STERLING BANCORP, INC. (SOUTHFIELD, MI)
The following management's discussion and analysis of financial condition and
results of operations ("MD&A") should be read in conjunction with the unaudited
condensed consolidated financial statements, related notes, and other financial
information appearing elsewhere in this Quarterly Report on Form 10-Q and the
consolidated financial statements and related notes included in our 2021 Form
10-K.
Unless we state otherwise or the context otherwise requires, references in this
Quarterly Report on Form 10-Q to "Sterling," "we," "our," "us" or "the Company"
refer to Sterling Bancorp, Inc. , a Michigan corporation, and its subsidiaries,
including Sterling Bank & Trust , F.S.B., which we sometimes refer to as
"Sterling Bank ," "the Bank" or "our Bank."
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains certain statements that are, or may be deemed to be, "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), regarding the Company's plans, expectations, thoughts, beliefs, estimates, goals, and outlook for the future that are intended to be covered by the protections provided under the Private Securities Litigation Reform Act of 1995. These forward-looking statements reflect our current views with respect to, among other things, future events and our financial performance. These statements are often, but not always, made through the use of words or phrases such as "may," "might," "should," "could," "predict," "potential," "believe," "expect," "attribute," "continue," "will," "anticipate," "seek," "estimate," "intend," "plan," "projection," "goal," "target," "outlook," "aim," "would" and "annualized" or the negative version of those words or other comparable words or phrases of a future or forward-looking nature. These forward-looking statements are not historical facts, and they are based on current expectations, estimates and projections about our industry, management's beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control. Accordingly, we caution you that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions, estimates and uncertainties that are difficult to predict. Although we believe that the expectations reflected in these forward-looking statements are reasonable as of the date made, actual results may prove to be materially different from the results expressed or implied by the forward-looking statements. Accordingly, you should not place undue reliance on any such forward-looking statements. The risks, uncertainties and other factors identified in our filings with theSEC , and others, may cause actual future results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements. A summary of these factors is below, under the heading "Risk Factors Summary." For additional information on factors that could materially affect the forward-looking statements included in this Quarterly Report on Form 10-Q for the quarter endedSeptember 30, 2022 , see the risk factors set forth under "Item 1A. Risk Factors" in our 2021 Form 10-K. You should carefully consider the factors discussed below, and in our Risk Factors and other disclosures, in evaluating these forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made, and we do not undertake any obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise except as required by law. New risks and uncertainties arise from time to time, and it is not possible for us to predict those events or how they may affect us. In addition, we cannot assess the impact of any particular risk, uncertainty or other factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.
Risk Factors Summary
The following is a summary of the material risks we are exposed to in the course
of our business activities. The below summary does not contain all of the
information that may be important to you, and you should read the below summary
together with the more detailed discussion of risks set forth under "Part II,
Item 1A. Risk Factors" and in our 2021 Form 10-K, as well as under this "Part I,
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations."
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Risks Related to the Advantage Loan Program
? The results of the Internal Review of our Advantage Loan Program and related
matters
? The results of investigations of us by the
agencies
? The costs of legal proceedings, including settlements and judgments
? The effects of the permanent discontinuation of our Advantage Loan Program
? Compliance with BSA/AML laws and regulations generally
Potential future losses in connection with representations and warranties we
? have made with respect to residential real estate loans that we have sold into
the secondary market
Risks Related to the COVID-19 Pandemic
? The economic impact, and governmental and regulatory actions to mitigate the
impact, of the disruptions created by the COVID-19 pandemic
? The effects of the economic disruptions resulting from the COVID-19 pandemic on
our loan portfolio
Risks Related to the Economy and Financial Markets
? The effects of fiscal and monetary policies and regulations of the federal
government and the
? Changes in the state of the general economy and the financial markets and their
effects on the demand for our loan services
? The effects of fiscal challenges facing the
? Macroeconomic and geopolitical challenges and uncertainties affecting the
stability of regions and countries around the globe
Risks Related to Credit
The credit risks of lending activities, including changes in the levels of
? delinquencies and nonperforming assets and changes in the financial performance
and/or economic condition of our borrowers
? Our concentration in residential real estate loans
? The geographic concentration of our loans and operations in
? The potential insufficiency of our allowance for loan losses to cover losses in
our loan portfolio
Risks Related to Our Highly Regulated Industry
The extensive laws and regulations affecting the financial services industry,
including the QTL test, the continued effects of the
? Reform and Consumer Protection Act (the "Dodd-Frank Act") and related
rulemaking, changes in banking, securities and tax laws and regulations and
their application by our regulators and the Community Reinvestment Act and fair
lending laws
? Failure to comply with banking laws and regulations
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? Enforcement priorities of the federal bank regulatory agencies
Risks Related to Competition
? Strong competition within our market areas or with respect to our products and
pricing
? Our reputation as a community bank and the effects of continued negative
publicity
? Our ability to keep pace with technological change and introduce new products
and services
? Consumers deciding not to use banks to complete their financial transactions
Risks Related to Interest Rates
? Negative impacts of future changes in interest rates
? Uncertainty relating to the determination and discontinuation of the
Interbank Offered Rate ("LIBOR")
Risks Related to Liquidity
? Our ability to ensure we have adequate liquidity
? Our ability to obtain external financing on favorable terms, or at all, in the
future
? The quality of our real estate loans and our ability to sell our loans to the
secondary market
Other Risks Related to Our Business
? Our ability to attract and retain key employees and other qualified personnel
Our operational, technological and organizational infrastructure, including the
? effectiveness of our enterprise risk management framework at mitigating risk
and loss to us
Operational risks from a high volume of financial transactions and increased
? reliance on technology, including risk of loss related to cybersecurity or
privacy breaches and the increased frequency and sophistication of cyberattacks
? The operational risk associated with third-party vendors and other financial
institutions
? The ability of customers and counterparties to provide accurate and complete
information and the soundness of third parties on which we rely
? Our employees' adherence to our internal policies and procedures
? The effects of natural disasters on us and our
adequacy of our business continuity and disaster recovery plans
? Environmental, social and governance matters and their effects on our
reputation and the market price of our securities
? Climate change and related legislative and regulatory initiatives
? Adverse conditions internationally and their effects on our customers
? Fluctuations in securities markets, including changes to the valuation of our
securities portfolio
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? The value of our mortgage servicing rights
The reliance of our critical accounting policies and estimates, including for
? the allowance for loan losses, on analytical and forecasting techniques and
models
Other economic, competitive, governmental, regulatory and technological factors
? affecting our operations, pricing, products and services and the other risks
described elsewhere herein or in the documents incorporated by reference herein
and our other filings with the
Risks Related to Governance Matters
? The Seligman family's ability to influence our operations and control the
outcome of matters submitted for shareholder approval
? Our ability to pay dividends
The foregoing risk factors should not be construed as an exhaustive list and should be read in conjunction with the cautionary statements that are included under "Cautionary Note Regarding Forward-Looking Statements" above, under "Item 1A. Risk Factors" in our 2021 Form 10-K and elsewhere in this Quarterly Report on Form 10-Q, as well as the items set forth under "Part II, Item 1A. Risk Factors."
Executive Summary
The following overview should be read in conjunction with our MD&A in its entirety.
Company Overview
We are a unitary thrift holding company headquartered inSouthfield, Michigan and our primary business is the operation of our wholly owned subsidiary,Sterling Bank . ThroughSterling Bank , we offer a range of loan products to the residential and commercial markets, as well as retail banking services.
Internal Review, Investigations and Regulatory Matters Related to the Advantage Loan Program
The primary focus of the Internal Review, which has been led by outside legal counsel under the direction of the Special Committee, has involved the origination of residential real estate loans under the Advantage Loan Program and related matters. The Internal Review has indicated that certain employees engaged in misconduct in connection with the origination of a significant number of such loans, including with respect to verification of income and employment, the amount of income reported for borrowers, reliance on third parties, and related documentation. As a result, the Company permanently discontinued the Advantage Loan Program, and a significant number of officers and employees have been terminated or resigned, including the top loan producers within the Advantage Loan Program. While the Internal Review is substantially complete, the Company expects it to remain open during the pendency of the government investigations discussed below, and it is possible additional work will be required in connection with the Internal Review. OnSeptember 27, 2022 , the Company entered into a Consent Order with the OCC, resolving the OCC Investigation, which had been ongoing for almost three years. Pursuant to the Consent Order, the Bank has paid a civil money penalty of$6 million , which has been applied against the Company's previously accrued liability for contingent losses. The Consent Order represents a full and final settlement of the OCC Investigation with respect to the Bank. Concurrent with the Consent Order, the OCC notified the Bank that the OCC Agreement entered into onJune 18, 2019 was terminated, which primarily related to certain aspects of the Bank's BSA/AML compliance program and the Bank's credit administration. The Bank is currently responding to grand jury subpoenas from theDOJ and remains under a formal investigation by theSEC , both of which are related to the Advantage Loan Program and the related disclosures of that program in the Company's federal securities law filings. 40
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The Company incurred significant legal, consulting and other third-party expenses during the third quarter of 2022, as it has over the past two years, in connection with the Internal Review, the government investigations, compliance with the OCC Agreement, defending litigation related to the Advantage Loan Program and reimbursing current and former officers and directors for their out-of-pocket legal costs in connection with the government investigations. OnOctober 7, 2022 , we commenced an action againstScott Seligman , the Bank's founder and controlling shareholder, and other nominal defendants, styledSterling Bank and Trust ,F.S.B. andSterling Bancorp , Inc. vs.Scott Seligman , et al., No. 2:22-cv-12398-SFC-DRG (E.D. Mich .), seeking compensatory and other damages, disgorgement of certain monies and injunctive relief. There is no assurance that we will be successful in any final adjudication of this case, that any remedy would be adequate in the event we are successful in the adjudication or that we would achieve an acceptable settlement. See "Part II, Item 1. Legal Proceedings" for additional detail regarding this matter. OnNovember 3, 2022 ,Mr. Seligman commenced an action against the Company in the Oakland County Business Court styledScott J. Seligman v.Sterling Bancorp, Inc. , No. 2:22-cv-12660-MAG-DRG (E.D. Mich .). The complaint alleges thatMr. Seligman is entitled to the advancement and reimbursement of all attorneys' fees and other expenses incurred in connection with the complaint filed against him by the Company and the Bank as well as certain government investigations involving the Company and the Bank, including investigations by theDOJ and OCC related to the Advantage Loan Program. The Company intends to vigorously defend this and any related actions. See "Part II, Item 1. Legal Proceedings" for additional detail regarding this matter.
Overview of Quarterly Performance
Net income was$1.2 million for the quarter endedSeptember 30, 2022 compared to$9.6 million for the quarter endedSeptember 30, 2021 . Our net interest margin continued to improve, though our loan portfolio continued to decline which reduced our net interest income compared to the third quarter of 2021. Also contributing to the decrease in net income for the third quarter of 2022 as compared to the third quarter of 2021, the 2021 period includes a refundable tax credit against certain employment taxes, also known as the ERC tax credit under the CARES Act. The Company recognized$6.5 million of ERC, resulting in a net reduction of salaries and employee benefits expense for the third quarter of 2021. Also, the 2021 period includes a gain of$1.4 million on the sale of theBellevue, Washington branch inJuly 2021 . We experienced a recovery for loan losses for the third quarter of 2022 compared to the provision for loan losses for the third quarter of 2021 as our asset quality improved during the third quarter of 2022; as our nonperforming assets declined to$42.2 million atSeptember 30, 2022 . In addition, the recovery for loan losses also reflects the continued decline of our loan portfolio. We also completed a sale of higher risk commercial real estate loans with unpaid principal balances of$21.9 million . Prior to the sale, we charged off$4.1 million of its recorded investment. We received net cash proceeds of$17.8 million on the sale of the commercial real estate loans. This sale further improved our credit metrics. We continued to experience significant repayments in excess of our loan originations contributing to our excess liquidity. This resulted in the continued overall decline of our consolidated balance sheet, with total assets declining from$2.9 billion atDecember 31, 2021 to$2.4 billion atSeptember 30, 2022 . During the three months endedSeptember 30, 2022 , we repurchased pools of Advantage Loan Program loans with total outstanding unpaid principal balances of$35.2 million . In connection with this repurchase, the Company recognized a loss of$1.6 million to record the fair value discount in other non-interest expense and a disposition of$0.5 million of mortgage servicing rights, and charged a loss of$0.9 million against the mortgage repurchase liability.
Our regulatory capital ratios remained well above the levels required to be considered well capitalized for regulatory purposes.
OnSeptember 29, 2022 , the court granted final approval of the Settlement in connection with the shareholder derivative action that was filed against us and certain of our current and former directors, styled Cahnman v. Allen, et al., No. 2:22-cv-10124 (E.D. Mich .). The Company entered into the Settlement onJanuary 21, 2022 , pursuant to which the Company agreed to adopt and implement the Corporate Governance Enhancements, many of which were already in progress and have now been completed, and pay attorneys' fees and expenses in the amount of$650 thousand in exchange for the release of all defendants from alleged claims therein. Reimbursement of the$650 thousand due under the Settlement was paid inOctober 2022 by the Company's insurance carriers under applicable insurance policies. 41 Table of Contents During the second quarter of 2022, we outsourced our residential loan origination function to Promontory MortgagePath, which provides community banks with an outsourced residential lending service for mortgage loan production. InNovember 2022 , Promontory MortgagePath advised the Company of its intent to cease conducting business. Promontory MortgagePath and the Company will continue to accept loan applications throughNovember 30, 2022 , and will use commercially reasonable efforts to evaluate and originate pending loan applications byFebruary 28, 2023 . At that time, we will suspend the origination of residential loans pending further evaluation of our alternatives, which may include discontinuing the origination of residential loans. However, we may purchase residential loans from the secondary market in the future.
Critical Accounting Policies and Estimates
Our condensed consolidated financial statements are prepared in accordance withU.S. GAAP and with general practices within the financial services industry. Application of these principles requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under current circumstances. These assumptions form the basis for our judgments about the carrying values of assets and liabilities that are not readily available from independent, objective sources. We evaluate our estimates on an ongoing basis. Use of alternative assumptions may have resulted in significantly different estimates. Actual results may differ from these estimates.
During the nine months ended
Financial Condition
The Company's total assets were$2.4 billion atSeptember 30, 2022 compared to$2.9 billion atDecember 31, 2021 . The investment securities portfolio increased$39.3 million , or 13%, to$353.2 million atSeptember 30, 2022 from$313.9 million atDecember 31, 2021 , which is attributable to purchases of additional investments totaling$147.5 million , partially offset by maturing investments, totaling$80.6 million and unrealized losses of$19.8 million . Total loans, net of allowance for loan losses, decreased to$1.6 billion atSeptember 30, 2022 compared to$2.0 billion atDecember 31, 2021 . The Company originated loans held for investment consisting of residential real estate loans of$55.0 million , commercial real estate loans of$51.7 million and commercial and industrial loans of$1.1 million , and originated residential real estate loans held for sale of$1.8 million . The Company repurchased Advantage Loan Program loans with an aggregate principal balance of$65.6 million and sold higher risk commercial real estate loans with a carrying value of$67.4 million . We received loan payoffs of$442.9 million during the nine months endedSeptember 30, 2022 . The significant loan repayments experienced during the nine months endedSeptember 30, 2022 continued the trend over the past several years in our Advantage Loan Program portfolio and, along with the decision to cease origination of construction loans, were the primary driver of the continued reduction of the consolidated balance sheet. Our loan production also continued to be adversely impacted by the termination of the Advantage Loan Program and the inability over the last several years to create and introduce new loan products. Most of the excess liquidity from the loan repayments was used to fund maturing time deposits that generally carried higher interest rates. Total deposits decreased$310.7 million , or 14%, to$2.0 billion atSeptember 30, 2022 . InJune 2022 , with increasing interest rates, our offerings on time deposits returned to more competitive rates, partially offsetting the decline experienced in the first half of 2022. FHLB borrowings decreased from$150.0 million atDecember 31, 2021 to$50.0 million atSeptember 30, 2022 , which is attributable to the repayment of$100.0 million in FHLB advances during the second quarter of 2022. 42
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Loan Portfolio Composition. The following table sets forth the composition of our loan portfolio by type of loan at the dates indicated.
At September 30, 2022 At December 31, 2021
Amount % Amount %
(Dollars in thousands)
Real estate:
Residential real estate $ 1,430,472 85 % $ 1,704,231 85 %
Commercial real estate 199,446 12 % 201,240 10 %
Construction 50,320 3 % 106,759 5 %
Total real estate 1,680,238 100 % 2,012,230 100 %
Commercial lines of credit 1,389 - % 363 - %
Other consumer 1 - % 221 - %
Total loans 1,681,628 100 % 2,012,814 100 %
Less: allowance for loan losses (45,362) (56,548)
Loans, net $ 1,636,266 $ 1,956,266 The following table sets forth our fixed and adjustable-rate loans in our loan
portfolio at
Fixed Adjustable Total
(In thousands)
Real estate:
Residential real estate $ 19,314 $ 1,411,158 $ 1,430,472
Commercial real estate 81,333 118,113 199,446
Construction - 50,320 50,320
Commercial lines of credit 1,213 176 1,389
Other consumer 1 - 1
Total $ 101,861 $ 1,579,767 $ 1,681,628 The table set forth below contains the repricing dates of adjustable-rate loans
included within our loan portfolio as of
Residential Commercial Commercial Other
Real Estate Real Estate Construction Lines of Credit Consumer Total
(In thousands)
Amounts to adjust in:
6 months or less $ 430,218 $ 1,601 $ 50,320 $ 176 $ - $ 482,315
After 6 months through 12 months 469,771 5,359 - - - 475,130
After 12 months through 24 months 131,858 2,088 - - - 133,946
After 24 months through 36 months 121,124 54,242 - - - 175,366
After 36 months through 60 months 187,019 54,823
- - - 241,842
After 60 months 71,168 - - - - 71,168
Fixed to maturity 19,314 81,333 - 1,213 1 101,861
Total $ 1,430,472 $ 199,446 $ 50,320 $ 1,389 $ 1 $ 1,681,628 AtSeptember 30, 2022 , we have adjustable-rate loans totaling$1.1 billion , or 63%, in our loan portfolio, that are LIBOR-indexed currently and will reprice to an interest rate based on LIBOR, until LIBOR is no longer available as a reference rate. AtSeptember 30, 2022 ,$123.8 million , or 8%, of our adjustable interest rate loans were at their interest rate floor. See Part I, Item 3. Quantitative and Qualitative Disclosures about Market Risk relating to the discontinuance of LIBOR and the expected conversion of our LIBOR based loans to Secured Overnight Financing Rate ("SOFR")-based rates. 43 Table of Contents Asset Quality
Nonperforming Assets. Nonperforming assets include nonaccrual loans, loans that are 90 or more days past due and still accruing interest, troubled debt restructurings and nonaccrual loans held for sale. For nonaccrual loans, interest previously accrued but not collected is reversed and charged against income at the time a loan is placed on nonaccrual status (i.e., when a loan is 90 days past due or earlier if conditions warrant). Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. Troubled debt restructurings are modified loans in which a borrower demonstrated financial difficulties and for which a concession has been granted. AtSeptember 30, 2022 andDecember 31, 2021 , we had troubled debt restructurings totaling$2.6 million and$18.4 million , respectively, a decrease which primarily reflects loans that were paid in full of$15.6 million . There were no troubled debt restructurings on nonaccrual status atSeptember 30, 2022 . We had troubled debt restructurings on nonaccrual status of$15.8 million atDecember 31, 2021 included in the nonaccrual loan categories in the following table. See Note 4-Loans-Troubled Debt Restructurings to our condensed consolidated financial statements for additional information about our troubled debt restructurings. The following table sets forth information regarding our nonperforming assets at the dates indicated. At September 30, At December 31, 2022 2021 (Dollars in thousands) Nonaccrual loans(1): Residential real estate $ 35,843 $ 45,675 Commercial real estate - 4,441 Construction - 12,499 Total nonaccrual loans(2) 35,843 62,615
Loans past due 90 days or more and still accruing interest 36 39 Nonperforming Loans 35,879 62,654 Other troubled debt restructurings(3) 2,643 2,664 Nonaccrual loans held for sale 3,657 18,026 Total nonperforming assets $ 42,179 $ 83,344 Total loans$ 1,681,628 $ 2,012,814 Total assets$ 2,447,904 $ 2,876,830
Total nonaccrual loans to total loans(2) 2.13 % 3.11 % Total nonperforming assets to total assets 1.72 % 2.90 %
(1) Loans are classified as held for investment and are presented before the
allowance for loan losses.
Total nonaccrual loans exclude nonaccrual loans held for sale but include
troubled debt restructurings on nonaccrual status. If nonaccrual loans held (2) for sale were included, the ratio of total nonaccrual loans to total gross
loans would have been 2.34% and 3.88% at
2021, respectively.
(3) Other troubled debt restructurings exclude those loans presented above as
nonaccrual or past due 90 days or more and still accruing interest.
As of September 30, 2022 , nonperforming assets totaled $42.2 million , a decrease
of $41.2 million at December 31, 2021 . This decrease is primarily attributable
to the decline in nonaccrual loans. Our ratio of nonaccrual loans to total loans
decreased from 3.11% at December 31, 2021 to 2.13% at September 30, 2022 . This
decrease reflects both nonaccrual loans being paid in full and loans returning
to accrual status and the sale of the commercial real estate loan portfolio held
for sale during the first quarter of 2022. When including nonaccrual loans held
for sale the ratio of nonaccrual loans to total gross loans decreased from 3.88%
at December 31, 2021 to 2.34% at September 30, 2022 .
Nonaccrual loans totaled $35.8 million at September 30, 2022 , a decrease of
$26.8 million from $62.6 million at December 31, 2021 . The decrease in
nonaccrual loans is primarily due to loan payoffs of $4.4 million of commercial
real estate and $12.5 million of construction loans. Nonaccrual residential real
estate loans totaled $35.8 million at September 30, 2022 , a decrease of $9.8
million from $45.7 million at December 31, 2021 . The remaining decline in
nonaccrual loans is due to nonaccrual residential real estate loans totaling
$8.7 million that were paid in full and loans totaling $10.4 million that
returned to accrual status, which was partially offset by loans totaling $12.4
million that were added to nonaccrual status.
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Nonaccrual loans held for sale totaled$3.7 million atSeptember 30, 2022 , a decrease of$14.4 million fromDecember 31, 2021 . The decrease in nonaccrual loans held for sale primarily is due to the sale of commercial real estate loans totaling$9.4 million and residential real estate loans totaling$3.9 million that were paid in full. The commercial real estate loans were sold as part of the larger sale of commercial real estate loans to a third-party purchaser inFebruary 2022 for cash proceeds of$49.6 million . These loans were secured primarily by single-room occupancy (SRO) properties.
Delinquent Loans. The following tables set forth our loan delinquencies, including nonaccrual loans, by type and amount at the dates indicated.
September 30, 2022
30 - 59 60 - 89 90 Days 30 - 59 60 - 89 90 Days
Days Days or More Days Days or More
Past Due Past Due Past Due Past Due Past Due Past Due
(In thousands)
Residential real estate
- - - - - 4,441
Construction - - - 10,500 - 12,499
Total delinquent loans $ 20,839 $ 3,284 $ 35,879 $ 34,651 $ 3,425 $ 62,654 Total loans 90 days or more past due, including nonaccrual loans, decreased$26.8 million , or 43%, from$62.7 million atDecember 31, 2021 to$35.9 million atSeptember 30, 2022 . This decrease was primarily attributable to loans that were paid in full totaling$25.6 million and loans reclassified from delinquent to current status totaling$10.4 million , which was partially offset by the addition of delinquent loans totaling$12.4 million during nine months endedSeptember 30, 2022 . Classified Loans. We categorize loans into risk categories based on relevant information about the ability of borrowers to service their debt such as current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors. The four risk categories utilized are Pass, Special Mention, Substandard and Doubtful. Loans in the Pass category are considered to be of satisfactory quality, while the remaining three categories indicate varying levels of credit risk. See Note 4-Loans-Credit Quality to our condensed consolidated financial statements for additional information about our risk categories. 45
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Loans classified as Special Mention, Substandard and Doubtful were as follows at
the dates indicated:
September 30, 2022 December 31, 2021
Loans Held for Loans Held for Loans Held for Loans Held for
Investment Sale Total Investment Sale Total
(In thousands)
Special Mention:
Commercial real estate $ 31,212 $ 1,554 $ 32,766 $ 10,524 $ 16,125 $ 26,649
Construction 4,648 - 4,648 17,226 - 17,226
Commercial lines of credit - - - 11 - 11
Total Special Mention 35,860 1,554 37,414 27,761 16,125 43,886
Substandard:
Residential real estate 35,879 3,657 39,536 45,485 8,671 54,156 Commercial real estate 1,548 -
1,548 21,393 33,230 54,623
Construction 8,055 - 8,055 16,348 - 16,348
Total Substandard 45,482 3,657 49,139 83,226 41,901 125,127
Doubtful:Residential real estate - -
- 233 - 233
Construction - - - 5,931 - 5,931
Total Doubtful - - - 6,164 - 6,164
Total $ 81,342 $ 5,211 $ 86,553 $ 117,151 $ 58,026 $ 175,177
Total Loans $ 1,681,628 $ 8,833
5 % 59 % 5 % 6 % 89 % 8 %
Total Special Mention, Substandard and Doubtful loans were $86.6 million , or 5%
of total gross loans, at September 30, 2022 , compared to $175.2 million , or 8%
of total gross loans, at December 31, 2021 . All of the three loan
classifications, noted above, decreased from December 31, 2021 .
The increase of $8.1 million in Special Mention loans held for investment was
primarily attributable to loans that were downgraded totaling $30.6 million ,
loans that were upgraded from Substandard totaling $10.3 million , which was
partially offset by the upgrade of loans totaling $12.6 million , loans that were
paid in full totaling $11.8 million , and commercial real estate loans that were
sold totaling $8.2 million . The decrease of $37.6 million in Substandard loans
held for investment was primarily attributable to loans that were paid in full
totaling $19.8 million , loans that were upgraded totaling $18.9 million , and
commercial real estate loans that were sold totaling $10.1 million , which was
partially offset by loans downgraded totaling $12.4 million . The decrease of
$6.2 million in Doubtful loans was related to loans that were paid in full.
The large decrease in classified loans held for sale is primarily due to the
sale of substantially all of our commercial real estate portfolio held for sale
during the first quarter of 2022. The sale of this pool of loans contributed to
the overall improvement of our credit metrics.
Impaired Loans. A loan is considered impaired when, based on current information
and events, it is probable that we will be unable to collect all amounts due
according to the contractual terms of the loan agreement. If a loan is impaired,
a portion of the allowance for loan losses is allocated so that the loan is
reported, net, at the present value of estimated future cash flows using the
loan's existing rate or at the fair value of collateral if repayment is expected
solely from the collateral or operations of collateral. See Note 4-Loans to our
condensed consolidated financial statements for tables presenting additional
data regarding the allowance for loan losses and impaired loans.
At September 30, 2022 and December 31, 2021 , we had impaired loans with a total
recorded investment of $2.6 million and $19.9 million , respectively. Total
impaired loans decreased $17.2 million , or 87%, from December 31, 2021 to
September 30, 2022 , primarily attributable to construction loans that were paid
in full totaling $12.4 million and a commercial real estate loan that was paid
in full totaling $4.4 million .
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Allowance for Loan Losses
The allowance for loan losses is maintained at levels considered adequate by
management to provide for probable loan losses inherent in the loan portfolio as
of the condensed consolidated balance sheet reporting dates. The allowance for
loan losses is based on management's assessment of various quantitative and
qualitative factors affecting the loan portfolio, including portfolio
composition, net charge offs, delinquent and nonaccrual loans, foreclosures,
Bank-specific factors (e.g., staff experience, underwriting guidelines etc.),
national and local business conditions, historical loss experience, an overall
evaluation of the quality of the underlying collateral and other external
factors. Certain qualitative components within our allowance for loan losses
methodology took on increased significance in prior periods, and to a lesser
extent in the most recent period, as a result of the economic impact of the
COVID-19 pandemic. These qualitative components include unemployment, commercial
property vacancy rates, uncertainty in property values and deterioration in the
overall macro-economic environment.
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The following table sets forth activity in our allowance for loan losses for the periods indicated (dollars in thousands):
Commercial
Residential Commercial Lines of Other
Three Months Ended September
30, 2022 Real Estate Real Estate Construction Credit Consumer Total
Allowance for loan losses:
Beginning balance $ 29,982 $ 15,035 $ 6,708 $ 36 $ 5 $ 51,766
Provision (recovery) for loan
losses (1,841) (209) (2,304) 2 (5) (4,357)
Charge offs - (4,064) - - - (4,064)
Recoveries 46 5 1,966 - - 2,017
Total ending balance $ 28,187 $ 10,767 $
6,370 $ 38 $ -
$ 1,449,854 $ 212,803 $ 52,843 $ 1,404 $ 23 $ 1,716,927 Net charge offs (recoveries) to average gross loans during period - % 1.91 % (3.72) % - % - % 0.12 % Commercial Residential Commercial Lines of Other
Nine Months Ended September 30, 2022 Real Estate Real Estate Construction Credit Consumer Total Allowance for loan losses: Beginning balance$ 32,202 $ 12,608 $ 11,730 $ 8 $ -$ 56,548 Provision (recovery) for loan losses (4,594) 2,138 (7,329) 30 - (9,755) Charge offs (197) (4,064) - - - (4,261) Recoveries 776 85 1,969 - - 2,830 Total ending balance$ 28,187 $ 10,767 $
6,370 $ 38 $ -
$ 1,547,432 $ 214,827 $ 70,027 $ 707 $ 40 $ 1,833,033 Net charge offs (recoveries) to average gross loans during period (0.04) % 1.85 % (2.81) % - % - % 0.08 % Commercial Residential Commercial Lines of Other Three Months Ended September 30, 2021 Real Estate Real Estate
Construction Credit Consumer Total Allowance for loan losses: Beginning balance
$ 33,064 $ 22,491 $ 15,056 $ 58 $ -$ 70,669 Provision (recovery) for loan losses 109 1,486 (1,194) (4) - 397 Charge offs - - (1,965) - - (1,965) Recoveries 530 605 2 - - 1,137 Total ending balance$ 33,703 $ 24,582 $
11,899 $ 54 $ -
$ 1,885,269 $ 285,050 $ 135,292 $ 1,947 $ 33 $ 2,307,591 Net charge offs (recoveries) to average gross loans during period (0.03) % (0.21) % 1.45 % - % - % 0.04 % Commercial Residential Commercial Lines of Other
Nine Months Ended September 30, 2021 Real Estate Real Estate Construction Credit Consumer Total Allowance for loan losses: Beginning balance$ 32,366 $ 21,942 $ 17,988 $ 91 $ -$ 72,387 Provision (recovery) for loan losses 16 2,004 (4,129) (37) - (2,146) Charge offs - - (1,965) - - (1,965) Recoveries 1,321 636 5 - - 1,962 Total ending balance$ 33,703 $ 24,582 $
11,899 $ 54 $ -
$ 1,937,210 $ 266,754 $ 168,382 $ 3,295 $ 14 $ 2,375,655 Net charge offs (recoveries) to average gross loans during period (0.07) % (0.24) % 1.16 % - % - % - % 48 Table of Contents Our total allowance for loan losses decreased by$11.2 million , or 20%, from$56.5 million atDecember 31, 2021 , primarily due to our overall reduction in our loan portfolio that has resulted from the decline in our loan production as a result of the discontinuation of the Advantage Loan Program and the absence of new loan products, as well as improvement in the credit quality of our loan portfolio during the nine months endedSeptember 30, 2022 . Net charge offs during the three months endedSeptember 30, 2022 were$2.0 million compared to$0.8 million during the comparable period of 2021. Net charge offs during the nine months endedSeptember 30, 2022 were$1.4 million compared to$3 thousand during the comparable period in 2021. Net charge offs in the three and nine months endedSeptember 30, 2022 included$4.1 million in write-downs of our recorded investment in higher risk commercial real estate loans held in the loan portfolio with an unpaid principal balance of$21.9 million , which we subsequently sold for net cash proceeds of$17.8 million duringSeptember 2022 . The following table sets forth the allowance for loan losses allocated by loan category at the dates indicated. The allowance for loan losses allocated to each category is not necessarily indicative of future losses in any particular category and does not restrict the use of the allowance for loan losses to absorb losses in other categories. At September 30, 2022 At December 31, 2021 Percent of Percent of Loans in Loans in Each Each Allowance Category to Allowance Category to for Loan Total for Loan Total Losses Loans Losses Loans (Dollars in thousands) Residential real estate$ 28,187 85 %$ 32,202 85 % Commercial real estate 10,767 12 % 12,608 10 % Construction 6,370 3 % 11,730 5 % Commercial lines of credit 38 - % 8 - % Other consumer - - % - - % Total$ 45,362 100 %$ 56,548 100 % Nonaccrual loans(1)$ 35,843 $ 62,615
Nonperforming loans and troubled debt restructurings(2)$ 38,522 $ 65,318 Total loans$ 1,681,628 $ 2,012,814 Allowance for loan losses to nonaccrual loans(1) 127 % 90 % Allowance for loan losses to total loans 2.70 % 2.81 %
(1) Nonaccrual loans exclude nonaccrual loans held for sale but include troubled
debt restructurings on nonaccrual status.
(2) Nonperforming loans and troubled debt restructurings exclude nonaccrual loans
and troubled debt restructurings in loans held for sale.
Our allowance for loan losses as a percentage of our loan portfolio was 2.70% and 2.81% as ofSeptember 30, 2022 andDecember 31, 2021 , respectively. In addition, our allowance for loan losses as a percentage of nonaccrual loans was 127% and 90% as ofSeptember 30, 2022 andDecember 31, 2021 , respectively. This increase is primarily attributable to our significant decline in nonaccrual loans. See "Results of Operations-Provision (Recovery) for Loan Losses" for additional information about our provision (recovery) for loan losses. Although we believe that we use the best information available to establish the allowance for loan losses, future adjustments to the allowance for loan losses may be necessary and our results of operations could be adversely affected if circumstances differ substantially from the assumptions used in determining the allowance for loan losses. Furthermore, while we believe we have established our allowance for loan losses in conformity withU.S. GAAP, there can be no assurance that regulators, in reviewing our loan portfolio, will not require us to increase our allowance for loan losses. In addition, because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for loan losses is adequate or that increases will not be necessary should the quality of any loans deteriorate. Any material increase in the allowance for loan losses may adversely affect our financial condition and results of operations. 49
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Investment Securities Portfolio
The following table sets forth the amortized cost and estimated fair value of our available for sale debt securities portfolio at the dates indicated:
At September 30, At December 31,
2022 2021
Amortized Fair Amortized Fair
Cost Value Cost Value
(In thousands)U.S. Treasury and Agency securities$ 175,433 $ 167,462 $ 122,291 $ 122,168 Mortgage-backed securities 43,183 37,626 49,739 49,437 Collateralized mortgage obligations 158,414 143,346 137,662 136,849 Collateralized debt obligations 158 153
211 203
Total $ 377,188 $ 348,587 $ 309,903 $ 308,657
We increased the size of our available for sale debt securities portfolio (on an
amortized-cost basis) by $67.3 million , or 22%, from December 31, 2021 to $377.2
million at September 30, 2022 , which is attributable to purchases of additional
investment securities of $147.5 million , primarily treasury securities,
partially offset by maturing investments. The purchase of investment securities
is consistent with the utilization of our excess liquidity.
We review the debt securities portfolio on a quarterly basis to determine the
cause, magnitude and duration of declines in the fair value of each security. In
estimating other-than-temporary impairment, we consider many factors including:
(1) the length of time and extent that fair value has been less than cost, (2)
the financial condition and near term prospects of the issuer, (3) whether the
market decline was affected by macroeconomic conditions and (4) whether we have
the intent to sell the security or more likely than not will be required to sell
the security before its anticipated recovery. If either of the criteria
regarding intent or requirement to sell is met, the entire difference between
amortized cost and fair value is recorded through income as an impairment. For
debt securities that do not meet the aforementioned criteria, the amount of
impairment is split into two components as follows: (1) other-than-temporary
impairment related to credit loss, which must be recognized in the condensed
consolidated statements of income and (2) other-than-temporary impairment
related to other factors, which is recognized in other comprehensive loss. The
credit loss is measured as the difference between the present value of the cash
flows expected to be collected and the amortized cost basis. The assessment of
whether any other-than-temporary decline exists may involve a high degree of
subjectivity and judgment and is based on the information available to
management at a point in time. We evaluate debt securities for
other-than-temporary impairment at least on a quarterly basis and more
frequently when economic or market conditions warrant such an evaluation.
At September 30, 2022 , gross unrealized losses on debt securities totaled $28.7
million . We do not consider the debt securities to be other-than-temporarily
impaired at September 30, 2022 , since (i) the decline in fair value of the debt
securities is attributable to changes in market value due to the current rising
interest rate environment, not credit quality, (ii) we do not have the intent to
sell the debt securities and (iii) it is likely that we will not be required to
sell the debt securities before their anticipated recovery.
Our equity securities consist of an investment in a qualified community
reinvestment act investment fund, which is a publicly-traded mutual fund, and an
investment in the common equity of Pacific Coast Banker's Bank, a thinly traded
restricted stock. At September 30, 2022 and December 31, 2021 , equity securities
totaled $4.6 million and $5.2 million , respectively.
Deposits
Deposits are the primary source of funding for the Company. We regularly review
the need to adjust our deposit offering rates on various deposit products in
order to maintain a stable liquidity profile and a competitive cost of funds.
50
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Total deposits were $2.0 billion as of September 30, 2022 , a decrease of $310.7
million , or 14%, compared to $2.3 billion at December 31, 2021 . Our time
deposits decreased by $134.2 million , or 15%, due to our strategy to reduce time
deposits by offering time deposits at less competitive rates. In June 2022 , with
increasing interest rates, our offerings on time deposits returned to more
competitive rates, partially offsetting the decline experienced in the first
half of 2022. Our money market, savings and NOW accounts decreased by $182.8
million , or 14%, and our noninterest-bearing demand deposits increased $6.3
million , or 10% from December 31, 2021 . Time deposits included brokered deposits
of $20.1 million at December 31, 2021 . We had no brokered deposits at September
30, 2022 . We continue to focus on core deposits, which we define as all deposits
except for time deposits greater than $0.25 million and brokered deposits. Core
deposits totaled $1.7 billion , or 89% of total deposits, at September 30, 2022
compared to $2.0 billion , or 88% of total deposits, at December 31, 2021 .
Borrowings
In addition to deposits, we generally use short-term borrowings, such as FHLB advances and an FHLB overdraft credit line, as sources of funds to meet the daily liquidity needs of our customers. Any short-term FHLB advances would consist primarily of advances of funds for one- or two-week periods.
AtSeptember 30, 2022 andDecember 31, 2021 , outstanding FHLB borrowings totaled$50.0 million and$150.0 million , respectively, and there were no amounts outstanding on lines of credit with other banks. InMay 2022 , we repaid$100 million in borrowings with the FHLB as a result of a call provision that allowed theFederal Home Loan Bank to require payment. In addition,$65.0 million in principal amount of our Subordinated Notes, dueApril 15, 2026 , remained outstanding as ofSeptember 30, 2022 andDecember 31, 2021 . AtSeptember 30, 2022 , we had the ability to borrow an additional$374.5 million from the FHLB, which included an available line of credit of$20.0 million . In addition, we have standby letters of credit, totaling$2.0 million , which provide credit support for certain of our obligations related to our commitments to repurchase certain Advantage Loan Program loans. We also had available credit lines with other banks totaling$80.0 million .
Shareholders' Equity
Total shareholders' equity was$329.6 million atSeptember 30, 2022 , compared to$343.6 million atDecember 31, 2021 . The decline in shareholders' equity is primarily due to an increase in accumulated other comprehensive loss of$19.8 million due to increased unrealized losses on our investment securities portfolio. These unrealized losses on our investment portfolio are primarily attributable to changes in market value due to the current rising interest rate environment but will not necessarily impact our eventual realized returns since we have both the intent and ability to hold these investment securities until maturity or the price recovers. This decrease is partially offset by net income of$4.2 million . Shareholders' equity also reflects the issuance of 160,978 common shares for$1.1 million to fund our matching contribution to the defined contribution retirement plan in the first quarter of 2022.
Results of Operations for the Three and Nine Months Ended
General. The Company had net income of$1.2 million for the three months endedSeptember 30, 2022 , a decrease of$8.4 million compared to net income of$9.6 million for the three months endedSeptember 30, 2021 . Net income was$4.2 million for the nine months endedSeptember 30, 2022 , a decrease of$11.1 million compared to net income of$15.3 million for the nine months endedSeptember 30, 2021 . Average Balance Sheet and Related Yields and Rates. The following table presents average balance sheet information, interest income, interest expense and the corresponding average yields earned and rates paid for the three and nine months endedSeptember 30, 2022 and 2021. The average balances are daily averages and, for loans, include both performing and nonperforming balances. Interest income on loans includes the effects of discount accretion and net deferred loan origination costs accounted for as yield adjustments. 51 Table of Contents As of and for the As of and for the Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Average Average Average Average Average Yield/ Average Yield/ Average Yield/ Average Yield/ Balance Interest Rate Balance Interest Rate Balance Interest Rate
Balance Interest Rate
(Dollars in thousands) (Dollars in thousands)
Interest-earning assets
Loans(1)
Residential real estate
and other consumer $ 1,457,171 $ 17,310 4.75 % $ 1,900,611 $ 22,002 4.63 % $ 1,556,569 $ 52,898 4.53 % $ 1,955,375 $ 70,392 4.80 %
Commercial real estate 214,453 2,458 4.58 % 285,055 3,422 4.80 % 227,524 8,441 4.95 % 266,763 10,049 5.02 % Construction
52,843 1,190 9.01 % 135,292 1,896 5.61 % 70,027 4,222 8.04 % 168,382 8,096 6.41 %
Commercial lines of
credit 1,404 17 4.84 % 1,947 28 5.75 % 707 28 5.28 % 3,295 179 7.24 %
Total loans 1,725,871 20,975 4.86 % 2,322,905 27,348 4.71 % 1,854,827 65,589 4.71 % 2,393,815 88,716 4.94 %
Securities, includes
restricted stock(2) 394,503 1,945 1.97 % 213,945 375 0.70 % 380,485 4,133 1.45 % 265,545 1,150 0.58 %
Other interest-earning
assets 328,177 1,925 2.35 % 664,747 253 0.15 % 395,400 2,931 0.99 % 838,223 743 0.12 %
Total interest-earning
assets 2,448,551 24,845 4.06 % 3,201,597 27,976 3.50 % 2,630,712 72,653 3.68 % 3,497,583 90,609 3.45 %
Noninterest-earning
assets
Cash and due from banks 4,083 7,376 3,848 7,472
Other assets 20,238 41,360 35,269 42,458
Total assets $ 2,472,872 $ 3,250,333 $ 2,669,829 $ 3,547,513
Interest-bearing
liabilities
Money Market, Savings and
NOW $ 1,184,601 $ 2,053 0.69 % $ 1,329,832 $ 771 0.23 % $ 1,260,953 $ 3,516 0.37 % $ 1,352,198 $ 2,513 0.25 %
Time deposits(3) 711,184 1,671 0.93 % 1,075,598 2,770 1.02 % 777,110 4,554 0.78 % 1,350,172 12,966 1.28 %
Total interest-bearing
deposits 1,895,785 3,724 0.78 % 2,405,430 3,541 0.58 % 2,038,063 8,070 0.53 % 2,702,370 15,479 0.77 %
FHLB borrowings 50,380 253 1.97 % 307,733 826 1.06 % 103,242 919 1.19 % 314,544 2,511 1.05 %
Subordinated notes, net 65,301 1,329 7.96 % 65,372 972 5.95 % 65,319 3,383 6.83 % 65,372 3,157 6.44 %
Total borrowings 115,681 1,582 5.35 % 373,105 1,798 1.91 % 168,561 4,302 3.37 % 379,916 5,668 1.96 %
Total interest-bearing
liabilities 2,011,466 5,306 1.05 % 2,778,535 5,339 0.76 % 2,206,624 12,372 0.75 % 3,082,286 21,147 0.92 %
Noninterest-bearing
liabilities
Demand deposits 74,550 66,566 70,427 62,131
Other liabilities(3) 50,476 72,694 51,314 75,162
Shareholders' equity 336,380 332,538 341,464 327,934
Total liabilities and
shareholders' equity $ 2,472,872 $ 3,250,333 $ 2,669,829 $ 3,547,513
Net interest income and
spread $ 19,539 3.01 % $ 22,637 2.74 % $ 60,281 2.93 % $ 69,462 2.53 %
Net interest margin 3.19 % 2.83 % 3.06 % 2.65 %
(1) Nonaccrual loans are included in the respective average loan balances.
Income, if any, on such loans is recognized on a cash basis.
(2) Interest income does not include taxable equivalence adjustments.
(3)Certain prior period amounts have been reclassified to conform with the current period presentation. The Company has reclassified accrued interest on outstanding time deposits from accrued expenses and other liabilities to interest-bearing deposits in the consolidated balance sheet atSeptember 30, 2021 . 52 Table of Contents The following table presents the dollar amount of changes in interest income and interest expense for major components of interest earning assets and interest-bearing liabilities for the periods indicated. The table distinguishes between: (1) changes attributable to volume (changes in volume multiplied by the prior period's rate), (2) changes attributable to rate (change in rate multiplied by the prior period's volume) and (3) total increase (decrease) (the sum of the previous columns). Changes attributable to both volume and rate are allocated ratably between the volume and rate categories. Three Months Ended Nine Months Ended September 30, 2022 vs. 2021 September 30, 2022 vs. 2021 Net Net Increase (Decrease) Increase Increase (Decrease) Increase due to (Decrease) due to (Decrease) Volume Rate Volume Rate (In thousands) Change in interest income: Loans Residential real estate and other consumer$ (5,249) $ 557 $ (4,692) $ (13,712) $ (3,782) $ (17,494) Commercial real estate (813) (151) (964) (1,469) (139) (1,608) Construction (1,507) 801
(706) (5,567) 1,693 (3,874) Commercial lines of credit
(7) (4) (11) (113) (38) (151)
Total loans (7,576) 1,203 (6,373) (20,861) (2,266) (23,127) Securities, includes restricted stock
499 1,071 1,570 668 2,315 2,983
Other interest-earning assets (188) 1,860 1,672 (595) 2,783 2,188
Total change in interest income (7,265) 4,134 (3,131) (20,788) 2,832 (17,956) Change in interest expense: Money Markets, Savings and NOW
(92) 1,374 1,282 (176) 1,179 1,003
Time deposits (872) (227) (1,099) (4,380) (4,032) (8,412) Total interest-bearing deposits
(964) 1,147 183 (4,556) (2,853) (7,409)
FHLB borrowings (974) 401 (573) (1,879) 287 (1,592)
Subordinated notes, net (1) 358 357 (2) 228 226Total change in interest expense (1,939) 1,906
(33) (6,437) (2,338) (8,775) Change in net interest income
$ (5,326) $ 2,228 $
(3,098)
Net Interest Income. Net interest income represents the difference between income on interest-earning assets and expense on interest-bearing liabilities. Net interest income depends primarily upon the volume of interest-earning assets and interest-bearing liabilities and the corresponding interest rates earned or paid. Our net interest income is significantly impacted by changes in interest rates and market yield curves and their related impact on cash flows.
Three Months Ended
Net interest income was$19.5 million for the three months endedSeptember 30, 2022 , a decrease of$3.1 million , or 14%, from$22.6 million for the same period in 2021. Interest income was$24.8 million for the three months endedSeptember 30, 2022 , a decrease of$3.1 million , or 11%, from the same period in 2021. The decrease in interest income was primarily due to a decline in the average balance of the loan portfolio of$597.0 million , or 26%, from$2.3 billion for the three months endedSeptember 30, 2021 compared to$1.7 billion for the three months endedSeptember 30, 2022 . The decrease in our average balance of loans is primarily due to our loan repayments continuing to outpace our loan production in regard to residential real estate loans and our decision to stop actively originating construction loans. Our loan production continues to be adversely impacted by the termination of the Advantage Loan Program and the inability over the last several years to create and introduce new loan products. Interest income related to loans was positively impacted by our average yield on loans which increased 15 basis points to 4.86% for the three months endedSeptember 30, 2022 from 4.71% compared to the three months endedSeptember 30, 2021 due to the increase in market interest rates. The average yield on our residential real estate and other consumer loans increased 12 basis points from the three months ended
September 30, 2021 . 53 Table of Contents The decrease in interest income on loans was partially offset by an increase in interest income on investment securities of$1.6 million and other interest-earning assets of$1.7 million during the three months endedSeptember 30, 2022 compared to the same period in 2021. Although the average balance of our investment securities and other interest-earning assets, which generally are lower-yielding and more liquid than our loans, was$722.7 million for three months endedSeptember 30, 2022 compared to$878.7 million for the three months endedSeptember 30, 2021 , the average yield was 2.14% for the three months endedSeptember 30, 2022 , an increase of 185 basis points from the three months endedSeptember 30, 2021 . Interest expense was$5.3 million for the three months endedSeptember 30, 2022 and remained relatively unchanged from the three months endedSeptember 30, 2021 . Interest on deposits increased$0.2 million which reflects an increase in the average rate paid on interest-bearing deposits of 20 basis points to 0.78% for the three months endedSeptember 30, 2022 compared to 0.58% for the three months endedSeptember 30, 2021 . However, although market interest rates increased, the average balance of interest-bearing deposits decreased$509.6 million , or 21%, to$1.9 billion in the three months endedSeptember 30, 2022 from$2.4 billion in the three months endedSeptember 30, 2021 . This decrease is primarily driven by a$364.4 million decrease in the average balance of time deposits, which generally have a higher cost. InJune 2022 , with increasing interest rates, our offerings on time deposits returned to more competitive rates, partially offsetting the decline experienced in the first half of 2022. The higher interest rates in 2022 than 2021 resulted in an increase in the average interest rate paid on subordinated notes from 5.95% during the three months endedSeptember 30, 2021 to 7.96% during the three months endedSeptember 30, 2022 . Additionally, the average balance of FHLB borrowings decreased$257.4 million fromSeptember 30, 2021 . This decrease in borrowings is the result of the repayments of$157.0 million in borrowings during the fourth quarter of 2021 and$100.0 million in borrowings during the second quarter of 2022 which had the effect of decreasing interest expense by approximately$0.6 million .
Nine Months Ended
Net interest income was$60.3 million for the nine months endedSeptember 30, 2022 , a decrease of$9.2 million , or 13%, from$69.5 million for the same period in 2021. Interest income was$72.7 million for the nine months endedSeptember 30, 2022 , a decrease of$18.0 million , or 20%, from the same period in 2021. The decrease in interest income was primarily due to a decline in the average balance of the loan portfolio of$539.0 million , or 23%, to$2.0 billion for the nine months endedSeptember 30, 2022 from$2.7 billion for the nine months endedSeptember 30, 2021 . The decrease in our average balance of loans is primarily due to our loan repayments continuing to outpace our loan production in regard to residential real estate loans and our decision to stop actively originating construction loans and sell our higher risk commercial real estate loans. Our loan production also continues to be adversely impacted by the termination of the Advantage Loan Program and the inability over the last several years to create and introduce new loan products. The decline in interest income also reflects a decline in the average yield on our loan portfolio in addition to the impact of the declining balance sheet. Our average yield on our loans decreased 23 basis points, to 4.71% for the nine months endedSeptember 30, 2022 from 4.94% for the same period of the prior year. The average yield on our residential real estate and other consumer loans decreased 27 basis points from the nine months endedSeptember 30, 2021 . Throughout 2021, market interest rates remained at historically low levels with it starting to rise in the first quarter of 2022 and continuing through the third quarter of 2022. The interest rates on our residential loan portfolio continued to reprice downward as a result, which included new production originating at much lower rates than the loans were paid in full. The decline of the average yield on our commercial real estate and construction loan portfolios during the nine months endedSeptember 30, 2022 was mitigated by the collection of approximately$1.8 million of interest on nonperforming commercial real estate and construction loans during the nine months endedSeptember 30, 2022 . The average balance of our investment securities and other interest-earning assets, which generally are lower-yielding and more liquid than our loans, was$775.9 million for nine months endedSeptember 30, 2022 compared to$1.1 billion for the nine months endedSeptember 30, 2021 . These assets had an average yield of 1.21% for the nine months endedSeptember 30, 2022 , an increase of 98 basis points from the nine months endedSeptember 30, 2021 resulting in interest income of$4.1 million for the nine months endedSeptember 30, 2022 compared to$1.2 million for the nine months endedSeptember 30, 2021 . 54
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Interest expense was$12.4 million for the nine months endedSeptember 30, 2022 , a decrease of$8.8 million , or 42%, from the nine months endedSeptember 30, 2021 . The decrease in interest expense was due in part to a decrease in the average balance of interest-bearing deposits which decreased$664.3 million , or 25%, in the nine months endedSeptember 30, 2022 compared to the nine months endedSeptember 30, 2021 . This decrease is primarily driven by a decrease in the average balance of time deposits of$573.1 million . The reduction of these higher costing deposits contributed to the lower average cost of interest-bearing deposits. Additionally, the average balance of FHLB borrowings decreased$211.3 million fromSeptember 30, 2021 and is the result of the repayment of$157.0 million in borrowings during the fourth quarter of 2021 and$100.0 million during the second quarter of 2022. Net Interest Margin and Interest Rate Spread. Net interest margin was 3.19% for the three months endedSeptember 30, 2022 , up 36 basis points from 2.83% for the same period in 2021. The interest rate spread was 3.01% for the three months endedSeptember 30, 2022 , up 27 basis points from 2.74% for the same period in 2021. Our net interest margin and interest rate spread for the three months endedSeptember 30, 2022 were positively impacted by increasing market interest rates as the yield on average interest-earning assets increased 56 basis points while the cost of average interest-earning liabilities increased 29 basis points. Net interest margin was 3.06% for the nine months endedSeptember 30, 2022 , up 41 basis points from 2.65% for the same period in 2021. The interest rate spread was 2.93% for the nine months endedSeptember 30, 2022 , up 40 basis points from 2.53% for the same period in 2021. Our net interest margin and interest rate spread for the nine months endedSeptember 30, 2022 were positively impacted by a decrease in the cost of average interest-bearing liabilities as higher interest cost of average time deposits decreased and an increase in the yield on average interest-earning assets as the yield on average interest-earning other assets increased while their average balances decreased. Provision (Recovery) for Loan Losses. Our recovery for loan losses was$(4.4) million for the three months endedSeptember 30, 2022 , compared to a provision for loan losses of$0.4 million for the three months endedSeptember 30, 2021 . Our recovery for loan losses for the three months endedSeptember 30, 2022 is primarily attributable to improvements in our credit quality as well as a decrease in our total loan portfolio of$96.5 million during the quarter. Our recovery for loan losses was$(9.8) million for the nine months endedSeptember 30, 2022 , compared to a recovery for loan losses of$(2.1) million for the nine months endedSeptember 30, 2021 . Our recovery for loan losses for the nine months endedSeptember 30, 2022 is primarily attributable to an improvement in the credit quality of our loan portfolio during the nine-month period, which includes the effects of a$35.8 million decrease of Special Mention, Substandard and Doubtful loans and the sale of higher risk commercial real estate in the third quarter of 2022, as well as a decrease in our total loan portfolio of$331.2 million fromDecember 31, 2021 , including construction loans of$56.4 million which carried a higher allocated allowance for loan loss. See "-Asset Quality" and "-Allowance for Loan Losses" for further discussion regarding our classified loans and the credit quality of our loan portfolio.
Our total allowance for loan losses decreased to
55
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Non-interest Income. Non-interest income information is as follows:
Three Months Ended Nine Months Ended
September 30, Change September 30, Change
2022 2021 Amount Percent 2022 2021 Amount Percent
(Dollars in thousands)
Service charges and fees $ 124 $ 120 $ 4 3 % $ 351 $ 423 $ (72) (17) %
Gain on sale of mortgage
loans held for sale - 151 (151) (100) % 200 619 (419) (68) %
Unrealized losses on
equity securities (184) (24) (160) N/M (590) (99) (491) N/M
Gain on sale of branch
office - 1,417 (1,417) (100) % - 1,417 (1,417) (100) %
Net servicing loss (384) (31) (353) N/M (118) (1,369) 1,251 91 %
Income on cash surrender
value of bank-owned life
insurance 87 325 (238) (73) % 670 960 (290) (30) % Other
- 100 (100)
(100) % 586 291 295 N/M
Total non-interest income
N/M - not meaningful Non-interest income of$(0.4) million for the three months endedSeptember 30, 2022 reflected a decrease of$2.4 million from the same period in 2021. Non-interest income of$1.1 million for the nine months endedSeptember 30, 2022 reflected a decrease of$1.1 million from the same period in 2021. The decrease in non-interest income for the three and nine months endedSeptember 30, 2022 is primarily attributable to the$1.4 million gain on sale of theBellevue, Washington branch office in the third quarter of 2021. Also, during the three and nine months endedSeptember 30, 2022 , we repurchased a pool of Advantage Loan Program loans with a total outstanding principal balance of$35.2 million and$65.6 million compared to loans with a total outstanding principal balance of$6.1 million and$173.8 million during the three and nine months endedSeptember 30, 2021 , respectively. These repurchases result in higher net servicing losses in those periods which have higher repurchase volumes due to the disposition of related mortgage servicing rights. Unrealized losses on equity securities were also greater in the three and nine months endedSeptember 30, 2022 compared to the three and nine months endedSeptember 30, 2021 due to the market interest rate environment.
Non-interest Expense. Non-interest expense information is as follows:
Three Months Ended Nine Months Ended
September 30, Change September 30, Change
2022 2021 Amount Percent 2022 2021 Amount Percent
(Dollars inthousands)
Salaries and employee benefits$ 9,336 $ 2,774 $ 6,562 N/M$ 24,522 $ 19,300 $ 5,222 27 % Occupancy and equipment 2,112 2,395 (283) (12) % 6,441 6,840 (399) (6) % Professional fees 5,756 4,024 1,732 43 % 17,979 18,500 (521) (3) % FDIC assessments 316 417 (101) (24) % 1,031 1,636 (605) (37) % Data processing 725 403 322 80 % 2,292 1,189 1,103 93 % Net recovery of mortgage repurchase liability (145) (298) 153 51 % (670) (963) 293 30 % Other 3,521 1,361 2,160 N/M 8,943 5,852 3,091 53 % Total non-interest expense$ 21,621 $ 11,076 $ 10,545 95 %$ 60,538 $ 52,354 $ 8,184 16 % Non-interest expense was$21.6 million and$11.1 million for the three months endedSeptember 30, 2022 and 2021, respectively, and$60.5 million and$52.4 million for the nine months endedSeptember 30, 2022 and 2021, respectively. Salaries and employee benefits expense increased for the three and nine months endedSeptember 30, 2022 when compared to the same periods in the prior year. In the third quarter of 2021, the Company recorded$6.5 million in the ERC, which were available under the CARES Act and resulted in a net reduction of salaries and employee benefits expense. Absent recognizing the$6.5 million ERC, salaries and benefits expense for the three and nine months endedSeptember 30, 2021 would have been substantially higher, and thus salaries and benefits expense for the three months endedSeptember 30, 2022 would have shown only modest increases from the three months endedSeptember 30, 2021 . 56
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Salaries and employee benefits expense for the nine months endedSeptember 30, 2022 benefited from the cancellation of certain deferred compensation and split dollar life insurance agreements with its controlling shareholder which resulted in the reversal of the related liabilities of$4.5 million upon surrender of a large split-dollar life program and certain BOLI policies partially offset by$0.4 million in separation costs related to the reduction in our mortgage origination staff, all of which occurred during the second quarter of 2022. Due to this reduction in mortgage origination staff, the Company experienced reduced salaries and benefits expense of$0.9 million during the third quarter of 2022. During the three and nine months endedSeptember 30, 2022 , we continued hiring employees in key positions, provided salary adjustments to employees to maintain compensation at competitive levels, and made enhancements to existing employee benefit plans, all of which had the impact of increasing salaries and benefits expense. Professional fees for the three months endedSeptember 30, 2022 increased$1.7 million compared to the three months endedSeptember 30, 2021 , which included a$1.4 million insurance reimbursement received in the third quarter of 2021. Absent the reimbursement, professional fees for the three months endedSeptember 30, 2022 would have reflected a slight increase from the prior year period. Professional fees for the nine months endedSeptember 30, 2022 declined by$0.5 million compared to the nine months endedSeptember 30, 2021 , which decline would have been greater but for the insurance reimbursements received in 2021 of$3.8 million and is attributable to the elevated professional services received in 2021 related to the Internal Review, the government investigations and regulatory initiatives. Other non-interest expense increased during the three month and nine months endedSeptember 30, 2022 largely due to the$1.6 million and$2.3 million fair value discounts on$35.2 million and$65.6 million of Advantage Loan Program loans repurchased in the three and nine months ended September, 30 2022, respectively. The repurchases made in 2021 had no such fair value discount as the rise in market interest rates drove the losses on loans repurchased in 2022. Additionally, the nine months endedSeptember 30, 2022 included additional tax of$1.3 million incurred during the second quarter of 2022 related to certain BOLI policies surrendered. Income Tax Expense. We recorded an income tax expense of$0.7 million and$6.4 million for the three and nine months endedSeptember 30, 2022 , respectively, compared to an income tax expense of$3.7 million and$6.2 million for the three and nine months endedSeptember 30, 2021 , respectively. During the second quarter of 2022, we surrendered a large split-dollar life program and a few smaller BOLI policies related to former executives and a controlling shareholder with a cash surrender value of$24.9 million . The$13.1 million increase in value over the duration of the ownership of the policies moved from non-taxable income to taxable income, resulting in a$3.6 million increase in income tax expense for the nine months endedSeptember 30, 2022 . Additionally, other than temporary differences originating in the nine months endedSeptember 30, 2022 were the non-taxable cancellation of the split-dollar life insurance agreement and the non-deductible additional tax related to the surrender of the bank-owned life insurance policies, which together resulted in an income tax benefit of approximately$0.8 million .
Liquidity and Capital Resources
Liquidity is the ability to meet current and future financial obligations when they come due. Our primary sources of funds consist of deposit inflows, loan repayments and FHLB borrowings. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition. We have substantial cash requirements going forward, as discussed below, which we plan to fund through our total available liquidity, cash flows from operations and additional liquidity measures, if determined to be necessary. We regularly review the need to adjust our investments 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 program. Excess liquid assets are generally invested in interest-earning deposits and short-term securities. Our most liquid assets are cash and due from banks, interest-bearing time deposits with other banks and debt securities classified as available for sale. The levels of these assets are dependent on our operating, financing, lending and investing activities during any given period. AtSeptember 30, 2022 andDecember 31, 2021 , cash and due from banks totaled$352.4 million and$411.7 million , respectively; interest-bearing time deposits with other banks totaled$1.2 million ; debt securities available for sale, which provide additional sources of liquidity, totaled$348.6 million and$308.7 million , respectively. AtSeptember 30, 2022 andDecember 31, 2021 , outstanding FHLB borrowings totaled$50.0 million and$150.0 million , respectively. InMay 2022 , we utilized our excess liquidity to repay$100.0 million in long-term fixed rate advances which the FHLB had called using the call provision. There were no amounts outstanding on lines of credit with other banks. 57
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AtSeptember 30, 2022 , we had the ability to borrow an additional$374.5 million from the FHLB, which included an available line of credit of$20 million . In addition, we have obtained standby letters of credit totaling$2.0 million , which provides credit support for certain of our obligations related to our commitment to repurchase certain pools of Advantage Loan Program loans. We also had available credit lines with other banks totaling$80 million . Although we reduced our excess liquidity during 2021 through 2022, we believe that our existing liquidity combined with our borrowing capacity with the FHLB and our bank lines of credit, as well as the ability to obtain additional funds through brokered deposits, would allow us to manage any unexpected increase in loan demand or any unforeseen financial demand or commitment. To avoid the uncertainty of audits and inquiries by third-party investors in the Advantage Loan Program loans, beginning at the end of the second quarter of 2020, the Company commenced making offers to each of those investors to repurchase 100% of the previously sold Advantage Loan Program loans. ThroughSeptember 30, 2022 , the Company has repurchased pools of Advantage Loan Program loans previously sold with a total outstanding unpaid principal balance of$309.0 million . During the nine months endedSeptember 30, 2022 , the Company repurchased$65.6 million of Advantage Loan Program loans. In addition, pursuant to existing agreements with such investors, the Company also agreed to repurchase an additional pool of Advantage Loan Program loans throughJuly 2023 . The aggregate unpaid principal balance of these loans was$21.4 million atSeptember 30, 2022 . AtSeptember 30, 2022 , the unpaid principal balance of the previously sold Advantage Loan Program loans that would be subject to repurchase by us if 100% of our offers were accepted totaled$45.0 million , which includes loans that we have committed to repurchase. Should additional secondary market investors accept our offers to repurchase Advantage Loan Program loans with respect to a substantial portion of such outstanding loans, the cash required to fund these repurchases will reduce our liquidity. We are a party to financial instruments in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to make loans and standby letters of credit that are not reflected in our condensed consolidated balance sheets and involve elements of credit and interest rate risk in excess of the amount recorded in the condensed consolidated balance sheets. Our exposure to credit loss is represented by the contractual amount of the instruments. We use the same credit policies in making commitments as we do for on-balance sheet instruments. AtSeptember 30, 2022 , we had$23.3 million in loan commitments and unused lines of credit outstanding and$24 thousand in standby letters of credit. AtDecember 31, 2021 , we had$69.4 million in loan commitments and unused lines of credit outstanding and$24 thousand in standby letters of credit. As ofSeptember 30, 2022 , time deposits due within one year were$457.4 million , or 23% of total deposits. Total time deposits atSeptember 30, 2022 were$757.6 million , or 39% of total deposits. As ofDecember 31, 2021 , time deposits due within one year were$646.6 million , or 29% of total deposits. Total time deposits atDecember 31, 2021 were$891.8 million , or 39% of total deposits. Our primary investing activities are the origination of loans and the purchase of investment securities. During the nine months endedSeptember 30, 2022 , we originated$109.6 million of loans and purchased$147.5 million of investment securities. During the nine months endedSeptember 30, 2021 , we originated$143.5 million of loans and purchased investment securities of$23.2 million . Additionally, we paid$63.5 million to the purchaser of theBellevue, Washington branch office, the sale of which included the transfer of all deposit accounts located at the branch and all branch premises and equipment. Cash flows provided by loan payoffs totaled$442.9 million and$596.5 million during the nine months endedSeptember 30, 2022 and 2021, respectively. Financing activities consist primarily of activity in deposit accounts and, to a lesser extent, borrowings. We experienced a net decrease in total deposits of$310.7 million during the nine months endedSeptember 30, 2022 , from$2.3 billion atDecember 31, 2021 . We generate deposits from local businesses and individuals through customer referrals and other relationships and through our retail presence. We utilize borrowings and brokered deposits to supplement funding needs and manage our liquidity position. During the nine months endedSeptember 30, 2022 , we repaid$135 million of borrowings with the FHLB and engaged in new borrowings with the FHLB of$35 million . The Company is a separate and distinct legal entity from the Bank, and, on a parent company-only basis, the Company's primary source of funding is dividends received from the Bank. Banking regulations limit the dividends that may be paid by the Bank. Approval by regulatory authorities is required if the total capital distributions for the applicable calendar year exceed the sum of the Bank's net income for that year to date plus the Bank's retained net income for the preceding two years, or the Bank would not be at least adequately capitalized following the distribution. Banking regulations also limit the ability of the Bank to pay dividends under other circumstances. The Company has the legal ability to access the debt and equity capital markets for funding, although the Company currently is required to obtain the prior approval of the FRB in order to issue debt. 58 Table of Contents In recent years, the Company's primary funding needs on a parent company-only basis have consisted of dividends to shareholders, interest expense on subordinated notes and stock repurchases. AtSeptember 30, 2022 , the Company had$65.0 million in principal amount of subordinated notes outstanding that are dueApril 15, 2026 but may be redeemed by us, in whole or in part. There have been no redemptions on the subordinated notes. Interest expense on the subordinated notes was$3.4 million and$3.2 million for the nine months endedSeptember 30, 2022 and 2021, respectively. The subordinated notes had an interest rate of 7% per annum, payable semi-annually onApril 15 andOctober 15 in arrears, throughApril 2021 , after which the subordinated notes converted to a variable interest rate of the three-month LIBOR rate plus a margin of 5.82% (8.33% atSeptember 30, 2022 ). In 2017, theUnited Kingdom ("U.K.")Financial Conduct Authority announced that it would no longer compel banks to submit rates for the calculation of LIBOR after 2021, and the administrator of LIBOR has proposed to extend publication of the most commonly usedU.S. dollar LIBOR settings toSeptember 30, 2023 . Pursuant to recent federal andNew York State legislation, upon the cessation of the publication of the three-month LIBOR rate, the subordinated notes will bear interest at a rate based on the SOFR. The Company's ability to pay cash dividends is restricted by the terms of the subordinated notes as well as applicable provisions ofMichigan law and the rules and regulations of the OCC and the FRB. Under the terms of the subordinated notes, as long as the subordinated notes are outstanding, the Company is permitted to pay dividends, if prior to such dividends, the Bank is considered well capitalized under applicable regulatory capital requirements. In addition, underMichigan law, the Company is prohibited from paying cash dividends if, after giving effect to the dividend, (i) it would not be able to pay its debts as they become due in the usual course of business or (ii) its total assets would be less than the sum of its total liabilities plus the preferential rights upon dissolution of shareholders with preferential rights on dissolution that are superior to those receiving the dividend, and we are currently required to obtain the prior approval of the FRB in order to pay any dividends to our shareholders. The Company and the Bank are required to meet several regulatory capital requirements administered by theFederal Reserve and the OCC, respectively. We manage our capital to comply with our internal planning targets and regulatory capital standards administered by theFederal Reserve and the OCC. We review capital levels on a quarterly basis including our needs for additional capital and ability to pay cash dividends. These capital requirements are the result of a final rule implementing recommendations of theBasel Committee on Banking Supervision and certain requirements of the Dodd-Frank Act. In addition to establishing the minimum regulatory capital requirements, the regulations have established a CCB consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets above the amount necessary to meet its minimum risk-based capital requirements. The CCB is designed to absorb losses during periods of economic stress. Banking institutions with a (i) CET1 to risk-weighted assets, (ii) Tier 1 capital to risk-weighted assets or (iii) total capital to risk-weighted assets above the respective minimum but below the minimum plus the CCB will face constraints on dividends, equity repurchases and discretionary bonus payments to executive officers based on the amount of the shortfall. The Bank, after consultation with the OCC, determined that a risk-weighting of 100% should be applied to its Advantage Loan Program loans under the risk weighting requirements for first-lien residential mortgage exposures set forth under the Basel III capital rules. Previously, the Company and the Bank generally applied a 50% risk weight to the Advantage Loan Program loans. The table below presents the Company's and the Bank's regulatory capital amounts and ratios applying the 100% risk weight as ofSeptember 30, 2022 andDecember 31, 2021 for the Company's and Bank's total adjusted capital to risk-weighted assets, Tier 1 (core) capital to risk-weighted assets and CET1 to risk weighted assets. 59 Table of Contents AtSeptember 30, 2022 andDecember 31, 2021 , the Company and the Bank had met all regulatory capital requirements to which they are subject and held capital in excess of the CCB, and the Bank's regulatory capital ratios exceeded the requirements to be considered well capitalized for all regulatory purposes. The following tables present the Company's consolidated and the Bank's actual and minimum required capital amounts and ratios atSeptember 30, 2022 andDecember 31, 2021 , applying the 100% risk weight to Advantage Loan Program loans: For Capital To be Well Actual Adequacy Purposes Capitalized Amount Ratio Amount Ratio Amount Ratio September 30, 2022 Total adjusted capital to riskweighted assets Consolidated$ 409,170 26.21 %$ 124,357 8.00 % N/A N/A Bank 413,262 26.60 124,275 8.00$ 155,344 10.00 % Tier 1 (core) capital to riskweighted assets Consolidated 350,162 22.43 93,268 6.00 N/A N/A Bank 393,524 25.33 93,206 6.00 124,275 8.00 Common Equity Tier 1 (CET1) Consolidated 350,162 22.43 69,951 4.50 N/A N/A Bank 393,524 25.33 69,905 4.50 100,974 6.50 Tier 1 (core) capital to adjusted tangible assets (leverage ratio) Consolidated 350,162 14.09 99,151 4.00 N/A N/A Bank 393,524 15.88 99,103 4.00 123,879 5.00 For Capital To be Well Actual Adequacy Purposes Capitalized Amount Ratio Amount Ratio Amount Ratio December 31, 2021 Total adjusted capital to riskweighted assets Consolidated$ 421,732 21.24 %$ 158,851 8.00 % N/A N/A Bank 407,699 20.55 158,707 8.00$ 198,384 10.00 % Tier 1 (core) capital to riskweighted assets Consolidated 344,247 17.34 119,138 6.00 N/A N/A Bank 382,509 19.28 119,030 6.00 158,707 8.00 Common Equity Tier 1 (CET1) Consolidated 344,247 17.34 89,354 4.50 N/A N/A Bank 382,509 19.28 89,273 4.50 128,950 6.50 Tier 1 (core) capital to adjusted tangible assets (leverage ratio) Consolidated 344,247 11.47 120,039 4.00 N/A N/A Bank 382,509 12.77 119,859 4.00 149,824 5.00 60 Table of Contents In order to provide a comparable trend analysis for the Bank's and the Company's risk based capital ratios applying the 100% risk weight to Advantage Loan Program loans, the tables below present the regulatory capital ratios applying the 100% risk weight atDecember 31 for each of the past five years. At each of the year-end dates reported, the Company and the Bank had met all minimum regulatory capital requirements and applicable capital cushions to which they are subject and held capital in excess of the CCB, and the Bank would have been considered well capitalized for all regulatory purposes. The CCB requirement was phased in beginning onJanuary 1, 2016 at the 0.625% level and increased by 0.625% on each subsequentJanuary 1 , until the buffer was implemented in full at 2.5% onJanuary 1, 2019 . Accordingly, the CCB atDecember 31, 2018 and 2017 was 1.875% and 1.25%, respectively. Company at December
31,
2021 2020 2019 2018 2017
Total adjusted capital to risk-weighted
assets 21.24 % 16.51 % 14.58 % 14.82 % 13.49 %
Tier 1 (core) capital to risk-weighted
assets 17.34 % 12.65 % 11.56 % 11.77 % 10.33 %
Common Equity Tier 1 (CET1) 17.34 % 12.65 % 11.56 % 11.77 % 10.33 %
Tier 1 (core) capital to adjusted tangible
assets (leverage ratio) 11.47 % 8.08 % 10.11 % 10.42 % 9.83 %
Bank at December 31,
2021 2020 2019 2018 2017
Total adjusted capital to risk-weighted
assets 20.55 % 15.74 % 12.08 % 11.43 % 10.06 %
Tier 1 (core) capital to risk-weighted
assets 19.28 % 14.47 % 11.32 % 10.66 % 9.12 %
Common Equity Tier 1 (CET1) 19.28 % 14.47 % 11.32 % 10.66 % 9.12 %
Tier 1 (core) capital to adjusted tangible
assets (leverage ratio) 12.77 % 9.20 % 9.90 % 9.44 % 8.68 %
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In comparison to the above tables, the tables below present the Bank's and the Company's regulatory capital ratios applying the 50% risk weight to Advantage Loan Program loans atDecember 31 for each of the past five years, as previously reported. Company at December 31, 2021 2020 2019 2018 2017 Total adjusted capital to risk-weighted assets 29.02 % 22.58 % 21.49 % 21.98 % 20.28 % Tier 1 (core) capital to risk-weighted assets 24.08 % 17.68 % 17.04 % 17.45 % 15.53 % Common Equity Tier 1 (CET1) 24.08 % 17.68 % 17.04 % 17.45 % 15.53 % Tier 1 (core) capital to adjusted tangible assets (leverage ratio) 11.47 % 8.08 % 10.11 % 10.42 % 9.83 % Bank at December 31, 2021 2020 2019 2018 2017 Total adjusted capital to risk-weighted assets 28.07 % 21.56 % 17.82 % 16.94 % 14.76 % Tier 1 (core) capital to risk-weighted assets 26.79 % 20.27 % 16.70 % 15.80 % 13.71 % Common Equity Tier 1 (CET1) 26.79 % 20.27 % 16.70 % 15.80 % 13.71 % Tier 1 (core) capital to adjusted tangible assets (leverage ratio) 12.77 % 9.20 % 9.90 %
9.44 % 8.68 %
Recently Issued Accounting Guidance
See Note 2-Summary of Significant Accounting Policies to our unaudited condensed consolidated financial statements included in "Part I, Item 1. Financial Statements" for a discussion of recently issued accounting guidance and related impact on our financial condition and results of operations.
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