First Internet Bancorp(INBK) - 2020 Q1 - Quarterly Report

Cover Page & Filing Information Filing Details This chapter provides basic filing information for First Internet Bancorp's 10-Q quarterly report as of March 31, 2020, including company name, jurisdiction, principal executive office address, phone number, registered securities, and filing status - Company Name: First Internet Bancorp[2] - Filing Type: Quarterly Report (FORM 10-Q)[1][2] - Reporting Period: As of March 31, 2020[2] Registered Securities Information | Title of each class | Trading Symbols | Name of each exchange on which registered | | :------------------ | :-------------- | :---------------------------------------- | | Common Stock, without par value | INBK | The Nasdaq Stock Market LLC | | 6.0% Fixed to Floating Subordinated Notes due 2026 | INBKL | The Nasdaq Stock Market LLC | | 6.0% Fixed to Floating Subordinated Notes due 2029 | INBKZ | The Nasdaq Stock Market LLC | - Filer Status: Accelerated Filer and Smaller Reporting Company[3][4] - As of May 1, 2020, 9,801,825 shares of common stock were outstanding[5] Cautionary Note Regarding Forward-Looking Statements Forward-Looking Statements This chapter warns investors that forward-looking statements in the report are not historical facts but are based on the company's current expectations for future business strategies and performance, involving known and unknown risks, uncertainties, and other factors that could cause actual results to differ materially, especially due to the COVID-19 pandemic - Forward-looking statements are based on current expectations, involving business strategies, anticipated results, and future performance[7] - The COVID-19 pandemic has adversely impacted the company, its customers, employees, and third-party service providers, with the ultimate extent of the impact remaining uncertain[7] - Other factors that could cause differences include economic conditions, credit quality, information system failures, loan portfolio growth risks, changes in regulatory requirements, market interest rate fluctuations, competitive factors, mergers and acquisitions, tax law changes, noninterest income growth, loss of key management, and changes in accounting policies[7] - The company does not undertake any obligation to publicly revise forward-looking statements to reflect future events or circumstances, unless required by law[8] PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS This chapter presents First Internet Bancorp's unaudited condensed consolidated financial statements as of March 31, 2020, including balance sheets, income statements, comprehensive income statements, statements of changes in shareholders' equity, and cash flow statements, along with related notes Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheets Key Data (As of March 31, 2020 vs. December 31, 2019) | Indicator (USD in thousands) | March 31, 2020 | December 31, 2019 | | :-------------- | :------------- | :------------- | | Assets | | | | Cash and due from banks | 5,726 | 5,061 | | Interest-bearing deposits | 345,542 | 322,300 | | Available-for-sale securities | 608,682 | 540,852 | | Held-to-maturity securities | 66,331 | 61,878 | | Loans held for sale | 52,394 | 56,097 | | Loans, net | 2,869,236 | 2,941,707 | | Total assets | 4,168,146 | 4,100,083 | | Liabilities | | | | Noninterest-bearing deposits | 70,562 | 57,115 | | Interest-bearing deposits | 3,107,944 | 3,096,848 | | Total deposits | 3,178,506 | 3,153,963 | | Federal Home Loan Bank borrowings | 514,911 | 514,910 | | Subordinated debt, net | 69,605 | 69,528 | | Total liabilities | 3,863,019 | 3,795,170 | | Shareholders' Equity | | | | Common stock | 219,893 | 219,423 | | Retained earnings | 105,100 | 99,681 | | Accumulated other comprehensive loss | (19,866) | (14,191) | | Total shareholders' equity | 305,127 | 304,913 | | Total liabilities and shareholders' equity | 4,168,146 | 4,100,083 | Condensed Consolidated Statements of Income Condensed Consolidated Statements of Income Key Data (For the three months ended March 31, 2020 vs. 2019) | Indicator (USD in thousands) | March 31, 2020 | March 31, 2019 | | :-------------- | :------------- | :------------- | | Total interest income | 36,244 | 34,999 | | Total interest expense | 21,226 | 18,755 | | Net interest income | 15,018 | 16,244 | | Provision for loan losses | 1,461 | 1,285 | | Net interest income after provision for loan losses | 13,557 | 14,959 | | Total noninterest income | 6,211 | 2,372 | | Total noninterest expense | 13,486 | 11,109 | | Income before income taxes | 6,282 | 6,222 | | Income tax expense | 263 | 526 | | Net income | 6,019 | 5,696 | | Earnings per share (basic) | 0.62 | 0.56 | | Earnings per share (diluted) | 0.62 | 0.56 | | Dividends per share | 0.06 | 0.06 | Condensed Consolidated Statements of Comprehensive Income Condensed Consolidated Statements of Comprehensive Income Key Data (For the three months ended March 31, 2020 vs. 2019) | Indicator (USD in thousands) | March 31, 2020 | March 31, 2019 | | :-------------- | :------------- | :------------- | | Net income | 6,019 | 5,696 | | Other comprehensive loss (income) | | | | Net unrealized holding gain on available-for-sale securities (pre-tax) | 6,299 | 6,910 | | Reclassification adjustment for realized gains | (41) | — | | Net unrealized holding loss on cash flow hedge derivatives (pre-tax) | (13,458) | (3,572) | | Other comprehensive loss (income) pre-tax | (7,200) | 3,338 | | Income tax (benefit) expense | (1,525) | 965 | | Other comprehensive loss (income) | (5,675) | 2,373 | | Comprehensive income | 344 | 8,069 | Condensed Consolidated Statements of Changes in Shareholders' Equity Changes in Shareholders' Equity (For the three months ended March 31, 2020 vs. 2019) | Indicator (USD in thousands) | March 31, 2020 | March 31, 2019 | | :-------------- | :------------- | :------------- | | 2020 | | | | Balance at January 1 | 304,913 | 288,735 | | Net income | 6,019 | 5,696 | | Other comprehensive loss | (5,675) | 2,373 | | Dividends declared ($0.06/share) | (600) | (618) | | Fair value recognition of equity awards | 555 | 478 | | Issuance of deferred stock rights and restricted stock units | 8 | 10 | | Net settlement of common stock for equity awards | (93) | (94) | | Balance at March 31 | 305,127 | 294,013 | | 2019 | | | | Impact of new accounting standard adoption | — | (821) | Condensed Consolidated Statements of Cash Flows Condensed Consolidated Statements of Cash Flows Key Data (For the three months ended March 31, 2020 vs. 2019) | Indicator (USD in thousands) | March 31, 2020 | March 31, 2019 | | :-------------- | :------------- | :------------- | | Net cash used in operating activities | (25,835) | (5,283) | | Net cash provided by (used in) investing activities | 25,877 | (160,239) | | Net cash provided by financing activities | 23,865 | 107,304 | | Net increase (decrease) in cash and cash equivalents | 23,907 | (58,218) | | Cash and cash equivalents at beginning of period | 327,361 | 188,712 | | Cash and cash equivalents at end of period | 351,268 | 130,494 | Notes to Condensed Consolidated Financial Statements Note 1: Basis of Presentation This note explains the basis of preparation for the condensed consolidated financial statements, which comply with U.S. GAAP and SEC regulations, noting that the statements are unaudited and include management's estimates and judgments - The financial statements are prepared in accordance with U.S. Generally Accepted Accounting Principles (GAAP) and SEC rules, and are unaudited[26] - Management is required to make estimates, judgments, and assumptions that may significantly impact the carrying values of assets and liabilities[27] - The consolidated financial statements include First Internet Bancorp and its wholly-owned subsidiary, First Internet Bank of Indiana, and its three wholly-owned subsidiaries[28] Note 2: Earnings Per Share This note provides the calculation methods for basic and diluted earnings per share and a reconciliation of weighted-average common shares outstanding, showing the impact of dilutive equity awards Earnings Per Share Calculation (For the three months ended March 31, 2020 vs. 2019) | Indicator (USD in thousands, except per share data) | March 31, 2020 | March 31, 2019 | | :---------------------------- | :------------- | :------------- | | Basic Earnings Per Share | | | | Net income | 6,019 | 5,696 | | Weighted-average common shares outstanding | 9,721,485 | 10,217,637 | | Basic earnings per common share | 0.62 | 0.56 | | Diluted Earnings Per Share | | | | Net income | 6,019 | 5,696 | | Weighted-average common shares outstanding | 9,721,485 | 10,217,637 | | Dilutive effect of equity awards | 29,043 | 12,894 | | Weighted-average common shares and incremental shares | 9,750,528 | 10,230,531 | | Diluted earnings per common share | 0.62 | 0.56 | - Potentially dilutive common shares are excluded from the calculation when their effect is anti-dilutive[33] Note 3: Securities This note provides detailed information on available-for-sale and held-to-maturity securities as of March 31, 2020, and December 31, 2019, including amortized cost, unrealized gains/losses, and fair value, also disclosing the reclassification of certain securities from available-for-sale to held-to-maturity Available-for-Sale Securities (As of March 31, 2020) | (USD in thousands) | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | | :-------------------------- | :------- | :------------- | :------------- | :------- | | U.S. government sponsored agencies | 71,387 | 438 | (1,821) | 70,004 | | Municipal securities | 94,981 | 4,049 | (4,211) | 94,819 | | Agency mortgage-backed securities | 279,458 | 6,901 | (3,727) | 282,632 | | Private mortgage-backed securities | 114,363 | 813 | (152) | 115,024 | | Asset-backed securities | 5,000 | — | (287) | 4,713 | | Corporate securities | 43,378 | 322 | (2,210) | 41,490 | | Total available-for-sale securities | 608,567 | 12,523 | (12,408) | 608,682 | Held-to-Maturity Securities (As of March 31, 2020) | (USD in thousands) | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | | :-------------------------- | :------- | :------------- | :------------- | :------- | | Municipal securities | 14,617 | 1,061 | — | 15,678 | | Corporate securities | 51,714 | 2,262 | (186) | 53,790 | | Total held-to-maturity securities | 66,331 | 3,323 | (186) | 69,468 | - On March 1, 2020, the company reclassified 10 available-for-sale securities with an aggregate fair value of $4.5 million to the held-to-maturity category[36] - As of March 31, 2020, the fair value of $205.1 million in investment securities was below historical cost, primarily due to market interest rate fluctuations, which management considers temporary declines[40] Note 4: Loans This note details loan balances as of March 31, 2020, and December 31, 2019, categorized by commercial and consumer, describing risk characteristics, allowance for loan losses methodology, credit risk profile, delinquency analysis, and nonperforming and troubled debt restructurings (TDRs), including non-TDR loan modifications due to COVID-19 Loan Balances (USD in thousands) (As of March 31, 2020 vs. December 31, 2019) | Loan Category | March 31, 2020 | December 31, 2019 | | :-------------------- | :------------- | :------------- | | Commercial Loans | | | | Commercial and industrial | 95,227 | 96,420 | | Owner-occupied commercial real estate | 74,737 | 73,392 | | Investor commercial real estate | 13,421 | 12,567 | | Construction | 64,581 | 60,274 | | Single-tenant lease finance | 972,275 | 995,879 | | Public finance | 627,678 | 687,094 | | Healthcare finance | 372,266 | 300,612 | | Small business loans | 67,275 | 60,279 | | Total commercial loans | 2,287,460 | 2,286,517 | | Consumer Loans | | | | Residential mortgage | 218,730 | 313,849 | | Home equity | 23,855 | 24,306 | | Other consumer loans | 296,605 | 295,309 | | Total consumer loans | 539,190 | 633,464 | | Total commercial and consumer loans | 2,826,650 | 2,919,981 | | Total loans | 2,892,093 | 2,963,547 | | Allowance for loan losses | (22,857) | (21,840) | | Loans, net | 2,869,236 | 2,941,707 | - The Allowance for Loan Losses (ALLL) is determined based on historical losses, current economic factors, and portfolio trends, considering qualitative factors[62] Allowance for Loan Losses Activity (USD in thousands) (For the three months ended March 31, 2020 vs. 2019) | Indicator | March 31, 2020 | March 31, 2019 | | :-------------------- | :------------- | :------------- | | Beginning balance | 21,840 | 17,896 | | Provision charged to expense | 1,461 | 1,285 | | Charge-offs | (498) | (429) | | Recoveries | 54 | 89 | | Ending balance | 22,857 | 18,841 | Nonperforming Loans (USD in thousands) (As of March 31, 2020 vs. December 31, 2019) | Category | March 31, 2020 | December 31, 2019 | | :-------------------- | :------------- | :------------- | | Loans with no specific valuation allowance | | | | Commercial and industrial | 695 | 2,693 | | Owner-occupied commercial real estate | 595 | 2,325 | | Small business loans | 3,327 | 3,338 | | Residential mortgage | 1,360 | 1,135 | | Other consumer loans | 48 | 43 | | Subtotal | 6,025 | 9,534 | | Loans with specific valuation allowance | | | | Commercial and industrial | 203 | 207 | | Single-tenant lease finance | 4,680 | 4,680 | | Subtotal | 4,883 | 4,887 | | Total nonperforming loans | 10,908 | 14,421 | - The company provided loan modifications to borrowers affected by COVID-19 under Section 4013 of the CARES Act, which are not classified as troubled debt restructurings (TDRs)[87][88] Note 5: Premises and Equipment This note lists the net book value of premises and equipment as of March 31, 2020, and December 31, 2019, and provides an update on the company's new headquarters construction project Premises and Equipment (USD in thousands) (As of March 31, 2020 vs. December 31, 2019) | (USD in thousands) | March 31, 2020 | December 31, 2019 | | :-------------------- | :------------- | :------------- | | Land | 2,500 | 2,500 | | Right-of-use lease assets | 1,450 | 1,602 | | Buildings and improvements | 14,291 | 10,004 | | Furniture and equipment | 10,258 | 9,689 | | Less: Accumulated depreciation | (9,616) | (9,165) | | Total | 18,883 | 14,630 | - The company's new headquarters mixed-use development project commenced on October 7, 2019, with substantial completion anticipated by September 30, 2021[92] Note 6: Leases This note discusses the company's adoption of ASU 2016-02 Leases and discloses lease-related expenses, cash flow information, and balance sheet impacts for operating leases - The company adopted ASU 2016-02 Leases on January 1, 2019, electing not to separate non-lease components from associated lease components[93] Lease Expense (USD in thousands) (For the three months ended March 31, 2020 vs. 2019) | (USD in thousands) | March 31, 2020 | March 31, 2019 | | :-------------- | :------------- | :------------- | | Operating lease cost | 215 | 187 | Operating Lease Balance Sheet Impact (USD in thousands) (As of March 31, 2020 vs. December 31, 2019) | (USD in thousands) | March 31, 2020 | December 31, 2019 | | :-------------------- | :------------- | :------------- | | Operating lease right-of-use assets | (1,485) | 1,602 | | Operating lease liabilities | (1,485) | 1,602 | | Weighted-average remaining lease term (years) | 2.2 | 2.4 | | Weighted-average discount rate | 2.0% | 2.0% | Note 7: Goodwill This note discloses the carrying value of goodwill as of March 31, 2020, and December 31, 2019, confirming no impairment triggering events since the last goodwill impairment test, despite the economic impact of COVID-19 - As of March 31, 2020, and December 31, 2019, the carrying value of goodwill was $4.7 million[101] - Despite the impact of COVID-19 on the economy and financial markets, management assessed that no triggering events have occurred since the last goodwill impairment test[102] Note 8: Servicing Asset This note provides changes in servicing assets and fair value as of March 31, 2020, and March 31, 2019, primarily related to the servicing portfolio of SBA guaranteed loans Servicing Asset Activity (USD in thousands) (For the three months ended March 31, 2020 vs. 2019) | (USD in thousands) | March 31, 2020 | March 31, 2019 | | :-------------- | :------------- | :------------- | | Beginning balance | 2,481 | — | | Additions | 113 | — | | Change in fair value | (179) | — | | Ending balance | 2,415 | — | Outstanding Principal Balance of Loans Serviced for Others (USD in thousands) (As of March 31, 2020 vs. December 31, 2019) | (USD in thousands) | March 31, 2020 | December 31, 2019 | | :-------------- | :------------- | :------------- | | SBA guaranteed loans | 103,878 | 103,981 | | Total | 103,878 | 103,981 | - Loan servicing income for the first quarter of 2020 was $0.3 million, with a $0.2 million valuation reduction due to servicing asset revaluation[106] Note 9: Subordinated Debt This note details the company's subordinated debt instruments, including the 2025, 2026, and 2029 Notes, specifying their principal balances, amortized debt issuance costs, interest rates, and maturity dates - Issued $10 million of 2025 Notes in October 2015, with a fixed interest rate of 6.4375%, maturing on October 1, 2025[108] - Issued $25 million of 2026 Notes in September 2016, with an initial fixed rate of 6.0%, converting to a floating rate (3-month LIBOR + 485 basis points) after September 30, 2021, and maturing on September 30, 2026[109] - Issued $37 million of 2029 Notes in June 2019, with an initial fixed rate of 6.0%, converting to a floating rate (benchmark rate + 411 basis points) after June 30, 2024, and maturing on June 30, 2029[110] Subordinated Debt Principal Balances and Amortized Debt Issuance Costs (USD in thousands) (As of March 31, 2020 vs. December 31, 2019) | (USD in thousands) | March 31, 2020 Principal | March 31, 2020 Amortized Debt Issuance Costs | December 31, 2019 Principal | December 31, 2019 Amortized Debt Issuance Costs | | :--------- | :---------------- | :--------------------- | :---------------- | :--------------------- | | 2025 Notes | 10,000 | (132) | 10,000 | (138) | | 2026 Notes | 25,000 | (808) | 25,000 | (839) | | 2029 Notes | 37,000 | (1,455) | 37,000 | (1,495) | | Total | 72,000 | (2,395) | 72,000 | (2,472) | Note 10: Benefit Plans This note provides details on the company's benefit plans, including the CEO's employment agreement, equity compensation expense and activity under the 2013 Equity Incentive Plan, and the status of the Directors' Deferred Stock Plan - The CEO's employment agreement specifies an annual base salary and annual bonus, with severance benefits provided under certain circumstances[113][114] - The company recognized $0.6 million in equity compensation expense for the first quarter of 2020, compared to $0.5 million for the first quarter of 2019[116] 2013 Plan Award Status (As of March 31, 2020) | Category | Restricted Stock Units | Restricted Stock Awards | Deferred Stock Units | | :-------------------- | :------------- | :------------- | :------------- | | Unvested at December 31, 2019 | 107,244 | — | — | | Granted | 66,756 | 13,164 | 3 | | Vested | (48,499) | (3,336) | (3) | | Forfeited | — | (1,638) | — | | Unvested at March 31, 2020 | 125,501 | 8,190 | — | - As of March 31, 2020, total unrecognized compensation cost related to unvested awards was $3.6 million, with a weighted-average expense recognition period of 2.1 years[117] Directors' Deferred Stock Rights Status (As of March 31, 2020) | Category | Deferred Stock Rights | | :-------------------- | :------------- | | Outstanding at beginning of period | 84,505 | | Granted | 214 | | Exercised | — | | Outstanding at end of period | 84,719 | Note 11: Commitments and Credit Risk This note discloses the company's various commitments arising in the normal course of business, including loan commitments not reflected in the consolidated financial statements, capital commitments to Small Business Investment Company funds, and capital expenditure commitments related to new headquarters construction - As of March 31, 2020, and December 31, 2019, total outstanding loan commitments were $295.9 million and $254.4 million, respectively[121] - As of March 31, 2020, the company had a commitment to contribute $1.7 million to a Small Business Investment Company fund[122] - The company has entered into $65.1 million in construction-related contracts for its future corporate headquarters, of which $58.9 million remained unexpended as of March 31, 2020[123] Note 12: Fair Value of Financial Instruments This note defines fair value and details the company's valuation methodologies and inputs for financial instruments measured at fair value on a recurring and non-recurring basis, categorized by the fair value hierarchy (Level 1, Level 2, Level 3) - Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date[124] - The fair value hierarchy consists of three levels: Level 1 (quoted prices in active markets), Level 2 (observable inputs other than Level 1 quoted prices), and Level 3 (unobservable inputs)[125] Fair Value Measurements (USD in thousands) (As of March 31, 2020) | (USD in thousands) | Fair Value | Level 1 | Level 2 | Level 3 | | :------------------------------------ | :------- | :----- | :----- | :----- | | U.S. government sponsored agencies | 70,004 | — | 70,004 | — | | Municipal securities | 94,819 | — | 94,819 | — | | Agency mortgage-backed securities | 282,632 | — | 282,632 | — | | Private mortgage-backed securities | 115,024 | — | 115,024 | — | | Asset-backed securities | 4,713 | — | 4,713 | — | | Corporate securities | 41,490 | — | 41,490 | — | | Total available-for-sale securities | 608,682 | — | 608,682 | — | | Servicing assets | 2,415 | — | — | 2,415 | | Interest rate swap liabilities | (78,552) | — | (78,552) | — | | Loans held for sale (mandatory delivery agreements) | 52,394 | — | 52,394 | — | | Forward contracts | (2,298) | (2,298) | — | — | | Interest rate lock commitments (IRLCs) | 2,064 | — | — | 2,064 | Level 3 Fair Value Measurement Changes (USD in thousands) (For the three months ended March 31, 2020 vs. 2019) | (USD in thousands) | Servicing Assets (2020) | IRLCs (2020) | Servicing Assets (2019) | IRLCs (2019) | | :-------------------- | :-------------- | :----------- | :-------------- | :----------- | | Beginning balance | 2,481 | 910 | — | 389 | | Additions | 113 | — | — | — | | Change in fair value | (179) | 1,154 | — | 392 | | Ending balance | 2,415 | 2,064 | — | 781 | Level 3 Fair Value Measurement Unobservable Inputs (As of March 31, 2020) | (USD in thousands) | Fair Value | Valuation Technique | Unobservable Input | Range | Weighted Average Range | | :--------- | :------- | :------- | :----------- | :--- | :----------- | | IRLCs | 2,064 | Discounted cash flow | Loan pull-through rate | 36% - 100% | 56% | | Servicing assets | 2,415 | Discounted cash flow | Prepayment speed | 0% - 25% | 14.4% | | | | | Expected weighted-average loan life | 3.3 - 5.3 years | 4.7 years | Note 13: Mortgage Banking Activities This note describes the company's residential real estate loan business, including mortgage origination and sales, related hedging activities, and the components of mortgage banking income - The company typically sells most originated mortgage loans into the secondary market and hedges them through forward contracts and interest rate lock commitments (IRLCs)[157] Mortgage Banking Income Components (USD in thousands) (For the three months ended March 31, 2020 vs. 2019) | (USD in thousands) | March 31, 2020 | March 31, 2019 | | :------------------------------------ | :------------- | :------------- | | Gain on loan sales | 4,343 | 1,473 | | Gain (loss) on fair value changes of loans held for sale | 316 | (182) | | Loss (gain) on fair value changes of derivatives | (991) | 326 | | Net mortgage banking income | 3,668 | 1,617 | - For the first quarter of 2020, the company originated $215.4 million of mortgage loans held for sale and sold $225.5 million of mortgage loans; for the first quarter of 2019, these figures were $75.2 million and $81.0 million, respectively[158] Note 14: Derivative Financial Instruments This note details the company's use of derivative financial instruments, such as interest rate swap agreements, forward contracts, and interest rate lock commitments, to manage and hedge interest rate risk, disclosing their fair values and financial statement impacts - The company uses derivative financial instruments to manage interest rate risk, including interest rate swap agreements (fair value and cash flow hedges), forward contracts, and interest rate lock commitments[161][162][163] Summary of Interest Rate Swap Derivatives Designated as Fair Value Hedges (USD in thousands) (As of March 31, 2020 vs. December 31, 2019) | (USD in thousands) | March 31, 2020 Notional Value | March 31, 2020 Fair Value | December 31, 2019 Notional Value | December 31, 2019 Fair Value | | :-------------------------- | :-------------------- | :------------- | :-------------------- | :------------- | | Loan-related | 424,834 | (44,872) | 427,446 | (21,551) | | Available-for-sale securities-related | 88,200 | (6,793) | 88,200 | (2,806) | | Total | 513,034 | (51,665) | 515,646 | (24,357) | Summary of Interest Rate Swap Derivatives Designated as Cash Flow Hedges (USD in thousands) (As of March 31, 2020 vs. December 31, 2019) | (USD in thousands) | March 31, 2020 Notional Value | March 31, 2020 Fair Value | December 31, 2019 Notional Value | December 31, 2019 Fair Value | | :-------------------------- | :-------------------- | :------------- | :-------------------- | :------------- | | Interest rate swaps (3-month LIBOR) | 110,000 | (17,509) | 110,000 | (8,390) | | Interest rate swaps (1-month LIBOR) | 100,000 | (9,378) | 100,000 | (5,040) | Derivative Instruments Notional Amounts and Fair Values (USD in thousands) (As of March 31, 2020 vs. December 31, 2019) | (USD in thousands) | March 31, 2020 Notional Amount | March 31, 2020 Fair Value | December 31, 2019 Notional Amount | December 31, 2019 Fair Value | | :------------------------------------ | :-------------------- | :------------- | :-------------------- | :------------- | | Asset Derivatives | | | | | | Interest rate lock commitments (IRLCs) | 139,907 | 2,064 | 56,256 | 910 | | Liability Derivatives | | | | | | Loan-related interest rate swaps | 424,834 | (44,872) | 427,446 | (21,551) | | Available-for-sale securities-related interest rate swaps | 88,200 | (6,793) | 88,200 | (2,806) | | Liability-related interest rate swaps | 210,000 | (26,887) | 210,000 | (13,429) | | Forward contracts | 106,750 | (2,298) | 115,000 | (153) | | Total | 829,784 | (80,850) | 840,646 | (37,939) | Note 15: Accumulated Other Comprehensive Loss This note presents the components of accumulated other comprehensive loss within shareholders' equity, including available-for-sale securities and cash flow hedges, and their changes during the reporting period Components of Accumulated Other Comprehensive Loss (USD in thousands) (For the three months ended March 31, 2020 vs. 2019) | (USD in thousands) | Available-for-Sale Securities | Cash Flow Hedges | Total | | :------------------------------------ | :------------- | :--------- | :----- | | 2020 | | | | | Balance at January 1, 2020 | (4,388) | (9,803) | (14,191) | | Net change in unrealized gains (losses) | 6,299 | (13,458) | (7,159) | | Reclassification of gains realized and included in earnings | (41) | — | (41) | | Accumulated other comprehensive income (loss) pre-tax | 1,870 | (23,261) | (21,391) | | Income tax expense (benefit) | 2,109 | (3,634) | (1,525) | | Balance at March 31, 2020 | (239) | (19,627) | (19,866) | | 2019 | | | | | Balance at January 1, 2019 | (13,360) | (3,181) | (16,541) | | Net change in unrealized gains (losses) | 6,910 | (3,572) | 3,338 | | Accumulated other comprehensive loss pre-tax | (6,450) | (6,753) | (13,203) | | Income tax expense (benefit) | 1,930 | (965) | 965 | | Balance at March 31, 2019 | (8,380) | (5,788) | (14,168) | Note 16: Recent Accounting Pronouncements This note outlines recently effective accounting pronouncements, including ASU 2016-13 (Financial Instruments-Credit Losses), ASU 2018-13 (Fair Value Measurement Disclosures), and ASU 2019-04 (Codification Improvements), specifically addressing the temporary exemption impact of the CARES Act on troubled debt restructurings (TDRs) - ASU 2016-13 (CECL) requires the expected credit loss methodology, which the company does not expect to early adopt and is evaluating its impact on financial statements[178][180][181][182][183] - ASU 2018-13 (Fair Value Measurement Disclosures) modified disclosure requirements, which the company has adopted with no material impact on financial statements[184] - ASU 2019-04 (Codification Improvements) clarified guidance for Topics 326, 815, and 825; the impact on Topic 326 is being evaluated, while no material impact is expected for Topics 815 and 825[186] - Section 4013 of the CARES Act stipulates that loan modifications made due to COVID-19 impacts should not be classified as troubled debt restructurings (TDRs, with this exemption period beginning March 1, 2020)[187] ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This chapter provides management's discussion and analysis of the company's financial condition and results of operations, covering key aspects such as company overview, COVID-19 pandemic impact, operating performance, balance sheet analysis, loan portfolio, asset quality, capital requirements, and liquidity Overview - First Internet Bancorp is a bank holding company conducting its primary business activities through its wholly-owned subsidiary, First Internet Bank of Indiana, the first state-chartered, FDIC-insured internet bank[189] - The company offers a wide range of commercial, small business, consumer, and municipal banking products and services, operating primarily nationwide through online channels without traditional branches[191] - Commercial banking activities include commercial real estate, commercial and industrial, public finance, healthcare finance, small business lending, and commercial deposit and treasury management[192][193] - On November 1, 2019, the company acquired the loan portfolio, servicing portfolio, and experienced SBA professional team of First Colorado National Bank to accelerate its small business lending platform development[194] COVID-19 Pandemic - The COVID-19 pandemic has negatively impacted global, national, and local economies, potentially adversely affecting the company's future financial condition and results of operations[195] - The company has fully implemented its business continuity plan, with most employees working remotely, and has implemented social distancing policies and enhanced cleaning protocols[196] - The company provided $0.25 million in grants to small businesses and non-profit organizations in Marion and Hamilton Counties, Indiana[196] - As a digital-first institution, the company serves affected customers by offering loan deferral programs and assisting with participation in the Paycheck Protection Program (PPP)[197] - As of May 1, 2020, the company originated 437 PPP loans totaling $59.6 million, with an average loan size of $0.136 million[198][199] Results of Operations Summary of Results of Operations (USD in thousands, except per share data) (For the three months ended March 31, 2020 vs. 2019) | Indicator | March 31, 2020 | March 31, 2019 | | :-------------------------- | :------------- | :------------- | | Net interest income | 15,018 | 16,244 | | Provision for loan losses | 1,461 | 1,285 | | Noninterest income | 6,211 | 2,372 | | Noninterest expense | 13,486 | 11,109 | | Income tax expense | 263 | 526 | | Net income | 6,019 | 5,696 | | Earnings per share - basic | 0.62 | 0.56 | | Earnings per share - diluted | 0.62 | 0.56 | | Return on average assets (ROAA) | 0.59% | 0.64% | | Return on average shareholders' equity (ROAE) | 7.78% | 7.91% | - Net income for the first quarter of 2020 was $6.0 million, a 5.7% increase year-over-year, primarily driven by a $3.8 million increase in noninterest income and a $0.3 million decrease in income tax expense, partially offset by a $0.2 million increase in the allowance for loan losses, a $2.4 million increase in noninterest expense, and a $1.2 million decrease in net interest income[204][205] - The decline in ROAA and ROAE was primarily due to the growth in average assets and average shareholders' equity[206] Consolidated Average Balance Sheets and Net Interest Income Analyses Consolidated Average Balance Sheets and Net Interest Income Analyses (USD in thousands) (For the three months ended March 31, 2020 vs. 2019) | Indicator | March 31, 2020 Average Balance | March 31, 2020 Interest/Dividends | March 31, 2020 Yield/Cost | March 31, 2019 Average Balance | March 31, 2019 Interest/Dividends | March 31, 2019 Yield/Cost | | :-------------------------- | :-------------------- | :-------------------- | :-------------------- | :-------------------- | :-------------------- | :-------------------- | | Assets | | | | | | | | Total interest-earning assets | 4,024,800 | 36,244 | 3.62% | 3,544,849 | 34,999 | 4.00% | | Loans (including held for sale) | 2,977,994 | 30,408 | 4.11% | 2,774,852 | 29,218 | 4.27% | | Securities - taxable | 531,046 | 3,619 | 2.74% | 429,020 | 3,324 | 3.14% | | Securities - tax-exempt | 99,833 | 572 | 2.30% | 94,245 | 684 | 2.94% | | Other interest-earning assets | 415,927 | 1,645 | 1.59% | 246,732 | 1,773 | 2.91% | | Liabilities | | | | | | | | Total interest-bearing liabilities | 3,673,510 | 21,226 | 2.32% | 3,269,379 | 18,755 | 2.33% | | Interest-bearing demand deposits | 122,925 | 219 | 0.72% | 109,453 | 212 | 0.79% | | Regular savings accounts | 30,345 | 78 | 1.03% | 38,853 | 108 | 1.13% | | Money market accounts | 866,605 | 3,743 | 1.74% | 563,106 | 2,752 | 1.98% | | Certificates of deposit and brokered deposits | 2,069,170 | 13,168 | 2.56% | 2,017,262 | 12,314 | 2.48% | | Other borrowings | 584,465 | 4,018 | 2.76% | 540,705 | 3,369 | 2.53% | | Net interest income | | 15,018 | | | 16,244 | | | Net interest spread | | | 1.30% | | | 1.67% | | Net interest margin | | | 1.50% | | | 1.86% | | Net interest margin - FTE | | | 1.65% | | | 2.04% | Rate/Volume Analysis Rate/Volume Impact on Net Interest Income (USD in thousands) (For the three months ended March 31, 2020 vs. 2019) | (USD in thousands) | Volume Change | Rate Change | Net Change | | :-------------------------- | :------- | :------- | :----- | | Interest Income | | | | | Loans (including held for sale) | 6,661 | (5,471) | 1,190 | | Securities – taxable | 2,427 | (2,132) | 295 | | Securities – tax-exempt | 234 | (346) | (112) | | Other interest-earning assets | 3,844 | (3,972) | (128) | | Total interest income | 13,166 | (11,921) | 1,245 | | Interest Expense | | | | | Interest-bearing deposits | 3,905 | (2,083) | 1,822 | | Other borrowings | 306 | 343 | 649 | | Total interest expense | 4,211 | (1,740) | 2,471 | | Net interest income increase (decrease) | 8,955 | (10,181) | (1,226) | - Net interest income for the first quarter of 2020 was $15.0 million, a $1.2 million (7.5%) decrease from $16.2 million in the first quarter of 2019[212] - The decline in net interest income was primarily due to a $2.5 million (13.2%) increase in total interest expense, partially offset by a $1.2 million (3.6%) increase in total interest income[212] - The overall yield on interest-earning assets decreased from 4.00% in the first quarter of 2019 to 3.62% in the first quarter of 2020, primarily due to sustained declines in market interest rates[213] - The net interest margin (NIM) decreased from 1.86% in the first quarter of 2019 to 1.50% in the first quarter of 2020, mainly due to a decline in interest-earning asset yields[216] Noninterest Income Noninterest Income (USD in thousands) (For the three months ended March 31, 2020 vs. 2019) | (USD in thousands) | March 31, 2020 | March 31, 2019 | | :-------------------------- | :------------- | :------------- | | Service charges and fees | 212 | 236 | | Loan servicing income | 251 | — | | Loan servicing asset revaluation | (179) | — | | Mortgage banking activities | 3,668 | 1,617 | | Gain (loss) on loan sales | 1,801 | (104) | | Gain (loss) on securities sales | 41 | — | | Other | 417 | 623 | | Total noninterest income | 6,211 | 2,372 | - Noninterest income for the first quarter of 2020 was $6.2 million, an increase of $3.8 million (161.8%) from $2.4 million in the first quarter of 2019[218] - The increase was primarily driven by higher mortgage banking income and increased loan sale gains, with mortgage banking income growth mainly due to increased interest rate lock commitments and origination activity resulting from declining market interest rates[218] - The company sold $190.7 million in single-tenant lease finance, public finance, portfolio residential mortgage, and SBA 7(a) loans during the first quarter of 2020, realizing $1.8 million in net gains[218] Noninterest Expense Noninterest Expense (USD in thousands) (For the three months ended March 31, 2020 vs. 2019) | (USD in thousands) | March 31, 2020 | March 31, 2019 | | :-------------------------- | :------------- | :------------- | | Salaries and employee benefits | 7,774 | 6,321 | | Marketing, advertising, and promotion | 375 | 469 | | Consulting and professional services | 1,177 | 814 | | Data processing | 375 | 317 | | Loan expenses | 599 | 314 | | Premises and equipment | 1,625 | 1,500 | | Deposit insurance assessments | 485 | 555 | | Other | 1,076 | 819 | | Total noninterest expense | 13,486 | 11,109 | - Noninterest expense for the first quarter of 2020 was $13.5 million, an increase of $2.4 million (21.4%) from $11.1 million in the first quarter of 2019[221] - The increase was primarily due to a $1.5 million increase in salaries and employee benefits (including growth in small business lending platform personnel and increased mortgage incentive compensation), a $0.4 million increase in consulting and professional services, a $0.3 million increase in loan expenses, and a $0.1 million increase in premises and equipment expenses[221] - Income tax expense for the first quarter of 2020 was $0.3 million, with an effective tax rate of 4.2%, a decrease from $0.5 million and 8.5% in the first quarter of 2019, primarily due to the CARES Act[222] Financial Condition Balance Sheet Data Summary (USD in thousands) (As of March 31, 2020 vs. December 31, 2019) | (USD in thousands) | March 31, 2020 | December 31, 2019 | | :-------------------------- | :------------- | :------------- | | Total assets | 4,168,146 | 4,100,083 | | Loans | 2,892,093 | 2,963,547 | | Total securities | 675,013 | 602,730 | | Loans held for sale | 52,394 | 56,097 | | Noninterest-bearing deposits | 70,562 | 57,115 | | Interest-bearing deposits | 3,107,944 | 3,096,848 | | Total deposits | 3,178,506 | 3,153,963 | | Federal Home Loan Bank borrowings | 514,911 | 514,910 | | Total shareholders' equity | 305,127 | 304,913 | - As of March 31, 2020, total assets increased by $68.1 million (1.7%) to $4.2 billion[224] - Deposits grew by $24.5 million (0.8%), while total loans decreased by $71.5 million (2.4%), leading to increased liquid assets, a $72.3 million (12.0%) increase in securities balances, and a $23.9 million (7.3%) increase in cash balances[224] - The loan-to-deposit ratio decreased from 94.0% as of December 31, 2019, to 91.0% as of March 31, 2020, reflecting increased balance sheet liquidity[224] Loan Portfolio Analysis Loan Portfolio Summary (USD in thousands) (As of March 31, 2020 vs. December 31, 2019) | (USD in thousands) | March 31, 2020 | Percentage | December 31, 2019 | Percentage | | :-------------------------- | :------------- | :--- | :------------- | :--- | | Commercial Loans | | | | | | Commercial and industrial | 95,227 | 3.3% | 96,420 | 3.3% | | Owner-occupied commercial real estate | 74,737 | 2.6% | 73,392 | 2.5% | | Investor commercial real estate | 13,421 | 0.5% | 12,567 | 0.4% | | Construction | 64,581 | 2.2% | 60,274 | 2.0% | | Single-tenant lease finance | 972,275 | 33.6% | 995,879 | 33.6% | | Public finance | 627,678 | 21.7% | 687,094 | 23.2% | | Healthcare finance | 372,266 | 12.9% | 300,612 | 10.1% | | Small business loans | 67,275 | 2.3% | 61,121 | 2.1% | | Total commercial loans | 2,287,460 | 79.1% | 2,287,359 | 77.2% | | Consumer Loans | | | | | | Residential mortgage | 218,730 | 7.6% | 313,849 | 10.6% | | Home equity | 23,855 | 0.8% | 24,306 | 0.8% | | Other consumer loans | 296,605 | 10.2% | 295,309 | 10.0% | | Total consumer loans | 539,190 | 18.6% | 633,464 | 21.4% | | Total loans | 2,892,093 | 100.0% | 2,963,547 | 100.0% | - As of March 31, 2020, total loans were $2.9 billion, a $71.5 million (2.4%) decrease from December 31, 2019[228] - Commercial loan balances were largely flat compared to December 31, 2019, with growth in healthcare finance, small business, and construction loans offset by declines in single-tenant lease finance and public finance loan portfolios, primarily due to $94.4 million in loan sales during the first quarter of 2020[228] - Consumer loan balances decreased by $94.3 million (14.9%), primarily due to the sale of $90.8 million in portfolio residential mortgage loans[229] - The company has identified loan exposures to industries affected by COVID-19, including healthcare finance (12.9%), full-service restaurants ($221.2 million), and quick-service restaurants ($218.6 million), but currently has no exposure to airline, cruise line, oil and gas, or multi-family residential loans[230] Asset Quality Nonperforming Assets Summary (USD in thousands) (As of March 31, 2020 vs. December 31, 2019) | (USD in thousands) | March 31, 2020 | December 31, 2019 | | :-------------------------- | :------------- | :------------- | | Nonaccrual Loans | | | | Total commercial loans | 6,288 | 5,370 | | Total consumer loans | 1,030 | 794 | | Total nonaccrual loans | 7,318 | 6,164 | | Loans 90 Days Past Due and Accruing | | | | Total commercial loans | 73 | — | | Total consumer loans | 52 | 568 | | Total loans 90 days past due and accruing | 125 | 568 | | Total nonperforming loans | 7,443 | 6,732 | | Other Real Estate Owned | | | | Investor commercial real estate | 2,065 | 2,065 | | Total other real estate owned | 2,065 | 2,065 | | Other nonperforming assets | 114 | 75 | | Total nonperforming assets | 9,622 | 8,872 | | Nonperforming loans to total loans | 0.26% | 0.23% | | Nonperforming assets to total assets | 0.23% | 0.22% | | Allowance for loan losses to total loans | 0.79% | 0.74% | | Allowance for loan losses to nonperforming loans | 307.1% | 324.4% | - As of March 31, 2020, nonperforming loans increased by $0.7 million (10.6%) to $7.4 million, primarily due to a $0.9 million small business loan being placed on nonaccrual status[235] - Total nonperforming assets increased by $0.8 million (8.5%)[235] - As of March 31, 2020, the company held one commercial real estate (OREO) property with a carrying value of $2.1 million[236] - As of March 31, 2020, COVID-19 had minimal impact on asset quality, but the ultimate impact of the pandemic remains highly uncertain[237] Troubled Debt Restructurings Troubled Debt Restructurings Summary (USD in thousands) (As of March 31, 2020 vs. December 31, 2019) | (USD in thousands) | March 31, 2020 | December 31, 2019 | | :-------------------------- | :------------- | :------------- | | Troubled debt restructurings – nonaccrual | 94 | 94 | | Troubled debt restructurings – performing | 378 | 427 | | Total troubled debt restructurings | 472 | 521 | - As of March 31, 2020, total troubled debt restructurings were $0.5 million, largely consistent with December 31, 2019[235] Non-TDR Loan Modifications due to COVID-19 - In accordance with regulatory guidance and Section 4013 of the CARES Act, the company provided loan modifications to borrowers affected by COVID-19 who were current on all principal and interest payments, with these modifications not classified as troubled debt restructurings (TDRs)[238][239][240] Deferred Loans by Loan Portfolio Type (USD in thousands) (As of March 31, 2020) | (USD in thousands) | Deferred Loans | Total Loan Balance | Percentage of Deferred Loans | | :-------------------------- | :------- | :--------- | :----------- | | Commercial Loans | | | | | Commercial and industrial | 16,147 | 95,227 | 17.0% | | Owner-occupied commercial real estate | 15,791 | 74,737 | 21.1% | | Single-tenant lease finance | 244,731 | 972,275 | 25.2% | | Healthcare finance | 296,477 | 372,266 | 79.6% | | Small business loans | 22,346 | 67,275 | 33.2% | | Total commercial loans | 595,492 | 2,287,460 | 26.0% | | Consumer Loans | | | | | Residential mortgage | 11,606 | 218,730 | 5.3% | | Home equity | 355 | 23,855 | 1.5% | | Other consumer loans | 8,591 | 296,605 | 2.9% | | Total consumer loans | 20,552 | 539,190 | 3.8% | | Total commercial and consumer loans | 616,044 | 2,826,650 | 21.8% | - Single-tenant lease finance and healthcare finance portfolios accounted for approximately 88% of the total approved loan deferrals[243] U.S. Small Business Administration Paycheck Protection Program - As an SBA Preferred Lender, the company assisted customers in participating in the Paycheck Protection Program (PPP)[244] - As of May 1, 2020, the company originated 437 PPP loans totaling $59.6 million, with an average loan size of $0.136 million[244] - Approximately $2.3 million in fee income is expected from the federal government, which will be deferred and recognized as interest income over the life of the PPP loans[244] Allowance for Loan Losses Allowance for Loan Losses Activity (USD in thousands) (For the three months ended March 31, 2020 vs. 2019) | (USD in thousands) | March 31, 2020 | March 31, 2019 | | :-------------------------- | :------------- | :------------- | | Beginning balance | 21,840 | 17,896 | | Provision charged to expense | 1,461 | 1,285 | | Charge-offs | (498) | (429) | | Recoveries | 54 | 89 | | Ending balance | 22,857 | 18,841 | | Net charge-offs to average loans | 0.06% | 0.05% | - As of March 31, 2020, the allowance for loan losses was $22.9 million, an increase from $21.8 million as of December 31, 2019[247] - Despite a decrease in total loans, the company adjusted economic qualitative factors in its allowance for loan losses model to reflect economic uncertainties arising from COVID-19[247] - The ratio of allowance for loan losses to total loans increased from 0.74% as of December 31, 2019, to 0.79% as of March 31, 2020[247] - The provision for loan losses for the first quarter of 2020 was $1.5 million, an increase of $1.0 million (212.2%) from $0.5 million in the fourth quarter of 2019[247] Investment Securities Portfolio Investment Portfolio Amortized Cost (USD in thousands) (As of March 31, 2020 vs. December 31, 2019) | (USD in thousands) | March 31, 2020 | December 31, 2019 | | :-------------------------- | :------------- | :------------- | | Available-for-Sale Securities | | | | U.S. government sponsored agencies | 71,387 | 77,715 | | Municipal securities | 94,981 | 97,447 | | Agency mortgage-backed securities | 279,458 | 264,142 | | Private mortgage-backed securities | 114,363 | 63,704 | | Asset-backed securities | 5,000 | 5,000 | | Corporate securities | 43,378 | 38,632 | | Total available-for-sale securities | 608,567 | 546,640 | | Held-to-Maturity Securities | | | | Municipal securities | 14,617 | 10,142 | | Corporate securities | 51,714 | 51,736 | | Total held-to-maturity securities | 66,331 | 61,878 | | Total securities | 674,898 | 608,518 | Investment Portfolio Approximate Fair Value (USD in thousands) (As of March 31, 2020 vs. December 31, 2019) | (USD in thousands) | March 31, 2020 | December 31, 2019 | | :-------------------------- | :------------- | :------------- | | Available-for-Sale Securities | | | | U.S. government sponsored agencies | 70,004 | 75,872 | | Municipal securities | 94,819 | 97,652 | | Agency mortgage-backed securities | 282,632 | 261,440 | | Private mortgage-backed securities | 115,024 | 63,613 | | Asset-backed securities | 4,713 | 4,955 | | Corporate securities | 41,490 | 37,320 | | Total available-for-sale securities | 608,682 | 540,852 | | Held-to-Maturity Securities | | | | Municipal securities | 15,678 | 10,368 | | Corporate securities | 53,790 | 52,192 | | Total held-to-maturity securities | 69,468 | 62,560 | | Total securities | 678,150 | 603,412 | - As of March 31, 2020, the approximate fair value of available-for-sale investment securities increased by $67.8 million (12.5%) to $608.7 million, primarily due to increases in private mortgage-backed securities and agency mortgage-backed securities[250] Accrued Income and Other Assets - As of March 31, 2020, accrued income and other assets were $112.3 million, an increase of $45.3 million (67.5%) from $67.1 million as of December 31, 2019[251] - The increase was primarily due to an increase in cash collateral pledged for interest rate swap agreements[251] Accrued Expenses and Other Liabilities - As of March 31, 2020, accrued expenses and other liabilities were $96.7 million, an increase of $43.7 million (82.5%) from $53.0 million as of December 31, 2019[252] - The increase was primarily due to a $40.8 million decrease in the fair value of interest rate swap agreements[252] Deposits Deposit Composition (USD in thousands) (As of March 31, 2020 vs. December 31, 2019) | (USD in thousands) | March 31, 2020 | Percentage | December 31, 2019 | Percentage | | :-------------------------- | :------------- | :--- | :------------- | :--- | | Noninterest-bearing deposits | 70,562 | 2.2% | 57,115 | 1.8% | | Interest-bearing demand deposits | 123,233 | 3.9% | 129,020 | 4.1% | | Savings accounts | 32,485 | 1.0% | 29,616 | 0.9% | | Money market accounts | 930,698 | 29.3% | 786,390 | 24.9% | | Certificates of deposit | 1,493,644 | 47.0% | 1,613,453 | 51.2% | | Brokered deposits | 527,884 | 16.6% | 538,369 | 17.1% | | Total deposits | 3,178,506 | 100.0% | 3,153,963 | 100.0% | - As of March 31, 2020, total deposits increased by $24.5 million (0.8%) to $3.2 billion[255] - The increase was primarily driven by a $144.3 million (18.4%) increase in money market deposits, partially offset by a $119.8 million (7.4%) decrease in certificates of deposit and a $10.5 million (2.0%) decrease in brokered deposits[255] Recent Debt and Equity Offerings - In June 2019, the company issued $37.0 million of 6.0% Fixed-to-Floating Rate Subordinated Notes due 2029 (2029 Notes)[256] - The 2029 Notes bear an initial fixed interest rate of 6.0% until June 30, 2024, after which they convert to a floating rate (benchmark rate plus 411 basis points), designed to qualify as Tier 2 capital under regulatory guidelines[256] Regulatory Capital Requirements - Both the company and the Bank are subject to various regulatory capital requirements by state and federal banking agencies, including the Basel III capital rules[257][258] - The Basel III capital rules, fully implemented on January 1, 2019, require maintaining minimum ratios of Common Equity Tier 1 capital, Tier 1 capital, and Total capital to risk-weighted assets, as well as a Tier 1 capital to adjusted quarterly average assets ratio (leverage ratio)[259] Actual vs. Minimum Capital Ratios (USD in thousands) (As of March 31, 2020) | (USD in thousands) | Actual Capital Amount | Actual Ratio | Basel III Minimum Required Capital Amount | Basel III Minimum Required Ratio | Minimum Required Capital Amount for Capital Adequacy | Minimum Required Ratio for Capital Adequacy | | :------------------------------------ | :------------- | :------- | :-------------------------- | :---------- | :--------------------------------- | :---------- | | As of March 31, 2020: | | | | | | | | Common Equity Tier 1 Capital to Risk-Weighted Assets | | | | | | | | Consolidated | 319,959 | 10.76% | 207,711 | 7.00% | N/A | N/A | | Bank | 349,499 | 11.77% | 207,525 | 7.00% | 192,702 | 6.50% | | Tier 1 Capital to Risk-Weighted Assets | | | | | | | | Consolidated | 319,959 | 10.76% | 252,220 | 8.50% | N/A | N/A | | Bank | 349,499 | 11.77% | 251,995 | 8.50% | 231,171 | 8.00% | | Total Capital to Risk-Weighted Assets | | | | | | | | Consolidated | 412,421 | 13.87% | 311,566 | 10.50% | N/A | N/A | | Bank | 372,356 | 12.54% | 311,288 | 10.50% | 296,464 | 10.00% | | Leverage Ratio | | | | | | | | Consolidated | 319,959 | 7.82% | 163,763 | 4.00% | N/A | N/A | | Bank | 349,499 | 8.54% | 163,661 | 4.00% | 204,576 | 5.00% | Shareholders' Dividends - The company's Board of Directors declared a cash dividend of $0.06 per share, payable on April 15, 2020, to shareholders of record as of March 31, 2020[264] - The declaration and amount of future cash dividends are at the sole discretion of the Board of Directors and depend on factors such as operating results, financial condition, capital requirements, regulatory and contractual restrictions, and the potential impact of COVID-19[264] - The subordinated debt agreements prohibit the company from paying common stock dividends or making other shareholder distributions if an event of default occurs[265] Capital Resources - The company believes it has sufficient liquidity and capital resources to meet its cash and capital expenditure needs for at least the next twelve months[266] - The company may explore strategic alternatives, including additional asset, deposit, or revenue-generating channels, which could require additional capital[266] Liquidity - Liquidity management is the process by which the company manages its ongoing cash flows to meet financial commitments on time and at a reasonable cost, while maintaining safe and sound operations[267] - Primary funding sources include deposits, principal and interest payments on loans and investment securities, maturing loans and investment securities, wholesale funding sources, and collateralized borrowings[267] - The company enhanced its liquidity management by increasing loan sale activity, selling $99.9 million in public finance, single-tenant lease finance, and SBA 7(a) guaranteed loans, and $90.8 million in portfolio residential mortgage loans during the first quarter of 2020[268] - As of March 31, 2020, the company held $960 million in cash and cash equivalents and available-for-sale investment securities, along with $52.4 million in loans held for sale[269] - As of March 31, 2020, the Bank had access to an additional $602.2 million in borrowings from the FHLB, Federal Reserve Bank, and correspondent bank federal funds lines of credit[269] - As of March 31, 2020, the company held $36.0 million in unconsolidated cash, exceeding its current year's ordinary shareholder dividends and operating expenses[270] Reconciliation of Non-GAAP Financial Measures - This section provides a reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures, including tangible common equity, tangible assets, tangible book value per share, average tangible common equity, return on average tangible common equity, tangible common equity to tangible assets ratio, total interest income-FTE, net interest income-FTE, and net interest margin-FTE[273] Reconciliation of Non-GAAP Financial Measures (USD in thousands, except per share data) (As of March 31, 2020 vs. 2019) | (USD in thousands, except per share data) | March 31, 2020 | March 31, 2019 | | :------------------------------------ | :------------- | :------------- | | Total shareholders' equity - GAAP | 305,127 | 294,013 | | Adjustment: Goodwill | (4,687) | (4,687) | | Tangible common equity | 300,440 | 289,326 | | Total assets - GAAP | 4,168,146 | 3,670,176 | | Adjustment: Goodwill | (4,687) | (4,687) | | Tangible assets | 4,163,459 | 3,665,489 | | Book value per share | 31.13 | 29.03 | | Tangible book value per share | 30.65 | 28.57 | | Tangible common equity to tangible assets ratio | 7.22% | 7.89% | | Return on average tangible common equity | 7.90% | 8.04% | | Total interest income - FTE | 37,779 | 36,556 | | Net interest income - FTE | 16,553 | 17,801 | | Net interest margin - FTE | 1.65% | 2.04% | Critical Accounting Policies and Estimates - The company's critical accounting policies or estimates have not materially changed since the annual report as of December 31, 2019[276] Recent Accounting Pronouncements (MD&A section) - Refer to Note 16 to the Condensed Consolidated Financial Statements for detailed information on recent accounting pronouncements[277] Off-Balance Sheet Arrangements - The company enters into financial transactions in the normal course of business, such as credit extensions, interest rate swap agreements, and commitments, which may be considered off-balance sheet arrangements[278] - As of March 31, 2020, and December 31, 2019, the notional amounts of the company's interest rate swaps were $723.0 million and $725.6 million, respectively[278] - As of March 31, 2020, and December 31, 2019, the company's commitments to sell residential real estate loans were $106.8 million and $115.0 million, respectively[278](index=278&t