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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
☑QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period ended March 31, 2023
OR
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From ________ to ________.
 
Commission File Number 001-35750 
First Internet Bancorp
(Exact Name of Registrant as Specified in Its Charter)
Indiana 20-3489991
(State or Other Jurisdiction of
Incorporation or Organization)		 (I.R.S. Employer
Identification No.)
   
8701 East 116th Street
Fishers, IN
 46038
(Address of Principal Executive Offices) (Zip Code)
(317) 532-7900
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading SymbolsName of each exchange on which registered
Common Stock, without par valueINBKThe Nasdaq Stock Market LLC
6.0% Fixed to Floating Subordinated Notes due 2029INBKZThe Nasdaq Stock Market LLC
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ No ¨
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ No ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer ¨
Accelerated Filer þ
Non-accelerated Filer ¨
Smaller Reporting Company ☐
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No þ
 
As of May 5, 2023, the registrant had 8,905,477 shares of common stock issued and outstanding.


Cautionary Note Regarding Forward-Looking Statements
  
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws. These statements are not historical facts, but rather statements based on the current expectations of First Internet Bancorp and its consolidated subsidiaries (the “Company,” “we,” “our,” or “us”) regarding our business strategies, intended results and future performance, including without limitation statements concerning the financial condition, results of operations, trends in lending policies and loan programs, plans and prospective business partnerships, objectives, future performance and business of the Company. Forward-looking statements are generally preceded by terms such as “acquire”, “anticipate,” “attempt,” “believe,” “can,” “continue,” “could,” “differentiate,” “diversify,” “driving,” “effort,” “emerging,” “estimate,” “expect,” “grow,” “increase,” “intend,” “likely,” “may,” “objective,” “optimistic,” “pending,” “plan,” “position,” “potential,” “preliminary,” “remain,” “retain,” “should,” “succeed,” “will,” “win,” “would” or other similar expressions. Such statements are subject to certain risks and uncertainties including: changes in market rates and prices that may adversely impact the value of securities, loans, deposits and other financial instruments and the interest rate sensitivity of our balance sheet; changing bank regulatory conditions, policies or programs, whether arising as new legislation or regulatory initiatives, that could lead to restrictions on activities of banks generally, or First Internet Bank (the “Bank”) in particular; more restrictive regulatory capital requirements; increased costs, including deposit insurance premiums; other general economic conditions, whether national or regional, and conditions in the lending markets in which we participate that may have an adverse effect on the demand for our loans and other products; our credit quality and related levels of nonperforming assets and credit losses, and the value and salability of the real estate that is the collateral for our loans; failures or breaches of or interruptions in the communication and information systems on which we rely to conduct our business that could reduce our revenues, increase our costs or lead to disruptions in our business; our dependence on capital distributions from the Bank; results of examinations of us by our regulators, including the possibility that our regulators may, among other things, require us to increase our allowance for credit losses or to write-down assets; regulation or prohibition of certain income producing activities or changes in the secondary market for loans and other products; our liquidity requirements being adversely affected by changes in our assets and liabilities; the effect of legislative or regulatory developments, including changes in laws concerning taxes, banking, securities, insurance and other aspects of the financial services industry; competitive factors among financial services organizations, including product and pricing pressures and our ability to attract, develop and retain qualified banking professionals; the growth and profitability of noninterest or fee income being less than expected; the loss of any key members of senior management; the effect of changes in accounting policies and practices, as may be adopted by the Financial Accounting Standards Board, the Securities and Exchange Commission (the “SEC”), the Public Company Accounting Oversight Board and other regulatory agencies; and the effect of fiscal and governmental policies of the United States federal government. Additional factors that may affect our results include those discussed in this Quarterly Report on Form 10-Q and our most recent Annual Report on Form 10-K under the heading “Risk Factors” and in other reports filed with the SEC. We caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The factors listed above could affect our financial performance and could cause our actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements.

Except as required by law, we do not undertake, and specifically disclaim any obligation, to publicly release the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

i

PART I

ITEM 1.    FINANCIAL STATEMENTS 

First Internet Bancorp
Condensed Consolidated Balance Sheets
(Amounts in thousands except share data)
 March 31, 2023December 31, 2022
 (Unaudited) 
Assets  
Cash and due from banks$27,741 $17,426 
Interest-bearing deposits276,231 239,126 
Total cash and cash equivalents303,972 256,552 
Securities available-for-sale, at fair value (amortized cost of $436,520 and $436,183 in 2023 and 2022, respectively)395,833 390,384 
Securities held-to-maturity, at amortized cost, net of allowance for credit losses (fair value of $192,463 and $168,483 in 2023 and 2022, respectively)210,761 189,168 
Loans held-for-sale (includes $2,209 and $9,110 at fair value in 2023 and 2022, respectively)18,144 21,511 
Loans3,607,242 3,499,401 
Allowance for credit losses - loans(36,879)(31,737)
Net loans3,570,363 3,467,664 
Accrued interest receivable22,322 21,069 
Federal Home Loan Bank of Indianapolis stock28,350 28,350 
Cash surrender value of bank-owned life insurance40,105 39,859 
Premises and equipment, net74,248 72,711 
Goodwill4,687 4,687 
Servicing asset, at fair value7,312 6,255 
Other real estate owned106 — 
Accrued income and other assets45,116 44,894 
Total assets$4,721,319 $4,543,104 
Liabilities and Shareholders’ Equity  
Liabilities  
Noninterest-bearing deposits$140,449 $175,315 
Interest-bearing deposits3,481,841 3,265,930 
Total deposits3,622,290 3,441,245 
Advances from Federal Home Loan Bank614,929 614,928 
Subordinated debt, net of unamortized debt issuance costs of $2,392 and $2,468 in 2023 and 2022, respectively104,608 104,532 
Accrued interest payable2,592 2,913 
Accrued expenses and other liabilities21,328 14,512 
Total liabilities4,365,747 4,178,130 
Commitments and Contingencies
Shareholders’ Equity  
Preferred stock, no par value; 4,913,779 shares authorized; issued and outstanding - none— — 
Voting common stock, no par value; 45,000,000 shares authorized; 8,943,477 and 9,065,883 shares issued and outstanding in 2023 and 2022, respectively189,202 192,935 
Nonvoting common stock, no par value; 86,221 shares authorized; issued and outstanding - none— — 
Retained earnings197,623 205,675 
Accumulated other comprehensive loss(31,253)(33,636)
Total shareholders’ equity355,572 364,974 
Total liabilities and shareholders’ equity$4,721,319 $4,543,104 

See Notes to Condensed Consolidated Financial Statements
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First Internet Bancorp
Condensed Consolidated Statements of Operations – Unaudited
(Amounts in thousands except share and per share data)
 Three Months Ended
 March 31, 2023March 31, 2022
Interest Income  
Loans$43,843 $33,188 
Securities – taxable3,606 2,221 
Securities – non-taxable798 249 
Other earning assets3,786 376 
Total interest income52,033 36,034 
Interest Expense  
Deposits27,270 6,097 
Other borrowed funds5,189 4,187 
Total interest expense32,459 10,284 
Net Interest Income19,574 25,750 
Provision for Credit Losses 1
9,415 791 
Net Interest Income After Provision for Credit Losses10,159 24,959 
Noninterest Income  
Service charges and fees209 316 
Loan servicing revenue785 585 
Loan servicing asset revaluation(55)(297)
Mortgage banking activities76 1,873 
Gain on sale of loans4,061 3,845 
Other370 498 
Total noninterest income5,446 6,820 
Noninterest Expense  
Salaries and employee benefits11,794 9,878 
Marketing, advertising and promotion844 756 
Consulting and professional services926 1,925 
Data processing659 449 
Loan expenses1,977 1,582 
Premises and equipment2,777 2,540 
Deposit insurance premium543 281 
Other1,434 1,369 
Total noninterest expense20,954 18,780 
(Loss) Income Before Income Taxes(5,349)12,999 
Income Tax (Benefit) Provision(2,332)1,790 
Net (Loss) Income$(3,017)$11,209 
(Loss) Income Per Share of Common Stock  
Basic$(0.33)$1.14 
Diluted$(0.33)$1.14 
Weighted-Average Number of Common Shares Outstanding  
Basic9,024,072 9,790,122 
Diluted9,024,072 9,870,394 
Dividends Declared Per Share$0.06 $0.06 
1Beginning January 1, 2023, the allowance calculation is based on the CECL methodology. Prior to January 1, 2023, the allowance calculation was based on the incurred loss methodology.

See Notes to Condensed Consolidated Financial Statements
2

First Internet Bancorp
Condensed Consolidated Statements of Comprehensive Loss – Unaudited
(Amounts in thousands except per share data)
 Three Months Ended March 31,
 20232022
Net (loss) income$(3,017)$11,209 
Other comprehensive income (loss)
Securities available-for-sale
Net unrealized holding gain (losses) recorded within other comprehensive income (loss) before income tax5,112 (17,881)
Income tax provision (benefit)1,170 (4,077)
Net effect on other comprehensive income (loss)3,942 (13,804)
Securities held-to-maturity
Reclassification of securities from available-for-sale to held-to-maturity— (5,402)
Amortization of net unrealized holding losses on securities transferred from available-for-sale to held-to-maturity158 119 
Income tax provision (benefit)46 (1,249)
Net effect on other comprehensive income (loss)112 (4,034)
Cash flow hedges
Net unrealized holding (losses) gains on cash flow hedging derivatives recorded within other comprehensive income before income tax(2,170)9,334 
Income tax (benefit) provision(499)3,318 
Net effect on other comprehensive (loss) income(1,671)6,016 
Total other comprehensive income (loss)2,383 (11,822)
Comprehensive loss$(634)$(613)
 
 See Notes to Condensed Consolidated Financial Statements

3

First Internet Bancorp
Condensed Consolidated Statements of Changes in Shareholders’ Equity - Unaudited
Three Months Ended March 31, 2023 and 2022
(Amounts in thousands except per share data)
Voting and
Nonvoting
Common
Stock		Retained
Earnings		Accumulated
Other
Comprehensive
Loss		Total
Shareholders’
Equity
Balance, January 1, 2023$192,935 $205,675 $(33,636)$364,974 
Impact of adoption of new accounting standards 1
— (4,491)— (4,491)
Net loss— (3,017)— (3,017)
Other comprehensive income— — 2,383 2,383 
Dividends declared ($0.06 per share)
— (544)— (544)
Recognition of the fair value of share-based compensation372 — — 372 
Repurchased shares of common stock (161,691)
(4,002)— — (4,002)
Deferred stock rights and restricted stock units issued in lieu of cash dividends payable on outstanding deferred stock rights and restricted stock units3— — 3 
Common stock redeemed for the net settlement of share-based awards(106)— — (106)
Balance, March 31, 2023$189,202 $197,623 $(31,253)$355,572 
Balance, January 1, 2022$218,946 $172,431 $(11,039)$380,338 
Net income— 11,209 — 11,209 
Other comprehensive loss— — (11,822)(11,822)
Dividends declared ($0.06 per share)
— (597)— (597)
Recognition of the fair value of share-based compensation640 — — 640 
Repurchase of common stock (103,703)
(5,118)— — (5,118)
Deferred stock rights and restricted stock units issued in lieu of cash dividends payable on outstanding deferred stock rights and restricted stock units5 — — 5 
Balance, March 31, 2022$214,473 $183,043 $(22,861)$374,655 
1 Reflects the impact of adopting Accounting Standards Update (“ASU”) 2016-13.

See Notes to Condensed Consolidated Financial Statements



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First Internet Bancorp
Condensed Consolidated Statements of Cash Flows – Unaudited
(Amounts in thousands except per share data)
 Three Months Ended March 31,
 20232022
Operating Activities  
Net (loss) income$(3,017)$11,209 
Adjustments to reconcile net income to net cash used in operating activities:  
Depreciation and amortization1,058 2,328 
Increase in cash surrender value of bank-owned life insurance(246)(233)
Provision for credit losses 1
9,415 791 
Share-based compensation expense372 640 
Loans originated for sale(91,789)(184,067)
Proceeds from sale of loans98,433 202,011 
Gain on loans sold(4,525)(5,907)
Decrease in fair value of loans held-for-sale136 489 
Gain (loss) on derivatives536 (2,565)
Loan servicing asset revaluation55 297 
Net change in accrued income and other assets(2,444)13,867 
Net change in accrued expenses and other liabilities(2,086)(7,999)
Net cash provided by operating activities5,898 30,861 
Investing Activities
Net loan activity, excluding purchases(25,111)32,510 
Proceeds from sale of other real estate owned— 1,188 
Maturities and calls of securities available-for-sale9,448 29,008 
Purchase of securities available-for-sale(1,411)(10,133)
Maturities and calls of securities held-to-maturity5,129 765 
Purchase of securities held-to-maturity(26,572)(8,320)
Redemption of Federal Home Loan Bank of Indianapolis stock— 431 
Purchase of premises and equipment(2,704)(9,808)
Loans purchased(90,029)(40,059)
Net proceeds from sale of portfolio loans— 14,466 
Other investing activities(1,315)374 
Net cash (used in) provided by investing activities(132,565)10,422 
Financing Activities
Net increase in deposits178,743 39,020 
Cash dividends paid(548)(596)
Repurchase of common stock(4,002)(5,118)
Proceeds from advances from Federal Home Loan Bank110,000 110,000 
Repayment of advances from Federal Home Loan Bank(110,000)(110,000)
Other, net(106)— 
Net cash provided by financing activities174,087 33,306 
Net Increase in Cash and Cash Equivalents47,420 74,589 
Cash and Cash Equivalents, Beginning of Period256,552 442,960 
Cash and Cash Equivalents, End of Period$303,972 $517,549 
Supplemental Disclosures
Cash paid during the period for interest32,782 10,770 
Cash paid during the period for taxes285 50 
Loans transferred to other real estate owned106 — 
Loans transferred to held-for-sale from portfolio— 14,049 
Cash dividends declared, paid in subsequent period537 581 
Securities purchased during the period, settled in subsequent period8,344 — 
Transfer of available-for-sale mortgage-backed securities to held-to-maturity mortgage-backed securities at fair value— 96,220 
1Beginning January 1, 2023, the allowance calculation is based on the CECL methodology. Prior to January 1, 2023, the allowance calculation was based on the incurred loss methodology.

See Notes to Condensed Consolidated Financial Statements
5

First Internet Bancorp
Notes to Condensed Consolidated Financial Statements – Unaudited
(Table amounts in thousands except share and per share data)
  
Note 1:        Basis of Presentation
 
The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information or footnotes necessary for a complete presentation of financial condition, results of operations, changes in shareholders’ equity, or cash flows in accordance with GAAP. In our opinion, all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation have been included. The results of operations for the three months ended March 31, 2023 are not necessarily indicative of the results expected for the year ending December 31, 2023 or any other period. The March 31, 2023 condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the First Internet Bancorp Annual Report on Form 10-K for the year ended December 31, 2022.
 
The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates, judgments, or assumptions that could have a material effect on the carrying value of certain assets and liabilities. These estimates, judgments, and assumptions affect the amounts reported in the condensed consolidated financial statements and the disclosures provided. The determination of the allowance for credit losses, income taxes, valuations and impairments of investment securities and goodwill, as well as fair value measurements of derivatives and loans held-for-sale are highly dependent upon management’s estimates, judgments, and assumptions, and changes in any of these could have a significant impact on the condensed consolidated financial statements.

The condensed consolidated financial statements include the accounts of First Internet Bancorp (the “Company”), its wholly owned subsidiary, First Internet Bank of Indiana (the “Bank”), and the Bank’s three wholly owned subsidiaries, First Internet Public Finance Corp., JKH Realty Services, LLC and SPF15, Inc. All significant intercompany accounts and transactions have been eliminated in consolidation.
 
The Company is subject to claims and lawsuits that arise primarily in the ordinary course of business. It is the opinion of management that the disposition or ultimate resolution of such claims and lawsuits will not have a material adverse effect on the consolidated financial position, results of operations, and cash flows of the Company.

Other than the adoption of new accounting standards, the Company has not changed its significant accounting and reporting policies from those disclosed in the Company’s Form 10-K for the year ended December 31, 2022.

Adoption of new accounting standards

ASU 2016 - 13

On January 1, 2023, the Company adopted ASU 2016-03 Financial Instruments - Credit losses (“ASC 326”): Measurement of Credit Losses on Financial Instruments, as amended, which replaces the incurred loss methodology with an expected credit loss (“CECL”) methodology. The CECL estimate is applicable to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities. It also applies to off-balance sheet credit exposures, including loan commitments, standby letters of credit, financial guarantees and other similar instruments. Additionally, ASC 326 resulted in changes to the accounting for available-for-sale and held-to-maturity debt securities.

The Company adopted ASC 326 for all financial assets measured at amortized cost, available for sale securities and off-balance sheet credit exposures. Results for reporting periods beginning after January 1, 2023 are presented under ASC 326, while prior period amounts continue to be reported in accordance with previously applicable U.S. GAAP. The Company recorded a net decrease to retained earnings of $4.5 million as of January 1, 2023 for the cumulative effect of adopting ASC 326. The net adjustment to allowance for credit losses (“ACL”) includes $2.3 million related to loans, $1.9 million related to off-balance sheet credit exposures and $0.3 million related to held-to-maturity debt securities.

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

For AFS debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or it is more likely than not that it will be required to sell, the security before recovery of its amortized cost basis. If either of the
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criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For AFS debt securities that do not meet the aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors, such as interest rates or market conditions. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded. Changes in the ACL are recorded as a provision for, or recovery of, credit loss expense. Losses are charged against the allowance when management believes that uncollectibility of an AFS debt security is confirmed or when either of the criteria regarding intent or requirement to sell is met.

Accrued interest receivable on AFS debt securities totaled $2.0 million at March 31, 2023 and is excluded from the estimate of credit losses. The Company made the policy election to exclude accrued interest from the amortized cost basis of AFS debt securities and report accrued interest separately on the condensed consolidated balance sheet.

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

Management measures expected credit losses on HTM debt securities on a collective basis by major security type. Accrued interest receivable on HTM debt securities totaled $0.8 million at March 31, 2023 and is excluded from the estimate of credit losses. The Company made the accounting policy election to not measure an ACL for accrued interest. Accrued interest deemed uncollectible will be written off through interest income. The HTM securities portfolio includes municipal securities, residential mortgage-backed-securities, commercial mortgage-backed securities and corporate securities. All residential and commercial mortgage-backed securities are U.S. government issued or sponsored and substantially all municipal and corporate securities are rated investment grade or above.

The estimate of expected credit losses considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. At the time of adoption, the estimated reserve was $0.3 million.

ACL - Loans

The ACL for loans represents management's estimate of all expected credit losses over the expected life of the Company’s existing loan portfolio. Management estimates the ACL balance using relevant available information about the collectability of cash flows, from internal and external sources, including historical information relating to past events, current conditions, and reasonable and supportable forecasts of future economic conditions. When the Company is unable to forecast future economic events, management may revert to historical information.

Accrued interest receivable on loans totaled $17.7 million and is excluded from the estimate of credit losses. The Company made the accounting policy election to not measure an ACL for accrued interest receivable. Accrued interest deemed uncollectible will be written off through interest income.

ACL - Loans - Collectively Evaluated

The ACL is measured on a collective pool basis when similar risk characteristics exist. The Company has identified the following portfolio segments in the table below.

The Company utilized a discounted cash flow (“DCF”) method to estimate the quantitative portion of the allowance for credit losses for loans evaluated on a collective pooled basis. For each segment, a loss driver analysis was performed in order to identify loss drivers and create a regression model for use in forecasting cash flows.

In creating the DCF model, the Company has established a one-year reasonable and supportable forecast period with a one-year straight line reversion to the long-term historical average. Due to its minimal loss history, the Company elected to use peer data for a more reasonable calculation.

Key inputs into the DCF model include loan-level detail, including the amortized cost basis of individual loans, payment structure, loss history, and forecasted loss drivers. The Company utilizes a third party to provide economic forecasts under various scenarios, which are assessed quarterly considering the scenarios in the context of the current economic environment and loss risk.

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Expected credit losses are estimated over the contractual term of the loans and adjusted for prepayments when appropriate. The contractual term excludes extensions, renewals, and modifications unless the extension or renewal options are included in the original or modified contract at the reporting date and are not unconditionally cancellable by the Company.

Additional key assumptions in the DCF model include the probability of default (“PD”), loss given default (“LGD”), and prepayment/curtailment rates. The Company utilizes the model-driven PD and a LGD derived from a method referred to as Frye Jacobs. The Frye Jacobs method is a mathematical formula that traces the relationship between LGD and PD over time and projects the LGD based on the level of PD forecasted. In all cases, the Frye Jacobs method is utilized to calculate LGDs during the forecast period, reversion period and long-term historical average. Prepayment and curtailment rates were calculated through third party analysis of the Company’s own data.

Qualitative factors for the DCF and weighted-average remaining maturity methodologies include the following:
•Changes in lending policies and procedures, including changes in underwriting standards and collections, charge-offs and recovery practices
•Changes in international, national, regional and local conditions
•Changes in the nature and volume of the portfolio and terms of loans
•Changes in the experience, depth and ability of lending management
•Changes in the volume and severity of past due loans and other similar conditions
•Changes in the quality of the organization’s loan review system
•Changes in the value of underlying collateral for collateral dependent loans
•The existence and effect of any concentrations of credit and changes in the levels of such concentrations
•The effect of other external factors (i.e. competition, legal and regulatory requirements) on the level of estimated credit losses

ACL - Loans - Individually Evaluated

Loans that do not share risk characteristics are evaluated on an individual basis and are excluded from the collective evaluation. The Company has determined that any loans which have been placed on nonaccrual status will be individually evaluated. Individual analysis will establish a specific reserve for loans, if necessary. Specific reserves on nonaccrual loans are typically based on management’s best estimate of the fair value of collateral securing these loans, adjusted for selling costs as necessary.

ACL - Off-Balance Sheet Credit Exposures

The Company estimates expected credit losses over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. The allowance on off-balance sheet credit exposure is recorded as a liability and adjusted as a provision for credit loss expense. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life. Funding rates are based on a historical analysis of the Company’s portfolio, while estimates of credit losses are determined using the same loss rates as funded loans.

Regulatory Capital

As permitted by the federal banking regulatory agencies, the Company has elected the option to delay the impact of the day one adoption of ASC 326. Refer to “Item 2. Regulatory Capital Requirements” for details of the phase-in transition adjustments.

Modified Loans to Borrowers Experiencing Financial Difficulty

Concurrent with the adoption of ASU 2016-03, the Company adopted ASU 2022-02 “Financial Instruments-Credit Losses (ASC 326): Troubled Debt restructurings and Vintage Disclosures,” as amended. The update eliminated the accounting guidance for troubled debt restructurings (“TDRs”) by creditors, while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty.

Revision of Previously Issued Financial Statements

The Company has revised amounts reported in previously issued financial statements for the periods presented in this Quarterly Report on Form 10-Q due to immaterial clerical errors. The clerical errors caused certain amounts related to
8

the transfer of available-for-sale mortgage-backed securities to held-to-maturity mortgage-backed securities to be reclassified to different line items within the statement of cash flows for the period ended March 31, 2022. The reclassifications were between the purchases, maturities and amortization, and depreciation line items related to securities and had no impact on the ending cash balance, consolidated balance sheet or statement of operations. The Company evaluated the impact of the clerical errors to our previously issued financial statements in accordance with SEC Staff Accounting Bulletins No. 99 and No. 108 and, based upon quantitative and qualitative factors, determined that the clerical errors were not material to the previously issued financial statements and disclosures included in our Quarterly Report on Form 10-Q for the three months ended March 31, 2022.



    



9

Note 2:        (Loss) Earnings Per Share
 
(Loss) earnings per share of common stock are based on the weighted-average number of basic shares and dilutive shares outstanding during the period.
 
The following is a reconciliation of the weighted-average common shares for the basic and diluted (loss) earnings per share computations for the three months ended March 31, 2023 and 2022. 
(dollars in thousands, except per share data)Three Months Ended March 31,
 20232022
Basic (loss) earnings per share  
Net (loss) income$(3,017)$11,209 
Weighted-average common shares9,024,072 9,790,122 
Basic (loss) earnings per common share$(0.33)$1.14 
Diluted (loss) earnings per share  
Net (loss) income$(3,017)$11,209 
Weighted-average common shares9,024,072 9,790,122 
Dilutive effect of equity compensation— 80,272 
     Weighted-average common and incremental shares9,024,072 9,870,394 
Diluted (loss) earnings per common share 1
$(0.33)$1.14 
1 Potential dilutive common shares are excluded from the computation of diluted EPS in the periods where the effect would be antidilutive. Since the Company was in a loss position for the three months ended March 31, 2023, basic net loss is the same as diluted net loss per share, as the inclusion of all potential shares of common stock outstanding would have been anti-dilutive. Excluded from the computation of diluted EPS were weighted-average antidilutive shares totaling 661 for the three months ended March 31, 2022.
  
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Note 3:         Securities
 
The following tables summarize securities available-for-sale and securities held-to-maturity as of March 31, 2023 and December 31, 2022.
 March 31, 2023
 AmortizedGross UnrealizedFair
(in thousands)CostGainsLossesValue
Securities available-for-sale    
U.S. Government-sponsored agencies$38,675 $49 $(1,677)$37,047 
Municipal securities69,243 602 (1,209)68,636 
Agency mortgage-backed securities - residential 1
249,795 7 (33,050)216,752 
Agency mortgage-backed securities - commercial16,739 — (1,209)15,530 
Private label mortgage-backed securities - residential11,445 — (1,170)10,275 
Asset-backed securities5,000 — (2)4,998 
Corporate securities45,623 2 (3,030)42,595 
Total available-for-sale$436,520 $660 $(41,347)$395,833 

 March 31, 2023
 Amortized CostGross UnrealizedFair ValueAllowance for Credit LossesNet Carrying Value
(in thousands)GainsLosses
Securities held-to-maturity    
Municipal securities$13,935 $10 $(801)$13,144 $(3)$13,932 
Mortgage-backed securities - residential146,809 11 (13,553)133,267 — 146,809 
Mortgage-backed securities - commercial5,806 — (1,103)4,703 — 5,806 
Corporate securities44,547 — (3,198)41,349 (333)44,214 
Total held-to-maturity$211,097 $21 $(18,655)$192,463 $(336)$210,761 

1 Includes $0.5 million of additional premium related to terminated interest rate swaps associated with agency mortgage-backed securities - residential as of March 31, 2023.


Accrued interest receivable on AFS and HTM securities at March 31, 2023 was $2.0 million and $0.8 million, respectively, and is included in accrued interest receivable on the condensed consolidated balance sheet. The Company elected to exclude all accrued interest receivable from securities when estimating credit losses.

Over 97% of mortgage-backed securities (including both AFS and HTM) held by the Company are issued by U.S. government-sponsored entities and agencies. These securities are either explicitly or implicitly guaranteed by the U.S. government and have a long history of no credit losses; therefore, the Company did not record an ACL on these securities.

Additionally, the Company evaluated credit impairment for individual AFS securities that are in an unrealized loss position and determined that the unrealized losses are unrelated to credit quality and are primarily attributable to changes in interest rates and volatility in the financial markets. As the Company does not intend to sell the AFS securities that are in an unrealized loss position and it is unlikely that it will be required to sell these securities before recovery of their amortized cost basis, the Company did not record an ACL on these securities.

In accordance with the adoption of ASC 326, the Company also evaluated its HTM securities that are in an unrealized loss position and considered issuer bond ratings, historical loss rates for bond ratings and economic forecasts. As a result, the Company recorded in an initial ACL in retained earnings of $0.3 million on January 1, 2023. The Company reevaluated these securities at March 31, 2023 and determined no additional ACL was necessary.

11

 December 31, 2022
 AmortizedGross UnrealizedFair
(in thousands)CostGainsLossesValue
Securities available-for-sale    
U.S. Government-sponsored agencies$35,606 $— $(1,797)$33,809 
Municipal securities68,958 458 (2,140)67,276 
Agency mortgage-backed securities - residential 1
252,066 — (36,974)215,092 
Agency mortgage-backed securities - commercial17,142 — (1,302)15,840 
Private label mortgage-backed securities - residential11,777 — (1,322)10,455 
Asset-backed securities
5,000 — (40)4,960 
Corporate securities45,634 35 (2,717)42,952 
Total available-for-sale$436,183 $493 $(46,292)$390,384 

 December 31, 2022
 AmortizedGross UnrealizedFair
(in thousands)CostGainsLossesValue
Securities held-to-maturity    
Municipal securities$13,946 $— $(1,114)$12,832 
Agency mortgage-backed securities - residential121,853 — (15,112)106,741 
Agency mortgage-backed securities - commercial5,818 — (1,266)4,552 
Corporate securities47,551 — (3,193)44,358 
Total held-to-maturity$189,168 $— $(20,685)$168,483 

1 Includes $0.5 million of additional premium related to terminated interest rate swaps associated with agency mortgage-backed securities - residential as of December 31, 2022.


The carrying value of securities at March 31, 2023 is shown below by their contractual maturity date. Actual maturities will differ because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
 Available-for-Sale
(in thousands)Amortized
Cost		Fair
Value
Within one year$269 $263 
One to five years34,401 35,141 
Five to ten years45,784 43,291 
After ten years73,087 69,583 
 153,541 148,278 
Agency mortgage-backed securities - residential249,795 216,752 
Agency mortgage-backed securities - commercial16,739 15,530 
Private label mortgage-backed securities - residential11,445 10,275 
Asset-backed securities5,000 4,998 
Total$436,520 $395,833 

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 Held-to-Maturity
(in thousands)Amortized
Cost		Fair
Value
Within one year$495 $484 
One to five years8,304 8,107 
Five to ten years44,208 40,910 
After ten years5,475 4,992 
58,482 54,493 
Agency mortgage-backed securities - residential146,809 133,267 
Agency mortgage-backed securities - commercial5,806 4,703 
Total$211,097 $192,463 

There were no gross gains or losses resulting from the sale of available-for-sale securities during the three months ended March 31, 2023 and March 31, 2022, respectively.

Certain investments in debt securities are reported in the condensed consolidated financial statements at an amount less than their historical cost. The total fair value of these investments at March 31, 2023 and December 31, 2022 was $573.4 million and $527.4 million, which was approximately 97% and 94%, respectively, of the Company’s AFS and HTM securities portfolios. As of March 31, 2023, the Company’s security portfolio consisted of 459 securities, of which 431 were in an unrealized loss position. As of December 31, 2022, the Company’s security portfolio consisted of 445 securities, of which 434 were in an unrealized loss position. The unrealized losses are related to the categories noted below.

U. S. Government-Sponsored Agencies, Municipal Securities and Corporate Securities

The unrealized losses on the Company’s investments in securities issued by U.S. Government-sponsored agencies, municipal organizations and corporate entities were caused primarily by interest rate changes. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments. The Company does not intend to sell the investments and it is not likely that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be upon maturity. As of March 31, 2023, the unrealized losses occurred as a result of changes in interest rates, market spreads and market conditions subsequent to purchase.
 
Agency Mortgage-Backed, Private Label Mortgage-Backed and Asset-Backed Securities
 
The unrealized losses on the Company’s investments in agency mortgage-backed, private label mortgage-backed and asset-backed securities were caused primarily by interest rate changes. The Company expects to recover the amortized cost basis over the terms of the securities. The Company does not intend to sell the investments and it is not likely that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be upon maturity. As of March 31, 2023, the unrealized losses occurred as a result of changes in interest rates, market spreads and market conditions subsequent to purchase.

The following tables show the securities portfolio’s gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at March 31, 2023 and December 31, 2022.
13

 March 31, 2023
 Less Than 12 Months12 Months or LongerTotal
(in thousands)Fair
Value		Unrealized
Losses		Fair
Value		Unrealized
Losses		Fair
Value		Unrealized
Losses
Securities available-for-sale      
U.S. Government-sponsored agencies$11,764 $(413)$20,681 $(1,264)$32,445 $(1,677)
Municipal securities32,847 (155)43,485 (1,054)76,332 (1,209)
Agency mortgage-backed securities- residential29,536 (3,708)185,093 (29,342)214,629 (33,050)
Agency mortgage-backed securities- commercial— — 15,530 (1,209)15,530 (1,209)
Private label mortgage-backed securities - residential127 (15)10,148 (1,155)10,275 (1,170)
     Asset-backed securities— — 4,998 (2)4,998 (2)
Corporate securities25,769 (857)14,828 (2,173)40,597 (3,030)
Total$100,043 $(5,148)$294,763 $(36,199)$394,806 $(41,347)




 December 31, 2022
 Less Than 12 Months12 Months or LongerTotal
(in thousands)Fair
Value		Unrealized
Losses		Fair
Value		Unrealized
Losses		Fair
Value		Unrealized
Losses
Securities available-for-sale      
U.S. Government-sponsored agencies$29,668 $(1,008)$4,141 $(789)$33,809 $(1,797)
Municipal securities39,557 (1,766)4,778 (374)44,335 (2,140)
Agency mortgage-backed securities - residential
170,026 (29,690)45,066 (7,284)215,092 (36,974)
Agency mortgage-backed securities - commercial10,560 (926)5,280 (376)15,840 (1,302)
Private label mortgage-backed securities2,445 (330)8,010 (992)10,455 (1,322)
Asset-backed securities
4,960 (40)— — 4,960 (40)
Corporate securities21,568 (1,452)13,239 (1,265)34,807 (2,717)
Total$278,784 $(35,212)$80,514 $(11,080)$359,298 $(46,292)

 December 31, 2022
 Less Than 12 Months12 Months or LongerTotal
(in thousands)Fair
Value		Unrealized
Losses		Fair
Value		Unrealized
Losses		Fair
Value		Unrealized
Losses
Securities held-to-maturity      
Municipal securities$8,160 $(661)$4,258 $(453)$12,418 $(1,114)
Agency mortgage-backed securities - residential68,408 (8,848)38,332 (6,264)106,740 (15,112)
Agency mortgage-backed securities - commercial4,552 (1,266)— — 4,552 (1,266)
Corporate securities36,866 (2,685)7,492 (508)44,358 (3,193)
Total$117,986 $(13,460)$50,082 $(7,225)$168,068 $(20,685)






14

The following table summarizes ratings for the Company’s HTM portfolio issued by state and political subdivisions and other securities as of March 31, 2023.

 Held-to-Maturity
(in thousands)State and MunicipalOtherTotal
Aaa/AAA$8,684 $— $8,684 
Aa1/AA+1,271 — 1,271 
Aa2/AA1,540 — 1,540 
A1/A+1,794 — 1,794 
A2/A646 — 646 
A3/A-— 9,517 9,517 
Baa1/BBB+— 9,500 9,500 
Baa2/BBB— 11,000 11,000 
Baa3/BBB-— 14,530 14,530 
Not Rated 1
— 152,615 152,615 
   Total$13,935 $197,162 $211,097 

1 HTM agency mortgage-backed securities - commercial and residential are listed under Other securities as not rated.

There were no amounts reclassified from accumulated other comprehensive loss to the condensed consolidated statements of operations during the three months ended March 31, 2023.




15

Note 4:        Loans

Loan balances as of March 31, 2023 and December 31, 2022 are summarized in the table below. Categories of loans include:

(in thousands)March 31, 2023December 31, 2022
Commercial loans  
Commercial and industrial$113,198 $126,108 
Owner-occupied commercial real estate59,643 61,836 
Investor commercial real estate142,174 93,121 
Construction158,147 181,966 
Single tenant lease financing952,533 939,240 
Public finance604,898 621,032 
Healthcare finance256,670 272,461 
Small business lending136,382 123,750 
Franchise finance382,161 299,835 
Total commercial loans2,805,806 2,719,349 
Consumer loans
Residential mortgage392,062 383,948 
Home equity26,160 24,712 
Other consumer loans338,133 324,598 
Total consumer loans756,355 733,258 
Total commercial and consumer loans3,562,161 3,452,607 
Net deferred loan origination fees/costs and premiums/discounts on purchased loans and other1
45,081 46,794 
Total loans3,607,242 3,499,401 
Allowance for credit losses(36,879)(31,737)
Net loans$3,570,363 $3,467,664 

1 Includes carrying value adjustments of $31.5 million and $32.5 million related to terminated interest rate swaps associated with public finance loans as of March 31, 2023 and December 31, 2022, respectively. 

Risk characteristics of each loan portfolio segment are as follows:

Commercial and Industrial: Commercial and industrial loans’ sources of repayment are primarily based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected, and the collateral securing these loans may fluctuate in value. Loans are made for working capital, equipment purchases, or other purposes. Most commercial and industrial loans are secured by the assets being financed and may incorporate a personal guarantee. This portfolio segment is generally concentrated in the Midwest and Southwest regions of the United States.

Owner-Occupied Commercial Real Estate: The primary source of repayment is the cash flow from the ongoing operations and activities conducted by the borrower, or an affiliate of the borrower, who owns the property. This portfolio segment is generally concentrated in the Midwest and Southwest regions of the United States and its loans are often secured by manufacturing and service facilities, as well as office buildings.

16

Investor Commercial Real Estate: These loans are underwritten primarily based on the cash flow expected to be generated from the property and are secondarily supported by the value of the real estate. These loans typically incorporate a personal guarantee from the primary sponsor or sponsors. This portfolio segment generally involves larger loan amounts with repayment primarily dependent on the successful leasing and operation of the property securing the loan or the business conducted on the property securing the loan. Investor commercial real estate loans may be more adversely affected by changing economic conditions in the real estate markets, industry dynamics or the overall health of the local economy where the property is located. The properties securing the Company’s investor commercial real estate portfolio tend to be diverse in terms of property type and are generally located in the Midwest and Southwest regions of the United States. Management monitors and evaluates commercial real estate loans based on property financial performance, collateral value, guarantor strength, economic and industry conditions together with other risk grade criteria. As a general rule, the Company avoids financing special use projects unless other underwriting factors are present to mitigate these additional risks.

Construction: Construction loans are secured by land and related improvements and are made to assist in the construction of new structures, which may include commercial (retail, industrial, office, and multi-family) properties, land development for residential properties or single family residential properties offered for sale by the builder. These loans generally finance a variety of project costs, including land, site preparation, architectural services, construction, closing and soft costs and interim financing needs. The cash flows of builders, while initially predictable, may fluctuate with market conditions, and the value of the collateral securing these loans may be subject to fluctuations based on general economic changes. This portfolio segment is generally concentrated in the Midwest and Southwest regions of the United States.

Single Tenant Lease Financing: These loans are made on a nationwide basis to property owners of real estate subject to long-term lease arrangements with single tenant operators. The real estate is typically operated by regionally, nationally or globally branded businesses. The loans are underwritten based on the financial strength of the borrower, characteristics of the real estate, cash flows generated from the lease arrangements and the financial strength of the tenant. Similar to the other loan portfolio segments, management monitors and evaluates these loans based on borrower and tenant financial performance, collateral value, industry trends and other risk grade criteria.

Public Finance: These loans are made on a nationwide basis to governmental and not-for-profit entities to provide both tax-exempt and taxable loans for a variety of purposes including: short-term cash-flow needs; debt refinancing; economic development; quality of life projects; infrastructure improvements; renewable energy projects; and equipment financing. The primary sources of repayment for public finance loans include pledged revenue sources including but not limited to: general obligations; property taxes; income taxes; tax increment revenue; utility revenue; gaming revenues; sales tax; and pledged general revenue. Certain loans may also include an additional collateral pledge of mortgaged property or a security interest in financed equipment.

Healthcare Finance: These loans are made on a nationwide basis to healthcare providers, primarily dentists, for practice acquisition financing or refinancing that occasionally includes owner-occupied commercial real estate and equipment purchases. The sources of repayment are primarily based on the identified cash flows from operations of the borrower and related entities and secondarily on the underlying collateral provided by the borrower.

Small Business Lending: These loans are made on a nationwide basis to small businesses and generally carry a partial guaranty from the U.S. Small Business Administration (“SBA”) under its 7(a) loan program. We generally sell the government guaranteed portion of SBA loans into the secondary market while retaining the non-guaranteed portion of the loan and the servicing rights. Loans in the small business lending portfolio have sources of repayment that are primarily based on the identified cash flows of the borrower and secondarily on any underlying collateral provided by the borrower. Loans may, but do not always, have a collateral shortfall. For SBA loans where the guaranteed portion is retained, the SBA guaranty provides a tertiary source of repayment to the Bank in event of borrower default. Cash flows of borrowers, however, may not be as expected and collateral securing these loans may fluctuate in value. Loans are made for a broad array of purposes including, but not limited to, providing operating cash flow, funding ownership changes, and facilitating equipment purchases.

Franchise Finance: These loans are made on a nationwide basis through our partnership with ApplePie Capital, which through their deep relationships with franchise brands provides franchisees with financing options for new franchise units, recapitalization, expansion, equipment and working capital. The sources of repayment are either based on identified cash flows from existing operations of the borrower or pro forma cash flow for new franchise locations.

17

Residential Mortgage: With respect to residential loans that are secured by 1-to-4 family residences and are generally owner occupied, the Bank typically establishes a maximum loan-to-value ratio and requires private mortgage insurance if that ratio is exceeded. Repayment of these loans is primarily dependent on the financial circumstances of the borrowers, which can be impacted by economic conditions in their market areas such as unemployment levels. Repayment can also be impacted by changes in residential property values. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers in geographically diverse locations throughout the country.

Home Equity: Home equity loans and lines of credit are typically secured by a subordinate interest in 1-to-4 family residences. The properties securing the home equity portfolio segment are generally geographically diverse as the Bank offered these products on a nationwide basis. Repayment of these loans and lines of credit is primarily dependent on the financial circumstances of the borrowers and may be impacted by changes in unemployment levels and property values on residential properties, among other economic conditions in the market.

Other Consumer: These loans primarily consist of consumer loans and credit cards. Consumer loans may be secured by consumer assets such as horse trailers or recreational vehicles. Some consumer loans are unsecured, such as small installment loans, home improvement loans and certain lines of credit. Repayment of consumer loans is primarily dependent upon the personal income of the borrowers, which can be impacted by economic conditions in their market areas such as unemployment levels. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers in geographically diverse locations throughout the country.

Allowance for Credit Losses (“ACL”) Methodology

The ACL for loans represents management's estimate of all expected credit losses over the expected life of the Company’s existing loan portfolio. Management estimates the ACL balance using relevant available information about the collectability of cash flows, from internal and external sources, including historical information relating to past events, current conditions, and reasonable and supportable forecasts of future economic conditions. When the Company is unable to forecast future economic events, management may revert to historical information.

The Company's methodologies incorporate a one-year reasonable and supportable forecast period with a one-year straight line reversion to the long-term historical average.

The ACL methodology may also consider other adjustments to address changes in conditions, trends, and circumstances such as local industry changes that could have a significant impact on the risk profile of the loan portfolio and provide for adjustments that may not be reflected and/or captured in the historical loss data. These factors include: lending policies, imprecision in forecasting future economic conditions, loan profile, lending staff, problem loan trends, loan review, collateral, credit concentration, or other internal and external factors.

The Company also includes qualitative adjustments to the allowance based on factors and considerations that have not otherwise been fully accounted for. Qualitative adjustments include, but are not limited to:

•Changes in lending policies and procedures, including changes in underwriting standards and collections, charge-offs and recovery practices
•Changes in international, national, regional and local conditions
•Changes in the nature and volume of the portfolio and terms of loans
•Changes in the experience, depth and ability of lending management
•Changes in the volume and severity of past due loans and other similar conditions
•Changes in the quality of the organization’s loan review system
•Changes in the value of underlying collateral for collateral dependent loans
•The existence and effect of any concentrations of credit and changes in the levels of such concentrations
•The effect of other external factors (i.e. competition, legal and regulatory requirements) on the level of estimated credit losses

The ACL is measured on a collective or pool basis when similar risk characteristics exist. The Company segments its portfolio generally by Federal Financial Institutions Examination Council ("FFIEC") Call Report codes that align with its lines of business. Additional sub-segmentation may be utilized to identify groups of loans with unique risk characteristics relative to the rest of the portfolio.

18

Loans that do not share similar risk characteristics are evaluated on an individual basis. These evaluations are typically performed on loans with a deteriorated internal risk rating. The allowance for credit loss is determined based on several methods, including estimating the fair value of the underlying collateral or the present value of expected cash flows.

The Company relies on a third-party platform that offers multiple methodologies to measure historical life-of-loan losses.

Modified Loans to Borrowers Experiencing Financial Difficulty

The Company may make modifications to certain loans in order to alleviate temporary difficulties in the borrower’s financial condition and/or constraints on the borrower’s ability to repay the loan, and to minimize potential losses to the Company. Modifications may include changes in the amortization terms of the loan, reductions in interest rates, acceptance of interest only payments, and/or reductions to the outstanding loan balance. Such loans are typically placed on nonaccrual status when there is doubt concerning the full repayment of principal and interest or the loan has been in default for a period of 90 days or more. These loans may be returned to accrual status when all contractual amounts past due have been brought current, and the borrower’s performance under the modified terms of the loan agreement and the ultimate collectability of all contractual amounts due under the modified terms is no longer in doubt. The Company typically measures the ACL on modified loans to borrowers experiencing financial difficulty on an individual basis when the loans are deemed to no longer share risk characteristics that are similar with other loans in the portfolio. The determination of the ACL for these loans is based on a discounted cash flow approach for both those measured collectively and individually, unless the loan is deemed collateral dependent, which requires measurement of the ACL based on the estimated expected fair value of the underlying collateral, less costs to sell. GAAP requires the Company to make certain disclosures related to these loans, including certain types of modifications, as well as how such loans have performed since their modifications.

Provision for Credit Losses
 
A provision for estimated losses on loans is charged to income based upon management’s evaluation of the potential losses. Such an evaluation, which includes a review of all loans for which full repayment may not be reasonably assured, considers, among other matters, the estimated net realizable value of the underlying collateral, as applicable, economic conditions, loan loss experience, and other factors that are particularly susceptible to changes that could result in a material adjustment in the near term. While management attempts to use the best information available in making its evaluations, future allowance adjustments may be necessary if economic conditions change substantially from the assumptions used in making the evaluations.
 
Policy for Charging Off Loans
 
The Company’s policy is to charge off a loan at any point in time when it no longer can be considered a bankable asset, meaning collectible within the parameters of policy. A secured loan is generally charged down to the estimated fair value of the collateral, less costs to sell, no later than when it is 120 days past due as to principal or interest. An unsecured loan generally is charged off no later than when it is 180 days past due as to principal or interest. A home improvement loan generally is charged off no later than when it is 90 days past due as to principal or interest.

19

The following tables present changes in the balance of the ACL during the three months ended March 31, 2023. 

(in thousands)Three Months Ended March 31, 2023
Allowance for credit losses:Balance, Beginning of PeriodAdoption of CECL(Credit) Provision Charged to ExpenseLosses
Charged Off		RecoveriesBalance,
End of Period
Commercial and industrial$1,711 $(120)$6,810 $(6,965)$1 $1,437 
Owner-occupied commercial real estate651 62 (1)— — 712 
Investor commercial real estate1,099 (191)368 — — 1,276 
Construction2,074 (435)(88)— — 1,551 
Single tenant lease financing10,519 (346)100 — — 10,273 
Public finance1,753 (135)(48)— — 1,570 
Healthcare finance2,997 1,034 (336)— — 3,695 
Small business lending2,168 334 (105)(60)3 2,340 
Franchise finance3,988 (313)997 — — 4,672 
Residential mortgage1,559 406 594 — 2 2,561 
Home equity69 133 51 — 1 254 
Other consumer loans3,149 2,533 1,031 (232)57 6,538 
Total$31,737 $2,962 $9,373 $(7,257)$64 $36,879 

Prior to the adoption of ASU 2016-13 on January 1, 2023, the Company calculated the allowance for loan losses using the incurred loss methodology. The following table presents the activity in the allowance for loan losses by segment for the three months ended March 31, 2022.

(in thousands)Three Months Ended March 31, 2022
Allowance for loan losses:Balance, Beginning of Period(Credit) Provision Charged to ExpenseLosses
Charged Off		RecoveriesBalance,
End of Period
Commercial and industrial$1,891 $88 $— $— $1,979 
Owner-occupied commercial real estate742 (116)— — 626 
Investor commercial real estate328 77 — — 405 
Construction1,612 154 — — 1,766 
Single tenant lease financing10,385 (1,645)— 1,231 9,971 
Public finance1,776 7 — — 1,783 
Healthcare finance5,940 (430)— — 5,510 
Small business lending1,387 111 (80)17 1,435 
Franchise finance1,083 354 — — 1,437 
Residential mortgage643 87 — 1 731 
Home equity64 (1)— 2 65 
Other consumer loans1,990 263 (163)99 2,189 
Tax refund advance loans— 1,842 (1,488)— 354 
Total$27,841 $791 $(1,731)$1,350 $28,251 



In addition to the ACL, the Company established a reserve for off-balance sheet commitments, classified in other liabilities, as required by the adoption of the CECL methodology for measuring credit losses. This reserve is maintained at a level management believes to be sufficient to absorb losses arising from unfunded loan commitments. The day one entry for off-balance sheet commitments resulted in a reserve of $2.5 million. The adequacy of the reserve for unfunded
20

commitments is determined quarterly based on methodology similar to the methodology for determining the ACL. The following table details activity in the provision for credit losses on off-balance sheet commitments through March 31, 2023.

(dollars in thousands)Pre-ASC 326 AdoptionImpact of ASC 326 AdoptionProvision for credit lossesBalance, March 31, 2023
Off-balance sheet commitments
Commercial loans
Commercial and industrial$— $110 $39 $149 
Owner-occupied commercial real estate— — 8 8 
Investor commercial real estate— 9 39 48 
Construction— 2,193 (39)2,154 
Healthcare finance— 2 — 2 
Total commercial loans— 2,314 47 2,361 
Consumer loans
Residential mortgage— 127 (14)113 
Home equity— 52 10 62 
Other consumer— 11 (1) 10 
Total consumer loans— 190 (5)185 
Total allowance for off-balance sheet commitments$— $2,504 $42 $2,546 
21


The following table present the recorded investment in loans based on portfolio segment and impairment method as of December 31, 2022. 


(in thousands)LoansAllowance for Loan Losses
December 31, 2022Ending Balance:  
Collectively Evaluated for Impairment		Ending Balance:  
Individually Evaluated for Impairment		Ending BalanceEnding Balance:  
Collectively Evaluated for Impairment		Ending Balance:  
Individually Evaluated for Impairment		Ending Balance
Commercial and industrial$116,307 $9,801 $126,108 $1,660 $51 $1,711 
Owner-occupied commercial real estate60,266 1,570 61,836 651 — 651 
Investor commercial real estate93,121 — 93,121 1,099 — 1,099 
Construction181,966 — 181,966 2,074 — 2,074 
Single tenant lease financing939,240 — 939,240 10,519 — 10,519 
Public finance621,032 — 621,032 1,753 — 1,753 
Healthcare finance272,461 — 272,461 2,997 — 2,997 
Small business lending1
113,699 10,051 123,750 1,465 703 2,168 
Franchise finance299,835 — 299,835 3,988 — 3,988 
Residential mortgage380,272 3,676 383,948 1,559 — 1,559 
Home equity24,683 29 24,712 69 — 69 
Other consumer324,581 17 324,598 3,149 — 3,149 
Total$3,427,463 $25,144 $3,452,607 $30,983 $754 $31,737 

1 Balance is partially guaranteed by the U.S. government.
22

The Company utilizes a risk grading matrix to assign a risk grade to each of its commercial loans. A description of the general characteristics of the risk grades is as follows:
 
•“Pass” - Higher quality loans that do not fit any of the other categories described below.

•“Special Mention” - Loans that possess some credit deficiency or potential weakness, which deserve close attention.

•“Substandard” - Loans that possess a defined weakness or weaknesses that jeopardize the liquidation of the debt. Loans characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. Loans that are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any.

•“Doubtful” - Such loans have been placed on nonaccrual status and may be heavily dependent upon collateral possessing a value that is difficult to determine or based upon some near-term event that lacks clear certainty. These loans have all of the weaknesses of those classified as Substandard; however, based on existing conditions, these weaknesses make full collection of the principal balance highly improbable.

•“Loss” - Loans that are considered uncollectible and of such little value that continuing to carry them as assets is not warranted.

The Company does not risk grade its consumer loans. It classifies them as either performing or nonperforming. Below is a description of those classifications:

•“Performing” - Loans that are accruing and full collection of principal and interest is expected.

•“Nonperforming” - Loans that are 90 days delinquent or for which the full collection of principal and interest may be in doubt.

23


The following tables present the credit risk profile of the Company’s commercial and consumer loan portfolios by loan class and by year of origination for the years indicated based on rating category and payment activity as of March 31, 2023 and December 31, 2022. 

March 31, 2023
Term Loans (amortized cost basis by origination year)Revolving loans amortized cost basisRevolving loans converted to term
(in thousands)20232022202120202019PriorTotal
Commercial and industrial
  Pass$2,393 $33,609 $15,988 $2,648 $12,826 $12,471 $29,091 $— $109,026 
  Special Mention — 36 918 — — — 382 — 1,336 
  Substandard— — 2,836 — — — — — 2,836 
  Doubtful— — — — — — — — — 
     Total Commercial and
     industrial		2,393 33,645 19,742 2,648 12,826 12,471 29,473 — 113,198 
     Gross charge-offs— — 6,914 — 51 — — — 6,965 
Owner-occupied commercial real estate
  Pass411 11,447 9,251 6,748 6,132 14,753 — — 48,742 
  Special Mention — — — 8,568 — 892 — — 9,460 
  Substandard— — — — — 1,441 — — 1,441 
  Doubtful— — — — — — — — — 
     Total owner-occupied
     commercial real estate		411 11,447 9,251 15,316 6,132 17,086 — — 59,643 
Investor commercial real estate
  Pass4,878 40,758 23,893 10,049 48,544 6,169 — — 134,291 
  Special Mention — — — — — 7,883 — — 7,883 
  Substandard— — — — — — — — — 
  Doubtful— — — — — — — — — 
     Total investor commercial real
     estate		4,878 40,758 23,893 10,049 48,544 14,052 — — 142,174 
Construction
  Pass785 80,984 34,384 38,905 — 640 973 — 156,671 
  Special Mention — — 1,476 — — — — — 1,476 
  Substandard— — — — — — — — — 
  Doubtful— — — — — — — — — 
     Total construction785 80,984 35,860 38,905 — 640 973 — 158,147 
Single tenant lease financing
  Pass25,137 230,780 98,253 71,375 147,335 376,515 — — 949,395 
  Special Mention — — — — — 3,138 — — 3,138 
  Substandard— — — — — — — — — 
  Doubtful— — — — — — — — — 
     Total single tenant lease
     financing		25,137 230,780 98,253 71,375 147,335 379,653 — — 952,533 
Public finance
  Pass861 79,566 31,950 7,722 48,759 433,760 — — 602,618 
  Special Mention — — — — — 2,280 — — 2,280 
  Substandard— — — — — — — — — 
  Doubtful— — — — — — — — — 
     Total public finance861 79,566 31,950 7,722 48,759 436,040 — — 604,898 
24

March 31, 2023
Term Loans (amortized cost basis by origination year)Revolving loans amortized cost basisRevolving loans converted to term
(in thousands)20232022202120202019PriorTotal
Healthcare finance
  Pass— — 11,609 143,651 72,756 27,327 — — 255,343 
  Special Mention — — — — 1,327 — — — 1,327 
  Substandard— — — — — — — — — 
  Doubtful— — — — — — — — — 
     Total healthcare finance— — 11,609 143,651 74,083 27,327 — — 256,670 
Small business lending 1
  Pass19,718 49,970 17,396 16,991 5,369 14,320 2,470 — 126,234 
  Special Mention — 343 123 1,717 714 2,078 150 — 5,125 
  Substandard— 780 716 1,445 800 1,185 97 — 5,023 
  Doubtful— — — — — — — — — 
     Total small business lending19,718 51,093 18,235 20,153 6,883 17,583 2,717 — 136,382 
     Gross charge-offs— — — 60 — — — — 60 
Franchise finance
  Pass78,796 237,658 65,129 — — — — — 381,583 
  Special Mention — — 578 — — — — — 578 
  Substandard— — — — — — — — — 
  Doubtful— — — — — — — — — 
     Total franchise finance78,796 237,658 65,707 — — — — — 382,161 
Consumer loans
Residential mortgage
  Payment performance
    Performing4,207 191,584 98,095 34,312 12,303 50,555 — — 391,056 
    Nonperforming— 235 — 76 — 695 — — 1,006 
      Total residential mortgage4,207 191,819 98,095 34,388 12,303 51,250 — — 392,062 
Home equity
  Payment performance
    Performing2,463 10,080 3,903 3,518 780 3,709 1,707 — 26,160 
    Nonperforming— — — — — — — — — 
      Total home equity2,463 10,080 3,903 3,518 780 3,709 1,707 — 26,160 
Other consumer
  Payment performance
    Performing29,138 120,846 49,726 31,542 32,736 73,230 774 — 337,992 
    Nonperforming— 54 — — 54 33 — — 141 
      Total other consumer29,138 120,900 49,726 31,542 32,790 73,263 774 — 338,133 
      Gross charge-offs— 35 7 8 107 75 — — 232 
Total Loans$168,787 $1,088,730 $466,224 $379,267 $390,435 $1,033,074 $35,644 $— $3,562,161 
Total gross charge-offs$— $35 $6,921 $68 $158 $75 $— $— $7,257 
1 Balance in “Substandard” is partially guaranteed by the U.S. government.
















25


The following tables present the credit risk profile of the Company’s commercial and consumer loan portfolios based on rating category and payment activity as of December 31, 2022. 

December 31, 2022
(in thousands)PassSpecial MentionSubstandardTotal
Commercial and industrial$114,934 1,373 $9,801 $126,108 
Owner-occupied commercial real estate50,721 9,546 1,569 61,836 
Investor commercial real estate93,121 — — 93,121 
Construction180,768 1,198 — 181,966 
Single tenant lease financing936,207 3,033 — 939,240 
Public finance618,752 2,280 — 621,032 
Healthcare finance271,085 1,376 — 272,461 
Small business lending 1
107,885 5,814 $10,051 123,750 
Franchise finance299,241 594 $— 299,835 
Wealth advisory lending— — — — 
      Total loans$2,672,714 $25,214 $21,421 $2,719,349 
1 Balance in “Substandard” is partially guaranteed by the U.S. government.

December 31, 2022
(in thousands)PerformingNonaccrualTotal
Residential mortgage$382,900 $1,048 $383,948 
Home equity24,712 — 24,712 
Other consumer324,581 17 324,598 
Total consumer loans$732,193 $1,065 $733,258 



The following tables present the Company’s loan portfolio delinquency analysis as of March 31, 2023 and December 31, 2022. 

March 31, 2023
(in thousands)30-59
Days
Past Due		60-89
Days
Past Due		90 Days 
or More
Past Due		Total 
Past Due		CurrentTotal
Loans
Commercial and industrial$— $— $— $— $113,198 $113,198 
Owner-occupied commercial real estate— — — — 59,643 59,643 
Investor commercial real estate— — — — 142,174 142,174 
Construction— — — — 158,147 158,147 
Single tenant lease financing— — — — 952,533 952,533 
Public finance— — — — 604,898 604,898 
Healthcare finance— — — — 256,670 256,670 
Small business lending1
55 1,426 2,354 3,835 132,547 136,382 
Franchise finance— — — — 382,161 382,161 
Residential mortgage301 234 235 770 391,292 392,062 
Home equity— — — — 26,160 26,160 
Other consumer78 38 35 151 337,982 338,133 
Total$434 $1,698 $2,624 $4,756 $3,557,405 $3,562,161 
1 Balance is partially guaranteed by the U.S. government.





26

December 31, 2022
(in thousands)30-59
Days
Past Due		60-89
Days
Past Due		90 Days 
or More
Past Due		Total 
Past Due		CurrentTotal
Loans
Commercial and industrial$81 $— $51 $132 $125,976 $126,108 
Owner-occupied commercial real estate— — — — 61,836 61,836 
Investor commercial real estate— — — — 93,121 93,121 
Construction— 1,198 — 1,198 180,768 181,966 
Single tenant lease financing— — — — 939,240 939,240 
Public finance— — — — 621,032 621,032 
Healthcare finance— — — — 272,461 272,461 
Small business lending1
57 — 3,485 3,542 120,208 123,750 
Franchise Finance313 — — 313 299,522 299,835 
Residential mortgage— 283 185 468 383,480 383,948 
Home equity— — — — 24,712 24,712 
Other consumer91 10 — 101 324,497 324,598 
Total$542 $1,491 $3,721 $5,754 $3,446,853 $3,452,607 
1 Balance is partially guaranteed by the U.S. government.

Loans are reclassified to a non-accruing status when, in management’s judgment, the collateral value and financial condition of the borrower do not justify accruing interest. At the time the accrual is discontinued, all unpaid accrued interest is reversed against earnings. Interest income accrued in prior years, if any, is charged to the allowance for credit losses. Payments subsequently received on nonaccrual loans are applied to principal. A loan is returned to accrual status when principal and interest are no longer past due and collectability is probable, typically after a minimum of six consecutive months of performance.

The following table summarizes the Company’s nonaccrual loans and loans past due 90 days or more and still accruing by loan class for the periods indicated:


March 31, 2023December 31, 2022
(in thousands)Nonaccrual LoansNonaccrual Loans with no Allowance for Credit LossesTotal Loans
90 Days or
More Past
Due and
Accruing		Nonaccrual LoansNonaccrual Loans with no Allowance for Credit LossesTotal Loans
90 Days or
More Past
Due and
Accruing
Commercial and industrial$2,836 $2,836 $— $51 $— $— 
Owner-occupied commercial real estate1,441 1,441 — 1,570 1,570 — 
Small business lending1
3,797 2,354 — 4,764 2,766 — 
Residential mortgage1,006 1,006 — 1,048 1,048 79 
Other consumer141 141 — 17 17 — 
Total loans$9,221 $7,778 $— $7,450 $5,401 $— 
1 Balance is partially guaranteed by the U.S. government.

There was no interest income recognized on nonaccrual loans for the three months ended March 31, 2023 and $25 thousand in interest income recognized on nonaccrual loans for the three months ended March 31, 2022.

Determining fair value for collateral dependent loans requires obtaining a current independent appraisal of the collateral and applying a discount factor, which includes selling costs if applicable, to the value. The fair value of real estate is generally based on appraisals by qualified licensed appraisers. The appraisers typically determine the value of the real estate by utilizing an income or market valuation approach. If an appraisal is not available, the fair value may be determined by using a cash flow analysis. Fair value on other collateral such as business assets is typically ascertained by assessing, either singularly or some combination of, asset appraisals, accounts receivable aging reports, inventory listings and or customer financial statements. Both appraised values and values based on borrower’s financial information are discounted as considered appropriate based on age and quality of the information and current market conditions.

27

The following table presents the amortized cost basis of collateral dependent loans, which are individually evaluated to determine expected credit losses as of March 31, 2023,

 March 31, 2023
(in thousands)Commercial Real EstateResidential Real EstateOtherTotalAllowance on Collateral Dependent Loans
Commercial and industrial$— $— $2,836 $2,836 $— 
Owner-occupied commercial real estate— — 1,441 1,441 — 
Small business lending1
2,147 395 877 3,419 603 
Residential mortgage— 1,006 — 1,006 — 
Other consumer loans— — 141 141 — 
Total loans$2,147 $1,401 $5,295 $8,843 $603 
1 Balance is partially guaranteed by the U.S. government.


The following table presents the Company’s impaired loans as of December 31, 2022.

 December 31, 2022
(in thousands)Recorded
Balance		Unpaid
Principal
Balance		Specific
Allowance
Loans without a specific valuation allowance
Commercial and industrial$9,750 $9,750 $— 
Owner-occupied commercial real estate1,570 1,779 — 
Small business lending8,184 8,705 — 
Residential mortgage3,676 3,835 — 
Home equity29 29 — 
Other consumer loans17 36 — 
Total23,226 24,134 — 
Loans with a specific valuation allowance
Commercial and industrial51 51 51 
Small business lending 1
1,867 1,867 703 
Total1,918 1,918 754 
Total impaired loans$25,144 $26,052 $754 

1 Balance is partially guaranteed by the U.S. government.

The table below presents average balances and interest income recognized for impaired loans during the three months ended March 31, 2022.

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Three Months Ended
 March 31, 2022
(in thousands)Average
Balance		Interest
Income
Loans without a specific valuation allowance
Owner-occupied commercial real estate3,307 — 
Small business lending830 — 
Residential mortgage3,273 8 
Home equity14 — 
Other consumer loans10 — 
Total7,434 8 
Loans with a specific valuation allowance
Commercial and industrial627 — 
Single tenant lease financing1,094 — 
Healthcare finance918 17 
Small business lending 1
1,333 — 
Total3,972 17 
Total impaired loans$11,406 $25 

1 Balance is partially guaranteed by the U.S. government.

The Company had $0.1 million in other real estate owned (“OREO”) as of March 31, 2023, which consisted of one residential mortgage property. The Company did not have any OREO as of December 31, 2022. There were two loans totaling $0.4 million and one loan totaling $0.1 million in the process of foreclosure at March 31, 2023 and December 31, 2022, respectively.

Loan Modifications to Borrowers Experiencing Financial Difficulty
 
In January 2023, the Company adopted ASU 2022-02, “Financial Instruments - Credit Losses (Topic 326): Troubled Debt restructurings and Vintage Disclosures” (“ASU 2022-02”), which eliminated the accounting guidance for troubled debt restructurings (“TDRs”) while enhancing disclosure requirements for certain loan refinancing and restructurings by creditors when a borrower is experiencing financial difficulty. This guidance was applied on a prospective basis. Upon adoption of this guidance, the Company no longer establishes a specific reserve for modifications to borrowers experiencing financial difficulty. Instead, these modifications are included in their respective loan pool and a historical loss rate is applied to the current loan balance to arrive at the quantitative baseline portion of the ACL.

Modifications to borrowers experiencing financial difficulty may include interest rate reductions, principal or interest forgiveness, forbearances, term extensions and other actions intended to minimize loss and to avoid foreclosure or repossession of collateral. The Company did not have any loan modifications made to borrowers experiencing financial difficulty during the quarter ended March 31, 2023.

There was one portfolio residential mortgage loan classified as a new TDR during the three months ended March 31, 2022 with a pre-modification and post-modification outstanding recorded investment of $0.7 million.



29


Note 5:        Premises and Equipment
 
The following table summarizes premises and equipment at March 31, 2023 and December 31, 2022.
(in thousands)March 31,
2023		December 31,
2022
Land$5,598 $5,598 
Construction in process177 714 
Right of use leased asset160 206 
Building and improvements60,199 57,505 
Furniture and equipment19,995 19,585 
Less: accumulated depreciation(11,881)(10,897)
Total$74,248 $72,711 
  

Note 6:        Goodwill        
 
As of March 31, 2023 and December 31, 2022, the carrying amount of goodwill was $4.7 million. There have been no changes in the carrying amount of goodwill for the three months ended March 31, 2023 or March 31, 2022. Goodwill is assessed for impairment annually as of August 31, or more frequently if events occur or circumstances change that indicate an impairment may exist. When assessing goodwill for impairment, first, a qualitative assessment can be made to determine whether it is more likely than not that the estimated fair value of a reporting unit is less than its estimated carrying value. If the results of the qualitative assessment are not conclusive, a quantitative goodwill test is performed. Alternatively, a quantitative goodwill test can be performed without performing a qualitative assessment.

Goodwill was assessed for impairment using a qualitative test performed as of August 31, 2022. The estimated fair value of the reporting unit exceeded the net carrying value, and therefore no goodwill impairment existed as of that date.


Note 7:        Servicing Asset

Activity for the servicing asset and the related changes in fair value for the three months ended March 2023 and 2022 are shown in the table below.

Three Months Ended
(in thousands)March 31, 2023March 31, 2022
Balance, beginning of period$6,255 $4,702 
  Additions:
     Originated and purchased servicing1,112 844 
  Subtractions
     Paydowns:(339)(256)
     Changes in fair value due to changes in valuation inputs or assumptions used in
      the valuation model 		284 (41)
      Loan servicing asset revaluation$(55)$(297)
Balance, end of period$7,312 $5,249 


30

Loans serviced for others are not included in the condensed consolidated balance sheets. The unpaid principal balances of these loans serviced for others as of March 31, 2023 and December 31, 2022 are shown in the table below.
(in thousands)March 31, 2023December 31, 2022
Loan portfolios serviced for:
   SBA guaranteed loans$356,808 $318,194 
     Total$356,808 $318,194 

Loan servicing revenue totaled $0.8 million and $0.6 million for the three months ended March 31, 2023 and March 31, 2022, respectively. Loan servicing asset revaluation, which represents the change in fair value of the servicing asset, resulted in a $0.1 million and $0.3 million downward valuation for the three months ended March 31, 2023 and March 31, 2022, respectively.

The fair value of servicing rights is highly sensitive to changes in underlying assumptions. Though fluctuations in prepayment speeds and changes in secondary market premiums generally have the most substantial impact on the fair value of servicing rights, other influencing factors include changing economic conditions, changes to the discount rate assumption and the weighted average life of the servicing portfolio. Measurement of fair value is limited to the conditions existing and the assumptions used as of a particular point in time; however, those assumptions may change over time. Refer to Note 11 - Fair Value of Financial Instruments for further details.

Note 8:        Subordinated Debt
 
In June 2019, the Company issued $37.0 million aggregate principal amount of 6.0% Fixed-to-Floating Rate Subordinated Notes due 2029 (the “2029 Notes”) in a public offering. The 2029 Notes initially bear a fixed interest rate of 6.0% per year to, but excluding, June 30, 2024, and thereafter a floating rate equal to the then-current benchmark rate (initially three-month LIBOR rate) plus 4.11%. All interest on the 2029 Notes is payable quarterly. The 2029 Notes are scheduled to mature on June 30, 2029. The 2029 Notes are unsecured subordinated obligations of the Company and may be repaid, without penalty, on any interest payment date on or after June 30, 2024. The 2029 Notes are intended to qualify as Tier 2 capital under regulatory guidelines.

In October 2020, the Company entered into a term loan in the principal amount of $10.0 million, evidenced by a term note due 2030 (the “2030 Note”). The 2030 Note initially bears a fixed interest rate of 6.0% per year to, but excluding, November 1, 2025 and thereafter at a floating rate equal to the then-current benchmark rate (initially the then current three-month term SOFR plus 5.795%). The 2030 Note is scheduled to mature on November 1, 2030. The 2030 Note is an unsecured subordinated obligation of the Company and may be repaid, without penalty, on any interest payment date on or after November 1, 2025. The 2030 Note is intended to qualify as Tier 2 capital under regulatory guidelines. The Company used the net proceeds from the issuance of the 2030 Note to redeem a subordinated term note that had been entered into in October 2015.

In August 2021, the Company issued $60.0 million aggregate principal amount of 3.75% Fixed-to-Floating Rate Subordinated Notes due 2031 (the “2031 Notes”) in a private placement. The 2031 Notes initially bear a fixed interest rate of 3.75% per year to, but excluding, September 1, 2026, and thereafter a floating rate equal to the then-current benchmark rate (initially three-month Term SOFR plus 3.11%). The 2031 Notes are scheduled to mature on September 1, 2031. The 2031 Notes are unsecured subordinated obligations of the Company and may be repaid, without penalty, on any interest payment date on or after September 1, 2026. The 2031 Notes are intended to qualify as Tier 2 capital under regulatory guidelines. The Company used a portion of the net proceeds from the issuance of the 2031 Notes to redeem subordinated notes issued by the Company in 2016. Pursuant to the terms of a Registration Rights Agreement between the Company and the initial purchasers of the 2031 Notes, the Company offered to exchange the 2031 Notes for subordinated notes that are registered under the Securities Act of 1933, as amended, and have substantially the same terms as the 2031 Notes. On December 30, 2021, we completed an exchange of $59.3 million principal amount of the unregistered 2031 Notes for registered 2031 Notes in satisfaction of our obligations under the registration rights agreement. Holders of $0.7 million of unregistered 2031 Notes did not participate in the exchange.

31

The following table presents the principal balance and unamortized debt issuance costs for the 2029 Notes, the 2030 Note, and the 2031 Notes as of March 31, 2023 and December 31, 2022.
March 31, 2023December 31, 2022
(in thousands)PrincipalUnamortized Debt Issuance CostsPrincipalUnamortized Debt Issuance Costs
2029 Notes$37,000 $(981)$37,000 $(1,020)
2030 Notes10,000 (178)10,000 (184)
2031 Notes60,000 (1,233)60,000 (1,264)
Total$107,000 $(2,392)$107,000 $(2,468)



Note 9:        Benefit Plans
 
Employment Agreements
 
The Company is party to certain employment agreements with each of its Chief Executive Officer, President and Chief Operating Officer and Executive Vice President and Chief Financial Officer. The employment agreements each provide for annual base salaries and annual bonuses, if any, as determined from time to time by the Compensation Committee of our Board of Directors. The annual bonuses are to be determined with reference to the achievement of annual performance objectives established by the Compensation Committee. The agreements also provide that each of the Chief Executive Officer, President and Chief Operating Officer and Executive Vice President and Chief Financial Officer, may be awarded additional compensation, benefits, or consideration as the Compensation Committee may determine.

The agreements also provide for the continuation of salary and certain other benefits for a specified period of time upon termination of employment under certain circumstances, including resignation for “good reason,” termination by the Company without “cause” at any time or any termination of employment within twelve months following a “change in control,” along with other specific conditions.
 
2022 Equity Incentive Plan

The First Internet Bancorp 2022 Equity Incentive Plan (the “2022 Plan”) was approved by our Board of Directors and ratified by our shareholders on May 16, 2022. The 2022 Plan permits awards of incentive and non-statutory stock options, stock appreciation rights, restricted stock awards, stock unit awards, performance awards and other stock-based awards. All employees, consultants, and advisors of the Company or any subsidiary, as well as all non-employee directors of the Company, are eligible to receive awards under the 2022 Plan. The 2022 Plan initially authorized the issuance of 400,000 new shares of the Company’s common stock plus all shares of common stock that remained available for future grants under the First Internet Bancorp 2013 Equity Incentive Plan (the “2013 Plan”).

Award Activity Under 2022 Plan

The Company recorded less than $0.1 million of share-based compensation expense for the three months ended March 31, 2023, related to stock-based awards under the 2022 Plan.

The following table summarizes the stock-based award activity under the 2022 Plan for the three months ended March 31, 2023.
Restricted Stock UnitsWeighted-Average Grant Date Fair Value Per ShareRestricted Stock AwardsWeighted-Average Grant Date Fair Value Per ShareDeferred Stock UnitsWeighted-Average Grant Date Fair Value Per Share
Unvested at December 31, 2022— $— 3,558 $36.84 — $— 
   Granted71,660 24.75 — — — — 
Unvested at March 31, 202371,660 $24.75 3,558 $36.84 — $— 

32

At March 31, 2023, the total unrecognized compensation cost related to unvested stock-based awards under the 2022 Plan was $1.7 million with a weighted-average expense recognition period of 2.8 years.


2013 Equity Incentive Plan
 
The 2013 Plan authorized the issuance of 750,000 shares of the Company’s common stock in the form of stock-based awards to employees, directors, and other eligible persons. Although outstanding stock-based awards under the 2013 Plan remain in place according to their terms, our authority to grant new awards under the 2013 Plan terminated upon shareholder approval of the 2022 Plan.

Award Activity Under 2013 Plan

The Company recorded $0.4 million of share-based compensation expense for the three months ended March 31, 2023, related to stock-based awards under the 2013 Plan. The Company recorded $0.6 million of share-based compensation expense for the three months ended March 31, 2022, related to stock-based awards under the 2013 Plan.

The following table summarizes the stock-based award activity under the 2013 Plan for the three months ended March 31, 2023.
Restricted Stock UnitsWeighted-Average Grant Date Fair Value Per ShareRestricted Stock AwardsWeighted-Average Grant Date Fair Value Per ShareDeferred Stock UnitsWeighted-Average Grant Date Fair Value Per Share
Unvested at December 31, 2022101,734 $35.93 — $— — $— 
   Granted— — — — — — 
   Cancelled/Forfeited(278)27.56 — — — — 
   Vested(35,808)31.87 — — — — 
Unvested at March 31, 202365,648 $38.18 — $— — $— 

At March 31, 2023, the total unrecognized compensation cost related to unvested stock-based awards under the 2013 Plan was $1.2 million with a weighted-average expense recognition period of 1.6 years.

Directors Deferred Stock Plan
 
Until January 2014, the Company had a practice of granting awards under a stock compensation plan for members of the Board of Directors (“Directors Deferred Stock Plan”). The Company reserved 180,000 shares of common stock that could have been issued pursuant to the Directors Deferred Stock Plan. The plan provided directors the option to elect to receive up to 100% of their annual retainer in either common stock or deferred stock rights. Deferred stock rights were to be settled in common stock following the end of the deferral period payable on the basis of one share of common stock for each deferred stock right.
 
The following table summarizes the status of deferred stock rights related to the Directors Deferred Stock Plan for the three months ended March 31, 2023.
 Deferred Stock Rights
Outstanding, beginning of period40,414 
Granted100 
Outstanding, end of period40,514 

All deferred stock rights granted during the 2023 period were additional rights issued in lieu of cash dividends payable on outstanding deferred stock rights.

33

Note 10:        Commitments and Credit Risk
 
In the normal course of business, the Company makes various commitments to extend credit which are not reflected in the accompanying condensed consolidated financial statements. At March 31, 2023 and December 31, 2022, the Company had outstanding loan commitments totaling approximately $501.7 million and $485.4 million, respectively.

Capital Commitments

Capital expenditures were made in connection with the construction of the building where our corporate headquarters is located, along with an attached parking garage. The Company entered into construction-related contracts. As of March 31, 2023, the project was completed at a total cost of $67.2 million. There are no remaining capital commitments left at March 31, 2023.

Note 11:        Fair Value of Financial Instruments
 
ASC Topic 820, Fair Value Measurement, defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC Topic 820 also specifies a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1    Quoted prices in active markets for identical assets or liabilities

Level 2    Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities

Level 3    Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities

Following is a description of the valuation methodologies and inputs used for assets measured at fair value on a recurring basis and recognized in the accompanying condensed consolidated balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy.

Available-for-Sale Securities
 
Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities include highly liquid mutual funds. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows.
 
Level 2 securities include U.S. Government-sponsored agencies, municipal securities, mortgage and asset-backed securities and corporate securities. Matrix pricing is a mathematical technique widely used in the banking industry to value investment securities.
 
In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy. Fair values are calculated using discounted cash flows. Discounted cash flows are calculated based off of the anticipated future cash flows updated to incorporate loss severities. Rating agency and industry research reports as well as default and deferral activity are reviewed and incorporated into the calculation. The Company did not own any securities classified within Level 3 of the hierarchy as of March 31, 2023 or December 31, 2022.

Loans Held-for-Sale (mandatory pricing agreements)

The fair value of loans held-for-sale is determined using quoted prices for similar assets, adjusted for specific attributes of that loan (Level 2).

34

Servicing Asset

Fair value is based on a loan-by-loan basis taking into consideration the origination to maturity dates of the loans, the current age of the loans and the remaining term to maturity. The valuation methodology utilized for the servicing asset begins with generating estimated future cash flows for each servicing asset based on their unique characteristics and market-based assumptions for prepayment speeds and costs to service. The present value of the future cash flows is then calculated utilizing market-based discount rate assumptions (Level 3).

Interest Rate Swap Agreements

The fair values of interest rate swap agreements are estimated using current market interest rates as of the balance sheet date and calculated using discounted cash flows that are observable or that can be corroborated by observable market data (Level 2).

Forward Contracts

The fair values of forward contracts on to-be-announced securities are determined using quoted prices in active markets or benchmarked thereto (Level 1).
 
Interest Rate Lock Commitments
 
The fair values of IRLCs are determined using the projected sale price of individual loans based on changes in market interest rates, projected pull-through rates (the probability that an IRLC will ultimately result in an originated loan), the reduction in the value of the applicant’s option due to the passage of time, and the remaining origination costs to be incurred based on management’s estimate of market costs (Level 3).

The following tables present the fair value measurements of assets and liabilities recognized in the accompanying condensed consolidated balance sheets measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at March 31, 2023 and December 31, 2022.

March 31, 2023
 Fair Value Measurements Using
(in thousands)Fair
Value		Quoted Prices
in Active Markets for Identical Assets
(Level 1)		Significant
Other
Observable
Inputs
(Level 2)		Significant
Unobservable
Inputs
(Level 3)
U.S. Government-sponsored agencies$37,047 $— $37,047 $— 
Municipal securities68,636 — 68,636 — 
Agency mortgage-backed securities - residential216,752 — 216,752 — 
Agency mortgage-backed securities - commercial15,530 — 15,530 — 
Private label mortgage-backed securities - residential10,275 — 10,275 — 
Asset-backed securities
4,998 — 4,998 — 
Corporate securities42,595 — 42,595 — 
Total available-for-sale securities$395,833 $— $395,833 $— 
Loans held-for-sale (mandatory pricing agreements)2,209 — 2,209 — 
Servicing asset7,312 — — 7,312 
Interest rate swap assets6,089 — 6,089 — 
Forward contracts(22)(22)— — 
IRLCs— — — — 


35

December 31, 2022
Fair Value Measurements Using
(in thousands)Fair
Value		Quoted Prices
in Active Markets for Identical Assets
(Level 1)		Significant
Other
Observable
Inputs
(Level 2)		Significant
Unobservable
Inputs
(Level 3)
U.S. Government-sponsored agencies$33,809 $— $33,809 $— 
Municipal securities67,276 — 67,276 — 
Agency mortgage-backed securities - residential215,092 — 215,092 — 
Agency mortgage-backed securities - commercial15,840 — 15,840 — 
Private label mortgage-backed securities - residential10,455 — 10,455 — 
Asset-backed securities
4,960 — 4,960 — 
Corporate securities42,952 — 42,952 — 
Total available-for-sale securities$390,384 $— $390,384 $— 
Loans held-for-sale (mandatory pricing agreements)9,110 — 9,110 — 
Servicing asset6,255 — — 6,255 
Interest rate swap agreements8,645 — 8,645 — 
Forward contracts97 97 — — 
IRLCs133 — — 133 



The following tables reconcile the beginning and ending balances of recurring fair value measurements recognized in the accompanying condensed consolidated balance sheets using significant unobservable (Level 3) inputs for the three months ended March 31, 2023 and 2022.
Three Months Ended
(in thousands)Servicing AssetInterest Rate Lock
Commitments
Balance, January 1, 2023$6,255 $133 
Total realized gains
Additions:
  Originated and purchased servicing1,112 — 
  Subtractions:
  Paydowns(339)— 
  Change in fair value284 (133)
Balance, March 31, 2023$7,312 $— 
Balance as of January 1, 2022$4,702 $718 
Total realized gains
Additions:
  Originated and purchased servicing844 — 
  Subtractions:
  Paydowns(256)— 
  Change in fair value(41)(806)
Balance, March 31, 2022$5,249 $(88)


36


The following describes the valuation methodologies and inputs used for assets measured at fair value on a nonrecurring basis, as well as the general classification of such assets pursuant to the valuation hierarchy.

Collateral Dependent Loans

Loans for which it is probable that the Company will not collect all principal and interest due according to contractual terms are measured for impairment. The amount of impairment may be determined based on the fair value of the underlying collateral, less costs to sell, the estimated present value of future cash flows or the loan’s observable market price.

If the impaired loan is identified as collateral dependent, the fair value of the underlying collateral, less costs to sell, is used to measure impairment. This method requires obtaining a current independent appraisal of the collateral and applying a discount factor to the value. If the impaired loan is not collateral dependent, the Company utilizes a discounted cash flow analysis to measure impairment.

Impaired loans with a specific valuation allowance based on the value of the underlying collateral or a discounted cash flow analysis are classified as Level 3 assets.

The following table presents the fair value measurements of assets and liabilities recognized in the accompanying condensed consolidated balance sheets measured at fair value on a nonrecurring basis and the level within the fair value hierarchy in which the fair value measurement falls at March 31, 2023 and December 31, 2022.

March 31, 2023
(in thousands)Fair Value Measurements Using
 Fair
Value		Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)		Significant
Other
Observable
Inputs
(Level 2)		Significant
Unobservable
Inputs
(Level 3)
Collateral dependent loans$3,676 $— $— $3,676 


December 31, 2022
(in thousands)Fair Value Measurements Using
 Fair
Value		Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)		Significant
Other
Observable
Inputs
(Level 2)		Significant
Unobservable
Inputs
(Level 3)
Impaired loans$1,164 $— $— $1,164 
 Significant Unobservable (Level 3) Inputs
 
The following tables present quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements.

(dollars in thousands)Fair Value at
March 31, 2023		Valuation
Technique		Significant Unobservable
Inputs		RangeWeighted-Average Range
Collateral dependent loans$3,676 Fair value of collateralDiscount for type of property and current market conditions
4% - 25%
12%
Servicing asset7,312 Discounted cash flowPrepayment speeds

Discount rate
0% - 25%

14%
11.5%

14%

37



(dollars in thousands)Fair Value at
December 31, 2022		Valuation
Technique		Significant Unobservable
Inputs		RangeWeighted-Average Range
Impaired loans$1,164 Fair value of collateralDiscount for type of property and current market conditions
0% - 25%
20%
IRLCs133 Discounted cash flowLoan closing rates
31% - 100%
89%
Servicing asset6,255 Discounted cash flowPrepayment speeds

Discount rate
0% - 25%

14%
14.6%

14%

The following methods were used to estimate the fair value of all other financial instruments recognized in the accompanying condensed consolidated balance sheets at amounts other than fair value.
 
Cash and Cash Equivalents
 
For these instruments, the carrying amount is a reasonable estimate of fair value.
 
Securities Held-to-Maturity
 
Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities include highly liquid mutual funds. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows.
 
Level 2 securities include agency mortgage-backed securities - residential, municipal securities and corporate securities. Matrix pricing is a mathematical technique widely used in the banking industry to value investment securities.
 
In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy. Fair values are calculated using discounted cash flows. Discounted cash flows are calculated based off of the anticipated future cash flows updated to incorporate loss severities. Rating agency and industry research reports as well as default and deferral activity are reviewed and incorporated into the calculation. The Company did not own any securities classified within Level 3 of the hierarchy as of March 31, 2023 or December 31, 2022.

Loans Held-for-Sale (best efforts pricing agreements)
 
The fair value of these loans approximates carrying value.

Loans
 
The fair value of loans is estimated on an exit price basis incorporating discounts for credit, liquidity and marketability factors.
 
Accrued Interest Receivable
 
The fair value of these financial instruments approximates carrying value.
 
Federal Home Loan Bank of Indianapolis Stock
 
The fair value of this financial instrument approximates carrying value.
 
Deposits 
The fair value of noninterest-bearing and interest-bearing demand deposits, savings and money market accounts approximates carrying value. The fair value of fixed maturity certificates of deposit and brokered deposits are estimated using rates currently offered for deposits of similar remaining maturities.
38


Advances from Federal Home Loan Bank
 
The fair value of fixed rate advances is estimated using rates currently available for advances with similar remaining maturities. The carrying value of variable rate advances approximates fair value.
 
Subordinated Debt
 
The fair value of the Company’s publicly traded subordinated debt is obtained from quoted market prices. The fair value of the Company’s remaining subordinated debt is estimated using discounted cash flow analysis, based on current borrowing rates for similar types of debt instruments.

 Accrued Interest Payable
 
The fair value of these financial instruments approximates carrying value.

Commitments
 
The fair value of commitments to extend credit are based on fees currently charged to enter into similar agreements with similar maturities and interest rates. The Company determined that the fair value of commitments was zero based on the contractual value of outstanding commitments at each of March 31, 2023 and December 31, 2022.
  
The following tables present the carrying value and estimated fair value of all financial assets and liabilities that are not measured at fair value on a recurring basis at March 31, 2023 and December 31, 2022.
March 31, 2023
Fair Value Measurements Using
(in thousands)Carrying
Amount		Fair ValueQuoted Prices
In Active
Market for
Identical Assets
(Level 1)		Significant
Other
Observable
Inputs
(Level 2)		Significant
Unobservable
Inputs
(Level 3)
Cash and cash equivalents$303,972 $303,972 $303,972 $— $— 
Securities held-to-maturity, net 210,761 192,463 — 192,463 — 
Loans held-for-sale (best efforts pricing agreements)15,935 15,935 — 15,935 — 
Net loans3,570,363 3,378,228 — — 3,378,228 
Accrued interest receivable22,322 22,322 22,322 — — 
Federal Home Loan Bank of Indianapolis stock28,350 28,350 — 28,350 — 
Deposits3,622,290 3,589,180 1,778,865 — 1,810,315 
Advances from Federal Home Loan Bank614,929 601,563 — 601,563 — 
Subordinated debt104,608 101,550 31,450 70,100 — 
Accrued interest payable2,592 2,592 2,592 — — 

39

December 31, 2022
Fair Value Measurements Using
(in thousands)Carrying
Amount		Fair ValueQuoted Prices
In Active
Market for
Identical
Assets
(Level 1)		Significant
Other
Observable
Inputs
(Level 2)		Significant
Unobservable
Inputs
(Level 3)
Cash and cash equivalents$256,552 $256,552 $256,552 $— $— 
Securities held-to-maturity 189,168 168,483 — 168,483 — 
Loans held-for-sale (best efforts pricing agreements)12,401 12,401 — 12,401 — 
Net loans3,467,664 3,225,845 — — 3,225,845 
Accrued interest receivable21,069 21,069 21,069 — — 
Federal Home Loan Bank of Indianapolis stock28,350 28,350 — 28,350 — 
Deposits3,441,245 3,415,390 1,974,344 — 1,441,046 
Advances from Federal Home Loan Bank614,928 596,455 — 596,455 — 
Subordinated debt104,532 102,669 32,560 70,109 — 
Accrued interest payable2,913 2,913 2,913 — — 
 
Note 12:        Mortgage Banking Activities

The Bank’s residential real estate lending business originated mortgage loans for customers and typically sold a majority of the originated loans into the secondary market. For most of the mortgages sold in the secondary market, the Bank hedged its mortgage banking pipeline by entering into forward contracts for the future delivery of mortgage loans to third party investors and entering into IRLCs with potential borrowers to fund specific mortgage loans that would be sold into the secondary market. To facilitate the hedging of the loans, the Bank elected the fair value option for loans originated and intended for sale in the secondary market under mandatory pricing agreements. Changes in the fair value of loans held-for-sale, IRLCs and forward contracts are recorded in the mortgage banking activities line item within noninterest income. Refer to Note 13 for further information on derivative financial instruments. 

During the three months ended March 31, 2023 and 2022, the Company originated mortgage loans held-for-sale of $36.3 million and $152.4 million, respectively, and sold $43.5 million and $162.4 million of mortgage loans, respectively, into the secondary market.

The following table presents the components of income from mortgage banking activities for the three months ended March 31, 2023 and 2022.
Three Months Ended March 31,
(in thousands)20232022
Gain on loans sold$464 $2,062 
Loss resulting from the change in fair value of loans held-for-sale(136)(489)
(Loss) gain resulting from the change in fair value of derivatives(252)300 
Net revenue from mortgage banking activities$76 $1,873 

Fluctuations in interest rates and changes in IRLC and loan volume within the mortgage banking pipeline may cause volatility in the fair value of loans held-for-sale and the fair value of derivatives used to hedge the mortgage banking pipeline.

40

Note 13:        Derivative Financial Instruments
 
The Company uses derivative financial instruments to help manage exposure to interest rate risk and the effects that changes in interest rates may have on net income and the fair value of assets and liabilities. The Company enters into interest rate swap agreements as part of its asset/liability management strategy to help manage its interest rate risk position. Additionally, the Company entered into forward contracts for the future delivery of mortgage loans to third-party investors and entered into IRLCs with potential borrowers to fund specific mortgage loans that were sold into the secondary market. The forward contracts were entered into in order to economically hedge the effect of changes in interest rates resulting from the Company’s commitment to fund the loans.
 
The Company had various interest rate swap agreements designated and qualifying as accounting hedges during the reported periods. Designating an interest rate swap as an accounting hedge allows the Company to recognize gains and losses in the condensed consolidated statements of income within the same period that the hedged item affects earnings. The Company includes the gain or loss on the hedged items in the same line item as the offsetting loss or gain on the related interest rate swaps. For derivative instruments that are designated and qualify as cash flow hedges, any gains or losses related to changes in fair value are recorded in accumulated other comprehensive loss, net of tax. The fair value of interest rate swaps with a positive fair value are reported in accrued income and other assets in the condensed consolidated balance sheets, while interest rate swaps with a negative fair value are reported in accrued expenses and other liabilities in the condensed consolidated balance sheets.

The IRLCs and forward contracts are not designated as accounting hedges and are recorded at fair value with changes in fair value reflected in noninterest income on the condensed consolidated statements of income. The fair value of derivative instruments with a positive fair value are reported in accrued income and other assets in the condensed consolidated balance sheets, while derivative instruments with a negative fair value are reported in accrued expenses and other liabilities in the condensed consolidated balance sheets.

The following table presents amounts that were recorded on the condensed consolidated balance sheets related to cumulative basis adjustments for interest rate swap derivatives designated as fair value accounting hedges as of March 31, 2023 and December 31, 2022.

(in thousands)Carrying amount of the hedged assetCumulative amount of fair value hedging adjustment included in the carrying amount of the hedged assets
Line item in the condensed consolidated balance sheets in which the hedged item is includedMarch 31, 2023December 31, 2022March 31, 2023December 31, 2022
Securities available-for-sale 1
$69,243 $68,963 $(1,707)$(2,088)

1 These amounts include the amortized cost basis of closed portfolios used to designate hedging relationships in which the hedged item is the last layer expected to be remaining at the end of the hedging relationship. The designated hedged items were $50.0 million at both March 31, 2023 and December 31, 2022.

The following tables present a summary of interest rate swap derivatives designated as fair value accounting hedges of fixed-rate receivables used in the Company’s asset/liability management activities at March 31, 2023 and December 31, 2022, identified by the underlying interest rate-sensitive instruments.

(dollars in thousands)
 
March 31, 2023
Notional ValueWeighted- Average Remaining Maturity (years)Weighted-Average Ratio
Instruments Associated WithFair ValueReceivePay
Securities available-for-sale$50,000 1.6$1,707 3-month LIBOR2.33 %
Total at March 31, 2023$50,000 1.6$1,707 3-month LIBOR2.33 %


41

(dollars in thousands)

December 31, 2022
Notional ValueWeighted- Average Remaining Maturity (years)Weighted-Average Ratio
Instruments Associated WithFair ValueReceivePay
Securities available-for-sale$50,000 1.8$2,093 3-month LIBOR2.33 %
Total swap portfolio at December 31, 2022$50,000 1.8$2,093 3-month LIBOR2.33 %

In March 2021, the Company terminated the last layer of interest rate swaps associated with available-for-sale agency mortgage-backed securities - residential, which resulted in swap termination payments to counterparties totaling $1.9 million. The corresponding fair value hedging adjustment was allocated pro-rata to the underlying hedged securities and is being amortized over the remaining lives of the designated securities. Amortization expense totaling less than $0.1 million was recognized as a reduction to interest income on securities for the three months ended March 31, 2023 and 2022, respectively.

In June 2020, the Company terminated all fair value hedging relationships associated with loans, which resulted in swap termination payments to counterparties totaling $46.1 million. The corresponding loan fair value hedging adjustment as of the date of termination is being amortized over the remaining lives of the designated loans, which have a weighted average term to maturity of 11.1 years as of March 31, 2023. Amortization expense totaling $1.0 million and $1.0 million for the three months ended March 31, 2023 and 2022, respectively, related to these previously terminated fair value hedges was recognized as a reduction to interest income on loans.

The following tables present a summary of interest rate swap derivatives designated as cash flow accounting hedges of variable-rate liabilities used in the Company’s asset/liability management activities at March 31, 2023 and December 31, 2022.

(dollars in thousands)
 
March 31, 2023
Notional ValueWeighted- Average Remaining Maturity (years)Weighted-Average Ratio
Cash Flow HedgesFair ValueReceivePay
Interest rate swaps$110,000 3.8$3,126 3-month LIBOR2.88 %
Interest rate swaps60,000 0.4473 1-month LIBOR2.88 %
Interest rate swaps40,000 1.2783 Fed Funds Effective2.78 %

(dollars in thousands)

December 31, 2022
Notional ValueWeighted- Average Remaining Maturity (years)Weighted-Average Ratio
Cash Flow HedgesFair ValueReceivePay
Interest rate swaps$110,000 4.1$4,787 3-month LIBOR2.88 %
Interest rate swaps60,000 0.6735 1-month LIBOR2.88 %
Interest rate swaps40,000 1.41,030 Fed Funds Effective2.78 %

These derivative financial instruments were entered into for the purpose of managing the interest rate risk of certain assets and liabilities. The Company received $6.6 million and $7.7 million of cash collateral from counterparties as security for their obligations related to these swap transactions at March 31, 2023 and December 31, 2022. The Company had no pledged cash collateral as of March 31, 2023 and December 31, 2022 to counterparties on interest rate swap agreements as security for its obligations related to these agreements. Collateral posted and received is dependent on the market valuation of the underlying hedges.

42

The following table presents the notional amount and fair value of interest rate swaps, IRLCs and forward contracts utilized by the Company at March 31, 2023 and December 31, 2022.
 March 31, 2023December 31, 2022
(in thousands)Notional
Amount		Fair
Value		Notional
Amount		Fair
Value
Asset Derivatives    
Derivatives designated as hedging instruments
Interest rate swaps associated with securities available-for-sale$50,000 $1,707 $50,000 $2,093 
Interest rate swaps associated with liabilities210,000 4,382 210,000 6,552 
Derivatives not designated as hedging instruments    
IRLCs— — 14,862 133 
Forward contracts— — 17,000 97 
Total contracts
$260,000 $6,089 $291,862 $8,875 
Liability Derivatives
Derivatives not designated as hedging instruments
Forward contracts$1,750 $(22)$— $— 
Total contracts
$1,750 $(22)$— $— 

The fair value of interest rate swaps was estimated using a discounted cash flow method that incorporates current market interest rates as of the balance sheet date. Fair values of IRLCs and forward contracts were estimated using changes in mortgage interest rates from the date the Company entered into the IRLC and the balance sheet date.

The following table presents the effects of the Company’s cash flow hedge relationships on the condensed consolidated statements of comprehensive income during the three months ended March 31, 2023 and 2022.

 Amount of Gain /(Loss) Recognized in Other Comprehensive Income (Loss) in The Three Months Ended
(in thousands)March 31, 2023March 31, 2022
Interest rate swap agreements$(2,170)$9,334 

The following table summarizes the periodic changes in the fair value of derivatives not designated as hedging instruments on the condensed consolidated statements of income for the three months ended March 31, 2023 and 2022.

 Amount of Gain / (Loss) Recognized in the Three Months Ended
(in thousands)March 31, 2023March 31, 2022
Asset Derivatives  
Derivatives not designated as hedging instruments  
IRLCs$— $— 
Forward contracts— 1,102 
Liability Derivatives  
Derivatives not designated as hedging instruments 
IRLCs$(133)$(802)
Forward contracts(119)— 
  
43

The following table presents the effects of the Company’s interest rate swap agreements on the condensed consolidated statements of operations during the three months ended March 31, 2023 and 2022.
(in thousands)

Line item in the condensed consolidated statements of operations
Three Months Ended
March 31, 2023March 31, 2022
Interest income
Securities - taxable$— $— 
Securities - non-taxable294 (260)
Total interest income
294 (260)
Interest expense  
Deposits(418)670 
Other borrowed funds(522)696 
Total interest expense
(940)1,366 
Net interest income
$1,234 $(1,626)

44

Note 14:     Accumulated Other Comprehensive Loss

The components of accumulated other comprehensive loss, included in shareholders' equity, for the three months ended March 31, 2023 and 2022, respectively, are presented in the table below.
(in thousands)Unrealized Losses On Debt SecuritiesUnrealized Losses On Debt Securities Transferred From Available-For-Sale To Held-To-MaturityCash Flow HedgesTotal
Balance, January 1, 2023$(35,831)$(3,519)$5,714 $(33,636)
Other comprehensive income (loss) before reclassifications from accumulated other comprehensive loss before tax5,112 — (2,170)2,942 
Reclassifications from accumulated other comprehensive loss to earnings before tax— 158 — 158 
Other comprehensive gain (loss) before tax5,112 158 (2,170)3,100 
Income tax provision (benefit) 1,170 46 (499)717 
Other comprehensive income (loss) - net of tax3,942 112 (1,671)2,383 
Balance, March 31, 2023$(31,889)$(3,407)$4,043 $(31,253)
Balance, January 1, 2022$(2,555)$— $(8,484)$(11,039)
Other comprehensive (loss) income before reclassifications from accumulated other comprehensive loss before tax(17,881)(5,402)9,334 (13,949)
Reclassifications from accumulated other comprehensive loss to earnings before tax— 119— 119 
Other comprehensive (loss) gain before tax(17,881)(5,283)9,334 (13,830)
Income tax (benefit) provision (4,077)(1,249)3,318 (2,008)
Other comprehensive (loss) income - net of tax(13,804)(4,034)6,016 (11,822)
Balance, March 31, 2022$(16,359)$(4,034)$(2,468)$(22,861)


Details About Accumulated Other Comprehensive Loss ComponentsAmounts Reclassified from
Accumulated Other Comprehensive Loss for the 		Affected Line Item in the
Statements of Operations
Three Months Ended March 31, 2023Three Months Ended March 31, 2022
Reclassifications from accumulated other comprehensive loss to earnings before tax$(158)(119)Interest income
Total amount reclassified before tax(158)(119)(Loss) income before income taxes
Tax benefit(46)(27)Income tax (benefit) provision
Total reclassifications from accumulated other comprehensive loss$(112)$(92)Net (loss) income
45



Note 15:     Recent Accounting Pronouncements

ASU 2016-13 - Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (June 2016)

The main objective of this update is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. To achieve this objective, the amendments in this update replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates.

The amendments affect entities holding financial assets that are not accounted for at fair value through net income. The amendments affect loans, debt securities, off-balance-sheet credit exposures, and any other financial assets not excluded from the scope that have the contractual right to receive cash. The amendments in this update affect an entity to varying degrees depending on the credit quality of the assets held by the entity, their duration, and how the entity applies current GAAP. There is diversity in practice in applying the incurred loss methodology, which means that before transition some entities may be more aligned under current GAAP than others to the new measure of expected credit losses. The following describes the main provisions of this update.

•Assets Measured at Amortized Cost: The amendments in this update require a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. The statements of income reflect the measurement of credit losses for newly recognized financial assets, as well as the expected increase or decrease of credit losses that have taken place during the period. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. An entity must use judgment in determining the relevant information and estimation methods that are appropriate in its circumstances.

•Available-for-Sale Debt Securities: Credit losses relating to available-for-sale debt securities should be recorded through an allowance for credit losses. Available-for-sale accounting recognizes that value may be realized either through collection of contractual cash flows or through sale of the security. Therefore, the amendments limit the amount of the allowance for credit losses to the amount by which fair value is below amortized cost because the classification as available-for-sale is premised on an investment strategy that recognizes that the investment could be sold at fair value if cash collection would result in the realization of an amount less than fair value.

•In May 2019, the FASB issued ASU 2019-05 - Financial Instruments - Credit Losses (Topic 326) - Targeted Transition Relief. This ASU allows an option for preparers to irrevocably elect the fair value option, on an instrument-by-instrument basis, for eligible financial assets measured at amortized cost basis upon adoption of the credit losses standard. This increases the comparability of financial statement information provided by institutions that otherwise would have reported similar financial instruments using different measurement methodologies, potentially decreasing costs for financial statement preparers while providing more useful information to investors and other users.

The Company formed a current expected credit losses (“CECL”) working group that discussed implementation matters related to the completeness and accuracy of historical data, model development and corporate governance documentation. The new allowance model estimates credit losses over the expected life of the portfolio and includes a qualitative framework to account for drivers of losses that the quantitative model does not capture. The CECL working group discussed results from parallel model runs for each portfolio segment, assumptions related to unfunded commitments and economic forecast factors. Model validation was completed by an independent third party in the fourth quarter 2022.

46

The ASU allows for several different methods of calculating the Allowance for Credit Losses (“ACL”) and based on its analysis of observable data, the Company determined the discounted cash flow method to be the most appropriate for all its loan segments.

The Company adopted this guidance on January 1, 2023 and recorded a $3.0 million pre-tax one-time cumulative effect adjustment to the ACL in retained earnings on the consolidated balance sheet as of the beginning of 2023, as is required in the guidance. In addition, the Company recorded a one-time $2.5 million pre-tax cumulative effect adjustment to the allowance for unfunded commitments in retained earnings on the consolidated balance sheet.

The qualitative impact of the new accounting standard is directed by many of the same factors that impacted the previous methodology for calculating the ACL, including but not limited to, quality and experience of staff, changes in the value of collateral, concentrations of credit in loan types or industries and changes to lending policies. In addition, the Company also uses reasonable and supportable forecasts. Examples of this are regression analyses of data from the Federal Open Market Committee quarterly economic projections for change in real GDP, housing price index and national unemployment.

The following table presents the impact of the adoption of ASC 326 as of January 1, 2023:

January 1, 2023
(dollars in thousands)Pre-ASC 326 AdoptionImpact of ASC 326 AdoptionAs Reported Under ASC 326
Assets:
Commercial loans
Commercial and industrial$1,711 $(120)$1,591 
Owner-occupied commercial real estate651 62 713 
Investor commercial real estate1,099 (191)908 
Construction2,074 (435)1,639 
Single tenant lease financing10,519 (346)10,173 
Public finance1,753 (135)1,618 
Healthcare finance2,997 1,034 4,031 
Small business lending2,168 334 2,502 
Franchise finance3,988 (313)3,675 
Total commercial loans26,960 (110)26,850 
Consumer loans
Residential mortgage1,559 406 1,965 
Home equity69 133 202 
Other consumer3,149 2,533  5,682 
Total consumer loans4,777 3,072 7,849 
Total allowance for credit losses$31,737 $2,962 $34,699 
Liabilities:
Liability for off-balance sheet credit exposures$— $2,504 $2,504 


The Company also performed an assessment to determine if an allowance for credit loss was needed for available-for-sale and held-to-maturity securities. The Company analyzed available-for-sale securities investment securities that were in an unrealized loss position as of January 1, 2023 and determined the decline in fair value for those securities was not related to credit, but rather related to changes in interest rates and general market conditions. As such, no ACL was recorded for available-for-sale securities. The Company analyzed held-to-maturity securities and recorded a $0.3 million one-time cumulative adjustment to the allowance in retained earnings.


47

ASU 2020-04 - Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on     Financial Reporting (March 2020) and ASU 2022-06 - Deferral of sunset Date of Topic 848

In March 2020, FASB issued ASU 2020-04 to ease the potential burden in accounting for the transition away from the LIBOR on financial reporting. The ASU provides optional expedients and exceptions for applying GAAP to contract modification and hedge accounting relationships. The guidance is effective March 12, 2020 through December 31, 2024. The Company believes the adoption of this guidance will not have a material impact on the condensed consolidated financial statements.


ASU 2022-02 - Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures (March 2022)

In March 2022, the FASB issued ASU No. 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. This ASU eliminates the separate recognition and measurement guidance for Troubled Debt Restructurings ("TDRs") by creditors. The elimination of the TDR guidance may be adopted prospectively for loan modifications after adoption or on a modified retrospective basis, which would also apply to loans previously modified, resulting in a cumulative effect adjustment to retained earnings in the period of adoption for changes in the allowance for credit losses. The ASU requires an entity to disclose current-period gross write-offs by year of origination for financing receivables within the scope of Subtopic 326-20. This guidance is effective on January 1, 2023, with early adoption permitted. Using a prospective approach, the Company adopted this guidance on January 1, 2023 and it did not have a material impact on the condensed consolidated financial statements.


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, 2022 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 financial holding company headquartered in Fishers, Indiana that conducts its primary business activities through its wholly-owned subsidiary, First Internet Bank of Indiana, 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 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
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corporate credit cards on a regional basis to commercial borrowers primarily in the Midwest and Southwest regions of the United States. We primarily offer construction and investor commercial real estate loans within Central Indiana or on a regional basis and 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 financial technology (“fintech”) company that specializes in providing financing to franchisees in various industry segments. 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 more than $155.4 million in SBA 7(a) loans during 2022 and ranking in the top 30 SBA 7(a) lenders for the SBA’s 2022 fiscal year. During the three months ended March 31, 2023, we closed more than $73.5 million in SBA 7(a) loans, ranking in the top 10 SBA 7(a) lenders for 2023. We also offer a top-ranked small business checking account product to our country’s entrepreneurs. We continue to scale up this business with the goal of driving increased earnings and profitability in future periods.

We also offer payment, deposit, card and lending products and services through fintech partnerships, which we plan to grow in future periods. With the rapid evolution of technology that enables consumers and 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 consumer and small business relationships will be significantly enhanced. Furthermore, we believe partnering with select fintechs will allow us to further diversify our revenue sources, acquire lower-cost deposits and pursue additional asset generation capabilities.

As of March 31, 2023, the Company had consolidated assets of $4.7 billion, consolidated deposits of $3.6 billion and stockholders’ equity of $355.6 million.
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Results of Operations

During the first quarter 2023, there was a net loss of $3.0 million, or $0.33 diluted loss per share, compared to first quarter 2022 net income of $11.2 million, or $1.14 per diluted share, representing a decrease in net income of $14.2 million, or 126.9%, and a decrease in diluted earnings per share of $1.47, or 129.0%.

The $14.2 million decrease in net income for the first quarter 2023 compared to the first quarter 2022 was due primarily to an increase of $8.6 million, or 1,090.3%, in provision for credit losses, a decrease of $6.2 million, or 24.0%, in net interest income, an increase of $2.2 million, or 11.6%, in noninterest expense and a decrease of $1.4 million, or 20.1%, in noninterest income, partially offset by a decrease of $4.1 million, or 230.3%, in income tax expense.

Due to the steep decline in consumer mortgage volumes and the negative outlook for consumer mortgage lending over the next several years, the Company decided to exit its consumer mortgage business during the first quarter 2023. This included its nationwide digital direct-to-consumer mortgage platform that originated residential loans for sale in the secondary market, as well as its local traditional consumer mortgage and construction-to-permanent business. In connection with this decision, the Company recognized $3.1 million of mortgage operations and exit costs during the first quarter 2023, which primarily drove the increase in noninterest expense compared to the first quarter 2022.

The Company also recognized $0.1 million of mortgage banking revenue during the first quarter 2023, down from $1.8 million in the first quarter 2022, as it immediately began winding down its existing pipeline following the decision to exit the business.

Additionally during the first quarter 2023, the Company recognized a partial charge-off of $6.9 million related to a commercial and industrial participation loan with a balance of $9.8 million, prior to the partial charge-off, that was moved to nonaccrual status late in the quarter. This action contributed to the increase in the provision for credit losses as compared to first quarter 2022. The Company expects that it will receive payment for the remaining balance of the participation loan during May 2023.

During the first quarter 2023, return on average assets (“ROAA”), return on average shareholders’ equity (“ROAE”), and return on average tangible common equity (“ROATCE”) were (0.26%), (3.37%), and (3.41%), respectively, compared to 1.08%, 11.94%, and 12.09%, respectively, for the first quarter 2022.

Excluding the impact of exiting consumer mortgage and the partial charge-off, adjusted net income for the first quarter 2023 was $4.8 million and adjusted diluted earnings per share was $0.53. Additionally, for the first quarter 2023, adjusted ROAA, adjusted ROAE and adjusted ROATCE were 0.43%, 5.36% and 5.44%, respectively.

During the first quarter 2022, the Company had a nonrecurring consulting fee associated with a special project of $0.9 million, as well as acquisition-related expenses of $0.2 million. Excluding these items, adjusted net income for the first quarter 2022 was $12.0 million and adjusted diluted earnings per share was $1.22. Additionally, for the first quarter 2022, adjusted ROAA, adjusted ROAE and adjusted ROATCE were 1.16%, 12.82% and 12.98%, respectively.

Refer to the “Reconciliation of Non-GAAP Financial Measures” section of Part I, Item 2 of this report, Management’s Discussion and Analysis of Financial Condition and Results of Operations for additional information.
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Consolidated Average Balance Sheets and Net Interest Income Analyses
 
For the periods presented, the following tables provide the average balances of interest-earning assets and interest-bearing liabilities and the related yields and cost of funds. The tables do not reflect any effect of income taxes except for net interest margin - FTE, as discussed below. Balances are based on the average of daily balances. Nonaccrual loans are included in average loan balances.
Three Months Ended
March 31, 2023December 31, 2022March 31, 2022
(dollars in thousands)Average BalanceInterest /DividendsYield /CostAverage BalanceInterest /DividendsYield /CostAverage BalanceInterest /DividendsYield /Cost
Assets
Interest-earning assets
Loans, including
loans held-for-sale 		$3,583,242 $43,843 4.96 %$3,391,379 $40,354 4.72 %$2,976,037 $33,188 4.52 %
Securities - taxable511,923 3,606 2.86 %508,725 3,222 2.51 %567,776 2,221 1.59 %
Securities - non-taxable73,347 798 4.41 %69,883 699 3.97 %80,952 249 1.25 %
Other earning assets331,294 3,786 4.63 %149,910 1,394 3.69 %455,960 376 0.33 %
Total interest-earning assets4,499,782 52,033 4.69 %4,119,897 45,669 4.40 %4,080,725 36,034 3.58 %
Allowance for credit losses - loans(35,075)(30,543)(27,974)
Noninterest-earning assets182,449 173,892 162,167 
Total assets$4,647,156 $4,263,246 $4,214,918 
Liabilities
Interest-bearing liabilities
Interest-bearing demand deposits$333,642 $900 1.09 %$326,102 $628 0.76 %$318,281 $412 0.52 %
Savings accounts38,482 82 0.86 %47,799 104 0.86 %60,616 53 0.35 %
Money market accounts1,377,600 12,300 3.62 %1,441,583 10,508 2.89 %1,454,436 1,503 0.42 %
BaaS - brokered deposits14,741 138 3.80 %4,563 13 1.13 %12,111 6 0.20 %
Certificates and brokered deposits1,647,504 13,850 3.41 %1,220,975 7,554 2.45 %1,225,976 4,123 1.36 %
Total interest-bearing deposits3,411,969 27,270 3.24 %3,041,022 18,807 2.45 %3,071,420 6,097 0.81 %
Other borrowed funds719,499 5,189 2.92 %712,465 5,193 2.89 %619,191 4,187 2.74 %
Total interest-bearing liabilities4,131,468 32,459 3.19 %3,753,487 24,000 2.54 %3,690,611 10,284 1.13 %
Noninterest-bearing deposits134,988 135,702 112,248 
Other noninterest-bearing liabilities17,427 9,400 31,292 
Total liabilities4,283,883 3,898,589 3,834,151 
Shareholders’ equity363,273 364,657 380,767 
Total liabilities and shareholders’ equity$4,647,156 $4,263,246 $4,214,918 
Net interest income$19,574 $21,669 $25,750 
Interest rate spread 1
1.50%1.86%2.45 %
Net interest margin 2
1.76%2.09%2.56 %
Net interest margin - FTE 3
1.89%2.22%2.69 %

1 Yield on total interest-earning assets minus cost of total interest-bearing liabilities.
2 Net interest income divided by total average interest-earning assets (annualized).
3 On an FTE basis assuming a 21% tax rate. Net interest income is adjusted to reflect income from assets such as municipal loans and securities that are exempt from Federal income taxes. This is to recognize the income tax savings that facilitates a comparison between taxable and tax-exempt assets. The Company believes that it is a standard practice in the banking industry to present net interest margin and net interest income on a fully-taxable equivalent basis, as these measures provide useful information to make peer comparisons. Net interest margin - FTE represents a non-GAAP financial measure. See “Reconciliation of Non-GAAP Financial Measures” for a reconciliation of this measure to its most directly comparable GAAP measure.



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Rate/Volume Analysis 

The following table illustrates the impact of changes in the volume of interest-earning assets and interest-bearing liabilities and interest rates on net interest income for the periods indicated. The change in interest not due solely to volume or rate has been allocated in proportion to the absolute dollar amounts of the change in each. 
Three Months Ended March 31, 2023 vs. December 31, 2022 Due to Changes inThree Months Ended March 31, 2023 vs. March 31, 2022 Due to Changes in
(in thousands)VolumeRateNetVolumeRateNet
Interest income   
Loans, including loans held-for-sale$1,837 $1,652 $3,489 $7,213 $3,442 $10,655 
Securities – taxable17 367 384 (1,429)2,814 1,385 
Securities – non-taxable31 68 99 (164)713 549 
Other earning assets1,976 416 2,392 (735)4,145 3,410 
Total3,861 2,503 6,364 4,885 11,114 15,999 
Interest expense      
Interest-bearing deposits2,323 6,140 8,463 755 20,418 21,173 
Other borrowed funds(2)(2)(4)713 289 1,002 
Total2,321 6,138 8,459 1,468 20,707 22,175 
Increase (decrease) in net interest income$1,540 $(3,635)$(2,095)$3,417 $(9,593)$(6,176)

Net interest income for the first quarter 2023 was $19.6 million, a decrease of $6.2 million, or 24.0%, compared to $25.8 million for the first quarter 2022. The decrease in net interest income was the result of a $22.2 million, or 215.6%, increase in total interest expense to $32.5 million for the first quarter 2023 from $10.3 million for the first quarter 2022, partially offset by a $16.0 million, or 44.4%, increase in total interest income to $52.0 million for the first quarter 2023 from $36.0 million for the first quarter 2022.

The increase in total interest income for the first quarter 2023 compared to first quarter 2022 was due primarily to a $10.7 million, or 32.1%, increase in interest earned on loans, $3.4 million, or 906.9%, increase in income from other earning assets and a $1.9 million, or 78.3%, increase in interest earned on securities. The increase in income from loans was due primarily to a 44 bp increase in the yield earned on loans, as well as an increase of $607.2 million, or 20.4%, in the average balance of loans compared to the first quarter 2022. The yield earned on other earning assets increased 430 bps, partially offset by a decrease in the average balance of other earning assets of $124.7 million, or 27.3%. The decrease in the average balance of other earning assets was due primarily to lower cash balances. The average balance of securities decreased $63.5 million, or 9.8%, while the yield earned on the securities portfolio increased 151 bps for the first quarter 2023 compared to the first quarter 2022. The increase in the yields earned on loans, other earning assets and securities was due to the rise in interest rates throughout 2022 that continued during the first quarter 2023. The yield on funded portfolio originations was 7.76% in the first quarter 2023, an increase of 292 bps compared to the first quarter 2022.

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The increase in total interest expense for the first quarter 2023 compared to the first quarter 2022 was due primarily to increases of $10.8 million, or 718.4%, in interest expense associated with money market accounts, $9.7 million, or 235.9%, in interest expense associated with certificates and brokered deposits and $0.5 million, or 118.5%, in interest expense associated with interest-bearing demand deposits. Additionally, the Company had a full quarter of Banking-as-a-Service (“BaaS”) deposits in 2023, which increased interest expense by $0.1 million. The increase in interest expense related to money market accounts was driven primarily by an increase of 320 bps in the cost of these deposits, partially offset by a decrease in the average balance of these deposits of $76.8 million, or 5.3%. The increase in interest expense related to certificates and brokered deposits was driven by an increase of 205 bps in the cost of these deposits, as well as an increase of $421.5 million, or 34.4%, in the average balance of these deposits. The increase in the average balance of these deposits was driven by strong certificates of deposit production in the first quarter 2023, as the Company took advantage of consumer and small business demand and pulled forward budgeted growth to build liquidity at rates beneficial to projected Federal Funds rates. The increase in interest expense related to interest-bearing demand deposits was due primarily to a 57 bp increase in the cost of these deposits, as well as an increase of $15.4 million, or 4.8%, in the average balance of these deposits. The increase in the overall cost of deposits was due primarily to the rise in interest rates throughout 2022 that continued during the first quarter 2023. Beginning in March 2022, the Federal Reserve has increased the Fed Funds rate 4.75% through March 31, 2023, which has impacted pricing of the Company’s deposit products.

Overall, the cost of total interest-bearing liabilities for the first quarter 2023 increased 206 bps to 3.19% from 1.13% for the first quarter 2022. The increase in the cost of funds for the first quarter 2023 reflects the rapid rise in interest rates throughout 2022 that continued into 2023.

Net interest margin (“NIM”) was 1.76% for the first quarter 2023 compared to 2.56% for the first quarter 2022, a decrease of 80 bps. On a fully-taxable equivalent (“FTE”) basis, NIM was 1.89% for the first quarter 2023 compared to 2.69% for the first quarter 2022, a decrease of 80 bps. The decrease in first quarter 2023 NIM and FTE NIM compared to the first quarter 2022 reflects the increase in the cost of interest-bearing liabilities, partially offset by the increase in earning asset yields noted above.

Noninterest Income

The following table presents noninterest income for the last five completed fiscal quarters.
Three Months Ended
(in thousands)March 31,
2023		December 31,
2022		September 30,
2022		June 30,
2022		March 31,
2022
Service charges and fees$209 $226 $248 $281 $316 
Loan servicing revenue785 715 653 620 585 
Loan servicing asset revaluation(55)(539)(333)(470)(297)
Mortgage banking activities76 1,010 871 1,710 1,873 
Gain on sale of loans4,061 2,862 2,713 1,952 3,845 
Other370 1,533 164 221 498 
Total noninterest income$5,446 $5,807 $4,316 $4,314 $6,820 

During the first quarter 2023, noninterest income was $5.4 million, representing a decrease of $1.4 million, or 20.1%, compared to $6.8 million for the first quarter 2022. The decrease in noninterest income was due primarily to decreases in revenue from mortgage banking activities and other noninterest income, partially offset by increases in gain on sale of loans, loan servicing revenue and loan servicing asset revaluation. The decline in mortgage banking revenue was due to the Company only recording $0.1 million of revenue, as it immediately began winding down its existing pipeline following the decision to exit mortgage in the first quarter 2023. The decrease in other noninterest income is due primarily to a distribution from the Company’s investment in a Small Business Investment Company fund that occurred during the first quarter 2022. The increase in loan servicing revenue was due to growth in the balance of the Company’s SBA 7(a) servicing portfolio. The increase in loan servicing asset revaluation was due to slower prepayment speeds in the first quarter 2023 compared to first quarter 2022. The increase in gain on sale of loans was due to the gain on sale of U.S. Small Business Administration guaranteed loans, which increased due to higher volume of loans sales, as well as higher net premiums.

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Noninterest Expense

The following table presents noninterest expense for the last five completed fiscal quarters.

Three Months Ended
(in thousands)March 31,
2023		December 31,
2022		September 30,
2022		June 30,
2022		March 31,
2022
Salaries and employee benefits$11,794 $10,404 $10,439 $10,832 $9,878 
Marketing, advertising and promotion844 837 1,041 920 756 
Consulting and professional services926 914 790 1,197 1,925 
Data processing659 567 483 490 449 
Loan expenses1,977 1,018 1,142 693 1,582 
Premises and equipment2,777 2,921 2,808 2,419 2,540 
Deposit insurance premium543 355 229 287 281 
Other1,434 1,497 1,063 1,147 1,369 
Total noninterest expense$20,954 $18,513 $17,995 $17,985 $18,780 

Noninterest expense for the first quarter 2023 was $21.0 million, compared to $18.8 million for the first quarter 2022. The increase of $2.2 million, or 11.6%, was due primarily to increases of $1.9 million, or 19.41%, in salaries and employee benefits, $0.4 million, or 25%, in loan expenses, $0.3 million, or 93.2%, in deposit insurance premium, and $0.2 million, or 46.8%, in data processing, partially offset by decrease of $1.0 million, or 51.9% in consulting and professional fees. The increases in salaries and employee benefits and loan expenses were due primarily to mortgage exit costs, such as severance, and other employee-related expenses, as well as accrued contract expenses. The increase in deposit insurance premium was due to mainly to asset growth, as well as the composition of loans and deposits. The increase in data processing was due primarily to implementation fees associated with small business technology initiatives. The decrease in consulting and professional fees was due primarily to consulting fees related to a special project that occurred in the first quarter 2022.

The Company recorded an income tax benefit for the first quarter 2023, compared to an income tax provision of $1.8 million for the first quarter 2022 and an effective tax rate of 13.8%.

Financial Condition

The following table presents summary balance sheet data for the last five completed fiscal quarters.
(in thousands)
Balance Sheet Data:March 31,
2023		December 31,
2022		September 30,
2022		June 30,
2022		March 31,
2022
Total assets$4,721,319 $4,543,104 $4,264,424 $4,099,806 $4,225,397 
Loans3,607,242 3,499,401 3,255,906 3,082,127 2,880,780 
Total securities606,594 579,552 584,622 610,602 628,658 
Loans held-for-sale18,144 21,511 23,103 31,580 33,991 
Noninterest-bearing deposits140,449 175,315 142,875 126,153 119,196 
Interest-bearing deposits3,481,841 3,265,930 3,049,769 3,025,948 3,098,783 
Total deposits3,622,290 3,441,245 3,192,644 3,152,101 3,217,979 
Advances from Federal Home Loan Bank614,929 614,928 589,926 464,925 514,923 
Total shareholders’ equity355,572 364,974 360,857 365,332 374,655 

Total assets increased $178.2 million, or 3.9%, to $4.7 billion at March 31, 2023 compared to $4.5 billion at December 31, 2022. The increase was due primarily to increases in loan, cash and securities balances, and was funded by growth in deposit balances of $181.0 million, or 5.3%.

As of March 31, 2023, total shareholders’ equity was $355.6 million, a decrease of $9.4 million, or 2.6%, compared to December 31, 2022. The decrease in retained earnings was due primarily to stock repurchase activity, the day 1 CECL adjustment and the net loss during the quarter, partially offset by a decrease in accumulated other comprehensive loss. Tangible common equity totaled $350.9 million as of March 31, 2023, representing a decrease of $9.4 million, or 2.6%, compared to December 31, 2022. The ratio of total shareholders’ equity to total assets decreased to 7.53% as of March 31, 2023 from 8.03% as of December 31, 2022, and the ratio of tangible common equity to tangible assets decreased to 7.44% as of March 31, 2023 from 7.94% as of December 31, 2022.
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Book value per common share decreased 1.2% to $39.76 as of March 31, 2023 from $40.26 as of December 31, 2022. Tangible book value per share decreased 1.3% to $39.23 as of March 31, 2023 from $39.74 as of December 31, 2022. The slight decline in both book value per common share and tangible book value per share reflects the declines in total shareholders’ equity and tangible common equity, partially offset by the effect of stock repurchase activity during the quarter. 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.
    

Loan Portfolio Analysis

    The following table presents a summary of the Company’s loan portfolio for the last five completed fiscal quarters.
(dollars in thousands)March 31,
2023		December 31,
2022		September 30,
2022		June 30,
2022		March 31,
2022
Commercial loans
Commercial and industrial$113,198 3.1 %$126,108 3.6 %$104,780 3.2 %$110,540 3.6 %$99,808 3.5 %
Owner-occupied commercial real estate59,643 1.7 %61,836 1.8 %58,615 1.8 %61,277 2.0 %56,752 2.0 %
Investor commercial real estate142,174 3.9 %93,121 2.7 %91,021 2.8 %52,648 1.7 %34,627 1.2 %
Construction158,147 4.4 %181,966 5.2 %139,509 4.3 %143,475 4.7 %149,662 5.2 %
Single tenant lease financing952,533 26.3 %939,240 26.8 %895,302 27.4 %867,181 28.1 %852,519 29.6 %
Public finance604,898 16.8 %621,032 17.7 %614,139 18.9 %613,759 19.9 %587,817 20.4 %
Healthcare finance256,670 7.1 %272,461 7.8 %293,686 9.0 %317,180 10.3 %354,574 12.3 %
Small business lending136,382 3.8 %123,750 3.5 %113,001 3.5 %102,724 3.3 %97,040 3.4 %
Franchise finance382,161 10.6 %299,835 8.6 %225,012 6.8 %168,942 5.5 %107,246 3.7 %
Total commercial loans2,805,806 77.7 %2,719,349 77.7 %2,535,065 77.7 %2,437,726 79.1 %2,340,045 81.3 %
Consumer loans
Residential mortgage392,062 10.9 %383,948 11.0 %337,565 10.4 %281,124 9.1 %191,153 6.6 %
Home equity26,160 0.7 %24,712 0.7 %22,114 0.7 %19,928 0.6 %18,100 0.6 %
Other consumer338,133 9.4 %324,598 9.3 %312,512 9.7 %292,955 9.6 %270,330 9.4 %
Tax refund advance loans— 0.0 %— 0.0 %— 0.0 %— 0.0 %9,177 0.3 %
Total consumer loans756,355 21.0 %733,258 21.0 %672,191 20.8 %594,007 19.3 %488,760 16.9 %
Net deferred loan origination costs, premiums and discounts on purchased loans and other 1
45,081 1.2 %46,794 1.3 %48,650 1.5 %50,394 1.6 %51,975 1.8 %
Total loans3,607,242 99.9 %3,499,401 100.0 %3,255,906 100.0 %3,082,127 100.0 %2,880,780 100.0 %
Allowance for credit losses 2
(36,879)(31,737)(29,866)(29,153)(28,251)
Net loans $3,570,363 $3,467,664 $3,226,040 $3,052,974 $2,852,529 

1 Includes carrying value adjustments of $31.5 million, $32.5 million, $33.9 million, $35.4 million and $36.4 million related to terminated interest rate swaps associated with public finance loans as of March 31, 2023, December 31, 2022, September 30, 2022, June 30, 2022 and March 31, 2022, respectively. 

2 Beginning January 1, 2023, the allowance calculation is based on the CECL methodology. Prior to January 1, 2023, the allowance calculation was based on the incurred loss methodology.


Total loans were $3.6 billion as of March 31, 2023, an increase of $107.8 million, or 3.1%, compared to December 31, 2022. Total commercial loan balances were $2.8 billion as of March 31, 2023, up $86.5 million, or 3.1%, from December 31, 2022. Total consumer loan balances were $756.4 million as of March 31, 2023, an increase of $23.1 million, or 3.2%, compared to December 31, 2022. Compared to December 31, 2022, the increase in commercial loan balances was driven by growth in franchise finance, single tenant lease financing and small business lending, as well as combined growth in investor commercial real estate and construction balances. The increase was partially offset by a decrease in public finance, as well as continued runoff in healthcare finance. The increase in consumer loans was due to higher balances in the recreational vehicles and trailers loan portfolios, in addition to funded residential mortgages that were in the pipeline prior to exiting the business.
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Asset Quality

Nonperforming loans are comprised of nonaccrual loans and loans 90 days past due and accruing. Nonperforming assets include nonperforming loans, other real estate owned and other nonperforming assets, which consist of repossessed assets. The following table provides a summary of the Company’s nonperforming assets for the last five completed fiscal quarters.
(dollars in thousands)March 31,
2023		December 31,
2022		September 30,
2022		June 30,
2022		March 31,
2022
Nonaccrual loans
Commercial loans:
Commercial and industrial$2,836 $51 $350 $350 $610 
Owner-occupied commercial real estate1,441 1,570 1,622 1,661 3,267 
Single tenant lease financing— — — — 1,092 
Small business lending 1
3,797 4,764 2,958 1,297 881 
Total commercial loans8,074 6,385 4,930 3,308 5,850 
Consumer loans:
Residential mortgage1,006 1,048 1,073 1,201 1,207 
Home equity— — — 14 14 
Other consumer141 17 3 4 13 
Total consumer loans1,147 1,065 1,076 1,219 1,234 
Total nonaccrual loans 9,221 7,450 6,006 4,527 7,084 
Past Due 90 days and accruing loans
Consumer loans:
Residential mortgage— 79 — — — 
Total consumer loans— 79 — — — 
Total past due 90 days and accruing loans— 79 — — — 
Total nonperforming loans
9,221 7,529 6,006 4,527 7,084 
Other real estate owned
Residential mortgage106 — — — — 
Total other real estate owned106 — — — — 
Other nonperforming assets19 42 — 23 1 
Total nonperforming assets $9,346 $7,571 $6,006 $4,550 $7,085 
Total nonperforming loans to total loans 2
0.26 %0.22 %0.18 %0.15 %0.25 %
Total nonperforming assets to total assets 2
0.20 %0.17 %0.14 %0.11 %0.17 %
Allowance for credit losses to total loans1.02 %0.91 %0.92 %0.95 %0.98 %
Nonaccrual loans to total loans0.26 %0.22 %0.18 %0.15 %0.25 %
Allowance for credit losses to nonperforming loans 2
400.0 %426.0 %497.3 %644.0 %398.8 %
1 Balance of loans are partially guaranteed by the U.S. government.
2 Includes the impact of nonperforming small business lending loans, which are guaranteed by the U.S. government.



56

Total nonperforming loans increased $1.7 million, or 22.5%, to $9.2 million as of March 31, 2023 compared to $7.5 million as of December 31, 2022 due primarily to a commercial and industrial participation loan that was placed on nonaccrual status during the quarter, partially offset by upgrades and payoffs in owner-occupied commercial real estate and small business loans. Total nonperforming assets increased $1.8 million, or 23.4%, to $9.3 million as of March 31, 2023, compared to $7.6 million as of December 31, 2022, due primarily to the nonperforming loan activity discussed above, as well as an increase in OREO. As of March 31, 2023, the Company had one residential mortgage property in OREO with a carrying value of $0.1 million. As of December 31, 2022, the Company did not own any OREO.

Troubled Debt Restructurings

With the adoption ASU 2022-02, effective January 1, 2023, TDR accounting was eliminated. Total TDRs as of December 31, 2022 was $5.5 million. There were two portfolio residential mortgage loans and one small business lending loan classified as new TDRs during the twelve months ended December 31, 2022 with pre-modification and post-modification balances totaling $1.6 million. The following table provides a summary of troubled debt restructurings.

(in thousands)March 31,
2023		December 31,
2022		September 30,
2022		June 30,
2022		March 31,
2022
Troubled debt restructurings – nonaccrual$— $2,864 $2,342 $2,389 $2,440 
Troubled debt restructurings – performing— 2,658 2,410 2,425 2,418 
Total troubled debt restructurings$— $5,522 $4,752 $4,814 $4,858 
 


57



Allowance for Credit Losses - Loans

The following table provides a rollforward of the allowance for credit losses for the last five completed fiscal quarters.
Three Months Ended
(dollars in thousands)March 31,
2023		December 31,
2022		September 30,
2022		June 30,
2022		March 31,
2022
Balance, beginning of period, December 31, 2022$31,737 $29,866 $29,153 $28,251 $27,841 
Adoption of ASU 2016-13 (CECL)2,962 — — — — 
Balance, beginning of period34,699 29,866 29,153 28,251 27,841 
Provision charged to expense9,373 2,109 892 1,185 791 
Losses charged off
Commercial and industrial6,965 — — — — 
Small business lending60 192 130 — 80 
Residential mortgage— — — — — 
Home equity— — — — — 
Other consumer232 101 106 128 163 
Tax refund advance loans— — — 372 1,488 
Total losses charged off7,257 293 236 500 1,731 
Recoveries
Commercial and industrial1 3 2 — — 
Single tenant lease financing— — — — 1,231 
Small business lending3 7 3 2 17 
Residential mortgage2 2 1 1 1 
Home equity1 2 1 134 2 
Other consumer57 41 50 80 99 
Total losses charged off64 55 57 217 1,350 
Balance, end of period$36,879 $31,737 $29,866 $29,153 $28,251 
Net charge-offs$7,193 $238 $179 $283 $381 
Net charge-offs (recoveries) to average loans (annualized)
Commercial and industrial27.16 %0.00 %0.00 %0.00 %0.00 %
Single tenant lease financing0.00 %0.00 %0.00 %0.00 %(0.58 %)
Small business lending0.15 %0.14 %0.14 %0.00 %0.23 %
Total commercial net charge-offs (recoveries)1.02 %0.01 %0.01 %0.00 %(0.20 %)
Residential mortgage0.00 %0.00 %0.00 %0.00 %0.00 %
Home equity(0.02 %)(0.01 %)(0.01 %)(1.42 %)(0.04 %)
Other consumer0.36 %0.18 %0.20 %0.30 %0.40 %
Tax refund advance loans0.00 %0.00 %0.00 %23.55 %9.97 %
Total consumer net charge-offs0.09 %0.01 %0.01 %0.11 %1.18 %
Total net charge-offs to average loans0.82 %0.03 %0.02 %0.04 %0.05 %
Total net charge-offs (recoveries), excluding tax refund advance loans0.82 %0.03 %0.02 %(0.01 %)(0.16 %)

    The allowance for credit losses (“ACL”) was $36.9 million as of March 31, 2023, compared to $31.7 million as of December 31, 2022. The increase in the ACL reflects the day one current expected credit losses (“CECL”) adjustment of $3.0 million, as well as overall growth in the loan portfolio and changes in certain economic forecasts that impacted quantitative factors for certain portfolios. The ACL as a percentage of total loans was 1.02% at March 31, 2023, compared to 0.91%, at December 31, 2022. The ACL as a percentage of nonperforming loans decreased to 400.0% as of March 31, 2023, compared to 426.0% as of December 31, 2022.

Net charge-offs of $7.2 million were recognized during the first quarter 2023, resulting in net charge-offs to average loans of 0.82%, compared to net charge-offs to average loans of 0.05% for the first quarter 2022. The increase in net charge-
58

offs was due mainly to the $6.9 million partial charge-off of a C&I participation loan that was placed on nonaccrual status during the quarter.

The provision for credit losses in the first quarter 2023 was $9.4 million, compared to $0.8 million for the first quarter 2022. The increase in provision for the first quarter 2023 was driven primarily by the partial charge-off of the C&I participation loan mentioned above, as well as growth in the loan portfolio and the impact of economic forecasts on certain portfolios.

Investment Securities Portfolio

The following tables present the amortized cost and approximate fair value of our investment portfolio by security type for the last five completed fiscal quarters.   
(in thousands)
Amortized CostMarch 31,
2023		December 31,
2022		September 30,
2022		June 30,
2022		March 31,
2022
Securities available-for-sale
U.S. Government-sponsored agencies$38,675 $35,606 $38,197 $41,542 $45,335 
Municipal securities69,243 68,958 71,156 71,264 72,420 
Agency mortgage-backed securities - residential249,795 252,066 259,568 265,196 276,392 
Agency mortgage-backed securities - commercial16,739 17,142 17,825 23,312 24,815 
Private label mortgage-backed securities - residential11,445 11,777 12,320 13,259 15,090 
Asset-backed securities5,000 5,000 5,000 5,000 5,000 
Corporate securities45,623 45,634 44,644 42,655 47,580 
Total available-for-sale436,520 436,183 448,710 462,228 486,632 
Securities held-to-maturity, net
Municipal securities13,932 13,946 13,957 13,969 13,981 
Agency mortgage-backed securities - residential146,809 121,853 123,718 117,749 95,982 
Agency mortgage-backed securities - commercial5,806 5,818 5,828 5,838 5,847 
Corporate securities44,214 47,551 47,554 47,557 47,560 
Total held-to-maturity, net210,761 189,168 191,057 185,113 163,370 
Total securities$647,281 $625,351 $639,767 $647,341 $650,002 
(in thousands)
Approximate Fair ValueMarch 31,
2023		December 31,
2022		September 30,
2022		June 30,
2022		March 31,
2022
Securities available-for-sale
U.S. Government-sponsored agencies$37,047 $33,809 $36,329 $40,003 $43,847 
Municipal securities68,636 67,276 63,537 67,923 72,804 
Agency mortgage-backed securities - residential216,752 215,092 219,191 237,546 257,682 
Agency mortgage-backed securities - commercial15,530 15,840 16,522 22,207 24,156 
Private label mortgage-backed securities - residential10,275 10,455 11,041 12,479 14,818 
Asset-backed securities4,998 4,960 4,884 4,897 4,986 
Corporate securities42,595 42,952 42,061 40,434 46,995 
Total available-for-sale395,833 390,384 393,565 425,489 465,288 
Securities held-to-maturity
Municipal securities13,144 12,832 12,668 13,356 14,093 
Agency mortgage-backed securities - residential133,267 106,741 107,570 109,054 92,939 
Agency mortgage-backed securities - commercial4,703 4,552 4,686 5,048 5,420 
Corporate securities41,349 44,358 45,053 46,561 47,519 
Total held-to-maturity192,463 168,483 169,977 174,019 159,971 
Total securities$588,296 $558,867 $563,542 $599,508 $625,259 

59

The approximate fair value of available-for-sale investment securities increased $5.4 million, or 1.4%, to $395.8 million as of March 31, 2023, compared to $390.4 million as of December 31, 2022. The increase was due primarily to increases of $3.2 million in U.S. Government-sponsored agencies, $1.7 million in agency mortgage-backed securities - residential and $1.4 million in municipal securities. The increases were due primarily to variable rate securities resetting higher, slower prepayment speeds and purchases in the portfolio.

Accrued Income and Other Assets

    Accrued income and other assets increased $0.2 million, or 0.5%, to $45.1 million at March 31, 2023 compared to $44.9 million at December 31, 2022. The increase was primarily related to an increase of $2.7 million in deferred tax assets and $1.2 million in fund investments, partially offset by decreases of $2.8 million in derivative assets and $0.9 million in prepaid assets.

Accrued Expenses and Other Liabilities

    Accrued expenses and other liabilities increased $6.8 million, or 47.0%, to $21.3 million at March 31, 2023, compared to $14.5 million at December 31, 2022. The increase was due primarily to increases of $8.4 million in other accrued expenses, $2.5 million in unfunded commitments related to the day 1 CECL entry and $0.2 million in accrued property taxes, partially offset by decreases of $2.1 million in other liabilities, $1.6 million in accrued salary and benefits and $0.6 million in accrued taxes.

Deposits  

The following table presents the composition of the Company’s deposit base for the last five completed fiscal quarters.
(dollars in thousands)March 31,
2023		December 31,
2022		September 30,
2022		June 30,
2022		March 31,
2022
Noninterest-bearing deposits$140,449 3.9 %$175,315 5.1 %$142,635 4.5 %$126,153 4.0 %$119,197 3.7 %
Interest-bearing demand deposits351,641 9.7 %335,611 9.8 %337,765 10.6 %350,551 11.1 %334,723 10.4 %
Savings accounts32,762 0.9 %44,819 1.3 %52,228 1.6 %65,365 2.1 %66,320 2.1 %
Money market accounts1,254,013 34.6 %1,418,599 41.2 %1,378,087 43.2 %1,363,424 43.3 %1,475,857 45.8 %
BaaS - brokered deposits25,725 0.7 %13,607 0.4 %96,287 3.0 %194,133 6.2 %50,006 1.6 %
Certificates of deposits1,170,094 32.3 %874,490 25.4 %773,040 24.2 %800,598 25.3 %889,789 27.6 %
Brokered deposits647,606 17.9 %578,804 16.8 %412,602 12.9 %251,877 8.0 %282,087 8.8 %
Total deposits$3,622,290 100.0 %$3,441,245 100.0 %$3,192,644 100.0 %$3,152,101 100.0 %$3,217,979 100.0 %
   
Total deposits increased $181.0 million, or 5.3%, to $3.6 billion as of March 31, 2023, compared to $3.4 billion as of December 31, 2022. This increase was due primarily to increases of $295.6 million, or 33.8%, in certificates of deposits, $68.8 million, or 11.9% in brokered deposits, $16.0 million, or 4.8%, in interest-bearing demand deposits and $12.1 million, or 89.1% in BaaS - brokered deposits, partially offset by decreases of $164.6 million, or 11.6%, in money market accounts, $34.9 million, or 19.9%, in noninterest-bearing deposits and $12.1 million, or 26.9%, in savings accounts. The increase in certificates of deposits and brokered deposits was due primarily to strong consumer and small business demand during the quarter that allowed the Company to pull forward origination activity planned for later in the year. The decrease in money market accounts was due primarily to certain customer activity that can be periodically volatile, as well as some outflow of uninsured deposits late in the quarter. The decline in noninterest-bearing deposits was due primarily to drawdowns from commercial real estate development and construction clients contributing to equity projects the Company is financing. The decrease in interest-bearing demand deposits was due to normal activity associated with a municipal deposit relationship.

Uninsured deposit balances represented 26.2% of total deposits at March 31, 2023, down from 33.1% at December 31, 2022. These balances include Indiana-based municipal deposits, which are insured by the Indiana Board for Depositories, as well as larger balance collateralized public funds and accounts under contractual agreements that only allow withdrawal under certain conditions. After subtracting these types of deposits, the adjusted uninsured deposit balance decreases to 19.2%, down from 24.2% as of December 31, 2022.

60

Recent Debt Offerings

    In August 2021, the Company issued $60.0 million aggregate principal amount of 3.75% Fixed-to-Floating Rate Subordinated Notes due 2031 (the “2031 Notes”) in a private placement. The 2031 Notes initially bear a fixed interest rate of 3.75% per year to, but excluding, September 1, 2026, and thereafter a floating rate equal to the then-current benchmark rate (initially three-month Term SOFR plus 3.11%). The 2031 Notes are scheduled to mature on September 1, 2031. The 2031 Notes are unsecured subordinated obligations of the Company and may be repaid, without penalty, on any interest payment date on or after September 1, 2026. The 2031 Notes are intended to qualify as Tier 2 capital under regulatory guidelines. Pursuant to the terms of a Registration Rights Agreement between the Company and the initial purchasers of the 2031 Notes, the Company offered to exchange the 2031 Notes for subordinated notes that are registered under the Securities Act of 1933, as amended, and have substantially the same terms as the 2031 Notes. On December 30, 2021, the Company completed an exchange of $59.3 million principal amount of the unregistered 2031 Notes for registered 2031 Notes in satisfaction of its obligations under the registration rights agreement. Holders of $0.7 million of unregistered 2031 Notes did not participate in the exchange.

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”).

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.

61

The following tables present actual and required capital ratios as of March 31, 2023 and December 31, 2022 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, 2023 and December 31, 2022, 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 has 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.
ActualMinimum Capital Required - Basel III Minimum Required to be Considered Well Capitalized
(dollars in thousands)Capital AmountRatioCapital AmountRatioCapital AmountRatio
As of March 31, 2023:
Common equity tier 1 capital to risk-weighted assets
Consolidated $379,210 10.30 %$257,714 7.00 %N/AN/A
Bank462,360 12.59 %257,095 7.00 %$238,731 6.50 %
Tier 1 capital to risk-weighted assets
Consolidated 379,210 10.30 %312,938 8.50 %N/AN/A
Bank462,360 12.59 %312,187 8.50 %293,823 8.00 %
Total capital to risk-weighted assets
Consolidated 520,211 14.13 %386,571 10.50 %N/AN/A
Bank498,753 13.58 %385,643 10.50 %367,279 10.00 %
Leverage ratio
Consolidated 379,210 8.10 %187,371 4.00 %N/AN/A
Bank462,360 9.88 %187,120 4.00 %233,900 5.00 %

ActualMinimum Capital Required - Basel III Minimum Required to be Considered Well Capitalized
(dollars in thousands)Capital AmountRatioCapital AmountRatioCapital AmountRatio
As of December 31, 2022:
Common equity tier 1 capital to risk-weighted assets
Consolidated $390,150 10.93 %$249,795 7.00 %N/AN/A
Bank466,257 13.10 %249,191 7.00 %$231,392 6.50 %
Tier 1 capital to risk-weighted assets
Consolidated 390,150 10.93 %303,323 8.50 %N/AN/A
Bank466,257 13.10 %302,590 8.50 %284,790 8.00 %
Total capital to risk-weighted assets
Consolidated 526,419 14.75 %374,693 10.50 %N/AN/A
Bank497,994 13.99 %373,787 10.50 %355,988 10.00 %
Leverage ratio
Consolidated 390,150 9.06 %172,330 4.00 %N/AN/A
Bank466,257 10.84 %172,093 4.00 %215,116 5.00 %

62

Shareholders’ Dividends

The Company’s Board of Directors declared a cash dividend of $0.06 per share of common stock payable April 17, 2023 to shareholders of record as of March 31, 2023. 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, 2023, 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 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.

In October 2021, the Company’s Board of Directors approved a stock repurchase program authorizing the repurchase of up to $30.0 million, which was subsequently increased to $35.0 million, of our outstanding common stock from time to time on the open market or in privately negotiated transactions. The stock repurchase authorization was scheduled to expire on December 31, 2022. Under this program, the Company repurchased 855,956 shares of common stock through December 19, 2022, at an average price of $36.31, for a total investment of $31.1 million.

In December 2022, the Company’s Board of Directors approved a new stock repurchase program authorizing the repurchase of up to $25.0 million of the Company’s outstanding stock from time to time on the open market or in privately negotiated transactions. The stock repurchase program is scheduled to expire on December 31, 2023, and replaces the stock repurchase program mentioned above. Under this program, the Company has repurchased 266,188 shares of common stock through May 5, 2023, at an average price of $22.35, for a total investment of $5.9 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.

Liquidity

Liquidity management is the process used by the Company to manage the continuing flow of funds necessary to meet its financial commitments on a timely basis and at a reasonable cost while also maintaining safe and sound operations. Liquidity, represented by cash and investment securities, is a product of the Company’s operating, investing and financing activities. The primary sources of funds are deposits, principal and interest payments on loans and investment securities, maturing loans and investment securities, access to wholesale funding sources and collateralized borrowings. While scheduled payments and maturities of loans and investment securities are relatively predictable sources of funds, deposit flows are greatly influenced by interest rates, general economic conditions and competition. Therefore, the Company supplements deposit growth and enhances interest rate risk management through borrowings and wholesale funding, which are generally advances from the Federal Home Loan Bank and brokered deposits.

63

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, 2023, on a consolidated basis, the Company had $699.8 million in cash and cash equivalents and investment securities available-for-sale and $18.1 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, 2023, the Bank had the ability to borrow an additional $627.7 million from the FHLB, the Federal Reserve and correspondent bank Fed Funds lines of credit, which when combined with cash balances, totaled $931.7 million and represented 134.1% 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, 2023, the Company, on an unconsolidated basis, had $14.0 million in cash generally available for its cash needs, which is in excess of its current annual regular shareholder dividend and operating expenses.
 
The Company uses its sources of funds primarily to meet ongoing financial commitments, including withdrawals by depositors, credit commitments to borrowers, operating expenses and capital expenditures. At March 31, 2023, approved outstanding loan commitments, including unused lines of credit and standby letters of credit, amounted to $501.7 million. Certificates of deposits and brokered deposits scheduled to mature in one year or less at March 31, 2023 totaled $936.2 million.

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, adjusted total revenue, adjusted noninterest 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 the last five completed fiscal quarters.


(dollars in thousands, except share and per share data)Three Months Ended
March 31,
2023		December 31,
2022		September 30,
2022		June 30,
2022		March 31,
2022
Total equity - GAAP$355,572 $364,974 $360,857 $365,332 $374,655 
Adjustments:
   Goodwill(4,687)(4,687)(4,687)(4,687)(4,687)
Tangible common equity$350,885 $360,287 $356,170 $360,645 $369,968 
Total assets - GAAP$4,721,319 $4,543,104 $4,264,424 $4,099,806 $4,225,397 
Adjustments:
   Goodwill(4,687)(4,687)(4,687)(4,687)(4,687)
Tangible assets$4,716,632 $4,538,417 $4,259,737 $4,095,119 $4,220,710 
Common shares outstanding8,943,477 9,065,883 9,290,885 9,404,000 9,683,727 
Book value per common share$39.76 $40.26 $38.84 $38.85 $38.69 
Effect of goodwill(0.53)(0.52)(0.50)(0.50)(0.48)
Tangible book value per common share$39.23 $39.74 $38.34 $38.35 $38.21 
Total shareholders’ equity to assets7.53 %8.03 %8.46 %8.91 %8.87 %
Effect of goodwill(0.09 %)(0.09 %)(0.10 %)(0.10 %)(0.10 %)
Tangible common equity to tangible assets7.44 %7.94 %8.36 %8.81 %8.77 %
Total average equity - GAAP$363,273 $364,657 $371,303 $374,274 $380,767 
Adjustments:
   Average goodwill(4,687)(4,687)(4,687)(4,687)(4,687)
Average tangible common equity$358,586 $359,970 $366,616 $369,587 $376,080 
Return on average shareholders’ equity(3.37)%6.91 %9.01 %10.23 %11.94 %
Effect of goodwill(0.04)%0.09 %0.12 %0.13 %0.15 %
Return on average tangible common equity(3.41)%7.00 %9.13 %10.36 %12.09 %


65

(dollars in thousands, except share and per share data)Three Months Ended
March 31,
2023		December 31,
2022		September 30,
2022		June 30,
2022		March 31,
2022
Total interest income$52,033 $45,669 $36,034 $111,239 $36,034 
Adjustments:
   Fully-taxable equivalent adjustments 1
1,383 1,384 1,314 3,971 1,314 
Total interest income - FTE$53,416 $47,053 $37,348 $115,210 $37,348 
Net interest income$19,574 $21,669 $25,750 $75,424 $25,750 
Adjustments:
   Fully-taxable equivalent adjustments 1
1,383 1,384 1,314 3,971 1,314 
Net interest income - FTE$20,957 $23,053 $27,064 $79,395 $27,064 
Net interest margin1.76 %2.09 %2.40 %2.60 %2.56 %
   Effect of fully-taxable equivalent adjustments 1
0.13 %0.13 %0.13 %0.14 %0.13 %
Net interest margin - FTE1.89 %2.22 %2.53 %2.74 %2.69 %
1 Assuming a 21% tax rate

66

(dollars in thousands, except share and per share data)Three Months Ended
March 31,
2023		December 31,
2022		September 30,
2022		June 30,
2022		March 31,
2022
Total Revenue- GAAP$25,020 $27,476 $28,310 $29,994 $32,570 
Adjustments:
   Mortgage-related revenue(65)— — — — 
Adjusted total revenue$24,955 $27,476 $28,310 $29,994 $32,570 
Noninterest income - GAAP$5,446 $5,807 $4,316 $4,314 $6,820 
Adjustments:
   Mortgage-related revenue(65)— — — — 
Adjusted noninterest income$5,381 $5,807 $4,316 $4,314 $6,820 
Noninterest expense - GAAP$20,954 $18,513 $17,995 $17,985 $18,780 
Adjustments:
   Mortgage-related costs(3,052)
   Acquisition-related expenses— — — (103)(170)
   Nonrecurring consulting fee— — — — (875)
   Write-down of Software— — (125)— — 
   Discretionary inflation bonus— — — (531)— 
   Accelerated equity compensation— — — (289)— 
Adjusted noninterest expense$17,902 $18,513 $17,870 $17,062 $17,735 
(Loss) income before income taxes - GAAP$(5,349)$6,854 $9,423 $10,824 $12,999 
Adjustments:1
   Mortgage-related revenue(65)— — — — 
   Mortgage-related costs3,052 — — — — 
   Acquisition-related expenses— — — 103 170 
   Nonrecurring consulting fee— — — — 875 
   Write-down of Software— — 125 — — 
   Discretionary inflation bonus— — — 531 — 
   Accelerated equity compensation— — — 289 — 
   Partial charge-off of C&I participation loan6,914 — — — — 
Adjusted income before income taxes$4,552 $6,854 $9,548 $11,747 $14,044 
Income tax (benefit) provision - GAAP$(2,332)$503 $987 $1,279 $1,790 
Adjustments:1
   Mortgage-related revenue(14)— — — — 
   Mortgage-related costs641 — — — — 
   Acquisition-related expenses— — — 21 36 
   Nonrecurring consulting fee— — — — 184 
   Write-down of Software— — 26 — — 
   Discretionary inflation bonus— — — 112 — 
   Accelerated equity compensation— — — 61 — 
   Partial charge-off of C&I participation loan1,452 — — — — 
Adjusted income tax (benefit) provision$(253)$503 $1,013 $1,473 $2,010 
1 Assuming a 21% tax rate
67

(dollars in thousands, except share and per share data)Three Months Ended
March 31,
2023		December 31,
2022		September 30,
2022		June 30,
2022		March 31,
2022
Net (loss) income - GAAP$(3,017)$6,351 $8,436 $9,545 $11,209 
Adjustments:
   Mortgage-related revenue(51)— — — — 
   Mortgage-related costs2,411 — — — — 
   Acquisition-related expenses— — — 82 134 
   Nonrecurring consulting fee— — — — 691 
   Write-down of Software— — 99 — — 
   Discretionary inflation bonus— — — 419 — 
   Accelerated equity compensation— — — 228 — 
   Partial charge-off of C&I participation loan5,462 — — — — 
Adjusted net income$4,805 $6,351 $8,535 $10,274 $12,034 
Diluted average common shares outstanding9,024,072 9,343,533 9,525,855 9,658,689 9,870,394 
Diluted (loss) earnings per share - GAAP$(0.33)$0.68 $0.89 $0.99 $1.14 
Adjustments:
   Mortgage-related revenue(0.01)— — — — 
   Mortgage-related costs0.27 — — — — 
   Effect of acquisition-related expenses— — — 0.01 0.01 
   Effect of nonrecurring consulting fee— — — — 0.07 
   Effect of write-down of software— — 0.01 — — 
   Effect of discretionary inflation bonus— — — 0.04 — 
   Effect of accelerated equity compensation— — — 0.02 — 
   Effect of partial charge-off of C&I participation loan0.60 — — — — 
Adjusted diluted earnings per share$0.53 $0.68 $0.90 $1.06 $1.22 
Return on average assets(0.26 %)0.59 %0.82 %0.93 %1.08 %
   Effect of mortgage-related revenue0.00 %0.00 %0.00 %0.00 %0.00 %
   Effect of mortgage-related costs0.21 %0.00 %0.00 %0.00 %0.00 %
   Effect of acquisition-related expenses0.00 %0.00 %0.00 %0.01 %0.01 %
   Effect of nonrecurring consulting fee0.00 %0.00 %0.00 %0.00 %0.07 %
   Effect of write-down of software0.00 %0.00 %0.01 %0.00 %0.00 %
   Effect of discretionary inflation bonus0.00 %0.00 %0.00 %0.04 %0.00 %
   Effect of accelerated equity compensation0.00 %0.00 %0.00 %0.02 %0.00 %
   Effect of partial charge-off of C&I participation loan0.48 %0.00 %0.00 %0.00 %0.00 %
Adjusted return on average assets0.43 %0.59 %0.83 %1.00 %1.16 %
Return on average shareholders' equity(3.37 %)6.91 %9.01 %10.23 %11.94 %
   Effect of mortgage-related revenue(0.06 %)0.00 %0.00 %0.00 %0.00 %
   Effect of mortgage-related costs2.69 %0.00 %0.00 %0.00 %0.00 %
   Effect of acquisition-related expenses0.00 %0.00 %0.00 %0.09 %0.14 %
   Effect of nonrecurring consulting fee0.00 %0.00 %0.00 %0.00 %0.74 %
   Effect of write-down of software0.00 %0.00 %0.11 %0.00 %0.00 %
   Effect of discretionary inflation bonus0.00 %0.00 %0.00 %0.45 %0.00 %
   Effect of accelerated equity compensation0.00 %0.00 %0.00 %0.24 %0.00 %
   Effect of partial charge-off of C&I participation loan6.10 %0.00 %0.00 %0.00 %0.00 %
Adjusted return on average shareholders' equity5.36 %6.91 %9.12 %11.01 %12.82 %
68

(dollars in thousands, except share and per share data)Three Months Ended
March 31,
2023		December 31,
2022		September 30,
2022		June 30,
2022		March 31,
2022
Return on average tangible common equity(3.41 %)7.00 %9.13 %10.36 %12.09 %
   Effect of mortgage-related revenue(0.06 %)0.00 %0.00 %0.00 %0.00 %
   Effect of mortgage-related costs2.73 %0.00 %0.00 %0.00 %0.00 %
   Effect of acquisition-related expenses0.00 %0.00 %0.00 %0.09 %0.14 %
   Effect of nonrecurring consulting fee0.00 %0.00 %0.00 %0.00 %0.75 %
   Effect of write-down of software0.00 %0.00 %0.11 %0.00 %0.00 %
   Effect of discretionary inflation bonus0.00 %0.00 %0.00 %0.45 %0.00 %
   Effect of accelerated equity compensation0.00 %0.00 %0.00 %0.25 %0.00 %
   Effect of partial charge-off of C&I participation loan6.18 %0.00 %0.00 %0.00 %0.00 %
Adjusted return on average tangible common equity5.44 %7.00 %9.24 %11.15 %12.98 %



Critical Accounting Policies and Estimates
 
There have been 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, 2022. Refer to Note 1 Basis of Presentation for further details.
 
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. At both March 31, 2023 and December 31, 2022, the Company had interest rate swaps with notional amounts of $260.0 million. Additionally, we enter into forward contracts related to our mortgage banking business to hedge the exposures we have from commitments to extend new residential mortgage loans to our customers and from our mortgage loans held-for-sale. At March 31, 2023, the company did not have any commitments to sell residential real estate loans. At December 31, 2022, the Company had commitments to sell residential real estate loans of $17.0 million. These contracts mature in less than one year. Refer to Note 13 to the condensed consolidated financial statements for additional information about derivative financial instruments.
69

ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     Market risk is the risk of loss arising from adverse changes in the fair value of financial instruments due to changes in interest rates, foreign exchange rates and equity prices. The primary source of market risk for the Company is interest rate risk, which can be defined as the risk to earnings and the value of our equity resulting from changes in market interest rates. Interest rate risk arises in the normal course of business to the extent that there are timing and volume differences between the amount of interest-earning assets and the amount of interest-bearing liabilities that are prepaid, withdrawn, re-priced or mature in specified periods. We seek to achieve consistent growth in net interest income and equity while managing volatility arising from shifts in market interest rates.

We monitor the Company’s interest rate risk position using income simulation models and economic value of equity (“EVE”) sensitivity analysis that capture both short-term and long-term interest rate risk exposure. Income simulation involves forecasting net interest income (“NII”) under a variety of interest rate scenarios. We use EVE sensitivity analysis to understand the impact of changes in interest rates on long-term cash flows, income and capital. EVE is calculated by discounting the cash flows for all balance sheet instruments under different interest-rate scenarios. Modeling the sensitivity of NII and EVE to changes in market interest rates is highly dependent on the assumptions incorporated into the modeling process, especially those pertaining to non-maturity deposit accounts. These assumptions are reviewed and refined on an ongoing basis by the Company. We continually model our NII and EVE positions with various interest rate scenarios and assumptions of future balance sheet composition. We utilize implied forward rates as its base case scenario which reflects market expectations for rate increases over the next 24 months. Presented below is the estimated impact on our NII and EVE position as of March 31, 2023, assuming a static balance sheet and instantaneous parallel shifts in interest rates:

% Change from Base Case for Instantaneous Parallel Changes in Rates
Implied Forward Curve -200 Basis PointsImplied Forward Curve -100 Basis Points Base Implied Forward CurveImplied Forward Curve +50 Basis PointsImplied Forward Curve +100 Basis Points
NII - Year 119.44 %10.33 %N/A(3.93 %)(8.06 %)
NII - Year 246.18 %36.25 %21.70 %16.04 %9.91 %
EVE29.38 %18.92 %N/A(8.45 %)(17.00 %)

To supplement the instantaneous rate shocks required by regulatory guidance, we also calculate our interest rate risk position assuming a gradual change in market interest rates. This gradual change is commonly referred to as a “rate ramp” and evenly allocates a change in interest rates over a specified time period.

Presented below is the estimated impact on the Company’s NII and EVE position as of March 31, 2023, assuming a static balance sheet and gradual parallel shifts in interest rates:

% Change from Base Case for Gradual Changes in Rates
Implied Forward Curve -200 Basis PointsImplied Forward Curve -100 Basis PointsBase Implied Forward CurveImplied Forward Curve +50 Basis PointsImplied Forward Curve +100 Basis Points
NII - Year 18.20 %4.40 %N/A(2.31 %)(4.67 %)
NII - Year 245.56 %35.95 %21.70 %15.11 %8.10 %
EVE25.51 %16.73 %N/A(8.63 %)(17.25 %)

70

In the Company’s supplementary model, it incorporates deposit betas ranging from 10% to 98% in up-rate scenarios related to its savings and money market non-maturity deposit products, which approximates actual deposit pricing experience in 2022. Presented below are the estimated impacts on the Company’s NII and EVE position as of March 31, 2023, assuming a static balance sheet and instantaneous and gradual parallel shifts in interest rates:

% Change from Base Case for Instantaneous Parallel Changes in Rates
Implied Forward Curve -200 Basis PointsImplied Forward Curve -100 Basis Points Base Implied Forward CurveImplied Forward Curve +50 Basis PointsImplied Forward Curve +100 Basis Points
NII - Year 119.42 %10.32 %N/A(3.64 %)(7.49 %)
NII - Year 246.16 %36.24 %21.70 %16.36 %10.57 %
EVE29.24 %18.90 %N/A(8.07 %)(16.26 %)

% Change from Base Case for Gradual Changes in Rates
Implied Forward Curve -200 Basis PointsImplied Forward Curve -100 Basis PointsBase Implied Forward CurveImplied Forward Curve +50 Basis PointsImplied Forward Curve +100 Basis Points
NII - Year 18.12 %4.36 %N/A(2.21 %)(4.47 %)
NII - Year 245.46 %35.89 %21.70 %15.29 %8.49 %
EVE25.33 %16.64 %N/A(8.44 %)(16.87 %)

The NII and EVE figures presented in the tables above are reflective of a static balance sheet, and do not incorporate either balance sheet growth or contraction, or strategies to increase net interest income while managing volatility arising from shifts in market interest rates. As such, it is likely that actual results will differ from what is presented in the tables above. Balance sheet strategies to achieve such objectives may include:
•Increasing the proportion of low-duration or variable-rate loans to total loans, including organic growth in small business, construction or C&I lending, and declines in longer-term loan portfolios
•Selling longer-term fixed rate loans
•Increasing the proportion of lower cost non-maturity deposits to total deposits
•Extending the duration of wholesale funding
•Executing derivative strategies to synthetically extend liabilities or shorten asset duration
•Repositioning the investment portfolio to manage its duration

ITEM 4.    CONTROLS AND PROCEDURES
 
Evaluation of Disclosure Controls and Procedures
 
The Company maintains disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in reports that it files or submits under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized, and reported within the time period specified in the SEC’s rules and forms. These controls and procedures are also designed to provide reasonable assurance that such information is accumulated and communicated to management, including the principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosures. In designing and evaluating disclosure controls and procedures, the Company has recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Management is required to apply judgment in evaluating its controls and procedures.
 
The Company performed an evaluation under the supervision and with the participation of management, including the principal executive and principal financial officers, to assess the effectiveness of the design and operation of its disclosure controls and procedures under the Exchange Act. Based on that evaluation, our management, including our principal executive officer and principal financial officer, concluded that our disclosure controls and procedures were effective at a reasonable assurance level as of March 31, 2023.
71


Changes in Internal Control over Financial Reporting
 
There has been no change in the Company’s internal control over financial reporting during the quarter ended March 31, 2023 that has materially affected, or is reasonably likely to materially affect, its internal control over financial reporting.
72

PART II
 
ITEM 1.    LEGAL PROCEEDINGS
 
Neither we nor any of our subsidiaries are party to any material legal proceedings. From time to time, the Bank is a party to legal actions arising from its normal business activities.
 
ITEM 1A.    RISK FACTORS
 
The following represents a material change in our risk factors from those previously disclosed in Part I, Item 1A, of our Annual Report on Form 10-K for the year ended December 31, 2022.

Recent negative developments in the banking industry could adversely affect our current and future business operations and financial condition.

The recent bank failures and related negative media attention have caused significant market trading volatility among publicly traded bank and financial holding companies, particularly for regional and community banks. These developments have negatively impacted customer confidence in smaller banks, which could prompt customers to move their deposits to larger financial institutions. Further, competition for and costs of deposits has similarly increased, putting pressure on net interest margin. While we have taken actions to improve our costs of funds, there is no guarantee that such actions will be successful or sufficient in the current or future market.

We also anticipate increased regulatory scrutiny – in the course of routine examinations and otherwise – and new regulations directed towards banks of similar size to the Bank designed to respond to recent negative developments in the banking industry, all of which may increase our costs of doing business and reduce our profitability. Among other things, there may be increased focus by both regulators and investors on deposit composition, the level of uninsured deposits, brokered deposits, unrealized losses in securities portfolios, liquidity, CRE composition and concentration, capital and general oversight and control of the foregoing. The Bank could face increased scrutiny or be viewed as higher risk by regulators and/or the investor community, which could negatively affect our future results of operations and financial condition.

ITEM 2.    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
Repurchases of Common Stock

In December 2022, the Company’s Board of Directors approved a stock repurchase program authorizing the repurchase of up to $25.0 million of the Company’s outstanding stock from time to time on the open market or in privately negotiated transactions. The stock repurchase program is scheduled to expire on December 31, 2023. Under this program, the Company has repurchased 266,188 shares of common stock through May 5, 2023, at an average price of $22.35, for a total investment of $5.9 million.

The following table presents information with respect to purchases of the Company’s common stock made by or on behalf of the Company or any “affiliated purchaser,” as defined in Rule 10b-18(a)(3), during the first quarter 2023.

Total Number of Shares PurchasedAverage Price Paid Per ShareTotal Number of Shares Purchased As Part of Publicly Announced ProgramsApproximate Dollar Value Of Shares That May Yet Be Purchased Under The Program
January 1, 2023 - January 31, 202377,691 $25.12 77,691 $21,913 
February 1, 2023 - February 28, 202338,000 $27.39 38,000 $20,872 
March 1, 2023 - March 31, 202346,000 $21.08 46,000 $19,902 
  Total161,691 161,691 

73

Limitations on the Payment of Dividends

The ability of the Company to make capital distributions, including paying dividends and repurchasing shares, depends upon our receipt of dividends from the Bank. The ability of the Bank to pay dividends is limited by state and federal laws and regulations, including the requirement for the Bank to obtain the prior approval of the Indiana Department of Financial Institutions (“DFI”) before paying a dividend that, together with other dividends it has paid during a calendar year, would exceed the sum of its net income for the year to date combined with its retained net income for the previous two years. The ability of the Bank to pay dividends is further affected by the requirement to maintain adequate capital pursuant to applicable capital adequacy guidelines and regulations, and it is generally prohibited from paying any dividends if, following payment thereof, it would be undercapitalized. Notwithstanding the availability of funds for dividends, the FDIC and the DFI may prohibit the payment of dividends by the Bank if either or both determine such payment would constitute an unsafe or unsound practice. In addition, under the Basel III Capital Rules, institutions that seek the freedom to pay dividends have to maintain 2.5% in Common Equity Tier 1 Capital attributable to the capital conservation buffer.

ITEM 3.    DEFAULTS UPON SENIOR SECURITIES
 
None.
 
ITEM 4.    MINE SAFETY DISCLOSURES
 
Not Applicable.
 
ITEM 5.    OTHER INFORMATION

None.
 
ITEM 6.    EXHIBITS 
Exhibit No.DescriptionMethod of Filing
Amended and Restated Articles of Incorporation of First Internet Bancorp (incorporated by reference to Exhibit 3.1 to current report on Form 8-K filed May 21, 2020)
Incorporated by Reference
Amended and Restated Bylaws of First Internet Bancorp (incorporated by reference to Exhibit 3.2 to current report on Form 8-K filed May 21, 2020)
Incorporated by Reference
Filed Electronically
Filed Electronically
Filed Electronically
Filed Electronically
101Inline XBRL Instance Document (does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document)Filed Electronically
101.SCHInline XBRL Taxonomy Extension SchemaFiled Electronically
101.CALInline XBRL Taxonomy Extension Calculation LinkbaseFiled Electronically
101.DEFInline XBRL Taxonomy Extension Definition LinkbaseFiled Electronically
101.LABInline XBRL Taxonomy Extension Label LinkbaseFiled Electronically
101.PREInline XBRL Taxonomy Extension Presentation LinkbaseFiled Electronically
104Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)Filed Electronically

*Management contract, compensatory plan or arrangement required to be filed as an exhibit.

74

SIGNATURES
 
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 
  FIRST INTERNET BANCORP
   
5/10/2023By/s/ David B. Becker
  
David B. Becker,
Chairman and Chief Executive Officer
(on behalf of Registrant)
   
5/10/2023By/s/ Kenneth J. Lovik
  
Kenneth J. Lovik,
Executive Vice President and Chief Financial Officer (principal financial officer)
 
75

Exhibit 10.1

FIRST INTERNET BANCORP
2022 EQUITY INCENTIVE PLAN
MANAGEMENT INCENTIVE AWARD AGREEMENT

RESTRICTED STOCK UNIT AWARD AGREEMENT

This Restricted Stock Unit Award Agreement (“Award Agreement”), effective as of _____ __, ______, is by and between First Internet Bancorp, an Indiana corporation (the “Company”), and the participant designated below (“Participant”), pursuant to the First Internet Bancorp 2022 Equity Incentive Plan (the “Plan”). Capitalized terms that are used but not defined herein have the meaning ascribed to them in the Plan.

I.    NOTICE OF GRANT.

The Company has granted the Participant an Award of Stock Units (designated as “Restricted Stock Units”), subject to the terms and conditions of the Plan and this Award Agreement. By executing this Award Agreement and delivering it to the Company, the Participant is accepting the terms and conditions of this Award.



Participant
Service Year
Date of Grant
Number of Performance-Based Restricted Stock Units Granted
Performance Period for Performance-Based Restricted Stock Units
Vesting Schedule for Performance-Based Restricted Stock Units
Number of Time-Based Restricted Stock Units Granted
Vesting Schedule

II.    TERMS AND CONDITIONS.

1.    Grant of Award. The Company hereby grants to the Participant on the Date of Grant a Restricted Stock Unit Award consisting of, in the aggregate, the number of Restricted Stock Units set forth above (the “Restricted Stock Units”). Each Restricted Stock Unit is a bookkeeping entry that represents an unfunded unsecured right to receive one Share or payment in lieu thereof, subject to the terms and conditions of the Plan and the restrictions set forth in this Award Agreement.

2.    Vesting; Performance Conditions. The Restricted Stock Units shall vest and become payable as set forth herein, subject to earlier expiration or termination as provided in this Award Agreement.

a.    Performance-Based Vesting. The performance-based Restricted Stock Units (“Performance-Based Restricted Stock Units”) shall vest and become payable at the end of the three-year Performance Period subject to the attainment of certain performance goals as described herein. Performance-Based Restricted Stock Units shall be
1


earned based on the Company’s performance compared to the [______] and [__________] goals measured at the end of the three-year Performance Period. Unless otherwise provided in this Award Agreement or the Plan, the number of Performance-Based Restricted Stock Units that vest and that will be settled shall be determined as follows:
i.If the Company fails to achieve the [_______] goal at the end of the Performance Period as determined by the Committee, none of the Performance-Based Restricted Stock Units shall vest and all of the Performance-Based Restricted Stock Units shall be forfeited. If the Company achieves the [__________] goal at the end of the Performance Period as determined by the Committee, the number of Performance-Based Restricted Stock Units eligible to vest based on the achievement of the [________] goal as determined pursuant to Section 2(a)(ii) of this Award Agreement shall vest. The [_______] goal associated with these Performance-Based Restricted Stock Units has been established by the Committee and is set forth on Exhibit A to this Award Agreement.
ii.If the [_______] goal is achieved, a number of Performance-Based Restricted Stock Units shall be eligible to vest at the end of the Performance Period, based on the achievement by the Company, as determined by the Committee, of the [______] goal set forth on Exhibit A. The number of Performance-Based Restricted Stock Units that will vest will range from 0% to 150% of the Performance-Based Restricted Stock Units granted, based upon the Company’s achievement of the [______] goal, as follows: 0% if performance is below the threshold level, 50% if performance is at the threshold level, 100% if performance is at target and 150% if performance is at or above the maximum level. If the actual level of achievement of the [________] goal is between the threshold level and the target level or between the target level and the maximum level, the percentage of Performance-Based Restricted Stock Units earned will be interpolated accordingly on a straight-line basis. The [_______] goal (including the associated threshold, target and maximum levels with respect thereto) associated with these Performance-Based Restricted Stock Units has been established by the Committee and is set forth on Exhibit A to this Award Agreement.

iii.Notwithstanding anything else in this Award Agreement, the Performance Based Restricted Stock Units shall only be eligible to vest in accordance with the terms and conditions of this Award Agreement (A) if the Participant is still employed by the Company or a wholly-owned subsidiary of the Company through the end of the Performance Period, or (B) as otherwise set forth in this Section 2(a)(iii). If the Participant experiences, after the Date of Grant but before the end of the Performance Period, death, Disability, or a separation from service without Cause after reaching age 65, a prorated number of Performance Based Restricted Stock Units (the “Prorated Amount”) shall be eligible to vest in accordance with the terms and conditions of this Award Agreement. The Prorated Amount shall be equal to (x) the number of Performance Based Restricted Stock Units that would have vested under this Award Agreement if the Participant were still employed by the Company or a wholly-owned subsidiary of the Company through the end of the Performance Period, multiplied by (y) a fraction, the numerator of which is the number of full months the Participant was employed by the Company or a wholly-owned subsidiary of the Company during the Performance Period, and the denominator of which is thirty-six (36).

b.    Time-Based Vesting. Unless otherwise provided in this Award Agreement or the Plan, the Restricted Stock Units subject only to time-based vesting restrictions (“Time-Based Restricted Stock Units”) shall become fully vested and nonforfeitable in three equal installments in accordance with the vesting schedule set forth below, but only if the Participant is still employed by the Company or a wholly-owned subsidiary of the Company on the applicable vesting date or has experienced, after the Date of Grant, death, Disability, or separation from service without Cause after reaching age 65.

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Vesting DateRestricted Stock Units That Vest

c.    If the Participant does not remain employed by the Company or a wholly-owned subsidiary of the Company through the applicable vesting date for any reason other than the Participant’s death, Disability, or separation from service without Cause after reaching age 65, the Participant’s unvested Restricted Stock Units shall be automatically forfeited upon such termination of employment and neither the Company nor any affiliate shall have any further obligations to the Participant under this Award Agreement. If the Participant dies, experiences a Disability, or separates from service without Cause after reaching age 65, the Participant’s unvested Restricted Stock Units shall not be forfeited and shall continue to vest in accordance with the vesting schedule set forth above.

3.    Account for Restricted Stock Units, Dividends, and Stock Splits.

a.    The Company will establish a bookkeeping account (the “Account”) in the Participant’s name and will initially credit to the Account the number of Restricted Stock Units granted. All amounts credited to the Account shall continue for all purposes to be part of the general assets of the Company. The Participant shall not have any rights of a shareholder with respect to the Shares underlying the Restricted Stock Units unless and until the Restricted Stock Units vest and are settled by the issuance of such Shares.

b.    If, prior to the settlement of all Restricted Stock Units pursuant to the Award Agreement, the Company declares a cash or stock dividend on its Shares, then, on the payment date of the dividend, the Account shall be credited with an amount equal to the dividends that would have been paid to the Participant if one Share had been issued on the Date of Grant for each Restricted Stock Unit in the Account (collectively, the “Dividend Equivalents”). Dividend Equivalents shall be withheld by the Company in the Account without interest and will be subject to the same vesting and forfeiture restrictions as the Restricted Stock Units to which they are attributable and shall be paid or settled on the same date that the Restricted Stock Units to which they are attributable are settled in accordance with Section 4 hereof.

c.    Any stock dividends paid on or additional Shares issued with respect to the Company’s Shares will be credited to the Account as an equivalent number of additional Restricted Stock Units. Such additional Restricted Stock Units will also be eligible for Dividend Equivalents as any further dividends are declared.

4.    Payment of Restricted Stock Units.

a.    Subject to Section 6 hereof, as soon as reasonably practical, and in any event no later than March 31 after such vesting occurs, the Company shall (a) issue and deliver to the Participant the number of shares of Common Stock equal to the number of Vested Units and any Dividend Equivalents credited with respect to such Vested Units; and (b) enter the Participant's name on the books of the Company as the shareholder of record with respect to the shares of Common Stock delivered to the Participant; provided, however, that the Committee may in its sole discretion elect to pay cash or pay part cash and part Common Stock in lieu of delivering only shares of Common Stock. If a cash payment is made in lieu of delivering shares of Common Stock, the amount shall be equal to the product of (a) the Fair Market Value of a share of Common Stock on the vesting date and (b) the number of Restricted Stock Units vesting on that date.


b.    If the Participant is deemed a "specified employee" within the meaning of Section 409A of the Code, as determined by the Committee, at a time when the Participant becomes eligible for settlement of the Restricted Stock Units upon Participant’s "separation from service" within the meaning of Section 409A of the Code, then to the extent necessary to prevent any accelerated or additional tax under Section 409A of the Code, such settlement will be delayed until the earlier of: (a) the date that is six months following the Participant's separation from service and (b) the Participant's death.
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c.    To the extent that the Participant does not vest in any Restricted Stock Units, all interest in such Restricted Stock Units and any related Dividend Equivalents shall be forfeited. The Participant has no right or interest in any Restricted Stock Units that are forfeited.

5.    Voting. The Participant shall have no right to vote the Restricted Stock Units.

6.    Tax Liability and Withholding.

a.    The Participant shall be required to pay to the Company, and the Company shall have the right to deduct from any compensation paid to the Participant pursuant to the Plan, the amount of any required withholding taxes in respect of the Restricted Stock Units and to take all such other action as the Committee deems necessary to satisfy all obligations for the payment of such withholding taxes. The Committee may permit the Participant to satisfy any federal, state or local tax withholding obligation by any of the following means, or by a combination of such means:

(i)    tendering a cash payment;

(ii)    authorizing the Company to withhold shares of Common Stock from the shares of Common Stock otherwise issuable or deliverable to the Participant as a result of the vesting of the Restricted Stock Units; provided, however, that no shares of Common Stock shall be withheld with a value exceeding the minimum amount of tax required to be withheld by law; or

(iii)    delivering to the Company previously owned and unencumbered shares of Common Stock.

b.    Notwithstanding any action the Company takes with respect to any or all income tax, social insurance, payroll tax, or other tax-related withholding ("Tax-Related Items"), the ultimate liability for all Tax-Related Items is and remains the Participant's responsibility and the Company (a) makes no representation or undertakings regarding the treatment of any Tax-Related Items in connection with the grant or vesting of the Restricted Stock Units or the subsequent sale of any shares; and (b) does not commit to structure the Restricted Stock Units to reduce or eliminate the Participant's liability for Tax-Related Items. The Participant should consult a tax adviser concerning the tax consequences of receiving the award and the earning, vesting, and payment of restricted stock units under the plan and this agreement.

7.    Change in Control. As provided in the Plan, upon the occurrence of a Change in Control, the Restricted Stock Unites may vest prior to the time provided for in this Award Agreement and may be paid at a time other than the payment date described herein.

8.    Clawback and Make-Up Payment. In the event of a restatement of the Company’s consolidated financial statements, (i) the Committee or the Company shall have the right to take appropriate action to recoup from the Participant all or any portion of this Award which would not have been earned, vested or paid if based on the restated financial statements for the applicable period, and (ii) the Participant shall be entitled to any additional portion of this Award which the Participant would have earned, which would have vested, or which Participant would have been entitled to be paid if based on the restated financial statements for the applicable period. This Section 8 shall become ineffective at such time as the Company adopts a clawback policy pursuant to the requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank”) which applies to the Participant. Any amounts required to be repaid hereunder shall take into account any taxes that the Participant has already paid.

9.    Prohibition on Assignment. Except as otherwise provided in this Award Agreement or the Plan, the Participant may not sell, assign, transfer, pledge or otherwise dispose of or encumber the Restricted Stock Units, or any interest therein, until paid to the Participant in the form of shares of Company common stock, and any purported
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sale, assignment, transfer, pledge or other disposition or encumbrance in violation of this Award Agreement or the Plan will be void and of no effect.

10.    Tax Consequences. THE PARTICIPANT SHOULD CONSULT A TAX ADVISER CONCERNING THE TAX CONSEQUENCES OF RECEIVING THE AWARD AND THE EARNING, VESTING, AND PAYMENT OF RESTRICTED STOCK UNITS UNDER THE PLAN AND THIS AWARD AGREEMENT.

11.    Notices. All notices and other communications required or permitted under this Award Agreement shall be written and delivered personally or sent by registered or certified first-class mail, postage prepaid and return receipt required, addressed as follows: if to the Company, to the Secretary of the Company at the Company’s executive offices in Fishers, Indiana, and if to the Participant, to the address appearing in the personnel records of the Company or its Affiliate. Notwithstanding the foregoing, the Company may authorize notice by any other means it deems desirable or efficient at a given time, such as notice by facsimile or electronic mail (e-mail). Participant agrees to notify the Company upon any change in the Participant’s residence address.

12.    Entire Agreement; Governing Law. The Plan is incorporated herein by reference. The Plan and this Award Agreement constitute the entire agreement of the parties with respect to the subject matter hereof and supersede in their entirety all prior undertakings and agreements of the Company and Participant with respect to the subject matter hereof, and may not be modified adversely to the Participant’s interest except by means of a writing signed by the Company and Participant. This Agreement will be construed and interpreted in accordance with the laws of the State of Indiana without regard to conflict of law principles.

13.    Successors and Assigns. The Company may assign any of its rights under this Award Agreement. This Award Agreement will be binding upon and inure to the benefit of the successors and assigns of the Company. Subject to the restrictions on transfer set forth herein, this Award Agreement will be binding upon the Participant and the Participant's beneficiaries, executors, administrators and the person(s) to whom the Restricted Stock Units may be transferred by will or the laws of descent or distribution.

14.    Severability. The invalidity or unenforceability of any provision of the Plan or this Award Agreement shall not affect the validity or enforceability of any other provision of the Plan or this Award Agreement, and each provision of the Plan and this Award Agreement shall be severable and enforceable to the extent permitted by law.

15.    Discretionary Nature of Plan. The Plan is discretionary and may be amended, cancelled or terminated by the Company at any time, in its discretion. The grant of the Restricted Stock Units in this Award Agreement does not create any contractual right or other right to receive any restricted stock units or other awards in the future. Future awards, if any, will be at the sole discretion of the Company. Any amendment, modification, or termination of the Plan shall not constitute a change or impairment of the terms and conditions of the Participant's employment with the Company.

15.    Amendment. The Committee has the right to amend, alter, suspend, discontinue or cancel the Restricted Stock Units, prospectively or retroactively; provided, that, no such amendment shall adversely affect the Participant's material rights under this Agreement without the Participant's consent.

16.    Headings. The section headings of this Agreement are for convenience and reference only and are not intended to define, extend or limit the contents of the sections.

18.    Section 409A. This Award Agreement is intended to comply with Section 409A of the Internal Revenue Code to the extent subject thereto, and, accordingly, to the maximum extent permitted, the Award Agreement shall be interpreted and administered to be in compliance therewith. In the event this Award Agreement or any benefit paid to Participant hereunder is deemed to be subject to section 409A of the Code, Participant consents to the Company adopting such conforming amendments as the Company deems necessary, in its reasonable discretion, to comply with section 409A of the Code.

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19.    No Guarantee of Continued Service. PARTICIPANT ACKNOWLEDGES AND AGREES THAT THIS AWARD DOES NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED EMPLOYMENT FOR ANY PERIOD, OR AT ALL, AND SHALL NOT INTERFERE IN ANY WAY WITH PARTICIPANT’S RIGHT OR THE COMPANY’S RIGHT TO TERMINATE PARTICIPANT’S EMPLOYMENT AT ANY TIME, WITH OR WITHOUT CAUSE.

20.    Plan Controlling. In the event of a conflict between the terms and conditions of the Plan and this Award Agreement, the terms and conditions of the Plan shall prevail. Participant acknowledges receipt of a copy of the Plan and represents that he or she is familiar with the terms and provisions thereof, and hereby accepts the Restricted Stock Units, subject to all of the terms and provisions thereof. Participant has reviewed the Plan and this Award Agreement in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Award Agreement and fully understands all provisions of the Award Agreement. Participant hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Committee upon any questions arising under the Plan or this Award Agreement.

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written.

                            FIRST INTERNET BANCORP

______________________________        By:_________________________________

Date:___________________________ Date: _______________________________

                            


















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Exhibit 31.1

Certification by the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, David B. Becker, certify that:

1.I have reviewed this Quarterly Report on Form 10-Q of First Internet Bancorp;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b.Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with generally accepted accounting principles;

c.Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d.Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function):

a.All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.


Date:May 10, 2023
/s/ David B. Becker
David B. Becker, Chief Executive Officer

Exhibit 31.2

Certification by the Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Kenneth J. Lovik, certify that:

1.I have reviewed this Quarterly Report on Form 10-Q of First Internet Bancorp;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b.Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with generally accepted accounting principles;

c.Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d.Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function):

a.All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.


Date:May 10, 2023
/s/ Kenneth J. Lovik
Kenneth J. Lovik, Chief Financial Officer

Exhibit 32.1

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of First Internet Bancorp (the “Company") on Form 10-Q for the period ended March 31, 2023 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), each of the undersigned certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ David B. Becker
David B. Becker
Chief Executive Officer
May 10, 2023
/s/ Kenneth J. Lovik
Kenneth J. Lovik
Chief Financial Officer
May 10, 2023