First Internet Bancorp 10-Q

ITEM 1. FINANCIAL STATEMENTS First Internet Bancorp Condensed Consolidated Balance Sheets (Amounts in thousands except share data) June 30, 2022 December 31, 2021 (Unaudited) Assets Cash and due from banks $ 6,155 $ 7,492 Interest-bearing deposits 201,798 435,468 Total cash and cash equivalents 207,953 442,960 Securities available-for-sale, at fair value (amortized cost of $462,228 and $606,507 in 2022 and 2021, respectively) 425,489 603,044 Securities held-to-maturity, at amortized cost (fair value of $174,019 and $61,468 in 2022 and 2021, respectively) 185,113 59,565 Loans held-for-sale (includes $17,072 and $23,233 at fair value in 2022 and 2021, respectively) 31,580 47,745 Loans 3,082,127 2,887,662 Allowance for loan losses ( 29,153 ) ( 27,841 ) Net loans 3,052,974 2,859,821 Accrued interest receivable 17,466 16,037 Federal Home Loan Bank of Indianapolis stock 25,219 25,650 Cash surrender value of bank-owned life insurance 39,369 38,900 Premises and equipment, net 70,288 59,842 Goodwill 4,687 4,687 Servicing asset, at fair value 5,345 4,702 Other real estate owned — 1,188 Accrued income and other assets 34,323 46,853 Total assets $ 4,099,806 $ 4,210,994 Liabilities and Shareholders’ Equity Liabilities Noninterest-bearing deposits $ 126,153 $ 117,531 Interest-bearing deposits 3,025,948 3,061,428 Total deposits 3,152,101 3,178,959 Advances from Federal Home Loan Bank 464,925 514,922 Subordinated debt, net of unamortized debt issuance costs of $2,619 and $2,769 in 2022 and 2021, respectively 104,381 104,231 Accrued interest payable 2,005 2,018 Accrued expenses and other liabilities 11,062 30,526 Total liabilities 3,734,474 3,830,656 Commitments and Contingencies Shareholders’ Equity Preferred stock, no par value; 4,913,779 shares authorized; issued and outstanding - none — — Voting common stock, no par value; 45,000,000 shares authorized; 9,404,000 and 9,754,455 shares issued and outstanding in 2022 and 2021, respectively 204,071 218,946 Nonvoting common stock, no par value; 86,221 shares authorized; issued and outstanding - none — — Retained earnings 192,011 172,431 Accumulated other comprehensive loss ( 30,750 ) ( 11,039 ) Total shareholders’ equity 365,332 380,338 Total liabilities and shareholders’ equity $ 4,099,806 $ 4,210,994 See Notes to Condensed Consolidated Financial Statements 1 First Internet Bancorp Condensed Consolidated Statements of Income – Unaudited (Amounts in thousands except share and per share data) Three Months Ended Six Months Ended June 30, 2022 June 30, 2021 June 30, 2022 June 30, 2021 Interest Income Loans $ 32,415 $ 30,835 $ 65,603 $ 61,720 Securities – taxable 2,567 1,921 4,788 3,700 Securities – non-taxable 328 259 577 540 Other earning assets 796 362 1,172 697 Total interest income 36,106 33,377 72,140 66,657 Interest Expense Deposits 6,408 7,705 12,505 16,333 Other borrowed funds 4,018 4,065 8,205 8,192 Total interest expense 10,426 11,770 20,710 24,525 Net Interest Income 25,680 21,607 51,430 42,132 Provision for Loan Losses 1,185 21 1,976 1,297 Net Interest Income After Provision for Loan Losses 24,495 21,586 49,454 40,835 Noninterest Income Service charges and fees 281 280 597 546 Loan servicing revenue 620 457 1,205 879 Loan servicing asset revaluation ( 470 ) ( 240 ) ( 767 ) ( 395 ) Mortgage banking activities 1,710 2,674 3,583 8,424 Gain on sale of loans 1,952 3,019 5,797 4,742 Gain on sale of premises and equipment — 2,523 — 2,523 Other 221 249 719 618 Total noninterest income 4,314 8,962 11,134 17,337 Noninterest Expense Salaries and employee benefits 10,832 9,232 20,710 18,724 Marketing, advertising and promotion 920 872 1,676 1,552 Consulting and professional services 1,197 1,078 3,122 2,064 Data processing 490 382 939 844 Loan expenses 693 541 2,275 1,075 Premises and equipment 2,419 1,587 4,959 3,188 Deposit insurance premium 287 275 568 700 Other 1,147 1,108 2,516 2,245 Total noninterest expense 17,985 15,075 36,765 30,392 Income Before Income Taxes 10,824 15,473 23,823 27,780 Income Tax Provision 1,279 2,377 3,069 4,234 Net Income $ 9,545 $ 13,096 $ 20,754 $ 23,546 Income Per Share of Common Stock Basic $ 0.99 $ 1.32 $ 2.14 $ 2.37 Diluted $ 0.99 $ 1.31 $ 2.13 $ 2.36 Weighted-Average Number of Common Shares Outstanding Basic 9,600,383 9,932,761 9,694,729 9,916,087 Diluted 9,658,689 9,981,422 9,764,232 9,970,147 Dividends Declared Per Share $ 0.06 $ 0.06 $ 0.12 $ 0.12 See Notes to Condensed Consolidated Financial Statements 2 First Internet Bancorp Condensed Consolidated Statements of Comprehensive Income – Unaudited (Amounts in thousands except per share data) Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Net income $ 9,545 $ 13,096 $ 20,754 $ 23,546 Other comprehensive (loss) income Securities available-for-sale Net unrealized holding (losses) gains recorded within other comprehensive income before income tax ( 15,395 ) 1,388 ( 33,276 ) ( 807 ) Income tax (benefit) provision ( 4,186 ) 333 ( 8,263 ) ( 175 ) Net effect on other comprehensive (loss) income ( 11,209 ) 1,055 ( 25,013 ) ( 632 ) Securities held-to-maturity Reclassification of securities from available-for-sale to held-to-maturity — — ( 5,402 ) — Amortization of net unrealized holding losses on securities transferred from available-for-sale to held-to-maturity 193 — 312 — Income tax benefit ( 23 ) — ( 1,272 ) — Net effect on other comprehensive income (loss) 216 — ( 3,818 ) — Cash flow hedges Net unrealized holding gains (losses) on cash flow hedging derivatives recorded within other comprehensive income before income tax 4,944 ( 54 ) 14,278 6,226 Income tax provision (benefit) 1,840 ( 8 ) 5,158 1,309 Net effect on other comprehensive income (loss) 3,104 ( 46 ) 9,120 4,917 Total other comprehensive (loss) income ( 7,889 ) 1,009 ( 19,711 ) 4,285 Comprehensive income $ 1,656 $ 14,105 $ 1,043 $ 27,831 See Notes to Condensed Consolidated Financial Statements 3 First Internet Bancorp Condensed Consolidated Statements of Changes in Shareholders’ Equity - Unaudited Six Months Ended June 30, 2022 and 2021 (Amounts in thousands except per share data) Voting and Nonvoting Common Stock Retained Earnings Accumulated Other Comprehensive Loss Total Shareholders’ Equity Balance, January 1, 2022 $ 218,946 $ 172,431 $ ( 11,039 ) $ 380,338 Net income — 20,754 — 20,754 Other comprehensive loss — — ( 19,711 ) ( 19,711 ) Dividends declared ($ 0.12 per share) — ( 1,174 ) — ( 1,174 ) Recognition of the fair value of share-based compensation 1,534 — — 1,534 Repurchased shares of common stock ( 398,167 ) ( 16,240 ) — — ( 16,240 ) Deferred stock rights and restricted stock units issued in lieu of cash dividends payable on outstanding deferred stock rights and restricted stock units 10 — — 10 Common stock redeemed for the net settlement of share-based awards ( 179 ) — — ( 179 ) Balance, June 30, 2022 $ 204,071 $ 192,011 $ ( 30,750 ) $ 365,332 Balance, January 1, 2021 $ 221,408 $ 126,732 $ ( 17,196 ) $ 330,944 Net income — 23,546 — 23,546 Other comprehensive income — — 4,285 4,285 Dividends declared ($ 0.12 per share) — ( 1,212 ) — ( 1,212 ) Recognition of the fair value of share-based compensation 1,262 — — 1,262 Deferred stock rights and restricted stock units issued in lieu of cash dividends payable on outstanding deferred stock rights and restricted stock units 11 — — 11 Common stock redeemed for the net settlement of share-based awards ( 195 ) — — ( 195 ) Balance, June 30, 2021 $ 222,486 $ 149,066 $ ( 12,911 ) $ 358,641 See Notes to Condensed Consolidated Financial Statements 4 First Internet Bancorp Condensed Consolidated Statements of Changes in Shareholders’ Equity - Unaudited Three Months Ended June 30, 2022 and 2021 (Amounts in thousands except per share data) Voting and Nonvoting Common Stock Retained Earnings Accumulated Other Comprehensive Loss Total Shareholders’ Equity Balance, April 1, 2022 $ 214,473 $ 183,043 $ ( 22,861 ) $ 374,655 Net income — 9,545 — 9,545 Other comprehensive loss — — ( 7,889 ) ( 7,889 ) Dividends declared ($ 0.06 per share) — ( 577 ) — ( 577 ) Recognition of the fair value of share-based compensation 895 — — 895 Repurchased shares of common stock ( 294,464 ) ( 11,123 ) — — ( 11,123 ) Deferred stock rights and restricted stock units issued in lieu of cash dividends payable on outstanding deferred stock rights and restricted stock units 5 — — 5 Common stock redeemed for the net settlement of share-based awards ( 179 ) — — ( 179 ) Balance, June 30, 2022 $ 204,071 $ 192,011 $ ( 30,750 ) $ 365,332 Balance, April 1, 2021 $ 221,911 $ 136,575 $ ( 13,920 ) $ 344,566 Net income — 13,096 — 13,096 Other comprehensive income — — 1,009 1,009 Dividends declared ($ 0.06 per share) — ( 605 ) — ( 605 ) Recognition of the fair value of share-based compensation 570 — — 570 Deferred stock rights and restricted stock units issued in lieu of cash dividends payable on outstanding deferred stock rights and restricted stock units 5 — — 5 Balance, June 30, 2021 $ 222,486 $ 149,066 $ ( 12,911 ) $ 358,641 See Notes to Condensed Consolidated Financial Statements 5 First Internet Bancorp Condensed Consolidated Statements of Cash Flows – Unaudited (Amounts in thousands except per share data) Six Months Ended June 30, 2022 2021 Operating Activities Net income $ 20,754 $ 23,546 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization 4,604 4,038 Increase in cash surrender value of bank-owned life insurance ( 469 ) ( 469 ) Provision for loan losses 1,976 1,297 Share-based compensation expense 1,534 1,262 Loans originated for sale ( 311,268 ) ( 421,012 ) Proceeds from sale of loans 335,226 448,093 Gain on loans sold ( 9,736 ) ( 16,774 ) Decrease in fair value of loans held-for-sale 149 744 Gain on derivatives ( 2,546 ) ( 1,384 ) Loan servicing asset revaluation 767 395 Net change in accrued income and other assets 16,183 1,631 Net change in accrued expenses and other liabilities ( 5,173 ) 1,984 Net cash provided by operating activities 52,001 41,492 Investing Activities Net loan activity, excluding purchases ( 11,665 ) 120,219 Proceeds from sale of other real estate owned 1,188 — Maturities and calls of securities available-for-sale 52,397 94,643 Purchase of securities available-for-sale ( 10,133 ) ( 247,791 ) Maturities and calls of securities held-to-maturity 2,309 2,500 Purchase of securities held-to-maturity ( 31,782 ) — Redemption of Federal Home Loan Bank of Indianapolis stock 431 — Net proceeds from sale of premises and equipment — 8,116 Purchase of premises and equipment ( 12,634 ) ( 13,707 ) Loans purchased ( 197,514 ) ( 22,611 ) Net proceeds from sale of portfolio loans 14,466 — Other investing activities 374 2,264 Net cash used in investing activities ( 192,563 ) ( 56,367 ) Financing Activities Net decrease in deposits ( 26,858 ) ( 64,738 ) Cash dividends paid ( 1,168 ) ( 1,201 ) Repayment of subordinated debt — ( 10,000 ) Repurchase of common stock ( 16,240 ) — Proceeds from advances from Federal Home Loan Bank 220,000 110,000 Repayment of advances from Federal Home Loan Bank ( 270,000 ) ( 110,000 ) Other, net ( 179 ) ( 195 ) Net cash used in financing activities ( 94,445 ) ( 76,134 ) Net Decrease in Cash and Cash Equivalents ( 235,007 ) ( 91,009 ) Cash and Cash Equivalents, Beginning of Period 442,960 419,806 Cash and Cash Equivalents, End of Period $ 207,953 $ 328,797 Supplemental Disclosures Cash paid during the period for interest 20,722 24,832 Cash paid during the period for taxes 1,892 2,905 Loans transferred to other real estate owned — 1,300 Loans transferred to held-for-sale from portfolio 14,049 — Cash dividends declared, paid in subsequent period 564 592 Securities purchased during the period, settled in subsequent period — 13,590 Transfer of available-for-sale mortgage-backed securities to held-to-maturity mortgage-backed securities at fair value 96,220 — See Notes to Condensed Consolidated Financial Statements 6 First Internet Bancorp Notes to Condensed Consolidated Financial Statements – Unaudited (Table amounts in thousands except share and per share data) Note 1: Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information or footnotes necessary for a complete presentation of financial condition, results of operations, changes in shareholders’ equity, or cash flows in accordance with GAAP. In our opinion, all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation have been included. The results of operations for the three and six months ended June 30, 2022 are not necessarily indicative of the results expected for the year ending December 31, 2022 or any other period. The June 30, 2022 condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the First Internet Bancorp Annual Report on Form 10-K for the year ended December 31, 2021. The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates, judgments, or assumptions that could have a material effect on the carrying value of certain assets and liabilities. These estimates, judgments, and assumptions affect the amounts reported in the condensed consolidated financial statements and the disclosures provided. The determination of the allowance for loan losses, valuations and impairments of investment securities, valuation of the servicing asset and the accounting for income tax expense are highly dependent upon management’s estimates, judgments, and assumptions, and changes in any of these could have a significant impact on the condensed consolidated financial statements. The condensed consolidated financial statements include the accounts of First Internet Bancorp (the “Company”), its wholly owned subsidiary, First Internet Bank of Indiana (the “Bank”), and the Bank’s three wholly owned subsidiaries, First Internet Public Finance Corp., JKH Realty Services, LLC and SPF15, Inc. All significant intercompany accounts and transactions have been eliminated in consolidation. The Company is subject to claims and lawsuits that arise primarily in the ordinary course of business. It is the opinion of management that the disposition or ultimate resolution of such claims and lawsuits will not have a material adverse effect on the consolidated financial position, results of operations, and cash flows of the Company. Certain reclassifications have been made to the 2021 financial statements to conform to the presentation of the 2022 financial statements. These reclassifications had no effect on net income. 7 Note 2: Earnings Per Share Earnings per share of common stock are based on the weighted-average number of basic shares and dilutive shares outstanding during the period. The following is a reconciliation of the weighted-average common shares for the basic and diluted earnings per share computations for the three and six months ended June 30, 2022 and 2021. (dollars in thousands, except per share data) Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Basic earnings per share Net income $ 9,545 $ 13,096 $ 20,754 $ 23,546 Weighted-average common shares 9,600,383 9,932,761 9,694,729 9,916,087 Basic earnings per common share $ 0.99 $ 1.32 $ 2.14 $ 2.37 Diluted earnings per share Net income $ 9,545 $ 13,096 $ 20,754 $ 23,546 Weighted-average common shares 9,600,383 9,932,761 9,694,729 9,916,087 Dilutive effect of equity compensation 58,306 48,661 69,503 54,060 Weighted-average common and incremental shares 9,658,689 9,981,422 9,764,232 9,970,147 Diluted earnings per common share (1) $ 0.99 $ 1.31 $ 2.13 $ 2.36 (1) Potential dilutive common shares are excluded from the computation of diluted EPS in the periods where the effect would be antidilutive. Excluded from the computation of diluted EPS were weighted-average antidilutive shares totaling 5,560 and 1,198 for the three and six months ended June 30, 2022, respectively. There were 6 and 3 weighted-average antidilutive shares for the three and six months ended June 30, 2021, respectively. Note 3: Securities The following tables summarize securities available-for-sale and securities held-to-maturity as of June 30, 2022 and December 31, 2021. June 30, 2022 Amortized Gross Unrealized Fair (in thousands) Cost Gains Losses Value Securities available-for-sale U.S. Government-sponsored agencies $ 41,542 $ — $ ( 1,539 ) $ 40,003 Municipal securities 71,264 254 ( 3,595 ) 67,923 Agency mortgage-backed securities - residential 265,196 — ( 27,650 ) 237,546 Agency mortgage-backed securities - commercial 23,312 — ( 1,105 ) 22,207 Private label mortgage-backed securities - residential 13,259 — ( 780 ) 12,479 Asset-backed securities 5,000 — ( 103 ) 4,897 Corporate securities 42,655 48 ( 2,269 ) 40,434 Total available-for-sale $ 462,228 $ 302 $ ( 37,041 ) $ 425,489 June 30, 2022 Amortized Gross Unrealized Fair (in thousands) Cost Gains Losses Value Securities held-to-maturity Municipal securities $ 13,969 $ 5 $ ( 618 ) $ 13,356 Mortgage-backed securities - residential 117,749 41 ( 8,736 ) 109,054 Mortgage-backed securities - commercial 5,838 — ( 790 ) 5,048 Corporate securities 47,557 24 ( 1,020 ) 46,561 Total held-to-maturity $ 185,113 $ 70 $ ( 11,164 ) $ 174,019 8 December 31, 2021 Amortized Gross Unrealized Fair (in thousands) Cost Gains Losses Value Securities available-for-sale U.S. Government-sponsored agencies $ 50,013 $ 164 $ ( 1,137 ) $ 49,040 Municipal securities 75,158 1,940 ( 65 ) 77,033 Agency mortgage-backed securities - residential 377,928 960 ( 5,652 ) 373,236 Agency mortgage-backed securities - commercial 36,024 441 ( 139 ) 36,326 Private label mortgage-backed securities - residential 15,902 122 ( 3 ) 16,021 Asset-backed securities 5,000 4 — 5,004 Corporate securities 46,482 597 ( 695 ) 46,384 Total available-for-sale $ 606,507 $ 4,228 $ ( 7,691 ) $ 603,044 December 31, 2021 Amortized Gross Unrealized Fair (in thousands) Cost Gains Losses Value Securities held-to-maturity Municipal securities $ 13,992 $ 717 $ — $ 14,709 Corporate securities 45,573 1,186 — 46,759 Total held-to-maturity $ 59,565 $ 1,903 $ — $ 61,468 The carrying value of securities at June 30, 2022 is shown below by their contractual maturity date. Actual maturities will differ because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Available-for-Sale (in thousands) Amortized Cost Fair Value One to five years $ 32,423 $ 31,625 Five to ten years 51,296 49,312 After ten years 71,742 67,423 155,461 148,360 Agency mortgage-backed securities - residential 265,196 237,546 Agency mortgage-backed securities - commercial 23,312 22,207 Private label mortgage-backed securities - residential 13,259 12,479 Asset-backed securities 5,000 4,897 Total $ 462,228 $ 425,489 Held-to-Maturity (in thousands) Amortized Cost Fair Value One to five years $ 11,167 $ 11,060 Five to ten years 39,228 38,689 After ten years 11,131 10,168 61,526 59,917 Agency mortgage-backed securities - residential 117,749 109,054 Agency mortgage-backed securities - commercial 5,838 5,048 Total $ 185,113 $ 174,019 There were no gross gains or losses resulting from the sale of available-for-sale securities during the three and six months ended June 30, 2022 and June 30, 2021, respectively. 9 Certain investments in debt securities are reported in the condensed consolidated financial statements at an amount less than their historical cost. The total fair value of these investments at June 30, 2022 and December 31, 2021 was $ 553.8 million and $ 403.2 million, which was approximately 92 % and 61 %, respectively, of the Company’s AFS and HTM securities portfolios. As of June 30, 2022, the Company’s security portfolio consisted of 444 securities, of which 407 were in an unrealized loss position. The unrealized losses are related to the categories noted below. These declines resulted primarily from fluctuations in market interest rates after purchase. Management believes the declines in fair value for these securities are temporary. Should the impairment of any of these securities become other than temporary, the cost basis of the investment will be reduced, with the resulting loss recognized in net income in the period the other-than-temporary impairment (“OTTI”) is identified. U. S. Government-Sponsored Agencies, Municipal Securities and Corporate Securities The unrealized losses on the Company’s investments in securities issued by U.S. Government-sponsored agencies, municipal organizations and corporate entities were caused primarily by interest rate changes. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost bases of the investments. Because the Company does not intend to sell the investments and it is not likely that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be upon maturity, the Company does not consider those investments to be other-than-temporarily impaired at June 30, 2022. Agency Mortgage-Backed, Private Label Mortgage-Backed and Asset-Backed Securities The unrealized losses on the Company’s investments in agency mortgage-backed, private label mortgage-backed and asset-backed securities were caused primarily by interest rate changes. The Company expects to recover the amortized cost bases over the terms of the securities. Because the Company does not intend to sell the investments and it is not likely that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be upon maturity, the Company does not consider those investments to be other-than-temporarily impaired at June 30, 2022. The following tables show the securities portfolio’s gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at June 30, 2022 and December 31, 2021. June 30, 2022 Less Than 12 Months 12 Months or Longer Total (in thousands) Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses Securities available-for-sale U.S. Government-sponsored agencies $ 4,265 $ ( 143 ) $ 35,852 $ ( 1,396 ) $ 40,117 $ ( 1,539 ) Municipal securities 48,691 ( 3,595 ) — — 48,691 ( 3,595 ) Agency mortgage-backed securities- residential 199,420 ( 22,520 ) 38,124 ( 5,130 ) 237,544 ( 27,650 ) Agency mortgage-backed securities- commercial 19,027 ( 675 ) 3,114 ( 430 ) 22,141 ( 1,105 ) Private label mortgage-backed securities - residential 13,044 ( 780 ) — — 13,044 ( 780 ) Asset-backed securities 4,897 ( 103 ) — — 4,897 ( 103 ) Corporate securities 25,735 ( 850 ) 8,582 ( 1,419 ) 34,317 ( 2,269 ) Total $ 315,079 $ ( 28,666 ) $ 85,672 $ ( 8,375 ) $ 400,751 $ ( 37,041 ) 10 June 30, 2022 Less Than 12 Months 12 Months or Longer Total (in thousands) Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses Securities held-to-maturity Municipal securities $ 11,042 $ ( 618 ) $ — $ — $ 11,042 $ ( 618 ) Agency mortgage-backed securities - residential 54,803 ( 4,490 ) 42,620 ( 4,246 ) 97,423 ( 8,736 ) Agency mortgage-backed securities - commercial 5,048 ( 790 ) — — 5,048 ( 790 ) Corporate securities 39,532 ( 1,020 ) — — 39,532 ( 1,020 ) Total $ 110,425 $ ( 6,918 ) $ 42,620 $ ( 4,246 ) $ 153,045 $ ( 11,164 ) December 31, 2021 Less Than 12 Months 12 Months or Longer Total (in thousands) Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses Securities available-for-sale U.S. Government-sponsored agencies $ 2,921 $ ( 79 ) $ 40,305 $ ( 1,058 ) $ 43,226 $ ( 1,137 ) Municipal securities 5,721 ( 65 ) — — 5,721 ( 65 ) Agency mortgage-backed securities - residential 287,820 ( 3,694 ) 40,840 ( 1,958 ) 328,660 ( 5,652 ) Agency mortgage-backed securities - commercial 3,944 ( 139 ) — — 3,944 ( 139 ) Private label mortgage-backed securities 374 ( 3 ) — — 374 ( 3 ) Asset-backed securities — — — — — — Corporate securities 11,813 ( 187 ) 9,491 ( 508 ) 21,304 ( 695 ) Total $ 312,593 $ ( 4,167 ) $ 90,636 $ ( 3,524 ) $ 403,229 $ ( 7,691 ) There were no amounts reclassified from accumulated other comprehensive loss to the condensed consolidated statements of income during the three and six months ended June 30, 2022 and June 30, 2021, respectively. 11 Note 4: Loans Loan balances as of June 30, 2022 and December 31, 2021 are summarized in the table below. Categories of loans include: (in thousands) June 30, 2022 December 31, 2021 Commercial loans Commercial and industrial $ 110,540 $ 96,008 Owner-occupied commercial real estate 61,277 66,732 Investor commercial real estate 52,648 28,019 Construction 143,475 136,619 Single tenant lease financing 867,181 865,854 Public finance 613,759 592,665 Healthcare finance 317,180 387,852 Small business lending 102,724 108,666 Franchise finance 168,942 81,448 Total commercial loans 2,437,726 2,363,863 Consumer loans Residential mortgage 281,124 186,770 Home equity 19,928 17,665 Other consumer loans 292,955 265,478 Tax refund advance loans — — Total consumer loans 594,007 469,913 Total commercial and consumer loans 3,031,733 2,833,776 Net deferred loan origination fees/costs and premiums/discounts on purchased loans and other (1) 50,394 53,886 Total loans 3,082,127 2,887,662 Allowance for loan losses ( 29,153 ) ( 27,841 ) Net loans $ 3,052,974 $ 2,859,821 (1) Includes carrying value adjustments of $ 35.4 million and $ 37.5 million related to terminated interest rate swaps associated with public finance loans as of June 30, 2022 and December 31, 2021, respectively. Risk characteristics of each loan portfolio segment are as follows: Commercial and Industrial: Commercial and industrial loans’ sources of repayment are primarily based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected, and the collateral securing these loans may fluctuate in value. Loans are made for working capital, equipment purchases, or other purposes. Most commercial and industrial loans are secured by the assets being financed and may incorporate a personal guarantee. This portfolio segment is generally concentrated in the Midwest and Southwest regions of the United States. Owner-Occupied Commercial Real Estate: The primary source of repayment is the cash flow from the ongoing operations and activities conducted by the borrower, or an affiliate of the borrower, who owns the property. This portfolio segment is generally concentrated in the Midwest and Southwest regions of the United States and its loans are often secured by manufacturing and service facilities, as well as office buildings. 12 Investor Commercial Real Estate: These loans are underwritten primarily based on the cash flow expected to be generated from the property and are secondarily supported by the value of the real estate. These loans typically incorporate a personal guarantee from the primary sponsor or sponsors. This portfolio segment generally involves larger loan amounts with repayment primarily dependent on the successful leasing and operation of the property securing the loan or the business conducted on the property securing the loan. Investor commercial real estate loans may be more adversely affected by changing economic conditions in the real estate markets, industry dynamics or the overall health of the local economy where the property is located. The properties securing the Company’s investor commercial real estate portfolio tend to be diverse in terms of property type and are generally located in the Midwest and Southwest regions of the United States. Management monitors and evaluates commercial real estate loans based on property financial performance, collateral value, guarantor strength, economic and industry conditions together with other risk grade criteria. As a general rule, the Company avoids financing special use projects unless other underwriting factors are present to mitigate these additional risks. Construction: Construction loans are secured by land and related improvements and are made to assist in the construction of new structures, which may include commercial (retail, industrial, office, and multi-family) properties or single family residential properties offered for sale by the builder. These loans generally finance a variety of project costs, including land, site preparation, architectural services, construction, closing and soft costs and interim financing needs. The cash flows of builders, while initially predictable, may fluctuate with market conditions, and the value of the collateral securing these loans may be subject to fluctuations based on general economic changes. This portfolio segment is generally concentrated in the Midwest and Southwest regions of the United States. Single Tenant Lease Financing: These loans are made on a nationwide basis to property owners of real estate subject to long-term lease arrangements with single tenant operators. The real estate is typically operated by regionally, nationally or globally branded businesses. The loans are underwritten based on the financial strength of the borrower, characteristics of the real estate, cash flows generated from the lease arrangements and the financial strength of the tenant. Similar to the other loan portfolio segments, management monitors and evaluates these loans based on borrower and tenant financial performance, collateral value, industry trends and other risk grade criteria. Public Finance: These loans are made on a nationwide basis to governmental and not-for-profit entities to provide both tax-exempt and taxable loans for a variety of purposes including: short-term cash-flow needs; debt refinancing; economic development; quality of life projects; infrastructure improvements; renewable energy projects; and equipment financing. The primary sources of repayment for public finance loans include pledged revenue sources including but not limited to: general obligations; property taxes; income taxes; tax increment revenue; utility revenue; gaming revenues; sales tax; and pledged general revenue. Certain loans may also include an additional collateral pledge of mortgaged property or a security interest in financed equipment. Healthcare Finance: These loans are made on a nationwide basis to healthcare providers, primarily dentists, for practice acquisition financing or refinancing that occasionally includes owner-occupied commercial real estate and equipment purchases. The sources of repayment are primarily based on the identified cash flows from operations of the borrower and related entities and secondarily on the underlying collateral provided by the borrower. Small Business Lending: These loans are made on a nationwide basis to small businesses and generally carry a partial guaranty from the U.S. Small Business Administration (“SBA”) under its 7(a) loan program. We generally sell the government guaranteed portion of SBA loans into the secondary market while retaining the non-guaranteed portion of the loan and the servicing rights. Loans in the small business lending portfolio have sources of repayment that are primarily based on the identified cash flows of the borrower and secondarily on any underlying collateral provided by the borrower. Loans may, but do not always, have a collateral shortfall. For SBA loans where the guaranteed portion is retained, the SBA guaranty provides a tertiary source of repayment to the Bank in event of borrower default. Cash flows of borrowers, however, may not be as expected and collateral securing these loans may fluctuate in value. Loans are made for a broad array of purposes including, but not limited to, providing operating cash flow, funding ownership changes, and facilitating equipment purchases. These loans also include loans originated by the Bank under the SBA’s Paycheck Protection Program, which are fully guaranteed by the SBA. Franchise Finance: These loans are made on a nationwide basis through our partnership with ApplePie Capital, which, through their deep relationships with franchise brands provides franchisees with financing options for new franchise units, recapitalization, expansion, equipment and working capital. The sources of repayment are either based on identified cash flows from existing operations of the borrower or pro forma cash flow for new franchise locations. 13 Residential Mortgage: With respect to residential loans that are secured by 1-to-4 family residences and are generally owner occupied, the Company typically establishes a maximum loan-to-value ratio and requires private mortgage insurance if that ratio is exceeded. Repayment of these loans is primarily dependent on the financial circumstances of the borrowers, which can be impacted by economic conditions in their market areas such as unemployment levels. Repayment can also be impacted by changes in residential property values. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers in geographically diverse locations throughout the country. Home Equity: Home equity loans and lines of credit are typically secured by a subordinate interest in 1-to-4 family residences. The properties securing the home equity portfolio segment are generally geographically diverse as the Company offers these products on a nationwide basis. Repayment of these loans and lines of credit is primarily dependent on the financial circumstances of the borrowers and may be impacted by changes in unemployment levels and property values on residential properties, among other economic conditions in the market. Other Consumer: These loans primarily consist of consumer loans and credit cards. Consumer loans may be secured by consumer assets such as horse trailers or recreational vehicles. Some consumer loans are unsecured, such as small installment loans, home improvement loans and certain lines of credit. Repayment of consumer loans is primarily dependent upon the personal income of the borrowers, which can be impacted by economic conditions in their market areas such as unemployment levels. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers in geographically diverse locations throughout the country. Tax Refund Advance Loans: These loans provide short-term tax refund advance loans to eligible individual taxpayers. Due to the nature of tax refund advance loans, it typically takes no more than three weeks from when the return is accepted by the IRS to collect from the borrower. In the event of default, the Bank has no recourse against the tax consumer. The Bank will charge off the balance of a tax refund advance loan if there is a balance at the end of the program year, or when collection of principal becomes doubtful. Allowance for Loan Losses Methodology Company policy is designed to maintain an adequate allowance for loan losses (“ALLL”). The portfolio is segmented by loan type, and the required ALLL for types of performing homogeneous loans which do not have a specific reserve is determined by applying a factor based on average historical losses, adjusted for current economic factors and portfolio trends. Management adds qualitative factors for observable trends, changes in internal practices, changes in delinquencies and impairments, and external factors. Observable factors include changes in the composition and size of portfolios, as well as loan terms or concentration levels. The Company evaluates the impact of internal changes such as management and staff experience levels or modification to loan underwriting processes. Delinquency trends are scrutinized for both volume and severity of past due, nonaccrual, or classified loans, as well as any changes in the value of underlying collateral. Finally, the Company considers the effect of other external factors such as national, regional, and local economic and business conditions, as well as competitive, legal, and regulatory requirements. Loans that are considered to be impaired are evaluated to determine the need for a specific allowance by applying at least one of three methodologies: present value of future cash flows; fair value of collateral less costs to sell; or the loan’s observable market price. All troubled debt restructurings (“TDR”) are considered impaired loans. Loans evaluated for impairment are removed from other pools to prevent double-counting. Accounting Standards Codification (“ASC”) Topic 310, Receivables , requires that impaired loans be measured based on the present value of expected future cash flows discounted at the loans’ effective interest rates or the fair value of the underlying collateral less costs to sell and allows existing methods for recognizing interest income. Provision for Loan Losses A provision for estimated losses on loans is charged to income based upon management’s evaluation of the potential losses. Such an evaluation, which includes a review of all loans for which full repayment may not be reasonably assured, considers, among other matters, the estimated net realizable value of the underlying collateral, as applicable, economic conditions, loan loss experience, and other factors that are particularly susceptible to changes that could result in a material adjustment in the near term. While management attempts to use the best information available in making its evaluations, future allowance adjustments may be necessary if economic conditions change substantially from the assumptions used in making the evaluations. 14 Policy for Charging Off Loans The Company’s policy is to charge off a loan at any point in time when it no longer can be considered a bankable asset, meaning collectible within the parameters of policy. A secured loan is generally charged down to the estimated fair value of the collateral, less costs to sell, no later than when it is 120 days past due as to principal or interest. An unsecured loan generally is charged off no later than when it is 180 days past due as to principal or interest. A home improvement loan generally is charged off no later than when it is 90 days past due as to principal or interest. The following tables present changes in the balance of the ALLL during the three and six months ended June 30, 2022 and 2021. (in thousands) Three Months Ended June 30, 2022 Allowance for loan losses: Balance, Beginning of Period (Credit) Provision Charged to Expense Losses Charged Off Recoveries Balance, End of Period Commercial and industrial $ 1,979 $ 47 $ — $ — $ 2,026 Owner-occupied commercial real estate 626 77 — — 703 Investor commercial real estate 405 216 — — 621 Construction 1,766 ( 59 ) — — 1,707 Single tenant lease financing 9,971 ( 259 ) — — 9,712 Public finance 1,783 67 — — 1,850 Healthcare finance 5,510 ( 748 ) — — 4,762 Small business lending 1,435 519 — 2 1,956 Franchise finance 1,437 844 — — 2,281 Residential mortgage 731 406 — 1 1,138 Home equity 65 ( 145 ) — 134 54 Other consumer loans 2,189 202 ( 128 ) 80 2,343 Tax refund advance loans 354 18 ( 372 ) — — Total $ 28,251 $ 1,185 $ ( 500 ) $ 217 $ 29,153 15 Six Months Ended June 30, 2022 Allowance for loan losses: Balance, Beginning of Period (Credit) Provision Charged to Expense Losses Charged Off Recoveries Balance, End of Period Commercial and industrial $ 1,891 $ 135 $ — $ — $ 2,026 Owner-occupied commercial real estate 742 ( 39 ) — — 703 Investor commercial real estate 328 293 — — 621 Construction 1,612 95 — — 1,707 Single tenant lease financing 10,385 ( 1,904 ) — 1,231 9,712 Public finance 1,776 74 — — 1,850 Healthcare finance 5,940 ( 1,178 ) — — 4,762 Small business lending 1,387 630 ( 80 ) 19 1,956 Franchise finance 1,083 1,198 — — 2,281 Residential mortgage 643 493 — 2 1,138 Home equity 64 ( 146 ) — 136 54 Other consumer loans 1,990 465 ( 291 ) 179 2,343 Tax refund advance loans — 1,860 ( 1,860 ) — — Total $ 27,841 $ 1,976 $ ( 2,231 ) $ 1,567 $ 29,153 16 (in thousands) Three Months Ended June 30, 2021 Allowance for loan losses: Balance, Beginning of Period (Credit) Provision Charged to Expense Losses Charged Off Recoveries Balance, End of Period Commercial and industrial $ 1,662 $ 267 $ ( 28 ) $ 2 $ 1,903 Owner-occupied commercial real estate 1,029 ( 8 ) — — 1,021 Investor commercial real estate 169 160 — — 329 Construction 1,420 ( 63 ) — — 1,357 Single tenant lease financing 13,178 418 ( 2,391 ) — 11,205 Public finance 1,748 ( 48 ) — — 1,700 Healthcare finance 7,755 ( 817 ) — — 6,938 Small business lending 700 214 ( 133 ) 2 783 Residential mortgage 601 ( 5 ) ( 6 ) 4 594 Home equity 57 4 — 2 63 Other consumer loans 2,323 ( 101 ) ( 131 ) 82 2,173 Total $ 30,642 $ 21 $ ( 2,689 ) $ 92 $ 28,066 Six Months Ended June 30, 2021 Allowance for loan losses: Balance, Beginning of Period (Credit) Provision Charged to Expense Losses Charged Off Recoveries Balance, End of Period Commercial and industrial $ 1,146 $ 701 $ ( 28 ) $ 84 $ 1,903 Owner-occupied commercial real estate 1,082 ( 61 ) — — 1,021 Investor commercial real estate 155 174 — — 329 Construction 1,192 165 — — 1,357 Single tenant lease financing 12,990 606 ( 2,391 ) — 11,205 Public finance 1,732 ( 32 ) — — 1,700 Healthcare finance 7,485 ( 547 ) — — 6,938 Small business lending 628 361 ( 212 ) 6 783 Residential mortgage 519 72 ( 6 ) 9 594 Home equity 48 63 ( 51 ) 3 63 Other consumer loans 2,507 ( 205 ) ( 313 ) 184 2,173 Total $ 29,484 $ 1,297 $ ( 3,001 ) $ 286 $ 28,066 17 The following tables present the recorded investment in loans based on portfolio segment and impairment method as of June 30, 2022 and December 31, 2021. (in thousands) Loans Allowance for Loan Losses June 30, 2022 Ending Balance: Collectively Evaluated for Impairment Ending Balance: Individually Evaluated for Impairment Ending Balance Ending Balance: Collectively Evaluated for Impairment Ending Balance: Individually Evaluated for Impairment Ending Balance Commercial and industrial $ 110,190 $ 350 $ 110,540 $ 1,676 $ 350 $ 2,026 Owner-occupied commercial real estate 59,616 1,661 61,277 703 — 703 Investor commercial real estate 52,648 — 52,648 621 — 621 Construction 143,475 — 143,475 1,707 — 1,707 Single tenant lease financing 867,181 — 867,181 9,712 — 9,712 Public finance 613,759 — 613,759 1,850 — 1,850 Healthcare finance 316,289 891 317,180 4,239 523 4,762 Small business lending (1) 100,028 2,696 102,724 1,278 678 1,956 Franchise finance 168,942 — 168,942 2,281 — 2,281 Residential mortgage 277,498 3,626 281,124 1,138 — 1,138 Home equity 19,914 14 19,928 54 — 54 Other consumer 292,951 4 292,955 2,343 — 2,343 Total $ 3,022,491 $ 9,242 $ 3,031,733 $ 27,602 $ 1,551 $ 29,153 1 Balance of loans individually evaluated for impairment are partially guaranteed by the U.S. government. (in thousands) Loans Allowance for Loan Losses December 31, 2021 Ending Balance: Collectively Evaluated for Impairment Ending Balance: Individually Evaluated for Impairment Ending Balance Ending Balance: Collectively Evaluated for Impairment Ending Balance: Individually Evaluated for Impairment Ending Balance Commercial and industrial $ 95,364 $ 644 $ 96,008 $ 1,441 $ 450 $ 1,891 Owner-occupied commercial real estate 63,387 3,345 66,732 742 — 742 Investor commercial real estate 28,019 — 28,019 328 — 328 Construction 136,619 — 136,619 1,612 — 1,612 Single tenant lease financing 864,754 1,100 865,854 10,290 95 10,385 Public finance 592,665 — 592,665 1,776 — 1,776 Healthcare finance 386,926 926 387,852 5,417 523 5,940 Small business lending (1) 106,682 1,984 108,666 994 393 1,387 Franchise finance 81,448 — 81,448 1,083 — 1,083 Residential mortgage 183,852 2,918 186,770 643 — 643 Home equity 17,651 14 17,665 64 — 64 Other consumer 265,469 9 265,478 1,990 — 1,990 Total $ 2,822,836 $ 10,940 $ 2,833,776 $ 26,380 $ 1,461 $ 27,841 1 Balance of loans individually evaluated for impairment are partially guaranteed by the U.S. government. 18 The Company utilizes a risk grading matrix to assign a risk grade to each of its commercial loans. A description of the general characteristics of the risk grades is as follows: • “Pass” - Higher quality loans that do not fit any of the other categories described below. • “Special Mention” - Loans that possess some credit deficiency or potential weakness, which deserve close attention. • “Substandard” - Loans that possess a defined weakness or weaknesses that jeopardize the liquidation of the debt. Loans characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. Loans that are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. • “Doubtful” - Such loans have been placed on nonaccrual status and may be heavily dependent upon collateral possessing a value that is difficult to determine or based upon some near-term event that lacks clear certainty. These loans have all of the weaknesses of those classified as Substandard; however, based on existing conditions, these weaknesses make full collection of the principal balance highly improbable. • “Loss” - Loans that are considered uncollectible and of such little value that continuing to carry them as assets is not warranted. Nonaccrual Loans Any loan which becomes 90 days delinquent or for which the full collection of principal and interest may be in doubt will be considered for nonaccrual status. At the time a loan is placed on nonaccrual status, all accrued but unpaid interest will be reversed from interest income. Placing the loan on nonaccrual status does not relieve the borrower of the obligation to repay interest. A loan placed on nonaccrual status may be restored to accrual status when all delinquent principal and interest has been brought current, and the Company expects full payment of the remaining contractual principal and interest. 19 The following tables present the credit risk profile of the Company’s commercial and consumer loan portfolios based on rating category and payment activity as of June 30, 2022 and December 31, 2021. June 30, 2022 (in thousands) Pass Special Mention Substandard Total Commercial and industrial $ 96,207 $ 13,983 $ 350 $ 110,540 Owner-occupied commercial real estate 47,139 12,477 1,661 61,277 Investor commercial real estate 52,648 — — 52,648 Construction 143,475 — — 143,475 Single tenant lease financing 866,040 1,141 — 867,181 Public finance 611,329 2,430 — 613,759 Healthcare finance 315,735 562 883 317,180 Small business lending (1) 94,367 5,668 2,689 102,724 Franchise finance 168,942 — — 168,942 Total commercial loans $ 2,395,882 $ 36,261 $ 5,583 $ 2,437,726 1 Balance in “Substandard” is partially guaranteed by the U.S. government. June 30, 2022 (in thousands) Performing Nonaccrual Total Residential mortgage $ 279,923 $ 1,201 $ 281,124 Home equity 19,914 14 19,928 Other consumer 292,951 4 292,955 Total consumer loans $ 592,788 $ 1,219 $ 594,007 December 31, 2021 (in thousands) Pass Special Mention Substandard Total Commercial and industrial $ 82,412 $ 12,952 $ 644 $ 96,008 Owner-occupied commercial real estate 59,369 4,018 3,345 66,732 Investor commercial real estate 28,019 — — 28,019 Construction 124,578 12,041 — 136,619 Single tenant lease financing 859,612 5,142 1,100 865,854 Public finance 591,630 1,035 — 592,665 Healthcare finance 386,337 589 926 387,852 Small business lending (1) 99,250 7,433 1,983 108,666 Franchise finance 81,448 — — 81,448 Total commercial loans $ 2,312,655 $ 43,210 $ 7,998 $ 2,363,863 1 Balance in “Substandard” is partially guaranteed by the U.S. government. December 31, 2021 (in thousands) Performing Nonaccrual Total Residential mortgage $ 185,544 $ 1,226 $ 186,770 Home equity 17,651 14 17,665 Other consumer 265,469 9 265,478 Total consumer loans $ 468,664 $ 1,249 $ 469,913 20 The following tables present the Company’s loan portfolio delinquency analysis as of June 30, 2022 and December 31, 2021. June 30, 2022 (in thousands) 30-59 Days Past Due 60-89 Days Past Due 90 Days or More Past Due Total Past Due Current Total Loans Non- accrual Loans Total Loans 90 Days or More Past Due and Accruing Commercial and industrial $ 35 $ — $ — $ 35 $ 110,505 $ 110,540 $ 350 $ — Owner-occupied commercial real estate — — — — 61,277 61,277 1,661 — Investor commercial real estate — — — — 52,648 52,648 — — Construction — — — — 143,475 143,475 — — Single tenant lease financing — — — — 867,181 867,181 — — Public finance — — — — 613,759 613,759 — — Healthcare finance — — — — 317,180 317,180 — — Small business lending (1) 82 355 490 927 101,797 102,724 1,297 — Franchise finance — — — — 168,942 168,942 — — Residential mortgage 156 352 106 614 280,510 281,124 1,201 — Home equity — — — — 19,928 19,928 14 — Other consumer 63 37 — 100 292,855 292,955 4 — Total $ 336 $ 744 $ 596 $ 1,676 $ 3,030,057 $ 3,031,733 $ 4,527 $ — 1 Balance in “Total Past Due” is partially guaranteed by the U.S. government. December 31, 2021 (in thousands) 30-59 Days Past Due 60-89 Days Past Due 90 Days or More Past Due Total Past Due Current Total Loans Non- accrual Loans Total Loans 90 Days or More Past Due and Accruing Commercial and industrial $ — $ — $ — $ — $ 96,008 $ 96,008 $ 674 $ — Owner-occupied commercial real estate — — — — 66,732 66,732 — — Investor commercial real estate — — — — 28,019 28,019 3,419 — Construction — — — — 136,619 136,619 — — Single tenant lease financing — — — — 865,854 865,854 1,100 — Public finance — — — — 592,665 592,665 — — Healthcare finance — — — — 387,852 387,852 — — Small business lending (1) — — 657 657 108,009 108,666 959 — Franchising Finance — — — — 81,448 81,448 — — Residential mortgage 51 226 106 383 186,387 186,770 1,226 — Home equity — — — — 17,665 17,665 14 — Other consumer 68 18 — 86 265,392 265,478 9 — Total $ 119 $ 244 $ 763 $ 1,126 $ 2,832,650 $ 2,833,776 $ 7,401 $ — 1 Balance in “Total Past Due” is partially guaranteed by the U.S. government. Impaired Loans 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. Payments with delays generally not exceeding 90 days outstanding are not considered impaired. Certain nonaccrual and substantially all delinquent loans more than 90 days past due may be considered to be impaired. Generally, loans are placed on nonaccrual status at 90 days past due and accrued interest is reversed against earnings, unless the loan is well-secured and in the process of collection. The accrual 21 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 as well as loans modified in 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. ASC Topic 310, Receivables , requires that impaired loans be measured based on the present value of expected future cash flows discounted at the loans’ effective interest rates or the fair value of the underlying collateral, less costs to sell, and allows existing methods for recognizing interest income. The following table presents the Company’s impaired loans as of June 30, 2022 and December 31, 2021. June 30, 2022 December 31, 2021 (in thousands) Recorded Balance Unpaid Principal Balance Specific Allowance Recorded Balance Unpaid Principal Balance Specific Allowance Loans without a specific valuation allowance Owner-occupied commercial real estate $ 1,661 $ 1,779 $ — $ 3,345 $ 3,466 $ — Small business lending (1) 854 1,078 — 959 1,193 — Residential mortgage 3,626 3,779 — 2,918 3,063 — Home equity 14 15 — 14 15 — Other consumer loans 4 31 — 9 44 — Total 6,159 6,682 — 7,245 7,781 — Loans with a specific valuation allowance Commercial and industrial 350 350 350 644 677 450 Single tenant lease financing — — — 1,100 1,123 95 Healthcare finance 891 891 523 926 926 523 Small business lending (1) 1,842 1,842 678 1,025 1,025 393 Total 3,083 3,083 1,551 3,695 3,751 1,461 Total impaired loans $ 9,242 $ 9,765 $ 1,551 $ 10,940 $ 11,532 $ 1,461 1 Balance of loans individually evaluated for impairment are partially guaranteed by the U.S. government. 22 The table below presents average balances and interest income recognized for impaired loans during the three and six months ended June 30, 2022 and 2021. Three Months Ended Six Months Ended June 30, 2022 June 30, 2021 June 30, 2022 June 30, 2021 (in thousands) Average Balance Interest Income Average Balance Interest Income Average Balance Interest Income Average Balance Interest Income Loans without a specific valuation allowance Commercial and industrial $ — $ — $ 259 $ — $ — $ — $ 259 $ 9 Owner-occupied commercial real estate 2,461 — 3,994 — 2,884 — 3,307 — Single tenant lease financing — — 148 — — — 100 5 Healthcare finance — — — — — — 336 — Small business lending (1) 867 — 1,123 — 848 — 970 — Residential mortgage 3,667 25 2,410 9 3,470 33 2,192 13 Home equity 15 — 15 — 14 — 13 — Other consumer 9 — 21 — 9 — 23 — Total 7,019 25 7,970 9 7,225 33 7,200 27 Loans with a specific valuation allowance Commercial and industrial 390 — 839 — 508 — 677 — Owner-occupied commercial real estate — — 1,420 — — — 473 — Single tenant lease financing 546 — 5,430 — 820 — 4,984 — Healthcare finance 901 28 979 24 909 45 815 36 Small business lending (1) 1,674 — — — 1,504 — — — Total 3,511 28 8,668 24 3,741 45 6,949 36 Total impaired loans $ 10,530 $ 53 $ 16,638 $ 33 $ 10,966 $ 78 $ 14,149 $ 63 1 Balance is partially guaranteed by the U.S. government. The Company did not have any other real estate owned (“OREO”) as of June 30, 2022. The Company had $ 1.2 million in OREO as of December 31, 2021, which consisted of one commercial property. There were two loans totaling $ 0.2 million and one loan totaling $0.1 million in the process of foreclosure at June 30, 2022 and December 31, 2021, respectively. Troubled Debt Restructurings The loan portfolio includes TDRs, which are loans that have been modified to grant economic concessions to borrowers who have experienced financial difficulties. These concessions typically result from loss mitigation efforts and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance, or other actions. Certain TDRs are classified as nonperforming at the time of restructuring and typically are returned to performing status after considering the borrower’s sustained repayment performance for a reasonable period, generally not less than six consecutive months. When loans are modified in a TDR, any possible impairment similar to other impaired loans is evaluated based on the present value of expected future cash flows, discounted at the contractual interest rate of the original loan agreement, or using the current fair value of the collateral, less selling costs, for collateral dependent loans. If it is determined that the value of the modified loan is less than the recorded balance of the loan, impairment is recognized through a specific allowance or charge-off to the allowance. In periods subsequent to modification, all TDRs, including those that have payment defaults, are evaluated for possible impairment, and impairment is recognized through the allowance. In the course of working with troubled borrowers, the Company may choose to restructure the contractual terms of certain loans in an effort to work out an alternative payment schedule with the borrower in order to optimize the collectability of the loan. Any loan modification is reviewed by the Company to identify whether a TDR has occurred when the Company grants a concession to the borrower that it would not otherwise consider based on economic or legal reasons related to a borrower’s financial difficulties. Terms may be modified to fit the ability of the borrower to repay in line with its current financial status or the loan may be restructured to obtain additional collateral and/or guarantees to support the debt, or a combination of the two. 23 There were no loans classified as new TDRs during the three months ended June 30, 2022. There was one portfolio residential mortgage loan classified as a new TDR during the six months ended June 30, 2022 with a pre-modification and post-modification outstanding recorded investment of $ 0.7 million. The Company did not allocate a specific allowance for that loan as of June 30, 2022. The modifications consisted of interest-only payments for a period of time. There was one portfolio residential mortgage loan classified as a new TDR during the three and six months ended June 30, 2021 with a pre-modification and post-modification outstanding recorded investment of $0.8 million. The Company did not allocate a specific allowance for that loan as of June 30, 2021. The modifications consisted of interest-only payments for a period of time. There were no performing TDRs that had payment defaults within the twelve months following modification during the three and six months ended June 30, 2022 and 2021, respectively. 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 encouraged 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 Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) 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 the earlier of January 1, 2022 or 60 days after the date on which the national emergency related to the COVID-19 pandemic formally terminates. As of June 30, 2022, the Company had one loan totaling $ 8.0 million in non-TDR loan modifications due to COVID-19. Note 5: Premises and Equipment The following table summarizes premises and equipment at June 30, 2022 and December 31, 2021. (in thousands) June 30, 2022 December 31, 2021 Land $ 5,598 $ — Construction in process 440 57,469 Right of use leased asset 110 208 Building and improvements 53,706 1,090 Furniture and equipment 19,136 7,800 Less: accumulated depreciation ( 8,702 ) ( 6,725 ) Total $ 70,288 $ 59,842 On February 16, 2021, the Company entered into an agreement to sell its then headquarters (the “Prior Headquarters”) and certain equipment located in the Prior Headquarters to a third party. The sale was completed on April 16, 2021, and the Company recorded a gain on sale of $ 2.5 million. As a part of the sale agreement, the buyer agreed to lease the Prior Headquarters back to the Company through December 31, 2021. The Company vacated the Prior Headquarters at the end of the lease, on or prior to December 31, 2021. Note 6: Goodwill As of June 30, 2022 and December 31, 2021, the carrying amount of goodwill was $ 4.7 million. There have been no changes in the carrying amount of goodwill for the three and six months ended June 30, 2022. Goodwill is assessed for impairment annually as of August 31, or more frequently if events occur or circumstances change that indicate an impairment may exist. When assessing goodwill for impairment, first, a qualitative assessment can be made to determine whether it is more likely than not that the estimated fair value of a reporting unit is less than its estimated carrying value. If the results of the qualitative assessment are not conclusive, a quantitative goodwill test is performed. Alternatively, a quantitative goodwill test can be performed without performing a qualitative assessment. 24 Goodwill was assessed for impairment using a qualitative test performed as of August 31, 2021. The estimated fair value of the reporting unit exceeded the net carrying value, and therefore no goodwill impairment existed as of that date. Note 7: Servicing Asset Activity for the servicing asset and the related changes in fair value for the three and six months ended June 30, 2022 and 2021 are shown in the table below. Three Months Ended (in thousands) June 30, 2022 June 30, 2021 Balance, beginning of period $ 5,249 $ 3,817 Additions: Originated and purchased servicing 566 543 Subtractions Paydowns: ( 353 ) ( 154 ) Changes in fair value due to changes in valuation inputs or assumptions used in the valuation model ( 117 ) ( 86 ) Loan servicing asset revaluation $ ( 470 ) $ ( 240 ) Balance, end of period $ 5,345 $ 4,120 Six Months Ended (in thousands) June 30, 2022 June 30, 2021 Balance, beginning of period $ 4,702 $ 3,569 Additions: Originated and purchased servicing 1,410 946 Subtractions Paydowns: ( 609 ) ( 324 ) Changes in fair value due to changes in valuation inputs or assumptions used in the valuation model ( 158 ) ( 71 ) Loan servicing asset revaluation $ ( 767 ) $ ( 395 ) Balance, end of period $ 5,345 $ 4,120 Loans serviced for others are not included in the condensed consolidated balance sheets. The unpaid principal balances of these loans serviced for others as of June 30, 2022 and December 31, 2021 are shown in the table below. (in thousands) June 30, 2022 December 31, 2021 Loan portfolios serviced for: SBA guaranteed loans $ 262,745 $ 230,514 Total $ 262,745 $ 230,514 Loan servicing revenue totaled $ 0.6 million and $ 1.2 million for the three and six months ended June 30, 2022 and $ 0.5 million and $ 0.9 million for the three and six months ended June 30, 2021, respectively. Loan servicing asset revaluation, which represents the change in fair value of the servicing asset, resulted in a $ 0.5 million and $ 0.8 million downward valuation for the three and six months ended June 30, 2022, respectively, and a $ 0.2 million and $ 0.4 million downward valuation for the three and six months ended June 30, 2021, respectively. The fair value of servicing rights is highly sensitive to changes in underlying assumptions. Though fluctuations in prepayment speeds and changes in secondary market premiums generally have the most substantial impact on the fair 25 value of servicing rights, other influencing factors include changing economic conditions, changes to the discount rate assumption and the weighted average life of the servicing portfolio. Measurement of fair value is limited to the conditions existing and the assumptions used as of a particular point in time; however, those assumptions may change over time. Refer to Note 11 - Fair Value of Financial Instruments for further details. Note 8: Subordinated Debt In September 2016, the Company issued $ 25.0 million aggregate principal amount of 6.0 % Fixed-to-Floating Rate Subordinated Notes due 2026 (the “2026 Notes”) in a public offering. The 2026 Notes initially had a fixed interest rate of 6.0 % per year to, but excluding September 30, 2021, and thereafter a floating rate equal to the then-current three-month LIBOR rate plus 485 basis points. All interest on the 2026 Notes was payable quarterly. The 2026 Notes were scheduled to mature on September 30, 2026. The 2026 Notes were unsecured subordinated obligations of the Company eligible to be repaid, without penalty, on any interest payment date on or after September 30, 2021. The 2026 Notes were intended to qualify as Tier 2 capital under regulatory guidelines. The Company redeemed the 2026 Notes in full on September 30, 2021. In June 2019, the Company issued $ 37.0 million aggregate principal amount of 6.0 % Fixed-to-Floating Rate Subordinated Notes due 2029 (the “2029 Notes”) in a public offering. The 2029 Notes initially bear a fixed interest rate of 6.0% per year to, but excluding, June 30, 2024, and thereafter a floating rate equal to the then-current benchmark rate (initially three-month LIBOR rate plus 4.11 %). All interest on the 2029 Notes is payable quarterly. The 2029 Notes are scheduled to mature on June 30, 2029. The 2029 Notes are unsecured subordinated obligations of the Company and may be repaid, without penalty, on any interest payment date on or after June 30, 2024. The 2029 Notes are intended to qualify as Tier 2 capital under regulatory guidelines. In October 2020, the Company entered into a term loan in the principal amount of $ 10.0 million evidenced by a term note due 2030 (the “2030 Note”). The 2030 Note initially bears a fixed interest rate of 6.0 % per year to, but excluding, November 1, 2025 and thereafter at a floating rate equal to the then-current benchmark rate (initially the then current three-month term secured overnight financing rate (“Term SOFR”) plus 5.795 %). The 2030 Note is an unsecured subordinated obligation of the Company and may be repaid, without penalty, on any interest payment date on or after November 1, 2025. The 2030 Note is intended to qualify as Tier 2 capital under regulatory guidelines. The Company used the net proceeds from the issuance of the 2030 Note to redeem a subordinated term note that had been entered into in October 2015. 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. On December 30, 2021, we completed an exchange of $ 59.3 million principal amount of the unregistered 2031 Notes for registered 2031 Notes in satisfaction of our obligations under the registration rights agreement. Holders of $ 0.7 million of unregistered 2031 Notes did not participate in the exchange. The following table presents the principal balance and unamortized debt issuance costs for the 2029 Notes, the 2030 Notes, and the 2031 Notes as of June 30, 2022 and December 31, 2021. June 30, 2022 December 31, 2021 (in thousands) Principal Unamortized Debt Issuance Costs Principal Unamortized Debt Issuance Costs 2029 Notes $ 37,000 $ ( 1,099 ) $ 37,000 $ ( 1,178 ) 2030 Notes 10,000 ( 196 ) 10,000 ( 208 ) 2031 Notes 60,000 ( 1,324 ) 60,000 ( 1,383 ) Total $ 107,000 $ ( 2,619 ) $ 107,000 $ ( 2,769 ) 26 Note 9: Benefit Plans Employment Agreements The Company is party to certain employment agreements with each of its Chief Executive Officer, President and Chief Operating Officer and Executive Vice President and Chief Financial Officer. The employment agreements each provide for annual base salaries and annual bonuses, if any, as determined from time to time by the Compensation Committee of our Board of Directors. The annual bonuses are to be determined with reference to the achievement of annual performance objectives established by the Compensation Committee. The agreements also provide that each of the Chief Executive Officer, President and Chief Operating Officer and Executive Vice President and Chief Financial Officer, may be awarded additional compensation, benefits, or consideration as the Compensation Committee may determine. The agreements also provide for the continuation of salary and certain other benefits for a specified period of time upon termination of employment under certain circumstances, including resignation for “good reason” or termination by the Company without “cause” at any time or any termination of employment within twelve months following a “change in control,” along with other specific conditions. 2022 Equity Incentive Plan The First Internet Bancorp 2022 Equity Incentive Plan (the “2022 Plan”) was approved by our Board of Directors and ratified by our shareholders on May 16, 2022. The plan permits awards of incentive and non-statutory stock options, stock appreciation rights, restricted stock awards, stock unit awards, performance awards and other stock-based awards. All employees, consultants, and advisors of the Company or any subsidiary, as well as all non-employee directors of the Company, are eligible to receive awards under the 2022 Plan. The 2022 Plan initially authorized the issuance of 400,000 new shares of the Company’s common stock plus all shares of common stock that remained available for future grants under the First Internet Bancorp 2013 Equity Incentive Plan (the “2013 Plan”). 2013 Equity Incentive Plan The 2013 Plan authorized the issuance of 750,000 shares of the Company’s common stock in the form of stock-based awards to employees, directors, and other eligible persons. Although outstanding stock-based awards under the 2013 Plan remain in place on their terms, our authority to grant new awards under the 2013 Plan terminated upon shareholder approval of the 2022 Plan. No awards had been made under the 2022 Plan as of June 30, 2022. Stock-Based Award Activity The Company recorded $ 0.9 million and $ 1.5 million of share-based compensation expense for the three and six months ended June 30, 2022, related to stock-based awards . The Company recorded $ 0.6 million and $ 1.3 million of share-based compensation expense for the three and six months ended June 30, 2021, related to stock-based awards. All awards granted during the periods presented were under the 2013 Plan. The following table summarizes the stock-based award activity for the six months ended June 30, 2022. Restricted Stock Units Weighted-Average Grant Date Fair Value Per Share Restricted Stock Awards Weighted-Average Grant Date Fair Value Per Share Deferred Stock Units Weighted-Average Grant Date Fair Value Per Share Unvested at December 31, 2021 112,822 $ 28.18 — $ — — $ — Granted 41,662 46.67 9,954 52.64 2 47.11 Cancelled/Forfeited ( 5,441 ) 36.62 ( 644 ) 52.64 — — Vested ( 23,256 ) 24.62 ( 5,446 ) 52.64 ( 2 ) 47.11 Unvested at June 30, 2022 125,787 $ 34.67 3,864 $ 52.64 — $ — At June 30, 2022, the total unrecognized compensation cost related to unvested stock-based awards was $ 2.7 million with a weighted-average expense recognition period of 1.9 years. 27 Directors Deferred Stock Plan Until January 2014, the Company had a practice of granting awards under a stock compensation plan for members of the Board of Directors (“Directors Deferred Stock Plan”). The Company reserved 180,000 shares of common stock that could have been issued pursuant to the Directors Deferred Stock Plan. The Directors Deferred Stock Plan provided directors the option to elect to receive up to 100 % of their annual retainer in either common stock or deferred stock rights. Deferred stock rights were to be settled in common stock following the end of the deferral period payable on the basis of one share of common stock for each deferred stock right. The following table summarizes the status of deferred stock rights related to the Directors Deferred Stock Plan for the six months ended June 30, 2022. Deferred Stock Rights Outstanding, beginning of period 84,536 Granted 214 Exercised — Outstanding, end of period 84,750 All deferred stock rights granted during the 2022 period were additional rights issued in lieu of cash dividends payable on outstanding deferred stock rights. Note 10: Commitments and Credit Risk In the normal course of business, the Company makes various commitments to extend credit which are not reflected in the accompanying condensed consolidated financial statements. At June 30, 2022 and December 31, 2021, the Company had outstanding loan commitments totaling approximately $ 349.5 million and $ 324.3 million, respectively. Capital Commitments Capital expenditures contracted for at the balance sheet date but not yet recognized in the financial statements are associated with the construction of the building where our corporate headquarters is located, along with an attached parking garage. The Company has entered into construction-related contracts in the amount of $ 69.1 million. As of June 30, 2022, $ 6.8 million of such contract commitments had not yet been incurred. These commitments are due within one year . Note 11: Fair Value of Financial Instruments ASC Topic 820, Fair Value Measurement , defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC Topic 820 also specifies a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value: Level 1 Quoted prices in active markets for identical assets or liabilities Level 2 Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities Following is a description of the valuation methodologies and inputs used for assets measured at fair value on a recurring basis and recognized in the accompanying condensed consolidated balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy. 28 Available-for-Sale Securities Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities include highly liquid mutual funds. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. Level 2 securities include U.S. Government-sponsored agencies, municipal securities, mortgage- and asset-backed securities and corporate securities. Matrix pricing is a mathematical technique widely used in the banking industry to value investment securities without relying exclusively on quoted prices for specific investment securities but also on the investment securities’ relationship to other benchmark quoted investment securities. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy. Fair values are calculated using discounted cash flows. Discounted cash flows are calculated based off of the anticipated future cash flows updated to incorporate loss severities. Rating agency and industry research reports as well as default and deferral activity are reviewed and incorporated into the calculation. The Company did not own any securities classified within Level 3 of the hierarchy as of June 30, 2022 or December 31, 2021. Loans Held-for-Sale (mandatory pricing agreements) The fair value of loans held-for-sale is determined using quoted prices for similar assets, adjusted for specific attributes of that loan (Level 2). Servicing Asset Fair value is based on a loan-by-loan basis taking into consideration the original maturity of the loans, the current age of the loans and the remaining term to maturity. The valuation methodology utilized for the servicing assets begins with generating estimated future cash flows for each servicing asset, based on their unique characteristics and market-based assumptions for prepayment speeds and costs to service. The present value of the future cash flows is then calculated utilizing market-based discount rate assumptions (Level 3). Interest Rate Swap Agreements The fair value of interest rate swap agreements is estimated using current market interest rates as of the balance sheet date and calculated using discounted cash flows that are observable or that can be corroborated by observable market data (Level 2). Forward Contracts The fair values of forward contracts on to-be-announced securities are determined using quoted prices in active markets or benchmarked thereto (Level 1). Interest Rate Lock Commitments The fair values of interest rate lock commitments (“IRLCs”) are determined using the projected sale price of individual loans based on changes in market interest rates, projected pull-through rates (the probability that an IRLC will ultimately result in an originated loan), the reduction in the value of the applicant’s option due to the passage of time, and the remaining origination costs to be incurred based on management’s estimate of market costs (Level 3). 29 The following tables present the fair value measurements of assets and liabilities recognized in the accompanying condensed consolidated balance sheets measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at June 30, 2022 and December 31, 2021. June 30, 2022 Fair Value Measurements Using (in thousands) Fair Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) U.S. Government-sponsored agencies $ 40,003 $ — $ 40,003 $ — Municipal securities 67,923 — 67,923 — Agency mortgage-backed securities - residential 237,546 — 237,546 — Agency mortgage-backed securities - commercial 22,207 — 22,207 — Private label mortgage-backed securities - residential 12,479 — 12,479 — Asset-backed securities 4,897 — 4,897 — Corporate securities 40,434 — 40,434 — Total available-for-sale securities $ 425,489 $ — $ 425,489 $ — Loans held-for-sale (mandatory pricing agreements) 17,072 — 17,072 — Servicing asset 5,345 — — 5,345 Interest rate swap agreements 1,738 — 1,738 — Forward contracts 13 13 — — IRLCs 462 — — 462 December 31, 2021 Fair Value Measurements Using (in thousands) Fair Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) U.S. Government-sponsored agencies $ 49,040 $ — $ 49,040 $ — Municipal securities 77,033 — 77,033 — Agency mortgage-backed securities - residential 373,236 — 373,236 — Agency mortgage-backed securities - commercial 36,326 — 36,326 — Private label mortgage-backed securities - residential 16,021 — 16,021 — Asset-backed securities 5,004 — 5,004 — Corporate securities 46,384 — 46,384 — Total available-for-sale securities $ 603,044 $ — $ 603,044 $ — Loans held-for-sale (mandatory pricing agreements) 23,233 — 23,233 — Servicing asset 4,702 — — 4,702 Interest rate swap agreements ( 14,271 ) — ( 14,271 ) — Forward contracts ( 30 ) ( 30 ) — — IRLCs 718 — — 718 30 The following tables reconcile the beginning and ending balances of recurring fair value measurements recognized in the accompanying condensed consolidated balance sheets using significant unobservable (Level 3) inputs for the three and six months ended June 30, 2022 and 2021. Three Months Ended (in thousands) Servicing Asset Interest Rate Lock Commitments Balance, April 1, 2022 $ 5,249 $ ( 88 ) Total realized gains Additions: Originated and purchased servicing 566 — Subtractions: Paydowns ( 353 ) — Change in fair value ( 117 ) 550 Balance, June 30, 2022 $ 5,345 $ 462 Balance as of April 1, 2021 $ 3,817 $ 1,110 Total realized gains Additions: Originated and purchased servicing 543 — Subtractions: Paydowns ( 154 ) — Change in fair value ( 86 ) ( 292 ) Balance, June 30, 2021 $ 4,120 $ 818 Six Months Ended (in thousands) Servicing Asset Interest Rate Lock Commitments Balance, January 1, 2022 $ 4,702 $ 718 Total realized gains Additions: — Originated and purchased servicing 1,410 Subtractions: Paydowns ( 609 ) — Change in fair value ( 158 ) ( 256 ) Balance, June 30, 2022 $ 5,345 $ 462 Balance as of January 1, 2021 $ 3,569 $ 3,361 Total realized gains Additions: Originated and purchased servicing 946 — Subtractions: Paydowns ( 324 ) — Change in fair ( 71 ) ( 2,543 ) Balance, June 30, 2021 $ 4,120 $ 818 The following describes the valuation methodologies and inputs used for assets measured at fair value on a nonrecurring basis, as well as the general classification of such assets pursuant to the valuation hierarchy. 31 Impaired Loans (Collateral Dependent) Loans for which it is probable that the Company will not collect all principal and interest due according to contractual terms are measured for impairment. The amount of impairment may be determined based on the fair value of the underlying collateral, less costs to sell, the estimated present value of future cash flows or the loan’s observable market price. If the impaired loan is identified as collateral dependent, the fair value of the underlying collateral, less costs to sell, is used to measure impairment. This method requires obtaining a current independent appraisal of the collateral and applying a discount factor to the value. If the impaired loan is not collateral dependent, the Company utilizes a discounted cash flow analysis to measure impairment. Impaired loans with a specific valuation allowance based on the value of the underlying collateral or a discounted cash flow analysis are classified as Level 3 assets. The following table presents the fair value measurements of assets and liabilities recognized in the accompanying condensed consolidated balance sheets measured at fair value on a nonrecurring basis and the level within the fair value hierarchy in which the fair value measurement falls at June 30, 2022 and December 31, 2021. June 30, 2022 (in thousands) Fair Value Measurements Using Fair Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Impaired loans $ 1,532 $ — $ — $ 1,532 December 31, 2021 (in thousands) Fair Value Measurements Using Fair Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Impaired loans $ 1,228 $ — $ — $ 1,228 Significant Unobservable (Level 3) Inputs The following tables present quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements. (dollars in thousands) Fair Value at June 30, 2022 Valuation Technique Significant Unobservable Inputs Range Weighted-Average Range Impaired loans $ 1,532 Fair value of collateral Discount for type of property and current market conditions 10 % 10 % IRLCs 462 Discounted cash flow Loan closing rates 33 % - 100 % 85 % Servicing asset 5,345 Discounted cash flow Prepayment speeds Discount rate 0 % - 25 % 11 % 14.3 % 11 % 32 (dollars in thousands) Fair Value at December 31, 2021 Valuation Technique Significant Unobservable Inputs Range Weighted-Average Range Impaired loans $ 1,228 Fair value of collateral Discount for type of property and current market conditions 0 % - 35 % 10.1 % IRLCs 718 Discounted cash flow Loan closing rates 42 % - 100 % 89 % Servicing asset 4,702 Discounted cash flow Prepayment speeds Discount rate 0 % - 25 % 10 % 12.5 % 10 % The following methods were used to estimate the fair value of all other financial instruments recognized in the accompanying condensed consolidated balance sheets at amounts other than fair value. Cash and Cash Equivalents For these instruments, the carrying amount is a reasonable estimate of fair value. Securities Held-to-Maturity Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities include highly liquid mutual funds. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. Level 2 securities include municipal securities and corporate securities. Matrix pricing is a mathematical technique widely used in the banking industry to value investment securities without relying exclusively on quoted prices for specific investment securities but also on the investment securities’ relationship to other benchmark quoted investment securities. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy. Fair values are calculated using discounted cash flows. Discounted cash flows are calculated based off of the anticipated future cash flows updated to incorporate loss severities. Rating agency and industry research reports as well as default and deferral activity are reviewed and incorporated into the calculation. The Company did not own any securities classified within Level 3 of the hierarchy as of June 30, 2022 or December 31, 2021. Loans Held-for-Sale (best efforts pricing agreements) The fair value of these loans approximates carrying value. Loans The fair value of loans is estimated on an exit price basis incorporating discounts for credit, liquidity and marketability factors. Accrued Interest Receivable The fair value of these financial instruments approximates carrying value. Federal Home Loan Bank of Indianapolis Stock The fair value approximates carrying value. Deposits The fair value of noninterest-bearing and interest-bearing demand deposits, savings and money market accounts approximates carrying value. The fair value of fixed maturity certificates of deposit and brokered deposits are estimated using rates currently offered for deposits of similar remaining maturities. 33 Advances from Federal Home Loan Bank The fair value of fixed rate advances is estimated using rates currently available for advances with similar remaining maturities. The carrying value of variable rate advances approximates fair value. Subordinated Debt The fair value of the Company’s publicly traded subordinated debt is obtained from quoted market prices. The fair value of the Company’s remaining subordinated debt is estimated using discounted cash flow analysis, based on current borrowing rates for similar types of debt instruments. Accrued Interest Payable The fair value of these financial instruments approximates carrying value. Commitments The fair value of commitments to extend credit are based on fees currently charged to enter into similar agreements with similar maturities and interest rates. The Company determined that the fair value of commitments was zero based on the contractual value of outstanding commitments at each of June 30, 2022 and December 31, 2021. The following tables present the carrying value and estimated fair value of all financial assets and liabilities that are not measured at fair value on a recurring basis at June 30, 2022 and December 31, 2021. June 30, 2022 Fair Value Measurements Using (in thousands) Carrying Amount Fair Value Quoted Prices In Active Market for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Cash and cash equivalents $ 207,953 $ 207,953 $ 207,953 $ — $ — Securities held-to-maturity 185,113 174,019 — 174,019 — Loans held-for-sale (best efforts pricing agreements) 14,508 14,508 — 14,508 — Net loans 3,052,974 2,903,257 — — 2,903,257 Accrued interest receivable 17,466 17,466 17,466 — — Federal Home Loan Bank of Indianapolis stock 25,219 25,219 — 25,219 — Deposits 3,152,101 2,946,116 1,905,493 — 1,040,623 Advances from Federal Home Loan Bank 464,925 457,411 — 457,411 — Subordinated debt 104,381 107,276 37,148 70,128 — Accrued interest payable 2,005 2,005 2,005 — — 34 December 31, 2021 Fair Value Measurements Using (in thousands) Carrying Amount Fair Value Quoted Prices In Active Market for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Cash and cash equivalents $ 442,960 $ 442,960 $ 442,960 $ — $ — Securities held-to-maturity 59,565 61,468 — 61,468 — Loans held-for-sale (best efforts pricing agreements) 24,512 24,512 — 24,512 — Net loans 2,859,821 2,880,024 — — 2,880,024 Accrued interest receivable 16,037 16,037 16,037 — — Federal Home Loan Bank of Indianapolis stock 25,650 25,650 — 25,650 — Deposits 3,178,959 3,190,000 1,909,432 — 1,280,568 Advances from Federal Home Loan Bank 514,922 526,143 — 526,143 — Subordinated debt 104,231 108,788 38,643 70,145 — Accrued interest payable 2,018 2,018 2,018 — — Note 12: Mortgage Banking Activities The Company’s residential real estate lending business originates mortgage loans for customers and typically sells a majority of the originated loans into the secondary market. For most of the mortgages it sells in the secondary market, the Company hedges its mortgage banking pipeline by entering into forward contracts for the future delivery of mortgage loans to third party investors and entering into IRLCs with potential borrowers to fund specific mortgage loans that will be sold into the secondary market. To facilitate the hedging of the loans, the Company has elected the fair value option for loans originated and intended for sale in the secondary market under mandatory pricing agreements. Changes in the fair value of loans held-for-sale, IRLCs and forward contracts are recorded in the mortgage banking activities line item within noninterest income. Refer to Note 13 for further information on derivative financial instruments. During the three months ended June 30, 2022 and 2021, the Company originated mortgage loans held-for-sale of $ 105.9 million and $ 163.3 million, respectively, and sold $ 107.9 million and $ 151.5 million of mortgage loans, respectively, into the secondary market. During the six months ended June 30, 2022 and 2021, the Company originated mortgage loans held-for-sale of $ 258.2 million and $ 387.2 million, respectively, and sold $ 270.3 million and $ 393.1 million of mortgage loans, respectively, into the secondary market. The following table presents the components of income from mortgage banking activities for the three and six months ended June 30, 2022 and 2021. Three Months Ended June 30, Six Months Ended June 30, (in thousands) 2022 2021 2022 2021 Gain on loans sold $ 1,878 $ 3,587 $ 3,940 $ 11,086 Gain (loss) resulting from the change in fair value of loans held-for-sale 340 118 ( 149 ) ( 744 ) Loss resulting from the change in fair value of derivatives ( 508 ) ( 1,031 ) ( 208 ) ( 1,918 ) Net revenue from mortgage banking activities $ 1,710 $ 2,674 $ 3,583 $ 8,424 Fluctuations in interest rates and changes in IRLC and loan volume within the mortgage banking pipeline may cause volatility in the fair value of loans held-for-sale and the fair value of derivatives used to hedge the mortgage banking pipeline. 35 Note 13: Derivative Financial Instruments The Company uses derivative financial instruments to help manage exposure to interest rate risk and the effects that changes in interest rates may have on net income and the fair value of assets and liabilities. The Company enters into interest rate swap agreements as part of its asset/liability management strategy to help manage its interest rate risk position. Additionally, the Company enters into forward contracts for the future delivery of mortgage loans to third-party investors and enters into IRLCs with potential borrowers to fund specific mortgage loans that will be sold into the secondary market. The forward contracts are entered into in order to economically hedge the effect of changes in interest rates resulting from the Company’s commitment to fund the loans. The Company had various interest rate swap agreements designated and qualifying as accounting hedges during the reported periods. Designating an interest rate swap as an accounting hedge allows the Company to recognize gains and losses in the condensed consolidated statements of income within the same period that the hedged item affects earnings. The Company includes the gain or loss on the hedged items in the same line item as the offsetting loss or gain on the related interest rate swaps. For derivative instruments that are designated and qualify as cash flow hedges, any gains or losses related to changes in fair value are recorded in accumulated other comprehensive loss, net of tax. The fair value of interest rate swaps with a positive fair value are reported in accrued income and other assets in the condensed consolidated balance sheets, while interest rate swaps with a negative fair value are reported in accrued expenses and other liabilities in the condensed consolidated balance sheets. The IRLCs and forward contracts are not designated as accounting hedges and are recorded at fair value with changes in fair value reflected in noninterest income on the condensed consolidated statements of income. The fair value of derivative instruments with a positive fair value are reported in accrued income and other assets in the condensed consolidated balance sheets, while derivative instruments with a negative fair value are reported in accrued expenses and other liabilities in the condensed consolidated balance sheets. The following table presents amounts that were recorded on the condensed consolidated balance sheets related to cumulative basis adjustments for interest rate swap derivatives designated as fair value accounting hedges as of June 30, 2022 and December 31, 2021. (in thousands) Carrying amount of the hedged asset Cumulative amount of fair value hedging adjustment included in the carrying amount of the hedged assets Line item in the condensed consolidated balance sheets in which the hedged item is included June 30, 2022 December 31, 2021 June 30, 2022 December 31, 2021 Securities available-for-sale (1) $ 70,331 $ 75,156 $ ( 932 ) $ 1,729 (1) These amounts include the amortized cost basis of closed portfolios used to designate hedging relationships in which the hedged item is the last layer expected to be remaining at the end of the hedging relationship. The designated hedged items were $ 50.0 million at both June 30, 2022 and December 31, 2021. The following tables present a summary of interest rate swap derivatives designated as fair value accounting hedges of fixed-rate receivables used in the Company’s asset/liability management activities at June 30 , 2022 and December 31, 2021, identified by the underlying interest rate-sensitive instruments. (dollars in thousands) June 30, 2022 Notional Value Weighted- Average Remaining Maturity (years) Weighted-Average Ratio Instruments Associated With Fair Value Receive Pay Securities available-for-sale $ 50,000 2.3 $ 912 3-month LIBOR 2.33 % Total at June 30, 2022 $ 50,000 2.3 $ 912 3-month LIBOR 2.33 % 36 (dollars in thousands) December 31, 2021 Notional Value Weighted- Average Remaining Maturity (years) Weighted-Average Ratio Instruments Associated With Fair Value Receive Pay Securities available-for-sale $ 50,000 2.8 $ ( 1,731 ) 3-month LIBOR 2.33 % Total at December 31, 2021 $ 50,000 2.8 $ ( 1,731 ) 3-month LIBOR 2.33 % In March 2021, the Company terminated the last layer of interest rate swaps associated with available-for-sale agency mortgage-backed securities - residential, which resulted in swap termination payments to counterparties totaling $ 1.9 million. The corresponding fair value hedging adjustment was allocated pro-rata to the underlying hedged securities and is being amortized over the remaining lives of the designated securities. During the three and six months ended June 30, 2022, amortization expense totaling $ 0.07 million and $ 0.2 million, respectively, was recognized as a reduction to interest income on securities. In June 2020, the Company terminated all fair value hedging relationships associated with loans, which resulted in swap termination payments to counterparties totaling $ 46.1 million. The corresponding loan fair value hedging adjustment as of the date of termination is being amortized over the remaining lives of the designated loans, which have a weighted average term to maturity of 12.0 years as of June 30, 2022. Amortization expense totaling $ 1.1 million and $ 2.1 million, for the three and six months ended June 30 2022, respectively, and $ 1.2 million and $ 2.3 million, for the three and six months ended June 30, 2021 respectively, related to these previously terminated fair value hedges was recognized as a reduction to interest income on loans. The following tables present a summary of interest rate swap derivatives designated as cash flow accounting hedges of variable-rate liabilities used in the Company’s asset/liability management activities at June 30, 2022 and December 31, 2021. (dollars in thousands) June 30, 2022 Notional Weighted- Average Remaining Maturity Weighted-Average Ratio Cash Flow Hedges Value (years) Fair Value Receive Pay Interest rate swaps $ 110,000 4.59 $ 550 3-month LIBOR 2.88 % Interest rate swaps 60,000 1.14 140 1-month LIBOR 2.88 % Interest rate swaps 40,000 1.92 136 Fed Funds Effective 2.78 % (dollars in thousands) December 31, 2021 Notional Weighted- Average Remaining Maturity Weighted-Average Ratio Cash Flow Hedges Value (years) Fair Value Receive Pay Interest rate swaps $ 110,000 5.1 $ ( 8,560 ) 3-month LIBOR 2.88 % Interest rate swaps 100,000 2.0 ( 3,980 ) 1-month LIBOR 2.88 % These derivative financial instruments were entered into for the purpose of managing the interest rate risk of certain assets and liabilities. As of June 30, 2022 the Company had no pledged cash collateral compared to $ 15.7 million, as of December 31, 2021. Cash collateral is pledged to counterparties on interest rate swap agreements as security for its obligations related to these agreements. Collateral posted and received is dependent on the market valuation of the underlying hedges. 37 The following table presents the notional amount and fair value of interest rate swaps, IRLCs and forward contracts utilized by the Company at June 30, 2022 and December 31, 2021. June 30, 2022 December 31, 2021 (in thousands) Notional Amount Fair Value Notional Amount Fair Value Asset Derivatives Derivatives designated as hedging instruments Interest rate swaps associated with securities available-for-sale $ 50,000 $ 912 $ — $ — Interest rate swaps associated with variable-rate liabilities 210,000 826 — — Derivatives not designated as hedging instruments IRLCs $ 42,544 $ 462 $ 62,789 $ 718 Forward contracts 37,500 13 — — Total contracts $ 340,044 $ 2,213 $ 62,789 $ 718 Liability Derivatives Derivatives designated as hedging instruments Interest rate swaps associated with securities available-for-sale $ — $ — $ 50,000 $ ( 1,731 ) Interest rate swaps associated with variable-rate liabilities — — 210,000 ( 12,540 ) Derivatives not designated as hedging instruments Forward contracts — — 72,750 ( 30 ) Total contracts $ — $ — $ 332,750 $ ( 14,301 ) The fair value of interest rate swaps was estimated using a discounted cash flow method that incorporates current market interest rates as of the balance sheet date. Fair values of IRLCs and forward contracts were estimated using changes in mortgage interest rates from the date the Company entered into the IRLC and the balance sheet date. The following table presents the effects of the Company’s cash flow hedge relationships on the condensed consolidated statements of comprehensive income during the three and six months ended June 30, 2022 and 2021. Amount of Gain / (Loss) Recognized in Other Comprehensive Income (Loss) in The Three Months Ended Amount of Gain Recognized in Other Comprehensive Income (Loss) in The Six Months Ended (in thousands) June 30, 2022 June 30, 2021 June 30, 2022 June 30, 2021 Interest rate swap agreements $ 4,944 $ ( 54 ) $ 14,278 $ 6,226 The following table summarizes the periodic changes in the fair value of derivatives not designated as hedging instruments on the condensed consolidated statements of income for the three and six ended June 30, 2022 and 2021. 38 Amount of Gain / (Loss) Recognized in the Three Months Ended Amount of Gain / (Loss) Recognized in the Six Months Ended (in thousands) June 30, 2022 June 30, 2021 June 30, 2022 June 30, 2021 Asset Derivatives Derivatives not designated as hedging instruments IRLCs $ 550 $ — $ — $ — Forward contracts — — 43 623 Liability Derivatives Derivatives not designated as hedging instruments IRLCs $ — $ ( 292 ) $ ( 252 ) $ ( 2,541 ) Forward contracts ( 1,059 ) ( 738 ) — — The following table presents the effects of the Company’s interest rate swap agreements on the condensed consolidated statements of income during the three and six months ended June 30, 2022 and 2021. (in thousands) Line item in the condensed consolidated statements of income Three Months Ended Six Months Ended June 30, 2022 June 30, 2021 June 30, 2022 June 30, 2021 Interest income Securities - taxable — — — ( 253 ) Securities - non-taxable ( 174 ) ( 271 ) ( 435 ) ( 537 ) Total interest income ( 174 ) ( 271 ) ( 435 ) ( 790 ) Interest expense Deposits 509 692 1,179 1,370 Other borrowed funds 491 753 1,187 1,483 Total interest expense 1,000 1,445 2,366 2,853 Net interest income $ ( 1,174 ) $ ( 1,716 ) $ ( 2,801 ) $ ( 3,643 ) Note 14: Accumulated Other Comprehensive Loss The components of accumulated other comprehensive loss, included in shareholders' equity, for the six months ended June 30, 2022 and 2021, respectively, are presented in the table below. 39 (in thousands) Unrealized Losses On Debt Securities Unrealized Losses On Debt Securities Transferred From Available-For-Sale To Held-To-Maturity Cash Flow Hedges Total Balance, January 1, 2022 $ ( 2,555 ) $ — $ ( 8,484 ) $ ( 11,039 ) Other comprehensive (loss) income before reclassifications from accumulated other comprehensive loss before tax ( 33,276 ) ( 5,402 ) 14,278 ( 24,400 ) Reclassifications from accumulated other comprehensive (loss) income to earnings before tax — 312 — 312 Other comprehensive (loss) gain before tax ( 33,276 ) ( 5,090 ) 14,278 ( 24,088 ) Income tax (benefit) provision ( 8,263 ) ( 1,272 ) 5,158 ( 4,377 ) Other comprehensive (loss) income - net of tax ( 25,013 ) ( 3,818 ) 9,120 ( 19,711 ) Balance, June 30, 2022 $ ( 27,568 ) $ ( 3,818 ) $ 636 $ ( 30,750 ) Balance, January 1, 2021 $ 468 $ — $ ( 17,664 ) $ ( 17,196 ) Other comprehensive (loss) income before reclassifications from accumulated other comprehensive loss before tax ( 807 ) — 6,226 5,419 Other comprehensive (loss) gain before tax ( 807 ) — 6,226 5,419 Income tax (benefit) provision ( 175 ) — 1,309 1,134 Other comprehensive (loss) income - net of tax ( 632 ) — 4,917 4,285 Balance, June 30, 2021 $ ( 164 ) $ — $ ( 12,747 ) $ ( 12,911 ) The components of accumulated other comprehensive loss, included in stockholders' equity, for the three months ended June 30, 2022 and 2021, respectively, are presented in the table below. (in thousands) Unrealized Losses On Debt Securities Unrealized Losses On Debt Securities Transferred From Available-For-Sale To Held-To-Maturity Cash Flow Hedges Total Balance, April 1, 2022 $ ( 16,359 ) $ ( 4,034 ) $ ( 2,468 ) $ ( 22,861 ) Other comprehensive (loss) income before reclassifications from accumulated other comprehensive loss before tax ( 15,395 ) — 4,944 ( 10,451 ) Reclassifications from accumulated other comprehensive (loss) income to earnings before tax — 193 — 193 Other comprehensive (loss) gain before tax ( 15,395 ) 193 4,944 ( 10,258 ) Income tax (benefit) provision ( 4,186 ) ( 23 ) 1,840 ( 2,369 ) Other comprehensive (loss) income - net of tax ( 11,209 ) 216 3,104 ( 7,889 ) Balance, June 30, 2022 $ ( 27,568 ) $ ( 3,818 ) $ 636 $ ( 30,750 ) Balance, April 1, 2021 $ ( 1,219 ) $ — $ ( 12,701 ) $ ( 13,920 ) Other comprehensive (loss) income before reclassifications from accumulated other comprehensive loss before tax 1,388 — ( 54 ) 1,334 Other comprehensive gain (loss) before tax 1,388 — ( 54 ) 1,334 Income tax (benefit) provision ( 333 ) — 8 ( 325 ) Other comprehensive income (loss) - net of tax 1,055 — ( 46 ) 1,009 Balance, June 30, 2021 $ ( 164 ) $ — $ ( 12,747 ) $ ( 12,911 ) 40 Details About Accumulated Other Comprehensive Income (Loss) Components Amounts Reclassified from Accumulated Other Comprehensive Income (Loss) for the Amounts Reclassified from Accumulated Other Comprehensive Income (Loss) for the Affected Line Item in the Statements of Income Three Months Ended June 30, 2022 Three Months Ended June 30, 2021 Six Months Ended June 30, 2022 Six Months Ended June 30, 2021 Reclassifications from accumulated other comprehensive loss to earnings before tax $ ( 193 ) — $ ( 312 ) $ — Interest income Total amount reclassified before tax ( 193 ) — ( 312 ) — Income before income taxes Tax benefit ( 44 ) — ( 71 ) — Income tax provision Total reclassifications from accumulated other comprehensive loss $ ( 149 ) $ — $ ( 241 ) $ — Net income 41 Note 15: Recent Accounting Pronouncements ASU 2016-13 - Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (June 2016) The main objective of this update is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. To achieve this objective, the amendments in this update replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The amendments affect entities holding financial assets that are not accounted for at fair value through net income. The amendments affect loans, debt securities, off-balance-sheet credit exposures, and any other financial assets not excluded from the scope that have the contractual right to receive cash. The amendments in this update affect an entity to varying degrees depending on the credit quality of the assets held by the entity, their duration, and how the entity applies current GAAP. There is diversity in practice in applying the incurred loss methodology, which means that before transition some entities may be more aligned under current GAAP than others to the new measure of expected credit losses. The following describes the main provisions of this update. • Assets Measured at Amortized Cost: The amendments in this update require a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. The statements of income reflect the measurement of credit losses for newly recognized financial assets, as well as the expected increase or decrease of credit losses that have taken place during the period. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. An entity must use judgment in determining the relevant information and estimation methods that are appropriate in its circumstances. • Available-for-Sale Debt Securities: Credit losses relating to available-for-sale debt securities should be recorded through an allowance for credit losses. Available-for-sale accounting recognizes that value may be realized either through collection of contractual cash flows or through sale of the security. Therefore, the amendments limit the amount of the allowance for credit losses to the amount by which fair value is below amortized cost because the classification as available-for-sale is premised on an investment strategy that recognizes that the investment could be sold at fair value if cash collection would result in the realization of an amount less than fair value. • In May 2019, the FASB issued ASU 2019-05 - Financial Instruments - Credit Losses (Topic 326) - Targeted Transition Relief . This ASU allows an option for preparers to irrevocably elect the fair value option, on an instrument-by-instrument basis, for eligible financial assets measured at amortized cost basis upon adoption of the credit losses standard. This increases the comparability of financial statement information provided by institutions that otherwise would have reported similar financial instruments using different measurement methodologies, potentially decreasing costs for financial statement preparers while providing more useful information to investors and other users. The Company expects to adopt this guidance on January 1, 2023 and is currently evaluating the impact of the amendments on the Company’s consolidated financial statements. The Company has a current expected credit losses (“CECL”) working group that has been meeting to discuss implementation matters related to the completeness and accuracy of historical data, model development and corporate governance documentation. Specific to the model, the CECL working group has discussed results from parallel model runs for each portfolio segment, assumptions related to unfunded commitments and economic forecast factors. Model validation is expected to be completed in the third quarter 2022. 42 The Company expects to record a one-time cumulative effect adjustment to the ALLL in retained earnings on the consolidated balance sheet as of the beginning of the first reporting period in which the new standard is effective, as is required in the guidance. The Company believes there will be an increase in the ALLL as a result of the adoption of this new standard; however, it is waiting to provide an estimate until the completion of the model validation and analysis by the CECL working group. The Company will continue to evaluate and refine the ALLL throughout the remainder of 2022, considering changes in portfolio composition, economic conditions and the results from the model validation. Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) In March 2020 in connection with the implementation of the CARES Act and related provisions, the Company adopted the temporary relief issued under the CARES Act, thereby suspending the guidance in ASC 310-40 on accounting for TDRs to loan modifications related to COVID-19. Section 4013 of the CARES Act specifies 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 the earlier of January 1, 2022 or 60 days after the date on which the national emergency related to the COVID-19 pandemic formally terminates. See the “Non-TDR Loan Modifications due to COVID-19” section of Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations for more information. ASU 2020-04 - Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (March 2020) In March 2020, FASB issued ASU 2020-04 to ease the potential burden in accounting for the transition away from the LIBORon financial reporting. The ASU provides optional expedients and exceptions for applying GAAP to contract modification and hedge accounting relationships. The guidance is effective March 12, 2020 through December 31, 2022. The Company believes the adoption of this guidance will not have a material impact on the condensed consolidated financial statements. ASU 2022-02 - Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures (March 2022) In March 2022, the FASB issued ASU No. 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. This ASU eliminates the separate recognition and measurement guidance for Troubled Debt Restructurings ("TDRs") by creditors. The elimination of the TDR guidance may be adopted prospectively for loan modifications after adoption or on a modified retrospective basis, which would also apply to loans previously modified, resulting in a cumulative effect adjustment to retained earnings in the period of adoption for changes in the allowance for credit losses. The ASU requires an entity to disclose current-period gross write-offs by year of origination for financing receivables within the scope of Subtopic 326-20. This guidance is effective on January 1, 2023, with early adoption permitted. The Company is currently assessing the impact of the adoption of this guidance.