Item 7. Management’s Discussion and Analysis
Item 7. 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 consolidated financial statements and related notes appearing elsewhere in this report.
The following discussion, analysis and comparisons generally focus on the operating results for the years ended December 31, 2024 and 2023. Discussion, analysis and comparisons of the years ended December 31, 2023 and 2022 that are not included in this Annual Report on Form 10-K can be found in “Management's Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2023. This discussion and analysis includes certain forward-looking statements that involve risks, uncertainties and assumptions. You should review the “Risk Factors” section of this report 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 the “Cautionary Note Regarding Forward-Looking Statements” at the beginning of this report.
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 $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. 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 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. 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.
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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.
Consolidated Average Balance Sheets and Net Interest Income Analyses
For the periods presented, the following table provides the average balances of interest-earning assets and interest-bearing liabilities and the related yields and cost of funds. The table does not reflect any effect of income taxes. Balances are based on the average of daily balances. Nonaccrual loans are included in average loan balances.
Twelve Months Ended
December 31, 2024 December 31, 2023 December 31, 2022
(dollars in thousands) Average Balance Interest/Dividends Yield/Cost Average Balance Interest/Dividends Yield/Cost Average Balance Interest/Dividends Yield/Cost
Assets
Interest-earning assets
Loans, including loans held-for-sale $ 3,997,397 $ 233,844 5.85 % $ 3,685,729 $ 192,337 5.22 % $ 3,142,166 $ 140,600 4.47 %
Securities - taxable 692,806 26,742 3.86 % 551,479 17,189 3.12 % 537,921 10,711 1.99 %
Securities - non-taxable 77,987 3,775 4.84 % 72,571 3,532 4.87 % 75,382 1,767 2.34 %
Other earning assets 516,836 27,526 5.33 % 500,061 26,384 5.28 % 278,073 3,830 1.38 %
Total interest-earning assets 5,285,026 291,887 5.52 % 4,809,840 239,442 4.98 % 4,033,542 156,908 3.89 %
Allowance for credit losses (42,758) (36,038) (29,143)
Noninterest-earning assets 220,462 194,712 166,127
Total assets $ 5,462,730 $ 4,968,514 $ 4,170,526
Liabilities
Interest-bearing liabilities
Interest-bearing demand deposits $ 494,082 $ 10,448 2.11 % $ 366,082 $ 6,186 1.69 % $ 333,737 $ 2,056 0.62 %
Savings accounts 22,336 189 0.85 % 29,200 249 0.85 % 58,156 336 0.58 %
Money market accounts 1,230,443 51,036 4.15 % 1,276,602 49,890 3.91 % 1,423,185 18,513 1.30 %
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 %
Total interest-bearing deposits 4,318,926 183,150 4.24 % 3,744,964 143,363 3.83 % 3,022,794 41,832 1.38 %
Other borrowed funds 629,137 21,360 3.40 % 719,617 21,175 2.94 % 638,526 17,983 2.82 %
Total interest-bearing liabilities 4,948,063 204,510 4.13 % 4,464,581 164,538 3.69 % 3,661,320 59,815 1.63 %
Noninterest-bearing deposits 114,396 125,816 120,325
Other noninterest-bearing liabilities 23,056 20,317 16,037
Total liabilities 5,085,515 4,610,714 3,797,682
Shareholders' equity 377,215 357,800 372,844
Total liabilities and shareholders' equity $ 5,462,730 $ 4,968,514 $ 4,170,526
Net interest income $ 87,377 $ 74,904 $ 97,093
Interest rate spread 1
1.39 % 1.29 % 2.26 %
Net interest margin 2
1.65 % 1.56 % 2.41 %
Net interest margin - FTE 3
1.74 % 1.67 % 2.54 %
1 Yield on total interest-earning assets minus cost of total interest-bearing liabilities
2 Net interest income divided by average interest-earning assets
3 On a fully-taxable equivalent (“FTE”) basis assuming a 21% tax rate. 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
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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.
Rate/Volume Analysis of Net Interest Income
Twelve Months Ended December 31, 2024 vs. December 31, 2023 Due to Changes in Twelve Months Ended December 31, 2023 vs. December 31, 2022 Due to Changes in
(amounts in thousands) Volume Rate Net Volume Rate Net
Interest income
Loans, including loans held-for-sale $ 17,100 $ 24,407 $ 41,507 $ 26,264 $ 25,473 $ 51,737
Securities – taxable 4,961 4,592 9,553 275 6,203 6,478
Securities – non-taxable 265 (22) 243 (69) 1,834 1,765
Other earning assets 891 251 1,142 4,967 17,587 22,554
Total 23,217 29,228 52,445 31,437 51,097 82,534
Interest expense
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
Total 20,034 19,938 39,972 22,875 81,848 104,723
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, 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. 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 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 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 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.
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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 1.74% 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
The following table presents noninterest income for the three most recent years.
Twelve Months Ended December 31,
(amounts in thousands) 2024 2023 2022
Service charges and fees $ 959 $ 851 $ 1,071
Loan servicing revenue 6,188 3,833 2,573
Loan servicing asset revaluation (2,537) (1,463) (1,639)
Mortgage banking activities — 76 5,464
Gain on sale of loans 33,329 20,526 11,372
Other 9,406 2,302 2,416
Total noninterest income $ 47,345 $ 26,125 $ 21,257
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 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
The following table presents noninterest expense for the three most recent years.
Twelve Months Ended December 31,
(amounts in thousands) 2024 2023 2022
Salaries and employee benefits $ 51,756 $ 45,322 $ 41,553
Marketing, advertising and promotion 2,589 2,567 3,554
Consulting and professional services 3,744 3,082 4,826
Data processing 2,448 2,373 1,989
Loan expenses 5,947 5,756 4,435
Premises and equipment 11,902 10,599 10,688
Deposit insurance premium 5,000 3,880 1,152
Other 6,724 5,857 5,076
Total noninterest expense $ 90,110 $ 79,436 $ 73,273
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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.
Income Taxes
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,
(amounts in thousands) 2024 2023 2022
Statutory rate times pre-tax income $ 5,784 $ 1,037 $ 8,421
(Subtract) add the tax effect of:
Income from tax-exempt securities and loans (3,500) (3,951) (4,190)
State income taxes, net of federal tax effect 47 (30) 592
Bank-owned life insurance (262) (215) (201)
Tax credits (110) (168) (143)
Other differences 307 (150) 80
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. In 2024 and 2023, the variance from the federal statutory rate was due primarily to tax-exempt income. 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.
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Financial Condition
The following table presents summary balance sheet data as of the end of the last two years.
(amounts in thousands) December 31,
Balance Sheet Data: 2024 2023
Total assets $ 5,737,859 $ 5,167,572
Loans 4,170,646 3,840,220
Total securities 837,151 702,008
Loans held-for-sale 54,695 22,052
Noninterest-bearing deposits 136,451 123,464
Interest-bearing deposits 4,796,755 3,943,509
Total deposits 4,933,206 4,066,973
Advances from Federal Home Loan Bank 295,000 614,934
Total shareholders' equity 384,063 362,795
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 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. or 8.6%. 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.
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 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.
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Loan Portfolio Analysis
The following table provides information regarding our loan portfolio as of the end of the last two years.
December 31,
(dollars in thousands) 2024 2023
Commercial loans
Commercial and industrial $ 120,175 2.9 % $ 129,349 3.4 %
Owner-occupied commercial real estate 53,591 1.3 % 57,286 1.5 %
Investor commercial real estate 269,431 6.5 % 132,077 3.4 %
Construction 413,523 9.9 % 261,750 6.8 %
Single tenant lease financing 949,748 22.7 % 936,616 24.4 %
Public finance 485,867 11.6 % 521,764 13.6 %
Healthcare finance 181,427 4.4 % 222,793 5.8 %
Small business lending 1
331,914 8.0 % 218,506 5.7 %
Franchise finance 536,909 12.9 % 525,783 13.7 %
Total commercial loans 3,342,585 80.2 % 3,005,924 78.3 %
Consumer loans
Residential mortgage 375,160 9.0 % 395,648 10.3 %
Home equity 18,274 0.4 % 23,669 0.6 %
Other consumer 407,947 9.8 % 377,614 9.8 %
Total consumer loans 801,381 19.2 % 796,931 20.7 %
Total commercial and consumer loans 4,143,966 99.4 % 3,802,855 99.0 %
Net deferred loan origination costs, premiums and discounts on purchased loans and other 2
26,680 0.6 % 37,365 1.0 %
Total loans 4,170,646 100.0 % 3,840,220 100.0 %
Allowance for credit losses - loans (44,769) (38,774)
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 $3.3 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, 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.
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Loan Maturities and Rate Sensitivity
The following table shows the contractual maturity distribution intervals (without regard to repayment or repricing schedules) of the outstanding loans in our portfolio as of December 31, 2024.
(amounts in thousands) Within 1 Year 1-5 Years 5-15 Years Beyond 15 Years Total
Commercial loans
Commercial and industrial $ 16,422 $ 68,168 $ 35,585 $ — $ 120,175
Owner-occupied commercial real estate 2,585 20,476 30,530 — 53,591
Investor commercial real estate 67,146 201,311 974 — 269,431
Construction 96,853 303,263 13,407 — 413,523
Single tenant lease financing 65,793 485,080 398,875 — 949,748
Public finance 32,545 86,213 367,109 — 485,867
Healthcare finance 800 45,382 135,245 — 181,427
Small business lending 88 2,864 267,775 61,187 331,914
Franchise finance — 146,922 389,987 — 536,909
Total commercial loans 282,232 1,359,679 1,639,487 61,187 3,342,585
Consumer loans
Residential mortgage 460 564 14,309 359,827 375,160
Home equity 825 360 4,377 12,712 18,274
Other consumer 530 21,361 326,117 59,939 407,947
Total consumer loans 1,815 22,285 344,803 432,478 801,381
Total commercial and consumer loans $ 284,047 $ 1,381,964 $ 1,984,290 $ 493,665 $ 4,143,966
The following table shows the rate sensitivity of the outstanding loans in our portfolio by the contractual maturity distribution intervals as of December 31, 2024.
(amounts in thousands) Within 1 Year 1-5 Years 5-15 Years Beyond 15 Years Total
Fixed rate $ 101,779 $ 851,035 $ 1,668,362 $ 375,656 $ 2,996,832
Variable rate 182,268 530,929 315,928 118,009 1,147,134
Total commercial and consumer loans $ 284,047 $ 1,381,964 $ 1,984,290 $ 493,665 $ 4,143,966
Loan Approval Procedures and Authority
Our lending activities follow written, non-discriminatory policies with loan approval limits approved by the Board of Directors of the Bank. Loan officers have underwriting and approval authorization of varying amounts based on their lending experience and product type. Additionally, based on the amount of the loan, multiple approvals may be required. Based on the Bank’s legal lending limit, the maximum it could lend to any one borrower at December 31, 2024 was $78.1 million.
Our goal is to have a well-diversified and balanced loan portfolio. In order to manage our loan portfolio risk, we establish concentration limits by borrower, product type, industry and geography. To supplement our internal loan review resources, we have engaged independent third-party loan review groups, which are a key component of our overall risk management process related to credit administration.
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Asset Quality
December 31,
(dollars in thousands) 2024 2023
Nonaccrual loans
Commercial loans:
Small business lending $ 11,429 $ 6,824
Franchise finance 10,382 303
Total commercial loans 21,811 7,127
Consumer loans:
Residential mortgage 4,083 1,911
Other consumer 61 86
Total consumer loans 4,144 1,997
Total nonaccrual loans 25,955 9,124
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
Total past due 90 days and accruing loans 2,466 838
Total nonperforming loans 28,421 9,962
Other real estate owned
Residential mortgage 272 375
Total other real estate owned 272 375
Other nonperforming assets 212 17
Total nonperforming assets $ 28,905 $ 10,354
Total nonperforming loans to total loans 0.68 % 0.26 %
Total nonperforming assets to total assets 0.50 % 0.20 %
Allowance for credit losses - loans to total loans 1.07 % 1.01 %
Nonaccrual loans to total loans 0.68 % 0.24 %
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. Payments with delays generally not exceeding 90 days outstanding are not individually evaluated. Certain nonaccrual and substantially all delinquent loans more than 90 days past due may be individually evaluated. Generally, loans are placed on nonaccrual status at 90 days past due and accrued interest is reversed against earnings, unless the loan is well secured and in the process of collection. The accrual of interest on individually evaluated loans is discontinued when, in management’s opinion, the borrower may be unable to meet payments as they become due.
Individually evaluated loans include nonperforming loans and also include loans where concessions have been granted to borrowers experiencing financial difficulties. These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance, or other actions intended to maximize collection.
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Nonperforming loans are comprised of total nonaccrual loans and loans 90 days past due and accruing. Nonperforming assets include nonperforming loans, other real estate owned (“OREO”) and other nonperforming assets, which consist of repossessed assets. Nonperforming assets could also include individual securities for which a credit loss has been recognized; however, we did not own any securities classified as such during the two-year period ended December 31, 2024.
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.
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Allowance for Credit Losses - Loans
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.
December 31,
(dollars in thousands) 2024 2023
Balance, beginning of period $ 38,774 $ 31,737
Adoption of ASU 2016-13 (CECL) — 2,962
Balance, beginning of period 38,774 34,699
Provision charged to expense 18,815 15,454
Losses charged off
Commercial and industrial — (7,049)
Investor commercial real estate — (591)
Single tenant lease financing (195) —
Healthcare finance — (605)
Small business lending (10,441) (2,586)
Franchise finance (1,466) (331)
Residential mortgage (159) (140)
Other consumer (1,009) (582)
Total losses charged off (13,270) (11,884)
Recoveries
Commercial and industrial 8 243
Small business lending 325 77
Residential mortgage 1 5
Home equity 7 6
Other consumer 109 174
Total recoveries 450 505
Balance, end of period $ 44,769 $ 38,774
Net charge-offs $ 12,820 $ 11,379
Net (recoveries) charge-offs to average loans (annualized)
Commercial and industrial (0.01 %) 6.87 %
Investor commercial real estate — % 0.47 %
Single tenant lease financing 0.02 % — %
Healthcare finance — % 0.25 %
Small business lending 3.39 % 1.34 %
Franchise Finance 0.27 % 0.08 %
Total commercial net charge-offs 0.37 % 0.38 %
Residential mortgage 0.04 % 0.03 %
Home equity (0.03 %) (0.02 %)
Other consumer 0.28 % 0.21 %
Total consumer net charge-offs 0.13 % 0.07 %
Net charge-offs to average loans 0.32 % 0.31 %
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.
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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. The ACL as a percentage of nonperforming loans decreased to 157.5% as of December 31, 2024, compared to 389.2% as of December 31, 2023.
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, 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 credit 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. Securities that we intend to hold until maturity are classified as “held-to-maturity” securities, and all other investment securities are classified as “available-for-sale.” The carrying values of available-for-sale investment securities are adjusted for unrealized gains or losses as a valuation allowance and any gain or loss is reported on an after-tax basis as a component of other comprehensive income (loss).
We periodically evaluate each security in an unrealized loss position to determine if there is an impairment. As of December 31, 2024, the unrealized losses in our investment securities portfolio were due primarily to interest rate changes. We have the ability and intent to hold all investment securities in an unrealized loss position resulting from interest rate changes to the earlier of the forecasted recovery or the maturity of the underlying investment security. As of December 31, 2024, we did not have any investment securities of a single issuer that exceeded 10% of shareholders’ equity. The term “issuer” excludes the U.S. Government and its sponsored agencies and corporations.
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The following tables present the amortized cost and approximate fair value of our investment securities portfolio by security type as of the end of the last two years.
(amounts in thousands) December 31,
Amortized Cost 2024 2023
Securities available-for-sale
U.S. Government-sponsored agencies $ 83,811 $ 96,404
Municipal securities 67,441 69,494
Agency mortgage-backed securities - residential 300,914 237,798
Agency mortgage-backed securities - commercial 64,214 40,215
Private label mortgage-backed securities - residential 46,623 21,742
Asset-backed securities 23,802 8,071
Corporate securities 40,049 39,591
Total securities available-for-sale 626,854 513,315
Securities held-to-maturity
Municipal securities 12,843 13,889
Agency mortgage-backed securities - residential 201,840 166,750
Agency mortgage-backed securities - commercial 5,705 5,767
Corporate securities 29,408 40,747
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
Securities available-for-sale
U.S. Government-sponsored agencies $ 82,816 $ 95,177
Municipal securities 63,654 68,446
Agency mortgage-backed securities - residential 269,641 206,649
Agency mortgage-backed securities - commercial 63,331 38,885
Private label mortgage-backed securities - residential 45,821 20,779
Asset-backed securities 23,821 8,081
Corporate securities 38,271 36,838
Total securities available-for-sale 587,355 474,855
Securities held-to-maturity
Municipal securities 11,925 13,040
Agency mortgage-backed securities - residential 184,412 152,642
Agency mortgage-backed securities - commercial 4,548 4,521
Corporate securities 27,966 37,369
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 $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.
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Investment Maturities
The following table summarizes the contractual maturity schedule (without regard to repricing schedules) of our investment securities at their amortized cost and their weighted average yields at December 31, 2024.
1 year or less More than 1 year
to 5 years More than 5 years
to 10 years More than 10 years Total
(dollars in thousands) Amortized
Cost Wtd.
Avg.
Yield 1
Amortized
Cost Wtd.
Avg.
Yield 1
Amortized
Cost Wtd.
Avg.
Yield 1
Amortized
Cost Wtd.
Avg.
Yield 1
Amortized
Cost Wtd.
Avg.
Yield 1
Securities:
U.S. Government-sponsored agencies
$ — 0.00 % $ 6,419 5.48 % $ 25,500 5.32 % $ 51,892 5.35 % $ 83,811 5.35 %
Municipal securities 2,533 2.61 % 11,731 2.94 % 27,319 2.72 % 38,701 2.88 % 80,284 2.83 %
Agency mortgage-backed securities - residential — — % 1,023 2.26 % 4,775 1.74 % 496,956 3.32 % 502,754 3.31 %
Agency mortgage-backed securities - commercial — — % 19,973 4.55 % 23,220 5.48 % 26,726 3.64 % 69,919 4.51 %
Private-label mortgage-backed securities - residential — — % — — % — — % 46,623 5.43 % 46,623 5.43 %
Asset-backed securities
— — % — — % — — % 23,802 6.00 % 23,802 5.62 %
Corporate securities 10,000 4.12 % 30,586 6.97 % 28,871 4.71 % — — % 69,457 6.00 %
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 $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.
Deposits
The following table presents the composition of our deposit base as of the end of the last two years.
December 31,
(dollars in thousands) 2024 2023
Noninterest-bearing deposits $ 136,451 2.8 % $ 123,464 3.0 %
Interest-bearing demand deposits 896,661 18.2 % 402,976 9.9 %
Savings accounts 19,823 0.4 % 21,364 0.5 %
Money market accounts 1,183,789 24.0 % 1,248,319 30.8 %
Fintech - brokered deposits 1
— — % 74,401 1.8 %
Certificates of deposits 2,133,455 43.2 % 1,605,156 39.5 %
Brokered deposits 563,027 11.4 % 591,293 14.5 %
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 $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 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.
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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 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.
Time Deposit Maturities at December 31, 2024
Period to Maturity Percentage of Total Certificate Accounts
(dollars in thousands) Less than 1
year > 1 year
to 2 years > 2 years
to 3 years More than
3 years Total
Interest Rate:
<1.00% $ 85,650 $ 35,835 $ 34,823 $ — $ 156,308 6.6 %
1.00% – 1.99% 5,381 9,978 241 — 15,600 0.7 %
2.00% – 2.99% 7,343 254 640 — 8,237 0.3 %
3.00% – 3.99% 7,171 4,018 41,032 245 52,466 2.2 %
4.00% – 4.99% 275,227 66,961 83,963 270,637 696,788 29.3 %
5.00% – 5.99% 1,099,924 119,404 71,198 158,759 1,449,285 60.9 %
Total $ 1,480,696 $ 236,450 $ 231,897 $ 429,641 $ 2,378,684 100.0 %
Time Deposit Maturities Greater than $250,000
(amounts in thousands) December 31, 2024
Maturity Period:
3 months or less $ 126,949
Over 3 through 6 months 128,102
Over 6 through 12 months 237,450
Over 12 months 284,287
Total $ 776,788
Federal Home Loan Bank Advances
Although deposits are the primary source of funds for our lending and investment activities and for general business purposes, we may use short-term advances from the Federal Home Loan Bank of Indianapolis (the “FHLB”) to manage liquidity needs and longer-term advances to supplement deposit growth and manage interest rate risk. The following table is a summary of FHLB borrowings for the periods indicated.
At or For The Twelve Months Ended December 31,
(dollars in thousands) 2024 2023
Balance outstanding at end of period $ 295,000 $ 614,934
Average amount outstanding during period 524,143 614,931
Maximum outstanding at any month end during period 614,935 614,934
Weighted average interest rate at end of period 1
3.39 % 3.04 %
Weighted average interest rate during period 1
2.93 % 3.00 %
1 Excludes the impact of interest rate swaps. Refer to Note 18 to our consolidated financial statements for additional information about derivative financial instruments.
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Accrued Expenses and Other Liabilities
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
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 December 31, 2024, on a consolidated basis, the Company had $1.1 billion in cash and cash equivalents and investment securities available-for-sale, and $54.7 million in loans held-for-sale that were generally available for our cash needs. The Company can also generate funds from wholesale funding sources and collateralized borrowings. At December 31, 2024, the Bank had the ability to borrow an additional $1.7 billion from the FHLB, the Federal Reserve and correspondent bank Fed Funds lines of credit.
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 December 31, 2024, the Company, on an unconsolidated basis, had $13.0 million in cash generally available for its cash needs, which is in excess of its current annual regular shareholder dividend 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 December 31, 2024, approved outstanding loan commitments, including unused lines of credit and standby letters of credit, amounted to $667.7 million. 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.
The following table presents the Company’s significant contractual obligations as of December 31, 2024.
Payments Due In
(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
8 $ 2,554,521 $ — $ — $ — $ 2,554,521
Certificates of deposits and brokered deposits 1
8 1,480,659 468,384 429,642 — 2,378,685
FHLB advances 1
9 50,000 60,000 35,000 150,000 295,000
Subordinated debt 1
10 — — 107,000 — 107,000
Total contractual obligations $ 4,085,180 $ 528,384 $ 571,642 $ 150,000 $ 5,335,206
1 Amounts do not include associated interest payments.
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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. In October 2022, the Company’s Board of Directors increased the authorization to $35.0 million. The Company repurchased a total of 855,956 shares at an average price of $36.31 per share under the program through December 19, 2022.
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 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.
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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 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 tables for the last three completed fiscal years ended on December 31.
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(dollars in thousands, except share and per share data) At or For The Twelve Months Ended December 31,
2024 2023 2022
Total equity - GAAP $ 384,063 $ 362,795 $ 364,974
Adjustments:
Goodwill (4,687) (4,687) (4,687)
Tangible common equity $ 379,376 $ 358,108 $ 360,287
Total assets - GAAP $ 5,737,859 $ 5,167,572 $ 4,543,104
Adjustments:
Goodwill (4,687) (4,687) (4,687)
Tangible assets $ 5,733,172 $ 5,162,885 $ 4,538,417
Total common shares outstanding 8,667,894 8,644,451 9,065,883
Book value per common share $ 44.31 $ 41.97 $ 40.26
Effect of goodwill (0.54) (0.54) (0.52)
Tangible book value per common share $ 43.77 $ 41.43 $ 39.74
Total shareholders’ equity to assets 6.69 % 7.02 % 8.03 %
Effect of goodwill (0.07 %) (0.08 %) (0.09 %)
Tangible common equity to tangible assets 6.62 % 6.94 % 7.94 %
Total average equity - GAAP $ 377,215 $ 357,800 $ 372,844
Adjustments:
Average goodwill (4,687) (4,687) (4,687)
Average tangible common equity $ 372,528 $ 353,113 $ 368,157
Return on average shareholders' equity 6.70 % 2.35 % 9.53 %
Effect of goodwill 0.08 % 0.03 % 0.12 %
Return on average tangible common equity 6.78 % 2.38 % 9.65 %
Total interest income $ 291,887 $ 239,442 $ 156,908
Adjustments:
Fully-taxable equivalent adjustments 1
4,650 5,233 5,355
Total interest income - FTE $ 296,537 $ 244,675 $ 162,263
Net interest income $ 87,377 $ 74,904 $ 97,093
Adjustments:
Fully-taxable equivalent adjustments 1
4,650 5,233 5,355
Net interest income - FTE $ 92,027 $ 80,137 $ 102,448
Net interest margin 1.65 % 1.56 % 2.41 %
Effect of fully-taxable equivalent adjustments 1
0.09 % 0.11 % 0.13 %
Net interest margin - FTE 1.74 % 1.67 % 2.54 %
1 Assuming a 21% tax rate
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(dollars in thousands, except share and per share data) At or For The Twelve Months Ended December 31,
2024 2023 2022
Total Revenue - GAAP $ 134,722 $ 101,029 $ 118,350
Adjustments:
Mortgage-related revenue — (65) —
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
Noninterest income - GAAP $ 47,345 $ 26,125 $ 21,257
Adjustments:
Mortgage-related revenue — (65) —
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
Noninterest expense - GAAP $ 90,110 $ 79,436 $ 73,273
Adjustments:
Mortgage-related costs — (3,052) —
Acquisition-related expenses — — (273)
IT termination fees (452) — —
Nonrecurring consulting fee — — (875)
Write-down of Software — — (125)
Discretionary inflation bonus — — (531)
Accelerated equity compensation — — (289)
Anniversary expenses (120) — —
Adjusted noninterest expense $ 89,538 $ 76,384 $ 71,180
Income before income taxes - GAAP $ 27,542 $ 4,940 $ 40,100
Adjustments: 1
Mortgage-related revenue — (65) —
Mortgage-related costs — 3,052 —
Partial charge-off of C&I participation loan — 6,914 —
Acquisition-related expenses — — 273
IT termination fees 452 — —
Nonrecurring consulting fee — — 875
Write-down of software — — 125
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
1 Assuming a 21% tax rate
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(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
Adjustments: 1
Mortgage-related revenue — (14) —
Mortgage-related costs — 641 —
Partial charge-off of C&I participation loan — 1,452 —
Acquisition-related expenses — — 57
IT termination fees 95 —
Nonrecurring consulting fee — — 184
Write-down of software — — 26
Discretionary inflation bonus — — 112
Accelerated equity compensation — — 61
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
Adjustments:
Mortgage-related revenue — (51) —
Mortgage-related costs — 2,411 —
Partial charge-off of C&I participation loan — 5,462 —
IT termination fees 357 — —
Acquisition-related expenses — — 216
Nonrecurring consulting fee — — 691
Write-down of software — — 99
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
Diluted average common shares outstanding 8,765,725 8,858,890 9,595,115
Diluted earnings per share - GAAP $ 2.88 $ 0.95 $ 3.70
Adjustments:
Mortgage-related revenue — (0.01) —
Mortgage-related costs — 0.27 —
Effect of partial charge-off of C&I participation loan — 0.62 —
Effect of acquisition-related expenses — — 0.02
Effect of IT termination fees 0.04 — —
Effect of nonrecurring consulting fee — — 0.07
Effect of write-down of software — — 0.01
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
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(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 %
Effect of mortgage-related revenue 0.00 % 0.00 % 0.00 %
Effect of mortgage-related costs 0.00 % 0.05 % 0.00 %
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 fees 0.01 % 0.00 % 0.00 %
Effect of nonrecurring consulting fee 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 %
Return on average shareholders' equity 6.70 % 2.35 % 9.53 %
Effect of mortgage-related revenue 0.00 % (0.01 %) 0.00 %
Effect of mortgage-related costs 0.00 % 0.67 % 0.00 %
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 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 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 %
Return on average tangible common equity 6.78 % 2.38 % 9.65 %
Effect of mortgage-related revenue 0.00 % (0.01 %) 0.00 %
Effect of mortgage-related costs 0.00 % 0.68 % 0.00 %
Effect of partial charge-off of C&I participation loan 0.00 % 1.55 % 0.00 %
Effect of acquisition-related expenses 0.00 % 0.00 % 0.06 %
Effect of IT termination fees 0.10 % 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 % 0.00 %
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 (0.39 %) 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 %
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Critical Accounting Policies and Estimates
ACL - Loans
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. Management estimates the ACL balance using relevant available information about the collectability of cash flows, from internal and external sources, including historical information relating to past events, current conditions, and reasonable and supportable forecasts of future economic conditions. When the Company is unable to forecast future economic events, management may revert to historical information.
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. Accrued interest deemed uncollectible will be written off through interest income.
ACL - Loans - Collectively Evaluated
The ACL is measured on a collective pool basis when similar risk characteristics exist.
The Company utilized a discounted cash flow (“DCF”) method to estimate the quantitative portion of the allowance for credit losses for loans evaluated on a collective pooled basis. 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 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. The Company utilizes a third party to provide economic forecasts under various scenarios, which are assessed quarterly considering the scenarios in the context of the current economic environment and loss risk.
Expected credit losses are estimated over the contractual term of the loans and adjusted for prepayments when appropriate. The contractual term excludes extensions, renewals, and modifications unless the extension or renewal options are included in the original or modified contract at the reporting date and are not unconditionally cancellable by the Company.
Additional key assumptions in the DCF model include the probability of default (“PD”), loss given default (“LGD”), and prepayment/curtailment rates. 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. In all cases, the Frye Jacobs method is utilized to calculate LGDs during the forecast period, reversion period and long-term historical average. Prepayment and curtailment rates were calculated through third party analysis of the Company’s own data.
Qualitative factors for the DCF and weighted-average remaining maturity methodologies include the following:
• Changes in lending policies and procedures, including changes in underwriting standards and collections, charge-offs and recovery practices
• Changes in international, national, regional and local conditions
• Changes in the nature and volume of the portfolio and terms of loans
• Changes in the experience, depth and ability of lending management
• Changes in the volume and severity of past due loans and other similar conditions
• Changes in the quality of the organization’s loan review system
• Changes in the value of underlying collateral for collateral dependent loans
• The existence and effect of any concentrations of credit and changes in the levels of such concentrations
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• The effect of other external factors (i.e. competition, legal and regulatory requirements) on the level of estimated credit losses
ACL - Loans - Individually Evaluated
Loans that do not share risk characteristics are evaluated on an individual basis and are excluded from the collective evaluation. The Company has determined that any loans which have been placed on nonaccrual status will be individually evaluated. Individual analysis will establish a specific reserve for loans, if necessary. Specific reserves on nonaccrual loans are typically based on management’s best estimate of the fair value of collateral securing these loans, adjusted for selling costs as necessary.
ACL - Off-Balance Sheet Credit Exposures
The Company estimates expected credit losses over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. The allowance on off-balance sheet credit exposure is recorded as a liability and adjusted as a provision for credit loss expense. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life. 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.
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
Refer to Note 23 to our consolidated financial statements.
Off-Balance Sheet Arrangements
In the ordinary course of business, we may enter into financial transactions to extend credit, engage in interest rate swaps or other forms of commitments that may be considered off-balance sheet arrangements. Interest rate swaps were arranged to receive hedge accounting treatment and were classified as either fair value or cash flow hedges. Fair value hedges were purchased to convert certain fixed rate assets to floating rate. Cash flow hedges were used to convert certain variable rate liabilities into fixed rate liabilities. 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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