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Item 2. Management’s Discussion and Analysis

2022-05-09 compared with 2021-11-09 · 316 added, 362 removed, 451 unchanged (60% of the section changed)

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This discussion and analysis includes certain forward-looking statements that involve risks, uncertainties, and assumptions.

You should review the “Risk Factors” sections of this report and our Annual Report on Form 10-K for the year ended December 31,

2020 for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by such forward-looking statements.

You should review the “Risk Factors” sections of this report and our Annual Report on Form 10-K for the year ended December 31, 2021 for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by such forward-looking statements.

See also “Cautionary Note Regarding Forward-Looking Statements” at the beginning of this report.

First Internet Bancorp (“we,” “our,” “us,” or the “Company”) is a bank holding company that conducts its primary business activities through its wholly owned subsidiary, First Internet Bank of Indiana, an Indiana chartered bank (the “Bank”).

First Internet Bancorp (“we,” “our,” “us,” or the “Company”) is a bank holding company with $4.2 billion in total assets as of March 31, 2022, that conducts its primary business activities through its wholly owned subsidiary, First Internet Bank of Indiana, an Indiana chartered bank (the “Bank”).

The Bank was the first state-chartered, Federal Deposit Insurance Corporation (“FDIC”) insured Internet bank and commenced banking operations in 1999.

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On March 21, 2006, we consummated a plan of exchange by which we acquired all of the outstanding shares of the Bank.

The Company has two wholly-owned subsidiaries:

the Bank and FC Subsidiary, Inc., a Georgia corporation, formed in connection with our potential acquisition of First Century Bancorp.

The Bank has three wholly-owned subsidiaries:

First Internet Public Finance Corp.

provides a range of public and municipal finance lending and leasing products to governmental entities throughout the United States and acquires securities issued by state and local governments and other municipalities;

JKH Realty Services, LLC, which manages other real estate owned (“OREO”) properties as needed;

and SPF15, Inc., which was established to acquire and hold real estate.

First Internet Public Finance Corp., an Indiana corporation that provides a range of public and municipal finance lending and leasing products to governmental entities throughout the United States and acquires securities issued by state and local governments and other municipalities;

JKH Realty Services, LLC, a Delaware limited liability company that manages other real estate owned (“OREO”) properties as needed;

and SPF15, Inc., an Indiana corporation that owns real estate used primarily for the Bank’s principal office.

We offer a wide range of commercial, small business, consumer and municipal banking products and services.

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Our commercial banking products and services are delivered through a relationship banking model and include commercial real estate (“CRE”) banking, commercial and industrial (“C&I”) banking, public finance, healthcare finance, small business lending, franchise finance and commercial deposits and treasury management.

Through our CRE team, we offer single tenant lease financing on a nationwide basis in addition to traditional investor CRE and construction loans on a regional basis.

Our C&I banking team provides credit solutions such as lines of credit, term loans, owner-occupied CRE loans and corporate credit cards to commercial borrowers located primarily on a regional basis in the Midwest and Southwest regions of the United States.

Within CRE banking, we offer single tenant lease financing on a nationwide basis in addition to traditional investor CRE and construction loans primarily within Central Indiana or on a regional basis.

Our C&I banking team provides credit solutions such as lines of credit, term loans, owner-occupied CRE loans and corporate credit cards on a regional basis to commercial borrowers primarily in the Midwest and Southwest regions of the United States.

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 originally established in conjunction with our strategic business 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 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 closed in the third quarter 2021.

It is our expectation that the acquiring institution will retain most, if not all, of Provide’s loan origination activity and that our healthcare finance loan balances may decline.

Our franchise finance business was established in July 2021 in conjunction with our business relationship with ApplePie Capital, a leading provider of growth financing to franchisees in various industry segments across the country.

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, which provided lending on a nationwide basis for healthcare practice finance or acquisition, acquisition or refinancing of owner-occupied CRE and equipment purchases.

In the third quarter 2021, Provide Inc.

was acquired by a super-regional financial institution.

It is our expectation that the acquiring institution will retain most, if not all, of Provide’s loan origination activity and that our healthcare finance loan balances will decline.

Our franchise finance business was established in July 2021 in conjunction with our business relationship with ApplePie Capital, a financial technology (“fintech”) company that specializes in providing financing to franchisees in various industry segments.

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.

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We have hired and continue to recruit experienced small business sales, credit and operations personnel to expand our capabilities in small business lending and U.S.

government guaranteed lending programs.

guaranteed lending programs.

We continue to scale up this business with the goal of driving increased earnings and profitability in future periods.

COVID-19 Pandemic

Throughout the coronavirus pandemic (“COVID-19”), our top priority has been the health of our team and clients.

As a digitally-focused institution without branch locations, we were able to continue serving clients when they needed us most, while minimizing operational disruptions caused by COVID-19.

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

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

Our plans remain flexible to adapt as these situations evolve.

COVID-19 impacted our business during 2020 as the low interest rate environment following Federal Reserve rate cuts in the first quarter 2020 reduced the yield on interest-earning assets but also allowed us to reprice our interest-bearing

deposits significantly lower, which provided an increase to net interest income.

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

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.

The 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 potential new variants of COVID-19, 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.

Pending Merger Transaction

As previously reported, on November 1, 2021, we entered into a definitive agreement to acquire all of the outstanding shares of common stock of First Century Bancorp.

(“First Century”), the parent company of First Century Bank, N.A., for $80 million cash.

With current headquarters in Roswell, GA, First Century is a technology-driven, financial solutions company with lines of business focused on payments, tax product lending, sponsored card programs and homeowners association services.

First Century also provides a wide range of products and services, including business banking, specialty lending and deposit products, to community-based businesses and individuals across its two branches located in Commerce, GA and Hilton Head Island, SC.

We expect to fund our payment obligations upon closing with available on-balance sheet cash.

The transaction is anticipated to close in the first quarter 2022, subject to satisfaction of customary closing conditions, including required approvals from the FDIC, Indiana Department of Financial Institutions and the Federal Reserve as well as First Century shareholder approval.

As of September 30, 2021, First Century had total assets of $408 million, total deposits of $330 million, and total loans of $32 million.

The acquisition, when completed, is expected to be accretive to 2023 earnings per share and initially dilutive to tangible book value per share.

We plan to expand our fintech partnerships.

With the rapid evolution of technology that enables consumers and small businesses to manage their finances digitally, fintechs are addressing a significantly growing marketplace.

Fintechs have created robust digital offerings, unburdened by legacy technology architecture, to address growing customer expectations.

Through partnerships with selected fintechs, we believe our ability to win and retain consumer and small business relationships will be significantly enhanced.

Furthermore, we believe partnering with select fintechs will allow us to further diversify our revenue sources, acquire lower-cost deposits and pursue additional asset generation capabilities.

Merger Transaction

On May 1, 2022, First Century Bancorp.

(“First Century”) terminated the previously announced Agreement and Plan of Merger dated November 1, 2021 (the “Merger Agreement”), by and among the Company, FC Subsidiary, Inc.

and First Century.

Under the Merger Agreement, the consummation of the merger was to have occurred on or before April 30, 2022.

The Board of Governors of the Federal Reserve approved the merger on April 29, 2022, but the parties were precluded from closing immediately thereafter due to statutory waiting periods.

The parties were unable to agree on extension terms, and First Century exercised its option to terminate the Merger Agreement.

Results of Operations

During the third quarter 2021, net income was $12.1 million, or $1.21 per diluted share, compared to the third quarter 2020 net income of $8.4 million, or $0.86 per diluted share, representing an increase in net income of $3.7 million, or 43.7%.

During the nine months ended September 30, 2021, net income was $35.6 million, or $3.57 per diluted share, compared to the nine months ended September 30, 2020 net income of $18.4 million, or $1.87 per diluted share, representing an increase in net income of $17.3 million, or 94.1%.

The $3.7 million increase in net income for the third quarter 2021 compared to the third quarter 2020 was due primarily to an increase of $4.7 million, or 28.9%, in net interest income, a decrease of $2.5 million, or 101.2%, in (benefit) provision for loan losses and a $2.0 million, or 11.9%, decrease in noninterest expense, partially offset by a decrease of $4.7 million, or 37.5%, in noninterest income and an increase of $0.8 million, or 59.1%, in income tax expense.

The $17.3 million increase in net income for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 was due primarily to an increase of $17.4 million, or 38.0%, in net interest income, a decrease of $5.2 million, or 80.4%, in provision for loan losses and an increase of $1.5 million, or 6.2%, in noninterest income, partially offset by a $5.1 million, or 364.3%, increase in income tax expense and a $1.7 million, or 3.9%, increase in noninterest expense.

During the third quarter 2021, return on average assets (“ROAA”), return on average shareholders’ equity (“ROAE”), and return on average tangible common equity (“ROATCE”) were 1.12%, 13.10%, and 13.27%, respectively, compared to 0.78%, 10.67%, and 10.83%, respectively, for the third quarter 2020.

During the nine months ended September 30, 2021, ROAA, ROAE, and ROATCE were 1.13%, 13.54%, and 13.73%, respectively, compared to 0.58%, 7.90%, and 8.02%, respectively, for the nine months ended September 30, 2020.

During the third quarter 2021, the Company fully redeemed its $25.0 million aggregate principal amount of 6.0% fixed-to-floating rate subordinated notes due in 2026 and recognized $0.8 million of pre-tax costs related to this redemption.

Excluding this item, adjusted net income for the third quarter 2021 was $12.7 million and adjusted diluted earnings per share was $1.27.

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

Excluding both the redemption costs associated with the subordinated notes due in 2026 and the gain on sale of the Company’s corporate headquarters, adjusted net income for the nine months ended September 30, 2021 was $34.3 million and adjusted diluted earnings per share was $3.44.

Additionally, for the third quarter 2021, adjusted ROAA, adjusted ROAE and adjusted ROATCE were 1.18%, 13.79% and 13.97%, respectively, and for the nine months ended September 30, 2021, adjusted ROAA, adjusted ROAE and adjusted ROATCE were 1.09%, 13.03% and 13.21%, respectively.

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

During the first quarter 2022, net income was $11.2 million, or $1.14 per diluted share, compared to first quarter 2021 net income of $10.5 million, or $1.05 per diluted share, representing an increase in net income of $0.8 million, or 7.3%, and an increase in diluted earnings per share of $0.09, or 8.6%.

The $0.8 million increase in net income for the first quarter 2022 compared to the first quarter 2021 was due primarily to an increase of $5.2 million, or 25.5%, in net interest income, a decrease of $0.5 million, or 38.0%, in provision for loan losses and a decrease of $0.1 million, or 3.6%, in income tax expense, partially offset by a $3.5 million, or 22.6%, increase in noninterest expense and a decrease of $1.6 million, or 18.6%, in noninterest income.

During the first quarter 2022, return on average assets (“ROAA”), return on average shareholders’ equity (“ROAE”), and return on average tangible common equity (“ROATCE”) were 1.08%, 11.94%, and 12.09%, respectively, compared to 1.02%, 12.61%, and 12.79%, respectively, for the first quarter 2021.

During the first quarter 2022, the Company had a nonrecurring consulting fee associated with a special project of $0.9 million, as well as acquisition-related expenses of $0.2 million.

Excluding these items, adjusted net income for the first quarter 2022 was $12.0 million and adjusted diluted earnings per share was $1.22.

Additionally, for the first quarter 2022, adjusted ROAA, adjusted ROAE and adjusted ROATCE were 1.16%, 12.82% and 12.98%, respectively.

These adjusted profitability ratios improved in the 2022 period compared to the 2021 period, as increases in net income and adjusted net income outpaced average asset growth.

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.

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Nonaccrual loans are included in average loan balances.

(dollars in thousands) Three Months Ended

September 30, 2021 June 30, 2021 September 30, 2020

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

Three Months Ended

March 31, 2022 December 31, 2021 March 31, 2021

(in thousands) Average Balance Interest /Dividends Yield /Cost Average Balance Interest /Dividends Yield /Cost Average Balance Interest /Dividends Yield /Cost

Interest-earning assets

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Interest-bearing demand deposits $ 318,281 $ 412 0.52 % $ 210,283 $ 158 0.30 % $ 180,746 $ 133 0.30 %

Regular savings accounts 62,195 56 0.36 % 55,811 49 0.35 % 45,466 79 0.69 %

Money market accounts 1,498,218 1,532 0.41 % 1,416,406 1,462 0.41 % 1,295,249 2,442 0.75 %

Certificates and brokered deposits 1,378,678 5,352 1.54 % 1,444,171 6,051 1.68 % 1,784,631 9,679 2.16 %

Total interest-bearing deposits 3,137,728 7,090 0.90 % 3,109,165 7,705 0.99 % 3,279,621 12,428 1.51 %

Other borrowed funds 611,975 5,025 3.26 % 584,751 4,065 2.79 % 584,634 4,090 2.78 %

Total interest-bearing liabilities 3,749,703 12,115 1.28 % 3,693,916 11,770 1.28 % 3,864,255 16,518 1.70 %

Noninterest-bearing deposits 104,161 98,207 75,901

Other noninterest-bearing liabilities 45,138 61,949 54,052

Total liabilities 3,899,002 3,854,072 3,994,208

Shareholders’ equity 366,187 352,894 313,611

Total liabilities and shareholders’ equity $ 4,265,189 $ 4,206,966 $ 4,307,819

Net interest income $ 20,919 $ 21,607 $ 16,232

Interest rate spread 1

1.88% 1.98% 1.39 %

Net interest margin 2

2.00% 2.11% 1.53 %

Net interest margin - FTE 3

2.13% 2.25% 1.67 %

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.

(dollars in thousands) Nine Months Ended

September 30, 2021 September 30, 2020

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

Interest-earning assets

Loans, including loans held-for-sale $ 3,016,817 $ 91,846 4.07 % $ 2,999,711 $ 89,698 3.99 %

Securities - taxable 527,625 5,997 1.52 % 543,699 9,135 2.24 %

Securities - non-taxable 85,130 781 1.23 % 96,960 1,410 1.94 %

Other earning assets 478,399 1,067 0.30 % 520,875 2,973 0.76 %

Total interest-earning assets 4,107,971 99,691 3.24 % 4,161,245 103,216 3.31 %

Allowance for loan losses (29,446) (23,605)

Noninterest-earning assets 136,954 108,561

Total assets $ 4,215,479 $ 4,246,201

Interest-bearing liabilities

Interest-bearing demand deposits $ 190,785 $ 425 0.30 % $ 138,288 $ 684 0.66 %

Regular savings accounts 54,740 145 0.35 % 37,700 249 0.88 %

Savings accounts 60,616 53 0.35 % 63,575 58 0.36 % 46,035 40 0.35 %

Money market accounts 1,454,436 1,503 0.42 % 1,453,447 1,507 0.41 % 1,369,626 1,391 0.41 %

BaaS - brokered deposits 12,111 6 0.20 % — — 0.00 % — — 0.00 %

Certificates and brokered deposits 1,225,976 4,123 1.36 % 1,305,130 4,676 1.42 % 1,519,580 7,064 1.89 %

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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 September 30, 2021 vs.

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

September 30, 2020 Due to Changes in Nine Months Ended September 30, 2021 vs.

September 30, 2020 Due to Changes in

Volume Rate Net Volume Rate Net Volume Rate Net

Three Months Ended March 31, 2022 vs.

December 31, 2021 Due to Changes in Three Months Ended March 31, 2022 vs.

March 31, 2021 Due to Changes in

(in thousands) Volume Rate Net Volume Rate Net

Interest income

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Total 402 (805) (403) 779 (3,250) (2,471)

Increase (decrease) in net interest income $ 45 $ (733) $ (688) $ (1,925) $ 6,612 $ 4,687 $ 909 $ 16,466 $ 17,375

Net interest income for the third quarter 2021 was $20.9 million, an increase of $4.7 million, or 28.9%, compared to $16.2 million for the third quarter 2020.

The increase in net interest income was the result of a $4.4 million, or 26.7%, decrease in total interest expense to $12.1 million for the third quarter 2021 from $16.5 million for the third quarter 2020, as well as a $0.3 million, or 0.9% increase in total interest income to $33.0 million for the third quarter 2021 from $32.8 million for the third quarter 2020.

Net interest income for the nine months ended September 30, 2021 was $63.1 million, an increase of $17.4 million, or 38.0%, compared to $45.7 million for the nine months ended September 30, 2020.

The increase in net interest income was the result of a $20.9 million, or 36.3%, decrease in total interest expense to $36.6 million for the nine months ended September 30, 2021 from $57.5 million for the nine months ended September 30, 2020, partially offset by a $3.5 million, or 3.4%, decrease in total interest income to $99.7 million for the nine months ended September 30, 2021 from $103.2 million for the nine months ended September 30, 2020.

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

(Decrease) increase in net interest income $ (741) $ 2,986 $ 2,245 $ (6,289) $ 11,513 $ 5,224

Net interest income for the first quarter 2022 was $25.8 million, an increase of $5.2 million, or 25.5%, compared to $20.5 million for the first quarter 2021.

The increase in net interest income was the result of a $2.8 million, or 8.3% increase in total interest income to $36.0 million for the first quarter 2022 from $33.3 million for the first quarter 2021, as well as a $2.5 million, or 19.4%, decrease in total interest expense to $10.3 million for the first quarter 2022 from $12.8 million for the first quarter 2021.

The increase in total interest income for the first quarter 2022 compared to the first quarter 2021 was due to an increase in interest earned on loans, securities and other earning assets.

Interest income earned on loans increased $2.3 million, or 7.5%, due primarily to an increase of 45 basis points (“bps”) in the yield earned on average loan balances, partially offset by a decrease of $103.1 million, or 3.3%, in average loan balances.

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

Interest income earned on other earning assets declined $0.2 million, or 35.0%, due mainly to a 10 bp decline in the yield earned on these assets, as well as a decrease of $73.0 million, or 13.2%, 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 earned on securities decreased $0.1 million, or 3.2%, due to a decline of 23 bps in the yield earned on securities, partially offset by an increase of $79.8 million, or 12.6%, in the average balance of securities.

The increase in loan yield was due mainly to an increase in prepayment fee income.

The decrease in the yield earned on other earning assets was due primarily to lower market interest rates.

The decrease in the yield earned on securities was driven primarily by lower yields earned on corporate securities as well as early redemptions and maturities in corporate securities.

The decrease in total interest income for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 was due primarily to a $3.8 million, or 35.7%, decrease in interest earned on securities and a $1.9 million, or 64.1%, decrease in interest earned on other earning assets, partially offset by a $2.1 million, or 2.4%, increase in income from loans.

The decrease in income from securities and other earning assets was primarily due to decreases of 72 bps and 46 bps, respectively, in the yield earned on these assets as well as a modest decrease in the average balance of these assets.

The decrease in the yield earned on securities was driven primarily by lower market interest rates following Federal Reserve interest rate cuts in March 2020 in response to the economic effects of COVID-19, which contributed to increased prepayment activity and lower yields earned on private label and agency mortgage-backed securities and U.S.

Government agency securities as well as early redemptions and maturities in corporate and municipal securities.

The decrease in the yield earned on other earning assets was primarily due to lower market interest rates, as described above.

The increase in income from loans was driven primarily by an 8 bp increase in the yield on loans and a modest increase in average loan balances.

The increase in loan yield was mostly due to an increase in prepayment fee income as well as a shift in the loan mix towards higher yielding commercial products.

Overall, the yield on interest-earning assets for the third quarter 2021 increased 7 bps to 3.16% from 3.09% for the third quarter 2020.

The yield on interest-earning assets for the nine months ended September 30, 2021 declined 7 bps to 3.24% from 3.31% for the nine months ended September 30, 2020.

The increase in the yield earned on interest-earning assets for the third quarter 2021 compared to the third quarter 2020 was due to a 16 bp increase in the yield earned on loans, partially offset by decreases of 23 bps in the yield earned on securities and 10 bps in other earning assets.

The decrease in the yield earned on interest-earning assets for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 was due to decreases of 72 bps in the yield earned on securities and 46 bps in other earning assets, partially offset by an 8 bp increase in the yield earned on loans.

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

The decrease in total interest expense for the third quarter 2021 compared to the third quarter 2020 was due to a decrease in interest expense related to interest-bearing deposits, partially offset by an increase in interest expense associated with other borrowed funds.

The increase in interest income was driven primarily by the recognition of $2.9 million of income from tax refund advance loans, partially offset by lower loan fees.

The decrease in average loan balances was due primarily to decreases in the average balance of healthcare finance, single tenant lease financing, public finance, owner-occupied CRE and small business lending portfolios, driven in part by prepayment activity, partially offset by increases in the average balance of tax refund advance loans, construction, commercial and industrial, and investor CRE loan portfolios.

The increase in loan yield was due to the income received from tax refund advance loans discussed above, as well as a shift in the loan mix towards higher-yielding commercial loans, partially offset by lower average loan balances.

Interest earned on securities increased due primarily to an increase of $100.3 million, or 18.3%, in the average balance of securities and an increase of 2 bps in the yield earned on securities.

Interest income earned on other earning assets increased by less than $0.1 million, or 12.2%, due mainly to a 3 bp increase in the yield earned on these assets, as well as an increase of $9.9 million, or 2.2%, 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.

The decrease in total interest expense for the first quarter 2022 compared to the first quarter 2021 was due primarily to a decrease in interest expense related to certificates and brokered deposits, partially offset by increases in interest expense associated with interest-bearing demand deposits, money market accounts and other borrowed funds.

Interest expense on certificates and brokered deposits decreased $2.9 million, or 41.6%, due to a decline of 53 bps in the cost of these deposits, as well as a $293.6 million, or 19.3%, 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 interest expense related to money market accounts of $0.9 million, or 37.3%, was driven by a decline of 34 bps in the cost of these deposits, partially offset by an increase of $203.0 million, or 15.7%, in the average balance of these deposits.

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 29 bps and 33 bps, respectively, partially offset by increases of $44.4 million, or 28.8%, and $16.7 million, or 36.8%, respectively, in the average balance of these deposits.

The increase in interest expense associated with other borrowed funds was due primarily to the recognition of $0.8 million of costs related to the Company redeeming the 2026 Notes on September 30, 2021.

The decrease in total interest expense for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 was due to a decrease in interest expense related to interest-bearing deposits, partially offset by an increase in interest expense associated with other borrowed funds.

The decrease in deposit interest expense was driven primarily by an 89 bp decline in the cost of funds related to interest-bearing deposits and a decrease of $92.3 million, or 2.9%, in the average balance of interest-bearing deposits.

The average balance of certificates and brokered deposits decreased $506.0 million, or 25.9%, while the cost of these deposits decreased 67 bps.

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 $5.3 million, or 54.9%, was driven by a decline of 79 bps in the cost of these deposits, partially offset by an increase of $344.1 million, or 31.7%, in the average balance of these deposits.

The increase in interest expense related to interest-bearing demand deposits was due primarily to approximately $100.0 million in deposits with a contractual term of five years and a fixed rate of 1.15% pursuant to a new customer relationship.

The $0.1 million, or 8.1%, increase in interest expense related to money market accounts was driven primarily by an increase of $84.8 million, or 6.2%, in the average balance of these deposits.

The increase in interest expense associated with other borrowed funds was due primarily to to the recognition of $0.8 million of costs related to the Company redeeming the 2026 Notes on September 30, 2021.

Overall, the cost of total interest-bearing liabilities for the third quarter 2021 declined 42 bps to 1.28% from 1.70% for the third quarter 2020.

Additionally, the cost of total interest-bearing liabilities for the nine months ended September 30, 2021 declined 70 bps to 1.32% from 2.02% for the nine months ended September 30, 2020.

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 in response to the economic effects of COVID-19 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 non-maturity deposit accounts also contributed to the decline in the cost of deposit funding.

Net interest margin (“NIM”) was 2.00% for the third quarter 2021 compared to 1.53% for the third quarter 2020, an increase of 47 bps.

On a fully-taxable equivalent (“FTE”) basis, NIM was 2.13% for the third quarter 2021 compared to 1.67% for the third quarter 2020, an increase of 46 bps.

NIM was 2.05% for the nine months ended September 30, 2021 compared to 1.47% for the nine months ended September 30, 2020;

an increase of 58 bps.

FTE NIM was 2.19% for the nine months ended September 30, 2021 compared to 1.61% for the nine months ended September 30, 2020;

an increase of 58 bps.

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

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

The increase in year-to-date September 2021 NIM and FTE NIM compared to year-to-date September 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.

Looking ahead to the fourth quarter 2021 and into 2022, the Company believes that yields on interest-earning assets will revert closer to what they were in the second quarter 2021 and then increase from there as the Company anticipates growing its commercial loan portfolio.

The Company also continues to see opportunities for further downward repricing of deposits in future periods.

Over the next twelve months, the Company has approximately $787.0 million of certificates and brokered deposits with a weighted average cost of 1.22% that are scheduled to mature.

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 remainder of 2021 and into 2022.

The increase in interest expense associated with other borrowed funds was due primarily to an increase of $34.2 million, or 48.8%, in the average balance of subordinated debt, partially offset by a 213 bp decrease in the cost of subordinated debt resulting from the issuance of the 2031 Notes and the redemption of the 2026 Notes.

Overall, the cost of total interest-bearing liabilities for the first quarter 2022 declined 27 bps to 1.13% from 1.40% for the first quarter 2021.

Declines in the cost of funds were due mainly to higher cost certificates and brokered deposits maturing without renewal or being renewed at lower rates.

Furthermore, a shift in the deposit composition from 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 2.56% for the first quarter 2022 compared to 2.04% for the first quarter 2021, an increase of 52 bps.

On a fully-taxable equivalent (“FTE”) basis, NIM was 2.69% for the first quarter 2022 compared to 2.18% for the first quarter 2021, an increase of 51 bps.

The increase in first quarter 2022 NIM and FTE NIM compared to the first quarter 2021 reflects the decrease in the cost of funds and increase in earning asset yields noted above.

The Company expects deposit costs to remain relatively stable for most of 2022.

Given the significant on-balance sheet liquidity across the industry, we don’t believe increases in market interest rates will have a significant impact on our deposit pricing in the near term.

Noninterest Income

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

(in thousands) Three Months Ended Nine Months Ended

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

Three Months Ended

(in thousands) March 31,

2022 December 31,

2021 September 30,

1 unchanged sentence

2021 March 31,

2021 December 31,

2020 September 30,

2021 September 30,

Service charges and fees $ 316 $ 292 $ 276 $ 280 $ 266

3 unchanged sentences

Gain on sale of loans 3,845 4,137 2,719 3,019 1,723

Gain on sale of securities — — — — 98 — 139

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

1 unchanged sentence

Total noninterest income $ 6,820 $ 7,694 $ 7,813 $ 8,962 $ 8,375

During the third quarter 2021, noninterest income was $7.8 million, representing a decrease of $4.7 million, or 37.5%, compared to $12.5 million for the third quarter 2020.

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

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

The increase in gain on sale of loans was due an increase in the volume of SBA 7(a) guaranteed loan sales and an increase in secondary market premiums during the third quarter 2021.

The increase in other noninterest income was due primarily to a distribution from the Company’s investment in a Small Business Investment Company fund.

During the nine months ended September 30, 2021, noninterest income was $25.2 million, an increase of $1.5 million, or 6.2%, compared to $23.7 million for the nine months ended September 30, 2020.

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

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 nine months ended September 30, 2021.

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

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

The decrease in mortgage banking income was due primarily to decreases in interest rate locks, sold loan volume and gain-on-sale margins.

During the first quarter 2022, noninterest income was $6.8 million, representing a decrease of $1.6 million, or 18.6%, compared to $8.4 million for the first quarter 2021.

The decrease in noninterest income was due primarily to a decrease in revenue from mortgage banking activities, partially offset by an increase in gain on sale of loans.

The decline in mortgage banking revenue in the first quarter 2022 compared to the first quarter 2021 was due primarily to decreases in interest rate locks, sold loan volumes and gain on sale margins.

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

SBA 7(a) guaranteed loan sales, as well as a $0.4 million gain on sale on the sale of $14.4 million of single tenant lease financing loans.

Noninterest Expense

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

(in thousands) Three Months Ended Nine Months Ended

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

Three Months Ended

(in thousands) March 31,

2022 December 31,

2021 September 30,

1 unchanged sentence

2021 March 31,

2021 December 31,

2020 September 30,

2021 September 30,

Salaries and employee benefits $ 9,878 $ 10,183 $ 9,316 $ 9,232 $ 9,492

5 unchanged sentences

Deposit insurance premium 281 283 230 275 425

Write-down of other real estate owned — — — — 2,065 — 2,065

Other 1,369 1,064 914 1,108 1,137

Total noninterest expense $ 18,780 $ 16,955 $ 14,451 $ 15,075 $ 15,317

Noninterest expense for the third quarter 2021 was $14.5 million, compared to $16.4 million for the third quarter 2020.

The decrease of $2.0 million, or 11.9%, was due primarily to a $2.1 million write-down of a commercial other real estate owned (“OREO”) property during the third quarter 2020 as well as decreases of $0.2 million, or 2.3%, in salaries and employee benefits and $0.2 million, or 47.7%, in deposit insurance premium during the third quarter 2021 compared to the third quarter 2020, partially offset by an increase of $0.4 million, or 90.8%, in marketing, advertising and promotion.

The decrease in salaries and employee benefits was due primarily to a decrease in medical claims expense.

The decrease in deposit insurance premium was due primarily to a decrease in asset growth and an increase in the Bank’s regulatory capital ratios, both of which positively impact the formula used to calculate deposit insurance expense.

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

Noninterest expense for the nine months ended September 30, 2021 was $44.8 million, compared to $43.1 million for the nine months ended September 30, 2020.

The increase of $1.7 million, or 3.9%, was due primarily to increases of $2.9 million in salaries and employee benefits and $1.2 million in marketing, advertising and promotion, partially offset by a decrease of $2.1 million in write-down of OREO, a $0.4 million decrease in deposit insurance premium and a $0.2 million decrease in other noninterest expense.

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.

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

The decrease in write-down of OREO is due to a $2.1 million write-down of a commercial OREO property that occurred in 2020.

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

Income tax provision was $2.2 million for the third quarter 2021, resulting in an effective tax rate of 15.5%, compared to a tax provision of $1.4 million for the third quarter 2020 and an effective tax rate of 14.2%.

Income tax provision was $6.5

million for the nine months ended September 30, 2021, resulting in an effective tax rate of 15.3%, compared to an income tax provision of $1.4 million and an effective tax rate of 7.0% for the nine months ended September 30, 2020.

The increase in income tax provision for the three months ended September 30, 2021 compared to the three months ended September 30, 2020 was due primarily to the increase in pre-tax earnings driven primarily by the $2.1 million write-down of OREO that occurred in the third quarter 2020.

The increase in income tax provision for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020, was due primarily to the increase in pre-tax earnings driven primarily by an increase in revenue and a decrease in the provision for loan losses, partially offset by an increase in noninterest expenses.

Additionally, the lower income tax provision and effective tax rate during the nine months ended September 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.

Noninterest expense for the first quarter 2022 was $18.8 million, compared to $15.3 million for the first quarter 2021.

The increase of $3.5 million, or 22.6%, was due primarily to increases of $1.0 million in loan expenses, $0.9 million in premises and equipment, $0.9 million in consulting and professional services, $0.4 million in salaries and employee benefits and $0.2 million in other expense.

The increase in loan expenses was driven primarily by servicing fees related to tax refund advance loans.

The increase in premises and equipment was primarily related to costs associated with the Company’s new corporate headquarters.

The increase in consulting and professional services was due primarily to a nonrecurring consulting fee and acquisition-related expenses.

The increase in salaries and employee benefits was due mainly to increased headcount and small business lending incentive compensation, partially offset by a decrease in mortgage banking incentive compensation and lower employee benefits costs.

Income tax provision was $1.8 million for the first quarter 2022, resulting in an effective tax rate of 13.8%, compared to a tax provision of $1.9 million for the first quarter 2021 and an effective tax rate of 15.1%.

Financial Condition

2 unchanged sentences

Balance Sheet Data:

2022 December 31,

2021 September 30,

1 unchanged sentence

2021 March 31,

2021 December 31,

2020 September 30,

Total assets $ 4,225,397 $ 4,210,994 $ 4,252,292 $ 4,204,642 $ 4,188,570

7 unchanged sentences

Total shareholders’ equity 374,655 380,338 370,442 358,641 344,566

Total assets increased $6.1 million, or 0.1%, to $4.3 billion at September 30, 2021 compared to $4.2 billion at December 31, 2020.

As of September 30, 2021, total shareholders’ equity was $370.4 million, an increase of $39.5 million, or 11.9%, 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 $365.8 million as of September 30, 2021, representing an increase of $39.5 million, or 12.1%, compared to December 31, 2020.

As both total shareholders’ equity and tangible common equity outpaced the growth in both total assets and tangible assets, the ratio of total shareholders’ equity to total assets increased to 8.71% as of September 30, 2021 from 7.79% as of December 31, 2020, and the ratio of tangible common equity to tangible assets increased to 8.61% as of September 30, 2021 from 7.69% as of December 31, 2020.

Book value per common share increased 11.3% to $37.59 as of September 30, 2021 from $33.77 as of December 31, 2020.

Tangible book value per share increased 11.5% to $37.12 as of September 30, 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.

Total assets increased $14.4 million, or 0.3%, to $4.2 billion at March 31, 2022 compared to $4.2 billion at December 31, 2021.

As of March 31, 2022, total shareholders’ equity was $374.7 million, a decrease of $5.7 million, or 1.5%, compared to December 31, 2021, due primarily to an increase in accumulated other comprehensive loss resulting from a decline in the value of the available-for-sale securities portfolio following the rapid rise in interest rates during the quarter, as well as stock repurchase activity during the quarter.

This was partially offset by the net income earned during the quarter and an increase in the value of interest rate swaps classified as cash flow hedges.

Tangible common equity totaled $370.0 million as of March 31, 2022, representing a decrease of $5.7 million, or 1.5%, compared to December 31, 2021.

The ratio of total shareholders’ equity to total assets decreased to 8.87% as of March 31, 2022 from 9.03% as of December 31, 2021, and the ratio of tangible common equity to tangible assets decreased to 8.77% as of March 31, 2022 from 8.93% as of December 31, 2021.

Book value per common share decreased 0.8% to $38.69 as of March 31, 2022 from $38.99 as of December 31, 2021.

Tangible book value per share decreased 0.8% to $38.21 as of March 31, 2022 from $38.51 as of December 31, 2021.

The decline in both book value per common share and tangible book value per share reflects the decline in total shareholders’ equity and tangible common equity.

1 unchanged sentence

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

(dollars in thousands) September 30,

2021 June 30,

2021 March 31,

(dollars in thousands) March 31,

2022 December 31,

2021 September 30,

2021 June 30,

2021 March 31,

Commercial loans

13 unchanged sentences

Other consumer 270,330 9.4 % 265,478 9.2 % 268,396 9.1 % 271,796 9.2 % 270,209 8.8 %

Tax refund advance loans 9,177 0.3 % — 0.0 % — 0.0 % — 0.0 % — 0.0 %

Total consumer loans 488,760 16.9 % 469,913 16.3 % 475,106 16.1 % 466,454 15.8 % 478,306 15.6 %

4 unchanged sentences

Net loans $ 2,852,529 $ 2,859,821 $ 2,908,148 $ 2,929,542 $ 3,028,052

(1) Includes carrying value adjustments of $38.9 million, $40.4 million, $41.6 million, $42.7 million and $44.3 million related to terminated interest rate swaps associated with public finance loans as of September 30, 2021, June 30, 2021, March 31, 2021, December 31, 2020, and September 30, 2020, respectively.

Total loans were $2.9 billion as of September 30, 2021, a decrease of $123.1 million, or 4.0%, compared to December 31, 2020.

Total commercial loan balances were $2.4 billion as of September 30, 2021, down $110.1 million, or 4.4%, from December 31, 2020.

Total consumer loan balances were $475.1 million as of September 30, 2021, a decrease of $7.2 million, or 1.5%, compared to 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, small business lending and public finance loans, which were partially offset by increases in commercial and industrial, franchise finance and investor commercial real estate loan balances.

The net payoffs in the healthcare finance portfolio were driven primarily by elevated prepayment activity and minimal origination activity.

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

The net payoffs in small business lending were predominantly related to PPP loan forgiveness, partially offset by new originations.

Franchise finance was established in July 2021 in conjunction with the Copmany’s business relationship with ApplePie Capital, a leading provider of growth financing to franchisees in various industry segments across the country.

Through this relationship, we began funding portfolio loans in the third quarter 2021 and expect to fund a total of up to $100.0 million of loans by the end of 2021 and up to an additional $150.0 million of loans during 2022.

(1) Includes carrying value adjustments of $36.4 million, $37.5 million, $38.9 million, $40.4 million and $41.6 million related to terminated interest rate swaps associated with public finance loans as of March 31, 2022, December 31, 2021, September 30, 2021, June 30, 2021, and March 31, 2021, respectively.

Total loans were $2.9 billion as of March 31, 2022, a decrease of $6.9 million, or 0.2%, compared to December 31, 2021.

Total commercial loan balances were $2.3 billion as of March 31, 2022, down $23.8 million, or 1.0%, from December 31, 2021.

Total consumer loan balances were $488.8 million as of March 31, 2022, an increase of $18.8 million, or 4.0%, compared to December 31, 2021.

Compared to December 31, 2021, the decline in commercial loan balances was driven largely by net payoffs in healthcare finance, small business lending, which included PPP repayment as well as some prepayments and sales of seasoned loans, owner-occupied commercial real estate and public finance loans, as well as the sale of $14.4 million of single tenant lease financing loans.

This decline was partially offset by growth in franchise finance, construction, investor commercial real estate and commercial and industrial loan balances.

The increase in consumer loans was due to higher balances in the residential mortgage, recreational vehicles and trailers loan portfolios, as well as the remaining outstanding balance of tax refund advance loans originated during the first quarter 2022.

Franchise finance was established in July 2021 in partnership with ApplePie Capital, a leading provider of growth financing to franchisees in various industry segments across the country.

Through this relationship, we began funding portfolio loans in 2021 and as of March 31, 2022, we have funded a total of $107.4 million in loans.

Also, the Company funded $184.2 million of tax refund advance loans during the first quarter of 2022 and received repayments of $173.6 million.

At quarter end, $9.2 million of balances remained outstanding on the tax refund advance loans.

Asset Quality

Nonperforming loans are comprised of nonaccrual loans and loans 90 days past due and accruing.

Nonperforming assets include nonperforming loans, OREO and other nonperforming assets, which consist of repossessed assets.

Nonperforming assets include nonperforming loans, other real estate owned and other nonperforming assets, which consist of repossessed assets.

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

(dollars in thousands) September 30,

2021 June 30,

2021 March 31,

(dollars in thousands) March 31,

2022 December 31,

2021 September 30,

2021 June 30,

2021 March 31,

Nonaccrual loans

19 unchanged sentences

Other real estate owned

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

Single tenant lease financing — 1,188 1,188 1,188 —

Residential mortgage — — — 112 —

7 unchanged sentences

Allowance for loan losses to total loans 0.98 % 0.96 % 0.95 % 0.95 % 1.00 %

Allowance for loan losses to total loans, excluding PPP loans (3)

0.96 % 0.96 % 1.02 % 0.98 % 0.91 %

Nonaccrual loans to total loans 0.25 % 0.26 % 0.27 % 0.31 % 0.47 %

Allowance for loan losses to nonperforming loans (2)

3 unchanged sentences

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

3 This information 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.

Troubled Debt Restructurings

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

(in thousands) September 30,

2021 June 30,

2021 March 31,

(in thousands) March 31,

2022 December 31,

2021 September 30,

2021 June 30,

2021 March 31,

Troubled debt restructurings – nonaccrual $ 2,440 $ 2,492 $ 2,550 $ 2,581 $ 2,606

1 unchanged sentence

Total troubled debt restructurings $ 4,858 $ 4,185 $ 3,393 $ 3,760 $ 3,793

The decline in nonperforming loans of $2.3 million, or 22.9%, to $7.9 million as of September 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 a payoff of a loan that was previously on nonaccrual, as well as 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 decreased $1.2 million, or 11.5%, as of September 30, 2021 compared to December 31, 2020, due primarily to a $2.3 million decrease in nonperforming loans discussed above, partially offset by a $1.2 million increase in OREO.

The ratio of nonperforming loans to total loans decreased to 0.27% as of September 30, 2021 compared to 0.33% as of December 31, 2020 and the ratio of nonperforming assets to total assets decreased to 0.21% as of September 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 September 30, 2021 were $3.4 million, up $0.4 million from December 31, 2020.

The decline in nonperforming loans of $0.3 million, or 4.3%, to $7.1 million as of March 31, 2022 compared to $7.4 million as of December 31, 2021 was due primarily to repayment activity in the small business lending, owner-occupied commercial real estate and commercial and industrial loan portfolios.

Total nonperforming assets decreased $1.5 million, or 17.8%, as of March 31, 2022 compared to December 31, 2021, due primarily to the $0.3 million decrease in nonperforming loans discussed above, as well as the decline in other real estate owned (“OREO”) discussed below.

The ratio of nonperforming loans to total loans decreased to 0.25% as of March 31, 2022 compared to 0.26% as of December 31, 2021, and the ratio of nonperforming assets to total assets decreased to 0.17% as of March 31, 2022 compared to 0.20% as of December 31, 2021.

Total TDRs as of March 31, 2022 were $4.9 million, up $0.7 million from December 31, 2021.

The increase was driven by one residential mortgage loan that became a TDR during the first quarter 2022.

As of September 30, 2021, the Company had one commercial property in OREO, with a carrying value of $1.2 million.

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

As of September 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.

As of December 31, 2021, the Company had one single tenant lease financing property in OREO with a carrying value of $1.2 million.

During the first quarter 2022, the Company reached a settlement agreement with the guarantor, which resulted in the Company recovering $1.2 million in excess of the carrying value of OREO.

As of March 31, 2022, the Company did not own any OREO.

Non-TDR Loan Modifications due to COVID-19

2 unchanged sentences

Additionally, Section 4013 of the CARES Act further provides that loan modifications due to the impact of COVID-19 that would otherwise be classified as TDRs under GAAP will not be so classified.

Modifications within the scope of this relief are in effect from the period beginning March 1, 2020 until the earlier of January 1, 2022, or 60 days after the date on which the national emergency related to the COVID-19 pandemic formally terminates.

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 September 30, 2021, the Company had thirteen loans totaling $3.0 million in non-TDR loan modifications due to COVID-19.

Modifications within the scope of this relief were in effect from the period beginning March 1, 2020 until January 1, 2022.

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

As of March 31, 2022, the Company had seven loans totaling $9.8 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 gross origination

fees of approximately $2.3 million.

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

The Company began processing applications for forgiveness from this round beginning in December 2020 and 99.5% of loan balances have been forgiven as of September 30, 2021.

The Company began processing applications for forgiveness from this round beginning in December 2020 and 100% of loan balances have been forgiven as of December 31, 2021.

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 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.

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 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 and 51.9% of loan balances have been forgiven as of September 30, 2021.

The Company began processing applications for forgiveness from this round beginning in May 2021 and 99% of loan balances have been forgiven as of March 31, 2022.

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 2022.

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

(dollars in thousands)

Number of Loans Principal Balance Net Deferred Fees

The following table provides a rollforward of the activity of PPP loans through March 31, 2022.

(in thousands) Number of Loans Principal Balance Net Deferred Fees

Originated 447 $ 58,336 $ 1,851

5 unchanged sentences

Net deferred fees recognized (1,624)

Balance, September 30, 2021 108 14,981 481

Balance, December 31, 2021 23 3,152 99

Originated — — —

Principal repaid (18) (2,149)

Net deferred fees recognized — (75)

Balance, March 31, 2022 5 $ 1,003 $ 24

Allowance for Loan Losses

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

(dollars in thousands) Three Months Ended Nine Months Ended

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

Three Months Ended

(in thousands) March 31,

2022 December 31,

2021 September 30,

1 unchanged sentence

2021 March 31,

2021 December 31,

2020 September 30,

2021 September 30,

Balance, beginning of period $ 27,841 $ 28,000 $ 28,066 $ 30,642 $ 29,484

Provision charged to expense (29) 21 1,276 2,865 2,509 1,268 6,461

Provision (credit) charged to expense 791 (238) (29) 21 1,276

Losses charged off

Recoveries 83 92 193 110 184 369 371

Commercial and industrial — — — 28 —

Single tenant lease financing — — — 2,392 —

Small business lending 80 — 10 133 79

Residential mortgage — — — 6 —

Home equity — — — — 51

Other consumer 163 106 110 131 181

Tax refund advance loans 1,488 — — — —

Total losses charged off 1,731 106 120 2,690 311

Commercial and industrial — 3 2 2 82

Single tenant lease financing 1,231 — — — —

Small business lending 17 48 26 2 4

Residential mortgage 1 51 3 4 5

Home equity 2 2 2 1 2

Other consumer 99 81 50 84 100

Total losses charged off 1,350 185 83 93 193

Balance, end of period $ 28,251 $ 27,841 $ 28,000 $ 28,066 $ 30,642

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

The allowance for loan losses was $28.0 million as of September 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 single tenant lease financing loans and a commercial and industrial relationship, all of which had been classified as nonaccrual.

The single tenant lease financing loans included a nonaccrual loan that was paid off during the quarter and a single tenant lease financing relationship consisting of 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 specific reserves

was partially offset by additional adjustments to the qualitative factors in the Company’s allowance model that increased the allowance for loan losses to total loans.

The allowance for loan losses as a percentage of total loans was 0.95% at September 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 356.6% as of September 30, 2021, compared to 289.5% as of December 31, 2020, due to the decrease in nonperforming loans related to single tenant lease financing loans and the commercial and industrial relationship discussed above.

The provision for loan losses in the third quarter 2021 was less than $0.1 million, compared to $2.5 million for the third quarter 2020.

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

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

Net charge-offs (recoveries) $ 381 $ (79) $ 37 $ 2,597 $ 118

Net charge-offs (recoveries) to average loans (annualized)

Commercial and industrial 0.00 % (0.01 %) (0.01 %) 0.14 % (0.49 %)

Single tenant lease financing (0.58 %) 0.00 % 0.00 % 1.04 % 0.00 %

Small business lending 0.23 % (0.17 %) (0.05 %) 0.35 % 0.20 %

Total commercial net charge-offs (recoveries) (0.20 %) (0.01 %) 0.00 % 0.42 % 0.00 %

Residential mortgage 0.00 % (0.11 %) (0.01 %) 0.00 % (0.01 %)

Home equity (0.04 %) (0.04 %) (0.05 %) (0.02 %) 1.04 %

Other consumer 0.40 % 0.28 % 0.24 % 0.32 % 0.42 %

Tax refund advance loans 9.97 % 0.00 % 0.00 % 0.00 % 0.00 %

Total consumer net charge-offs (recoveries) 0.05 % (0.01 %) 0.01 % 0.35 % 0.02 %

Total net charge-offs (recoveries), excluding tax refund advance loans (0.16 %) (0.01 %) 0.01 % 0.35 % 0.02 %

The allowance for loan losses was $28.3 million as of March 31, 2022, compared to $27.8 million as of December 31, 2021.

The allowance for loan losses as a percentage of total loans, including and excluding PPP loans, was 0.98% at March 31, 2022, compared to 0.96%, or 0.97% when excluding PPP loans, at December 31, 2021.

The allowance for loan losses as a percentage of nonperforming loans increased to 398.8% as of March 31, 2022, compared to 376.2% as of December 31, 2021.

Net charge-offs of $0.4 million were recognized during the first quarter 2022, resulting in net charge-offs to average loans of 0.05%, compared to net charge-offs to average loans of 0.02% for the first quarter 2021.

Excluding $1.5 million of net charge-offs related to tax refund advance loans, net recoveries of $1.1 million were recognized during the first quarter 2022, resulting in net recoveries to average loans of 0.16%.

The provision for loan losses in the first quarter 2022 was $0.8 million, compared to $1.3 million for the first quarter 2021.

The provision for the first quarter 2022 was driven by the provision related to tax refund advance loans, which totaled $1.8 million, and, to a lesser extent, adjustments to qualitative factors that increased the overall allowance as a percentage of

This was partially offset by a $1.2 million recovery on a single tenant lease financing relationship that previously had been partially charged-off with the remaining balance transferred to other real estate owned.

Investment Securities Portfolio

1 unchanged sentence

(in thousands)

Amortized Cost September 30,

2021 June 30,

2021 March 31,

Amortized Cost March 31,

2022 December 31,

2021 September 30,

2021 June 30,

2021 March 31,

Securities available-for-sale

1 unchanged sentence

Municipal securities 72,420 75,158 76,528 77,364 79,168

Agency mortgage-backed securities 432,613 445,895 229,981 241,795 250,755

Private label mortgage-backed securities 19,997 29,003 40,550 57,268 71,519

Agency mortgage-backed securities - residential 276,392 377,928 398,504 410,971 197,326

Agency mortgage-backed securities - commercial 24,815 36,024 34,109 34,924 32,655

Private label mortgage-backed securities - residential 15,090 15,902 19,997 29,003 40,550

Asset-backed securities 5,000 5,000 5,000 5,000 5,000

3 unchanged sentences

Municipal securities 13,981 13,992 14,538 14,549 14,560

Agency mortgage-backed securities - residential 95,982 — — — —

Agency mortgage-backed securities - commercial 5,847 — — — —

Corporate securities 47,560 45,573 47,591 51,110 53,630

2 unchanged sentences

(in thousands)

Approximate Fair Value September 30,

2021 June 30,

2021 March 31,

Approximate Fair Value March 31,

2022 December 31,

2021 September 30,

2021 June 30,

2021 March 31,

Securities available-for-sale

1 unchanged sentence

Municipal securities 72,804 77,033 77,450 78,438 79,208

Agency mortgage-backed securities 429,885 444,494 228,818 243,921 253,292

Private label mortgage-backed securities 20,235 29,363 41,106 58,116 72,626

Agency mortgage-backed securities - residential 257,682 373,236 395,105 408,710 195,514

Agency mortgage-backed securities - commercial 24,156 36,326 34,780 35,784 33,304

Private label mortgage-backed securities - residential 14,818 16,021 20,235 29,363 41,106

Asset-backed securities 4,986 5,004 5,005 5,005 5,006

3 unchanged sentences

Municipal securities 14,093 14,709 15,319 15,373 15,109

Agency mortgage-backed securities - residential 92,939 — — — —

Agency mortgage-backed securities - commercial 5,420 — — — —

Corporate securities 47,519 46,759 49,018 52,685 54,274

1 unchanged sentence

Total securities $ 625,259 $ 664,512 $ 698,344 $ 731,577 $ 531,759

The approximate fair value of available-for-sale investment securities increased $136.4 million, or 27.4%, to $634.0 million as of September 30, 2021, compared to $497.6 million as of December 31, 2020.

The increase was due primarily to an increase of $186.0 million in agency mortgage-backed securities, partially offset by a $38.1 million decrease in private label mortgage-backed securities and a $8.1 million decrease in U.S.

The approximate fair value of available-for-sale investment securities decreased $137.8 million, or 22.8%, to $465.3 million as of March 31, 2022, compared to $603.0 million as of December 31, 2021.

The decrease was due primarily to a decrease of $115.6 million in agency mortgage-backed securities - residential, a decrease of $12.2 million in agency mortgage-

backed securities - commercial and a decrease of $5.2 million in U.S.

Government-sponsored agencies.

The increase in agency mortgage-backed securities was driven primarily by purchases during the nine months ended September 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.

The decrease in agency mortgage-backed securities - residential and agency mortgage-backed securities - commercial was due primarily to the transfer of $96.2 million of these securities from available-for-sale to held-to-maturity in the first quarter 2022, as well as a decline in fair value resulting from the rapid rise in interest rates during the quarter.

The decreases in other securities types were also driven by a decline in value resulting from the rapid rise in interest rates.

Accrued Income and Other Assets

Accrued income and other assets decreased $9.9 million, or 15.4%, to $54.4 million at September 30, 2021 compared to $64.3 million at December 31, 2020.

Accrued income and other assets decreased $12.4 million, or 26.4%, to $34.5 million at March 31, 2022 compared to $46.9 million at December 31, 2021.

The decrease was primarily related to a decrease of $12.9 million in cash pledged as collateral.

2 unchanged sentences

Accrued Expenses and Other Liabilities

Accrued expenses and other liabilities were $36.6 million at September 30, 2021 compared to $48.4 million at December 31, 2020.

The decrease in accrued expenses and other liabilities was due primarily to an $11.8 million, or 38.7%, decrease in derivative liabilities due to changes in fair value.

Accrued expenses and other liabilities were $12.0 million at March 31, 2022 compared to $30.5 million at December 31, 2021.

The decrease in accrued expenses and other liabilities was due primarily to decreases of $11.4 million, or 79.6%, in derivative liabilities, a $3.8 million decrease in accrued taxes payable and a $2.3 million decrease in accrued bonuses.

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

(dollars in thousands) September 30,

2021 June 30,

2021 March 31,

(dollars in thousands) March 31,

2022 December 31,

2021 September 30,

2021 June 30,

2021 March 31,

Noninterest-bearing deposits $ 119,197 3.7 % $ 117,531 3.7 % $ 110,117 3.4 % $ 113,996 3.6 % $ 100,700 3.1 %

2 unchanged sentences

Money market accounts 1,475,857 45.8 % 1,483,936 46.7 % 1,479,358 45.8 % 1,432,355 44.6 % 1,397,449 43.4 %

BaaS - brokered deposits 50,006 1.6 % — 0.0 % — 0.0 % — 0.0 % — 0.0 %

Certificates of deposits 889,789 27.6 % 970,107 30.5 % 1,043,898 32.4 % 1,087,350 33.9 % 1,174,764 36.5 %

1 unchanged sentence

Total deposits $ 3,217,979 100.0 % $ 3,178,959 100.0 % $ 3,224,595 100.0 % $ 3,206,147 100.0 % $ 3,217,603 100.0 %

Total deposits decreased $46.3 million, or 1.4%, to $3.2 billion as of September 30, 2021, compared to $3.3 billion as of December 31, 2020.

This decrease was due primarily to a decline of $245.4 million, or 19.0%, in certificates of deposits, partially offset by increases of $128.8 million, or 9.6%, in money market accounts, $23.6 million, or 54.5%, in savings accounts, $20.5 million, or 6.8%, in brokered deposits, $13.4 million, or 13.8%, in noninterest-bearing deposits, and $12.9 million, or 6.8%, 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.

The decrease in certificates of deposits was due to the maturity of higher cost balances and reduced pricing strategies designed to limit the volume of new production.

Total deposits increased $39.0 million, or 1.2%, to $3.2 billion as of March 31, 2022, compared to $3.2 billion as of December 31, 2021.

This increase was due primarily to an increase of $86.8 million, or 35.0%, in interest-bearing demand deposits, $50.0 million in BaaS brokered deposits, and $6.3 million, or 10.5%, in savings accounts, partially offset by decreases of $80.3 million, or 8.3%, in certificates of deposits, $17.3 million, or 5.8%, in brokered deposits, and $8.1 million, or 0.5%, in money market accounts.

The increase in the balance of interest-bearing demand deposits was due primarily to approximately $100 million in deposits with a contractual term of five years and a fixed rate of 1.15% pursuant to a new customer relationship.

Additionally, the Company generated $50.0 million of new BaaS deposits during the quarter at a cost of 0.20%.

Aside from these two new deposit relationships, the balance and cost of non-maturity deposits remained relatively stable from the end of 2021.

The decrease in the balance of certificates of deposits was due to the maturity of higher cost balances and reduced pricing strategies designed to limit the volume of new production.

Recent Debt Offerings

On October 26, 2020, the Company issued $10.0 million in aggregate principal amount of 6.0% Fixed-to-Floating Rate Subordinated Notes due 2030 (the “2030 Notes”).

The Notes were offered and sold by the Company in a private placement and are scheduled to mature on November 1, 2030.

The 2030 Notes bear interest at a fixed rate of 6.0% per year from and including October 26, 2020, to, but excluding, November 1, 2025, and thereafter at a floating interest rate initially equal to the three-month term SOFR plus 5.795%.

The 2030 Notes are unsecured subordinated obligations of the Company and may be repaid, without penalty, on any interest payment date on or after November 1, 2025.

The 2030 Notes are intended to qualify as Tier 2 capital under regulatory guidelines.

The net proceeds were used to redeem the 2025 Note in January 2021.

In August 2021, the Company issued $60.0 million aggregate principal amount of 3.75% Fixed-to-Floating Rate Subordinated Notes due 2031 (the “2031 Notes”) in a private placement.

The 2031 Notes initially bear a fixed interest rate of 3.75% per year to, but excluding, September 1, 2026, and thereafter a floating rate equal to the then current three-month SOFR, plus 311 basis points.

The 2031 Notes initially bear a fixed interest rate of 3.75% per year to, but excluding, September 1, 2026, and thereafter a floating rate equal to the then-current benchmark rate (initially three-month Term SOFR plus 3.11%).

The 2031 Notes are scheduled to mature on September 1, 2031.

2 unchanged sentences

The Company used a portion of the net proceeds from the issuance of the 2031 Notes to redeem the 2026 Notes.

Under the terms of a Registration Rights Agreement between the Company and the initial purchasers of the 2031 Notes, the Company has agreed to take certain actions to provide for the exchange of the 2031 Notes for subordinated notes that are registered under the Securities Act of 1933, as amended, and have substantially the same terms as the 2031 Notes.

Pursuant to the terms of a Registration Rights Agreement between the Company and the initial purchasers of the 2031 Notes, the Company offered to exchange the 2031 Notes for subordinated notes that are registered under the Securities Act of 1933, as amended, and have substantially the same terms as the 2031 Notes.

The offering period to exchange the unregistered 2031 Notes for registered 2031 Notes expired on December 30, 2021.

Regulatory Capital Requirements

11 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 September 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 September 30, 2021 and December 31, 2020, which are based on the Basel III Capital Rules.

The following tables present actual and required capital ratios as of March 31, 2022 and December 31, 2021 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, 2022 and December 31, 2021, which are 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 September 30, 2021:

As of March 31, 2022:

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 October 15, 2021 to shareholders of record as of September 30, 2021.

The Company’s Board of Directors declared a cash dividend of $0.06 per share of common stock payable April 18, 2022 to shareholders of record as of March 31, 2022.

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 September 30, 2021, the Company had $107.0 million principal amount of subordinated debt outstanding evidenced by its 6.0% Fixed-to-Floating Rate Subordinated Notes due 2026, the 2029 Notes, the 2030 Notes, as well as its 3.75% Fixed-to-Floating Rate Subordinated Notes due 2031.

As of March 31, 2022, the Company had $107.0 million principal amount of subordinated debt outstanding evidenced by its 2029 Notes, 2030 Note and 2031 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.

4 unchanged sentences

If the Company is unable to secure such capital at favorable terms, its ability to take advantage of such opportunities could be adversely affected.

On October 20, 2021, the Company’s Board of Directors approved a stock repurchase program authorizing the repurchase of up to $30 million of the Company’s outstanding common stock from time to time on the open market or in privately negotiated transactions.

The Company repurchased 100,000 shares under this program during 2021 and 103,703 shares under this program during the first quarter 2022.

The stock repurchase authorization is scheduled to expire on December 31, 2022.

Various factors determine the amount and timing of our share repurchases, including our capital requirements, the number of shares we expect to issue in the future, economic and market conditions (including the trading price of our stock), and regulatory and legal considerations.

See Part II, Item 2, of this report for information regarding recent repurchase activity and our remaining authority under the program.

Liquidity management is the process used by the Company to manage the continuing flow of funds necessary to meet its financial commitments on a timely basis and at a reasonable cost while also maintaining safe and sound operations.

4 unchanged sentences

The Company holds cash and investment securities that qualify as liquid assets to maintain adequate liquidity to ensure safe and sound operations and meet its financial commitments.

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 September 30, 2021, on a consolidated basis, the Company had $1.0 billion in cash and cash equivalents and investment securities available-for-sale and $44.0 million in loans held-for-sale that were generally available for its cash needs.

At March 31, 2022, on a consolidated basis, the Company had $982.8 million in cash and cash equivalents and investment securities available-for-sale and $34.0 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 September 30, 2021, the Bank had the ability to borrow an additional $597.9 million from the FHLB, the Federal Reserve and correspondent bank Fed Funds lines of credit.

At March 31, 2022, the Bank had the ability to borrow an additional $526.5 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 September 30, 2021, the Company, on an unconsolidated basis, had $58.8 million in cash generally available for its cash needs, which is in excess of its current annual regular shareholder dividend and operating expenses.

At March 31, 2022, the Company, on an unconsolidated basis, had $44.3 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 September 30, 2021, approved outstanding loan commitments, including unused lines of credit and standby letters of credit, amounted to $278.3 million.

Certificates of deposits and brokered deposits scheduled to mature in one year or less at September 30, 2021 totaled $787.0 million.

At March 31, 2022, approved outstanding loan commitments, including unused lines of credit and standby letters of credit, amounted to $304.8 million.

Certificates of deposits and brokered deposits scheduled to mature in one year or less at March 31, 2022 totaled $623.9 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.

Non-GAAP financial measures, specifically tangible common equity, tangible assets, tangible book value per common share, tangible common equity to tangible assets, average tangible common equity, return on average tangible common equity, total interest income - FTE, adjusted total interest income - FTE, net interest income - FTE, adjusted net interest income, adjusted net interest income - FTE, net interest margin - FTE, adjusted net interest margin, adjusted net interest margin - FTE, (benefit) provision for loan losses, excluding tax refund advance loans, average loans, excluding tax refund advance loans, net (recoveries) charge-offs to average loans, excluding tax refund advance loans, loans, excluding PPP loans, allowance for loan losses to loans, excluding PPP loans, adjusted noninterest expense, adjusted income before income taxes, adjusted income tax provision, 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, adjusted effective income tax rate, income before income taxes, excluding tax refund advance loans, income tax provision, excluding tax refund advance loans, and net income, excluding tax refund advance loans 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 and the nine months ended September 30, 2021 and 2020.

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

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

2022 December 31,

2021 September 30,

1 unchanged sentence

2021 March 31,

2021 December 31,

2020 September 30,

2021 September 30,

Total equity - GAAP $ 374,655 $ 380,338 $ 370,442 $ 358,641 $ 344,566

17 unchanged sentences

Return on average tangible common equity 12.09 % 13.30 % 13.27 % 15.09 % 12.79 %

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

(dollars in thousands) Three Months Ended

2022 December 31,

2021 September 30,

1 unchanged sentence

2021 March 31,

2021 December 31,

2020 September 30,

2021 September 30,

Total interest income $ 36,034 $ 34,192 $ 33,034 $ 33,377 $ 33,280

2 unchanged sentences

Total interest income - FTE $ 37,348 $ 35,540 $ 34,390 $ 34,771 $ 34,636

Income from tax refund advance loans (2,864) — — — —

Adjusted total interest income - FTE $ 34,484 $ 35,540 $ 34,390 $ 34,771 $ 34,636

Net interest income $ 25,750 $ 23,505 $ 20,919 $ 21,607 $ 20,525

4 unchanged sentences

Subordinated debt redemption cost — — 810 — —

Income from tax refund advance loans (2,864) — — — —

Adjusted net interest income $ 22,886 $ 23,505 $ 20,919 $ 21,607 $ 20,525

3 unchanged sentences

Subordinated debt redemption cost — — 810 — —

Income from tax refund advance loans (2,864) — — — —

Adjusted net interest income - FTE $ 24,200 $ 24,853 $ 22,275 $ 23,001 $ 21,881

1 Assuming a 21% tax rate

(dollars in thousands) Three Months Ended

2022 December 31,

2021 September 30,

2021 June 30,

2021 March 31,

Net interest margin 2.56 % 2.30 % 2.00 % 2.11 % 2.04 %

4 unchanged sentences

Effect of subordinated debt redemption cost 0.00 % 0.00 % 0.08 % 0.00 % 0.00 %

Effect of income from tax refund advance loans (0.28 %) 0.00 % 0.00 % 0.00 % 0.00 %

Adjusted net interest margin 2.28 % 2.30 % 2.08 % 2.11 % 2.04 %

2 unchanged sentences

Effect of subordinated debt redemption cost 0.00 % 0.00 % 0.08 % 0.00 % 0.00 %

Effect of income from tax refund advance loans (0.28 %) 0.00 % 0.00 % 0.00 % 0.00 %

Adjusted net interest margin - FTE 2.41 % 2.43 % 2.21 % 2.25 % 2.18 %

Provision (benefit) for loan losses $ 791 $ (238) $ (29) $ 21 $ 1,276

Provision for tax refund advance loans losses (1,842) — — — —

(Benefit) provision for loan losses, excluding tax refund advance loans $ (1,051) $ (238) $ (29) $ 21 $ 1,276

Average loans $ 2,947,924 $ 2,914,858 $ 2,933,654 $ 2,994,850 $ 3,047,915

Average tax refund advance loans (60,499) — — — —

Average loans, excluding tax refund advance loans $ 2,887,425 $ 2,914,858 $ 2,933,654 $ 2,994,850 $ 3,047,915

Net charge-offs (recoveries) to average loans 0.05 % (0.01 %) 0.01 % 0.35 % 0.02 %

Effect of tax refund advance lending net charge-offs to average loans (0.21 %) 0.00 % 0.00 % 0.00 % 0.00 %

Net (recoveries) charge-offs to average loans, excluding tax refund advance loans (0.16 %) (0.01 %) 0.01 % 0.35 % 0.02 %

Allowance for loan losses $ 28,251 $ 27,841 $ 28,000 $ 28,066 $ 30,642

6 unchanged sentences

1 Assuming a 21% tax rate

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

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

2022 December 31,

2021 September 30,

1 unchanged sentence

2021 March 31,

2021 December 31,

2020 September 30,

2021 September 30,

Total Revenue- GAAP $ 28,732 $ 30,569 $ 28,900 $ 31,522 $ 28,727 $ 88,201 $ 69,355

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

Subordinated debt redemption cost 810 — — — — 810 —

Adjusted total revenue $ 27,922 $ 28,046 $ 28,900 $ 31,522 $ 28,727 $ 86,488 $ 69,355

Non-interest income - GAAP $ 7,813 $ 8,962 $ 8,375 $ 12,657 $ 12,495 $ 25,150 $ 23,679

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

Adjusted non-interest income $ 7,813 $ 6,439 $ 8,375 $ 12,657 $ 12,495 $ 22,627 $ 23,679

Noninterest expense - GAAP $ 18,780 $ 16,955 $ 14,451 $ 15,075 $ 15,317

Acquisition-related expenses (170) (163) — — —

IT termination fee — (475) — — —

Nonrecurring consulting fee (875) — — — —

Adjusted noninterest expense $ 17,735 $ 16,317 $ 14,451 $ 15,075 $ 15,317

Income before income taxes - GAAP $ 12,999 $ 14,482 $ 14,310 $ 15,473 $ 12,307

Write-down of other real estate owned — — — — 2,065 — 2,065

Acquisition-related expenses 170 163 — — —

IT termination fee — 475 — — —

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

Subordinated debt redemption cost — — 810 — —

Nonrecurring consulting fee 875 — — — —

Adjusted income before income taxes $ 14,044 $ 15,120 $ 15,120 $ 12,950 $ 12,307

Income tax provision - GAAP $ 1,790 $ 2,004 $ 2,220 $ 2,377 $ 1,857

Write-down of other real estate owned — — — — 434 — 434

Acquisition-related expenses 36 34 — — —

IT termination fee — 100 — — —

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

Subordinated debt redemption cost — — 170 — —

Nonrecurring consulting fee 184 — — — —

Adjusted income tax provision $ 2,010 $ 2,138 $ 2,390 $ 1,847 $ 1,857

Net income - GAAP $ 11,209 $ 12,478 $ 12,090 $ 13,096 $ 10,450

Write-down of other real estate owned — — — — 1,631 — 1,631

Acquisition-related expenses 134 129 — — —

IT termination fee — 375 — — —

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

Subordinated debt redemption cost — — 640 — —

Nonrecurring consulting fee 691 — — — —

Adjusted net income $ 12,034 $ 12,982 $ 12,730 $ 11,103 $ 10,450

1 unchanged sentence

Diluted earnings per share - GAAP $ 1.14 $ 1.25 $ 1.21 $ 1.31 $ 1.05

Effect of write-down of other real estate owned — — — — 0.17 — 0.16

Effect of acquisition-related expenses 0.01 0.01 — — —

Effect of IT termination fee — 0.04 — — —

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

Effect of subordinated debt redemption cost — — 0.06 — —

Effect of nonrecurring consulting fee 0.07 — — — —

Adjusted diluted earnings per share $ 1.22 $ 1.30 $ 1.27 $ 1.11 $ 1.05

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

September 30,

2021 June 30,

2021 March 31,

2021 December 31,

2020 September 30,

2021 September 30,

Return on average assets 1.08 % 1.19 % 1.12 % 1.25 % 1.02 %

Effect of write-down of other real estate owned 0.00 % 0.00 % 0.00 % 0.00 % 0.15 % 0.00 % 0.05 %

Effect of acquisition-related expenses 0.01 % 0.01 % 0.00 % 0.00 % 0.00 %

Effect of IT termination fee 0.00 % 0.04 % 0.00 % 0.00 % 0.00 %

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

Effect of subordinated debt redemption cost 0.00 % 0.00 % 0.06 % 0.00 % 0.00 %

Effect of nonrecurring consulting fee 0.07 % 0.00 % 0.00 % 0.00 % 0.00 %

Adjusted return on average assets 1.16 % 1.24 % 1.18 % 1.06 % 1.02 %

(dollars in thousands) Three Months Ended

2022 December 31,

2021 September 30,

2021 June 30,

2021 March 31,

Return on average shareholders' equity 11.94 % 13.14 % 13.10 % 14.88 % 12.61 %

Effect of write-down of other real estate owned 0.00 % 0.00 % 0.00 % 0.00 % 2.07 % 0.00 % 0.70 %

Effect of acquisition-related expenses 0.14 % 0.14 % 0.00 % 0.00 % 0.00 %

Effect of IT termination fee 0.00 % 0.39 % 0.00 % 0.00 % 0.00 %

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

Effect of subordinated debt redemption cost 0.00 % 0.00 % 0.69 % 0.00 % 0.00 %

Effect of nonrecurring consulting fee 0.74 % 0.00 % 0.00 % 0.00 % 0.00 %

Adjusted return on average shareholders' equity 12.82 % 13.67 % 13.79 % 12.62 % 12.61 %

Return on average tangible common equity 12.09 % 13.30 % 13.27 % 15.09 % 12.79 %

Effect of write-down of other real estate owned 0.00 % 0.00 % 0.00 % 0.00 % 2.10 % 0.00 % 0.71 %

Effect of acquisition-related expenses 0.14 % 0.14 % 0.00 % 0.00 % 0.00 %

Effect of IT termination fee 0.00 % 0.40 % 0.00 % 0.00 % 0.00 %

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

Effect of subordinated debt redemption cost 0.00 % 0.00 % 0.70 % 0.00 % 0.00 %

Effect of nonrecurring consulting fee 0.75 % 0.00 % 0.00 % 0.00 % 0.00 %

Adjusted return on average tangible common equity 12.98 % 13.84 % 13.97 % 12.79 % 12.79 %

Effective income tax rate 13.8 % 13.8 % 15.5 % 15.4 % 15.1 %

Effect of write-down of other real estate owned 0.0 % 0.0 % 0.0 % 0.0 % 1.2 % 0.0 % 1.4 %

Effect of acquisition-related expenses 0.3 % 0.1 % 0.0 % 0.0 % 0.0 %

Effect of IT termination fee 0.0 % 0.2 % 0.0 % 0.0 % 0.0 %

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

Effect of subordinated debt redemption cost 0.0 % 0.0 % 0.3 % 0.0 % 0.0 %

Effect of nonrecurring consulting fee 1.3 % 0.0 % 0.0 % 0.0 % 0.0 %

Adjusted effective income tax rate 15.4 % 14.1 % 15.8 % 14.3 % 15.1 %

Income before income taxes - GAAP $ 12,999 $ 14,482 $ 14,310 $ 15,473 $ 12,307

Income from tax refund advance lending (2,864) — — — —

Provision for tax refund advance loans losses 1,842 — — — —

Tax refund advance lending servicing fee 921 — — — —

Income before income taxes, excluding tax refund advance loans $ 12,898 $ 14,482 $ 14,310 $ 15,473 12,307

Income tax provision - GAAP $ 1,790 $ 2,004 $ 2,220 $ 2,377 $ 1,857

Income from tax refund advance lending (601) — — — —

Provision for tax refund advance loans losses 387 — — — —

Tax refund advance lending servicing fee 193 — — — —

Income tax provision, excluding tax refund advance loans $ 1,769 $ 2,004 $ 2,220 $ 2,377 $ 1,857

Net income - GAAP $ 11,209 $ 12,478 $ 12,090 $ 13,096 $ 10,450

Income from tax refund advance lending (2,263) — — — —

Provision for tax refund advance loans losses 1,455 — — — —

Tax refund advance lending servicing fee 728 — — — —

Net income, excluding tax refund advance loans $ 11,129 $ 12,478 $ 12,090 $ 13,096 $ 10,450

Critical Accounting Policies and Estimates

7 unchanged sentences

Cash flow hedges are used to convert certain variable rate liabilities into fixed rate liabilities.

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

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

At both March 31, 2022 and December 31, 2021, the Company had interest rate swaps with notional amounts of $260.0 million.

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 September 30, 2021 and December 31, 2020, the Company had commitments to sell residential real estate loans of $78.6 million and $107.5 million, respectively.

At March 31, 2022 and December 31, 2021, the Company had commitments to sell residential real estate loans of $56.8 million and $72.8 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