First Internet Bancorp 10-Q

ITEM 1. FINANCIAL STATEMENTS First Internet Bancorp Condensed Consolidated Balance Sheets (Amounts in thousands except share data) June 30, 2023 December 31, 2022 (Unaudited) Assets Cash and due from banks $ 9,503 $ 17,426 Interest-bearing deposits 456,128 239,126 Total cash and cash equivalents 465,631 256,552 Securities available-for-sale, at fair value (amortized cost of $424,891 and $436,183 in 2023 and 2022, respectively) 379,394 390,384 Securities held-to-maturity, at amortized cost, net of allowance for credit losses (fair value of $208,643 and $168,483 in 2023 and 2022, respectively) 230,605 189,168 Loans held-for-sale (includes $9,110 at fair value in 2022) 32,001 21,511 Loans 3,646,832 3,499,401 Allowance for credit losses - loans ( 36,058 ) ( 31,737 ) Net loans 3,610,774 3,467,664 Accrued interest receivable 24,101 21,069 Federal Home Loan Bank of Indianapolis stock 28,350 28,350 Cash surrender value of bank-owned life insurance 40,357 39,859 Premises and equipment, net 73,525 72,711 Goodwill 4,687 4,687 Servicing asset, at fair value 8,252 6,255 Other real estate owned 106 — Accrued income and other assets 49,266 44,894 Total assets $ 4,947,049 $ 4,543,104 Liabilities and Shareholders’ Equity Liabilities Noninterest-bearing deposits $ 119,291 $ 175,315 Interest-bearing deposits 3,735,017 3,265,930 Total deposits 3,854,308 3,441,245 Advances from Federal Home Loan Bank 614,931 614,928 Subordinated debt, net of unamortized debt issuance costs of $2,316 and $2,468 in 2023 and 2022, respectively 104,684 104,532 Accrued interest payable 3,338 2,913 Accrued expenses and other liabilities 15,456 14,512 Total liabilities 4,592,717 4,178,130 Commitments and Contingencies Shareholders’ Equity Preferred stock, no par value; 4,913,779 shares authorized; issued and outstanding - none — — Voting common stock, no par value; 45,000,000 shares authorized; 8,774,507 and 9,065,883 shares issued and outstanding in 2023 and 2022, respectively 186,545 192,935 Nonvoting common stock, no par value; 86,221 shares authorized; issued and outstanding - none — — Retained earnings 200,973 205,675 Accumulated other comprehensive loss ( 33,186 ) ( 33,636 ) Total shareholders’ equity 354,332 364,974 Total liabilities and shareholders’ equity $ 4,947,049 $ 4,543,104 See Notes to Condensed Consolidated Financial Statements 1 First Internet Bancorp Condensed Consolidated Statements of Income – Unaudited (Amounts in thousands except share and per share data) Three Months Ended Six Months Ended June 30, 2023 June 30, 2022 June 30, 2023 June 30, 2022 Interest Income Loans $ 46,906 $ 32,415 $ 90,749 $ 65,603 Securities – taxable 3,835 2,567 7,441 4,788 Securities – non-taxable 860 328 1,658 577 Other earning assets 6,521 796 10,307 1,172 Total interest income 58,122 36,106 110,155 72,140 Interest Expense Deposits 34,676 6,408 61,946 12,505 Other borrowed funds 5,301 4,018 10,490 8,205 Total interest expense 39,977 10,426 72,436 20,710 Net Interest Income 18,145 25,680 37,719 51,430 Provision for Credit Losses 1 1,698 1,185 11,113 1,976 Net Interest Income After Provision for Credit Losses 16,447 24,495 26,606 49,454 Noninterest Income Service charges and fees 218 281 427 597 Loan servicing revenue 850 620 1,635 1,205 Loan servicing asset revaluation ( 358 ) ( 470 ) ( 413 ) ( 767 ) Mortgage banking activities — 1,710 76 3,583 Gain on sale of loans 4,868 1,952 8,929 5,797 Other 293 221 663 719 Total noninterest income 5,871 4,314 11,317 11,134 Noninterest Expense Salaries and employee benefits 10,706 10,832 22,500 20,710 Marketing, advertising and promotion 705 920 1,549 1,676 Consulting and professional services 711 1,197 1,637 3,122 Data processing 520 490 1,179 939 Loan expenses 1,072 693 3,049 2,275 Premises and equipment 2,661 2,419 5,438 4,959 Deposit insurance premium 936 287 1,479 568 Other 1,359 1,147 2,793 2,516 Total noninterest expense 18,670 17,985 39,624 36,765 Income (Loss) Before Income Taxes 3,648 10,824 ( 1,701 ) 23,823 Income Tax (Benefit) Provision ( 234 ) 1,279 ( 2,566 ) 3,069 Net Income $ 3,882 $ 9,545 $ 865 $ 20,754 Income Per Share of Common Stock Basic $ 0.44 $ 0.99 $ 0.10 $ 2.14 Diluted $ 0.44 $ 0.99 $ 0.10 $ 2.13 Weighted-Average Number of Common Shares Outstanding Basic 8,903,213 9,600,383 8,963,308 9,694,729 Diluted 8,908,180 9,658,689 8,980,262 9,764,232 Dividends Declared Per Share $ 0.06 $ 0.06 $ 0.12 $ 0.12 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 2 First Internet Bancorp Condensed Consolidated Statements of Comprehensive Income – Unaudited (Amounts in thousands except per share data) Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 Net income $ 3,882 $ 9,545 $ 865 $ 20,754 Other comprehensive (loss) income Securities available-for-sale Net unrealized holding (losses) gains recorded within other comprehensive (loss) income before income tax ( 4,810 ) ( 15,395 ) 302 ( 33,276 ) Income tax (benefit) provision ( 1,107 ) ( 4,186 ) 63 ( 8,263 ) Net effect on other comprehensive (loss) income ( 3,703 ) ( 11,209 ) 239 ( 25,013 ) Securities held-to-maturity Reclassification of securities from available-for-sale to held-to-maturity — — — ( 5,402 ) Amortization of net unrealized holding losses on securities transferred from available-for-sale to held-to-maturity 206 193 364 312 Income tax provision (benefit) 49 ( 23 ) 95 ( 1,272 ) Net effect on other comprehensive income (loss) 157 216 269 ( 3,818 ) Cash flow hedges Net unrealized holding gains (losses) on cash flow hedging derivatives recorded within other comprehensive income (loss) before income tax 2,094 4,944 ( 76 ) 14,278 Income tax provision (benefit) 481 1,840 ( 18 ) 5,158 Net effect on other comprehensive income (loss) 1,613 3,104 ( 58 ) 9,120 Total other comprehensive (loss) income ( 1,933 ) ( 7,889 ) 450 ( 19,711 ) Comprehensive income $ 1,949 $ 1,656 $ 1,315 $ 1,043 See Notes to Condensed Consolidated Financial Statements 3 First Internet Bancorp Condensed Consolidated Statements of Changes in Shareholders’ Equity - Unaudited Six Months Ended June 30, 2023 and 2022 (Amounts in thousands except per share data) Voting and Nonvoting Common Stock Retained Earnings Accumulated Other Comprehensive Loss Total Shareholders’ Equity Balance, January 1, 2023 $ 192,935 $ 205,675 $ ( 33,636 ) $ 364,974 Impact of adoption of new accounting standards 1 — ( 4,491 ) — ( 4,491 ) Net Income — 865 — 865 Other comprehensive income — — 450 450 Dividends declared ($ 0.12 per share) — ( 1,076 ) — ( 1,076 ) Recognition of the fair value of share-based compensation 487 — — 487 Repurchased shares of common stock ( 364,691 ) ( 6,774 ) — — ( 6,774 ) Deferred stock rights and restricted stock units issued in lieu of cash dividends payable on outstanding deferred stock rights and restricted stock units 3 — — 3 Common stock redeemed for the net settlement of share-based awards ( 106 ) — — ( 106 ) Balance, June 30, 2023 $ 186,545 $ 200,973 $ ( 33,186 ) $ 354,332 Balance, January 1, 2022 $ 218,946 $ 172,431 $ ( 11,039 ) $ 380,338 Net income — 20,754 — 20,754 Other comprehensive loss — — ( 19,711 ) ( 19,711 ) Dividends declared ($ 0.12 per share) — ( 1,174 ) — ( 1,174 ) Recognition of the fair value of share-based compensation 1,534 — — 1,534 Repurchase of common stock ( 398,167 ) ( 16,240 ) — — ( 16,240 ) Deferred stock rights and restricted stock units issued in lieu of cash dividends payable on outstanding deferred stock rights and restricted stock units 10 — — 10 Common stock redeemed for the net settlement of share-based awards ( 179 ) — — ( 179 ) Balance, June 30, 2022 $ 204,071 $ 192,011 $ ( 30,750 ) $ 365,332 1 Reflects the impact of adopting Accounting Standards Update (“ASU”) 2016-13. See Notes to Condensed Consolidated Financial Statements 4 First Internet Bancorp Condensed Consolidated Statements of Changes in Shareholders’ Equity - Unaudited Three Months Ended June 30, 2023 and 2022 (Amounts in thousands except per share data) Voting and Nonvoting Common Stock Retained Earnings Accumulated Other Comprehensive Loss Total Shareholders’ Equity Balance April 1, 2023 $ 189,202 $ 197,623 $ ( 31,253 ) $ 355,572 Net income — 3,882 — 3,882 Other comprehensive loss — — ( 1,933 ) ( 1,933 ) Dividends declared ($ 0.06 per share) — ( 532 ) — ( 532 ) Recognition of the fair value of share-based compensation 115 — — 115 Repurchased shares of common stock ( 85,000 ) ( 2,745 ) — — ( 2,745 ) Excise tax on repurchase of common stock ( 27 ) — — ( 27 ) Balance, June 30, 2023 $ 186,545 $ 200,973 $ ( 33,186 ) $ 354,332 Balance April 1, 2022 $ 214,473 $ 183,043 $ ( 22,861 ) $ 374,655 Net income — 9,545 — 9,545 Other comprehensive loss — — ( 7,889 ) ( 7,889 ) Dividends declared ($ 0.06 per share) — ( 577 ) — ( 577 ) Recognition of the fair value of share-based compensation 895 — — 895 Repurchase of common stock (294,464) ( 11,123 ) — — ( 11,123 ) Deferred stock rights and restricted stock units issued in lieu of cash dividends payable on outstanding deferred stock rights and restricted stock units 5 — — 5 Common stock redeemed for the net settlement of share-based awards ( 179 ) — — ( 179 ) Balance, June 30, 2022 $ 204,071 $ 192,011 $ ( 30,750 ) $ 365,332 5 First Internet Bancorp Condensed Consolidated Statements of Cash Flows – Unaudited (Amounts in thousands except per share data) Six Months Ended June 30, 2023 2022 Operating Activities Net income $ 865 $ 20,754 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization 2,918 4,604 Increase in cash surrender value of bank-owned life insurance ( 498 ) ( 469 ) Provision for credit losses 1 11,113 1,976 Share-based compensation expense 487 1,534 Loans originated for sale ( 170,112 ) ( 311,268 ) Proceeds from sale of loans 166,469 335,226 Gain on loans sold ( 9,400 ) ( 9,736 ) Decrease in fair value of loans held-for-sale 143 149 Gain (loss) on derivatives 368 ( 2,546 ) Loan servicing asset revaluation 413 767 Net change in accrued income and other assets ( 4,985 ) 16,183 Net change in accrued expenses and other liabilities ( 2,625 ) ( 5,173 ) Net cash (used in) provided by operating activities ( 4,844 ) 52,001 Investing Activities Net loan activity, excluding purchases ( 37,490 ) ( 11,665 ) Proceeds from sale of other real estate owned — 1,188 Maturities and calls of securities available-for-sale 25,446 52,397 Purchase of securities available-for-sale ( 14,863 ) ( 10,133 ) Maturities and calls of securities held-to-maturity 11,332 2,309 Purchase of securities held-to-maturity ( 49,443 ) ( 31,782 ) Redemption of Federal Home Loan Bank of Indianapolis stock — 431 Purchase of premises and equipment ( 3,132 ) ( 12,634 ) Loans purchased ( 118,813 ) ( 197,514 ) Net proceeds from sale of portfolio loans — 14,466 Other investing activities ( 2,094 ) 374 Net cash used in investing activities ( 189,057 ) ( 192,563 ) Financing Activities Net increase (decrease) in deposits 410,951 ( 26,858 ) Cash dividends paid ( 1,091 ) ( 1,168 ) Repurchase of common stock ( 6,774 ) ( 16,240 ) Proceeds from advances from Federal Home Loan Bank 220,000 220,000 Repayment of advances from Federal Home Loan Bank ( 220,000 ) ( 270,000 ) Other, net ( 106 ) ( 179 ) Net cash provided by (used in) financing activities 402,980 ( 94,445 ) Net Increase (Decrease) in Cash and Cash Equivalents 209,079 ( 235,007 ) Cash and Cash Equivalents, Beginning of Period 256,552 442,960 Cash and Cash Equivalents, End of Period $ 465,631 $ 207,953 Supplemental Disclosures Cash paid during the period for interest 72,013 20,722 Cash paid during the period for taxes 818 1,892 Loans transferred to other real estate owned 106 — Loans transferred to held-for-sale from portfolio — 14,049 Cash dividends declared, paid in subsequent period 526 564 Securities purchased during the period, settled in subsequent period 2,632 — 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 6 First Internet Bancorp Notes to Condensed Consolidated Financial Statements – Unaudited (Table amounts in thousands except share and per share data) Note 1: Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information or footnotes necessary for a complete presentation of financial condition, results of operations, changes in shareholders’ equity, or cash flows in accordance with GAAP. In our opinion, all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation have been included. The results of operations for the three and six months ended June 30, 2023 are not necessarily indicative of the results expected for the year ending December 31, 2023 or any other period. The June 30, 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 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. All significant intercompany accounts and transactions have been eliminated in consolidation. The Company is subject to claims and lawsuits that arise primarily in the ordinary course of business. It is the opinion of management that the disposition or ultimate resolution of such claims and lawsuits will not have a material adverse effect on the consolidated financial position, results of operations, and cash flows of the Company. 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. GAAP. 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 7 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 June 30, 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 $ 1.0 million at June 30, 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. ACL - Loans 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 $ 19.3 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. 8 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 ACL for 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. 9 Note 2: Earnings Per Share Earnings per share of common stock are based on the weighted-average number of basic shares and dilutive shares outstanding during the period. The following is a reconciliation of the weighted-average common shares for the basic and diluted earnings per share computations for the three and six months ended June 30, 2023 and 2022. (dollars in thousands, except per share data) Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 Basic earnings per share Net income $ 3,882 $ 9,545 $ 865 $ 20,754 Weighted-average common shares 8,903,213 9,600,383 8,963,308 9,694,729 Basic earnings per common share $ 0.44 $ 0.99 $ 0.10 $ 2.14 Diluted earnings per share Net income $ 3,882 $ 9,545 $ 865 $ 20,754 Weighted-average common shares 8,903,213 9,600,383 8,963,308 9,694,729 Dilutive effect of equity compensation 4,967 58,306 16,954 69,503 Weighted-average common and incremental shares 8,908,180 9,658,689 8,980,262 9,764,232 Diluted earnings per common share 1 $ 0.44 $ 0.99 $ 0.10 $ 2.13 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 79,313 and 35,033 for the three and six months ended June 30, 2023, respectively. Excluded from the computation of diluted EPS were weighted-average antidilutive shares totaling 5,560 and 1,198 for the three and six months ended June 30, 2022, respectively. 10 Note 3: Securities The following tables summarize securities available-for-sale and securities held-to-maturity as of June 30, 2023 and December 31, 2022. June 30, 2023 Amortized Gross Unrealized Fair (in thousands) Cost Gains Losses Value Securities available-for-sale U.S. Government-sponsored agencies $ 41,024 $ 130 $ ( 1,680 ) $ 39,474 Municipal securities 68,931 413 ( 2,135 ) 67,209 Agency mortgage-backed securities - residential 1 239,263 — ( 35,122 ) 204,141 Agency mortgage-backed securities - commercial 16,311 — ( 1,420 ) 14,891 Private label mortgage-backed securities - residential 14,749 — ( 1,334 ) 13,415 Asset-backed securities 1,000 — — 1,000 Corporate securities 43,613 44 ( 4,393 ) 39,264 Total available-for-sale $ 424,891 $ 587 $ ( 46,084 ) $ 379,394 June 30, 2023 Amortized Cost Gross Unrealized Fair Value Allowance for Credit Losses Net Carrying Value (in thousands) Gains Losses Securities held-to-maturity Municipal securities $ 13,916 $ — $ ( 966 ) $ 12,950 $ ( 3 ) $ 13,913 Mortgage-backed securities - residential 169,186 — ( 15,593 ) 153,593 — 169,186 Mortgage-backed securities - commercial 5,795 — ( 1,244 ) 4,551 — 5,795 Corporate securities 42,044 — ( 4,495 ) 37,549 ( 333 ) 41,711 Total held-to-maturity $ 230,941 $ — $ ( 22,298 ) $ 208,643 $ ( 336 ) $ 230,605 1 Includes $ 0.4 million of additional premium related to terminated interest rate swaps associated with agency mortgage-backed securities - residential as of June 30, 2023. Accrued interest receivable on AFS and HTM securities at June 30, 2023 was $ 2.0 million and $ 1.0 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 June 30, 2023 and determined no additional ACL was necessary. 11 December 31, 2022 Amortized Gross Unrealized Fair (in thousands) Cost Gains Losses Value Securities available-for-sale U.S. Government-sponsored agencies $ 35,606 $ — $ ( 1,797 ) $ 33,809 Municipal securities 68,958 458 ( 2,140 ) 67,276 Agency mortgage-backed securities - residential 1 252,066 — ( 36,974 ) 215,092 Agency mortgage-backed securities - commercial 17,142 — ( 1,302 ) 15,840 Private label mortgage-backed securities - residential 11,777 — ( 1,322 ) 10,455 Asset-backed securities 5,000 — ( 40 ) 4,960 Corporate securities 45,634 35 ( 2,717 ) 42,952 Total available-for-sale $ 436,183 $ 493 $ ( 46,292 ) $ 390,384 December 31, 2022 Amortized Gross Unrealized Fair (in thousands) Cost Gains Losses Value Securities held-to-maturity 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 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 June 30, 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. Available-for-Sale (in thousands) Amortized Cost Fair Value Within one year $ 569 $ 563 One to five years 32,459 32,565 Five to ten years 47,959 44,817 After ten years 72,581 68,002 153,568 145,947 Agency mortgage-backed securities - residential 239,263 204,141 Agency mortgage-backed securities - commercial 16,311 14,891 Private label mortgage-backed securities - residential 14,749 13,415 Asset-backed securities 1,000 1,000 Total $ 424,891 $ 379,394 12 Held-to-Maturity (in thousands) Amortized Cost Fair Value Within one year $ 495 $ 486 One to five years 5,798 5,580 Five to ten years 44,203 39,557 After ten years 5,464 4,876 55,960 50,499 Agency mortgage-backed securities - residential 169,186 153,593 Agency mortgage-backed securities - commercial 5,795 4,551 Total $ 230,941 $ 208,643 There were no gross gains or losses resulting from the sale of available-for-sale securities during the three and six months ended June 30, 2023 and June 30, 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 June 30, 2023 and December 31, 2022 was $ 542.0 million and $ 527.4 million, which was approximately 92 % and 94 %, respectively, of the Company’s AFS and HTM securities portfolios. As of June 30, 2023, the Company’s security portfolio consisted of 477 securities, of which 462 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. U. S. Government-Sponsored Agencies, Municipal Securities and Corporate Securities The unrealized losses on the Company’s investments in securities issued by U.S. Government-sponsored agencies, municipal organizations and corporate entities were caused primarily by interest rate changes. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost 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 June 30, 2023, the unrealized losses occurred as a result of changes in interest rates, market spreads and market conditions subsequent to purchase. Agency Mortgage-Backed and Private Label Mortgage-Backed Securities The unrealized losses on the Company’s investments in agency mortgage-backed and private label mortgage-backed securities were caused primarily by interest rate changes. The Company expects to recover the amortized cost basis over the terms of the securities. 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 June 30, 2023, the unrealized losses occurred as a result of changes in interest rates, market spreads and market conditions subsequent to purchase. The following tables show the securities portfolio’s gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at June 30, 2023 and December 31, 2022. 13 June 30, 2023 Less Than 12 Months 12 Months or Longer Total (in thousands) Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses Securities available-for-sale U.S. Government-sponsored agencies $ 3,819 $ ( 13 ) $ 28,895 $ ( 1,667 ) $ 32,714 $ ( 1,680 ) Municipal securities 1,454 ( 59 ) 39,935 ( 2,076 ) 41,389 ( 2,135 ) Agency mortgage-backed securities- residential 5,489 ( 361 ) 198,652 ( 34,761 ) 204,141 ( 35,122 ) Agency mortgage-backed securities- commercial — — 14,891 ( 1,420 ) 14,891 ( 1,420 ) Private label mortgage-backed securities - residential 3,642 ( 87 ) 9,773 ( 1,247 ) 13,415 ( 1,334 ) Corporate securities 8,523 ( 1,036 ) 18,643 ( 3,357 ) 27,166 ( 4,393 ) Total $ 22,927 $ ( 1,556 ) $ 310,789 $ ( 44,528 ) $ 333,716 $ ( 46,084 ) December 31, 2022 Less Than 12 Months 12 Months or Longer Total (in thousands) Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses Securities available-for-sale U.S. Government-sponsored agencies $ 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 ) Total $ 278,784 $ ( 35,212 ) $ 80,514 $ ( 11,080 ) $ 359,298 $ ( 46,292 ) December 31, 2022 Less Than 12 Months 12 Months or Longer Total (in thousands) Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses Securities held-to-maturity Municipal securities $ 8,160 $ ( 661 ) $ 4,258 $ ( 453 ) $ 12,418 $ ( 1,114 ) Agency mortgage-backed securities - residential 68,408 ( 8,848 ) 38,332 ( 6,264 ) 106,740 ( 15,112 ) Agency mortgage-backed securities - commercial 4,552 ( 1,266 ) — — 4,552 ( 1,266 ) 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 ) 14 The following table summarizes ratings for the Company’s HTM portfolio issued by state and political subdivisions and other securities as of June 30, 2023. Held-to-Maturity (in thousands) State and Municipal Other Total Aaa/AAA $ 8,671 $ — $ 8,671 Aa1/AA+ 1,266 — 1,266 Aa2/AA 1,540 — 1,540 A1/A+ 1,794 — 1,794 A2/A 645 — 645 A3/A- — 9,514 9,514 Baa1/BBB+ — 9,500 9,500 Baa2/BBB — 8,500 8,500 Baa3/BBB- — 12,530 12,530 Ba1/BB+ — 2,000 2,000 Not Rated 1 — 174,981 174,981 Total $ 13,916 $ 217,025 $ 230,941 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 income during the three and six months ended June 30, 2023. 15 Note 4: Loans Loan balances as of June 30, 2023 and December 31, 2022 are summarized in the table below. Categories of loans include: (in thousands) June 30, 2023 December 31, 2022 Commercial loans Commercial and industrial $ 112,423 $ 126,108 Owner-occupied commercial real estate 59,564 61,836 Investor commercial real estate 137,504 93,121 Construction 192,453 181,966 Single tenant lease financing 947,466 939,240 Public finance 575,541 621,032 Healthcare finance 245,072 272,461 Small business lending 170,550 123,750 Franchise finance 390,479 299,835 Total commercial loans 2,831,052 2,719,349 Consumer loans Residential mortgage 396,154 383,948 Home equity 24,375 24,712 Other consumer loans 352,124 324,598 Total consumer loans 772,653 733,258 Total commercial and consumer loans 3,603,705 3,452,607 Net deferred loan origination fees/costs and premiums/discounts on purchased loans and other 1 43,127 46,794 Total loans 3,646,832 3,499,401 Allowance for credit losses ( 36,058 ) ( 31,737 ) Net loans $ 3,610,774 $ 3,467,664 1 Includes carrying value adjustments of $ 30.5 million and $ 32.5 million related to terminated interest rate swaps associated with public finance loans as of June 30, 2023 and December 31, 2022, respectively. Risk characteristics of each loan portfolio segment are as follows: Commercial and Industrial: Commercial and industrial loans’ sources of repayment are primarily based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected, and the collateral securing these loans may fluctuate in value. Loans are made for working capital, equipment purchases, or other purposes. Most commercial and industrial loans are secured by the assets being financed and may incorporate a personal guarantee. This portfolio segment is generally concentrated in the Midwest and Southwest regions of the United States. Owner-Occupied Commercial Real Estate: The primary source of repayment is the cash flow from the ongoing operations and activities conducted by the borrower, or an affiliate of the borrower, who owns the property. This portfolio segment is generally concentrated in the Midwest and Southwest regions of the United States and its loans are often secured by manufacturing and service facilities, as well as office buildings. 16 Investor Commercial Real Estate: These loans are underwritten primarily based on the cash flow expected to be generated from the property and are secondarily supported by the value of the real estate. These loans typically incorporate a personal guarantee from the primary sponsor or sponsors. This portfolio segment generally involves larger loan amounts with repayment primarily dependent on the successful leasing and operation of the property securing the loan or the business conducted on the property securing the loan. Investor commercial real estate loans may be more adversely affected by changing economic conditions in the real estate markets, industry dynamics or the overall health of the local economy where the property is located. The properties securing the Company’s investor commercial real estate portfolio tend to be diverse in terms of property type and are generally located in the Midwest and Southwest regions of the United States. Management monitors and evaluates commercial real estate loans based on property financial performance, collateral value, guarantor strength, economic and industry conditions together with other risk grade criteria. As a general rule, the Company avoids financing special use projects unless other underwriting factors are present to mitigate these additional risks. Construction: Construction loans are secured by land and related improvements and are made to assist in the construction of new structures, which may include commercial (retail, industrial, office, and multi-family) properties, 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. The cash flows of builders, while initially predictable, may fluctuate with market conditions, and the value of the collateral securing these loans may be subject to fluctuations based on general economic changes. This portfolio segment is generally concentrated in the Midwest and Southwest regions of the United States. Single Tenant Lease Financing: These loans are made on a nationwide basis to property owners of real estate subject to long-term lease arrangements with single tenant operators. The real estate is typically operated by regionally, nationally or globally branded businesses. The loans are underwritten based on the financial strength of the borrower, characteristics of the real estate, cash flows generated from the lease arrangements and the financial strength of the tenant. Similar to the other loan portfolio segments, management monitors and evaluates these loans based on borrower and tenant financial performance, collateral value, industry trends and other risk grade criteria. Public Finance: These loans are made on a nationwide basis to governmental and not-for-profit entities to provide both tax-exempt and taxable loans for a variety of purposes including: short-term cash-flow needs; debt refinancing; economic development; quality of life projects; infrastructure improvements; renewable energy projects; and equipment financing. The primary sources of repayment for public finance loans include pledged revenue sources including but not limited to: general obligations; property taxes; income taxes; tax increment revenue; utility revenue; gaming revenues; sales tax; and pledged general revenue. Certain loans may also include an additional collateral pledge of mortgaged property or a security interest in financed equipment. Healthcare Finance: These loans are made on a nationwide basis to healthcare providers, primarily dentists, for practice acquisition financing or refinancing that occasionally includes owner-occupied commercial real estate and equipment purchases. The sources of repayment are primarily based on the identified cash flows from operations of the borrower and related entities and secondarily on the underlying collateral provided by the borrower. Small Business Lending: These loans are made on a nationwide basis to small businesses and generally carry a partial guaranty from the U.S. Small Business Administration (“SBA”) under its 7(a) loan program. We generally sell the government guaranteed portion of SBA loans into the secondary market while retaining the non-guaranteed portion of the loan and the servicing rights. Loans in the small business lending portfolio have sources of repayment that are primarily based on the identified cash flows of the borrower and secondarily on any underlying collateral provided by the borrower. Loans may, but do not always, have a collateral shortfall. For SBA loans where the guaranteed portion is retained, the SBA guaranty provides a tertiary source of repayment to the Bank in event of borrower default. Cash flows of borrowers, however, may not be as expected and collateral securing these loans may fluctuate in value. Loans are made for a broad array of purposes including, but not limited to, providing operating cash flow, funding ownership changes, and facilitating equipment purchases. Franchise Finance: These loans are made on a nationwide basis through our partnership with ApplePie Capital, which through their deep relationships with franchise brands provides franchisees with financing options for new franchise units, recapitalization, expansion, equipment and working capital. The sources of repayment are either based on identified cash flows from existing operations of the borrower or pro forma cash flow for new franchise locations. 17 Residential Mortgage: 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. Repayment can also be impacted by changes in residential property values. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers in geographically diverse locations throughout the country. Home Equity: Home equity loans and lines of credit are typically secured by a subordinate interest in 1-to-4 family residences. The properties securing the home equity portfolio segment are generally geographically diverse as the 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. Other Consumer: These loans primarily consist of consumer loans and credit cards. Consumer loans may be secured by consumer assets such as horse trailers or recreational vehicles. Some consumer loans are unsecured, such as small installment loans, home improvement loans and certain lines of credit. Repayment of consumer loans is primarily dependent upon the personal income of the borrowers, which can be impacted by economic conditions in their market areas such as unemployment levels. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers in geographically diverse locations throughout the country. 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. 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. 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: • 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 The ACL is measured on a collective or pool basis when similar risk characteristics exist. The Company segments its portfolio generally by Federal Financial Institutions Examination Council ("FFIEC") Call Report codes that align with its lines of business. Additional sub-segmentation may be utilized to identify groups of loans with unique risk characteristics relative to the rest of the portfolio. 18 Loans that do not share similar risk characteristics are evaluated on an individual basis. These evaluations are typically performed on loans with a deteriorated internal risk rating. The allowance for credit loss is determined based on several methods, including estimating the fair value of the underlying collateral or the present value of expected cash flows. The Company relies on a third-party platform that offers multiple methodologies to measure historical life-of-loan losses. Modified Loans to Borrowers Experiencing Financial Difficulty The Company may make modifications to certain loans in order to alleviate temporary difficulties in the borrower’s financial condition and/or constraints on the borrower’s ability to repay the loan, and to minimize potential losses to the Company. Modifications may include changes in the amortization terms of the loan, reductions in interest rates, acceptance of interest only payments, and/or reductions to the outstanding loan balance. Such loans are typically placed on nonaccrual status when there is doubt concerning the full repayment of principal and interest or the loan has been delinquent for a period of 90 days or more. These loans may be returned to accrual status when all contractual amounts past due have been brought current, and the borrower’s performance under the modified terms of the loan agreement and the ultimate collectability of all contractual amounts due under the modified terms is no longer in doubt. The Company typically measures the ACL on modified loans to borrowers experiencing financial difficulty on an individual basis when the loans are deemed to no longer share risk characteristics that are similar with other loans in the portfolio. The determination of the ACL for these loans is based on a discounted cash flow approach for both those measured collectively and individually, unless the loan is deemed collateral dependent, which requires measurement of the ACL based on the estimated expected fair value of the underlying collateral, less costs to sell. GAAP requires the Company to make certain disclosures related to these loans, including certain types of modifications, as well as how such loans have performed since their modifications. Provision for Credit Losses A provision for estimated losses on loans is charged to income based upon management’s evaluation of the potential losses. Such an evaluation, which includes a review of all loans for which full repayment may not be reasonably assured, considers, among other matters, the estimated net realizable value of the underlying collateral, as applicable, economic conditions, loan loss experience, and other factors that are particularly susceptible to changes that could result in a material adjustment in the near term. While management attempts to use the best information available in making its evaluations, future allowance adjustments may be necessary if economic conditions change substantially from the assumptions used in making the evaluations. Policy for Charging Off Loans The Company’s policy is to charge off a loan at any point in time when it no longer can be considered a bankable asset, meaning collectible within the parameters of policy. A secured loan is generally charged down to the estimated fair value of the collateral, less costs to sell, no later than when it is 120 days past due as to principal or interest. An unsecured loan generally is charged off no later than when it is 180 days past due as to principal or interest. A home improvement loan generally is charged off no later than when it is 90 days past due as to principal or interest. 19 The following tables present changes in the balance of the ACL during the three and six months ended June 30, 2023. (in thousands) Three Months Ended June 30, 2023 Allowance for credit losses: Balance, Beginning of Period (Credit) Provision Charged to Expense Losses Charged Off Recoveries Balance, End of Period Commercial and industrial $ 1,437 $ 195 $ — $ 217 $ 1,849 Owner-occupied commercial real estate 712 77 — — 789 Investor commercial real estate 1,276 140 — — 1,416 Construction 1,551 389 — — 1,940 Single tenant lease financing 10,273 ( 303 ) — — 9,970 Public finance 1,570 ( 61 ) — — 1,509 Healthcare finance 3,695 ( 1,249 ) ( 25 ) — 2,421 Small business lending 2,340 1,599 ( 1,358 ) 37 2,618 Franchise finance 4,672 143 ( 331 ) — 4,484 Residential mortgage 2,561 ( 12 ) — 1 2,550 Home equity 254 ( 32 ) — 2 224 Other consumer loans 6,538 ( 133 ) ( 150 ) 33 6,288 Total $ 36,879 $ 753 $ ( 1,864 ) $ 290 $ 36,058 (in thousands) Six Months Ended June 30, 2023 Allowance for credit losses: Balance, Beginning of Period Adoption of CECL (Credit) Provision Charged to Expense Losses Charged Off Recoveries Balance, End of Period Commercial and industrial $ 1,711 $ ( 120 ) $ 7,005 $ ( 6,965 ) $ 218 $ 1,849 Owner-occupied commercial real estate 651 62 76 — — 789 Investor commercial real estate 1,099 ( 191 ) 508 — — 1,416 Construction 2,074 ( 435 ) 301 — — 1,940 Single tenant lease financing 10,519 ( 346 ) ( 203 ) — — 9,970 Public finance 1,753 ( 135 ) ( 109 ) — — 1,509 Healthcare finance 2,997 1,034 ( 1,585 ) ( 25 ) — 2,421 Small business lending 2,168 334 1,493 ( 1,417 ) 40 2,618 Franchise finance 3,988 ( 313 ) 1,140 ( 331 ) — 4,484 Residential mortgage 1,559 406 582 — 3 2,550 Home equity 69 133 19 — 3 224 Other consumer loans 3,149 2,533 899 ( 383 ) 90 6,288 Total $ 31,737 $ 2,962 $ 10,126 $ ( 9,121 ) $ 354 $ 36,058 20 Prior to the adoption of ASU 2016-13 on January 1, 2023, the Company calculated the allowance for loan losses using the incurred loss methodology. The following table presents the activity in the allowance for loan losses by segment for the three and six months ended June 30, 2022. (in thousands) Three Months Ended June 30, 2022 Allowance for loan losses: Balance, Beginning of Period (Credit) Provision Charged to Expense Losses Charged Off Recoveries Balance, End of Period Commercial and industrial $ 1,979 $ 47 $ — $ — $ 2,026 Owner-occupied commercial real estate 626 77 — — 703 Investor commercial real estate 405 216 — — 621 Construction 1,766 ( 59 ) — — 1,707 Single tenant lease financing 9,971 ( 259 ) — — 9,712 Public finance 1,783 67 — — 1,850 Healthcare finance 5,510 ( 748 ) — — 4,762 Small business lending 1,435 519 — 2 1,956 Franchise finance 1,437 844 — — 2,281 Residential mortgage 731 406 — 1 1,138 Home equity 65 ( 145 ) — 134 54 Other consumer loans 2,189 202 ( 128 ) 80 2,343 Tax refund advance loans 354 18 ( 372 ) — — Total $ 28,251 $ 1,185 $ ( 500 ) $ 217 $ 29,153 (in thousands) Six Months Ended June 30, 2022 Allowance for loan losses: Balance, Beginning of Period (Credit) Provision Charged to Expense Losses Charged Off Recoveries Balance, End of Period Commercial and industrial $ 1,891 $ 135 $ — $ — $ 2,026 Owner-occupied commercial real estate 742 ( 39 ) — — 703 Investor commercial real estate 328 293 — — 621 Construction 1,612 95 — — 1,707 Single tenant lease financing 10,385 ( 1,904 ) — 1,231 9,712 Public finance 1,776 74 — — 1,850 Healthcare finance 5,940 ( 1,178 ) — — 4,762 Small business lending 1,387 630 ( 80 ) 19 1,956 Franchise finance 1,083 1,198 — — 2,281 Residential mortgage 643 493 — 2 1,138 Home equity 64 ( 146 ) — 136 54 Other consumer loans 1,990 465 ( 291 ) 179 2,343 Tax refund advance loans — 1,860 ( 1,860 ) — — Total $ 27,841 $ 1,976 $ ( 2,231 ) $ 1,567 $ 29,153 In addition to the ACL, the Company established a reserve for off-balance sheet commitments, classified in other liabilities, as required by the adoption of the CECL methodology for measuring credit losses. This reserve is maintained at a level management believes to be sufficient to absorb losses arising from unfunded loan commitments. The day one entry for off-balance sheet commitments resulted in a reserve of $ 2.5 million. The adequacy of the reserve for unfunded commitments is determined quarterly based on methodology similar to the methodology for determining the ACL. The following table details activity in the provision for credit losses on off-balance sheet commitments for the three months ended June 30, 2023. 21 (dollars in thousands) Balance March 31, 2023 Provision for credit losses Balance June 30, 2023 Off-balance sheet commitments Commercial loans Commercial and industrial $ 149 $ 39 $ 188 Owner-occupied commercial real estate 8 — 8 Investor commercial real estate 48 ( 28 ) 20 Construction 2,154 743 2,897 Healthcare finance 2 ( 2 ) — Small business lending — 242 242 Total commercial loans 2,361 994 3,355 Consumer loans Residential mortgage 113 ( 54 ) 59 Home equity 62 1 63 Other consumer 10 4 14 Total consumer loans 185 ( 49 ) 136 Total allowance for off-balance sheet commitments $ 2,546 $ 945 $ 3,491 The following table details activity in the provision for credit losses on off-balance sheet commitments for the six months ended June 30, 2023. (dollars in thousands) Pre-ASC 326 Adoption Impact of ASC 326 Adoption Provision for credit losses Balance June 30, 2023 Off-balance sheet commitments Commercial loans Commercial and industrial $ — $ 110 $ 78 $ 188 Owner-occupied commercial real estate — — 8 8 Investor commercial real estate — 9 11 20 Construction — 2,193 704 2,897 Healthcare finance — 2 ( 2 ) — Small business lending — — 242 242 Total commercial loans — 2,314 1,041 3,355 Consumer loans Residential mortgage — 127 ( 68 ) 59 Home equity — 52 11 63 Other consumer — 11 3 14 Total consumer loans — 190 ( 54 ) 136 Total allowance for off-balance sheet commitments $ — $ 2,504 $ 987 $ 3,491 22 The following table presents the recorded investment in loans based on portfolio segment and impairment method as of December 31, 2022. (in thousands) Loans Allowance for Loan Losses December 31, 2022 Ending Balance: Collectively Evaluated for Impairment Ending Balance: Individually Evaluated for Impairment Ending Balance Ending Balance: Collectively Evaluated for Impairment Ending Balance: Individually Evaluated for Impairment Ending Balance Commercial and industrial $ 116,307 $ 9,801 $ 126,108 $ 1,660 $ 51 $ 1,711 Owner-occupied commercial real estate 60,266 1,570 61,836 651 — 651 Investor commercial real estate 93,121 — 93,121 1,099 — 1,099 Construction 181,966 — 181,966 2,074 — 2,074 Single tenant lease financing 939,240 — 939,240 10,519 — 10,519 Public finance 621,032 — 621,032 1,753 — 1,753 Healthcare finance 272,461 — 272,461 2,997 — 2,997 Small business lending 1 113,699 10,051 123,750 1,465 703 2,168 Franchise finance 299,835 — 299,835 3,988 — 3,988 Residential mortgage 380,272 3,676 383,948 1,559 — 1,559 Home equity 24,683 29 24,712 69 — 69 Other consumer 324,581 17 324,598 3,149 — 3,149 Total $ 3,427,463 $ 25,144 $ 3,452,607 $ 30,983 $ 754 $ 31,737 1 Balance is partially guaranteed by the U.S. government. 23 The Company utilizes a risk grading matrix to assign a risk grade to each of its commercial loans. A description of the general characteristics of the risk grades is as follows: • “Pass” - Higher quality loans that do not fit any of the other categories described below. • “Special Mention” - Loans that possess some credit deficiency or potential weakness, which deserve close attention. • “Substandard” - Loans that possess a defined weakness or weaknesses that jeopardize the liquidation of the debt. Loans characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. Loans that are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. • “Doubtful” - Such loans have been placed on nonaccrual status and may be heavily dependent upon collateral possessing a value that is difficult to determine or based upon some near-term event that lacks clear certainty. These loans have all of the weaknesses of those classified as Substandard; however, based on existing conditions, these weaknesses make full collection of the principal balance highly improbable. • “Loss” - Loans that are considered uncollectible and of such little value that continuing to carry them as assets is not warranted. The Company does not risk grade its consumer loans. It classifies them as either performing or nonperforming. Below is a description of those classifications: • “Performing” - Loans that are accruing and full collection of principal and interest is expected. • “Nonperforming” - Loans that are 90 days delinquent or for which the full collection of principal and interest may be in doubt. 24 The following tables present the credit risk profile of the Company’s commercial and consumer loan portfolios by loan class and by year of origination for the years indicated based on rating category and payment activity as of June 30, 2023. June 30, 2023 Term Loans (amortized cost basis by origination year) Revolving loans amortized cost basis Revolving loans converted to term (in thousands) 2023 2022 2021 2020 2019 Prior Total Commercial and industrial Pass $ 9,599 $ 32,980 $ 15,583 $ 2,582 $ 12,672 $ 9,598 $ 28,056 $ — $ 111,070 Special Mention — 34 890 — — — 429 — 1,353 Substandard — — — — — — — — — Doubtful — — — — — — — — — Total Commercial and industrial 9,599 33,014 16,473 — 2,582 12,672 9,598 28,485 — 112,423 Gross charge-offs — — 6,914 — 51 — — — 6,965 Owner-occupied commercial real estate Pass 409 11,404 9,140 6,697 5,867 13,217 — — 46,734 Special Mention 827 — — 8,511 — 2,087 — — 11,425 Substandard — — — — — 1,405 — — 1,405 Doubtful — — — — — — — — — Total owner-occupied commercial real estate 1,236 11,404 9,140 15,208 5,867 16,709 — — 59,564 Investor commercial real estate Pass 4,953 35,893 24,569 9,989 48,312 5,945 — — 129,661 Special Mention — — — — — 7,843 — — 7,843 Substandard — — — — — — — — — Doubtful — — — — — — — — — Total investor commercial real estate 4,953 35,893 24,569 9,989 48,312 13,788 — — 137,504 Construction Pass 2,086 104,985 41,960 38,589 — 815 3,372 — 191,807 Special Mention — — 646 — — — — — 646 Substandard — — — — — — — — — Doubtful — — — — — — — — — Total construction 2,086 104,985 42,606 38,589 — 815 3,372 — 192,453 Single tenant lease financing Pass 36,534 228,614 97,500 70,880 146,126 365,317 — — 944,971 Special Mention — — — — — 2,495 — — 2,495 Substandard — — — — — — — — — Doubtful — — — — — — — — — Total single tenant lease financing 36,534 228,614 97,500 70,880 146,126 367,812 — — 947,466 Public finance Pass 2,396 54,105 31,950 7,640 46,505 430,665 — — 573,261 Special Mention — — — — — 2,280 — — 2,280 Substandard — — — — — — — — — Doubtful — — — — — — — — — Total public finance 2,396 54,105 31,950 7,640 46,505 432,945 — — 575,541 25 June 30, 2023 Term Loans (amortized cost basis by origination year) Revolving loans amortized cost basis Revolving loans converted to term (in thousands) 2023 2022 2021 2020 2019 Prior Total Healthcare finance Pass — — 10,908 137,660 69,275 25,942 — — 243,785 Special Mention — — — — 1,287 — — — 1,287 Substandard — — — — — — — — — Doubtful — — — — — — — — — Total healthcare finance — — 10,908 137,660 70,562 25,942 — — 245,072 Gross charge-offs — — — — 25 — — — 25 Small business lending 1 Pass 60,406 47,213 16,579 15,227 4,890 13,885 3,540 — 161,740 Special Mention — 1,223 123 1,361 1,108 1,098 399 — 5,312 Substandard — 780 28 1,697 793 56 144 — 3,498 Doubtful — — — — — — — — — Total small business lending 60,406 49,216 16,730 18,285 6,791 15,039 4,083 — 170,550 Gross charge-offs — — 60 1,358 — — — — 1,418 Franchise finance Pass 103,670 224,752 61,755 — — — — — 390,177 Special Mention — — 302 — — — — — 302 Substandard — — — — — — — — — Doubtful — — — — — — — — — Total franchise finance 103,670 224,752 62,057 — — — — — 390,479 Gross charge-offs — 331 — — — — — — 331 Consumer loans Residential mortgage Payment performance Performing 8,966 192,725 97,832 33,590 12,224 49,825 — — 395,162 Nonperforming — 235 — 74 — 683 — — 992 Total residential mortgage 8,966 192,960 97,832 33,664 12,224 50,508 — — 396,154 Home equity Payment performance Performing 1,413 2,372 360 487 176 631 17,639 1,297 24,375 Nonperforming — — — — — — — — — Total home equity 1,413 2,372 360 487 176 631 17,639 1,297 24,375 Other consumer Payment performance Performing 60,418 115,827 46,881 29,747 30,286 68,085 779 — 352,023 Nonperforming — 63 — 6 18 15 — — 102 Total other consumer 60,418 115,889 46,881 29,753 30,304 68,100 779 — 352,124 Gross charge-offs 58 50 19 12 107 136 — — 382 Total Loans $ 291,677 $ 1,053,204 $ 457,006 $ 364,737 $ 379,539 $ 1,001,887 $ 54,358 $ 1,297 $ 3,603,705 Total gross charge-offs $ 58 $ 381 $ 6,993 $ 1,370 $ 183 $ 136 $ — $ — $ 9,121 1 Balance in “Substandard” is partially guaranteed by the U.S. government. 26 The following tables present the credit risk profile of the Company’s commercial and consumer loan portfolios based on rating category and payment activity as of December 31, 2022. December 31, 2022 (in thousands) Pass Special Mention Substandard Total Commercial and industrial $ 114,934 1,373 $ 9,801 $ 126,108 Owner-occupied commercial real estate 50,721 9,546 1,569 61,836 Investor commercial real estate 93,121 — — 93,121 Construction 180,768 1,198 — 181,966 Single tenant lease financing 936,207 3,033 — 939,240 Public finance 618,752 2,280 — 621,032 Healthcare finance 271,085 1,376 — 272,461 Small business lending 1 107,885 5,814 10,051 123,750 Franchise finance 299,241 594 — 299,835 Total loans $ 2,672,714 $ 25,214 $ 21,421 $ 2,719,349 1 Balance in “Substandard” is partially guaranteed by the U.S. government. December 31, 2022 (in thousands) Performing Nonaccrual Total Residential mortgage $ 382,900 $ 1,048 $ 383,948 Home equity 24,712 — 24,712 Other consumer 324,581 17 324,598 Total consumer loans $ 732,193 $ 1,065 $ 733,258 The following tables present the Company’s loan portfolio delinquency analysis as of June 30, 2023 and December 31, 2022. June 30, 2023 (in thousands) 30-59 Days Past Due 60-89 Days Past Due 90 Days or More Past Due Total Past Due Current Total Loans Commercial and industrial $ 20 $ — $ — $ 20 $ 112,403 $ 112,423 Owner-occupied commercial real estate — — — — 59,564 59,564 Investor commercial real estate — — — — 137,504 137,504 Construction — — — — 192,453 192,453 Single tenant lease financing — — — — 947,466 947,466 Public finance — — — — 575,541 575,541 Healthcare finance — — — — 245,072 245,072 Small business lending 1 270 28 1,677 1,975 168,575 170,550 Franchise finance — — — — 390,479 390,479 Residential mortgage 705 291 235 1,231 394,923 396,154 Home equity — — — — 24,375 24,375 Other consumer 114 39 17 170 351,954 352,124 Total $ 1,109 $ 358 $ 1,929 $ 3,396 $ 3,600,309 $ 3,603,705 1 Balance is partially guaranteed by the U.S. government. 27 December 31, 2022 (in thousands) 30-59 Days Past Due 60-89 Days Past Due 90 Days or More Past Due Total Past Due Current Total Loans Commercial and industrial $ 81 $ — $ 51 $ 132 $ 125,976 $ 126,108 Owner-occupied commercial real estate — — — — 61,836 61,836 Investor commercial real estate — — — — 93,121 93,121 Construction — 1,198 — 1,198 180,768 181,966 Single tenant lease financing — — — — 939,240 939,240 Public finance — — — — 621,032 621,032 Healthcare finance — — — — 272,461 272,461 Small business lending 1 57 — 3,485 3,542 120,208 123,750 Franchise Finance 313 — — 313 299,522 299,835 Residential mortgage — 283 185 468 383,480 383,948 Home equity — — — — 24,712 24,712 Other consumer 91 10 — 101 324,497 324,598 Total $ 542 $ 1,491 $ 3,721 $ 5,754 $ 3,446,853 $ 3,452,607 1 Balance is partially guaranteed by the U.S. government. Loans are reclassified to a non-accruing status when, in management’s judgment, the collateral value and financial condition of the borrower do not justify accruing interest. At the time the accrual is discontinued, all unpaid accrued interest is reversed against earnings. Interest income accrued in prior years, if any, is charged to the allowance for credit losses. Payments subsequently received on nonaccrual loans are applied to principal. A loan is returned to accrual status when principal and interest are no longer past due and collectability is probable, typically after a minimum of six consecutive months of performance. The following table summarizes the Company’s nonaccrual loans and loans past due 90 days or more and still accruing by loan class for the periods indicated: June 30, 2023 December 31, 2022 (in thousands) Nonaccrual Loans Nonaccrual Loans with no Allowance for Credit Losses Total Loans 90 Days or More Past Due and Accruing Nonaccrual Loans Nonaccrual Loans with no Allowance for Loan Losses Total Loans 90 Days or More Past Due and Accruing Commercial and industrial $ — $ — $ — $ 51 $ — $ — Owner-occupied commercial real estate 1,405 1,405 — 1,570 1,570 — Small business lending 1 3,729 2,205 — 4,764 2,766 — Residential mortgage 992 992 — 1,048 1,048 79 Other consumer 101 101 — 17 17 — Total loans $ 6,227 $ 4,703 $ — $ 7,450 $ 5,401 $ 79 1 Balance is partially guaranteed by the U.S. government. There was $ 69 thousand and $ 78 thousand in interest income recognized on nonaccrual loans for the six months ended June 30, 2023 and June 30, 2022, respectively. Determining fair value for collateral dependent loans requires obtaining a current independent appraisal of the collateral and applying a discount factor, which includes selling costs if applicable, to the value. The fair value of real estate is generally based on appraisals by qualified licensed appraisers. The appraisers typically determine the value of the real estate by utilizing an income or market valuation approach. If an appraisal is not available, the fair value may be determined by using a cash flow analysis. Fair value on other collateral such as business assets is typically ascertained by assessing, either singularly or some combination of, asset appraisals, accounts receivable aging reports, inventory listings and/or customer financial statements. Both appraised values and values based on borrower’s financial information are discounted as considered appropriate based on age and quality of the information and current market conditions. 28 The following table presents the amortized cost basis of collateral dependent loans, which are individually evaluated to determine expected credit losses as of June 30, 2023, June 30, 2023 (in thousands) Commercial Real Estate Residential Real Estate Other Total Allowance on Collateral Dependent Loans Commercial and industrial $ — $ — $ — $ — $ — Owner-occupied commercial real estate — — 1,406 1,406 — Small business lending 1 1,598 1,626 398 3,622 633 Residential mortgage — 992 — 992 — Other consumer loans — — 101 101 — Total loans $ 1,598 $ 2,618 $ 1,905 $ 6,121 $ 633 1 Balance is partially guaranteed by the U.S. government. The following table presents the Company’s impaired loans as of December 31, 2022. December 31, 2022 (in thousands) Recorded Balance Unpaid Principal Balance Specific Allowance Loans without a specific valuation allowance Commercial and industrial $ 9,750 $ 9,750 $ — Owner-occupied commercial real estate 1,570 1,779 — Small business lending 8,184 8,705 — Residential mortgage 3,676 3,835 — Home equity 29 29 — Other consumer loans 17 36 — Total 23,226 24,134 — Loans with a specific valuation allowance Commercial and industrial 51 51 51 Small business lending 1 1,867 1,867 703 Total 1,918 1,918 754 Total impaired loans $ 25,144 $ 26,052 $ 754 1 Balance is partially guaranteed by the U.S. government. The table below presents average balances and interest income recognized for impaired loans during the three and six months ended June 30, 2022. 29 Three Months Ended Six Months Ended June 30, 2022 June 30, 2022 (in thousands) Average Balance Interest Income Average Balance Interest Income Loans without a specific valuation allowance Owner-occupied commercial real estate $ 2,461 $ — $ 2,884 $ — Small business lending 867 — 848 — Residential mortgage 3,667 25 3,470 33 Home equity 15 — 14 — Other consumer loans 9 — 9 — Total 7,019 25 7,225 33 Loans with a specific valuation allowance Commercial and industrial $ 390 $ — 508 — Single tenant lease financing 546 — 820 — Healthcare finance 901 28 909 45 Small business lending 1,674 — 1,504 — Total 3,511 28 3,741 45 Total impaired loans $ 10,530 $ 53 $ 10,966 $ 78 1 Balance is partially guaranteed by the U.S. government. The Company had $ 0.1 million in other real estate owned (“OREO”) as of June 30, 2023, which consisted of one residential mortgage property. The Company did not have any OREO as of December 31, 2022. There were two loans totaling $ 0.4 million and one loan totaling $ 0.1 million in the process of foreclosure at June 30, 2023 and December 31, 2022, respectively. Loan Modifications to Borrowers Experiencing Financial Difficulty In January 2023, the Company adopted ASU 2022-02, “Financial Instruments - Credit Losses (Topic 326): Troubled Debt restructurings and Vintage Disclosures” (“ASU 2022-02”), which eliminated the accounting guidance for troubled debt restructurings (“TDRs”) while enhancing disclosure requirements for certain loan refinancing and restructurings by creditors when a borrower is experiencing financial difficulty. This guidance was applied on a prospective basis. Upon adoption of this guidance, the Company no longer establishes a specific reserve for modifications to borrowers experiencing financial difficulty. Instead, these modifications are included in their respective loan pool and a historical loss rate is applied to the current loan balance to arrive at the quantitative baseline portion of the ACL. Modifications to borrowers experiencing financial difficulty may include interest rate reductions, principal or interest forgiveness, forbearances, term extensions and other actions intended to minimize loss and to avoid foreclosure or repossession of collateral. The Company did not have any loan modifications made to borrowers experiencing financial difficulty during the three and six months ended June 30, 2023. There were no loans classified as new TDRs during the three months ended June 30, 2022. There was one portfolio residential mortgage loan classified as a new TDR during the six months ended June 30, 2022 with a pre-modification and post-modification outstanding recorded investment of $ 0.7 million. The Company did not allocate a specific allowance for that loan as of June 30, 2022. The modifications consisted of interest-only payments for a period of time. There were no performing TDRs that had payment defaults within the twelve months following modification during the three and six months ended June 30, 2022, respectively. 30 Note 5: Premises and Equipment The following table summarizes premises and equipment at June 30, 2023 and December 31, 2022. (in thousands) June 30, 2023 December 31, 2022 Land $ 5,598 $ 5,598 Construction in process 81 714 Right of use leased asset 114 206 Building and improvements 60,524 57,505 Furniture and equipment 19,921 19,585 Less: accumulated depreciation ( 12,713 ) ( 10,897 ) Total $ 73,525 $ 72,711 Note 6: Goodwill As of June 30, 2023 and December 31, 2022, the carrying amount of goodwill was $ 4.7 million. There have been no changes in the carrying amount of goodwill for the three and six months ended June 30, 2023 or June 30, 2022. Goodwill is assessed for impairment annually as of August 31, or more frequently if events occur or circumstances change that indicate an impairment may exist. When assessing goodwill for impairment, first, a qualitative assessment can be made to determine whether it is more likely than not that the estimated fair value of a reporting unit is less than its estimated carrying value. If the results of the qualitative assessment are not conclusive, a quantitative goodwill test is performed. Alternatively, a quantitative goodwill test can be performed without performing a qualitative assessment. In March 2023, the closure of two large regional banks resulted in market volatility and a significant decline in regional bank stock prices, including our stock price. This triggering event indicated that goodwill may be impaired and resulted in us performing a goodwill impairment assessment as of May 31, 2023. The estimated fair value of the reporting unit exceeded the net carrying value, and therefore no goodwill impairment existed as of that date. Note 7: Servicing Asset Activity for the servicing asset and the related changes in fair value for the three and six months ended June 2023 and 2022 are shown in the table below. Three Months Ended (in thousands) June 30, 2023 June 30, 2022 Balance, beginning of period $ 7,312 $ 5,249 Additions: Originated and purchased servicing 1,298 566 Subtractions Paydowns: ( 528 ) ( 353 ) Changes in fair value due to changes in valuation inputs or assumptions used in the valuation model 170 ( 117 ) Loan servicing asset revaluation $ ( 358 ) $ ( 470 ) Balance, end of period $ 8,252 $ 5,345 31 Six Months Ended (in thousands) June 30, 2023 June 30, 2022 Balance, beginning of period $ 6,255 $ 4,702 Additions: Originated and purchased servicing 2,410 1,410 Subtractions Paydowns: ( 867 ) ( 609 ) Changes in fair value due to changes in valuation inputs or assumptions used in the valuation model 454 ( 158 ) Loan servicing asset revaluation $ ( 413 ) $ ( 767 ) Balance, end of period $ 8,252 $ 5,345 Loans serviced for others are not included in the condensed consolidated balance sheets. The unpaid principal balances of these loans serviced for others as of June 30, 2023 and December 31, 2022 are shown in the table below. (in thousands) June 30, 2023 December 31, 2022 Loan portfolios serviced for: SBA guaranteed loans $ 397,908 $ 318,194 Total $ 397,908 $ 318,194 Loan servicing revenue totaled $ 0.9 million and $ 1.6 million for the three and six months ended June 30, 2023, respectively, and $ 0.6 million and $ 1.2 million for the three and six months ended June 30, 2022, respectively. Loan servicing asset revaluation, which represents the change in fair value of the servicing asset, resulted in a $ 0.4 million and $ 0.4 million downward valuation for the three and six months ended June 30, 2023, respectively, and a $ 0.5 million and $ 0.8 million downward valuation for the three and six months ended June 30, 2022, respectively. The fair value of servicing rights is highly sensitive to changes in underlying assumptions. Though fluctuations in prepayment speeds and changes in secondary market premiums generally have the most substantial impact on the fair value of servicing rights, other influencing factors include changing economic conditions, changes to the discount rate assumption and the weighted average life of the servicing portfolio. Measurement of fair value is limited to the conditions existing and the assumptions used as of a particular point in time; however, those assumptions may change over time. Refer to Note 11 - Fair Value of Financial Instruments for further details. Note 8: Subordinated Debt In June 2019, the Company issued $ 37.0 million aggregate principal amount of 6.0 % Fixed-to-Floating Rate Subordinated Notes due 2029 (the “2029 Notes”) in a public offering. The 2029 Notes initially bear a fixed interest rate of 6.0 % per year to, but excluding, June 30, 2024, and thereafter a floating rate equal to the then-current benchmark rate (initially three-month LIBOR rate) plus 4.11 %. All interest on the 2029 Notes is payable quarterly. The 2029 Notes are scheduled to mature on June 30, 2029. The 2029 Notes are unsecured subordinated obligations of the Company and may be repaid, without penalty, on any interest payment date on or after June 30, 2024. The 2029 Notes are intended to qualify as Tier 2 capital under regulatory guidelines. In October 2020, the Company entered into a term loan in the principal amount of $ 10.0 million, evidenced by a term note due 2030 (the “2030 Note”). The 2030 Note initially bears a fixed interest rate of 6.0 % per year to, but excluding, November 1, 2025 and thereafter at a floating rate equal to the then-current benchmark rate (initially the then current three-month term SOFR plus 5.795 %). The 2030 Note is scheduled to mature on November 1, 2030. The 2030 Note is an unsecured subordinated obligation of the Company and may be repaid, without penalty, on any interest payment date on or after November 1, 2025. The 2030 Note is intended to qualify as Tier 2 capital under regulatory guidelines. The Company used the net proceeds from the issuance of the 2030 Note to redeem a subordinated term note that had been entered into in October 2015. 32 In August 2021, the Company issued $ 60.0 million aggregate principal amount of 3.75 % Fixed-to-Floating Rate Subordinated Notes due 2031 (the “2031 Notes”) in a private placement. The 2031 Notes initially bear a fixed interest rate of 3.75 % per year to, but excluding, September 1, 2026, and thereafter a floating rate equal to the then-current benchmark rate (initially three-month Term SOFR plus 3.11 %). The 2031 Notes are scheduled to mature on September 1, 2031. The 2031 Notes are unsecured subordinated obligations of the Company and may be repaid, without penalty, on any interest payment date on or after September 1, 2026. The 2031 Notes are intended to qualify as Tier 2 capital under regulatory guidelines. The Company used a portion of the net proceeds from the issuance of the 2031 Notes to redeem subordinated notes issued by the Company in 2016. Pursuant to the terms of a Registration Rights Agreement between the Company and the initial purchasers of the 2031 Notes, the Company offered to exchange the 2031 Notes for subordinated notes that are registered under the Securities Act of 1933, as amended, and have substantially the same terms as the 2031 Notes. On December 30, 2021, we completed an exchange of $ 59.3 million principal amount of the unregistered 2031 Notes for registered 2031 Notes in satisfaction of our obligations under the registration rights agreement. Holders of $ 0.7 million of unregistered 2031 Notes did not participate in the exchange. The following table presents the principal balance and unamortized debt issuance costs for the 2029 Notes, the 2030 Note, and the 2031 Notes as of June 30, 2023 and December 31, 2022. June 30, 2023 December 31, 2022 (in thousands) Principal Unamortized Debt Issuance Costs Principal Unamortized Debt Issuance Costs 2029 Notes $ 37,000 $ ( 941 ) $ 37,000 $ ( 1,020 ) 2030 Notes 10,000 ( 172 ) 10,000 ( 184 ) 2031 Notes 60,000 ( 1,203 ) 60,000 ( 1,264 ) Total $ 107,000 $ ( 2,316 ) $ 107,000 $ ( 2,468 ) Note 9: Benefit Plans Employment Agreements The Company is party to certain employment agreements with each of its Chief Executive Officer, President and Chief Operating Officer and Executive Vice President and Chief Financial Officer. The employment agreements each provide for annual base salaries and annual bonuses, if any, as determined from time to time by the Compensation Committee of our Board of Directors. The annual bonuses are to be determined with reference to the achievement of annual performance objectives established by the Compensation Committee. The agreements also provide that each of the Chief Executive Officer, President and Chief Operating Officer and Executive Vice President and Chief Financial Officer, may be awarded additional compensation, benefits, or consideration as the Compensation Committee may determine. The agreements also provide for the continuation of salary and certain other benefits for a specified period of time upon termination of employment under certain circumstances, including resignation for “good reason,” termination by the Company without “cause” at any time or any termination of employment within twelve months following a “change in control,” along with other specific conditions. 2022 Equity Incentive Plan The First Internet Bancorp 2022 Equity Incentive Plan (the “2022 Plan”) was approved by our Board of Directors and ratified by our shareholders on May 16, 2022. The 2022 Plan permits awards of incentive and non-statutory stock options, stock appreciation rights, restricted stock awards, stock unit awards, performance awards and other stock-based awards. All employees, consultants, and advisors of the Company or any subsidiary, as well as all non-employee directors of the Company, are eligible to receive awards under the 2022 Plan. The 2022 Plan initially authorized the issuance of 400,000 new shares of the Company’s common stock plus all shares of common stock that remained available for future grants under the First Internet Bancorp 2013 Equity Incentive Plan (the “2013 Plan”). 33 Award Activity Under 2022 Plan The Company recorded less than $ 0.1 million o f share-based compensation expense for the three and six months ended June 30, 2023, related to stock-based awards under the 2022 Plan . The following table summarizes the stock-based award activity under the 2022 Plan for the six months ended June 30, 2023. Restricted Stock Units Weighted-Average Grant Date Fair Value Per Share Restricted Stock Awards Weighted-Average Grant Date Fair Value Per Share Deferred Stock Units Weighted-Average Grant Date Fair Value Per Share Unvested at December 31, 2022 — $ — 3,558 $ 36.84 — $ — Granted 72,354 24.61 30,030 11.18 — — Cancelled/Forfeited — — — — — — Vested — — ( 3,558 ) 36.85 — — Unvested at June 30, 2023 72,354 $ 24.61 30,030 $ 11.18 — $ — At June 30, 2023, the total unrecognized compensation cost related to unvested stock-based awards under the 2022 Plan was $ 2.8 million with a weighted-average expense recognition period of 2.0 years. 2013 Equity Incentive Plan The 2013 Plan authorized the issuance of 750,000 shares of the Company’s common stock in the form of stock-based awards to employees, directors, and other eligible persons. Although outstanding stock-based awards under the 2013 Plan remain in place according to their terms, our authority to grant new awards under the 2013 Plan terminated upon shareholder approval of the 2022 Plan. Award Activity Under 2013 Plan The Company recorded less than $ 0.1 million and $ 0.5 million of share-based compensation expense for the three and six months ended June 30, 2023, related to stock-based awards under the 2013 Plan . The Company recorded $ 0.9 million and $ 1.5 million of share-based compensation expense for the three and six months ended June 30, 2022, related to stock-based awards under the 2013 Plan. The following table summarizes the stock-based award activity under the 2013 Plan for the six months ended June 30, 2023. Restricted Stock Units Weighted-Average Grant Date Fair Value Per Share Restricted Stock Awards Weighted-Average Grant Date Fair Value Per Share Deferred Stock Units Weighted-Average Grant Date Fair Value Per Share Unvested at December 31, 2022 101,734 $ 35.93 — $ — — $ — Granted — — — — — — Cancelled/Forfeited ( 278 ) 27.56 — — — — Vested ( 35,808 ) 31.87 — — — — Unvested at June 30, 2023 65,648 $ 38.18 — $ — — $ — At June 30, 2023, the total unrecognized compensation cost related to unvested stock-based awards under the 2013 Plan was $ 1.0 million with a weighted-average expense recognition period of 1.4 years. 34 Directors Deferred Stock Plan Until January 2014, the Company had a practice of granting awards under a stock compensation plan for members of the Board of Directors (“Directors Deferred Stock Plan”). The Company reserved 180,000 shares of common stock that could have been issued pursuant to the Directors Deferred Stock Plan. The plan provided directors the option to elect to receive up to 100 % of their annual retainer in either common stock or deferred stock rights. Deferred stock rights were to be settled in common stock following the end of the deferral period payable on the basis of one share of common stock for each deferred stock right. The following table summarizes the status of deferred stock rights related to the Directors Deferred Stock Plan for the six months ended June 30, 2023. Deferred Stock Rights Outstanding, beginning of period 40,414 Granted 201 Outstanding, end of period 40,615 All deferred stock rights granted during the 2023 period were additional rights issued in lieu of cash dividends payable on outstanding deferred stock rights. Note 10: Commitments and Credit Risk In the normal course of business, the Company makes various commitments to extend credit which are not reflected in the accompanying condensed consolidated financial statements. At June 30, 2023 and December 31, 2022, the Company had outstanding loan commitments totaling approximately $ 544.8 million and $ 485.4 million, respectively. Capital Commitments Capital expenditures were made in connection with the construction of the building where our corporate headquarters is located, along with an attached parking garage. The Company entered into construction-related contracts. As of June 30, 2023, the project was completed at a total cost of $ 67.2 million. There are no remaining capital commitments left at June 30, 2023. Note 11: Fair Value of Financial Instruments ASC Topic 820, Fair Value Measurement , defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC Topic 820 also specifies a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value: Level 1 Quoted prices in active markets for identical assets or liabilities Level 2 Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities Following is a description of the valuation methodologies and inputs used for assets measured at fair value on a recurring basis and recognized in the accompanying condensed consolidated balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy. 35 Available-for-Sale Securities Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities include highly liquid mutual funds. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. Level 2 securities include U.S. Government-sponsored agencies, municipal securities, mortgage and asset-backed securities and corporate securities. Matrix pricing is a mathematical technique widely used in the banking industry to value investment securities. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy. Fair values are calculated using discounted cash flows. Discounted cash flows are calculated based off of the anticipated future cash flows updated to incorporate loss severities. Rating agency and industry research reports as well as default and deferral activity are reviewed and incorporated into the calculation. The Company did not own any securities classified within Level 3 of the hierarchy as of June 30, 2023 or December 31, 2022. Loans Held-for-Sale (mandatory pricing agreements) The fair value of loans held-for-sale is determined using quoted prices for similar assets, adjusted for specific attributes of that loan (Level 2). Servicing Asset Fair value is based on a loan-by-loan basis taking into consideration the origination to maturity dates of the loans, the current age of the loans and the remaining term to maturity. The valuation methodology utilized for the servicing asset begins with generating estimated future cash flows for each servicing asset based on their unique characteristics and market-based assumptions for prepayment speeds and costs to service. The present value of the future cash flows is then calculated utilizing market-based discount rate assumptions (Level 3). Interest Rate Swap Agreements The fair values of interest rate swap agreements are estimated using current market interest rates as of the balance sheet date and calculated using discounted cash flows that are observable or that can be corroborated by observable market data (Level 2). Forward Contracts The fair values of forward contracts on to-be-announced securities are determined using quoted prices in active markets or benchmarked thereto (Level 1). Interest Rate Lock Commitments The fair values of IRLCs are determined using the projected sale price of individual loans based on changes in market interest rates, projected pull-through rates (the probability that an IRLC will ultimately result in an originated loan), the reduction in the value of the applicant’s option due to the passage of time, and the remaining origination costs to be incurred based on management’s estimate of market costs (Level 3). 36 The following tables present the fair value measurements of assets and liabilities recognized in the accompanying condensed consolidated balance sheets measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at June 30, 2023 and December 31, 2022. June 30, 2023 Fair Value Measurements Using (in thousands) Fair Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) U.S. Government-sponsored agencies $ 39,474 $ — $ 39,474 $ — Municipal securities 67,209 — 67,209 — Agency mortgage-backed securities - residential 204,141 — 204,141 — Agency mortgage-backed securities - commercial 14,891 — 14,891 — Private label mortgage-backed securities - residential 13,415 — 13,415 — Asset-backed securities 1,000 — 1,000 — Corporate securities 39,264 — 39,264 — Total available-for-sale securities $ 379,394 $ — $ 379,394 $ — Servicing asset 8,252 — — 8,252 Interest rate swap agreements 8,395 — 8,395 — December 31, 2022 Fair Value Measurements Using (in thousands) Fair Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) U.S. Government-sponsored agencies $ 33,809 $ — $ 33,809 $ — Municipal securities 67,276 — 67,276 — Agency mortgage-backed securities - residential 215,092 — 215,092 — Agency mortgage-backed securities - commercial 15,840 — 15,840 — Private label mortgage-backed securities - residential 10,455 — 10,455 — Asset-backed securities 4,960 — 4,960 — Corporate securities 42,952 — 42,952 — Total available-for-sale securities $ 390,384 $ — $ 390,384 $ — Loans held-for-sale (mandatory pricing agreements) 9,110 — 9,110 — Servicing asset 6,255 — — 6,255 Interest rate swap agreements 8,645 — 8,645 — Forward contracts 97 97 — — IRLCs 133 — — 133 37 The following tables reconcile the beginning and ending balances of recurring fair value measurements recognized in the accompanying condensed consolidated balance sheets using significant unobservable (Level 3) inputs for the three and six months ended June 30, 2023 and 2022. Three Months Ended (in thousands) Servicing Asset Interest Rate Lock Commitments Balance, April 1, 2023 $ 7,312 $ — Total realized gains Additions: Originated and purchased servicing 1,298 — Subtractions: Paydowns ( 528 ) — Change in fair value 170 — Balance, June 30, 2023 $ 8,252 $ — Balance as of April 1, 2022 $ 5,249 $ ( 88 ) Total realized gains Additions: Originated and purchased servicing 566 — Subtractions: Paydowns ( 353 ) — Change in fair value ( 117 ) 550 Balance, June 30, 2022 $ 5,345 $ 462 Six Months Ended (in thousands) Servicing Asset Interest Rate Lock Commitments Balance, January 1, 2023 $ 6,255 $ 133 Total realized gains Additions: Originated and purchased servicing 2,410 — Subtractions: Paydowns ( 867 ) — Change in fair value 454 ( 133 ) Balance, June 30, 2023 $ 8,252 $ — Balance as of January 1, 2022 $ 4,702 $ 718 Total realized gains Additions: Originated and purchased servicing 1,410 — Subtractions: Paydowns ( 609 ) — Change in fair value ( 158 ) ( 256 ) Balance, June 30, 2022 $ 5,345 $ 462 38 The following describes the valuation methodologies and inputs used for assets measured at fair value on a nonrecurring basis, as well as the general classification of such assets pursuant to the valuation hierarchy. Collateral Dependent Loans Loans for which it is probable that the Company will not collect all principal and interest due according to contractual terms are measured for impairment. The amount of impairment may be determined based on the fair value of the underlying collateral, less costs to sell, the estimated present value of future cash flows or the loan’s observable market price. If the impaired loan is identified as collateral dependent, the fair value of the underlying collateral, less costs to sell, is used to measure impairment. This method requires obtaining a current independent appraisal of the collateral and applying a discount factor to the value. If the impaired loan is not collateral dependent, the Company utilizes a discounted cash flow analysis to measure impairment. Impaired loans with a specific valuation allowance based on the value of the underlying collateral or a discounted cash flow analysis are classified as Level 3 assets. The following table presents the fair value measurements of assets and liabilities recognized in the accompanying condensed consolidated balance sheets measured at fair value on a nonrecurring basis and the level within the fair value hierarchy in which the fair value measurement falls at June 30, 2023 and December 31, 2022. June 30, 2023 (in thousands) Fair Value Measurements Using Fair Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Collateral dependent loans $ 891 $ — $ — $ 891 December 31, 2022 (in thousands) Fair Value Measurements Using Fair Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Impaired loans $ 1,164 $ — $ — $ 1,164 Significant Unobservable (Level 3) Inputs The following tables present quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements. (dollars in thousands) Fair Value at June 30, 2023 Valuation Technique Significant Unobservable Inputs Range Weighted-Average Range Collateral dependent loans $ 891 Fair value of collateral Discount for type of property and current market conditions 10 % - 25 % 21 % Servicing asset 8,252 Discounted cash flow Prepayment speeds Discount rate 0 % - 25 % 14 % 11.4 % 14 % 39 (dollars in thousands) Fair Value at December 31, 2022 Valuation Technique Significant Unobservable Inputs Range Weighted-Average Range Impaired loans $ 1,164 Fair value of collateral Discount for type of property and current market conditions 0 % - 25 % 20 % IRLCs 133 Discounted cash flow Loan closing rates 31 % - 100 % 89 % Servicing asset 6,255 Discounted cash flow Prepayment speeds Discount rate 0 % - 25 % 14 % 14.6 % 14 % The following methods were used to estimate the fair value of all other financial instruments recognized in the accompanying condensed consolidated balance sheets at amounts other than fair value. Cash and Cash Equivalents For these instruments, the carrying amount is a reasonable estimate of fair value. Securities Held-to-Maturity Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities include highly liquid mutual funds. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. Level 2 securities include agency mortgage-backed securities - residential, municipal securities and corporate securities. Matrix pricing is a mathematical technique widely used in the banking industry to value investment securities. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy. Fair values are calculated using discounted cash flows. Discounted cash flows are calculated based off of the anticipated future cash flows updated to incorporate loss severities. Rating agency and industry research reports as well as default and deferral activity are reviewed and incorporated into the calculation. The Company did not own any securities classified within Level 3 of the hierarchy as of June 30, 2023 or December 31, 2022. Loans Held-for-Sale (best efforts pricing agreements) The fair value of these loans approximates carrying value. Loans The fair value of loans is estimated on an exit price basis incorporating discounts for credit, liquidity and marketability factors. Accrued Interest Receivable The fair value of these financial instruments approximates carrying value. Federal Home Loan Bank of Indianapolis Stock The fair value of this financial instrument approximates carrying value. Deposits The fair value of noninterest-bearing and interest-bearing demand deposits, savings and money market accounts approximates carrying value. The fair value of fixed maturity certificates of deposit and brokered deposits are estimated using rates currently offered for deposits of similar remaining maturities. 40 Advances from Federal Home Loan Bank The fair value of fixed rate advances is estimated using rates currently available for advances with similar remaining maturities. The carrying value of variable rate advances approximates fair value. Subordinated Debt The fair value of the Company’s publicly traded subordinated debt is obtained from quoted market prices. The fair value of the Company’s remaining subordinated debt is estimated using discounted cash flow analysis, based on current borrowing rates for similar types of debt instruments. Accrued Interest Payable The fair value of these financial instruments approximates carrying value. Commitments The fair value of commitments to extend credit are based on fees currently charged to enter into similar agreements with similar maturities and interest rates. The Company determined that the fair value of commitments was zero based on the contractual value of outstanding commitments at each of June 30, 2023 and December 31, 2022. The following tables present the carrying value and estimated fair value of all financial assets and liabilities that are not measured at fair value on a recurring basis at June 30, 2023 and December 31, 2022. June 30, 2023 Fair Value Measurements Using (in thousands) Carrying Amount Fair Value Quoted Prices In Active Market for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Cash and cash equivalents $ 465,631 $ 465,631 $ 465,631 $ — $ — Securities held-to-maturity, net 230,605 208,643 — 208,643 — Loans held-for-sale (best efforts pricing agreements) 32,001 32,001 — 32,001 — Net loans 3,610,774 3,409,661 — — 3,409,661 Accrued interest receivable 24,101 24,101 24,101 — — Federal Home Loan Bank of Indianapolis stock 28,350 28,350 — 28,350 — Deposits 3,854,308 3,838,133 1,779,148 — 2,058,985 Advances from Federal Home Loan Bank 614,931 598,932 — 598,932 — Subordinated debt 104,684 99,700 29,600 70,100 — Accrued interest payable 3,338 3,338 3,338 — — 41 December 31, 2022 Fair Value Measurements Using (in thousands) Carrying Amount Fair Value Quoted Prices In Active Market for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Cash and cash equivalents $ 256,552 $ 256,552 $ 256,552 $ — $ — Securities held-to-maturity 189,168 168,483 — 168,483 — Loans held-for-sale (best efforts pricing agreements) 12,401 12,401 — 12,401 — Net loans 3,467,664 3,225,845 — — 3,225,845 Accrued interest receivable 21,069 21,069 21,069 — — Federal Home Loan Bank of Indianapolis stock 28,350 28,350 — 28,350 — Deposits 3,441,245 3,415,390 1,974,344 — 1,441,046 Advances from Federal Home Loan Bank 614,928 596,455 — 596,455 — Subordinated debt 104,532 102,669 32,560 70,109 — Accrued interest payable 2,913 2,913 2,913 — — Note 12: Mortgage Banking Activities The Bank’s residential real estate lending business originated mortgage loans for customers and typically sold a majority of the originated loans into the secondary market. For most of the mortgages sold in the secondary market, the Bank hedged its mortgage banking pipeline by entering into forward contracts for the future delivery of mortgage loans to third party investors and entering into IRLCs with potential borrowers to fund specific mortgage loans that would be sold into the secondary market. To facilitate the hedging of the loans, the Bank elected the fair value option for loans originated and intended for sale in the secondary market under mandatory pricing agreements. Changes in the fair value of loans held-for-sale, IRLCs and forward contracts are recorded in the mortgage banking activities line item within noninterest income. Refer to Note 13 for further information on derivative financial instruments. During the three months ended June 30, 2023, the Company originated no mortgage loans held-for-sale and sold $ 3.1 million of mortgage loans into the secondary market. During the three months ended June 30, 2022, the Company originated $ 105.9 million of mortgage loans held-for-sale and sold $ 107.9 million of mortgage loans into the secondary market. During the six months ended June 30, 2023 and 2022, the Company originated mortgage loans held-for-sale of $ 36.3 million and $ 258.2 million, respectively, and sold $ 46.5 million and $ 270.3 million of mortgage loans, respectively, into the secondary market. The following table presents the components of income from mortgage banking activities for the three and six months ended June 30, 2023 and 2022. Three Months Ended June 30, Six Months Ended June 30, (in thousands) 2023 2022 2023 2022 Gain on loans sold $ — $ 1,878 $ 471 $ 3,940 Gain (loss) resulting from the change in fair value of loans held-for-sale — 340 ( 143 ) ( 149 ) Loss resulting from the change in fair value of derivatives — ( 508 ) ( 252 ) ( 208 ) Net revenue from mortgage banking activities $ — $ 1,710 $ 76 $ 3,583 Fluctuations in interest rates and changes in IRLC and loan volume within the mortgage banking pipeline may cause volatility in the fair value of loans held-for-sale and the fair value of derivatives used to hedge the mortgage banking pipeline. 42 Note 13: Derivative Financial Instruments The Company uses derivative financial instruments to help manage exposure to interest rate risk and the effects that changes in interest rates may have on net income and the fair value of assets and liabilities. The Company enters into interest rate swap agreements as part of its asset/liability management strategy to help manage its interest rate risk position. Additionally, the Company entered into forward contracts for the future delivery of mortgage loans to third-party investors and entered into IRLCs with potential borrowers to fund specific mortgage loans that were sold into the secondary market. The forward contracts were entered into in order to economically hedge the effect of changes in interest rates resulting from the Company’s commitment to fund the loans. The Company had various interest rate swap agreements designated and qualifying as accounting hedges during the reported periods. Designating an interest rate swap as an accounting hedge allows the Company to recognize gains and losses in the condensed consolidated statements of income within the same period that the hedged item affects earnings. The Company includes the gain or loss on the hedged items in the same line item as the offsetting loss or gain on the related interest rate swaps. For derivative instruments that are designated and qualify as cash flow hedges, any gains or losses related to changes in fair value are recorded in accumulated other comprehensive loss, net of tax. The fair value of interest rate swaps with a positive fair value are reported in accrued income and other assets in the condensed consolidated balance sheets, while interest rate swaps with a negative fair value are reported in accrued expenses and other liabilities in the condensed consolidated balance sheets. The IRLCs and forward contracts are not designated as accounting hedges and are recorded at fair value with changes in fair value reflected in noninterest income on the condensed consolidated statements of income. The fair value of derivative instruments with a positive fair value are reported in accrued income and other assets in the condensed consolidated balance sheets, while derivative instruments with a negative fair value are reported in accrued expenses and other liabilities in the condensed consolidated balance sheets. The following table presents amounts that were recorded on the condensed consolidated balance sheets related to cumulative basis adjustments for interest rate swap derivatives designated as fair value accounting hedges as of June 30, 2023 and December 31, 2022. (in thousands) Carrying amount of the hedged asset Cumulative amount of fair value hedging adjustment included in the carrying amount of the hedged assets Line item in the condensed consolidated balance sheets in which the hedged item is included June 30, 2023 December 31, 2022 June 30, 2023 December 31, 2022 Securities available-for-sale 1 $ 68,935 $ 68,963 $ ( 1,914 ) $ ( 2,088 ) 1 These amounts include the amortized cost basis of closed portfolios used to designate hedging relationships in which the hedged item is the last layer expected to be remaining at the end of the hedging relationship. The designated hedged items were $ 50.0 million at both June 30, 2023 and December 31, 2022. The following tables present a summary of interest rate swap derivatives designated as fair value accounting hedges of fixed-rate receivables used in the Company’s asset/liability management activities at June 30, 2023 and December 31, 2022, identified by the underlying interest rate-sensitive instruments. (dollars in thousands) June 30, 2023 Notional Value Weighted- Average Remaining Maturity (years) Weighted-Average Ratio Instruments Associated With Fair Value Receive Pay Securities available-for-sale $ 50,000 1.3 $ 1,919 3-month LIBOR 2.33 % Total at June 30, 2023 $ 50,000 1.3 $ 1,919 3-month LIBOR 2.33 % 43 (dollars in thousands) December 31, 2022 Notional Value Weighted- Average Remaining Maturity (years) Weighted-Average Ratio Instruments Associated With Fair Value Receive Pay Securities available-for-sale $ 50,000 1.8 $ 2,093 3-month LIBOR 2.33 % Total swap portfolio at December 31, 2022 $ 50,000 1.8 $ 2,093 3-month LIBOR 2.33 % In March 2021, the Company terminated the last layer of interest rate swaps associated with available-for-sale agency mortgage-backed securities - residential, which resulted in swap termination payments to counterparties totaling $ 1.9 million. The corresponding fair value hedging adjustment was allocated pro-rata to the underlying hedged securities and is being amortized over the remaining lives of the designated securities. Amortization expense totaling less than $ 0.1 million and $0.1 million was recognized as a reduction to interest income on securities for the three and six months ended June 30, 2023 and 2022, respectively. In June 2020, the Company terminated all fair value hedging relationships associated with loans, which resulted in swap termination payments to counterparties totaling $ 46.1 million. The corresponding loan fair value hedging adjustment as of the date of termination is being amortized over the remaining lives of the designated loans, which have a weighted average term to maturity of 10.8 years as of June 30, 2023. Amortization expense totaling $ 1.0 million and $ 2.0 million for the three and six months ended June 30, 2023, respectively, and $ 1.1 million and $ 2.1 million for the three and six months ended June 30 2022 respectively, related to these previously terminated fair value hedges was recognized as a reduction to interest income on loans. The following tables present a summary of interest rate swap derivatives designated as cash flow accounting hedges of variable-rate liabilities used in the Company’s asset/liability management activities at June 30, 2023 and December 31, 2022. (dollars in thousands) June 30, 2023 Notional Value Weighted- Average Remaining Maturity (years) Weighted-Average Ratio Cash Flow Hedges Fair Value Receive Pay Interest rate swaps $ 110,000 3.6 $ 5,395 3-month LIBOR 2.88 % Interest rate swaps 60,000 0.1 197 1-month LIBOR 2.88 % Interest rate swaps 40,000 0.9 884 Fed Funds Effective 2.78 % (dollars in thousands) December 31, 2022 Notional Value Weighted- Average Remaining Maturity (years) Weighted-Average Ratio Cash Flow Hedges Fair Value Receive Pay Interest rate swaps $ 110,000 4.1 $ 4,787 3-month LIBOR 2.88 % Interest rate swaps 60,000 0.6 735 1-month LIBOR 2.88 % Interest rate swaps 40,000 1.4 1,030 Fed Funds Effective 2.78 % These derivative financial instruments were entered into for the purpose of managing the interest rate risk of certain assets and liabilities. The Company received $ 8.3 million and $ 7.7 million of cash collateral from counterparties as security for their obligations related to these swap transactions at June 30, 2023 and December 31, 2022. The Company had no pledged cash collateral as of June 30, 2023 and December 31, 2022 to counterparties on interest rate swap agreements as security for its obligations related to these agreements. Collateral posted and received is dependent on the market valuation of the underlying hedges. 44 The following table presents the notional amount and fair value of interest rate swaps, IRLCs and forward contracts utilized by the Company at June 30, 2023 and December 31, 2022. June 30, 2023 December 31, 2022 (in thousands) Notional Amount Fair Value Notional Amount Fair Value Asset Derivatives Derivatives designated as hedging instruments Interest rate swaps associated with securities available-for-sale $ 50,000 $ 1,919 $ 50,000 $ 2,093 Interest rate swaps associated with liabilities 210,000 6,476 210,000 6,552 Derivatives not designated as hedging instruments IRLCs — — 14,862 133 Forward contracts — — 17,000 97 Total contracts $ 260,000 $ 8,395 $ 291,862 $ 8,875 The fair value of interest rate swaps was estimated using a discounted cash flow method that incorporates current market interest rates as of the balance sheet date. Fair values of IRLCs and forward contracts were estimated using changes in mortgage interest rates from the date the Company entered into the IRLC and the balance sheet date. The following table presents the effects of the Company’s cash flow hedge relationships on the condensed consolidated statements of comprehensive income during the three and six months ended June 30, 2023 and 2022. Amount of Gain Recognized in Other Comprehensive Loss in The Three Months Ended Amount of (Loss) Gain Recognized in Other Comprehensive Income (Loss) in The Six Months Ended (in thousands) June 30, 2023 June 30, 2022 June 30, 2023 June 30, 2022 Interest rate swap agreements $ 2,094 $ 4,944 $ ( 76 ) $ 14,278 The following table summarizes the periodic changes in the fair value of derivatives not designated as hedging instruments on the condensed consolidated statements of income for the three and six months ended June 30, 2023 and 2022. Amount of Gain / (Loss) Recognized in the Three Months Ended Amount of Gain / (Loss) Recognized in the Six Months Ended (in thousands) June 30, 2023 June 30, 2022 June 30, 2023 June 30, 2022 Asset Derivatives Derivatives not designated as hedging instruments IRLCs $ — $ 550 $ — $ — Forward contracts — — — 43 Liability Derivatives Derivatives not designated as hedging instruments IRLCs $ — $ — $ ( 133 ) $ ( 252 ) Forward contracts — ( 1,059 ) ( 119 ) — 45 The following table presents the effects of the Company’s interest rate swap agreements on the condensed consolidated statements of operations during the three and six months ended June 30, 2023 and 2022. (in thousands) Line item in the condensed consolidated statements of operations Three Months Ended Six Months Ended June 30, 2023 June 30, 2022 June 30, 2023 June 30, 2022 Interest income Securities - taxable $ — $ — $ — $ — Securities - non-taxable 354 ( 174 ) 648 ( 435 ) Total interest income 354 ( 174 ) 648 ( 435 ) Interest expense Deposits ( 539 ) 509 ( 957 ) 1,179 Other borrowed funds ( 595 ) 491 ( 1,117 ) 1,187 Total interest expense ( 1,134 ) 1,000 ( 2,074 ) 2,366 Net interest income $ 1,488 $ ( 1,174 ) $ 2,722 $ ( 2,801 ) Note 14: Accumulated Other Comprehensive Loss The components of accumulated other comprehensive loss, included in shareholders' equity, for the six months ended June 30, 2023 and 2022, respectively, are presented in the table below. (in thousands) Unrealized Losses On Debt Securities Unrealized Losses On Debt Securities Transferred From Available-For-Sale To Held-To-Maturity Cash Flow Hedges Total Balance, January 1, 2023 $ ( 35,831 ) $ ( 3,519 ) $ 5,714 $ ( 33,636 ) Other comprehensive income (loss) before reclassifications from accumulated other comprehensive loss before tax 302 — ( 76 ) 226 Reclassifications from accumulated other comprehensive loss to earnings before tax — 364 — 364 Other comprehensive gain (loss) before tax 302 364 ( 76 ) 590 Income tax provision (benefit) 63 95 ( 18 ) 140 Other comprehensive income (loss) - net of tax 239 269 ( 58 ) 450 Balance, June 30, 2023 $ ( 35,592 ) $ ( 3,250 ) $ 5,656 $ ( 33,186 ) Balance, January 1, 2022 $ ( 2,555 ) $ — $ ( 8,484 ) $ ( 11,039 ) Other comprehensive (loss) income before reclassifications from accumulated other comprehensive loss before tax ( 33,276 ) ( 5,402 ) 14,278 ( 24,400 ) Reclassifications from accumulated other comprehensive loss to earnings before tax — 312 — 312 Other comprehensive (loss) gain before tax ( 33,276 ) ( 5,090 ) 14,278 ( 24,088 ) Income tax (benefit) provision ( 8,263 ) ( 1,272 ) 5,158 ( 4,377 ) Other comprehensive (loss) income - net of tax ( 25,013 ) ( 3,818 ) 9,120 ( 19,711 ) Balance, June 30, 2022 $ ( 27,568 ) $ ( 3,818 ) $ 636 $ ( 30,750 ) 46 The components of accumulated other comprehensive loss, included in stockholders' equity, for the three months ended June 30, 2023 and 2022, respectively, are presented in the table below. (in thousands) Unrealized Losses On Debt Securities Unrealized Losses On Debt Securities Transferred From Available-For-Sale To Held-To-Maturity Cash Flow Hedges Total Balance, April 1, 2023 $ ( 31,889 ) $ ( 3,407 ) $ 4,043 $ ( 31,253 ) Other comprehensive (loss) income before reclassifications from accumulated other comprehensive loss before tax ( 4,810 ) — 2,094 ( 2,716 ) Reclassifications from accumulated other comprehensive loss to earnings before tax — 206 — 206 Other comprehensive (loss) gain before tax ( 4,810 ) 206 2,094 ( 2,510 ) Income tax (benefit) provision ( 1,107 ) 49 481 ( 577 ) Other comprehensive (loss) income - net of tax ( 3,703 ) 157 1,613 ( 1,933 ) Balance, June 30, 2023 $ ( 35,592 ) $ ( 3,250 ) $ 5,656 $ ( 33,186 ) Balance, April 1, 2022 $ ( 16,359 ) $ ( 4,034 ) $ ( 2,468 ) $ ( 22,861 ) Other comprehensive (loss) income before reclassifications from accumulated other comprehensive loss before tax ( 15,395 ) — 4,944 ( 10,451 ) Reclassifications from accumulated other comprehensive loss to earnings before tax — 193 — 193 Other comprehensive (loss) gain before tax ( 15,395 ) 193 4,944 ( 10,258 ) Income tax (benefit) provision ( 4,186 ) ( 23 ) 1,840 ( 2,369 ) Other comprehensive (loss) income - net of tax ( 11,209 ) 216 3,104 ( 7,889 ) Balance, June 30, 2022 $ ( 27,568 ) $ ( 3,818 ) $ 636 $ ( 30,750 ) Details About Accumulated Other Comprehensive Loss Components Amounts Reclassified from Accumulated Other Comprehensive Loss for the Amounts Reclassified from Accumulated Other Comprehensive Income (Loss) for the Affected Line Item in the Statements of Operations Three Months Ended June 30, 2023 Three Months Ended June 30, 2022 Six Months Ended June 30, 2023 Six Months Ended June 30, 2022 Reclassifications from accumulated other comprehensive loss to earnings before tax $ ( 206 ) ( 193 ) $ ( 364 ) $ ( 312 ) Interest income Total amount reclassified before tax ( 206 ) ( 193 ) ( 364 ) ( 312 ) Income (loss) before income taxes Tax benefit ( 49 ) ( 44 ) ( 95 ) ( 71 ) Income tax (benefit) provision Total reclassifications from accumulated other comprehensive loss $ ( 157 ) $ ( 149 ) $ ( 269 ) $ ( 241 ) Net income (loss) 47 Note 15: Recent Accounting Pronouncements ASU 2016-13 - Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (June 2016) The main objective of this update is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. To achieve this objective, the amendments in this update replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The amendments affect entities holding financial assets that are not accounted for at fair value through net income. The amendments affect loans, debt securities, off-balance-sheet credit exposures, and any other financial assets not excluded from the scope that have the contractual right to receive cash. The amendments in this update affect an entity to varying degrees depending on the credit quality of the assets held by the entity, their duration, and how the entity applies current GAAP. There is diversity in practice in applying the incurred loss methodology, which means that before transition some entities may be more aligned under current GAAP than others to the new measure of expected credit losses. The following describes the main provisions of this update. • Assets Measured at Amortized Cost: The amendments in this update require a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. The statements of income reflect the measurement of credit losses for newly recognized financial assets, as well as the expected increase or decrease of credit losses that have taken place during the period. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. An entity must use judgment in determining the relevant information and estimation methods that are appropriate in its circumstances. • Available-for-Sale Debt Securities: Credit losses relating to available-for-sale debt securities should be recorded through an allowance for credit losses. Available-for-sale accounting recognizes that value may be realized either through collection of contractual cash flows or through sale of the security. Therefore, the amendments limit the amount of the allowance for credit losses to the amount by which fair value is below amortized cost because the classification as available-for-sale is premised on an investment strategy that recognizes that the investment could be sold at fair value if cash collection would result in the realization of an amount less than fair value. • In May 2019, the FASB issued ASU 2019-05 - Financial Instruments - Credit Losses (Topic 326) - Targeted Transition Relief . This ASU allows an option for preparers to irrevocably elect the fair value option, on an instrument-by-instrument basis, for eligible financial assets measured at amortized cost basis upon adoption of the credit losses standard. This increases the comparability of financial statement information provided by institutions that otherwise would have reported similar financial instruments using different measurement methodologies, potentially decreasing costs for financial statement preparers while providing more useful information to investors and other users. The Company formed a current expected credit losses (“CECL”) working group that discussed implementation matters related to the completeness and accuracy of historical data, model development and corporate governance documentation. The new allowance model estimates credit losses over the expected life of the portfolio and includes a qualitative framework to account for drivers of losses that the quantitative model does not capture. The CECL working group discussed results from parallel model runs for each portfolio segment, assumptions related to unfunded commitments and economic forecast factors. Model validation was completed by an independent third party in the fourth quarter 2022. 48 The ASU allows for several different methods of calculating the Allowance for Credit Losses (“ACL”) and based on its analysis of observable data, the Company determined the discounted cash flow method to be the most appropriate for all its loan segments. The Company adopted this guidance on January 1, 2023 and recorded a $ 3.0 million pre-tax one-time cumulative effect adjustment to the ACL in retained earnings on the consolidated balance sheet as of the beginning of 2023, as is required in the guidance. In addition, the Company recorded a one-time $ 2.5 million pre-tax cumulative effect adjustment to the allowance for unfunded commitments in retained earnings on the consolidated balance sheet. The qualitative impact of the new accounting standard is directed by many of the same factors that impacted the previous methodology for calculating the ACL, including but not limited to, quality and experience of staff, changes in the value of collateral, concentrations of credit in loan types or industries and changes to lending policies. In addition, the Company also uses reasonable and supportable forecasts. Examples of this are regression analyses of data from the Federal Open Market Committee quarterly economic projections for change in real GDP, housing price index and national unemployment. The following table presents the impact of the adoption of ASC 326 as of January 1, 2023: January 1, 2023 (dollars in thousands) Pre-ASC 326 Adoption Impact of ASC 326 Adoption As Reported Under ASC 326 Assets: Commercial loans Commercial and industrial $ 1,711 $ ( 120 ) $ 1,591 Owner-occupied commercial real estate 651 62 713 Investor commercial real estate 1,099 ( 191 ) 908 Construction 2,074 ( 435 ) 1,639 Single tenant lease financing 10,519 ( 346 ) 10,173 Public finance 1,753 ( 135 ) 1,618 Healthcare finance 2,997 1,034 4,031 Small business lending 2,168 334 2,502 Franchise finance 3,988 ( 313 ) 3,675 Total commercial loans 26,960 ( 110 ) 26,850 Consumer loans Residential mortgage 1,559 406 1,965 Home equity 69 133 202 Other consumer 3,149 2,533 5,682 Total consumer loans 4,777 3,072 7,849 Total allowance for credit losses $ 31,737 $ 2,962 $ 34,699 Liabilities: Liability for off-balance sheet credit exposures $ — $ 2,504 $ 2,504 The Company also performed an assessment to determine if an allowance for credit loss was needed for available-for-sale and held-to-maturity securities. The Company analyzed available-for-sale securities investment securities that were in an unrealized loss position as of January 1, 2023 and determined the decline in fair value for those securities was not related to credit, but rather related to changes in interest rates and general market conditions. As such, no ACL was recorded for available-for-sale securities. The Company analyzed held-to-maturity securities and recorded a $ 0.3 million one-time cumulative adjustment to the allowance in retained earnings. 49 ASU 2020-04 - Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (March 2020) and ASU 2022-06 - Deferral of sunset Date of Topic 848 In March 2020, FASB issued ASU 2020-04 to ease the potential burden in accounting for the transition away from the LIBOR on financial reporting. The ASU provides optional expedients and exceptions for applying GAAP to contract modification and hedge accounting relationships. The guidance is effective March 12, 2020 through December 31, 2024. The Company believes the adoption of this guidance will not have a material impact on the condensed consolidated financial statements. ASU 2022-02 - Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures (March 2022) In March 2022, the FASB issued ASU No. 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. This ASU eliminates the separate recognition and measurement guidance for Troubled Debt Restructurings ("TDRs") by creditors. The elimination of the TDR guidance may be adopted prospectively for loan modifications after adoption or on a modified retrospective basis, which would also apply to loans previously modified, resulting in a cumulative effect adjustment to retained earnings in the period of adoption for changes in the allowance for credit losses. The ASU requires an entity to disclose current-period gross write-offs by year of origination for financing receivables within the scope of Subtopic 326-20. This guidance is effective on January 1, 2023, with early adoption permitted. Using a prospective approach, the Company adopted this guidance on January 1, 2023 and it did not have a material impact on the condensed consolidated financial statements.