What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2025-03-12 compared with 2024-03-13 · 176 added, 210 removed, 588 unchanged (40% of the section changed)

6 unchanged sentences

See also the “Cautionary Note Regarding Forward-Looking Statements” at the beginning of this report.

Costs Associated with Exit Activities

Due to the steep decline in consumer mortgage volumes and the negative outlook for consumer mortgage lending, the Company decided to exit its consumer mortgage business during the first quarter 2023.

This included its nationwide digital direct-to-consumer mortgage platform that originated residential loans for sale in the secondary market, as well as its local traditional consumer mortgage and construction-to-permanent business.

The Company’s commercial construction and land development business was not affected by the decision and remains an important part of the Company’s lending strategy.

The Company incurred total pre-tax expense of $3.1 million in 2023 associated with exiting the consumer mortgage origination business.

Results of Operations

During the twelve months ended December 31, 2024, net income was $25.3 million, or $2.88 per diluted share, compared to net income of $8.4 million, or $0.95 per diluted share, for the twelve months ended December 31, 2023 and net income of $35.5 million, or $3.70 per diluted share, for the twelve months ended December 31, 2022.

The $27.1 million decrease in net income for the twelve months ended December 31, 2023 compared to the twelve months ended December 31, 2022 was due primarily to a decrease of $22.2 million, or 22.9%, in net interest income, an increase of $11.7 million, or 234.6%, in provision for credit losses and an increase of $6.2 million, or 8.4%, in noninterest expense, partially offset by a decrease of $8.0 million, or 176.3%, in income tax expense and an increase of $4.9 million, or 22.9%, in noninterest income.

The Company recognized $3.1 million of mortgage operations and exit costs during the first quarter 2023, which contributed to the increase in noninterest expense compared to the twelve months ended December 31, 2022.

The Company also recognized only $0.1 million of mortgage banking revenue during the twelve months ended December 31, 2023, down from $5.5 million during the twelve months ended December 31, 2022, as it immediately began winding down its existing pipeline following the decision to exit the business.

This action contributed to the increase in the provision for credit losses as compared to the twelve months ended December 31, 2022.

The Company received payment for the remaining balance of the participation loan during 2023.

The decrease in net income of $12.6 million for the twelve months ended December 31, 2022 compared to the twelve months ended December 31, 2021 was due primarily to an $11.6 million decrease in noninterest income, an $11.5 million increase in noninterest expense and a $3.9 million increase in provision for loan losses, partially offset by a $10.5 million increase in net interest income and $3.9 million decrease in income tax expense.

During the twelve months ended December 31, 2023, return on average assets (“ROAA”), return on average equity (“ROAE”) and return on average tangible common equity (“ROATCE”) were 0.17%, 2.35% and 2.38%.

Excluding the impact of exiting consumer mortgage and the partial charge-off, adjusted net income for the twelve months ended December 31, 2023,

was $16.2 million, and adjusted diluted earnings per share was $1.83.

The $16.9 million increase in net income for the twelve months ended December 31, 2024 compared to the twelve months ended December 31, 2023 was due primarily to an increase of $21.2 million, or 81.2%, in noninterest income, an increase of $12.5 million, or 16.7%, in net interest income, partially offset by an increase of $10.7 million, or 13.4%, in noninterest expense, an increase of $5.7 million, in income tax expense and an increase of $0.4 million, or 2.5%, in provision for credit losses.

During the twelve months ended December 31, 2024, return on average assets (“ROAA”), return on average equity (“ROAE”) and return on average tangible common equity (“ROATCE”) were 0.46%, 6.70% and 6.78%, respectively.

The Company recognized gains of $2.9 million from termination of interest rate swap agreements and $1.8 million from prepayment of FHLB advances as well as expenses of $0.5 million in IT termination fees and $0.1 million in anniversary expenses.

Adjusted net income for the twelve months ended December 31, 2024, was $22.0 million, and adjusted diluted earnings per share was $2.51.

Additionally, for the twelve months ended December 31, 2024, adjusted ROAA, adjusted ROAE and adjusted ROATCE were 0.40%, 5.83% and 5.90%, 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.

In connection with this decision, the Company recognized $3.1 million of mortgage operations and exit costs during the twelve months ended December 31, 2023.

The Company also recognized $0.1 million of mortgage banking revenue during the twelve months ended December 31, 2023.

Additionally, during the twelve months ended December 31, 2023, the Company recognized a $6.9 million partial charge-off related to a commercial and industrial participation loan with a balance of $9.8 million, 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 2023.

The decrease in net income of $27.1 million for the twelve months ended December 31, 2023 compared to the twelve months ended December 31, 2022 was due primarily to a decrease of $22.2 million, or 22.9%, in net interest income, an increase of $11.7 million, or 234.6%, in provision for loan losses and an increase of $6.2 million, or 8.4%, in noninterest expense, partially offset by a decrease of $8.0 million, or 176.3%, in income tax expense and an increase of $4.9 million, or 22.9%, in noninterest income.

During the twelve months ended December 31, 2023, ROAA, ROAE and ROATCE were 0.17%, 2.35% and 2.38%, respectively.

The Company recognized a nonrecurring consulting fee associated with a special project of $0.9 million, paid a $0.5 million discretionary inflation bonus to certain employees, recognized accelerated equity compensation expense of $0.3 million related to several retirements, incurred acquisition-related expenses of $0.3 million and recognized a $0.1 million write-down of software.

Excluding these items, adjusted net income for the twelve months ended December 31, 2022 was $37.2 million and adjusted diluted earnings per share was $3.86.

Excluding the impact of exiting consumer mortgage and the partial charge-off, adjusted net income for the twelve months ended December 31, 2023 was $16.2 million and adjusted diluted earnings per share was $1.83.

Additionally, for the twelve months ended December 31, 2023, adjusted ROAA, adjusted ROAE and adjusted ROATCE were 0.33%, 4.54% and 4.60%, respectively.

21 unchanged sentences

Money market accounts 1,230,443 51,036 4.15 % 1,276,602 49,890 3.91 % 1,423,185 18,513 1.30 %

BaaS - brokered deposits 33,039 1,402 4.24 % 60,699 1,033 1.70 % — — 0.00 %

Fintech - brokered deposits 141,860 6,023 4.25 % 33,039 1,402 4.24 % 60,699 1,033 1.70 %

Certificates and brokered deposits 2,430,205 115,454 4.75 % 2,040,041 85,636 4.20 % 1,147,017 19,894 1.73 %

33 unchanged sentences

Interest expense

Interest-bearing deposits 12,042 89,489 101,531 (744) 12,754 12,010

Interest-bearing demand deposits 2,491 1,771 4,262 220 3,910 4,130

Savings accounts (60) — (60) (207) 120 (87)

Money market accounts (1,847) 2,993 1,146 (2,094) 33,471 31,377

Fintech - brokered deposits 4,618 3 4,621 (634) 1,003 369

Certificates and brokered deposits 17,699 12,119 29,818 23,199 42,543 65,742

Other borrowed funds (2,867) 3,052 185 2,391 801 3,192

1 unchanged sentence

Increase /(decrease) in net interest income $ 3,183 $ 9,290 $ 12,473 $ 8,562 $ (30,751) $ (22,189)

Net interest income for the twelve months ended December 31, 2023 was $74.9 million, a decrease of $22.2 million, or 22.9%, compared to $97.1 million for the twelve months ended December 31, 2022.

The decrease in net interest income was the result of a $104.7 million, or 175.1%, increase in total interest expense to $164.5 million for the twelve months ended December 31, 2023 compared to $59.8 million for the twelve months ended December 31, 2022.

The increase in total interest expense was partially offset by an $82.5 million, or 52.6%, increase in total interest income to $239.4 million for the twelve months ended December 31, 2023 compared to $156.9 million for the twelve months ended December 31, 2022.

Net interest income for the twelve months ended December 31, 2024 was $87.4 million, an increase of $12.5 million, or 16.7%, compared to $74.9 million for the twelve months ended December 31, 2023.

The increase in net interest income was the result of a $52.4 million, or 21.9%, increase in total interest income to $291.9 million for the twelve months ended December 31, 2024 compared to $239.4 million for the twelve months ended December 31, 2023.

The increase in total interest income was partially offset by a $40.0 million, or 24.3%, increase in total interest expense to $204.5 million for the twelve months ended December 31, 2024 compared to $164.5 million for the twelve months ended December 31, 2023.

The growth in total interest income was due primarily to an increase in interest earned on loans resulting from an increase of 63 bps in the yield earned on loans, as well as an increase of $311.7 million, or 8.5%, in the average balance of loans, including loans held-for-sale.

Furthermore, the yield on other earning assets increased 390 bps and the average balance of other earning assets increased $222.0 million, or 79.8%.

Additionally, the average balance of securities increased $146.7 million, or 23.5%, and the yield earned on the securities portfolio increased 64 bps.

The increase in the yields earned on loans, other earning assets and securities was due to the continued rise in interest rates during the fourth quarter 2022 and into 2023.

As a result of the higher interest rate environment, the yield on funded portfolio originations was 8.41% for the twelve months ended December 31, 2023, an increase of 302 bps compared to the twelve months ended December 31, 2022.

The increase in total interest expense was due primarily to increases of $65.7 million, or 330.5%, in interest expense associated with certificates and brokered deposits, $31.4 million, or 169.5%, in interest expense associated with money market accounts, $4.1 million, or 200.9%, in interest expense associated with interest-bearing demand deposits and $3.2 million, or 17.8%, in interest expense associated with other borrowed funds.

The increase in the yield earned on loans and securities 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 originations was 8.29% for the twelve months ended December 31, 2024, an increase of 5 bps compared to the twelve months ended December 31, 2023.

The increase in total interest expense was due primarily to increases of $29.8 million, or 34.8%, in interest expense associated with certificates and brokered deposits, $4.6 million, or 329.6%, in interest expense associated with fintech - brokered deposits and $4.3 million, or 68.9%, 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 55 bps in the cost of these deposits, as well as an increase of $390.2 million, or 19.1%, in the average balance of these deposits.

The increase in the average balance of these deposits was driven by strong consumer and small business demand for certificates of deposits in 2023, as well as the funding of brokered deposits during the fourth quarter 2022 and earlier in 2023 to supplement on-balance sheet liquidity.

The increase in interest expense related to money market accounts was driven primarily by an increase of 261 bps in the cost of these deposits, partially offset by a decrease of $146.6 million, or 10.3%, in the average balance of these deposits.

The increase in 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 2024.

The increase in interest expense related to fintech - brokered deposits was driven primarily by an increase of $108.8 million, or 329.6%, in the average balance of these deposits.

The balance of these deposits is driven by payments volume associated with one of the Company’s fintech partnerships, which increased significantly year-over-year.

The increase in interest expense related to interest-bearing demand deposits was due primarily to a 42 bp increase in the cost of these deposits, as well as an increase of $128.0 million, or 35.0%, in the average balance of these deposits.

The increase in interest expense related to other borrowed funds was due primarily to additional long-term FHLB advances in the second half of 2022 at rates lower than market deposit costs, as the cost of the borrowed funds increased only 12 bps while the average balance increased 12.7%.

The increase in the overall cost of deposits was due primarily to the continued rise in interest rates during the fourth quarter 2022 and into 2023.

However, as the Federal Reserve’s last rate increase was in July 2023, the pace of increase in deposit costs during the third and fourth quarters of 2023 was considerably slower than that experienced during 2022 and the first half of 2023.

The increase in the average balance of these deposits was due to growth in deposit activity from certain fintech partnerships.

The increase in the cost of funds across all of these deposit types reflects the impact of the elevated interest rate environment throughout 2024.

Net interest margin (“NIM”) was 1.65% for the twelve months ended December 31, 2024 compared to 1.56% for the twelve months ended December 31, 2023.

On a fully-taxable equivalent (“FTE”) basis, NIM was 1.67% for the twelve months ended December 31, 2023 compared to 2.54% for the twelve months ended December 31, 2022, a decrease of 87 bps.

The decrease in NIM and FTE NIM compared to the twelve months ended December 31, 2022 reflects the increase in the cost of interest-bearing liabilities of 206 bps, partially offset by the increase in earning asset yields of 109 bps.

On a fully-taxable equivalent (“FTE”) basis, NIM was 1.74% for the twelve months ended December 31, 2024 compared to 1.67% for the twelve months ended December 31, 2023, an increase of 7 bps.

The increase in NIM and FTE NIM compared to the twelve months ended December 31, 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.

Noninterest Income

7 unchanged sentences

Gain on sale of loans 33,329 20,526 11,372

Gain on sale of premises and equipment — — 2,523

Other 9,406 2,302 2,416

1 unchanged sentence

During the twelve months ended December 31, 2024, noninterest income totaled $47.3 million, representing an increase of $21.2 million, or 81.2%, compared to $26.1 million for the twelve months ended December 31, 2023.

The increase in noninterest income was driven primarily by increases in gain on sale of loans and net loan servicing revenue, partially offset by a decrease in mortgage banking activities.

Due to growth in the Company’s small business lending line of business, the amount of SBA 7(a) loan sales increased 110.4% during 2023 to $281.1 million from sales of $133.6 million during 2022.

As a result, gain on sale of loans increased $9.2 million, or 80.5%, in 2023 compared to the prior year.

The increase in net loan servicing revenue was due to growth in the balance of the Company’s SBA 7(a) servicing portfolio, as well as slower prepayment speeds in 2023.

The decrease in mortgage banking activities was due to the Company’s exit from the mortgage business in the first quarter 2023.

The increase in noninterest income was driven primarily by increases of $12.8 million in gain on sale of loans, $7.1 million in other income and $1.3 million in net loan servicing revenue.

The increase in gain on sale of loans was due primarily to an increase of 48.8% in the volume of SBA 7(a) guaranteed loan sales as well as an increase of 83 bps to 108.17% in net gain on sale premium for the year.

The increase in other income was due primarily to distributions from fund investments, as well as a gain on termination of interest rate swaps of $2.9 million and a gain on prepayment of FHLB advances of $1.8 million.

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

11 unchanged sentences

Total noninterest expense $ 90,110 $ 79,436 $ 73,273

Noninterest expense for the twelve months ended December 31, 2023 was $79.4 million, compared to $73.3 million for the twelve months ended December 31, 2022.

The increase of $6.2 million, or 8.4%, compared to the twelve months ended December 31, 2022 was due primarily to increases of $3.8 million in salaries and employee benefits, $2.8 million in deposit insurance premium and $1.3 million in loan expenses, partially offset by decreases of $1.7 million in consulting and professional fees and $1.0 million in marketing, advertising and promotion.

The increase in salaries and employee benefits was due primarily to mortgage exit costs, as well as an increase in headcount and higher incentive compensation in small business and construction lending.

The increase in deposit insurance premium was due mainly to year-over-year asset growth, as well as the composition of loans and deposits.

The increase in loan expenses was due primarily to mortgage exit costs and accrued contract expenses, as well as higher third-party loan servicing fees and other miscellaneous lending costs.

The decrease in consulting and professional fees was due primarily to consulting fees related to a special project that occurred in the first quarter 2022, as well as lower legal fees in 2023.

The decrease in marketing, advertising and promotion expense was due primarily to cost savings from the Company’s exit from the mortgage business in the first quarter 2023.

The following table reconciles reported income tax (benefit) provision to that computed at the statutory federal tax rate for the three most recent years.

Noninterest expense for the twelve months ended December 31, 2024 was $90.1 million, representing an increase of $10.7, or 13.4%, compared to $79.4 million for the twelve months ended December 31, 2023.

The increase was due primarily to increases of $6.4 million, or 14.2%, in salaries and employee benefits, $1.3 million, or 12.3%, in premises and equipment, $1.1 million, or 28.9%, in deposit insurance premium, $0.9 million, or 14.8%, in other expenses and $0.7 million, or 21.5%, in consulting and professional fees.

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 in 2024.

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 mainly 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 following table reconciles reported income provision tax (benefit) to that computed at the statutory federal tax rate for the three most recent years.

Twelve Months Ended December 31,

7 unchanged sentences

Other differences 307 (150) 80

Income tax (benefit) provision $ (3,477) $ 4,559 $ 8,458

We recognized an income tax benefit of $3.5 million in 2023, compared to an income tax provision of $4.6 million and an effective tax rate of 11.4% in 2022.

Income tax provision (benefit) $ 2,266 $ (3,477) $ 4,559

We recognized an income tax provision of $2.3 million and an effective tax rate of 8.2% in 2024, compared to an income tax benefit of $3.5 million in 2023.

Our federal statutory tax rate was 21% in 2024 and 2023.

1 unchanged sentence

Interest income on certain loans or securities issued by governmental, municipal and not-for-profit entities, and earnings from bank-owned life insurance were the primary components of tax-exempt income.

The income tax benefits recognized during 2023 also 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 in 2023.

Financial Condition

12 unchanged sentences

Total assets increased $570.3 million, or 11.0%, to $5.7 billion as of December 31, 2024 compared to $5.2 billion as of December 31, 2023.

Balance sheet growth was driven primarily by an increase in deposits of $625.7 million, or 18.2%.

A portion of the increase in deposits was used to fund loan growth as loan balances increased $340.8 million, or 9.7%.

However, as deposit growth outpaced loan growth, balance sheet liquidity increased as the combined balance of cash and securities increased $271.8 million, or 32.5%, and the percentage of loans to deposits declined to 94.4% as of December 31, 2023, compared to 101.7% as of December 31, 2022.

As of December 31, 2023, total shareholders’ equity was $362.8 million, a decrease of $2.2 million, or 0.6%, compared to December 31, 2022.

The decrease in shareholders’ equity was due primarily to stock repurchase activity and the day 1 CECL adjustment, partially offset by net income earned during the period.

Tangible common equity totaled $358.1 million as of December 31, 2023, representing a decrease of $2.2 million, or 0.6%, compared to December 31, 2022.

Balance sheet growth was driven primarily by an increase in total deposits of $866.2 million, or 21.3%.

The increase in deposits was used, in part, to fund loan growth, as loan balances increased $330.4 million.

Furthermore, additional liquidity from the increase in deposits was deployed to reduce advances from the FHLB, which declined as FHLB advances decreased $319.9 million, or 52.0%.

As deposit growth outpaced loan growth, balance sheet liquidity increased as the combined balance of cash and securities increased $195.7 million, or 17.7%, and the percentage of loans to deposits declined to 84.5% as of December 31, 2024 from 94.4% as of December 31, 2023.

As of December 31, 2024, total shareholders’ equity was $384.1 million, an increase of $21.3 million, or 5.9%, compared to December 31, 2023.

The increase in shareholders’ equity was due primarily to the net income earned during 2024, partially offset by an increase in accumulated other comprehensive loss.

Tangible common equity totaled $379.4 million as of December 31, 2024, representing an increase of $21.3 million, or 5.9%, compared to December 31, 2023.

The ratio of total shareholders’ equity to total assets decreased to 6.69% as of December 31, 2024 from 7.02% as of December 31, 2023 and the ratio of tangible common equity to tangible assets decreased to 6.62% as of December 31, 2024 from 6.94% as of December 31, 2023.

The decrease in both shareholders’ equity to total assets and tangible common equity to tangible assets is due primarily to the stock repurchase activity and day 1 CECL adjustment mentioned above, as well as an increase in total assets, partially offset by net income earned during the period.

Book value per common share increased 5.6% to $44.31 as of December 31, 2024 from $41.97 as of December 31, 2023.

Tangible book value per share increased 5.6% to $43.77 as of December 31, 2024 from $41.43 as of December 31, 2023.

The increase in both book value per common share and tangible book value per share reflects the effect of stock repurchase activity throughout the year, partially offset by the declines in total shareholders’ equity and tangible common equity.

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 Item 7 of Part II of this report, Management's Discussion and Analysis of Financial Condition and Results of Operations for additional information.

11 unchanged sentences

Small business lending 1

331,914 8.0 % 218,506 5.7 %

Franchise finance 536,909 12.9 % 525,783 13.7 %

11 unchanged sentences

Net loans $ 4,125,877 $ 3,801,446

1 Balances include $34.0 million and $33.5 million that are guaranteed by the U.S.

government as of December 31, 2024 and December 31, 2023, respectively.

2 Includes carrying value adjustments of $22.9 million and $27.8 million related to terminated interest rate swaps associated with public finance loans as of December 31, 2024 and December 31, 2023, respectively.

Total loans were $4.2 billion as of December 31, 2024, an increase of $330.4 million, or 8.6%, compared to December 31, 2023.

Total commercial loan balances were $3.0 billion, as of December 31, 2023, up $286.6 million, or 10.5%, from December 31, 2022.

Total commercial loan balances were $3.3 billion, as of December 31, 2024, an increase of $336.7 million, or 11.2%, from December 31, 2023.

Total consumer loan balances were $801.4 million as of December 31, 2024, an increase of $4.5 million, or 0.6%, compared to December 31, 2023.

Compared to December 31, 2022, the increase in commercial loan balances was driven by growth in the franchise finance, small business lending, construction and investor commercial real estate portfolios.

The increase was partially offset by a decrease in the fixed-rate public finance portfolio, as well as continued runoff in the healthcare finance portfolio.

During 2023, the Company continued to execute on its strategy of redeploying cash flows from longer-duration fixed rate portfolios to variable rate and higher yielding loan types in order to improve net interest margin and mitigate long-term interest rate risk.

The increase in consumer loans was due to higher balances in the recreational vehicles and trailers loan portfolios, in addition to funded residential mortgages and draws on construction/perm loans that were in the pipeline prior to exiting the business.

Compared to December 31, 2023, in connection with the Company’s focus on variable rate products, the increase in commercial loan balances was driven by growth in the construction, investor commercial real estate and small business lending portfolios.

The increase was partially offset by continued runoff in the healthcare finance portfolio and a decrease in the fixed-rate public 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.

Loan Maturities and Rate Sensitivity

35 unchanged sentences

Commercial loans:

Commercial and industrial $ — $ 51

Owner-occupied commercial real estate — 1,570

Small business lending $ 11,429 $ 6,824

7 unchanged sentences

Past Due 90 days and accruing loans

Commercial loans:

Small business lending 1,320 —

Total commercial loans 1,320 —

Consumer loans:

Residential mortgage 1,142 838

Other consumer 4 —

Total consumer loans 1,146 838

11 unchanged sentences

Allowance for credit losses - loans to nonaccrual loans 172.5 % 425.0 %

Allowance for credit losses - loans to nonperforming loans 157.5 % 389.2 %

A loan is individually evaluated, when, based on current information or events, it is probable that we will be unable to collect all amounts due (principal and interest) according to the contractual terms of the loan agreement.

9 unchanged sentences

however, we did not own any securities classified as such during the two-year period ended December 31, 2024.

Total nonperforming loans increased $2.4 million, or 32.3%, to $10.0 million as of December 31, 2023 compared to $7.5 million as of December 31, 2022, due primarily to increases in nonperforming loans related to the small business lending and residential mortgage portfolios, partially offset by an owner-occupied commercial real estate loan that was returned to accrual status during the year.

Total nonperforming assets increased $2.8 million, or 36.8%, to $10.4 million as of December 31, 2023, compared to $7.6 million as of December 31, 2022, due primarily to the increases of nonperforming loans related to small business lending and residential mortgage portfolios mentioned above, as well as increases in other real estate owned (“OREO”) and accruing loans past due 90 days or more, partially offset by the owner-occupied commercial real estate loan mentioned above.

Total nonperforming loans increased $18.5 million, or 185.3%, to $28.4 million as of December 31, 2024 compared to $10.0 million as of December 31, 2023, due primarily to increases in nonperforming loans related to the small business lending, franchise finance and residential mortgage portfolios, as well as an increase in accruing loans past due 90 days or more.

Total nonperforming assets increased $18.6 million, or 179.2%, to $28.9 million as of December 31, 2024, compared to $10.4 million as of December 31, 2023, due primarily to the increases in nonperforming loans mentioned above, as well as an increase in loan repossessions (“REPO”), partially offset by a decrease in other real estate owned (“OREO”).

As of December 31, 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.

As of December 31, 2022, the Company did not own any OREO.

Troubled Debt Restructurings

With the adoption ASU 2022-02, effective January 1, 2023, troubled debt restructurings (“TDRs”) accounting was eliminated.

Total TDRs as of December 31, 2022 were $5.5 million.

There were two portfolio residential mortgage loans and one small business lending loan classified as new TDRs during the twelve months ended December 31, 2022, with pre-modification and post-modification balances totaling $1.6 million.

The following table provides a summary of troubled debt restructurings.

(amounts in thousands) 2023 2022

Troubled debt restructurings – nonaccrual $ — $ 2,864

Troubled debt restructurings – performing — 2,658

Total troubled debt restructurings $ — $ 5,522

Allowance for Credit Losses - Loans

The following table provides a rollforward of the allowance for credit losses for the twelve months ended December 31, 2023 and 2022.

(amounts in thousands) 2023 2022

The following table provides a rollforward of the ACL on loans by loan portfolio segment for the twelve months ended December 31, 2024 and 2023;

however, allocation of a portion of the allowance to one segment does not preclude its availability to absorb losses in other segments.

(dollars in thousands) 2024 2023

Balance, beginning of period $ 38,774 $ 31,737

5 unchanged sentences

Investor commercial real estate — (591)

Single tenant lease financing (195) —

Healthcare finance — (605)

5 unchanged sentences

Commercial and industrial 8 243

Single tenant lease financing — 1,231

Small business lending 325 77

5 unchanged sentences

Net charge-offs $ 12,820 $ 11,379

Net charge-offs (recoveries) to average loans (annualized)

Net (recoveries) charge-offs to average loans (annualized)

Commercial and industrial (0.01 %) 6.87 %

4 unchanged sentences

Franchise Finance 0.27 % 0.08 %

Total commercial net charge-offs (recoveries) 0.38 % (0.03 %)

Total commercial net charge-offs 0.37 % 0.38 %

Residential mortgage 0.04 % 0.03 %

1 unchanged sentence

Other consumer 0.28 % 0.21 %

Total consumer net charge-offs (recoveries) 0.07 % 0.32 %

Total consumer net charge-offs 0.13 % 0.07 %

Net charge-offs to average loans 0.32 % 0.31 %

The determination of the allowance for credit losses (“ACL”) and the related provision for credit losses are components of our significant accounting policies as discussed within Note 1 to our consolidated financial statements.

The determination of the ACL and the related provision for credit losses are components of our significant accounting policies as discussed within Note 1 to our consolidated financial statements.

The adequacy of the allowance for credit losses and the provision are based on the review and evaluation of the loan portfolio and reflect management’s assessment of the risks and potential losses within the portfolio.

This evaluation uses a discounted cash flow analysis based on historical loss data, reasonable and supportable forecasts and prepayment rates, as well as qualitative factors such as economic and business conditions, portfolio growth, concentrations of credit in the portfolio, trends in risk grades, delinquencies within the portfolio and changes in our lending policies and practices.

Management actively monitors asset quality and, when appropriate, charges off loans against the allowance for credit losses.

Although management believes it uses the best information available to make determinations with respect to the

allowance for credit losses, future adjustments may be necessary if economic conditions differ substantially from those in the assumptions used to determine the size of the allowance for credit losses.

The ACL was $38.8 million as of December 31, 2023, compared to an ALLL of $31.7 million as of December 31, 2022.

The increase in the ACL reflects the day one current expected credit losses (“CECL”) adjustment of $3.0 million, overall growth in the loan portfolio, changes in certain economic forecasts that impacted quantitative loss rates, adjustments to qualitative factors for certain portfolios and specific reserves placed on certain loans.

Management actively monitors asset quality and, when appropriate, charges off loans against the ACL.

Although management believes it uses the best information available to make determinations with respect to the ACL, future adjustments may be necessary if economic conditions differ substantially from those in the assumptions used to determine the size of the ACL.

The ACL was $44.8 million as of December 31, 2024, compared to an ACL of $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 1.07% as of December 31, 2024, compared to 1.01% at December 31, 2023.

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The provision for credit losses - loans was $18.8 million for the twelve months ended December 31, 2024 compared to $15.5 million for the twelve months ended December 31, 2023.

The increase in the provision for credit losses - loans for the twelve months ended December 31, 2023 was driven primarily by increases in net charge-offs, which included the aforementioned partial charge-off of a commercial and industrial participation loan and increased charge-offs in small business lending.

Also impacting the increase in the provision for credit losses - loans were additional specific reserves related to small business lending, partially offset by the positive impact of economic forecasts on certain portfolios.

The increase in the provision for credit losses - loans for the twelve months ended December 31, 2024 was driven primarily by increases in net charge-offs in the small business lending and franchise finance portfolios, as well as growth in ACL discussed above, partially offset by lower net charge-offs in the commercial and industrial portfolio.

Investment Securities Portfolio

In managing our investment securities portfolio, management focuses on providing an adequate level of liquidity and managing long-term interest rate risk, while earning an adequate level of investment income without taking undue risk.

Investment securities that are acquired and held principally for the purpose of selling them in the near term with the objective of generating economic profits on short-term differences in market characteristics are classified as “trading securities.” We did not classify any securities as trading securities as of December 31, 2024 and 2023.

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Corporate securities 29,408 40,747

Total held-to-maturity, net 227,153 189,168

Total securities held-to-maturity, net 249,796 227,153

Total securities $ 876,650 $ 740,468

(amounts in thousands) December 31,

Approximate Fair Value 2024 2023

13 unchanged sentences

Corporate securities 27,966 37,369

Total held-to-maturity 207,572 168,483

Total securities held-to-maturity 228,851 207,572

Total securities $ 816,206 $ 682,427

The approximate fair value of investment securities available-for-sale increased $112.5 million, or 23.7%, to $587.4 million as of December 31, 2024 compared to $474.9 million as of December 31, 2023.

The increase was due primarily to increases of $61.4 million in U.S.

Government-sponsored agencies securities, $23.0 million in agency mortgage-backed securities - commercial and $10.3 million in private label mortgage-backed securities - residential, partially offset by decreases of $8.4 million in agency mortgage-backed securities - residential and $6.1 million in corporate securities.

During 2023, the Company’s strategy for purchasing available-for-sale securities included a focus on variable rate agency and high-quality short duration private label mortgage-backed securities in order to minimize price risk regardless of the interest rate environment.

As of December 31, 2023, the Company had securities with an amortized cost basis of $207.6 million designated as held-to-maturity compared to $168.5 million as of December 31, 2022.

The increase was due primarily to CRA-eligible purchases of agency mortgage-backed securities - residential.

The increase was due primarily to increases of $63.0 million in agency mortgage-backed securities - residential, $25.0 million in private label mortgage-backed securities - residential, $24.4 million in agency mortgage-backed securities - commercial, and $15.7 million in asset-backed securities, partially offset by decreases of $12.4 million in U.S.

Government-sponsored agencies securities and $4.8 million in municipal securities.

The increase was primarily attributable to new purchase activity within the available-for-sale portfolios, partially offset by net paydown activity.

As of December 31, 2024, the Company had securities with a net carrying value of $249.8 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.

Investment Maturities

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(dollars in thousands) Amortized

Yield Amortized

Government-sponsored agencies

8 unchanged sentences

Total securities $ 12,533 3.82 % $ 69,732 5.40 % $ 109,685 4.39 % $ 684,700 3.70 % $ 876,650 3.92 %

1 Weighted-average yields are calculated on a fully-taxable equivalent basis using the federal statutory rate of 21% for 2024.

Accrued Income and Other Assets

Accrued income and other assets increased $11.9 million, or 23.3%, to $63.0 million at December 31, 2024 compared to $51.1 million at December 31, 2023.

The increase was due primarily to increases of $3.0 million in deferred tax assets and $3.4 million in fund investments.

The increase was due primarily to increases of $12.9 million in equity investments, $3.0 million related to a bond that was called on December 30, 2024 and $2.3 million in income tax receivable, partially offset by a decrease of $5.6 million in derivative assets.

The following table presents the composition of our deposit base as of the end of the last two years.

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Money market accounts 1,183,789 24.0 % 1,248,319 30.8 %

BaaS - brokered deposits 74,401 1.8 % 13,607 0.4 %

Fintech - brokered deposits 1

— — % 74,401 1.8 %

Certificates of deposits 2,133,455 43.2 % 1,605,156 39.5 %

1 unchanged sentence

Total $ 4,933,206 100.0 % $ 4,066,973 100.0 %

1 Fintech - brokered deposits that had been previously classified as brokered deposits were reclassified to interest-bearing demand deposits as of December 31, 2024.

Total deposits increased $866.2 million, or 21.3%, to $4.9 billion as of December 31, 2024 compared to $4.1 billion as of December 31, 2023.

This increase was due primarily to increases of $730.7 million, or 83.6%, in certificates of deposits, $67.4 million, or 20.1%, in interest-bearing demand deposits, $60.8 million, or 446.8%, in BaaS - brokered deposits and $12.5 million, 2.2%, in brokered deposits, partially offset by decreases of $170.3 million, or 12.0%, in money market accounts, $51.9 million, or 29.6%, in noninterest-bearing deposits, and $23.5 million, or 52.3%, in savings accounts.

The increase in certificates of deposits and brokered deposits was due primarily to strong consumer and small business demand in 2023.

This increase was due primarily to increases of $528.3 million, or 32.9%, in certificates of deposits, $493.7 million, or 122.5%, in interest-bearing demand deposits and $13.0 million, or 10.5%, in noninterest-bearing deposits, partially offset by decreases of $64.5 million, or 5.2%, in money market accounts, $28.3 million, or 4.8%, in brokered deposits and $1.5 million, or 7.2%, in savings accounts.

The increase in certificates of deposits was due primarily to strong consumer and small business demand in 2024.

The increase in interest-bearing demand deposits was due primarily to growth in fintech partnership deposits.

The increase in BaaS - brokered deposits was driven by higher payments volume with one of our fintech partners.

The increase in brokered deposits was due to the issuance of long-term brokered certificates of deposits to manage long-term interest rate risk and take advantage of the inverted yield curve.

The decrease in money market accounts was due primarily to certain customer activity that can be periodically volatile, as well as certain higher-cost relationships that were exited during 2023.

The decline in noninterest-bearing deposits was due primarily to drawdowns from commercial real estate development and construction clients contributing equity to projects the Company is financing.

The decrease in savings accounts was due primarily to customer withdrawal activity.

Uninsured deposit balances represented 25% of total deposits at December 31, 2023, down from 33% at December 31, 2022.

The decrease in money market accounts was driven by general customer withdraw activity which was due to larger-balance accounts that can experience volatility from time-to-time.

The decrease in brokered deposits was driven by using excess liquidity to paydown higher-cost deposits throughout the year.

Uninsured deposit balances represented 25% of total deposits as of December 31, 2024 and 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 decreased to 19% as of December 31 2023, down from 24% as of December 31, 2022.

After subtracting these types of deposits, the adjusted uninsured deposit balance drops to 20% as of December 31, 2024, compared to 19% as of December 31, 2023.

The following tables present contractual interest rates paid on time deposits, their scheduled maturities, and the scheduled maturities for time deposits greater than $250,000.

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Time Deposit Maturities Greater than $250,000

(dollars in thousands) December 31, 2023

(amounts in thousands) December 31, 2024

Maturity Period:

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Accrued Expenses and Other Liabilities

Accrued expenses and other liabilities decreased $0.3 million, or 2.3%, to $14.2 million at December 31, 2023, compared to $14.5 million at December 31, 2022.

The decrease was due primarily to decreases of $2.9 million in other liabilities, $1.6 million in accrued taxes, $0.2 million in accrued salary and benefits and $0.4 million in accrued property taxes, partially offset by increases of $3.7 million in the reserve for unfunded commitments as a result of the adoption of CECL in 2023, as well as new origination activity, and an increase of $0.7 million in derivative liability due to changes in fair value.

Accrued expenses and other liabilities increased $3.8 million, or 26.5%, to $17.9 million at December 31, 2024, compared to $14.2 million at December 31, 2023.

The increase was due primarily to increases of $2.3 million in accrued salary and benefits and $3.1 million in various expenses and liabilities, partially offset by a decrease of $1.6 million in the reserve for unfunded commitments.

Liquidity and Capital Resources

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Certificates of deposits and brokered certificates of deposits scheduled to mature in one year or less at December 31, 2024 totaled $1.5 billion.

At December 31, 2024, capital ratios for the Company and the Bank were above regulatory requirements for well-capitalized institutions.

Refer to “Note 14:

Regulatory Capital Requirements” for additional information regarding regulatory capital requirements.

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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Payments Due In

(dollars in thousands) Note Reference Less than 1 year 1-3 years 3-5 years More than 5 years Total

(amounts in thousands) Note Reference Less than 1 year 1-3 years 3-5 years More than 5 years Total

Deposits and brokered deposits without stated maturity 1

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1 Amounts do not include associated interest payments.

2 Amounts do not include the effect of interest rate swaps used to convert short-term advances into long-term funding.

In October 2021, the Company’s Board of Directors approved a stock repurchase program authorizing the repurchase of up to $30.0 million of the Company’s outstanding common stock from time to time on the open market or in privately negotiated transactions.

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The new program authorized the repurchase of up to $25.0 million of our outstanding common stock from time to time on the open market or in privately negotiated transactions.

The stock repurchase authorization is scheduled to expire on December 31, 2024.

Under this program, the Company repurchased 502,525 shares of common stock at an average price of $18.40 per share, during 2023 and 46,497 shares of common stock at an average price of $24.42 per share, during 2022.

As of December 31, 2023, the Company had $14.6 million of remaining authority under the program.

Various factors determine the amount and timing of our share repurchases, including our capital requirements, organic growth and other strategic opportunities, economic and market conditions (including the trading price of our stock), and regulatory and legal considerations.

See Part II, Item 5, of this report for information regarding recent repurchase activity and our remaining authority under the program.

The stock repurchase authorization expired as of December 31, 2024.

Under this program, the Company repurchased 10,500 shares of common stock at an average price of $26.95 per share during 2024, 502,525 shares of common stock at an average price of $18.40 per share during 2023, and 46,497 shares of common stock at an average price of $24.42 per share during 2022.

Reconciliation of Non-GAAP Financial Measures

This Management's Discussion and Analysis contains financial information determined by methods other than in accordance with GAAP.

Non-GAAP financial measures, specifically tangible common equity, tangible assets, tangible book value per common share, tangible common equity to tangible assets, average tangible common equity, return on average tangible common equity, total interest income - FTE, net interest income - FTE, net interest margin - FTE, adjusted total revenue, adjusted noninterest income, adjusted noninterest expense, adjusted income before income taxes, adjusted income tax provision, adjusted net income, adjusted diluted earnings per share, adjusted return on average assets, adjusted return on average shareholders’ equity and adjusted return on average tangible common equity are used by the Company's management to measure the strength of its capital and analyze profitability, including its ability to generate earnings on tangible capital invested by its shareholders.

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 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.

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Mortgage-related revenue — (65) —

Gain on sale of premises and equipment — — (2,523)

Subordinated debt redemption cost — — 810

Gain on prepayment of FHLB advances (1,829) — —

Gain on termination of interest rate swaps (2,904) — —

Adjusted total revenue $ 129,989 $ 100,964 $ 118,350

1 unchanged sentence

Mortgage-related revenue — (65) —

Gain on sale of premises and equipment — — (2,523)

Gain on prepayment of FHLB advances (1,829) — —

Gain on termination of interest rate swaps (2,904) — —

Adjusted noninterest income $ 42,612 $ 26,060 $ 21,257

2 unchanged sentences

Acquisition-related expenses — — (273)

IT Termination fee — (475)

IT termination fees (452) — —

Nonrecurring consulting fee — — (875)

2 unchanged sentences

Accelerated equity compensation — — (289)

Anniversary expenses (120) — —

Adjusted noninterest expense $ 89,538 $ 76,384 $ 71,180

2 unchanged sentences

Mortgage-related costs — 3,052 —

Gain on sale of premises and equipment — — (2,523)

Partial charge-off of C&I participation loan — 6,914 —

Acquisition-related expenses — — 273

IT Termination fee — 475

IT termination fees 452 — —

Nonrecurring consulting fee — — 875

Write-down of software — — 125

Subordinated debt redemption cost — — 810

Discretionary inflation bonus — — 531

Accelerated equity compensation — — 289

Anniversary expenses 120 — —

Gain on prepayment of FHLB advances (1,829) — —

Gain on termination of interest rate swaps (2,904) — —

Adjusted income before income taxes $ 23,381 $ 14,841 $ 42,193

Income tax provision - GAAP $ (3,477) $ 4,559 $ 8,458

1 Assuming a 21% tax rate

(dollars in thousands, except share and per share data) At or For The Twelve Months Ended December 31,

2024 2023 2022

Income tax provision (benefit) - GAAP $ 2,266 $ (3,477) $ 4,559

Mortgage-related revenue — (14) —

Mortgage-related costs — 641 —

Gain on sale of premises and equipment — — (530)

Partial charge-off of C&I participation loan — 1,452 —

Acquisition-related expenses — — 57

IT Termination fee — 100

IT termination fees 95 —

Nonrecurring consulting fee — — 184

Write-down of software — — 26

Subordinated debt redemption cost — — 170

Discretionary inflation bonus — — 112

Accelerated equity compensation — — 61

Adjusted income tax provision $ (1,398) $ 4,999 $ 8,232

1 Assuming a 21% tax rate

(dollars in thousands, except share and per share data) At or For The Twelve Months Ended December 31,

2023 2022 2021

Anniversary expenses 25 — —

Gain on prepayment of FHLB advances (384) — —

Gain on termination of interest rate swaps (610) — —

Adjusted income tax provision (benefit) $ 1,392 $ (1,398) $ 4,999

Net income - GAAP $ 25,276 $ 8,417 $ 35,541

2 unchanged sentences

Partial charge-off of C&I participation loan — 5,462 —

Gain on sale of premises and equipment — — (1,993)

IT Termination fee — — 375

IT termination fees 357 — —

Acquisition-related expenses — — 216

1 unchanged sentence

Write-down of software — — 99

Subordinated debt redemption cost — — 640

Discretionary inflation bonus — — 419

Accelerated equity compensation — — 228

Anniversary expenses 95 — —

Gain on prepayment of FHLB advances (1,445) — —

Gain on termination of interest rate swaps (2,294) — —

Adjusted net income $ 21,989 $ 16,239 $ 37,194

3 unchanged sentences

Mortgage-related costs — 0.27 —

Effect of gain on sale of premises and equipment — — (0.19)

Effect of partial charge-off of C&I participation loan — 0.62 —

Effect of acquisition-related expenses — — 0.02

Effect of IT termination fee — — 0.04

Effect of IT termination fees 0.04 — —

Effect of nonrecurring consulting fee — — 0.07

Effect of write-down of software — — 0.01

Effect of subordinated debt redemption cost — — 0.06

Effect of discretionary inflation bonus — — 0.04

Effect of accelerated equity compensation — — 0.02

Effect of anniversary expenses 0.01 — —

Effect of gain on prepayment of FHLB advances (0.16) — —

Effect of gain on termination of interest rate swaps (0.26) — —

Adjusted diluted earnings per share $ 2.51 $ 1.83 $ 3.86

1 Assuming a 21% tax rate

(dollars in thousands, except share and per share data) At or For The Twelve Months Ended December 31,

2024 2023 2022

Return on average assets 0.46 % 0.17 % 0.85 %

1 unchanged sentence

Effect of mortgage-related costs 0.00 % 0.05 % 0.00 %

Effect of gain on sale of premises and equipment 0.00 % 0.00 % (0.05 %)

Effect of partial charge-off of C&I participation loan 0.00 % 0.11 % 0.00 %

Effect of acquisition-related expenses 0.00 % 0.00 % 0.01 %

Effect of IT termination fee 0.00 % 0.00 % 0.01 %

Effect of IT termination fees 0.01 % 0.00 % 0.00 %

Effect of nonrecurring consulting fee 0.00 % 0.00 % 0.02 %

Effect of write-down of software 0.00 % 0.00 % 0.00 %

Effect of subordinated debt redemption cost 0.00 % 0.00 % 0.02 %

Effect of discretionary inflation bonus 0.00 % 0.00 % 0.01 %

Effect of accelerated equity compensation 0.00 % 0.00 % 0.01 %

Effect of anniversary expenses 0.00 % 0.00 % 0.00 %

Effect of gain on prepayment of FHLB advances (0.03 %) 0.00 % 0.00 %

Effect of gain on termination of interest rate swaps (0.04 %) 0.00 % 0.00 %

Adjusted return on average assets 0.40 % 0.33 % 0.90 %

(dollars in thousands, except share and per share data) At or For The Twelve Months Ended December 31,

2023 2022 2021

Return on average shareholders' equity 6.70 % 2.35 % 9.53 %

1 unchanged sentence

Effect of mortgage-related costs 0.00 % 0.67 % 0.00 %

Effect of gain on sale of premises and equipment 0.00 % 0.00 % (0.56 %)

Effect of partial charge-off of C&I participation loan 0.00 % 1.53 % 0.00 %

Effect of acquisition-related expenses 0.00 % 0.00 % 0.06 %

Effect of IT termination fee 0.00 % 0.00 % 0.10 %

Effect of IT termination fees 0.09 % 0.00 % 0.00 %

Effect of nonrecurring consulting fee 0.00 % 0.00 % 0.19 %

Effect of write-down of software 0.00 % 0.00 % 0.03 %

Effect of subordinated debt redemption cost 0.00 % 0.00 % 0.18 %

Effect of discretionary inflation bonus 0.00 % 0.00 % 0.11 %

Effect of accelerated equity compensation 0.00 % 0.00 % 0.06 %

Effect of anniversary expenses 0.03 % 0.00 % 0.00 %

Effect of gain on prepayment of FHLB advances (0.38 %) 0.00 % 0.00 %

Effect of gain on termination of interest rate swaps (0.61 %) 0.00 % 0.00 %

Adjusted return on average shareholders' equity 5.83 % 4.54 % 9.98 %

3 unchanged sentences

Effect of partial charge-off of C&I participation loan 0.00 % 1.55 % 0.00 %

Effect of gain on sale of premises and equipment 0.00 % 0.00 % (0.56 %)

Effect of acquisition-related expenses 0.00 % 0.00 % 0.06 %

Effect of IT termination fee 0.00 % 0.00 % 0.10 %

Effect of IT termination fees 0.10 % 0.00 % 0.00 %

Effect of nonrecurring consulting fee 0.00 % 0.00 % 0.19 %

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Effect of accelerated equity compensation 0.00 % 0.00 % 0.06 %

Effect of anniversary expenses 0.03 % 0.00 % 0.00 %

Effect of gain on prepayment of FHLB advances (0.39 %) 0.00 % 0.00 %

Effect of gain on termination of interest rate swaps (0.62 %) 0.00 % 0.00 %

Adjusted return on average tangible common equity 5.90 % 4.60 % 10.10 %

Critical Accounting Policies and Estimates

Adoption of new accounting standards

ASU 2016 - 13

On January 1, 2023, the Company adopted ASU 2016-03 Financial Instruments - Credit losses (“ASC 326”):

Measurement of Credit Losses on Financial Instruments, as amended, which replaces the incurred loss methodology with an expected credit loss (“CECL”) methodology.

The CECL estimate is applicable to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities.

It also applies to off-balance sheet credit exposures, including loan commitments, standby letters of credit, financial guarantees and other similar instruments.

Additionally, ASC 326 resulted in changes to the accounting for available-for-sale and held-to-maturity debt securities.

The Company adopted ASC 326 for all financial assets measured at amortized cost, available-for-sale securities and off-balance sheet credit exposures.

Results for reporting periods beginning after January 1, 2023 are presented under ASC 326, while prior period amounts continue to be reported in accordance with previously applicable U.S.

The Company recorded a net decrease to retained earnings of $4.5 million as of January 1, 2023 for the cumulative effect of adopting ASC 326.

The net adjustment to allowance for credit losses (“ACL”) includes $2.3 million related to loans, $1.9 million related to off-balance sheet credit exposures and $0.3 million related to held-to-maturity debt securities.

Management considers the policies related to the ACL- loans to be critical to the financial statement presentation.

The total allowance for credit losses on loans includes activity related to allowances calculated in accordance with Accounting Standards Codification (“ASC”) 326, Financial Instruments - Credit Losses.

The ACL for loans represents management's estimate of all expected credit losses over the expected life of the Company’s existing loan portfolio.

1 unchanged sentence

When the Company is unable to forecast future economic events, management may revert to historical information.

Accrued interest receivable on loans totaled $20.9 million as of December 31, 2023 and is excluded from the estimate of credit losses.

Accrued interest receivable on loans is excluded from the estimate of credit losses.

The Company made the accounting policy election to not measure an ACL for accrued interest receivable.

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For each segment, a loss driver analysis was performed in order to identify loss drivers and create a regression model for use in forecasting cash flows.

In creating the DCF model, the Company has established a one-year reasonable and supportable forecast period with a one-year straight line reversion to the long-term historical average.

Due to its minimal loss history, the Company elected to use peer data for a more reasonable calculation.

In creating the DCF model, the Company has established a one-year reasonable and supportable forecast period with a one-year straight line reversion to the long-term historical average for most segments.

Due to its limited loss history, the Company elected to use peer data for a more reasonable calculation.

Key inputs into the DCF model include loan-level detail, including the amortized cost basis of individual loans, payment structure, loss history, and forecasted loss drivers.

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The Company utilizes the model-driven PD and a LGD derived from a method referred to as Frye Jacobs.

The Frye Jacobs method is a mathematical formula that traces the relationship between LGD and PD over time and

projects the LGD based on the level of PD forecasted.

The Frye Jacobs method is a mathematical formula that traces the relationship between LGD and PD over time and projects the LGD based on the level of PD forecasted.

In all cases, the Frye Jacobs method is utilized to calculate LGDs during the forecast period, reversion period and long-term historical average.

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Funding rates are based on a historical analysis of the Company’s portfolio, while estimates of credit losses are determined using the same loss rates as funded loans.

Modified Loans to Borrowers Experiencing Financial Difficulty

Concurrent with the adoption of ASU 2016-03, the Company adopted ASU 2022-02 “Financial Instruments-Credit Losses (ASC 326):

Troubled Debt restructurings and Vintage Disclosures,” as amended.

The update eliminated the accounting guidance for troubled debt restructurings (“TDRs”) by creditors, while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty.

ACL - Available-For-Sale (“AFS”) Debt Securities

For AFS debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or it is more likely than not that it will be required to sell, the security before recovery of its amortized cost basis.

If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income.

For AFS debt securities that do not meet the aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors, such as interest rates or market conditions.

In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency and adverse conditions specifically related to the security, among other factors.

If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security.

If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded.

Changes in the ACL are recorded as a provision for, or recovery of, credit loss expense.

Losses are charged against the allowance when management believes that uncollectibility of an AFS debt security is confirmed or when either of the criteria regarding intent or requirement to sell is met.

Accrued interest receivable on AFS debt securities totaled $2.9 million at December 31, 2023 and is excluded from the estimate of credit losses.

The Company made the policy election to exclude accrued interest from the amortized cost basis of AFS debt securities and report accrued interest separately on the condensed consolidated balance sheet.

ACL - Held-To-Maturity (“HTM”) Debt Securities

Management measures expected credit losses on HTM debt securities on a collective basis by major security type.

Accrued interest receivable on HTM debt securities totaled $1.2 million at December 31, 2023 and is excluded from the estimate of credit losses.

The Company made the accounting policy election to not measure an ACL for accrued interest.

Accrued interest deemed uncollectible will be written off through interest income.

The HTM securities portfolio includes municipal securities, residential mortgage-backed-securities, commercial mortgage-backed securities and corporate securities.

All residential and commercial mortgage-backed securities are U.S.

government issued or sponsored and substantially all municipal and corporate securities are rated investment grade or above.

The estimate of expected credit losses considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts.

At the time of adoption, the estimated reserve was $0.3 million.

Impairment of Goodwill.

As a result of a previous acquisition by the Company, goodwill, an intangible asset with an indefinite life, is reflected on the balance sheet.

Goodwill is evaluated for impairment annually, unless there are factors present that indicate a potential impairment, in which case, the goodwill impairment test is performed more frequently.

Deferred Income Tax Assets/Liabilities.

Our net deferred income tax asset arises from differences in the dates that items of income and expense enter into our reported income and taxable income.

Deferred tax assets and liabilities are established for these items as they arise.

From an accounting standpoint, deferred tax assets are reviewed to determine if they are realizable based on the historical level of taxable income, estimates of future taxable income and the reversals of deferred tax liabilities.

In most cases, the realization of the deferred tax asset is based on future profitability.

If we were to experience net operating losses for tax purposes in a future period, the realization of deferred tax assets would be evaluated for a potential valuation reserve.

Allowance for Loan Losses

Management believes the allowance for loan losses is a critical accounting policy that requires the most significant judgments and assumptions used in the preparation of our consolidated financial statements.

An estimate of potential losses inherent in the loan portfolio is determined and an allowance for those losses is established by considering factors including historical loss rates, expected cash flows, estimated collateral values, and other qualitative factors.

The allowance for loan losses represents management’s best estimate of losses inherent in the existing loan portfolio.

The allowance for loan losses is increased by the provision for loan losses charged to expense and reduced by loans charged off, net of recoveries.

Management evaluates the allowance for loan losses quarterly.

If the underlying assumptions later prove to be inaccurate based on subsequent loss evaluations, the allowance for loan losses is adjusted.

Management estimates the appropriate level of allowance for loan losses by separately evaluating impaired and non-impaired loans.

A specific allowance is assigned to an impaired loan when expected cash flows or collateral do not justify the carrying amount of the loan.

The methodology used to assign an allowance to a non-impaired loan is more subjective.

Generally, the allowance assigned to non-impaired loans is determined by applying historical loss rates to existing loans with similar risk characteristics, adjusted for qualitative factors including changes in economic and business conditions, unemployment rates, concentrations of credit, changes in the nature and volume of the portfolio, terms of loans, risk grades, trends in charge-offs and recoveries, trends in delinquencies, nonaccrual loans, and impaired loans, and changes in lending policies and procedures.

Because the economic and business climate in any given industry or market, and its impact on any given borrower, can change rapidly, the risk profile of the loan portfolio is periodically assessed and adjusted when appropriate.

Notwithstanding these procedures, there still exists the possibility that the assessment could prove to be significantly incorrect and that an immediate adjustment to the allowance for loan losses would be required.

Recent Accounting Pronouncements

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Cash flow hedges were used to convert certain variable rate liabilities into fixed rate liabilities.

At December 31, 2023 and December 31, 2022, we had interest rate swaps with a notional amount of $200.0 million and $260.0 million, respectively.

Additionally, prior to the Company’s decision to exit its consumer mortgage business in the first quarter 2023, we entered into forward contracts related to our mortgage banking business to hedge the exposures we had from commitments to extend new residential mortgage loans to our customers and from our mortgage loans held-for-sale.

At December 31, 2023, the Company did not have any commitments to sell residential real estate loans.

At December 31, 2022, the Company had commitments to sell residential real estate loans of $17.0 million.

At December 31, 2024, we had no interest rate swaps that were classified as either fair value or cash flow hedges.

At December 31, 2023, we had interest rate swaps with a notional amount of $200.0 million.

Refer to Note 18 to our consolidated financial statements for additional information about derivative financial instruments.

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What changed 10-K

Item 7. Management’s Discussion and Analysis