First Internet Bancorp 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this report. The following discussion, analysis and comparisons generally focus on the operating results for the years ended December 31, 2020 and 2019. Discussion, analysis and comparisons of the years ended December 31, 2019 and 2018 that are not included in this Form 10-K can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of the Company's Annual Report on Form 10-K for the year ended December 31, 2019. This discussion and analysis includes certain forward-looking statements that involve risks, uncertainties and assumptions. You should review the “Risk Factors” section of this report 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 “Cautionary Note Regarding Forward-Looking Statements” at the beginning of this report. Impact of the COVID-19 Pandemic The year 2020 was characterized by continued uncertainty as the coronavirus (“COVID-19”) pandemic persisted globally, resulting in high unemployment and market volatility. However, federal, state and local governments have taken steps to reopen and stimulate economies, evidenced by improving economic indicators as the fourth quarter 2020 progressed. While the effects of COVID-19 did have an impact on our operating results as of December 31, 2020, we believe the impact was consistent with the effects of COVID-19 on the overall banking industry. The low interest rate environment following Federal Reserve rate cuts in the first quarter 2020 had a negative impact on our variable rate assets throughout 2020. However, the low interest rate environment has also allowed us to reprice our interest-bearing deposits at lower rates, which provided a benefit to net interest income in 2020. The benefit from lower deposit pricing is expected to continue into 2021. Additionally, the low interest rate environment has driven residential mortgage rates to historically low levels, which has resulted in increased mortgage originations and has benefited our residential mortgage business. At this time, the ultimate impact of COVID-19 on our business continues to remain uncertain as we cannot predict the duration of the pandemic or when the economies in which we operate will return to conditions existing prior to COVID-19. As a result of continued measures to either contain or reduce the impact of COVID-19, or an increase in the number of reported cases or mortality rates, we may experience issues that negatively impact our business, such as a decline in the liquidity of our borrowers or volatility in interest rates. As a digitally-focused institution without branch locations, we were able to continue serving clients when they needed us most, while minimizing operational disruptions caused by COVID-19. Beginning in the first quarter 2020, we offered loan payment deferral programs for clients affected by COVID-19. Loan balances on payment deferral programs peaked in late May 2020 but as of December 31, 2020, less than 1% of loan balances were in deferral status and all borrowers coming off deferrals had resumed normal payment schedules. Despite the challenging environment, we have continued to prudently extend credit to both commercial and consumer clients. Results of Operations During the twelve months ended December 31, 2020, net income was $29.5 million, or $2.99 per diluted share, compared to net income of $25.2 million, or $2.51 per diluted share, for the twelve months ended December 31, 2019 and net income of $21.9 million, or $2.30 per diluted share, for the twelve months ended December 31, 2018. The $4.2 million increase in net income for the twelve months ended December 31, 2020 compared to the twelve months ended December 31, 2019 was due primarily to a $19.5 million increase in noninterest income and a $1.6 million increase in net interest income, but was partially offset by an $11.0 million increase in noninterest expense, a $3.4 million increase in provision for loan losses and a $2.5 million increase in income tax expense. The increase in net income of $3.3 million for the twelve months ended December 31, 2019 compared to the twelve months ended December 31, 2018 was due primarily to a $8.0 million increase in noninterest income, a $0.7 million increase in net interest income and a $0.1 million decrease in income tax expense, but was partially offset by a $3.5 million increase in noninterest expense and $2.1 million increase in provision for loan losses. During the twelve months ended December 31, 2020, return on average assets was 0.69%, compared to 0.65% for the twelve months ended December 31, 2019. During the twelve months ended December 31, 2020, return on average shareholders’ equity was 9.39%, compared to 8.52% for the twelve months ended December 31, 2019. Additionally, for the 23 twelve months ended December 31, 2020, return on average tangible common equity was 9.53% compared to 8.65% for the twelve months ended December 31, 2019. These profitability ratios improved during 2020 as net income growth of 16.7% outpaced total average balance sheet growth of 9.6%, as well as average shareholders' equity growth of 5.9% and average tangible common equity growth of 6.0%. Refer to the "Reconciliation of Non-GAAP Financial Measures" section of Item 7 of Part II of this report, Management's Discussion and Analysis of Financial Condition and Results of Operations for additional information. Consolidated Average Balance Sheets and Net Interest Income Analyses For the periods presented, the following tables provide the average balances of interest-earning assets and interest-bearing liabilities and the related yields and cost of funds. The tables do not reflect any effect of income taxes. Balances are based on the average of daily balances. Nonaccrual loans are included in average loan balances. Twelve Months Ended December 31, 2020 December 31, 2019 December 31, 2018 (dollars in thousands) Average Balance Interest/Dividends Yield/Cost Average Balance Interest/Dividends Yield/Cost Average Balance Interest/Dividends Yield/Cost Assets Interest-earning assets Loans, including loans held-for-sale $ 3,025,989 $ 120,628 3.99 % $ 2,894,174 $ 122,228 4.22 % $ 2,382,504 $ 99,082 4.16 % Securities - taxable 530,849 11,123 2.10 % 462,704 13,807 2.98 % 391,958 10,630 2.71 % Securities - non-taxable 95,173 1,728 1.82 % 97,613 2,595 2.66 % 94,072 2,810 2.99 % Other earning assets 523,788 3,380 0.65 % 355,412 8,784 2.47 % 116,074 2,945 2.54 % Total interest-earning assets 4,175,799 136,859 3.28 % 3,809,903 147,414 3.87 % 2,984,608 115,467 3.87 % Allowance for loan losses (24,660) (19,891) (16,097) Noninterest earning-assets 112,659 100,696 86,713 Total assets $ 4,263,798 $ 3,890,708 $ 3,055,224 Liabilities Interest-bearing liabilities Interest-bearing demand deposits $ 145,207 $ 840 0.58 % $ 118,874 $ 882 0.74 % $ 90,229 $ 583 0.65 % Savings accounts 40,593 303 0.75 % 35,751 398 1.11 % 51,333 585 1.14 % Money market accounts 1,156,084 11,381 0.98 % 637,360 12,661 1.99 % 544,802 8,803 1.62 % Certificates and brokered deposits 1,882,773 43,452 2.31 % 2,146,637 55,372 2.58 % 1,585,673 32,513 2.05 % Total interest-bearing deposits 3,224,657 55,976 1.74 % 2,938,622 69,313 2.36 % 2,272,037 42,484 1.87 % Other borrowed funds 586,372 16,342 2.79 % 564,757 15,134 2.68 % 468,411 10,716 2.29 % Total interest-bearing liabilities 3,811,029 72,318 1.90 % 3,503,379 84,447 2.41 % 2,740,448 53,200 1.94 % Noninterest-bearing deposits 74,277 44,682 45,562 Other noninterest-bearing liabilities 64,729 46,265 9,798 Total liabilities 3,950,035 3,594,326 2,795,808 Shareholders' equity 313,763 296,382 259,416 Total liabilities and shareholders' equity $ 4,263,798 $ 3,890,708 $ 3,055,224 Net interest income $ 64,541 $ 62,967 $ 62,267 Interest rate spread 1 1.38 % 1.46 % 1.93 % Net interest margin 2 1.55 % 1.65 % 2.09 % Net interest margin - FTE 3 1.68 % 1.82 % 2.25 % 1 Yield on total interest-earning assets minus cost of total interest-bearing liabilities 2 Net interest income divided by average interest-earning assets 3 On a fully-taxable equivalent ("FTE") basis assuming a 21% tax rate. Refer to the "Reconciliation of Non-GAAP Financial Measures" section of Item 7 of Part II of this report, Management's Discussion and Analysis of Financial Condition and Results of Operations 24 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. Rate/Volume Analysis of Net Interest Income Twelve Months Ended December 31, 2020 vs. December 31, 2019 Due to Changes in Twelve Months Ended December 31, 2019 vs. December 31, 2018 Due to Changes in (amounts in thousands) Volume Rate Net Volume Rate Net Interest income Loans, including loans held-for-sale $ 5,333 $ (6,933) $ (1,600) $ 21,689 $ 1,457 $ 23,146 Securities – taxable 1,817 (4,501) (2,684) 2,047 1,130 3,177 Securities – non-taxable (64) (803) (867) 103 (318) (215) Other earning assets 2,948 (8,352) (5,404) 5,922 (83) 5,839 Total 10,034 (20,589) (10,555) 29,761 2,186 31,947 Interest expense Interest-bearing deposits 6,245 (19,582) (13,337) 14,172 12,657 26,829 Other borrowed funds 583 625 1,208 2,417 2,001 4,418 Total 6,828 (18,957) (12,129) 16,589 14,658 31,247 Increase (decrease) in net interest income $ 3,206 $ (1,632) $ 1,574 $ 13,172 $ (12,472) $ 700 2020 v. 2019 Net interest income for the twelve months ended December 31, 2020 was $64.5 million, an increase of $1.6 million, or 2.5%, compared to $63.0 million for the twelve months ended December 31, 2019. The increase in net interest income was the result of a $12.1 million, or 14.4%, decrease in total interest expense to $72.3 million for the twelve months ended December 31, 2020 compared to $84.4 million for the twelve months ended December 31, 2019. This decrease in total interest expense was partially offset by a $10.6 million, or 7.2%, decrease in total interest income to $136.9 million for the twelve months ended December 31, 2020 compared to $147.4 million for the twelve months ended December 31, 2019. The decrease in total interest expense was driven primarily by a decrease in interest expense related to certificates and brokered deposits and money market accounts. Interest expense on certificates and brokered deposits decreased $11.9 million, or 21.5%, due to a decline of 27 bps in the cost of these deposits as well as a $263.9 million, or 12.3%, 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 $1.3 million, or 10.1%, was driven by a decline of 101 bps in the cost of these deposits, partially offset by an increase of $518.7 million, or 81.4%, in the average balance of these deposits. Money market balances increased throughout 2020 due to targeted digital marketing efforts to grow small business accounts, as well as consumers, small businesses and commercial clients increasing their cash balances due in part to the economic uncertainty resulting from COVID-19. The decrease in total interest income was due primarily to a decrease in interest earned on loans, including loans held-for-sale, other earning assets and securities. Interest income earned on other earning assets decreased $5.4 million, or 61.5%, due to a decline of 182 bps in the yield earned on these assets, partially offset by an increase of $168.4 million, or 47.4%, in the average balance of other earning assets. The increase in the average balance of other earning assets was due to higher cash balances driven by growth in the average balance of deposits. Interest income earned on securities decreased $3.6 million, or 21.6%, due to a decline of 87 bps in the yield earned on securities, partially offset by an increase of $65.7 million, or 11.7%, in the average balance of securities. The increase in average securities balances was due to deployment of liquidity driven by deposit growth. Interest income earned on loans, including loans held-for-sale, decreased by $1.6 million as the yield on the loan portfolio decreased by 23 bps, but was partially offset by an increase of $131.8 million, or 4.6%, in the average balance of loans. The increase in average loan balances was due to growth in the healthcare finance portfolio, small business lending portfolio (which included loans acquired from First Colorado National Bank in late 2019, as well as loans originated through the Paycheck Protection Program ("PPP")) and increased construction lending, but was partially offset by decreases in the residential mortgage, public finance and single tenant lease financing portfolios. 25 Net interest margin was 1.55% for the twelve months ended December 31, 2020 compared to 1.65% for the twelve months ended December 31, 2019. The decrease in net interest margin was due primarily to a 59 bp decrease in the yield earned on interest-earning assets, but was partially offset by a 51 bp decrease in the cost of interest-bearing liabilities. The decline in the yield earned on interest-earning assets and the decline in the cost of interest-bearing liabilities was due primarily to the continued decrease in market interest rates from the year-ago period. Interest rates began declining during 2019 and declined significantly in 2020 following Federal Reserve interest rate cuts in March 2020 in response to the economic effects of COVID-19. During this time, variable rate assets tied to market interest rates repriced faster than deposits. However, as the pace of short-term market interest rate declines slowed over the course of 2020, the Company believes that yields on interest-earning assets have largely stabilized. Furthermore, the Company has approximately $917.0 million of certificates and brokered deposits with a weighted average cost of 1.87% that mature over the next twelve months. As the weighted average of cost of these deposits is significantly higher than current new production costs, the Company expects the cost of deposit funding to continue to decline in 2021. Noninterest Income The following table presents noninterest income for the five most recent years. Twelve Months Ended December 31, (amounts in thousands) 2020 2019 2018 2017 2016 Service charges and fees $ 824 $ 885 $ 934 $ 888 $ 818 Loan servicing revenue 1,159 166 — — — Loan servicing asset revaluation (432) — — — — Mortgage banking activities 24,693 11,541 5,718 7,836 12,398 Gain on sale of loans 8,298 2,074 503 395 — Gain (loss) on sale of securities 139 (458) — (8) — Other 1,655 2,581 1,605 1,430 861 Total noninterest income $ 36,336 $ 16,789 $ 8,760 $ 10,541 $ 14,077 2020 v. 2019 During the twelve months ended December 31, 2020, noninterest income totaled $36.3 million, representing an increase of $19.5 million, or 116.4%, compared to $16.8 million for the twelve months ended December 31, 2019. The increase in noninterest income was driven primarily by an increase in revenue from mortgage banking activities, gain on sale of loans, loan servicing revenue and gain on sale of securities, which were partially offset by lower other income and loan servicing asset revaluation. The increase in mortgage banking revenue was due mainly to an increase in loan origination volume, driven by historically low mortgage interest rates, and higher gain-on-sale margins. The increase in gain on sale of loans was due to gains of $6.8 million being recognized on sales of SBA 7(a) guaranteed loans and sales of portfolio loans with book values totaling $224.1 million that resulted in a gain of $1.5 million during the twelve months ended December 31, 2020, compared to the Company recognizing gains of $1.7 million on the sale of SBA 7(a) guaranteed loans and selling portfolio loans with book values of $264.7 million that resulted in a net gain of $0.4 million during the twelve months ended December 31, 2019. The Company recognized $0.7 million of loan servicing revenue, net of the loan servicing asset revaluation, in 2020, in connection with its SBA 7(a) servicing portfolio, which includes the portfolio acquired in the fourth quarter 2019 as well as loans originated by the Company in 2020. The increase in gain on sale of securities was due to a gain of $0.1 million being recorded during the twelve months ended December 31, 2020 compared to the twelve months ended December 31, 2019 when the Company sold lower-yielding mortgage-backed and U.S. Government Agency securities that resulted in a loss of $0.5 million. The decrease in other noninterest income was mainly the result of income recognized in the prior year associated with the sale of the Company’s Visa Class B shares at a gain of $0.5 million and $0.4 million of income related to the Company’s temporary ownership of the land associated with its future corporate headquarters. Refer to Note 16 to the Company's consolidated financial statements for additional information about the Company’s new headquarters. 26 Noninterest Expense The following table presents noninterest expense for the five most recent years. Twelve Months Ended December 31, (amounts in thousands) 2020 2019 2018 2017 2016 Salaries and employee benefits $ 34,231 $ 27,014 $ 23,174 $ 21,164 $ 17,387 Marketing, advertising and promotion 1,654 1,800 2,468 2,393 1,823 Consulting and professional services 3,511 3,669 3,055 3,091 3,143 Data processing 1,528 1,338 1,233 971 1,127 Loan expenses 2,036 1,142 942 1,027 891 Premises and equipment 6,396 6,059 4,996 4,183 3,699 Deposit insurance premium 1,810 1,903 1,956 1,410 1,159 Write-down of other real estate owned 2,065 — 2,423 — — Other 4,423 3,709 2,936 2,484 2,222 Total noninterest expense $ 57,654 $ 46,634 $ 43,183 $ 36,723 $ 31,451 2020 v. 2019 Noninterest expense for the twelve months ended December 31, 2020 was $57.7 million, compared to $46.6 million for the twelve months ended December 31, 2019. The increase of $11.0 million, or 23.6%, compared to the twelve months ended December 31, 2019 was due primarily to a $7.2 million increase in salaries and employee benefits, a $2.1 million write-down of a legacy commercial OREO property, a $0.9 million increase in loan expenses, a $0.7 million increase in other expenses and a $0.3 million increase in premises and equipment. The increase in salaries and employee benefits was primarily the result of personnel growth, mostly associated with the Company’s small business lending platform, as well as increased mortgage and small business lending incentive compensation. The increase in loan expenses was driven primarily by costs associated with nonperforming loans. The increase in other expenses was due primarily to a $0.3 million charitable contribution the Company made to assist small businesses and nonprofits address the economic challenges of the COVID-19 pandemic, as well as various other miscellaneous expenses, none of which were individually significant. The increase in premises and equipment was due primarily to higher software expense. 27 Income Taxes The following table reconciles reported income tax expense to that computed at the statutory federal tax rate for the five most recent years. Twelve Months Ended December 31, (amounts in thousands) 2020 2019 2018 2017 2016 Statutory rate times pre-tax income $ 7,119 $ 5,703 $ 5,030 $ 8,025 $ 6,115 (Subtract) add the tax effect of: Income from tax-exempt securities and loans (4,464) (4,881) (3,833) (2,512) (635) State income taxes, net of federal tax effect 1,765 1,285 1,164 693 567 Bank-owned life insurance (200) (198) (200) (318) (159) Net deferred tax asset revaluation — — — 1,846 — Tax credits (178) (181) (180) — — Other differences 403 189 71 (32) 23 Income tax expense $ 4,445 $ 1,917 $ 2,052 $ 7,702 $ 5,911 2020 v. 2019 The Company recognized income tax expense of $4.4 million in 2020, resulting in an effective tax rate of 13.1%, compared to $1.9 million and an effective tax rate of 7.1% in 2019. The Company's federal statutory tax rate was 21% in 2020 and 2019. In both 2020 and 2019, the variance from the federal statutory rate was due primarily to tax-exempt income, partially offset by state income taxes. Interest income on certain loans or securities issued by governmental, municipal and not-for-profit entities, and earnings from bank-owned life insurance were the primary components of tax-exempt income. The increase in the effective tax rate and income tax expense was primarily due to the increase in pre-tax earnings driven by a higher proportion of taxable revenue, including higher mortgage banking revenue and gain on sale of loans. 28 Financial Condition The following table presents summary balance sheet data as of the end of the last five years. (amounts in thousands) December 31, Balance Sheet Data: 2020 2019 2018 2017 2016 Total assets $ 4,246,156 $ 4,100,083 $ 3,541,692 $ 2,767,687 $ 1,854,335 Loans 3,059,231 2,963,547 2,716,228 2,091,193 1,250,789 Total securities 565,851 602,730 504,095 492,484 473,371 Loans held-for-sale 39,584 56,097 18,328 51,407 27,101 Noninterest-bearing deposits 96,753 57,115 43,301 44,686 31,166 Interest-bearing deposits 3,174,132 3,096,848 2,628,050 2,040,255 1,431,701 Total deposits 3,270,885 3,153,963 2,671,351 2,084,941 1,462,867 Advances from Federal Home Loan Bank 514,916 514,910 525,153 410,176 189,981 Total shareholders' equity 330,944 304,913 288,735 224,127 153,942 Total assets increased $146.1 million, or 3.6%, to $4.2 billion as of December 31, 2020 as compared to $4.1 billion as of December 31, 2019. Balance sheet growth was driven primarily by an increase in deposits of $116.9 million, or 3.7%. Additionally, the increase in deposits was used to fund loan growth as loan balances increased $95.7 million, or 3.2%. As deposit growth outpaced loan growth, balance sheet liquidity increased as the combined balance of cash and securities increased $55.6 million, or 6.0%, and the percentage of loans declined modestly to 93.5% as of December 31, 2020 from 94.0% as of December 31, 2019. As of December 31, 2020, total shareholders’ equity was $330.9 million, an increase of $26.0 million, or 8.5%, compared to December 31, 2019, due primarily to the net income earned during the year, partially offset by the increase in accumulated other comprehensive loss. Tangible common equity totaled $326.3 million as of December 31, 2020, representing an increase of $26.0 million, or 8.7%, compared to December 31, 2019. As the growth in both total shareholders’ equity and tangible common equity outpaced growth of 3.6% in both total assets and tangible assets, the ratio of total shareholders’ equity to total assets increased to 7.79% as of December 31, 2020 from 7.44% as of December 31, 2019 and the ratio of tangible common equity to tangible assets increased to 7.69% as of December 31, 2010 from 7.33% as of December 31, 2019. Book value per common share increased 7.9% to $33.77 as of December 30, 2020 from $31.30 as of December 31, 2019. Tangible book value per share increased 8.0% to $33.29 as of December 31, 2020 from $30.82 as of December 31, 2019. 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 year-over-year, or 0.6%. Refer to the "Reconciliation of Non-GAAP Financial Measures" section of Item 7 of Part II of this report, Management's Discussion and Analysis of Financial Condition and Results of Operations for additional information. 29 Loan Portfolio Analysis The following table provides information regarding the Company’s loan portfolio as of the end of the last five years. December 31, (dollars in thousands) 2020 2019 2018 2017 2016 Commercial loans Commercial and industrial $ 75,387 2.5 % $ 96,420 3.3 % $ 107,405 4.0 % $ 121,966 5.8 % $ 101,326 8.1 % Owner-occupied commercial real estate 89,785 2.9 % 86,726 2.9 % 77,569 2.9 % 71,872 3.4 % 55,637 4.4 % Investor commercial real estate 13,902 0.5 % 12,567 0.4 % 5,391 0.2 % 7,273 0.4 % 13,181 1.0 % Construction 110,385 3.6 % 60,274 2.0 % 39,916 1.5 % 49,213 2.4 % 53,291 4.3 % Single tenant lease financing 950,172 31.1 % 995,879 33.6 % 919,440 33.8 % 803,299 38.5 % 606,568 48.5 % Public finance 622,257 20.3 % 687,094 23.2 % 706,342 26.0 % 438,341 21.0 % — 0.0 % Healthcare finance 528,154 17.3 % 300,612 10.1 % 117,007 4.4 % 31,573 1.5 % — 0.0 % Small business lending 125,589 4.1 % 46,945 1.6 % 17,370 0.5 % 4,870 0.2 % 3,142 0.3 % Total commercial loans 2,515,631 82.3 % 0.823 2,286,517 77.1 % 1,990,440 73.3 % 1,528,407 73.2 % 833,145 66.6 % Consumer loans Residential mortgage 186,787 6.1 % 313,849 10.6 % 399,898 14.7 % 299,935 14.3 % 205,554 16.4 % Home equity 19,857 0.6 % 24,306 0.8 % 28,735 1.1 % 30,554 1.5 % 35,036 2.8 % Other consumer 275,692 9.0 % 295,309 10.0 % 279,771 10.3 % 227,533 10.8 % 173,449 13.9 % Total consumer loans 482,336 15.7 % 633,464 21.4 % 708,404 26.1 % 558,022 26.6 % 414,039 33.1 % Total commercial and consumer loans 2,997,967 98.0 % 2,919,981 98.5 % 2,698,844 99.4 % 2,086,429 99.8 % 1,247,184 99.7 % Net deferred loan origination costs and premiums and discounts on purchased loans and other (1) 61,264 2.0 % 43,566 1.5 % 17,384 0.6 % 4,764 0.2 % 3,605 0.3 % Total loans 3,059,231 100.0 % 2,963,547 100.0 % 2,716,228 100.0 % 2,091,193 100.0 % 1,250,789 100.0 % Allowance for loan losses (29,484) (21,840) (17,896) (14,970) (10,981) Net loans $ 3,029,747 $ 2,941,707 $ 2,698,332 $ 2,076,223 $ 1,239,808 1 Includes carrying value adjustments of $42.7 million related to terminated interest rate swaps associated with public finance loans as of December 31, 2020 and $21.4 million, $5.0 million, $0.3 million, and $0.0 million as of December 31, 2019, 2018, 2017 and 2016, respectively, related to interest rate swaps associated with public finance loans. Total loans were $3.1 billion as of December 31, 2020, an increase of $95.7 million, or 3.2%, compared to December 31, 2019. Growth in commercial loan balances of $229.1 million, or 10.0%, was partially offset by a decline of $151.1 million, or 23.9%, in consumer loan balances. The growth in commercial loan balances was driven primarily by increased production in healthcare finance, small business lending and construction, which was partially offset by lower balances in the public finance and single tenant lease financing loan portfolios, due primarily to sales of $106.6 million of loans in these categories during 2020, as well as a decline in commercial and industrial balances. The growth in healthcare finance balances was due primarily to a combination of strong borrower demand following the re-opening of state and local economies across the U.S. subsequent to shelter-in-place orders in response to COVID-19 and growth in the sales team at Provide, Inc. (formerly known as Lendeavor, Inc.), the Company’s origination partner in this loan category. The growth in small business lending was driven by $58.3 million of PPP loan balances originated during 2020, as well as an increase in originated SBA 7(a) loans during 2020. The growth in construction balances was due to focused efforts to increase borrower relationships in the Central Indiana market, as well as expand relationships with existing clients. The decrease in consumer loan balances was due primarily to the sale of $90.8 million of portfolio mortgage loans in the first quarter 2020. Additionally, the balances of residential mortgage loans and other consumer loans were impacted by elevated prepayment activity, which more than offset new origination activity. 30 Loan Maturities and Rate Sensitivity The following table shows the contractual maturity distribution intervals (without regard to repayment schedules) of the outstanding loans in our portfolio as of December 31, 2020. (amounts in thousands) Within 1 Year 1-3 Years 4-5 Years Beyond 5 Years Total Commercial loans Commercial and industrial $ 13,560 $ 18,773 $ 15,751 $ 27,303 $ 75,387 Owner-occupied commercial real estate 6,484 23,375 6,731 53,195 89,785 Investor commercial real estate 3,000 8,365 629 1,908 13,902 Construction 42,070 47,139 14,137 7,039 110,385 Single tenant lease financing 52,832 94,472 177,912 624,956 950,172 Public finance 31,210 15,662 3,437 571,948 622,257 Healthcare finance 430 56 2,908 524,760 528,154 Small business lending 5 51,573 2,598 71,413 125,589 Total commercial loans 149,591 259,415 224,103 1,882,522 2,515,631 Consumer loans Residential mortgage 1,592 1,659 293 183,243 186,787 Home equity 31 3,555 321 15,950 19,857 Other consumer 1,837 6,388 12,108 255,359 275,692 Total consumer loans 3,460 11,602 12,722 454,552 482,336 Total commercial and consumer loans $ 153,051 $ 271,017 $ 236,825 $ 2,337,074 $ 2,997,967 The following table shows the rate sensitivity of the outstanding loans in our portfolio by the contractual maturity distribution intervals as of December 31, 2020. (amounts in thousands) Within 1 Year 1-3 Years 4-5 Years Beyond 5 Years Total Predetermined rates $ 91,349 $ 206,317 $ 215,690 $ 2,121,641 $ 2,634,997 Adjustable rate 61,702 64,700 21,135 215,433 362,970 Total commercial and consumer loans $ 153,051 $ 271,017 $ 236,825 $ 2,337,074 $ 2,997,967 Loan Approval Procedures and Authority Our lending activities follow written, non-discriminatory policies with loan approval limits approved by the Board of Directors of the Bank. Loan officers have underwriting and approval authorization of varying amounts based on their lending experience and product type. Additionally, based on the amount of the loan, multiple approvals may be required. Based on the Bank’s legal lending limit, the maximum it could lend to any one borrower at December 31, 2020 was $58.8 million. Our goal is to have a well-diversified and balanced loan portfolio. In order to manage our loan portfolio risk, we establish concentration limits by borrower, product type, industry and geography. To supplement our internal loan review resources, we have engaged independent third-party loan review groups, which are a key component of our overall risk management process related to credit administration. 31 Asset Quality December 31, (dollars in thousands) 2020 2019 2018 2017 2016 Nonaccrual loans Commercial loans: Commercial and industrial $ — $ 226 $ 195 $ — $ — Owner-occupied commercial real estate 1,838 464 325 — — Single tenant lease financing 7,116 4,680 — — — Total commercial loans 8,954 5,370 520 — — Consumer loans: Residential mortgage 1,183 761 175 724 1,024 Home equity — — 55 83 — Other consumer 46 33 42 32 59 Total consumer loans 1,229 794 272 839 1,083 Total nonaccrual loans 10,183 6,164 792 839 1,083 Past Due 90 days and accruing loans Consumer loans: Residential mortgage — 416 97 — — Total consumer loans — 416 97 — — Total past due 90 days and accruing loans — 416 97 — — Total nonperforming loans 10,183 6,580 889 839 1,083 Other real estate owned Investor commercial real estate — 2,065 2,066 4,488 4,488 Residential mortgage — — 553 553 45 Total other real estate owned — 2,065 2,619 5,041 4,533 Other nonperforming assets 35 75 — 12 85 Total nonperforming assets $ 10,218 $ 8,720 $ 3,508 $ 5,892 $ 5,701 Total nonperforming loans to total loans 0.33 % 0.23 % 0.03 % 0.04 % 0.09 % Total nonperforming assets to total assets 0.22 % 0.22 % 0.10 % 0.21 % 0.31 % A loan is designated as impaired, in accordance with the impairment accounting guidance when, based on current information or events, it is probable that the Company will be unable to collect all amounts due (principal and interest) according to the contractual terms of the loan agreement. Payments with delays generally not exceeding 90 days outstanding are not considered impaired. Certain nonaccrual and substantially all delinquent loans more than 90 days past due may be considered to be impaired. Generally, loans are placed on nonaccrual status at 90 days past due and accrued interest is reversed against earnings, unless the loan is well secured and in the process of collection. The accrual of interest on impaired and nonaccrual loans is discontinued when, in management’s opinion, the borrower may be unable to meet payments as they become due. Impaired loans include nonperforming loans but also include loans modified in troubled debt restructurings (“TDRs”) where concessions have been granted to borrowers experiencing financial difficulties. These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance, or other actions intended to maximize collection. Nonperforming loans are comprised of total 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. Nonperforming assets can also include investments that were classified as other-than-temporarily impaired; however, we did not own any investments classified as such during the five-year period ended December 31, 2020. 32 Troubled Debt Restructurings December 31, (amounts in thousands) 2020 2019 2018 2017 2016 Troubled debt restructurings – nonaccrual $ 2,637 $ 94 $ — $ — $ — Troubled debt restructurings – performing 367 427 410 473 757 Total troubled debt restructurings $ 3,004 $ 521 $ 410 $ 473 $ 757 The increase in nonperforming loans of $3.6 million, or 54.8%, to $10.2 million as of December 31, 2020 compared to $6.6 million as of December 31, 2019 was due primarily to an increase in nonperforming single tenant lease financing loans with unpaid principal balances of $2.5 million and an increase in nonperforming owner-occupied commercial real estate loans with unpaid principal balances of $1.6 million that were placed on nonaccrual status during 2020, partially offset by a $0.4 million decrease in accruing residential mortgage loans that were 90 days past due and one nonaccrual owner-occupied commercial real estate loan that paid off in full during 2020. Total nonperforming assets increased $1.5 million, or 17.2%, as of December 31, 2020 compared to December 31, 2019, due primarily to the increase in nonperforming loans discussed above, partially offset by a $2.1 million write-down of a legacy commercial OREO property in 2020. The ratio of nonperforming loans to total loans increased to 0.33% as of December 31, 2020 compared to 0.23% as of December 31, 2019 and the ratio of nonperforming assets to total assets remained 0.22% as of December 31, 2020, consistent with 0.22% as of December 31, 2019. Total TDRs as of December 31, 2020 were $3.0 million, up $2.5 million from December 31, 2019. The increase was driven by one residential mortgage loan that became a TDR during the second quarter 2020 and one loan relationship in the owner-occupied real estate category that became a TDR during the fourth quarter 2020. As of December 31, 2019, the Company had one commercial property in OREO with a carrying value of $2.1 million which was written-off during 2020. The property consisted of two buildings that were residential units adjacent to a university campus. The Company did not have any OREO as of December 31, 2020. As of December 31, 2020, our financial results have reflected little impact on asset quality to date as a result of COVID-19. However, the ultimate impact the pandemic may have on our business and asset quality is still uncertain. We remain optimistic that the combination of government stimulus programs and the relief programs we have provided to our clients will lessen the economic stress on our borrowers. However, if the effects of the pandemic extend for a prolonged period of time, we may experience negative trends in nonperforming loans and assets. Non-TDR Loan Modifications due to COVID-19 The “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus” was issued by our banking regulators on March 22, 2020. This guidance encourages financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations due to the effects of COVID-19. Additionally, Section 4013 of the CARES Act further provides that loan modifications due to the impact of COVID-19 that would otherwise be classified as TDRs under GAAP will not be so classified. Modifications within the scope of this relief are in effect from the period beginning March 1, 2020 until January 1, 2022, or 60 days after the date on which the national emergency related to the COVID-19 pandemic formally terminates. In accordance with this guidance, the Company offered modifications to borrowers who were both impacted by COVID-19 and current on all principal and interest payments. As of December 31, 2020, the Company had $11.9 million in non-TDR loan modifications due to COVID-19. U.S. Small Business Administration Paycheck Protection Program Section 1102 of the CARES Act created the PPP, which is jointly administered by the SBA and the Department of the Treasury. The PPP is designed to provide economic relief to small businesses nationwide adversely impacted by COVID-19. On December 27, 2020, the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act was enacted, extending the authority to continue to make PPP loans, including a provision for second draw PPP loans, through March 31, 2021. These loans may be 100% forgiven if certain conditions, including predefined SBA approved use of the funds and certain borrower certifications are satisfied and are fully guaranteed by the SBA. As a preferred SBA lender, we assisted our clients in 33 participating in the PPP to help them maintain their workforces in an uncertain and challenging environment. The loans originated by us during 2020 bear an interest rate of 1.00% and we received weighted average origination fees of 3.86% of the amount funded, or approximately $2.3 million in total. The Company received this fee revenue from the SBA in late June 2020 and it is being deferred over the life of the PPP loans and recognized as interest income. As of December 31, 2020, we had 376 PPP loans totaling $50.6 million outstanding. As of December 31, 2020, the Company processed 84 applications for forgiveness from PPP borrowers. On December 27, 2020, additional funding was allocated to the PPP through the passage of the Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venues Act. The additional funding can be used by small businesses who have yet to receive a PPP loan as well as certain small businesses who may be eligible to receive a second PPP loan. The Company began offering PPP loans again in the first quarter of 2021. The Company anticipates that the majority of PPP loans it originates 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 during 2021. Allowance for Loan Losses December 31, (amounts in thousands) 2020 2019 2018 2017 2016 Balance, beginning of period $ 21,840 $ 17,896 $ 14,970 $ 10,981 $ 8,351 Provision charged to expense 9,325 5,966 3,892 4,872 4,330 Losses charged off Commercial and industrial (461) (921) (92) (271) (1,582) Owner-occupied commercial real estate (24) — — — — Healthcare finance (743) — — — — Small business lending (110) — — — — Residential mortgage (20) (76) (9) (116) (134) Home equity — (68) — — (33) Other consumer (804) (1,292) (1,176) (895) (440) Total losses charged off (2,162) (2,357) (1,277) (1,282) (2,189) Recoveries Commercial and industrial 6 29 3 69 187 Healthcare finance 87 — — — — Small business lending 19 5 — — — Residential mortgage 4 4 5 4 30 Home equity 11 10 16 23 13 Other consumer 354 287 287 303 259 Total recoveries 481 335 311 399 489 Balance, end of period $ 29,484 $ 21,840 $ 17,896 $ 14,970 $ 10,981 Net charge-offs $ 1,681 $ 2,022 $ 966 $ 883 $ 1,700 Net charge-offs to average loans 0.06 % 0.07 % 0.04 % 0.05 % 0.15 % The determination of the allowance for loan losses and the related provision for loan losses are components of our significant accounting policies as discussed within Note 1 to the Company's consolidated financial statements. The adequacy of the allowance for loan losses and the provision are based on the review and evaluation of the loan portfolio and reflect management’s assessment of the risks and potential losses within the portfolio. This evaluation considers historical loss experience as well as qualitative factors such as economic and business conditions, portfolio growth, concentrations of credit in the portfolio, trends in risk grades, delinquencies within the portfolio and changes in our lending policies and practices. Management actively monitors asset quality and, when appropriate, charges off loans against the allowance for loan losses. Although management believes it uses the best information available to make determinations with respect to the allowance for loan losses, future adjustments may be necessary if economic conditions differ substantially from those in the assumptions used to determine the size of the allowance for loan losses. 34 The allowance for loan losses was $29.5 million as of December 31, 2020, compared to $21.8 million as of December 31, 2019. While total loan balances experienced a modest increase of $95.7 million, or 3.2%, the Company made additional adjustments to qualitative factors in its allowance model to reflect the continued economic uncertainty resulting from COVID-19. As a result, both the allowance for loan losses and the allowance as a percentage of total loans increased compared to December 31, 2019. The allowance for loan losses as a percentage of total loans was 0.96% as of December 31, 2020, or 0.98% when excluding PPP Loans, compared to 0.74% as of December 31, 2019. The allowance for loan losses as a percentage of nonperforming loans decreased to 289.5% as of December 31, 2020, from to 324.4% as of December 31, 2019. The provision for loans losses was $9.3 million for the twelve months ended December 31, 2020 compared to $6.0 million for the twelve months ended December 31, 2019. The increase in the provision for loan losses was due primarily to the additional adjustments to qualitative factors in the allowance model discussed above. During 2020, the Company recorded net charge-offs of $1.7 million, compared to $2.0 million during 2019. Investment Securities Portfolio In managing the Company’s investment securities portfolio, management focuses on providing an adequate level of liquidity and managing long-term interest rate risk, while earning an adequate level of investment income without taking undue risk. Investment securities that are acquired and held principally for the purpose of selling them in the near term with the objective of generating economic profits on short-term differences in market characteristics are classified as “trading securities.” The Company did not classify any securities as trading securities as of December 31, 2020 and 2019. Securities that we intend to hold until maturity are classified as “held-to-maturity” securities, and all other investment securities are classified as “available-for-sale.” The carrying values of available-for-sale investment securities are adjusted for unrealized gains or losses as a valuation allowance and any gain or loss is reported on an after-tax basis as a component of other comprehensive income (loss). The Company periodically evaluates each security in an unrealized loss position to determine if the impairment is temporary or other-than-temporary. As of December 31, 2020, the unrealized losses in the Company’s investment securities portfolio were due primarily to interest rate changes and elevated credit spreads resulting from the economic uncertainty of the COVID-19 pandemic. The Company has the ability and intent to hold all investment securities in an unrealized loss position resulting from interest rate changes to the earlier of the forecasted recovery or the maturity of the underlying investment security. As of December 31, 2020, the Company did not have any investment securities of a single issuer that exceeded 10% of shareholders’ equity. The term "issuer" excludes the U.S. Government and its sponsored agencies and corporations. 35 The following tables present the amortized cost and approximate fair value of the Company’s investment securities portfolio by security type as of the end of the last five years. (amounts in thousands) December 31, Amortized Cost 2020 2019 2018 2017 2016 Securities available-for-sale U.S. Government-sponsored agencies $ 61,765 $ 77,715 $ 109,631 $ 133,424 $ 92,599 Municipal securities 82,757 97,447 97,090 97,370 97,647 Agency mortgage-backed securities 241,795 264,142 242,293 215,452 238,354 Private-label mortgage-backed securities 57,268 63,704 9,199 — — Asset-backed securities 5,000 5,000 5,002 5,000 19,470 Corporate securities 48,419 38,632 36,678 27,111 20,000 Other securities — — — 3,000 3,000 Total securities available-for-sale 497,004 546,640 499,893 481,357 471,070 Securities held-to-maturity Municipal securities 14,571 10,142 10,157 10,164 10,171 Corporate securities 53,652 51,736 12,593 9,045 6,500 Total securities held-to-maturity 68,223 61,878 22,750 19,209 16,671 Total securities $ 565,227 $ 608,518 $ 522,643 $ 500,566 $ 487,741 December 31, Approximate Fair Value 2020 2019 2018 2017 2016 Securities available-for-sale U.S. Government-sponsored agencies $ 60,545 $ 75,872 $ 107,585 $ 133,190 $ 91,896 Municipal securities 82,489 97,652 92,506 96,377 91,886 Agency mortgage-backed securities 243,921 261,440 233,734 209,720 231,641 Private-label mortgage-backed securities 58,116 63,613 9,178 — — Asset-backed securities 4,961 4,955 4,859 5,009 19,534 Corporate securities 47,596 37,320 33,483 26,047 18,811 Other securities — — — 2,932 2,932 Total securities available-for-sale 497,628 540,852 481,345 473,275 456,700 Securities held-to-maturity Municipal securities 15,317 10,368 9,801 9,847 9,673 Corporate securities 54,135 52,192 12,617 9,236 6,524 Total securities held-to-maturity 69,452 62,560 22,418 19,083 16,197 Total securities $ 567,080 $ 603,412 $ 503,763 $ 492,358 $ 472,897 The approximate fair value of investment securities available-for-sale decreased $43.2 million, or 8.0%, to $497.6 million as of December 31, 2020 compared to $540.9 million as of December 31, 2019. The decrease was due primarily to decreases of $17.5 million in agency mortgage-backed securities, $15.3 million in agency securities, $15.2 million in municipal securities and $5.5 million in private-label mortgage-backed securities. These decreases were driven primarily by prepayments and maturities in agency and mortgage-backed securities, as well as early redemptions and maturities in municipal securities. The decreases were partially offset by purchases of corporate securities as excess liquidity from deposit growth was deployed. As of December 31, 2020, the Company had securities with an amortized cost basis of $68.2 million designated as held-to-maturity compared to $61.9 million as of December 31, 2019, an increase of $6.3 million, due mainly to the purchase of corporate securities. 36 Investment Maturities The following table summarizes the contractual maturity schedule of the Company’s investment securities at their amortized cost and their weighted average yields at December 31, 2020. 1 year or less More than 1 year to 5 years More than 5 years to 10 years More than 10 years Total (dollars in thousands) Amortized Cost Wtd. Avg. Yield Amortized Cost Wtd. Avg. Yield Amortized Cost Wtd. Avg. Yield Amortized Cost Wtd. Avg. Yield Amortized Cost Wtd. Avg. Yield Securities: U.S. Government-sponsored agencies $ — 0.00 % $ 1,804 2.49 % $ 40,532 0.30 % $ 19,429 1.13 % $ 61,765 0.62 % Municipal securities 1 — 0.00 % 4,638 2.17 % 15,096 2.53 % 77,594 2.56 % 97,328 2.54 % Agency mortgage-backed securities 1 — 0.00 % — 0.00 % 15,519 1.67 % 226,276 1.77 % 241,795 1.76 % Private-label mortgage-backed securities — 0.00 % — 0.00 % — 0.00 % 57,268 2.53 % 57,268 2.53 % Asset-backed securities — 0.00 % — 0.00 % 5,000 1.74 % — 0.00 % 5,000 1.74 % Corporate securities — 0.00 % 23,328 1.37 % 73,743 3.80 % 5,000 3.00 % 102,071 3.20 % Total securities $ — 0.00 % $ 29,770 1.57 % $ 149,890 2.43 % $ 385,567 2.02 % $ 565,227 2.11 % 1 Excludes the impact of interest rate swaps associated with fixed-rate securities. Accrued Income and Other Assets Accrued income and other assets were $64.3 million at December 31, 2020 compared to $67.1 million at December 31, 2019. As of these dates, the Company pledged $30.6 million and $42.3 million, respectively, of cash collateral to counterparties on interest rate swap agreements as security for its obligations related to these agreements. Collateral posted and received is dependent on the fair value of the underlying agreements as of the respective date. The decrease in cash collateral pledged was partially offset by an increase of $4.9 million in deferred tax assets. Deposits The following table presents the composition of the Company's deposit base as of the end of the last five years. December 31, (dollars in thousands) 2020 2019 2018 2017 2016 Noninterest-bearing deposits $ 96,753 3.0 % $ 57,115 1.8 % $ 43,301 1.6 % $ 44,686 2.1 % $ 31,166 2.1 % Interest-bearing demand deposits 188,645 5.8 % 129,020 4.1 % 121,055 4.5 % 94,674 4.5 % 93,074 6.4 % Savings accounts 43,200 1.3 % 29,616 0.9 % 38,489 1.4 % 49,939 2.4 % 27,955 1.9 % Money market accounts 1,350,566 41.3 % 786,390 24.9 % 528,533 19.9 % 499,501 24.0 % 340,240 23.3 % Certificates of deposits 1,289,319 39.4 % 1,613,453 51.2 % 1,292,883 48.4 % 1,319,488 63.3 % 964,819 65.9 % Brokered deposits 302,402 9.2 % 538,369 17.1 % 647,090 24.2 % 76,653 3.7 % 5,613 0.4 % Total $ 3,270,885 100.0 % $ 3,153,963 100.0 % $ 2,671,351 100.0 % $ 2,084,941 100.0 % $ 1,462,867 100.0 % Total deposits increased $116.9 million, or 3.7%, to $3.3 billion as of December 31, 2020 as compared to $3.2 billion as of December 31, 2019. During 2020, money market accounts increased $564.2 million, or 71.7%, interest-bearing deposits increased $59.6 million, or 46.2%, and noninterest-bearing demand deposits increased $39.6 million, or 69.4%. These increases were partially offset by declines of $324.1 million, or 20.1%, in certificates of deposits and $236.0 million, or 43.8%, in brokered deposits accounts. The Company experienced strong growth in money market balances due to targeted digital marketing efforts to grow small business accounts, as well as consumers, small businesses and commercial clients increasing their cash balances due in part to the economic uncertainty resulting from the COVID-19 pandemic. The declines in certificates of deposits and brokered deposits were due to the maturity of higher cost balances and reduced pricing strategies designed to limit the volume of new production. 37 The following tables present contractual interest rates paid on time deposits, their scheduled maturities, and the scheduled maturities for time deposits $100,000 or greater. Time Deposit Maturities at December 31, 2020 Period to Maturity Percentage of Total Certificate Accounts (dollars in thousands) Less than 1 year > 1 year to 2 years > 2 years to 3 years More than 3 years Total Interest Rate: <1.00% $ 181,493 $ 60,614 $ 6,991 $ 9,094 $ 258,192 19.5 % 1.00% – 1.99% $ 286,711 $ 65,821 $ 12,090 $ 21,308 $ 385,930 29.1 % 2.00% – 2.99% 377,936 106,768 43,964 27,343 556,011 41.9 % 3.00% – 3.99% 37,321 8,850 36,443 43,144 125,758 9.5 % Total $ 883,461 $ 242,053 $ 99,488 $ 100,889 $ 1,325,891 100.0 % Time Deposit Maturities of $100,000 or Greater (dollars in thousands) December 31, 2020 Maturity Period: 3 months or less $ 245,739 Over 3 through 6 months 214,052 Over 6 through 12 months 281,039 Over 12 months 350,566 Total $ 1,091,396 Federal Home Loan Bank Advances Although deposits are the primary source of funds for our lending and investment activities and for general business purposes, we may use short-term advances from the Federal Home Loan Bank of Indianapolis (the "FHLB") to manage liquidity needs and longer-term advances to supplement balance sheet growth and manage interest rate risk. During 2018, the Company converted $110.0 million of short-term FHLB advances to longer term fixed-rate structures using interest rate swaps to reduce long-term interest rate risk. Refer to Note 19 to the Company's consolidated financial statements for additional information about derivative financial instruments. The following table is a summary of FHLB borrowings for the periods indicated. At Or For The Twelve Months Ended December 31, (dollars in thousands) 2020 2019 2018 Balance outstanding at end of period $ 514,916 $ 514,910 $ 525,153 Average amount outstanding during period 514,913 511,093 433,211 Maximum outstanding at any month end during period 514,916 525,000 525,153 Weighted average interest rate at end of period 1 1.30 % 1.98 % 2.15 % Weighted average interest rate during period 1 1.78 % 2.15 % 1.88 % 1 Excludes the impact of interest rate swaps. Accrued Expenses and Other Liabilities Accrued expenses and other liabilities were $48.4 million at December 31, 2020 compared to $53.0 million at December 31, 2019. The decrease of $4.6 million, or 8.7%, was due primarily to an $8.0 million increase in the fair value of interest rate swap agreements. Liquidity and 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 38 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 management is the process used by the Company to manage the continuing flow of funds necessary to meet its financial commitments on a timely basis and at a reasonable cost while also maintaining safe and sound operations. Liquidity, represented by cash and investment securities, is a product of the Company’s operating, investing and financing activities. The primary sources of funds are deposits, principal and interest payments on loans and investment securities, maturing loans and investment securities, access to wholesale funding sources and collateralized borrowings. While scheduled payments and maturities of loans and investment securities are relatively predictable sources of funds, deposit flows are greatly influenced by interest rates, general economic conditions and competition. Therefore, the Company supplements deposit growth and enhances interest rate risk management through borrowings and wholesale funding, which are generally advances from the FHLB and brokered deposits. Additionally, the Company has enhanced its liquidity management process through increased loan sale activity. During 2020, the Company sold $188.6 million of public finance, single tenant lease financing and SBA 7(a) guaranteed loans at premiums to book value, as well as a $90.8 million pool of residential mortgage loans. During 2019, the Company sold $237.5 million of portfolio residential mortgage, single tenant lease financing and public finance loans. These loan sales have provided liquidity to manage overall loan portfolio growth and capital utilization. The Company holds cash and investment securities that qualify as liquid assets to maintain adequate liquidity to ensure safe and sound operations and meet its financial commitments. We modestly reduced the size of our balance sheet during the fourth quarter 2020 through continued deposit repricing as loan demand was lower than earlier in the year. A component of this balance sheet management strategy included reducing our cash balances from the levels at September 30, 2020. However, given the uncertainty regarding the duration and ultimate economic effect of COVID-19, we believe it will be prudent to maintain higher levels of cash on the balance sheet than we have historically maintained until the crisis passes. We believe we have sufficient on-balance sheet liquidity, supplemented by access to additional funding sources, to manage the potential economic impact of COVID-19. At December 31, 2020, on a consolidated basis, the Company had $917.4 million in cash and cash equivalents and investment securities available-for-sale, and $39.6 million in loans held-for-sale that were generally available for its cash needs. The Company can also generate funds from wholesale funding sources and collateralized borrowings. At December 31, 2020, the Bank had the ability to borrow an additional $492.3 million in advances from the FHLB and correspondent bank Fed Funds lines of credit. The Company is a separate legal entity from the Bank and must provide for its own liquidity. In addition to its operating expenses, the Company is responsible for paying any dividends declared to its common shareholders and interest and principal on outstanding debt. The Company’s primary sources of funds are cash maintained at the holding company level and dividends from the Bank, the payment of which is subject to regulatory limits. At December 31, 2020, the Company, on an unconsolidated basis, had $40.5 million in cash generally available for its cash needs, which is in excess of its current annual regular shareholder dividend and operating expenses. The Company uses its sources of funds primarily to meet ongoing financial commitments, including withdrawals by depositors, credit commitments to borrowers, operating expenses and capital expenditures. At December 31, 2020, approved outstanding loan commitments, including unused lines of credit, amounted to $263.9 million. Certificates of deposit scheduled to mature in one year or less at December 31, 2020 totaled $883.5 million. On December 18, 2018 the Company's Board of Directors approved a stock repurchase program authorizing the repurchase of up to $10.0 million of the Company's outstanding common stock from time to time on the open market or in privately negotiated transactions. The stock repurchase program was scheduled to expire on December 31, 2019. Under this program, the Company repurchased 482,970 shares of common stock through September 30, 2019, at an average price of $20.70, for a total repurchase amount of $10.0 million, thus repurchasing the maximum amount of stock authorized by the Company's Board of Directors under this program. In March 2013, the Company borrowed $4.0 million from the Bank for the purchase of the Company’s principal executive offices. The loan was originally scheduled to mature in March 2014 and had been extended annually through March 2020. In February 2020, the Company entered into an amendment that, among other things, extended its maturity to April 1, 2022. The principal balance of the loan was $3.0 million as of December 31, 2019 and its payment terms are interest only through April 1, 2022. The amounts borrowed under the loan bear interest at a variable rate equal to the then applicable prime rate (as determined by the Bank with reference to the “Prime Rate” published in The Wall Street Journal) plus 1.00% per annum. 39 Reconciliation of Non-GAAP Financial Measures This annual report on Form 10-K contains financial information determined by methods other than in accordance with U.S. generally accepted accounting principles (“GAAP”). Non-GAAP financial measures, specifically tangible common equity, tangible assets, tangible book value per common share, the ratio of tangible common equity to tangible assets, average tangible common equity, return on average tangible common equity, net interest income - FTE, net interest margin - FTE, adjusted income before income taxes, adjusted income tax provision, adjusted net income, adjusted diluted earnings per share, adjusted return on average assets, adjusted return on average shareholders' equity, adjusted return on average tangible common equity and adjusted effective income tax rate are used by management to measure the strength of the Company's capital and analyze profitability, including its ability to generate earnings on tangible capital invested by its shareholders. Management also believes that it is a standard practice in the banking industry to present net interest margin and net income on a fully-taxable equivalent basis as those measures provide useful information for peer comparisons. Although the Company believes these non-GAAP 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 performance 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. (dollars in thousands, except share and per share data) At Or For The Twelve Months Ended December 31, 2020 2019 2018 2017 2016 Total equity - GAAP $ 330,944 $ 304,913 $ 288,735 $ 224,127 $ 153,942 Adjustments: Goodwill (4,687) (4,687) (4,687) (4,687) (4,687) Tangible common equity $ 326,257 $ 300,226 $ 284,048 $ 219,440 $ 149,255 Total assets - GAAP $ 4,246,156 $ 4,100,083 $ 3,541,692 $ 2,767,687 $ 1,854,335 Adjustments: Goodwill (4,687) (4,687) (4,687) (4,687) (4,687) Tangible assets $ 4,241,469 $ 4,095,396 $ 3,537,005 $ 2,763,000 $ 1,849,648 Total common shares outstanding 9,800,569 9,741,800 10,170,778 8,411,077 6,478,050 Book value per common share $ 33.77 $ 31.30 $ 28.39 $ 26.65 $ 23.76 Effect of goodwill (0.48) (0.48) (0.46) (0.56) (0.72) Tangible book value per common share $ 33.29 $ 30.82 $ 27.93 $ 26.09 $ 23.04 Total shareholders’ equity to assets ratio 7.79 % 7.44 % 8.15 % 8.10 % 8.30 % Effect of goodwill (0.10) % (0.11) % (0.12) % (0.16) % (0.23) % Tangible common equity to tangible assets ratio 7.69 % 7.33 % 8.03 % 7.94 % 8.07 % Total average equity - GAAP $ 313,763 $ 296,382 $ 259,416 $ 178,212 $ 124,023 Adjustments: Average goodwill (4,687) (4,687) (4,687) (4,687) (4,687) Average tangible common equity $ 309,076 $ 291,695 $ 254,729 $ 173,525 $ 119,336 Return on average shareholders' equity 9.39 % 8.52 % 8.44 % 8.54 % 9.74 % Effect of goodwill 0.14 % 0.13 % 0.16 % 0.23 % 0.38 % Return on average tangible common equity 9.53 % 8.65 % 8.60 % 8.77 % 10.12 % Net interest income $ 64,541 $ 62,967 $ 62,267 $ 53,982 $ 39,689 Adjustments: Fully-taxable equivalent adjustments 1 5,796 6,334 5,010 4,053 1,090 Net interest income - FTE $ 70,337 $ 69,301 $ 67,277 $ 58,035 $ 40,779 Net interest margin 1.55 % 1.65 % 2.09 % 2.39 % 2.49 % Effect of fully-taxable equivalent adjustments 1 0.13 % 0.17 % 0.16 % 0.18 % 0.06 % Net interest margin - FTE 1.68 % 1.82 % 2.25 % 2.57 % 2.55 % 1 Assuming a 21% tax rate in 2020, 2019 and 2018 and a 35% tax rate in 2017 and 2016 40 Critical Accounting Policies and Estimates Allowance for Loan Losses. We believe the allowance for loan losses is the critical accounting policy that requires the most significant judgments and assumptions used in the preparation of our consolidated financial statements. An estimate of potential losses inherent in the loan portfolio is determined and an allowance for those losses is established by considering factors including historical loss rates, expected cash flows, estimated collateral values, and other qualitative factors. The allowance for loan losses represents management’s best estimate of losses inherent in the existing loan portfolio. The allowance for loan losses is increased by the provision for loan losses charged to expense and reduced by loans charged off, net of recoveries. Management evaluates the allowance for loan losses quarterly. If the underlying assumptions later prove to be inaccurate based on subsequent loss evaluations, the allowance for loan losses is adjusted. Management estimates the appropriate level of allowance for loan losses by separately evaluating impaired and non-impaired loans. A specific allowance is assigned to an impaired loan when expected cash flows or collateral do not justify the carrying amount of the loan. The methodology used to assign an allowance to a non-impaired loan is more subjective. Generally, the allowance assigned to non-impaired loans is determined by applying historical loss rates to existing loans with similar risk characteristics, adjusted for qualitative factors including changes in economic and business conditions, unemployment rates, concentrations of credit, changes in the nature and volume of the portfolio, terms of loans, risk grades, trends in charge-offs and recoveries, trends in delinquencies, nonaccrual loans, and impaired loans, and changes in lending policies and procedures. Because the economic and business climate in any given industry or market, and its impact on any given borrower, can change rapidly, the risk profile of the loan portfolio is periodically assessed and adjusted when appropriate. Notwithstanding these procedures, there still exists the possibility that the assessment could prove to be significantly incorrect and that an immediate adjustment to the allowance for loan losses would be required. Investments in Debt and Equity Securities. We classify investments in debt and equity securities as available-for-sale in accordance with Accounting Standards Codification, or ASC, Topic 320, “Accounting for Certain Investments in Debt and Equity Securities.” Securities classified as held-to-maturity would be recorded at cost or amortized cost. Available-for-sale securities are carried at fair value. Fair value calculations are based on quoted market prices when such prices are available. If quoted market prices are not available, estimates of fair value are computed using a variety of pricing sources, including Reuters/EJV, Interactive Data and Standard & Poors. Due to the subjective nature of the valuation process, it is possible that the actual fair values of these investments could differ from the estimated amounts, thereby affecting our financial position, results of operations and cash flows. If the estimated value of investments is less than the cost or amortized cost, management evaluates whether an event or change in circumstances has occurred that may have a significant adverse effect on the fair value of the investment. If such an event or change has occurred and management determines that the impairment is other-than-temporary, a further determination is made as to the portion of impairment that is related to credit loss. The impairment of the investment that is related to the credit loss is expensed in the period in which the event or change occurred. The remainder of the impairment is recorded in other comprehensive income (loss). Other Real Estate Owned (“OREO”). OREO acquired through loan foreclosure is initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. The adjustment at the time of foreclosure is recorded through the allowance for loan losses. Due to the subjective nature of establishing the fair value when the asset is acquired, the actual fair value of the OREO or foreclosed asset could differ from the original estimate. If it is determined that fair value declines subsequent to foreclosure, a valuation adjustment is recorded through noninterest expense. Net operating costs associated with the assets after acquisition are also recorded as noninterest expense. Gains and losses on the disposition of OREO and foreclosed assets are netted and posted through noninterest income. Impairment of Goodwill. As a result of a previous acquisition by the Company, goodwill, an intangible asset with an indefinite life, is reflected on the balance sheet. Goodwill is evaluated for impairment annually, unless there are factors present that indicate a potential impairment, in which case, the goodwill impairment test is performed more frequently. Deferred Income Tax Assets/Liabilities. Our net deferred income tax asset arises from differences in the dates that items of income and expense enter into our reported income and taxable income. Deferred tax assets and liabilities are established for these items as they arise. From an accounting standpoint, deferred tax assets are reviewed to determine if they are realizable based on the historical level of taxable income, estimates of future taxable income and the reversals of deferred tax liabilities. In most cases, the realization of the deferred tax asset is based on future profitability. If we were to experience net operating losses for tax purposes in a future period, the realization of deferred tax assets would be evaluated for a potential valuation reserve. 41 Recent Accounting Pronouncements Refer to Note 24 to the Company’s consolidated financial statements. Off-Balance Sheet Arrangements In the ordinary course of business, the Company enters into financial transactions to extend credit, interest rate swaps and forms of commitments that may be considered off-balance sheet arrangements. Interest rate swaps are arranged to receive hedge accounting treatment and are classified as either fair value or cash flow hedges. Fair value hedges are purchased to convert certain fixed rate assets to floating rate. Cash flow hedges are used to convert certain variable rate liabilities into fixed rate liabilities. In June 2020, the Company terminated all fair value hedging instruments associated with loans. At December 31, 2020 and December 31, 2019, the Company had interest rate swaps with notional amounts of $298.2 million and $725.6 million, respectively. Additionally, we enter into forward contracts relating to our mortgage banking business to hedge the exposures we have from commitments to extend new residential mortgage loans to our customers and from our mortgage loans held-for-sale. At December 31, 2020 and December 31, 2019, we had commitments to sell residential real estate loans of $107.5 million and $115.0 million, respectively. These contracts mature in less than one year. Refer to Note 19 to the Company's consolidated financial statements for additional information about derivative financial instruments. Contractual Obligations The following table presents significant fixed and determinable contractual obligations and significant commitments as of December 31, 2020. Further discussion of each obligation or commitment is included in the referenced note to the consolidated financial statements. Payments Due In (dollars in thousands) Note Reference Less than 1 year 1-3 years 3-5 years More than 5 years Total Deposits and brokered deposits without stated maturity 1 9 $ 1,828,960 $ — $ — $ — $ 1,828,960 Certificates of deposits and brokered certificates of deposits 1 9 919,189 401,847 120,639 250 1,441,925 FHLB advances 1,2 10 110,000 35,000 235,020 134,896 514,916 Subordinated debt 1 11 — — — 82,000 82,000 Operating lease commitments 6 423 354 — — 777 Total contractual obligations $ 2,858,572 $ 437,201 $ 355,659 $ 217,146 $ 3,868,578 1 Amounts do not include associated interest payments. 2 Amounts do not include the effect of interest rate swaps used to convert short-term advances into long-term funding. 42