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Item 2. Management’s Discussion and Analysis

2022-08-08 compared with 2022-05-09 · 426 added, 339 removed, 319 unchanged (71% of the section changed)

Item 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The purpose of this discussion and analysis is to provide a concise description of the consolidated financial condition and results of operations of NBT Bancorp Inc.

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on Form 10‑K for the year ended December 31, 2021 for an understanding of the following discussion and analysis.

Operating results for the three month period ending March 31, 2022 are not necessarily indicative of the results of the full year ending

December 31, 2022 or any future period.

Operating results for the three and six month periods ending June 30, 2022 are not necessarily indicative of the results of the full year

ending December 31, 2022 or any future period.

Forward-looking Statements

Certain statements in this filing and future filings by the NBT Bancorp Inc.

Certain statements in this filing and future filings by NBT Bancorp Inc.

(the “Company”) with the Securities and Exchange Commission (“SEC”), in the Company’s press releases or other public or

stockholder communications or in oral statements made with the approval of an authorized executive officer, contain forward-looking statements, as defined in the Private Securities Litigation Reform Act.

These statements may be identified by the use

of phrases such as “anticipate,” “believe,” “expect,” “forecasts,” “projects,” “will,” “can,” “would,” “should,” “could,” “may,” or other similar terms.

There are a number of factors, many of which are beyond the Company’s control that could cause

actual results to differ materially from those contemplated by the forward-looking statements.

Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements include, among others, the following

possibilities:

These statements may be identified by

the use of phrases such as “anticipate,” “believe,” “expect,” “forecasts,” “projects,” “will,” “can,” “would,” “should,” “could,” “may,” or other similar terms.

There are a number of factors, many of which are beyond the Company’s control, that could

cause actual results to differ materially from those contemplated by the forward-looking statements.

Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements include, among others, the

following possibilities:

(1) local, regional, national and international economic conditions and the impact they may have on the Company and its customers and the Company’s assessment of that impact;

(2) changes in the level of nonperforming assets and

(2) changes in the level of nonperforming assets

and charge-offs;

(3) changes in estimates of future reserve requirements based upon the periodic review thereof under relevant regulatory and accounting requirements;

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(7) acts of war, including international military conflicts, or

(8) the timely development and acceptance of new products and services and perceived overall value of these products and services by users;

(9) changes in consumer spending, borrowings and savings habits;

(8) the timely development and acceptance of new products and services and the perceived overall value of these products and services by users;

(9) changes in consumer spending, borrowing and saving habits;

(10) changes in the financial

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(11) technological changes;

(12) acquisitions and integration of acquired businesses;

(12) acquisition and integration of acquired businesses;

(13) the ability to increase market share and control expenses;

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and (21) the Company’s success at managing the risks involved in the foregoing items.

Currently, one of the most significant factors that could cause actual outcomes to differ materially from the Company’s forward-looking statements is the potential adverse effect of the current

COVID-19 pandemic on the financial condition, results of operations, cash flows and performance of the Company, its customers and the global economy and financial markets.

The extent to which the COVID-19 pandemic impacts the Company will depend on

future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the pandemic, treatment developments, public adoption rates of COVID-19 vaccines, including booster shots, and

their effectiveness against emerging variants of COVID-19, the impact of the COVID-19 pandemic on the Company’s customers and demand for financial services, the actions governments, businesses and individuals take in response to the pandemic, the

impact of the COVID-19 pandemic and actions taken in response to the pandemic on global and regional economies, national and local economic activity, and the pace of recovery when the COVID-19 pandemic subsides, among others.

Moreover, investors are

cautioned to interpret many of the risks identified under the section entitled “Risk Factors” in our Form 10-K for the year ended December 31, 2021 as being heightened as a result of the ongoing and numerous adverse impacts of the COVID-19 pandemic.

The Company cautions readers not to place undue reliance on any forward-looking statements, which speak only as of the date made, and advises readers that various factors, including, but not

limited to, those described above and other factors discussed in the Company’s annual and quarterly reports previously filed with the SEC, could affect the Company’s financial performance and could cause the Company’s actual results or circumstances

for future periods to differ materially from those anticipated or projected.

Unless required by law, the Company does not undertake, and specifically disclaims any obligations to, publicly release any revisions that may be made to any forward-looking statements to reflect

the occurrence of anticipated or unanticipated events or circumstances after the date of such statements.

Currently, one of the most significant factors that could cause actual outcomes to differ materially from the Company’s forward-looking statements is the potential adverse effect of the current COVID-19

pandemic on the financial condition, results of operations, cash flows and performance of the Company, its customers and the global economy and financial markets.

The extent to which the COVID-19 pandemic impacts the Company will depend on future

developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the pandemic, treatment developments, public adoption rates of COVID-19 vaccines, including booster shots, and their

effectiveness against emerging variants of COVID-19, the impact of the COVID-19 pandemic on the Company’s customers and demand for financial services, the actions governments, businesses and individuals take in response to the pandemic, the impact of

the COVID-19 pandemic and actions taken in response to the pandemic on global and regional economies, national and local economic activity, and the pace of recovery when the COVID-19 pandemic subsides, among others.

Moreover, investors are cautioned

to interpret many of the risks identified under the section entitled “Risk Factors” in our Form 10-K for the year ended December 31, 2021 as being heightened as a result of the ongoing and numerous adverse impacts of the COVID-19 pandemic.

The Company cautions readers not to place undue reliance on any forward-looking statements, which speak only as of the date made, and advises readers that various factors including, but not limited to,

those described above and other factors discussed in the Company’s annual and quarterly reports previously filed with the SEC, could affect the Company’s financial performance and could cause the Company’s actual results or circumstances for future

periods to differ materially from those anticipated or projected.

Unless required by law, the Company does not undertake, and specifically disclaims any obligation to publicly release any revisions that may be made to any forward-looking statements to reflect the

occurrence of anticipated or unanticipated events or circumstances after the date of such statements.

Non-GAAP Measures

This Quarterly Report on Form 10-Q contains financial information determined by methods other than in accordance with accounting principles generally accepted in the United States of America

This Quarterly Report on Form 10-Q contains financial information determined by methods other than in accordance with accounting principles generally accepted in the United States of America (“GAAP”).

Where non-GAAP disclosures are used in this Form 10-Q, the comparable GAAP measure, as well as a reconciliation to the comparable GAAP measure, is provided in the accompanying tables.

Management believes that these non-GAAP measures provide

useful information that is important to an understanding of the results of the Company’s core business as well as provide information standard in the financial institution industry.

Non-GAAP measures should not be considered a substitute for

financial measures determined in accordance with GAAP and investors should consider the Company’s performance and financial condition as reported under GAAP and all other relevant information when assessing the performance or financial condition of

Critical Accounting Policies and Estimates

The Company has identified policies as being critical because they require management to make particularly difficult, subjective and/or complex judgments about matters that are inherently

The judgment and assumptions made are based upon historical experience or other factors that management believes to be reasonable under the circumstances.

Because of the nature of the judgment and assumptions, actual results could differ

from estimates, which could have a material effect on our financial condition and results of operations.

Management believes that these non-GAAP measures provide useful

information that is important to an understanding of the results of the Company’s core business as well as provide information standard in the financial institution industry.

Non-GAAP measures should not be considered a substitute for financial

measures determined in accordance with GAAP and investors should consider the Company’s performance and financial condition as reported under GAAP and all other relevant information when assessing the performance or financial condition of the

Amounts previously reported in the consolidated financial statements are reclassified whenever necessary to conform to current period presentation.

Critical Accounting Estimates

The Company has identified policies as being critical because they require management to make particularly difficult, subjective and/or complex judgments about matters that are inherently uncertain.

judgment and assumptions made are based upon historical experience or other factors that management believes to be reasonable under the circumstances.

Because of the nature of the judgment and assumptions, actual results could differ from estimates,

which could have a material effect on our financial condition and results of operations.

These policies relate to the allowance for credit losses, pension accounting and provision for income taxes.

The allowance for credit losses consists of the allowance for credit losses and the allowance for losses on unfunded commitments.

Measurement of Credit Losses on Financial Instruments (“CECL”)

approach requires an estimate of the credit losses expected over the life of an exposure (or pool of exposures).

The estimate of expected credit losses under the CECL approach is based on relevant information about past events, current conditions,

and reasonable and supportable forecasts that affect the collectability of the reported amounts.

Measurement of Credit Losses on Financial Instruments (“CECL”) approach

requires an estimate of the credit losses expected over the life of an exposure (or pool of exposures).

The estimate of expected credit losses under the CECL approach is based on relevant information about past events, current conditions, and

reasonable and supportable forecasts that affect the collectability of the reported amounts.

Historical loss experience is generally the starting point for estimating expected credit losses.

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The allowance for losses on unfunded commitments is determined by estimating future draws and applying the expected loss rates on those draws.

Management of the Company considers the accounting policy relating to the allowance for credit losses to be a critical accounting estimate given the uncertainty in evaluating the level of the

allowance required to cover management’s estimate of all expected credit losses over the expected contractual life of our loan portfolio.

Determining the appropriateness of the allowance is complex and requires judgment by management about the effect

of matters that are inherently uncertain.

Management of the Company considers the accounting policy relating to the allowance for credit losses to be a critical accounting estimate given the uncertainty in evaluating the level of the allowance

required to cover management’s estimate of all expected credit losses over the expected contractual life of our loan portfolio.

Determining the appropriateness of the allowance is complex and requires judgment by management about the effect of

matters that are inherently uncertain.

Subsequent evaluations of the then-existing loan portfolio, in light of the factors then prevailing, may result in significant changes in the allowance for credit losses in those future periods.

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these and other relevant factors may result in greater volatility to the reserve for credit losses, and therefore, greater volatility to our reported earnings.

Management is required to make various assumptions in valuing the Company’s pension assets and liabilities.

These assumptions include the expected rate of return on plan assets, the discount rate,

the rate of increase in future compensation levels and interest rate of credit for cash balance plans.

Changes to these assumptions could impact earnings in future periods.

The Company takes into account the plan asset mix, funding obligations and

expert opinions in determining the various rates used to estimate pension expense.

The Company also considers market interest rates and discounted cash flows in setting the appropriate discount rate.

In addition, the Company reviews expected

inflationary and merit increases to compensation in determining the rate of increase in future compensation levels.

The Company is subject to examinations from various taxing authorities.

These tax laws are complex and subject to different interpretations by the taxpayer and the relevant government taxing

In establishing a provision for income tax expense, we must make judgments and interpretations about the application of these inherently complex tax laws.

Quarterly, a review of income tax expense and the carrying value of deferred tax

assets and liabilities is performed and balances are adjusted as appropriate.

We must also make estimates about when in the future certain items will affect taxable income in the various tax jurisdictions.

Although management believes that the

assumptions and judgments used to record tax-related assets or liabilities have been reasonable and appropriate, actual results could differ and we may be exposed to losses or gains that could be material.

Should tax laws change or the taxing

authorities during their examinations determine that their assumptions differ from management’s and we do not prevail in a dispute over interpretations of tax laws, an adjustment may be required which could have a material effect on the Company’s

results of operations.

The Company’s policies on the CECL method for allowance for credit losses, pension accounting and provision for income taxes are disclosed in Note 1 to the consolidated financial statements

presented in our 2021 Annual Report on Form 10-K.

All accounting policies are important and as such, the Company encourages the reader to review each of the policies included in Note 1 to the consolidated financial statements presented in our 2021

Annual Report on Form 10-K to obtain a better understanding of how the Company’s financial performance is reported.

Refer to Note 3 to the unaudited interim consolidated finance statements in this Quarterly Report on Form 10-Q for recently adopted

accounting standards.

One of the most significant judgements involved in estimating the Company’s allowance for credit losses relates to the macroeconomic forecasts used to estimate

expected credit losses over the forecast period.

As of June 30, 2022, the quantitative model incorporated a baseline economic outlook along with an alternative downside scenario.

Excluding other factors, the changes in the weightings of our

forecasted scenarios would impact the amount of estimated allowance for credit losses.

To demonstrate the sensitivity of the allowance for credit losses estimate to macroeconomic forecast weightings assumptions as of June 30, 2022, the Company

increased the downside scenario weighting by 10% to 60% and decreased the baseline scenario to 40% weighting which resulted in a 4% increase in the estimated allowance for credit losses.

The Company’s policies on the CECL method for allowance for credit losses are disclosed in Note 1 to the consolidated financial statements presented in our 2021 Annual Report on Form 10-K.

All accounting policies are

important and as such, the Company encourages the reader to review each of the policies included in Note 1 to the consolidated financial statements presented in our 2021 Annual Report on Form 10-K to obtain a better understanding of how the Company’s

financial performance is reported.

Refer to Note 3 to the unaudited interim consolidated finance statements in this Quarterly Report on Form 10-Q for recently adopted accounting standards.

Significant factors management reviews to evaluate the Company’s operating results and financial condition include, but are not limited to:

net income and earnings per share, return on average

assets and equity, net interest margin, noninterest income, operating expenses, asset quality indicators, loan and deposit growth, capital management, liquidity and interest rate sensitivity, enhancements to customer products and services, technology

net income and earnings per share, return on average assets

and equity, net interest margin, noninterest income, operating expenses, asset quality indicators, loan and deposit growth, capital management, liquidity and interest rate sensitivity, enhancements to customer products and services, technology

advancements, market share and peer comparisons.

The Company’s results in 2022 and 2021 have been impacted by the COVID-19 pandemic and the CECL accounting methodology, including the estimated impact of the COVID-19 pandemic on expected credit

The following information should be considered in connection with the Company’s results for the three months ended March 31, 2022:

net income for the three months ended March 31, 2022 was $39.1 million, up $1.8 million from the fourth quarter of 2021 and down $0.7 million from the first quarter of 2021;

diluted earnings per share of $0.90 for the three months ended March 31, 2022, up $0.04 from the fourth quarter of 2021 and down $0.01 from the first quarter of 2021;

noninterest income for the three months ended March 31, 2022 was $42.7 million, up $1.5 million from the fourth quarter of 2021 and up $5.6 million from the first quarter of 2021;

represents 35% of total

The following information should be considered in connection with the Company’s results for the three and six months ended June 30, 2022:

net income for the three months ended June 30, 2022 was $37.8 million, down $2.5 million from the second quarter of 2021 and down $1.4 million from the first quarter of 2022;

diluted earnings per share of $0.88 for the three months ended June 30, 2022, down $0.04 from the second quarter of 2021 and down $0.02 from the first quarter of 2022;

noninterest income for the three months ended June 30, 2022 was $41.7 million, up $2.3 million from the second quarter of 2021 and down $1.0 million from the first quarter of 2022;

represents 33% of total revenues

excluding securities gains (losses);

period end loans were $7.78 billion, up 7.5%, annualized, from December 31, 2021 (9.9% excluding Paycheck Protection Program (“PPP”) loans);

strong credit quality metrics including net charge-offs to average loans of 0.14% annualized, and allowance for loan losses to total loans at 1.18%;

book value per share of $27.96 at March 31, 2022;

tangible book value per share (1) was $21.25 at March 31, 2022, $22.26 at

December 31, 2021 and $20.71 at March 31, 2021.

strong credit quality metrics including net charge-offs to average loans of 0.04% annualized for the three months ended June 30, 2022 and 0.09% annualized for the six months ended June 30, 2022, and allowance for

loan losses to total loans at 1.20% (1.21% excluding PPP loans and related allowance);

book value per share of $27.75 at June 30, 2022;

tangible book value per share (1) was $20.99 at June 30, 2022, $21.25 at March 31, 2022, and $21.50 at June 30, 2021.

Non-GAAP measure - Refer to non-GAAP reconciliation below.

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The COVID-19 pandemic and countermeasures taken to contain its spread have caused economic and financial disruptions globally.

The impact of the COVID-19 pandemic on the Company’s results of

operations and the ultimate effect of the pandemic will depend on numerous factors that are highly uncertain, including how long restrictions for business and individuals will last, further information around the severity of the virus and any

variants, additional actions taken by federal, state and local governments to contain and treat COVID-19 and what, if any, additional government relief will be provided.

The expected impact of the pandemic on the Company’s business, financial

condition, results of operations, and its customers has not fully manifested.

The pandemic appears to be slowly receding, and thus becoming less disruptive on the Company's business, financial condition, results of operations, and its clients as of

March 31, 2022.

The impact of the COVID-19 pandemic on the Company’s results of operations

and the ultimate effect of the pandemic will depend on numerous factors that are highly uncertain, including how long restrictions for business and individuals will last, further information around the severity of the virus and any variants,

additional actions taken by federal, state and local governments to contain and treat COVID-19 and what, if any, additional government relief will be provided.

The expected impact of the pandemic on the Company’s business, financial condition,

results of operations, and its customers has not fully manifested.

The pandemic appears to be slowly receding, and thus becoming less disruptive on the Company’s business, financial condition, results of operations, and its clients as of June 30,

However, economic uncertainty remains high and volatility is expected to continue in 2022.

The Company believes its historically strong underwriting practices, diverse and granular portfolios and geographic footprint will help to

mitigate any adverse impact to the Company.

The Company has participated in the Small Business Administration’s (“SBA”) PPP, a loan guarantee program created under the CARES Act and the Consolidated Appropriation Act targeted to provide

The Company believes its historically strong underwriting practices, diverse and granular portfolios and geographic footprint will help to mitigate any

adverse impact to the Company.

The Company participated in the Small Business Administration’s (“SBA”) PPP, a guaranteed, forgivable loan program created under the CARES Act and the Consolidated Appropriation Act targeted to provide

small businesses with support to cover payroll and certain other expenses.

Loans made under the PPP are fully guaranteed by the SBA, whose guarantee is backed by the full faith and credit of the United States government.

Loans made under the PPP are fully guaranteed by the SBA, the guarantee is backed by the full faith and credit of the United States government.

PPP covered loans also afford

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The Company processed approximately 6,100 loans totaling $835 million in relief.

The Company is supporting the forgiveness process under the PPP with online

resources, educational webinars and a partnership with a certified public accounting firm.

As of March 31, 2022, the Company has received payment from the SBA on 5,479 of our loans totaling $754 million and total forgiveness and paydown is equal to

94% of the original balance.

The Company is supporting the forgiveness process under the PPP with online resources, educational webinars and a partnership with a

certified public accounting firm.

As of June 30, 2022, the Company has received payment from the SBA on 5,867 loans totaling $790 million and total forgiveness and paydown is equal to 98% of the original balance.

Results of Operations

The Company reported net income of $39.1 million for the three months ended March 31, 2022, up $1.8 million from the fourth quarter of 2021 and down $0.7 million from the first quarter of 2021.

interest income was $80.3 million for the three months ended March 31, 2022, down $4.8 million, or 5.7%, from the fourth quarter of 2021 and up $1.3 million or 1.6% from the first quarter of 2021.

Average interest-earning assets were up $71.9

million, or 0.7%, from the prior quarter and grew $0.9 billion, or 9.3%, from the first quarter of 2021.

The provision for loan losses was $0.6 million for the three months ended March 31, 2022, as compared with $3.1 million in the fourth quarter of

2021 and a net benefit of $2.8 million in the first quarter of 2021.

The Company reported net income of $37.8 million for the three months ended June 30, 2022, down $1.4 million from $39.1 million for the first quarter of 2022 and down $2.5 million from $40.3 million for

the second quarter of 2021.

Net interest income was $87.6 million for the three months ended June 30, 2022, up $7.2 million, or 9.0%, from the first quarter of 2022 and up $8.4 million, or 10.6% from the second quarter of 2021.

interest-earning assets were down $106.1 million, or 1.0% from the prior quarter and up $351.9 million, or 3.3%, from the second quarter of 2021.

The provision for loan losses was $4.4 million for three months ended June 30, 2022, as compared with

$0.6 million in the first quarter of 2022 and a net benefit of $5.2 million in the second quarter of 2021.

The Company reported net income of $76.9 million for the six months ended June 30, 2022, down $3.2 million from $80.1 million for the same period last year.

Net interest income was $167.9 million for

the six months ended June 30, 2022, up $9.7 million, or 6.1% from $158.2 million for the six months ended June 30, 2021.

Average interest-earning assets were up $648.3 million, or 6.2% from the same period last year.

The provision for loan losses was

$5.0 million for the six months ended June 30, 2022, as compared to a net benefit of $8.0 million for the six months ended June 30, 2021.

The following table sets forth certain financial highlights:

Three Months Ended

December 31, 2021

Six Months Ended

Performance :

Diluted earnings per share

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Total risk-based capital ratio

The following tables provide non-GAAP reconciliations:

The following table provide non-GAAP reconciliations:

Three Months Ended

(In thousands)

December 31, 2021

Six Months Ended

(In thousands, except share and per share data)

Return on average tangible common equity:

Amortization of intangible assets (net of tax)

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Return on average tangible common equity (2)

Three Months Ended

(In thousands)

December 31, 2021

Stockholder’s equity

Tangible equity ratio:

Three Months Ended

(In thousands, except share and per share data)

December 31, 2021

Stockholder’s equity

Stockholders’ equity

Tangible equity ratio

Tangible book value:

Stockholders’ equity

Tangible equity

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Net Interest Income

Net interest income is the difference between interest income on earning assets, primarily loans and securities and interest expense on interest-bearing liabilities, primarily deposits and

Net interest income is the difference between interest income on earning assets, primarily loans and securities and interest expense on interest-bearing liabilities, primarily deposits and borrowings.

Net interest income is affected by the interest rate spread, the difference between the yield on interest-earning assets and cost of interest-bearing liabilities, as well as the volumes of such assets and liabilities.

Net interest income

is one of the key determining factors in a financial institution’s performance as it is the principal source of earnings.

Net interest income was $80.3 million for the first quarter of 2022, down $4.8 million, or 5.7%, from the previous quarter.

Net interest income is one of

the key determining factors in a financial institution’s performance as it is the principal source of earnings.

Net interest income was $87.6 million for the second quarter of 2022, up $7.2 million, or 9.0%, from the previous quarter.

PPP loan interest and fees recognized into interest income for the three months

ended June 30, 2022 was $1.3 million compared to $2.0 million for the previous quarter.

The FTE net interest margin was 3.21% for the three months ended June 30, 2022, an increase of 26 basis points (“bps”) from the previous quarter.

Interest income

increased $7.3 million, or 8.6%, as the yield on average interest-earning assets increased 26 bps from the prior quarter to 3.35%, while average interest-earning assets of $10.98 billion decreased $106.1 million from the prior quarter, primarily due

to a decrease in short-term interest-bearing accounts (“excess liquidity”), resulting primarily from the incremental deployment of excess liquidity into loans and investment securities.

Interest expense and the cost of interest-bearing liabilities

remained consistent for the quarter ended June 30, 2022 compared to the prior quarter.

Net interest income was $87.6 million for the second quarter of 2022, up $8.4 million, or 10.6%, from the second quarter of 2021.

PPP loan interest and fees recognized into interest income for the three

months ended March 31, 2022 was $2.0 million compared to $7.5 million for the previous quarter.

The FTE net interest margin was 2.95% for the three months ended March 31, 2022, a decrease of 13 bps from the previous quarter.

Interest income decreased

$5.1 million, or 5.7%, as the yield on average interest-earning assets decreased 14 bps from the prior quarter to 3.09%, while average interest-earning assets of $11.1 billion increased $71.9 million from the prior quarter, primarily due to an

increase in average investment securities partly offset by a decrease in short-term interest-bearing accounts (“excess liquidity”).

Interest expense was down $0.3 million, or 6.6%, as the cost of interest-bearing liabilities decreased 1 bps to 0.23%

for the quarter ended March 31, 2022, driven by interest-bearing deposit costs decreasing 2 bps.

Net interest income was $80.3 million for the first quarter of 2022, up $1.3 million, or 1.6%, from the first quarter of 2021.

PPP loan interest and fees recognized into interest income for the

three months ended March 31, 2022 was $2.0 million compared to $6.2 million for the three months ended March 31, 2021.

The FTE net interest margin was 2.95% for the three months ended March 31, 2022, a decrease of 22 bps from the first quarter of

Interest income decreased $0.1 million, or 0.1%, as the yield on average interest-earning assets decreased 29 bps from the same period in 2021 to 3.09%, while average interest-earning assets increased $0.9 billion, or 9.3%, from the first

quarter of 2021, primarily due to excess liquidity and an increase in average investment securities.

Interest expense decreased $1.4 million, or 26.7%, as the cost of interest-bearing liabilities decreased 11 bps to 0.23% for the quarter ended March

31, 2022, driven by interest-bearing deposit costs decreasing 10 bps.

months ended June 30, 2022 was $1.3 million compared to $4.7 million for the second quarter of 2021.

The FTE net interest margin was 3.21% for the three months ended June 30, 2022, an increase of 21 bps from the second quarter of 2021.

income increased $7.4 million, or 8.9%, as the yield on average interest-earning assets increased 17 bps from the same period in 2021 to 3.35%, while average interest-earning assets of $10.98 billion increased $351.9 million from the second quarter

of 2021, primarily due to an increase in average investment securities partly offset by a decrease in excess liquidity and an increase in Federal Reserve’s targeted Federal Funds rate.

Interest expense was down $1.0 million, or 19.9%, as the cost of

interest-bearing liabilities decreased 6 bps to 0.23% for the quarter ended June 30, 2022, driven by interest-bearing deposit costs decreasing 7 bps.

Net interest income for the first six months of 2022 was $167.9 million, up $9.7 million, or 6.1%, from the same period in 2021.

PPP loan interest and fees recognized into interest income for the six

months ended June 30, 2022 was $3.3 million compared to $10.9 million for the same period in 2021.

FTE net interest margin of 3.08% for the six months ended June 30, 2022, was comparable to the same period in 2021.

Interest income increased $7.3

million, or 4.4%, as the yield on average interest-earning assets decreased 6 bps from the same period in 2021 to 3.22%, while average interest-earning assets of $11.04 billion increased $648.3 million primarily due to an increase in average

investment securities.

Interest expense was down $2.4 million, or 23.4%, for the six months ended June 30, 2022 as compared to the same period in 2021 as the cost of interest-bearing liabilities decreased 8 bps to 0.23%, driven by interest-bearing

deposit costs decreasing 9 bps.

Average Balances and Net Interest Income

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Three Months Ended

March 31, 2022

December 31, 2021

March 31, 2021

June 30, 2022

June 30, 2021

(Dollars in thousands)

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Federal Reserve Bank and FHLB stock

Loans (2) (3)

Total interest-earning assets

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Long-term debt

Subordinated debt

Subordinated debt, net

Junior subordinated debt

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Interest income for tax-exempt securities and loans have been adjusted to a FTE basis using the statutory Federal income tax rate of 21%.

The following table presents changes in interest income and interest expense attributable to changes in volume (change in average balance multiplied by prior year rate), changes in rate (change in

rate multiplied by prior year volume) and the net change in net interest income.

Six Months Ended

June 30, 2022

June 30, 2021

(Dollars in thousands)

Short-term interest-bearing accounts

Securities taxable (1)

Securities tax-exempt (1) (3)

Federal Reserve Bank and FHLB stock

Loans (2) (3)

Total interest-earning assets

Liabilities and stockholders’ equity:

Money market deposit accounts

NOW deposit accounts

Savings deposits

Time deposits

Total interest-bearing deposits

Federal funds purchased

Repurchase agreements

Short-term borrowings

Long-term debt

Subordinated debt, net

Junior subordinated debt

Total interest-bearing liabilities

Demand deposits

Other liabilities

Stockholders’ equity

Total liabilities and stockholders’ equity

Net interest income (FTE)

Interest rate spread

Net interest margin (FTE)

Taxable equivalent adjustment

Net interest income

Securities are shown at average amortized cost.

For purposes of these computations, nonaccrual loans and loans held for sale are included in the average loan balances outstanding.

Interest income for tax-exempt securities and loans have been adjusted to a FTE basis using the statutory Federal income tax rate of 21%.

The following table presents changes in interest income and interest expense attributable to changes in volume (change in average balance multiplied by prior year rate), changes in rate (change in rate

multiplied by prior year volume) and the net change in net interest income.

The net change attributable to the combined impact of volume and rate has been allocated to each in proportion to the absolute dollar amounts of change.

Three Months Ended March 31,

Three Months Ended June 30,

Increase (Decrease)

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Long-term debt

Subordinated debt

Subordinated debt, net

Junior subordinated debt

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Change in FTE net interest income

Six Months Ended June 30,

Increase (Decrease)

2022 over 2021

(In thousands)

Short-term interest-bearing accounts

Securities taxable

Securities tax exempt

Federal Reserve Bank and FHLB stock

Total FTE interest income

Money market deposit accounts

NOW deposit accounts

Savings deposits

Time deposits

Repurchase agreements

Short-term borrowings

Long-term debt

Subordinated debt

Junior subordinated debt

Total FTE interest expense

Change in net FTE interest income

Noninterest Income

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noninterest income for the periods indicated:

Three Months Ended March 31,

Three Months Ended

Six Months Ended

(In thousands)

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Total noninterest income

Noninterest income for the three months ended March 31, 2022 was $42.7 million, up $1.5 million, or 3.8%, from the prior quarter and up $5.6 million, or 15.2%, from the first quarter of 2021.

Excluding net securities (losses) gains, noninterest income for the three months ended March 31, 2022 was $42.8 million, up $1.7 million, or 4.2% from the prior quarter and up $6.3 million, or 17.1% from the first quarter of 2021.

The increase from

the prior quarter was primarily driven by an increase in retirement plan administration fees driven by higher activity-based fees, continued organic growth as well as the impact of positive equity market returns over the past year.

The increase from

the first quarter of 2021 was primarily due to an increase in retirement plan administration fees driven by higher activity-based fees, continued organic growth as well as the impact of positive equity market returns over the past year, higher wealth

management fees aided by market performance and additional new customers, higher card services income due to increased volume and higher per transaction rates and higher service charges on deposit accounts as the volume of transactions has normalized

to near pre-pandemic levels.

Noninterest income for the three months ended June 30, 2022 was $41.7 million, down $1.0 million, or 2.4%, from the prior quarter and up $2.3 million, or 6.0%, from the second quarter of 2021.

net securities (losses) gains, noninterest income for the three months ended June 30, 2022 was $42.2 million, down $0.6 million, or 1.4%, from the prior quarter and up $3.1 million, or 8.0%, from the second quarter of 2021.

The decrease from the

prior quarter was primarily driven by lower retirement plan administration fees, resulting from seasonal revenue fluctuations related to activity-based fees and lower wealth management fees due to market performance.

The increase from the second

quarter of 2021 was primarily due to higher retirement plan administration fees driven by higher activity-based fees and continued organic growth, higher card services income resulting from increased volume and higher service charges on deposit

accounts as the volume of transaction has normalized to near pre-pandemic levels.

Noninterest income for the six months ended June 30, 2022 was $84.3 million, up $8.0 million, or 10.4%, from the same period in 2021.

Excluding net securities (losses) gains, noninterest income for the

six months ended June 30, 2022 was $85.1 million, up $9.4 million, or 12.4%, from the same period in 2021.

The increase from the prior year was primarily due to an increase in retirement plan administration fees driven by higher activity-based fees,

continued organic growth as well as the impact of positive equity market returns over the past year, higher card services income resulting from increased volume and higher service charges on deposit accounts as the volume of transactions has

normalized to near pre-pandemic levels, partly offset by lower swap fees.

Noninterest Expense

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The following table sets forth the major components of noninterest expense for the periods indicated:

Three Months Ended March 31,

Three Months Ended

Six Months Ended

(In thousands)

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Office supplies and postage

FDIC expenses

Amortization of intangible assets

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Total noninterest expense

Noninterest expense for the three months ended March 31, 2022 was $72.1 million, down $3.0 million, or 3.9%, from the prior quarter and up $4.3 million, or 6.3%, from the first quarter of 2021.

decrease from the prior quarter was primarily driven by lower other expenses due principally to the seasonal timing of certain items, lower professional fees and outside services due to timing of cost associated with several digital and other

technology-related initiatives, lower loan collection and other real estate owned due to the gain on the sale of a property in the first quarter of 2022 and a write-down of a property in the prior quarter.

The decrease from the prior quarter was

partly offset by the increase in salaries and employee benefits due to seasonally higher payroll taxes and stock-based compensation expenses, partly offset by two less payroll days.

The increase from the first quarter of 2021 was due to higher

salaries and employee benefits due to increased salaries and wages including merit pay increases and higher levels of incentive compensation and higher professional fees and outside services due to timing of cost associated with several digital and

other technology-related initiatives.

Income tax expense for the three months ended March 31, 2022 was $11.1 million, up $0.4 million from the prior quarter and comparable to the first quarter of 2021.

Noninterest expense for the three months ended June 30, 2022 was $76.1 million, up $4.0 million, or 5.5%, from the prior quarter and up $4.7 million, or 6.6%, from the second quarter of 2021.

increase from the prior quarter was due to higher salaries and employee benefits due to one additional day of payroll in the second quarter, annual merit pay increases and higher medical expenses.

Technology and data services expense increased from

the prior quarter due to continued investment in digital platform solutions including the completion of the Company’s human resources information system conversion.

Loan collection and other real estate owned were higher than the prior quarter due to

higher collection expenses and a gain on the sale of a property in the first quarter of 2022.

Other expenses increased from the prior quarter due to a $0.5 million increase in the provision for the reserve for unfunded commitments, higher travel and

training expenses and seasonal timing of certain expenditures.

The increase in noninterest expense from the second quarter of 2021 was due to increased salaries and wages including merit pay increases, higher levels of incentive compensation and

increased medical expenses.

Other expenses increased from the second quarter of 2021 due to higher activity-based expenses including travel and training along with an increase in the provision for the reserve for unfunded commitments mostly offset by

$1.9 million in lower non-recurring costs which occurred during the second quarter of 2021, including an estimated legal settlement charge.

Noninterest expense for the six months ended June 30, 2022 was $148.3 million, up $9.0 million, or 6.4%, from the same period in 2021.

The increase from the prior year was driven by higher salaries and

employee benefits due to increased salaries and wages including merit pay increases, higher levels of incentive compensation and increased medical expenses, along with increased professional fees and outside services due to timing of expenditures,

increased advertising expenses and higher travel and training expenditures.

Income tax expense for the three months ended June 30, 2022 was $11.0 million, down $0.2 million from the prior quarter and down $1.0 million from the second quarter of 2021.

The effective tax rate was

for the first quarter of 2022 compared to 22.4% for the fourth quarter of 2021 and 21.9% for the first quarter of 2021.

22.5% for the second quarter of 2022, compared to 22.2% in the prior quarter and 22.9% for the second quarter of 2021.

Income tax expense for the six months ended June 30, 2022 was $22.1 million, down $1.1 million from the same period of 2021.

The effective tax rate of 22.3% for the first six months of 2022 was down

from 22.4% for the same period in the prior year.

ANALYSIS OF FINANCIAL CONDITION

Total securities increased $136.1 million, or 5.5%, from December 31, 2021 to March 31, 2022.

The securities portfolio represents 21.3% of total assets as of March 31, 2022 as compared to 20.4% of

total assets as of December 31, 2021.

The following table details the composition of securities available for sale, securities held to maturity and regulatory investments for the periods indicated:

March 31, 2022

Total securities increased $131.7 million, or 5.4%, from December 31, 2021 to June 30, 2022.

The securities portfolio represented 22.1% of total assets as of June 30, 2022 as compared to 20.4% of total

assets as of December 31, 2021.

The following table details the composition of securities available for sale, securities held to maturity and equity securities for the periods indicated:

June 30, 2022

December 31, 2021

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With maturities greater than 15 years

Collateral mortgage obligations

Collateralized mortgage obligations

Municipal securities

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The Company’s mortgage-backed securities, U.S.

agency notes and collateralized mortgage obligations are all guaranteed by Fannie Mae, Freddie Mac, the Federal Home Loan Bank, Federal Farm Credit

Banks or Ginnie Mae (“GNMA”).

agency notes and collateralized mortgage obligations are all guaranteed by Fannie Mae, Freddie Mac, Federal Home Loan Bank, Federal Farm Credit Banks or

Ginnie Mae (“GNMA”).

GNMA securities are considered similar in credit quality to U.S.

Treasury securities, as they are backed by the full faith and credit of the U.S.

Currently, there are no subprime mortgages in our investment

Currently, there are no subprime mortgages in the investment portfolio.

A summary of the loan portfolio by major categories (1) , net of deferred fees and origination costs, for the periods indicated follows:

(In thousands)

March 31, 2022

June 30, 2022

December 31, 2021

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Paycheck protection program

Residential real estate

Residential real estate mortgages

Indirect auto

Specialty lending

Residential solar

Other consumer

(1) Loans are summarized by business line which do not align to how the Company assesses credit risk in the estimate for credit losses under CECL.

Total loans increased by $151.4 million, or 8.2% annualized, from December 31, 2021 to March 31, 2022.

Total PPP loans as of March 31, 2022 were $51.0 million (net of unamortized fees).

following PPP loan activity occurred during three months ended March 31, 2022;

Loans are summarized by business line which does not align to how the Company assesses credit risk in the estimate for credit losses under CECL.

Total loans increased by $279.2 million, or 7.5% annualized, from December 31, 2021 to June 30, 2022.

Total PPP loans as of June 30, 2022 were $17.3 million (net of unamortized fees).

The following PPP

loan activity occurred during the six months ended June 30, 2022:

there were no PPP loan originations, $85.1 million of loans forgiven and $3.3 million of interest and fees recognized into interest income.

Excluding PPP loans, period end

loans increased $201.6 million from December 31, 2021.

Excluding PPP loans, period end loans

increased $363.2 million from December 31, 2021, or 9.9% annualized.

Commercial and industrial loans increased $142.8 million to $1.30 billion;

commercial real estate loans increased $15.3 million to $2.67 billion;

and total consumer loans increased $87.8 million to

$3.7 billion.

Total loans represent approximately 63.0% of assets as of March 31, 2022, as compared to 62.4% as of December 31, 2021.

and total consumer loans increased

$205.1 million to $3.79 billion.

Total loans represent approximately 66.4% of assets as of June 30, 2022, as compared to 62.4% as of December 31, 2021.

Allowance for Credit Losses, Provision for Loan Losses and Nonperforming Assets

Management considers the accounting policy relating to the allowance for credit losses to be a critical accounting policy given the degree of judgment exercised in evaluating the level of the

Management considers the accounting policy relating to the allowance for credit losses to be a critical accounting estimate given the degree of judgment exercised in evaluating the level of the

allowance required to estimate expected credit losses over the expected contractual life of our loan portfolio and the material effect that such judgments can have on the consolidated results of operations.

The CECL approach requires an estimate of the credit losses expected over the life of a loan (or pool of loans).

It replaces the incurred loss approach’s threshold that required recognition of a

credit loss when it was probable a loss event was incurred.

The allowance for credit losses is a valuation account that is deducted from, or added to, the loans’ amortized cost basis to present the net, lifetime amount expected to be collected on the

The allowance for credit losses is a valuation account that is deducted from, or added

to, the loans’ amortized cost basis to present the net, lifetime amount expected to be collected on the loans.

Loan losses are charged off against the allowance when management believes a loan balance is confirmed to be uncollectible.

Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off.

recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off.

Required additions or reductions to the allowance for credit losses are made periodically by charges or credits to the provision for loan losses.

These are necessary to maintain the allowance at a

level which management believes is reasonably reflective of the overall loss expected over the contractual life of the loan portfolio.

While management uses available information to recognize losses on loans, additions or reductions to the allowance

may fluctuate from one reporting period to another.

These are necessary to maintain the allowance at a level

which management believes is reasonably reflective of the overall loss expected over the contractual life of the loan portfolio.

While management uses available information to recognize losses on loans, additions or reductions to the allowance may

fluctuate from one reporting period to another.

These fluctuations are reflective of changes in risk associated with portfolio content and/or changes in management’s assessment of any or all of the determining factors discussed above.

considers the allowance for credit losses to be appropriate based on evaluation and analysis of the loan portfolio.

Management estimates the allowance balance using relevant available information, from internal and external sources, related to past events, current conditions, and reasonable and supportable

Management estimates the allowance for credit losses using relevant available information, from internal and external sources, related to past events, current conditions, and reasonable and supportable

Historical credit loss experience provides the basis for the estimation of expected credit losses.

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management judgment is required at each point in the measurement process.

The allowance for credit losses is measured on a collective (pool) basis, with both a quantitative and qualitative analysis that is applied on a quarterly basis, when similar risk characteristics

The respective quantitative allowance for each segment is measured using an econometric, discounted PD/LGD modeling methodology in which distinct, segment-specific multi-variate regression models are applied to multiple, probabilistically

weighted external economic forecasts.

Under the discounted cash flows methodology, expected credit losses are estimated over the effective life of the loans by measuring the difference between the net present value of modeled cash flows and amortized

After quantitative considerations, management applies additional qualitative adjustments so that the allowance for credit loss is reflective of the estimate of lifetime losses that exist in the loan portfolio at the balance sheet date.

The allowance for credit losses is measured on a collective (pool) basis, with both a quantitative and qualitative analysis that is applied on a quarterly basis, when similar risk characteristics exist.

The respective quantitative allowance for each segment is measured using an econometric, discounted probability of default (PD) and loss given default (LGD) modeling methodology in which distinct, segment-specific multi-variate regression models are

applied to multiple, probabilistically weighted external economic forecasts.

Under the discounted cash flows methodology, expected credit losses are estimated over the effective life of the loans by measuring the difference between the net present

value of modeled cash flows and amortized cost basis.

After quantitative considerations, management applies additional qualitative adjustments so that the allowance for credit loss is reflective of the estimate of lifetime losses that exist in the

loan portfolio at the balance sheet date.

Portfolio segment is defined as the level at which an entity develops and documents a systematic methodology to determine its allowance for credit losses.

Upon adoption of CECL, management revised

the manner in which loans were pooled for similar risk characteristics.

Management developed segments for estimating loss based on type of borrower and collateral which is generally based upon federal call report segmentation and have been combined

or subsegmented as needed to ensure loans of similar risk profiles are appropriately pooled.

Upon adoption of CECL, management revised the

manner in which loans were pooled for similar risk characteristics.

Management developed segments for estimating loss based on type of borrower and collateral which is generally based upon federal call report segmentation and have been combined or

subsegmented as needed to ensure loans of similar risk profiles are appropriately pooled.

Additional information about our Allowance for Loan Losses is included in Note 5 to the consolidated financial statements.

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appropriate based on evaluation and analysis of the loan portfolio.

The allowance for credit losses totaled $90.0 million at March 31, 2022, compared to $92.0 million at December 31, 2021 and $105.0 million at March 31, 2021.

The allowance for credit losses as a

percentage of loans was 1.18% (1.18% excluding PPP loans) at March 31, 2022, compared to 1.23% (1.24% excluding PPP loans) at December 31, 2021 and 1.38% (1.48% excluding PPP loans) at March 31, 2021.

The allowance for credit losses was 324.25% of

nonperforming loans at March 31, 2022, compared to 280.98% at December 31, 2021 and 230.50% at March 31, 2021.

The allowance for credit losses was 348.68% of nonaccrual loans at March 31, 2022, compared to 303.78% of nonaccrual loans at December 31,

2021 and compared to 241.94% at March 31, 2021.

The decrease in allowance for credit losses from December 31, 2021 and March 31, 2021 to March 31, 2022 was primarily due to the improved economic conditions in the CECL forecast, partly offset by

providing for the increase in loan balances.

The provision for loan losses was $0.6 million for three months ended March 31, 2022, compared to $3.1 million in the prior quarter and a net benefit of $2.8 million for the same period in the

Provision expense decreased from the prior quarter due to reductions in the reserve due to improved economic conditions in the CECL forecast, partly offset by providing for the increase in loan balances and a decline in net charge-offs in

the current quarter.

Provision expense increased from the same period in the prior year due primarily to the stable economic condition forecast in the current quarter as compared to improvements in the significantly deteriorated economic conditions

that took place at the end of first quarter in 2020 due to COVID-19.

Net charge-offs totaled $2.6 million during the three months ended March 31, 2022, compared to net charge-offs of $4.1 million during the fourth quarter of 2021 and $2.2 million in the first

quarter of 2021.

Net charge-offs to average loans was 14 bps for the three months ended March 31, 2022, compared to 22 bps for the fourth quarter of 2021 and 12 bps for the three months ended March 31, 2021.

As of March 31, 2022, the unfunded commitment reserve totaled $4.8 million, compared to $5.1 million as of December 31, 2021 and $5.9 million as of March 31, 2021.

The allowance for credit losses totaled $93.6 million at June 30, 2022, compared to $90.0 million at March 31, 2022 and $98.5 million at June 30, 2021.

The allowance for credit losses as a percentage of loans was 1.20%

(1.21% excluding PPP loans) at June 30, 2022, compared to 1.18% (1.18% excluding PPP loans) at March 31, 2022 and 1.31% (1.38% excluding PPP loans) at June 30, 2021.

The allowance for credit losses was 363.23% of nonperforming loans at June 30, 2022,

compared to 324.25% at March 31, 2022 and 228.41% at June 30, 2021.

The allowance for credit losses was 395.39% of nonaccrual loans at June 30, 2022, compared to 348.68% of nonaccrual loans at March 31, 2022 and compared to 242.91% at June 30, 2021.

The increase in the allowance for credit losses from March 31, 2022 to June 30, 2022 was primarily due to the deterioration in the forecast of economic conditions, which increased the level of expected credit losses, the increase in loan balances and

an additional specific reserve established during the quarter.

The decrease in allowance for credit losses from June 30, 2021 to June 30, 2022 was primarily due to the improved economic conditions in the current quarter CECL forecast as compared to

those in the same period in the prior year.

The provision for loan losses was $4.4 million for three months ended June 30, 2022, compared to $0.6 million in the prior quarter and a net benefit of $5.2 million for the same period in the prior year.

expense increased from the prior quarter driven by modest deterioration of the macro-economic forecasts, providing for loan growth and an additional specific reserve established during the quarter, partly offset by a lower level of net charge-offs.

Provision expense increased from the same period in the prior year driven by providing for loan growth and an additional specific reserve established during the quarter, and an increase in the level of allowance for loan losses resulting from less

favorable economic forecasts in the current quarter relative to improved economic forecasts that took place at the end of second quarter in 2021.

Net charge-offs totaled $0.8 million during the three months ended June 30, 2022, compared to net

charge-offs of $2.6 million during the first quarter of 2022 and $1.3 million in the second quarter of 2021.

Net charge-offs to average loans was 4 bps for the three months ended June 30, 2022, compared to 14 bps for the first quarter of 2022 and 7

bps for the three months ended June 30, 2021.

The provision for loan losses was $5.0 million for the six months ended June 30, 2022, compared to a net benefit of $8.0 million for the six months ended June 30, 2021.

Provision expense increased from the same period

in the prior year due primarily to a more stable economic condition forecast in the current year as compared to significant improvements experienced in the economic condition forecast in the prior year.

Net charge-offs totaled $3.4 million during the

six months ended June 30, 2022, compared to net charge-offs of $3.5 million during the six months ended June 30, 2021.

As of June 30, 2022, the unfunded commitment reserve totaled $5.1 million, compared to $4.8 million as of March 31, 2022 and $5.8 million as of June 30, 2021.

Nonperforming assets consist of nonaccrual loans, loans over 90 days past due and still accruing, restructured loans, other real estate owned (“OREO”) and nonperforming securities.

generally placed on nonaccrual when principal or interest payments become 90 days past due, unless the loan is well secured and in the process of collection.

Loans may also be placed on nonaccrual when circumstances indicate that the borrower may be

unable to meet the contractual principal or interest payments.

Loans are generally placed on

nonaccrual when principal or interest payments become 90 days past due, unless the loan is well secured and in the process of collection.

Loans may also be placed on nonaccrual when circumstances indicate that the borrower may be unable to meet the

contractual principal or interest payments.

The threshold for evaluating classified and nonperforming loans specifically evaluated for impairment is $1.0 million.

OREO represents property acquired through foreclosure and is valued

at the lower of the carrying amount or fair value, less any estimated disposal costs.

March 31, 2022

OREO represents property acquired through foreclosure and is valued at the lower of the

carrying amount or fair value, less any estimated disposal costs.

June 30, 2022

December 31, 2021

(Dollars in thousands)

N onaccrual loans:

Nonaccrual loans:

Troubled debt restructured loans

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Total allowance for loan losses to nonaccrual loans

Total nonperforming assets were $27.8 million at March 31, 2022, compared to $32.9 million at December 31, 2021 and $46.9 million at March 31, 2021.

Nonperforming loans at March 31, 2022 were $27.8

Total nonperforming assets were $25.8 million at June 30, 2022, compared to $32.9 million at December 31, 2021 and $43.9 million at June 30, 2021.

Nonperforming loans at June 30, 2022 were $25.8

million, or 0.33% of total loans (0.33% excluding PPP loan originations), compared with $32.7 million, or 0.44% of total loans (0.44% excluding PPP loan originations) at December 31, 2021 and $43.1 million, or 0.57% of total loans (0.60% excluding

PPP loan originations) at March 31, 2021.

PPP loan originations) at June 30, 2021.

The decrease in nonperforming loans primarily resulted from a reduction in commercial and residential mortgage nonaccrual loans.

Total nonaccrual loans were $25.8 million or 0.33% of total loans at March 31,

2022, compared to $30.3 million or 0.40% of total loans at December 31, 2021 and compared to $43.4 million or 0.57% of total loans at March 31, 2021.

Past due loans as a percentage of total loans was 0.24% at March 31, 2022 (0.25% excluding PPP loan

originations), down from 0.29% at December 31, 2021 (0.29% excluding PPP loan originations) and up slightly from 0.22% at March 31, 2021 (0.23% excluding PPP loan originations).

In addition to nonperforming loans discussed above, the Company has also identified approximately $66.7 million in potential problem loans at March 31, 2022 as compared to $74.9 million at December

31, 2021 and $136.7 million at March 31, 2021.

Total nonaccrual loans were $23.7 million or 0.30% of total loans at June 30,

2022, compared to $30.3 million or 0.40% of total loans at December 31, 2021 and compared to $40.6 million or 0.54% of total loans at June 30, 2021.

Past due loans as a percentage of total loans was 0.40% at June 30, 2022 (0.40% excluding PPP loan

originations), up from 0.29% at December 31, 2021 (0.29% excluding PPP loan originations) and up from 0.26% at June 30, 2021 (0.27% excluding PPP loan originations).

The increase in past due loans in the second quarter of 2022 was almost entirely due

to one commercial credit which returned to current status in early July.

In addition to nonperforming loans discussed above, the Company has also identified approximately $56.0 million in potential problem loans at June 30, 2022 as compared to $74.9 million at December 31,

2021 and $120.5 million at June 30, 2021.

Potential problem loans are loans that are currently performing, with a possibility of loss if weaknesses are not corrected.

Such loans may need to be disclosed as nonperforming at some time in the

Potential problem loans are classified by the Company’s loan rating system as “substandard.” The decrease in potential problem loans from March 31, 2021 is primarily due to the improved economic conditions which resulted in loans coming off

deferral and returning to payment.

Such loans may need to be disclosed as nonperforming at some time in the future.

Potential problem loans are classified by the Company’s loan rating system as “substandard.” The decrease in potential problem loans from June 30, 2021 is primarily due to the improved economic conditions which resulted in loans coming off deferral

and returning to payment.

Higher risk industries include entertainment, restaurants, retail, healthcare and accommodations.

As of March 31, 2022, 8.8% of the Company’s outstanding loans were in higher risk industries due to the COVID-19

As of June 30, 2022, 8.5% of the Company’s outstanding loans were in higher risk industries due to the COVID-19 pandemic.

Management cannot predict the extent to which economic conditions may worsen or other factors, which may impact borrowers and the potential problem loans.

Accordingly, there can be no assurance that other loans will not become over 90 days

past due, be placed on nonaccrual, become restructured or require increased allowance coverage and provision for loan losses.

To mitigate this risk the Company maintains a diversified loan portfolio, has no significant concentration in any particular

industry and originates loans primarily within its footprint.

Total deposits were $10.5 billion at March 31, 2022, up $227.2 million, or 2.2%, from December 31, 2021.

Accordingly, there can be no assurance that other loans will not become over 90 days past due,

be placed on nonaccrual, become restructured or require increased allowance coverage and provision for loan losses.

To mitigate this risk the Company maintains a diversified loan portfolio, has no significant concentration in any particular industry

and originates loans primarily within its footprint.

Total deposits were $10.03 billion at June 30, 2022, down $0.21 billion, or 2.0%, from December 31, 2021.

Total average deposits increased $0.66 billion, or 6.8%, from the same period last year.

growth was driven primarily by an increase of $391.1 million, or 11.8%, in demand deposits, combined with an increase in interest-bearing deposits of $586.2 million, or 9.8%, due to growth in money market deposit account (“MMDA”), NOW deposit account

and savings deposit accounts, partly offset by a decrease in time accounts.

The high rate of deposit growth was primarily due to funding of PPP loans and various government support programs.

growth was driven primarily by an increase of $279.4 million, or 8.1%, in demand deposits, combined with an increase in interest-bearing deposits of $376.3 million, or 6.1%, due to growth in money market deposit accounts (“MMDA”), NOW deposit

accounts and savings deposit accounts, partly offset by a decrease in time accounts.

Borrowed Funds

The Company’s borrowed funds consist of short-term borrowings and long-term debt.

Short-term borrowings totaled $65.0 million at March 31, 2022 compared to $97.8 million at December 31, 2021.

Long-term debt was $14.0 million at March 31, 2022 and December 31, 2021.

Short-term borrowings totaled $62.5 million at June 30, 2022 compared to $97.8 million at December 31, 2021.

debt was $3.3 million at June 30, 2022 compared to $14.0 million at December 31, 2021.

For more information about the Company’s borrowing capacity and liquidity position, see “Liquidity Risk” below.

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On June 23, 2020, the Company issued $100.0 million of 5.00% fixed-to-floating rate subordinated notes due 2030.

The subordinated notes, which qualify as Tier 2 capital, bear interest at an annual

rate of 5.00%, payable semi-annually in arrears commencing on January 1, 2021, and a floating rate of interest equivalent to the three-month Secured Overnight Financing Rate (“SOFR”) plus a spread of 4.85%, payable quarterly in arrears commencing on

October 1, 2025.

The subordinated notes, which qualify as Tier 2 capital, bear interest at an annual rate

of 5.00%, payable semi-annually in arrears commencing on January 1, 2021, and a floating rate of interest equivalent to the three-month Secured Overnight Financing Rate plus a spread of 4.85%, payable quarterly in arrears commencing on October 1,

The subordinated debt issuance cost, which is being amortized on a straight-line basis, was $2.2 million.

As of March 31, 2022 and December 31, 2021 the subordinated debt net of unamortized issuance costs was $98.6 million and $98.5

million, respectively.

As of June 30, 2022 and December 31, 2021 the subordinated debt net of unamortized issuance costs was $98.7 million and $98.5 million,

respectively.

Capital Resources

Stockholders’ equity of $1.2 billion represented 9.90% of total assets at March 31, 2022 compared with $1.3 billion, or 10.41% of total assets, as of December 31, 2021.

Stockholders’ equity

decreased $48.2 million from December 31, 2021 as net income of $39.1 million for the three months ending March 31, 2022 was offset by a decrease in accumulated other comprehensive income of $68.0 million due to the change in the market value of

securities available for sale, dividends declared of $12.1 million during the period and repurchase of common stock of $8.2 million.

The deferred tax asset related to the unrealized losses in investment securities decreased $22.8 million from

December 31, 2021.

The Company purchased 217,100 shares of its common stock during the first quarter of 2022 at an average price of $37.55 per share under its previously announced share repurchase program.

March 31, 2022, there were 1,782,900 shares available for repurchase under this plan authorized on December 20, 2021 and set to expire on December 31, 2023.

As the capital ratios in the following table indicate, the Company remained “well capitalized” at March 31, 2022 under applicable bank regulatory requirements.

Capital measurements are well in

excess of regulatory minimum guidelines and meet the requirements to be considered well capitalized for all periods presented.

To be considered well capitalized, tier 1 leverage, common equity tier 1 capital, tier 1 capital and total risk-based

capital ratios must be 5%, 6.5%, 8% and 10%, respectively.

Stockholders’ equity of $1.19 billion represented 10.14% of total assets at June 30, 2022 compared with $1.3 billion, or 10.41% of total assets, as of December 31, 2021.

Stockholders’ equity decreased

$61.9 million from December 31, 2021 driven by the $101.4 million decrease in accumulated other comprehensive income due to the change in market value of securities available for sale, dividends declared of $24.1 million and the repurchase of common

stock of $14.7 million, partly offset by net income of $76.9 million for the six months ending June 30, 2022.

The deferred tax asset related to the unrealized losses in investment securities increased $34.0 million from December 31, 2021.

The Company purchased 182,900 shares of its common stock during the second quarter of 2022 at an average price of $35.88 per share under its previously announced share repurchase program.

As of June 30,

2022, there were 1,600,000 shares available for repurchase under this plan authorized on December 20, 2021 and set to expire on December 31, 2023.

The Board of Directors considers the Company’s capital levels, earnings position and earnings potential when making dividend decisions.

The Board of Directors approved a third-quarter 2022 cash dividend

of $0.30 per share at a meeting held on July 25, 2022.

The dividend, which represents a $0.02 per share, or 7.1% increase, will be paid on September 15, 2022 to stockholders of record as of September 1, 2022.

As the capital ratios in the following table indicate, the Company remained “well capitalized” at June 30, 2022 under applicable bank regulatory requirements.

Capital measurements are well in excess of

regulatory minimum guidelines and meet the requirements to be considered well capitalized for all periods presented.

To be considered well capitalized, tier 1 leverage, common equity tier 1 capital, tier 1 capital and total risk-based capital ratios

must be 5%, 6.5%, 8% and 10%, respectively.

Capital Measurements

March 31, 2022

June 30, 2022

December 31, 2021

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Non-GAAP measure - Stockholders’ equity less goodwill and intangible assets divided by total assets less goodwill and intangible assets.

In March 2020, the Office of Comptroller of the Currency (“OCC”), the Board of Governors of the Federal Reserve System, and the Federal Deposit Insurance Corporation (“FDIC”) announced an interim

In March 2020, the Office of the Comptroller of the Currency (“OCC”), the Board of Governors of the Federal Reserve System, and the Federal Deposit Insurance Corporation (“FDIC”) announced an interim

final rule to delay the estimated impact on regulatory capital stemming from the implementation of CECL.

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Interest rate risk is the most significant market risk affecting the Company.

Other types of market risk, such as foreign currency exchange rate risk and commodity price risk, do not arise in the

normal course of the Company’s business activities or are immaterial to the results of operations.

Other types of market risk, such as foreign currency exchange rate risk and commodity price risk, do not arise in the normal

course of the Company’s business activities or are immaterial to the results of operations.

Interest rate risk is defined as an exposure to a movement in interest rates that could have an adverse effect on the Company’s net interest income.

Net interest income is susceptible to interest

rate risk to the degree that interest-bearing liabilities mature or reprice on a different basis than earning assets.

When interest-bearing liabilities mature or reprice more quickly than earning assets in a given period, a significant increase in

market rates of interest could adversely affect net interest income.

Net interest income is susceptible to interest rate

risk to the degree that interest-bearing liabilities mature or reprice on a different basis than earning assets.

When interest-bearing liabilities mature or reprice more quickly than earning assets in a given period, a significant increase in market

rates of interest could adversely affect net interest income.

Similarly, when earning assets mature or reprice more quickly than interest-bearing liabilities, falling interest rates could result in a decrease in net interest income.

To manage the Company’s exposure to changes in interest rates, management monitors the Company’s interest rate risk.

The Management’s Asset Liability Committee (“ALCO”) meets monthly to review the

Company’s interest rate risk position and profitability and to recommend strategies for consideration by the Board of Directors.

Management also reviews loan and deposit pricing and the Company’s securities portfolio, formulates investment and

funding strategies and oversees the timing and implementation of transactions to assure attainment of the Board’s objectives in the most effective manner.

Notwithstanding the Company’s interest rate risk management activities, the potential for

changing interest rates is an uncertainty that can have an adverse effect on net income.

Management’s Asset Liability Committee (“ALCO”) meets monthly to review the Company’s

interest rate risk position and profitability and to recommend strategies for consideration by the Board of Directors.

Management also reviews loan and deposit pricing and the Company’s securities portfolio, formulates investment and funding

strategies and oversees the timing and implementation of transactions to assure attainment of the Board’s objectives in the most effective manner.

Notwithstanding the Company’s interest rate risk management activities, the potential for changing

interest rates is an uncertainty that can have an adverse effect on net income.

In adjusting the Company’s asset/liability position, the Board and management aim to manage the Company’s interest rate risk while minimizing net interest margin compression.

At times, depending on

the level of general interest rates, the relationship between long and short-term interest rates, market conditions and competitive factors, the Board and management may determine to increase the Company’s interest rate risk position somewhat in

order to increase its net interest margin.

At times, depending on the

level of general interest rates, the relationship between long and short-term interest rates, market conditions and competitive factors, the Board and management may determine to increase the Company’s interest rate risk position somewhat in order to

increase its net interest margin.

The Company’s results of operations and net portfolio values remain vulnerable to changes in interest rates and fluctuations in the difference between long and short-term interest rates.

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securities along with any optionality within the deposits and borrowings.

The model is first run under an assumption of a flat rate scenario (i.e.

no change in current interest rates) with a static balance sheet.

The model is first run under an assumption of a flat rate scenario (e.g., no change in current interest rates) with a static balance sheet.

Three additional models are run in

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In the declining rate scenario, net interest income is projected to decrease when compared to the forecasted net interest income in the flat rate scenario through the simulation period.

decrease in net interest income is a result of earning assets rolling over at lower yields while interest-bearing liabilities remain at or near their floors.

In the rising rate scenarios, net interest income is projected to experience a modest

increase from the flat rate scenario;

The decrease in

net interest income is a result of earning assets repricing and rolling over at lower yields at a faster pace than interest-bearing liabilities decline and/or reach their floors.

In the rising rate scenarios, net interest income is projected to

experience an increase from the flat rate scenario;

however, the potential impact on earnings may be affected by the ability to lag deposit repricing on NOW, savings, MMDA and time accounts.

Net interest income for the next twelve months in the +200/+100/-50 bp

scenarios, as described above, is within the internal policy risk limits of not more than a 7.5% change in net interest income.

The following table summarizes the percentage change in net interest income in the rising and declining rate scenarios

over a 12-month period from the forecasted net interest income in the flat rate scenario using the March 31, 2022 balance sheet position:

Net interest income for the next twelve months in the

+200/+100/-50 bp scenarios, as described above, is within the internal policy risk limits of not more than a 7.5% change in net interest income.

The following table summarizes the percentage change in net interest income in the rising and declining

rate scenarios over a 12-month period from the forecasted net interest income in the flat rate scenario using the June 30, 2022 balance sheet position:

Interest Rate Sensitivity Analysis

Change in interest rates

(in basis points)

Percent change in

(in bps points)

net interest income

The Company anticipates that the trajectory of net interest income will depend significantly on the timing and path of the recovery from the recent economic downturn, related inflationary pressures

and FOMC monetary policy.

The Company anticipates that the trajectory of net interest income will continue to depend significantly on the timing and path of the recovery from the recent economic downturn, related inflationary

pressures and FOMC monetary policy.

In response to the economic impact of the pandemic, the federal funds rate was reduced by 150 bps in March 2020, term interest rates fell sharply across the yield curve and the Company reduced deposit rates.

pressures have resulted in a higher overall yield curve and expectations for material increases to short term interest rates.

With deposit rates near their historic lows, the Company will focus on managing deposit expense in a rising rate environment

while allowing assets to reprice upward.

It is important to note that the current competitive lending environment may limit the Company’s ability to increase asset yields commensurate with relative interest rates.

Inflationary pressures have resulted in a higher overall yield curve, Fed Funds increases of 150 bps so far in 2022 and expectations for continued increases to short-term interest rates.

With deposit rates near their historic lows, the Company will

focus on managing deposit expense in a rising rate environment while allowing assets to reprice upward.

Liquidity Risk

Liquidity risk arises from the possibility that we may not be able to satisfy current or future financial commitments or may become unduly reliant on alternate funding sources.

Liquidity risk arises from the possibility that the Company may not be able to satisfy current or future financial commitments or may become unduly reliant on alternate funding sources.

The objective of

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Liquidity policies must also provide the

flexibility to implement appropriate strategies, regular monitoring of liquidity and testing of the contingent liquidity plan.

flexibility to implement appropriate strategies, along with regular monitoring of liquidity and testing of the contingent liquidity plan.

Requirements change as loans grow, deposits and securities mature and payments on borrowings are made.

Liquidity management

includes a focus on interest rate sensitivity management with a goal of avoiding widely fluctuating net interest margins through periods of changing economic conditions.

Loan repayments and maturing investment securities are a relatively predictable

source of funds.

However, deposit flows, calls of investment securities and prepayments of loans and mortgage-related securities are strongly influenced by interest rates, the housing market, general and local economic conditions, and competition in

the marketplace.

management includes a focus on interest rate sensitivity management with a goal of avoiding widely fluctuating net interest margins through periods of changing economic conditions.

Loan repayments and maturing investment securities are a relatively

predictable source of funds.

competition in the marketplace.

Management continually monitors marketplace trends to identify patterns that might improve the predictability of the timing of deposit flows or asset prepayments.

The primary liquidity measurement the Company utilizes is called “Basic Surplus,” which captures the adequacy of its access to reliable sources of cash relative to the stability of its funding mix

of average liabilities.

average liabilities.

This approach recognizes the importance of balancing levels of cash flow liquidity from short and long-term securities with the availability of dependable borrowing sources, which can be accessed when necessary.

2022, the Company’s Basic Surplus measurement was 25.3% of total assets or approximately $3.1 billion as compared to the December 31, 2021 Basic Surplus of 28.5% or $3.4 billion, and was above the Company’s minimum of 5% (calculated at $607.4 million

and $600.6 million, of period end total assets at March 31, 2022 and December 31, 2021, respectively) set forth in its liquidity policies.

At March 31, 2022 and December 31, 2021, Federal Home Loan Bank (“FHLB”) advances outstanding totaled $14.0 million.

At March 31, 2022 and December 31, 2021, the Bank had $8.0 million and $81.0

million, respectively, of collateral encumbered by municipal letters of credit.

The Bank is a member of the FHLB system and had additional borrowing capacity from the FHLB of approximately $1.8 billion at March 31, 2022 and $1.7 billion at December

In addition, unpledged securities could have been used to increase borrowing capacity at the FHLB by an additional $827.0 million and $999.1 million at March 31, 2022 and December 31, 2021, respectively, or used to collateralize other

borrowings, such as repurchase agreements.

The Company also has the ability to issue brokered time deposits and to borrow against established borrowing facilities with other banks (federal funds), which could provide additional liquidity of $2.1

billion at March 31, 2022 and $2.0 billion at December 31, 2021.

At June 30, 2022,

the Company’s Basic Surplus measurement was 22.2% of total assets, or $2.60 billion, as compared to the December 31, 2021 Basic Surplus of 28.5%, or $3.43 billion, and was above the Company’s minimum of 5% (calculated at $586.0 million and $600.6

million, of period end total assets as June 30, 2022 and December 31, 2021, respectively) set forth in its liquidity policies.

At June 30, 2022 and December 31, 2021, Federal Home Loan Bank (“FHLB”) advances outstanding totaled $3.3 million and $14.0 million, respectively.

At June 30, 2022 and December 31, 2021, the Bank had

$8.0 million and $81.0 million, respectively, of collateral encumbered by municipal letters of credit.

The Bank is a member of the FHLB system and had additional borrowing capacity from the FHLB of approximately $1.68 billion at June 30, 2022 and

$1.67 billion at December 31, 2021.

In addition, unpledged securities could have been used to increase borrowing capacity at the FHLB by an additional $1.05 billion and $1.00 billion at June 30, 2022 and December 31, 2021, respectively, or used to

collateralize other borrowings, such as repurchase agreements.

The Company also has the ability to issue brokered time deposits and to borrow against established borrowing facilities with other banks (federal funds), which could provide additional

liquidity of $1.99 billion at June 30, 2022 and $2.03 billion at December 31, 2021.

In addition, the Bank has a “Borrower-in-Custody” program with the FRB with the addition of the ability to pledge automobile loans as collateral.

At March 31, 2022 and December 31,

2021, the Bank had the capacity to borrow $574.2 million and $580.8 million, respectively, from this program.

The Company’s internal policies authorize borrowings up to 25% of assets.

Under this policy, remaining available borrowing capacity totaled

$3.0 billion at March 31, 2022 and $2.9 billion at December 31, 2021.

At June 30, 2022 and

December 31, 2021, the Bank had the capacity to borrow $608.5 million and $580.8 million, respectively, from this program.

The Company’s internal policies authorize borrowing up to 25% of assets.

Under this policy, remaining available borrowing

capacity totaled $2.90 billion at June 30, 2022 and $2.89 billion at December 31, 2021.

This Basic Surplus approach enables the Company to appropriately manage liquidity from both operational and contingency perspectives.

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Investment decisions and deposit pricing strategies are impacted by the liquidity position.

The Company considered its Basic Surplus position to be strong.

The Company considers its Basic Surplus position to be strong.

However, certain events may adversely impact

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and adding additional sources of liquidity.

At March 31, 2022, a portion of the Company’s loans and securities were pledged as collateral on borrowings.

Therefore, once on-balance-sheet liquidity is depleted, future growth of earning assets

will depend upon the Company’s ability to obtain additional funding, through growth of core deposits and collateral management and may require further use of brokered time deposits or other higher cost borrowing arrangements.

At June 30, 2022, a portion of the Company’s loans and securities were pledged as collateral on borrowings.

Therefore, once on-balance-sheet liquidity is depleted, future growth of earning assets will

depend upon the Company’s ability to obtain additional funding, through growth of core deposits and collateral management and may require further use of brokered time deposits or other higher cost borrowing arrangements.

The Company’s primary source of funds is the Bank.

Certain restrictions exist regarding the ability of the subsidiary bank to transfer funds to the Company in the form of cash dividends.

approval of the OCC is required to pay dividends when a bank fails to meet certain minimum regulatory capital standards or when such dividends are in excess of a subsidiary bank’s earnings retained in the current year plus retained net profits for

the preceding two years as specified in applicable OCC regulations.

At March 31, 2022, approximately $109.5 million of the total stockholders’ equity of the Bank was available for payment of dividends to the Company without approval by the OCC.

Bank’s ability to pay dividends is also subject to the Bank being in compliance with regulatory capital requirements.

The approval of

the OCC is required to pay dividends when a bank fails to meet certain minimum regulatory capital standards or when such dividends are in excess of a subsidiary bank’s earnings retained in the current year plus retained net profits for the preceding

two years as specified in applicable OCC regulations.

At June 30, 2022, approximately $120.8 million of the total stockholders’ equity of the Bank was available for payment of dividends to the Company without approval by the OCC.

The Bank’s ability

to pay dividends is also subject to the Bank being in compliance with regulatory capital requirements.

The Bank is currently in compliance with these requirements.

Under the State of Delaware General Corporation Law, the Company may

declare and pay dividends either out of accumulated net retained earnings or capital surplus.

Under the State of Delaware General Corporation Law, the Company may declare and pay

dividends either out of accumulated net retained earnings or capital surplus.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Information called for by Item 3 is contained in the Liquidity and Interest Rate Sensitivity Management section of the Management’s Discussion and Analysis of Financial Condition and Results of

Information called for by Item 3 is contained in the Liquidity and Interest Rate Sensitivity Management section of the Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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