FIRST ANALYSIS BY BANCORP INTERNET MANAGEMENT ON THE FINANCIAL POSITION AND OPERATING RESULTS (Form 10-Q)
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 , 40 -------------------------------------------------------------------------------- 2020 for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by such forward-looking statements. See also "Cautionary Note Regarding Forward-Looking Statements" at the beginning of this report.
Overview
First Internet Bancorp ("we," "our," "us," or the "Company") is a bank holding company that conducts its primary business activities through its wholly owned subsidiary,First Internet Bank of Indiana , anIndiana chartered bank (the "Bank"). The Bank was the first state-chartered,Federal Deposit Insurance Corporation ("FDIC") insured Internet bank and commenced banking operations in 1999. The Company was incorporated under the laws of theState of Indiana onSeptember 15, 2005 . OnMarch 21, 2006 , we consummated a plan of exchange by which we acquired all of the outstanding shares of the Bank. The Bank has three wholly owned subsidiaries.First Internet Public Finance Corp. provides a range of public and municipal finance lending and leasing products to governmental entities throughoutthe United States and acquires securities issued by state and local governments and other municipalities;JKH Realty Services, LLC , which manages other real estate owned ("OREO") properties as needed; andSPF15, Inc. , which was established to acquire and hold real estate. We offer a wide range of commercial, small business, consumer and municipal banking products and services. We conduct our consumer and small business deposit operations primarily through 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 real estate ("CRE") banking, commercial and industrial ("C&I") banking, public finance, healthcare finance, small business lending, franchise finance 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 on a regional basis. Our C&I banking team provides credit solutions such as lines of credit, term loans, owner-occupied CRE loans and corporate credit cards to commercial borrowers located primarily on a regional basis in the Midwest and Southwest regions ofthe United States . Our public finance team provides a range of public and municipal lending and leasing products to government entities on a nationwide basis. Our healthcare finance team was originally established in conjunction with our strategic business 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 acquisition or refinancing of owner-occupied CRE and equipment purchases. During the second quarter 2021, Provide announced that it had entered into an agreement to be acquired by a super-regional financial institution, which closed in the third quarter 2021. It is our expectation that the acquiring institution will retain most, if not all, of Provide's loan origination activity and that our healthcare finance loan balances may decline. Our franchise finance business was established inJuly 2021 in conjunction with our business relationship withApplePie Capital , a leading provider of growth financing to franchisees in various industry segments across the country. 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.
Covid-19 pandemic
Throughout the coronavirus pandemic ("COVID-19"), our top priority has been
the health of our team and clients. 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. The vast
majority of our employees who worked remotely during the earlier stages of the
pandemic have returned to the office. Management continues to assess the
evolving health and safety situations at local, regional and national levels.
Our plans remain flexible to adapt as these situations evolve.
COVID-19 impacted our business during 2020 as the low interest rate environment
following Federal Reserve rate cuts in the first quarter 2020 reduced the yield
on interest-earning assets but also allowed us to reprice our interest-bearing
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deposits significantly lower, which provided an increase to net interest income.
Additionally, the low interest rate environment has driven residential mortgage
rates to historically low levels, which continued to benefit our mortgage
business.
During 2021, federal, state and local governments have continued to take
additional steps to reopen and stimulate economies. We are optimistic that the
combination of vaccinations and government stimulus programs will help mitigate
any significant negative effects from the pandemic on our business and credit
quality; however, there is still significant uncertainty concerning the ongoing
trajectory of the pandemic and the speed at which the national and local
economies will recover. The extent to which COVID-19 will continue to impact our
business will depend on numerous evolving factors and future developments that
we are not able to predict, including potential new variants of COVID-19, the
effectiveness of continuing containment measures, including the speed of the
ongoing vaccine distribution effort, the efficacy of the various vaccines, and
how quickly and to what extent normal economic and operating conditions can
resume. Should economic conditions worsen to levels experienced in 2020, our
business and credit quality could be adversely affected.
Pending merge transaction
As previously reported, onNovember 1, 2021 , we entered into a definitive agreement to acquire all of the outstanding shares of common stock ofFirst Century Bancorp . ("First Century"), the parent company ofFirst Century Bank, N.A. , for$80 million cash. With current headquarters inRoswell, GA , First Century is a technology-driven, financial solutions company with lines of business focused on payments, tax product lending, sponsored card programs and homeowners association services. First Century also provides a wide range of products and services, including business banking, specialty lending and deposit products, to community-based businesses and individuals across its two branches located inCommerce, GA andHilton Head Island, SC . We expect to fund our payment obligations upon closing with available on-balance sheet cash. The transaction is anticipated to close in the first quarter 2022, subject to satisfaction of customary closing conditions, including required approvals from theFDIC ,Indiana Department of Financial Institutions and theFederal Reserve as well as First Century shareholder approval. As ofSeptember 30, 2021 , First Century had total assets of$408 million , total deposits of$330 million , and total loans of$32 million . The acquisition, when completed, is expected to be accretive to 2023 earnings per share and initially dilutive to tangible book value per share. 42
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Results of operations
During the third quarter 2021, net income was$12.1 million , or$1.21 per diluted share, compared to the third quarter 2020 net income of$8.4 million , or$0.86 per diluted share, representing an increase in net income of$3.7 million , or 43.7%. During the nine months endedSeptember 30, 2021 , net income was$35.6 million , or$3.57 per diluted share, compared to the nine months endedSeptember 30, 2020 net income of$18.4 million , or$1.87 per diluted share, representing an increase in net income of$17.3 million , or 94.1%. The$3.7 million increase in net income for the third quarter 2021 compared to the third quarter 2020 was due primarily to an increase of$4.7 million , or 28.9%, in net interest income, a decrease of$2.5 million , or 101.2%, in (benefit) provision for loan losses and a$2.0 million , or 11.9%, decrease in noninterest expense, partially offset by a decrease of$4.7 million , or 37.5%, in noninterest income and an increase of$0.8 million , or 59.1%, in income tax expense. The$17.3 million increase in net income for the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 was due primarily to an increase of$17.4 million , or 38.0%, in net interest income, a decrease of$5.2 million , or 80.4%, in provision for loan losses and an increase of$1.5 million , or 6.2%, in noninterest income, partially offset by a$5.1 million , or 364.3%, increase in income tax expense and a$1.7 million , or 3.9%, increase in noninterest expense. During the third quarter 2021, return on average assets ("ROAA"), return on average shareholders' equity ("ROAE"), and return on average tangible common equity ("ROATCE") were 1.12%, 13.10%, and 13.27%, respectively, compared to 0.78%, 10.67%, and 10.83%, respectively, for the third quarter 2020. During the nine months endedSeptember 30, 2021 , ROAA, ROAE, and ROATCE were 1.13%, 13.54%, and 13.73%, respectively, compared to 0.58%, 7.90%, and 8.02%, respectively, for the nine months endedSeptember 30, 2020 . During the third quarter 2021, the Company fully redeemed its$25.0 million aggregate principal amount of 6.0% fixed-to-floating rate subordinated notes due in 2026 and recognized$0.8 million of pre-tax costs related to this redemption. Excluding this item, adjusted net income for the third quarter 2021 was$12.7 million and adjusted diluted earnings per share was$1.27 . During the second quarter 2021, the Company recognized a$2.5 million pre-tax gain on sale of its corporate headquarters. Excluding both the redemption costs associated with the subordinated notes due in 2026 and the gain on sale of the Company's corporate headquarters, adjusted net income for the nine months endedSeptember 30, 2021 was$34.3 million and adjusted diluted earnings per share was$3.44 . Additionally, for the third quarter 2021, adjusted ROAA, adjusted ROAE and adjusted ROATCE were 1.18%, 13.79% and 13.97%, respectively, and for the nine months endedSeptember 30, 2021 , adjusted ROAA, adjusted ROAE and adjusted ROATCE were 1.09%, 13.03% and 13.21%, respectively. These profitability ratios improved in the 2021 periods compared to the 2020 periods, as increases in net income and adjusted net income outpaced average asset growth, which was down slightly from the 2020 periods.
Refer to the “Reconciliation of Non-GAAP Financial Measures†section of Part I, Section 2 of this Report, Management’s Discussion and Analysis of Financial Condition and Results of Operations for more information.
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Average consolidated balance sheets and analyzes of net interest income
For the periods presented, the following tables provide the average balances of interest-earning assets and interest-bearing liabilities and the related yields and cost of funds. The tables do not reflect any effect of income taxes except for net interest margin - FTE, as discussed below. Balances are based on the average of daily balances. Nonaccrual loans are included in average loan balances. (dollars in thousands) Three Months EndedSeptember 30, 2021 June 30, 2021 September 30, 2020 Interest Interest Interest Average Balance /Dividends Yield /Cost Average Balance /Dividends Yield /Cost Average Balance /Dividends Yield /Cost Assets Interest-earning assets Loans, including loans held-for-sale$ 2,956,333 $ 30,126 4.04 %$ 3,016,330 $ 30,835 4.10 %$ 3,031,024 $ 29,560 3.88 % Securities - taxable 629,101 2,297 1.45 % 490,634 1,921 1.57 % 539,154 2,240 1.65 %
Securities - non-taxable 84,241 241 1.14 % 84,050 259 1.24 % 94,398 381 1.61 % Other earning assets 479,051 370 0.31 % 509,735 362 0.28 % 552,058 569 0.41 % Total interest-earning assets 4,148,726 33,034 3.16 % 4,100,749 33,377 3.26 % 4,216,634 32,750 3.09 % Allowance for loan losses (28,127) (30,348) (25,347) Noninterest-earning assets 144,590 136,565 116,532 Total assets$ 4,265,189 $ 4,206,966 $ 4,307,819 Liabilities Interest-bearing liabilities Interest-bearing demand deposits$ 198,637 $ 150 0.30 %$ 192,777 $ 143 0.30 %$ 154,275 $ 228 0.59 % Regular savings accounts 62,195 56 0.36 % 55,811 49 0.35 % 45,466 79 0.69 % Money market accounts 1,498,218 1,532 0.41 % 1,416,406 1,462 0.41 % 1,295,249 2,442 0.75 % Certificates and brokered deposits 1,378,678 5,352 1.54 % 1,444,171 6,051 1.68 % 1,784,631 9,679 2.16 % Total interest-bearing deposits 3,137,728 7,090 0.90 % 3,109,165 7,705 0.99 % 3,279,621 12,428 1.51 % Other borrowed funds 611,975 5,025 3.26 % 584,751 4,065 2.79 % 584,634 4,090 2.78 % Total interest-bearing liabilities 3,749,703 12,115 1.28 % 3,693,916 11,770 1.28 % 3,864,255 16,518 1.70 % Noninterest-bearing deposits 104,161 98,207 75,901 Other noninterest-bearing liabilities 45,138 61,949 54,052 Total liabilities 3,899,002 3,854,072 3,994,208 Shareholders' equity 366,187 352,894 313,611 Total liabilities and shareholders' equity$ 4,265,189 $ 4,206,966 $ 4,307,819 Net interest income$ 20,919 $ 21,607 $ 16,232 Interest rate spread 1 1.88% 1.98% 1.39 % Net interest margin 2 2.00% 2.11% 1.53 % Net interest margin - FTE 3 2.13% 2.25% 1.67 % 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. 44 -------------------------------------------------------------------------------- (dollars in thousands) Nine Months Ended September 30, 2021 September 30, 2020 Interest Interest Average Balance /Dividends Yield /Cost Average Balance /Dividends Yield /Cost Assets Interest-earning assets Loans, including loans held-for-sale$ 3,016,817 $ 91,846 4.07 %$ 2,999,711 $ 89,698 3.99 % Securities - taxable 527,625 5,997 1.52 % 543,699 9,135 2.24 % Securities - non-taxable 85,130 781 1.23 % 96,960 1,410 1.94 % Other earning assets 478,399 1,067 0.30 % 520,875 2,973 0.76 % Total interest-earning assets 4,107,971 99,691 3.24 % 4,161,245 103,216 3.31 % Allowance for loan losses (29,446) (23,605) Noninterest-earning assets 136,954 108,561 Total assets$ 4,215,479 $ 4,246,201 Liabilities Interest-bearing liabilities Interest-bearing demand deposits$ 190,785 $ 425 0.30 %$ 138,288 $ 684 0.66 % Regular savings accounts 54,740 145 0.35 % 37,700 249 0.88 % Money market accounts 1,428,554 4,385 0.41 % 1,084,411 9,726 1.20 % Certificates and brokered deposits 1,446,960 18,468 1.71 % 1,952,973 34,740 2.38 % Total interest-bearing deposits 3,121,039 23,423 1.00 % 3,213,372 45,399 1.89 % Other borrowed funds 593,605 13,217 2.98 % 584,547 12,141 2.77 % Total interest-bearing liabilities 3,714,644 36,640 1.32 % 3,797,919 57,540 2.02 % Noninterest-bearing deposits 97,760 70,060 Other noninterest-bearing liabilities 51,281 67,716 Total liabilities 3,863,685 3,935,695 Shareholders' equity 351,794 310,506 Total liabilities and shareholders' equity$ 4,215,479 $ 4,246,201 Net interest income$ 63,051 $ 45,676 Interest rate spread 1 1.92 % 1.29 % Net interest margin 2 2.05 % 1.47 % Net interest margin - FTE 3 2.19 % 1.61 % 1 Yield on total interest-earning assets minus cost of total interest-bearing liabilities. 2 Net interest income divided by total average interest-earning assets (annualized). 3 On an FTE basis assuming a 21% tax rate. Net interest income is adjusted to reflect income from assets such as municipal loans and securities that are exempt from Federal income taxes. This is to recognize the income tax savings that facilitates a comparison between taxable and tax-exempt assets. The Company believes that it is a standard practice in the banking industry to present net interest margin and net interest income on a fully-taxable equivalent basis, as these measures provide useful information to make peer comparisons. Net interest margin - FTE represents a non-GAAP financial measure. See "Reconciliation of Non-GAAP Financial Measures" for a reconciliation of this measure to its most directly comparable GAAP measure. 45 --------------------------------------------------------------------------------
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, 2021 vs. June Three Months Ended September 30, 2021 vs. Nine Months Ended September 30, 2021 vs.
(dollars in thousands) 30, 2021 Due to Changes in September 30, 2020 Due to Changes in
Volume Rate Net Volume Rate Net Volume Rate Net Interest income Loans, including loans held-for-sale$ (408) $ (301)
476$ 1,672 $ 2,148 Securities - taxable 1,223 (847) 376 1,282 (1,225) 57
(264) (2,874) (3,138) Securities - non-taxable 3 (21) (18) (38) (102) (140) (158) (471) (629) Other earning assets (107) 115 8 (70) (129) (199) (226) (1,680) (1,906) Total 711 (1,054) (343) (2,242) 2,526 284 (172) (3,353) (3,525) Interest expense Interest-bearing deposits 458 (1,073) (615) (516) (4,822) (5,338) (1,264) (20,712) (21,976) Other borrowed funds 208 752 960 199 736 935 183 893 1,076 Total 666 (321) 345 (317) (4,086) (4,403) (1,081) (19,819) (20,900) Increase (decrease) in net interest income$ 45 $ (733) $ (688) $ (1,925) $ 6,612 $ 4,687 $ 909 $ 16,466 $ 17,375 Net interest income for the third quarter 2021 was$20.9 million , an increase of$4.7 million , or 28.9%, compared to$16.2 million for the third quarter 2020. The increase in net interest income was the result of a$4.4 million , or 26.7%, decrease in total interest expense to$12.1 million for the third quarter 2021 from$16.5 million for the third quarter 2020, as well as a$0.3 million , or 0.9% increase in total interest income to$33.0 million for the third quarter 2021 from$32.8 million for the third quarter 2020. Net interest income for the nine months endedSeptember 30, 2021 was$63.1 million , an increase of$17.4 million , or 38.0%, compared to$45.7 million for the nine months endedSeptember 30, 2020 . The increase in net interest income was the result of a$20.9 million , or 36.3%, decrease in total interest expense to$36.6 million for the nine months endedSeptember 30, 2021 from$57.5 million for the nine months endedSeptember 30, 2020 , partially offset by a$3.5 million , or 3.4%, decrease in total interest income to$99.7 million for the nine months endedSeptember 30, 2021 from$103.2 million for the nine months endedSeptember 30, 2020 . The increase in total interest income for the third quarter 2021 compared to the third quarter 2020 was due primarily to an increase in interest earned on loans, partially offset by decreases in interest earned on other earning assets and securities. Interest income earned on loans increased$0.6 million , or 1.9%, due primarily to an increase of 16 basis points ("bps") in the yield earned on average loan balances, partially offset by a decrease of$74.7 million , or 2.5%, in average loan balances. The decrease in average loan balances was due primarily to decreases in the average balance of single tenant lease financing, residential mortgage, public finance, consumer lending and small business lending portfolios, which included loans originated through the Paycheck Protection Program ("PPP") that have since been forgiven, partially offset by increases in the average balance of commercial and industrial, construction and healthcare finance loan balances. Interest income earned on other earning assets declined$0.2 million , or 35.0%, due mainly to a 10 bp decline in the yield earned on these assets, as well as a decrease of$73.0 million , or 13.2%, in the average balance of other earning assets. The decrease in the average balance of other earning assets was due primarily to lower cash balances. Interest earned on securities decreased$0.1 million , or 3.2%, due to a decline of 23 bps in the yield earned on securities, partially offset by an increase of$79.8 million , or 12.6%, in the average balance of securities. The increase in loan yield was due mainly to an increase in prepayment fee income. The decrease in the yield earned on other earning assets was due primarily to lower market interest rates. The decrease in the yield earned on securities was driven primarily by lower yields earned on corporate securities as well as early redemptions and maturities in corporate securities. 46 -------------------------------------------------------------------------------- The decrease in total interest income for the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 was due primarily to a$3.8 million , or 35.7%, decrease in interest earned on securities and a$1.9 million , or 64.1%, decrease in interest earned on other earning assets, partially offset by a$2.1 million , or 2.4%, increase in income from loans. The decrease in income from securities and other earning assets was primarily due to decreases of 72 bps and 46 bps, respectively, in the yield earned on these assets as well as a modest decrease in the average balance of these assets. The decrease in the yield earned on securities was driven primarily by lower market interest rates followingFederal Reserve interest rate cuts inMarch 2020 in response to the economic effects of COVID-19, which contributed to increased prepayment activity and lower yields earned on private label and agency mortgage-backed securities andU.S. Government agency securities as well as early redemptions and maturities in corporate and municipal securities. The decrease in the yield earned on other earning assets was primarily due to lower market interest rates, as described above. The increase in income from loans was driven primarily by an 8 bp increase in the yield on loans and a modest increase in average loan balances. The increase in loan yield was mostly due to an increase in prepayment fee income as well as a shift in the loan mix towards higher yielding commercial products. Overall, the yield on interest-earning assets for the third quarter 2021 increased 7 bps to 3.16% from 3.09% for the third quarter 2020. The yield on interest-earning assets for the nine months endedSeptember 30, 2021 declined 7 bps to 3.24% from 3.31% for the nine months endedSeptember 30, 2020 . The increase in the yield earned on interest-earning assets for the third quarter 2021 compared to the third quarter 2020 was due to a 16 bp increase in the yield earned on loans, partially offset by decreases of 23 bps in the yield earned on securities and 10 bps in other earning assets. The decrease in the yield earned on interest-earning assets for the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 was due to decreases of 72 bps in the yield earned on securities and 46 bps in other earning assets, partially offset by an 8 bp increase in the yield earned on loans. The decline in market interest rates negatively impacted the yields earned on securities and cash balances during both the quarter and the nine months endedSeptember 30, 2021 , in comparison to the same time periods in 2020. The decrease in total interest expense for the third quarter 2021 compared to the third quarter 2020 was due to a decrease in interest expense related to interest-bearing deposits, partially offset by an increase in interest expense associated with other borrowed funds. Interest expense on certificates and brokered deposits decreased$4.3 million , or 44.7%, due to a decline of 62 bps in the cost of these deposits, as well as a$406.0 million , or 22.8%, 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$0.9 million , or 37.3%, was driven by a decline of 34 bps in the cost of these deposits, partially offset by an increase of$203.0 million , or 15.7%, in the average balance of these deposits. Average money market balances increased from the prior year period due primarily 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 interest expense related to interest-bearing demand deposits and savings accounts was due primarily to decreases of 29 bps and 33 bps, respectively, partially offset by increases of$44.4 million , or 28.8%, and$16.7 million , or 36.8%, respectively, in the average balance of these deposits. The increase in interest expense associated with other borrowed funds was due primarily to the recognition of$0.8 million of costs related to the Company redeeming the 2026 Notes onSeptember 30, 2021 . The decrease in total interest expense for the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 was due to a decrease in interest expense related to interest-bearing deposits, partially offset by an increase in interest expense associated with other borrowed funds. The decrease in deposit interest expense was driven primarily by an 89 bp decline in the cost of funds related to interest-bearing deposits and a decrease of$92.3 million , or 2.9%, in the average balance of interest-bearing deposits. The average balance of certificates and brokered deposits decreased$506.0 million , or 25.9%, while the cost of these deposits decreased 67 bps. 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$5.3 million , or 54.9%, was driven by a decline of 79 bps in the cost of these deposits, partially offset by an increase of$344.1 million , or 31.7%, in the average balance of these deposits. Average money market balances increased from the prior year period due primarily 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 interest expense associated with other borrowed funds was due primarily to to the recognition of$0.8 million of costs related to the Company redeeming the 2026 Notes onSeptember 30, 2021 . Overall, the cost of total interest-bearing liabilities for the third quarter 2021 declined 42 bps to 1.28% from 1.70% for the third quarter 2020. Additionally, the cost of total interest-bearing liabilities for the nine months endedSeptember 30, 2021 declined 70 bps to 1.32% from 2.02% for the nine months endedSeptember 30, 2020 . Declines in the cost of funds were due to 47 -------------------------------------------------------------------------------- the continued decrease in market interest rates from the prior year periods. The sharp declines in both short- and long-term interest rates in response to the economic effects of COVID-19 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 non-maturity deposit accounts also contributed to the decline in the cost of deposit funding. Net interest margin ("NIM") was 2.00% for the third quarter 2021 compared to 1.53% for the third quarter 2020, an increase of 47 bps. On a fully-taxable equivalent ("FTE") basis, NIM was 2.13% for the third quarter 2021 compared to 1.67% for the third quarter 2020, an increase of 46 bps. NIM was 2.05% for the nine months endedSeptember 30, 2021 compared to 1.47% for the nine months endedSeptember 30, 2020 ; an increase of 58 bps. FTE NIM was 2.19% for the nine months endedSeptember 30, 2021 compared to 1.61% for the nine months endedSeptember 30, 2020 ; an increase of 58 bps. The increase in third quarter 2021 NIM and FTE NIM compared to the third quarter 2020 reflects a decrease in the cost of funds while asset yields were up modestly. The reduction in the cost of interest-bearing liabilities was due primarily to the continued decrease in market interest rates from the prior year period. The increase in year-to-dateSeptember 2021 NIM and FTE NIM compared to year-to-dateSeptember 2020 reflects a decrease in the cost of funds, partially offset by a moderate decrease in interest-earning asset yields. The decline in the cost of interest-bearing liabilities and the yield on interest-earning assets was due primarily to the continued decrease in market interest rates from the prior year period. Looking ahead to the fourth quarter 2021 and into 2022, the Company believes that yields on interest-earning assets will revert closer to what they were in the second quarter 2021 and then increase from there as the Company anticipates growing its commercial loan portfolio. The Company also continues to see opportunities for further downward repricing of deposits in future periods. Over the next twelve months, the Company has approximately$787.0 million of certificates and brokered deposits with a weighted average cost of 1.22% that are scheduled to mature. As the weighted average of cost of these deposits is significantly higher than current new production costs, the Company expects the cost of deposit funding to continue to decline during the remainder of 2021 and into 2022. Noninterest Income
The following table shows the non-interest income for the last five fiscal quarters ended and the nine months ended.
Three Months Ended
Nine months ended
September 30, June 30, March 31, December 31, September 30, September 30, September 30,
2021 2021 2021 2020 2020 2021 2020
Service charges and
fees $ 276 $ 280 $ 266 $ 206 $ 224 $ 822 $ 618
Loan servicing revenue 511 457 422 379 274 1,390 780
Loan servicing asset
revaluation (274) (240) (155) (60) (103) (669) (372)
Mortgage banking
activities 3,850 2,674 5,750 7,987 9,630 12,274 16,706
Gain on sale of loans 2,719 3,019 1,723 3,702 2,033 7,461 4,596
Gain on sale of
securities - - - - 98 - 139
Gain on sale of
premises and equipment - 2.523 - - - 2,523 -
Other 731 249 369 443 339 1,349 1,212
Total noninterest
income $ 7,813 $ 8.962 $ 8,375 $ 12,657 $ 12,495 $ 25,150 $ 23,679
During the third quarter 2021, noninterest income was $7.8 million , representing
a decrease of $4.7 million , or 37.5%, compared to $12.5 million for the third
quarter 2020. The decrease in noninterest income was due primarily to a decrease
in revenue from mortgage banking activities, partially offset by increases in
gain on sale of loans and other noninterest income. The decline in mortgage
banking revenue in the third quarter of 2021 versus the third quarter of 2020
was due primarily to decreases in interest rate locks, sold loan volume and
gain-on-sale margins. The increase in gain on sale of loans was due an increase
in the volume of SBA 7(a) guaranteed loan sales and an increase in secondary
market premiums during the third quarter 2021. The increase in other noninterest
income was due primarily to a distribution from the Company's investment in a
Small Business Investment Company fund.
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During the nine months ended September 30, 2021 , noninterest income was $25.2
million , an increase of $1.5 million , or 6.2%, compared to $23.7 million for the
nine months ended September 30, 2020 . The increase in noninterest income was due
primarily to increases in revenue from gain on sale of loans, gain on sale of
premises and equipment, and loan servicing revenue, which was partially offset
by a decrease in mortgage banking activities. The increase in gain on sale of
loans was due to an increase in the volume of SBA 7(a) guaranteed loan sales and
an increase in secondary market premiums during the nine months ended September
30, 2021 . The increase in gain on sale of premises and equipment was due to the
Company completing the sale of its headquarters. The increase in loan servicing
revenue was due to growth in the balance of the Company's SBA 7(a) servicing
portfolio due to continued origination activity. The decrease in mortgage
banking income was due primarily to decreases in interest rate locks, sold loan
volume and gain-on-sale margins.
Non-interest charges
The following table shows the non-interest expenses for the last five fiscal quarters ended and the nine months ended.
Three Months Ended
Nine months ended
September 30, June 30, March 31, December 31, September 30, September 30, September 30,
2021 2021 2021 2020 2020 2021 2020
Salaries and employee
benefits $ 9,316 $ 9,232 $ 9,492 $ 9,135 $ 9,533 $ 28,040 $ 25,096
Marketing, advertising
and promotion 813 872 680 443 426 2,365 1,212
Consulting and
professional services 728 1,078 986 788 614 2,792 2,723
Data processing 380 382 462 426 388 1,224 1,102
Loan expenses 383 541 534 630 408 1,458 1,406
Premises and equipment 1,687 1,587 1,601 1,601 1,568 4,875 4,795
Deposit insurance
premium 230 275 425 450 440 930 1,360
Write-down of other
real estate owned - - - - 2,065 - 2,065
Other 914 1,108 1,137 1,040 970 3,159 3,383
Total noninterest
expense $ 14,451 $ 15,075 $ 15,317 $ 14,513 $ 16,412 $ 44,843 $ 43,142
Noninterest expense for the third quarter 2021 was $14.5 million , compared to
$16.4 million for the third quarter 2020. The decrease of $2.0 million , or
11.9%, was due primarily to a $2.1 million write-down of a commercial other real
estate owned ("OREO") property during the third quarter 2020 as well as
decreases of $0.2 million , or 2.3%, in salaries and employee benefits and $0.2
million , or 47.7%, in deposit insurance premium during the third quarter 2021
compared to the third quarter 2020, partially offset by an increase of $0.4
million , or 90.8%, in marketing, advertising and promotion. The decrease in
salaries and employee benefits was due primarily to a decrease in medical claims
expense. The decrease in deposit insurance premium was due primarily to a
decrease in asset growth and an increase in the Bank's regulatory capital
ratios, both of which positively impact the formula used to calculate deposit
insurance expense. The increase in marketing, advertising and promotion was due
mainly to higher mortgage lead generation costs and digital marketing
initiatives.
Noninterest expense for the nine months ended September 30, 2021 was $44.8
million , compared to $43.1 million for the nine months ended September 30, 2020 .
The increase of $1.7 million , or 3.9%, was due primarily to increases of $2.9
million in salaries and employee benefits and $1.2 million in marketing,
advertising and promotion, partially offset by a decrease of $2.1 million in
write-down of OREO, a $0.4 million decrease in deposit insurance premium and a
$0.2 million decrease in other noninterest expense. 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. The increase in marketing, advertising and promotion was due primarily
to higher mortgage lead generation costs and digital marketing initiatives. The
decrease in write-down of OREO is due to a $2.1 million write-down of a
commercial OREO property that occurred in 2020. The decrease in deposit
insurance premium was due primarily to a decrease in asset growth and an
increase in the Bank's regulatory capital ratios, both of which positively
impact the formula used to calculate deposit insurance expense. The decrease in
other noninterest expense was due primarily to a $0.3 million charitable
contribution the Company made in 2020 to assist small businesses and nonprofits
in addressing the economic challenges of the COVID-19 pandemic.
Income tax provision was $2.2 million for the third quarter 2021, resulting in
an effective tax rate of 15.5%, compared to a tax provision of $1.4 million for
the third quarter 2020 and an effective tax rate of 14.2%. Income tax provision
was $6.5
49
--------------------------------------------------------------------------------
million for the nine months ended September 30, 2021 , resulting in an effective
tax rate of 15.3%, compared to an income tax provision of $1.4 million and an
effective tax rate of 7.0% for the nine months ended September 30, 2020 . The
increase in income tax provision for the three months ended September 30, 2021
compared to the three months ended September 30, 2020 was due primarily to the
increase in pre-tax earnings driven primarily by the $2.1 million write-down of
OREO that occurred in the third quarter 2020. The increase in income tax
provision for the nine months ended September 30, 2021 compared to the nine
months ended September 30, 2020 , was due primarily to the increase in pre-tax
earnings driven primarily by an increase in revenue and a decrease in the
provision for loan losses, partially offset by an increase in noninterest
expenses. Additionally, the lower income tax provision and effective tax rate
during the nine months ended September 30, 2020 , was impacted by the passage of
the CARES Act, which was signed into law on March 27, 2020 , and provided the
Company the ability to carryback certain federal net operating losses.
Financial condition
The following table presents summary balance sheet data for the last five completed financial quarters. (in thousands)
September 30, June 30, March 31, December 31, September
30,
Balance Sheet Data: 2021 2021 2021 2020 2020 Total assets$ 4,252,292 $ 4,204,642 $ 4,188,570 $ 4,246,156 $ 4,333,624 Loans 2,936,148 2,957,608 3,058,694 3,059,231 3,012,914 Total securities 696,136 729,178 530,566 565,851 596,565 Loans held-for-sale 43,970 27,587 30,235 39,584 76,208 Noninterest-bearing deposits 110,117 113,996 101,700 96,753 86,088 Interest-bearing deposits 3,114,478
3,092,151 3,116,903 3,174,132 3,286,303 Total deposits 3,224,595 3,206,147 3,217,603 3,270,885 3,372,391 Advances from Federal Home Loan Bank 514,920 514,919 514,917 514,916 514,914 Total shareholders' equity 370,442 358,641 344,566 330,944 318,102
Total assets increased
As ofSeptember 30, 2021 , total shareholders' equity was$370.4 million , an increase of$39.5 million , or 11.9%, compared toDecember 31, 2020 , due primarily to the net income earned during the period, as well as a decrease in accumulated other comprehensive loss. Tangible common equity totaled$365.8 million as ofSeptember 30, 2021 , representing an increase of$39.5 million , or 12.1%, compared toDecember 31, 2020 . As both total shareholders' equity and tangible common equity outpaced the growth in both total assets and tangible assets, the ratio of total shareholders' equity to total assets increased to 8.71% as ofSeptember 30, 2021 from 7.79% as ofDecember 31, 2020 , and the ratio of tangible common equity to tangible assets increased to 8.61% as ofSeptember 30, 2021 from 7.69% as ofDecember 31, 2020 . Book value per common share increased 11.3% to$37.59 as ofSeptember 30, 2021 from$33.77 as ofDecember 31, 2020 . Tangible book value per share increased 11.5% to$37.12 as ofSeptember 30, 2021 from$33.29 as ofDecember 31, 2020 . The growth in both book value per common share and tangible book value per share reflects the growth in total shareholders' equity and tangible common equity while total common shares outstanding increased slightly fromDecember 31, 2020 . Refer to the "Reconciliation of Non-GAAP Financial Measures" section of Part I, Item 2 of this report, Management's Discussion and Analysis of Financial Condition and Results of Operations for additional information. 50 --------------------------------------------------------------------------------
Loan portfolio analysis
The following table presents a summary of the Company’s loan portfolio for the last five completed financial quarters.
September 30 ,June 30 ,March 31 ,December 31 ,September 30 , (dollars in thousands) 2021 2021 2021 2020 2020 Commercial loans Commercial and industrial$ 107,142 3.6 %$ 96,203 3.3 %$ 71,835 2.3 %$ 75,387 2.5 %$ 77,116 2.6 % Owner-occupied commercial real estate 84,819 2.9 % 87,136 2.9 % 87,930 2.9 % 89,785 2.9 % 89,095 3.0 % Investor commercial real estate 28,505 1.0 % 28,871 1.0 % 14,832 0.5 % 13,902 0.5 % 13,084 0.4 % Construction 115,414 3.9 % 117,970 4.0 % 123,483 4.0 % 110,385 3.6 % 92,154 3.1 % Single tenant lease financing 921,998 31.5 % 913,115 30.9 % 941,322 30.8 % 950,172 31.1 % 960,505 31.9 % Public finance 601,738 20.5 % 612,138 20.7 % 637,600 20.8 % 622,257 20.3 % 625,638 20.8 % Healthcare finance 417,388 14.2 % 455,890 15.3 % 510,237 16.8 % 528,154 17.3 % 461,740 15.3 % Small business lending 102,889 3.5 % 123,293 4.2 % 132,490 4.3 % 125,589 4.1 % 123,168 4.1 % Franchise finance 25,598 0.9 % - - % - - % - - % - - % Total commercial loans 2,405,491 82.0 % 2,434,616 82.3 % 2,519,729 82.4 % 2,515,631 82.3 % 2,442,500 81.2 % Consumer loans Residential mortgage 188,750 6.4 % 177,148 6.0 % 190,148 6.2 % 186,787 6.1 % 203,041 6.7 % Home equity 17,960 0.6 % 17,510 0.6 % 17,949 0.6 % 19,857 0.6 % 22,169 0.7 % Other consumer 268,396 9.1 % 271,796 9.2 % 270,209 8.8 % 275,692 9.0 % 282,450 9.3 % Total consumer loans 475,106 16.1 % 466,454 15.8 % 478,306 15.6 % 482,336 15.7 % 507,660 16.7 % Net deferred loan origination costs, premiums and discounts on purchased loans and other (1) 55,551 1.9 % 56,538 1.9 % 60,659 2.0 % 61,264 2.0 % 62,754 2.1 % Total loans 2,936,148 100.0 % 2,957,608 100.0 % 3,058,694 100.0 % 3,059,231 100.0 % 3,012,914 100.0 % Allowance for loan losses (28,000) (28,066) (30,642) (29,484) (26,917) Net loans$ 2,908,148 $ 2,929,542 $ 3,028,052 $ 3,029,747 $ 2,985,997 (1) Includes carrying value adjustments of$38.9 million ,$40.4 million ,$41.6 million ,$42.7 million and$44.3 million related to terminated interest rate swaps associated with public finance loans as ofSeptember 30, 2021 ,June 30, 2021 ,March 31, 2021 ,December 31, 2020 , andSeptember 30, 2020 , respectively. Total loans were$2.9 billion as ofSeptember 30, 2021 , a decrease of$123.1 million , or 4.0%, compared toDecember 31, 2020 . Total commercial loan balances were$2.4 billion as ofSeptember 30, 2021 , down$110.1 million , or 4.4%, fromDecember 31, 2020 . Total consumer loan balances were$475.1 million as ofSeptember 30, 2021 , a decrease of$7.2 million , or 1.5%, compared toDecember 31, 2020 . Compared toDecember 31, 2020 , the decline in commercial loan balances was driven largely by net payoffs in healthcare finance, single tenant lease financing, small business lending and public finance loans, which were partially offset by increases in commercial and industrial, franchise finance and investor commercial real estate loan balances. The net payoffs in the healthcare finance portfolio were driven primarily by elevated prepayment activity and minimal origination activity. Going forward, we expect the balance of healthcare finance loans may continue to decline as a result of Provide's acquisition by a super-regional financial institution, as well as potential prepayment activity. The net payoffs in small business lending were predominantly related to PPP loan forgiveness, partially offset by new originations. Franchise finance was established inJuly 2021 in conjunction with the Copmany's business relationship withApplePie Capital , a leading provider of growth financing to franchisees in various industry segments across the country. Through this relationship, we began funding portfolio loans in the third quarter 2021 and expect to fund a total of up to$100.0 million of loans by the end of 2021 and up to an additional$150.0 million of loans during 2022. 51 --------------------------------------------------------------------------------
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) 2021 2021 2021 2020 2020
Nonaccrual loans
Commercial loans:
Commercial and industrial $ 678 $ 692 $
$ 1,002 –
Owner-occupied commercial property
3,429 3,487 4,266 1,838 1,390 Single tenant lease financing 1,100 2,373 7,080 7,116 7,148 Small business lending (1) 1,351 1,209 865 - - Total commercial loans 6,558 7,761 13,213 8,954 8,655 Consumer loans: Residential mortgage 1,253 1,253 1,120 1,183 1,085 Home equity 14 14 15 - - Other consumer 26 10 23 46 34 Total consumer loans 1,293 1,277 1,158 1,229 1,119 Total nonaccrual loans 7,851 9,038 14,371 10,183 9,774 Past Due 90 days and accruing loans Commercial loans: Commercial and industrial - - 278 - - Total commercial loans - - 278 - - Total past due 90 days and accruing loans - - 278 - - Total nonperforming loans 7,851 9,038 14,649 10,183 9,774 Other real estate owned Investor commercial real estate 1,188 1,188 - - - Residential mortgage - 112 - - - Total other real estate owned 1,188 1,300 - - - Other nonperforming assets - - 29 35 8
Total non-performing assets
Total nonperforming loans to total loans(2) 0.27 % 0.31 % 0.48 % 0.33 % 0.32 % Total nonperforming assets to total assets(2) 0.21 % 0.25 % 0.35 % 0.24 % 0.23 % Allowance for loan losses to total loans 0.95 % 0.95 % 1.00 % 0.96 % 0.89 % Allowance for loan losses to total loans, excluding PPP loans(3) 0.96 % 0.96 % 1.02 % 0.98 % 0.91 % Allowance for loan losses to nonperforming loans(2) 356.6 % 310.5 % 209.2 % 289.5 % 275.4 % 1 Balance representsU.S. government guaranteed loans. 2 Includes the impact of nonperforming small business lending loans, which are guaranteed by theU.S. government. 3 This information represents a non-GAAP financial measure. See "Reconciliation of Non-GAAP Financial Measures" for a reconciliation of this measure to its most directly comparable GAAP measure. 52 --------------------------------------------------------------------------------
Debt restructuring in difficulty
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,
2021 2021 2021 2020 2020
Troubled debt restructurings -
nonaccrual $ 2,550 $ 2,581
843 1,179 1,187 367 365
Total restructuring of troubled debts
The decline in nonperforming loans of$2.3 million , or 22.9%, to$7.9 million as ofSeptember 30, 2021 compared to$10.2 million as ofDecember 31, 2020 was due primarily to a decrease in nonaccrual single tenant lease financing balances, which was partially offset by an increase in nonperforming small business lending, owner-occupied commercial real estate and commercial and industrial loans. The decrease in nonaccrual single tenant lease financing balances was due to a payoff of a loan that was previously on nonaccrual, as well as positive developments related to a relationship which included two loans, one of which was paid off at net book value (unpaid principal balance less specific reserves) and the other was transferred to OREO. Total nonperforming assets decreased$1.2 million , or 11.5%, as ofSeptember 30, 2021 compared toDecember 31, 2020 , due primarily to a$2.3 million decrease in nonperforming loans discussed above, partially offset by a$1.2 million increase in OREO. The ratio of nonperforming loans to total loans decreased to 0.27% as ofSeptember 30, 2021 compared to 0.33% as ofDecember 31, 2020 and the ratio of nonperforming assets to total assets decreased to 0.21% as ofSeptember 30, 2021 compared to 0.24% as ofDecember 31, 2020 , also due primarily to the loans and OREO mentioned above.
Total TOR at
As ofSeptember 30, 2021 , the Company had one commercial property in OREO, with a carrying value of$1.2 million . The Company did not have any OREO as ofDecember 31, 2020 . As ofSeptember 30, 2021 , our financial results have reflected little impact on asset quality as a result of COVID-19. We are optimistic that the combination of vaccinations, government stimulus programs and relief programs we have provided to our clients will continue to mitigate the impact of the pandemic on the Company's business. However, if economic conditions return to levels experienced during 2020, our credit quality and overall financial performance could be adversely affected.
Non-TDR loan modifications due to COVID-19
The "Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus" was issued by our banking regulators 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 are in effect from the period beginningMarch 1, 2020 until the earlier ofJanuary 1, 2022 , or 60 days after the date on which the national emergency related to the COVID-19 pandemic formally terminates. In accordance with this guidance, the Company has offered modifications to borrowers who were both impacted by COVID-19 and current on all principal and interest payments. As ofSeptember 30, 2021 , the Company had thirteen loans totaling$3.0 million in non-TDR loan modifications due to COVID-19.
Section 1102 of the CARES Act created the PPP, which is jointly administered by theU.S. Small Business Administration ("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 workforces in an uncertain and challenging environment. The loans originated in 2020 bear an interest rate of 1.00%, and we received gross origination 53 -------------------------------------------------------------------------------- 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 99.5% of loan balances have been forgiven as ofSeptember 30, 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 51.9% of loan balances have been forgiven as ofSeptember 30, 2021 . The Company anticipates that the majority of the PPP loans will ultimately be forgiven, in whole or in part, by the SBA in accordance with the terms of the program. Management anticipates that loan forgiveness applications will continue throughout 2021. The following table provides a rollforward of the activity of PPP loans throughSeptember 30, 2021 . (dollars in thousands) Number of Loans Principal Balance Net Deferred Fees Originated 447 $ 58,336 $ 1,851 Principal repaid (71) (7,184) Net deferred fees recognized (1,253) Balance, December 31, 2020 376 51,152 598 Originated 281 27,377 1,125 Principal repaid (549) (63,548) Net deferred fees recognized (1,242) Balance, September 30, 2021 108 14,981 481 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 nine months endedSeptember 30, 2021 and 2020. (dollars in thousands) Three Months Ended Nine Months Ended September 30, June 30, March 31, December 31, September 30, September 30, September 30, 2021 2021 2021 2020 2020 2021 2020 Balance, beginning of period$ 28,066 $ 30,642 $ 29,484 $ 26,917 $ 24,465 $ 29,484 $ 21,840 Provision charged to expense (29) 21 1,276 2,865 2,509 1,268 6,461 Losses charged off (120) (2,689) (311) (408) (241) (3,121) (1,755) Recoveries 83 92 193 110 184 369 371 Balance, end of period$ 28,000 $ 28,066 $ 30,642 $ 29,484 $ 26,917 $ 28,000 $ 26,917 Net charge-offs to average loans 0.01 % 0.35 % 0.02 % 0.04 % 0.01 % 0.12 % 0.06 % The allowance for loan losses was$28.0 million as ofSeptember 30, 2021 , compared to$29.5 million as ofDecember 31, 2020 . The decrease in the allowance for loan losses compared toDecember 31, 2020 was due primarily to the elimination of$2.9 million of specific reserves related to single tenant lease financing loans and a commercial and industrial relationship, all of which had been classified as nonaccrual. The single tenant lease financing loans included a nonaccrual loan that was paid off during the quarter and a single tenant lease financing relationship consisting of two loans, one of which was paid off at net book value (unpaid principal balance less specific reserves) and the other was transferred to OREO. The commercial and industrial relationship included four loans, two of which were paid off during the quarter. The decrease in the specific reserves 54 -------------------------------------------------------------------------------- was partially offset by additional adjustments to the qualitative factors in the Company's allowance model that increased the allowance for loan losses to total loans. The allowance for loan losses as a percentage of total loans was 0.95% atSeptember 30, 2021 , or 0.96%, when excluding PPP loans, compared to 0.96%, or 0.98%, when excluding PPP loans, atDecember 31, 2020 . The allowance for loan losses as a percentage of nonperforming loans increased to 356.6% as ofSeptember 30, 2021 , compared to 289.5% as ofDecember 31, 2020 , due to the decrease in nonperforming loans related to single tenant lease financing loans and the commercial and industrial relationship discussed above. The provision for loan losses in the third quarter 2021 was less than$0.1 million , compared to$2.5 million for the third quarter 2020. The decrease in the provision for loan losses was due primarily to the decline in loan balances. During the third quarter 2021, the Company recorded net charge-offs of less than$0.1 million , compared to net charge-offs of$0.1 million for the third quarter 2020.
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 2021 2021 2021 2020 2020
Securities available-for-sale
U.S. Government-sponsored agencies $ 53,380 $ 57,984
Municipal titles
76,528 77,364 79,168 82,757 87,365 Agency mortgage-backed securities 432,613 445,895 229,981 241,795 250,755 Private label mortgage-backed securities 19,997 29,003 40,550 57,268 71,519 Asset-backed securities 5,000 5,000 5,000 5,000 5,000 Corporate securities 48,460 48,447 48,433 48,419 48,406 Total available-for-sale 635,978 663,693 463,947 497,004 528,052 Securities held-to-maturity Municipal securities 14,538 14,549 14,560 14,571 14,582 Corporate securities 47,591 51,110 53,630 53,652 53,672 Total held-to-maturity 62,129 65,659 68,190 68,223 68,254 Total securities$ 698,107 $ 729,352 $ 532,137 $ 565,227 $ 596,306 (in thousands) September 30, June 30, March 31, December 31, September 30, Approximate Fair Value 2021 2021 2021 2020 2020 Securities available-for-sale U.S. Government-sponsored agencies$ 52,455 $ 57,135
Municipal titles
77,450 78,438 79,208 82,489 86,421 Agency mortgage-backed securities 429,885 444,494 228,818 243,921 253,292 Private label mortgage-backed securities 20,235 29,363 41,106 58,116 72,626 Asset-backed securities 5,005 5,005 5,006 4,961 4,921 Corporate securities 48,977 49,084 48,760 47,596 47,369 Total available-for-sale 634,007 663,519 462,376 497,628 528,311 Securities held-to-maturity Municipal securities 15,319 15,373 15,109 15,317 15,328 Corporate securities 49,018 52,685 54,274 54,135 53,848 Total held-to-maturity 64,337 68,058 69,383 69,452 69,176 Total securities$ 698,344 $ 731,577 $ 531,759 $ 567,080 $ 597,487 The approximate fair value of available-for-sale investment securities increased$136.4 million , or 27.4%, to$634.0 million as ofSeptember 30, 2021 , compared to$497.6 million as ofDecember 31, 2020 . The increase was due primarily to an increase of$186.0 million in agency mortgage-backed securities, partially offset by a$38.1 million decrease in private label mortgage-backed securities and a$8.1 million decrease inU.S. Government -sponsored agencies. The increase in agency mortgage-backed securities was driven primarily by purchases during the nine months endedSeptember 30, 2021 , partially 55 --------------------------------------------------------------------------------
offset by prepayments and maturities on agency and private label mortgage-backed securities, as well as prepayments and maturities on municipal bonds.
Accrued income and other assets
Accrued income and other assets decreased$9.9 million , or 15.4%, to$54.4 million atSeptember 30, 2021 compared to$64.3 million atDecember 31, 2020 . The decrease was primarily related to a decrease of$11.3 million in cash pledged as collateral. As of these dates, the Company pledged$19.3 million and$30.6 million , respectively, of cash collateral to counterparties on interest rate swap agreements as security for its obligations related to these agreements. Collateral posted and received is dependent on the fair value of the underlying agreements as of the respective date.
Accruals and other liabilities
Accrued expenses and other liabilities were$36.6 million atSeptember 30, 2021 compared to$48.4 million atDecember 31, 2020 . The decrease in accrued expenses and other liabilities was due primarily to an$11.8 million , or 38.7%, decrease in derivative liabilities due to changes in fair value.
Deposits
The following table shows the composition of the Company’s deposit base for the last five completed financial quarters.
September 30 ,June 30 ,March 31 ,December 31 ,September 30 , (dollars in thousands) 2021 2021 2021 2020 2020 Noninterest-bearing deposits$ 110,117 3.4 %$ 113,996 3.6 %$ 100,700 3.1 %$ 96,753 3.0 %$ 86,088 2.6 % Interest-bearing demand deposits 201,557 6.3 % 196,841 6.1 % 186,015 5.8 % 188,645 5.8 % 155,054 4.6 % Savings accounts 66,762 2.1 % 56,298 1.8 % 51,251 1.6 % 43,200 1.3 % 49,890 1.5 % Money market accounts 1,479,358 45.8 % 1,432,355 44.6 % 1,397,449 43.4 % 1,350,566 41.3 % 1,359,178 40.3 % Certificates of deposits 1,043,898 32.4 % 1,087,350 33.9 % 1,174,764 36.5 % 1,289,319 39.4 % 1,360,575 40.3 % Brokered deposits 322,903 10.0 % 319,307 10.0 % 307,424 9.6 % 302,402 9.2 % 361,606 10.7 % Total deposits$ 3,224,595 100.0 %$ 3,206,147 100.0 %$ 3,217,603 100.0 %$ 3,270,885 100.0 %$ 3,372,391 100.0 % Total deposits decreased$46.3 million , or 1.4%, to$3.2 billion as ofSeptember 30, 2021 , compared to$3.3 billion as ofDecember 31, 2020 . This decrease was due primarily to a decline of$245.4 million , or 19.0%, in certificates of deposits, partially offset by increases of$128.8 million , or 9.6%, in money market accounts,$23.6 million , or 54.5%, in savings accounts,$20.5 million , or 6.8%, in brokered deposits,$13.4 million , or 13.8%, in noninterest-bearing deposits, and$12.9 million , or 6.8%, in interest-bearing demand deposits. The Company experienced strong growth in money market deposit accounts due to targeted digital marketing efforts to grow small business accounts as well as consumers, small business and commercial clients increasing their cash balances in part due to the economic uncertainty resulting from the COVID-19 pandemic. The decrease in certificates of deposits was due to the maturity of higher cost balances and reduced pricing strategies designed to limit the volume of new production.
Recent Debt Offers
OnOctober 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 onNovember 1, 2030 . The 2030 Notes bear interest at a fixed rate of 6.0% per year from and includingOctober 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 afterNovember 1, 2025 . The 2030 Notes are intended to qualify as Tier 2 capital under regulatory guidelines. The net proceeds were used to redeem the 2025 Note inJanuary 2021 . 56 -------------------------------------------------------------------------------- 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 three-month SOFR, plus 311 basis points. 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. The Company used a portion of the net proceeds from the issuance of the 2031 Notes to redeem the 2026 Notes. Under the terms of a Registration Rights Agreement between the Company and the initial purchasers of the 2031 Notes, the Company has agreed to take certain actions to provide for the exchange of 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.
Regulatory capital requirements
The Company and the Bank are subject to various regulatory capital requirements administered by state and federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weighting and other factors. The Basel III Capital Rules became effective for the Company and the Bank onJanuary 1, 2015 , subject to a phase-in period for certain provisions. Quantitative measures established by the Basel III Capital Rules to ensure capital adequacy require the maintenance of minimum amounts and ratios of Common Equity Tier 1 capital, Tier 1 capital and Total capital, as defined in the regulations, to risk-weighted assets, and of Tier 1 capital to adjusted quarterly average assets ("Leverage Ratio"). The Basel III Capital Rules were fully phased in onJanuary 1, 2019 and require the Company and the Bank to maintain: 1) a minimum ratio of Common Equity Tier 1 capital to risk-weighted assets of 4.5%, plus a 2.5% "capital conservation buffer" (resulting in a minimum ratio of Common Equity Tier 1 capital to risk-weighted assets of 7.0%); 2) a minimum ratio of Tier 1 capital to risk-weighted assets of 6.0%, plus the capital conservation buffer (resulting in a minimum Tier 1 capital ratio of 8.5%); 3) a minimum ratio of Total capital to risk-weighted assets of 8.0%, plus the capital conservation buffer (resulting in a minimum Total capital ratio of 10.5%); and 4) a minimum Leverage Ratio of 4.0%. The 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. 57 -------------------------------------------------------------------------------- The following tables present actual and required capital ratios as ofSeptember 30, 2021 andDecember 31, 2020 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 ofSeptember 30, 2021 andDecember 31, 2020 , 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 theBasel 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 ofSeptember 30, 2021 : Common equity tier 1 capital to risk-weighted assets Consolidated$ 376,903 12.62 %$ 209,119 7.00 % N/A N/A Bank 417,612 13.99 % 208,885 7.00 %$ 193,964 6.50 % Tier 1 capital to risk-weighted assets Consolidated 376,903 12.62 % 253,930 8.50 % N/A N/A Bank 417,612 13.99 % 253,646 8.50 % 238,725 8.00 % Total capital to risk-weighted assets Consolidated 509,059 17.04 % 313,679 10.50 % N/A N/A Bank 445,612 14.93 % 313,327 10.50 % 298,407 10.00 % Leverage ratio Consolidated 376,903 8.86 % 170,169 4.00 % N/A N/A Bank 417,612 9.83 % 169,865 4.00 % 212,332 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, 2020 : Common equity tier 1 capital to risk-weighted assets Consolidated$ 342,159 11.31 %$ 211,828 7.00 % N/A N/A Bank 377,678 12.49 % 211,612 7.00 %$ 196,497 6.50 % Tier 1 capital to risk-weighted assets Consolidated 342,159 11.31 % 257,220 8.50 % N/A N/A Bank 377,678 12.49 % 256,957 8.50 % 241,842 8.00 % Total capital to risk-weighted assets Consolidated 451,246 14.91 % 317,742 10.50 % N/A N/A Bank 407,162 13.47 % 317,418 10.50 % 302,303 10.00 % Leverage ratio Consolidated 342,159 7.95 % 172,154 4.00 % N/A N/A Bank 377,678 8.78 % 172,036 4.00 % 215,045 5.00 % 58
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Shareholder dividends
The Company's Board of Directors declared a cash dividend of$0.06 per share of common stock payableOctober 15, 2021 to shareholders of record as ofSeptember 30, 2021 . The Company expects to continue to pay cash dividends on a quarterly basis; however, the declaration and amount of any future cash dividends will be subject to the sole discretion of the Board of Directors and will depend upon many factors, including its results of operations, financial condition, capital requirements, regulatory and contractual restrictions (including with respect to the Company's outstanding subordinated debt), business strategy and other factors deemed relevant by the Board of Directors, including any potential impact resulting from COVID-19. As ofSeptember 30, 2021 , the Company had$107.0 million principal amount of subordinated debt outstanding evidenced by its 6.0% Fixed-to-Floating Rate Subordinated Notes due 2026, the 2029 Notes, the 2030 Notes, as well as its 3.75% Fixed-to-Floating Rate Subordinated Notes due 2031. The agreements that govern our outstanding subordinated debt prohibit the Company from paying any dividends on its common stock or making any other distributions to shareholders at any time when there shall have occurred, and be continuing to occur, an event of default under the applicable agreement. If an event of default were to occur and the Company did not cure it, the Company would be prohibited from paying any dividends or making any other distributions to shareholders or from redeeming or repurchasing any common stock.
Capital resources
The Company believes it has sufficient liquidity and capital resources to meet its cash and capital expenditure requirements for at least the next twelve months. The Company may explore strategic alternatives, including additional asset, deposit or revenue generation channels that complement our commercial and consumer banking platforms, which may require additional capital. If the Company is unable to secure such capital at favorable terms, its ability to take advantage of such opportunities could be adversely affected.
Liquidity
Liquidity management is the process used by the Company to manage the continuing flow of funds necessary to meet its financial commitments on a timely basis and at a reasonable cost while also maintaining safe and sound operations. Liquidity, represented by cash and investment securities, is a product of the Company's operating, investing and financing activities. The primary sources of funds are deposits, principal and interest payments on loans and investment securities, maturing loans and investment securities, access to wholesale funding sources and collateralized borrowings. While scheduled payments and maturities of loans and investment securities are relatively predictable sources of funds, deposit flows are greatly influenced by interest rates, general economic conditions and competition. Therefore, the Company supplements deposit growth and enhances interest rate risk management through borrowings and wholesale funding, which are generally advances from the FHLB and brokered deposits. 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 believe we have sufficient on-balance sheet liquidity, supplemented by access to additional funding sources, to manage the potential economic impact of COVID-19. AtSeptember 30, 2021 , on a consolidated basis, the Company had$1.0 billion in cash and cash equivalents and investment securities available-for-sale and$44.0 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. AtSeptember 30, 2021 , the Bank had the ability to borrow an additional$597.9 million from the FHLB, theFederal Reserve and correspondent bank Fed Funds lines of credit. The Company is a separate legal entity from the Bank and must provide for its own liquidity. In addition to its operating expenses, the Company is responsible for paying any dividends declared to its common shareholders and interest and principal on outstanding debt. The Company's primary sources of funds are cash maintained at the holding company level and dividends from the Bank, the payment of which is subject to regulatory limits. AtSeptember 30, 2021 , the Company, on an unconsolidated basis, had$58.8 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. AtSeptember 30, 2021 , approved outstanding loan commitments, including unused lines of credit and standby letters of credit, amounted to$278.3 million . Certificates of deposits and brokered deposits scheduled to mature in one year or less atSeptember 30, 2021 totaled$787.0 million . 59 -------------------------------------------------------------------------------- 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. 60 --------------------------------------------------------------------------------
Reconciliation of non-GAAP financial measures
This Management's Discussion and Analysis contains financial information determined by methods other than in accordance with GAAP. Non-GAAP financial measures, specifically tangible common equity, tangible assets, tangible book value per common share, tangible common equity to tangible assets ratio, average tangible common equity, return on average tangible common equity, total interest income - FTE, net interest income - FTE, net interest margin - FTE, allowance for loan losses to loans, excluding PPP loans, adjusted revenue, adjusted income before income taxes, adjusted income tax, adjusted net income, adjusted diluted earnings per share, adjusted return on average assets, adjusted return on average shareholders' equity, adjusted return on average tangible common equity and adjusted effective income tax rate are used by the Company's management to measure the strength of its capital and analyze profitability, including its ability to generate earnings on tangible capital invested by its shareholders. The Company also believes that it is a standard practice in the banking industry to present total interest income, net interest income and net interest margin on a fully-taxable equivalent basis, as those measures provide useful information for peer comparisons. Although the Company believes these non-GAAP financial measures provide a greater understanding of its business, they should not be considered a substitute for financial measures determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP financial measures that may be presented by other companies. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures are included in the following table for the last five completed fiscal quarters and the nine months endedSeptember 30, 2021 and 2020. 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) 2021 2021 2021 2020 2020 2021 2020 Total equity - GAAP$ 370,442 $ 358,641 $
344,566
$ 318,102 Adjustments: Goodwill (4,687) (4,687) (4,687) (4,687) (4,687) (4,687) (4,687)
Ordinary tangible assets
339 879
Total assets - GAAP$ 4,252,292 $ 4,204,642 $
4,188,570
$ 4,333,624 Adjustments: Goodwill (4,687) (4,687) (4,687) (4,687) (4,687) (4,687) (4,687) Tangible assets$ 4,247,605 $ 4,199,955 $
4,183,883
Common shares outstanding 9,854,153 9,854,153 9,823,831 9,800,569 9,800,569 9,854,153 9,800,569
Book value per common share
35.07
$ 32.46 Effect of goodwill (0.47) (0.47) (0.47) (0.48) (0.48) (0.47) (0.48) Tangible book value per common share$ 37.12 $ 35.92 $
34.60
Total shareholders' equity to assets 8.71 % 8.53 % 8.23 % 7.79 % 7.34 % 8.71 % 7.34 % Effect of goodwill (0.10) % (0.10) % (0.11) % (0.10) % (0.10) % (0.10) % (0.10) % Tangible common equity to tangible assets 8.61 % 8.43 % 8.12 % 7.69 % 7.24 % 8.61 % 7.24 %
Total average equity – GAAP
335,968
$ 310,506 Adjustments: Average goodwill (4,687) (4,687) (4,687) (4,687) (4,687) (4,687) (4,687)
Average tangible ordinary equity
331,281$ 318,777 $ 308,924 $ 347,107 $ 305,819 Return on average shareholders' equity 13.10 % 14.88 % 12.61 % 13.64 % 10.67 % 13.54 % 7.90 % Effect of goodwill 0.17 % 0.21 % 0.18 % 0.20 % 0.16 % 0.19 % 0.12 % Return on average tangible common equity 13.27 % 15.09 % 12.79 % 13.84 % 10.83 % 13.73 % 8.02 % 61
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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) 2021 2021 2021 2020 2020 2021 2020
Total interest income $ 33,034 $ 33,377 $ 33,280 $ 33,643 $ 32,750 $ 99,691 $ 103,216
Adjustments:
Fully-taxable equivalent
adjustments 1 1,356 1,394 1,356 1,400 1,424 4,105 4,396
Total interest income – FTE
34 636
Net interest income$ 20,919 $ 21,607 $
20,525
$ 45,676 Adjustments: Fully-taxable equivalent adjustments 1 1,356 1,394 1,356 1,424 1,424 4,105 4,396
Net interest income – FTE
21,881$ 20,289 $ 17,656 $ 67,156 $ 50,072 Net interest income$ 20,919 $ 21,607 $ 20,525 $ 18,865 $ 16,232 $ 63,051 $ 45,676 Adjustments: Subordinated debt redemption cost 810 - - - - 810 -
Adjusted net interest income
20,525$ 18,865 $ 16,232 $ 63,861 $ 45,676 Net interest income$ 20,919 $ 21,607 $ 20,525 $ 18,865 $ 16,232 $ 63,051 $ 45,676 Adjustments: Fully-taxable equivalent adjustments 1 1,356 1,394 1,356 1,400 1,424 4,105 4,396 Subordinated debt redemption cost 810 - - - - 810 - Adjusted net interest income - FTE$ 23,085 $ 23,001 $
21 881
Net interest margin 2.00 % 2.11 % 2.04 % 1.78 % 1.53 % 2.05 % 1.47 % Effect of fully-taxable equivalent adjustments 1 0.13 % 0.14 % 0.14 % 0.13 % 0.14 % 0.14 % 0.15 % Net interest margin - FTE 2.13 % 2.25 % 2.18 % 1.91 % 1.67 % 2.19 % 1.61 % Net interest margin 2.00 % 2.11 % 2.04 % 1.78 % 1.53 % 2.05 % 1.47 % Effect of subordinated debt redemption cost 0.08 % - % - % - % - % 0.02 % - % Adjusted net interest margin 2.08 % 2.11 % 2.04 % 1.78 % 1.53 % 2.07 % 1.47 % Net interest margin 2.00 % 2.11 % 2.04 % 1.78 % 1.53 % 2.05 % 1.47 % Effect of fully-taxable equivalent adjustments 0.13 % 0.14 % 0.14 % 0.13 % 0.14 % 0.14 % 0.14 % Effect of subordinated debt redemption cost 0.08 % - % - % - % - % 0.02 % - % Adjusted net interest margin - FTE 2.21 % 2.25 % 2.18 % 1.91 % 1.67 % 2.21 % 1.61 %
Allowance for loan losses
30,642$ 29,484 $ 26,917 $ 28,000 $ 26,917 Loans$ 2,936,148 $ 2,957,608 $ 3,058,694 $ 3,059,231 $ 3,012,914 $ 2,936,148
$ 3,012,914 Adjustments: PPP loans (14,981) (39,682) (53,365) (50,554) (58,337) (14,981) (58,337)
Loans, excluding PPP loans
Allowance for loan losses to loans 0.95 % 0.95 % 1.00 % 0.96 % 0.89 % 0.95 % 0.89 % Effect of PPP loans 0.01 % 0.01 % 0.02 % 0.02 % 0.02 % 0.01 % 0.02 % Allowance for loan losses to loans, excluding PPP loans 0.96 % 0.96 % 1.02 % 0.98 % 0.91 % 0.96
% 0.91 %
1 Assuming a 21% tax rate
62
-------------------------------------------------------------------------------- (dollars in thousands, Three Months Ended Nine Months Ended except share and per September 30, June 30, March 31, December 31, September 30, September 30, September 30, share data) 2021 2021 2021 2020 2020 2021 2020 Total Revenue- GAAP$ 28,732 $ 30,569 $ 28,900 $ 31,522 $ 28,727 $ 88,201 $ 69,355 Adjustments: Gain on sale of premises and equipment - (2,523) - - - (2,523) - Subordinated debt redemption cost 810 - - - - 810 - Adjusted total revenue$ 27,922 $ 28,046 $ 28,900 $ 31,522 $ 28,727 $
86,488
Non-interest income - GAAP $ 7,813$ 8,962
25,150$ 23,679 Adjustments: Gain on sale of premises and equipment - (2,523) - - - (2,523) - Adjusted non-interest income $ 7,813$ 6,439 $ 8,375 $ 12,657 $ 12,495 $
22 627
Income before income taxes - GAAP$ 14,310 $ 15,473
42,090$ 19,752 Adjustments: Write-down of other real estate owned - - - - 2,065 - 2,065 Gain on sale of premises and equipment - (2,523) - - - (2,523) - Subordinated debt redemption cost 810 - - - - 810 - Adjusted income before income taxes$ 15,120 $ 12,950
40,377
Income tax provision - GAAP $ 2,220$ 2,377
6,454 $ 1,390 Adjustments: Write-down of other real estate owned - - - - 434 - 434 Gain on sale of premises and equipment - (530) - - - (530) - Subordinated debt redemption cost 170 - - - - 170 - Adjusted income tax provision $ 2,390$ 1,847 $ 1,857 $ 3,055 $ 1,829$ 6,094 $ 1,824 Net income - GAAP$ 12,090 $ 13,096 $ 10,450 $ 11,090 $ 8,411$ 35,636 $ 18,362 Adjustments: Write-down of other real estate owned - - - - 1,631 - 1,631 Gain on sale of premises and equipment - (1,993) - - - (1,993) - Subordinated debt redemption cost 640 - - - - 640 - Adjusted net income$ 12,730 $ 11,103 $ 10,450 $ 11,090 $ 10,042 $ 34,283 $ 19,993 Diluted average common shares outstanding 9,988,102 9,981,422 9,963,036 9,914,022 9,773,224 9,974,071 9,827,182 Diluted earnings per share - GAAP $ 1.21$ 1.31 $ 1.05 $ 1.12 $ 0.86 $ 3.57 $ 1.87 Adjustments: 63
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Effect of write-down of other real estate owned - - - - 0.17 - 0.16 Effect of gain on sale of premises and equipment - (0.20) - - - (0.19) - Effect of subordinated debt redemption cost 0.06 - - - - 0.06 - Adjusted diluted earnings per share$ 1.27 $ 1.11 $ 1.05 $ 1.12 $ 1.03 $ 3.44 $ 2.03 (dollars in thousands, Three Months Ended Nine Months Ended except share and per September 30, June 30,
September 30 , share data) 2021 2021 2021 2020 2020 2021 2020 Return on average assets 1.12 % 1.25 % 1.02 % 1.02 % 0.78 % 1.13 % 0.58 % Effect of write-down of other real estate owned 0.00 % 0.00 % 0.00 % 0.00 % 0.15 % 0.00 % 0.05 % Effect of gain on sale of premises and equipment 0.00 % (0.19) % 0.00 % 0.00 % 0.00 % (0.06) % 0.00 % Effect of subordinated debt redemption cost 0.06 % 0.00 % 0.00 % 0.00 % 0.00 % 0.02 % 0.00 % Adjusted return on average assets 1.18 % 1.06 % 1.02 % 1.02 % 0.93 % 1.09 % 0.63 % Return on average shareholders' equity 13.10 % 14.88 % 12.61 % 13.64 % 10.67 % 13.54 % 7.90 % Effect of write-down of other real estate owned 0.00 % 0.00 % 0.00 % 0.00 % 2.07 % 0.00 % 0.70 % Effect of gain on sale of premises and equipment 0.00 % (2.26) % 0.00 % 0.00 % 0.00 % (0.75) % 0.00 % Effect of subordinated debt redemption cost 0.69 % 0.00 % 0.00 % 0.00 % 0.00 % 0.24 % 0.00 % Adjusted return on average shareholders' equity 13.79 % 12.62 % 12.61 % 13.64 % 12.74 % 13.03 % 8.60 % Return on average tangible common equity 13.27 % 15.09 % 12.79 % 13.84 % 10.83 % 13.73 % 8.02 % Effect of write-down of other real estate owned 0.00 % 0.00 % 0.00 % 0.00 % 2.10 % 0.00 % 0.71 % Effect of gain on sale of premises and equipment 0.00 % (2.30) % 0.00 % 0.00 % 0.00 % (0.77) % 0.00 % Effect of subordinated debt redemption cost 0.70 % 0.00 % 0.00 % 0.00 % 0.00 % 0.25 % 0.00 % Adjusted return on average tangible common equity 13.97 % 12.79 % 12.79 % 13.84 % 12.93 % 13.21 % 8.73 % Effective income tax rate 15.5 % 15.4 % 15.1 % 21.6 % 14.2 % 15.3 % 7.0 % Effect of write-down of other real estate owned 0.0 % 0.0 % 0.0 % 0.0 % 1.2 % 0.0 % 1.4 % Effect of gain on sale of premises and equipment 0.0 % (1.1) % 0.0 % 0.0 % 0.0 % (0.6) % 0.0 % Effect of subordinated debt redemption cost 0.3 % 0.0 % 0.0 % 0.0 % 0.0 % 0.4 % 0.0 % Adjusted effective income tax rate 15.8 % 14.3 % 15.1 % 21.6 % 15.4 % 15.1 % 8.4 %
Critical accounting conventions 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 positions
Refer to note 15 of the condensed consolidated financial statements.
64 --------------------------------------------------------------------------------
Off-balance sheet provisions
In the ordinary course of business, the Company enters into financial transactions to extend credit, interest rate swap agreements and forms of commitments that may be considered off-balance sheet arrangements. Interest rate swaps are arranged to receive hedge accounting treatment and are classified as either fair value or cash flow hedges. Fair value hedges are purchased to convert certain fixed rate assets to floating rate. Cash flow hedges are used to convert certain variable rate liabilities into fixed rate liabilities. InJune 2020 , the Company terminated all fair value hedging instruments associated with loans. AtSeptember 30, 2021 andDecember 31, 2020 , the Company had interest rate swaps with notional amounts of$260.0 million and$298.2 million , respectively. Additionally, we enter into forward contracts related to our mortgage banking business to hedge the exposures we have from commitments to extend new residential mortgage loans to our customers and from our mortgage loans held-for-sale. AtSeptember 30, 2021 andDecember 31, 2020 , the Company had commitments to sell residential real estate loans of$78.6 million and$107.5 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. 65
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