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October 7, 2022

As many of you know, Integrity is the third local community bank for which I have been the President & CEO. I have written many President’s Reports over the years. In many ways, this President’s Report has been both the easiest and the hardest for me to write.

For the “easy” part of this Report, your Bank opened on May 3, 2021. On the surface, our overarching challenge for us was to grow your Bank’s loans and deposits as quickly as possible in a safe and sound manner. But there were other pressing matters that we had to address in our “spare time.” Much remained to be done for Integrity to become the bank that we envisioned it to be.

First, we had to complete our initial capital offering with several post-opening phases. The result of this process was total invested capital of $24.4 million, well above the minimum capital of $20.0 million for final regulatory approval of our applications to open your Bank.

Second, over the course of last year, we spent countless hours fine-tuning our deposit banking operations and our business banking software. In other words, we had to customize our operations and software to enable us to deliver to our prospective business clients the customized banking services that are now the hallmarks of your Bank.

Third, all new banks receive heightened regulatory scrutiny during their first three years of operation. This period of time is known as the special supervision period. New banks have initial six-month regulatory examinations and then, if appropriate, move into the normal twelve-month examination cycle. You can only imagine the pressures that these immediate six-month examinations place on new banks. Nevertheless, we welcomed our six-month examination to assist us in uncovering any operational matters requiring our attention for the benefit of the Bank and our shareholders.

In addition to the examination process, during this special supervision period, bank regulators closely scrutinize, on a quarterly basis, a new bank’s actual performance compared to its projected performance under its Business Plan that was included in the new bank’s regulatory applications to open for business. We maintain an ongoing dialogue with our bank regulators to provide them with variance reports and explanations for all material variations from our Business Plan.

Fortunately for us, Integrity has a veteran banking team with many years of bank regulatory experience. We had anticipated these additional regulatory requirements for a new bank and are dealing with these requirements in the ordinary course of business.

Considering all of this and our small team of thirteen employees, we are very pleased with the growth of Integrity’s assets to $81.8 million on June 30, 2022. It is almost beyond comprehension that such a small team could create such an outstanding business bank over such a short period of time.

Well, that is the “easy” part of this Report. The “hard” part of this Report is to give you specific insight into your Bank’s growth in this fiscal year in the face of high inflation, recessionary pressures on our local economy, and rising interest rates. I do not have a crystal ball, but I can point to some possibilities for your Bank in the rest of 2022 and early 2023.

Regarding recession, it may be counter-intuitive, but a recession creates business development opportunities for a new bank that is not distracted by existing problem loans in its portfolio. In a recession, some good businesses with loans may encounter difficulties with their existing banks from poorly structured loans administered by inattentive and/or unsophisticated lending officers. Often, the fresh eyes of a new bank with sophisticated lending officers can easily transform these loans into properly structured loans at the new bank for the mutual benefit of the new bank and these businesses.

In the same vein, inflation places intense pressures on small businesses from rapidly increasing costs for labor, materials, services, and inventory. It is often difficult for these businesses to pass on all of these cost increases to their customers for various reasons. This can result in short-term unnecessary pressures on these businesses from poorly structured loans. Once again, fresh looks by a new bank at the outstanding loans of these small businesses can turn stressed lending relationships with existing banks into properly structured loans with a new bank eliminating the stresses on the small businesses from their existing loans.

On the other hand, the current economic environment has provided other investment opportunities that we, as a new bank, are able to use to our advantage. Interest rate increases are the primary tool of the Federal Reserve System to control inflation, and those increases are reflected in the yields of safe and sound United States Treasury and United States government-sponsored securities. Interest income from investments in these securities have become a significant part of our total interest income to supplement our interest income from our loan portfolio.

The “hard part” of this Report would be (1) to project correctly the future levels of inflation and interest rates and timelines for these levels to occur together with the likelihood and severity of any related recession and (2) then to project correctly the future opportunities and pitfalls for your Bank from these events. If I were to try to make these projections now, it would be sheer speculation and may undermine your confidence in me and your Bank. Suffice it to say, your Bank has strong capital, an experienced and thoughtful lending team, and no distractions from existing potential problem loans which enable us to take advantage of any opportunities that may arise in an inflationary and/or recessionary environment. Your Bank has no fear of inflation and recession and sees more opportunities than pitfalls in that economic environment.

From the days when the Bank’s organizers and I first began discussing opening your Bank, we had great expectations for your Bank but knew that there were no certainties. The past year has given us much more clarity on your Bank’s potential for great success. We have a strong business banking service platform that is second to none for business banking. We have had warm receptions from the vast majority of our business banking prospects on whom we have made direct personal calls. We are receiving referrals for new prospects from many of our existing clients. Our reputation for business banking excellence is growing in our community.

Are we pleased with our progress so far? Yes. Are we satisfied? No. We see so much opportunity for your Bank in the years ahead that we sometimes find it hard to focus on today. To paraphrase a famous quote by Joe Namath, “We can’t wait until tomorrow because we get better every day.”

Mike Ives

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