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Item 2. Management’s Discussion and Analysis

2023-05-10 compared with 2022-11-09 · 243 added, 431 removed, 461 unchanged (59% of the section changed)

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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 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”).

First Internet Bancorp is a financial holding company headquartered in Fishers, Indiana that conducts its primary business activities through its wholly-owned subsidiary, First Internet Bank of Indiana, an Indiana chartered bank.

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

The Company was incorporated under the laws of the State of Indiana on September 15, 2005.

First Internet Bancorp was incorporated under the laws of the State of Indiana on September 15, 2005.

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

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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;

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

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

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We conduct our consumer and small business deposit operations primarily through digital channels on a nationwide basis and have no traditional branch offices.

Our residential mortgage products are offered nationwide primarily through a digital direct-to-consumer platform and are supplemented with Central Indiana-based mortgage and construction lending.

Our consumer lending products are primarily originated on a nationwide basis through relationships with dealerships and financing partners.

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.

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.

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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.

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

government guaranteed lending programs.

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

We are one of the fastest-growing lenders in the Small Business Administration (“SBA”) 7(a) program, closing more than $155.4 million in SBA 7(a) loans during 2022 and ranking in the top 30 SBA 7(a) lenders for the SBA’s 2022 fiscal year.

During the three months ended March 31, 2023, we closed more than $73.5 million in SBA 7(a) loans, ranking in the top 10 SBA 7(a) lenders for 2023.

We also offer a top-ranked small business checking account product to our country’s entrepreneurs.

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

We plan to expand our fintech partnerships.

We also offer payment, deposit, card and lending products and services through fintech partnerships, which we plan to grow in future periods.

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

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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.

As of March 31, 2023, the Company had consolidated assets of $4.7 billion, consolidated deposits of $3.6 billion and stockholders’ equity of $355.6 million.

Results of Operations

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.

During the first quarter 2023, there was a net loss of $3.0 million, or $0.33 diluted loss per share, compared to first quarter 2022 net income of $11.2 million, or $1.14 per diluted share, representing a decrease in net income of $14.2 million, or 126.9%, and a decrease in diluted earnings per share of $1.47, or 129.0%.

The $14.2 million decrease in net income for the first quarter 2023 compared to the first quarter 2022 was due primarily to an increase of $8.6 million, or 1,090.3%, in provision for credit losses, a decrease of $6.2 million, or 24.0%, in net interest income, an increase of $2.2 million, or 11.6%, in noninterest expense and a decrease of $1.4 million, or 20.1%, in noninterest income, partially offset by a decrease of $4.1 million, or 230.3%, in income tax expense.

Due to the steep decline in consumer mortgage volumes and the negative outlook for consumer mortgage lending over the next several years, the Company decided to exit its consumer mortgage business during the first quarter 2023.

This included its nationwide digital direct-to-consumer mortgage platform that originated residential loans for sale in the secondary market, as well as its local traditional consumer mortgage and construction-to-permanent business.

In connection with this decision, the Company recognized $3.1 million of mortgage operations and exit costs during the first quarter 2023, which primarily drove the increase in noninterest expense compared to the first quarter 2022.

The Company also recognized $0.1 million of mortgage banking revenue during the first quarter 2023, down from $1.8 million in the first quarter 2022, as it immediately began winding down its existing pipeline following the decision to exit the business.

Additionally during the first quarter 2023, the Company recognized a partial charge-off of $6.9 million related to a commercial and industrial participation loan with a balance of $9.8 million, prior to the partial charge-off, that was moved to nonaccrual status late in the quarter.

This action contributed to the increase in the provision for credit losses as compared to first quarter 2022.

The Company expects that it will receive payment for the remaining balance of the participation loan during May 2023.

During the first quarter 2023, return on average assets (“ROAA”), return on average shareholders’ equity (“ROAE”), and return on average tangible common equity (“ROATCE”) were (0.26%), (3.37%), and (3.41%), respectively, compared to 1.08%, 11.94%, and 12.09%, respectively, for the first quarter 2022.

Excluding the impact of exiting consumer mortgage and the partial charge-off, adjusted net income for the first quarter 2023 was $4.8 million and adjusted diluted earnings per share was $0.53.

Additionally, for the first quarter 2023, adjusted ROAA, adjusted ROAE and adjusted ROATCE were 0.43%, 5.36% and 5.44%, respectively.

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.

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

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

March 31, 2023 December 31, 2022 March 31, 2022

(dollars 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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Total interest-earning assets 4,499,782 52,033 4.69 % 4,119,897 45,669 4.40 % 4,080,725 36,034 3.58 %

Allowance for loan losses (29,423) (28,599) (28,127)

Allowance for credit losses - loans (35,075) (30,543) (27,974)

Noninterest-earning assets 182,449 173,892 162,167

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

Nine Months Ended

September 30, 2022 September 30, 2021

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

Interest-earning assets

Loans, including

loans held-for-sale $ 3,057,768 $ 100,246 4.38 % $ 3,016,817 $ 91,846 4.07 %

Securities - taxable 547,759 7,489 1.83 % 527,625 5,997 1.52 %

Securities - non-taxable 77,236 1,068 1.85 % 85,130 781 1.23 %

Other earning assets 321,262 2,436 1.01 % 478,399 1,067 0.30 %

Total interest-earning assets 4,004,025 111,239 3.71 % 4,107,971 99,691 3.24 %

Allowance for loan losses (28,671) (29,446)

Noninterest-earning assets 163,512 136,954

Total assets $ 4,138,866 $ 4,215,479

Interest-bearing liabilities

Interest-bearing demand deposits $ 336,311 $ 1,429 0.57 % $ 190,785 $ 425 0.30 %

Savings accounts 61,647 232 0.50 % $ 54,740 145 0.35 %

Money market accounts 1,416,984 8,006 0.76 % 1,428,554 4,385 0.41 %

BaaS - brokered deposits 79,613 1,019 1.71 % — — 0.00 %

Certificates and brokered deposits 1,122,097 12,339 1.47 % 1,446,960 18,468 1.71 %

Total interest-bearing deposits 3,016,652 23,025 1.02 % 3,121,039 23,423 1.00 %

Other borrowed funds 613,609 12,790 2.79 % 593,605 13,217 2.98 %

Total interest-bearing liabilities 3,630,261 35,815 1.32 % 3,714,644 36,640 1.32 %

Noninterest-bearing deposits 115,142 97,760

Other noninterest-bearing liabilities 18,273 51,281

Total liabilities 3,763,676 3,863,685

Shareholders’ equity 375,190 351,794

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

Net interest income $ 75,424 $ 63,051

Interest rate spread 1

Net interest margin 2

Net interest margin - FTE 3

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

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

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

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

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

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

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

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

Rate/Volume Analysis

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

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

Three Months Ended March 31, 2023 vs.

December 31, 2022 Due to Changes in Three Months Ended March 31, 2023 vs.

March 31, 2022 Due to Changes in

(in thousands) Volume Rate Net Volume Rate Net

Interest income

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Increase (decrease) in net interest income $ 1,540 $ (3,635) $ (2,095) $ 3,417 $ (9,593) $ (6,176)

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.

Net interest income for the first quarter 2023 was $19.6 million, a decrease of $6.2 million, or 24.0%, compared to $25.8 million for the first quarter 2022.

The decrease in net interest income was the result of a $22.2 million, or 215.6%, increase in total interest expense to $32.5 million for the first quarter 2023 from $10.3 million for the first quarter 2022, partially offset by a $16.0 million, or 44.4%, increase in total interest income to $52.0 million for the first quarter 2023 from $36.0 million for the first quarter 2022.

The increase in total interest income for the first quarter 2023 compared to first quarter 2022 was due primarily to a $10.7 million, or 32.1%, increase in interest earned on loans, $3.4 million, or 906.9%, increase in income from other earning assets and a $1.9 million, or 78.3%, increase in interest earned on securities.

The increase in income from loans was due primarily to a 44 bp increase in the yield earned on loans, as well as an increase of $607.2 million, or 20.4%, in the average balance of loans compared to the first quarter 2022.

The yield earned on other earning assets increased 430 bps, partially offset by a decrease in the average balance of other earning assets of $124.7 million, or 27.3%.

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

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 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.

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 average balance of securities decreased $63.5 million, or 9.8%, while the yield earned on the securities portfolio increased 151 bps for the first quarter 2023 compared to the first quarter 2022.

The increase in the yields earned on loans, other earning assets and securities was due to the rise in interest rates throughout 2022 that continued during the first quarter 2023.

The yield on funded portfolio originations was 7.76% in the first quarter 2023, an increase of 292 bps compared to the first quarter 2022.

The increase in total interest expense for the first quarter 2023 compared to the first quarter 2022 was due primarily to increases of $10.8 million, or 718.4%, in interest expense associated with money market accounts, $9.7 million, or 235.9%, in interest expense associated with certificates and brokered deposits and $0.5 million, or 118.5%, in interest expense associated with interest-bearing demand deposits.

Additionally, the Company had a full quarter of Banking-as-a-Service (“BaaS”) deposits in 2023, which increased interest expense by $0.1 million.

The increase in interest expense related to money market accounts was driven primarily by an increase of 320 bps in the cost of these deposits, partially offset by a decrease in the average balance of these deposits of $76.8 million, or 5.3%.

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.

The increase in interest expense related to certificates and brokered deposits was driven by an increase of 205 bps in the cost of these deposits, as well as an increase of $421.5 million, or 34.4%, in the average balance of these deposits.

The increase in the average balance of these deposits was driven by strong certificates of deposit production in the first quarter 2023, as the Company took advantage of consumer and small business demand and pulled forward budgeted growth to build liquidity at rates beneficial to projected Federal Funds rates.

The increase in interest expense related to interest-bearing demand deposits was due primarily to a 57 bp increase in the cost of these deposits, as well as an increase of $15.4 million, or 4.8%, in the average balance of these deposits.

The increase in the overall cost of deposits was due primarily to the rise in interest rates throughout 2022 that continued during the first quarter 2023.

Beginning in March 2022, the Federal Reserve has increased the Fed Funds rate 4.75% through March 31, 2023, which has impacted pricing of the Company’s deposit products.

Overall, the cost of total interest-bearing liabilities for the first quarter 2023 increased 206 bps to 3.19% from 1.13% for the first quarter 2022.

The increase in the cost of funds for the first quarter 2023 reflects the rapid rise in interest rates throughout 2022 that continued into 2023.

Net interest margin (“NIM”) was 1.76% for the first quarter 2023 compared to 2.56% for the first quarter 2022, a decrease of 80 bps.

On a fully-taxable equivalent (“FTE”) basis, NIM was 1.89% for the first quarter 2023 compared to 2.69% for the first quarter 2022, a decrease of 80 bps.

The decrease in first quarter 2023 NIM and FTE NIM compared to the first quarter 2022 reflects the increase in the cost of interest-bearing liabilities, partially offset by the increase in earning asset yields noted above.

Noninterest Income

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,

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

Three Months Ended

(in thousands) March 31,

2023 December 31,

2022 September 30,

2021 September 30,

2022 September 30,

2022 June 30,

2022 March 31,

Service charges and fees $ 209 $ 226 $ 248 $ 281 $ 316

3 unchanged sentences

Gain on sale of loans 4,061 2,862 2,713 1,952 3,845

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

Other 370 1,533 164 221 498

Total noninterest income $ 5,446 $ 5,807 $ 4,316 $ 4,314 $ 6,820

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.

During the first quarter 2023, noninterest income was $5.4 million, representing a decrease of $1.4 million, or 20.1%, compared to $6.8 million for the first quarter 2022.

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

The decline in mortgage banking revenue was due to the Company only recording $0.1 million of revenue, as it immediately began winding down its existing pipeline following the decision to exit mortgage in the first quarter 2023.

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 first quarter 2022.

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

The increase in loan servicing asset revaluation was due to slower prepayment speeds in the first quarter 2023 compared to first quarter 2022.

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

Small Business Administration guaranteed loans, which increased due to higher volume of loans sales, as well as higher net premiums.

Noninterest Expense

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,

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

Three Months Ended

(in thousands) March 31,

2023 December 31,

2022 September 30,

2021 September 30,

2022 September 30,

2022 June 30,

2022 March 31,

Salaries and employee benefits $ 11,794 $ 10,404 $ 10,439 $ 10,832 $ 9,878

7 unchanged sentences

Total noninterest expense $ 20,954 $ 18,513 $ 17,995 $ 17,985 $ 18,780

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 $1.0 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.

Noninterest expense for the first quarter 2023 was $21.0 million, compared to $18.8 million for the first quarter 2022.

The increase of $2.2 million, or 11.6%, was due primarily to increases of $1.9 million, or 19.41%, in salaries and employee benefits, $0.4 million, or 25%, in loan expenses, $0.3 million, or 93.2%, in deposit insurance premium, and $0.2 million, or 46.8%, in data processing, partially offset by decrease of $1.0 million, or 51.9% in consulting and professional fees.

The increases in salaries and employee benefits and loan expenses were due primarily to mortgage exit costs, such as severance, and other employee-related expenses, as well as accrued contract expenses.

The increase in deposit insurance premium was due to mainly to asset growth, as well as the composition of loans and deposits.

The increase in data processing was due primarily to implementation fees associated with small business technology initiatives.

The decrease in consulting and professional fees was due primarily to consulting fees related to a special project that occurred in the first quarter 2022.

The Company recorded an income tax benefit for the first quarter 2023, compared to an income tax provision of $1.8 million for the first quarter 2022 and an effective tax rate of 13.8%.

Financial Condition

2 unchanged sentences

Balance Sheet Data:

2023 December 31,

2022 September 30,

1 unchanged sentence

2022 March 31,

2022 December 31,

2021 September 30,

Total assets $ 4,721,319 $ 4,543,104 $ 4,264,424 $ 4,099,806 $ 4,225,397

7 unchanged sentences

Total shareholders’ equity 355,572 364,974 360,857 365,332 374,655

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 $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.

Total assets increased $178.2 million, or 3.9%, to $4.7 billion at March 31, 2023 compared to $4.5 billion at December 31, 2022.

The increase was due primarily to increases in loan, cash and securities balances, and was funded by growth in deposit balances of $181.0 million, or 5.3%.

As of March 31, 2023, total shareholders’ equity was $355.6 million, a decrease of $9.4 million, or 2.6%, compared to December 31, 2022.

The decrease in retained earnings was due primarily to stock repurchase activity, the day 1 CECL adjustment and the net loss during the quarter, partially offset by a decrease in accumulated other comprehensive loss.

Tangible common equity totaled $350.9 million as of March 31, 2023, representing a decrease of $9.4 million, or 2.6%, compared to December 31, 2022.

The ratio of total shareholders’ equity to total assets decreased to 7.53% as of March 31, 2023 from 8.03% as of December 31, 2022, and the ratio of tangible common equity to tangible assets decreased to 7.44% as of March 31, 2023 from 7.94% as of December 31, 2022.

Book value per common share decreased 1.2% to $39.76 as of March 31, 2023 from $40.26 as of December 31, 2022.

Tangible book value per share decreased 1.3% to $39.23 as of March 31, 2023 from $39.74 as of December 31, 2022.

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, partially offset by the effect of stock repurchase activity during the quarter.

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,

2022 June 30,

2022 March 31,

(dollars in thousands) March 31,

2023 December 31,

2022 September 30,

2022 June 30,

2022 March 31,

Commercial loans

18 unchanged sentences

Total loans 3,607,242 99.9 % 3,499,401 100.0 % 3,255,906 100.0 % 3,082,127 100.0 % 2,880,780 100.0 %

Allowance for loan losses (29,866) (29,153) (28,251) (27,841) (28,000)

Allowance for credit losses 2

(36,879) (31,737) (29,866) (29,153) (28,251)

Net loans $ 3,570,363 $ 3,467,664 $ 3,226,040 $ 3,052,974 $ 2,852,529

(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 $234.1 million in total originations since inception.

1 Includes carrying value adjustments of $31.5 million, $32.5 million, $33.9 million, $35.4 million and $36.4 million related to terminated interest rate swaps associated with public finance loans as of March 31, 2023, December 31, 2022, September 30, 2022, June 30, 2022 and March 31, 2022, respectively.

2 Beginning January 1, 2023, the allowance calculation is based on the CECL methodology.

Prior to January 1, 2023, the allowance calculation was based on the incurred loss methodology.

Total loans were $3.6 billion as of March 31, 2023, an increase of $107.8 million, or 3.1%, compared to December 31, 2022.

Total commercial loan balances were $2.8 billion as of March 31, 2023, up $86.5 million, or 3.1%, from December 31, 2022.

Total consumer loan balances were $756.4 million as of March 31, 2023, an increase of $23.1 million, or 3.2%, compared to December 31, 2022.

Compared to December 31, 2022, the increase in commercial loan balances was driven by growth in franchise finance, single tenant lease financing and small business lending, as well as combined growth in investor commercial real estate and construction balances.

The increase was partially offset by a decrease in public finance, as well as continued runoff in healthcare finance.

The increase in consumer loans was due to higher balances in the recreational vehicles and trailers loan portfolios, in addition to funded residential mortgages that were in the pipeline prior to exiting the business.

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) September 30,

2022 June 30,

2022 March 31,

(dollars in thousands) March 31,

2023 December 31,

2022 September 30,

2022 June 30,

2022 March 31,

Nonaccrual loans

13 unchanged sentences

Past Due 90 days and accruing loans

Consumer loans:

Residential mortgage — 79 — — —

Total consumer loans — 79 — — —

Total past due 90 days and accruing loans — 79 — — —

Total nonperforming loans

9,221 7,529 6,006 4,527 7,084

Other real estate owned

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

Residential mortgage 106 — — — —

6 unchanged sentences

0.20 % 0.17 % 0.14 % 0.11 % 0.17 %

Allowance for loan losses to total loans 0.92 % 0.95 % 0.98 % 0.96 % 0.95 %

Allowance for credit losses to total loans 1.02 % 0.91 % 0.92 % 0.95 % 0.98 %

Nonaccrual loans to total loans 0.26 % 0.22 % 0.18 % 0.15 % 0.25 %

Allowance for loan losses to nonperforming loans (2)

Allowance for credit losses to nonperforming loans 2

400.0 % 426.0 % 497.3 % 644.0 % 398.8 %

1 unchanged sentence

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

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.

Total nonperforming loans increased $1.7 million, or 22.5%, to $9.2 million as of March 31, 2023 compared to $7.5 million as of December 31, 2022 due primarily to a commercial and industrial participation loan that was placed on nonaccrual status during the quarter, partially offset by upgrades and payoffs in owner-occupied commercial real estate and small business loans.

Total nonperforming assets increased $1.8 million, or 23.4%, to $9.3 million as of March 31, 2023, compared to $7.6 million as of December 31, 2022, due primarily to the nonperforming loan activity discussed above, as well as an increase in OREO.

As of March 31, 2023, the Company had one residential mortgage property in OREO with a carrying value of $0.1 million.

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

Troubled Debt Restructurings

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

(in thousands) September 30,

2022 June 30,

2022 March 31,

With the adoption ASU 2022-02, effective January 1, 2023, TDR accounting was eliminated.

Total TDRs as of December 31, 2022 was $5.5 million.

There were two portfolio residential mortgage loans and one small business lending loan classified as new TDRs during the twelve months ended December 31, 2022 with pre-modification and post-modification balances totaling $1.6 million.

The following table provides a summary of troubled debt restructurings.

(in thousands) March 31,

2023 December 31,

2022 September 30,

2022 June 30,

2022 March 31,

Troubled debt restructurings – nonaccrual $ — $ 2,864 $ 2,342 $ 2,389 $ 2,440

1 unchanged sentence

Total troubled debt restructurings $ — $ 5,522 $ 4,752 $ 4,814 $ 4,858

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 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.

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.

Non-TDR Loan Modifications due to COVID-19

The “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus” was issued by our banking regulators on March 22, 2020.

This guidance encourages financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations due to the effects of COVID-19.

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

Small Business Administration Paycheck Protection Program

Section 1102 of the CARES Act created the PPP, which is jointly administered by the SBA and the Department of the Treasury.

The PPP is designed to provide a direct incentive to small businesses to retain employees on their payroll during COVID-19 as well as to help cover certain utility costs and rent payments.

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 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 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.

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

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

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

The Company received this fee revenue from the SBA during 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

Originated 447 $ 58,336 $ 1,851

Principal repaid (71) (7,184)

Net deferred fees recognized (1,253)

Balance, December 31, 2020 376 51,152 598

Originated 281 27,377 1,125

Principal repaid (634) (75,377)

Net deferred fees recognized (1,624)

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

Originated — — —

Principal repaid (3) (809)

Net deferred fees recognized (19)

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 nine months ended September 30, 2022 and 2021.

Three Months Ended Nine Months Ended

(in thousands) September 30,

2022 June 30,

2022 March 31,

Allowance for Credit Losses - Loans

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

Three Months Ended

(dollars in thousands) March 31,

2023 December 31,

2022 September 30,

2021 September 30,

2022 September 30,

2022 June 30,

2022 March 31,

Balance, beginning of period, December 31, 2022 $ 31,737 $ 29,866 $ 29,153 $ 28,251 $ 27,841

Adoption of ASU 2016-13 (CECL) 2,962 — — — —

Balance, beginning of period 34,699 29,866 29,153 28,251 27,841

Provision (credit) charged to expense 892 1,185 791 (238) (29) 2,868 1,268

Provision charged to expense 9,373 2,109 892 1,185 791

Losses charged off

Commercial and industrial 6,965 — — — —

Single tenant lease financing — — — — — — 2,391

Small business lending 60 192 130 — 80

12 unchanged sentences

Balance, end of period $ 36,879 $ 31,737 $ 29,866 $ 29,153 $ 28,251

Net charge-offs (recoveries) $ 179 $ 283 $ 381 $ (79) $ 37 $ 843 $ 2,752

Net charge-offs $ 7,193 $ 238 $ 179 $ 283 $ 381

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

7 unchanged sentences

Tax refund advance loans 0.00 % 0.00 % 0.00 % 23.55 % 9.97 %

Total consumer net charge-offs (recoveries) 0.01 % 0.11 % 1.18 % (0.02 %) 0.05 % 0.44 % 0.06 %

Total net charge-offs (recoveries) to average loans 0.02 % 0.04 % 0.05 % (0.01) % 0.01 % 0.04 % 0.12 %

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 $29.9 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.

Total consumer net charge-offs 0.09 % 0.01 % 0.01 % 0.11 % 1.18 %

Total net charge-offs to average loans 0.82 % 0.03 % 0.02 % 0.04 % 0.05 %

Total net charge-offs (recoveries), excluding tax refund advance loans 0.82 % 0.03 % 0.02 % (0.01 %) (0.16 %)

The allowance for credit losses (“ACL”) was $36.9 million as of March 31, 2023, compared to $31.7 million as of December 31, 2022.

The increase in the ACL reflects the day one current expected credit losses (“CECL”) adjustment of $3.0 million, as well as overall growth in the loan portfolio and changes in certain economic forecasts that impacted quantitative factors for certain portfolios.

The ACL as a percentage of total loans was 1.02% at March 31, 2023, compared to 0.91%, at December 31, 2022.

The ACL as a percentage of nonperforming loans decreased to 400.0% as of March 31, 2023, compared to 426.0% as of December 31, 2022.

Net charge-offs of $7.2 million were recognized during the first quarter 2023, resulting in net charge-offs to average loans of 0.82%, compared to net charge-offs to average loans of 0.05% for the first quarter 2022.

The increase in net charge-

offs was due mainly to the $6.9 million partial charge-off of a C&I participation loan that was placed on nonaccrual status during the quarter.

The provision for credit losses in the first quarter 2023 was $9.4 million, compared to $0.8 million for the first quarter 2022.

The increase in provision for the first quarter 2023 was driven primarily by the partial charge-off of the C&I participation loan mentioned above, as well as growth in the loan portfolio and the impact of economic forecasts on certain portfolios.

Investment Securities Portfolio

1 unchanged sentence

(in thousands)

Amortized Cost September 30,

2022 June 30,

2022 March 31,

Amortized Cost March 31,

2023 December 31,

2022 September 30,

2022 June 30,

2022 March 31,

Securities available-for-sale

7 unchanged sentences

Total available-for-sale 436,520 436,183 448,710 462,228 486,632

Securities held-to-maturity

Securities held-to-maturity, net

Municipal securities 13,932 13,946 13,957 13,969 13,981

2 unchanged sentences

Corporate securities 44,214 47,551 47,554 47,557 47,560

Total held-to-maturity 191,057 185,113 163,370 59,565 62,129

Total held-to-maturity, net 210,761 189,168 191,057 185,113 163,370

Total securities $ 647,281 $ 625,351 $ 639,767 $ 647,341 $ 650,002

(in thousands)

Approximate Fair Value September 30,

2022 June 30,

2022 March 31,

Approximate Fair Value March 31,

2023 December 31,

2022 September 30,

2022 June 30,

2022 March 31,

Securities available-for-sale

14 unchanged sentences

Total securities $ 588,296 $ 558,867 $ 563,542 $ 599,508 $ 625,259

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.

Government-sponsored agencies.

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, as well as net paydown activity.

The approximate fair value of available-for-sale investment securities increased $5.4 million, or 1.4%, to $395.8 million as of March 31, 2023, compared to $390.4 million as of December 31, 2022.

The increase was due primarily to increases of $3.2 million in U.S.

Government-sponsored agencies, $1.7 million in agency mortgage-backed securities - residential and $1.4 million in municipal securities.

The increases were due primarily to variable rate securities resetting higher, slower prepayment speeds and purchases in the portfolio.

Accrued Income and Other Assets

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.

Collateral posted and received is dependent on the fair value of the underlying agreements as of the respective date.

Accrued income and other assets increased $0.2 million, or 0.5%, to $45.1 million at March 31, 2023 compared to $44.9 million at December 31, 2022.

The increase was primarily related to an increase of $2.7 million in deferred tax assets and $1.2 million in fund investments, partially offset by decreases of $2.8 million in derivative assets and $0.9 million in prepaid assets.

Accrued Expenses and 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.

Accrued expenses and other liabilities increased $6.8 million, or 47.0%, to $21.3 million at March 31, 2023, compared to $14.5 million at December 31, 2022.

The increase was due primarily to increases of $8.4 million in other accrued expenses, $2.5 million in unfunded commitments related to the day 1 CECL entry and $0.2 million in accrued property taxes, partially offset by decreases of $2.1 million in other liabilities, $1.6 million in accrued salary and benefits and $0.6 million in accrued taxes.

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

(dollars in thousands) September 30,

2022 June 30,

2022 March 31,

(dollars in thousands) March 31,

2023 December 31,

2022 September 30,

2022 June 30,

2022 March 31,

Noninterest-bearing deposits $ 140,449 3.9 % $ 175,315 5.1 % $ 142,635 4.5 % $ 126,153 4.0 % $ 119,197 3.7 %

6 unchanged sentences

Total deposits $ 3,622,290 100.0 % $ 3,441,245 100.0 % $ 3,192,644 100.0 % $ 3,152,101 100.0 % $ 3,217,979 100.0 %

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.

Total deposits increased $181.0 million, or 5.3%, to $3.6 billion as of March 31, 2023, compared to $3.4 billion as of December 31, 2022.

This increase was due primarily to increases of $295.6 million, or 33.8%, in certificates of deposits, $68.8 million, or 11.9% in brokered deposits, $16.0 million, or 4.8%, in interest-bearing demand deposits and $12.1 million, or 89.1% in BaaS - brokered deposits, partially offset by decreases of $164.6 million, or 11.6%, in money market accounts, $34.9 million, or 19.9%, in noninterest-bearing deposits and $12.1 million, or 26.9%, in savings accounts.

The increase in certificates of deposits and brokered deposits was due primarily to strong consumer and small business demand during the quarter that allowed the Company to pull forward origination activity planned for later in the year.

The decrease in money market accounts was due primarily to certain customer activity that can be periodically volatile, as well as some outflow of uninsured deposits late in the quarter.

The decline in noninterest-bearing deposits was due primarily to drawdowns from commercial real estate development and construction clients contributing to equity projects the Company is financing.

The decrease in interest-bearing demand deposits was due to normal activity associated with a municipal deposit relationship.

Uninsured deposit balances represented 26.2% of total deposits at March 31, 2023, down from 33.1% at December 31, 2022.

These balances include Indiana-based municipal deposits, which are insured by the Indiana Board for Depositories, as well as larger balance collateralized public funds and accounts under contractual agreements that only allow withdrawal under certain conditions.

After subtracting these types of deposits, the adjusted uninsured deposit balance decreases to 19.2%, down from 24.2% as of December 31, 2022.

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 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.

The following tables present actual and required capital ratios as of March 31, 2023 and December 31, 2022 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, 2023 and December 31, 2022, 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.

As permitted by the federal banking regulatory agencies, the Company has elected the option to delay the impact of the day one adoption of ASC 326.

The transition adjustments of $4.5 million will be phased into the regulatory capital calculations over a three-year period, with 25% of the adjustment recognized in 2023, 50% of the adjustment recognized in 2024, 75% of the adjustment recognized in 2025 and 100% of the adjustment recognized in 2026.

Actual Minimum Capital Required - Basel III Minimum Required to be Considered Well Capitalized

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

As of September 30, 2022:

As of March 31, 2023:

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 17, 2022 to shareholders of record as of September 30, 2022.

The Company’s Board of Directors declared a cash dividend of $0.06 per share of common stock payable April 17, 2023 to shareholders of record as of March 31, 2023.

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 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.

As of March 31, 2023, 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.

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 $30.0 million of the Company’s outstanding common stock from time to time on the open market or in privately negotiated transactions.

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.

In October 2021, the Company’s Board of Directors approved a stock repurchase program authorizing the repurchase of up to $30.0 million, which was subsequently increased to $35.0 million, of our outstanding common stock from time to time on the open market or in privately negotiated transactions.

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

Under this program, the Company repurchased 855,956 shares of common stock through December 19, 2022, at an average price of $36.31, for a total investment of $31.1 million.

In December 2022, the Company’s Board of Directors approved a new stock repurchase program authorizing the repurchase of up to $25.0 million of the Company’s outstanding stock from time to time on the open market or in privately negotiated transactions.

The stock repurchase program is scheduled to expire on December 31, 2023, and replaces the stock repurchase program mentioned above.

Under this program, the Company has repurchased 266,188 shares of common stock through May 5, 2023, at an average price of $22.35, for a total investment of $5.9 million.

Various factors determine the amount and timing of our share repurchases, including our capital requirements, organic growth and other strategic opportunities, economic and market conditions (including the trading price of our stock), and regulatory and legal considerations.

4 unchanged sentences

While scheduled payments and maturities of loans and investment securities are relatively predictable sources of funds, deposit flows are greatly influenced by interest rates, general economic conditions and competition.

Therefore, the Company supplements deposit growth and enhances interest rate risk management through borrowings and wholesale funding, which are generally advances from the Federal Home Loan Bank (“FHLB”) and brokered deposits.

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 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.

At March 31, 2023, on a consolidated basis, the Company had $699.8 million in cash and cash equivalents and investment securities available-for-sale and $18.1 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 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.

At March 31, 2023, the Bank had the ability to borrow an additional $627.7 million from the FHLB, the Federal Reserve and correspondent bank Fed Funds lines of credit, which when combined with cash balances, totaled $931.7 million and represented 134.1% of adjusted uninsured deposit balances.

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, 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.

At March 31, 2023, the Company, on an unconsolidated basis, had $14.0 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, 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.

At March 31, 2023, approved outstanding loan commitments, including unused lines of credit and standby letters of credit, amounted to $501.7 million.

Certificates of deposits and brokered deposits scheduled to mature in one year or less at March 31, 2023 totaled $936.2 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, 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, provision (benefit) 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, 2022 and 2021.

(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

2023 December 31,

2022 September 30,

1 unchanged sentence

2022 March 31,

2022 December 31,

2021 September 30,

2022 September 30,

Total equity - GAAP $ 355,572 $ 364,974 $ 360,857 $ 365,332 $ 374,655

17 unchanged sentences

Return on average tangible common equity (3.41) % 7.00 % 9.13 % 10.36 % 12.09 %

(dollars in thousands) Three Months Ended Nine Months Ended

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

2023 December 31,

2022 September 30,

1 unchanged sentence

2022 March 31,

2022 December 31,

2021 September 30,

2022 September 30,

Total interest income $ 52,033 $ 45,669 $ 36,034 $ 111,239 $ 36,034

2 unchanged sentences

Total interest income - FTE $ 53,416 $ 47,053 $ 37,348 $ 115,210 $ 37,348

Total interest income - FTE $ 40,379 $ 37,483 $ 37,348 $ 35,540 $ 34,390 $ 115,210 $ 103,796

Income from tax refund advance loans — (149) (2,864) — — (3,013) —

Adjusted total interest income - FTE $ 40,379 $ 37,334 $ 34,484 $ 35,540 $ 34,390 $ 112,197 $ 103,796

Net interest income $ 19,574 $ 21,669 $ 25,750 $ 75,424 $ 25,750

2 unchanged sentences

Net interest income - FTE $ 20,957 $ 23,053 $ 27,064 $ 79,395 $ 27,064

Net interest income $ 23,994 $ 25,680 $ 25,750 $ 23,505 $ 20,919 $ 75,424 $ 63,051

Subordinated debt redemption cost — — — — 810 — 810

Income from tax refund advance loans — (149) (2,864) — — (3,013) —

Adjusted net interest income $ 23,994 $ 25,531 $ 22,886 $ 23,505 $ 21,729 $ 72,411 $ 63,861

Net interest income $ 23,994 $ 25,680 $ 25,750 $ 23,505 $ 20,919 $ 75,424 $ 63,051

Fully-taxable equivalent adjustments 1

1,280 1,377 1,314 1,348 1,356 3,971 4,105

Subordinated debt redemption cost — — — — 810 — 810

Income from tax refund advance loans — (149) (2,864) — — (3,013) —

Adjusted net interest income - FTE $ 25,274 $ 26,908 $ 24,200 $ 24,853 $ 23,085 $ 76,382 $ 67,966

1 Assuming a 21% tax rate

(dollars in thousands) Three Months Ended Nine Months Ended

September 30,

2022 June 30,

2022 March 31,

2022 December 31,

2021 September 30,

2022 September 30,

Net interest margin 1.76 % 2.09 % 2.40 % 2.60 % 2.56 %

2 unchanged sentences

Net interest margin - FTE 1.89 % 2.22 % 2.53 % 2.74 % 2.69 %

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

Effect of subordinated debt redemption cost 0.00 % 0.00 % 0.00 % 0.00 % 0.08 % 0.00 % 0.02 %

Effect of income from tax refund advance loans 0.00 % (0.02 %) (0.28 %) 0.00 % 0.00 % (0.10 %) 0.00 %

Adjusted net interest margin 2.40 % 2.58 % 2.28 % 2.30 % 2.08 % 2.42 % 2.07 %

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

Effect of fully-taxable equivalent adjustments 0.13 % 0.14 % 0.13 % 0.13 % 0.13 % 0.13 % 0.14 %

Effect of subordinated debt redemption cost 0.00 % 0.00 % 0.00 % 0.00 % 0.08 % 0.00 % 0.02 %

Effect of income from tax refund advance loans 0.00 % (0.02 %) (0.28 %) 0.00 % 0.00 % (0.10 %) 0.00 %

Adjusted net interest margin - FTE 2.53 % 2.72 % 2.41 % 2.43 % 2.21 % 2.55 % 2.21 %

Provision (benefit) for loan losses $ 892 $ 1,185 $ 791 $ (238) $ (29) $ 2,868 $ 1,268

Provision for tax refund advance loans losses — (18) (1,842) — — (1,860) —

Provision (benefit) for loan losses, excluding tax refund advance loans $ 892 $ 1,167 $ (1,051) $ (238) $ (29) $ 1,008 $ 1,268

Average loans $ 3,161,850 $ 2,998,144 $ 2,947,924 $ 2,914,858 $ 2,933,654 $ 3,036,532 $ 2,991,556

Average tax refund advance loans — (3,185) (60,499) — — (20,996) —

Average loans, excluding tax refund advance loans $ 3,161,850 $ 2,994,959 $ 2,887,425 $ 2,914,858 $ 2,933,654 $ 3,015,536 $ 2,991,556

Net charge-offs (recoveries) to average loans 0.02 % 0.04 % 0.05 % (0.01 %) 0.01 % 0.04 % 0.12 %

Effect of tax refund advance lending net charge-offs to average loans 0.00 % (0.05 %) (0.21 %) 0.00 % 0.00 % (0.08 %) 0.00 %

Net (recoveries) charge-offs to average loans, excluding tax refund advance loans 0.02 % (0.01 %) (0.16 %) (0.01 %) 0.01 % (0.04 %) 0.12 %

Allowance for loan losses $ 29,866 $ 29,153 $ 28,251 $ 27,841 $ 28,000 $ 29,866 $ 28,000

Loans $ 3,255,906 $ 3,082,127 $ 2,880,780 $ 2,887,662 $ 2,936,148 $ 3,255,906 $ 2,936,148

PPP loans — (194) (1,003) (3,152) (14,981) — (14,981)

Loans, excluding PPP loans $ 3,255,906 $ 3,081,933 $ 2,879,777 $ 2,884,510 $ 2,921,167 $ 3,255,906 $ 2,921,167

Allowance for loan losses to loans 0.92 % 0.95 % 0.98 % 0.96 % 0.95 % 0.92 % 0.95 %

Effect of PPP loans 0.00 % 0.00 % 0.00 % 0.01 % 0.01 % 0.00 % 0.01 %

Allowance for loan losses to loans, excluding PPP loans 0.92 % 0.95 % 0.98 % 0.97 % 0.96 % 0.92 % 0.96 %

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

2023 December 31,

2022 September 30,

1 unchanged sentence

2022 March 31,

2022 December 31,

2021 September 30,

2022 September 30,

Total Revenue- GAAP $ 25,020 $ 27,476 $ 28,310 $ 29,994 $ 32,570

Mortgage-related revenue (65) — — — —

Adjusted total revenue $ 24,955 $ 27,476 $ 28,310 $ 29,994 $ 32,570

Noninterest income - GAAP $ 5,446 $ 5,807 $ 4,316 $ 4,314 $ 6,820

Mortgage-related revenue (65) — — — —

Adjusted noninterest income $ 5,381 $ 5,807 $ 4,316 $ 4,314 $ 6,820

Noninterest expense - GAAP $ 20,954 $ 18,513 $ 17,995 $ 17,985 $ 18,780

Mortgage-related costs (3,052)

Acquisition-related expenses — — — (103) (170)

4 unchanged sentences

Adjusted noninterest expense $ 17,902 $ 18,513 $ 17,870 $ 17,062 $ 17,735

Income before income taxes - GAAP $ 9,423 $ 10,824 $ 12,999 $ 14,482 $ 14,310 $ 33,246 $ 42,090

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

(Loss) income before income taxes - GAAP $ (5,349) $ 6,854 $ 9,423 $ 10,824 $ 12,999

Mortgage-related revenue (65) — — — —

Mortgage-related costs 3,052 — — — —

Acquisition-related expenses — — — 103 170

1 unchanged sentence

Write-down of Software — — 125 — —

Subordinated debt redemption cost — — — — 810 — 810

Discretionary inflation bonus — — — 531 —

Accelerated equity compensation — — — 289 —

Partial charge-off of C&I participation loan 6,914 — — — —

Adjusted income before income taxes $ 4,552 $ 6,854 $ 9,548 $ 11,747 $ 14,044

Income tax provision - GAAP $ 987 $ 1,279 $ 1,790 $ 2,004 $ 2,220 $ 4,056 $ 6,454

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

Income tax (benefit) provision - GAAP $ (2,332) $ 503 $ 987 $ 1,279 $ 1,790

Mortgage-related revenue (14) — — — —

Mortgage-related costs 641 — — — —

Acquisition-related expenses — — — 21 36

1 unchanged sentence

Write-down of Software — — 26 — —

Subordinated debt redemption cost — — — — 170 — 170

Discretionary inflation bonus — — — 112 —

Accelerated equity compensation — — — 61 —

Adjusted income tax provision $ 1,013 $ 1,473 $ 2,010 $ 2,138 $ 2,390 $ 4,496 $ 6,094

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

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

Partial charge-off of C&I participation loan 1,452 — — — —

Adjusted income tax (benefit) provision $ (253) $ 503 $ 1,013 $ 1,473 $ 2,010

1 Assuming a 21% tax rate

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

2023 December 31,

2022 September 30,

2022 June 30,

2022 March 31,

Net (loss) income - GAAP $ (3,017) $ 6,351 $ 8,436 $ 9,545 $ 11,209

Mortgage-related revenue (51) — — — —

Mortgage-related costs 2,411 — — — —

Acquisition-related expenses — — — 82 134

1 unchanged sentence

Write-down of Software — — 99 — —

Subordinated debt redemption cost — — — — 640 — 640

Discretionary inflation bonus — — — 419 —

Accelerated equity compensation — — — 228 —

Partial charge-off of C&I participation loan 5,462 — — — —

Adjusted net income $ 4,805 $ 6,351 $ 8,535 $ 10,274 $ 12,034

1 Assuming a 21% tax rate

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

September 30,

2022 June 30,

2022 March 31,

2022 December 31,

2021 September 30,

2022 September 30,

Diluted average common shares outstanding 9,024,072 9,343,533 9,525,855 9,658,689 9,870,394

Diluted earnings per share - GAAP $ 0.89 $ 0.99 $ 1.14 $ 1.25 $ 1.21 $ 3.01 $ 3.57

Effect of gain on sale of premises and equipment — — — — — — (0.19)

Diluted (loss) earnings per share - GAAP $ (0.33) $ 0.68 $ 0.89 $ 0.99 $ 1.14

Mortgage-related revenue (0.01) — — — —

Mortgage-related costs 0.27 — — — —

Effect of acquisition-related expenses — — — 0.01 0.01

1 unchanged sentence

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

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

Effect of discretionary inflation bonus — — — 0.04 —

Effect of accelerated equity compensation — — — 0.02 —

Effect of partial charge-off of C&I participation loan 0.60 — — — —

Adjusted diluted earnings per share $ 0.53 $ 0.68 $ 0.90 $ 1.06 $ 1.22

Return on average assets (0.26 %) 0.59 % 0.82 % 0.93 % 1.08 %

Effect of gain on sale of premises and equipment 0.00 % 0.00 % 0.00 % 0.00 % 0.00 % 0.00 % (0.06 %)

Effect of mortgage-related revenue 0.00 % 0.00 % 0.00 % 0.00 % 0.00 %

Effect of mortgage-related costs 0.21 % 0.00 % 0.00 % 0.00 % 0.00 %

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

1 unchanged sentence

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

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

Effect of discretionary inflation bonus 0.00 % 0.00 % 0.00 % 0.04 % 0.00 %

Effect of accelerated equity compensation 0.00 % 0.00 % 0.00 % 0.02 % 0.00 %

Effect of partial charge-off of C&I participation loan 0.48 % 0.00 % 0.00 % 0.00 % 0.00 %

Adjusted return on average assets 0.43 % 0.59 % 0.83 % 1.00 % 1.16 %

Return on average shareholders' equity (3.37 %) 6.91 % 9.01 % 10.23 % 11.94 %

Effect of gain on sale of premises and equipment 0.00 % 0.00 % 0.00 % 0.00 % 0.00 % 0.00 % (0.75 %)

Effect of mortgage-related revenue (0.06 %) 0.00 % 0.00 % 0.00 % 0.00 %

Effect of mortgage-related costs 2.69 % 0.00 % 0.00 % 0.00 % 0.00 %

Effect of acquisition-related expenses 0.00 % 0.00 % 0.00 % 0.09 % 0.14 %

1 unchanged sentence

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

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

Effect of discretionary inflation bonus 0.00 % 0.00 % 0.00 % 0.45 % 0.00 %

Effect of accelerated equity compensation 0.00 % 0.00 % 0.00 % 0.24 % 0.00 %

Effect of partial charge-off of C&I participation loan 6.10 % 0.00 % 0.00 % 0.00 % 0.00 %

Adjusted return on average shareholders' equity 5.36 % 6.91 % 9.12 % 11.01 % 12.82 %

(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

2023 December 31,

2022 September 30,

1 unchanged sentence

2022 March 31,

2022 December 31,

2021 September 30,

2022 September 30,

Return on average tangible common equity (3.41 %) 7.00 % 9.13 % 10.36 % 12.09 %

Effect of gain on sale of premises and equipment 0.00 % 0.00 % 0.00 % 0.00 % 0.00 % 0.00 % (0.77 %)

Effect of mortgage-related revenue (0.06 %) 0.00 % 0.00 % 0.00 % 0.00 %

Effect of mortgage-related costs 2.73 % 0.00 % 0.00 % 0.00 % 0.00 %

Effect of acquisition-related expenses 0.00 % 0.00 % 0.00 % 0.09 % 0.14 %

1 unchanged sentence

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

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

Effect of discretionary inflation bonus 0.00 % 0.00 % 0.00 % 0.45 % 0.00 %

Effect of accelerated equity compensation 0.00 % 0.00 % 0.00 % 0.25 % 0.00 %

Effect of partial charge-off of C&I participation loan 6.18 % 0.00 % 0.00 % 0.00 % 0.00 %

Adjusted return on average tangible common equity 5.44 % 7.00 % 9.24 % 11.15 % 12.98 %

Effective income tax rate 10.5 % 11.8 % 13.8 % 13.8 % 15.5 % 12.2 % 15.3 %

Effect of gain on sale of premises and equipment 0.0 % 0.0 % 0.0 % 0.0 % 0.0 % 0.0 % (0.6 %)

Effect of acquisition-related expenses 0.0 % 0.2 % 0.3 % 0.1 % 0.0 % 0.2 % 0.0 %

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

Effect of discretionary inflation bonus 0.0 % 1.0 % 0.0 % 0.0 % 0.0 % 0.3 % 0.0 %

Effect of accelerated equity compensation 0.0 % 0.6 % 0.0 % 0.0 % 0.0 % 0.2 % 0.0 %

Adjusted effective income tax rate 10.8 % 13.6 % 15.4 % 14.1 % 15.8 % 13.5 % 15.1 %

Income before income taxes - GAAP $ 9,423 $ 10,824 $ 12,999 $ 14,482 $ 14,310 $ 33,246 $ 42,090

Income from tax refund advance lending — (149) (2,864) — — (3,013) —

Provision for tax refund advance loans losses — 18 1,842 — — 1,860 —

Tax refund advance lending servicing fee — 9 921 — — 930 —

Income before income taxes, excluding tax refund advance loans $ 9,423 $ 10,702 $ 12,898 $ 14,482 $ 14,310 $ 33,023 $ 42,090

Income tax provision - GAAP $ 987 $ 1,279 $ 1,790 $ 2,004 $ 2,220 $ 4,056 $ 6,454

Income from tax refund advance lending — (31) (601) — — (632) —

Provision for tax refund advance loans losses — 4 387 — — 391 —

Tax refund advance lending servicing fee — 2 193 — — 195 —

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 Nine Months Ended

September 30,

2022 June 30,

2022 March 31,

2022 December 31,

2021 September 30,

2022 September 30,

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

Income from tax refund advance lending — (118) (2,263) — — (2,381) —

Provision for tax refund advance loans losses — 14 1,455 — — 1,469 —

Tax refund advance lending servicing fee — 7 728 — — 735 —

Net income, excluding tax refund advance loans $ 8,436 $ 9,448 $ 11,129 $ 12,478 $ 12,090 $ 29,013 $ 35,636

1 Assuming a 21% tax rate

Critical Accounting Policies and Estimates

There have been no material changes in the Company’s critical accounting policies or estimates from those disclosed in its Annual Report on Form 10-K for the year ended December 31, 2021.

There have been changes in the Company’s critical accounting policies or estimates from those disclosed in its Annual Report on Form 10-K for the year ended December 31, 2022.

Refer to Note 1 Basis of Presentation for further details.

Recent Accounting Pronouncements

5 unchanged sentences

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

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

At both March 31, 2023 and December 31, 2022, 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, 2022 and December 31, 2021, the Company had commitments to sell residential real estate loans of $27.8 million and $72.8 million, respectively.

At March 31, 2023, the company did not have any commitments to sell residential real estate loans.

At December 31, 2022, the Company had commitments to sell residential real estate loans of $17.0 million.

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