FIRST INTERNET BANCORP 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, our Quarterly Report on Form 10-Q for the quarter endedMarch 31, 2020 and our Annual Report on Form 10-K for the year endedDecember 31, 2019 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 , anIndiana 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 theState of Indiana onSeptember 15, 2005 . OnMarch 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 throughoutthe United States and acquires securities issued by state and local governments and other municipalities.JKH Realty Services, LLC , manages other real estate owned ("OREO") properties as needed.SPF15, Inc. is a real estate holding company. 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 online channels on a nationwide basis and have no traditional branch offices. Our residential mortgage products are offered nationwide primarily through an online direct-to-consumer platform and are supplemented withCentral Indiana -based mortgage and construction lending. Our consumer 40 --------------------------------------------------------------------------------
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
and depositors located primarily in Central Indiana , Phoenix, Arizona and
adjacent markets, our C&I banking team provides credit solutions such as lines
of credit, term loans, owner-occupied CRE loans and corporate credit cards. Our
public finance team provides a range of public and municipal lending and leasing
products to government entities on a nationwide basis. Our healthcare finance
team was established in conjunction with our strategic partnership with
Lendeavor, Inc. , a San Francisco -based technology-enabled lender to healthcare
practices, and provides lending for healthcare practice finance or acquisition,
acquisition or refinancing of owner-occupied CRE and equipment purchases. This
portfolio segment is generally concentrated in the Western and Southwestern
regions of the United States with plans to continue expanding nationwide. 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
loans, revenue and deposits. We believe that we can differentiate ourselves from
larger financial institutions through providing a full suite of services to
emerging small businesses and entrepreneurs. We have been focused on adding
experienced personnel to build out our capabilities in small business lending
and U.S. government guaranteed lending programs, including loans originated
under the Small Business Administration ("SBA") guidelines. To accelerate 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.
COVID-19 Pandemic
The coronavirus pandemic ("COVID-19") continues to pose health and economic
challenges globally. In response, federal, state and local governments have
passed laws and enacted policy changes intended to provide relief to affected
businesses and individuals and to stimulate national and local economies. While
the effect of COVID-19, including the responses from governmental agencies, did
have an impact on our operating results as of June 30, 2020 , we believe the
impact was consistent with the effect of COVID-19 on the overall banking
industry and was minimal on our operations. However, a prolonged outbreak could
have an adverse effect on our financial condition and results of operations in
future periods. The ultimate impact of COVID-19 on our business remains
uncertain as we cannot predict with confidence 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, 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. A significant number of our employees are still working
remotely, and for those that continue to come into the office we have
implemented social distancing policies and increased cleaning frequency and
protocols at all Company locations.
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. Beginning in the first quarter 2020, we offered
loan payment deferral programs for clients affected by COVID-19. Loan balances
on payment deferral programs peaked in late May 2020 . As certain parts of the
economy re-opened during the second quarter 2020, loan balances under deferral
agreements have been reduced significantly from the peak and all borrowers
coming off deferrals have resumed normal payment schedules. As a preferred SBA
lender, we also assisted clients by participating in the Paycheck Protection
Program ("PPP"). Despite the challenging environment, we have continued to
prudently extend credit to both commercial and consumer clients.
41
--------------------------------------------------------------------------------Section 1102 of the CARES Act created the PPP, which is jointly administered by the SBA and theDepartment 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. Loans originated under the PPP bear an interest rate of 1.00% and do not require payments for the first six months. Originally, all PPP Loans carried a two-year term, however Congressional amendments to the CARES Act changed the maturity of loans approved afterJune 5, 2020 to a five-year term. These loans may be forgiven if the loan proceeds were used for payroll costs and other qualifying business expenses as long as a minimum of 60% of the forgiven amount was used to maintain payroll costs. The federal government approved an initial appropriation of$349.0 billion for PPP loans and when that was depleted, approved an additional$310.0 billion . As a preferred SBA lender, we assisted our clients in participating in both rounds of the PPP. ThroughJune 30, 2020 , we approved and funded 449 PPP loans totaling$58.9 million to help small businesses maintain their workforces in an uncertain and challenging environment. All of the loans the Company originated have two-year maturities as they were originated prior toJune 5, 2020 . 42 --------------------------------------------------------------------------------
Results of Operations
The following table presents a summary of the Company's financial performance for the last five completed fiscal quarters and the six months endedJune 30, 2020 and 2019. Three Months Ended Six Months Ended (dollars in thousands except forJune 30 ,March 31 ,December 31 ,September 30 ,June 30 ,June 30 ,June 30 , per share data) 2020 2020 2019 2019 2019 2020 2019 Income Statement Summary: Net interest income$ 14,426 $ 15,018 $ 15,374 $ 15,244 $ 16,105 $ 29,444 $ 32,349 Provision for loan losses 2,491 1,461 468 2,824 1,389 3,952 2,674 Noninterest income 4,973 6,211 5,405 5,558 3,454 11,184 5,826 Noninterest expense 13,244 13,486 12,613 11,203 11,709 26,730 22,818 Income tax (benefit) provision (268) 263 602 449 340 (5) 866 Net income$ 3,932 $ 6,019 $ 7,096 $ 6,326 $ 6,121 $ 9,951 $ 11,817 Per Share Data: Earnings per share - basic$ 0.40 $ 0.62 $ 0.72 $ 0.63 $ 0.60 $ 1.02 $ 1.16 Earnings per share - diluted$ 0.40 $ 0.62 $ 0.72 $ 0.63 $ 0.60 $ 1.02 $
1.16
Dividends declared per share$ 0.06 $ 0.06 $ 0.06 $ 0.06 $ 0.06 $ 0.12 $
0.12
Book value per common share$ 31.40 $ 31.13 $ 31.30 $ 30.30 $ 29.56 $ 31.40 $
29.56
Tangible book value per common share 1$ 30.92 $ 30.65 $ 30.82 $ 29.82 $ 29.10 $ 30.92 $ 29.10 Common shares outstanding 9,799,047 9,801,825 9,741,800 9,741,800 10,016,458 9,799,047
10,016,458
Average common shares outstanding:
Basic 9,768,227 9,721,485 9,825,784 9,979,603 10,148,285 9,798,528 10,182,770
Diluted 9,768,227 9,750,528 9,843,829 9,980,612 10,148,285 9,802,427 10,186,833
Dividend payout ratio 2 15.00 % 9.68 % 8.33 % 9.52 % 10.00 % 11.76 % 10.34 %
Performance Ratios:
Return on average assets 0.37 % 0.59 % 0.69 % 0.63 % 0.65 % 0.47 % 0.64 %
Return on average shareholders'
equity 5.15 % 7.78 % 9.46 % 8.40 % 8.26 % 6.48 % 8.09 %
Return on average tangible common
equity 1 5.23 % 7.90 % 9.61 % 8.53 % 8.39 % 6.58 % 8.22 %
Net interest margin 1.37 % 1.50 % 1.51 % 1.54 % 1.73 % 1.43 % 1.79 %
Net interest margin - FTE 1,3 1.50 % 1.65 % 1.67 % 1.70 % 1.91 % 1.58 % 1.97 %
Noninterest expense to average
assets 1.22 % 1.32 % 1.22 % 1.11 % 1.23 % 0.94 % 1.55 %
Capital Ratios:
Total shareholders' equity to
assets 7.12 % 7.32 % 7.44 % 7.21 % 7.48 % 7.12 % 7.48 %
Tangible common equity to tangible
assets ratio 1 7.01 % 7.22 % 7.33 % 7.10 % 7.37 % 7.01 % 7.37 %
Tier 1 leverage ratio 7.49 % 7.82 % 7.64 % 7.66 % 8.06 % 7.49 % 8.06 %
Common equity tier 1 capital ratio 10.94 % 10.76 % 10.84 % 10.93 % 11.08 % 10.94 % 11.08 %
Tier 1 capital ratio 10.94 % 10.76 % 10.84 % 10.93 % 11.08 % 10.94 % 11.08 %
Total risk-based capital ratio 14.13 % 13.87 % 13.99 % 14.17 % 14.31 % 14.13 % 14.31 %
1 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.
2 Dividends per share divided by diluted earnings per share.
3 On a fully-taxable equivalent ("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.
43
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During the second quarter 2020, net income was $3.9 million , or $0.40 per
diluted share, compared to the second quarter 2019 net income of $6.1 million ,
or $0.60 per diluted share, representing a decrease in net income of $2.2
million , or 35.8%. During the six months ended June 30, 2020 , net income was
$10.0 million , or $1.02 per diluted share, compared to the six months ended
June 30, 2019 net income of $11.8 million , or $1.16 per diluted share, resulting
in a decrease in net income of $1.9 million , or 15.8%.
The $2.2 million decrease in net income in the second quarter 2020 compared to
the second quarter 2019 was due primarily to a decrease of $1.7 million , or
10.4%, in net interest income, a $1.5 million , or 13.1%, increase in noninterest
expense and a $1.1 million , or 79.3%, increase in provision for loan losses,
partially offset by a $1.5 million , or 44.0%, increase in noninterest income and
a decrease of $0.6 million , or 178.8%, in income tax expense.
The $1.9 million decrease in net income in the six months ended June 30, 2020
compared to the six months ended June 30, 2019 was due primarily to a $3.9
million , or 17.1%, increase in noninterest expense, a $2.9 million , or 9.0%,
decrease in net interest income and a $1.3 million , or 47.8% increase in
provision for loan losses, partially offset by a $5.4 million , or 92.0%,
increase in noninterest income and a $0.9 million , or 100.6%, decrease in income
tax expense.
During the second quarter 2020, return on average assets ("ROAA") and return on
average shareholders' equity ("ROAE") were 0.37% and 5.15%, respectively,
compared to 0.65% and 8.26%, respectively, for the second quarter 2019. During
the six months ended June 30, 2020 , ROAA and ROAE were 0.47% and 6.48%,
respectively, compared to 0.64% and 8.09%, respectively, for the six months
ended June 30, 2019 . The decrease in ROAA for both the three and six months
ended June 30, 2020 compared to the three and six months ended June 30, 2019 was
due primarily to the combination of lower net income and the Company's growth in
average assets. The decrease in ROAE during the three and six months ended June
30, 2020 compared to the three and six months ended June 30, 2019 was mainly the
result of the combination of lower net income and the Company's growth in
average shareholders' equity. The increase in average shareholder's equity was
due mainly to an increase in the average balance of retained earnings, but
partially offset by an increase in the average balance of accumulated other
comprehensive loss.
44
--------------------------------------------------------------------------------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
June 30, 2020 March 31, 2020 June 30, 2019
Interest Interest Interest
Average Balance /Dividends Yield /Cost Average Balance /Dividends Yield /Cost Average Balance /Dividends Yield /Cost
Assets
Interest-earning assets
Loans, including
loans held-for-sale $ 2,989,772 $ 29,730 4.00 % $ 2,977,994 $ 30,408 4.11 % $ 2,916,076 $ 30,842 4.24 %
Securities - taxable 560,947 3,276 2.35 % 531,046 3,619 2.74 % 460,816 3,540 3.08 %
Securities - non-taxable 96,675 457 1.90 % 99,833 572 2.30 % 97,536 668 2.75 %
Other earning assets 594,296 759 0.51 % 415,927 1,645 1.59 % 248,996 1,794 2.89 %
Total interest-earning assets 4,241,690 34,222 3.24 % 4,024,800 36,244 3.62 % 3,723,424 36,844 3.97 %
Allowance for loan losses (23,388) (22,059) (19,275) Noninterest-earning assets 111,872 97,191 100,872 Total assets$ 4,330,174 $ 4,099,932 $ 3,805,021 Liabilities Interest-bearing liabilities Interest-bearing demand deposits$ 137,487 $ 237 0.69 %$ 122,925 $ 219 0.72 %$ 117,665 $ 214 0.73 % Regular savings accounts 37,204 92 0.99 % 30,345 78 1.03 % 37,507 106 1.13 % Money market accounts 1,089,063 3,541 1.31 % 866,605 3,743 1.74 % 592,106 2,995 2.03 % Certificates and brokered deposits 2,006,966 11,893 2.38 % 2,069,170 13,168 2.56 % 2,131,729 13,832 2.60 % Total interest-bearing deposits 3,270,720 15,763 1.94 % 3,089,045 17,208 2.24 % 2,879,007 17,147 2.39 % Other borrowed funds 584,543 4,033 2.77 % 584,465 4,018 2.76 % 548,932 3,592 2.62 % Total interest-bearing liabilities 3,855,263 19,796 2.07 % 3,673,510 21,226 2.32 % 3,427,939 20,739 2.43 % Noninterest-bearing deposits 73,758 60,456 42,566 Other noninterest-bearing liabilities 94,285 54,961 37,368 Total liabilities 4,023,306 3,788,927 3,507,873 Shareholders' equity 306,868 311,005 297,148 Total liabilities and shareholders' equity$ 4,330,174 $ 4,099,932 $ 3,805,021 Net interest income$ 14,426 $ 15,018 $ 16,105 Interest rate spread 1 1.17% 1.30% 1.54 % Net interest margin 2 1.37% 1.50% 1.73 % Net interest margin - FTE 3 1.50% 1.65% 1.91 % 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. 45
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(dollars in thousands) Six Months Ended
June 30, 2020 June 30, 2019
Interest Interest
Average Balance /Dividends Yield /Cost Average Balance /Dividends Yield /Cost
Assets
Interest-earning assets
Loans, including loans
held-for-sale $ 2,983,883 $ 60,138 4.05 % $ 2,845,854 $ 60,060 4.26 %
Securities - taxable 545,997 6,895 2.54 % 445,006 6,864 3.11 %
Securities - non-taxable 98,254 1,029 2.11 % 95,899 1,352 2.84 %
Other earning assets 505,111 2,404 0.96 % 247,871 3,567 2.90 %
Total interest-earning assets 4,133,245 70,466 3.43 % 3,634,630 71,843 3.99 %
Allowance for loan losses (22,724) (18,755)
Noninterest-earning assets 104,532 100,880
Total assets $ 4,215,053 $ 3,716,755
Liabilities
Interest-bearing liabilities
Interest-bearing demand deposits $ 130,206 $ 456 0.70 % $ 113,582 $ 427 0.76 %
Regular savings accounts 33,774 170 1.01 % 38,177 213 1.13 %
Money market accounts 977,834 7,284 1.50 % 577,686 5,747 2.01 %
Certificates and brokered deposits 2,038,068 25,061 2.47 % 2,074,812 26,146 2.54 %
Total interest-bearing deposits 3,179,882 32,971 2.09 % 2,804,257 32,533 2.34 %
Other borrowed funds 584,504 8,051 2.77 % 544,841 6,961 2.58 %
Total interest-bearing liabilities 3,764,386 41,022 2.19 % 3,349,098 39,494 2.38 %
Noninterest-bearing deposits 67,107 42,558
Other noninterest-bearing
liabilities 74,623 30,569
Total liabilities 3,906,116 3,422,225
Shareholders' equity 308,937 294,530
Total liabilities and shareholders'
equity $ 4,215,053 $ 3,716,755
Net interest income $ 29,444 $ 32,349
Interest rate spread 1 1.24 % 1.61 %
Net interest margin 2 1.43 % 1.79 %
Net interest margin - FTE 3 1.58 % 1.97 %
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.
46--------------------------------------------------------------------------------
Rate/Volume Analysis
The following table illustrates the impact of changes in the volume of
interest-earning assets and interest-bearing liabilities and interest rates on
net interest income for the periods indicated. The change in interest not due
solely to volume or rate has been allocated in proportion to the absolute dollar
amounts of the change in each.
Three Months Ended June 30, 2020 vs. March 31, Three Months Ended June 30, 2020 vs. June 30, 2019
(dollars in thousands) 2020 Due to Changes in Due to Changes in
Six Months Ended
Volume Rate Net Volume Rate Net Volume Rate Net
Interest income
Loans, including loans held-for-sale $ 756 $ (1,434) $ (678) $ 3,978 $ (5,090) $ (1,112) $ 5,966 $ (5,888) $ 78
Securities - taxable 1,077 (1,420) (343) 3,092 (3,356) (264) 2,824 (2,793) 31
Securities - non-taxable (18) (97) (115) (6) (205) (211) 94 (417) (323)
Other earning assets 3,134 (4,020) (886) 6,787 (7,822) (1,035) 5,141 (6,304) (1,163)
Total 4,949 (6,971) (2,022) 13,851 (16,473) (2,622) 14,025 (15,402) (1,377)
Interest expense
Interest-bearing deposits 5,215 (6,660) (1,445) 10,289 (11,673) (1,384) 8,044 (7,606) 438
Other borrowed funds - 14 14 234 207 441 542 548 1,090
Total 5,215 (6,646) (1,431) 10,523 (11,466) (943) 8,586 (7,058) 1,528
Increase (decrease) in net interest income $ (266) $ (325) $ (591) $ 3,328 $ (5,007) $ (1,679) $ 5,439 $ (8,344) $ (2,905)
Net interest income for the second quarter 2020 was $14.4 million , a decrease of
$1.7 million , or 10.4%, compared to $16.1 million for the second quarter 2019.
The decrease in net interest income was primarily the result of a $2.6 million ,
or 7.1%, decrease in total interest income to $34.2 million for the second
quarter 2020 from $36.8 million for the second quarter 2019. The decrease in
total interest income was partially offset by a $0.9 million , or 4.5%, decrease
in total interest expense to$19.8 million for the second quarter 2020 from $20.7
million for the second quarter 2019.
Net interest income for the six months ended June 30, 2020 was $29.4 million , a
decrease of $2.9 million , or 9.0%, compared to $32.3 million for the six months
ended June 30, 2019 . The decrease in net interest income was the result of a
$1.5 million , or 3.9%, increase in total interest expense to $41.0 million for
the six months ended June 30, 2020 from $39.5 million for the six months ended
June 30, 2019 and a $1.4 million , or 1.9%, decrease in total interest income to
$70.5 million for the six months ended June 30, 2020 from $71.8 million for the
six months ended June 30, 2019 .
The decrease in total interest income for the second quarter 2020 compared to
the second quarter 2019 was due to decreases in interest earned on loans,
including loans held-for-sale, other earning assets and securities. Interest
income earned on loans decreased $1.1 million , or 3.6%, due primarily to a
decline of 24 basis points ("bps") in the yield earned on average loan balances,
partially offset by an increase of $73.7 million , or 2.5%, in average loan
balances. Interest income earned on other earning assets declined $1.0 million ,
or 57.7%, due mainly to a 238 bp decline in the yield earned on these assets,
partially offset by an increase of $345.3 million , or 138.7%, 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.
Additionally, interest income earned on securities decreased $0.5 million , or
11.3%, due to a decline of 74 bps in the yield earned on securities, partially
offset by an increase of $99.3 million , or 17.8%, in the average balance of
securities.
The decrease in total interest income for the six months ended June 30, 2020
compared to the six months ended June 30, 2019 was due to decreases in interest
income earned on other earning assets and securities. Interest income earned on
other earning assets decreased $1.2 million , or 32.6%, due to a decline of 194
bps in the yield earned on these assets, partially offset by an increase of
$257.2 million , or 103.8%, 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 $0.3 million , or 3.6%, due to a decline of 59 bps in the yield earned
on securities, partially offset by an increase of $103.3 million , or 19.1%, in
the average balance of securities. Interest income earned on loans, including
loans held-for-sale, increased slightly as an increase of $138.0 million , or
4.9%, in the average balance of loans was partially offset by a decline of 21
bps in the yield earned on loans.
Overall, the yield on interest-earning assets for the second quarter 2020
declined 73 bps to 3.24% from 3.97% for the second quarter 2019. Additionally,
the yield on interest-earning assets for the six months ended
47
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to 3.43% from 3.99% for the six months ended June 30, 2019 . The declines in the
yields earned on interest-earning assets were due to the continued decrease in
market interest rates from the year-ago periods. 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 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 throughout both the second quarter 2020 and
the six months ended June 30, 2020 as discussed above.
The decrease in total interest expense for the second quarter 2020 compared to
the second quarter 2019 was due to a decrease in interest expense related to
certificates and brokered deposits, partially offset by increases in expense
related to money market accounts and other borrowed funds. Interest expense on
certificates and brokered deposits decreased $1.9 million , or 14.2%, due to a
decline of 22 bps in the cost of these deposits as well as a $124.8 million , or
5.9%, 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 increase in
expense related to money market accounts of $0.5 million , or 18.2%, was driven
by an increase of $497.0 million , or 83.9%, in the average balance of these
deposits, partially offset by a decline of 72 bps in the cost of these deposits.
Money market balances have increased throughout 2020 as consumers, small
businesses and commercial clients have increased cash balances due to the
economic uncertainty resulting from COVID-19. The increase in expense related to
other borrowed funds of $0.4 million , or 12.3%, was due to the impact of the
2029 Notes (subordinated debt) issued in June 2019 with an aggregate principal
amount of $37.0 million and an initial fixed interest rate of 6.00%.
The increase in total interest expense for the six months ended June 30, 2020
compared to the six months ended June 30, 2019 was due to increases in interest
expense on money market accounts and other borrowed funds, partially offset by a
decrease in interest expense related to certificates and brokered deposits.
Interest expense on money market accounts increased $1.5 million , or 26.7%,
driven by an increase of $400.1 million , or 69.3%, in the average balance of
these deposits, partially offset by a decline of 51 bps in the cost of these
deposits. Money market balances have increased throughout 2020 as consumers,
small businesses and commercial clients have increased cash balances due to the
economic uncertainty resulting from COVID-19. The increase in expense related to
other borrowed funds of $1.1 million , or 15.7%, was due to the impact of the
issuance of the 2029 Notes discussed above. The decrease in expense related to
certificates and brokered deposits of $1.1 million , or 4.2%, was due to a
decline of 7 bps in the cost of these deposits as well as a $36.7 million , or
1.8%, decrease in the average balance of these deposits.
Overall, the cost of total interest-bearing liabilities for the second quarter
2020 declined 36 bps to 2.07% from 2.43% for the second quarter 2019.
Additionally, the cost of total interest-bearing liabilities for the six months
ended June 30, 2020 declined 19 bps to 2.19% from 2.38% for the six months ended
June 30, 2019 . Similar to asset yields, the declines in the cost of funds were
due to the continued decrease in market interest rates from the year-ago
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 market accounts also
contributed to the decline in the cost of deposit funding.
Net interest margin ("NIM") was 1.37% for the second quarter 2020 compared to
1.73% for the second quarter 2019. On a fully-taxable equivalent basis, NIM was
1.50% for the second quarter 2020 compared to 1.91% for the second quarter 2019.
NIM was 1.43% for the six months ended June 30, 2020 compared to 1.79% for the
six months ended June 30, 2019 . On a fully-taxable equivalent basis, NIM was
1.58% for the six months ended June 30, 2020 compared to 1.97% for the six
months ended June 30, 2019 .
The decrease in NIM reflects the greater decline in asset yields compared to the
decline in the cost of funds during the applicable periods. Following the
Federal Reserve's interest rate cuts in March 2020 in response to COVID-19,
variable rate assets tied to market rates repriced faster than deposits.
However, as the pace of short-term market interest rate declines has slowed over
the course of the second quarter 2020, the Company believes that yields on
interest-earning assets have largely stabilized. Furthermore, the Company has
approximately $1.0 billion of certificates and brokered deposits with a weighted
average cost of 2.18% that mature over the next twelve months. As the weighted
average cost of these deposits is significantly higher than current new
production costs, the Company expects the cost of deposit funding to continue to
decline.
48
--------------------------------------------------------------------------------Noninterest Income
The following table presents noninterest income for the last five completed
fiscal quarters and the six months ended
Three Months Ended Six Months Ended
June 30, March 31, December 31, September 30, June 30, June 30, June 30,
2020 2020 2019 2019 2019 2020 2019
Service charges and
fees $ 182 $ 212 $ 213 $ 211 $ 225 $ 394 $ 461
Loan servicing
revenue 255 251 166 - - 506 -
Loan servicing asset
revaluation (90) (179) - - - (269) -
Mortgage banking
activities 3,408 3,668 2,953 4,307 2,664 7,076 4,281
Gain (loss) on sale
of loans 762 1,801 1,721 523 (66) 2,563 (170)
Gain (loss) on sale
of securities - 41 - - (458) 41 (458)
Other 456 417 352 517 1,089 873 1,712
Total noninterest
income $ 4,973 $ 6,211 $ 5,405 $ 5,558 $ 3,454 $ 11,184 $ 5,826
During the second quarter 2020, noninterest income was $5.0 million ,
representing an increase of $1.5 million , or 44.0%, compared to $3.5 million for
the second quarter 2019. The increase in noninterest income was due primarily to
increases in revenue from mortgage banking activities, gain on sale of loans,
gain on sale of securities and loan servicing revenue, which were partially
offset by lower other income. The increase in mortgage banking revenue was due
mainly to an increase in mandatory pipeline and best efforts sales volumes as
the year-over-year decline in market interest rates drove increased origination
activity. The increase in gain on sale of loans was due to the Company selling
$11.5 million of SBA 7(a) guaranteed loans during the second quarter 2020,
recognizing a net gain of $0.8 million , as compared to a $0.1 million net loss
on the sale of loans in the second quarter 2019. The increase in gain on sale of
securities was due to the sale of lower-yielding mortgage-backed and U.S.
Government Agency securities in the second quarter 2019 that resulted in a loss
of $0.5 million , compared to no sales of securities in the second quarter 2020.
Additionally, compared to the second quarter 2019, the Company recognized $0.2
million of loan servicing revenue, net of the loan servicing asset revaluation,
in the second quarter 2020, in connection with the SBA 7(a) servicing portfolio
acquired in the fourth quarter 2019. The decrease in other noninterest income
was due primarily to the Company recognizing a $0.5 million gain on the sale of
its ownership of Visa Class B shares in the second quarter 2019.
During the six months ended June 30, 2020 , noninterest income was $11.2 million ,
an increase of $5.4 million , or 92.0%, from the six months ended June 30, 2019 .
The increase in noninterest income was due primarily to increases in revenue
from mortgage banking activities, gain on sale of loans, loan servicing revenue
and gain on sale of securities, which were partially offset by a decrease in
other income. The increase in mortgage banking revenue was due mainly to an
increase in mandatory pipeline and best efforts sales volumes as the
year-over-year decline in market interest rates drove increased origination
activity. The increase in gain on sale of loans was due to sales of portfolio
loans with book values totaling $185.1 million that resulted in a gain of $1.3
million , as well as a gain of $1.2 million on the sale of SBA 7(a) guaranteed
loans during the six months ended June 30, 2020 compared to the Company selling
portfolio loans with book values of $148.4 million that resulted in a net loss
of $0.2 million during the six months ended June 30, 2019 . The increase in gain
on sale of securities was due to a gain of less than $0.1 million being recorded
during the six months ended June 30, 2020 compared to the six months ended June
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, net of servicing asset
revaluation, of $0.2 million , during the six months ended June 30, 2020 , in
connection with the SBA 7(a) servicing portfolio acquired in the fourth quarter
2019. The decrease in other noninterest income was mainly the result of income
recognized in the prior year associated with the sale of the Company's Visa
Class B shares and income associated with the Company's temporary ownership of
the land associated with the Company's new headquarters. Refer to Note 11 to the
condensed consolidated financial statements for additional information about the
Company's new headquarters.
49--------------------------------------------------------------------------------
Noninterest Expense
The following table presents noninterest expense for the last five completed
fiscal quarters and the six months ended
Three Months Ended Six Months Ended
June 30, March 31, December 31, September 30, June 30, June 30, June 30,
2020 2020 2019 2019 2019 2020 2019
Salaries and employee
benefits $ 7,789 $ 7,774 $ 7,168 $ 6,883 $ 6,642 $ 15,563 $ 12,963
Marketing, advertising
and promotion 411 375 409 456 466 786 935
Consulting and
professional services 932 1,177 1,242 778 835 2,109 1,649
Data processing 339 375 312 381 328 714 645
Loan expenses 399 599 289 247 292 998 606
Premises and equipment 1,602 1,625 1,556 1,506 1,497 3,227 2,997
Deposit insurance
premium 435 485 601 - 747 920 1,302
Other 1,337 1,076 1,036 952 902 2,413 1,721
Total noninterest
expense $ 13,244 $ 13,486 $ 12,613 $ 11,203 $ 11,709 $ 26,730 $ 22,818
Noninterest expense for the second quarter 2020 was $13.2 million , compared to
$11.7 million for the second quarter 2019. The increase of $1.5 million , or
13.1%, compared to the second quarter 2019 was due primarily to increases of
$1.1 million in salaries and employee benefits and $0.4 million in other
expenses. 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. The increase in
other expenses was due primarily to a $0.3 million charitable contribution the
Company made to assist small businesses and nonprofits address the economic
challenges of the COVID-19 pandemic.
Noninterest expense for the six months ended June 30, 2020 was $26.7 million ,
compared to $22.8 million for the six months ended June 30, 2019 . The increase
of $3.9 million , or 17.1%, compared to the six months ended June 30, 2019 was
due primarily to increases of $2.6 million in salaries and employee benefits,
$0.7 million in other expenses, $0.5 million in consulting and professional
services, $0.4 million in loan expenses, and $0.2 million in premises and
equipment, partially offset by a decrease of $0.4 million in deposit insurance
premium. 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 increase in other expenses was due primarily to the $0.3
million charitable contribution mentioned above. The increase in consulting and
professional services was due primarily to increased recruitment costs and
directors' fees. The increase in loan expenses was driven primarily by costs
associated with nonperforming loans. The increase in premises and equipment was
due primarily to higher software expense. The decrease in deposit insurance
premium was due primarily to declines in the balance of brokered deposits and
year-over-year asset growth, both of which positively impact the formula used to
calculate deposit insurance expense.
The Company recorded an income tax benefit of $0.3 million for the second
quarter 2020, compared to a $0.3 million income tax provision and an effective
tax rate of 5.3% for the second quarter 2019. The Company's income tax benefit
was less than $0.1 million for the six months ended June 30, 2020 , compared to a
$0.9 million income tax provision and an effective tax rate of 6.8% for the six
months ended June 30, 2019 . The decrease in income tax provision for the three
months ended June 30, 2020 compared to the three months ended June 30, 2019 was
due primarily to lower income before income taxes in the 2020 period. The
decrease in the income tax provision for the six months ended June 30, 2020
compared to the six months ended June 30, 2019 was due to lower income before
income taxes, as well as the impact of the CARES Act, which was signed into law
on March 27, 2020 . The CARES Act provided the opportunity to carryback certain
federal net operating losses based on the difference between the current
statutory rate and the statutory rate in effect during the period to which the
net operating loss will be carried back.
50
--------------------------------------------------------------------------------Financial Condition
The following table presents summary balance sheet data for the last five
completed fiscal quarters.
(in thousands)
June 30, March 31, December 31, September 30, June 30,
Balance Sheet Data: 2020 2020 2019 2019 2019
Total assets $ 4,324,600 $ 4,168,146 $ 4,100,083 $ 4,095,491 $ 3,958,829
Loans 2,973,674 2,892,093 2,963,547 2,881,272 2,861,156
Total securities 657,312 675,013 602,730 591,549 558,160
Loans held-for-sale 38,813 52,394 56,097 41,119 30,642
Noninterest-bearing deposits 82,864 70,562 57,115 50,560 44,040
Interest-bearing deposits 3,297,925 3,107,944 3,096,848 3,097,682 2,962,223
Total deposits 3,380,789 3,178,506 3,153,963 3,148,242 3,006,263
Advances from Federal Home Loan Bank 514,913 514,911 514,910 514,908 514,906
Total shareholders' equity 307,711 305,127 304,913 295,140 296,120
Total assets increased $224.5 million , or 5.5%, to $4.3 billion at June 30, 2020
compared to $4.1 billion at December 31, 2019 . Balance sheet growth was driven
by an increase in deposits of $226.8 million , or 7.2%. As loan balances remained
relatively consistent since December 31, 2019 , the deposit growth resulted in an
increase in liquid assets as cash balances increased $171.3 million , or 52.3%,
and securities balances increased $54.6 million , or 9.1%. The increase in
balance sheet liquidity was reflected in the percentage of loans to deposits,
which declined to 88.0% as of June 30, 2020 , compared to 94.0% as of December
31, 2019 .
51--------------------------------------------------------------------------------
Loan Portfolio Analysis
The following table presents a summary of the Company's loan portfolio for the last five completed fiscal quarters.
June 30 ,March 31 ,December 31 ,September 30 ,June 30 , (dollars in thousands) 2020 2020 2019 2019 2019 Commercial loans Commercial and industrial$ 81,687 2.7 %$ 95,227 3.3 %$ 96,420 3.3 %$ 83,481 2.9 %$ 101,218 3.5 % Owner-occupied commercial real estate(1) 86,897 2.9 % 87,957 3.0 % 86,726 2.9 % 86,357 3.0 % 83,979 2.9 % Investor commercial real estate 13,286 0.4 % 13,421 0.5 % 12,567 0.4 % 11,852 0.4 % 21,179 0.7 % Construction 77,591 2.6 % 64,581 2.2 % 60,274 2.0 % 54,131 1.9 % 47,849 1.7 % Single tenant lease financing 980,292 33.0 % 972,275 33.6 % 995,879 33.6 % 1,008,247 35.0 % 1,001,196 35.1 % Public finance 647,107 21.8 % 627,678 21.7 % 687,094 23.2 % 686,622 23.8 % 706,161 24.7 % Healthcare finance 380,956 12.8 % 372,266 12.9 % 300,612 10.1 % 251,530 8.6 % 212,351 7.4 % Small business lending(1) 118,526 4.0 % 54,055 1.9 % 46,945 1.6 % 11,597 0.4 % 8,925 0.3 % Total commercial loans 2,386,342 80.2 % 2,287,460 79.1 % 2,286,517 77.1 % 2,193,817 76.0 % 2,182,858 76.3 % Consumer loans Residential mortgage 208,728 7.0 % 218,730 7.6 % 313,849 10.6 % 320,451 11.1 % 318,678 11.1 % Home equity 22,640 0.8 % 23,855 0.8 % 24,306 0.8 % 25,042 0.9 % 26,825 0.9 % Other consumer 291,632 9.8 % 296,605 10.2 % 295,309 10.0 % 296,573 10.4 % 294,251 10.4 % Total consumer loans 523,000 17.6 % 539,190 18.6 % 633,464 21.4 % 642,066 22.4 % 639,754 22.4 % Net deferred loan origination costs, premiums and discounts on purchased loans and other (2) 64,332 2.2 % 65,443 2.3 % 43,566 1.5 % 45,389 1.6 % 38,544 1.3 % Total loans 2,973,674 100.0 % 2,892,093 100.0 % 2,963,547 100.0 % 2,881,272 100.0 % 2,861,156 100.0 % Allowance for loan losses (24,465) (22,857) (21,840) (21,683) (19,976) Net loans$ 2,949,209 $ 2,869,236 $ 2,941,707 $ 2,859,589 $ 2,841,180 (1) As ofDecember 31, 2019 , the Company held$13.3 million of SBA 7(a) 504 loans which were classified within the small business lending category. In the second quarter 2020, those balances were reclassified into the owner-occupied commercial real estate category. (2) Includes carrying value adjustments of$46.0 million related to terminated interest rate swaps associated with public finance loans as ofJune 30, 2020 and$44.6 million ,$21.4 million ,$27.6 million and$22.2 million as ofMarch 31, 2020 ,December 31, 2019 ,September 30, 2019 andJune 30, 2019 , respectively, related to interest rate swaps associated with public finance loans. Total loans were$3.0 billion as ofJune 30, 2020 , an increase of$10.1 million , or 0.3%, compared toDecember 31, 2019 . Total commercial balances were$2.4 billion as ofJune 30, 2020 , up slightly from$2.3 billion inDecember 31, 2019 . Compared toDecember 31, 2019 , production 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$94.4 million of loans in these categories during the first quarter 2020. The growth in small business lending was driven by$58.9 million of PPP loan balances originated during the second quarter 2020, partially offset by sales of SBA 7(a) guaranteed loans. The Company did not execute any portfolio loan sales during the second quarter 2020 due to market conditions resulting from COVID-19; however, it expects to resume portfolio loan sales in the future to help further its objectives of managing balance sheet growth and capital, providing liquidity and improving NIM and profitability. Total consumer loan balances were$523.0 million as ofJune 30, 2020 , a decrease of$110.5 million , or 17.4%, compared toDecember 31, 2019 . The decline in consumer loan balances fromDecember 31, 2019 was due primarily to the sale of$90.8 million of portfolio residential mortgage loans, which included seasoned lower-yielding loans. The Company has identified loan exposures to certain industries that may be impacted by COVID-19. Our healthcare finance portfolio, which represents 12.8% of our total loan portfolio, is comprised primarily of loans to dentists and other specialists that have been impacted by government actions to contain COVID-19 occurring late in the first quarter 2020 and into the second quarter 2020. As certain states reopened their economies later in the second quarter 2020, we experienced a 52 --------------------------------------------------------------------------------
decline in healthcare finance loan balances under deferral agreements. See "Non-TDR Loan Modifications due to COVID-19" below for additional information on this portfolio.
Within the rest of the portfolio, as ofJune 30, 2020 , additional exposures represent approximately 17.7% of our total loan portfolio and include full-service restaurants of$221.1 million , quick-service restaurants of$229.8 million , consumer services of$35.7 million , healthcare and social assistance of$21.2 million and hotels and accommodations of$16.8 million . Given the economic uncertainty related to COVID-19, the ultimate impact of the pandemic on these exposures is unknown at this time. We currently have no exposure to other highly impacted industries such as airlines, cruise ships, oil & gas or multifamily lending. 53
--------------------------------------------------------------------------------
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.
June 30, March 31, December 31, September 30, June 30,
(dollars in thousands) 2020 2020 2019 2019 2019
Nonaccrual loans
Commercial loans:
Commercial and industrial $ 299 $ 218 $ 226 $ 585 $ 1,604
Owner-occupied commercial real estate 2,066 1,390 464 465 478
Single tenant lease financing 4,680 4,680 4,680 4,691 -
Total commercial loans 7,045 6,288 5,370 5,741 2,082
Consumer loans:
Residential mortgage 1,042 991 761 - 3,134
Other consumer 108 39 33 41 49
Total consumer loans 1,150 1,030 794 41 3,183
Total nonaccrual loans 8,195 7,318 6,164 5,782 5,265
Past Due 90 days and accruing loans
Commercial loans:
Commercial and industrial - 73 - - -
Total commercial loans - 73 - - -
Consumer loans:
Residential mortgage - 51 568 - 121
Other consumer - 1 - 1 -
Total consumer loans - 52 568 1 121
Total past due 90 days and accruing
loans - 125 568 1 121
Total nonperforming loans 8,195 7,443 6,732 5,783 5,386
Other real estate owned
Investor commercial real estate 2,065 2,065 2,065 2,066 2,066
Residential mortgage - - - 553 553
Total other real estate owned 2,065 2,065 2,065 2,619 2,619
Other nonperforming assets 44 114 75 95 36
Total nonperforming assets $ 10,304 $ 9,622 $
8,872
Total nonperforming loans to total
loans 0.28 % 0.26 % 0.23 % 0.20 % 0.19 %
Total nonperforming assets to total
assets 0.24 % 0.23 % 0.22 % 0.21 % 0.20 %
Allowance for loan losses to total
loans 0.82 % 0.79 % 0.74 % 0.75 % 0.70 %
Allowance for loan losses to total
loans, excluding PPP loans(1) 0.84 % 0.79 % 0.74 % 0.75 % 0.70 %
Allowance for loan losses to
nonperforming loans 298.5 % 307.1 % 324.4 % 374.9 % 370.9 %
1 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.
54
--------------------------------------------------------------------------------Troubled Debt Restructurings
The following table provides a summary of troubled debt restructurings for the last five completed fiscal quarters. (in thousands) June 30, March 31,
2020 2020 2019 2019 2019
Troubled debt restructurings -
nonaccrual $ 854 $ 94 $ 94 $ 171 $ 174
Troubled debt restructurings -
performing 372 378 427 470 1,985
Total troubled debt restructurings
521 $ 641 $ 2,159
The increase in nonperforming loans of $1.5 million , or 21.7%, to $8.2 million
as of June 30, 2020 compared to $6.7 million as of December 31, 2019 was due
primarily to an increase in nonperforming owner-occupied commercial real estate
loans with unpaid principal balanced of $1.6 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. Total nonperforming
assets increased $1.4 million , or 16.1%, as of June 30, 2020 compared to
December 31, 2019 . The ratio of nonperforming loans to total loans increased to
0.28% as of June 30, 2020 compared to 0.23% as of December 31, 2019 and the
ratio of nonperforming assets to total assets increased to 0.24% as of June 30,
2020 compared to 0.22% as of December 31, 2019 , due primarily to the loans
mentioned above.
Total TDRs as of June, 2020 were $1.2 million , up $0.7 million from December 31,
2019 . The increase was driven by one residential mortgage loan that became a TDR
during the second quarter 2020.
As of June 30, 2020 and December 31, 2019 , the Company had one commercial
property in OREO with a carrying value of $2.1 million . This property consists
of two buildings that are residential units adjacent to a university campus.
As of June 30, 2020 , 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 remain optimistic that the combination
of government stimulus programs and relief programs we have provided to our
clients will lessen the economic stress on our borrowers. However, if the
pandemic extends for a prolonged period of time, we may experience negative
trends in nonperforming loans and assets.
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, 2020 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.
55
--------------------------------------------------------------------------------
The following table shows the Company's deferrals by loan portfolio type
that have been granted through July 31, 2020 . The balances shown are as of June
30, 2020 .
% Of Balances With
(dollars in thousands) Deferrals Total Loan Balance Deferrals
Commercial loans
Commercial and industrial $ 517 $ 81,687 0.6 %
Owner-occupied commercial real estate 14,929 86,897 17.2 %
Investor commercial real estate 411 13,286 3.1 %
Construction - 77,591 0.0 %
Single tenant lease financing 276,716 980,292 28.2 %
Public finance - 647,107 0.0 %
Healthcare finance 20,631 380,956 5.4 %
Small business lending 1,823 118,526 1.5 %
Total commercial loans 315,027 2,386,342 13.2 %
Consumer loans
Residential mortgage 6,393 208,728 3.1 %
Home equity 229 22,640 1.0 %
Other consumer 1,692 291,632 0.6 %
Total consumer loans 8,314 523,000 1.6 %
Total commercial and consumer loans $ 323,341 $ 2,909,342 11.1 %
The single tenant lease financing and healthcare finance portfolios comprise
approximately 92% of the total loan deferrals granted as of July 31, 2020 .
Borrowers in these portfolios have experienced short-term cash flow challenges
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 54% and all borrowers, except for the single relationship
on nonaccrual status, made their April 2020 loan payments in a timely manner,
prior to entering a deferral program. Furthermore, a significant majority of
these loans are scheduled to resume making payments in August 2020 and there are
no delinquencies for nonperforming 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 July 31,
2020 , this percentage had dropped to 5.4%. The majority of healthcare finance
loans under deferral listed above are scheduled to resume making payments within
the next 30 days. Furthermore, all borrowers who have come off a deferral
program have resumed making scheduled loan payments in a timely manner.
Section 1102 of the CARES Act created the PPP, which is jointly administered by theU.S. Small Business Administration ("SBA") and theDepartment of the Treasury . Loans originated under the PPP bear an interest rate of 1.00% and do not require payments for the first six months. Originally, all PPP Loans carried a two-year term; however, Congressional amendments to the CARES Act changed the maturity of loans approved afterJune 5, 2020 to a five-year term. 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 the funds were used for payroll costs and other qualifying business expenses as long as a minimum of 60% of the forgiven amount was used to maintain payroll costs. The federal government approved an initial appropriation of$349.0 billion for PPP loans and when that was depleted approved an additional$310.0 billion . As a preferred SBA lender, we assisted our clients in participating in both rounds of the PPP. ThroughJune 30, 2020 , we provided 449 PPP loans totaling$58.9 million , to help small businesses maintain their workforces in an uncertain and challenging environment. The weighted average fee was 3.86% of the amount funded, or approximately$2.3 million in total. The Company received this fee revenue from the SBA in late June and it will be deferred over the life of the PPP loans and recognized as interest income. 56 --------------------------------------------------------------------------------
Allowance for Loan Losses
The following table provides a rollforward of the allowance for loan losses for
the last five completed fiscal quarters.
(dollars in thousands) Three Months Ended
June 30, March 31, December 31, September 30, June 30,
2020 2020 2019 2019 2019
Balance, beginning of period $ 22,857 $ 21,840 $ 21,683 $ 19,976 $ 18,841
Provision charged to expense 2,491 1,461 468 2,824 1,389
Losses charged off (1,016) (498) (409) (1,182) (337)
Recoveries 133 54 98 65 83
Balance, end of period $ 24,465 $ 22,857 $ 21,840 $ 21,683 $ 19,976
Net charge-offs to average loans 0.12 % 0.06 % 0.04 % 0.15 % 0.05 %
The allowance for loan losses was $24.5 million as of June 30, 2020 ,
compared to $21.8 million as of December 31, 2019 . While total loan balances
experienced a slight increase of $10.2 million , or 0.3%, compared to December
31, 2019 , the Company made additional adjustments to qualitative factors 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 . During the
second quarter 2020, the Company recorded net charge-offs of $0.9 million ,
compared to net charge-offs of $0.3 million for the second quarter 2019. The
increase in net charge-offs was due primarily to a $0.7 million charge-off in
the healthcare finance portfolio.
The allowance for loan losses as a percentage of total loans was 0.82% at
June 30, 2020 , or 0.84% when excluding PPP Loans, and 0.74% at December 31,
2019 . The allowance for loan losses as a percentage of nonperforming loans
decreased to 298.5% as of June 30, 2020 , compared to 324.4% as of December 31,
2019 . The provision for loan losses in the second quarter 2020 was $2.5 million ,
compared to $1.4 million for the second quarter 2019. The increase of 1.1
million, or 79.3%, compared to the second quarter 2019 was due primarily to the
healthcare finance charge-off discussed above and adjustments to the economic
qualitative factors in the allowance model discussed above.
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)
June 30, March 31, December 31, September 30, June 30,
Amortized Cost 2020 2020 2019 2019 2019
Securities available-for-sale
U.S. Government-sponsored agencies $ 68,203 $ 71,387
91,906 94,981 97,447 96,076 96,202
Agency mortgage-backed securities 275,433 279,458 264,142 278,327 257,050
Private label mortgage-backed securities 101,110 114,363 63,704 45,969 40,695
Asset-backed securities 5,000 5,000 5,000 5,000 5,000
Corporate securities 48,394 43,378 38,632 38,638 38,644
Total available-for-sale 590,046 608,567 546,640 547,034 526,679
Securities held-to-maturity
Municipal securities 14,603 14,617 10,142 10,145 10,147
Corporate securities 53,692 51,714 51,736 36,662 25,679
Total held-to-maturity 68,295 66,331 61,878 46,807 35,826
Total securities $ 658,341 $ 674,898 $ 608,518 $ 593,841 $ 562,505
57--------------------------------------------------------------------------------
(in thousands)
June 30, March 31, December 31, September 30, June 30,
Approximate Fair Value 2020 2020 2019 2019 2019
Securities available-for-sale
U.S. Government-sponsored agencies $ 66,544 $ 70,004
90,562 94,819 97,652 97,942 96,988
Agency mortgage-backed securities 278,530 282,632 261,440 277,530 254,876
Private label mortgage-backed securities 101,925 115,024 63,613 46,459 41,112
Asset-backed securities 4,837 4,713 4,955 4,931 4,928
Corporate securities 46,619 41,490 37,320 36,445 36,693
Total available-for-sale 589,017 608,682 540,852 544,742 522,334
Securities held-to-maturity
Municipal securities 15,274 15,678 10,368 10,490 10,296
Corporate securities 53,878 53,790 52,192 37,065 25,992
Total held-to-maturity 69,152 69,468 62,560 47,555 36,288
Total securities $ 658,169 $ 678,150 $ 603,412 $ 592,297 $ 558,622
The approximate fair value of available-for-sale investment securities increased
$48.1 million , or 8.9%, to $589.0 million as of June 30, 2020 , compared to
$540.9 million as of December 31, 2019 . The increase was due primarily to
increases of $38.3 million in private label mortgage-backed securities and $17.1
million in agency mortgage-backed securities. These increases were driven
primarily by purchases as liquidity from deposit growth was deployed and, to a
lesser extent, increases in market value due to changes in interest rates. As of
June 30, 2020 , the Company had securities with an amortized cost basis of $68.3
million designated as held-to-maturity compared to $61.9 million as of
December 31, 2019 .
Accrued Income and Other Assets
Accrued income and other assets were $63.2 million at June 30, 2020 compared
to $67.1 million at December 31, 2019 . The decrease of $3.8 million , or 5.74%,
was due primarily to cash collateral pledged for interest rate swap agreements.
The Company pledged $34.6 million and $42.3 million of cash collateral to
counterparties as security for its obligations related to these agreements at
June 30, 2020 and December 31, 2019 , respectively. Collateral posted and
received is dependent on the fair value of the underlying agreements as of the
respective date.
Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities were
Deposits
The following table presents the composition of the Company's deposit base for the last five completed fiscal quarters.
June 30 ,March 31 ,December 31 ,September 30 ,June 30 , (dollars in thousands) 2020 2020 2019 2019 2019 Noninterest-bearing deposits$ 82,864 2.5 %$ 70,562 2.2 %$ 57,115 1.8 %$ 50,560 1.6 %$ 44,040 1.5 % Interest-bearing demand deposits 152,391 4.5 % 123,233 3.9 % 129,020 4.1 % 122,551 3.9 % 126,669 4.2 % Savings accounts 43,366 1.3 % 32,485 1.0 % 29,616 0.9 % 34,886 1.1 % 31,445 1.0 % Money market accounts 1,241,874 36.7 % 930,698 29.3 % 786,390 24.9 % 698,077 22.2 % 607,849 20.3 % Certificates of deposits 1,470,905 43.5 % 1,493,644 47.0 % 1,613,453 51.2 % 1,681,377 53.4 % 1,629,886 54.2 % Brokered deposits 389,389 11.5 % 527,884 16.6 % 538,369 17.1 % 560,791 17.8 % 566,374 18.8 % Total deposits$ 3,380,789 100.0 %$ 3,178,506 100.0 %$ 3,153,963 100.0 %$ 3,148,242 100.0 %$ 3,006,263 100.0 % 58
-------------------------------------------------------------------------------- Total deposits increased$226.8 million , or 7.2%, to$3.4 billion as ofJune 30, 2020 , compared to$3.2 billion as ofDecember 31, 2019 . This increase was due primarily to an increase of$455.5 million , or 57.9%, in money market accounts, largely offset by declines of$142.5 million , or 8.8%, in certificates of deposits and$149.0 million , or 2.8%, in brokered deposits. The Company experienced strong growth in money market balances from consumers, small businesses and commercial clients as our customers have increased their cash balances due to the economic uncertainty resulting from the COVID-19 pandemic. The declines 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 and Equity Offerings
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."
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 onJanuary 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 onJanuary 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 onJanuary 1, 2016 at the 0.625% level and was phased in over a four-year period, increasing by increments of that amount on each subsequentJanuary 1 until it reached 2.5% onJanuary 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. 59 -------------------------------------------------------------------------------- The following tables present actual and required capital ratios as ofJune 30, 2020 andDecember 31, 2019 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 ofJune 30, 2020 andDecember 31, 2019 based on the Basel III Capital Rules and the minimum required capital levels as ofJanuary 1, 2019 . 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. Minimum Required to be Considered Well Actual Minimum Capital Required - Basel III Capitalized (dollars in thousands) Capital Amount Ratio Capital Amount Ratio Capital Amount Ratio As ofJune 30, 2020 : Common equity tier 1 capital to risk-weighted assets Consolidated$ 323,415 10.94 %$ 206,854 7.00 % N/A N/A Bank 354,978 12.02 % 206,662 7.00 %$ 191,900 6.50 % Tier 1 capital to risk-weighted assets Consolidated 323,415 10.94 % 177,303 8.50 % N/A N/A Bank 354,978 12.02 % 177,139 8.50 % 236,185 8.00 % Total capital to risk-weighted assets Consolidated 417,561 14.13 % 236,404 10.50 % N/A N/A Bank 379,443 12.85 % 236,185 10.50 % 295,231 10.00 % Leverage ratio Consolidated 323,415 7.49 % 172,813 4.00 % N/A N/A Bank 354,978 8.22 % 172,708 4.00 % 215,885 5.00 % Minimum Required to be Considered Well Actual Minimum Capital Required - Basel III Capitalized (dollars in thousands) Capital Amount Ratio Capital Amount Ratio Capital Amount Ratio As ofDecember 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 % 60
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Shareholders' Dividends
The Company's Board of Directors declared a cash dividend of$0.06 per share of common stock payableJuly 15, 2020 to shareholders of record as ofJune 30, 2020 . 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 ofJune 30, 2020 , the Company had$72.0 million principal amount of subordinated debt outstanding pursuant its term loan evidenced by a term note due 2025, its 6.0% Fixed-to-Floating Rate Subordinated Notes due 2026 and the 2029 Notes. The agreements that govern our outstanding subordinated debt prohibit the Company from paying any dividends on its common stock or making any other distributions to shareholders at any time when there shall have occurred, and be continuing to occur, an event of default under the applicable agreement. If an event of default were to occur and the Company did not cure it, the Company would be prohibited from paying any dividends or making any other distributions to shareholders or from redeeming or repurchasing any common stock.
Capital Resources
The Company believes it has sufficient liquidity and capital resources to meet its cash and capital expenditure requirements for 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 six months of 2020, the Company sold$111.4 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 reduce the size of our balance sheet during the second half of 2020 through continued deposit repricing in order to manage capital levels. A component of this balance sheet management strategy is expected to include reducing our cash balances from those as ofJune 30, 2020 . However, given the uncertainty regarding the length 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 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. AtJune 30, 2020 , on a consolidated basis, the Company had$1.1 billion in cash and cash equivalents and investment securities available-for-sale and$38.8 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. AtJune 30, 2020 , the Bank had the ability to borrow an additional$558.4 million from the FHLB, theFederal Reserve and correspondent bank Fed Funds lines of credit. 61 -------------------------------------------------------------------------------- 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. AtJune 30, 2020 , the Company, on an unconsolidated basis, had$36.0 million in cash generally available for its cash needs, which is in excess of its current annual regular shareholder dividend and operating expenses. The Company uses its sources of funds primarily to meet ongoing financial commitments, including withdrawals by depositors, credit commitments to borrowers, operating expenses and capital expenditures. AtJune 30, 2020 , approved outstanding loan commitments, including unused lines of credit and standby letters of credit, amounted to$267.4 million . Certificates of deposits and brokered deposits scheduled to mature in one year or less atJune 30, 2020 totaled$1.04 billion . Management is not aware of any other events or regulatory requirements that, if implemented, are likely to have a material effect on either the Company's or the Bank's liquidity. 62 --------------------------------------------------------------------------------
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, average tangible common equity, return on average tangible common equity, tangible common equity to tangible assets ratio, total interest income - FTE, net interest income - FTE, net interest margin - FTE and allowance for loan losses to loans, excluding PPP loans 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 six months endedJune 30, 2020 and 2019. Three Months Ended Six Months Ended (dollars in thousands, exceptJune 30 ,March 31 ,December 31 ,September 30 ,June 30 ,June 30 ,June 30 , share and per share data) 2020 2020 2019 2019 2019 2020 2019 Total equity - GAAP$ 307,711 $ 305,127 $ 304,913 $ 295,140 $ 296,120 $ 307,711 $ 296,120 Adjustments:Goodwill (4,687) (4,687) (4,687) (4,687) (4,687) (4,687) (4,687) Tangible common equity$ 303,024 $ 300,440 $ 300,226 $ 290,453 $ 291,433 $ 303,024 $ 291,433 Total assets - GAAP$ 4,324,600 $ 4,168,146 $ 4,100,083 $ 4,095,491 $ 3,958,829 $ 4,324,600 $ 3,958,829 Adjustments:Goodwill (4,687) (4,687) (4,687) (4,687) (4,687) (4,687) (4,687) Tangible assets$ 4,319,913 $ 4,163,459 $ 4,095,396 $ 4,090,804 $ 3,954,142 $ 4,319,913 $ 3,954,142 Total common shares outstanding 9,799,047 9,801,825 9,741,800 9,741,800 10,016,458 9,799,047 10,016,458 Book value per common share$ 31.40 $ 31.13 $ 31.30 $ 30.30 $ 29.56 $ 31.40 $ 29.56 Effect of goodwill (0.48) (0.48) (0.48) (0.48) (0.46) (0.48) (0.46) Tangible book value per common share$ 30.92 $ 30.65 $ 30.82 $ 29.82 $ 29.10 $ 30.92 $ 29.10 Total shareholders' equity to assets 7.12 % 7.32% 7.44 % 7.21 % 7.48 % 7.12 % 7.48 % Effect of goodwill (0.11) % (0.10) % (0.11) % (0.11) % (0.11) % (0.11) % (0.11) % Tangible common equity to tangible assets 7.01 % 7.22% 7.33 % 7.10 % 7.37 % 7.01 % 7.37 % Total average equity - GAAP$ 306,868 $ 311,005 $ 297,623 $ 298,782 $ 297,148 $ 308,937 $ 294,530 Adjustments: Average goodwill (4,687) (4,687) (4,687) (4,687) (4,687) (4,687) (4,687) Average tangible common equity$ 302,181 $ 306,318 $ 292,936 $ 294,095 $ 292,461 $ 304,250 $ 289,843 Return on average shareholders' equity 5.15 % 7.78% 9.46 % 8.40 % 8.26 % 6.48 % 8.09 % Effect of goodwill 0.08 % 0.12% 0.15 % 0.13 % 0.13 % 0.10 % 0.13 % Return on average tangible common equity 5.23 % 7.90 % 9.61 % 8.53 % 8.39 % 6.58 % 8.22 % 63
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Three Months Ended Six Months Ended
(dollars in thousands, except share June 30 , March 31 , December 31 , September 30 , June 30 , June 30 , June 30 ,
and per share data) 2020 2020 2019 2019 2019 2020 2019
Total interest income $ 34,222 $ 36,244 $ 37,877 $ 37,964 $ 36,844 $ 70,466 $ 71,843
Adjustments:
Fully-taxable equivalent
adjustments 1 1,437 1,535 1,570 1,595 1,612 2,972 3,169
Total interest income - FTE $ 35,659 $ 37,779 $ 39,447 $ 33,326 $ 38,456 $ 73,438 $ 75,012
Net interest income $ 14,426 $ 15,018 $ 15,374 $ 15,244 $ 16,105 $ 29,444 $ 32,349
Adjustments:
Fully-taxable equivalent
adjustments 1 1,437 1,535 1,570 1,595 1,612 2,972 3,169
Net interest income - FTE $ 15,863 $ 16,553 $ 16,944 $ 16,839 $ 17,717 $ 32,416 $ 35,518
Net interest margin 1.37 % 1.50 % 1.51 % 1.54 % 1.73 % 1.43 % 1.79 %
Effect of fully-taxable equivalent
adjustments 1 0.13 % 0.15 % 0.16 % 0.16 % 0.18 % 0.15 % 0.18 %
Net interest margin - FTE 1.50 % 1.65 % 1.67 % 1.70 % 1.91 % 1.58 % 1.97 %
Allowance for loan losses $ 24,465 $ 22,857 $ 21,840 $ 21,683 $ 19,976 $ 24,465 $ 19,976
Loans $ 2,973,674 $ 2,892,093 $ 2,963,547 $ 2,881,272 $ 2,861,156 $ 2,973,674 $ 2,861,156
Adjustments:
PPP loans (58,948) - - - - (58,948) -
Loans, excluding PPP loans $ 2,914,726 $ 2,892,093 $ 2,963,547 $ 2,881,272 $ 2,861,156 $ 2,914,726 $ 2,861,156
Allowance for loan losses to loans 0.82 % 0.79 % 0.74 % 0.75 % 0.70 % 0.82 % 0.70 %
Effect of PPP loans 0.02 % 0.00 % 0.00 % 0.00 % 0.00 % 0.02 % 0.00 %
Allowance for loan losses to loans,
excluding PPP loans 0.84 % 0.79 % 0.74 % 0.75 % 0.70 % 0.84 % 0.70 %
1 Assuming a 21% tax rate
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
Recent Accounting Pronouncements
Refer to Note 16 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. InJune 2020 , the Company terminated all fair value hedging instruments associated with loans. AtJune 30, 2020 andDecember 31, 2019 , the Company had interest rate swaps with notional amounts of$298.2 million and$725.6 million , respectively. Additionally, we enter into forward contracts relating 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. AtJune 30, 2020 andDecember 31, 2019 , the Company had commitments to sell residential real estate loans of$11.7 million and$115.0 million , respectively. These contracts mature in less than one year. Refer to Note 14 to the condensed consolidated financial statements for additional information about derivative financial instruments. 64
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