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 SeptemberJune 30, 20202021
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.) |
| | |
11201 USA Parkway Fishers, IN | | 46037 |
(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 class | | Trading Symbols | | Name of each exchange on which registered |
Common Stock, without par value | | INBK | | The Nasdaq Stock Market LLC |
6.0% Fixed to Floating Subordinated Notes due 2026 | | INBKL | | The Nasdaq Stock Market LLC |
6.0% Fixed to Floating Subordinated Notes due 2029 | | INBKZ | | The 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 October 30, 2020,August 6, 2021, the registrant had 9,800,5699,854,153 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 (“we,” “our,” “us” or the “Company”) regarding its business strategies, intended results and future performance. Forward-looking statements are generally preceded by terms such as “anticipate,” “attempt,” “believe,” “can,” “continue,” “could,” “effort,” “estimate,” “expect,” “intend,” “likely,” “may,” “objective,” “optimistic,” “pending,” “plan,” “position,” “potential,” “preliminary,” “remain,” “should,” “will,” “would” andor other similar expressions. Forward-lookingSuch statements are not a guarantee of future performance or results, are based on information available at the time the statements are made and involve knownare subject to certain risks and unknown risks, uncertainties including: the effects of the COVID-19 global pandemic and other factors that could cause actual results to differ materially fromadverse public health developments on the information in the forward-looking statements. The COVID-19 pandemic has resulted in deterioration of generaleconomy, our business and economic conditions and continued to impact us, our customers, counterparties, employees, and third-party service providers. Sustained deterioration in market conditions could adversely affect our revenuesoperations and the valuesbusiness and operations of our assetsvendors and liabilities, reduce the availability of funding, lead to a tightening of credit and further increase stock price volatility. In addition, changes to statutes, regulations, or regulatory policies or practices as a result of, or in response to COVID-19, could affect us in substantial and unpredictable ways. The ultimate magnitude and duration of the pandemic is still unknown at this time, therefore, the extent of the impact on our business, financial position, results of operations, liquidity and prospects remains uncertain. Other factors that may cause such differences include:customers: 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 loan losses, and the value and salability of the real estate that we own or 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 plans to growcontinue originating our commercial real estate, commercial and industrial, public finance, U.S. Small Business Administration (“SBA”) and healthcare finance loan portfolios,loans, and to start originating franchise finance loans, which may carry greater risks of non-payment or other unfavorable consequences; our dependence on capital distributions from First Internet Bank of Indiana (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 loan losses or to write-down assets; 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 the Bank in particular; more restrictive regulatory capital requirements; increased costs, including deposit insurance premiums; regulation or prohibition of certain income producing activities or changes in the secondary market for loans and other products; 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; 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; execution of future acquisition, reorganization or disposition transactions, including without limitation, the related time and costs of implementing such transactions, integrating operations as part of these transactions and possible failures to achieve expected gains, revenue growth and/or expense savings and other anticipated benefits from such transactions; changes in applicable tax laws; 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.
PART I
ITEM 1. FINANCIAL STATEMENTS
First Internet Bancorp
Condensed Consolidated Balance Sheets
(Amounts in thousands except share data)
| | | | September 30, 2020 | | December 31, 2019 | | | June 30, 2021 | | December 31, 2020 |
| | | (Unaudited) | | | | | (Unaudited) | | |
Assets | Assets | | | | | Assets | | | | |
Cash and due from banks | Cash and due from banks | | $ | 5,804 | | | $ | 5,061 | | Cash and due from banks | | $ | 4,347 | | | $ | 7,367 | |
Interest-bearing deposits | Interest-bearing deposits | | 482,649 | | | 322,300 | | Interest-bearing deposits | | 324,450 | | | 412,439 | |
Total cash and cash equivalents | Total cash and cash equivalents | | 488,453 | | | 327,361 | | Total cash and cash equivalents | | 328,797 | | | 419,806 | |
| Securities available-for-sale, at fair value (amortized cost of $528,052 and $546,640 in 2020 and 2019, respectively) | | 528,311 | | | 540,852 | | |
Securities held-to-maturity, at amortized cost (fair value of $69,176 and $62,560 in 2020 and 2019, respectively) | | 68,254 | | | 61,878 | | |
Loans held-for-sale (includes 35,321 and 56,097 at fair value in 2020 and 2019, respectively) | | 76,208 | | | 56,097 | | |
Securities available-for-sale, at fair value (amortized cost of $663,693 and $497,004 in 2021 and 2020, respectively) | | Securities available-for-sale, at fair value (amortized cost of $663,693 and $497,004 in 2021 and 2020, respectively) | | 663,519 | | | 497,628 | |
Securities held-to-maturity, at amortized cost (fair value of $68,058 and $69,452 in 2021 and 2020, respectively) | | Securities held-to-maturity, at amortized cost (fair value of $68,058 and $69,452 in 2021 and 2020, respectively) | | 65,659 | | | 68,223 | |
Loans held-for-sale (includes $16,870 and $26,341 at fair value in 2021 and 2020, respectively) | | Loans held-for-sale (includes $16,870 and $26,341 at fair value in 2021 and 2020, respectively) | | 27,587 | | | 39,584 | |
Loans | Loans | | 3,012,914 | | | 2,963,547 | | Loans | | 2,957,608 | | | 3,059,231 | |
Allowance for loan losses | Allowance for loan losses | | (26,917) | | | (21,840) | | Allowance for loan losses | | (28,066) | | | (29,484) | |
Net loans | Net loans | | 2,985,997 | | | 2,941,707 | | Net loans | | 2,929,542 | | | 3,029,747 | |
Accrued interest receivable | Accrued interest receivable | | 17,768 | | | 18,607 | | Accrued interest receivable | | 16,345 | | | 17,416 | |
Federal Home Loan Bank of Indianapolis stock | Federal Home Loan Bank of Indianapolis stock | | 25,650 | | | 25,650 | | Federal Home Loan Bank of Indianapolis stock | | 25,650 | | | 25,650 | |
Cash surrender value of bank-owned life insurance | Cash surrender value of bank-owned life insurance | | 37,714 | | | 37,002 | | Cash surrender value of bank-owned life insurance | | 38,421 | | | 37,952 | |
Premises and equipment, net | Premises and equipment, net | | 31,262 | | | 14,630 | | Premises and equipment, net | | 44,249 | | | 37,590 | |
Goodwill | Goodwill | | 4,687 | | | 4,687 | | Goodwill | | 4,687 | | | 4,687 | |
Servicing asset, at fair value | Servicing asset, at fair value | | 2,818 | | | 2,481 | | Servicing asset, at fair value | | 4,120 | | | 3,569 | |
Other real estate owned | Other real estate owned | | 0 | | | 2,065 | | Other real estate owned | | 1,300 | | | 0 | |
Accrued income and other assets | Accrued income and other assets | | 66,502 | | | 67,066 | | Accrued income and other assets | | 54,766 | | | 64,304 | |
Total assets | Total assets | | $ | 4,333,624 | | | $ | 4,100,083 | | Total assets | | $ | 4,204,642 | | | $ | 4,246,156 | |
Liabilities and Shareholders’ Equity | Liabilities and Shareholders’ Equity | | | | | Liabilities and Shareholders’ Equity | | | | |
Liabilities | Liabilities | | | | | Liabilities | | | | |
Noninterest-bearing deposits | Noninterest-bearing deposits | | $ | 86,088 | | | $ | 57,115 | | Noninterest-bearing deposits | | $ | 113,996 | | | $ | 96,753 | |
Interest-bearing deposits | Interest-bearing deposits | | 3,286,303 | | | 3,096,848 | | Interest-bearing deposits | | 3,092,151 | | | 3,174,132 | |
Total deposits | Total deposits | | 3,372,391 | | | 3,153,963 | | Total deposits | | 3,206,147 | | | 3,270,885 | |
Advances from Federal Home Loan Bank | Advances from Federal Home Loan Bank | | 514,914 | | | 514,910 | | Advances from Federal Home Loan Bank | | 514,919 | | | 514,916 | |
Subordinated debt, net of unamortized debt issuance costs of $2,242 and $2,472 in 2020 and 2019, respectively | | 69,758 | | | 69,528 | | |
Subordinated debt, net of unamortized debt issuance costs of $2,129 and $2,397 in 2021 and 2020, respectively | | Subordinated debt, net of unamortized debt issuance costs of $2,129 and $2,397 in 2021 and 2020, respectively | | 69,871 | | | 79,603 | |
Accrued interest payable | Accrued interest payable | | 1,249 | | | 3,767 | | Accrued interest payable | | 1,132 | | | 1,439 | |
Accrued expenses and other liabilities | Accrued expenses and other liabilities | | 57,210 | | | 53,002 | | Accrued expenses and other liabilities | | 53,932 | | | 48,369 | |
Total liabilities | Total liabilities | | 4,015,522 | | | 3,795,170 | | Total liabilities | | 3,846,001 | | | 3,915,212 | |
Commitments and Contingencies | Commitments and Contingencies | | Commitments and Contingencies | | 0 | | 0 |
Shareholders’ Equity | Shareholders’ Equity | | | | | Shareholders’ Equity | | | | |
Preferred stock, no par value; 4,913,779 shares authorized; issued and outstanding - none | Preferred stock, no par value; 4,913,779 shares authorized; issued and outstanding - none | | 0 | | | 0 | | Preferred stock, no par value; 4,913,779 shares authorized; issued and outstanding - none | | 0 | | | 0 | |
Voting common stock, no par value; 45,000,000 shares authorized; 9,800,569 and 9,741,800 shares issued and outstanding in 2020 and 2019, respectively | | 220,951 | | | 219,423 | | |
Voting common stock, no par value; 45,000,000 shares authorized; 9,854,153 and 9,800,569 shares issued and outstanding in 2021 and 2020, respectively | | Voting common stock, no par value; 45,000,000 shares authorized; 9,854,153 and 9,800,569 shares issued and outstanding in 2021 and 2020, respectively | | 222,486 | | | 221,408 | |
Nonvoting common stock, no par value; 86,221 shares authorized; issued and outstanding - none | Nonvoting common stock, no par value; 86,221 shares authorized; issued and outstanding - none | | 0 | | | 0 | | Nonvoting common stock, no par value; 86,221 shares authorized; issued and outstanding - none | | 0 | | | 0 | |
Retained earnings | Retained earnings | | 116,241 | | | 99,681 | | Retained earnings | | 149,066 | | | 126,732 | |
Accumulated other comprehensive loss | Accumulated other comprehensive loss | | (19,090) | | | (14,191) | | Accumulated other comprehensive loss | | (12,911) | | | (17,196) | |
Total shareholders’ equity | Total shareholders’ equity | | 318,102 | | | 304,913 | | Total shareholders’ equity | | 358,641 | | | 330,944 | |
Total liabilities and shareholders’ equity | Total liabilities and shareholders’ equity | | $ | 4,333,624 | | | $ | 4,100,083 | | Total liabilities and shareholders’ equity | | $ | 4,204,642 | | | $ | 4,246,156 | |
See Notes to Condensed Consolidated Financial Statements
First Internet Bancorp
Condensed Consolidated Statements of Income – Unaudited
(Amounts in thousands except share and per share data)
| | | | Three Months Ended | | Nine Months Ended | | | Three Months Ended | | Six Months Ended |
| | | September 30, 2020 | | September 30, 2019 | | September 30, 2020 | | September 30, 2019 | | | June 30, 2021 | | June 30, 2020 | | June 30, 2021 | | June 30, 2020 |
Interest Income | Interest Income | | | | | | | | | Interest Income | | | | | | | | |
Loans | Loans | | $ | 29,560 | | | $ | 30,594 | | | $ | 89,698 | | | $ | 90,654 | | Loans | | $ | 30,835 | | | $ | 29,730 | | | $ | 61,720 | | | $ | 60,138 | |
Securities – taxable | Securities – taxable | | 2,240 | | | 3,468 | | | 9,135 | | | 10,332 | | Securities – taxable | | 1,921 | | | 3,276 | | | 3,700 | | | 6,895 | |
Securities – non-taxable | Securities – non-taxable | | 381 | | | 639 | | | 1,410 | | | 1,991 | | Securities – non-taxable | | 259 | | | 457 | | | 540 | | | 1,029 | |
Other earning assets | Other earning assets | | 569 | | | 2,993 | | | 2,973 | | | 6,560 | | Other earning assets | | 362 | | | 759 | | | 697 | | | 2,404 | |
Total interest income | Total interest income | | 32,750 | | | 37,694 | | | 103,216 | | | 109,537 | | Total interest income | | 33,377 | | | 34,222 | | | 66,657 | | | 70,466 | |
Interest Expense | Interest Expense | | | | | | | | | Interest Expense | | | | | | | | |
Deposits | Deposits | | 12,428 | | | 18,363 | | | 45,399 | | | 50,896 | | Deposits | | 7,705 | | | 15,763 | | | 16,333 | | | 32,971 | |
Other borrowed funds | Other borrowed funds | | 4,090 | | | 4,087 | | | 12,141 | | | 11,048 | | Other borrowed funds | | 4,065 | | | 4,033 | | | 8,192 | | | 8,051 | |
Total interest expense | Total interest expense | | 16,518 | | | 22,450 | | | 57,540 | | | 61,944 | | Total interest expense | | 11,770 | | | 19,796 | | | 24,525 | | | 41,022 | |
Net Interest Income | Net Interest Income | | 16,232 | | | 15,244 | | | 45,676 | | | 47,593 | | Net Interest Income | | 21,607 | | | 14,426 | | | 42,132 | | | 29,444 | |
Provision for Loan Losses | Provision for Loan Losses | | 2,509 | | | 2,824 | | | 6,461 | | | 5,498 | | Provision for Loan Losses | | 21 | | | 2,491 | | | 1,297 | | | 3,952 | |
Net Interest Income After Provision for Loan Losses | Net Interest Income After Provision for Loan Losses | | 13,723 | | | 12,420 | | | 39,215 | | | 42,095 | | Net Interest Income After Provision for Loan Losses | | 21,586 | | | 11,935 | | | 40,835 | | | 25,492 | |
Noninterest Income | Noninterest Income | | | | | | | | Noninterest Income | | | | | | | |
Service charges and fees | Service charges and fees | | 224 | | | 211 | | | 618 | | | 672 | | Service charges and fees | | 280 | | | 182 | | | 546 | | | 394 | |
Loan servicing revenue | Loan servicing revenue | | 274 | | | 0 | | | 780 | | | 0 | | Loan servicing revenue | | 457 | | | 255 | | | 879 | | | 506 | |
Loan servicing asset revaluation | Loan servicing asset revaluation | | (103) | | | 0 | | | (372) | | | 0 | | Loan servicing asset revaluation | | (240) | | | (90) | | | (395) | | | (269) | |
Mortgage banking activities | Mortgage banking activities | | 9,630 | | | 4,307 | | | 16,706 | | | 8,588 | | Mortgage banking activities | | 2,674 | | | 3,408 | | | 8,424 | | | 7,076 | |
| Gain on sale of loans | Gain on sale of loans | | 2,033 | | | 523 | | | 4,596 | | | 353 | | Gain on sale of loans | | 3,019 | | | 762 | | | 4,742 | | | 2,563 | |
Gain (loss) on sale of securities | | 98 | | | 0 | | | 139 | | | (458) | | |
Gain on sale of securities | | Gain on sale of securities | | 0 | | | 0 | | | 0 | | | 41 | |
Gain on sale of premises and equipment | | Gain on sale of premises and equipment | | 2,523 | | | 0 | | | 2,523 | | | 0 | |
Other | Other | | 339 | | | 517 | | | 1,212 | | | 2,229 | | Other | | 249 | | | 456 | | | 618 | | | 873 | |
Total noninterest income | Total noninterest income | | 12,495 | | | 5,558 | | | 23,679 | | | 11,384 | | Total noninterest income | | 8,962 | | | 4,973 | | | 17,337 | | | 11,184 | |
Noninterest Expense | Noninterest Expense | | | | | | | Noninterest Expense | | | | | | |
Salaries and employee benefits | Salaries and employee benefits | | 9,533 | | | 6,883 | | | 25,096 | | | 19,846 | | Salaries and employee benefits | | 9,232 | | | 7,789 | | | 18,724 | | | 15,563 | |
Marketing, advertising and promotion | Marketing, advertising and promotion | | 426 | | | 456 | | | 1,212 | | | 1,391 | | Marketing, advertising and promotion | | 872 | | | 411 | | | 1,552 | | | 786 | |
Consulting and professional services | Consulting and professional services | | 614 | | | 778 | | | 2,723 | | | 2,427 | | Consulting and professional services | | 1,078 | | | 932 | | | 2,064 | | | 2,109 | |
Data processing | Data processing | | 388 | | | 381 | | | 1,102 | | | 1,026 | | Data processing | | 382 | | | 339 | | | 844 | | | 714 | |
Loan expenses | Loan expenses | | 408 | | | 247 | | | 1,406 | | | 853 | | Loan expenses | | 541 | | | 399 | | | 1,075 | | | 998 | |
Premises and equipment | Premises and equipment | | 1,568 | | | 1,506 | | | 4,795 | | | 4,503 | | Premises and equipment | | 1,587 | | | 1,602 | | | 3,188 | | | 3,227 | |
Deposit insurance premium | Deposit insurance premium | | 440 | | | 0 | | | 1,360 | | | 1,302 | | Deposit insurance premium | | 275 | | | 435 | | | 700 | | | 920 | |
Write-down of other real estate owned | | 2,065 | | | 0 | | | 2,065 | | | 0 | | |
| Other | Other | | 970 | | | 952 | | | 3,383 | | | 2,673 | | Other | | 1,108 | | | 1,337 | | | 2,245 | | | 2,413 | |
Total noninterest expense | Total noninterest expense | | 16,412 | | | 11,203 | | | 43,142 | | | 34,021 | | Total noninterest expense | | 15,075 | | | 13,244 | | | 30,392 | | | 26,730 | |
Income Before Income Taxes | Income Before Income Taxes | | 9,806 | | | 6,775 | | | 19,752 | | | 19,458 | | Income Before Income Taxes | | 15,473 | | | 3,664 | | | 27,780 | | | 9,946 | |
Income Tax Provision | | 1,395 | | | 449 | | | 1,390 | | | 1,315 | | |
Income Tax Provision (Benefit) | | Income Tax Provision (Benefit) | | 2,377 | | | (268) | | | 4,234 | | | (5) | |
Net Income | Net Income | | $ | 8,411 | | | $ | 6,326 | | | $ | 18,362 | | | $ | 18,143 | | Net Income | | $ | 13,096 | | | $ | 3,932 | | | $ | 23,546 | | | $ | 9,951 | |
Income Per Share of Common Stock | Income Per Share of Common Stock | | | | | | | Income Per Share of Common Stock | | | | | | |
Basic | Basic | | $ | 0.86 | | | $ | 0.63 | | | $ | 1.87 | | | $ | 1.79 | | Basic | | $ | 1.32 | | | $ | 0.40 | | | $ | 2.37 | | | $ | 1.02 | |
Diluted | Diluted | | $ | 0.86 | | | $ | 0.63 | | | $ | 1.87 | | | $ | 1.79 | | Diluted | | $ | 1.31 | | | $ | 0.40 | | | $ | 2.36 | | | $ | 1.02 | |
Weighted-Average Number of Common Shares Outstanding | Weighted-Average Number of Common Shares Outstanding | | | | | | | Weighted-Average Number of Common Shares Outstanding | | | | | | |
Basic | Basic | | 9,773,175 | | | 9,979,603 | | | 9,825,683 | | | 10,114,303 | | Basic | | 9,932,761 | | | 9,768,227 | | | 9,916,087 | | | 9,798,528 | |
Diluted | Diluted | | 9,773,224 | | | 9,980,612 | | | 9,827,182 | | | 10,116,507 | | Diluted | | 9,981,422 | | | 9,768,227 | | | 9,970,147 | | | 9,802,427 | |
Dividends Declared Per Share | Dividends Declared Per Share | | $ | 0.06 | | | $ | 0.06 | | | $ | 0.18 | | | $ | 0.18 | | Dividends Declared Per Share | | $ | 0.06 | | | $ | 0.06 | | | $ | 0.12 | | | $ | 0.12 | |
See Notes to Condensed Consolidated Financial Statements
First Internet Bancorp
Condensed Consolidated Statements of Comprehensive Income – Unaudited
(Amounts in thousands)
| | | | Three Months Ended September 30, | | Nine Months Ended September 30, | | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | | 2020 | | 2019 | | 2020 | | 2019 | | | 2021 | | 2020 | | 2021 | | 2020 |
Net income | Net income | | $ | 8,411 | | | $ | 6,326 | | | $ | 18,362 | | | $ | 18,143 | | Net income | | $ | 13,096 | | | $ | 3,932 | | | $ | 23,546 | | | $ | 9,951 | |
Other comprehensive income (loss) | Other comprehensive income (loss) | | Other comprehensive income (loss) | |
Net unrealized holding gains on securities available-for-sale recorded within other comprehensive (loss) income before income tax | | 1,386 | | | 1,266 | | | 6,187 | | | 11,843 | | |
Net unrealized holding gains (losses) on securities available-for-sale recorded within other comprehensive income (loss) before income tax | | Net unrealized holding gains (losses) on securities available-for-sale recorded within other comprehensive income (loss) before income tax | | 1,388 | | | (1,498) | | | (807) | | | 4,801 | |
| Reclassification adjustment for (gains) losses realized | | (98) | | | 0 | | | (139) | | | 458 | | |
Net unrealized holding gains (losses) on cash flow hedging derivatives recorded within other comprehensive income (loss) before income tax | | 1,514 | | | (3,225) | | | (12,453) | | | (12,689) | | |
Reclassification adjustment for gains realized | | Reclassification adjustment for gains realized | | 0 | | | 0 | | | 0 | | | (41) | |
Net unrealized holding (losses) gains on cash flow hedging derivatives recorded within other comprehensive income (loss) before income tax | | Net unrealized holding (losses) gains on cash flow hedging derivatives recorded within other comprehensive income (loss) before income tax | | (54) | | | (509) | | | 6,226 | | | (13,967) | |
| Other comprehensive income (loss) before income tax | Other comprehensive income (loss) before income tax | | 2,802 | | | (1,959) | | | (6,405) | | | (388) | | Other comprehensive income (loss) before income tax | | 1,334 | | | (2,007) | | | 5,419 | | | (9,207) | |
Income tax provision (benefit) | Income tax provision (benefit) | | 754 | | | (482) | | | (1,506) | | | 126 | | Income tax provision (benefit) | | 325 | | | (735) | | | 1,134 | | | (2,260) | |
Other comprehensive income (loss) | Other comprehensive income (loss) | | 2,048 | | | (1,477) | | | (4,899) | | | (514) | | Other comprehensive income (loss) | | 1,009 | | | (1,272) | | | 4,285 | | | (6,947) | |
Comprehensive income | Comprehensive income | | $ | 10,459 | | | $ | 4,849 | | | $ | 13,463 | | | $ | 17,629 | | Comprehensive income | | $ | 14,105 | | | $ | 2,660 | | | $ | 27,831 | | | $ | 3,004 | |
See Notes to Condensed Consolidated Financial Statements
First Internet Bancorp
Condensed Consolidated Statements of Changes in Shareholders’ Equity - Unaudited
NineSix Months Ended SeptemberJune 30, 20202021 and 20192020
(Amounts in thousands except per share data)
| | | Voting and Nonvoting Common Stock | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Total Shareholders’ Equity | | Voting and Nonvoting Common Stock | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Total Shareholders’ Equity |
Balance, January 1, 2020 | | $ | 219,423 | | | $ | 99,681 | | | $ | (14,191) | | | $ | 304,913 | | |
Balance, January 1, 2021 | | Balance, January 1, 2021 | | $ | 221,408 | | | $ | 126,732 | | | $ | (17,196) | | | $ | 330,944 | |
| Net income | Net income | | — | | | 18,362 | | | — | | | 18,362 | | Net income | | — | | | 23,546 | | | — | | | 23,546 | |
| Other comprehensive loss | | — | | | — | | | (4,899) | | | (4,899) | | |
Dividends declared ($0.18 per share) | | — | | | (1,802) | | | — | | | (1,802) | | |
Other comprehensive income | | Other comprehensive income | | — | | | — | | | 4,285 | | | 4,285 | |
Dividends declared ($0.12 per share) | | Dividends declared ($0.12 per share) | | — | | | (1,212) | | | — | | | (1,212) | |
| Recognition of the fair value of share-based compensation | Recognition of the fair value of share-based compensation | | 1,600 | | | — | | | — | | | 1,600 | | Recognition of the fair value of share-based compensation | | 1,262 | | | — | | | — | | | 1,262 | |
| Deferred stock rights and restricted stock units issued in lieu of cash dividends payable on outstanding deferred stock rights and restricted stock units | Deferred stock rights and restricted stock units issued in lieu of cash dividends payable on outstanding deferred stock rights and restricted stock units | | 21 | | | — | | | — | | | 21 | | Deferred stock rights and restricted stock units issued in lieu of cash dividends payable on outstanding deferred stock rights and restricted stock units | | 11 | | | — | | | — | | | 11 | |
Common stock redeemed for the net settlement of share-based awards | Common stock redeemed for the net settlement of share-based awards | | (93) | | | — | | | — | | | (93) | | Common stock redeemed for the net settlement of share-based awards | | (195) | | | — | | | — | | | (195) | |
| Balance, September 30, 2020 | | $ | 220,951 | | | $ | 116,241 | | | $ | (19,090) | | | $ | 318,102 | | |
Balance, June 30, 2021 | | Balance, June 30, 2021 | | $ | 222,486 | | | $ | 149,066 | | | $ | (12,911) | | | $ | 358,641 | |
| Balance, January 1, 2019 | | $ | 227,587 | | | $ | 77,689 | | | $ | (16,541) | | | $ | 288,735 | | |
Impact of adoption of new accounting standards (1) | | — | | | (821) | | | — | | | (821) | | |
Balance, January 1, 2020 | | Balance, January 1, 2020 | | $ | 219,423 | | | $ | 99,681 | | | $ | (14,191) | | | $ | 304,913 | |
Net income | Net income | | — | | | 18,143 | | | — | | | 18,143 | | Net income | | — | | | 9,951 | | | — | | | 9,951 | |
| Other comprehensive loss | Other comprehensive loss | | — | | | — | | | (514) | | | (514) | | Other comprehensive loss | | — | | | — | | | (6,947) | | | (6,947) | |
Dividends declared ($0.18 per share) | | — | | | (1,829) | | | — | | | (1,829) | | |
Dividends declared ($0.12 per share) | | Dividends declared ($0.12 per share) | | — | | | (1,201) | | | — | | | (1,201) | |
| Recognition of the fair value of share-based compensation | Recognition of the fair value of share-based compensation | | 1,278 | | | — | | | — | | | 1,278 | | Recognition of the fair value of share-based compensation | | 1,073 | | | — | | | — | | | 1,073 | |
Repurchase of common stock | | (9,784) | | | (9,784) | | |
| Deferred stock rights and restricted stock units issued in lieu of cash dividends payable on outstanding deferred stock rights and restricted stock units | Deferred stock rights and restricted stock units issued in lieu of cash dividends payable on outstanding deferred stock rights and restricted stock units | | 26 | | | — | | | — | | | 26 | | Deferred stock rights and restricted stock units issued in lieu of cash dividends payable on outstanding deferred stock rights and restricted stock units | | 15 | | | — | | | — | | | 15 | |
Common stock redeemed for the net settlement of share-based awards | Common stock redeemed for the net settlement of share-based awards | | (94) | | | — | | | — | | | (94) | | Common stock redeemed for the net settlement of share-based awards | | (93) | | | — | | | — | | | (93) | |
| Balance, September 30, 2019 | | $ | 219,013 | | | $ | 93,182 | | | $ | (17,055) | | | $ | 295,140 | | |
Balance, June 30, 2020 | | Balance, June 30, 2020 | | $ | 220,418 | | | $ | 108,431 | | | $ | (21,138) | | | $ | 307,711 | |
(1) Represents the impact of adopting Accounting Standards Update (“ASU”) 2017-08.
See Notes to Condensed Consolidated Financial Statements
First Internet Bancorp
Condensed Consolidated Statements of Changes in Shareholders’ Equity - Unaudited
Three Months Ended SeptemberJune 30, 20202021 and 20192020
(Amounts in thousands except per share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Voting and Nonvoting Common Stock | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Total Shareholders’ Equity |
Balance, July 1, 2020 | | $ | 220,418 | | | $ | 108,431 | | | $ | (21,138) | | | $ | 307,711 | |
| | | | | | | | |
Net income | | — | | | 8,411 | | | — | | | 8,411 | |
| | | | | | | | |
Other comprehensive income | | — | | | — | | | 2,048 | | | 2,048 | |
Dividends declared ($0.06 per share) | | — | | | (601) | | | — | | | (601) | |
| | | | | | | | |
Recognition of the fair value of share-based compensation | | 527 | | | — | | | — | | | 527 | |
| | | | | | | | |
Deferred stock rights and restricted stock units issued in lieu of cash dividends payable on outstanding deferred stock rights and restricted stock units | | 6 | | | — | | | — | | | 6 | |
| | | | | | | | |
| | | | | | | | |
Balance, September 30, 2020 | | $ | 220,951 | | | $ | 116,241 | | | $ | (19,090) | | | $ | 318,102 | |
| | | | | | | | |
Balance, July 1, 2019 | | $ | 224,244 | | | $ | 87,454 | | | $ | (15,578) | | | $ | 296,120 | |
| | | | | | | | |
Net income | | — | | | 6,326 | | | — | | | 6,326 | |
| | | | | | | | |
Other comprehensive loss | | — | | | — | | | (1,477) | | | (1,477) | |
Dividends declared ($0.06 per share) | | — | | | (598) | | | — | | | (598) | |
| | | | | | | | |
Recognition of the fair value of share-based compensation | | 416 | | | — | | | — | | | 416 | |
Repurchase of common stock | | (5,651) | | | | | | | (5,651) | |
Deferred stock rights and restricted stock units issued in lieu of cash dividends payable on outstanding deferred stock rights and restricted stock units | | 4 | | | — | | | — | | | 4 | |
| | | | | | | | |
| | | | | | | | |
Balance, September 30, 2019 | | $ | 219,013 | | | $ | 93,182 | | | $ | (17,055) | | | $ | 295,140 | |
See Notes to Condensed Consolidated Financial Statements
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Voting and Nonvoting Common Stock | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Total Shareholders’ Equity |
Balance, April 1, 2021 | | $ | 221,911 | | | $ | 136,575 | | | $ | (13,920) | | | $ | 344,566 | |
| | | | | | | | |
Net income | | — | | | 13,096 | | | — | | | 13,096 | |
| | | | | | | | |
Other comprehensive income | | — | | | — | | | 1,009 | | | 1,009 | |
Dividends declared ($0.06 per share) | | — | | | (605) | | | — | | | (605) | |
| | | | | | | | |
Recognition of the fair value of share-based compensation | | 570 | | | — | | | — | | | 570 | |
| | | | | | | | |
Deferred stock rights and restricted stock units issued in lieu of cash dividends payable on outstanding deferred stock rights and restricted stock units | | 5 | | | — | | | — | | | 5 | |
Common stock redeemed for the net settlement of share-based awards | | 0 | | | — | | | — | | | 0 | |
| | | | | | | | |
Balance, June 30, 2021 | | $ | 222,486 | | | $ | 149,066 | | | $ | (12,911) | | | $ | 358,641 | |
| | | | | | | | |
Balance, April 1, 2020 | | $ | 219,893 | | | $ | 105,100 | | | $ | (19,866) | | | $ | 305,127 | |
Net income | | — | | | 3,932 | | | — | | | 3,932 | |
| | | | | | | | |
Other comprehensive loss | | — | | | — | | | (1,272) | | | (1,272) | |
Dividends declared ($0.06 per share) | | — | | | (601) | | | — | | | (601) | |
| | | | | | | | |
Recognition of the fair value of share-based compensation | | 517 | | | — | | | — | | | 517 | |
| | | | | | | | |
Deferred stock rights and restricted stock units issued in lieu of cash dividends payable on outstanding deferred stock rights and restricted stock units | | 8 | | | — | | | — | | | 8 | |
Common stock redeemed for the net settlement of share-based awards | | 0 | | | — | | | — | | | 0 | |
| | | | | | | | |
Balance, June 30, 2020 | | $ | 220,418 | | | $ | 108,431 | | | $ | (21,138) | | | $ | 307,711 | |
First Internet Bancorp
Condensed Consolidated Statements of Cash Flows – Unaudited
(Amounts in thousands)
| | | | Nine Months Ended September 30, | | | Six Months Ended June 30, |
| | | 2020 | | 2019 | | | 2021 | | 2020 |
Operating Activities | Operating Activities | | | | | Operating Activities | | | | |
Net income | Net income | | $ | 18,362 | | | $ | 18,143 | | Net income | | $ | 23,546 | | | $ | 9,951 | |
Adjustments to reconcile net income to net cash used in operating activities: | Adjustments to reconcile net income to net cash used in operating activities: | | | | | Adjustments to reconcile net income to net cash used in operating activities: | | | | |
Depreciation and amortization | Depreciation and amortization | | 5,699 | | | 5,300 | | Depreciation and amortization | | 4,038 | | | 3,515 | |
Increase in cash surrender value of bank-owned life insurance | Increase in cash surrender value of bank-owned life insurance | | (712) | | | (705) | | Increase in cash surrender value of bank-owned life insurance | | (469) | | | (472) | |
Provision for loan losses | Provision for loan losses | | 6,461 | | | 5,498 | | Provision for loan losses | | 1,297 | | | 3,952 | |
Share-based compensation expense | Share-based compensation expense | | 1,600 | | | 1,278 | | Share-based compensation expense | | 1,262 | | | 1,073 | |
Write-down of other real estate owned | | 2,065 | | | 0 | | |
Gain (loss) on sale of available-for-sale securities | | (139) | | | 458 | | |
| Loss on sale of available-for-sale securities | | Loss on sale of available-for-sale securities | | 0 | | | (41) | |
Loans originated for sale | Loans originated for sale | | (431,384) | | | (430,453) | | Loans originated for sale | | (421,012) | | | (427,323) | |
Proceeds from sale of loans | Proceeds from sale of loans | | 429,284 | | | 415,171 | | Proceeds from sale of loans | | 448,093 | | | 454,737 | |
Gain on loans sold | Gain on loans sold | | (19,544) | | | (7,057) | | Gain on loans sold | | (16,774) | | | (11,069) | |
| Decrease (increase) in fair value of loans held-for-sale | | 116 | | | (452) | | |
Gain on derivatives | | (1,974) | | | (1,295) | | |
Decrease in fair value of loans held-for-sale | | Decrease in fair value of loans held-for-sale | | 744 | | | 939 | |
Loss on derivatives | | Loss on derivatives | | (1,384) | | | 377 | |
Settlement of derivatives | Settlement of derivatives | | (46,109) | | | 0 | | Settlement of derivatives | | (1,859) | | | (46,109) | |
Net change in servicing asset | | (337) | | | 0 | | |
| Loan servicing asset revaluation | | Loan servicing asset revaluation | | 395 | | | (41) | |
Amortization of operating lease right-of-use assets | | Amortization of operating lease right-of-use assets | | 0 | | | 360 | |
Net change in accrued income and other assets | Net change in accrued income and other assets | | 491 | | | (49,036) | | Net change in accrued income and other assets | | 1,631 | | | (2,221) | |
Net change in accrued expenses and other liabilities | Net change in accrued expenses and other liabilities | | 1,098 | | | 2,297 | | Net change in accrued expenses and other liabilities | | 1,984 | | | (1,840) | |
Net cash used in operating activities | | (35,023) | | | (40,853) | | |
Net cash provided by (used in) operating activities | | Net cash provided by (used in) operating activities | | 41,492 | | | (14,212) | |
Investing Activities | Investing Activities | | | | | Investing Activities | | | | |
Net loan activity, excluding purchases | Net loan activity, excluding purchases | | 2,284 | | | (173,220) | | Net loan activity, excluding purchases | | 120,219 | | | (18,907) | |
| Maturities and calls of securities available-for-sale | Maturities and calls of securities available-for-sale | | 142,432 | | | 58,106 | | Maturities and calls of securities available-for-sale | | 94,643 | | | 74,828 | |
Proceeds from sale of securities available-for-sale | Proceeds from sale of securities available-for-sale | | 893 | | | 30,137 | | Proceeds from sale of securities available-for-sale | | 0 | | | 795 | |
Purchase of securities available-for-sale | Purchase of securities available-for-sale | | (119,263) | | | (136,602) | | Purchase of securities available-for-sale | | (247,791) | | | (116,993) | |
Maturities and calls of securities held-to-maturity | | Maturities and calls of securities held-to-maturity | | 2,500 | | | 0 | |
Purchase of securities held-to-maturity | Purchase of securities held-to-maturity | | (2,000) | | | (24,116) | | Purchase of securities held-to-maturity | | 0 | | | (2,000) | |
Purchase of Federal Home Loan Bank of Indianapolis stock | | 0 | | | (2,025) | | |
| | Net proceeds from sale of premises and equipment | | Net proceeds from sale of premises and equipment | | 8,116 | | | 0 | |
Purchase of premises and equipment | Purchase of premises and equipment | | (18,571) | | | (3,581) | | Purchase of premises and equipment | | (13,707) | | | (10,580) | |
| Loans purchased | Loans purchased | | (260,841) | | | (208,795) | | Loans purchased | | (22,611) | | | (172,250) | |
Net proceeds from sale of portfolio loans | Net proceeds from sale of portfolio loans | | 234,619 | | | 238,016 | | Net proceeds from sale of portfolio loans | | 0 | | | 205,023 | |
| Other investing activities | | Other investing activities | | 2,264 | | | 0 | |
Net cash used in investing activities | Net cash used in investing activities | | (20,447) | | | (222,080) | | Net cash used in investing activities | | (56,367) | | | (40,084) | |
Financing Activities | Financing Activities | | | | | Financing Activities | | | | |
Net increase in deposits | | 218,428 | | | 476,891 | | |
Net increase (decrease) in deposits | | Net increase (decrease) in deposits | | (64,738) | | | 226,826 | |
| Cash dividends paid | Cash dividends paid | | (1,773) | | | (1,808) | | Cash dividends paid | | (1,201) | | | (1,179) | |
Repayment of subordinated debt | | Repayment of subordinated debt | | (10,000) | | | 0 | |
| Net proceeds from issuance of subordinated debt | | 0 | | | 35,418 | | |
Repurchase of common stock | | 0 | | | (9,784) | | |
| Proceeds from advances from Federal Home Loan Bank | Proceeds from advances from Federal Home Loan Bank | | 330,000 | | | 485,000 | | Proceeds from advances from Federal Home Loan Bank | | 110,000 | | | 220,000 | |
Repayment of advances from Federal Home Loan Bank | Repayment of advances from Federal Home Loan Bank | | (330,000) | | | (495,000) | | Repayment of advances from Federal Home Loan Bank | | (110,000) | | | (220,000) | |
| Other, net | Other, net | | (93) | | | (94) | | Other, net | | (195) | | | (93) | |
Net cash provided by financing activities | | 216,562 | | | 490,623 | | |
Net Increase in Cash and Cash Equivalents | | 161,092 | | | 227,690 | | |
Net cash (used in) provided by financing activities | | Net cash (used in) provided by financing activities | | (76,134) | | | 225,554 | |
Net (Decrease) Increase in Cash and Cash Equivalents | | Net (Decrease) Increase in Cash and Cash Equivalents | | (91,009) | | | 171,258 | |
Cash and Cash Equivalents, Beginning of Period | Cash and Cash Equivalents, Beginning of Period | | 327,361 | | | 188,712 | | Cash and Cash Equivalents, Beginning of Period | | 419,806 | | | 327,361 | |
Cash and Cash Equivalents, End of Period | Cash and Cash Equivalents, End of Period | | $ | 488,453 | | | $ | 416,402 | | Cash and Cash Equivalents, End of Period | | $ | 328,797 | | | $ | 498,619 | |
Supplemental Disclosures | Supplemental Disclosures | | | | | Supplemental Disclosures | | | | |
Initial recognition of right-of-use asset | | $ | 0 | | | $ | 2,096 | | |
Initial recognition of operating lease liabilities | | 0 | | | 2,096 | | |
| Cash paid during the period for interest | Cash paid during the period for interest | | 60,058 | | | 60,417 | | Cash paid during the period for interest | | 24,832 | | | 43,716 | |
Cash paid during the period for taxes | Cash paid during the period for taxes | | 2,516 | | | 4,527 | | Cash paid during the period for taxes | | 2,905 | | | 91 | |
| Loans transferred to other real estate owned | | Loans transferred to other real estate owned | | 1,300 | | | 0 | |
Loans transferred to held-for-sale from portfolio | Loans transferred to held-for-sale from portfolio | | 185,797 | | | 237,942 | | Loans transferred to held-for-sale from portfolio | | 0 | | | 204,258 | |
Cash dividends declared, paid in subsequent period | Cash dividends declared, paid in subsequent period | | 588 | | | 585 | | Cash dividends declared, paid in subsequent period | | 592 | | | 588 | |
Securities purchased during the period, settled in subsequent period | Securities purchased during the period, settled in subsequent period | | 5,547 | | | 3,000 | | Securities purchased during the period, settled in subsequent period | | 13,590 | | | 0 | |
Transfer of available-for-sale municipal securities to held-to-maturity municipal securities | Transfer of available-for-sale municipal securities to held-to-maturity municipal securities | | 4,479 | | | 0 | | Transfer of available-for-sale municipal securities to held-to-maturity municipal securities | | 0 | | | 4,479 | |
|
See Notes to Condensed Consolidated Financial Statements
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 and ninesix months ended SeptemberJune 30, 20202021 are not necessarily indicative of the results expected for the year ending December 31, 20202021 or any other period. The SeptemberJune 30, 20202021 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, 2019.2020.
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 loan losses, valuations and impairments of investment securities, valuation of the servicing asset and the accounting for income tax expense 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 3 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.
Certain reclassifications have been made to the 20192020 financial statements to conform to the presentation of the 20202021 financial statements. These reclassifications had no effect on net income.
Note 2: Earnings Per Share
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 earnings per share computations for the three and ninesix months ended SeptemberJune 30, 20202021 and 2019.2020.
| (dollars in thousands, except per share data) | (dollars in thousands, except per share data) | | Three Months Ended September 30, | | Nine Months Ended September 30, | (dollars in thousands, except per share data) | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | | 2020 | | 2019 | | 2020 | | 2019 | | | 2021 | | 2020 | | 2021 | | 2020 |
Basic earnings per share | Basic earnings per share | | | | | | | | | Basic earnings per share | | | | | | | | |
Net income | Net income | | $ | 8,411 | | | $ | 6,326 | | | $ | 18,362 | | | $ | 18,143 | | Net income | | $ | 13,096 | | | $ | 3,932 | | | $ | 23,546 | | | $ | 9,951 | |
Weighted-average common shares | Weighted-average common shares | | 9,773,175 | | | 9,979,603 | | | 9,825,683 | | | 10,114,303 | | Weighted-average common shares | | 9,932,761 | | | 9,768,227 | | | 9,916,087 | | | 9,798,528 | |
Basic earnings per common share | Basic earnings per common share | | $ | 0.86 | | | $ | 0.63 | | | $ | 1.87 | | | $ | 1.79 | | Basic earnings per common share | | $ | 1.32 | | | $ | 0.40 | | | $ | 2.37 | | | $ | 1.02 | |
Diluted earnings per share | Diluted earnings per share | | | | | | | | | Diluted earnings per share | | | | | | | | |
Net income | Net income | | $ | 8,411 | | | $ | 6,326 | | | $ | 18,362 | | | $ | 18,143 | | Net income | | $ | 13,096 | | | $ | 3,932 | | | $ | 23,546 | | | $ | 9,951 | |
Weighted-average common shares | Weighted-average common shares | | 9,773,175 | | | 9,979,603 | | | 9,825,683 | | | 10,114,303 | | Weighted-average common shares | | 9,932,761 | | | 9,768,227 | | | 9,916,087 | | | 9,798,528 | |
| Dilutive effect of equity compensation | Dilutive effect of equity compensation | | 49 | | | 1,009 | | | 1,499 | | | 2,204 | | Dilutive effect of equity compensation | | 48,661 | | | 0 | | | 54,060 | | | 3,899 | |
Weighted-average common and incremental shares | Weighted-average common and incremental shares | | 9,773,224 | | | 9,980,612 | | | 9,827,182 | | | 10,116,507 | | Weighted-average common and incremental shares | | 9,981,422 | | | 9,768,227 | | | 9,970,147 | | | 9,802,427 | |
Diluted earnings per common share (1) | Diluted earnings per common share (1) | | $ | 0.86 | | | $ | 0.63 | | | $ | 1.87 | | | $ | 1.79 | | Diluted earnings per common share (1) | | $ | 1.31 | | | $ | 0.40 | | | $ | 2.36 | | | $ | 1.02 | |
|
(1) Potential dilutive common shares are excluded from the computation of diluted EPS in the periods where the effect would be antidilutive. Excluded from the computation of diluted EPS were weighted-average antidilutive shares totaling 55,3096 and 38,2123 for the three and ninesix months ended SeptemberJune 30, 2020,2021, respectively, and 15,25679,893 and 22,20929,606 for the three and ninesix months ended SeptemberJune 30, 2019,2020, respectively.
Note 3: Securities
The following tables summarize securities available-for-sale and securities held-to-maturity as of SeptemberJune 30, 20202021 and December 31, 2019.2020.
| | | | September 30, 2020 | | | June 30, 2021 |
| | | Amortized | | Gross Unrealized | | Fair | | | Amortized | | Gross Unrealized | | Fair |
(in thousands) | (in thousands) | | Cost | | Gains | | Losses | | Value | (in thousands) | | Cost | | Gains | | Losses | | Value |
Securities available-for-sale | Securities available-for-sale | | | | | | | | | Securities available-for-sale | | | | | | | | |
U.S. Government-sponsored agencies | U.S. Government-sponsored agencies | | $ | 65,007 | | | $ | 489 | | | $ | (1,814) | | | $ | 63,682 | | U.S. Government-sponsored agencies | | $ | 57,984 | | | $ | 337 | | | $ | (1,186) | | | $ | 57,135 | |
Municipal securities | Municipal securities | | 87,365 | | | 3,296 | | | (4,240) | | | 86,421 | | Municipal securities | | 77,364 | | | 1,229 | | | (155) | | | 78,438 | |
Agency mortgage-backed securities | Agency mortgage-backed securities | | 250,755 | | | 5,773 | | | (3,236) | | | 253,292 | | Agency mortgage-backed securities | | 445,895 | | | 2,734 | | | (4,135) | | | 444,494 | |
Private label mortgage-backed securities | Private label mortgage-backed securities | | 71,519 | | | 1,128 | | | (21) | | | 72,626 | | Private label mortgage-backed securities | | 29,003 | | | 360 | | | 0 | | | 29,363 | |
Asset-backed securities | Asset-backed securities | | 5,000 | | | 0 | | | (79) | | | 4,921 | | Asset-backed securities | | 5,000 | | | 5 | | | 0 | | | 5,005 | |
Corporate securities | Corporate securities | | 48,406 | | | 500 | | | (1,537) | | | 47,369 | | Corporate securities | | 48,447 | | | 855 | | | (218) | | | 49,084 | |
| Total available-for-sale | Total available-for-sale | | $ | 528,052 | | | $ | 11,186 | | | $ | (10,927) | | | $ | 528,311 | | Total available-for-sale | | $ | 663,693 | | | $ | 5,520 | | | $ | (5,694) | | | $ | 663,519 | |
| | | | September 30, 2020 | | | June 30, 2021 |
| | | Amortized | | Gross Unrealized | | Fair | | | Amortized | | Gross Unrealized | | Fair |
(in thousands) | (in thousands) | | Cost | | Gains | | Losses | | Value | (in thousands) | | Cost | | Gains | | Losses | | Value |
Securities held-to-maturity | Securities held-to-maturity | | | | | | | | | Securities held-to-maturity | | | | | | | | |
Municipal securities | Municipal securities | | $ | 14,582 | | | $ | 746 | | | $ | 0 | | | $ | 15,328 | | Municipal securities | | $ | 14,549 | | | $ | 824 | | | $ | 0 | | | $ | 15,373 | |
Corporate securities | Corporate securities | | 53,672 | | | 551 | | | (375) | | | 53,848 | | Corporate securities | | 51,110 | | | 1,575 | | | 0 | | | 52,685 | |
Total held-to-maturity | Total held-to-maturity | | $ | 68,254 | | | $ | 1,297 | | | $ | (375) | | | $ | 69,176 | | Total held-to-maturity | | $ | 65,659 | | | $ | 2,399 | | | $ | 0 | | | $ | 68,058 | |
| | | | December 31, 2019 | | | December 31, 2020 |
| | | Amortized | | Gross Unrealized | | Fair | | | Amortized | | Gross Unrealized | | Fair |
(in thousands) | (in thousands) | | Cost | | Gains | | Losses | | Value | (in thousands) | | Cost | | Gains | | Losses | | Value |
Securities available-for-sale | Securities available-for-sale | | | | | | | | | Securities available-for-sale | | | | | | | | |
U.S. Government-sponsored agencies | U.S. Government-sponsored agencies | | $ | 77,715 | | | $ | 99 | | | $ | (1,942) | | | $ | 75,872 | | U.S. Government-sponsored agencies | | $ | 61,765 | | | $ | 432 | | | $ | (1,652) | | | $ | 60,545 | |
Municipal securities | Municipal securities | | 97,447 | | | 1,706 | | | (1,501) | | | 97,652 | | Municipal securities | | 82,757 | | | 463 | | | (731) | | | 82,489 | |
Agency mortgage-backed securities | Agency mortgage-backed securities | | 264,142 | | | 1,304 | | | (4,006) | | | 261,440 | | Agency mortgage-backed securities | | 241,795 | | | 4,591 | | | (2,465) | | | 243,921 | |
Private label mortgage-backed securities | Private label mortgage-backed securities | | 63,704 | | | 97 | | | (188) | | | 63,613 | | Private label mortgage-backed securities | | 57,268 | | | 850 | | | (2) | | | 58,116 | |
Asset-backed securities | Asset-backed securities | | 5,000 | | | 0 | | | (45) | | | 4,955 | | Asset-backed securities | | 5,000 | | | 0 | | | (39) | | | 4,961 | |
Corporate securities | Corporate securities | | 38,632 | | | 220 | | | (1,532) | | | 37,320 | | Corporate securities | | 48,419 | | | 771 | | | (1,594) | | | 47,596 | |
| Total available-for-sale | Total available-for-sale | | $ | 546,640 | | | $ | 3,426 | | | $ | (9,214) | | | $ | 540,852 | | Total available-for-sale | | $ | 497,004 | | | $ | 7,107 | | | $ | (6,483) | | | $ | 497,628 | |
| | | | December 31, 2019 | | | December 31, 2020 |
| | | Amortized | | Gross Unrealized | | Fair | | | Amortized | | Gross Unrealized | | Fair |
(in thousands) | (in thousands) | | Cost | | Gains | | Losses | | Value | (in thousands) | | Cost | | Gains | | Losses | | Value |
Securities held-to-maturity | Securities held-to-maturity | | | | | | | | | Securities held-to-maturity | | | | | | | | |
Municipal securities | Municipal securities | | $ | 10,142 | | | $ | 226 | | | $ | 0 | | | $ | 10,368 | | Municipal securities | | $ | 14,571 | | | $ | 746 | | | $ | 0 | | | $ | 15,317 | |
Corporate securities | Corporate securities | | 51,736 | | | 588 | | | (132) | | | 52,192 | | Corporate securities | | 53,652 | | | 610 | | | (127) | | | 54,135 | |
Total held-to-maturity | Total held-to-maturity | | $ | 61,878 | | | $ | 814 | | | $ | (132) | | | $ | 62,560 | | Total held-to-maturity | | $ | 68,223 | | | $ | 1,356 | | | $ | (127) | | | $ | 69,452 | |
The Company elected to transfer 10 available-for-sale (“AFS”) securities with an aggregate fair value of $4.5 million to a classification of held-to-maturity (“HTM”) on March 1, 2020. The net unrealized holding gain of $0.1 million, net of tax, as the date of the transfer was retained in accumulated other comprehensive loss, with the associated pretax amount retained in the carrying value of the HTM securities. Such amounts will be amortized to interest income over the remaining life of the securities. The fair value of the transferred AFS securities became the book value of the HTM securities as of March 1, 2020, with no unrealized gain or loss at that date.
The carrying value of securities at SeptemberJune 30, 20202021 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 | | | Available-for-Sale |
(in thousands) | (in thousands) | | Amortized Cost | | Fair Value | (in thousands) | | Amortized Cost | | Fair Value |
Within one year | Within one year | | $ | 0 | | | $ | 0 | | Within one year | | $ | 0 | | | $ | 0 | |
One to five years | One to five years | | 31,197 | | | 26,893 | | One to five years | | 29,686 | | | 27,234 | |
Five to ten years | Five to ten years | | 82,255 | | | 80,704 | | Five to ten years | | 72,226 | | | 72,380 | |
After ten years | After ten years | | 87,326 | | | 89,875 | | After ten years | | 81,883 | | | 85,043 | |
| | | 200,778 | | | 197,472 | | | | 183,795 | | | 184,657 | |
Agency mortgage-backed securities | Agency mortgage-backed securities | | 250,755 | | | 253,292 | | Agency mortgage-backed securities | | 445,895 | | | 444,494 | |
Private label mortgage-backed securities | Private label mortgage-backed securities | | 71,519 | | | 72,626 | | Private label mortgage-backed securities | | 29,003 | | | 29,363 | |
Asset-backed securities | Asset-backed securities | | 5,000 | | | 4,921 | | Asset-backed securities | | 5,000 | | | 5,005 | |
| Total | Total | | $ | 528,052 | | | $ | 528,311 | | Total | | $ | 663,693 | | | $ | 663,519 | |
| | | | Held-to-Maturity | | | Held-to-Maturity |
(in thousands) | (in thousands) | | Amortized Cost | | Fair Value | (in thousands) | | Amortized Cost | | Fair Value |
| One to five years | One to five years | | $ | 2,869 | | | $ | 2,989 | | One to five years | | $ | 3,375 | | | $ | 3,556 | |
Five to ten years | Five to ten years | | 53,181 | | | 53,544 | | Five to ten years | | 50,096 | | | 51,908 | |
After ten years | After ten years | | 12,204 | | | 12,643 | | After ten years | | 12,188 | | | 12,594 | |
Total | Total | | $ | 68,254 | | | $ | 69,176 | | Total | | $ | 65,659 | | | $ | 68,058 | |
There were 0 gross gains or losses resulting from sale of available-for-sale securities during the three and six months ended June 30, 2021. There were 0 gross gains or losses resulting from sale of available-for-sale securities during the three months ended June 30, 2020 and gross gains of less than $0.1 million resulting from sales of available-for-sale securities during the six months ended June 30, 2020.
There were $0.1 million of gross gains resulting from sales of AFS securities during the three and nine months ended September 30, 2020. There were 0 and $0.5 million of gross losses resulting from sales of AFS securities during the three and nine months ended September 30, 2019, 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 SeptemberJune 30, 20202021 and December 31, 20192020 was $206.4$451.8 million and $317.5$226.5 million, which was approximately 35%62% and 53%40%, respectively, of the Company’s AFS and HTM securities portfolios. As of June 30, 2021, the Company’s security portfolio consisted of 448 securities, of which 152 were in an unrealized loss position. The unrealized losses are related to the categories noted below. These declines resulted primarily from fluctuations in market interest rates after purchase. Management believes the declines in fair value for these securities are temporary. Should the impairment of any of these securities become other than temporary, the cost basis of the investment will be reduced, with the resulting loss recognized in net income in the period the other-than-temporary impairment (“OTTI”) is identified.
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 bases of the investments. Because 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 bases, which may be upon maturity, the Company does not consider those investments to be other-than-temporarily impaired at SeptemberJune 30, 2020.2021.
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 bases over the termterms of the securities. Because 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 bases, which may be upon maturity, the Company does not consider those investments to be other-than-temporarily impaired at SeptemberJune 30, 2020.2021.
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 SeptemberJune 30, 20202021 and December 31, 2019.2020.
| | | | September 30, 2020 | | | June 30, 2021 |
| | | Less Than 12 Months | | 12 Months or Longer | | Total | | | Less Than 12 Months | | 12 Months or Longer | | Total |
(in thousands) | (in thousands) | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | (in thousands) | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
Securities available-for-sale | Securities available-for-sale | | | | | | | | | | | | | Securities available-for-sale | | | | | | | | | | | | |
U.S. Government-sponsored agencies | U.S. Government-sponsored agencies | | $ | 0 | | | $ | 0 | | | $ | 55,382 | | | $ | (1,814) | | | $ | 55,382 | | | $ | (1,814) | | U.S. Government-sponsored agencies | | $ | 2,969 | | | $ | (31) | | | $ | 47,281 | | | $ | (1,155) | | | $ | 50,250 | | | $ | (1,186) | |
Municipal securities | Municipal securities | | 61,269 | | | (4,240) | | | 0 | | | 0 | | | 61,269 | | | (4,240) | | Municipal securities | | 61,658 | | | (155) | | | 0 | | | 0 | | | 61,658 | | | (155) | |
Agency mortgage-backed securities | Agency mortgage-backed securities | | 29,466 | | | (361) | | | 10,294 | | | (2,875) | | | 39,760 | | | (3,236) | | Agency mortgage-backed securities | | 316,123 | | | (3,543) | | | 8,956 | | | (592) | | | 325,079 | | | (4,135) | |
Private label mortgage-backed securities | | 2,410 | | | (9) | | | 1,026 | | | (12) | | | 3,436 | | | (21) | | |
Asset-backed securities | | 0 | | | 0 | | | 4,921 | | | (79) | | | 4,921 | | | (79) | | |
| Corporate securities | Corporate securities | | 0 | | | 0 | | | 20,463 | | | (1,537) | | | 20,463 | | | (1,537) | | Corporate securities | | 4,984 | | | (16) | | | 9,799 | | | (202) | | | 14,783 | | | (218) | |
| Total | Total | | $ | 93,145 | | | $ | (4,610) | | | $ | 92,086 | | | $ | (6,317) | | | $ | 185,231 | | | $ | (10,927) | | Total | | $ | 385,734 | | | $ | (3,745) | | | $ | 66,036 | | | $ | (1,949) | | | $ | 451,770 | | | $ | (5,694) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2020 |
| | Less Than 12 Months | | 12 Months or Longer | | Total |
(in thousands) | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
Securities held-to-maturity | | | | | | | | | | | | |
| | | | | | | | | | | | |
Corporate securities | | $ | 21,200 | | | $ | (375) | | | $ | 0 | | | $ | 0 | | | $ | 21,200 | | | $ | (375) | |
Total | | $ | 21,200 | | | $ | (375) | | | $ | 0 | | | $ | 0 | | | $ | 21,200 | | | $ | (375) | |
There were no securities held-to-maturity with gross unrealized losses at June 30, 2021.
| | | | December 31, 2019 | | | December 31, 2020 |
| | | Less Than 12 Months | | 12 Months or Longer | | Total | | | Less Than 12 Months | | 12 Months or Longer | | Total |
(in thousands) | (in thousands) | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | (in thousands) | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
Securities available-for-sale | Securities available-for-sale | | | | | | | | | | | | | Securities available-for-sale | | | | | | | | | | | | |
U.S. Government-sponsored agencies | U.S. Government-sponsored agencies | | $ | 4,820 | | | $ | (61) | | | $ | 62,182 | | | $ | (1,881) | | | $ | 67,002 | | | $ | (1,942) | | U.S. Government-sponsored agencies | | $ | 0 | | | $ | 0 | | | $ | 52,351 | | | $ | (1,652) | | | $ | 52,351 | | | $ | (1,652) | |
Municipal securities | Municipal securities | | 1,279 | | | (1,501) | | | 0 | | | 0 | | | 1,279 | | | (1,501) | | Municipal securities | | 18,731 | | | (114) | | | 23,519 | | | (617) | | | 42,250 | | | (731) | |
Agency mortgage-backed securities | Agency mortgage-backed securities | | 91,159 | | | (829) | | | 83,212 | | | (3,177) | | | 174,371 | | | (4,006) | | Agency mortgage-backed securities | | 38,987 | | | (276) | | | 45,297 | | | (2,189) | | | 84,284 | | | (2,465) | |
Private label mortgage-backed securities | Private label mortgage-backed securities | | 30,077 | | | (180) | | | 2,884 | | | (8) | | | 32,961 | | | (188) | | Private label mortgage-backed securities | | 1,277 | | | (1) | | | 558 | | | (1) | | | 1,835 | | | (2) | |
Asset-backed securities | Asset-backed securities | | 0 | | | 0 | | | 4,955 | | | (45) | | | 4,955 | | | (45) | | Asset-backed securities | | 0 | | | 0 | | | 4,961 | | | (39) | | | 4,961 | | | (39) | |
Corporate securities | Corporate securities | | 0 | | | 0 | | | 22,985 | | | (1,532) | | | 22,985 | | | (1,532) | | Corporate securities | | 0 | | | 0 | | | 20,406 | | | (1,594) | | | 20,406 | | | (1,594) | |
| Total | Total | | $ | 127,335 | | | $ | (2,571) | | | $ | 176,218 | | | $ | (6,643) | | | $ | 303,553 | | | $ | (9,214) | | Total | | $ | 58,995 | | | $ | (391) | | | $ | 147,092 | | | $ | (6,092) | | | $ | 206,087 | | | $ | (6,483) | |
| | | | December 31, 2019 | | | December 31, 2020 |
| | | Less Than 12 Months | | 12 Months or Longer | | Total | | | Less Than 12 Months | | 12 Months or Longer | | Total |
(in thousands) | (in thousands) | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | (in thousands) | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
Securities held-to-maturity | Securities held-to-maturity | | | | | | | | | | | | | Securities held-to-maturity | | | | | | | | | | | | |
| Corporate securities | Corporate securities | | 13,977 | | | (132) | | | 0 | | | 0 | | | 13,977 | | | (132) | | Corporate securities | | 17,456 | | | (126) | | | 2,999 | | | (1) | | | 20,455 | | | (127) | |
Total | Total | | $ | 13,977 | | | $ | (132) | | | $ | 0 | | | $ | 0 | | | $ | 13,977 | | | $ | (132) | | Total | | $ | 17,456 | | | $ | (126) | | | $ | 2,999 | | | $ | (1) | | | $ | 20,455 | | | $ | (127) | |
There were no amounts reclassified from accumulated other comprehensive loss to the condensed consolidated statements of income during the three and six months ended June 30, 2021. Amounts reclassified from accumulated other comprehensive loss and the affected line items in the condensed consolidated statements of income during the three and ninesix months ended SeptemberJune 30, 2020 and September 30, 2019 were as follows:
| (in thousands)
Details About Accumulated Other Comprehensive Loss Components | (in thousands)
Details About Accumulated Other Comprehensive Loss Components | | | | Affected Line Item in the Statements of Income |
(in thousands)
Details About Accumulated Other Comprehensive Loss Components | | | | Affected Line Item in the Statements of Income |
| Three Months Ended September 30, 2020 | | Nine Months Ended September 30, 2020 | | Three Months Ended September 30, 2019 | | Nine Months Ended September 30, 2019 | | | Three Months Ended June 30, 2021 | | Six Months Ended June 30, 2021 | | Three Months Ended June 30, 2020 | | Six Months Ended June 30, 2020 | |
Realized gains (losses) on securities available-for-sale | | | | | | | | | | |
Gain (loss) realized in earnings | | $ | 98 | | | $ | 139 | | | $ | 0 | | | $ | (458) | | | Gain (loss) on sale of securities | |
Realized gains on securities available-for-sale | | Realized gains on securities available-for-sale | | | | | | | | | |
Gain realized in earnings | | Gain realized in earnings | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 41 | | | Gain on sale of securities |
| Total reclassified amount before tax | Total reclassified amount before tax | | 98 | | | 139 | | | 0 | | | (458) | | | Income Before Income Taxes | Total reclassified amount before tax | | 0 | | | 0 | | | 0 | | | 41 | | | Income Before Income Taxes |
Tax expense (benefit) | | 26 | | | 38 | | | 0 | | | (124) | | | Income Tax Provision | |
Tax expense | | Tax expense | | 0 | | | 0 | | | 0 | | 11 | | | Income Tax Provision |
Total reclassifications out of accumulated other comprehensive loss | Total reclassifications out of accumulated other comprehensive loss | | $ | 72 | | | $ | 101 | | | $ | 0 | | | $ | (334) | | | Net Income | Total reclassifications out of accumulated other comprehensive loss | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 30 | | | Net Income |
Note 4: Loans
Loan balances as of SeptemberJune 30, 20202021 and December 31, 20192020 are summarized in the table below. Categories of loans include:
| (in thousands) | (in thousands) | | September 30, 2020 | | December 31, 2019 | (in thousands) | | June 30, 2021 | | December 31, 2020 |
Commercial loans | Commercial loans | | | | | Commercial loans | | | | |
Commercial and industrial | Commercial and industrial | | $ | 77,116 | | | $ | 96,420 | | Commercial and industrial | | $ | 96,203 | | | $ | 75,387 | |
Owner-occupied commercial real estate(1) | Owner-occupied commercial real estate(1) | | 89,095 | | | 86,726 | | Owner-occupied commercial real estate(1) | | 87,136 | | | 89,785 | |
Investor commercial real estate | Investor commercial real estate | | 13,084 | | | 12,567 | | Investor commercial real estate | | 28,871 | | | 13,902 | |
Construction | Construction | | 92,154 | | | 60,274 | | Construction | | 117,970 | | | 110,385 | |
Single tenant lease financing | Single tenant lease financing | | 960,505 | | | 995,879 | | Single tenant lease financing | | 913,115 | | | 950,172 | |
Public finance | Public finance | | 625,638 | | | 687,094 | | Public finance | | 612,138 | | | 622,257 | |
Healthcare finance | Healthcare finance | | 461,740 | | | 300,612 | | Healthcare finance | | 455,890 | | | 528,154 | |
Small business lending(1) | Small business lending(1) | | 123,168 | | | 46,945 | | Small business lending(1) | | 123,293 | | | 125,589 | |
| Total commercial loans | Total commercial loans | | 2,442,500 | | | 2,286,517 | | Total commercial loans | | 2,434,616 | | | 2,515,631 | |
Consumer loans | Consumer loans | | | | | Consumer loans | | | | |
Residential mortgage | Residential mortgage | | 203,041 | | | 313,849 | | Residential mortgage | | 177,148 | | | 186,787 | |
Home equity | Home equity | | 22,169 | | | 24,306 | | Home equity | | 17,510 | | | 19,857 | |
Other consumer | Other consumer | | 282,450 | | | 295,309 | | Other consumer | | 271,796 | | | 275,692 | |
Total consumer loans | Total consumer loans | | 507,660 | | | 633,464 | | Total consumer loans | | 466,454 | | | 482,336 | |
Total commercial and consumer loans | Total commercial and consumer loans | | 2,950,160 | | | 2,919,981 | | Total commercial and consumer loans | | 2,901,070 | | | 2,997,967 | |
Net deferred loan origination fees/costs and premiums/discounts on purchased loans and other(2) | | 62,754 | | | 43,566 | | |
Net deferred loan origination fees/costs and premiums/discounts on purchased loans and other(1) | | Net deferred loan origination fees/costs and premiums/discounts on purchased loans and other(1) | | 56,538 | | | 61,264 | |
Total loans | Total loans | | 3,012,914 | | | 2,963,547 | | Total loans | | 2,957,608 | | | 3,059,231 | |
Allowance for loan losses | Allowance for loan losses | | (26,917) | | | (21,840) | | Allowance for loan losses | | (28,066) | | | (29,484) | |
Net loans | Net loans | | $ | 2,985,997 | | | $ | 2,941,707 | | Net loans | | $ | 2,929,542 | | | $ | 3,029,747 | |
(1) As of September 30, 2020, $12.0 million of commercial real estate loan balances were reclassified from small business lending to owner-occupied commercial real estate.
(2) Includes carrying value adjustments of $44.3$40.4 million and $42.7 million related to terminated interest rate swaps associated with public finance loans as of SeptemberJune 30, 20202021 and $21.4 million related to interest rate swaps associated with public finance loans as of December 31, 2019.2020, respectively.
The 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 Central Indiana and adjacent markets and the greater Phoenix, Arizona market.
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 Central Indiana and adjacent markets and the greater Phoenix, Arizona market and its loans are often secured by manufacturing and service facilities, as well as office buildings.
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 state of Indiana or markets immediately adjacent to Indiana. 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 or properties outside of its designated market areas 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 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 Central Indiana.
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 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; 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. Public finance lending has been conducted primarily in the Midwest, but continues to expand nationwide.
Healthcare Finance: These loans are made to healthcare providers, primarily dentists, for practice acquisition 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 if the real estate is held in a separate entity and secondarily on the underlying collateral provided by the borrower. This portfolio segment was initially concentrated in the Western United States but has been growing rapidlysince expanded throughout the rest of the country with the addition of a growing sales force located in Eastern and Midwestern markets.country.
Small Business Lending: These loans are 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. These loans also include loans originated by the Bank under the SBA’s Paycheck Protection Program, which are fully guaranteed by the SBA. This portfolio segment has an emerging geography, with a nationwide focus.
Residential Mortgage: With respect to residential loans that are secured by 1-to-4 family residences and are generally owner occupied, the Company 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 Company offers 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 Loan Losses Methodology
Company policy is designed to maintain an adequate allowance for loan losses (“ALLL”). The portfolio is segmented by loan type, and the required ALLL for types of performing homogeneous loans which do not have a specific reserve is determined by applying a factor based on average historical losses, adjusted for current economic factors and portfolio trends. Management adds qualitative factors for observable trends, changes in internal practices, changes in delinquencies and impairments, and external factors. Observable factors include changes in the composition and size of portfolios, as well as loan terms or concentration levels. The Company evaluates the impact of internal changes such as management and staff experience levels or modification to loan underwriting processes. Delinquency trends are scrutinized for both volume and severity of past due, nonaccrual, or classified loans, as well as any changes in the value of underlying collateral. Finally, the Company considers the effect of other external factors such as national, regional, and local economic and business conditions, as well as competitive, legal, and regulatory requirements. Loans that are considered to be impaired are evaluated to determine the need for a specific allowance by applying at least one of three methodologies: present value of future cash flows; fair value of collateral less costs to sell; or the loan’s observable market price. All troubled debt restructurings (“TDR”) are considered impaired loans. Loans evaluated for impairment are removed from other pools to prevent double-counting. Accounting Standards Codification (“ASC”) Topic 310, Receivables, requires that impaired loans be measured based on the present value of expected future cash flows discounted at the loans’ effective interest rates or the fair value of the underlying collateral less costs to sell and allows existing methods for recognizing interest income.
Provision for Loan 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.
The following tables present changes in the balance of the ALLL during the three and ninesix months ended SeptemberJune 30, 20202021 and 2019.2020.
| (in thousands) | (in thousands) | Three Months Ended September 30, 2020 | (in thousands) | Three Months Ended June 30, 2021 |
Allowance for loan losses: | Allowance for loan losses: | Balance, Beginning of Period | | Provision (Credit) Charged to Expense | | Losses Charged Off | | Recoveries | | Balance, End of Period | Allowance for loan losses: | Balance, Beginning of Period | | Provision (Credit) Charged to Expense | | Losses Charged Off | | Recoveries | | Balance, End of Period |
Commercial and industrial | Commercial and industrial | $ | 1,477 | | | $ | (227) | | | $ | (99) | | | $ | 0 | | | $ | 1,151 | | Commercial and industrial | $ | 1,662 | | | $ | 267 | | | $ | (28) | | | $ | 2 | | | $ | 1,903 | |
Owner-occupied commercial real estate | Owner-occupied commercial real estate | 846 | | | 167 | | | 0 | | | 0 | | | 1,013 | | Owner-occupied commercial real estate | 1,029 | | | (8) | | | 0 | | | 0 | | | 1,021 | |
Investor commercial real estate | Investor commercial real estate | 130 | | | 0 | | | 0 | | | 0 | | | 130 | | Investor commercial real estate | 169 | | | 160 | | | 0 | | | 0 | | | 329 | |
Construction | Construction | 721 | | | 155 | | | 0 | | | 0 | | | 876 | | Construction | 1,420 | | | (63) | | | 0 | | | 0 | | | 1,357 | |
Single tenant lease financing | Single tenant lease financing | 11,318 | | | 717 | | | 0 | | | 0 | | | 12,035 | | Single tenant lease financing | 13,178 | | | 418 | | | (2,391) | | | 0 | | | 11,205 | |
Public finance | Public finance | 1,542 | | | 191 | | | 0 | | | 0 | | | 1,733 | | Public finance | 1,748 | | | (48) | | | 0 | | | 0 | | | 1,700 | |
Healthcare finance | Healthcare finance | 4,762 | | | 1,232 | | | 0 | | | 87 | | | 6,081 | | Healthcare finance | 7,755 | | | (817) | | | 0 | | | 0 | | | 6,938 | |
Small business lending | Small business lending | 251 | | | 230 | | | 0 | | | 3 | | | 484 | | Small business lending | 700 | | | 214 | | | (133) | | | 2 | | | 783 | |
| Residential mortgage | Residential mortgage | 539 | | | 26 | | | 0 | | | 0 | | | 565 | | Residential mortgage | 601 | | | (5) | | | (6) | | | 4 | | | 594 | |
Home equity | Home equity | 51 | | | (1) | | | 0 | | | 3 | | | 53 | | Home equity | 57 | | | 4 | | | 0 | | | 2 | | | 63 | |
Other consumer | Other consumer | 2,828 | | | 19 | | | (142) | | | 91 | | | 2,796 | | Other consumer | 2,323 | | | (101) | | | (131) | | | 82 | | | 2,173 | |
Total | Total | $ | 24,465 | | | $ | 2,509 | | | $ | (241) | | | $ | 184 | | | $ | 26,917 | | Total | $ | 30,642 | | | $ | 21 | | | $ | (2,689) | | | $ | 92 | | | $ | 28,066 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2020 |
Allowance for loan losses: | Balance, Beginning of Period | | Provision (Credit) Charged to Expense | | Losses Charged Off | | Recoveries | | Balance, End of Period |
Commercial and industrial | $ | 1,521 | | | $ | (22) | | | $ | (353) | | | $ | 5 | | | $ | 1,151 | |
Owner-occupied commercial real estate | 561 | | | 452 | | | 0 | | | 0 | | | 1,013 | |
Investor commercial real estate | 109 | | | 21 | | | 0 | | | 0 | | | 130 | |
Construction | 380 | | | 496 | | | 0 | | | 0 | | | 876 | |
Single tenant lease financing | 11,175 | | | 860 | | | 0 | | | 0 | | | 12,035 | |
Public finance | 1,580 | | | 153 | | | 0 | | | 0 | | | 1,733 | |
Healthcare finance | 3,247 | | | 3,490 | | | (743) | | | 87 | | | 6,081 | |
Small business lending | 54 | | | 413 | | | 0 | | | 17 | | | 484 | |
Residential mortgage | 657 | | | (81) | | | (15) | | | 4 | | | 565 | |
Home equity | 46 | | | (1) | | | 0 | | | 8 | | | 53 | |
Other consumer | 2,510 | | | 680 | | | (644) | | | 250 | | | 2,796 | |
Total | $ | 21,840 | | | $ | 6,461 | | | $ | (1,755) | | | $ | 371 | | | $ | 26,917 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2021 |
Allowance for loan losses: | Balance, Beginning of Period | | Provision (Credit) Charged to Expense | | Losses Charged Off | | Recoveries | | Balance, End of Period |
Commercial and industrial | $ | 1,146 | | | $ | 701 | | | $ | (28) | | | $ | 84 | | | $ | 1,903 | |
Owner-occupied commercial real estate | 1,082 | | | (61) | | | 0 | | | 0 | | | 1,021 | |
Investor commercial real estate | 155 | | | 174 | | | 0 | | | 0 | | | 329 | |
Construction | 1,192 | | | 165 | | | 0 | | | 0 | | | 1,357 | |
Single tenant lease financing | 12,990 | | | 606 | | | (2,391) | | | 0 | | | 11,205 | |
Public finance | 1,732 | | | (32) | | | 0 | | | 0 | | | 1,700 | |
Healthcare finance | 7,485 | | | (547) | | | 0 | | | 0 | | | 6,938 | |
Small business lending | 628 | | | 361 | | | (212) | | | 6 | | | 783 | |
| | | | | | | | | |
Residential mortgage | 519 | | | 72 | | | (6) | | | 9 | | | 594 | |
Home equity | 48 | | | 63 | | | (51) | | | 3 | | | 63 | |
Other consumer | 2,507 | | | (205) | | | (313) | | | 184 | | | 2,173 | |
Total | $ | 29,484 | | | $ | 1,297 | | | $ | (3,001) | | | $ | 286 | | | $ | 28,066 | |
| (in thousands) | Three Months Ended September 30, 2019 | |
| | | Three Months Ended June 30, 2020 |
Allowance for loan losses: | Allowance for loan losses: | Balance, Beginning of Period | | Provision (Credit) Charged to Expense | | Losses Charged Off | | Recoveries | | Balance, End of Period | Allowance for loan losses: | Balance, Beginning of Period | | Provision (Credit) Charged to Expense | | Losses Charged Off | | Recoveries | | Balance, End of Period |
Commercial and industrial | Commercial and industrial | $ | 1,795 | | | $ | 519 | | | $ | (800) | | | $ | 0 | | | $ | 1,514 | | Commercial and industrial | $ | 1,670 | | | $ | (141) | | | $ | (57) | | | $ | 5 | | | $ | 1,477 | |
Owner-occupied commercial real estate | Owner-occupied commercial real estate | 624 | | | 26 | | | 0 | | | 0 | | | 650 | | Owner-occupied commercial real estate | 645 | | | 201 | | | 0 | | | 0 | | | 846 | |
Investor commercial real estate | Investor commercial real estate | 169 | | | (65) | | | 0 | | | 0 | | | 104 | | Investor commercial real estate | 128 | | | 2 | | | 0 | | | 0 | | | 130 | |
Construction | Construction | 302 | | | 39 | | | 0 | | | 0 | | | 341 | | Construction | 460 | | | 261 | | | 0 | | | 0 | | | 721 | |
Single tenant lease financing | Single tenant lease financing | 9,661 | | | 1,633 | | | 0 | | | 0 | | | 11,294 | | Single tenant lease financing | 10,755 | | | 563 | | | 0 | | | 0 | | | 11,318 | |
Public finance | Public finance | 1,763 | | | (198) | | | 0 | | | 0 | | | 1,565 | | Public finance | 1,483 | | | 59 | | | 0 | | | 0 | | | 1,542 | |
Healthcare finance | Healthcare finance | 2,293 | | | 499 | | | 0 | | | 0 | | | 2,792 | | Healthcare finance | 4,318 | | | 1,187 | | | (743) | | | 0 | | | 4,762 | |
Small business lending | Small business lending | 129 | | | (3) | | | 0 | | | 0 | | | 126 | | Small business lending | 265 | | | (20) | | | 0 | | | 6 | | | 251 | |
| Residential mortgage | Residential mortgage | 662 | | | 10 | | | (1) | | | 1 | | | 672 | | Residential mortgage | 500 | | | 36 | | | 0 | | | 3 | | | 539 | |
Home equity | Home equity | 48 | | | (5) | | | 0 | | | 2 | | | 45 | | Home equity | 53 | | | (4) | | | 0 | | | 2 | | | 51 | |
Other consumer | Other consumer | 2,530 | | | 369 | | | (381) | | | 62 | | | 2,580 | | Other consumer | 2,580 | | | 347 | | | (216) | | | 117 | | | 2,828 | |
Total | Total | $ | 19,976 | | | $ | 2,824 | | | $ | (1,182) | | | $ | 65 | | | $ | 21,683 | | Total | $ | 22,857 | | | $ | 2,491 | | | $ | (1,016) | | | $ | 133 | | | $ | 24,465 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2020 | |
Allowance for loan losses: | Balance, Beginning of Period | | Provision (Credit) Charged to Expense | | Losses Charged Off | | Recoveries | | Balance, End of Period | |
Commercial and industrial | $ | 1,521 | | | $ | 205 | | | $ | (254) | | | $ | 5 | | | $ | 1,477 | | |
Owner-occupied commercial real estate | 561 | | | 285 | | | 0 | | | 0 | | | 846 | | |
Investor commercial real estate | 109 | | | 21 | | | 0 | | | 0 | | | 130 | | |
Construction | 380 | | | 341 | | | 0 | | | 0 | | | 721 | | |
Single tenant lease financing | 11,175 | | | 143 | | | 0 | | | 0 | | | 11,318 | | |
Public finance | 1,580 | | | (38) | | | 0 | | | 0 | | | 1,542 | | |
Healthcare finance | 3,247 | | | 2,258 | | | (743) | | | 0 | | | 4,762 | | |
Small business lending | 54 | | | 183 | | | 0 | | | 14 | | | 251 | | |
| | | | | | | | | | |
Residential mortgage | 657 | | | (107) | | | (15) | | | 4 | | | 539 | | |
Home equity | 46 | | | 0 | | | 0 | | | 5 | | | 51 | | |
Other consumer | 2,510 | | | 661 | | | (502) | | | 159 | | | 2,828 | | |
Total | $ | 21,840 | | | $ | 3,952 | | | $ | (1,514) | | | $ | 187 | | | $ | 24,465 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2019 |
Allowance for loan losses: | Balance, Beginning of Period | | Provision (Credit) Charged to Expense | | Losses Charged Off | | Recoveries | | Balance, End of Period |
Commercial and industrial | $ | 1,384 | | | $ | 1,042 | | | $ | (912) | | | $ | 0 | | | $ | 1,514 | |
Owner-occupied commercial real estate | 891 | | | (241) | | | 0 | | | 0 | | | 650 | |
Investor commercial real estate | 61 | | | 43 | | | 0 | | | 0 | | | 104 | |
Construction | 251 | | | 90 | | | 0 | | | 0 | | | 341 | |
Single tenant lease financing | 8,827 | | | 2,467 | | | 0 | | | 0 | | | 11,294 | |
Public finance | 1,670 | | | (105) | | | 0 | | | 0 | | | 1,565 | |
Healthcare finance | 1,264 | | | 1,528 | | | 0 | | | 0 | | | 2,792 | |
Small business lending | 95 | | | 31 | | | 0 | | | 0 | | | 126 | |
Residential mortgage | 1,079 | | | (409) | | | (1) | | | 3 | | | 672 | |
Home equity | 53 | | | (16) | | | 0 | | | 8 | | | 45 | |
Other consumer | 2,321 | | | 1,068 | | | (1,035) | | | 226 | | | 2,580 | |
Total | $ | 17,896 | | | $ | 5,498 | | | $ | (1,948) | | | $ | 237 | | | $ | 21,683 | |
The following tables present the recorded investment in loans based on portfolio segment and impairment method as of SeptemberJune 30, 20202021 and December 31, 2019.2020.
| (in thousands) | (in thousands) | Loans | | Allowance for Loan Losses | (in thousands) | Loans | | Allowance for Loan Losses |
September 30, 2020 | Ending Balance: Collectively Evaluated for Impairment | | Ending Balance: Individually Evaluated for Impairment | | Ending Balance | | Ending Balance: Collectively Evaluated for Impairment | | Ending Balance: Individually Evaluated for Impairment | | Ending Balance | |
June 30, 2021 | | June 30, 2021 | Ending Balance: Collectively Evaluated for Impairment | | Ending Balance: Individually Evaluated for Impairment | | Ending Balance | | Ending Balance: Collectively Evaluated for Impairment | | Ending Balance: Individually Evaluated for Impairment | | Ending Balance |
Commercial and industrial | Commercial and industrial | $ | 76,481 | | | $ | 635 | | | $ | 77,116 | | | $ | 1,101 | | | $ | 50 | | | $ | 1,151 | | Commercial and industrial | $ | 95,511 | | | $ | 692 | | | $ | 96,203 | | | $ | 1,453 | | | $ | 450 | | | $ | 1,903 | |
Owner-occupied commercial real estate | Owner-occupied commercial real estate | 85,848 | | | 3,247 | | | 89,095 | | | 1,013 | | | 0 | | | 1,013 | | Owner-occupied commercial real estate | 83,649 | | | 3,487 | | | 87,136 | | | 1,021 | | | 0 | | | 1,021 | |
Investor commercial real estate | Investor commercial real estate | 13,084 | | | 0 | | | 13,084 | | | 130 | | | 0 | | | 130 | | Investor commercial real estate | 28,871 | | | 0 | | | 28,871 | | | 329 | | | 0 | | | 329 | |
Construction | Construction | 92,154 | | | 0 | | | 92,154 | | | 876 | | | 0 | | | 876 | | Construction | 117,970 | | | 0 | | | 117,970 | | | 1,357 | | | 0 | | | 1,357 | |
Single tenant lease financing | Single tenant lease financing | 953,140 | | | 7,365 | | | 960,505 | | | 10,008 | | | 2,027 | | | 12,035 | | Single tenant lease financing | 910,742 | | | 2,373 | | | 913,115 | | | 10,838 | | | 367 | | | 11,205 | |
Public finance | Public finance | 625,638 | | | 0 | | | 625,638 | | | 1,733 | | | 0 | | | 1,733 | | Public finance | 612,138 | | | 0 | | | 612,138 | | | 1,700 | | | 0 | | | 1,700 | |
Healthcare finance | Healthcare finance | 460,706 | | | 1,034 | | | 461,740 | | | 6,081 | | | 0 | | | 6,081 | | Healthcare finance | 454,919 | | | 971 | | | 455,890 | | | 6,415 | | | 523 | | | 6,938 | |
Small business lending(1) | Small business lending(1) | 123,168 | | | 0 | | | 123,168 | | | 484 | | | 0 | | | 484 | | Small business lending(1) | 122,084 | | | 1,209 | | | 123,293 | | | 783 | | | 0 | | | 783 | |
| Residential mortgage | Residential mortgage | 201,591 | | | 1,450 | | | 203,041 | | | 565 | | | 0 | | | 565 | | Residential mortgage | 174,717 | | | 2,431 | | | 177,148 | | | 594 | | | 0 | | | 594 | |
Home equity | Home equity | 22,169 | | | 0 | | | 22,169 | | | 53 | | | 0 | | | 53 | | Home equity | 17,496 | | | 14 | | | 17,510 | | | 63 | | | 0 | | | 63 | |
Other consumer | Other consumer | 282,412 | | | 38 | | | 282,450 | | | 2,796 | | | 0 | | | 2,796 | | Other consumer | 271,786 | | | 10 | | | 271,796 | | | 2,173 | | | 0 | | | 2,173 | |
Total | Total | $ | 2,936,391 | | | $ | 13,769 | | | $ | 2,950,160 | | | $ | 24,840 | | | $ | 2,077 | | | $ | 26,917 | | Total | $ | 2,889,883 | | | $ | 11,187 | | | $ | 2,901,070 | | | $ | 26,726 | | | $ | 1,340 | | | $ | 28,066 | |
1 Balance of loans individually evaluated for impairment are guaranteed by the U.S. government.
| (in thousands) | (in thousands) | Loans | | Allowance for Loan Losses | (in thousands) | Loans | | Allowance for Loan Losses |
December 31, 2019 | Ending Balance: Collectively Evaluated for Impairment | | Ending Balance: Individually Evaluated for Impairment | | Ending Balance | | Ending Balance: Collectively Evaluated for Impairment | | Ending Balance: Individually Evaluated for Impairment | | Ending Balance | |
December 31, 2020 | | December 31, 2020 | Ending Balance: Collectively Evaluated for Impairment | | Ending Balance: Individually Evaluated for Impairment | | Ending Balance | | Ending Balance: Collectively Evaluated for Impairment | | Ending Balance: Individually Evaluated for Impairment | | Ending Balance |
Commercial and industrial | Commercial and industrial | $ | 93,520 | | | $ | 2,900 | | | $ | 96,420 | | | $ | 1,412 | | | $ | 109 | | | $ | 1,521 | | Commercial and industrial | $ | 74,870 | | | $ | 517 | | | $ | 75,387 | | | $ | 1,146 | | | $ | 0 | | | $ | 1,146 | |
Owner-occupied commercial real estate | Owner-occupied commercial real estate | 81,063 | | | 5,663 | | | 86,726 | | | 561 | | | 0 | | | 561 | | Owner-occupied commercial real estate | 87,947 | | | 1,838 | | | 89,785 | | | 1,082 | | | 0 | | | 1,082 | |
Investor commercial real estate | Investor commercial real estate | 12,567 | | | 0 | | | 12,567 | | | 109 | | | 0 | | | 109 | | Investor commercial real estate | 13,902 | | | 0 | | | 13,902 | | | 155 | | | 0 | | | 155 | |
Construction | Construction | 60,274 | | | 0 | | | 60,274 | | | 380 | | | 0 | | | 380 | | Construction | 110,385 | | | 0 | | | 110,385 | | | 1,192 | | | 0 | | | 1,192 | |
Single tenant lease financing | Single tenant lease financing | 991,199 | | | 4,680 | | | 995,879 | | | 9,515 | | | 1,660 | | | 11,175 | | Single tenant lease financing | 942,848 | | | 7,324 | | | 950,172 | | | 9,900 | | | 3,090 | | | 12,990 | |
Public finance | Public finance | 687,094 | | | 0 | | | 687,094 | | | 1,580 | | | 0 | | | 1,580 | | Public finance | 622,257 | | | 0 | | | 622,257 | | | 1,732 | | | 0 | | | 1,732 | |
Healthcare finance | Healthcare finance | 300,612 | | | 0 | | | 300,612 | | | 3,247 | | | 0 | | | 3,247 | | Healthcare finance | 527,144 | | | 1,010 | | | 528,154 | | | 7,485 | | | 0 | | | 7,485 | |
Small business lending | Small business lending | 46,945 | | | 0 | | | 46,945 | | | 54 | | | 0 | | | 54 | | Small business lending | 125,589 | | | 0 | | | 125,589 | | | 628 | | | 0 | | | 628 | |
| Residential mortgage | Residential mortgage | 312,714 | | | 1,135 | | | 313,849 | | | 657 | | | 0 | | | 657 | | Residential mortgage | 185,241 | | | 1,546 | | | 186,787 | | | 519 | | | 0 | | | 519 | |
Home equity | Home equity | 24,306 | | | 0 | | | 24,306 | | | 46 | | | 0 | | | 46 | | Home equity | 19,857 | | | 0 | | | 19,857 | | | 48 | | | 0 | | | 48 | |
Other consumer | Other consumer | 295,266 | | | 43 | | | 295,309 | | | 2,510 | | | 0 | | | 2,510 | | Other consumer | 275,642 | | | 50 | | | 275,692 | | | 2,507 | | | 0 | | | 2,507 | |
Total | Total | $ | 2,905,560 | | | $ | 14,421 | | | $ | 2,919,981 | | | $ | 20,071 | | | $ | 1,769 | | | $ | 21,840 | | Total | $ | 2,985,682 | | | $ | 12,285 | | | $ | 2,997,967 | | | $ | 26,394 | | | $ | 3,090 | | | $ | 29,484 | |
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.
Nonaccrual Loans
Any loan which becomes 90 days delinquent or for which the full collection of principal and interest may be in doubt will be considered for nonaccrual status. At the time a loan is placed on nonaccrual status, all accrued but unpaid interest will be reversed from interest income. Placing the loan on nonaccrual status does not relieve the borrower of the obligation to repay interest. A loan placed on nonaccrual status may be restored to accrual status when all delinquent principal and interest has been brought current, and the Company expects full payment of the remaining contractual principal and interest.
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 SeptemberJune 30, 20202021 and December 31, 2019.2020.
| | | September 30, 2020 | | June 30, 2021 |
(in thousands) | (in thousands) | Pass | | Special Mention | | Substandard | | | Total | (in thousands) | Pass | | Special Mention | | Substandard | | | Total |
Commercial and industrial | Commercial and industrial | $ | 74,760 | | | $ | 1,721 | | | $ | 635 | | | | $ | 77,116 | | Commercial and industrial | $ | 79,928 | | | $ | 15,563 | | | $ | 712 | | | | $ | 96,203 | |
Owner-occupied commercial real estate | Owner-occupied commercial real estate | 80,463 | | | 5,385 | | | 3,247 | | | | 89,095 | | Owner-occupied commercial real estate | 79,730 | | | 3,919 | | | 3,487 | | | | 87,136 | |
Investor commercial real estate | Investor commercial real estate | 13,084 | | | 0 | | | 0 | | | | 13,084 | | Investor commercial real estate | 28,871 | | | 0 | | | 0 | | | | 28,871 | |
Construction | Construction | 92,154 | | | 0 | | | 0 | | | | 92,154 | | Construction | 117,970 | | | 0 | | | 0 | | | | 117,970 | |
Single tenant lease financing | Single tenant lease financing | 947,050 | | | 6,090 | | | 7,365 | | | | 960,505 | | Single tenant lease financing | 901,505 | | | 9,237 | | | 2,373 | | | | 913,115 | |
Public finance | Public finance | 625,638 | | | 0 | | | 0 | | | | 625,638 | | Public finance | 612,138 | | | 0 | | | 0 | | | | 612,138 | |
Healthcare finance | Healthcare finance | 460,706 | | | 0 | | | 1,034 | | | | 461,740 | | Healthcare finance | 454,312 | | | 615 | | | 963 | | | | 455,890 | |
Small business lending(1) | Small business lending(1) | 123,168 | | | 0 | | | 0 | | | | 123,168 | | Small business lending(1) | 112,864 | | | 8,718 | | | 1,711 | | | | 123,293 | |
| Total commercial loans | Total commercial loans | $ | 2,417,023 | | | $ | 13,196 | | | $ | 12,281 | | | | $ | 2,442,500 | | Total commercial loans | $ | 2,387,318 | | | $ | 38,052 | | | $ | 9,246 | | | | $ | 2,434,616 | |
1 Balance in “Substandard” is guaranteed by the U.S. government.
| | | | | | | | | | | | | | | | | |
| September 30, 2020 |
(in thousands) | Performing | | Nonaccrual | | Total |
Residential mortgage | $ | 201,956 | | | $ | 1,085 | | | $ | 203,041 | |
Home equity | 22,169 | | | 0 | | | 22,169 | |
Other consumer | 282,416 | | | 34 | | | 282,450 | |
Total consumer loans | $ | 506,541 | | | $ | 1,119 | | | $ | 507,660 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2019 |
(in thousands) | Pass | | Special Mention | | Substandard | | | | | | Total |
Commercial and industrial | $ | 89,818 | | | $ | 3,973 | | | $ | 2,629 | | | | | | | $ | 96,420 | |
Owner-occupied commercial real estate | 79,329 | | | 3,462 | | | 3,935 | | | | | | | 86,726 | |
Investor commercial real estate | 12,567 | | | 0 | | | 0 | | | | | | | 12,567 | |
Construction | 60,274 | | | 0 | | | 0 | | | | | | | 60,274 | |
Single tenant lease financing | 983,448 | | | 7,751 | | | 4,680 | | | | | | | 995,879 | |
Public finance | 687,094 | | | 0 | | | 0 | | | | | | | 687,094 | |
Healthcare finance | 300,612 | | | 0 | | | 0 | | | | | | | 300,612 | |
Small business lending | 46,945 | | | 0 | | | 0 | | | | | | | 46,945 | |
Total commercial loans | $ | 2,260,087 | | | $ | 15,186 | | | $ | 11,244 | | | | | | | $ | 2,286,517 | |
| | | | | | | | | | | | | | | | | |
| June 30, 2021 |
(in thousands) | Performing | | Nonaccrual | | Total |
Residential mortgage | $ | 175,895 | | | $ | 1,253 | | | $ | 177,148 | |
Home equity | 17,496 | | | 14 | | | 17,510 | |
Other consumer | 271,786 | | | 10 | | | 271,796 | |
Total consumer loans | $ | 465,177 | | | $ | 1,277 | | | $ | 466,454 | |
| | | | | | | | | | | | | | | | | |
| December 31, 2019 |
(in thousands) | Performing | | Nonaccrual | | Total |
Residential mortgage | $ | 313,088 | | | $ | 761 | | | $ | 313,849 | |
Home equity | 24,306 | | | 0 | | | 24,306 | |
Other consumer | 295,276 | | | 33 | | | 295,309 | |
Total consumer loans | $ | 632,670 | | | $ | 794 | | | $ | 633,464 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 |
(in thousands) | Pass | | Special Mention | | Substandard | | | | | | Total |
Commercial and industrial | $ | 74,138 | | | $ | 732 | | | $ | 517 | | | | | | | $ | 75,387 | |
Owner-occupied commercial real estate | 84,292 | | | 3,655 | | | 1,838 | | | | | | | 89,785 | |
Investor commercial real estate | 13,902 | | | 0 | | | 0 | | | | | | | 13,902 | |
Construction | 110,385 | | | 0 | | | 0 | | | | | | | 110,385 | |
Single tenant lease financing | 932,830 | | | 10,018 | | | 7,324 | | | | | | | 950,172 | |
Public finance | 622,257 | | | 0 | | | 0 | | | | | | | 622,257 | |
Healthcare finance | 526,517 | | | 627 | | | 1,010 | | | | | | | 528,154 | |
Small business lending | 117,474 | | | 2,930 | | | 5,185 | | | | | | | 125,589 | |
| | | | | | | | | | | |
Total commercial loans | $ | 2,481,795 | | | $ | 17,962 | | | $ | 15,874 | | | | | | | $ | 2,515,631 | |
| | | | | | | | | | | | | | | | | |
| December 31, 2020 |
(in thousands) | Performing | | Nonaccrual | | Total |
Residential mortgage | $ | 185,604 | | | $ | 1,183 | | | $ | 186,787 | |
Home equity | 19,857 | | | 0 | | | 19,857 | |
Other consumer | 275,646 | | | 46 | | | 275,692 | |
Total consumer loans | $ | 481,107 | | | $ | 1,229 | | | $ | 482,336 | |
The following tables present the Company’s loan portfolio delinquency analysis as of SeptemberJune 30, 20202021 and December 31, 2019.2020.
| | | September 30, 2020 | | June 30, 2021 |
(in thousands) | (in thousands) | | 30-59 Days Past Due | | 60-89 Days Past Due | | 90 Days or More Past Due | | Total Past Due | | Current | | Total Loans | | Non- accrual Loans | | Total Loans 90 Days or More Past Due and Accruing | (in thousands) | | 30-59 Days Past Due | | 60-89 Days Past Due | | 90 Days or More Past Due | | Total Past Due | | Current | | Total Loans | | Non- accrual Loans | | Total Loans 90 Days or More Past Due and Accruing |
Commercial and industrial | Commercial and industrial | | $ | 0 | | | $ | 0 | | | $ | 117 | | | $ | 117 | | | $ | 76,999 | | | $ | 77,116 | | | $ | 117 | | | $ | 0 | | Commercial and industrial | | $ | 2 | | | $ | 0 | | | $ | 0 | | | $ | 2 | | | $ | 96,201 | | | $ | 96,203 | | | $ | 692 | | | $ | 0 | |
Owner-occupied commercial real estate | Owner-occupied commercial real estate | | 0 | | | 0 | | | 1,390 | | | 1,390 | | | 87,705 | | | 89,095 | | | 1,390 | | | 0 | | Owner-occupied commercial real estate | | 0 | | | 0 | | | 0 | | | 0 | | | 87,136 | | | 87,136 | | | 0 | | | 0 | |
Investor commercial real estate | Investor commercial real estate | | 0 | | | 0 | | | 0 | | | 0 | | | 13,084 | | | 13,084 | | | 0 | | | 0 | | Investor commercial real estate | | 0 | | | 0 | | | 0 | | | 0 | | | 28,871 | | | 28,871 | | | 3,487 | | | 0 | |
Construction | Construction | | 0 | | | 0 | | | 0 | | | 0 | | | 92,154 | | | 92,154 | | | 0 | | | 0 | | Construction | | 0 | | | 0 | | | 0 | | | 0 | | | 117,970 | | | 117,970 | | | 0 | | | 0 | |
Single tenant lease financing | Single tenant lease financing | | 0 | | | 0 | | | 4,680 | | | 4,680 | | | 955,825 | | | 960,505 | | | 7,148 | | | 0 | | Single tenant lease financing | | 0 | | | 0 | | | 0 | | | 0 | | | 913,115 | | | 913,115 | | | 2,373 | | | 0 | |
Public finance | Public finance | | 0 | | | 0 | | | 0 | | | 0 | | | 625,638 | | | 625,638 | | | 0 | | | 0 | | Public finance | | 0 | | | 0 | | | 0 | | | 0 | | | 612,138 | | | 612,138 | | | 0 | | | 0 | |
Healthcare finance | Healthcare finance | | 0 | | | 0 | | | 0 | | | 0 | | | 461,740 | | | 461,740 | | | 0 | | | 0 | | Healthcare finance | | 0 | | | 0 | | | 0 | | | 0 | | | 455,890 | | | 455,890 | | | 0 | | | 0 | |
Small business lending(1) | Small business lending(1) | | 0 | | | 0 | | | 0 | | | 0 | | | 123,168 | | | 123,168 | | | 0 | | | 0 | | Small business lending(1) | | 0 | | | 0 | | | 1,209 | | | 1,209 | | | 122,084 | | | 123,293 | | | 1,209 | | | 0 | |
| Residential mortgage | Residential mortgage | | 0 | | | 0 | | | 157 | | | 157 | | | 202,884 | | | 203,041 | | | 1,085 | | | 0 | | Residential mortgage | | 0 | | | 0 | | | 364 | | | 364 | | | 176,784 | | | 177,148 | | | 1,253 | | | 0 | |
Home equity | Home equity | | 46 | | | 0 | | | 0 | | | 46 | | | 22,123 | | | 22,169 | | | 0 | | | 0 | | Home equity | | 0 | | | 0 | | | 0 | | | 0 | | | 17,510 | | | 17,510 | | | 14 | | | 0 | |
Other consumer | Other consumer | | 126 | | | 33 | | | 0 | | | 159 | | | 282,291 | | | 282,450 | | | 34 | | | 0 | | Other consumer | | 89 | | | 9 | | | 0 | | | 98 | | | 271,698 | | | 271,796 | | | 10 | | | 0 | |
Total | Total | | $ | 172 | | | $ | 33 | | | $ | 6,344 | | | $ | 6,549 | | | $ | 2,943,611 | | | $ | 2,950,160 | | | $ | 9,774 | | | $ | 0 | | Total | | $ | 91 | | | $ | 9 | | | $ | 1,573 | | | $ | 1,673 | | | $ | 2,899,397 | | | $ | 2,901,070 | | | $ | 9,038 | | | $ | 0 | |
1 Balance in “90 Days or More Past Due” is guaranteed by the U.S. government.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2019 |
(in thousands) | | 30-59 Days Past Due | | 60-89 Days Past Due | | 90 Days or More Past Due | | Total Past Due | | Current | | Total Loans | | Non- accrual Loans | | Total Loans 90 Days or More Past Due and Accruing |
Commercial and industrial | | $ | 15 | | | $ | 96 | | | $ | 122 | | | $ | 233 | | | $ | 96,187 | | | $ | 96,420 | | | $ | 226 | | | $ | 0 | |
Owner-occupied commercial real estate | | 0 | | | 0 | | | 464 | | | 464 | | | 86,262 | | | 86,726 | | | 464 | | | 0 | |
Investor commercial real estate | | 0 | | | 0 | | | 0 | | | 0 | | | 12,567 | | | 12,567 | | | 0 | | | 0 | |
Construction | | 0 | | | 0 | | | 0 | | | 0 | | | 60,274 | | | 60,274 | | | 0 | | | 0 | |
Single tenant lease financing | | 0 | | | 4,680 | | | 0 | | | 4,680 | | | 991,199 | | | 995,879 | | | 4,680 | | | 0 | |
Public finance | | 0 | | | 0 | | | 0 | | | 0 | | | 687,094 | | | 687,094 | | | 0 | | | 0 | |
Healthcare finance | | 0 | | | 0 | | | 0 | | | 0 | | | 300,612 | | | 300,612 | | | 0 | | | 0 | |
Small business lending | | 54 | | | | | 0 | | | 54 | | | 46,891 | | | 46,945 | | | 0 | | | 0 | |
Residential mortgage | | 0 | | | 0 | | | 1,177 | | | 1,177 | | | 312,672 | | | 313,849 | | | 761 | | | 416 | |
Home equity | | 0 | | | 0 | | | 0 | | | 0 | | | 24,306 | | | 24,306 | | | 0 | | | 0 | |
Other consumer | | 240 | | | 107 | | | 0 | | | 347 | | | 294,962 | | | 295,309 | | | 33 | | | 0 | |
Total | | $ | 309 | | | $ | 4,883 | | | $ | 1,763 | | | $ | 6,955 | | | $ | 2,913,026 | | | $ | 2,919,981 | | | $ | 6,164 | | | $ | 416 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2020 |
(in thousands) | | 30-59 Days Past Due | | 60-89 Days Past Due | | 90 Days or More Past Due | | Total Past Due | | Current | | Total Loans | | Non- accrual Loans | | Total Loans 90 Days or More Past Due and Accruing |
Commercial and industrial | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 75,387 | | | $ | 75,387 | | | $ | 0 | | | $ | 0 | |
Owner-occupied commercial real estate | | 0 | | | 0 | | | 0 | | | 0 | | | 89,785 | | | 89,785 | | | 1,838 | | | 0 | |
Investor commercial real estate | | 0 | | | 0 | | | 0 | | | 0 | | | 13,902 | | | 13,902 | | | 0 | | | 0 | |
Construction | | 0 | | | 0 | | | 0 | | | 0 | | | 110,385 | | | 110,385 | | | 0 | | | 0 | |
Single tenant lease financing | | 0 | | | 0 | | | 4,680 | | | 4,680 | | | 945,492 | | | 950,172 | | | 7,116 | | | 0 | |
Public finance | | 0 | | | 0 | | | 0 | | | 0 | | | 622,257 | | | 622,257 | | | 0 | | | 0 | |
Healthcare finance | | 0 | | | 0 | | | 0 | | | 0 | | | 528,154 | | | 528,154 | | | 0 | | | 0 | |
Small business lending | | 0 | | | 0 | | | 0 | | | 0 | | | 125,589 | | | 125,589 | | | 0 | | | 0 | |
| | | | | | | | | | | | | | | | |
Residential mortgage | | 49 | | | 0 | | | 269 | | | 318 | | | 186,469 | | | 186,787 | | | 1,183 | | | 0 | |
Home equity | | 0 | | | 15 | | | 0 | | | 15 | | | 19,842 | | | 19,857 | | | 0 | | | 0 | |
Other consumer | | 176 | | | 51 | | | 5 | | | 232 | | | 275,460 | | | 275,692 | | | 46 | | | 0 | |
Total | | $ | 225 | | | $ | 66 | | | $ | 4,954 | | | $ | 5,245 | | | $ | 2,992,722 | | | $ | 2,997,967 | | | $ | 10,183 | | | $ | 0 | |
Impaired Loans
A loan is designated as impaired, in accordance with the impairment accounting guidance, when, based on current information or events, it is probable that the Company will be unable to collect all amounts due (principal and interest) according to the contractual terms of the loan agreement. Payments with delays generally not exceeding 90 days outstanding are not considered impaired. Certain nonaccrual and substantially all delinquent loans more than 90 days past due may be considered to be impaired. Generally, loans are placed on nonaccrual status at 90 days past due and accrued interest is reversed against earnings, unless the loan is well-secured and in the process of collection. The accrual of interest on impaired and nonaccrual loans is discontinued when, in management’s opinion, the borrower may be unable to meet payments as they become due.
Impaired loans include nonperforming loans as well as loans modified in TDRs where concessions have been granted to borrowers experiencing financial difficulties. These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance, or other actions intended to maximize collection.
ASC Topic 310, Receivables, requires that impaired loans be measured based on the present value of expected future cash flows discounted at the loans’ effective interest rates or the fair value of the underlying collateral, less costs to sell, and allows existing methods for recognizing interest income.
The following table presents the Company’s impaired loans as of SeptemberJune 30, 20202021 and December 31, 2019.2020.
| | | | September 30, 2020 | | December 31, 2019 | | | June 30, 2021 | | December 31, 2020 |
(in thousands) | (in thousands) | | Recorded Balance | | Unpaid Principal Balance | | Specific Allowance | | Recorded Balance | | Unpaid Principal Balance | | Specific Allowance | (in thousands) | | Recorded Balance | | Unpaid Principal Balance | | Specific Allowance | | Recorded Balance | | Unpaid Principal Balance | | Specific Allowance |
Loans without a specific valuation allowance | Loans without a specific valuation allowance | | | | | | | | | | | | | Loans without a specific valuation allowance | | | | | | | | | | | | |
Commercial and industrial | Commercial and industrial | | $ | 517 | | | $ | 517 | | | $ | 0 | | | $ | 2,693 | | | $ | 2,694 | | | $ | 0 | | Commercial and industrial | | $ | 3,487 | | | $ | 3,513 | | | $ | 0 | | | $ | 517 | | | $ | 517 | | | $ | 0 | |
Owner-occupied commercial real estate | Owner-occupied commercial real estate | | 3,246 | | | 3,250 | | | 0 | | | 5,663 | | | 5,665 | | | 0 | | Owner-occupied commercial real estate | | 0 | | | 0 | | | 0 | | | 1,838 | | | 1,850 | | | 0 | |
| Single tenant lease financing | Single tenant lease financing | | 217 | | | 217 | | | 0 | | | 0 | | | 0 | | | 0 | | Single tenant lease financing | | 0 | | | 0 | | | 0 | | | 1,315 | | | 1,334 | | | 0 | |
| Healthcare finance | Healthcare finance | | 1,034 | | | 1,034 | | | 0 | | | 0 | | | 0 | | | 0 | | Healthcare finance | | 0 | | | 0 | | | 0 | | | 1,010 | | | 1,010 | | | 0 | |
Small business lending(1) | | Small business lending(1) | | 1,209 | | | 1,209 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Residential mortgage | Residential mortgage | | 1,450 | | | 1,543 | | | 0 | | | 1,135 | | | 1,209 | | | 0 | | Residential mortgage | | 2,431 | | | 2,566 | | | 0 | | | 1,546 | | | 1,652 | | | 0 | |
| Home equity | | Home equity | | 14 | | | 15 | | | 0 | | | 0 | | | 0 | | | 0 | |
Other consumer | Other consumer | | 39 | | | 105 | | | 0 | | | 43 | | | 107 | | | 0 | | Other consumer | | 10 | | | 47 | | | 0 | | | 50 | | | 120 | | | 0 | |
Total | Total | | 6,503 | | | 6,666 | | | 0 | | | 9,534 | | | 9,675 | | | 0 | | Total | | 7,151 | | | 7,350 | | | 0 | | | 6,276 | | | 6,483 | | | 0 | |
Loans with a specific valuation allowance | Loans with a specific valuation allowance | | | | | | | | | | | | | Loans with a specific valuation allowance | | | | | | | | | | | | |
Commercial and industrial | Commercial and industrial | | 118 | | | 140 | | | 50 | | | 207 | | | 244 | | | 109 | | Commercial and industrial | | 692 | | | 723 | | | 450 | | | 0 | | | 0 | | | 0 | |
| Single tenant lease financing | Single tenant lease financing | | 7,148 | | | 7,166 | | | 2,027 | | | 4,680 | | | 4,680 | | | 1,660 | | Single tenant lease financing | | 2,373 | | | 2,463 | | | 367 | | | 6,009 | | | 6,036 | | | 3,090 | |
| Healthcare Finance | | Healthcare Finance | | 971 | | | 971 | | | 523 | | | 0 | | | 0 | | | 0 | |
| Total | Total | | 7,266 | | | 7,306 | | | 2,077 | | | 4,887 | | | 4,924 | | | 1,769 | | Total | | 4,036 | | | 4,157 | | | 1,340 | | | 6,009 | | | 6,036 | | | 3,090 | |
Total impaired loans | Total impaired loans | | $ | 13,769 | | | $ | 13,972 | | | $ | 2,077 | | | $ | 14,421 | | | $ | 14,599 | | | $ | 1,769 | | Total impaired loans | | $ | 11,187 | | | $ | 11,507 | | | $ | 1,340 | | | $ | 12,285 | | | $ | 12,519 | | | $ | 3,090 | |
1 Entire balance is guaranteed by the U.S. government.
The table below presents average balances and interest income recognized for impaired loans during the three and ninesix months ended SeptemberJune 30, 20202021 and 2019.2020.
| | | Three Months Ended | | Nine Months Ended | | Three Months Ended | | Six Months Ended |
| | September 30, 2020 | | September 30, 2019 | | September 30, 2020 | | September 30, 2019 | | June 30, 2021 | | June 30, 2020 | | June 30, 2021 | | June 30, 2020 |
(in thousands) | (in thousands) | | Average Balance | | Interest Income | | Average Balance | | Interest Income | | Average Balance | | Interest Income | | Average Balance | | Interest Income | (in thousands) | | Average Balance | | Interest Income | | Average Balance | | Interest Income | | Average Balance | | Interest Income | | Average Balance | | Interest Income |
Loans without a specific valuation allowance | Loans without a specific valuation allowance | | | | | | | | | | | | | | | | | Loans without a specific valuation allowance | | | | | | | | | | | | | | | | |
Commercial and industrial | Commercial and industrial | | $ | 971 | | | $ | 18 | | | $ | 4,433 | | | $ | 70 | | | $ | 1,210 | | | $ | 54 | | | $ | 4,395 | | | $ | 237 | | Commercial and industrial | | $ | 259 | | | $ | 0 | | | $ | 594 | | | $ | 18 | | | $ | 259 | | | $ | 9 | | | $ | 1,330 | | 237 | $ | 36 | |
Owner-occupied commercial real estate | Owner-occupied commercial real estate | | 3,586 | | | 29 | | | 4,803 | | | 52 | | | 4,244 | | | 60 | | | 3,244 | | | 145 | | Owner-occupied commercial real estate | | 3,994 | | | 0 | | | 3,923 | | | 29 | | | 3,307 | | | 0 | | | 4,573 | | 145 | 31 | |
| Single tenant lease financing | | Single tenant lease financing | | 148 | | | 0 | | | 0 | | | 0 | | | 100 | | | 5 | | | 0 | | | 0 | |
| Healthcare finance | Healthcare finance | | 692 | | | 8 | | | 231 | | | 8 | | | 0 | | | 0 | | | 0 | | | 0 | | Healthcare finance | | 0 | | | 0 | | | 0 | | | 0 | | | 336 | | | 0 | | | 0 | | | 0 | |
Small business lending(1) | | Small business lending(1) | | 1,123 | | | 0 | | | 0 | | | 0 | | | 970 | | | 0 | | | 0 | | | 0 | |
| Residential mortgage | Residential mortgage | | 1,233 | | | 0 | | | 2,714 | | | 0 | | | 1,286 | | | 0 | | | 2,768 | | | 0 | | Residential mortgage | | 2,410 | | | 9 | | | 1,352 | | | 0 | | | 2,192 | | | 13 | | | 1,313 | | | 0 | |
Home equity | Home equity | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 14 | | | 0 | | Home equity | | 15 | | | 0 | | | 0 | | | 0 | | | 13 | | | 0 | | | 0 | | | 0 | |
Other consumer | Other consumer | | 68 | | | 0 | | | 66 | | | 0 | | | 63 | | | 0 | | | 75 | | | 0 | | Other consumer | | 21 | | | 0 | | | 75 | | | 0 | | | 23 | | | 0 | | | 60 | | | 0 | |
Total | Total | | 6,550 | | | 55 | | | 12,016 | | | 122 | | | 7,034 | | | 122 | | | 10,496 | | | 382 | | Total | | 7,970 | | | 9 | | | 5,944 | | | 47 | | | 7,200 | | | 27 | | | 7,276 | | | 67 | |
Loans with a specific valuation allowance | Loans with a specific valuation allowance | | | | | | | | | | | | | | | | | Loans with a specific valuation allowance | | | | | | | | | | | | | | | | |
Commercial and industrial | Commercial and industrial | | 182 | | | 18 | | | 1,032 | | | 0 | | | 196 | | | 18 | | | 462 | | | 0 | | Commercial and industrial | | 839 | | | 0 | | | 204 | | | 0 | | | 677 | | | 0 | | | 204 | | | 0 | |
| Owner-occupied commercial real estate | | Owner-occupied commercial real estate | | 1,420 | | | — | | | — | | | — | | | 473 | | | — | | | — | | | — | |
| Single tenant lease financing | Single tenant lease financing | | 5,978 | | | 4 | | | 1,173 | | | 0 | | | 5,113 | | | 4 | | | 391 | | | 0 | | Single tenant lease financing | | 5,430 | | | 0 | | | 4,680 | | | 0 | | | 4,984 | | | 0 | | | 4,680 | | | 0 | |
| Healthcare Finance | | Healthcare Finance | | 979 | | | 24 | | | — | | | — | | | 815 | | | 36 | | | — | | | — | |
| Total | Total | | 6,160 | | | 51 | | | 2,205 | | | 0 | | | 5,309 | | | 51 | | | 853 | | | 0 | | Total | | 8,668 | | | 24 | | | 4,884 | | | 0 | | | 6,949 | | | 36 | | | 4,884 | | | 0 | |
Total impaired loans | Total impaired loans | | $ | 12,710 | | | $ | 106 | | | $ | 14,221 | | | $ | 122 | | | $ | 12,343 | | | $ | 173 | | | $ | 11,349 | | | $ | 382 | | Total impaired loans | | $ | 16,638 | | | $ | 33 | | | $ | 10,828 | | | $ | 47 | | | $ | 14,149 | | | $ | 63 | | | $ | 12,160 | | | $ | 67 | |
1 Entire balance is guaranteed by the U.S. government.
The Company had 0 residential mortgage$1.3 million in other real estate owned (“OREO”) as of SeptemberJune 30, 20202021, which consisted of 1 commercial property with a carrying value of $1.2 million and 1 residential mortgage with a carrying value of $0.1 million. The Company did not have any OREO as of December 31, 2019.2020. There were 2 loans totaling $0.4 million and 0 loans in the process of foreclosure at SeptemberJune 30, 20202021 and December 31, 2019.2020, respectively.
Troubled Debt Restructurings
The loan portfolio includes TDRs, which are loans that have been modified to grant economic concessions to borrowers who have experienced financial difficulties. These concessions typically result from loss mitigation efforts and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance, or other actions. Certain
TDRs are classified as nonperforming at the time of restructuring and typically are returned to performing status after considering the borrower’s sustained repayment performance for a reasonable period, generally not less than six consecutive months.
When loans are modified in a TDR, any possible impairment similar to other impaired loans is evaluated based on the present value of expected future cash flows, discounted at the contractual interest rate of the original loan agreement, or using the current fair value of the collateral, less selling costs, for collateral dependent loans. If it is determined that the value of the modified loan is less than the recorded balance of the loan, impairment is recognized through a specific allowance or charge-off to the allowance. In periods subsequent to modification, all TDRs, including those that have payment defaults, are evaluated for possible impairment, and impairment is recognized through the allowance.
In the course of working with troubled borrowers, the Company may choose to restructure the contractual terms of certain loans in an effort to work out an alternative payment schedule with the borrower in order to optimize the collectability of the loan. Any loan modification is reviewed by the Company to identify whether a TDR has occurred when the Company grants a concession to the borrower that it would not otherwise consider based on economic or legal reasons related to a borrower’s financial difficulties. Terms may be modified to fit the ability of the borrower to repay in line with its current financial status or the loan may be restructured to secure additional collateral and/or guarantees to support the debt, or a combination of the two.
There were 0 loans classified as new TDRs during the three months ended September 30, 2020 andwas 1 portfolio residential mortgage loan classified as a new TDR during the ninethree and six months ended SeptemberJune 30, 2021 with a pre-modification and post-modification outstanding recorded investment of $0.8 million. The Company
did not allocate a specific allowance for that loan as of June 30, 2021. The modifications consisted of interest-only payments for a period of time. There was 1 portfolio residential mortgage loan classified as a new TDR during the three and six months ended June 30, 2020, with a pre-modification and post-modification outstanding recorded investment of $0.8 million. The Company did not allocate a specific allowance for that loan as of SeptemberJune 30, 2020. The modification consisted of an extension of the maturity date. There were 0 loans classified as new TDRs during the three months ended September 30, 2019 and 4 commercial and industrial loans classified as new TDRs during the nine months ended September 30, 2019 with a pre-modification and post-modification outstanding recorded investment of $2.0 million. The Company did not allocate a specific allowance for those loans as of September 30, 2019. The modifications consisted of interest-only payments for a period of time. There were no performing TDRs that had payment defaults within the twelve months following modification during the three and ninesix months ended SeptemberJune 30, 20202021 and 2019,2020, respectively.
Non-TDR Loan Modifications due to COVID-19
The “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus” was issued by our banking regulators on March 22, 2020. This guidance encourages financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations due to the effects of COVID-19.
Additionally, Section 4013 of the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) provides that loan modifications due to the impact of COVID-19 that would otherwise be classified as TDRs under GAAP will not be so classified. Modifications within the scope of this relief are in effect from the period beginning March 1, 2020 until the earlier of December 31, 2020January 1, 2022 or 60 days after the date on which the national emergency related to the COVID-19 pandemic formally terminates.
In accordance with this guidance, the Company offered modifications to borrowers who were both impacted by COVID-19 and current on all principal and interest payments. The table below presents loan deferrals by loan category as As of June 30, 2020 and September 30, 2020, respectively.
| | | | | | | | | | | | | | | | | | | | |
(in thousands) | | June 30, 2020 Deferrals Balance | | September 30, 2020 Deferrals Balance | | September 30, 2020 Number of Deferrals |
Commercial loans | | | | | | |
Commercial and industrial | | $ | 2,312 | | | $ | 722 | | | 5 |
Owner-occupied commercial real estate | | 25,254 | | | 6,235 | | | 4 |
Investor commercial real estate | | 411 | | | 0 | | | 0 |
Construction | | 0 | | | 0 | | | 0 |
Single tenant lease financing | | 275,129 | | | 8,281 | | | 4 |
Public finance | | 0 | | | 0 | | | 0 |
Healthcare finance | | 79,179 | | | 2,275 | | | 3 |
Small business lending | | 1,823 | | | 2,790 | | | 10 |
Total commercial loans | | 384,108 | | | 20,303 | | | 26 |
Consumer loans | | | | | | |
Residential mortgage | | 4,719 | | | 2,329 | | | 5 |
Home equity | | 398 | | | 0 | | | 0 |
Other consumer | | 3,205 | | | 632 | | | 21 |
Total consumer loans | | 8,322 | | | 2,961 | | | 26 |
Total commercial and consumer loans | | $ | 392,430 | | | $ | 23,264 | | | 52 |
2021, the Company had eight loans totaling $7.9 million in non-TDR loan modifications due to COVID-19.
Note 5: Premises and Equipment
The following table summarizes premises and equipment at SeptemberJune 30, 20202021 and December 31, 2019.2020.
| (in thousands) | (in thousands) | | September 30, 2020 | | December 31, 2019 | (in thousands) | | June 30, 2021 | | December 31, 2020 |
Land | Land | | $ | 2,500 | | | $ | 2,500 | | Land | | $ | 0 | | | $ | 2,500 | |
Right of use leased asset | Right of use leased asset | | 1,032 | | | 1,602 | | Right of use leased asset | | 304 | | | 819 | |
Construction in process | | Construction in process | | 42,106 | | | 28,754 | |
Building and improvements | Building and improvements | | 27,572 | | | 10,004 | | Building and improvements | | 439 | | | 5,819 | |
Furniture and equipment | Furniture and equipment | | 10,692 | | | 9,689 | | Furniture and equipment | | 7,636 | | | 10,671 | |
Less: accumulated depreciation | Less: accumulated depreciation | | (10,534) | | | (9,165) | | Less: accumulated depreciation | | (6,236) | | | (10,973) | |
Total | Total | | $ | 31,262 | | | $ | 14,630 | | Total | | $ | 44,249 | | | $ | 37,590 | |
DuringIn December 2018, the Bank'sBank’s subsidiary, SPF15, Inc., (“SPF15”) acquired several parcels of land consisting of approximately 3.3 acres located in Fishers, Indiana for approximately $10.2 million, inclusive of acquisition costs. Pursuant toentered into a Land Acquisition Agreementproject agreement with the City of Fishers, Indiana (the “City”), and its Redevelopment Commission, among others, the City agreed to reimburse SPF15 for the purchase price and other specified land acquisition costs. The Land Acquisition Agreement was replaced by a Project Agreement in December 2018, which extended the reimbursement deadline to October 31, 2019 and made additional financial incentives available to the Company for constructingconstruct an office building to include the Company’s future headquarters and associated parking garage on property the property. As contemplated underBank had acquired in 2018. Construction began on the Project Agreement,project in the City transferredfourth quarter 2019 and is expected to SPF15 2 additional parcelsbe substantially complete in the fourth quarter 2021. The Company anticipates fully occupying the new headquarters building by the end of land consisting2021.
On February 16, 2021, the Company entered into an agreement to sell its current headquarters and certain equipment currently located in the building to a third party. The sale was completed on April 16, 2021 and as a part of approximately 0.75 acres and SPF15 transferredthe sale agreement, the buyer agreed to lease the office building back to the Fishers Town Hall Building Corporation and third parties a certain parcel of land consisting of approximately 1.65 acresCompany through December 31, 2021, with an option to extend up to 90 days beyond that date. The sale price was $8.9 million in connection with the developmentcash paid in full at closing. The Company is expected to continue to lease substantially all of the property. On October 25, 2019,office space for the City satisfied its reimbursement obligation, resulting induration of the payment of SPF15 of an aggregate of $11.1 million for purchase prices and other specified land acquisition costs.primary leaseback period.
Site demolition has been completed and construction of a multi-use development, to include the Company's future headquarters, began on October 7, 2019. Development of the site is estimated to be substantially completed by the fourth quarter 2021.
Note 6: Leases
A lease is defined as a contract, or part of a contract, that conveys the right to control the use of identified property or equipment for a period of time in exchange for consideration. On January 1, 2019, the Company adopted ASU 2016-02 - Leases (Topic 842) and elected the optional transition method, which allows the Company to not separate non-lease components from the associated lease component if certain conditions are met. In addition, the Company elected not to adjust prior comparative periods.
The Company has 3 operating leases that are used for general office operations with remaining lease terms of two to four years. With the adoption of ASU 2016-02, operating lease agreements are required to be recognized on the condensed consolidated balance sheets as a right-of-use asset and a corresponding lease liability.
The following table shows the components of lease expense.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | | Three Months Ended | Nine Months Ended |
| | September 30, 2020 | | September 30, 2019 | | September 30, 2020 | | September 30, 2019 |
Operating lease cost | | $ | 225 | | | $ | 182 | | | $ | 691 | | | $ | 550 | |
| | | | | | | | |
The following table shows supplemental cash flow information related to leases.
| | | | | | | | | | | | | | | | | | | | |
(in thousands) | | | | Nine Months Ended |
| | | | | | September 30, 2020 | | September 30, 2019 | | |
Cash paid for amounts included in the measurement of lease liabilities: | | | | | | | | | | |
Operating cash flows from operating leases | | | | | | $ | 740 | | | $ | 590 | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
The following table shows the operating leases’ impact on the condensed consolidated balance sheets. The Company elected not to include short-term leases (leases with original terms of 12 months or less) or equipment leases, as those amounts are insignificant. The Company’s leases do not provide an implicit rate. The discount rate utilized to determine the present value of lease payments is the Company’s incremental borrowing rate based on the information available at the lease inception date. The incremental borrowing rate is the rate of interest the Company would have to pay to borrow on a collateralized basis over a similar term in an amount equal to the lease payments in a similar economic environment.
| | | | | | | | | | | | | | | | | |
(dollars in thousands) | | | |
| | September 30, 2020 | | December 31, 2019 | | | |
Operating lease right-of-use assets | | $ | 1,032 | | | $ | 1,602 | | | | |
Operating lease liabilities | | 1,032 | | | 1,602 | | | | |
| | | | | | | |
Weighted-average remaining lease term (years) | | | | | | | |
Operating leases | | 2.0 | | 2.4 | | | |
| | | | | | | |
Weighted-average discount rate | | | | | | | |
Operating leases | | 2.0 | % | | 2.0 | % | | | |
The following table shows the future minimum payments of operating leases with initial or remaining terms of one year or more as of September 30, 2020.
| | | | | | | | | | | |
(in thousands) | | | |
Twelve months ended September 30, | | | | | |
2021 | | $ | 558 | | | | |
2022 | | 264 | | | | |
2023 | | 174 | | | | |
2024 | | 0 | | | | |
2025 | | 0 | | | | |
Thereafter | | 0 | | | | |
Total lease payments | | 996 | | | | |
Less: imputed interest | | (22) | | | | |
Total | | $ | 974 | | | | |
Note 7:6: Goodwill
As of SeptemberJune 30, 20202021 and December 31, 2019,2020, the carrying amount of goodwill was $4.7 million. There have been no changes in the carrying amount of goodwill for the three and six months ended SeptemberJune 30, 2020.2021. 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 quantitative test performed as of August 31, 2020. The estimated fair value of the reporting unit exceeded the net carrying value, and therefore no goodwill impairment existed as of that date.
Note 8:7: Servicing Asset
Activity for the servicing asset and the related changes in fair value for the ninethree and six months ended SeptemberJune 30, 20202021 and 20192020 are shown in the table below.
| | | | | | | | | | | | | | | | | | | | |
(in thousands) | | Nine Months Ended | | |
| | September 30, 2020 | | September 30, 2019 | | | | | | |
Beginning balance | | $ | 2,481 | | | $ | 0 | | | | | | | |
Additions | | 709 | | | 0 | | | | | | | |
Changes in fair value | | (372) | | | 0 | | | | | | | |
Ending balance | | $ | 2,818 | | | $ | 0 | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | | | | | | | |
(in thousands) | | Three Months Ended |
| | June 30, 2021 | | June 30, 2020 | | |
Balance, beginning of period | | $ | 3,817 | | | $ | 2,415 | | | |
Additions | | | | | | |
Originated and purchased servicing | | 543 | | | 197 | | | |
Subtractions | | | | | | |
Paydowns | | (154) | | | (90) | | | |
Changes in fair value due to changes in valuation inputs or assumptions used in the valuation model | | (86) | | | 0 | | | |
Balance, end of period | | $ | 4,120 | | | $ | 2,522 | | | |
| | | | | | | | | | | | | | | | | | | | |
(in thousands) | | Six Months Ended | | |
| | June 30, 2021 | | June 30, 2020 | | | | | | |
Balance, beginning of period | | $ | 3,569 | | | $ | 2,481 | | | | | | | |
Additions | | | | | | | | | | |
Originated and purchased servicing | | 946 | | | 310 | | | | | | | |
Subtractions | | | | | | | | | | |
Paydowns | | (324) | | | (269) | | | | | | | |
Changes in fair value due to changes in valuation inputs or assumptions used in the valuation model | | (71) | | | 0 | | | | | | | |
Balance, end of period | | $ | 4,120 | | | $ | 2,522 | | | | | | | |
| | | | | | | | | | |
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 SeptemberJune 30, 20202021 and December 31, 20192020 are shown in the table below.
| (in thousands) | (in thousands) | | | | (in thousands) | | | |
| | | September 30, 2020 | | December 31, 2019 | | | | June 30, 2021 | | December 31, 2020 | |
Loan portfolios serviced for: | Loan portfolios serviced for: | | | | | | Loan portfolios serviced for: | | | | | |
SBA guaranteed loans | SBA guaranteed loans | | $ | 131,525 | | | $ | 103,981 | | | SBA guaranteed loans | | $ | 196,869 | | | $ | 165,961 | | |
| Total | Total | | $ | 131,525 | | | $ | 103,981 | | | Total | | $ | 196,869 | | | $ | 165,961 | | |
|
Loan servicing revenue totaled $0.5 million and $0.9 million for the three and six months ended June 30, 2021 and $0.3 million and $0.8$0.5 million duringfor the three and ninesix months ended SeptemberJune 30, 2020, respectively. There was 0 loan servicing revenue during the three and nine months ended September 30, 2019.
Loan servicing asset revaluation, which represents the change in fair value of the servicing asset, resulted in a $0.1$0.2 million and $0.4 million
downward valuation for the three and six months ended June 30, 2021, respectively, and a $0.1 and $0.3 million downward valuation for the three and ninesix months ended SeptemberJune 30, 2020, respectively. There was 0 loan servicing asset revaluation during the three and nine months ended September 30, 2019.
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 1211 - Fair Value of Financial Instruments for further details.
Note 9:8: Subordinated Debt
In October 2015, the Company entered into a term loan in the principal amount of $10.0 million, evidenced by a term note due 2025 (the “2025 Note”). The 2025 Note bearshad a fixed interest rate of 6.4375% per year, payable quarterly, and iswas scheduled to mature on October 1, 2025. The 2025 Note iswas an unsecured subordinated obligation of the Company and maywas eligible to be repaid, without penalty, on any interest payment date on or after October 15, 2020. The 2025 Note iswas intended to qualify as Tier 2 capital under regulatory guidelines. The Company redeemed the 2025 Note on January 4, 2021.
In September 2016, the Company issued $25.0 million aggregate principal amount of 6.0% Fixed-to-Floating Rate Subordinated Notes due 2026 (the “2026 Notes”) in a public offering. The 2026 Notes initially bear a fixed interest rate of 6.0% per year to, but excluding September 30, 2021, and thereafter a floating rate equal to the then-current three-month LIBOR rate plus 485 basis points. All interest on the 2026 Notes is payable quarterly. The 2026 Notes are scheduled to mature on September 30, 2026. The 2026 Notes are unsecured subordinated obligations of the Company and may be repaid, without penalty, on any interest payment date on or after September 30, 2021. The 2026 Notes are intended to qualify as Tier 2 capital under regulatory guidelines.
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 411 basis points. 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 term notes due 2030 (the “2030 Notes”). The 2030 Notes 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 three-month Term SOFR plus 5.795%). The 2030 Notes are 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 Notes are intended to qualify as Tier 2 capital under regulatory guidelines. The Company used the net proceeds from the issuance of the 2030 Notes to redeem the 2025 Note as discussed above.
The following table presents the principal balance and unamortized debt issuance costs for the 2025 Note, the 2026 Notes, and the 2029 Notes and the 2030 Notes as of SeptemberJune 30, 20202021 and December 31, 2019.2020.
| | | September 30, 2020 | | December 31, 2019 | | June 30, 2021 | | December 31, 2020 |
(in thousands) | (in thousands) | Principal | | Unamortized Debt Issuance Costs | | Principal | | Unamortized Debt Issuance Costs | (in thousands) | Principal | | Unamortized Debt Issuance Costs | | Principal | | Unamortized Debt Issuance Costs |
| 2025 Note | 2025 Note | 10,000 | | | (120) | | | 10,000 | | | (138) | | 2025 Note | 0 | | | 0 | | | 10,000 | | | (114) | |
2026 Notes | 2026 Notes | 25,000 | | | (746) | | | 25,000 | | | (839) | | 2026 Notes | 25,000 | | | (652) | | | 25,000 | | | (715) | |
2029 Notes | 2029 Notes | 37,000 | | | (1,376) | | | 37,000 | | | (1,495) | | 2029 Notes | 37,000 | | | (1,258) | | | 37,000 | | | (1,337) | |
2030 Notes | | 2030 Notes | $ | 10,000 | | | $ | (219) | | | $ | 10,000 | | | $ | (231) | |
Total | Total | $ | 72,000 | | | $ | (2,242) | | | $ | 72,000 | | | $ | (2,472) | | Total | $ | 72,000 | | | $ | (2,129) | | | $ | 82,000 | | | $ | (2,397) | |
Note 10:9: Benefit Plans
Employment Agreement
The Company is party to an employment agreement with its Chief Executive Officer that provides for an annual base salary and an annual bonus, if any, as determined from time to time by the Compensation Committee of our Board of Directors. The annual bonus is to be determined with reference to the achievement of annual performance objectives established by the Compensation Committee for the Chief Executive Officer and other senior officers. The agreement also provides that the Chief Executive Officer may be awarded additional compensation, benefits, or consideration as the Compensation Committee may determine.
The agreement provides for the continuation of salary and certain other benefits for a specified period of time upon termination of his employment under certain circumstances, including his resignation for “good reason” or termination by the Company without “cause” at any time or any termination of his employment for any reason within twelve months following a “change in control,” along with other specific conditions.
2013 Equity Incentive Plan
The 2013 Equity Incentive Plan (the “2013 Plan”) authorizes the issuance of 750,000 shares of the Company’s common stock in the form of equity-based awards to employees, directors, and other eligible persons. Under the terms of the 2013 Plan, the pool of shares available for issuance may be used for available types of equity awards under the 2013 Plan, which includes stock options, stock appreciation rights, restricted stock awards, stock unit awards, and other share-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 2013 Plan.
The Company recorded $0.5$0.6 million and $1.6$1.3 million of share-based compensation expense for the three and ninesix months ended SeptemberJune 30, 2020,2021, respectively, related to awards made under the 2013 Plan. The Company recorded $0.40.5 million and $1.3$1.1 million of share-based compensation expense for the three and ninesix months ended SeptemberJune 30, 2019,2020, respectively, related to awards made under the 2013 Plan.
The following table summarizes the status of the 2013 Plan awards as of SeptemberJune 30, 20202021, and activity for the ninesix months ended SeptemberJune 30, 2020.2021.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Restricted Stock Units | | Weighted-Average Grant Date Fair Value Per Share | | Restricted Stock Awards | | Weighted-Average Grant Date Fair Value Per Share | | Deferred Stock Units | | Weighted-Average Grant Date Fair Value Per Share |
Nonvested at December 31, 2019 | 107,244 | | | $ | 29.03 | | | 0 | | | $ | 0 | | | 0 | | | $ | 0 | |
Granted | 66,855 | | | 27.56 | | | 16,090 | | | 25.58 | | | 10 | | | 17.96 | |
Vested | (48,499) | | | 30.34 | | | (10,630) | | | 25.68 | | | (10) | | | 17.96 | |
Forfeited | 0 | | | 0 | | | (1,638) | | | 27.56 | | | 0 | | | 0 | |
Nonvested at September 30, 2020 | 125,600 | | | $ | 27.74 | | | 3,822 | | | $ | 24.44 | | | 0 | | | $ | 0 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Restricted Stock Units | | Weighted-Average Grant Date Fair Value Per Share | | Restricted Stock Awards | | Weighted-Average Grant Date Fair Value Per Share | | Deferred Stock Units | | Weighted-Average Grant Date Fair Value Per Share |
Nonvested at December 31, 2020 | 112,985 | | | $ | 27.76 | | | 0 | | | $ | 0 | | | 0 | | | $ | 0 | |
Granted | 60,111 | | | 30.42 | | | 13,878 | | | 30.27 | | | 4 | | | 32.53 | |
Cancelled/Forfeited | — | | | — | | | (1,057) | | | 30.13 | | | — | | | — | |
Vested | (35,745) | | | 30.12 | | | (6,479) | | | 30.20 | | | (4) | | | 32.53 | |
| | | | | | | | | | | |
Nonvested at June 30, 2021 | 137,351 | | | $ | 28.32 | | | 6,342 | | | $ | 30.36 | | | 0 | | | $ | 0 | |
At SeptemberJune 30, 2020,2021, the total unrecognized compensation cost related to nonvested awards was $2.6$3.1 million with a weighted-average expense recognition period of 1.8 years.
Directors Deferred Stock Plan
Until January 1, 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 Directors Deferred Stock 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 ninesix months ended SeptemberJune 30, 2020.2021.
| | | | | | | | | |
| | Deferred Stock Rights | |
Outstanding, beginning of period | | 84,50583,835 | | |
Granted | | 640350 | | |
Exercised | | 0 | | |
Outstanding, end of period | | 85,14584,185 | | |
All deferred stock rights granted during the 20202021 period were additional rights issued in lieu of cash dividends payable on outstanding deferred stock rights.
Note 11:10: 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 SeptemberJune 30, 20202021 and December 31, 2019,2020, the Company had outstanding loan commitments totaling approximately $278.7$293.1 million and $254.4$263.9 million, respectively.
In addition, the Company had unfunded commitments to provide capital contributions for on-balance-sheet investments in the amount of $4.8 million as of June 30, 2021.
The Company is also a limited partner in a Small Business Investment Company fund (the “SBIC Fund”). As of SeptemberJune 30, 2020,2021, the Company has committed to contribute up to $1.7$1.1 million of capital to the SBIC Fund.
Capital Commitments
Capital expenditures contracted to at the balance sheet date but not yet recognized in the financial statements are associated with the construction of premises intended to house our future corporate headquarters. The Company has entered into construction-related contracts and change orders in the amount of $65.1$66.4 million. As of SeptemberJune 30, 2020, $44.72021, $25.4 million of such contract commitments had not yet been incurred. These commitments are due within two years.twelve months.
Note 12:11: 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 without relying exclusively on quoted prices for specific investment securities but also on the investment securities’ relationship to other benchmark quoted 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 SeptemberJune 30, 20202021 or December 31, 2019.2020.
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).
Servicing Asset
Fair value is based on a loan-by-loan basis taking into consideration the original maturity of the loans, the current age of the loans and the remaining term to maturity. The valuation methodology utilized for the servicing assets 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 value of interest rate swap agreements is 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 interest rate lock commitments (“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 SeptemberJune 30, 20202021 and December 31, 2019.2020.
| | | September 30, 2020 Fair Value Measurements Using | | June 30, 2021 Fair Value Measurements Using |
(in thousands) | (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) | (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 | U.S. Government-sponsored agencies | | $ | 63,682 | | | $ | 0 | | | $ | 63,682 | | | $ | 0 | | U.S. Government-sponsored agencies | | $ | 57,135 | | | $ | 0 | | | $ | 57,135 | | | $ | 0 | |
Municipal securities | Municipal securities | | 86,421 | | | 0 | | | 86,421 | | | 0 | | Municipal securities | | 78,438 | | | 0 | | | 78,438 | | | 0 | |
Agency mortgage-backed securities | Agency mortgage-backed securities | | 253,292 | | | 0 | | | 253,292 | | | 0 | | Agency mortgage-backed securities | | 444,494 | | | 0 | | | 444,494 | | | 0 | |
Private label mortgage-backed securities | Private label mortgage-backed securities | | 72,626 | | | 72,626 | | | 0 | | Private label mortgage-backed securities | | 29,363 | | | 0 | | 29,363 | | | 0 | |
Asset-backed securities | Asset-backed securities | | 4,921 | | | 0 | | | 4,921 | | | 0 | | Asset-backed securities | | 5,005 | | | 0 | | | 5,005 | | | 0 | |
Corporate securities | Corporate securities | | 47,369 | | | 0 | | | 47,369 | | | 0 | | Corporate securities | | 49,084 | | | 0 | | | 49,084 | | | 0 | |
| Total available-for-sale securities | Total available-for-sale securities | | 528,311 | | | 0 | | | 528,311 | | | 0 | | Total available-for-sale securities | | 663,519 | | | 0 | | | 663,519 | | | 0 | |
Loans held-for-sale (mandatory pricing agreements) | Loans held-for-sale (mandatory pricing agreements) | | 35,321 | | | 0 | | | 35,321 | | | 0 | | Loans held-for-sale (mandatory pricing agreements) | | 16,870 | | | 0 | | | 16,870 | | | 0 | |
Servicing asset | Servicing asset | | 2,818 | | | 0 | | | 0 | | | 2,818 | | Servicing asset | | 4,120 | | | 0 | | | 0 | | | 4,120 | |
| Interest rate swap agreements | Interest rate swap agreements | | (32,492) | | | 0 | | | (32,492) | | | 0 | | Interest rate swap agreements | | (20,286) | | | 0 | | | (20,286) | | | 0 | |
Forward contracts | Forward contracts | | (485) | | | (485) | | | 0 | | | 0 | | Forward contracts | | (17) | | | (17) | | | 0 | | | 0 | |
IRLCs | IRLCs | | 3,116 | | | 0 | | | 0 | | | 3,116 | | IRLCs | | 818 | | | 0 | | | 0 | | | 818 | |
| | | December 31, 2019 Fair Value Measurements Using | | December 31, 2020 Fair Value Measurements Using |
(in thousands) | (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) | (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 | U.S. Government-sponsored agencies | | $ | 75,872 | | | $ | 0 | | | $ | 75,872 | | | $ | 0 | | U.S. Government-sponsored agencies | | $ | 60,545 | | | $ | 0 | | | $ | 60,545 | | | $ | 0 | |
Municipal securities | Municipal securities | | 97,652 | | | 0 | | | 97,652 | | | 0 | | Municipal securities | | 82,489 | | | 0 | | | 82,489 | | | 0 | |
Agency mortgage-backed securities | Agency mortgage-backed securities | | 261,440 | | | 0 | | | 261,440 | | | 0 | | Agency mortgage-backed securities | | 243,921 | | | 0 | | | 243,921 | | | 0 | |
Private label mortgage-backed securities | Private label mortgage-backed securities | | 63,613 | | | 0 | | | 63,613 | | | 0 | | Private label mortgage-backed securities | | 58,116 | | | 0 | | | 58,116 | | | 0 | |
Asset-backed securities | Asset-backed securities | | 4,955 | | | 0 | | | 4,955 | | | 0 | | Asset-backed securities | | 4,961 | | | 0 | | | 4,961 | | | 0 | |
Corporate securities | Corporate securities | | 37,320 | | | 0 | | | 37,320 | | | 0 | | Corporate securities | | 47,596 | | | 0 | | | 47,596 | | | 0 | |
| Total available-for-sale securities | Total available-for-sale securities | | 540,852 | | | 0 | | | 540,852 | | | 0 | | Total available-for-sale securities | | 497,628 | | | 0 | | | 497,628 | | | 0 | |
Loans held-for-sale (mandatory pricing agreements) | Loans held-for-sale (mandatory pricing agreements) | | 56,097 | | | 0 | | | 56,097 | | | 0 | | Loans held-for-sale (mandatory pricing agreements) | | 26,341 | | | 0 | | | 26,341 | | | 0 | |
Servicing asset | Servicing asset | | 2,481 | | | 0 | | | 0 | | | 2,481 | | Servicing asset | | 3,569 | | | 0 | | | 0 | | | 3,569 | |
| Interest rate swap agreements | Interest rate swap agreements | | (37,786) | | | 0 | | | (37,786) | | | 0 | | Interest rate swap agreements | | (17,606) | | | 0 | | | (17,606) | | | 0 | |
Forward contracts | Forward contracts | | (153) | | | (153) | | | 0 | | | 0 | | Forward contracts | | (640) | | | (640) | | | 0 | | | 0 | |
IRLCs | IRLCs | | 910 | | | 0 | | | 0 | | | 910 | | IRLCs | | 3,361 | | | 0 | | | 0 | | | 3,361 | |
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 and ninesix months ended SeptemberJune 30, 20202021 and 2019.2020.
| | | | | | | | | | | | | | | | |
| | | | Three Months Ended |
(in thousands) | | | | Servicing Asset | | Interest Rate Lock Commitments |
Balance, July 1, 2020 | | | | $ | 2,522 | | | $ | 282 | |
Total realized gains (losses) | | | | | | |
Additions | | | | 399 | | | 0 | |
Change in fair value | | | | (103) | | | 2,834 | |
| | | | | | |
Balance, September 30, 2020 | | | | 2,818 | | | 3,116 | |
| | | | | | |
Balance as of July 1, 2019 | | | | $ | 0 | | | $ | 1,209 | |
Total realized gains | | | | | | |
| | | | | | |
Change in fair value | | | | 0 | | | 275 | |
| | | | | | |
Balance, September 30, 2019 | | | | $ | 0 | | | $ | 1,484 | |
29 | | | | | | | | | | | | | | | | |
| | | | Three Months Ended |
(in thousands) | | | | Servicing Asset | | Interest Rate Lock Commitments |
Balance, April 1, 2021 | | | | $ | 3,817 | | | $ | 1,110 | |
Total realized gains | | | | | | |
Additions | | | | 543 | | | 0 | |
Paydowns | | | | (154) | | | 0 | |
Change in fair value | | | | (86) | | | (292) | |
| | | | | | |
Balance, June 30, 2021 | | | | 4,120 | | | 818 | |
| | | | | | |
Balance as of April 1, 2020 | | | | $ | 2,415 | | | $ | 2,064 | |
Total realized gains | | | | | | |
Additions | | | | 197 | | | 0 | |
Paydowns | | | | 0 | | | 0 | |
Change in fair value | | | | (90) | | | (1,782) | |
| | | | | | |
Balance, June 30, 2020 | | | | $ | 2,522 | | | $ | 282 | |
| | | | | | | | | | | | | | | | |
| | | | Six Months Ended |
(in thousands) | | | | Servicing Asset | | Interest Rate Lock Commitments |
Balance, January 1, 2021 | | | | $ | 3,569 | | | $ | 3,361 | |
Total realized gains | | | | | | |
Additions | | | | 946 | | | 0 | |
Paydowns | | | | (324) | | | 0 | |
Change in fair value | | | | (71) | | | (2,543) | |
| | | | | | |
Balance, June 30, 2021 | | | | 4,120 | | | 818 | |
| | | | | | |
Balance as of January 1, 2020 | | | | $ | 2,481 | | | $ | 910 | |
Total realized gains | | | | | | |
Additions | | | | 310 | | | 0 | |
Paydowns | | | | 0 | | | 0 | |
Change in fair value | | | | (269) | | | (628) | |
| | | | | | |
Balance, June 30, 2020 | | | | $ | 2,522 | | | $ | 282 | |
| | | | | | | | | | | | | | | | |
| | | | | | |
(in thousands) | | Nine Months Ended | | |
| | Servicing Asset | | Interest Rate Lock Commitments | | |
Balance January 1, 2020 | | $ | 2,481 | | | $ | 910 | | | |
Total realized gains (losses) | | | | | | |
Additions | | 709 | | 0 | | | |
Change in fair value | | (372) | | | 2,206 | | | |
| | | | | | |
Balance, September 30, 2020 | | $ | 2,818 | | | 3,116 | | | |
| | | | | | |
Balance as of January 1, 2019 | | $ | 0 | | | $ | 389 | | | |
Total realized gains | | | | | | |
Change in fair value | | 0 | | | 1,095 | | | |
| | | | | | |
Balance, September 30, 2019 | | $ | 0 | | | $ | 1,484 | | | |
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.
Impaired Loans (Collateral Dependent)
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 SeptemberJune 30, 20202021 and December 31, 2019.2020.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | September 30, 2020 |
(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 | | $ | 2,102 | | | $ | — | | | $ | — | | | $ | 2,102 | |
| | | | | | | | |
Other real estate owned | | 0 | | | — | | | — | | | 0 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | June 30, 2021 |
(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 | | 4,035 | | | — | | | — | | | 4,035 | |
| | | | | | | | |
| | | | | | | | |
| | | December 31, 2019 | | December 31, 2020 |
(in thousands) | (in thousands) | | Fair Value Measurements Using | (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) | | | 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 | Impaired loans | | $ | 3,019 | | | $ | — | | | $ | — | | | $ | 3,019 | | Impaired loans | | $ | 4,026 | | | $ | — | | | $ | — | | | $ | 4,026 | |
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) | (dollars in thousands) | | Fair Value at September 30, 2020 | | Valuation Technique | | Significant Unobservable Inputs | | Range | | Weighted-Average Range | (dollars in thousands) | | Fair Value at June 30, 2021 | | Valuation Technique | | Significant Unobservable Inputs | | Range | | Weighted-Average Range |
| Impaired loans | Impaired loans | | $ | 2,102 | | | Fair value of collateral | | Discount for type of property and current market conditions | | 8% - 20% | | 15% | Impaired loans | | $ | 4,035 | | | Fair value of collateral | | Discount for type of property and current market conditions | | 10% | | 10% |
IRLCs | IRLCs | | 3,116 | | | Discounted cash flow | | Loan closing rates | | 45% - 100% | | 84% | IRLCs | | 818 | | | Discounted cash flow | | Loan closing rates | | 63% - 100% | | 92% |
Servicing asset | Servicing asset | | 2,818 | | | Discounted cash flow | | Prepayment speeds | | 0% - 25% | | 12.8% | Servicing asset | | 3,817 | | | Discounted cash flow | | Prepayment speeds
Discount rate | | 0% - 25%
10% | | 12.6%
10% |
Other real estate owned | | 0 | | | Fair value of collateral | | Discount to reflect current market conditions | | 100% | | 100% | |
|
| (dollars in thousands) | (dollars in thousands) | | Fair Value at December 31, 2019 | | Valuation Technique | | Significant Unobservable Inputs | | Range | | Weighted-Average Range | (dollars in thousands) | | Fair Value at December 31, 2020 | | Valuation Technique | | Significant Unobservable Inputs | | Range | | Weighted-Average Range |
Impaired loans | Impaired loans | | $ | 3,019 | | | Fair value of collateral | | Discount for type of property and current market conditions | | 10% | | 10% | Impaired loans | | $ | 4,026 | | | Fair value of collateral | | Discount for type of property and current market conditions | | 10% | | 10% |
| IRLCs | IRLCs | | 910 | | | Discounted cash flow | | Loan closing rates | | 50% - 100% | | 84% | IRLCs | | 3,361 | | | Discounted cash flow | | Loan closing rates | | 44% - 100% | | 87% |
Servicing asset | Servicing asset | | 2,481 | | | Discounted cash flow | | Prepayment speeds | | 0% - 25% | | 13.5% | Servicing asset | | 3,569 | | |
Discounted cash flow | | Prepayment speeds
Discount rate | | 0% - 25%
10% | | 12.1%
10% |
|
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 municipal securities and corporate securities. Matrix pricing is a mathematical technique widely used in the banking industry to value investment securities without relying exclusively on quoted prices for
specific investment securities but also on the investment securities’ relationship to other benchmark quoted 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 SeptemberJune 30, 20202021 or December 31, 2019.2020.
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 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.
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 SeptemberJune 30, 20202021 and December 31, 2019.2020.
The following tables present the carrying value and estimated fair value of all financial assets and liabilities at SeptemberJune 30, 20202021 and December 31, 2019.2020.
| | | September 30, 2020 Fair Value Measurements Using | | June 30, 2021 Fair Value Measurements Using |
(in thousands) | (in thousands) | | Carrying Amount | | Fair Value | | Quoted Prices In Active Market for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | (in thousands) | | Carrying Amount | | Fair Value | | Quoted Prices In Active Market for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
Cash and cash equivalents | Cash and cash equivalents | | $ | 488,453 | | | $ | 488,453 | | | $ | 488,453 | | | $ | 0 | | | $ | 0 | | Cash and cash equivalents | | $ | 328,797 | | | $ | 328,797 | | | $ | 328,797 | | | $ | 0 | | | $ | 0 | |
| Securities held-to-maturity | Securities held-to-maturity | | 68,254 | | | 69,176 | | | 0 | | | 69,176 | | | 0 | | Securities held-to-maturity | | 65,659 | | | 68,058 | | | 0 | | | 68,058 | | | 0 | |
Loans held-for-sale (best efforts pricing agreements) | Loans held-for-sale (best efforts pricing agreements) | | 40,887 | | | 40,887 | | | — | | | 40,887 | | | — | | Loans held-for-sale (best efforts pricing agreements) | | 10,717 | | | 10,717 | | | 0 | | | 10,717 | | | 0 | |
Net loans | Net loans | | 2,985,997 | | | 3,049,741 | | | 0 | | | 0 | | | 3,049,741 | | Net loans | | 2,929,542 | | | 2,975,406 | | | 0 | | | 0 | | | 2,975,406 | |
Accrued interest receivable | Accrued interest receivable | | 17,768 | | | 17,768 | | | 17,768 | | | 0 | | | 0 | | Accrued interest receivable | | 16,345 | | | 16,345 | | | 16,345 | | | 0 | | | 0 | |
Federal Home Loan Bank of Indianapolis stock | Federal Home Loan Bank of Indianapolis stock | | 25,650 | | | 25,650 | | | 0 | | | 25,650 | | | 0 | | Federal Home Loan Bank of Indianapolis stock | | 25,650 | | | 25,650 | | | 0 | | | 25,650 | | | 0 | |
Deposits | Deposits | | 3,372,391 | | | 3,417,780 | | | 1,650,210 | | | 0 | | | 1,767,570 | | Deposits | | 3,206,147 | | | 3,229,241 | | | 1,799,490 | | | 0 | | | 1,429,751 | |
Advances from Federal Home Loan Bank | Advances from Federal Home Loan Bank | | 514,914 | | | 545,751 | | | 0 | | | 545,751 | | | 0 | | Advances from Federal Home Loan Bank | | 514,919 | | | 533,237 | | | 0 | | | 533,237 | | | 0 | |
Subordinated debt | Subordinated debt | | 69,758 | | | 72,333 | | | 62,146 | | | 10,187 | | | 0 | | Subordinated debt | | 69,871 | | | 75,456 | | | 65,294 | | | 10,162 | | | 0 | |
Accrued interest payable | Accrued interest payable | | 1,249 | | | 1,249 | | | 1,249 | | | 0 | | | 0 | | Accrued interest payable | | 1,132 | | | 1,132 | | | 1,132 | | | 0 | | | 0 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2019 Fair Value Measurements Using |
(in thousands) | | Carrying Amount | | Fair Value | | Quoted Prices In Active Market for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
Cash and cash equivalents | | $ | 327,361 | | | $ | 327,361 | | | $ | 327,361 | | | $ | 0 | | | $ | 0 | |
| | | | | | | | | | |
Securities held-to-maturity | | 61,878 | | | 62,560 | | | 0 | | | 62,560 | | | 0 | |
| | | | | | | | | | |
Net loans | | 2,941,707 | | | 2,876,688 | | | 0 | | | 0 | | | 2,876,688 | |
Accrued interest receivable | | 18,607 | | | 18,607 | | | 18,607 | | | 0 | | | 0 | |
Federal Home Loan Bank of Indianapolis stock | | 25,650 | | | 25,650 | | | 0 | | | 25,650 | | | 0 | |
Deposits | | 3,153,963 | | | 3,232,065 | | | 1,002,141 | | | 0 | | | 2,229,924 | |
Advances from Federal Home Loan Bank | | 514,910 | | | 520,950 | | | 0 | | | 520,950 | | | 0 | |
Subordinated debt | | 69,528 | | | 75,206 | | | 64,996 | | | 10,210 | | | 0 | |
Accrued interest payable | | 3,767 | | | 3,767 | | | 3,767 | | | 0 | | | 0 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2020 Fair Value Measurements Using |
(in thousands) | | Carrying Amount | | Fair Value | | Quoted Prices In Active Market for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
Cash and cash equivalents | | $ | 419,806 | | | $ | 419,806 | | | $ | 419,806 | | | $ | 0 | | | $ | 0 | |
| | | | | | | | | | |
Securities held-to-maturity | | 68,223 | | | 69,452 | | | 0 | | | 69,452 | | | 0 | |
Loans held-for-sale (best efforts pricing agreements) | | 13,243 | | | 13,243 | | | 0 | | | 13,243 | | | 0 | |
Net loans | | 3,029,747 | | | 3,084,375 | | | 0 | | | 0 | | | 3,084,375 | |
Accrued interest receivable | | 17,416 | | | 17,416 | | | 17,416 | | | 0 | | | 0 | |
Federal Home Loan Bank of Indianapolis stock | | 25,650 | | | 25,650 | | | 0 | | | 25,650 | | | 0 | |
Deposits | | 3,270,885 | | | 3,307,038 | | | 1,679,164 | | | 0 | | | 1,627,874 | |
Advances from Federal Home Loan Bank | | 514,916 | | | 541,945 | | | 0 | | | 541,945 | | | 0 | |
Subordinated debt | | 79,603 | | | 83,682 | | | 63,325 | | | 20,357 | | | 0 | |
Accrued interest payable | | 1,439 | | | 1,439 | | | 1,439 | | | 0 | | | 0 | |
Note 13:12: Mortgage Banking Activities
The Company’s residential real estate lending business originates mortgage loans for customers and typically sells a majority of the originated loans into the secondary market. For most of the mortgages it sells in the secondary market, the Company hedges 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 will be sold into the secondary market. To facilitate the hedging of the loans, the Company has 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 1413 for further information on derivative financial instruments.
During the three months ended SeptemberJune 30, 20202021 and 2019,2020, the Company originated mortgage loans held-for-sale of $216.0$163.3 million and $210.2$211.9 million, respectively, and sold $203.7$151.5 million and $203.7$229.2 million of mortgage loans, respectively, into the secondary market. During the ninesix months ended SeptemberJune 30, 20202021 and 2019,2020, the Company originated mortgage loans held-for-sale of $431.4$387.2 million and $430.5$427.3 million, respectively, and sold $429.3$393.1 million and $415.2$454.7 million of mortgage loans, respectively, into the secondary market.
The following table presents the components of income from mortgage banking activities for the three and ninesix months ended SeptemberJune 30, 20202021 and 2019.2020.
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
(in thousands) | (in thousands) | 2020 | | 2019 | | 2020 | | 2019 | (in thousands) | 2021 | | 2020 | | 2021 | | 2020 |
Gain on loans sold | Gain on loans sold | $ | 6,441 | | | $ | 3,606 | | | $ | 14,948 | | | $ | 7,608 | | Gain on loans sold | $ | 3,587 | | | $ | 4,164 | | | $ | 11,086 | | | $ | 8,507 | |
Gain (loss) resulting from the change in fair value of loans held-for-sale | 823 | | | (100) | | | (116) | | | (452) | | |
Gain resulting from the change in fair value of derivatives | 2,366 | | | 801 | | | 1,874 | | | 1,432 | | |
(Loss) gain resulting from the change in fair value of loans held-for-sale | | (Loss) gain resulting from the change in fair value of loans held-for-sale | 118 | | | (1,255) | | | (744) | | | (939) | |
(Loss) gain resulting from the change in fair value of derivatives | | (Loss) gain resulting from the change in fair value of derivatives | (1,031) | | | 499 | | | (1,918) | | | (492) | |
Net revenue from mortgage banking activities | Net revenue from mortgage banking activities | $ | 9,630 | | | $ | 4,307 | | | $ | 16,706 | | | $ | 8,588 | | Net revenue from mortgage banking activities | $ | 2,674 | | | $ | 3,408 | | | $ | 8,424 | | | $ | 7,076 | |
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.
Note 14:13: 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 enters into forward contracts for the future delivery of mortgage loans to third-party investors and enters into IRLCs with potential borrowers to fund specific mortgage loans that will be sold into the secondary market. The forward contracts are 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, less any ineffectiveness, 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 SeptemberJune 30, 20202021 and December 31, 2019.2020.
| (in thousands) | (in thousands) | | Carrying amount of the hedged asset | | Cumulative amount of fair value hedging adjustment included in the carrying amount of the hedged assets | (in thousands) | | Carrying amount of the hedged asset | | Cumulative 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 included | Line item in the condensed consolidated balance sheets in which the hedged item is included | | September 30, 2020 | | December 31, 2019 | | September 30, 2020 | | December 31, 2019 | Line item in the condensed consolidated balance sheets in which the hedged item is included | | June 30, 2021 | | December 31, 2020 | | June 30, 2021 | | December 31, 2020 |
Loans | | $ | 0 | | | $ | 474,957 | | | $ | 0 | | | $ | 21,440 | | |
| Securities available-for-sale (1) | Securities available-for-sale (1) | | 134,949 | | | 151,538 | | | 6,595 | | | 2,802 | | Securities available-for-sale (1) | | 77,363 | | | 124,210 | | | 2,834 | | | 6,064 | |
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(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. At both September 30, 2020 and December 31, 2019, the amounts of theThe designated hedged items were $50.0 million and $88.2 million.million, at June 30, 2021 and December 31, 2020.
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 SeptemberJune 30, 20202021 and December 31, 2019,2020, identified by the underlying interest rate-sensitive instruments.
| (dollars in thousands)
September 30, 2020 | | Notional Value | | Weighted- Average Remaining Maturity (years) | | Weighted-Average Ratio | |
(dollars in thousands)
June 30, 2021 | | (dollars in thousands)
June 30, 2021 | | Notional Value | | Weighted- Average Remaining Maturity (years) | | Weighted-Average Ratio |
Instruments Associated With | Instruments Associated With | | Notional Value | | Weighted- Average Remaining Maturity (years) | | Fair Value | | Receive | | Pay | Instruments Associated With | | Fair Value | | Receive | | Pay |
| Securities available-for-sale | Securities available-for-sale | | $ | 88,200 | | | 3.4 | | $ | (6,610) | | | 3-month LIBOR | | 2.54 | % | Securities available-for-sale | | $ | 50,000 | | | 3.3 | | $ | (2,835) | | | 3-month LIBOR | | 2.33 | % |
Total at September 30, 2020 | | $ | 88,200 | | | 3.4 | | $ | (6,610) | | | 3-month LIBOR | | 2.54 | % | |
Total at June 30, 2021 | | Total at June 30, 2021 | | $ | 50,000 | | | 3.3 | | $ | (2,835) | | | 3-month LIBOR | | 2.33 | % |
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(dollars in thousands)
December 31, 2019 | | Notional Value | | Weighted- Average Remaining Maturity (years) | | | | Weighted-Average Ratio |
Instruments Associated With | | | | Fair Value | | Receive | | Pay |
Loans | | $ | 427,446 | | | 5.5 | | $ | (21,551) | | | 3-month LIBOR | | 2.86 | % |
Securities available-for-sale | | 88,200 | | | 4.1 | | (2,806) | | | 3-month LIBOR | | 2.54 | % |
Total at December 31, 2019 | | $ | 515,646 | | | 5.3 | | $ | (24,357) | | | 3-month LIBOR | | 2.80 | % |
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In March 2021, the Company terminated fair value hedging relationships with a notional value of $38.2 million associated with agency mortgage-backed securities available-for-sale, which resulted in swap termination payments to counterparties totaling $1.9 million. The corresponding securities fair value hedging adjustment as of the date of termination is being amortized over the remaining lives of the designated securities. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(dollars in thousands)
December 31, 2020 | | Notional Value | | Weighted- Average Remaining Maturity (years) | | | | Weighted-Average Ratio |
Instruments Associated With | | | | Fair Value | | Receive | | Pay |
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Securities available-for-sale | | 88,200 | | | 3.1 | | (6,072) | | | 3-month LIBOR | | 2.54 | % |
Total at December 31, 2020 | | $ | 88,200 | | | 3.1 | | $ | (6,072) | | | 3-month LIBOR | | 2.54 | % |
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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. As of September 30, 2020, the remaining unamortized loan fair value hedging adjustment was $44.3 million and the remaining lives of the designated loans, which have a weighted-averageweighted average term to maturity of 13.4 years.12.61 years as of June 30, 2021.
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 SeptemberJune 30, 20202021 and December 31, 2019.2020.
| (dollars in thousands)
September 30, 2020 | | Notional | | Weighted- Average Remaining Maturity | | Weighted-Average Ratio | |
(dollars in thousands)
June 30, 2021 | | (dollars in thousands)
June 30, 2021 | | Notional | | Weighted- Average Remaining Maturity | | Weighted-Average Ratio |
Cash Flow Hedges | Cash Flow Hedges | | Value | | (years) | | Fair Value | | Receive | | Pay | Cash Flow Hedges | | Value | | (years) | | Fair Value | | Receive | | Pay |
Interest rate swaps | Interest rate swaps | | $ | 110,000 | | | 6.3 | | $ | (17,177) | | | 3-month LIBOR | | 2.88 | % | Interest rate swaps | | $ | 110,000 | | | 5.6 | | $ | (11,349) | | | 3-month LIBOR | | 2.88 | % |
Interest rate swaps | Interest rate swaps | | 100,000 | | | 3.2 | | (8,705) | | | 1-month LIBOR | | 2.88 | % | Interest rate swaps | | 100,000 | | | 2.5 | | (6,103) | | | 1-month LIBOR | | 2.88 | % |
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(dollars in thousands)
December 31, 2019 | | Notional | | Weighted- Average Remaining Maturity | | | | Weighted-Average Ratio |
Cash Flow Hedges | | Value | | (years) | | Fair Value | | Receive | | Pay |
Interest rate swaps | | $ | 110,000 | | | 7.1 | | $ | (8,390) | | | 3-month LIBOR | | 2.88 | % |
Interest rate swaps | | 100,000 | | | 4.0 | | (5,040) | | | 1-month LIBOR | | 2.88 | % |
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(dollars in thousands)
December 31, 2020 | | Notional | | Weighted- Average Remaining Maturity | | | | Weighted-Average Ratio |
Cash Flow Hedges | | Value | | (years) | | Fair Value | | Receive | | Pay |
Interest rate swaps | | $ | 110,000 | | | 6.1 | | $ | (15,727) | | | 3-month LIBOR | | 2.88 | % |
Interest rate swaps | | 100,000 | | | 3.0 | | (7,951) | | | 1-month LIBOR | | 2.88 | % |
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These derivative financial instruments were entered into for the purpose of managing the interest rate risk of certain assets and liabilities. The Company pledged $33.7$21.0 million and $42.3$30.6 million of cash collateral to counterparties as security for its obligations related to these interest rate swap transactions at SeptemberJune 30, 20202021 and December 31, 2019,2020, respectively. Collateral posted and received is dependent on the market valuation of the underlying hedges.
The following table presents the notional amount and fair value of interest rate swaps, IRLCs and forward contracts utilized by the Company at SeptemberJune 30, 20202021 and December 31, 2019.2020.
| | | | September 30, 2020 | | December 31, 2019 | | | June 30, 2021 | | December 31, 2020 |
(in thousands) | (in thousands) | | Notional Amount | | Fair Value | | Notional Amount | | Fair Value | (in thousands) | | Notional Amount | | Fair Value | | Notional Amount | | Fair Value |
Asset Derivatives | Asset Derivatives | | | | | | | | | Asset Derivatives | | | | | | | | |
| Derivatives not designated as hedging instruments | Derivatives not designated as hedging instruments | | | | | | | | | Derivatives not designated as hedging instruments | | | | | | | | |
IRLCs | IRLCs | | $ | 114,546 | | | $ | 3,116 | | | $ | 56,256 | | | $ | 910 | | IRLCs | | $ | 47,493 | | | $ | 818 | | | $ | 108,095 | | | $ | 3,361 | |
| Total contracts | Total contracts | | $ | 114,546 | | | $ | 3,116 | | | $ | 56,256 | | | $ | 910 | | Total contracts | | $ | 47,493 | | | $ | 818 | | | $ | 108,095 | | | $ | 3,361 | |
Liability Derivatives | Liability Derivatives | | | | | | | | | Liability Derivatives | | | | | | | | |
Derivatives designated as hedging instruments | Derivatives designated as hedging instruments | | Derivatives designated as hedging instruments | |
Interest rate swaps associated with loans | Interest rate swaps associated with loans | | $ | 0 | | | $ | 0 | | | $ | 427,446 | | | $ | (21,551) | | Interest rate swaps associated with loans | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | |
Interest rate swaps associated with securities available-for-sale | Interest rate swaps associated with securities available-for-sale | | 88,200 | | | (6,610) | | | 88,200 | | | (2,806) | | Interest rate swaps associated with securities available-for-sale | | 50,000 | | | (2,835) | | | 88,200 | | | (6,072) | |
Interest rate swaps associated with liabilities | Interest rate swaps associated with liabilities | | 210,000 | | | (25,882) | | | 210,000 | | | (13,429) | | Interest rate swaps associated with liabilities | | 210,000 | | | (17,451) | | | 210,000 | | | (23,678) | |
Derivatives not designated as hedging instruments | Derivatives not designated as hedging instruments | | Derivatives not designated as hedging instruments | |
Forward contracts | Forward contracts | | 118,000 | | | (485) | | | 115,000 | | | (153) | | Forward contracts | | 46,750 | | | (17) | | | 107,500 | | | (640) | |
| Total contracts | Total contracts | | $ | 416,200 | | | $ | (32,977) | | | $ | 840,646 | | | $ | (37,939) | | Total contracts | | $ | 306,750 | | | $ | (20,303) | | | $ | 405,700 | | | $ | (30,390) | |
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 and ninesix months ended SeptemberJune 30, 20202021 and 2019.2020.
| | | | Amount of Gain (Loss )Recognized in Other Comprehensive Income (Loss) in The Three Months Ended | | Amount of Loss Recognized in Other Comprehensive Income (Loss) in The Nine Months Ended | | | Amount of Gain (Loss )Recognized in Other Comprehensive Income Loss in The Three Months Ended | | Amount of Loss Recognized in Other Comprehensive Income Gain (Loss) in The Six Months Ended |
(in thousands) | (in thousands) | | September 30, 2020 | | September 30, 2019 | | September 30, 2020 | | September 30, 2019 | (in thousands) | | June 30, 2021 | | June 30, 2020 | | June 30, 2021 | | June 30, 2020 |
| Interest rate swap agreements | Interest rate swap agreements | | $ | 1,514 | | | $ | (3,225) | | | $ | (12,453) | | | $ | (12,689) | | Interest rate swap agreements | | $ | (54) | | | $ | (509) | | | $ | 6,226 | | | $ | (13,967) | |
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 and ninesix months ended SeptemberJune 30, 20202021 and 2019.2020.
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| | Amount of Gain / (Loss) Recognized in the Three Months Ended | | Amount of Gain / (Loss) Recognized in the Nine Months Ended |
(in thousands) | | September 30, 2020 | | September 30, 2019 | | September 30, 2020 | | September 30, 2019 |
Asset Derivatives | | | | | | | | |
Derivatives not designated as hedging instruments | | | | | | | | |
IRLCs | | $ | 2,834 | | | $ | 275 | | | $ | 2,206 | | | $ | 1,095 | |
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Liability Derivatives | | | | | | | | |
Derivatives not designated as hedging instruments | | | | | | | | |
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Forward contracts | | $ | (468) | | | $ | 526 | | | $ | (332) | | | $ | 337 | |
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| | Amount of Gain / (Loss) Recognized in the Three Months Ended | | Amount of Gain / (Loss) Recognized in the Six Months Ended |
(in thousands) | | June 30, 2021 | | June 30, 2020 | | June 30, 2021 | | June 30, 2020 |
Asset Derivatives | | | | | | | | |
Derivatives not designated as hedging instruments | | | | | | | | |
IRLCs | | $ | (292) | | | $ | (1,781) | | | $ | (2,541) | | | $ | (628) | |
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Liability Derivatives | | | | | | | | |
Derivatives not designated as hedging instruments | | | | | | | | |
IRLCs | | 0 | | | 0 | | | 0 | | | 0 | |
Forward contracts | | $ | (738) | | | $ | 2,281 | | | $ | 623 | | | $ | 136 | |
The following table presents the effects of the Company’s interest rate swap agreements on the condensed consolidated statements of income during the three and ninesix months ended SeptemberJune 30, 20202021 and 2019.2020.
| (in thousands)
Line item in the condensed consolidated statements of income | (in thousands)
Line item in the condensed consolidated statements of income | | Three Months Ended | | Nine Months Ended | (in thousands)
Line item in the condensed consolidated statements of income | | Three Months Ended | | Six Months Ended |
| September 30, 2020 | | September 30, 2019 | | September 30, 2020 | | September 30, 2019 | | June 30, 2021 | | June 30, 2020 | | June 30, 2021 | | June 30, 2020 |
Interest income | Interest income | | | | | | | | | Interest income | | | | | | | | |
Loans | Loans | | $ | 0 | | | $ | (521) | | | $ | (2,445) | | | $ | (785) | | Loans | | $ | 0 | | | $ | (1,221) | | | $ | 0 | | | $ | (2,445) | |
Securities - taxable | Securities - taxable | | (229) | | | (42) | | | (479) | | | (59) | | Securities - taxable | | 0 | | | (159) | | | (253) | | | (250) | |
Securities - non-taxable | Securities - non-taxable | | (242) | | | 0 | | | (472) | | | 72 | | Securities - non-taxable | | (271) | | | (164) | | | (537) | | | (230) | |
Total interest income | Total interest income | | (471) | | | (563) | | | (3,396) | | | (772) | | Total interest income | | (271) | | | (1,544) | | | (790) | | | (2,925) | |
Interest expense | Interest expense | | | | | | | | | Interest expense | | | | | | | | |
Deposits | Deposits | | 685 | | | 161 | | | 1,585 | | | 355 | | Deposits | | 692 | | | 593 | | | 1,370 | | | 899 | |
Other borrowed funds | Other borrowed funds | | 721 | | | 136 | | | 1,632 | | | 249 | | Other borrowed funds | | 753 | | | 589 | | | 1,483 | | | 911 | |
Total interest expense | Total interest expense | | 1,406 | | | 297 | | | 3,217 | | | 604 | | Total interest expense | | 1,445 | | | 1,182 | | | 2,853 | | | 1,810 | |
Net interest income | Net interest income | | $ | (1,877) | | | $ | (860) | | | $ | (6,613) | | | $ | (1,376) | | Net interest income | | $ | (1,716) | | | $ | (2,726) | | | $ | (3,643) | | | $ | (4,735) | |
Note 15:14: Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive loss, included in stockholders' equity, for the ninesix months ended SeptemberJune 30, 20202021 and 2019,2020, respectively, are presented in the table below.
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(in thousands) | | Available-For-Sale Securities | | Cash Flow Hedges | | Total |
Balance, January 1, 2020 | | $ | (4,388) | | | $ | (9,803) | | | $ | (14,191) | |
Net change in unrealized gain (loss) | | 6,187 | | | (12,453) | | | (6,266) | |
Reclassification of gain realized and included in earnings | | (139) | | | 0 | | | (139) | |
Accumulated other comprehensive income (loss) before income tax | | 1,660 | | | (22,256) | | | (20,596) | |
Income tax provision (benefit) | | 2,096 | | | (3,602) | | | (1,506) | |
Balance, September 30, 2020 | | $ | (436) | | | $ | (18,654) | | | $ | (19,090) | |
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Balance, January 1, 2019 | | $ | (13,360) | | | $ | (3,181) | | | $ | (16,541) | |
Net change in unrealized gain (loss) | | 11,843 | | | (12,689) | | | (846) | |
Reclassification of net loss realized and included in earnings | | 458 | | | 0 | | | 458 | |
Accumulated other comprehensive loss before income tax | | (1,059) | | | (15,870) | | | (16,929) | |
Income tax provision (benefit) | | 3,552 | | | (3,426) | | | 126 | |
Balance, September 30, 2019 | | $ | (4,611) | | | $ | (12,444) | | | $ | (17,055) | |
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(in thousands) | | Available-For-Sale Securities | | Cash Flow Hedges | | Total |
Balance, January 1, 2021 | | $ | 468 | | | $ | (17,664) | | | $ | (17,196) | |
Net unrealized holding (losses) gains recorded within other comprehensive income before income tax | | (807) | | | 6,226 | | | 5,419 | |
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Other comprehensive (loss) gain before tax | | (807) | | | 6,226 | | | 5,419 | |
Income tax (benefit) provision | | (175) | | | 1,309 | | | 1,134 | |
Other comprehensive (loss) income - net of tax | | $ | (632) | | | $ | 4,917 | | | $ | 4,285 | |
Balance, June 30, 2021 | | $ | (164) | | | $ | (12,747) | | | $ | (12,911) | |
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Balance, January 1, 2020 | | $ | (4,388) | | | $ | (9,803) | | | $ | (14,191) | |
Net unrealized holding gains (losses) recorded within other comprehensive income before income tax | | 4,801 | | | (13,967) | | | (9,166) | |
Reclassification of net loss realized and included in earnings | | (41) | | | 0 | | | (41) | |
Other comprehensive income (loss) before tax | | 4,760 | | | (13,967) | | | (9,207) | |
Income tax provision (benefit) | | 1,760 | | | (4,020) | | | (2,260) | |
Other comprehensive income (loss) - net of tax | | 3,000 | | | (9,947) | | | (6,947) | |
Balance, June 30, 2020 | | $ | (1,388) | | | $ | (19,750) | | | $ | (21,138) | |
The components of accumulated other comprehensive loss, included in stockholders' equity, for the three months ended SeptemberJune 30, 20202021 and 2019,2020, respectively, are presented in the table below.
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(in thousands) | | Available-For-Sale Securities | | Cash Flow Hedges | | Total |
Balance, July 1, 2020 | | $ | (1,388) | | | $ | (19,750) | | | $ | (21,138) | |
Net change in unrealized loss | | 1,386 | | | 1,514 | | | 2,900 | |
Reclassification of gain realized and included in earnings | | (98) | | | 0 | | | (98) | |
Accumulated other comprehensive loss before income tax | | (100) | | | (18,236) | | | (18,336) | |
Income tax benefit | | 336 | | | 418 | | | 754 | |
Balance, September 30, 2020 | | $ | (436) | | | $ | (18,654) | | | $ | (19,090) | |
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Balance, July 1, 2019 | | $ | (5,488) | | | $ | (10,090) | | | $ | (15,578) | |
Net change in unrealized gain (loss) | | 1,266 | | | (3,225) | | | (1,959) | |
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Accumulated other comprehensive loss before income tax | | (4,222) | | | (13,315) | | | (17,537) | |
Income tax (benefit) provision | | 389 | | | (871) | | | (482) | |
Balance, September 30, 2019 | | $ | (4,611) | | | $ | (12,444) | | | $ | (17,055) | |
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(in thousands) | | Available-For-Sale Securities | | Cash Flow Hedges | | Total |
Balance, April 1, 2021 | | $ | (1,219) | | | $ | (12,701) | | | $ | (13,920) | |
Net unrealized holding gains (losses) recorded within other comprehensive income before income tax | | 1,388 | | | (54) | | | 1,334 | |
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Other comprehensive gain (loss) before tax | | 1,388 | | | (54) | | | 1,334 | |
Income tax (benefit) provision | | (333) | | | 8 | | | (325) | |
Other comprehensive (loss) income - net of tax | | $ | 1,055 | | | $ | (46) | | | $ | 1,009 | |
Balance, June 30, 2021 | | $ | (164) | | | $ | (12,747) | | | $ | (12,911) | |
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Balance, April 1, 2020 | | $ | (239) | | | $ | (19,627) | | | $ | (19,866) | |
Net change in unrealized loss | | (1,498) | | | (509) | | | (2,007) | |
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Other comprehensive loss before tax | | (1,498) | | | (509) | | | (2,007) | |
Income tax benefit | | (349) | | | (386) | | | (735) | |
Other comprehensive income (loss) - net of tax | | (1,149) | | | (123) | | | (1,272) | |
Balance, June 30, 2020 | | $ | (1,388) | | | $ | (19,750) | | | $ | (21,138) | |
Note 16:15: 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.
For public business entities that are SEC filers, the amendments in this update are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. All entities may early adopt the amendments in this update as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. In October 2019, the FASB voted to delay the effective date for smaller reporting companies to fiscal years beginning after December 15, 2022. An entity will apply the amendments in this update through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (that is, a modified-retrospective approach). A prospective transition approach is required for debt securities for which an OTTI had been recognized before the effective date. The effect of a prospective transition approach is to maintain the same amortized cost basis before and after the effective date of this update.
The Company does not expectexpects to early adopt this guidance on January 1, 2023 and is currently evaluating the impact of the amendments on the Company’s condensed consolidated financial statements. The Company currently cannot determine or reasonably quantify the impact of the adoption of the amendments due to the complexity and extensive changes. The Company intends to develop processes and procedures prior to the effective date to ensure it is fully compliant with the amendments at the adoption date. The Company has formed an implementation committee and has engaged a third-party consultant to assist in developing current expected credit losses (“CECL”) models using appropriate methodologies.
ASU 2017-04 - Intangibles - Goodwill and other (Topic 350) - Simplifying the Test for Goodwill Impairment” (January 2017)
The amendments in this update simplify the goodwill impairment test by eliminating Step 2 of the goodwill impairment process, which requires an entity to determine the implied fair value of its goodwill by assigning fair value to all its assets and liabilities. Under the new guidance, an entity will record an impairment charge if a reporting unit’s carrying amount exceeds its fair value. Entities still have the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment is necessary. The amendments in this ASU are effective for smaller reporting companies for annual and interim impairment tests performed in periods beginning after December 15, 2022. Early adoption is permitted. The Company adopted this guidance effective July 1, 2020 and it did not have a material impact on the condensed consolidated financial statements.
ASU 2018-13 - Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement (August 2018)
The amendments in this update modify the disclosure requirements on fair value measurements in ASC Topic 820. This ASU eliminates the requirements to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for timing of transfers between levels and the valuation processes for Level 3 fair value measurements. In addition, this ASU requires entities that calculate net asset value to disclose the timing of liquidation of an investee’s assets and the date when restrictions from redemption might lapse only if the investee has communicated the timing to the entity or announced the timing publicly. This ASU also adds new requirements, which include the disclosure of the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The amendments in this ASU are effective for public companies for fiscal years, and interim fiscal periods within those fiscal years, beginning after December 15, 2019. The Company adopted this guidance and it did not have a material impact on the condensed consolidated financial statements.
ASU 2019-04 - Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments (April 2019)
The amendments in this ASU clarify or correct the guidance in ASC Topic 326, Topic 815 and Topic 825. With respect to Topic 326, ASU 2019-04 addresses a number of issues as it relates to the CECL standard including consideration of accrued interest, recoveries, variable-rate financial instruments, prepayments, extension and renewal options, among other things, in the measurement of expected credit losses. The amendments to Topic 326 have the same effective dates as ASU 2016-13 and the Company is currently evaluating the potential impact of these amendments on the condensed consolidated financial statements. With respect to Topic 815, ASU 2019-04 clarifies issues related to partial-term hedges, hedged debt securities, and transitioning from a quantitative method of assessing hedge effectiveness to a more simplified method. The amendments to Topic 815 are effective for interim and annual reporting periods beginning after December 15, 2019 and are not expected to have a material impact on the condensed consolidated financial statements. With respect to Topic 825, ASU 2019-04 addresses the scope of the guidance, the requirement for remeasurement under ASC Topic 820 when using the measurement alternative, certain disclosure requirements, and which equity securities must be remeasured at historical exchanges rates. The amendments to Topic 825 are effective for interim and annual reporting periods beginning after December 15, 2019 and are not expected to have a material impact on the condensed consolidated financial statements.
Coronavirus Aid, Relief and Economic Security Act (“CARES Act”)
In March 2020 in connection with the implementation of the CARES Act and related provisions, the Company adopted the temporary relief issued under the CARES Act, thereby suspending the guidance in ASC 310-40 on accounting for TDRs to loan modifications related to COVID-19. Section 4013 of the CARES Act specifies that loan modifications due to the impact of COVID-19 that would otherwise be classified as TDRs under GAAP will not be so classified. Modifications within the scope of this relief are in effect from the period beginning March 1, 2020 until the earlier of December 31, 2020January 1, 2022 or 60 days after the date on which the national emergency related to the COVID-19 pandemic formally terminates. See the “Non-TDR Loan Modifications due to COVID-19” section of Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations for more information.
Note 17: Subsequent EventASU 2020-04 - Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (March 2020)
SubsequentIn March 2020, FASB issued ASU 2020-04 to ease the endpotential burden in accounting for the transition away from the LIBORon 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, 2022. The Company believes the adoption of this guidance will not have a material impact on the quarter, on October 26, 2020, the Company issued $10.0 million in aggregate principal amount of 6.0% Fixed-to-Floating Rate Subordinated Notes due 2030 (the “2030 Notes”). The Notes were offered and sold by the Company in a private placement and are scheduled to mature on November 1, 2030. The 2030 Notes bear interest at a fixed rate of 6.0% per annum from and including October 26, 2020, to, but excluding, November 1, 2025, and thereafter at a floating interest rate initially equal to the three-month term SOFR plus 5.795%. The 2030 Notes are unsecured subordinated obligations of the Company and may be repaid, without penalty, on any interest payment date on or after November 1, 2025. The 2030 Notes are intended to qualify as Tier 2 capital under regulatory guidelines.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, 20192020 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 (“we,” “our,” “us,” or the “Company”) is a bank holding company that conducts its primary business activities through its wholly owned subsidiary, First Internet Bank of Indiana, an Indiana chartered bank (the “Bank”). The Bank was the first state-chartered, Federal Deposit Insurance Corporation (“FDIC”) insured Internet bank and commenced banking operations in 1999. The Company 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. 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.municipalities; JKH Realty Services, LLC, which manages other real estate owned (“OREO”) properties as needed.needed; and SPF15, Inc. is a, which was established to acquire and hold real estate holding company.estate.
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 onlinedigital channels on a nationwide basis and have no traditional branch offices. Our residential mortgage products are offered nationwide primarily through an onlinea digital direct-to-consumer platform and are supplemented with Central Indiana-based mortgage and construction lending. Our consumer lending products are primarily originated on a nationwide basis over the Internet, as well as through relationships with dealerships and financing partners.
Our commercial banking products and services are delivered through a relationship banking model and include commercial real estate (“CRE”) banking, commercial and industrial (“C&I”) banking, public finance, healthcare finance, small business lending and commercial deposits and treasury management. Through our CRE team, we offer single tenant lease financing on a nationwide basis in addition to traditional investor CRE and construction loans primarily within Central Indiana and adjacent markets. To meet the needs of commercial borrowers located primarily in Central Indiana, Phoenix, Arizona and adjacent markets, ourOur C&I banking team provides credit solutions such as lines of credit, term loans, owner-occupied CRE loans and corporate credit cards.cards to commercial borrowers located primarily in Central Indiana, Phoenix, Arizona and adjacent markets. 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 originally 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, and provideswhich provided lending on a nationwide basis for healthcare practice finance or acquisition, acquisition or refinancing of owner-occupied CRE and equipment purchases. This portfolio segmentDuring the second quarter 2021, Provide announced that it had entered into an agreement to be acquired by a super-regional financial institution, which is generally concentratedexpected to close in the Westernthird quarter 2021. Subsequent to closing, we expect that the acquiring institution will retain most, if not all, of Provide’s loan origination activity and Southwestern regions of the United States with plansthat our healthcare finance loan balances may to continue expanding nationwide.decline. 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.
In 2018, we identified small business as an area for potential growth in revenue, loans revenue and deposits. We believe that we can differentiate ourselves from larger financial institutions throughby providing a full suite of services to emerging small businesses and entrepreneurs.entrepreneurs on a nationwide basis. We have been focused on addinghired and continue to recruit experienced small business sales, credit and operations personnel to build outexpand our capabilities in small business lending and U.S. government guaranteed lending programs, includingprograms. As this business scales up, we expect it will drive increased earnings and profitability in future periods.
In connection with our commitment to small businesses, during the second quarter 2021 we entered into a relationship with a fintech-oriented specialty lender that provides financing to franchisees in various industry segments. Through this relationship, we expect to begin funding portfolio loans originated underin the Small Business Administration (“SBA”) guidelines. To acceleratethird quarter 2021 and expect to fund up to $100.0 million of loans over the next twelve months. We also expect this relationship to provide SBA 7(a) loan opportunities to supplement our efforts in this area, on November 1, 2019 we acquired a loan portfolio, a servicing portfolio and a team of experienced SBA professionals from First Colorado National Bank. During 2020, we have continued to hire additional small business sales, credit and operations personnel and plan to continue our efforts in onboarding talent as we build out our nationwide small business platform.own origination efforts.
COVID-19 Pandemic
The third quarter 2020 was characterized by continued uncertainty asThroughout the coronavirus pandemic (“COVID-19”) persisted globally, resulting in high unemployment and market volatility. However, Federal, state and local governments have taken steps to reopen and stimulate economies, evidenced by improving economic indicators as the quarter progressed. While the effects of COVID-19 did have an impact on our operating results as of September 30, 2020, we believe the impact was consistent with the effects of COVID-19 on the overall banking industry. The low interest rate environment following Federal Reserve rate cuts in the first quarter 2020 had a negative impact on our variable rate assets in the second and third quarters of 2020. However, the low interest rate environment has also allowed us to reprice our interest-bearing deposits at lower rates, which provided a benefit to net interest income in the third quarter 2020. The benefit from lower deposit pricing is expected to continue in the fourth quarter 2020 and into 2021. Additionally, the low interest rate environment has driven residential mortgage rates to historically low levels, which has resulted in increased mortgage originations and has benefited our residential mortgage business.
At this time, the ultimate impact of COVID-19 on our business continues to remain uncertain as we cannot predict the duration of the pandemic or when the economies in which we operate will return to conditions existing prior to COVID-19. As a result of continued measures to either contain or reduce the impact of COVID-19, or an increase in the number of reported cases or mortality rates, we may experience issues that negatively impact our business, such as a decline in the liquidity of our borrowers or volatility in interest rates.
Throughout the COVID-19 pandemic,, our top priority has been the health of our team and clients. Most of our employees who worked remotely during the earlier stages of the pandemic have returned to the office. We have implemented social distancing policies, require our employees to wear masks while at work and increased cleaning frequency and protocols at all Company locations. Management will continue to assess the evolving health and safety situations at local and regional levels. Our plans remain flexible to adapt as these situations evolve.
As a digitally-focused institution without branch locations, we were able to continue serving clients when they needed us most, while minimizing operational disruptions caused by COVID-19. BeginningMost of our employees who worked remotely during the earlier stages of the pandemic have returned to the office. Management continues to assess the evolving health and safety situations at local and regional levels. Our plans remain flexible to adapt as these situations evolve.
COVID-19 impacted our business during 2020 as the low interest rate environment following Federal Reserve rate cuts in the first quarter 2020 we offered loan payment deferral programs for clients affected by COVID-19. Loan balancesreduced the yield on payment deferral programs peaked in late May 2020interest-earning assets but as of October 30, 2020, less than 1% of loan balances were in deferral statusalso allowed us to reprice our interest-bearing deposits significantly lower, which provided an increase to net interest income. Additionally, the low interest rate environment has driven residential mortgage rates to historically low levels, which continued to benefit our mortgage business.
During 2021, federal, state and all borrowers coming off deferrals have resumed normal payment schedules. Despite the challenging environment, welocal governments have continued to prudently extendtake additional steps to reopen and stimulate economies. We are optimistic that the combination of vaccinations and government stimulus programs will help mitigate any significant negative effects from the pandemic on our business and credit to both commercialquality; however, there is still significant uncertainty concerning the ongoing trajectory of the pandemic and consumer clients. the speed at which the national and local economies will recover. The
extent to which COVID-19 will continue to impact our business will depend on numerous evolving factors and future developments that we are not able to predict, including the new Delta variant of COVID-19 (which appears to be the most transmissible variant to date), the effectiveness of continuing containment measures, including the speed of the ongoing vaccine distribution effort, the efficacy of the various vaccines, and how quickly and to what extent normal economic and operating conditions can resume. Should economic conditions worsen to levels experienced in 2020, our business and credit quality could be adversely affected.
Results of Operations
During the second quarter 2021, net income was $13.1 million, or $1.31 per diluted share, compared to the second quarter 2020 net income of $3.9 million, or $0.40 per diluted share, representing an increase in net income of $9.2 million, or 233.1%. During the six months ended June 30, 2021, net income was $23.5 million, or $2.36 per diluted share, compared to the six months ended June 30, 2020 net income of $10.0 million, or $1.02 per diluted share, representing an increase in net income of $13.6 million, or 136.6%.
The following table presents a summary of the Company’s financial performance$9.2 million increase in net income for the last five completed fiscal quarterssecond quarter 2021 compared to the second quarter 2020 was due primarily to an increase of $7.2 million, or 49.8%, in net interest income, an increase of $4.0 million, or 80.2%, in noninterest income and a decrease of $2.5 million, or 99.2%, in provision for loan losses, partially offset by increases of $2.6 million in income tax expense and $1.8 million, or 13.8%, in noninterest expense.
The $13.6 million increase in net income for the six months ended June 30, 2021 compared to the six months ended June 30, 2020 was due primarily to an increase of $12.7 million, or 43.1%, in net interest income, an increase of $6.2 million, or 55.0%, in noninterest income and a decrease of $2.7 million, or 67.2%, in provision for loan losses, partially offset by a $4.2 million increase in income tax expense and a $3.7 million, or 13.7%, increase in noninterest expense.
During the second quarter 2021, return on average assets (“ROAA”), return on average shareholders’ equity (“ROAE”), and return on average tangible common equity (“ROATCE”) were 1.25%, 14.88%, and 15.09%, respectively, compared to 0.37%, 5.15%, and 5.23%, respectively, for the second quarter 2020. During the six months ended June 30, 2021, ROAA, ROAE, and ROATCE were 1.13%, 13.78%, and 13.97%, respectively, compared to 0.47%, 6.48%, and 6.58%, respectively, for the six months ended June 30, 2020.
During the second quarter of 2021, the Company recognized a $2.5 million pre-tax gain of sale of its corporate headquarters. Excluding this item, adjusted net income for the second quarter of 2021 was $11.1 million, or $1.11 per diluted share, and adjusted net income for the six months ended June 30, 2021 was $21.6 million, or $2.16 per diluted share. Additionally, for the second quarter of 2021, adjusted ROAA, adjusted ROAE and adjusted ROATCE were 1.06%, 12.62% and 12.79, respectively, while for the six months ended June 30, 2021 adjusted ROAA, adjusted ROAE and adjusted ROATCE were 1.04%, 12.62% and 12.79, respectively.
These profitability ratios improved in the 2021 periods compared to the 2020 periods, as increases in net income and adjusted net income outpaced asset growth, which was relatively flat.
Refer to the “Reconciliation of Non-GAAP Financial Measures” section of Part I, Item 2 of this report, Management’s Discussion and Analysis of Financial Condition and Results of Operations for additional information.
Consolidated Average Balance Sheets and Net Interest Income Analyses
For the periods presented, the following tables provide the average balances of interest-earning assets and interest-bearing liabilities and the nine months ended September 30, 2020related yields and 2019.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.
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(dollars in thousands except for per share data) | Three Months Ended | | Nine Months Ended |
September 30, 2020 | | June 30, 2020 | | March 31, 2020 | | December 31, 2019 | | September 30, 2019 | | September 30, 2020 | | September 30, 2019 |
Income Statement Summary: | | | | | | | | | | | | | |
Net interest income | $ | 16,232 | | | $ | 14.426 | | | $ | 15,018 | | | $ | 15,374 | | | $ | 15,244 | | | $ | 45,676 | | | $ | 47,593 | |
Provision for loan losses | 2,509 | | | 2,491 | | | 1,461 | | | 468 | | | 2,824 | | | 6,461 | | | 5,498 | |
Noninterest income | 12,495 | | | 4,973 | | | 6,211 | | | 5,405 | | | 5,558 | | | 23,679 | | | 11,384 | |
Noninterest expense | 16,412 | | | 13,244 | | | 13,486 | | | 12,613 | | | 11,203 | | | 43,142 | | | 34,021 | |
Income tax provision (benefit) | 1,395 | | | (268) | | | 263 | | | 602 | | | 449 | | | 1,390 | | | 1,315 | |
Net income | $ | 8,411 | | | $ | 3,932 | | | $ | 6,019 | | | $ | 7,096 | | | $ | 6,326 | | | $ | 18,362 | | | $ | 18,143 | |
Per Share Data: | | | | | | | | | | | | | |
Earnings per share - basic | $ | 0.86 | | | $ | 0.40 | | | $ | 0.62 | | | $ | 0.72 | | | $ | 0.63 | | | $ | 1.87 | | | $ | 1.79 | |
Earnings per share - diluted | $ | 0.86 | | | $ | 0.40 | | | $ | 0.62 | | | $ | 0.72 | | | $ | 0.63 | | | $ | 1.87 | | | $ | 1.79 | |
Dividends declared per share | $ | 0.06 | | | $ | 0.06 | | | $ | 0.06 | | | $ | 0.06 | | | $ | 0.06 | | | $ | 0.18 | | | $ | 0.18 | |
Book value per common share | $ | 32.46 | | | $ | 31.40 | | | $ | 31.13 | | | $ | 31.30 | | | $ | 30.30 | | | $ | 32.46 | | | $ | 30.30 | |
Tangible book value per common share 1 | $ | 31.98 | | | $ | 30.92 | | | $ | 30.65 | | | $ | 30.82 | | | $ | 29.82 | | | $ | 31.98 | | | $ | 29.82 | |
Common shares outstanding | 9,800,569 | | | 9,799,047 | | | 9,801,825 | | | 9,741,800 | | | 9,741,800 | | | 9,800,569 | | | 9,741,800 | |
Average common shares outstanding: | | | | | | | | | | | | | |
Basic | 9,773,175 | | | 9,768,227 | | | 9,721,485 | | | 9,825,784 | | | 9,979,603 | | | 9,825,683 | | | 10,114,303 | |
Diluted | 9,773,224 | | | 9,768,227 | | | 9,750,528 | | | 9,843,829 | | | 9,980,612 | | | 9,827,182 | | | 10,116,507 | |
Dividend payout ratio 2 | 6.98 | % | | 15.00 | % | | 9.68 | % | | 8.33 | % | | 9.52 | % | | 9.63 | % | | 10.06 | % |
Performance Ratios: | | | | | | | | | | | | | |
Return on average assets | 0.78 | % | | 0.37 | % | | 0.59 | % | | 0.69 | % | | 0.63 | % | | 0.58 | % | | 0.64 | % |
Return on average shareholders’ equity | 10.67 | % | | 5.15 | % | | 7.78 | % | | 9.46 | % | | 8.40 | % | | 7.90 | % | | 8.20 | % |
Return on average tangible common equity 1 | 10.83 | % | | 5.23 | % | | 7.90 | % | | 9.61 | % | | 8.53 | % | | 8.02 | % | | 8.33 | % |
Net interest margin | 1.53 | % | | 1.37 | % | | 1.50 | % | | 1.51 | % | | 1.54 | % | | 1.47 | % | | 1.70 | % |
Net interest margin - FTE 1,3 | 1.67 | % | | 1.50 | % | | 1.65 | % | | 1.67 | % | | 1.70 | % | | 1.61 | % | | 1.87 | % |
Noninterest expense to average assets | 1.52 | % | | 1.22 | % | | 1.32 | % | | 1.22 | % | | 1.11 | % | | 1.36 | % | | 1.19 | % |
Capital Ratios: | | | | | | | | | | | | | |
Total shareholders’ equity to assets | 7.34 | % | | 7.12 | % | | 7.32 | % | | 7.44 | % | | 7.21 | % | | 7.34 | % | | 7.21 | % |
Tangible common equity to tangible assets ratio 1 | 7.24 | % | | 7.01 | % | | 7.22 | % | | 7.33 | % | | 7.10 | % | | 7.24 | % | | 7.10 | % |
Tier 1 leverage ratio | 7.72 | % | | 7.49 | % | | 7.82 | % | | 7.64 | % | | 7.66 | % | | 7.72 | % | | 7.66 | % |
Common equity tier 1 capital ratio | 11.13 | % | | 10.94 | % | | 10.76 | % | | 10.84 | % | | 10.93 | % | | 11.13 | % | | 10.93 | % |
Tier 1 capital ratio | 11.13 | % | | 10.94 | % | | 10.76 | % | | 10.84 | % | | 10.93 | % | | 11.13 | % | | 10.93 | % |
Total risk-based capital ratio | 14.38 | % | | 14.13 | % | | 13.87 | % | | 13.99 | % | | 14.17 | % | | 14.38 | % | | 14.17 | % |
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(dollars in thousands) | | Three Months Ended |
| | June 30, 2021 | | March 31, 2021 | | June 30, 2020 |
| | Average Balance | | Interest /Dividends | | Yield /Cost | | Average Balance | | Interest /Dividends | | Yield /Cost | | Average Balance | | Interest /Dividends | | Yield /Cost |
Assets | | | | | | | | | | | | | | | | | | |
Interest-earning assets | | | | | | | | | | | | | | | | | | |
Loans, including loans held-for-sale | | $ | 3,016,330 | | | $ | 30,835 | | | 4.10 | % | | $ | 3,079,130 | | | $ | 30,885 | | | 4.07 | % | | $ | 2,989,772 | | | $ | 29,730 | | | 4.00 | % |
Securities - taxable | | 490,634 | | | 1,921 | | | 1.57 | % | | 461,300 | | | 1,779 | | | 1.56 | % | | 560,947 | | | 3,276 | | | 2.35 | % |
Securities - non-taxable | | 84,050 | | | 259 | | | 1.24 | % | | 87,129 | | | 281 | | | 1.31 | % | | 96,675 | | | 457 | | | 1.90 | % |
Other earning assets | | 509,735 | | | 362 | | | 0.28 | % | | 446,045 | | | 335 | | | 0.30 | % | | 594,296 | | | 759 | | | 0.51 | % |
Total interest-earning assets | | 4,100,749 | | | 33,377 | | | 3.26 | % | | 4,073,604 | | | 33,280 | | | 3.31 | % | | 4,241,690 | | | 34,222 | | | 3.24 | % |
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Allowance for loan losses | | (30,348) | | | | | | | (29,884) | | | | | | | (23,388) | | | | | |
Noninterest-earning assets | | 136,565 | | | | | | | 129,553 | | | | | | | 111,872 | | | | | |
Total assets | | $ | 4,206,966 | | | | | | | $ | 4,173,273 | | | | | | | $ | 4,330,174 | | | | | |
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Liabilities | | | | | | | | | | | | | | | | | | |
Interest-bearing liabilities | | | | | | | | | | | | | | | | | | |
Interest-bearing demand deposits | | $ | 192,777 | | | $ | 143 | | | 0.30 | % | | $ | 180,746 | | | $ | 133 | | | 0.30 | % | | $ | 137,487 | | | $ | 237 | | | 0.69 | % |
Regular savings accounts | | 55,811 | | | 49 | | | 0.35 | % | | 46,035 | | | 40 | | | 0.35 | % | | 37,204 | | | 92 | | | 0.99 | % |
Money market accounts | | 1,416,406 | | | 1,462 | | | 0.41 | % | | 1,369,626 | | | 1,391 | | | 0.41 | % | | 1,089,063 | | | 3,541 | | | 1.31 | % |
Certificates and brokered deposits | | 1,444,171 | | | 6,051 | | | 1.68 | % | | 1,519,580 | | | 7,064 | | | 1.89 | % | | 2,006,966 | | | 11,893 | | | 2.38 | % |
Total interest-bearing deposits | | 3,109,165 | | | 7,705 | | | 0.99 | % | | 3,115,987 | | | 8,628 | | | 1.12 | % | | 3,270,720 | | | 15,763 | | | 1.94 | % |
Other borrowed funds | | 584,751 | | | 4,065 | | | 2.79 | % | | 583,780 | | | 4,127 | | | 2.87 | % | | 584,543 | | | 4,033 | | | 2.77 | % |
Total interest-bearing liabilities | | 3,693,916 | | | 11,770 | | | 1.28 | % | | 3,699,767 | | | 12,755 | | | 1.40 | % | | 3,855,263 | | | 19,796 | | | 2.07 | % |
Noninterest-bearing deposits | | 98,207 | | | | | | | 90,764 | | | | | | | 73,758 | | | | | |
Other noninterest-bearing liabilities | | 61,949 | | | | | | | 46,774 | | | | | | | 94,285 | | | | | |
Total liabilities | | 3,854,072 | | | | | | | 3,837,305 | | | | | | | 4,023,306 | | | | | |
| | | | | | | | | | | | | | | | | | |
Shareholders’ equity | | 352,894 | | | | | | | 335,968 | | | | | | | 306,868 | | | | | |
Total liabilities and shareholders’ equity | | $ | 4,206,966 | | | | | | | $ | 4,173,273 | | | | | | | $ | 4,330,174 | | | | | |
| | | | | | | | | | | | | | | | | | |
Net interest income | | | | $ | 21,607 | | | | | | | $ | 20,525 | | | | | | | $ | 14,426 | | | |
| | | | | | | | | | | | | | | | | | |
Interest rate spread 1 | | | | | | 1.98% | | | | | | 1.91% | | | | | | 1.17 | % |
Net interest margin 2 | | | | | | 2.11% | | | | | | 2.04% | | | | | | 1.37 | % |
Net interest margin - FTE 3 | | | | | | 2.25% | | | | | | 2.18% | | | | | | 1.50 | % |
1 This information represents a non-GAAP financial measure. See “ReconciliationYield on total interest-earning assets minus cost of Non-GAAP Financial Measures” for a reconciliation of this measure to its most directly comparable GAAP measure.total interest-bearing liabilities.
2 Dividends per shareNet interest income divided by diluted earnings per share.total average interest-earning assets (annualized).
3 On a fully-taxable equivalent (“FTE”)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.
During the third quarter 2020, net income was $8.4 million, or $0.86 per diluted share, compared to the third quarter 2019 net income of $6.3 million, or $0.63 per diluted share, representing an increase in net income of $2.1 million, or 33.0%. During the nine months ended September 30, 2020, net income was $18.4 million, or $1.87 per diluted share, compared to the nine months ended September 30, 2019 net income of $18.1 million, or $1.79 per diluted share, representing an increase in net income of $0.2 million, or 1.2%.
The $2.1 million increase in net income in the third quarter 2020 compared to the third quarter 2019 was due primarily to an increase of $6.9 million, or 124.8%, in noninterest income, an increase of $1.0 million, or 6.5%, in net interest income and a $0.3 million, or 11.2%, decrease in provision for loan losses, partially offset by a $5.2 million, or 46.5%, increase in noninterest expense and an increase of $0.9 million, or 210.7%, in income tax expense.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(dollars in thousands) | | Six Months Ended |
| | June 30, 2021 | | June 30, 2020 |
| | Average Balance | | Interest /Dividends | | Yield /Cost | | Average Balance | | Interest /Dividends | | Yield /Cost |
Assets | | | | | | | | | | | | |
Interest-earning assets | | | | | | | | | | | | |
Loans, including loans held-for-sale | | $ | 3,047,560 | | | $ | 61,720 | | | 4.08 | % | | $ | 2,983,883 | | | $ | 60,138 | | | 4.05 | % |
Securities - taxable | | 476,049 | | | 3,700 | | | 1.57 | % | | 545,997 | | | 6,895 | | | 2.54 | % |
Securities - non-taxable | | 85,581 | | | 540 | | | 1.27 | % | | 98,254 | | | 1,029 | | | 2.11 | % |
Other earning assets | | 478,065 | | | 697 | | | 0.29 | % | | 505,111 | | | 2,404 | | | 0.96 | % |
Total interest-earning assets | | 4,087,255 | | | 66,657 | | | 3.29 | % | | 4,133,245 | | | 70,466 | | | 3.43 | % |
| | | | | | | | | | | | |
Allowance for loan losses | | (30,117) | | | | | | | (22,724) | | | | | |
Noninterest-earning assets | | 133,074 | | | | | | | 104,532 | | | | | |
Total assets | | $ | 4,190,212 | | | | | | | $ | 4,215,053 | | | | | |
| | | | | | | | | | | | |
Liabilities | | | | | | | | | | | | |
Interest-bearing liabilities | | | | | | | | | | | | |
Interest-bearing demand deposits | | $ | 186,795 | | | $ | 276 | | | 0.30 | % | | $ | 130,206 | | | $ | 456 | | | 0.70 | % |
Regular savings accounts | | 50,950 | | | 89 | | | 0.35 | % | | 33,774 | | | 170 | | | 1.01 | % |
Money market accounts | | 1,393,145 | | | 2,853 | | | 0.41 | % | | 977,834 | | | 7,284 | | | 1.50 | % |
Certificates and brokered deposits | | 1,481,667 | | | 13,115 | | | 1.78 | % | | 2,038,068 | | | 25,061 | | | 2.47 | % |
Total interest-bearing deposits | | 3,112,557 | | | 16,333 | | | 1.06 | % | | 3,179,882 | | | 32,971 | | | 2.09 | % |
Other borrowed funds | | 584,268 | | | 8,192 | | | 2.83 | % | | 584,504 | | | 8,051 | | | 2.77 | % |
Total interest-bearing liabilities | | 3,696,825 | | | 24,525 | | | 1.34 | % | | 3,764,386 | | | 41,022 | | | 2.19 | % |
Noninterest-bearing deposits | | 94,506 | | | | | | | 67,107 | | | | | |
Other noninterest-bearing liabilities | | 54,403 | | | | | | | 74,623 | | | | | |
Total liabilities | | 3,845,734 | | | | | | | 3,906,116 | | | | | |
| | | | | | | | | | | | |
Shareholders’ equity | | 344,478 | | | | | | | 308,937 | | | | | |
Total liabilities and shareholders’ equity | | $ | 4,190,212 | | | | | | | $ | 4,215,053 | | | | | |
| | | | | | | | | | | | |
Net interest income | | | | $ | 42,132 | | | | | | | $ | 29,444 | | | |
| | | | | | | | | | | | |
Interest rate spread 1 | | | | | | 1.95 | % | | | | | | 1.24 | % |
Net interest margin 2 | | | | | | 2.08 | % | | | | | | 1.43 | % |
Net interest margin - FTE 3 | | | | | | 2.21 | % | | | | | | 1.58 | % |
The $0.2 million increase in net income in the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 was due primarily to a $12.3 million, or 108.0%, increase in noninterest income, partially offset by a $9.1 million, or 26.8%, increase in noninterest expense, a $1.9 million, or 4.0%, decrease in net interest income, a $1.0 million, or 17.5%, increase in provision for loan losses and a $0.1 million, or 5.7%, increase in income tax expense.
During the third quarter 2020, return on average assets (“ROAA”) and return on average shareholders’ equity (“ROAE”) were 0.78% and 10.67%, respectively, compared to 0.63% and 8.40%, respectively, for the third quarter 2019. During the nine months ended September 30, 2020, ROAA and ROAE were 0.58% and 7.90%, respectively, compared to 0.64% and 8.20%, respectively, for the nine months ended September 30, 2019. The increase in ROAA for the three months ended September 30, 2020 compared to the three months ended September 30, 2019 was due primarily to the increase in net income. The decrease in ROAA for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 was due primarily to the Company’s growth in average assets. The increase in ROAE during the three months ended September 30, 2020 compared to the three months ended September 30, 2019 was due mainly to the increase in net income. The decrease in ROAE during the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 was due to the Company’s growth in average equity.
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.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(dollars in thousands) | | Three Months Ended |
| | September 30, 2020 | | June 30, 2020 | | September 30, 2019 |
| | Average Balance | | Interest /Dividends | | Yield /Cost | | Average Balance | | Interest /Dividends | | Yield /Cost | | Average Balance | | Interest /Dividends | | Yield /Cost |
Assets | | | | | | | | | | | | | | | | | | |
Interest-earning assets | | | | | | | | | | | | | | | | | | |
Loans, including loans held-for-sale | | $ | 3,031,024 | | | $ | 29,560 | | | 3.88 | % | | $ | 2,989,772 | | | $ | 29,730 | | | 4.00 | % | | $ | 2,902,081 | | | $ | 30,594 | | | 4.18 | % |
Securities - taxable | | 539,154 | | | 2,240 | | | 1.65 | % | | 560,947 | | | 3,276 | | | 2.35 | % | | 462,490 | | | 3,468 | | | 2.97 | % |
Securities - non-taxable | | 94,398 | | | 381 | | | 1.61 | % | | 96,675 | | | 457 | | | 1.90 | % | | 99,290 | | | 639 | | | 2.55 | % |
Other earning assets | | 552,058 | | | 569 | | | 0.41 | % | | 594,296 | | | 759 | | | 0.51 | % | | 469,454 | | | 2,993 | | | 2.53 | % |
Total interest-earning assets | | 4,216,634 | | | 32,750 | | | 3.09 | % | | 4,241,690 | | | 34,222 | | | 3.24 | % | | 3,933,315 | | | 37,694 | | | 3.80 | % |
| | | | | | | | | | | | | | | | | | |
Allowance for loan losses | | (25,347) | | | | | | | (23,388) | | | | | | | (20,050) | | | | | |
Noninterest-earning assets | | 116,532 | | | | | | | 111,872 | | | | | | | 102,168 | | | | | |
Total assets | | $ | 4,307,819 | | | | | | | $ | 4,330,174 | | | | | | | $ | 4,015,433 | | | | | |
| | | | | | | | | | | | | | | | | | |
Liabilities | | | | | | | | | | | | | | | | | | |
Interest-bearing liabilities | | | | | | | | | | | | | | | | | | |
Interest-bearing demand deposits | | $ | 154,275 | | | $ | 228 | | | 0.59 | % | | $ | 137,487 | | | $ | 237 | | | 0.69 | % | | $ | 126,130 | | | $ | 233 | | | 0.73 | % |
Regular savings accounts | | 45,466 | | | 79 | | | 0.69 | % | | 37,204 | | | 92 | | | 0.99 | % | | 32,434 | | | 91 | | | 1.11 | % |
Money market accounts | | 1,295,249 | | | 2,442 | | | 0.75 | % | | 1,089,063 | | | 3,541 | | | 1.31 | % | | 639,181 | | | 3,261 | | | 2.02 | % |
Certificates and brokered deposits | | 1,784,631 | | | 9,679 | | | 2.16 | % | | 2,006,966 | | | 11,893 | | | 2.38 | % | | 2,233,350 | | | 14,778 | | | 2.63 | % |
Total interest-bearing deposits | | 3,279,621 | | | 12,428 | | | 1.51 | % | | 3,270,720 | | | 15,763 | | | 1.94 | % | | 3,031,095 | | | 18,363 | | | 2.40 | % |
Other borrowed funds | | 584,634 | | | 4,090 | | | 2.78 | % | | 584,543 | | | 4,033 | | | 2.77 | % | | 584,308 | | | 4,087 | | | 2.78 | % |
Total interest-bearing liabilities | | 3,864,255 | | | 16,518 | | | 1.70 | % | | 3,855,263 | | | 19,796 | | | 2.07 | % | | 3,615,403 | | | 22,450 | | | 2.46 | % |
Noninterest-bearing deposits | | 75,901 | | | | | | | 73,758 | | | | | | | 43,972 | | | | | |
Other noninterest-bearing liabilities | | 54,052 | | | | | | | 94,285 | | | | | | | 57,276 | | | | | |
Total liabilities | | 3,994,208 | | | | | | | 4,023,306 | | | | | | | 3,716,651 | | | | | |
| | | | | | | | | | | | | | | | | | |
Shareholders’ equity | | 313,611 | | | | | | | 306,868 | | | | | | | 298,782 | | | | | |
Total liabilities and shareholders’ equity | | $ | 4,307,819 | | | | | | | $ | 4,330,174 | | | | | | | $ | 4,015,433 | | | | | |
| | | | | | | | | | | | | | | | | | |
Net interest income | | | | $ | 16,232 | | | | | | | $ | 14,426 | | | | | | | $ | 15,244 | | | |
| | | | | | | | | | | | | | | | | | |
Interest rate spread 1 | | | | | | 1.39% | | | | | | 1.17% | | | | | | 1.34 | % |
Net interest margin 2 | | | | | | 1.53% | | | | | | 1.37% | | | | | | 1.54 | % |
Net interest margin - FTE 3 | | | | | | 1.67% | | | | | | 1.50% | | | | | | 1.70 | % |
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.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(dollars in thousands) | | Nine Months Ended |
| | September 30, 2020 | | September 30, 2019 |
| | Average Balance | | Interest /Dividends | | Yield /Cost | | Average Balance | | Interest /Dividends | | Yield /Cost |
Assets | | | | | | | | | | | | |
Interest-earning assets | | | | | | | | | | | | |
Loans, including loans held-for-sale | | $ | 2,999,711 | | | $ | 89,698 | | | 3.99 | % | | $ | 2,864,802 | | | $ | 90,654 | | | 4.23 | % |
Securities - taxable | | 543,699 | | | 9,135 | | | 2.24 | % | | 450,898 | | | 10,322 | | | 3.06 | % |
Securities - non-taxable | | 96,960 | | | 1,410 | | | 1.94 | % | | 97,042 | | | 1,991 | | | 2.74 | % |
Other earning assets | | 520,875 | | | 2,973 | | | 0.76 | % | | 322,544 | | | 6,560 | | | 2.72 | % |
Total interest-earning assets | | 4,161,245 | | | 103,216 | | | 3.31 | % | | 3,735,286 | | | 109,537 | | | 3.92 | % |
| | | | | | | | | | | | |
Allowance for loan losses | | (23,605) | | | | | | | (19,191) | | | | | |
Noninterest-earning assets | | 108,561 | | | | | | | 101,313 | | | | | |
Total assets | | $ | 4,246,201 | | | | | | | $ | 3,817,408 | | | | | |
| | | | | | | | | | | | |
Liabilities | | | | | | | | | | | | |
Interest-bearing liabilities | | | | | | | | | | | | |
Interest-bearing demand deposits | | $ | 138,288 | | | $ | 684 | | | 0.66 | % | | $ | 117,811 | | | $ | 659 | | | 0.75 | % |
Regular savings accounts | | 37,700 | | | 249 | | | 0.88 | % | | 36,241 | | | 304 | | | 1.12 | % |
Money market accounts | | 1,084,411 | | | 9,726 | | | 1.20 | % | | 598,410 | | | 9,009 | | | 2.01 | % |
Certificates and brokered deposits | | 1,952,973 | | | 34,740 | | | 2.38 | % | | 2,128,239 | | | 40,924 | | | 2.57 | % |
Total interest-bearing deposits | | 3,213,372 | | | 45,399 | | | 1.89 | % | | 2,880,701 | | | 50,896 | | | 2.36 | % |
Other borrowed funds | | 584,547 | | | 12,141 | | | 2.77 | % | | 558,141 | | | 11,048 | | | 2.65 | % |
Total interest-bearing liabilities | | 3,797,919 | | | 57,540 | | | 2.02 | % | | 3,438,842 | | | 61,944 | | | 2.41 | % |
Noninterest-bearing deposits | | 70,060 | | | | | | | 43,035 | | | | | |
Other noninterest-bearing liabilities | | 67,716 | | | | | | | 39,568 | | | | | |
Total liabilities | | 3,936,695 | | | | | | | 3,521,455 | | | | | |
| | | | | | | | | | | | |
Shareholders’ equity | | 310,506 | | | | | | | 295,963 | | | | | |
Total liabilities and shareholders’ equity | | $ | 4,246,201 | | | | | | | $ | 3,817,408 | | | | | |
| | | | | | | | | | | | |
Net interest income | | | | $ | 45,676 | | | | | | | $ | 47,593 | | | |
| | | | | | | | | | | | |
Interest rate spread 1 | | | | | | 1.29 | % | | | | | | 1.51 | % |
Net interest margin 2 | | | | | | 1.47 | % | | | | | | 1.70 | % |
Net interest margin - FTE 3 | | | | | | 1.61 | % | | | | | | 1.87 | % |
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.
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.
| (dollars in thousands) | (dollars in thousands) | | Three Months Ended September 30, 2020 vs. June 30, 2020 Due to Changes in | | Three Months Ended September 30, 2020 vs. September 30, 2019 Due to Changes in | | Nine Months Ended September 30, 2020 vs. September 30, 2019 Due to Changes in | (dollars in thousands) | | Three Months Ended June 30, 2021 vs. March 31, 2021 Due to Changes in | | Three Months Ended June 30, 2021 vs. June 30, 2020 Due to Changes in | | Six Months Ended June 30, 2021 vs. June 30, 2020 Due to Changes in |
| | | Volume | | Rate | | Net | | Volume | | Rate | | Net | | Volume | | Rate | | Net | | | Volume | | Rate | | Net | | Volume | | Rate | | Net | | Volume | | Rate | | Net |
Interest income | Interest income | | | | | | | | | | | | | | | | | | | Interest income | | | | | | | | | | | | | | | | | | |
Loans, including loans held-for-sale | Loans, including loans held-for-sale | | $ | 2,207 | | | $ | (2,377) | | | $ | (170) | | | $ | 6,263 | | | $ | (7,297) | | | $ | (1,034) | | | $ | 5,804 | | | $ | (6,167) | | | $ | (363) | | Loans, including loans held-for-sale | | $ | (1,394) | | | $ | 1,344 | | | $ | (50) | | | $ | 290 | | | $ | 815 | | | $ | 1,105 | | | $ | 1,174 | | | $ | 408 | | | $ | 1,582 | |
Securities – taxable | Securities – taxable | | (119) | | | (917) | | | (1,036) | | | 2,983 | | | (4,211) | | | (1,228) | | | 2,692 | | | (3,889) | | | (1,197) | | Securities – taxable | | 129 | | | 13 | | | 142 | | | (371) | | | (984) | | | (1,355) | | | (803) | | | (2,392) | | | (3,195) | |
Securities – non-taxable | Securities – non-taxable | | (10) | | | (66) | | | (76) | | | (30) | | | (228) | | | (258) | | | (1) | | | (580) | | | (581) | | Securities – non-taxable | | (9) | | | (13) | | | (22) | | | (54) | | | (144) | | | (198) | | | (120) | | | (369) | | | (489) | |
Other earning assets | Other earning assets | | (50) | | | (140) | | | (190) | | | 3,034 | | | (5,458) | | | (2,424) | | | 4,170 | | | (7,757) | | | (3,587) | | Other earning assets | | 140 | | | (113) | | | 27 | | | (95) | | | (302) | | | (397) | | | (122) | | | (1,585) | | | (1,707) | |
Total | Total | | 2,028 | | | (3,500) | | | (1,472) | | | 12,250 | | | (17,194) | | | (4,944) | | | 12,665 | | | (18,393) | | | (5,728) | | Total | | (1,134) | | | 1,231 | | | 97 | | | (230) | | | (615) | | | (845) | | | 129 | | | (3,938) | | | (3,809) | |
| Interest expense | Interest expense | | | | | | | | | | | | | | | | | | | Interest expense | | | | | | | | | | | | | | | | | | |
Interest-bearing deposits | Interest-bearing deposits | | 301 | | | (3,636) | | | (3,335) | | | 8,695 | | | (14,630) | | | (5,935) | | | 7,921 | | | (13,418) | | | (5,497) | | Interest-bearing deposits | | (17) | | | (906) | | | (923) | | | (738) | | | (7,320) | | | (8,058) | | | (685) | | | (15,953) | | | (16,638) | |
Other borrowed funds | Other borrowed funds | | 3 | | | 54 | | | 57 | | | 3 | | | — | | | 3 | | | 558 | | | 535 | | | 1,093 | | Other borrowed funds | | 49 | | | (111) | | | (62) | | | 2 | | | 30 | | | 32 | | | (11) | | | 152 | | | 141 | |
Total | Total | | 304 | | | (3,582) | | | (3,278) | | | 8,698 | | | (14,630) | | | (5,932) | | | 8,479 | | | (12,883) | | | (4,404) | | Total | | 32 | | | (1,017) | | | (985) | | | (736) | | | (7,290) | | | (8,026) | | | (696) | | | (15,801) | | | (16,497) | |
| Increase (decrease) in net interest income | | $ | 1,724 | | | $ | 82 | | | $ | 1,806 | | | $ | 3,552 | | | $ | (2,564) | | | $ | 988 | | | $ | 4,186 | | | $ | (5,510) | | | $ | (1,324) | | |
(Decrease) increase in net interest income | | (Decrease) increase in net interest income | | $ | (1,166) | | | $ | 2,248 | | | $ | 1,082 | | | $ | 506 | | | $ | 6,675 | | | $ | 7,181 | | | $ | 825 | | | $ | 11,863 | | | $ | 12,688 | |
Net interest income for the thirdsecond quarter 20202021 was $16.2$21.6 million, an increase of $1.0$7.2 million, or 6.5%49.8%, compared to $15.2$14.4 million for the thirdsecond quarter 2019.2020. The increase in net interest income was primarily the result of a $5.9an $8.0 million, or 26.4%40.5%, decrease in total interest expense to $16.5$11.8 million for the thirdsecond quarter 20202021 from $22.5$19.8 million for the thirdsecond quarter 2019.2020. The decrease in total interest expense was partially offset by a $4.9$0.8 million, or 13.1%2.5%, decrease in total interest income to $32.8$33.4 million for the thirdsecond quarter 20202021 from $37.7$34.2 million for the thirdsecond quarter 2019.2020.
Net interest income for the ninesix months ended SeptemberJune 30, 20202021 was $45.7$42.1 million, a decreasean increase of $1.9$12.7 million, or 4.0%43.1%, compared to $47.6$29.4 million for the ninesix months ended SeptemberJune 30, 2019.2020. The decreaseincrease in net interest income was the result of a decrease in total interest income of $6.3$16.5 million, or 5.8%, from $109.5 million for the nine months ended September 30, 2019 to $103.2 million for the nine months ended September 30, 2020. This decrease was partially offset by a $4.4 million, or 7.1%40.2%, decrease in total interest expense to $57.5$24.5 million for the ninesix months ended SeptemberJune 30, 2021 from $41.0 million for the six months ended June 30, 2020, from $61.9partially offset by a $3.8 million, or 5.4%, decrease in total interest income to $66.7 million for the ninesix months ended SeptemberJune 30, 2019.2021 from $70.5 million for the six months ended June 30, 2020.
The decrease in total interest income for the thirdsecond quarter 20202021 compared to the thirdsecond quarter 20192020 was due to decreases in interest earned on loans, including loans held-for-sale,securities and other earning assets, partially offset by an increase in interest earned on loans. Interest income earned on securities decreased $1.6 million, or 41.6%, due to a decline of 76 basis points (“bps”) in the yield earned on securities, as well as a decrease of $82.9 million, or 12.6%, in the average balance of securities. The decrease in the average balance of securities was driven primarily by prepayments and maturities in private label mortgage-backed securities and agency mortgage-backed securities and early redemptions and maturities in municipal securities. Interest income earned on other earning assets declined $2.4$0.4 million, or 81.0%52.3%, due mainly to a 212 basis point (“bp”)23 bp decline in the yield earned on these assets, partially offset by an increaseas well as a decrease of $82.6$84.6 million, or 17.6%14.2%, in the average balance of other earning assets. The increasedecrease in the average balance of other earning assets was due primarily to higherlower cash balances driven by growth in the average balance of deposits. Additionally, interest income earned on securities decreased $1.5 million, or 36.2%, due to a decline of 118 bps in the yield earned on securities, partially offset by an increase of $71.8 million, or 12.8%, in the average balance of securities. The increase in average securities balances was due to the deployment of liquidity driven by deposit growth.balances. Interest income earned on loans decreased $1.0increased $1.1 million, or 3.4%3.7%, due primarily to a declinean increase of 3010 bps in the yield earned on average loan balances, partially offset byas well as an increase of $128.9$26.6 million, or 4.4%0.9%, in average loan balances. The increase in average loan balances was due primarily to growth in the healthcare finance, portfolioconstruction and the small business lending portfolio,portfolios, which included loans acquired from First Colorado National Bank, as well as loans originated through PPP.the Paycheck Protection Program (“PPP”), partially offset by a decrease in the average balance of residential mortgage, single tenant lease financing, public finance and commercial, and industrial loan balances.
The decrease in total interest income for the ninesix months ended SeptemberJune 30, 20202021 compared to the ninesix months ended SeptemberJune 30, 20192020 was due primarily to decreases in interest income earned on loans, including loans held-for-sale, other earning assets and securities. Interest income earned on other earning assets decreased $3.6a decrease of $82.6 million, or 54.7%12.8%, due to a declinein the average balance of 196 bps insecurities and the yield earned on thesethe securities portfolio decreased 95 bps for the six months ended June 30, 2021 compared to the six months ended June 30, 2020. The decrease in the average balance of securities was driven primarily by prepayments and maturities in private label mortgage-backed securities and agency mortgage-backed securities and early redemptions and maturities in municipal securities, as well as a decrease in purchases of securities. The average balance in other earning assets also decreased $27.0 million, or 5.4%, due primarily to lower cash balances. These decreases were partially offset by an increase of $198.3$63.7 million, or 61.5%, in the average balance of other earning assets. The increase in other earning assets was due to higher cash balances driven by growth in the average balance of deposits. Interest income earned on securities decreased $1.8 million, or 14.4%, due to a decline of 81 bps in the yield earned on securities, partially offset by an increase of $92.7 million, or 16.9%, in the average balance of securities. The increase in average securities balances was due to deployment of liquidity driven by deposit growth. Interest income earned on
loans, including loans held-for-sale, decreased by $1.0 million as an increase of $134.9 million, or 4.7%2.1%, in the average balance of loans, was partially offset by a declineas well as an increase of 243 bps in the yield earned on loans. The increase in average loan balances was due primarily to growth in the healthcare finance, portfolioconstruction and the small business lending portfolio,portfolios, which included loans acquired from First Colorado National Bank, as well as loans originated through PPP.the Paycheck Protection Program (“PPP”), partially offset by a decrease in the average balance of residential mortgage, single tenant lease financing, public finance and commercial, and industrial loan balances.
Overall, the yield on interest-earning assets for the thirdsecond quarter 2020 declined 712021 increased 2 bps to 3.09%3.26% from 3.80%3.24% for the thirdsecond quarter 2019. Additionally, the2020. The yield on interest-earning assets for the ninesix months ended SeptemberJune 30, 20202021 declined 6114 bps to 3.31%3.29% from 3.92%3.43% for the ninesix months ended SeptemberJune 30, 2019.2020. The declinesincrease in the yieldsyield earned on interest-earning assets werefor the second quarter 2021 compared to the second quarter 2020 was due to a 10 bp increase in the continuedyield earned on loans, partially offset by decreases of 76 bps in the yield earned on securities and 23 bps in other earning assets. The decrease in market interest rates from the year-ago periods.yield earned on interest-earning assets for the six months ended June 30, 2021 compared to the six months ended June 30, 2020 was due to decreases of 95 bps in the yield earned on securities and 67 bps in other earning assets, partially offset by a 3 bp increase in the yield earned on loans. Interest rates began declining during 2019 and have declined significantly in 2020 following Federal Reserve interest rate cuts in March 2020 in response to the economic effects of COVID-19. The decline in market interest rates negatively impacted the yields earned on variable rate loans, including fixed rate loans that have been effectively converted to variable rate loans through the use of interest rate swap agreements, and new loan originations as well as variable rate securities and cash balances which were elevated throughoutduring both the third quarter 2020 and the ninesix months ended SeptemberJune 30, 2020 due2021, in comparison to growththe same time periods in average deposit balances.2020.
The decrease in total interest expense for the thirdsecond quarter 20202021 compared to the thirdsecond quarter 20192020 was due primarily to a decrease in interest expense related to certificates and brokered deposits and money market accounts.interest-bearing deposits. Interest expense on certificates and brokered deposits decreased $5.1$5.8 million, or 34.5%49.1%, due to a decline of 4770 bps in the cost of these deposits, as well as a $448.7$562.8 million, or 20.1%28.0%, decrease in the average balance of these deposits. The decrease in certificates and brokered deposit balances was driven by the Company’s pricing strategy to reduce the level of these higher cost deposits. The decrease in interest expense related to money market accounts of $0.8$2.1 million, or 25.1%58.7%, was driven by a decline of 12790 bps in the cost of these deposits, partially offset by an increase of $656.1$327.3 million, or 102.6%30.1%, in the average balance of these deposits. MoneyAverage money market balances have increased throughout 2020from the prior year period due to targeted digital marketing efforts to grow small business accounts, as well as consumers, small businesses and commercial clients increasing their cash balances due in part to the economic uncertainty resulting from COVID-19.
The decrease in total interest expense for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 was due to a decrease in interest expense related to certificates and brokered deposits, partially offset by increases in interest expense on money market accounts and other borrowed funds. The decrease in expense related to certificates and brokered deposits of $6.2 million, or 15.1%, was due to a decline of 19 bps in the cost of these deposits as well as a $175.3 million, or 8.2%, decrease in the average balance of these deposits. The decrease in certificates and brokered deposit balances was driven by the Company’s pricing strategy to reduce the level of these higher cost deposits. Interest expense on money market accounts increased $0.7 million, or 8.0%, driven by an increase of $486.0 million, or 81.2%, in the average balance of these deposits, partially offset by a decline of 81 bps in the cost of these deposits. Money market balances have increased throughout 2020 dueprimarily to targeted digital marketing efforts to grow small business accounts, as well as consumers, small businesses and commercial clients increasing their cash balances due in part to the economic uncertainty resulting from COVID-19. The increasedecrease in interest expense related to other borrowed funds of $1.1 million, or 9.8%,interest-bearing demand deposits and savings accounts was due primarily to decreases of 39 bps and 64 bps, respectively, partially offset by increases of $55.3 million, or 40.2%, and $18.6 million, or 50.0%, respectively, in the impactaverage balance of these deposits.
The decrease in total interest expense for the issuancesix months ended June 30, 2021 compared to the six months ended June 30, 2020, was driven primarily by a 103 bp decline in the cost of funds related to interest-bearing deposits and a decrease of $67.3 million, or 2.1%, in the 2029 Notes (subordinated debt) issuedaverage balance of interest-bearing deposits. The decrease in June 2019 withthe cost of interest-bearing deposits was due primarily to a $556.4 million, or 27.3%, decrease in average certificates and brokered deposits balances and a 69 bp decrease in the related cost of these deposits. The decrease in interest expense related to money market accounts of $4.4 million, or 60.8%, was driven by a decline of 109 bps in the cost of these deposits, partially offset by an aggregate principal amountincrease of $37.0$415.3 million, and an initial fixed interest rateor 42.5%, in the average balance of 6.00%.these deposits.
Overall, the cost of total interest-bearing liabilities for the thirdsecond quarter 20202021 declined 7679 bps to 1.70%1.28% from 2.46%2.07% for the thirdsecond quarter 2019.2020. Additionally, the cost of total interest-bearing liabilities for the ninesix months ended SeptemberJune 30, 20202021 declined 3985 bps to 2.02%1.34% from 2.41%2.19% for the ninesix months ended SeptemberJune 30, 2019.2020. Similar to asset yields, the declines in the cost of funds were due to the continued decrease in market interest rates from the year-agoprior year periods. The sharp declines in both short- and long-term interest rates due to COVID-19 have allowed the Company to reprice all of its deposit products at lower rates. Furthermore, a shift in the deposit composition from higher cost certificates and brokered deposits to lower cost money marketnon-maturity deposit accounts also contributed to the decline in the cost of deposit funding.
Net interest margin (“NIM”) was 1.53%2.11% for the thirdsecond quarter 20202021 compared to 1.54%1.37% for the thirdsecond quarter 2019.2020; an increase of 74 bps. On a fully-taxable equivalent (“FTE”) basis, NIM was 1.67%2.25% for the thirdsecond quarter 20202021 compared to 1.70%1.50% for the thirdsecond quarter 2019.2020; an increase of 75 bps.
NIM was 1.47% for the nine months ended September 30, 2020 compared to 1.70% for the nine months ended September 30, 2019. On a fully-taxable equivalent basis, NIM was 1.61% for the nine months ended September 30, 2020 compared to 1.87% for the nine months ended September 30, 2019.
ForNIM was 2.08% for the ninesix months ended SeptemberJune 30, 2020,2021 compared to 1.43% for the decreasesix months ended June 30, 2020; an increase of 65 bps. FTE NIM was 2.21% for the six months ended June 30, 2021 compared to 1.58% for the six months ended June 30, 2020; an increase of 63 bps.
The increase in second quarter 2021 NIM reflects the greater decline in asset yieldsand FTE NIM compared to the declinesecond quarter 2020 reflects a decrease in the cost of funds duringwhile asset yields were up modestly. The reductions in the applicable periods. Followingcost of interest-bearing liabilities was due primarily to the continued decrease in market interest rates from the prior year period. Interest rates declined significantly in 2020 following Federal Reserve’sReserve interest rate cuts in March 2020 in response to COVID-19, variable ratethe economic effects of COVID-19.
The increase in year-to-date June 2021 NIM and FTE NIM compared to year-to-date June 2020 reflects a decrease in the cost of funds, partially offset by a moderate decrease in interest-earning asset yields. The decline in the cost of interest-bearing liabilities and the yield on interest-earning assets tiedwas due primarily to the continued decrease in market interest rates repriced faster than deposits. However, asfrom the prior year period.
As the pace of the decline in short-term market interest rate declinesrates has slowed, over the course of the year, the Company believes that yields on
interest-earning assets have largely stabilized. Furthermore, the Company has approximately $931.0$779.0 million of certificates and brokered deposits with a weighted average cost of 2.02%1.35% that mature over the next twelve months. As the weighted average of cost of these deposits is significantly higher than current new production costs, the Company expects the cost of deposit funding to continue to decline.decline during the second half of 2021.
Noninterest Income
The following table presents noninterest income for the last five completed fiscal quarters and the ninesix months ended SeptemberJune 30, 20202021 and 2019.2020.
| (in thousands) | (in thousands) | Three Months Ended | | Nine Months Ended | (in thousands) | Three Months Ended | | Six Months Ended |
| | September 30, 2020 | | June 30, 2020 | | March 31, 2020 | | December 31, 2019 | | September 30, 2019 | | September 30, 2020 | | September 30, 2019 | | June 30, 2021 | | March 31, 2021 | | December 31, 2020 | | September 30, 2020 | | June 30, 2020 | | June 30, 2021 | | June 30, 2020 |
Service charges and fees | Service charges and fees | $ | 224 | | | $ | 182 | | | $ | 212 | | | $ | 213 | | | $ | 211 | | | $ | 618 | | | $ | 672 | | Service charges and fees | $ | 280 | | | $ | 266 | | | $ | 206 | | | $ | 224 | | | $ | 182 | | | $ | 546 | | | $ | 394 | |
Loan servicing revenue | Loan servicing revenue | 274 | | | 255 | | | 251 | | | 166 | | | — | | | 780 | | | — | | Loan servicing revenue | 457 | | | 422 | | | 379 | | | 274 | | | 255 | | | 879 | | | 506 | |
Loan servicing asset revaluation | Loan servicing asset revaluation | (103) | | | (90) | | | (179) | | | — | | | — | | | (372) | | | — | | Loan servicing asset revaluation | (240) | | | (155) | | | (60) | | | (103) | | | (90) | | | (395) | | | (269) | |
Mortgage banking activities | Mortgage banking activities | 9,630 | | | 3,408 | | | 3,668 | | | 2,953 | | | 4,307 | | | 16,706 | | | 8,588 | | Mortgage banking activities | 2,674 | | | 5,750 | | | 7,987 | | | 9,630 | | | 3,408 | | | 8,424 | | | 7,076 | |
Gain on sale of loans | Gain on sale of loans | 2,033 | | | 762 | | | 1,801 | | | 1,721 | | | 523 | | | 4,596 | | | 353 | | Gain on sale of loans | 3,019 | | | 1,723 | | | 3,702 | | | 2,033 | | | 762 | | | 4,742 | | | 2,563 | |
Gain (loss) on sale of securities | 98 | | | — | | | 41 | | | — | | | — | | | 139 | | | (458) | | |
Gain on sale of securities | | Gain on sale of securities | — | | | — | | | — | | | 98 | | | — | | | — | | | 41 | |
Gain on sale of premises and equipment | | Gain on sale of premises and equipment | 2,523 | | | — | | | — | | | — | | | — | | | 2,523 | | | — | |
Other | Other | 339 | | | 456 | | | 417 | | | 352 | | | 517 | | | 1,212 | | | 2,229 | | Other | 249 | | | 369 | | | 443 | | | 339 | | | 456 | | | 618 | | | 873 | |
Total noninterest income | Total noninterest income | $ | 12,495 | | | $ | 4,973 | | | $ | 6,211 | | | $ | 5,405 | | | $ | 5,558 | | | $ | 23,679 | | | $ | 11,384 | | Total noninterest income | $ | 8,962 | | | $ | 8,375 | | | $ | 12,657 | | | $ | 12,495 | | | $ | 4,973 | | | $ | 17,337 | | | $ | 11,184 | |
During the thirdsecond quarter 2020,2021, noninterest income was $12.5$9.0 million, representing an increase of $6.9$4.0 million, or 124.8%80.2%, compared to $5.6$5.0 million for the thirdsecond quarter 2019.2020. The increase in noninterest income was due primarily to increases in revenue from mortgage banking activities,gain on sale of premises and equipment and gain on sale of loans, and loan servicing revenue, which were partially offset by lowerdecreases in mortgage banking activities and other income and loan servicing asset revaluation.noninterest income. The increase in mortgage banking revenuegain on sale of premises and equipment was due mainly to an increase in loan origination volume, driven by historically low mortgage interest rates, and higher gain-on-sale margins.the Company completing the sale of its current headquarters. The increase in gain on sale of loans was due toan increase in the Company selling $12.9 millionvolume of SBAU.S. Small Business Administration 7(a) guaranteed loansloan sales and $12.2 million of single tenant lease financing loansan increase in secondary market premiums during the thirdsecond quarter 2020, recognizing a net gain of $2.0 million, as compared to a $0.5 million net gain on the sale of loans2021.The decline in mortgage banking revenue in the thirdsecond quarter 2019 from sales totaling $53.4 million of single tenant lease financing2021 versus the second quarter of 2020 was due primarily to decreases in interest rate locks, sold loan volume and public finance loans. The Company recognized $0.2 million of loan servicing revenue, net of the loan servicing asset revaluation, in the third quarter 2020, in connection with its SBA 7(a) servicing portfolio, which includes the portfolio acquired in the fourth quarter 2019 as well as loans originated by the Company in 2020.gain-on-sale margins. The decrease in other noninterest income was mainly the resultdue to various items, none of income recognized in the prior year related to the Company’s temporary ownership of the land associated with the Company’s future corporate headquarters. Refer to Note 11 to the condensed consolidated financial statements for additional information about the Company’s new headquarters.which were individually deemed significant.
During the ninesix months ended SeptemberJune 30, 2020,2021, noninterest income was $23.7$17.3 million, representing an increase of $12.3$6.2 million, or 108.0%55.0%, compared to $11.4$11.2 million for the ninesix months ended SeptemberJune 30, 2019.2020. The increase in noninterest income was due primarily to increases in revenue from mortgage banking activities,gain on sale of premises and equipment, gain on sale of loans, mortgage banking activities, and loan servicing revenue, and gain (loss) on sale of securities, which werewas partially offset by a decrease in other income. The increase in mortgage banking revenuegain on sale of premises and equipment was due mainly to an increase in loan origination volume, driven by historically low mortgage interest rates, and higher gain-on-sale margins. the Company completing the sale of its current headquarters.The increase in gain on sale of loans was due to sales of portfolio loans with book values totaling $216.7 million that resultedan increase in a gain of $1.3 million, as well as a gain of $3.3 million on the salevolume of SBA 7(a) guaranteed loansloan sales and an increase in secondary market premiums during the ninesix months ended SeptemberJune 30, 2020, compared to the Company selling portfolio loans with book values of $201.8 million that resulted in a net gain of $0.4 million during the nine months ended September 30, 2019.2021. The increase in gain (loss) on sale of securitiesmortgage banking revenue was due mainly to higher gain-on-sale margins. The increase in loan servicing revenue was due to a gain of $0.1 million being recorded duringgrowth in the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 when the Company sold lower-yielding mortgage-backed and U.S. Government Agency securities that resulted in a loss of $0.5 million. The Company also recognized loan servicing revenue, netbalance of the loan servicing asset revaluation, of $0.4 million, during the nine months ended September 30, 2020, in connection with itsCompany’s SBA 7(a) servicing
portfolio which includesdue to origination activity over the portfolio acquired in the fourth quarter 2019, as well as loans originated by the Company in 2020.last twelve months. The decrease in other noninterest income was mainly the resultdue to various items, none of income recognized in the prior year associated with the sale of the Company’s Visa Class B shares at a gain of $0.5 million and $0.4 million of income related to the Company’s temporary ownership of the land associated with its future corporate headquarters. Refer to Note 11 to the condensed consolidated financial statements for additional information about the Company’s new headquarters.
which were individually deemed significant.
Noninterest Expense
The following table presents noninterest expense for the last five completed fiscal quarters and the ninesix months ended SeptemberJune 30, 20202021 and 2019.2020.
| (in thousands) | (in thousands) | Three Months Ended | | Nine Months Ended | (in thousands) | Three Months Ended | | Six Months Ended |
| | September 30, 2020 | | June 30, 2020 | | March 31, 2020 | | December 31, 2019 | | September 30, 2019 | | September 30, 2020 | | September 30, 2019 | | June 30, 2021 | | March 31, 2021 | | December 31, 2020 | | September 30, 2020 | | June 30, 2020 | | June 30, 2021 | | June 30, 2020 |
Salaries and employee benefits | Salaries and employee benefits | $ | 9,533 | | | $ | 7,789 | | | $ | 7,774 | | | $ | 7,168 | | | $ | 6,883 | | | $ | 25,096 | | | $ | 19,846 | | Salaries and employee benefits | $ | 9,232 | | | $ | 9,492 | | | $ | 9,135 | | | $ | 9,533 | | | $ | 7,789 | | | $ | 18,724 | | | $ | 15,563 | |
Marketing, advertising and promotion | Marketing, advertising and promotion | 426 | | | 411 | | | 375 | | | 409 | | | 456 | | | 1,212 | | | 1,391 | | Marketing, advertising and promotion | 872 | | | 680 | | | 443 | | | 426 | | | 411 | | | 1,552 | | | 786 | |
Consulting and professional services | Consulting and professional services | 614 | | | 932 | | | 1,177 | | | 1,242 | | | 778 | | | 2,723 | | | 2,427 | | Consulting and professional services | 1,078 | | | 986 | | | 788 | | | 614 | | | 932 | | | 2,064 | | | 2,109 | |
Data processing | Data processing | 388 | | | 339 | | | 375 | | | 312 | | | 381 | | | 1,102 | | | 1,026 | | Data processing | 382 | | | 462 | | | 426 | | | 388 | | | 339 | | | 844 | | | 714 | |
Loan expenses | Loan expenses | 408 | | | 399 | | | 599 | | | 289 | | | 247 | | | 1,406 | | | 853 | | Loan expenses | 541 | | | 534 | | | 630 | | | 408 | | | 399 | | | 1,075 | | | 998 | |
Premises and equipment | Premises and equipment | 1,568 | | | 1,602 | | | 1,625 | | | 1,556 | | | 1,506 | | | 4,795 | | | 4,503 | | Premises and equipment | 1,587 | | | 1,601 | | | 1,601 | | | 1,568 | | | 1,602 | | | 3,188 | | | 3,227 | |
Deposit insurance premium | Deposit insurance premium | 440 | | | 435 | | | 485 | | | 601 | | | — | | | 1,360 | | | 1,302 | | Deposit insurance premium | 275 | | | 425 | | | 450 | | | 440 | | | 435 | | | 700 | | | 920 | |
Write-down of other real estate owned | Write-down of other real estate owned | 2,065 | | | — | | | — | | | — | | | — | | | 2,065 | | | — | | Write-down of other real estate owned | — | | | — | | | — | | | 2,065 | | | — | | | — | | | — | |
Other | Other | 970 | | | 1,337 | | | 1,076 | | | 1,036 | | | 952 | | | 3,383 | | | 2,673 | | Other | 1,108 | | | 1,137 | | | 1,040 | | | 970 | | | 1,337 | | | 2,245 | | | 2,413 | |
Total noninterest expense | Total noninterest expense | $ | 16,412 | | | $ | 13,244 | | | $ | 13,486 | | | $ | 12,613 | | | $ | 11,203 | | | $ | 43,142 | | | $ | 34,021 | | Total noninterest expense | $ | 15,075 | | | $ | 15,317 | | | $ | 14,513 | | | $ | 16,412 | | | $ | 13,244 | | | $ | 30,392 | | | $ | 26,730 | |
Noninterest expense for the thirdsecond quarter 20202021 was $16.4$15.1 million, compared to $11.2$13.2 million for the thirdsecond quarter 2019.2020. The increase of $5.2$1.8 million, or 46.5%13.8%, compared to the thirdsecond quarter 20192020 was due primarily to increases of $2.7$1.4 million in salaries and employee benefits and $0.4$0.5 million in marketing, advertising and promotion, partially offset by decreases of $0.2 million and $0.2 million in deposit insurance premium as well as a $2.1 million write-down of a legacy commercialand other real estate owned (“OREO”) property.noninterest expense, respectively. The increase in salaries and employee benefits was due mainly to an increase in headcount, which includes the impact of personnel growth associated with the Company’s small business lending platform, as well as increased mortgage and small business lending incentive compensation.compensation for the second quarter 2021. The increase in deposit insurance premiummarketing, advertising and promotion was due primarily to the Company not incurring deposit insurance premium expense during the third quarter 2019 as a result of the small bank assessment credit applied by the FDIC.
Noninterest expense for the nine months ended September 30, 2020 was $43.1 million, compared to $34.0 million for the nine months ended September 30, 2019.higher mortgage lead generation costs and sponsorship initiatives. The increase of $9.1 million, or 26.8%, compared to the nine months ended September 30, 2019 was due primarily to increases of $5.3 million in salaries and employee benefits, $0.7 million in other expenses, $0.6 million in loan expenses, $0.3 million in consulting and professional services and $0.3 million in premises and equipment, as well as a $2.1 million write-down of a legacy commercial OREO property. The increase in salaries and employee benefits was primarily the result of personnel growth, mostly associated with the Company’s small business lending platform, as well as increased mortgage and small business lending incentive compensation. The increasedecrease in other expenses was due primarily to a $0.3 million charitable contribution the Company made in the second quarter 2020 to assist small businesses and nonprofits addressin addressing the economic challenges of the COVID-19 pandemic, as well as various other miscellaneous expenses, nonepandemic. The decrease in deposit insurance premium is due primarily to a decrease in the balance of brokered deposits and a decrease in the overall size of the balance sheet, both of which were individually significant.positively impact the formula used to calculate deposit insurance expense.
Noninterest expense for the six months ended June 30, 2021 was $30.4 million, compared to $26.7 million for the six months ended June 30, 2020. The increase in loan expenses was driven primarily by costs associated with nonperforming loans. The increase in consulting and professional servicesof $3.7 million, or 13.7%, compared to the six months ended June 30, 2020 was due primarily to increased recruitment costsincreases of $3.2 million in salaries and directors’ fees.employee benefits and $0.8 million in marketing, advertising and promotion, partially offset by decreases of $0.2 million and $0.2 million in deposit insurance premium and other noninterest expense, respectively. The increase in premisessalaries and equipmentemployee benefits was due mainly to an increase in headcount, which includes the impact of personnel growth associated with the Company’s small business lending platform, as well as increased small business lending incentive compensation. The increase in marketing, advertising and promotion was due primarily to higher softwaremortgage lead generation costs and digital marketing initiatives. The decrease in deposit insurance premium was due primarily to a decrease in the balance of brokered deposits and a decrease in the overall size of the balance sheet, both of which positively impact the formula used to calculate deposit insurance expense. The decrease in other expenses was due primarily to a $0.3 million charitable contribution the Company made in the second quarter 2020 to assist small businesses and nonprofits in addressing the economic challenges of the COVID-19 pandemic.
Income tax provision was $1.4$2.4 million for the thirdsecond quarter 2020,2021, resulting in an effective tax rate of 14.2%15.4%, compared to $0.5a tax benefit of $0.3 million and an effective tax rate of 6.6% for the thirdsecond quarter 2019.2020. Income tax provision was $1.4$4.2 million for the ninesix months ended SeptemberJune 30, 2020,2021, resulting in an effective tax rate of 7.0%15.2%, compared to $1.3an income tax benefit of less than $0.1 million and an effective tax rate of 6.8% for the ninesix months ended SeptemberJune 30, 2019.2020. The increase in income tax provision for both the third quarter 2020three and six months ended June 30, 2021 compared to the third quarter 2019three and six months ended June 30, 2020, was due primarily to the increase in pre-tax earnings driven by aincreased net interest income and noninterest income, partially offset by higher proportionnoninterest expenses. Additionally, the lower income tax provision and effective tax rate during the six months ended June 30, 2020, was impacted by the passage of taxable revenue from mortgage banking and gain on sale of loans.the
CARES Act, which was signed into law on March 27, 2020, and provided the Company the ability to carryback certain federal net operating losses.
Financial Condition
The following table presents summary balance sheet data for the last five completed fiscal quarters.
| (in thousands) | (in thousands) | | (in thousands) | |
Balance Sheet Data: | Balance Sheet Data: | | September 30, 2020 | | June 30, 2020 | | March 31, 2020 | | December 31, 2019 | | September 30, 2019 | Balance Sheet Data: | | June 30, 2021 | | March 31, 2021 | | December 31, 2020 | | September 30, 2020 | | June 30, 2020 |
Total assets | Total assets | | $ | 4,333,624 | | | $ | 4,324,600 | | | $ | 4,168,146 | | | $ | 4,100,083 | | | $ | 4,095,491 | | Total assets | | $ | 4,204,642 | | | $ | 4,188,570 | | | $ | 4,246,156 | | | $ | 4,333,624 | | | $ | 4,324,600 | |
Loans | Loans | | 3,012,914 | | | 2,973,674 | | | 2,892,093 | | | 2,963,547 | | | 2,881,272 | | Loans | | 2,957,608 | | | 3,058,694 | | | 3,059,231 | | | 3,012,914 | | | 2,973,674 | |
Total securities | Total securities | | 596,565 | | | 657,312 | | | 675,013 | | | 602,730 | | | 591,549 | | Total securities | | 729,178 | | | 530,566 | | | 565,851 | | | 596,565 | | | 657,312 | |
| Loans held-for-sale | Loans held-for-sale | | 76,208 | | | 38,813 | | | 52,394 | | | 56,097 | | | 41,119 | | Loans held-for-sale | | 27,587 | | | 30,235 | | | 39,584 | | | 76,208 | | | 38,813 | |
Noninterest-bearing deposits | Noninterest-bearing deposits | | 86,088 | | | 82,864 | | | 70,562 | | | 57,115 | | | 50,560 | | Noninterest-bearing deposits | | 113,996 | | | 100,700 | | | 96,753 | | | 86,088 | | | 82,864 | |
Interest-bearing deposits | Interest-bearing deposits | | 3,286,303 | | | 3,297,925 | | | 3,107,944 | | | 3,096,848 | | | 3,097,682 | | Interest-bearing deposits | | 3,092,151 | | | 3,116,903 | | | 3,174,132 | | | 3,286,303 | | | 3,297,925 | |
Total deposits | Total deposits | | 3,372,391 | | | 3,380,789 | | | 3,178,506 | | | 3,153,963 | | | 3,148,242 | | Total deposits | | 3,206,147 | | | 3,217,603 | | | 3,270,885 | | | 3,372,391 | | | 3,380,789 | |
Advances from Federal Home Loan Bank | Advances from Federal Home Loan Bank | | 514,914 | | | 514,913 | | | 514,911 | | | 514,910 | | | 514,908 | | Advances from Federal Home Loan Bank | | 514,919 | | | 514,917 | | | 514,916 | | | 514,914 | | | 514,913 | |
Total shareholders’ equity | Total shareholders’ equity | | 318,102 | | | 307,711 | | | 307,711 | | | 304,913 | | | 295,140 | | Total shareholders’ equity | | 358,641 | | | 344,566 | | | 330,944 | | | 318,102 | | | 307,711 | |
Total assets increased $233.5decreased $41.5 million, or 5.7%1.0%, to $4.3$4.2 billion at SeptemberJune 30, 20202021 compared to $4.1$4.2 billion at December 31, 2019. Balance sheet growth2020. This decrease was driven by a $64.7 million, or 2.0%, decrease in deposit balances, which includes a $202.0 million, or 15.7%, decrease in certificates of deposits and an $81.8 million, or 6.1%, increase in money market account balances.
As of June 30, 2021, total shareholders’ equity was $358.6 million, an increase in deposits of $218.4$27.7 million, or 6.9%. The deposit growth drove8.4%, compared to December 31, 2020, due primarily to the net income earned during the period, as well as a decrease in accumulated other comprehensive loss. Tangible common equity totaled $354.0 million as of June 30, 2021, representing an increase in liquid assets as cash balances increased $161.1of $27.7 million, or 49.2%. Additionally, loan balances8.5%, compared to December 31, 2020. As both total shareholders’ equity and tangible common equity increased, $49.4 million, or 1.7%while both total assets and tangible assets decreased 1.0%, and loans held-for-salerespectively, the ratio of total shareholders’ equity to total assets increased $20.1 million, or 35.9%. As deposit growth outpaced loan growth, balance sheet liquidity increased as reflected in the percentage of loans to deposits, which declined to 89.3%8.53% as of SeptemberJune 30, 2020, compared to 94.0%2021 from 7.79% as of December 31, 2019.2020, and the ratio of tangible common equity to tangible assets increased to 8.43% as of June 30, 2021 from 7.69% as of December 31, 2020.
Book value per common share increased 7.8% to $36.39 as of June 30, 2021 from $33.77 as of December 31, 2020. Tangible book value per share increased 7.9% to $35.92 as of June 31, 2021 from $33.29 as of December 31, 2020. The growth in both book value per common share and tangible book value per share reflects the growth in total shareholders’ equity and tangible common equity while total common shares outstanding increased slightly from December 31, 2020. 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) | (dollars in thousands) | September 30, 2020 | | June 30, 2020 | | March 31, 2020 | | December 31, 2019 | | September 30, 2019 | (dollars in thousands) | June 30, 2021 | | March 31, 2021 | | December 31, 2020 | | September 30, 2020 | | June 30, 2020 | |
Commercial loans | Commercial loans | | | | | | | | | | Commercial loans | | | | | | | | | | |
Commercial and industrial | Commercial and industrial | $ | 77,116 | | | 2.6 | % | | $ | 81,687 | | | 2.7 | % | | $ | 95,227 | | | 3.3 | % | | $ | 96,420 | | | 3.3 | % | | $ | 83,481 | | | 2.9 | % | Commercial and industrial | $ | 96,203 | | | 3.3 | % | | $ | 71,835 | | | 2.3 | % | | $ | 75,387 | | | 2.5 | % | | $ | 77,116 | | | 2.6 | % | | $ | 81,687 | | | 2.7 | % | |
Owner-occupied commercial real estate(1) | Owner-occupied commercial real estate(1) | 89,095 | | | 3.0 | % | | 86,897 | | | 2.9 | % | | 87,957 | | | 3.0 | % | | 86,726 | | | 2.9 | % | | 86,357 | | | 3.0 | % | Owner-occupied commercial real estate(1) | 87,136 | | | 2.9 | % | | 87,930 | | | 2.9 | % | | 89,785 | | | 2.9 | % | | 89,095 | | | 3.0 | % | | 86,897 | | | 2.9 | % | |
Investor commercial real estate | Investor commercial real estate | 13,084 | | | 0.4 | % | | 13,286 | | | 0.4 | % | | 13,421 | | | 0.5 | % | | 12,567 | | | 0.4 | % | | 11,852 | | | 0.4 | % | Investor commercial real estate | 28,871 | | | 1.0 | % | | 14,832 | | | 0.5 | % | | 13,902 | | | 0.5 | % | | 13,084 | | | 0.4 | % | | 13,286 | | | 0.4 | % | |
Construction | Construction | 92,154 | | | 3.1 | % | | 77,591 | | | 2.6 | % | | 64,581 | | | 2.2 | % | | 60,274 | | | 2.0 | % | | 54,131 | | | 1.9 | % | Construction | 117,970 | | | 4.0 | % | | 123,483 | | | 4.0 | % | | 110,385 | | | 3.6 | % | | 92,154 | | | 3.1 | % | | 77,591 | | | 2.6 | % | |
Single tenant lease financing | Single tenant lease financing | 960,505 | | | 31.9 | % | | 980,292 | | | 33.0 | % | | 972,275 | | | 33.6 | % | | 995,879 | | | 33.6 | % | | 1,008,247 | | | 35.0 | % | Single tenant lease financing | 913,115 | | | 30.9 | % | | 941,322 | | | 30.8 | % | | 950,172 | | | 31.1 | % | | 960,505 | | | 31.9 | % | | 980,292 | | | 33.0 | % | |
Public finance | Public finance | 625,638 | | | 20.8 | % | | 647,107 | | | 21.8 | % | | 627,678 | | | 21.7 | % | | 687,094 | | | 23.2 | % | | 686,622 | | | 23.8 | % | Public finance | 612,138 | | | 20.7 | % | | 637,600 | | | 20.8 | % | | 622,257 | | | 20.3 | % | | 625,638 | | | 20.8 | % | | 647,107 | | | 21.8 | % | |
Healthcare finance | Healthcare finance | 461,740 | | | 15.3 | % | | 380,956 | | | 12.8 | % | | 372,266 | | | 12.9 | % | | 300,612 | | | 10.1 | % | | 251,530 | | | 8.6 | % | Healthcare finance | 455,890 | | | 15.3 | % | | 510,237 | | | 16.8 | % | | 528,154 | | | 17.3 | % | | 461,740 | | | 15.3 | % | | 380,956 | | | 12.8 | % | |
Small business lending(1) | Small business lending(1) | 123,168 | | | 4.1 | % | | 118,526 | | | 4.0 | % | | 54,055 | | | 1.9 | % | | 46,945 | | | 1.6 | % | | 11,597 | | | 0.4 | % | Small business lending(1) | 123,293 | | | 4.2 | % | | 132,490 | | | 4.3 | % | | 125,589 | | | 4.1 | % | | 123,168 | | | 4.1 | % | | 118,526 | | | 4.0 | % | |
| Total commercial loans | Total commercial loans | 2,442,500 | | | 81.2 | % | | 2,386,342 | | | 80.2 | % | | 2,287,460 | | | 79.1 | % | | 2,286,517 | | | 77.1 | % | | 2,193,817 | | | 76.0 | % | Total commercial loans | 2,434,616 | | | 82.3 | % | | 2,519,729 | | | 82.4 | % | | 2,515,631 | | | 82.3 | % | | 2,442,500 | | | 81.2 | % | | 2,386,342 | | | 80.2 | % | |
Consumer loans | Consumer loans | | Consumer loans | | | | | | | | | | | | | | | | | | | | |
Residential mortgage | Residential mortgage | 203,041 | | | 6.7 | % | | 208,728 | | | 7.0 | % | | 218,730 | | | 7.6 | % | | 313,849 | | | 10.6 | % | | 320,451 | | | 11.1 | % | Residential mortgage | 177,148 | | | 6.0 | % | | 190,148 | | | 6.2 | % | | 186,787 | | | 6.1 | % | | 203,041 | | | 6.7 | % | | 208,728 | | | 7.0 | % | |
Home equity | Home equity | 22,169 | | | 0.7 | % | | 22,640 | | | 0.8 | % | | 23,855 | | | 0.8 | % | | 24,306 | | | 0.8 | % | | 25,042 | | | 0.9 | % | Home equity | 17,510 | | | 0.6 | % | | 17,949 | | | 0.6 | % | | 19,857 | | | 0.6 | % | | 22,169 | | | 0.7 | % | | 22,640 | | | 0.8 | % | |
Other consumer | Other consumer | 282,450 | | | 9.3 | % | | 291,632 | | | 9.8 | % | | 296,605 | | | 10.2 | % | | 295,309 | | | 10.0 | % | | 296,573 | | | 10.4 | % | Other consumer | 271,796 | | | 9.2 | % | | 270,209 | | | 8.8 | % | | 275,692 | | | 9.0 | % | | 282,450 | | | 9.3 | % | | 291,632 | | | 9.8 | % | |
Total consumer loans | Total consumer loans | 507,660 | | | 16.7 | % | | 523,000 | | | 17.6 | % | | 539,190 | | | 18.6 | % | | 633,464 | | | 21.4 | % | | 642,066 | | | 22.4 | % | Total consumer loans | 466,454 | | | 15.8 | % | | 478,306 | | | 15.6 | % | | 482,336 | | | 15.7 | % | | 507,660 | | | 16.7 | % | | 523,000 | | | 17.6 | % | |
Net deferred loan origination costs, premiums and discounts on purchased loans and other (2) | 62,754 | | | 2.1 | % | | 64,332 | | | 2.2 | % | | 65,443 | | | 2.3 | % | | 43,566 | | | 1.5 | % | | 45,389 | | | 1.6 | % | |
Net deferred loan origination costs, premiums and discounts on purchased loans and other (1) | | Net deferred loan origination costs, premiums and discounts on purchased loans and other (1) | 56,538 | | | 1.9 | % | | 60,659 | | | 2.0 | % | | 61,264 | | | 2.0 | % | | 62,754 | | | 2.1 | % | | 64,332 | | | 2.2 | % | |
Total loans | Total loans | 3,012,914 | | | 100.0 | % | | 2,973,674 | | | 100.0 | % | | 2,892,093 | | | 100.0 | % | | 2,963,547 | | | 100.0 | % | | 2,881,272 | | | 100.0 | % | Total loans | 2,957,608 | | | 100.0 | % | | 3,058,694 | | | 100.0 | % | | 3,059,231 | | | 100.0 | % | | 3,012,914 | | | 100.0 | % | | 2,973,674 | | | 100.0 | % | |
Allowance for loan losses | Allowance for loan losses | (26,917) | | | (24,465) | | | (22,857) | | | (21,840) | | | (21,683) | | | Allowance for loan losses | (28,066) | | | (30,642) | | | (29,484) | | | (26,917) | | | (24,465) | | | |
Net loans | Net loans | $ | 2,985,997 | | | $ | 2,949,209 | | | $ | 2,869,236 | | | $ | 2,941,707 | | | $ | 2,859,589 | | | Net loans | $ | 2,929,542 | | | $ | 3,028,052 | | | $ | 3,029,747 | | | $ | 2,985,997 | | | $ | 2,949,209 | | | |
(1) As of December 31, 2019, the Company held $13.3 million of SBA loans which were classified within the small business lending category. In the third quarter 2020, those balances were reclassified into the owner-occupied commercial real estate category.
(2) Includes carrying value adjustments of $40.4 million, $41.6 million, $42.7 million, $44.3 million and $46.0 million related to terminated interest rate swaps associated with public finance loans as of June 30, 2021, March 31, 2021, December 31, 2020, September 30, 2020 and June 30, 2020, respectively, and $44.6 million, $21.4 million and $27.6 million, as of March 31, 2020, December 31, 2019 and September 30, 2019, respectively, related to interest rate swaps associated with public finance loans.respectively.
Total loans were $3.0 billion as of SeptemberJune 30, 2020, an increase2021, a decrease of $49.4$101.6 million, or 1.7%3.3%, compared to December 31, 2019.2020. Total commercial loan balances were $2.4 billion as of SeptemberJune 30, 2020, up $156.02021, down $81.0 million, or 6.8%3.2%, from December 31, 2019.2020. Compared to December 31, 2019, production2020, the decline in commercial loan balances was driven largely by net payoffs in healthcare finance, small business lending and construction was partially offset by lower balances in the public finance and single tenant lease financing loan portfolios, due primarily to sales of $106.6 million ofand public finance loans, in these categories during 2020, as well as a declinewhich were partially offset by increases in commercial and industrial, construction and investor commercial real estate loan balances.
The growthnet payoffs in the healthcare finance balances was dueportfolio were driven primarily by elevated prepayment activity combined with a lower level of new originations, as heightened competition and the low interest rate environment has driven loan pricing to unattractively low levels. Going forward, we expect the balance of healthcare finance loans may decline as a combinationresult of strong borrower demand following the re-opening of state and local economies across the U.S. subsequent to shelter-in-place orders in response to COVID-19 and growth in loan originationsProvide’s acquisition by the sales team at Lendeavor, the Company’s origination partner in this loan category. The growth in small business lending was driven by $58.3 million of PPP loan balances originated during the second quarter 2020,a super-regional financial institution, as well as an increase in originated SBA 7(a) loans during 2020.potential prepayment activity.
Total consumer loan balances were $507.7$466.5 million as of SeptemberJune 30, 2020,2021, a decrease of $125.8$15.9 million, or 19.9%3.3%, compared to December 31, 2019.2020. The decline in consumer loan balances from December 31, 20192020 was due primarily to the sale of $90.8 million of portfolio residential mortgage loans in the first quarter 2020, which included seasoned lower-yielding loans. Additionally, the balances of residential mortgage loans and other consumer loans have been impacted by elevatedincreased prepayment activity which more than offset new origination activity.across the consumer portfolio.
Asset Quality
Nonperforming loans are comprised of nonaccrual loans and loans 90 days past due and accruing. Nonperforming assets include nonperforming loans, OREO 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) | (dollars in thousands) | September 30, 2020 | | June 30, 2020 | | March 31, 2020 | | December 31, 2019 | | September 30, 2019 | (dollars in thousands) | June 30, 2021 | | March 31, 2021 | | December 31, 2020 | | September 30, 2020 | | June 30, 2020 |
Nonaccrual loans | Nonaccrual loans | | | | | | | | | | Nonaccrual loans | | | | | | | | | |
Commercial loans: | Commercial loans: | | Commercial loans: | |
Commercial and industrial | Commercial and industrial | $ | 117 | | | $ | 299 | | | $ | 218 | | | $ | 226 | | | $ | 585 | | Commercial and industrial | $ | 692 | | | $ | 1,002 | | | $ | — | | | $ | 117 | | | $ | 299 | |
Owner-occupied commercial real estate | Owner-occupied commercial real estate | 1,390 | | | 2,066 | | | 1,390 | | | 464 | | | 465 | | Owner-occupied commercial real estate | 3,487 | | | 4,266 | | | 1,838 | | | 1,390 | | | 2,066 | |
| Single tenant lease financing | Single tenant lease financing | 7,148 | | | 4,680 | | | 4,680 | | | 4,680 | | | 4,691 | | Single tenant lease financing | 2,373 | | | 7,080 | | | 7,116 | | | 7,148 | | | 4,680 | |
Small business lending (1) | | Small business lending (1) | 1,209 | | | 865 | | | — | | | — | | | — | |
| Total commercial loans | Total commercial loans | 8,655 | | | 7,045 | | | 6,288 | | | 5,370 | | | 5,741 | | Total commercial loans | 7,761 | | | 13,213 | | | 8,954 | | | 8,655 | | | 7,045 | |
Consumer loans: | Consumer loans: | | Consumer loans: | | | | | | | | | |
Residential mortgage | Residential mortgage | 1,085 | | | 1,042 | | | 991 | | | 761 | | | — | | Residential mortgage | 1,253 | | | 1,120 | | | 1,183 | | | 1,085 | | | 1,042 | |
| Home equity | | Home equity | 14 | | | 15 | | | — | | | — | | | — | |
Other consumer | Other consumer | 34 | | | 108 | | | 39 | | | 33 | | | 41 | | Other consumer | 10 | | | 23 | | | 46 | | | 34 | | | 108 | |
Total consumer loans | Total consumer loans | 1,119 | | | 1,150 | | | 1,030 | | | 794 | | | 41 | | Total consumer loans | 1,277 | | | 1,158 | | | 1,229 | | | 1,119 | | | 1,150 | |
Total nonaccrual loans | Total nonaccrual loans | 9,774 | | | 8,195 | | | 7,318 | | | 6,164 | | | 5,782 | | Total nonaccrual loans | 9,038 | | | 14,371 | | | 10,183 | | | 9,774 | | | 8,195 | |
| Past Due 90 days and accruing loans | Past Due 90 days and accruing loans | | Past Due 90 days and accruing loans | |
Commercial loans: | Commercial loans: | | Commercial loans: | |
Commercial and industrial | Commercial and industrial | — | | | — | | | 73 | | | — | | | — | | Commercial and industrial | — | | | 278 | | | — | | | — | | | — | |
| Total commercial loans | Total commercial loans | — | | | — | | | 73 | | | — | | | — | | Total commercial loans | — | | | 278 | | | — | | | — | | | — | |
Consumer loans: | | |
Residential mortgage | — | | | — | | | 51 | | | 568 | | | — | | |
| Other consumer | — | | | — | | | 1 | | | — | | | 1 | | |
Total consumer loans | — | | | — | | | 52 | | | 568 | | | 1 | | |
| Total past due 90 days and accruing loans | Total past due 90 days and accruing loans | — | | | — | | | 125 | | | 568 | | | 1 | | Total past due 90 days and accruing loans | — | | | 278 | | | — | | | — | | | — | |
| Total nonperforming loans | Total nonperforming loans | 9,774 | | | 8,195 | | | 7,443 | | | 6,732 | | | 5,783 | | Total nonperforming loans | 9,038 | | | 14,649 | | | 10,183 | | | 9,774 | | | 8,195 | |
| Other real estate owned | Other real estate owned | | Other real estate owned | |
Investor commercial real estate | Investor commercial real estate | — | | | 2,065 | | | 2,065 | | | 2,065 | | | 2,066 | | Investor commercial real estate | 1,188 | | | — | | | — | | | — | | | 2,065 | |
Residential mortgage | Residential mortgage | — | | | — | | | — | | | — | | | 553 | | Residential mortgage | 112 | | | — | | | — | | | — | | | — | |
Total other real estate owned | Total other real estate owned | — | | | 2,065 | | | 2,065 | | | 2,065 | | | 2,619 | | Total other real estate owned | 1,300 | | | — | | | — | | | — | | | 2,065 | |
| Other nonperforming assets | Other nonperforming assets | 8 | | | 44 | | | 114 | | | 75 | | | 95 | | Other nonperforming assets | — | | | 29 | | | 35 | | | 8 | | | 44 | |
| Total nonperforming assets | Total nonperforming assets | $ | 9,782 | | | $ | 10,304 | | | $ | 9,622 | | | $ | 8,872 | | | $ | 8,497 | | Total nonperforming assets | $ | 10,338 | | | $ | 14,678 | | | $ | 10,218 | | | $ | 9,782 | | | $ | 10,304 | |
| Total nonperforming loans to total loans | 0.32 | % | | 0.28 | % | | 0.26 | % | | 0.23 | % | | 0.20 | % | |
Total nonperforming assets to total assets | 0.23 | % | | 0.24 | % | | 0.23 | % | | 0.22 | % | | 0.21 | % | |
Total nonperforming loans to total loans(2) | | Total nonperforming loans to total loans(2) | 0.31 | % | | 0.48 | % | | 0.33 | % | | 0.32 | % | | 0.28 | % |
Total nonperforming assets to total assets(2) | | Total nonperforming assets to total assets(2) | 0.25 | % | | 0.35 | % | | 0.24 | % | | 0.23 | % | | 0.24 | % |
Allowance for loan losses to total loans | Allowance for loan losses to total loans | 0.89 | % | | 0.82 | % | | 0.79 | % | | 0.74 | % | | 0.75 | % | Allowance for loan losses to total loans | 0.95 | % | | 1.00 | % | | 0.96 | % | | 0.89 | % | | 0.82 | % |
Allowance for loan losses to total loans, excluding PPP loans(1) | 0.91 | % | | 0.84 | % | | 0.79 | % | | 0.74 | % | | 0.75 | % | |
Allowance for loan losses to nonperforming loans | 275.4 | % | | 298.5 | % | | 307.1 | % | | 324.4 | % | | 374.9 | % | |
Allowance for loan losses to total loans, excluding PPP loans(3) | | Allowance for loan losses to total loans, excluding PPP loans(3) | 0.96 | % | | 1.02 | % | | 0.98 | % | | 0.91 | % | | 0.84 | % |
Allowance for loan losses to nonperforming loans(2) | | Allowance for loan losses to nonperforming loans(2) | 310.5 | % | | 209.2 | % | | 289.5 | % | | 275.4 | % | | 298.5 | % |
1Balance represents U.S. government guaranteed loans.
2 Includes the impact of nonperforming small business lending loans, which are guaranteed by the U.S. government.
3 This information 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.
Troubled Debt Restructurings
The following table provides a summary of troubled debt restructurings for the last five completed fiscal quarters.
| (in thousands) | (in thousands) | September 30, 2020 | | June 30, 2020 | | March 31, 2020 | | December 31, 2019 | | September 30, 2019 | (in thousands) | June 30, 2021 | | March 31, 2021 | | December 31, 2020 | | September 30, 2020 | | June 30, 2020 |
Troubled debt restructurings – nonaccrual | Troubled debt restructurings – nonaccrual | $ | 811 | | | $ | 854 | | | $ | 94 | | | $ | 94 | | | $ | 171 | | Troubled debt restructurings – nonaccrual | $ | 2,581 | | | $ | 2,606 | | | $ | 2,637 | | | $ | 811 | | | $ | 854 | |
Troubled debt restructurings – performing | Troubled debt restructurings – performing | 365 | | | 372 | | | 378 | | | 427 | | | 470 | | Troubled debt restructurings – performing | 1,179 | | | 1,187 | | | 367 | | | 365 | | | 372 | |
Total troubled debt restructurings | Total troubled debt restructurings | $ | 1,176 | | | $ | 1,226 | | | $ | 472 | | | $ | 521 | | | $ | 641 | | Total troubled debt restructurings | $ | 3,760 | | | $ | 3,793 | | | $ | 3,004 | | | $ | 1,176 | | | $ | 1,226 | |
The increasedecline in nonperforming loans of 3.0$1.2 million, or 45.2%9.0%, to $9.8$9.0 million as of SeptemberJune 30, 20202021 compared to $6.7$10.2 million as of December 31, 20192020 was due primarily to a decrease in nonaccrual single tenant lease financing balances, which was partially offset by an increase in nonperforming small business lending, owner-occupied commercial real estate loans with unpaid principal balances of $1.6 million and an increasecommercial and industrial loans. The decrease in nonperformingnonaccrual single tenant lease financing balances was due to positive developments related to a relationship which included two loans, with unpaid principal balancesone of $2.5 million that were placed on nonaccrual status during 2020, partially offset by a decrease in accruing residential mortgage loans that were 90 days past due and one nonaccrual owner-occupied commercial real estate loan thatwhich was paid off duringat net book value (unpaid principal balance less specific reserves) and the third quarter 2020. other was transferred to OREO.
Total nonperforming assets increased $0.9$0.1 million, or 10.3%1.2%, as of SeptemberJune 30, 20202021 compared to December 31, 2019,2020, due primarily to a $1.3 million increase in OREO, partially offset by the increase$1.2 million decrease in nonperforming loans discussed above, partially offset by a $2.1 million write-down of a legacy commercial OREO property in the third quarter 2020.above. The ratio of nonperforming loans to total loans increaseddecreased to 0.32%0.31% as of SeptemberJune 30, 20202021 compared to 0.23%0.33% as of December 31, 20192020 and the ratio of nonperforming assets to total assets increased to 0.23%0.25% as of SeptemberJune 30, 20202021 compared to 0.22%0.24% as of December 31, 2019,2020, also due primarily to the loans and OREO mentioned above.
Total TDRs as of SeptemberJune 30, 20202021 were $1.2$3.8 million, up $0.7$0.8 million from December 31, 2019.2020. The increase was driven by one residential mortgage loan that became a TDR during the secondfirst quarter 2021.
As of June 30, 2021, the Company had two properties in OREO, one commercial property with a carrying value of $1.2 million and one residential mortgage with a carrying value of $0.1 million. The Company did not have any OREO as of December 31, 2020.
As of SeptemberJune 30, 2020, the Company did not have any OREO. As of December 31, 2019, the Company had one commercial property in OREO with a carrying value of $2.1 million. This property consisted of two buildings that are residential units adjacent to a university campus. During the third quarter 2020, we wrote off the balance of OREO and are currently evaluating alternatives related to the ultimate disposition of this property.
As of September 30, 2020,2021, our financial results have reflected little impact on asset quality as a result of COVID-19. Actions taken to either contain or reduce the impact of the pandemic have had a detrimental effect on the national and our local economies. The ultimate impact it may have on our business and asset quality is still uncertain; however, we remainWe are optimistic that the combination of vaccinations, government stimulus programs and relief programs we have provided to our clients will lessencontinue to mitigate the economic stressimpact of the pandemic on our borrowers.the Company’s business. However, if the pandemic extends for a prolonged period of time, we may experience negative trends in nonperforming loanseconomic conditions return to levels experienced during 2020, our credit quality and assets.overall financial performance could be adversely affected.
Non-TDR Loan Modifications due to COVID-19
The “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus” was issued by our banking regulators on March 22, 2020. This guidance encourages financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations due to the effects of COVID-19.
Additionally, Section 4013 of the CARES Act further provides that loan modifications due to the impact of COVID-19 that would otherwise be classified as TDRs under GAAP will not be so classified. Modifications within the scope of this relief are in effect from the period beginning March 1, 2020 until the earlier of December 31, 2020January 1, 2022, or 60 days after the date on which the national emergency related to the COVID-19 pandemic formally terminates.
In accordance with this guidance, the Company has offered modifications to borrowers who were both impacted by COVID-19 and current on all principal and interest payments.
The following table showsAs of June 30, 2021, the Company’s deferrals byCompany had eight loans totaling $7.9 million in non-TDR loan portfolio type that have been granted through October 30, 2020. The balances shown are as of September 30, 2020.
| | | | | | | | | | | | | | | | | | | | |
(dollars in thousands) | | Deferrals | | Total Loan Balance | | % Of Balances With Deferrals |
Commercial loans | | | | | | |
Commercial and industrial | | $ | 680 | | | $ | 77,116 | | | 0.9 | % |
Owner-occupied commercial real estate | | — | | | 89,095 | | | — | % |
Investor commercial real estate | | — | | | 13,084 | | | 0.0 | % |
Construction | | — | | | 92,154 | | | 0.0 | % |
Single tenant lease financing | | 5,362 | | | 960,505 | | | 0.6 | % |
Public finance | | — | | | 625,638 | | | 0.0 | % |
Healthcare finance | | 2,275 | | | 461,740 | | | 0.5 | % |
Small business lending | | 8,637 | | | 123,168 | | | 7.0 | % |
Total commercial loans | | 16,954 | | | 2,442,500 | | | 0.7 | % |
Consumer loans | | | | | | |
Residential mortgage | | 2,542 | | | 203,041 | | | 1.3 | % |
Home equity | | — | | | 22,169 | | | — | % |
Other consumer | | 436 | | | 282,450 | | | 0.2 | % |
Total consumer loans | | 2,978 | | | 507,660 | | | 0.5 | % |
| | | | | | |
Total commercial and consumer loans | | $ | 19,932 | | | $ | 2,950,160 | | | 0.7 | % |
During the first and second quarters 2020 and into early third quarter 2020, the single tenant lease financing and healthcare finance portfolios had comprised a significant majority of total loan deferrals. However, as of October 30, 2020, these portfolios had declined to approximately 0.26% of the total loan portfolio. Earlier in the year, borrowers in these portfolios had experienced short-term cash flow challengesmodifications due to broad-based federal and state government actions to contain COVID-19. Within the single tenant lease financing portfolio, the portfolio average loan-to-value ratio is 49% and all borrowers, except for one relationship that is on nonaccrual status, made their loan payments in a timely manner prior to entering a deferral program. Furthermore, there are no delinquencies for performing loans not on deferral status. Related to the healthcare finance portfolio, over 90% of the loans are made to dental practices, many of which have been allowed to resume seeing patients as certain states across the country have reopened their economies. The amount of healthcare finance loans on deferral status peaked in late May when approximately 80% of this portfolio balance was under deferral. As of October 30, 2020, this percentage had dropped to 0.5%. All borrowers who have come off a deferral program have resumed making scheduled loan payments without delinquency.
U.S. Small Business Administration Paycheck Protection Program
Section 1102 of the CARES Act created the PPP, which is jointly administered by the U.S. Small Business Administration (“SBA”) and the Department of the Treasury. The PPP is designed to provide a direct incentive to small businesses to retain employees on their payroll during COVID-19 as well as to help cover certain utility costs and rent payments. These loans may be forgiven if certain conditions are satisfied and are fully guaranteed by the SBA. AsIn 2020, as a preferred SBA lender, we assisted our clients in participating in the PPP to help them maintain their workforces in an uncertain
and challenging environment. The loans originated in 2020 bear an interest rate of 1.00%, and we received weighted averagegross origination fees of 3.86% of the amount funded, or approximately $2.3 million in total.million. The Company received this fee revenue from the SBA in late June 2020, and it willwas deferred over the life of the PPP loans and recognized as interest income.
On December 27, 2020, $285 billion in additional funding was allocated to the PPP through the passage of the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act. The additional funding was used to fund PPP loans for small businesses, as well as certain small businesses who were eligible to receive a second PPP loan. The Company began offering PPP loans again in 2021 and continued until the program’s funds were depleted. These loans may be forgiven if certain conditions are satisfied and are fully guaranteed by the SBA. The loans originated during 2021 bear an interest rate of 1.00% and the Company received gross origination fees of approximately $1.3 million. The Company received this fee revenue from the SBA during the six month period ended June 30, 2021, and it is being deferred over the life of the PPP loans and recognized as interest income. As of September 30, 2020, we had 447 PPP loans totaling $58.3 million outstanding. The Company began processing applications for forgiveness from this round beginning in May 2021.
The Company anticipates that the majority of thesethe PPP loans will ultimately be forgiven, in whole or in part, by the SBA in accordance with the terms of the program. As of September 30, 2020, the Company did not receive any formal applications for forgiveness from PPP borrowers. Management anticipates that loan forgiveness applications will increase during the fourth quarter 2020.continue throughout 2021.
The following table provides a rollforward of the activity of PPP loans through June 30, 2021.
56 | | | | | | | | | | | | | | | | | |
(dollars in thousands) | |
| Number of Loans | | Principal Balance | | Net Deferred Fees |
Originated | 447 | | | $ | 58,336 | | | $ | 1,851 | |
Principal repaid | (71) | | | (7,184) | | | |
Net deferred fees recognized | | | | | (1,253) | |
Balance, December 31, 2020 | 376 | | | 51,152 | | | 598 | |
Originated | 278 | | | 27,201 | | | 1,118 | |
Principal repaid | (348) | | | (38,671) | | | |
Net deferred fees recognized | | | | | (768) | |
Balance, June 30, 2021 | 306 | | | 39,682 | | | 948 | |
Allowance for Loan Losses
The following table provides a rollforward of the allowance for loan losses for the last five completed fiscal quarters.quarters and the six months ended June 30, 2021 and 2020.
| (dollars in thousands) | (dollars in thousands) | Three Months Ended | | (dollars in thousands) | Three Months Ended | | Six Months Ended |
| | September 30, 2020 | | June 30, 2020 | | March 31, 2020 | | December 31, 2019 | | September 30, 2019 | | | June 30, 2021 | | March 31, 2021 | | December 31, 2020 | | September 30, 2020 | | June 30, 2020 | | June 30, 2021 | | June 30, 2020 |
Balance, beginning of period | Balance, beginning of period | $ | 24,465 | | | $ | 22,857 | | | $ | 21,840 | | | $ | 21,683 | | | $ | 19,976 | | | Balance, beginning of period | $ | 30,642 | | | $ | 29,484 | | | $ | 26,917 | | | $ | 24,465 | | | $ | 22,857 | | | $ | 29,484 | | | $ | 21,840 | |
Provision charged to expense | Provision charged to expense | 2,509 | | | 2,491 | | | 1,461 | | | 468 | | | 2,824 | | | Provision charged to expense | 21 | | | 1,276 | | | 2,865 | | | 2,509 | | | 2,491 | | | 1,297 | | | 3,952 | |
Losses charged off | Losses charged off | (241) | | | (1,016) | | | (498) | | | (409) | | | (1,182) | | | Losses charged off | (2,689) | | | (311) | | | (408) | | | (241) | | | (1,016) | | | (3,001) | | | (1,514) | |
Recoveries | Recoveries | 184 | | | 133 | | | 54 | | | 98 | | | 65 | | | Recoveries | 92 | | | 193 | | | 110 | | | 184 | | | 133 | | | 286 | | | 187 | |
Balance, end of period | Balance, end of period | $ | 26,917 | | | $ | 24,465 | | | $ | 22,857 | | | $ | 21,840 | | | $ | 21,683 | | | Balance, end of period | $ | 28,066 | | | $ | 30,642 | | | $ | 29,484 | | | $ | 26,917 | | | $ | 24,465 | | | $ | 28,066 | | | $ | 24,465 | |
| Net charge-offs to average loans | Net charge-offs to average loans | 0.01 | % | | 0.12 | % | | 0.06 | % | | 0.04 | % | | 0.15 | % | | Net charge-offs to average loans | 0.35 | % | | 0.02 | % | | 0.04 | % | | 0.01 | % | | 0.12 | % | | 0.06 | % | | 0.06 | % |
The allowance for loan losses was $26.9$28.1 million as of SeptemberJune 30, 2020,2021, compared to $21.8$29.5 million as of December 31, 2019. While total loan balances experienced a modest increase of $49.4 million, or 1.7%, compared to December 31, 2019, the Company made additional adjustments to qualitative factors2020. The decrease in its allowance model to reflect the continued economic uncertainty resulting from COVID-19. As a result, both the allowance for loan losses and the allowance as a percentage of total loans increased compared to December 31, 2019.2020 was due primarily to the elimination of $2.9 million of specific reserves related to a single tenant lease financing relationship and a commercial and industrial relationship, both of which had been classified as nonaccrual. The single tenant lease financing relationship included two loans, one of which was paid off at net book value (unpaid principal balance less specific reserves) and the other was transferred to OREO. The commercial and industrial relationship included four loans, two of which were paid off during the quarter. The decrease in the allowance for loan losses was partially offset by additional adjustments to the qualitative factors in the Company’s allowance model.
The allowance for loan losses as a percentage of total loans was 0.89%0.95% at SeptemberJune 30, 2020,2021, or 0.91%0.96%, when excluding PPP Loans,loans, compared to 0.74%0.96%, or 0.98%, when excluding PPP loans, at December 31, 2019.2020. The allowance for loan losses as a percentage of nonperforming loans decreasedincreased to 275.4%310.5% as of SeptemberJune 30, 2020,2021, compared to 324.4%289.5% as of December 31, 2019.2020, due to a decrease in nonperforming loans related to the single tenant lease financing relationship and commercial and industrial relationship discussed above. The provision for loan losses in the thirdsecond quarter 20202021 was $2.5 million,$21 thousand, compared to $2.8$2.5 million for the thirdsecond quarter 2019.2020. The decrease in the provision for loan losses was due primarily to the decline in loan balances. During the thirdsecond quarter 2020,2021, the Company recorded net charge-offs of $0.1$2.6 million, compared to net charge-offs of $1.1$0.9 million for the thirdsecond quarter 2019.2020. The increase in net charge-offs was due primarily to a charge-off of $2.4 million related to the single tenant lease financing relationship discussed above, as the loan payoff and the transfer to the OREO were recorded at net book value.
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) | (in thousands) | | (in thousands) | |
Amortized Cost | Amortized Cost | September 30, 2020 | | June 30, 2020 | | March 31, 2020 | | December 31, 2019 | | September 30, 2019 | Amortized Cost | June 30, 2021 | | March 31, 2021 | | December 31, 2020 | | September 30, 2020 | | June 30, 2020 |
Securities available-for-sale | Securities available-for-sale | | | | | | | | | | Securities available-for-sale | | | | | | | | | |
U.S. Government-sponsored agencies | U.S. Government-sponsored agencies | $ | 65,007 | | | $ | 68,203 | | | $ | 71,387 | | | $ | 77,715 | | | $ | 83,024 | | U.S. Government-sponsored agencies | $ | 57,984 | | | $ | 60,815 | | | $ | 61,765 | | | $ | 65,007 | | | $ | 68,203 | |
Municipal securities | Municipal securities | 87,365 | | | 91,906 | | | 94,981 | | | 97,447 | | | 96,076 | | Municipal securities | 77,364 | | | 79,168 | | | 82,757 | | | 87,365 | | | 91,906 | |
Agency mortgage-backed securities | Agency mortgage-backed securities | 250,755 | | | 275,433 | | | 279,458 | | | 264,142 | | | 278,327 | | Agency mortgage-backed securities | 445,895 | | | 229,981 | | | 241,795 | | | 250,755 | | | 275,433 | |
Private label mortgage-backed securities | Private label mortgage-backed securities | 71,519 | | | 101,110 | | | 114,363 | | | 63,704 | | | 45,969 | | Private label mortgage-backed securities | 29,003 | | | 40,550 | | | 57,268 | | | 71,519 | | | 101,110 | |
Asset-backed securities | Asset-backed securities | 5,000 | | | 5,000 | | | 5,000 | | | 5,000 | | | 5,000 | | Asset-backed securities | 5,000 | | | 5,000 | | | 5,000 | | | 5,000 | | | 5,000 | |
Corporate securities | Corporate securities | 48,406 | | | 48,394 | | | 43,378 | | | 38,632 | | | 38,638 | | Corporate securities | 48,447 | | | 48,433 | | | 48,419 | | | 48,406 | | | 48,394 | |
| Total available-for-sale | Total available-for-sale | 528,052 | | | 590,046 | | | 608,567 | | | 546,640 | | | 547,034 | | Total available-for-sale | 663,693 | | | 463,947 | | | 497,004 | | | 528,052 | | | 590,046 | |
Securities held-to-maturity | Securities held-to-maturity | | Securities held-to-maturity | |
Municipal securities | Municipal securities | 14,582 | | | 14,603 | | | 14,617 | | | 10,142 | | | 10,145 | | Municipal securities | 14,549 | | | 14,560 | | | 14,571 | | | 14,582 | | | 14,603 | |
Corporate securities | Corporate securities | 53,672 | | | 53,692 | | | 51,714 | | | 51,736 | | | 36,662 | | Corporate securities | 51,110 | | | 53,630 | | | 53,652 | | | 53,672 | | | 53,692 | |
Total held-to-maturity | Total held-to-maturity | 68,254 | | | 68,295 | | | 66,331 | | | 61,878 | | | 46,807 | | Total held-to-maturity | 65,659 | | | 68,190 | | | 68,223 | | | 68,254 | | | 68,295 | |
Total securities | Total securities | $ | 596,306 | | | $ | 658,341 | | | $ | 674,898 | | | $ | 608,518 | | | $ | 593,841 | | Total securities | $ | 729,352 | | | $ | 532,137 | | | $ | 565,227 | | | $ | 596,306 | | | $ | 658,341 | |
| (in thousands) | (in thousands) | | (in thousands) | |
Approximate Fair Value | Approximate Fair Value | September 30, 2020 | | June 30, 2020 | | March 31, 2020 | | December 31, 2019 | | September 30, 2019 | Approximate Fair Value | June 30, 2021 | | March 31, 2021 | | December 31, 2020 | | September 30, 2020 | | June 30, 2020 |
Securities available-for-sale | Securities available-for-sale | | | | | | | | | | Securities available-for-sale | | | | | | | | | |
U.S. Government-sponsored agencies | U.S. Government-sponsored agencies | $ | 63,682 | | | $ | 66,544 | | | $ | 70,004 | | | $ | 75,872 | | | $ | 81,435 | | U.S. Government-sponsored agencies | $ | 57,135 | | | $ | 59,478 | | | $ | 60,545 | | | $ | 63,682 | | | $ | 66,544 | |
Municipal securities | Municipal securities | 86,421 | | | 90,562 | | | 94,819 | | | 97,652 | | | 97,942 | | Municipal securities | 78,438 | | | 79,208 | | | 82,489 | | | 86,421 | | | 90,562 | |
Agency mortgage-backed securities | Agency mortgage-backed securities | 253,292 | | | 278,530 | | | 282,632 | | | 261,440 | | | 277,530 | | Agency mortgage-backed securities | 444,494 | | | 228,818 | | | 243,921 | | | 253,292 | | | 278,530 | |
Private label mortgage-backed securities | Private label mortgage-backed securities | 72,626 | | | 101,925 | | | 115,024 | | | 63,613 | | | 46,459 | | Private label mortgage-backed securities | 29,363 | | | 41,106 | | | 58,116 | | | 72,626 | | | 101,925 | |
Asset-backed securities | Asset-backed securities | 4,921 | | | 4,837 | | | 4,713 | | | 4,955 | | | 4,931 | | Asset-backed securities | 5,005 | | | 5,006 | | | 4,961 | | | 4,921 | | | 4,837 | |
Corporate securities | Corporate securities | 47,369 | | | 46,619 | | | 41,490 | | | 37,320 | | | 36,445 | | Corporate securities | 49,084 | | | 48,760 | | | 47,596 | | | 47,369 | | | 46,619 | |
| Total available-for-sale | Total available-for-sale | 528,311 | | | 589,017 | | | 608,682 | | | 540,852 | | | 544,742 | | Total available-for-sale | 663,519 | | | 462,376 | | | 497,628 | | | 528,311 | | | 589,017 | |
Securities held-to-maturity | Securities held-to-maturity | | Securities held-to-maturity | |
Municipal securities | Municipal securities | 15,328 | | | 15,274 | | | 15,678 | | | 10,368 | | | 10,490 | | Municipal securities | 15,373 | | | 15,109 | | | 15,317 | | | 15,328 | | | 15,274 | |
Corporate securities | Corporate securities | 53,848 | | | 53,878 | | | 53,790 | | | 52,192 | | | 37,065 | | Corporate securities | 52,685 | | | 54,274 | | | 54,135 | | | 53,848 | | | 53,878 | |
Total held-to-maturity | Total held-to-maturity | 69,176 | | | 69,152 | | | 69,468 | | | 62,560 | | | 47,555 | | Total held-to-maturity | 68,058 | | | 69,383 | | | 69,452 | | | 69,176 | | | 69,152 | |
Total securities | Total securities | $ | 597,487 | | | $ | 658,169 | | | $ | 678,150 | | | $ | 603,412 | | | $ | 592,297 | | Total securities | $ | 731,577 | | | $ | 531,759 | | | $ | 567,080 | | | $ | 597,487 | | | $ | 658,169 | |
The approximate fair value of available-for-sale investment securities decreased $12.5increased $165.9 million, or 2.4%33.3%, to $528.3$663.5 million as of SeptemberJune 30, 2020,2021, compared to $540.9$497.6 million as of December 31, 2019.2020. The decreaseincrease was due primarily to decreasesan increase of $12.2 million in agency securities, $11.2 million in municipal securities and $8.1$200.6 million in agency mortgage-backed securities, partially offset by a $28.8 million decrease in private label mortgage-backed securities and a $4.1 million decrease in municipal securities. These decreases wereThe increase in agency mortgage-backed securities was driven primarily by increased purchases during the six months ended June 30, 2021, partially offset by
prepayments and maturities in agency and agencyprivate label mortgage-backed securities, as well as early redemptions and maturities in municipal securities. The decreases were partially offset by purchases of corporate and private label mortgage-backed securities as liquidity from deposit growth was deployed.
Accrued Income and Other Assets
Accrued income and other assets were $66.5decreased $9.5 million, or 14.8%, to $54.8 million at SeptemberJune 30, 20202021 compared to $67.1$64.3 million at December 31, 2019.2020. The decrease primarily related to decreases of $9.5 million in cash pledged as collateral, $3.5 million in deferred tax assets and $2.5 million in derivative assets. As of these dates, the Company pledged $33.7$21.0 million and $42.3$30.6 million, respectively, of cash collateral to counterparties on interest rate swap agreements as security for its obligations related to these agreements. Collateral posted and received is dependent on the fair value of the underlying agreements as of the respective date. The decrease in cash collateral pledged was partially offset by an increase of $5.3 million in deferred tax assets.
Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities were $57.2$53.9 million at SeptemberJune 30, 20202021 compared to $53.0$48.4 million at December 31, 2019. The increase of $4.2 million, or 7.9%, was due primarily to a $4.9 million trade date accrual related to securities that were purchased in September 2020 but did not settle until October 2020, a $3.4 million increase in income taxes payable and a $1.5 million increase in accrued salaries and benefits. These increases were partially offset by a $5.0 million decrease in the fair value of interest rate swap agreements.2020.
Deposits
The following table presents the composition of the Company’s deposit base for the last five completed fiscal quarters.
| (dollars in thousands) | (dollars in thousands) | | September 30, 2020 | | June 30, 2020 | | March 31, 2020 | | December 31, 2019 | | September 30, 2019 | (dollars in thousands) | | June 30, 2021 | | March 31, 2021 | | December 31, 2020 | | September 30, 2020 | | June 30, 2020 |
Noninterest-bearing deposits | Noninterest-bearing deposits | | $ | 86,088 | | | 2.6 | % | | $ | 82,864 | | | 2.5 | % | | $ | 70,562 | | | 2.2 | % | | $ | 57,115 | | | 1.8 | % | | $ | 50,560 | | | 1.6 | % | Noninterest-bearing deposits | | $ | 113,996 | | | 3.6 | % | | $ | 100,700 | | | 3.1 | % | | $ | 96,753 | | | 3.0 | % | | $ | 86,088 | | | 2.6 | % | | $ | 82,864 | | | 2.5 | % |
Interest-bearing demand deposits | Interest-bearing demand deposits | | 155,054 | | | 4.6 | % | | 152,391 | | | 4.5 | % | | 123,233 | | | 3.9 | % | | 129,020 | | | 4.1 | % | | 122,551 | | | 3.9 | % | Interest-bearing demand deposits | | 196,841 | | | 6.1 | % | | 186,015 | | | 5.8 | % | | 188,645 | | | 5.8 | % | | 155,054 | | | 4.6 | % | | 152,391 | | | 4.5 | % |
Savings accounts | Savings accounts | | 49,890 | | | 1.5 | % | | 43,366 | | | 1.3 | % | | 32,485 | | | 1.0 | % | | 29,616 | | | 0.9 | % | | 34,886 | | | 1.1 | % | Savings accounts | | 56,298 | | | 1.8 | % | | 51,251 | | | 1.6 | % | | 43,200 | | | 1.3 | % | | 49,890 | | | 1.5 | % | | 43,366 | | | 1.3 | % |
Money market accounts | Money market accounts | | 1,359,178 | | | 40.3 | % | | 1,241,874 | | | 36.7 | % | | 930,698 | | | 29.3 | % | | 786,390 | | | 24.9 | % | | 698,077 | | | 22.2 | % | Money market accounts | | 1,432,355 | | | 44.6 | % | | 1,397,449 | | | 43.4 | % | | 1,350,566 | | | 41.3 | % | | 1,359,178 | | | 40.3 | % | | 1,241,874 | | | 36.7 | % |
Certificates of deposits | Certificates of deposits | | 1,360,575 | | | 40.3 | % | | 1,470,905 | | | 43.5 | % | | 1,493,644 | | | 47.0 | % | | 1,613,453 | | | 51.2 | % | | 1,681,377 | | | 53.4 | % | Certificates of deposits | | 1,087,350 | | | 33.9 | % | | 1,174,764 | | | 36.5 | % | | 1,289,319 | | | 39.4 | % | | 1,360,575 | | | 40.3 | % | | 1,470,905 | | | 43.5 | % |
Brokered deposits | Brokered deposits | | 361,606 | | | 10.7 | % | | 389,389 | | | 11.5 | % | | 527,884 | | | 16.6 | % | | 538,369 | | | 17.1 | % | | 560,791 | | | 17.8 | % | Brokered deposits | | 319,307 | | | 10.0 | % | | 307,424 | | | 9.6 | % | | 302,402 | | | 9.2 | % | | 361,606 | | | 10.7 | % | | 389,389 | | | 11.5 | % |
Total deposits | Total deposits | | $ | 3,372,391 | | | 100.0 | % | | $ | 3,380,789 | | | 100.0 | % | | $ | 3,178,506 | | | 100.0 | % | | $ | 3,153,963 | | | 100.0 | % | | $ | 3,148,242 | | | 100.0 | % | Total deposits | | $ | 3,206,147 | | | 100.0 | % | | $ | 3,217,603 | | | 100.0 | % | | $ | 3,270,885 | | | 100.0 | % | | $ | 3,372,391 | | | 100.0 | % | | $ | 3,380,789 | | | 100.0 | % |
Total deposits increased $218.4decreased $64.7 million, or 6.9%2.0%, to $3.4 billion as of September 30, 2020, compared to $3.2 billion as of June 30, 2021, compared to $3.3 billion as of December 31, 2019.2020. This increasedecrease was due primarily to an increasea decline of $572.8 million, or 72.8%, in money market accounts, offset by declines of $252.9$202.0 million, or 15.7%, in certificates of deposits, and $176.8partially offset by increases of $81.8 million, or 2.8%6.1%, in money market accounts, $17.2 million, or 17.8%, in noninterest-bearing deposits, $16.9 million, or 5.6%, in brokered deposits, $13.1 million, or 30.3%, in savings accounts, and $8.2 million, or 4.3%, in interest-bearing demand deposits. The Company experienced strong growth in money market balancesdeposit accounts due to targeted digital marketing efforts to grow small business accounts as well as consumers, small businessesbusiness and commercial clients increasing their cash balances due in part due to the economic uncertainty resulting from the COVID-19 pandemic. The declinesdecrease in certificates of deposits and brokered deposits were due to the maturity of higher cost balances and reduced pricing strategies designed to limit the volume of new production.
Recent Debt Offerings
Subsequent to the end of the quarter, onOn October 26, 2020, the Company issued $10.0 million in aggregate principal amount of 6.0% Fixed-to-Floating Rate Subordinated Notes due 2030 (the “2030 Notes”). The Notes were offered and sold by the Company in a private placement and are scheduled to mature on November 1, 2030. The 2030 Notes bear interest at a fixed rate of 6.0% per annum from and including October 26, 2020, to, but excluding, November 1, 2025, and thereafter at a floating interest rate initially equal to the three-month term SOFR plus 5.795%. The 2030 Notes are unsecured subordinated obligations of the Company and may be repaid, without penalty, on any interest payment date on or after November 1, 2025. The 2030 Notes are intended to qualify as Tier 2 capital under regulatory guidelines. We intend to use theThe net proceeds were used to redeem the 2025 Note on or beforein January 15, 2021, subject to the receipt of any applicable regulatory approvals.
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 411 basis points. 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. The 2029 Notes are trading on the Nasdaq Global Select Market under the symbol “INBKZ.”2021.
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 implementation of the capital conservation buffer began on January 1, 2016 at the 0.625% level and was phased in over a four-year period, increasing by increments of that amount on each subsequent January 1 until it reached 2.5% on January 1, 2019. The capital conservation buffer is designed to absorb losses during periods of economic stress. Failure to maintain the minimum Common Equity Tier 1 capital ratio plus the capital conservation buffer will result in potential restrictions on a banking institution’s ability to pay dividends, repurchase stock and/or pay discretionary compensation to its employees.
The following tables present actual and required capital ratios as of SeptemberJune 30, 20202021 and December 31, 20192020 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 SeptemberJune 30, 20202021 and December 31, 20192020 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.
| | | Actual | | | Minimum Capital Required - Basel III | | Minimum Required to be Considered Well Capitalized | | Actual | | | Minimum Capital Required - Basel III | | Minimum Required to be Considered Well Capitalized |
(dollars in thousands) | (dollars in thousands) | Capital Amount | | Ratio | | | Capital Amount | | Ratio | | Capital Amount | | Ratio | (dollars in thousands) | Capital Amount | | Ratio | | | Capital Amount | | Ratio | | Capital Amount | | Ratio |
As of September 30, 2020: | | | | | | | | | | | | | |
As of June 30, 2021: | | As of June 30, 2021: | | | | | | | | | | | | |
Common equity tier 1 capital to risk-weighted assets | Common equity tier 1 capital to risk-weighted assets | | | | Common equity tier 1 capital to risk-weighted assets | | | |
Consolidated | Consolidated | $ | 331,408 | | | 11.13 | % | | | $ | 208,452 | | | 7.00 | % | | N/A | | N/A | Consolidated | $ | 364,991 | | | 12.23 | % | | | $ | 208,989 | | | 7.00 | % | | N/A | | N/A |
Bank | Bank | 364,889 | | | 12.27 | % | | | 208,246 | | | 7.00 | % | | $ | 193,372 | | | 6.50 | % | Bank | 402,948 | | | 13.53 | % | | | 208,451 | | | 7.00 | % | | $ | 193,562 | | | 6.50 | % |
Tier 1 capital to risk-weighted assets | Tier 1 capital to risk-weighted assets | | | | Tier 1 capital to risk-weighted assets | | | |
Consolidated | Consolidated | 331,408 | | | 11.13 | % | | | 253,121 | | | 8.50 | % | | N/A | | N/A | Consolidated | 364,991 | | | 12.23 | % | | | 253,773 | | | 8.50 | % | | N/A | | N/A |
Bank | Bank | 364,889 | | | 12.27 | % | | | 252,870 | | | 8.50 | % | | 237,996 | | | 8.00 | % | Bank | 402,948 | | | 13.53 | % | | | 253,120 | | | 8.50 | % | | 238,230 | | | 8.00 | % |
Total capital to risk-weighted assets | Total capital to risk-weighted assets | | | | Total capital to risk-weighted assets | | | |
Consolidated | Consolidated | 428,083 | | | 14.38 | % | | | 312,679 | | | 10.50 | % | | N/A | | N/A | Consolidated | 462,928 | | | 15.51 | % | | | 313,484 | | | 10.50 | % | | N/A | | N/A |
Bank | Bank | 391,806 | | | 13.17 | % | | | 312,369 | | | 10.50 | % | | 297,495 | | | 10.00 | % | Bank | 431,014 | | | 14.47 | % | | | 312,677 | | | 10.50 | % | | 297,788 | | | 10.00 | % |
Leverage ratio | Leverage ratio | | | | Leverage ratio | | | |
Consolidated | Consolidated | 331,408 | | | 7.72 | % | | | 171,779 | | | 4.00 | % | | N/A | | N/A | Consolidated | 364,991 | | | 8.70 | % | | | 167,907 | | | 4.00 | % | | N/A | | N/A |
Bank | Bank | 364,889 | | | 8.50 | % | | | 171,666 | | | 4.00 | % | | 214,582 | | | 5.00 | % | Bank | 402,948 | | | 9.61 | % | | | 167,663 | | | 4.00 | % | | 209,579 | | | 5.00 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Actual | | | | Minimum Capital Required - Basel III | | Minimum Required to be Considered Well Capitalized |
(dollars in thousands) | Capital Amount | | Ratio | | | | | | Capital Amount | | Ratio | | Capital Amount | | Ratio |
As of December 31, 2019: | | | | | | | | | | | | | | | |
Common equity tier 1 capital to risk-weighted assets | | | | | | | | | | | | | | | |
Consolidated | $ | 313,803 | | | 10.84 | % | | | | | | $ | 202,661 | | | 7.00 | % | | N/A | | N/A |
Bank | 341,242 | | | 11.80 | % | | | | | | 202,480 | | | 7.00 | % | | $ | 188,017 | | | 6.50 | % |
Tier 1 capital to risk-weighted assets | | | | | | | | | | | | | | | |
Consolidated | 313,803 | | | 10.84 | % | | | | | | 246,088 | | | 8.50 | % | | N/A | | N/A |
Bank | 341,242 | | | 11.80 | % | | | | | | 245,869 | | | 8.50 | % | | 231,406 | | | 8.00 | % |
Total capital to risk-weighted assets | | | | | | | | | | | | | | | |
Consolidated | 405,171 | | | 13.99 | % | | | | | | 303,991 | | | 10.50 | % | | N/A | | N/A |
Bank | 363,082 | | | 12.55 | % | | | | | | 303,720 | | | 10.50 | % | | 289,257 | | | 10.00 | % |
Leverage ratio | | | | | | | | | | | | | | | |
Consolidated | 313,803 | | | 7.64 | % | | | | | | 164,219 | | | 4.00 | % | | N/A | | N/A |
Bank | 341,242 | | | 8.32 | % | | | | | | 164,121 | | | 4.00 | % | | 205,151 | | | 5.00 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Actual | | | | Minimum Capital Required - Basel III | | Minimum Required to be Considered Well Capitalized |
(dollars in thousands) | Capital Amount | | Ratio | | | | | | Capital Amount | | Ratio | | Capital Amount | | Ratio |
As of December 31, 2020: | | | | | | | | | | | | | | | |
Common equity tier 1 capital to risk-weighted assets | | | | | | | | | | | | | | | |
Consolidated | $ | 342,159 | | | 11.31 | % | | | | | | $ | 211,828 | | | 7.00 | % | | N/A | | N/A |
Bank | 377,678 | | | 12.49 | % | | | | | | 211,612 | | | 7.00 | % | | $ | 196,497 | | | 6.50 | % |
Tier 1 capital to risk-weighted assets | | | | | | | | | | | | | | | |
Consolidated | 342,159 | | | 11.31 | % | | | | | | 257,220 | | | 8.50 | % | | N/A | | N/A |
Bank | 377,678 | | | 12.49 | % | | | | | | 256,957 | | | 8.50 | % | | 241,842 | | | 8.00 | % |
Total capital to risk-weighted assets | | | | | | | | | | | | | | | |
Consolidated | 451,246 | | | 14.91 | % | | | | | | 317,742 | | | 10.50 | % | | N/A | | N/A |
Bank | 407,162 | | | 13.47 | % | | | | | | 317,418 | | | 10.50 | % | | 302,303 | | | 10.00 | % |
Leverage ratio | | | | | | | | | | | | | | | |
Consolidated | 342,159 | | | 7.95 | % | | | | | | 172,154 | | | 4.00 | % | | N/A | | N/A |
Bank | 377,678 | | | 8.78 | % | | | | | | 172,036 | | | 4.00 | % | | 215,045 | | | 5.00 | % |
Shareholders’ Dividends
The Company’s Board of Directors declared a cash dividend of $0.06 per share of common stock payable OctoberJuly 15, 20202021 to shareholders of record as of OctoberJuly 1, 2020.2021. 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 its 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, including any potential impact resulting from COVID-19.
As of SeptemberJune 30, 2020,2021, the Company had $72.0 million principal amount of subordinated debt outstanding pursuant its term loan evidenced by a term note due 2025 (the “2025 Note”), its 6.0% Fixed-to-Floating Rate Subordinated Notes due 2026, and the 2029 Notes. Subsequent toNotes and the end of the quarter, on October 26, 2020, we issued an additional $10.0 million aggregate principal amount of 2030 Notes. The agreements that govern our outstanding subordinated debt including the 2030 Notes, 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 at least the next twelve months. 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.
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 FHLB and brokered deposits.
Additionally, the Company has enhanced its liquidity management process during 2019 and 2020 through increased loan sale activity. During the first nine months of 2020, the Company sold $143.0 million of public finance, single tenant lease financing and SBA 7(a) guaranteed loans at premiums to book value, as well as a $90.8 million pool of residential mortgage loans. During 2019, the Company sold $237.5 million of portfolio residential mortgage, single tenant lease financing and public finance loans. These loan sales have provided liquidity to manage overall loan portfolio growth and capital utilization.
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. We intend to modestly reduce the size of our balance sheet during the fourth quarter 2020 through continued deposit repricing to help manage capital levels. A component of this balance sheet management strategy is expected to include reducing our cash balances from the levels at September 30, 2020. However, givenGiven the uncertainty regarding the lengthduration and ultimate economic effect of COVID-19, we believe it will be prudent to maintain higher levels of cash on the balance sheet than we have historically maintained until the crisis passes. We believe we have sufficient on-balance sheet liquidity, supplemented by access to additional funding sources, to manage the potential economic impact of COVID-19. At SeptemberJune 30, 2020,2021, on a consolidated basis, the Company had $1.1 billion$992.3 million in cash and cash equivalents and investment securities available-for-sale and $76.2$27.6 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 SeptemberJune 30, 2020,2021, the Bank had the ability to borrow an additional $558.4$636.9 million from the FHLB, the Federal Reserve and correspondent bank Fed Funds lines of credit.
The Company is a separate legal entity from the Bank and must provide for its own liquidity. In addition to its operating expenses, the Company is responsible for paying any dividends declared to its common shareholders and interest and principal on outstanding debt. The Company’s primary sources of funds are cash maintained at the holding company level and dividends from the Bank, the payment of which is subject to regulatory limits. At SeptemberJune 30, 2020,2021, the Company, on an unconsolidated basis, had $36.0$27.7 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 SeptemberJune 30, 2020,2021, approved outstanding loan commitments, including unused lines of credit and standby letters of credit, amounted to $267.4$293.1 million. Certificates of deposits and brokered deposits scheduled to mature in one year or less at SeptemberJune 30, 20202021 totaled $931.0$779.0 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.
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 ratio, average tangible common equity, return on average tangible common equity, total interest income - FTE, net interest income - FTE, net interest margin - FTE, allowance for loan losses to loans, excluding PPP loans, adjusted revenue, adjusted income before income taxes, adjusted income tax, provision, adjusted net income, adjusted diluted earnings per share, adjusted return on average assets, adjusted return on average shareholders’ equity, adjusted return on average tangible common equity and adjusted effective income tax rate 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 and the ninesix months ended SeptemberJune 30, 20202021 and 2019.2020.
| (dollars in thousands, except share and per share data) | (dollars in thousands, except share and per share data) | Three Months Ended | | Nine Months Ended | (dollars in thousands, except share and per share data) | Three Months Ended | | Six Months Ended |
September 30, 2020 | | June 30, 2020 | | March 31, 2020 | | December 31, 2019 | | September 30, 2019 | | September 30, 2020 | | September 30, 2019 | June 30, 2021 | | March 31, 2021 | | December 31, 2020 | | September 30, 2020 | | June 30, 2020 | | June 30, 2021 | | June 30, 2020 |
Total equity - GAAP | Total equity - GAAP | $ | 318,102 | | | $ | 307,711 | | | $ | 304,913 | | | $ | 295,140 | | | $ | 295,140 | | | $ | 318,102 | | | $ | 295,140 | | Total equity - GAAP | $ | 358,641 | | | $ | 344,566 | | | $ | 330,944 | | | $ | 318,102 | | | $ | 307,711 | | | $ | 358,641 | | | $ | 307,711 | |
Adjustments: | Adjustments: | | Adjustments: | |
Goodwill | Goodwill | (4,687) | | | (4,687) | | | (4,687) | | | (4,687) | | | (4,687) | | | (4,687) | | | (4,687) | | Goodwill | (4,687) | | | (4,687) | | | (4,687) | | | (4,687) | | | (4,687) | | | (4,687) | | | (4,687) | |
Tangible common equity | Tangible common equity | $ | 313,415 | | | $ | 303,024 | | | $ | 300,226 | | | $ | 290,453 | | | $ | 290,453 | | | $ | 313,415 | | | $ | 290,453 | | Tangible common equity | $ | 353,954 | | | $ | 339,879 | | | $ | 326,257 | | | $ | 313,415 | | | $ | 303,024 | | | $ | 353,954 | | | $ | 303,024 | |
| Total assets - GAAP | Total assets - GAAP | $ | 4,333,624 | | | $ | 4,324,600 | | | $ | 4,100,083 | | | $ | 4,095,491 | | | $ | 4,095,491 | | | $ | 4,333,624 | | | $ | 4,095,491 | | Total assets - GAAP | $ | 4,204,642 | | | $ | 4,188,570 | | | $ | 4,246,156 | | | $ | 4,333,624 | | | $ | 4,324,600 | | | $ | 4,204,642 | | | $ | 4,324,600 | |
Adjustments: | Adjustments: | | Adjustments: | |
Goodwill | Goodwill | (4,687) | | | (4,687) | | | (4,687) | | | (4,687) | | | (4,687) | | | (4,687) | | | (4,687) | | Goodwill | (4,687) | | | (4,687) | | | (4,687) | | | (4,687) | | | (4,687) | | | (4,687) | | | (4,687) | |
Tangible assets | Tangible assets | $ | 4,328,937 | | | $ | 4,319,913 | | | $ | 4,095,396 | | | $ | 4,090,804 | | | $ | 4,090,804 | | | $ | 4,328,937 | | | $ | 4,090,804 | | Tangible assets | $ | 4,199,955 | | | $ | 4,183,883 | | | $ | 4,241,469 | | | $ | 4,328,937 | | | $ | 4,319,913 | | | $ | 4,199,955 | | | $ | 4,319,913 | |
| Total common shares outstanding | Total common shares outstanding | 9,800,569 | | | 9,799,047 | | | 9,741,800 | | | 9,741,800 | | | 9,741,800 | | | 9,800,569 | | | 9,741,800 | | Total common shares outstanding | 9,854,153 | | | 9,823,831 | | | 9,800,569 | | | 9,800,569 | | | 9,799,047 | | | 9,854,153 | | | 9,799,047 | |
| Book value per common share | Book value per common share | $ | 32.46 | | | $ | 31.40 | | | $ | 31.30 | | | $ | 30.30 | | | $ | 30.30 | | | $ | 32.46 | | | $ | 30.30 | | Book value per common share | $ | 36.39 | | | $ | 35.07 | | | $ | 33.77 | | | $ | 32.46 | | | $ | 31.40 | | | $ | 36.39 | | | $ | 31.40 | |
Effect of goodwill | Effect of goodwill | (0.48) | | | (0.48) | | | (0.48) | | | (0.48) | | | (0.48) | | | (0.48) | | | (0.48) | | Effect of goodwill | (0.47) | | | (0.47) | | | (0.48) | | | (0.48) | | | (0.48) | | | (0.47) | | | (0.48) | |
Tangible book value per common share | Tangible book value per common share | $ | 31.98 | | | $ | 30.92 | | | $ | 30.82 | | | $ | 29.82 | | | $ | 29.82 | | | $ | 31.98 | | | $ | 29.82 | | Tangible book value per common share | $ | 35.92 | | | $ | 34.60 | | | $ | 33.29 | | | $ | 31.98 | | | $ | 30.92 | | | $ | 35.92 | | | $ | 30.92 | |
| Total shareholders’ equity to assets | Total shareholders’ equity to assets | 7.34 | % | | 7.12 | % | | 7.44 | % | | 7.21 | % | | 7.21 | % | | 7.34 | % | | 7.21 | % | Total shareholders’ equity to assets | 8.53 | % | | 8.23 | % | | 7.79 | % | | 7.34 | % | | 7.12 | % | | 8.53 | % | | 7.12 | % |
Effect of goodwill | Effect of goodwill | (0.10) | % | | (0.11) | % | | (0.11) | % | | (0.11) | % | | (0.11) | % | | (0.10) | % | | (0.11) | % | Effect of goodwill | (0.10) | % | | (0.11) | % | | (0.10) | % | | (0.10) | % | | (0.11) | % | | (0.10) | % | | (0.11) | % |
Tangible common equity to tangible assets | 7.24 | % | | 7.01 | % | | 7.33 | % | | 7.10 | % | | 7.10 | % | | 7.24 | % | | 7.10 | % | |
Tangible common equity to tangible assets ratio | | Tangible common equity to tangible assets ratio | 8.43 | % | | 8.12 | % | | 7.69 | % | | 7.24 | % | | 7.01 | % | | 8.43 | % | | 7.01 | % |
| Total average equity - GAAP | Total average equity - GAAP | $ | 313,611 | | | $ | 306,868 | | | $ | 297,623 | | | $ | 298,782 | | | $ | 298,782 | | | $ | 310,506 | | | $ | 295,963 | | Total average equity - GAAP | $ | 352,894 | | | $ | 335,968 | | | $ | 323,464 | | | $ | 313,611 | | | $ | 306,868 | | | $ | 344,478 | | | $ | 308,937 | |
Adjustments: | Adjustments: | | Adjustments: | |
Average goodwill | Average goodwill | (4,687) | | | (4,687) | | | (4,687) | | | (4,687) | | | (4,687) | | | (4,687) | | | (4,687) | | Average goodwill | (4,687) | | | (4,687) | | | (4,687) | | | (4,687) | | | (4,687) | | | (4,687) | | | (4,687) | |
Average tangible common equity | Average tangible common equity | $ | 308,924 | | | $ | 302,181 | | | $ | 292,936 | | | $ | 294,095 | | | $ | 294,095 | | | $ | 305,819 | | | $ | 291,276 | | Average tangible common equity | $ | 348,207 | | | $ | 331,281 | | | $ | 318,777 | | | $ | 308,924 | | | $ | 302,181 | | | $ | 339,791 | | | $ | 304,250 | |
| Return on average shareholders’ equity | Return on average shareholders’ equity | 10.67 | % | | 5.15 | % | | 9.46 | % | | 8.40 | % | | 8.40 | % | | 7.90 | % | | 8.20 | % | Return on average shareholders’ equity | 14.88 | % | | 12.61 | % | | 13.64 | % | | 10.67 | % | | 5.15 | % | | 13.78 | % | | 6.48 | % |
Effect of goodwill | Effect of goodwill | 0.16 | % | | 0.08 | % | | 0.15 | % | | 0.13 | % | | 0.13 | % | | 0.12 | % | | 0.13 | % | Effect of goodwill | 0.21 | % | | 0.18 | % | | 0.20 | % | | 0.16 | % | | 0.08 | % | | 0.19 | % | | 0.10 | % |
Return on average tangible common equity | Return on average tangible common equity | 10.83 | % | | 5.23 | % | | 9.61 | % | | 8.53 | % | | 8.53 | % | | 8.02 | % | | 8.33 | % | Return on average tangible common equity | 15.09 | % | | 12.79 | % | | 13.84 | % | | 10.83 | % | | 5.23 | % | | 13.97 | % | | 6.58 | % |
| (dollars in thousands, except share and per share data) | (dollars in thousands, except share and per share data) | Three Months Ended | | Nine Months Ended | (dollars in thousands, except share and per share data) | Three Months Ended | | Six Months Ended |
September 30, 2020 | | June 30, 2020 | | March 31, 2020 | | December 31, 2019 | | September 30, 2019 | | September 30, 2020 | | September 30, 2019 | June 30, 2021 | | March 31, 2021 | | December 31, 2020 | | September 30, 2020 | | June 30, 2020 | | June 30, 2021 | | June 30, 2020 |
Total interest income | Total interest income | $ | 32,750 | | | $ | 34,222 | | | $ | 37,877 | | | $ | 37,964 | | | $ | 37,694 | | | $ | 103,216 | | | $ | 109,537 | | Total interest income | $ | 33,377 | | | $ | 33,280 | | | $ | 33,643 | | | $ | 32,750 | | | $ | 34,222 | | | $ | 66,657 | | | $ | 70,466 | |
Adjustments: | Adjustments: | | Adjustments: | |
Fully-taxable equivalent adjustments 1 | Fully-taxable equivalent adjustments 1 | 1,424 | | | 1,437 | | | 1,570 | | | 1,595 | | | 1,595 | | | 4,396 | | | 4,764 | | Fully-taxable equivalent adjustments 1 | 1,394 | | | 1,356 | | | 1,400 | | | 1,424 | | | 1,437 | | | 2,750 | | | 2,972 | |
Total interest income - FTE | Total interest income - FTE | $ | 34,174 | | | $ | 35,659 | | | $ | 39,447 | | | $ | 33,326 | | | $ | 33,326 | | | $ | 107,612 | | | $ | 114,301 | | Total interest income - FTE | $ | 34,771 | | | $ | 34,636 | | | $ | 35,043 | | | $ | 34,174 | | | $ | 35,659 | | | $ | 69,407 | | | $ | 73,438 | |
| Net interest income | Net interest income | $ | 16,232 | | | $ | 14 | | | $ | 15,018 | | | $ | 15,374 | | | $ | 15,244 | | | $ | 45,676 | | | $ | 47,593 | | Net interest income | $ | 21,607 | | | $ | 20,525 | | | $ | 18,865 | | | $ | 16,232 | | | $ | 14,426 | | | $ | 42,132 | | | $ | 29,444 | |
Adjustments: | Adjustments: | | Adjustments: | |
Fully-taxable equivalent adjustments 1 | Fully-taxable equivalent adjustments 1 | 1,424 | | | 1,437 | | | 1,570 | | | 1,595 | | | 1,595 | | | 4,396 | | | 4,764 | | Fully-taxable equivalent adjustments 1 | 1,394 | | | 1,356 | | | 1,400 | | | 1,424 | | | 1,437 | | | 2,750 | | | 2,972 | |
Net interest income - FTE | Net interest income - FTE | $ | 17,656 | | | $ | 1,451 | | | $ | 16,588 | | | $ | 16,969 | | | $ | 16,839 | | | $ | 50,072 | | | $ | 52,357 | | Net interest income - FTE | $ | 23,001 | | | $ | 21,881 | | | $ | 20,265 | | | $ | 17,656 | | | $ | 15,863 | | | $ | 44,882 | | | $ | 32,416 | |
| Net interest margin | Net interest margin | 1.53 | % | | 1.37 | % | | 1.50 | % | | 1.51 | % | | 1.54 | % | | 1.47 | % | | 1.70 | % | Net interest margin | 2.11 | % | | 2.04 | % | | 1.78 | % | | 1.53 | % | | 1.37 | % | | 2.08 | % | | 1.43 | % |
Effect of fully-taxable equivalent adjustments 1 | Effect of fully-taxable equivalent adjustments 1 | 0.14 | % | | 0.13 | % | | 0.15 | % | | 0.16 | % | | 0.16 | % | | 0.14 | % | | 0.17 | % | Effect of fully-taxable equivalent adjustments 1 | 0.14 | % | | 0.14 | % | | 0.13 | % | | 0.14 | % | | 0.13 | % | | 0.13 | % | | 0.15 | % |
Net interest margin - FTE | Net interest margin - FTE | 1.67 | % | | 1.50 | % | | 1.65 | % | | 1.67 | % | | 1.70 | % | | 1.61 | % | | 1.87 | % | Net interest margin - FTE | 2.25 | % | | 2.18 | % | | 1.91 | % | | 1.67 | % | | 1.50 | % | | 2.21 | % | | 1.58 | % |
| Allowance for loan losses | Allowance for loan losses | $ | 26,917 | | | $ | 24,465 | | | $ | 22,857 | | | $ | 21,840 | | | $ | 21,683 | | | $ | 26,917 | | | $ | 21,683 | | Allowance for loan losses | $ | 28,066 | | | $ | 30,642 | | | $ | 29,484 | | | $ | 26,917 | | | $ | 24,465 | | | $ | 28,066 | | | $ | 24,465 | |
| Loans | Loans | $ | 3,012,914 | | | $ | 2,973,674 | | | $ | 2,892,093 | | | $ | 2,963,547 | | | $ | 2,881,272 | | | $ | 3,012,914 | | | $ | 2,881,272 | | Loans | $ | 2,957,608 | | | $ | 3,058,694 | | | $ | 3,059,231 | | | $ | 3,012,914 | | | $ | 2,973,674 | | | $ | 2,957,608 | | | $ | 2,973,674 | |
Adjustments: | Adjustments: | | Adjustments: | |
PPP loans | PPP loans | (58,337) | | | (58,948) | | | — | | | — | | | — | | | (58,337) | | | — | | PPP loans | (39,682) | | | (53,365) | | | (50,554) | | | (58,337) | | | (58,948) | | | (39,682) | | | (58,948) | |
Loans, excluding PPP loans | Loans, excluding PPP loans | $ | 2,954,577 | | | $ | 2,914,726 | | | $ | 2,892,093 | | | $ | 2,963,547 | | | $ | 2,881,272 | | | $ | 2,954,577 | | | $ | 2,881,272 | | Loans, excluding PPP loans | $ | 2,917,926 | | | $ | 3,005,329 | | | $ | 3,008,677 | | | $ | 2,954,577 | | | $ | 2,914,726 | | | $ | 2,917,926 | | | $ | 2,914,726 | |
| Allowance for loan losses to loans | Allowance for loan losses to loans | 0.89 | % | | 0.82 | % | | 0.79 | % | | 0.74 | % | | 0.75 | % | | 0.89 | % | | 0.75 | % | Allowance for loan losses to loans | 0.95 | % | | 1.00 | % | | 0.96 | % | | 0.89 | % | | 0.82 | % | | 0.95 | % | | 0.82 | % |
Effect of PPP loans | Effect of PPP loans | 0.02 | % | | 0.02 | % | | 0.00 | % | | 0.00 | % | | 0.00 | % | | 0.02 | % | | 0.00 | % | Effect of PPP loans | 0.01 | % | | 0.02 | % | | 0.02 | % | | 0.02 | % | | 0.02 | % | | 0.01 | % | | 0.02 | % |
Allowance for loan losses to loans, excluding PPP loans | Allowance for loan losses to loans, excluding PPP loans | 0.91 | % | | 0.84 | % | | 0.79 | % | | 0.74 | % | | 0.75 | % | | 0.91 | % | | 0.75 | % | Allowance for loan losses to loans, excluding PPP loans | 0.96 | % | | 1.02 | % | | 0.98 | % | | 0.91 | % | | 0.84 | % | | 0.96 | % | | 0.84 | % |
1 Assuming a 21% tax rate
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(dollars in thousands, except share and per share data) | | Three Months Ended | | Six Months Ended | | | | | | |
| June 30, 2021 | | March 31, 2021 | | December 31, 2020 | | September 30, 2020 | | June 30, 2020 | | June 30, 2021 | | June 30, 2020 | | | | | | |
Total Revenue- GAAP | | $ | 30,569 | | | $ | 28,900 | | | $ | 31,522 | | | $ | 28,727 | | | $ | 19,399 | | | $ | 59,469 | | | $ | 40,628 | | | | | | | |
Adjustments: | | | | | | | | | | | | | | | | | | | | |
Gain on sale of premises and equipment | | (2,523) | | | — | | | — | | | — | | | — | | | (2,523) | | | — | | | | | | | |
Adjusted revenue | | $ | 28,046 | | | $ | 28,900 | | | $ | 31,522 | | | $ | 28,727 | | | $ | 19,399 | | | $ | 56,946 | | | $ | 40,628 | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Income before income taxes - GAAP | | $ | 15,473 | | | $ | 12,307 | | | $ | 14,145 | | | $ | 9,806 | | | $ | 3,664 | | | $ | 27,780 | | | $ | 9,946 | | | | | | | |
Adjustments: | | | | | | | | | | | | | | | | | | | | |
Gain on sale of premises and equipment | | (2,523) | | | — | | | — | | | — | | | — | | | (2,523) | | | — | | | | | | | |
Adjusted income before income taxes | | $ | 12,950 | | | $ | 12,307 | | | $ | 14,145 | | | $ | 9,806 | | | $ | 3,664 | | | $ | 25,257 | | | $ | 9,946 | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Income tax provision (benefit) - GAAP | | $ | 2,377 | | | $ | 1,857 | | | $ | 3,055 | | | $ | 1,395 | | | $ | (268) | | | $ | 4,234 | | | $ | (5) | | | | | | | |
Adjustments: | | | | | | | | | | | | | | | | | | | | |
Gain on sale of premises and equipment | | (530) | | | — | | | — | | | — | | | — | | | (530) | | | — | | | | | | | |
Adjusted income tax provision (benefit) | | $ | 1,847 | | | $ | 1,857 | | | $ | 3,055 | | | $ | 1,395 | | | $ | (268) | | | $ | 3,704 | | | $ | (5) | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | (dollars in thousands, except share and per share data) | | Three Months Ended | | Nine Months Ended | |
| September 30, 2020 | | June 30, 2020 | | March 31, 2020 | | December 31, 2019 | | September 30, 2019 | | September 30, 2020 | | September 30, 2019 | |
Income before income taxes - GAAP | | $ | 9,806 | | | $ | 3,664 | | | $ | 6,282 | | | $ | 7,698 | | | $ | 6,775 | | | $ | 19,752 | | | $ | 19,458 | | |
Adjustments: | | |
Write-down of other real estate owned | | 2,065 | | | — | | | — | | | — | | | — | | | 2,065 | | | — | | |
Adjusted income before income taxes | | $ | 11,871 | | | $ | 3,664 | | | $ | 6,282 | | | $ | 7,698 | | | $ | 6,775 | | | $ | 21,817 | | | $ | 19,458 | | |
| Income tax provision (benefit) - GAAP | | $ | 1,395 | | | $ | (268) | | | $ | 263 | | | $ | 602 | | | $ | 449 | | | $ | 1,390 | | | $ | 1,315 | | |
Adjustments: | | |
Write-down of other real estate owned | | 434 | | | — | | | — | | | — | | | — | | | 434 | | | — | | |
Adjusted income tax provision (benefit) | | $ | 1,829 | | | $ | (268) | | | $ | 263 | | | $ | 602 | | | $ | 449 | | | $ | 1,824 | | | $ | 1,315 | | |
| Net income - GAAP | Net income - GAAP | | $ | 8,411 | | | $ | 3,932 | | | $ | 6,019 | | | $ | 7,096 | | | $ | 6,326 | | | $ | 18,362 | | | $ | 18,143 | | Net income - GAAP | | $ | 13,096 | | | $ | 10,450 | | | $ | 11,090 | | | $ | 8,411 | | | $ | 3,932 | | | $ | 23,546 | | | $ | 9,951 | | |
Adjustments: | Adjustments: | | Adjustments: | | |
Write-down of other real estate owned | | 1,631 | | | — | | | — | | | — | | | — | | | 1,631 | | | — | | |
Gain on sale of premises and equipment | | Gain on sale of premises and equipment | | $ | (1,993) | | | — | | | — | | | — | | | — | | | $ | (1,993) | | | — | | |
Adjusted net income | Adjusted net income | | $ | 10,042 | | | $ | 3,932 | | | $ | 6,019 | | | $ | 7,096 | | | $ | 6,326 | | | $ | 19,993 | | | $ | 18,143 | | Adjusted net income | | $ | 11,103 | | | $ | 10,450 | | | $ | 11,090 | | | $ | 8,411 | | | $ | 3,932 | | | $ | 21,553 | | | $ | 9,951 | | |
| Diluted average common shared outstanding | | 9,773,224 | | | 9,768,227 | | | 9,750,528 | | | 9,843,829 | | | 9,980,612 | | | 9,827,182 | | | 10,116,507 | | |
Diluted average common shares outstanding | | Diluted average common shares outstanding | | 9,981,422 | | | 9,963,036 | | | 9,914,022 | | | 9,773,224 | | | 9,768,227 | | | 9,970,147 | | | 9,802,427 | | |
| Diluted earnings per share - GAAP | Diluted earnings per share - GAAP | | $ | 0.86 | | | $ | 0.40 | | | $ | 0.62 | | | $ | 0.72 | | | $ | 0.63 | | | $ | 1.87 | | | $ | 1.79 | | Diluted earnings per share - GAAP | | $ | 1.31 | | | $ | 1.05 | | | $ | 1.12 | | | $ | 0.86 | | | $ | 0.40 | | | $ | 2.36 | | | $ | 1.02 | | |
Adjustments: | Adjustments: | | Adjustments: | | |
Effect of write-down of other real estate owned | | 0.17 | | | — | | | — | | | — | | | — | | | 0.16 | | | — | | |
Effect of gain on sale of premises and equipment | | Effect of gain on sale of premises and equipment | | (0.20) | | | — | | | — | | | — | | | — | | | (0.20) | | | — | | |
Adjusted diluted earnings per share | Adjusted diluted earnings per share | | $ | 1.03 | | | $ | 0.40 | | | $ | 0.62 | | | $ | 0.72 | | | $ | 0.63 | | | $ | 2.03 | | | $ | 1.79 | | Adjusted diluted earnings per share | | $ | 1.11 | | | $ | 1.05 | | | $ | 1.12 | | | $ | 0.86 | | | $ | 0.40 | | | $ | 2.16 | | | $ | 1.02 | | |
| Return on average assets | Return on average assets | | 0.78 | % | | 0.37 | % | | 0.59 | % | | 0.69 | % | | 0.63 | % | | 0.58 | % | | 0.64 | % | Return on average assets | | 1.25 | % | | 1.02 | % | | 1.02 | % | | 0.78 | % | | 0.37 | % | | 1.13 | % | | 0.47 | % | |
Effect of write-down of other real estate owned | | 0.15 | % | | 0.00 | % | | 0.00 | % | | 0.00 | % | | 0.00 | % | | 0.05 | % | | 0.00 | % | |
Effect of gain on sale of premises and equipment | | Effect of gain on sale of premises and equipment | | (0.19) | % | | 0.00 | % | | 0.00 | % | | 0.00 | % | | 0.00 | % | | (0.09) | % | | 0.00 | % | |
Adjusted return on average assets | Adjusted return on average assets | | 0.93 | % | | 0.37 | % | | 0.59 | % | | 0.69 | % | | 0.63 | % | | 0.63 | % | | 0.64 | % | Adjusted return on average assets | | 1.06 | % | | 1.02 | % | | 1.02 | % | | 0.78 | % | | 0.37 | % | | 1.04 | % | | 0.47 | % | |
| Return on average shareholders' equity | Return on average shareholders' equity | | 10.67 | % | | 5.15 | % | | 7.78 | % | | 9.46 | % | | 8.40 | % | | 7.90 | % | | 8.20 | % | Return on average shareholders' equity | | 14.88 | % | | 12.61 | % | | 13.64 | % | | 10.67 | % | | 5.15 | % | | 13.78 | % | | 6.48 | % | |
Effect of write-down of other real estate owned | | 2.07 | % | | 0.00 | % | | 0.00 | % | | 0.00 | % | | 0.00 | % | | 0.70 | % | | 0.00 | % | |
Adjusted return on average shareholders’ equity | | 12.74 | % | | 5.15 | % | | 7.78 | % | | 9.46 | % | | 8.40 | % | | 8.60 | % | | 8.20 | % | |
Effect of gain on sale of premises and equipment | | Effect of gain on sale of premises and equipment | | (2.26) | % | | 0.00 | % | | 0.00 | % | | 0.00 | % | | 0.00 | % | | (1.16) | % | | 0.00 | % | |
Adjusted return on average shareholders' equity | | Adjusted return on average shareholders' equity | | 12.62 | % | | 12.61 | % | | 13.64 | % | | 10.67 | % | | 5.15 | % | | 12.62 | % | | 6.48 | % | |
| Return on average tangible common equity | Return on average tangible common equity | | 10.83 | % | | 5.23 | % | | 7.90 | % | | 9.61 | % | | 8.53 | % | | 8.02 | % | | 8.33 | % | Return on average tangible common equity | | 15.09 | % | | 12.79 | % | | 13.84 | % | | 10.83 | % | | 5.23 | % | | 13.97 | % | | 6.58 | % | |
Effect of write-down of other real estate owned | | 2.10 | % | | 0.00 | % | | 0.00 | % | | 0.71 | % | | 0.00 | % | |
Effect of gain on sale of premises and equipment | | Effect of gain on sale of premises and equipment | | (2.30) | % | | 0.00 | % | | 0.00 | % | | 0.00 | % | | 0.00 | % | | (1.18) | % | | 0.00 | % | |
Adjusted return on average tangible common equity | Adjusted return on average tangible common equity | | 12.93 | % | | 5.23 | % | | 7.90 | % | | 9.61 | % | | 8.53 | % | | 8.73 | % | | 8.33 | % | Adjusted return on average tangible common equity | | 12.79 | % | | 12.79 | % | | 13.84 | % | | 10.83 | % | | 5.23 | % | | 12.79 | % | | 6.58 | % | |
| Effective income tax rate | Effective income tax rate | | 14.2 | % | | (7.3) | % | | 4.2 | % | | 7.8 | % | | 6.6 | % | | 7.0 | % | | 6.8 | % | Effective income tax rate | | 15.4 | % | | 15.1 | % | | 21.6 | % | | 14.2 | % | | (7.3) | % | | 15.2 | % | | (0.1) | % | |
Effect of write-down of other real estate owned | | 1.2 | % | | 0.0 | % | | 0.0 | % | | 0.0 | % | | 0.0 | % | | 1.4 | % | | 0.0 | % | |
Effect of gain on sale of premises and equipment | | Effect of gain on sale of premises and equipment | | (1.1) | % | | 0.0 | % | | 0.0 | % | | 0.0 | % | | 0.0 | % | | (0.5) | % | | 0.0 | % | |
Adjusted effective income tax rate | Adjusted effective income tax rate | | 15.4 | % | | (7.3) | % | | 4.2 | % | | 7.8 | % | | 6.6 | % | | 8.4 | % | | 6.8 | % | Adjusted effective income tax rate | | 14.3 | % | | 15.1 | % | | 21.6 | % | | 14.2 | % | | (7.3) | % | | 14.7 | % | | (0.1) | % | |
Critical Accounting Policies and Estimates
There have been no material changes in the Company’s critical accounting policies or estimates from those disclosed in its Annual Report on Form 10-K for the year ended December 31, 2019.2020.
Recent Accounting Pronouncements
Refer to Note 1615 to the condensed consolidated financial statements.
Off-Balance Sheet Arrangements
In the ordinary course of business, the Company enters into financial transactions to extend credit, interest rate swap agreements and forms of commitments that may be considered off-balance sheet arrangements. Interest rate swaps are arranged to receive hedge accounting treatment and are classified as either fair value or cash flow hedges. Fair value hedges are purchased to convert certain fixed rate assets to floating rate. Cash flow hedges are used to convert certain variable rate liabilities into fixed rate liabilities. In June 2020, the Company terminated all fair value hedging instruments associated with loans. At SeptemberJune 30, 20202021 and December 31, 2019,2020, the Company had interest rate swaps with notional amounts of $298.2$260.0 million and $725.6$298.2 million, respectively. 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 SeptemberJune 30, 20202021 and December 31, 2019,2020, the Company had commitments to sell residential real estate loans of $118.0$46.8 million and $115.0$107.5 million, respectively. These contracts mature in less than one year. Refer to Note 1413 to the condensed consolidated financial statements for additional information about derivative financial instruments.
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. Interest rate risk, iswhich can be defined as the risk to earnings and the value of the Company’s equity resulting from changes in market interest rates andrates. 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. The Company seeks to achieve consistent growth in net interest income and equity while managing volatility arising from shifts in market interest rates.
The Company monitors its 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. The Company uses 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.process, especially those pertaining to non-maturity deposit accounts. These assumptions are reviewed and refined on an ongoing basis by the Company. The Company continually reviewsmodels its NII and refinesEVE positions with various interest rate scenarios and assumptions of future balance sheet composition. The Company utilizes implied forward rates as its base case scenario which reflects market expectations for rate increases over the assumptions usednext 24 months. Presented below is the estimated impact on the Company’s NII and EVE position as of June 30, 2021, 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 -25 Basis Points | | Base Implied Forward Curve | | Implied Forward Curve +100 Basis Points | | Implied Forward Curve +200 Basis Points |
NII - Year 1 | 0.52 | % | | N/A | | (2.77) | % | | (7.00) | % |
NII - Year 2 | 4.92 | % | | 2.69 | % | | (0.01) | % | | (5.53) | % |
EVE | 1.72 | % | | N/A | | (7.10) | % | | (16.58) | % |
To supplement the instantaneous rate shocks required by regulatory guidance, the Company also calculates its interest rate risk modeling.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 SeptemberJune 30, 2020,2021, assuming a static balance sheet and gradual parallel shifts in interest rates over a twelve month period:
| | | | | | | | | | | | | | | | | | | | | | | |
| % Change from Base Case for Gradual Parallel Changes in Rates |
| Implied Forward Curve -25 Basis Points | | Base Implied Forward Curve | | Implied Forward Curve +100 Basis Points | | Implied Forward Curve +200 Basis Points |
NII - Year 1 | (0.10) | % | | N/A | | (0.54) | % | | (2.07) | % |
NII - Year 2 | 4.45 | % | | 2.69 | % | | 0.27 | % | | (4.76) | % |
EVE | 1.48 | % | | N/A | | (7.00) | % | | (16.10) | % |
The NII and EVE figures presented in both tables above are reflective of a static balance sheet:
| | | | | | | | | | | | | | | | | | | | | | | |
| % Change from Base Case for Parallel Changes in Rates |
| -50 Basis Points | | -25 Basis Points | | +100 Basis Points | | +200 Basis Points |
NII - Year 1 | (0.84) | % | | 0.85 | % | | (1.50) | % | | (4.95) | % |
NII - Year 2 | 10.90 | % | | 13.43 | % | | 8.33 | % | | 2.64 | % |
EVE | (1.58) | % | | (0.21) | % | | (0.64) | % | | (8.17) | % |
sheet, and do not incorporate either balance sheet growth 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 SBA, construction or C&I lending
The Company’s objective is•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 liability or shorten asset duration
•Repositioning the investment portfolio to manage the balance sheet with a “risk-neutral” position. A “risk-neutral” position refers to the absence of a strong bias toward either asset or liability sensitivity. An “asset sensitive” position refers to when the characteristics of the balance sheet are expected to generate higher NII when interest rates increase as rates earned on interest-earning assets would reprice upward more quickly or in greater quantities than rates paid on interest-bearing liabilities. A “liability sensitive” position refers to when the characteristics of the balance sheet are expected to generate higher NII when interest rates decrease as rates paid on interest-bearing liabilities would reprice downward more quickly or in greater quantities than rates earned on interest-earning assets.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, the principal executive and principal financial officers concluded that the disclosure controls and procedures were effective at a reasonable assurance level as of SeptemberJune 30, 2020.2021.
Changes in Internal Control Overover Financial Reporting
There has been no change in the Company’s internal control over financial reporting during the quarter ended SeptemberJune 30, 20202021 that has materially affected, or is reasonably likely to materially affect, its internal control over financial reporting.
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
There have been no material changes to the risk factors previously disclosed in Part I, Item 1A, of our Annual Report on Form 10-K for the year ended December 31, 2019 (“2019 Form 10-K”), as updated in Part II, Item 1A of our Quarterly Report on Form 10-Q for the three months ended June 30, 2020 (“Second Quarter 2020 Form 10-Q”), except as described below. The risk factor set forth below updates, and should be read together with, the risk factors described in our 2019 Form 10-K. In addition, the COVID-19 pandemic could exacerbate or trigger other risks discussed in our 2019 Form 10-K, any of which could materially affect our business, financial condition and results of operations.
The COVID-19 pandemic has resulted in deterioration of general business and economic conditions and continued to impact us, our customers, counterparties, employees, and third-party service providers. The ultimate magnitude and duration of the pandemic is still unknown at this time and, therefore, the extent of the impact on our business, financial position, results of operations, liquidity and prospects remains uncertain.2020.
Global health concerns related to the ongoing COVID-19 pandemic and related government actions taken to reduce the spread of the virus have had a significant negative impact on the macroeconomic environment and market conditions, including significant disruption of, and volatility in, financial markets, and the pandemic has significantly increased economic uncertainty, reduced economic activity and resulted in lost revenues and increased unemployment throughout the United States, but also specifically in Indiana, where we maintain a significant portion of our operations. Our business is dependent upon the willingness and ability of our customers to conduct banking and other financial transactions. The continuing effects of the COVID-19 pandemic, or any other highly contagious or infectious disease, could negatively impact the ability of our employees and customers to conduct such transactions and disrupt the business activities and operations in the areas in which we operate. While the spread of the COVID-19 virus has minimally impacted our operations as of September 30, 2020, we could experience temporary closures of our corporate offices and/or suspension of certain services in particular markets. Currently, it is unknown how long the COVID-19 pandemic will last, or when restrictions on individuals and businesses across the country will be fully lifted. Additionally, new information may emerge regarding the severity or spread of COVID-19 and additional actions may be taken by federal, state and local governments to contain COVID-19 or treat its impact. Should there be sustained disruption in our operations, or that of our customers, our financial condition and results of operations could be negatively impacted.
The COVID-19 pandemic has significantly affected the financial markets and has resulted in a number of Federal Reserve actions, which have resulted in a significant decline in market interest rates. Most of our assets and liabilities are financial in nature and are sensitive to movements in market interest rates. A prolonged period of volatile and unstable market conditions will impact both the level of income and expense recorded on our assets and liabilities and the market value of all interest-earning assets and interest-bearing liabilities, which in turn could have an adverse effect on our net interest income, net interest margin and profitability.
Although we have business continuity plans and other safeguards against pandemics or another contagious disease, the spread of COVID-19 could also negatively impact the availability of our employees who are necessary to conduct business operations, as well as potentially impact the business and operations of our third-party service providers. If the response to contain COVID-19, or another highly infectious or contagious disease, is unsuccessful, we could experience a material adverse effect on our business operations, asset valuations, financial condition and results of operations. Material adverse impacts may include all or a combination of valuation impairments on our intangible assets, investments, loans, loan servicing rights, deferred tax assets, or derivatives. The extent to which the COVID-19 pandemic impacts our business, results of operations and financial condition will depend on future developments that are highly uncertain and are difficult to predict, including, but not limited to, the duration and spread of the outbreak, its severity, the actions to contain the virus or treat its impact, and how quickly and to what extent normal economic and operating conditions can resume. After the COVID-19 pandemic has subsided, we may continue to experience materially adverse impacts to our business, financial condition and results of operations as a result of the virus’s global and local economic impact, including the availability of credit, adverse impacts on our liquidity and any recession that has occurred or may occur in the future.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not Applicable.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
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Exhibit No. | | Description | | Method of Filing |
| | | | Incorporated by Reference |
| | | | Incorporated by Reference |
| | | | Incorporated by Reference |
| | | | Incorporated by Reference |
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| | | | Incorporated by Reference |
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| | | | Filed Electronically |
| | | | Filed Electronically |
| | | | Filed Electronically |
101 | | Inline XBRL Instance Document (does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document) | | Filed Electronically |
101.SCH | | Inline XBRL Taxonomy Extension Schema | | Filed Electronically |
101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase | | Filed Electronically |
101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase | | Filed Electronically |
101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase | | Filed Electronically |
101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase | | Filed Electronically |
104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | | Filed Electronically |
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.
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| | FIRST INTERNET BANCORP |
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11/5/20208/9/2021 | By | /s/ David B. Becker |
| | David B. Becker, Chairman President and Chief Executive Officer (on behalf of Registrant) |
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11/5/20208/9/2021 | By | /s/ Kenneth J. Lovik |
| | Kenneth J. Lovik, Executive Vice President and Chief Financial Officer (principal financial officer) |