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 and our Annual Report on Form 10-K for the year endedDecember 31, 2021 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. 43 --------------------------------------------------------------------------------
Overview
First Internet Bancorp ("we," "our," "us," or the "Company") is a bank holding company with$4.1 billion in total assets as ofJune 30, 2022 , 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. , anIndiana corporation that 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 , aDelaware limited liability company that manages other real estate owned ("OREO") properties as needed; andSPF15, Inc. , anIndiana corporation that owns real estate used primarily for the Bank's principal office. We offer a wide range of commercial, small business, consumer and municipal banking products and services. We conduct our consumer and small business deposit operations primarily through digital channels on a nationwide basis and have no traditional branch offices. Our residential mortgage products are offered nationwide primarily through a digital direct-to-consumer platform and are supplemented withCentral Indiana -based mortgage and construction lending. Our consumer lending products are primarily originated on a nationwide basis through relationships with dealerships and financing partners. Our commercial banking products and services are delivered through a relationship banking model and include commercial and industrial ("C&I"), construction and investor commercial real estate, single tenant lease financing, public finance, healthcare finance, small business lending, franchise finance and commercial deposits and treasury management. Our C&I team provides credit solutions such as lines of credit, term loans, owner-occupied commercial real estate loans and corporate credit cards on a regional basis to commercial borrowers primarily in the Midwest and Southwest regions of the United States.We primarily offer construction and investor commercial real estate loans withinCentral Indiana or on a regional basis and single tenant lease financing on a nationwide basis. Our public finance team provides a range of public and municipal lending and leasing products to government entities on a nationwide basis. Our healthcare finance team was established in conjunction with our strategic partnership withProvide, Inc. (formerly known asLendeavor, Inc. ), aSan Francisco -based technology-enabled lender to healthcare practices, which provided lending on a nationwide basis for healthcare practice finance or acquisition, acquisition or refinancing of owner-occupied commercial real estate and equipment purchases. In the third quarter 2021, Provide was acquired by a super-regional financial institution. Subsequent to Provide being acquired, the acquiring institution has retained most, if not all, of Provide's loan origination activity and our healthcare finance loan balances have declined. Our franchise finance business was established inJuly 2021 in conjunction with our business relationship withApplePie Capital , a financial technology ("fintech") company that specializes in providing financing to franchisees in various industry segments. Our commercial deposits and treasury management team works with the other commercial teams to provide deposit products and treasury management services to our commercial and municipal lending customers as well as pursues commercial deposit opportunities in business segments where we have no credit relationships. We believe that we can differentiate ourselves from larger financial institutions by providing a full suite of services to emerging small businesses and entrepreneurs on a nationwide basis. We have hired and continue to recruit experienced small business sales, credit and operations personnel to expand our capabilities in small business lending andU.S. government guaranteed lending programs. We continue to scale up this business with the goal of driving increased earnings and profitability in future periods. We plan to expand our fintech partnerships. With the rapid evolution of technology that enables consumers and small businesses to manage their finances digitally, fintechs are addressing a significantly growing marketplace. Fintechs have created robust digital offerings, unburdened by legacy technology architecture, to address growing customer expectations. Through partnerships with selected fintechs, we believe our ability to win and retain consumer and small business relationships will be significantly enhanced. Furthermore, we believe partnering with select fintechs will allow us to further diversify our revenue sources, acquire lower-cost deposits and pursue additional asset generation capabilities. 44 --------------------------------------------------------------------------------
Results of Operations
During the second quarter 2022, net income was$9.5 million , or$0.99 per diluted share, compared to second quarter 2021 net income of$13.1 million , or$1.31 per diluted share, representing a decrease in net income of$3.6 million , or 27.1%, and a decrease in diluted earnings per share of$0.32 , or 24.4%. During the six months endedJune 30, 2022 , net income was$20.8 million , or$2.13 per diluted share, compared to the six months endedJune 30, 2021 net income of$23.5 million , or$2.36 per diluted share, resulting in a decrease in net income of$2.8 million , or 11.9%, and a decrease in diluted earnings per share of$0.23 , or 9.7%.
The
The$2.8 million decrease in net income for the six months endedJune 30, 2022 compared to the six months endedJune 30, 2021 was due primarily to an increase of$6.4 million , or 21.0% in noninterest expense, a decrease of$6.2 million , or 35.8%, in noninterest income and an increase of$0.7 million , or 52.4%, in provision for loan losses, partially offset by an increase of$9.3 million , or 22.1%, in net interest income and a decrease of$1.2 million , or 27.5%, in income tax expense. During the second quarter 2022, return on average assets ("ROAA"), return on average shareholders' equity ("ROAE"), and return on average tangible common equity ("ROATCE") were 0.93%, 10.23%, and 10.36%, respectively, compared to 1.25%, 14.88%, and 15.09%, respectively, for the second quarter 2021. During the six months endedJune 30, 2022 , ROAA, ROAE and ROATCE were 1.01%, 11.09%, and 11.23%, respectively, compared to 1.13%, 13.78%, and 13.97%, respectively, for the six months endedJune 30, 2021 . During the second quarter 2022, the Company paid a$0.5 million discretionary inflation bonus to certain employees, recognized accelerated equity compensation expense of$0.3 million related to several retirements and incurred$0.1 million of acquisition-related expenses. Excluding these items, adjusted net income for the second quarter 2022 was$10.3 million and adjusted diluted earnings per share was$1.06 . Additionally, for the second quarter 2022, adjusted ROAA, adjusted ROAE and adjusted ROATCE were 1.00%, 11.01% and 11.15%, respectively. During the second quarter 2021, the Company recognized a$2.5 million pre-tax gain on sale of its corporate headquarters. Excluding this item, adjusted net income for the second quarter 2021 was$11.1 million , or$1.11 per diluted share. Additionally, for the second quarter 2021, adjusted ROAA, adjusted ROAE and adjusted ROATCE were 1.06%, 12.62% and 12.79%, respectively. During the six months endedJune 30, 2022 , the Company recognized a nonrecurring consulting fee associated with a special project of$0.9 million , paid a$0.5 million discretionary inflation bonus to certain employees, recognized accelerated equity compensation expense of$0.3 million related to several retirements and incurred acquisition-related expenses of$0.3 million . Excluding these items, adjusted net income for the six months endedJune 30, 2022 was$22.3 million and adjusted diluted earnings per share was$2.28 . Additionally, for the six months endedJune 30, 2022 , adjusted ROAA, adjusted ROAE and adjusted ROATCE were 1.08%, 11.92% and 12.07%, respectively. During the six months endedJune 30, 2021 , the Company recognized a$2.5 million pre-tax gain on sale of its corporate headquarters. Excluding this item, adjusted net income for the six months endedJune 30, 2021 was$21.6 million , or$2.16 per diluted share. Additionally, for the six months endedJune 30, 2021 , adjusted ROAA, adjusted ROAE and adjusted ROATCE were 1.04%, 12.62% and 12.79%, respectively.
Refer to the "Reconciliation of Non-GAAP Financial Measures" section of Part I, Item 2 of this report, Management's Discussion and Analysis of Financial Condition and Results of Operations for additional information.
45
--------------------------------------------------------------------------------Consolidated Average Balance Sheets and Net Interest Income Analyses
For the periods presented, the following tables provide the average balances of
interest-earning assets and interest-bearing liabilities and the related yields
and cost of funds. The tables do not reflect any effect of income taxes except
for net interest margin - FTE, as discussed below. Balances are based on the
average of daily balances. Nonaccrual loans are included in average loan
balances.
Three Months Ended
June 30, 2022 March 31, 2022 June 30, 2021
Interest Interest Interest
(in thousands) 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 $ 3,019,891 $ 32,415 4.31 % $ 2,976,037 $ 33,188 4.52 % $ 3,016,330 $ 30,835 4.10 %
Securities - taxable 543,422 2,567 1.89 % 567,776 2,221 1.59 % 490,634 1,921 1.57 %Securities - non-taxable 76,974 328 1.71 % 80,952 249 1.25 % 84,050 259 1.24 % Other earning assets 322,302 796 0.99 % 455,960 376 0.33 % 509,735 362 0.28 % Total interest-earning assets 3,962,589 36,106 3.65 % 4,080,725 36,034 3.58 % 4,100,749 33,377 3.26 % Allowance for loan losses (28,599) (27,974) (30,348) Noninterest-earning assets 163,875 162,167 136,565 Total assets$ 4,097,865 $ 4,214,918 $ 4,206,966 Liabilities Interest-bearing liabilities Interest-bearing demand deposits$ 348,274 $ 466 0.54 %$ 318,281 $ 412 0.52 %$ 192,777 $ 143 0.30 % Savings accounts 66,657 68 0.41 % 60,616 53 0.35 % 55,811 49 0.35 % Money market accounts 1,427,665 1,921 0.54 % 1,454,436 1,503 0.42 % 1,416,406 1,462 0.41 % BaaS - brokered deposits 71,234 154 0.87 % 12,111 6 0.20 % - - 0.00 % Certificates and brokered deposits 1,104,592 3,799 1.38 % 1,225,976 4,123 1.36 % 1,444,171 6,051 1.68 % Total interest-bearing deposits 3,018,422 6,408 0.85 % 3,071,420 6,097 0.81 % 3,109,165 7,705 0.99 % Other borrowed funds 583,553 4,018 2.76 % 619,191 4,187 2.74 % 584,751 4,065 2.79 % Total interest-bearing liabilities 3,601,975 10,426 1.16 % 3,690,611 10,284 1.13 % 3,693,916 11,770 1.28 % Noninterest-bearing deposits 108,980 112,248 98,207 Other noninterest-bearing liabilities 12,636 31,292 61,949 Total liabilities 3,723,591 3,834,151 3,854,072 Shareholders' equity 374,274 380,767 352,894 Total liabilities and shareholders' equity$ 4,097,865 $ 4,214,918 $ 4,206,966 Net interest income$ 25,680 $ 25,750 $ 21,607 Interest rate spread 1 2.49% 2.45% 1.98 % Net interest margin 2 2.60% 2.56% 2.11 % Net interest margin - FTE 3 2.74% 2.69% 2.25 % 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 --------------------------------------------------------------------------------
Six Months Ended
June 30, 2022 June 30, 2021
Interest Interest
(in thousands) Average Balance /Dividends Yield /Cost Average Balance /Dividends Yield /Cost
Assets
Interest-earning assets
Loans, including
loans held-for-sale $ 2,998,085 $ 65,603 4.41 % $ 3,047,560 $ 61,720 4.08 %
Securities - taxable 555,533 4,788 1.74 % 476,049 3,700 1.57 %
Securities - non-taxable 78,952 577 1.47 % 85,581 540 1.27 %
Other earning assets 388,760 1,172 0.61 % 478,065 697 0.29 %
Total interest-earning assets 4,021,330 72,140 3.62 % 4,087,255 66,657 3.29 %
Allowance for loan losses (28,288) (30,117)
Noninterest-earning assets 163,026 133,074
Total assets $ 4,156,068 $ 4,190,212
Liabilities
Interest-bearing liabilities
Interest-bearing demand deposits $ 333,361 $ 878 0.53 % $ 186,795 $ 276 0.30 %
Savings accounts 63,653 121 0.38 % $ 50,950 89 0.35 %
Money market accounts 1,440,976 3,425 0.48 % 1,393,145 2,853 0.41 %
BaaS - brokered deposits 41,836 160 0.77 % - - 0.00 %
Certificates and brokered deposits 1,164,949 7,921 1.37 % 1,481,667 13,115 1.78 %
Total interest-bearing deposits 3,044,775 12,505 0.83 % 3,112,557 16,333 1.06 %
Other borrowed funds 601,274 8,205 2.75 % 584,268 8,192 2.83 %
Total interest-bearing liabilities 3,646,049 20,710 1.15 % 3,696,825 24,525 1.34 %
Noninterest-bearing deposits 110,605 94,506
Other noninterest-bearing liabilities 21,910 54,403
Total liabilities 3,778,564 3,845,734
Shareholders' equity
Total liabilities and shareholders'
equity 377,504 344,478
$ 4,156,068 $ 4,190,212
Net interest income
$ 51,430 $ 42,132
Interest rate spread 1 2.47% 1.95%
Net interest margin 2 2.58% 2.08%
Net interest margin - FTE 3 2.71% 2.21%
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.
47
--------------------------------------------------------------------------------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, 2022 vs.
2022 Due to Changes in 2021 Due to Changes in Due to Changes in
(in thousands) Volume Rate Net Volume Rate Net Volume Rate Net
Interest income
Loans, including loans
held-for-sale $ 2,823 $ (3,596) $ (773) $ 36 $ 1,544 $ 1,580 $ (2,714) $ 6,597 $ 3,883
Securities - taxable (567) 913 346 223 423 646 660 428 1,088
Securities - non-taxable (79) 158 79 (131) 200 69 (100) 137 37
Other earning assets (716) 1,136 420 (862) 1,296 434 (374) 849 475
Total 1,461 (1,389) 72 (734) 3,463 2,729 (2,528) 8,011 5,483
Interest expense
Interest-bearing deposits (556) 867 311 (222) (1,075) (1,297) (349) (3,479) (3,828)
Other borrowed funds (370) 201 (169) (7) (40) (47) 480 (467) 13
Total (926) 1,068 142 (229) (1,115) (1,344) 131 (3,946) (3,815)
(Decrease) increase in net
interest income $ 2,387 $ (2,457) $ (70) $ (505) $ 4,578 $ 4,073 $ (2,659) $ 11,957 $ 9,298
Net interest income for the second quarter 2022 was $25.7 million , an increase
of $4.1 million , or 18.9%, compared to $21.6 million for the second quarter
2021. The increase in net interest income was the result of a $2.7 million , or
8.2% increase in total interest income to $36.1 million for the second quarter
2022 from $33.4 million for the second quarter 2021, as well as a $1.3 million ,
or 11.4%, decrease in total interest expense to $10.4 million for the second
quarter 2022 from $11.8 million for the second quarter 2021.
Net interest income for the six months ended June 30, 2022 was $51.4 million , an
increase of $9.3 million , or 22.1%, compared to $42.1 million for the six months
ended June 30, 2021 . The increase in net interest income was the result of a
$5.5 million , or 8.2%, increase in total interest income to $72.1 million for
the six months ended June 30, 2022 from $66.7 million for the six months ended
June 30, 2021 , as well as a $3.8 million , or 15.6%, decrease in total interest
expense to $20.7 million for the six months ended June 30, 2022 from $24.5
million for the six months ended June 30, 2021 .
The increase in total interest income for the second quarter 2022 compared to
second quarter 2021 was due primarily to a $1.6 million , or 5.1%, increase in
interest earned on loans, a $0.7 million , or 32.8%, increase in interest earned
on securities and a $0.4 million , or 119.9%, increase in income from other
earning assets. The increase in income from loans was primarily due to a 21 bp
increase in the yield earned on loans as the average balance of loans was
relatively flat compared to the second quarter 2021. The average balance of
securities increased $45.7 million , or 8.0%, and the yield earned on the
securities portfolio increased 35 bps for the second quarter 2022 compared to
the second quarter 2021. In addition, the yield earned on other earning assets
increased 71 bps, partially offset by a decrease in the average balance of other
earning assets of $187.4 million , or 36.8%. The decrease in the average balance
of other earning assets was due primarily to lower cash balances.
The increase in total interest income from the six months ended June 30, 2022
compared to the six months ended June 30, 2021 was due primarily to a $3.9
million , or 6.3%, increase in interest earned on loans, a $1.1 million , or
26.5%, increase in interest earned on securities and a $0.5 million , or 68.1%,
increase in income from other earning assets. The increase in income from loans
was due primarily to a 33 bp increase in the yield earned on loans, partially
offset by a $49.5 million , or 1.6%, decrease in the average balance of loans.
The average balance of securities increased $72.9 million , or 13.0%, and the
yield earned on the securities portfolio increased 19 bps for the six months
ended June 30, 2022 compared to the six months ended June 30, 2021 . In addition,
the yield earned on other earning assets increased 32 bps, partially offset by a
decrease in the average balance of other earning assets of $89.3 million , or
18.7%. The decrease in the average balance of other earning assets was due
primarily to lower cash balances.
48
--------------------------------------------------------------------------------
The decrease in total interest expense for the second quarter 2022 compared to
the second quarter 2021 was due primarily to a $2.3 million , or 37.2%, decrease
in interest expense related to certificates and brokered deposits, partially
offset by an increase of $0.5 million , or 31.4%, in interest expense associated
with money market accounts and a $0.3 million , or 225.9%, increase in interest
expense associated with interest-bearing demand deposits. Additionally, the
Company added Banking-as-a-service deposits in 2022, which increased interest
expense by $0.2 million . Interest expense on certificates and brokered deposits
decreased due to a decline of 30 bps in the cost of these deposits, as well as a
$339.6 million , or 23.5%, 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 interest expense related to money market accounts was driven
primarily by an increase of 13 bps in the cost of these deposits, as well as an
increase in the average balance of these deposits of $11.3 million , or 0.8%. The
increase in interest expense related to interest-bearing demand deposits was due
primarily to approximately $100.0 million in deposits with a contractual term of
five years and a fixed rate of 1.15% pursuant to a new customer relationship in
2022.
The decrease in total interest expense for the six months ended June 30, 2022
compared to the six months ended June 30, 2021 was driven primarily by a $5.2
million , or 39.6%, decrease in interest expense related to certificates and
brokered deposits, partially offset by a $0.6 million , or 218.1%, increase in
interest expense associated with interest-bearing demand deposits and a $0.6
million , or 20.1%, increase in interest expense associated with money market
accounts. Additionally, the Company added Banking-as-a-service deposits in 2022,
which increased interest expense by $0.2 million . Interest expense on
certificates and brokered deposits decreased due to a decline of 41 bps in the
cost of these deposits, as well as a $316.7 million , or 21.4%, decrease in
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 interest expense related to
interest-bearing demand deposits was due primarily to approximately $100.0
million in deposits with a contractual term of five years and a fixed rate of
1.15% pursuant to a new customer relationship in 2022. The increase in interest
expense related to money market accounts was driven primarily by an increase of
7 bps in the cost of these deposits, as well as an increase in the average
balance of these deposits of $47.8 million , or 3.4%.
Overall, the cost of total interest-bearing liabilities for the second quarter
2022 declined 12 bps to 1.16% from 1.28% for the second quarter 2021.
Additionally, the cost of total interest-bearing liabilities for the six months
ended June 30, 2022 declined 23 bps to 1.15% from 1.34% for the six months ended
June 30, 2021 . The decline in the cost of funds for both the second quarter 2022
and the six months ended June 30, 2022 reflects the net maturities of higher
cost certificates and brokered deposits and the continued shift in the deposit
composition from certificates and brokered deposits to lower cost non-maturity
deposit accounts.
Net interest margin ("NIM") was 2.60% for the second quarter 2022 compared to
2.11% for the second quarter 2021, an increase of 49 bps. On a fully-taxable
equivalent ("FTE") basis, NIM was 2.74% for the second quarter 2022 compared to
2.25% for the second quarter 2021, an increase of 49 bps. The increase in second
quarter 2022 NIM and FTE NIM compared to the second quarter 2021 reflects the
decrease in the cost of funds and increase in earning asset yields noted above.
NIM was 2.58% for the six months ended June 30, 2022 compared to 2.08% for the
six months ended June 30, 2021 , and increase of 50 bps. On a fully-taxable
equivalent basis, NIM was 2.71% for the six months ended June 30, 2022 , compared
to 2.21% for the six months ended June 30, 2021 , an increase of 50 bps. The
increase in NIM for the six months ended June 30, 2022 compared to the six
months ended June 30, 2021 reflects the decrease in the cost of funds and
increase in earning asset yields noted above.
49
--------------------------------------------------------------------------------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,
(in thousands) 2022 2022 2021 2021 2021 2022 2021
Service charges and
fees $ 281 $ 316 $ 292 $ 276 $ 280 $ 597 $ 546
Loan servicing revenue 620 585 544 511 457 1,205 879
Loan servicing asset
revaluation (470) (297) (400) (274) (240) (767) (395)
Mortgage banking
activities 1,710 1,873 2,776 3,850 2,674 3,583 8,424
Gain on sale of loans 1,952 3,845 4,137 2,719 3,019 5,797 4,742 Gain on sale of premises and equipment - - - - 2,523 - 2,523 Other 221 498 345 731 249 719 618 Total noninterest
income$ 4,314 $ 6,820 $ 7,694 $ 7,813 $ 8,962 $ 11,134 $ 17,337 During the second quarter 2022, noninterest income was$4.3 million , representing a decrease of$4.6 million , or 51.9%, compared to$9.0 million for the second quarter 2021. The decrease in noninterest income was due to a$2.5 million gain on sale of premises and equipment resulting from the sale of the Company's former headquarters in the second quarter 2021, as well as a decrease of$1.1 million , or 35.3%, in gain on sale of loans and a decrease of$1.0 million , or 36.1%, in revenue from mortgage banking activities during the second quarter 2022 compared to the second quarter 2021. The decrease in gain on sale on loans was due to a decrease in the volume ofU.S. SBA 7(a) guaranteed loan sales, as well as lower net gain on sale premiums. The decline in mortgage banking revenue was due primarily to decreases in interest rate locks, sold loan volumes and gain-on-sale margins. During the six months endedJune 30, 2022 , noninterest income was$11.1 million , a decrease of$6.2 million , or 35.8%, compared to$17.3 million for the six months endedJune 30, 2021 . The decrease in noninterest income was due primarily to a decrease in mortgage banking revenue of$4.8 million , or 57.5%, and a$2.5 million gain on sale of premises and equipment resulting from the sale of the Company's former headquarters in the second quarter 2021, partially offset by a$1.1 million , or 22.2%, increase in gain on sale of loans. The decrease in mortgage banking activities was due mainly to a decrease in interest rate locks, sold loan volume and gain-on-sale margins. The increase in gain on sale of loans was due to an increase in the volume ofU.S. SBA 7(a) guaranteed loan sales, as well as a$0.4 million gain on the sale of$14.4 million of single tenant lease financing loans in 2022. 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,
2022 2022 2021 2021 2021 2022 2021
Salaries and employee
benefits $ 10,832 $ 9,878 $ 10,183 $ 9,316 $ 9,232 $ 20,710 $ 18,724
Marketing, advertising
and promotion 920 756 896 813 872 1,676 1,552
Consulting and
professional services 1,197 1,925 1,262 728 1,078 3,122 2,064
Data processing 490 449 425 380 382 939 844
Loan expenses 693 1,582 654 383 541 2,275 1,075
Premises and equipment 2,419 2,540 2,188 1,687 1,587 4,959 3,188
Deposit insurance
premium 287 281 283 230 275 568 700
Other 1,147 1,369 1,064 914 1,108 2,516 2,245
Total noninterest
expense $ 17,985 $ 18,780 $ 16,955 $ 14,451 $ 15,075 $ 36,765 $ 30,392
50-------------------------------------------------------------------------------- Noninterest expense for the second quarter 2022 was$18.0 million , compared to$15.1 million for the second quarter 2021. The increase of$2.9 million , or 19.3%, was due primarily to increases of$1.6 million in salaries and employee benefits,$0.8 million in premises and equipment and$0.2 million in loan expenses. The higher salaries and employee benefits expense was due mainly to a$0.5 million discretionary inflation bonus paid to certain employees,$0.3 million of accelerated equity compensation related to employees who retired during the quarter and an increase in headcount, partially offset by lower incentive compensation due to decreased mortgage origination volume. The increase in premises and equipment was primarily related to costs associated with the Company's new corporate headquarters, as well as investments in technology and software maintenance expense. The increase in loan expenses was due mainly to servicing fees related to franchise finance loans. Noninterest expense for the six months endedJune 30, 2022 was$36.8 million , compared to$30.4 million for the six months endedJune 30, 2021 . The increase of$6.4 million , or 21.0%, was due primarily to increases of$2.0 million in salaries and employee benefits,$1.8 million in premises and equipment,$1.2 million in loan expenses,$1.1 million in consulting and professional fees and$0.3 million in other expense. The higher salaries and employee benefits expense was due primarily to an increase in headcount, as well as the discretionary inflation bonus and accelerated equity compensation mentioned above, partially offset by lower incentive compensation due to decreased mortgage origination volume. The increase in premises and equipment was due mainly to costs associated with the Company's new corporate headquarters, as well as investments in technology and software maintenance expense. The increase in loan expenses was due primarily to servicing fees related to tax refund advance loans and franchise finance loans. The increase in consulting and professional fees was due primarily to a$0.9 million consulting fee associated with a special project. Income tax provision was$1.3 million for the second quarter 2022, resulting in an effective tax rate of 11.8%, compared to a tax provision of$2.4 million for the second quarter 2021 and an effective tax rate of 15.4%. Income tax provision was$3.1 million for the six months endedJune 30, 2022 , resulting in an effective tax rate of 12.9%, compared to an income tax provision of$4.2 million , or an effective tax rate of 15.2%, for the six months endedJune 30, 2021 . The lower income tax provision and effective tax rate during the three and six months endedJune 30, 2022 is the result of the decline in noninterest income, resulting in a higher proportion of tax exempt income to total pre-tax income. Financial Condition The following table presents summary balance sheet data for the last five completed fiscal quarters. (in thousands) June 30, March 31, December 31, September 30, June 30, Balance Sheet Data: 2022 2022 2021 2021 2021 Total assets$ 4,099,806 $ 4,225,397 $ 4,210,994 $ 4,252,292 $ 4,204,642 Loans 3,082,127 2,880,780 2,887,662 2,936,148 2,957,608 Total securities 610,602 628,658 662,609 696,136 729,178 Loans held-for-sale 31,580 33,991 47,745 43,970 27,587 Noninterest-bearing deposits 126,153 119,196 117,531 110,117 113,996 Interest-bearing deposits 3,025,948
3,098,783 3,061,428 3,114,478 3,092,151 Total deposits 3,152,101 3,217,979 3,178,959 3,224,595 3,206,147 Advances from Federal Home Loan Bank 464,925 514,923 514,922 514,920 514,919 Total shareholders' equity 365,332 374,655 380,338 370,442 358,641 Total assets decreased$111.2 million , or 2.6%, to$4.1 billion atJune 30, 2022 compared to$4.2 billion atDecember 31, 2021 . The decrease is due primarily to decreases in cash balances and the fair value of total securities balances, partially offset by an increase in loan balances. As ofJune 30, 2022 , total shareholders' equity was$365.3 million , a decrease of$15.0 million , or 3.9%, compared toDecember 31, 2021 , due primarily to stock repurchase activity and an increase in accumulated other comprehensive loss resulting from a decline in the value of the available-for-sale securities portfolio caused by the continued rise in interest rates during the year. This was partially offset by the net income earned during the year and an increase in the value of interest rate swaps classified as cash flow hedges. Tangible common equity totaled$360.6 million as ofJune 30, 2022 , representing a decrease of$15.0 million , or 4.0%, compared toDecember 31, 2021 . The ratio of total shareholders' equity to total assets decreased to 8.91% as ofJune 30, 2022 from 9.03% as ofDecember 31, 2021 , and the ratio of tangible common equity to tangible assets decreased to 8.81% as ofJune 30, 2022 from 8.93% as ofDecember 31, 2021 . Book value per common share decreased 0.4% to$38.85 as ofJune 30, 2022 from$38.99 as ofDecember 31, 2021 . Tangible book value per share decreased 0.4% to$38.35 as ofJune 30, 2022 from$38.51 as ofDecember 31, 2021 . The 51 -------------------------------------------------------------------------------- decline in both book value per common share and tangible book value per share reflects the declines in total shareholders' equity and tangible common equity. Refer to the "Reconciliation of Non-GAAP Financial Measures" section of Part I, Item 2 of this report, Management's Discussion and Analysis of Financial Condition and Results of Operations for additional information.
Loan Portfolio Analysis
The following table presents a summary of the Company's loan portfolio for the last five completed fiscal quarters.
June 30 ,March 31 ,December 31 ,September 30 ,June 30 , (dollars in thousands) 2022 2022 2021 2021 2021 Commercial loans Commercial and industrial$ 110,540 3.6 %$ 99,808 3.5 %$ 96,008 3.3 %$ 107,142 3.6 %$ 96,203 3.3 % Owner-occupied commercial real estate 61,277 2.0 % 56,752 2.0 % 66,732 2.3 % 84,819 2.9 % 87,136 2.9 % Investor commercial real estate 52,648 1.7 % 34,627 1.2 % 28,019 1.0 % 28,505 1.0 % 28,871 1.0 % Construction 143,475 4.7 % 149,662 5.2 % 136,619 4.7 % 115,414 3.9 % 117,970 4.0 % Single tenant lease financing 867,181 28.1 % 852,519 29.6 % 865,854 30.0 % 921,998 31.5 % 913,115 30.9 % Public finance 613,759 19.9 % 587,817 20.4 % 592,665 20.5 % 601,738 20.5 % 612,138 20.7 % Healthcare finance 317,180 10.3 % 354,574 12.3 % 387,852 13.4 % 417,388 14.2 % 455,890 15.3 % Small business lending 102,724 3.3 % 97,040 3.4 % 108,666 3.8 % 102,889 3.5 % 123,293 4.2 % Franchise finance 168,942 5.5 % 107,246 3.7 % 81,448 2.8 % 25,598 0.9 % - 0.0 % Total commercial loans 2,437,726 79.1 % 2,340,045 81.3 % 2,363,863 81.8 % 2,405,491 82.0 % 2,434,616 82.3 % Consumer loans Residential mortgage 281,124 9.1 % 191,153 6.6 % 186,770 6.5 % 188,750 6.4 % 177,148 6.0 % Home equity 19,928 0.6 % 18,100 0.6 % 17,665 0.6 % 17,960 0.6 % 17,510 0.6 % Other consumer 292,955 9.6 % 270,330 9.4 % 265,478 9.2 % 268,396 9.1 % 271,796 9.2 % Tax refund advance loans - 0.0 % 9,177 0.3 % - 0.0 % - 0.0 % - 0.0 % Total consumer loans 594,007 19.3 % 488,760 16.9 % 469,913 16.3 % 475,106 16.1 % 466,454 15.8 % Net deferred loan origination costs, premiums and discounts on purchased loans and other (1) 50,394 1.6 % 51,975 1.8 % 53,886 1.9 % 55,551 1.9 % 56,538 1.9 % Total loans 3,082,127 100.0 % 2,880,780 100.0 % 2,887,662 100.0 % 2,936,148 100.0 % 2,957,608 100.0 % Allowance for loan losses (29,153) (28,251) (27,841) (28,000) (28,066) Net loans$ 3,052,974 $ 2,852,529 $ 2,859,821 $ 2,908,148 $ 2,929,542 (1) Includes carrying value adjustments of$35.4 million ,$36.4 million ,$37.5 million ,$38.9 million and$40.4 million related to terminated interest rate swaps associated with public finance loans as ofJune 30, 2022 ,March 31, 2022 ,December 31, 2021 ,September 30, 2021 , andJune 30, 2021 , respectively. Total loans were$3.1 billion as ofJune 30, 2022 , an increase of$194.5 million , or 6.7%, compared toDecember 31, 2021 . Total commercial loan balances were$2.4 billion as ofJune 30, 2022 , up$73.9 million , or 3.1%, fromDecember 31, 2021 . Total consumer loan balances were$594.0 million as ofJune 30, 2022 , an increase of$124.1 million , or 26.4%, compared toDecember 31, 2021 . Compared toDecember 31, 2021 , the increase in commercial loan balances was driven by growth in franchise finance, investor commercial real estate, public finance, commercial and industrial and construction loan balances. The increase was partially offset by payoffs in healthcare finance, small business lending, and owner-occupied commercial real estate loans. The increase in consumer loans was due to higher balances in the residential mortgage, recreational vehicles and trailers loan portfolios.
Franchise finance was established in
52
--------------------------------------------------------------------------------Asset Quality
Nonperforming loans are comprised of nonaccrual loans and loans 90 days past due
and accruing. Nonperforming assets include nonperforming loans, other real
estate owned and other nonperforming assets, which consist of repossessed
assets. The following table provides a summary of the Company's nonperforming
assets for the last five completed fiscal quarters.
June 30, March 31, December 31, September 30, June 30,
(dollars in thousands) 2022 2022 2021 2021 2021
Nonaccrual loans
Commercial loans:
Commercial and industrial $ 350 $ 610 $ 674 $ 678 $ 692
Owner-occupied commercial real
estate 1,661 3,267 3,419 3,429 3,487
Single tenant lease financing - 1,092 1,100 1,100 2,373
Small business lending (1) 1,297 881 959 1,351 1,209
Total commercial loans 3,308 5,850 6,152 6,558 7,761
Consumer loans:
Residential mortgage 1,201 1,207 1,226 1,253 1,253
Home equity 14 14 14 14 14
Other consumer 4 13 9 26 10
Total consumer loans 1,219 1,234 1,249 1,293 1,277
Total nonaccrual loans 4,527 7,084 7,401 7,851 9,038
Past Due 90 days and accruing loans
Total past due 90 days and accruing loans - - - - - Total nonperforming loans 4,527 7,084 7,401 7,851 9,038 Other real estate owned Single tenant lease financing - - 1,188 1,188 1,188 Residential mortgage - - - - 112 Total other real estate owned - - 1,188 1,188 1,300 Other nonperforming assets 23 1 29 - - Total nonperforming assets$ 4,550 $ 7,085 $
8,618
Total nonperforming loans to total loans(2) 0.15 % 0.25 % 0.26 % 0.27 % 0.31 % Total nonperforming assets to total assets(2) 0.11 % 0.17 % 0.20 % 0.21 % 0.25 % Allowance for loan losses to total loans 0.95 % 0.98 % 0.96 % 0.95 % 0.95 % Nonaccrual loans to total loans 0.15 % 0.25 % 0.26 % 0.27 % 0.31 % Allowance for loan losses to nonperforming loans(2) 644.0 % 398.8 % 376.2 % 356.6 % 310.5 %
1 Balance represents
Total nonperforming loans declined$2.9 million , or 38.8%, to$4.5 million as ofJune 30, 2022 compared to$7.4 million as ofDecember 31, 2021 due primarily to upgrades and payoffs in the owner-occupied commercial real estate and commercial and industrial loan portfolios. Total nonperforming assets declined$4.1 million , or 47.2%, as ofJune 30, 2022 , compared toDecember 31, 2021 , due primarily to the upgrades and payoffs discussed above as well as the decline in other real estate owned ("OREO") discussed below. 53 --------------------------------------------------------------------------------
Troubled Debt Restructurings
The following table provides a summary of troubled debt restructurings for the last five completed fiscal quarters.
June 30, March 31, December 31, September 30, June 30,
(in thousands) 2022 2022 2021 2021 2021
Troubled debt restructurings -
nonaccrual $ 2,389 $ 2,440
2,425 2,418 1,693 843 1,179
Total troubled debt restructurings
Total TDRs as ofJune 30, 2022 were$4.8 million , up$0.6 million fromDecember 31, 2021 . The increase was driven by one residential mortgage loan that became a TDR in 2022. As ofJune 30, 2022 , the Company did not own any OREO. As ofDecember 31, 2021 , the Company had one single tenant lease financing property in OREO with a carrying value of$1.2 million . During the first quarter 2022, the Company reached a settlement agreement with the guarantor, which resulted in the Company recovering$1.2 million in excess of the carrying value of OREO.
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 onMarch 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 were in effect from the period beginningMarch 1, 2020 untilJanuary 1, 2022 . In accordance with this guidance, the Company offered modifications to borrowers who were both impacted by COVID-19 and current on all principal and interest payments. As ofJune 30, 2022 , the Company had one loan totaling$8.0 million in non-TDR loan modifications due to COVID-19.
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. These loans may be forgiven if certain conditions are satisfied and are fully guaranteed by the SBA. In 2020, as a preferred SBA lender, we assisted our clients in participating in the PPP to help them maintain their workforce in an uncertain and challenging environment. The loans originated in 2020 bear an interest rate of 1.00%, and we received gross origination fees of approximately$2.3 million . The Company received this fee revenue from the SBA in lateJune 2020 , and it was deferred over the life of the PPP loans and recognized as interest income. The Company began processing applications for forgiveness from this round beginning inDecember 2020 and 100% of loan balances have been forgiven as ofDecember 31, 2021 . OnDecember 27, 2020 ,$285 billion in additional funding was allocated to the PPP through the passage of the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act. The Company began offering PPP loans again in 2021 and continued until the program's funds were depleted. These loans may be forgiven if certain conditions are satisfied and are fully guaranteed by the SBA. The loans originated during 2021 bear an interest rate of 1.00% and the Company received gross origination fees of approximately$1.3 million . The Company received this fee revenue from the SBA during 2021, and it is being deferred over the life of the PPP loans and recognized as interest income. The Company began processing applications for forgiveness from this round beginning inMay 2021 and 99% of loan balances have been forgiven as ofJune 30, 2022 . 54 --------------------------------------------------------------------------------
The following table provides a rollforward of the activity of PPP loans through
(in thousands, except Number of Loans) Number of Loans Principal Balance Net Deferred Fees Originated 447 $ 58,336 $ 1,851 Principal repaid (71) (7,184) Net deferred fees recognized (1,253) Balance, December 31, 2020 376 51,152 598 Originated 281 27,377 1,125 Principal repaid (634) (75,377) Net deferred fees recognized (1,624) Balance, December 31, 2021 23 3,152 99 Originated - - - Principal repaid (18) (2,149) Net deferred fees recognized (75) Balance, March 31, 2022 5 $ 1,003 $ 24 Originated - - - Principal repaid (3) (809) Net deferred fees recognized (19) Balance, June 30, 2022 2 $ 194 $ 5
Allowance for Loan Losses
The following table provides a rollforward of the allowance for loan losses for the last five completed fiscal quarters and the six months endedJune 30, 2022 and 2021. 55 --------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, March 31, December 31, September 30, June 30, June 30, June 30,
(in thousands) 2022 2022 2021 2021 2021 2022 2021
Balance, beginning of
period $ 28,251 $ 27,841 $ 28,000 $ 28,066 $ 30,642 $ 27,841 $ 29,484
Provision (credit) charged to expense 1,185 791 (238) (29) 21 1,976 1,297 Losses charged off Commercial and industrial - - - - 28 - 28 Single tenant lease financing - - - - 2,392 - 2,392 Small business lending - 80 - 10 133 80 212 Residential mortgage - - - - 6 - 6 Home equity - - - - - - 51 Other consumer 128 163 106 110 131 291 312 Tax refund advance loans 372 1,488 - - - 1,860 - Total losses charged off 500 1,731 106 120 2,690 2,231 3,001 Recoveries Commercial and industrial - - 3 2 2 - 84 Single tenant lease financing - 1,231 - - - 1,231 - Small business lending 2 17 48 26 2 19 6 Residential mortgage 1 1 51 3 4 2 9 Home equity 134 2 2 2 1 136 3 Other consumer 80 99 81 50 84 179 184 Total losses charged off 217 1,350 185 83 93 1,567 286 Balance, end of period$ 29,153 $ 28,251 $ 27,841 $ 28,000 $ 28,066 $ 29,153 $ 28,066 Net charge-offs (recoveries)$ 283 $ 381 $ (79) $ 37$ 2,597 $ 664 $ 2,715 Net charge-offs (recoveries) to average loans (annualized) Commercial and industrial 0.00 % 0.00 % (0.01 %) (0.01 %) 0.14 % 0.00 % (0.16 %) Single tenant lease financing 0.00 % (0.58 %) 0.00 % 0.00 % 1.04 % (0.29 %)
0.52 %
Small business lending 0.00 % 0.23 % (0.17 %) (0.05 %) 0.35 % 0.11 % 0.28 % Total commercial net charge-offs (recoveries) 0.00 % (0.20 %) (0.01 %) 0.00 % 0.42 % (0.10 %) 0.21 % Residential mortgage 0.00 % 0.00 % (0.11 %) (0.01 %) 0.00 % - % - % Home equity (1.42 %) (0.04 %) (0.04 %) (0.05 %) (0.02 %) (1.48 %) 0.52 % Other consumer 0.30 % 0.40 % 0.28 % 0.24 % 0.32 % 0.34 % 0.37 % Tax refund advance loans 23.55 % 9.97 % 0.00 % 0.00 % 0.00 % 12.89 % - % Total consumer net charge-offs (recoveries) 0.11 % 1.18 % (0.02 %) 0.05 % 0.04 % 0.71 % 0.07 % Total net charge-offs (recoveries) to average loans 0.04 % 0.05 % (0.01 %) 0.01 % 0.35 % 0.05 % 0.18 % Total net (recoveries) charge-offs, excluding tax refund advance
loans (0.01 %) (0.16 %) (0.01 %) 0.01 % 0.35 % (0.08) % 0.18 % The allowance for loan losses was$29.2 million as ofJune 30, 2022 , compared to$27.8 million as ofDecember 31, 2021 . The allowance for loan losses as a percentage of total loans, including and excluding PPP loans, was 0.95% atJune 30 , 56 --------------------------------------------------------------------------------
2022, compared to 0.96%, or 0.97% when excluding PPP loans, at
Net charge-offs of$0.3 million were recognized during the second quarter 2022, resulting in net charge-offs to average loans of 0.04%, compared to net charge-offs to average loans of 0.35% for the second quarter 2021. Excluding net charge-offs related to tax refund advance loans, net recoveries of$0.1 million were recognized during the second quarter 2022, resulting in net recoveries to average loans of 0.01%.
The provision for loan losses in the second quarter 2022 was
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 2022 2022 2021 2021 2021
Securities available-for-sale
71,264 72,420 75,158 76,528 77,364
Agency mortgage-backed securities -
residential 265,196 276,392 377,928 398,504 410,971
Agency mortgage-backed securities -
commercial 23,312 24,815 36,024 34,109 34,924
Private label mortgage-backed
securities - residential 13,259 15,090 15,902 19,997 29,003
Asset-backed securities 5,000 5,000 5,000 5,000 5,000
Corporate securities 42,655 47,580 46,482 48,460 48,447
Total available-for-sale 462,228 486,632 606,507 635,978 663,693
Securities held-to-maturity
Municipal securities 13,969 13,981 13,992 14,538 14,549
Agency mortgage-backed securities -
residential 117,749 95,982 - - -
Agency mortgage-backed securities -
commercial 5,838 5,847 - - -
Corporate securities 47,557 47,560 45,573 47,591 51,110
Total held-to-maturity 185,113 163,370 59,565 62,129 65,659
Total securities $ 647,341 $ 650,002 $ 666,072 $ 698,107 $ 729,352
57--------------------------------------------------------------------------------
(in thousands)
June 30, March 31, December 31, September 30, June 30,
Approximate Fair Value 2022 2022 2021 2021 2021
Securities available-for-sale
67,923 72,804 77,033 77,450 78,438
Agency mortgage-backed securities -
residential 237,546 257,682 373,236 395,105 408,710
Agency mortgage-backed securities -
commercial 22,207 24,156 36,326 34,780 35,784
Private label mortgage-backed
securities - residential 12,479 14,818 16,021 20,235 29,363
Asset-backed securities 4,897 4,986 5,004 5,005 5,005
Corporate securities 40,434 46,995 46,384 48,977 49,084
Total available-for-sale 425,489 465,288 603,044 634,007 663,519
Securities held-to-maturity
Municipal securities 13,356 14,093 14,709 15,319 15,373
Agency mortgage-backed securities -
residential 109,054 92,939 - - -
Agency mortgage-backed securities -
commercial 5,048 5,420 - - -
Corporate securities 46,561 47,519 46,759 49,018 52,685
Total held-to-maturity 174,019 159,971 61,468 64,337 68,058
Total securities $ 599,508 $ 625,259 $ 664,512 $ 698,344 $ 731,577
The approximate fair value of available-for-sale investment securities decreased
$177.6 million , or 29.4%, to $425.5 million as of June 30, 2022 , compared to
$603.0 million as of December 31, 2021 . The decrease was due primarily to
decreases of $135.7 million in agency mortgage-backed securities - residential,
$14.1 million in agency mortgage-backed securities - commercial, $9.1 million in
municipal securities and $9.0 million in U.S. Government -sponsored agencies. The
decrease in agency mortgage-backed securities - residential and agency
mortgage-backed securities - commercial was due primarily to the transfer of
$96.2 million of these securities from available-for-sale to held-to-maturity in
the first quarter 2022, as well as a decline in fair value resulting from the
continued rise in interest rates. The decreases in other securities types were
also driven by a decline in value resulting from the continued rise in interest
rates.
Accrued Income and Other Assets
Accrued income and other assets decreased$12.5 million , or 26.7%, to$34.3 million atJune 30, 2022 compared to$46.9 million atDecember 31, 2021 . The decrease was primarily related to a decrease of$15.7 million in cash pledged as collateral, partially offset by an increase of$3.9 million in income tax receivable. As ofJune 30, 2022 the Company had no pledged cash collateral compared to$15.7 million , as ofDecember 31, 2021 . Cash collateral is pledged 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.
Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities decreased$19.5 million , or 63.8%, to$11.1 million atJune 30, 2022 , compared to$30.5 million atDecember 31, 2021 . The decrease in accrued expenses and other liabilities was due primarily to decreases of$14.3 million , or 100.0%, in derivative liabilities,$1.9 million , or 0.4%, in accrued salary and benefits and$3.9 million in accrued taxes, partially offset by an increase in other liabilities. 58 --------------------------------------------------------------------------------
Deposits
The following table presents the composition of the Company's deposit base for the last five completed fiscal quarters.
June 30 ,March 31 ,December 31 ,September 30 ,June 30 , (dollars in thousands) 2022 2022 2021 2021 2021 Noninterest-bearing deposits$ 126,153 4.0 %$ 119,197 3.7 %$ 117,531 3.7 %$ 110,117 3.4 %$ 113,996 3.6 % Interest-bearing demand deposits 350,551 11.1 % 334,723 10.4 % 247,967 7.8 % 201,557 6.3 % 196,841 6.1 % Savings accounts 65,365 2.1 % 66,320 2.1 % 59,998 1.9 % 66,762 2.1 % 56,298 1.8 % Money market accounts 1,363,424 43.3 % 1,475,857 45.8 % 1,483,936 46.7 % 1,479,358 45.8 % 1,432,355 44.6 % BaaS - brokered deposits 194,133 6.2 % 50,006 1.6 % - 0.0 % - 0.0 % - 0.0 % Certificates of deposits 800,598 25.3 % 889,789 27.6 % 970,107 30.5 % 1,043,898 32.4 % 1,087,350 33.9 % Brokered deposits 251,877 8.0 % 282,087 8.8 % 299,420 9.4 % 322,903 10.0 % 319,307 10.0 % Total deposits$ 3,152,101 100.0 %$ 3,217,979 100.0 %$ 3,178,959 100.0 %$ 3,224,595 100.0 %$ 3,206,147 100.0 % Total deposits decreased$26.9 million , or 0.8%, to$3.2 billion as ofJune 30, 2022 , compared to$3.2 billion as ofDecember 31, 2021 . This decrease was due primarily to decreases of$169.5 million , or 17.5%, in certificates of deposits,$120.5 million , or 8.1%, in money market accounts and$47.5 million , or 15.9%, in brokered deposits, partially offset by increases of$194.1 million , in BaaS - brokered deposits,$102.6 million , or 41.4%, in interest-bearing demand deposits, and$8.6 million , or 7.3%, in noninterest-bearing deposits. The decrease in the balance of certificates of deposits was due to the maturity of higher-cost balances and reduced pricing strategies designed to limit the volume of new production. The decrease in money market accounts was due primarily to certain customer activity that can be periodically volatile. The decrease in brokered deposits was due to the maturity of higher-cost balances. The increase in BaaS deposits was due to a relationship established in the first quarter 2022 that grew during the second quarter 2022. The increase in the balance of interest-bearing demand deposits was due primarily to a new customer relationship with approximately$100.0 million in deposits with a contractual term of five years and a fixed rate of 1.15%.
Recent Debt Offerings
InAugust 2021 , the Company issued$60.0 million aggregate principal amount of 3.75% Fixed-to-Floating Rate Subordinated Notes due 2031 (the "2031 Notes") in a private placement. The 2031 Notes initially bear a fixed interest rate of 3.75% per year to, but excluding,September 1, 2026 , and thereafter a floating rate equal to the then-current benchmark rate (initially three-month Term SOFR plus 3.11%). The 2031 Notes are scheduled to mature onSeptember 1, 2031 . The 2031 Notes are unsecured subordinated obligations of the Company and may be repaid, without penalty, on any interest payment date on or afterSeptember 1, 2026 . The 2031 Notes are intended to qualify as Tier 2 capital under regulatory guidelines. Pursuant to the terms of a Registration Rights Agreement between the Company and the initial purchasers of the 2031 Notes, the Company offered to exchange the 2031 Notes for subordinated notes that are registered under the Securities Act of 1933, as amended, and have substantially the same terms as the 2031 Notes. OnDecember 30, 2021 , the Company completed an exchange of$59.3 million principal amount of the unregistered 2031 Notes for registered 2031 Notes in satisfaction of its obligations under the registration rights agreement. Holders of$0.7 million of unregistered 2031 Notes did not participate in the exchange.
Regulatory Capital Requirements
The Company and the Bank are subject to various regulatory capital requirements administered by state and federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weighting and other factors. The Basel III Capital Rules became effective for the Company and the Bank 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"). 59 -------------------------------------------------------------------------------- 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 capital conservation buffer is designed to absorb losses during periods of economic stress. Failure to maintain the minimum Common Equity Tier 1 capital ratio plus the capital conservation buffer will result in potential restrictions on a banking institution's ability to pay dividends, repurchase stock and/or pay discretionary compensation to its employees. The following tables present actual and required capital ratios as ofJune 30, 2022 andDecember 31, 2021 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, 2022 andDecember 31, 2021 , which are based on the Basel III Capital Rules. Capital levels required to be considered well capitalized are based upon prompt corrective action regulations, as amended to reflect the changes under the Basel III Capital Rules. 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 ofJune 30, 2022 : Common equity tier 1 capital to risk-weighted assets Consolidated$ 388,865 12.46 %$ 218,444 7.00 % N/A N/A Bank 453,223 14.56 % 217,863 7.00 %$ 202,301 6.50 % Tier 1 capital to risk-weighted assets Consolidated 388,865 12.46 % 265,253 8.50 % N/A N/A Bank 453,223 14.56 % 264,548 8.50 % 248,986 8.00 % Total capital to risk-weighted assets Consolidated 522,399 16.74 % 327,666 10.50 % N/A N/A Bank 482,376 15.50 % 326,795 10.50 % 311,233 10.00 % Leverage ratio Consolidated 388,865 9.45 % 164,623 4.00 % N/A N/A Bank 453,223 11.03 % 164,414 4.00 % 205,518 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 ofDecember 31, 2021 : Common equity tier 1 capital to risk-weighted assets Consolidated$ 384,499 12.93 %$ 208,202 7.00 % N/A N/A Bank 432,181 14.55 % 207,913 7.00 %$ 193,062 6.50 % Tier 1 capital to risk-weighted assets Consolidated 384,499 12.93 % 252,817 8.50 % N/A N/A Bank 432,181 14.55 % 252,466 8.50 % 237,615 8.00 % Total capital to risk-weighted assets Consolidated 516,571 17.37 % 312,303 10.50 % N/A N/A Bank 460,022 15.49 % 311,870 10.50 % 297,019 10.00 % Leverage ratio Consolidated 384,499 9.22 % 166,824 4.00 % N/A N/A Bank 432,181 10.37 % 166,693 4.00 % 208,366 5.00 % 60
--------------------------------------------------------------------------------
Shareholders' Dividends
The Company's Board of Directors declared a cash dividend of$0.06 per share of common stock payableJuly 15, 2022 to shareholders of record as ofJuly 1, 2022 . The Company expects to continue to pay cash dividends on a quarterly basis; however, the declaration and amount of any future cash dividends will be subject to the sole discretion of the Board of Directors and will depend upon many factors, including the Company's results of operations, financial condition, capital requirements, regulatory and contractual restrictions (including with respect to the Company's outstanding subordinated debt), business strategy and other factors deemed relevant by the Board of Directors. As ofJune 30, 2022 , the Company had$107.0 million principal amount of subordinated debt outstanding evidenced by the 2029 Notes, 2030 Note and 2031 Notes. The agreements that govern our outstanding subordinated debt prohibit the Company from paying any dividends on its common stock or making any other distributions to shareholders at any time when there shall have occurred, and be continuing to occur, an event of default under the applicable agreement. If an event of default were to occur and the Company did not cure it, the Company would be prohibited from paying any dividends or making any other distributions to shareholders or from redeeming or repurchasing any common stock.
Capital Resources
The Company believes it has sufficient liquidity and capital resources to meet its cash and capital expenditure requirements for the next twelve months and longer. The Company may explore strategic alternatives, including additional asset, deposit or revenue generation channels that complement our commercial and consumer banking platforms, which may require additional capital. If the Company is unable to secure such capital at favorable terms, its ability to take advantage of such opportunities could be adversely affected. OnOctober 20, 2021 , the Company's Board of Directors approved a stock repurchase program authorizing the repurchase of up to$30 million of the Company's outstanding common stock from time to time on the open market or in privately negotiated transactions. Under this program, the Company repurchased 100,000 shares at a total cost of$4.4 million during 2021, 103,703 shares at a total cost of$5.1 million during the first quarter 2022 and 294,464 shares at a total cost of$11.1 million during the second quarter 2022. The stock repurchase authorization is scheduled to expire onDecember 31, 2022 . Various factors determine the amount and timing of our share repurchases, including our capital requirements, organic growth and other strategic opportunities, economic and market conditions (including the trading price of our stock), and regulatory and legal considerations. See Part II, Item 2, of this report for information regarding recent repurchase activity and our remaining authority under the program.
Liquidity
Liquidity management is the process used by the Company to manage the continuing flow of funds necessary to meet its financial commitments on a timely basis and at a reasonable cost while also maintaining safe and sound operations. Liquidity, represented by cash and investment securities, is a product of the Company's operating, investing and financing activities. The primary sources of funds are deposits, principal and interest payments on loans and investment securities, maturing loans and investment securities, access to wholesale funding sources and collateralized borrowings. While scheduled payments and maturities of loans and investment securities are relatively predictable sources of funds, deposit flows are greatly influenced by interest rates, general economic conditions and competition. Therefore, the Company supplements deposit growth and enhances interest rate risk management through borrowings and wholesale funding, which are generally advances from theFederal Home Loan Bank ("FHLB") and brokered deposits. 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. AtJune 30, 2022 , on a consolidated basis, the Company had$633.4 million in cash and cash equivalents and investment securities available-for-sale and$31.6 million in loans held-for-sale that were generally available for its cash needs. The Company can also generate funds from wholesale funding sources and collateralized borrowings. AtJune 30, 2022 , the Bank had the ability to borrow an additional$552.2 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, 2022 , the Company, on an unconsolidated basis, had$44.3 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, 2022 , approved outstanding loan commitments, including unused lines of credit and standby letters of credit, amounted to$349.2 million . Certificates of deposits and brokered deposits scheduled to mature in one year or less atJune 30, 2022 totaled$594.1 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. 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, tangible common equity to tangible assets, average tangible common equity, return on average tangible common equity, total interest income - FTE, adjusted total interest income - FTE, net interest income - FTE, adjusted net interest income, adjusted net interest income - FTE, net interest margin - FTE, adjusted net interest margin, adjusted net interest margin - FTE, provision (benefit) for loan losses, excluding tax refund advance loans, average loans, excluding tax refund advance loans, net (recoveries) charge-offs to average loans, excluding tax refund advance loans, loans, excluding PPP loans, allowance for loan losses to loans, excluding PPP loans, adjusted noninterest expense, adjusted income before income taxes, adjusted income tax provision, adjusted net income, adjusted diluted earnings per share, adjusted return on average assets, adjusted return on average shareholders' equity, adjusted return on average tangible common equity, adjusted effective income tax rate, income before income taxes, excluding tax refund advance loans, income tax provision, excluding tax refund advance loans, and net income, excluding tax refund advance 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, 2022 and 2021. 63 -------------------------------------------------------------------------------- Three Months Ended Six Months Ended (dollars in thousands, except June 30, March 31, December 31, September 30, June 30, June 30, June 30, share and per share data) 2022 2022 2021 2021 2021 2022 2021 Total equity - GAAP$ 365,332 $ 374,655 $ 380,338 $ 370,442 $ 358,641 $ 365,332 $ 358,641 Adjustments: Goodwill (4,687) (4,687) (4,687) (4,687) (4,687) (4,687) (4,687) Tangible common equity$ 360,645 $ 369,968 $ 375,651 $ 365,755 $ 353,954 $
360,645
Total assets - GAAP$ 4,099,806 $ 4,225,397 $ 4,210,994 $ 4,252,292 $ 4,204,642 $ 4,099,806 $ 4,204,642 Adjustments: Goodwill (4,687) (4,687) (4,687) (4,687) (4,687) (4,687) (4,687) Tangible assets$ 4,095,119 $ 4,220,710 $ 4,206,307 $ 4,247,605 $ 4,199,955 $ 4,095,119 $ 4,199,955 Common shares outstanding 9,404,000 9,683,727 9,754,455 9,854,153 9,854,153 9,404,000 9,854,153 Book value per common share$ 38.85 $ 38.69 $ 38.99 $ 37.59 $ 36.39 $ 38.85 $ 36.39 Effect of goodwill (0.50) (0.48) (0.48) (0.47) (0.47) (0.50) (0.47) Tangible book value per common share$ 38.35 $ 38.21 $ 38.51 $ 37.12 $ 35.92 $
38.35
Total shareholders' equity to assets 8.91 % 8.87 % 9.03 % 8.71 % 8.53 % 8.91 % 8.53 % Effect of goodwill (0.10 %) (0.10 %) (0.10 %) (0.10 %) (0.10 %) (0.10) % (0.10) % Tangible common equity to tangible assets 8.81 % 8.77 % 8.93 % 8.61 % 8.43 % 8.81 % 8.43 % Total average equity - GAAP$ 374,274 $ 380,767 $ 376,832 $ 366,187 $ 352,894 $ 377,504 $ 344,478 Adjustments: Average goodwill (4,687) (4,687) (4,687) (4,687) (4,687) (4,687) (4,687) Average tangible common equity$ 369,587 $ 376,080 $ 372,145 $ 361,500 $ 348,207 $
372,817
Return on average
shareholders' equity 10.23 % 11.94 % 13.14 % 13.10 % 14.88 % 11.09 % 13.78 %
Effect of goodwill 0.13 % 0.15 % 0.16 % 0.17 % 0.21 % 0.14 % 0.19 %
Return on average tangible
common equity 10.36 % 12.09 % 13.30 % 13.27 % 15.09 % 11.23 % 13.97 %
64--------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, March 31, December 31, September 30, June 30, June 30, June 30,
(dollars in thousands) 2022 2022 2021 2021 2021 2022 2021
Total interest income
Fully-taxable equivalent adjustments 1 1,377 1,314 1,348 1,356 1,394 2,691
2,750
Total interest income - FTE$ 37,483 $ 37,348 $
35,540
Total interest income - FTE$ 37,483 $ 37,348 $ 35,540 $ 34,390 $ 34,771 $ 74,831 $ 69,407 Adjustments: Income from tax refund advance loans (149) (2,864) - - - (3,013) - Adjusted total interest income - FTE$ 37,334 $ 34,484 $ 35,540 $ 34,390 $ 34,771 $ 71,818 $ 69,407 Net interest income$ 25,680 $ 25,750 $ 23,505 $ 20,919 $ 21,607 $ 51,430 $ 42,132 Adjustments: Fully-taxable equivalent adjustments 1 1,377 1,314 1,348 1,356 1,394 2,691
2,750
Net interest income - FTE$ 27,057 $ 27,064 $ 24,853 $ 22,275 $ 23,001 $ 54,121 $ 44,882 Net interest income$ 25,680 $ 25,750 $ 23,505 $ 20,919 $ 21,607 $ 51,430 $ 42,132 Adjustments: Subordinated debt redemption cost - - - 810 - - - Income from tax refund advance loans (149) (2,864) - - - (3,013) - Adjusted net interest income$ 25,531 $ 22,886 $ 23,505 $ 21,729 $ 21,607 $ 48,417 $ 42,132 Net interest income$ 25,680 $ 25,750 $ 23,505 $ 20,919 $ 21,607 $ 51,430 $ 42,132 Adjustments: Fully-taxable equivalent adjustments 1 1,377 1,314 1,348 1,356 1,394 2,691 2,750 Subordinated debt redemption cost - - - 810 - - - Income from tax refund advance loans (149) (2,864) - - - (3,013) - Adjusted net interest income - FTE$ 26,908 $ 24,200 $
24,853
65
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Three Months Ended Six Months Ended
June 30, March 31, December 31, September 30, June 30, June 30, June 30,
(dollars in thousands) 2022 2022 2021 2021 2021 2022 2021
Net interest margin 2.60 % 2.56 % 2.30 % 2.00 % 2.11 % 2.58 % 2.08 %
Effect of fully-taxable
equivalent adjustments 1 0.14 % 0.13 % 0.13 % 0.13 % 0.14 % 0.13 % 0.13 %
Net interest margin - FTE 2.74 % 2.69 % 2.43 % 2.13 % 2.25 % 2.71 % 2.21 %
Net interest margin 2.60 % 2.56 % 2.30 % 2.00 % 2.11 % 2.58 % 2.08 %
Effect of subordinated
debt redemption cost 0.00 % 0.00 % 0.00 % 0.08 % 0.00 % 0.00 % 0.00 %
Effect of income from tax
refund advance loans (0.02 %) (0.28 %) 0.00 % 0.00 % 0.00 % (0.15 %) 0.00 %
Adjusted net interest margin 2.58 % 2.28 % 2.30 % 2.08 % 2.11 % 2.43 % 2.08 %
Net interest margin 2.60 % 2.56 % 2.30 % 2.00 % 2.11 % 2.58 % 2.08 %
Effect of fully-taxable
equivalent adjustments 0.14 % 0.13 % 0.13 % 0.13 % 0.14 % 0.13 % 0.13 %
Effect of subordinated
debt redemption cost 0.00 % 0.00 % 0.00 % 0.08 % 0.00 % 0.00 % 0.00 %
Effect of income from tax
refund advance loans (0.02 %) (0.28 %) 0.00 % 0.00 % 0.00 % (0.15 %) 0.00 %
Adjusted net interest margin
- FTE 2.72 % 2.41 % 2.43 % 2.21 % 2.25 % 2.56 % 2.21 %
Provision (benefit) for loan
losses $ 1,185 $ 791 $ (238) $ (29) $ 21 $ 1,976 $ 1,297
Adjustments:
Provision for tax refund
advance loans losses (18) (1,842) - - - (1,860) -
Provision (benefit) for
loan losses, excluding tax
refund advance loans $ 1,167 $ (1,051) $ (238) $ (29) $ 21 $ 116 $ 1,297
Average loans $ 2,998,144 $ 2,947,924 $ 2,914,858 $ 2,933,654 $ 2,994,356 $ 2,973,173 $ 3,020,987
Adjustments:
Average tax refund advance
loans (3,185) (60,499) - - - (29,096) -
Average loans, excluding tax
refund advance loans $ 2,994,959 $ 2,887,425 $ 2,914,858 $ 2,933,654 $ 2,994,356 $ 2,944,077 Net charge-offs (recoveries) to average loans 0.04 % 0.05 % (0.01 %) 0.01 % 0.35 % 0.05 % 0.18 % Adjustments: Effect of tax refund advance lending net charge-offs to average loans (0.05 %) (0.21 %) 0.00 % 0.00 % 0.00 % (0.13 %) 0.00 % Net (recoveries) charge-offs to average loans, excluding tax refund advance loans (0.01 %) (0.16 %) (0.01 %) 0.01 % 0.35 % (0.08 %) 0.18 % Allowance for loan losses$ 29,153 $ 28,251 $
27,841$ 28,000 $ 28,066 $ 29,153 $ 28,066 Loans$ 3,082,127 $ 2,880,780 $ 2,887,662 $ 2,936,148 $ 2,957,608 $ 3,082,127 $ 2,957,608 Adjustments: PPP loans (194) (1,003) (3,152) (14,981) (39,682) (194) (39,682) Loans, excluding PPP loans$ 3,081,933 $ 2,879,777 $ 2,884,510 $ 2,921,167 $ 2,917,926 $ 3,081,933
Allowance for loan losses to loans 0.95 % 0.98 % 0.96 % 0.95 % 0.95 % 0.95 % 0.95 % Effect of PPP loans 0.00 % 0.00 % 0.01 % 0.01 % 0.01 % 0.00 % 0.01 % Allowance for loan losses to loans, excluding PPP loans 0.95 % 0.98 % 0.97 % 0.96 % 0.96 % 0.95
% 0.96 %
1 Assuming a 21% tax rate
66--------------------------------------------------------------------------------
(dollars in thousands, Three Months Ended Six Months Ended except share and per share June 30, March 31, December 31, September 30, June 30, June 30, June 30, data) 2022 2022 2021 2021 2021 2022 2021 Noninterest expense - GAAP$ 17,985 $ 18,780 $ 16,955 $ 14,451 $ 15,075 $ 36,765 $ 30,392 Adjustments: Acquisition-related expenses (103) (170) (163) - - (273) - Nonrecurring consulting fee - (875) - - - (875) - IT termination fee - - (475) - - - - Discretionary inflation bonus (531) - - - - (531) - Accelerated equity compensation (289) - - - - (289) - Adjusted noninterest expense$ 17,062 $ 17,735 $
16,317
Income before income taxes - GAAP$ 10,824 $ 12,999 $
14,482
$ 27,780 Adjustments: Gain on sale of premises and equipment - - - - (2,523) - (2,523) Acquisition-related expenses 103 170 163 - - 273 - Nonrecurring consulting fee - 875 - - - 875 - IT termination fee - - 475 - - - - Subordinated debt redemption cost - - - 810 - - - Discretionary inflation bonus 531 - - - - 531 - Accelerated equity compensation 289 - - - - 289 - Adjusted income before income taxes$ 11,747 $ 14,044 $ 15,120 $ 15,120 $ 12,950 $ 25,791 $ 25,257
Income tax provision - GAAP
2,004
$ 4,234 Adjustments:1 Gain on sale of premises and equipment - - - - (530) - (530) Acquisition-related expenses 21 36 34 - - 57 - Nonrecurring consulting fee - 184 - - - 184 - IT termination fee - - 100 - - - - Subordinated debt redemption cost - - - 170 - - - Discretionary inflation bonus 112 - - - - 112 - Accelerated equity compensation 61 - - - - 61 - Adjusted income tax provision$ 1,473 $ 2,010 $ 2,138 $ 2,390 $ 1,847 $ 3,483 $ 3,704 Net income - GAAP$ 9,545 $ 11,209 $ 12,478 $ 12,090 $ 13,096 $ 20,754 $ 23,546 Adjustments: Gain on sale of premises and equipment - - - - (1,993) - (1,993) Acquisition-related expenses 82 134 129 - - 216 - Nonrecurring consulting fee - 691 - - - 691 - IT termination fee - - 375 - - - - Subordinated debt redemption cost - - - 640 - - - Discretionary inflation bonus 419 - - - - 419 - Accelerated equity compensation 228 - - - - 228 - Adjusted net income$ 10,274 $ 12,034 $ 12,982 $ 12,730 $ 11,103 $ 22,308 $ 21,553 1 Assuming a 21% tax rate 67
--------------------------------------------------------------------------------
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) 2022 2022 2021 2021 2021 2022 2021
Diluted average common shares
outstanding 9,658,689 9,870,394 9,989,951 9,988,102 9,981,422 9,764,232 9,970,147
Diluted earnings per share - GAAP
$ 2.13 $ 2.36 Adjustments: Effect of gain on sale of premises and equipment - - - - (0.20) - (0.20) Effect of acquisition-related expenses 0.01 0.01 0.01 - - 0.02 - Effect of nonrecurring consulting fee - 0.07 - - - 0.07 - Effect of IT termination fee - - 0.04 - - - - Effect of subordinated debt redemption cost - - - 0.06 - - - Effect of discretionary inflation bonus 0.04 - - - - 0.04 - Effect of accelerated equity compensation 0.02 - - - - 0.02 -
Adjusted diluted earnings per share
Return on average assets 0.93 % 1.08 % 1.19 % 1.12 % 1.25 % 1.01 % 1.13 %
Effect of gain on sale of
premises and equipment 0.00 % 0.00 % 0.00 % 0.00 % (0.19 %) 0.00 % (0.09 %)
Effect of acquisition-related
expenses 0.01 % 0.01 % 0.01 % 0.00 % 0.00 % 0.01 % 0.00 %
Effect of nonrecurring consulting
fee 0.00 % 0.07 % 0.00 % 0.00 % 0.00 % 0.03 % 0.00 %
Effect of IT termination fee 0.00 % 0.00 % 0.04 % 0.00 % 0.00 % 0.00 % 0.00 %
Effect of subordinated debt
redemption cost 0.00 % 0.00 % 0.00 % 0.06 % 0.00 % 0.00 % 0.00 %
Effect of discretionary inflation
bonus 0.04 % 0.00 % 0.00 % 0.00 % 0.00 % 0.02 % 0.00 %
Effect of accelerated equity
compensation 0.02 % 0.00 % 0.00 % 0.00 % 0.00 % 0.01 % 0.00 %
Adjusted return on average assets 1.00 % 1.16 % 1.24 % 1.18 % 1.06 % 1.08 % 1.04 %
Return on average shareholders'
equity 10.23 % 11.94 % 13.14 % 13.10 % 14.88 % 11.09 % 13.78 %
Effect of gain on sale of
premises and equipment 0.00 % 0.00 % 0.00 % 0.00 % (2.26 %) 0.00 % (1.16 %)
Effect of acquisition-related
expenses 0.09 % 0.14 % 0.14 % 0.00 % 0.00 % 0.12 % 0.00 %
Effect of nonrecurring consulting
fee 0.00 % 0.74 % 0.00 % 0.00 % 0.00 % 0.37 % 0.00 %
Effect of IT termination fee 0.00 % 0.00 % 0.39 % 0.00 % 0.00 % 0.00 % 0.00 %
Effect of subordinated debt
redemption cost 0.00 % 0.00 % 0.00 % 0.69 % 0.00 % 0.00 % 0.00 %
Effect of discretionary inflation
bonus 0.45 % 0.00 % 0.00 % 0.00 % 0.00 % 0.22 % 0.00 %
Effect of accelerated equity
compensation 0.24 % 0.00 % 0.00 % 0.00 % 0.00 % 0.12 % 0.00 %
Adjusted return on average
shareholders' equity 11.01 % 12.82 % 13.67 % 13.79 % 12.62 % 11.92 % 12.62 %
68
--------------------------------------------------------------------------------
Three Months Ended Six
Months Ended
(dollars in thousands, except
June 30, June 30, June 30,
share and per share data) 2022 2022 2021 2021 2021 2022 2021
Return on average tangible
common equity 10.36 % 12.09 % 13.30 % 13.27 % 15.09 % 11.23 % 13.97 %
Effect of gain on sale of premises and equipment 0.00 % 0.00 % 0.00 % 0.00 % (2.30 %) 0.00 %
(1.18 %)
Effect of acquisition-related expenses 0.09 % 0.14 % 0.14 % 0.00 % 0.00 % 0.12 % 0.00 % Effect of nonrecurring consulting fee 0.00 % 0.75 % 0.00 % 0.00 % 0.00 % 0.37 % 0.00 % Effect of IT termination fee 0.00 % 0.00 % 0.40 % 0.00 % 0.00 % 0.00 %
0.00 %
Effect of subordinated debt redemption cost 0.00 % 0.00 % 0.00 % 0.70 % 0.00 % 0.00 %
0.00 %
Effect of discretionary inflation bonus 0.45 % 0.00 % 0.00 % 0.00 % 0.00 % 0.23 % 0.00 % Effect of accelerated equity compensation 0.25 % 0.00 % 0.00 % 0.00 % 0.00 % 0.12 % 0.00 % Adjusted return on average tangible common equity 11.15 % 12.98 % 13.84 % 13.97 % 12.79 % 12.07 %
12.79 %
Effective income tax rate 11.8 % 13.8 % 13.8 % 15.5 % 15.4 % 12.9 %
15.2 %
Effect of gain on sale of premises and equipment 0.0 % 0.0 % 0.0 % 0.0 % (1.1 %) 0.0 %
(0.5 %)
Effect of acquisition-related expenses 0.2 % 0.3 % 0.1 % 0.0 % 0.0 % 0.2 % 0.0 % Effect of nonrecurring consulting fee 0.0 % 1.3 % 0.0 % 0.0 % 0.0 % 0.7 % 0.0 % Effect of IT termination fee 0.0 % 0.0 % 0.2 % 0.0 % 0.0 % 0.0 % 0.0 % Effect of subordinated debt redemption cost 0.0 % 0.0 % 0.0 % 0.3 % 0.0 % 0.0 % 0.0 % Effect of discretionary inflation bonus 1.0 % 0.0 % 0.0 % 0.0 % 0.0 % 0.5 % 0.0 % Effect of accelerated equity compensation 0.6 % 0.0 % 0.0 % 0.0 % 0.0 % 0.3 % 0.0 % Adjusted effective income tax rate 13.6 % 15.4 % 14.1 % 15.8 % 14.3 % 14.6 % 14.7 % Income before income taxes - GAAP$ 10,824 $ 12,999 $ 14,482 $ 14,310 $ 15,473 $ 23,823 $ 27,780 Adjustments: Income from tax refund advance lending (149) (2,864) - - - (3,013) - Provision for tax refund advance loans losses 18 1,842 - - - 1,860 - Tax refund advance lending servicing fee 9 921 - - - 930 - Income before income taxes, excluding tax refund advance loans$ 10,702 $ 12,898 $ 14,482 $ 14,310 $ 15,473 $ 23,600
Income tax provision - GAAP
2,004 $ 2,220 $ 2,377 $ 3,069 $ 4,234
Adjustments:1
Income from tax refund
advance lending (31) (601) - - - (633) -
Provision for tax refund
advance loans losses 4 387 - - - 391 -
Tax refund advance lending
servicing fee 2 193 - - - 195 -
Income tax provision,
excluding tax refund advance
loans $ 1,254 $ 1,769 $ 2,004$ 2,220 $ 2,377 $ 3,022 $ 4,234 69
-------------------------------------------------------------------------------- (dollars in thousands, Three Months Ended Six Months Ended except share and per June 30, March 31, December 31, September 30, June 30, June 30, June 30, share data) 2022 2022 2021 2021 2021 2022 2021 Net income - GAAP$ 9,545 $ 11,209 $ 12,478 $ 12,090 $ 13,096 $ 20,754 $ 23,546 Adjustments: Income from tax refund advance lending (118) (2,263) - - - (2,380) - Provision for tax refund advance loans losses 14 1,455 - - - 1,469 - Tax refund advance lending servicing fee 7 728 - - - 735 - Net income, excluding tax refund advance loans$ 9,448 $ 11,129 $ 12,478 $ 12,090 $ 13,096 $ 20,578 $ 23,546 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 15 to the condensed consolidated financial statements.
Off-Balance Sheet Arrangements
In the ordinary course of business, the Company enters into financial transactions to extend credit, interest rate swap agreements and forms of commitments that may be considered off-balance sheet arrangements. Interest rate swaps are arranged to receive hedge accounting treatment and are classified as either fair value or cash flow hedges. Fair value hedges are purchased to convert certain fixed rate assets to floating rate. Cash flow hedges are used to convert certain variable rate liabilities into fixed rate liabilities. At bothJune 30, 2022 andDecember 31, 2021 , the Company had interest rate swaps with notional amounts of$260.0 million . Additionally, we enter into forward contracts related to our mortgage banking business to hedge the exposures we have from commitments to extend new residential mortgage loans to our customers and from our mortgage loans held-for-sale. AtJune 30, 2022 andDecember 31, 2021 , the Company had commitments to sell residential real estate loans of$37.5 million and$72.8 million , respectively. These contracts mature in less than one year. Refer to Note 13 to the condensed consolidated financial statements for additional information about derivative financial instruments. 70
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