First Internet Bancorp 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes appearing elsewhere in this report. This discussion and analysis includes certain forward-looking statements that involve risks, uncertainties, and assumptions. You should review the “Risk Factors” sections of this report and our Annual Report on Form 10-K for the year ended December 31, 2023 for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by such forward-looking statements. See also “Cautionary Note Regarding Forward-Looking Statements” at the beginning of this report. Overview First Internet Bancorp is a financial holding company headquartered in Fishers, Indiana that conducts its primary business activities through its wholly-owned subsidiary, First Internet Bank of Indiana, an Indiana chartered bank. The Bank was the first state-chartered, Federal Deposit Insurance Corporation (“FDIC”) insured Internet bank and commenced banking operations in 1999. First Internet Bancorp was incorporated under the laws of the State of Indiana on September 15, 2005. On March 21, 2006, we consummated a plan of exchange by which we acquired all of the outstanding shares of the Bank. The Bank has three wholly-owned subsidiaries: First Internet Public Finance Corp., an Indiana corporation that provides a range of public and municipal finance lending and leasing products to governmental entities throughout the United States and acquires securities issued by state and local governments and other municipalities; JKH Realty Services, LLC, a Delaware limited liability company that manages other real estate owned properties as needed; and SPF15, Inc., an Indiana corporation that owns real estate used primarily for the Bank’s principal office. 43 We offer a wide range of commercial, small business, consumer and municipal banking products and services. We conduct our consumer and small business deposit operations primarily through digital channels on a nationwide basis and have no traditional branch offices. Our consumer lending products are primarily originated on a nationwide basis through relationships with dealerships and financing partners. Our commercial banking products and services are delivered through a relationship banking model or through strategic partnerships and include commercial and industrial (“C&I”), construction and investor commercial real estate, single tenant lease financing, public finance, healthcare finance, small business lending, franchise finance and commercial deposits and treasury management. Our C&I team provides credit solutions such as lines of credit, term loans, owner-occupied commercial real estate loans and corporate credit cards on a regional basis to commercial borrowers primarily in the Midwest and Southwest regions of the United States. We offer construction, investor commercial real estate loans, as well as single tenant lease financing on a nationwide basis. Our public finance team provides a range of public and municipal lending and leasing products to government entities on a nationwide basis. Our healthcare finance team was established in conjunction with our strategic partnership with Provide, Inc. (formerly known as Lendeavor, Inc.), a San Francisco-based technology-enabled lender to healthcare practices, which provided lending on a nationwide basis for healthcare practice finance or acquisition, acquisition or refinancing of owner-occupied commercial real estate and equipment purchases. In the third quarter 2021, Provide was acquired by a super-regional financial institution. Subsequent to Provide being acquired, the acquiring institution has retained most, if not all, of Provide’s loan origination activity and our healthcare finance loan balances have declined. Our franchise finance business was established in July 2021 in conjunction with our business relationship with ApplePie Capital, a company that specializes in providing financing to franchisees in various industry segments across the United States. Our commercial deposits and treasury management team works with the other commercial teams to provide deposit products and treasury management services to our commercial and municipal lending customers as well as pursues commercial deposit opportunities in business segments where we have no credit relationships. We believe that we differentiate ourselves from larger financial institutions by providing a full suite of services to emerging small businesses and entrepreneurs on a nationwide basis. We are one of the fastest-growing lenders in the Small Business Administration (“SBA”) 7(a) program, closing more than $98.3 million in SBA 7(a) loans during the three months ended March 31, 2024, and currently rank as one of the top 10 largest SBA 7(a) lenders for the SBA’s year-to-date 2024 fiscal year. We also offer a top-ranked small business checking account product to our country’s entrepreneurs. We continue to scale up this business with the goal of driving increased earnings and profitability in future periods. We also offer payment, deposit, card and lending products and services through partnerships with financial technology companies and platforms (“fintechs”). With the rapid evolution of technology that enables consumers and small businesses to manage their finances digitally, fintechs are addressing a significantly growing marketplace. Fintechs have created robust digital offerings, unburdened by legacy technology architecture, to address growing customer expectations. Through partnerships with selected fintechs, we believe our ability to win and retain consumer and small business relationships will be significantly enhanced. Furthermore, we believe partnering with select fintechs will allow us to further diversify our revenue sources, acquire lower-cost deposits and pursue additional asset generation capabilities. As of March 31, 2024, the Company had consolidated assets of $5.3 billion, consolidated deposits of $4.3 billion and stockholders’ equity of $366.7 million. 44 Results of Operations During the first quarter 2024, net income was $5.2 million, or $0.59 diluted earnings per share, compared to a net loss of $3.0 million, or $0.33 diluted loss per share, during the first quarter 2023, representing an increase in net income of $8.2 million and an increase in diluted earnings per share of $0.92. The $8.2 million increase in net income for the first quarter 2024 compared to the first quarter 2023 was due primarily to a $7.0 million, or 74.0%, decrease in the provision for credit losses, an increase of $2.9 million, or 53.3%, in noninterest income and a $1.2 million, or 5.9%, increase in net interest income, partially offset by a $2.8 million increase in income tax expense. During the first quarter 2024, return on average assets (“ROAA”), return on average shareholders’ equity (“ROAE”), and return on average tangible common equity (“ROATCE”) were 0.40%, 5.64%, and 5.71%, respectively, compared to (0.26%), (3.37%), and (3.41%), respectively, for the first quarter 2023. During the first quarter 2023, the Company had a partial charge-off of a C&I participation loan of $6.9 million, $3.1 million of mortgage operations and exit costs and $0.1 million of mortgage revenue. Excluding these items, adjusted net income for the first quarter 2023 was $4.8 million and adjusted diluted earnings per share was $0.53. Additionally, for the first quarter 2023, adjusted ROAA, adjusted ROAE and adjusted ROATCE were 0.43%, 5.36% and 5.44%, respectively. Refer to the “Reconciliation of Non-GAAP Financial Measures” section of Part I, Item 2 of this report, Management’s Discussion and Analysis of Financial Condition and Results of Operations for additional information. 45 Consolidated Average Balance Sheets and Net Interest Income Analyses For the periods presented, the following tables provide the average balances of interest-earning assets and interest-bearing liabilities and the related yields and cost of funds. The tables do not reflect any effect of income taxes except for net interest margin - FTE, as discussed below. Balances are based on the average of daily balances. Nonaccrual loans are included in average loan balances. Three Months Ended March 31, 2024 December 31, 2023 March 31, 2023 (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 $ 3,892,589 $ 55,435 5.73 % $ 3,799,932 $ 52,690 5.50 % $ 3,583,218 $ 43,843 4.96 % Securities - taxable 627,216 5,694 3.65 % 611,664 5,447 3.53 % 511,923 3,606 2.86 % Securities - non-taxable 76,293 969 5.11 % 71,804 962 5.32 % 73,347 798 4.41 % Other earning assets 434,118 6,067 5.62 % 500,733 7,173 5.68 % 331,294 3,786 4.63 % Total interest-earning assets 5,030,216 68,165 5.45 % 4,984,133 66,272 5.28 % 4,499,782 52,033 4.69 % Allowance for credit losses - loans (38,611) (36,792) (35,075) Noninterest-earning assets 216,331 206,944 182,449 Total assets $ 5,207,936 $ 5,154,285 $ 4,647,156 Liabilities Interest-bearing liabilities Interest-bearing demand deposits $ 415,106 $ 2,091 2.03 % $ 382,427 $ 1,646 1.71 % $ 333,642 $ 900 1.09 % Savings accounts 22,521 48 0.86 % 22,394 48 0.85 % 38,482 82 0.86 % Money market accounts 1,217,966 12,671 4.18 % 1,225,781 12,739 4.12 % 1,377,600 12,300 3.62 % BaaS - brokered deposits 85,366 931 4.39 % 62,098 685 4.38 % 14,741 138 3.80 % Certificates and brokered deposits 2,246,050 26,388 4.73 % 2,242,819 25,960 4.59 % 1,647,504 13,850 3.41 % Total interest-bearing deposits 3,987,009 42,129 4.25 % 3,935,519 41,078 4.14 % 3,411,969 27,270 3.24 % Other borrowed funds 716,735 5,302 2.98 % 719,733 5,387 2.97 % 719,499 5,189 2.92 % Total interest-bearing liabilities 4,703,744 47,431 4.06 % 4,655,252 46,465 3.96 % 4,131,468 32,459 3.19 % Noninterest-bearing deposits 113,341 123,351 134,988 Other noninterest-bearing liabilities 21,480 22,645 17,427 Total liabilities 4,838,565 4,801,248 4,283,883 Shareholders’ equity 369,371 353,037 363,273 Total liabilities and shareholders’ equity $ 5,207,936 $ 5,154,285 $ 4,647,156 Net interest income $ 20,734 $ 19,807 $ 19,574 Interest rate spread 1 1.39% 1.32% 1.50 % Net interest margin 2 1.66% 1.58% 1.76 % Net interest margin - FTE 3 1.75% 1.68% 1.89 % 1 Yield on total interest-earning assets minus cost of total interest-bearing liabilities. 2 Net interest income divided by total average interest-earning assets (annualized). 3 On an FTE basis assuming a 21% tax rate. Net interest income is adjusted to reflect income from assets such as municipal loans and securities that are exempt from Federal income taxes. This is to recognize the income tax savings that facilitates a comparison between taxable and tax-exempt assets. The Company believes that it is a standard practice in the banking industry to present net interest margin and net interest income on a fully-taxable equivalent basis, as these measures provide useful information to make peer comparisons. Net interest margin - FTE represents a non-GAAP financial measure. See “Reconciliation of Non-GAAP Financial Measures” for a reconciliation of this measure to its most directly comparable GAAP measure. 46 Rate/Volume Analysis The following table illustrates the impact of changes in the volume of interest-earning assets and interest-bearing liabilities and interest rates on net interest income for the periods indicated. The change in interest not due solely to volume or rate has been allocated in proportion to the absolute dollar amounts of the change in each. Three Months Ended March 31, 2024 vs. December 31, 2023 Due to Changes in Three Months Ended March 31, 2024 vs. March 31, 2023 Due to Changes in (in thousands) Volume Rate Net Volume Rate Net Interest income Loans, including loans held-for-sale $ 1,011 $ 1,734 $ 2,745 $ 4,143 $ 7,449 $ 11,592 Securities – taxable 106 141 247 938 1,150 2,088 Securities – non-taxable 189 (182) 7 35 136 171 Other earning assets (1,025) (81) (1,106) 1,351 930 2,281 Total 281 1,612 1,893 6,467 9,665 16,132 Interest expense Interest-bearing deposits 347 704 1,051 5,214 9,645 14,859 Other borrowed funds (127) 42 (85) (119) 232 113 Total 220 746 966 5,095 9,877 14,972 Increase (decrease) in net interest income $ 61 $ 866 $ 927 $ 1,372 $ (212) $ 1,160 Net interest income for the first quarter 2024 was $20.7 million, an increase of $1.2 million, or 5.9%, compared to $19.6 million for the first quarter 2023. The increase in net interest income was the result of a $16.1 million, or 31.0%, increase in total interest income to $68.2 million for the first quarter 2024 from $52.0 million for the first quarter 2023, partially offset by a $15.0 million, or 46.1%, increase in total interest expense to $47.4 million for the first quarter 2024 from $32.5 million for the first quarter 2023. The increase in total interest income for the first quarter 2024 compared to first quarter 2023 was due primarily to an increase in interest earned on loans, resulting from an increase of 77 bps in the yield on loans, including loans held-for-sale, as well as an increase of $309.4 million, or 8.6%, in the average balance of loans, including loans held-for-sale. The yield earned on other earning assets also increased 99 bps and the average balance of other earning assets increased $102.8 million, or 31.0%. The increase in the average balance of other earning assets was due primarily to carrying higher cash balances. The average balance of securities increased $118.2 million, or 20.2%, while the yield earned on the securities portfolio increased 76 bps for the first quarter 2024 compared to the first quarter 2023. The increase in the yields earned on loans, other earning assets and securities was due to the impact of the continued elevated interest rate environment on both existing and newly-originated interest-earnings assets. As a result of the higher interest rate environment, the yield on funded portfolio originations was 8.84% in the first quarter 2024, an increase of 108 bps compared to the first quarter 2023. The increase in total interest expense for the first quarter 2024 compared to the first quarter 2023 was due primarily to increases of $12.5 million, or 90.5%, in interest expense associated with certificates and brokered deposits. The increase in interest expense related to certificates and brokered deposits was driven by an increase of 132 bps in the cost of these deposits, as well as an increase of $598.5 million, or 36.3%, 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, partially offset by lower brokered deposit balances as the Company used on-balance sheet liquidity to pay down balances throughout 2023 and the first quarter 2024. Overall, the cost of total interest-bearing liabilities for the first quarter 2024 increased 87 bps to 4.06% from 3.19% for the first quarter 2023. The increase in the cost of funds for the three months ended March 31, 2024 reflects the impact of the continued elevated interest rate environment throughout 2023 and into 2024. Net interest margin (“NIM”) was 1.66% for the first quarter 2024 compared to 1.76% for the first quarter 2023, a decrease of 10 bps. On a fully-taxable equivalent (“FTE”) basis, NIM was 1.75% for the first quarter 2023 compared to 1.89% for the first quarter 2023, a decrease of 14 bps. The decrease in the first quarter 2024 NIM and FTE NIM compared to the first quarter 2023 reflects the increase in the cost of interest-bearing liabilities of 87 bps, partially offset by the increase in earning asset yields noted above. 47 Noninterest Income The following table presents noninterest income for the last five completed fiscal quarters. Three Months Ended (in thousands) March 31, 2024 December 31, 2023 September 30, 2023 June 30, 2023 March 31, 2023 Service charges and fees $ 220 $ 216 $ 208 $ 218 $ 209 Loan servicing revenue 1,323 1,134 1,064 850 785 Loan servicing asset revaluation (434) (793) (257) (358) (55) Mortgage banking activities — — — — 76 Gain on sale of loans 6,536 6,028 5,569 4,868 4,061 Other 702 816 823 293 370 Total noninterest income $ 8,347 $ 7,401 $ 7,407 $ 5,871 $ 5,446 During the first quarter 2024, noninterest income was $8.3 million, representing an increase of $2.9 million, or 53.3%, compared to $5.4 million for the first quarter 2023. The increase in noninterest income was due primarily to increases in gain on sale of loans, other income and net loan servicing revenue, partially offset by a decrease in revenue from mortgage banking activities. The increase of $2.5 million, or 60.9%, in gain on sale of loans was due to an increase in U.S. Small Business Administration (“SBA”) 7(a) guaranteed loan sales, as well as an increase in gain on sale margins. The increase of $0.3 million, or 89.7%, in other income is due primarily to income from fund investments. The increase in loan servicing revenue was due primarily to growth in the balance of the Company’s SBA 7 (a) servicing portfolio. The decrease in mortgage banking revenue 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 last five completed fiscal quarters. Three Months Ended (in thousands) March 31, 2024 December 31, 2023 September 30, 2023 June 30, 2023 March 31, 2023 Salaries and employee benefits $ 11,796 $ 11,055 $ 11,767 $ 10,706 $ 11,794 Marketing, advertising and promotion 736 518 500 705 844 Consulting and professional services 853 893 552 711 926 Data processing 564 493 701 520 659 Loan expenses 1,445 1,371 1,336 1,072 1,977 Premises and equipment 2,826 2,846 2,315 2,661 2,777 Deposit insurance premium 1,145 1,334 1,067 936 543 Other 1,658 1,546 1,518 1,359 1,434 Total noninterest expense $ 21,023 $ 20,056 $ 19,756 $ 18,670 $ 20,954 Noninterest expense for the first quarter 2024 and 2023 was $21.0 million, comparable to the first quarter 2023. The increase of less than $0.1 million, or 0.3%, was due primarily to a $0.6 million increase in deposit insurance premium and a $0.2 million increase in other, partially offset by a $0.5 million decrease in loan expenses, $0.1 million decrease in marketing, advertising and promotion expense and a $0.1 million decrease in data processing. The increase in deposit insurance premium was due primarily to year-over-year asset growth and changes in the composition of the loans and deposit portfolios. The increase in other expense was due to various expenses, none of which were individually significant. The decrease in loan expenses was due primarily to expenses incurred in the first quarter 2023 as a result of the Company’s exit from the mortgage business, partially offset by higher third-party loan servicing fees and other miscellaneous lending costs. 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 decrease in data processing was due primarily to variable deposit activity-based expenses. 48 In the first quarter 2023, the Company incurred $2.2 million in severance costs as a result of its decision to exit the mortgage business. Excluding these costs, salaries and employee benefits increased $2.2 million, or 22.4%, in the first quarter 2024, compared to the first quarter 2023. The increase was due primarily to continued staffing growth and higher incentive compensation in small business lending, as well as higher incentive compensation accruals based on the increase in net income in the first quarter 2024 compared to first quarter 2023. The Company recorded an income provision tax provision of $0.4 million and an effective tax rate of 7.6% for the first quarter 2024, compared to an income tax benefit of $2.3 million for the first quarter 2023. Financial Condition The following table presents summary balance sheet data for the last five completed fiscal quarters. (in thousands) Balance Sheet Data: March 31, 2024 December 31, 2023 September 30, 2023 June 30, 2023 March 31, 2023 Total assets $ 5,340,667 $ 5,167,572 $ 5,169,023 $ 4,947,049 $ 4,721,319 Loans 3,909,804 3,840,220 3,735,068 3,646,832 3,607,242 Total securities 718,169 702,008 682,755 609,999 606,594 Loans held-for-sale 22,589 22,052 31,669 32,001 18,144 Noninterest-bearing deposits 130,760 123,464 125,265 119,291 140,449 Interest-bearing deposits 4,143,008 3,943,509 3,958,280 3,735,017 3,481,841 Total deposits 4,273,768 4,066,973 4,083,545 3,854,308 3,622,290 Advances from Federal Home Loan Bank 574,936 614,934 614,933 614,931 614,929 Total shareholders’ equity 366,739 362,795 347,744 354,332 355,572 Total assets increased $173.1 million, or 3.3%, to $5.3 billion at March 31, 2024 compared to $5.2 billion at December 31, 2023. The increase was due primarily to increases in cash balances and loans, driven by growth in deposit balances of $206.8 million, or 5.1%. As of March 31, 2024, total shareholders’ equity was $366.7 million, an increase of $3.9 million, or 1.1%, compared to December 31, 2023. The increase in shareholders’ equity was due primarily to the net income earned during the quarter, partially offset by an increase in accumulated other comprehensive loss. Tangible common equity totaled $362.1 million as of March 31, 2024, representing an increase of $3.9 million, or 1.1%, compared to December 31, 2023. The ratio of total shareholders’ equity to total assets decreased to 6.87% as of March 31, 2024 from 7.02% as of December 31, 2023, and the ratio of tangible common equity to tangible assets decreased to 6.79% as of March 31, 2024 from 6.94% as of December 31, 2023. Book value per common share increased 1.0% to $42.37 as of March 31, 2024 from $41.97 as of December 31, 2023. Tangible book value per share increased 1.0% to $41.83 as of March 31, 2024 from $41.43 as of December 31, 2023. The increase in both book value per common share and tangible book value per share was driven primarily by the increase in total shareholders’ equity and tangible common equity. Refer to the “Reconciliation of Non-GAAP Financial Measures” section of Part I, Item 2 of this report, Management’s Discussion and Analysis of Financial Condition and Results of Operations for additional information. 49 Loan Portfolio Analysis The following table presents a summary of the Company’s loan portfolio for the last five completed fiscal quarters. (dollars in thousands) March 31, 2024 December 31, 2023 September 30, 2023 June 30, 2023 March 31, 2023 Commercial loans Commercial and industrial $ 133,897 3.4 % $ 129,349 3.4 % $ 114,265 3.1 % $ 112,423 3.1 % $ 113,198 3.1 % Owner-occupied commercial real estate 57,787 1.5 % 57,286 1.5 % 58,486 1.6 % 59,564 1.6 % 59,643 1.7 % Investor commercial real estate 128,276 3.3 % 132,077 3.4 % 129,831 3.5 % 137,504 3.8 % 142,174 3.9 % Construction 325,597 8.3 % 261,750 6.8 % 252,105 6.7 % 192,453 5.3 % 158,147 4.4 % Single tenant lease financing 941,597 24.1 % 936,616 24.4 % 933,873 25.0 % 947,466 25.9 % 952,533 26.4 % Public finance 498,262 12.7 % 521,764 13.6 % 535,960 14.3 % 575,541 15.8 % 604,898 16.8 % Healthcare finance 213,332 5.5 % 222,793 5.8 % 235,622 6.3 % 245,072 6.7 % 256,670 7.1 % Small business lending 239,263 6.1 % 218,506 5.7 % 192,996 5.2 % 170,550 4.7 % 136,382 3.8 % Franchise finance 543,122 13.9 % 525,783 13.7 % 455,094 12.2 % 390,479 10.6 % 382,161 10.6 % Total commercial loans 3,081,133 78.8 % 3,005,924 78.3 % 2,908,232 77.9 % 2,831,052 77.5 % 2,805,806 77.8 % Consumer loans Residential mortgage 390,009 10.0 % 395,648 10.3 % 393,501 10.5 % 396,154 10.9 % 392,062 10.9 % Home equity 22,753 0.6 % 23,669 0.6 % 23,544 0.6 % 24,375 0.7 % 26,160 0.7 % Other consumer 380,675 9.7 % 377,614 9.8 % 369,451 9.9 % 352,124 9.7 % 338,133 9.4 % Total consumer loans 793,437 20.3 % 796,931 20.7 % 786,496 21.0 % 772,653 21.3 % 756,355 21.0 % Net deferred loan origination costs, premiums and discounts on purchased loans and other 1 35,234 0.9 % 37,365 1.0 % 40,340 1.1 % 43,127 1.2 % 45,081 1.2 % Total loans 3,909,804 100.0 % 3,840,220 100.0 % 3,735,068 100.0 % 3,646,832 100.0 % 3,607,242 100.0 % Allowance for credit losses - loans (40,891) (38,774) (36,452) (36,058) (36,879) Net loans $ 3,868,913 $ 3,801,446 $ 3,698,616 $ 3,610,774 $ 3,570,363 1 Includes carrying value adjustments of $26.9 million, $27.8 million, $29.0 million, $30.5 million and $31.5 million related to terminated interest rate swaps associated with public finance loans as of March 31, 2024, December 31, 2023, September 30, 2023, June 30, 2023 and March 31, 2023, respectively. Total loans were $3.9 billion as of March 31, 2024, an increase of $69.6 million, or 1.8%, compared to December 31, 2023. Total commercial loan balances were $3.1 billion as of March 31, 2024, up $75.2 million, or 2.5%, from December 31, 2023. Total consumer loan balances were $793.4 million as of March 31, 2024, a decrease of $3.5 million, or 0.4%, compared to December 31, 2023. Compared to December 31, 2023, the increase in commercial loan balances was driven by growth in the construction, small business lending and franchise finance portfolios. These increases were partially offset by a decrease in the fixed-rate public finance portfolio, as well as continued runoff in the healthcare finance portfolio. The slight decrease in consumer loan balances was due primarily to a decrease in the residential mortgage portfolio, partially offset by an increase in the trailers portfolio. 50 Asset Quality Nonperforming loans are comprised of nonaccrual loans and loans 90 days past due and accruing. Nonperforming assets include nonperforming loans, other real estate owned and other nonperforming assets, which consist of repossessed assets. The following table provides a summary of the Company’s nonperforming assets for the last five completed fiscal quarters. (dollars in thousands) March 31, 2024 December 31, 2023 September 30, 2023 June 30, 2023 March 31, 2023 Nonaccrual loans Commercial loans: Commercial and industrial $ — $ — $ — $ — $ 2,836 Owner-occupied commercial real estate — — — 1,405 1,441 Small business lending 1 9,532 6,824 4,443 3,729 3,797 Franchise finance 295 303 — — — Total commercial loans 9,827 7,127 4,443 5,134 8,074 Consumer loans: Residential mortgage 2,309 1,911 1,354 992 1,006 Other consumer 129 86 88 101 141 Total consumer loans 2,438 1,997 1,442 1,093 1,147 Total nonaccrual loans 12,265 9,124 5,885 6,227 9,221 Past Due 90 days and accruing loans Commercial loans: Franchise finance 230 — — — — Total commercial loans 230 — — — — Consumer loans: Residential mortgage 555 838 — — — Total consumer loans 555 838 — — — Total past due 90 days and accruing loans 785 838 — — — Total nonperforming loans 13,050 9,962 5,885 6,227 9,221 Other real estate owned Residential mortgage 375 375 106 106 106 Total other real estate owned 375 375 106 106 106 Other nonperforming assets — 17 78 64 19 Total nonperforming assets $ 13,425 $ 10,354 $ 6,069 $ 6,397 $ 9,346 Total nonperforming loans to total loans 2 0.33 % 0.26 % 0.16 % 0.17 % 0.26 % Total nonperforming assets to total assets 2 0.25 % 0.20 % 0.12 % 0.13 % 0.20 % Allowance for credit losses to total loans 1.05 % 1.01 % 0.98 % 0.99 % 1.02 % Nonaccrual loans to total loans 0.31 % 0.24 % 0.16 % 0.17 % 0.26 % Allowance for credit losses to nonperforming loans 2 333.4 % 425.0 % 619.4 % 579.1 % 400.0 % 1 Balance of loans are partially guaranteed by the U.S. government. 2 Includes the impact of nonperforming small business lending loans, which are guaranteed by the U.S. government. Total nonperforming loans increased $3.1 million, or 31.0%, to $13.1 million as of March 31, 2024 compared to $10.0 million as of December 31, 2023 due primarily to an increase in nonperforming loans in small business lending and residential mortgage loans during the quarter. Total nonperforming assets increased $3.1 million, or 30.0%, to $13.4 million as of March 31, 2024, compared to $10.4 million as of December 31, 2023, due primarily to the increases in nonperforming small business lending and residential mortgage loans mentioned above. The Company had two residential mortgage properties in OREO with a carrying value of $0.4 million at both March 31, 2024 and December 31, 2023. 51 Allowance for Credit Losses - Loans The following table provides a rollforward of the allowance for credit losses for the last five completed fiscal quarters. Three Months Ended (dollars in thousands) March 31, 2024 December 31, 2023 September 30, 2023 June 30, 2023 March 31, 2023 Balance, beginning of period $ 38,774 $ 36,452 $ 36,058 $ 36,879 $ 31,737 Adoption of ASU 2016-13 (CECL) — — — — 2,962 Balance, beginning of period 38,774 36,452 36,058 36,879 34,699 Provision charged to expense 2,582 3,478 1,850 753 9,373 Losses charged off Commercial and industrial — — — — 6,965 Investor commercial real estate — — 591 — — Healthcare finance — 580 — 25 — Small business lending 289 417 751 1,358 60 Franchise finance — — — 331 — Residential mortgage 69 84 56 — — Other consumer 175 164 120 150 232 Total losses charged off 533 1,245 1,518 1,864 7,257 Recoveries Commercial and industrial 2 23 2 217 1 Small business lending 40 23 14 37 3 Residential mortgage 1 1 1 1 2 Home equity 2 1 2 2 1 Other consumer 23 41 43 33 57 Total recoveries 68 89 62 290 64 Balance, end of period $ 40,891 $ 38,774 $ 36,452 $ 36,058 $ 36,879 Net charge-offs $ 465 $ 1,156 $ 1,456 $ 1,574 $ 7,193 Net charge-offs (recoveries) to average loans (annualized) Commercial and industrial (0.01 %) (0.02 %) 0.00 % (0.46 %) 27.16 % Investor commercial real estate 0.00 % 0.00 % 0.59 % 0.00 % 0.00 % Healthcare finance 0.00 % 0.25 % 0.00 % 0.02 % 0.00 % Small business lending 0.40 % 0.17 % 0.50 % 1.50 % 0.15 % Franchise finance 0.00 % 0.00 % 0.00 % 0.17 % 0.00 % Total commercial net charge-offs 0.03 % 0.03 % 0.06 % 0.10 % 1.02 % Residential mortgage 0.07 % 0.08 % 0.06 % 0.00 % 0.00 % Home equity (0.03 %) 0.00 % (0.01 %) (0.02 %) (0.02 %) Other consumer 0.21 % 0.22 % 0.18 % 0.21 % 0.25 % Total consumer net charge-offs 0.11 % 0.03 % 0.02 % 0.03 % 0.09 % Total net charge-offs to average loans 0.05 % 0.12 % 0.16 % 0.17 % 0.82 % The allowance for credit losses - loans (“ACL”) was $40.9 million as of March 31, 2024, compared to $38.8 million as of December 31, 2023. The increase in the ACL reflects the addition of specific reserves on nonperforming small business lending loans, as well as loan growth, partially offset by the positive impact of economic data on forecasted loss rates and qualitative factors on other portfolios. The ACL as a percentage of total loans was 1.05% at March 31, 2024, compared to 1.01% at December 31, 2023. The ACL as a percentage of nonperforming loans decreased to 333.4% as of March 31, 2024, compared to 425.0% as of December 31, 2023, due primarily to the increase in the nonperforming loans. Net charge-offs of $0.5 million were recognized during the first quarter 2024, resulting in net charge-offs to average loans of 0.05%, compared to net charge-offs of $7.2 million, or 0.82% of average loans, for the first quarter 2023. The decrease 52 in net charge-offs was due primarily to a $6.9 million partial charge-off of a C&I participation loan that was placed on nonaccrual status during the first quarter 2023, partially offset by an increase in charge-offs in small business lending. The provision for credit losses - loans in the first quarter 2024 was $2.6 million, compared to $9.4 million for the first quarter 2023. The decrease in the provision for credit losses - loans for the first quarter 2024 was driven primarily by the partial charge-off of the C&I participation loan mentioned above that occurred in the first quarter 2023, partially offset by the specific reserves related to small business lending and growth in certain loan portfolios. Investment Securities Portfolio The following tables present the amortized cost and approximate fair value of our investment securities portfolio by security type for the last five completed fiscal quarters. (in thousands) Amortized Cost March 31, 2024 December 31, 2023 September 30, 2023 June 30, 2023 March 31, 2023 Securities available-for-sale U.S. Government-sponsored agencies $ 93,323 $ 96,404 $ 98,594 $ 41,024 $ 38,675 Municipal securities 69,289 69,494 69,031 68,931 69,243 Agency mortgage-backed securities - residential 253,181 237,798 235,468 239,263 249,795 Agency mortgage-backed securities - commercial 39,367 40,215 37,931 16,311 16,739 Private label mortgage-backed securities - residential 23,307 21,742 20,292 14,749 11,445 Asset-backed securities 7,417 8,071 6,713 1,000 5,000 Corporate securities 37,081 39,591 39,603 43,613 45,623 Total available-for-sale 522,965 513,315 507,632 424,891 436,520 Securities held-to-maturity, net carrying value Municipal securities 13,381 13,889 13,900 13,913 13,932 Agency mortgage-backed securities - residential 178,800 166,750 170,524 169,186 146,809 Agency mortgage-backed securities - commercial 5,752 5,767 5,782 5,795 5,806 Corporate securities 37,805 40,747 41,722 41,711 44,214 Total held-to-maturity, net carrying value 235,738 227,153 231,928 230,605 210,761 Total securities $ 758,703 $ 740,468 $ 739,560 $ 655,496 $ 647,281 (in thousands) Approximate Fair Value March 31, 2024 December 31, 2023 September 30, 2023 June 30, 2023 March 31, 2023 Securities available-for-sale U.S. Government-sponsored agencies $ 92,101 $ 95,177 $ 97,178 $ 39,474 $ 37,047 Municipal securities 67,415 68,446 62,772 67,209 68,636 Agency mortgage-backed securities - residential 220,484 206,649 193,096 204,141 216,752 Agency mortgage-backed securities - commercial 38,081 38,885 36,163 14,891 15,530 Private label mortgage-backed securities - residential 22,266 20,779 18,576 13,415 10,275 Asset-backed securities 7,459 8,081 6,703 1,000 4,998 Corporate securities 34,625 36,838 36,339 39,264 42,595 Total available-for-sale 482,431 474,855 450,827 379,394 395,833 Securities held-to-maturity Municipal securities 12,450 13,040 12,449 12,950 13,144 Agency mortgage-backed securities - residential 161,915 152,642 147,412 153,593 133,267 Agency mortgage-backed securities - commercial 4,560 4,521 4,190 4,551 4,703 Corporate securities 35,295 37,369 37,599 37,549 41,349 Total held-to-maturity 214,220 207,572 201,650 208,643 192,463 Total securities $ 696,651 $ 682,427 $ 652,477 $ 588,037 $ 588,296 53 The approximate fair value of available-for-sale investment securities increased $7.6 million, or 1.6%, to $482.4 million as of March 31, 2024, compared to $474.9 million as of December 31, 2023. The increase was due primarily to increases of $13.8 million in agency mortgage-backed securities - residential, $1.5 million in private label mortgage-backed securities - residential, partially offset by decreases of $3.1 million in U.S. Government-sponsored agencies, $2.2 million in corporate securities, and $1.0 million in municipal securities. This increase was caused primarily by new purchase activity within certain available-for-sale portfolios, partially offset by a decline in fair value resulting from an increase in market interest rates, as well as net paydown activity. As of March 31, 2024, the Company had securities with a net carrying value of $235.7 million designated as held-to-maturity compared to $227.2 million as of December 31, 2023. The increase was due primarily to purchases of CRA-eligible agency mortgage-backed securities - residential. Accrued Income and Other Assets Accrued income and other assets increased $12.3 million, or 24.0%, to $63.4 million at March 31, 2024 compared to $51.1 million at December 31, 2023. The increase was due primarily to a $6.6 million increase in equity investments and a $1.2 million increase in prepaid assets. Accrued Expenses and Other Liabilities Accrued expenses and other liabilities increased $2.7 million, or 19.3%, to $16.9 million at March 31, 2024, compared to $14.2 million at December 31, 2023. The increase was due primarily to an increase of $4.4 million in accrued expenses related to a security that was purchased in the first quarter 2024, but settled in the subsequent quarter, partially offset by decreases of $1.2 million in accrued salary and benefits and $0.5 million in derivative liability due to changes in fair value. Deposits The following table presents the composition of the Company’s deposit base for the last five completed fiscal quarters. (dollars in thousands) March 31, 2024 December 31, 2023 September 30, 2023 June 30, 2023 March 31, 2023 Noninterest-bearing deposits $ 130,760 3.1 % $ 123,464 3.0 % $ 125,265 3.1 % $ 119,291 3.1 % $ 140,449 3.9 % Interest-bearing demand deposits 423,529 9.9 % 402,976 9.9 % 374,915 9.2 % 398,899 10.3 % 351,641 9.7 % Savings accounts 23,554 0.6 % 21,364 0.5 % 23,811 0.6 % 28,239 0.7 % 32,762 0.9 % Money market accounts 1,251,230 29.2 % 1,248,319 30.8 % 1,222,511 29.9 % 1,232,719 32.0 % 1,254,013 34.6 % BaaS - brokered deposits 107,911 2.5 % 74,401 1.8 % 41,884 1.0 % 25,549 0.7 % 25,725 0.7 % Certificates of deposits 1,738,996 40.7 % 1,605,156 39.5 % 1,624,447 39.8 % 1,366,409 35.5 % 1,170,094 32.3 % Brokered deposits 597,788 14.0 % 591,293 14.5 % 670,712 16.4 % 683,202 17.7 % 647,606 17.9 % Total deposits $ 4,273,768 100.0 % $ 4,066,973 100.0 % $ 4,083,545 100.0 % $ 3,854,308 100.0 % $ 3,622,290 100.0 % Total deposits increased $206.8 million, or 5.1%, to $4.3 billion as of March 31, 2024, compared to $4.1 billion as of December 31, 2023. This increase was due primarily to increases of $133.8 million, or 8.3%, in certificates of deposits, $33.5 million, or 45.0%, in BaaS - brokered deposits and $20.6 million, or 5.1%, in interest-bearing demand deposits. The increase in certificates of deposits and brokered deposits was due primarily to strong consumer and small business demand for certificates of deposits in 2024. 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 volumes. Uninsured deposit balances represented 26% of total deposits at March 31, 2024, up from 25% at December 31, 2023. 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 drops to 20%, compared to 19% as of December 31, 2023. 54 Regulatory Capital Requirements The Company and the Bank are subject to various regulatory capital requirements administered by state and federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weighting and other factors. The Basel III Capital Rules became effective for the Company and the Bank on January 1, 2015, subject to a phase-in period for certain provisions. Quantitative measures established by the Basel III Capital Rules to ensure capital adequacy require the maintenance of minimum amounts and ratios of Common Equity Tier 1 capital, Tier 1 capital and Total capital, as defined in the regulations, to risk-weighted assets, and of Tier 1 capital to adjusted quarterly average assets (“Leverage Ratio”). The Basel III Capital Rules were fully phased in on January 1, 2019 and require the Company and the Bank to maintain: 1) a minimum ratio of Common Equity Tier 1 capital to risk-weighted assets of 4.5%, plus a 2.5% “capital conservation buffer” (resulting in a minimum ratio of Common Equity Tier 1 capital to risk-weighted assets of 7.0%); 2) a minimum ratio of Tier 1 capital to risk-weighted assets of 6.0%, plus the capital conservation buffer (resulting in a minimum Tier 1 capital ratio of 8.5%); 3) a minimum ratio of Total capital to risk-weighted assets of 8.0%, plus the capital conservation buffer (resulting in a minimum Total capital ratio of 10.5%); and 4) a minimum Leverage Ratio of 4.0%. The capital conservation buffer is designed to absorb losses during periods of economic stress. Failure to maintain the minimum Common Equity Tier 1 capital ratio plus the capital conservation buffer will result in potential restrictions on a banking institution’s ability to pay dividends, repurchase stock and/or pay discretionary compensation to its employees. The following tables present actual and required capital ratios as of March 31, 2024 and December 31, 2023 for the Company and the Bank under the Basel III Capital Rules. The minimum required capital amounts presented include the minimum required capital levels as of March 31, 2024 and December 31, 2023, which are based on the Basel III Capital Rules. Capital levels required to be considered well capitalized are based upon prompt corrective action regulations, as amended to reflect the changes under the Basel III Capital Rules. As permitted by the federal banking regulatory agencies, the Company elected the option to delay the impact of the day one adoption of ASC 326. The transition adjustments of $4.5 million will be phased into the regulatory capital calculations over a three-year period, with 25% of the adjustment recognized in 2023, 50% of the adjustment recognized in 2024, 75% of the adjustment recognized in 2025 and 100% of the adjustment recognized in 2026. Actual Minimum Capital Required - Basel III Minimum Required to be Considered Well Capitalized (dollars in thousands) Capital Amount Ratio Capital Amount Ratio Capital Amount Ratio As of March 31, 2024: Common equity tier 1 capital to risk-weighted assets Consolidated $ 383,580 9.52 % $ 282,102 7.00 % N/A N/A Bank 465,510 11.60 % 280,854 7.00 % $ 260,793 6.50 % Tier 1 capital to risk-weighted assets Consolidated 383,580 9.52 % 342,553 8.50 % N/A N/A Bank 465,510 11.60 % 341,038 8.50 % 320,976 8.00 % Total capital to risk-weighted assets Consolidated 531,045 13.18 % 423,153 10.50 % N/A N/A Bank 508,060 12.66 % 421,282 10.50 % 401,221 10.00 % Leverage ratio Consolidated 383,580 7.33 % 209,373 4.00 % N/A N/A Bank 465,510 8.92 % 208,711 4.00 % 260,889 5.00 % 55 Actual Minimum Capital Required - Basel III Minimum Required to be Considered Well Capitalized (dollars in thousands) Capital Amount Ratio Capital Amount Ratio Capital Amount Ratio As of December 31, 2023: Common equity tier 1 capital to risk-weighted assets Consolidated $ 381,001 9.60 % $ 277,914 7.00 % N/A N/A Bank 464,390 11.73 % 277,063 7.00 % $ 257,273 6.50 % Tier 1 capital to risk-weighted assets Consolidated 381,001 9.60 % 337,467 8.50 % N/A N/A Bank 464,390 11.73 % 336,434 8.50 % 316,644 8.00 % Total capital to risk-weighted assets Consolidated 525,283 13.23 % 416,870 10.50 % N/A N/A Bank 503,834 12.73 % 415,595 10.50 % 395,804 10.00 % Leverage ratio Consolidated 381,001 7.33 % 207,929 4.00 % N/A N/A Bank 464,390 8.95 % 207,479 4.00 % 259,349 5.00 % Shareholders’ Dividends The Company’s Board of Directors declared a cash dividend of $0.06 per share of common stock payable April 15, 2024 to shareholders of record as of March 28, 2024. The Company expects to continue to pay cash dividends on a quarterly basis; however, the declaration and amount of any future cash dividends will be subject to the sole discretion of the Board of Directors and will depend upon many factors, including the Company’s results of operations, financial condition, capital requirements, regulatory and contractual restrictions (including with respect to the Company’s outstanding subordinated debt), business strategy and other factors deemed relevant by the Board of Directors. As of March 31, 2024, the Company had $107.0 million principal amount of subordinated debt outstanding evidenced by the 2029 Notes, 2030 Note and 2031 Notes. The agreements that govern our outstanding subordinated debt prohibit the Company from paying any dividends on its common stock or making any other distributions to shareholders at any time when there shall have occurred, and be continuing to occur, an event of default under the applicable agreement. If an event of default were to occur and the Company did not cure it, the Company would be prohibited from paying any dividends or making any other distributions to shareholders or from redeeming or repurchasing any common stock. Capital Resources The Company believes it has sufficient liquidity and capital resources to meet its cash and capital expenditure requirements for the next twelve months and longer. The Company may explore strategic alternatives, including additional asset, deposit or revenue generation channels that complement our small business, commercial and consumer banking platforms, which may require additional capital. If the Company is unable to secure such capital at favorable terms, its ability to take advantage of such opportunities could be adversely affected. 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 559,522 shares of common stock through March 31, 2024, at an average price of $19.06, for a total investment of $10.7 million. Various factors determine the amount and timing of our share repurchases, including our capital requirements, organic growth and other strategic opportunities, economic and market conditions (including the trading price of our stock), and regulatory and legal considerations. See Part II, Item 2, of this report for information regarding recent repurchase activity and our remaining authority under the program. 56 Liquidity Liquidity management is the process used by the Company to manage the continuing flow of funds necessary to meet its financial commitments on a timely basis and at a reasonable cost while also maintaining safe and sound operations. Liquidity, represented by cash and investment securities, is a product of the Company’s operating, investing and financing activities. The primary sources of funds are deposits, principal and interest payments on loans and investment securities, maturing loans and investment securities, access to wholesale funding sources and collateralized borrowings. While scheduled payments and maturities of loans and investment securities are relatively predictable sources of funds, deposit flows are greatly influenced by interest rates, general economic conditions and competition. Therefore, the Company supplements deposit growth and enhances interest rate risk management through borrowings and wholesale funding, which are generally advances from the Federal Home Loan Bank and brokered deposits. The Company holds cash and investment securities that qualify as liquid assets to maintain adequate liquidity to ensure safe and sound operations and meet its financial commitments. At March 31, 2024, on a consolidated basis, the Company had $963.7 million in cash and cash equivalents and investment securities available-for-sale and $22.6 million in loans held-for-sale that were generally available for its cash needs. The Company can also generate funds from wholesale funding sources and collateralized borrowings. At March 31, 2024, the Bank had the ability to borrow an additional $1.3 billion from the FHLB, the Federal Reserve and correspondent bank Fed Funds lines of credit, which when combined with cash balances, totaled $1.7 billion and represented 203% of adjusted uninsured deposit balances. The Company is a separate legal entity from the Bank and must provide for its own liquidity. In addition to its operating expenses, the Company is responsible for paying any dividends declared to its common shareholders and interest and principal on outstanding debt. The Company’s primary sources of funds are cash maintained at the holding company level and dividends from the Bank, the payment of which is subject to regulatory limits. At March 31, 2024, the Company, on an unconsolidated basis, had $7.0 million in cash for debt servicing and operating expenses. The Company uses its sources of funds primarily to meet ongoing financial commitments, including withdrawals by depositors, credit commitments to borrowers, operating expenses and capital expenditures. At March 31, 2024, approved outstanding loan commitments, including unused lines of credit and standby letters of credit, amounted to $726.5 million. Certificates of deposits and brokered deposits scheduled to mature in one year or less at March 31, 2024 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. 57 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 (benefit), adjusted net income, adjusted diluted earnings per share, adjusted return on average assets, adjusted return on average shareholders’ equity and adjusted return on average tangible common equity are used by the Company’s management to measure the strength of its capital and analyze profitability, including its ability to generate earnings on tangible capital invested by its shareholders. The Company also believes that it is a standard practice in the banking industry to present total interest income, net interest income and net interest margin on a fully-taxable equivalent basis, as those measures provide useful information for peer comparisons. Although the Company believes these non-GAAP financial measures provide a greater understanding of its business, they should not be considered a substitute for financial measures determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP financial measures that may be presented by other companies. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures are included in the following table for the last five completed fiscal quarters. (dollars in thousands, except share and per share data) Three Months Ended March 31, 2024 December 31, 2023 September 30, 2023 June 30, 2023 March 31, 2023 Total equity - GAAP $ 366,739 $ 362,795 $ 347,744 $ 354,332 $ 355,572 Adjustments: Goodwill (4,687) (4,687) (4,687) (4,687) (4,687) Tangible common equity $ 362,052 $ 358,108 $ 343,057 $ 349,645 $ 350,885 Total assets - GAAP $ 5,340,667 $ 5,167,572 $ 5,169,023 $ 4,947,049 $ 4,721,319 Adjustments: Goodwill (4,687) (4,687) (4,687) (4,687) (4,687) Tangible assets $ 5,335,980 $ 5,162,885 $ 5,164,336 $ 4,942,362 $ 4,716,632 Common shares outstanding 8,655,854 8,644,451 8,669,673 8,774,507 8,943,477 Book value per common share $ 42.37 $ 41.97 $ 40.11 $ 40.38 $ 39.76 Effect of goodwill (0.54) (0.54) (0.54) (0.53) (0.53) Tangible book value per common share $ 41.83 $ 41.43 $ 39.57 $ 39.85 $ 39.23 Total shareholders’ equity to assets 6.87 % 7.02 % 6.73 % 7.16 % 7.53 % Effect of goodwill (0.08 %) (0.08 %) (0.09 %) (0.09 %) (0.09 %) Tangible common equity to tangible assets 6.79 % 6.94 % 6.64 % 7.07 % 7.44 % Total average equity - GAAP $ 369,371 $ 353,037 $ 356,701 $ 358,312 $ 363,273 Adjustments: Average goodwill (4,687) (4,687) (4,687) (4,687) (4,687) Average tangible common equity $ 364,684 $ 348,350 $ 352,014 $ 353,625 $ 358,586 Return on average shareholders’ equity 5.64 % 4.66 % 3.79 % 4.35 % (3.37 %) Effect of goodwill 0.07 % 0.06 % 0.05 % 0.05 % (0.04 %) Return on average tangible common equity 5.71 % 4.72 % 3.84 % 4.40 % (3.41 %) 58 (dollars in thousands, except share and per share data) Three Months Ended March 31, 2024 December 31, 2023 September 30, 2023 June 30, 2023 March 31, 2023 Total interest income $ 68,165 $ 66,272 $ 63,015 $ 58,122 $ 52,033 Adjustments: Fully-taxable equivalent adjustments 1 1,190 1,238 1,265 1,347 1,383 Total interest income - FTE $ 69,355 $ 67,510 $ 64,280 $ 59,469 $ 53,416 Net interest income $ 20,734 $ 19,807 $ 17,378 $ 18,145 $ 19,574 Adjustments: Fully-taxable equivalent adjustments 1 1,190 1,238 1,265 1,347 1,383 Net interest income - FTE $ 21,924 $ 21,045 $ 18,643 $ 19,492 $ 20,957 Net interest margin 1.66 % 1.58 % 1.39 % 1.53 % 1.76 % Effect of fully-taxable equivalent adjustments 1 0.09 % 0.10 % 0.10 % 0.11 % 0.13 % Net interest margin - FTE 1.75 % 1.68 % 1.49 % 1.64 % 1.89 % 1 Assuming a 21% tax rate 59 (dollars in thousands, except share and per share data) Three Months Ended March 31, 2024 December 31, 2023 September 30, 2023 June 30, 2023 March 31, 2023 Total Revenue- GAAP $ 29,081 $ 27,208 $ 24,785 $ 24,016 $ 25,020 Adjustments: Mortgage-related revenue — — — — (65) Adjusted total revenue $ 29,081 $ 27,208 $ 24,785 $ 24,016 $ 24,955 Noninterest income - GAAP $ 8,347 $ 7,401 $ 7,407 $ 5,871 $ 5,446 Adjustments: Mortgage-related revenue — — — — (65) Adjusted noninterest income $ 8,347 $ 7,401 $ 7,407 $ 5,871 $ 5,381 Noninterest expense - GAAP $ 21,023 $ 20,056 $ 19,756 $ 18,670 $ 20,954 Adjustments: Mortgage-related costs — — — — (3,052) Adjusted noninterest expense $ 21,023 $ 20,056 $ 19,756 $ 18,670 $ 17,902 Income (loss) before income taxes - GAAP $ 5,610 $ 3,558 $ 3,083 $ 3,648 $ (5,349) Adjustments: 1 Mortgage-related revenue — — — — (65) Mortgage-related costs — — — — 3,052 Partial charge-off of C&I participation loan — — — — 6,914 Adjusted income before income taxes $ 5,610 $ 3,558 $ 3,083 $ 3,648 $ 4,552 Income tax provision (benefit) - GAAP $ 429 $ (585) $ (326) $ (234) $ (2,332) Adjustments: 1 Mortgage-related revenue — — — — (14) Mortgage-related costs — — — — 641 Partial charge-off of C&I participation loan — — — — 1,452 Adjusted income tax provision (benefit) $ 429 $ (585) $ (326) $ (234) $ (253) 1 Assuming a 21% tax rate 60 (dollars in thousands, except share and per share data) Three Months Ended March 31, 2024 December 31, 2023 September 30, 2023 June 30, 2023 March 31, 2023 Net income (loss) - GAAP $ 5,181 $ 4,143 $ 3,409 $ 3,882 $ (3,017) Adjustments: Mortgage-related revenue — — — — (51) Mortgage-related costs — — — — 2,411 Partial charge-off of C&I participation loan — — — — 5,462 Adjusted net income $ 5,181 $ 4,143 $ 3,409 $ 3,882 $ 4,805 Diluted average common shares outstanding 8,750,297 8,720,078 8,767,217 8,908,180 9,024,072 Diluted earnings (loss) per share - GAAP $ 0.59 $ 0.48 $ 0.39 $ 0.44 $ (0.33) Adjustments: Mortgage-related revenue — — — — (0.01) Mortgage-related costs — — — — 0.27 Effect of partial charge-off of C&I participation loan — — — — 0.60 Adjusted diluted earnings per share $ 0.59 $ 0.48 $ 0.39 $ 0.44 $ 0.53 Return on average assets 0.40 % 0.32 % 0.26 % 0.32 % (0.26 %) Effect of mortgage-related costs 0.00 % 0.00 % 0.00 % 0.00 % 0.21 % Effect of partial charge-off of C&I participation loan 0.00 % 0.00 % 0.00 % 0.00 % 0.48 % Adjusted return on average assets 0.40 % 0.32 % 0.26 % 0.32 % 0.43 % Return on average shareholders' equity 5.64 % 4.66 % 3.79 % 4.35 % (3.37 %) Effect of mortgage-related revenue 0.00 % 0.00 % 0.00 % 0.00 % (0.06 %) Effect of mortgage-related costs 0.00 % 0.00 % 0.00 % 0.00 % 2.69 % Effect of partial charge-off of C&I participation loan 0.00 % 0.00 % 0.00 % 0.00 % 6.10 % Adjusted return on average shareholders' equity 5.64 % 4.66 % 3.79 % 4.35 % 5.36 % Return on average tangible common equity 5.71 % 4.72 % 3.84 % 4.40 % (3.41 %) Effect of mortgage-related revenue 0.00 % 0.00 % 0.00 % 0.00 % (0.06 %) Effect of mortgage-related costs 0.00 % 0.00 % 0.00 % 0.00 % 2.73 % Effect of partial charge-off of C&I participation loan 0.00 % 0.00 % 0.00 % 0.00 % 6.18 % Adjusted return on average tangible common equity 5.71 % 4.72 % 3.84 % 4.40 % 5.44 % Critical Accounting Policies and Estimates There have been no material changes in the Company’s critical accounting policies or estimates from those disclosed in its Annual Report on Form 10-K for the year ended December 31, 2023. Recent Accounting Pronouncements Refer to Note 15 to the condensed consolidated financial statements. Off-Balance Sheet Arrangements In the ordinary course of business, the Company enters into financial transactions to extend credit, interest rate swap agreements and forms of commitments that may be considered off-balance sheet arrangements. Interest rate swaps are arranged to receive hedge accounting treatment and are classified as either fair value or cash flow hedges. Fair value hedges are purchased to convert certain fixed rate assets to floating rate. Cash flow hedges are used to convert certain variable rate liabilities into fixed rate liabilities. At both March 31, 2024 and December 31, 2023, the Company had interest rate swaps with notional amounts of $200.0 million. Refer to Note 13 to the condensed consolidated financial statements for additional information about derivative financial instruments. 61