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, 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.
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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. 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 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, 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 third quarter 2020 was characterized by continued uncertainty as 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.
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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. 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 but as of October 30, 2020,
less than 1% of loan balances were in deferral status and all borrowers coming
off deferrals have resumed normal payment schedules. Despite the challenging
environment, we have continued to prudently extend credit to both commercial and
consumer clients.
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Results of Operations
The following table presents a summary of the Company's financial performance
for the last five completed fiscal quarters and the nine months ended September
30, 2020 and 2019.
Three Months Ended Nine Months Ended
(dollars in thousands September 30, June 30, March 31, December 31, September 30, September 30, September 30,
except for per share data) 2020 2020 2020 2019 2019 2020 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 %
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.
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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.
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.
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Consolidated Average Balance Sheets and Net Interest Income Analyses
For the periods presented, the following tables provide the average balances of
interest-earning assets and interest-bearing liabilities and the related yields
and cost of funds. The tables do not reflect any effect of income taxes except
for net interest margin - FTE, as discussed below. Balances are based on the
average of daily balances. Nonaccrual loans are included in average loan
balances.
(dollars in thousands) Three Months Ended
September 30, 2020June 30, 2020September 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 $ 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.
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(dollars in thousands) Nine Months Ended
September 30, 2020 September 30, 2019
Interest Interest
Average Balance /Dividends Yield /Cost Average Balance /Dividends Yield /Cost
Assets
Interest-earning assets
Loans, including loans
held-for-sale $ 2,999,711$ 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.
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Rate/Volume Analysis
The following table illustrates the impact of changes in the volume of
interest-earning assets and interest-bearing liabilities and interest rates on
net interest income for the periods indicated. The change in interest not due
solely to volume or rate has been allocated in proportion to the absolute dollar
amounts of the change in each.
Three Months Ended September 30, 2020 vs. June Three Months Ended September 30, 2020 vs. Nine Months Ended September 30, 2020 vs.
(dollars in thousands) 30, 2020 Due to Changes in September 30, 2019 Due to Changes in September 30, 2019 Due to Changes in
Volume Rate Net Volume Rate Net Volume Rate Net
Interest income
Loans, including loans held-for-sale $ 2,207$ (2,377)$ (170)$ 6,263$ (7,297)$ (1,034)$ 5,804$ (6,167)$ (363)
Securities - taxable (119) (917) (1,036) 2,983 (4,211) (1,228) 2,692 (3,889) (1,197)
Securities - non-taxable (10) (66) (76) (30) (228) (258) (1) (580) (581)
Other earning assets (50) (140) (190) 3,034 (5,458) (2,424) 4,170 (7,757) (3,587)
Total 2,028 (3,500) (1,472) 12,250 (17,194) (4,944) 12,665 (18,393) (5,728)
Interest expense
Interest-bearing deposits 301 (3,636) (3,335) 8,695 (14,630) (5,935) 7,921 (13,418) (5,497)
Other borrowed funds 3 54 57 3 - 3 558 535 1,093
Total 304 (3,582) (3,278) 8,698 (14,630) (5,932) 8,479 (12,883) (4,404)
Increase (decrease) in net interest
income $ 1,724$ 82$ 1,806$ 3,552$ (2,564)$ 988$ 4,186$ (5,510)$ (1,324)
Net interest income for the third quarter 2020 was $16.2 million, an increase of
$1.0 million, or 6.5%, compared to $15.2 million for the third quarter 2019. The
increase in net interest income was primarily the result of a $5.9 million, or
26.4%, decrease in total interest expense to $16.5 million for the third quarter
2020 from $22.5 million for the third quarter 2019. The decrease in total
interest expense was partially offset by a $4.9 million, or 13.1%, decrease in
total interest income to $32.8 million for the third quarter 2020 from $37.7
million for the third quarter 2019.
Net interest income for the nine months ended September 30, 2020 was $45.7
million, a decrease of $1.9 million, or 4.0%, compared to $47.6 million for the
nine months ended September 30, 2019. The decrease in net interest income was
the result of a decrease in total interest income of $6.3 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%, decrease in total interest expense to $57.5 million
for the nine months ended September 30, 2020 from $61.9 million the nine months
ended September 30, 2019.
The decrease in total interest income for the third quarter 2020 compared to the
third 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 other earning assets declined $2.4 million, or 81.0%, due mainly to a 212
basis point ("bp") decline in the yield earned on these assets, partially offset
by an increase of $82.6 million, or 17.6%, 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 $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. Interest income earned on loans decreased $1.0
million, or 3.4%, due primarily to a decline of 30 bps in the yield earned on
average loan balances, partially offset by an increase of $128.9 million, or
4.4%, in average loan balances. The increase in average loan balances was due to
growth in the healthcare finance portfolio and the small business lending
portfolio, which included loans acquired from First Colorado National Bank, as
well as loans originated through PPP.
The decrease in total interest income for the nine months ended September 30,
2020 compared to the nine months ended September 30, 2019 was due 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
$3.6 million, or 54.7%, due to a decline of 196 bps in the yield earned on these
assets, partially offset by an increase of $198.3 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
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loans, including loans held-for-sale, decreased by $1.0 million as an increase
of $134.9 million, or 4.7%, in the average balance of loans was partially offset
by a decline of 24 bps in the yield earned on loans. The increase in average
loan balances was due to growth in the healthcare finance portfolio and the
small business lending portfolio, which included loans acquired from First
Colorado National Bank, as well as loans originated through PPP.
Overall, the yield on interest-earning assets for the third quarter 2020
declined 71 bps to 3.09% from 3.80% for the third quarter 2019. Additionally,
the yield on interest-earning assets for the nine months ended September 30,
2020 declined 61 bps to 3.31% from 3.92% for the nine months ended September 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 third
quarter 2020 and the nine months ended September 30, 2020 due to growth in
average deposit balances.
The decrease in total interest expense for the third quarter 2020 compared to
the third quarter 2019 was due primarily to a decrease in interest expense
related to certificates and brokered deposits and money market accounts.
Interest expense on certificates and brokered deposits decreased $5.1 million,
or 34.5%, due to a decline of 47 bps in the cost of these deposits as well as a
$448.7 million, or 20.1%, 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
million, or 25.1%, was driven by a decline of 127 bps in the cost of these
deposits, partially offset by an increase of $656.1 million, or 102.6%, in the
average balance of these deposits. Money market balances have increased
throughout 2020 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
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
increase in expense related to other borrowed funds of $1.1 million, or 9.8%,
was due primarily to the impact of the issuance 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%.
Overall, the cost of total interest-bearing liabilities for the third quarter
2020 declined 76 bps to 1.70% from 2.46% for the third quarter 2019.
Additionally, the cost of total interest-bearing liabilities for the nine months
ended September 30, 2020 declined 39 bps to 2.02% from 2.41% for the nine months
ended September 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 1.53% for the third quarter 2020 compared to
1.54% for the third quarter 2019. On a fully-taxable equivalent basis, NIM was
1.67% for the third quarter 2020 compared to 1.70% for the third quarter 2019.
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.
For the nine months ended September 30, 2020, 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 year, the Company
believes that yields on
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interest-earning assets have largely stabilized. Furthermore, the Company has
approximately $931.0 million of certificates and brokered deposits with a
weighted average cost of 2.02% 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.
Noninterest Income
The following table presents noninterest income for the last five completed
fiscal quarters and the nine months ended September 30, 2020 and 2019.
(in thousands)
Three Months Ended
Nine Months Ended
September 30, June 30, March 31, December 31, September 30, September 30, September 30,
2020 2020 2020 2019 2019 2020 2019
Service charges and
fees $ 224 $ 182$ 212
$ 213 $ 211 $ 618
$ 672
Loan servicing revenue 274 255 251 166 - 780 -
Loan servicing asset
revaluation (103) (90) (179) - - (372) -
Mortgage banking
activities 9,630 3,408 3,668 2,953 4,307 16,706 8,588
Gain on sale of loans 2,033 762 1,801 1,721 523 4,596 353
Gain (loss) on sale of
securities 98 - 41 - - 139 (458)
Other 339 456 417 352 517 1,212 2,229
Total noninterest
income $ 12,495$ 4,973$ 6,211$ 5,405$ 5,558$ 23,679$ 11,384
During the third quarter 2020, noninterest income was $12.5 million,
representing an increase of $6.9 million, or 124.8%, compared to $5.6 million
for the third quarter 2019. The increase in noninterest income was due primarily
to increases in revenue from mortgage banking activities, gain on sale of loans
and loan servicing revenue, which were partially offset by lower other income
and loan servicing asset revaluation. The increase in mortgage banking revenue
was due mainly to an increase in loan origination volume, driven by historically
low mortgage interest rates, and higher gain-on-sale margins. The increase in
gain on sale of loans was due to the Company selling $12.9 million of SBA 7(a)
guaranteed loans and $12.2 million of single tenant lease financing loans during
the third quarter 2020, recognizing a net gain of $2.0 million, as compared to a
$0.5 million net gain on the sale of loans in the third quarter 2019 from sales
totaling $53.4 million of single tenant lease financing 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. The
decrease in other noninterest income was mainly the result 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.
During the nine months ended September 30, 2020, noninterest income was $23.7
million, representing an increase of $12.3 million, or 108.0%, compared to $11.4
million for the nine months ended September 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
(loss) 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 loan origination volume, driven by historically low mortgage interest rates,
and higher gain-on-sale margins. The increase in gain on sale of loans was due
to sales of portfolio loans with book values totaling $216.7 million that
resulted in a gain of $1.3 million, as well as a gain of $3.3 million on the
sale of SBA 7(a) guaranteed loans during the nine months ended September 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. The increase in gain (loss) on sale of securities was due to
a gain of $0.1 million being recorded during 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, net of the loan servicing asset revaluation, of $0.4 million, during
the nine months ended September 30, 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. 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 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.
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Noninterest Expense
The following table presents noninterest expense for the last five completed
fiscal quarters and the nine months ended September 30, 2020 and 2019.
(in thousands)
Three Months Ended
Nine Months Ended
September 30, June 30, March 31, December 31, September 30, September 30, September 30,
2020 2020 2020 2019 2019 2020 2019
Salaries and employee
benefits $ 9,533$ 7,789$ 7,774$ 7,168$ 6,883$ 25,096$ 19,846
Marketing, advertising
and promotion 426 411 375 409 456 1,212 1,391
Consulting and
professional services 614 932 1,177 1,242 778 2,723 2,427
Data processing 388 339 375 312 381 1,102 1,026
Loan expenses 408 399 599 289 247 1,406 853
Premises and equipment 1,568 1,602 1,625 1,556 1,506 4,795 4,503
Deposit insurance
premium 440 435 485 601 - 1,360 1,302
Write-down of other
real estate owned 2,065 - - - - 2,065 -
Other 970 1,337 1,076 1,036 952 3,383 2,673
Total noninterest
expense $ 16,412$ 13,244$ 13,486$ 12,613$ 11,203$ 43,142$ 34,021
Noninterest expense for the third quarter 2020 was $16.4 million, compared to
$11.2 million for the third quarter 2019. The increase of $5.2 million, or
46.5%, compared to the third quarter 2019 was due primarily to increases of $2.7
million in salaries and employee benefits and $0.4 million in deposit insurance
premium, as well as a $2.1 million write-down of a legacy commercial other real
estate owned ("OREO") property. 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 deposit insurance premium 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.
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 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, as well as various other miscellaneous expenses, none of which were
individually significant. The increase in loan expenses was driven primarily by
costs associated with nonperforming loans. The increase in consulting and
professional services was due primarily to increased recruitment costs and
directors' fees. The increase in premises and equipment was due primarily to
higher software expense.
Income tax provision was $1.4 million for the third quarter 2020, resulting in
an effective tax rate of 14.2%, compared to $0.5 million and an effective tax
rate of 6.6% for the third quarter 2019. Income tax provision was $1.4 million
for the nine months ended September 30, 2020, resulting in an effective tax rate
of 7.0%, compared to $1.3 million and an effective tax rate of 6.8% for the nine
months ended September 30, 2019. The increase in income tax provision for the
third quarter 2020 compared to the third quarter 2019 was due primarily to the
increase in pre-tax earnings driven by a higher proportion of taxable revenue
from mortgage banking and gain on sale of loans.
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Financial Condition
The following table presents summary balance sheet data for the last five
completed fiscal quarters.
(in thousands)
September 30, June 30, March 31, December 31, September
30,
Balance Sheet Data: 2020 2020 2020 2019 2019
Total assets $ 4,333,624$ 4,324,600$ 4,168,146$ 4,100,083$ 4,095,491
Loans 3,012,914 2,973,674 2,892,093 2,963,547 2,881,272
Total securities 596,565 657,312 675,013 602,730 591,549
Loans held-for-sale 76,208 38,813 52,394 56,097 41,119
Noninterest-bearing deposits 86,088 82,864 70,562 57,115 50,560
Interest-bearing deposits 3,286,303
3,297,925 3,107,944 3,096,848 3,097,682
Total deposits 3,372,391 3,380,789 3,178,506 3,153,963 3,148,242
Advances from Federal Home Loan Bank 514,914 514,913 514,911 514,910 514,908
Total shareholders' equity 318,102 307,711 307,711 304,913 295,140
Total assets increased $233.5 million, or 5.7%, to $4.3 billion at September 30,
2020 compared to $4.1 billion at December 31, 2019. Balance sheet growth was
driven by an increase in deposits of $218.4 million, or 6.9%. The deposit growth
drove an increase in liquid assets as cash balances increased $161.1 million, or
49.2%. Additionally, loan balances increased $49.4 million, or 1.7%, and loans
held-for-sale 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% as of September 30, 2020, compared to
94.0% as of December 31, 2019.
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Loan Portfolio Analysis
The following table presents a summary of the Company's loan portfolio for the
last five completed fiscal quarters.
September 30, June 30, March 31, December 31, September 30,
(dollars in thousands) 2020 2020 2020 2019 2019
Commercial loans
Commercial and industrial $ 77,116 2.6 % $ 81,687 2.7 % $ 95,227 3.3 % $ 96,420 3.3 % $ 83,481 2.9 %
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 %
Investor commercial real
estate 13,084 0.4 % 13,286 0.4 % 13,421 0.5 % 12,567 0.4 % 11,852 0.4 %
Construction 92,154 3.1 % 77,591 2.6 % 64,581 2.2 % 60,274 2.0 % 54,131 1.9 %
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 %
Public finance 625,638 20.8 % 647,107 21.8 % 627,678 21.7 % 687,094 23.2 % 686,622 23.8 %
Healthcare finance 461,740 15.3 % 380,956 12.8 % 372,266 12.9 % 300,612 10.1 % 251,530 8.6 %
Small business lending(1) 123,168 4.1 % 118,526 4.0 % 54,055 1.9 % 46,945 1.6 % 11,597 0.4 %
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 %
Consumer loans
Residential mortgage 203,041 6.7 % 208,728 7.0 % 218,730 7.6 % 313,849 10.6 % 320,451 11.1 %
Home equity 22,169 0.7 % 22,640 0.8 % 23,855 0.8 % 24,306 0.8 % 25,042 0.9 %
Other consumer 282,450 9.3 % 291,632 9.8 % 296,605 10.2 % 295,309 10.0 % 296,573 10.4 %
Total consumer loans 507,660 16.7 % 523,000 17.6 % 539,190 18.6 % 633,464 21.4 % 642,066 22.4 %
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 %
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 %
Allowance for loan losses (26,917) (24,465) (22,857) (21,840) (21,683)
Net loans $ 2,985,997$ 2,949,209$ 2,869,236$ 2,941,707$ 2,859,589
(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 $44.3 and $46.0 million related to
terminated interest rate swaps associated with public finance loans as of
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.
Total loans were $3.0 billion as of September 30, 2020, an increase of $49.4
million, or 1.7%, compared to December 31, 2019. Total commercial balances were
$2.4 billion as of September 30, 2020, up $156.0 million, or 6.8%, from December
31, 2019. Compared to December 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 $106.6 million of loans in these categories during 2020, as well as
a decline in commercial and industrial balances. The growth in healthcare
finance balances was due primarily to a combination 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
originations 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, as well
as an increase in originated SBA 7(a) loans during 2020.
Total consumer loan balances were $507.7 million as of September 30, 2020, a
decrease of $125.8 million, or 19.9%, compared to December 31, 2019. The decline
in consumer loan balances from December 31, 2019 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
elevated prepayment activity, which more than offset new origination activity.
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Asset Quality
Nonperforming loans are comprised of nonaccrual loans and loans 90 days past due
and accruing. Nonperforming assets include nonperforming loans, 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.
September 30, June 30,
March 31, December 31, September 30,
(dollars in thousands)
2020 2020 2020 2019 2019
Nonaccrual loans
Commercial loans:
Commercial and industrial $ 117$ 299
$ 218$ 226$ 585
Owner-occupied commercial real
estate
1,390 2,066 1,390 464 465
Single tenant lease financing 7,148 4,680 4,680 4,680 4,691
Total commercial loans 8,655 7,045 6,288 5,370 5,741
Consumer loans:
Residential mortgage 1,085 1,042 991 761 -
Other consumer 34 108 39 33 41
Total consumer loans 1,119 1,150 1,030 794 41
Total nonaccrual loans 9,774 8,195 7,318 6,164 5,782
Past Due 90 days and accruing loans
Commercial loans:
Commercial and industrial - - 73 - -
Total commercial loans - - 73 - -
Consumer loans:
Residential mortgage - - 51 568 -
Other consumer - - 1 - 1
Total consumer loans - - 52 568 1
Total past due 90 days and accruing
loans - - 125 568 1
Total nonperforming loans 9,774 8,195 7,443 6,732 5,783
Other real estate owned
Investor commercial real estate - 2,065 2,065 2,065 2,066
Residential mortgage - - - - 553
Total other real estate owned - 2,065 2,065 2,065 2,619
Other nonperforming assets 8 44 114 75 95
Total nonperforming assets $ 9,782$ 10,304
$ 9,622$ 8,872$ 8,497
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 %
Allowance for loan losses to total
loans 0.89 % 0.82 % 0.79 % 0.74 % 0.75 %
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 %
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.
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Troubled Debt Restructurings
The following table provides a summary of troubled debt restructurings for the
last five completed fiscal quarters.
(in thousands) September 30, June 30, March 31, December 31, September 30,
2020 2020 2020 2019 2019
Troubled debt restructurings -
nonaccrual $ 811 $ 854
$ 94 $ 94 $ 171
Troubled debt restructurings -
performing
365 372 378 427 470
Total troubled debt restructurings $ 1,176$ 1,226
$ 472 $ 521 $ 641
The increase in nonperforming loans of 3.0 million, or 45.2%, to $9.8 million as
of September 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 balances of $1.6 million and an increase in
nonperforming single tenant lease financing loans with unpaid principal balances
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 that paid
off during the third quarter 2020. Total nonperforming assets increased $0.9
million, or 10.3%, as of September 30, 2020 compared to December 31, 2019, due
primarily to the increase 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. The ratio of nonperforming loans to total loans increased to
0.32% as of September 30, 2020 compared to 0.23% as of December 31, 2019 and the
ratio of nonperforming assets to total assets increased to 0.23% as of
September 30, 2020 compared to 0.22% as of December 31, 2019, due primarily to
the loans mentioned above.
Total TDRs as of September 30, 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 September 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, 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.
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The following table shows the Company's deferrals by loan portfolio type that
have been granted through October 30, 2020. The balances shown are as of
September 30, 2020.
Total Loan % Of Balances With
(dollars in thousands) Deferrals Balance 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 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 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. 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
bear an interest rate of 1.00% and we received weighted average origination fees
of 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. As of
September 30, 2020, we had 447 PPP loans totaling $58.3 million outstanding.
The Company anticipates that the majority of these 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.
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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
September 30, June 30, March 31, December 31, September 30,
2020 2020 2020 2019 2019
Balance, beginning of period $ 24,465$ 22,857$ 21,840$ 21,683$ 19,976
Provision charged to expense 2,509 2,491 1,461 468 2,824
Losses charged off (241) (1,016) (498) (409) (1,182)
Recoveries 184 133 54 98 65
Balance, end of period $ 26,917$ 24,465$ 22,857$ 21,840$ 21,683
Net charge-offs to average loans 0.01 % 0.12 % 0.06 % 0.04 % 0.15 %
The allowance for loan losses was $26.9 million as of September 30, 2020,
compared to $21.8 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 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.
The allowance for loan losses as a percentage of total loans was 0.89% at
September 30, 2020, or 0.91% when excluding PPP Loans, compared to 0.74% at
December 31, 2019. The allowance for loan losses as a percentage of
nonperforming loans decreased to 275.4% as of September 30, 2020, compared to
324.4% as of December 31, 2019. The provision for loan losses in the third
quarter 2020 was $2.5 million, compared to $2.8 million for the third quarter
2019. During the third quarter 2020, the Company recorded net charge-offs of
$0.1 million, compared to net charge-offs of $1.1 million for the third quarter
2019.
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)
September 30, June 30, March 31, December 31, September 30,
Amortized Cost 2020 2020 2020 2019 2019
Securities available-for-sale
U.S. Government-sponsored agencies $ 65,007$ 68,203
$ 71,387$ 77,715$ 83,024
Municipal securities
87,365 91,906 94,981 97,447 96,076
Agency mortgage-backed securities 250,755 275,433 279,458 264,142 278,327
Private label mortgage-backed securities 71,519 101,110 114,363 63,704 45,969
Asset-backed securities 5,000 5,000 5,000 5,000 5,000
Corporate securities 48,406 48,394 43,378 38,632 38,638
Total available-for-sale 528,052 590,046 608,567 546,640 547,034
Securities held-to-maturity
Municipal securities 14,582 14,603 14,617 10,142 10,145
Corporate securities 53,672 53,692 51,714 51,736 36,662
Total held-to-maturity 68,254 68,295 66,331 61,878 46,807
Total securities $ 596,306$ 658,341$ 674,898$ 608,518$ 593,841
57
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(in thousands)
September 30, June 30, March 31, December 31, September 30,
Approximate Fair Value 2020 2020 2020 2019 2019
Securities available-for-sale
U.S. Government-sponsored agencies $ 63,682$ 66,544
$ 70,004$ 75,872$ 81,435
Municipal securities
86,421 90,562 94,819 97,652 97,942
Agency mortgage-backed securities 253,292 278,530 282,632 261,440 277,530
Private label mortgage-backed securities 72,626 101,925 115,024 63,613 46,459
Asset-backed securities 4,921 4,837 4,713 4,955 4,931
Corporate securities 47,369 46,619 41,490 37,320 36,445
Total available-for-sale 528,311 589,017 608,682 540,852 544,742
Securities held-to-maturity
Municipal securities 15,328 15,274 15,678 10,368 10,490
Corporate securities 53,848 53,878 53,790 52,192 37,065
Total held-to-maturity 69,176 69,152 69,468 62,560 47,555
Total securities $ 597,487$ 658,169$ 678,150$ 603,412$ 592,297
The approximate fair value of available-for-sale investment securities decreased
$12.5 million, or 2.4%, to $528.3 million as of September 30, 2020, compared to
$540.9 million as of December 31, 2019. The decrease was due primarily to
decreases of $12.2 million in agency securities, $11.2 million in municipal
securities and $8.1 million in agency mortgage-backed securities. These
decreases were driven primarily by prepayments and maturities in agency and
agency 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 $66.5 million at September 30, 2020
compared to $67.1 million at December 31, 2019. As of these dates, the Company
pledged $33.7 million and $42.3 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 million at September 30,
2020 compared to $53.0 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.
Deposits
The following table presents the composition of the Company's deposit base for
the last five completed fiscal quarters.
September 30, June 30, March 31, December 31, September 30,
(dollars in thousands) 2020 2020 2020 2019 2019
Noninterest-bearing deposits $ 86,088 2.6 % $ 82,864 2.5 % $ 70,562 2.2 % $ 57,115 1.8 % $ 50,560 1.6 %
Interest-bearing demand deposits 155,054 4.6 % 152,391 4.5 % 123,233 3.9 % 129,020 4.1 % 122,551 3.9 %
Savings accounts 49,890 1.5 % 43,366 1.3 % 32,485 1.0 % 29,616 0.9 % 34,886 1.1 %
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 %
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 %
Brokered deposits 361,606 10.7 % 389,389 11.5 % 527,884 16.6 % 538,369 17.1 % 560,791 17.8 %
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 %
58
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Total deposits increased $218.4 million, or 6.9%, to $3.4 billion as of
September 30, 2020, compared to $3.2 billion as of December 31, 2019. This
increase was due primarily to an increase of $572.8 million, or 72.8%, in money
market accounts, offset by declines of $252.9 million, or 15.7%, in certificates
of deposits and $176.8 million, or 2.8%, in brokered deposits. The Company
experienced strong growth in money market balances 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 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 Offerings
Subsequent to the end of 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. We intend to use the net proceeds to redeem the 2025 Note
on or before 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."
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.
59
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The following tables present actual and required capital ratios as of
September 30, 2020 and December 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 of September 30, 2020 and December 31,
2019 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.
Minimum Capital Required Minimum Required to be Considered
Actual - Basel III Well Capitalized
(dollars in thousands) Capital Amount Ratio Capital Amount Ratio Capital Amount Ratio
As of September 30, 2020:
Common equity tier 1 capital to
risk-weighted assets
Consolidated $ 331,408 11.13 % $ 208,452 7.00 % N/A N/A
Bank 364,889 12.27 % 208,246 7.00 % $ 193,372 6.50 %
Tier 1 capital to risk-weighted assets
Consolidated 331,408 11.13 % 253,121 8.50 % N/A N/A
Bank 364,889 12.27 % 252,870 8.50 % 237,996 8.00 %
Total capital to risk-weighted assets
Consolidated 428,083 14.38 % 312,679 10.50 % N/A N/A
Bank 391,806 13.17 % 312,369 10.50 % 297,495 10.00 %
Leverage ratio
Consolidated 331,408 7.72 % 171,779 4.00 % N/A N/A
Bank 364,889 8.50 % 171,666 4.00 % 214,582 5.00 %
Minimum Capital Required - Minimum Required to be Considered
Actual Basel III 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 %
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 payable October 15, 2020 to shareholders of record as of October 1,
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 of September 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 (the "2025 Note"), its 6.0% Fixed-to-Floating Rate Subordinated Notes
due 2026 and the 2029 Notes. Subsequent to 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, 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 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 September 30, 2020, on a consolidated basis, the Company had
$1.1 billion in cash and cash equivalents and investment securities
available-for-sale and $76.2 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 September 30, 2020, the Bank
had the ability to borrow an additional $558.4 million from the FHLB, the
Federal Reserve and correspondent bank Fed Funds lines of credit.
61
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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 September 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. At September 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 at September 30,
2020 totaled $931.0 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.
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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 income before income
taxes, adjusted income tax provision, adjusted net income, adjusted diluted
earnings per share, adjusted return on average assets, adjusted return on
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 nine
months ended September 30, 2020 and 2019.
Three Months Ended Nine Months Ended
(dollars in thousands, except September 30, June 30, March 31, December 31, September 30, September 30, September 30,
share and per share data) 2020 2020 2020 2019 2019 2020 2019
Total equity - GAAP $ 318,102$ 307,711 $
304,913 $ 295,140$ 295,140$ 318,102
$ 295,140
Adjustments:
Goodwill (4,687) (4,687) (4,687) (4,687) (4,687) (4,687) (4,687)
Tangible common equity $ 313,415$ 303,024 $
300,226 $ 290,453$ 290,453$ 313,415
$ 290,453
Total assets - GAAP $ 4,333,624$ 4,324,600 $
4,100,083 $ 4,095,491$ 4,095,491$ 4,333,624
$ 4,095,491
Adjustments:
Goodwill (4,687) (4,687) (4,687) (4,687) (4,687) (4,687) (4,687)
Tangible assets $ 4,328,937$ 4,319,913 $
4,095,396 $ 4,090,804$ 4,090,804$ 4,328,937
$ 4,090,804
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
Book value per common share $ 32.46$ 31.40 $
31.30 $ 30.30$ 30.30$ 32.46
$ 30.30
Effect of goodwill (0.48) (0.48) (0.48) (0.48) (0.48) (0.48) (0.48)
Tangible book value per common
share $ 31.98$ 30.92 $
30.82 $ 29.82$ 29.82$ 31.98
$ 29.82
Total shareholders' equity to
assets 7.34 % 7.12 % 7.44 % 7.21 % 7.21 % 7.34 % 7.21 %
Effect of goodwill (0.10) % (0.11) % (0.11) % (0.11) % (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 %
Total average equity - GAAP $ 313,611$ 306,868 $
297,623 $ 298,782$ 298,782$ 310,506
$ 295,963
Adjustments:
Average goodwill (4,687) (4,687) (4,687) (4,687) (4,687) (4,687) (4,687)
Average tangible common equity $ 308,924$ 302,181 $
292,936 $ 294,095$ 294,095$ 305,819$ 291,276
Return on average
shareholders' equity 10.67 % 5.15 % 9.46 % 8.40 % 8.40 % 7.90 % 8.20 %
Effect of goodwill 0.16 % 0.08 % 0.15 % 0.13 % 0.13 % 0.12 % 0.13 %
Return on average tangible
common equity 10.83 % 5.23 % 9.61 % 8.53 % 8.53 % 8.02 % 8.33 %
63
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Three Months Ended Nine Months Ended
(dollars in thousands, except September 30, June 30, March 31, December 31, September 30, September 30, September 30,
share and per share data) 2020 2020 2020 2019 2019 2020 2019
Total interest income $ 32,750$ 34,222$ 37,877$ 37,964$ 37,694$ 103,216$ 109,537
Adjustments:
Fully-taxable equivalent
adjustments 1 1,424 1,437 1,570 1,595 1,595 4,396 4,764
Total interest income - FTE $ 34,174$ 35,659 $
39,447 $ 33,326$ 33,326$ 107,612
$ 114,301
Net interest income $ 16,232$ 14 $
15,018 $ 15,374$ 15,244$ 45,676
$ 47,593
Adjustments:
Fully-taxable equivalent
adjustments 1 1,424 1,437 1,570 1,595 1,595 4,396 4,764
Net interest income - FTE $ 17,656$ 1,451 $
16,588 $ 16,969$ 16,839$ 50,072
$ 52,357
Net interest margin 1.53 % 1.37 % 1.50 % 1.51 % 1.54 % 1.47 % 1.70 %
Effect of fully-taxable
equivalent adjustments 1 0.14 % 0.13 % 0.15 % 0.16 % 0.16 % 0.14 % 0.17 %
Net interest margin - FTE 1.67 % 1.50 % 1.65 % 1.67 % 1.70 % 1.61 % 1.87 %
Allowance for loan losses $ 26,917$ 24,465 $
22,857 $ 21,840$ 21,683$ 26,917$ 21,683
Loans $ 3,012,914$ 2,973,674$ 2,892,093$ 2,963,547$ 2,881,272$ 3,012,914
$ 2,881,272
Adjustments:
PPP loans (58,337) (58,948) - - - (58,337) -
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
Allowance for loan losses to
loans 0.89 % 0.82 % 0.79 % 0.74 % 0.75 % 0.89 % 0.75 %
Effect of PPP loans 0.02 % 0.02 % 0.00 % 0.00 % 0.00 % 0.02 % 0.00 %
Allowance for loan losses to
loans, excluding PPP loans 0.91 % 0.84 % 0.79 % 0.74 % 0.75 % 0.91
% 0.75 %
1 Assuming a 21% tax rate
64
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Three Months Ended Nine Months Ended
(dollars in thousands, except September 30, June 30, March 31, December 31, September 30, September 30, September 30,
share and per share data) 2020 2020 2020 2019 2019 2020 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 $ 8,411$ 3,932$ 6,019$ 7,096$ 6,326$ 18,362$ 18,143
Adjustments:
Write-down of other real
estate owned 1,631 - - - - 1,631 -
Adjusted net income $ 10,042$ 3,932$ 6,019$ 7,096$ 6,326$ 19,993$ 18,143
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 earnings per share -
GAAP $ 0.86$ 0.40$ 0.62$ 0.72$ 0.63$ 1.87$ 1.79
Adjustments:
Effect of write-down of
other real estate owned 0.17 - - - - 0.16 -
Adjusted diluted earnings per
share $ 1.03$ 0.40
$ 0.62$ 0.72$ 0.63 $
2.03 $ 1.79
Return on average assets 0.78 % 0.37 % 0.59 % 0.69 % 0.63 % 0.58 % 0.64 %
Effect of write-down of
other real estate owned 0.15 % 0.00 % 0.00 % 0.00 % 0.00 % 0.05 % 0.00 %
Adjusted return on average
assets 0.93 % 0.37 % 0.59 % 0.69 % 0.63 % 0.63 % 0.64 %
Return on average shareholders'
equity 10.67 % 5.15 % 7.78 % 9.46 % 8.40 % 7.90 % 8.20 %
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 %
Return on average tangible
common equity 10.83 % 5.23 % 7.90 % 9.61 % 8.53 % 8.02 % 8.33 %
Effect of write-down of
other real estate owned 2.10 % 0.00 % 0.00 % 0.71 % 0.00 %
Adjusted return on average
tangible common equity 12.93 % 5.23 % 7.90 % 9.61 % 8.53 % 8.73 % 8.33 %
Effective income tax rate 14.2 % (7.3) % 4.2 % 7.8 % 6.6 % 7.0 % 6.8 %
Effect of write-down of
other real estate owned 1.2 % 0.0 % 0.0 % 0.0 % 0.0 % 1.4 % 0.0 %
Adjusted effective income tax
rate 15.4 % (7.3) % 4.2 % 7.8 % 6.6 % 8.4 % 6.8 %
65
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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.
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. In June
2020, the Company terminated all fair value hedging instruments associated with
loans. At September 30, 2020 and December 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 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 September 30, 2020 and December 31, 2019, the Company
had commitments to sell residential real estate loans of $118.0 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.
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