What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-11-09 compared with 2022-08-09 · 224 added, 210 removed, 668 unchanged (39% of the section changed)

4 unchanged sentences

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 with $4.1 billion in total assets as of June 30, 2022, 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 financial holding company with $4.3 billion in total assets as of September 30, 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.

10 unchanged sentences

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

Our C&I team provides credit solutions such as lines of credit, term loans, owner-occupied commercial real estate loans and corporate credit cards on a regional basis to commercial borrowers primarily in the Midwest and Southwest regions of the United States.We primarily offer construction and investor commercial real estate loans within Central Indiana or on a regional basis and single tenant lease financing on a nationwide basis.

We primarily offer construction and investor commercial real estate loans within Central Indiana or on a regional basis and single tenant lease financing on a nationwide basis.

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

6 unchanged sentences

We believe that we can differentiate ourselves from larger financial institutions by providing a full suite of services to emerging small businesses and entrepreneurs on a nationwide basis.

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.

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

government guaranteed lending programs.

6 unchanged sentences

Results of Operations

During the second quarter 2022, net income was $9.5 million, or $0.99 per diluted share, compared to second quarter 2021 net income of $13.1 million, or $1.31 per diluted share, representing a decrease in net income of $3.6 million, or 27.1%, and a decrease in diluted earnings per share of $0.32, or 24.4%.

During the six months ended June 30, 2022, net income was $20.8 million, or $2.13 per diluted share, compared to the six months ended June 30, 2021 net income of $23.5 million, or $2.36 per diluted share, resulting in a decrease in net income of $2.8 million, or 11.9%, and a decrease in diluted earnings per share of $0.23, or 9.7%.

The $3.6 million decrease in net income for the second quarter 2022 compared to the second quarter 2021 was due primarily to a decrease of $4.6 million, or 51.9%, in noninterest income, an increase of $2.9 million, or 19.3%, in noninterest expense and an increase of $1.2 million, in provision for loan losses, partially offset by an increase of $4.1 million, or 18.9%, in net interest income, and a decrease of $1.1 million, or 46.2%, in income tax expense.

The $2.8 million decrease in net income for the six months ended June 30, 2022 compared to the six months ended June 30, 2021 was due primarily to an increase of $6.4 million, or 21.0% in noninterest expense, a decrease of $6.2 million, or 35.8%, in noninterest income and an increase of $0.7 million, or 52.4%, in provision for loan losses, partially offset by an increase of $9.3 million, or 22.1%, in net interest income and a decrease of $1.2 million, or 27.5%, in income tax expense.

During the second quarter 2022, return on average assets (“ROAA”), return on average shareholders’ equity (“ROAE”), and return on average tangible common equity (“ROATCE”) were 0.93%, 10.23%, and 10.36%, respectively, compared to 1.25%, 14.88%, and 15.09%, respectively, for the second quarter 2021.

During the six months ended June 30, 2022, ROAA, ROAE and ROATCE were 1.01%, 11.09%, and 11.23%, respectively, compared to 1.13%, 13.78%, and 13.97%, respectively, for the six months ended June 30, 2021.

During the second quarter 2022, the Company paid a $0.5 million discretionary inflation bonus to certain employees, recognized accelerated equity compensation expense of $0.3 million related to several retirements and incurred $0.1 million of acquisition-related expenses.

Excluding these items, adjusted net income for the second quarter 2022 was $10.3 million and adjusted diluted earnings per share was $1.06.

Additionally, for the second quarter 2022, adjusted ROAA, adjusted ROAE and adjusted ROATCE were 1.00%, 11.01% and 11.15%, respectively.

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

Excluding this item, adjusted net income for the second quarter 2021 was $11.1 million, or $1.11 per diluted share.

Additionally, for the second quarter 2021, adjusted ROAA, adjusted ROAE and adjusted ROATCE were 1.06%, 12.62% and 12.79%, respectively.

During the six months ended June 30, 2022, the Company recognized a nonrecurring consulting fee associated with a special project of $0.9 million, paid a $0.5 million discretionary inflation bonus to certain employees, recognized accelerated equity compensation expense of $0.3 million related to several retirements and incurred acquisition-related expenses of $0.3 million.

Excluding these items, adjusted net income for the six months ended June 30, 2022 was $22.3 million and adjusted diluted earnings per share was $2.28.

Additionally, for the six months ended June 30, 2022, adjusted ROAA, adjusted ROAE and adjusted ROATCE were 1.08%, 11.92% and 12.07%, respectively.

During the six months ended June 30, 2021, the Company recognized a $2.5 million pre-tax gain on sale of its corporate headquarters.

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

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

During the third quarter 2022, net income was $8.4 million, or $0.89 per diluted share, compared to third quarter 2021 net income of $12.1 million, or $1.21 per diluted share, representing a decrease in net income of $3.7 million, or 30.2%, and a decrease in diluted earnings per share of $0.32, or 26.4%.

During the nine months ended September 30, 2022, net income was $29.2 million, or $3.01 per diluted share, compared to the nine months ended September 30, 2021 net income of $35.6 million, or $3.57 per diluted share, resulting in a decrease in net income of $6.4 million, or 18.1%, and a decrease in diluted earnings per share of $0.56, or 15.7%.

The $3.7 million decrease in net income for the third quarter 2022 compared to the third quarter 2021 was due primarily to a decrease of $3.5 million, or 44.8%, in noninterest income, an increase of $3.5 million, or 24.5%, in noninterest expense and an increase of $0.9 million, in provision for loan losses, partially offset by an increase of $3.1 million, or 14.7%, in net interest income, and a decrease of $1.2 million, or 55.5%, in income tax expense.

The $6.4 million decrease in net income for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021 was due primarily to an increase of $9.9 million, or 22.1% in noninterest expense, a decrease of $9.7 million, or 38.6%, in noninterest income and an increase of $1.6 million, or 126.2%, in provision for loan losses, partially offset by an increase of $12.4 million, or 19.6%, in net interest income and a decrease of $2.4 million, or 37.2%, in income tax expense.

During the third quarter 2022, return on average assets (“ROAA”), return on average shareholders’ equity (“ROAE”), and return on average tangible common equity (“ROATCE”) were 0.82%, 9.01%, and 9.13%, respectively, compared to 1.12%, 13.10%, and 13.27%, respectively, for the third quarter 2021.

During the nine months ended September 30, 2022, ROAA, ROAE and ROATCE were 0.94%, 10.40%, and 10.53%, respectively, compared to 1.13%, 13.54%, and 13.73%, respectively, for the nine months ended September 30, 2021.

During the third quarter 2022, the Company had a $0.1 million write-down of software.

Excluding this item, adjusted net income for the third quarter 2022 was $8.5 million and adjusted diluted earnings per share was $0.90.

Additionally, for the third quarter 2022, adjusted ROAA, adjusted ROAE and adjusted ROATCE were 0.83%, 9.12% and 9.24%, respectively.

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

Additionally, for the third quarter 2021, adjusted ROAA, adjusted ROAE and adjusted ROATCE were 1.18%, 13.79% and 13.97%, respectively.

During the nine months ended September 30, 2022, the Company recognized a nonrecurring consulting fee associated with a special project of $0.9 million, paid a $0.5 million discretionary inflation bonus to certain employees, recognized accelerated equity compensation expense of $0.3 million related to several retirements, incurred acquisition-related expenses of $0.3 million and expensed a write-down of software of $0.1 million.

Excluding these items, adjusted net income for the nine months ended September 30, 2022 was $30.8 million and adjusted diluted earnings per share was $3.17.

Additionally, for the nine months ended September 30, 2022, adjusted ROAA, adjusted ROAE and adjusted ROATCE were 0.99%, 11.00% and 11.13%, respectively.

During the nine months ended September 30, 2021, the Company recognized a $2.5 million pre-tax gain on sale of its corporate headquarters and recognized $0.8 million of pre-tax costs related to the redemption of its $25.0 million aggregate principal amount of 6.0% fixed-to-floating rate subordinated notes due in 2026.

Excluding these items, adjusted net income for the nine months ended September 30, 2021 was $34.3 million, or $3.44 per diluted share.

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

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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Three Months Ended

June 30, 2022 March 31, 2022 June 30, 2021

September 30, 2022 June 30, 2022 September 30, 2021

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

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

Six Months Ended

June 30, 2022 June 30, 2021

Nine Months Ended

September 30, 2022 September 30, 2021

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

23 unchanged sentences

Total liabilities and shareholders’ equity $ 4,138,866 $ 4,215,479

$ 4,156,068 $ 4,190,212

Net interest income $ 75,424 $ 63,051

$ 51,430 $ 42,132

Interest rate spread 1

12 unchanged sentences

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.

Three Months Ended June 30, 2022 vs.

March 31, 2022 Due to Changes in Three Months Ended June 30, 2022 vs.

June 30, 2021 Due to Changes in Six Months Ended June 30, 2022 vs.

June 30, 2021 Due to Changes in

Three Months Ended September 30, 2022 vs.

June 30, 2022 Due to Changes in Three Months Ended September 30, 2022 vs.

September 30, 2021 Due to Changes in Nine Months Ended September 30, 2022 vs.

September 30, 2021 Due to Changes in

(in thousands) Volume Rate Net Volume Rate Net Volume Rate Net

9 unchanged sentences

Total (408) 5,087 4,679 (1,428) 4,418 2,990 (398) (427) (825)

(Decrease) increase in net interest income $ 2,387 $ (2,457) $ (70) $ (505) $ 4,578 $ 4,073 $ (2,659) $ 11,957 $ 9,298

Net interest income for the second quarter 2022 was $25.7 million, an increase of $4.1 million, or 18.9%, compared to $21.6 million for the second quarter 2021.

The increase in net interest income was the result of a $2.7 million, or 8.2% increase in total interest income to $36.1 million for the second quarter 2022 from $33.4 million for the second quarter 2021, as well as a $1.3 million, or 11.4%, decrease in total interest expense to $10.4 million for the second quarter 2022 from $11.8 million for the second quarter 2021.

Net interest income for the six months ended June 30, 2022 was $51.4 million, an increase of $9.3 million, or 22.1%, compared to $42.1 million for the six months ended June 30, 2021.

The increase in net interest income was the result of a $5.5 million, or 8.2%, increase in total interest income to $72.1 million for the six months ended June 30, 2022 from $66.7 million for the six months ended June 30, 2021, as well as a $3.8 million, or 15.6%, decrease in total interest expense to $20.7 million for the six months ended June 30, 2022 from $24.5 million for the six months ended June 30, 2021.

The increase in total interest income for the second quarter 2022 compared to second quarter 2021 was due primarily to a $1.6 million, or 5.1%, increase in interest earned on loans, a $0.7 million, or 32.8%, increase in interest earned on securities and a $0.4 million, or 119.9%, increase in income from other earning assets.

The increase in income from loans was primarily due to a 21 bp increase in the yield earned on loans as the average balance of loans was relatively flat compared to the second quarter 2021.

The average balance of securities increased $45.7 million, or 8.0%, and the yield earned on the securities portfolio increased 35 bps for the second quarter 2022 compared to the second quarter 2021.

In addition, the yield earned on other earning assets increased 71 bps, partially offset by a decrease in the average balance of other earning assets of $187.4 million, or 36.8%.

Increase (decrease) in net interest income $ 49 $ (1,735) $ (1,686) $ 38 $ 3,037 $ 3,075 $ 1,124 $ 11,249 $ 12,373

Net interest income for the third quarter 2022 was $24.0 million, an increase of $3.1 million, or 14.7%, compared to $20.9 million for the third quarter 2021.

The increase in net interest income was the result of a $6.1 million, or 18.4% increase in total interest income to $39.1 million for the third quarter 2022 from $33.0 million for the third quarter 2021, partially offset by a $3.0 million, or 24.7%, increase in total interest expense to $15.1 million for the third quarter 2022 from $12.1 million for the third quarter 2021.

Net interest income for the nine months ended September 30, 2022 was $75.4 million, an increase of $12.4 million, or 19.6%, compared to $63.1 million for the nine months ended September 30, 2021.

The increase in net interest income was the result of an $11.5 million, or 11.6%, increase in total interest income to $111.2 million for the nine months ended September 30, 2022 from $99.7 million for the nine months ended September 30, 2021, as well as a $0.8 million, or 2.3%, decrease in total interest expense to $35.8 million for the nine months ended September 30, 2022 from $36.6 million for the nine months ended September 30, 2021.

The increase in total interest income for the third quarter 2022 compared to third quarter 2021 was due primarily to a $4.5 million, or 15.0%, increase in interest earned on loans, $0.9 million, or 241.6%, increase in income from other earning assets and a $0.7 million, or 25.8%, increase in interest earned on securities.

The increase in income from loans was due primarily to a 29 bp increase in the yield earned on loans, as well as an increase of $219.5 million, or 7.4%, in the average balance of loans compared to the third quarter 2021.

The yield earned on other earning assets increased 235 bps, partially offset by a decrease in the average balance of other earning assets of $290.6 million, or 60.7%.

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

The increase in total interest income from the six months ended June 30, 2022 compared to the six months ended June 30, 2021 was due primarily to a $3.9 million, or 6.3%, increase in interest earned on loans, a $1.1 million, or 26.5%, increase in interest earned on securities and a $0.5 million, or 68.1%, increase in income from other earning assets.

The increase in income from loans was due primarily to a 33 bp increase in the yield earned on loans, partially offset by a $49.5 million, or 1.6%, decrease in the average balance of loans.

The average balance of securities increased $72.9 million, or 13.0%, and the yield earned on the securities portfolio increased 19 bps for the six months ended June 30, 2022 compared to the six months ended June 30, 2021.

In addition, the yield earned on other earning assets increased 32 bps, partially offset by a decrease in the average balance of other earning assets of $89.3 million, or 18.7%.

The average balance of securities decreased $107.0 million, or 15.0%, while the yield earned on the securities portfolio increased 68 bps for the third quarter 2022 compared to the third quarter 2021.

The increase in the yields earned on loans, other earning assets and securities was due to the rise in interest rates throughout 2022.

The increase in total interest income for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021 was due primarily to an $8.4 million, or 9.2%, increase in interest earned on loans, a $1.8 million, or 26.3%, increase in interest earned on securities and a $1.4 million, or 128.3%, increase in income from other earning assets.

The increase in income from loans was due primarily to a 31 bp increase in the yield earned on loans, as well as a $41.0 million, or 1.4%, increase in the average balance of loans.

The average balance of securities increased $12.2 million, or 2.0%, and the yield earned on the securities portfolio increased 35 bps for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021.

In addition, the yield earned on other earning assets increased 71 bps, but was partially offset by a decrease in the average balance of other earning assets of $157.1 million, or 32.9%.

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

The decrease in total interest expense for the second quarter 2022 compared to the second quarter 2021 was due primarily to a $2.3 million, or 37.2%, decrease in interest expense related to certificates and brokered deposits, partially offset by an increase of $0.5 million, or 31.4%, in interest expense associated with money market accounts and a $0.3 million, or 225.9%, increase in interest expense associated with interest-bearing demand deposits.

Additionally, the Company added Banking-as-a-service deposits in 2022, which increased interest expense by $0.2 million.

Interest expense on certificates and brokered deposits decreased due to a decline of 30 bps in the cost of these deposits, as well as a $339.6 million, or 23.5%, 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 increase in interest expense related to money market accounts was driven primarily by an increase of 13 bps in the cost of these deposits, as well as an increase in the average balance of these deposits of $11.3 million, or 0.8%.

The increase in the yields earned on loans, securities and other earning assets was due to the rise in interest rates throughout 2022.

The increase in total interest expense for the third quarter 2022 compared to the third quarter 2021 was due primarily to an increase of $3.0 million, or 199.0%, in interest expense associated with money market accounts and a $0.4 million, or 267.3%, increase in interest expense associated with interest-bearing demand deposits, partially offset by a $0.9 million, or 17.5%, decrease in interest expense related to certificates and brokered deposits.

Additionally, the Company added Banking-as-a-Service (“BaaS”) deposits in 2022, which increased interest expense by $0.9 million.

The increase in interest expense related to money market accounts was driven primarily by an increase of 92 bps in the cost of these deposits, partially offset by a decrease in the average balance of these deposits of $128.4 million, or 8.6%.

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 in 2022.

The decrease in total interest expense for the six months ended June 30, 2022 compared to the six months ended June 30, 2021 was driven primarily by a $5.2 million, or 39.6%, decrease in interest expense related to certificates and brokered deposits, partially offset by a $0.6 million, or 218.1%, increase in interest expense associated with interest-bearing demand deposits and a $0.6 million, or 20.1%, increase in interest expense associated with money market accounts.

Additionally, the Company added Banking-as-a-service deposits in 2022, which increased interest expense by $0.2 million.

Interest expense on certificates and brokered deposits decreased due to a $340.9 million, or 24.7%, decrease in the average balance of these deposits, partially offset by an increase of 15 bps in the cost 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 increase in the cost of money market accounts and certificates and brokered deposits, as well as the cost of BaaS deposits, was due to the rise in interest rates throughout 2022.

The decrease in total interest expense for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021 was driven primarily by a $6.1 million, or 33.2%, decrease in interest expense related to certificates and brokered deposits, partially offset by a $3.6 million, or 82.6%, increase in interest expense associated with money market accounts and a $1.0 million, or 236.2%, increase in interest expense associated with interest-bearing demand deposits.

Additionally, the Company added BaaS deposits in 2022, which increased interest expense by $1.0 million.

Interest expense on certificates and brokered deposits decreased due to a decline of 24 bps in the cost of these deposits, as well as a $324.9 million, or 22.5%, decrease in 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 increase in interest expense related to money market accounts was driven primarily by an increase of 35 bps in the cost of these deposits, partially offset by a decrease in the average balance of these deposits of $11.6 million, or 0.8%.

The increase in interest expense related to money market accounts was driven primarily by an increase of 7 bps in the cost of these deposits, as well as an increase in the average balance of these deposits of $47.8 million, or 3.4%.

Overall, the cost of total interest-bearing liabilities for the second quarter 2022 declined 12 bps to 1.16% from 1.28% for the second quarter 2021.

Additionally, the cost of total interest-bearing liabilities for the six months ended June 30, 2022 declined 23 bps to 1.15% from 1.34% for the six months ended June 30, 2021.

The decline in the cost of funds for both the second quarter 2022 and the six months ended June 30, 2022 reflects the net maturities of higher cost certificates and brokered deposits and the continued shift in the deposit composition from certificates and brokered deposits to lower cost non-maturity deposit accounts.

Net interest margin (“NIM”) was 2.60% for the second quarter 2022 compared to 2.11% for the second quarter 2021, an increase of 49 bps.

On a fully-taxable equivalent (“FTE”) basis, NIM was 2.74% for the second quarter 2022 compared to 2.25% for the second quarter 2021, an increase of 49 bps.

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

NIM was 2.58% for the six months ended June 30, 2022 compared to 2.08% for the six months ended June 30, 2021, and increase of 50 bps.

On a fully-taxable equivalent basis, NIM was 2.71% for the six months ended June 30, 2022, compared to 2.21% for the six months ended June 30, 2021, an increase of 50 bps.

The increase in NIM for the six months ended June 30, 2022 compared to the six months ended June 30, 2021 reflects the decrease in the cost of funds and increase in earning asset yields noted above.

The increase in the cost of money market accounts, as well as the cost of BaaS deposits, reflects the increase in interest rates throughout 2022

Overall, the cost of total interest-bearing liabilities for the third quarter 2022 increased 39 bps to 1.67% from 1.28% for the third quarter 2021.

The cost of total interest-bearing liabilities for the nine months ended September 30, 2022 remained flat with the nine months ended September 30, 2021 at 1.32%.

The increase in the cost of funds for the third quarter 2022 reflects the rapid rise in interest rates throughout 2022.

Net interest margin (“NIM”) was 2.40% for the third quarter 2022 compared to 2.00% for the third quarter 2021, an increase of 40 bps.

On a fully-taxable equivalent (“FTE”) basis, NIM was 2.53% for the third quarter 2022 compared to 2.13% for the third quarter 2021, an increase of 40 bps.

The increase in third quarter 2022 NIM and FTE NIM compared to the third quarter 2021 reflects the increase in earning asset yields noted above, partially offset by the increase in the cost of interest-bearing liabilities.

NIM was 2.52% for the nine months ended September 30, 2022 compared to 2.05% for the nine months ended September 30, 2021, an increase of 47 bps.

On a fully-taxable equivalent basis, NIM was 2.65% for the nine months ended September 30, 2022, compared to 2.19% for the nine months ended September 30, 2021, an increase of 46 bps.

The increase in NIM for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021 reflects the increase in earning asset yields noted above, as the cost of interest-bearing liabilities remained stable.

Noninterest Income

The following table presents noninterest income for the last five completed fiscal quarters and the six months ended June 30, 2022 and 2021.

Three Months Ended Six Months Ended

(in thousands) June 30,

The following table presents noninterest income for the last five completed fiscal quarters and the nine months ended September 30, 2022 and 2021.

Three Months Ended Nine Months Ended

(in thousands) September 30,

2022 June 30,

2022 March 31,

1 unchanged sentence

2021 September 30,

2021 June 30,

2022 June 30,

2021 September 30,

2022 September 30,

Service charges and fees $ 248 $ 281 $ 316 $ 292 $ 276 $ 845 $ 822

6 unchanged sentences

Total noninterest income $ 4,316 $ 4,314 $ 6,820 $ 7,694 $ 7,813 $ 15,450 $ 25,150

During the second quarter 2022, noninterest income was $4.3 million, representing a decrease of $4.6 million, or 51.9%, compared to $9.0 million for the second quarter 2021.

The decrease in noninterest income was due to a $2.5 million gain on sale of premises and equipment resulting from the sale of the Company’s former headquarters in the second quarter 2021, as well as a decrease of $1.1 million, or 35.3%, in gain on sale of loans and a decrease of $1.0 million, or 36.1%, in revenue from mortgage banking activities during the second quarter 2022 compared to the second quarter 2021.

The decrease in gain on sale on loans was due to a decrease in the volume of U.S.

SBA 7(a) guaranteed loan sales, as well as lower net gain on sale premiums.

The decline in mortgage banking revenue was due primarily to decreases in interest rate locks, sold loan volumes and gain-on-sale margins.

During the six months ended June 30, 2022, noninterest income was $11.1 million, a decrease of $6.2 million, or 35.8%, compared to $17.3 million for the six months ended June 30, 2021.

The decrease in noninterest income was due primarily to a decrease in mortgage banking revenue of $4.8 million, or 57.5%, and a $2.5 million gain on sale of premises and equipment resulting from the sale of the Company’s former headquarters in the second quarter 2021, partially offset by a $1.1 million, or 22.2%, increase in gain on sale of loans.

The decrease in mortgage banking activities was due mainly to a decrease in interest rate locks, sold loan volume and gain-on-sale margins.

During the third quarter 2022, noninterest income was $4.3 million, representing a decrease of $3.5 million, or 44.8%, compared to $7.8 million for the third quarter 2021.

The decrease in noninterest income was due primarily to a decrease in revenue from mortgage banking activities and a decrease in other noninterest income, partially offset by an increase in loan servicing revenue.

The decline in mortgage banking revenue was due primarily to decreases in interest rate locks, sold loan volumes and gain-on-sale margins driven by the increase in interest rates throughout 2022.

The decrease in other noninterest income is due primarily to a distribution from the Company’s investment in a Small Business Investment Company fund that occurred during the three months ended September 30, 2021.

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

During the nine months ended September 30, 2022, noninterest income was $15.5 million, representing a decrease of $9.7 million, or 38.6%, compared to $25.2 million for the nine months ended September 30, 2021.

The decrease in noninterest income was due primarily to a decrease in revenue from mortgage banking activities and a decrease of $2.5 million from the gain on sale of premises and equipment resulting from the sale of the Company’s former headquarters that occurred in the second quarter 2021, partially offset by a $1.0 million, or 14.1%, increase in gain on sale of loans.

The decrease in mortgage banking activities was due mainly to decreases in interest rate locks, sold loan volumes and gain-on-sale margins driven by the increase in interest rates throughout 2022.

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 the sale of $14.4 million of single tenant lease financing loans in 2022.

SBA 7(a) guaranteed loan sales, as well as a gain on the sale of $14.4 million of single tenant lease financing loans in 2022.

Noninterest Expense

The following table presents noninterest expense for the last five completed fiscal quarters and the six months ended June 30, 2022 and 2021.

Three Months Ended Six Months Ended

(in thousands) June 30,

The following table presents noninterest expense for the last five completed fiscal quarters and the nine months ended September 30, 2022 and 2021.

Three Months Ended Nine Months Ended

(in thousands) September 30,

2022 June 30,

2022 March 31,

1 unchanged sentence

2021 September 30,

2021 June 30,

2022 June 30,

2021 September 30,

2022 September 30,

Salaries and employee benefits $ 10,439 $ 10,832 $ 9,878 $ 10,183 $ 9,316 $ 31,149 $ 28,040

7 unchanged sentences

Total noninterest expense $ 17,995 $ 17,985 $ 18,780 $ 16,955 $ 14,451 $ 54,760 $ 44,843

Noninterest expense for the second quarter 2022 was $18.0 million, compared to $15.1 million for the second quarter 2021.

The increase of $2.9 million, or 19.3%, was due primarily to increases of $1.6 million in salaries and employee benefits, $0.8 million in premises and equipment and $0.2 million in loan expenses.

The higher salaries and employee benefits expense was due mainly to a $0.5 million discretionary inflation bonus paid to certain employees, $0.3 million of accelerated equity compensation related to employees who retired during the quarter and an increase in headcount, partially offset by lower incentive compensation due to decreased mortgage origination volume.

The increase in premises and equipment was primarily related to costs associated with the Company’s new corporate headquarters, as well as investments in technology and software maintenance expense.

The increase in loan expenses was due mainly to servicing fees related to franchise finance loans.

Noninterest expense for the six months ended June 30, 2022 was $36.8 million, compared to $30.4 million for the six months ended June 30, 2021.

The increase of $6.4 million, or 21.0%, was due primarily to increases of $2.0 million in salaries and employee benefits, $1.8 million in premises and equipment, $1.2 million in loan expenses, $1.1 million in consulting and professional fees and $0.3 million in other expense.

The higher salaries and employee benefits expense was due primarily to an increase in headcount, as well as the discretionary inflation bonus and accelerated equity compensation mentioned above, partially offset by lower incentive compensation due to decreased mortgage origination volume.

The increase in premises and equipment was due mainly to costs associated with the Company’s new corporate headquarters, as well as investments in technology and software maintenance expense.

Noninterest expense for the third quarter 2022 was $18.0 million, compared to $14.5 million for the third quarter 2021.

The increase of $3.5 million, or 24.5%, was due primarily to increases of $1.1 million, or 12.1%, in salaries and employee benefits, $1.1 million, or 2.9%, in premises and equipment, and $0.8 million, or 2.0%, in loan expenses.

The higher salaries and employee benefits expense was due mainly to an increase in headcount as well as an increase in medical claims expense.The increase in premises and equipment was primarily related to costs associated with the Company’s new corporate headquarters, as well as investments in technology, software maintenance and a write-down of software.

The increase in loan expenses was due mainly to servicing fees related to the growth in franchise finance loans.

Noninterest expense for the nine months ended September 30, 2022 was $54.8 million, compared to $44.8 million for the nine months ended September 30, 2021.

The increase of $9.9 million, or 22.1%, was due primarily to increases of $3.1 million in salaries and employee benefits, $2.9 million in premises and equipment, $2.0 million in loan expenses and $1.1 million in consulting and professional fees.

The higher salaries and employee benefits expense was due primarily to an increase in headcount, higher medical claims expense, a $0.5 million discretionary inflation bonus paid to certain employees and $0.3 million of accelerated equity compensation related to employees who retired during the year.

The increase in premises and equipment was due mainly to costs associated with the Company’s new corporate headquarters, as well as investments in technology, software maintenance and a write-down of software.

The increase in loan expenses was due primarily to servicing fees related to tax refund advance loans and franchise finance loans.

The increase in consulting and professional fees was due primarily to a $0.9 million consulting fee associated with a special project.

Income tax provision was $1.3 million for the second quarter 2022, resulting in an effective tax rate of 11.8%, compared to a tax provision of $2.4 million for the second quarter 2021 and an effective tax rate of 15.4%.

Income tax provision was $3.1 million for the six months ended June 30, 2022, resulting in an effective tax rate of 12.9%, compared to an income tax provision of $4.2 million, or an effective tax rate of 15.2%, for the six months ended June 30, 2021.

The lower income tax provision and effective tax rate during the three and six months ended June 30, 2022 is the result of the decline in noninterest income, resulting in a higher proportion of tax exempt income to total pre-tax income.

Income tax provision was $1.0 million for the third quarter 2022, resulting in an effective tax rate of 10.5%, compared to a tax provision of $2.2 million for the third quarter 2021 and an effective tax rate of 15.5%.

Income tax provision was $4.1 million for the nine months ended September 30, 2022, resulting in an effective tax rate of 12.2%, compared to an income tax provision of $6.5 million, or an effective tax rate of 15.3%, for the nine months ended September 30, 2021.

The lower income tax provision and effective tax rate during the three and nine months ended September 30, 2022 is the result of the decline in noninterest income, resulting in a higher proportion of tax exempt income to total pre-tax income.

Financial Condition

2 unchanged sentences

Balance Sheet Data:

September 30,

2022 June 30,

2022 March 31,

1 unchanged sentence

2021 September 30,

2021 June 30,

Total assets $ 4,264,424 $ 4,099,806 $ 4,225,397 $ 4,210,994 $ 4,252,292

7 unchanged sentences

Total shareholders’ equity 360,857 365,332 374,655 380,338 370,442

Total assets decreased $111.2 million, or 2.6%, to $4.1 billion at June 30, 2022 compared to $4.2 billion at December 31, 2021.

The decrease is due primarily to decreases in cash balances and the fair value of total securities balances, partially offset by an increase in loan balances.

As of June 30, 2022, total shareholders’ equity was $365.3 million, a decrease of $15.0 million, or 3.9%, compared to December 31, 2021, due primarily to stock repurchase activity and an increase in accumulated other comprehensive loss resulting from a decline in the value of the available-for-sale securities portfolio caused by the continued rise in interest rates during the year.

Total assets increased $53.4 million, or 1.3%, to $4.3 billion at September 30, 2022 compared to $4.2 billion at December 31, 2021.

The increase was due primarily to increases in loan balances, partially offset by decreases in total securities balances and cash balances.

As of September 30, 2022, total shareholders’ equity was $360.9 million, a decrease of $19.5 million, or 5.1%, compared to December 31, 2021, due primarily to stock repurchase activity and an increase in accumulated other comprehensive loss resulting from a decline in the value of the available-for-sale securities portfolio caused by the continued rise in interest rates during the year.

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

Tangible common equity totaled $360.6 million as of June 30, 2022, representing a decrease of $15.0 million, or 4.0%, compared to December 31, 2021.

The ratio of total shareholders’ equity to total assets decreased to 8.91% as of June 30, 2022 from 9.03% as of December 31, 2021, and the ratio of tangible common equity to tangible assets decreased to 8.81% as of June 30, 2022 from 8.93% as of December 31, 2021.

Book value per common share decreased 0.4% to $38.85 as of June 30, 2022 from $38.99 as of December 31, 2021.

Tangible book value per share decreased 0.4% to $38.35 as of June 30, 2022 from $38.51 as of December 31, 2021.

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

Tangible common equity totaled $356.2 million as of September 30, 2022, representing a decrease of $19.5 million, or 5.2%, compared to December 31, 2021.

The ratio of total shareholders’ equity to total assets decreased to 8.46% as of September 30, 2022 from 9.03% as of December 31, 2021, and the ratio of tangible common equity to tangible assets decreased to 8.36% as of September 30, 2022 from 8.93% as of December 31, 2021.

Book value per common share decreased 0.4% to $38.84 as of September 30, 2022 from $38.99 as of December 31, 2021.

Tangible book value per share decreased 0.4% to $38.34 as of September 30, 2022 from $38.51 as of December 31, 2021.

The slight decline in both book value per common share and tangible book value per share reflects the declines in total

shareholders’ equity and tangible common equity, mostly offset by shares repurchased throughout the year.

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) June 30,

(dollars in thousands) September 30,

2022 June 30,

2022 March 31,

1 unchanged sentence

2021 September 30,

2021 June 30,

Commercial loans

20 unchanged sentences

Net loans $ 3,226,040 $ 3,052,974 $ 2,852,529 $ 2,859,821 $ 2,908,148

(1) Includes carrying value adjustments of $35.4 million, $36.4 million, $37.5 million, $38.9 million and $40.4 million related to terminated interest rate swaps associated with public finance loans as of June 30, 2022, March 31, 2022, December 31, 2021, September 30, 2021, and June 30, 2021, respectively.

Total loans were $3.1 billion as of June 30, 2022, an increase of $194.5 million, or 6.7%, compared to December 31, 2021.

Total commercial loan balances were $2.4 billion as of June 30, 2022, up $73.9 million, or 3.1%, from December 31, 2021.

Total consumer loan balances were $594.0 million as of June 30, 2022, an increase of $124.1 million, or 26.4%, compared to December 31, 2021.

Compared to December 31, 2021, the increase in commercial loan balances was driven by growth in franchise finance, investor commercial real estate, public finance, commercial and industrial and construction loan balances.

The increase was partially offset by payoffs in healthcare finance, small business lending, and owner-occupied commercial real estate loans.

The increase in consumer loans was due to higher balances in the residential mortgage, recreational vehicles and trailers loan portfolios.

(1) Includes carrying value adjustments of $33.9 million, $35.4 million, $36.4 million, $37.5 million and $38.9 million related to terminated interest rate swaps associated with public finance loans as of September 30, 2022, June 30, 2022, March 31, 2022, December 31, 2021, and September 30, 2021, respectively.

Total loans were $3.3 billion as of September 30, 2022, an increase of $368.2 million, or 12.8%, compared to December 31, 2021.

Total commercial loan balances were $2.5 billion as of September 30, 2022, up $171.2 million, or 7.2%, from December 31, 2021.

Total consumer loan balances were $672.2 million as of September 30, 2022, an increase of $202.3 million, or 43.1%, compared to December 31, 2021.

Compared to December 31, 2021, the increase in commercial loan balances was driven by growth in franchise finance, investor commercial real estate, single tenant lease financing, public finance, commercial and industrial and small business lending.

The increase was partially offset by net payoffs in healthcare finance and owner-occupied commercial real estate loans.

The increase in consumer loans was due to higher balances in the residential mortgage, home equity, trailers, recreational vehicles and other consumer loan portfolios.

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 have funded $173.8 million in total originations through June 30, 2022.

Through this relationship, we have funded $234.1 million in total originations since inception.

Asset Quality

2 unchanged sentences

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

(dollars in thousands) June 30,

(dollars in thousands) September 30,

2022 June 30,

2022 March 31,

1 unchanged sentence

2021 September 30,

2021 June 30,

Nonaccrual loans

29 unchanged sentences

497.3 % 644.0 % 398.8 % 376.2 % 356.6 %

1 Balance represents U.S.

government guaranteed loans.

1 Balance of loans are partially guaranteed by the U.S.

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

Total nonperforming loans declined $2.9 million, or 38.8%, to $4.5 million as of June 30, 2022 compared to $7.4 million as of December 31, 2021 due primarily to upgrades and payoffs in the owner-occupied commercial real estate and commercial and industrial loan portfolios.

Total nonperforming assets declined $4.1 million, or 47.2%, as of June 30, 2022, compared to December 31, 2021, due primarily to the upgrades and payoffs discussed above as well as the decline in other real estate owned (“OREO”) discussed below.

Total nonperforming loans declined $1.4 million, or 18.9%, to $6.0 million as of September 30, 2022 compared to $7.4 million as of December 31, 2021 due primarily to upgrades and payoffs in the owner-occupied commercial real estate and commercial and industrial loan portfolios, partially offset by SBA loans placed on nonaccrual during 2022.

Total nonperforming assets declined $2.6 million, or 30.3%, as of September 30, 2022, compared to December 31, 2021, due primarily to the upgrades and payoffs discussed above, as well as the decline in other real estate owned (“OREO”) discussed below.

Troubled Debt Restructurings

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

(in thousands) June 30,

(in thousands) September 30,

2022 June 30,

2022 March 31,

1 unchanged sentence

2021 September 30,

2021 June 30,

Troubled debt restructurings – nonaccrual $ 2,342 $ 2,389 $ 2,440 $ 2,492 $ 2,550

1 unchanged sentence

Total troubled debt restructurings $ 4,752 $ 4,814 $ 4,858 $ 4,185 $ 3,393

Total TDRs as of June 30, 2022 were $4.8 million, up $0.6 million from December 31, 2021.

Total TDRs as of September 30, 2022 were $4.8 million, up $0.6 million from December 31, 2021.

The increase was driven by one residential mortgage loan that became a TDR in 2022.

As of June 30, 2022, the Company did not own any OREO.

As of September 30, 2022, the Company did not own any OREO.

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

6 unchanged sentences

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 June 30, 2022, the Company had one loan totaling $8.0 million in non-TDR loan modifications due to COVID-19.

As of September 30, 2022, the Company had no loans as non-TDR loan modifications due to COVID-19.

Small Business Administration Paycheck Protection Program

5 unchanged sentences

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 100% of loan balances have been forgiven as of December 31, 2021.

The Company began processing applications for forgiveness from this round beginning in December 2020 and 100% of loan balances had 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.

2 unchanged sentences

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 99% of loan balances have been forgiven as of June 30, 2022.

The following table provides a rollforward of the activity of PPP loans through June 30, 2022.

The Company received this fee revenue from the SBA during 2021, 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 May 2021 and 100% of loan balances had been forgiven as of September 30, 2022.

The following table provides a rollforward of the activity of PPP loans through September 30, 2022.

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

15 unchanged sentences

Balance, June 30, 2022 2 $ 194 $ 5

Originated — — —

Principal repaid (2) (194)

Net deferred fees recognized (5)

Balance, September 30, 2022 — $ — $ —

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 six months ended June 30, 2022 and 2021.

Three Months Ended Six Months Ended

(in thousands) June 30,

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, 2022 and 2021.

Three Months Ended Nine Months Ended

(in thousands) September 30,

2022 June 30,

2022 March 31,

1 unchanged sentence

2021 September 30,

2021 June 30,

2022 June 30,

2021 September 30,

2022 September 30,

Balance, beginning of period $ 29,153 $ 28,251 $ 27,841 $ 28,000 $ 28,066 $ 27,841 $ 29,484

30 unchanged sentences

Total net (recoveries) charge-offs, excluding tax refund advance loans 0.02 % (0.01 %) (0.16 %) (0.01) % 0.01 % (0.05) % 0.12 %

The allowance for loan losses was $29.2 million as of June 30, 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 0.95% at June 30,

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 644.0% as of June 30, 2022, compared to 376.2% as of December 31, 2021.

Net charge-offs of $0.3 million were recognized during the second quarter 2022, resulting in net charge-offs to average loans of 0.04%, compared to net charge-offs to average loans of 0.35% for the second quarter 2021.

Excluding net charge-offs related to tax refund advance loans, net recoveries of $0.1 million were recognized during the second quarter 2022, resulting in net recoveries to average loans of 0.01%.

The provision for loan losses in the second quarter 2022 was $1.2 million, compared to $21 thousand for the second quarter 2021.

The provision for the second quarter 2022 was driven primarily by growth in the loan portfolio.

The allowance for loan losses was $29.9 million as of September 30, 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 0.92% at September 30, 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 497.3% as of September 30, 2022, compared to 376.2% as of December 31, 2021.

Net charge-offs of $0.2 million were recognized during the third quarter 2022, resulting in net charge-offs to average loans of 0.02%, compared to net recoveries to average loans of 0.01% for the third quarter 2021.

The provision for loan losses in the third quarter 2022 was $0.9 million, compared to a $29 thousand credit for the third quarter 2021.

The provision for the third quarter 2022 was driven primarily by growth in the loan portfolio, partially offset by reductions in specific reserves due to positive developments on certain monitored loans.

Investment Securities Portfolio

1 unchanged sentence

(in thousands)

Amortized Cost June 30,

Amortized Cost September 30,

2022 June 30,

2022 March 31,

1 unchanged sentence

2021 September 30,

2021 June 30,

Securities available-for-sale

15 unchanged sentences

(in thousands)

Approximate Fair Value June 30,

Approximate Fair Value September 30,

2022 June 30,

2022 March 31,

1 unchanged sentence

2021 September 30,

2021 June 30,

Securities available-for-sale

14 unchanged sentences

Total securities $ 563,542 $ 599,508 $ 625,259 $ 664,512 $ 698,344

The approximate fair value of available-for-sale investment securities decreased $177.6 million, or 29.4%, to $425.5 million as of June 30, 2022, compared to $603.0 million as of December 31, 2021.

The approximate fair value of available-for-sale investment securities decreased $209.5 million, or 34.7%, to $393.6 million as of September 30, 2022, compared to $603.0 million as of December 31, 2021.

The decrease was due primarily to decreases of $154.0 million in agency mortgage-backed securities - residential, $19.8 million in agency mortgage-backed securities - commercial, $13.5 million in municipal securities, and $12.7 million in U.S.

1 unchanged sentence

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 continued rise in interest rates.

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

The decreases in other securities types were also driven by a decline in value resulting from the continued rise in interest rates, as well as net paydown activity.

Accrued Income and Other Assets

Accrued income and other assets decreased $12.5 million, or 26.7%, to $34.3 million at June 30, 2022 compared to $46.9 million at December 31, 2021.

The decrease was primarily related to a decrease of $15.7 million in cash pledged as collateral, partially offset by an increase of $3.9 million in income tax receivable.

As of June 30, 2022 the Company had no pledged cash collateral compared to $15.7 million, as of December 31, 2021.

Accrued income and other assets decreased $3.4 million, or 7.2%, to $43.5 million at September 30, 2022 compared to $46.9 million at December 31, 2021.

The decrease was primarily related to a decrease of $15.7 million in cash pledged as collateral and $7.7 million in deferred tax assets, partially offset by increases of $9.3 million in derivative assets, $8.6 million in income tax receivable, and $2.1 million in investment fund partnerships.

As of September 30, 2022 the Company had no pledged cash collateral compared to $15.7 million, as of December 31, 2021.

Cash collateral is pledged to counterparties on interest rate swap agreements as security for its obligations related to these agreements.

1 unchanged sentence

Accrued Expenses and Other Liabilities

Accrued expenses and other liabilities decreased $19.5 million, or 63.8%, to $11.1 million at June 30, 2022, compared to $30.5 million at December 31, 2021.

The decrease in accrued expenses and other liabilities was due primarily to decreases of $14.3 million, or 100.0%, in derivative liabilities, $1.9 million, or 0.4%, in accrued salary and benefits and $3.9 million in accrued taxes, partially offset by an increase in other liabilities.

Accrued expenses and other liabilities decreased $15.9 million, or 52.0%, to $14.7 million at September 30, 2022, compared to $30.5 million at December 31, 2021.

The decrease in accrued expenses and other liabilities was due primarily to decreases of $13.9 million, or 97.3%, in derivative liabilities and $3.9 million in accrued taxes, partially offset by increases of $1.8 million, or 0.3%, in other liabilities and $0.1 million in accrued salary and benefits.

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

(dollars in thousands) June 30,

(dollars in thousands) September 30,

2022 June 30,

2022 March 31,

1 unchanged sentence

2021 September 30,

2021 June 30,

Noninterest-bearing deposits $ 142,635 4.5 % $ 126,153 4.0 % $ 119,197 3.7 % $ 117,531 3.7 % $ 110,117 3.4 %

6 unchanged sentences

Total deposits $ 3,192,644 100.0 % $ 3,152,101 100.0 % $ 3,217,979 100.0 % $ 3,178,959 100.0 % $ 3,224,595 100.0 %

Total deposits decreased $26.9 million, or 0.8%, to $3.2 billion as of June 30, 2022, compared to $3.2 billion as of December 31, 2021.

This decrease was due primarily to decreases of $169.5 million, or 17.5%, in certificates of deposits, $120.5 million, or 8.1%, in money market accounts and $47.5 million, or 15.9%, in brokered deposits, partially offset by increases of $194.1 million, in BaaS - brokered deposits, $102.6 million, or 41.4%, in interest-bearing demand deposits, and $8.6 million, or 7.3%, in noninterest-bearing deposits.

Total deposits increased $13.7 million, or 0.4%, to $3.2 billion as of September 30, 2022, compared to $3.2 billion as of December 31, 2021.

This increase was due primarily to increases of $113.2 million, or 37.8%, in brokered deposits, $96.3 million in BaaS - brokered deposits, $89.8 million, or 36.2%, in interest-bearing demand deposits and $25.1 million, or 21.4%, in noninterest-bearing deposits, partially offset by decreases of $197.1 million, or 20.3%, in certificates of deposits, $105.8 million, or 7.1% in money market accounts and $7.8 million, or 13.0%, in savings accounts.

The increase in brokered deposits was due to accessing certain deposit channels during the third quarter 2022 to support balance sheet liquidity and manage interest rate risk.

The increase in BaaS brokered deposits was due to a relationship established in the first quarter 2022.

The increase in the balance of interest-bearing demand deposits was due primarily to a new customer relationship from the first quarter of 2022 with approximately $100.0 million in deposits with a contractual term of five years and a fixed rate of 1.15%.

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.

The decrease in money market accounts was due primarily to certain customer activity that can be periodically volatile.

The decrease in brokered deposits was due to the maturity of higher-cost balances.

The increase in BaaS deposits was due to a relationship established in the first quarter 2022 that grew during the second quarter 2022.

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

Recent Debt Offerings

20 unchanged sentences

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

The following tables present actual and required capital ratios as of June 30, 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 June 30, 2022 and December 31, 2021, which are based on the Basel III Capital Rules.

The following tables present actual and required capital ratios as of September 30, 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 September 30, 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 June 30, 2022:

As of September 30, 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 July 15, 2022 to shareholders of record as of July 1, 2022.

The Company’s Board of Directors declared a cash dividend of $0.06 per share of common stock payable October 17, 2022 to shareholders of record as of September 30, 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 the Company’s 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.

As of June 30, 2022, the Company had $107.0 million principal amount of subordinated debt outstanding evidenced by the 2029 Notes, 2030 Note and 2031 Notes.

As of September 30, 2022, the Company had $107.0 million principal amount of subordinated debt outstanding evidenced by the 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.

5 unchanged sentences

On October 20, 2021, the Company’s Board of Directors approved a stock repurchase program authorizing the repurchase of up to $30.0 million of the Company’s outstanding common stock from time to time on the open market or in privately negotiated transactions.

Under this program, the Company repurchased 100,000 shares at a total cost of $4.4 million during 2021, 103,703 shares at a total cost of $5.1 million during the first quarter 2022 and 294,464 shares at a total cost of $11.1 million during the second quarter 2022.

In October 2022, the Company’s Board of Directors increased the authorization to $35.0 million.

Under this program, the Company repurchased 100,000 shares at a total cost of $4.4 million during 2021, 103,703 shares at a total cost of $5.1 million during the first quarter 2022, 294,464 shares at a total cost of $11.1 million during the second quarter 2022 and 120,000 shares at a total cost of $4.4 million during the third quarter 2022.

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

7 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.

At June 30, 2022, on a consolidated basis, the Company had $633.4 million in cash and cash equivalents and investment securities available-for-sale and $31.6 million in loans held-for-sale that were generally available for its cash needs.

At September 30, 2022, on a consolidated basis, the Company had $614.6 million in cash and cash equivalents and investment securities available-for-sale and $23.1 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 June 30, 2022, the Bank had the ability to borrow an additional $552.2 million from the FHLB, the Federal Reserve and correspondent bank Fed Funds lines of credit.

At September 30, 2022, the Bank had the ability to borrow an additional $473.7 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 June 30, 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.

At September 30, 2022, the Company, on an unconsolidated basis, had $25.7 million in cash generally available for its cash needs, which is in excess of its current annual regular shareholder dividend and operating expenses.

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

At June 30, 2022, approved outstanding loan commitments, including unused lines of credit and standby letters of credit, amounted to $349.2 million.

Certificates of deposits and brokered deposits scheduled to mature in one year or less at June 30, 2022 totaled $594.1 million.

At September 30, 2022, approved outstanding loan commitments, including unused lines of credit and standby letters of credit, amounted to $508.6 million.

Certificates of deposits and brokered deposits scheduled to mature in one year or less at September 30, 2022 totaled $549.5 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.

4 unchanged sentences

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 six months ended June 30, 2022 and 2021.

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

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

September 30,

2022 June 30,

2022 March 31,

1 unchanged sentence

2021 September 30,

2021 June 30,

2022 June 30,

2021 September 30,

2022 September 30,

Total equity - GAAP $ 360,857 $ 365,332 $ 374,655 $ 380,338 $ 370,442 $ 360,857 $ 370,442

17 unchanged sentences

Return on average tangible common equity 9.13 % 10.36 % 12.09 % 13.30 % 13.27 % 10.53 % 13.73 %

(dollars in thousands) Three Months Ended Six Months Ended

(dollars in thousands) Three Months Ended Nine Months Ended

September 30,

2022 June 30,

2022 March 31,

1 unchanged sentence

2021 September 30,

2021 June 30,

2022 June 30,

2021 September 30,

2022 September 30,

Total interest income $ 39,099 $ 36,106 $ 36,034 $ 34,192 $ 33,034 $ 111,239 $ 99,691

20 unchanged sentences

1 Assuming a 21% tax rate

(dollars in thousands) Three Months Ended Six Months Ended

(dollars in thousands) Three Months Ended Nine Months Ended

September 30,

2022 June 30,

2022 March 31,

1 unchanged sentence

2021 September 30,

2021 June 30,

2022 June 30,

2021 September 30,

2022 September 30,

Net interest margin 2.40 % 2.60 % 2.56 % 2.30 % 2.00 % 2.52 % 2.05 %

28 unchanged sentences

1 Assuming a 21% tax rate

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

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

September 30,

2022 June 30,

2022 March 31,

1 unchanged sentence

2021 September 30,

2021 June 30,

2022 June 30,

2021 September 30,

2022 September 30,

Noninterest expense - GAAP $ 17,995 $ 17,985 $ 18,780 $ 16,955 $ 14,451 $ 54,760 $ 44,843

1 unchanged sentence

Nonrecurring consulting fee — — (875) — — (125) —

IT termination fee — — (475) — — — —

Write-down of Software (125) — — (475) — (875) —

Discretionary inflation bonus — (531) — — — (531) —

5 unchanged sentences

Nonrecurring consulting fee — — 875 — — 875 —

IT termination fee — — 475 — — — —

Write-down of Software 125 — — 475 — 125 —

Subordinated debt redemption cost — — — — 810 — 810

6 unchanged sentences

Nonrecurring consulting fee — — 184 — — 184 —

IT termination fee — — 100 — — — —

Write-down of Software 26 — — 100 — 26 —

Subordinated debt redemption cost — — — — 170 — 170

6 unchanged sentences

Nonrecurring consulting fee — — 691 — — 691 —

IT termination fee — — 375 — — — —

Write-down of Software 99 — — 375 — 99 —

Subordinated debt redemption cost — — — — 640 — 640

3 unchanged sentences

1 Assuming a 21% tax rate

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

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

September 30,

2022 June 30,

2022 March 31,

1 unchanged sentence

2021 September 30,

2021 June 30,

2022 June 30,

2021 September 30,

2022 September 30,

Diluted average common shares outstanding 9,525,855 9,658,689 9,870,394 9,989,951 9,988,102 9,681,742 9,974,071

3 unchanged sentences

Effect of nonrecurring consulting fee — — 0.07 — — 0.07 —

Effect of IT termination fee — — 0.04 — — — —

Effect of write-down of software 0.01 — — 0.04 — 0.01 —

Effect of subordinated debt redemption cost — — — — 0.06 — 0.06

6 unchanged sentences

Effect of nonrecurring consulting fee 0.00 % 0.00 % 0.07 % 0.00 % 0.00 % 0.02 % 0.00 %

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

Effect of write-down of software 0.01 % 0.00 % 0.00 % 0.04 % 0.00 % 0.00 % 0.00 %

Effect of subordinated debt redemption cost 0.00 % 0.00 % 0.00 % 0.00 % 0.06 % 0.00 % 0.02 %

6 unchanged sentences

Effect of nonrecurring consulting fee 0.00 % 0.00 % 0.74 % 0.00 % 0.00 % 0.25 % 0.00 %

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

Effect of write-down of software 0.11 % 0.00 % 0.00 % 0.39 % 0.00 % 0.04 % 0.00 %

Effect of subordinated debt redemption cost 0.00 % 0.00 % 0.00 % 0.00 % 0.69 % 0.00 % 0.24 %

2 unchanged sentences

Adjusted return on average shareholders' equity 9.12 % 11.01 % 12.82 % 13.67 % 13.79 % 11.00 % 13.03 %

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

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

September 30,

2022 June 30,

2022 March 31,

1 unchanged sentence

2021 September 30,

2021 June 30,

2022 June 30,

2021 September 30,

2022 September 30,

Return on average tangible common equity 9.13 % 10.36 % 12.09 % 13.30 % 13.27 % 10.53 % 13.73 %

2 unchanged sentences

Effect of nonrecurring consulting fee 0.00 % 0.00 % 0.75 % 0.00 % 0.00 % 0.25 % 0.00 %

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

Effect of write-down of software 0.11 % 0.00 % 0.00 % 0.40 % 0.00 % 0.04 % 0.00 %

Effect of subordinated debt redemption cost 0.00 % 0.00 % 0.00 % 0.00 % 0.70 % 0.00 % 0.25 %

6 unchanged sentences

Effect of nonrecurring consulting fee 0.0 % 0.0 % 1.3 % 0.0 % 0.0 % 0.5 % 0.0 %

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

Effect of write-down of software 0.3 % 0.0 % 0.0 % 0.2 % 0.0 % 0.1 % 0.0 %

Effect of subordinated debt redemption cost 0.0 % 0.0 % 0.0 % 0.0 % 0.3 % 0.0 % 0.4 %

12 unchanged sentences

Income tax provision, excluding tax refund advance loans $ 987 $ 1,254 $ 1,769 $ 2,004 $ 2,220 $ 4,010 $ 6,454

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

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

September 30,

2022 June 30,

2022 March 31,

1 unchanged sentence

2021 September 30,

2021 June 30,

2022 June 30,

2021 September 30,

2022 September 30,

Net income - GAAP $ 8,436 $ 9,545 $ 11,209 $ 12,478 $ 12,090 $ 29,190 $ 35,636

13 unchanged sentences

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

At both June 30, 2022 and December 31, 2021, the Company had interest rate swaps with notional amounts of $260.0 million.

At both September 30, 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 June 30, 2022 and December 31, 2021, the Company had commitments to sell residential real estate loans of $37.5 million and $72.8 million, respectively.

At September 30, 2022 and December 31, 2021, the Company had commitments to sell residential real estate loans of $27.8 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