Item 2. Management’s Discussion and Analysis
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes appearing elsewhere in this report. This discussion and analysis includes certain forward-looking statements that involve risks, uncertainties, and assumptions. You should review the “Risk Factors” sections of this report and our Annual Report on Form 10-K for the year ended December 31, 2023 for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by such forward-looking statements. See also “Cautionary Note Regarding Forward-Looking Statements” at the beginning of this report.
Overview
First Internet Bancorp is a bank holding company headquartered in Fishers, Indiana that conducts its primary business activities through its wholly-owned subsidiary, First Internet Bank of Indiana (the “Bank”), an Indiana chartered bank. The Bank was the first state-chartered, Federal Deposit Insurance Corporation (“FDIC”) insured Internet bank and commenced banking operations in 1999. First Internet Bancorp was incorporated under the laws of the State of Indiana on September 15, 2005. On March 21, 2006, we consummated a plan of exchange by which we acquired all of the outstanding shares of the Bank.
The Bank has three wholly-owned subsidiaries: First Internet Public Finance Corp., an Indiana corporation that provides a range of public and municipal finance lending and leasing products to governmental entities throughout the United States and acquires securities issued by state and local governments and other municipalities; JKH Realty Services, LLC, a Delaware limited liability company that manages other real estate owned properties as needed; and SPF15, Inc., an Indiana corporation that owns real estate used primarily for the Bank’s principal office.
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We offer a wide range of commercial, small business, consumer and municipal banking products and services. We conduct our consumer and small business deposit operations primarily through digital channels on a nationwide basis and have no traditional branch offices. Our consumer lending products are primarily originated on a nationwide basis through relationships with dealerships and financing partners.
Our commercial banking products and services are delivered through a relationship banking model or through strategic partnerships and include commercial and industrial (“C&I”), construction and investor commercial real estate, single tenant lease financing, public finance, healthcare finance, small business lending, franchise finance and commercial deposits and treasury management. Our C&I team provides credit solutions such as lines of credit, term loans, owner-occupied commercial real estate loans and corporate credit cards on a regional basis to commercial borrowers primarily in the Midwest and Southwest regions of the United States. We offer construction and investor commercial real estate loans, as well as single tenant lease financing, on a nationwide basis. Our public finance team provides a range of public and municipal lending and leasing products to government entities on a nationwide basis. Our healthcare finance team was established in conjunction with our strategic partnership with Provide, Inc. (formerly known as Lendeavor, Inc.), a San Francisco-based technology-enabled lender to healthcare practices, which provided lending on a nationwide basis for healthcare practice finance or acquisition, acquisition or refinancing of owner-occupied commercial real estate and equipment purchases. In the third quarter 2021, Provide was acquired by a super-regional financial institution. Subsequent to Provide being acquired, the acquiring institution has retained most, if not all, of Provide’s loan origination activity and our healthcare finance loan balances have declined. Our franchise finance business was established in July 2021 in conjunction with our business relationship with ApplePie Capital, a company that specializes in providing financing to franchisees in various industry segments across the United States. Our commercial deposits and treasury management team works with the other commercial teams to provide deposit products and treasury management services to our commercial and municipal lending customers as well as pursues commercial deposit opportunities in business segments where we have no credit relationships.
We believe that we differentiate ourselves from larger financial institutions by providing a full suite of services to emerging small businesses and entrepreneurs on a nationwide basis. We are one of the fastest-growing lenders in the Small Business Administration (“SBA”) 7(a) program, closing $371.0 million in SBA 7(a) loans during the nine months ended September 30, 2024, and ranked as the 8th largest SBA 7(a) lender for the SBA’s 2024 fiscal year. We also offer a top-ranked small business checking account product to our country’s entrepreneurs. We continue to scale up this business with the goal of driving increased earnings and profitability in future periods.
We also offer payment, deposit, card and lending products and services through partnerships with financial technology companies and platforms (“fintechs”). With the rapid evolution of technology that enables small businesses to manage their finances digitally, fintechs are addressing a significantly growing marketplace. Fintechs have created robust digital offerings, unburdened by legacy technology architecture, to address growing customer expectations. Through partnerships with selected fintechs, we believe our ability to win and retain small business relationships will be significantly enhanced. Furthermore, we believe partnering with select fintechs will allow us to further diversify our revenue sources, acquire deposits and pursue additional asset generation capabilities.
As of September 30, 2024, the Company had consolidated assets of $5.8 billion, consolidated deposits of $4.8 billion and stockholders’ equity of $385.1 million.
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Results of Operations
During the third quarter 2024, net income was $7.0 million, or $0.80 diluted earnings per share, compared to net income of $3.4 million, or $0.39 diluted earnings per share, during the third quarter 2023, representing an increase in net income of $3.6 million, or 105.0%, and an increase in diluted earnings per share of $0.41, or 105.1%. During the nine months ended September 30, 2024, net income was $17.9 million, or $2.05 diluted earnings per share, compared to the nine months ended September 30, 2023 net income of $4.3 million, or $0.48 per diluted share, resulting in an increase in net income of $13.7 million, or 319.9%, and an increase in diluted earnings per share of $1.57, or 327.1%.
The $3.6 million increase in net income for the third quarter 2024 compared to the third quarter 2023 was due primarily to a $4.6 million, or 62.4%, increase in noninterest income and a $4.4 million, or 25.2%, increase in net interest income, partially offset by increases of $3.0 million, or 15.4%, in noninterest expense, $1.4 million, or 74.2%, in the provision for credit losses and $0.9 million in income tax expense.
The $13.7 million increase in net income for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023 was due primarily to a $12.7 million, or 67.7%, increase in noninterest income, an $8.7 million, or 15.8%, increase in net interest income and a $3.2 million, or 24.4%, decrease in provision for credit losses, partially offset by increases of $6.8 million, or 11.4%, in noninterest expense and $4.2 million in income tax expense.
During the third quarter 2024, return on average assets (“ROAA”), return on average shareholders’ equity (“ROAE”), and return on average tangible common equity (“ROATCE”) were 0.50%, 7.32%, and 7.41%, respectively, compared to 0.26%, 3.79%, and 3.84%, respectively, for the third quarter 2023. During the nine months ended September 30, 2024, ROAA, ROAE and ROATCE were 0.45%, 6.42%, and 6.51%, respectively, compared to 0.12%, 1.59%, and 1.61%, respectively, for the nine months ended September 30, 2023.
During the nine months ended September 30, 2024, the Company recognized $0.5 million in IT termination fees and $0.1 million in anniversary expenses. Excluding these items, adjusted net income for the nine months ended September 30, 2024 was $18.4 million and adjusted diluted earnings per share was $2.10. Additionally, for the nine months ended September 30, 2024, adjusted ROAA, adjusted ROAE and adjusted ROATCE were 0.46%, 6.58% and 6.67%, respectively.
Due to the steep decline in consumer mortgage volumes and the negative outlook for consumer mortgage lending, the Company decided to exit its consumer mortgage business during the first quarter 2023. This included its nationwide digital direct-to-consumer mortgage platform that originated residential loans for sale in the secondary market, as well as its local traditional consumer mortgage and construction-to-permanent business. In connection with this decision, the Company recognized $3.1 million of mortgage operations and exit costs during the nine months ended September 30, 2023. The Company also recognized $0.1 million of mortgage banking revenue during the nine months ended September 30, 2023.
Additionally, during the nine months ended September 30, 2023, the Company recognized a partial charge-off of $6.9 million related to a commercial and industrial participation loan with a balance of $9.8 million, prior to the partial charge-off, that was moved to nonaccrual status late in the first quarter 2023. The Company received payment for the remaining balance of the participation loan during the second quarter 2023.
Excluding the impact of exiting consumer mortgage and the partial charge-off, adjusted net income for the nine months ended September 30, 2023 was $12.1 million and adjusted diluted earnings per share was $1.35. Additionally, for the nine months ended September 30, 2023, adjusted ROAA, adjusted ROAE and adjusted ROATCE were 0.34%, 4.50% and 4.56%, respectively
Refer to the “Reconciliation of Non-GAAP Financial Measures” section of Part I, Item 2 of this report, Management’s Discussion and Analysis of Financial Condition and Results of Operations for additional information.
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Consolidated Average Balance Sheets and Net Interest Income Analyses
For the periods presented, the following tables provide the average balances of interest-earning assets and interest-bearing liabilities and the related yields and cost of funds. The tables do not reflect any effect of income taxes except for net interest margin - FTE, as discussed below. Balances are based on the average of daily balances. Nonaccrual loans are included in average loan balances.
Three Months Ended
September 30, 2024 June 30, 2024 September 30, 2023
(dollars in thousands) Average Balance Interest /Dividends Yield /Cost Average Balance Interest /Dividends Yield /Cost Average Balance Interest /Dividends Yield /Cost
Assets
Interest-earning assets
Loans, including
loans held-for-sale $ 4,029,360 $ 59,792 5.90 % $ 3,936,723 $ 57,094 5.83 % $ 3,701,072 $ 48,898 5.24 %
Securities - taxable 713,992 6,953 3.87 % 670,502 6,476 3.88 % 550,208 4,301 3.10 %
Securities - non-taxable 78,417 1,042 5.29 % 74,035 970 5.27 % 72,012 912 5.02 %
Other earning assets 526,384 7,203 5.44 % 469,045 6,421 5.51 % 653,375 8,904 5.41 %
Total interest-earning assets 5,348,153 74,990 5.58 % 5,150,305 70,961 5.54 % 4,976,667 63,015 5.02 %
Allowance for credit losses - loans (44,572) (41,362) (35,601)
Noninterest-earning assets 220,329 223,833 196,408
Total assets $ 5,523,910 $ 5,332,776 $ 5,137,474
Liabilities
Interest-bearing liabilities
Interest-bearing demand deposits $ 511,446 $ 2,880 2.24 % $ 474,124 $ 2,567 2.18 % $ 387,517 $ 2,131 2.18 %
Savings accounts 22,774 48 0.84 % 22,987 48 0.84 % 26,221 56 0.85 %
Money market accounts 1,224,680 12,980 4.22 % 1,243,011 13,075 4.23 % 1,230,746 12,537 4.04 %
Fintech - brokered deposits 153,012 1,682 4.37 % 119,662 1,299 4.37 % 31,891 348 4.33 %
Certificates and brokered deposits 2,472,166 29,825 4.80 % 2,313,192 27,506 4.78 % 2,235,321 25,267 4.48 %
Total interest-bearing deposits 4,384,078 47,415 4.30 % 4,172,976 44,495 4.29 % 3,911,696 40,339 4.09 %
Other borrowed funds 620,032 5,810 3.73 % 652,176 5,139 3.17 % 719,655 5,298 2.92 %
Total interest-bearing liabilities 5,004,110 53,225 4.23 % 4,825,152 49,634 4.14 % 4,631,351 45,637 3.91 %
Noninterest-bearing deposits 113,009 116,939 127,540
Other noninterest-bearing liabilities 26,730 20,860 21,882
Total liabilities 5,143,849 4,962,951 4,780,773
Shareholders’ equity 380,061 369,825 356,701
Total liabilities and shareholders’ equity $ 5,523,910 $ 5,332,776 $ 5,137,474
Net interest income $ 21,765 $ 21,327 $ 17,378
Interest rate spread 1
1.35% 1.40% 1.11 %
Net interest margin 2
1.62% 1.67% 1.39 %
Net interest margin - FTE 3
1.70% 1.76% 1.49 %
1 Yield on total interest-earning assets minus cost of total interest-bearing liabilities.
2 Net interest income divided by total average interest-earning assets (annualized).
3 On an FTE basis assuming a 21% tax rate. Net interest income is adjusted to reflect income from assets such as municipal loans and securities that are exempt from Federal income taxes. This is to recognize the income tax savings that facilitates a comparison between taxable and tax-exempt assets. The Company believes that it is a standard practice in the banking industry to present net interest margin and net interest income on a fully-taxable equivalent basis, as these measures provide useful information to make peer comparisons. Net interest margin - FTE represents a non-GAAP financial measure. See “Reconciliation of Non-GAAP Financial Measures” for a reconciliation of this measure to its most directly comparable GAAP measure.
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Nine Months Ended
September 30, 2024 September 30, 2023
(dollars in thousands) Average Balance Interest /Dividends Yield /Cost Average Balance Interest /Dividends Yield /Cost
Assets
Interest-earning assets
Loans, including
loans held-for-sale $ 3,953,170 $ 172,321 5.82 % $ 3,647,243 $ 139,647 5.12 %
Securities - taxable 670,728 19,123 3.81 % 531,197 11,742 2.96 %
Securities - non-taxable 76,257 2,981 5.22 % 72,829 2,570 4.72 %
Other earning assets 476,697 19,691 5.52 % 499,835 19,211 5.14 %
Total interest-earning assets 5,176,852 214,116 5.52 % 4,751,104 173,170 4.87 %
Allowance for credit losses - loans (41,526) (35,784)
Noninterest-earning assets 220,165 190,590
Total assets $ 5,355,491 $ 4,905,910
Liabilities
Interest-bearing liabilities
Interest-bearing demand deposits $ 467,054 $ 7,538 2.16 % $ 360,573 $ 4,540 1.68 %
Savings accounts 22,760 144 0.85 % 31,494 202 0.86 %
Money market accounts 1,228,538 38,727 4.21 % 1,293,728 37,151 3.84 %
Fintech - brokered deposits 119,470 3,912 4.37 % 23,246 716 4.12 %
Certificates and brokered deposits 2,344,272 83,718 4.77 % 1,971,705 59,676 4.05 %
Total interest-bearing deposits 4,182,094 134,039 4.28 % 3,680,746 102,285 3.72 %
Other borrowed funds 662,824 16,251 3.28 % 719,577 15,788 2.93 %
Total interest-bearing liabilities 4,844,918 150,290 4.14 % 4,400,323 118,073 3.59 %
Noninterest-bearing deposits 114,425 126,647
Other noninterest-bearing liabilities 23,037 19,535
Total liabilities 4,982,380 4,546,505
Shareholders’ equity 373,111 359,405
Total liabilities and shareholders’ equity $ 5,355,491 $ 4,905,910
Net interest income $ 63,826 $ 55,097
Interest rate spread 1
1.38% 1.28%
Net interest margin 2
1.65% 1.55%
Net interest margin - FTE 3
1.74% 1.66%
1 Yield on total interest-earning assets minus cost of total interest-bearing liabilities.
2 Net interest income divided by total average interest-earning assets (annualized).
3 On an FTE basis assuming a 21% tax rate. Net interest income is adjusted to reflect income from assets such as municipal loans and securities that are exempt from Federal income taxes. This is to recognize the income tax savings that facilitates a comparison between taxable and tax-exempt assets. The Company believes that it is a standard practice in the banking industry to present net interest margin and net interest income on a fully-taxable equivalent basis, as these measures provide useful information to make peer comparisons. Net interest margin - FTE represents a non-GAAP financial measure. See “Reconciliation of Non-GAAP Financial Measures” for a reconciliation of this measure to its most directly comparable GAAP measure.
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Rate/Volume Analysis
The following table illustrates the impact of changes in the volume of interest-earning assets and interest-bearing liabilities and interest rates on net interest income for the periods indicated. The change in interest not due solely to volume or rate has been allocated in proportion to the absolute dollar amounts of the change in each.
Three Months Ended September 30, 2024 vs. June 30, 2024 Due to Changes in Three Months Ended September 30, 2024 vs. September 30, 2023 Due to Changes in Nine Months Ended September 30, 2024 vs. September 30, 2023 Due to Changes in
(in thousands) Volume Rate Net Volume Rate Net Volume Rate Net
Interest income
Loans, including loans held-for-sale $ 1,786 $ 912 $ 2,698 $ 4,502 $ 6,392 $ 10,894 $ 12,423 $ 20,251 $ 32,674
Securities – taxable 588 (111) 477 1,446 1,206 2,652 3,526 3,855 7,381
Securities – non-taxable 68 4 72 81 49 130 127 284 411
Other earning assets 1,303 (521) 782 (2,035) 334 (1,701) (1,278) 1,758 480
Total 3,745 284 4,029 3,994 7,981 11,975 14,798 26,148 40,946
Interest expense
Interest-bearing deposits 2,791 129 2,920 4,965 2,111 7,076 15,084 16,670 31,754
Other borrowed funds (1,447) 2,118 671 (3,711) 4,223 512 (1,819) 2,282 463
Total 1,344 2,247 3,591 1,254 6,334 7,588 13,265 18,952 32,217
Increase in net interest income $ 2,401 $ (1,963) $ 438 $ 2,740 $ 1,647 $ 4,387 $ 1,533 $ 7,196 $ 8,729
Net interest income for the third quarter 2024 was $21.8 million, an increase of $4.4 million, or 25.2%, compared to $17.4 million for the third quarter 2023. The increase in net interest income was the result of a $12.0 million, or 19.0%, increase in total interest income to $75.0 million for the third quarter 2024 from $63.0 million for the third quarter 2023, partially offset by a $7.6 million, or 16.6%, increase in total interest expense to $53.2 million for the third quarter 2024 from $45.6 million for the third quarter 2023.
Net interest income for the nine months ended September 30, 2024 was $63.8 million, an increase of $8.7 million, or 15.8%, compared to $55.1 million for the nine months ended September 30, 2023. The increase in net interest income was the result of a $40.9 million, or 23.6%, increase in total interest income to $214.1 million for the nine months ended September 30, 2024 from $173.2 million for the nine months ended September 30, 2023. The increase in total interest income was partially offset by a $32.2 million, or 27.3%, increase in total interest expense to $150.3 million for the nine months ended September 30, 2024 from $118.1 million for the nine months ended September 30, 2023.
The increase in total interest income for the third quarter 2024 compared to third quarter 2023 was due primarily to an increase in interest earned on loans, resulting from an increase of 66 bps in the yield earned on loans, including loans held-for-sale, as well as an increase of $328.3 million, or 8.9%, in the average balance of loans, including loans held-for-sale. Additionally, the average balance of securities increased $170.2 million, or 27.4%, and the yield earned on the securities portfolio increased 69 bps for the third quarter 2024 compared to the third quarter 2023. The increase in the yields earned on loans and securities was due to the impact of the continued elevated interest rate environment on existing interest-earning assets. The yield on funded portfolio loan originations was 8.85% for the third quarter 2024, a decrease of 7 bps compared to the third quarter 2023.
The increase in total interest income for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023 was due primarily to an increase in interest earned on loans resulting from an increase of 70 bps in the yield earned on loans, including loans held-for-sale, as well as an increase of $305.9 million, or 8.4%, in the average balance of loans, including loans held-for-sale. Additionally, the average balance of securities increased $143.0 million, or 23.7%, and the yield earned on the securities portfolio increased 78 bps for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023. Furthermore, the yield on other earning assets increased 38 bps, partially offset by a $23.1 million, or 4.6%, decrease in the average balance of other earning assets. The increase in the yield earned on loans, securities and other earning assets was due to the impact of the continued elevated interest rate environment on both existing and newly-originated interest-earning assets. The yield on funded portfolio loan originations was 8.85% for the nine months ended September 30, 2024, an increase of 56 bps compared to the nine months ended September 30, 2023.
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The increase in total interest expense for the third quarter 2024 compared to the third quarter 2023 was due primarily to increases of $4.6 million, or 18.0%, in interest expense associated with certificates and brokered deposits, $1.3 million, or 383.3%, in interest expense associated with fintech - brokered deposits and $0.7 million, or 35.1%, in interest expense associated with interest-bearing demand deposits. The increase in interest expense related to certificates and brokered deposits was driven by an increase of 32 bps in the cost of these deposits, as well as an increase of $236.8 million, or 10.6%, in the average balance of these deposits. The increase in the average balance of these deposits was driven by strong consumer and small business demand for certificates of deposits, partially offset by lower brokered deposit balances as the Company used on-balance sheet liquidity to pay down higher-cost balances throughout 2023 and 2024. The increase in interest expense related to fintech - brokered deposits was driven by an increase of 4 bps in the cost of these deposits, as well as an increase of $121.1 million, or 379.8%, in the average balance of these deposits. The increase in interest expense related to interest-bearing demand deposits was driven by an increase of 6 bps in the cost of these deposits, as well as an increase of $123.9 million, or 32.0%, in the average balance of these deposits. The increase in the cost of funds reflects the impact of the continued elevated interest rate environment throughout 2023 and 2024.
The increase in total interest expense for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023 was due primarily to increases of $24.0 million, or 40.3%, in interest expense associated with certificates and brokered deposits, $3.2 million, or 446.4%, in interest expense associated with fintech - brokered deposits, $3.0 million, or 66.0%, in interest expense associated with interest-bearing demand deposits, and $1.6 million, or 4.2%, in interest expense associated with money market accounts. The increase in interest expense related to certificates and brokered deposits was driven by an increase of 72 bps in the cost of these deposits, as well as an increase of $372.6 million, or 18.9%, in the average balance of these deposits. The increase in the average balance of these deposits was driven by strong consumer and small business demand for certificates of deposits in 2024, partially offset by lower brokered deposit balances as the Company used on-balance sheet liquidity to pay down higher-cost balances throughout 2023 and 2024. The increase in interest expense related to interest-bearing demand deposits was due primarily to a 48 bp increase in the cost of these deposits, as well as an increase of $106.5 million, or 29.5%, in the average balance of these deposits. The increase in interest expense related to fintech - brokered deposits was driven primarily by an increase of 25 bps in the cost of these deposits, as well as an increase of $96.2 million, or 413.9%, in the average balance of these deposits. The increase in interest expense related to money market accounts was driven primarily by an increase of 37 bps in the cost of these deposits, partially offset by a decrease of $65.2 million, or 5.0%, in the average balance of these deposits. The increase in the cost of funds reflects the impact of the continued elevated interest rate environment throughout 2023 and 2024.
Overall, the cost of total interest-bearing liabilities for the third quarter 2024 increased 32 bps to 4.23% from 3.91% for the third quarter 2023. The cost of total interest-bearing liabilities for the nine months ended September 30, 2024 increased 55 bps to 4.14% from 3.59% for the nine months ended September 30, 2023. The increase in the cost of funds for the three and nine months ended September 30, 2024 reflects the impact of the continued elevated interest rate environment throughout 2023 and 2024.
Net interest margin (“NIM”) was 1.62% for the third quarter 2024 compared to 1.39% for the third quarter 2023, an increase of 23 bps. On a fully-taxable equivalent (“FTE”) basis, NIM was 1.70% for the third quarter 2024 compared to 1.49% for the third quarter 2023, an increase of 21 bps. NIM was 1.65% for the nine months ended September 30, 2024 compared to 1.55% for the nine months ended September 30, 2023, an increase of 10 bps. FTE NIM was 1.74% for the nine months ended September 30, 2024 compared to 1.66% for the nine months ended September 30, 2023, an increase of 8 bps.
The increase in the third quarter 2024 NIM and FTE NIM compared to the third quarter 2023 reflects the increase in earning asset yields noted above outpacing the increase in the cost of interest-bearing liabilities. The increase in NIM and FTE NIM for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023 reflects the decelerating pace of increase in the cost of interest-bearing deposits and the Company’s focus on shifting the loan composition towards variable rate and higher-yielding products.
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Noninterest Income
The following table presents noninterest income for the last five completed fiscal quarters and the nine months ended September 30, 2024 and 2023.
Three Months Ended Nine Months Ended
(in thousands) September 30,
2024 June 30,
2024 March 31,
2024 December 31,
2023 September 30,
2023 September 30,
2024 September 30,
2023
Service charges and fees $ 245 $ 246 $ 220 $ 216 $ 208 $ 711 $ 635
Loan servicing revenue 1,570 1,470 1,323 1,134 1,064 4,363 2,699
Loan servicing asset revaluation (846) (829) (434) (793) (257) (2,109) (670)
Mortgage banking activities — — — — — — 76
Gain on sale of loans 9,933 8,292 6,536 6,028 5,569 24,761 14,498
Other 1,127 1,854 702 816 823 3,683 1,486
Total noninterest income $ 12,029 $ 11,033 $ 8,347 $ 7,401 $ 7,407 $ 31,409 $ 18,724
During the third quarter 2024, noninterest income was $12.0 million, representing an increase of $4.6 million, or 62.4%, compared to $7.4 million for the third quarter 2023. The increase in noninterest income was due primarily to increases in gain on sale of loans and other income, partially offset by a decrease in net loan servicing revenue. The increase of $4.4 million, or 78.4%, in gain on sale of loans was due primarily to an increase in U.S. Small Business Administration (“SBA”) 7(a) guaranteed loan sales. The increase of $0.3 million, or 36.9%, in other income was due primarily to distributions from fund investments. The decrease in net loan servicing was due to the fair value adjustment to the loan servicing asset.
During the nine months ended September 30, 2024, noninterest income was $31.4 million, an increase of $12.7 million, or 67.7%, compared to $18.7 million for the nine month ended September 30, 2023. The increase in noninterest income was due primarily to increases in gain on sale of loans, other income and net loan servicing revenue. The increase of $10.3 million, or 70.8%, in gain on sale of loans was due primarily to an increase in SBA 7(a) guaranteed loan sales. The increase of $2.2 million, or 147.8%, in other income was due primarily to distributions from fund investments. The increase in net loan servicing revenue was due to growth in the balance of the Company’s SBA 7 (a) servicing portfolio, partially offset by the fair value adjustment to the loan servicing asset.
Noninterest Expense
The following table presents noninterest expense for the last five completed fiscal quarters and the nine months ended September 30, 2024 and 2023.
Three Months Ended Nine Months Ended
(in thousands) September 30,
2024 June 30,
2024 March 31,
2024 December 31,
2023 September 30,
2023 September 30,
2024 September 30,
2023
Salaries and employee benefits $ 13,456 $ 12,462 $ 11,796 $ 11,055 $ 11,767 $ 37,714 $ 34,267
Marketing, advertising and promotion 548 609 736 518 500 1,893 2,049
Consulting and professional services 902 1,022 853 893 552 2,777 2,189
Data processing 675 606 564 493 701 1,845 1,880
Loan expenses 1,524 1,597 1,445 1,371 1,336 4,566 4,385
Premises and equipment 2,918 3,154 2,826 2,846 2,315 8,898 7,753
Deposit insurance premium 1,219 1,172 1,145 1,334 1,067 3,536 2,546
Other 1,552 1,714 1,658 1,546 1,518 4,924 4,311
Total noninterest expense $ 22,794 $ 22,336 $ 21,023 $ 20,056 $ 19,756 19756000 $ 66,153 $ 59,380
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Noninterest expense for the third quarter 2024 was $22.8 million, compared to $19.8 million for the third quarter 2023. The increase of $3.0 million, or 15.4%, was due primarily to increases of $1.7 million in salaries and employee benefits, $0.6 million in premises and equipment, $0.4 million in consulting and professional fees, $0.2 million in loan expenses, and $0.2 million in deposit insurance premium. The increase in salaries and employee benefits was due primarily to higher small business lending incentive compensation, as well as staff additions in small business lending and risk management. The increase in premises and equipment was due primarily to property taxes, as well as software maintenance expense. The increase in consulting and professional fees was due primarily to increased consulting and audit fees. The increase in loan expenses was due primarily to higher third-party loan servicing fees and other miscellaneous lending costs. The increase in deposit insurance premium was due to asset growth and changes in the composition of the loan and deposit portfolios.
Noninterest expense for the nine months ended September 30, 2024 was $66.2 million, compared to $59.4 million for the nine months ended September 30, 2023. The increase of $6.8 million, or 11.4%, was due primarily to increases of $3.4 million in salaries and employee benefits, $1.1 million in premises and equipment, $1.0 million in deposit insurance premium, $0.6 million in other expenses and $0.6 million in consulting and professional fees. In the first quarter 2023, the Company incurred $2.2 million in severance costs as a result of its decision to exit the mortgage business. In the second quarter 2024, the Company incurred $0.1 million in non-recurring anniversary expenses. Excluding these costs, salaries and employee benefits increased $6.4 million, or 20.4%. The increase in salaries and employee benefits was due primarily to higher small business lending incentive compensation and staff additions in small business lending and risk management, as well as higher incentive compensation accruals based on the increase in net income for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023. The increase in premises and equipment was due primarily to non-recurring IT termination fees, property taxes and software maintenance expense. The increase in deposit insurance premium was due primarily to year-over-year asset growth and changes in the composition of the loan and deposit portfolios. The increase in other expenses was due primarily to various expenses, none of which were individually significant. The increase in consulting and professional fees was due primarily to increased consulting and audit fees.
The Company recorded an income tax provision of $0.6 million and an effective tax rate of 8.1% for the third quarter 2024, compared to an income tax benefit of $0.3 million for the third quarter 2023. The Company recorded an income tax provision of $1.3 million and an effective tax rate of 6.6% for the nine months ended September 30, 2024, compared to an income tax benefit of $2.9 million for the nine months ended September 30, 2023. The income tax benefits recognized during 2023 reflect the benefit of tax exempt income relative to stated pre-tax income, as well as the impact on pre-tax income from mortgage exit costs and the partial charge-off of a commercial and industrial participation loan during the nine months ended September 30, 2023.
Financial Condition
The following table presents summary balance sheet data for the last five completed fiscal quarters.
(in thousands)
Balance Sheet Data: September 30,
2024 June 30,
2024 March 31,
2024 December 31,
2023 September 30,
2023
Total assets $ 5,823,259 $ 5,343,302 $ 5,340,667 $ 5,167,572 $ 5,169,023
Loans 4,035,880 3,961,146 3,909,804 3,840,220 3,735,068
Total securities 838,577 758,921 718,169 702,008 — 682,755
Loans held-for-sale 32,996 19,384 22,589 22,052 31,669
Noninterest-bearing deposits 111,591 126,438 130,760 123,464 125,265
Interest-bearing deposits 4,686,119 4,147,484 4,143,008 3,943,509 3,958,280
Total deposits 4,797,710 4,273,922 4,273,768 4,066,973 4,083,545
Advances from Federal Home Loan Bank 515,000 575,000 574,936 614,934 614,933
Total shareholders’ equity 385,129 371,953 366,739 362,795 347,744
Total assets increased $655.7 million, or 12.7%, to $5.8 billion at September 30, 2024 compared to $5.2 billion at December 31, 2023. The increase was due primarily to increases in cash balances, securities and loans.
As of September 30, 2024, total shareholders’ equity was $385.1 million, an increase of $22.3 million, or 6.2%, compared to December 31, 2023. The increase in shareholders’ equity was due primarily to the net income earned during the nine months ended September 30, 2024 and a decrease in accumulated other comprehensive loss, as unrealized losses on securities decreased during 2024. Tangible common equity totaled $380.4 million as of September 30, 2024, representing an
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increase of $22.3 million, or 6.2%, compared to December 31, 2023. The ratio of total shareholders’ equity to total assets decreased to 6.61% as of September 30, 2024 from 7.02% as of December 31, 2023, and the ratio of tangible common equity to tangible assets decreased to 6.54% as of September 30, 2024 from 6.94% as of December 31, 2023.
Book value per common share increased 5.9% to $44.43 as of September 30, 2024 from $41.97 as of December 31, 2023. Tangible book value per share increased 5.9% to $43.89 as of September 30, 2024 from $41.43 as of December 31, 2023. The increase in both book value per common share and tangible book value per share was driven primarily by the increases in total shareholders’ equity and tangible common equity. Refer to the “Reconciliation of Non-GAAP Financial Measures” section of Part I, Item 2 of this report, Management’s Discussion and Analysis of Financial Condition and Results of Operations for additional information.
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Loan Portfolio Analysis
The following table presents a summary of the Company’s loan portfolio for the last five completed fiscal quarters.
(dollars in thousands) September 30,
2024 June 30,
2024 March 31,
2024 December 31,
2023 September 30,
2023
Commercial loans
Commercial and industrial $ 111,199 2.8 % $ 115,585 2.9 % $ 133,897 3.4 % $ 129,349 3.4 % $ 114,265 3.1 %
Owner-occupied commercial real estate 56,461 1.4 % 58,089 1.5 % 57,787 1.5 % 57,286 1.5 % 58,486 1.6 %
Investor commercial real estate 260,614 6.5 % 188,409 4.8 % 128,276 3.3 % 132,077 3.4 % 129,831 3.5 %
Construction 340,954 8.4 % 328,922 8.3 % 325,597 8.3 % 261,750 6.8 % 252,105 6.7 %
Single tenant lease financing 932,148 23.1 % 927,462 23.4 % 941,597 24.1 % 936,616 24.4 % 933,873 25.0 %
Public finance 462,730 11.5 % 486,200 12.3 % 498,262 12.7 % 521,764 13.6 % 535,960 14.3 %
Healthcare finance 190,287 4.7 % 202,079 5.1 % 213,332 5.5 % 222,793 5.8 % 235,622 6.3 %
Small business lending 298,645 7.4 % 270,129 6.8 % 239,263 6.1 % 218,506 5.7 % 192,996 5.2 %
Franchise finance 550,442 13.6 % 551,133 13.9 % 543,122 13.9 % 525,783 13.7 % 455,094 12.2 %
Total commercial loans 3,203,480 79.4 % 3,128,008 79.0 % 3,081,133 78.8 % 3,005,924 78.3 % 2,908,232 77.9 %
Consumer loans
Residential mortgage 378,701 9.4 % 382,549 9.7 % 390,009 10.0 % 395,648 10.3 % 393,501 10.5 %
Home equity 20,264 0.5 % 21,405 0.5 % 22,753 0.6 % 23,669 0.6 % 23,544 0.6 %
Other consumer 404,388 10.0 % 396,527 10.0 % 380,675 9.7 % 377,614 9.8 % 369,451 9.9 %
Total consumer loans 803,353 19.9 % 800,481 20.2 % 793,437 20.3 % 796,931 20.7 % 786,496 21.0 %
Net deferred loan origination costs, premiums and discounts on purchased loans and other 1
29,047 0.7 % 32,657 0.8 % 35,234 0.9 % 37,365 1.0 % 40,340 1.1 %
Total loans 4,035,880 100.0 % 3,961,146 100.0 % 3,909,804 100.0 % 3,840,220 100.0 % 3,735,068 100.0 %
Allowance for credit losses - loans (45,721) (43,405) (40,891) (38,774) (36,452)
Net loans $ 3,990,159 $ 3,917,741 $ 3,868,913 $ 3,801,446 $ 3,698,616
1 Includes carrying value adjustments of $24.1 million, $25.6 million, $26.9 million, $27.8 million and $29.0 million related to terminated interest rate swaps associated with public finance loans as of September 30, 2024, June 30, 2024, March 31, 2024, December 31, 2023 and September 30, 2023, respectively.
Total loans were $4.0 billion as of September 30, 2024, an increase of $195.7 million, or 5.1%, compared to December 31, 2023. Total commercial loan balances were $3.2 billion as of September 30, 2024, up $197.6 million, or 6.6%, from December 31, 2023. Total consumer loan balances were $803.4 million as of September 30, 2024, an increase of $6.4 million, or 0.8%, compared to December 31, 2023. Compared to December 31, 2023, in connection with the Company’s focus on variable rate and higher-yielding products, the increase in commercial loan balances was driven by growth in the investor commercial real estate, small business lending, construction, and franchise finance portfolios. These increases were partially offset by decreases in the public finance and single tenant lease financing portfolios, as well as continued runoff in the healthcare finance portfolio. Additionally, commercial and industrial balances declined due primarily to early payoffs. The slight increase in consumer loan balances was due primarily to new origination activity in the other consumer loans portfolios, partially offset by a decrease in the residential mortgage portfolio.
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Asset Quality
Nonperforming loans are comprised of nonaccrual loans and loans 90 days past due and accruing. Nonperforming assets include nonperforming loans, other real estate owned and other nonperforming assets, which consist of repossessed assets. The following table provides a summary of the Company’s nonperforming assets for the last five completed fiscal quarters.
(dollars in thousands) September 30,
2024 June 30,
2024 March 31,
2024 December 31,
2023 September 30,
2023
Nonaccrual loans
Commercial loans:
Owner-occupied commercial real estate $ — $ — $ — $ — $ —
Small business lending 1
11,364 10,246 9,532 6,824 4,443
Franchise finance 6,515 — 295 303 —
Total commercial loans 17,879 10,246 9,827 7,127 4,443
Consumer loans:
Residential mortgage 3,169 2,117 2,309 1,911 1,354
Other consumer 16 54 129 86 88
Total consumer loans 3,185 2,171 2,438 1,997 1,442
Total nonaccrual loans 21,064 12,417 12,265 9,124 5,885
Past Due 90 days and accruing loans
Commercial loans:
Small business lending 61 — — — —
Franchise finance 785 556 230 — —
Total commercial loans 846 556 230 — —
Consumer loans:
Residential mortgage 568 — 555 838 —
Other consumer — 5 — — —
Total consumer loans 568 5 555 838 —
Total past due 90 days and accruing loans 1,414 561 785 838 —
Total nonperforming loans
22,478 12,978 13,050 9,962 5,885
Other real estate owned
Residential mortgage 251 — 375 375 106
Total other real estate owned 251 — 375 375 106
Other nonperforming assets 215 77 — 17 78
Total nonperforming assets $ 22,944 $ 13,055 $ 13,425 $ 10,354 $ 6,069
Total nonperforming loans to total loans 2
0.56 % 0.33 % 0.33 % 0.26 % 0.16 %
Total nonperforming assets to total assets 2
0.57 % 0.24 % 0.25 % 0.20 % 0.12 %
Allowance for credit losses - loans to total loans 1.13 % 1.10 % 1.05 % 1.01 % 0.98 %
Nonaccrual loans to total loans 0.52 % 0.31 % 0.31 % 0.24 % 0.16 %
Allowance for credit losses - loans to nonaccrual loans 2
217.1 % 349.6 % 333.4 % 425.0 % 619.4 %
Allowance for credit losses - loans to nonperforming loans 2
203.4 % 334.5 % 313.3 % 389.2 % 619.4 %
1 Balance of loans are partially guaranteed by the U.S. government.
2 Includes the impact of nonperforming small business lending loans, which are partially guaranteed by the U.S. government.
Total nonperforming loans increased $12.5 million, or 125.6%, to $22.5 million as of September 30, 2024 compared to $10.0 million as of December 31, 2023 due primarily to an increase in nonperforming loans in franchise finance and small business lending during the year. Total nonperforming assets increased $12.6 million, or 121.6%, to $22.9 million as of
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September 30, 2024, compared to $10.4 million as of December 31, 2023, due primarily to the increase in nonperforming loans in franchise finance and small business lending mentioned above. As of September 30, 2024, the Company had one residential mortgage property in OREO with a carrying value of $0.3 million. As of December 31, 2023, the Company had two residential mortgage properties in OREO with a carrying value of $0.4 million
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Allowance for Credit Losses - Loans
The following table provides a rollforward of the allowance for credit losses for the last five completed fiscal quarters and the nine months ended September 30, 2024 and 2023.
Three Months Ended Nine Months Ended
(dollars in thousands) September 30,
2024 June 30,
2024 March 31,
2024 December 31,
2023 September 30,
2023 September 30,
2024 September 30,
2023
Balance, beginning of period $ 43,405 $ 40,891 $ 38,774 $ 36,452 $ 36,058 $ 38,774 $ 31,737
Adoption of ASU 2016-13 (CECL) — — — — — — 2,962
Balance, beginning of period 43,405 40,891 38,774 36,452 36,058 38,774 34,699
Provision charged to expense 3,858 3,920 2,582 3,478 1,850 10,360 11,976
Losses charged off
Commercial and industrial — — — — — — 6,965
Investor commercial real estate — — — — 591 — 591
Single tenant lease financing — 195 — — — 195 —
Healthcare finance — — — 580 — — 25
Small business lending 1,309 573 289 417 751 2,171 2,169
Franchise finance — 577 — — — 577 331
Residential mortgage 17 — 69 84 56 86 56
Other consumer 425 160 175 164 120 760 502
Total losses charged off 1,751 1,505 533 1,245 1,518 3,789 10,639
Recoveries
Commercial and industrial 3 2 2 23 2 7 220
Small business lending 169 65 40 23 14 274 54
Residential mortgage — — 1 1 1 1 4
Home equity 3 1 2 1 2 6 5
Other consumer 34 31 23 41 43 88 133
Total recoveries 209 99 68 89 62 376 416
Balance, end of period $ 45,721 $ 43,405 $ 40,891 $ 38,774 $ 36,452 $ 45,721 $ 36,452
Net charge-offs $ 1,542 $ 1,406 $ 465 $ 1,156 $ 1,456 $ 3,413 $ 10,223
Net charge-offs (recoveries) to average loans (annualized)
Commercial and industrial (0.01 %) 0.00 % (0.01 %) (0.02 %) 0.00 % (0.01 %) 9.26 %
Investor commercial real estate 0.00 % 0.00 % 0.00 % 0.00 % 0.59 % 0.00 % 0.63 %
Single tenant lease financing 0.00 % 0.04 % 0.00 % 0.00 % 0.00 % 0.03 % 0.00 %
Healthcare finance 0.00 % 0.00 % 0.00 % 0.25 % 0.00 % 0.00 % 0.01 %
Small business lending 0.48 % 0.37 % 0.40 % 0.17 % 0.50 % 0.90 % 1.61 %
Franchise finance 0.00 % 0.21 % 0.00 % 0.00 % 0.00 % 0.14 % 0.11 %
Total commercial net charge-offs 0.05 % 0.08 % 0.03 % 0.03 % 0.06 % 0.11 % 0.46 %
Residential mortgage 0.02 % 0.00 % 0.07 % 0.08 % 0.06 % 0.03 % 0.02 %
Home equity (0.02 %) (0.01 %) (0.03 %) 0.00 % (0.01 %) (0.04 %) (0.03 %)
Other consumer 0.46 % 0.20 % 0.21 % 0.22 % 0.18 % 0.29 % 0.25 %
Total consumer net charge-offs 0.07 % 0.03 % 0.11 % 0.03 % 0.02 % 0.13 % 0.07 %
Total net charge-offs to average loans 0.15 % 0.14 % 0.05 % 0.12 % 0.16 % 0.12 % 0.38 %
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The allowance for credit losses - loans (“ACL”) was $45.7 million as of September 30, 2024, compared to $38.8 million as of December 31, 2023. The increase in the ACL reflects growth and higher coverage ratios in certain portfolios, as well as additional reserves for nonperforming small business lending and franchise finance loans, partially offset by the impact of economic data on forecasted loss rates and qualitative factors for other portfolios. The ACL as a percentage of total loans was 1.13% at September 30, 2024, compared to 1.01% at December 31, 2023. The ACL as a percentage of nonperforming loans decreased to 203.4% as of September 30, 2024, compared to 389.2% as of December 31, 2023, due primarily to the increase in nonperforming loans in small business lending and franchise finance.
Net charge-offs of $1.5 million were recognized during the third quarter 2024, resulting in net charge-offs to average loans of 0.15%, compared to net charge-offs of $1.5 million, or 0.16% of average loans, for the third quarter 2023.
During the nine months ended September 30, 2024, the Company recorded net charge-offs of $3.4 million, compared to net charge-offs of $10.2 million during the nine months ended September 30, 2023. The decrease in net charge-offs for the nine months ended September 30, 2024 was driven primarily by a $6.9 million partial charge-off of a C&I participation loan that was placed on nonaccrual status and charged off during the first quarter 2023.
The provision for credit losses - loans in the third quarter 2024 was $3.9 million, compared to $1.9 million for the third quarter 2023. The increase in the provision for credit losses - loans for the third quarter 2024 was driven primarily by growth and higher coverage ratios in certain loan portfolios, as well as additional reserves related to small business lending and franchise finance loans, partially offset by the impact of economic data on forecasted loss rates and qualitative factors on other portfolios.
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Investment Securities Portfolio
The following tables present the amortized cost and approximate fair value of our investment securities portfolio by security type for the last five completed fiscal quarters.
(in thousands)
Amortized Cost September 30,
2024 June 30,
2024 March 31,
2024 December 31,
2023 September 30,
2023
Securities available-for-sale
U.S. Government-sponsored agencies $ 88,990 $ 88,694 $ 93,323 $ 96,404 $ 98,594
Municipal securities 67,399 68,057 69,289 69,494 69,031
Agency mortgage-backed securities - residential 290,213 262,758 253,181 237,798 235,468
Agency mortgage-backed securities - commercial 65,772 37,986 39,367 40,215 37,931
Private label mortgage-backed securities - residential 34,971 26,709 23,307 21,742 20,292
Asset-backed securities 18,318 8,383 7,417 8,071 6,713
Corporate securities 40,059 37,070 37,081 39,591 39,603
Total available-for-sale 605,722 529,657 522,965 513,315 507,632
Securities held-to-maturity, net carrying value
Municipal securities 12,856 13,368 13,381 13,889 13,900
Agency mortgage-backed securities - residential 207,878 213,440 178,800 166,750 170,524
Agency mortgage-backed securities - commercial 5,722 5,738 5,752 5,767 5,782
Corporate securities 36,864 37,803 37,805 40,747 41,722
Total held-to-maturity, net carrying value 263,320 270,349 235,738 227,153 231,928
Total securities $ 869,042 $ 800,006 $ 758,703 $ 740,468 $ 739,560
(in thousands)
Approximate Fair Value September 30,
2024 June 30,
2024 March 31,
2024 December 31,
2023 September 30,
2023
Securities available-for-sale
U.S. Government-sponsored agencies $ 88,316 $ 87,746 $ 92,101 $ 95,177 $ 97,178
Municipal securities 65,423 64,412 67,415 68,446 62,772
Agency mortgage-backed securities - residential 265,853 230,045 220,484 206,649 193,096
Agency mortgage-backed securities - commercial 64,934 36,891 38,081 38,885 36,163
Private label mortgage-backed securities - residential 34,536 25,631 22,266 20,779 18,576
Asset-backed securities 18,341 8,429 7,459 8,081 6,703
Corporate securities 37,854 35,418 34,625 36,838 36,339
Total available-for-sale 575,257 488,572 482,431 474,855 450,827
Securities held-to-maturity
Municipal securities 12,247 12,326 12,450 13,040 12,449
Agency mortgage-backed securities - residential 197,298 195,337 161,915 152,642 147,412
Agency mortgage-backed securities - commercial 4,898 4,699 4,560 4,521 4,190
Corporate securities 35,175 35,068 35,295 37,369 37,599
Total held-to-maturity 249,618 247,430 214,220 207,572 201,650
Total securities $ 824,875 $ 736,002 $ 696,651 $ 682,427 $ 652,477
The approximate fair value of available-for-sale investment securities increased $100.4 million, or 21.1%, to $575.3 million as of September 30, 2024, compared to $474.9 million as of December 31, 2023. The increase was due primarily to increases of $59.2 million in agency mortgage-backed securities - residential, $26.0 million in agency mortgage-backed securities - commercial, $13.8 million in private label mortgage-backed securities - residential and $10.3 million in asset-backed securities, partially offset by a decrease of $6.9 million in U.S. Government-sponsored agencies. This increase was
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caused primarily by new purchase activity within certain available-for-sale portfolios, partially offset by net paydown activity. As of September 30, 2024, the Company had securities with a net carrying value of $263.3 million designated as held-to-maturity, compared to $227.2 million as of December 31, 2023. The increase was due primarily to purchases of CRA-eligible agency mortgage-backed securities - residential.
Accrued Income and Other Assets
Accrued income and other assets increased $9.0 million, or 17.6%, to $60.1 million at September 30, 2024, compared to $51.1 million at December 31, 2023. The increase was due primarily to increases of $11.1 million in equity investments and $4.1 million in income tax receivable, partially offset by a decrease of $5.8 million in deferred tax assets.
Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities increased $3.4 million, or 23.7%, to $17.5 million at September 30, 2024, compared to $14.2 million at December 31, 2023. The increase was due primarily to increases of $1.9 million in accrued salary and benefits, and $1.5 million in other various expenses and liabilities.
Deposits
The following table presents the composition of the Company’s deposit base for the last five completed fiscal quarters.
(dollars in thousands) September 30,
2024 June 30,
2024 March 31,
2024 December 31,
2023 September 30,
2023
Noninterest-bearing deposits $ 111,591 2.3 % $ 126,438 3.0 % $ 130,760 3.1 % $ 123,464 3.0 % $ 125,265 3.1 %
Interest-bearing demand deposits 538,484 11.2 % 480,141 11.2 % 423,529 9.9 % 402,976 9.9 % 374,915 9.2 %
Savings accounts 21,712 0.5 % 22,619 0.5 % 23,554 0.6 % 21,364 0.5 % 23,811 0.6 %
Money market accounts 1,230,707 25.7 % 1,222,197 28.6 % 1,251,230 29.2 % 1,248,319 30.8 % 1,222,511 29.9 %
Fintech - brokered deposits 211,814 4.4 % 140,180 3.3 % 107,911 2.5 % 74,401 1.8 % 41,884 1.0 %
Certificates of deposits 2,110,618 44.0 % 1,829,644 42.8 % 1,738,996 40.7 % 1,605,156 39.5 % 1,624,447 39.8 %
Brokered deposits 572,784 11.9 % 452,703 10.6 % 597,788 14.0 % 591,293 14.5 % 670,712 16.4 %
Total deposits $ 4,797,710 100.0 % $ 4,273,922 100.0 % $ 4,273,768 100.0 % $ 4,066,973 100.0 % $ 4,083,545 100.0 %
Total deposits increased $730.7 million, or 18.0%, to $4.8 billion as of September 30, 2024, compared to $4.1 billion as of December 31, 2023. The increase was due primarily to increases of $505.5 million, or 31.5%, in certificates of deposits, $137.4 million, or 184.7%, in fintech - brokered deposits and $135.5 million, or 33.6% in interest-bearing demand deposits, partially offset by decreases of $18.5 million, or 3.1%, in brokered deposits, $17.6 million, or 1.4%, in money market accounts and $11.9 million, or 9.6%, in noninterest-bearing deposits. The increase in certificates of deposits was due primarily to strong consumer and small business demand throughout 2024. The increase in fintech - brokered deposits was driven by higher payments volumes from our fintech partners. The increase in interest-bearing demand deposits was due primarily to growth in fintech partnership deposits. Using liquidity created by the growth in these deposit channels, the Company was able to pay down higher-cost brokered deposits during 2024.
Uninsured deposit balances represented 24% of total deposits at September 30, 2024, down from 25% at December 31, 2023. These balances include Indiana-based municipal deposits, which are insured by the Indiana Board for Depositories, as well as larger balance accounts under contractual agreements that only allow withdrawal under certain conditions. After subtracting these types of deposits, the adjusted uninsured deposit balance drops to 19% at both September 30, 2024 and December 31, 2023.
Regulatory Capital Requirements
The Company and the Bank are subject to various regulatory capital requirements administered by state and federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weighting and other factors.
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The Basel III Capital Rules became effective for the Company and the Bank on January 1, 2015, subject to a phase-in period for certain provisions. Quantitative measures established by the Basel III Capital Rules to ensure capital adequacy require the maintenance of minimum amounts and ratios of Common Equity Tier 1 capital, Tier 1 capital and Total capital, as defined in the regulations, to risk-weighted assets, and of Tier 1 capital to adjusted quarterly average assets (“Leverage Ratio”).
The Basel III Capital Rules were fully phased in on January 1, 2019 and require the Company and the Bank to maintain: 1) a minimum ratio of Common Equity Tier 1 capital to risk-weighted assets of 4.5%, plus a 2.5% “capital conservation buffer” (resulting in a minimum ratio of Common Equity Tier 1 capital to risk-weighted assets of 7.0%); 2) a minimum ratio of Tier 1 capital to risk-weighted assets of 6.0%, plus the capital conservation buffer (resulting in a minimum Tier 1 capital ratio of 8.5%); 3) a minimum ratio of Total capital to risk-weighted assets of 8.0%, plus the capital conservation buffer (resulting in a minimum Total capital ratio of 10.5%); and 4) a minimum Leverage Ratio of 4.0%.
The capital conservation buffer is designed to absorb losses during periods of economic stress. Failure to maintain the minimum Common Equity Tier 1 capital ratio plus the capital conservation buffer will result in potential restrictions on a banking institution’s ability to pay dividends, repurchase stock and/or pay discretionary compensation to its employees.
The following tables present actual and required capital ratios as of September 30, 2024 and December 31, 2023 for the Company and the Bank under the Basel III Capital Rules. The minimum required capital amounts presented include the minimum required capital levels as of September 30, 2024 and December 31, 2023, which are based on the Basel III Capital Rules. Capital levels required to be considered well capitalized are based upon prompt corrective action regulations, as amended to reflect the changes under the Basel III Capital Rules.
As permitted by the federal banking regulatory agencies, the Company elected the option to delay the impact of the day one adoption of ASC 326. The transition adjustments of $4.5 million will be phased into the regulatory capital calculations over a three-year period, with 25% of the adjustment recognized in 2023, 50% of the adjustment recognized in 2024, 75% of the adjustment recognized in 2025 and 100% of the adjustment recognized in 2026.
Actual Minimum Capital Required - Basel III Minimum Required to be Considered Well Capitalized
(dollars in thousands) Capital Amount Ratio Capital Amount Ratio Capital Amount Ratio
As of September 30, 2024:
Common equity tier 1 capital to risk-weighted assets
Consolidated $ 395,462 9.37 % $ 295,473 7.00 % N/A N/A
Bank 471,364 11.22 % 294,031 7.00 % $ 273,028 6.50 %
Tier 1 capital to risk-weighted assets
Consolidated 395,462 9.37 % 358,789 8.50 % N/A N/A
Bank 471,364 11.22 % 357,037 8.50 % 336,035 8.00 %
Total capital to risk-weighted assets
Consolidated 540,007 12.79 % 443,210 10.50 % N/A N/A
Bank 518,387 12.34 % 441,046 10.50 % 420,044 10.00 %
Leverage ratio
Consolidated 395,462 7.13 % 221,873 4.00 % N/A N/A
Bank 471,364 8.53 % 221,011 4.00 % 276,264 5.00 %
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Actual Minimum Capital Required - Basel III Minimum Required to be Considered Well Capitalized
(dollars in thousands) Capital Amount Ratio Capital Amount Ratio Capital Amount Ratio
As of December 31, 2023:
Common equity tier 1 capital to risk-weighted assets
Consolidated $ 381,001 9.60 % $ 277,914 7.00 % N/A N/A
Bank 464,390 11.73 % 277,063 7.00 % $ 257,273 6.50 %
Tier 1 capital to risk-weighted assets
Consolidated 381,001 9.60 % 337,467 8.50 % N/A N/A
Bank 464,390 11.73 % 336,434 8.50 % 316,644 8.00 %
Total capital to risk-weighted assets
Consolidated 525,283 13.23 % 416,870 10.50 % N/A N/A
Bank 503,834 12.73 % 415,595 10.50 % 395,804 10.00 %
Leverage ratio
Consolidated 381,001 7.33 % 207,929 4.00 % N/A N/A
Bank 464,390 8.95 % 207,479 4.00 % 259,349 5.00 %
Shareholders’ Dividends
The Company’s Board of Directors declared a cash dividend of $0.06 per share of common stock payable October 15, 2024 to shareholders of record as of September 30, 2024. The Company expects to continue to pay cash dividends on a quarterly basis; however, the declaration and amount of any future cash dividends will be subject to the sole discretion of the Board of Directors and will depend upon many factors, including the Company’s results of operations, financial condition, capital requirements, regulatory and contractual restrictions (including with respect to the Company’s outstanding subordinated debt), business strategy and other factors deemed relevant by the Board of Directors.
As of September 30, 2024, the Company had $107.0 million principal amount of subordinated debt outstanding evidenced by the 2029 Notes, 2030 Note and 2031 Notes. The agreements that govern our outstanding subordinated debt prohibit the Company from paying any dividends on its common stock or making any other distributions to shareholders at any time when there shall have occurred, and be continuing to occur, an event of default under the applicable agreement. If an event of default were to occur and the Company did not cure it, the Company would be prohibited from paying any dividends or making any other distributions to shareholders or from redeeming or repurchasing any common stock.
Capital Resources
The Company believes it has sufficient liquidity and capital resources to meet its cash and capital expenditure requirements for the next twelve months and longer. The Company may explore strategic alternatives, including additional asset, deposit or revenue generation channels that complement our small business, commercial and consumer banking platforms, which may require additional capital. If the Company is unable to secure such capital at favorable terms, its ability to take advantage of such opportunities could be adversely affected.
On December 19, 2022, the Company's Board of Directors approved a new stock repurchase program to replace the prior program. The new program authorized the repurchase of up to $25.0 million of our outstanding common stock from time to time on the open market or in privately negotiated transactions. The stock repurchase authorization is scheduled to expire on December 31, 2024. Under this program, the Company repurchased 559,522 shares of common stock through September 30, 2024, at an average price of $19.06, for a total investment of $10.7 million.
Various factors determine the amount and timing of our share repurchases, including our capital requirements, organic growth and other strategic opportunities, economic and market conditions (including the trading price of our stock), and regulatory and legal considerations. See Part II, Item 2, of this report for information regarding recent repurchase activity and our remaining authority under the program.
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Liquidity
Liquidity management is the process used by the Company to manage the continuing flow of funds necessary to meet its financial commitments on a timely basis and at a reasonable cost while also maintaining safe and sound operations. Liquidity, represented by cash and investment securities, is a product of the Company’s operating, investing and financing activities. The primary sources of funds are deposits, principal and interest payments on loans and investment securities, maturing loans and investment securities, access to wholesale funding sources and collateralized borrowings. While scheduled payments and maturities of loans and investment securities are relatively predictable sources of funds, deposit flows are greatly influenced by interest rates, general economic conditions and competition. Therefore, the Company supplements deposit growth and enhances interest rate risk management through borrowings and wholesale funding, which are generally advances from the Federal Home Loan Bank and brokered deposits.
The Company holds cash and investment securities that qualify as liquid assets to maintain adequate liquidity to ensure safe and sound operations and meet its financial commitments. At September 30, 2024, on a consolidated basis, the Company had $1.3 billion in cash and cash equivalents and investment securities available-for-sale and $33.0 million in loans held-for-sale that were generally available for its cash needs. The Company can also generate funds from wholesale funding sources and collateralized borrowings. At September 30, 2024, the Bank had the ability to borrow an additional $1.4 billion from the FHLB, the Federal Reserve and correspondent bank Fed Funds lines of credit, which when combined with cash balances, totaled $2.1 billion and represented 230% of adjusted uninsured deposit balances.
The Company is a separate legal entity from the Bank and must provide for its own liquidity. In addition to its operating expenses, the Company is responsible for paying any dividends declared to its common shareholders and interest and principal on outstanding debt. The Company’s primary sources of funds are cash maintained at the holding company level and dividends from the Bank, the payment of which is subject to regulatory limits. At September 30, 2024, the Company, on an unconsolidated basis, had $9.7 million in cash for debt servicing and operating expenses.
The Company uses its sources of funds primarily to meet ongoing financial commitments, including withdrawals by depositors, credit commitments to borrowers, operating expenses and capital expenditures. At September 30, 2024, approved outstanding loan commitments, including unused lines of credit and standby letters of credit, amounted to $708.3 million. Certificates of deposits and brokered deposits scheduled to mature in one year or less at September 30, 2024 totaled $1.4 billion.
Management is not aware of any other events or regulatory requirements that, if implemented, are likely to have a material effect on either the Company’s or the Bank’s liquidity.
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Reconciliation of Non-GAAP Financial Measures
This Management’s Discussion and Analysis contains financial information determined by methods other than in accordance with GAAP. Non-GAAP financial measures, specifically tangible common equity, tangible assets, tangible book value per common share, tangible common equity to tangible assets, average tangible common equity, return on average tangible common equity, total interest income - FTE, net interest income - FTE, net interest margin - FTE, adjusted total revenue, adjusted noninterest income, adjusted noninterest expense, adjusted income before income taxes, adjusted income tax provision (benefit), adjusted net income, adjusted diluted earnings per share, adjusted return on average assets, adjusted return on average shareholders’ equity and adjusted return on average tangible common equity are used by the Company’s management to measure the strength of its capital and analyze profitability, including its ability to generate earnings on tangible capital invested by its shareholders. The Company also believes that it is a standard practice in the banking industry to present total interest income, net interest income and net interest margin on a fully-taxable equivalent basis, as those measures provide useful information for peer comparisons. Although the Company believes these non-GAAP financial measures provide a greater understanding of its business, they should not be considered a substitute for financial measures determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP financial measures that may be presented by other companies. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures are included in the following table for the last five completed fiscal quarters.
(dollars in thousands, except share and per share data) Three Months Ended Nine Months Ended
September 30,
2024 June 30,
2024 March 31,
2024 December 31,
2023 September 30,
2023 September 30,
2024 September 30,
2023
Total equity - GAAP $ 385,129 $ 371,953 $ 366,739 $ 362,795 $ 347,744 $ 385,129 $ 347,744
Adjustments:
Goodwill (4,687) (4,687) (4,687) (4,687) (4,687) (4,687) (4,687)
Tangible common equity $ 380,442 $ 367,266 $ 362,052 $ 358,108 $ 343,057 $ 380,442 $ 343,057
Total assets - GAAP $ 5,823,259 $ 5,343,302 $ 5,340,667 $ 5,167,572 $ 5,169,023 $ 5,823,259 $ 5,169,023
Adjustments:
Goodwill (4,687) (4,687) (4,687) (4,687) (4,687) (4,687) (4,687)
Tangible assets $ 5,818,572 $ 5,338,615 $ 5,335,980 $ 5,162,885 $ 5,164,336 $ 5,818,572 $ 5,164,336
Common shares outstanding 8,667,894 8,667,894 8,655,854 8,644,451 8,669,673 8,667,894 8,669,673
Book value per common share $ 44.43 $ 42.91 $ 42.37 $ 41.97 $ 40.11 $ 44.43 $ 40.11
Effect of goodwill (0.54) (0.54) (0.54) (0.54) (0.54) (0.54) (0.54)
Tangible book value per common share $ 43.89 $ 42.37 $ 41.83 $ 41.43 $ 39.57 $ 43.89 $ 39.57
Total shareholders’ equity to assets 6.61 % 6.96 % 6.87 % 7.02 % 6.73 % 6.61 % 6.73 %
Effect of goodwill (0.07 %) (0.08 %) (0.08 %) (0.08 %) (0.09 %) (0.07 %) (0.09 %)
Tangible common equity to tangible assets 6.54 % 6.88 % 6.79 % 6.94 % 6.64 % 6.54 % 6.64 %
Total average equity - GAAP $ 380,061 $ 369,825 $ 369,371 $ 353,037 $ 356,701 $ 373,111 $ 359,405
Adjustments:
Average goodwill (4,687) (4,687) (4,687) (4,687) (4,687) (4,687) (4,687)
Average tangible common equity $ 375,374 $ 365,138 $ 364,684 $ 348,350 $ 352,014 $ 368,424 $ 354,718
Return on average shareholders’ equity 7.32 % 6.28 % 5.64 % 4.66 % 3.79 % 6.42 % 1.59 %
Effect of goodwill 0.09 % 0.08 % 0.07 % 0.06 % 0.05 % 0.09 % 0.02 %
Return on average tangible common equity 7.41 % 6.36 % 5.71 % 4.72 % 3.84 % 6.51 % 1.61 %
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(dollars in thousands, except share and per share data) Three Months Ended Nine Months Ended
September 30,
2024 June 30,
2024 March 31,
2024 December 31,
2023 September 30,
2023 September 30,
2024 September 30,
2023
Total interest income $ 74,990 $ 70,961 $ 68,165 $ 66,272 $ 63,015 $ 214,116 $ 173,170
Adjustments:
Fully-taxable equivalent adjustments 1
1,133 1,175 1,190 1,238 1,265 3,498 3,995
Total interest income - FTE $ 76,123 $ 72,136 $ 69,355 $ 67,510 $ 64,280 $ 217,614 $ 177,165
Net interest income $ 21,765 $ 21,327 $ 20,734 $ 19,807 $ 17,378 $ 63,826 $ 55,097
Adjustments:
Fully-taxable equivalent adjustments 1
1,133 1,175 1,190 1,238 1,265 3,498 3,995
Net interest income - FTE $ 22,898 $ 22,502 $ 21,924 $ 21,045 $ 18,643 $ 67,324 $ 59,092
Net interest margin 1.62 % 1.67 % 1.66 % 1.58 % 1.39 % 1.65 % 1.55 %
Effect of fully-taxable equivalent adjustments 1
0.08 % 0.09 % 0.09 % 0.10 % 0.10 % 0.09 % 0.11 %
Net interest margin - FTE 1.70 % 1.76 % 1.75 % 1.68 % 1.49 % 1.74 % 1.66 %
1 Assuming a 21% tax rate
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(dollars in thousands, except share and per share data) Three Months Ended Nine Months Ended
September 30,
2024 June 30,
2024 March 31,
2024 December 31,
2023 September 30,
2023 September 30,
2024 September 30,
2023
Total revenue- GAAP $ 33,794 $ 32,360 $ 29,081 $ 27,208 $ 24,785 $ 95,235 $ 73,821
Adjustments:
Mortgage-related revenue — — — — — — (65)
Adjusted total revenue $ 33,794 $ 32,360 $ 29,081 $ 27,208 $ 24,785 $ 95,235 $ 73,756
Noninterest income - GAAP $ 12,029 $ 11,033 $ 8,347 $ 7,401 $ 7,407 $ 31,409 $ 18,724
Adjustments:
Mortgage-related revenue — — — — — — (65)
Adjusted noninterest income $ 12,029 $ 11,033 $ 8,347 $ 7,401 $ 7,407 $ 31,409 $ 18,659
Noninterest expense - GAAP $ 22,794 $ 22,336 $ 21,023 $ 20,056 $ 19,756 $ 66,153 $ 59,380
Adjustments:
Mortgage-related costs — — — — — — (3,052)
IT termination fees — (452) — — — (452) —
Anniversary expenses — (120) — — — (120) —
Adjusted noninterest expense $ 22,794 $ 21,764 $ 21,023 $ 20,056 $ 19,756 $ 65,581 $ 56,328
Income before income taxes - GAAP $ 7,610 $ 5,993 $ 5,610 $ 3,558 $ 3,083 $ 19,213 $ 1,382
Adjustments: 1
Mortgage-related revenue — — — — — — (65)
Mortgage-related costs — — — — — — 3,052
Partial charge-off of C&I participation loan — — — — — — 6,914
IT termination fees — 452 — — — 452 —
Anniversary expenses — 120 — — — 120 —
Adjusted income before income taxes $ 7,610 $ 6,565 $ 5,610 $ 3,558 $ 3,083 $ 19,785 $ 11,283
Income tax provision (benefit) - GAAP $ 620 $ 218 $ 429 $ (585) $ (326) $ 1,267 $ (2,892)
Adjustments: 1
Mortgage-related revenue — — — — — — (14)
Mortgage-related costs — — — — — — 641
Partial charge-off of C&I participation loan — — — — — — 1,452
IT termination fees — 95 — — — 95 —
Anniversary expenses — 25 — — — 25 —
Adjusted income tax provision (benefit) $ 620 $ 338 $ 429 $ (585) $ (326) $ 1,387 $ (813)
1 Assuming a 21% tax rate
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(dollars in thousands, except share and per share data) Three Months Ended Nine Months Ended
September 30,
2024 June 30,
2024 March 31,
2024 December 31,
2023 September 30,
2023 September 30,
2024 September 30,
2023
Net income - GAAP $ 6,990 $ 5,775 $ 5,181 $ 4,143 $ 3,409 $ 17,946 $ 4,274
Adjustments:
Mortgage-related revenue — — — — — — (51)
Mortgage-related costs — — — — — — 2,411
Partial charge-off of C&I participation loan — — — — — — 5,462
IT termination fees — 357 — — — 357 —
Anniversary expenses — 95 — — — 95 —
Adjusted net income $ 6,990 $ 6,227 $ 5,181 $ 4,143 $ 3,409 $ 18,398 $ 12,096
Diluted average common shares outstanding 8,768,731 8,656,215 8,750,297 8,720,078 8,767,217 8,756,544 8,907,748
Diluted earnings per share - GAAP $ 0.80 $ 0.67 $ 0.59 $ 0.48 $ 0.39 $ 2.05 $ 0.48
Adjustments:
Mortgage-related revenue — — — — — — (0.01)
Mortgage-related costs — — — — — — 0.27
Effect of partial charge-off of C&I participation loan — — — — — — 0.61
Effect of IT termination fees — 0.04 — — — 0.04 —
Effect of anniversary expenses — 0.01 — — — 0.01 —
Adjusted diluted earnings per share $ 0.80 $ 0.72 $ 0.59 $ 0.48 $ 0.39 $ 2.10 $ 1.35
Return on average assets 0.50 % 0.44 % 0.40 % 0.32 % 0.26 % 0.45 % 0.12 %
Effect of mortgage-related revenue — — — — — — —
Effect of mortgage-related costs — — — — — — 0.07 %
Effect of partial charge-off of C&I participation loan — — — — — — 0.15 %
Effect of IT termination fees — 0.03 % — — — 0.01 % —
Effect of anniversary expenses — 0.01 % — — — 0.00 % —
Adjusted return on average assets 0.50 % 0.48 % 0.40 % 0.32 % 0.26 % 0.46 % 0.34 %
Return on average shareholders' equity 7.32 % 6.28 % 5.64 % 4.66 % 3.79 % 6.42 % 1.59 %
Effect of mortgage-related revenue — — — — — — (0.02 %)
Effect of mortgage-related costs — — — — — — 0.90 %
Effect of partial charge-off of C&I participation loan — — — — — — 2.03 %
Effect of IT termination fees — 0.39 % — — — 0.13 % —
Effect of anniversary expenses — 0.10 % — — — 0.03 % —
Adjusted return on average shareholders' equity 7.32 % 6.77 % 5.64 % 4.66 % 3.79 % 6.58 % 4.50 %
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(dollars in thousands, except share and per share data) Three Months Ended Nine Months Ended
September 30,
2024 June 30,
2024 March 31,
2024 December 31,
2023 September 30,
2023 September 30,
2024 September 30,
2023
Return on average tangible common equity 7.41 % 6.36 % 5.71 % 4.72 % 3.84 % 6.51 % 1.61 %
Effect of mortgage-related revenue — — — — — — (0.02 %)
Effect of mortgage-related costs — — — — — — 0.91 %
Effect of partial charge-off of C&I participation loan — — — — — — 2.06 %
Effect of IT termination fees — 0.39 % — — — 0.13 % —
Effect of anniversary expenses — 0.10 % — — — 0.03 % —
Adjusted return on average tangible common equity 7.41 % 6.85 % 5.71 % 4.72 % 3.84 % 6.67 % 4.56 %
Critical Accounting Policies and Estimates
There have been no material changes in the Company’s critical accounting policies or estimates from those disclosed in its Annual Report on Form 10-K for the year ended December 31, 2023.
Recent Accounting Pronouncements
Refer to Note 15 to the condensed consolidated financial statements.
Off-Balance Sheet Arrangements
In the ordinary course of business, the Company enters into financial transactions to extend credit, interest rate swap agreements and forms of commitments that may be considered off-balance sheet arrangements. Interest rate swaps are arranged to receive hedge accounting treatment and are classified as either fair value or cash flow hedges. Fair value hedges are purchased to convert certain fixed rate assets to floating rate. Cash flow hedges are used to convert certain variable rate liabilities into fixed rate liabilities. The Company had interest rate swaps with notional amounts of $160.0 million at September 30, 2024, and $200.0 million at December 31, 2023. Refer to Note 13 to the condensed consolidated financial statements for additional information about derivative financial instruments.
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