Michael S. Ives Updated 10:19 AM CDT, Thu September 4, 2025 Published Under: News September 4, 2025In many of my President's Messages, I have stated that we are focused on creating franchise value for our shareholders. What I have not done is give you more detailed information on what franchise value actually means.Franchise value is generally considered to be the value of a business beyond its balance sheet asset value. Unfortunately, there is no precise definition of how to measure or create franchise value. There are many different ideas on this subject. Some observers look to asset growth. Others look to income growth. Still others look to loan and/or deposit growth.These measures have some validity but are, at best, superficial. One has to look beneath the surface to obtain a more complete picture for franchise value. In my opinion, in banking, the real value lies in the types of assets and liabilities that are on the bank's balance sheet is the real question. High-risk commercial real estate loans and illiquid securities can reduce franchise value even if they increase income over the short run. Similarly, high-yield money market accounts and certificates of deposit and public deposits do not create franchise value while true local core deposits do.Income from noncore banking activities may well have less "value" and more volatility than income from core banking activities.Since its opening, our Bank has focused on core banking activities with local business clients. We raise noninterest-bearing deposits and interest-bearing deposits, typically at local market rates, and we make loans on local market rates, terms, and conditions with excellent asset quality. These are the types of loans and deposits that banks consider the most desirable.How does this create franchise value exactly? How can you measure it?On a quarterly basis, we use one of our interest rate risk models to estimate our franchise value. This model is the economic value of equity or "EVE." We use FHN Financial, a subsidiary of a large regional bank, to "mark to market" the economic value of our assets and liabilities on the last business day of each calendar quarter, based on the interest rates prevailing on that day, together with some other assumptions from our Bank or FHN including FHN's decay rates for deposits. That is our EVE. To account for interest rate risk, we stress this EVE to see the impact on our EVE as if interest rates had risen or fallen substantially as of that day.At the same time, we look at this EVE to give us an estimate of the franchise value that we have created by this "mark to market" of our assets and liabilities, compared to their static “book value,” which remains unchanged from the moment they were added to the Bank’s balance sheet.In other words, we assess how the estimated value of our assets and liabilities on our balance sheet adds to, or detracts from, the Bank's equity based on real-world market conditions. This is why EVE analysis is typically one of the tools that banks use to negotiate the prices of the loans and deposits being sold in a branch.Below are our EVE calculations as of June 30, 2025, at the then prevailing interest rates and assumptions: BOOK VALUEEVE(millions)(millions)Cash and Bank Deposits $29.9$29.9Securities 21.721.7Loans46.946.1Other Assets 1.51.5TOTAL ASSETS $100$99.2Noninterest-bearing Deposits$35.4$29.6Interest-bearing Deposits27.826.5Short-term Borrowings15.015.0Other Liabilities0.50.5TOTAL LIABILITIES$78.7$71.6TOTAL EQUITY $21.3$27.6 As you can see, our estimated EVE as of June 30, 2025, was $27.6 million, which shows an estimated $6.3 million of net value created from the types and rates of loans and deposits on our balance sheet. Our loans show a reduction in value of $0.8 million resulting from the low-rate loans that we originated in 2021 and early 2022 prior to the rapid rise in prevailing interest rates in 2022. This reduction in value for our loans is more than offset by the increase in value of $7.1 million resulting from the amounts of noninterest-bearing deposits and other low-cost core deposits on our balance sheet in a higher interest-rate environment. I am not giving you this information as a precise quantification of our franchise value. There are many variables and subjective assumptions that go into these calculations. Rather, I am giving you this information as our reasoning behind our focus on local loans and core deposits, which we consider to be the way to create real franchise value. The interrelationship between franchise value and EVE may be new information for some of you. I would be pleased to answer any questions that you may have. Michael S. IvesPresident and Chief Executive Officer The above letter from the CEO of Integrity Bank for Business (the “Bank”) may contain “forward looking statements” regarding future events and future results of the Bank. Forward-looking statements can be identified by words such as “anticipates,” “estimates,” “intends,” “plans,” “believes,” “projects,” “will,” “expects,” “may,” and similar references to future periods. Forward-looking statements are neither historical facts nor assurances of future performance, but are based only on the Bank’s current beliefs, expectations, and assumptions regarding the future of its business, plans and strategies, projections, anticipated events and trends, the economy, and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks, and changes in circumstances that are difficult to predict and outside of the Bank’s control. The Bank’s actual results and financial condition may differ materially from those indicated in forward-looking statements, and therefore you should not rely on forward-looking statements. Any forward-looking statement made by the Bank is based only on information available to the Bank as of the date on which it is made, and the Bank has no obligation to update any forward-looking statement, whether as a result of new information, future developments or otherwise.
