First Internet Bancorp 10-Q

ITEM 1. FINANCIAL STATEMENTS First Internet Bancorp Condensed Consolidated Balance Sheets (Amounts in thousands except share data) September 30, 2024 December 31, 2023 (Unaudited) Assets Cash and due from banks $ 6,539 $ 8,269 Interest-bearing deposits 705,940 397,629 Total cash and cash equivalents 712,479 405,898 Securities available-for-sale, at fair value (amortized cost of $ 605,722 and $ 513,315 in 2024 and 2023, respectively) 575,257 474,855 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 $ 249,618 and $ 207,572 in 2024 and 2023, respectively) 263,320 227,153 Loans held-for-sale 32,996 22,052 Loans 4,035,880 3,840,220 Allowance for credit losses - loans ( 45,721 ) ( 38,774 ) Net loans 3,990,159 3,801,446 Accrued interest receivable 27,750 26,746 Federal Home Loan Bank of Indianapolis stock 28,350 28,350 Cash surrender value of bank-owned life insurance 41,111 40,882 Premises and equipment, net 72,150 73,463 Goodwill 4,687 4,687 Servicing asset, at fair value 14,662 10,567 Other real estate owned 251 375 Accrued income and other assets 60,087 51,098 Total assets $ 5,823,259 $ 5,167,572 Liabilities and Shareholders’ Equity Liabilities Noninterest-bearing deposits $ 111,591 $ 123,464 Interest-bearing deposits 4,686,119 3,943,509 Total deposits 4,797,710 4,066,973 Advances from Federal Home Loan Bank 515,000 614,934 Subordinated debt, net of unamortized debt issuance costs of $ 1,929 and $ 2,162 in 2024 and 2023, respectively 105,071 104,838 Accrued interest payable 2,808 3,848 Accrued expenses and other liabilities 17,541 14,184 Total liabilities 5,438,130 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 185,631 184,700 Nonvoting common stock, no par value; 86,221 shares authorized; issued and outstanding - none — — Retained earnings 223,824 207,470 Accumulated other comprehensive loss ( 24,326 ) ( 29,375 ) Total shareholders’ equity 385,129 362,795 Total liabilities and shareholders’ equity $ 5,823,259 $ 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 Nine Months Ended September 30, 2024 September 30, 2023 September 30, 2024 September 30, 2023 Interest Income Loans $ 59,792 $ 48,898 $ 172,321 $ 139,647 Securities – taxable 6,953 4,301 19,123 11,742 Securities – non-taxable 1,042 912 2,981 2,570 Other earning assets 7,203 8,904 19,691 19,211 Total interest income 74,990 63,015 214,116 173,170 Interest Expense Deposits 47,415 40,339 134,039 102,285 Other borrowed funds 5,810 5,298 16,251 15,788 Total interest expense 53,225 45,637 150,290 118,073 Net Interest Income 21,765 17,378 63,826 55,097 Provision for credit losses - loans 3,858 1,850 10,360 11,976 Benefit for credit losses - debt securities held to maturity ( 29 ) ( 15 ) ( 93 ) ( 15 ) (Benefit) Provision for credit losses - off-balance sheet commitments ( 439 ) 111 ( 398 ) 1,098 Net Interest Income After Provision for Credit Losses 18,375 15,432 53,957 42,038 Noninterest Income Service charges and fees 245 208 711 635 Loan servicing revenue 1,570 1,064 4,363 2,699 Loan servicing asset revaluation ( 846 ) ( 257 ) ( 2,109 ) ( 670 ) Mortgage banking activities — — — 76 Gain on sale of loans 9,933 5,569 24,761 14,498 Other 1,127 823 3,683 1,486 Total noninterest income 12,029 7,407 31,409 18,724 Noninterest Expense Salaries and employee benefits 13,456 11,767 37,714 34,267 Marketing, advertising and promotion 548 500 1,893 2,049 Consulting and professional services 902 552 2,777 2,189 Data processing 675 701 1,845 1,880 Loan expenses 1,524 1,336 4,566 4,385 Premises and equipment 2,918 2,315 8,898 7,753 Deposit insurance premium 1,219 1,067 3,536 2,546 Other 1,552 1,518 4,924 4,311 Total noninterest expense 22,794 19,756 66,153 59,380 Income Before Income Taxes 7,610 3,083 19,213 1,382 Income Tax Provision (Benefit) 620 ( 326 ) 1,267 ( 2,892 ) Net Income $ 6,990 $ 3,409 $ 17,946 $ 4,274 Income Per Share of Common Stock Basic $ 0.80 $ 0.39 $ 2.07 $ 0.48 Diluted $ 0.80 $ 0.39 $ 2.05 $ 0.48 Weighted-Average Number of Common Shares Outstanding Basic 8,696,634 8,744,385 8,688,304 8,889,532 Diluted 8,768,731 8,767,217 8,756,544 8,907,748 Dividends Declared Per Share $ 0.06 $ 0.06 $ 0.18 $ 0.18 See Notes to Condensed Consolidated Financial Statements 2 First Internet Bancorp Condensed Consolidated Statements of Comprehensive Income (Loss) – Unaudited (Amounts in thousands) Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 Net income $ 6,990 $ 3,409 $ 17,946 $ 4,274 Other comprehensive income (loss) Securities available-for-sale Net unrealized holding gains (losses) recorded within other comprehensive income (loss) before income tax 10,620 ( 11,308 ) 7,995 ( 11,006 ) Income tax provision (benefit) 2,442 ( 2,600 ) 1,841 ( 2,537 ) Net effect on other comprehensive income (loss) 8,178 ( 8,708 ) 6,154 ( 8,469 ) Securities held-to-maturity Amortization of net unrealized holding losses on securities transferred from available-for-sale to held-to-maturity 185 173 607 537 Income tax provision 46 45 149 140 Net effect on other comprehensive income 139 128 458 397 Cash flow hedges Net unrealized holding (losses) gains on cash flow hedging derivatives recorded within other comprehensive income (loss) before income tax ( 2,670 ) 740 ( 2,030 ) 664 Income tax (benefit) provision ( 614 ) 171 ( 467 ) 153 Net effect on other comprehensive (loss) income ( 2,056 ) 569 ( 1,563 ) 511 Total other comprehensive income (loss) 6,261 ( 8,011 ) 5,049 ( 7,561 ) Comprehensive income (loss) $ 13,251 $ ( 4,602 ) $ 22,995 $ ( 3,287 ) See Notes to Condensed Consolidated Financial Statements 3 First Internet Bancorp Condensed Consolidated Statements of Changes in Shareholders’ Equity - Unaudited Nine Months Ended September 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 — 17,946 — 17,946 Other comprehensive income — — 5,049 5,049 Dividends declared ($ 0.18 per share) — ( 1,592 ) — ( 1,592 ) Recognition of the fair value of share-based compensation 1,356 — — 1,356 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 3 — — 3 Common stock redeemed for the net settlement of share-based awards ( 142 ) — — ( 142 ) Balance, September 30, 2024 $ 185,631 $ 223,824 $ ( 24,326 ) $ 385,129 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 — 4,274 — 4,274 Other comprehensive loss — — ( 7,561 ) ( 7,561 ) Dividends declared ($ 0.18 per share) — ( 1,602 ) — ( 1,602 ) Recognition of the fair value of share-based compensation 873 — — 873 Repurchased shares of common stock ( 462,525 ) ( 8,535 ) — — ( 8,535 ) Excise tax on repurchase of common stock ( 85 ) — — ( 85 ) 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, September 30, 2023 $ 185,085 $ 203,856 $ ( 41,197 ) $ 347,744 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 September 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, July 1, 2024 185,175 $ 217,365 $ ( 30,587 ) $ 371,953 Net income — 6,990 — 6,990 Other comprehensive income — — 6,261 6,261 Dividends declared ($ 0.06 per share) — ( 531 ) — ( 531 ) Recognition of the fair value of share-based compensation 454 — — 454 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 Balance, September 30, 2024 $ 185,631 $ 223,824 $ ( 24,326 ) $ 385,129 Balance, July 1, 2023 $ 186,545 $ 200,973 $ ( 33,186 ) $ 354,332 Net income — 3,409 — 3,409 Other comprehensive loss — — ( 8,011 ) ( 8,011 ) Dividends declared ($ 0.06 per share) — ( 526 ) — ( 526 ) Recognition of the fair value of share-based compensation 386 — — 386 Repurchased shares of common stock ( 97,834 ) ( 1,828 ) ( 1,828 ) Excise tax on repurchase of common stock ( 18 ) — — ( 18 ) Balance, September 30, 2023 $ 185,085 $ 203,856 $ ( 41,197 ) $ 347,744 See Notes to Condensed Consolidated Financial Statements 5 First Internet Bancorp Condensed Consolidated Statements of Cash Flows – Unaudited (Amounts in thousands) Nine Months Ended September 30, 2024 2023 Operating Activities Net income $ 17,946 $ 4,274 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization 6,030 3,019 Increase in cash surrender value of bank-owned life insurance ( 817 ) ( 760 ) Provision for credit losses 9,869 13,059 Share-based compensation expense 1,356 873 Loans originated for sale ( 366,948 ) ( 248,622 ) Proceeds from sale of loans 374,561 249,296 Gain on loans sold ( 24,761 ) ( 14,969 ) Gain on sale of other real estate owned ( 31 ) — Decrease in fair value of loans held-for-sale — 143 Loss on derivatives 768 362 Gain on bank-owned life insurance ( 149 ) — Loan servicing asset revaluation 2,109 670 Net change in accrued income and other assets ( 3,525 ) ( 4,385 ) Net change in accrued expenses and other liabilities 2,739 ( 3,584 ) Net cash provided by (used in) operating activities 19,147 ( 624 ) Investing Activities Net loan activity, excluding purchases ( 117,719 ) ( 51,677 ) Proceeds from sale of other real estate owned 406 — Maturities and calls of securities available-for-sale 54,418 39,749 Purchase of securities available-for-sale ( 148,019 ) ( 110,749 ) Maturities and calls of securities held-to-maturity 18,426 14,236 Purchase of securities held-to-maturity ( 53,977 ) ( 53,573 ) Purchase of premises and equipment ( 2,097 ) ( 4,970 ) Proceeds from bank-owned life insurance 737 — Loans purchased ( 81,605 ) ( 194,318 ) Other investing activities ( 11,857 ) ( 3,442 ) Net cash used in investing activities ( 341,287 ) ( 364,744 ) Financing Activities Net increase in deposits 730,737 640,370 Cash dividends paid ( 1,580 ) ( 1,623 ) Repurchase of common stock ( 283 ) ( 8,620 ) Proceeds from advances from Federal Home Loan Bank 430,000 415,000 Repayment of advances from Federal Home Loan Bank ( 530,000 ) ( 415,000 ) Other, net ( 153 ) ( 106 ) Net cash provided by financing activities 628,721 630,021 Net Increase in Cash and Cash Equivalents 306,581 264,653 Cash and Cash Equivalents, Beginning of Period 405,898 256,552 Cash and Cash Equivalents, End of Period $ 712,479 $ 521,205 Supplemental Disclosures Cash paid during the period for interest 151,330 118,019 Cash paid during the period for taxes 492 864 Loans transferred to other real estate owned 251 106 Cash dividends declared, paid in subsequent period 520 520 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 nine months ended September 30, 2024 are not necessarily indicative of the results expected for the year ending December 31, 2024 or any other period. The September 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 nine months ended September 30, 2024 and 2023. (dollars in thousands, except share and per share data) Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 Basic earnings per share Net income $ 6,990 $ 3,409 $ 17,946 $ 4,274 Weighted-average common shares 8,696,634 8,744,385 8,688,304 8,889,532 Basic earnings per common share $ 0.80 $ 0.39 $ 2.07 $ 0.48 Diluted earnings per share Net income $ 6,990 $ 3,409 $ 17,946 $ 4,274 Weighted-average common shares 8,696,634 8,744,385 8,688,304 8,889,532 Dilutive effect of equity compensation 72,097 22,832 68,240 18,216 Weighted-average common and incremental shares 8,768,731 8,767,217 8,756,544 8,907,748 Diluted earnings per common share 1 $ 0.80 $ 0.39 $ 2.05 $ 0.48 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 nine months ended September 30, 2024. Excluded from the computation of diluted EPS were weighted-average antidilutive shares totaling 12,713 and 28,363 for the three and nine months ended September 30, 2023, respectively. 8 Note 3: Securities The following tables summarize securities available-for-sale and securities held-to-maturity as of September 30, 2024 and December 31, 2023. September 30, 2024 Amortized Gross Unrealized Fair (in thousands) Cost Gains Losses Value Securities available-for-sale U.S. Government-sponsored agencies $ 88,990 $ 539 $ ( 1,213 ) $ 88,316 Municipal securities 67,399 24 ( 2,000 ) 65,423 Agency mortgage-backed securities - residential 1 290,213 673 ( 25,033 ) 265,853 Agency mortgage-backed securities - commercial 65,772 184 ( 1,022 ) 64,934 Private label mortgage-backed securities - residential 34,971 295 ( 730 ) 34,536 Asset-backed securities 18,318 41 ( 18 ) 18,341 Corporate securities 40,059 84 ( 2,289 ) 37,854 Total available-for-sale $ 605,722 $ 1,840 $ ( 32,305 ) $ 575,257 September 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 $ 12,859 $ 1 $ ( 613 ) $ 12,247 $ ( 3 ) $ 12,856 Agency mortgage-backed securities - residential 207,878 935 ( 11,515 ) 197,298 — 207,878 Agency mortgage-backed securities - commercial 5,722 — ( 824 ) 4,898 — 5,722 Corporate securities 37,061 — ( 1,886 ) 35,175 ( 197 ) 36,864 Total held-to-maturity $ 263,520 $ 936 $ ( 14,838 ) $ 249,618 $ ( 200 ) $ 263,320 1 Includes $ 0.3 million of additional premium related to terminated interest rate swaps associated with agency mortgage-backed securities - residential as of September 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 September 30, 2024 was $ 2.8 million and $ 1.2 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 September 30, 2024 and December 31, 2023, over 94 % 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. 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. The ACL on HTM securities at September 30, 2024 was $ 0.2 million. The carrying value of securities at September 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 $ 10,725 $ 10,537 One to five years 22,032 22,069 Five to ten years 72,412 70,160 After ten years 91,279 88,827 196,448 191,593 Agency mortgage-backed securities - residential 290,213 265,853 Agency mortgage-backed securities - commercial 65,772 64,934 Private label mortgage-backed securities - residential 34,971 34,536 Asset-backed securities 18,318 18,341 Total $ 605,722 $ 575,257 10 Held-to-Maturity (in thousands) Amortized Cost Fair Value Within one year $ 1,812 $ 1,795 One to five years 15,201 14,791 Five to ten years 29,408 27,666 After ten years 3,499 3,170 49,920 47,422 Agency mortgage-backed securities - residential 207,878 197,298 Agency mortgage-backed securities - commercial 5,722 4,898 Total $ 263,520 $ 249,618 There were no gross gains or losses resulting from the sale of available-for-sale securities during the three and nine months ended September 30, 2024 and September 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 September 30, 2024 and December 31, 2023 was $ 586.9 million and $ 578.9 million, which was approximately 71 % and 85 %, respectively, of the Company’s AFS and HTM securities portfolios. As of September 30, 2024, the Company’s security portfolio consisted of 573 securities, of which 442 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. 11 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 September 30, 2024 and December 31, 2023. September 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 $ 24,430 $ ( 93 ) $ 22,792 $ ( 1,120 ) $ 47,222 $ ( 1,213 ) Municipal securities 2,465 ( 125 ) 49,399 ( 1,875 ) 51,864 ( 2,000 ) Agency mortgage-backed securities- residential 44,406 ( 119 ) 181,557 ( 24,914 ) 225,963 ( 25,033 ) Agency mortgage-backed securities- commercial 18,779 ( 63 ) 12,518 ( 959 ) 31,297 ( 1,022 ) Private label mortgage-backed securities - residential 5,049 ( 20 ) 8,048 ( 710 ) 13,097 ( 730 ) Asset-backed securities 7,467 ( 18 ) — — 7,467 ( 18 ) Corporate securities 4,325 ( 675 ) 22,413 ( 1,614 ) 26,738 ( 2,289 ) Total $ 106,921 $ ( 1,113 ) $ 296,727 $ ( 31,192 ) $ 403,648 $ ( 32,305 ) 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 September 30, 2024 and December 31, 2023. September 30, 2024 Held-to-Maturity (in thousands) Municipal Securities Mortgage-Backed Securities - Residential Mortgage-Backed Securities - Commercial Corporate Securities Total AAA equivalent - agency $ — $ 207,878 $ 5,722 $ — $ 213,600 Aa1/AA+ 8,889 — — — 8,889 Aa2/AA 2,177 — — — 2,177 Aa3/AA- 1,793 — — — 1,793 A2/A — — — 5,000 5,000 A3/A- — — — 4,501 4,501 Baa1/BBB+ — — — 8,500 8,500 Baa2/BBB — — — 8,500 8,500 Baa3/BBB- — — — 8,560 8,560 Ba1/BB+ — — — 2,000 2,000 Total $ 12,859 $ 207,878 $ 5,722 $ 37,061 $ 263,520 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 September 30, 2024 and December 31, 2023 are summarized in the table below. Categories of loans include: (in thousands) September 30, 2024 December 31, 2023 Commercial loans Commercial and industrial $ 111,199 $ 129,349 Owner-occupied commercial real estate 56,461 57,286 Investor commercial real estate 260,614 132,077 Construction 340,954 261,750 Single tenant lease financing 932,148 936,616 Public finance 462,730 521,764 Healthcare finance 190,287 222,793 Small business lending 298,645 218,506 Franchise finance 550,442 525,783 Total commercial loans 3,203,480 3,005,924 Consumer loans Residential mortgage 378,701 395,648 Home equity 20,264 23,669 Other consumer loans 404,388 377,614 Total consumer loans 803,353 796,931 Total commercial and consumer loans 4,006,833 3,802,855 Net deferred loan origination fees/costs and premiums/discounts on purchased loans and other 1 29,047 37,365 Total loans 4,035,880 3,840,220 Allowance for credit losses ( 45,721 ) ( 38,774 ) Net loans $ 3,990,159 $ 3,801,446 1 Includes carrying value adjustments of $ 24.1 million and $ 27.8 million related to terminated interest rate swaps associated with public finance loans as of September 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, other-than-insignificant payment delays, reductions in interest rates, acceptance of interest only payments, and/or reductions to the outstanding loan balance. Such loans may be 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 nine months ended September 30, 2024 and 2023. (in thousands) Three Months Ended September 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 $ 1,389 $ ( 166 ) $ — $ 3 $ 1,226 Owner-occupied commercial real estate 561 ( 9 ) — — 552 Investor commercial real estate 1,172 ( 29 ) — — 1,143 Construction 3,140 ( 357 ) — — 2,783 Single tenant lease financing 8,256 ( 1,562 ) — — 6,694 Public finance 742 ( 44 ) — — 698 Healthcare finance 1,809 ( 87 ) — — 1,722 Small business lending 11,993 3,346 ( 1,309 ) 169 14,199 Franchise finance 5,991 1,963 — — 7,954 Residential mortgage 2,112 67 ( 17 ) — 2,162 Home equity 118 ( 6 ) — 3 115 Other consumer loans 6,122 742 ( 425 ) 34 6,473 Total $ 43,405 $ 3,858 $ ( 1,751 ) $ 209 $ 45,721 (in thousands) Nine Months Ended September 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 $ ( 966 ) $ — $ 7 $ 1,226 Owner-occupied commercial real estate 825 ( 273 ) — — 552 Investor commercial real estate 1,311 ( 168 ) — — 1,143 Construction 2,167 616 — — 2,783 Single tenant lease financing 8,129 ( 1,240 ) ( 195 ) — 6,694 Public finance 1,372 ( 674 ) — — 698 Healthcare finance 1,976 ( 254 ) — — 1,722 Small business lending 6,532 9,564 ( 2,171 ) 274 14,199 Franchise finance 6,363 2,168 ( 577 ) — 7,954 Residential mortgage 2,054 193 ( 86 ) 1 2,162 Home equity 171 ( 62 ) — 6 115 Other consumer loans 5,689 1,456 ( 760 ) 88 6,473 Total $ 38,774 $ 10,360 $ ( 3,789 ) $ 376 $ 45,721 18 (in thousands) Three Months Ended September 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 $ 1,849 $ 260 $ — $ 1 $ 2,110 Owner-occupied commercial real estate 789 69 — — 858 Investor commercial real estate 1,416 488 ( 591 ) — 1,313 Construction 1,940 163 — — 2,103 Single tenant lease financing 9,970 ( 1,605 ) — — 8,365 Public finance 1,509 ( 98 ) — — 1,411 Healthcare finance 2,421 ( 194 ) — — 2,227 Small business lending 2,618 2,341 ( 751 ) 13 4,221 Franchise finance 4,484 763 — — 5,247 Residential mortgage 2,550 ( 215 ) ( 56 ) 1 2,280 Home equity 224 ( 34 ) — 2 192 Other consumer loans 6,288 ( 88 ) ( 119 ) 44 6,125 Total $ 36,058 $ 1,850 $ ( 1,517 ) $ 61 $ 36,452 (in thousands) Nine Months Ended September 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 ) $ 7,265 $ ( 6,965 ) $ 219 $ 2,110 Owner-occupied commercial real estate 651 62 145 — — 858 Investor commercial real estate 1,099 ( 191 ) 996 ( 591 ) — 1,313 Construction 2,074 ( 435 ) 464 — — 2,103 Single tenant lease financing 10,519 ( 346 ) ( 1,808 ) — — 8,365 Public finance 1,753 ( 135 ) ( 207 ) — — 1,411 Healthcare finance 2,997 1,034 ( 1,779 ) ( 25 ) — 2,227 Small business lending 2,168 334 3,834 ( 2,169 ) 54 4,221 Franchise finance 3,988 ( 313 ) 1,903 ( 331 ) — 5,247 Residential mortgage 1,559 406 367 ( 56 ) 4 2,280 Home equity 69 133 ( 15 ) — 5 192 Other consumer loans 3,149 2,533 811 ( 502 ) 134 6,125 Total $ 31,737 $ 2,962 $ 11,976 $ ( 10,639 ) $ 416 $ 36,452 Accrued interest receivable on loans totaled $ 27.8 million and $ 26.7 million at September 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 the ACL. The following tables detail activity in the provision (benefit) for credit losses on off-balance sheet commitments for the three and nine months ended September 30, 2024. 19 (in thousands) Balance June 30, 2024 Provision (Benefit) for credit losses Balance September 30, 2024 Off-balance sheet commitments Commercial loans Commercial and industrial $ 188 $ 24 $ 212 Owner-occupied commercial real estate — 24 24 Investor commercial real estate — 10 10 Construction 3,420 ( 556 ) 2,864 Single tenant lease financing — 28 28 Small business lending 131 31 162 Total commercial loans 3,739 ( 439 ) 3,300 Consumer loans Residential mortgage 3 ( 1 ) 2 Home equity 33 1 34 Other consumer 11 — 11 Total consumer loans 47 — 47 Total allowance for off-balance sheet commitments $ 3,786 $ ( 439 ) $ 3,347 (in thousands) Balance December 31, 2023 Provision (Benefit) for credit losses Balance September 30, 2024 Off-balance sheet commitments Commercial loans Commercial and industrial $ 233 $ ( 21 ) $ 212 Owner-occupied commercial real estate 9 15 24 Investor commercial real estate 6 4 10 Construction 2,889 ( 25 ) 2,864 Single tenant lease financing — 28 28 Small business lending 541 ( 379 ) 162 Total commercial loans 3,678 ( 378 ) 3,300 Consumer loans Residential mortgage 11 ( 9 ) 2 Home equity 45 ( 11 ) 34 Other consumer 11 — 11 Total consumer loans 67 ( 20 ) 47 Total allowance for off-balance sheet commitments $ 3,745 $ ( 398 ) $ 3,347 20 The following table details activity in the provision for credit losses on off-balance sheet commitments for the three and nine months ended September 30, 2023. (in thousands) Balance June 30, 2023 Provision (Benefit) for credit losses Balance September 30, 2023 Off-balance sheet commitments Commercial loans Commercial and industrial $ 188 $ 18 $ 206 Owner-occupied commercial real estate 8 1 9 Investor commercial real estate 20 ( 3 ) 17 Construction 2,897 ( 8 ) 2,889 Small business lending 242 148 390 Total commercial loans 3,355 156 3,511 Consumer loans Residential mortgage 59 ( 34 ) 25 Home equity 63 ( 9 ) 54 Other consumer 14 ( 2 ) 12 Total consumer loans 136 ( 45 ) 91 Total allowance for off-balance sheet commitments $ 3,491 $ 111 $ 3,602 (in thousands) Pre-ASC 326 Adoption Impact of ASC 326 Adoption Provision (Benefit) for credit losses Balance September 30, 2023 Off-balance sheet commitments Commercial loans Commercial and industrial $ — $ 110 $ 96 $ 206 Owner-occupied commercial real estate — — 9 9 Investor commercial real estate — 9 8 17 Construction — 2,193 696 2,889 Healthcare finance — 2 ( 2 ) — Small business lending — — 390 390 Total commercial loans — 2,314 1,197 3,511 Consumer loans Residential mortgage — 127 ( 102 ) 25 Home equity — 52 2 54 Other consumer — 11 1 12 Total consumer loans — 190 ( 99 ) 91 Total allowance for off-balance sheet commitments $ — $ 2,504 $ 1,098 $ 3,602 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 September 30, 2024 and December 31, 2023. September 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 $ 15,655 $ 9,127 $ 14,422 $ 5,480 $ 2,397 $ 18,819 $ 40,614 $ — $ 106,514 Special Mention 51 172 4,462 — — — — — 4,685 Substandard — — — — — — — — — Doubtful — — — — — — — — — Total commercial and industrial 15,706 9,299 18,884 5,480 2,397 18,819 40,614 — 111,199 Year-to-date gross charge-offs — — — — — — — — — Owner-occupied commercial real estate Pass 3,432 1,467 10,496 6,538 5,766 16,263 — — 43,962 Special Mention — — 574 897 8,208 1,165 — — 10,844 Substandard — — — — — 1,655 — — 1,655 Doubtful — — — — — — — — — Total owner-occupied commercial real estate 3,432 1,467 11,070 7,435 13,974 19,083 — — 56,461 Year-to-date gross charge-offs — — — — — — — — — Investor commercial real estate Pass 60,642 2,894 90,280 65,050 9,673 27,709 — — 256,248 Special Mention — — — — — 4,366 — — 4,366 Substandard — — — — — — — — — Doubtful — — — — — — — — — Total investor commercial real estate 60,642 2,894 90,280 65,050 9,673 32,075 — — 260,614 Year-to-date gross charge-offs — — — — — — — — — Construction Pass 24,292 128,924 136,518 47,004 2,098 — 2,118 — 340,954 Special Mention — — — — — — — — — Substandard — — — — — — — — — Doubtful — — — — — — — — — Total construction 24,292 128,924 136,518 47,004 2,098 — 2,118 — 340,954 Year-to-date gross charge-offs — — — — — — — — — Single tenant lease financing Pass 40,680 51,925 214,769 88,047 64,010 447,248 — — 906,679 Special Mention 646 — 7,667 4,333 — 12,823 — — 25,469 Substandard — — — — — — — — — Doubtful — — — — — — — — — Total single tenant lease financing 41,326 51,925 222,436 92,380 64,010 460,071 — — 932,148 Year-to-date gross charge-offs — — — — — 195 — — 195 Public finance Pass 5,565 1,788 7,790 27,775 634 417,168 — — 460,720 Special Mention — — — — — 2,010 — — 2,010 Substandard — — — — — — — — — Doubtful — — — — — — — — — Total public finance 5,565 1,788 7,790 27,775 634 419,178 — — 462,730 Year-to-date gross charge-offs — — — — — — — — — 23 September 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 — — — 9,220 108,900 71,521 — — 189,641 Special Mention — — — — — 646 — — 646 Substandard — — — — — — — — — Doubtful — — — — — — — — — Total healthcare finance — — — 9,220 108,900 72,167 — — 190,287 Year-to-date gross charge-offs — — — — — — — — — Small business lending 1 Pass 95,188 103,226 32,612 12,447 10,500 11,643 14,191 — 279,807 Special Mention 977 2,365 1,556 642 364 579 991 — 7,474 Substandard — 5,350 2,579 70 1,437 1,466 462 — 11,364 Doubtful — — — — — — — — — Total small business lending 96,165 110,941 36,747 13,159 12,301 13,688 15,644 — 298,645 Year-to-date gross charge-offs — 1,303 677 — 104 87 — — 2,171 Franchise finance Pass 62,376 238,009 185,117 45,867 — — — — 531,369 Special Mention — 2,226 3,993 6,339 — — — — 12,558 Substandard — 2,985 3,057 473 — — — — 6,515 Doubtful — — — — — — — — — Total franchise finance 62,376 243,220 192,167 52,679 — — — — 550,442 Year-to-date gross charge-offs — 281 — 296 — — — — 577 Consumer loans Residential mortgage Performing 1,393 13,746 186,656 87,071 29,170 57,496 — — 375,532 Nonperforming — — 828 611 69 1,661 — — 3,169 Total residential mortgage 1,393 13,746 187,484 87,682 29,239 59,157 — — 378,701 Year-to-date gross charge-offs — — 28 58 — — — — 86 Home equity Performing — 1,018 1,577 364 431 557 15,392 925 20,264 Nonperforming — — — — — — — — — Total home equity — 1,018 1,577 364 431 557 15,392 925 20,264 Year-to-date gross charge-offs — — — — — — — — — Other consumer Performing 82,580 102,067 92,328 35,338 22,069 69,149 841 — 404,372 Nonperforming — — — — 2 14 — — 16 Total other consumer 82,580 102,067 92,328 35,338 22,071 69,163 841 — 404,388 Year-to-date gross charge-offs 49 214 235 100 1 161 — — 760 Total Loans $ 393,477 $ 667,289 $ 997,281 $ 443,566 $ 265,728 $ 1,163,958 $ 74,609 $ 925 $ 4,006,833 Total year-to-date gross charge-offs $ 49 $ 1,798 $ 940 $ 454 $ 105 $ 443 $ — $ — $ 3,789 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 September 30, 2024 and December 31, 2023. September 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 $ — $ — $ — $ — $ 111,199 $ 111,199 Owner-occupied commercial real estate — — — — 56,461 56,461 Investor commercial real estate — — — — 260,614 260,614 Construction — — — — 340,954 340,954 Single tenant lease financing — — — — 932,148 932,148 Public finance — — — — 462,730 462,730 Healthcare finance — — — — 190,287 190,287 Small business lending 1 3,180 1,755 6,779 11,714 286,931 298,645 Franchise finance 1,938 3,651 7,300 12,889 537,553 550,442 Residential mortgage 1,216 1,570 2,647 5,433 373,268 378,701 Home equity — — — — 20,264 20,264 Other consumer 164 11 — 175 404,213 404,388 Total $ 6,498 $ 6,987 $ 16,726 $ 30,211 $ 3,976,622 $ 4,006,833 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 recognized less than $ 0.1 million in interest income on nonaccrual loans for both the three and nine months ended September 30, 2024 and September 30, 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: September 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 $ 11,364 $ 888 $ 61 $ 6,824 $ 904 $ — Franchise finance 6,515 — 785 303 — — Residential mortgage 3,169 3,169 568 1,911 1,911 838 Other consumer 16 16 — 86 86 — Total loans $ 21,064 $ 4,073 $ 1,414 $ 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 September 30, 2024 and December 31, 2023. September 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 1,192 — 8,147 9,339 5,337 Franchise finance 6,515 — — 6,515 2,017 Residential mortgage — 3,169 — 3,169 — Other consumer loans — — 16 16 — Total loans $ 7,707 $ 3,169 $ 9,817 $ 20,693 $ 7,354 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, other-than-insignificant payment delays, term extensions and other actions intended to minimize loss and to avoid foreclosure or repossession of collateral. The Company had three loan modifications made to borrowers experiencing financial difficulty during both the three and nine months ended September 30, 2024. The Company did not have any loan modifications made to borrowers experiencing financial difficulty during the three and nine months ended September 30, 2023. The following tables present loans that were both experiencing financial difficulty and modified during the three and nine months ended September 30, 2024. (in thousands) Three Months Ended September 30, 2024 Payment Delay Total Modification by Loan Class % of Class of Loans Investor commercial real estate $ 3,731 $ 3,731 1.4 % Franchise finance 4,028 4,028 0.7 % Total loans $ 7,759 $ 7,759 (in thousands) Nine Months Ended September 30, 2024 Payment Delay Total Modification by Loan Class % of Class of Loans Investor commercial real estate $ 3,731 $ 3,731 1.4 % Franchise finance 4,028 4,028 0.7 % Total loans $ 7,759 $ 7,759 The following tables describe the financial effect of the modifications made to borrowers experiencing financial difficulty. As of September 30, 2024, the Company had no commitments to lend additional funds to these borrowers included in the table below. (in thousands) Three Months Ended September 30, 2024 - Payment Delay Loan Type Financial Effect Investor commercial real estate Forbearance average of 9 months. Franchise finance Forbearance average of 7 months. (in thousands) Nine Months Ended September 30, 2024 - Payment Delay Loan Type Financial Effect Investor commercial real estate Forbearance average of 9 months. Franchise finance Forbearance average of 7 months. 29 The Company closely monitors the performance of loans that are modified to borrowers experiencing financial difficulty to understand the effectiveness of its modification efforts. The following table presents the performance of such loans that have been modified in the last twelve months as of September 30, 2024. (in thousands) Current 30 - 89 Days Past Due 90+ Days Past Due Investor commercial real estate $ 3,731 $ — $ — Franchise finance 4,028 — — Total loans $ 7,759 $ — $ — No modified loans defaulted during the three and nine months ended September 30, 2024. Other Real Estate Owned The Company had $ 0.3 million in other real estate owned (“OREO”) as of September 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 seven loans totaling $ 1.9 million and one loan totaling $ 0.8 million, in the process of foreclosure at September 30, 2024 and December 31, 2023, respectively. 30 Note 5: Premises and Equipment The following table summarizes premises and equipment at September 30, 2024 and December 31, 2023. (in thousands) September 30, 2024 December 31, 2023 Land $ 5,598 $ 5,598 Construction in process 382 1,119 Right of use leased asset 203 66 Building and improvements 62,583 60,699 Furniture and equipment 21,677 20,836 Less: accumulated depreciation ( 18,293 ) ( 14,855 ) Total $ 72,150 $ 73,463 Note 6: Goodwill As of September 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 nine months ended September 30, 2024 or September 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 qualitative test performed as of August 31, 2024. 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 nine months ended September 2024 and 2023 are shown in the table below. Three Months Ended (in thousands) September 30, 2024 September 30, 2023 Balance, beginning of period $ 13,009 $ 8,251 Additions: Originated 2,499 1,585 Subtractions Paydowns: ( 689 ) ( 408 ) Changes in fair value due to changes in valuation inputs or assumptions used in the valuation model ( 157 ) 151 Loan servicing asset revaluation $ ( 846 ) $ ( 257 ) Balance, end of period $ 14,662 $ 9,579 31 Nine Months Ended (in thousands) September 30, 2024 September 30, 2023 Balance, beginning of period $ 10,567 $ 6,255 Additions: Originated 6,204 3,994 Subtractions Paydowns: ( 2,097 ) ( 1,275 ) Changes in fair value due to changes in valuation inputs or assumptions used in the valuation model ( 12 ) 605 Loan servicing asset revaluation $ ( 2,109 ) $ ( 670 ) Balance, end of period $ 14,662 $ 9,579 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 September 30, 2024 and December 31, 2023 are shown in the table below. (in thousands) September 30, 2024 December 31, 2023 Loan portfolios serviced for: SBA guaranteed loans $ 783,276 $ 531,927 Total $ 783,276 $ 531,927 Loan servicing revenue totaled $ 1.6 million and $ 4.4 million for the three and nine months ended September 30, 2024, respectively, and $ 1.1 million and $ 2.7 million for the three and nine months ended September 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 $ 2.1 million downward valuation for the three and nine months ended September 30, 2024, respectively, and a $ 0.3 million and $ 0.7 million downward valuation for both the three and nine months ended September 30, 2023, respectively. The fair value of servicing rights is highly sensitive to changes in underlying assumptions. Though fluctuations in prepayment speeds and changes in secondary market premiums generally have the most substantial impact on the fair value of servicing rights, other influencing factors include changing economic conditions, changes to the discount rate assumption and the weighted average life of the servicing portfolio. Measurement of fair value is limited to the conditions existing and the assumptions used as of a particular point in time; however, those assumptions may change over time. Refer to Note 11 - Fair Value of Financial Instruments for further details. Note 8: Subordinated Debt In June 2019, the Company issued $ 37.0 million aggregate principal amount of 6.0 % Fixed-to-Floating Rate Subordinated Notes due 2029 (the “2029 Notes”) in a public offering. The 2029 Notes 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 at any time, without penalty. 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. 32 In August 2021, the Company issued $ 60.0 million aggregate principal amount of 3.75 % Fixed-to-Floating Rate Subordinated Notes due 2031 (the “2031 Notes”) in a private placement. The 2031 Notes initially bear a fixed interest rate of 3.75 % per year to, but excluding, September 1, 2026, and thereafter a floating rate equal to the then-current benchmark rate (initially three-month Term SOFR plus 3.11 %). The 2031 Notes are scheduled to mature on September 1, 2031. The 2031 Notes are unsecured subordinated obligations of the Company and may be repaid, without penalty, on any interest payment date on or after September 1, 2026. The 2031 Notes are intended to qualify as Tier 2 capital under regulatory guidelines. The Company used a portion of the net proceeds from the issuance of the 2031 Notes to redeem subordinated notes issued by the Company in 2016. Pursuant to the terms of a Registration Rights Agreement between the Company and the initial purchasers of the 2031 Notes, the Company offered to exchange the 2031 Notes for subordinated notes that are registered under the Securities Act of 1933, as amended, and have substantially the same terms as the 2031 Notes. On December 30, 2021, we completed an exchange of $ 59.3 million principal amount of the unregistered 2031 Notes for registered 2031 Notes in satisfaction of our obligations under the registration rights agreement. Holders of $ 0.7 million of unregistered 2031 Notes did not participate in the exchange. The following table presents the principal balance and unamortized discount and debt issuance costs for the 2029 Notes, the 2030 Note, and the 2031 Notes as of September 30, 2024 and December 31, 2023. September 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 $ ( 743 ) $ 37,000 $ ( 862 ) 2030 Notes 10,000 ( 143 ) 10,000 ( 160 ) 2031 Notes 60,000 ( 1,043 ) 60,000 ( 1,140 ) Total $ 107,000 $ ( 1,929 ) $ 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”). 33 Award Activity Under 2022 Plan The Company recorded $ 0.4 million and $ 1.1 million o f share-based compensation expense for the three and nine months ended September 30, 2024, respectively, related to stock-based awards under the 2022 Plan. The Company recorded $ 0.2 million and $ 0.6 million o f share-based compensation expense for the three and nine months ended September 30, 2023, respectively, related to stock-based awards under the 2022 Plan . The following table summarizes the stock-based award activity under the 2022 Plan for the nine months ended September 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 — — Cancelled/Forfeited ( 1,290 ) 24.37 — — — — Vested ( 14,294 ) 24.52 ( 30,030 ) 11.18 — — Unvested at September 30, 2024 131,992 $ 24.35 12,040 $ 31.46 — $ — At September 30, 2024, the total unrecognized compensation cost related to unvested stock-based awards under the 2022 Plan was $ 2.4 million with a weighted-average expense recognition period of 1.8 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 nine months ended September 30, 2024, respectively, related to stock-based awards under the 2013 Plan . The Company recorded less than $ 0.2 million and $ 0.3 million of share-based compensation expense for the three and nine months ended September 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 nine months ended September 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 ( 22,806 ) 30.45 — — — — Vested ( 8,089 ) 46.64 — — — — Unvested at September 30, 2024 23,090 $ 46.69 — $ — — $ — At September 30, 2024, the total unrecognized compensation cost related to unvested stock-based awards under the 2013 Plan was $ 0.1 million with a weighted-average expense recognition period of 0.3 years. 34 Directors Deferred Stock Plan Until January 2014, the Company had a practice of granting awards under a stock compensation plan for members of the Board of Directors (“Directors Deferred Stock Plan”). The Company reserved 180,000 shares of common stock that could have been issued pursuant to the Directors Deferred Stock Plan. The plan provided directors the option to elect to receive up to 100 % of their annual retainer in either common stock or deferred stock rights. Deferred stock rights were to be settled in common stock following the end of the deferral period payable on the basis of one share of common stock for each deferred stock right. The following table summarizes the status of deferred stock rights related to the Directors Deferred Stock Plan for the nine months ended September 30, 2024. Deferred Stock Rights Outstanding, beginning of period 28,538 Granted 213 Outstanding, end of period 28,751 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 September 30, 2024 and December 31, 2023, the Company had outstanding loan commitments totaling approximately $ 707.5 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 September 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. 35 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 September 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). 36 The following tables present the fair value measurements of assets and liabilities recognized in the accompanying condensed consolidated balance sheets measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at September 30, 2024 and December 31, 2023. September 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 $ 88,316 $ — $ 88,316 $ — Municipal securities 65,423 — 65,423 — Agency mortgage-backed securities - residential 265,853 — 265,853 — Agency mortgage-backed securities - commercial 64,934 — 64,934 — Private label mortgage-backed securities - residential 34,536 — 34,536 — Asset-backed securities 18,341 — 18,341 — Corporate securities 37,854 — 37,854 — Total available-for-sale securities $ 575,257 $ — $ 575,257 $ — Servicing asset 14,662 — — 14,662 Interest rate swap agreements 2,079 — 2,079 — Interest rate swap agreements - assets (back-to-back) 700 — 700 — Interest rate swap agreements - liabilities (back-to-back) ( 700 ) — ( 700 ) — 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 ) — 37 The following tables reconcile the beginning and ending balances of recurring fair value measurements recognized in the accompanying condensed consolidated balance sheets using significant unobservable (Level 3) inputs for the three and nine months ended September 30, 2024 and 2023. Three Months Ended (in thousands) Servicing Asset Interest Rate Lock Commitments Balance as of July 1, 2024 $ 13,009 $ — Total realized gains Additions: Originated 2,499 — Subtractions: Paydowns ( 689 ) — Change in fair value ( 157 ) — Balance, September 30, 2024 $ 14,662 $ — Balance as of July 1, 2023 $ 8,251 $ — Total realized gains Additions: Originated 1,585 — Subtractions: Paydowns ( 408 ) — Change in fair value 151 — Balance, September 30, 2023 $ 9,579 $ — Nine Months Ended (in thousands) Servicing Asset Interest Rate Lock Commitments Balance, January 1, 2024 $ 10,567 $ — Total realized gains Additions: Originated 6,204 — Subtractions: — Paydowns ( 2,097 ) — Change in fair value ( 12 ) — Balance, September 30, 2024 $ 14,662 $ — Balance, January 1, 2023 $ 6,255 $ 133 Total realized gains Additions: Originated 3,994 — Subtractions: Paydowns ( 1,275 ) — Change in fair value 605 ( 133 ) Balance, September 30, 2023 $ 9,579 $ — 38 The following describes the valuation methodologies and inputs used for assets measured at fair value on a nonrecurring basis, as well as the general classification of such assets pursuant to the valuation hierarchy. 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 September 30, 2024 and December 31, 2023. September 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 $ 7,221 $ — $ — $ 7,221 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 September 30, 2024 Valuation Technique Significant Unobservable Inputs Range Weighted-Average Range Collateral dependent loans $ 7,221 Fair value of collateral Discount for type of property and current market conditions 0 %- 90 % 21 % Servicing asset 14,662 Discounted cash flow Prepayment speeds Discount rate 0 % - 25 % 14 % 11.6 % 14 % 39 (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 September 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. 40 Advances from Federal Home Loan Bank The fair value of fixed rate advances is estimated using rates currently available for advances with similar remaining maturities. The carrying value of variable rate advances approximates fair value. Subordinated Debt The fair value of the Company’s publicly traded subordinated debt is obtained from quoted market prices. The fair value of the Company’s remaining subordinated debt is estimated using discounted cash flow analysis, based on current borrowing rates for similar types of debt instruments. Accrued Interest Payable The fair value of these financial instruments approximates carrying value. Commitments The fair value of commitments to extend credit are based on fees currently charged to enter into similar agreements with similar maturities and interest rates. The Company determined that the fair value of commitments was zero based on the contractual value of outstanding commitments at each of September 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 September 30, 2024 and December 31, 2023. September 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 $ 712,479 $ 712,479 $ 712,479 $ — $ — Securities held-to-maturity, net 263,320 249,618 — 249,618 — Loans held-for-sale (best efforts pricing agreements) 32,996 32,996 — 32,996 — Net loans 3,990,159 3,854,166 — — 3,854,166 Accrued interest receivable 27,750 27,750 27,750 — — Federal Home Loan Bank of Indianapolis stock 28,350 28,350 — 28,350 — Deposits 4,797,710 4,818,679 1,902,494 — 2,916,185 Advances from Federal Home Loan Bank 515,000 516,348 — 516,348 — Subordinated debt 105,071 107,767 37,725 70,042 — Accrued interest payable 2,808 2,808 2,808 — — 41 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 nine months ended September 30, 2024, the Company had no mortgage loans held-for-sale or sold mortgage loans into the secondary market. During the three months ended September 30, 2023, the Company had no mortgage loans held-for-sale and sold mortgage loans into the secondary market. During the nine months ended September 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 nine months ended September 30, 2024 and 2023. Three Months Ended September 30, Nine Months Ended September 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. 42 Note 13: Derivative Financial Instruments The Company uses derivative financial instruments to help manage exposure to interest rate risk and the effects that changes in interest rates may have on net income and the fair value of assets and liabilities. The Company enters into interest rate swap agreements as part of its asset/liability management strategy to help manage its interest rate risk position. Additionally, the Company entered into forward contracts for the future delivery of mortgage loans to third-party investors and entered into IRLCs with potential borrowers to fund specific mortgage loans that were sold into the secondary market. The forward contracts were entered into in order to economically hedge the effect of changes in interest rates resulting from the Company’s commitment to fund the loans. The Company had various interest rate swap agreements designated and qualifying as accounting hedges during the reported periods. Designating an interest rate swap as an accounting hedge allows the Company to recognize gains and losses in the condensed consolidated statements of income within the same period that the hedged item affects earnings. The Company includes the gain or loss on the hedged items in the same line item as the offsetting loss or gain on the related interest rate swaps. For derivative instruments that are designated and qualify as cash flow hedges, any gains or losses related to changes in fair value are recorded in accumulated other comprehensive loss, net of tax. The fair value of interest rate swaps with a positive fair value are reported in accrued income and other assets in the condensed consolidated balance sheets, while interest rate swaps with a negative fair value are reported in accrued expenses and other liabilities in the condensed consolidated balance sheets. The 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 September 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 September 30, 2024 December 31, 2023 September 30, 2024 December 31, 2023 Securities available-for-sale 1 $ 67,410 $ 69,504 $ ( 112 ) $ ( 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 September 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 September 30, 2024 and December 31, 2023, identified by the underlying interest rate-sensitive instruments. 43 (dollars in thousands) September 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 0.1 $ 123 3-month SOFR 2.33 % Total swap portfolio at September 30, 2024 $ 50,000 0.1 $ 123 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 nine months ended September 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 9.8 years as of September 30, 2024. The Company had amortization expense totaling $ 1.6 million and $ 3.7 million for the three and nine months ended September 30, 2024, respectively, and $ 1.5 million and $ 3.5 million for the three and nine months ended September 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 September 30, 2024 and December 31, 2023. (dollars in thousands) September 30, 2024 Notional Value Weighted- Average Remaining Maturity (years) Weighted-Average Ratio Cash Flow Hedges Fair Value Receive Pay Interest rate swaps $ 110,000 2.3 $ 1,956 3-month SOFR 2.88 % (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 $ 1.6 million and $ 5.2 million of cash collateral from counterparties as security for their obligations related to these swap transactions at September 30, 2024 and December 31, 2023. The Company had no pledged cash collateral as of September 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. 44 The following table presents the notional amount and fair value of interest rate swaps utilized by the Company at September 30, 2024 and December 31, 2023. September 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 $ 123 $ 50,000 $ 1,153 Interest rate swaps associated with liabilities 110,000 1,956 150,000 3,986 Derivatives not designated as hedging instruments Back-to-back swaps 18,885 700 1,778 677 Total contracts $ 178,885 $ 2,779 $ 201,778 $ 5,816 Liability Derivatives Derivatives not designated as hedging instruments Back-to-back swaps $ 18,885 $ ( 700 ) $ 1,778 $ ( 677 ) Total contracts $ 18,885 $ ( 700 ) $ 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 nine months ended September 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 Nine Months Ended (in thousands) September 30, 2024 September 30, 2023 September 30, 2024 September 30, 2023 Interest rate swap agreements $ ( 2,670 ) $ 740 $ ( 2,030 ) $ 664 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 nine months ended September 30, 2024 and 2023. Amount of Loss Recognized in the Three Months Ended Amount of Loss Recognized in the Nine Months Ended (in thousands) September 30, 2024 September 30, 2023 September 30, 2024 September 30, 2023 Liability Derivatives Derivatives not designated as hedging instruments IRLCs $ — $ — $ — $ ( 133 ) Forward contracts — — — ( 119 ) 45 The following table presents the effects of the Company’s interest rate swap agreements on the condensed consolidated statements of operations during the three and nine months ended September 30, 2024 and 2023. (in thousands) Line item in the condensed consolidated statements of operations Three Months Ended Nine Months Ended September 30, 2024 September 30, 2023 September 30, 2024 September 30, 2023 Interest income Securities - non-taxable $ 421 $ 407 $ 1,250 $ 1,055 Total interest income 421 407 1,250 1,055 Interest expense Deposits — ( 372 ) ( 424 ) ( 1,330 ) Other borrowed funds ( 782 ) ( 748 ) ( 2,304 ) ( 1,865 ) Total interest expense ( 782 ) ( 1,120 ) ( 2,728 ) ( 3,195 ) Net interest income $ 1,203 $ 1,527 $ 3,978 $ 4,250 Note 14: Accumulated Other Comprehensive Loss The components of accumulated other comprehensive loss, included in shareholders' equity, for the nine months ended September 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 Balance, January 1, 2024 $ ( 30,174 ) $ ( 2,939 ) $ 3,738 $ ( 29,375 ) Other comprehensive income (loss) before reclassifications from accumulated other comprehensive loss before tax 7,995 — ( 2,030 ) 5,965 Reclassifications from accumulated other comprehensive loss to earnings before tax — 607 — 607 Other comprehensive gain (loss) before tax 7,995 607 ( 2,030 ) 6,572 Income tax provision (benefit) 1,841 149 ( 467 ) 1,523 Other comprehensive gain (loss) - net of tax 6,154 458 ( 1,563 ) 5,049 Balance, September 30, 2024 $ ( 24,020 ) $ ( 2,481 ) $ 2,175 $ ( 24,326 ) Balance, January 1, 2023 $ ( 35,831 ) $ ( 3,519 ) $ 5,714 $ ( 33,636 ) Other comprehensive (loss) income before reclassifications from accumulated other comprehensive loss before tax ( 11,006 ) — 664 ( 10,342 ) Reclassifications from accumulated other comprehensive loss to earnings before tax — 537 — 537 Other comprehensive (loss) gain before tax ( 11,006 ) 537 664 ( 9,805 ) Income tax (benefit) provision ( 2,537 ) 140 153 ( 2,244 ) Other comprehensive (loss) gain - net of tax ( 8,469 ) 397 511 ( 7,561 ) Balance, September 30, 2023 $ ( 44,300 ) $ ( 3,122 ) $ 6,225 $ ( 41,197 ) 46 The components of accumulated other comprehensive loss, included in stockholders' equity, for the three months ended September 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, July 1, 2024 $ ( 32,198 ) $ ( 2,620 ) $ 4,231 $ ( 30,587 ) Other comprehensive income (loss) before reclassifications from accumulated other comprehensive loss before tax 10,620 — ( 2,670 ) 7,950 Reclassifications from accumulated other comprehensive loss to earnings before tax — 185 185 Other comprehensive gain (loss) before tax 10,620 185 ( 2,670 ) 8,135 Income tax provision (benefit) 2,442 46 ( 614 ) 1,874 Other comprehensive income (loss) - net of tax 8,178 139 ( 2,056 ) 6,261 Balance, September 30, 2024 $ ( 24,020 ) $ ( 2,481 ) $ 2,175 $ ( 24,326 ) Balance, July 1, 2023 $ ( 35,592 ) $ ( 3,250 ) $ 5,656 $ ( 33,186 ) Other comprehensive (loss) income before reclassifications from accumulated other comprehensive loss before tax ( 11,308 ) — 740 ( 10,568 ) Reclassifications from accumulated other comprehensive loss to earnings before tax — 173 — 173 Other comprehensive (loss) gain before tax ( 11,308 ) 173 740 ( 10,395 ) Income tax (benefit) provision ( 2,600 ) 45 171 ( 2,384 ) Other comprehensive (loss) income - net of tax ( 8,708 ) 128 569 ( 8,011 ) Balance, September 30, 2023 $ ( 44,300 ) $ ( 3,122 ) $ 6,225 $ ( 41,197 ) 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 September 30, 2024 Three Months Ended September 30, 2023 Nine Months Ended September 30, 2024 Nine Months Ended September 30, 2023 Reclassifications from accumulated other comprehensive loss to earnings before tax $ ( 185 ) ( 173 ) $ ( 607 ) $ ( 537 ) Interest income Total amount reclassified before tax ( 185 ) ( 173 ) ( 607 ) ( 537 ) Income before income taxes Tax benefit ( 46 ) ( 45 ) ( 149 ) ( 140 ) Income tax provision (benefit) Total reclassifications from accumulated other comprehensive loss $ ( 139 ) $ ( 128 ) $ ( 458 ) $ ( 397 ) Net income 47 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.