What changed in this filing

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Item 1. Financial Statements

2023-05-10 compared with 2022-11-09 · 574 added, 471 removed, 949 unchanged (52% of the section changed)

3 unchanged sentences

(Amounts in thousands except share data)

September 30, 2022 December 31, 2021

March 31, 2023 December 31, 2022

Cash and due from banks $ 27,741 $ 17,426

2 unchanged sentences

Securities available-for-sale, at fair value (amortized cost of $436,520 and $436,183 in 2023 and 2022, respectively) 395,833 390,384

Securities held-to-maturity, at amortized cost (fair value of $169,977 and $61,468 in 2022 and 2021, respectively) 191,057 59,565

Securities held-to-maturity, at amortized cost, net of allowance for credit losses (fair value of $192,463 and $168,483 in 2023 and 2022, respectively) 210,761 189,168

Loans held-for-sale (includes $2,209 and $9,110 at fair value in 2023 and 2022, respectively) 18,144 21,511

Loans 3,607,242 3,499,401

Allowance for loan losses ( 29,866 ) ( 27,841 )

Allowance for credit losses - loans ( 36,879 ) ( 31,737 )

Net loans 3,570,363 3,467,664

34 unchanged sentences

First Internet Bancorp

Condensed Consolidated Statements of Income – Unaudited

Condensed Consolidated Statements of Operations – Unaudited

(Amounts in thousands except share and per share data)

Three Months Ended Nine Months Ended

September 30, 2022 September 30, 2021 September 30, 2022 September 30, 2021

Three Months Ended

March 31, 2023 March 31, 2022

Interest Income

9 unchanged sentences

Net Interest Income 19,574 25,750

Provision for Loan Losses 892 ( 29 ) 2,868 1,268

Net Interest Income After Provision for Loan Losses 23,102 20,948 72,556 61,783

Provision for Credit Losses 1

Net Interest Income After Provision for Credit Losses 10,159 24,959

Noninterest Income

4 unchanged sentences

Gain on sale of loans 4,061 3,845

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

Other 370 498

10 unchanged sentences

Total noninterest expense 20,954 18,780

Income Before Income Taxes 9,423 14,310 33,246 42,090

Income Tax Provision 987 2,220 4,056 6,454

Net Income $ 8,436 $ 12,090 $ 29,190 $ 35,636

Income Per Share of Common Stock

(Loss) Income Before Income Taxes ( 5,349 ) 12,999

Income Tax (Benefit) Provision ( 2,332 ) 1,790

Net (Loss) Income $ ( 3,017 ) $ 11,209

(Loss) Income Per Share of Common Stock

Basic $ ( 0.33 ) $ 1.14

4 unchanged sentences

Dividends Declared Per Share $ 0.06 $ 0.06

1 Beginning January 1, 2023, the allowance calculation is based on the CECL methodology.

Prior to January 1, 2023, the allowance calculation was based on the incurred loss methodology.

See Notes to Condensed Consolidated Financial Statements

First Internet Bancorp

Condensed Consolidated Statements of Comprehensive Income – Unaudited

Condensed Consolidated Statements of Comprehensive Loss – Unaudited

(Amounts in thousands except per share data)

Three Months Ended September 30, Nine Months Ended September 30,

2022 2021 2022 2021

Net income $ 8,436 $ 12,090 $ 29,190 $ 35,636

Other comprehensive (loss) income

Three Months Ended March 31,

Net (loss) income $ ( 3,017 ) $ 11,209

Other comprehensive income (loss)

Securities available-for-sale

Net unrealized holding losses recorded within other comprehensive income before income tax ( 18,406 ) ( 1,789 ) ( 51,682 ) ( 2,596 )

Income tax benefit ( 5,121 ) ( 441 ) ( 13,384 ) ( 616 )

Net effect on other comprehensive (loss) income ( 13,285 ) ( 1,348 ) ( 38,298 ) ( 1,980 )

Net unrealized holding gain (losses) recorded within other comprehensive income (loss) before income tax 5,112 ( 17,881 )

Income tax provision (benefit) 1,170 ( 4,077 )

Net effect on other comprehensive income (loss) 3,942 ( 13,804 )

Securities held-to-maturity

2 unchanged sentences

Income tax provision (benefit) 46 ( 1,249 )

Net effect on other comprehensive (loss) income 227 — ( 3,591 ) —

Net effect on other comprehensive income (loss) 112 ( 4,034 )

Cash flow hedges

Net unrealized holding gains on cash flow hedging derivatives recorded within other comprehensive income before income tax 6,058 1,439 19,424 7,665

Income tax provision 1,393 348 5,639 1,657

Net unrealized holding (losses) gains on cash flow hedging derivatives recorded within other comprehensive income before income tax ( 2,170 ) 9,334

Income tax (benefit) provision ( 499 ) 3,318

Net effect on other comprehensive (loss) income ( 1,671 ) 6,016

Total other comprehensive (loss) income ( 8,393 ) ( 257 ) ( 28,104 ) 4,028

Comprehensive income $ 43 $ 11,833 $ 1,086 $ 39,664

Total other comprehensive income (loss) 2,383 ( 11,822 )

Comprehensive loss $ ( 634 ) $ ( 613 )

See Notes to Condensed Consolidated Financial Statements

1 unchanged sentence

Condensed Consolidated Statements of Changes in Shareholders’ Equity - Unaudited

Nine Months Ended September 30, 2022 and 2021

Three Months Ended March 31, 2023 and 2022

(Amounts in thousands except per share data)

4 unchanged sentences

Balance, January 1, 2023 $ 192,935 $ 205,675 $ ( 33,636 ) $ 364,974

Net income — 29,190 — 29,190

Other comprehensive loss — — ( 28,104 ) ( 28,104 )

Impact of adoption of new accounting standards 1

— ( 4,491 ) — ( 4,491 )

Net loss — ( 3,017 ) — ( 3,017 )

Other comprehensive income — — 2,383 2,383

Dividends declared ($ 0.06 per share)

5 unchanged sentences

Common stock redeemed for the net settlement of share-based awards ( 106 ) — — ( 106 )

Balance, September 30, 2022 $ 200,123 $ 199,877 $ ( 39,143 ) $ 360,857

Balance, March 31, 2023 $ 189,202 $ 197,623 $ ( 31,253 ) $ 355,572

Balance, January 1, 2022 $ 218,946 $ 172,431 $ ( 11,039 ) $ 380,338

Net income — 11,209 — 11,209

Other comprehensive income — — 4,028 4,028

Dividends declared ($ 0.18 per share)

— ( 1,817 ) — ( 1,817 )

Recognition of the fair value of share-based compensation 1,830 — — 1,830

Deferred stock rights and restricted stock units issued in lieu of cash dividends payable on outstanding deferred stock rights and restricted stock units 16 — — 16

Common stock redeemed for the net settlement of share-based awards ( 195 ) — — ( 195 )

Balance, September 30, 2021 $ 223,059 $ 160,551 $ ( 13,168 ) $ 370,442

See Notes to Condensed Consolidated Financial Statements

First Internet Bancorp

Condensed Consolidated Statements of Changes in Shareholders’ Equity - Unaudited

Three Months Ended September 30, 2022 and 2021

(Amounts in thousands except per share data)

Stock Retained

Earnings Accumulated

Comprehensive

Shareholders’

Balance July 1, 2022 $ 204,071 $ 192,011 $ ( 30,750 ) $ 365,332

Net income — 8,436 — 8,436

Other comprehensive loss — — ( 11,822 ) ( 11,822 )

2 unchanged sentences

Recognition of the fair value of share-based compensation 640 — — 640

Repurchased shares of common stock ( 120,000 )

( 4,387 ) — — ( 4,387 )

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, September 30, 2022 $ 200,123 $ 199,877 $ ( 39,143 ) $ 360,857

Balance July 1, 2021 $ 222,486 $ 149,066 $ ( 12,911 ) $ 358,641

Net income — 12,090 — 12,090

Other comprehensive loss — — ( 257 ) ( 257 )

Dividends declared ($ 0.06 per share)

Repurchase of common stock ( 103,703 )

( 5,118 ) — — ( 5,118 )

Recognition of the fair value of share-based compensation 568 — — 568

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, September 30, 2021 $ 223,059 $ 160,551 $ ( 13,168 ) $ 370,442

Balance, March 31, 2022 $ 214,473 $ 183,043 $ ( 22,861 ) $ 374,655

1 Reflects the impact of adopting Accounting Standards Update (“ASU”) 2016-13.

See Notes to Condensed Consolidated Financial Statements

2 unchanged sentences

(Amounts in thousands except per share data)

Nine Months Ended September 30,

Three Months Ended March 31,

Operating Activities

Net income $ 29,190 $ 35,636

Net (loss) income $ ( 3,017 ) $ 11,209

Adjustments to reconcile net income to net cash used in operating activities:

1 unchanged sentence

Increase in cash surrender value of bank-owned life insurance ( 246 ) ( 233 )

Provision for loan losses 2,868 1,268

Provision for credit losses 1

Share-based compensation expense 372 640

4 unchanged sentences

Gain (loss) on derivatives 536 ( 2,565 )

Settlement of derivatives — ( 1,859 )

Loan servicing asset revaluation 55 297

10 unchanged sentences

Redemption of Federal Home Loan Bank of Indianapolis stock — 431

Purchase of Federal Home Loan Bank of Indianapolis stock ( 3,131 ) —

Net proceeds from sale of premises and equipment — 8,116

Purchase of premises and equipment ( 2,704 ) ( 9,808 )

2 unchanged sentences

Other investing activities ( 1,315 ) 374

Net cash used in investing activities ( 361,831 ) ( 30,606 )

Net cash (used in) provided by investing activities ( 132,565 ) 10,422

Financing Activities

Net increase (decrease) in deposits 13,685 ( 46,290 )

Net increase in deposits 178,743 39,020

Cash dividends paid ( 548 ) ( 596 )

Repayment of subordinated debt — ( 35,000 )

Net proceeds from issuance of subordinated debt — 58,658

Repurchase of common stock ( 4,002 ) ( 5,118 )

2 unchanged sentences

Other, net ( 106 ) —

Net cash provided by (used in) financing activities 66,147 ( 24,628 )

Net Decrease in Cash and Cash Equivalents ( 221,908 ) ( 12,291 )

Net cash provided by financing activities 174,087 33,306

Net Increase in Cash and Cash Equivalents 47,420 74,589

Cash and Cash Equivalents, Beginning of Period 256,552 442,960

8 unchanged sentences

Transfer of available-for-sale mortgage-backed securities to held-to-maturity mortgage-backed securities at fair value — 96,220

1 Beginning January 1, 2023, the allowance calculation is based on the CECL methodology.

Prior to January 1, 2023, the allowance calculation was based on the incurred loss methodology.

See Notes to Condensed Consolidated Financial Statements

8 unchanged sentences

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 nine months ended September 30, 2022 are not necessarily indicative of the results expected for the year ending December 31, 2022 or any other period.

The September 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 results of operations for the three months ended March 31, 2023 are not necessarily indicative of the results expected for the year ending December 31, 2023 or any other period.

The March 31, 2023 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, 2022.

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 determination of the allowance for credit losses, income taxes, valuations and impairments of investment securities and goodwill, as well as fair value measurements of derivatives and loans held-for-sale 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.

2 unchanged sentences

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.

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 nine months ended September 30, 2022 and 2021.

(dollars in thousands, except per share data) Three Months Ended September 30, Nine Months Ended September 30,

2022 2021 2022 2021

Basic earnings per share

Net income $ 8,436 $ 12,090 $ 29,190 $ 35,636

Other than the adoption of new accounting standards, the Company has not changed its significant accounting and reporting policies from those disclosed in the Company’s Form 10-K for the year ended December 31, 2022.

Adoption of new accounting standards

ASU 2016 - 13

On January 1, 2023, the Company adopted ASU 2016-03 Financial Instruments - Credit losses (“ASC 326”):

Measurement of Credit Losses on Financial Instruments, as amended, which replaces the incurred loss methodology with an expected credit loss (“CECL”) methodology.

The CECL estimate is applicable to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities.

It also applies to off-balance sheet credit exposures, including loan commitments, standby letters of credit, financial guarantees and other similar instruments.

Additionally, ASC 326 resulted in changes to the accounting for available-for-sale and held-to-maturity debt securities.

The Company adopted ASC 326 for all financial assets measured at amortized cost, available for sale securities and off-balance sheet credit exposures.

Results for reporting periods beginning after January 1, 2023 are presented under ASC 326, while prior period amounts continue to be reported in accordance with previously applicable U.S.

The Company recorded a net decrease to retained earnings of $ 4.5 million as of January 1, 2023 for the cumulative effect of adopting ASC 326.

The net adjustment to allowance for credit losses (“ACL”) includes $ 2.3 million related to loans, $ 1.9 million related to off-balance sheet credit exposures and $ 0.3 million related to held-to-maturity debt securities.

ACL - Available-For-Sale (“AFS”) Debt Securities

For AFS debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or it is more likely than not that it will be required to sell, the security before recovery of its amortized cost basis.

If either of the

criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income.

For AFS debt securities that do not meet the aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors, such as interest rates or market conditions.

In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency and adverse conditions specifically related to the security, among other factors.

If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security.

If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded.

Changes in the ACL are recorded as a provision for, or recovery of, credit loss expense.

Losses are charged against the allowance when management believes that uncollectibility of an AFS debt security is confirmed or when either of the criteria regarding intent or requirement to sell is met.

Accrued interest receivable on AFS debt securities totaled $ 2.0 million at March 31, 2023 and is excluded from the estimate of credit losses.

The Company made the policy election to exclude accrued interest from the amortized cost basis of AFS debt securities and report accrued interest separately on the condensed consolidated balance sheet.

ACL - Held-To-Maturity (“HTM”) Debt Securities

Management measures expected credit losses on HTM debt securities on a collective basis by major security type.

Accrued interest receivable on HTM debt securities totaled $ 0.8 million at March 31, 2023 and is excluded from the estimate of credit losses.

The Company made the accounting policy election to not measure an ACL for accrued interest.

Accrued interest deemed uncollectible will be written off through interest income.

The HTM securities portfolio includes municipal securities, residential mortgage-backed-securities, commercial mortgage-backed securities and corporate securities.

All residential and commercial mortgage-backed securities are U.S.

government issued or sponsored and substantially all municipal and corporate securities are rated investment grade or above.

The estimate of expected credit losses considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts.

At the time of adoption, the estimated reserve was $ 0.3 million.

The ACL for loans represents management's estimate of all expected credit losses over the expected life of the Company’s existing loan portfolio.

Management estimates the ACL balance using relevant available information about the collectability of cash flows, from internal and external sources, including historical information relating to past events, current conditions, and reasonable and supportable forecasts of future economic conditions.

When the Company is unable to forecast future economic events, management may revert to historical information.

Accrued interest receivable on loans totaled $ 17.7 million and is excluded from the estimate of credit losses.

The Company made the accounting policy election to not measure an ACL for accrued interest receivable.

Accrued interest deemed uncollectible will be written off through interest income.

ACL - Loans - Collectively Evaluated

The ACL is measured on a collective pool basis when similar risk characteristics exist.

The Company has identified the following portfolio segments in the table below.

The Company utilized a discounted cash flow (“DCF”) method to estimate the quantitative portion of the allowance for credit losses for loans evaluated on a collective pooled basis.

For each segment, a loss driver analysis was performed in order to identify loss drivers and create a regression model for use in forecasting cash flows.

In creating the DCF model, the Company has established a one-year reasonable and supportable forecast period with a one-year straight line reversion to the long-term historical average.

Due to its minimal loss history, the Company elected to use peer data for a more reasonable calculation.

Key inputs into the DCF model include loan-level detail, including the amortized cost basis of individual loans, payment structure, loss history, and forecasted loss drivers.

The Company utilizes a third party to provide economic forecasts under various scenarios, which are assessed quarterly considering the scenarios in the context of the current economic environment and loss risk.

Expected credit losses are estimated over the contractual term of the loans and adjusted for prepayments when appropriate.

The contractual term excludes extensions, renewals, and modifications unless the extension or renewal options are included in the original or modified contract at the reporting date and are not unconditionally cancellable by the Company.

Additional key assumptions in the DCF model include the probability of default (“PD”), loss given default (“LGD”), and prepayment/curtailment rates.

The Company utilizes the model-driven PD and a LGD derived from a method referred to as Frye Jacobs.

The Frye Jacobs method is a mathematical formula that traces the relationship between LGD and PD over time and projects the LGD based on the level of PD forecasted.

In all cases, the Frye Jacobs method is utilized to calculate LGDs during the forecast period, reversion period and long-term historical average.

Prepayment and curtailment rates were calculated through third party analysis of the Company’s own data.

Qualitative factors for the DCF and weighted-average remaining maturity methodologies include the following:

• Changes in lending policies and procedures, including changes in underwriting standards and collections, charge-offs and recovery practices

• Changes in international, national, regional and local conditions

• Changes in the nature and volume of the portfolio and terms of loans

• Changes in the experience, depth and ability of lending management

• Changes in the volume and severity of past due loans and other similar conditions

• Changes in the quality of the organization’s loan review system

• Changes in the value of underlying collateral for collateral dependent loans

• The existence and effect of any concentrations of credit and changes in the levels of such concentrations

• The effect of other external factors (i.e.

competition, legal and regulatory requirements) on the level of estimated credit losses

ACL - Loans - Individually Evaluated

Loans that do not share risk characteristics are evaluated on an individual basis and are excluded from the collective evaluation.

The Company has determined that any loans which have been placed on nonaccrual status will be individually evaluated.

Individual analysis will establish a specific reserve for loans, if necessary.

Specific reserves on nonaccrual loans are typically based on management’s best estimate of the fair value of collateral securing these loans, adjusted for selling costs as necessary.

ACL - Off-Balance Sheet Credit Exposures

The Company estimates expected credit losses over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company.

The allowance on off-balance sheet credit exposure is recorded as a liability and adjusted as a provision for credit loss expense.

The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life.

Funding rates are based on a historical analysis of the Company’s portfolio, while estimates of credit losses are determined using the same loss rates as funded loans.

Regulatory Capital

As permitted by the federal banking regulatory agencies, the Company has elected the option to delay the impact of the day one adoption of ASC 326.

Refer to “Item 2.

Regulatory Capital Requirements” for details of the phase-in transition adjustments.

Modified Loans to Borrowers Experiencing Financial Difficulty

Concurrent with the adoption of ASU 2016-03, the Company adopted ASU 2022-02 “Financial Instruments-Credit Losses (ASC 326):

Troubled Debt restructurings and Vintage Disclosures,” as amended.

The update eliminated the accounting guidance for troubled debt restructurings (“TDRs”) by creditors, while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty.

Revision of Previously Issued Financial Statements

The Company has revised amounts reported in previously issued financial statements for the periods presented in this Quarterly Report on Form 10-Q due to immaterial clerical errors.

The clerical errors caused certain amounts related to

the transfer of available-for-sale mortgage-backed securities to held-to-maturity mortgage-backed securities to be reclassified to different line items within the statement of cash flows for the period ended March 31, 2022.

The reclassifications were between the purchases, maturities and amortization, and depreciation line items related to securities and had no impact on the ending cash balance, consolidated balance sheet or statement of operations.

The Company evaluated the impact of the clerical errors to our previously issued financial statements in accordance with SEC Staff Accounting Bulletins No.

108 and, based upon quantitative and qualitative factors, determined that the clerical errors were not material to the previously issued financial statements and disclosures included in our Quarterly Report on Form 10-Q for the three months ended March 31, 2022.

(Loss) Earnings Per Share

(Loss) 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 (loss) earnings per share computations for the three months ended March 31, 2023 and 2022.

(dollars in thousands, except per share data) Three Months Ended March 31,

Basic (loss) earnings per share

Net (loss) income $ ( 3,017 ) $ 11,209

Weighted-average common shares 9,024,072 9,790,122

Basic earnings per common share $ 0.89 $ 1.22 $ 3.04 $ 3.59

Diluted earnings per share

Net income $ 8,436 $ 12,090 $ 29,190 $ 35,636

Basic (loss) earnings per common share $ ( 0.33 ) $ 1.14

Diluted (loss) earnings per share

Net (loss) income $ ( 3,017 ) $ 11,209

Weighted-average common shares 9,024,072 9,790,122

1 unchanged sentence

Weighted-average common and incremental shares 9,024,072 9,870,394

Diluted earnings per common share (1)

Diluted (loss) earnings per common share 1

$ ( 0.33 ) $ 1.14

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 426 and 1,616 for the three and nine months ended September 30, 2022, respectively.

There were 0 and 28 weighted-average antidilutive shares for the three and nine months ended September 30, 2021, respectively.

The following tables summarize securities available-for-sale and securities held-to-maturity as of September 30, 2022 and December 31, 2021.

September 30, 2022

Since the Company was in a loss position for the three months ended March 31, 2023, basic net loss is the same as diluted net loss per share, as the inclusion of all potential shares of common stock outstanding would have been anti-dilutive.

Excluded from the computation of diluted EPS were weighted-average antidilutive shares totaling 661 for the three months ended March 31, 2022.

The following tables summarize securities available-for-sale and securities held-to-maturity as of March 31, 2023 and December 31, 2022.

March 31, 2023

Amortized Gross Unrealized Fair

4 unchanged sentences

Agency mortgage-backed securities - residential 1

249,795 7 ( 33,050 ) 216,752

Agency mortgage-backed securities - commercial 16,739 — ( 1,209 ) 15,530

3 unchanged sentences

Total available-for-sale $ 436,520 $ 660 $ ( 41,347 ) $ 395,833

September 30, 2022

Amortized Gross Unrealized Fair

(in thousands) Cost Gains Losses Value

March 31, 2023

Amortized Cost Gross Unrealized Fair Value Allowance for Credit Losses Net Carrying Value

(in thousands) Gains Losses

Securities held-to-maturity

4 unchanged sentences

Total held-to-maturity $ 211,097 $ 21 $ ( 18,655 ) $ 192,463 $ ( 336 ) $ 210,761

1 Includes $ 0.5 million of additional premium related to terminated interest rate swaps associated with agency mortgage-backed securities - residential as of March 31, 2023.

Accrued interest receivable on AFS and HTM securities at March 31, 2023 was $ 2.0 million and $ 0.8 million, respectively, and is included in accrued interest receivable on the condensed consolidated balance sheet.

The Company elected to exclude all accrued interest receivable from securities when estimating credit losses.

Over 97% of mortgage-backed securities (including both AFS and HTM) held by the Company are issued by U.S.

government-sponsored entities and agencies.

These securities are either explicitly or implicitly guaranteed by the U.S.

government and have a long history of no credit losses;

therefore, the Company did not record an ACL on these securities.

Additionally, the Company evaluated credit impairment for individual AFS securities that are in an unrealized loss position and determined that the unrealized losses are unrelated to credit quality and are primarily attributable to changes in interest rates and volatility in the financial markets.

As the Company does not intend to sell the AFS securities that are in an unrealized loss position and it is unlikely that it will be required to sell these securities before recovery of their amortized cost basis, the Company did not record an ACL on these securities.

In accordance with the adoption of ASC 326, the Company also evaluated its HTM securities that are in an unrealized loss position and considered issuer bond ratings, historical loss rates for bond ratings and economic forecasts.

As a result, the Company recorded in an initial ACL in retained earnings of $ 0.3 million on January 1, 2023.

The Company reevaluated these securities at March 31, 2023 and determined no additional ACL was necessary.

December 31, 2022

5 unchanged sentences

Agency mortgage-backed securities - residential 1

252,066 — ( 36,974 ) 215,092

Agency mortgage-backed securities - commercial 17,142 — ( 1,302 ) 15,840

9 unchanged sentences

Municipal securities $ 13,946 $ — $ ( 1,114 ) $ 12,832

Agency mortgage-backed securities - residential 121,853 — ( 15,112 ) 106,741

Agency mortgage-backed securities - commercial 5,818 — ( 1,266 ) 4,552

Corporate securities 47,551 — ( 3,193 ) 44,358

Total held-to-maturity $ 189,168 $ — $ ( 20,685 ) $ 168,483

The carrying value of securities at September 30, 2022 is shown below by their contractual maturity date.

1 Includes $0.5 million of additional premium related to terminated interest rate swaps associated with agency mortgage-backed securities - residential as of December 31, 2022.

The carrying value of securities at March 31, 2023 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.

1 unchanged sentence

(in thousands) Amortized

Within one year $ 269 $ 263

One to five years 34,401 35,141

9 unchanged sentences

(in thousands) Amortized

Within one year $ 495 $ 484

One to five years 8,304 8,107

5 unchanged sentences

Total $ 211,097 $ 192,463

There were no gross gains or losses resulting from the sale of available-for-sale securities during the three and nine months ended September 30, 2022 and September 30, 2021, respectively.

There were no gross gains or losses resulting from the sale of available-for-sale securities during the three months ended March 31, 2023 and March 31, 2022, respectively.

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 September 30, 2022 and December 31, 2021 was $ 541.0 million and $ 403.2 million, which was approximately 96 % and 61 %, respectively, of the Company’s AFS and HTM securities portfolios.

As of September 30, 2022, the Company’s security portfolio consisted of 447 securities, of which 438 were in an unrealized loss position.

The total fair value of these investments at March 31, 2023 and December 31, 2022 was $ 573.4 million and $ 527.4 million, which was approximately 97 % and 94 %, respectively, of the Company’s AFS and HTM securities portfolios.

As of March 31, 2023, the Company’s security portfolio consisted of 459 securities, of which 431 were in an unrealized loss position.

As of December 31, 2022, the Company’s security portfolio consisted of 445 securities, of which 434 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.

Government-Sponsored Agencies, Municipal Securities and Corporate Securities

1 unchanged sentence

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 September 30, 2022.

The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments.

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 basis, which may be upon maturity.

As of March 31, 2023, the unrealized losses occurred as a result of changes in interest rates, market spreads and market conditions subsequent to purchase.

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.

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 September 30, 2022 and December 31, 2021.

September 30, 2022

The Company expects to recover the amortized cost basis over the terms of the securities.

As of March 31, 2023, the unrealized losses occurred as a result of changes in interest rates, market spreads and market conditions subsequent to purchase.

March 31, 2023

Less Than 12 Months 12 Months or Longer Total

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Total $ 100,043 $ ( 5,148 ) $ 294,763 $ ( 36,199 ) $ 394,806 $ ( 41,347 )

September 30, 2022

December 31, 2022

Less Than 12 Months 12 Months or Longer Total

3 unchanged sentences

Value Unrealized

Securities held-to-maturity

Securities available-for-sale

Government-sponsored agencies $ 29,668 $ ( 1,008 ) $ 4,141 $ ( 789 ) $ 33,809 $ ( 1,797 )

Municipal securities 39,557 ( 1,766 ) 4,778 ( 374 ) 44,335 ( 2,140 )

Agency mortgage-backed securities - residential

170,026 ( 29,690 ) 45,066 ( 7,284 ) 215,092 ( 36,974 )

Agency mortgage-backed securities - commercial 10,560 ( 926 ) 5,280 ( 376 ) 15,840 ( 1,302 )

Private label mortgage-backed securities 2,445 ( 330 ) 8,010 ( 992 ) 10,455 ( 1,322 )

Asset-backed securities

4,960 ( 40 ) — — 4,960 ( 40 )

Corporate securities 21,568 ( 1,452 ) 13,239 ( 1,265 ) 34,807 ( 2,717 )

6 unchanged sentences

Value Unrealized

Securities available-for-sale

Government-sponsored agencies $ 2,921 $ ( 79 ) $ 40,305 $ ( 1,058 ) $ 43,226 $ ( 1,137 )

Securities held-to-maturity

Municipal securities $ 8,160 $ ( 661 ) $ 4,258 $ ( 453 ) $ 12,418 $ ( 1,114 )

1 unchanged sentence

Agency mortgage-backed securities - commercial 4,552 ( 1,266 ) — — 4,552 ( 1,266 )

Private label mortgage-backed securities

374 ( 3 ) — — 374 ( 3 )

Asset-backed securities

Corporate securities 36,866 ( 2,685 ) 7,492 ( 508 ) 44,358 ( 3,193 )

Total $ 117,986 $ ( 13,460 ) $ 50,082 $ ( 7,225 ) $ 168,068 $ ( 20,685 )

There were no amounts reclassified from accumulated other comprehensive loss to the condensed consolidated statements of income during the three and nine months ended September 30, 2022 and September 30, 2021, respectively.

Loan balances as of September 30, 2022 and December 31, 2021 are summarized in the table below.

The following table summarizes ratings for the Company’s HTM portfolio issued by state and political subdivisions and other securities as of March 31, 2023.

Held-to-Maturity

(in thousands) State and Municipal Other Total

Aaa/AAA $ 8,684 $ — $ 8,684

Aa1/AA+ 1,271 — 1,271

Aa2/AA 1,540 — 1,540

A1/A+ 1,794 — 1,794

A2/A 646 — 646

A3/A- — 9,517 9,517

Baa1/BBB+ — 9,500 9,500

Baa2/BBB — 11,000 11,000

Baa3/BBB- — 14,530 14,530

— 152,615 152,615

Total $ 13,935 $ 197,162 $ 211,097

1 HTM agency mortgage-backed securities - commercial and residential are listed under Other securities as not rated.

There were no amounts reclassified from accumulated other comprehensive loss to the condensed consolidated statements of operations during the three months ended March 31, 2023.

Loan balances as of March 31, 2023 and December 31, 2022 are summarized in the table below.

Categories of loans include:

(in thousands) September 30, 2022 December 31, 2021

(in thousands) March 31, 2023 December 31, 2022

Commercial loans

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Total loans 3,607,242 3,499,401

Allowance for loan losses ( 29,866 ) ( 27,841 )

Allowance for credit losses ( 36,879 ) ( 31,737 )

Net loans $ 3,570,363 $ 3,467,664

(1) Includes carrying value adjustments of $ 33.9 million and $ 37.5 million related to terminated interest rate swaps associated with public finance loans as of September 30, 2022 and December 31, 2021, respectively.

1 Includes carrying value adjustments of $ 31.5 million and $ 32.5 million related to terminated interest rate swaps associated with public finance loans as of March 31, 2023 and December 31, 2022, respectively.

Risk characteristics of each loan portfolio segment are as follows:

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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.

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, land development for residential 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.

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Healthcare Finance:

These loans were 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.

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.

8 unchanged sentences

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:

2 unchanged sentences

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.

With respect to residential loans that are secured by 1-to-4 family residences and are generally owner occupied, the Bank 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.

2 unchanged sentences

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.

The properties securing the home equity portfolio segment are generally geographically diverse as the Bank offered 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.

5 unchanged sentences

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.

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

Allowance for Credit Losses (“ACL”) Methodology

The ACL for loans represents management's estimate of all expected credit losses over the expected life of the Company’s existing loan portfolio.

When the Company is unable to forecast future economic events, management may revert to historical information.

The Company's methodologies incorporate a one-year reasonable and supportable forecast period with a one-year straight line reversion to the long-term historical average.

The ACL methodology may also consider other adjustments to address changes in conditions, trends, and circumstances such as local industry changes that could have a significant impact on the risk profile of the loan portfolio and provide for adjustments that may not be reflected and/or captured in the historical loss data.

These factors include:

lending policies, imprecision in forecasting future economic conditions, loan profile, lending staff, problem loan trends, loan review, collateral, credit concentration, or other internal and external factors.

The Company also includes qualitative adjustments to the allowance based on factors and considerations that have not otherwise been fully accounted for.

Qualitative adjustments include, but are not limited to: