First Internet Bancorp 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes appearing elsewhere in this report. This discussion and analysis includes certain forward-looking statements that involve risks, uncertainties, and assumptions. You should review the “Risk Factors” sections of this report and our Annual Report on Form 10-K for the year ended December 31, 2024 for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by such forward-looking statements. See also “Cautionary Note Regarding Forward-Looking Statements” at the beginning of this report. 40 Overview First Internet Bancorp is a bank holding company headquartered in Fishers, Indiana that conducts its primary business activities through its wholly-owned subsidiary, First Internet Bank of Indiana (the “Bank”), an Indiana chartered bank. The Bank was the first state-chartered, Federal Deposit Insurance Corporation (“FDIC”) insured Internet bank and commenced banking operations in 1999. First Internet Bancorp was incorporated under the laws of the State of Indiana on September 15, 2005. On March 21, 2006, we consummated a plan of exchange by which we acquired all of the outstanding shares of the Bank. The Bank has three wholly-owned subsidiaries: First Internet Public Finance Corp., an Indiana corporation that provides a range of public and municipal finance lending and leasing products to governmental entities throughout the United States and acquires securities issued by state and local governments and other municipalities; JKH Realty Services, LLC, a Delaware limited liability company that manages other real estate owned properties as needed; and SPF15, Inc., an Indiana corporation that owns real estate used primarily for the Bank’s principal office. We offer a wide range of commercial, small business, consumer and municipal banking products and services. We conduct our consumer and small business deposit operations primarily through digital channels on a nationwide basis and have no traditional branch offices. Our consumer lending products are primarily originated on a nationwide basis through relationships with dealerships and financing partners. Our commercial banking products and services are delivered through a relationship banking model or through strategic partnerships and include commercial and industrial (“C&I”), construction and investor commercial real estate, single tenant lease financing, public finance, healthcare finance, small business lending, franchise finance and commercial deposits and treasury management. Our C&I team provides credit solutions such as lines of credit, term loans, owner-occupied commercial real estate loans and corporate credit cards on a regional basis to commercial borrowers primarily in the Midwest and Southwest regions of the United States. We offer construction and investor commercial real estate loans, as well as single tenant lease financing, on a nationwide basis. Our public finance team provides a range of public and municipal lending and leasing products to government entities on a nationwide basis. Our healthcare finance team was established in conjunction with our strategic partnership with Provide, Inc. (formerly known as Lendeavor, Inc.), a San Francisco-based technology-enabled lender to healthcare practices, which provided lending on a nationwide basis for healthcare practice finance or acquisition, acquisition or refinancing of owner-occupied commercial real estate and equipment purchases. In the third quarter 2021, Provide was acquired by a super-regional financial institution. Subsequent to Provide being acquired, the acquiring institution has retained most, if not all, of Provide’s loan origination activity and our healthcare finance loan balances have declined. Our franchise finance business was established in July 2021 in conjunction with our business relationship with ApplePie Capital, a company that specializes in providing financing to franchisees in various industry segments across the United States. Our commercial deposits and treasury management team works with the other commercial teams to provide deposit products and treasury management services to our commercial and municipal lending customers as well as pursues commercial deposit opportunities in business segments where we have no credit relationships. We believe that we differentiate ourselves from larger financial institutions by providing a full suite of services to emerging small businesses and entrepreneurs on a nationwide basis. We are one of the fastest-growing lenders in the Small Business Administration (“SBA”) 7(a) program, closing $113.8 million in SBA 7(a) loans during the three months ended March 31, 2025, and currently rank as the 8th largest SBA 7(a) lender for the SBA’s year-to-date 2025 fiscal year. We also offer a top-ranked small business checking account product to our country’s entrepreneurs. We also offer payment, deposit, card and lending products and services through partnerships with financial technology companies and platforms (“fintechs”). With the rapid evolution of technology that enables small businesses to manage their finances digitally, fintechs are addressing a significantly growing marketplace. Fintechs have created robust digital offerings, unburdened by legacy technology architecture, to address growing customer expectations. Through partnerships with selected fintechs, we believe our ability to win and retain small business relationships will be significantly enhanced. Furthermore, we believe partnering with select fintechs will allow us to further diversify our revenue sources, acquire deposits and pursue additional asset generation capabilities. As of March 31, 2025, the Company had consolidated assets of $5.9 billion, consolidated deposits of $4.9 billion and stockholders’ equity of $387.7 million. 41 Results of Operations During the first quarter 2025, net income was $0.9 million, or $0.11 diluted earnings per share, compared to net income of $5.2 million, or $0.59 diluted earnings per share, during the first quarter 2024, representing a decrease in net income of $4.2 million, or 81.8%, and a decrease in diluted earnings per share of $0.48, or 81.4%. The $4.2 million decrease in net income for the first quarter 2025 compared to the first quarter 2024 was due primarily to increases of $9.5 million, or 387.5%, in the provision for credit losses and $2.5 million, or 12.0%, in noninterest expense, partially offset by increases of $4.4 million, or 21.0%, in net interest income and $2.1 million, or 24.9%, in noninterest income as well as a $1.3 million income tax benefit. During the first quarter 2025, return on average assets (“ROAA”), return on average shareholders’ equity (“ROAE”), and return on average tangible common equity (“ROATCE”) were 0.07%, 0.98%, and 0.99%, respectively, compared to 0.40%, 5.64%, and 5.71%, respectively, for the first quarter 2024. Pre-tax, pre-provision income (“PTPP”) was $12.0 million, an increase of 48.5%, from PTPP of $8.1 million for the first quarter 2024. The $3.9 million increase was due to increases of $8.7 million, or 12.7%, in interest income and $2.1 million, or 24.9%, in noninterest income, partially offset by increases of $4.3 million, or 9.1%, in interest expense and $2.5 million, or 12.0%, in noninterest expense. Refer to the “Reconciliation of Non-GAAP Financial Measures” section of Part I, Item 2 of this report, Management’s Discussion and Analysis of Financial Condition and Results of Operations for additional information. 42 Consolidated Average Balance Sheets and Net Interest Income Analyses For the periods presented, the following tables provide the average balances of interest-earning assets and interest-bearing liabilities and the related yields and cost of funds. The tables do not reflect any effect of income taxes except for net interest margin - FTE, as discussed below. Balances are based on the average of daily balances. Nonaccrual loans are included in average loan balances. Three Months Ended March 31, 2025 December 31, 2024 March 31, 2024 (dollars in thousands) Average Balance Interest /Dividends Yield /Cost Average Balance Interest /Dividends Yield /Cost Average Balance Interest /Dividends Yield /Cost Assets Interest-earning assets Loans, including loans held-for-sale $ 4,242,933 $ 62,662 5.99 % $ 4,129,118 $ 61,523 5.93 % $ 3,892,589 $ 55,435 5.73 % Securities - taxable 820,175 8,463 4.18 % 758,560 7,619 4.00 % 627,216 5,694 3.65 % Securities - non-taxable 81,743 661 3.28 % 83,140 794 3.80 % 76,293 969 5.11 % Other earning assets 445,280 5,043 4.59 % 636,377 7,835 4.90 % 434,118 6,067 5.62 % Total interest-earning assets 5,590,131 76,829 5.57 % 5,607,195 77,771 5.52 % 5,030,216 68,165 5.45 % Allowance for credit losses - loans (45,664) (46,427) (38,611) Noninterest-earning assets 225,913 221,348 216,331 Total assets $ 5,770,380 $ 5,782,116 $ 5,207,936 Liabilities Interest-bearing liabilities Interest-bearing demand deposits $ 956,322 $ 6,974 2.96 % $ 574,577 $ 2,910 2.01 % $ 415,106 $ 2,091 2.03 % Savings accounts 20,568 43 0.85 % 21,072 45 0.85 % 22,521 48 0.86 % Money market accounts 1,221,795 11,361 3.77 % 1,236,116 12,309 3.96 % 1,217,966 12,671 4.18 % Fintech - brokered deposits — — — % 208,545 2,111 4.03 % 85,366 931 4.39 % Certificates and brokered deposits 2,617,293 29,248 4.53 % 2,686,139 31,736 4.70 % 2,246,050 26,388 4.73 % Total interest-bearing deposits 4,815,978 47,626 4.01 % 4,726,449 49,111 4.13 % 3,987,009 42,129 4.25 % Other borrowed funds 401,300 4,107 4.15 % 528,806 5,109 3.84 % 716,735 5,302 2.98 % Total interest-bearing liabilities 5,217,278 51,733 4.02 % 5,255,255 54,220 4.10 % 4,703,744 47,431 4.06 % Noninterest-bearing deposits 135,878 114,311 113,341 Other noninterest-bearing liabilities 25,189 23,115 21,480 Total liabilities 5,378,345 5,392,681 4,838,565 Shareholders’ equity 392,035 389,435 369,371 Total liabilities and shareholders’ equity $ 5,770,380 $ 5,782,116 $ 5,207,936 Net interest income $ 25,096 $ 23,551 $ 20,734 Interest rate spread 1 1.55% 1.42% 1.39 % Net interest margin 2 1.82% 1.67% 1.66 % Net interest margin - FTE 3 1.91% 1.75% 1.75 % 1 Yield on total interest-earning assets minus cost of total interest-bearing liabilities. 2 Net interest income divided by total average interest-earning assets (annualized). 3 On an FTE basis assuming a 21% tax rate. Net interest income is adjusted to reflect income from assets such as municipal loans and securities that are exempt from Federal income taxes. This is to recognize the income tax savings that facilitates a comparison between taxable and tax-exempt assets. The Company believes that it is a standard practice in the banking industry to present net interest margin and net interest income on a fully-taxable equivalent basis, as these measures provide useful information to make peer comparisons. Net interest margin - FTE represents a non-GAAP financial measure. See “Reconciliation of Non-GAAP Financial Measures” for a reconciliation of this measure to its most directly comparable GAAP measure. 43 Rate/Volume Analysis The following table illustrates the impact of changes in the volume of interest-earning assets and interest-bearing liabilities and interest rates on net interest income for the periods indicated. The change in interest not due solely to volume or rate has been allocated in proportion to the absolute dollar amounts of the change in each. Three Months Ended March 31, 2025 vs. December 31, 2024 Due to Changes in Three Months Ended March 31, 2025 vs. March 31, 2024 Due to Changes in (amounts in thousands) Volume Rate Net Volume Rate Net Interest income Loans, including loans held-for-sale $ 833 $ 306 $ 1,139 $ 4,805 $ 2,422 $ 7,227 Securities – taxable 543 301 844 1,881 888 2,769 Securities – non-taxable (15) (118) (133) 413 (721) (308) Other earning assets (2,306) (486) (2,792) 974 (1,998) (1,024) Total (945) 3 (942) 8,073 591 8,664 Interest expense Interest-bearing deposits 3,891 (5,376) (1,485) 19,373 (13,876) 5,497 Other borrowed funds (3,207) 2,205 (1,002) (9,496) 8,301 (1,195) Total 684 (3,171) (2,487) 9,877 (5,575) 4,302 (Decrease) increase in net interest income $ (1,629) $ 3,174 $ 1,545 $ (1,804) $ 6,166 $ 4,362 Net interest income for the first quarter 2025 was $25.1 million, an increase of $4.4 million, or 21.0%, compared to $20.7 million for the first quarter 2024. The increase in net interest income was the result of an $8.7 million, or 12.7%, increase in total interest income to $76.8 million for the first quarter 2025 from $68.2 million for the first quarter 2024, partially offset by a $4.3 million, or 9.1%, increase in total interest expense to $51.7 million for the first quarter 2025 from $47.4 million for the first quarter 2024. The increase in total interest income for the first quarter 2025 compared to first quarter 2024 was due primarily to an increase in interest earned on loans, resulting from an increase of 26 bps in the yield earned on loans, including loans held-for-sale, as well as an increase of $350.3 million, or 9.0%, in the average balance of loans, including loans held-for-sale. Additionally, the average balance of securities increased $198.4 million, or 28.2%, and the yield earned on the securities portfolio increased 29 bps for the first quarter 2025 compared to the first quarter 2024. The yield on funded portfolio loan originations was 7.78% for the first quarter 2025, a decrease of 107 bps compared to the first quarter 2024, reflective of 100 bps of Fed rate cuts in the second half of 2024. However, new origination yields remained well above the overall loan portfolio yield, helping to drive both total interest income and the loan portfolio yield higher. The increase in total interest expense for the first quarter 2025 compared to the first quarter 2024 was due primarily to increases of $4.9 million, or 233.5%, in interest expense associated with interest-bearing demand deposits and $2.9 million, or 10.8%, in interest expense associated with certificates and brokered deposits, partially offset by decreases of $1.3 million, or 10.3%, in interest expense associated with money market accounts and $1.2 million, or 22.5%, in interest expense associated with other borrowed funds. When combined with deposits formerly classified as fintech – brokered deposits, the increase in interest expense related to interest-bearing demand deposits was driven by an increase in the average balance of $173.2 million, or 22.1%, compared to the the fourth quarter of 2024 due to continued growth in fintech deposits, while the cost of fund increased 41 bps due to the change in deposit mix. The increase in interest expense related to certificates and brokered deposits was driven by an increase in the average deposit balance of $371.2 million, or 16.5%, partially offset by a decrease of 20 bps in the cost of these deposits. The increase in the average balance of these deposits was driven by strong consumer and small business demand for certificates of deposits, partially offset by lower brokered deposit balances as the Company used on-balance sheet liquidity to pay down higher-cost brokered deposits, which is expected to positively impact deposit costs in future periods. The decrease in interest expense related to money market accounts was driven by a 41 bp decrease in cost of these deposits. The decrease in interest expense related to other borrowed funds was driven by a decrease in the average balance of $127.5 million, or 24.1%, partially offset by an increase of 31bps in the cost of funds. Overall, the cost of total interest-bearing liabilities for the first quarter 2025 decreased 4 bps to 4.02% from 4.06% for the first quarter 2024. 44 Net interest margin (“NIM”) was 1.82% for the first quarter 2025 compared to 1.66% for the first quarter 2024, an increase of 16 bps. On a fully-taxable equivalent (“FTE”) basis, NIM was 1.91% for the first quarter 2025 compared to 1.75% for the first quarter 2024, an increase of 16 bps. The increase in the first quarter 2025 NIM and FTE NIM compared to the first quarter 2024 reflects the combination of deploying cash balances into higher yielding loans and securities and continued improvement in the cost of funds related to deposits. Noninterest Income The following table shows noninterest income for each of the periods presented. Three Months Ended (amounts in thousands) March 31, 2025 December 31, 2024 March 31, 2024 Service charges and fees $ 265 $ 248 $ 220 Loan servicing revenue 1,983 1,825 1,323 Loan servicing asset revaluation (1,181) (428) (434) Mortgage banking activities — — — Gain on sale of loans 8,647 8,568 6,536 Other 713 5,723 702 Total noninterest income $ 10,427 $ 15,936 $ 8,347 During the first quarter 2025, noninterest income was $10.4 million, representing an increase of $2.1 million, or 24.9%, compared to $8.3 million for the first quarter 2024. The increase in noninterest income was due primarily to increases in gain on sale of loans, partially offset by a decrease in net loan servicing revenue. The increase of $2.1 million, or 32.3%, in gain on sale of loans was due primarily to an increase of 36.2% in the volume of U.S. Small Business Administration (“SBA”) 7(a) guaranteed loan sales, partially offset by a decrease of 36 bps in the net premium earned on loan sales. The decrease in net loan servicing was due to the fair value adjustment to the loan servicing asset, partially offset by growth in the balance of the Company’s SBA 7(a) servicing portfolio. Noninterest Expense The following table shows noninterest expense for each of the periods presented. Three Months Ended (amounts in thousands) March 31, 2025 December 31, 2024 March 31, 2024 Salaries and employee benefits $ 13,107 $ 14,042 $ 11,796 Marketing, advertising and promotion 647 696 736 Consulting and professional services 1,228 967 853 Data processing 635 603 564 Loan expenses 1,531 1,381 1,445 Premises and equipment 3,115 3,004 2,826 Deposit insurance premium 1,398 1,464 1,145 Other 1,895 1,800 1,658 Total noninterest expense $ 23,556 $ 23,957 $ 21,023 Noninterest expense for the first quarter 2025 was $23.6 million, compared to $21.0 million for the first quarter 2024. The increase of $2.5 million, or 12.0%, was due primarily to increases of $1.3 million in salaries and employee benefits, $0.4 million in consulting and professional fees, $0.3 million in premises and equipment, $0.3 million in deposit insurance premium, $0.2 million in other expenses. The increase in salaries and employee benefits was due primarily to higher small business lending incentive compensation, as well as staff additions in small business lending and risk management. The increase in consulting and professional fees is due primarily to increased legal and audit fees. The increase in premises and equipment was due primarily to property taxes, as well as software maintenance expense. The increase in deposit insurance premium was due to year-over-year asset growth and changes in the composition of the loan and deposit portfolios. The increase in other expenses is due primarily to increases in service fees. 45 The Company recorded an income tax benefit of $0.9 million for the first quarter 2025, compared to an income tax provision of $0.4 million and an effective tax rate of 7.6% for the first quarter 2024. Financial Condition The following table shows summary balance sheet data for each of the periods presented. (amounts in thousands) Balance Sheet Data: March 31, 2025 December 31, 2024 March 31, 2024 Total assets $ 5,851,608 $ 5,737,859 $ 5,340,667 Loans 4,254,412 4,170,646 3,909,804 Total securities 958,327 837,151 718,169 Loans held-for-sale 31,738 54,695 22,589 Noninterest-bearing deposits 151,815 136,451 130,760 Interest-bearing deposits 4,793,810 4,796,755 4,143,008 Total deposits 4,945,625 4,933,206 4,273,768 Advances from Federal Home Loan Bank 395,000 295,000 574,936 Total shareholders’ equity 387,747 384,063 366,739 Total assets increased $113.7 million, or 2.0%, to $5.9 billion at March 31, 2025 compared to $5.7 billion at December 31, 2024. The increase was due primarily to an increase in deposits driven by growth in fintech partnerships which was used in conjunction with on-balance sheet liquidity to fund loan growth, purchase securities and pay down higher cost CD maturities and brokered deposits. As of March 31, 2025, total shareholders’ equity was $387.7 million, an increase of $3.7 million, or 1.0%, compared to December 31, 2024. The increase in shareholders’ equity was due primarily to the net income earned during the quarter and a decrease in accumulated other comprehensive loss as unrealized losses on securities decreased during the quarter. Tangible common equity totaled $383.1 million as of March 31, 2025, representing an increase of $3.7 million, or 1.0%, compared to December 31, 2024. The ratio of total shareholders’ equity to total assets decreased to 6.63% as of March 31, 2025 from 6.69% as of December 31, 2024, and the ratio of tangible common equity to tangible assets decreased to 6.55% as of March 31, 2025 from 6.62% as of December 31, 2024. Book value per common share increased 0.6% to $44.58 as of March 31, 2025 from $44.31 as of December 31, 2024. Tangible book value per share increased 0.6% to $44.04 as of March 31, 2025 from $43.77 as of December 31, 2024. The increase in both book value per common share and tangible book value per share was driven primarily by the increases in total shareholders’ equity and tangible common equity. Refer to the “Reconciliation of Non-GAAP Financial Measures” section of Part I, Item 2 of this report, Management’s Discussion and Analysis of Financial Condition and Results of Operations for additional information. 46 Loan Portfolio Analysis The following table shows a summary of the Company’s loan portfolio for each of the periods presented. (dollars in thousands) March 31, 2025 December 31, 2024 March 31, 2024 Commercial loans Commercial and industrial $ 140,239 3.3 % $ 120,175 2.9 % $ 133,897 3.4 % Owner-occupied commercial real estate 49,954 1.2 % 53,591 1.3 % 57,787 1.5 % Investor commercial real estate 297,874 7.0 % 269,431 6.5 % 128,276 3.3 % Construction 471,082 11.1 % 413,523 9.9 % 325,597 8.3 % Single tenant lease financing 950,814 22.4 % 949,748 22.7 % 941,597 24.1 % Public finance 482,558 11.3 % 485,867 11.6 % 498,262 12.7 % Healthcare finance 171,430 4.0 % 181,427 4.4 % 213,332 5.5 % Small business lending 353,408 8.3 % 331,914 8.0 % 239,263 6.1 % Franchise finance 514,700 12.1 % 536,909 12.9 % 543,122 13.9 % Total commercial loans 3,432,059 80.7 % 3,342,585 80.2 % 3,081,133 78.8 % Consumer loans Residential mortgage 367,722 8.6 % 375,160 9.0 % 390,009 10.0 % Home equity 17,421 0.4 % 18,274 0.4 % 22,753 0.6 % Other consumer 412,553 9.7 % 407,947 9.8 % 380,675 9.7 % Total consumer loans 797,696 18.7 % 801,381 19.2 % 793,437 20.3 % Net deferred loan origination costs, premiums and discounts on purchased loans and other 1 24,657 0.6 % 26,680 0.6 % 35,234 0.9 % Total loans 4,254,412 100.0 % 4,170,646 100.0 % 3,909,804 100.0 % Allowance for credit losses - loans (47,238) (44,769) (40,891) Net loans $ 4,207,174 $ 4,125,877 $ 3,868,913 1 Includes carrying value adjustments of $22.1 million, $22.9 million and $26.9 million related to terminated interest rate swaps associated with public finance loans as of March 31, 2025, December 31, 2024 and March 31, 2024, respectively. Total loans were $4.3 billion as of March 31, 2025, an increase of $83.8 million, or 2.0%, compared to December 31, 2024. Total commercial loan balances were $3.4 billion as of March 31, 2025, up $89.5 million, or 2.7%, from December 31, 2024. Total consumer loan balances were $797.7 million as of March 31, 2025, a decrease of $3.7 million, or 0.5%, compared to December 31, 2024. Compared to December 31, 2024, in connection with the Company’s focus on variable rate and higher-yielding products, the increase in commercial loan balances was driven by growth in the construction, investor commercial real estate, small business lending, and commercial and industrial portfolios. These increases were partially offset by a decrease in the franchise finance portfolio and continued runoff in the healthcare finance portfolio, as well as decreases in the owner-occupied commercial real estate and public finance portfolios. The slight decrease in consumer loan balances was due primarily to a decrease in the residential mortgage portfolio, partially offset by origination activity in the other consumer loans portfolio. 47 Asset Quality Nonperforming loans are comprised of nonaccrual loans and loans 90 days past due and accruing. Nonperforming assets include nonperforming loans, other real estate owned and other nonperforming assets, which consist of repossessed assets. The following table provides a summary of the Company’s nonperforming assets for each of the periods presented. (dollars in thousands) March 31, 2025 December 31, 2024 March 31, 2024 Nonaccrual loans Commercial loans: Small business lending $ 12,658 $ 11,429 $ 9,532 Franchise finance 15,684 10,382 295 Total commercial loans 28,342 21,811 9,827 Consumer loans: Residential mortgage 4,702 4,083 2,309 Other consumer 164 61 129 Total consumer loans 4,866 4,144 2,438 Total nonaccrual loans 33,208 25,955 12,265 Past Due 90 days and accruing loans Commercial loans: Small business lending 845 1,320 — Franchise finance — — 230 Total commercial loans 845 1,320 230 Consumer loans: Residential mortgage 156 1,142 555 Other consumer 34 4 — Total consumer loans 190 1,146 555 Total past due 90 days and accruing loans 1,035 2,466 785 Total nonperforming loans 34,243 28,421 13,050 Other real estate owned Small business lending 1,518 — — Residential mortgage — 272 375 Total other real estate owned 1,518 272 375 Other nonperforming assets 160 212 — Total nonperforming assets $ 35,921 $ 28,905 $ 13,425 Total nonperforming loans to total loans 0.80 % 0.68 % 0.33 % Total nonperforming assets to total assets 0.61 % 0.50 % 0.25 % Allowance for credit losses - loans to total loans 1.11 % 1.07 % 1.05 % Nonaccrual loans to total loans 0.78 % 0.62 % 0.31 % Allowance for credit losses - loans to nonaccrual loans 142.2 % 172.5 % 333.4 % Allowance for credit losses - loans to nonperforming loans 138.0 % 157.5 % 313.3 % Total nonperforming loans increased $5.8 million, or 20.5%, to $34.2 million as of March 31, 2025 compared to $28.4 million as of December 31, 2024 due primarily to an increase in nonperforming loans in franchise finance and small business lending during the year. Total nonperforming assets increased $7.0 million, or 24.3%, to $35.9 million as of March 31, 2025, compared to $28.9 million as of December 31, 2024, due primarily to the increase in nonperforming loans in franchise finance and small business lending mentioned above, and an increase in OREO related to small business lending. As of March 31, 2025, the Company had two small business lending properties in OREO with a carrying value of $1.5 million. As of December 31, 2024, the Company had one residential mortgage property in OREO with a carrying value of $0.3 million. 48 Allowance for Credit Losses - Loans The following table provides a rollforward of the allowance for credit losses for each of the periods presented; however, allocation of a portion of the allowance to one segment does not preclude its availability to absorb losses in other segments. Three Months Ended (dollars in thousands) March 31, 2025 December 31, 2024 March 31, 2024 Balance, beginning of period $ 44,769 $ 45,721 $ 38,774 Provision charged to expense 12,121 8,455 2,582 Losses charged off Small business lending 3,668 8,270 289 Franchise finance 5,848 889 — Residential mortgage 11 73 69 Other consumer 314 249 175 Total losses charged off 9,841 9,481 533 Recoveries Commercial and industrial 2 1 2 Small business lending 133 51 40 Residential mortgage 6 — 1 Home equity 2 1 2 Other consumer 46 21 23 Total recoveries 189 74 68 Balance, end of period $ 47,238 $ 44,769 $ 40,891 Net charge-offs $ 9,652 $ 9,407 $ 465 Net charge-offs (recoveries) to average loans (annualized) Commercial and industrial (0.01 %) 0.00 % (0.01 %) Small business lending 3.79 % 2.38 % 0.40 % Franchise finance 4.49 % 0.16 % 0.00 % Total commercial net charge-offs 1.12 % 0.28 % 0.03 % Residential mortgage 0.01 % 0.08 % 0.07 % Home equity (0.05 %) (0.01 %) (0.03 %) Other consumer 0.36 % 0.26 % 0.21 % Total consumer net charge-offs 0.14 % 0.04 % 0.11 % Total net charge-offs to average loans 0.92 % 0.91 % 0.05 % The allowance for credit losses - loans (“ACL”) was $47.2 million as of March 31, 2025, compared to $44.8 million as of December 31, 2024. The increase in the ACL reflects the addition of specific reserves related to franchise finance and small business lending loans that were placed on nonaccrual during the quarter and growth in the overall loan portfolio, partially offset by the impact of economic metrics on qualitative factors in certain portfolios. The net increase to specific reserves totaled $3.3 million, of which, $2.5 million related to franchise finance and $0.8 million related to small business lending. The ACL as a percentage of total loans was 1.11% at March 31, 2025, compared to 1.07% at December 31, 2024. The ACL as a percentage of nonperforming loans decreased to 138.0% as of March 31, 2025, compared to 157.5% as of December 31, 2024 as the percentage increase in nonperforming loans outpaced the increase in the overall loan portfolio. Net charge-offs of $9.7 million were recognized during the first quarter 2025, resulting in net charge-offs to average loans of 0.92%, compared to net charge-offs of $0.5 million, or 0.05% of average loans, for the first quarter 2024. Net charge-offs in the first quarter of 2025 were elevated as the Company continued to take action to resolve problem loans in the small business lending and franchise finance portfolios. The increase in net charge-offs included $3.5 million in small business lending and $0.3 million in consumer loan portfolios. Approximately $5.8 million of net charge-offs recognized during the quarter were related to franchise finance loans with $2.6 million of existing specific reserves. The provision for credit losses - loans in the first quarter 2025 was $12.1 million, compared to $2.6 million for the first quarter 2024. The increase in the provision for credit losses - loans for the first quarter 2025 was driven primarily by the 49 elevated net charge-offs, the additional specific reserves discussed above and overall growth in the loan portfolio, partially offset by the impact of economic metrics on qualitative factors in certain portfolios. 50 Investment Securities Portfolio The following tables show the amortized cost and approximate fair value of our investment securities portfolio by security type for each of the periods presented. (amounts in thousands) Amortized Cost March 31, 2025 December 31, 2024 March 31, 2024 Securities available-for-sale U.S. Government-sponsored agencies $ 79,021 $ 83,811 $ 93,323 Municipal securities 65,344 67,441 69,289 Agency mortgage-backed securities - residential 398,021 300,914 253,181 Agency mortgage-backed securities - commercial 64,827 64,214 39,367 Private label mortgage-backed securities - residential 43,947 46,623 23,307 Asset-backed securities 21,662 23,802 7,417 Corporate securities 44,038 40,049 37,081 Total available-for-sale 716,860 626,854 522,965 Securities held-to-maturity, net carrying value Municipal securities 12,215 12,843 13,381 Agency mortgage-backed securities - residential 232,235 201,840 178,800 Agency mortgage-backed securities - commercial 5,687 5,705 5,752 Corporate securities 26,405 29,408 37,805 Total held-to-maturity, net carrying value 276,542 249,796 235,738 Total securities $ 993,402 $ 876,650 $ 758,703 (amounts in thousands) Approximate Fair Value March 31, 2025 December 31, 2024 March 31, 2024 Securities available-for-sale U.S. Government-sponsored agencies $ 78,278 $ 82,816 $ 92,101 Municipal securities 60,997 63,654 67,415 Agency mortgage-backed securities - residential 371,043 269,641 220,484 Agency mortgage-backed securities - commercial 63,934 63,331 38,081 Private label mortgage-backed securities - residential 43,319 45,821 22,266 Asset-backed securities 21,677 23,821 7,459 Corporate securities 42,537 38,271 34,625 Total available-for-sale 681,785 587,355 482,431 Securities held-to-maturity Municipal securities 11,401 11,925 12,450 Agency mortgage-backed securities - residential 217,714 184,412 161,915 Agency mortgage-backed securities - commercial 4,708 4,548 4,560 Corporate securities 25,293 27,966 35,295 Total held-to-maturity 259,116 228,851 214,220 Total securities $ 940,901 $ 816,206 $ 696,651 The approximate fair value of available-for-sale investment securities increased $94.4 million, or 16.1%, to $681.8 million as of March 31, 2025, compared to $587.4 million as of December 31, 2024. The increase was due primarily to increases of $101.4 million in agency mortgage-backed securities - residential and $4.3 million in corporate securities, partially offset by decreases of $4.5 million in U.S. Government-sponsored agencies, $2.7 million in municipal securities and $2.5 million in private label mortgage-backed securities - residential. The Company deployed liquidity during the first quarter of 2025 into new purchases of variable-rate agency mortgage-backed security-residential, which was within certain available-for-sale portfolios, partially offset by net pay down activity. As of March 31, 2025, the Company had securities with a net carrying value of $276.5 million designated as held-to-maturity, compared to $249.8 million as of December 31, 2024. The increase was due primarily to purchases of CRA-eligible agency mortgage-backed securities - residential. 51 Accrued Income and Other Assets Accrued income and other assets increased $3.8 million, or 6.0%, to $66.8 million at March 31, 2025, compared to $63.0 million at December 31, 2024. The increase was due primarily to increases of $4.1 million in equity fund investments, $0.8 million in prepaid assets and $0.1 million in both deferred tax assets and derivative assets, partially offset by a decrease in receivables related to a bond that was called in the fourth quarter 2024. Accrued Expenses and Other Liabilities Accrued expenses and other liabilities decreased $1.6 million, or 8.8%, to $16.4 million at March 31, 2025, compared to $17.9 million at December 31, 2024. The decrease was due primarily to decreases of $3.1 million in accrued salary and benefits, partially offset by $1.4 million in other various expenses and liabilities, none of which were individually significant. Deposits The following table shows the composition of the Company’s deposit base for each of the periods presented. (dollars in thousands) March 31, 2025 December 31, 2024 March 31, 2024 Noninterest-bearing deposits $ 151,815 3.1 % $ 136,451 2.8 % $ 130,760 3.1 % Interest-bearing demand deposits 1 1,103,540 22.3 % 896,661 18.2 % 423,529 9.9 % Savings accounts 21,632 0.4 % 19,823 0.4 % 23,554 0.6 % Money market accounts 1,292,235 26.2 % 1,183,789 24.0 % 1,251,230 29.2 % Fintech - brokered deposits 1 — — % — — % 107,911 2.5 % Certificates of deposits 2,029,801 41.0 % 2,133,455 43.2 % 1,738,996 40.7 % Brokered deposits 346,602 7.0 % 563,027 11.4 % 597,788 14.0 % Total deposits $ 4,945,625 100.0 % $ 4,933,206 100.0 % $ 4,273,768 100.0 % 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 $12.4 million, or 0.3%, to $4.9 billion as of March 31, 2025, compared to $4.9 billion as of December 31, 2024. The increase was due primarily to increases of $206.9 million, or 23.1%, in interest-bearing demand deposits, $108.4 million, or 9.2%, in money market accounts and $15.4 million, or 11.3%, in noninterest-bearing deposits, partially offset by decreases of $216.4 million, or 38.4%, in brokered deposits and $103.7 million, or 4.9%, in certificates of deposits. The increase in interest-bearing demand deposits was due primarily to growth in fintech partnership deposits. When combined with the liquidity provided by growth in money market accounts, the Company paid down a significant amount of higher-cost brokered deposits and maturing certificates of deposits. Uninsured deposit balances represented 27% of total deposits at March 31, 2025, up from 25% at December 31, 2024. 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 22% as of March 31, 2025, compared to 20% as of December 31, 2024. Regulatory Capital Requirements The Company and the Bank are subject to various regulatory capital requirements administered by state and federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weighting and other factors. The Basel III Capital Rules became effective for the Company and the Bank on January 1, 2015, subject to a phase-in period for certain provisions. Quantitative measures established by the Basel III Capital Rules to ensure capital adequacy require the maintenance of minimum amounts and ratios of Common Equity Tier 1 capital, Tier 1 capital and Total capital, as defined in the regulations, to risk-weighted assets, and of Tier 1 capital to adjusted quarterly average assets (“Leverage Ratio”). 52 The Basel III Capital Rules were fully phased in on January 1, 2019 and require the Company and the Bank to maintain: 1) a minimum ratio of Common Equity Tier 1 capital to risk-weighted assets of 4.5%, plus a 2.5% “capital conservation buffer” (resulting in a minimum ratio of Common Equity Tier 1 capital to risk-weighted assets of 7.0%); 2) a minimum ratio of Tier 1 capital to risk-weighted assets of 6.0%, plus the capital conservation buffer (resulting in a minimum Tier 1 capital ratio of 8.5%); 3) a minimum ratio of Total capital to risk-weighted assets of 8.0%, plus the capital conservation buffer (resulting in a minimum Total capital ratio of 10.5%); and 4) a minimum Leverage Ratio of 4.0%. The capital conservation buffer is designed to absorb losses during periods of economic stress. Failure to maintain the minimum Common Equity Tier 1 capital ratio plus the capital conservation buffer will result in potential restrictions on a banking institution’s ability to pay dividends, repurchase stock and/or pay discretionary compensation to its employees. The following tables present actual and required capital ratios as of March 31, 2025 and December 31, 2024 for the Company and the Bank under the Basel III Capital Rules. The minimum required capital amounts presented include the minimum required capital levels as of March 31, 2025 and December 31, 2024, which are based on the Basel III Capital Rules. Capital levels required to be considered well capitalized are based upon prompt corrective action regulations, as amended to reflect the changes under the Basel III Capital Rules. As permitted by the federal banking regulatory agencies, the Company elected the option to delay the impact of the day one adoption of ASC 326. The transition adjustments of $4.5 million will be phased into the regulatory capital calculations over a three-year period, with 25% of the adjustment recognized in 2023, 50% of the adjustment recognized in 2024, 75% of the adjustment recognized in 2025 and 100% of the adjustment recognized in 2026. Actual Minimum Capital Required - Basel III Minimum Required to be Considered Well Capitalized (dollars in thousands) Capital Amount Ratio Capital Amount Ratio Capital Amount Ratio As of March 31, 2025: Common equity tier 1 capital to risk-weighted assets Consolidated $ 397,687 9.15 % $ 304,165 7.00 % N/A N/A Bank 471,982 10.91 % 302,794 7.00 % $ 281,166 6.50 % Tier 1 capital to risk-weighted assets Consolidated 397,687 9.15 % 369,343 8.50 % N/A N/A Bank 471,982 10.91 % 367,679 8.50 % 346,051 8.00 % Total capital to risk-weighted assets Consolidated 543,869 12.52 % 456,247 10.50 % N/A N/A Bank 520,203 12.03 % 454,191 10.50 % 432,563 10.00 % Leverage ratio Consolidated 397,687 6.87 % 231,512 4.00 % N/A N/A Bank 471,982 8.18 % 230,713 4.00 % 288,391 5.00 % 53 Actual Minimum Capital Required - Basel III Minimum Required to be Considered Well Capitalized (dollars in thousands) Capital Amount Ratio Capital Amount Ratio Capital Amount Ratio As of December 31, 2024: Common equity tier 1 capital to risk-weighted assets Consolidated $ 400,100 9.30 % $ 301,052 7.00 % N/A N/A Bank 475,793 11.11 % 299,774 7.00 % $ 278,362 6.50 % Tier 1 capital to risk-weighted assets Consolidated 400,100 9.30 % 365,563 8.50 % N/A N/A Bank 475,793 11.11 % 364,012 8.50 % 342,599 8.00 % Total capital to risk-weighted assets Consolidated 542,808 12.62 % 451,578 10.50 % N/A N/A Bank 520,610 12.16 % 449,662 10.50 % 428,249 10.00 % Leverage ratio Consolidated 400,100 6.90 % 232,011 4.00 % N/A N/A Bank 475,793 8.23 % 231,331 4.00 % 289,164 5.00 % Shareholders’ Dividends The Company’s Board of Directors declared a cash dividend of $0.06 per share of common stock payable April 15, 2025 to shareholders of record as of March 31, 2025. The Company expects to continue to pay cash dividends on a quarterly basis; however, the declaration and amount of any future cash dividends will be subject to the sole discretion of the Board of Directors and will depend upon many factors, including the Company’s results of operations, financial condition, capital requirements, regulatory and contractual restrictions (including with respect to the Company’s outstanding subordinated debt), business strategy and other factors deemed relevant by the Board of Directors. As of March 31, 2025, the Company had $107.0 million principal amount of subordinated debt outstanding evidenced by the 2029 Notes, 2030 Note and 2031 Notes. The agreements that govern our outstanding subordinated debt prohibit the Company from paying any dividends on its common stock or making any other distributions to shareholders at any time when there shall have occurred, and be continuing to occur, an event of default under the applicable agreement. If an event of default were to occur and the Company did not cure it, the Company would be prohibited from paying any dividends or making any other distributions to shareholders or from redeeming or repurchasing any common stock. Capital Resources The Company believes it has sufficient liquidity and capital resources to meet its cash and capital expenditure requirements for the next twelve months and longer. The Company may explore strategic alternatives, including additional asset, deposit or revenue generation channels that complement our small business, commercial and consumer banking platforms, which may require additional capital. If the Company is unable to secure such capital at favorable terms, its ability to take advantage of such opportunities could be adversely affected. On December 19, 2022, the Company's Board of Directors approved a new stock repurchase program to replace the prior program. The new program authorized the repurchase of up to $25.0 million of our outstanding common stock from time to time on the open market or in privately negotiated transactions. The stock repurchase authorization expired on December 31, 2024. Under this program, the Company repurchased 559,522 shares of common stock at an average price of $19.06, for a total investment of $10.7 million. Various factors determine the amount and timing of our share repurchases, including our capital requirements, organic growth and other strategic opportunities, economic and market conditions (including the trading price of our stock), and regulatory and legal considerations. See Part II, Item 2, of this report for information regarding recent repurchase activity and our remaining authority under the program. 54 Liquidity Liquidity management is the process used by the Company to manage the continuing flow of funds necessary to meet its financial commitments on a timely basis and at a reasonable cost while also maintaining safe and sound operations. Liquidity, represented by cash and investment securities, is a product of the Company’s operating, investing and financing activities. The primary sources of funds are deposits, principal and interest payments on loans and investment securities, maturing loans and investment securities, access to wholesale funding sources and collateralized borrowings. While scheduled payments and maturities of loans and investment securities are relatively predictable sources of funds, deposit flows are greatly influenced by interest rates, general economic conditions and competition. Therefore, the Company supplements deposit growth and enhances interest rate risk management through borrowings and wholesale funding, which are generally advances from the Federal Home Loan Bank (“FHLB”) 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 March 31, 2025, on a consolidated basis, the Company had $1.1 billion in cash and cash equivalents and investment securities available-for-sale and $31.7 million in loans held-for-sale that were generally available for its cash needs. The Company can also generate funds from wholesale funding sources and collateralized borrowings. At March 31, 2025, 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, which when combined with cash balances, totaled $2.1 billion and represented 194% of adjusted uninsured deposit balances. The Company is a separate legal entity from the Bank and must provide for its own liquidity. In addition to its operating expenses, the Company is responsible for paying any dividends declared to its common shareholders and interest and principal on outstanding debt. The Company’s primary sources of funds are cash maintained at the holding company level and dividends from the Bank, the payment of which is subject to regulatory limits. At March 31, 2025, the Company, on an unconsolidated basis, had $12.7 million in cash for debt servicing and operating expenses. The Company uses its sources of funds primarily to meet ongoing financial commitments, including withdrawals by depositors, credit commitments to borrowers, operating expenses and capital expenditures. At March 31, 2025, approved outstanding loan commitments, including unused lines of credit and standby letters of credit, amounted to $626.2 million. Certificates of deposits and brokered deposits scheduled to mature in one year or less at March 31, 2025 totaled $1.4 billion. Management is not aware of any other events or regulatory requirements that, if implemented, are likely to have a material effect on either the Company’s or the Bank’s liquidity. 55 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, pre-tax, pre-provision income, adjusted pre-tax, pre-provision income, adjusted noninterest income, adjusted income before income taxes, adjusted income tax (benefit) 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. The Company also believes that it is a standard practice in the banking industry to present total interest income, net interest income and net interest margin on a fully-taxable equivalent basis, as those measures provide useful information for peer comparisons. Although the Company believes these non-GAAP financial measures provide a greater understanding of its business, they should not be considered a substitute for financial measures determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP financial measures that may be presented by other companies. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures are included in the following table for each of the periods presented. (dollars in thousands, except share and per share data) Three Months Ended March 31, 2025 December 31, 2024 March 31, 2024 Total equity - GAAP $ 387,747 $ 384,063 $ 366,739 Adjustments: Goodwill (4,687) (4,687) (4,687) Tangible common equity $ 383,060 $ 379,376 $ 362,052 Total assets - GAAP $ 5,851,608 $ 5,737,859 $ 5,340,667 Adjustments: Goodwill (4,687) (4,687) (4,687) Tangible assets $ 5,846,921 $ 5,733,172 $ 5,335,980 Common shares outstanding 8,697,085 8,667,894 8,655,854 Book value per common share $ 44.58 $ 44.31 $ 42.37 Effect of goodwill (0.54) (0.54) (0.54) Tangible book value per common share $ 44.04 $ 43.77 $ 41.83 Total shareholders’ equity to assets 6.63 % 6.69 % 6.87 % Effect of goodwill (0.08 %) (0.07 %) (0.08 %) Tangible common equity to tangible assets 6.55 % 6.62 % 6.79 % Total average equity - GAAP $ 392,035 $ 389,435 $ 369,371 Adjustments: Average goodwill (4,687) (4,687) (4,687) Average tangible common equity $ 387,348 $ 384,748 $ 364,684 Return on average shareholders’ equity 0.98 % 7.49 % 5.64 % Effect of goodwill 0.01 % 0.09 % 0.07 % Return on average tangible common equity 0.99 % 7.58 % 5.71 % 56 (dollars in thousands, except share and per share data) Three Months Ended March 31, 2025 December 31, 2024 March 31, 2024 Total interest income $ 76,829 $ 77,771 $ 68,165 Adjustments: Fully-taxable equivalent adjustments 1 1,169 1,152 1,190 Total interest income - FTE $ 77,998 $ 78,923 $ 69,355 Net interest income $ 25,096 $ 23,551 $ 20,734 Adjustments: Fully-taxable equivalent adjustments 1 1,169 1,152 1,190 Net interest income - FTE $ 26,265 $ 24,703 $ 21,924 Net interest margin 1.82 % 1.67 % 1.66 % Effect of fully-taxable equivalent adjustments 1 0.09 % 0.08 % 0.09 % Net interest margin - FTE 1.91 % 1.75 % 1.75 % 1 Assuming a 21% tax rate 57 (dollars in thousands, except share and per share data) Three Months Ended March 31, 2025 December 31, 2024 March 31, 2024 Total revenue- GAAP $ 35,523 $ 39,487 $ 29,081 Adjustments: Gain on prepayment of FHLB advances — (1,829) — Gain on termination of swaps — (2,904) — Adjusted total revenue $ 35,523 $ 34,754 $ 29,081 Net income-GAAP $ 943 $ 7,330 $ 5,181 Adjustments: 1 Provision for credit losses 11,933 7,201 2,448 Income tax (benefit) provision (909) 999 429 Pre-tax, pre-provision income $ 11,967 $ 15,530 $ 8,058 Pre-tax, pre-provision income $ 11,967 $ 15,530 $ 8,058 Adjustments: Gain on prepayment of FHLB advances — (1,829) — Gain on termination of swaps — (2,904) — Adjusted pre-tax, pre-provision income $ 11,967 $ 10,797 $ 8,058 Noninterest income - GAAP $ 10,427 $ 15,936 $ 8,347 Adjustments: Gain on prepayment of FHLB advances — (1,829) — Gain on termination of swaps — (2,904) — Adjusted noninterest income $ 10,427 $ 11,203 $ 8,347 Income before income taxes - GAAP $ 34 $ 8,329 $ 5,610 Adjustments: 1 Gain on prepayment of FHLB advances — (1,829) — Gain on termination of swaps — (2,904) — Adjusted income before income taxes $ 34 $ 3,596 $ 5,610 Income tax (benefit) provision - GAAP $ (909) $ 999 $ 429 Adjustments: 1 Gain on prepayment of FHLB advances — (384) — Gain on termination of swaps — (610) — Adjusted income tax (benefit) provision $ (909) $ 5 $ 429 Net income - GAAP $ 943 $ 7,330 $ 5,181 Adjustments: Gain on prepayment of FHLB advances — (1,445) — Gain on termination of swaps — (2,294) — Adjusted net income $ 943 $ 3,591 $ 5,181 1 Assuming a 21% tax rate 58 (dollars in thousands, except share and per share data) Three Months Ended March 31, 2025 December 31, 2024 March 31, 2024 Diluted average common shares outstanding 8,784,970 8,788,793 8,750,297 Diluted earnings per share - GAAP $ 0.11 $ 0.83 $ 0.59 Effect of gain on prepayment of FHLB advances — (0.16) — Effect of gain on termination of swaps — (0.26) — Adjusted diluted earnings per share $ 0.11 $ 0.41 $ 0.59 Return on average assets 0.07 % 0.50 % 0.40 % Effect of gain on prepayment of FHLB advances — (0.10 %) — Effect of gain on termination of swaps — (0.16 %) — Adjusted return on average assets 0.07 % 0.24 % 0.40 % Return on average shareholders' equity 0.98 % 7.49 % 5.64 % Effect of gain on prepayment of FHLB advances — (1.48 %) — Effect of gain on termination of swaps — (2.34 %) — Adjusted return on average shareholders' equity 0.98 % 3.67 % 5.64 % Return on average tangible common equity 0.99 % 7.58 % 5.71 % Effect of gain on prepayment of FHLB advances — (1.49 %) — Effect of gain on termination of swaps — (2.37 %) — Adjusted return on average tangible common equity 0.99 % 3.72 % 5.71 % Critical Accounting Policies and Estimates There have been no material changes in the Company’s critical accounting policies or estimates from those disclosed in its Annual Report on Form 10-K for the year ended December 31, 2024. Recent Accounting Pronouncements Refer to Note 15 to the condensed consolidated financial statements. Off-Balance Sheet Arrangements In the ordinary course of business, the Company enters into financial transactions to extend credit, interest rate swap agreements and forms of commitments that may be considered off-balance sheet arrangements. Interest rate swaps are arranged to receive hedge accounting treatment and are classified as either fair value or cash flow hedges. Fair value hedges are purchased to convert certain fixed rate assets to floating rate. Cash flow hedges are used to convert certain variable rate liabilities into fixed rate liabilities. In November 2024, the Company’s interest rate swap derivative designated as fair value hedges matured. In December 2024, the Company terminated interest rate swaps utilized as cash flow hedges against Federal Home Loan Bank advances. As a result, the Company had no interest rate swaps that were classified as either fair value or cash flow hedges either at March 31, 2025 or at December 31, 2024. Refer to Note 12 to the condensed consolidated financial statements for additional information about derivative financial instruments. 59