What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2023-05-03 compared with 2022-11-02 · 196 added, 317 removed, 351 unchanged (59% of the section changed)

23 unchanged sentences

• changes in loan underwriting, credit review or loss reserve policies associated with economic conditions, examination conclusions, or regulatory developments;

• the continuing impacts of the Coronavirus Disease 2019 (“COVID-19”) pandemic on trade (including supply chains and export levels), travel, employee productivity and other economic activities that may have a destabilizing and negative effect on financial markets, economic activity and customer behavior;

• recent adverse developments in the banking industry highlighted by high-profile bank failures and the potential impact of such developments on customer confidence, liquidity, and regulatory responses to these developments;

• the impacts of global health crises and pandemics, such as the Coronavirus Disease 2019 (“COVID-19”) pandemic, on trade (including supply chains and export levels), travel, employee productivity and other economic activities that may have a destabilizing and negative effect on financial markets, economic activity and customer behavior;

• a reduction in or the termination of the Company’s ability to use the technology-based platform that is critical to the success of the Company’s business model or to develop a next-generation banking platform, including a failure in or a breach of the Company’s operational or security systems or those of its third party service providers;

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• fluctuations in markets for equity, fixed-income, commercial paper and other securities, which could affect availability, market liquidity levels, and pricing;

• the effects of competition from other commercial banks, non-bank lenders, consumer finance companies, credit unions, securities brokerage firms, insurance companies, money market and mutual funds, and other financial service providers operating in the Company’s market area and elsewhere, including providers operating regionally, nationally and internationally, together with such competitors offering banking products and services by mail, telephone and the Internet;

• the effects of competition from other commercial banks, non-bank lenders, consumer finance companies, credit unions, securities brokerage firms, insurance companies, money market and mutual funds, and other financial institutions operating in the Company’s market area and elsewhere, including institutions operating regionally, nationally and internationally, together with such competitors offering banking products and services by mail, telephone and the Internet;

• the Company's ability to attract and retain key personnel;

• changes in governmental monetary and fiscal policies as well as other legislative and regulatory changes, including with respect to SBA or USDA lending programs and investment tax credits;

• a deterioration of the credit rating for U.S.

long-term sovereign debt, actions that the U.S.

government may take to avoid exceeding the debt ceiling, and uncertainties surrounding the debt ceiling and the federal budget;

• changes in political and economic conditions;

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A significant portion of the loans originated by the Bank are guaranteed by the SBA under the 7(a) Loan Program and the U.S.

Department of Agriculture’s ("USDA") Rural Energy for America Program ("REAP"), Water and Environmental Program (“WEP”) and Business & Industry ("B&I") loan programs.

The Company’s wholly owned subsidiaries include the Bank, Government Loan Solutions (“GLS”), Live Oak Grove, LLC (“Grove”), Live Oak Ventures, Inc.

Department of Agriculture’s (“USDA”) Rural Energy for America Program (“REAP”), Water and Environmental Program (“WEP”), Business & Industry (“B&I”) and Community Facilities loan programs.

The Company’s wholly owned material subsidiaries are the Bank, Government Loan Solutions (“GLS”), Live Oak Grove, LLC (“Grove”), Live Oak Ventures, Inc.

(“Live Oak Ventures”) and Canapi Advisors, LLC (“Canapi Advisors”).

GLS is a management and technology consulting firm that advises and offers solutions and services to participants in the government guaranteed lending sector.

GLS primarily provides services in connection with the settlement, accounting, and securitization processes for government guaranteed loans, including loans originated under the SBA 7(a) loan programs and USDA guaranteed loans.

The Grove provides Company employees and business visitors an on-site restaurant location.

Live Oak Ventures’ purpose is investing in businesses that align with the Company's strategic initiative to be a leader in financial technology.

Canapi Advisors provides investment advisory services to a series of funds (the “Canapi Funds”) focused on providing venture capital to new and emerging financial technology companies.

The Bank’s wholly owned subsidiaries are Live Oak Number One, Inc., Live Oak Clean Energy Financing LLC (“LOCEF”), Live Oak Private Wealth, LLC (“Live Oak Private Wealth”) and Tiburon Land Holdings, LLC (“TLH”).

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holds properties foreclosed on by the Bank.

LOCEF provides financing to entities for renewable energy applications and became a wholly owned subsidiary of the Bank during the first quarter of 2019.

LOCEF provides financing to entities for renewable energy applications.

Live Oak Private Wealth provides high-net-worth individuals and families with strategic wealth and investment management services.

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TLH was formed in the third quarter of 2022 to hold land adjacent to the Bank's headquarters consisting of wetlands and other protected property for the use and enjoyment of the Bank's employees and customers.

GLS is a management and technology consulting firm that advises and offers solutions and services to participants in the government guaranteed lending sector.

The Grove provides Company employees and business visitors an on-site restaurant location.

Live Oak Ventures’ purpose is investing in businesses that align with the Company's strategic initiative to be a leader in financial technology.

Canapi Advisors provides investment advisory services to a series of funds (the “Canapi Funds”) focused on providing venture capital to new and emerging financial technology companies.

The Company generates revenue primarily from net interest income and secondarily through origination and sale of government guaranteed loans.

Income from the retention of loans is comprised principally of interest income.

Income from the sale of loans is comprised of net gains on sales of loans along with loan servicing revenue and revaluation of related servicing assets.

Income from the sale of loans is comprised of loan servicing revenue and revaluation of related servicing assets along with net gains on sales of loans.

Offsetting these revenues are the cost of funding sources, provision for loan and lease credit losses, any costs related to foreclosed assets and other operating costs such as salaries and employee benefits, travel, professional services, advertising and marketing and tax expense.

The Company also generates gains and losses arising from its financial technology investments in its fintech segment, as discussed more fully later in this section entitled “Results of Segment Operations.”

The Company also has less routinely generated gains and losses arising from its financial technology investments predominantly in its fintech segment, as discussed more fully later in this section under the caption “Results of Segment Operations.”

Results of Operations

Performance Summary

Three months ended September 30, 2022 compared with three months ended September 30, 2021

For the three months ended September 30, 2022, the Company reported net income of $42.9 million, or $0.96 per diluted share, compared to net income of $33.8 million, or $0.76 per diluted share, for the third quarter of 2021.

The increase in net income was largely due to the following items:

• Increase in equity method investment income of $30.4 million, largely driven by a $28.4 million gain related to the Company’s sale of its investment in Payrailz, LLC (“Payrailz”);

Three months ended March 31, 2023 compared with three months ended March 31, 2022

For the three months ended March 31, 2023, the Company reported net income of $398 thousand, or $0.01 per diluted share, compared to net income of $34.5 million, or $0.76 per diluted share, for the first quarter of 2022.

The decrease in net income was largely due to the following items:

• Provision for loan and lease credit losses increased $17.2 million, compared to $1.8 million for the first quarter of 2022.

The level of provision expense in the first quarter of 2023 was primarily the result of continued growth of the loan and lease portfolio combined with portfolio trends and changes in the macroeconomic outlook;

• Decreased net gains on sales of loans of $10.8 million, or 51.5%, the result of lower loan sale volume and comparatively lower premiums in the first quarter of 2023;

• The net loss on loans accounted for under the fair value option of $4.5 million, increased by $5.0 million, from a net gain of $516 thousand in the first quarter of 2022;

• Increased noninterest expense of $13.2 million, or 20.2%, principally comprised of salaries and employee benefits up $6.3 million, or 16.3%, and other expense up $3.5 million largely a product of $2.8 million in increased levels of reserves on unfunded commitments driven by refinements in estimation assumptions.

Key factors partially offsetting the decrease in net income for the first quarter of 2023 were:

• Increase in net interest income of $4.2 million, or 5.4%, predominately from increases in volume for the total loan and lease portfolio, partially mitigated by a decrease in the net interest margin arising from an increase in interest-bearing liabilities combined with average cost of funds outpacing the average yield on interest-earning assets;

• A net loss on loan servicing asset revaluation decreasing by $4.6 million, or 77.5%;

• The net gain on loans accounted for under the fair value option increasing by $5.5 million, or 529.1%, from a net loss of $1.0 million in the third quarter of 2021;

• Decreased income tax expense of $7.9 million, or 83.8%, largely due to higher than expected investment tax credits arising from renewable energy investments in the third quarter of 2022.

Key factors partially offsetting the increase in net income for the third quarter of 2022 were:

• Provision for loan and lease credit losses increased $9.9 million, or 228.1%, compared to $4.3 million for the third quarter of 2021.

The level of provision expense in the third quarter of 2022 was primarily the result of loan growth, charge-off experience impacts, increased levels of loans classified as held for investment and changes in the macroeconomic outlook;

• Decreased net gains on sales of loans of $9.6 million, or 50.8%, the result of lower volume of loan sales combined with overall weaker market conditions compared to those experienced in the prior year;

• Increased noninterest expense of $27.6 million, or 49.7%, principally comprised of salaries and employee benefits up $15.3 million, or 54.2%, and $7.7 million in impairment charges related to a renewable energy tax credit investment closed in the third quarter of 2022.

Nine months ended September 30, 2022 compared with nine months ended September 30, 2021

For the nine months ended September 30, 2022, the Company reported a net income of $174.4 million, or $3.88 per diluted share, as compared to net income of $136.8 million, or $3.05 per diluted share, for the nine months ended September 30, 2021.

This increase in net income was largely due to the following items:

• Increase in equity method investment income of $150.8 million, due to the above mentioned third quarter 2022 Payrailz gain of $28.4 million combined with the $120.5 million gain recognized in the second quarter of 2022 related to the sale of its investment in Finxact, Inc.

• Increase in net interest income of $22.5 million, or 10.2%, predominately from increases in both average yield and volume for the total loan and lease portfolio.

The growth in net interest income was mitigated by rising average cost of funds and moderate growth in interest-bearing liabilities.

Key factors partially offsetting the increase in net income for the first nine months of 2022 were:

• Decreased equity security investment gains of $42.0 million, due to the Company’s $44.1 million second quarter 2021 fair value gain from its investment in Greenlight Financial Technologies, Inc.

(“Greenlight”);

• Provision for loan and lease credit losses increasing $10.0 million, or 88.4%, compared to $11.3 million in the first nine months of 2021.

The level of provision expense in the year to date period of 2022 was primarily the result of the above mentioned factors driving the increase for the third quarter of 2022;

• Decreased net gains on sales of loans of $11.1 million, or 23.7%, combined with an increased loss on loan servicing asset revaluation of $4.0 million, or 52.8%, and a net gain on loans accounted for under the fair value option decreasing by $3.8 million, or 89.0%, all principally the result of weaker overall market conditions emerging in 2022 as compared to the first nine months of 2021;

• Increased noninterest expense of $58.4 million, or 34.1%, principally comprised of salaries and employee benefits up $35.8 million, or 38.7%, advertising and marketing expense up $3.5 million, or 110.6%, technology expense up $3.4 million, or 21.2%, contributions and donations up $4.4 million, or 221.0%;

and increased impairment charges of $4.6 million related to renewable energy tax credits;

• Increased income tax expense of $9.0 million primarily due the above discussed increase in net income.

• A net gain on loan servicing asset revaluation of $356 thousand compared to a net loss of $1.6 million in the first quarter of 2022, resulting in a positive change of $1.9 million, or 122.7%;

• Increased management fee income of $2.0 million, or 133.3%;

• Decreased income tax expense of $5.2 million, or 61.7%, principally related to above discussed decrease in net income.

Net Interest Income and Margin

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Due to the nature of a branchless bank and the relatively low overhead required for deposit gathering, the rates that the Bank offers are generally above the industry average.

Three months ended September 30, 2022 compared with three months ended September 30, 2021

For the three months ended September 30, 2022, net interest income increased $6.2 million, or 7.9%, to $83.9 million compared to $77.7 million for the three months ended September 30, 2021.

This increase was principally due to growth in the volume for the total loan and lease portfolio outpacing moderate growth in interest-bearing liabilities combined with an increase in average cost of funds which exceeded the increase in average yield on interest-earning assets.

This increase in net interest income over the prior year was significantly higher when excluding the effects of declining levels of Paycheck Protection Program (“PPP”) loan net interest income for the compared period, which has been declining over time as PPP loans are paid down.

Excluding PPP loan impacts of $1.2 million, comprised of amortization of net deferred fees combined with a 1% annualized interest rate less the related interest expense from funding activity, net interest income increased by $17.2 million.

Average interest-earning assets increased by $926.6 million, or 12.0%, to $8.66 billion for the three months ended September 30, 2022, compared to $7.74 billion for the three months ended September 30, 2021, while the yield on average interest-earning assets increased fifty-five basis points to 5.31%.

The cost of funds on interest-bearing liabilities for the three months ended September 30, 2022, increased seventy-five basis points to 1.55% while the average balance of interest-bearing liabilities increased by $704.9 million, or 9.5%, over the three months ended September 30, 2021.

The increase in average interest-bearing liabilities was largely driven by funding for significant loan originations and growth.

This increase was muted by a $755.3 million reduction in average borrowings largely related to the Federal Reserve Bank's Paycheck Protection Program Liquidity Facility ("PPPLF") repayments since September 30, 2021.

As indicated in the rate/volume table below, the overall increase discussed above is reflected in increased interest income of $23.0 million outpacing growth in interest expense of $16.9 million for the third quarter of 2022 compared to the third quarter of 2021.

For the three months ended September 30, 2021, compared to the three months ended September 30, 2022, net interest margin decreased from 3.99% to 3.84%.

As of September 30, 2022, the Company had $23.9 million in PPP loan balances on its books which includes $490 thousand in net deferred fees remaining to be recognized into future interest income.

The Company expects to recognize most of the remaining net deferred fees for PPP loans in 2022.

Nine months ended September 30, 2022 compared with nine months ended September 30, 2021

For the nine months ended September 30, 2022, net interest income increased $22.5 million, or 10.2%, to $241.6 million compared to $219.1 million for the nine months ended September 30, 2021.

This increase was principally due to growth in both average yield and volume for the total loan and lease portfolio outpacing growth in both interest-bearing liabilities and average cost of funds.

This increase in net interest income over the prior year was significantly higher when excluding the effects of declining levels of PPP loan net interest income for the compared period.

Excluding PPP loan impacts of $6.5 million as defined above, net interest income increased by $59.9 million.

Average interest-earning assets increased by $566.9 million, or 7.4%, to $8.26 billion for the nine months ended September 30, 2022, compared to $7.69 billion for the nine months ended September 30, 2021, while the yield on average interest-earning assets increased thirty-one basis points to 4.99%.

The cost of funds on interest-bearing liabilities for the nine months ended September 30, 2022, increased twenty-four basis points to 1.13% while the average balance of interest-bearing liabilities increased by $349.6 million, or 4.7%, over the nine months ended September 30, 2021.

Three months ended March 31, 2023 compared with three months ended March 31, 2022

For the three months ended March 31, 2023, net interest income increased $4.2 million, or 5.4%, to $82.0 million compared to $77.8 million for the three months ended March 31, 2022.

This increase was principally due to the growth in the held for investment loan and lease portfolio outpacing growth in interest-bearing liabilities combined with an increase in average cost of funds which exceeded the increase in average yield on interest-earning assets.

Excluding PPP loan impacts, comprised of amortization of net deferred fees combined with a 1% annualized interest rate less the related interest expense from funding activity, net interest income increased by $8.2 million.

Average interest-earning assets increased by $1.75 billion, or 22.3%, to $9.61 billion for the first quarter of 2023, compared to $7.85 billion for the first quarter of 2022, while the yield on average interest-earning assets increased one hundred-sixty basis points to 6.39%.

The cost of funds on interest-bearing liabilities for the first quarter of 2023 increased two hundred-thirty basis points to 3.11%, and the average balance of interest-bearing liabilities increased by $1.53 billion, or 20.3%, over the first quarter of 2022.

The increase in average interest-bearing liabilities was also largely driven by funding for significant loan originations and growth.

This increase was muted by a $1.05 billion reduction in average borrowings largely related to PPPLF repayments since September 30, 2021.

As indicated in the rate/volume table below, the overall increase discussed above is reflected in increased interest income of $38.9 million as compared to an increase in interest expense of $16.4 million for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021.

For the nine months ended September 30, 2021 compared to the nine months ended September 30, 2022, net interest margin increased from 3.81% to 3.91%.

During the first nine months of 2022, the Federal Reserve increased the federal funds target r ate by 300 basis points.

In September 2022, the Federal Reserve released federal funds target rate midpoint projections which implied an additional increase of approximately 125 basis points in the remainder of 2022 and an increase of approximately 30 basis points by the end of 2023.

Of the additional increases anticipated in 2022, a 75 basis point increase is currently expected to occur in November 2022.

This increase was muted by a $104.0 million reduction in average borrowings largely related to Paycheck Protection Program Liquidity Facility, or PPPLF, repayments in 2022.

As indicated in the rate/volume table below, the overall increase discussed above is reflected in increased interest income of $58.6 million outpacing growth in interest expense of $54.4 million for the first quarter of 2023 compared to the first quarter of 2022.

For the first quarter of 2023 compared to the first quarter of 2022, net interest margin decreased from 4.02% to 3.46%.

During 2022 and through March of 2023, the Federal Reserve increased the federal funds upper target rate by 425 basis points and 50 basis points, respectively, to 5.00%.

In March 2023, the Federal Reserve released its most current federal funds target rate midpoint projections which implied an increase of the median Federal Funds rate to 5.1% by the end of 2023 and a decrease of approximately 75 basis points to 4.3% by the end of 2024.

There can be no assurance that any further increases in the federal funds rate will occur, and if they do, the amount and timing of actual increases are subject to change.

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Loan fees are included in interest income on loans.

Three Months Ended September 30,

Three Months Ended March 31,

Balance Interest Average

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Interest-bearing liabilities:

Savings $ 4,009,928 $ 16,775 1.66 % $ 3,367,168 $ 4,359 0.51 %

Money market accounts 100,074 72 0.29 104,576 74 0.28

Certificates of deposit 3,978,793 14,706 1.47 3,156,834 9,726 1.22

Total deposits 8,088,795 31,553 1.55 6,628,578 14,159 0.85

Borrowings 63,207 395 2.48 818,511 892 0.43

Total interest-bearing liabilities 8,152,002 31,948 1.55 7,447,089 15,051 0.80

Noninterest-bearing deposits 133,676 79,006

Noninterest-bearing liabilities 84,597 46,907

Shareholders' equity 824,842 688,173

Total liabilities and shareholders' equity

$ 9,195,117 $ 8,261,175

Net interest income and interest rate spread

$ 83,886 3.76 % $ 77,735 3.96 %

Net interest margin 3.84 % 3.99 %

Ratio of average interest-earning assets to average interest-bearing liabilities

106.26 % 103.88 %

(1) Average loan and lease balances include non-accruing loans and leases.

Nine Months Ended September 30,

Interest Average

Interest-earning assets:

Interest-earning balances in other banks $ 259,212 $ 2,402 1.24 % $ 433,219 $ 752 0.23 %

Federal funds sold 92,127 1,275 1.85 22,151 19 0.11

Investment securities 950,787 12,951 1.82 769,890 9,078 1.58

Loans held for sale 1,078,743 47,308 5.86 1,127,924 45,383 5.38

Loans and leases held for investment (1)

5,876,078 243,927 5.55 5,336,824 213,778 5.36

Total interest-earning assets 8,256,947 307,863 4.99 7,690,008 269,010 4.68

Allowance for credit losses on loans and leases

(63,613) (53,589)

Noninterest-earning assets 610,330 599,902

Total assets $ 8,803,664 $ 8,236,321

Interest-bearing liabilities:

Interest-bearing checking $ 21,668 $ 271 5.07 % $ — $ — — %

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For purposes of this table, increases or decreases attributable to changes in both rate and volume that cannot be segregated have been allocated proportionally based on the changes due to rate and the changes due to volume.

Three Months Ended September 30, Nine Months Ended September 30,

2021 2022 vs.

Increase (Decrease) Due to Increase (Decrease) Due to

Rate Volume Total Rate Volume Total

Three Months Ended March 31,

Increase (Decrease) Due to

Rate Volume Total

Interest income:

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The Company believes that its focus on compliance with regulations and guidance from the SBA and USDA are key factors to managing this risk.

For the third quarter of 2022, there was a provision for loan and lease credit losses of $14.2 million compared to $4.3 million for the same period in 2021, an increase of $9.9 million.

For the first nine months of 2022, there was a provision for loan and lease credit losses of $21.3 million compared to $11.3 million for the same period in 2021, an increase of $10.0 million.

The increase in provision expense as compared to the third quarter of 2021 and the first nine months of 2021 was primarily the result of loan growth, charge-off experience impacts, a transfer of $729.5 million in loans carried at amortized cost, including $694.0 million in guaranteed loans, from held for sale to held for investment and changes in the macroeconomic outlook.

See “Results of Operations” discussion of “Net Gains on Sales of Loans” for additional information influencing management's intent to hold more loans for investment.

Loans and leases held for investment at historical cost were $6.35 billion as of September 30, 2022, increasing by $1.6 billion, or 34.3%, compared to September 30, 2021.

Excluding PPP loans and net unearned fees on those loans, the balance in loans and leases held for investment at historical cost was $6.32 billion at September 30, 2022, an increase of $2.09 billion, or 49.3%, over September 30, 2021.

Net charge-offs for loans and leases carried at historical cost were $1.7 million, or 0.12% of average quarterly loans and leases held for investment, carried at historical cost, on an annualized basis, for the three months ended September 30, 2022, compared to net charge-offs of $2.5 million, or 0.21%, for the three months ended September 30, 2021.

For the nine months ended September 30, 2022, net charge-offs totaled $6.6 million compared to $3.9 million for the nine months ended September 30, 2021 , an increase of $2.6 million, or 67.6%.

The increase in net charge-offs for the first nine months of 2022 was anticipated following the expiration of government subsidies and the return to expected losses consistent with pre-Covid historical experience.

For the first quarter of 2023, there was a provision for loan and lease credit losses of $19.0 million compared to $1.8 million for the same period in 2022, an increase of $17.2 million.

The increase in provision expense as compared to the first quarter of 2022 was primarily the result of loan growth, combined with portfolio trends and changes in the macroeconomic outlook.

Loans and leases held for investment at historical cost were $7.22 billion as of March 31, 2023, increasing by $2.08 billion, or 40.5%, compared to March 31, 2022.

Excluding PPP loans and net unearned fees on those loans, the balance in loans and leases held for investment at historical cost was $7.21 billion at March 31, 2023, an increase of $2.20 billion, or 44.0%, over March 31, 2022.

Net charge-offs for loans and leases carried at historical cost were $6.7 million, or 0.38% of average quarterly loans and leases held for investment, carried at historical cost, on an annualized basis, for the three months ended March 31, 2023, compared to net charge-offs of $2.4 million, or 0.19%, for the three months ended March 31, 2022.

The increase in net charge-offs for the first three months of 2023 was primarily isolated to two relationships.

Net charge-offs are a key element of historical experience in the Company's estimation of the allowance for credit losses on loans an d leases.

In addition, nonperforming loans and leases not guaranteed by the SBA or USDA, excluding $2.7 million and $6.3 million accounted for under the fair value option at September 30, 2022 and 2021, respectively, totaled $14.3 million, which was 0.23% of the held for investment loan and lease portfolio carried at historical cost at September 30, 2022, compared to $20.5 million, or 0.43% of loans and leases held for investment carried at historical cost at September 30, 2021.

Nonperforming loans and leases carried at historical cost which are not guaranteed by the SBA or USDA were 0.23% and 0.48% of the historical cost portion of the held for investment loan and lease portfolio, excluding PPP loans, at September 30, 2022 and 2021, respectively.

In addition, nonperforming loans and leases not guaranteed by the SBA or USDA, excluding $8.2 million and $4.5 million accounted for under the fair value option at March 31, 2023 and 2022, respectively, totaled $22.0 million, which was 0.30% of the held for investment loan and lease portfolio carried at historical cost at March 31, 2023, compared to $19.5 million, or 0.38% of loans and leases held for investment carried at historical cost at March 31, 2022.

Noninterest Income

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In addition, the loan servicing revaluation is significantly impacted by changes in market rates and other underlying assumptions such as prepayment speeds and default rates.

Net gain (loss) on loans accounted for under the fair value option is also significantly impacted by changes in market rates, prepayment speeds and inherent credit risk.

Net (loss) gain on loans accounted for under the fair value option is also significantly impacted by changes in market rates, prepayment speeds and inherent credit risk.

Other less consistent elements of noninterest income include gains and losses on investments.

The following table shows the components of noninterest income and the dollar and percentage changes for the periods presented.

Three Months Ended September 30, 2022/2021 Increase (Decrease)

2022 2021 Amount Percent

Noninterest income

Loan servicing revenue $ 6,230 $ 6,278 $ (48) (0.8) %

Loan servicing asset revaluation (1,324) (5,878) 4,554 77.5

Net gains on sales of loans 9,275 18,860 (9,585) (50.8)

Net gain (loss) on loans accounted for under the fair value option 4,420 (1,030) 5,450 529.1

Equity method investments income (loss) 29,136 (1,250) 30,386 2,430.9

Equity security investments gains (losses), net 876 176 700 397.7

Lease income 2,516 2,527 (11) (0.4)

Management fee income 2,844 1,489 1,355 91.0

Other noninterest income 3,751 4,104 (353) (8.6)

Total noninterest income $ 57,724 $ 25,276 $ 32,448 128.4 %

Nine Months Ended September 30, 2022/2021 Increase (Decrease)

Three Months Ended March 31, 2023/2022 Increase (Decrease)

2023 2022 Amount Percent

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Net gains on sales of loans 10,175 20,977 (10,802) (51.5)

Net gain (loss) on loans accounted for under the fair value option 475 4,323 (3,848) (89.0)

Net (loss) gain on loans accounted for under the fair value option (4,529) 516 (5,045) (977.7)

Equity method investments income (loss) (2,952) (2,124) (828) (39.0)

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Total noninterest income $ 19,579 $ 32,668 $ (13,089) (40.1) %

For the three months ended September 30, 2022, noninterest income increased by $32.4 million, or 128.4%, compared to the three months ended September 30, 2021.

The increase over the prior year is the result of the $28.4 million Payrailz gain included in equity method investment income, combined with a decrease in the net loss on servicing asset revaluation of $4.6 million and a $5.5 million increase in net gains on loans accounted for under the fair value option.

Partially offsetting the increase over the prior year was decreased net gains on sales of loans of $9.6 million.

For the nine months ended September 30, 2022, noninterest income increased by $92.5 million, or 73.1%, compared to the nine months ended September 30, 2021 .

The increase over the prior year is also the result of the above mentioned Payrailz gain combined with the $120.5 million Finxact gain recognized in the second quarter of 2022.

Partially offsetting the increase over the prior year was a decrease in equity security investment gains of $42.0 million, related to the 2021 Greenlight gain.

Also partially offsetting the increase over the first nine months of 2021 was decreased net gains on sales of loans of $11.1 million, an increased loss on loan servicing asset revaluation of $4.0 million, and a decreased net gain on loans accounted for under the fair value option of $3.8 million.

For the three months ended March 31, 2023, noninterest income decreased by $13.1 million, or 40.1%, compared to the three months ended March 31, 2022.

The decrease over the prior year is the result of a decrease in net gains on sales of loans of $10.8 million combined with an incremental $5.0 million net loss on loans accounted for under the fair value option.

Partially offsetting the decrease over the prior year was the net gain on servicing asset revaluation incrementally increasing $1.9 million combined with $2.0 million more in management fee income generated by Canapi Advisors.

Canapi Advisors is included in the Company's Fintech segment.

The following table reflects loan and lease production, sales of guaranteed loans and the aggregate balance in guaranteed loans sold.

These components are key drivers of the Company's noninterest income.

Three Months Ended September 30, Three Months Ended June 30, Three Months Ended March 31,

2022 2021 2022 2021 2022 2021

Amount of loans and leases originated $ 1,005,235 $ 1,063,190 $ 959,635 $ 1,153,693 $ 865,063 $ 1,180,219

Guaranteed portions of loans sold 148,110 201,903 68,818 130,858 219,703 136,747

Outstanding balance of guaranteed loans sold (1)

2,671,705 2,731,031 2,681,079 2,694,931 2,786,403 2,843,963

Nine Months Ended September 30, For years ended December 31,

Three Months Ended March 31, For years ended December 31,

2023 2022 2022 2021 2020 2019

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The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as adequate compensation for servicing, the discount rate, the custodial earnings rate, an inflation rate, ancillary income, prepayment speeds and default rates and losses, with the prepayment speed being one of the most sensitive assumptions.

For the three months ended September 30, 2022, there was a negative loan servicing revaluation adjustment of $1.3 million, compared to $5.9 million for the three months ended September 30, 2021, a decrease in expense of $4.6 million, or 77.5%.

For the nine months ended September 30, 2022 there was negative loan servicing revaluation adjustment of $11.6 million compared to $7.6 million for the nine months ended September 30, 2021, an increase in expense of $4.0 million, or 52.8%.

The decrease in the loss on valuation of the servicing asset compared to the third quarter of 2021 was principally the result of positive movements in market pricing, particularly as it relates to variable products, during the third quarter of 2022.

The increase in the loss on loan servicing valuation when comparing to the first nine months of 2021 is principally the result of the emergence of weaker market conditions in 2022 than those experienced in the first nine months of the prior year.

For the three months ended March 31, 2023, there was a net gain on loan servicing asset revaluation of $356 thousand, compared to a net loss of $1.6 million for the three months ended March 31, 2022, resulting in a positive change of $1.9 million, or 122.7%.

The increase in the net gain on valuation of the servicing asset compared to the first quarter of 2022 was principally the result of positive movements in market pricing during the first three months of 2023 as compared to negative market changes within the first quarter of 2022.

Net Gains on Sales of Loans:

For the three months ended September 30, 2022, net gains on sales of loans decreased $9.6 million, or 50.8%, compared to the three months ended September 30, 2021.

The volume of guaranteed loans sold decreased $53.8 million, or 26.6%, for the three months ended September 30, 2022 to $148.1 million from $201.9 million in the three months ended September 30, 2021.

For the nine months ended September 30, 2022, net gains on sales of loans decreased $11.1 million, or 23.7%, compared to the nine months ended September 30, 2021.

For the nine months ended September 30, 2022, the volume of guaranteed loans sold decreased $32.9 million, or 7.0%, to $436.6 million from $469.5 million for the nine months ended September 30, 2021.

The average net gain on loan sale premium decreased from 110% to 108% in the third quarters of 2021 and 2022, respectively, and decreased from 110% to 109% in the first nine months of 2021 and 2022, respectively.

The decrease in net gains on sales of loans for both periods was principally the result of lower loan sales volume combined with negative market conditions beginning to materialize in 2022, as discussed above.

Accordingly, these market trends influenced the Company's appetite for loan sales during periods of weaker premiums in the current year.

Net Gain (Loss) on Loans Accounted for Under the Fair Value Option :

For the three months ended September 30, 2022, the Company had a net gain on loans accounted for under the fair value option of $4.4 million compared to a net loss of $1.0 million for the third quarter of 2021, a positive change of $5.5 million, or 529.1%.

For the nine months ended September 30, 2022, the Company had a net gain on loans accounted for under the fair value option of $475 thousand compared to a net gain of $4.3 million for the same period of 2021, a negative change of $3.8 million, or 89.0%.

The carrying amount of loans accounted for under the fair value option at September 30, 2022 and 2021 was $512.2 million (all classified as held for investment) and $725.4 million ($27.4 million classified as held for sale and $698.0 million classified as held for investment), respectively, a decrease of $213.2 million, or 29.4% .

The increased net gain on loans accounted for under the fair value option during third quarter of 2022 compared to the third quarter of 2021 was largely the result of positive movements in market pricing, as discussed above relative to loan servicing, in combination with continued amortization of the underlying loan portfolio.

The decreased net gain on loans accounted for under the fair value option during the first nine months of 2022 as compared to the prior comparative period is principally the result of the emergence of weaker market conditions than those experienced in the first nine months of 2021.

For the three months ended March 31, 2023, net gains on sales of loans decreased $10.8 million, or 51.5%, compared to the three months ended March 31, 2022.

The volume of guaranteed loans sold decreased $51.9 million, or 23.6%, for the three months ended March 31, 2023 to $167.8 million from $219.7 million in the three months ended March 31, 2022.

The average net gain on loan sale premium decreased from 109% to 106% in the first quarters of 2022 and 2023, respectively.

The decrease in net gains on sales of loans was principally the result of lower loan sale volume and comparatively lower premiums in the first quarter of 2023.

Accordingly, these market trends influenced the Company's level of appetite for loan sales during periods of weaker premiums in the current year.

Net (Loss) Gain on Loans Accounted for Under the Fair Value Option :

For the three months ended March 31, 2023, the Company had a net loss on loans accounted for under the fair value option of $4.5 million compared to a net gain of $516 thousand for the first quarter of 2022, a negative change of $5.0 million.

The carrying amount of loans accounted for under the fair value option at March 31, 2023 and 2022 was $467.0 million (all classified as held for investment) and $625.7 million ($25.1 million classified as held for sale and $600.6 million classified as held for investment), respectively, a decrease of $158.7 million, or 25.4% .

The incremental net loss on loans accounted for under the fair value option during first quarter of 2023 compared to the first quarter of 2022 was largely the result of negative market impacts related to rising interest rates.

Noninterest Expense

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The following table shows the components of noninterest expense and the related dollar and percentage changes for the periods presented.

Three Months Ended September 30, 2022/2021 Increase (Decrease)

2022 2021 Amount Percent

Noninterest expense

Salaries and employee benefits $ 43,479 $ 28,202 $ 15,277 54.2 %

Non-employee expenses:

Travel expense 2,372 1,819 553 30.4 %

Professional services expense 2,505 4,251 (1,746) (41.1)

Advertising and marketing expense 2,621 1,631 990 60.7

Occupancy expense 2,519 2,042 477 23.4

Technology expense 7,770 6,150 1,620 26.3

Equipment expense 3,761 3,706 55 1.5

Other loan origination and maintenance expense 3,376 3,489 (113) (3.2)

Renewable energy tax credit investment impairment 7,721 60 7,661 12,768.3

FDIC insurance 2,697 1,670 1,027 61.5

Contributions and donations 191 523 (332) (63.5)

Other expense 4,036 1,916 2,120 110.6

Total non-employee expenses 39,569 27,257 12,312 45.2 %

Total noninterest expense $ 83,048 $ 55,459 $ 27,589 49.7 %

Nine Months Ended September 30, 2022/2021 Increase (Decrease)

Three Months Ended March 31, 2023/2022 Increase (Decrease)

2023 2022 Amount Percent

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Total noninterest expense $ 78,962 $ 65,714 $ 13,248 20.2 %

Total noninterest expense for the three and nine months ended September 30, 2022, increased $27.6 million, or 49.7%, and $58.4 million, or 34.1%, respectively, compared to the same periods in 2021.

The increase in noninterest expense for the comparable three and nine month periods was largely driven by various components, as discussed below.

Total noninterest expense for the three months ended March 31, 2023, increased $13.2 million, or 20.2%, compared to the same period in 2022.

The increase in noninterest expense for the comparable three month period was largely driven by various components, as discussed below.

Salaries and employee benefits :

Total personnel expense for the three and nine months ended September 30, 2022 increased by $15.3 million, or 54.2%, and $35.8 million, or 38.7%, respectively, compared to the same periods in 2021.

Total personnel expense for the three months ended March 31, 2023 increased by $6.3 million, or 16.3%, compared to the same period in 2022.

The increase in salaries and employee benefits was principally related to continued investment in human resources to support strategic and growth initiatives.

Additional bonus accruals of $7.5 million and $3.0 million were included in both the second and third quarters of 2022 related to the earlier discussed Finxact and Payrailz gains, respectively, while the second quarter of 2021 included an additional $4.0 million bonus accrual, related to earlier mentioned Greenlight gain.

Total full-time equivalent employees increased from 755 at September 30 , 2021, to 940 at September 30 , 2022.

Salaries and employee benefits expense included $5.0 million and $15.1 million of stock-based compensation for the three and nine months ended September 30, 2022 , respectively, compared to $3.7 million and $12.8 million for the three and nine months ended September 30, 2021, respectively.

Total full-time equivalent employees increased from 842 at March 31 , 2022, to 968 at March 31 , 2023.

Salaries and employee benefits expense included $6.2 million and $5.0 million of stock-based compensation for the three months ended March 31, 2023 and 2022, respectively.

Expenses related to the employee stock purchase program, stock grants, stock option compensation and restricted stock expense are all considered stock-based compensation.

Travel expense:

For the nine months ended September 30, 2022, travel expenses increased $2.6 million, or 64.6%, compared to the same period in 2021 .

Travel expenses increased primarily in relation to supporting both loan origination volume and the customer base as travel restrictions have eased combined with inflationary impacts on travel related costs.

Professional service expense:

For the three and nine months ended September 30, 2022, professional service expenses decreased $1.7 million, or 41.1%, and $2.1 million, or 18.6%, respectively, compared to the same periods in 2021 .

The decrease compared to the prior periods was largely driven by lower legal fees.

For the three months ended March 31, 2023, professional service expenses decreased $1.9 million, or 66.8%, compared to the same period in 2022 .

The decrease compared to the prior period was due to an insurance recovery of $1.3 million in the current quarter related to previously expensed legal fees.

Advertising and marketing expense :

For the three and nine months ended September 30, 2022, advertising and marketing expense increased $990 thousand, or 60.7%, and $3.5 million, or 110.6%, respectively, compared to the same periods in 2021.

Increases were largely driven by a continuation of renewed marketing events.

For the three months ended March 31, 2023, advertising and marketing expense increased $1.9 million, or 108.4%, compared to the same period in 2022.

This increase was largely driven by continued investment in the Company’s lending and deposit market growth.

Technology expense :

For the three and nine months ended September 30, 2022, technology expense increased $1.6 million, or 26.3%, and $3.4 million, or 21.2%, respectively, compared to the same periods in 2021.

For the three months ended March 31, 2023, technology expense increased $1.7 million, or 27.7%, compared to the same period in 2022.

This increase was primarily related to enhanced investments in the Company’s technology resources.

Renewable energy tax credit investment impairment:

During the third quarter of 2022, the Company recognized $7.7 million in impairment charges related to a new renewable energy tax credit investment that was fully funded.

Investments of this type generate a return primarily through the realization of income tax credits and other benefits;

accordingly, impairment of the investment amount is recognized in conjunction with the realization of related tax benefits.

Partially offsetting this increase over the first nine months of 2021 was $3.1 million in impairment charges for a first quarter 2021 renewable energy tax credit investment.

Contributions and donations:

For the nine months ended September 30, 2022, contributions and donations expense increased $4.4 million, or 221.0%, compared to the same period in 2021.

This increase was related to a special charitable donation during the second quarter of 2022 of $5.0 million made in connection with the earlier discussed Finxact gain.

FDIC insurance:

For the three months ended March 31, 2023, FDIC insurance increased $1.4 million, or 72.6%, compared to the same period in 2022.

This increase is largely a product of the Bank's continued growth.

Other expense:

For the three months ended March 31, 2023, other expense increased $3.5 million, compared to the same period in 2022, largely related to $2.8 million in increased levels of reserves on unfunded commitments.

This increase in the reserve for unfunded commitments was largely a result of refinements to the estimation assumptions in the first quarter of 2023.

Income Tax Expense

For the three months ended September 30, 2022, income tax expense was $1.5 million compared to $9.4 million for the third quarter of 2021, and the Company’s effective tax rates were 3.4% and 21.7%, respectively.

For the nine months ended September 30, 2022, income tax expense was $35.2 million compared to $26.2 million for the first nine months of 2021, and the Company’s effective tax rates were 16.8% and 16.0%, respectively.

The lower level of income tax expense and effective tax rate for the third quarter of 2022 as compared to the same period in 2021 was principally the result of higher than anticipated investment tax credits related to renewable energy investments, arising from impacts of the passage of the Inflation Reduction Act of 2022 combined with higher than expected costs, as a result of the ongoing inflationary environment.

The increase in income tax expense for first nine months of 2022 compared to the comparative period of 2021 was primarily from increased pretax income during the current period, largely a product of the earlier discussed Finxact and Payrailz gains.

For the three months ended March 31, 2023, income tax expense was $3.2 million compared to $8.4 million for the first quarter of 2022, and the Company’s effective tax rates were 89.0% and 19.6%, respectively.

The lower level of income tax expense for the first quarter of 2023 as compared to the same period in 2022 was principally the result of decreased pretax income while the higher effective tax rate was principally the product of discrete items in the first quarter of 2023 related to stock compensation.

Results of Segment Operations

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Net income (loss) by operating segment is presented below:

Three Months Ended September 30, Nine Months Ended September 30,

2022 2021 2022 2021

Three Months Ended March 31,

Banking $ 2,388 $ 37,840

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Consolidated net income $ 398 $ 34,509

For the three and nine months ended September 30, 2022, net income decreased $19.6 million, or 52.8%, and $53.9 million, or 47.7%, respectively, compared to the same periods of 2021.

For the three months ended March 31, 2023, net income decreased $35.5 million, or 93.7%, compared to the same period of 2022.

Key factors influencing this decrease are discussed below.

The provision for loan and lease credit losses for the three and nine months ended September 30, 2022, increased $9.9 million, or 228.1%, and $10.0 million, or 88.4%, respectively.

The provision for loan and lease credit losses for the three months ended March 31, 2023, increased $17.2 million.

See the analysis of provision for loan and lease credit losses included in the above section captioned “Provision for Loan and Lease Credit Losses” as it is entirely related to the Banking segment.

For the three and nine months ended September 30, 2022, noninterest income increased $2.1 million, or 8.5%, and decreased $18.1 million, or 21.9%, respectively, compared to the same periods of 2021.

The decrease for the nine month comparative periods was principally driven by a decrease in net gains on sales of loans combined with an increase of losses in loan servicing asset revaluation and decrease in net gain arising from loans accounted for under the fair value option.

For the three months ended March 31, 2023, noninterest income decreased $14.9 million, or 46.8%, compared to the same period of 2022.

See the analysis of these categories of noninterest income included in the above section captioned “Noninterest Income” for additional discussion.

For the three and nine months ended September 30, 2022, noninterest expense increased $26.1 million, or 49.7%, and $57.8 million, or 36.4%, respectively, compared to same periods of 2021.

For the three months ended March 31, 2023, noninterest expense increased $13.1 million, or 21.3%, compared to same period of 2022.

See the analysis of these categories of noninterest expense included in the above section captioned “Noninterest Expense” for additional discussion.

For the three and nine months ended September 30, 2022, income tax expense decreased $8.0 million, or 85.6%, and $9.0 million, or 47.0%, respectively, compared to the same periods of 2021.

This decrease relative to the Bank for both comparative periods is discussed in the above section captioned "Income Tax Expense" in regard to impacts of changes in anticipated investment tax credits related to renewable energy investments.

For the three and nine months ended September 30, 2022, net income increased by $28.4 million, and $90.9 million, respectively, compared to same periods of 2021.

The increase was principally due to the third and second quarters of 2022 equity method investment gains of $28.4 million and $120.5 million from the sale of Payrailz and Finxact, respectively.

This increase for the comparative nine month periods was partially offset by the equity security investment gains arising from the second quarter of 2021 gain of $44.1 million arising from the Company’s investment in Greenlight.

For the three and nine months ended September 30, 2022, noninterest expense increased $1.3 million and $3.5 million, respectively, compared to the same period of 2021.

This increase was largely due increased levels of salaries and benefits.

For the three and nine months ended September 30, 2022, income tax expense increased $622 thousand, or 301.9%, and $16.1 million, or 161.2%, respectively, compared to the same periods of 2021.

This increase is a product of the above discussed increase in Fintech segment income for comparative periods.

See the above section captioned “Income Tax Expense.”

For the three months ended March 31, 2023, income tax expense decreased $5.8 million, or 63.7%, compared to the same period of 2022.

This decrease relative to the Bank for both comparative periods is discussed in the above section captioned “ Income Tax Expense.

For the three months ended March 31, 2023, net loss decreased by $1.4 million, compared to same period of 2022.

The primary factor influencing the decrease in net loss was an increase in noninterest income of $1.8 million compared to the same period of 2022.

This increase was principally due to a $2.0 million increase in management fee income earned by Canapi Advisors.

There were two funds receiving advisory services in the first quarter of 2022 compared to four funds in the first quarter of 2023.

Discussion and Analysis of Financial Condition

September 30, 2022 vs.

March 31, 2023 vs.

December 31, 2022

Total assets at September 30, 2022 were $9.31 billion, an increase of $1.10 billion, or 13.4%, compared to total assets of $8.21 billion at December 31, 2021.

Total assets at March 31, 2023 were $10.36 billion, an increase of $508.8 million, or 5.2%, compared to total assets of $9.86 billion at December 31, 2022.

The growth in total assets was principally driven by the following:

• Cash and cash equivalents, comprised of cash and due from banks and federal funds sold was $403.4 million at September 30, 2022, an increase of $199.6 million, or 98.0%, compared to $203.8 million at December 31, 2021.

This change reflects increased liquidity planning levels in the current rising rate environment and proceeds arising from the Payrailz and Finxact sales combined with growing deposit levels.

• Growth in total loans and leases held for investment and held for sale of $753.3 million resulting from strong origination activity in the first nine months of 2022 and holding loans available for sale for longer periods of time before sale, as discussed more fully below.

Total originations during the first nine months of 2022 were $2.83 billion.

Loans held for sale decreased $578.9 million, or 51.8%, during the first nine months of 2022, from $1.12 billion at December 31, 2021, to $537.6 million at September 30, 2022.

The decrease was primarily the result of a $754.7 million transfer of loans, including $696.6 million in guaranteed loans, from held for sale to held for investment in the third quarter of 2022.

This transfer was largely due to the impact of recent and anticipated future market conditions in a rising rate environment influencing management's intent and ability to hold these loans for the foreseeable future.

See “Results of Operations” discussion of “Net Gains on Sales of Loans” for additional information influencing managements intent to hold more loans for investment.

Loans and leases held for investment increased $1.33 billion, or 24.1%, during the first nine months of 2022, from $5.52 billion at December 31, 2021, to $6.85 billion at September 30, 2022.

• Growth in total loans and leases held for investment and held for sale of $321.5 million resulting from strong origination activity in the first three months of 2023 and holding loans available for sale for longer periods of time before sale, as discussed more fully below.

Total originations during the first quarter of 2023 were $1.03 billion.

• Investment securities available-for-sale increased $135.0 million during the first three months of 2023, from $1.01 billion at December 31, 2022, to $1.15 billion at March 31, 2023, an increase of 13.3%.

The increase was largely the result of liquidity and balance sheet management.

At March 31, 2023, the investment portfolio was comprised of U.S.

government agencies, U.S.

government-sponsored entity mortgage-backed securities, municipal bonds and other debt securities.

Cash and cash equivalents, comprised of cash and due from banks and federal funds sold, was $463.2 million at March 31, 2023, an increase of $46.6 million, or 11.2%, compared to $416.6 million at December 31, 2022.

This change principally reflects strategically increased liquidity in response to the recent banking crisis.

Loans held for sale decreased $21.3 million, or 3.8%, during the first three months of 2023, from $554.6 million at December 31, 2022, to $533.3 million at March 31, 2023.

The decrease in loans held for sale was principally due to the impact of market conditions in a rising rate environment which has influenced management's intent to hold a greater portion of loans as held for investment.

Loans and leases held for investment increased $342.8 million, or 4.7%, during the first three months of 2023, from $7.34 billion at December 31, 2022, to $7.69 billion at March 31, 2023.

The increase was primarily the result of the above-mentioned loan originations in 2023 combined with increased levels of loans retained as held for investment.

Excluding PPP loans, total loans and leases held for investment increased $1.57 billion, or 29.9%, during the first nine months of 2022.

All PPP loans are classified as held for investment.

Other assets increased $48.1 million, or 19.2%, during the first nine months of 2022, from $250.3 million at December 31, 2022 to $298.4 million at September 30, 2022.

This increase was principally comprised of full and partially funded commitments to equity method and equity security investments.

Total deposits were $8.40 billion at September 30, 2022, an increase of $1.29 billion, or 18.2%, from $7.11 billion at December 31, 2021.

The increase in deposits is largely driven by significant loan origination efforts.

Borrowings decreased to $35.6 million at September 30, 2022 from $318.3 million at December 31, 2021.

This decrease was related principally to net curtailments of borrowings through the PPPLF which was paid off by September 30, 2022 from $267.6 million at December 31, 2021.

These PPPLF borrowings were used to help fund PPP loans.

Shareholders’ equity at September 30, 2022 was $802.2 million as compared to $715.1 million at December 31, 2021.

The book value per share was $18.24 at September 30, 2022 compared to $16.39 at December 31, 2021.

Average equity to average assets was 9.1% for the nine months ended September 30, 2022 compared to 8.8% for the year ended December 31, 2021.

The increase in shareholders’ equity for the first nine months of 2022 was principally the result of $174.4 million in net income and stock-based compensation expense of $15.1 million, partially offset by other comprehensive loss associated with negative market impacts on the Company’s available-for-sale investment portfolio of $97.2 million.

Total deposits were $9.42 billion at March 31, 2023, an increase of $537.1 million, or 6.0%, from $8.88 billion at December 31, 2022.

The increase in total deposits from the prior period was to support growth in the loan and lease portfolio, as well as enhance the Company’s liquidity profile in response to the recent banking crisis.

In addition, the Company began offering the IntraFi Insured Cash Sweep product in the first quarter of 2023 whereby depositors have access to FDIC insurance in excess of $250 thousand.

At March 31, 2023 the Bank’s total uninsured deposits were approximately $1.4 billion, or 14.5% of total deposits.

Borrowings decreased to $30.8 million at March 31, 2023 from $83.2 million at December 31, 2022.

This decrease was principally due to paying off the Company’s Fed Funds line of credit in the first quarter of 2023.

Borrowings in the accompanying Notes to Unaudited Condensed Consolidated Financial Statements for a discussion of current sources of available debt capacity.

Regulatory Impact of Asset Growth

As of March 31, 2023, the Company and the Bank each first exceeded $10 billion in total assets.

As of March 31, 2023, the Company and the Bank each had total assets of $10.36 billion and $10.25 billion, respectively.

The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) and its implementing regulations impose various additional requirements on bank holding companies and banks with $10 billion or more in total consolidated assets.

As a general matter, the Company and the Bank are not immediately subject to these additional requirements when they exceed $10 billion in assets;

instead, the Company and the Bank will be subject to these various requirements over various dates, as described below.

Consumer Financial Laws.

Under the Dodd-Frank Act, the Consumer Financial Protection Bureau (CFPB) has near-exclusive supervision authority, including examination authority, to assess compliance with federal consumer financial laws for a bank and its affiliates if the bank has total assets of more than $10 billion.

This provision becomes applicable to a bank following the fourth consecutive quarter where the total assets of the bank, as reported in its quarterly Call Report, exceed $10 billion and afterwards remains applicable to the bank unless the bank has reported total assets of $10 billion or less in its quarterly Call Report for four consecutive quarters.

Deposit Insurance Assessments.

Also under the Dodd-Frank Act, the minimum ratio of net worth to insured deposits of the federal Deposit Insurance Fund administered by the FDIC was increased from 1.15 percent to 1.35 percent and the FDIC is required, in setting deposit insurance assessments, to offset the effect of the increase on institutions with assets of less than $10 billion, which results in institutions with assets greater than $10 billion paying higher assessments.

In addition, following the fourth consecutive quarter where the total assets of a bank exceeds $10 billion, as reported in its quarterly Call Report, the FDIC utilizes a different method for determining deposit insurance assessments.

This large bank method is based on a bank’s ability to withstand asset- and funding-related stress, its regulatory ratings, and potential losses to the FDIC in the event of the bank’s failure, subject to discretionary adjustments by the FDIC.

Volcker Rule.

Under provisions of the Dodd-Frank Act referred to as the “Volcker Rule,” certain limitations are placed on the ability of insured depository institutions and their affiliates to engage in sponsoring, investing in and transacting with certain investment funds, known as “covered funds” under the rule.

There are a number of exclusions from the definition of “covered funds,” including for investments in Small Business Investment Companies, or SBICs, and certain qualifying venture capital funds.

The Volcker Rule also places restrictions on proprietary trading, which could impact certain hedging activities.

Community banks are excluded from the restrictions of the Volcker Rule if (i) the community bank, and every entity that controls it, has total consolidated assets equal to or less than $10 billion and (ii) trading assets and liabilities of the community bank, and every entity that controls it, are equal to or less than five percent of its total consolidated assets.

The Company and the Bank will no longer be eligible for this exemption upon exceeding $10 billion in total consolidated assets.

Limits on Interchange Fees.

The Bank also may be affected by the Durbin Amendment to the Dodd-Frank Act regarding limits on debit card interchange fees.

The Durbin Amendment gave the Federal Reserve Board the authority to establish rules regarding interchange fees charged for electronic debit transactions by a payment card issuer that, together with its affiliates, has assets of $10 billion or more, as of December 31 of the preceding calendar year, and to enforce a new statutory requirement that such fees be reasonable and proportional to the actual cost of a transaction to the issuer.

The Federal Reserve Board has adopted rules under this provision that limit the swipe fees that a debit card issuer can charge a merchant for a transaction to the sum of 21 cents and five basis points times the value of the transaction, plus up to one cent for fraud prevention costs.

Asset Quality

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Typically, collections of interest and principal received on a nonaccrual loan or lease are applied to the outstanding principal as determined at the time of collection of the loan or lease.

Troubled debt restructurings (“TDRs”) occur when, because of economic or legal reasons pertaining to the debtor’s financial difficulties, debtors are granted concessions that would not otherwise be considered.

Such concessions would include, but are not limited to, the transfer of assets or the issuance of equity interests by the debtor to satisfy all or part of the debt, modification of the terms of debt or the substitution or addition of debtor(s).

Nonperforming assets and TDRs, excluding loans measured at fair value, at September 30, 2022 were $108.0 million, which represented a $27.8 million, or 34.7%, increase from December 31, 2021.

These nonperforming assets at September 30, 2022 included $60.1 million in nonaccrual loans and leases and $1.2 million in foreclosed assets.

Of the $108.0 million of nonperforming assets and TDRs, $65.3 million carried a government guarantee, leaving an unguaranteed exposure of $42.7 million in total nonperforming assets and TDRs at September 30, 2022.

In respect to the Company's adoption of ASU No.

2022-02 on January 1, 2023, as described more fully in Note 2 in the accompanying Unaudited Condensed Consolidated Financial Statements, the prior period discussed below has been adjusted to exclude previously disclosed troubled debt restructurings for comparative purposes.

Nonperforming assets, excluding loans measured at fair value, at March 31, 2023 were $85.7 million, which represented a $12.3 million, or 16.8%, increase from December 31, 2022.

These nonperforming assets at March 31, 2023 were comprised of $85.7 million in nonaccrual loans and leases.

At March 31, 2023, there were no foreclosed assets.

Of the $85.7 million of nonperforming assets, $63.7 million carried a government guarantee, leaving an unguaranteed exposure of $22.0 million in total nonperforming assets at March 31, 2023.

This represents an increase of $3.2 million, or 17.1%, from an unguaranteed exposure of $18.8 million at December 31, 2022.

The following table provides information with respect to nonperforming assets and troubled debt restructurings, excluding loans measured at fair value, at the dates indicated.

September 30, 2022 (1)

The following table provides information with respect to nonperforming assets, excluding loans measured at fair value, at the dates indicated.

March 31, 2023 (1)

December 31, 2022 (1)

1 unchanged sentence

Total nonperforming loans and leases (all on nonaccrual) $ 85,698 $ 73,392

Total accruing loans and leases past due 90 days or more — —

Foreclosed assets — —

Total troubled debt restructurings 66,404 55,273

Less nonaccrual troubled debt restructurings (19,600) (18,210)

Total performing troubled debt restructurings 46,804 37,063

Total nonperforming assets and troubled debt restructurings $ 108,046 $ 80,216

Total nonperforming assets $ 85,698 $ 73,392

Allowance for credit losses on loans and leases $ 108,242 $ 96,566

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Total nonperforming loans and leases to total assets 0.87 % 0.78 %

Total nonperforming assets and troubled debt restructurings to total assets 1.23 % 1.06 %

Allowance for credit losses on loans and leases to loans and leases held for investment 1.50 % 1.41 %

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(1) Excludes loans measured at fair value.

September 30, 2022 (1)

March 31, 2023 (1)

December 31, 2022 (1)

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Total nonperforming loans and leases guaranteed by the U.S government (all on nonaccrual) $ 63,696 $ 54,608

Total accruing loans and leases past due 90 days or more guaranteed by the U.S government — —

Foreclosed assets guaranteed by the U.S.

government — —

Total troubled debt restructurings guaranteed by the U.S.

government 34,160 26,954

Less nonaccrual troubled debt restructurings guaranteed by the U.S.

government (15,471) (10,770)

Total performing troubled debt restructurings guaranteed by U.S.

government 18,689 16,184

Total nonperforming assets and troubled debt restructurings guaranteed by the U.S.

Total nonperforming assets guaranteed by the U.S.

government $ 63,696 $ 54,608

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government to total assets 0.22 % 0.20 %

Total nonperforming assets and troubled debt restructurings not guaranteed by the U.S.

government to total assets 0.49 % 0.49 %

Allowance for credit losses on loans and leases to total nonperforming loans and leases not guaranteed by the U.S.

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(1) Excludes loans measured at fair value.

Total nonperforming assets and TDRs, including loans measured at fair value, at September 30, 2022 were $164.0 million, which represented a $10.4 million, or 6.8%, increase from December 31, 2021.

These nonperforming assets at September 30, 2022 included $90.3 million in nonaccrual loans and leases and $1.2 million in foreclosed assets.

Of the $164.0 million of nonperforming assets and TDRs, $110.4 million carried a government guarantee, leaving an unguaranteed exposure of $53.6 million in total nonperforming assets and TDRs at September 30, 2022.

Total nonperforming assets, including loans measured at fair value, at March 31, 2023 were $141.3 million, which represented a $20.9 million, or 17.4%, increase from December 31, 2022.

Of the $141.3 million of nonperforming assets, $109.4 million carried a government guarantee, leaving an unguaranteed exposure of $31.9 million in total nonperforming assets at March 31, 2023.

This represents an increase of $5.9 million, or 22.5%, from an unguaranteed exposure of $26.0 million at December 31, 2022.

See the below discussion related to the change in potential problem and impaired loans and leases for management’s overall observations regarding growth in total nonperforming loans and leases.

As a percentage of the Bank’s total capital, nonperforming loans and leases, excluding loans measured at fair value, represented 7.6% at September 30, 2022, compared to 6.0% at December 31, 2021.

Adjusting the ratio to include only the unguaranteed portion of nonperforming loans and leases at historical cost to reflect management’s belief that the greater magnitude of risk resides in this portion, the ratios at both September 30, 2022 and December 31, 2021 were 1.8% and 2.3%, respectively.

As of September 30, 2022, and December 31, 2021, potential problem (also referred to as criticized) and classified loans and leases, excluding loans measured at fair value, totaled $379.4 million and $372.7 million, respectively.

As a percentage of the Bank’s total capital, nonperforming loans and leases, excluding loans measured at fair value, represented 10.4% at March 31, 2023, compared to 9.0% at December 31, 2022.

Adjusting the ratio to include only the unguaranteed portion of nonperforming loans and leases at historical cost to reflect management’s belief that the greater magnitude of risk resides in this portion, the ratios at both March 31, 2023 and December 31, 2022 were 2.7% and 2.3%, respectively.

As of March 31, 2023, and December 31, 2022, potential problem (also referred to as criticized) and classified loans and leases, excluding loans measured at fair value, totaled $504.2 million and $424.7 million, respectively.

The following is a discussion of these loans and leases.

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Loans and Leases Held for Investment and Credit Quality in the Company’s 2022 Form 10-K.

At September 30, 2022 , the portion of criticized and classified loans and leases guaranteed by the SBA or USDA totaled $191.8 million and total portfolio unguaranteed exposure risk was $187.6 million, or 5.0% of total held for investment unguaranteed exposure carried at historical cost.

At March 31, 2023 , the portion of criticized and classified loans and leases guaranteed by the SBA or USDA totaled $218.3 million and total portfolio unguaranteed exposure risk was $285.9 million, or 6.4% of total held for investment unguaranteed exposure carried at historical cost.

This compares to the December 31, 2022 portion of criticized and classified loans and leases guaranteed by the SBA or USDA which totaled $195.8 million and total portfolio unguaranteed exposure risk was $228.9 million, or 5.5% of total held for investment unguaranteed exposure carried at historical cost.

As of September 30, 2022 , loans and leases carried at historical cost within the following verticals comprise the largest portion of the total potential problem and classified loans and leases:

Wine and Craft Beverage at 11.7%, General Lending at 9.5%, Senior Care at 9.4%, Hotels at 8.5%, Healthcare at 8.2%, Educational Services at 8.0%, Fitness Centers at 5.2%, Sponsor Finance at 4.6%, Entertainment Centers at 4.5%, Agriculture at 4.5%, and Veterinary at 4.0%.

As of March 31, 2023 , loans and leases carried at historical cost within the following verticals comprise the largest portion of the total potential problem and classified loans and leases:

Sponsor Finance at 12.8% (principally related to Search Fund Lending), Wine and Craft Beverage at 11.3%, Senior Housing at 11.0%, General Lending at 10.7%, Healthcare at 6.2%, Hotels at 5.0%, Senior Care at 4.6% and Fitness Centers at 4.2%.

As of December 31, 2022 , loans and leases carried at historical cost within the following verticals comprise the largest portion of the total potential problem and classified loans and leases:

Educational Services at 16.1%, Wine and Craft Beverage at 13.7%, Hotels at 11.8%, Entertainment Centers at 10.4%, Healthcare at 9.0%, Fitness Centers at 5.3%, Self-Storage at 4.8%, Agriculture at 4.5% and Veterinary at 4.4%.

Other than Hotels and Sponsor Finance which are a part of the Company’s Specialty Lending division, all of the above listed verticals are within the Company’s Small Business Banking divisio n.

The majority of the $6.7 million increase in potential problem and classified loans and leases in the first nine months of 2022 was comprised of several relationships that did not have a government guarantee, largely related to some of the more recently matured verticals.

Wine and Craft Beverage at 11.5%, General Lending at 10.3%, Senior Housing at 10.2%, Sponsor Finance at 7.8%, Healthcare at 6.4%, Hotels at 5.9%, Fitness Centers at 5.1%, Agriculture at 4.5% and Senior Care at 4.0%.

Of the above listed verticals, Senior Housing and Sponsor Finance are within the Company’s Specialty Lending division while Hotels are within the Energy & Infrastructure division, the remainder of the above listed verticals are within the Small Business Banking division.

The majority of the $79.5 million increase in potential problem and classified loans and leases in the first three months of 2023 was comprised of several relationships that did not have a government guarantee.

The Company believes that its underwriting and credit quality standards have remained high and continues to consider changing economic conditions in a rising interest rate environment.

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This could be due, among other reasons, to illness, weather, impact from a one-time expense, slower than expected start-up, construction issues or other short-term issues.

Credit personnel will review the request to determine if the customer is stressed and how the event has impacted the ability of the customer to repay the loan or lease lon g term.

At September 30, 2022, the Company had a total of $10.7 million in modified unguaranteed loans and leases on payment deferral with $362 thousand in accrued interest.

Credit personnel will review the request to determine if the customer is stressed and how the event has impacted the ability of the customer to repay the loan or lease long term.

At March 31, 2023, the Company had a total of $21.1 million in loans modified in the first quarter of 2023 to borrowers experiencing financial difficulty, all of which remained current with $4.2 million on principal payment deferral.

Management endeavors to be proactive in its approach to identify and resolve problem loans and leases and is focused on working with the borrowers and guarantors of these loans and leases to provide loan and lease modifications when warranted.

Management implements a proactive approach to identifying and classifying loans and leases as special mention (also referred to as criticized), Risk Grade 5.

At September 30, 2022 , and December 31, 2021 , Risk Grade 5 loans and leases, excluding loans measured at fair value, totaled $259.9 million and $267.4 million, respectively.

The decrease in Risk Grade 5 loans and leases, exclusive of loans measured at fair value, during the first nine months of 2022 was principally confined to three verticals:

Educational Services ($27.1 million or 361.6%), Entertainment Centers ($13.9 million or 185.6%) and Hotels ($9.2 million or 122.9%).

Partially offsetting the above decreases were increases in Risk Grade 5 loans principally concentrated in four ver ticals:

Senior Care ($15.4 million or 205.3%), General Lending ($12.7 million or 168.8%), Sponsor Finance ($6.9 million or 92.4%) and Bioenergy ($4.1 million or 54.8%).

The decrease in criticized loans in the first nine months of 2022 was due to principal paydowns and positive risk grade migration.

Hotels, Sponsor Finance and Bioenergy are a part of the Company’s Specialty Lending division with the remaining above listed verticals within the Company’s Small Business Banking division.

At September 30, 2022 , approximately 100.0% of loans and leases classified as Risk Grade 5 are performing with no relationships having payments past due more than 30 days.

At March 31, 2023, and December 31, 2022, Risk Grade 5 loans and leases, excluding lo ans measured at fair value, totaled $370.8 million and $286.5 million, respectively, for a quarter over quarter increase of $84.3 million.

The increase in Risk Grade 5 loans and leases, exclusive of loans measured at fair value, during the first quarter of 2023 was principally confined to seven verticals:

Sponsor Finance ($32.3 million or 38.3%, principally related to Search Fund Lending ), Bioenergy ($13.5 million or 16.0%), Senior Housing ($12.2 million or 14.4%), Venture Banking ($11.8 million or 14.0%), Wine and Craft Beverage ($8.4 million or 10.0%), Conventional Financing ($6.6 million or 7.8%) and Senior Care ($6.0 million or 7.2%).

The increase in criticized loans in 2023 was related to a small number of large relationships within four mature verticals.

Of the above listed verticals, Sponsor Finance, Senior Housing, Venture Banking and Conventional Financing are within the Company’s Specialty Lending division while Bioenergy is within the Energy & Infrastructure division, the remainder of the above listed verticals are within the Small Business Banking division.

At March 31, 2023, approximately 99.6% of loans and leases classified as Risk Grade 5 are performing with no relationships having payments past due more than 30 days.

While the level of nonperforming assets fluctuates in response to changing economic and market conditions, in light of the relative size and composition of the loan and lease portfolio and management’s degree of success in resolving problem assets, management believes that a proactive approach to early identification and intervention is critical to successfully managing a small business loan portfolio.

As government payment assistance began to expire toward the end of 2020, bo rrowers with continuing difficulties arising from the pandemic were provided additional relief through payment deferrals.

At September 30, 2022, the Company had $16.6 million in unguaranteed loans on SBA payment assistance.

As government payment assistance began to expire toward the end of 2020, borrowers with continuing difficulties arising from the pandemic were provided additional relief through payment deferrals.

At March 31, 2023, the Company had $6.6 million in unguaranteed loans on SBA payment assistance.

Management monitors these borrowers closely and has observed financial conditions continuing to improve.

Management has also noted that most loans with expired government assistance have been able to resume making regular payments.

Allowance for Credit Losses on Loans and Leases

The ACL of $63.6 million at December 31, 2021, increased by $14.7 million, or 23.1%, to $78.3 million at September 30, 2022.

The ACL as a percentage of loans and leases held for investment at historical cost amounted to 1.3% and 1.2% at December 31, 2021 and September 30, 2022, respectively.

The increase in the ACL during the first nine months of 2022 was primarily due to loan growth, charge-off experience impacts, the previously discussed loan reclassification from held for sale to held for investment and changes in the macroeconomic outlook.

The ACL of $96.6 million at December 31, 2022, increased by $11.7 million, or 12.1%, to $108.2 million at March 31, 2023.

The ACL as a percentage of loans and leases held for investment at historical cost amounted to 1.4% and 1.5% at December 31, 2022 and March 31, 2023, respectively.

The increase in the ACL during the first three months of 2023 was primarily the result of loan growth, combined with portfolio trends and changes in the macroeconomic outlook.

See also the above section captioned “Provision for Loan and Lease Credit Losses” in “Results of Operations” for related information.

The ACL for PPP loans and leases was $2.4 million and $37 thousand at December 31, 2021 and September 30, 2022, respectively.

Actual past due held for investment loans and leases, inclusive of loans measured at fair value, have decreased by $23.1 million since December 31, 2021 .

Total loans and leases 90 or more days past due decreased $14.7 million, or 29.9%, compared to December 31, 2021 .

This decrease was comprised of a $8.3 million decrease in unguaranteed exposure combined with a $6.4 million decrease in the guaranteed portion of past due loans compared to December 31, 2021 .

At September 30, 2022 and December 31, 2021 , total held for investment unguaranteed loans and leases past due as a percentage of total held for investment unguaranteed loans and leases, inclusive of loans measured at fair value, was 0.2% and 0.6%, respectively.

Total unguaranteed loans and leases past due were comprised of $6.5 million carried at historical cost, a decrease of $10.1 million, and $3.8 million measured at fair value, a decrease of $1.3 million, as of September 30, 2022 compared to December 31, 2021 .

Actual past due held for investment loans and leases, inclusive of loans measured at fair value, have increased by $15.3 million since December 31, 2022.

Total loans and leases 90 or more days past due increased $29.6 million, or 52.4%, compared to December 31, 2022.

This increase was comprised of a $9.5 million increase in unguaranteed exposure combined with a $20.1 million increase in the guaranteed portion of past due loans compared to December 31, 2022.

At March 31, 2023 and December 31, 2022, total held for investment unguaranteed loans and leases past due as a percentage of total held for investment unguaranteed loans and leases, inclusive of loans measured at fair value, was 0.6% and 0.7%, respectively.

Total unguaranteed loans and leases past due were comprised of $21.0 million carried at historical cost, a decrease of $160 thousand, and $8.7 million measured at fair value, an decrease of $909 thousand, as of March 31, 2023 compared to December 31, 2022.

Management continues to actively monitor and work to improve asset quality.

Management believes the ACL of $78.3 million at September 30, 2022 is appropriate in light of the risk inherent in the loan and lease portfolio.

Management believes the ACL of $108.2 million at March 31, 2023 is appropriate in light of the risk inherent in the loan and lease portfolio.

Management’s judgments are based on numerous assumptions about current and expected events that it believes to be reasonable, but which may or may not be valid.

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and (d) availability under lines of credit.

At September 30, 2022, the total amount of these four items was $4.06 billion, or 43.6% of total assets, an increase of $644.1 million from $3.42 billion, or 41.6% of total assets, at December 31, 2021.

At March 31, 2023, the total amount of these four items was $4.24 billion, or 40.9% of total assets compared to 40.7% of total assets, at December 31, 2022.

Loans and other assets are funded by loan sales, wholesale deposits and core deposits.

To date, an increasing retail deposit base and a stable amount of brokered deposits have been adequate to meet loan obligations, while maintaining the desired level of immediate liquidity.

The Company maintains an investment securities portfolio that is available for both immediate and secondary contingent liquidity purposes, whether via pledging to the Federal Home Loan Bank or through liquidation.

Additionally, the Company maintains a guaranteed loan portfolio that is also a contingent liquidity source, whether via pledging to the Federal Reserve Discount Window or through liquidation.

At September 30, 2022, none of the investment securities portfolio was pledged to secure public deposits or pledged to retail repurchase agreements, leaving $1.00 billion available to pledge as collateral.

At March 31, 2023, none of the investment securities portfolio was pledged to secure public deposits or pledged to retail repurchase agreements, leaving $1.15 billion available to pledge as collateral.

Contractual Obligations

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One method used to manage interest rate sensitivity is to measure, over various time periods, the interest rate sensitivity positions, or gaps.

As of September 30, 2022, the balance sheet’s total cumulative gap position was asset-sensitive at 5.2%.

As of March 31, 2023, the balance sheet’s total cumulative gap position was 5.8%, for further information, see Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

The interest rate gap method, however, addresses only the magnitude of asset and liability repricing timing differences as of the report date and does not address earnings, market value, changes in account behaviors based on the interest rate environment, nor growth.

Therefore, management also uses an earnings simulation model to prepare, on a regular basis, earnings projections based on a range of instantaneous parallel interest rate shocks applied to a static balance sheet to measure interest rate risk.

As of September 30, 2022, the Company’s interest rate risk profile under the instantaneous parallel interest rate shock scenarios remained asset-sensitive.

As of March 31, 2023, the Company’s interest rate risk profile under the instantaneous parallel interest rate shock scenarios shifted from asset-sensitive to slightly liability-sensitive.

For more information, see Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

An asset-sensitive position means that net interest income will generally move in the same direction as interest rates.

For instance, if interest rates increase, net interest income can be expected to increase, and if interest rates decrease, net interest income can be expected to decrease.

A liability-sensitive position means that net interest income will generally move in the opposite direction as interest rates.

For instance, if interest rates increase, net interest income can be expected to decrease, and if interest rates decrease, net interest income can be expected to increase.

The Company attempts to mitigate interest rate risk by match funding assets and liabilities with similar rate instruments.

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Note that the Company regularly models various forecasted rate projections with non-parallel shifts that are reflective of potential current rate environment outcomes.

Under these scenarios, the Company’s interest rate risk profile may increase in asset sensitivity, decrease in asset sensitivity, or depending on the scenario and timing of anticipated rate changes, may transition to a liability sensitive interest rate risk profile.

Under these scenarios, the Company’s interest rate risk profile may increase in liability sensitivity, decrease in liability sensitivity, or depending on the scenario and timing of anticipated rate changes, may transition back to an asset-sensitive interest rate risk profile.

Regular, robust modeling of various interest rate outcomes allows the Company to properly assess and manage potential risks from various rate shifts.

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Risk-based capital ratios, which include Tier 1 Capital, Total Capital and Common Equity Tier 1 Capital, are calculated based on regulatory guidance related to the measurement of capital and risk-weighted assets.

Capital amounts and ratios as of September 30, 2022 and December 31, 2021, are presented in the table below.

Capital amounts and ratios as of March 31, 2023 and December 31, 2022, are presented in the table below.

Actual Minimum Capital

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Amount Ratio Amount Ratio Amount Ratio

Consolidated - September 30, 2022

Consolidated - March 31, 2023

Common Equity Tier 1 (to Risk-Weighted Assets) $ 889,810 11.67 % $ 342,998 4.50 % N/A N/A

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Tier 1 Capital (to Average Assets) 889,810 8.70 409,302 4.00 N/A N/A

Bank - September 30, 2022

Bank - March 31, 2023

Common Equity Tier 1 (to Risk-Weighted Assets) $ 732,399 10.00 % $ 329,580 4.50 % $ 476,060 6.50 %

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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