First Internet Bancorp 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes appearing elsewhere in this report. This discussion and analysis includes certain forward-looking statements that involve risks, uncertainties, and assumptions. You should review the “Risk Factors” sections of this report and our Annual Report on Form 10-K for the year ended December 31, 2020 for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by such forward-looking statements. See also “Cautionary Note Regarding Forward-Looking Statements” at the beginning of this report. 37 Overview First Internet Bancorp (“we,” “our,” “us,” or the “Company”) is a bank holding company that conducts its primary business activities through its wholly owned subsidiary, First Internet Bank of Indiana, an Indiana chartered bank (the “Bank”). The Bank was the first state-chartered, Federal Deposit Insurance Corporation (“FDIC”) insured Internet bank and commenced banking operations in 1999. The Company was incorporated under the laws of the State of Indiana on September 15, 2005. On March 21, 2006, we consummated a plan of exchange by which we acquired all of the outstanding shares of the Bank. The Bank has three wholly owned subsidiaries. First Internet Public Finance Corp. provides a range of public and municipal finance lending and leasing products to governmental entities throughout the United States and acquires securities issued by state and local governments and other municipalities; JKH Realty Services, LLC, 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 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. 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 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 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 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 continues to assess the evolving health and safety situations at local and regional levels. Our plans remain flexible to adapt as these situations evolve. COVID-19 impacted our business during 2020 as the low interest rate environment following Federal Reserve rate cuts in the first quarter 2020 reduced the yield on interest-earning assets but also allowed us to reprice our interest-bearing 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. 38 Results of Operations 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. 39 Consolidated Average Balance Sheets and Net Interest Income Analyses For the periods presented, the following tables provide the average balances of interest-earning assets and interest-bearing liabilities and the related yields and cost of funds. The tables do not reflect any effect of income taxes except for net interest margin - FTE, as discussed below. Balances are based on the average of daily balances. Nonaccrual loans are included in average loan balances. (dollars in thousands) Three Months Ended 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 Assets Interest-earning assets Loans, including loans held-for-sale $ 3,079,130 $ 30,885 4.07 % $ 3,104,251 $ 30,930 3.96 % $ 2,977,994 $ 30,408 4.11 % Securities - taxable 461,300 1,779 1.56 % 492,573 1,988 1.61 % 531,046 3,619 2.74 % Securities - non-taxable 87,129 281 1.31 % 89,852 318 1.41 % 99,833 572 2.30 % Other earning assets 446,045 335 0.30 % 532,466 407 0.30 % 415,927 1,645 1.59 % Total interest-earning assets 4,073,604 33,280 3.31 % 4,219,142 33,643 3.17 % 4,024,800 36,244 3.62 % Allowance for loan losses (29,884) (27,805) (22,059) Noninterest-earning assets 129,553 124,870 97,191 Total assets $ 4,173,273 $ 4,316,207 $ 4,099,932 Liabilities Interest-bearing liabilities Interest-bearing demand deposits $ 180,746 $ 133 0.30 % $ 165,815 $ 156 0.37 % $ 122,925 $ 219 0.72 % Regular savings accounts 46,035 40 0.35 % 49,209 54 0.44 % 30,345 78 1.03 % Money market accounts 1,369,626 1,391 0.41 % 1,369,543 1,655 0.48 % 866,605 3,743 1.74 % Certificates and brokered deposits 1,519,580 7,064 1.89 % 1,673,702 8,712 2.07 % 2,069,170 13,168 2.56 % Total interest-bearing deposits 3,115,987 8,628 1.12 % 3,258,269 10,577 1.29 % 3,089,045 17,208 2.24 % Other borrowed funds 583,780 4,127 2.87 % 591,806 4,201 2.82 % 584,465 4,018 2.76 % Total interest-bearing liabilities 3,699,767 12,755 1.40 % 3,850,075 14,778 1.53 % 3,673,510 21,226 2.32 % Noninterest-bearing deposits 90,764 86,836 60,456 Other noninterest-bearing liabilities 46,774 55,832 54,961 Total liabilities 3,837,305 3,992,743 3,788,927 Shareholders’ equity 335,968 323,464 311,005 Total liabilities and shareholders’ equity $ 4,173,273 $ 4,316,207 $ 4,099,932 Net interest income $ 20,525 $ 18,865 $ 15,018 Interest rate spread 1 1.91% 1.64% 1.30 % Net interest margin 2 2.04% 1.78% 1.50 % Net interest margin - FTE 3 2.18% 1.91% 1.65 % 1 Yield on total interest-earning assets minus cost of total interest-bearing liabilities. 2 Net interest income divided by total average interest-earning assets (annualized). 3 On an FTE basis assuming a 21% tax rate. Net interest income is adjusted to reflect income from assets such as municipal loans and securities that are exempt from Federal income taxes. This is to recognize the income tax savings that facilitates a comparison between taxable and tax-exempt assets. The Company believes that it is a standard practice in the banking industry to present net interest margin and net interest income on a fully-taxable equivalent basis, as these measures provide useful information to make peer comparisons. Net interest margin - FTE represents a non-GAAP financial measure. See “Reconciliation of Non-GAAP Financial Measures” for a reconciliation of this measure to its most directly comparable GAAP measure. 40 Rate/Volume Analysis The following table illustrates the impact of changes in the volume of interest-earning assets and interest-bearing liabilities and interest rates on net interest income for the periods indicated. The change in interest not due solely to volume or rate has been allocated in proportion to the absolute dollar amounts of the change in each. (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 Loans, including loans held-for-sale $ (1,551) $ 1,506 $ (45) $ 2,222 $ (1,745) $ 477 Securities – taxable (140) (69) (209) (430) (1,410) (1,840) Securities – non-taxable (11) (26) (37) (66) (225) (291) Other earning assets (72) — (72) 772 (2,082) (1,310) Total (1,774) 1,411 (363) 2,498 (5,462) (2,964) Interest expense Interest-bearing deposits (485) (1,464) (1,949) 1,040 (9,620) (8,580) Other borrowed funds (288) 214 (74) (34) 143 109 Total (773) (1,250) (2,023) 1,006 (9,477) (8,471) (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 41 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. 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 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 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. (in thousands) Three Months Ended March 31, 2021 December 31, 2020 September 30, 2020 June 30, 2020 March 31, 2020 Service charges and fees $ 266 $ 206 $ 224 $ 182 $ 212 Loan servicing revenue 422 379 274 255 251 Loan servicing asset revaluation (155) (60) (103) (90) (179) Mortgage banking activities 5,750 7,987 9,630 3,408 3,668 Gain on sale of loans 1,723 3,702 2,033 762 1,801 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 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. 42 Noninterest Expense The following table presents noninterest expense for the last five completed fiscal quarters. (in thousands) Three Months Ended March 31, 2021 December 31, 2020 September 30, 2020 June 30, 2020 March 31, 2020 Salaries and employee benefits $ 9,492 $ 9,135 $ 9,533 $ 7,789 $ 7,774 Marketing, advertising and promotion 680 443 426 411 375 Consulting and professional services 986 788 614 932 1,177 Data processing 462 426 388 339 375 Loan expenses 534 630 408 399 599 Premises and equipment 1,601 1,601 1,568 1,602 1,625 Deposit insurance premium 425 450 440 435 485 Write-down of other real estate owned — — 2,065 — — Other 1,137 1,040 970 1,337 1,076 Total noninterest expense $ 15,317 $ 14,513 $ 16,412 $ 13,244 $ 13,486 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 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 The following table presents summary balance sheet data for the last five completed fiscal quarters. (in thousands) Balance Sheet Data: March 31, 2021 December 31, 2020 September 30, 2020 June 30, 2020 March 31, 2020 Total assets $ 4,188,570 $ 4,246,156 $ 4,333,624 $ 4,324,600 $ 4,168,146 Loans 3,058,694 3,059,231 3,012,914 2,973,674 2,892,093 Total securities 530,566 565,851 596,565 657,312 675,013 Loans held-for-sale 30,235 39,584 76,208 38,813 52,394 Noninterest-bearing deposits 100,700 96,753 86,088 82,864 70,562 Interest-bearing deposits 3,116,903 3,174,132 3,286,303 3,297,925 3,107,944 Total deposits 3,217,603 3,270,885 3,372,391 3,380,789 3,178,506 Advances from Federal Home Loan Bank 514,917 514,916 514,914 514,913 514,911 Total shareholders’ equity 344,566 330,944 318,102 307,711 305,127 43 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. Refer to the “Reconciliation of Non-GAAP Financial Measures” section of Part I, Item 2 of this report, Management’s Discussion and Analysis of Financial Condition and Results of Operations for additional information. Loan Portfolio Analysis The following table presents a summary of the Company’s loan portfolio for the last five completed fiscal quarters. (dollars in thousands) March 31, 2021 December 31, 2020 September 30, 2020 June 30, 2020 March 31, 2020 Commercial loans Commercial and industrial $ 71,835 2.3 % $ 75,387 2.5 % $ 77,116 2.6 % $ 81,687 2.7 % $ 95,227 3.3 % 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 % Investor commercial real estate 14,832 0.5 % 13,902 0.5 % 13,084 0.4 % 13,286 0.4 % 13,421 0.5 % Construction 123,483 4.0 % 110,385 3.6 % 92,154 3.1 % 77,591 2.6 % 64,581 2.2 % Single tenant lease financing 941,322 30.8 % 950,172 31.1 % 960,505 31.9 % 980,292 33.0 % 972,275 33.6 % Public finance 637,600 20.8 % 622,257 20.3 % 625,638 20.8 % 647,107 21.8 % 627,678 21.7 % Healthcare finance 510,237 16.8 % 528,154 17.3 % 461,740 15.3 % 380,956 12.8 % 372,266 12.9 % Small business lending 132,490 4.3 % 125,589 4.1 % 123,168 4.1 % 118,526 4.0 % 67,275 2.3 % 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 % Consumer loans Residential mortgage 190,148 6.2 % 186,787 6.1 % 203,041 6.7 % 208,728 7.0 % 218,730 7.6 % Home equity 17,949 0.6 % 19,857 0.6 % 22,169 0.7 % 22,640 0.8 % 23,855 0.8 % Other consumer 270,209 8.8 % 275,692 9.0 % 282,450 9.3 % 291,632 9.8 % 296,605 10.2 % Total consumer loans 478,306 15.6 % 482,336 15.7 % 507,660 16.7 % 523,000 17.6 % 539,190 18.6 % Net deferred loan origination costs, premiums and discounts on purchased loans and other (1) 60,659 2.0 % 61,264 2.0 % 62,754 2.1 % 64,332 2.2 % 65,443 2.3 % Total loans 3,058,694 100.0 % 3,059,231 100.0 % 3,012,914 100.0 % 2,973,674 100.0 % 2,892,093 100.0 % Allowance for loan losses (30,642) (29,484) (26,917) (24,465) (22,857) Net loans $ 3,028,052 $ 3,029,747 $ 2,985,997 $ 2,949,209 $ 2,869,236 (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. 44 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. 45 Asset Quality Nonperforming loans are comprised of nonaccrual loans and loans 90 days past due and accruing. Nonperforming assets include nonperforming loans, OREO and other nonperforming assets, which consist of repossessed assets. The following table provides a summary of the Company’s nonperforming assets for the last five completed fiscal quarters. (dollars in thousands) March 31, 2021 December 31, 2020 September 30, 2020 June 30, 2020 March 31, 2020 Nonaccrual loans Commercial loans: Commercial and industrial $ 1,002 $ — $ 117 $ 299 $ 218 Owner-occupied commercial real estate 4,266 1,838 1,390 2,066 1,390 Single tenant lease financing 7,080 7,116 7,148 4,680 4,680 Small business lending (1) 865 — — — — Total commercial loans 13,213 8,954 8,655 7,045 6,288 Consumer loans: Residential mortgage 1,120 1,183 1,085 1,042 991 Home equity 15 — — — — Other consumer 23 46 34 108 39 Total consumer loans 1,158 1,229 1,119 1,150 1,030 Total nonaccrual loans 14,371 10,183 9,774 8,195 7,318 Past Due 90 days and accruing loans Commercial loans: Commercial and industrial 278 — — — 73 Total commercial loans 278 — — — 73 Consumer loans: Residential mortgage — — — — 51 Other consumer — — — — 1 Total consumer loans — — — — 52 Total past due 90 days and accruing loans 278 — — — 125 Total nonperforming loans 14,649 10,183 9,774 8,195 7,443 Other real estate owned Investor commercial real estate — — — 2,065 2,065 Total other real estate owned — — — 2,065 2,065 Other nonperforming assets 29 35 8 44 114 Total nonperforming assets $ 14,678 $ 10,218 $ 9,782 $ 10,304 $ 9,622 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 % Allowance for loan losses to total loans, excluding PPP loans (3) 1.02 % 0.98 % 0.91 % 0.84 % 0.79 % 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. government. 2 Includes the impact of nonperforming small business lending loans, which are 100% guaranteed by the U.S. government. 3 This information represents a non-GAAP financial measure. See “Reconciliation of Non-GAAP Financial Measures” for a reconciliation of this measure to its most directly comparable GAAP measure. 46 Troubled Debt Restructurings The following table provides a summary of troubled debt restructurings for the last five completed fiscal quarters. (in thousands) March 31, 2021 December 31, 2020 September 30, 2020 June 30, 2020 March 31, 2020 Troubled debt restructurings – nonaccrual $ 2,606 $ 2,637 $ 811 $ 854 $ 94 Troubled debt restructurings – performing 1,187 367 365 372 378 Total troubled debt restructurings $ 3,793 $ 3,004 $ 1,176 $ 1,226 $ 472 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 The “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus” was issued by our banking regulators on March 22, 2020. This guidance encourages financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations due to the effects of COVID-19. Additionally, Section 4013 of the CARES Act further provides that loan modifications due to the impact of COVID-19 that would otherwise be classified as TDRs under GAAP will not be so classified. Modifications within the scope of this relief are in effect from the period beginning March 1, 2020 until the earlier of 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. As of March 31, 2021, the Company had 37 loans totaling $14.3 million in non-TDR loan modifications due to COVID-19. U.S. Small Business Administration Paycheck Protection Program Section 1102 of the CARES Act created the PPP, which is jointly administered by the U.S. Small Business Administration (“SBA”) and the Department of the Treasury. The PPP is designed to provide a direct incentive to small businesses to retain employees on their payroll during COVID-19 as well as to help cover certain utility costs and rent payments. These loans may be forgiven if certain conditions are satisfied and are fully guaranteed by the SBA. 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. 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 47 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 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 The following table provides a rollforward of the allowance for loan losses for the last five completed fiscal quarters. (dollars in thousands) Three Months Ended March 31, 2021 December 31, 2020 September 30, 2020 June 30, 2020 March 31, 2020 Balance, beginning of period $ 29,484 $ 26,917 $ 24,465 $ 22,857 $ 21,840 Provision charged to expense 1,276 2,865 2,509 2,491 1,461 Losses charged off (311) (408) (241) (1,016) (498) Recoveries 193 110 184 133 54 Balance, end of period $ 30,642 $ 29,484 $ 26,917 $ 24,465 $ 22,857 Net charge-offs to average loans 0.02 % 0.04 % 0.01 % 0.12 % 0.06 % 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 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. 48 Investment Securities Portfolio The following tables present the amortized cost and approximate fair value of our investment portfolio by security type for the last five completed fiscal quarters. (in thousands) Amortized Cost March 31, 2021 December 31, 2020 September 30, 2020 June 30, 2020 March 31, 2020 Securities available-for-sale U.S. Government-sponsored agencies $ 60,815 $ 61,765 $ 65,007 $ 68,203 $ 71,387 Municipal securities 79,168 82,757 87,365 91,906 94,981 Agency mortgage-backed securities 229,981 241,795 250,755 275,433 279,458 Private label mortgage-backed securities 40,550 57,268 71,519 101,110 114,363 Asset-backed securities 5,000 5,000 5,000 5,000 5,000 Corporate securities 48,433 48,419 48,406 48,394 43,378 Total available-for-sale 463,947 497,004 528,052 590,046 608,567 Securities held-to-maturity Municipal securities 14,560 14,571 14,582 14,603 14,617 Corporate securities 53,630 53,652 53,672 53,692 51,714 Total held-to-maturity 68,190 68,223 68,254 68,295 66,331 Total securities $ 532,137 $ 565,227 $ 596,306 $ 658,341 $ 674,898 (in thousands) Approximate Fair Value March 31, 2021 December 31, 2020 September 30, 2020 June 30, 2020 March 31, 2020 Securities available-for-sale U.S. Government-sponsored agencies $ 59,478 $ 60,545 $ 63,682 $ 66,544 $ 70,004 Municipal securities 79,208 82,489 86,421 90,562 94,819 Agency mortgage-backed securities 228,818 243,921 253,292 278,530 282,632 Private label mortgage-backed securities 41,106 58,116 72,626 101,925 115,024 Asset-backed securities 5,006 4,961 4,921 4,837 4,713 Corporate securities 48,760 47,596 47,369 46,619 41,490 Total available-for-sale 462,376 497,628 528,311 589,017 608,682 Securities held-to-maturity Municipal securities 15,109 15,317 15,328 15,274 15,678 Corporate securities 54,274 54,135 53,848 53,878 53,790 Total held-to-maturity 69,383 69,452 69,176 69,152 69,468 Total securities $ 531,759 $ 567,080 $ 597,487 $ 658,169 $ 678,150 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 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. 49 Accrued Expenses and Other Liabilities 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. Deposits The following table presents the composition of the Company’s deposit base for the last five completed fiscal quarters. (dollars in thousands) March 31, 2021 December 31, 2020 September 30, 2020 June 30, 2020 March 31, 2020 Noninterest-bearing deposits $ 100,700 3.1 % $ 96,753 3.0 % $ 86,088 2.6 % $ 82,864 2.5 % $ 70,562 2.2 % Interest-bearing demand deposits 186,015 5.8 % 188,645 5.8 % 155,054 4.6 % 152,391 4.5 % 123,233 3.9 % Savings accounts 51,251 1.6 % 43,200 1.3 % 49,890 1.5 % 43,366 1.3 % 32,485 1.0 % Money market accounts 1,397,449 43.4 % 1,350,566 41.3 % 1,359,178 40.3 % 1,241,874 36.7 % 930,698 29.3 % Certificates of deposits 1,174,764 36.5 % 1,289,319 39.4 % 1,360,575 40.3 % 1,470,905 43.5 % 1,493,644 47.0 % Brokered deposits 307,424 9.6 % 302,402 9.2 % 361,606 10.7 % 389,389 11.5 % 527,884 16.6 % 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 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 On October 26, 2020, the Company issued $10.0 million in aggregate principal amount of 6.0% Fixed-to-Floating Rate Subordinated Notes due 2030 (the “2030 Notes”). The Notes were offered and sold by the Company in a private placement and are scheduled to mature on November 1, 2030. The 2030 Notes bear interest at a fixed rate of 6.0% per annum from and including October 26, 2020, to, but excluding, November 1, 2025, and thereafter at a floating interest rate initially equal to the three-month term SOFR plus 5.795%. The 2030 Notes are unsecured subordinated obligations of the Company and may be repaid, without penalty, on any interest payment date on or after November 1, 2025. The 2030 Notes are intended to qualify as Tier 2 capital under regulatory guidelines. The net proceeds were used to redeem the 2025 Note in January 2021. Regulatory Capital Requirements The Company and the Bank are subject to various regulatory capital requirements administered by state and federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weighting and other factors. The Basel III Capital Rules became effective for the Company and the Bank on January 1, 2015, subject to a phase-in period for certain provisions. Quantitative measures established by the Basel III Capital Rules to ensure capital adequacy require the maintenance of minimum amounts and ratios of Common Equity Tier 1 capital, Tier 1 capital and Total capital, as defined in the regulations, to risk-weighted assets, and of Tier 1 capital to adjusted quarterly average assets (“Leverage Ratio”). 50 The Basel III Capital Rules were fully phased in on January 1, 2019 and require the Company and the Bank to maintain: 1) a minimum ratio of Common Equity Tier 1 capital to risk-weighted assets of 4.5%, plus a 2.5% “capital conservation buffer” (resulting in a minimum ratio of Common Equity Tier 1 capital to risk-weighted assets of 7.0%); 2) a minimum ratio of Tier 1 capital to risk-weighted assets of 6.0%, plus the capital conservation buffer (resulting in a minimum Tier 1 capital ratio of 8.5%); 3) a minimum ratio of Total capital to risk-weighted assets of 8.0%, plus the capital conservation buffer (resulting in a minimum Total capital ratio of 10.5%); and 4) a minimum Leverage Ratio of 4.0%. The 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 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. Actual Minimum Capital Required - Basel III Minimum Required to be Considered Well Capitalized (dollars in thousands) Capital Amount Ratio Capital Amount Ratio Capital Amount Ratio As of March 31, 2021: Common equity tier 1 capital to risk-weighted assets Consolidated $ 352,100 11.81 % $ 208,716 7.00 % N/A N/A Bank 389,810 13.08 % 208,566 7.00 % $ 193,669 6.50 % Tier 1 capital to risk-weighted assets Consolidated 352,100 11.81 % 253,441 8.50 % N/A N/A Bank 389,810 13.08 % 253,259 8.50 % 238,362 8.00 % Total capital to risk-weighted assets Consolidated 452,536 15.18 % 313,074 10.50 % N/A N/A Bank 420,452 14.11 % 312,849 10.50 % 297,952 10.00 % Leverage ratio Consolidated 352,100 8.46 % 166,449 4.00 % N/A N/A Bank 389,810 9.37 % 166,356 4.00 % 207,945 5.00 % Actual Minimum Capital Required - Basel III Minimum Required to be Considered Well Capitalized (dollars in thousands) Capital Amount Ratio Capital Amount Ratio Capital Amount Ratio As of December 31, 2020: Common equity tier 1 capital to risk-weighted assets Consolidated $ 342,159 11.31 % $ 211,828 7.00 % N/A N/A Bank 377,678 12.49 % 211,612 7.00 % $ 196,497 6.50 % Tier 1 capital to risk-weighted assets Consolidated 342,159 11.31 % 257,220 8.50 % N/A N/A Bank 377,678 12.49 % 256,957 8.50 % 241,842 8.00 % Total capital to risk-weighted assets Consolidated 451,246 14.91 % 317,742 10.50 % N/A N/A Bank 407,162 13.47 % 317,418 10.50 % 302,303 10.00 % Leverage ratio Consolidated 342,159 7.95 % 172,154 4.00 % N/A N/A Bank 377,678 8.78 % 172,036 4.00 % 215,045 5.00 % 51 Shareholders’ Dividends 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 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. Capital Resources The Company believes it has sufficient liquidity and capital resources to meet its cash and capital expenditure requirements for at least the next twelve months. The Company may explore strategic alternatives, including additional asset, deposit or revenue generation channels that complement our commercial and consumer banking platforms, which may require additional capital. If the Company is unable to secure such capital at favorable terms, its ability to take advantage of such opportunities could be adversely affected. Liquidity Liquidity management is the process used by the Company to manage the continuing flow of funds necessary to meet its financial commitments on a timely basis and at a reasonable cost while also maintaining safe and sound operations. Liquidity, represented by cash and investment securities, is a product of the Company’s operating, investing and financing activities. The primary sources of funds are deposits, principal and interest payments on loans and investment securities, maturing loans and investment securities, access to wholesale funding sources and collateralized borrowings. While scheduled payments and maturities of loans and investment securities are relatively predictable sources of funds, deposit flows are greatly influenced by interest rates, general economic conditions and competition. Therefore, the Company supplements deposit growth and enhances interest rate risk management through borrowings and wholesale funding, which are generally advances from the FHLB and brokered deposits. The Company holds cash and investment securities that qualify as liquid assets to maintain adequate liquidity to ensure safe and sound operations and meet its financial commitments. 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 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 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. In addition to its operating expenses, the Company is responsible for paying any dividends declared to its common shareholders and interest and principal on outstanding debt. The Company’s primary sources of funds are cash maintained at the holding company level and dividends from the Bank, the payment of which is subject to regulatory limits. At 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 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. 52 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. 53 Reconciliation of Non-GAAP Financial Measures This Management’s Discussion and Analysis contains financial information determined by methods other than in accordance with GAAP. Non-GAAP financial measures, specifically tangible common equity, tangible assets, tangible book value per common share, tangible common equity to tangible assets ratio, average tangible common equity, return on average tangible common equity, total interest income - FTE, net interest income - FTE, net interest margin - FTE and allowance for loan losses to loans, excluding PPP loans are used by the Company’s management to measure the strength of its capital and analyze profitability, including its ability to generate earnings on tangible capital invested by its shareholders. The Company also believes that it is a standard practice in the banking industry to present total interest income, net interest income and net interest margin on a fully-taxable equivalent basis, as those measures provide useful information for peer comparisons. Although the Company believes these non-GAAP financial measures provide a greater understanding of its business, they should not be considered a substitute for financial measures determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP financial measures that may be presented by other companies. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures are included in the following table for the last five completed fiscal quarters. (dollars in thousands, except share and per share data) Three Months Ended March 31, 2021 December 31, 2020 September 30, 2020 June 30, 2020 March 31, 2020 Total equity - GAAP $ 344,566 $ 330,944 $ 318,102 $ 307,711 $ 305,127 Adjustments: Goodwill (4,687) (4,687) (4,687) (4,687) (4,687) Tangible common equity $ 339,879 $ 326,257 $ 313,415 $ 303,024 $ 300,440 Total assets - GAAP $ 4,188,570 $ 4,246,156 $ 4,333,624 $ 4,324,600 $ 4,168,146 Adjustments: Goodwill (4,687) (4,687) (4,687) (4,687) (4,687) Tangible assets $ 4,183,883 $ 4,241,469 $ 4,328,937 $ 4,319,913 $ 4,163,459 Total common shares outstanding 9,823,831 9,800,569 9,800,569 9,799,047 9,801,825 Book value per common share $ 35.07 $ 33.77 $ 32.46 $ 31.40 $ 31.13 Effect of goodwill (0.47) (0.48) (0.48) (0.48) (0.48) Tangible book value per common share $ 34.60 $ 33.29 $ 31.98 $ 30.92 $ 30.65 Total shareholders’ equity to assets 8.23 % 7.79 % 7.34 % 7.12 % 7.32 % Effect of goodwill (0.11) % (0.10) % (0.10) % (0.11) % (0.10) % 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 Adjustments: Average goodwill (4,687) (4,687) (4,687) (4,687) (4,687) Average tangible common equity $ 331,281 $ 318,777 $ 308,924 $ 302,181 $ 306,318 Return on average shareholders’ equity 12.61 % 13.64 % 10.67 % 5.15 % 7.78 % Effect of goodwill 0.18 % 0.20 % 0.16 % 0.08 % 0.12 % Return on average tangible common equity 12.79 % 13.84 % 10.83 % 5.23 % 7.90 % 54 (dollars in thousands, except share and per share data) Three Months Ended March 31, 2021 December 31, 2020 September 30, 2020 June 30, 2020 March 31, 2020 Total interest income $ 33,280 $ 33,643 $ 32,750 $ 34,222 $ 36,244 Adjustments: Fully-taxable equivalent adjustments 1 1,356 1,400 1,424 1,437 1,535 Total interest income - FTE $ 34,636 $ 35,043 $ 34,174 $ 35,659 $ 37,779 Net interest income $ 20,525 $ 18,865 $ 16,232 $ 14,426 $ 15,018 Adjustments: Fully-taxable equivalent adjustments 1 1,356 1,400 1,424 1,437 1,535 Net interest income - FTE $ 21,881 $ 20,265 $ 17,656 $ 15,863 $ 16,553 Net interest margin 2.04 % 1.78 % 1.53 % 1.37 % 1.50 % Effect of fully-taxable equivalent adjustments 1 0.14 % 0.13 % 0.14 % 0.13 % 0.15 % Net interest margin - FTE 2.18 % 1.91 % 1.67 % 1.50 % 1.65 % Allowance for loan losses $ 30,642 $ 29,484 $ 26,917 $ 24,465 $ 22,857 Loans $ 3,058,694 $ 3,059,231 $ 3,012,914 $ 2,973,674 $ 2,892,093 Adjustments: PPP loans (53,365) (50,554) (58,337) (58,948) — Loans, excluding PPP loans $ 3,005,329 $ 3,008,677 $ 2,954,577 $ 2,914,726 $ 2,892,093 Allowance for loan losses to loans 1.00 % 0.96 % 0.89 % 0.82 % 0.79 % Effect of PPP loans 0.02 % 0.02 % 0.02 % 0.02 % 0.00 % Allowance for loan losses to loans, excluding PPP loans 1.02 % 0.98 % 0.91 % 0.84 % 0.79 % 1 Assuming a 21% tax rate Critical Accounting Policies and Estimates There have been no material changes in the Company’s critical accounting policies or estimates from those disclosed in its Annual Report on Form 10-K for the year ended December 31, 2020. Recent Accounting Pronouncements Refer to Note 16 to the condensed consolidated financial statements. Off-Balance Sheet Arrangements In the ordinary course of business, the Company enters into financial transactions to extend credit, interest rate swap agreements and forms of commitments that may be considered off-balance sheet arrangements. Interest rate swaps are arranged to receive hedge accounting treatment and are classified as either fair value or cash flow hedges. Fair value hedges are purchased to convert certain fixed rate assets to floating rate. Cash flow hedges are used to convert certain variable rate liabilities into fixed rate liabilities. In June 2020, the Company terminated all fair value hedging instruments associated with loans. At 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 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. Refer to Note 14 to the condensed consolidated financial statements for additional information about derivative financial instruments. 55