What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-08-08 compared with 2023-05-10 · 268 added, 170 removed, 534 unchanged (45% of the section changed)

18 unchanged sentences

corporate credit cards on a regional basis to commercial borrowers primarily in the Midwest and Southwest regions of the United States.

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

We primarily offer construction and investor commercial real estate loans in the Midwest and Southwest regions of the Untied States and single tenant lease financing on a nationwide basis.

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

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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.

During the six months ended June 30, 2023, we closed more than $199.5 million in SBA 7(a) loans, and currently rank in the top 10 SBA 7(a) lenders for the SBA’s 2023 fiscal year-to-date.

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

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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.

As of June 30, 2023, the Company had consolidated assets of $4.9 billion, consolidated deposits of $3.9 billion and stockholders’ equity of $354.3 million.

Results of Operations

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.

During the second quarter 2023, net income was $3.9 million, or $0.44 diluted earnings per share, compared to second quarter 2022 net income of $9.5 million, or $0.99 diluted earnings per share, representing a decrease in net income of $5.7 million, or 59.3%, and a decrease in diluted earnings per share of $0.55, or 55.6%.

During the six months ended June 30, 2023, net income was $0.9 million, or $0.10 per diluted share, compared to the six months ended June 30, 2022 net income of $20.8 million, or $2.13 per diluted share, resulting in a decrease in net income of $19.9 million, or 95.8%.

The $5.7 million decrease in net income for the second quarter 2023 compared to the second quarter 2022 was due primarily to a decrease of $7.5 million, or 29.3%, in net interest income, an increase of $0.7 million, or 3.8%, in noninterest expense and an increase of $0.5 million, or 43.3%, in provision for credit losses, partially offset by an increase of $1.6 million, or 36.1%, in noninterest income and a decrease of $1.5 million, or 118.3%, in income tax expense.

The decrease in net income for the six months ended June 30, 2023 compared to the six months ended June 30, 2022 was due primarily to a $13.7 million, or 26.7%, decrease in net interest income, a $9.1 million, or 462.4%, increase in provision for credit losses and a $2.9 million, or 7.8%, increase in noninterest expense, partially offset by a $5.6 million, or 183.6%, decrease in income tax expense and a $0.2 million, or 1.6%, increase in noninterest income.

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.

The Company also recognized $0.1 million of mortgage banking revenue during the six months ended June 30, 2023, down from $3.6 million in the six months ended June 30, 2022, as it immediately began winding down its existing pipeline following the decision to exit the business.

Additionally, during the six months ended June 30, 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 first quarter 2023.

This action contributed to the increase in the provision for credit losses as compared to the six months ended June 30, 2022.

The Company received payment for the remaining balance of the participation loan during the second quarter 2023.

During the second quarter 2023, return on average assets (“ROAA”), return on average shareholders’ equity (“ROAE”), and return on average tangible common equity (“ROATCE”) were 0.32%, 4.35%, and 4.40%, respectively, compared to 0.93%, 10.23%, and 10.36%, respectively, for the second quarter 2022.

During the six months ended June 30, 2023, ROAA, ROAE and ROATCE were 0.04%, 0.48%, and 0.49%, respectively, compared to 1.01%, 11.09%, and 11.23%, respectively, for the six months ended June 30, 2022.

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

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

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

Excluding the impact of exiting consumer mortgage and the partial charge-off, adjusted net income for the six months ended June 30, 2023 was $8.7 million and adjusted diluted earnings per share was $0.97.

Additionally, for the six months ended June 30, 2023, adjusted ROAA, adjusted ROAE and adjusted ROATCE were 0.37%, 4.85% and 4.92%, respectively.

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

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

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

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

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

June 30, 2023 March 31, 2023 June 30, 2022

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

38 unchanged sentences

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

Six Months Ended

June 30, 2023 June 30, 2022

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

Interest-earning assets

Loans, including

loans held-for-sale $ 3,619,883 $ 90,749 5.06 % $ 2,998,085 $ 65,603 4.41 %

Securities - taxable 521,533 7,441 2.88 % 555,533 4,788 1.74 %

Securities - non-taxable 73,244 1,658 4.56 % 78,952 577 1.47 %

Other earning assets 421,793 10,307 4.93 % 388,760 1,172 0.61 %

Total interest-earning assets 4,636,453 110,155 4.79 % 4,021,330 72,140 3.62 %

Allowance for credit losses - loans (35,877) (28,288)

Noninterest-earning assets 187,633 163,026

Total assets $ 4,788,209 $ 4,156,068

Interest-bearing liabilities

Interest-bearing demand deposits $ 346,878 $ 2,409 1.40 % $ 333,361 $ 878 0.53 %

Savings accounts 34,175 145 0.86 % 63,653 121 0.38 %

Money market accounts 1,325,741 24,614 3.74 % 1,440,976 3,425 0.48 %

BaaS - brokered deposits 18,852 368 3.94 % 41,836 160 0.77 %

Certificates and brokered deposits 1,837,713 34,410 3.78 % 1,164,949 7,921 1.37 %

Total interest-bearing deposits 3,563,359 61,946 3.51 % 3,044,775 12,505 0.83 %

Other borrowed funds 719,538 10,490 2.94 % 601,274 8,205 2.75 %

Total interest-bearing liabilities 4,282,897 72,436 3.41 % 3,646,049 20,710 1.15 %

Noninterest-bearing deposits 126,194 110,605

Other noninterest-bearing liabilities 18,339 21,910

Total liabilities 4,427,430 3,778,564

Shareholders’ equity 360,779 377,504

Total liabilities and shareholders’ equity $ 4,788,209 $ 4,156,068

Net interest income $ 37,719 $ 51,430

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 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

Three Months Ended June 30, 2023 vs.

March 31, 2023 Due to Changes in Three Months Ended June 30, 2023 vs.

June 30, 2022 Due to Changes in Six Months Ended June 30, 2023 vs.

June 30, 2022 Due to Changes in

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

Interest income

9 unchanged sentences

Increase (decrease) in net interest income $ 842 $ (2,271) $ (1,429) $ 4,947 $ (12,482) $ (7,535) $ 9,658 $ (23,369) $ (13,711)

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 $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%.

Net interest income for the second quarter 2023 was $18.1 million, a decrease of $7.5 million, or 29.3%, compared to $25.7 million for the second quarter 2022.

The decrease in net interest income was the result of a $29.6 million, or 283.4%, increase in total interest expense to $40.0 million for the second quarter 2023 from $10.4 million for the second quarter 2022, partially offset by a $22.0 million, or 61.0%, increase in total interest income to $58.1 million for the second quarter 2023 from $36.1 million for the second quarter 2022.

Net interest income for the six months ended June 30, 2023 was $37.7 million, a decrease of $13.7 million, or 26.7%, compared to $51.4 million for the six months ended June 30, 2022.

The decrease in net interest income was the result of a $51.7 million, or 249.8%, increase in total interest expense to $72.4 million for the six months ended June 30, 2023 from $20.7 million for the six months ended June 30, 2022.

The increase in total interest expense was partially offset by a $38.0 million, or 52.7%, increase in total interest income to $110.2 million for the six months ended June 30, 2023 from $72.1 million for the six months ended June 30, 2022.

The increase in total interest income for the second quarter 2023 compared to second quarter 2022 was due primarily to a $14.5 million, or 44.7%, increase in interest earned on loans, $5.7 million, or 719.2%, increase in income from other earning assets and a $1.8 million, or 62.2%, increase in interest earned on securities.

The increase in income from loans was due primarily to an 84 bp increase in the yield earned on loans, as well as an increase of $636.3 million, or 21.1%, in the average balance of loans compared to the second quarter 2022.

The yield earned on other earning assets increased 413 bps and the average balance of other earning assets increased $189.0 million, or 58.6%.

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

The average balance of securities decreased $16.2 million, or 2.6%, while the yield earned on the securities portfolio increased 125 bps for the second quarter 2023 compared to the second quarter 2022.

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

The yield on funded portfolio originations was 8.42% in the second quarter 2023, an increase of 366 bps compared to the second quarter 2022.

The increase in total interest income for the six months ended June 30, 2023 compared to the six months ended June 30, 2022 was due primarily to an increase in interest earned on loans resulting from an increase of 65 bps in the yield on loans, including loans held-for-sale, as well as an increase of $621.8 million, or 20.7%, in the average balance of loans, including loans held-for-sale.

The yield on other earning assets increased 432 bps and the average balance of other earning assets increased $33.0 million, or 8.5%.

In addition, the average balance of securities decreased $39.7 million, or 6.3%, and the yield earned on the securities portfolio increased 138 bps for the six months ended June 30, 2023 compared to the six months ended June 30, 2022.

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

The yield on funded portfolio originations was 8.0% for the six months ended June 30, 2023, an increase of 314 bps compared to the six months ended June 30, 2022.

The increase in total interest expense for the second quarter 2023 compared to the second quarter 2022 was due primarily to increases of $16.8 million, or 441.2%, in interest expense associated with certificates and brokered deposits, $10.4 million, or 541.0%, in interest expense associated with money market accounts, $1.3 million, or 31.9%, in interest expense associated with other borrowed funds and $1.0 million, or 223.8%, in interest expense associated with interest-bearing demand deposits.

The increase in interest expense related to certificates and brokered deposits was driven by an increase of 269 bps in the cost of these deposits, as well as an increase of $921.2 million, or 83.4%, 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 the average balance of these deposits was driven by strong consumer and small business demand for certificates of deposits in 2023, as well as the funding of brokered deposits throughout 2023 to supplement on-balance sheet liquidity.

The increase in interest expense related to money market accounts was driven primarily by an increase of 334 bps in the cost of these deposits, partially offset by a decrease in the average balance of these deposits of $153.2 million, or 10.7%.

The increase in interest expense related to other borrowed funds was due primarily to additional long-term FHLB advances in the second half of 2022 at rates lower than market deposit costs, as the cost of the borrowed funds increased only 19 bps while the average balance increased 23.3%.

The increase in interest expense related to interest-bearing demand deposits was due primarily to a 114 bp increase in the cost of these deposits, as well as an increase of $11.7 million, or 3.4%, 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.

The increase in the overall cost of deposits was due primarily to the continued rise in interest rates during 2023.

Beginning in March 2022, the Federal Reserve has increased the Fed Funds rate 5.00% through June 30, 2023, which has impacted pricing of the Company’s deposit products.

The increase in total interest expense for the six months ended June 30, 2023 compared to the six months ended June 30, 2022 was due primarily to increases of $26.5 million, or 334.4%, in interest expense associated with certificates and brokered deposits, $21.2 million, or 618.7%, in interest expense associated with money market accounts, $2.3 million, or 395.4%, in interest expense associated with other borrowed funds and $1.5 million, or 174.4%, in interest expense associated with interest-bearing demand deposits.

The increase in interest expense related to certificates and brokered deposits was driven by an increase of 241 bps in the cost of these deposits, as well as an increase of 672.8 million, or 57.8%, in the average balance of these deposits.

The increase in interest expense related to money market accounts was driven primarily by an increase of 326 bps in the cost of these deposits, partially offset by a decrease of $115.2 million, or 8.0%, in the average balance of these deposits.

The increase in interest expense related to interest-bearing demand deposits was due primarily to an 87 bp increase in the cost of these deposits, as well as an increase of $13.5 million, or 4.1%, in the average balance of these deposits.

The increase in the overall cost of deposits was due primarily to the continued rise in interest rates during 2023.

Beginning in March 2022, the Federal Reserve has increased the Fed Funds rate 5.00% through June 30, 2023, which has impacted pricing of the Company’s deposit products.

Overall, the cost of total interest-bearing liabilities for the second quarter 2023 increased 246 bps to 3.62% from 1.16% for the second quarter 2022.

The cost of total interest-bearing liabilities for the six months ended June 30, 2023 increased 226 bps to 3.41% from 1.15% for the six months ended June 30, 2022.

The increase in the cost of funds for both the three and six months ended June 30, 2023 reflects the rapid rise in interest rates in 2023.

Net interest margin (“NIM”) was 1.53% for the second quarter 2023 compared to 2.60% for the second quarter 2022, a decrease of 107 bps.

On a fully-taxable equivalent (“FTE”) basis, NIM was 1.64% for the second quarter 2023 compared to 2.74% for the second quarter 2022, a decrease of 110 bps.

NIM was 1.64% for the six months ended June 30, 2023 compared to 2.58% for the six months ended June 30, 2022, a decrease of 94 bps.

FTE NIM was 1.76% for the six months ended June 30, 2023 compared to 2.71% for the six months ended June 30, 2022, a decrease of 95 bps.

The decrease in both the three and six months ended June 30, 2023 NIM and FTE NIM compared to the three and six months ended June 30, 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.

Three Months Ended

(in thousands) March 31,

The following table presents noninterest income for the last five completed fiscal quarters and the six months ended June 30, 2023 and 2022.

Three Months Ended Six Months Ended

(in thousands) June 30,

2023 March 31,

2023 December 31,

1 unchanged sentence

2022 June 30,

2022 March 31,

2022 June 30,

2023 June 30,

Service charges and fees $ 218 $ 209 $ 226 $ 248 $ 281 $ 427 $ 597

5 unchanged sentences

Total noninterest income $ 5,871 $ 5,446 $ 5,807 $ 4,316 $ 4,314 $ 11,317 $ 11,134

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.

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.

During the second quarter 2023, noninterest income was $5.9 million, representing an increase of $1.6 million, or 36.1%, compared to $4.3 million for the second quarter 2022.

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

The increase of $2.9 million, or 149.4%, in gain on sale of loans was due to an increase in the volume of U.S.

Small Business Administration (“SBA”) 7(a) guaranteed loan sales.

The increase of $0.3 million, or 228.0%, in net servicing revenue reflects the growth in the Company’s SBA servicing portfolio, as origination volume has increased over the past year.

The decrease in mortgage banking revenue was due to the Company’s exit from the mortgage business in the first quarter 2023.

During the six months ended June 30, 2023, noninterest income was $11.3 million, an increase of $0.2 million, or 1.6%, compared to $11.1 million for the six months ended June 30, 2022.

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

The increase of $3.1 million, or 54.0%, in gain on sale of loans was due to an increase in the volume of SBA 7(a) guaranteed loan sales.

The increase in net loan servicing revenue was due to growth in the balance of the Company’s SBA 7(a) servicing portfolio, as well as slower prepayment speeds in first six months of 2023 compared to first six months of 2022.

The decrease in mortgage banking revenue was due to the Company’s exit from the mortgage business in the first quarter 2023.

Noninterest Expense

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

Three Months Ended

(in thousands) March 31,

The following table presents noninterest expense for the last five completed fiscal quarters and the six months ended June 30, 2023 and 2022.

Three Months Ended Six Months Ended

(in thousands) June 30,

2023 March 31,

2023 December 31,

1 unchanged sentence

2022 June 30,

2022 March 31,

2022 June 30,

2023 June 30,

Salaries and employee benefits $ 10,706 $ 11,794 $ 10,404 $ 10,439 $ 10,832 $ 22,500 $ 20,710

7 unchanged sentences

Total noninterest expense $ 18,670 $ 20,954 $ 18,513 $ 17,995 $ 17,985 $ 39,624 $ 36,765

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%.

Noninterest expense for the second quarter 2023 was $18.7 million, compared to $18.0 million for the second quarter 2022.

The increase of $0.7 million, or 3.8%, was due primarily to a $0.6 million increase in deposit insurance premium and a $0.4 million increase in loan expenses, partially offset by a decrease of $0.5 million in consulting and professional fees.

The second quarter 2022 includes a $0.5 million discretionary inflation bonus paid to certain employees and $0.3 million of accelerated equity compensation expense related to several retirements.

Excluding these items, salaries and employee benefits increased $0.7 million due primarily to increased headcount and higher incentive compensation in small business lending.

The increase in deposit insurance premium was due primarily to year-over-year asset growth and changes in the composition of the loans and deposit portfolios.

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

The decrease in consulting and professional fees was due primarily to lower legal fees.

Noninterest expense for the six months ended June 30, 2023 was $39.6 million, compared to $36.8 million for the six months ended June 30, 2022.

The increase of $2.8 million, or 7.8%, was due primarily to increases of $1.8 million in salaries and benefits, $0.9 million in deposit insurance premium, $0.8 million in loan expenses and $0.5 million in premises and equipment, partially offset by a $1.5 million decrease in consulting and professional fees.

During the six months ended June 30, 2022, the Company paid a $0.5 million discretionary inflation bonus to certain employees and recognized accelerated equity compensation expense of $0.3 million related to several retirements.

Excluding these items, salaries and employee benefits increased $2.6 million.

The increase in salaries and employee benefits was due primarily to mortgage exit costs, such as severance, as well as an increase in headcount and higher incentive compensation in small business lending.

The increase in loan expenses was due primarily to mortgage exit costs and accrued contract expenses.

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

The increase in premises and equipment was due mainly to increases in software maintenance and building maintenance.

The decrease in consulting and professional fees was due primarily to consulting fees related to a special project that occurred in the first quarter of 2022, as well as lower legal fees in 2023.

The Company recorded an income tax benefit of $0.2 million for the second quarter 2023, compared to an income tax provision of $1.3 million for the second quarter 2022 and an effective tax rate of 11.8%.

The Company recorded an income tax benefit of $2.6 million for the six months ended June 30, 2023, compared to an income tax provision of $3.1 million, or an effective tax rate of 12.9%, for the six months ended June 30, 2022.

The income tax benefits recognized during 2023 reflect the impact of the partial charge-off of the commercial and industrial participation loan, as well as the benefit of tax exempt income relative to stated pre-tax income.

Financial Condition

2 unchanged sentences

Balance Sheet Data:

2023 March 31,

2023 December 31,

1 unchanged sentence

2022 June 30,

2022 March 31,

Total assets $ 4,947,049 $ 4,721,319 $ 4,543,104 $ 4,264,424 $ 4,099,806

7 unchanged sentences

Total shareholders’ equity 354,332 355,572 364,974 360,857 365,332

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.

Total assets increased $403.9 million, or 8.9%, to $4.9 billion at June 30, 2023 compared to $4.5 billion at December 31, 2022.

The increase was due primarily to increases in loan and cash balances, and was funded by growth in deposit balances of $413.0 million, or 12.0%.

As of June 30, 2023, total shareholders’ equity was $354.3 million, a decrease of $10.6 million, or 3.0%, compared to December 31, 2022.

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

Tangible common equity totaled $349.6 million as of June 30, 2023, representing a decrease of $10.6 million, or 3.0%, compared to December 31, 2022.

The ratio of total shareholders’ equity to total assets decreased to 7.16% as of June 30, 2023 from 8.03% as of December 31, 2022, and the ratio of tangible common equity to tangible assets decreased to 7.07% as of June 30, 2023 from 7.94% as of December 31, 2022.

Book value per common share increased 0.3% to $40.38 as of June 30, 2023 from $40.26 as of December 31, 2022.

Tangible book value per share increased 0.3% to $39.85 as of June 30, 2023 from $39.74 as of December 31, 2022.

The slight increase in both book value per common share and tangible book value per share reflects the effect of stock repurchase activity during the year, partially offset by declines in total shareholders’ equity and tangible common equity.

1 unchanged sentence

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

(dollars in thousands) March 31,

(dollars in thousands) June 30,

2023 March 31,

2023 December 31,

1 unchanged sentence

2022 June 30,

2022 March 31,

Commercial loans

13 unchanged sentences

Other consumer 352,124 9.7 % 338,133 9.4 % 324,598 9.3 % 312,512 9.7 % 292,955 9.6 %

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

Total consumer loans 772,653 21.3 % 756,355 21.0 % 733,258 21.0 % 672,191 20.8 % 594,007 19.3 %

5 unchanged sentences

Net loans $ 3,610,774 $ 3,570,363 $ 3,467,664 $ 3,226,040 $ 3,052,974

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.

1 Includes carrying value adjustments of $30.5 million, $31.5 million, $32.5 million, $33.9 million and $35.4 million related to terminated interest rate swaps associated with public finance loans as of June 30, 2023, March 31, 2023, December 31, 2022, September 30, 2022 and June 30, 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.

Total loans were $3.6 billion as of June 30, 2023, an increase of $147.4 million, or 4.2%, compared to December 31, 2022.

Total commercial loan balances were $2.8 billion as of June 30, 2023, up $111.7 million, or 4.1%, from December 31, 2022.

Total consumer loan balances were $772.7 million as of June 30, 2023, an increase of $39.4 million, or 5.4%, compared to December 31, 2022.

Compared to December 31, 2022, the increase in commercial loan balances was driven by growth in franchise finance 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.

The increase in consumer loans was due to higher balances in the recreational vehicles and trailers loan portfolios, in addition to funded residential mortgages and draws on construction/perm loans 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) March 31,

(dollars in thousands) June 30,

2023 March 31,

2023 December 31,

1 unchanged sentence

2022 June 30,

2022 March 31,

Nonaccrual loans

34 unchanged sentences

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

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.

Total nonperforming loans decreased $1.3 million, or 17.3%, to $6.2 million as of June 30, 2023 compared to $7.5 million as of December 31, 2022 due primarily to payoffs in small business lending.

Total nonperforming assets decreased $1.2 million, or 15.5%, to $6.4 million as of June 30, 2023, compared to $7.6 million as of December 31, 2022, due primarily to the payoff activity discussed above, partially offset by an increase in OREO.

As of June 30, 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.

1 unchanged sentence

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.

Total TDRs as of December 31, 2022 were $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,

(in thousands) June 30,

2023 March 31,

2023 December 31,

1 unchanged sentence

2022 June 30,

2022 March 31,

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

2 unchanged sentences

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,

The following table provides a rollforward of the allowance for credit losses for the last five completed fiscal quarters and the six months ended June 30, 2023 and 2022.

Three Months Ended Six Months Ended

(dollars in thousands) June 30,

2023 March 31,

2023 December 31,

1 unchanged sentence

2022 June 30,

2022 March 31,

2022 June 30,

2023 June 30,

Balance, beginning of period, December 31, 2022 $ 36,879 $ 31,737 $ 29,866 $ 29,153 $ 28,251 $ 31,737 $ 27,841

4 unchanged sentences

Commercial and industrial — 6,965 — — — 6,965 —

Healthcare finance 25 — — — — 25 —

Small business lending 1,358 60 192 130 — 1,418 80

Residential mortgage — — — — —

Home equity — — — — —

Franchise finance 331 — — — — 331 —

Other consumer 150 232 101 106 128 382 291

7 unchanged sentences

Other consumer 33 57 41 50 80 90 179

Total losses charged off 64 55 57 217 1,350

Total recoveries 290 64 55 57 217 354 1,567

Balance, end of period $ 36,058 $ 36,879 $ 31,737 $ 29,866 $ 29,153 $ 36,058 $ 29,153

3 unchanged sentences

Single tenant lease financing 0.00 % 0.00 % 0.00 % 0.00 % 0.00 % 0.00 % (0.29 %)

Healthcare finance 0.02 % 0.00 % 0.00 % 0.00 % 0.00 % 0.02 % 0.00 %

Small business lending 1.50 % 0.15 % 0.14 % 0.14 % 0.00 % 1.69 % 0.11 %

Franchise finance 0.17 % 0.00 % 0.00 % 0.00 % 0.00 % 0.18 % 0.00 %

Total commercial net charge-offs (recoveries) 0.10 % 1.02 % 0.01 % 0.01 % 0.00 % 0.61 % (0.10 %)

5 unchanged sentences

Total net charge-offs to average loans 0.17 % 0.82 % 0.03 % 0.02 % 0.04 % 0.49 % 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.

The allowance for credit losses (“ACL”) was $36.1 million as of June 30, 2023, compared to $31.7 million as of December 31, 2022.

factors for certain portfolios.

The ACL as a percentage of total loans was 0.99% at June 30, 2023, compared to 0.91%, at December 31, 2022.

The ACL as a percentage of nonperforming loans increased to 579.1% as of June 30, 2023, compared to 426.0% as of December 31, 2022, due to the increase in the ACL, as well as the decline in nonperforming loans.

Net charge-offs of $1.6 million were recognized during the second quarter 2023, resulting in net charge-offs to average loans of 0.17%, compared to net charge-offs to average loans of 0.04% for the second quarter 2022.

The increase in net charge-offs was due primarily to an increase in charge-offs in small business loans and a charge off of one franchise finance loan.

During the six months ended June 30, 2023, the Company recorded net charge-offs of $8.8 million, compared to net charge-offs of $0.7 million during the six months ended June 30, 2022.

The increase in net charge-offs for the six months ended June 30, 2023 was driven primarily by a $6.9 million partial charge-off of a C&I participation loan that was placed on nonaccrual status and subsequently charged off during the first quarter 2023, as well as the increase in charge-offs in small business loans and a charge-off of one franchise finance loan discussed above and a recovery in single tenant lease financing in the first quarter 2022.

These were offset by $1.9 million of charge-offs related to tax refund advance loans in 2022.

The provision for credit losses in the second quarter 2023 was $1.7 million, compared to $1.2 million for the second quarter 2022.

The increase in provision for the second quarter 2023 was driven primarily by the increase in net charge-offs and an increase in the reserve for unfunded commitments, partially offset by the positive impact of economic forecasts on certain portfolios.

Investment Securities Portfolio

1 unchanged sentence

(in thousands)

Amortized Cost March 31,

Amortized Cost June 30,

2023 March 31,

2023 December 31,

1 unchanged sentence

2022 June 30,

2022 March 31,

Securities available-for-sale

15 unchanged sentences

(in thousands)

Approximate Fair Value March 31,

Approximate Fair Value June 30,

2023 March 31,

2023 December 31,

1 unchanged sentence

2022 June 30,

2022 March 31,

Securities available-for-sale

14 unchanged sentences

Total securities $ 588,037 $ 588,296 $ 558,867 $ 563,542 $ 599,508

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.

The approximate fair value of available-for-sale investment securities decreased $11.0 million, or 2.8%, to $379.4 million as of June 30, 2023, compared to $390.4 million as of December 31, 2022.

The decrease was due primarily to decreases of $11.0 million in agency mortgage-backed securities - residential, $4.0 million in asset-backed securities and $3.7 million in corporate securities, partially offset by increases of $5.7 million in U.S.

Government-sponsored agencies and $3.0 million in private label mortgage-backed securities - residential.

The decrease was caused primarily by principal paydowns outpacing new purchase activity for certain available-for-sale portfolios.

Accrued Income and Other Assets

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 income and other assets increased $4.4 million, or 9.7%, to $49.3 million at June 30, 2023 compared to $44.9 million at December 31, 2022.

The increase was primarily related to an increase of $3.5 million in deferred tax assets and $1.4 million in fund investments, partially offset by a decrease of $0.5 million in derivative assets.

Accrued Expenses and Other Liabilities

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.

Accrued expenses and other liabilities increased $0.9 million, or 6.5%, to $15.5 million at June 30, 2023, compared to $14.5 million at December 31, 2022.

The increase was due primarily to increases of $3.5 million in the reserve for unfunded commitments and $2.4 million in other accrued expenses, partially offset by decreases of $2.1 million in other liabilities, $1.5 million in accrued salary and benefits and $1.2 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) March 31,

(dollars in thousands) June 30,

2023 March 31,

2023 December 31,

1 unchanged sentence

2022 June 30,

2022 March 31,

Noninterest-bearing deposits $ 119,291 3.1 % $ 140,449 3.9 % $ 175,315 5.1 % $ 142,635 4.5 % $ 126,153 4.0 %

6 unchanged sentences

Total deposits $ 3,854,308 100.0 % $ 3,622,290 100.0 % $ 3,441,245 100.0 % $ 3,192,644 100.0 % $ 3,152,101 100.0 %

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.

Total deposits increased $413.1 million, or 12.0%, to $3.9 billion as of June 30, 2023, compared to $3.4 billion as of December 31, 2022.

This increase was due primarily to increases of $491.9 million, or 56.3%, in certificates of deposits, $104.4 million, or 18.0%, in brokered deposits, $63.3 million, or 18.9%, in interest-bearing demand deposits and $11.9 million, or 87.8%, in BaaS - brokered deposits, partially offset by decreases of $185.9 million, or 13.1%, in money market accounts, $56.0 million, or 32.0%, in noninterest-bearing deposits and $16.6 million, or 37.0%, 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.

The increase in certificates of deposits and brokered deposits was due primarily to strong consumer and small business demand for certificates of deposits in 2023, as well as the funding of brokered deposits throughout 2023 to supplement on-balance sheet liquidity.

The increase in interest-bearing demand deposits was due primarily to growth in BaaS deposits.

The decrease in money market accounts was due primarily to certain customer activity that can be periodically volatile, as well as certain higher-cost relationships that were exited during 2023.

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

Uninsured deposit balances represented 24% of total deposits at June 30, 2023, down from 33% 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 accounts under contractual agreements that only allow withdrawal under certain conditions.

After subtracting these types of deposits, the adjusted uninsured deposit balance decreases to 18%, down from 24% as of December 31, 2022.

21 unchanged sentences

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

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

The following tables present actual and required capital ratios as of June 30, 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 June 30, 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.

3 unchanged sentences

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

As of March 31, 2023:

As of June 30, 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 April 17, 2023 to shareholders of record as of March 31, 2023.

The Company’s Board of Directors declared a cash dividend of $0.06 per share of common stock payable July 17, 2023 to shareholders of record as of June 30, 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 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.

As of June 30, 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.

2 unchanged sentences

The Company believes it has sufficient liquidity and capital resources to meet its cash and capital expenditure requirements for the next twelve months and longer.

The Company may explore strategic alternatives, including additional asset, deposit or revenue generation channels that complement our commercial and consumer banking platforms, which may require additional capital.

The Company may explore strategic alternatives, including additional asset, deposit or revenue generation channels that complement our small business, commercial and consumer banking platforms, which may require additional capital.

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

4 unchanged sentences

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.

Under this program, the Company repurchased 411,188 shares of common stock through June 30, 2023, at an average price of $19.07, for a total investment of $7.8 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.

6 unchanged sentences

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

At 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.

At June 30, 2023, on a consolidated basis, the Company had $845.0 million in cash and cash equivalents and investment securities available-for-sale and $32.0 million in loans held-for-sale that were generally available for its cash needs.

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

At 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.

At June 30, 2023, the Bank had the ability to borrow an additional $729.2 million from the FHLB, the Federal Reserve and correspondent bank Fed Funds lines of credit, which when combined with cash balances, totaled $1.2 billion and represented 127% 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 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.

At June 30, 2023, the Company, on an unconsolidated basis, had $12.3 million in cash generally available for its cash needs, which is in excess of its current annual regular shareholder dividend and operating expenses.

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

At 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.

At June 30, 2023, approved outstanding loan commitments, including unused lines of credit and standby letters of credit, amounted to $544.8 million.

Certificates of deposits and brokered deposits scheduled to mature in one year or less at June 30, 2023 totaled $1.1 billion.

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, net interest income - FTE, net interest margin - FTE, adjusted total revenue, adjusted noninterest income, adjusted noninterest expense, adjusted income before income taxes, adjusted income tax (benefit) provision, adjusted net income, adjusted diluted earnings per share, adjusted return on average assets, adjusted return on average shareholders’ equity and adjusted return on average tangible common equity are used by the Company’s management to measure the strength of its capital and analyze profitability, including its ability to generate earnings on tangible capital invested by its shareholders.

Non-GAAP financial measures, specifically tangible common equity, tangible assets, tangible book value per common share, tangible common equity to tangible assets, average tangible common equity, return on average tangible common equity, total interest income - FTE, net interest income - FTE, net interest margin - FTE, adjusted total revenue, adjusted noninterest income, adjusted noninterest expense, adjusted income (loss) before income taxes, adjusted income tax (benefit) provision, adjusted net income, adjusted diluted earnings (loss) per share, adjusted return on average assets, adjusted return on average shareholders’ equity and adjusted return on average tangible common equity are used by the Company’s management to measure the strength of its capital and analyze profitability, including its ability to generate earnings on tangible capital invested by its shareholders.

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

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

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

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

Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures are included in the following table for the last five completed fiscal quarters and the six months ended June 30, 2023 and 2022.

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

2023 March 31,

2023 December 31,

1 unchanged sentence

2022 June 30,

2022 March 31,

2022 June 30,

2023 June 30,

Total equity - GAAP $ 354,332 $ 355,572 $ 364,974 $ 360,857 $ 365,332 $ 354,332 $ 365,332

17 unchanged sentences

Return on average tangible common equity 4.40 % (3.41 %) 7.00 % 9.13 % 10.36 % 0.49 % 11.23 %

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

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

2023 March 31,

2023 December 31,

1 unchanged sentence

2022 June 30,

2022 March 31,

2022 June 30,

2023 June 30,

Total interest income $ 58,122 $ 52,033 $ 45,669 $ 36,034 $ 36,106 $ 110,155 $ 72,140

11 unchanged sentences

1 Assuming a 21% tax rate

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

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

2023 March 31,

2023 December 31,

1 unchanged sentence

2022 June 30,

2022 March 31,

2022 June 30,

2023 June 30,

Total Revenue- GAAP $ 24,016 $ 25,020 $ 27,476 $ 28,310 $ 29,994 $ 49,036 $ 62,564

12 unchanged sentences

Adjusted noninterest expense $ 18,670 $ 17,902 $ 18,513 $ 17,870 $ 17,062 $ 36,572 $ 34,797

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

Income (loss) before income taxes - GAAP $ 3,648 $ (5,349) $ 6,854 $ 9,423 $ 10,824 $ (1,701) $ 23,823

Mortgage-related revenue — (65) — — — (65) —

Mortgage-related costs — 3,052 — — — 3,052 —

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

Acquisition-related expenses — — — — 103 — 273

3 unchanged sentences

Accelerated equity compensation — — — — 289 — 289

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

Adjusted income before income taxes $ 3,648 $ 4,552 $ 6,854 $ 9,548 $ 11,747 $ 8,200 $ 25,791

2 unchanged sentences

Mortgage-related costs — 641 — — — 641 —

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

Acquisition-related expenses — — — — 21 — 57

3 unchanged sentences

Accelerated equity compensation — — — — 61 — 61

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

Adjusted income tax (benefit) provision $ (234) $ (253) $ 503 $ 1,013 $ 1,473 $ (487) $ 3,483

1 Assuming a 21% tax rate

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

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

2023 March 31,

2023 December 31,

1 unchanged sentence

2022 June 30,

2022 March 31,

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

2022 June 30,

2023 June 30,

Net income (loss) - GAAP $ 3,882 $ (3,017) $ 6,351 $ 8,436 $ 9,545 $ 865 $ 20,754

Mortgage-related revenue — (51) — — — (51) —

Mortgage-related costs — 2,411 — — — 2,411 —

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

Acquisition-related expenses — — — — 82 — 216

3 unchanged sentences

Accelerated equity compensation — — — — 228 — 228

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

Adjusted net income $ 3,882 $ 4,805 $ 6,351 $ 8,535 $ 10,274 $ 8,687 $ 22,308

Diluted average common shares outstanding 8,908,180 9,024,072 9,343,533 9,525,855 9,658,689 8,980,262 9,764,232

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

Diluted earnings (loss) per share - GAAP $ 0.44 $ (0.33) $ 0.68 $ 0.89 $ 0.99 $ 0.10 $ 2.13

Mortgage-related revenue — (0.01) — — — (0.01) —

Mortgage-related costs — 0.27 — — — 0.27 —

Effect of partial charge-off of C&I participation loan — 0.60 — — — 0.61 —

Effect of acquisition-related expenses — — — — 0.01 — 0.02

3 unchanged sentences

Effect of accelerated equity compensation — — — — 0.02 — 0.02

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

Adjusted diluted earnings per share $ 0.44 $ 0.53 $ 0.68 $ 0.90 $ 1.06 $ 0.97 $ 2.28

2 unchanged sentences

Effect of mortgage-related costs 0.00 % 0.21 % 0.00 % 0.00 % 0.00 % 0.10 % 0.00 %

Effect of partial charge-off of C&I participation loan 0.00 % 0.48 % 0.00 % 0.00 % 0.00 % 0.23 % 0.00 %

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

3 unchanged sentences

Effect of accelerated equity compensation 0.00 % 0.00 % 0.00 % 0.00 % 0.02 % 0.00 % 0.01 %

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 0.32 % 0.43 % 0.59 % 0.83 % 1.00 % 0.37 % 1.08 %

1 unchanged sentence

Effect of mortgage-related revenue 0.00 % (0.06 %) 0.00 % 0.00 % 0.00 % (0.03 %) 0.00 %

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

2023 March 31,

2023 December 31,

2022 September 30,

2022 June 30,

2023 June 30,

Effect of mortgage-related costs 0.00 % 2.69 % 0.00 % 0.00 % 0.00 % 1.35 % 0.00 %

Effect of partial charge-off of C&I participation loan 0.00 % 6.10 % 0.00 % 0.00 % 0.00 % 3.05 % 0.00 %

Effect of acquisition-related expenses 0.00 % 0.00 % 0.00 % 0.00 % 0.09 % 0.00 % 0.12 %

3 unchanged sentences

Effect of accelerated equity compensation 0.00 % 0.00 % 0.00 % 0.00 % 0.24 % 0.00 % 0.12 %

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 4.35 % 5.36 % 6.91 % 9.12 % 11.01 % 4.85 % 11.92 %

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

2023 December 31,

2022 September 30,

2022 June 30,

2022 March 31,

Return on average tangible common equity 4.40 % (3.41 %) 7.00 % 9.13 % 10.36 % 0.49 % 11.23 %

1 unchanged sentence

Effect of mortgage-related costs 0.00 % 2.73 % 0.00 % 0.00 % 0.00 % 1.37 % 0.00 %

Effect of partial charge-off of C&I participation loan 0.00 % 6.18 % 0.00 % 0.00 % 0.00 % 3.09 % 0.00 %

Effect of acquisition-related expenses 0.00 % 0.00 % 0.00 % 0.00 % 0.09 % 0.00 % 0.12 %

3 unchanged sentences

Effect of accelerated equity compensation 0.00 % 0.00 % 0.00 % 0.00 % 0.25 % 0.00 % 0.12 %

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 4.40 % 5.44 % 7.00 % 9.24 % 11.15 % 4.92 % 12.07 %

9 unchanged sentences

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

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

At both June 30, 2023 and December 31, 2022, the Company had interest rate swaps with notional amounts of $260.0 million.

Additionally, prior to the Company’s decision to exit its consumer mortgage business in the first quarter 2023, we entered into forward contracts related to our mortgage banking business to hedge the exposures we have from commitments to extend new residential mortgage loans to our customers and from our mortgage loans held-for-sale.

At June 30, 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.

Refer to Note 13 to the condensed consolidated financial statements for additional information about derivative financial instruments.

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