FINWISE BANCORP The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and related notes thereto and other financial information included elsewhere in this Report. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions that could cause actual results to differ materially from our expectations. Factors that could cause such differences are discussed in the sections of this Report and our most recently filed Annual Report on Form 10-K entitled "Risk Factors," "Cautionary Note Regarding Forward-Looking Statements" and elsewhere in this Report. We assume no obligation to update any of these forward-looking statements except to the extent required by law. The following discussion pertains to our historical results, on a consolidated basis. However, because we conduct all our material business operations through our wholly owned subsidiary,FinWise Bank , the discussion and analysis relates to activities primarily conducted at the subsidiary level. All dollar amounts in the tables in this section are in thousands of dollars, except per share data or where otherwise specifically noted. Unless otherwise stated, all information in this Report gives effect to a six-for-one stock split of our common stock completed effectiveJuly 26, 2021 . The effect of the stock split on outstanding shares and per share figures has been retroactively applied to all periods presented in this Report.
Overview
The Company is aUtah corporation and the parent company ofFinWise Bank . The Company's assets consist primarily of its investment in the Bank and all of its material business activities are conducted through the Bank. The Company is a registered bank holding company that is subject to supervision by the UDFI and theFederal Reserve . As aUtah state-chartered bank that is not a member of theFederal Reserve System , the Bank is separately subject to regulations and supervision by both the UDFI and theFDIC . The Bank's deposits are federally insured up to the maximum legal limits. See "Supervision and Regulation." Our banking business is our only business line. Our banking business offers a diverse range of commercial and retail banking products and services, and consists primarily of originating loans in a variety of sectors. Attracting nationwide deposits from the general public, businesses and other financial institutions, and investing those deposits, together with borrowings and other sources of funds, is also critical to our banking business. While our commercial and residential real estate lending and other products and services offered from our branch continue to be concentrated in and around theSalt Lake City, Utah MSA, our third-party loan origination relationships have allowed us to expand into new markets acrossthe United States . These relationships were developed to support our ability to generate significant loan volume across diverse consumer and commercial markets and have been the primary source of our significant growth and superior profitability. Our analytics platform, FinView™, enhances our ability to gather and interpret performance data for our originations and provides management with an ability to identify attractive, risk-adjusted sectors for growth. These insights coupled with the billions of dollars in originations funded annually and our ability to sell loans or retain for investment enhance our unique position. Our track record has demonstrated that these qualities deliver superior growth and profitability and that the flexibility inherent in our model enhances our ability to manage credit risk. Our financial condition and results of operations depend primarily on our ability to (i) originate loans using our strategic relationships with third-party loan origination platforms to earn interest and noninterest income, (ii) utilize FinView™ to identify attractive risk-adjusted lending opportunities and inform the selection of loans for investment while limiting credit losses, (iii) attract and retain low cost, stable deposits, and (iv) efficiently operate in compliance with applicable regulations.
Our lending focuses on four main lending areas: (i) SBA 7(a) loans, (ii) Strategic Programs, (iii) residential and commercial real estate and (iv) consumer lending. For a description and analysis of the Company's loan categories, see "-Principal Factors Affecting Our Financial Condition".
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Covid 19 Pandemic
SinceMarch 2020 , our nation has experienced a massive health and economic crisis as a result of the Covid-19 pandemic, which continues to negatively impact the health and finances of millions of people and businesses and have a pronounced impact on the global and national economy. To control the spread of the Covid-19 virus, governments around the world instituted widespread shutdowns of the economy which resulted in record unemployment in a matter of weeks. The economic turbulence spawned by the Covid-19 pandemic left many banks with potential credit quality and income issues. These issues are further compounded by uncertainties regarding the length, depth and possible resurgence of the pandemic and its ultimate long-term effects on the economy. In an effort to reduce the impact of economic shutdowns, theUnited States Congress has passed the CARES Act, the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act, the Consolidated Appropriations Act, 2021, and recently the American Rescue Plan Act of 2021. These relief measures have provided stimulus payments to individuals, expanded unemployment benefits, and created programs that provided critical financing to small businesses through products such as the EIDL and the PPP, both of which are being administered by the SBA. Additionally,the United States government agreed to make six months of payments on SBA loans and increase the SBA guaranty on SBA 7(a) loans to 90% for loans originated fromFebruary 1, 2020 throughSeptember 30, 2021 . The SBA has made the full monthly P&I payments with respect to our qualifying SBA 7(a) customers in "regular servicing" status for six months. For most of our SBA portfolio (the legacy loans), the SBA made borrowers' principal and interest payments fromApril 2020 throughSeptember 2020 . These were officially referred to as First Round Section 1112 Payments, as they derived from Section 1112 of the CARES Act. To be eligible for the full six months of First Round Section 1112 Payments, the SBA loans were required to be: (i) in "regular servicing" status; (ii) approved by the SBA beforeMarch 27, 2020 ; and (iii) fully disbursed bySeptember 27, 2020 . Under the Economic Aid Act, the SBA will make an additional two payments for eligible SBA customers, capped at$9,000 per month per loan. Borrowers with loan payments above$9,000 per month are responsible for paying the difference. For our legacy portfolio, the SBA will make payment on the lesser of a borrower's monthly principal and interest payment or$9,000 per month fromFebruary 2021 throughMarch 2021 . These are referred to as Second Round Section 1112 Payments. The SBA released a list of NAICS codes deemed to have been particularly affected by the Covid-19 pandemic. SBA customers who met all other Section 1112 qualifying criteria and operated within certain NAICS codes, are entitled to an additional three months of payments which were completed in 2021. As ofMarch 31, 2021 , the Bank had 35 qualifying SBA loans totaling approximately$4.9 million in SBA 7(a) unguaranteed balance that received an additional three months of Second Round Section 1112 Payments, which were capped at$9,000 per month and per loan. As ofMarch 31, 2022 , 5 of the 35 qualifying SBA loans have been paid in full. The remaining 30 loans are performing and total approximately$4.4 million in SBA 7(a) unguaranteed balance. As ofMarch 31, 2022 , none of the remaining 30 loans are entitled to additional Section 1112 payments. We ceased originating PPP loans after 2020. We believe the Bank's diversified loan portfolio and associated revenue streams have enabled the Bank to sustain and grow its business despite the adverse conditions relating to the Covid-19 pandemic. For the three months endedMarch 31, 2021 , the provision for loan losses amounted to$0.6 million . For the three months endedMarch 31, 2022 the provision for loan losses amounted to$2.9 million . While some of the adverse conditions relating to the Covid-19 pandemic reversed in 2021, and have continued such reversal in the beginning of 2022, sustained improvements are highly dependent upon strengthening economic conditions. The Covid-19 pandemic continues to cause economic uncertainties which may again result in these and other adverse impacts to our financial condition and results of operations. We believe our SBA 7(a) underwriting program has remained strong throughout the Covid-19 pandemic and our SBA 7(a) loans are well collateralized when compared to the SBA industry in general. 32
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Results of Operations
Net Income Overview
The following table sets forth the principal components of net income for the
periods indicated.
For the Three Months Ended
March 31,
($ in thousands) 2022 2021
Interest income $ 13,223 $ 8,806
Interest expense (262 ) (372 )
Provision for loan losses (2,947 ) (633 )
Non-interest income 11,682 6,079
Non-interest expense (9,048 ) (6,663 )
Provision for income taxes (3,214 ) (1,926 )
Net income 9,434 5,291
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Net income for the three months endedMarch 31, 2022 was$9.4 million , an increase of$4.1 million or 78.3% from net income of$5.3 million for the three months endedMarch 31, 2021 . The increase was primarily due to an increase of$5.6 million or 92.2% in non-interest income and an increase of$4.4 million or 50.2% in interest income, offset by an increase of$2.4 million or 35.8% in non-interest expense and an increase of$2.3 million or 365.6% in provision for loan losses, as described below.
Net Interest Income and Net Interest Margin Analysis
Net interest income was the primary contributor to our earnings in 2022 and 2021. We believe our net interest income results were enhanced by using FinView™ to identify attractive risk-adjusted lending opportunities and assist in the selection of Strategic Program loans that we chose to hold for investment. Net interest income is affected by changes in the amount and mix of interest-earning assets and interest-bearing liabilities, referred to as "volume changes." It is also affected by changes in yields earned on interest-earning assets and rates paid on interest-bearing deposits and other borrowed funds, referred to as "rate changes." For the three months endedMarch 31, 2022 , our net interest income increased$4.5 million , or 53.7%, to$13.0 million compared to the three months endedMarch 31, 2021 . This increase was primarily due to an increase in asset yields, growth in average interest earning assets, and a decrease in our cost of funds. Average interest earning assets increased by$80.1 million , or 26.0%, to$387.8 million for the three months endedMarch 31, 2022 compared to the three months endedMarch 31, 2021 , while the related yield on average interest earning assets increased by 219 basis points to 13.64%, resulting in increased interest income for the three months endedMarch 31, 2022 of$13.2 million . A substantial decrease in the average balances of comparatively low yielding PPP loans during the three months endedMarch 31, 2022 contributed to the increase in yield on average interest earning assets for the period. The corresponding cost of funds on interest bearing liabilities for the three months endedMarch 31, 2022 declined by 9 basis points to 0.79%, and the average balance in interest bearing liabilities decreased by$35.5 million , or 21.0%. The general decline of interest rates in theU.S. financial markets in 2021 is the primary cause for the decline in the cost of funds. As indicated in the rate/volume table set forth below, the decline in the cost of funds and the effect of decreased volumes of interest-bearing liabilities resulted in decreased interest expense for the three months endedMarch 31, 2022 to$0.3 million . We gather deposits in theSalt Lake City, Utah MSA through our one branch and nationwide from our Strategic Program service providers, SBA 7(a) borrowers, Institutional Deposit exchanges, and brokered deposit arrangements. For the three months endedMarch 31, 2022 , average outstanding balances under our PPPLF decreased compared to the three months endedMarch 31, 2021 . The decrease in funding from our PPPLF was partially offset by increases in deposits sourced through our branch, Strategic Programs, SBA 7(a) borrowers, national Institutional Deposit exchanges and brokered deposit arrangements compared to the three months endedMarch 31, 2021 . Our net interest margin increased from 10.96% atMarch 31, 2021 to 13.37% atMarch 31, 2022 . 34
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Average Balances and Yields. The following table presents average balances for assets and liabilities, the total dollar amounts of interest income from average interest-earning assets, the total dollar amounts of interest expense on average interest-bearing liabilities, and the resulting average yields and costs. The yields and costs for the periods indicated are derived by dividing the income or expense by the average balances for assets or liabilities, respectively, for the periods presented. Loan fees are included in interest income on loans and represent a net cost of approximately$0.4 million (including de minimis SBA fees related to PPP loans) for the three months endedMarch 31 , 2022.and$1.3 million (including approximately$0.9 million in SBA fees related to PPP loans) of net loan fees are included in interest income on loans for the three months endedMarch 31, 2021 . Average balances have been calculated using daily averages. Three Months Ended March 31, 2022 2021 Average Average Average Average ($ in thousands) Balance Interest Yield/Rate Balance Interest Yield/Rate Interest earning assets: Interest-bearing deposits with the Federal Reserve, non-U.S. central banks and other banks$ 79,855 $ 28 0.14 %$ 46,885 $ 10 0.09 % Investment securities 11,263 39 1.39 % 1,750 6 1.37 % Loans held for sale 94,610 6,765 28.60 % 35,349 3,566 40.35 % Loans held for investment 202,052 6,391 12.65 % 223,728 5,224 9.34 % Total interest earning assets 387,780 13,223 13.64 % 307,712 8,806 11.45 % Less: ALL (10,366 ) (6,288 ) Non-interest earning assets 24,160 11,354 Total assets$ 401,574 $ 312,778 Interest bearing liabilities: Demand$ 6,344 $ 14 0.88 %$ 6,287 $ 14 0.89 % Savings 6,678 1 0.06 % 6,851 3 0.18 % Money market accounts 31,889 22 0.28 % 17,728 16 0.36 % Certificates of deposit 87,626 224 1.02 % 50,888 264 2.08 % Total deposits 132,537 261 0.79 % 81,754 297 1.45 % Other borrowings 985 1 0.41 % 87,267 75 0.34 % Total interest bearing liabilities 133,522 262 0.79 % 169,021 372 0.88 % Non-interest bearing deposits 137,750 89,111 Non-interest bearing liabilities 11,553 6,586 Shareholders' equity 118,749 48,060 Total liabilities and shareholders' equity$ 401,574 $ 312,778 Net interest income and interest rate spread$ 12,961 12.85 %$ 8,434 10.57 % Net interest margin 13.37 % 10.96 % Ratio of average interest-earning assets to average interest- bearing liabilities 290.42 % 182.06 % 35
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Rate/Volume Analysis. The following table sets forth the effects of changing
rates and volumes on our net interest income. The rate column shows the effects
attributable to changes in rate. The volume column shows the effects
attributable to changes in volume. For purposes of this table, changes
attributable to changes in both rate and volume that cannot be segregated have
been allocated proportionally based on the changes due to rate and the changes
due to volume.
Three Months Ended March 31,
2022
Increase (Decrease) Due to
($ in thousands) Rate Volume Total
Interest income:
Interest-bearing deposits with the Federal
Reserve, non-U.S. central banks and other banks $ 9 $ 9 $ 18
Investment securities - 33 33
Loans held-for-sale (672 ) 3,871 3,199
Loans held for investment 1,606 (439 ) 1,167
Total interest income 943 3,474 4,417
Interest expense:
Demand - - -
Savings (2 ) - (2 )
Money market accounts (3 ) 9 6
Certificates of deposit 95 (135 ) (40 )
Other borrowings 17 (91 ) (74 )
Total interest bearing liabilities 107 (217 ) (110 )
Net interest income $ 836 $ 3,691 $ 4,527
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Provision for Loan Losses
The provision for loan losses is a charge to income to bring our ALL to a level deemed appropriate by management and approved by of board of directors. We determine the provision for loan losses monthly in connection with our monthly evaluation of the adequacy of our ALL. For a description of the factors we considered in determining the ALL see "-Principal Factors Affecting Our Financial Condition-Allowance for Loan Losses" and "-Critical Accounting Policies and Estimates-Allowance for Loan Losses." Our provision for loan losses was$2.9 million and$0.6 million for the three months endedMarch 31, 2022 and 2021, respectively. The increase of$2.3 million was primarily due to substantial growth in SBA 7(a) and Strategic Program loans, and an increase in net charge offs.
Noninterest Income
The largest portion of our noninterest income is associated with our Strategic
Program fees. Other sources of noninterest income include gain on sale of loans,
SBA loan servicing fees, change in fair value on investment in BFG and other
miscellaneous fees.
The following table presents, for the periods indicated, the major categories of
noninterest income:
For the Three Months Ended
March 31, Change
($ in thousands) 2022 2021 $ %
Noninterest income:
Strategic Program fees $ 6,623 $ 2,953 $ 3,670 124.3 %
Gain on sale of loans 5,052 2,603 2,449 94.1 %
SBA loan servicing fees 387 152 235 154.6 %
Change in fair value on investment in BFG (398 ) 360 (758 ) (210.6 %)
Other miscellaneous income 18 11 7 63.6 %
Total noninterest income $ 11,682 $ 6,079 $ 5,603 92.2 %
For the three months ended March 31, 2022 , total noninterest income increased
$5.6 million , or 92.2%, to $11.7 million compared to the three months ended
March 31, 2021 . This increase was primarily due to the increase in Strategic
Program fees, gain on sale of loans, and SBA loan servicing fees. The increase
in Strategic Program fees was primarily due to the increase in loan origination
volume in the Strategic Program. The increase in gain on sale of loans was
primarily due to the increase in the number of SBA 7(a) loans sold during the
three months ended March 31, 2022 . The increase in SBA loan servicing fees was
primarily due to the increase in SBA 7(a) loans serviced for others during the
period. These increases were partially offset by a decrease in the change in
fair value on investment in BFG due primarily to the softening of comparable
company values used in determining BFG fair value.
Noninterest Expense
Noninterest expense has increased as we have grown and as we have expanded and
modernized our operational infrastructure and implemented our plan to build an
efficient, technology-driven banking operation with significant capacity for
growth.
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The following table presents, for the periods indicated, the major categories of
noninterest expense:
For the Three Months Ended
($ in thousands) March 31, Change
2022 2021 $ %
Noninterest expense:
Salaries and employee benefits $ 7,092 $ 4,895 $ 2,197 44.9 %
Occupancy and equipment expenses 302 194 108 55.7 %
Recovery of SBA servicing asset (59 ) - (59 ) (100.0 %)
Other operating expenses 1,713 1,574 139 8.8 %
Total noninterest expense $ 9,048 $ 6,663 $ 2,385 35.8 %
For the three months ended March 31, 2022 , total noninterest expense increased
$2.4 million , or 35.8%, to $9.0 million compared to the three months ended March
31, 2021 . This increase was primarily due to the increase in salaries and
employee benefits. For the three months ended March 31, 2022 , salaries and
employee benefits increased $2.2 million , or 44.9%, to $7.1 million compared to
the three months ended March 31, 2021 . This increase was primarily due to the
increase in the number of employees during the three months ended March 31,
2022 . The increase in employees during this timeframe coincided with an increase
in Strategic Program loan volume and the expansion of our information technology
and security division to support enhancements in our infrastructure, and an
increase in contractual bonuses paid relating to the expansion of the Strategic
Programs in 2022. For the three months ended March 31, 2022 , other operating
expense increased $0.1 million , or 8.8%, to $1.7 million compared to the three
months ended March 31, 2021 . This increase was primarily due to our initiative
to develop new and upgrade existing technology, increased third party financial
and business process reviews, increased marketing costs, and increased legal and
professional fees, all with the intent of supporting of our growth. For the
three months ended March 31, 2022 , the increase in noninterest expense was
partially offset by a the minor recovery and lack of additional impairment on
the SBA servicing asset during the three months ended March 31, 2022 .
Financial Condition
Loan Portfolio
We manage our loan portfolio based on factors that include concentrations per
loan program and aggregated portfolio, industry selection and geographies. We
also monitor the impact of identified and estimated losses on capital as well as
the pricing characteristics of each product. The following provides a general
description and the risk characteristics relevant to each of the business lines.
Each loan is assigned a risk grade during the origination and closing process by
credit administration personnel based on criteria described later in this
section. We analyze the resulting ratings, as well as other external statistics
and factors such as delinquency, to track the migration performance of the
portfolio balances. This ratings analysis is performed at least quarterly.
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SBA 7(a) Loans
We originate and service loans partially guaranteed by the SBA under its Section 7(a) loan program. SBA 7(a) loans are made to small businesses and professionals throughout theUSA . As ofMarch 31, 2022 andDecember 31, 2021 , we had total SBA 7(a) loans of$126.8 million and$141.3 million , respectively, representing 46.5% and 53.2% of our total loans, respectively. Loans are sourced primarily through our referral relationship with BFG. Although BFG actively markets throughout theUSA , because of its physical location in theNew York area we have developed a lending presence in theNew York andNew Jersey geographies. The maximum SBA 7(a) loan amount is$5 million . Underwriting is generally based on commercial credit metrics where the primary repayment source is borrower cash flow, secondary is personal guarantor cash flow and tertiary is the sale of collateral pledged. These loans may be secured by commercial and residential mortgages as well as liens on business assets. In addition to typical underwriting metrics, we review the nature of the business, use of proceeds, length of time in business and management experience to help us target loans that we believe have lower credit risk. The SBA 7(a) program generally provides 50%, 75%, 85% and 90% guarantees for eligible SBA 7(a) loans. The guaranty is conditional and covers a portion of the risk of payment default by the borrower, but not the risk of improper underwriting, closing or servicing by the lender. As such, prudent underwriting, closing and servicing processes are essential to effective utilization of the SBA 7(a) program. Historically, we have generally sold the SBA-guaranteed portion (typically 75% of the principal balance) of a majority of the loans we originate at a premium in the secondary market while retaining all servicing rights and the unguaranteed portion; however, beginning in 2020, we made the decision to drive interest income by temporarily retaining a larger amount of the guaranteed portion of these loans.
SBA Paycheck Protection Program Loans
As ofMarch 31, 2022 andDecember 31, 2021 , we had total PPP loans of$1.0 million and$1.1 million , respectively, representing 0.4% of our total loans, respectively. The PPP loans also resulted in fees paid by the SBA to the originating bank for processing PPP loans, which fees are accreted into interest income over the life of the applicable loans. If a PPP loan is forgiven or paid off before maturity, the remaining unearned fee is recognized into income at that time. For the three months endedMarch 31, 2021 , the Company recognized a total of$0.9 million in PPP-related accreted fees ($0.6 million of which were accelerated due to loan forgiveness). A de minimis amount was recognized during the three months endedMarch 31, 2022 and a de minimis amount of deferred fees remained as ofMarch 31, 2022 .
Commercial, non-real estate
Commercial non-real estate loans consist of loans and leases made to commercial enterprises that are not secured by real estate. As ofMarch 31, 2022 andDecember 31, 2021 , we had total commercial non-real estate loans of$3.3 million and$3.4 million , respectively, representing 1.2% and 1.3% of our total loans, respectively. Any loan, line of credit, or letter of credit (including any unfunded commitments) and any interest obtained in such loans made by another lender to individuals, sole proprietorships, partnerships, corporations, or other business enterprises for commercial, industrial, agricultural, or professional purposes, not secured by real estate, but not for personal expenditure purposes are included in this category. For example, commercial vehicle term loans and commercial working capital term loans. Underwriting is generally based on commercial credit metrics where the primary repayment source is borrower cash flow, secondary is personal guarantor cash flow (when applicable) and tertiary is the sale of collateral pledged. The nature of the business, use of proceeds, length of time in business, management experience, repayment ability, credit history, ratio calculations and assessment of collateral adequacy are all considerations. These loans are generally secured by liens on business assets. Historically, we have retained these loans on our balance sheet for investment.
Residential real estate
Residential real estate loans include construction, lot and land development loans that are for the purpose of acquisition and development of property to be improved through the construction of residential buildings, and loans secured by other residential real estate. As ofMarch 31, 2022 andDecember 31, 2021 , we had total residential real estate loans of$30.8 million and$27.1 million , respectively, representing 11.3% and 10.2% of our total loans, respectively. Construction loans are usually paid off through the conversion to permanent financing from third-party lending institutions. Lot loans may be paid off as the borrower converts to a construction loan. At the completion of the construction project, if the loan is converted to permanent financing by us or if scheduled loan amortization begins, it is then reclassified from construction to single-family dwelling. Underwriting of construction and development loans typically includes analysis of not only the borrower's financial condition and ability to meet the required debt obligations, but also the general market conditions associated with the area and type of project being funded. These loans are generally secured by mortgages for residential property located primarily in theSalt Lake City, Utah MSA, and we obtain guarantees from responsible parties. Historically, we have retained these loans on our balance sheet for investment. Strategic Program loans We, through our Strategic Program service providers, issue, on a nationwide basis, unsecured consumer and secured or unsecured business loans to borrowers within certain approved credit profiles. As ofMarch 31, 2022 andDecember 31, 2021 , we had total Strategic Program loans of$101.8 million and$85.9 million , respectively, representing 37.4% and 32.3% of our total loans, respectively. Loans originated through these programs are limited to predetermined Bank underwriting criterion, which has been approved by our board of directors. The primary form of repayment on these loans is from personal or business cash flow. Business loans may be secured by liens on business assets, as applicable. We have generally sold most of these loans, but as our capital grows and FinView™ evolves, we may choose to hold more of the funded loans and/or receivables. We reserve the right to sell any portion of funded loans and/or receivables directly to the Strategic Program service providers or other investors. We retain the legal right to service all these loans, but contract with the Strategic Program service provider or another approved sub-servicer to service these loans on our behalf. 39
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Commercial real estate
Commercial real estate loans include loans to individuals, sole proprietorships, partnerships, corporations, or other business enterprises for commercial, industrial, agricultural, or professional purposes, secured by real estate primarily located in theSalt Lake City, Utah MSA, but not for personal expenditure purposes. As ofMarch 31, 2022 andDecember 31, 2021 , we had total commercial real estate loans of$4.2 million and$2.4 million , respectively, representing 1.5% and 0.9% of our total loans, respectively. Underwriting is generally based on commercial credit metrics where the primary repayment source is borrower cash flow, secondary is personal guarantor cash flow (when applicable) and tertiary is the sale of collateral pledged. The nature of the business, use of proceeds, length of time in business, management experience, repayment ability, credit history, ratio calculations and assessment of collateral adequacy are all considerations. In addition to real estate, these loans may also be secured by liens on business assets. Historically, we have retained these loans on our balance sheet for investment.
Consumer
Consumer lending provides financing for personal, family, or household purposes on a nationwide basis. Most of these loans are originated through our POS platform and come from a variety of sources, including other approved merchant or dealer relationships and lending platforms. As ofMarch 31, 2022 andDecember 31, 2021 , we had total consumer loans of$4.7 million and$4.6 million , respectively, representing 1.7% of our total loans, respectively. We use a debt-to-income ("DTI") ratio to determine whether an applicant will be able to service the debt. The DTI ratio compares the applicant's anticipated monthly expenses and total monthly obligations to the applicant's monthly gross income. Our policy is to limit the DTI ratio to 45% after calculating interest payments related to the new loan. Loan officers, at their discretion, may make exceptions to this ratio if the loan is within their authorized lending limit. DTI ratios of no more than 50% may be approved subject to an increase in interest rate. Strong offsetting factors such as higher discretionary income or large down payments are used to justify exceptions to these guidelines. All exceptions are documented and reported. While the loans are generally for the purchase of goods which may afford us a purchase money security interest, they are underwritten as if they were unsecured. On larger loans, we may file a Uniform Commercial Code financing form. Historically, we have retained these loans on our balance sheet for investment.
Loan Portfolio Program Summary
Through our diversification efforts and FinView™, we have built a portfolio that
we believe positions us to withstand economic shifts. For example, we focus on
industries and loan types that have historically lower loss rates such as
professional, scientific and technical services (including law firms), non-store
retailers (e-commerce), and ambulatory healthcare services. We believe that
these efforts helped minimize our exposure to industries severely impacted by
the Covid-19 pandemic.
The following table summarizes our loan portfolio by loan program as of the
dates indicated:
As of March 31, As of December 31,
2022 2021
% of % of
total total
Amount loans Amount loans
SBA(1) $ 127,778 46.9 % $ 142,392 53.6 %
Commercial, non real estate 3,285 1.2 % 3,428 1.3 %
Residential real estate 30,772 11.3 % 27,108 10.2 %
Strategic Program loans 101,819 37.4 % 85,850 32.3 %
Commercial real estate 4,187 1.5 % 2,436 0.9 %
Consumer 4,711 1.7 % 4,574 1.7 %
Total $ 272,552 100.0 % $ 265,788 100.0 %
(1) The amount of SBA loans as of March 31, 2022 and December 31, 2021 includes
approximately $1.0 million and $1.1 million of PPP loans. SBA loans as of March
31, 2022 and December 31, 2021 include $53.2 million and $75.7 million ,
respectively, of SBA 7(a) loan balances that are guaranteed by the SBA.
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Loan Maturity and Sensitivity to Changes in Interest Rates
As ofMarch 31, 2022 , including the impact of PPP loans,$107.7 million , or 54.2%, of the total held for investment loan balance matures in less than five years. Loans maturing in greater than five years totaled$91.1 million as ofMarch 31, 2022 . The variable rate portion of our total held for investment loan portfolio atMarch 31, 2022 was$155.1 million , or 78.0%. As ofDecember 31, 2021 , including the impact of PPP loans,$103.1 million , or 50.3%, of the total held for investment loan balance matures in less than five years. Loans maturing in greater than five years totaled$101.9 million as ofDecember 31, 2021 . The variable rate portion of our total held for investment loan portfolio atDecember 31, 2021 was$163.8 million , or 79.9%. The variable rate portion of the total held for investment loans reflects our strategy to minimize interest rate risk through the use of variable rate products.
The following tables detail maturities and sensitivity to interest rate changes
for our loan portfolio at
At March 31, 2022 Remaining Contractual Maturity Held for Investment
After Five
After One Years and
Year and Through After
One Year Through Fifteen Fifteen
($ in thousands) or Less Five Years Years Years Total
Fixed rate loans:
SBA(1) $ 623 $ 661 $ 254 $ 110 $ 1,648
Commercial, non-real estate 1,087 1,987 202 9 3,285
Residential real estate 3,113 1,056 - - 4,169
Strategic Program loans 17,470 10,544 - - 28,014
Commercial real estate 1,624 521 8 1 2,154
Consumer 1,485 2,880 53 - 4,418
Variable rate loans:
SBA 7,364 29,246 52,542 36,978 126,130
Commercial, non-real estate - - - - -
Residential real estate 26,047 304 247 5 26,603
Strategic Program loans - - - - -
Commercial real estate 864 521 648 - 2,033
Consumer 79 214 - - 293
Total $ 59,756 $ 47,934 $ 53,954 $ 37,103 $ 198,747
(1) The amount of SBA fixed rate loans includes approximately $1.0 million of
PPP loans. PPP loans originated prior to June 5, 2020 , have a two year term. PPP
loans originated on or after June 5, 2020 , have a five year term. For PPP
borrowers who submit completed applications for forgiveness, loan payments are
automatically deferred until the SBA renders a decision on the forgiveness
request. PPP borrowers who fail to submit timely forgiveness applications are
required to make monthly payments beginning ten months from the end of the
chosen "covered period". The "covered period" is a maximum of 24 weeks from the
origination date. Assuming a 24 week covered period, PPP borrowers are not
required to begin making payments until 16 months after the origination date. At
the time payments begin, if the borrower and lender of a two year PPP loan
mutually agree to extend the term of the loan it can be extended to a five year
term. As of March 31, 2022 , three PPP loans have been granted maturity date
extensions.
At December 31, 2021 Remaining Contractual Maturity Held for Investment
After Five
After One Years and
Year and Through After
One Year Through Fifteen Fifteen
($ in thousands) or Less Five Years Years Years Total
Fixed rate loans:
SBA(1) $ 644 $ 732 $ 259 $ 114 $ 1,749
Commercial, non-real
estate 1,168 2,112 142 6 3,428
Residential real
estate 2,876 1,519 - - 4,395
Strategic Program
loans 18,121 6,981 - - 25,102
Commercial real
estate 1,565 639 7 1 2,212
Consumer 1,500 2,793 66 - 4,359
Variable rate loans:
SBA 7,920 31,598 58,493 42,632 140,643
Commercial, non-real
estate - - - - -
Residential real
estate 22,234 291 188 - 22,713
Strategic Program
loans - - - - -
Commercial real
estate 224 - - - 224
Consumer 62 153 - - 215
Total $ 56,314 $ 46,818 $ 59,155 $ 42,753 $ 205,040
(1) The amount of SBA fixed rate loans includes approximately $1.1 million of
PPP loans. PPP loans originated prior to June 5, 2020 , have a two year term. PPP
loans originated on or after June 5, 2020 , have a five year term. For PPP
borrowers who submit completed applications for forgiveness, loan payments are
automatically deferred until the SBA renders a decision on the forgiveness
request. PPP borrowers who fail to submit timely forgiveness applications are
required to make monthly payments beginning ten months from the end of the
chosen "covered period". The "covered period" is a maximum of 24 weeks from the
origination date. Assuming a 24 week covered period, PPP borrowers are not
required to begin making payments until 16 months after the origination date. At
the time payments begin, if the borrower and lender of a two year PPP loan
mutually agree to extend the term of the loan it can be extended to a five year
term. As of December 31, 2021 , three PPP loans have been granted maturity date
extensions.
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Index
Nonperforming Assets
Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were contractually due. Loans are placed on nonaccrual status when, in management's opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. Loans may be placed on nonaccrual status regardless of whether such loans are actually past due. In general, we place loans on nonaccrual status when they become 90 days past due. We also generally place loans on nonaccrual status if they are less than 90 days past due if the collection of principal or interest is in doubt. When interest accrual is discontinued, all unpaid accrued interest is reversed from income. Interest income is subsequently recognized only to the extent recoveries received (either from payments received from the customer, derived from the disposition of collateral or from legal action, such as judgment enforcement) exceed liquidation expenses incurred and outstanding principal.
A non-accrual asset may be restored to accrual status when (1) none of its principal and interest is due and unpaid, and we expect repayment of the remaining contractual principal and interest, or (2) when asset otherwise becomes well secured and is not in the process of collection.
Any loan which we deem to be uncollectible, in whole or in part, is charged off
to the extent of the anticipated loss. In general, loans that are past due for
90 days or more are charged off unless the loan is both well secured and in the
process of collection. We believe our disciplined lending approach and focused
management of nonperforming assets has resulted in sound asset quality and
timely resolution of problem assets. We have several procedures in place to
assist us in maintaining the overall quality of our loan portfolio. We have
established underwriting guidelines to be followed by our loan officers, and we
also monitor our delinquency levels for any negative or adverse trends. There
can be no assurance, however, that our loan portfolio will not become subject to
increasing pressures from deteriorating borrower credit due to general economic
conditions.
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The following table provides information with respect to our nonperforming assets and troubled debt restructurings at the dates indicated:
As of
($ in thousands) March 31, 2022 December 31, 2021
Nonaccrual loans:
SBA $ 657 $ 657
Commercial, non real estate - -
Residential real estate - -
Strategic Program loans 1 -
Total nonperforming loans $ 658 $ 657
Total accruing loans past due 90 days or more $ 359 $ 54
Nonaccrual troubled debt restructuring $ 25 $ 25
Total troubled debt restructurings 96 106
Other Real Estate Owned - -
Less nonaccrual troubled debt restructurings (25 ) (25 )
Total nonperforming assets and troubled debt restructurings $ 754 $ 763
Total nonperforming loans to total loans 0.2 % 0.2 %
Total nonperforming loans to total assets 0.2 % 0.2 %
Total nonperforming assets and troubled debt restructurings to total loans
0.3 % 0.3 %
Total nonperforming assets and troubled debt restructurings to total assets
0.2 % 0.2 %
Total nonperforming assets and troubled debt restructurings to total assets (less PPP loans) (1)
0.2 % 0.2 %
(1) See "GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures" for a reconciliation of this measure to its most comparable GAAP measure.
Our total nonperforming assets and troubled debt restructurings atMarch 31, 2022 andDecember 31, 2021 were$0.8 million . Total nonperforming assets atMarch 31, 2022 andDecember 31, 2021 were composed of$0.7 million in nonaccrual loans and$0.1 million of troubled debt restructurings. We do not classify loans that experience insignificant payment delays and payment shortfalls as impaired. We consider an "insignificant period of time" from payment delays to be a period of 90 days or less, or 180 days or less in certain Strategic Programs. We will customarily attempt to provide a modification for a customer experiencing what we consider to be a short-term event that has temporarily impacted cash flow. In those cases, we will review the request to determine if the customer is experiencing cash flow strain and how the event has impacted the ability of the customer to repay in the long term. Short-term modifications are not classified as troubled debt restructurings because they do not meet the definition set by theFDIC or our accounting policy for identifying troubled debt restructurings. TheFDIC issued statements in March and April of 2020 that encouraged banks to work with all borrowers, especially those from industry sectors particularly vulnerable to economic volatility. TheFDIC clarified that prudent efforts to modify the terms on existing loans for affected customers will not be subject to examiner criticism, and that certain loan modifications made in response to Covid-19 are not troubled debt restructurings.
Interest income that would have been recorded for the three months ended
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Credit Risk Profile
We believe that we underwrite loans carefully and thoroughly, limiting our
lending activities to those products and services where we have the resources
and expertise to lend profitably without undue credit risk. We require all loans
to conform to policy (or otherwise be identified as exceptions to policy and
monitored and reported on, at minimum, quarterly) and be granted on a sound and
collectable basis. Loans are made with a primary emphasis on loan profitability,
credit risk and concentration exposures.
We are proactive in our approach to identifying and resolving problem loans and
are focused on working with the borrowers and guarantors of problem loans to
provide loan modifications when warranted. When considering how to best
diversify our loan portfolio, we consider several factors including our
aggregate and product-line specific concentration risks, our business line
expertise, and the ability of our infrastructure to appropriately support the
product. While certain product lines generate higher net charge-offs, our
exposure is carefully monitored and mitigated by our concentration policies and
reserved for by the loan loss allowance we maintain. Specifically, retention of
certain Strategic Program loans with higher default rates account for a
disproportionate amount of our charge-offs. In addition to our oversight of the
credit policies and processes associated with these programs, we limit within
our concentration policies the aggregate exposure of these loans as a percentage
of the total loan portfolio, carefully monitor certain vintage loss-indicative
factors such as first payment default and marketing channels, and appropriately
provision for these balances so that the cumulative charge-off rates remain
consistent with management expectations. While the level of nonperforming assets
fluctuates in response to changing economic and market conditions, the relative
size and composition of the loan portfolio, and our management's degree of
success in resolving problem assets, we believe our proactive stance to early
identification and intervention is the key to successfully managing our loan
portfolio. As an example, at the beginning of the Covid-19 pandemic we analyzed
our portfolio to identify loans that were more likely to be vulnerable to the
pandemic's impact. We then proactively opened a dialogue with potentially
affected borrowers to assess their needs and provide assistance. Through this
process we were able to not only better understand our portfolio risks but were
able to intercede with borrowers if needed.
Accurate and timely loan risk grading is considered a critical component of an
effective credit risk management system. Loan grades take into consideration the
borrower's financial condition, industry trends, and the economic environment.
Loan risk grades are changed as necessary to reflect the risk inherent in the
loan. Among other things, we use loan risk grading information for loan pricing,
risk and collection management and determining monthly loan loss reserve
adequacy. Further, on a quarterly basis, the Loan Committee holds a Loan Risk
Grade meeting, wherein all loans in our portfolio are reviewed for accurate risk
grading. Any changes are made after the Loan Risk Grade meeting to provide for
accurate reporting. Reporting is achieved in Loan Committee minutes, which
minutes are reviewed by the Board. We supplement credit department supervision
of the loan underwriting, approval, closing, servicing and risk grading process
with periodic loan reviews by risk department personnel specific to the testing
of controls.
We use a grading system to rank the quality of each loan. The grade is
periodically evaluated and adjusted as performance dictates. Loan grades 1
through 4 are passing grades, grade 5 is special mention. Collectively, grades 6
(substandard), 7 (doubtful) and 8 (loss) represent classified loans within the
portfolio. The following guidelines govern the assignment of these risk grades.
We do not currently grade Strategic Program loans held for investment due to
their small balances and homogenous nature. As credit quality for Strategic
Program loans have been highly correlated with delinquency levels, the Strategic
Program loans are evaluated collectively for impairment.
Grade 1: Pass - Loans fully secured by deposit accounts. Loans where the
borrower has strong sources of repayment, generally 5 years or more of
consistent employment (or related field) and income history. Debt of the
borrower is modest relative to the borrower's financial strength and ability to
pay with a DTI ratio of less than 25%. Cash flow is very strong as evidenced by
significant discretionary income amounts. Borrower will consistently maintain
30% of the outstanding debts in deposit accounts with us, often with the right
of offset, holds, etc. Loan to value ratios (LTV) will be 60% or less. Loans in
this category require very minimal monitoring.
Grade 2: Pass - The borrower has good sources of repayment, generally 3 years or
more of consistent employment (or related field) and income history. The debt of
the borrower is reasonable relative to the borrower's financial strength with a
DTI ratio of less than 35%. Cash flow is strong as evidenced by exceptional
discretionary income amounts. Borrowers will consistently maintain 20% of the
outstanding debts in deposit accounts with us. LTV ratios will be 70% or less.
These loans require minimal monitoring.
Grade 3: Pass - There is a comfortable primary source of repayment, generally 2
years or more of consistent employment (or related field) and income history.
Borrowers may exhibit a mix of strengths and weaknesses. For example, they have
either adequate cash flow with higher than desired leverage, or marginal cash
flow with strong collateral and liquidity. Borrowers will have DTIs less than
45%. Borrowers will generally maintain deposit accounts with us, but the
consistency and amount of the deposits are not as strong as Grades 1 and 2. LTV
ratios will be within our guidelines. These loans will be monitored on a
quarterly basis.
Grade 4: Pass Watch - There is adequate primary source of repayment, generally
employment time or time in a related field is less than 2 years. Borrowers' debt
to income ratios may fall outside of our guidelines or there is minimal excess
cash flow. There may be heavy reliance on collateral, or the loan is large,
relative to the financial strength of the borrower. The loans may be maintenance
intensive requiring closer monitoring.
Grade 5: Special Mention - A loan in this category has a specific weakness or
problem but does not currently present a significant risk of loss or default as
to any material terms of the loan or financing agreement. A typical problem
could include a documentation deficiency. If the deficiency is corrected the
account will be re-graded.
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Grade 6: Classified Substandard - A substandard loan has a developing or current weakness or weaknesses that could result in loss or default if deficiencies are not corrected, or adverse conditions arise.
Grade 7: Classified Doubtful - A doubtful loan has an existing weakness or weaknesses that make collection or liquidation in full, on the basis of currently existing facts and conditions, highly questionable and improbable.
Grade 8: Classified Loss - A loss loan has an existing weakness or weaknesses
that render the loan uncollectible and of such little value that continuing to
carry as an asset on our book is not warranted. This classification does not
mean that the loan has absolutely no recovery or salvage value, but rather it is
not practical nor desirable to defer writing off this basically worthless asset,
even though partial recovery may be affected in the future.
The following table presents, as of the period presented, the loan balances by
loan program as well as risk rating. No loans were classified as 'Loss' grade
during the periods presented.
As of March 31, 2022
Special Classified/
Pass Mention Doubtful Loss
($ in thousands) Grade 1-4 Grade 5 Grade 6-7 Grade 8 Total
SBA $ 125,366 $ 1,461 $ 951 $ - $ 127,778
Commercial, non real estate 3,285 - - - 3,285
Residential real estate 30,572 - 200 - 30,772
Commercial real estate 4,187 - - - 4,187
Consumer 4,711 - - - 4,711
Not Risk Graded
Strategic Program(1) loans 101,819
Total $ 168,121 $ 1,461 $ 1,151 $ - $ 272,552
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As of December 31, 2021
Special Classified/
Pass Mention Doubtful Loss
($ in thousands) Grade 1-4 Grade 5 Grade 6-7 Grade 8 Total
SBA $ 139,985 $ 1,435 $ 972 $ - $ 142,392
Commercial, non real estate 3,382 46 - - 3,428
Residential real estate 27,108 - - - 27,108
Commercial real estate 2,436 - - - 2,436
Consumer 4,574 - - - 4,574
Not Risk Graded
Strategic Program(1) loans 85,850
Total $ 177,485 $ 1,481 $ 972 $ - $ 265,788
(1) The Strategic Program loan balance includes $73.8 million and $60.7 million
of loans classified as held-for-sale as of March 31, 2022 and December 31, 2021 ,
respectively.
Allowance for Loan Losses
We have not adopted Financial Accounting Standards Board Accounting Standards
Update No. 2016-13, Financial Instruments - Credit Losses (Topic 326), commonly
referred to as the "CECL model," but plan to adopt the CECL model in the 2023
calendar year.
The ALL, a material estimate which could change significantly in the near-term
in the event of rapidly shifting credit quality, is established through a
provision for loan losses charged to earnings to account for losses that are
inherent in the loan portfolio and estimated to occur, and is maintained at a
level that we consider adequate to absorb potential losses in the loan
portfolio. Loan losses are charged against the ALL when we believe that the
collectability of the principal loan balance is unlikely. Subsequent recoveries,
if any, are credited to the ALL when received.
Our judgment in determining the adequacy of the allowance is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available and as situations and information change.
We evaluate the ALL on a monthly basis and take into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans and current economic conditions and trends that may affect the borrower's ability to repay. The quality of the loan portfolio and the adequacy of the ALL is reviewed by regulatory examinations.
The ALL consists of the following two elements:
? Specific allowance for identified impaired loans. For such loans that are
identified as impaired, an allowance is established when the discounted cash
flows (or collateral value if the loan is collateral dependent) or observable
market price of the impaired loan are lower than the carrying value of that
loan.
Independent appraisals are obtained for all collateral dependent loans deemed
impaired when collateral value is expected to exceed
and/or anticipated liquidation-related expenses. After initially measured for
impairment, new appraisals are ordered on at least an annual basis for all real
estate secured loans deemed impaired. Non-real estate secured loan appraisal
values are reevaluated and assessed throughout the year based upon interim
changes in collateral and market conditions.
? General valuation allowance. This component represents a valuation allowance on
the remainder of the loan portfolio, after excluding impaired loans. For this
portion of the allowance, loans are reviewed based on industry, stage and
structure and are assigned allowance percentages based on historical loan loss
experience for similar loans with similar characteristics and trends adjusted
for qualitative factors. Qualitative factors that, in management's judgment,
affect the collectability of the portfolio as of the evaluation date, may
include changes in lending policies and procedures; changes in national and
local economic and business conditions, including the condition of various
market sectors; changes in the nature and volume of the portfolio; changes in
the experience, ability and depth of lending management and staff; changes in
the volume and severity of past due and classified loans and in the volume of
nonaccruals, troubled debt restructurings, and other loan modifications; the
existence and effect of any concentrations of credit and changes in the level
of such concentrations; and the effect of external factors, such as competition
and legal and regulatory requirements, on the level of estimated and inherent
credit losses in our current portfolio.
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The ALL was$10.0 million atMarch 31, 2022 compared to$9.9 million atDecember 31, 2021 , an increase of$0.1 million , or 1.3%. The increase was primarily due to increased retention of Strategic Program loans with higher loss reserving characteristics. The following table presents a summary of changes in the ALL for the periods and dates indicated: For the Three Months Ended March 31, ($ in thousands) 2022 2021 ALL: Beginning balance$ 9,855 $ 6,199 Provision for loan losses 2,947 633 Charge offs SBA (31 ) (7 ) Commercial, non-real estate - (41 ) Residential real estate - - Strategic Program loans (2,878 ) (741 ) Commercial real estate - - Consumer - (2 ) Recoveries SBA - 11 Commercial, non-real estate 1 - Residential real estate - - Strategic Program loans 93 132 Commercial real estate - - Consumer - - Ending balance$ 9,987 $ 6,184 Although we believe that we have established our ALL in accordance with GAAP and that the ALL was adequate to provide for known and inherent losses in the portfolio at all times shown above, future provisions for loan losses will be subject to ongoing evaluations of the risks in our loan portfolio. 47
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The following table shows the allocation of the ALL among loan categories and certain other information as of the dates indicated. The ALL related to Strategic Programs constitutes 63.3% and 66.5% of the total ALL while comprising 37.4% and 32.3% of total loans as ofMarch 31, 2022 andDecember 31, 2021 , respectively. This reflects the increased credit risks associated with certain retained Strategic Program loans. March 31, 2022 % of Loans in Category % of of Total Total Total ($ in thousands) Amount Loans Allowance Loans SBA$ 3,064 $ 127,778 30.7 % 46.9 % Commercial, non real estate 107 3,285 1.1 % 1.2 % Residential real estate 411 30,772 4.1 % 11.3 % Strategic Program loans 6,322 101,819 63.3 % 37.4 % Commercial real estate 21 4,187 0.2 % 1.5 % Consumer 62 4,711 0.6 % 1.7 % Total$ 9,987 $ 272,552 100.0 % 100.0 % December 31, 2021 % of Loans in Category % of of Total Total ($ in thousands) Amount Total Loans Allowance Loans SBA$ 2,739 $ 142,392 27.8 % 53.6 % Commercial, non real estate 132 3,428 1.3 % 1.3 % Residential real estate 352 27,108 3.6 % 10.2 % Strategic Program loans 6,549 85,850 66.5 % 32.3 % Commercial real estate 21 2,436 0.2 % 0.9 % Consumer 62 4,574 0.6 % 1.7 % Total$ 9,855 $ 265,788 100.0 % 100.0 % The following tables reflect the ratio of the ALL to nonperforming loan balances and net charge-offs to average loans outstanding by loan category, for the periods presented. The ratio of net charge-offs to average loans outstanding generally decreased or remained consistent for loan categories in the three months endedMarch 31, 2022 from the three months endedMarch 31, 2021 . The increase in the ratio for Strategic Programs loans was primarily due to increases in charge-offs in the three months endedMarch 31, 2022 while the decreases in Commercial, non-real estate and Consumer were primarily due to lower charge-off amounts in the three months endedMarch 31, 2022 . For the Three Months Ended March 31, 2022 2021 Net charge-offs to average loans outstanding by loan category SBA 0.1 % 0.0 % Commercial, non-real estate (0.1 %) 4.0 % Residential real estate 0.0 % 0.0 % Strategic Program loans 9.2 % 5.7 % Commercial real estate 0.0 % 0.0 % Consumer 0.0 % 0.1 % As of March 31, December 31, 2022 2021 ALL to nonperforming loans 1,517.8 % 1,499.1 % 48
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Interest-Bearing Deposits in Other Banks
Our interest-bearing deposits in other banks increased to$116.2 million atMarch 31, 2022 from$85.3 million atDecember 31, 2021 , an increase of$30.9 million , or 36.2%. This increase was primarily due to the Company's public stock offering and an increase in loan originations. Interest-bearing deposits in other banks have generally been the primary repository of the liquidity we use to fund our operations. Aside from minimal balances held with our correspondent banks, the majority of our interest-bearing deposits in other banks was held directly with theFederal Reserve .
Securities
We use our securities portfolio to provide a source of liquidity, provide an appropriate return on funds invested, manage interest rate risk, meet collateral requirements and meet regulatory capital requirements. We classify investment securities as either held-to-maturity or available-for-sale based on our intentions and the Company's ability to hold such securities until maturity. In determining such classifications, securities that we have the positive intent and the ability to hold until maturity are classified as held-to-maturity and carried at amortized cost. All other securities are designated as available-for-sale and carried at estimated fair value with unrealized gains and losses included in shareholders' equity on an after-tax basis. For the year presented, all securities were classified as held-to-maturity. The following tables summarize the contractual maturities and weighted average yields of investment securities atMarch 31, 2022 , and the amortized cost of those securities as of the indicated dates. At
One Year or Less After One to Five Years
Weighted Weighted
Amortized Average Amortized Average
($ in thousands) Cost Yield Cost Yield
Mortgage-backed securities $ - - $ - -
At March 31, 2022
After Five to Ten Years Weighted After Ten Years Weighted
Weighted Weighted Total
Amortized Average Amortized Average Amortized
($ in thousands) Cost Yield Cost Yield CostMortgage-backed securities $ 1,462 1.2 %$ 9,524 1.4 %$ 10,986
The weighted average yield of investment securities is the sum of all interest that the investments generate, divided by the sum of the book value.
There were no calls, sales or maturities of securities during the three months
ended
AtMarch 31, 2022 , there were 13 securities, consisting of five collateralized mortgage obligations and eight mortgage-backed securities. One of these securities were in a gain position for greater than 12 months and twelve of these securities were in an unrealized loss position as ofMarch 31, 2022 . There were nine securities in an unrealized loss position as ofDecember 31, 2021 .
Deposits
Deposits are the major source of funding for the Company, with the exception of
the Company's participation in the PPPLF, which added a significant amount of
funding in 2020 (see discussion below in Liquidity and Capital Resources -
Liquidity Management). We offer a variety of deposit products including interest
and noninterest bearing demand accounts, money market and savings accounts and
certificates of deposit, all of which we market at competitive pricing. We
generate deposits from our customers on a relationship basis and through access
to national Institutional and brokered deposit sources. We also generate
deposits in relation to our Strategic Programs in the form of reserve accounts
as discussed above. These deposits add an element of flexibility in that they
tend to increase or decrease in relation to the size of or Strategic Program
loan portfolio. In addition to the reserve account, some Strategic Program loan
originators maintain operating deposit accounts with us.
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The following table presents the end of period and average balances and for the
periods indicated (average balances have been calculated using daily averages):
March 31, 2022 December 31, 2021
($ in thousands) Total Percent Total Percent
Period end:
Noninterest-bearing demand deposits $ 127,330 45.9 % $ 110,548 43.9 %
Interest-bearing deposits:
Demand 7,919 2.8 % 5,399 2.1 %
Savings 7,089 2.6 % 6,685 2.7 %
Money markets 53,434 19.3 % 31,076 12.3 %
Time certificates of deposit 81,688 29.4 % 98,184 39.0 %
Total period end deposits $ 277,460 100.0 % $ 251,892 100.0 %
For the Three Months Ended March 31,
2022 2021
($ in thousands) Total Percent Total Percent
Average:
Noninterest-bearing demand deposits $ 137,750 51.0 % $ 89,111 52.1 %
Interest-bearing deposits:
Demand 6,344 2.3 % 6,287 3.7 %
Savings 6,678 2.5 % 6,851 4.0 %
Money market 31,889 11.8 % 17,728 10.4 %
Time certificates of deposit 87,626 32.4 % 50,888 29.8 %
Total average deposits $ 270,287 100.0 % $ 170,865 100.0 %
Our deposits increased to $277.5 million at March 31, 2022 from $251.9 million
at December 31, 2021 , an increase of $25.6 million , or 10.2%. This increase was
primarily due to an increase in money markets and noninterest-bearing demand
deposits.
As an FDIC -insured institution, our deposits are insured up to applicable limits
by the DIF of the FDIC . The Dodd-Frank Act raised the limit for federal deposit
insurance to $250,000 for most deposit accounts and increased the cash limit of
Securities Investor Protection Corporation protection from $100,000 to $250,000 .
Our total uninsured deposits were $187.9 million and $106.4 million for the
three months ended March 31, 2022 and 2021, respectively. The maturity profile
of our uninsured time deposits, those amounts that exceed the FDIC insurance
limit, at March 31, 2022 is as follows:
March 31, 2022
More than
three More than
Three months six months More than
months to six to twelve twelve
($ in thousands) or less months months months Total
Time deposits, uninsured $ 128 $ - $ 502 $ 144 $ 774
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Liquidity and Capital Resources
Liquidity Management
Liquidity management is the ability to meet current and future financial obligations of a short-term nature. Our primary sources of funds consist of deposit inflows, the sale of loans, repayment of loans and net profits. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows, loan prepayments, loan sales and security sales are greatly influenced by general interest rates, economic conditions, and competition. OnNovember 23, 2021 , we completed our IPO at a price of$10.50 per share. We raised approximately$36.1 million in net proceeds after deducting underwriting discounts and commissions of approximately$3.0 million and certain estimated offering expenses payable by us of approximately of$3.2 million . The net proceeds less$0.5 million in other related expenses, including legal fees totaled$35.6 million . Our primary source of funds to originate new loans (other than the PPPLF program used to fund PPP loans in 2020) is derived from deposits. Deposits are comprised of core and noncore deposits. We use brokered deposits and a rate listing service to advertise rates to banks, credit unions, and other institutional entities. We designate deposits obtained from this source as Institutional Deposits. To date, depositors of brokered and Institutional Deposits have been willing to place deposits with us at rates near the middle of the market. To attract deposits from local and nationwide consumer and commercial markets, we historically paid rates at the higher end of the market, which we have been able to pay due to our high margin and technology oriented business model. We utilize rate listing services and website advertising to attract deposits from consumer and commercial sources. We regularly evaluate new, core deposit products and in 2020, we launched a deposit product targeted to the needs of our PPP borrowers. We intend to have various term offerings to match our funding needs. Plans for 2022 include marketing commercial checking accounts to selected business customers and expanded roll out of our deposit product targeted to the needs of our SBA borrowers. These accounts offer small business cash management tools including ACH and wire capabilities, competitive interest rates, and personalized customer support. The commercial checking account is expected to be a no-fee based account with emphasis on electronic banking. With no current plans to expand our brick-and-mortar branch network, online and mobile banking offers a means to meet customer needs and better efficiency through technology compared to traditional branch networks. We believe that the rise of mobile and online banking provides us the opportunity to further leverage the technological competency we have demonstrated in recent years. We regularly adjust our investment in liquid assets based upon our assessment of (1) expected loan demand, (2) expected deposit flows, (3) yields available on interest-earning deposits and securities and (4) the objectives of our asset/liability management, funds management and liquidity policies. The objective of the liquidity policy is to reduce the risk to our earnings and capital arising from the inability to meet obligations in a timely manner. This entails ensuring sufficient funds are available at a reasonable cost to meet potential demands from both fund providers and borrowers. Liquid assets, defined as cash and due from banks and interest bearing deposits, were 27.5% of total assets atMarch 31, 2022 . We primarily utilize short-term and long-term borrowings to supplement deposits to fund our lending and investment activities, each of which is discussed below. AtMarch 31, 2022 , we had the ability to access$9.6 million from theFederal Reserve Bank's Discount Window on a collateralized basis. ThroughZions Bank , the Bank had an available unsecured line available of$1.0 million . The Bank had an available unsecured line of credit withBankers' Bank of the West to borrow up to$1.05 million in overnight funds. We also maintain a$3.9 million line of credit withFederal Home Loan Bank , secured by specific pledged loans. We had no outstanding balances on such unsecured or secured lines of credit as ofMarch 31, 2022 . In long term borrowings, we had$1.0 million outstanding atMarch 31, 2022 related to the PPPLF. The PPPLF is secured by pledged PPP loans. Our most liquid assets are cash and cash equivalents. The levels of these assets depend on our operating, financing, lending and investing activities during any given period. AtMarch 31, 2022 , liquid assets (defined as cash and due from banks and interest bearing deposits), consisting of cash and due from banks, totaled$116.6 million . We believe that our liquid assets combined with the available lines of credit provide adequate liquidity to meet our current financial obligations for at least the next 12 months.
Capital Resources
Shareholders' equity increased$9.5 million to$125.0 million atMarch 31, 2022 compared to$115.4 million atDecember 31, 2021 . The increase in shareholders' equity was primarily attributable to net income recognized of$9.4 million . Stock options exercised, and stock-based compensation increased additional paid-in capital aggregately by approximately$0.1 million . We use several indicators of capital strength. The most commonly used measure is average common equity to average assets, which was 29.9% and 25.7% for the three months endedMarch 31, 2022 andDecember 31, 2021 , respectively. 51
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Our return on average equity was 31.4% and 43.1% for the three months ended
We seek to maintain adequate capital to support anticipated asset growth, operating needs and unexpected risks, and to ensure that we are in compliance with all current and anticipated regulatory capital guidelines. Our primary sources of new capital include retained earnings and proceeds from the sale and issuance of capital stock or other securities. Expected future use or activities for which capital may be set aside include balance sheet growth and associated relative increases in market or credit exposure, investment activity, potential product and business expansions, acquisitions and strategic or infrastructure investments. The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of its assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Under the prompt corrective action rules, an institution is deemed "well capitalized" if its Tier 1 leverage ratio, Common Equity Tier 1 ratio, Tier 1 Capital ratio, and Total Capital ratio meet or exceed 5%, 6.5%, 8%, and 10%, respectively. OnSeptember 17, 2019 , the federal banking agencies jointly finalized a rule intending to simplify the regulatory capital requirements described above for qualifying community banking organizations that opt into the Community Bank Leverage Ratio framework, as required by Section 201 of the Regulatory Relief Act. The Bank has elected to opt into theCommunity Bank Leverage Ratio framework starting in 2020. Under these new capital requirements, as temporarily amended by Section 4012 of the CARES Act, the Bank must maintain a leverage ratio greater than 8.5% for 2021 and 9.0% for 2022. As ofMarch 31, 2022 andDecember 31, 2021 , the most recent notification from theFDIC categorized the Bank as well-capitalized under the regulatory framework for prompt corrective action (there are no conditions or events since that notification we believe have changed the Bank's category). The following table sets forth the actual capital amounts and ratios for the Bank and the amount of capital required to be categorized as well-capitalized as of the dates indicated. The following table presents the regulatory capital ratios for the Bank as of the dates indicated: March 31, December 31, 2022 2021 Well- Well- Capitalized Capitalized Capital Ratios 2022 2021 Requirement Requirement
Leverage Ratio (under CBLR) 19.1 % 17.7 % 9.0 %(1) 8.5 %(2)
(1) The Well-Capitalized Requirement for years 2022 and 2021 were 9.0% and 8.5%.
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Contractual Obligations
We have contractual obligations to make future payments on debt and lease agreements. While our liquidity monitoring and management consider both present and future demands for and sources of liquidity, the following table of contractual commitments focuses only on future obligations and summarizes our contractual obligations as ofMarch 31, 2022 . One to More Less than Three Three to Than Five ($ in thousands) Total One Year Years Five Years Years Contractual Obligations Deposits without stated maturity$ 135,249 $ 135,249 $ - $ - $ - Time deposits 81,688 28,967 35,080 16,901 740 Long term borrowings(1) 952 545 - 407 - Operating lease obligations 7,982 740 1,949 2,220 3,073 Total$ 225,871 $ 165,501 $ 37,029 $ 19,528 $ 3,813
(1) Balances in this category pertain to the PPPLF and are fully-collateralized with PPP loans
Off-Balance Sheet Items In the normal course of business, we enter into various transactions, which, in accordance with GAAP, are not included in our consolidated statements of financial condition. We enter into these transactions to meet the financing needs of our customers. These transactions include commitments to extend credit, which involves, to varying degrees, elements of credit risk and interest rate risk exceeding the amounts recognized in our consolidated statements of financial condition. Our exposure to credit loss is represented by the contractual amounts of these commitments. The same credit policies and procedures are used in making these commitments as for on-balance sheet instruments. We are not aware of any accounting loss to be incurred by funding these commitments; if required, we would maintain an allowance for off-balance sheet credit risk which would be recorded in other liabilities on the consolidated balance sheets.
Our commitments to extend credit as of the dates indicated are summarized below. Since commitments associated with commitments to extend credit may expire unused, the amounts shown do not necessarily reflect the actual future cash funding requirements.
($ in thousands) As of March 31, As of December 31,
2022 2021
Revolving, open-end lines of credit $ 1,224 $ 1,259
Commercial real estate 22,167 15,402
Other unused commitments 255 377
Total commitments $ 23,646 $ 17,038
Critical Accounting Policies and Estimates
The accompanying management's discussion and analysis of results of operations and financial condition is based upon our unaudited interim consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements in accordance with GAAP requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under current circumstances, results of which form the basis for making judgments about the carrying value of certain assets and liabilities that are not readily available from other sources. We evaluate our estimates on an ongoing basis. Actual results may differ from these estimates under different assumptions or conditions. There have been no significant changes during the three months endedMarch 31, 2022 to the items that we disclosed as our critical accounting policies and estimates in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the 2021 Form 10-K. Accounting policies, as described in detail in the notes to our consolidated financial statements, included in the 2021 Form 10-K, are an integral part of our financial statements. A thorough understanding of these accounting policies is essential when reviewing our reported results of operations and our financial position. We believe that those critical accounting policies and estimates require us to make difficult, subjective or complex judgments about matters that are inherently uncertain. Changes in these estimates, which are likely to occur from period to period, or use of different estimates that we could have reasonably used in the current period, would have a material impact on our financial position, results of operations or liquidity. 53
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GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures
Some of the financial measures included in this Report are not measures of financial performance recognized by GAAP. This non-GAAP financial measure is "total nonperforming assets and troubled debt restructurings to total assets (less PPP loans)." Our management uses this non-GAAP financial measures in its analysis of our performance.
• "Total nonperforming assets and troubled debt restructurings to total assets
(less PPP loans)" is defined as the sum of nonperforming assets and troubled
debt restructurings divided by total assets minus PPP loans. The most directly
comparable GAAP financial measure is the sum of nonperforming assets and
troubled debt restructurings to total assets. We believe this measure is
important because we believe that PPP loans will not be included in
nonperforming assets or troubled debt restructurings since PPP loans are 100%
guaranteed by the SBA. We believe that the non-GAAP measure more accurately
discloses the proportion of nonperforming assets and troubled debt
restructurings to total assets consistently with periods prior to the presence
of PPP loans.
We believe these non-GAAP financial measures provide useful information to
management and investors that is supplementary to our financial condition,
results of operations and cash flows computed in accordance with GAAP; however,
we acknowledge that our non-GAAP financial measures have a number of
limitations. As such, you should not view these measures as a substitute for
results determined in accordance with GAAP, and they are not necessarily
comparable to non-GAAP financial measures that other companies use. The
following table provides a reconciliation of these non-GAAP financial measures
to the most closely related GAAP measure.
Total nonperforming assets and troubled debt restructurings to total assets
(less PPP loans)
As of
($ in thousands) March 31, 2022 December 31, 2021
Total nonperforming assets and troubled debt restructuring $ 754 $ 763
Total assets $ 424,484 $ 380,214
PPP loans $ 991 $ 1,091
Total assets less PPP loans $ 423,493 $ 379,123
Total nonperforming assets and troubled debt restructurings to total assets (less PPP loans)
0.2 % 0.2 %
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