What changed in this filing

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Item 7. Management’s Discussion and Analysis

2024-03-13 compared with 2023-03-14 · 349 added, 200 removed, 449 unchanged (55% of the section changed)

7 unchanged sentences

Costs Associated with Exit Activities

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

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

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

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

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

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

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

The Company’s commercial construction and land development business was not affected by the decision and remains an important part of the Company’s lending strategy.

The Company incurred total pre-tax expense of $3.1 million in 2023 associated with exiting the consumer mortgage origination business.

Results of Operations

During the twelve months ended December 31, 2023, net income was $8.4 million, or $0.95 per diluted share, compared to net income of $35.5 million, or $3.70 per diluted share, for the twelve months ended December 31, 2022 and net income of $48.1 million, or $4.82 per diluted share, for the twelve months ended December 31, 2021.

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

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

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

During the twelve months ended December 31, 2022, return on average shareholders’ equity was 9.53%, compared to 13.44% for the twelve months ended December 31, 2021.

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

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

The $27.1 million decrease in net income for the twelve months ended December 31, 2023 compared to the twelve months ended December 31, 2022 was due primarily to a decrease of $22.2 million, or 22.9%, in net interest income, an increase of $11.7 million, or 234.6%, in provision for credit losses and an increase of $6.2 million, or 8.4%, in noninterest expense, partially offset by a decrease of $8.0 million, or 176.3%, in income tax expense and an increase of $4.9 million, or 22.9%, in noninterest income.

The Company recognized $3.1 million of mortgage operations and exit costs during the first quarter 2023, which contributed to the increase in noninterest expense compared to the twelve months ended December 31, 2022.

The Company also recognized only $0.1 million of mortgage banking revenue during the twelve months ended December 31, 2023, down from $5.5 million during the twelve months ended December 31, 2022, as it immediately began winding down its existing pipeline following the decision to exit the business.

Additionally, during the twelve months ended December 31, 2023, the Company recognized a $6.9 million partial charge-off related to a commercial and industrial participation loan with a balance of $9.8 million.

This action contributed to the increase in the provision for credit losses as compared to the twelve months ended December 31, 2022.

The Company received payment for the remaining balance of the participation loan during 2023.

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

During the twelve months ended December 31, 2023, return on average assets (“ROAA”), return on average equity (“ROAE”) and return on average tangible common equity (“ROATCE”) were 0.17%, 2.35% and 2.38%.

Excluding the impact of exiting consumer mortgage and the partial charge-off, adjusted net income for the twelve months ended December 31, 2023,

was $16.2 million, and adjusted diluted earnings per share was $1.83.

Additionally, for the twelve months ended December 31, 2023, adjusted ROAA, adjusted ROAE and adjusted ROATCE were 0.33%, 4.54% and 4.60%, respectively.

During the twelve months ended December 31, 2022, ROAA, ROAE and ROATCE were 0.85%, 9.53% and 9.65%, respectively.

The Company recognized a nonrecurring consulting fee associated with a special project of $0.9 million, paid a $0.5 million discretionary inflation bonus to certain employees, recognized accelerated equity compensation expense of $0.3 million related to several retirements, incurred acquisition-related expenses of $0.3 million and recognized a $0.1 million write-down of software.

Excluding these items, adjusted net income for the twelve months ended December 31, 2022 was $37.2 million and adjusted diluted earnings per share was $3.86.

Additionally, for the twelve months ended December 31, 2022, adjusted ROAA, adjusted ROAE and adjusted ROATCE were 0.90%, 9.98% and 10.10%, respectively.

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

Consolidated Average Balance Sheets and Net Interest Income Analyses

For the periods presented, the following tables provide the average balances of interest-earning assets and interest-bearing liabilities and the related yields and cost of funds.

The tables do not reflect any effect of income taxes.

For the periods presented, the following table provides the average balances of interest-earning assets and interest-bearing liabilities and the related yields and cost of funds.

The table does not reflect any effect of income taxes.

Balances are based on the average of daily balances.

9 unchanged sentences

Total interest-earning assets 4,809,840 239,442 4.98 % 4,033,542 156,908 3.89 % 4,094,935 133,883 3.27 %

Allowance for loan losses (29,143) (29,068) (24,660)

Allowance for credit losses (36,038) (29,143) (29,068)

Noninterest earning-assets 194,712 166,127 140,059

43 unchanged sentences

Total 14,433 90,290 104,723 350 12,138 12,488

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Increase /(decrease) in net interest income $ 17,004 $ (39,193) $ (22,189) $ 4,793 $ 5,744 $ 10,537

Net interest income for the twelve months ended December 31, 2023 was $74.9 million, a decrease of $22.2 million, or 22.9%, compared to $97.1 million for the twelve months ended December 31, 2022.

The decrease in net interest income was the result of a $104.7 million, or 175.1%, increase in total interest expense to $164.5 million for the twelve months ended December 31, 2023 compared to $59.8 million for the twelve months ended December 31, 2022.

The increase in total interest expense was partially offset by an $82.5 million, or 52.6%, increase in total interest income to $239.4 million for the twelve months ended December 31, 2023 compared to $156.9 million for the twelve months ended December 31, 2022.

The growth in total interest income was due primarily to an increase in interest earned on loans resulting from an increase of 75 bps in the yield earned on loans, as well as an increase of $543.6 million, or 17.3%, in the average balance of loans, including loans held-for-sale.

Furthermore, the yield on other earning assets increased 390 bps and the average balance of other earning assets increased $222.0 million, or 79.8%.

Additionally, the average balance of securities increased $10.7 million, or 1.8%, and the yield earned on the securities portfolio increased 129 bps.

The increase in the yields earned on loans, other earning assets and securities was due to the continued rise in interest rates during the fourth quarter 2022 and into 2023.

As a result of the higher interest rate environment, the yield on funded portfolio originations was 8.41% for the twelve months ended December 31, 2023, an increase of 302 bps compared to the twelve months ended December 31, 2022.

The increase in total interest expense was due primarily to increases of $65.7 million, or 330.5%, in interest expense associated with certificates and brokered deposits, $31.4 million, or 169.5%, in interest expense associated with money market accounts, $4.1 million, or 200.9%, in interest expense associated with interest-bearing demand deposits and $3.2 million, or 17.8%, in interest expense associated with other borrowed funds.

The increase in interest expense related to certificates and brokered deposits was driven by an increase of 247 bps in the cost of these deposits, as well as an increase of $893.0 million, or 77.9%, in the average balance of these deposits.

The increase in the average balance of these deposits was driven by strong consumer and small business demand for certificates of deposits in 2023, as well as the funding of brokered deposits during the fourth quarter 2022 and earlier in 2023 to supplement on-balance sheet liquidity.

The increase in interest expense related to money market accounts was driven primarily by an increase of 261 bps in the cost of these deposits, partially offset by a decrease of $146.6 million, or 10.3%, in the average balance of these deposits.

The increase in interest expense related to interest-bearing demand deposits was due primarily to a 107 bp increase in the cost of these deposits, as well as an increase of $32.3 million, or 9.7%, in the average balance of these deposits.

The increase in interest expense related to other borrowed funds was due primarily to additional long-term FHLB advances in the second half of 2022 at rates lower than market deposit costs, as the cost of the borrowed funds increased only 12 bps while the average balance increased 12.7%.

The increase in the overall cost of deposits was due primarily to the continued rise in interest rates during the fourth quarter 2022 and into 2023.

However, as the Federal Reserve’s last rate increase was in July 2023, the pace of increase in deposit costs during the third and fourth quarters of 2023 was considerably slower than that experienced during 2022 and the first half of 2023.

Net interest margin (“NIM”) was 1.56% for the twelve months ended December 31, 2023 compared to 2.41% for the twelve months ended December 31, 2022.

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

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

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

On a fully-taxable equivalent (“FTE”) basis, NIM was 1.67% for the twelve months ended December 31, 2023 compared to 2.54% for the twelve months ended December 31, 2022, a decrease of 87 bps.

The decrease in NIM and FTE NIM compared to the twelve months ended December 31, 2022 reflects the increase in the cost of interest-bearing liabilities of 206 bps, partially offset by the increase in earning asset yields of 109 bps.

Noninterest Income

7 unchanged sentences

Gain on sale of loans 20,526 11,372 11,598

Gain on sale of securities — — 139

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

1 unchanged sentence

Total noninterest income $ 26,125 $ 21,257 $ 32,844

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

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

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

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

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

During the twelve months ended December 31, 2023, noninterest income totaled $26.1 million, representing an increase of $4.9 million, or 22.9%, compared to $21.3 million for the twelve months ended December 31, 2022.

The increase in noninterest income was driven primarily by increases in gain on sale of loans and net loan servicing revenue, partially offset by a decrease in mortgage banking activities.

Due to growth in the Company’s small business lending line of business, the amount of SBA 7(a) loan sales increased 110.4% during 2023 to $281.1 million from sales of $133.6 million during 2022.

As a result, gain on sale of loans increased $9.2 million, or 80.5%, in 2023 compared to the prior year.

The increase in net loan servicing revenue was due to growth in the balance of the Company’s SBA 7(a) servicing portfolio, as well as slower prepayment speeds in 2023.

The decrease in mortgage banking activities was due to the Company’s exit from the mortgage business in the first quarter 2023.

Noninterest Expense

9 unchanged sentences

Deposit insurance premium 3,880 1,152 1,213

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

Other 5,857 5,076 4,223

1 unchanged sentence

Noninterest expense for the twelve months ended December 31, 2023 was $79.4 million, compared to $73.3 million for the twelve months ended December 31, 2022.

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

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

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

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

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

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

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

The increase of $6.2 million, or 8.4%, compared to the twelve months ended December 31, 2022 was due primarily to increases of $3.8 million in salaries and employee benefits, $2.8 million in deposit insurance premium and $1.3 million in loan expenses, partially offset by decreases of $1.7 million in consulting and professional fees and $1.0 million in marketing, advertising and promotion.

The increase in salaries and employee benefits was due primarily to mortgage exit costs, as well as an increase in headcount and higher incentive compensation in small business and construction lending.

The increase in deposit insurance premium was due mainly to year-over-year asset growth, as well as the composition of loans and deposits.

The increase in loan expenses was due primarily to mortgage exit costs and accrued contract expenses, as well as higher third-party loan servicing fees and other miscellaneous lending costs.

The decrease in consulting and professional fees was due primarily to consulting fees related to a special project that occurred in the first quarter 2022, as well as lower legal fees in 2023.

The decrease in marketing, advertising and promotion expense was due primarily to cost savings from the Company’s exit from the mortgage business in the first quarter 2023.

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

Twelve Months Ended December 31,

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Other differences (150) 80 304

Income tax expense $ 4,559 $ 8,458 $ 4,445

We recognized income tax expense of $4.6 million in 2022, resulting in an effective tax rate of 11.4%, compared to $8.5 million and an effective tax rate of 15.0% in 2021.

Income tax (benefit) provision $ (3,477) $ 4,559 $ 8,458

We recognized an income tax benefit of $3.5 million in 2023, compared to an income tax provision of $4.6 million and an effective tax rate of 11.4% in 2022.

Our federal statutory tax rate was 21% in 2023 and 2022.

In both 2022 and 2021, the variance from the federal statutory rate was due primarily to tax-exempt income, partially offset by state income taxes.

In 2023 and 2022, the variance from the federal statutory rate was due primarily to tax-exempt income.

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

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

Financial Condition

12 unchanged sentences

Total assets increased $624.5 million, or 13.7%, to $5.2 billion as of December 31, 2023 compared to $4.5 billion as of December 31, 2022.

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

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

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

Balance sheet growth was driven primarily by an increase in deposits of $625.7 million, or 18.2%.

A portion of the increase in deposits was used to fund loan growth as loan balances increased $340.8 million, or 9.7%.

However, as deposit growth outpaced loan growth, balance sheet liquidity increased as the combined balance of cash and securities increased $271.8 million, or 32.5%, and the percentage of loans to deposits declined to 94.4% as of December 31, 2023, compared to 101.7% as of December 31, 2022.

As of December 31, 2023, total shareholders’ equity was $362.8 million, a decrease of $2.2 million, or 0.6%, compared to December 31, 2022.

The decrease in shareholders’ equity was due primarily to stock repurchase activity and the day 1 CECL adjustment, partially offset by net income earned during the period.

Tangible common equity totaled $358.1 million as of December 31, 2023, representing a decrease of $2.2 million, or 0.6%, compared to December 31, 2022.

The ratio of total shareholders’ equity to total assets decreased to 7.02% as of December 31, 2023 from 8.03% as of December 31, 2022 and the ratio of tangible common equity to tangible assets decreased to 6.94% as of December 31, 2023 from 7.94% as of December 31, 2022.

The decrease in both shareholders’ equity to total assets and tangible common equity to tangible assets is due primarily to the stock repurchase activity and day 1 CECL adjustment mentioned above, as well as an increase in total assets, partially offset by net income earned during the period.

Book value per common share increased 4.2% to $41.97 as of December 31, 2023 from $40.26 as of December 31, 2022.

Tangible book value per share increased 4.2% to $41.43 as of December 31, 2023 from $39.74 as of December 31, 2022.

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

The increase in both book value per common share and tangible book value per share reflects the effect of stock repurchase activity throughout the year, partially offset by the declines in total shareholders’ equity and tangible common equity.

22 unchanged sentences

Total loans 3,840,220 100.0 % 3,499,401 100.0 %

Allowance for loan losses (31,737) (27,841)

Allowance for credit losses - loans (38,774) (31,737)

Net loans $ 3,801,446 $ 3,467,664

3 unchanged sentences

Total consumer loan balances were $796.9 million as of December 31, 2023, an increase of $63.7 million, or 8.7%, compared to December 31, 2022.

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

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

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

Compared to December 31, 2022, the increase in commercial loan balances was driven by growth in the franchise finance, small business lending, construction and investor commercial real estate portfolios.

The increase was partially offset by a decrease in the fixed-rate public finance portfolio, as well as continued runoff in the healthcare finance portfolio.

During 2023, the Company continued to execute on its strategy of redeploying cash flows from longer-duration fixed rate portfolios to variable rate and higher yielding loan types in order to improve net interest margin and mitigate long-term interest rate risk.

The increase in consumer loans was due to higher balances in the recreational vehicles and trailers loan portfolios, in addition to funded residential mortgages and draws on construction/perm loans that were in the pipeline prior to exiting the business.

Loan Maturities and Rate Sensitivity

The following table shows the contractual maturity distribution intervals (without regard to repayment schedules) of the outstanding loans in our portfolio as of December 31, 2022.

The following table shows the contractual maturity distribution intervals (without regard to repayment or repricing schedules) of the outstanding loans in our portfolio as of December 31, 2023.

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

35 unchanged sentences

Owner-occupied commercial real estate — 1,570

Single tenant lease financing — 1,100

Small business lending 6,824 4,764

Franchise finance 303 —

Total commercial loans 7,127 6,385

1 unchanged sentence

Residential mortgage 1,911 1,048

Home equity — 14

Other consumer 86 17

8 unchanged sentences

Other real estate owned

Single tenant lease financing — 1,188

Residential mortgage 375 —

Total other real estate owned 375 —

3 unchanged sentences

Total nonperforming assets to total assets 0.20 % 0.17 %

Allowance for loan losses to total loans 0.91 % 0.96 %

Allowance for credit losses - loans to total loans 1.01 % 0.91 %

Nonaccrual loans to total loans 0.24 % 0.21 %

Allowance for loan losses to nonaccrual loans 426.0 % 376.2 %

A loan is designated as impaired, in accordance with the impairment accounting guidance when, based on current information or events, it is probable that we will be unable to collect all amounts due (principal and interest) according to the contractual terms of the loan agreement.

Payments with delays generally not exceeding 90 days outstanding are not considered impaired.

Certain nonaccrual and substantially all delinquent loans more than 90 days past due may be considered to be impaired.

Allowance for credit losses - loans to nonaccrual loans 425.0 % 426.0 %

A loan is individually evaluated, when, based on current information or events, it is probable that we will be unable to collect all amounts due (principal and interest) according to the contractual terms of the loan agreement.

Payments with delays generally not exceeding 90 days outstanding are not individually evaluated.

Certain nonaccrual and substantially all delinquent loans more than 90 days past due may be individually evaluated.

Generally, loans are placed on nonaccrual status at 90 days past due and accrued interest is reversed against earnings, unless the loan is well secured and in the process of collection.

The accrual of interest on impaired and nonaccrual loans is discontinued when, in management’s opinion, the borrower may be unable to meet payments as they become due.

Impaired loans include nonperforming loans and also include loans modified in troubled debt restructurings (“TDRs”) where concessions have been granted to borrowers experiencing financial difficulties.

The accrual of interest on individually evaluated loans is discontinued when, in management’s opinion, the borrower may be unable to meet payments as they become due.

Individually evaluated loans include nonperforming loans and also include loans where concessions have been granted to borrowers experiencing financial difficulties.

These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance, or other actions intended to maximize collection.

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

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

repossessed assets.

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

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

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

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

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

Nonperforming assets include nonperforming loans, other real estate owned (“OREO”) and other nonperforming assets, which consist of repossessed assets.

Nonperforming assets could also include individual securities for which a credit loss has been recognized;

however, we did not own any securities classified as such during the two-year period ended December 31, 2023.

Total nonperforming loans increased $2.4 million, or 32.3%, to $10.0 million as of December 31, 2023 compared to $7.5 million as of December 31, 2022, due primarily to increases in nonperforming loans related to the small business lending and residential mortgage portfolios, partially offset by an owner-occupied commercial real estate loan that was returned to accrual status during the year.

Total nonperforming assets increased $2.8 million, or 36.8%, to $10.4 million as of December 31, 2023, compared to $7.6 million as of December 31, 2022, due primarily to the increases of nonperforming loans related to small business lending and residential mortgage portfolios mentioned above, as well as increases in other real estate owned (“OREO”) and accruing loans past due 90 days or more, partially offset by the owner-occupied commercial real estate loan mentioned above.

As of December 31, 2023, the Company had two residential mortgage properties in OREO with a carrying value of $0.4 million.

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

Troubled Debt Restructurings

With the adoption ASU 2022-02, effective January 1, 2023, troubled debt restructurings (“TDRs”) accounting was eliminated.

Total TDRs as of December 31, 2022 were $5.5 million.

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

The following table provides a summary of troubled debt restructurings.

(amounts in thousands) 2023 2022

2 unchanged sentences

Total troubled debt restructurings $ — $ 5,522

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

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

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

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

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

Non-TDR Loan Modifications due to COVID-19

The “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus” was issued by our banking regulators on March 22, 2020.

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

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

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

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

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

Small Business Administration Paycheck Protection Program

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

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

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

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

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

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

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

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

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

These loans may be forgiven if certain conditions are satisfied and

are fully guaranteed by the SBA.

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

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

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

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

(dollars in thousands)

Number of Loans Principal Balance Net Deferred Fees

Originated 447 $ 58,336 $ 1,851

Principal repaid (71) (7,184)

Net deferred fees recognized (1,253)

Balance, December 31, 2020 376 51,152 598

Originated 281 27,377 1,125

Principal repaid (634) (75,377)

Net deferred fees recognized (1,624)

Balance, December 31, 2021 23 3,152 99

Principal repaid (23) (3,152)

Net deferred fees recognized (99)

Balance, December 31, 2022 — $ — $ —

Allowance for Loan Losses

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

Allowance for Credit Losses - Loans

The following table provides a rollforward of the allowance for credit losses for the twelve months ended December 31, 2023 and 2022.

(amounts in thousands) 2023 2022

Balance, beginning of period $ 31,737 $ 27,841

Adoption of ASU 2016-13 (CECL) 2,962 —

Balance, beginning of period 34,699 27,841

Provision charged to expense 15,454 4,977

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Commercial and industrial (7,049) —

Single tenant lease financing — (2,391)

Investor commercial real estate (591) —

Healthcare finance (605) —

Small business lending (2,586) (402)

Franchise finance (331)

Residential mortgage (140) —

Home equity — (51)

Other consumer (582) (2,358)

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Commercial and industrial 6.87 % (0.01 %)

Investor commercial real estate 0.47 % — %

Single tenant lease financing — % (0.14 %)

Healthcare finance 0.25 % — %

Small business lending 1.34 % 0.32 %

Franchise Finance 0.08 % — %

Total commercial net charge-offs (recoveries) 0.38 % (0.03 %)

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Net charge-offs to average loans 0.31 % 0.03 %

The determination of the allowance for loan losses and the related provision for loan losses are components of our significant accounting policies as discussed within Note 1 to our consolidated financial statements.

The adequacy of the allowance for loan losses and the provision are based on the review and evaluation of the loan portfolio and reflect management’s assessment of the risks and potential losses within the portfolio.

This evaluation considers historical loss experience as well as qualitative factors such as economic and business conditions, portfolio growth, concentrations of credit in the portfolio, trends in risk grades, delinquencies within the portfolio and changes in our lending policies and practices.

Management actively monitors asset quality and, when appropriate, charges off loans against the allowance for loan losses.

Although management believes it uses the best information available to make determinations with respect to the allowance for loan losses, future adjustments may be necessary if economic conditions differ substantially from those in the assumptions used to determine the size of the allowance for loan losses.

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

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

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

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

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

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

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

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

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

The determination of the allowance for credit losses (“ACL”) and the related provision for credit losses are components of our significant accounting policies as discussed within Note 1 to our consolidated financial statements.

The adequacy of the allowance for credit losses and the provision are based on the review and evaluation of the loan portfolio and reflect management’s assessment of the risks and potential losses within the portfolio.

This evaluation uses a discounted cash flow analysis based on historical loss data, reasonable and supportable forecasts and prepayment rates, as well as qualitative factors such as economic and business conditions, portfolio growth, concentrations of credit in the portfolio, trends in risk grades, delinquencies within the portfolio and changes in our lending policies and practices.

Management actively monitors asset quality and, when appropriate, charges off loans against the allowance for credit losses.

Although management believes it uses the best information available to make determinations with respect to the

allowance for credit losses, future adjustments may be necessary if economic conditions differ substantially from those in the assumptions used to determine the size of the allowance for credit losses.

The ACL was $38.8 million as of December 31, 2023, compared to an ALLL of $31.7 million as of December 31, 2022.

The increase in the ACL reflects the day one current expected credit losses (“CECL”) adjustment of $3.0 million, overall growth in the loan portfolio, changes in certain economic forecasts that impacted quantitative loss rates, adjustments to qualitative factors for certain portfolios and specific reserves placed on certain loans.

The ACL as a percentage of total loans was 1.01% as of December 31, 2023, compared to 0.91% at December 31, 2022.

The ACL as a percentage of nonperforming loans decreased to 389.2% as of December 31, 2023, compared to 421.5% as of December 31, 2022.

The provision for credit losses - loans was $15.5 million for the twelve months ended December 31, 2023 compared to $5.0 million for the twelve months ended December 31, 2022.

The increase in the provision for credit losses - loans for the twelve months ended December 31, 2023 was driven primarily by increases in net charge-offs, which included the aforementioned partial charge-off of a commercial and industrial participation loan and increased charge-offs in small business lending.

Also impacting the increase in the provision for credit losses - loans were additional specific reserves related to small business lending, partially offset by the positive impact of economic forecasts on certain portfolios.

Investment Securities Portfolio

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Securities that we intend to hold until maturity are classified as “held-to-maturity” securities, and all other investment securities are classified as “available-for-sale.” The carrying values of available-for-sale investment securities are adjusted for unrealized gains or losses as a valuation allowance and any gain or loss is reported on an after-tax basis as a component of other comprehensive income (loss).

We periodically evaluate each security in an unrealized loss position to determine if the impairment is temporary or other-than-temporary.

We periodically evaluate each security in an unrealized loss position to determine if there is an impairment.

As of December 31, 2023, the unrealized losses in our investment securities portfolio were due primarily to interest rate changes.

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Corporate securities 40,747 47,551

Total securities held-to-maturity 189,168 59,565

Total held-to-maturity, net 227,153 189,168

Total securities $ 740,468 $ 625,351

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Corporate securities 37,369 44,358

Total securities held-to-maturity 168,483 61,468

Total held-to-maturity 207,572 168,483

Total securities $ 682,427 $ 558,867

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

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

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

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

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

The approximate fair value of investment securities available-for-sale increased $84.5 million, or 21.6%, to $474.9 million as of December 31, 2023 compared to $390.4 million as of December 31, 2022.

The increase was due primarily to increases of $61.4 million in U.S.

Government-sponsored agencies securities, $23.0 million in agency mortgage-backed securities - commercial and $10.3 million in private label mortgage-backed securities - residential, partially offset by decreases of $8.4 million in agency mortgage-backed securities - residential and $6.1 million in corporate securities.

During 2023, the Company’s strategy for purchasing available-for-sale securities included a focus on variable rate agency and high-quality short duration private label mortgage-backed securities in order to minimize price risk regardless of the interest rate environment.

As of December 31, 2023, the Company had securities with an amortized cost basis of $207.6 million designated as held-to-maturity compared to $168.5 million as of December 31, 2022.

The increase was due primarily to CRA-eligible purchases of agency mortgage-backed securities - residential.

Investment Maturities

The following table summarizes the contractual maturity schedule of our investment securities at their amortized cost and their weighted average yields at December 31, 2022.

The following table summarizes the contractual maturity schedule (without regard to repricing schedules) of our investment securities at their amortized cost and their weighted average yields at December 31, 2023.

1 year or less More than 1 year

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Accrued Income and Other Assets

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

Accrued income and other assets increased $6.2 million, or 13.8%, to $51.1 million at December 31, 2023 compared to $44.9 million at December 31, 2022.

The increase was due primarily to increases of $3.0 million in deferred tax assets and $3.4 million in fund investments.

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

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Total deposits increased $625.7 million, or 18.2%, to $4.1 billion as of December 31, 2023 compared to $3.4 billion as of December 31, 2022.

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

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

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

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

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

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

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

This increase was due primarily to increases of $730.7 million, or 83.6%, in certificates of deposits, $67.4 million, or 20.1%, in interest-bearing demand deposits, $60.8 million, or 446.8%, in BaaS - brokered deposits and $12.5 million, 2.2%, in brokered deposits, partially offset by decreases of $170.3 million, or 12.0%, in money market accounts, $51.9 million, or 29.6%, in noninterest-bearing deposits, and $23.5 million, or 52.3%, in savings accounts.

The increase in certificates of deposits and brokered deposits was due primarily to strong consumer and small business demand in 2023.

The increase in interest-bearing demand deposits was due primarily to growth in fintech partnership deposits.

The increase in BaaS - brokered deposits was driven by higher payments volume with one of our fintech partners.

The increase in brokered deposits was due to the issuance of long-term brokered certificates of deposits to manage long-term interest rate risk and take advantage of the inverted yield curve.

The decrease in money market accounts was due primarily to certain customer activity that can be periodically volatile, as well as certain higher-cost relationships that were exited during 2023.

The decline in noninterest-bearing deposits was due primarily to drawdowns from commercial real estate development and construction clients contributing equity to projects the Company is financing.

The decrease in savings accounts was due primarily to customer withdrawal activity.

Uninsured deposit balances represented 25% of total deposits at December 31, 2023, down from 33% at December 31, 2022.

These balances include Indiana-based municipal deposits, which are insured by the Indiana Board for Depositories, as well as larger balance accounts under contractual agreements that only allow withdrawal under certain conditions.

After subtracting these types of deposits, the adjusted uninsured deposit balance decreased to 19% as of December 31 2023, down from 24% as of December 31, 2022.

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

12 unchanged sentences

4.00% – 4.99% 1,142,207 50,088 20,328 56,031 1,268,654 67.7 %

5.00% – 5.99% 5,955 — 213 — 6,168 0.3 %

Total $ 1,332,424 $ 175,877 $ 98,749 $ 265,964 $ 1,873,014 100.0 %

22 unchanged sentences

Accrued Expenses and Other Liabilities

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

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

Accrued expenses and other liabilities decreased $0.3 million, or 2.3%, to $14.2 million at December 31, 2023, compared to $14.5 million at December 31, 2022.

The decrease was due primarily to decreases of $2.9 million in other liabilities, $1.6 million in accrued taxes, $0.2 million in accrued salary and benefits and $0.4 million in accrued property taxes, partially offset by increases of $3.7 million in the reserve for unfunded commitments as a result of the adoption of CECL in 2023, as well as new origination activity, and an increase of $0.7 million in derivative liability due to changes in fair value.

Liquidity and Capital Resources

7 unchanged sentences

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

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

At December 31, 2023, the Bank had the ability to borrow an additional $1.2 billion from the FHLB, the Federal Reserve and correspondent bank Fed Funds lines of credit.

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

4 unchanged sentences

At December 31, 2023, approved outstanding loan commitments, including unused lines of credit and standby letters of credit, amounted to $755.4 million.

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

Certificates of deposits and brokered certificates of deposits scheduled to mature in one year or less at December 31, 2023 totaled $1.3 billion.

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

2 unchanged sentences

(dollars in thousands) Note Reference Less than 1 year 1-3 years 3-5 years More than 5 years Total

Premises and equipment 5 $ 4,200 $ — $ — $ — $ 4,200

Deposits and brokered deposits without stated maturity 1

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

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

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

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

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

On December 19, 2022, the Company's Board of Directors approved a new stock repurchase program to replace the prior program.

The new program authorized the repurchase of up to $25.0 million of our outstanding common stock from time to time on the open market or in privately negotiated transactions.

The stock repurchase authorization is scheduled to expire on December 31, 2024.

Under this program, the Company repurchased 502,525 shares of common stock at an average price of $18.40 per share, during 2023 and 46,497 shares of common stock at an average price of $24.42 per share, during 2022.

As of December 31, 2023, the Company had $14.6 million of remaining authority under the program.

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

2 unchanged sentences

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

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

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

Although the Company believes these non-GAAP financial measures provide a greater understanding of its business, they should not be considered a substitute for financial measures determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP financial measures that may be presented by other companies.

Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures are included in the following table for the last three completed fiscal years ended on December 31.

Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures are included in the following tables for the last three completed fiscal years ended on December 31.

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

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1 Assuming a 21% tax rate

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

2023 2022 2021

Total Revenue- GAAP $ 101,029 $ 118,350 $ 119,400

Mortgage-related revenue (65) — —

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

Subordinated debt redemption cost — — 810

Adjusted total revenue $ 100,964 $ 118,350 $ 117,687

Noninterest income - GAAP $ 26,125 $ 21,257 $ 32,844

Mortgage-related revenue (65) — —

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

Adjusted noninterest income $ 26,060 $ 21,257 $ 30,321

Noninterest expense - GAAP $ 79,436 $ 73,273 $ 61,798

Mortgage-related costs (3,052) — —

Acquisition-related expenses — (273) (163)

IT Termination fee — (475)

Nonrecurring consulting fee — (875) —

Write-down of Software — (125) —

Discretionary inflation bonus — (531) —

Accelerated equity compensation — (289) —

Adjusted noninterest expense $ 76,384 $ 71,180 $ 61,160

Income before income taxes - GAAP $ 4,940 $ 40,100 $ 56,572

Mortgage-related revenue (65) — —

Mortgage-related costs 3,052 — —

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

Partial charge-off of C&I participation loan 6,914 — —

Acquisition-related expenses — 273 163

IT Termination fee — 475

Nonrecurring consulting fee — 875 —

Write-down of Software — 125 —

Subordinated debt redemption cost — — 810

Discretionary inflation bonus — 531 —

Accelerated equity compensation — 289 —

Adjusted income before income taxes $ 14,841 $ 42,193 $ 55,497

Income tax provision - GAAP $ (3,477) $ 4,559 $ 8,458

Mortgage-related revenue (14) — —

Mortgage-related costs 641 — —

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

Partial charge-off of C&I participation loan 1,452 — —

Acquisition-related expenses — 57 34

IT Termination fee — 100

Nonrecurring consulting fee — 184 —

Write-down of Software — 26 —

Subordinated debt redemption cost — — 170

Discretionary inflation bonus — 112 —

Accelerated equity compensation — 61 —

Adjusted income tax provision $ (1,398) $ 4,999 $ 8,232

1 Assuming a 21% tax rate

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

2023 2022 2021

Net income - GAAP $ 8,417 $ 35,541 $ 48,114

Mortgage-related revenue (51) — —

Mortgage-related costs 2,411 — —

Partial charge-off of C&I participation loan 5,462 — —

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

IT Termination fee — — 375

Acquisition-related expenses — 216 129

Nonrecurring consulting fee — 691 —

Write-down of Software — 99 —

Subordinated debt redemption cost — — 640

Discretionary inflation bonus — 419 —

Accelerated equity compensation — 228 —

Adjusted net income $ 16,239 $ 37,194 $ 47,265

Diluted average common shares outstanding 8,858,890 9,595,115 9,976,261

Diluted earnings per share - GAAP $ 0.95 $ 3.70 $ 4.82

Mortgage-related revenue (0.01) — —

Mortgage-related costs 0.27 — —

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

Effect of partial charge-off of C&I participation loan 0.62 — —

Effect of acquisition-related expenses — 0.02 0.01

Effect of IT termination fee — — 0.04

Effect of nonrecurring consulting fee — 0.07 —

Effect of write-down of software — 0.01 —

Effect of subordinated debt redemption cost — — 0.06

Effect of discretionary inflation bonus — 0.04 —

Effect of accelerated equity compensation — 0.02 —

Adjusted diluted earnings per share $ 1.83 $ 3.86 $ 4.74

Return on average assets 0.17 % 0.85 % 1.14 %

Effect of mortgage-related revenue 0.00 % 0.00 % 0.00 %

Effect of mortgage-related costs 0.05 % 0.00 % 0.00 %

Effect of gain on sale of premises and equipment 0.00 % 0.00 % (0.05 %)

Effect of partial charge-off of C&I participation loan 0.11 % 0.00 % 0.00 %

Effect of acquisition-related expenses 0.00 % 0.01 % 0.00 %

Effect of IT termination fee 0.00 % 0.00 % 0.01 %

Effect of nonrecurring consulting fee 0.00 % 0.02 % 0.00 %

Effect of write-down of software 0.00 % 0.00 % 0.00 %

Effect of subordinated debt redemption cost 0.00 % 0.00 % 0.02 %

Effect of discretionary inflation bonus 0.00 % 0.01 % 0.00 %

Effect of accelerated equity compensation 0.00 % 0.01 % 0.00 %

Adjusted return on average assets 0.33 % 0.90 % 1.12 %

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

2023 2022 2021

Return on average shareholders' equity 2.35 % 9.53 % 13.44 %

Effect of mortgage-related revenue (0.01) % 0.00 % 0.00 %

Effect of mortgage-related costs 0.67 % 0.00 % 0.00 %

Effect of gain on sale of premises and equipment 0.00 % 0.00 % (0.56 %)

Effect of partial charge-off of C&I participation loan 1.53 % 0.00 % 0.00 %

Effect of acquisition-related expenses 0.00 % 0.06 % 0.04 %

Effect of IT termination fee 0.00 % 0.00 % 0.10 %

Effect of nonrecurring consulting fee 0.00 % 0.19 % 0.00 %

Effect of write-down of software 0.00 % 0.03 % 0.00 %

Effect of subordinated debt redemption cost 0.00 % 0.00 % 0.18 %

Effect of discretionary inflation bonus 0.00 % 0.11 % 0.00 %

Effect of accelerated equity compensation 0.00 % 0.06 % 0.00 %

Adjusted return on average shareholders' equity 4.54 % 9.98 % 13.20 %

Return on average tangible common equity 2.38 % 9.65 % 13.61 %

Effect of mortgage-related revenue (0.01) % 0.00 % 0.00 %

Effect of mortgage-related costs 0.68 % 0.00 % 0.00 %

Effect of partial charge-off of C&I participation loan 1.55 % 0.00 % 0.00 %

Effect of gain on sale of premises and equipment 0.00 % 0.00 % (0.56 %)

Effect of acquisition-related expenses 0.00 % 0.06 % 0.04 %

Effect of IT termination fee 0.00 % 0.00 % 0.10 %

Effect of nonrecurring consulting fee 0.00 % 0.19 % 0.00 %

Effect of write-down of software 0.00 % 0.03 % 0.00 %

Effect of subordinated debt redemption cost 0.00 % 0.00 % 0.18 %

Effect of discretionary inflation bonus 0.00 % 0.11 % 0.00 %

Effect of accelerated equity compensation 0.00 % 0.06 % 0.00 %

Adjusted return on average tangible common equity 4.60 % 10.10 % 13.37 %

Critical Accounting Policies and Estimates

Allowance for Loan Losses.

We believe the allowance for loan losses is the critical accounting policy that requires the most significant judgments and assumptions used in the preparation of our consolidated financial statements.

An estimate of potential losses inherent in the loan portfolio is determined and an allowance for those losses is established by considering factors including historical loss rates, expected cash flows, estimated collateral values, and other qualitative factors.

The allowance for loan losses represents management’s best estimate of losses inherent in the existing loan portfolio.

The allowance for loan losses is increased by the provision for loan losses charged to expense and reduced by loans charged off, net of recoveries.

Management evaluates the allowance for loan losses quarterly.

If the underlying assumptions later prove to be inaccurate based on subsequent loss evaluations, the allowance for loan losses is adjusted.

Management estimates the appropriate level of allowance for loan losses by separately evaluating impaired and non-impaired loans.

A specific allowance is assigned to an impaired loan when expected cash flows or collateral do not justify the carrying amount of the loan.

The methodology used to assign an allowance to a non-impaired loan is more subjective.

Generally, the allowance assigned to non-impaired loans is determined by applying historical loss rates to existing loans with similar risk characteristics, adjusted for qualitative factors including changes in economic and business conditions, unemployment rates, concentrations of credit, changes in the nature and volume of the portfolio, terms of loans, risk grades, trends in charge-offs and recoveries, trends in delinquencies, nonaccrual loans, and impaired loans, and changes in lending policies and procedures.

Because the economic and business climate in any given industry or market, and its impact on any given borrower, can change rapidly, the risk profile of the loan portfolio is periodically assessed and adjusted when appropriate.

Notwithstanding these procedures, there still exists the possibility that the assessment could prove to be significantly incorrect and that an immediate adjustment to the allowance for loan losses would be required.

Investments in Debt and Equity Securities.

We classify investments in debt and equity securities as available-for-sale in accordance with Accounting Standards Codification, or ASC, Topic 320, “Accounting for Certain Investments in Debt and Equity Securities.” Securities classified as held-to-maturity would be recorded at cost or amortized cost.

Available-for-sale securities are carried at fair value.

Fair value calculations are based on quoted market prices when such prices are available.

If quoted market prices are not available, estimates of fair value are computed using a variety of pricing sources, including Reuters/EJV, Interactive Data and Standard & Poors.

Due to the subjective nature of the valuation process, it is possible that the actual fair values of these investments could differ from the estimated amounts, thereby affecting our financial position, results of operations and cash flows.

If the estimated value of investments is less than the cost or amortized cost, management evaluates whether an event or change in circumstances has occurred that may have a significant adverse effect on the fair value of the investment.

If such an event or change has occurred and management determines that the impairment is other-than-temporary, a further determination is made as to the portion of impairment that is related to credit loss.

The impairment of the investment that is related to the credit loss is expensed in the period in which the event or change occurred.

The remainder of the impairment is recorded in other comprehensive income (loss).

Other Real Estate Owned.

OREO acquired through loan foreclosure is initially recorded at fair value less costs to sell when acquired, establishing a new cost basis.

The adjustment at the time of foreclosure is recorded through the allowance for loan losses.

Due to the subjective nature of establishing the fair value when the asset is acquired, the actual fair value of the OREO or foreclosed asset could differ from the original estimate.

If it is determined that fair value declines subsequent to foreclosure, a valuation adjustment is recorded through noninterest expense.

Net operating costs associated with the assets after acquisition are also recorded as noninterest expense.

Gains and losses on the disposition of OREO and foreclosed assets are netted and posted through noninterest income.

Adoption of new accounting standards

ASU 2016 - 13

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

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

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

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

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

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

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

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

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

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 $20.9 million as of December 31, 2023 and is excluded from the estimate of credit losses.

The Company made the accounting policy election to not measure an ACL for accrued interest 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 utilized a discounted cash flow (“DCF”) method to estimate the quantitative portion of the allowance for credit losses for loans evaluated on a collective pooled basis.

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

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

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

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

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

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

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

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

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

The Frye Jacobs method is a mathematical formula that traces the relationship between LGD and PD over time and

projects the LGD based on the level of PD forecasted.

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

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

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

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

• Changes in international, national, regional and local conditions

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

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

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

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

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

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

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

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

ACL - Loans - Individually Evaluated

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

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

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

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

ACL - Off-Balance Sheet Credit Exposures

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

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

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

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

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.

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

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

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

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

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

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

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

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

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

Accrued interest receivable on AFS debt securities totaled $2.9 million at December 31, 2023 and is excluded from the estimate of credit losses.

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

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

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

Accrued interest receivable on HTM debt securities totaled $1.2 million at December 31, 2023 and is excluded from the estimate of credit losses.

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

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

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

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

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

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

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

Impairment of Goodwill.

14 unchanged sentences

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

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

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

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

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

These contracts mature in less than one year.

At December 31, 2023 and December 31, 2022, we had interest rate swaps with a notional amount of $200.0 million and $260.0 million, respectively.

Additionally, prior to the Company’s decision to exit its consumer mortgage business in the first quarter 2023, we entered into forward contracts related to our mortgage banking business to hedge the exposures we had from commitments to extend new residential mortgage loans to our customers and from our mortgage loans held-for-sale.

At December 31, 2023, the Company did not have any commitments to sell residential real estate loans.

At December 31, 2022, the Company had commitments to sell residential real estate loans of $17.0 million.

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

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

What changed 10-K

Item 7. Management’s Discussion and Analysis