THE BANCORP, INC. Forward-Looking Statements
When used in this Form 10-Q, the words "believes", "anticipates", "expects" and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties more particularly described in Item 1A, under the caption "Risk Factors," in our Annual Report on Form 10-K for the year endedDecember 31, 2021 and in other of our public filings with theSecurities and Exchange Commission . These risks and uncertainties could cause actual results to differ materially from those expressed or implied in this Form 10-Q. We caution readers not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. We undertake no obligation to publicly revise or update these forward-looking statements to reflect events or circumstances after the date of this Form 10-Q except as required by applicable law. In the following discussion we provide information about our results of operations, financial condition, liquidity and asset quality. We intend that this information facilitate your understanding and assessment of significant changes and trends related to our financial condition and results of operations. You should read this section in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our Annual Report on Form 10-K for the year endedDecember 31, 2021 .
Key Performance Indicators
We use a number of key performance indicators to measure our overall financial
performance. We describe how we calculate and use a number of these performance
indicators and analyze their results below.
Return on assets and return on equity. Two performance indicators we believe are
commonly used within the banking industry to measure overall financial
performance are return on assets and return on equity. Return on assets measures
the amount of earnings compared to the level of assets utilized to generate
those earnings. It is derived by dividing net income by average assets. Return
on equity measures the amount of earnings compared to the equity utilized to
generate those earnings. It is derived by dividing net income by average
shareholders' equity.
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Net interest margin and credit losses. The largest component of our earnings is
net interest income, or the difference between the interest earned on our
interest-earning assets consisting of loans and investments, less the interest
on our funding, consisting primarily of deposits. The key performance indicator
for net interest income is net interest margin, derived by dividing net interest
income by average interest-earning assets. Higher levels of earnings and net
interest income, on lower levels of assets, equity and interest-earning assets
are generally desirable. However, these indicators must be considered in light
of regulatory capital requirements which impact equity, and credit risk inherent
in loans. Accordingly, the magnitude of credit losses is an additional key
performance indicator.
Other performance indicators. Other performance indicators we use include loan growth, non-interest income growth, the level of non-interest expense and various capital measures.
Results of performance indicators. Our strategies continue to target loan niches
which we believe are lower risk than certain other forms of lending. These
include: multi-family (apartment) loans in selected national regions; loans
collateralized by securities ("SBLOC") and the cash value of life insurance
("IBLOC"); SBA loans, a significant portion of which are government guaranteed
or must have loan-to-value ratios lower than other forms of lending; and leasing
to which we have access to underlying vehicles. Loan balances in these
categories have grown significantly in recent years, which we believe has
contributed generally to increases in key performance indicators.
A 12% increase in net income, to $29.0 million in the first quarter of 2022,
from $26.0 million in the first quarter of 2021, was reflected in increases in
return on assets and equity. In the first quarter of 2022, return on assets and
return on equity amounted to 1.68% and 18.01% (annualized), respectively,
compared to 1.56% and 17.88% (annualized) in the first quarter of 2021. Net
interest income decreased $904,000 , reflecting a $3.4 million decrease in
Payroll Protection Program ("PPP") related interest and fees, and a $3.9 million
decrease in securities interest. The reduction in securities interest reflected
lower balances and lower yields resulting from the continuing lower rate
environment. Increased returns on assets and equity in 2022 also reflected
higher non-interest income including higher fees related to non-SBA commercial
bridge loan repayments. Lower non-interest expense also contributed to higher
net income, as salaries and employee benefits decreased $1.8 million reflecting
lower incentive compensation expense while FDIC insurance expense decreased
$1.4 million reflecting the impact of the reclassification of certain deposits
to non-brokered. Net interest margin was 3.12% in the first quarter of 2022
versus 3.34% in the first quarter of 2021. The reduction in 2022 reflects lower
yields on securities resulting from the aforementioned lower rate environment
which also resulted in lower loan yields. One capital measure utilized in the
banking industry is the ratio of equity to assets, which is derived by dividing
period-end shareholders' equity by period-end total assets. At March 31, 2022 ,
that ratio was 9.21%, compared to 7.70% a year earlier. The increase reflected
higher levels of capital from retained earnings while assets, after increasing
temporarily due to stimulus payments at March 31, 2021 , decreased in subsequent
periods due to related outflows.
Overview
We are aDelaware financial holding company and our primary subsidiary, which we wholly own, isThe Bancorp Bank , which we refer to as the Bank. The vast majority of our revenue and income is currently generated through the Bank. In our continuing operations, we have four primary lines of specialty lending:
?SBLOC, IBLOC, and investment advisor financing;
?leasing (direct lease financing);
?small business loans, primarily SBA loans, and
?non-SBA commercial real estate bridge ("CRE") loans.
SBLOCs and IBLOCs are loans which are generated through affinity groups and are respectively collateralized by marketable securities and the cash value of insurance policies. SBLOCs are typically offered in conjunction with brokerage accounts and are offered nationally. IBLOC loans are typically viewed as an alternative to standard policy loans from insurance companies and are utilized by our existing advisor base as well as insurance agents throughout the country. Investment advisor financing are loans made to investment advisors for purposes of debt refinance, acquisition of another investment firm or internal succession. Vehicle fleet and, to a lesser extent, other equipment leases are generated in a number ofAtlantic Coast and other states and are collateralized primarily by vehicles. SBA loans are made nationally and are collateralized by commercial properties and other types of collateral. Our non-SBA commercial real estate bridge loans, at fair value, are primarily collateralized by multi-family properties (apartment buildings), and to a lesser extent, by hotel and retail properties. These loans were originally generated for sale through securitizations. In 2020, we decided to retain these loans on our balance sheet as interest earning assets and resumed originating such loans in the third quarter of 2021. These new originations are identified as real estate bridge loans and are held for investment in the loan portfolio. Prior originations originally intended for securitizations continue to be accounted for at fair value, and are included in the balance sheet in "Commercial loans, at fair value." The majority of our deposit accounts and non-interest income are generated in our payments business line, the name for which has been changed toFintech Solutions Group , which consists of consumer deposit accounts accessed by prepaid or debit cards, or issuing, automated clearing house, or ACH accounts, other payments such as rapid funds transfer and the collection of payments through credit 38
-------------------------------------------------------------------------------- card companies on behalf of merchants. The issuing deposit accounts are comprised of debit and prepaid card accounts that are generated by independent companies that market directly to end users. Our issuing deposit account types are diverse and include: consumer and business debit, general purpose reloadable prepaid, pre-tax medical spending benefit, payroll, gift, government, corporate incentive, reward, business payment accounts and others. Our ACH accounts facilitate bill payments, and our acquiring accounts provide clearing and settlement services for payments made to merchants which must be settled through associations such asVisa or MasterCard. We also provide banking services to organizations with a pre-existing customer base tailored to support or complement the services provided by these organizations to their customers. These services include loan and deposit accounts for investment advisory companies through our institutional banking department. We typically provide these services under the name and through the facilities of each organization with whom we develop a relationship. We refer to this, generally, as affinity banking. The increase in our net income to$29.0 million for the first quarter of 2022, from$26.0 million for the first quarter of 2021, resulted primarily from an increase in non-interest income and decreases in net interest income and non-interest expense. The$904,000 decrease in net interest income reflected reductions in securities interest partially offset by increases in loan interest, including interest from loan growth. Increases in loan interest were offset by a$3.9 million decrease in securities interest resulting from lower securities balances and the impact of the lower rate environment. Excluding the impact of PPP, small business loans ("SBL"), primarily SBA, totaled$705.2 million compared to$692.1 million atMarch 31, 2022 and 2021, respectively, an increase of 1.9%. However, the impact of SBL growth on interest income was more than offset by a$3.4 million reduction in PPP related fees and interest, which resulted in a$2.9 million reduction in SBL loan interest. SBLOC, IBLOC and investment advisor loans totaled$2.21 billion atMarch 31, 2022 , compared to$1.68 billion atMarch 31, 2021 , reflecting 31.7% annual growth. Related interest increased$3.8 million . Interest expense decreased$165,000 . Our largest funding sources, prepaid and debit card account deposits, contractually adjust to only a portion of increases or decreases in market rates, as reflected in a 19 basis point cost of funds in the first quarter of 2022. A$1.5 million provision for credit losses in first quarter 2022, compared to an$822,000 provision in the first quarter of 2021, reflecting the impact of higher allowances on specific loans. Prepaid, debit card and related fees are the largest driver of non-interest income. Such fees for the first quarter of 2022 decreased$556,000 over the comparable 2021 period. Leasing income increased$8,000 over the prior year quarter. Both periods reflected vehicle sales at relatively higher market prices due to vehicle shortages. For those periods, non-interest expense decreased$3.5 million which reflected a$1.8 million decrease in salaries and employee benefits, a$1.4 million reduction inFederal Deposit Insurance Corporation ("FDIC") insurance expense and a$1.3 million decrease in legal expense. AtDecember 31, 2021 discontinued assets consisted of$61.6 million of loans and$17.3 million of other real estate owned. In the first quarter of 2022, discontinued loans were reclassified to loans held for investment, as efforts to sell the loans have been winding down. These loans will accordingly be accounted for as such, and included in related tables. Discontinued other real estate owned which constituted the remainder of discontinued assets was reclassified to the other real estate owned caption on the balance sheet.
Critical Accounting Policies and Estimates
Our accounting and reporting policies conform with accounting principles generally accepted inthe United States and general practices within the financial services industry. The preparation of financial statements in conformity with accounting principles generally accepted inthe United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates. We believe that the determination of our allowance for credit losses on loans, leases and securities, our determination of the fair value of financial instruments and the level in which an instrument is placed within the valuation hierarchy, and stock compensation and income tax accounting involve a higher degree of judgment and complexity than our other significant accounting policies. We determine our allowance for credit losses using the current expected credit losses method, or CECL, with the objective of maintaining a reserve level we believe to be sufficient to absorb our estimated probable credit losses. We base our determination of the adequacy of the allowance on periodic evaluations of our loan portfolio and other relevant factors. However, this evaluation is inherently subjective as it requires material estimates, including, among others, expected default probabilities, the amount of loss we may incur on a defaulted loan, expected commitment usage, the amounts and timing of expected future cash flows on credit deteriorated loans, value of collateral, estimated losses on consumer loans, and historical loss experience. We also evaluate economic conditions and uncertainties in estimating losses and inherent risks in our loan portfolio. To the extent actual outcomes differ from our estimates, we may need additional provisions for credit losses. Any such additional provisions for credit losses will be a direct charge to our earnings. See "Allowance for Credit Losses". The fair value of a financial instrument is defined as the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. We estimate the fair value of a financial instrument using a variety of valuation methods. Where financial instruments are actively traded and have quoted market prices, quoted market prices are used for fair value. When the financial instruments are not actively traded, other observable market inputs, such as quoted prices of securities with similar characteristics, may be used, if available, to determine fair value. When observable market prices do not exist, we estimate fair value. Our valuation methods and inputs consider factors such as types of underlying assets or liabilities, rates of estimated credit losses, interest rate or discount rate and collateral. Our best estimate of fair value involves assumptions including, but not limited to, various performance indicators, such as historical and projected default and recovery rates, credit ratings, current delinquency rates, loan-to-value ratios and the possibility of obligor refinancing. 39 -------------------------------------------------------------------------------- At the end of each quarter, we assess the valuation hierarchy for each asset or liability measured. From time to time, assets or liabilities may be transferred within hierarchy levels due to changes in availability of observable market inputs to measure fair value at the measurement date. Transfers into or out of hierarchy levels are based upon the fair value at the beginning of the reporting period. We periodically review our investment portfolio to determine whether unrealized losses on securities result from credit, based on evaluations of the creditworthiness of the issuers or guarantors, and underlying collateral, as applicable. In addition, we consider the continuing performance of the securities. We recognize credit losses through the Consolidated Statements of Operations. If management believes market value losses are not credit related, we recognize the reduction in other comprehensive income, through equity. We evaluate whether a credit loss exists by considering primarily the following factors: (a) the extent to which the fair value has been less than the amortized cost of the security, (b) changes in the financial condition, credit rating and near-term prospects of the issuer, (c) whether the issuer is current on contractually obligated interest and principal payments, (d) changes in the financial condition of the security's underlying collateral and (e) the payment structure of the security. If a credit loss is determined, we estimate expected future cash flows to estimate the credit loss amount with a quantitative and qualitative process that incorporates information received from first-party sources and internal assumptions and judgments regarding the future performance of the security. We account for our stock-based compensation plans based on the fair value of the awards made, which include stock options, restricted stock, and performance based shares. To assess the fair value of the awards made, management makes assumptions as to expected stock price volatility, option terms, forfeiture rates and dividend rates. All these estimates and assumptions may be susceptible to significant change that may impact earnings in future periods. We account for income taxes under the liability method whereby we determine deferred tax assets and liabilities based on the difference between the carrying values on our consolidated financial statements and the tax basis of assets and liabilities as measured by the enacted tax rates which will be in effect when these differences reverse. Deferred tax expense (benefit) is the result of changes in deferred tax assets and liabilities.
Results of Operations
First quarter 2022 to first quarter 2021
Net Income: Income from continuing operations before income taxes was$38.1 million in the first quarter of 2022 compared to$35.1 million in the first quarter of 2021. Net income from continuing operations for the first quarter of 2022 was$29.0 million , or$0.50 per diluted share, compared to$26.1 million , or$0.44 per diluted share, for the first quarter of 2021. Income increased between those respective periods primarily as a result of higher non-interest income and lower non-interest expense. After discontinued operations, net income for the first quarter of 2022 amounted to$29.0 million , compared to$26.0 million for the first quarter of 2021. Net interest income for the first quarter of 2022 decreased 1.7%, to$52.9 million from$53.8 million in the first quarter of 2021. The decrease reflected reductions in securities interest resulting from lower balances, and lower yields which reflected the impact ofFederal Reserve rate reductions. Such decreases were partially offset by increases in loan interest as a result of higher loan balances. The provision for credit losses increased$685,000 to$1.5 million in the first quarter of 2022 compared to an$822,000 provision in the first quarter of 2021 reflecting the impact of higher allowances on specific loans. Non-interest income (excluding security gains and losses) increased$1.0 million , reflecting an increase in net realized and unrealized gains on non-SBA CRE bridge loans, at fair value of$1.4 million which resulted primarily from increases of fees related to related repayments in 2022. The vast majority of non-SBA CRE bridge loans at fair value are comprised of multi-family (apartment) loans. Prepaid, debit card and related fees are the primary driver of non-interest income and decreased$556,000 , or 2.9% to$18.7 million in the first quarter of 2022, compared to$19.2 million for the first quarter of 2021. Non-interest expense decreased$3.5 million , or 8.4%, to$38.4 million in the first quarter of 2022, compared to$41.9 million in the first quarter of 2021, reflecting a$1.8 million decrease in salary expense, a$1.4 million decrease in ourFDIC insurance expense and a$1.3 million decrease in legal expense. Additionally, the 2022 effective tax rate was lower compared to other recent periods. Diluted income per share was$0.50 in the first quarter of 2022 compared to$0.44 diluted income per share in the first quarter of 2021 primarily reflecting the above factors. Net Interest Income: Our net interest income for the first quarter of 2022 decreased$904,000 , or 1.7%, to$52.9 million , from$53.8 million in the first quarter of 2021. Our interest income for the first quarter of 2022 decreased to$55.9 million , a decrease of$1.1 million , or 1.9%, from$56.9 million for the first quarter of 2021. The decrease in interest income resulted primarily from reductions in securities interest resulting from lower balances, and lower yields which reflected the impact ofFederal Reserve rate reductions. Those decreases were partially offset by the impact of higher loan balances. Our average loans and leases increased to$5.14 billion for the first quarter of 2022 from$4.48 billion for the first quarter of 2021, an increase of$656.8 million , or 14.6%. Related interest income increased$2.7 million on a tax equivalent basis. The increase in average loans reflected growth in SBLOC, IBLOC, investment advisor loans, direct lease financing, and real estate bridge loans partially offset by decreases in PPP loans. Small business loans which also grew, have generally been comprised of SBA loans; however, in 2021 they reflected larger balances of pandemic-related PPP loans guaranteed by theU.S. government, the majority of which have been repaid, accounting for the decrease. The balance of our commercial loans, at fair value also decreased, as a result of non-SBA CRE bridge loan payoffs. In the third quarter of 2021 we resumed originating 40 -------------------------------------------------------------------------------- such loans, referred to as real estate bridge loans. Of the total$2.7 million increase in loan interest income on a tax equivalent basis, the largest increases were$3.8 million for SBLOC, IBLOC and investment advisor financing and$1.3 million for all real estate bridge loans. SBA loan interest decreased$2.9 million , which reflected a$3.4 million decrease in PPP related interest and fees. WhileMarch 31, 2022 leasing balances were 11.2% higher than a year earlier, related interest grew only$165,000 as a result of lower yields. Our average investment securities of$943.1 million for the first quarter of 2022 decreased$254.0 million from$1.20 billion for the first quarter of 2021. Related tax equivalent interest income decreased$3.9 million primarily reflecting a decrease in yields and secondarily reflecting a decrease in balances. Yields on loans and securities decreased as a result of the lower rate environment, which resulted in lower rates on new loans while higher rate loans continued to repay, partially offset by the impact of weighted average 4.8% interest rate floors on the non-SBA CRE bridge loans, at fair value. While interest income decreased by$1.1 million , interest expense decreased by$165,000 . Our net interest margin (calculated by dividing net interest income by average interest earning assets) for the first quarter of 2022 was 3.12% compared to 3.34% for the first quarter of 2021, a decrease of 22 basis points. While the yield on interest earning assets decreased 24 basis points, the cost of deposits and interest bearing liabilities decreased 2 basis points, or a net change of 22 basis points. Balances at theFederal Reserve earn lower rates of interest than loans and securities. Average interest earning deposits at theFederal Reserve Bank decreased$61.2 million , or 8.2%, to$686.6 million in the first quarter of 2022 from$747.8 million in the first quarter of 2021. In 2021, the net interest margin benefited from interest and fees related to PPP loans, which were$3.4 million higher than those in 2022, and which did not proportionately increase average interest earning assets. The net interest margin also reflected the impact of 4.8% weighted average floors on non-SBA CRE bridge loans, at fair value. Yields on variable rate loans generally fell as a result of theFederal Reserve rate reductions in 2020, and continued to decrease as new loans were made at lower rates while higher rate loans repaid. In the first quarter of 2022, the average yield on our loans decreased to 3.93% from 4.27% for the first quarter of 2021, a decrease of 34 basis points. Yields on taxable investment securities in the first quarter of 2022 decreased to 2.08% compared to 2.95% for the first quarter of 2021, a decrease of 87 basis points. The cost of total deposits and interest bearing liabilities decreased 2 basis points to 0.19% for the first quarter of 2022 compared to 0.21% in the first quarter of 2021. InMarch 2022 , theFederal Reserve began raising rates, with an initial hike of .25%, and additional hikes projected going forward. While the majority of our loans and securities are rate sensitive and should increase as rates increase, those cumulative hikes must exceed the difference between current loan rates and rate floors on certain loans. Accordingly, cumulative rate hikes approaching 2% might be required to increase net interest income. Please see "Asset and Liability Management." 41 -------------------------------------------------------------------------------- Average Daily Balances. The following table presents the average daily balances of assets, liabilities and shareholders' equity and the respective interest earned or paid on interest-earning assets and interest-bearing liabilities, as well as average annualized rates, for the periods indicated: Three months ended March 31, 2022 2021 Average Average Average Average Balance Interest Rate Balance Interest Rate (dollars in thousands) Assets: Interest earning assets: Loans, net of deferred loan fees and costs **$ 5,136,377 $ 50,508 3.93%$ 4,476,617 $ 47,811 4.27% Leases-bank qualified* 4,015 105 10.46% 6,982 118 6.76% Investment securities-taxable 939,511 4,891 2.08% 1,193,009 8,808 2.95% Investment securities-nontaxable* 3,559 32 3.60% 4,042 35 3.46% Interest earning deposits at Federal Reserve Bank 686,614 347 0.20%
747,845 183 0.10% Net interest earning assets 6,770,076 55,883 3.30% 6,428,495 56,955 3.54%
Allowance for credit losses (17,810)
(16,069)
Assets held-for-sale from
discontinued operations - - - 109,128 853 3.13%
Other assets 224,312 214,171
$ 6,976,578 $ 6,735,725
Liabilities and
shareholders' equity:
Deposits:
Demand and interest checking $ 5,575,228 $ 1,406 0.10% $ 5,501,697 $ 1,617 0.12%
Savings and money market 532,047 200 0.15% 407,186 149 0.15%
Total deposits 6,107,275 1,606 0.11% 5,908,883 1,766 0.12%
Short-term borrowings 555 - - 13,055 8 0.25%
Repurchase agreements 41 - - 41 - -
Subordinated debt 13,401 116 3.46% 13,401 113 3.37%
Senior debt 98,724 1,279 5.18% 100,140 1,279 5.11%
Total deposits and
liabilities 6,219,996 3,001 0.19% 6,035,520 3,166 0.21%
Other liabilities 104,207 111,241
Total liabilities 6,324,203 6,146,761
Shareholders' equity 652,375 588,964
$ 6,976,578 $ 6,735,725
Net interest income on tax
equivalent basis * $ 52,882 $ 54,642
Tax equivalent adjustment 29 32
Net interest income $ 52,853 $ 54,610
Net interest margin * 3.12% 3.34%
* Full taxable equivalent basis, using 21% statutory Federal tax rates in 2022 and 2021.
** Includes commercial loans, at fair value. All periods include non-accrual loans.
NOTE: In the table above, the 2021 interest on loans reflects $1.4 million of interest and fees which were
earned on a short-term line of credit to another institution to initially fund PPP loans, which did not
significantly increase average loans or assets and which are not expected to recur. Interest on loans for
2022 and 2021 includes $440,000 and $2.4 million , respectively, of interest and fees on PPP loans.
For the first quarter of 2022, average interest earning assets increased to
$6.77 billion , an increase of $341.6 million , or 5.3%, from $6.43 billion in the
first quarter of 2021. The increase reflected increased average balances of
loans and leases of $656.8 million , or 14.6%, partially offset by decreased
average investment securities of $254.0 million , or 21.2%. For those respective
periods, average demand and interest checking deposits increased $73.5 million ,
or 1.3%, primarily as a result of deposit growth in prepaid and debit card
accounts. The $124.9 million increase in average savings and money market
balances between these respective periods reflected growth in interest bearing
accounts offered by our affinity group clients to prepaid and debit card account
customers. A portion of the 2021 deposits resulted from economic stimulus
payments related to the pandemic, and was temporary. The interest expense shown
for demand and interest checking is primarily comprised of interest paid to our
affinity groups.
Provision for Credit Losses. Our provision for credit losses was $1.5 million
for the first quarter of 2022 compared to $822,000 for the first quarter of
2021. The increase reflected higher allowances on specific loans while both
periods reflected the impact of loan growth on the CECL model. The allowance for
credit losses was $19.1 million , or 0.46%, of total loans at March 31, 2022 ,
compared to $17.8 million , or 0.48%, of total loans at December 31, 2021 . We
believe that our allowance is adequate to cover expected losses. For more
information about our provision and allowance for credit losses and our loss
experience, see "Financial Condition-Allowance for
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credit losses", "-Net charge-offs," and "-Non-performing loans, loans 90 days
delinquent and still accruing, and troubled debt restructurings," below and Note
6 to the consolidated financial statements.
Non-Interest Income. Non-interest income was $25.1 million in the first quarter
of 2022 compared to $24.1 million in the first quarter of 2021. The
$1.0 million , or 4.3%, increase between those respective periods was primarily
the result of an increase in net realized and unrealized gains on non-SBA CRE
bridge loans, at fair value. Net realized and unrealized gains on such loans
increased to a gain of $3.4 million from a gain of $2.0 million . The
$1.4 million change was primarily the result of fees related to repayments of
non-SBA CRE bridge loans. The gain in 2022 also included a gain on hedges
related to those loans, partially offset by $1.2 million of fair value losses.
The fair value losses reflected the increase in market interest rates on fixed
rate loans. Prepaid, debit card and related fees decreased $556,000 , or 2.9%, to
$18.7 million for the first quarter of 2022 compared to $19.2 million in the
first quarter of 2021. The decrease reflected lower transaction volume resulting
from an affinity client relationship transitioning to its own bank, which offset
growth in other debit and prepaid card account programs. Related fees in this
category include income related to the use of cash in ATMs for prepaid payroll
cardholders. ACH, card and other payment processing fees increased $188,000 , or
10.5%, to $2.0 million for the first quarter of 2022 compared to $1.8 million in
the first quarter of 2021, reflecting increased ACH volume. Leasing related
income increased $8,000 , or 0.8%, to $973,000 for the first quarter of 2022 from
$965,000 for the first quarter of 2021. Both periods reflected vehicle sales at
relatively higher market prices due to vehicle shortages. Other non-interest
income increased $11,000 , or 10.1%, to $120,000 for the first quarter of 2022
from $109,000 in the first quarter of 2021.
Non-Interest Expense. Total non-interest expense was $38.4 million for the first
quarter of 2022, a decrease of $3.5 million , or 8.4%, compared to $41.9 million
for the first quarter of 2021. Salaries and employee benefits decreased to
$23.8 million for the first quarter of 2022, a decrease of $1.8 million , or
7.1%, from $25.7 million for the first quarter of 2021. Lower salary expense in
2022 reflected lower incentive compensation expense, including equity
compensation expense. Depreciation and amortization increased $86,000 , or 12.1%,
to $795,000 in the first quarter of 2022 from $709,000 in the first quarter of
2021, primarily as a result of equipment additions related to a new data center
and a new telephone system. Rent and occupancy increased $39,000 , or 3.1%, to
$1.3 million in the first quarter of 2022 from $1.3 million in the first quarter
of 2021. Data processing increased $63,000 , or 5.6%, to $1.2 million in the
first quarter of 2022 from $1.1 million in the first quarter of 2021. Printing
and supplies increased $20,000 , or 30.3%, to $86,000 in the first quarter of
2022 from $66,000 in the first quarter of 2021. Audit expense decreased $1,000 ,
or 0.3%, to $362,000 in the first quarter of 2022 from $363,000 in the first
quarter of 2021. Legal expense decreased $1.3 million , or 61.3%, to $794,000 in
the first quarter of 2022 from $2.1 million in the first quarter of 2021,
reflecting decreased costs associated with the Cascade matter and two
fact-finding inquiries by the SEC as described in Note 14 to the consolidated
financial statements. Amortization of intangible assets decreased by $0 , or
0.0%, to $99,000 in the first quarter of 2022 from $99,000 in the first quarter
of 2021. FDIC insurance expense decreased $1.4 million , or 59.1%, to $974,000
for the first quarter of 2022 from $2.4 million in the first quarter of 2021
primarily due to a reduction in the Bank's assessment rate resulting from the
reclassification of certain of our deposits from brokered to non-brokered. The
assessment rate is subject to multiple factors which may significantly change
the amount assessed. Accordingly, we cannot assure you that reduced rates will
continue. Software expense increased $180,000 , or 4.9%, to $3.9 million in the
first quarter of 2022 from $3.7 million in the first quarter of 2021. The
increase reflected expenditures for information technology to improve efficiency
and scalability, including expenses related to cybersecurity. Insurance expense
increased $319,000 , or 42.8%, to $1.1 million in the first quarter of 2022
compared to $745,000 in the first quarter of 2021, reflecting higher rates.
Telecom and IT network communications decreased $31,000 , or 7.7%, to $374,000 in
the first quarter of 2022 from $405,000 in the first quarter of 2021. Consulting
increased $39,000 , or 14.8%, to $303,000 in the first quarter of 2022 from
$264,000 in the first quarter of 2021. Other non-interest expense increased
$231,000 , or 7.5%, to $3.3 million in the first quarter of 2022 from
$3.1 million in the first quarter of 2021. The $231,000 increase reflected a
$162,000 increase in travel expenses.
Income Taxes. Income tax expense for continuing operations was $9.1 million for
the first quarter of 2022 compared to $9.1 million in the first quarter of 2021.
A 24.0% effective tax rate in 2022 and a 25.8% effective tax rate in 2021
primarily reflected a 21% federal tax rate and the impact of various state
income taxes. The reduction in effective tax rate for 2022 reflected the impact
of a tax deduction related to stock-based compensation recorded as a discrete
item in 2021. The large deduction and tax benefit resulted from the increase in
the Company's stock price as compared to the original grant date of the stock
compensation.
Liquidity and Capital Resources
Liquidity defines our ability to generate funds to support asset growth, meet deposit withdrawals, satisfy borrowing needs and otherwise operate on an ongoing basis. We invest the funds we do not need for daily operations primarily in overnight federal funds or in our interest-bearing account at theFederal Reserve . Our primary source of funding has been deposits. Average total deposits increased by$198.4 million , or 3.4%, to$6.11 billion for the first quarter of 2022 compared to the first quarter of 2021.Federal Reserve average balances decreased to$686.6 million in first quarter 2022 from$747.8 million in the first quarter of 2021. First quarter deposit balances are temporarily increased as a result of account holders' tax refunds. Overnight borrowings are also periodically utilized as a funding source to facilitate cash management, but average balances have generally not been significant. 43 -------------------------------------------------------------------------------- Our primary source of liquidity is available-for-sale securities which amounted to$907.3 million atMarch 31, 2022 , compared to$953.7 million atDecember 31, 2021 . Loan repayments, also a source of funds, were exceeded by new loan disbursements during first quarter 2022. As a result, atMarch 31, 2022 outstanding loans amounted to$4.16 billion , compared to$3.75 billion at the prior year end, an increase of$417.1 million , which was funded by deposits and securities repayments. Commercial loans, at fair value, decreased to$1.18 billion from$1.39 billion between those respective dates, a decrease of$207.5 million , which also provided funding for other loan categories. In 2019 and previous years, these loans were generally originated for sale into securitizations at six month intervals, but in 2020 we decided to retain such loans on the balance sheet. While we suspended originating such loans after the first quarter of 2020, we resumed originations, which consist primarily of non-SBA CRE bridge loans, in the third quarter of 2021. Our liquidity planning has not previously placed undue reliance on securitizations, and while our future planning excludes the impact of securitizations, other liquidity sources, primarily deposits, are determined to be adequate. While we do not have a traditional branch system, we believe that our core deposits, which include our demand, interest checking, savings and money market accounts, have similar characteristics to those of a bank with a branch system. The majority of our deposit accounts are obtained with the assistance of third-parties and as a result have historically been classified as brokered by theFDIC . PriorFDIC guidance for classification of deposit accounts as brokered was relatively broad, and generally included accounts which were referred to or "placed" with the institution by other companies. If the Bank ceases to be categorized as "well capitalized" under banking regulations, it will be prohibited from accepting, renewing or rolling over brokered deposits without the consent of theFDIC . In such a case, theFDIC's refusal to grant consent to our accepting, renewing or rolling over brokered deposits could effectively restrict or eliminate the ability of the Bank to operate its business lines as presently conducted. InDecember 2020 , theFDIC issued a new regulation which, in the third quarter of 2021, resulted in the majority of our deposits being reclassified from brokered to non-brokered. Certain accounts currently remain classified as brokered and require applications to theFDIC for reclassification. As ofMarch 31, 2022 , approximately$2.04 billion of our total deposit accounts of$6.23 billion were not insured byFDIC insurance, which requires identification of the depositor and is limited to$250,000 per identified depositor. Uninsured accounts may represent a greater liquidity risk thanFDIC -insured accounts, should large depositors withdraw funds as a result of negative financial developments either at the Bank or in the economy. Significant amounts of our uninsured deposits are comprised of small balances, such as anonymous gift cards and corporate incentive cards for which there is no identified depositor. We do not believe that such uninsured accounts present a significant liquidity risk. We focus on customer service which we believe has resulted in a history of customer loyalty. Certain components of our deposits do experience seasonality, creating greater excess liquidity at certain times. The largest deposit inflows occur in the first quarter of the year when certain of our accounts are credited with tax refund payments from theU.S. Treasury . While consumer deposit accounts including prepaid and debit card accounts comprise the vast majority of our funding needs, we maintain secured borrowing lines with theFederal Home Loan Bank ("FHLB") and theFederal Reserve . As ofMarch 31, 2022 , we had a line of credit with theFederal Reserve which exceededone billion dollars , which may be collateralized by various types of loans, but which we generally have not used. To mitigate the impact of the COVID-19 pandemic, theFederal Reserve has encouraged banks to utilize their lines to maximize the amount of funding available for credit markets. Accordingly, the Bank has borrowed on its line on an overnight basis and may do so in the future. The amount of loans pledged varies and the collateral may be unpledged at any time to the extent the collateral exceeds advances. We have pledged in excess of$1.3 billion of multi-family loans to the FHLB. As a result, we have approximately$1.1 billion of availability on our line of credit which we can access at any time. Additionally, in excess of$400 million of our available-for-sale securities areU.S. government agency securities which are highly liquid and may be pledged as additional collateral. Our collateralized line of credit with theFederal Reserve Bank ("FRB") is$1.3 billion as ofMarch 31, 2022 . No amounts are outstanding on either line atMarch 31, 2022 . We expect to continue to maintain our facilities with the FHLB andFederal Reserve . We actively monitor our positions and contingent funding sources daily. As a holding company conducting substantially all our business through our subsidiaries, our near term need for liquidity consists principally of cash for required interest payments on our trust preferred securities and senior debt. Our sources of liquidity are primarily comprised of dividends from the Bank to the holding company, and the issuance of debt. In the third quarter of 2020, holding company cash was increased by approximately$98.2 million as a result of the net proceeds of a senior debt offering. As ofMarch 31, 2022 , we had cash reserves of approximately$50.2 million at the holding company. A reduction from the prior quarter end reflected the impact of$15.0 million of common stock repurchases. The biannual interest payments on the$100.0 million of senior debt are approximately$2.4 million based on a fixed rate of 4.75%. Current quarterly interest payments on the$13.4 million of subordinated debentures are approximately$150,000 based on a floating rate of 3.25% over London Inter-bank Offered Rate ("LIBOR"). The senior debt matures inAugust 2025 and the subordinated debentures mature inMarch 2038 . In lieu of repayment of debt from Bank dividends, industry practice includes the issuance of new debt to repay maturing debt.
Included in our cash and cash-equivalents at
In the first quarter of 2022, purchases of$7.4 million of securities were exceeded by$31.6 million of redemptions. We had outstanding commitments to fund loans, including unused lines of credit, of$2.12 billion and$2.15 billion as ofMarch 31, 2022 andDecember 31 , 44 -------------------------------------------------------------------------------- 2021, respectively. The majority of our commitments are variable rate and originate with security backed lines of credit. The recorded amount of such commitments has, for many accounts, been based on the full amount of collateral in a customer's investment account. The funding requirements for such commitments occur on a measured basis over time and would be funded by normal deposit growth. Additionally, these loans are "demand" loans and as such, represent a contingency source of funding. We must comply with capital adequacy guidelines issued by theFDIC . A bank must, in general, have a Tier 1 leverage ratio of 5.00%, a ratio of Tier I capital to risk-weighted assets of 8.0%, a ratio of total capital to risk-weighted assets of 10.0% and a ratio of common equity tier 1 to risk weighted assets of 6.5% to be considered "well capitalized." The Tier I leverage ratio is the ratio of Tier 1 capital to average assets for the quarter. "Tier I capital" includes common shareholders' equity, certain qualifying perpetual preferred stock and minority interests in equity accounts of consolidated subsidiaries, less intangibles. AtMarch 31, 2022 , we were "well capitalized" under banking regulations. The reduction in the leverage ratio, which is based on average quarterly assets, from the prior quarter, reflected deposit inflows in the first quarter of 2022, which resulted primarily from tax refunds deposited into customer accounts, a significant amount of which is temporary until those funds are spent. The following table sets forth our regulatory capital amounts and ratios for the periods indicated: Common Tier 1 capital Tier 1 capital Total capital equity tier 1 to to average to risk-weighted to risk-weighted risk weighted assets ratio assets ratio assets ratio assets As of March 31, 2022 The Bancorp, Inc. 9.47% 14.15% 14.56% 14.15% The Bancorp Bank 10.19% 15.23% 15.64% 15.23% "Well capitalized" institution (under FDIC regulations-Basel III) 5.00% 8.00% 10.00% 6.50% As ofDecember 31, 2021 The Bancorp, Inc. 10.40% 14.72% 15.13% 14.72% The Bancorp Bank 10.98% 15.48% 15.88% 15.48% "Well capitalized" institution (under FDIC regulations-Basel III) 5.00% 8.00% 10.00% 6.50%
Asset and Liability Management
The management of rate sensitive assets and liabilities is essential to controlling interest rate risk and optimizing interest margins. An interest rate sensitive asset or liability is one that, within a defined time period, either matures or experiences an interest rate change in line with general market rates. Interest rate sensitivity measures the relative volatility of an institution's interest margin resulting from changes in market interest rates. While it is difficult to predict the impact of inflation and responsiveFederal Reserve rate changes on our net interest income, theFederal Reserve has historically utilized interest rate increases in the overnight federal funds rate as one tool in fighting inflation. Our largest funding source, prepaid and debit card accounts, contractually adjust to only a portion of increases or decreases in rates which are largely determined by suchFederal Reserve actions. That pricing has generally supported the maintenance of a balance sheet for which net interest income tends to increase with increases in rates. While deposits reprice to only a portion of rate increases, interest earning assets tend to adjust more fully to rate increases at contractual pricing intervals which may be monthly or up to several years. Most of our loans and securities reprice monthly or quarterly, although some reprice over longer periods. Additionally, the impact of loan interest rate floors which must be exceeded before rates on certain loans increase, may result in decreases in net interest income with lesser increases in rates. Primarily as a result of the impact of such interest rate floors, cumulativeFederal Reserve interest rate increases approaching 200 basis points might be required to increase net interest income. We monitor, manage and control interest rate risk through a variety of techniques, including the use of traditional interest rate sensitivity analysis (also known as "gap analysis") and an interest rate risk management model. With the interest rate risk management model, we project future net interest income and then estimate the effect of various changes in interest rates on that projected net interest income. We also use the interest rate risk management model to calculate the change in net portfolio value over a range of interest rate change scenarios. Traditional gap analysis involves arranging our interest earning assets and interest bearing liabilities by repricing periods and then computing the difference (or "interest rate sensitivity gap") between the assets and liabilities that we estimate will reprice during each time period and cumulatively through the end of each time period. Both interest rate sensitivity modeling and gap analysis are done at a specific point in time and involve a variety of significant estimates and assumptions. Interest rate sensitivity modeling requires, among other things, estimates of how much and when yields and costs on individual categories of interest earning assets and interest bearing liabilities will respond to general changes in market rates, future cash flows and discount rates. Gap analysis requires estimates as to when individual categories of interest-sensitive assets and liabilities will reprice, and assumes that assets and liabilities assigned to the same repricing period will reprice at the same time and in the same amount. Gap analysis does not account for the fact that repricing of assets and liabilities is discretionary and subject to competitive and other 45 -------------------------------------------------------------------------------- pressures. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities. A gap is considered negative when the amount of interest rate sensitive liabilities exceeds interest rate sensitive assets. During a period of falling interest rates, a positive gap would tend to adversely affect net interest income, while a negative gap would tend to result in an increase in net interest income. During a period of rising interest rates, a positive gap would tend to result in an increase in net interest income while a negative gap would tend to affect net interest income adversely. The following table sets forth the estimated maturity or repricing structure of our interest earning assets and interest bearing liabilities atMarch 31, 2022 . Except as stated below, the amounts of assets or liabilities shown which reprice or mature during a particular period were determined in accordance with the contractual terms of each asset or liability. The majority of demand and interest bearing demand deposits and savings deposits are assumed to be "core" deposits, or deposits that will generally remain with us regardless of market interest rates. We estimate the repricing characteristics of these deposits based on historical performance, past experience, judgmental predictions and other deposit behavior assumptions. However, we may choose not to reprice liabilities proportionally to changes in market interest rates for competitive or other reasons. Additionally, although non-interest bearing demand accounts are not paid interest, we estimate certain of the balances will reprice as a result of the contractual fees that are paid to the affinity groups which are based upon a rate index, and therefore are included in interest expense. We have adjusted the demand and interest checking balances in the table downward, to better reflect the impact of their partial adjustment to changes in rates. Loans and security balances, which adjust more fully to market rate changes, are based upon actual balances. The rates on the vast majority of commercial loans, at fair value, totaling approximately$1.18 billion atMarch 31, 2022 , were at their floors. Additionally, the rates on the vast majority of IBLOC loans totaling approximately$907.1 million atMarch 31, 2022 , were at their floors. The table does not assume any prepayment of fixed-rate loans and mortgage-backed securities are scheduled based on their anticipated cash flow, including prepayments based on historical data and current market trends. The table does not necessarily indicate the impact of general interest rate movements on our net interest income because the repricing and related behavior of certain categories of assets and liabilities is beyond our control as, for example, prepayments of loans and withdrawal of deposits. As a result, certain assets and liabilities indicated as repricing within a stated period may in fact reprice at different times and at different rate levels. 1-90 91-364 1-3 3-5 Over 5 Days Days Years Years Years (dollars in thousands) Interest earning assets: Commercial loans, at fair value$ 1,057,763 $ 11,365 $ 23,675 $ 81,312 $ 6,770 Loans, net of deferred loan fees and costs 3,163,600 110,915 303,960 376,503 209,320 Investment securities 488,023 78,077 122,057 138,081 81,100 Interest earning deposits 662,827 - - - - Total interest earning assets 5,372,213 200,357 449,692 595,896 297,190 Interest bearing liabilities: Demand and interest checking 3,600,418 52,494 52,494 - - Savings and money market 180,560 361,120 180,560 - - Securities sold under agreements to repurchase 42 - - - - Senior debt and 13,401 - 98,774 - - subordinated debentures Total interest bearing liabilities 3,794,421 413,614 331,828 - - Gap$ 1,577,792 $ (213,257) $ 117,864 $ 595,896 $ 297,190 Cumulative gap$ 1,577,792 $ 1,364,535 $ 1,482,399 $ 2,078,295 $ 2,375,485 Gap to assets ratio 22% (3)% 2% 8% 5% Cumulative gap to assets ratio 22% 19% 21% 29% 34%
* While demand deposits are non-interest bearing, related fees paid to affinity groups may reprice according to specified indices.
The methods used to analyze interest rate sensitivity in this table have a number of limitations. Certain assets and liabilities may react differently to changes in interest rates even though they reprice or mature in the same or similar time periods. The interest rates on certain assets and liabilities may change at different times than market interest rates, with some changing in advance of changes in market rates and some lagging behind changes in market rates. Additionally, the actual prepayments and withdrawals we experience when interest rates change may deviate significantly from those assumed in calculating the data shown in the table. Accordingly, actual results can and often do differ from projections. While the gap table above shows a positive gap, cumulativeFederal Reserve interest rate increases approaching 200 basis points might be required to increase net interest income, primarily as a result of interest rate floors. Financial Condition General. Our total assets atMarch 31, 2022 were$7.08 billion , of which our total loans were$4.16 billion , and our commercial loans, at fair value, were$1.18 billion . AtDecember 31, 2021 , our total assets were$6.84 billion , of which our total loans were$3.75 billion , and our commercial loans, at fair value were$1.39 billion . The increase in assets reflected an increase in deposits which reflected the seasonal deposit inflows resulting from federal tax refunds. 46
-------------------------------------------------------------------------------- Interest earning deposits and federal funds sold. AtMarch 31, 2022 , we had a total of$662.8 million of interest earning deposits compared to$596.4 million atDecember 31, 2021 , an increase of$66.4 million . These deposits were comprised primarily of balances at theFederal Reserve , which reflected the elevated seasonal tax refund deposits noted above. Investment portfolio. For detailed information on the composition and maturity distribution of our investment portfolio, see Note 5 to the consolidated financial statements. Total investment securities decreased to$907.3 million atMarch 31, 2022 , a decrease of$46.4 million , or 4.9%, fromDecember 31, 2021 . The decrease reflected securities repayments. Under the accounting guidance related to CECL, changes in fair value of securities unrelated to credit losses, continue to be recognized through equity. However, credit-related losses are recognized through an allowance, rather than through a reduction in the amortized cost of the security. CECL accounting guidance also permits the reversal of allowances for credit deterioration in future periods based on improvements in credit, which was not included in previous guidance. Generally, a security's credit-related loss is the difference between its amortized cost basis and the best estimate of its expected future cash flows discounted at the security's effective yield. That difference is recognized through the income statement, as with prior guidance, but is renamed a provision for credit loss. For the three months endedMarch 31, 2022 and 2021, we recognized no credit-related losses on our portfolio. Investments inFederal Home Loan andAtlantic Central Bankers Bank stock are recorded at cost and amounted to$1.7 million atMarch 31, 2022 and$1.7 million atDecember 31, 2021 .Federal Home Loan Bank stock purchases are required in order to borrow from theFederal Home Loan Bank . Both theFHLB andAtlantic Central Bankers Bank require its correspondent banking institutions to hold stock as a condition of membership. AtMarch 31, 2022 andDecember 31, 2021 no investment securities were encumbered as there were no borrowings as of those dates. Of the six securities we purchased from our securitizations, all have been repaid except those from CRE-2 and CRE-6. Payments on CRE-6 are on schedule. As ofMarch 31, 2022 , the principal balance of the security we owned issued by CRE-2 was$12.6 million . Repayment is expected from the workout or disposition of commercial real estate collateral, after repayment of more senior tranches. Our$12.6 million security has 47% excess credit support; thus, losses of 47% of remaining security balances would have to be incurred, prior to any loss on our security. Additionally, the commercial real estate collateral supporting three of the remaining four loans was re-appraised in 2020 and 2021. The updated appraised value is approximately$70.3 million , which is net of$3.5 million due to the servicer. The remaining principal to be repaid on all securities is approximately$66.2 million and, as noted, our security is scheduled to be repaid prior to 47% of the outstanding securities. However, any future reappraisals could result in further decreases in collateral valuation. While available information indicates that the value of existing collateral will be adequate to repay our security, there can be no assurance that such valuations will be realized upon loan resolutions, and that deficiencies will not exceed the 47% credit support. The following table shows the contractual maturity distribution and the weighted average yield of our investment portfolio security as ofMarch 31, 2022 (in thousands). The weighted average yield was calculated by dividing the amount of individual securities to total securities in each category, multiplying by the yield of the individual security and adding the results of those individual computations. After After Zero one to five to Over to one Average five Average ten Average ten Average Available-for-sale year yield years yield years yield years yield TotalU.S. Government agency securities $ - -$ 3,025 2.27%$ 14,269 2.72%$ 12,912 2.32%$ 30,206 Asset-backed securities - - 6,158 1.91% 139,976 1.85% 210,205 2.03% 356,339
Tax-exempt obligations of states and political subdivisions * - - 3,583 2.77% - - - - 3,583 Taxable obligations of states and political subdivisions - - 39,745 3.18% 6,458 4.28% - - 46,203 Residential mortgage-backed securities - - 41,521 2.45% 17,608 3.01% 107,970 1.67% 167,099 Collateralized mortgage obligation securities - - 452 1.83% 8,151 2.41% 45,223 1.98% 53,826 Commercial mortgage-backed securities 20,797 2.58% 47,840 2.61% 32,078 1.21% 142,677 2.94% 243,392 Corporate debt securities - - - - - - 6,690 3.68% 6,690 Total$ 20,797 $ 142,324 $ 218,540 $ 525,677 $ 907,338 Weighted average yield 2.58% 2.69% 2.00% 2.21%
* If adjusted to their taxable equivalents, yields would approximate 3.51% for one to five years at a Federal tax rate of 21%.
Commercial loans, at fair value. Commercial loans, at fair value are comprised of non-SBA CRE loans and SBA loans which had been originated for sale or securitization through first quarter 2020, and which are now being held on the balance sheet. Non-SBA CRE loans and SBA loans are valued using a discounted cash flow analysis based upon pricing for similar loans where market indications of the sales price of such loans are not available, on a pooled basis. Commercial loans, at fair value decreased to$1.18 billion atMarch 31, 2022 from$1.39 billion atDecember 31, 2021 reflecting the impact of loan repayments. These loans continue to be accounted for at 47 -------------------------------------------------------------------------------- fair value. In the third quarter of 2021 we resumed originating non-SBA CRE loans, after suspending such originations in the first quarter of 2020. These originations reflect lending criteria similar to the existing loan portfolio and are primarily comprised of multi-family (apartment buildings) collateral. The new originations, which are intended to be held for investment, are accounted for at amortized cost. Interest rates shown in that table represent rate floors, set at origination. Rates on new loans will vary with market rates for such loans. Loan portfolio. Total loans increased to$4.16 billion atMarch 31, 2022 from$3.75 billion atDecember 31, 2021 . The following table summarizes our loan portfolio, excluding loans held at fair value, by loan category for the periods indicated (in thousands): March 31, December 31, 2022 2021 SBL non-real estate$ 122,387 $ 147,722 SBL commercial mortgage 385,559 361,171 SBL construction 31,432 27,199 Small business loans 539,378 536,092 Direct lease financing 538,616 531,012 SBLOC / IBLOC * 2,067,233 1,929,581 Advisor financing ** 146,461 115,770 Real estate bridge loans 803,477 621,702 Other loans *** 61,096 5,014 4,156,261 3,739,171 Unamortized loan fees and costs 8,037
8,053
Total loans, including unamortized loan fees and costs$ 4,164,298 $ 3,747,224 March 31 ,December 31, 2022 2021
SBL loans, including costs net of deferred fees of
541,437
SBL loans included in commercial loans, at fair value 183,408
199,585
Total small business loans ****$ 728,870 $
741,022
* Securities Backed Lines of Credit, or SBLOC, are collateralized by marketable securities, while Insurance Backed Lines of Credit, or IBLOC, are collateralized by the cash surrender value of insurance policies. AtMarch 31, 2022 andDecember 31, 2021 , respectively, IBLOC loans amounted to$907.1 million and$788.3 million . ** In 2020, the Company began originating loans to investment advisors for purposes of debt refinance, acquisition of another firm or internal succession. Maximum loan amounts are subject to loan-to-value ratios of 70%, based on third-party business appraisals, but may be increased depending upon the debt service coverage ratio. Personal guarantees and blanket business liens are obtained as appropriate. *** Includes demand deposit overdrafts reclassified as loan balances totaling$310,000 and$322,000 atMarch 31, 2022 andDecember 31, 2021 , respectively. Estimated overdraft charge-offs and recoveries are reflected in the allowance for credit losses and have been immaterial. **** The small business loans held at fair value are comprised of the government guaranteed portion of SBA 7a loans at the dates indicated. A reduction in SBL non-real estate from$147.7 million to$122.4 million in the first quarter of 2022 resulted fromU.S. government repayments of$21.1 million of PPP loans authorized by The Consolidated Appropriations Act, 2021. PPP loans totaled$23.7 million atMarch 31, 2022 and$44.8 million atDecember 31, 2021 , respectively.
The following table summarizes our small business loan portfolio, including
loans held at fair value, by loan category as of
Loan principal
U.S. government guaranteed portion of SBA loans (a) $
368,932
Paycheck Protection Program loans (PPP) (a) 23,713 Commercial mortgage SBA (b) 191,635 Construction SBA (c) 18,614
Non-guaranteed portion of
16,700 Total principal$ 720,072 Unamortized fees and costs 8,798 Total small business loans$ 728,870
(a)This is the portion of SBA 7a loans (7a) and PPP loans which have been
guaranteed by the
(b)Substantially all these loans are made under the SBA 504 Fixed Asset Financing program (504) which dictates origination date loan-to-value percentages ("LTV"), generally 50-60%, to which the Bank adheres.
(c)Of the $18.6 million in Construction SBA loans,
(d)The$100.5 million represents the unguaranteed portion of 7a loans which are 70% or more guaranteed by theU.S. government. 7a loans are not made on the basis of real estate LTV; however, they are subject to SBA's "All Available Collateral" rule which mandates that to the extent a borrower or its 20% or greater principals have available collateral (including personal residences), the collateral must be pledged to fully collateralize the loan, after applying SBA-determined liquidation rates. In addition, all 7a and 504 loans require the personal guaranty of all 20% or greater owners. 48 -------------------------------------------------------------------------------- (e)The$16.7 million of non-SBA loans is comprised of approximately 20 conventional coffee/doughnut/carryout franchisee note purchases. The majority of purchased notes were made to multi-unit operators, are considered seasoned and have performed as agreed. The following table summarizes our small business loan portfolio, excluding the government guaranteed portion of SBA 7a loans and PPP loans, by loan type as ofMarch 31, 2022 (dollars in thousands): SBL commercial SBL non-real mortgage* SBL construction* estate Total % Total Hotels (except casino hotels) and motels$ 65,808 $ 5,490 $ 21$ 71,319 22% Full-service restaurants 12,641 1,999 2,370 17,010 5% Outpatient mental health and substance abuse centers 14,713 - - 14,713 4% Child day care services 12,278 - 962 13,240 4% Baked goods stores 4,382 - 8,727 13,109 4% Car washes 10,357 746 119 11,222 3% Offices of lawyers 9,310 - - 9,310 3% Assisted living facilities for the elderly 8,844 - - 8,844 3% Funeral homes and funeral services 8,233 - - 8,233 3% Gasoline stations with convenience stores 8,219 - - 8,219 3% Lessors of nonresidential buildings (except miniwarehouses) 7,943 - - 7,943 2% General warehousing and storage 7,036 - - 7,036 2% Fitness and recreational sports centers 456 4,507 1,561 6,524 2% Limited-service restaurants 1,129 1,820 3,040 5,989 2% All other amusement and recreation industries 4,581 33 1,069 5,683 2% Other technical and trade schools 44 4,867 - 4,911 1% Other spectator sports 4,790 - - 4,790 1% Other warehousing and storage 3,200 - - 3,200 1% Plumbing, heating, and air-conditioning contractors 2,893 - 267 3,160 1% Offices of dentists 2,595 372 91 3,058 1% All other miscellaneous wood product manufacturing 2,987 - - 2,987 1% Offices of physicians 2,743 - 8 2,751 1% Elementary and secondary schools 2,464 - - 2,464 1%
Landscaping
services 1,055 144 1,251 2,450 1%
Lessors of other
real estate
property 2,416 - - 2,416 1%
All other
miscellaneous
general purpose
machinery
manufacturing 2,416 - - 2,416 1%
Sewing, needlework,
and piece goods
stores 2,311 - - 2,311 1%
Automotive body,
paint, and interior
repair and
maintenance 1,720 - 577 2,297 1%
Pet care (except
veterinary)
services 1,895 - 345 2,240 1%
Amusement arcades 2,208 - - 2,208 1%
Caterers 2,097 - 105 2,202 1%
Offices of real
estate agents and
brokers 2,155 - - 2,155 1%
Vocational
rehabilitation
services 2,016 - - 2,016 1%
Other** 44,061 1,450 23,491 69,002 18%
$ 261,996 $ 21,428 $ 44,004 $ 327,428 100%
* Of the SBL commercial mortgage and SBL construction loans, $73.2 million
represents the total of the non-guaranteed portion of SBA 7a loans and non-SBA
loans. The balance of those categories represents SBA 504 loans with 50%-60%
origination date loan-to-values.
** Loan types less than
49--------------------------------------------------------------------------------
The following table summarizes our small business loan portfolio, excluding the
government guaranteed portion of SBA 7a loans and PPP loans, by state as of
SBL
commercial SBL non-real
mortgage* SBL construction* estate Total % Total
Florida $ 62,188 $ 383 $ 5,316 $ 67,887 21%
California 44,204 1,999 4,034 50,237 15%
North Carolina 23,625 6,854 2,438 32,917 10%
Pennsylvania 28,802 - 2,561 31,363 10%
New York 17,678 5,490 2,917 26,085 8%
Illinois 14,824 - 2,176 17,000 5%
Texas 12,277 - 3,718 15,995 5%
New Jersey 7,097 - 6,712 13,809 4%
Colorado 4,093 5,513 1,382 10,988 3%
Virginia 9,302 - 1,456 10,758 3%
Tennessee 8,189 - 383 8,572 3%
Georgia 3,017 - 1,340 4,357 1%
Ohio 3,672 - 516 4,188 1%
Michigan 3,301 - 796 4,097 1%
Washington 2,767 - 193 2,960 1%
Other States 16,960 1,189 8,066 26,215 9%
$ 261,996 $ 21,428 $ 44,004 $ 327,428 100%
* Of the SBL commercial mortgage and SBL construction loans, $73.2 million
represents the total of the non-guaranteed portion of SBA 7a loans and non-SBA
loans. The balance of those categories represents SBA 504 loans with 50%-60%
origination date loan-to-values.
The following table summarizes the 10 largest loans in our small business loan
portfolio, including loans held at fair value, as of
Type* State SBL commercial
mortgage*
Mental health and substance abuse center Florida $ 10,156 Hotel Florida 8,729 Lawyers office California 8,581 General warehousing and storage Pennsylvania 7,036 Hotel North Carolina 5,774 Hotel New York 5,419 Assisted living facility Florida 5,153 Technical and trade school North Carolina 4,867 Hotel North Carolina 4,704 Mental health and substance abuse center Pennsylvania 4,557 Total $ 64,976
* All the top 10 loans are 504 SBA loans with 50%-60% origination date
loan-to-value. The top 10 loan table above does not include loans to the extent
that they are
Commercial real estate loans, primarily bridge loans, excluding SBA loans, are as follows including LTV at origination as ofMarch 31, 2022 (dollars in thousands): Weighted average Weighted origination date average # Loans Balance LTV interest rate Real estate bridge loans (multi-family apartment loans recorded at book value)* 74$ 803,477 74% 3.99% Non-SBA commercial real estate loans, at fair value: Multi-family (apartment bridge loans)* 67$ 858,200 76% 4.71% Hospitality (hotels and lodging) 9 70,600 65% 5.68% Retail 5 59,233 71% 4.28% Other 6 15,914 73% 5.13% 87 1,003,947 75% 4.76% Fair value adjustment (6,470) Total non-SBA commercial real estate loans, at fair value 997,477 Total commercial real estate loans$ 1,800,954 75% 4.43% *In the third quarter of 2021, we resumed the origination of multi-family apartment loans. These are similar to the multi-family apartment loans carried at fair value, but at origination are intended to be held on the balance sheet, so are not accounted for at fair value. 50
--------------------------------------------------------------------------------
The following table summarizes our commercial real estate loans, primarily bridge loans excluding SBA loans, by state as ofMarch 31, 2022 (dollars in thousands): Balance Origination date LTV Texas$ 708,304 76% Georgia 171,385 74% Ohio 122,573 72% Alabama 89,835 74% Florida 80,089 73% Tennessee 64,583 68% Arizona 55,319 74% Other States each <$55 million 508,866 74% Total$ 1,800,954 74%
The following table summarizes our 15 largest commercial real estate loans,
primarily bridge loans, excluding SBA loans, as of
Balance Origination date LTV
Texas $ 41,040 75%
Texas 39,345 79%
Texas 37,283 75%
Texas 36,992 80%
Tennessee 30,361 62%
Missouri 30,000 72%
Texas 29,962 75%
Mississippi 28,853 79%
Texas 28,500 77%
North Carolina 27,969 77%
Texas 27,481 77%
New Jersey 26,800 77%
Oklahoma 26,800 78%
Ohio 26,403 74%
Texas 25,850 77%
15 Largest loans $ 463,639 76%
The following table summarizes our institutional banking portfolio by type as of
Type Principal % of total
Securities backed lines of credit (SBLOC)
146,461 7%
Total $ 2,213,694 100%
For SBLOC, we generally lend up to 50% of the value of equities and 80% for
investment grade securities. While equities have fallen in excess of 30% in
recent years, the reduction in collateral value of brokerage accounts
collateralizing SBLOCs generally has been less, for two reasons. First, many
collateral accounts are "balanced" and accordingly, have a component of debt
securities, which have either not decreased in value as much as equities, or in
some cases may have increased in value. Secondly, many of these accounts have
the benefit of professional investment advisors who provided some protection
against market downturns, through diversification and other means. Additionally,
borrowers often utilize only a portion of collateral value, which lowers the
percentage of principal to the market value of collateral.
The following table summarizes our top 10 SBLOC loans as of March 31, 2022
(dollars in thousands):
Principal amount % Principal to collateral
$ 17,506 38%
14,428 29%
9,465 33%
9,376 61%
9,034 38%
8,441 72%
7,907 67%
7,496 74%
6,690 35%
6,492 13%
Total and weighted average $ 96,835 45%
51
-------------------------------------------------------------------------------- IBLOC loans are backed by the cash value of life insurance policies which have been assigned to us. We lend up to 100% of such cash value. Our underwriting standards require approval of the insurance companies which carry the policies backing these loans. Currently, eight insurance companies have been approved and, as ofJanuary 26, 2022 , all were rated A (excellent or better) by AM BEST.
The following table summarizes our direct lease financing portfolio* by type as
of
Principal balance % Total
Construction $ 98,638 18%
Government agencies and public institutions** 82,090 15%
Waste management and remediation services 63,823
12%
Real estate and rental and leasing 55,856 10% Retail trade 45,615 8% Wholesale purchase 43,324 8% Health care and social assistance 30,494
6%
Transportation and warehousing 28,913
5%
Professional, scientific, and technical services 19,485 4% Wholesale trade 16,558 3% Manufacturing 16,406 3% Educational services 8,154 2% Other 29,260 6% Total $ 538,616 100%
* Of the total
** Includes public universities and school districts.
The following table summarizes our direct lease financing portfolio by state as
of
Principal balance % Total
Florida $ 91,293 17%
Utah 47,354 9%
California 46,693 9%
New Jersey 39,061 7%
Pennsylvania 34,417 6%
New York 30,535 6%
North Carolina 25,473 5%
Maryland 23,543 4%
Texas 21,873 4%
Connecticut 16,175 3%
Washington 15,599 3%
Georgia 12,873 2%
Idaho 10,569 2%
Alabama 10,111 2%
Tennessee 9,827 2%
Other States 103,220 19%
Total $ 538,616 100%
52
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The following table presents loan categories by maturity for the period
indicated. Actual repayments historically have, and will likely in the future,
continue to differ significantly from contractual maturities because individual
borrowers generally have the right to prepay loans, with or without prepayment
penalties. Please see "Asset and Liability Management" which addresses interest
rate risk.
March 31, 2022
Within One to five After five but
one year years within 15 years After 15 years Total
(in thousands)
SBL non-real
estate $ 14,930 $ 62,709 $ 126,676 $ 1,394 $ 205,709
SBL commercial
mortgage 18,045 3,083 96,485 373,782 491,395
SBL construction 3,856 - - 27,910 31,766
Leasing 79,548 427,027 25,731 6,310 538,616
SBLOC/IBLOC 2,067,233 - - - 2,067,233
Advisor
financing - 771 145,690 - 146,461
Real estate
bridge lending - 803,477 - - 803,477
Other loans 23,261 20,531 2,333 16,924 63,049
Loans at fair
value excluding
SBL 696,770 296,958 - 3,749 997,477
$ 2,903,643 $ 1,614,556 $ 396,915 $ 430,069$ 5,345,183 Loan maturities after one year with: Fixed rates SBL non-real estate$ 23,713 $ - $ -$ 23,713 Leasing 427,027 25,731 6,310 459,068 Advisor financing 771 145,690 - 146,461 Other loans 2,419 320 16,606 19,345 Loans at fair value excluding SBL 65,397 - - 65,397 Total loans at fixed rates 519,327 171,741 22,916 713,984 Variable rates SBL non-real estate 38,996 126,676 1,394 167,066 SBL commercial mortgage 3,083 96,485 373,782 473,350 SBL construction - - 27,910 27,910 Real estate bridge lending 803,477 - - 803,477 Other loans 18,112 2,013 318 20,443 Loans at fair value excluding SBL 231,561 - 3,749 235,310 Total at variable rates 1,095,229 225,174 407,153 1,727,556 Total$ 1,614,556 $ 396,915 $ 430,069 $ 2,441,540 Allowance for credit losses. We review the adequacy of our allowance for credit losses on at least a quarterly basis to determine a provision for credit losses to maintain our allowance at a level we believe is appropriate to recognize current expected credit losses. OurChief Credit Officer oversees the loan review department, which measures the adequacy of the allowance for credit losses independently of loan production officers. For detailed information on the allowance for credit loss methodology, please see Note 6 to the consolidated financial statements. AtMarch 31, 2022 , the allowance for credit losses amounted to$19.1 million which represented a$1.2 million increase compared to the$17.8 million atDecember 31, 2021 . The increase reflected the impact of loan growth on the CECL model and higher allowances on specific loans atMarch 31, 2022 . Troubled debt restructured loans are individually considered by comparing collateral values with principal outstanding and establishing specific reserves within the allowance. AtMarch 31, 2022 , there were 14 troubled debt restructured loans with a balance of$5.3 million which had specific reserves of$655,000 . These reserves related primarily to the non-guaranteed portion of SBA loans for start-up businesses.
A description of loan review coverage targets is set forth below.
The following loan review percentages are performed over periods of eighteen to twenty-four months. AtMarch 31, 2022 , in excess of 50% of the total continuing loan portfolio was reviewed by the loan review department or, for small business loans, rated internally by that department. In addition to the review of all classified loans, the targeted coverages and scope of the reviews are risk-based and vary according to each portfolio as follows: Securities Backed Lines of Credit (SBLOC) - The targeted review threshold for 2022 is 40%, including a sample focusing on the largest 25% of SBLOCs by commitment. A random sample of at least twenty loans will be reviewed each quarter. AtMarch 31, 2022 , approximately 51% of the SBLOC portfolio had been reviewed. 53
-------------------------------------------------------------------------------- Insurance Backed Lines of Credit (IBLOC) - The targeted review threshold for 2022 is 40%, including a sample focusing on the largest 25% of IBLOCs by commitment. A random sample of at least twenty loans will be reviewed each quarter. AtMarch 31, 2022 , approximately 55% of the IBLOC portfolio had been reviewed. Advisor Financing - The targeted review threshold for 2022 is 50%. AtMarch 31, 2022 , approximately 83% of the advisor financing portfolio had been reviewed. The loan balance review threshold is$1.0 million . Small Business Loans - The targeted review threshold for 2022 is 60%, to be rated and/or reviewed within 90 days of funding, excluding fully guaranteed loans purchased for CRA, and fully guaranteed PPP loans. The loan balance review threshold is$1.5 million and additionally includes any classified loans. AtMarch 31, 2022 , approximately 66% of the non-government guaranteed loan portfolio had been reviewed.
Direct Lease Financing - The targeted review threshold for 2022 is 35%. At
Commercial Real EstateBridge Loans , at fair value andCommercial Real Estate Bridge Loans held for investment (floating rate excluding SBA, which are included in Small Business Loans above) - The targeted review threshold for 2022 is 60%. Floating rate loans will be reviewed initially within 90 days of funding and will be monitored on an ongoing basis as to payment status. Subsequent reviews will be performed for relationships over$10 million . AtMarch 31, 2022 , approximately 100% of the non-SBA CRE floating rate loans outstanding for more than 90 days had been reviewed. Commercial Real Estate Loans, at fair value (fixed rate excluding SBA which are included in Small Business Loans above) - The targeted review threshold for 2022 is 100%. AtMarch 31, 2022 , approximately 100% of the non-SBA CRE fixed rate portfolio had been reviewed. Specialty Lending - Specialty Lending, defined as commercial loans unique in nature that do not fit into other established categories, will have a review coverage threshold of 100% for non-CRA loans. AtMarch 31, 2022 , approximately 100% of the non-CRA loans had been reviewed. Home Equity Lines of Credit or HELOC - Due to the small number and outstanding balances of HELOCs only the largest loans will be subject to review. The remaining loans are monitored and, if necessary, adversely classified under the Uniform Retail Credit Classification and Account Management Policy. AtMarch 31, 2022 , approximately 68% of the HELOC portfolio had been reviewed. The following tables present delinquencies by type of loan as of the dates specified (in thousands): March 31, 2022 30-59 Days 60-89 Days 90+ Days Total Total past due past due still accruing
Non-accrual past due Current loans SBL non-real estate$ 2,551 $ 1,135 $ 420$ 1,639 $ 5,745 $ 116,642 $ 122,387 SBL commercial mortgage 283 215 - 589 1,087 384,472 385,559 SBL construction - - - 710 710 30,722 31,432 Direct lease financing 734 652 613 8 2,007 536,609 538,616 SBLOC / IBLOC 1,706 - - - 1,706 2,065,527 2,067,233 Advisor financing - - - - - 146,461 146,461 Real estate bridge loans - - - - - 803,477 803,477 Other loans 274 - 3,564 675 4,513 56,583 61,096 Unamortized loan fees and costs - - - - - 8,037 8,037$ 5,548 $ 2,002 $ 4,597$ 3,621 $ 15,768 $ 4,148,530 $ 4,164,298 December 31, 2021 30-59 Days 60-89 Days 90+ Days Total Total past due past due still accruing Non-accrual past due Current loans SBL non-real estate$ 1,375 $ 3,138 $ 441$ 1,313 $ 6,267 $ 141,455 $ 147,722 SBL commercial mortgage - 220 - 812 1,032 360,139 361,171 SBL construction - - - 710 710 26,489 27,199 Direct lease financing 1,833 692 20 254 2,799 528,213 531,012 SBLOC / IBLOC 5,985 289 - - 6,274 1,923,307 1,929,581 Advisor financing - - - - - 115,770 115,770 Real estate bridge loans - - - - - 621,702 621,702 Other loans - - - 72 72 4,942 5,014 Unamortized loan fees and costs - - - - - 8,053 8,053$ 9,193 $ 4,339 $ 461$ 3,161 $ 17,154 $ 3,730,070 $ 3,747,224 Although we consider our allowance for credit losses to be adequate based on information currently available, future additions to the allowance may be necessary due to changes in economic conditions, our ongoing loss experience and that of our peers, changes in 54
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management's assumptions as to future delinquencies, recoveries and losses, deterioration of specific credits and management's intent with regard to the disposition of loans and leases.
The following table summarizes select asset quality ratios for each of the
periods indicated:
For the three months
ended
or as of March 31,
2022 2021
Ratio of:
Allowance for credit losses to total loans 0.46% 0.58%
Allowance for credit losses to non-performing loans * 231.82%
119.65%
Non-performing loans to total loans* 0.20%
0.49%
Non-performing assets to total assets * 0.38%
0.40%
Net charge-offs to average loans 0.01%
0.01%
* Includes loans 90 days past due still accruing interest.
The ratio of the allowance for credit losses to total loans decreased to 0.46% as ofMarch 31, 2022 from 0.58% atMarch 31, 2021 . The reduction reflected a decrease in allowances on specific loans while total loans outstanding between the periods increased significantly. The ratio of the allowance for credit losses to non-performing loans increased to 231.82% atMarch 31, 2022 , from 119.65% atMarch 31, 2021 , primarily as a result of a decrease in non-performing SBA loans. That decrease was also reflected in the lower ratio of non-performing assets to total assets which decreased to 0.38% atMarch 31, 2022 from 0.40% atMarch 31, 2021 , the impact of which was partially offset by a decrease in assets. Net charge-offs to average loans remained constant at 0.01% for the three months endedMarch 31, 2022 compared to 0.01% for the three months endedMarch 31, 2021 . Net charge-offs. Net charge-offs were$258,000 for the three months endedMarch 31, 2022 , an increase of$8,000 from net charge-offs of$250,000 during the comparable period of 2021. Charge-offs in both periods resulted primarily from direct lease financing and non- real estate SBL charge-offs. SBL charge-offs result primarily from the non-government guaranteed portion of SBA loans.
The following tables reflect the relationship of average loan volume and net charge-offs by segment (dollars in thousands):
March 31, 2022
SBL
SBL non-real commercial Direct lease Advisor Real estate
estate mortgage SBL construction financing SBLOC / IBLOC financing bridge loans Other loans
Charge-offs $ 98 $ - $ - $ 191 $ - $ - $ - $ -
Recoveries 12 - - 19 - - - -
Net
charge-offs $ 86 $ - $ - $ 172 $ - $ - $ - $ -
Average loan
balance $ 135,055 $ 373,365 $ 29,316 $ 534,814 $ 1,998,407 $ 131,116 $ 712,589 $ 33,055
Ratio of net
charge-offs
during the
period to
average loans
during the
period 0.06% - - 0.03% - - - -
March 31, 2021
SBL
SBL non-real commercial Direct lease Advisor
estate mortgage SBL construction financing SBLOC / IBLOC financing Other loans
Charge-offs $ 144 $ - $ - $ 97 $ 15 $ - $ -
Recoveries 4 - - 2 - - -
Net charge-offs $ 140 $ - $ - $ 95 $ 15 $ - $ -
Average loan
balance $ 280,382 $ 310,415 $ 20,483 $ 473,249 $ 1,586,223 $ 53,601 $ 6,439
Ratio of net
charge-offs
during the
period to
average loans
during the
period 0.05% - - 0.02% - - -
Non-accrual Loans, Loans 90 Days Delinquent and Still Accruing, Other Real
Estate Owned and Troubled Debt Restructurings. Loans are considered to be
non-performing if they are on a non-accrual basis or they are past due 90 days
or more and still accruing interest. A loan which is past due 90 days or more
and still accruing interest remains on accrual status only when it is both
adequately secured as to principal and interest, and is in the process of
collection. Troubled debt restructurings are loans with terms that have been
renegotiated to provide a reduction or deferral of interest or principal,
because of a weakening in the financial positions of the borrowers. We had
$18.9 million of other real estate owned ("OREO") at March 31, 2022 and
$18.9 million of OREO at December 31, 2021 . The following tables summarize our
non-performing loans, OREO, and loans past due 90 days or more still accruing
interest.
55
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March 31, December 31,
2022 2021
(in thousands)
Non-accrual loans
SBL non-real estate $ 1,639 $ 1,313
SBL commercial mortgage 589 812
SBL construction 710 710
Direct leasing 8 254
Other loans 607 -
Consumer - home equity 68 72
Total non-accrual loans 3,621 3,161
Loans past due 90 days or more and still accruing 4,597 461
Total non-performing loans 8,218 3,622
Other real estate owned 18,873 18,873
Total non-performing assets $ 27,091 $ 22,495 Loans that were modified as of
dollars in thousands):
March 31, 2022 December 31, 2021
Pre-modification Post-modification Pre-modification Post-modification
Number recorded investment recordedinvestment Number recorded investment recorded investment SBL non-real estate 12 $ 1,451 $ 1,451 9 $ 1,231 $ 1,231 Other loans 1 3,564 3,564 - - - Consumer - home equity 1 245 245 1 248 248 Total(1) 14 $ 5,260 $ 5,260 10 $ 1,479 $ 1,479
(1)Troubled debt restructurings include non-accrual loans of
The balances below provide information as to how the loans were modified as troubled debt restructurings loans atMarch 31, 2022 andDecember 31, 2021 (in thousands): March 31, 2022 December 31, 2021 Adjusted Combined rate Combined rate interest rate Extended maturity and maturity
Adjusted interest rate Extended maturity and maturity SBL non-real estate $ - $ -$ 1,451 $ - $ -$ 1,231 Other loans - - 3,564 - - - Consumer - home equity - - 245 - - 248 Total(1) $ - $ -$ 5,260 $ - $ -$ 1,479
(1)Troubled debt restructurings include non-accrual loans of
The tables above do not include loans which are reported at fair value. A$30.0 million credit, collateralized by a commercial retail property with multiple tenants, is included in commercial loans, at fair value. The underlying collateral consists of a multi-tenant shopping center and the loan value had been previously written down as a result of a decreased occupancy rate. ByDecember 31, 2020 the center had been substantially all leased and previous write-downs had been reversed. OnMarch 13, 2019 , we renewed this loan for four years and reduced the interest rate to the following: LIBOR plus 2% in year one, increasing 0.5% each year until the fourth year when the rate will be LIBOR plus 3.5% which will also be the rate for a one year extension, if exercised. The loan is performing in accordance with those restructured terms.
We had no commitments to extend additional credit to loans classified as
troubled debt restructurings as of
The following table summarizes loans that were restructured within the 12 months
ended
March 31, 2022
Number Pre-modification recorded investment
SBL non-real estate 1 $ 334
Total 1 $ 334
56
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The following table provides information about credit deteriorated loans at
March 31, 2022
Unpaid Average Interest
Recorded ?principal Related ?recorded ?income
?investment ?balance ?allowance ?investment ?recognized
Without an
allowance recorded
SBL non-real
estate $ 529 $ 3,278 $ - $ 469 $ 2
SBL commercial
mortgage - - - 111 -
Direct lease
financing 8 8 - 131 -
Other loans 4,171 4,171 - 4,171 29
Consumer - home
equity 312 312 - 316 3
With an allowance
recorded
SBL non-real
estate 1,817 1,817 (1,338) 1,648 10
SBL commercial
mortgage 589 589 (116) 589 -
SBL construction 710 710 (34) 710 -
Total
SBL non-real
estate 2,346 5,095 (1,338) 2,117 12
SBL commercial
mortgage 589 589 (116) 700 -
SBL construction 710 710 (34) 710 -
Direct lease
financing 8 8 - 131 -
Other loans 4,171 4,171 - 4,171 29
Consumer - home
equity 312 312 - 316 3
$ 8,136 $ 10,885 $ (1,488) $ 8,145 $ 44
December 31, 2021
Unpaid Average Interest
Recorded ?principal Related ?recorded ?income
?investment ?balance ?allowance ?investment ?recognized
Without an
allowance recorded
SBL non-real
estate $ 409 $ 3,414 $ - $ 412 $ 5
SBL commercial
mortgage 223 246 - 1,717 -
Direct lease
financing 254 254 - 430 -
Consumer - home
equity 320 320 - 458 8
With an allowance
recorded
SBL non-real
estate 1,478 1,478 (829) 2,267 13
SBL commercial
mortgage 589 589 (115) 2,634 -
SBL construction 710 710 (34) 711 -
Direct lease
financing - - - 132 -
Consumer - other - - - 5 -
Total
SBL non-real
estate 1,887 4,892 (829) 2,679 18
SBL commercial
mortgage 812 835 (115) 4,351 -
SBL construction 710 710 (34) 711 -
Direct lease
financing 254 254 - 562 -
Consumer - other - - - 5 -
Consumer - home
equity 320 320 - 458 8
$ 3,983 $ 7,011 $ (978) $ 8,766 $ 26
We had $3.6 million of non-accrual loans at March 31, 2022 compared to
$3.2 million of non-accrual loans at December 31, 2021 . The $460,000 increase in
non-accrual loans was primarily due to $576,000 of loans placed on non-accrual
status partially offset by $98,000 of charge-offs. Loans past due 90 days or
more still accruing interest amounted to $4.6 million at March 31, 2022 and
$461,000 at December 31, 2021 . The $4.1 million increase reflected $614,000 of
additions, $44,000 of loan payments and $3.6 million of loans reclassified from
discontinued operations.
We had
We evaluate loans under an internal loan risk rating system as a means of
identifying problem loans. At
Premises and equipment, net. Premises and equipment amounted to
Assets held-for-sale from discontinued operations. Assets held-for-sale from
discontinued operations were reclassified to continuing operations as of
57
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mortgage and construction loans, and OREO, which consisted primarily of a
Florida mall which has been written down to $15.0 million . We expect to continue
our efforts to dispose of the mall, which was appraised in December 2021 for
$21.4 million .
Deposits. Our primary source of funding is deposit acquisition. We offer a
variety of deposit accounts with a range of interest rates and terms, including
demand, checking and money market accounts. The majority of our deposits are
generated through prepaid card and other payments related deposit accounts. One
strategic focus is growing these accounts through affinity groups. At March 31,
2022 , we had total deposits of $6.23 billion compared to $5.98 billion at
December 31, 2021 , an increase of $251.4 million , or 4.2%. The increase
reflected tax refunds deposited into customer accounts, a significant amount of
which is temporary until those funds are spent.
The following table presents the average balance and rates paid on deposits for
the periods indicated (dollars in thousands):
For the three months ended For the year ended
March 31, 2022 December 31, 2021
Average Average Average Average
balance rate balance rate
Demand and interest checking * $ 5,575,228 0.10% $ 5,321,283 0.09%
Savings and money market 532,047 0.15% 427,708 0.14%
Total deposits $ 6,107,275 0.11% $ 5,748,991 0.10%
* Non-interest bearing demand accounts are not paid interest. The amount shown
as interest reflects the fees paid to affinity groups, which are based upon a
rate index, and therefore classified as interest expense.
Short-term borrowings. Short-term borrowings consist of amounts borrowed on our
line of credit with the FRB or FHLB. There were no borrowings on either line at
March 31, 2022 or December 31, 2021 . We generally utilize overnight borrowings
to manage our daily reserve requirements at the Federal Reserve . Period-end and
year-to-date information for the dates shown is as follows.
March 31, December 31,
2022 2021
(dollars in thousands)
Short-term borrowings
Balance at period end $ - $ -
Average for the three months ended March 31, 2022 555 na
Average during the year 555 19,958
Maximum month-end balance - 300,000
Weighted average rate during the period 0.25% 0.25%
Rate at period end 0.25% 0.25%
Senior debt. On August 13, 2020 , we issued $100.0 million of senior debt with a
maturity date of August 15, 2025 , and a 4.75% interest rate, with interest paid
semi-annually on March 15 and September 15 . The Senior Notes are the Company's
direct, unsecured and unsubordinated obligations and rank equal in priority with
all our existing and future unsecured and unsubordinated indebtedness and senior
in right of payment to all our existing and future subordinated indebtedness. In
lieu of repayment of debt from Bank dividends, industry practice includes the
issuance of new debt to repay maturing debt.
Borrowings. At March 31, 2022 , we had other long-term borrowings of
$39.3 million compared to $39.5 million at December 31, 2021 . The borrowings
consisted of sold loans which were accounted for as a secured borrowing because
they did not qualify for true sale accounting. We do not have any policy
prohibiting us from incurring debt. Subordinated debentures of $13.4 million are
grandfathered to qualify as tier 1 capital at the Bank, mature in March 2038 and
carry a floating rate of 3-Month LIBOR plus 3.25%.
Other liabilities. Other liabilities amounted to $50.5 million at March 31, 2022
compared to $62.2 million at December 31, 2021 .
The difference reflected changes in taxes payable.
Off-balance sheet arrangements. There were no off-balance sheet arrangements
during the three months ended March 31, 2022 that have or are reasonably likely
to have, a current or future effect on our financial condition, changes in
financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources that is material to our interests.
Contractual Obligations and Other Commitments
Our contractual obligations atMarch 31, 2022 , with the exception of minimum annual rentals on noncancelable operating leases, did not significantly change from our contractual obligations atDecember 31, 2021 , which are disclosed in our Annual Report on Form 10-K for the year endedDecember 31, 2021 . OnJanuary 28, 2022 , the Company signed a lease for approximately 52,000 square feet to relocate itsSioux Falls office to a newSioux Falls location, for a minimum period of 10 years, which can be extended. Estimated occupancy is mid-2023 when rent payments, which begin at$24 per square foot, will increase throughout that 10 year period and amount to$28.68 in year 10. 58
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The approximate future minimum annual rental payments, including any additional rents for escalation clauses, as ofMarch 31, 2022 (in thousands), are as follows: Payments due by period Less than One to Three to After Contractual obligation Total one year three years five years five years Minimum annual rentals on noncancelable operating leases$ 31,709 $ 2,450 $ 7,124 $ 4,284 $ 17,851 Total$ 31,709 $ 2,450 $ 7,124 $ 4,284 $ 17,851 ? 59
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