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. 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. 46 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 $282.8 million in SBA 7(a) loans during the six months ended June 30, 2025, and currently rank as the 7th 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 June 30, 2025, the Company had consolidated assets of $6.1 billion, consolidated deposits of $5.3 billion and stockholders’ equity of $390.2 million. 47 Results of Operations During the second quarter 2025, net income was $0.2 million, or $0.02 diluted earnings per share, compared to net income of $5.8 million, or $0.67 diluted earnings per share, during the second quarter 2024, representing a decrease in net income of $5.6 million, or 96.7%, and a decrease in diluted earnings per share of $0.65, or 97.0%. During the six months ended June 30, 2025, net income was $1.1 million, or $0.13 diluted earnings per share, compared to the six months ended June 30, 2024 net income of $11.0 million, or $1.25 per diluted share, resulting in a decrease in net income of $9.8 million, or 89.6%, and a decrease in diluted earnings per share of $1.12, or 89.6%. The $5.6 million decrease in net income for the second quarter 2025 compared to the second quarter 2024 was due primarily to an increase of $9.6 million, or 237.6%, in the provision for credit losses and a decrease of $5.5 million, or 49.6%, in noninterest income, partially offset by increases of $6.7 million, or 31.2%, in net interest income as well as a $2.3 million income tax benefit and a decrease of $0.5 million, or 2.4%, in noninterest expense. The $9.8 million decrease in net income for the six months ended June 30, 2025 compared to the six months ended June 30, 2024 was due primarily to increases of $19.1 million, or 294.2%, in the provision for credit loss and $2.0 million, or 4.6%, in noninterest expense and a decrease of $3.4 million, or 17.5%, in noninterest income, partially offset by an increase of $11.0 million, or 26.2%, in net interest income and a $3.6 million in income tax benefit. During the second quarter 2025, return on average assets (“ROAA”), return on average shareholders’ equity (“ROAE”), and return on average tangible common equity (“ROATCE”) were 0.01%, 0.20%, and 0.20%, respectively, compared to 0.44%, 6.28%, and 6.36%, respectively, for the second quarter 2024. During the six months ended June 30, 2025, ROAA, ROAE and ROATCE were 0.04%, 0.58%, and 0.59%, respectively, compared to 0.42%, 5.96%, and 6.04%, respectively, for the six months ended June 30, 2024. During the second quarter 2025, pre-tax, pre-provision income (“PTPP”) was $11.7 million, an increase of 17.2% from PTPP of $10.0 million for the second quarter 2024. The $1.7 million increase was due to an increase of $6.7 million, or 31.2%, in net interest income and a decrease of $0.5 million, or 2.4%, in noninterest expense, partially offset by a decrease of $5.5 million, or 49.6%, in noninterest income. During the six months ended June 30, 2025, PTPP income was $23.7 million, an increase of 31.1% from PTPP of $18.1 million for the six months ended June 30, 2024. The $5.6 million increase was due to an increase of $11.0 million, or 26.2%, in net interest income, partially offset by a decrease of $3.4 million, or 17.5%, in noninterest income and an increase of $2.0 million, or 4.6%, in noninterest expense. During the second quarter 2024, the Company recognized $0.5 million in IT termination fees and $0.1 million in anniversary expenses. Excluding these items, adjusted net income for the second quarter 2024 was $6.2 million and adjusted diluted earnings per share was $0.72. Additionally, for the second quarter 2024, adjusted ROAA, adjusted ROAE and adjusted ROATCE were 0.48%, 6.77% and 6.85%, respectively. During the six months ended June 30, 2024, the Company recognized $0.5 million in IT termination fees and $0.1 million in anniversary expenses. Excluding these items, adjusted net income for the six months ended June 30, 2024 was $11.4 million and adjusted diluted earnings per share was $1.30. Additionally, for the six months ended June 30, 2024, adjusted ROAA, adjusted ROAE and adjusted ROATCE were 0.43%, 6.20% and 6.29%, respectively. Refer to the “Reconciliation of Non-GAAP Financial Measures” section of Part I, Item 2 of this report, Management’s Discussion and Analysis of Financial Condition and Results of Operations for additional information. 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. 48 Three Months Ended June 30, 2025 June 30, 2024 (dollars in thousands) Average Balance Interest /Dividends Yield /Cost Average Balance Interest /Dividends Yield /Cost Assets Interest-earning assets Loans, including loans held-for-sale $ 4,407,196 $ 66,685 6.07 % $ 3,936,723 $ 57,094 5.83 % Securities - taxable 856,070 9,062 4.25 % 670,502 6,476 3.88 % Securities - non-taxable 78,924 654 3.32 % 74,035 970 5.27 % Other earning assets 396,829 4,485 4.53 % 469,045 6,421 5.51 % Total interest-earning assets 5,739,019 80,886 5.65 % 5,150,305 70,961 5.54 % Allowance for credit losses - loans (49,073) (41,362) Noninterest-earning assets 234,198 223,833 Total assets $ 5,924,144 $ 5,332,776 Liabilities Interest-bearing liabilities Interest-bearing demand deposits $ 1,226,439 $ 9,767 3.19 % $ 474,124 $ 2,567 2.18 % Savings accounts 21,760 46 0.85 % 22,987 48 0.84 % Money market accounts 1,187,782 11,087 3.74 % 1,243,011 13,075 4.23 % Fintech - brokered deposits — — — % 119,662 1,299 4.37 % Certificates and brokered deposits 2,356,958 25,894 4.41 % 2,313,192 27,506 4.78 % Total interest-bearing deposits 4,792,939 46,794 3.92 % 4,172,976 44,495 4.29 % Other borrowed funds 567,575 6,102 4.31 % 652,176 5,139 3.17 % Total interest-bearing liabilities 5,360,514 52,896 3.96 % 4,825,152 49,634 4.14 % Noninterest-bearing deposits 153,016 116,939 Other noninterest-bearing liabilities 18,744 20,860 Total liabilities 5,532,274 4,962,951 Shareholders’ equity 391,870 369,825 Total liabilities and shareholders’ equity $ 5,924,144 $ 5,332,776 Net interest income $ 27,990 $ 21,327 Interest rate spread 1 1.69% 1.40 % Net interest margin 2 1.96% 1.67 % Net interest margin - FTE 3 2.04% 1.76 % 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. 49 Six Months Ended June 30, 2025 June 30, 2024 (dollars in thousands) Average Balance Interest /Dividends Yield /Cost Average Balance Interest /Dividends Yield /Cost Assets Interest-earning assets Loans, including loans held-for-sale $ 4,325,518 $ 129,347 6.03 % $ 3,914,656 $ 112,529 5.78 % Securities - taxable 838,222 17,525 4.22 % 648,860 12,170 3.77 % Securities - non-taxable 80,325 1,315 3.30 % 75,163 1,939 5.19 % Other earning assets 420,921 9,528 4.56 % 451,582 12,488 5.56 % Total interest-earning assets 5,664,986 157,715 5.61 % 5,090,261 139,126 5.50 % Allowance for credit losses - loans (47,378) (39,986) Noninterest-earning assets 230,079 220,081 Total assets $ 5,847,687 $ 5,270,356 Liabilities Interest-bearing liabilities Interest-bearing demand deposits $ 1,092,127 $ 16,742 3.09 % $ 444,615 $ 4,658 2.11 % Savings accounts 21,167 88 0.84 % 22,754 96 0.85 % Money market accounts 1,204,695 22,449 3.76 % 1,230,488 25,746 4.21 % Fintech - brokered deposits — — — % 102,514 2,230 4.37 % Certificates and brokered deposits 2,486,407 55,141 4.47 % 2,279,621 53,894 4.75 % Total interest-bearing deposits 4,804,396 94,420 3.96 % 4,079,992 86,624 4.27 % Other borrowed funds 484,897 10,209 4.25 % 684,456 10,441 3.07 % Total interest-bearing liabilities 5,289,293 104,629 3.99 % 4,764,448 97,065 4.10 % Noninterest-bearing deposits 144,494 115,140 Other noninterest-bearing liabilities 21,948 21,170 Total liabilities 5,455,735 4,900,758 Shareholders’ equity 391,952 369,598 Total liabilities and shareholders’ equity $ 5,847,687 $ 5,270,356 Net interest income $ 53,086 $ 42,061 Interest rate spread 1 1.62% 1.40% Net interest margin 2 1.89% 1.67% Net interest margin - FTE 3 1.97% 1.76% 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. 50 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 June 30, 2025 vs. June 30, 2024 Due to Changes in Six Months Ended June 30, 2025 vs. June 30, 2024 Due to Changes in (amounts in thousands) Volume Rate Net Volume Rate Net Interest income Loans, including loans held-for-sale $ 7,134 $ 2,457 $ 9,591 $ 11,910 $ 4,908 $ 16,818 Securities – taxable 1,923 663 2,586 3,801 1,554 5,355 Securities – non-taxable 390 (706) (316) 352 (976) (624) Other earning assets (898) (1,038) (1,936) (811) (2,149) (2,960) Total 8,549 1,376 9,925 15,252 3,337 18,589 Interest expense Interest-bearing deposits 20,992 (18,693) 2,299 23,488 (15,692) 7,796 Other borrowed funds (3,687) 4,650 963 (7,068) 6,836 (232) Total 17,305 (14,043) 3,262 16,420 (8,856) 7,564 (Decrease) increase in net interest income $ (8,756) $ 15,419 $ 6,663 $ (1,168) $ 12,193 $ 11,025 Net interest income for the second quarter 2025 was $28.0 million, an increase of $6.7 million, or 31.2%, compared to $21.3 million for the second quarter 2024. The increase in net interest income was the result of a $9.9 million, or 14.0%, increase in total interest income to $80.9 million for the second quarter 2025 from $71.0 million for the second quarter 2024, partially offset by a $3.3 million, or 6.6%, increase in total interest expense to $52.9 million for the second quarter 2025 from $49.6 million for the second quarter 2024. Net interest income for the six months ended June 30, 2025 was $53.1 million, an increase of $11.0 million, or 26.2%, compared to $42.1 million for the six months ended June 30, 2024. The increase in net interest income was the result of an $18.6 million, or 13.4%, increase in total interest income to $157.7 million for the six months ended June 30, 2025 from $139.1 million for the six months ended June 30, 2024. The increase in total interest income was partially offset by a $7.6 million, or 7.8%, increase in total interest expense to $104.6 million for the six months ended June 30, 2025 from $97.1 million for the six months ended June 30, 2024. The increase in total interest income for the second quarter 2025 compared to second quarter 2024 was due primarily to an increase in interest earned on loans, resulting from an increase of 24 bps in the yield earned on loans, including loans held-for-sale, as well as an increase of $470.5 million, or 12.0%, in the average balance of loans, including loans held-for-sale. Additionally, the average balance of securities increased $190.5 million, or 25.6%, and the yield earned on the securities portfolio increased 15 bps for the second quarter 2025 compared to the second quarter 2024. The yield on funded portfolio loan originations was 7.55% for the second quarter 2025, a decrease of 133 bps compared to the second 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 income for the six months ended June 30, 2025 compared to the six months ended June 30, 2024 was due primarily to an increase in interest earned on loans, resulting from an increase of 25 bps in the yield on loans, including loans held-for-sale, as well as an increase of $410.9 million, or 10.5%, in the average balance of loans, including loans held-for-sale. Additionally, the average balance of securities increased $194.5 million, or 26.9%, and the yield earned on the securities portfolio increased 22 bps for the six months ended June 30, 2025 compared to the six months ended June 30, 2024. The increase in total interest income was partially offset as the yield on other earning assets decreased 100 bps and the average balance of other earning assets decreased $30.7 million, or 6.8%. 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 loan originations was 7.57% for the six months ended June 30, 2025, a decrease of 119 bps compared to the six months ended June 30, 2024. 51 The increase in total interest expense for the second quarter 2025 compared to the second quarter 2024 was due primarily to increases of $7.2 million, or 280.5%, in interest expense associated with interest-bearing demand deposits and $1.0 million, or 18.7%, in interest expense associated with other borrowed funds, partially offset by decreases of $2.0 million, or 15.2%, in interest expense associated with money market accounts and $1.6 million, or 5.9%, in interest expense associated with certificates and brokered deposits. 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 $632.7 million, or 106.5%, compared to the second quarter of 2024 due to continued growth in fintech deposits, while the cost of funds increased 57 bps due to the change in deposit mix. The decrease in interest expense related to money market accounts was driven by a decrease in the average deposit balance of $55.2 million, or 4.4%, as well as a 49 bp decrease in the cost of these deposits. The decrease in interest expense related to certificates and brokered deposits was driven by a decrease of 37 bps in the cost of these deposits, partially offset by an increase in the average deposit balance of $43.8 million. 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 increase in interest expense related to other borrowed funds was driven by an increase of 114 bps in the cost of funds, partially offset by a decrease in the average balance of $84.6 million, or 13.0%. The increase in total interest expense for the six months ended June 30, 2025 compared to the six months ended June 30, 2024 was due primarily to increases of $12.1 million, or 259.4%, in interest expense associated with interest-bearing demand deposits and $1.2 million, or 2.3%, in interest expense associated with certificates and brokered deposits, partially offset by decreases of $3.3 million, or 12.8%, in interest expense associated with money market deposits and $0.2 million, or 2.2%, 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 due primarily to a 56 bp increase in the cost of these deposits, as well as an increase of $545.0 million, or 99.6%, in the average balance of these deposits. The increase in interest expense related to certificates and brokered deposits was driven by an increase of $206.8 million, or 9.1%, in the average balance of these deposits, partially offset by a decrease of 28 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. The decrease in interest expense related to money market accounts was driven primarily by a decrease of $25.8 million, or 2.1%, in the average balance of these deposits as well as a decrease of 45 bps in the cost of these deposits. The decrease in interest expense related to other borrowed funds was driven by a decrease in the average balance of $199.6 million, or 29.2%, partially offset by a 118 bp increase in the cost of these funds. Overall, the cost of total interest-bearing liabilities for the second quarter 2025 decreased 18 bps to 3.96% from 4.14% for the second quarter 2024. The cost of total interest-bearing liabilities for the six months ended June 30, 2025 decreased 11 bps to 3.99% from 4.10% for the six months ended June 30, 2024. Net interest margin (“NIM”) was 1.96% for the second quarter 2025 compared to 1.67% for the second quarter 2024, an increase of 29 bps. On a fully-taxable equivalent (“FTE”) basis, NIM was 2.04% for the second quarter 2025 compared to 1.76% for the second quarter 2024, an increase of 28 bps. NIM was 1.89% for the six months ended June 30, 2025 compared to 1.67% for the six months ended June 30, 2024, an increase of 22 bps. FTE NIM was 1.97% for the six months ended June 30, 2025 compared to 1.76% for the six months ended June 30, 2024, an increase of 21 bps. The increase in the second quarter and six months ended June 30, 2025 NIM and FTE NIM compared to the second quarter and six months ended June 30, 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. 52 Noninterest Income The following table shows noninterest income for each of the periods presented. Three Months Ended Six Months Ended (amounts in thousands) June 30, 2025 June 30, 2024 June 30, 2025 June 30, 2024 Service charges and fees $ 278 $ 246 $ 543 $ 466 Loan servicing revenue 1,979 1,470 3,962 2,793 Loan servicing asset revaluation (1,153) (829) (2,334) (1,263) Gain on sale of loans 1,673 8,292 10,320 14,828 Other 2,780 1,854 3,493 2,556 Total noninterest income $ 5,557 $ 11,033 $ 15,984 $ 19,380 During the second quarter 2025, noninterest income was $5.6 million, representing a decrease of $5.4 million, or 49.6%, compared to $11.0 million for the second quarter 2024. The decrease in noninterest income was due primarily to a decrease in gain on sale of loans, partially offset by increases in other revenue and net loan servicing revenue. The decrease of $6.6 million, or 79.8%, in gain on sale of loans was due to a decrease in the volume of U.S. Small Business Administration (“SBA”) 7(a) guaranteed loans sales, as the Company implemented a process change to hold SBA loans for a longer period of time before selling them in the secondary market. The increase of $0.9 million, or 49.9%, in other noninterest income was due primarily to a planned distribution from a fund investment. The increase of $0.2 million, or 28.9%, in net loan servicing 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. During the six months ended June 30, 2025, noninterest income was $16.0 million, a decrease of $3.4 million, or 17.5%, compared to $19.4 million for the six months ended June 30, 2024. The decrease in noninterest income was due primarily to a decrease in gain on sale of loans, partially offset by increases in other income and net loan servicing revenue. The decrease of $4.5 million, or 30.4%, in gain on sale of loans was due to a decrease in the volume of SBA 7(a) guaranteed loans sales, as the Company implemented a process change to hold SBA for a longer period of time before selling them in the secondary market. The increase of $0.9 million, or 36.7%, in other noninterest income was due primarily to a planned distribution from a fund investment. The increase of $0.1 million, or 6.4%, in net loan servicing 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 shows noninterest expense for each of the periods presented. Three Months Ended Six Months Ended (amounts in thousands) June 30, 2025 June 30, 2024 June 30, 2025 June 30, 2024 Salaries and employee benefits $ 10,867 $ 12,462 $ 23,974 $ 24,258 Marketing, advertising and promotion 702 609 1,349 1,345 Consulting and professional services 936 1,022 2,164 1,875 Data processing 656 606 1,291 1,170 Loan expenses 1,520 1,597 3,051 3,042 Premises and equipment 3,281 3,154 6,396 5,980 Deposit insurance premium 1,564 1,172 2,962 2,317 Other 2,274 1,714 4,170 3,372 Total noninterest expense $ 21,800 $ 22,336 22336000 $ 45,357 $ 43,359 53 Noninterest expense for the second quarter 2025 was $21.8 million, representing a decrease of $0.5 million, or 2.4%, compared to $22.3 million for the second quarter 2024. The decrease in noninterest expense was due primarily to decreases in salaries and employee benefits, partially offset by increases in other expenses, deposit insurance premium and premises and equipment. The decrease of $1.6 million, or 12.8%, in salaries and employee benefits was driven primarily by a reduction in incentive compensation. The increase of $0.6 million, or 32.7%, in other expense was due primarily to higher fintech volume activity. The increase of $0.4 million, or 33.4%, in deposit insurance premium was due to year-over-year asset growth and changes in the composition of the loan portfolio. The increase of $0.1 million, or 4.0%, in premises and equipment was due primarily to software maintenance expense. Noninterest expense for the six months ended June 30, 2025 was $45.4 million, an increase of $2.0 million, or 4.6%, compared to $43.4 million for the six months ended June 30, 2024. The increase was due primarily to increases in other expense, deposit insurance premium, premises and equipment, and consulting and professional fees, partially offset by a decrease in salaries and employee benefits. The increase of $0.8 million, or 23.7%, in other expense was due primarily to higher fintech volume activity. The increase of $0.6 million, or 27.8%, in deposit insurance premium was due to year-over-year asset growth and changes in the composition of the loan portfolio. The increase of $0.4 million, or 7.0%, in premises and equipment was due primarily to software maintenance expense. The increase of $0.3 million, or 15.4%, in consulting and professional fees was due mainly to increased legal and audit fees. The decrease of $0.3 million, or 1.2%, in salaries and employee benefits was driven primarily by a reduction in incentive compensation. The Company recorded an income tax benefit of $2.1 million for the second quarter 2025, compared to an income tax provision of $0.2 million and an effective tax rate of 3.6% for the second quarter 2024. The Company recorded an income tax benefit of $3.0 million for the six months ended June 30, 2025, compared to an income tax provision of $0.6 million and an effective tax rate of 5.6% for the six months ended June 30, 2024. The income tax benefits recognized during the second quarter 2025 and the six months ended June 30, 2025 reflect lower pre-tax earnings, as well as the benefit of tax exempt income. The variance from the federal statutory rate for the second quarter 2024 and the six months ended June 30, 2024 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. Financial Condition The following table shows summary balance sheet data for each of the periods presented. (amounts in thousands) Balance Sheet Data: June 30, 2025 December 31, 2024 Total assets $ 6,072,573 $ 5,737,859 Loans 4,362,562 4,170,646 Total securities 916,394 837,151 Loans held-for-sale 126,533 54,695 Noninterest-bearing deposits 145,166 136,451 Interest-bearing deposits 5,153,623 4,796,755 Total deposits 5,298,789 4,933,206 Advances from Federal Home Loan Bank 264,500 295,000 Total shareholders’ equity 390,239 384,063 Total assets increased $334.7 million, or 5.8%, to $6.1 billion at June 30, 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 brokered deposits and FHLB advances. As of June 30, 2025, total shareholders’ equity was $390.2 million, an increase of $6.2 million, or 1.6%, compared to December 31, 2024. The increase in shareholders’ equity was due primarily to a decrease in accumulated other comprehensive loss as unrealized losses on securities decreased during the six months ended June 30, 2025. Tangible common equity totaled $385.6 million as of June 30, 2025, representing an increase of $6.2 million, or 1.6%, compared to December 31, 2024. The ratio of total shareholders’ equity to total assets decreased to 6.43% as of June 30, 2025 from 6.69% as of December 31, 2024, and the ratio of tangible common equity to tangible assets decreased to 6.35% as of June 30, 2025 from 6.62% as of December 31, 2024. 54 Book value per common share increased 1.1% to $44.79 as of June 30, 2025 from $44.31 as of December 31, 2024. Tangible book value per share increased 1.1% to $44.25 as of June 30, 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. 55 Loan Portfolio Analysis The following table shows a summary of the Company’s loan portfolio for each of the periods presented. (dollars in thousands) June 30, 2025 December 31, 2024 Commercial loans Commercial and industrial $ 174,475 4.0 % $ 120,175 2.9 % Owner-occupied commercial real estate 50,096 1.1 % 53,591 1.3 % Investor commercial real estate 513,411 11.8 % 269,431 6.5 % Construction 332,658 7.6 % 413,523 9.9 % Single tenant lease financing 970,042 22.3 % 949,748 22.7 % Public finance 476,339 10.9 % 485,867 11.6 % Healthcare finance 160,073 3.7 % 181,427 4.4 % Small business lending 383,455 8.8 % 331,914 8.0 % Franchise finance 479,757 11.0 % 536,909 12.9 % Total commercial loans 3,540,306 81.2 % 3,342,585 80.2 % Consumer loans Residential mortgage 358,922 8.2 % 375,160 9.0 % Home equity 16,668 0.4 % 18,274 0.4 % Other consumer loans 421,581 9.6 % 407,947 9.8 % Total consumer loans 797,171 18.2 % 801,381 801381000 19.2 % Net deferred loan origination costs, premiums and discounts on purchased loans and other 1 25,085 0.6 % 26,680 0.6 % Total loans 4,362,562 100.0 % 4,170,646 100.0 % Allowance for credit losses - loans (46,517) (44,769) Net loans $ 4,316,045 $ 4,125,877 1 Includes carrying value adjustments of $21.2 million and $22.9 million related to terminated interest rate swaps associated with public finance loans as of June 30, 2025 and December 31, 2024, respectively. Total loans were $4.4 billion as of June 30, 2025, an increase of $191.9 million, or 4.6%, compared to December 31, 2024. Total commercial loan balances were $3.5 billion as of June 30, 2025, up $197.7 million, or 5.9%, from December 31, 2024. Total consumer loan balances were $797.2 million as of June 30, 2025, a decrease of $4.2 million, or 0.5%, compared to December 31, 2024. Compared to December 31, 2024, in connection with the Company’s focus on variable rate products, as well as capitalizing on the overall higher interest rate environment, the increase in commercial loan balances was driven by growth in the investor commercial real estate, commercial and industrial, small business lending and single tenant lease financing portfolios. These increases were partially offset by decreases in the construction, franchise finance and public finance portfolios, as well as continued runoff in the healthcare finance portfolio. The decrease in construction balances was partially due to completed projects that were moved to investor commercial real estate upon entering their stabilization period. 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. 56 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) June 30, 2025 December 31, 2024 Nonaccrual loans Commercial loans: Single tenant lease financing $ 1,665 $ — Small business lending 11,582 11,429 Franchise finance 23,857 10,382 Total commercial loans 37,104 21,811 Consumer loans: Residential mortgage 3,927 4,083 Other consumer loans 124 61 Total consumer loans 4,051 4,144 Total nonaccrual loans 41,155 25,955 Past due 90 days and accruing loans Commercial loans: Commercial and industrial 16 — Small business lending 2,370 1,320 Total commercial loans 2,386 1,320 Consumer loans: Residential mortgage — 1,142 Other consumer loans — 4 Total consumer loans — 1,146 Total past due 90 days and accruing loans 2,386 2,466 Total nonperforming loans 43,541 28,421 Other real estate owned Small business lending 1,509 — Residential mortgage 221 272 Total other real estate owned 1,730 272 Other nonperforming assets 268 212 Total nonperforming assets $ 45,539 $ 28,905 Total nonperforming loans to total loans 1.00 % 0.68 % Total nonperforming assets to total assets 0.75 % 0.50 % Allowance for credit losses - loans to total loans 1.07 % 1.07 % Nonaccrual loans to total loans 0.94 % 0.62 % Allowance for credit losses - loans to nonaccrual loans 113.0 % 172.5 % Allowance for credit losses - loans to nonperforming loans 106.8 % 157.5 % Total nonperforming loans increased $15.1 million, or 53.2%, to $43.5 million as of June 30, 2025 compared to $28.4 million as of December 31, 2024 due primarily to an increase in nonperforming loans in the franchise finance, single tenant lease financing and small business lending portfolios during the year. Total nonperforming assets increased $16.6 million, or 57.6%, to $45.5 million as of June 30, 2025, compared to $28.9 million as of December 31, 2024, due primarily to the increase in nonperforming loans mentioned above and an increase in OREO related to small business lending. As of June 30, 2025, the Company had two small business lending properties and one residential mortgage property in OREO with carrying values of 57 $1.5 million and $0.2 million, respectively. As of December 31, 2024, the Company had one residential mortgage property in OREO with a carrying value of $0.3 million. 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 Six Months Ended Year Ended (dollars in thousands) June 30, 2025 June 30, 2024 June 30, 2025 June 30, 2024 December 31, 2024 Balance, beginning of period $ 47,238 $ 40,891 $ 44,769 $ 38,774 $ 38,774 Provision charged to expense 13,596 3,920 25,717 6,502 18,815 Losses charged off Single tenant lease financing — 195 — 195 195 Small business lending 11,851 573 15,520 862 10,441 Franchise finance 2,238 577 8,086 577 1,466 Residential mortgage — — 11 69 159 Other consumer loans 359 160 672 335 1,009 Total losses charged off 14,448 1,505 24,289 2,038 13,270 Recoveries Commercial and industrial 2 2 4 4 8 Small business lending 40 65 173 105 325 Franchise finance 18 — 18 — — Residential mortgage 1 — 7 1 1 Home equity 1 1 3 3 7 Other consumer loans 69 31 115 54 109 Total recoveries 131 99 320 167 450 Balance, end of period $ 46,517 $ 43,405 $ 46,517 $ 43,405 $ 44,769 Net charge-offs $ 14,317 $ 1,406 $ 23,969 $ 1,871 $ 12,820 Net charge-offs (recoveries) to average loans (annualized) Commercial and industrial 0.00 % 0.00 % (0.01 %) (0.01 %) (0.01 %) Single tenant lease financing 0.00 % 0.04 % 0.00 % 0.04 % 0.02 % Small business lending 5.43 % 0.37 % 7.57 % 0.57 % 3.39 % Franchise finance 0.90 % 0.21 % 3.17 % 0.21 % 0.27 % Total commercial net charge-offs 0.79 % 0.08 % 1.35 % 0.10 % 0.37 % Residential mortgage 0.00 % 0.00 % 0.00 % 0.04 % 0.04 % Home equity (0.01 %) (0.01 %) (0.03 %) (0.03 %) (0.03 %) Other consumer loans 0.41 % 0.20 % 0.38 % 0.20 % 0.28 % Total consumer net charge-offs 0.07 % 0.03 % 0.14 % 0.09 % 0.13 % Total net charge-offs to average loans 1.31 % 0.14 % 1.12 % 0.10 % 0.32 % The allowance for credit losses - loans (“ACL”) was $46.5 million as of June 30, 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 loans that were placed on nonaccrual during the six month period ended June 30, 2025 and growth in the overall loan portfolio, partially offset by the removal of specific reserves for small business lending and franchise finance loans that were charged off. The ACL as a percentage of total loans was 1.07% at both June 30, 2025 and December 31, 2024. The ACL as a percentage of nonperforming loans decreased to 106.8% as of June 30, 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 $14.3 million were recognized during the second quarter 2025, resulting in net charge-offs to average loans of 1.31%, compared to net charge-offs of $1.4 million, or 0.14% of average loans, for the second quarter 2024. Net charge-offs in the second quarter 2025 were elevated as the Company continued to take action to resolve problem loans in the small business lending and franchise finance portfolios. Approximately $11.9 million of net charge-offs recognized during 58 the quarter were related to small business lending and $2.2 million were related to franchise finance loans, with $7.3 million of existing specific reserves previously applied to these loans. During the six months ended June 30, 2025, the Company recorded net charge-offs of $24.0 million, compared to net charge-offs of $1.9 million during the six months ended June 30, 2024. The increase in net charge-offs for the six months ended June 30, 2025 was driven primarily by $15.5 million in net charge-offs related to small business lending and $8.1 million in net charge-offs related to franchise finance loans, as the Company continued to take action to resolve problem loans in these portfolios. The provision for credit losses - loans in the second quarter 2025 was $13.6 million, compared to $3.9 million for the second quarter 2024. The increase in the provision for credit losses - loans for the second quarter 2025 was driven primarily by the net charge-offs and additional specific reserves discussed above, as well as overall growth in the loan portfolio, partially offset by the decrease in specific reserves related to small business lending and franchise finance loans that were charged off. The provision for credit losses - loans during the six months ended June 30, 2025 was $25.7 million, compared to $6.5 million for the six months ended June 30, 2024. The increase in the provision for credit losses - loans for the six months ended June 30, 2025 was driven primarily by the net charge-offs and additional specific reserves discussed above, as well as overall growth in the loan portfolio, partially offset by the decrease in specific reserves related to small business lending and franchise finance loans that were charged off. 59 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 June 30, 2025 December 31, 2024 Securities available-for-sale U.S. Government-sponsored agencies $ 73,297 $ 83,811 Municipal securities 65,274 67,441 Agency mortgage-backed securities - residential 383,145 300,914 Agency mortgage-backed securities - commercial 62,340 64,214 Private label mortgage-backed securities - residential 39,971 46,623 Asset-backed securities 19,442 23,802 Corporate securities 33,027 40,049 Total available-for-sale 676,496 626,854 Securities held-to-maturity, net carrying value Municipal securities 12,204 12,843 Agency mortgage-backed securities - residential 228,446 201,840 Agency mortgage-backed securities - commercial 5,670 5,705 Corporate securities 25,417 29,408 Total held-to-maturity, net carrying value 271,737 249,796 Total securities $ 948,233 $ 876,650 (amounts in thousands) Approximate Fair Value June 30, 2025 December 31, 2024 Securities available-for-sale U.S. Government-sponsored agencies $ 72,700 $ 82,816 Municipal securities 61,423 63,654 Agency mortgage-backed securities - residential 358,071 269,641 Agency mortgage-backed securities - commercial 61,474 63,331 Private label mortgage-backed securities - residential 39,423 45,821 Asset-backed securities 19,488 23,821 Corporate securities 32,078 38,271 Total available-for-sale 644,657 587,355 Securities held-to-maturity Municipal securities 11,477 11,925 Agency mortgage-backed securities - residential 214,074 184,412 Agency mortgage-backed securities - commercial 4,701 4,548 Corporate securities 24,415 27,966 Total held-to-maturity 254,667 228,851 Total securities $ 899,324 $ 816,206 The approximate fair value of available-for-sale investment securities increased $57.3 million, or 9.8%, to $644.7 million as of June 30, 2025, compared to $587.4 million as of December 31, 2024. The increase was due primarily to an increase of $88.4 million in agency mortgage-backed securities - residential, partially offset by decreases of $10.1 million in U.S. Government-sponsored agencies, $6.4 million in private label mortgage-backed securities - residential, $6.2 million in corporate securities, $4.3 million in asset-backed securities, $2.2 million in municipal securities and $1.9 million in agency mortgage-backed securities - commercial. The Company deployed liquidity during the first half of 2025 into new purchases of available-for-sale variable-rate agency mortgage-backed securities - residential, partially offset by net pay down activity in other security types. As of June 30, 2025, the Company had securities with a net carrying value of $271.7 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. 60 Accrued Income and Other Assets Accrued income and other assets increased $9.6 million, or 15.3%, to $72.6 million at June 30, 2025, compared to $63.0 million at December 31, 2024. The increase was due primarily to increases of $5.3 million in equity fund investments, $3.3 million in prepaid assets and $0.8 million in deferred tax assets. Accrued Expenses and Other Liabilities Accrued expenses and other liabilities decreased $5.8 million, or 32.4%, to $12.1 million at June 30, 2025, compared to $17.9 million at December 31, 2024. The decrease was due primarily to decreases of $5.1 million in accrued salary and benefits and $0.8 million in other liabilities. Deposits The following table shows the composition of the Company’s deposit base for each of the periods presented. (dollars in thousands) June 30, 2025 December 31, 2024 Noninterest-bearing deposits $ 145,166 2.7 % $ 136,451 2.8 % Interest-bearing demand deposits 1,458,123 27.5 % 896,661 18.2 % Savings accounts 20,902 0.4 % 19,823 0.4 % Money market accounts 1,210,960 22.9 % 1,183,789 24.0 % Certificates of deposits 2,146,356 40.5 % 2,133,455 43.2 % Brokered deposits 317,282 6.0 % 563,027 11.4 % Total deposits $ 5,298,789 100.0 % $ 4,933,206 100.0 % Total deposits increased $365.6 million, or 7.4%, to $5.3 billion as of June 30, 2025, compared to $4.9 billion as of December 31, 2024. The increase was due primarily to increases of $561.5 million, or 62.6%, in interest-bearing demand deposits, $27.2 million, or 2.3%, in money market accounts, $12.9 million, or 0.6%, in certificates of deposit and $8.7 million or 6.4%, in noninterest-bearing deposits, partially offset by a decrease of $245.7 million, or 43.7%, in brokered 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. Uninsured deposit balances represented 27% of total deposits at June 30, 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 June 30, 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”). 61 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 June 30, 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 June 30, 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 June 30, 2025: Common equity tier 1 capital to risk-weighted assets Consolidated $ 397,215 8.90 % $ 312,571 7.00 % N/A N/A Bank 469,414 10.56 % 311,084 7.00 % $ 288,864 6.50 % Tier 1 capital to risk-weighted assets Consolidated 397,215 8.90 % 379,550 8.50 % N/A N/A Bank 469,414 10.56 % 377,745 8.50 % 355,525 8.00 % Total capital to risk-weighted assets Consolidated 542,760 12.16 % 468,856 10.50 % N/A N/A Bank 516,927 11.63 % 466,626 10.50 % 444,406 10.00 % Leverage ratio Consolidated 397,215 6.69 % 237,602 4.00 % N/A N/A Bank 469,414 7.93 % 236,795 4.00 % 295,994 5.00 % 62 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 July 15, 2025 to shareholders of record as of June 30, 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 June 30, 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 stock repurchase program that 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. 63 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 June 30, 2025, on a consolidated basis, the Company had $1.1 billion in cash and cash equivalents and investment securities available-for-sale and $126.5 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 June 30, 2025, the Bank had the ability to borrow an additional $1.9 billion from the FHLB, the Federal Reserve and correspondent bank Fed Funds lines of credit, which when combined with cash balances, totaled $2.3 billion and represented 200% 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 June 30, 2025, the Company, on an unconsolidated basis, had $13.6 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 June 30, 2025, approved outstanding loan commitments, including unused lines of credit and standby letters of credit, amounted to $584.5 million. Certificates of deposits and brokered deposits scheduled to mature in one year or less at June 30, 2025 totaled $1.5 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. 64 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, pre-tax, pre-provision income, adjusted noninterest expense, 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 Six Months Ended June 30, 2025 June 30, 2024 June 30, 2025 June 30, 2024 Total equity - GAAP $ 390,239 $ 371,953 $ 390,239 $ 371,953 Adjustments: Goodwill (4,687) (4,687) (4,687) (4,687) Tangible common equity $ 385,552 $ 367,266 $ 385,552 $ 367,266 Total assets - GAAP $ 6,072,573 $ 5,343,302 $ 6,072,573 $ 5,343,302 Adjustments: Goodwill (4,687) (4,687) (4,687) (4,687) Tangible assets $ 6,067,886 $ 5,338,615 $ 6,067,886 $ 5,338,615 Common shares outstanding 8,713,094 8,667,894 8,713,094 8,667,894 Book value per common share $ 44.79 $ 42.91 $ 44.79 $ 42.91 Effect of goodwill (0.54) (0.54) (0.54) (0.54) Tangible book value per common share $ 44.25 $ 42.37 $ 44.25 $ 42.37 Total shareholders’ equity to assets 6.43 % 6.96 % 6.43 % 6.96 % Effect of goodwill (0.08 %) (0.08 %) (0.08 %) (0.08 %) Tangible common equity to tangible assets 6.35 % 6.88 % 6.35 % 6.88 % Total average equity - GAAP $ 391,870 $ 369,825 $ 391,952 $ 369,598 Adjustments: Average goodwill (4,687) (4,687) (4,687) (4,687) Average tangible common equity $ 387,183 $ 365,138 $ 387,265 $ 364,911 Return on average shareholders’ equity 0.20 % 6.28 % 0.58 % 5.96 % Effect of goodwill 0.00 % 0.08 % 0.01 % 0.08 % Return on average tangible common equity 0.20 % 6.36 % 0.59 % 6.04 % 65 (dollars in thousands, except share and per share data) Three Months Ended Six Months Ended June 30, 2025 June 30, 2024 June 30, 2025 June 30, 2024 Total interest income $ 80,886 $ 70,961 $ 157,715 $ 139,126 Adjustments: Fully-taxable equivalent adjustments 1 1,157 1,175 2,326 2,365 Total interest income - FTE $ 82,043 $ 72,136 $ 160,041 $ 141,491 Net interest income $ 27,990 $ 21,327 $ 53,086 $ 42,061 Adjustments: Fully-taxable equivalent adjustments 1 1,157 1,175 2,326 2,365 Net interest income - FTE $ 29,147 $ 22,502 $ 55,412 $ 44,426 Net interest margin 1.96 % 1.67 % 1.89 % 1.67 % Effect of fully-taxable equivalent adjustments 1 0.08 % 0.09 % 0.08 % 0.09 % Net interest margin - FTE 2.04 % 1.76 % 1.97 % 1.76 % 1 Assuming a 21% tax rate 66 (dollars in thousands, except share and per share data) Three Months Ended Six Months Ended June 30, 2025 June 30, 2024 June 30, 2025 June 30, 2024 Net income-GAAP $ 193 $ 5,775 $ 1,136 $ 10,956 Adjustments: 1 Provision for credit losses 13,608 4,031 25,541 6,479 Income tax (benefit) provision (2,054) 218 (2,964) 647 Pre-tax, pre-provision income $ 11,747 $ 10,024 $ 23,713 $ 18,082 Noninterest expense - GAAP $ 21,800 $ 22,336 $ 45,357 $ 43,359 Adjustments: IT termination fees — (452) — (452) Anniversary expenses — (120) — (120) Adjusted noninterest expense $ 21,800 $ 21,764 $ 45,357 $ 42,787 (Loss) Income before income taxes - GAAP $ (1,861) $ 5,993 $ (1,828) $ 11,603 Adjustments: IT termination fees — 452 — 452 Anniversary expenses — 120 — 120 Adjusted (loss) income before income taxes $ (1,861) $ 6,565 $ (1,828) $ 12,175 Income tax (benefit) provision - GAAP $ (2,054) $ 218 $ (2,964) $ 647 Adjustments: 1 IT termination fees — 95 — 95 Anniversary expenses — 25 — 25 Adjusted income tax (benefit) provision $ (2,054) $ 338 $ (2,964) $ 767 Net income - GAAP $ 193 $ 5,775 $ 1,136 $ 10,956 Adjustments: IT termination fees — 357 — 357 Anniversary expenses — 95 — 95 Adjusted net income $ 193 $ 6,227 $ 1,136 $ 11,408 Diluted average common shares outstanding 8,760,374 8,656,215 8,784,005 8,750,017 Diluted earnings per share - GAAP $ 0.02 $ 0.67 $ 0.13 $ 1.25 Adjustments: Effect of IT termination fees — 0.04 — 0.04 Effect of anniversary expenses — 0.01 — 0.01 Adjusted diluted earnings per share $ 0.02 $ 0.72 $ 0.13 $ 1.30 Return on average assets 0.01 % 0.44 % 0.04 % 0.42 % Effect of IT termination fees 0.00 % 0.03 % 0.00 % 0.01 % Effect of anniversary expenses 0.00 % 0.01 % 0.00 % 0.00 % Adjusted return on average assets 0.01 % 0.48 % 0.04 % 0.43 % Return on average shareholders' equity 0.20 % 6.28 % 0.58 % 5.96 % Effect of IT termination fees 0.00 % 0.39 % 0.00 % 0.19 % Effect of anniversary expenses 0.00 % 0.10 % 0.00 % 0.05 % Adjusted return on average shareholders' equity 0.20 % 6.77 % 0.58 % 6.20 % 1 Assuming a 21% tax rate 67 (dollars in thousands, except share and per share data) Three Months Ended Six Months Ended June 30, 2025 June 30, 2024 June 30, 2025 June 30, 2024 Return on average tangible common equity 0.20 % 6.36 % 0.59 % 6.04 % Effect of IT termination fees 0.00 % 0.39 % 0.00 % 0.20 % Effect of anniversary expenses 0.00 % 0.10 % 0.00 % 0.05 % Adjusted return on average tangible common equity 0.20 % 6.85 % 0.59 % 6.29 % 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 June 30, 2025 or at December 31, 2024. Refer to Note 12 to the condensed consolidated financial statements for additional information about derivative financial instruments. 68