What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2023-03-14 compared with 2022-03-15 · 143 added, 273 removed, 506 unchanged (45% of the section changed)

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

COVID-19 Pandemic

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

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

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

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

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

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

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

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

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

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

Our plans remain flexible to adapt as these situations evolve.

Pending Merger Transaction

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

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

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

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

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

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

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

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

Costs Associated with Exit Activities

Due to the steep decline in consumer mortgage volumes and the negative outlook for consumer mortgage lending over the next several years, the Company decided to exit its consumer mortgage business during the first quarter of 2023.

This includes its nationwide digital direct-to-consumer mortgage platform that originates residential loans for sale in the secondary market, as well as its local traditional consumer mortgage and construction-to-permanent business.

The Company’s commercial construction and land development business will not be affected by this decision and will remain an important part of the Company’s lending strategy.

This action is expected to reduce total annual noninterest expense by approximately $6.8 million and increase annualized pre-tax income by approximately $2.7 million, with 80% of the benefit realized in 2023 and 100% thereafter.

The Company estimates that it will incur total pre-tax expense of approximately $3.3 million in the first and second quarters of 2023 associated with exiting this line of business.

Results of Operations

During the twelve months ended December 31, 2022, net income was $35.5 million, or $3.70 per diluted share, compared to net income of $48.1 million, or $4.82 per diluted share, for the twelve months ended December 31, 2021 and net income of $29.5 million, or $2.99 per diluted share, for the twelve months ended December 31, 2020.

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

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

The $12.6 million decrease in net income for the twelve months ended December 31, 2022 compared to the twelve months ended December 31, 2021 was due primarily to an $11.6 million decrease in noninterest income, an $11.5 million increase in noninterest expense and a $3.9 million increase in provision for loan losses, partially offset by a $10.5 million increase in net interest income and a $3.9 million decrease in income tax expense.

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

During the twelve months ended December 31, 2022, return on average assets was 0.85%, compared to 1.14% for the twelve months ended December 31, 2021.

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Additionally, for the twelve months ended December 31, 2022, return on average tangible common equity was 9.65% compared to 13.61% for the twelve months ended December 31, 2021.

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

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

These profitability ratios declined during 2022 due primarily to the decrease in net income.

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

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Money market accounts 1,423,185 18,513 1.30 % 1,434,829 5,892 0.41 % 1,156,084 11,381 0.98 %

BaaS - brokered deposits 60,699 1,033 1.70 % — — 0.00 % — — 0.00 %

Certificates and brokered deposits 1,147,017 19,894 1.73 % 1,411,211 23,144 1.64 % 1,882,773 43,452 2.31 %

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Total 350 12,138 12,488 (1,709) (23,282) (24,991)

Increase (decrease) in net interest income $ 406 $ 21,609 $ 22,015 $ 3,206 $ (1,632) $ 1,574

Increase in net interest income $ 4,793 $ 5,744 $ 10,537 $ 406 $ 21,609 $ 22,015

Net interest income for the twelve months ended December 31, 2022 was $97.1 million, an increase of $10.5 million, or 12.2%, compared to $86.6 million for the twelve months ended December 31, 2021.

The increase in net interest income was the result of a $25.0 million, or 34.6%, decrease in total interest expense to $47.3 million for the twelve months ended December 31, 2021 compared to $72.3 million for the twelve months ended December 31, 2020.

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

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

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

The increase in net interest income was the result of a $23.0 million, or 17.2%, increase in total interest income to $156.9 million for the twelve months ended December 31, 2022 compared to $133.9 million for the twelve months ended December 31, 2021.

This increase in total interest income was partially offset by a $12.5 million, or 26.4%, increase in total interest expense to $59.8 million for the twelve months ended December 31, 2022 compared to $47.3 million for the twelve months ended December 31, 2021.

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

Interest income earned on loans, including loans held-for-sale, increased by $17.1 million as a result of the yield on the loan portfolio increasing by 35 bps, as well as the average balance of loans increasing by $142.9 million, or 4.8%.

The increase in average loan balances was due primarily to increases in both the commercial (with the exception of healthcare finance) and consumer loan portfolios.

Interest income earned on securities increased $3.5 million, or 38.8%, due to an increase of 60 bps in the yield earned on securities, partially offset by a decrease of $15.8 million, or 2.5%, in the average balance of securities.

Interest income earned on other earning assets increased $2.4 million, or 168.0%, due to an increase of 107 bps in the yield earned on these assets, partially offset by a decrease of $188.5 million, or 40.4%, in the average balance of other earning assets.

The decrease in the average balance of other earning assets was due primarily to lower cash balances.

The increase in the yields earned on loans, securities and other earning assets was due primarily to the rise in interest rates throughout 2022.

The increase in total interest expense was driven primarily by increases in interest expense related to money market accounts, interest-bearing demand deposits and BaaS – brokered deposits, but partially offset by a decrease in interest expense related to certificates and brokered deposits.

The increase in interest expense related to money market accounts of $12.6 million, or 214.2%, was driven by an increase of 89 bps in the cost of these deposits, partially offset by a decrease of $11.6 million, or 0.8%, in the average balance of these deposits.

The increase in interest expense related to interest-bearing demand deposits of $1.5 million, or 252.7%, was due primarily to an increase of $138.0 million, or 70.5%, in the average balance of these deposits and an increase of 32 bps in the cost of these deposits.

The increase in BaaS – brokered deposit expense was due to a $60.7 million increase in the average balance of deposits.

The decrease in interest expense in certificates and brokered deposits of $3.3 million, or 14.0%, was due primarily to a $264.2 million, or 18.7%, decrease in the average balance of these deposits, partially offset by an increase of 9 bps in the cost of these deposits.

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

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

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

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

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

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

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

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

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

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

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

described above.

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

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

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

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

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

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

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

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

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

The increase in the cost of total interest-bearing deposits, reflects the increase in interest rates throughout 2022.

Net interest margin (“NIM”) was 2.41% for the twelve months ended December 31, 2022 compared to 2.11% for the twelve months ended December 31, 2021.

On a fully-taxable equivalent (“FTE”) basis, NIM was 2.54% for the twelve months ended December 31, 2022 compared to 2.25% for the twelve months ended December 31, 2021, an increase of 29 bps.

The increase in NIM and FTE NIM compared to the twelve months ended December 31, 2021 was due primarily to an increase in the yield earned on interest-earning assets, partially offset by an increase in the cost of interest-bearing liabilities.

The increase in the yield on interest-earning assets and cost of interest-bearing deposits was driven primarily by the increase in interest rates throughout 2022.

Noninterest Income

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Gain on sale of loans 11,372 11,598 8,298

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

Gain on sale of securities — — 139

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

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During the twelve months ended December 31, 2022, noninterest income totaled $21.3 million, representing a decrease of $11.6 million, or 35.3%, compared to $32.8 million for the twelve months ended December 31, 2021.

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

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

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

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

The decrease in noninterest income was driven primarily by a decrease in revenue from mortgage banking activities, no gain on sale of premises and equipment in 2022 and a $0.6 million decrease in loan servicing asset revaluation, which was partially offset by an increase in other noninterest income.

The decrease in mortgage banking revenue was due mainly to decreases in interest rate locks, sold loan volumes and gain-on-sale margins driven by the increase in interest rates throughout 2022.

The increase in other noninterest income was due primarily to distributions received on certain Small Business Investment Company and venture capital fund investments.

Net loan servicing revenue was relatively stable as growth in the balance of the Company’s SBA 7(a) servicing portfolio was offset by the negative impact of prepayment speeds on the servicing asset revaluation.

Noninterest Expense

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Noninterest expense for the twelve months ended December 31, 2022 was $73.3 million, compared to $61.8 million for the twelve months ended December 31, 2021.

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

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

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

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

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

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

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

The increase of $11.5 million, or 18.6%, compared to the twelve months ended December 31, 2021 was due primarily to increases of $3.6 million in premises and equipment, $3.3 million in salaries and employee benefits, $2.3 million in loan expenses, $0.9 million in other noninterest expense and $0.8 million in consulting and professional fees.

The increase in premises and equipment was due mainly to costs associated with the Company’s new corporate headquarters, as well as investments in technology, software maintenance and a write-down of software.

The higher salaries and employee benefits expense was due mainly to increased headcount, higher medical claims expense, a $0.5 million discretionary inflation bonus paid to certain employees and $0.3 million of accelerated equity compensation related to employees who retired during the year.

The increase in loan expenses was due primarily to servicing fees related to tax refund advance loans and franchise finance loans.

The increase in other was due to several items, none of which were individually significant.

The increase in consulting and professional fees was due primarily to a $0.9 million consulting fee associated with a special project.

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

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

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

The decrease in the effective tax rate and income tax expense was due primarily to the decrease in pre-tax earnings driven by a lower proportion of taxable revenue, including decreased mortgage banking activities and no gain on sale of premises and equipment in 2022.

Financial Condition

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Total shareholders' equity 364,974 380,338

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

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

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

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

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

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

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

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

Total assets increased $332.1 million, or 7.9%, to $4.5 billion as of December 31, 2022 compared to $4.2 billion as of December 31, 2021.

The increase in total assets was driven primarily by an increase in loan balances, partially offset by decreases in cash and securities.

As of December 31, 2022, total shareholders’ equity was $365.0 million, a decrease of $15.4 million, or 4.0%, compared to December 31, 2021, due primarily to stock repurchase activity and an increase in accumulated other comprehensive loss resulting from a decline in the value of the available-for-sale securities portfolio caused mainly by the continued rise in interest rates during the year.

This was partially offset by the net income earned during the year and an increase in the value of interest rate swaps classified as cash flow hedges.

Tangible common equity totaled $360.3 million as of December 31, 2022, representing a decrease of $15.4 million, or 4.1%, compared to December 31, 2021.

The ratio of total shareholders’ equity to total assets decreased to 8.03% as of December 31, 2022 from 9.03% as of December 31, 2021 and the ratio of tangible common equity to tangible assets decreased to 7.94% as of December 31, 2022 from 8.93% as of December 31, 2021.

Book value per common share increased 3.3% to $40.26 as of December 30, 2022 from $38.99 as of December 31, 2021.

Tangible book value per share increased 3.2% to $39.74 as of December 31, 2022 from $38.51 as of December 31, 2021.

The growth in both book value per common share and tangible book value per share reflects the growth in total shareholders’ equity and tangible common equity while total common shares outstanding decreased slightly year-over-year, or 0.5%.

The growth in both book value per common share and tangible book value per share reflects net income earned during the year and the effect of stock repurchase activity throughout the year, partially offset by the increase in accumulated other comprehensive loss.

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Total commercial and consumer loans 3,452,607 98.7 % 2,833,776 98.1 %

Net deferred loan origination costs and premiums and discounts on purchased loans and other (1)

Net deferred loan origination costs, premiums and discounts on purchased loans and other 1

46,794 1.3 % 53,886 1.9 %

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1 Includes carrying value adjustments of $32.5 million and $37.5 million related to terminated interest rate swaps associated with public finance loans as of December 31, 2022 and December 31, 2021, respectively.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Total loans were $3.5 billion as of December 31, 2022, an increase of $611.7 million, or 21.2%, compared to December 31, 2021.

Total commercial loan balances were $2.7 billion, as of December 31, 2022, up $355.5 million, or 15.0%, from December 31, 2021.

Total consumer loan balances were $733.3 million as of December 30, 2022, an increase of $263.3 million, or 56.0%, compared to December 31, 2021.

The increase in commercial loan balances was driven primarily by growth in franchise finance, single tenant lease financing, investor commercial real estate, construction, commercial and industrial, public finance and small business lending balances.

These increases were partially offset by net payoffs in healthcare finance and owner-occupied commercial real estate loans.

The increase in consumer loan balances was due primarily to higher balances in the residential mortgage, recreational vehicles and trailers loan portfolios.

Loan Maturities and Rate Sensitivity

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(amounts in thousands) Within 1 Year 1-5 Years 5-15 Years Beyond 15 Years Total

Predetermined rates $ 73,199 $ 562,473 $ 1,655,648 $ 125,658 $ 2,416,978

Adjustable rate 67,287 138,999 131,704 78,808 416,798

Fixed rate $ 73,869 $ 681,066 $ 1,820,429 $ 304,928 $ 2,880,292

Variable rate 108,770 240,005 120,254 103,286 572,315

Total commercial and consumer loans $ 182,639 $ 921,071 $ 1,940,683 $ 408,214 $ 3,452,607

23 unchanged sentences

Past Due 90 days and accruing loans

Consumer loans:

Residential mortgage 79 —

Total consumer loans 79 —

Total past due 90 days and accruing loans 79 —

Total nonperforming loans 7,529 7,401

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Nonperforming loans are comprised of total nonaccrual loans and loans 90 days past due and accruing.

Nonperforming assets include nonperforming loans, other real estate owned and other nonperforming assets, which consist of repossessed assets.

Nonperforming assets include nonperforming loans, other real estate owned and other nonperforming assets, which consist of

repossessed assets.

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

however, we did not own any investments classified as such during the two-year period ended December 31, 2022.

The increase in nonperforming loans of $0.1 million, or 1.7%, to $7.5 million as of December 31, 2022 compared to $7.4 million as of December 31, 2021 was due primarily to SBA loans placed on nonaccrual, partially offset by upgrades and payoffs in owner-occupied commercial real estate and single tenant lease financing during 2022.

Total nonperforming assets declined by $1.0 million, or 12.2%, as of December 31, 2022 compared to December 31, 2021, due primarily to the upgrades and payoffs discussed above, as well as the decline in other real estate owned (“OREO”) discussed below.

The ratio of nonperforming loans to total loans decreased to 0.22% as of December 31, 2022 compared to 0.26% as of December 31, 2021 and the ratio of nonperforming assets to total assets decreased to 0.17% as of December 31, 2022, compared to 0.20% as of December 31, 2021.

Troubled Debt Restructurings

3 unchanged sentences

Total troubled debt restructurings $ 5,522 $ 4,185

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

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

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

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

Total TDRs as of December 31, 2022 were $5.5 million, up $1.3 million from December 31, 2021.

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

The increase was driven by two portfolio residential mortgage loans and one small business lending loan classified as new TDRs during the twelve months ended December 31, 2022 with pre-modification and post-modification balances totaling $1.6 million.

As of December 31, 2022, the Company did not own any OREO.

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

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

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

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

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

During 2022, the Company reached a settlement agreement with the guarantor, which resulted in the Company recovering $1.2 million in excess of the carrying value of OREO.

Non-TDR Loan Modifications due to COVID-19

1 unchanged sentence

This guidance encourages financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations due to the effects of COVID-19.

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

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

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

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

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

As of December 31, 2022, the Company had no loans as non-TDR loan modifications due to COVID-19.

Small Business Administration Paycheck Protection Program

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

Section 1102 of the CARES Act created the Paycheck Protection Program (“PPP”), which is jointly administered by the SBA and the Department of the Treasury.

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

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

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

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

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

We received this fee revenue from

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

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

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

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

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

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

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

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

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

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

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

These loans may be forgiven if certain conditions are satisfied and

are fully guaranteed by the SBA.

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

The Company received this fee revenue from the SBA during 2021, and it was deferred over the life of the PPP loans and recognized as interest income.

The Company began processing applications for forgiveness from this round beginning in May 2021 and 100% of loan balances had been forgiven as of December 31, 2022.

The following table provides a rollforward of the activity of PPP loans through December 31, 2022.

9 unchanged sentences

Balance, December 31, 2021 23 3,152 99

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

Management anticipates that loan forgiveness applications will continue during 2022.

Principal repaid (23) (3,152)

Net deferred fees recognized (99)

Balance, December 31, 2022 — $ — $ —

Allowance for Loan Losses

The following table provides a rollforward of the allowance for loan losses for the twelve months ended December 31, 2022 and 2021.

(amounts in thousands) 2022 2021

3 unchanged sentences

Commercial and industrial — (28)

Owner-occupied commercial real estate — (24)

Single tenant lease financing — (2,391)

Healthcare finance — (743)

Small business lending (402) (222)

4 unchanged sentences

Commercial and industrial 5 89

Healthcare finance — 87

Single tenant lease financing 1,231 —

Small business lending 29 80

7 unchanged sentences

Commercial and industrial (0.01) % (0.08) %

Owner-occupied commercial real estate — % 0.03 %

Single tenant lease financing (0.14) % 0.26 %

Healthcare finance — % 0.16 %

Small business lending 0.32 % 0.11 %

11 unchanged sentences

The allowance for loan losses was $31.7 million as of December 31, 2022, compared to $27.8 million as of December 31, 2021.

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

The single tenant lease financing loans included a nonaccrual loan

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

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

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

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

The increase in the allowance for loan losses compared to December 31, 2021 was due primarily to the growth in the overall loan portfolio, partially offset by a reduction in specific reserves.

The decrease in the specific reserves was due to positive developments on certain monitored loans.

The allowance for loan losses as a percentage of total loans, including and excluding PPP loans, was 0.91% as of December 31, 2022, compared to 0.96% and 0.97%, respectively, as of December 31, 2021.

The allowance for loan losses as a percentage of nonperforming loans increased to 421.5% as of December 31, 2022, up from to 376.2% as of December 31, 2021.

The provision for loans losses was $5.0 million for the twelve months ended December 31, 2022 compared to $1.0 million for the twelve months ended December 31, 2021.

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

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

During 2022, we recorded net charge-offs of $1.1 million, compared to $2.7 million during 2021.

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

The decrease in net charge-offs was due primarily to charge-offs that occurred during 2021 related to single tenant lease financing loans and a commercial and industrial relationship.

Investment Securities Portfolio

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Municipal securities 13,946 13,992

Agency mortgage-backed securities - residential 121,853 —

Agency mortgage-backed securities - commercial 5,818 —

Corporate securities 47,551 45,573

13 unchanged sentences

Municipal securities 12,832 14,709

Agency mortgage-backed securities - residential 106,741 —

Agency mortgage-backed securities - commercial 4,552 —

Corporate securities 44,358 46,759

1 unchanged sentence

Total securities $ 558,867 $ 664,512

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

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

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

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

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

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

The approximate fair value of investment securities available-for-sale decreased $212.7 million, or 35.3%, to $390.4 million as of December 31, 2022 compared to $603.0 million as of December 31, 2021.

The decrease was due primarily to a decrease of $158.1 million in agency mortgage-backed securities - residential, $20.5 million in agency mortgage-backed securities - commercial, $15.2 million in U.S.

Government-sponsored agencies securities, $9.8 million in municipal securities, and $5.6 million in private label mortgage-backed securities - residential.

The decrease in agency mortgage-backed securities - residential and agency mortgage-backed securities - commercial was due primarily to the transfer of $96.2 million of these securities from available-for-sale to held-to-maturity in the first quarter 2022, a decline in fair value resulting from the continued rise in interest rates, as well as net paydown activity.

The decreases in other securities types were also driven by a decline in value resulting from the continued rise in interest rates, as well as net paydown activity.

Investment Maturities

11 unchanged sentences

Municipal securities — 0.00 % 9,522 2.90 % 13,290 2.78 % 60,092 2.68 % 82,904 2.72 %

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

Agency mortgage-backed securities - residential — 0.00 % — 0.00 % 5,273 2.70 % 368,646 1.82 % 373,919 1.83 %

Agency mortgage-backed securities - commercial — 0.00 % 4,950 2.24 % 705 4.49 % 17,305 2.23 % 22,960 1.46 %

5 unchanged sentences

Accrued Income and Other Assets

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

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

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

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

Accrued income and other assets decreased $2.0 million, or 4.2%, to $44.9 million at December 31, 2022 compared to $46.9 million at December 31, 2021.

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

4 unchanged sentences

Money market accounts 1,418,599 41.2 % 1,483,936 46.7 %

BaaS - brokered deposits 13,607 0.4 % — — %

Certificates of deposits 874,490 25.4 % 970,107 30.5 %

1 unchanged sentence

Total $ 3,441,245 100.0 % $ 3,178,959 100.0 %

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

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

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

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

Total deposits increased $262.3 million, or 8.3%, to $3.4 billion as of December 31, 2022 compared to $3.2 billion as of December 31, 2021.

This increase was due primarily to increases of $279.4 million, or 93.3%, in brokered deposits, $87.6 million, or 35.3%, in interest-bearing demand deposits, $57.8 million, or 49.2%, in noninterest-bearing deposits and $13.6 million in BaaS - brokered deposits partially offset by a decline of $95.6 million, or 9.9% in certificates of deposits, $65.3 million, or 4.4%, in money market accounts, and $15.2 million, or 25.3%, in savings accounts.

The increase in brokered deposits was due to accessing certain deposit channels during the third and fourth quarters 2022 to support balance sheet liquidity and manage interest rate risk.

The increase in the balance of interest-bearing demand deposits was due primarily to a new customer relationship with approximately $100.0 million in deposits with a contractual term of five years and a fixed rate of 1.15%.

The increase in the balance of noninterest-bearing demand deposits was driven primarily by deposits associated with our commercial real estate construction and development lending, as well as an increase in non-brokered BaaS deposits.

BaaS - brokered deposits increased due to certain fintech relationships being on-boarded during the fourth quarter 2022, which resulted in deposit inflows of $13.6 million at year end 2022.

The decrease in the balance of certificates of deposits was due to the maturity of higher-cost balances and reduced pricing strategies designed to limit the volume of new production.

The decrease in money market accounts was due primarily to certain customer activity that can be periodically volatile.

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

11 unchanged sentences

3.00% – 3.99% 99,011 21,034 8,983 26,695 155,723 13.8 %

4.00% – 4.99% 88,411 4,360 — — 92,771 8.2 %

Total $ 639,001 $ 197,912 $ 123,842 $ 169,008 $ 1,129,763 100.0 %

8 unchanged sentences

Federal Home Loan Bank Advances

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

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

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

9 unchanged sentences

1 Excludes the impact of interest rate swaps.

Subordinated Notes due 2031

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

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

The subordinated notes mature on September 1, 2031.

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

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

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

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

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

Accrued Expenses and Other Liabilities

Accrued expenses and other liabilities were $14.5 million at December 31, 2022 compared to $30.5 million at December 31, 2021.

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

The decrease in accrued expenses and other liabilities was due primarily to a $14.3 million decrease in derivative liabilities due to changes in fair value.

Liquidity and Capital Resources

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

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

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

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

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

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

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

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

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

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

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

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

At December 31, 2022, on a consolidated basis, the Company had $0.6 billion in cash and cash equivalents and investment securities available-for-sale, and $21.5 million in loans held-for-sale that were generally available for our cash needs.

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

At December 31, 2022, the Bank had the ability to borrow an additional $473.9 million from the FHLB, the Federal Reserve and correspondent bank Fed Funds lines of credit.

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

2 unchanged sentences

At December 31, 2022, the Company, on an unconsolidated basis, had $22.3 million in cash generally available for its cash needs, which is in excess of its current annual regular shareholder dividend and operating expenses.

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

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

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

At December 31, 2022, approved outstanding loan commitments, including unused lines of credit and standby letters of credit, amounted to $485.4 million.

Certificates of deposits and brokered certificates of deposits scheduled to mature in one year or less at December 31, 2022 totaled $639.0 million.

Management is not aware of any other events or regulatory requirements that, if implemented, are likely to have a material effect on either the Company’s or the Bank’s liquidity.

The following table presents the Company’s significant contractual obligations as of December 31, 2022.

4 unchanged sentences

8 2,311,482 — — — 2,311,482

Certificates of deposits and brokered certificates of deposits 1

Certificates of deposits and brokered deposits 1,2

8 639,002 321,754 169,007 — 1,129,763

6 unchanged sentences

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

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

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

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

In October 2022, the Company’s Board of Directors increased the authorization to $35.0 million.

Under this program, The Company repurchased a total of 855,956 shares at an average price of $36.31 per share under the program through December 19, 2022.

On December 19, 2022, the Company's Board of Directors approved a new stock repurchase program authorizing the repurchase of up to $25.0 million of our outstanding common stock from time to time on the open market or in privately negotiated transactions.

The stock repurchase authorization replaced the Company’s previously announced stock repurchase program and is scheduled to expire on December 31, 2023.

Various factors determine the amount and timing of our share repurchases, including our capital requirements, organic growth and other strategic opportunities, economic and market conditions (including the trading price of our stock), and regulatory and legal considerations.

See Part II, Item 5, of this report for information regarding recent repurchase activity and our remaining authority under the program.

Reconciliation of Non-GAAP Financial Measures

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

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

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

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

30 unchanged sentences

Net interest income - FTE $ 102,448 $ 92,009 $ 70,337

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

Subordinated debt redemption cost 810 — —

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

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

Fully-taxable equivalent adjustments 1

5,453 5,796 6,334

Subordinated debt redemption cost 810 — —

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

Net interest margin 2.41 % 2.11 % 1.55 %

2 unchanged sentences

Net interest margin - FTE 2.54 % 2.25 % 1.68 %

Net interest margin 2.11 % 1.55 % 1.65 %

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

Adjusted net interest margin 2.13 % 1.55 % 1.65 %

Net interest margin 2.11 % 1.55 % 1.65 %

Effect of fully-taxable equivalent adjustments 1

0.14 % 0.13 % 0.17 %

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

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

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

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

PPP loans (3,152) (50,554) —

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

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

Effect of PPP loans 0.01 % 0.02 % — %

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

1 Assuming a 21% tax rate

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

2021 2020 2019

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

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

Subordinated debt redemption cost 810 — —

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

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

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

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

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

Acquisition-related expenses (163) — —

IT termination fee (475) — —

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

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

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

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

Subordinated debt redemption cost 810 — —

Acquisition-related expenses 163 — —

IT termination fee 475 — —

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

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

Write-down of other real estate owned — 434 —

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

Subordinated debt redemption cost 170 — —

Acquisition-related expenses 34 — —

IT termination fee 100 — —

Net deferred tax asset revaluation — — —

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

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

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

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

Subordinated debt redemption cost 640 — —

Acquisition-related expenses 129 — —

IT termination fee 375 — —

Net deferred tax asset revaluation — — —

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

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

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

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

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

Effect of subordinated debt redemption cost 0.06 — —

Effect of acquisition-related expenses 0.01 — —

Effect of IT termination fee 0.04 — —

Effect of net deferred tax asset revaluation — — —

Adjusted diluted earnings per share $ 4.74 $ 3.16 $ 2.51

Return on average assets 1.14 % 0.69 % 0.65 %

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

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

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

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

Effect of IT termination fee 0.01 % — % — %

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

Adjusted return on average assets 1.12 % 0.73 % 0.65 %

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

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

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

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

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

Effect of IT termination fee 0.10 % — % — %

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

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

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

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

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

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

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

Effect of IT termination fee 0.10 % — % — %

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

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

Effective income tax rate 15.0 % 13.1 % 7.1 %

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

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

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

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

Effect of IT termination fee 0.1 % — % — %

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

Adjusted effective income tax rate 14.8 % 13.6 % 7.1 %

Critical Accounting Policies and Estimates

41 unchanged sentences

Off-Balance Sheet Arrangements

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

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

Fair value hedges are purchased to convert certain fixed rate assets to floating rate.

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

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

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

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

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

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

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

Fair value hedges were purchased to convert certain fixed rate assets to floating rate.

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

At December 31, 2022 and December 31, 2021, we had interest rate swaps with a notional amount of $260.0 million.

Additionally, we may enter into forward contracts relating to our mortgage banking business to

hedge the exposures we have from commitments to extend new residential mortgage loans to our customers and from our mortgage loans held-for-sale.

At December 31, 2022 and December 31, 2021, we had commitments to sell residential real estate loans of $17.0 million and $72.8 million, respectively.

These contracts mature in less than one year.

1 unchanged sentence

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis