PRESIDENT’S MESSAGE TO SHAREHOLDERS OF INTEGRITY BANK FOR BUSINESSAugust 7, 2024 The progress of our Bank is not measurable by historical standards- nor should it be. Historically, from 2008 through 2021, following the progress of community banks had been a straightforward exercise. Interest rates stayed low and relatively stable, and credit quality was excellent throughout this period. The progress of a new community bank could be easily seen from loan growth, deposit growth, and income growth. However, over the past several years, the dramatic increase in the Fed Funds Rate of 525 basis points and liquidity pressures on banks made this simple approach to determining a new community bank’s progress questionable at best. In other words, has a new community bank really improved if it has grown its deposits by pricing its existing and new deposits at the highest local rates and then investing this “hot money” in higher yielding, but higher risk commercial real estate loans? To ask this question is but to answer it. At Integrity, we have carefully managed our balance sheet to avoid undermining our safety and soundness for the future. We have maintained our focus on relationship clients with core deposits and core loans. We have not reached out for “hot money” to fund higher yielding, higher risk commercial real estate loans. Pundits continue to debate whether a recession will occur soon. We believe that we have little to fear about what impact, if any, that a recession might have on our Bank because of our loan underwriting strategy. We have underwritten our loans based on the borrowers’ overall cash flows and liquidity. This provides cushions against business slowdowns or property vacancies. This is the same approach to loan underwriting that I used at Heritage Bank that served that Bank so well during the Great Recession. Our core Bank continues to grow beneath the surface. Total loans and total deposits publicly announced by Integrity only tell part of this story. Since we opened in 2021, many shareholders and friends of the Bank placed deposits and loans with the Bank for limited periods of time to help the Bank move forward quickly and reduce initial operating losses. Now, most of these transitional loans and deposits have left the Bank. We are very grateful to these shareholders and supporters of our Bank for their assistance. They will always be considered special friends of our Bank who will be given the greatest respect and gratitude in the years ahead. Previously, I have not tried to quantify the total amounts of these transitional deposits and loans at our Bank. It may be helpful to you for me to give you today some specific information on these transitional deposits and loans. On June 30, 2024, the Bank had net loans of approximately $41,480,000, an increase of 5.9% above the Bank’s net loans of approximately $39,169,000 on June 30, 2023. However, the Bank’s loans on June 30, 2023, included a short-term transitional loan of $3.0 million that was repaid in November 2023. Reducing the Bank’s net loans on June 30, 2023, by the amount of this transitional loan leaves the Bank’s core loans on that date at approximately $36,169,000. Comparing this adjusted balance of net loans on June 30, 2023, with the balance for net loans on June 30, 2024 shows an increase in core net loans of approximately $5.3 million or 14.7%. On June 30, 2024, the Bank had noninterest-bearing demand deposits of approximately $26,233,000 compared to noninterest-bearing demand deposits of approximately $30,582,000 on June 30, 2023. Noninterest-bearing demand deposits are the very essence of core deposits, and these balances have been decreasing significantly at most banks because of the high deposit rate environment. On the surface, a decline of approximately $4.35 million or 14.2% in the Bank’s noninterest-bearing demand deposits may appear disturbing. Once again, the Bank’s numbers are better beneath the surface. Our noninterest-bearing demand deposits on June 30, 2023, included approximately $2.77 million of transitional deposits. Reducing the Bank’s noninterest-bearing deposits by this transitional amount leaves the Bank’s core noninterest-bearing deposits on that date at approximately $27,812,000. Comparing this balance for core noninterest-bearing demand deposits on June 30, 2023, with the balance for noninterest-bearing demand deposits on June 30, 2024, shows a small decrease in our noninterest-bearing deposits of $1,579,000 or only 6.0% in a high interest rate environment. I further note that in July, our average noninterest-bearing demand deposits were $27,695,000, essentially the same amount as the balance in our noninterest-bearing deposits on June 30, 2023. This is further evidence that our noninterest-bearing demand deposits have remained a relatively stable source of funding for the Bank. It also shows that undue focus on numbers at specific points in time don’t necessarily tell the whole story. From this, we believe that we have a relatively stable base of core loans and deposits with relationship clients from which the Bank can move forward. So, the question is what are we going to do now? On May 3, 2024, Integrity celebrated the third anniversary of its opening for business. Anniversaries are milestones in and of themselves. This anniversary was of great importance for the Bank. On that date, the three-year special supervisory period for every new bank expired for Integrity. Among other things, Integrity may now recruit new executive officers or add new lines of business in a streamlined fashion just like any other existing community bank without the special regulatory filings and approvals required of a new bank. During the past calendar quarter, the Bank had a net loss of approximately $188,000. Several factors exacerbated this loss. The Bank engaged a consultant to assist the Bank with its development of a new strategic plan after the expiration of the Bank’s special supervisory period. There were duplicative compensation expenses from personnel transitions together with appropriate employee salary increases. The Bank had much more limited tax benefits from its operating loss for various reasons that are not apparent on the surface. Finally, the Bank’s interest income remained relatively stable, but interest expense continued to rise from the inverted yield curve. As I told you earlier, we are actively recruiting a new executive officer to replace Ms. Anne Vanderberry, our current Chief Financial Officer, who is retiring on September 30th. Ms. Vanderberry had a wide range of responsibilities so the executive replacing her will need to be able to handle these diverse responsibilities, as well as the normal responsibilities of the chief financial officer of a small community bank. Also, we are actively recruiting a new Chief Lending Officer to assume some of the responsibilities of our current Chief Administrative officer/Chief Lending Officer, Mr. Leigh Keogh. The new Chief Lending Officer will be responsible for personal business development as well as recruiting and supervising additional lending officers over time. Meanwhile, Mr. Keogh will continue to focus on his ever-expanding administrative responsibilities as well as loan administration and directly handling some specific types of loans. We hope to announce in the near future the successful completion of our recruiting efforts for these two executives. With these two additions, we believe that the staffing of our Executive Management Team will then be complete. Over the short term, this will add to our compensation expense without any immediate offsetting income. However, filling these positions now will give Integrity a strong framework for growth well into the future. In addition, we are implementing a systematic outreach program to introduce Integrity to a number of our local businesses who may be unfamiliar with Integrity. We do not yet have this program in place but expect to start our outreach in September. This will be part of a change in our operating strategy together with adding new senior executives. All in all, it’s time for Integrity to be more aggressive with the expiration of our special supervisory period and the likelihood of falling interest rates. As you may have expected, on June 30th, the Bank had no loans past due for 30 days, no nonperforming loans, no repossessed assets, and no real estate owned. This has been the case since the Bank opened in 2021. Finally, I have attached a current balance sheet and income statement with some supplemental information for your review in advance of our Annual Report. We will start delivering these financial statements to you quarterly with my shareholder letters. More detail can always be found in the Bank’s quarterly Call Report filed on the FDIC Central Data Repository website (www.ffiec.gov) using the Bank’s RSSD ID No. 5543735. We are excited about the future of Integrity Bank for Business. The journey has just begun! Mike Michael S. Ives
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