Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this report.
The following discussion, analysis and comparisons generally focus on the operating results for the years ended December 31, 2023 and 2022. Discussion, analysis and comparisons of the years ended December 31, 2022 and 2021 that are not included in this Annual Report on Form 10-K can be found in “Management's Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2022. This discussion and analysis includes certain forward-looking statements that involve risks, uncertainties and assumptions. You should review the “Risk Factors” section of this report for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by such forward-looking statements. See also the “Cautionary Note Regarding Forward-Looking Statements” at the beginning of this report.
Costs Associated with Exit Activities
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 $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,
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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.
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Consolidated Average Balance Sheets and Net Interest Income Analyses
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. Nonaccrual loans are included in average loan balances.
Twelve Months Ended
December 31, 2023 December 31, 2022 December 31, 2021
(dollars in thousands) Average Balance Interest/Dividends Yield/Cost Average Balance Interest/Dividends Yield/Cost Average Balance Interest/Dividends Yield/Cost
Assets
Interest-earning assets
Loans, including loans held-for-sale $ 3,685,729 $ 192,337 5.22 % $ 3,142,166 $ 140,600 4.47 % $ 2,999,232 $ 123,467 4.12 %
Securities - taxable 551,479 17,189 3.12 % 537,921 10,711 1.99 % 544,613 7,970 1.46 %
Securities - non-taxable 72,571 3,532 4.87 % 75,382 1,767 2.34 % 84,482 1,017 1.20 %
Other earning assets 500,061 26,384 5.28 % 278,073 3,830 1.38 % 466,608 1,429 0.31 %
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 credit losses (36,038) (29,143) (29,068)
Noninterest earning-assets 194,712 166,127 140,059
Total assets $ 4,968,514 $ 4,170,526 $ 4,205,926
Liabilities
Interest-bearing liabilities
Interest-bearing demand deposits $ 366,082 $ 6,186 1.69 % $ 333,737 $ 2,056 0.62 % $ 195,699 $ 583 0.30 %
Savings accounts 29,200 249 0.85 % 58,156 336 0.58 % 56,967 203 0.36 %
Money market accounts 1,276,602 49,890 3.91 % 1,423,185 18,513 1.30 % 1,434,829 5,892 0.41 %
BaaS - brokered deposits 33,039 1,402 4.24 % 60,699 1,033 1.70 % — — 0.00 %
Certificates and brokered deposits 2,040,041 85,636 4.20 % 1,147,017 19,894 1.73 % 1,411,211 23,144 1.64 %
Total interest-bearing deposits 3,744,964 143,363 3.83 % 3,022,794 41,832 1.38 % 3,098,706 29,822 0.96 %
Other borrowed funds 719,617 21,175 2.94 % 638,526 17,983 2.82 % 600,035 17,505 2.92 %
Total interest-bearing liabilities 4,464,581 164,538 3.69 % 3,661,320 59,815 1.63 % 3,698,741 47,327 1.28 %
Noninterest-bearing deposits 125,816 120,325 101,825
Other noninterest-bearing liabilities 20,317 16,037 47,255
Total liabilities 4,610,714 3,797,682 3,847,821
Shareholders' equity 357,800 372,844 358,105
Total liabilities and shareholders' equity $ 4,968,514 $ 4,170,526 $ 4,205,926
Net interest income $ 74,904 $ 97,093 $ 86,556
Interest rate spread 1
1.29 % 2.26 % 1.99 %
Net interest margin 2
1.56 % 2.41 % 2.11 %
Net interest margin - FTE 3
1.67 % 2.54 % 2.25 %
1 Yield on total interest-earning assets minus cost of total interest-bearing liabilities
2 Net interest income divided by average interest-earning assets
3 On a fully-taxable equivalent (“FTE”) basis assuming a 21% tax rate. 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
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Rate/Volume Analysis
The following table illustrates the impact of changes in the volume of interest-earning assets and interest-bearing liabilities and interest rates on net interest income for the periods indicated. The change in interest not due solely to volume or rate has been allocated in proportion to the absolute dollar amounts of the change in each.
Rate/Volume Analysis of Net Interest Income
Twelve Months Ended December 31, 2023 vs. December 31, 2022 Due to Changes in Twelve Months Ended December 31, 2022 vs. December 31, 2021 Due to Changes in
(amounts in thousands) Volume Rate Net Volume Rate Net
Interest income
Loans, including loans held-for-sale $ 26,264 $ 25,473 $ 51,737 $ 6,157 $ 10,976 $ 17,133
Securities – taxable 275 6,203 6,478 (100) 2,841 2,741
Securities – non-taxable (69) 1,834 1,765 (120) 870 750
Other earning assets 4,967 17,587 22,554 (794) 3,195 2,401
Total 31,437 51,097 82,534 5,143 17,882 23,025
Interest expense
Interest-bearing deposits 12,042 89,489 101,531 (744) 12,754 12,010
Other borrowed funds 2,391 801 3,192 1,094 (616) 478
Total 14,433 90,290 104,723 350 12,138 12,488
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.
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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 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
The following table presents noninterest income for the three most recent years.
Twelve Months Ended December 31,
(amounts in thousands) 2023 2022 2021
Service charges and fees $ 851 $ 1,071 $ 1,114
Loan servicing revenue 3,833 2,573 1,934
Loan servicing asset revaluation (1,463) (1,639) (1,069)
Mortgage banking activities 76 5,464 15,050
Gain on sale of loans 20,526 11,372 11,598
Gain on sale of premises and equipment — — 2,523
Other 2,302 2,416 1,694
Total noninterest income $ 26,125 $ 21,257 $ 32,844
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
The following table presents noninterest expense for the three most recent years.
Twelve Months Ended December 31,
(amounts in thousands) 2023 2022 2021
Salaries and employee benefits $ 45,322 $ 41,553 $ 38,223
Marketing, advertising and promotion 2,567 3,554 3,261
Consulting and professional services 3,082 4,826 4,054
Data processing 2,373 1,989 1,649
Loan expenses 5,756 4,435 2,112
Premises and equipment 10,599 10,688 7,063
Deposit insurance premium 3,880 1,152 1,213
Other 5,857 5,076 4,223
Total noninterest expense $ 79,436 $ 73,273 $ 61,798
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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 $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.
Income Taxes
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,
(amounts in thousands) 2023 2022 2021
Statutory rate times pre-tax income $ 1,037 $ 8,421 $ 11,880
(Subtract) add the tax effect of:
Income from tax-exempt securities and loans (3,951) (4,190) (4,217)
State income taxes, net of federal tax effect (30) 592 865
Bank-owned life insurance (215) (201) (199)
Tax credits (168) (143) (175)
Other differences (150) 80 304
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 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.
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Financial Condition
The following table presents summary balance sheet data as of the end of the last two years.
(amounts in thousands) December 31,
Balance Sheet Data: 2023 2022
Total assets $ 5,167,572 $ 4,543,104
Loans 3,840,220 3,499,401
Total securities 702,008 579,552
Loans held-for-sale 22,052 21,511
Noninterest-bearing deposits 123,464 175,315
Interest-bearing deposits 3,943,509 3,265,930
Total deposits 4,066,973 3,441,245
Advances from Federal Home Loan Bank 614,934 614,928
Total shareholders' equity 362,795 364,974
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. 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 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. Refer to the “Reconciliation of Non-GAAP Financial Measures” section of Item 7 of Part II of this report, Management's Discussion and Analysis of Financial Condition and Results of Operations for additional information.
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Loan Portfolio Analysis
The following table provides information regarding our loan portfolio as of the end of the last two years.
December 31,
(dollars in thousands) 2023 2022
Commercial loans
Commercial and industrial $ 129,349 3.4 % $ 126,108 3.6 %
Owner-occupied commercial real estate 57,286 1.5 % 61,836 1.8 %
Investor commercial real estate 132,077 3.4 % 93,121 2.7 %
Construction 261,750 6.8 % 181,966 5.2 %
Single tenant lease financing 936,616 24.4 % 939,240 26.8 %
Public finance 521,764 13.6 % 621,032 17.7 %
Healthcare finance 222,793 5.8 % 272,461 7.8 %
Small business lending 218,506 5.7 % 123,750 3.5 %
Franchise finance 525,783 13.7 % 299,835 8.6 %
Total commercial loans 3,005,924 78.3 % 2,719,349 77.7 %
Consumer loans
Residential mortgage 395,648 10.3 % 383,948 11.0 %
Home equity 23,669 0.6 % 24,712 0.7 %
Other consumer 377,614 9.8 % 324,598 9.3 %
Total consumer loans 796,931 20.7 % 733,258 21.0 %
Total commercial and consumer loans 3,802,855 99.0 % 3,452,607 98.7 %
Net deferred loan origination costs, premiums and discounts on purchased loans and other 1
37,365 1.0 % 46,794 1.3 %
Total loans 3,840,220 100.0 % 3,499,401 100.0 %
Allowance for credit losses - loans (38,774) (31,737)
Net loans $ 3,801,446 $ 3,467,664
1 Includes carrying value adjustments of $27.8 million and $32.5 million related to terminated interest rate swaps associated with public finance loans as of December 31, 2023 and December 31, 2022, respectively.
Total loans were $3.8 billion as of December 31, 2023, an increase of $340.8 million, or 9.7%, compared to December 31, 2022. Total commercial loan balances were $3.0 billion, as of December 31, 2023, up $286.6 million, or 10.5%, from December 31, 2022. 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. 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.
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Loan Maturities and Rate Sensitivity
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
Commercial loans
Commercial and industrial $ 36,461 $ 58,856 $ 34,023 $ 9 $ 129,349
Owner-occupied commercial real estate 6,546 19,260 31,480 — 57,286
Investor commercial real estate 61,012 68,360 2,705 — 132,077
Construction 83,560 176,993 1,197 — 261,750
Single tenant lease financing 35,083 383,420 518,113 — 936,616
Public finance 33,267 64,720 372,050 51,727 521,764
Healthcare finance — 21,333 201,460 — 222,793
Small business lending 45 1,884 170,448 46,129 218,506
Franchise finance — 40,831 484,952 — 525,783
Total commercial loans 255,974 835,657 1,816,428 97,865 3,005,924
Consumer loans
Residential mortgage — 400 15,573 379,675 395,648
Home equity 1,239 278 5,973 16,179 23,669
Other consumer 1,264 18,576 307,663 50,111 377,614
Total consumer loans 2,503 19,254 329,209 445,965 796,931
Total commercial and consumer loans $ 258,477 $ 854,911 $ 2,145,637 $ 543,830 $ 3,802,855
The following table shows the rate sensitivity of the outstanding loans in our portfolio by the contractual maturity distribution intervals as of December 31, 2023.
(amounts in thousands) Within 1 Year 1-5 Years 5-15 Years Beyond 15 Years Total
Fixed rate $ 76,393 $ 594,012 $ 1,945,170 $ 429,865 $ 3,045,440
Variable rate 182,084 260,899 200,467 113,965 757,415
Total commercial and consumer loans $ 258,477 $ 854,911 $ 2,145,637 $ 543,830 $ 3,802,855
Loan Approval Procedures and Authority
Our lending activities follow written, non-discriminatory policies with loan approval limits approved by the Board of Directors of the Bank. Loan officers have underwriting and approval authorization of varying amounts based on their lending experience and product type. Additionally, based on the amount of the loan, multiple approvals may be required. Based on the Bank’s legal lending limit, the maximum it could lend to any one borrower at December 31, 2023 was $75.6 million.
Our goal is to have a well-diversified and balanced loan portfolio. In order to manage our loan portfolio risk, we establish concentration limits by borrower, product type, industry and geography. To supplement our internal loan review resources, we have engaged independent third-party loan review groups, which are a key component of our overall risk management process related to credit administration.
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Asset Quality
December 31,
(dollars in thousands) 2023 2022
Nonaccrual loans
Commercial loans:
Commercial and industrial $ — $ 51
Owner-occupied commercial real estate — 1,570
Small business lending 6,824 4,764
Franchise finance 303 —
Total commercial loans 7,127 6,385
Consumer loans:
Residential mortgage 1,911 1,048
Other consumer 86 17
Total consumer loans 1,997 1,065
Total nonaccrual loans 9,124 7,450
Past Due 90 days and accruing loans
Consumer loans:
Residential mortgage 838 79
Total consumer loans 838 79
Total past due 90 days and accruing loans 838 79
Total nonperforming loans 9,962 7,529
Other real estate owned
Residential mortgage 375 —
Total other real estate owned 375 —
Other nonperforming assets 17 42
Total nonperforming assets $ 10,354 $ 7,571
Total nonperforming loans to total loans 0.26 % 0.22 %
Total nonperforming assets to total assets 0.20 % 0.17 %
Allowance for credit losses - loans to total loans 1.01 % 0.91 %
Nonaccrual loans to total loans 0.24 % 0.21 %
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 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 (“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.
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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.
December 31,
(amounts in thousands) 2023 2022
Troubled debt restructurings – nonaccrual $ — $ 2,864
Troubled debt restructurings – performing — 2,658
Total troubled debt restructurings $ — $ 5,522
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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.
December 31,
(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
Losses charged off
Commercial and industrial (7,049) —
Investor commercial real estate (591) —
Healthcare finance (605) —
Small business lending (2,586) (402)
Franchise finance (331)
Residential mortgage (140) —
Other consumer (582) (2,358)
Total losses charged off (11,884) (2,760)
Recoveries
Commercial and industrial 243 5
Single tenant lease financing — 1,231
Small business lending 77 29
Residential mortgage 5 4
Home equity 6 139
Other consumer 174 271
Total recoveries 505 1,679
Balance, end of period $ 38,774 $ 31,737
Net charge-offs $ 11,379 $ 1,081
Net charge-offs (recoveries) to average loans (annualized)
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 %)
Residential mortgage 0.03 % — %
Home equity (0.02 %) (0.68 %)
Other consumer 0.21 % 0.43 %
Total consumer net charge-offs (recoveries) 0.07 % 0.32 %
Net charge-offs to average loans 0.31 % 0.03 %
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
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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
In managing our investment securities portfolio, management focuses on providing an adequate level of liquidity and managing long-term interest rate risk, while earning an adequate level of investment income without taking undue risk. Investment securities that are acquired and held principally for the purpose of selling them in the near term with the objective of generating economic profits on short-term differences in market characteristics are classified as “trading securities.” We did not classify any securities as trading securities as of December 31, 2023 and 2022. 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 there is an impairment. As of December 31, 2023, the unrealized losses in our investment securities portfolio were due primarily to interest rate changes. We have the ability and intent to hold all investment securities in an unrealized loss position resulting from interest rate changes to the earlier of the forecasted recovery or the maturity of the underlying investment security. As of December 31, 2023, we did not have any investment securities of a single issuer that exceeded 10% of shareholders’ equity. The term “issuer” excludes the U.S. Government and its sponsored agencies and corporations.
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The following tables present the amortized cost and approximate fair value of our investment securities portfolio by security type as of the end of the last two years.
(amounts in thousands) December 31,
Amortized Cost 2023 2022
Securities available-for-sale
U.S. Government-sponsored agencies $ 96,404 $ 35,606
Municipal securities 69,494 68,958
Agency mortgage-backed securities - residential 237,798 252,066
Agency mortgage-backed securities - commercial 40,215 17,142
Private label mortgage-backed securities - residential 21,742 11,777
Asset-backed securities 8,071 5,000
Corporate securities 39,591 45,634
Total securities available-for-sale 513,315 436,183
Securities held-to-maturity
Municipal securities 13,889 13,946
Agency mortgage-backed securities - residential 166,750 121,853
Agency mortgage-backed securities - commercial 5,767 5,818
Corporate securities 40,747 47,551
Total held-to-maturity, net 227,153 189,168
Total securities $ 740,468 $ 625,351
December 31,
Approximate Fair Value 2023 2022
Securities available-for-sale
U.S. Government-sponsored agencies $ 95,177 $ 33,809
Municipal securities 68,446 67,276
Agency mortgage-backed securities - residential 206,649 215,092
Agency mortgage-backed securities - commercial 38,885 15,840
Private label mortgage-backed securities - residential 20,779 10,455
Asset-backed securities 8,081 4,960
Corporate securities 36,838 42,952
Total securities available-for-sale 474,855 390,384
Securities held-to-maturity
Municipal securities 13,040 12,832
Agency mortgage-backed securities - residential 152,642 106,741
Agency mortgage-backed securities - commercial 4,521 4,552
Corporate securities 37,369 44,358
Total held-to-maturity 207,572 168,483
Total securities $ 682,427 $ 558,867
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.
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Investment Maturities
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
to 5 years More than 5 years
to 10 years More than 10 years Total
(dollars in thousands) Amortized
Cost Wtd.
Avg.
Yield Amortized
Cost Wtd.
Avg.
Yield Amortized
Cost Wtd.
Avg.
Yield Amortized
Cost Wtd.
Avg.
Yield Amortized
Cost Wtd.
Avg.
Yield
Securities:
U.S. Government-sponsored agencies
$ 250 2.84 % $ 1,996 4.86 % $ 39,391 5.61 % $ 54,767 5.58 % $ 96,404 5.57 %
Municipal securities 1,295 2.35 % 11,987 2.89 % 16,938 2.71 % 53,163 2.71 % 83,383 2.73 %
Agency mortgage-backed securities - residential — — % 568 1.68 % 4,558 2.06 % 399,422 2.45 % 404,548 2.45 %
Agency mortgage-backed securities - commercial — — % 4,769 2.39 % 22,158 6.17 % 19,055 2.84 % 45,982 4.40 %
Private-label mortgage-backed securities - residential — — % — — % — — % 21,742 4.68 % 21,742 4.68 %
Asset-backed securities
— — % — — % — — % 8,071 6.94 % 8,071 6.94 %
Corporate securities — — % 23,546 5.78 % 56,792 4.64 % — — % 80,338 4.98 %
Total securities $ 1,545 2.43 % $ 42,866 4.50 % $ 139,837 4.84 % $ 556,220 2.95 % $ 740,468 3.39 %
Accrued Income and Other Assets
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.
Deposits
The following table presents the composition of our deposit base as of the end of the last two years.
December 31,
(dollars in thousands) 2023 2022
Noninterest-bearing deposits $ 123,464 3.0 % $ 175,315 5.1 %
Interest-bearing demand deposits 402,976 9.9 % 335,611 9.8 %
Savings accounts 21,364 0.5 % 44,819 1.3 %
Money market accounts 1,248,319 30.8 % 1,418,599 41.2 %
BaaS - brokered deposits 74,401 1.8 % 13,607 0.4 %
Certificates of deposits 1,605,156 39.5 % 874,490 25.4 %
Brokered deposits 591,293 14.5 % 578,804 16.8 %
Total $ 4,066,973 100.0 % $ 3,441,245 100.0 %
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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 $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.
Time Deposit Maturities at December 31, 2023
Period to Maturity Percentage of Total Certificate Accounts
(dollars in thousands) Less than 1
year > 1 year
to 2 years > 2 years
to 3 years More than
3 years Total
Interest Rate:
<1.00% $ 64,307 $ 91,103 $ 47,939 $ 53,638 $ 256,987 13.8 %
1.00% – 1.99% 14,668 7,643 254 628 23,193 1.2 %
2.00% – 2.99% 77,257 6,217 2,875 40,610 126,959 6.8 %
3.00% – 3.99% 28,030 20,826 27,140 115,057 191,053 10.2 %
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 %
Time Deposit Maturities Greater than $250,000
(dollars in thousands) December 31, 2023
Maturity Period:
3 months or less $ 157,414
Over 3 through 6 months 112,044
Over 6 through 12 months 160,658
Over 12 months 273,719
Total $ 703,835
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Federal Home Loan Bank Advances
Although deposits are the primary source of funds for our lending and investment activities and for general business purposes, we may use short-term advances from the Federal Home Loan Bank of Indianapolis (the “FHLB”) to manage liquidity needs and longer-term advances to supplement deposit growth and manage interest rate risk. The following table is a summary of FHLB borrowings for the periods indicated.
At or For The Twelve Months Ended December 31,
(dollars in thousands) 2023 2022
Balance outstanding at end of period $ 614,934 $ 614,928
Average amount outstanding during period 614,931 534,144
Maximum outstanding at any month end during period 614,934 615,928
Weighted average interest rate at end of period 1
3.04 % 2.82 %
Weighted average interest rate during period 1
3.00 % 2.15 %
1 Excludes the impact of interest rate swaps. Refer to Note 18 to our consolidated financial statements for additional information about derivative financial instruments.
Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities 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
Liquidity management is the process used by the Company to manage the continuing flow of funds necessary to meet its financial commitments on a timely basis and at a reasonable cost while also maintaining safe and sound operations. Liquidity, represented by cash and investment securities, is a product of the Company’s operating, investing and financing activities. The primary sources of funds are deposits, principal and interest payments on loans and investment securities, maturing loans and investment securities, access to wholesale funding sources and collateralized borrowings. While scheduled payments and maturities of loans and investment securities are relatively predictable sources of funds, deposit flows are greatly influenced by interest rates, general economic conditions and competition. Therefore, the Company supplements deposit growth and enhances interest rate risk management through borrowings and wholesale funding, which are generally advances from the Federal Home Loan Bank and brokered deposits.
The Company holds cash and investment securities that qualify as liquid assets to maintain adequate liquidity to ensure safe and sound operations and meet its financial commitments. At December 31, 2023, on a consolidated basis, the Company had $0.9 billion in cash and cash equivalents and investment securities available-for-sale, and $22.1 million in loans held-for-sale that were generally available for our cash needs. The Company can also generate funds from wholesale funding sources and collateralized borrowings. At December 31, 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. In addition to its operating expenses, the Company is responsible for paying any dividends declared to its common shareholders and interest and principal on outstanding debt. The Company’s primary sources of funds are cash maintained at the holding company level and dividends from the Bank, the payment of which is subject to regulatory limits. At December 31, 2023, the Company, on an unconsolidated basis, had $11.6 million in cash generally available for its cash needs, which is in excess of its current annual regular shareholder dividend and operating expenses.
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The Company uses its sources of funds primarily to meet ongoing financial commitments, including withdrawals by depositors, credit commitments to borrowers, operating expenses and capital expenditures. At December 31, 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, 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.
The following table presents the Company’s significant contractual obligations as of December 31, 2023.
Payments Due In
(dollars in thousands) Note Reference Less than 1 year 1-3 years 3-5 years More than 5 years Total
Deposits and brokered deposits without stated maturity 1
8 2,193,959 — — — 2,193,959
Certificates of deposits and brokered deposits 1
8 1,332,424 274,626 259,564 6,400 1,873,014
FHLB advances 1,2
9 255,003 100,000 135,000 124,931 614,934
Subordinated debt 1
10 — — — 107,000 107,000
Total contractual obligations $ 3,781,386 $ 374,626 $ 394,564 $ 238,331 $ 4,788,907
1 Amounts do not include associated interest payments.
2 Amounts do not include the effect of interest rate swaps used to convert short-term advances into long-term funding.
In October 2021, the Company’s Board of Directors approved a stock repurchase program authorizing the repurchase of up to $30.0 million of the Company’s outstanding common stock from time to time on the open market or in privately negotiated transactions. In October 2022, the Company’s Board of Directors increased the authorization to $35.0 million. 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. See Part II, Item 5, of this report for information regarding recent repurchase activity and our remaining authority under the program.
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Reconciliation of Non-GAAP Financial Measures
This Management's Discussion and Analysis contains financial information determined by methods other than in accordance with GAAP. Non-GAAP financial measures, specifically tangible common equity, tangible assets, tangible book value per common share, tangible common equity to tangible assets, average tangible common equity, return on average tangible common equity, total interest income - FTE, net interest income - FTE, net interest margin - FTE, adjusted total revenue, adjusted noninterest income, adjusted noninterest expense, adjusted income before income taxes, adjusted income tax 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 tables for the last three completed fiscal years ended on December 31.
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(dollars in thousands, except share and per share data) At or For The Twelve Months Ended December 31,
2023 2022 2021
Total equity - GAAP $ 362,795 $ 364,974 $ 380,338
Adjustments:
Goodwill (4,687) (4,687) (4,687)
Tangible common equity $ 358,108 $ 360,287 $ 375,651
Total assets - GAAP $ 5,167,572 $ 4,543,104 $ 4,210,994
Adjustments:
Goodwill (4,687) (4,687) (4,687)
Tangible assets $ 5,162,885 $ 4,538,417 $ 4,206,307
Total common shares outstanding 8,644,451 9,065,883 9,754,455
Book value per common share $ 41.97 $ 40.26 $ 38.99
Effect of goodwill (0.54) (0.52) (0.48)
Tangible book value per common share $ 41.43 $ 39.74 $ 38.51
Total shareholders’ equity to assets 7.02 % 8.03 % 9.03 %
Effect of goodwill (0.08 %) (0.09 %) (0.10 %)
Tangible common equity to tangible assets 6.94 % 7.94 % 8.93 %
Total average equity - GAAP $ 357,800 $ 372,844 $ 358,105
Adjustments:
Average goodwill (4,687) (4,687) (4,687)
Average tangible common equity $ 353,113 $ 368,157 $ 353,418
Return on average shareholders' equity 2.35 % 9.53 % 13.44 %
Effect of goodwill 0.03 % 0.12 % 0.17 %
Return on average tangible common equity 2.38 % 9.65 % 13.61 %
Total interest income $ 239,442 $ 156,908 $ 133,883
Adjustments:
Fully-taxable equivalent adjustments 1
5,233 5,355 5,453
Total interest income - FTE $ 244,675 $ 162,263 $ 139,336
Net interest income $ 74,904 $ 97,093 $ 86,556
Adjustments:
Fully-taxable equivalent adjustments 1
5,233 5,355 5,453
Net interest income - FTE $ 80,137 $ 102,448 $ 92,009
Net interest margin 1.56 % 2.41 % 2.11 %
Effect of fully-taxable equivalent adjustments 1
0.11 % 0.13 % 0.14 %
Net interest margin - FTE 1.67 % 2.54 % 2.25 %
1 Assuming a 21% tax rate
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(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
Adjustments:
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
Adjustments:
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
Adjustments:
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
Adjustments: 1
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
Adjustments: 1
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
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(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
Adjustments:
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
Adjustments:
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 %
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(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 %
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Critical Accounting Policies and Estimates
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 - 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 $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
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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.
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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. As a result of a previous acquisition by the Company, goodwill, an intangible asset with an indefinite life, is reflected on the balance sheet. Goodwill is evaluated for impairment annually, unless there are factors present that indicate a potential impairment, in which case, the goodwill impairment test is performed more frequently.
Deferred Income Tax Assets/Liabilities. Our net deferred income tax asset arises from differences in the dates that items of income and expense enter into our reported income and taxable income. Deferred tax assets and liabilities are established for these items as they arise. From an accounting standpoint, deferred tax assets are reviewed to determine if they are realizable based on the historical level of taxable income, estimates of future taxable income and the reversals of deferred tax liabilities. In most cases, the realization of the deferred tax asset is based on future profitability. If we were to experience net operating losses for tax purposes in a future period, the realization of deferred tax assets would be evaluated for a potential valuation reserve.
Recent Accounting Pronouncements
Refer to Note 22 to our consolidated financial statements.
Off-Balance Sheet Arrangements
In the ordinary course of business, we may enter into financial transactions to extend credit, engage in interest rate swaps or other forms of commitments that may be considered off-balance sheet arrangements. Interest rate swaps were arranged to receive hedge accounting treatment and were classified as either fair value or cash flow hedges. Fair value hedges were purchased to convert certain fixed rate assets to floating rate. Cash flow hedges were used to convert certain variable rate liabilities into fixed rate liabilities. At December 31, 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.
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