for the second quarter 2021, resulting in an effective tax rate of 15.4%, compared to a tax benefit of $0.3 million for the second quarter 2020.

Income tax provision was $4.2 million for the six months ended June 30, 2021, resulting in an effective tax rate of 15.2%, compared to an income tax benefit of less than $0.1 million for the six months ended June 30, 2020.

The increase in income tax provision for both the three and six months ended June 30, 2021 compared to the three and six months ended June 30, 2020, was due primarily to the increase in pre-tax earnings driven by increased net interest income and noninterest income, partially offset by higher noninterest expenses.

Additionally, the lower income tax provision and effective tax rate during the six months ended June 30, 2020, was impacted by the passage of the

CARES Act, which was signed into law on March 27, 2020, and provided the Company the ability to carryback certain federal net operating losses.

Financial Condition

2 unchanged sentences

Balance Sheet Data:

2021 March 31,

2021 December 31,

1 unchanged sentence

2020 June 30,

2020 March 31,

Total assets $ 4,204,642 $ 4,188,570 $ 4,246,156 $ 4,333,624 $ 4,324,600

7 unchanged sentences

Total shareholders’ equity 358,641 344,566 330,944 318,102 307,711

Total assets decreased $57.6 million, or 1.4%, to $4.2 billion at March 31, 2021 compared to $4.2 billion at December 31, 2020.

This was driven by a $53.3 million, or 1.6%, decrease in deposit balances, which includes a $114.6 million, or 8.9% decrease in certificates of deposits and a $46.9 million, or 3.5%, increase in money market account balances.

As of March 31, 2021, total shareholders’ equity was $344.6 million, an increase of $13.6 million, or 4.1%, compared to December 31, 2020, due primarily to the net income earned during the period, as well as a decrease in accumulated other comprehensive loss.

Tangible common equity totaled $339.9 million as of March 31, 2021, representing an increase of $13.6 million, or 4.2%, compared to December 31, 2020.

As both total shareholders’ equity and tangible common equity increased, while both total assets and tangible assets decreased 1.4%, the ratio of total shareholders’ equity to total assets increased to 8.23% as of March 31, 2021 from 7.79% as of December 31, 2020 and the ratio of tangible common equity to tangible assets increased to 8.12% as of March 31, 2021 from 7.69% as of December 31, 2020.

Book value per common share increased 3.8% to $35.07 as of March 31, 2021 from $33.77 as of December 31, 2020.

Tangible book value per share increased 3.9% to $34.60 as of March 31, 2021 from $33.29 as of December 31, 2020.

Total assets decreased $41.5 million, or 1.0%, to $4.2 billion at June 30, 2021 compared to $4.2 billion at December 31, 2020.

This decrease was driven by a $64.7 million, or 2.0%, decrease in deposit balances, which includes a $202.0 million, or 15.7%, decrease in certificates of deposits and an $81.8 million, or 6.1%, increase in money market account balances.

As of June 30, 2021, total shareholders’ equity was $358.6 million, an increase of $27.7 million, or 8.4%, compared to December 31, 2020, due primarily to the net income earned during the period, as well as a decrease in accumulated other comprehensive loss.

Tangible common equity totaled $354.0 million as of June 30, 2021, representing an increase of $27.7 million, or 8.5%, compared to December 31, 2020.

As both total shareholders’ equity and tangible common equity increased, while both total assets and tangible assets decreased 1.0%, respectively, the ratio of total shareholders’ equity to total assets increased to 8.53% as of June 30, 2021 from 7.79% as of December 31, 2020, and the ratio of tangible common equity to tangible assets increased to 8.43% as of June 30, 2021 from 7.69% as of December 31, 2020.

Book value per common share increased 7.8% to $36.39 as of June 30, 2021 from $33.77 as of December 31, 2020.

Tangible book value per share increased 7.9% to $35.92 as of June 31, 2021 from $33.29 as of December 31, 2020.

The growth in both book value per common share and tangible book value per share reflects the growth in total shareholders’ equity and tangible common equity while total common shares outstanding increased slightly from December 31, 2020.

2 unchanged sentences

The following table presents a summary of the Company’s loan portfolio for the last five completed fiscal quarters.

(dollars in thousands) March 31,

(dollars in thousands) June 30,

2021 March 31,

2021 December 31,

1 unchanged sentence

2020 June 30,

2020 March 31,

Commercial loans

18 unchanged sentences

Net loans $ 2,929,542 $ 3,028,052 $ 3,029,747 $ 2,985,997 $ 2,949,209

(1) Includes carrying value adjustments of $41.6 million, $42.7 million, $44.3 million and $46.0 million related to terminated interest rate swaps associated with public finance loans as of March 31, 2021, December 31, 2020, September 30, 2020 and June 30, 2020, respectively, and $44.6 million related to interest rate swaps associated with public finance loans as of March 31, 2020.

Total loans were $3.1 billion as of March 31, 2021, relatively consistent with December 31, 2020.

Total commercial loan balances were $2.5 billion as of March 31, 2021, up $4.1 million, or 0.2%, from December 31, 2020.

Compared to December 31, 2020, the growth in commercial loan balances was driven largely by production in public finance, construction and small business lending, but was partially offset by a decrease in healthcare finance and single tenant lease financing balances due to elevated prepayment activity.

Total consumer loan balances were $478.3 million as of March 31, 2021, a decrease of $4.0 million, or 0.8%, compared to December 31, 2020.

The slight decline in consumer loan balances from December 31, 2020 was due primarily to increased prepayment activity across the recreational vehicle and trailer portfolios.

(1) Includes carrying value adjustments of $40.4 million, $41.6 million, $42.7 million, $44.3 million and $46.0 million related to terminated interest rate swaps associated with public finance loans as of June 30, 2021, March 31, 2021, December 31, 2020, September 30, 2020 and June 30, 2020, respectively.

Total loans were $3.0 billion as of June 30, 2021, a decrease of $101.6 million, or 3.3%, compared to December 31, 2020.

Total commercial loan balances were $2.4 billion as of June 30, 2021, down $81.0 million, or 3.2%, from December 31, 2020.

Compared to December 31, 2020, the decline in commercial loan balances was driven largely by net payoffs in healthcare finance, single tenant lease financing and public finance loans, which were partially offset by increases in commercial and industrial, construction and investor commercial real estate loan balances.

The net payoffs in the healthcare finance portfolio were driven primarily by elevated prepayment activity combined with a lower level of new originations, as heightened competition and the low interest rate environment has driven loan pricing to unattractively low levels.

Going forward, we expect the balance of healthcare finance loans may decline as a result of Provide’s acquisition by a super-regional financial institution, as well as potential prepayment activity.

Total consumer loan balances were $466.5 million as of June 30, 2021, a decrease of $15.9 million, or 3.3%, compared to December 31, 2020.

The decline in consumer loan balances from December 31, 2020 was due primarily to increased prepayment activity across the consumer portfolio.

Asset Quality

2 unchanged sentences

The following table provides a summary of the Company’s nonperforming assets for the last five completed fiscal quarters.

(dollars in thousands) March 31,

(dollars in thousands) June 30,

2021 March 31,

2021 December 31,

1 unchanged sentence

2020 June 30,

2020 March 31,

Nonaccrual loans

4 unchanged sentences

Small business lending (1)

1,209 865 — — —

Total commercial loans 7,761 13,213 8,954 8,655 7,045

9 unchanged sentences

Total commercial loans — 278 — — —

Consumer loans:

Residential mortgage — — — — 51

Other consumer — — — — 1

Total consumer loans — — — — 52

Total past due 90 days and accruing loans — 278 — — —

2 unchanged sentences

Investor commercial real estate 1,188 — — — 2,065

Residential mortgage 112 — — — —

Total other real estate owned 1,300 — — — 2,065

10 unchanged sentences

310.5 % 209.2 % 289.5 % 275.4 % 298.5 %

1 Entire balance is guaranteed by the U.S.

1 Balance represents U.S.

government guaranteed loans.

2 Includes the impact of nonperforming small business lending loans, which are guaranteed by the U.S.

3 unchanged sentences

The following table provides a summary of troubled debt restructurings for the last five completed fiscal quarters.

(in thousands) March 31,

(in thousands) June 30,

2021 March 31,

2021 December 31,

1 unchanged sentence

2020 June 30,

2020 March 31,

Troubled debt restructurings – nonaccrual $ 2,581 $ 2,606 $ 2,637 $ 811 $ 854

1 unchanged sentence

Total troubled debt restructurings $ 3,760 $ 3,793 $ 3,004 $ 1,176 $ 1,226

The increase in nonperforming loans of $4.5 million, or 43.9%, to $14.6 million as of March 31, 2021 compared to $10.2 million as of December 31, 2020 was due primarily to an increase in nonperforming owner-occupied commercial real estate and commercial and industrial loans.

This increase is the result of a single commercial relationship that was placed on nonaccrual status during the quarter.

Total nonperforming assets increased $4.5 million, or 43.4%, as of March 31, 2021 compared to December 31, 2020, due primarily to the increase in nonperforming loans discussed above.

The ratio of nonperforming loans to total loans increased to 0.48% as of March 31, 2021 compared to 0.33% as of December 31, 2020 and the ratio of nonperforming assets to total assets increased to 0.35% as of March 31, 2021 compared to 0.24% as of December 31, 2020, also due primarily to the loans mentioned above.

Total TDRs as of March 31, 2021 were $3.8 million, up $0.8 million from December 31, 2020.

The decline in nonperforming loans of $1.2 million, or 9.0%, to $9.0 million as of June 30, 2021 compared to $10.2 million as of December 31, 2020 was due primarily to a decrease in nonaccrual single tenant lease financing balances, which was partially offset by an increase in nonperforming small business lending, owner-occupied commercial real estate and commercial and industrial loans.

The decrease in nonaccrual single tenant lease financing balances was due to positive developments related to a relationship which included two loans, one of which was paid off at net book value (unpaid principal balance less specific reserves) and the other was transferred to OREO.

Total nonperforming assets increased $0.1 million, or 1.2%, as of June 30, 2021 compared to December 31, 2020, due primarily to a $1.3 million increase in OREO, partially offset by the $1.2 million decrease in nonperforming loans discussed above.

The ratio of nonperforming loans to total loans decreased to 0.31% as of June 30, 2021 compared to 0.33% as of December 31, 2020 and the ratio of nonperforming assets to total assets increased to 0.25% as of June 30, 2021 compared to 0.24% as of December 31, 2020, also due primarily to the loans and OREO mentioned above.

Total TDRs as of June 30, 2021 were $3.8 million, up $0.8 million from December 31, 2020.

The increase was driven by one residential mortgage loan that became a TDR during the first quarter 2021.

The Company did not have any OREO as of March 31, 2021 and December 31, 2020, respectively.

As of March 31, 2021, our financial results have reflected little impact on asset quality as a result of COVID-19.

We are optimistic that the combination of the vaccine rollout, government stimulus programs and relief programs we have provided to our clients will continue to mitigate the impact of the pandemic on the Company’s business.

However, if economic conditions return to levels experienced during 2020, our nonperforming loans and assets could be adversely affected.

As of June 30, 2021, the Company had two properties in OREO, one commercial property with a carrying value of $1.2 million and one residential mortgage with a carrying value of $0.1 million.

The Company did not have any OREO as of December 31, 2020.

As of June 30, 2021, our financial results have reflected little impact on asset quality as a result of COVID-19.

We are optimistic that the combination of vaccinations, government stimulus programs and relief programs we have provided to our clients will continue to mitigate the impact of the pandemic on the Company’s business.

However, if economic conditions return to levels experienced during 2020, our credit quality and overall financial performance could be adversely affected.

Non-TDR Loan Modifications due to COVID-19

4 unchanged sentences

In accordance with this guidance, the Company has offered modifications to borrowers who were both impacted by COVID-19 and current on all principal and interest payments.

As of March 31, 2021, the Company had 37 loans totaling $14.3 million in non-TDR loan modifications due to COVID-19.

As of June 30, 2021, the Company had eight loans totaling $7.9 million in non-TDR loan modifications due to COVID-19.

Small Business Administration Paycheck Protection Program

3 unchanged sentences

These loans may be forgiven if certain conditions are satisfied and are fully guaranteed by the SBA.

In 2020, as a preferred SBA lender, we assisted our clients in participating in the PPP to help them maintain their workforces in an uncertain and challenging environment.

The loans originated in 2020 bear an interest rate of 1.00% and we received weighted average origination fees of 3.86% of the amount funded, or approximately $2.3 million in total.

The Company received this fee revenue from the SBA in late June 2020 and it will be deferred over the life of the PPP loans and recognized as interest income.

In 2020, as a preferred SBA lender, we assisted our clients in participating in the PPP to help them maintain their workforces in an uncertain

and challenging environment.

The loans originated in 2020 bear an interest rate of 1.00%, and we received gross origination fees of approximately $2.3 million.

The Company received this fee revenue from the SBA in late June 2020, and it was deferred over the life of the PPP loans and recognized as interest income.

On December 27, 2020, $285 billion in additional funding was allocated to the PPP through the passage of the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act.

The additional funding can be used by small

businesses who have yet to receive a PPP loan, as well as certain small businesses who may be eligible to receive a second PPP loan.

The Company began offering PPP loans again in the first quarter 2021.

These loans also may be forgiven if certain conditions are satisfied and are fully guaranteed by the SBA.

In the first quarter 2021, we assisted our clients in participating in this next round of PPP to help them continue to recover from the economic damage created by the COVID-19 pandemic.

The loans originated during the first quarter 2021 bear an interest rate of 1.00% and we received weighted average origination fees of 6.60% of the amount funded, or approximately $1.3 million in total.

The Company received this fee revenue from the SBA in February and March 2021 and it will be deferred over the life of the PPP loans and recognized as interest income.

During the first quarter 2021, we originated 244 PPP loans totaling $26.1 million outstanding.

In total, the Company has 416 PPP loans with an outstanding principal balance of $53.4 million.

The Company expects to begin processing applications for forgiveness from this round beginning in May 2021.

The Company anticipates that the majority of these loans will ultimately be forgiven, in whole or in part, by the SBA in accordance with the terms of the program.

As of March 31, 2021, the Company processed 274 applications for forgiveness from PPP borrowers.

The additional funding was used to fund PPP loans for small businesses, as well as certain small businesses who were eligible to receive a second PPP loan.

The Company began offering PPP loans again in 2021 and continued until the program’s funds were depleted.

These loans may be forgiven if certain conditions are satisfied and are fully guaranteed by the SBA.

The loans originated during 2021 bear an interest rate of 1.00% and the Company received gross origination fees of approximately $1.3 million.

The Company received this fee revenue from the SBA during the six month period ended June 30, 2021, and it is being deferred over the life of the PPP loans and recognized as interest income.

The Company began processing applications for forgiveness from this round beginning in May 2021.

The Company anticipates that the majority of the PPP loans will ultimately be forgiven, in whole or in part, by the SBA in accordance with the terms of the program.

Management anticipates that loan forgiveness applications will continue throughout 2021.

The following table provides a rollforward of the activity of PPP loans through June 30, 2021.

(dollars in thousands)

Number of Loans Principal Balance Net Deferred Fees

Originated 447 $ 58,336 $ 1,851

Principal repaid (71) (7,184)

Net deferred fees recognized (1,253)

Balance, December 31, 2020 376 51,152 598

Originated 278 27,201 1,118

Principal repaid (348) (38,671)

Net deferred fees recognized (768)

Balance, June 30, 2021 306 39,682 948

Allowance for Loan Losses

The following table provides a rollforward of the allowance for loan losses for the last five completed fiscal quarters.

(dollars in thousands) Three Months Ended

The following table provides a rollforward of the allowance for loan losses for the last five completed fiscal quarters and the six months ended June 30, 2021 and 2020.

(dollars in thousands) Three Months Ended Six Months Ended

2021 March 31,

2021 December 31,

1 unchanged sentence

2020 June 30,

2020 March 31,

2020 June 30,

2021 June 30,

Balance, beginning of period $ 30,642 $ 29,484 $ 26,917 $ 24,465 $ 22,857 $ 29,484 $ 21,840

4 unchanged sentences

Net charge-offs to average loans 0.35 % 0.02 % 0.04 % 0.01 % 0.12 % 0.06 % 0.06 %

The allowance for loan losses was $30.6 million as of March 31, 2021, compared to $29.5 million as of December 31, 2020.

While total loan balances were consistent with December 31, 2020, the Company made additional adjustments to qualitative factors in its allowance model, as well as recorded specific reserves on two commercial relationships totaling $1.1 million in the aggregate.

These items were partially offset by loan portfolio composition changes, which included reductions in certain portfolios with higher reserve coverage ratios, as well as growth in portfolios with lower reserve coverage ratios.

As a result, both the allowance for loan losses and the allowance as a percentage of total loans increased compared to December 31, 2020.

The allowance for loan losses as a percentage of total loans was 1.00% at March 31, 2021, or 1.02%, when excluding PPP loans, compared to 0.96%, or 0.98%, when excluding PPP loans, at December 31, 2020.

The allowance for loan losses as a percentage of nonperforming loans decreased to 209.2% as of March 31, 2021, compared to 289.5% as of December 31, 2020, due to an increase in nonperforming loans primarily related to a single commercial relationship that was placed on nonaccrual during the first quarter 2021.

The provision for loan losses in the first quarter 2021 was $1.3 million, compared to $1.5 million for the first quarter 2020.

During the first quarter 2021, the Company recorded net charge-offs of $0.1 million, compared to net charge-offs of $0.4 million for the first quarter 2020.

The allowance for loan losses was $28.1 million as of June 30, 2021, compared to $29.5 million as of December 31, 2020.

The decrease in the allowance for loan losses compared to December 31, 2020 was due primarily to the elimination of $2.9 million of specific reserves related to a single tenant lease financing relationship and a commercial and industrial relationship, both of which had been classified as nonaccrual.

The single tenant lease financing relationship included two loans, one of which was paid off at net book value (unpaid principal balance less specific reserves) and the other was transferred to OREO.

The commercial and industrial relationship included four loans, two of which were paid off during the quarter.

The decrease in the allowance for loan losses was partially offset by additional adjustments to the qualitative factors in the Company’s allowance model.

The allowance for loan losses as a percentage of total loans was 0.95% at June 30, 2021, or 0.96%, when excluding PPP loans, compared to 0.96%, or 0.98%, when excluding PPP loans, at December 31, 2020.

The allowance for loan losses as a percentage of nonperforming loans increased to 310.5% as of June 30, 2021, compared to 289.5% as of December 31, 2020, due to a decrease in nonperforming loans related to the single tenant lease financing relationship and commercial and industrial relationship discussed above.

The provision for loan losses in the second quarter 2021 was $21 thousand, compared to $2.5 million for the second quarter 2020.

The decrease in the provision for loan losses was due primarily to the decline in loan balances.

During the second quarter 2021, the Company recorded net charge-offs of $2.6 million, compared to net charge-offs of $0.9 million for the second quarter 2020.

The increase in net charge-offs was due primarily to a charge-off of $2.4 million related to the single tenant lease financing relationship discussed above, as the loan payoff and the transfer to the OREO were recorded at net book value.

Investment Securities Portfolio

1 unchanged sentence

(in thousands)

Amortized Cost March 31,

Amortized Cost June 30,

2021 March 31,

2021 December 31,

1 unchanged sentence

2020 June 30,

2020 March 31,

Securities available-for-sale

12 unchanged sentences

(in thousands)

Approximate Fair Value March 31,

Approximate Fair Value June 30,

2021 March 31,

2021 December 31,

1 unchanged sentence

2020 June 30,

2020 March 31,

Securities available-for-sale

11 unchanged sentences

Total securities $ 731,577 $ 531,759 $ 567,080 $ 597,487 $ 658,169

The approximate fair value of available-for-sale investment securities decreased $35.3 million, or 7.1%, to $462.4 million as of March 31, 2021, compared to $497.6 million as of December 31, 2020.

The decrease was due primarily to decreases of $17.0 million in private label mortgage-backed securities, $15.1 million in agency mortgage-backed securities and $3.3 million in municipal securities.

These decreases were driven primarily by prepayments and maturities in private label mortgage-backed securities and agency mortgage-backed securities, as well as early redemptions and maturities in municipal securities.

These decreases were partially offset by purchases of agency mortgage-backed securities during the first quarter 2021.

The approximate fair value of available-for-sale investment securities increased $165.9 million, or 33.3%, to $663.5 million as of June 30, 2021, compared to $497.6 million as of December 31, 2020.

The increase was due primarily to an increase of $200.6 million in agency mortgage-backed securities, partially offset by a $28.8 million decrease in private label mortgage-backed securities and a $4.1 million decrease in municipal securities.

The increase in agency mortgage-backed securities was driven primarily by increased purchases during the six months ended June 30, 2021, partially offset by

prepayments and maturities in agency and private label mortgage-backed securities, as well as early redemptions and maturities in municipal securities.

Accrued Income and Other Assets

Accrued income and other assets decreased $11.9 million, or 18.6%, to $52.4 million at March 31, 2021 compared to $64.3 million at December 31, 2020.

The decrease was primarily related to a $7.2 million decrease in cash pledged as collateral, as well as a decrease of $3.3 million in deferred tax assets.

Accrued income and other assets decreased $9.5 million, or 14.8%, to $54.8 million at June 30, 2021 compared to $64.3 million at December 31, 2020.

The decrease primarily related to decreases of $9.5 million in cash pledged as collateral, $3.5 million in deferred tax assets and $2.5 million in derivative assets.

As of these dates, the Company pledged $21.0 million and $30.6 million, respectively, of cash collateral to counterparties on interest rate swap agreements as security for its obligations related to these agreements.

1 unchanged sentence

Accrued Expenses and Other Liabilities

Accrued expenses and other liabilities were $40.3 million at March 31, 2021 compared to $48.4 million at December 31, 2020.

The decrease of $8.1 million, or 16.74%, was due primarily to a $10.0 million decrease in derivative liabilities due to an increase in the fair value of these contracts.

Accrued expenses and other liabilities were $53.9 million at June 30, 2021 compared to $48.4 million at December 31, 2020.

The following table presents the composition of the Company’s deposit base for the last five completed fiscal quarters.

(dollars in thousands) March 31,

(dollars in thousands) June 30,

2021 March 31,

2021 December 31,

1 unchanged sentence

2020 June 30,

2020 March 31,

Noninterest-bearing deposits $ 113,996 3.6 % $ 100,700 3.1 % $ 96,753 3.0 % $ 86,088 2.6 % $ 82,864 2.5 %

5 unchanged sentences

Total deposits $ 3,206,147 100.0 % $ 3,217,603 100.0 % $ 3,270,885 100.0 % $ 3,372,391 100.0 % $ 3,380,789 100.0 %

Total deposits decreased $53.3 million, or 1.6%, to $3.2 billion as of March 31, 2021, compared to $3.3 billion as of December 31, 2020.

This decrease was due primarily to declines of $114.6 million, or 8.9%, in certificates of deposits and $2.6 million, or 1.4%, in interest-bearing demand deposits, partially offset by increases of $46.9 million, or 3.5%, in money market accounts, $8.1 million, or 18.6%, in savings accounts, $5.0 million, or 1.7%, in brokered deposits and $3.9 million, or 4.1% in non-interest bearing deposits.

Total deposits decreased $64.7 million, or 2.0%, to $3.2 billion as of June 30, 2021, compared to $3.3 billion as of December 31, 2020.

This decrease was due primarily to a decline of $202.0 million, or 15.7%, in certificates of deposits, partially offset by increases of $81.8 million, or 6.1%, in money market accounts, $17.2 million, or 17.8%, in noninterest-bearing deposits, $16.9 million, or 5.6%, in brokered deposits, $13.1 million, or 30.3%, in savings accounts, and $8.2 million, or 4.3%, in interest-bearing demand deposits.

The Company experienced strong growth in money market deposit accounts due to targeted digital marketing efforts to grow small business accounts as well as consumers, small business and commercial clients increasing their cash balances in part due to the economic uncertainty resulting from the COVID-19 pandemic.

20 unchanged sentences

Failure to maintain the minimum Common Equity Tier 1 capital ratio plus the capital conservation buffer will result in potential restrictions on a banking institution’s ability to pay dividends, repurchase stock and/or pay discretionary compensation to its employees.

The following tables present actual and required capital ratios as of March 31, 2021 and December 31, 2020 for the Company and the Bank under the Basel III Capital Rules.

The minimum required capital amounts presented include the minimum required capital levels as of March 31, 2021 and December 31, 2020 based on the Basel III Capital Rules.

The following tables present actual and required capital ratios as of June 30, 2021 and December 31, 2020 for the Company and the Bank under the Basel III Capital Rules.

The minimum required capital amounts presented include the minimum required capital levels as of June 30, 2021 and December 31, 2020 based on the Basel III Capital Rules.

Capital levels required to be considered well capitalized are based upon prompt corrective action regulations, as amended to reflect the changes under the Basel III Capital Rules.

1 unchanged sentence

(dollars in thousands) Capital Amount Ratio Capital Amount Ratio Capital Amount Ratio

As of March 31, 2021:

As of June 30, 2021:

Common equity tier 1 capital to risk-weighted assets

26 unchanged sentences

Shareholders’ Dividends

The Company’s Board of Directors declared a cash dividend of $0.06 per share of common stock payable April 15, 2021 to shareholders of record as of March 31, 2021.

The Company’s Board of Directors declared a cash dividend of $0.06 per share of common stock payable July 15, 2021 to shareholders of record as of July 1, 2021.

The Company expects to continue to pay cash dividends on a quarterly basis;

however, the declaration and amount of any future cash dividends will be subject to the sole discretion of the Board of Directors and will depend upon many factors, including its results of operations, financial condition, capital requirements, regulatory and contractual restrictions (including with respect to the Company’s outstanding subordinated debt), business strategy and other factors deemed relevant by the Board of Directors, including any potential impact resulting from COVID-19.

As of March 31, 2021, the Company had $72.0 million principal amount of subordinated debt outstanding evidenced by its 6.0% Fixed-to-Floating Rate Subordinated Notes due 2026, the 2029 Notes and the 2030 Notes.

As of June 30, 2021, the Company had $72.0 million principal amount of subordinated debt outstanding evidenced by its 6.0% Fixed-to-Floating Rate Subordinated Notes due 2026, the 2029 Notes and the 2030 Notes.

The agreements that govern our outstanding subordinated debt prohibit the Company from paying any dividends on its common stock or making any other distributions to shareholders at any time when there shall have occurred, and be continuing to occur, an event of default under the applicable agreement.

12 unchanged sentences

We believe we have sufficient on-balance sheet liquidity, supplemented by access to additional funding sources, to manage the potential economic impact of COVID-19.

At March 31, 2021, on a consolidated basis, the Company had $878.6 million in cash and cash equivalents and investment securities available-for-sale and $30.2 million in loans held-for-sale that were generally available for its cash needs.

At June 30, 2021, on a consolidated basis, the Company had $992.3 million in cash and cash equivalents and investment securities available-for-sale and $27.6 million in loans held-for-sale that were generally available for its cash needs.

The Company can also generate funds from wholesale funding sources and collateralized borrowings.

At March 31, 2021, the Bank had the ability to borrow an additional $451.1 million from the FHLB, the Federal Reserve and correspondent bank Fed Funds lines of credit.

At June 30, 2021, the Bank had the ability to borrow an additional $636.9 million from the FHLB, the Federal Reserve and correspondent bank Fed Funds lines of credit.

The Company is a separate legal entity from the Bank and must provide for its own liquidity.

1 unchanged sentence

The Company’s primary sources of funds are cash maintained at the holding company level and dividends from the Bank, the payment of which is subject to regulatory limits.

At March 31, 2021, the Company, on an unconsolidated basis, had $28.1 million in cash generally available for its cash needs, which is in excess of its current annual regular shareholder dividend and operating expenses.

At June 30, 2021, the Company, on an unconsolidated basis, had $27.7 million in cash generally available for its cash needs, which is in excess of its current annual regular shareholder dividend and operating expenses.

The Company uses its sources of funds primarily to meet ongoing financial commitments, including withdrawals by depositors, credit commitments to borrowers, operating expenses and capital expenditures.

At March 31, 2021, approved outstanding loan commitments, including unused lines of credit and standby letters of credit, amounted to $261.2 million.

Certificates of deposits and brokered deposits scheduled to mature in one year or less at March 31, 2021 totaled $807.0 million.

At June 30, 2021, approved outstanding loan commitments, including unused lines of credit and standby letters of credit, amounted to $293.1 million.

Certificates of deposits and brokered deposits scheduled to mature in one year or less at June 30, 2021 totaled $779.0 million.

Management is not aware of any other events or regulatory requirements that, if implemented, are likely to have a material effect on either the Company’s or the Bank’s liquidity.

1 unchanged sentence

This Management’s Discussion and Analysis contains financial information determined by methods other than in accordance with GAAP.

Non-GAAP financial measures, specifically tangible common equity, tangible assets, tangible book value per common share, tangible common equity to tangible assets ratio, average tangible common equity, return on average tangible common equity, total interest income - FTE, net interest income - FTE, net interest margin - FTE, allowance for loan losses to loans, excluding PPP loans, adjusted revenue, adjusted income before income taxes, adjusted income tax, adjusted net income, adjusted diluted earnings per share, adjusted return on average assets, adjusted return on average shareholders’ equity, adjusted return on average tangible common equity and adjusted effective income tax rate are used by the Company’s management to measure the strength of its capital and analyze profitability, including its ability to generate earnings on tangible capital invested by its shareholders.

The Company also believes that it is a standard practice in the banking industry to present total interest income, net interest income and net interest margin on a fully-taxable equivalent basis, as those measures provide useful information for peer comparisons.

Although the Company believes these non-GAAP financial measures provide a greater understanding of its business, they should not be considered a substitute for financial measures determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP financial measures that may be presented by other companies.

Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures are included in the following table for the last five completed fiscal quarters.

(dollars in thousands, except share and per share data) Three Months Ended

Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures are included in the following table for the last five completed fiscal quarters and the six months ended June 30, 2021 and 2020.

(dollars in thousands, except share and per share data) Three Months Ended Six Months Ended

2021 March 31,

2021 December 31,

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2020 June 30,

2020 March 31,

2020 June 30,

2021 June 30,

Total equity - GAAP $ 358,641 $ 344,566 $ 330,944 $ 318,102 $ 307,711 $ 358,641 $ 307,711

17 unchanged sentences

Return on average tangible common equity 15.09 % 12.79 % 13.84 % 10.83 % 5.23 % 13.97 % 6.58 %

(dollars in thousands, except share and per share data) Three Months Ended

(dollars in thousands, except share and per share data) Three Months Ended Six Months Ended

2021 March 31,

2021 December 31,

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2020 June 30,

2020 March 31,

2020 June 30,

2021 June 30,

Total interest income $ 33,377 $ 33,280 $ 33,643 $ 32,750 $ 34,222 $ 66,657 $ 70,466

18 unchanged sentences

1 Assuming a 21% tax rate

(dollars in thousands, except share and per share data) Three Months Ended Six Months Ended

2021 March 31,

2021 December 31,

2020 September 30,

2020 June 30,

2020 June 30, 2021 June 30,

Total Revenue- GAAP $ 30,569 $ 28,900 $ 31,522 $ 28,727 $ 19,399 $ 59,469 $ 40,628

Gain on sale of premises and equipment (2,523) — — — — (2,523) —

Adjusted revenue $ 28,046 $ 28,900 $ 31,522 $ 28,727 $ 19,399 $ 56,946 $ 40,628

Income before income taxes - GAAP $ 15,473 $ 12,307 $ 14,145 $ 9,806 $ 3,664 $ 27,780 $ 9,946

Gain on sale of premises and equipment (2,523) — — — — (2,523) —

Adjusted income before income taxes $ 12,950 $ 12,307 $ 14,145 $ 9,806 $ 3,664 $ 25,257 $ 9,946

Income tax provision (benefit) - GAAP $ 2,377 $ 1,857 $ 3,055 $ 1,395 $ (268) $ 4,234 $ (5)

Gain on sale of premises and equipment (530) — — — — (530) —

Adjusted income tax provision (benefit) $ 1,847 $ 1,857 $ 3,055 $ 1,395 $ (268) $ 3,704 $ (5)

Net income - GAAP $ 13,096 $ 10,450 $ 11,090 $ 8,411 $ 3,932 $ 23,546 $ 9,951

Gain on sale of premises and equipment $ (1,993) — — — — $ (1,993) —

Adjusted net income $ 11,103 $ 10,450 $ 11,090 $ 8,411 $ 3,932 $ 21,553 $ 9,951

Diluted average common shares outstanding 9,981,422 9,963,036 9,914,022 9,773,224 9,768,227 9,970,147 9,802,427

Diluted earnings per share - GAAP $ 1.31 $ 1.05 $ 1.12 $ 0.86 $ 0.40 $ 2.36 $ 1.02

Effect of gain on sale of premises and equipment (0.20) — — — — (0.20) —

Adjusted diluted earnings per share $ 1.11 $ 1.05 $ 1.12 $ 0.86 $ 0.40 $ 2.16 $ 1.02

Return on average assets 1.25 % 1.02 % 1.02 % 0.78 % 0.37 % 1.13 % 0.47 %

Effect of gain on sale of premises and equipment (0.19) % 0.00 % 0.00 % 0.00 % 0.00 % (0.09) % 0.00 %

Adjusted return on average assets 1.06 % 1.02 % 1.02 % 0.78 % 0.37 % 1.04 % 0.47 %

Return on average shareholders' equity 14.88 % 12.61 % 13.64 % 10.67 % 5.15 % 13.78 % 6.48 %

Effect of gain on sale of premises and equipment (2.26) % 0.00 % 0.00 % 0.00 % 0.00 % (1.16) % 0.00 %

Adjusted return on average shareholders' equity 12.62 % 12.61 % 13.64 % 10.67 % 5.15 % 12.62 % 6.48 %

Return on average tangible common equity 15.09 % 12.79 % 13.84 % 10.83 % 5.23 % 13.97 % 6.58 %

Effect of gain on sale of premises and equipment (2.30) % 0.00 % 0.00 % 0.00 % 0.00 % (1.18) % 0.00 %

Adjusted return on average tangible common equity 12.79 % 12.79 % 13.84 % 10.83 % 5.23 % 12.79 % 6.58 %

Effective income tax rate 15.4 % 15.1 % 21.6 % 14.2 % (7.3) % 15.2 % (0.1) %

Effect of gain on sale of premises and equipment (1.1) % 0.0 % 0.0 % 0.0 % 0.0 % (0.5) % 0.0 %

Adjusted effective income tax rate 14.3 % 15.1 % 21.6 % 14.2 % (7.3) % 14.7 % (0.1) %

Critical Accounting Policies and Estimates

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In June 2020, the Company terminated all fair value hedging instruments associated with loans.

At March 31, 2021 and December 31, 2020, the Company had interest rate swaps with notional amounts of $260.0 million and $298.2 million, respectively.

At June 30, 2021 and December 31, 2020, the Company had interest rate swaps with notional amounts of $260.0 million and $298.2 million, respectively.

Additionally, we enter into forward contracts related to our mortgage banking business to hedge the exposures we have from commitments to extend new residential mortgage loans to our customers and from our mortgage loans held-for-sale.

At March 31, 2021 and December 31, 2020, the Company had commitments to sell residential real estate loans of $81.5 million and $107.5 million, respectively.

At June 30, 2021 and December 31, 2020, the Company had commitments to sell residential real estate loans of $46.8 million and $107.5 million, respectively.

These contracts mature in less than one year.

1 unchanged sentence

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