What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-05-10 compared with 2020-11-05 · 191 added, 414 removed, 401 unchanged (60% of the section changed)

11 unchanged sentences

provides a range of public and municipal finance lending and leasing products to governmental entities throughout the United States and acquires securities issued by state and local governments and other municipalities;

JKH Realty Services, LLC, manages other real estate owned (“OREO”) properties as needed.

is a real estate holding company.

JKH Realty Services, LLC, which manages other real estate owned (“OREO”) properties as needed;

and SPF15, 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 online channels on a nationwide basis and have no traditional branch offices.

Our residential mortgage products are offered nationwide primarily through an online direct-to-consumer platform and are supplemented with Central Indiana-based mortgage and construction lending.

Our consumer lending products are primarily originated on a nationwide basis over the Internet, as well as through relationships with dealerships and financing partners.

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 with Central 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 and commercial deposits and treasury management.

Through our CRE team, we offer single tenant lease financing on a nationwide basis in addition to traditional investor CRE and construction loans primarily within Central Indiana and adjacent markets.

To meet the needs of commercial borrowers located primarily in Central Indiana, Phoenix, Arizona and adjacent markets, our C&I banking team provides credit solutions such as lines of credit, term loans, owner-occupied CRE loans and corporate credit cards.

Our 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 in Central Indiana, Phoenix, Arizona and adjacent markets.

Our public finance team provides a range of public and municipal lending and leasing products to government entities on a nationwide basis.

Our healthcare finance team was established in conjunction with our strategic partnership with Lendeavor, Inc., a San Francisco-based technology-enabled lender to healthcare practices, and provides lending for healthcare practice finance or acquisition, acquisition or refinancing of owner-occupied CRE and equipment purchases.

This portfolio segment is generally concentrated in the Western and Southwestern regions of the United States with plans to continue expanding nationwide.

Our healthcare finance team was established in conjunction with our strategic partnership with Provide, Inc.

(formerly known as Lendeavor, Inc.), a San Francisco-based technology-enabled lender to healthcare practices, and provides lending on a nationwide basis for healthcare practice finance or acquisition, acquisition or refinancing of owner-occupied CRE and equipment purchases.

Our commercial deposits and treasury management team works with the other commercial teams to provide deposit products and treasury management services to our commercial and municipal lending customers as well as pursues commercial deposit opportunities in business segments where we have no credit relationships.

In 2018, we identified small business as an area for potential growth in loans, revenue and deposits.

We believe that we can differentiate ourselves from larger financial institutions through providing a full suite of services to emerging small businesses and entrepreneurs.

We have been focused on adding experienced personnel to build out our capabilities in small business lending and U.S.

government guaranteed lending programs, including loans originated under the Small Business Administration (“SBA”) guidelines.

To accelerate our efforts in this area, on November 1, 2019 we acquired a loan portfolio, a servicing portfolio and a team of experienced SBA professionals from First Colorado National Bank.

During 2020, we have continued to hire additional small business sales, credit and operations personnel and plan to continue our efforts in onboarding talent as we build out our nationwide small business platform.

In 2018, we identified small business as an area for potential growth in revenue, loans and deposits.

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 and U.S.

government guaranteed lending programs.

As this business scales up, we expect it will drive increased earnings and profitability in future periods.

COVID-19 Pandemic

The third quarter 2020 was characterized by continued uncertainty as the coronavirus pandemic (“COVID-19”) persisted globally, resulting in high unemployment and market volatility.

However, Federal, state and local governments have taken steps to reopen and stimulate economies, evidenced by improving economic indicators as the quarter progressed.

While the effects of COVID-19 did have an impact on our operating results as of September 30, 2020, we believe the impact was consistent with the effects of COVID-19 on the overall banking industry.

The low interest rate environment following Federal Reserve rate cuts in the first quarter 2020 had a negative impact on our variable rate assets in the second and third quarters of 2020.

However, the low interest rate environment has also allowed us to reprice our interest-bearing deposits at lower rates, which provided a benefit to net interest income in the third quarter 2020.

The benefit from lower deposit pricing is expected to continue in the fourth quarter 2020 and into 2021.

Additionally, the low interest rate environment has driven residential mortgage rates to historically low levels, which has resulted in increased mortgage originations and has benefited our residential mortgage business.

At this time, the ultimate impact of COVID-19 on our business continues to remain uncertain as we cannot predict the duration of the pandemic or when the economies in which we operate will return to conditions existing prior to COVID-19.

As a result of continued measures to either contain or reduce the impact of COVID-19, or an increase in the number of reported cases or mortality rates, we may experience issues that negatively impact our business, such as a decline in the liquidity of our borrowers or volatility in interest rates.

Throughout the COVID-19 pandemic, our top priority has been the health of our team and clients.

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.

Most of our employees who worked remotely during the earlier stages of the pandemic have returned to the office.

We have implemented social distancing policies, require our employees to wear masks while at work and increased cleaning frequency and protocols at all Company locations.

Management will continue to assess the evolving health and safety situations at local and regional levels.

Management continues to assess the evolving health and safety situations at local and regional levels.

Our plans remain flexible to adapt as these situations evolve.

As a digitally-focused institution without branch locations, we were able to continue serving clients when they needed us most, while minimizing operational disruptions caused by COVID-19.

Beginning in the first quarter 2020, we offered loan payment deferral programs for clients affected by COVID-19.

Loan balances on payment deferral programs peaked in late May 2020 but as of October 30, 2020, less than 1% of loan balances were in deferral status and all borrowers coming off deferrals have resumed normal payment schedules.

Despite the challenging environment, we have continued to prudently extend credit to both commercial and consumer clients.

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 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.

In 2021, federal, state and local governments have continued to take additional steps to reopen and stimulate economies.

We are optimistic that the nationwide rollout of vaccinations coupled with elevated government spending will help mitigate any significant negative effects from the pandemic on our business and credit quality.

However, should economic conditions worsen to levels experienced in 2020, our business and credit quality could be adversely affected.

Results of Operations

The following table presents a summary of the Company’s financial performance for the last five completed fiscal quarters and the nine months ended September 30, 2020 and 2019.

(dollars in thousands except for per share data) Three Months Ended Nine Months Ended

September 30,

2020 June 30,

2020 March 31,

2020 December 31,

2019 September 30,

2020 September 30,

Income Statement Summary:

Net interest income $ 16,232 $ 14.426 $ 15,018 $ 15,374 $ 15,244 $ 45,676 $ 47,593

Provision for loan losses 2,509 2,491 1,461 468 2,824 6,461 5,498

Noninterest income 12,495 4,973 6,211 5,405 5,558 23,679 11,384

Noninterest expense 16,412 13,244 13,486 12,613 11,203 43,142 34,021

Income tax provision (benefit) 1,395 (268) 263 602 449 1,390 1,315

Net income $ 8,411 $ 3,932 $ 6,019 $ 7,096 $ 6,326 $ 18,362 $ 18,143

Per Share Data:

Earnings per share - basic $ 0.86 $ 0.40 $ 0.62 $ 0.72 $ 0.63 $ 1.87 $ 1.79

Earnings per share - diluted $ 0.86 $ 0.40 $ 0.62 $ 0.72 $ 0.63 $ 1.87 $ 1.79

Dividends declared per share $ 0.06 $ 0.06 $ 0.06 $ 0.06 $ 0.06 $ 0.18 $ 0.18

Book value per common share $ 32.46 $ 31.40 $ 31.13 $ 31.30 $ 30.30 $ 32.46 $ 30.30

Tangible book value per common share 1

$ 31.98 $ 30.92 $ 30.65 $ 30.82 $ 29.82 $ 31.98 $ 29.82

Common shares outstanding 9,800,569 9,799,047 9,801,825 9,741,800 9,741,800 9,800,569 9,741,800

Average common shares outstanding:

Basic 9,773,175 9,768,227 9,721,485 9,825,784 9,979,603 9,825,683 10,114,303

Diluted 9,773,224 9,768,227 9,750,528 9,843,829 9,980,612 9,827,182 10,116,507

Dividend payout ratio 2

6.98 % 15.00 % 9.68 % 8.33 % 9.52 % 9.63 % 10.06 %

Performance Ratios:

Return on average assets 0.78 % 0.37 % 0.59 % 0.69 % 0.63 % 0.58 % 0.64 %

Return on average shareholders’ equity 10.67 % 5.15 % 7.78 % 9.46 % 8.40 % 7.90 % 8.20 %

Return on average tangible common equity 1

10.83 % 5.23 % 7.90 % 9.61 % 8.53 % 8.02 % 8.33 %

Net interest margin 1.53 % 1.37 % 1.50 % 1.51 % 1.54 % 1.47 % 1.70 %

Net interest margin - FTE 1,3

1.67 % 1.50 % 1.65 % 1.67 % 1.70 % 1.61 % 1.87 %

Noninterest expense to average assets 1.52 % 1.22 % 1.32 % 1.22 % 1.11 % 1.36 % 1.19 %

Capital Ratios:

Total shareholders’ equity to assets 7.34 % 7.12 % 7.32 % 7.44 % 7.21 % 7.34 % 7.21 %

Tangible common equity to tangible assets ratio 1

7.24 % 7.01 % 7.22 % 7.33 % 7.10 % 7.24 % 7.10 %

Tier 1 leverage ratio 7.72 % 7.49 % 7.82 % 7.64 % 7.66 % 7.72 % 7.66 %

Common equity tier 1 capital ratio 11.13 % 10.94 % 10.76 % 10.84 % 10.93 % 11.13 % 10.93 %

Tier 1 capital ratio 11.13 % 10.94 % 10.76 % 10.84 % 10.93 % 11.13 % 10.93 %

Total risk-based capital ratio 14.38 % 14.13 % 13.87 % 13.99 % 14.17 % 14.38 % 14.17 %

1 This information represents a non-GAAP financial measure.

See “Reconciliation of Non-GAAP Financial Measures” for a reconciliation of this measure to its most directly comparable GAAP measure.

2 Dividends per share divided by diluted earnings per share.

3 On a fully-taxable equivalent (“FTE”) basis assuming a 21% tax rate.

Net interest income is adjusted to reflect income from assets such as municipal loans and securities that are exempt from Federal income taxes.

This is to recognize the income tax savings that facilitates a comparison between taxable and tax-exempt assets.

The Company believes that it is a standard practice in the banking industry to present net interest margin and net interest income on a fully-taxable equivalent basis, as these measures provide useful information to make peer comparisons.

During the third quarter 2020, net income was $8.4 million, or $0.86 per diluted share, compared to the third quarter 2019 net income of $6.3 million, or $0.63 per diluted share, representing an increase in net income of $2.1 million, or 33.0%.

During the nine months ended September 30, 2020, net income was $18.4 million, or $1.87 per diluted share, compared to the nine months ended September 30, 2019 net income of $18.1 million, or $1.79 per diluted share, representing an increase in net income of $0.2 million, or 1.2%.

The $2.1 million increase in net income in the third quarter 2020 compared to the third quarter 2019 was due primarily to an increase of $6.9 million, or 124.8%, in noninterest income, an increase of $1.0 million, or 6.5%, in net interest income and a $0.3 million, or 11.2%, decrease in provision for loan losses, partially offset by a $5.2 million, or 46.5%, increase in noninterest expense and an increase of $0.9 million, or 210.7%, in income tax expense.

The $0.2 million increase in net income in the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 was due primarily to a $12.3 million, or 108.0%, increase in noninterest income, partially offset by a $9.1 million, or 26.8%, increase in noninterest expense, a $1.9 million, or 4.0%, decrease in net interest income, a $1.0 million, or 17.5%, increase in provision for loan losses and a $0.1 million, or 5.7%, increase in income tax expense.

During the third quarter 2020, return on average assets (“ROAA”) and return on average shareholders’ equity (“ROAE”) were 0.78% and 10.67%, respectively, compared to 0.63% and 8.40%, respectively, for the third quarter 2019.

During the nine months ended September 30, 2020, ROAA and ROAE were 0.58% and 7.90%, respectively, compared to 0.64% and 8.20%, respectively, for the nine months ended September 30, 2019.

The increase in ROAA for the three months ended September 30, 2020 compared to the three months ended September 30, 2019 was due primarily to the increase in net income.

The decrease in ROAA for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 was due primarily to the Company’s growth in average assets.

The increase in ROAE during the three months ended September 30, 2020 compared to the three months ended September 30, 2019 was due mainly to the increase in net income.

The decrease in ROAE during the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 was due to the Company’s growth in average equity.

During the first quarter 2021, net income was $10.5 million, or $1.05 per diluted share, compared to the first quarter 2020 net income of $6.0 million, or $0.62 per diluted share, representing an increase in net income of $4.4 million, or 73.6%.

The $4.4 million increase in net income in the first quarter 2021 compared to the first quarter 2020 was due primarily to an increase of $5.5 million, or 36.7%, in net interest income, an increase of $2.2 million, or 34.8%, in noninterest income and a $0.2 million, or 12.7%, decrease in provision for loan losses, partially offset by a $1.8 million, or 13.6%, increase in noninterest expense and an increase of $1.6 million, or 606.1%, in income tax expense.

During the first quarter 2021, return on average assets and return on average shareholders’ equity were 1.02% and 12.61%, respectively, compared to 0.59% and 7.78%, respectively, for the first quarter 2020.

Additionally, for the three months ended March 31, 2021, return on average tangible common equity was 12.79% compared to 7.90% for the three months ended March 31, 2020.

These profitability ratios improved during 2021 as net income growth of 73.6% outpaced total average balance sheet growth of 1.8%, as well as average shareholders’ equity growth of 8.0% and average tangible common equity growth of 8.1%.

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.

Consolidated Average Balance Sheets and Net Interest Income Analyses

4 unchanged sentences

(dollars in thousands) Three Months Ended

September 30, 2020 June 30, 2020 September 30, 2019

March 31, 2021 December 31, 2020 March 31, 2020

Average Balance Interest /Dividends Yield /Cost Average Balance Interest /Dividends Yield /Cost Average Balance Interest /Dividends Yield /Cost

37 unchanged sentences

See “Reconciliation of Non-GAAP Financial Measures” for a reconciliation of this measure to its most directly comparable GAAP measure.

(dollars in thousands) Nine Months Ended

September 30, 2020 September 30, 2019

Average Balance Interest /Dividends Yield /Cost Average Balance Interest /Dividends Yield /Cost

Interest-earning assets

Loans, including loans held-for-sale $ 2,999,711 $ 89,698 3.99 % $ 2,864,802 $ 90,654 4.23 %

Securities - taxable 543,699 9,135 2.24 % 450,898 10,322 3.06 %

Securities - non-taxable 96,960 1,410 1.94 % 97,042 1,991 2.74 %

Other earning assets 520,875 2,973 0.76 % 322,544 6,560 2.72 %

Total interest-earning assets 4,161,245 103,216 3.31 % 3,735,286 109,537 3.92 %

Allowance for loan losses (23,605) (19,191)

Noninterest-earning assets 108,561 101,313

Total assets $ 4,246,201 $ 3,817,408

Interest-bearing liabilities

Interest-bearing demand deposits $ 138,288 $ 684 0.66 % $ 117,811 $ 659 0.75 %

Regular savings accounts 37,700 249 0.88 % 36,241 304 1.12 %

Money market accounts 1,084,411 9,726 1.20 % 598,410 9,009 2.01 %

Certificates and brokered deposits 1,952,973 34,740 2.38 % 2,128,239 40,924 2.57 %

Total interest-bearing deposits 3,213,372 45,399 1.89 % 2,880,701 50,896 2.36 %

Other borrowed funds 584,547 12,141 2.77 % 558,141 11,048 2.65 %

Total interest-bearing liabilities 3,797,919 57,540 2.02 % 3,438,842 61,944 2.41 %

Noninterest-bearing deposits 70,060 43,035

Other noninterest-bearing liabilities 67,716 39,568

Total liabilities 3,936,695 3,521,455

Shareholders’ equity 310,506 295,963

Total liabilities and shareholders’ equity $ 4,246,201 $ 3,817,408

Net interest income $ 45,676 $ 47,593

Interest rate spread 1

1.29 % 1.51 %

Net interest margin 2

1.47 % 1.70 %

Net interest margin - FTE 3

1.61 % 1.87 %

1 Yield on total interest-earning assets minus cost of total interest-bearing liabilities.

2 Net interest income divided by total average interest-earning assets (annualized).

3 On an FTE basis assuming a 21% tax rate.

Net interest income is adjusted to reflect income from assets such as municipal loans and securities that are exempt from Federal income taxes.

This is to recognize the income tax savings that facilitates a comparison between taxable and tax-exempt assets.

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.

Rate/Volume Analysis

1 unchanged sentence

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.

(dollars in thousands) Three Months Ended September 30, 2020 vs.

June 30, 2020 Due to Changes in Three Months Ended September 30, 2020 vs.

September 30, 2019 Due to Changes in Nine Months Ended September 30, 2020 vs.

September 30, 2019 Due to Changes in

Volume Rate Net Volume Rate Net Volume Rate Net

(dollars in thousands) Three Months Ended March 31, 2021 vs.

December 31, 2020 Due to Changes in Three Months Ended March 31, 2021 vs.

March 31, 2020 Due to Changes in

Volume Rate Net Volume Rate Net

Interest income

8 unchanged sentences

Total (773) (1,250) (2,023) 1,006 (9,477) (8,471)

Increase (decrease) in net interest income $ 1,724 $ 82 $ 1,806 $ 3,552 $ (2,564) $ 988 $ 4,186 $ (5,510) $ (1,324)

Net interest income for the third quarter 2020 was $16.2 million, an increase of $1.0 million, or 6.5%, compared to $15.2 million for the third quarter 2019.

The increase in net interest income was primarily the result of a $5.9 million, or 26.4%, decrease in total interest expense to $16.5 million for the third quarter 2020 from $22.5 million for the third quarter 2019.

The decrease in total interest expense was partially offset by a $4.9 million, or 13.1%, decrease in total interest income to $32.8 million for the third quarter 2020 from $37.7 million for the third quarter 2019.

Net interest income for the nine months ended September 30, 2020 was $45.7 million, a decrease of $1.9 million, or 4.0%, compared to $47.6 million for the nine months ended September 30, 2019.

The decrease in net interest income was the result of a decrease in total interest income of $6.3 million, or 5.8%, from $109.5 million for the nine months ended September 30, 2019 to $103.2 million for the nine months ended September 30, 2020.

This decrease was partially offset by a $4.4 million, or 7.1%, decrease in total interest expense to $57.5 million for the nine months ended September 30, 2020 from $61.9 million the nine months ended September 30, 2019.

The decrease in total interest income for the third quarter 2020 compared to the third quarter 2019 was due to decreases in interest earned on loans, including loans held-for-sale, other earning assets and securities.

Interest income earned on other earning assets declined $2.4 million, or 81.0%, due mainly to a 212 basis point (“bp”) decline in the yield earned on these assets, partially offset by an increase of $82.6 million, or 17.6%, in the average balance of other earning assets.

The increase in other earning assets was due to higher cash balances driven by growth in the average balance of deposits.

Additionally, interest income earned on securities decreased $1.5 million, or 36.2%, due to a decline of 118 bps in the yield earned on securities, partially offset by an increase of $71.8 million, or 12.8%, in the average balance of securities.

The increase in average securities balances was due to the deployment of liquidity driven by deposit growth.

Interest income earned on loans decreased $1.0 million, or 3.4%, due primarily to a decline of 30 bps in the yield earned on average loan balances, partially offset by an increase of $128.9 million, or 4.4%, in average loan balances.

The increase in average loan balances was due to growth in the healthcare finance portfolio and the small business lending portfolio, which included loans acquired from First Colorado National Bank, as well as loans originated through PPP.

The decrease in total interest income for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 was due to decreases in interest income earned on loans, including loans held-for-sale, other earning assets and securities.

Interest income earned on other earning assets decreased $3.6 million, or 54.7%, due to a decline of 196 bps in the yield earned on these assets, partially offset by an increase of $198.3 million, or 61.5%, in the average balance of other earning assets.

The increase in other earning assets was due to higher cash balances driven by growth in the average balance of deposits.

Interest income earned on securities decreased $1.8 million, or 14.4%, due to a decline of 81 bps in the yield earned on securities, partially offset by an increase of $92.7 million, or 16.9%, in the average balance of securities.

The increase in average securities balances was due to deployment of liquidity driven by deposit growth.

Interest income earned on

loans, including loans held-for-sale, decreased by $1.0 million as an increase of $134.9 million, or 4.7%, in the average balance of loans was partially offset by a decline of 24 bps in the yield earned on loans.

Overall, the yield on interest-earning assets for the third quarter 2020 declined 71 bps to 3.09% from 3.80% for the third quarter 2019.

Additionally, the yield on interest-earning assets for the nine months ended September 30, 2020 declined 61 bps to 3.31% from 3.92% for the nine months ended September 30, 2019.

The declines in the yields earned on interest-earning assets were due to the continued decrease in market interest rates from the year-ago periods.

Interest rates began declining during 2019 and have declined significantly in 2020 following Federal Reserve interest rate cuts in March 2020 in response to the economic effects of COVID-19.

The decline in interest rates negatively impacted the yields earned on variable rate loans, including fixed rate loans that have been effectively converted to variable rate loans through the use of interest rate swap agreements, and new loan originations as well as variable rate securities and cash balances, which were elevated throughout both the third quarter 2020 and the nine months ended September 30, 2020 due to growth in average deposit balances.

The decrease in total interest expense for the third quarter 2020 compared to the third quarter 2019 was due primarily to a decrease in interest expense related to certificates and brokered deposits and money market accounts.

(Decrease) increase in net interest income $ (1,001) $ 2,661 $ 1,660 $ 1,492 $ 4,015 $ 5,507

Net interest income for the first quarter 2021 was $20.5 million, an increase of $5.5 million, or 36.7%, compared to $15.0 million for the first quarter 2020.

The increase in net interest income was the result of an $8.5 million, or 39.9%, decrease in total interest expense to $12.8 million for the first quarter 2021 from $21.2 million for the first quarter 2020.

The decrease in total interest expense was partially offset by a $3.0 million, or 8.2%, decrease in total interest income to $33.3 million for the first quarter 2021 from $36.2 million for the first quarter 2020.

The decrease in total interest income for the first quarter 2021 compared to the first quarter 2020 was due to decreases in interest earned on securities and other earning assets, but partially offset by an increase in interest earned on loans.

Interest income earned on securities decreased $2.1 million, or 50.9%, due to a decline of 115 basis points (“bps”) in the yield earned on securities, as well as a decrease of $82.5 million, or 13.1%, in the average balance of securities.

The decrease in the average balance of securities was driven primarily by prepayments and maturities in private label mortgage-backed securities and agency mortgage-backed securities and early redemptions and maturities in municipal securities, as well as a decrease in purchases of securities.

Interest income earned on other earning assets declined $1.3 million, or 79.6%, due mainly to a 129 bp decline in the yield earned on these assets, partially offset by an increase of $30.1 million, or 7.2%, in the average balance of other earning assets.

The increase in the average balance of other earning assets was due primarily to higher cash balances driven by growth in the average balance of deposits.

Interest income earned on loans increased $0.5 million, or 1.6%, due primarily to an increase of $101.1 million, or 3.4%, in average loan balances, partially offset by a decline of 4 bps in the yield earned on average loan balances.

The increase in average loan balances was due primarily to growth in the healthcare finance, construction and small business lending portfolios, which included loans originated through the Paycheck Protection Program (“PPP”), but partially offset by a decrease in the average balance of single tenant lease financing, public finance and commercial, and industrial loan balances.

Overall, the yield on interest-earning assets for the first quarter 2021 declined 31 bps to 3.31% from 3.62% for the first quarter 2020.

The decline in the yield earned on interest-earning assets was due to the continued decrease in market interest rates from the year-ago period.

Interest rates began declining in 2020 following Federal Reserve interest rate cuts in March 2020 in response to the economic effects of COVID-19.

The decline in interest rates negatively impacted the yields earned on variable rate loans, new loan originations, and securities and cash balances throughout the first quarter 2021.

The decrease in total interest expense for the first quarter 2021 compared to the first quarter 2020 was due primarily to a decrease in interest expense related to certificates and brokered deposits and money market accounts.

Interest expense on certificates and brokered deposits decreased $6.1 million, or 46.4%, due to a decline of 67 bps in the cost of these deposits as well as a $549.6 million, or 26.6%, 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 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 $2.4 million, or 62.8%, was driven by a decline of 133 bps in the cost of these deposits, partially offset by an increase of $503.0 million, or 58.0%, in the average balance of these deposits.

Money market balances have increased throughout 2020 due to targeted digital marketing efforts to grow small business accounts, as well as consumers, small businesses and commercial clients increasing their cash balances due in part to the economic uncertainty resulting from COVID-19.

The decrease in total interest expense for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 was due to a decrease in interest expense related to certificates and brokered deposits, partially offset by increases in interest expense on money market accounts and other borrowed funds.

The decrease in expense related to certificates and brokered deposits of $6.2 million, or 15.1%, was due to a decline of 19 bps in the cost of these deposits as well as a $175.3 million, or 8.2%, decrease in the average balance of these deposits.

The decrease in certificates and brokered deposit balances was driven by the Company’s pricing strategy to reduce the level of these higher cost deposits.

Interest expense on money market accounts increased $0.7 million, or 8.0%, driven by an increase of $486.0 million, or 81.2%, in the average balance of these deposits, partially offset by a decline of 81 bps in the cost of these deposits.

Money market balances have increased throughout 2020 due to targeted digital marketing efforts to grow small business accounts as well as consumers, small businesses and commercial clients increasing their cash balances due in part to the economic uncertainty resulting from COVID-19.

The increase in expense related to other borrowed funds of $1.1 million, or 9.8%, was due primarily to the impact of the issuance of the 2029 Notes (subordinated debt) issued in June 2019 with an aggregate principal amount of $37.0 million and an initial fixed interest rate of 6.00%.

Overall, the cost of total interest-bearing liabilities for the third quarter 2020 declined 76 bps to 1.70% from 2.46% for the third quarter 2019.

Additionally, the cost of total interest-bearing liabilities for the nine months ended September 30, 2020 declined 39 bps to 2.02% from 2.41% for the nine months ended September 30, 2019.

Similar to asset yields, the declines in the cost of funds were due to the continued decrease in market interest rates from the year-ago periods.

Average money market balances increased from the year ago 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.

Overall, the cost of total interest-bearing liabilities for the first quarter 2021 declined 92 bps to 1.40% from 2.32% for the first quarter 2020.

Similar to asset yields, the declines in the cost of funds were due to the continued decrease in market interest rates from the year-ago period.

The sharp declines in both short- and long-term interest rates due to COVID-19 have allowed the Company to reprice all of its deposit products at lower rates.

Furthermore, a shift in the deposit composition from higher cost certificates and brokered deposits to lower cost money market accounts also contributed to the decline in the cost of deposit funding.

Net interest margin (“NIM”) was 1.53% for the third quarter 2020 compared to 1.54% for the third quarter 2019.

On a fully-taxable equivalent basis, NIM was 1.67% for the third quarter 2020 compared to 1.70% for the third quarter 2019.

NIM was 1.47% for the nine months ended September 30, 2020 compared to 1.70% for the nine months ended September 30, 2019.

On a fully-taxable equivalent basis, NIM was 1.61% for the nine months ended September 30, 2020 compared to 1.87% for the nine months ended September 30, 2019.

For the nine months ended September 30, 2020, the decrease in NIM reflects the greater decline in asset yields compared to the decline in the cost of funds during the applicable periods.

Following the Federal Reserve’s interest rate cuts in March 2020 in response to COVID-19, variable rate assets tied to market rates repriced faster than deposits.

However, as the pace of short-term market interest rate declines has slowed over the course of the year, the Company believes that yields on

interest-earning assets have largely stabilized.

Net interest margin (“NIM”) was 2.04% for the first quarter 2021 compared to 1.50% for the first quarter 2020.

On a fully-taxable equivalent basis, NIM was 2.18% for the first quarter 2021 compared to 1.65% for the first quarter 2020.

The increase in net interest margin was due primarily to the 92 bp decrease in the cost of interest-bearing liabilities, but was partially offset by the 31 bp decrease in the yield on interest-earning assets.

The decline in the cost of interest-bearing liabilities and yield earned on interest-earning assets was due primarily to the continued decrease in market interest rates from the year-ago period.

Interest rates 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 and into 2021, the Company believes that yields on interest-earning assets have largely stabilized.

Furthermore, the Company has approximately $807.0 million of certificates and brokered deposits with a weighted average cost of 1.58% that mature over the next twelve months.

As the weighted average cost of these deposits is significantly higher than current new production costs, the Company expects the cost of deposit funding to continue to decline.

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 last five completed fiscal quarters and the nine months ended September 30, 2020 and 2019.

(in thousands) Three Months Ended Nine Months Ended

The following table presents noninterest income for the last five completed fiscal quarters.

(in thousands) Three Months Ended

2021 December 31,

2020 September 30,

1 unchanged sentence

2020 March 31,

2020 December 31,

2019 September 30,

2020 September 30,

Service charges and fees $ 266 $ 206 $ 224 $ 182 $ 212

3 unchanged sentences

Gain on sale of loans 1,723 3,702 2,033 762 1,801

Gain (loss) on sale of securities 98 — 41 — — 139 (458)

Gain on sale of securities — — 98 — 41

Other 369 443 339 456 417

Total noninterest income $ 8,375 $ 12,657 $ 12,495 $ 4,973 $ 6,211

During the third quarter 2020, noninterest income was $12.5 million, representing an increase of $6.9 million, or 124.8%, compared to $5.6 million for the third quarter 2019.

The increase in noninterest income was due primarily to increases in revenue from mortgage banking activities, gain on sale of loans and loan servicing revenue, which were partially offset by lower other income and loan servicing asset revaluation.

The increase in mortgage banking revenue was due mainly to an increase in loan origination volume, driven by historically low mortgage interest rates, and higher gain-on-sale margins.

The increase in gain on sale of loans was due to the Company selling $12.9 million of SBA 7(a) guaranteed loans and $12.2 million of single tenant lease financing loans during the third quarter 2020, recognizing a net gain of $2.0 million, as compared to a $0.5 million net gain on the sale of loans in the third quarter 2019 from sales totaling $53.4 million of single tenant lease financing and public finance loans.

The Company recognized $0.2 million of loan servicing revenue, net of the loan servicing asset revaluation, in the third quarter 2020, in connection with its SBA 7(a) servicing portfolio, which includes the portfolio acquired in the fourth quarter 2019 as well as loans originated by the Company in 2020.

The decrease in other noninterest income was mainly the result of income recognized in the prior year related to the Company’s temporary ownership of the land associated with the Company’s future corporate headquarters.

Refer to Note 11 to the condensed consolidated financial statements for additional information about the Company’s new headquarters.

During the nine months ended September 30, 2020, noninterest income was $23.7 million, representing an increase of $12.3 million, or 108.0%, compared to $11.4 million for the nine months ended September 30, 2019.

The increase in noninterest income was due primarily to increases in revenue from mortgage banking activities, gain on sale of loans, loan servicing revenue and gain (loss) on sale of securities, which were partially offset by a decrease in other income.

The increase in mortgage banking revenue was due mainly to an increase in loan origination volume, driven by historically low mortgage interest rates, and higher gain-on-sale margins.

The increase in gain on sale of loans was due to sales of portfolio loans with book values totaling $216.7 million that resulted in a gain of $1.3 million, as well as a gain of $3.3 million on the sale of SBA 7(a) guaranteed loans during the nine months ended September 30, 2020, compared to the Company selling portfolio loans with book values of $201.8 million that resulted in a net gain of $0.4 million during the nine months ended September 30, 2019.

The increase in gain (loss) on sale of securities was due to a gain of $0.1 million being recorded during the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 when the Company sold lower-yielding mortgage-backed and U.S.

Government Agency securities that resulted in a loss of $0.5 million.

The Company also recognized loan servicing revenue, net of the loan servicing asset revaluation, of $0.4 million, during the nine months ended September 30, 2020, in connection with its SBA 7(a) servicing portfolio, which includes the portfolio acquired in the fourth quarter 2019, as well as loans originated by the Company in 2020.

The decrease in other noninterest income was mainly the result of income recognized in the prior year associated with the sale of the Company’s Visa Class B shares at a gain of $0.5 million and $0.4 million of income related to the Company’s temporary ownership of the land associated with its future corporate headquarters.

Refer to Note 11 to the condensed consolidated financial statements for additional information about the Company’s new headquarters.

During the first quarter 2021, noninterest income was $8.4 million, representing an increase of $2.2 million, or 34.8%, compared to $6.2 million for the first quarter 2020.

The increase in noninterest income was due primarily to increases in revenue from mortgage banking activities and loan servicing revenue of $2.1 million and $0.2 million, respectively.

The increase in mortgage banking revenue was due mainly to higher gain-on-sale margins.

The increase in loan servicing revenue was due to an increase in the balance of the Company’s SBA 7(a) servicing portfolio.

Noninterest Expense

The following table presents noninterest expense for the last five completed fiscal quarters and the nine months ended September 30, 2020 and 2019.

(in thousands) Three Months Ended Nine Months Ended

The following table presents noninterest expense for the last five completed fiscal quarters.

(in thousands) Three Months Ended

2021 December 31,

2020 September 30,

1 unchanged sentence

2020 March 31,

2020 December 31,

2019 September 30,

2020 September 30,

Salaries and employee benefits $ 9,492 $ 9,135 $ 9,533 $ 7,789 $ 7,774

8 unchanged sentences

Total noninterest expense $ 15,317 $ 14,513 $ 16,412 $ 13,244 $ 13,486

Noninterest expense for the third quarter 2020 was $16.4 million, compared to $11.2 million for the third quarter 2019.

The increase of $5.2 million, or 46.5%, compared to the third quarter 2019 was due primarily to increases of $2.7 million in salaries and employee benefits and $0.4 million in deposit insurance premium, as well as a $2.1 million write-down of a legacy commercial other real estate owned (“OREO”) property.

Noninterest expense for the first quarter 2021 was $15.3 million, compared to $13.5 million for the first quarter 2020.

The increase of $1.8 million, or 13.6%, compared to the first quarter 2020 was due primarily to increases of $1.7 million in salaries and employee benefits and $0.3 million in marketing, advertising and promotion but partially offset by a $0.2 million decrease in consulting and professional fees.

The increase in salaries and employee benefits was due mainly to an increase in headcount, which includes the impact of personnel growth associated with the Company’s small business lending platform, as well as increased mortgage and small business lending incentive compensation.

The increase in deposit insurance premium was due primarily to the Company not incurring deposit insurance premium expense during the third quarter 2019 as a result of the small bank assessment credit applied by the FDIC.

Noninterest expense for the nine months ended September 30, 2020 was $43.1 million, compared to $34.0 million for the nine months ended September 30, 2019.

The increase of $9.1 million, or 26.8%, compared to the nine months ended September 30, 2019 was due primarily to increases of $5.3 million in salaries and employee benefits, $0.7 million in other expenses, $0.6 million in loan expenses, $0.3 million in consulting and professional services and $0.3 million in premises and equipment, as well as a $2.1 million write-down of a legacy commercial OREO property.

The increase in salaries and employee benefits was primarily the result of personnel growth, mostly associated with the Company’s small business lending platform, as well as increased mortgage and small business lending incentive compensation.

The increase in other expenses was due primarily to a $0.3 million charitable contribution the Company made to assist small businesses and nonprofits address the economic challenges of the COVID-19 pandemic, as well as various other miscellaneous expenses, none of which were individually significant.

The increase in loan expenses was driven primarily by costs associated with nonperforming loans.

The increase in consulting and professional services was due primarily to increased recruitment costs and directors’ fees.

The increase in premises and equipment was due primarily to higher software expense.

Income tax provision was $1.4 million for the third quarter 2020, resulting in an effective tax rate of 14.2%, compared to $0.5 million and an effective tax rate of 6.6% for the third quarter 2019.

Income tax provision was $1.4 million for the nine months ended September 30, 2020, resulting in an effective tax rate of 7.0%, compared to $1.3 million and an effective tax rate of 6.8% for the nine months ended September 30, 2019.

The increase in income tax provision for the third quarter 2020 compared to the third quarter 2019 was due primarily to the increase in pre-tax earnings driven by a higher proportion of taxable revenue from mortgage banking and gain on sale of loans.

The increase in marketing, advertising and promotion was due primarily to increased digital marketing initiatives related to deposits.

The decrease in consulting and professional services is primarily related to a decrease in routine legal costs.

Additionally, during the first quarter 2021, and reflected in other noninterest expense, the Company made a $0.3 million contribution to a foundation that supports not-for-profit organizations and community-based initiatives in Hamilton County, Indiana.

Income tax provision was $1.9 million for the first quarter 2021, resulting in an effective tax rate of 15.1%, compared to $0.3 million and an effective tax rate of 4.2% for the first quarter 2020.

The increase in income tax provision for the first quarter 2021 compared to the first quarter 2020 was due primarily to the increase in pre-tax earnings driven by increased net interest income, as well as a higher proportion of taxable revenue from mortgage banking.

Additionally, the lower income tax provision and effective tax rate during the year ago period 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 in the first quarter 2020.

Financial Condition

2 unchanged sentences

Balance Sheet Data:

2021 December 31,

2020 September 30,

1 unchanged sentence

2020 March 31,

2020 December 31,

2019 September 30,

Total assets $ 4,188,570 $ 4,246,156 $ 4,333,624 $ 4,324,600 $ 4,168,146

7 unchanged sentences

Total shareholders’ equity 344,566 330,944 318,102 307,711 305,127

Total assets increased $233.5 million, or 5.7%, to $4.3 billion at September 30, 2020 compared to $4.1 billion at December 31, 2019.

Balance sheet growth was driven by an increase in deposits of $218.4 million, or 6.9%.

The deposit growth drove an increase in liquid assets as cash balances increased $161.1 million, or 49.2%.

Additionally, loan balances increased $49.4 million, or 1.7%, and loans held-for-sale increased $20.1 million, or 35.9%.

As deposit growth outpaced loan growth, balance sheet liquidity increased as reflected in the percentage of loans to deposits, which declined to 89.3% as of September 30, 2020, compared to 94.0% as of December 31, 2019.

Total assets decreased $57.6 million, or 1.4%, to $4.2 billion at March 31, 2021 compared to $4.2 billion at December 31, 2020.

This was driven by a $53.3 million, or 1.6%, decrease in deposit balances, which includes a $114.6 million, or 8.9% decrease in certificates of deposits and a $46.9 million, or 3.5%, increase in money market account balances.

As of March 31, 2021, total shareholders’ equity was $344.6 million, an increase of $13.6 million, or 4.1%, compared to December 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 $339.9 million as of March 31, 2021, representing an increase of $13.6 million, or 4.2%, compared to December 31, 2020.

As both total shareholders’ equity and tangible common equity increased, while both total assets and tangible assets decreased 1.4%, the ratio of total shareholders’ equity to total assets increased to 8.23% as of March 31, 2021 from 7.79% as of December 31, 2020 and the ratio of tangible common equity to tangible assets increased to 8.12% as of March 31, 2021 from 7.69% as of December 31, 2020.

Book value per common share increased 3.8% to $35.07 as of March 31, 2021 from $33.77 as of December 31, 2020.

Tangible book value per share increased 3.9% to $34.60 as of March 31, 2021 from $33.29 as of December 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 from December 31, 2020.

Loan Portfolio Analysis

The following table presents a summary of the Company’s loan portfolio for the last five completed fiscal quarters.

(dollars in thousands) September 30,

2020 June 30,

2020 March 31,

(dollars in thousands) March 31,

2021 December 31,

2020 September 30,

2020 June 30,

2020 March 31,

Commercial loans

1 unchanged sentence

Owner-occupied commercial real estate 87,930 2.9 % 89,785 2.9 % 89,095 3.0 % 86,897 2.9 % 74,737 2.6 %

89,095 3.0 % 86,897 2.9 % 87,957 3.0 % 86,726 2.9 % 86,357 3.0 %

Investor commercial real estate 14,832 0.5 % 13,902 0.5 % 13,084 0.4 % 13,286 0.4 % 13,421 0.5 %

4 unchanged sentences

Small business lending 132,490 4.3 % 125,589 4.1 % 123,168 4.1 % 118,526 4.0 % 67,275 2.3 %

123,168 4.1 % 118,526 4.0 % 54,055 1.9 % 46,945 1.6 % 11,597 0.4 %

Total commercial loans 2,519,729 82.4 % 2,515,631 82.3 % 2,442,500 81.2 % 2,386,342 80.2 % 2,287,460 79.1 %

9 unchanged sentences

Net loans $ 3,028,052 $ 3,029,747 $ 2,985,997 $ 2,949,209 $ 2,869,236

(1) As of December 31, 2019, the Company held $13.3 million of SBA loans which were classified within the small business lending category.

In the third quarter 2020, those balances were reclassified into the owner-occupied commercial real estate category.

(2) Includes carrying value adjustments of $44.3 and $46.0 million related to terminated interest rate swaps associated with public finance loans as of September 30, 2020 and June 30, 2020, respectively, and $44.6 million, $21.4 million and $27.6 million, as of March 31, 2020, December 31, 2019 and September 30, 2019, respectively, related to interest rate swaps associated with public finance loans.

Total loans were $3.0 billion as of September 30, 2020, an increase of $49.4 million, or 1.7%, compared to December 31, 2019.

Total commercial balances were $2.4 billion as of September 30, 2020, up $156.0 million, or 6.8%, from December 31, 2019.

Compared to December 31, 2019, production in healthcare finance, small business lending and construction was partially offset by lower balances in the public finance and single tenant lease financing loan portfolios, due primarily to sales of $106.6 million of loans in these categories during 2020, as well as a decline in commercial and industrial balances.

The growth in healthcare finance balances was due primarily to a combination of strong borrower demand following the re-opening of state and local economies across the U.S.

subsequent to shelter-in-place orders in response to COVID-19 and growth in loan originations by the sales team at Lendeavor, the Company’s origination partner in this loan category.

The growth in small business lending was driven by $58.3 million of PPP loan balances originated during the second quarter 2020, as well as an increase in originated SBA 7(a) loans during 2020.

Total consumer loan balances were $507.7 million as of September 30, 2020, a decrease of $125.8 million, or 19.9%, compared to December 31, 2019.

The decline in consumer loan balances from December 31, 2019 was due primarily to the sale of $90.8 million of portfolio residential mortgage loans in the first quarter 2020, which included seasoned lower-yielding loans.

Additionally, the balances of residential mortgage loans and other consumer loans have been impacted by elevated prepayment activity, which more than offset new origination activity.

(1) Includes carrying value adjustments of $41.6 million, $42.7 million, $44.3 million and $46.0 million related to terminated interest rate swaps associated with public finance loans as of March 31, 2021, December 31, 2020, September 30, 2020 and June 30, 2020, respectively, and $44.6 million related to interest rate swaps associated with public finance loans as of March 31, 2020.

Total loans were $3.1 billion as of March 31, 2021, relatively consistent with December 31, 2020.

Total commercial loan balances were $2.5 billion as of March 31, 2021, up $4.1 million, or 0.2%, from December 31, 2020.

Compared to December 31, 2020, the growth in commercial loan balances was driven largely by production in public finance, construction and small business lending, but was partially offset by a decrease in healthcare finance and single tenant lease financing balances due to elevated prepayment activity.

Total consumer loan balances were $478.3 million as of March 31, 2021, a decrease of $4.0 million, or 0.8%, compared to December 31, 2020.

The slight decline in consumer loan balances from December 31, 2020 was due primarily to increased prepayment activity across the recreational vehicle and trailer portfolios.

Asset Quality

2 unchanged sentences

The following table provides a summary of the Company’s nonperforming assets for the last five completed fiscal quarters.

(dollars in thousands) September 30,

2020 June 30,

2020 March 31,

(dollars in thousands) March 31,

2021 December 31,

2020 September 30,

2020 June 30,

2020 March 31,

Nonaccrual loans

3 unchanged sentences

Single tenant lease financing 7,080 7,116 7,148 4,680 4,680

Small business lending (1)

Total commercial loans 13,213 8,954 8,655 7,045 6,288

1 unchanged sentence

Residential mortgage 1,120 1,183 1,085 1,042 991

Home equity 15 — — — —

Other consumer 23 46 34 108 39

13 unchanged sentences

Investor commercial real estate — — — 2,065 2,065

Residential mortgage — — — — 553

Total other real estate owned — — — 2,065 2,065

2 unchanged sentences

Total nonperforming loans to total loans (2)

0.48 % 0.33 % 0.32 % 0.28 % 0.26 %

Total nonperforming assets to total assets (2)

0.35 % 0.24 % 0.23 % 0.24 % 0.23 %

Allowance for loan losses to total loans 1.00 % 0.96 % 0.89 % 0.82 % 0.79 %

2 unchanged sentences

Allowance for loan losses to nonperforming loans (2)

209.2 % 289.5 % 275.4 % 298.5 % 307.1 %

1 Entire balance is guaranteed by the U.S.

2 Includes the impact of nonperforming small business lending loans, which are 100% guaranteed by the U.S.

3 This information represents a non-GAAP financial measure.

2 unchanged sentences

The following table provides a summary of troubled debt restructurings for the last five completed fiscal quarters.

(in thousands) September 30,

2020 June 30,

2020 March 31,

(in thousands) March 31,

2021 December 31,

2020 September 30,

2020 June 30,

2020 March 31,

Troubled debt restructurings – nonaccrual $ 2,606 $ 2,637 $ 811 $ 854 $ 94

1 unchanged sentence

Total troubled debt restructurings $ 3,793 $ 3,004 $ 1,176 $ 1,226 $ 472

The increase in nonperforming loans of 3.0 million, or 45.2%, to $9.8 million as of September 30, 2020 compared to $6.7 million as of December 31, 2019 was due primarily to an increase in nonperforming owner-occupied commercial real estate loans with unpaid principal balances of $1.6 million and an increase in nonperforming single tenant lease financing loans with unpaid principal balances of $2.5 million that were placed on nonaccrual status during 2020, partially offset by a decrease in accruing residential mortgage loans that were 90 days past due and one nonaccrual owner-occupied commercial real estate loan that paid off during the third quarter 2020.

Total nonperforming assets increased $0.9 million, or 10.3%, as of September 30, 2020 compared to December 31, 2019, due primarily to the increase in nonperforming loans discussed above, partially offset by a $2.1 million write-down of a legacy commercial OREO property in the third quarter 2020.

The ratio of nonperforming loans to total loans increased to 0.32% as of September 30, 2020 compared to 0.23% as of December 31, 2019 and the ratio of nonperforming assets to total assets increased to 0.23% as of September 30, 2020 compared to 0.22% as of December 31, 2019, due primarily to the loans mentioned above.

Total TDRs as of September 30, 2020 were $1.2 million, up $0.7 million from December 31, 2019.

The increase was driven by one residential mortgage loan that became a TDR during the second quarter 2020.

As of September 30, 2020, the Company did not have any OREO.

As of December 31, 2019, the Company had one commercial property in OREO with a carrying value of $2.1 million.

This property consisted of two buildings that are residential units adjacent to a university campus.

During the third quarter 2020, we wrote off the balance of OREO and are currently evaluating alternatives related to the ultimate disposition of this property.

As of September 30, 2020, our financial results have reflected little impact on asset quality as a result of COVID-19.

Actions taken to either contain or reduce the impact of the pandemic have had a detrimental effect on the national and our local economies.

The ultimate impact it may have on our business and asset quality is still uncertain;

however, we remain optimistic that the combination of government stimulus programs and relief programs we have provided to our clients will lessen the economic stress on our borrowers.

However, if the pandemic extends for a prolonged period of time, we may experience negative trends in nonperforming loans and assets.

The increase in nonperforming loans of $4.5 million, or 43.9%, to $14.6 million as of March 31, 2021 compared to $10.2 million as of December 31, 2020 was due primarily to an increase in nonperforming owner-occupied commercial real estate and commercial and industrial loans.

This increase is the result of a single commercial relationship that was placed on nonaccrual status during the quarter.

Total nonperforming assets increased $4.5 million, or 43.4%, as of March 31, 2021 compared to December 31, 2020, due primarily to the increase in nonperforming loans discussed above.

The ratio of nonperforming loans to total loans increased to 0.48% as of March 31, 2021 compared to 0.33% as of December 31, 2020 and the ratio of nonperforming assets to total assets increased to 0.35% as of March 31, 2021 compared to 0.24% as of December 31, 2020, also due primarily to the loans mentioned above.

Total TDRs as of March 31, 2021 were $3.8 million, up $0.8 million from December 31, 2020.

The increase was driven by one residential mortgage loan that became a TDR during the first quarter 2021.

The Company did not have any OREO as of March 31, 2021 and December 31, 2020, respectively.

As of March 31, 2021, our financial results have reflected little impact on asset quality as a result of COVID-19.

We are optimistic that the combination of the vaccine rollout, 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 nonperforming loans and assets could be adversely affected.

Non-TDR Loan Modifications due to COVID-19

2 unchanged sentences

Additionally, Section 4013 of the CARES Act further provides that loan modifications due to the impact of COVID-19 that would otherwise be classified as TDRs under GAAP will not be so classified.

Modifications within the scope of this relief are in effect from the period beginning March 1, 2020 until the earlier of December 31, 2020 or 60 days after the date on which the national emergency related to the COVID-19 pandemic formally terminates.

Modifications within the scope of this relief are in effect from the period beginning March 1, 2020 until the earlier of 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 has offered modifications to borrowers who were both impacted by COVID-19 and current on all principal and interest payments.

The following table shows the Company’s deferrals by loan portfolio type that have been granted through October 30, 2020.

The balances shown are as of September 30, 2020.

(dollars in thousands) Deferrals Total Loan Balance % Of Balances With Deferrals

Commercial loans

Commercial and industrial $ 680 $ 77,116 0.9 %

Owner-occupied commercial real estate — 89,095 — %

Investor commercial real estate — 13,084 0.0 %

Construction — 92,154 0.0 %

Single tenant lease financing 5,362 960,505 0.6 %

Public finance — 625,638 0.0 %

Healthcare finance 2,275 461,740 0.5 %

Small business lending 8,637 123,168 7.0 %

Total commercial loans 16,954 2,442,500 0.7 %

Consumer loans

Residential mortgage 2,542 203,041 1.3 %

Home equity — 22,169 — %

Other consumer 436 282,450 0.2 %

Total consumer loans 2,978 507,660 0.5 %

Total commercial and consumer loans $ 19,932 $ 2,950,160 0.7 %

During the first and second quarters 2020 and into early third quarter 2020, the single tenant lease financing and healthcare finance portfolios had comprised a significant majority of total loan deferrals.

However, as of October 30, 2020, these portfolios had declined to approximately 0.26% of the total loan portfolio.

Earlier in the year, borrowers in these portfolios had experienced short-term cash flow challenges due to broad-based federal and state government actions to contain COVID-19.

Within the single tenant lease financing portfolio, the portfolio average loan-to-value ratio is 49% and all borrowers, except for one relationship that is on nonaccrual status, made their loan payments in a timely manner prior to entering a deferral program.

Furthermore, there are no delinquencies for performing loans not on deferral status.

Related to the healthcare finance portfolio, over 90% of the loans are made to dental practices, many of which have been allowed to resume seeing patients as certain states across the country have reopened their economies.

The amount of healthcare finance loans on deferral status peaked in late May when approximately 80% of this portfolio balance was under deferral.

As of October 30, 2020, this percentage had dropped to 0.5%.

All borrowers who have come off a deferral program have resumed making scheduled loan payments without delinquency.

As of March 31, 2021, the Company had 37 loans totaling $14.3 million in non-TDR loan modifications due to COVID-19.

Small Business Administration Paycheck Protection Program

3 unchanged sentences

These loans may be forgiven if certain conditions are satisfied and are fully guaranteed by the SBA.

As a preferred SBA lender, we assisted our clients in participating in the PPP to help them maintain their workforces in an uncertain and challenging environment.

The loans bear an interest rate of 1.00% and we received weighted average origination fees of 3.86% of the amount funded, or approximately $2.3 million in total.

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 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 will be deferred over the life of the PPP loans and recognized as interest income.

As of September 30, 2020, we had 447 PPP loans totaling $58.3 million outstanding.

On December 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 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 2021.

These loans also may be forgiven if certain conditions are satisfied and are fully guaranteed by the SBA.

In the first quarter 2021, we assisted our clients in participating in this next round of PPP to help them continue to recover from the economic damage created by the COVID-19 pandemic.

The loans originated during the first quarter 2021 bear an interest rate of 1.00% and we received weighted average origination fees of 6.60% of the amount funded, or approximately $1.3 million in total.

The Company received this fee revenue from the SBA in February and March 2021 and it will be deferred over the life of the PPP loans and recognized as interest income.

During the first quarter 2021, we originated 244 PPP loans totaling $26.1 million outstanding.

In total, the Company has 416 PPP loans with an outstanding principal balance of $53.4 million.

The Company expects to begin processing applications for forgiveness from this round beginning in May 2021.

The Company anticipates that the majority of these loans will ultimately be forgiven, in whole or in part, by the SBA in accordance with the terms of the program.

As of September 30, 2020, the Company did not receive any formal applications for forgiveness from PPP borrowers.

Management anticipates that loan forgiveness applications will increase during the fourth quarter 2020.

As of March 31, 2021, the Company processed 274 applications for forgiveness from PPP borrowers.

Management anticipates that loan forgiveness applications will continue throughout 2021.

Allowance for Loan Losses

1 unchanged sentence

(dollars in thousands) Three Months Ended

2021 December 31,

2020 September 30,

1 unchanged sentence

2020 March 31,

2020 December 31,

2019 September 30,

Balance, beginning of period $ 29,484 $ 26,917 $ 24,465 $ 22,857 $ 21,840

4 unchanged sentences

Net charge-offs to average loans 0.02 % 0.04 % 0.01 % 0.12 % 0.06 %

The allowance for loan losses was $26.9 million as of September 30, 2020, compared to $21.8 million as of December 31, 2019.

While total loan balances experienced a modest increase of $49.4 million, or 1.7%, compared to December 31, 2019, the Company made additional adjustments to qualitative factors in its allowance model to reflect the continued economic uncertainty resulting from COVID-19.

The allowance for loan losses was $30.6 million as of March 31, 2021, compared to $29.5 million as of December 31, 2020.

While total loan balances were consistent with December 31, 2020, the Company made additional adjustments to qualitative factors in its allowance model, as well as recorded specific reserves on two commercial relationships totaling $1.1 million in the aggregate.

These items were partially offset by loan portfolio composition changes, which included reductions in certain portfolios with higher reserve coverage ratios, as well as growth in portfolios with lower reserve coverage ratios.

As a result, both the allowance for loan losses and the allowance as a percentage of total loans increased compared to December 31, 2020.

The allowance for loan losses as a percentage of total loans was 0.89% at September 30, 2020, or 0.91% when excluding PPP Loans, compared to 0.74% at December 31, 2019.

The allowance for loan losses as a percentage of nonperforming loans decreased to 275.4% as of September 30, 2020, compared to 324.4% as of December 31, 2019.

The provision for loan losses in the third quarter 2020 was $2.5 million, compared to $2.8 million for the third quarter 2019.

During the third quarter 2020, the Company recorded net charge-offs of $0.1 million, compared to net charge-offs of $1.1 million for the third quarter 2019.

The allowance for loan losses as a percentage of total loans was 1.00% at March 31, 2021, or 1.02%, when excluding PPP loans, compared to 0.96%, or 0.98%, when excluding PPP loans, at December 31, 2020.

The allowance for loan losses as a percentage of nonperforming loans decreased to 209.2% as of March 31, 2021, compared to 289.5% as of December 31, 2020, due to an increase in nonperforming loans primarily related to a single commercial relationship that was placed on nonaccrual during the first quarter 2021.

The provision for loan losses in the first quarter 2021 was $1.3 million, compared to $1.5 million for the first quarter 2020.

During the first quarter 2021, the Company recorded net charge-offs of $0.1 million, compared to net charge-offs of $0.4 million for the first quarter 2020.

Investment Securities Portfolio

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(in thousands)

Amortized Cost September 30,

2020 June 30,

2020 March 31,

Amortized Cost March 31,

2021 December 31,

2020 September 30,

2020 June 30,

2020 March 31,

Securities available-for-sale

12 unchanged sentences

(in thousands)

Approximate Fair Value September 30,

2020 June 30,

2020 March 31,

Approximate Fair Value March 31,

2021 December 31,

2020 September 30,

2020 June 30,

2020 March 31,

Securities available-for-sale

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Total securities $ 531,759 $ 567,080 $ 597,487 $ 658,169 $ 678,150

The approximate fair value of available-for-sale investment securities decreased $12.5 million, or 2.4%, to $528.3 million as of September 30, 2020, compared to $540.9 million as of December 31, 2019.

The decrease was due primarily to decreases of $12.2 million in agency securities, $11.2 million in municipal securities and $8.1 million in agency mortgage-backed securities.

These decreases were driven primarily by prepayments and maturities in agency and agency mortgage-backed securities, as well as early redemptions and maturities in municipal securities.

The decreases were partially offset by purchases of corporate and private label mortgage-backed securities as liquidity from deposit growth was deployed.

The approximate fair value of available-for-sale investment securities decreased $35.3 million, or 7.1%, to $462.4 million as of March 31, 2021, compared to $497.6 million as of December 31, 2020.

The decrease was due primarily to decreases of $17.0 million in private label mortgage-backed securities, $15.1 million in agency mortgage-backed securities and $3.3 million in municipal securities.

These decreases were driven primarily by prepayments and maturities in private label mortgage-backed securities and agency mortgage-backed securities, as well as early redemptions and maturities in municipal securities.

These decreases were partially offset by purchases of agency mortgage-backed securities during the first quarter 2021.

Accrued Income and Other Assets

Accrued income and other assets were $66.5 million at September 30, 2020 compared to $67.1 million at December 31, 2019.

Accrued income and other assets decreased $11.9 million, or 18.6%, to $52.4 million at March 31, 2021 compared to $64.3 million at December 31, 2020.

The decrease was primarily related to a $7.2 million decrease in cash pledged as collateral, as well as a decrease of $3.3 million in deferred tax assets.

As of these dates, the Company pledged $23.4 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.

The decrease in cash collateral pledged was partially offset by an increase of $5.3 million in deferred tax assets.

Accrued Expenses and Other Liabilities

Accrued expenses and other liabilities were $57.2 million at September 30, 2020 compared to $53.0 million at December 31, 2019.

The increase of $4.2 million, or 7.9%, was due primarily to a $4.9 million trade date accrual related to securities that were purchased in September 2020 but did not settle until October 2020, a $3.4 million increase in income taxes payable and a $1.5 million increase in accrued salaries and benefits.

These increases were partially offset by a $5.0 million decrease in the fair value of interest rate swap agreements.

Accrued expenses and other liabilities were $40.3 million at March 31, 2021 compared to $48.4 million at December 31, 2020.

The decrease of $8.1 million, or 16.74%, was due primarily to a $10.0 million decrease in derivative liabilities due to an increase in the fair value of these contracts.

The following table presents the composition of the Company’s deposit base for the last five completed fiscal quarters.

(dollars in thousands) September 30,

2020 June 30,

2020 March 31,

(dollars in thousands) March 31,

2021 December 31,

2020 September 30,

2020 June 30,

2020 March 31,

Noninterest-bearing deposits $ 100,700 3.1 % $ 96,753 3.0 % $ 86,088 2.6 % $ 82,864 2.5 % $ 70,562 2.2 %

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Total deposits $ 3,217,603 100.0 % $ 3,270,885 100.0 % $ 3,372,391 100.0 % $ 3,380,789 100.0 % $ 3,178,506 100.0 %

Total deposits increased $218.4 million, or 6.9%, to $3.4 billion as of September 30, 2020, compared to $3.2 billion as of December 31, 2019.

This increase was due primarily to an increase of $572.8 million, or 72.8%, in money market accounts, offset by declines of $252.9 million, or 15.7%, in certificates of deposits and $176.8 million, or 2.8%, in brokered deposits.

The Company experienced strong growth in money market balances due to targeted digital marketing efforts to grow small business accounts, as well as consumers, small businesses and commercial clients increasing their cash balances due in part to the economic uncertainty resulting from the COVID-19 pandemic.

The declines in certificates of deposits and brokered deposits were due to the maturity of higher cost balances and reduced pricing strategies designed to limit the volume of new production.

Total deposits decreased $53.3 million, or 1.6%, to $3.2 billion as of March 31, 2021, compared to $3.3 billion as of December 31, 2020.

This decrease was due primarily to declines of $114.6 million, or 8.9%, in certificates of deposits and $2.6 million, or 1.4%, in interest-bearing demand deposits, partially offset by increases of $46.9 million, or 3.5%, in money market accounts, $8.1 million, or 18.6%, in savings accounts, $5.0 million, or 1.7%, in brokered deposits and $3.9 million, or 4.1% in non-interest bearing 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 were due to the maturity of higher cost balances and reduced pricing strategies designed to limit the volume of new production.

Recent Debt Offerings

Subsequent to the end of the quarter, on October 26, 2020, the Company issued $10.0 million in aggregate principal amount of 6.0% Fixed-to-Floating Rate Subordinated Notes due 2030 (the “2030 Notes”).

On October 26, 2020, the Company issued $10.0 million in aggregate principal amount of 6.0% Fixed-to-Floating Rate Subordinated Notes due 2030 (the “2030 Notes”).

The Notes were offered and sold by the Company in a private placement and are scheduled to mature on November 1, 2030.

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The 2030 Notes are intended to qualify as Tier 2 capital under regulatory guidelines.

We intend to use the net proceeds to redeem the 2025 Note on or before January 15, 2021, subject to the receipt of any applicable regulatory approvals.

In June 2019, the Company issued $37.0 million aggregate principal amount of 6.0% Fixed-to-Floating Rate Subordinated Notes due 2029 (the “2029 Notes”) in a public offering.

The 2029 Notes initially bear a fixed interest rate of 6.0% per year to, but excluding June 30, 2024, and thereafter a floating rate equal to the then-current benchmark rate (initially three-month LIBOR rate) plus 411 basis points.

All interest on the 2029 Notes is payable quarterly.

The 2029 Notes are scheduled to mature on June 30, 2029.

The 2029 Notes are unsecured subordinated obligations of the Company and may be repaid, without penalty, on any interest payment date on or after June 30, 2024.

The 2029 Notes are intended to qualify as Tier 2 capital under regulatory guidelines.

The 2029 Notes are trading on the Nasdaq Global Select Market under the symbol “INBKZ.”

The net proceeds were used to redeem the 2025 Note in January 2021.

Regulatory Capital Requirements

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and 4) a minimum Leverage Ratio of 4.0%.

The implementation of the capital conservation buffer began on January 1, 2016 at the 0.625% level and was phased in over a four-year period, increasing by increments of that amount on each subsequent January 1 until it reached 2.5% on January 1, 2019.

The capital conservation buffer is designed to absorb losses during periods of economic stress.

Failure to maintain the minimum Common Equity Tier 1 capital ratio plus the capital conservation buffer will result in potential restrictions on a banking institution’s ability to pay dividends, repurchase stock and/or pay discretionary compensation to its employees.

The following tables present actual and required capital ratios as of September 30, 2020 and December 31, 2019 for the Company and the Bank under the Basel III Capital Rules.

The minimum required capital amounts presented include the minimum required capital levels as of September 30, 2020 and December 31, 2019 based on the Basel III Capital Rules.

The following tables present actual and required capital ratios as of March 31, 2021 and December 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 of March 31, 2021 and December 31, 2020 based on the Basel III Capital Rules.

Capital levels required to be considered well capitalized are based upon prompt corrective action regulations, as amended to reflect the changes under the Basel III Capital Rules.

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(dollars in thousands) Capital Amount Ratio Capital Amount Ratio Capital Amount Ratio

As of September 30, 2020:

As of March 31, 2021:

Common equity tier 1 capital to risk-weighted assets

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Shareholders’ Dividends

The Company’s Board of Directors declared a cash dividend of $0.06 per share of common stock payable October 15, 2020 to shareholders of record as of October 1, 2020.

The Company’s Board of Directors declared a cash dividend of $0.06 per share of common stock payable April 15, 2021 to shareholders of record as of March 31, 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 of September 30, 2020, the Company had $72.0 million principal amount of subordinated debt outstanding pursuant its term loan evidenced by a term note due 2025 (the “2025 Note”), its 6.0% Fixed-to-Floating Rate Subordinated Notes due 2026 and the 2029 Notes.

Subsequent to the end of the quarter, on October 26, 2020, we issued an additional $10.0 million aggregate principal amount of 2030 Notes.

The agreements that govern our outstanding subordinated debt, including the 2030 Notes, prohibit the Company from paying any dividends on its common stock or making any other distributions to shareholders at any time when there shall have occurred, and be continuing to occur, an event of default under the applicable agreement.

As of March 31, 2021, the Company had $72.0 million principal amount of subordinated debt outstanding evidenced by its 6.0% Fixed-to-Floating Rate Subordinated Notes due 2026, the 2029 Notes and the 2030 Notes.

The agreements that govern our outstanding subordinated debt prohibit the Company from paying any dividends on its common stock or making any other distributions to shareholders at any time when there shall have occurred, and be continuing to occur, an event of default under the applicable agreement.

If an event of default were to occur and the Company did not cure it, the Company would be prohibited from paying any dividends or making any other distributions to shareholders or from redeeming or repurchasing any common stock.

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Therefore, the Company supplements deposit growth and enhances interest rate risk management through borrowings and wholesale funding, which are generally advances from the FHLB and brokered deposits.

Additionally, the Company has enhanced its liquidity management process during 2019 and 2020 through increased loan sale activity.

During the first nine months of 2020, the Company sold $143.0 million of public finance, single tenant lease financing and SBA 7(a) guaranteed loans at premiums to book value, as well as a $90.8 million pool of residential mortgage loans.

During 2019, the Company sold $237.5 million of portfolio residential mortgage, single tenant lease financing and public finance loans.

These loan sales have provided liquidity to manage overall loan portfolio growth and capital utilization.

The Company holds cash and investment securities that qualify as liquid assets to maintain adequate liquidity to ensure safe and sound operations and meet its financial commitments.

We intend to modestly reduce the size of our balance sheet during the fourth quarter 2020 through continued deposit repricing to help manage capital levels.

A component of this balance sheet management strategy is expected to include reducing our cash balances from the levels at September 30, 2020.

However, given the uncertainty regarding the length and ultimate economic effect of COVID-19, we believe it will be prudent to maintain higher levels of cash on the balance sheet than we have historically maintained until the crisis passes.

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 September 30, 2020, on a consolidated basis, the Company had $1.1 billion in cash and cash equivalents and investment securities available-for-sale and $76.2 million in loans held-for-sale that were generally available for its cash needs.

At March 31, 2021, on a consolidated basis, the Company had $878.6 million in cash and cash equivalents and investment securities available-for-sale and $30.2 million in loans held-for-sale that were generally available for its cash needs.

The Company can also generate funds from wholesale funding sources and collateralized borrowings.

At September 30, 2020, the Bank had the ability to borrow an additional $558.4 million from the FHLB, the Federal Reserve and correspondent bank Fed Funds lines of credit.

At March 31, 2021, the Bank had the ability to borrow an additional $451.1 million from the FHLB, the Federal 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.

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The Company’s primary sources of funds are cash maintained at the holding company level and dividends from the Bank, the payment of which is subject to regulatory limits.

At September 30, 2020, the Company, on an unconsolidated basis, had $36.0 million in cash generally available for its cash needs, which is in excess of its current annual regular shareholder dividend and operating expenses.

At March 31, 2021, the Company, on an unconsolidated basis, had $28.1 million in cash generally available for its cash needs, which is in excess of its current annual regular shareholder dividend and operating expenses.

The Company uses its sources of funds primarily to meet ongoing financial commitments, including withdrawals by depositors, credit commitments to borrowers, operating expenses and capital expenditures.

At September 30, 2020, approved outstanding loan commitments, including unused lines of credit and standby letters of credit, amounted to $267.4 million.

Certificates of deposits and brokered deposits scheduled to mature in one year or less at September 30, 2020 totaled $931.0 million.

At March 31, 2021, approved outstanding loan commitments, including unused lines of credit and standby letters of credit, amounted to $261.2 million.

Certificates of deposits and brokered deposits scheduled to mature in one year or less at March 31, 2021 totaled $807.0 million.

Management is not aware of any other events or regulatory requirements that, if implemented, are likely to have a material effect on either the Company’s or the Bank’s liquidity.

1 unchanged sentence

This Management’s Discussion and Analysis contains financial information determined by methods other than in accordance with GAAP.

Non-GAAP financial measures, specifically tangible common equity, tangible assets, tangible book value per common share, tangible common equity to tangible assets ratio, average tangible common equity, return on average tangible common equity, total interest income - FTE, net interest income - FTE, net interest margin - FTE, allowance for loan losses to loans, excluding PPP loans, adjusted income before income taxes, adjusted income tax provision, adjusted net income, adjusted diluted earnings per share, adjusted return on average assets, adjusted return on shareholders’ equity, adjusted return on average tangible common equity and adjusted effective income tax rate are used by the Company’s management to measure the strength of its capital and analyze profitability, including its ability to generate earnings on tangible capital invested by its shareholders.

The Company also believes that it is a standard practice in the banking industry to present total interest income, net interest income and net interest margin on a fully-taxable equivalent basis, as those measures provide useful information for peer comparisons.

Although the Company believes these non-GAAP financial measures provide a greater understanding of its business, they should not be considered a substitute for financial measures determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP financial measures that may be presented by other companies.

Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures are included in the following table for the last five completed fiscal quarters and the nine months ended September 30, 2020 and 2019.

(dollars in thousands, except share and per share data) Three Months Ended Nine Months Ended

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.

(dollars in thousands, except share and per share data) Three Months Ended

2021 December 31,

2020 September 30,

1 unchanged sentence

2020 March 31,

2020 December 31,

2019 September 30,

2020 September 30,

Total equity - GAAP $ 344,566 $ 330,944 $ 318,102 $ 307,711 $ 305,127

10 unchanged sentences

Effect of goodwill (0.11) % (0.10) % (0.10) % (0.11) % (0.10) %

Tangible common equity to tangible assets 7.24 % 7.01 % 7.33 % 7.10 % 7.10 % 7.24 % 7.10 %

Tangible common equity to tangible assets ratio 8.12 % 7.69 % 7.24 % 7.01 % 7.22 %

Total average equity - GAAP $ 335,968 $ 323,464 $ 313,611 $ 306,868 $ 311,005

4 unchanged sentences

Return on average tangible common equity 12.79 % 13.84 % 10.83 % 5.23 % 7.90 %

(dollars in thousands, except share and per share data) Three Months Ended Nine Months Ended

(dollars in thousands, except share and per share data) Three Months Ended

2021 December 31,

2020 September 30,

1 unchanged sentence

2020 March 31,

2020 December 31,

2019 September 30,

2020 September 30,

Total interest income $ 33,280 $ 33,643 $ 32,750 $ 34,222 $ 36,244

18 unchanged sentences

1 Assuming a 21% tax rate

(dollars in thousands, except share and per share data) Three Months Ended Nine Months Ended

September 30,

2020 June 30,

2020 March 31,

2020 December 31,

2019 September 30,

2020 September 30,

Income before income taxes - GAAP $ 9,806 $ 3,664 $ 6,282 $ 7,698 $ 6,775 $ 19,752 $ 19,458

Write-down of other real estate owned 2,065 — — — — 2,065 —

Adjusted income before income taxes $ 11,871 $ 3,664 $ 6,282 $ 7,698 $ 6,775 $ 21,817 $ 19,458

Income tax provision (benefit) - GAAP $ 1,395 $ (268) $ 263 $ 602 $ 449 $ 1,390 $ 1,315

Write-down of other real estate owned 434 — — — — 434 —

Adjusted income tax provision (benefit) $ 1,829 $ (268) $ 263 $ 602 $ 449 $ 1,824 $ 1,315

Net income - GAAP $ 8,411 $ 3,932 $ 6,019 $ 7,096 $ 6,326 $ 18,362 $ 18,143

Write-down of other real estate owned 1,631 — — — — 1,631 —

Adjusted net income $ 10,042 $ 3,932 $ 6,019 $ 7,096 $ 6,326 $ 19,993 $ 18,143

Diluted average common shared outstanding 9,773,224 9,768,227 9,750,528 9,843,829 9,980,612 9,827,182 10,116,507

Diluted earnings per share - GAAP $ 0.86 $ 0.40 $ 0.62 $ 0.72 $ 0.63 $ 1.87 $ 1.79

Effect of write-down of other real estate owned 0.17 — — — — 0.16 —

Adjusted diluted earnings per share $ 1.03 $ 0.40 $ 0.62 $ 0.72 $ 0.63 $ 2.03 $ 1.79

Return on average assets 0.78 % 0.37 % 0.59 % 0.69 % 0.63 % 0.58 % 0.64 %

Effect of write-down of other real estate owned 0.15 % 0.00 % 0.00 % 0.00 % 0.00 % 0.05 % 0.00 %

Adjusted return on average assets 0.93 % 0.37 % 0.59 % 0.69 % 0.63 % 0.63 % 0.64 %

Return on average shareholders' equity 10.67 % 5.15 % 7.78 % 9.46 % 8.40 % 7.90 % 8.20 %

Effect of write-down of other real estate owned 2.07 % 0.00 % 0.00 % 0.00 % 0.00 % 0.70 % 0.00 %

Adjusted return on average shareholders’ equity 12.74 % 5.15 % 7.78 % 9.46 % 8.40 % 8.60 % 8.20 %

Return on average tangible common equity 10.83 % 5.23 % 7.90 % 9.61 % 8.53 % 8.02 % 8.33 %

Effect of write-down of other real estate owned 2.10 % 0.00 % 0.00 % 0.71 % 0.00 %

Adjusted return on average tangible common equity 12.93 % 5.23 % 7.90 % 9.61 % 8.53 % 8.73 % 8.33 %

Effective income tax rate 14.2 % (7.3) % 4.2 % 7.8 % 6.6 % 7.0 % 6.8 %

Effect of write-down of other real estate owned 1.2 % 0.0 % 0.0 % 0.0 % 0.0 % 1.4 % 0.0 %

Adjusted effective income tax rate 15.4 % (7.3) % 4.2 % 7.8 % 6.6 % 8.4 % 6.8 %

Critical Accounting Policies and Estimates

8 unchanged sentences

In June 2020, the Company terminated all fair value hedging instruments associated with loans.

At September 30, 2020 and December 31, 2019, the Company had interest rate swaps with notional amounts of $298.2 million and $725.6 million, respectively.

At March 31, 2021 and December 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.

At September 30, 2020 and December 31, 2019, the Company had commitments to sell residential real estate loans of $118.0 million and $115.0 million, respectively.

At March 31, 2021 and December 31, 2020, the Company had commitments to sell residential real estate loans of $81.5 million and $107.5 million, respectively.

These contracts mature in less than one year.

1 unchanged sentence

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis