First Internet Bancorp 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes appearing elsewhere in this report. This discussion and analysis includes certain forward-looking statements that involve risks, uncertainties, and assumptions. You should review the “Risk Factors” sections of this report and our Annual Report on Form 10-K for the year ended December 31, 2021 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 also “Cautionary Note Regarding Forward-Looking Statements” at the beginning of this report. Overview First Internet Bancorp (“we,” “our,” “us,” or the “Company”) is a bank holding company with $4.2 billion in total assets as of March 31, 2022, that conducts its primary business activities through its wholly owned subsidiary, First Internet Bank of Indiana, an Indiana chartered bank (the “Bank”). The Bank was the first state-chartered, Federal Deposit Insurance Corporation (“FDIC”) insured Internet bank and commenced banking operations in 1999. The Company was incorporated under the laws of the State of Indiana on September 15, 2005. On March 21, 2006, we consummated a plan of exchange by which we acquired all of the outstanding shares of the Bank. The Company has two wholly-owned subsidiaries: the Bank and FC Subsidiary, Inc., a Georgia corporation, formed in connection with our potential acquisition of First Century Bancorp. The Bank has three wholly-owned subsidiaries: First Internet Public Finance Corp., an Indiana corporation that provides a range of public and municipal finance lending and leasing products to governmental entities throughout the United States and acquires securities issued by state and local governments and other municipalities; JKH Realty Services, LLC, a Delaware limited liability company that manages other real estate owned (“OREO”) properties as needed; and SPF15, Inc., an Indiana corporation that owns real estate used primarily for the Bank’s principal office. We offer a wide range of commercial, small business, consumer and municipal banking products and services. We conduct our consumer and small business deposit operations primarily through digital channels on a nationwide basis and have no traditional branch offices. Our residential mortgage products are offered nationwide primarily through a digital direct-to-consumer platform and are supplemented with Central Indiana-based mortgage and construction lending. Our consumer lending products are primarily originated on a nationwide basis through relationships with dealerships and financing partners. Our commercial banking products and services are delivered through a relationship banking model and include commercial real estate (“CRE”) banking, commercial and industrial (“C&I”) banking, public finance, healthcare finance, small business lending, franchise finance and commercial deposits and treasury management. Within CRE banking, we offer single tenant lease financing on a nationwide basis in addition to traditional investor CRE and construction loans primarily within Central Indiana or on a regional basis. Our C&I banking team provides credit solutions such as lines of credit, term loans, owner-occupied CRE loans and corporate credit cards on a regional basis to commercial borrowers primarily in the Midwest and Southwest regions of the United States. Our public finance team provides a range of public and municipal lending and leasing products to government entities on a nationwide basis. Our healthcare finance team was established in conjunction with our strategic partnership with Provide, Inc. (formerly known as Lendeavor, Inc.), a San Francisco-based technology-enabled lender to healthcare practices, which provided lending on a nationwide basis for healthcare practice finance or acquisition, acquisition or refinancing of owner-occupied CRE and equipment purchases. In the third quarter 2021, Provide Inc. was acquired by a super-regional financial institution. It is our expectation that the acquiring institution will retain most, if not all, of Provide’s loan origination activity and that our healthcare finance loan balances will decline. Our franchise finance business was established in July 2021 in conjunction with our business relationship with ApplePie Capital, a financial technology (“fintech”) company that specializes in providing financing to franchisees in various industry segments. Our commercial deposits and treasury management team works with the other commercial teams to provide deposit products and treasury management services to our commercial and municipal lending customers as well as pursues commercial deposit opportunities in business segments where we have no credit relationships. We believe that we can differentiate ourselves from larger financial institutions by providing a full suite of services to emerging small businesses and entrepreneurs on a nationwide basis. We have hired and continue to recruit experienced small business sales, credit and operations personnel to expand our capabilities in small business lending and U.S. government 38 guaranteed lending programs. We continue to scale up this business with the goal of driving increased earnings and profitability in future periods. We plan to expand our fintech partnerships. With the rapid evolution of technology that enables consumers and small businesses to manage their finances digitally, fintechs are addressing a significantly growing marketplace. Fintechs have created robust digital offerings, unburdened by legacy technology architecture, to address growing customer expectations. Through partnerships with selected fintechs, we believe our ability to win and retain consumer and small business relationships will be significantly enhanced. Furthermore, we believe partnering with select fintechs will allow us to further diversify our revenue sources, acquire lower-cost deposits and pursue additional asset generation capabilities. Merger Transaction On May 1, 2022, First Century Bancorp. (“First Century”) terminated the previously announced Agreement and Plan of Merger dated November 1, 2021 (the “Merger Agreement”), by and among the Company, FC Subsidiary, Inc. and First Century. Under the Merger Agreement, the consummation of the merger was to have occurred on or before April 30, 2022. The Board of Governors of the Federal Reserve approved the merger on April 29, 2022, but the parties were precluded from closing immediately thereafter due to statutory waiting periods. The parties were unable to agree on extension terms, and First Century exercised its option to terminate the Merger Agreement. 39 Results of Operations During the first quarter 2022, net income was $11.2 million, or $1.14 per diluted share, compared to first quarter 2021 net income of $10.5 million, or $1.05 per diluted share, representing an increase in net income of $0.8 million, or 7.3%, and an increase in diluted earnings per share of $0.09, or 8.6%. The $0.8 million increase in net income for the first quarter 2022 compared to the first quarter 2021 was due primarily to an increase of $5.2 million, or 25.5%, in net interest income, a decrease of $0.5 million, or 38.0%, in provision for loan losses and a decrease of $0.1 million, or 3.6%, in income tax expense, partially offset by a $3.5 million, or 22.6%, increase in noninterest expense and a decrease of $1.6 million, or 18.6%, in noninterest income. During the first quarter 2022, return on average assets (“ROAA”), return on average shareholders’ equity (“ROAE”), and return on average tangible common equity (“ROATCE”) were 1.08%, 11.94%, and 12.09%, respectively, compared to 1.02%, 12.61%, and 12.79%, respectively, for the first quarter 2021. During the first quarter 2022, the Company had a nonrecurring consulting fee associated with a special project of $0.9 million, as well as acquisition-related expenses of $0.2 million. Excluding these items, adjusted net income for the first quarter 2022 was $12.0 million and adjusted diluted earnings per share was $1.22. Additionally, for the first quarter 2022, adjusted ROAA, adjusted ROAE and adjusted ROATCE were 1.16%, 12.82% and 12.98%, respectively. These adjusted profitability ratios improved in the 2022 period compared to the 2021 period, as increases in net income and adjusted net income outpaced average asset growth. Refer to the “Reconciliation of Non-GAAP Financial Measures” section of Part I, Item 2 of this report, Management’s Discussion and Analysis of Financial Condition and Results of Operations for additional information. 40 Consolidated Average Balance Sheets and Net Interest Income Analyses For the periods presented, the following tables provide the average balances of interest-earning assets and interest-bearing liabilities and the related yields and cost of funds. The tables do not reflect any effect of income taxes except for net interest margin - FTE, as discussed below. Balances are based on the average of daily balances. Nonaccrual loans are included in average loan balances. Three Months Ended March 31, 2022 December 31, 2021 March 31, 2021 (in thousands) Average Balance Interest /Dividends Yield /Cost Average Balance Interest /Dividends Yield /Cost Average Balance Interest /Dividends Yield /Cost Assets Interest-earning assets Loans, including loans held-for-sale $ 2,976,037 $ 33,188 4.52 % $ 2,947,053 $ 31,621 4.26 % $ 3,079,130 $ 30,885 4.07 % Securities - taxable 567,776 2,221 1.59 % 595,024 1,973 1.32 % 461,300 1,779 1.56 % Securities - non-taxable 80,952 249 1.25 % 82,556 236 1.13 % 87,129 281 1.31 % Other earning assets 455,960 376 0.33 % 431,621 362 0.33 % 446,045 335 0.30 % Total interest-earning assets 4,080,725 36,034 3.58 % 4,056,254 34,192 3.34 % 4,073,604 33,280 3.31 % Allowance for loan losses (27,974) (27,946) (29,884) Noninterest-earning assets 162,167 149,270 129,553 Total assets $ 4,214,918 $ 4,177,578 $ 4,173,273 Liabilities Interest-bearing liabilities Interest-bearing demand deposits $ 318,281 $ 412 0.52 % $ 210,283 $ 158 0.30 % $ 180,746 $ 133 0.30 % Savings accounts 60,616 53 0.35 % 63,575 58 0.36 % 46,035 40 0.35 % Money market accounts 1,454,436 1,503 0.42 % 1,453,447 1,507 0.41 % 1,369,626 1,391 0.41 % BaaS - brokered deposits 12,111 6 0.20 % — — 0.00 % — — 0.00 % Certificates and brokered deposits 1,225,976 4,123 1.36 % 1,305,130 4,676 1.42 % 1,519,580 7,064 1.89 % Total interest-bearing deposits 3,071,420 6,097 0.81 % 3,032,435 6,399 0.84 % 3,115,987 8,628 1.12 % Other borrowed funds 619,191 4,187 2.74 % 619,115 4,288 2.75 % 583,780 4,127 2.87 % Total interest-bearing liabilities 3,690,611 10,284 1.13 % 3,651,550 10,687 1.16 % 3,699,767 12,755 1.40 % Noninterest-bearing deposits 112,248 113,887 90,764 Other noninterest-bearing liabilities 31,292 35,309 46,774 Total liabilities 3,834,151 3,800,746 3,837,305 Shareholders’ equity 380,767 376,832 335,968 Total liabilities and shareholders’ equity $ 4,214,918 $ 4,177,578 $ 4,173,273 Net interest income $ 25,750 $ 23,505 $ 20,525 Interest rate spread 1 2.45% 2.18% 1.91 % Net interest margin 2 2.56% 2.30% 2.04 % Net interest margin - FTE 3 2.69% 2.43% 2.18 % 1 Yield on total interest-earning assets minus cost of total interest-bearing liabilities. 2 Net interest income divided by total average interest-earning assets (annualized). 3 On an FTE basis assuming a 21% tax rate. Net interest income is adjusted to reflect income from assets such as municipal loans and securities that are exempt from Federal income taxes. This is to recognize the income tax savings that facilitates a comparison between taxable and tax-exempt assets. The Company believes that it is a standard practice in the banking industry to present net interest margin and net interest income on a fully-taxable equivalent basis, as these measures provide useful information to make peer comparisons. Net interest margin - FTE represents a non-GAAP financial measure. See “Reconciliation of Non-GAAP Financial Measures” for a reconciliation of this measure to its most directly comparable GAAP measure. 41 Rate/Volume Analysis The following table illustrates the impact of changes in the volume of interest-earning assets and interest-bearing liabilities and interest rates on net interest income for the periods indicated. The change in interest not due solely to volume or rate has been allocated in proportion to the absolute dollar amounts of the change in each. Three Months Ended March 31, 2022 vs. December 31, 2021 Due to Changes in Three Months Ended March 31, 2022 vs. March 31, 2021 Due to Changes in (in thousands) Volume Rate Net Volume Rate Net Interest income Loans, including loans held-for-sale $ 218 $ 1,349 $ 1,567 $ (5,906) $ 8,209 $ 2,303 Securities – taxable (543) 791 248 408 34 442 Securities – non-taxable (28) 41 13 (19) (13) (32) Other earning assets 14 — 14 7 33 40 Total (339) 2,181 1,842 (5,510) 8,263 2,753 Interest expense Interest-bearing deposits 401 (703) (302) (124) (2,407) (2,531) Other borrowed funds 1 (102) (101) 903 (843) 60 Total 402 (805) (403) 779 (3,250) (2,471) (Decrease) increase in net interest income $ (741) $ 2,986 $ 2,245 $ (6,289) $ 11,513 $ 5,224 Net interest income for the first quarter 2022 was $25.8 million, an increase of $5.2 million, or 25.5%, compared to $20.5 million for the first quarter 2021. The increase in net interest income was the result of a $2.8 million, or 8.3% increase in total interest income to $36.0 million for the first quarter 2022 from $33.3 million for the first quarter 2021, as well as a $2.5 million, or 19.4%, decrease in total interest expense to $10.3 million for the first quarter 2022 from $12.8 million for the first quarter 2021. The increase in total interest income for the first quarter 2022 compared to the first quarter 2021 was due to an increase in interest earned on loans, securities and other earning assets. Interest income earned on loans increased $2.3 million, or 7.5%, due primarily to an increase of 45 basis points (“bps”) in the yield earned on average loan balances, partially offset by a decrease of $103.1 million, or 3.3%, in average loan balances. The increase in interest income was driven primarily by the recognition of $2.9 million of income from tax refund advance loans, partially offset by lower loan fees. The decrease in average loan balances was due primarily to decreases in the average balance of healthcare finance, single tenant lease financing, public finance, owner-occupied CRE and small business lending portfolios, driven in part by prepayment activity, partially offset by increases in the average balance of tax refund advance loans, construction, commercial and industrial, and investor CRE loan portfolios. The increase in loan yield was due to the income received from tax refund advance loans discussed above, as well as a shift in the loan mix towards higher-yielding commercial loans, partially offset by lower average loan balances. Interest earned on securities increased due primarily to an increase of $100.3 million, or 18.3%, in the average balance of securities and an increase of 2 bps in the yield earned on securities. Interest income earned on other earning assets increased by less than $0.1 million, or 12.2%, due mainly to a 3 bp increase in the yield earned on these assets, as well as an increase of $9.9 million, or 2.2%, in the average balance of other earning assets. The increase in the average balance of other earning assets was due primarily to higher cash balances. 42 The decrease in total interest expense for the first quarter 2022 compared to the first quarter 2021 was due primarily to a decrease in interest expense related to certificates and brokered deposits, partially offset by increases in interest expense associated with interest-bearing demand deposits, money market accounts and other borrowed funds. Interest expense on certificates and brokered deposits decreased $2.9 million, or 41.6%, due to a decline of 53 bps in the cost of these deposits, as well as a $293.6 million, or 19.3%, 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 increase in interest expense related to interest-bearing demand deposits was due primarily to approximately $100.0 million in deposits with a contractual term of five years and a fixed rate of 1.15% pursuant to a new customer relationship. The $0.1 million, or 8.1%, increase in interest expense related to money market accounts was driven primarily by an increase of $84.8 million, or 6.2%, in the average balance of these deposits. Average money market balances increased from the prior year period due primarily 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 increase in interest expense associated with other borrowed funds was due primarily to an increase of $34.2 million, or 48.8%, in the average balance of subordinated debt, partially offset by a 213 bp decrease in the cost of subordinated debt resulting from the issuance of the 2031 Notes and the redemption of the 2026 Notes. Overall, the cost of total interest-bearing liabilities for the first quarter 2022 declined 27 bps to 1.13% from 1.40% for the first quarter 2021. Declines in the cost of funds were due mainly to higher cost certificates and brokered deposits maturing without renewal or being renewed at lower rates. Furthermore, a shift in the deposit composition from certificates and brokered deposits to lower cost non-maturity deposit accounts also contributed to the decline in the cost of deposit funding. Net interest margin (“NIM”) was 2.56% for the first quarter 2022 compared to 2.04% for the first quarter 2021, an increase of 52 bps. On a fully-taxable equivalent (“FTE”) basis, NIM was 2.69% for the first quarter 2022 compared to 2.18% for the first quarter 2021, an increase of 51 bps. The increase in first quarter 2022 NIM and FTE NIM compared to the first quarter 2021 reflects the decrease in the cost of funds and increase in earning asset yields noted above. The Company expects deposit costs to remain relatively stable for most of 2022. Given the significant on-balance sheet liquidity across the industry, we don’t believe increases in market interest rates will have a significant impact on our deposit pricing in the near term. Noninterest Income The following table presents noninterest income for the last five completed fiscal quarters. Three Months Ended (in thousands) March 31, 2022 December 31, 2021 September 30, 2021 June 30, 2021 March 31, 2021 Service charges and fees $ 316 $ 292 $ 276 $ 280 $ 266 Loan servicing revenue 585 544 511 457 422 Loan servicing asset revaluation (297) (400) (274) (240) (155) Mortgage banking activities 1,873 2,776 3,850 2,674 5,750 Gain on sale of loans 3,845 4,137 2,719 3,019 1,723 Gain on sale of premises and equipment — — — 2,523 — Other 498 345 731 249 369 Total noninterest income $ 6,820 $ 7,694 $ 7,813 $ 8,962 $ 8,375 During the first quarter 2022, noninterest income was $6.8 million, representing a decrease of $1.6 million, or 18.6%, compared to $8.4 million for the first quarter 2021. The decrease in noninterest income was due primarily to a decrease in revenue from mortgage banking activities, partially offset by an increase in gain on sale of loans. The decline in mortgage banking revenue in the first quarter 2022 compared to the first quarter 2021 was due primarily to decreases in interest rate locks, sold loan volumes and gain on sale margins. The increase in gain on sale of loans was due to an increase in the volume of U.S. SBA 7(a) guaranteed loan sales, as well as a $0.4 million gain on sale on the sale of $14.4 million of single tenant lease financing loans. 43 Noninterest Expense The following table presents noninterest expense for the last five completed fiscal quarters. Three Months Ended (in thousands) March 31, 2022 December 31, 2021 September 30, 2021 June 30, 2021 March 31, 2021 Salaries and employee benefits $ 9,878 $ 10,183 $ 9,316 $ 9,232 $ 9,492 Marketing, advertising and promotion 756 896 813 872 680 Consulting and professional services 1,925 1,262 728 1,078 986 Data processing 449 425 380 382 462 Loan expenses 1,582 654 383 541 534 Premises and equipment 2,540 2,188 1,687 1,587 1,601 Deposit insurance premium 281 283 230 275 425 Other 1,369 1,064 914 1,108 1,137 Total noninterest expense $ 18,780 $ 16,955 $ 14,451 $ 15,075 $ 15,317 Noninterest expense for the first quarter 2022 was $18.8 million, compared to $15.3 million for the first quarter 2021. The increase of $3.5 million, or 22.6%, was due primarily to increases of $1.0 million in loan expenses, $0.9 million in premises and equipment, $0.9 million in consulting and professional services, $0.4 million in salaries and employee benefits and $0.2 million in other expense. The increase in loan expenses was driven primarily by servicing fees related to tax refund advance loans. The increase in premises and equipment was primarily related to costs associated with the Company’s new corporate headquarters. The increase in consulting and professional services was due primarily to a nonrecurring consulting fee and acquisition-related expenses. The increase in salaries and employee benefits was due mainly to increased headcount and small business lending incentive compensation, partially offset by a decrease in mortgage banking incentive compensation and lower employee benefits costs. Income tax provision was $1.8 million for the first quarter 2022, resulting in an effective tax rate of 13.8%, compared to a tax provision of $1.9 million for the first quarter 2021 and an effective tax rate of 15.1%. Financial Condition The following table presents summary balance sheet data for the last five completed fiscal quarters. (in thousands) Balance Sheet Data: March 31, 2022 December 31, 2021 September 30, 2021 June 30, 2021 March 31, 2021 Total assets $ 4,225,397 $ 4,210,994 $ 4,252,292 $ 4,204,642 $ 4,188,570 Loans 2,880,780 2,887,662 2,936,148 2,957,608 3,058,694 Total securities 628,658 662,609 696,136 729,178 530,566 Loans held-for-sale 33,991 47,745 43,970 27,587 30,235 Noninterest-bearing deposits 119,196 117,531 110,117 113,996 100,700 Interest-bearing deposits 3,098,783 3,061,428 3,114,478 3,092,151 3,116,903 Total deposits 3,217,979 3,178,959 3,224,595 3,206,147 3,217,603 Advances from Federal Home Loan Bank 514,923 514,922 514,920 514,919 514,917 Total shareholders’ equity 374,655 380,338 370,442 358,641 344,566 Total assets increased $14.4 million, or 0.3%, to $4.2 billion at March 31, 2022 compared to $4.2 billion at December 31, 2021. As of March 31, 2022, total shareholders’ equity was $374.7 million, a decrease of $5.7 million, or 1.5%, compared to December 31, 2021, due primarily to an increase in accumulated other comprehensive loss resulting from a decline in the value of the available-for-sale securities portfolio following the rapid rise in interest rates during the quarter, as well as stock repurchase activity during the quarter. This was partially offset by the net income earned during the quarter and an increase in the value of interest rate swaps classified as cash flow hedges. Tangible common equity totaled $370.0 million as of March 31, 2022, representing a decrease of $5.7 million, or 1.5%, compared to December 31, 2021. The ratio of total shareholders’ equity to total assets decreased to 8.87% as of March 31, 2022 from 9.03% as of December 31, 2021, and the ratio of tangible common equity to tangible assets decreased to 8.77% as of March 31, 2022 from 8.93% as of December 31, 2021. 44 Book value per common share decreased 0.8% to $38.69 as of March 31, 2022 from $38.99 as of December 31, 2021. Tangible book value per share decreased 0.8% to $38.21 as of March 31, 2022 from $38.51 as of December 31, 2021. The decline in both book value per common share and tangible book value per share reflects the decline in total shareholders’ equity and tangible common equity. Refer to the “Reconciliation of Non-GAAP Financial Measures” section of Part I, Item 2 of this report, Management’s Discussion and Analysis of Financial Condition and Results of Operations for additional information. Loan Portfolio Analysis The following table presents a summary of the Company’s loan portfolio for the last five completed fiscal quarters. (dollars in thousands) March 31, 2022 December 31, 2021 September 30, 2021 June 30, 2021 March 31, 2021 Commercial loans Commercial and industrial $ 99,808 3.5 % $ 96,008 3.3 % $ 107,142 3.6 % $ 96,203 3.3 % $ 71,835 2.3 % Owner-occupied commercial real estate 56,752 2.0 % 66,732 2.3 % 84,819 2.9 % 87,136 2.9 % 87,930 2.9 % Investor commercial real estate 34,627 1.2 % 28,019 1.0 % 28,505 1.0 % 28,871 1.0 % 14,832 0.5 % Construction 149,662 5.2 % 136,619 4.7 % 115,414 3.9 % 117,970 4.0 % 123,483 4.0 % Single tenant lease financing 852,519 29.6 % 865,854 30.0 % 921,998 31.5 % 913,115 30.9 % 941,322 30.8 % Public finance 587,817 20.4 % 592,665 20.5 % 601,738 20.5 % 612,138 20.7 % 637,600 20.8 % Healthcare finance 354,574 12.3 % 387,852 13.4 % 417,388 14.2 % 455,890 15.3 % 510,237 16.8 % Small business lending 97,040 3.4 % 108,666 3.8 % 102,889 3.5 % 123,293 4.2 % 132,490 4.3 % Franchise finance 107,246 3.7 % 81,448 2.8 % 25,598 0.9 % — 0.0 % — 0.0 % Total commercial loans 2,340,045 81.3 % 2,363,863 81.8 % 2,405,491 82.0 % 2,434,616 82.3 % 2,519,729 82.4 % Consumer loans Residential mortgage 191,153 6.6 % 186,770 6.5 % 188,750 6.4 % 177,148 6.0 % 190,148 6.2 % Home equity 18,100 0.6 % 17,665 0.6 % 17,960 0.6 % 17,510 0.6 % 17,949 0.6 % Other consumer 270,330 9.4 % 265,478 9.2 % 268,396 9.1 % 271,796 9.2 % 270,209 8.8 % Tax refund advance loans 9,177 0.3 % — 0.0 % — 0.0 % — 0.0 % — 0.0 % Total consumer loans 488,760 16.9 % 469,913 16.3 % 475,106 16.1 % 466,454 15.8 % 478,306 15.6 % Net deferred loan origination costs, premiums and discounts on purchased loans and other (1) 51,975 1.8 % 53,886 1.9 % 55,551 1.9 % 56,538 1.9 % 60,659 2.0 % Total loans 2,880,780 100.0 % 2,887,662 100.0 % 2,936,148 100.0 % 2,957,608 100.0 % 3,058,694 100.0 % Allowance for loan losses (28,251) (27,841) (28,000) (28,066) (30,642) Net loans $ 2,852,529 $ 2,859,821 $ 2,908,148 $ 2,929,542 $ 3,028,052 (1) Includes carrying value adjustments of $36.4 million, $37.5 million, $38.9 million, $40.4 million and $41.6 million related to terminated interest rate swaps associated with public finance loans as of March 31, 2022, December 31, 2021, September 30, 2021, June 30, 2021, and March 31, 2021, respectively. Total loans were $2.9 billion as of March 31, 2022, a decrease of $6.9 million, or 0.2%, compared to December 31, 2021. Total commercial loan balances were $2.3 billion as of March 31, 2022, down $23.8 million, or 1.0%, from December 31, 2021. Total consumer loan balances were $488.8 million as of March 31, 2022, an increase of $18.8 million, or 4.0%, compared to December 31, 2021. Compared to December 31, 2021, the decline in commercial loan balances was driven largely by net payoffs in healthcare finance, small business lending, which included PPP repayment as well as some prepayments and sales of seasoned loans, owner-occupied commercial real estate and public finance loans, as well as the sale of $14.4 million of single tenant lease financing loans. This decline was partially offset by growth in franchise finance, construction, investor commercial real estate and commercial and industrial loan balances. The increase in consumer loans was due to higher balances in the residential mortgage, recreational vehicles and trailers loan portfolios, as well as the remaining outstanding balance of tax refund advance loans originated during the first quarter 2022. 45 Franchise finance was established in July 2021 in partnership with ApplePie Capital, a leading provider of growth financing to franchisees in various industry segments across the country. Through this relationship, we began funding portfolio loans in 2021 and as of March 31, 2022, we have funded a total of $107.4 million in loans. Also, the Company funded $184.2 million of tax refund advance loans during the first quarter of 2022 and received repayments of $173.6 million. At quarter end, $9.2 million of balances remained outstanding on the tax refund advance loans. 46 Asset Quality Nonperforming loans are comprised of nonaccrual loans and loans 90 days past due and accruing. Nonperforming assets include nonperforming loans, other real estate owned and other nonperforming assets, which consist of repossessed assets. The following table provides a summary of the Company’s nonperforming assets for the last five completed fiscal quarters. (dollars in thousands) March 31, 2022 December 31, 2021 September 30, 2021 June 30, 2021 March 31, 2021 Nonaccrual loans Commercial loans: Commercial and industrial $ 610 $ 674 $ 678 $ 692 $ 1,002 Owner-occupied commercial real estate 3,267 3,419 3,429 3,487 4,266 Single tenant lease financing 1,092 1,100 1,100 2,373 7,080 Small business lending (1) 881 959 1,351 1,209 865 Total commercial loans 5,850 6,152 6,558 7,761 13,213 Consumer loans: Residential mortgage 1,207 1,226 1,253 1,253 1,120 Home equity 14 14 14 14 15 Other consumer 13 9 26 10 23 Total consumer loans 1,234 1,249 1,293 1,277 1,158 Total nonaccrual loans 7,084 7,401 7,851 9,038 14,371 Past Due 90 days and accruing loans Commercial loans: Commercial and industrial — — — — 278 Total commercial loans — — — — 278 Total past due 90 days and accruing loans — — — — 278 Total nonperforming loans 7,084 7,401 7,851 9,038 14,649 Other real estate owned Single tenant lease financing — 1,188 1,188 1,188 — Residential mortgage — — — 112 — Total other real estate owned — 1,188 1,188 1,300 — Other nonperforming assets 1 29 — — 29 Total nonperforming assets $ 7,085 $ 8,618 $ 9,039 $ 10,338 $ 14,678 Total nonperforming loans to total loans (2) 0.25 % 0.26 % 0.27 % 0.31 % 0.48 % Total nonperforming assets to total assets (2) 0.17 % 0.20 % 0.21 % 0.25 % 0.35 % Allowance for loan losses to total loans 0.98 % 0.96 % 0.95 % 0.95 % 1.00 % Nonaccrual loans to total loans 0.25 % 0.26 % 0.27 % 0.31 % 0.47 % Allowance for loan losses to nonperforming loans (2) 398.8 % 376.2 % 356.6 % 310.5 % 209.2 % 1 Balance represents U.S. government guaranteed loans. 2 Includes the impact of nonperforming small business lending loans, which are guaranteed by the U.S. government. 47 Troubled Debt Restructurings The following table provides a summary of troubled debt restructurings for the last five completed fiscal quarters. (in thousands) March 31, 2022 December 31, 2021 September 30, 2021 June 30, 2021 March 31, 2021 Troubled debt restructurings – nonaccrual $ 2,440 $ 2,492 $ 2,550 $ 2,581 $ 2,606 Troubled debt restructurings – performing 2,418 1,693 843 1,179 1,187 Total troubled debt restructurings $ 4,858 $ 4,185 $ 3,393 $ 3,760 $ 3,793 The decline in nonperforming loans of $0.3 million, or 4.3%, to $7.1 million as of March 31, 2022 compared to $7.4 million as of December 31, 2021 was due primarily to repayment activity in the small business lending, owner-occupied commercial real estate and commercial and industrial loan portfolios. Total nonperforming assets decreased $1.5 million, or 17.8%, as of March 31, 2022 compared to December 31, 2021, due primarily to the $0.3 million decrease in nonperforming loans discussed above, as well as the decline in other real estate owned (“OREO”) discussed below. The ratio of nonperforming loans to total loans decreased to 0.25% as of March 31, 2022 compared to 0.26% as of December 31, 2021, and the ratio of nonperforming assets to total assets decreased to 0.17% as of March 31, 2022 compared to 0.20% as of December 31, 2021. Total TDRs as of March 31, 2022 were $4.9 million, up $0.7 million from December 31, 2021. The increase was driven by one residential mortgage loan that became a TDR during the first quarter 2022. As of December 31, 2021, the Company had one single tenant lease financing property in OREO with a carrying value of $1.2 million. During the first quarter 2022, the Company reached a settlement agreement with the guarantor, which resulted in the Company recovering $1.2 million in excess of the carrying value of OREO. As of March 31, 2022, the Company did not own any OREO. Non-TDR Loan Modifications due to COVID-19 The “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus” was issued by our banking regulators on March 22, 2020. This guidance encourages financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations due to the effects of COVID-19. 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 were in effect from the period beginning March 1, 2020 until January 1, 2022. 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 March 31, 2022, the Company had seven loans totaling $9.8 million in non-TDR loan modifications due to COVID-19. U.S. Small Business Administration Paycheck Protection Program Section 1102 of the CARES Act created the PPP, which is jointly administered by the U.S. Small Business Administration (“SBA”) and the Department of the Treasury. 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 workforce 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. The Company 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. The Company 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. The Company 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 48 are fully guaranteed by the SBA. The loans originated during 2021 bear an interest rate of 1.00% and the Company received gross origination fees of approximately $1.3 million. The Company 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. The Company began processing applications for forgiveness from this round beginning in May 2021 and 99% of loan balances have been forgiven as of March 31, 2022. The Company anticipates that the majority of the PPP loans 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 throughout 2022. The following table provides a rollforward of the activity of PPP loans through March 31, 2022. (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 Originated — — — Principal repaid (18) (2,149) Net deferred fees recognized — (75) Balance, March 31, 2022 5 $ 1,003 $ 24 49 Allowance for Loan Losses The following table provides a rollforward of the allowance for loan losses for the last five completed fiscal quarters. Three Months Ended (in thousands) March 31, 2022 December 31, 2021 September 30, 2021 June 30, 2021 March 31, 2021 Balance, beginning of period $ 27,841 $ 28,000 $ 28,066 $ 30,642 $ 29,484 Provision (credit) charged to expense 791 (238) (29) 21 1,276 Losses charged off Commercial and industrial — — — 28 — Single tenant lease financing — — — 2,392 — Small business lending 80 — 10 133 79 Residential mortgage — — — 6 — Home equity — — — — 51 Other consumer 163 106 110 131 181 Tax refund advance loans 1,488 — — — — Total losses charged off 1,731 106 120 2,690 311 Recoveries Commercial and industrial — 3 2 2 82 Single tenant lease financing 1,231 — — — — Small business lending 17 48 26 2 4 Residential mortgage 1 51 3 4 5 Home equity 2 2 2 1 2 Other consumer 99 81 50 84 100 Total losses charged off 1,350 185 83 93 193 Balance, end of period $ 28,251 $ 27,841 $ 28,000 $ 28,066 $ 30,642 Net charge-offs (recoveries) $ 381 $ (79) $ 37 $ 2,597 $ 118 Net charge-offs (recoveries) to average loans (annualized) Commercial and industrial 0.00 % (0.01 %) (0.01 %) 0.14 % (0.49 %) Single tenant lease financing (0.58 %) 0.00 % 0.00 % 1.04 % 0.00 % Small business lending 0.23 % (0.17 %) (0.05 %) 0.35 % 0.20 % Total commercial net charge-offs (recoveries) (0.20 %) (0.01 %) 0.00 % 0.42 % 0.00 % Residential mortgage 0.00 % (0.11 %) (0.01 %) 0.00 % (0.01 %) Home equity (0.04 %) (0.04 %) (0.05 %) (0.02 %) 1.04 % Other consumer 0.40 % 0.28 % 0.24 % 0.32 % 0.42 % Tax refund advance loans 9.97 % 0.00 % 0.00 % 0.00 % 0.00 % Total consumer net charge-offs (recoveries) 0.05 % (0.01 %) 0.01 % 0.35 % 0.02 % Total net charge-offs (recoveries), excluding tax refund advance loans (0.16 %) (0.01 %) 0.01 % 0.35 % 0.02 % The allowance for loan losses was $28.3 million as of March 31, 2022, compared to $27.8 million as of December 31, 2021. The allowance for loan losses as a percentage of total loans, including and excluding PPP loans, was 0.98% at March 31, 2022, compared to 0.96%, or 0.97% when excluding PPP loans, at December 31, 2021. The allowance for loan losses as a percentage of nonperforming loans increased to 398.8% as of March 31, 2022, compared to 376.2% as of December 31, 2021. Net charge-offs of $0.4 million were recognized during the first quarter 2022, resulting in net charge-offs to average loans of 0.05%, compared to net charge-offs to average loans of 0.02% for the first quarter 2021. Excluding $1.5 million of net charge-offs related to tax refund advance loans, net recoveries of $1.1 million were recognized during the first quarter 2022, resulting in net recoveries to average loans of 0.16%. The provision for loan losses in the first quarter 2022 was $0.8 million, compared to $1.3 million for the first quarter 2021. The provision for the first quarter 2022 was driven by the provision related to tax refund advance loans, which totaled $1.8 million, and, to a lesser extent, adjustments to qualitative factors that increased the overall allowance as a percentage of 50 loans. This was partially offset by a $1.2 million recovery on a single tenant lease financing relationship that previously had been partially charged-off with the remaining balance transferred to other real estate owned. Investment Securities Portfolio The following tables present the amortized cost and approximate fair value of our investment portfolio by security type for the last five completed fiscal quarters. (in thousands) Amortized Cost March 31, 2022 December 31, 2021 September 30, 2021 June 30, 2021 March 31, 2021 Securities available-for-sale U.S. Government-sponsored agencies $ 45,335 $ 50,013 $ 53,380 $ 57,984 $ 60,815 Municipal securities 72,420 75,158 76,528 77,364 79,168 Agency mortgage-backed securities - residential 276,392 377,928 398,504 410,971 197,326 Agency mortgage-backed securities - commercial 24,815 36,024 34,109 34,924 32,655 Private label mortgage-backed securities - residential 15,090 15,902 19,997 29,003 40,550 Asset-backed securities 5,000 5,000 5,000 5,000 5,000 Corporate securities 47,580 46,482 48,460 48,447 48,433 Total available-for-sale 486,632 606,507 635,978 663,693 463,947 Securities held-to-maturity Municipal securities 13,981 13,992 14,538 14,549 14,560 Agency mortgage-backed securities - residential 95,982 — — — — Agency mortgage-backed securities - commercial 5,847 — — — — Corporate securities 47,560 45,573 47,591 51,110 53,630 Total held-to-maturity 163,370 59,565 62,129 65,659 68,190 Total securities $ 650,002 $ 666,072 $ 698,107 $ 729,352 $ 532,137 (in thousands) Approximate Fair Value March 31, 2022 December 31, 2021 September 30, 2021 June 30, 2021 March 31, 2021 Securities available-for-sale U.S. Government-sponsored agencies $ 43,847 $ 49,040 $ 52,455 $ 57,135 $ 59,478 Municipal securities 72,804 77,033 77,450 78,438 79,208 Agency mortgage-backed securities - residential 257,682 373,236 395,105 408,710 195,514 Agency mortgage-backed securities - commercial 24,156 36,326 34,780 35,784 33,304 Private label mortgage-backed securities - residential 14,818 16,021 20,235 29,363 41,106 Asset-backed securities 4,986 5,004 5,005 5,005 5,006 Corporate securities 46,995 46,384 48,977 49,084 48,760 Total available-for-sale 465,288 603,044 634,007 663,519 462,376 Securities held-to-maturity Municipal securities 14,093 14,709 15,319 15,373 15,109 Agency mortgage-backed securities - residential 92,939 — — — — Agency mortgage-backed securities - commercial 5,420 — — — — Corporate securities 47,519 46,759 49,018 52,685 54,274 Total held-to-maturity 159,971 61,468 64,337 68,058 69,383 Total securities $ 625,259 $ 664,512 $ 698,344 $ 731,577 $ 531,759 The approximate fair value of available-for-sale investment securities decreased $137.8 million, or 22.8%, to $465.3 million as of March 31, 2022, compared to $603.0 million as of December 31, 2021. The decrease was due primarily to a decrease of $115.6 million in agency mortgage-backed securities - residential, a decrease of $12.2 million in agency mortgage- 51 backed securities - commercial and a decrease of $5.2 million in U.S. Government-sponsored agencies. The decrease in agency mortgage-backed securities - residential and agency mortgage-backed securities - commercial was due primarily to the transfer of $96.2 million of these securities from available-for-sale to held-to-maturity in the first quarter 2022, as well as a decline in fair value resulting from the rapid rise in interest rates during the quarter. The decreases in other securities types were also driven by a decline in value resulting from the rapid rise in interest rates. Accrued Income and Other Assets Accrued income and other assets decreased $12.4 million, or 26.4%, to $34.5 million at March 31, 2022 compared to $46.9 million at December 31, 2021. The decrease was primarily related to a decrease of $12.9 million in cash pledged as collateral. As of these dates, the Company pledged $2.7 million and $15.7 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. Accrued Expenses and Other Liabilities Accrued expenses and other liabilities were $12.0 million at March 31, 2022 compared to $30.5 million at December 31, 2021. The decrease in accrued expenses and other liabilities was due primarily to decreases of $11.4 million, or 79.6%, in derivative liabilities, a $3.8 million decrease in accrued taxes payable and a $2.3 million decrease in accrued bonuses. Deposits The following table presents the composition of the Company’s deposit base for the last five completed fiscal quarters. (dollars in thousands) March 31, 2022 December 31, 2021 September 30, 2021 June 30, 2021 March 31, 2021 Noninterest-bearing deposits $ 119,197 3.7 % $ 117,531 3.7 % $ 110,117 3.4 % $ 113,996 3.6 % $ 100,700 3.1 % Interest-bearing demand deposits 334,723 10.4 % 247,967 7.8 % 201,557 6.3 % 196,841 6.1 % 186,015 5.8 % Savings accounts 66,320 2.1 % 59,998 1.9 % 66,762 2.1 % 56,298 1.8 % 51,251 1.6 % Money market accounts 1,475,857 45.8 % 1,483,936 46.7 % 1,479,358 45.8 % 1,432,355 44.6 % 1,397,449 43.4 % BaaS - brokered deposits 50,006 1.6 % — 0.0 % — 0.0 % — 0.0 % — 0.0 % Certificates of deposits 889,789 27.6 % 970,107 30.5 % 1,043,898 32.4 % 1,087,350 33.9 % 1,174,764 36.5 % Brokered deposits 282,087 8.8 % 299,420 9.4 % 322,903 10.0 % 319,307 10.0 % 307,424 9.6 % Total deposits $ 3,217,979 100.0 % $ 3,178,959 100.0 % $ 3,224,595 100.0 % $ 3,206,147 100.0 % $ 3,217,603 100.0 % Total deposits increased $39.0 million, or 1.2%, to $3.2 billion as of March 31, 2022, compared to $3.2 billion as of December 31, 2021. This increase was due primarily to an increase of $86.8 million, or 35.0%, in interest-bearing demand deposits, $50.0 million in BaaS brokered deposits, and $6.3 million, or 10.5%, in savings accounts, partially offset by decreases of $80.3 million, or 8.3%, in certificates of deposits, $17.3 million, or 5.8%, in brokered deposits, and $8.1 million, or 0.5%, in money market accounts. The increase in the balance of interest-bearing demand deposits was due primarily to approximately $100 million in deposits with a contractual term of five years and a fixed rate of 1.15% pursuant to a new customer relationship. Additionally, the Company generated $50.0 million of new BaaS deposits during the quarter at a cost of 0.20%. Aside from these two new deposit relationships, the balance and cost of non-maturity deposits remained relatively stable from the end of 2021. The decrease in the balance of certificates of deposits was due to the maturity of higher cost balances and reduced pricing strategies designed to limit the volume of new production. 52 Recent Debt Offerings In August 2021, the Company issued $60.0 million aggregate principal amount of 3.75% Fixed-to-Floating Rate Subordinated Notes due 2031 (the “2031 Notes”) in a private placement. The 2031 Notes initially bear a fixed interest rate of 3.75% per year to, but excluding, September 1, 2026, and thereafter a floating rate equal to the then-current benchmark rate (initially three-month Term SOFR plus 3.11%). The 2031 Notes are scheduled to mature on September 1, 2031. The 2031 Notes are unsecured subordinated obligations of the Company and may be repaid, without penalty, on any interest payment date on or after September 1, 2026. The 2031 Notes are intended to qualify as Tier 2 capital under regulatory guidelines. The Company used a portion of the net proceeds from the issuance of the 2031 Notes to redeem the 2026 Notes. Pursuant to the terms of a Registration Rights Agreement between the Company and the initial purchasers of the 2031 Notes, the Company offered to exchange the 2031 Notes for subordinated notes that are registered under the Securities Act of 1933, as amended, and have substantially the same terms as the 2031 Notes. The offering period to exchange the unregistered 2031 Notes for registered 2031 Notes expired on December 30, 2021. Regulatory Capital Requirements The Company and the Bank are subject to various regulatory capital requirements administered by state and federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weighting and other factors. The Basel III Capital Rules became effective for the Company and the Bank on January 1, 2015, subject to a phase-in period for certain provisions. Quantitative measures established by the Basel III Capital Rules to ensure capital adequacy require the maintenance of minimum amounts and ratios of Common Equity Tier 1 capital, Tier 1 capital and Total capital, as defined in the regulations, to risk-weighted assets, and of Tier 1 capital to adjusted quarterly average assets (“Leverage Ratio”). The Basel III Capital Rules were fully phased in on January 1, 2019 and require the Company and the Bank to maintain: 1) a minimum ratio of Common Equity Tier 1 capital to risk-weighted assets of 4.5%, plus a 2.5% “capital conservation buffer” (resulting in a minimum ratio of Common Equity Tier 1 capital to risk-weighted assets of 7.0%); 2) a minimum ratio of Tier 1 capital to risk-weighted assets of 6.0%, plus the capital conservation buffer (resulting in a minimum Tier 1 capital ratio of 8.5%); 3) a minimum ratio of Total capital to risk-weighted assets of 8.0%, plus the capital conservation buffer (resulting in a minimum Total capital ratio of 10.5%); and 4) a minimum Leverage Ratio of 4.0%. The capital conservation buffer is designed to absorb losses during periods of economic stress. Failure to maintain the minimum Common Equity Tier 1 capital ratio plus the capital conservation buffer will result in potential restrictions on a banking institution’s ability to pay dividends, repurchase stock and/or pay discretionary compensation to its employees. 53 The following tables present actual and required capital ratios as of March 31, 2022 and December 31, 2021 for the Company and the Bank under the Basel III Capital Rules. The minimum required capital amounts presented include the minimum required capital levels as of March 31, 2022 and December 31, 2021, which are based on the Basel III Capital Rules. Capital levels required to be considered well capitalized are based upon prompt corrective action regulations, as amended to reflect the changes under the Basel III Capital Rules. Actual Minimum Capital Required - Basel III Minimum Required to be Considered Well Capitalized (dollars in thousands) Capital Amount Ratio Capital Amount Ratio Capital Amount Ratio As of March 31, 2022: Common equity tier 1 capital to risk-weighted assets Consolidated $ 390,255 13.16 % $ 207,661 7.00 % N/A N/A Bank 445,240 15.03 % 207,347 7.00 % $ 192,537 6.50 % Tier 1 capital to risk-weighted assets Consolidated 390,255 13.16 % 252,160 8.50 % N/A N/A Bank 445,240 15.03 % 251,779 8.50 % 236,968 8.00 % Total capital to risk-weighted assets Consolidated 522,812 17.62 % 311,492 10.50 % N/A N/A Bank 473,491 15.99 % 311,021 10.50 % 296,210 10.00 % Leverage ratio Consolidated 390,255 9.26 % 168,584 4.00 % N/A N/A Bank 445,240 10.57 % 168,420 4.00 % 210,524 5.00 % Actual Minimum Capital Required - Basel III Minimum Required to be Considered Well Capitalized (dollars in thousands) Capital Amount Ratio Capital Amount Ratio Capital Amount Ratio As of December 31, 2021: Common equity tier 1 capital to risk-weighted assets Consolidated $ 384,499 12.93 % $ 208,202 7.00 % N/A N/A Bank 432,181 14.55 % 207,913 7.00 % $ 193,062 6.50 % Tier 1 capital to risk-weighted assets Consolidated 384,499 12.93 % 252,817 8.50 % N/A N/A Bank 432,181 14.55 % 252,466 8.50 % 237,615 8.00 % Total capital to risk-weighted assets Consolidated 516,571 17.37 % 312,303 10.50 % N/A N/A Bank 460,022 15.49 % 311,870 10.50 % 297,019 10.00 % Leverage ratio Consolidated 384,499 9.22 % 166,824 4.00 % N/A N/A Bank 432,181 10.37 % 166,693 4.00 % 208,366 5.00 % 54 Shareholders’ Dividends The Company’s Board of Directors declared a cash dividend of $0.06 per share of common stock payable April 18, 2022 to shareholders of record as of March 31, 2022. The Company expects to continue to pay cash dividends on a quarterly basis; however, the declaration and amount of any future cash dividends will be subject to the sole discretion of the Board of Directors and will depend upon many factors, including its results of operations, financial condition, capital requirements, regulatory and contractual restrictions (including with respect to the Company’s outstanding subordinated debt), business strategy and other factors deemed relevant by the Board of Directors. As of March 31, 2022, the Company had $107.0 million principal amount of subordinated debt outstanding evidenced by its 2029 Notes, 2030 Note and 2031 Notes. The agreements that govern our outstanding subordinated debt prohibit the Company from paying any dividends on its common stock or making any other distributions to shareholders at any time when there shall have occurred, and be continuing to occur, an event of default under the applicable agreement. If an event of default were to occur and the Company did not cure it, the Company would be prohibited from paying any dividends or making any other distributions to shareholders or from redeeming or repurchasing any common stock. 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. On October 20, 2021, the Company’s Board of Directors approved a stock repurchase program authorizing the repurchase of up to $30 million of the Company’s outstanding common stock from time to time on the open market or in privately negotiated transactions. The Company repurchased 100,000 shares under this program during 2021 and 103,703 shares under this program during the first quarter 2022. The stock repurchase authorization is scheduled to expire on December 31, 2022. Various factors determine the amount and timing of our share repurchases, including our capital requirements, the number of shares we expect to issue in the future, economic and market conditions (including the trading price of our stock), and regulatory and legal considerations. See Part II, Item 2, of this report for information regarding recent repurchase activity and our remaining authority under the program. Liquidity 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. 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. 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. At March 31, 2022, on a consolidated basis, the Company had $982.8 million in cash and cash equivalents and investment securities available-for-sale and $34.0 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 March 31, 2022, the Bank had the ability to borrow an additional $526.5 million from the FHLB, the Federal Reserve 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. In addition to its operating expenses, the Company is responsible for paying any dividends declared to its common shareholders and interest and principal on outstanding debt. The Company’s primary sources of funds are cash maintained at the holding company level and dividends from the Bank, the payment of which is subject to regulatory limits. At March 31, 2022, the Company, on an unconsolidated basis, had $44.3 million in cash generally available for its cash needs, which is in excess of its current annual regular shareholder dividend and operating expenses. 55 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. At March 31, 2022, approved outstanding loan commitments, including unused lines of credit and standby letters of credit, amounted to $304.8 million. Certificates of deposits and brokered deposits scheduled to mature in one year or less at March 31, 2022 totaled $623.9 million. Management is not aware of any other events or regulatory requirements that, if implemented, are likely to have a material effect on either the Company’s or the Bank’s liquidity. 56 Reconciliation of Non-GAAP Financial Measures 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, average tangible common equity, return on average tangible common equity, total interest income - FTE, adjusted 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, (benefit) provision for loan losses, excluding tax refund advance loans, average loans, excluding tax refund advance loans, net (recoveries) charge-offs to average loans, excluding tax refund advance loans, loans, excluding PPP loans, allowance for loan losses to loans, excluding PPP loans, 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, adjusted effective income tax rate, income before income taxes, excluding tax refund advance loans, income tax provision, excluding tax refund advance loans, and net income, excluding tax refund advance loans 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 a 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 five completed fiscal quarters. (dollars in thousands, except share and per share data) Three Months Ended March 31, 2022 December 31, 2021 September 30, 2021 June 30, 2021 March 31, 2021 Total equity - GAAP $ 374,655 $ 380,338 $ 370,442 $ 358,641 $ 344,566 Adjustments: Goodwill (4,687) (4,687) (4,687) (4,687) (4,687) Tangible common equity $ 369,968 $ 375,651 $ 365,755 $ 353,954 $ 339,879 Total assets - GAAP $ 4,225,397 $ 4,210,994 $ 4,252,292 $ 4,204,642 $ 4,188,570 Adjustments: Goodwill (4,687) (4,687) (4,687) (4,687) (4,687) Tangible assets $ 4,220,710 $ 4,206,307 $ 4,247,605 $ 4,199,955 $ 4,183,883 Common shares outstanding 9,683,727 9,754,455 9,854,153 9,854,153 9,823,831 Book value per common share $ 38.69 $ 38.99 $ 37.59 $ 36.39 $ 35.07 Effect of goodwill (0.48) (0.48) (0.47) (0.47) (0.47) Tangible book value per common share $ 38.21 $ 38.51 $ 37.12 $ 35.92 $ 34.60 Total shareholders’ equity to assets 8.87 % 9.03 % 8.71 % 8.53 % 8.23 % Effect of goodwill (0.10 %) (0.10 %) (0.10 %) (0.10 %) (0.11 %) Tangible common equity to tangible assets 8.77 % 8.93 % 8.61 % 8.43 % 8.12 % Total average equity - GAAP $ 380,767 $ 376,832 $ 366,187 $ 352,894 $ 335,968 Adjustments: Average goodwill (4,687) (4,687) (4,687) (4,687) (4,687) Average tangible common equity $ 376,080 $ 372,145 $ 361,500 $ 348,207 $ 331,281 Return on average shareholders’ equity 11.94 % 13.14 % 13.10 % 14.88 % 12.61 % Effect of goodwill 0.15 % 0.16 % 0.17 % 0.21 % 0.18 % Return on average tangible common equity 12.09 % 13.30 % 13.27 % 15.09 % 12.79 % 57 (dollars in thousands) Three Months Ended March 31, 2022 December 31, 2021 September 30, 2021 June 30, 2021 March 31, 2021 Total interest income $ 36,034 $ 34,192 $ 33,034 $ 33,377 $ 33,280 Adjustments: Fully-taxable equivalent adjustments 1 1,314 1,348 1,356 1,394 1,356 Total interest income - FTE $ 37,348 $ 35,540 $ 34,390 $ 34,771 $ 34,636 Total interest income - FTE $ 37,348 $ 35,540 $ 34,390 $ 34,771 $ 34,636 Adjustments: Income from tax refund advance loans (2,864) — — — — Adjusted total interest income - FTE $ 34,484 $ 35,540 $ 34,390 $ 34,771 $ 34,636 Net interest income $ 25,750 $ 23,505 $ 20,919 $ 21,607 $ 20,525 Adjustments: Fully-taxable equivalent adjustments 1 1,314 1,348 1,356 1,394 1,356 Net interest income - FTE $ 27,064 $ 24,853 $ 22,275 $ 23,001 $ 21,881 Net interest income $ 25,750 $ 23,505 $ 20,919 $ 21,607 $ 20,525 Adjustments: Subordinated debt redemption cost — — 810 — — Income from tax refund advance loans (2,864) — — — — Adjusted net interest income $ 22,886 $ 23,505 $ 20,919 $ 21,607 $ 20,525 Net interest income $ 25,750 $ 23,505 $ 20,919 $ 21,607 $ 20,525 Adjustments: Fully-taxable equivalent adjustments 1 1,314 1,348 1,356 1,394 1,356 Subordinated debt redemption cost — — 810 — — Income from tax refund advance loans (2,864) — — — — Adjusted net interest income - FTE $ 24,200 $ 24,853 $ 22,275 $ 23,001 $ 21,881 1 Assuming a 21% tax rate 58 (dollars in thousands) Three Months Ended March 31, 2022 December 31, 2021 September 30, 2021 June 30, 2021 March 31, 2021 Net interest margin 2.56 % 2.30 % 2.00 % 2.11 % 2.04 % Effect of fully-taxable equivalent adjustments 1 0.13 % 0.13 % 0.13 % 0.14 % 0.14 % Net interest margin - FTE 2.69 % 2.43 % 2.13 % 2.25 % 2.18 % Net interest margin 2.56 % 2.30 % 2.00 % 2.11 % 2.04 % Effect of subordinated debt redemption cost 0.00 % 0.00 % 0.08 % 0.00 % 0.00 % Effect of income from tax refund advance loans (0.28 %) 0.00 % 0.00 % 0.00 % 0.00 % Adjusted net interest margin 2.28 % 2.30 % 2.08 % 2.11 % 2.04 % Net interest margin 2.56 % 2.30 % 2.00 % 2.11 % 2.04 % Effect of fully-taxable equivalent adjustments 0.13 % 0.13 % 0.13 % 0.14 % 0.14 % Effect of subordinated debt redemption cost 0.00 % 0.00 % 0.08 % 0.00 % 0.00 % Effect of income from tax refund advance loans (0.28 %) 0.00 % 0.00 % 0.00 % 0.00 % Adjusted net interest margin - FTE 2.41 % 2.43 % 2.21 % 2.25 % 2.18 % Provision (benefit) for loan losses $ 791 $ (238) $ (29) $ 21 $ 1,276 Adjustments: Provision for tax refund advance loans losses (1,842) — — — — (Benefit) provision for loan losses, excluding tax refund advance loans $ (1,051) $ (238) $ (29) $ 21 $ 1,276 Average loans $ 2,947,924 $ 2,914,858 $ 2,933,654 $ 2,994,850 $ 3,047,915 Adjustments: Average tax refund advance loans (60,499) — — — — Average loans, excluding tax refund advance loans $ 2,887,425 $ 2,914,858 $ 2,933,654 $ 2,994,850 $ 3,047,915 Net charge-offs (recoveries) to average loans 0.05 % (0.01 %) 0.01 % 0.35 % 0.02 % Adjustments: Effect of tax refund advance lending net charge-offs to average loans (0.21 %) 0.00 % 0.00 % 0.00 % 0.00 % Net (recoveries) charge-offs to average loans, excluding tax refund advance loans (0.16 %) (0.01 %) 0.01 % 0.35 % 0.02 % Allowance for loan losses $ 28,251 $ 27,841 $ 28,000 $ 28,066 $ 30,642 Loans $ 2,880,780 $ 2,887,662 $ 2,936,148 $ 2,957,608 $ 3,058,694 Adjustments: PPP loans (1,003) (3,152) (14,981) (39,682) (53,365) Loans, excluding PPP loans $ 2,879,777 $ 2,884,510 $ 2,921,167 $ 2,917,926 $ 3,005,329 Allowance for loan losses to loans 0.98 % 0.96 % 0.95 % 0.95 % 1.00 % Effect of PPP loans 0.00 % 0.01 % 0.01 % 0.01 % 0.02 % Allowance for loan losses to loans, excluding PPP loans 0.98 % 0.97 % 0.96 % 0.96 % 1.02 % 1 Assuming a 21% tax rate 59 (dollars in thousands, except share and per share data) Three Months Ended March 31, 2022 December 31, 2021 September 30, 2021 June 30, 2021 March 31, 2021 Noninterest expense - GAAP $ 18,780 $ 16,955 $ 14,451 $ 15,075 $ 15,317 Adjustments: Acquisition-related expenses (170) (163) — — — IT termination fee — (475) — — — Nonrecurring consulting fee (875) — — — — Adjusted noninterest expense $ 17,735 $ 16,317 $ 14,451 $ 15,075 $ 15,317 Income before income taxes - GAAP $ 12,999 $ 14,482 $ 14,310 $ 15,473 $ 12,307 Adjustments: Acquisition-related expenses 170 163 — — — IT termination fee — 475 — — — Gain on sale of premises and equipment — — — (2,523) — Subordinated debt redemption cost — — 810 — — Nonrecurring consulting fee 875 — — — — Adjusted income before income taxes $ 14,044 $ 15,120 $ 15,120 $ 12,950 $ 12,307 Income tax provision - GAAP $ 1,790 $ 2,004 $ 2,220 $ 2,377 $ 1,857 Adjustments: Acquisition-related expenses 36 34 — — — IT termination fee — 100 — — — Gain on sale of premises and equipment — — — (530) — Subordinated debt redemption cost — — 170 — — Nonrecurring consulting fee 184 — — — — Adjusted income tax provision $ 2,010 $ 2,138 $ 2,390 $ 1,847 $ 1,857 Net income - GAAP $ 11,209 $ 12,478 $ 12,090 $ 13,096 $ 10,450 Adjustments: Acquisition-related expenses 134 129 — — — IT termination fee — 375 — — — Gain on sale of premises and equipment — — — (1,993) — Subordinated debt redemption cost — — 640 — — Nonrecurring consulting fee 691 — — — — Adjusted net income $ 12,034 $ 12,982 $ 12,730 $ 11,103 $ 10,450 Diluted average common shares outstanding 9,870,394 9,989,951 9,988,102 9,981,422 9,963,036 Diluted earnings per share - GAAP $ 1.14 $ 1.25 $ 1.21 $ 1.31 $ 1.05 Adjustments: Effect of acquisition-related expenses 0.01 0.01 — — — Effect of IT termination fee — 0.04 — — — Effect of gain on sale of premises and equipment — — — (0.20) — Effect of subordinated debt redemption cost — — 0.06 — — Effect of nonrecurring consulting fee 0.07 — — — — Adjusted diluted earnings per share $ 1.22 $ 1.30 $ 1.27 $ 1.11 $ 1.05 Return on average assets 1.08 % 1.19 % 1.12 % 1.25 % 1.02 % Effect of acquisition-related expenses 0.01 % 0.01 % 0.00 % 0.00 % 0.00 % Effect of IT termination fee 0.00 % 0.04 % 0.00 % 0.00 % 0.00 % Effect of gain on sale of premises and equipment 0.00 % 0.00 % 0.00 % (0.19 %) 0.00 % Effect of subordinated debt redemption cost 0.00 % 0.00 % 0.06 % 0.00 % 0.00 % Effect of nonrecurring consulting fee 0.07 % 0.00 % 0.00 % 0.00 % 0.00 % Adjusted return on average assets 1.16 % 1.24 % 1.18 % 1.06 % 1.02 % 60 (dollars in thousands) Three Months Ended March 31, 2022 December 31, 2021 September 30, 2021 June 30, 2021 March 31, 2021 Return on average shareholders' equity 11.94 % 13.14 % 13.10 % 14.88 % 12.61 % Effect of acquisition-related expenses 0.14 % 0.14 % 0.00 % 0.00 % 0.00 % Effect of IT termination fee 0.00 % 0.39 % 0.00 % 0.00 % 0.00 % Effect of gain on sale of premises and equipment 0.00 % 0.00 % 0.00 % (2.26 %) 0.00 % Effect of subordinated debt redemption cost 0.00 % 0.00 % 0.69 % 0.00 % 0.00 % Effect of nonrecurring consulting fee 0.74 % 0.00 % 0.00 % 0.00 % 0.00 % Adjusted return on average shareholders' equity 12.82 % 13.67 % 13.79 % 12.62 % 12.61 % Return on average tangible common equity 12.09 % 13.30 % 13.27 % 15.09 % 12.79 % Effect of acquisition-related expenses 0.14 % 0.14 % 0.00 % 0.00 % 0.00 % Effect of IT termination fee 0.00 % 0.40 % 0.00 % 0.00 % 0.00 % Effect of gain on sale of premises and equipment 0.00 % 0.00 % 0.00 % (2.30 %) 0.00 % Effect of subordinated debt redemption cost 0.00 % 0.00 % 0.70 % 0.00 % 0.00 % Effect of nonrecurring consulting fee 0.75 % 0.00 % 0.00 % 0.00 % 0.00 % Adjusted return on average tangible common equity 12.98 % 13.84 % 13.97 % 12.79 % 12.79 % Effective income tax rate 13.8 % 13.8 % 15.5 % 15.4 % 15.1 % Effect of acquisition-related expenses 0.3 % 0.1 % 0.0 % 0.0 % 0.0 % Effect of IT termination fee 0.0 % 0.2 % 0.0 % 0.0 % 0.0 % Effect of gain on sale of premises and equipment 0.0 % 0.0 % 0.0 % (1.1 %) 0.0 % Effect of subordinated debt redemption cost 0.0 % 0.0 % 0.3 % 0.0 % 0.0 % Effect of nonrecurring consulting fee 1.3 % 0.0 % 0.0 % 0.0 % 0.0 % Adjusted effective income tax rate 15.4 % 14.1 % 15.8 % 14.3 % 15.1 % Income before income taxes - GAAP $ 12,999 $ 14,482 $ 14,310 $ 15,473 $ 12,307 Adjustments: Income from tax refund advance lending (2,864) — — — — Provision for tax refund advance loans losses 1,842 — — — — Tax refund advance lending servicing fee 921 — — — — Income before income taxes, excluding tax refund advance loans $ 12,898 $ 14,482 $ 14,310 $ 15,473 12,307 Income tax provision - GAAP $ 1,790 $ 2,004 $ 2,220 $ 2,377 $ 1,857 Adjustments: Income from tax refund advance lending (601) — — — — Provision for tax refund advance loans losses 387 — — — — Tax refund advance lending servicing fee 193 — — — — Income tax provision, excluding tax refund advance loans $ 1,769 $ 2,004 $ 2,220 $ 2,377 $ 1,857 Net income - GAAP $ 11,209 $ 12,478 $ 12,090 $ 13,096 $ 10,450 Adjustments: Income from tax refund advance lending (2,263) — — — — Provision for tax refund advance loans losses 1,455 — — — — Tax refund advance lending servicing fee 728 — — — — Net income, excluding tax refund advance loans $ 11,129 $ 12,478 $ 12,090 $ 13,096 $ 10,450 61 Critical Accounting Policies and Estimates There have been no material changes in the Company’s critical accounting policies or estimates from those disclosed in its Annual Report on Form 10-K for the year ended December 31, 2021. Recent Accounting Pronouncements Refer to Note 15 to the condensed consolidated financial statements. Off-Balance Sheet Arrangements In the ordinary course of business, the Company enters into financial transactions to extend credit, interest rate swap agreements 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. Fair value hedges are purchased to convert certain fixed rate assets to floating rate. Cash flow hedges are used to convert certain variable rate liabilities into fixed rate liabilities. At both March 31, 2022 and December 31, 2021, the Company had interest rate swaps with notional amounts of $260.0 million. Additionally, we enter into forward contracts related 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 March 31, 2022 and December 31, 2021, the Company had commitments to sell residential real estate loans of $56.8 million and $72.8 million, respectively. These contracts mature in less than one year. Refer to Note 13 to the condensed consolidated financial statements for additional information about derivative financial instruments. 62