What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-11-08 compared with 2023-08-08 · 213 added, 202 removed, 600 unchanged (41% 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 in the Midwest and Southwest regions of the Untied States 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 United 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 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 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 are one of the fastest-growing lenders in the Small Business Administration (“SBA”) 7(a) program, closing more than $308.5 million in SBA 7(a) loans during the nine months ended September 30, 2023, and ranked as the 9 th largest SBA 7(a) lender for the SBA’s 2023 fiscal year.

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 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.

As of September 30, 2023, the Company had consolidated assets of $5.2 billion, consolidated deposits of $4.1 billion and stockholders’ equity of $347.7 million.

Results of Operations

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.

During the third quarter 2023, net income was $3.4 million, or $0.39 diluted earnings per share, compared to third quarter 2022 net income of $8.4 million, or $0.89 diluted earnings per share, representing a decrease in net income of $5.0 million, or 59.6%, and a decrease in diluted earnings per share of $0.50, or 56.2%.

During the nine months ended September 30, 2023, net income was $4.3 million, or $0.48 per diluted share, compared to the nine months ended September 30, 2022 net income of $29.2 million, or $3.01 per diluted share, resulting in a decrease in net income of $24.9 million, or 85.4%.

The $5.0 million decrease in net income for the third quarter 2023 compared to the third quarter 2022 was due primarily to a decrease of $6.6 million, or 27.6%, in net interest income, an increase of $1.8 million, or 9.8%, in noninterest expense and an increase of $1.1 million, or 118.2%, in provision for credit losses, partially offset by an increase of $3.1 million, or 71.6%, in noninterest income and a decrease of $1.3 million, or 133.0%, in income tax expense.

The decrease in net income for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 was due primarily to a $20.3 million, or 27.0%, decrease in net interest income, a $10.2 million, or 355.3%, increase in provision for credit losses and a $4.6 million, or 8.4%, increase in noninterest expense, partially offset by a $6.9 million, or 171.3%, decrease in income tax expense and a $3.3 million, or 21.2%, 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 six months ended June 30, 2022.

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.

In connection with this decision, the Company recognized $3.1 million of mortgage operations and exit costs during the first quarter 2023, which contributed to the increase in noninterest expense compared to the nine months ended September 30, 2022.

The Company also recognized only $0.1 million of mortgage banking revenue during the nine months ended September 30, 2023, down from $4.5 million in the nine months ended September 30, 2022, as it immediately began winding down its existing pipeline following the decision to exit the business.

Additionally, during the nine months ended September 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 nine months ended September 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.

During the third quarter 2023, return on average assets (“ROAA”), return on average shareholders’ equity (“ROAE”), and return on average tangible common equity (“ROATCE”) were 0.26%, 3.79%, and 3.84%, respectively, compared to 0.82%, 9.01%, and 9.13%, respectively, for the third quarter 2022.

During the nine months ended September 30, 2023, ROAA, ROAE and ROATCE were 0.12%, 1.59%, and 1.61%, respectively, compared to 0.94%, 10.40%, and 10.53%, respectively, for the nine months ended September 30, 2022.

During the third quarter 2022, the Company recognized 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.

Excluding the impact of exiting consumer mortgage and the partial charge-off, adjusted net income for the nine months ended September 30, 2023 was $12.1 million and adjusted diluted earnings per share was $1.35.

Additionally, for the nine months ended September 30, 2023, adjusted ROAA, adjusted ROAE and adjusted ROATCE were 0.34%, 4.50% and 4.56%, 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 recognized a $0.1 million write-down of software.

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.

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

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Three Months Ended

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

September 30, 2023 June 30, 2023 September 30, 2022

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

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Total interest-earning assets 4,976,667 63,015 5.02 % 4,771,623 58,122 4.89 % 3,970,650 39,099 3.91 %

Allowance for credit losses - loans (36,671) (35,075) (28,599)

Allowance for credit losses (35,601) (36,671) (29,423)

Noninterest-earning assets 196,408 192,760 164,461

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

Six Months Ended

June 30, 2023 June 30, 2022

Nine Months Ended

September 30, 2023 September 30, 2022

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

6 unchanged sentences

Total interest-earning assets 4,751,104 173,170 4.87 % 4,004,025 111,239 3.71 %

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

Allowance for credit losses (35,784) (28,671)

Noninterest-earning assets 190,590 163,512

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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 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

Three Months Ended September 30, 2023 vs.

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

September 30, 2022 Due to Changes in Nine Months Ended September 30, 2023 vs.

September 30, 2022 Due to Changes in

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

10 unchanged sentences

Increase (decrease) in net interest income $ 781 $ (1,548) $ (767) $ 6,766 $ (13,382) $ (6,616) $ 14,114 $ (34,441) $ (20,327)

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.

Net interest income for the third quarter 2023 was $17.4 million, a decrease of $6.6 million, or 27.6%, compared to $24.0 million for the third quarter 2022.

The decrease in net interest income was the result of a $30.5 million, or 202.1%, increase in total interest expense to $45.6 million for the third quarter 2023 from $15.1 million for the third quarter 2022, partially offset by a $23.9 million, or 61.2%, increase in total interest income to $63.0 million for the third quarter 2023 from $39.1 million for the third quarter 2022.

Net interest income for the nine months ended September 30, 2023 was $55.1 million, a decrease of $20.3 million, or 27.0%, compared to $75.4 million for the nine months ended September 30, 2022.

The decrease in net interest income was the result of an $82.3 million, or 229.7%, increase in total interest expense to $118.1 million for the nine months ended September 30, 2023 from $35.8 million for the nine months ended September 30, 2022.

The increase in total interest expense was partially offset by a $61.9 million, or 55.7%, increase in total interest income to $173.2 million for the nine months ended September 30, 2023 from $111.2 million for the nine months ended September 30, 2022.

The increase in total interest income for the third quarter 2023 compared to third quarter 2022 was due primarily to a $14.3 million, or 41.1%, increase in interest earned on loans, $7.6 million, or 604.4%, increase in income from other earning assets and a $2.0 million, or 63.3%, increase in interest earned on securities.

The increase in income from loans was due primarily to a 91 bp increase in the yield earned on loans, including loans held-for-sale, as well as an increase of $525.2 million, or 16.5%, in the average balance of loans, including loans held-for-sale, compared to the third quarter 2022.

The yield earned on other earning assets increased 275 bps and the average balance of other earning assets increased $464.9 million, or 246.7%.

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

The average balance of securities increased $15.9 million, or 2.6%, while the yield earned on the securities portfolio increased 123 bps for the third quarter 2023 compared to the third 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 the fourth quarter 2022 and into 2023.

The yield on funded portfolio originations was 8.92% in the third quarter 2023, an increase of 362 bps compared to the third quarter 2022.

The increase in total interest income for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 was due primarily to an increase in interest earned on loans resulting from an increase of 74 bps in the yield on loans, including loans held-for-sale, as well as an increase of $589.5 million, or 19.3%, in the average balance of loans, including loans held-for-sale.

The yield on other earning assets increased 413 bps and the average balance of other earning assets increased $178.6 million, or 55.6%.

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 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.

In addition, while the average balance of securities decreased $21.0 million, or 3.4%, the yield earned on the securities portfolio increased 134 bps for the nine months ended September 30, 2023 compared to the nine months ended September 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 the fourth quarter 2022 and into 2023.

The yield on funded portfolio originations was 8.29% for the nine months ended September 30, 2023, an increase of 324 bps compared to the nine months ended September 30, 2022.

The increase in total interest expense for the third quarter 2023 compared to the third quarter 2022 was due primarily to increases of $20.8 million, or 471.9%, in interest expense associated with certificates and brokered deposits, $8.0 million, or 173.7%, in interest expense associated with money market accounts, $1.6 million, or 286.8%, in interest expense associated with interest-bearing demand deposits, and $0.7 million, or 15.6%, in interest expense associated with other borrowed funds.

The increase in interest expense related to certificates and brokered deposits was driven by an increase of 279 bps in the cost of these deposits, as well as an increase of $1.2 billion, or 115.4%, in the average balance of these deposits.

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 earlier in 2023 to supplement on-balance sheet liquidity.

The increase in interest expense related to money market accounts was driven primarily by an increase of 271 bps in the cost of these deposits, partially offset by a decrease in the average balance of these deposits of $139.0 million, or 10.2%.

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 154 bp increase in the cost of these deposits, as well as an increase of $45.4 million, or 13.3%, 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.

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 the overall cost of deposits was due primarily to the continued rise in interest rates during the fourth quarter 2022 and into 2023.

However, the pace of increase in deposit costs during the third quarter was the slowest experienced by the Company in the past five quarters.

The increase in total interest expense for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 was due primarily to increases of $47.3 million, or 383.6%, in interest expense associated with certificates and brokered deposits, $29.1 million, or 364.0%, in interest expense associated with money market accounts, $3.1 million, or 217.7%, in interest expense associated with interest-bearing demand deposits and $3.0 million, or 23.4%, in interest expense associated with other borrowed funds.

The increase in interest expense related to certificates and brokered deposits was driven by an increase of 258 bps in the cost of these deposits, as well as an increase of $849.6 million, or 75.7%, in the average balance of these deposits.

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 during the fourth quarter 2022 and earlier in 2023 to supplement on-balance sheet liquidity.

The increase in interest expense related to money market accounts was driven primarily by an increase of 308 bps in the cost of these deposits, partially offset by a decrease of $123.3 million, or 8.7%, in the average balance of these deposits.

The increase in interest expense related to interest-bearing demand deposits was due primarily to a 111 bp increase in the cost of these deposits, as well as an increase of $24.3 million, or 7.2%, 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.

The increase in the overall cost of deposits was due primarily to the continued rise in interest rates during the fourth quarter 2022 and into 2023.

However, as mentioned above, the pace of increase in deposit costs during the third quarter was the slowest experienced by the Company in the past five quarters.

Overall, the cost of total interest-bearing liabilities for the third quarter 2023 increased 224 bps to 3.91% from 1.67% for the third quarter 2022.

The cost of total interest-bearing liabilities for the nine months ended September 30, 2023 increased 227 bps to 3.59% from 1.32% for the nine months ended September 30, 2022.

The increase in the cost of funds for both the three and nine months ended September 30, 2023 reflects the rapid rise in interest rates in late 2022 and 2023.

Net interest margin (“NIM”) was 1.39% for the third quarter 2023 compared to 2.40% for the third quarter 2022, a decrease of 101 bps.

On a fully-taxable equivalent (“FTE”) basis, NIM was 1.49% for the third quarter 2023 compared to 2.53% for the third quarter 2022, a decrease of 104 bps.

NIM was 1.55% for the nine months ended September 30, 2023 compared to 2.52% for the nine months ended September 30, 2022, a decrease of 97 bps.

FTE NIM was 1.66% for the nine months ended September 30, 2023 compared to 2.65% for the nine months ended September 30, 2022, a decrease of 99 bps.

The decrease in both the three and nine months ended September 30, 2023 NIM and FTE NIM compared to the three and nine months ended September 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 and the six months ended June 30, 2023 and 2022.

Three Months Ended Six Months Ended

(in thousands) June 30,

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

Three Months Ended Nine Months Ended

(in thousands) September 30,

2023 June 30,

2023 March 31,

1 unchanged sentence

2022 September 30,

2022 June 30,

2023 June 30,

2022 September 30,

2023 September 30,

Service charges and fees $ 208 $ 218 $ 209 $ 226 $ 248 $ 635 $ 845

5 unchanged sentences

Total noninterest income $ 7,407 $ 5,871 $ 5,446 $ 5,807 $ 4,316 $ 18,724 $ 15,450

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.

During the third quarter 2023, noninterest income was $7.4 million, representing an increase of $3.1 million, or 71.6%, compared to $4.3 million for the third quarter 2022.

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

The increase of $2.9 million, or 105.3%, 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.

Small Business Administration (“SBA”) 7(a) guaranteed loan sales, partially offset by lower net premiums.

The increase of $0.7 million, or 401.8%, in other income is due primarily to income from fund investments.

The increase in loan servicing revenue reflects the growth in the Company’s SBA servicing portfolio, as origination volume has increased compared to the third quarter 2022.

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.

During the nine months ended September 30, 2023, noninterest income was $18.7 million, an increase of $3.3 million, or 21.2%, compared to $15.5 million for the nine months ended September 30, 2022.

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

The increase of $6.0 million, or 70.4%, in gain on sale of loans was due to an increase in the volume of SBA 7(a) guaranteed loan sales, partially offset by lower net premiums.

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 nine months of 2023 compared to first nine months of 2022.

The increase in other income was due primarily to income from fund investments.

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 and the six months ended June 30, 2023 and 2022.

Three Months Ended Six Months Ended

(in thousands) June 30,

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

Three Months Ended Nine Months Ended

(in thousands) September 30,

2023 June 30,

2023 March 31,

1 unchanged sentence

2022 September 30,

2022 June 30,

2023 June 30,

2022 September 30,

2023 September 30,

Salaries and employee benefits $ 11,767 $ 10,706 $ 11,794 $ 10,404 $ 10,439 $ 34,267 $ 31,149

7 unchanged sentences

Total noninterest expense $ 19,756 $ 18,670 $ 20,954 $ 18,513 $ 17,995 $ 59,380 $ 54,760

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.

Noninterest expense for the third quarter 2023 was $19.8 million, compared to $18.0 million for the third quarter 2022.

The increase of $1.8 million, or 9.8%, was due primarily to a $1.3 million increase in salaries and employee benefits, a $0.8 million increase in deposit insurance premium, a $0.5 million increase in other, a $0.2 million increase in data processing and a $0.2 million increase in loan expenses, partially offset by a $0.5 million decrease in marketing, advertising and promotion expense and a $0.5 million decrease in premises and equipment.

The increase in salaries and employee benefits was due primarily to increased headcount and higher incentive compensation in small business and construction 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.

The increase in other expense was due to various expenses, none of which were individually significant.

The increase in data processing expense was due to variable deposit activity-based expenses.

The decrease in marketing, advertising and promotion expense was due primarily to cost savings from the Company’s exit from the mortgage business in the first quarter 2023.

The decrease in premises and equipment was due primarily to a decrease in property tax expense.

Noninterest expense for the nine months ended September 30, 2023 was $59.4 million, compared to $54.8 million for the nine months ended September 30, 2022.

The increase of $4.6 million, or 8.4%, was due primarily to increases of $3.1 million in salaries and benefits, $1.7 million in deposit insurance premium, $1.0 million in loan expenses and $0.7 million in other expenses, partially offset by a $1.7 million decrease in consulting and professional fees and a $0.7 million decrease in marketing, advertising and promotion expense.

During the nine months ended September 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 $3.9 million in 2023.

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

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

The increase in loan expenses was due primarily to mortgage exit costs and accrued contract expenses, as well as higher third-party loan servicing fees and other miscellaneous lending costs.

The increase in other expense was due to various expenses, none of which were individually significant.

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, as well as lower legal fees in 2023.

The decrease in marketing, advertising and promotion expense was due primarily to cost savings from the Company’s exit from the mortgage business in the first quarter 2023.

The Company recorded an income tax benefit of $0.3 million for the third quarter 2023, compared to an income tax provision of $1.0 million and an effective tax rate of 10.5% for the third quarter 2022.

The Company recorded an income tax benefit of $2.9 million for the nine months ended September 30, 2023, compared to an income tax provision of $4.1 million and an effective tax rate of 12.2% for the nine months ended September 30, 2022.

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

Financial Condition

2 unchanged sentences

Balance Sheet Data:

September 30,

2023 June 30,

2023 March 31,

1 unchanged sentence

2022 September 30,

2022 June 30,

Total assets $ 5,169,023 $ 4,947,049 $ 4,721,319 $ 4,543,104 $ 4,264,424

7 unchanged sentences

Total shareholders’ equity 347,744 354,332 355,572 364,974 360,857

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.

Total assets increased $625.9 million, or 13.8%, to $5.2 billion at September 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 $642.3 million, or 18.7%.

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.

As of September 30, 2023, total shareholders’ equity was $347.7 million, a decrease of $17.2 million, or 4.7%, compared to December 31, 2022.

The decrease in shareholders’ equity was due primarily to stock repurchase activity, an increase in accumulated other comprehensive loss and the day 1 CECL adjustment, partially offset by net income earned during the period.

Tangible common equity totaled $343.1 million as of September 30, 2023, representing a decrease of $17.2 million, or 4.8%, compared to December 31, 2022.

The ratio of total shareholders’ equity to total assets decreased to 6.73% as of September 30, 2023 from 8.03% as of December 31, 2022, and the ratio of tangible common equity to tangible assets decreased to 6.64% as of September 30, 2023 from 7.94% as of December 31, 2022.

Book value per common share decreased 0.4% to $40.11 as of September 30, 2023 from $40.26 as of December 31, 2022.

Tangible book value per share decreased 0.4% to $39.57 as of September 30, 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 year.

1 unchanged sentence

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

(dollars in thousands) June 30,

(dollars in thousands) September 30,

2023 June 30,

2023 March 31,

1 unchanged sentence

2022 September 30,

2022 June 30,

Commercial loans

20 unchanged sentences

Net loans $ 3,698,616 $ 3,610,774 $ 3,570,363 $ 3,467,664 $ 3,226,040

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.

1 Includes carrying value adjustments of $29.0 million, $30.5 million, $31.5 million, $32.5 million and $33.9 million related to terminated interest rate swaps associated with public finance loans as of September 30, 2023, June 30, 2023, March 31, 2023, December 31, 2022 and September 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 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.

Total loans were $3.7 billion as of September 30, 2023, an increase of $235.7 million, or 6.7%, compared to December 31, 2022.

Total commercial loan balances were $2.9 billion as of September 30, 2023, up $188.9 million, or 7.0%, from December 31, 2022.

Total consumer loan balances were $786.5 million as of September 30, 2023, an increase of $53.2 million, or 7.3%, compared to December 31, 2022.

Compared to December 31, 2022, the increase in commercial loan balances was driven by growth in the franchise finance, small business lending, construction and investor commercial real estate portfolios.

The increase was partially offset by planned decreases in the fixed-rate public finance and single tenant lease financing, as well as continued runoff in the healthcare finance portfolio.

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.

3 unchanged sentences

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

(dollars in thousands) June 30,

(dollars in thousands) September 30,

2023 June 30,

2023 March 31,

1 unchanged sentence

2022 September 30,

2022 June 30,

Nonaccrual loans

2 unchanged sentences

Owner-occupied commercial real estate — 1,405 1,441 1,570 1,622

Single tenant lease financing — — — — —

Small business lending 1

3 unchanged sentences

Residential mortgage 1,354 992 1,006 1,048 1,073

Home equity — — — — 14

Other consumer 88 101 141 17 3

23 unchanged sentences

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

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.

Total nonperforming loans decreased $1.6 million, or 21.8%, to $5.9 million as of September 30, 2023 compared to $7.5 million as of December 31, 2022 due primarily to an owner-occupied commercial real estate loan that was returned to accrual status during the quarter.

Total nonperforming assets decreased $1.5 million, or 19.8%, to $6.1 million as of September 30, 2023, compared to $7.6 million as of December 31, 2022, due primarily to the owner-occupied commercial real estate loan mentioned above, partially offset by an increase in OREO.

As of September 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.

4 unchanged sentences

The following table provides a summary of troubled debt restructurings.

(in thousands) June 30,

(in thousands) September 30,

2023 June 30,

2023 March 31,

1 unchanged sentence

2022 September 30,

2022 June 30,

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

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 and the six months ended June 30, 2023 and 2022.

Three Months Ended Six Months Ended

(dollars in thousands) June 30,

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

Three Months Ended Nine Months Ended

(dollars in thousands) September 30,

2023 June 30,

2023 March 31,

1 unchanged sentence

2022 September 30,

2022 June 30,

2023 June 30,

2022 September 30,

2023 September 30,

Balance, beginning of period, December 31, 2022 $ 36,058 $ 36,879 $ 31,737 $ 29,866 $ 29,153 $ 31,737 $ 27,841

4 unchanged sentences

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

Investor commercial real estate 591 — — — — 591 —

Healthcare finance — 25 — — — 25 —

1 unchanged sentence

Franchise finance — 331 — — — 331 —

Residential mortgage 56 — — — — 56 —

Other consumer 120 150 232 101 106 502 397

12 unchanged sentences

Commercial and industrial 0.00 % (0.46 %) 27.16 % 0.00 % 0.00 % 9.26 % 0.00 %

Investor commercial real estate 0.59 % 0.00 % 0.00 % 0.00 % 0.00 % 0.63 % 0.00 %

Single tenant lease financing 0.00 % 0.00 % 0.00 % 0.00 % 0.00 % 0.00 % (0.19 %)

9 unchanged sentences

Total net charge-offs to average loans 0.16 % 0.17 % 0.82 % 0.03 % 0.02 % 0.38 % 0.04 %

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.

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 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.

The allowance for credit losses (“ACL”) was $36.5 million as of September 30, 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, overall growth in the loan portfolio, changes in certain economic forecasts that impacted quantitative loss rates, adjustments to qualitative factors for certain portfolios, and specific reserves placed on certain loans.

The ACL as a percentage of total loans was 0.98% at September 30, 2023, compared to 0.91% at December 31, 2022.

The ACL as a percentage of

nonperforming loans increased to 619.4% as of September 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 $1.5 million were recognized during the third quarter 2023, resulting in net charge-offs to average loans of 0.16%, compared to net charge-offs to average loans of 0.02% for the third quarter 2022.

The increase in net charge-offs was due primarily to an increase in charge-offs in small business lending and a loss on the sale of one investor commercial real estate participation loan executed by the lead bank.

During the nine months ended September 30, 2023, the Company recorded net charge-offs of $10.2 million, compared to net charge-offs of $0.8 million during the nine months ended September 30, 2022.

The increase in net charge-offs for the nine months ended September 30, 2023 was driven primarily by the $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 an increase in charge-offs in small business lending and a loss on the sale of one investor commercial real estate participation loan executed by the lead bank.

The provision for credit losses in the third quarter 2023 was $1.9 million, compared to $0.9 million for the third quarter 2022.

During the nine months ended September 30, 2023, the provision for credit losses was $13.1 million, compared to $2.9 million during the nine months ended September 30, 2022.

The increase in the provision for credit losses for the three and nine months ended September 30, 2023 was driven primarily by increases in net charge-offs, as well as increases in specific reserves and unfunded commitments, partially offset by the positive impact of economic forecasts on certain portfolios.

Investment Securities Portfolio

1 unchanged sentence

(in thousands)

Amortized Cost June 30,

Amortized Cost September 30,

2023 June 30,

2023 March 31,

1 unchanged sentence

2022 September 30,

2022 June 30,

Securities available-for-sale

15 unchanged sentences

(in thousands)

Approximate Fair Value June 30,

Approximate Fair Value September 30,

2023 June 30,

2023 March 31,

1 unchanged sentence

2022 September 30,

2022 June 30,

Securities available-for-sale

14 unchanged sentences

Total securities $ 652,477 $ 588,037 $ 588,296 $ 558,867 $ 563,542

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.

The approximate fair value of available-for-sale investment securities increased $60.4 million, or 15.5%, to $450.8 million as of September 30, 2023, compared to $390.4 million as of December 31, 2022.

The increase was due primarily to increases of $63.4 million U.S.

Government-sponsored agencies, $20.3 million in asset-backed securities - commercial and $8.1 million in private label mortgage-backed securities - residential, partially offset by decreases of $22.0 million in agency mortgage-backed securities - residential, $6.6 million in corporate securities and $4.5 million in municipal securities.

The increase was caused primarily by new purchase activity for certain available-for-sale portfolios, partially offset by a decline in fair value resulting from the continued rise in interest rates, as well as net paydown activity.

Accrued Income and Other Assets

Accrued income and other assets 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 income and other assets increased $8.6 million, or 19.1%, to $53.5 million at September 30, 2023 compared to $44.9 million at December 31, 2022.

The increase was due primarily to increases of $6.1 million in deferred tax assets and $2.5 million in fund investments.

Accrued Expenses and Other Liabilities

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.

Accrued expenses and other liabilities increased $0.6 million, or 3.9%, to $15.1 million at September 30, 2023, compared to $14.5 million at December 31, 2022.

The increase was due primarily to increases of $3.6 million in the reserve for unfunded commitments resulting from the adoption of CECL in 2023, as well as new origination activity, $0.5 million in accrued salary and benefits and $0.4 million in other accrued expenses, partially offset by decreases of $2.3 million in other liabilities, $1.3 million in accrued taxes and $0.2 million in accrued property taxes.

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

(dollars in thousands) June 30,

(dollars in thousands) September 30,

2023 June 30,

2023 March 31,

1 unchanged sentence

2022 September 30,

2022 June 30,

Noninterest-bearing deposits $ 125,265 3.1 % $ 119,291 3.1 % $ 140,449 3.9 % $ 175,315 5.1 % $ 142,635 4.5 %

6 unchanged sentences

Total deposits $ 4,083,545 100.0 % $ 3,854,308 100.0 % $ 3,622,290 100.0 % $ 3,441,245 100.0 % $ 3,192,644 100.0 %

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.

Total deposits increased $642.3 million, or 18.7%, to $4.1 billion as of September 30, 2023, compared to $3.4 billion as of December 31, 2022.

This increase was due primarily to increases of $750.0 million, or 85.8%, in certificates of deposits, $91.9 million, or 15.9%, in brokered deposits, $39.3 million, or 11.7%, in interest-bearing demand deposits and $28.3 million, or 207.8%, in BaaS - brokered deposits, partially offset by decreases of $196.1 million, or 13.8%, in money market accounts, $50.1 million, or 28.6%, in noninterest-bearing deposits and $21.0 million, or 46.9%, in savings accounts.

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 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 earlier in 2023 to supplement on-balance sheet liquidity.

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

The increase in BaaS - brokered deposits was driven by higher payments volume.

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.

The decrease in savings accounts was due primarily to customer withdrawal activity.

Uninsured deposit balances represented 23% of total deposits at September 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.

22 unchanged sentences

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

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

The following tables present actual and required capital ratios as of September 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 September 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 June 30, 2023:

As of September 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 July 17, 2023 to shareholders of record as of June 30, 2023.

The Company’s Board of Directors declared a cash dividend of $0.06 per share of common stock payable October 16, 2023 to shareholders of record as of September 29, 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 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.

As of September 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.

9 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 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.

Under this program, the Company repurchased 509,022 shares of common stock through September 30, 2023, at an average price of $18.92, for a total investment of $9.6 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.

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

At June 30, 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.

At September 30, 2023, on a consolidated basis, the Company had $972.0 million in cash and cash equivalents and investment securities available-for-sale and $31.7 million in loans held-for-sale that were generally available for its cash needs.

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

At June 30, 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.

At September 30, 2023, the Bank had the ability to borrow an additional $1.2 billion from the FHLB, the Federal Reserve and correspondent bank Fed Funds lines of credit, which when combined with cash balances, totaled $1.7 billion and represented 182% of adjusted uninsured deposit balances.

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

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

At June 30, 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.

At September 30, 2023, the Company, on an unconsolidated basis, had $10.6 million in cash generally available for its cash needs, which is in excess of its current annual regular shareholder dividend and operating expenses.

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

At June 30, 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.

At September 30, 2023, approved outstanding loan commitments, including unused lines of credit and standby letters of credit, amounted to $668.2 million.

Certificates of deposits and brokered deposits scheduled to mature in one year or less at September 30, 2023 totaled $1.4 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.

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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 (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.

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.

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 six months ended June 30, 2023 and 2022.

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

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

September 30,

2023 June 30,

2023 March 31,

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2022 September 30,

2022 June 30,

2023 June 30,

2022 September 30,

2023 September 30,

Total equity - GAAP $ 347,744 $ 354,332 $ 355,572 $ 364,974 $ 360,857 $ 347,744 $ 360,857

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Return on average tangible common equity 3.84 % 4.40 % (3.41 %) 7.00 % 9.13 % 1.61 % 10.53 %

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

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

September 30,

2023 June 30,

2023 March 31,

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2022 September 30,

2022 June 30,

2023 June 30,

2022 September 30,

2023 September 30,

Total interest income $ 63,015 $ 58,122 $ 52,033 $ 45,669 $ 39,099 $ 173,170 $ 111,239

11 unchanged sentences

1 Assuming a 21% tax rate

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

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

September 30,

2023 June 30,

2023 March 31,

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2022 September 30,

2022 June 30,

2023 June 30,

2022 September 30,

2023 September 30,

Total Revenue- GAAP $ 24,785 $ 24,016 $ 25,020 $ 27,476 $ 28,310 $ 73,821 $ 90,874

33 unchanged sentences

1 Assuming a 21% tax rate

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

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

September 30,

2023 June 30,

2023 March 31,

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2022 September 30,

2022 June 30,

2023 June 30,

2022 September 30,

2023 September 30,

Net income (loss) - GAAP $ 3,409 $ 3,882 $ (3,017) $ 6,351 $ 8,436 $ 4,274 $ 29,190

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

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

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

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Effect of mortgage-related revenue 0.00 % 0.00 % (0.06 %) 0.00 % 0.00 % (0.02 %) 0.00 %

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

Effect of mortgage-related costs 0.00 % 0.00 % 2.69 % 0.00 % 0.00 % 0.90 % 0.00 %

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

September 30,

2023 June 30,

2023 March 31,

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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 %

2022 September 30,

2023 September 30,

Effect of partial charge-off of C&I participation loan 0.00 % 0.00 % 6.10 % 0.00 % 0.00 % 2.03 % 0.00 %

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

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

At September 30, 2023 and December 31, 2022, the Company had interest rate swaps with notional amounts of $220 million and $260.0 million, respectively.

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 September 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.

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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