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Item 7. Management’s Discussion and Analysis

2022-03-15 compared with 2021-03-15 · 344 added, 216 removed, 435 unchanged (56% of the section changed)

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The following discussion, analysis and comparisons generally focus on the operating results for the years ended December 31, 2021 and 2020.

Discussion, analysis and comparisons of the years ended December 31, 2019 and 2018 that are not included in this Form 10-K can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of the Company's Annual Report on Form 10-K for the year ended December 31, 2019.

Discussion, analysis and comparisons of the years ended December 31, 2020 and 2019 that are not included in this Annual Report on Form 10-K can be found in “Management's Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2020.

This discussion and analysis includes certain forward-looking statements that involve risks, uncertainties and assumptions.

You should review the “Risk Factors” section of this report for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by such forward-looking statements.

See “Cautionary Note Regarding Forward-Looking Statements” at the beginning of this report.

Impact of the COVID-19 Pandemic

The year 2020 was characterized by continued uncertainty as the coronavirus (“COVID-19”) pandemic persisted globally, resulting in high unemployment and market volatility.

However, federal, state and local governments have taken steps to reopen and stimulate economies, evidenced by improving economic indicators as the fourth quarter 2020 progressed.

While the effects of COVID-19 did have an impact on our operating results as of December 31, 2020, we believe the impact was consistent with the effects of COVID-19 on the overall banking industry.

The low interest rate environment following Federal Reserve rate cuts in the first quarter 2020 had a negative impact on our variable rate assets throughout 2020.

See also the “Cautionary Note Regarding Forward-Looking Statements” at the beginning of this report.

COVID-19 Pandemic

The year 2021 was characterized by continued uncertainty as the coronavirus (“COVID-19”) pandemic persisted globally.

However, federal, state and local governments have continued to take additional steps to reopen and stimulate economies, evidenced by improving economic indicators as 2021 progressed.

While the effects of COVID-19 did have an impact on our operating results during 2021, we believe the impact was consistent with the effects of COVID-19 on the overall banking industry.

The extent to which COVID-19 will continue to impact our business will depend on numerous evolving factors and future developments that we are not able to predict, including potential new variants of COVID-19, the effectiveness of continuing containment measures, including the speed of the ongoing vaccine distribution effort, the efficacy of the various vaccines, and how quickly and to what extent normal economic and operating conditions can resume.

COVID-19 impacted our business during 2021, as the low interest rate environment following Federal Reserve rate cuts in the first quarter 2020 had a negative impact on some variable rate assets throughout 2021.

However, the low interest rate environment has also allowed us to reprice our interest-bearing deposits at lower rates, which provided a benefit to net interest income in 2021.

The benefit from lower deposit pricing is expected to continue into 2021.

Additionally, the low interest rate environment has driven residential mortgage rates to historically low levels, which has resulted in increased mortgage originations and has benefited our residential mortgage business.

At this time, the ultimate impact of COVID-19 on our business continues to remain uncertain as we cannot predict the duration of the pandemic or when the economies in which we operate will return to conditions existing prior to COVID-19.

As a result of continued measures to either contain or reduce the impact of COVID-19, or an increase in the number of reported cases or mortality rates, we may experience issues that negatively impact our business, such as a decline in the liquidity of our borrowers or volatility in interest rates.

Throughout COVID-19, our top priority has been the health of our team and clients.

As a digitally-focused institution without branch locations, we were able to continue serving clients when they needed us most, while minimizing operational disruptions caused by COVID-19.

Beginning in the first quarter 2020, we offered loan payment deferral programs for clients affected by COVID-19.

Loan balances on payment deferral programs peaked in late May 2020 but as of December 31, 2020, less than 1% of loan balances were in deferral status and all borrowers coming off deferrals had resumed normal payment schedules.

Despite the challenging environment, we have continued to prudently extend credit to both commercial and consumer clients.

The vast majority of our employees who worked remotely during the earlier stages of the pandemic have returned to the office.

Management continues to assess the evolving health and safety situations at local, regional and national levels.

Our plans remain flexible to adapt as these situations evolve.

Pending Merger Transaction

On November 1, 2021, we entered into a merger agreement to acquire all of the outstanding shares of common stock of First Century Bancorp.

(“First Century”), the parent company of First Century Bank, N.A.

(“First Century Bank”), for $80 million in cash.

First Century Bank is a technology-driven, financial solutions company with lines of business focused on payments, tax product lending, sponsored card programs and homeowners association services.

We expect to fund our payment obligations upon closing with available on-balance sheet cash.

The acquisition is subject to customary regulatory approvals and the completion of various closing conditions.

The acquisition has received approval from the Indiana Department of Financial Institutions and First Century shareholders, but it is awaiting approval from the Federal Deposit Insurance Corporation and the Federal Reserve.

As of December 31, 2021, First Century had total assets of $486.7 million, total deposits of $409.4 million, and total loans of $25.2 million.

Results of Operations

During the twelve months ended December 31, 2021, net income was $48.1 million, or $4.82 per diluted share, compared to net income of $29.5 million, or $2.99 per diluted share, for the twelve months ended December 31, 2020 and net income of $25.2 million, or $2.51 per diluted share, for the twelve months ended December 31, 2019.

The $4.2 million increase in net income for the twelve months ended December 31, 2020 compared to the twelve months ended December 31, 2019 was due primarily to a $19.5 million increase in noninterest income and a $1.6 million increase in net interest income, but was partially offset by an $11.0 million increase in noninterest expense, a $3.4 million increase in provision for loan losses and a $2.5 million increase in income tax expense.

The increase in net income of $3.3 million for the twelve months ended December 31, 2019 compared to the twelve months ended December 31, 2018 was due primarily to a $8.0 million increase in noninterest income, a $0.7 million increase in net interest income and a $0.1 million decrease in income tax expense, but was partially offset by a $3.5 million increase in noninterest expense and $2.1 million increase in provision for loan losses.

The $18.7 million increase in net income for the twelve months ended December 31, 2021 compared to the twelve months ended December 31, 2020 was due primarily to a $22.0 million increase in net interest income and an $8.3 million decrease in provision for loan losses, partially offset by a $4.1 million increase in noninterest expense, a $4.0 million increase in income tax expense and a $3.5 million decrease in noninterest income.

The increase in net income of $4.2 million for the twelve months ended December 31, 2020 compared to the twelve months ended December 31, 2019 was due primarily to a $19.5 million increase in noninterest income and a $1.6 million increase in net interest income, partially offset by an $11.0 million increase in noninterest expense, a $3.4 million increase in provision for loan losses and a $2.5 million increase in income tax expense.

During the twelve months ended December 31, 2021, return on average assets was 1.14%, compared to 0.69% for the twelve months ended December 31, 2020.

During the twelve months ended December 31, 2021, return on average shareholders’ equity was 13.44%, compared to 9.39% for the twelve months ended December 31, 2020.

Additionally, for the

twelve months ended December 31, 2020, return on average tangible common equity was 9.53% compared to 8.65% for the twelve months ended December 31, 2019.

These profitability ratios improved during 2020 as net income growth of 16.7% outpaced total average balance sheet growth of 9.6%, as well as average shareholders' equity growth of 5.9% and average tangible common equity growth of 6.0%.

Additionally, for the twelve months ended December 31, 2021, return on average tangible common equity was 13.61% compared to 9.53% for the twelve months ended December 31, 2020.

These profitability ratios improved during 2021 due to net income growth of 63.4%, while total average assets was down slightly from 2020.

Additionally, the growth in net income outpaced growth in average shareholders' equity of 14.1% and growth in average tangible common equity of 14.4%.

Refer to the “Reconciliation of Non-GAAP Financial Measures” section of Item 7 of Part II of this report, Management's Discussion and Analysis of Financial Condition and Results of Operations for additional information.

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This decrease in total interest expense was partially offset by a $3.0 million, or 2.2%, decrease in total interest income to $133.9 million for the twelve months ended December 31, 2021 compared to $136.9 million for the twelve months ended December 31, 2020.

The decrease in total interest expense was driven primarily by a decrease in interest expense related to certificates and brokered deposits and money market accounts.

The decrease in total interest expense was driven primarily by decreases in interest expense related to certificates and brokered deposits and money market accounts.

Interest expense on certificates and brokered deposits decreased $20.3 million, or 46.7%, due to a decline of 67 bps in the cost of these deposits as well as a $471.6 million, or 25.0%, decrease in the average balance of these deposits.

The decrease in certificates and brokered deposit balances was driven by the Company’s pricing strategy to reduce the level of these higher cost deposits.

The decrease in certificates and brokered deposit balances was driven by our pricing strategy to reduce the level of these higher cost deposits.

The decrease in interest expense related to money market accounts of $5.5 million, or 48.2%, was driven by a decline of 57 bps in the cost of these deposits, partially offset by an increase of $278.7 million, or 24.1%, in the average balance of these deposits.

Money market balances increased throughout 2020 due to targeted digital marketing efforts to grow small business accounts, as well as consumers, small businesses and commercial clients increasing their cash balances due in part to the economic uncertainty resulting from COVID-19.

The decrease in total interest income was due primarily to a decrease in interest earned on loans, including loans held-for-sale, other earning assets and securities.

Interest income earned on other earning assets decreased $5.4 million, or 61.5%, due to a decline of 182 bps in the yield earned on these assets, partially offset by an increase of $168.4 million, or 47.4%, in the average balance of other earning assets.

The increase in the average balance of other earning assets was due to higher cash balances driven by growth in the average balance of deposits.

Money market balances increased throughout 2021 due to targeted digital marketing efforts to grow small business accounts, as well as consumers, small businesses and commercial clients increasing their cash balances due in part to the continued economic uncertainty resulting from COVID-19.

The decrease in interest expense related to interest-bearing demand deposits and savings accounts was due primarily to decreases of 28 bps and 39 bps, respectively, in the cost of these deposits, partially offset by increases of $50.5 million, or 34.8%, and $16.4 million, or 40.3%, respectively, in the average balance of these deposits.

The increase in interest expense associated with other borrowed funds was due primarily to the recognition of $0.8 million of costs related to the Company redeeming the 2026 Notes on September 30, 2021.

The decrease in total interest income was due primarily to decreases in interest earned on securities and other earning assets, partially offset by an increase in interest earned on loans, including loans held-for sale.

Interest income earned on securities decreased $3.9 million, or 21.6%, due to a decline of 62 bps in the yield earned on securities, partially offset by an increase of $3.1 million, or 0.4%, in the average balance of securities.

The increase in average securities balances was due to deployment of liquidity driven by deposit growth.

Interest income earned on loans, including loans held-for-sale, decreased by $1.6 million as the yield on the loan portfolio decreased by 23 bps, but was partially offset by an increase of $131.8 million, or 4.6%, in the average balance of loans.

The increase in average loan balances was due to growth in the healthcare finance portfolio, small business lending portfolio (which included loans acquired from First Colorado National Bank in late 2019, as well as loans originated through the Paycheck Protection Program ("PPP")) and increased construction lending, but was partially offset by decreases in the residential mortgage, public finance and single tenant lease financing portfolios.

The decrease in the yield earned on securities was driven primarily by lower market interest rates following Federal Reserve interest rate cuts in March 2020 in response to the economic effects of COVID-19, which contributed to increased prepayment activity and lower yields earned on private label and agency mortgage-backed securities and U.S.

Government agency securities, as well as early redemptions and maturities in corporate and municipal securities.

Interest income earned on other earning assets decreased $2.0 million, or 57.7%, due to a decline of 34 bps in the yield earned on these assets, as well as a decrease of $57.2 million, or 10.9%, in the average balance of other earning assets.

The decrease in the yield earned on other earning assets was due primarily to lower market interest rates, as

described above.

The decrease in the average balance of other earning assets was due to lower cash balances driven by declines in the average balance of deposits.

Interest income earned on loans, including loans held-for-sale, increased by $2.8 million as the yield on the loan portfolio increased by 13 bps, but was partially offset by a decrease of $26.8 million, or 0.9%, in the average balance of loans.

The decrease in average loan balances was due primarily to declines in the single tenant lease financing, public finance, owner-occupied commercial real estate, commercial and industrial and consumer portfolios, but was partially offset by increases in the healthcare finance, construction, small business lending (which included loans originated through the Paycheck Protection Program (“PPP”)), franchise finance and investor commercial real estate portfolios.

Net interest margin was 2.11% for the twelve months ended December 31, 2021 compared to 1.55% for the twelve months ended December 31, 2020.

The decrease in net interest margin was due primarily to a 59 bp decrease in the yield earned on interest-earning assets, but was partially offset by a 51 bp decrease in the cost of interest-bearing liabilities.

The decline in the yield earned on interest-earning assets and the decline in the cost of interest-bearing liabilities was due primarily to the continued decrease in market interest rates from the year-ago period.

Interest rates began declining during 2019 and declined significantly in 2020 following Federal Reserve interest rate cuts in March 2020 in response to the economic effects of COVID-19.

During this time, variable rate assets tied to market interest rates repriced faster than deposits.

However, as the pace of short-term market interest rate declines slowed over the course of 2020, the Company believes that yields on interest-earning assets have largely stabilized.

Furthermore, the Company has approximately $917.0 million of certificates and brokered deposits with a weighted average cost of 1.87% that mature over the next twelve months.

As the weighted average of cost of these deposits is significantly higher than current new production costs, the Company expects the cost of deposit funding to continue to decline in 2021.

The increase in net interest margin was due primarily to a 62 bp decrease in the cost of interest-bearing liabilities, partially offset by a 1 bp decrease in the yield earned on interest-earning assets.

The decline in the cost of interest-bearing liabilities was driven primarily by the lower deposit costs, as discussed above, due primarily to the continued low interest rate environment following Federal Reserve interest rate cuts in March 2020 in response to the economic effects of COVID-19.

Looking ahead into 2022, we believe that yields on interest-earning assets will increase as we anticipate growing our commercial loan portfolio.

We have approximately $712.8 million of certificates and brokered deposits with a weighted average cost of 1.02% that mature over the next twelve months.

As the weighted average of cost of these deposits is significantly higher than current new production costs, we expect the cost of deposit funding to continue to decline in 2022, although at a much slower pace than in 2021.

Noninterest Income

The following table presents noninterest income for the five most recent years.

The following table presents noninterest income for the three most recent years.

Twelve Months Ended December 31,

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Gain (loss) on sale of securities — 139 (458)

Gain on sale of premises and equipment 2,523 — —

Other 1,694 1,655 2,581

Total noninterest income $ 32,844 $ 36,336 $ 16,789

During the twelve months ended December 31, 2020, noninterest income totaled $36.3 million, representing an increase of $19.5 million, or 116.4%, compared to $16.8 million for the twelve months ended December 31, 2019.

The increase in noninterest income was driven primarily by an increase in revenue from mortgage banking activities, gain on sale of loans, loan servicing revenue and gain on sale of securities, which were partially offset by lower other income and loan servicing asset revaluation.

The increase in mortgage banking revenue was due mainly to an increase in loan origination volume, driven by historically low mortgage interest rates, and higher gain-on-sale margins.

The increase in gain on sale of loans was due to gains of $6.8 million being recognized on sales of SBA 7(a) guaranteed loans and sales of portfolio loans with book values totaling $224.1 million that resulted in a gain of $1.5 million during the twelve months ended December 31, 2020, compared to the Company recognizing gains of $1.7 million on the sale of SBA 7(a) guaranteed loans and selling portfolio loans with book values of $264.7 million that resulted in a net gain of $0.4 million during the twelve months ended December 31, 2019.

The Company recognized $0.7 million of loan servicing revenue, net of the loan servicing asset revaluation, in 2020, in connection with its SBA 7(a) servicing portfolio, which includes the portfolio acquired in the fourth quarter 2019 as well as loans originated by the Company in 2020.

The increase in gain on sale of securities was due to a gain of $0.1 million being recorded during the twelve months ended December 31, 2020 compared to the twelve months ended December 31, 2019 when the Company sold lower-yielding mortgage-backed and U.S.

Government Agency securities that resulted in a loss of $0.5 million.

The decrease in other noninterest income was mainly the result of income recognized in the prior year associated with the sale of the Company’s Visa Class B shares at a gain of $0.5 million and $0.4 million of income related to the Company’s temporary ownership of the land associated with its future corporate headquarters.

Refer to Note 16 to the Company's consolidated financial statements for additional information about the Company’s new headquarters.

During the twelve months ended December 31, 2021, noninterest income totaled $32.8 million, representing a decrease of $3.5 million, or 9.6%, compared to $36.3 million for the twelve months ended December 31, 2020.

The decrease in noninterest income was driven primarily by a decrease in revenue from mortgage banking activities, which was partially offset by increases in gain on sale of loans and gain on sale of premises and equipment.

The decrease in mortgage banking revenue was due mainly to decreases in interest rate locks and sold loan volume as well as lower gain-on-sale margins.

The increase in gain on sale of loans for the twelve months ended December 31, 2021 was due to a higher amount of SBA 7(a) guaranteed loan sales as well as the sale of single tenant lease financing loans.

The increase in gain on sale of premises and equipment was due to the Company completing the sale of its headquarters during 2021.

Noninterest Expense

The following table presents noninterest expense for the five most recent years.

The following table presents noninterest expense for the three most recent years.

Twelve Months Ended December 31,

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Noninterest expense for the twelve months ended December 31, 2021 was $61.8 million, compared to $57.7 million for the twelve months ended December 31, 2020.

The increase of $11.0 million, or 23.6%, compared to the twelve months ended December 31, 2019 was due primarily to a $7.2 million increase in salaries and employee benefits, a $2.1 million write-down of a legacy commercial OREO property, a $0.9 million increase in loan expenses, a $0.7 million increase in other expenses and a $0.3 million increase in premises and equipment.

The increase in salaries and employee benefits was primarily the result of personnel growth, mostly associated with the Company’s small business lending platform, as well as increased mortgage and small business lending incentive compensation.

The increase in loan expenses was driven primarily by costs associated with nonperforming loans.

The increase in other expenses was due primarily to a $0.3 million charitable contribution the Company made to assist small businesses and nonprofits address the economic challenges of the COVID-19 pandemic, as well as various other miscellaneous expenses, none of which were individually significant.

The increase in premises and equipment was due primarily to higher software expense.

The following table reconciles reported income tax expense to that computed at the statutory federal tax rate for the five most recent years.

The increase of $4.1 million, or 7.2%, compared to the twelve months ended December 31, 2020 was due primarily to a $4.0 million increase in salaries and employee benefits, a $1.6 million increase in marketing, advertising and promotion, a $0.7 million increase in premises and equipment, and a $0.5 million increase in consulting and professional fees, partially offset by a $2.1 million decrease in write-down of other real estate owned and a $0.6 million decrease in deposit insurance premium.

The increase in salaries and employee benefits was due mainly to increased headcount, predominately in the Company’s small business lending, information technology and construction lending groups.

The increase in marketing, advertising and promotion was due primarily to higher mortgage lead generation costs and digital marketing initiatives.

The increase in consulting and professional fees was due primarily to acquisition-related expenses.

The increase in premises and equipment was driven primarily by a $0.5 million termination fee related to an information technology contract.

The decrease in write-down of other real estate owned was due to no write-down in 2021, as opposed to a $2.1 million write-down in 2020.

The decrease in deposit insurance premium was due primarily to a decrease in asset growth and an increase in the Bank's regulatory capital ratios, both of which positively impact the formula used to calculate deposit insurance expense.

The following table reconciles reported income tax expense to that computed at the statutory federal tax rate for the three most recent years.

Twelve Months Ended December 31,

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Bank-owned life insurance (199) (200) (198)

Net deferred tax asset revaluation — — — 1,846 —

Tax credits (175) (178) (181)

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Income tax expense $ 8,458 $ 4,445 $ 1,917

The Company recognized income tax expense of $4.4 million in 2020, resulting in an effective tax rate of 13.1%, compared to $1.9 million and an effective tax rate of 7.1% in 2019.

The Company's federal statutory tax rate was 21% in 2020 and 2019.

We recognized income tax expense of $8.5 million in 2021, resulting in an effective tax rate of 15.0%, compared to $4.4 million and an effective tax rate of 13.1% in 2020.

Our federal statutory tax rate was 21% in 2021 and 2020.

In both 2021 and 2020, the variance from the federal statutory rate was due primarily to tax-exempt income, partially offset by state income taxes.

Interest income on certain loans or securities issued by governmental, municipal and not-for-profit entities, and earnings from bank-owned life insurance were the primary components of tax-exempt income.

The increase in the effective tax rate and income tax expense was primarily due to the increase in pre-tax earnings driven by a higher proportion of taxable revenue, including higher mortgage banking revenue and gain on sale of loans.

The increase in the effective tax rate and income tax expense was due primarily to the increase in pre-tax earnings driven by a higher proportion of taxable revenue, including higher net interest income, gain on sale of loans and gain on sale of premises and equipment.

Financial Condition

The following table presents summary balance sheet data as of the end of the last five years.

The following table presents summary balance sheet data as of the end of the last two years.

(amounts in thousands) December 31,

Balance Sheet Data:

2020 2019 2018 2017 2016

Total assets $ 4,210,994 $ 4,246,156

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Total shareholders' equity 380,338 330,944

Total assets increased $146.1 million, or 3.6%, to $4.2 billion as of December 31, 2020 as compared to $4.1 billion as of December 31, 2019.

Balance sheet growth was driven primarily by an increase in deposits of $116.9 million, or 3.7%.

Additionally, the increase in deposits was used to fund loan growth as loan balances increased $95.7 million, or 3.2%.

As deposit growth outpaced loan growth, balance sheet liquidity increased as the combined balance of cash and securities increased $55.6 million, or 6.0%, and the percentage of loans declined modestly to 93.5% as of December 31, 2020 from 94.0% as of December 31, 2019.

As of December 31, 2020, total shareholders’ equity was $330.9 million, an increase of $26.0 million, or 8.5%, compared to December 31, 2019, due primarily to the net income earned during the year, partially offset by the increase in accumulated other comprehensive loss.

Total assets decreased $35.2 million, or 0.8%, to $4.2 billion as of December 31, 2021 compared to $4.2 billion as of December 31, 2020.

The decline in total assets was driven primarily by a decrease in loan balances of $171.6 million, or 5.6%.

The liquidity provided by the decline in loan balances was used, in part, to fund the reduction in higher cost deposit balances.

Overall, deposit balances declined $91.9 million, or 2.8%, compared to the year-end 2020.

Additional liquidity from the decline in loan balances was deployed into securities as total securities balances increased $96.8 million, or 17.1%, compared to balances at December 31, 2020.

As of December 31, 2021, total shareholders’ equity was $380.3 million, an increase of $49.4 million, or 14.9%, compared to December 31, 2020, due primarily to the net income earned during the year, as well as a decrease in accumulated other comprehensive loss.

Tangible common equity totaled $375.7 million as of December 31, 2021, representing an increase of $49.4 million, or 15.1%, compared to December 31, 2020.

As the growth in both total shareholders’ equity and tangible common equity outpaced growth of 3.6% in both total assets and tangible assets, the ratio of total shareholders’ equity to total assets increased to 7.79% as of December 31, 2020 from 7.44% as of December 31, 2019 and the ratio of tangible common equity to tangible assets increased to 7.69% as of December 31, 2010 from 7.33% as of December 31, 2019.

As both total shareholders’ equity and tangible common equity increased compared to a slight decline in both total assets and tangible assets, the ratio of total shareholders’ equity to total assets increased to 9.03% as of December 31, 2021 from 7.79% as of December 31, 2020 and the ratio of tangible common equity to tangible assets increased to 8.93% as of December 31, 2021 from 7.69% as of December 31, 2020.

Book value per common share increased 15.5% to $38.99 as of December 30, 2021 from $33.77 as of December 31, 2020.

Tangible book value per share increased 15.7% to $38.51 as of December 31, 2021 from $33.29 as of December 31, 2020.

The growth in both book value per common share and tangible book value per share reflects the growth in total shareholders’ equity and tangible common equity while total common shares outstanding increased slightly year-over-year, or 0.6%.

Loan Portfolio Analysis

The following table provides information regarding the Company’s loan portfolio as of the end of the last five years.

The following table provides information regarding our loan portfolio as of the end of the last two years.

(dollars in thousands) 2021 2020

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Small business lending 108,666 3.8 % 125,589 4.1 %

Franchise finance 81,448 2.8 % — 0.0 %

Total commercial loans 2,363,863 81.8 % 2,515,631 82.3 %

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Net loans $ 2,859,821 $ 3,029,747

1 Includes carrying value adjustments of $42.7 million related to terminated interest rate swaps associated with public finance loans as of December 31, 2020 and $21.4 million, $5.0 million, $0.3 million, and $0.0 million as of December 31, 2019, 2018, 2017 and 2016, respectively, related to interest rate swaps associated with public finance loans.

Total loans were $3.1 billion as of December 31, 2020, an increase of $95.7 million, or 3.2%, compared to December 31, 2019.

Growth in commercial loan balances of $229.1 million, or 10.0%, was partially offset by a decline of $151.1 million, or 23.9%, in consumer loan balances.

The growth in commercial loan balances was driven primarily by increased production in healthcare finance, small business lending and construction, which was partially offset by lower balances in the public finance and single tenant lease financing loan portfolios, due primarily to sales of $106.6 million of loans in these categories during 2020, as well as a decline in commercial and industrial balances.

The growth in healthcare finance balances was due primarily to a combination of strong borrower demand following the re-opening of state and local economies across the U.S.

subsequent to shelter-in-place orders in response to COVID-19 and growth in the sales team at Provide, Inc.

(formerly known as Lendeavor, Inc.), the Company’s origination partner in this loan category.

The growth in small business lending was driven by $58.3 million of PPP loan balances originated during 2020, as well as an increase in originated SBA 7(a) loans during 2020.

The growth in construction balances was due to focused efforts to increase borrower relationships in the Central Indiana market, as well as expand relationships with existing clients.

The decrease in consumer loan balances was due primarily to the sale of $90.8 million of portfolio mortgage loans in the first quarter 2020.

Additionally, the balances of residential mortgage loans and other consumer loans were impacted by elevated prepayment activity, which more than offset new origination activity.

1 Includes carrying value adjustments of $37.5 million and $42.7 million related to terminated interest rate swaps associated with public finance loans as of December 31, 2021 and December 31, 2020, respectively.

Total loans were $2.9 billion as of December 31, 2021, a decrease of $171.6 million, or 5.6%, compared to December 31, 2020.

Total commercial loan balances were $2.4 billion, as of December 31, 2021, down $151.8 million, or 6.0%, from December 31, 2020.

Total consumer loan balances were $469.9 million as of December 30, 2021, a decrease of $12.4 million, or 2.6%, compared to December 31, 2020.

Compared to December 31, 2020, the decline in commercial loan balances was driven largely by net payoffs in healthcare finance, single tenant lease financing, small business lending and public finance loans.

These items were partially offset by increases in franchise finance, construction, commercial and industrial, franchise finance and investor commercial real estate loan balances.

The net payoffs in the healthcare finance portfolio were driven primarily by elevated prepayment activity and minimal origination activity.

Going forward, we expect the balance of healthcare finance loans to continue to decline as a result of Provide, Inc.'s acquisition by a superregional financial institution, as well as potential prepayment activity.

The decline in single tenant lease financing balances was due to elevated prepayment activity and lower origination volumes as well as a sale of $20.1 million of balances in the fourth quarter 2021.

The decline in public finance balances was due to lower origination activity and scheduled maturities.

Related to single tenant lease financing, public finance and other lending areas with fixed interest rates, the combination of the low interest rate environment and heightened competition for high quality borrowers drove pricing to levels that we consider unattractive, which negatively impacted origination activity in such areas during 2021.

The net payoffs in small business lending were predominantly related to PPP loan forgiveness, partially offset by originations.

Franchise finance was established in July 2021 in conjunction with our business relationship with ApplePie Capital, a provider of growth financing to franchisees in various industry segments across the country.

We began funding franchise finance loans during 2021 and, as of December 31, 2021, we funded a total of $81.4 million in loans.

We expect to fund approximately $150.0 million of franchise finance loans during 2022.

The increase in construction balances was driven by increased origination activity, offset by paydowns, as we have increased our reserves in this area due to the variable rate structure and attractive pricing levels.

Loan Maturities and Rate Sensitivity

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Small business lending 1,055 6,567 69,297 31,747 108,666

Franchise finance — 1,968 79,480 — 81,448

Total commercial loans 137,250 670,624 1,523,443 32,546 2,363,863

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Single tenant lease financing 1,100 7,116

Small business lending 959 —

Total commercial loans 6,152 8,954

6 unchanged sentences

Past Due 90 days and accruing loans — —

Consumer loans:

Residential mortgage — 416 97 — —

Total consumer loans — 416 97 — —

Total past due 90 days and accruing loans — 416 97 — —

Total nonperforming loans 7,401 10,183

Other real estate owned

Investor commercial real estate — 2,065 2,066 4,488 4,488

Residential mortgage — — 553 553 45

Single tenant lease financing 1,188 —

Total other real estate owned 1,188 —

3 unchanged sentences

Total nonperforming assets to total assets 0.20 % 0.22 %

A loan is designated as impaired, in accordance with the impairment accounting guidance when, based on current information or events, it is probable that the Company will be unable to collect all amounts due (principal and interest) according to the contractual terms of the loan agreement.

Allowance for loan losses to total loans 0.96 % 0.96 %

Nonaccrual loans to total loans 0.26 % 0.33 %

Allowance for loan losses to nonaccrual loans 376.2 % 289.5 %

A loan is designated as impaired, in accordance with the impairment accounting guidance when, based on current information or events, it is probable that we will be unable to collect all amounts due (principal and interest) according to the contractual terms of the loan agreement.

Payments with delays generally not exceeding 90 days outstanding are not considered impaired.

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The accrual of interest on impaired and nonaccrual loans is discontinued when, in management’s opinion, the borrower may be unable to meet payments as they become due.

Impaired loans include nonperforming loans but also include loans modified in troubled debt restructurings (“TDRs”) where concessions have been granted to borrowers experiencing financial difficulties.

Impaired loans include nonperforming loans and also include loans modified in troubled debt restructurings (“TDRs”) where concessions have been granted to borrowers experiencing financial difficulties.

These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance, or other actions intended to maximize collection.

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Nonperforming assets can also include investments that were classified as other-than-temporarily impaired;

however, we did not own any investments classified as such during the five-year period ended December 31, 2020.

however, we did not own any investments classified as such during the two-year period ended December 31, 2021.

Troubled Debt Restructurings

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Total troubled debt restructurings $ 4,185 $ 3,004

The increase in nonperforming loans of $3.6 million, or 54.8%, to $10.2 million as of December 31, 2020 compared to $6.6 million as of December 31, 2019 was due primarily to an increase in nonperforming single tenant lease financing loans with unpaid principal balances of $2.5 million and an increase in nonperforming owner-occupied commercial real estate loans with unpaid principal balances of $1.6 million that were placed on nonaccrual status during 2020, partially offset by a $0.4 million decrease in accruing residential mortgage loans that were 90 days past due and one nonaccrual owner-occupied commercial real estate loan that paid off in full during 2020.

Total nonperforming assets increased $1.5 million, or 17.2%, as of December 31, 2020 compared to December 31, 2019, due primarily to the increase in nonperforming loans discussed above, partially offset by a $2.1 million write-down of a legacy commercial OREO property in 2020.

The ratio of nonperforming loans to total loans increased to 0.33% as of December 31, 2020 compared to 0.23% as of December 31, 2019 and the ratio of nonperforming assets to total assets remained 0.22% as of December 31, 2020, consistent with 0.22% as of December 31, 2019.

The decrease in nonperforming loans of $2.8 million, or 27.3%, to $7.4 million as of December 31, 2021 compared to $10.2 million as of December 31, 2020 was due primarily to a decrease in nonaccrual single tenant lease financing balances, which was partially offset by an increase in nonaccrual loans in owner-occupied commercial real estate, and to a lessor extent, increases in small business lending and commercial and industrial loans.

The decrease in nonaccrual single tenant lease financing balances was due to a payoff of a loan that was previously on nonaccrual, as well as positive developments related to a single tenant lease financing relationship which included two loans, one of which was paid off at net book value (unpaid principal balance less specific reserves) and the other was transferred to other real estate owned (“OREO”).

Total nonperforming assets decreased $1.6 million, or 15.7%, as of December 31, 2021 compared to December 31, 2020, due primarily to the decrease in nonperforming loans discussed above, partially offset by a $1.2 million increase in OREO related to the single tenant loan financing relationship discussed above.

The ratio of nonperforming loans to total loans decreased to 0.26% as of December 31, 2021 compared to 0.33% as of December 31, 2020 and the ratio of nonperforming assets to total assets decreased to 0.20% as of December 31, 2021, compared to 0.22% as of December 31, 2020.

Total TDRs as of December 31, 2021 were $4.2 million, up $1.2 million from December 31, 2020.

The increase was driven by one residential mortgage loan that became a TDR during the second quarter 2020 and one loan relationship in the owner-occupied real estate category that became a TDR during the fourth quarter 2020.

As of December 31, 2019, the Company had one commercial property in OREO with a carrying value of $2.1 million which was written-off during 2020.

The property consisted of two buildings that were residential units adjacent to a university campus.

The Company did not have any OREO as of December 31, 2020.

The increase was driven by two portfolio residential mortgage loans classified as new TDRs during the twelve months ended December 31, 2021 with a pre-modification and post-modification outstanding recorded investment of $1.6 million.

As of December 31, 2021, we had one commercial property in OREO with a carrying value of $1.2 million.

We did not have any OREO as of December 31, 2020.

As of December 31, 2021, our financial results have reflected little impact on asset quality to date as a result of COVID-19.

However, the ultimate impact the pandemic may have on our business and asset quality is still uncertain.

We remain optimistic that the combination of government stimulus programs and the relief programs we have provided to our clients will lessen the economic stress on our borrowers.

However, if the effects of the pandemic extend for a prolonged period of time, we may experience negative trends in nonperforming loans and assets.

We are optimistic that the combination of vaccinations, government stimulus programs and relief programs we have provided to our clients will continue to mitigate the impact of the pandemic on our business.

However, if economic conditions return to levels experienced during 2020, our credit quality and overall financial performance could be adversely affected.

Non-TDR Loan Modifications due to COVID-19

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Additionally, Section 4013 of the CARES Act further provides that loan modifications due to the impact of COVID-19 that would otherwise be classified as TDRs under GAAP will not be so classified.

Modifications within the scope of this relief are in effect from the period beginning March 1, 2020 until January 1, 2022, or 60 days after the date on which the national emergency related to the COVID-19 pandemic formally terminates.

In accordance with this guidance, the Company offered modifications to borrowers who were both impacted by COVID-19 and current on all principal and interest payments.

As of December 31, 2020, the Company had $11.9 million in non-TDR loan modifications due to COVID-19.

Modifications within the scope of this relief were in effect from the period beginning March 1, 2020 until January 1, 2022.

In accordance with this guidance, we offered modifications to borrowers who were both impacted by COVID-19 and current on all principal and interest payments.

As of December 31, 2021, we had eleven loans totaling $10.5 million in non-TDR loan modifications due to COVID-19.

Small Business Administration Paycheck Protection Program

Section 1102 of the CARES Act created the PPP, which is jointly administered by the SBA and the Department of the Treasury.

The PPP is designed to provide economic relief to small businesses nationwide adversely impacted by COVID-19.

On December 27, 2020, the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act was enacted, extending the authority to continue to make PPP loans, including a provision for second draw PPP loans, through March 31, 2021.

These loans may be 100% forgiven if certain conditions, including predefined SBA approved use of the funds and certain borrower certifications are satisfied and are fully guaranteed by the SBA.

As a preferred SBA lender, we assisted our clients in

participating in the PPP to help them maintain their workforces in an uncertain and challenging environment.

The loans originated by us during 2020 bear an interest rate of 1.00% and we received weighted average origination fees of 3.86% of the amount funded, or approximately $2.3 million in total.

The Company received this fee revenue from the SBA in late June 2020 and it is being deferred over the life of the PPP loans and recognized as interest income.

As of December 31, 2020, we had 376 PPP loans totaling $50.6 million outstanding.

As of December 31, 2020, the Company processed 84 applications for forgiveness from PPP borrowers.

On December 27, 2020, additional funding was allocated to the PPP through the passage of the Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venues Act.

The additional funding can be used by small businesses who have yet to receive a PPP loan as well as certain small businesses who may be eligible to receive a second PPP loan.

The Company began offering PPP loans again in the first quarter of 2021.

The Company anticipates that the majority of PPP loans it originates will ultimately be forgiven, in whole or in part, by the SBA in accordance with the terms of the program.

The PPP is designed to provide a direct incentive to small businesses to retain employees on their payroll during COVID-19 as well as to help cover certain utility costs and rent payments.

These loans may be forgiven if certain conditions are satisfied and are fully guaranteed by the SBA.

In 2020, as a preferred SBA lender, we assisted our clients in participating in the PPP to help them maintain their workforces in an uncertain and challenging environment.

The loans originated in 2020 bear an interest rate of 1.00%, and we received gross origination fees of approximately $2.3 million.

We received this fee revenue from

the SBA in late June 2020, and it was deferred over the life of the PPP loans and recognized as interest income.

We began processing applications for forgiveness from this round beginning in December 2020 and 100% of loan balances have been forgiven as of December 31, 2021.

On December 27, 2020, $285 billion in additional funding was allocated to the PPP through the passage of the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act.

We began offering PPP loans again in 2021 and continued until the program’s funds were depleted.

These loans may be forgiven if certain conditions are satisfied and are fully guaranteed by the SBA.

The loans originated during 2021 bear an interest rate of 1.00% and we received gross origination fees of approximately $1.3 million.

We received this fee revenue from the SBA during 2021, and it is being deferred over the life of the PPP loans and recognized as interest income.

We began processing applications for forgiveness from this round beginning in May 2021 and 96.5% of loan balances have been forgiven as of December 31, 2021.

The following table provides a rollforward of the activity of PPP loans through December 31, 2021.

(dollars in thousands)

Number of Loans Principal Balance Net Deferred Fees

Originated 447 $ 58,336 $ 1,851

Principal repaid (71) (7,184)

Net deferred fees recognized (1,253)

Balance, December 31, 2020 376 51,152 598

Originated 281 27,377 1,125

Principal repaid (634) (75,377)

Net deferred fees recognized (1,624)

Balance, December 31, 2021 23 $ 3,152 $ 99

We anticipate that the majority of PPP loans we originated will ultimately be forgiven, in whole or in part, by the SBA in accordance with the terms of the program.

Management anticipates that loan forgiveness applications will continue during 2022.

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Owner-occupied commercial real estate — (24)

Single tenant lease financing (2,391) —

Healthcare finance — (743)

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Net charge-offs $ 2,673 $ 1,681

Net charge-offs (recoveries) to average loans (annualized)

Commercial and industrial (0.08) % 0.58 %

Owner-occupied commercial real estate — % 0.03 %

Single tenant lease financing 0.26 % — %

Healthcare finance — % 0.16 %

Small business lending 0.11 % 0.08 %

Total commercial net charge-offs (recoveries) 0.10 % 0.05 %

Residential mortgage (0.03) % 0.01 %

Home equity 0.24 % (0.05) %

Other consumer 0.29 % 0.68 %

Total consumer net charge-offs (recoveries) 0.04 % 0.08 %

Net charge-offs to average loans 0.09 % 0.06 %

The determination of the allowance for loan losses and the related provision for loan losses are components of our significant accounting policies as discussed within Note 1 to the Company's consolidated financial statements.

The determination of the allowance for loan losses and the related provision for loan losses are components of our significant accounting policies as discussed within Note 1 to our consolidated financial statements.

The adequacy of the allowance for loan losses and the provision are based on the review and evaluation of the loan portfolio and reflect management’s assessment of the risks and potential losses within the portfolio.

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The allowance for loan losses was $27.8 million as of December 31, 2021, compared to $29.5 million as of December 31, 2020.

While total loan balances experienced a modest increase of $95.7 million, or 3.2%, the Company made additional adjustments to qualitative factors in its allowance model to reflect the continued economic uncertainty resulting from COVID-19.

As a result, both the allowance for loan losses and the allowance as a percentage of total loans increased compared to December 31, 2019.

The allowance for loan losses as a percentage of total loans was 0.96% as of December 31, 2020, or 0.98% when excluding PPP Loans, compared to 0.74% as of December 31, 2019.

The allowance for loan losses as a percentage of nonperforming loans decreased to 289.5% as of December 31, 2020, from to 324.4% as of December 31, 2019.

The decrease in the allowance for loan losses compared to December 31, 2020 was due primarily to the elimination of $2.9 million of specific reserves related to single tenant lease financing loans and a commercial and industrial relationship, all of which had been classified as nonaccrual.

The single tenant lease financing loans included a nonaccrual loan

that was paid off during the year and a relationship consisting of two loans, one of which was paid off at net book value (unpaid principal balance less specific reserves) and the other was transferred to OREO.

The commercial and industrial relationship included four loans, two of which were paid off during the year.

The decrease in the specific reserves was partially offset by additional adjustments to the qualitative factors in our allowance model that increased the allowance for loan losses to total loans.

The allowance for loan losses as a percentage of total loans was 0.96% as of December 31, 2021, or 0.97 % when excluding PPP Loans, compared to 0.96% and 0.98%, respectively, as of December 31, 2020.

The allowance for loan losses as a percentage of nonperforming loans increased to 376.2% as of December 31, 2021, up from to 289.5% as of December 31, 2020.

The provision for loans losses was $1.0 million for the twelve months ended December 31, 2021 compared to $9.3 million for the twelve months ended December 31, 2020.

The increase in the provision for loan losses was due primarily to the additional adjustments to qualitative factors in the allowance model discussed above.

During 2020, the Company recorded net charge-offs of $1.7 million, compared to $2.0 million during 2019.

The decrease in the provision for loan losses was due primarily to the decline in loan balances during the year.

During 2021, we recorded net charge-offs of $2.7 million, compared to $1.7 million during 2020.

The increase in net charge-offs was due primarily to the elimination of the specific reserve related to the single tenant lease financing loans disclosed above, offset by a $0.7 million charge-off of a healthcare finance relationship in 2020.

Investment Securities Portfolio

In managing the Company’s investment securities portfolio, management focuses on providing an adequate level of liquidity and managing long-term interest rate risk, while earning an adequate level of investment income without taking undue risk.

Investment securities that are acquired and held principally for the purpose of selling them in the near term with the objective of generating economic profits on short-term differences in market characteristics are classified as “trading securities.” The Company did not classify any securities as trading securities as of December 31, 2020 and 2019.

In managing our investment securities portfolio, management focuses on providing an adequate level of liquidity and managing long-term interest rate risk, while earning an adequate level of investment income without taking undue risk.

Investment securities that are acquired and held principally for the purpose of selling them in the near term with the objective of generating economic profits on short-term differences in market characteristics are classified as “trading securities.” We did not classify any securities as trading securities as of December 31, 2021 and 2020.

Securities that we intend to hold until maturity are classified as “held-to-maturity” securities, and all other investment securities are classified as “available-for-sale.” The carrying values of available-for-sale investment securities are adjusted for unrealized gains or losses as a valuation allowance and any gain or loss is reported on an after-tax basis as a component of other comprehensive income (loss).

The Company periodically evaluates each security in an unrealized loss position to determine if the impairment is temporary or other-than-temporary.

As of December 31, 2020, the unrealized losses in the Company’s investment securities portfolio were due primarily to interest rate changes and elevated credit spreads resulting from the economic uncertainty of the COVID-19 pandemic.

The Company has the ability and intent to hold all investment securities in an unrealized loss position resulting from interest rate changes to the earlier of the forecasted recovery or the maturity of the underlying investment security.

As of December 31, 2020, the Company did not have any investment securities of a single issuer that exceeded 10% of shareholders’ equity.

We periodically evaluate each security in an unrealized loss position to determine if the impairment is temporary or other-than-temporary.

As of December 31, 2021, the unrealized losses in our investment securities portfolio were due primarily to interest rate changes.

We have the ability and intent to hold all investment securities in an unrealized loss position resulting from interest rate changes to the earlier of the forecasted recovery or the maturity of the underlying investment security.

As of December 31, 2021, we did not have any investment securities of a single issuer that exceeded 10% of shareholders’ equity.

The term “issuer” excludes the U.S.

Government and its sponsored agencies and corporations.

The following tables present the amortized cost and approximate fair value of the Company’s investment securities portfolio by security type as of the end of the last five years.

The following tables present the amortized cost and approximate fair value of our investment securities portfolio by security type as of the end of the last two years.

(amounts in thousands) December 31,

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Municipal securities 75,158 82,757

Agency mortgage-backed securities 241,795 264,142 242,293 215,452 238,354

Private-label mortgage-backed securities 57,268 63,704 9,199 — —

Agency mortgage-backed securities - residential 377,928 213,408

Agency mortgage-backed securities - commercial 36,024 28,387

Private label mortgage-backed securities - residential 15,902 57,268

Asset-backed securities 5,000 5,000

Corporate securities 46,482 48,419

Other securities — — — 3,000 3,000

Total securities available-for-sale 606,507 497,004

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Municipal securities 77,033 82,489

Agency mortgage-backed securities 243,921 261,440 233,734 209,720 231,641

Private-label mortgage-backed securities 58,116 63,613 9,178 — —

Agency mortgage-backed securities - residential 373,236 214,330

Agency mortgage-backed securities - commercial 36,326 29,591

Private label mortgage-backed securities - residential 16,021 58,116

Asset-backed securities 5,004 4,961

Corporate securities 46,384 47,596

Other securities — — — 2,932 2,932

Total securities available-for-sale 603,044 497,628

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Total securities $ 664,512 $ 567,080

The approximate fair value of investment securities available-for-sale decreased $43.2 million, or 8.0%, to $497.6 million as of December 31, 2020 compared to $540.9 million as of December 31, 2019.

The decrease was due primarily to decreases of $17.5 million in agency mortgage-backed securities, $15.3 million in agency securities, $15.2 million in municipal securities and $5.5 million in private-label mortgage-backed securities.

These decreases were driven primarily by prepayments and maturities in agency and mortgage-backed securities, as well as early redemptions and maturities in municipal securities.

The decreases were partially offset by purchases of corporate securities as excess liquidity from deposit growth was deployed.

As of December 31, 2020, the Company had securities with an amortized cost basis of $68.2 million designated as held-to-maturity compared to $61.9 million as of December 31, 2019, an increase of $6.3 million, due mainly to the purchase of corporate securities.

The approximate fair value of investment securities available-for-sale increased $105.4 million, or 21.2%, to $603.0 million as of December 31, 2021 compared to $497.6 million as of December 31, 2020.

The increase was due primarily to an increase of $158.9 million in agency mortgage-backed securities - residential and $6.7 million in agency mortgage-backed securities - commercial, partially offset by decreases of $42.1 million in private label mortgage-backed securities - residential, $11.5 million in U.S.

Government-sponsored agencies securities, and $5.5 million in municipal securities.

The increase in agency mortgage-backed securities was driven primarily by purchases during the twelve months ended December 31, 2021, partially offset by prepayments and maturities in agency and private label mortgage-backed securities and U.S.

Government-sponsored agencies, as well as early redemptions and maturities in municipal securities.

As of December 31, 2021, we had securities with an amortized cost basis of $59.6 million designated as held-to-maturity compared to $68.2 million as of December 31, 2020, a decrease of $8.7 million, due mainly to contractual calls within corporate securities.

Investment Maturities

The following table summarizes the contractual maturity schedule of the Company’s investment securities at their amortized cost and their weighted average yields at December 31, 2020.

The following table summarizes the contractual maturity schedule of our investment securities at their amortized cost and their weighted average yields at December 31, 2021.

1 year or less More than 1 year

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Municipal securities — 0.00 % 10,335 1.92 % 13,165 2.64 % 65,650 2.67 % 89,150 2.53 %

— 0.00 % 4,638 2.17 % 15,096 2.53 % 77,594 2.56 % 97,328 2.54 %

Agency mortgage-backed securities — 0.00 % — 0.00 % 1,892 1.46 % 376,036 1.36 % 377,928 1.36 %

— 0.00 % — 0.00 % 15,519 1.67 % 226,276 1.77 % 241,795 1.76 %

Private-label mortgage-backed securities — 0.00 % — 0.00 % — 0.00 % 57,268 2.53 % 57,268 2.53 %

Agency mortgage-backed securities - commercial — 0.00 % 360 2.37 % 11,675 1.78 % 23,989 1.99 % 36,024 1.93 %

Private-label mortgage-backed securities - residential — 0.00 % — 0.00 % — 0.00 % 15,902 2.90 % 15,902 2.90 %

Asset-backed securities

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Total securities $ — 0.00 % $ 43,963 2.03 % $ 117,947 2.45 % $ 504,162 1.62 % $ 666,072 1.56 %

1 Excludes the impact of interest rate swaps associated with fixed-rate securities.

Accrued Income and Other Assets

Accrued income and other assets were $46.9 million at December 31, 2021 compared to $64.3 million at December 31, 2020.

As of these dates, the Company pledged $30.6 million and $42.3 million, respectively, of cash collateral to counterparties on interest rate swap agreements as security for its obligations related to these agreements.

The decrease was primarily related to a decrease of $14.9 million in cash pledged as collateral.

As of these dates, we pledged $15.7 million and $30.6 million, respectively, of cash collateral to counterparties on interest rate swap agreements as security for its obligations related to these agreements.

Collateral posted and received is dependent on the fair value of the underlying agreements as of the respective date.

The decrease in cash collateral pledged was partially offset by an increase of $4.9 million in deferred tax assets.

The following table presents the composition of the Company's deposit base as of the end of the last five years.

The following table presents the composition of our deposit base as of the end of the last two years.

(dollars in thousands) 2021 2020

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Total $ 3,178,959 100.0 % $ 3,270,885 100.0 %

Total deposits increased $116.9 million, or 3.7%, to $3.3 billion as of December 31, 2020 as compared to $3.2 billion as of December 31, 2019.

During 2020, money market accounts increased $564.2 million, or 71.7%, interest-bearing deposits increased $59.6 million, or 46.2%, and noninterest-bearing demand deposits increased $39.6 million, or 69.4%.

These increases were partially offset by declines of $324.1 million, or 20.1%, in certificates of deposits and $236.0 million, or 43.8%, in brokered deposits accounts.

The Company experienced strong growth in money market balances due to targeted digital marketing efforts to grow small business accounts, as well as consumers, small businesses and commercial clients increasing their cash balances due in part to the economic uncertainty resulting from the COVID-19 pandemic.

Total deposits decreased $91.9 million, or 2.8%, to $3.2 billion as of December 31, 2021 compared to $3.3 billion as of December 31, 2020.

This decrease was due primarily to a decline of $319.2 million, or 24.8%, in certificates of deposits, partially offset by increases of $133.4 million, or 9.9%, in money market accounts, $59.3 million, or 31.4%, in interest-bearing demand deposits, $20.8 million, or 21.5%, in noninterest-bearing deposits, and $16.8 million, or 38.9%, in savings accounts.

We experienced strong growth in money market and interest-bearing demand deposits balances due to targeted digital marketing efforts to grow small business accounts, as well as consumers, small businesses and commercial clients increasing their cash balances due in part to the continued economic uncertainty resulting from the COVID-19 pandemic.

The declines in certificates of deposits and brokered deposits were due to the maturity of higher cost balances and reduced pricing strategies designed to limit the volume of new production.

The following tables present contractual interest rates paid on time deposits, their scheduled maturities, and the scheduled maturities for time deposits $100,000 or greater.

The following tables present contractual interest rates paid on time deposits, their scheduled maturities, and the scheduled maturities for time deposits greater than $250,000.

Time Deposit Maturities at December 31, 2021

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Total $ 747,552 $ 208,673 $ 99,430 $ 64,031 $ 1,119,686 100.0 %

Time Deposit Maturities of $100,000 or Greater

Time Deposit Maturities Greater than $250,000

(dollars in thousands) December 31, 2021

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Although deposits are the primary source of funds for our lending and investment activities and for general business purposes, we may use short-term advances from the Federal Home Loan Bank of Indianapolis (the “FHLB”) to manage liquidity needs and longer-term advances to supplement balance sheet growth and manage interest rate risk.

During 2018, the Company converted $110.0 million of short-term FHLB advances to longer term fixed-rate structures using interest rate swaps to reduce long-term interest rate risk.

Refer to Note 19 to the Company's consolidated financial statements for additional information about derivative financial instruments.

Refer to Note 18 to our consolidated financial statements for additional information about derivative financial instruments.

The following table is a summary of FHLB borrowings for the periods indicated.

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1 Excludes the impact of interest rate swaps.

Subordinated Notes due 2031

On August 16, 2021, we issued $60.0 million of subordinated notes at an initial fixed interest rate of 3.75%, which is payable semi-annually.

Beginning on September 1, 2026, the interest rate converts to a variable interest rate, reset quarterly, equal to the three-month Term SOFR plus 3.11%, which is payable quarterly.

The subordinated notes mature on September 1, 2031.

The subordinated notes, net of issuance costs, were $58.6 million million at December 31, 2021.

On December 30, 2021, we completed an exchange of $59.3 million principal amount of the subordinated notes for substantially identical subordinated notes registered under the Securities Act of 1933, in satisfaction of our obligations under a registration rights agreement entered into with the initial purchasers of the subordinated notes.

The subordinated notes qualify for Tier 2 regulatory capital treatment at the Company level under applicable regulatory guidelines.

For additional information regarding these and our other outstanding subordinated notes, refer to Note 10 to our consolidated financial statements

Accrued Expenses and Other Liabilities

Accrued expenses and other liabilities were $30.5 million at December 31, 2021 compared to $48.4 million at December 31, 2020.

The decrease of $4.6 million, or 8.7%, was due primarily to an $8.0 million increase in the fair value of interest rate swap agreements.

The decrease in accrued expenses and other liabilities was due primarily to an $16.1 million, or 52.9%, decrease in derivative liabilities due to changes in fair value.

Liquidity and Capital Resources

The Company believes it has sufficient liquidity and capital resources to meet its cash and capital expenditure requirements for at least the next twelve months.

The Company may explore strategic alternatives, including additional asset, deposit or revenue generation channels that complement our commercial and consumer banking platforms, which may require

additional capital.

If the Company is unable to secure such capital at favorable terms, its ability to take advantage of such opportunities could be adversely affected.

Liquidity management is the process used by the Company to manage the continuing flow of funds necessary to meet its financial commitments on a timely basis and at a reasonable cost while also maintaining safe and sound operations.

Liquidity, represented by cash and investment securities, is a product of the Company’s operating, investing and financing activities.

Liquidity management is the process we use to manage the continuing flow of funds necessary to meet our financial commitments on a timely basis and at a reasonable cost while also maintaining safe and sound operations.

Liquidity, represented by cash and investment securities, is a product of our operating, investing and financing activities.

The primary sources of funds are deposits, principal and interest payments on loans and investment securities, maturing loans and investment securities, access to wholesale funding sources and collateralized borrowings.

While scheduled payments and maturities of loans and investment securities are relatively predictable sources of funds, deposit flows are greatly influenced by interest rates, general economic conditions and competition.

Therefore, the Company supplements deposit growth and enhances interest rate risk management through borrowings and wholesale funding, which are generally advances from the FHLB and brokered deposits.

Additionally, the Company has enhanced its liquidity management process through increased loan sale activity.

During 2020, the Company sold $188.6 million of public finance, single tenant lease financing and SBA 7(a) guaranteed loans at premiums to book value, as well as a $90.8 million pool of residential mortgage loans.

During 2019, the Company sold $237.5 million of portfolio residential mortgage, single tenant lease financing and public finance loans.

These loan sales have provided liquidity to manage overall loan portfolio growth and capital utilization.

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

We modestly reduced the size of our balance sheet during the fourth quarter 2020 through continued deposit repricing as loan demand was lower than earlier in the year.

A component of this balance sheet management strategy included reducing our cash balances from the levels at September 30, 2020.

However, given the uncertainty regarding the duration and ultimate economic effect of COVID-19, we believe it will be prudent to maintain higher levels of cash on the balance sheet than we have historically maintained until the crisis passes.

We believe we have sufficient on-balance sheet liquidity, supplemented by access to additional funding sources, to manage the potential economic impact of COVID-19.

At December 31, 2020, on a consolidated basis, the Company had $917.4 million in cash and cash equivalents and investment securities available-for-sale, and $39.6 million in loans held-for-sale that were generally available for its cash needs.

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

At December 31, 2020, the Bank had the ability to borrow an additional $492.3 million in advances from the FHLB and correspondent bank Fed Funds lines of credit.

We supplement deposit growth and enhance interest rate risk management, if necessary, through borrowings and wholesale funding, which are generally advances from the FHLB and brokered deposits.

We hold cash and investment securities that qualify as liquid assets to maintain adequate liquidity to ensure safe and sound operations and to meet our financial commitments.

At December 31, 2021, on a consolidated basis, we had $1.0 billion in cash and cash equivalents and investment securities available-for-sale, and $47.7 million in loans held-for-sale that were generally available for our cash needs.

Additionally, at December 31, 2021, the Bank had the ability to borrow an additional $596.5 million in advances from the FHLB and correspondent bank Fed Funds lines of credit.

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

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At December 31, 2021, the Company, on an unconsolidated basis, had $52.9 million in cash generally available for its cash needs, which is in excess of its current annual regular shareholder dividend and operating expenses.

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

We use our sources of funds primarily to meet ongoing financial commitments, including withdrawals by depositors, credit commitments to borrowers, operating expenses and capital expenditures.

At December 31, 2021, approved outstanding loan commitments, including unused lines of credit, amounted to $324.3 million.

Certificates of deposit scheduled to mature in one year or less at December 31, 2020 totaled $883.5 million.

On December 18, 2018 the Company's Board of Directors approved a stock repurchase program authorizing the repurchase of up to $10.0 million of the Company's outstanding common stock from time to time on the open market or in privately negotiated transactions.

The stock repurchase program was scheduled to expire on December 31, 2019.

Under this program, the Company repurchased 482,970 shares of common stock through September 30, 2019, at an average price of $20.70, for a total repurchase amount of $10.0 million, thus repurchasing the maximum amount of stock authorized by the Company's Board of Directors under this program.

In March 2013, the Company borrowed $4.0 million from the Bank for the purchase of the Company’s principal executive offices.

The loan was originally scheduled to mature in March 2014 and had been extended annually through March 2020.

In February 2020, the Company entered into an amendment that, among other things, extended its maturity to April 1, 2022.

The principal balance of the loan was $3.0 million as of December 31, 2019 and its payment terms are interest only through April 1, 2022.

The amounts borrowed under the loan bear interest at a variable rate equal to the then applicable prime rate (as determined by the Bank with reference to the “Prime Rate” published in The Wall Street Journal) plus 1.00% per annum.

Certificates of deposits and brokered certificates of deposits scheduled to mature in one year or less at December 31, 2021 totaled $747.6 million.

The following table presents the Company’s significant contractual obligations as of December 31, 2021.

Payments Due In

(dollars in thousands) Note Reference Less than 1 year 1-3 years 3-5 years More than 5 years Total

Premises and equipment 5 $ 14,780 $ — $ — $ — $ 14,780

Deposits and brokered deposits without stated maturity 1

8 2,059,273 — — — 2,059,273

Certificates of deposits and brokered certificates of deposits 1

8 747,552 308,103 29,452 34,579 1,119,686

FHLB advances 1,2

9 110,000 180,014 100,000 124,908 514,922

Subordinated debt 1

10 — — — 107,000 107,000

Total contractual obligations $ 2,931,605 $ 488,117 $ 129,452 $ 266,487 $ 3,815,661

1 Amounts do not include associated interest payments.

2 Amounts do not include the effect of interest rate swaps used to convert short-term advances into long-term funding.

On October 18, 2021, our Board of Directors approved a stock repurchase program authorizing the repurchase of up to $30.0 million of our outstanding common stock from time to time on the open market or in privately negotiated transactions.

The stock repurchase authorization is scheduled to expire on December 31, 2022.

Reconciliation of Non-GAAP Financial Measures

This annual report on Form 10-K contains financial information determined by methods other than in accordance with U.S.

generally accepted accounting principles (“GAAP”).

Non-GAAP financial measures, specifically tangible common equity, tangible assets, tangible book value per common share, the ratio of tangible common equity to tangible assets, average tangible common equity, return on average tangible common equity, net interest income - FTE, net interest margin - FTE, adjusted income before income taxes, adjusted income tax provision, adjusted net income, adjusted diluted earnings per share, adjusted return on average assets, adjusted return on average shareholders' equity, adjusted return on average tangible common equity and adjusted effective income tax rate are used by management to measure the strength of the Company's capital and analyze profitability, including its ability to generate earnings on tangible capital invested by its shareholders.

Management also believes that it is a standard practice in the banking industry to present net interest margin and net income on a fully-taxable equivalent basis as those measures provide useful information for peer comparisons.

Although the Company believes these non-GAAP measures provide a greater understanding of its business, they should not be considered a substitute for financial measures determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies.

Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures are included in the following table.

This Management's Discussion and Analysis contains financial information determined by methods other than in accordance with GAAP.

Non-GAAP financial measures, specifically tangible common equity, tangible assets, tangible book value per common share, tangible common equity to tangible assets ratio, average tangible common equity, return on average tangible common equity, total interest income - FTE, net interest income - FTE, adjusted net interest income, adjusted net interest income - FTE, net interest margin - FTE, adjusted net interest margin, adjusted net interest margin - FTE, allowance for loan losses, loans, excluding PPP loans, adjusted total revenue, adjusted noninterest income, adjusted noninterest expense, adjusted income before income taxes, adjusted income tax provision, adjusted net income, adjusted diluted earnings per share, adjusted return on average assets, adjusted return on average shareholders' equity, adjusted return on average tangible common equity and adjusted effective income tax rate are used by the Company's management to measure the strength of its capital and analyze profitability, including its ability to generate earnings on tangible capital invested by its shareholders.

The Company also believes that it is standard practice in the banking industry to present total interest income, net interest income and net interest margin on a fully-taxable equivalent basis, as those measures provide useful information for peer comparisons.

Although the Company believes these non-GAAP financial measures provide a greater understanding of its business, they should not be considered a substitute for financial measures determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP financial measures that may be presented by other companies.

Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures are included in the following table for the last three completed fiscal years ended on December 31.

(dollars in thousands, except share and per share data) At or For The Twelve Months Ended December 31,

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Tangible book value per common share $ 38.51 $ 33.29 $ 30.82

Total shareholders’ equity to assets ratio 7.79 % 7.44 % 8.15 % 8.10 % 8.30 %

Total shareholders’ equity to assets 9.03 % 7.79 % 7.44 %

Effect of goodwill (0.10) % (0.10) % (0.11) %

Tangible common equity to tangible assets ratio 7.69 % 7.33 % 8.03 % 7.94 % 8.07 %

Tangible common equity to tangible assets 8.93 % 7.69 % 7.33 %

Total average equity - GAAP $ 358,105 $ 313,763 $ 296,382

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Return on average tangible common equity 13.61 % 9.53 % 8.65 %

Total interest income $ 133,883 $ 136,859 $ 147,414

Fully-taxable equivalent adjustments 1

5,453 5,796 6,334

Total interest income - FTE $ 139,336 $ 142,655 $ 153,748

Net interest income $ 86,556 $ 64,541 $ 62,967

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Net interest income - FTE $ 92,009 $ 70,337 $ 69,301

Net interest income $ 86,556 $ 64,541 $ 62,967

Subordinated debt redemption cost 810 — —

Adjusted net interest income $ 87,366 $ 64,541 $ 62,967

Net interest income $ 86,556 $ 64,541 $ 62,967

Fully-taxable equivalent adjustments 1

5,453 5,796 6,334

Subordinated debt redemption cost 810 — —

Adjusted net interest income - FTE $ 92,819 $ 70,337 $ 69,301

Net interest margin 2.11 % 1.55 % 1.65 %

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Net interest margin - FTE 2.25 % 1.68 % 1.82 %

1 Assuming a 21% tax rate in 2020, 2019 and 2018 and a 35% tax rate in 2017 and 2016

Net interest margin 2.11 % 1.55 % 1.65 %

Effect of subordinated debt redemption cost 0.02 % — % — %

Adjusted net interest margin 2.13 % 1.55 % 1.65 %

Net interest margin 2.11 % 1.55 % 1.65 %

Effect of fully-taxable equivalent adjustments 1

0.14 % 0.13 % 0.17 %

Effect of subordinated debt redemption cost 0.02 % — % — %

Adjusted net interest margin - FTE 2.27 % 1.68 % 1.82 %

Allowance for loan losses $ 27,841 $ 29,484 $ 21,840

Loans $ 2,887,662 $ 3,059,231 $ 2,963,547

PPP loans (3,152) (50,554) —

Loans, excluding PPP loans $ 2,884,510 $ 3,008,677 $ 2,963,547

Allowance for loan losses to loans 0.96 % 0.96 % 0.74 %

Effect of PPP loans 0.01 % 0.02 % — %

Allowance for loan losses to loans, excluding PPP loans 0.97 % 0.98 % 0.74 %

1 Assuming a 21% tax rate

(dollars in thousands, except share and per share data) At Or For The Twelve Months Ended December 31,

2021 2020 2019

Total revenue - GAAP $ 119,400 $ 100,877 $ 79,756

Gain on sale of premises and equipment (2,523) — —

Subordinated debt redemption cost 810 — —

Adjusted total revenue $ 117,687 $ 100,877 $ 79,756

Noninterest income - GAAP $ 32,844 $ 36,336 $ 16,789

Gain on sale of premises and equipment (2,523) — —

Adjusted noninterest income $ 30,321 $ 36,336 $ 16,789

Noninterest expense - GAAP $ 61,798 $ 57,654 $ 46,634

Acquisition-related expenses (163) — —

IT termination fee (475) — —

Adjusted noninterest expense $ 61,160 $ 57,654 $ 46,634

Income before income taxes - GAAP $ 56,572 $ 33,898 $ 27,156

Write-down of other real estate owned — 2,065 —

Gain on sale of premises and equipment (2,523) — —

Subordinated debt redemption cost 810 — —

Acquisition-related expenses 163 — —

IT termination fee 475 — —

Adjusted income before income taxes $ 55,497 $ 35,963 $ 27,156

Income tax provision - GAAP $ 8,458 $ 4,445 $ 1,917

Write-down of other real estate owned — 434 —

Gain on sale of premises and equipment (530) — —

Subordinated debt redemption cost 170 — —

Acquisition-related expenses 34 — —

IT termination fee 100 — —

Net deferred tax asset revaluation — — —

Adjusted income tax provision $ 8,232 $ 4,879 $ 1,917

Net income - GAAP $ 48,114 $ 29,453 $ 25,239

Write-down of other real estate owned — 1,631 —

Gain on sale of premises and equipment (1,993) — —

Subordinated debt redemption cost 640 — —

Acquisition-related expenses 129 — —

IT termination fee 375 — —

Net deferred tax asset revaluation — — —

Adjusted net income $ 47,265 $ 31,084 $ 25,239

Diluted average common shares outstanding 9,976,261 9,842,425 10,044,483

Diluted earnings per share - GAAP $ 4.82 $ 2.99 $ 2.51

Effect of write-down of other real estate owned — 0.17 —

Effect of gain on sale of premises and equipment (0.19) — —

Effect of subordinated debt redemption cost 0.06 — —

Effect of acquisition-related expenses 0.01 — —

Effect of IT termination fee 0.04 — —

Effect of net deferred tax asset revaluation — — —

Adjusted diluted earnings per share $ 4.74 $ 3.16 $ 2.51

Return on average assets 1.14 % 0.69 % 0.65 %

Effect of write-down of other real estate owned — % 0.04 % — %

Effect of gain on sale of premises and equipment (0.05) % — % — %

Effect of subordinated debt redemption cost 0.02 % — % — %

Effect of acquisition-related expenses — % — % — %

Effect of IT termination fee 0.01 % — % — %

Effect of net deferred tax asset revaluation — % — % — %

Adjusted return on average assets 1.12 % 0.73 % 0.65 %

Return on average shareholders' equity 13.44 % 9.39 % 8.52 %

Effect of write-down of other real estate owned — % 0.52 % — %

Effect of gain on sale of premises and equipment (0.56) % — % — %

Effect of subordinated debt redemption cost 0.18 % — % — %

Effect of acquisition-related expenses 0.04 % — % — %

Effect of IT termination fee 0.10 % — % — %

Effect of net deferred tax asset revaluation — % — % — %

Adjusted return on average shareholders' equity 13.20 % 9.91 % 8.52 %

Return on average tangible common equity 13.61 % 9.53 % 8.65 %

Effect of write-down of other real estate owned — % 0.53 % — %

Effect of gain on sale of premises and equipment (0.56) % — % — %

Effect of subordinated debt redemption cost 0.18 % — % — %

Effect of acquisition-related expenses 0.04 % — % — %

Effect of IT termination fee 0.10 % — % — %

Effect of net deferred tax asset revaluation — % — % — %

Adjusted return on average tangible common equity 13.37 % 10.06 % 8.65 %

Effective income tax rate 15.0 % 13.1 % 7.1 %

Effect of write-down of other real estate owned — % 0.5 % — %

Effect of gain on sale of premises and equipment (0.4) % — % — %

Effect of subordinated debt redemption cost 0.1 % — % — %

Effect of acquisition-related expenses — % — % — %

Effect of IT termination fee 0.1 % — % — %

Effect of net deferred tax asset revaluation — % — % — %

Adjusted effective income tax rate 14.8 % 13.6 % 7.1 %

Critical Accounting Policies and Estimates

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The remainder of the impairment is recorded in other comprehensive income (loss).

Other Real Estate Owned (“OREO”).

Other Real Estate Owned.

OREO acquired through loan foreclosure is initially recorded at fair value less costs to sell when acquired, establishing a new cost basis.

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Recent Accounting Pronouncements

Refer to Note 24 to the Company’s consolidated financial statements.

Refer to Note 22 to our consolidated financial statements.

Off-Balance Sheet Arrangements

In the ordinary course of business, the Company enters into financial transactions to extend credit, interest rate swaps and forms of commitments that may be considered off-balance sheet arrangements.

In the ordinary course of business, we enter into financial transactions to extend credit, interest rate swaps and forms of commitments that may be considered off-balance sheet arrangements.

Interest rate swaps are arranged to receive hedge accounting treatment and are classified as either fair value or cash flow hedges.

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

In June 2020, the Company terminated all fair value hedging instruments associated with loans.

At December 31, 2020 and December 31, 2019, the Company had interest rate swaps with notional amounts of $298.2 million and $725.6 million, respectively.

In June 2020, we terminated all fair value hedging instruments associated with loans.

At December 31, 2021 and December 31, 2020, we had interest rate swaps with notional amounts of $260.0 million and $298.2 million, respectively.

Additionally, we enter into forward contracts relating to our mortgage banking business to hedge the exposures we have from commitments to extend new residential mortgage loans to our customers and from our mortgage loans held-for-sale.

At December 31, 2020 and December 31, 2019, we had commitments to sell residential real estate loans of $107.5 million and $115.0 million, respectively.

December 31, 2021 and December 31, 2020, we had commitments to sell residential real estate loans of $72.8 million and $107.5 million, respectively.

These contracts mature in less than one year.

Refer to Note 19 to the Company's consolidated financial statements for additional information about derivative financial instruments.

Contractual Obligations

The following table presents significant fixed and determinable contractual obligations and significant commitments as of December 31, 2020.

Further discussion of each obligation or commitment is included in the referenced note to the consolidated financial statements.

Payments Due In

(dollars in thousands) Note Reference Less than 1 year 1-3 years 3-5 years More than 5 years Total

Deposits and brokered deposits without stated maturity 1

9 $ 1,828,960 $ — $ — $ — $ 1,828,960

Certificates of deposits and brokered certificates of deposits 1

9 919,189 401,847 120,639 250 1,441,925

FHLB advances 1,2

10 110,000 35,000 235,020 134,896 514,916

Subordinated debt 1

11 — — — 82,000 82,000

Operating lease commitments 6 423 354 — — 777

Total contractual obligations $ 2,858,572 $ 437,201 $ 355,659 $ 217,146 $ 3,868,578

1 Amounts do not include associated interest payments.

2 Amounts do not include the effect of interest rate swaps used to convert short-term advances into long-term funding.

Refer to Note 18 to our consolidated financial statements for additional information about derivative financial instruments.

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-K

Item 7. Management’s Discussion and Analysis