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. 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. 39 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 originally 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, which provided lending on a nationwide basis for healthcare practice finance or acquisition, acquisition or refinancing of owner-occupied CRE and equipment purchases. During the second quarter 2021, Provide announced that it had entered into an agreement to be acquired by a super-regional financial institution, which is expected to close in the third quarter 2021. Subsequent to closing, we expect that the acquiring institution will retain most, if not all, of Provide’s loan origination activity and that our healthcare finance loan balances may to decline. 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. In connection with our commitment to small businesses, during the second quarter 2021 we entered into a relationship with a fintech-oriented specialty lender that provides financing to franchisees in various industry segments. Through this relationship, we expect to begin funding portfolio loans in the third quarter 2021 and expect to fund up to $100.0 million of loans over the next twelve months. We also expect this relationship to provide SBA 7(a) loan opportunities to supplement our own origination efforts. 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. 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. During 2021, federal, state and local governments have continued to take additional steps to reopen and stimulate economies. We are optimistic that the combination of vaccinations and government stimulus programs will help mitigate any significant negative effects from the pandemic on our business and credit quality; however, there is still significant uncertainty concerning the ongoing trajectory of the pandemic and the speed at which the national and local economies will recover. The 40 extent to which COVID-19 will continue to impact our business will depend on numerous evolving factors and future developments that we are not able to predict, including the new Delta variant of COVID-19 (which appears to be the most transmissible variant to date), the effectiveness of continuing containment measures, including the speed of the ongoing vaccine distribution effort, the efficacy of the various vaccines, and how quickly and to what extent normal economic and operating conditions can resume. Should economic conditions worsen to levels experienced in 2020, our business and credit quality could be adversely affected. 41 Results of Operations During the second quarter 2021, net income was $13.1 million, or $1.31 per diluted share, compared to the second quarter 2020 net income of $3.9 million, or $0.40 per diluted share, representing an increase in net income of $9.2 million, or 233.1%. During the six months ended June 30, 2021, net income was $23.5 million, or $2.36 per diluted share, compared to the six months ended June 30, 2020 net income of $10.0 million, or $1.02 per diluted share, representing an increase in net income of $13.6 million, or 136.6%. The $9.2 million increase in net income for the second quarter 2021 compared to the second quarter 2020 was due primarily to an increase of $7.2 million, or 49.8%, in net interest income, an increase of $4.0 million, or 80.2%, in noninterest income and a decrease of $2.5 million, or 99.2%, in provision for loan losses, partially offset by increases of $2.6 million in income tax expense and $1.8 million, or 13.8%, in noninterest expense. The $13.6 million increase in net income for the six months ended June 30, 2021 compared to the six months ended June 30, 2020 was due primarily to an increase of $12.7 million, or 43.1%, in net interest income, an increase of $6.2 million, or 55.0%, in noninterest income and a decrease of $2.7 million, or 67.2%, in provision for loan losses, partially offset by a $4.2 million increase in income tax expense and a $3.7 million, or 13.7%, increase in noninterest expense. During the second quarter 2021, return on average assets (“ROAA”), return on average shareholders’ equity (“ROAE”), and return on average tangible common equity (“ROATCE”) were 1.25%, 14.88%, and 15.09%, respectively, compared to 0.37%, 5.15%, and 5.23%, respectively, for the second quarter 2020. During the six months ended June 30, 2021, ROAA, ROAE, and ROATCE were 1.13%, 13.78%, and 13.97%, respectively, compared to 0.47%, 6.48%, and 6.58%, respectively, for the six months ended June 30, 2020. During the second quarter of 2021, the Company recognized a $2.5 million pre-tax gain of sale of its corporate headquarters. Excluding this item, adjusted net income for the second quarter of 2021 was $11.1 million, or $1.11 per diluted share, and adjusted net income for the six months ended June 30, 2021 was $21.6 million, or $2.16 per diluted share. Additionally, for the second quarter of 2021, adjusted ROAA, adjusted ROAE and adjusted ROATCE were 1.06%, 12.62% and 12.79, respectively, while for the six months ended June 30, 2021 adjusted ROAA, adjusted ROAE and adjusted ROATCE were 1.04%, 12.62% and 12.79, respectively. These profitability ratios improved in the 2021 periods compared to the 2020 periods, as increases in net income and adjusted net income outpaced asset growth, which was relatively flat. 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. 42 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 June 30, 2021 March 31, 2021 June 30, 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 $ 3,016,330 $ 30,835 4.10 % $ 3,079,130 $ 30,885 4.07 % $ 2,989,772 $ 29,730 4.00 % Securities - taxable 490,634 1,921 1.57 % 461,300 1,779 1.56 % 560,947 3,276 2.35 % Securities - non-taxable 84,050 259 1.24 % 87,129 281 1.31 % 96,675 457 1.90 % Other earning assets 509,735 362 0.28 % 446,045 335 0.30 % 594,296 759 0.51 % Total interest-earning assets 4,100,749 33,377 3.26 % 4,073,604 33,280 3.31 % 4,241,690 34,222 3.24 % Allowance for loan losses (30,348) (29,884) (23,388) Noninterest-earning assets 136,565 129,553 111,872 Total assets $ 4,206,966 $ 4,173,273 $ 4,330,174 Liabilities Interest-bearing liabilities Interest-bearing demand deposits $ 192,777 $ 143 0.30 % $ 180,746 $ 133 0.30 % $ 137,487 $ 237 0.69 % Regular savings accounts 55,811 49 0.35 % 46,035 40 0.35 % 37,204 92 0.99 % Money market accounts 1,416,406 1,462 0.41 % 1,369,626 1,391 0.41 % 1,089,063 3,541 1.31 % Certificates and brokered deposits 1,444,171 6,051 1.68 % 1,519,580 7,064 1.89 % 2,006,966 11,893 2.38 % Total interest-bearing deposits 3,109,165 7,705 0.99 % 3,115,987 8,628 1.12 % 3,270,720 15,763 1.94 % Other borrowed funds 584,751 4,065 2.79 % 583,780 4,127 2.87 % 584,543 4,033 2.77 % Total interest-bearing liabilities 3,693,916 11,770 1.28 % 3,699,767 12,755 1.40 % 3,855,263 19,796 2.07 % Noninterest-bearing deposits 98,207 90,764 73,758 Other noninterest-bearing liabilities 61,949 46,774 94,285 Total liabilities 3,854,072 3,837,305 4,023,306 Shareholders’ equity 352,894 335,968 306,868 Total liabilities and shareholders’ equity $ 4,206,966 $ 4,173,273 $ 4,330,174 Net interest income $ 21,607 $ 20,525 $ 14,426 Interest rate spread 1 1.98% 1.91% 1.17 % Net interest margin 2 2.11% 2.04% 1.37 % Net interest margin - FTE 3 2.25% 2.18% 1.50 % 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. 43 (dollars in thousands) Six Months Ended June 30, 2021 June 30, 2020 Average Balance Interest /Dividends Yield /Cost Average Balance Interest /Dividends Yield /Cost Assets Interest-earning assets Loans, including loans held-for-sale $ 3,047,560 $ 61,720 4.08 % $ 2,983,883 $ 60,138 4.05 % Securities - taxable 476,049 3,700 1.57 % 545,997 6,895 2.54 % Securities - non-taxable 85,581 540 1.27 % 98,254 1,029 2.11 % Other earning assets 478,065 697 0.29 % 505,111 2,404 0.96 % Total interest-earning assets 4,087,255 66,657 3.29 % 4,133,245 70,466 3.43 % Allowance for loan losses (30,117) (22,724) Noninterest-earning assets 133,074 104,532 Total assets $ 4,190,212 $ 4,215,053 Liabilities Interest-bearing liabilities Interest-bearing demand deposits $ 186,795 $ 276 0.30 % $ 130,206 $ 456 0.70 % Regular savings accounts 50,950 89 0.35 % 33,774 170 1.01 % Money market accounts 1,393,145 2,853 0.41 % 977,834 7,284 1.50 % Certificates and brokered deposits 1,481,667 13,115 1.78 % 2,038,068 25,061 2.47 % Total interest-bearing deposits 3,112,557 16,333 1.06 % 3,179,882 32,971 2.09 % Other borrowed funds 584,268 8,192 2.83 % 584,504 8,051 2.77 % Total interest-bearing liabilities 3,696,825 24,525 1.34 % 3,764,386 41,022 2.19 % Noninterest-bearing deposits 94,506 67,107 Other noninterest-bearing liabilities 54,403 74,623 Total liabilities 3,845,734 3,906,116 Shareholders’ equity 344,478 308,937 Total liabilities and shareholders’ equity $ 4,190,212 $ 4,215,053 Net interest income $ 42,132 $ 29,444 Interest rate spread 1 1.95 % 1.24 % Net interest margin 2 2.08 % 1.43 % Net interest margin - FTE 3 2.21 % 1.58 % 1 Yield on total interest-earning assets minus cost of total interest-bearing liabilities. 2 Net interest income divided by total average interest-earning assets (annualized). 3 On an FTE basis assuming a 21% tax rate. Net interest income is adjusted to reflect income from assets such as municipal loans and securities that are exempt from Federal income taxes. This is to recognize the income tax savings that facilitates a comparison between taxable and tax-exempt assets. The Company believes that it is a standard practice in the banking industry to present net interest margin and net interest income on a fully-taxable equivalent basis, as these measures provide useful information to make peer comparisons. Net interest margin - FTE represents a non-GAAP financial measure. See “Reconciliation of Non-GAAP Financial Measures” for a reconciliation of this measure to its most directly comparable GAAP measure. 44 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 June 30, 2021 vs. March 31, 2021 Due to Changes in Three Months Ended June 30, 2021 vs. June 30, 2020 Due to Changes in Six Months Ended June 30, 2021 vs. June 30, 2020 Due to Changes in Volume Rate Net Volume Rate Net Volume Rate Net Interest income Loans, including loans held-for-sale $ (1,394) $ 1,344 $ (50) $ 290 $ 815 $ 1,105 $ 1,174 $ 408 $ 1,582 Securities – taxable 129 13 142 (371) (984) (1,355) (803) (2,392) (3,195) Securities – non-taxable (9) (13) (22) (54) (144) (198) (120) (369) (489) Other earning assets 140 (113) 27 (95) (302) (397) (122) (1,585) (1,707) Total (1,134) 1,231 97 (230) (615) (845) 129 (3,938) (3,809) Interest expense Interest-bearing deposits (17) (906) (923) (738) (7,320) (8,058) (685) (15,953) (16,638) Other borrowed funds 49 (111) (62) 2 30 32 (11) 152 141 Total 32 (1,017) (985) (736) (7,290) (8,026) (696) (15,801) (16,497) (Decrease) increase in net interest income $ (1,166) $ 2,248 $ 1,082 $ 506 $ 6,675 $ 7,181 $ 825 $ 11,863 $ 12,688 Net interest income for the second quarter 2021 was $21.6 million, an increase of $7.2 million, or 49.8%, compared to $14.4 million for the second quarter 2020. The increase in net interest income was the result of an $8.0 million, or 40.5%, decrease in total interest expense to $11.8 million for the second quarter 2021 from $19.8 million for the second quarter 2020. The decrease in total interest expense was partially offset by a $0.8 million, or 2.5%, decrease in total interest income to $33.4 million for the second quarter 2021 from $34.2 million for the second quarter 2020. Net interest income for the six months ended June 30, 2021 was $42.1 million, an increase of $12.7 million, or 43.1%, compared to $29.4 million for the six months ended June 30, 2020. The increase in net interest income was the result of a $16.5 million, or 40.2%, decrease in total interest expense to $24.5 million for the six months ended June 30, 2021 from $41.0 million for the six months ended June 30, 2020, partially offset by a $3.8 million, or 5.4%, decrease in total interest income to $66.7 million for the six months ended June 30, 2021 from $70.5 million for the six months ended June 30, 2020. The decrease in total interest income for the second quarter 2021 compared to the second quarter 2020 was due to decreases in interest earned on securities and other earning assets, partially offset by an increase in interest earned on loans. Interest income earned on securities decreased $1.6 million, or 41.6%, due to a decline of 76 basis points (“bps”) in the yield earned on securities, as well as a decrease of $82.9 million, or 12.6%, 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. Interest income earned on other earning assets declined $0.4 million, or 52.3%, due mainly to a 23 bp decline in the yield earned on these assets, as well as a decrease of $84.6 million, or 14.2%, in the average balance of other earning assets. The decrease in the average balance of other earning assets was due primarily to lower cash balances. Interest income earned on loans increased $1.1 million, or 3.7%, due primarily to an increase of 10 bps in the yield earned on average loan balances, as well as an increase of $26.6 million, or 0.9%, in 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”), partially offset by a decrease in the average balance of residential mortgage, single tenant lease financing, public finance and commercial, and industrial loan balances. 45 The decrease in total interest income for the six months ended June 30, 2021 compared to the six months ended June 30, 2020 was due primarily to a decrease of $82.6 million, or 12.8%, in the average balance of securities and the yield earned on the securities portfolio decreased 95 bps for the six months ended June 30, 2021 compared to the six months ended June 30, 2020. 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. The average balance in other earning assets also decreased $27.0 million, or 5.4%, due primarily to lower cash balances. These decreases were partially offset by an increase of $63.7 million, or 2.1%, in the average balance of loans, as well as an increase of 3 bps in the yield on loans. 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”), partially offset by a decrease in the average balance of residential mortgage, single tenant lease financing, public finance and commercial, and industrial loan balances. Overall, the yield on interest-earning assets for the second quarter 2021 increased 2 bps to 3.26% from 3.24% for the second quarter 2020. The yield on interest-earning assets for the six months ended June 30, 2021 declined 14 bps to 3.29% from 3.43% for the six months ended June 30, 2020. The increase in the yield earned on interest-earning assets for the second quarter 2021 compared to the second quarter 2020 was due to a 10 bp increase in the yield earned on loans, partially offset by decreases of 76 bps in the yield earned on securities and 23 bps in other earning assets. The decrease in the yield earned on interest-earning assets for the six months ended June 30, 2021 compared to the six months ended June 30, 2020 was due to decreases of 95 bps in the yield earned on securities and 67 bps in other earning assets, partially offset by a 3 bp increase in the yield earned on loans. 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 market interest rates negatively impacted the yields earned on securities and cash balances during both the quarter and the six months ended June 30, 2021, in comparison to the same time periods in 2020. The decrease in total interest expense for the second quarter 2021 compared to the second quarter 2020 was due to a decrease in interest expense related to interest-bearing deposits. Interest expense on certificates and brokered deposits decreased $5.8 million, or 49.1%, due to a decline of 70 bps in the cost of these deposits, as well as a $562.8 million, or 28.0%, decrease in the average balance of these deposits. The decrease in certificates and brokered deposit balances was driven by the Company’s pricing strategy to reduce the level of these higher cost deposits. The decrease in interest expense related to money market accounts of $2.1 million, or 58.7%, was driven by a decline of 90 bps in the cost of these deposits, partially offset by an increase of $327.3 million, or 30.1%, in the average balance of these deposits. Average money market balances increased from the prior year period due primarily to targeted digital marketing efforts to grow small business accounts, as well as consumers, small businesses and commercial clients increasing their cash balances due in part to the economic uncertainty resulting from COVID-19. The decrease in interest expense related to interest-bearing demand deposits and savings accounts was due primarily to decreases of 39 bps and 64 bps, respectively, partially offset by increases of $55.3 million, or 40.2%, and $18.6 million, or 50.0%, respectively, in the average balance of these deposits. The decrease in total interest expense for the six months ended June 30, 2021 compared to the six months ended June 30, 2020, was driven primarily by a 103 bp decline in the cost of funds related to interest-bearing deposits and a decrease of $67.3 million, or 2.1%, in the average balance of interest-bearing deposits. The decrease in the cost of interest-bearing deposits was due primarily to a $556.4 million, or 27.3%, decrease in average certificates and brokered deposits balances and a 69 bp decrease in the related cost of these deposits. The decrease in interest expense related to money market accounts of $4.4 million, or 60.8%, was driven by a decline of 109 bps in the cost of these deposits, partially offset by an increase of $415.3 million, or 42.5%, in the average balance of these deposits. Overall, the cost of total interest-bearing liabilities for the second quarter 2021 declined 79 bps to 1.28% from 2.07% for the second quarter 2020. Additionally, the cost of total interest-bearing liabilities for the six months ended June 30, 2021 declined 85 bps to 1.34% from 2.19% for the six months ended June 30, 2020. Similar to asset yields, declines in the cost of funds were due to the continued decrease in market interest rates from the prior year periods. 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 non-maturity deposit accounts also contributed to the decline in the cost of deposit funding. Net interest margin (“NIM”) was 2.11% for the second quarter 2021 compared to 1.37% for the second quarter 2020; an increase of 74 bps. On a fully-taxable equivalent (“FTE”) basis, NIM was 2.25% for the second quarter 2021 compared to 1.50% for the second quarter 2020; an increase of 75 bps. 46 NIM was 2.08% for the six months ended June 30, 2021 compared to 1.43% for the six months ended June 30, 2020; an increase of 65 bps. FTE NIM was 2.21% for the six months ended June 30, 2021 compared to 1.58% for the six months ended June 30, 2020; an increase of 63 bps. The increase in second quarter 2021 NIM and FTE NIM compared to the second quarter 2020 reflects a decrease in the cost of funds while asset yields were up modestly. The reductions in the cost of interest-bearing liabilities was due primarily to the continued decrease in market interest rates from the prior year 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. The increase in year-to-date June 2021 NIM and FTE NIM compared to year-to-date June 2020 reflects a decrease in the cost of funds, partially offset by a moderate decrease in interest-earning asset yields. The decline in the cost of interest-bearing liabilities and the yield on interest-earning assets was due primarily to the continued decrease in market interest rates from the prior year period. As the pace of the decline in short-term market interest rates has slowed, the Company believes that yields on interest-earning assets have largely stabilized. Furthermore, the Company has approximately $779.0 million of certificates and brokered deposits with a weighted average cost of 1.35% 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 during the second half of 2021. Noninterest Income The following table presents noninterest income for the last five completed fiscal quarters and the six months ended June 30, 2021 and 2020. (in thousands) Three Months Ended Six Months Ended June 30, 2021 March 31, 2021 December 31, 2020 September 30, 2020 June 30, 2020 June 30, 2021 June 30, 2020 Service charges and fees $ 280 $ 266 $ 206 $ 224 $ 182 $ 546 $ 394 Loan servicing revenue 457 422 379 274 255 879 506 Loan servicing asset revaluation (240) (155) (60) (103) (90) (395) (269) Mortgage banking activities 2,674 5,750 7,987 9,630 3,408 8,424 7,076 Gain on sale of loans 3,019 1,723 3,702 2,033 762 4,742 2,563 Gain on sale of securities — — — 98 — — 41 Gain on sale of premises and equipment 2,523 — — — — 2,523 — Other 249 369 443 339 456 618 873 Total noninterest income $ 8,962 $ 8,375 $ 12,657 $ 12,495 $ 4,973 $ 17,337 $ 11,184 During the second quarter 2021, noninterest income was $9.0 million, representing an increase of $4.0 million, or 80.2%, compared to $5.0 million for the second quarter 2020. The increase in noninterest income was due primarily to increases in revenue from gain on sale of premises and equipment and gain on sale of loans, partially offset by decreases in mortgage banking activities and other noninterest income. The increase in gain on sale of premises and equipment was due to the Company completing the sale of its current headquarters. The increase in gain on sale of loans was due an increase in the volume of U.S. Small Business Administration 7(a) guaranteed loan sales and an increase in secondary market premiums during the second quarter 2021. The decline in mortgage banking revenue in the second quarter of 2021 versus the second quarter of 2020 was due primarily to decreases in interest rate locks, sold loan volume and gain-on-sale margins. The decrease in other noninterest income was due to various items, none of which were individually deemed significant. During the six months ended June 30, 2021, noninterest income was $17.3 million, an increase of $6.2 million, or 55.0%, compared to $11.2 million for the six months ended June 30, 2020. The increase in noninterest income was due primarily to increases in revenue from gain on sale of premises and equipment, gain on sale of loans, mortgage banking activities, and loan servicing revenue, which was partially offset by a decrease in other income. The increase in gain on sale of premises and equipment was due to the Company completing the sale of its current headquarters. The increase in gain on sale of loans was due to an increase in the volume of SBA 7(a) guaranteed loan sales and an increase in secondary market premiums during the six months ended June 30, 2021. The increase in mortgage banking revenue was due mainly to higher gain-on-sale margins. The increase in loan servicing revenue was due to growth in the balance of the Company’s SBA 7(a) servicing 47 portfolio due to origination activity over the last twelve months. The decrease in other noninterest income was due to various items, none of which were individually deemed significant. Noninterest Expense The following table presents noninterest expense for the last five completed fiscal quarters and the six months ended June 30, 2021 and 2020. (in thousands) Three Months Ended Six Months Ended June 30, 2021 March 31, 2021 December 31, 2020 September 30, 2020 June 30, 2020 June 30, 2021 June 30, 2020 Salaries and employee benefits $ 9,232 $ 9,492 $ 9,135 $ 9,533 $ 7,789 $ 18,724 $ 15,563 Marketing, advertising and promotion 872 680 443 426 411 1,552 786 Consulting and professional services 1,078 986 788 614 932 2,064 2,109 Data processing 382 462 426 388 339 844 714 Loan expenses 541 534 630 408 399 1,075 998 Premises and equipment 1,587 1,601 1,601 1,568 1,602 3,188 3,227 Deposit insurance premium 275 425 450 440 435 700 920 Write-down of other real estate owned — — — 2,065 — — — Other 1,108 1,137 1,040 970 1,337 2,245 2,413 Total noninterest expense $ 15,075 $ 15,317 $ 14,513 $ 16,412 $ 13,244 $ 30,392 $ 26,730 Noninterest expense for the second quarter 2021 was $15.1 million, compared to $13.2 million for the second quarter 2020. The increase of $1.8 million, or 13.8%, compared to the second quarter 2020 was due primarily to increases of $1.4 million in salaries and employee benefits and $0.5 million in marketing, advertising and promotion, partially offset by decreases of $0.2 million and $0.2 million in deposit insurance premium and other noninterest expense, respectively. 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 small business lending incentive compensation for the second quarter 2021. The increase in marketing, advertising and promotion was due primarily to higher mortgage lead generation costs and sponsorship initiatives. The decrease in other expenses was due primarily to a $0.3 million charitable contribution the Company made in the second quarter 2020 to assist small businesses and nonprofits in addressing the economic challenges of the COVID-19 pandemic. The decrease in deposit insurance premium is due primarily to a decrease in the balance of brokered deposits and a decrease in the overall size of the balance sheet, both of which positively impact the formula used to calculate deposit insurance expense. Noninterest expense for the six months ended June 30, 2021 was $30.4 million, compared to $26.7 million for the six months ended June 30, 2020. The increase of $3.7 million, or 13.7%, compared to the six months ended June 30, 2020 was due primarily to increases of $3.2 million in salaries and employee benefits and $0.8 million in marketing, advertising and promotion, partially offset by decreases of $0.2 million and $0.2 million in deposit insurance premium and other noninterest expense, respectively. 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 small business lending incentive compensation. The increase in marketing, advertising and promotion was due primarily to higher mortgage lead generation costs and digital marketing initiatives. The decrease in deposit insurance premium was due primarily to a decrease in the balance of brokered deposits and a decrease in the overall size of the balance sheet, both of which positively impact the formula used to calculate deposit insurance expense. The decrease in other expenses was due primarily to a $0.3 million charitable contribution the Company made in the second quarter 2020 to assist small businesses and nonprofits in addressing the economic challenges of the COVID-19 pandemic. Income tax provision was $2.4 million for the second quarter 2021, resulting in an effective tax rate of 15.4%, compared to a tax benefit of $0.3 million for the second quarter 2020. Income tax provision was $4.2 million for the six months ended June 30, 2021, resulting in an effective tax rate of 15.2%, compared to an income tax benefit of less than $0.1 million for the six months ended June 30, 2020. The increase in income tax provision for both the three and six months ended June 30, 2021 compared to the three and six months ended June 30, 2020, was due primarily to the increase in pre-tax earnings driven by increased net interest income and noninterest income, partially offset by higher noninterest expenses. Additionally, the lower income tax provision and effective tax rate during the six months ended June 30, 2020, was impacted by the passage of the 48 CARES Act, which was signed into law on March 27, 2020, and provided the Company the ability to carryback certain federal net operating losses. Financial Condition The following table presents summary balance sheet data for the last five completed fiscal quarters. (in thousands) Balance Sheet Data: June 30, 2021 March 31, 2021 December 31, 2020 September 30, 2020 June 30, 2020 Total assets $ 4,204,642 $ 4,188,570 $ 4,246,156 $ 4,333,624 $ 4,324,600 Loans 2,957,608 3,058,694 3,059,231 3,012,914 2,973,674 Total securities 729,178 530,566 565,851 596,565 657,312 Loans held-for-sale 27,587 30,235 39,584 76,208 38,813 Noninterest-bearing deposits 113,996 100,700 96,753 86,088 82,864 Interest-bearing deposits 3,092,151 3,116,903 3,174,132 3,286,303 3,297,925 Total deposits 3,206,147 3,217,603 3,270,885 3,372,391 3,380,789 Advances from Federal Home Loan Bank 514,919 514,917 514,916 514,914 514,913 Total shareholders’ equity 358,641 344,566 330,944 318,102 307,711 Total assets decreased $41.5 million, or 1.0%, to $4.2 billion at June 30, 2021 compared to $4.2 billion at December 31, 2020. This decrease was driven by a $64.7 million, or 2.0%, decrease in deposit balances, which includes a $202.0 million, or 15.7%, decrease in certificates of deposits and an $81.8 million, or 6.1%, increase in money market account balances. As of June 30, 2021, total shareholders’ equity was $358.6 million, an increase of $27.7 million, or 8.4%, 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 $354.0 million as of June 30, 2021, representing an increase of $27.7 million, or 8.5%, compared to December 31, 2020. As both total shareholders’ equity and tangible common equity increased, while both total assets and tangible assets decreased 1.0%, respectively, the ratio of total shareholders’ equity to total assets increased to 8.53% as of June 30, 2021 from 7.79% as of December 31, 2020, and the ratio of tangible common equity to tangible assets increased to 8.43% as of June 30, 2021 from 7.69% as of December 31, 2020. Book value per common share increased 7.8% to $36.39 as of June 30, 2021 from $33.77 as of December 31, 2020. Tangible book value per share increased 7.9% to $35.92 as of June 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. 49 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) June 30, 2021 March 31, 2021 December 31, 2020 September 30, 2020 June 30, 2020 Commercial loans Commercial and industrial $ 96,203 3.3 % $ 71,835 2.3 % $ 75,387 2.5 % $ 77,116 2.6 % $ 81,687 2.7 % Owner-occupied commercial real estate 87,136 2.9 % 87,930 2.9 % 89,785 2.9 % 89,095 3.0 % 86,897 2.9 % Investor commercial real estate 28,871 1.0 % 14,832 0.5 % 13,902 0.5 % 13,084 0.4 % 13,286 0.4 % Construction 117,970 4.0 % 123,483 4.0 % 110,385 3.6 % 92,154 3.1 % 77,591 2.6 % Single tenant lease financing 913,115 30.9 % 941,322 30.8 % 950,172 31.1 % 960,505 31.9 % 980,292 33.0 % Public finance 612,138 20.7 % 637,600 20.8 % 622,257 20.3 % 625,638 20.8 % 647,107 21.8 % Healthcare finance 455,890 15.3 % 510,237 16.8 % 528,154 17.3 % 461,740 15.3 % 380,956 12.8 % Small business lending 123,293 4.2 % 132,490 4.3 % 125,589 4.1 % 123,168 4.1 % 118,526 4.0 % Total commercial loans 2,434,616 82.3 % 2,519,729 82.4 % 2,515,631 82.3 % 2,442,500 81.2 % 2,386,342 80.2 % Consumer loans Residential mortgage 177,148 6.0 % 190,148 6.2 % 186,787 6.1 % 203,041 6.7 % 208,728 7.0 % Home equity 17,510 0.6 % 17,949 0.6 % 19,857 0.6 % 22,169 0.7 % 22,640 0.8 % Other consumer 271,796 9.2 % 270,209 8.8 % 275,692 9.0 % 282,450 9.3 % 291,632 9.8 % Total consumer loans 466,454 15.8 % 478,306 15.6 % 482,336 15.7 % 507,660 16.7 % 523,000 17.6 % Net deferred loan origination costs, premiums and discounts on purchased loans and other (1) 56,538 1.9 % 60,659 2.0 % 61,264 2.0 % 62,754 2.1 % 64,332 2.2 % Total loans 2,957,608 100.0 % 3,058,694 100.0 % 3,059,231 100.0 % 3,012,914 100.0 % 2,973,674 100.0 % Allowance for loan losses (28,066) (30,642) (29,484) (26,917) (24,465) Net loans $ 2,929,542 $ 3,028,052 $ 3,029,747 $ 2,985,997 $ 2,949,209 (1) Includes carrying value adjustments of $40.4 million, $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 June 30, 2021, March 31, 2021, December 31, 2020, September 30, 2020 and June 30, 2020, respectively. Total loans were $3.0 billion as of June 30, 2021, a decrease of $101.6 million, or 3.3%, compared to December 31, 2020. Total commercial loan balances were $2.4 billion as of June 30, 2021, down $81.0 million, or 3.2%, from December 31, 2020. Compared to December 31, 2020, the decline in commercial loan balances was driven largely by net payoffs in healthcare finance, single tenant lease financing and public finance loans, which were partially offset by increases in commercial and industrial, construction and investor commercial real estate loan balances. The net payoffs in the healthcare finance portfolio were driven primarily by elevated prepayment activity combined with a lower level of new originations, as heightened competition and the low interest rate environment has driven loan pricing to unattractively low levels. Going forward, we expect the balance of healthcare finance loans may decline as a result of Provide’s acquisition by a super-regional financial institution, as well as potential prepayment activity. Total consumer loan balances were $466.5 million as of June 30, 2021, a decrease of $15.9 million, or 3.3%, compared to December 31, 2020. The decline in consumer loan balances from December 31, 2020 was due primarily to increased prepayment activity across the consumer portfolio. 50 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) June 30, 2021 March 31, 2021 December 31, 2020 September 30, 2020 June 30, 2020 Nonaccrual loans Commercial loans: Commercial and industrial $ 692 $ 1,002 $ — $ 117 $ 299 Owner-occupied commercial real estate 3,487 4,266 1,838 1,390 2,066 Single tenant lease financing 2,373 7,080 7,116 7,148 4,680 Small business lending (1) 1,209 865 — — — Total commercial loans 7,761 13,213 8,954 8,655 7,045 Consumer loans: Residential mortgage 1,253 1,120 1,183 1,085 1,042 Home equity 14 15 — — — Other consumer 10 23 46 34 108 Total consumer loans 1,277 1,158 1,229 1,119 1,150 Total nonaccrual loans 9,038 14,371 10,183 9,774 8,195 Past Due 90 days and accruing loans Commercial loans: Commercial and industrial — 278 — — — Total commercial loans — 278 — — — Total past due 90 days and accruing loans — 278 — — — Total nonperforming loans 9,038 14,649 10,183 9,774 8,195 Other real estate owned Investor commercial real estate 1,188 — — — 2,065 Residential mortgage 112 — — — — Total other real estate owned 1,300 — — — 2,065 Other nonperforming assets — 29 35 8 44 Total nonperforming assets $ 10,338 $ 14,678 $ 10,218 $ 9,782 $ 10,304 Total nonperforming loans to total loans (2) 0.31 % 0.48 % 0.33 % 0.32 % 0.28 % Total nonperforming assets to total assets (2) 0.25 % 0.35 % 0.24 % 0.23 % 0.24 % Allowance for loan losses to total loans 0.95 % 1.00 % 0.96 % 0.89 % 0.82 % Allowance for loan losses to total loans, excluding PPP loans (3) 0.96 % 1.02 % 0.98 % 0.91 % 0.84 % Allowance for loan losses to nonperforming loans (2) 310.5 % 209.2 % 289.5 % 275.4 % 298.5 % 1 Balance represents U.S. government guaranteed loans. 2 Includes the impact of nonperforming small business lending loans, which are 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. 51 Troubled Debt Restructurings The following table provides a summary of troubled debt restructurings for the last five completed fiscal quarters. (in thousands) June 30, 2021 March 31, 2021 December 31, 2020 September 30, 2020 June 30, 2020 Troubled debt restructurings – nonaccrual $ 2,581 $ 2,606 $ 2,637 $ 811 $ 854 Troubled debt restructurings – performing 1,179 1,187 367 365 372 Total troubled debt restructurings $ 3,760 $ 3,793 $ 3,004 $ 1,176 $ 1,226 The decline in nonperforming loans of $1.2 million, or 9.0%, to $9.0 million as of June 30, 2021 compared to $10.2 million as of December 31, 2020 was due primarily to a decrease in nonaccrual single tenant lease financing balances, which was partially offset by an increase in nonperforming small business lending, owner-occupied commercial real estate and commercial and industrial loans. The decrease in nonaccrual single tenant lease financing balances was due to positive developments related to a relationship which included two loans, one of which was paid off at net book value (unpaid principal balance less specific reserves) and the other was transferred to OREO. Total nonperforming assets increased $0.1 million, or 1.2%, as of June 30, 2021 compared to December 31, 2020, due primarily to a $1.3 million increase in OREO, partially offset by the $1.2 million decrease in nonperforming loans discussed above. The ratio of nonperforming loans to total loans decreased to 0.31% as of June 30, 2021 compared to 0.33% as of December 31, 2020 and the ratio of nonperforming assets to total assets increased to 0.25% as of June 30, 2021 compared to 0.24% as of December 31, 2020, also due primarily to the loans and OREO mentioned above. Total TDRs as of June 30, 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. As of June 30, 2021, the Company had two properties in OREO, one commercial property with a carrying value of $1.2 million and one residential mortgage with a carrying value of $0.1 million. The Company did not have any OREO as of December 31, 2020. As of June 30, 2021, our financial results have reflected little impact on asset quality as a result of COVID-19. We are optimistic that the combination of vaccinations, government stimulus programs and relief programs we have provided to our clients will continue to mitigate the impact of the pandemic on the Company’s business. However, if economic conditions return to levels experienced during 2020, our credit quality and overall financial performance could be adversely affected. Non-TDR Loan Modifications due to COVID-19 The “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus” was issued by our banking regulators 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 June 30, 2021, the Company had eight loans totaling $7.9 million in non-TDR loan modifications due to COVID-19. U.S. Small Business Administration Paycheck Protection Program Section 1102 of the CARES Act created the PPP, which is jointly administered by the 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 52 and challenging environment. The loans originated in 2020 bear an interest rate of 1.00%, and we received gross origination fees of approximately $2.3 million. The Company received this fee revenue from the SBA in late June 2020, and it was 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 was used to fund PPP loans for small businesses, as well as certain small businesses who were eligible to receive a second PPP loan. The Company began offering PPP loans again in 2021 and continued until the program’s funds were depleted. These loans may be forgiven if certain conditions are satisfied and are fully guaranteed by the SBA. The loans originated during 2021 bear an interest rate of 1.00% and the Company received gross origination fees of approximately $1.3 million. The Company received this fee revenue from the SBA during the six month period ended June 30, 2021, and it is being deferred over the life of the PPP loans and recognized as interest income. The Company began processing applications for forgiveness from this round beginning in May 2021. The Company anticipates that the majority of the PPP loans will ultimately be forgiven, in whole or in part, by the SBA in accordance with the terms of the program. Management anticipates that loan forgiveness applications will continue throughout 2021. The following table provides a rollforward of the activity of PPP loans through June 30, 2021. (dollars in thousands) Number of Loans Principal Balance Net Deferred Fees Originated 447 $ 58,336 $ 1,851 Principal repaid (71) (7,184) Net deferred fees recognized (1,253) Balance, December 31, 2020 376 51,152 598 Originated 278 27,201 1,118 Principal repaid (348) (38,671) Net deferred fees recognized (768) Balance, June 30, 2021 306 39,682 948 Allowance for Loan Losses The following table provides a rollforward of the allowance for loan losses for the last five completed fiscal quarters and the six months ended June 30, 2021 and 2020. (dollars in thousands) Three Months Ended Six Months Ended June 30, 2021 March 31, 2021 December 31, 2020 September 30, 2020 June 30, 2020 June 30, 2021 June 30, 2020 Balance, beginning of period $ 30,642 $ 29,484 $ 26,917 $ 24,465 $ 22,857 $ 29,484 $ 21,840 Provision charged to expense 21 1,276 2,865 2,509 2,491 1,297 3,952 Losses charged off (2,689) (311) (408) (241) (1,016) (3,001) (1,514) Recoveries 92 193 110 184 133 286 187 Balance, end of period $ 28,066 $ 30,642 $ 29,484 $ 26,917 $ 24,465 $ 28,066 $ 24,465 Net charge-offs to average loans 0.35 % 0.02 % 0.04 % 0.01 % 0.12 % 0.06 % 0.06 % The allowance for loan losses was $28.1 million as of June 30, 2021, compared to $29.5 million as of December 31, 2020. The decrease in the allowance for loan losses compared to December 31, 2020 was due primarily to the elimination of $2.9 million of specific reserves related to a single tenant lease financing relationship and a commercial and industrial relationship, both of which had been classified as nonaccrual. The single tenant lease financing relationship included two loans, one of which was paid off at net book value (unpaid principal balance less specific reserves) and the other was transferred to OREO. The commercial and industrial relationship included four loans, two of which were paid off during the quarter. The decrease in the allowance for loan losses was partially offset by additional adjustments to the qualitative factors in the Company’s allowance model. 53 The allowance for loan losses as a percentage of total loans was 0.95% at June 30, 2021, or 0.96%, 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 increased to 310.5% as of June 30, 2021, compared to 289.5% as of December 31, 2020, due to a decrease in nonperforming loans related to the single tenant lease financing relationship and commercial and industrial relationship discussed above. The provision for loan losses in the second quarter 2021 was $21 thousand, compared to $2.5 million for the second quarter 2020. The decrease in the provision for loan losses was due primarily to the decline in loan balances. During the second quarter 2021, the Company recorded net charge-offs of $2.6 million, compared to net charge-offs of $0.9 million for the second quarter 2020. The increase in net charge-offs was due primarily to a charge-off of $2.4 million related to the single tenant lease financing relationship discussed above, as the loan payoff and the transfer to the OREO were recorded at net book value. 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 June 30, 2021 March 31, 2021 December 31, 2020 September 30, 2020 June 30, 2020 Securities available-for-sale U.S. Government-sponsored agencies $ 57,984 $ 60,815 $ 61,765 $ 65,007 $ 68,203 Municipal securities 77,364 79,168 82,757 87,365 91,906 Agency mortgage-backed securities 445,895 229,981 241,795 250,755 275,433 Private label mortgage-backed securities 29,003 40,550 57,268 71,519 101,110 Asset-backed securities 5,000 5,000 5,000 5,000 5,000 Corporate securities 48,447 48,433 48,419 48,406 48,394 Total available-for-sale 663,693 463,947 497,004 528,052 590,046 Securities held-to-maturity Municipal securities 14,549 14,560 14,571 14,582 14,603 Corporate securities 51,110 53,630 53,652 53,672 53,692 Total held-to-maturity 65,659 68,190 68,223 68,254 68,295 Total securities $ 729,352 $ 532,137 $ 565,227 $ 596,306 $ 658,341 (in thousands) Approximate Fair Value June 30, 2021 March 31, 2021 December 31, 2020 September 30, 2020 June 30, 2020 Securities available-for-sale U.S. Government-sponsored agencies $ 57,135 $ 59,478 $ 60,545 $ 63,682 $ 66,544 Municipal securities 78,438 79,208 82,489 86,421 90,562 Agency mortgage-backed securities 444,494 228,818 243,921 253,292 278,530 Private label mortgage-backed securities 29,363 41,106 58,116 72,626 101,925 Asset-backed securities 5,005 5,006 4,961 4,921 4,837 Corporate securities 49,084 48,760 47,596 47,369 46,619 Total available-for-sale 663,519 462,376 497,628 528,311 589,017 Securities held-to-maturity Municipal securities 15,373 15,109 15,317 15,328 15,274 Corporate securities 52,685 54,274 54,135 53,848 53,878 Total held-to-maturity 68,058 69,383 69,452 69,176 69,152 Total securities $ 731,577 $ 531,759 $ 567,080 $ 597,487 $ 658,169 The approximate fair value of available-for-sale investment securities increased $165.9 million, or 33.3%, to $663.5 million as of June 30, 2021, compared to $497.6 million as of December 31, 2020. The increase was due primarily to an increase of $200.6 million in agency mortgage-backed securities, partially offset by a $28.8 million decrease in private label mortgage-backed securities and a $4.1 million decrease in municipal securities. The increase in agency mortgage-backed securities was driven primarily by increased purchases during the six months ended June 30, 2021, partially offset by 54 prepayments and maturities in agency and private label mortgage-backed securities, as well as early redemptions and maturities in municipal securities. Accrued Income and Other Assets Accrued income and other assets decreased $9.5 million, or 14.8%, to $54.8 million at June 30, 2021 compared to $64.3 million at December 31, 2020. The decrease primarily related to decreases of $9.5 million in cash pledged as collateral, $3.5 million in deferred tax assets and $2.5 million in derivative assets. As of these dates, the Company pledged $21.0 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. Accrued Expenses and Other Liabilities Accrued expenses and other liabilities were $53.9 million at June 30, 2021 compared to $48.4 million at December 31, 2020. Deposits The following table presents the composition of the Company’s deposit base for the last five completed fiscal quarters. (dollars in thousands) June 30, 2021 March 31, 2021 December 31, 2020 September 30, 2020 June 30, 2020 Noninterest-bearing deposits $ 113,996 3.6 % $ 100,700 3.1 % $ 96,753 3.0 % $ 86,088 2.6 % $ 82,864 2.5 % Interest-bearing demand deposits 196,841 6.1 % 186,015 5.8 % 188,645 5.8 % 155,054 4.6 % 152,391 4.5 % Savings accounts 56,298 1.8 % 51,251 1.6 % 43,200 1.3 % 49,890 1.5 % 43,366 1.3 % Money market accounts 1,432,355 44.6 % 1,397,449 43.4 % 1,350,566 41.3 % 1,359,178 40.3 % 1,241,874 36.7 % Certificates of deposits 1,087,350 33.9 % 1,174,764 36.5 % 1,289,319 39.4 % 1,360,575 40.3 % 1,470,905 43.5 % Brokered deposits 319,307 10.0 % 307,424 9.6 % 302,402 9.2 % 361,606 10.7 % 389,389 11.5 % Total deposits $ 3,206,147 100.0 % $ 3,217,603 100.0 % $ 3,270,885 100.0 % $ 3,372,391 100.0 % $ 3,380,789 100.0 % Total deposits decreased $64.7 million, or 2.0%, to $3.2 billion as of June 30, 2021, compared to $3.3 billion as of December 31, 2020. This decrease was due primarily to a decline of $202.0 million, or 15.7%, in certificates of deposits, partially offset by increases of $81.8 million, or 6.1%, in money market accounts, $17.2 million, or 17.8%, in noninterest-bearing deposits, $16.9 million, or 5.6%, in brokered deposits, $13.1 million, or 30.3%, in savings accounts, and $8.2 million, or 4.3%, in interest-bearing demand deposits. The Company experienced strong growth in money market deposit accounts due to targeted digital marketing efforts to grow small business accounts as well as consumers, small business and commercial clients increasing their cash balances in part due to the economic uncertainty resulting from the COVID-19 pandemic. The decrease in certificates of deposits 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. 55 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”). 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 June 30, 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 June 30, 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 June 30, 2021: Common equity tier 1 capital to risk-weighted assets Consolidated $ 364,991 12.23 % $ 208,989 7.00 % N/A N/A Bank 402,948 13.53 % 208,451 7.00 % $ 193,562 6.50 % Tier 1 capital to risk-weighted assets Consolidated 364,991 12.23 % 253,773 8.50 % N/A N/A Bank 402,948 13.53 % 253,120 8.50 % 238,230 8.00 % Total capital to risk-weighted assets Consolidated 462,928 15.51 % 313,484 10.50 % N/A N/A Bank 431,014 14.47 % 312,677 10.50 % 297,788 10.00 % Leverage ratio Consolidated 364,991 8.70 % 167,907 4.00 % N/A N/A Bank 402,948 9.61 % 167,663 4.00 % 209,579 5.00 % 56 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 % Shareholders’ Dividends The Company’s Board of Directors declared a cash dividend of $0.06 per share of common stock payable July 15, 2021 to shareholders of record as of July 1, 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 June 30, 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. 57 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 June 30, 2021, on a consolidated basis, the Company had $992.3 million in cash and cash equivalents and investment securities available-for-sale and $27.6 million in loans held-for-sale that were generally available for its cash needs. The Company can also generate funds from wholesale funding sources and collateralized borrowings. At June 30, 2021, the Bank had the ability to borrow an additional $636.9 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 June 30, 2021, the Company, on an unconsolidated basis, had $27.7 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 June 30, 2021, approved outstanding loan commitments, including unused lines of credit and standby letters of credit, amounted to $293.1 million. Certificates of deposits and brokered deposits scheduled to mature in one year or less at June 30, 2021 totaled $779.0 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. 58 Reconciliation of Non-GAAP Financial Measures This Management’s Discussion and Analysis contains financial information determined by methods other than in accordance with GAAP. Non-GAAP financial measures, specifically tangible common equity, tangible assets, tangible book value per common share, tangible common equity to tangible assets ratio, average tangible common equity, return on average tangible common equity, total interest income - FTE, net interest income - FTE, net interest margin - FTE, allowance for loan losses to loans, excluding PPP loans, adjusted revenue, adjusted income before income taxes, adjusted income tax, adjusted net income, adjusted diluted earnings per share, adjusted return on average assets, adjusted return on average shareholders’ equity, adjusted return on average tangible common equity and adjusted effective income tax rate are used by the Company’s management to measure the strength of its capital and analyze profitability, including its ability to generate earnings on tangible capital invested by its shareholders. The Company also believes that it is a standard practice in the banking industry to present total interest income, net interest income and net interest margin on a fully-taxable equivalent basis, as those measures provide useful information for peer comparisons. Although the Company believes these non-GAAP financial measures provide a greater understanding of its business, they should not be considered a substitute for financial measures determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP financial measures that may be presented by other companies. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures are included in the following table for the last five completed fiscal quarters and the six months ended June 30, 2021 and 2020. (dollars in thousands, except share and per share data) Three Months Ended Six Months Ended June 30, 2021 March 31, 2021 December 31, 2020 September 30, 2020 June 30, 2020 June 30, 2021 June 30, 2020 Total equity - GAAP $ 358,641 $ 344,566 $ 330,944 $ 318,102 $ 307,711 $ 358,641 $ 307,711 Adjustments: Goodwill (4,687) (4,687) (4,687) (4,687) (4,687) (4,687) (4,687) Tangible common equity $ 353,954 $ 339,879 $ 326,257 $ 313,415 $ 303,024 $ 353,954 $ 303,024 Total assets - GAAP $ 4,204,642 $ 4,188,570 $ 4,246,156 $ 4,333,624 $ 4,324,600 $ 4,204,642 $ 4,324,600 Adjustments: Goodwill (4,687) (4,687) (4,687) (4,687) (4,687) (4,687) (4,687) Tangible assets $ 4,199,955 $ 4,183,883 $ 4,241,469 $ 4,328,937 $ 4,319,913 $ 4,199,955 $ 4,319,913 Total common shares outstanding 9,854,153 9,823,831 9,800,569 9,800,569 9,799,047 9,854,153 9,799,047 Book value per common share $ 36.39 $ 35.07 $ 33.77 $ 32.46 $ 31.40 $ 36.39 $ 31.40 Effect of goodwill (0.47) (0.47) (0.48) (0.48) (0.48) (0.47) (0.48) Tangible book value per common share $ 35.92 $ 34.60 $ 33.29 $ 31.98 $ 30.92 $ 35.92 $ 30.92 Total shareholders’ equity to assets 8.53 % 8.23 % 7.79 % 7.34 % 7.12 % 8.53 % 7.12 % Effect of goodwill (0.10) % (0.11) % (0.10) % (0.10) % (0.11) % (0.10) % (0.11) % Tangible common equity to tangible assets ratio 8.43 % 8.12 % 7.69 % 7.24 % 7.01 % 8.43 % 7.01 % Total average equity - GAAP $ 352,894 $ 335,968 $ 323,464 $ 313,611 $ 306,868 $ 344,478 $ 308,937 Adjustments: Average goodwill (4,687) (4,687) (4,687) (4,687) (4,687) (4,687) (4,687) Average tangible common equity $ 348,207 $ 331,281 $ 318,777 $ 308,924 $ 302,181 $ 339,791 $ 304,250 Return on average shareholders’ equity 14.88 % 12.61 % 13.64 % 10.67 % 5.15 % 13.78 % 6.48 % Effect of goodwill 0.21 % 0.18 % 0.20 % 0.16 % 0.08 % 0.19 % 0.10 % Return on average tangible common equity 15.09 % 12.79 % 13.84 % 10.83 % 5.23 % 13.97 % 6.58 % 59 (dollars in thousands, except share and per share data) Three Months Ended Six Months Ended June 30, 2021 March 31, 2021 December 31, 2020 September 30, 2020 June 30, 2020 June 30, 2021 June 30, 2020 Total interest income $ 33,377 $ 33,280 $ 33,643 $ 32,750 $ 34,222 $ 66,657 $ 70,466 Adjustments: Fully-taxable equivalent adjustments 1 1,394 1,356 1,400 1,424 1,437 2,750 2,972 Total interest income - FTE $ 34,771 $ 34,636 $ 35,043 $ 34,174 $ 35,659 $ 69,407 $ 73,438 Net interest income $ 21,607 $ 20,525 $ 18,865 $ 16,232 $ 14,426 $ 42,132 $ 29,444 Adjustments: Fully-taxable equivalent adjustments 1 1,394 1,356 1,400 1,424 1,437 2,750 2,972 Net interest income - FTE $ 23,001 $ 21,881 $ 20,265 $ 17,656 $ 15,863 $ 44,882 $ 32,416 Net interest margin 2.11 % 2.04 % 1.78 % 1.53 % 1.37 % 2.08 % 1.43 % Effect of fully-taxable equivalent adjustments 1 0.14 % 0.14 % 0.13 % 0.14 % 0.13 % 0.13 % 0.15 % Net interest margin - FTE 2.25 % 2.18 % 1.91 % 1.67 % 1.50 % 2.21 % 1.58 % Allowance for loan losses $ 28,066 $ 30,642 $ 29,484 $ 26,917 $ 24,465 $ 28,066 $ 24,465 Loans $ 2,957,608 $ 3,058,694 $ 3,059,231 $ 3,012,914 $ 2,973,674 $ 2,957,608 $ 2,973,674 Adjustments: PPP loans (39,682) (53,365) (50,554) (58,337) (58,948) (39,682) (58,948) Loans, excluding PPP loans $ 2,917,926 $ 3,005,329 $ 3,008,677 $ 2,954,577 $ 2,914,726 $ 2,917,926 $ 2,914,726 Allowance for loan losses to loans 0.95 % 1.00 % 0.96 % 0.89 % 0.82 % 0.95 % 0.82 % Effect of PPP loans 0.01 % 0.02 % 0.02 % 0.02 % 0.02 % 0.01 % 0.02 % Allowance for loan losses to loans, excluding PPP loans 0.96 % 1.02 % 0.98 % 0.91 % 0.84 % 0.96 % 0.84 % 1 Assuming a 21% tax rate (dollars in thousands, except share and per share data) Three Months Ended Six Months Ended June 30, 2021 March 31, 2021 December 31, 2020 September 30, 2020 June 30, 2020 June 30, 2021 June 30, 2020 Total Revenue- GAAP $ 30,569 $ 28,900 $ 31,522 $ 28,727 $ 19,399 $ 59,469 $ 40,628 Adjustments: Gain on sale of premises and equipment (2,523) — — — — (2,523) — Adjusted revenue $ 28,046 $ 28,900 $ 31,522 $ 28,727 $ 19,399 $ 56,946 $ 40,628 Income before income taxes - GAAP $ 15,473 $ 12,307 $ 14,145 $ 9,806 $ 3,664 $ 27,780 $ 9,946 Adjustments: Gain on sale of premises and equipment (2,523) — — — — (2,523) — Adjusted income before income taxes $ 12,950 $ 12,307 $ 14,145 $ 9,806 $ 3,664 $ 25,257 $ 9,946 Income tax provision (benefit) - GAAP $ 2,377 $ 1,857 $ 3,055 $ 1,395 $ (268) $ 4,234 $ (5) Adjustments: Gain on sale of premises and equipment (530) — — — — (530) — Adjusted income tax provision (benefit) $ 1,847 $ 1,857 $ 3,055 $ 1,395 $ (268) $ 3,704 $ (5) 60 Net income - GAAP $ 13,096 $ 10,450 $ 11,090 $ 8,411 $ 3,932 $ 23,546 $ 9,951 Adjustments: Gain on sale of premises and equipment $ (1,993) — — — — $ (1,993) — Adjusted net income $ 11,103 $ 10,450 $ 11,090 $ 8,411 $ 3,932 $ 21,553 $ 9,951 Diluted average common shares outstanding 9,981,422 9,963,036 9,914,022 9,773,224 9,768,227 9,970,147 9,802,427 Diluted earnings per share - GAAP $ 1.31 $ 1.05 $ 1.12 $ 0.86 $ 0.40 $ 2.36 $ 1.02 Adjustments: Effect of gain on sale of premises and equipment (0.20) — — — — (0.20) — Adjusted diluted earnings per share $ 1.11 $ 1.05 $ 1.12 $ 0.86 $ 0.40 $ 2.16 $ 1.02 Return on average assets 1.25 % 1.02 % 1.02 % 0.78 % 0.37 % 1.13 % 0.47 % Effect of gain on sale of premises and equipment (0.19) % 0.00 % 0.00 % 0.00 % 0.00 % (0.09) % 0.00 % Adjusted return on average assets 1.06 % 1.02 % 1.02 % 0.78 % 0.37 % 1.04 % 0.47 % Return on average shareholders' equity 14.88 % 12.61 % 13.64 % 10.67 % 5.15 % 13.78 % 6.48 % Effect of gain on sale of premises and equipment (2.26) % 0.00 % 0.00 % 0.00 % 0.00 % (1.16) % 0.00 % Adjusted return on average shareholders' equity 12.62 % 12.61 % 13.64 % 10.67 % 5.15 % 12.62 % 6.48 % Return on average tangible common equity 15.09 % 12.79 % 13.84 % 10.83 % 5.23 % 13.97 % 6.58 % Effect of gain on sale of premises and equipment (2.30) % 0.00 % 0.00 % 0.00 % 0.00 % (1.18) % 0.00 % Adjusted return on average tangible common equity 12.79 % 12.79 % 13.84 % 10.83 % 5.23 % 12.79 % 6.58 % Effective income tax rate 15.4 % 15.1 % 21.6 % 14.2 % (7.3) % 15.2 % (0.1) % Effect of gain on sale of premises and equipment (1.1) % 0.0 % 0.0 % 0.0 % 0.0 % (0.5) % 0.0 % Adjusted effective income tax rate 14.3 % 15.1 % 21.6 % 14.2 % (7.3) % 14.7 % (0.1) % 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 15 to the condensed consolidated financial statements. 61 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 June 30, 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 June 30, 2021 and December 31, 2020, the Company had commitments to sell residential real estate loans of $46.8 million and $107.5 million, respectively. These contracts mature in less than one year. Refer to Note 13 to the condensed consolidated financial statements for additional information about derivative financial instruments. 62