First Internet Bancorp 10-Q

ITEM 1. FINANCIAL STATEMENTS First Internet Bancorp Condensed Consolidated Balance Sheets (Amounts in thousands except share data) June 30, 2024 December 31, 2023 (Unaudited) Assets Cash and due from banks $ 6,162 $ 8,269 Interest-bearing deposits 390,624 397,629 Total cash and cash equivalents 396,786 405,898 Securities available-for-sale, at fair value (amortized cost of $ 529,657 and $ 513,315 in 2024 and 2023, respectively) 488,572 474,855 Securities held-to-maturity, at amortized cost, net of allowance for credit losses of $ 0.2 million and $ 0.3 million in 2024 and 2023, respectively, (fair value of $ 247,430 and $ 207,572 in 2024 and 2023, respectively) 270,349 227,153 Loans held-for-sale 19,384 22,052 Loans 3,961,146 3,840,220 Allowance for credit losses - loans ( 43,405 ) ( 38,774 ) Net loans 3,917,741 3,801,446 Accrued interest receivable 28,118 26,746 Federal Home Loan Bank of Indianapolis stock 28,350 28,350 Cash surrender value of bank-owned life insurance 40,834 40,882 Premises and equipment, net 72,516 73,463 Goodwill 4,687 4,687 Servicing asset, at fair value 13,009 10,567 Other real estate owned — 375 Accrued income and other assets 62,956 51,098 Total assets $ 5,343,302 $ 5,167,572 Liabilities and Shareholders’ Equity Liabilities Noninterest-bearing deposits $ 126,438 $ 123,464 Interest-bearing deposits 4,147,484 3,943,509 Total deposits 4,273,922 4,066,973 Advances from Federal Home Loan Bank 575,000 614,934 Subordinated debt, net of unamortized debt issuance costs of $ 2,007 and $ 2,162 in 2024 and 2023, respectively 104,993 104,838 Accrued interest payable 3,419 3,848 Accrued expenses and other liabilities 14,015 14,184 Total liabilities 4,971,349 4,804,777 Commitments and Contingencies Shareholders’ Equity Preferred stock, no par value; 4,913,779 shares authorized; issued and outstanding - none — — Voting common stock, no par value; 45,000,000 shares authorized; 8,667,894 and 8,644,451 shares issued and outstanding in 2024 and 2023, respectively 185,175 184,700 Nonvoting common stock, no par value; 86,221 shares authorized; issued and outstanding - none — — Retained earnings 217,365 207,470 Accumulated other comprehensive loss ( 30,587 ) ( 29,375 ) Total shareholders’ equity 371,953 362,795 Total liabilities and shareholders’ equity $ 5,343,302 $ 5,167,572 See Notes to Condensed Consolidated Financial Statements 1 First Internet Bancorp Condensed Consolidated Statements of Income – Unaudited (Amounts in thousands except share and per share data) Three Months Ended Six Months Ended June 30, 2024 June 30, 2023 June 30, 2024 June 30, 2023 Interest Income Loans $ 57,094 $ 46,906 $ 112,529 $ 90,749 Securities – taxable 6,476 3,835 12,170 7,441 Securities – non-taxable 970 860 1,939 1,658 Other earning assets 6,421 6,521 12,488 10,307 Total interest income 70,961 58,122 139,126 110,155 Interest Expense Deposits 44,495 34,676 86,624 61,946 Other borrowed funds 5,139 5,301 10,441 10,490 Total interest expense 49,634 39,977 97,065 72,436 Net Interest Income 21,327 18,145 42,061 37,719 Provision for credit losses - loans 3,920 753 6,502 10,126 Benefit for credit losses - debt securities held to maturity ( 2 ) — ( 64 ) — Provision for credit losses - off-balance sheet commitments 113 945 41 987 Net Interest Income After Provision for Credit Losses 17,296 16,447 35,582 26,606 Noninterest Income Service charges and fees 246 218 466 427 Loan servicing revenue 1,470 850 2,793 1,635 Loan servicing asset revaluation ( 829 ) ( 358 ) ( 1,263 ) ( 413 ) Mortgage banking activities — — — 76 Gain on sale of loans 8,292 4,868 14,828 8,929 Other 1,854 293 2,556 663 Total noninterest income 11,033 5,871 19,380 11,317 Noninterest Expense Salaries and employee benefits 12,462 10,706 24,258 22,500 Marketing, advertising and promotion 609 705 1,345 1,549 Consulting and professional services 1,022 711 1,875 1,637 Data processing 606 520 1,170 1,179 Loan expenses 1,597 1,072 3,042 3,049 Premises and equipment 3,154 2,661 5,980 5,438 Deposit insurance premium 1,172 936 2,317 1,479 Other 1,714 1,359 3,372 2,793 Total noninterest expense 22,336 18,670 43,359 39,624 Income (Loss) Before Income Taxes 5,993 3,648 11,603 ( 1,701 ) Income Tax Provision (Benefit) 218 ( 234 ) 647 ( 2,566 ) Net Income $ 5,775 $ 3,882 $ 10,956 $ 865 Income Per Share of Common Stock Basic $ 0.67 $ 0.44 $ 1.26 $ 0.10 Diluted $ 0.67 $ 0.44 $ 1.25 $ 0.10 Weighted-Average Number of Common Shares Outstanding Basic 8,594,315 8,903,213 8,684,093 8,963,308 Diluted 8,656,215 8,908,180 8,750,017 8,980,262 Dividends Declared Per Share $ 0.06 $ 0.06 $ 0.12 $ 0.12 See Notes to Condensed Consolidated Financial Statements 2 First Internet Bancorp Condensed Consolidated Statements of Comprehensive Income – Unaudited (Amounts in thousands) Three Months Ended June 30, Six Months Ended June 30, 2024 2023 2024 2023 Net income $ 5,775 $ 3,882 $ 10,956 $ 865 Other comprehensive (loss) income Securities available-for-sale Net unrealized holding (losses) gains recorded within other comprehensive (loss) income before income tax ( 551 ) ( 4,810 ) ( 2,625 ) 302 Income tax (benefit) provision ( 126 ) ( 1,107 ) ( 601 ) 63 Net effect on other comprehensive (loss) income ( 425 ) ( 3,703 ) ( 2,024 ) 239 Securities held-to-maturity Amortization of net unrealized holding losses on securities transferred from available-for-sale to held-to-maturity 188 206 422 364 Income tax provision 46 49 103 95 Net effect on other comprehensive income 142 157 319 269 Cash flow hedges Net unrealized holding (losses) gains on cash flow hedging derivatives recorded within other comprehensive income (loss) before income tax ( 262 ) 2,094 640 ( 76 ) Income tax (benefit) provision ( 60 ) 481 147 ( 18 ) Net effect on other comprehensive (loss) income ( 202 ) 1,613 493 ( 58 ) Total other comprehensive (loss) income ( 485 ) ( 1,933 ) ( 1,212 ) 450 Comprehensive income $ 5,290 $ 1,949 $ 9,744 $ 1,315 See Notes to Condensed Consolidated Financial Statements 3 First Internet Bancorp Condensed Consolidated Statements of Changes in Shareholders’ Equity - Unaudited Six Months Ended June 30, 2024 and 2023 (Amounts in thousands except share and per share data) Voting and Nonvoting Common Stock Retained Earnings Accumulated Other Comprehensive Loss Total Shareholders’ Equity Balance, January 1, 2024 $ 184,700 $ 207,470 $ ( 29,375 ) $ 362,795 Net income — 10,956 — 10,956 Other comprehensive loss — — ( 1,212 ) ( 1,212 ) Dividends declared ($ 0.12 per share) — ( 1,061 ) — ( 1,061 ) Recognition of the fair value of share-based compensation 901 — — 901 Repurchased shares of common stock ( 10,500 ) ( 283 ) — — ( 283 ) Excise tax on repurchase of common stock ( 3 ) — — ( 3 ) Deferred stock rights and restricted stock units issued in lieu of cash dividends payable on outstanding deferred stock rights and restricted stock units 2 — — 2 Common stock redeemed for the net settlement of share-based awards ( 142 ) — — ( 142 ) Balance, June 30, 2024 $ 185,175 $ 217,365 $ ( 30,587 ) $ 371,953 Balance, January 1, 2023 $ 192,935 $ 205,675 $ ( 33,636 ) $ 364,974 Impact of adoption of new accounting standards 1 — ( 4,491 ) — ( 4,491 ) Net income — 865 — 865 Other comprehensive income — — 450 450 Dividends declared ($ 0.12 per share) — ( 1,076 ) — ( 1,076 ) Recognition of the fair value of share-based compensation 487 — — 487 Repurchased shares of common stock ( 364,691 ) ( 6,774 ) — — ( 6,774 ) Deferred stock rights and restricted stock units issued in lieu of cash dividends payable on outstanding deferred stock rights and restricted stock units 3 — — 3 Common stock redeemed for the net settlement of share-based awards ( 106 ) — — ( 106 ) Balance, June 30, 2023 $ 186,545 $ 200,973 $ ( 33,186 ) $ 354,332 1 Reflects the impact of adopting Accounting Standards Update (“ASU”) 2016-13. See Notes to Condensed Consolidated Financial Statements 4 First Internet Bancorp Condensed Consolidated Statements of Changes in Shareholders’ Equity - Unaudited Three Months Ended June 30, 2024 and 2023 (Amounts in thousands except per share data) Voting and Nonvoting Common Stock Retained Earnings Accumulated Other Comprehensive Loss Total Shareholders’ Equity Balance, April 1, 2024 184,720 $ 212,121 $ ( 30,102 ) $ 366,739 Net income — 5,775 — 5,775 Other comprehensive loss — — ( 485 ) ( 485 ) Dividends declared ($ 0.06 per share) — ( 531 ) — ( 531 ) Recognition of the fair value of share-based compensation 458 — — 458 Excise tax on repurchase of common stock ( 3 ) — — ( 3 ) Balance, June 30, 2024 $ 185,175 $ 217,365 $ ( 30,587 ) $ 371,953 Balance, April 1, 2023 $ 189,202 $ 197,623 $ ( 31,253 ) $ 355,572 Net income — 3,882 — 3,882 Other comprehensive loss — — ( 1,933 ) ( 1,933 ) Dividends declared ($ 0.06 per share) — ( 532 ) — ( 532 ) Recognition of the fair value of share-based compensation 115 — — 115 Repurchased shares of common stock ( 85,000 ) ( 2,745 ) ( 2,745 ) Excise tax on repurchase of common stock ( 27 ) — — ( 27 ) Balance, June 30, 2023 $ 186,545 $ 200,973 $ ( 33,186 ) $ 354,332 See Notes to Condensed Consolidated Financial Statements 5 First Internet Bancorp Condensed Consolidated Statements of Cash Flows – Unaudited (Amounts in thousands) Six Months Ended June 30, 2024 2023 Operating Activities Net income $ 10,956 $ 865 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization 3,846 2,918 Increase in cash surrender value of bank-owned life insurance ( 540 ) ( 498 ) Provision for credit losses 6,479 11,113 Share-based compensation expense 901 487 Loans originated for sale ( 200,500 ) ( 170,112 ) Proceeds from sale of loans 214,291 166,469 Gain on loans sold ( 14,828 ) ( 9,400 ) Gain on sale of other real estate owned ( 31 ) — Decrease in fair value of loans held-for-sale — 143 Gain on derivatives 1,803 368 Gain on bank-owned life insurance ( 149 ) — Loan servicing asset revaluation 1,263 413 Net change in accrued income and other assets ( 3,370 ) ( 4,985 ) Net change in accrued expenses and other liabilities ( 1,305 ) ( 2,625 ) Net cash provided by (used in) by operating activities 18,816 ( 4,844 ) Investing Activities Net loan activity, excluding purchases ( 57,851 ) ( 37,490 ) Proceeds from sale of other real estate owned 406 — Maturities and calls of securities available-for-sale 33,701 25,446 Purchase of securities available-for-sale ( 50,947 ) ( 14,863 ) Maturities and calls of securities held-to-maturity 11,418 11,332 Purchase of securities held-to-maturity ( 53,977 ) ( 49,443 ) Purchase of premises and equipment ( 1,496 ) ( 3,132 ) Proceeds from bank-owned life insurance 737 — Loans purchased ( 64,944 ) ( 118,813 ) Other investing activities ( 10,438 ) ( 2,094 ) Net cash used in investing activities ( 193,391 ) ( 189,057 ) Financing Activities Net increase in deposits 206,949 410,951 Cash dividends paid ( 1,049 ) ( 1,091 ) Repurchase of common stock ( 283 ) ( 6,774 ) Proceeds from advances from Federal Home Loan Bank 320,000 220,000 Repayment of advances from Federal Home Loan Bank ( 360,000 ) ( 220,000 ) Other, net ( 154 ) ( 106 ) Net cash provided by financing activities 165,463 402,980 Net (Decrease) Increase in Cash and Cash Equivalents ( 9,112 ) 209,079 Cash and Cash Equivalents, Beginning of Period 405,898 256,552 Cash and Cash Equivalents, End of Period $ 396,786 $ 465,631 Supplemental Disclosures Cash paid during the period for interest 97,494 72,013 Cash paid during the period for taxes 378 818 Loans transferred to other real estate owned — 106 Cash dividends declared, paid in subsequent period 520 526 Securities purchased during the period, settled in subsequent period — 2,632 See Notes to Condensed Consolidated Financial Statements 6 First Internet Bancorp Notes to Condensed Consolidated Financial Statements – Unaudited (Table amounts in thousands except share and per share data) Note 1: Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information or footnotes necessary for a complete presentation of financial condition, results of operations, changes in shareholders’ equity, or cash flows in accordance with GAAP. In our opinion, all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation have been included. The results of operations for the three and six months ended June 30, 2024 are not necessarily indicative of the results expected for the year ending December 31, 2024 or any other period. The June 30, 2024 condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the First Internet Bancorp Annual Report on Form 10-K for the year ended December 31, 2023. The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates, judgments, or assumptions that could have a material effect on the carrying value of certain assets and liabilities. These estimates, judgments, and assumptions affect the amounts reported in the condensed consolidated financial statements and the disclosures provided. The determination of the allowance for credit losses, income taxes, valuations and impairments of investment securities and goodwill, as well as fair value measurements of derivatives and loans held-for-sale are highly dependent upon management’s estimates, judgments, and assumptions, and changes in any of these could have a significant impact on the condensed consolidated financial statements. The condensed consolidated financial statements include the accounts of First Internet Bancorp (the “Company”), its wholly owned subsidiary, First Internet Bank of Indiana (the “Bank”), and the Bank’s three wholly owned subsidiaries, First Internet Public Finance Corp., JKH Realty Services, LLC and SPF15, Inc. All significant intercompany accounts and transactions have been eliminated in consolidation. The Company is subject to claims and lawsuits that arise primarily in the ordinary course of business. It is the opinion of management that the disposition or ultimate resolution of such claims and lawsuits will not have a material adverse effect on the consolidated financial position, results of operations, and cash flows of the Company. 7 Note 2: Earnings Per Share Earnings per share of common stock are based on the weighted-average number of basic shares and dilutive shares outstanding during the period. The following is a reconciliation of the weighted-average common shares for the basic and diluted earnings per share computations for the three and six months ended June 30, 2024 and 2023. (dollars in thousands, except share and per share data) Three Months Ended June 30, Six Months Ended June 30, 2024 2023 2024 2023 Basic earnings per share Net income $ 5,775 $ 3,882 $ 10,956 $ 865 Weighted-average common shares 8,594,315 8,903,213 8,684,093 8,963,308 Basic earnings per common share $ 0.67 $ 0.44 $ 1.26 $ 0.10 Diluted earnings per share Net income $ 5,775 $ 3,882 $ 10,956 $ 865 Weighted-average common shares 8,594,315 8,903,213 8,684,093 8,963,308 Dilutive effect of equity compensation 61,900 4,967 65,924 16,954 Weighted-average common and incremental shares 8,656,215 8,908,180 8,750,017 8,980,262 Diluted earnings per common share 1 $ 0.67 $ 0.44 $ 1.25 $ 0.10 1 Potential dilutive common shares are excluded from the computation of diluted EPS in the periods where the effect would be antidilutive. There were no antidilutive shares for both the three and six months ended June 30, 2024. Excluded from the computation of diluted EPS were weighted-average antidilutive shares totaling 79,313 and 35,033 for the three and six months ended June 30, 2023, respectively. 8 Note 3: Securities The following tables summarize securities AFS and securities HTM as of June 30, 2024 and December 31, 2023. June 30, 2024 Amortized Gross Unrealized Fair (in thousands) Cost Gains Losses Value Securities available-for-sale U.S. Government-sponsored agencies $ 88,694 $ 505 $ ( 1,453 ) $ 87,746 Municipal securities 68,057 31 ( 3,676 ) 64,412 Agency mortgage-backed securities - residential 1 262,758 162 ( 32,875 ) 230,045 Agency mortgage-backed securities - commercial 37,986 202 ( 1,297 ) 36,891 Private label mortgage-backed securities - residential 26,709 86 ( 1,164 ) 25,631 Asset-backed securities 8,383 47 ( 1 ) 8,429 Corporate securities 37,070 106 ( 1,758 ) 35,418 Total available-for-sale $ 529,657 $ 1,139 $ ( 42,224 ) $ 488,572 June 30, 2024 Amortized Cost Gross Unrealized Fair Value Allowance for Credit Losses Net Carrying Value (in thousands) Gains Losses Securities held-to-maturity Municipal securities $ 13,371 $ — $ ( 1,045 ) $ 12,326 $ ( 3 ) $ 13,368 Mortgage-backed securities - residential 213,440 15 ( 18,118 ) 195,337 — 213,440 Mortgage-backed securities - commercial 5,738 — ( 1,039 ) 4,699 — 5,738 Corporate securities 38,029 — ( 2,961 ) 35,068 ( 226 ) 37,803 Total held-to-maturity $ 270,578 $ 15 $ ( 23,163 ) $ 247,430 $ ( 229 ) $ 270,349 1 Includes $ 0.3 million of additional premium related to terminated interest rate swaps associated with agency mortgage-backed securities - residential as of June 30, 2024 . December 31, 2023 Amortized Gross Unrealized Fair (in thousands) Cost Gains Losses Value Securities available-for-sale U.S. Government-sponsored agencies $ 96,404 $ 402 $ ( 1,629 ) $ 95,177 Municipal securities 69,494 356 ( 1,404 ) 68,446 Agency mortgage-backed securities - residential 1 237,798 101 ( 31,250 ) 206,649 Agency mortgage-backed securities - commercial 40,215 9 ( 1,339 ) 38,885 Private label mortgage-backed securities - residential 21,742 144 ( 1,107 ) 20,779 Asset-backed securities 8,071 17 ( 7 ) 8,081 Corporate securities 39,591 25 ( 2,778 ) 36,838 Total available-for-sale $ 513,315 $ 1,054 $ ( 39,514 ) $ 474,855 9 December 31, 2023 Amortized Gross Unrealized Fair Allowance for Credit Losses Net Carrying Value (in thousands) Cost Gains Losses Value Securities held-to-maturity Municipal securities $ 13,892 $ 1 $ ( 853 ) $ 13,040 $ ( 3 ) $ 13,889 Agency mortgage-backed securities - residential 166,750 4 ( 14,112 ) 152,642 — $ 166,750 Agency mortgage-backed securities - commercial 5,767 — ( 1,246 ) 4,521 — $ 5,767 Corporate securities 41,037 — ( 3,668 ) 37,369 ( 290 ) $ 40,747 Total held-to-maturity $ 227,446 $ 5 $ ( 19,879 ) $ 207,572 $ ( 293 ) $ 227,153 1 Includes $ 0.4 million of additional premium related to terminated interest rate swaps associated with agency mortgage-backed securities - residential as of December 31, 2023. Accrued interest receivable on AFS and HTM securities at June 30, 2024 was $ 2.8 million and $ 1.3 million, respectively, compared to $ 2.9 million and $ 1.2 million, respectively, at December 31, 2023, and is included in accrued interest receivable on the condensed consolidated balance sheet. The Company elected to exclude all accrued interest receivable from securities when estimating credit losses. At both June 30, 2024 and December 31, 2023, over 95 % of mortgage-backed securities (including both AFS and HTM) held by the Company are issued by U.S. government-sponsored entities and agencies. These securities are either explicitly or implicitly guaranteed by the U.S. government and have a long history of no credit losses; therefore, the Company did not record an ACL on these securities. Additionally, the Company evaluated credit impairment for individual AFS securities that are in an unrealized loss position and determined that the unrealized losses are unrelated to credit quality and are primarily attributable to changes in interest rates and volatility in the financial markets. As the Company does not intend to sell the AFS securities that are in an unrealized loss position, and it is unlikely that it will be required to sell these securities before recovery of their amortized cost basis, the Company did not record an ACL on these securities. In accordance with the adoption of ASC 326, the Company also evaluated its HTM securities that are in an unrealized loss position and considered issuer bond ratings, historical loss rates for bond ratings and economic forecasts. As a result, the Company recorded in an initial ACL in retained earnings of $ 0.3 million on January 1, 2023. The Company reevaluated these securities at June 30, 2024 and determined no additional ACL was necessary. The carrying value of securities at June 30, 2024 is shown below by their contractual maturity date. Actual maturities will differ because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Available-for-Sale (in thousands) Amortized Cost Fair Value Within one year $ 10,001 $ 9,825 One to five years 21,133 21,530 Five to ten years 72,660 70,261 After ten years 90,027 85,960 193,821 187,576 Agency mortgage-backed securities - residential 262,758 230,045 Agency mortgage-backed securities - commercial 37,986 36,891 Private label mortgage-backed securities - residential 26,709 25,631 Asset-backed securities 8,383 8,429 Total $ 529,657 $ 488,572 10 Held-to-Maturity (in thousands) Amortized Cost Fair Value Within one year $ 1,005 $ 995 One to five years 12,611 12,029 Five to ten years 34,278 31,345 After ten years 3,506 3,025 51,400 47,394 Agency mortgage-backed securities - residential 213,440 195,337 Agency mortgage-backed securities - commercial 5,738 4,699 Total $ 270,578 $ 247,430 There were no gross gains or losses resulting from the sale of available-for-sale securities during the three and six months ended June 30, 2024 and June 30, 2023, respectively. Certain investments in debt securities are reported in the condensed consolidated financial statements at an amount less than their historical cost. The total fair value of these investments at June 30, 2024 and December 31, 2023 was $ 603.2 million and $ 578.9 million, which was approximately 82 % and 85 %, respectively, of the Company’s AFS and HTM securities portfolios. As of June 30, 2024, the Company’s security portfolio consisted of 553 securities, of which 493 were in an unrealized loss position. As of December 31, 2023, the Company’s security portfolio consisted of 512 securities, of which 434 were in an unrealized loss position. The unrealized losses are related to the categories noted below. U. S. Government-Sponsored Agencies, Municipal Securities and Corporate Securities The unrealized losses on the Company’s investments in securities issued by U.S. Government-sponsored agencies, municipal organizations and corporate entities were caused primarily by interest rate changes. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments. The Company does not intend to sell the investments and it is not likely that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be upon maturity. Agency Mortgage-Backed and Private Label Mortgage-Backed Securities The unrealized losses on the Company’s investments in agency mortgage-backed and private label mortgage-backed securities were caused primarily by interest rate changes. The Company expects to recover the amortized cost basis over the terms of the securities. The Company does not intend to sell the investments and it is not likely that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be upon maturity. The following tables show the securities portfolio’s gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at June 30, 2024 and December 31, 2023. 11 June 30, 2024 Less Than 12 Months 12 Months or Longer Total (in thousands) Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses Securities available-for-sale U.S. Government-sponsored agencies $ 22,285 $ ( 97 ) $ 19,514 $ ( 1,356 ) $ 41,799 $ ( 1,453 ) Municipal securities 4,452 ( 195 ) 54,022 ( 3,481 ) 58,474 ( 3,676 ) Agency mortgage-backed securities- residential 27,981 ( 137 ) 181,940 ( 32,738 ) 209,921 ( 32,875 ) Agency mortgage-backed securities- commercial — — 13,026 ( 1,297 ) 13,026 ( 1,297 ) Private label mortgage-backed securities - residential 4,924 ( 32 ) 11,387 ( 1,132 ) 16,311 ( 1,164 ) Asset-backed securities 1,348 ( 1 ) — — 1,348 ( 1 ) Corporate securities 4,625 ( 375 ) 22,650 ( 1,383 ) 27,275 ( 1,758 ) Total $ 65,615 $ ( 837 ) $ 302,539 $ ( 41,387 ) $ 368,154 $ ( 42,224 ) December 31, 2023 Less Than 12 Months 12 Months or Longer Total (in thousands) Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses Securities available-for-sale U.S. Government-sponsored agencies $ 41,934 $ ( 161 ) $ 24,579 $ ( 1,468 ) $ 66,513 $ ( 1,629 ) Municipal securities 2,399 ( 103 ) 36,193 ( 1,301 ) 38,592 ( 1,404 ) Agency mortgage-backed securities - residential 1,089 ( 5 ) 194,095 ( 31,245 ) 195,184 ( 31,250 ) Agency mortgage-backed securities - commercial 21,561 ( 50 ) 14,217 ( 1,289 ) 35,778 ( 1,339 ) Private label mortgage-backed securities - residential 3,567 ( 29 ) 9,114 ( 1,078 ) 12,681 ( 1,107 ) Asset-backed securities 1,654 ( 7 ) — — 1,654 ( 7 ) Corporate securities 1,680 ( 365 ) 24,587 ( 2,413 ) 26,267 ( 2,778 ) Total $ 73,884 $ ( 720 ) $ 302,785 $ ( 38,794 ) $ 376,669 $ ( 39,514 ) 12 The following tables summarize ratings for the Company’s HTM portfolio as of June 30, 2024 and December 31, 2023. June 30, 2024 Held-to-Maturity (in thousands) Municipal Securities Mortgage-Backed Securities - Residential Mortgage-Backed Securities - Commercial Corporate Securities Total AAA equivalent - agency $ — $ 213,440 $ 5,738 $ — $ 219,178 Aa1/AA+ 9,400 — — — 9,400 Aa2/AA 2,178 — — — 2,178 A1/A+ 1,793 — — — 1,793 A2/A — — — 5,000 5,000 A3/A- — — — 4,504 4,504 Baa1/BBB+ — — — 8,500 8,500 Baa2/BBB — — — 8,500 8,500 Baa3/BBB- — — — 9,525 9,525 Ba1/BB+ — — — 2,000 2,000 Total $ 13,371 $ 213,440 $ 5,738 $ 38,029 $ 270,578 December 31, 2023 Held-to-Maturity (in thousands) Municipal Securities Mortgage-Backed Securities - Residential Mortgage-Backed Securities - Commercial Corporate Securities Total AAA equivalent - agency $ — $ 166,750 $ 5,767 $ — $ 172,517 Aa1/AA+ 9,917 — — — 9,917 Aa2/AA 1,538 — — — 1,538 A1/A+ 1,794 — — — 1,794 A2/A 643 — — 5,000 5,643 A3/A- — — — 4,509 4,509 Baa1/BBB+ — — — 8,500 8,500 Baa2/BBB — — — 8,500 8,500 Baa3/BBB- — — — 12,528 12,528 Ba1/BB+ — — — 2,000 2,000 Total $ 13,892 $ 166,750 $ 5,767 $ 41,037 $ 227,446 13 Note 4: Loans Loan balances as of June 30, 2024 and December 31, 2023 are summarized in the table below. Categories of loans include: (in thousands) June 30, 2024 December 31, 2023 Commercial loans Commercial and industrial $ 115,585 $ 129,349 Owner-occupied commercial real estate 58,089 57,286 Investor commercial real estate 188,409 132,077 Construction 328,922 261,750 Single tenant lease financing 927,462 936,616 Public finance 486,200 521,764 Healthcare finance 202,079 222,793 Small business lending 270,129 218,506 Franchise finance 551,133 525,783 Total commercial loans 3,128,008 3,005,924 Consumer loans Residential mortgage 382,549 395,648 Home equity 21,405 23,669 Other consumer loans 396,527 377,614 Total consumer loans 800,481 796,931 Total commercial and consumer loans 3,928,489 3,802,855 Net deferred loan origination fees/costs and premiums/discounts on purchased loans and other 1 32,657 37,365 Total loans 3,961,146 3,840,220 Allowance for credit losses ( 43,405 ) ( 38,774 ) Net loans $ 3,917,741 $ 3,801,446 1 Includes carrying value adjustments of $ 25.6 million and $ 27.8 million related to terminated interest rate swaps associated with public finance loans as of June 30, 2024 and December 31, 2023, respectively. Risk characteristics of each loan portfolio segment are as follows: Commercial and Industrial: Commercial and industrial loans’ sources of repayment are primarily based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected, and the collateral securing these loans may fluctuate in value. Loans are made for working capital, equipment purchases, or other purposes. Most commercial and industrial loans are secured by the assets being financed and may incorporate a personal guarantee. This portfolio segment is generally concentrated in the Midwest and Southwest regions of the United States. Owner-Occupied Commercial Real Estate: The primary source of repayment is the cash flow from the ongoing operations and activities conducted by the borrower, or an affiliate of the borrower, who owns the property. This portfolio segment is generally concentrated in the Midwest and Southwest regions of the United States and its loans are often secured by manufacturing and service facilities. 14 Investor Commercial Real Estate: These loans are made on a nationwide basis and are underwritten primarily based on the cash flow expected to be generated from the property and are secondarily supported by the value of the real estate. These loans typically incorporate a personal guarantee from the primary sponsor or sponsors. This portfolio segment generally involves larger loan amounts with repayment primarily dependent on the successful leasing and operation of the property securing the loan or the business conducted on the property securing the loan. Investor commercial real estate loans may be more adversely affected by changing economic conditions in the real estate markets, industry dynamics or the overall health of the local economy where the property is located. The properties securing the Company’s investor commercial real estate portfolio tend to be diverse in terms of property type. Management monitors and evaluates commercial real estate loans based on property financial performance, collateral value, guarantor strength, economic and industry conditions together with other risk grade criteria. As a general rule, the Company avoids financing special use projects unless other underwriting factors are present to mitigate these additional risks. Construction: Construction loans are made on a nationwide basis and are secured by land and related improvements and are made to assist in the construction of new structures, which may include commercial (retail, industrial, office, and multi-family) properties, land development for residential properties or single family residential properties offered for sale by the builder. These loans generally finance a variety of project costs, including land, site preparation, architectural services, construction, closing and soft costs and interim financing needs. The cash flows of builders, while initially predictable, may fluctuate with market conditions, and the value of the collateral securing these loans may be subject to fluctuations based on general economic changes. Single Tenant Lease Financing: These loans are made on a nationwide basis to owners of real estate subject to long-term lease arrangements with single tenant operators. The real estate is typically operated by regionally, nationally or globally branded businesses. The loans are underwritten based on the financial strength of the borrower, characteristics of the real estate, cash flows generated from the lease arrangements and the financial strength of the tenant. Similar to the other loan portfolio segments, management monitors and evaluates these loans based on borrower and tenant financial performance, collateral value, industry trends and other risk grade criteria. Public Finance: These loans are made on a nationwide basis to governmental and not-for-profit entities to provide both tax-exempt and taxable loans for a variety of purposes including: short-term cash-flow needs; debt refinancing; economic development; quality of life projects; infrastructure improvements; renewable energy projects; and equipment financing. The primary sources of repayment for public finance loans include pledged revenue sources including but not limited to: general obligations; property taxes; income taxes; tax increment revenue; utility revenue; gaming revenues; sales tax; and pledged general revenue. Certain loans may also include an additional collateral pledge of mortgaged property or a security interest in financed equipment. Healthcare Finance: These loans are made on a nationwide basis to healthcare providers, primarily dentists, for practice acquisition financing or refinancing that occasionally includes owner-occupied commercial real estate and equipment purchases. The sources of repayment are primarily based on the identified cash flows from operations of the borrower and related entities and secondarily on the underlying collateral provided by the borrower. Small Business Lending: These loans are made on a nationwide basis to small businesses and generally carry a partial guaranty from the U.S. Small Business Administration (“SBA”) under its 7(a) loan program. We generally sell the government guaranteed portion of SBA loans into the secondary market while retaining the non-guaranteed portion of the loan and the servicing rights. Loans in the small business lending portfolio have sources of repayment that are primarily based on the identified cash flows of the borrower and secondarily on any underlying collateral provided by the borrower. Loans may, but do not always, have a collateral shortfall. For SBA loans where the guaranteed portion is retained, the SBA guaranty provides a tertiary source of repayment to the Bank in event of borrower default. Cash flows of borrowers, however, may not be as expected and collateral securing these loans may fluctuate in value. Loans are made for a broad array of purposes including, but not limited to, providing operating cash flow, funding ownership changes, and facilitating equipment and commercial real estate purchases. Franchise Finance: These loans are made on a nationwide basis through our partnership with ApplePie Capital, which through their deep relationships with franchise brands provides franchisees with financing options for new franchise units, recapitalization, expansion, equipment and working capital. The sources of repayment are either based on identified cash flows from existing operations of the borrower or pro forma cash flow for new franchise locations. 15 Residential Mortgage: With respect to residential loans that are secured by 1-to-4 family residences and are generally owner occupied, the Company typically establishes a maximum loan-to-value ratio and requires private mortgage insurance if that ratio is exceeded. Repayment of these loans is primarily dependent on the financial circumstances of the borrowers, which can be impacted by economic conditions in their market areas such as unemployment levels. Repayment can also be impacted by changes in residential property values. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers in geographically diverse locations throughout the country. Home Equity: Home equity loans and lines of credit are typically secured by a subordinate interest in 1-to-4 family residences. The properties securing the home equity portfolio segment are generally geographically diverse as the Company offers these products on a nationwide basis. Repayment of these loans and lines of credit is primarily dependent on the financial circumstances of the borrowers and may be impacted by changes in unemployment levels and property values on residential properties, among other economic conditions in the market. Other Consumer: These loans primarily consist of consumer loans and credit cards. Consumer loans may be secured by consumer assets such as horse trailers or recreational vehicles. Some consumer loans are unsecured, such as small installment loans, home improvement loans and certain lines of credit. Repayment of consumer loans is primarily dependent upon the personal income of the borrowers, which can be impacted by economic conditions in their market areas such as unemployment levels. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers in geographically diverse locations throughout the country. Allowance for Credit Losses (“ACL”) Methodology The ACL for loans represents management's estimate of all expected credit losses over the expected life of the Company’s existing loan portfolio. Management estimates the ACL balance using relevant available information about the collectability of cash flows, from internal and external sources, including historical information relating to past events, current conditions, and reasonable and supportable forecasts of future economic conditions. When the Company is unable to forecast future economic events, management may revert to historical information. The Company's methodologies incorporate a one-year reasonable and supportable forecast period with a one-year straight line reversion to the long-term historical average. The ACL methodology may also consider other adjustments to address changes in conditions, trends, and circumstances such as local industry changes that could have a significant impact on the risk profile of the loan portfolio and provide for adjustments that may not be reflected and/or captured in the historical loss data. These factors include: lending policies, imprecision in forecasting future economic conditions, loan profile, lending staff, problem loan trends, loan review, collateral, credit concentration, or other internal and external factors. The Company also includes qualitative adjustments to the allowance based on factors and considerations that have not otherwise been fully accounted for. Qualitative adjustments include, but are not limited to: • Changes in lending policies and procedures, including changes in underwriting standards and collections, charge-offs and recovery practices • Changes in international, national, regional and local conditions • Changes in the nature and volume of the portfolio and terms of loans • Changes in the experience, depth and ability of lending management • Changes in the volume and severity of past due loans and other similar conditions • Changes in the quality of the organization’s loan review system • Changes in the value of underlying collateral for collateral dependent loans • The existence and effect of any concentrations of credit and changes in the levels of such concentrations • The effect of other external factors (i.e. competition, legal and regulatory requirements) on the level of estimated credit losses The ACL is measured on a collective or pool basis when similar risk characteristics exist. The Company segments its portfolio generally by Federal Financial Institutions Examination Council ("FFIEC") Call Report codes that align with its lines of business. Additional sub-segmentation may be utilized to identify groups of loans with unique risk characteristics relative to the rest of the portfolio. 16 Loans that do not share similar risk characteristics are evaluated on an individual basis. These evaluations are typically performed on loans with a deteriorated internal risk rating. The allowance for credit loss is determined based on several methods, including estimating the fair value of the underlying collateral or the present value of expected cash flows. The Company relies on a third-party platform that offers multiple methodologies to measure historical life-of-loan losses. Modified Loans to Borrowers Experiencing Financial Difficulty The Company may make modifications to certain loans in order to alleviate temporary difficulties in the borrower’s financial condition and/or constraints on the borrower’s ability to repay the loan, and to minimize potential losses to the Company. Modifications may include changes in the amortization terms of the loan, reductions in interest rates, acceptance of interest only payments, and/or reductions to the outstanding loan balance. Such loans are typically placed on nonaccrual status when there is doubt concerning the full repayment of principal and interest or the loan has been delinquent for a period of 90 days or more. These loans may be returned to accrual status when all contractual amounts past due have been brought current, and the borrower’s performance under the modified terms of the loan agreement and the ultimate collectability of all contractual amounts due under the modified terms is no longer in doubt. The Company typically measures the ACL on modified loans to borrowers experiencing financial difficulty on an individual basis when the loans are deemed to no longer share risk characteristics that are similar with other loans in the portfolio. The determination of the ACL for these loans is based on a discounted cash flow approach for both those measured collectively and individually, unless the loan is deemed collateral dependent, which requires measurement of the ACL based on the estimated expected fair value of the underlying collateral, less costs to sell. GAAP requires the Company to make certain disclosures related to these loans, including certain types of modifications, as well as how such loans have performed since their modifications. Provision for Credit Losses A provision for estimated losses on loans is charged to income based upon management’s evaluation of the potential losses. Such an evaluation, which includes a review of all loans for which full repayment may not be reasonably assured, considers, among other matters, the estimated net realizable value of the underlying collateral, as applicable, economic conditions, loan loss experience, and other factors that are particularly susceptible to changes that could result in a material adjustment in the near term. While management attempts to use the best information available in making its evaluations, future allowance adjustments may be necessary if economic conditions change substantially from the assumptions used in making the evaluations. Policy for Charging Off Loans The Company’s policy is to charge off a loan at any point in time when it no longer can be considered a bankable asset, meaning collectible within the parameters of policy. A secured loan is generally charged down to the estimated fair value of the collateral, less costs to sell, no later than when it is 120 days past due as to principal or interest. An unsecured loan generally is charged off no later than when it is 180 days past due as to principal or interest. A home improvement loan generally is charged off no later than when it is 90 days past due as to principal or interest. 17 The following tables present changes in the balance of the ACL during the three and six months ended June 30, 2024 and 2023. (in thousands) Three Months Ended June 30, 2024 Allowance for credit losses: Balance, Beginning of Period (Credit) Provision Charged to Expense Losses Charged Off Recoveries Balance, End of Period Commercial and industrial $ 1,800 $ ( 413 ) $ — $ 2 $ 1,389 Owner-occupied commercial real estate 769 ( 208 ) — — 561 Investor commercial real estate 798 374 — — 1,172 Construction 2,942 198 — — 3,140 Single tenant lease financing 8,471 ( 20 ) ( 195 ) — 8,256 Public finance 1,336 ( 594 ) — — 742 Healthcare finance 1,917 ( 108 ) — — 1,809 Small business lending 8,868 3,633 ( 573 ) 65 11,993 Franchise finance 6,166 402 ( 577 ) — 5,991 Residential mortgage 1,945 167 — — 2,112 Home equity 125 ( 8 ) — 1 118 Other consumer loans 5,754 497 ( 160 ) 31 6,122 Total $ 40,891 $ 3,920 $ ( 1,505 ) $ 99 $ 43,405 (in thousands) Six Months Ended June 30, 2024 Allowance for credit losses: Balance, Beginning of Period (Credit) Provision Charged to Expense Losses Charged Off Recoveries Balance, End of Period Commercial and industrial $ 2,185 $ ( 800 ) $ — $ 4 $ 1,389 Owner-occupied commercial real estate 825 ( 264 ) — — 561 Investor commercial real estate 1,311 ( 139 ) — — 1,172 Construction 2,167 973 — — 3,140 Single tenant lease financing 8,129 322 ( 195 ) — 8,256 Public finance 1,372 ( 630 ) — — 742 Healthcare finance 1,976 ( 167 ) — — 1,809 Small business lending 6,532 6,218 ( 862 ) 105 11,993 Franchise finance 6,363 205 ( 577 ) — 5,991 Residential mortgage 2,054 126 ( 69 ) 1 2,112 Home equity 171 ( 56 ) — 3 118 Other consumer loans 5,689 714 ( 335 ) 54 6,122 Total $ 38,774 $ 6,502 $ ( 2,038 ) $ 167 $ 43,405 18 (in thousands) Three Months Ended June 30, 2023 Allowance for credit losses: Balance, Beginning of Period (Credit) Provision Charged to Expense Losses Charged Off Recoveries Balance, End of Period Commercial and industrial $ 1,437 $ 195 $ — $ 217 $ 1,849 Owner-occupied commercial real estate 712 77 — — 789 Investor commercial real estate 1,276 140 — — 1,416 Construction 1,551 389 — — 1,940 Single tenant lease financing 10,273 ( 303 ) — — 9,970 Public finance 1,570 ( 61 ) — — 1,509 Healthcare finance 3,695 ( 1,249 ) ( 25 ) — 2,421 Small business lending 2,340 1,599 ( 1,358 ) 37 2,618 Franchise finance 4,672 143 ( 331 ) — 4,484 Residential mortgage 2,561 ( 12 ) — 1 2,550 Home equity 254 ( 32 ) — 2 224 Other consumer loans 6,538 ( 133 ) ( 150 ) 33 6,288 Total $ 36,879 $ 753 $ ( 1,864 ) $ 290 $ 36,058 (in thousands) Six Months Ended June 30, 2023 Allowance for credit losses: Balance, Beginning of Period Adoption of CECL (Credit) Provision Charged to Expense Losses Charged Off Recoveries Balance, End of Period Commercial and industrial $ 1,711 $ ( 120 ) $ 7,005 $ ( 6,965 ) $ 218 $ 1,849 Owner-occupied commercial real estate 651 62 76 — — 789 Investor commercial real estate 1,099 ( 191 ) 508 — — 1,416 Construction 2,074 ( 435 ) 301 — — 1,940 Single tenant lease financing 10,519 ( 346 ) ( 203 ) — — 9,970 Public finance 1,753 ( 135 ) ( 109 ) — — 1,509 Healthcare finance 2,997 1,034 ( 1,585 ) ( 25 ) — 2,421 Small business lending 2,168 334 1,493 ( 1,417 ) 40 2,618 Franchise finance 3,988 ( 313 ) 1,140 ( 331 ) — 4,484 Residential mortgage 1,559 406 582 — 3 2,550 Home equity 69 133 19 — 3 224 Other consumer loans 3,149 2,533 899 ( 383 ) 90 6,288 Total $ 31,737 $ 2,962 $ 10,126 $ ( 9,121 ) $ 354 $ 36,058 Accrued interest receivable on loans totaled $ 28.1 million and $ 26.7 million at June 30, 2024 and December 31, 2023, respectively, 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. In addition to the ACL, the Company established a reserve for off-balance sheet commitments, classified in other liabilities, as required by the adoption of the CECL methodology for measuring credit losses. This reserve is maintained at a level management believes to be sufficient to absorb losses arising from unfunded loan commitments. The day one entry for off-balance sheet commitments resulted in a reserve of $ 2.5 million. The adequacy of the reserve for unfunded commitments is determined quarterly based on methodology similar to the methodology for determining 19 the ACL. The following tables detail activity in the provision (benefit) for credit losses on off-balance sheet commitments for the three and six months ended June 30, 2024. (in thousands) Balance March 31, 2024 Provision (Benefit) for credit losses Balance June 30, 2024 Off-balance sheet commitments Commercial loans Commercial and industrial $ 193 $ ( 5 ) $ 188 Construction 3,270 150 3,420 Small business lending 159 ( 28 ) 131 Total commercial loans 3,622 117 3,739 Consumer loans Residential mortgage 5 ( 2 ) 3 Home equity 35 ( 2 ) 33 Other consumer 11 — 11 Total consumer loans 51 ( 4 ) 47 Total allowance for off-balance sheet commitments $ 3,673 $ 113 $ 3,786 (in thousands) Balance December 31, 2023 Provision (Benefit) for credit losses Balance June 30, 2024 Off-balance sheet commitments Commercial loans Commercial and industrial $ 233 $ ( 45 ) $ 188 Owner-occupied commercial real estate 9 ( 9 ) — Investor commercial real estate 6 ( 6 ) — Construction 2,889 531 3,420 Healthcare finance — — — Small business lending 541 ( 410 ) 131 Total commercial loans 3,678 61 3,739 Consumer loans Residential mortgage 11 ( 8 ) 3 Home equity 45 ( 12 ) 33 Other consumer 11 — 11 Total consumer loans 67 ( 20 ) 47 Total allowance for off-balance sheet commitments $ 3,745 $ 41 $ 3,786 20 The following table details activity in the provision for credit losses on off-balance sheet commitments for the three and six months ended June 30, 2023. (in thousands) Balance March 31, 2023 Provision (Benefit) for credit losses Balance June 30, 2023 Off-balance sheet commitments Commercial loans Commercial and industrial $ 149 $ 39 $ 188 Owner-occupied commercial real estate 8 — 8 Investor commercial real estate 48 ( 28 ) 20 Construction 2,154 743 2,897 Healthcare finance 2 ( 2 ) — Small business lending — 242 242 Total commercial loans 2,361 994 3,355 Consumer loans Residential mortgage 113 ( 54 ) 59 Home equity 62 1 63 Other consumer 10 4 14 Total consumer loans 185 ( 49 ) 136 Total allowance for off-balance sheet commitments $ 2,546 $ 945 $ 3,491 (in thousands) Pre-ASC 326 Adoption Impact of ASC 326 Adoption Provision (Benefit) for credit losses Balance June 30, 2023 Off-balance sheet commitments Commercial loans Commercial and industrial $ — $ 110 $ 78 $ 188 Owner-occupied commercial real estate — — 8 8 Investor commercial real estate — 9 11 20 Construction — 2,193 704 2,897 Healthcare finance — 2 ( 2 ) — Small business lending — — 242 242 Total commercial loans — 2,314 1,041 3,355 Consumer loans Residential mortgage — 127 ( 68 ) 59 Home equity — 52 11 63 Other consumer — 11 3 14 Total consumer loans — 190 ( 54 ) 136 Total allowance for off-balance sheet commitments $ — $ 2,504 $ 987 $ 3,491 21 The Company utilizes a risk grading matrix to assign a risk grade to each of its commercial loans. A description of the general characteristics of the risk grades is as follows: • “Pass” - Higher quality loans that do not fit any of the other categories described below. • “Special Mention” - Loans that possess some credit deficiency or potential weakness, which deserve close attention. • “Substandard” - Loans that possess a defined weakness or weaknesses that jeopardize the liquidation of the debt. Loans characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. Loans that are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. • “Doubtful” - Such loans have been placed on nonaccrual status and may be heavily dependent upon collateral possessing a value that is difficult to determine or based upon some near-term event that lacks clear certainty. These loans have all of the weaknesses of those classified as Substandard; however, based on existing conditions, these weaknesses make full collection of the principal balance highly improbable. • “Loss” - Loans that are considered uncollectible and of such little value that continuing to carry them as assets is not warranted. The Company does not risk grade its consumer loans. It classifies them as either performing or nonperforming. Below is a description of those classifications: • “Performing” - Loans that are accruing and full collection of principal and interest is expected. • “Nonperforming” - Loans that are 90 days delinquent or for which the full collection of principal and interest may be in doubt. 22 The following tables present the credit risk profile of the Company’s commercial and consumer loan portfolios by loan class and by year of origination for the years indicated based on rating category and payment activity as of June 30, 2024 and December 31, 2023. June 30, 2024 Term Loans (amortized cost basis by origination year) Revolving loans amortized cost basis Revolving loans converted to term (in thousands) 2024 2023 2022 2021 2020 Prior Total Commercial and industrial Pass $ 12,036 $ 17,401 $ 16,381 $ 15,318 $ 2,431 $ 19,953 $ 27,711 $ — $ 111,231 Special Mention — — 4,354 — — — — — 4,354 Substandard — — — — — — — — — Doubtful — — — — — — — — — Total commercial and industrial 12,036 17,401 20,735 15,318 2,431 19,953 27,711 — 115,585 Year-to-date gross charge-offs — — — — — — — — — Owner-occupied commercial real estate Pass 3,254 1,475 10,558 7,779 5,814 16,628 — — 45,508 Special Mention — — 577 905 8,270 1,174 — — 10,926 Substandard — — — — — 1,655 — — 1,655 Doubtful — — — — — — — — — Total owner-occupied commercial real estate 3,254 1,475 11,135 8,684 14,084 19,457 — — 58,089 Year-to-date gross charge-offs — — — — — — — — — Investor commercial real estate Pass 52,000 2,894 67,153 24,250 9,737 32,375 — — 188,409 Special Mention — — — — — — — — — Substandard — — — — — — — — — Doubtful — — — — — — — — — Total investor commercial real estate 52,000 2,894 67,153 24,250 9,737 32,375 — — 188,409 Year-to-date gross charge-offs — — — — — — — — — Construction Pass 11,886 77,716 152,610 82,159 2,429 — 2,122 — 328,922 Special Mention — — — — — — — — — Substandard — — — — — — — — — Doubtful — — — — — — — — — Total construction 11,886 77,716 152,610 82,159 2,429 — 2,122 — 328,922 Year-to-date gross charge-offs — — — — — — — — — Single tenant lease financing Pass 17,736 52,073 220,920 88,674 64,537 464,691 — — 908,631 Special Mention 1,240 — 2,597 4,368 1,166 9,460 — — 18,831 Substandard — — — — — — — — — Doubtful — — — — — — — — — Total single tenant lease financing 18,976 52,073 223,517 93,042 65,703 474,151 — — 927,462 Year-to-date gross charge-offs — — — — — 195 — — 195 Public finance Pass 5,957 1,788 12,028 28,790 719 434,798 — — 484,080 Special Mention — — — — — 2,120 — — 2,120 Substandard — — — — — — — — — Doubtful — — — — — — — — — Total public finance 5,957 1,788 12,028 28,790 719 436,918 — — 486,200 Year-to-date gross charge-offs — — — — — — — — — 23 June 30, 2024 Term Loans (amortized cost basis by origination year) Revolving loans amortized cost basis Revolving loans converted to term (in thousands) 2024 2023 2022 2021 2020 Prior Total Healthcare finance Pass — — — 9,472 114,826 77,099 — — 201,397 Special Mention — — — — — 682 — — 682 Substandard — — — — — — — — — Doubtful — — — — — — — — — Total healthcare finance — — — 9,472 114,826 77,781 — — 202,079 Year-to-date gross charge-offs — — — — — — — — — Small business lending 1 Pass 56,182 118,343 34,334 13,395 10,817 12,013 10,035 — 255,119 Special Mention — 2,632 660 390 374 592 199 — 4,847 Substandard — 3,304 2,958 72 1,483 1,883 463 — 10,163 Doubtful — — — — — — — — — Total small business lending 56,182 124,279 37,952 13,857 12,674 14,488 10,697 — 270,129 Year-to-date gross charge-offs — 218 487 — 72 85 — — 862 Franchise finance Pass 52,006 247,634 195,745 54,548 — — — — 549,933 Special Mention — — 1,200 — — — — — 1,200 Substandard — — — — — — — — — Doubtful — — — — — — — — — Total franchise finance 52,006 247,634 196,945 54,548 — — — — 551,133 Year-to-date gross charge-offs — 281 — 296 — — — — 577 Consumer loans Residential mortgage Performing — 13,973 191,732 87,717 29,250 58,287 — — 380,959 Nonperforming — — 484 332 71 703 — — 1,590 Total residential mortgage — 13,973 192,216 88,049 29,321 58,990 — — 382,549 Year-to-date gross charge-offs — — 13 56 — — — — 69 Home equity Performing — 1,228 1,898 372 441 600 15,475 1,391 21,405 Nonperforming — — — — — — — — — Total home equity — 1,228 1,898 372 441 600 15,475 1,391 21,405 Year-to-date gross charge-offs — — — — — — — — — Other consumer Performing 54,803 106,976 96,992 37,282 23,548 76,067 805 — 396,473 Nonperforming — — 7 27 3 17 — — 54 Total other consumer 54,803 106,976 96,999 37,309 23,551 76,084 805 — 396,527 Gross charge-offs — 100 90 57 1 87 — — 335 Total Loans $ 267,100 $ 647,437 $ 1,013,188 $ 455,850 $ 275,916 $ 1,210,797 $ 56,810 $ 1,391 $ 3,928,489 Total year-to-date gross charge-offs $ — $ 599 $ 590 $ 409 $ 73 $ 367 $ — $ — $ 2,038 1 Balance in “Substandard” is partially guaranteed by the U.S. government. 24 December 31, 2023 Term Loans (amortized cost basis by origination year) Revolving loans amortized cost basis Revolving loans converted to term (in thousands) 2023 2022 2021 2020 2019 Prior Total Commercial and industrial Pass $ 24,329 $ 19,382 $ 15,464 $ 2,502 $ 12,365 $ 8,703 $ 41,967 $ — $ 124,712 Special Mention — 4,637 — — — — — — 4,637 Substandard — — — — — — — — — Doubtful — — — — — — — — — Total commercial and industrial 24,329 24,019 15,464 2,502 12,365 8,703 41,967 — 129,349 Year-to-date gross charge-offs — — 6,914 5 130 — — — 7,049 Owner-occupied commercial real estate Pass 1,492 10,731 7,990 6,591 5,255 12,485 — — 44,544 Special Mention — 584 922 8,392 — 1,189 — — 11,087 Substandard — — — — — 1,655 — — 1,655 Doubtful — — — — — — — — — Total owner-occupied commercial real estate 1,492 11,315 8,912 14,983 5,255 15,329 — — 57,286 Year-to-date gross charge-offs — — — — — — — — — Investor commercial real estate Pass 6,571 35,209 26,841 9,864 47,827 5,765 — — 132,077 Special Mention — — — — — — — — — Substandard — — — — — — — — — Doubtful — — — — — — — — — Total investor commercial real estate 6,571 35,209 26,841 9,864 47,827 5,765 — — 132,077 Year-to-date gross charge-offs — — — — — 591 — — 591 Construction Pass 26,539 153,066 70,175 6,121 — — 5,849 — 261,750 Special Mention — — — — — — — — — Substandard — — — — — — — — — Doubtful — — — — — — — — — Total construction 26,539 153,066 70,175 6,121 — — 5,849 — 261,750 Year-to-date gross charge-offs — — — — — — — — — Single tenant lease financing Pass 52,360 221,964 89,075 65,863 142,023 346,695 — — 917,980 Special Mention — 4,362 6,698 3,032 — 4,544 — — 18,636 Substandard — — — — — — — — — Doubtful — — — — — — — — — Total single tenant lease financing 52,360 226,326 95,773 68,895 142,023 351,239 — — 936,616 Year-to-date gross charge-offs — — — — — — — — — Public finance Pass 3,805 30,583 29,750 719 43,611 411,176 — — 519,644 Special Mention — — — — — 2,120 — — 2,120 Substandard — — — — — — — — — Doubtful — — — — — — — — — Total public finance 3,805 30,583 29,750 719 43,611 413,296 — — 521,764 Year-to-date gross charge-offs — — — — — — — — — 25 December 31, 2023 Term Loans (amortized cost basis by origination year) Revolving loans amortized cost basis Revolving loans converted to term (in thousands) 2023 2022 2021 2020 2019 Prior Total Healthcare finance Pass — — 9,955 124,654 63,486 23,484 — — 221,579 Special Mention — — — — 1,214 — — — 1,214 Substandard — — — — — — — — — Doubtful — — — — — — — — — Total healthcare finance — — 9,955 124,654 64,700 23,484 — — 222,793 Year-to-date gross charge-offs — — — — 605 — — — 605 Small business lending 1 Pass 119,149 42,077 15,180 13,948 4,582 9,215 5,388 — 209,539 Special Mention 343 496 — 341 265 698 — — 2,143 Substandard 1,095 1,854 52 1,777 1,155 417 474 — 6,824 Doubtful — — — — — — — — — Total small business lending 120,587 44,427 15,232 16,066 6,002 10,330 5,862 — 218,506 Year-to-date gross charge-offs 67 739 416 1,364 — — — — 2,586 Franchise finance Pass 256,944 210,617 57,919 — — — — — 525,480 Special Mention — — — — — — — — — Substandard — — 303 — — — — — 303 Doubtful — — — — — — — — — Total franchise finance 256,944 210,617 58,222 — — — — — 525,783 Year-to-date gross charge-offs — 331 — — — — — — 331 Consumer loans Residential mortgage Performing 14,942 195,453 91,010 30,092 13,072 48,330 — — 392,899 Nonperforming — 738 456 73 — 1,482 — — 2,749 Total residential mortgage 14,942 196,191 91,466 30,165 13,072 49,812 — — 395,648 Year-to-date gross charge-offs — 53 70 — 17 — — — 140 Home equity Performing 1,369 1,997 436 467 141 585 16,896 1,778 23,669 Nonperforming — — — — — — — — — Total home equity 1,369 1,997 436 467 141 585 16,896 1,778 23,669 Year-to-date gross charge-offs — — — — — — — — — Other consumer Performing 115,736 106,883 41,598 26,527 27,087 58,902 795 — 377,528 Nonperforming — 53 — 5 15 13 — — 86 Total other consumer 115,736 106,936 41,598 26,532 27,102 58,915 795 — 377,614 Year-to-date gross charge-offs 97 115 20 51 56 243 — — 582 Total Loans $ 624,674 $ 1,040,686 $ 463,824 $ 300,968 $ 362,098 $ 937,458 $ 71,369 $ 1,778 $ 3,802,855 Total year-to-date gross charge-offs $ 164 $ 1,238 $ 7,420 $ 1,420 $ 808 $ 834 $ — $ — $ 11,884 1 Balance in “Substandard” is partially guaranteed by the U.S. government. 26 The following tables present the Company’s loan portfolio delinquency analysis as of June 30, 2024 and December 31, 2023. June 30, 2024 (in thousands) 30-59 Days Past Due 60-89 Days Past Due 90 Days or More Past Due Total Past Due Current Total Loans Commercial and industrial $ 9 $ — $ — $ 9 $ 115,576 $ 115,585 Owner-occupied commercial real estate — — — — 58,089 58,089 Investor commercial real estate — — — — 188,409 188,409 Construction — — — — 328,922 328,922 Single tenant lease financing — — — — 927,462 927,462 Public finance — — — — 486,200 486,200 Healthcare finance — — — — 202,079 202,079 Small business lending 1 5,216 1,329 4,995 11,540 258,589 270,129 Franchise finance 4,442 909 555 5,906 545,227 551,133 Residential mortgage 1,182 2,563 673 4,418 378,131 382,549 Home equity — — — — 21,405 21,405 Other consumer 194 40 38 272 396,255 396,527 Total $ 11,043 $ 4,841 $ 6,261 $ 22,145 $ 3,906,344 $ 3,928,489 1 Balance is partially guaranteed by the U.S. government. December 31, 2023 (in thousands) 30-59 Days Past Due 60-89 Days Past Due 90 Days or More Past Due Total Past Due Current Total Loans Commercial and industrial $ 40 $ 21 $ — $ 61 $ 129,288 $ 129,349 Owner-occupied commercial real estate — — — — 57,286 57,286 Investor commercial real estate — — — — 132,077 132,077 Construction — — — — 261,750 261,750 Single tenant lease financing — — — — 936,616 936,616 Public finance — — — — 521,764 521,764 Healthcare finance — — — — 222,793 222,793 Small business lending 1 2,680 57 2,794 5,531 212,975 218,506 Franchise finance — 2,923 303 3,226 522,557 525,783 Residential mortgage 70 709 1,663 2,442 393,206 395,648 Home equity — — — — 23,669 23,669 Other consumer 223 68 53 344 377,270 377,614 Total $ 3,013 $ 3,778 $ 4,813 $ 11,604 $ 3,791,251 $ 3,802,855 1 Balance is partially guaranteed by the U.S. government. Loans are reclassified to a non-accruing status when, in management’s judgment, the collateral value and financial condition of the borrower do not justify accruing interest. At the time the accrual is discontinued, all unpaid accrued interest is reversed against earnings. Interest income accrued in prior years, if any, is charged to the allowance for credit losses. Payments subsequently received on nonaccrual loans are applied to principal. A loan is returned to accrual status when principal and interest are no longer past due and collectability is probable, typically after a minimum of nine consecutive months of performance. The Company recorded less than $ 0.1 million interest income recognized on nonaccrual loans for both the six months ended June 30, 2024 and 2023. 27 The following table summarizes the Company’s nonaccrual loans and loans past due 90 days or more and still accruing by loan class for the periods indicated: June 30, 2024 December 31, 2023 (in thousands) Nonaccrual Loans Nonaccrual Loans with no Allowance for Credit Losses Total Loans 90 Days or More Past Due and Accruing Nonaccrual Loans Nonaccrual Loans with no Allowance for Credit Losses Total Loans 90 Days or More Past Due and Accruing Small business lending 1 $ 10,246 $ 2,865 $ 2 $ 6,824 $ 904 $ — Franchise finance — — 555 303 — — Residential mortgage 2,117 2,117 — 1,911 1,911 838 Other consumer 54 54 4 86 86 — Total loans $ 12,417 $ 5,036 $ 561 $ 9,124 $ 2,901 $ 838 1 Balance is partially guaranteed by the U.S. government. Determining fair value for collateral dependent loans requires obtaining a current independent appraisal of the collateral and applying a discount factor, which includes selling costs if applicable, to the value. The fair value of real estate is generally based on appraisals by qualified licensed appraisers. The appraisers typically determine the value of the real estate by utilizing an income or market valuation approach. If an appraisal is not available, the fair value may be determined by using a cash flow analysis. Fair value on other collateral such as business assets is typically ascertained by assessing, either singularly or some combination of, asset appraisals, accounts receivable aging reports, inventory listings and/or customer financial statements. Both appraised values and values based on borrower’s financial information are discounted as considered appropriate based on age and quality of the information and current market conditions. The following tables present the amortized cost basis of collateral dependent loans, which are individually evaluated to determine expected credit losses as of June 30, 2024 and December 31, 2023. June 30, 2024 (in thousands) Commercial Real Estate Residential Real Estate Other Total Allowance on Collateral Dependent Loans Owner-occupied commercial real estate $ — $ — $ 1,654 $ 1,654 $ — Small business lending 1 2,003 — 7,332 9,335 5,144 Residential mortgage — 2,117 — 2,117 — Other consumer loans — — 54 54 — Total loans $ 2,003 $ 2,117 $ 9,040 $ 13,160 $ 5,144 1 Balance is partially guaranteed by the U.S. government. December 31, 2023 (in thousands) Commercial Real Estate Residential Real Estate Other Total Allowance on Collateral Dependent Loans Owner-occupied commercial real estate $ — $ — $ 1,654 $ 1,654 $ — Small business lending 1 2,875 1,210 2,226 6,311 2,391 Residential mortgage — 1,911 — 1,911 — Other consumer loans — — 86 86 — Total loans $ 2,875 $ 3,121 $ 3,966 $ 9,962 $ 2,391 1 Balance is partially guaranteed by the U.S. government. 28 Loan Modifications to Borrowers Experiencing Financial Difficulty In January 2023, the Company adopted ASU 2022-02, “Financial Instruments - Credit Losses (Topic 326): Troubled Debt restructurings and Vintage Disclosures” (“ASU 2022-02”), which eliminated the accounting guidance for troubled debt restructurings (“TDRs”) while enhancing disclosure requirements for certain loan refinancing and restructurings by creditors when a borrower is experiencing financial difficulty. This guidance was applied on a prospective basis. Upon adoption of this guidance, the Company no longer establishes a specific reserve for modifications to borrowers experiencing financial difficulty. Instead, these modifications are included in their respective loan pool and a historical loss rate is applied to the current loan balance to arrive at the quantitative baseline portion of the ACL. Modifications to borrowers experiencing financial difficulty may include interest rate reductions, principal or interest forgiveness, forbearances, term extensions and other actions intended to minimize loss and to avoid foreclosure or repossession of collateral. The Company did not have any loan modifications made to borrowers experiencing financial difficulty during the three and six months ended June 30, 2024 and 2023. Other Real Estate Owned The Company had no other real estate owned (“OREO”) as of June 30, 2024. The Company had $ 0.4 million in other real estate owned (“OREO”) as of December 31, 2023, which consisted of two residential mortgage properties. There were two loans totaling $ 0.5 million and one loan totaling $ 0.8 million, in the process of foreclosure at June 30, 2024 and December 31, 2023, respectively. 29 Note 5: Premises and Equipment The following table summarizes premises and equipment at June 30, 2024 and December 31, 2023. (in thousands) June 30, 2024 December 31, 2023 Land $ 5,598 $ 5,598 Construction in process 665 1,119 Right of use leased asset 17 66 Building and improvements 61,971 60,699 Furniture and equipment 21,403 20,836 Less: accumulated depreciation ( 17,138 ) ( 14,855 ) Total $ 72,516 $ 73,463 Note 6: Goodwill As of June 30, 2024 and December 31, 2023, the carrying amount of goodwill was $ 4.7 million. There have been no changes in the carrying amount of goodwill for the three and six months ended June 30, 2024 or June 30, 2023. Goodwill is assessed for impairment annually as of August 31, or more frequently if events occur or circumstances change that indicate an impairment may exist. When assessing goodwill for impairment, first, a qualitative assessment can be made to determine whether it is more likely than not that the estimated fair value of a reporting unit is less than its estimated carrying value. If the results of the qualitative assessment are not conclusive, a quantitative goodwill test is performed. Alternatively, a quantitative goodwill test can be performed without performing a qualitative assessment. Goodwill was assessed for impairment using a quantitative test performed as of August 31, 2023. The estimated fair value of the reporting unit exceeded the net carrying value, and therefore no goodwill impairment existed as of that date. Note 7: Servicing Asset Activity for the servicing asset and the related changes in fair value for the three and six months ended June 2024 and 2023 are shown in the table below. Three Months Ended (in thousands) June 30, 2024 June 30, 2023 Balance, beginning of period $ 11,760 $ 7,312 Additions: Originated 2,078 1,298 Subtractions Paydowns: ( 797 ) ( 528 ) Changes in fair value due to changes in valuation inputs or assumptions used in the valuation model ( 32 ) 170 Loan servicing asset revaluation $ ( 829 ) $ ( 358 ) Balance, end of period $ 13,009 $ 8,252 30 Six Months Ended (in thousands) June 30, 2024 June 30, 2023 Balance, beginning of period $ 10,567 $ 6,255 Additions: Originated 3,705 2,410 Subtractions Paydowns: ( 1,408 ) ( 867 ) Changes in fair value due to changes in valuation inputs or assumptions used in the valuation model 145 454 Loan servicing asset revaluation $ ( 1,263 ) $ ( 413 ) Balance, end of period $ 13,009 $ 8,252 Loans serviced for others are not included in the condensed consolidated balance sheets. The unpaid principal balances of these loans serviced for others as of June 30, 2024 and December 31, 2023 are shown in the table below. (in thousands) June 30, 2024 December 31, 2023 Loan portfolios serviced for: SBA guaranteed loans $ 676,497 $ 531,927 Total $ 676,497 $ 531,927 Loan servicing revenue totaled $ 1.5 million and $ 2.8 million for the three and six months ended June 30, 2024, respectively, and $ 0.9 million and $ 1.6 million for the three and six months ended June 30, 2023, respectively. Loan servicing asset revaluation, which represents the change in fair value of the servicing asset, resulted in a $ 0.8 million and $ 1.3 million downward valuation for the three and six months ended June 30, 2024, respectively, and a $ 0.4 million downward valuation for both the three and six months ended June 30, 2023. The fair value of servicing rights is highly sensitive to changes in underlying assumptions. Though fluctuations in prepayment speeds and changes in secondary market premiums generally have the most substantial impact on the fair value of servicing rights, other influencing factors include changing economic conditions, changes to the discount rate assumption and the weighted average life of the servicing portfolio. Measurement of fair value is limited to the conditions existing and the assumptions used as of a particular point in time; however, those assumptions may change over time. Refer to Note 11 - Fair Value of Financial Instruments for further details. Note 8: Subordinated Debt In June 2019, the Company issued $ 37.0 million aggregate principal amount of 6.0 % Fixed-to-Floating Rate Subordinated Notes due 2029 (the “2029 Notes”) in a public offering. The 2029 Notes bear interest at a floating rate equal to three-month Term SOFR plus 4.376 %. All interest on the 2029 Notes is payable quarterly. The 2029 Notes are scheduled to mature on June 30, 2029. The 2029 Notes are unsecured subordinated obligations of the Company and may be repaid, without penalty, on any interest payment date on or after June 30, 2024. The 2029 Notes are intended to qualify as Tier 2 capital under regulatory guidelines. In October 2020, the Company entered into a term loan in the principal amount of $ 10.0 million, evidenced by a term note due 2030 (the “2030 Note”). The 2030 Note initially bears a fixed interest rate of 6.0 % per year to, but excluding, November 1, 2025 and thereafter at a floating rate equal to the then-current benchmark rate (initially three-month Term SOFR plus 5.795 %). The 2030 Note is scheduled to mature on November 1, 2030. The 2030 Note is an unsecured subordinated obligation of the Company and may be repaid, without penalty, on any interest payment date on or after November 1, 2025. The 2030 Note is intended to qualify as Tier 2 capital under regulatory guidelines. The Company used the net proceeds from the issuance of the 2030 Note to redeem a subordinated term note that had been entered into in October 2015. 31 In August 2021, the Company issued $ 60.0 million aggregate principal amount of 3.75 % Fixed-to-Floating Rate Subordinated Notes due 2031 (the “2031 Notes”) in a private placement. The 2031 Notes initially bear a fixed interest rate of 3.75 % per year to, but excluding, September 1, 2026, and thereafter a floating rate equal to the then-current benchmark rate (initially three-month Term SOFR plus 3.11 %). The 2031 Notes are scheduled to mature on September 1, 2031. The 2031 Notes are unsecured subordinated obligations of the Company and may be repaid, without penalty, on any interest payment date on or after September 1, 2026. The 2031 Notes are intended to qualify as Tier 2 capital under regulatory guidelines. The Company used a portion of the net proceeds from the issuance of the 2031 Notes to redeem subordinated notes issued by the Company in 2016. Pursuant to the terms of a Registration Rights Agreement between the Company and the initial purchasers of the 2031 Notes, the Company offered to exchange the 2031 Notes for subordinated notes that are registered under the Securities Act of 1933, as amended, and have substantially the same terms as the 2031 Notes. On December 30, 2021, we completed an exchange of $ 59.3 million principal amount of the unregistered 2031 Notes for registered 2031 Notes in satisfaction of our obligations under the registration rights agreement. Holders of $ 0.7 million of unregistered 2031 Notes did not participate in the exchange. The following table presents the principal balance and unamortized discount and debt issuance costs for the 2029 Notes, the 2030 Note, and the 2031 Notes as of June 30, 2024 and December 31, 2023. June 30, 2024 December 31, 2023 (in thousands) Principal Unamortized Discount and Debt Issuance Costs Principal Unamortized Discount and Debt Issuance Costs 2029 Notes $ 37,000 $ ( 783 ) $ 37,000 $ ( 862 ) 2030 Notes 10,000 ( 149 ) 10,000 ( 160 ) 2031 Notes 60,000 ( 1,075 ) 60,000 ( 1,140 ) Total $ 107,000 $ ( 2,007 ) $ 107,000 $ ( 2,162 ) Note 9: Benefit Plans Employment Agreements The Company is party to certain employment agreements with each of its Chief Executive Officer, President and Chief Operating Officer and Executive Vice President and Chief Financial Officer. The employment agreements each provide for annual base salaries and annual bonuses, if any, as determined from time to time by the Compensation Committee of our Board of Directors. The annual bonuses are to be determined with reference to the achievement of annual performance objectives established by the Compensation Committee. The agreements also provide that each of the Chief Executive Officer, President and Chief Operating Officer and Executive Vice President and Chief Financial Officer, may be awarded additional compensation, benefits, or consideration as the Compensation Committee may determine. The agreements also provide for the continuation of salary and certain other benefits for a specified period of time upon termination of employment under certain circumstances, including resignation for “good reason,” termination by the Company without “cause” at any time or any termination of employment within twelve months following a “change in control,” along with other specific conditions. 2022 Equity Incentive Plan The First Internet Bancorp 2022 Equity Incentive Plan (the “2022 Plan”) was approved by our Board of Directors and ratified by our shareholders on May 16, 2022. The plan permits awards of incentive and non-statutory stock options, stock appreciation rights, restricted stock awards, stock unit awards, performance awards and other stock-based awards. All employees, consultants and advisors of the Company or any subsidiary, as well as all non-employee directors of the Company, are eligible to receive awards under the 2022 Plan. The 2022 Plan initially authorized the issuance of 400,000 new shares of the Company’s common stock plus all shares of common stock that remained available for future grants under the First Internet Bancorp 2013 Equity Incentive Plan (the “2013 Plan”). 32 Award Activity Under 2022 Plan The Company recorded $ 0.4 million and $ 0.7 million o f share-based compensation expense for the three and six months ended June 30, 2024, respectively, related to stock-based awards under the 2022 Plan. The Company recorded less than $ 0.1 million o f share-based compensation expense for both the three and six months ended June 30, 2023, related to stock-based awards under the 2022 Plan . The following table summarizes the stock-based award activity under the 2022 Plan for the six months ended June 30, 2024. Restricted Stock Units Weighted-Average Grant Date Fair Value Per Share Restricted Stock Awards Weighted-Average Grant Date Fair Value Per Share Deferred Stock Units Weighted-Average Grant Date Fair Value Per Share Unvested at December 31, 2023 72,354 $ 24.61 30,030 $ 11.18 — $ — Granted 75,222 24.13 12,040 31.46 — — Vested ( 14,294 ) 24.52 ( 30,030 ) 11.18 — — Unvested at June 30, 2024 133,282 $ 24.35 12,040 $ 31.46 — $ — At June 30, 2024, the total unrecognized compensation cost related to unvested stock-based awards under the 2022 Plan was $ 2.8 million with a weighted-average expense recognition period of 2.0 years. 2013 Equity Incentive Plan The 2013 Plan authorized the issuance of 750,000 shares of the Company’s common stock in the form of stock-based awards to employees, directors, and other eligible persons. Although outstanding stock-based awards under the 2013 Plan remain in place according to their terms, our authority to grant new awards under the 2013 Plan terminated upon shareholder approval of the 2022 Plan. Award Activity Under 2013 Plan The Company recorded $ 0.1 million and $ 0.2 million of share-based compensation expense for the three and six months ended June 30, 2024, respectively, related to stock-based awards under the 2013 Plan . The Company recorded less than $ 0.1 million and $ 0.5 million of share-based compensation expense for the three and six months ended June 30, 2023, respectively, related to stock-based awards under the 2013 Plan . The following table summarizes the stock-based award activity under the 2013 Plan for the six months ended June 30, 2024. Restricted Stock Units Weighted-Average Grant Date Fair Value Per Share Restricted Stock Awards Weighted-Average Grant Date Fair Value Per Share Deferred Stock Units Weighted-Average Grant Date Fair Value Per Share Unvested at December 31, 2023 53,985 $ 39.86 — $ — — $ — Cancelled/Forfeited ( 22,685 ) 30.45 — — — — Vested ( 8,089 ) 46.64 — — — — Unvested at June 30, 2024 23,211 $ 46.69 — $ — — $ — At June 30, 2024, the total unrecognized compensation cost related to unvested stock-based awards under the 2013 Plan was $ 0.2 million with a weighted-average expense recognition period of 0.6 years. 33 Directors Deferred Stock Plan Until January 2014, the Company had a practice of granting awards under a stock compensation plan for members of the Board of Directors (“Directors Deferred Stock Plan”). The Company reserved 180,000 shares of common stock that could have been issued pursuant to the Directors Deferred Stock Plan. The plan provided directors the option to elect to receive up to 100 % of their annual retainer in either common stock or deferred stock rights. Deferred stock rights were to be settled in common stock following the end of the deferral period payable on the basis of one share of common stock for each deferred stock right. The following table summarizes the status of deferred stock rights related to the Directors Deferred Stock Plan for the six months ended June 30, 2024. Deferred Stock Rights Outstanding, beginning of period 28,538 Granted 142 Outstanding, end of period 28,680 All deferred stock rights granted during the 2024 period were additional rights issued in lieu of cash dividends payable on outstanding deferred stock rights. Note 10: Commitments and Credit Risk In the normal course of business, the Company makes various commitments to extend credit which are not reflected in the accompanying condensed consolidated financial statements. At June 30, 2024 and December 31, 2023, the Company had outstanding loan commitments totaling approximately $ 715.0 million and $ 755.4 million, respectively. Note 11: Fair Value of Financial Instruments ASC Topic 820, Fair Value Measurement , defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC Topic 820 also specifies a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value: Level 1 Quoted prices in active markets for identical assets or liabilities Level 2 Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities Following is a description of the valuation methodologies and inputs used for assets measured at fair value on a recurring basis and recognized in the accompanying condensed consolidated balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy. Available-for-Sale Securities Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. The Company did not own any securities classified within Level 1 of the hierarchy as of June 30, 2024 or December 31, 2023. Level 2 securities include U.S. Government-sponsored agencies, municipal securities, mortgage and asset-backed securities and corporate securities. Matrix pricing is a mathematical technique widely used in the banking industry to value investment securities. 34 In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy. Fair values are calculated using discounted cash flows. Discounted cash flows are calculated based off of the anticipated future cash flows updated to incorporate loss severities. Rating agency and industry research reports as well as default and deferral activity are reviewed and incorporated into the calculation. The Company did not own any securities classified within Level 3 of the hierarchy as of June 30, 2024 or December 31, 2023. Loans Held-for-Sale (mandatory pricing agreements) The fair value of loans held-for-sale is determined using quoted prices for similar assets, adjusted for specific attributes of that loan (Level 2). Servicing Asset Fair value is based on a loan-by-loan basis taking into consideration the origination to maturity dates of the loans, the current age of the loans and the remaining term to maturity. The valuation methodology utilized for the servicing asset begins with generating estimated future cash flows for each servicing asset based on their unique characteristics and market-based assumptions for prepayment speeds and costs to service. The present value of the future cash flows is then calculated utilizing market-based discount rate assumptions (Level 3). Interest Rate Swap Agreements The fair values of interest rate swap agreements are estimated using current market interest rates as of the balance sheet date and calculated using discounted cash flows that are observable or that can be corroborated by observable market data (Level 2). Back-to-Back Swap Agreements The Company offers interest rate swaps to certain loan customers to allow them to hedge the risk of rising interest rates on their variable rate loans. The Company originates a variable rate loan and enters into a variable-to-fixed interest rate contract with the customer. The Company also enters into an offsetting interest rate swap with a correspondent bank. These back-to-back swap agreements are intended to offset each other and allow the Company to originate a variable rate loan, while providing a contract for fixed interest payments for the customer. The net cash flow for the Company is equal to the interest income received from a variable rate loan originated with the customer. The fair value of these derivatives is based on a discounted cash flow approach. The fair value assets and liabilities of centrally cleared interest rate swaps are net of variation margin settled-to-market (Level 2). Interest Rate Lock Commitments The fair values of IRLCs are determined using the projected sale price of individual loans based on changes in market interest rates, projected pull-through rates (the probability that an IRLC will ultimately result in an originated loan), the reduction in the value of the applicant’s option due to the passage of time, and the remaining origination costs to be incurred based on management’s estimate of market costs (Level 3). 35 The following tables present the fair value measurements of assets and liabilities recognized in the accompanying condensed consolidated balance sheets measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at June 30, 2024 and December 31, 2023. June 30, 2024 Fair Value Measurements Using (in thousands) Fair Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) U.S. Government-sponsored agencies $ 87,746 $ — $ 87,746 $ — Municipal securities 64,412 — 64,412 — Agency mortgage-backed securities - residential 230,045 — 230,045 — Agency mortgage-backed securities - commercial 36,891 — 36,891 — Private label mortgage-backed securities - residential 25,631 — 25,631 — Asset-backed securities 8,429 — 8,429 — Corporate securities 35,418 — 35,418 — Total available-for-sale securities $ 488,572 $ — $ 488,572 $ — Servicing asset 13,009 — — 13,009 Interest rate swap agreements 4,681 — 4,681 — Interest rate swap agreements - assets (back-to-back) 12 — 12 — Interest rate swap agreements - liabilities (back-to-back) ( 12 ) — ( 12 ) — December 31, 2023 Fair Value Measurements Using (in thousands) Fair Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) U.S. Government-sponsored agencies $ 95,177 $ — $ 95,177 $ — Municipal securities 68,446 — 68,446 — Agency mortgage-backed securities - residential 206,649 — 206,649 — Agency mortgage-backed securities - commercial 38,885 — 38,885 — Private label mortgage-backed securities - residential 20,779 — 20,779 — Asset-backed securities 8,081 — 8,081 — Corporate securities 36,838 — 36,838 — Total available-for-sale securities $ 474,855 $ — $ 474,855 $ — Servicing asset 10,567 — — 10,567 Interest rate swap agreements 5,139 — 5,139 — Interest rate swap agreements - assets (back-to-back) 677 — 677 — Interest rate swap agreements - liabilities (back-to-back) ( 677 ) — ( 677 ) — 36 The following tables reconcile the beginning and ending balances of recurring fair value measurements recognized in the accompanying condensed consolidated balance sheets using significant unobservable (Level 3) inputs for the three and six months ended June 30, 2024 and 2023. Three Months Ended (in thousands) Servicing Asset Interest Rate Lock Commitments Balance as of April 1, 2024 $ 11,760 $ — Total realized gains Additions: Originated 2,078 — Subtractions: Paydowns ( 797 ) — Change in fair value ( 32 ) — Balance, June 30, 2024 $ 13,009 $ — Balance as of April 1, 2023 $ 7,312 $ — Total realized gains Additions: Originated 1,298 — Subtractions: Paydowns ( 528 ) — Change in fair value 170 — Balance, June 30, 2023 $ 8,252 $ — Six Months Ended (in thousands) Servicing Asset Interest Rate Lock Commitments Balance, January 1, 2024 $ 10,567 $ — Total realized gains Additions: Originated 3,705 — Subtractions: — Paydowns ( 1,408 ) — Change in fair value 145 — Balance, June 30, 2024 $ 13,009 $ — Balance, January 1, 2023 $ 6,255 $ 133 Total realized gains Additions: Originated 2,410 — Subtractions: Paydowns ( 867 ) — Change in fair value 454 ( 133 ) Balance, June 30, 2023 $ 8,252 $ — 37 The following describes the valuation methodologies and inputs used for assets measured at fair value on a nonrecurring basis, as well as the general classification of such assets pursuant to the valuation hierarchy. Individually Analyzed Collateral Dependent Loans Loans for which it is probable that the Company will not collect all principal and interest due according to contractual terms are measured for impairment. The amount of impairment may be determined based on the fair value of the underlying collateral, less costs to sell, the estimated present value of future cash flows or the loan’s observable market price. If the individually analyzed loan is identified as collateral dependent, the fair value of the underlying collateral, less costs to sell, is used to measure impairment. This method requires obtaining a current independent appraisal of the collateral and applying a discount factor to the value. If the individually analyzed loan is not collateral dependent, the Company utilizes a discounted cash flow analysis to measure impairment. Individually analyzed loans with a specific valuation allowance based on the value of the underlying collateral or a discounted cash flow analysis are classified as Level 3 assets. The following table presents the fair value measurements of assets and liabilities recognized in the accompanying condensed consolidated balance sheets measured at fair value on a nonrecurring basis and the level within the fair value hierarchy in which the fair value measurement falls at June 30, 2024 and December 31, 2023. June 30, 2024 (in thousands) Fair Value Measurements Using Fair Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Collateral dependent loans $ 2,528 $ — $ — $ 2,528 December 31, 2023 (in thousands) Fair Value Measurements Using Fair Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Collateral dependent loans $ 2,799 $ — $ — $ 2,799 Significant Unobservable (Level 3) Inputs The following tables present quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements. (dollars in thousands) Fair Value at June 30, 2024 Valuation Technique Significant Unobservable Inputs Range Weighted-Average Range Collateral dependent loans $ 2,528 Fair value of collateral Discount for type of property and current market conditions 0 %- 90 % 25 % Servicing asset 13,009 Discounted cash flow Prepayment speeds Discount rate 0 % - 25 % 15 % 11.7 % 15 % 38 (dollars in thousands) Fair Value at December 31, 2023 Valuation Technique Significant Unobservable Inputs Range Weighted-Average Range Collateral dependent loans $ 2,799 Fair value of collateral Discount for type of property and current market conditions 0 % - 90 % 28 % Servicing asset 10,567 Discounted cash flow Prepayment speeds Discount rate 0 % - 25 % 15 % 11.3 % 15 % The following methods were used to estimate the fair value of all other financial instruments recognized in the accompanying condensed consolidated balance sheets at amounts other than fair value. Cash and Cash Equivalents For these instruments, the carrying amount is a reasonable estimate of fair value. Securities Held-to-Maturity Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities include highly liquid mutual funds. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. Level 2 securities include agency mortgage-backed securities - residential, municipal securities and corporate securities. Matrix pricing is a mathematical technique widely used in the banking industry to value investment securities. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy. Fair values are calculated using discounted cash flows. Discounted cash flows are calculated based off of the anticipated future cash flows updated to incorporate loss severities. Rating agency and industry research reports as well as default and deferral activity are reviewed and incorporated into the calculation. The Company did not own any securities classified within Level 3 of the hierarchy as of June 30, 2024 or December 31, 2023. Loans Held-for-Sale (best efforts pricing agreements) The fair value of these loans approximates carrying value. Loans The fair value of loans is estimated on an exit price basis incorporating discounts for credit, liquidity and marketability factors. Accrued Interest Receivable The fair value of these financial instruments approximates carrying value. Federal Home Loan Bank of Indianapolis Stock The fair value of this financial instrument approximates carrying value. Deposits The fair value of noninterest-bearing and interest-bearing demand deposits, savings and money market accounts approximates carrying value. The fair value of fixed maturity certificates of deposit and brokered deposits are estimated using rates currently offered for deposits of similar remaining maturities. 39 Advances from Federal Home Loan Bank The fair value of fixed rate advances is estimated using rates currently available for advances with similar remaining maturities. The carrying value of variable rate advances approximates fair value. Subordinated Debt The fair value of the Company’s publicly traded subordinated debt is obtained from quoted market prices. The fair value of the Company’s remaining subordinated debt is estimated using discounted cash flow analysis, based on current borrowing rates for similar types of debt instruments. Accrued Interest Payable The fair value of these financial instruments approximates carrying value. Commitments The fair value of commitments to extend credit are based on fees currently charged to enter into similar agreements with similar maturities and interest rates. The Company determined that the fair value of commitments was zero based on the contractual value of outstanding commitments at each of June 30, 2024 and December 31, 2023. The following tables present the carrying value and estimated fair value of all financial assets and liabilities that are not measured at fair value on a recurring basis at June 30, 2024 and December 31, 2023. June 30, 2024 Fair Value Measurements Using (in thousands) Carrying Amount Fair Value Quoted Prices In Active Market for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Cash and cash equivalents $ 396,786 $ 396,786 $ 396,786 $ — $ — Securities held-to-maturity, net 270,349 247,430 — 247,430 — Loans held-for-sale (best efforts pricing agreements) 19,384 19,384 — 19,384 — Net loans 3,917,741 3,751,788 — — 3,751,788 Accrued interest receivable 28,118 28,118 28,118 — — Federal Home Loan Bank of Indianapolis stock 28,350 28,350 — 28,350 — Deposits 4,273,922 4,255,761 1,851,395 — 2,404,366 Advances from Federal Home Loan Bank 575,000 565,906 — 565,906 — Subordinated debt 104,993 106,578 36,526 70,052 — Accrued interest payable 3,419 3,419 3,419 — — 40 December 31, 2023 Fair Value Measurements Using (in thousands) Carrying Amount Fair Value Quoted Prices In Active Market for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Cash and cash equivalents $ 405,898 $ 405,898 $ 405,898 $ — $ — Securities held-to-maturity 227,153 207,572 — 207,572 — Loans held-for-sale (best efforts pricing agreements) 22,052 22,052 — 22,052 — Net loans 3,801,446 3,611,909 — — 3,611,909 Accrued interest receivable 26,746 26,746 26,746 — — Federal Home Loan Bank of Indianapolis stock 28,350 28,350 — 28,350 — Deposits 4,066,973 4,059,447 1,796,123 — 2,263,324 Advances from Federal Home Loan Bank 614,934 605,366 — 605,366 — Subordinated debt 104,838 102,632 32,560 70,072 — Accrued interest payable 3,848 3,848 3,848 — — Note 12: Mortgage Banking Activities The Bank’s residential real estate lending business originated mortgage loans for customers and typically sold a majority of the originated loans into the secondary market. For most of the mortgages sold in the secondary market, the Bank hedged its mortgage banking pipeline by entering into forward contracts for the future delivery of mortgage loans to third party investors and entering into IRLCs with potential borrowers to fund specific mortgage loans that would be sold into the secondary market. To facilitate the hedging of the loans, the Bank elected the fair value option for loans originated and intended for sale in the secondary market under mandatory pricing agreements. Changes in the fair value of loans held-for-sale, IRLCs and forward contracts are recorded in the mortgage banking activities line item within noninterest income. Refer to Note 13 for further information on derivative financial instruments. During both the three and six months ended June 30, 2024, the Company had no mortgage loans held-for-sale or sold mortgage loans into the secondary market. During the three months ended June 30, 2023, the Company had no mortgage loans held-for-sale and sold $ 3.1 million of mortgage loans into the secondary market. During the six months ended June 30, 2023, the Company originated $ 36.3 million of mortgage loans held-for-sale and sold $ 46.5 million of mortgage loans, respectively, into the secondary market. During the first quarter 2023, the Company made the decision to exit the residential mortgage business. The following table presents the components of income from mortgage banking activities for the three and six months ended June 30, 2024 and 2023. Three Months Ended June 30, Six Months Ended June 30, (in thousands) 2024 2023 2024 2023 Gain on loans sold $ — $ — $ — $ 471 Loss resulting from the change in fair value of loans held-for-sale — — — ( 143 ) Loss resulting from the change in fair value of derivatives — — — ( 252 ) Net revenue from mortgage banking activities $ — $ — $ — $ 76 Fluctuations in interest rates and changes in IRLC and loan volume within the mortgage banking pipeline may cause volatility in the fair value of loans held-for-sale and the fair value of derivatives used to hedge the mortgage banking pipeline. 41 Note 13: Derivative Financial Instruments The Company uses derivative financial instruments to help manage exposure to interest rate risk and the effects that changes in interest rates may have on net income and the fair value of assets and liabilities. The Company enters into interest rate swap agreements as part of its asset/liability management strategy to help manage its interest rate risk position. Additionally, the Company entered into forward contracts for the future delivery of mortgage loans to third-party investors and entered into IRLCs with potential borrowers to fund specific mortgage loans that were sold into the secondary market. The forward contracts were entered into in order to economically hedge the effect of changes in interest rates resulting from the Company’s commitment to fund the loans. The Company had various interest rate swap agreements designated and qualifying as accounting hedges during the reported periods. Designating an interest rate swap as an accounting hedge allows the Company to recognize gains and losses in the condensed consolidated statements of income within the same period that the hedged item affects earnings. The Company includes the gain or loss on the hedged items in the same line item as the offsetting loss or gain on the related interest rate swaps. For derivative instruments that are designated and qualify as cash flow hedges, any gains or losses related to changes in fair value are recorded in accumulated other comprehensive loss, net of tax. The fair value of interest rate swaps with a positive fair value are reported in accrued income and other assets in the condensed consolidated balance sheets, while interest rate swaps with a negative fair value are reported in accrued expenses and other liabilities in the condensed consolidated balance sheets. The Company offers interest rate swaps to certain loan customers to allow them to hedge the risk of rising interest rates on their variable rate loans. The Company originates a variable rate loan and enters into a variable-to-fixed interest rate contract with the customer. The Company also enters into an offsetting interest rate swap with a correspondent bank. These back-to-back swap agreements are intended to offset each other and allow the Company to originate a variable rate loan, while providing a contract for fixed interest payments for the customer. The net cash flow for the Company is equal to the interest income received from a variable rate loan originated with the customer. The fair value of these derivatives is based on a discounted cash flow approach. The fair value assets and liabilities of centrally cleared interest rate swaps are net of variation margin settled-to-market. The IRLCs and forward contracts are not designated as accounting hedges and are recorded at fair value with changes in fair value reflected in noninterest income on the condensed consolidated statements of income. The fair value of derivative instruments with a positive fair value are reported in accrued income and other assets in the condensed consolidated balance sheets, while derivative instruments with a negative fair value are reported in accrued expenses and other liabilities in the condensed consolidated balance sheets. The following table presents amounts that were recorded on the condensed consolidated balance sheets related to cumulative basis adjustments for interest rate swap derivatives designated as fair value accounting hedges as of June 30, 2024 and December 31, 2023. (in thousands) Carrying amount of the hedged asset Cumulative amount of fair value hedging adjustment included in the carrying amount of the hedged assets Line item in the condensed consolidated balance sheets in which the hedged item is included June 30, 2024 December 31, 2023 June 30, 2024 December 31, 2023 Securities available-for-sale 1 $ 68,064 $ 69,504 $ ( 549 ) $ ( 1,143 ) 1 These amounts include the amortized cost basis of closed portfolios used to designate hedging relationships in which the hedged item is the last layer expected to be remaining at the end of the hedging relationship. The designated hedged items were $ 50.0 million at both June 30, 2024 and December 31, 2023. The following tables present a summary of interest rate swap derivatives designated as fair value accounting hedges of fixed-rate receivables used in the Company’s asset/liability management activities at June 30, 2024 and December 31, 2023, identified by the underlying interest rate-sensitive instruments. 42 (dollars in thousands) June 30, 2024 Notional Value Weighted- Average Remaining Maturity (years) Weighted-Average Ratio Instruments Associated With Fair Value Receive Pay Securities available-for-sale $ 50,000 0.3 $ 556 3-month SOFR 2.33 % Total swap portfolio at June 30, 2024 $ 50,000 0.3 $ 556 3-month SOFR 2.33 % (dollars in thousands) December 31, 2023 Notional Value Weighted- Average Remaining Maturity (years) Weighted-Average Ratio Instruments Associated With Fair Value Receive Pay Securities available-for-sale $ 50,000 0.8 $ 1,153 3-month SOFR 2.33 % Total swap portfolio at December 31, 2023 $ 50,000 0.8 $ 1,153 3-month SOFR 2.33 % In March 2021, the Company terminated the last layer of interest rate swaps associated with available-for-sale agency mortgage-backed securities - residential, which resulted in swap termination payments to counterparties totaling $ 1.9 million. The corresponding fair value hedging adjustment was allocated pro-rata to the underlying hedged securities and is being amortized over the remaining lives of the designated securities. The Company had amortization expense totaling less than $ 0.1 million for both the three and six months ended June 30, 2024 and 2023, which was recognized as a reduction to interest income on securities. In June 2020, the Company terminated all fair value hedging relationships associated with loans, which resulted in swap termination payments to counterparties totaling $ 46.1 million. The corresponding loan fair value hedging adjustment as of the date of termination is being amortized over the remaining lives of the designated loans, which have a weighted average term to maturity of 10.0 years as of June 30, 2024. The Company had amortization expense totaling $ 1.2 million and $ 2.2 million for the three and six months ended June 30, 2024, respectively, and $ 1.0 million and $ 2.0 million for the three and six months ended June 30 2023, respectively, related to these previously terminated fair value hedges was recognized as a reduction to interest income on loans. The following tables present a summary of interest rate swap derivatives designated as cash flow accounting hedges of variable-rate liabilities used in the Company’s asset/liability management activities at June 30, 2024 and December 31, 2023. (dollars in thousands) June 30, 2024 Notional Value Weighted- Average Remaining Maturity (years) Weighted-Average Ratio Cash Flow Hedges Fair Value Receive Pay Interest rate swaps $ 110,000 2.6 $ 4,623 3-month SOFR 2.88 % Interest rate swaps 20,000 0.0 3 Fed Funds Effective 2.78 % (dollars in thousands) December 31, 2023 Notional Value Weighted- Average Remaining Maturity (years) Weighted-Average Ratio Cash Flow Hedges Fair Value Receive Pay Interest rate swaps $ 110,000 3.1 $ 3,596 3-month SOFR 2.88 % Interest rate swaps 40,000 0.4 390 Fed Funds Effective 2.78 % These derivative financial instruments were entered into for the purpose of managing the interest rate risk of certain assets and liabilities. The Company received $ 5.5 million and $ 5.2 million of cash collateral from counterparties as security for their obligations related to these swap transactions at June 30, 2024 and December 31, 2023. The Company had no pledged cash collateral as of June 30, 2024 and December 31, 2023 to counterparties on interest rate swap agreements as security for its obligations related to these agreements. Collateral posted and received is dependent on the market valuation of the underlying hedges. 43 The following table presents the notional amount and fair value of interest rate swaps utilized by the Company at June 30, 2024 and December 31, 2023. June 30, 2024 December 31, 2023 (in thousands) Notional Amount Fair Value Notional Amount Fair Value Asset Derivatives Derivatives designated as hedging instruments Interest rate swaps associated with securities available-for-sale $ 50,000 $ 556 $ 50,000 $ 1,153 Interest rate swaps associated with liabilities 130,000 4,626 150,000 3,986 Derivatives not designated as hedging instruments Back-to-back swaps 12,325 12 1,778 677 Total contracts $ 192,325 $ 5,194 $ 201,778 $ 5,816 Liability Derivatives Derivatives not designated as hedging instruments Back-to-back swaps $ 12,325 $ ( 12 ) $ 1,778 $ ( 677 ) Total contracts $ 12,325 $ ( 12 ) $ 1,778 $ ( 677 ) The fair value of interest rate swaps was estimated using a discounted cash flow method that incorporates current market interest rates as of the balance sheet date. Back-to-back swaps consist of two interest-rate swaps (a customer swap and an offsetting counterparty swap). As a result of this offsetting relationship, no net gains or losses are recognized in income. The following table presents the effects of the Company’s cash flow hedge relationships on the condensed consolidated statements of comprehensive income during the three and six months ended June 30, 2024 and 2023. Amount of (Loss) Gain Recognized in Other Comprehensive Income in The Three Months Ended Amount of Gain (Loss) Recognized in Other Comprehensive Income (Loss) in The Six Months Ended (in thousands) June 30, 2024 June 30, 2023 June 30, 2024 June 30, 2023 Interest rate swap agreements $ ( 262 ) $ 2,094 $ 640 $ ( 76 ) The following table summarizes the periodic changes in the fair value of derivatives not designated as hedging instruments on the condensed consolidated statements of income for the three and six months ended June 30, 2024 and 2023. Amount of Gain / (Loss) Recognized in the Three Months Ended Amount of Gain / (Loss) Recognized in the Six Months Ended (in thousands) June 30, 2024 June 30, 2023 June 30, 2024 June 30, 2023 Liability Derivatives Derivatives not designated as hedging instruments IRLCs $ — $ — $ — $ ( 133 ) Forward contracts — — — ( 119 ) 44 The following table presents the effects of the Company’s interest rate swap agreements on the condensed consolidated statements of operations during the three and six months ended June 30, 2024 and 2023. (in thousands) Line item in the condensed consolidated statements of operations Three Months Ended Six Months Ended June 30, 2024 June 30, 2023 June 30, 2024 June 30, 2023 Interest income Securities - non-taxable $ 415 $ 354 $ 829 $ 648 Total interest income 415 354 829 648 Interest expense Deposits ( 169 ) ( 539 ) ( 424 ) ( 957 ) Other borrowed funds ( 760 ) ( 595 ) ( 1,522 ) ( 1,117 ) Total interest expense ( 929 ) ( 1,134 ) ( 1,946 ) ( 2,074 ) Net interest income $ 1,344 $ 1,488 $ 2,775 $ 2,722 Note 14: Accumulated Other Comprehensive Loss The components of accumulated other comprehensive loss, included in shareholders' equity, for the six months ended June 30, 2024 and 2023, respectively, are presented in the table below. (in thousands) Unrealized Losses On Debt Securities Unrealized Losses On Debt Securities Transferred From Available-For-Sale To Held-To-Maturity Cash Flow Hedges Total Balance, January 1, 2024 $ ( 30,174 ) $ ( 2,939 ) $ 3,738 $ ( 29,375 ) Other comprehensive (loss) income before reclassifications from accumulated other comprehensive loss before tax ( 2,625 ) — 640 ( 1,985 ) Reclassifications from accumulated other comprehensive loss to earnings before tax — 422 — 422 Other comprehensive (loss) gain before tax ( 2,625 ) 422 640 ( 1,563 ) Income tax (benefit) provision ( 601 ) 103 147 ( 351 ) Other comprehensive (loss) gain - net of tax ( 2,024 ) 319 493 ( 1,212 ) Balance, June 30, 2024 $ ( 32,198 ) $ ( 2,620 ) $ 4,231 $ ( 30,587 ) Balance, January 1, 2023 $ ( 35,831 ) $ ( 3,519 ) $ 5,714 $ ( 33,636 ) Other comprehensive income (loss) before reclassifications from accumulated other comprehensive loss before tax 302 — ( 76 ) 226 Reclassifications from accumulated other comprehensive loss to earnings before tax — 364 — 364 Other comprehensive gain (loss) before tax 302 364 ( 76 ) 590 Income tax provision (benefit) 63 95 ( 18 ) 140 Other comprehensive income (loss) - net of tax 239 269 ( 58 ) 450 Balance, June 30, 2023 $ ( 35,592 ) $ ( 3,250 ) $ 5,656 $ ( 33,186 ) The components of accumulated other comprehensive loss, included in stockholders' equity, for the three months ended June 30, 2024 and 2023, respectively, are presented in the table below. 45 (in thousands) Unrealized Losses On Debt Securities Unrealized Losses On Debt Securities Transferred From Available-For-Sale To Held-To-Maturity Cash Flow Hedges Total Balance, April 1, 2024 $ ( 31,773 ) $ ( 2,762 ) $ 4,433 $ ( 30,102 ) Other comprehensive loss before reclassifications from accumulated other comprehensive loss before tax ( 551 ) — ( 262 ) ( 813 ) Reclassifications from accumulated other comprehensive loss to earnings before tax — 188 188 Other comprehensive (loss) gain before tax ( 551 ) 188 ( 262 ) ( 625 ) Income tax (benefit) provision ( 126 ) 46 ( 60 ) ( 140 ) Other comprehensive (loss) income - net of tax ( 425 ) 142 ( 202 ) ( 485 ) Balance, June 30, 2024 $ ( 32,198 ) $ ( 2,620 ) $ 4,231 $ ( 30,587 ) Balance, April 1, 2023 $ ( 31,889 ) $ ( 3,407 ) $ 4,043 $ ( 31,253 ) Other comprehensive (loss) income before reclassifications from accumulated other comprehensive loss before tax ( 4,810 ) — 2,094 ( 2,716 ) Reclassifications from accumulated other comprehensive loss to earnings before tax — 206 — 206 Other comprehensive (loss) gain before tax ( 4,810 ) 206 2,094 ( 2,510 ) Income tax (benefit) provision ( 1,107 ) 49 481 ( 577 ) Other comprehensive (loss) income - net of tax ( 3,703 ) 157 1,613 ( 1,933 ) Balance, June 30, 2023 $ ( 35,592 ) $ ( 3,250 ) $ 5,656 $ ( 33,186 ) Details About Accumulated Other Comprehensive Loss Components Amounts Reclassified from Accumulated Other Comprehensive Loss for the Amounts Reclassified from Accumulated Other Comprehensive Loss for the Affected Line Item in the Statements of Operations Three Months Ended June 30, 2024 Three Months Ended June 30, 2023 Six Months Ended June 30, 2024 Six Months Ended June 30, 2023 Reclassifications from accumulated other comprehensive loss to earnings before tax $ ( 188 ) ( 206 ) $ ( 422 ) $ ( 364 ) Interest income (loss) Total amount reclassified before tax ( 188 ) ( 206 ) ( 422 ) ( 364 ) Income (loss) before income taxes Tax benefit ( 46 ) ( 49 ) ( 103 ) ( 95 ) Income tax provision (benefit) Total reclassifications from accumulated other comprehensive loss $ ( 142 ) $ ( 157 ) $ ( 319 ) $ ( 269 ) Net income 46 Note 15: Recent Accounting Pronouncements ASU 2023-02 - Investments - Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method (March 2023) In March 2023, the FASB issued ASU No. 2023-02, Investments - Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method. This ASU permits companies to account for tax equity investments, regardless of the tax credit program from which the income tax credits are received, using the proportional amortization method if certain conditions are met. The Company adopted this guidance on January 1, 2024 and it did not have a material impact on its consolidated financial statements. ASU 2023-07 - Segment Reporting (Topic 280): Improvements to Reportable Segments (November 2023) In November 2023, the FASB issued ASU No. 2023-07, Segment Reporting (Topic 280) - Improvements to Reportable Segments. This ASU enhances financial reporting by requiring disclosure of incremental segment information on an annual and interim basis. The guidance is effective for fiscal years beginning after December 15, 2023 and for interim periods within fiscal years beginning after December 15, 2024 with early adoption permitted. The Company is currently evaluating the impact of this ASU on its condensed consolidated financial statements. ASU 2023-09 - Income Taxes (Topic 740): Improvements to Income Tax Disclosures (December 2023) In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740) - Improvements to Income Tax Disclosures. This ASU enhances the transparency and usefulness of income tax disclosures, which addresses investor requests for more transparency about income tax disclosures related primarily to the rate reconciliation and income taxes paid information. The guidance is effective for annual periods beginning after December 15, 2024 with early adoption permitted. The Company is currently evaluating the impact of this ASU on its condensed consolidated financial statements.