First Internet Bancorp 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes appearing elsewhere in this report. This discussion and analysis includes certain forward-looking statements that involve risks, uncertainties, and assumptions. You should review the “Risk Factors” sections of this report and our Annual Report on Form 10-K for the year ended December 31, 2022 for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by such forward-looking statements. See also “Cautionary Note Regarding Forward-Looking Statements” at the beginning of this report. Overview First Internet Bancorp is a financial holding company headquartered in Fishers, Indiana that conducts its primary business activities through its wholly-owned subsidiary, First Internet Bank of Indiana, an Indiana chartered bank. The Bank was the first state-chartered, Federal Deposit Insurance Corporation (“FDIC”) insured Internet bank and commenced banking operations in 1999. First Internet Bancorp was incorporated under the laws of the State of Indiana on September 15, 2005. On March 21, 2006, we consummated a plan of exchange by which we acquired all of the outstanding shares of the Bank. The Bank has three wholly-owned subsidiaries: First Internet Public Finance Corp., an Indiana corporation that provides a range of public and municipal finance lending and leasing products to governmental entities throughout the United States and acquires securities issued by state and local governments and other municipalities; JKH Realty Services, LLC, a Delaware limited liability company that manages other real estate owned properties as needed; and SPF15, Inc., an Indiana corporation that owns real estate used primarily for the Bank’s principal office. We offer a wide range of commercial, small business, consumer and municipal banking products and services. We conduct our consumer and small business deposit operations primarily through digital channels on a nationwide basis and have no traditional branch offices. Our consumer lending products are primarily originated on a nationwide basis through relationships with dealerships and financing partners. Our commercial banking products and services are delivered through a relationship banking model and include commercial and industrial (“C&I”), construction and investor commercial real estate, single tenant lease financing, public finance, healthcare finance, small business lending, franchise finance and commercial deposits and treasury management. Our C&I team provides credit solutions such as lines of credit, term loans, owner-occupied commercial real estate loans and 48 corporate credit cards on a regional basis to commercial borrowers primarily in the Midwest and Southwest regions of the United States. We primarily offer construction and investor commercial real estate loans within Central Indiana or on a regional basis and single tenant lease financing on a nationwide basis. Our public finance team provides a range of public and municipal lending and leasing products to government entities on a nationwide basis. Our healthcare finance team was established in conjunction with our strategic partnership with Provide, Inc. (formerly known as Lendeavor, Inc.), a San Francisco-based technology-enabled lender to healthcare practices, which provided lending on a nationwide basis for healthcare practice finance or acquisition, acquisition or refinancing of owner-occupied commercial real estate and equipment purchases. In the third quarter 2021, Provide was acquired by a super-regional financial institution. Subsequent to Provide being acquired, the acquiring institution has retained most, if not all, of Provide’s loan origination activity and our healthcare finance loan balances have declined. Our franchise finance business was established in July 2021 in conjunction with our business relationship with ApplePie Capital, a financial technology (“fintech”) company that specializes in providing financing to franchisees in various industry segments. Our commercial deposits and treasury management team works with the other commercial teams to provide deposit products and treasury management services to our commercial and municipal lending customers as well as pursues commercial deposit opportunities in business segments where we have no credit relationships. We believe that we differentiate ourselves from larger financial institutions by providing a full suite of services to emerging small businesses and entrepreneurs on a nationwide basis. We are one of the fastest-growing lenders in the Small Business Administration (“SBA”) 7(a) program, closing more than $155.4 million in SBA 7(a) loans during 2022 and ranking in the top 30 SBA 7(a) lenders for the SBA’s 2022 fiscal year. During the three months ended March 31, 2023, we closed more than $73.5 million in SBA 7(a) loans, ranking in the top 10 SBA 7(a) lenders for 2023. We also offer a top-ranked small business checking account product to our country’s entrepreneurs. We continue to scale up this business with the goal of driving increased earnings and profitability in future periods. We also offer payment, deposit, card and lending products and services through fintech partnerships, which we plan to grow in future periods. With the rapid evolution of technology that enables consumers and small businesses to manage their finances digitally, fintechs are addressing a significantly growing marketplace. Fintechs have created robust digital offerings, unburdened by legacy technology architecture, to address growing customer expectations. Through partnerships with selected fintechs, we believe our ability to win and retain consumer and small business relationships will be significantly enhanced. Furthermore, we believe partnering with select fintechs will allow us to further diversify our revenue sources, acquire lower-cost deposits and pursue additional asset generation capabilities. As of March 31, 2023, the Company had consolidated assets of $4.7 billion, consolidated deposits of $3.6 billion and stockholders’ equity of $355.6 million. 49 Results of Operations During the first quarter 2023, there was a net loss of $3.0 million, or $0.33 diluted loss per share, compared to first quarter 2022 net income of $11.2 million, or $1.14 per diluted share, representing a decrease in net income of $14.2 million, or 126.9%, and a decrease in diluted earnings per share of $1.47, or 129.0%. The $14.2 million decrease in net income for the first quarter 2023 compared to the first quarter 2022 was due primarily to an increase of $8.6 million, or 1,090.3%, in provision for credit losses, a decrease of $6.2 million, or 24.0%, in net interest income, an increase of $2.2 million, or 11.6%, in noninterest expense and a decrease of $1.4 million, or 20.1%, in noninterest income, partially offset by a decrease of $4.1 million, or 230.3%, in income tax expense. 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 2023. This included its nationwide digital direct-to-consumer mortgage platform that originated residential loans for sale in the secondary market, as well as its local traditional consumer mortgage and construction-to-permanent business. In connection with this decision, the Company recognized $3.1 million of mortgage operations and exit costs during the first quarter 2023, which primarily drove the increase in noninterest expense compared to the first quarter 2022. The Company also recognized $0.1 million of mortgage banking revenue during the first quarter 2023, down from $1.8 million in the first quarter 2022, as it immediately began winding down its existing pipeline following the decision to exit the business. Additionally during the first quarter 2023, the Company recognized a partial charge-off of $6.9 million related to a commercial and industrial participation loan with a balance of $9.8 million, prior to the partial charge-off, that was moved to nonaccrual status late in the quarter. This action contributed to the increase in the provision for credit losses as compared to first quarter 2022. The Company expects that it will receive payment for the remaining balance of the participation loan during May 2023. During the first quarter 2023, return on average assets (“ROAA”), return on average shareholders’ equity (“ROAE”), and return on average tangible common equity (“ROATCE”) were (0.26%), (3.37%), and (3.41%), respectively, compared to 1.08%, 11.94%, and 12.09%, respectively, for the first quarter 2022. Excluding the impact of exiting consumer mortgage and the partial charge-off, adjusted net income for the first quarter 2023 was $4.8 million and adjusted diluted earnings per share was $0.53. Additionally, for the first quarter 2023, adjusted ROAA, adjusted ROAE and adjusted ROATCE were 0.43%, 5.36% and 5.44%, respectively. During the first quarter 2022, the Company had a nonrecurring consulting fee associated with a special project of $0.9 million, as well as acquisition-related expenses of $0.2 million. Excluding these items, adjusted net income for the first quarter 2022 was $12.0 million and adjusted diluted earnings per share was $1.22. Additionally, for the first quarter 2022, adjusted ROAA, adjusted ROAE and adjusted ROATCE were 1.16%, 12.82% and 12.98%, respectively. Refer to the “Reconciliation of Non-GAAP Financial Measures” section of Part I, Item 2 of this report, Management’s Discussion and Analysis of Financial Condition and Results of Operations for additional information. 50 Consolidated Average Balance Sheets and Net Interest Income Analyses For the periods presented, the following tables provide the average balances of interest-earning assets and interest-bearing liabilities and the related yields and cost of funds. The tables do not reflect any effect of income taxes except for net interest margin - FTE, as discussed below. Balances are based on the average of daily balances. Nonaccrual loans are included in average loan balances. Three Months Ended March 31, 2023 December 31, 2022 March 31, 2022 (dollars in thousands) Average Balance Interest /Dividends Yield /Cost Average Balance Interest /Dividends Yield /Cost Average Balance Interest /Dividends Yield /Cost Assets Interest-earning assets Loans, including loans held-for-sale $ 3,583,242 $ 43,843 4.96 % $ 3,391,379 $ 40,354 4.72 % $ 2,976,037 $ 33,188 4.52 % Securities - taxable 511,923 3,606 2.86 % 508,725 3,222 2.51 % 567,776 2,221 1.59 % Securities - non-taxable 73,347 798 4.41 % 69,883 699 3.97 % 80,952 249 1.25 % Other earning assets 331,294 3,786 4.63 % 149,910 1,394 3.69 % 455,960 376 0.33 % Total interest-earning assets 4,499,782 52,033 4.69 % 4,119,897 45,669 4.40 % 4,080,725 36,034 3.58 % Allowance for credit losses - loans (35,075) (30,543) (27,974) Noninterest-earning assets 182,449 173,892 162,167 Total assets $ 4,647,156 $ 4,263,246 $ 4,214,918 Liabilities Interest-bearing liabilities Interest-bearing demand deposits $ 333,642 $ 900 1.09 % $ 326,102 $ 628 0.76 % $ 318,281 $ 412 0.52 % Savings accounts 38,482 82 0.86 % 47,799 104 0.86 % 60,616 53 0.35 % Money market accounts 1,377,600 12,300 3.62 % 1,441,583 10,508 2.89 % 1,454,436 1,503 0.42 % BaaS - brokered deposits 14,741 138 3.80 % 4,563 13 1.13 % 12,111 6 0.20 % Certificates and brokered deposits 1,647,504 13,850 3.41 % 1,220,975 7,554 2.45 % 1,225,976 4,123 1.36 % Total interest-bearing deposits 3,411,969 27,270 3.24 % 3,041,022 18,807 2.45 % 3,071,420 6,097 0.81 % Other borrowed funds 719,499 5,189 2.92 % 712,465 5,193 2.89 % 619,191 4,187 2.74 % Total interest-bearing liabilities 4,131,468 32,459 3.19 % 3,753,487 24,000 2.54 % 3,690,611 10,284 1.13 % Noninterest-bearing deposits 134,988 135,702 112,248 Other noninterest-bearing liabilities 17,427 9,400 31,292 Total liabilities 4,283,883 3,898,589 3,834,151 Shareholders’ equity 363,273 364,657 380,767 Total liabilities and shareholders’ equity $ 4,647,156 $ 4,263,246 $ 4,214,918 Net interest income $ 19,574 $ 21,669 $ 25,750 Interest rate spread 1 1.50% 1.86% 2.45 % Net interest margin 2 1.76% 2.09% 2.56 % Net interest margin - FTE 3 1.89% 2.22% 2.69 % 1 Yield on total interest-earning assets minus cost of total interest-bearing liabilities. 2 Net interest income divided by total average interest-earning assets (annualized). 3 On an FTE basis assuming a 21% tax rate. Net interest income is adjusted to reflect income from assets such as municipal loans and securities that are exempt from Federal income taxes. This is to recognize the income tax savings that facilitates a comparison between taxable and tax-exempt assets. The Company believes that it is a standard practice in the banking industry to present net interest margin and net interest income on a fully-taxable equivalent basis, as these measures provide useful information to make peer comparisons. Net interest margin - FTE represents a non-GAAP financial measure. See “Reconciliation of Non-GAAP Financial Measures” for a reconciliation of this measure to its most directly comparable GAAP measure. 51 Rate/Volume Analysis The following table illustrates the impact of changes in the volume of interest-earning assets and interest-bearing liabilities and interest rates on net interest income for the periods indicated. The change in interest not due solely to volume or rate has been allocated in proportion to the absolute dollar amounts of the change in each. Three Months Ended March 31, 2023 vs. December 31, 2022 Due to Changes in Three Months Ended March 31, 2023 vs. March 31, 2022 Due to Changes in (in thousands) Volume Rate Net Volume Rate Net Interest income Loans, including loans held-for-sale $ 1,837 $ 1,652 $ 3,489 $ 7,213 $ 3,442 $ 10,655 Securities – taxable 17 367 384 (1,429) 2,814 1,385 Securities – non-taxable 31 68 99 (164) 713 549 Other earning assets 1,976 416 2,392 (735) 4,145 3,410 Total 3,861 2,503 6,364 4,885 11,114 15,999 Interest expense Interest-bearing deposits 2,323 6,140 8,463 755 20,418 21,173 Other borrowed funds (2) (2) (4) 713 289 1,002 Total 2,321 6,138 8,459 1,468 20,707 22,175 Increase (decrease) in net interest income $ 1,540 $ (3,635) $ (2,095) $ 3,417 $ (9,593) $ (6,176) Net interest income for the first quarter 2023 was $19.6 million, a decrease of $6.2 million, or 24.0%, compared to $25.8 million for the first quarter 2022. The decrease in net interest income was the result of a $22.2 million, or 215.6%, increase in total interest expense to $32.5 million for the first quarter 2023 from $10.3 million for the first quarter 2022, partially offset by a $16.0 million, or 44.4%, increase in total interest income to $52.0 million for the first quarter 2023 from $36.0 million for the first quarter 2022. The increase in total interest income for the first quarter 2023 compared to first quarter 2022 was due primarily to a $10.7 million, or 32.1%, increase in interest earned on loans, $3.4 million, or 906.9%, increase in income from other earning assets and a $1.9 million, or 78.3%, increase in interest earned on securities. The increase in income from loans was due primarily to a 44 bp increase in the yield earned on loans, as well as an increase of $607.2 million, or 20.4%, in the average balance of loans compared to the first quarter 2022. The yield earned on other earning assets increased 430 bps, partially offset by a decrease in the average balance of other earning assets of $124.7 million, or 27.3%. The decrease in the average balance of other earning assets was due primarily to lower cash balances. The average balance of securities decreased $63.5 million, or 9.8%, while the yield earned on the securities portfolio increased 151 bps for the first quarter 2023 compared to the first quarter 2022. The increase in the yields earned on loans, other earning assets and securities was due to the rise in interest rates throughout 2022 that continued during the first quarter 2023. The yield on funded portfolio originations was 7.76% in the first quarter 2023, an increase of 292 bps compared to the first quarter 2022. 52 The increase in total interest expense for the first quarter 2023 compared to the first quarter 2022 was due primarily to increases of $10.8 million, or 718.4%, in interest expense associated with money market accounts, $9.7 million, or 235.9%, in interest expense associated with certificates and brokered deposits and $0.5 million, or 118.5%, in interest expense associated with interest-bearing demand deposits. Additionally, the Company had a full quarter of Banking-as-a-Service (“BaaS”) deposits in 2023, which increased interest expense by $0.1 million. The increase in interest expense related to money market accounts was driven primarily by an increase of 320 bps in the cost of these deposits, partially offset by a decrease in the average balance of these deposits of $76.8 million, or 5.3%. The increase in interest expense related to certificates and brokered deposits was driven by an increase of 205 bps in the cost of these deposits, as well as an increase of $421.5 million, or 34.4%, in the average balance of these deposits. The increase in the average balance of these deposits was driven by strong certificates of deposit production in the first quarter 2023, as the Company took advantage of consumer and small business demand and pulled forward budgeted growth to build liquidity at rates beneficial to projected Federal Funds rates. The increase in interest expense related to interest-bearing demand deposits was due primarily to a 57 bp increase in the cost of these deposits, as well as an increase of $15.4 million, or 4.8%, in the average balance of these deposits. The increase in the overall cost of deposits was due primarily to the rise in interest rates throughout 2022 that continued during the first quarter 2023. Beginning in March 2022, the Federal Reserve has increased the Fed Funds rate 4.75% through March 31, 2023, which has impacted pricing of the Company’s deposit products. Overall, the cost of total interest-bearing liabilities for the first quarter 2023 increased 206 bps to 3.19% from 1.13% for the first quarter 2022. The increase in the cost of funds for the first quarter 2023 reflects the rapid rise in interest rates throughout 2022 that continued into 2023. Net interest margin (“NIM”) was 1.76% for the first quarter 2023 compared to 2.56% for the first quarter 2022, a decrease of 80 bps. On a fully-taxable equivalent (“FTE”) basis, NIM was 1.89% for the first quarter 2023 compared to 2.69% for the first quarter 2022, a decrease of 80 bps. The decrease in first quarter 2023 NIM and FTE NIM compared to the first quarter 2022 reflects the increase in the cost of interest-bearing liabilities, partially offset by the increase in earning asset yields noted above. Noninterest Income The following table presents noninterest income for the last five completed fiscal quarters. Three Months Ended (in thousands) March 31, 2023 December 31, 2022 September 30, 2022 June 30, 2022 March 31, 2022 Service charges and fees $ 209 $ 226 $ 248 $ 281 $ 316 Loan servicing revenue 785 715 653 620 585 Loan servicing asset revaluation (55) (539) (333) (470) (297) Mortgage banking activities 76 1,010 871 1,710 1,873 Gain on sale of loans 4,061 2,862 2,713 1,952 3,845 Other 370 1,533 164 221 498 Total noninterest income $ 5,446 $ 5,807 $ 4,316 $ 4,314 $ 6,820 During the first quarter 2023, noninterest income was $5.4 million, representing a decrease of $1.4 million, or 20.1%, compared to $6.8 million for the first quarter 2022. The decrease in noninterest income was due primarily to decreases in revenue from mortgage banking activities and other noninterest income, partially offset by increases in gain on sale of loans, loan servicing revenue and loan servicing asset revaluation. The decline in mortgage banking revenue was due to the Company only recording $0.1 million of revenue, as it immediately began winding down its existing pipeline following the decision to exit mortgage in the first quarter 2023. The decrease in other noninterest income is due primarily to a distribution from the Company’s investment in a Small Business Investment Company fund that occurred during the first quarter 2022. The increase in loan servicing revenue was due to growth in the balance of the Company’s SBA 7(a) servicing portfolio. The increase in loan servicing asset revaluation was due to slower prepayment speeds in the first quarter 2023 compared to first quarter 2022. The increase in gain on sale of loans was due to the gain on sale of U.S. Small Business Administration guaranteed loans, which increased due to higher volume of loans sales, as well as higher net premiums. 53 Noninterest Expense The following table presents noninterest expense for the last five completed fiscal quarters. Three Months Ended (in thousands) March 31, 2023 December 31, 2022 September 30, 2022 June 30, 2022 March 31, 2022 Salaries and employee benefits $ 11,794 $ 10,404 $ 10,439 $ 10,832 $ 9,878 Marketing, advertising and promotion 844 837 1,041 920 756 Consulting and professional services 926 914 790 1,197 1,925 Data processing 659 567 483 490 449 Loan expenses 1,977 1,018 1,142 693 1,582 Premises and equipment 2,777 2,921 2,808 2,419 2,540 Deposit insurance premium 543 355 229 287 281 Other 1,434 1,497 1,063 1,147 1,369 Total noninterest expense $ 20,954 $ 18,513 $ 17,995 $ 17,985 $ 18,780 Noninterest expense for the first quarter 2023 was $21.0 million, compared to $18.8 million for the first quarter 2022. The increase of $2.2 million, or 11.6%, was due primarily to increases of $1.9 million, or 19.41%, in salaries and employee benefits, $0.4 million, or 25%, in loan expenses, $0.3 million, or 93.2%, in deposit insurance premium, and $0.2 million, or 46.8%, in data processing, partially offset by decrease of $1.0 million, or 51.9% in consulting and professional fees. The increases in salaries and employee benefits and loan expenses were due primarily to mortgage exit costs, such as severance, and other employee-related expenses, as well as accrued contract expenses. The increase in deposit insurance premium was due to mainly to asset growth, as well as the composition of loans and deposits. The increase in data processing was due primarily to implementation fees associated with small business technology initiatives. The decrease in consulting and professional fees was due primarily to consulting fees related to a special project that occurred in the first quarter 2022. The Company recorded an income tax benefit for the first quarter 2023, compared to an income tax provision of $1.8 million for the first quarter 2022 and an effective tax rate of 13.8%. Financial Condition The following table presents summary balance sheet data for the last five completed fiscal quarters. (in thousands) Balance Sheet Data: March 31, 2023 December 31, 2022 September 30, 2022 June 30, 2022 March 31, 2022 Total assets $ 4,721,319 $ 4,543,104 $ 4,264,424 $ 4,099,806 $ 4,225,397 Loans 3,607,242 3,499,401 3,255,906 3,082,127 2,880,780 Total securities 606,594 579,552 584,622 610,602 628,658 Loans held-for-sale 18,144 21,511 23,103 31,580 33,991 Noninterest-bearing deposits 140,449 175,315 142,875 126,153 119,196 Interest-bearing deposits 3,481,841 3,265,930 3,049,769 3,025,948 3,098,783 Total deposits 3,622,290 3,441,245 3,192,644 3,152,101 3,217,979 Advances from Federal Home Loan Bank 614,929 614,928 589,926 464,925 514,923 Total shareholders’ equity 355,572 364,974 360,857 365,332 374,655 Total assets increased $178.2 million, or 3.9%, to $4.7 billion at March 31, 2023 compared to $4.5 billion at December 31, 2022. The increase was due primarily to increases in loan, cash and securities balances, and was funded by growth in deposit balances of $181.0 million, or 5.3%. As of March 31, 2023, total shareholders’ equity was $355.6 million, a decrease of $9.4 million, or 2.6%, compared to December 31, 2022. The decrease in retained earnings was due primarily to stock repurchase activity, the day 1 CECL adjustment and the net loss during the quarter, partially offset by a decrease in accumulated other comprehensive loss. Tangible common equity totaled $350.9 million as of March 31, 2023, representing a decrease of $9.4 million, or 2.6%, compared to December 31, 2022. The ratio of total shareholders’ equity to total assets decreased to 7.53% as of March 31, 2023 from 8.03% as of December 31, 2022, and the ratio of tangible common equity to tangible assets decreased to 7.44% as of March 31, 2023 from 7.94% as of December 31, 2022. 54 Book value per common share decreased 1.2% to $39.76 as of March 31, 2023 from $40.26 as of December 31, 2022. Tangible book value per share decreased 1.3% to $39.23 as of March 31, 2023 from $39.74 as of December 31, 2022. The slight decline in both book value per common share and tangible book value per share reflects the declines in total shareholders’ equity and tangible common equity, partially offset by the effect of stock repurchase activity during the quarter. Refer to the “Reconciliation of Non-GAAP Financial Measures” section of Part I, Item 2 of this report, Management’s Discussion and Analysis of Financial Condition and Results of Operations for additional information. Loan Portfolio Analysis The following table presents a summary of the Company’s loan portfolio for the last five completed fiscal quarters. (dollars in thousands) March 31, 2023 December 31, 2022 September 30, 2022 June 30, 2022 March 31, 2022 Commercial loans Commercial and industrial $ 113,198 3.1 % $ 126,108 3.6 % $ 104,780 3.2 % $ 110,540 3.6 % $ 99,808 3.5 % Owner-occupied commercial real estate 59,643 1.7 % 61,836 1.8 % 58,615 1.8 % 61,277 2.0 % 56,752 2.0 % Investor commercial real estate 142,174 3.9 % 93,121 2.7 % 91,021 2.8 % 52,648 1.7 % 34,627 1.2 % Construction 158,147 4.4 % 181,966 5.2 % 139,509 4.3 % 143,475 4.7 % 149,662 5.2 % Single tenant lease financing 952,533 26.3 % 939,240 26.8 % 895,302 27.4 % 867,181 28.1 % 852,519 29.6 % Public finance 604,898 16.8 % 621,032 17.7 % 614,139 18.9 % 613,759 19.9 % 587,817 20.4 % Healthcare finance 256,670 7.1 % 272,461 7.8 % 293,686 9.0 % 317,180 10.3 % 354,574 12.3 % Small business lending 136,382 3.8 % 123,750 3.5 % 113,001 3.5 % 102,724 3.3 % 97,040 3.4 % Franchise finance 382,161 10.6 % 299,835 8.6 % 225,012 6.8 % 168,942 5.5 % 107,246 3.7 % Total commercial loans 2,805,806 77.7 % 2,719,349 77.7 % 2,535,065 77.7 % 2,437,726 79.1 % 2,340,045 81.3 % Consumer loans Residential mortgage 392,062 10.9 % 383,948 11.0 % 337,565 10.4 % 281,124 9.1 % 191,153 6.6 % Home equity 26,160 0.7 % 24,712 0.7 % 22,114 0.7 % 19,928 0.6 % 18,100 0.6 % Other consumer 338,133 9.4 % 324,598 9.3 % 312,512 9.7 % 292,955 9.6 % 270,330 9.4 % Tax refund advance loans — 0.0 % — 0.0 % — 0.0 % — 0.0 % 9,177 0.3 % Total consumer loans 756,355 21.0 % 733,258 21.0 % 672,191 20.8 % 594,007 19.3 % 488,760 16.9 % Net deferred loan origination costs, premiums and discounts on purchased loans and other 1 45,081 1.2 % 46,794 1.3 % 48,650 1.5 % 50,394 1.6 % 51,975 1.8 % Total loans 3,607,242 99.9 % 3,499,401 100.0 % 3,255,906 100.0 % 3,082,127 100.0 % 2,880,780 100.0 % Allowance for credit losses 2 (36,879) (31,737) (29,866) (29,153) (28,251) Net loans $ 3,570,363 $ 3,467,664 $ 3,226,040 $ 3,052,974 $ 2,852,529 1 Includes carrying value adjustments of $31.5 million, $32.5 million, $33.9 million, $35.4 million and $36.4 million related to terminated interest rate swaps associated with public finance loans as of March 31, 2023, December 31, 2022, September 30, 2022, June 30, 2022 and March 31, 2022, respectively. 2 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. Total loans were $3.6 billion as of March 31, 2023, an increase of $107.8 million, or 3.1%, compared to December 31, 2022. Total commercial loan balances were $2.8 billion as of March 31, 2023, up $86.5 million, or 3.1%, from December 31, 2022. Total consumer loan balances were $756.4 million as of March 31, 2023, an increase of $23.1 million, or 3.2%, compared to December 31, 2022. Compared to December 31, 2022, the increase in commercial loan balances was driven by growth in franchise finance, single tenant lease financing and small business lending, as well as combined growth in investor commercial real estate and construction balances. The increase was partially offset by a decrease in public finance, as well as continued runoff in healthcare finance. The increase in consumer loans was due to higher balances in the recreational vehicles and trailers loan portfolios, in addition to funded residential mortgages that were in the pipeline prior to exiting the business. 55 Asset Quality Nonperforming loans are comprised of nonaccrual loans and loans 90 days past due and accruing. Nonperforming assets include nonperforming loans, other real estate owned and other nonperforming assets, which consist of repossessed assets. The following table provides a summary of the Company’s nonperforming assets for the last five completed fiscal quarters. (dollars in thousands) March 31, 2023 December 31, 2022 September 30, 2022 June 30, 2022 March 31, 2022 Nonaccrual loans Commercial loans: Commercial and industrial $ 2,836 $ 51 $ 350 $ 350 $ 610 Owner-occupied commercial real estate 1,441 1,570 1,622 1,661 3,267 Single tenant lease financing — — — — 1,092 Small business lending 1 3,797 4,764 2,958 1,297 881 Total commercial loans 8,074 6,385 4,930 3,308 5,850 Consumer loans: Residential mortgage 1,006 1,048 1,073 1,201 1,207 Home equity — — — 14 14 Other consumer 141 17 3 4 13 Total consumer loans 1,147 1,065 1,076 1,219 1,234 Total nonaccrual loans 9,221 7,450 6,006 4,527 7,084 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 9,221 7,529 6,006 4,527 7,084 Other real estate owned Residential mortgage 106 — — — — Total other real estate owned 106 — — — — Other nonperforming assets 19 42 — 23 1 Total nonperforming assets $ 9,346 $ 7,571 $ 6,006 $ 4,550 $ 7,085 Total nonperforming loans to total loans 2 0.26 % 0.22 % 0.18 % 0.15 % 0.25 % Total nonperforming assets to total assets 2 0.20 % 0.17 % 0.14 % 0.11 % 0.17 % Allowance for credit losses to total loans 1.02 % 0.91 % 0.92 % 0.95 % 0.98 % Nonaccrual loans to total loans 0.26 % 0.22 % 0.18 % 0.15 % 0.25 % Allowance for credit losses to nonperforming loans 2 400.0 % 426.0 % 497.3 % 644.0 % 398.8 % 1 Balance of loans are partially guaranteed by the U.S. government. 2 Includes the impact of nonperforming small business lending loans, which are guaranteed by the U.S. government. 56 Total nonperforming loans increased $1.7 million, or 22.5%, to $9.2 million as of March 31, 2023 compared to $7.5 million as of December 31, 2022 due primarily to a commercial and industrial participation loan that was placed on nonaccrual status during the quarter, partially offset by upgrades and payoffs in owner-occupied commercial real estate and small business loans. Total nonperforming assets increased $1.8 million, or 23.4%, to $9.3 million as of March 31, 2023, compared to $7.6 million as of December 31, 2022, due primarily to the nonperforming loan activity discussed above, as well as an increase in OREO. As of March 31, 2023, the Company had one residential mortgage property in OREO with a carrying value of $0.1 million. As of December 31, 2022, the Company did not own any OREO. Troubled Debt Restructurings With the adoption ASU 2022-02, effective January 1, 2023, TDR accounting was eliminated. Total TDRs as of December 31, 2022 was $5.5 million. There were 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. The following table provides a summary of troubled debt restructurings. (in thousands) March 31, 2023 December 31, 2022 September 30, 2022 June 30, 2022 March 31, 2022 Troubled debt restructurings – nonaccrual $ — $ 2,864 $ 2,342 $ 2,389 $ 2,440 Troubled debt restructurings – performing — 2,658 2,410 2,425 2,418 Total troubled debt restructurings $ — $ 5,522 $ 4,752 $ 4,814 $ 4,858 57 Allowance for Credit Losses - Loans The following table provides a rollforward of the allowance for credit losses for the last five completed fiscal quarters. Three Months Ended (dollars in thousands) March 31, 2023 December 31, 2022 September 30, 2022 June 30, 2022 March 31, 2022 Balance, beginning of period, December 31, 2022 $ 31,737 $ 29,866 $ 29,153 $ 28,251 $ 27,841 Adoption of ASU 2016-13 (CECL) 2,962 — — — — Balance, beginning of period 34,699 29,866 29,153 28,251 27,841 Provision charged to expense 9,373 2,109 892 1,185 791 Losses charged off Commercial and industrial 6,965 — — — — Small business lending 60 192 130 — 80 Residential mortgage — — — — — Home equity — — — — — Other consumer 232 101 106 128 163 Tax refund advance loans — — — 372 1,488 Total losses charged off 7,257 293 236 500 1,731 Recoveries Commercial and industrial 1 3 2 — — Single tenant lease financing — — — — 1,231 Small business lending 3 7 3 2 17 Residential mortgage 2 2 1 1 1 Home equity 1 2 1 134 2 Other consumer 57 41 50 80 99 Total losses charged off 64 55 57 217 1,350 Balance, end of period $ 36,879 $ 31,737 $ 29,866 $ 29,153 $ 28,251 Net charge-offs $ 7,193 $ 238 $ 179 $ 283 $ 381 Net charge-offs (recoveries) to average loans (annualized) Commercial and industrial 27.16 % 0.00 % 0.00 % 0.00 % 0.00 % Single tenant lease financing 0.00 % 0.00 % 0.00 % 0.00 % (0.58 %) Small business lending 0.15 % 0.14 % 0.14 % 0.00 % 0.23 % Total commercial net charge-offs (recoveries) 1.02 % 0.01 % 0.01 % 0.00 % (0.20 %) Residential mortgage 0.00 % 0.00 % 0.00 % 0.00 % 0.00 % Home equity (0.02 %) (0.01 %) (0.01 %) (1.42 %) (0.04 %) Other consumer 0.36 % 0.18 % 0.20 % 0.30 % 0.40 % Tax refund advance loans 0.00 % 0.00 % 0.00 % 23.55 % 9.97 % Total consumer net charge-offs 0.09 % 0.01 % 0.01 % 0.11 % 1.18 % Total net charge-offs to average loans 0.82 % 0.03 % 0.02 % 0.04 % 0.05 % Total net charge-offs (recoveries), excluding tax refund advance loans 0.82 % 0.03 % 0.02 % (0.01 %) (0.16 %) The allowance for credit losses (“ACL”) was $36.9 million as of March 31, 2023, compared to $31.7 million as of December 31, 2022. The increase in the ACL reflects the day one current expected credit losses (“CECL”) adjustment of $3.0 million, as well as overall growth in the loan portfolio and changes in certain economic forecasts that impacted quantitative factors for certain portfolios. The ACL as a percentage of total loans was 1.02% at March 31, 2023, compared to 0.91%, at December 31, 2022. The ACL as a percentage of nonperforming loans decreased to 400.0% as of March 31, 2023, compared to 426.0% as of December 31, 2022. Net charge-offs of $7.2 million were recognized during the first quarter 2023, resulting in net charge-offs to average loans of 0.82%, compared to net charge-offs to average loans of 0.05% for the first quarter 2022. The increase in net charge- 58 offs was due mainly to the $6.9 million partial charge-off of a C&I participation loan that was placed on nonaccrual status during the quarter. The provision for credit losses in the first quarter 2023 was $9.4 million, compared to $0.8 million for the first quarter 2022. The increase in provision for the first quarter 2023 was driven primarily by the partial charge-off of the C&I participation loan mentioned above, as well as growth in the loan portfolio and the impact of economic forecasts on certain portfolios. Investment Securities Portfolio The following tables present the amortized cost and approximate fair value of our investment portfolio by security type for the last five completed fiscal quarters. (in thousands) Amortized Cost March 31, 2023 December 31, 2022 September 30, 2022 June 30, 2022 March 31, 2022 Securities available-for-sale U.S. Government-sponsored agencies $ 38,675 $ 35,606 $ 38,197 $ 41,542 $ 45,335 Municipal securities 69,243 68,958 71,156 71,264 72,420 Agency mortgage-backed securities - residential 249,795 252,066 259,568 265,196 276,392 Agency mortgage-backed securities - commercial 16,739 17,142 17,825 23,312 24,815 Private label mortgage-backed securities - residential 11,445 11,777 12,320 13,259 15,090 Asset-backed securities 5,000 5,000 5,000 5,000 5,000 Corporate securities 45,623 45,634 44,644 42,655 47,580 Total available-for-sale 436,520 436,183 448,710 462,228 486,632 Securities held-to-maturity, net Municipal securities 13,932 13,946 13,957 13,969 13,981 Agency mortgage-backed securities - residential 146,809 121,853 123,718 117,749 95,982 Agency mortgage-backed securities - commercial 5,806 5,818 5,828 5,838 5,847 Corporate securities 44,214 47,551 47,554 47,557 47,560 Total held-to-maturity, net 210,761 189,168 191,057 185,113 163,370 Total securities $ 647,281 $ 625,351 $ 639,767 $ 647,341 $ 650,002 (in thousands) Approximate Fair Value March 31, 2023 December 31, 2022 September 30, 2022 June 30, 2022 March 31, 2022 Securities available-for-sale U.S. Government-sponsored agencies $ 37,047 $ 33,809 $ 36,329 $ 40,003 $ 43,847 Municipal securities 68,636 67,276 63,537 67,923 72,804 Agency mortgage-backed securities - residential 216,752 215,092 219,191 237,546 257,682 Agency mortgage-backed securities - commercial 15,530 15,840 16,522 22,207 24,156 Private label mortgage-backed securities - residential 10,275 10,455 11,041 12,479 14,818 Asset-backed securities 4,998 4,960 4,884 4,897 4,986 Corporate securities 42,595 42,952 42,061 40,434 46,995 Total available-for-sale 395,833 390,384 393,565 425,489 465,288 Securities held-to-maturity Municipal securities 13,144 12,832 12,668 13,356 14,093 Agency mortgage-backed securities - residential 133,267 106,741 107,570 109,054 92,939 Agency mortgage-backed securities - commercial 4,703 4,552 4,686 5,048 5,420 Corporate securities 41,349 44,358 45,053 46,561 47,519 Total held-to-maturity 192,463 168,483 169,977 174,019 159,971 Total securities $ 588,296 $ 558,867 $ 563,542 $ 599,508 $ 625,259 59 The approximate fair value of available-for-sale investment securities increased $5.4 million, or 1.4%, to $395.8 million as of March 31, 2023, compared to $390.4 million as of December 31, 2022. The increase was due primarily to increases of $3.2 million in U.S. Government-sponsored agencies, $1.7 million in agency mortgage-backed securities - residential and $1.4 million in municipal securities. The increases were due primarily to variable rate securities resetting higher, slower prepayment speeds and purchases in the portfolio. Accrued Income and Other Assets Accrued income and other assets increased $0.2 million, or 0.5%, to $45.1 million at March 31, 2023 compared to $44.9 million at December 31, 2022. The increase was primarily related to an increase of $2.7 million in deferred tax assets and $1.2 million in fund investments, partially offset by decreases of $2.8 million in derivative assets and $0.9 million in prepaid assets. Accrued Expenses and Other Liabilities Accrued expenses and other liabilities increased $6.8 million, or 47.0%, to $21.3 million at March 31, 2023, compared to $14.5 million at December 31, 2022. The increase was due primarily to increases of $8.4 million in other accrued expenses, $2.5 million in unfunded commitments related to the day 1 CECL entry and $0.2 million in accrued property taxes, partially offset by decreases of $2.1 million in other liabilities, $1.6 million in accrued salary and benefits and $0.6 million in accrued taxes. Deposits The following table presents the composition of the Company’s deposit base for the last five completed fiscal quarters. (dollars in thousands) March 31, 2023 December 31, 2022 September 30, 2022 June 30, 2022 March 31, 2022 Noninterest-bearing deposits $ 140,449 3.9 % $ 175,315 5.1 % $ 142,635 4.5 % $ 126,153 4.0 % $ 119,197 3.7 % Interest-bearing demand deposits 351,641 9.7 % 335,611 9.8 % 337,765 10.6 % 350,551 11.1 % 334,723 10.4 % Savings accounts 32,762 0.9 % 44,819 1.3 % 52,228 1.6 % 65,365 2.1 % 66,320 2.1 % Money market accounts 1,254,013 34.6 % 1,418,599 41.2 % 1,378,087 43.2 % 1,363,424 43.3 % 1,475,857 45.8 % BaaS - brokered deposits 25,725 0.7 % 13,607 0.4 % 96,287 3.0 % 194,133 6.2 % 50,006 1.6 % Certificates of deposits 1,170,094 32.3 % 874,490 25.4 % 773,040 24.2 % 800,598 25.3 % 889,789 27.6 % Brokered deposits 647,606 17.9 % 578,804 16.8 % 412,602 12.9 % 251,877 8.0 % 282,087 8.8 % Total deposits $ 3,622,290 100.0 % $ 3,441,245 100.0 % $ 3,192,644 100.0 % $ 3,152,101 100.0 % $ 3,217,979 100.0 % Total deposits increased $181.0 million, or 5.3%, to $3.6 billion as of March 31, 2023, compared to $3.4 billion as of December 31, 2022. This increase was due primarily to increases of $295.6 million, or 33.8%, in certificates of deposits, $68.8 million, or 11.9% in brokered deposits, $16.0 million, or 4.8%, in interest-bearing demand deposits and $12.1 million, or 89.1% in BaaS - brokered deposits, partially offset by decreases of $164.6 million, or 11.6%, in money market accounts, $34.9 million, or 19.9%, in noninterest-bearing deposits and $12.1 million, or 26.9%, in savings accounts. The increase in certificates of deposits and brokered deposits was due primarily to strong consumer and small business demand during the quarter that allowed the Company to pull forward origination activity planned for later in the year. The decrease in money market accounts was due primarily to certain customer activity that can be periodically volatile, as well as some outflow of uninsured deposits late in the quarter. The decline in noninterest-bearing deposits was due primarily to drawdowns from commercial real estate development and construction clients contributing to equity projects the Company is financing. The decrease in interest-bearing demand deposits was due to normal activity associated with a municipal deposit relationship. Uninsured deposit balances represented 26.2% of total deposits at March 31, 2023, down from 33.1% at December 31, 2022. These balances include Indiana-based municipal deposits, which are insured by the Indiana Board for Depositories, as well as larger balance collateralized public funds and accounts under contractual agreements that only allow withdrawal under certain conditions. After subtracting these types of deposits, the adjusted uninsured deposit balance decreases to 19.2%, down from 24.2% as of December 31, 2022. 60 Recent Debt Offerings In August 2021, the Company issued $60.0 million aggregate principal amount of 3.75% Fixed-to-Floating Rate Subordinated Notes due 2031 (the “2031 Notes”) in a private placement. The 2031 Notes initially bear a fixed interest rate of 3.75% per year to, but excluding, September 1, 2026, and thereafter a floating rate equal to the then-current benchmark rate (initially three-month Term SOFR plus 3.11%). The 2031 Notes are scheduled to mature on September 1, 2031. The 2031 Notes are unsecured subordinated obligations of the Company and may be repaid, without penalty, on any interest payment date on or after September 1, 2026. The 2031 Notes are intended to qualify as Tier 2 capital under regulatory guidelines. Pursuant to the terms of a Registration Rights Agreement between the Company and the initial purchasers of the 2031 Notes, the Company offered to exchange the 2031 Notes for subordinated notes that are registered under the Securities Act of 1933, as amended, and have substantially the same terms as the 2031 Notes. On December 30, 2021, the Company completed an exchange of $59.3 million principal amount of the unregistered 2031 Notes for registered 2031 Notes in satisfaction of its obligations under the registration rights agreement. Holders of $0.7 million of unregistered 2031 Notes did not participate in the exchange. Regulatory Capital Requirements The Company and the Bank are subject to various regulatory capital requirements administered by state and federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weighting and other factors. The Basel III Capital Rules became effective for the Company and the Bank on January 1, 2015, subject to a phase-in period for certain provisions. Quantitative measures established by the Basel III Capital Rules to ensure capital adequacy require the maintenance of minimum amounts and ratios of Common Equity Tier 1 capital, Tier 1 capital and Total capital, as defined in the regulations, to risk-weighted assets, and of Tier 1 capital to adjusted quarterly average assets (“Leverage Ratio”). The Basel III Capital Rules were fully phased in on January 1, 2019 and require the Company and the Bank to maintain: 1) a minimum ratio of Common Equity Tier 1 capital to risk-weighted assets of 4.5%, plus a 2.5% “capital conservation buffer” (resulting in a minimum ratio of Common Equity Tier 1 capital to risk-weighted assets of 7.0%); 2) a minimum ratio of Tier 1 capital to risk-weighted assets of 6.0%, plus the capital conservation buffer (resulting in a minimum Tier 1 capital ratio of 8.5%); 3) a minimum ratio of Total capital to risk-weighted assets of 8.0%, plus the capital conservation buffer (resulting in a minimum Total capital ratio of 10.5%); and 4) a minimum Leverage Ratio of 4.0%. The capital conservation buffer is designed to absorb losses during periods of economic stress. Failure to maintain the minimum Common Equity Tier 1 capital ratio plus the capital conservation buffer will result in potential restrictions on a banking institution’s ability to pay dividends, repurchase stock and/or pay discretionary compensation to its employees. 61 The following tables present actual and required capital ratios as of March 31, 2023 and December 31, 2022 for the Company and the Bank under the Basel III Capital Rules. The minimum required capital amounts presented include the minimum required capital levels as of March 31, 2023 and December 31, 2022, which are based on the Basel III Capital Rules. Capital levels required to be considered well capitalized are based upon prompt corrective action regulations, as amended to reflect the changes under the Basel III Capital Rules. 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. The transition adjustments of $4.5 million will be phased into the regulatory capital calculations over a three-year period, with 25% of the adjustment recognized in 2023, 50% of the adjustment recognized in 2024, 75% of the adjustment recognized in 2025 and 100% of the adjustment recognized in 2026. Actual Minimum Capital Required - Basel III Minimum Required to be Considered Well Capitalized (dollars in thousands) Capital Amount Ratio Capital Amount Ratio Capital Amount Ratio As of March 31, 2023: Common equity tier 1 capital to risk-weighted assets Consolidated $ 379,210 10.30 % $ 257,714 7.00 % N/A N/A Bank 462,360 12.59 % 257,095 7.00 % $ 238,731 6.50 % Tier 1 capital to risk-weighted assets Consolidated 379,210 10.30 % 312,938 8.50 % N/A N/A Bank 462,360 12.59 % 312,187 8.50 % 293,823 8.00 % Total capital to risk-weighted assets Consolidated 520,211 14.13 % 386,571 10.50 % N/A N/A Bank 498,753 13.58 % 385,643 10.50 % 367,279 10.00 % Leverage ratio Consolidated 379,210 8.10 % 187,371 4.00 % N/A N/A Bank 462,360 9.88 % 187,120 4.00 % 233,900 5.00 % Actual Minimum Capital Required - Basel III Minimum Required to be Considered Well Capitalized (dollars in thousands) Capital Amount Ratio Capital Amount Ratio Capital Amount Ratio As of December 31, 2022: Common equity tier 1 capital to risk-weighted assets Consolidated $ 390,150 10.93 % $ 249,795 7.00 % N/A N/A Bank 466,257 13.10 % 249,191 7.00 % $ 231,392 6.50 % Tier 1 capital to risk-weighted assets Consolidated 390,150 10.93 % 303,323 8.50 % N/A N/A Bank 466,257 13.10 % 302,590 8.50 % 284,790 8.00 % Total capital to risk-weighted assets Consolidated 526,419 14.75 % 374,693 10.50 % N/A N/A Bank 497,994 13.99 % 373,787 10.50 % 355,988 10.00 % Leverage ratio Consolidated 390,150 9.06 % 172,330 4.00 % N/A N/A Bank 466,257 10.84 % 172,093 4.00 % 215,116 5.00 % 62 Shareholders’ Dividends The Company’s Board of Directors declared a cash dividend of $0.06 per share of common stock payable April 17, 2023 to shareholders of record as of March 31, 2023. The Company expects to continue to pay cash dividends on a quarterly basis; however, the declaration and amount of any future cash dividends will be subject to the sole discretion of the Board of Directors and will depend upon many factors, including the Company’s results of operations, financial condition, capital requirements, regulatory and contractual restrictions (including with respect to the Company’s outstanding subordinated debt), business strategy and other factors deemed relevant by the Board of Directors. As of March 31, 2023, the Company had $107.0 million principal amount of subordinated debt outstanding evidenced by the 2029 Notes, 2030 Note and 2031 Notes. The agreements that govern our outstanding subordinated debt prohibit the Company from paying any dividends on its common stock or making any other distributions to shareholders at any time when there shall have occurred, and be continuing to occur, an event of default under the applicable agreement. If an event of default were to occur and the Company did not cure it, the Company would be prohibited from paying any dividends or making any other distributions to shareholders or from redeeming or repurchasing any common stock. Capital Resources The Company believes it has sufficient liquidity and capital resources to meet its cash and capital expenditure requirements for the next twelve months and longer. The Company may explore strategic alternatives, including additional asset, deposit or revenue generation channels that complement our commercial and consumer banking platforms, which may require additional capital. If the Company is unable to secure such capital at favorable terms, its ability to take advantage of such opportunities could be adversely affected. In October 2021, the Company’s Board of Directors approved a stock repurchase program authorizing the repurchase of up to $30.0 million, which was subsequently increased to $35.0 million, of our outstanding common stock from time to time on the open market or in privately negotiated transactions. The stock repurchase authorization was scheduled to expire on December 31, 2022. Under this program, the Company repurchased 855,956 shares of common stock through December 19, 2022, at an average price of $36.31, for a total investment of $31.1 million. In December 2022, the Company’s Board of Directors approved a new stock repurchase program authorizing the repurchase of up to $25.0 million of the Company’s outstanding stock from time to time on the open market or in privately negotiated transactions. The stock repurchase program is scheduled to expire on December 31, 2023, and replaces the stock repurchase program mentioned above. Under this program, the Company has repurchased 266,188 shares of common stock through May 5, 2023, at an average price of $22.35, for a total investment of $5.9 million. 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 2, of this report for information regarding recent repurchase activity and our remaining authority under the program. Liquidity Liquidity management is the process used by the Company to manage the continuing flow of funds necessary to meet its financial commitments on a timely basis and at a reasonable cost while also maintaining safe and sound operations. Liquidity, represented by cash and investment securities, is a product of the Company’s operating, investing and financing activities. The primary sources of funds are deposits, principal and interest payments on loans and investment securities, maturing loans and investment securities, access to wholesale funding sources and collateralized borrowings. While scheduled payments and maturities of loans and investment securities are relatively predictable sources of funds, deposit flows are greatly influenced by interest rates, general economic conditions and competition. Therefore, the Company supplements deposit growth and enhances interest rate risk management through borrowings and wholesale funding, which are generally advances from the Federal Home Loan Bank and brokered deposits. 63 The Company holds cash and investment securities that qualify as liquid assets to maintain adequate liquidity to ensure safe and sound operations and meet its financial commitments. At March 31, 2023, on a consolidated basis, the Company had $699.8 million in cash and cash equivalents and investment securities available-for-sale and $18.1 million in loans held-for-sale that were generally available for its cash needs. The Company can also generate funds from wholesale funding sources and collateralized borrowings. At March 31, 2023, the Bank had the ability to borrow an additional $627.7 million from the FHLB, the Federal Reserve and correspondent bank Fed Funds lines of credit, which when combined with cash balances, totaled $931.7 million and represented 134.1% of adjusted uninsured deposit balances. The Company is a separate legal entity from the Bank and must provide for its own liquidity. In addition to its operating expenses, the Company is responsible for paying any dividends declared to its common shareholders and interest and principal on outstanding debt. The Company’s primary sources of funds are cash maintained at the holding company level and dividends from the Bank, the payment of which is subject to regulatory limits. At March 31, 2023, the Company, on an unconsolidated basis, had $14.0 million in cash generally available for its cash needs, which is in excess of its current annual regular shareholder dividend and operating expenses. The Company uses its sources of funds primarily to meet ongoing financial commitments, including withdrawals by depositors, credit commitments to borrowers, operating expenses and capital expenditures. At March 31, 2023, approved outstanding loan commitments, including unused lines of credit and standby letters of credit, amounted to $501.7 million. Certificates of deposits and brokered deposits scheduled to mature in one year or less at March 31, 2023 totaled $936.2 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. 64 Reconciliation of Non-GAAP Financial Measures This Management’s Discussion and Analysis contains financial information determined by methods other than in accordance with GAAP. Non-GAAP financial measures, specifically tangible common equity, tangible assets, tangible book value per common share, tangible common equity to tangible assets, average tangible common equity, return on average tangible common equity, total interest income - FTE, net interest income - FTE, net interest margin - FTE, adjusted total revenue, adjusted noninterest income, adjusted noninterest expense, adjusted income before income taxes, adjusted income tax (benefit) provision, adjusted net income, adjusted diluted earnings per share, adjusted return on average assets, adjusted return on average shareholders’ equity and adjusted return on average tangible common equity are used by the Company’s management to measure the strength of its capital and analyze profitability, including its ability to generate earnings on tangible capital invested by its shareholders. The Company also believes that it is a standard practice in the banking industry to present total interest income, net interest income and net interest margin on a fully-taxable equivalent basis, as those measures provide useful information for peer comparisons. Although the Company believes these non-GAAP financial measures provide a greater understanding of its business, they should not be considered a substitute for financial measures determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP financial measures that may be presented by other companies. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures are included in the following table for the last five completed fiscal quarters. (dollars in thousands, except share and per share data) Three Months Ended March 31, 2023 December 31, 2022 September 30, 2022 June 30, 2022 March 31, 2022 Total equity - GAAP $ 355,572 $ 364,974 $ 360,857 $ 365,332 $ 374,655 Adjustments: Goodwill (4,687) (4,687) (4,687) (4,687) (4,687) Tangible common equity $ 350,885 $ 360,287 $ 356,170 $ 360,645 $ 369,968 Total assets - GAAP $ 4,721,319 $ 4,543,104 $ 4,264,424 $ 4,099,806 $ 4,225,397 Adjustments: Goodwill (4,687) (4,687) (4,687) (4,687) (4,687) Tangible assets $ 4,716,632 $ 4,538,417 $ 4,259,737 $ 4,095,119 $ 4,220,710 Common shares outstanding 8,943,477 9,065,883 9,290,885 9,404,000 9,683,727 Book value per common share $ 39.76 $ 40.26 $ 38.84 $ 38.85 $ 38.69 Effect of goodwill (0.53) (0.52) (0.50) (0.50) (0.48) Tangible book value per common share $ 39.23 $ 39.74 $ 38.34 $ 38.35 $ 38.21 Total shareholders’ equity to assets 7.53 % 8.03 % 8.46 % 8.91 % 8.87 % Effect of goodwill (0.09 %) (0.09 %) (0.10 %) (0.10 %) (0.10 %) Tangible common equity to tangible assets 7.44 % 7.94 % 8.36 % 8.81 % 8.77 % Total average equity - GAAP $ 363,273 $ 364,657 $ 371,303 $ 374,274 $ 380,767 Adjustments: Average goodwill (4,687) (4,687) (4,687) (4,687) (4,687) Average tangible common equity $ 358,586 $ 359,970 $ 366,616 $ 369,587 $ 376,080 Return on average shareholders’ equity (3.37) % 6.91 % 9.01 % 10.23 % 11.94 % Effect of goodwill (0.04) % 0.09 % 0.12 % 0.13 % 0.15 % Return on average tangible common equity (3.41) % 7.00 % 9.13 % 10.36 % 12.09 % 65 (dollars in thousands, except share and per share data) Three Months Ended March 31, 2023 December 31, 2022 September 30, 2022 June 30, 2022 March 31, 2022 Total interest income $ 52,033 $ 45,669 $ 36,034 $ 111,239 $ 36,034 Adjustments: Fully-taxable equivalent adjustments 1 1,383 1,384 1,314 3,971 1,314 Total interest income - FTE $ 53,416 $ 47,053 $ 37,348 $ 115,210 $ 37,348 Net interest income $ 19,574 $ 21,669 $ 25,750 $ 75,424 $ 25,750 Adjustments: Fully-taxable equivalent adjustments 1 1,383 1,384 1,314 3,971 1,314 Net interest income - FTE $ 20,957 $ 23,053 $ 27,064 $ 79,395 $ 27,064 Net interest margin 1.76 % 2.09 % 2.40 % 2.60 % 2.56 % Effect of fully-taxable equivalent adjustments 1 0.13 % 0.13 % 0.13 % 0.14 % 0.13 % Net interest margin - FTE 1.89 % 2.22 % 2.53 % 2.74 % 2.69 % 1 Assuming a 21% tax rate 66 (dollars in thousands, except share and per share data) Three Months Ended March 31, 2023 December 31, 2022 September 30, 2022 June 30, 2022 March 31, 2022 Total Revenue- GAAP $ 25,020 $ 27,476 $ 28,310 $ 29,994 $ 32,570 Adjustments: Mortgage-related revenue (65) — — — — Adjusted total revenue $ 24,955 $ 27,476 $ 28,310 $ 29,994 $ 32,570 Noninterest income - GAAP $ 5,446 $ 5,807 $ 4,316 $ 4,314 $ 6,820 Adjustments: Mortgage-related revenue (65) — — — — Adjusted noninterest income $ 5,381 $ 5,807 $ 4,316 $ 4,314 $ 6,820 Noninterest expense - GAAP $ 20,954 $ 18,513 $ 17,995 $ 17,985 $ 18,780 Adjustments: Mortgage-related costs (3,052) Acquisition-related expenses — — — (103) (170) Nonrecurring consulting fee — — — — (875) Write-down of Software — — (125) — — Discretionary inflation bonus — — — (531) — Accelerated equity compensation — — — (289) — Adjusted noninterest expense $ 17,902 $ 18,513 $ 17,870 $ 17,062 $ 17,735 (Loss) income before income taxes - GAAP $ (5,349) $ 6,854 $ 9,423 $ 10,824 $ 12,999 Adjustments: 1 Mortgage-related revenue (65) — — — — Mortgage-related costs 3,052 — — — — Acquisition-related expenses — — — 103 170 Nonrecurring consulting fee — — — — 875 Write-down of Software — — 125 — — Discretionary inflation bonus — — — 531 — Accelerated equity compensation — — — 289 — Partial charge-off of C&I participation loan 6,914 — — — — Adjusted income before income taxes $ 4,552 $ 6,854 $ 9,548 $ 11,747 $ 14,044 Income tax (benefit) provision - GAAP $ (2,332) $ 503 $ 987 $ 1,279 $ 1,790 Adjustments: 1 Mortgage-related revenue (14) — — — — Mortgage-related costs 641 — — — — Acquisition-related expenses — — — 21 36 Nonrecurring consulting fee — — — — 184 Write-down of Software — — 26 — — Discretionary inflation bonus — — — 112 — Accelerated equity compensation — — — 61 — Partial charge-off of C&I participation loan 1,452 — — — — Adjusted income tax (benefit) provision $ (253) $ 503 $ 1,013 $ 1,473 $ 2,010 1 Assuming a 21% tax rate 67 (dollars in thousands, except share and per share data) Three Months Ended March 31, 2023 December 31, 2022 September 30, 2022 June 30, 2022 March 31, 2022 Net (loss) income - GAAP $ (3,017) $ 6,351 $ 8,436 $ 9,545 $ 11,209 Adjustments: Mortgage-related revenue (51) — — — — Mortgage-related costs 2,411 — — — — Acquisition-related expenses — — — 82 134 Nonrecurring consulting fee — — — — 691 Write-down of Software — — 99 — — Discretionary inflation bonus — — — 419 — Accelerated equity compensation — — — 228 — Partial charge-off of C&I participation loan 5,462 — — — — Adjusted net income $ 4,805 $ 6,351 $ 8,535 $ 10,274 $ 12,034 Diluted average common shares outstanding 9,024,072 9,343,533 9,525,855 9,658,689 9,870,394 Diluted (loss) earnings per share - GAAP $ (0.33) $ 0.68 $ 0.89 $ 0.99 $ 1.14 Adjustments: Mortgage-related revenue (0.01) — — — — Mortgage-related costs 0.27 — — — — Effect of acquisition-related expenses — — — 0.01 0.01 Effect of nonrecurring consulting fee — — — — 0.07 Effect of write-down of software — — 0.01 — — Effect of discretionary inflation bonus — — — 0.04 — Effect of accelerated equity compensation — — — 0.02 — Effect of partial charge-off of C&I participation loan 0.60 — — — — Adjusted diluted earnings per share $ 0.53 $ 0.68 $ 0.90 $ 1.06 $ 1.22 Return on average assets (0.26 %) 0.59 % 0.82 % 0.93 % 1.08 % Effect of mortgage-related revenue 0.00 % 0.00 % 0.00 % 0.00 % 0.00 % Effect of mortgage-related costs 0.21 % 0.00 % 0.00 % 0.00 % 0.00 % Effect of acquisition-related expenses 0.00 % 0.00 % 0.00 % 0.01 % 0.01 % Effect of nonrecurring consulting fee 0.00 % 0.00 % 0.00 % 0.00 % 0.07 % Effect of write-down of software 0.00 % 0.00 % 0.01 % 0.00 % 0.00 % Effect of discretionary inflation bonus 0.00 % 0.00 % 0.00 % 0.04 % 0.00 % Effect of accelerated equity compensation 0.00 % 0.00 % 0.00 % 0.02 % 0.00 % Effect of partial charge-off of C&I participation loan 0.48 % 0.00 % 0.00 % 0.00 % 0.00 % Adjusted return on average assets 0.43 % 0.59 % 0.83 % 1.00 % 1.16 % Return on average shareholders' equity (3.37 %) 6.91 % 9.01 % 10.23 % 11.94 % Effect of mortgage-related revenue (0.06 %) 0.00 % 0.00 % 0.00 % 0.00 % Effect of mortgage-related costs 2.69 % 0.00 % 0.00 % 0.00 % 0.00 % Effect of acquisition-related expenses 0.00 % 0.00 % 0.00 % 0.09 % 0.14 % Effect of nonrecurring consulting fee 0.00 % 0.00 % 0.00 % 0.00 % 0.74 % Effect of write-down of software 0.00 % 0.00 % 0.11 % 0.00 % 0.00 % Effect of discretionary inflation bonus 0.00 % 0.00 % 0.00 % 0.45 % 0.00 % Effect of accelerated equity compensation 0.00 % 0.00 % 0.00 % 0.24 % 0.00 % Effect of partial charge-off of C&I participation loan 6.10 % 0.00 % 0.00 % 0.00 % 0.00 % Adjusted return on average shareholders' equity 5.36 % 6.91 % 9.12 % 11.01 % 12.82 % 68 (dollars in thousands, except share and per share data) Three Months Ended March 31, 2023 December 31, 2022 September 30, 2022 June 30, 2022 March 31, 2022 Return on average tangible common equity (3.41 %) 7.00 % 9.13 % 10.36 % 12.09 % Effect of mortgage-related revenue (0.06 %) 0.00 % 0.00 % 0.00 % 0.00 % Effect of mortgage-related costs 2.73 % 0.00 % 0.00 % 0.00 % 0.00 % Effect of acquisition-related expenses 0.00 % 0.00 % 0.00 % 0.09 % 0.14 % Effect of nonrecurring consulting fee 0.00 % 0.00 % 0.00 % 0.00 % 0.75 % Effect of write-down of software 0.00 % 0.00 % 0.11 % 0.00 % 0.00 % Effect of discretionary inflation bonus 0.00 % 0.00 % 0.00 % 0.45 % 0.00 % Effect of accelerated equity compensation 0.00 % 0.00 % 0.00 % 0.25 % 0.00 % Effect of partial charge-off of C&I participation loan 6.18 % 0.00 % 0.00 % 0.00 % 0.00 % Adjusted return on average tangible common equity 5.44 % 7.00 % 9.24 % 11.15 % 12.98 % Critical Accounting Policies and Estimates There have been changes in the Company’s critical accounting policies or estimates from those disclosed in its Annual Report on Form 10-K for the year ended December 31, 2022. Refer to Note 1 Basis of Presentation for further details. Recent Accounting Pronouncements Refer to Note 15 to the condensed consolidated financial statements. Off-Balance Sheet Arrangements In the ordinary course of business, the Company enters into financial transactions to extend credit, interest rate swap agreements and forms of commitments that may be considered off-balance sheet arrangements. Interest rate swaps are arranged to receive hedge accounting treatment and are classified as either fair value or cash flow hedges. Fair value hedges are purchased to convert certain fixed rate assets to floating rate. Cash flow hedges are used to convert certain variable rate liabilities into fixed rate liabilities. At both March 31, 2023 and December 31, 2022, the Company had interest rate swaps with notional amounts of $260.0 million. Additionally, we enter into forward contracts related to our mortgage banking business to hedge the exposures we have from commitments to extend new residential mortgage loans to our customers and from our mortgage loans held-for-sale. At March 31, 2023, the company did not have any commitments to sell residential real estate loans. At December 31, 2022, the Company had commitments to sell residential real estate loans of $17.0 million. These contracts mature in less than one year. Refer to Note 13 to the condensed consolidated financial statements for additional information about derivative financial instruments. 69