UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
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x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE | |
SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended: September 30, 20172022
| TRANSITION REPORT PURSUANT TO SECTION 13 | |
SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from: _____ to _____
Commission file number: 51018000-51018
(Exact name of registrant as specified in its charter)
Delaware | 23-3016517 | |
(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) | |
409 Silverside Road, Wilmington, DE 19809 | (302) 385-5000 | |
(Address of principal executive offices and zip code) | (Registrant's telephone number, including area code) |
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class | Trading Symbol(s) | Name of each Exchange on Which Registered |
Common Stock, par value $1.00 per share | TBBK | Nasdaq Global Select |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X]x No [ ]o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X]x No [ ]o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | Accelerated filer | Non-accelerated filer |
Smaller reporting company | Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ]o No [X]x
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
As of November 7, 2017,October 27, 2022, there were 55,859,66055,981,560 outstanding shares of common stock, $1.00 par value.
Form 10-Q Index
Page | |||
Part I Financial Information | |||
Item | 3 | ||
Consolidated Balance Sheets – September 30, | 3 | ||
4 | |||
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8 | |||
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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3. |
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Item 4. |
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Part II Other Information | |||
Item 1. |
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Item |
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Item 2. | 70 | ||
Item 3. |
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Item 4. | 70 | ||
Item 5. | 70 | ||
Item 6. | 71 | ||
72 | |||
2
PART I – FINANCIAL INFORMATION
THE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCEBALANCE SHEETS
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| September 30, |
| December 31, | September 30, | December 31, | |||
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| 2017 |
| 2016 | 2022 | 2021 | |||
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| (unaudited) |
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| (in thousands) | |||||||
(Dollars in thousands, except per share and share data) | (unaudited) | ||||||||
ASSETS |
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Cash and cash equivalents |
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Cash and due from banks |
| $ 5,813 |
| $ 4,127 | $ | 22,537 | $ | 5,382 | |
Interest earning deposits at Federal Reserve Bank |
| 328,023 |
| 955,733 | 700,175 | 596,402 | |||
Securities purchased under agreements to resell |
| 65,095 |
| 39,199 | |||||
Total cash and cash equivalents |
| 398,931 |
| 999,059 | 722,712 | 601,784 | |||
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Investment securities, available-for-sale, at fair value |
| 1,196,956 |
| 1,248,614 | 790,594 | 953,709 | |||
Investment securities, held-to-maturity (fair value $85,099 and $91,799, respectively) |
| 86,402 |
| 93,467 | |||||
Commercial loans held for sale |
| 380,272 |
| 663,140 | |||||
Commercial loans, at fair value (includes $0 and $61.6 million of loans held for sale at lower of cost or fair value at September 30, 2022 and December 31, 2021, respectively) | 818,040 | 1,388,416 | |||||||
Loans, net of deferred loan fees and costs |
| 1,374,060 |
| 1,222,911 | 5,267,375 | 3,747,224 | |||
Allowance for loan and lease losses |
| (7,283) |
| (6,332) | |||||
Allowance for credit losses | (19,689) | (17,806) | |||||||
Loans, net |
| 1,366,777 |
| 1,216,579 | 5,247,686 | 3,729,418 | |||
Federal Home Loan Bank and Atlantic Central Bankers Bank stock |
| 991 |
| 1,613 | |||||
Federal Home Loan Bank, Atlantic Central Bankers Bank, and Federal Reserve Bank stock | 12,629 | 1,663 | |||||||
Premises and equipment, net |
| 21,087 |
| 24,125 | 18,443 | 16,156 | |||
Accrued interest receivable |
| 10,131 |
| 10,589 | 25,506 | 17,871 | |||
Intangible assets, net |
| 5,185 |
| 6,906 | 2,149 | 2,447 | |||
Other real estate owned |
| - |
| 104 | 18,873 | 18,873 | |||
Deferred tax asset, net |
| 53,017 |
| 55,666 | 27,241 | 12,667 | |||
Investment in unconsolidated entity, at fair value |
| 107,711 |
| 126,930 | |||||
Assets held for sale from discontinued operations |
| 314,994 |
| 360,711 | |||||
Assets held-for-sale from discontinued operations | — | 3,268 | |||||||
Other assets |
| 51,164 |
| 50,611 | 93,201 | 96,967 | |||
Total assets |
| $ 3,993,618 |
| $ 4,858,114 | $ | 7,777,074 | $ | 6,843,239 | |
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LIABILITIES |
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Deposits |
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Demand and interest checking |
| $ 3,113,212 |
| $ 3,816,524 | $ | 5,934,591 | $ | 5,561,365 | |
Savings and money market |
| 452,183 |
| 421,780 | 575,381 | 415,546 | |||
Time deposits, $100,000 and over | 401,331 | — | |||||||
Total deposits |
| 3,565,395 |
| 4,238,304 | 6,911,303 | 5,976,911 | |||
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Securities sold under agreements to repurchase |
| 180 |
| 274 | 42 | 42 | |||
Senior debt | 98,958 | 98,682 | |||||||
Subordinated debentures |
| 13,401 |
| 13,401 | 13,401 | 13,401 | |||
Long-term borrowings |
| 42,482 |
| 263,099 | |||||
Other long-term borrowings | 38,928 | 39,521 | |||||||
Other liabilities |
| 32,699 |
| 44,073 | 50,704 | 62,228 | |||
Total liabilities |
| 3,654,157 |
| 4,559,151 | 7,113,336 | 6,190,785 | |||
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SHAREHOLDERS' EQUITY |
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Common stock - authorized, 75,000,000 shares of $1.00 par value; 55,859,660 and 55,419,204 |
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shares issued at September 30, 2017 and December 31, 2016, respectively |
| 55,860 |
| 55,419 | |||||
Treasury stock, at cost (100,000 shares) |
| (866) |
| (866) | |||||
Common stock - authorized, 75,000,000 shares of $1.00 par value; 56,201,560 and 57,370,563 | |||||||||
shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively | 56,202 | 57,371 | |||||||
Additional paid-in capital |
| 362,340 |
| 360,564 | 311,569 | 349,686 | |||
Accumulated deficit |
| (77,850) |
| (111,941) | |||||
Accumulated other comprehensive loss |
| (23) |
| (4,213) | |||||
Retained earnings | 329,078 | 239,106 | |||||||
Accumulated other comprehensive (loss) income | (33,111) | 6,291 | |||||||
Total shareholders' equity |
| 339,461 |
| 298,963 | 663,738 | 652,454 | |||
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Total liabilities and shareholders' equity |
| $ 3,993,618 |
| $ 4,858,114 | $ | 7,777,074 | $ | 6,843,239 |
The accompanying notes are an integral part of these consolidated statements.
THE BANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
For the three months ended September 30, | For the nine months ended September 30, | ||||||||||
2022 | 2021 | 2022 | 2021 | ||||||||
(Dollars in thousands, except per share data) | |||||||||||
Interest income | |||||||||||
Loans, including fees | $ | 75,579 | $ | 46,426 | $ | 181,320 | $ | 143,784 | |||
Investment securities: | |||||||||||
Taxable interest | 6,792 | 6,882 | 17,115 | 22,891 | |||||||
Tax-exempt interest | 25 | 25 | 74 | 78 | |||||||
Interest earning deposits | 1,525 | 167 | 2,876 | 650 | |||||||
83,921 | 53,500 | 201,385 | 167,403 | ||||||||
Interest expense | |||||||||||
Deposits | 16,065 | 1,209 | 23,261 | 4,494 | |||||||
Short-term borrowings | 1,235 | 7 | 1,267 | 15 | |||||||
Long-term borrowings | 506 | — | 506 | — | |||||||
Senior debt | 1,279 | 1,279 | 3,838 | 3,838 | |||||||
Subordinated debentures | 177 | 112 | 432 | 337 | |||||||
19,262 | 2,607 | 29,304 | 8,684 | ||||||||
Net interest income | 64,659 | 50,893 | 172,081 | 158,719 | |||||||
Provision for credit losses | 822 | 1,613 | 4,331 | 1,484 | |||||||
Net interest income after provision for credit losses | 63,837 | 49,280 | 167,750 | 157,235 | |||||||
Non-interest income | |||||||||||
ACH, card and other payment processing fees | 2,230 | 1,905 | 6,552 | 5,605 | |||||||
Prepaid, debit card and related fees | 19,175 | 18,223 | 57,865 | 56,878 | |||||||
Net realized and unrealized gains | |||||||||||
on commercial loans, at fair value | 745 | 4,306 | 11,262 | 8,881 | |||||||
Leasing related income | 1,048 | 1,968 | 3,566 | 4,700 | |||||||
Other | 228 | 186 | 698 | 459 | |||||||
Total non-interest income | 23,426 | 26,588 | 79,943 | 76,523 | |||||||
Non-interest expense | |||||||||||
Salaries and employee benefits | 28,001 | 25,094 | 77,848 | 77,839 | |||||||
Depreciation and amortization | 685 | 729 | 2,224 | 2,144 | |||||||
Rent and related occupancy cost | 1,268 | 1,256 | 3,831 | 3,777 | |||||||
Data processing expense | 1,292 | 1,209 | 3,727 | 3,481 | |||||||
Printing and supplies | 154 | 81 | 342 | 277 | |||||||
Audit expense | 366 | 356 | 1,107 | 1,110 | |||||||
Legal expense | 907 | 1,251 | 3,175 | 5,349 | |||||||
Legal settlement | — | — | 1,152 | — | |||||||
Civil money penalty | 1,750 | — | 1,750 | — | |||||||
Amortization of intangible assets | 99 | 99 | 298 | 298 | |||||||
FDIC insurance | 679 | 266 | 2,326 | 5,235 | |||||||
Software | 4,001 | 4,045 | 12,030 | 11,435 | |||||||
Insurance | 1,314 | 1,110 | 3,692 | 2,881 | |||||||
Telecom and IT network communications | 368 | 413 | 1,119 | 1,227 | |||||||
Consulting | 339 | 448 | 902 | 952 | |||||||
Other | 3,607 | 3,027 | 10,504 | 9,145 | |||||||
Total non-interest expense | 44,830 | 39,384 | 126,027 | 125,150 | |||||||
Income from continuing operations before income taxes | 42,433 | 36,484 | 121,666 | 108,608 | |||||||
Income tax expense | 11,829 | 8,289 | 31,694 | 25,195 | |||||||
Net income from continuing operations | $ | 30,604 | $ | 28,195 | $ | 89,972 | $ | 83,413 | |||
Discontinued operations | |||||||||||
Income from discontinued operations before income taxes | — | 87 | — | 324 | |||||||
Income tax expense | — | 21 | — | 76 | |||||||
Income from discontinued operations, net of tax | — | 66 | — | 248 | |||||||
Net income | $ | 30,604 | $ | 28,261 | $ | 89,972 | $ | 83,661 | |||
Net income per share from continuing operations - basic | $ | 0.54 | $ | 0.49 | $ | 1.58 | $ | 1.45 | |||
Net income per share from discontinued operations - basic | $ | — | $ | — | $ | — | $ | 0.01 | |||
Net income per share - basic | $ | 0.54 | $ | 0.49 | $ | 1.58 | $ | 1.46 | |||
Net income per share from continuing operations - diluted | $ | 0.54 | $ | 0.48 | $ | 1.56 | $ | 1.41 | |||
Net income per share from discontinued operations - diluted | $ | — | $ | — | $ | — | $ | 0.01 | |||
Net income per share - diluted | $ | 0.54 | $ | 0.48 | $ | 1.56 | $ | 1.42 | |||
The accompanying notes are an integral part of these consolidated statements.
THE BANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the three months ended September 30, | For the nine months ended September 30, | ||||||||||
2022 | 2021 | 2022 | 2021 | ||||||||
(Dollars in thousands) | |||||||||||
Net income | $ | 30,604 | $ | 28,261 | $ | 89,972 | $ | 83,661 | |||
Other comprehensive loss, net of reclassifications into net income: | |||||||||||
Other comprehensive loss | |||||||||||
Securities available-for-sale: | |||||||||||
Change in net unrealized losses during the period | (14,431) | (4,867) | (53,982) | (9,192) | |||||||
Reclassification adjustments for losses included in income | — | — | 6 | 7 | |||||||
Other comprehensive loss | (14,431) | (4,867) | (53,976) | (9,185) | |||||||
Income tax benefit related to items of other comprehensive loss | |||||||||||
Securities available-for-sale: | |||||||||||
Change in net unrealized losses during the period | (3,897) | (1,314) | (14,576) | (2,483) | |||||||
Reclassification adjustments for losses included in income | — | — | 2 | 2 | |||||||
Income tax benefit related to items of other comprehensive loss | (3,897) | (1,314) | (14,574) | (2,481) | |||||||
Other comprehensive loss, net of tax and reclassifications into net income | (10,534) | (3,553) | (39,402) | (6,704) | |||||||
Comprehensive income | $ | 20,070 | $ | 24,708 | $ | 50,570 | $ | 76,957 |
The accompanying notes are an integral part of these consolidated statements.
THE BANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
For the three and nine months ended September 30, 2022 | |||||||||||||||||
(Dollars in thousands, except share data) | |||||||||||||||||
Accumulated | |||||||||||||||||
Common | Additional | other | |||||||||||||||
stock | Common | paid-in | Retained | comprehensive | |||||||||||||
shares | stock | capital | earnings | loss | Total | ||||||||||||
Balance at January 1, 2022 | 57,370,563 | $ | 57,371 | $ | 349,686 | $ | 239,106 | $ | 6,291 | $ | 652,454 | ||||||
Net income | — | — | — | 28,966 | — | 28,966 | |||||||||||
Common stock issued from option exercises, | |||||||||||||||||
net of tax benefits | 27,818 | 27 | 57 | — | — | 84 | |||||||||||
Common stock issued from restricted units, | |||||||||||||||||
net of tax benefits | 284,040 | 284 | (284) | — | — | — | |||||||||||
Stock-based compensation | — | — | 1,618 | — | — | 1,618 | |||||||||||
Common stock repurchases | (527,393) | (527) | (14,473) | — | — | (15,000) | |||||||||||
Other comprehensive loss net of | |||||||||||||||||
reclassification adjustments and tax | — | — | — | — | (15,827) | (15,827) | |||||||||||
Balance at March 31, 2022 | 57,155,028 | $ | 57,155 | $ | 336,604 | $ | 268,072 | $ | (9,536) | $ | 652,295 | ||||||
Net income | — | $ | — | $ | — | $ | 30,402 | $ | — | $ | 30,402 | ||||||
Common stock issued from option exercises, | |||||||||||||||||
net of tax benefits | 7,500 | 7 | 71 | — | — | 78 | |||||||||||
Common stock issued from restricted units, | |||||||||||||||||
net of tax benefits | 280,892 | 281 | (281) | — | — | — | |||||||||||
Stock-based compensation | — | — | 1,802 | — | — | 1,802 | |||||||||||
Common stock repurchases | (577,926) | (578) | (14,422) | — | — | (15,000) | |||||||||||
Other comprehensive loss net of | |||||||||||||||||
reclassification adjustments and tax | — | — | — | — | (13,041) | (13,041) | |||||||||||
Balance at June 30, 2022 | 56,865,494 | $ | 56,865 | $ | 323,774 | $ | 298,474 | $ | (22,577) | $ | 656,536 | ||||||
Net income | — | $ | — | $ | — | $ | 30,604 | $ | — | $ | 30,604 | ||||||
Stock-based compensation | — | — | 2,131 | — | — | 2,131 | |||||||||||
Common stock repurchases | (663,934) | (663) | (14,336) | — | — | (14,999) | |||||||||||
Other comprehensive loss net of | |||||||||||||||||
reclassification adjustments and tax | — | — | — | — | (10,534) | (10,534) | |||||||||||
Balance at September 30, 2022 | 56,201,560 | $ | 56,202 | $ | 311,569 | $ | 329,078 | $ | (33,111) | $ | 663,738 |
The accompanying notes are an integral part of these consolidated statements.
THE BANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTSSTATEMENT OF OPERATIONSCHANGES IN SHAREHOLDERS' EQUITY
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| For the three months ended September 30, |
| For the nine months ended September 30, | ||||
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| 2017 |
| 2016 |
| 2017 |
| 2016 |
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| (in thousands, except per share data) | ||||||
Interest income |
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Loans, including fees |
| $ 21,420 |
| $ 17,697 |
| $ 59,066 |
| $ 48,928 |
Interest on investment securities: |
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Taxable interest |
| 8,847 |
| 8,350 |
| 26,990 |
| 22,782 |
Tax-exempt interest |
| 86 |
| 142 |
| 228 |
| 639 |
Federal funds sold/securities purchased under agreements to resell |
| 371 |
| 146 |
| 931 |
| 301 |
Interest earning deposits |
| 1,190 |
| 397 |
| 3,961 |
| 1,677 |
|
| 31,914 |
| 26,732 |
| 91,176 |
| 74,327 |
Interest expense |
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Deposits |
| 3,688 |
| 2,906 |
| 10,554 |
| 8,692 |
Securities sold under agreements to repurchase |
| - |
| - |
| - |
| 1 |
Short-term borrowings |
| 175 |
| 153 |
| 197 |
| 263 |
Subordinated debenture |
| 150 |
| 131 |
| 432 |
| 383 |
|
| 4,013 |
| 3,190 |
| 11,183 |
| 9,339 |
Net interest income |
| 27,901 |
| 23,542 |
| 79,993 |
| 64,988 |
Provision for loan and lease losses |
| 800 |
| 750 |
| 2,150 |
| 1,810 |
Net interest income after provision for loan and lease losses |
| 27,101 |
| 22,792 |
| 77,843 |
| 63,178 |
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Non-interest income |
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Service fees on deposit accounts |
| 1,700 |
| 1,510 |
| 4,895 |
| 3,335 |
Card payment and ACH processing fees |
| 1,564 |
| 1,459 |
| 4,596 |
| 4,183 |
Prepaid card fees |
| 12,491 |
| 12,249 |
| 39,272 |
| 39,333 |
Gain on sale of loans |
| 11,394 |
| 903 |
| 17,535 |
| 809 |
Gain on sale of investment securities |
| 506 |
| 981 |
| 1,595 |
| 3,131 |
Change in value of investment in unconsolidated entity |
| (4) |
| 811 |
| (20) |
| (12,313) |
Leasing income |
| 705 |
| 588 |
| 2,088 |
| 1,456 |
Affinity fees |
| 275 |
| 1,091 |
| 1,445 |
| 3,507 |
Gain on sale of health savings accounts |
| - |
| - |
| 2,538 |
| - |
Loss from sale of European prepaid operations |
| - |
| - |
| (3,437) |
| - |
Other |
| 376 |
| 312 |
| 892 |
| 4,691 |
Total non-interest income |
| 29,007 |
| 19,904 |
| 71,399 |
| 48,132 |
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Non-interest expense |
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Salaries and employee benefits |
| 21,788 |
| 21,508 |
| 57,902 |
| 62,400 |
Depreciation and amortization |
| 1,080 |
| 1,241 |
| 3,405 |
| 3,751 |
Rent and related occupancy cost |
| 1,368 |
| 1,638 |
| 4,227 |
| 4,797 |
Data processing expense |
| 1,926 |
| 3,507 |
| 8,047 |
| 10,949 |
One time fee to exit data processing contract |
| 1,136 |
| - |
| 1,136 |
| - |
Printing and supplies |
| 282 |
| 825 |
| 1,120 |
| 2,194 |
Audit expense |
| 393 |
| 246 |
| 1,270 |
| 746 |
Legal expense |
| 2,744 |
| 814 |
| 5,909 |
| 3,786 |
Amortization of intangible assets |
| 377 |
| 394 |
| 1,133 |
| 1,032 |
Losses on sale and write downs on other real estate owned |
| - |
| - |
| 19 |
| - |
FDIC insurance |
| 2,063 |
| 2,436 |
| 7,586 |
| 7,118 |
Software |
| 3,088 |
| 3,032 |
| 9,328 |
| 8,266 |
Insurance |
| 633 |
| 631 |
| 1,853 |
| 1,695 |
Telecom and IT network communications |
| 426 |
| 582 |
| 1,443 |
| 1,547 |
Securitization and servicing expense |
| - |
| - |
| 100 |
| 747 |
Consulting |
| 505 |
| 1,701 |
| 1,745 |
| 4,214 |
Bank Secrecy Act and lookback consulting expenses |
| - |
| 1,340 |
| - |
| 29,076 |
Civil money penalty |
| 2,500 |
| - |
| 2,500 |
| - |
For the three and nine months ended September 30, 2021 | |||||||||||||||||
(in thousands, except share data) | |||||||||||||||||
Accumulated | |||||||||||||||||
Common | Additional | other | |||||||||||||||
stock | Common | paid-in | Retained | comprehensive | |||||||||||||
shares | stock | capital | earnings | income | Total | ||||||||||||
Balance at January 1, 2021 | 57,550,629 | $ | 57,551 | $ | 377,452 | $ | 128,453 | $ | 17,708 | $ | 581,164 | ||||||
Net income | — | — | — | 25,965 | — | 25,965 | |||||||||||
Common stock issued from option exercises, | |||||||||||||||||
net of tax benefits | 61,500 | 61 | 404 | — | — | 465 | |||||||||||
Common stock issued from restricted units, | |||||||||||||||||
net of tax benefits | 230,212 | 230 | (230) | — | — | — | |||||||||||
Stock-based compensation | — | — | 2,261 | — | — | 2,261 | |||||||||||
Common stock repurchases | (594,428) | (594) | (9,406) | — | — | (10,000) | |||||||||||
Other comprehensive loss net of | |||||||||||||||||
reclassification adjustments and tax | — | — | — | — | (3,091) | (3,091) | |||||||||||
Balance at March 31, 2021 | 57,247,913 | $ | 57,248 | $ | 370,481 | $ | 154,418 | $ | 14,617 | $ | 596,764 | ||||||
Net income | — | $ | — | $ | — | $ | 29,435 | $ | — | $ | 29,435 | ||||||
Common stock issued from option exercises, | |||||||||||||||||
net of tax benefits | 217,368 | 217 | 547 | — | — | 764 | |||||||||||
Common stock issued from restricted units, | |||||||||||||||||
net of tax benefits | 442,321 | 442 | (442) | — | — | — | |||||||||||
Stock-based compensation | — | — | 2,206 | — | — | 2,206 | |||||||||||
Common stock repurchases | (449,315) | (449) | (9,551) | — | — | (10,000) | |||||||||||
Other comprehensive loss net of | |||||||||||||||||
reclassification adjustments and tax | — | — | — | — | (60) | (60) | |||||||||||
Balance at June 30, 2021 | 57,458,287 | $ | 57,458 | $ | 363,241 | $ | 183,853 | $ | 14,557 | $ | 619,109 | ||||||
Net income | — | $ | — | $ | — | $ | 28,261 | $ | — | $ | 28,261 | ||||||
Common stock issued from restricted units, | |||||||||||||||||
net of tax benefits | 313,446 | 314 | 1,790 | — | — | 2,104 | |||||||||||
Stock-based compensation | — | — | 2,056 | — | — | 2,056 | |||||||||||
Common stock repurchases | (440,887) | (441) | (9,559) | (10,000) | |||||||||||||
Other comprehensive loss net of | |||||||||||||||||
reclassification adjustments and tax | — | — | — | — | (3,553) | (3,553) | |||||||||||
Balance at September 30, 2021 | 57,330,846 | $ | 57,331 | $ | 357,528 | $ | 212,114 | $ | 11,004 | $ | 637,977 |
4
Other |
| 3,574 |
| 4,276 |
| 10,306 |
| 14,127 |
Total non-interest expense |
| 43,883 |
| 44,171 |
| 119,029 |
| 156,445 |
Income (loss) from continuing operations before income taxes |
| 12,225 |
| (1,475) |
| 30,213 |
| (45,135) |
Income tax expense (benefit) | 5,455 |
| 55 |
| (457) |
| (15,324) | |
Net income (loss) from continuing operations |
| $ 6,770 |
| $ (1,530) |
| $ 30,670 |
| $ (29,811) |
Discontinued operations |
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations before income taxes |
| 829 |
| (21,490) |
| 5,488 |
| (38,073) |
Income tax expense (benefit) | 318 |
| 2,531 |
| 2,050 |
| (164) | |
Income (loss) from discontinued operations, net of tax |
| 511 |
| (24,021) |
| 3,438 |
| (37,909) |
Net income (loss) available to common shareholders |
| $ 7,281 |
| $ (25,551) |
| $ 34,108 |
| $ (67,720) |
|
|
|
|
|
|
|
|
|
Net income (loss) per share from continuing operations - basic |
| $ 0.12 |
| $ (0.03) |
| $ 0.55 |
| $ (0.73) |
Net income (loss) per share from discontinued operations - basic |
| $ 0.01 |
| $ (0.51) |
| $ 0.06 |
| $ (0.92) |
Net income (loss) per share - basic |
| $ 0.13 |
| $ (0.54) |
| $ 0.61 |
| $ (1.65) |
|
|
|
|
|
|
|
|
|
Net income (loss) per share from continuing operations - diluted |
| $ 0.12 |
| $ (0.03) |
| $ 0.55 |
| $ (0.73) |
Net income (loss) per share from discontinued operations - diluted |
| $ 0.01 |
| $ (0.51) |
| $ 0.06 |
| $ (0.92) |
Net income (loss) per share - diluted |
| $ 0.13 |
| $ (0.54) |
| $ 0.61 |
| $ (1.65) |
The accompanying notes are an integral part of these consolidated statements.statements.
THE BANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOMECASH FLOWS
|
|
|
|
|
|
|
|
| For the nine months | ||
| ended September 30, | ||
| 2017 |
| 2016 |
| (in thousands) | ||
|
|
|
|
Net income (loss) | $ 34,108 |
| $ (67,720) |
Other comprehensive income (loss) net of reclassifications into net income: |
|
|
|
|
|
|
|
Other comprehensive income (loss) |
|
|
|
Change in net unrealized gain during the period | 8,194 |
| 19,207 |
Reclassification adjustments for gains included in income | (1,595) |
| (3,131) |
Reclassification adjustments for foreign currency translation gains | 216 |
| 335 |
Amortization of losses previously held as available-for-sale | 25 |
| 25 |
Net unrealized gain | 6,840 |
| 16,436 |
|
|
|
|
Deferred tax expense |
|
|
|
Securities available-for-sale: |
|
|
|
Change in net unrealized gain during the period | 3,278 |
| 7,683 |
Reclassification adjustments for gains included in income | (638) |
| (1,252) |
Amortization of losses previously held as available-for-sale | 10 |
| 10 |
Income tax expense related to items of other comprehensive income | 2,650 |
| 6,441 |
|
|
|
|
Other comprehensive income net of tax and reclassifications into net income | 4,190 |
| 9,995 |
Comprehensive income (loss) | $ 38,298 |
| $ (57,725) |
For the nine months | |||||
ended September 30, | |||||
2022 | 2021 | ||||
(Dollars in thousands) | |||||
Operating activities | |||||
Net income from continuing operations | $ | 89,972 | $ | 83,413 | |
Net income from discontinued operations, net of tax | — | 248 | |||
Adjustments to reconcile net income to net cash provided by operating activities | |||||
Depreciation and amortization | 2,522 | 2,442 | |||
Provision for credit losses | 4,331 | 1,484 | |||
Net amortization of investment securities discounts/premiums | 1,356 | 3,216 | |||
Stock-based compensation expense | 5,551 | 6,523 | |||
Gain on commercial loans, at fair value | (15,034) | (7,267) | |||
Gain from discontinued operations | — | (1,492) | |||
Change in fair value of commercial loans, at fair value | 5,278 | 1,330 | |||
Change in fair value of derivatives | (1,505) | (1,328) | |||
Loss on sales of investment securities | 6 | 7 | |||
(Increase) decrease in accrued interest receivable | (7,635) | 3,278 | |||
Increase in other assets | (5,563) | (6,216) | |||
Change in fair value of discontinued assets held-for-sale | — | 498 | |||
Decrease in other liabilities | (10,971) | (14,744) | |||
Net cash provided by operating activities | 68,308 | 71,392 | |||
Investing activities | |||||
Purchase of investment securities available-for-sale | (19,321) | (246,958) | |||
Proceeds from redemptions and prepayments of securities available-for-sale | 127,374 | 386,369 | |||
Sale of repossessed assets | 852 | 927 | |||
Net increase in loans | (1,459,304) | (485,647) | |||
Net decrease in discontinued loans held-for-sale | — | 21,882 | |||
Commercial loans, at fair value drawn during the period | (36,877) | (62,151) | |||
Payments on commercial loans, at fair value | 554,836 | 351,239 | |||
Purchases of premises and equipment | (4,495) | (1,237) | |||
Change in receivable from investment in unconsolidated entity | — | 18 | |||
Return of investment in unconsolidated entity | — | 7,337 | |||
Decrease in discontinued assets held-for-sale | — | 4,858 | |||
Net cash used in investing activities | (836,935) | (23,363) | |||
Financing activities | |||||
Net increase (decrease) in deposits | 934,392 | (349,548) | |||
Proceeds from short-term borrowings | — | 300,000 | |||
Proceeds from the issuance of common stock | 162 | 3,333 | |||
Repurchases of common stock | (44,999) | (30,000) | |||
Net cash provided by (used in) financing activities | 889,555 | (76,215) | |||
Net increase (decrease) in cash and cash equivalents | 120,928 | (28,186) | |||
Cash and cash equivalents, beginning of period | 601,784 | 345,515 | |||
Cash and cash equivalents, end of period | $ | 722,712 | $ | 317,329 | |
Supplemental disclosure: | |||||
Interest paid | $ | 30,079 | $ | 10,343 | |
Taxes paid | $ | 30,168 | $ | 31,057 | |
Non-cash investing and financing activities | |||||
Transfer of loans from investment in unconsolidated entity upon its dissolution | $ | — | $ | 22,926 | |
Transfer of real estate owned from investment in unconsolidated entity upon its dissolution | $ | — | $ | 2,145 | |
Transfer of loans from discontinued operations | $ | 61,580 | $ | — | |
Transfer of real estate owned from discontinued operations | $ | 17,343 | $ | — | |
Leased vehicles transferred to repossessed assets | $ | 830 | $ | 757 |
The accompanying notes are an integral part of these consolidated statements.statements.
7
THE BANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
| For the nine months | ||
|
| ended September 30, | ||
|
| 2017 |
| 2016 |
|
| (in thousands) | ||
Operating activities |
|
|
|
|
Net income (loss) from continuing operations |
| $ 30,670 |
| $ (29,811) |
Net income (loss) from discontinued operations |
| 3,438 |
| (37,909) |
Adjustments to reconcile net income to net cash |
|
|
|
|
provided by operating activities |
|
|
|
|
Depreciation and amortization |
| 4,538 |
| 4,783 |
Provision for loan and lease losses |
| 2,150 |
| 1,810 |
Net amortization of investment securities discounts/premiums |
| 6,955 |
| 6,066 |
Stock-based compensation expense |
| 2,400 |
| 1,990 |
Loans originated for sale |
| (398,410) |
| (372,065) |
Sale of loans originated for resale |
| 453,976 |
| 299,855 |
Gain on sales of loans originated for resale |
| (13,119) |
| (809) |
Loss (gain) on sale of fixed assets |
| 28 |
| (21) |
Loss on sale of other real estate owned |
| 19 |
| - |
Fair value adjustment on investment in unconsolidated entity |
| (20) |
| 14,753 |
Gain on sales of investment securities |
| (1,595) |
| (3,131) |
Decrease (increase) in accrued interest receivable |
| 458 |
| (1,025) |
Decrease (increase) in other assets |
| 872 |
| (19,290) |
Decrease (increase) in discontinued assets held for sale |
| 1,123 |
| (5,779) |
Increase (decrease) in other liabilities |
| (18,794) |
| 10,505 |
Net cash provided by (used in) operating activities |
| 74,689 |
| (130,078) |
|
|
|
|
|
Investing activities |
|
|
|
|
Purchase of investment securities available-for-sale |
| (237,870) |
| (499,969) |
Proceeds from sale of investment securities available-for-sale |
| 83,918 |
| 115,637 |
Proceeds from redemptions and prepayments of securities held-to-maturity |
| 7,000 |
| 51 |
Proceeds from redemptions and prepayments of securities available-for-sale |
| 234,163 |
| 133,212 |
Proceeds from sale of other real estate owned |
| 85 |
| - |
Net increase in loans |
| (152,484) |
| (120,312) |
Net decrease in discontinued loans held for sale |
| 44,594 |
| 203,533 |
Proceeds from sale of fixed assets |
| 366 |
| 341 |
Purchases of premises and equipment |
| (625) |
| (4,237) |
Investment in unconsolidated entity |
| 19,239 |
| 6,371 |
Net cash used in investing activities |
| (1,614) |
| (165,373) |
|
|
|
|
|
Financing activities |
|
|
|
|
Net decrease in deposits |
| (672,909) |
| (647,822) |
Net decrease in securities sold under agreements to repurchase |
| (94) |
| (572) |
Proceeds of short-term borrowings and federal funds purchased |
| - |
| 70,000 |
Common stock issuance expense |
| (200) |
| - |
Proceeds from the issuance of common stock |
| - |
| 74,812 |
Net cash used in financing activities |
| (673,203) |
| (503,582) |
|
|
|
|
|
Net decrease in cash and cash equivalents |
| (600,128) |
| (799,033) |
|
|
|
|
|
Cash and cash equivalents, beginning of period |
| 999,059 |
| 1,155,162 |
|
|
|
|
|
Cash and cash equivalents, end of period |
| $ 398,931 |
| $ 356,129 |
|
|
|
|
|
Supplemental disclosure: |
|
|
|
|
Interest paid |
| $ 11,176 |
| $ 9,514 |
Taxes paid |
| $ 1,051 |
| $ 366 |
8
The accompanying notes are an integral part of these consolidated statements.
9
THE BANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLDIATEDCONSOLIDATED FINANCIAL STATEMENTS
Note 1. StructureOrganization and Nature of CompanyOperations
The Bancorp, Inc. (the Company), or (“the Company”), is a Delaware corporation and a registered financial holding company. Its primary subsidiary is The Bancorp Bank, (the Bank)National Association, or (“the Bank”), which is wholly owned by the Company. The Bank is a Delawarenationally chartered commercial bank located in Wilmington, Delaware and is a Federal Deposit Insurance Corporation (FDIC)(“FDIC”) insured institution. InAs a nationally chartered institution, its continuing operations,primary regulator is the Office of the Comptroller of the Currency (“OCC”). The Bank has fourtwo primary lines of business consisting of its national specialty lending:lending segment and its payments segment.
In the national specialty lending segment, the Bank makes the following types of loans: securities-backed lines of credit (SBLOC)(“SBLOC”) and cash value of insurance-backed lines of credit (“IBLOC”), leasing,leases (direct lease financing), Small Business Administration (SBA)(“SBA”) loans and non-SBA commercial real estate (“CRE”) bridge loans. Prior to 2020, the Company generated CRE bridge loans generated for sale into capital markets primarily through commercial loan securitizations (CMBS)which issued commercial mortgage backed securities (“CMBS”). ThroughIn the Bank,third quarter of 2020, the Company decided to retain the CRE bridge loans on its balance sheet and no future securitizations are currently planned. In the third quarter of 2021, the Company resumed originating CRE bridge loans (primarily apartment buildings), after suspending the origination of such loans for most of 2020 and the first half of 2021. These new originations are classified as real estate bridge loans (“REBL”) and are accounted for at amortized cost, while prior CRE bridge loans originally generated for securitization continue to be accounted for at fair value. Additionally, in 2020, the Company began originating advisor financing loans to investment advisors for debt refinance, acquisition of other advisory firms or internal succession.
While the national specialty lending segment generates the majority of the Company’s revenues, the payment segment also contributes significant revenues. In its payments segment, the Company provides bankingpayment and deposit services nationally, which include prepaid cards,and debit card accounts, private label banking, institutional banking,deposit accounts to investment advisors’ customers, card payment and other payment processing. processing services. Payment segment deposits fund the majority of the Company’s loans and securities and may be lower cost than other funding sources. Most of that segment’s revenues and deposits, in addition to SBLOC and IBLOC loans, result from relationships with third parties that market such products. Concentrations of loans and lower cost deposits result based upon the cumulative account balances generated by those third parties. Similar revenue concentrations result in prepaid, debit card and related fees.
The Company and the Bank are subject to regulation by certain state and federal agencies and, accordingly, they are examined periodically by those regulatory authorities. As a consequence of the extensive regulation of commercial banking activities, the Company’s and the Bank’s businesses may be affected by state and federal legislation and regulations.
Note 2. Significant Accounting Policies
Basis of Presentation
The financial statements of the Company, as of September 30, 20172022 and for the three and nine month periods ended September 30, 20172022 and 2016,2021, are unaudited. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP)(“U.S. GAAP”) have been condensed or omitted in this Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Commission.Commission (“SEC”). However, in the opinion of management, these interim financial statements include all necessary adjustments to fairly present the results of the interim periods presented. The unaudited interim consolidated financial statements should be read in conjunction with the audited financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 (20162021 (the “2021 Form 10-K Report)10-K”). The results of operations for the nine month period ended September 30, 20172022 may not necessarily be indicative of the results of operations for the full year ending December 31, 2017. 2022. In the first quarter of 2021, the Company changed its presentation of treasury stock acquired through common stock repurchases. To simplify presentation, common stock repurchases previously shown separately as treasury stock, are now shown as reductions in common stock and additional paid-in capital.
There have been no significant changes to the Significant Accounting Policies as described in the 2021 Form 10-K. The Company performed a strategic evaluation of its businesses in the third quarter of 2014 and decided to discontinue its Philadelphia commercial lending operations to focus on its specialty finance lending. The Company has since disposed of the vast majority of related loans and other real estate owned. While in the process of disposition, financial results of the commercial lending operations were presented as separate from continuing operations on the consolidated statements of operations and assets of the commercial lending operations to be disposed of were presented as assets held-for-sale on the consolidated balance sheets. As disposition efforts concluded, discontinued loans of $61.6 million were reclassified to loans held for investment in the first quarter of 2022. Accordingly, these loans will be accounted for as such, and included in related tables. On the December 31, 2021 consolidated balance sheet, these discontinued loans
were reclassified as loans held for sale in continuing operations and included within “Commercial loans, at fair value”. Discontinued other real estate owned of $17.3 million which constituted the remainder of discontinued assets was reclassified to the other real estate owned caption on the balance sheet. As noted above, in the first quarter of 2022 the loans previously in discontinued operations were reclassified to held for investment. In the second quarter of 2022, as a result of the loan reclassification, related valuation reserves were reversed as a credit to “Net realized and unrealized gains on commercial loans, at fair value” in the consolidated statement of operations, while the allowances for credit losses and loan commitments in the consolidated balance sheet were increased through a provision for credit losses. The $3.5 million credit to “ Net realized and unrealized gains on commercial loans, at fair value” was offset by a provision for credit losses of $3.5 million with no net impact on income. Of the $3.5 million provision, $1.3 million increased the allowance for credit losses and $2.2 million increased the allowance for loan commitments recorded in other liabilities. These reclassification entries were made retroactive to the first quarter of 2022 and are reflected in year to date 2022 results.
The Company’s 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, the Company decided to retain these loans on its balance sheet as interest earning assets and has resumed originating such loans. These new originations are identified as REBL and are held for investment in the loan portfolio. Prior originations initially 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 Company recognizes compensation expense for stock options in accordance with Financial Accounting Standards Board (FASB) (“FASB”) Accounting Standards Codification (ASC)(“ASC”) 718, “Stock Based Compensation”. The expense of the option is generally measured at fair value at the grant date with compensation expense recognized over the service period, which is typically the vesting period. For grants subject to a service condition, the Company utilizes the Black-Scholes option-pricing model to estimate the fair value of each option on the date of grant. The Black-Scholes model takes into consideration the exercise price and expected life of the options, the current price of the underlying stock and its expected volatility, the expected dividends on the stock and the current risk-free interest rate for the expected life of the option. The Company’s estimate of the fair value of a stock option is based on expectations derived from historical experience and may not necessarily equate to its market value when fully vested. In accordance with ASC 718, the Company estimates the number of options for which the requisite service is expected to be rendered. At September 30, 2017,2022, the Company had twothree active stock-based compensation plans, which are more fully described in its 2016 Form 10-K Report. plans.
The Company did not grant stock options duringDuring the nine month periodmonths ended September 30, 2017. The2022, the Company granted 300,000100,000 stock options with a vesting period of four years inand a weighted average grant-date fair value of $14.01. During the first nine months ended September 30, 2021, the Company granted 100,000 stock options with a vesting period of 2016.four years and a weighted average grant-date fair value of $8.51. There were 28,50035,318 common stock options exercised in the nine month periodsperiod ended September 30, 2017, and no2022.There were 657,500 common stock options were exercised duringin the nine month period ended September 30, 2016. 2021.
10
A summary of the status of the Company’s equity compensation plansstock options is presented below.
|
|
|
|
|
|
|
| |||||||||
|
|
|
|
|
|
|
| |||||||||
|
|
|
|
|
|
|
| Weighted average | ||||||||
|
|
|
|
|
|
|
| remaining | ||||||||
|
|
|
|
| Weighted average |
|
| Weighted average | contractual | Aggregate | ||||||
|
|
|
|
| remaining |
|
| Options | exercise price | term (years) | intrinsic value | |||||
|
|
| Weighted average |
| contractual |
| Aggregate | |||||||||
| Shares |
| exercise price |
| term (years) |
| intrinsic value | |||||||||
Outstanding at January 1, 2017 | 2,021,625 |
| $ 8.32 |
| 5.24 |
| $ - | |||||||||
Outstanding at January 1, 2022 | 550,104 | $ | 9.67 | 7.17 | $ | 8,603,191 | ||||||||||
Granted | - |
| - |
| - |
| - | 100,000 | 30.32 | 9.37 | — | |||||
Exercised | (28,500) |
| 7.36 |
| - |
| - | (35,318) | 8.84 | — | 808,850 | |||||
Expired | (1,000) |
| 25.43 |
| - |
| - | — | — | — | — | |||||
Forfeited | (38,750) |
| 8.37 |
| - |
| - | (7,182) | — | — | — | |||||
Outstanding at September 30, 2017 | 1,953,375 |
| $ 8.31 |
| 4.51 |
| $ 941,090 | |||||||||
Exercisable at September 30, 2017 | 1,705,875 |
| $ 8.50 |
| 3.93 |
| $ 599,090 | |||||||||
Outstanding at September 30, 2022 | 607,604 | $ | 13.13 | 7.40 | $ | 6,213,070 | ||||||||||
Exercisable at September 30, 2022 | 266,328 | $ | 8.87 | 6.31 | $ | 3,490,558 |
The Company granted 955,024260,693 restricted stock units (RSUs)(“RSUs”) in the first nine months of 20172022, of which 820,024219,311 have a vesting period of three years and 135,00041,382 have a vesting period of one year. At issuance, for the 260,693 RSUs granted in the first nine months of 2017: 799,5592022 had a weighted average fair value of $5.06, 7,923 had a fair value of $6.31 and 147,542 had a fair value of $7.65. In$28.61 per unit. In the first nine months of 2016, the2021, the Company granted 789,000 restricted313,697 RSUs of which 620,000 had261,073 have a vesting period of three years and 169,000 had52,624 have a vesting period of one year. OfAt issuance, the 313,697 RSUs granted in the first nine months of 2016, 489,0002021 had a weighted average fair value of $4.50 and 300,000 had a fair value of $6.75 at issuance. The total fair value of RSUs vested for the nine months ended September 30, 2017 and 2016 was $2.6 million and $830,000, respectively.$18.81 per unit.
A summary of the status of the Company’s RSUs is presented below.
|
|
|
|
|
| ||||||
|
|
|
|
|
| ||||||
|
|
| Weighted average |
| Average remaining | Weighted average | Average remaining | ||||
|
|
| grant date |
| contractual | grant date | contractual | ||||
| Shares |
| fair value |
| term (years) | RSUs | fair value | term (years) | |||
Outstanding at January 1, 2017 | 831,775 |
| $ 5.77 |
| 1.62 | ||||||
Outstanding at January 1, 2022 | 1,030,124 | $ | 10.49 | 1.17 | |||||||
Granted | 955,024 |
| 5.47 |
|
| 260,693 | 28.61 | 2.09 | |||
Vested | (438,441) |
| 5.89 |
|
| (564,932) | 10.21 | — | |||
Forfeited | (83,904) |
| 5.93 |
|
| (23,220) | 13.29 | — | |||
Outstanding at September 30, 2017 | 1,264,454 |
| $ 5.49 |
| 1.92 | ||||||
Outstanding at September 30, 2022 | 702,665 | $ | 17.52 | 1.22 |
As of September 30, 2017,2022, there was a total of $5.9$10.3 million of unrecognized compensation cost related to unvested awards under share-based plans. This cost is expected to be recognized over a weighted average period of approximately 2.01.3 years. Related compensation expense for the three months ended September 30, 2022 and 2021 was $2.1 million and $2.1 million, respectively. Related compensation expense for the nine months ended September 30, 2017 2022 and 20162021 was $2.4$5.6 million and $2.0$6.5 million, respectively. The total issuance date fair value of RSUs vested and options exercised during the nine months ended September 30, 2022 and 2021 was $6.0 million and $7.6 million, respectively. The total intrinsic value of the options exercised and RSUs vested in those respective periods was $14.7 million and $25.3 million, respectively.
For the periods ended September 30, 2022 and 2021, the Company estimated the fair value of each stock option grant on the date of grant using the Black-Scholes options pricing model with the following weighted average assumptions:
September 30, | |||
2022 | 2021 | ||
Risk-free interest rate | 1.94% | 1.19% | |
Expected dividend yield | — | — | |
Expected volatility | 45.10% | 45.61% | |
Expected lives (years) | 6.3 | 6.3 |
Expected volatility is based on the historical volatility of the Company’s stock and peer group comparisons over the expected life of the grant. The risk-free rate for periods within the expected life of the option is based on the U.S. Treasury strip rate in effect at the time of the grant. The life of the option is based on historical factors which include the contractual term, vesting period, exercise behavior and employee terminations. In accordance with ASC 718, Stock Based Compensation, stock based compensation expense for the period ended September 30, 2022 is based on awards that are ultimately expected to vest and has been reduced for estimated forfeitures. The Company estimated forfeitures using historical data based upon the groups identified by management.
The Company calculates earnings per share underin accordance with ASC 260, “Earnings Per Share”. Basic earnings per share exclude dilution and are computed by dividing income available to common shareholders by the weighted average common shares outstanding during the period. Diluted earnings per share takes into account the potential dilution that could occur if securities, including stock options and RSUs or other contracts to issue common stock were exercised and converted into common stock. Stock options are dilutive if exercise prices are less than current stock prices. RSUs are dilutive because they represent grants over vesting periods which do not require employees to pay exercise prices. The dilution shown in the tables below includes the potential dilution from both stock options and RSUs.
11
The following tables show the Company’s earnings per share for the periods presented:
|
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| ||||||||
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|
| ||||||||
|
| For the three months ended | For the three months ended | |||||||||||
|
| September 30, 2017 | September 30, 2022 | |||||||||||
|
| Income |
| Shares |
| Per share | Income | Shares | Per share | |||||
|
| (numerator) |
| (denominator) |
| amount | (numerator) | (denominator) | amount | |||||
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|
| (Dollars in thousands except share and per share data) | |||||||
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| (dollars in thousands except share and per share data) | ||||||||||||
Basic earnings per share from continuing operations |
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| ||||||||
Basic earnings per share | ||||||||||||||
Net earnings available to common shareholders |
| $ 6,770 |
| 55,758,433 |
| $ 0.12 | $ | 30,604 | 56,429,425 | $ | 0.54 | |||
Effect of dilutive securities |
|
|
|
|
|
| ||||||||
Common stock options |
| - |
| 554,405 |
| - | ||||||||
Common stock options and restricted stock units | — | 578,799 | — | |||||||||||
Diluted earnings per share |
|
|
|
|
|
| ||||||||
Net earnings available to common shareholders |
| $ 6,770 |
| 56,312,838 |
| $ 0.12 | $ | 30,604 | 57,008,224 | $ | 0.54 |
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|
| For the three months ended | ||||
|
| September 30, 2017 | ||||
|
| Income |
| Shares |
| Per share |
|
| (numerator) |
| (denominator) |
| amount |
|
|
|
|
|
|
|
|
| (dollars in thousands except share and per share data) | ||||
Basic earnings per share from discontinued operations |
|
|
|
|
|
|
Net earnings available to common shareholders |
| $ 511 |
| 55,758,433 |
| $ 0.01 |
Effect of dilutive securities |
|
|
|
|
|
|
Common stock options |
| - |
| 554,405 |
| - |
Diluted earnings per share |
|
|
|
|
|
|
Net earnings available to common shareholders |
| $ 511 |
| 56,312,838 |
| $ 0.01 |
|
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|
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|
| For the three months ended | ||||
|
| September 30, 2017 | ||||
|
| Income |
| Shares |
| Per share |
|
| (numerator) |
| (denominator) |
| amount |
| �� |
|
|
|
|
|
|
| (dollars in thousands except share and per share data) | ||||
Basic earnings per share |
|
|
|
|
|
|
Net earnings available to common shareholders |
| $ 7,281 |
| 55,758,433 |
| $ 0.13 |
Effect of dilutive securities |
|
|
|
|
|
|
Common stock options |
| - |
| 554,405 |
| - |
Diluted earnings per share |
|
|
|
|
|
|
Net earnings available to common shareholders |
| $ 7,281 |
| 56,312,838 |
| $ 0.13 |
Stock options for 1,633,375407,604 shares, exercisable at prices between $6.75$6.87 and $10.45 per share, were outstanding at September 30, 2017, but were not2022, and included in the dilutive shares diluted earnings per share computation because the exercise price per share was greaterless than the average market price.
12
|
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| For the nine months ended | ||||
|
| September 30, 2017 | ||||
|
| Income |
| Shares |
| Per share |
|
| (numerator) |
| (denominator) |
| amount |
|
| (dollars in thousands except share and per share data) | ||||
Basic earnings per share from continuing operations |
|
|
|
|
|
|
Net earnings available to common shareholders |
| $ 30,670 |
| 55,661,538 |
| $ 0.55 |
Effect of dilutive securities |
|
|
|
|
|
|
Common stock options |
| - |
| 382,371 |
| - |
Diluted earnings per share |
|
|
|
|
|
|
Net earnings available to common shareholders |
| $ 30,670 |
| 56,043,909 |
| $ 0.55 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the nine months ended | ||||
|
| September 30, 2017 | ||||
|
| Income |
| Shares |
| Per share |
|
| (numerator) |
| (denominator) |
| amount |
|
| (dollars in thousands except share and per share data) | ||||
Basic earnings per share from discontinued operations |
|
|
|
|
|
|
Net earnings available to common shareholders |
| $ 3,438 |
| 55,661,538 |
| $ 0.06 |
Effect of dilutive securities |
|
|
|
|
|
|
Common stock options |
| - |
| 382,371 |
| - |
Diluted earnings per share |
|
|
|
|
|
|
Net earnings available to common shareholders |
| $ 3,438 |
| 56,043,909 |
| $ 0.06 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the nine months ended | ||||
|
| September 30, 2017 | ||||
|
| Income |
| Shares |
| Per share |
|
| (numerator) |
| (denominator) |
| amount |
|
|
|
|
|
|
|
|
| (dollars in thousands except share and per share data) | ||||
Basic earnings per share |
|
|
|
|
|
|
Net earnings available to common shareholders |
| $ 34,108 |
| 55,661,538 |
| $ 0.61 |
Effect of dilutive securities |
|
|
|
|
|
|
Common stock options |
| - |
| 382,371 |
| - |
Diluted earnings per share |
|
|
|
|
|
|
Net earnings available to common shareholders |
| $ 34,108 |
| 56,043,909 |
| $ 0.61 |
price. Stock options for 1,953,375200,000 shares were anti-dilutive and not included in the earnings per share calculation.
For the nine months ended | ||||||||
September 30, 2022 | ||||||||
Income | Shares | Per share | ||||||
(numerator) | (denominator) | amount | ||||||
(Dollars in thousands except share and per share data) | ||||||||
Basic earnings per share | ||||||||
Net earnings available to common shareholders | $ | 89,972 | 56,782,524 | $ | 1.58 | |||
Effect of dilutive securities | ||||||||
Common stock options and restricted stock units | — | 728,462 | (0.02) | |||||
Diluted earnings per share | ||||||||
Net earnings available to common shareholders | $ | 89,972 | 57,510,986 | $ | 1.56 |
Stock options for 407,604 shares, exercisable at prices between $6.75$6.87 and $10.45 per share, were outstanding at September 30, 2017, but were not2022, and included in the dilutive shares diluted earnings per share computation because the exercise price per share was greaterless than the average market price.
|
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| For the three months ended | ||||
|
| September 30, 2016 | ||||
|
| Income |
| Shares |
| Per share |
|
| (numerator) |
| (denominator) |
| amount |
|
|
|
|
|
|
|
|
| (dollars in thousands except share and per share data) | ||||
Basic loss per share from continuing operations |
|
|
|
|
|
|
Net loss available to common shareholders |
| $ (1,530) |
| 47,153,658 |
| $ (0.03) |
Effect of dilutive securities |
|
|
|
|
|
|
Common stock options |
| - |
| - |
| - |
Diluted loss per share |
|
|
|
|
|
|
Net loss available to common shareholders |
| $ (1,530) |
| 47,153,658 |
| $ (0.03) |
13
|
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|
| For the three months ended | ||||
|
| September 30, 2016 | ||||
|
| Income |
| Shares |
| Per share |
|
| (numerator) |
| (denominator) |
| amount |
|
|
|
|
|
|
|
|
| (dollars in thousands except share and per share data) | ||||
Basic loss per share from discontinued operations |
|
|
|
|
|
|
Net loss available to common shareholders |
| $ (24,021) |
| 47,153,658 |
| $ (0.51) |
Effect of dilutive securities |
|
|
|
|
|
|
Common stock options |
| - |
| - |
| - |
Diluted loss per share |
|
|
|
|
|
|
Net loss available to common shareholders |
| $ (24,021) |
| 47,153,658 |
| $ (0.51) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the three months ended | ||||
|
| September 30, 2016 | ||||
|
| Income |
| Shares |
| Per share |
|
| (numerator) |
| (denominator) |
| amount |
|
|
|
|
|
|
|
|
| (dollars in thousands except share and per share data) | ||||
Basic loss per share |
|
|
|
|
|
|
Net loss available to common shareholders |
| $ (25,551) |
| 47,153,658 |
| $ (0.54) |
Effect of dilutive securities |
|
|
|
|
|
|
Common stock options |
| - |
| - |
| - |
Diluted loss per share |
|
|
|
|
|
|
Net loss available to common shareholders |
| $ (25,551) |
| 47,153,658 |
| $ (0.54) |
price. Stock options for 2,036,500200,000 shares were anti-dilutive and not included in the earnings per share calculation.
For the three months ended | ||||||||
September 30, 2021 | ||||||||
Income | Shares | Per share | ||||||
(numerator) | (denominator) | amount | ||||||
(dollars in thousands except share and per share data) | ||||||||
Basic earnings per share from continuing operations | ||||||||
Net earnings available to common shareholders | $ | 28,195 | 57,198,778 | $ | 0.49 | |||
Effect of dilutive securities | ||||||||
Common stock options and restricted stock units | — | 1,429,528 | (0.01) | |||||
Diluted earnings per share | ||||||||
Net earnings available to common shareholders | $ | 28,195 | 58,628,306 | $ | 0.48 |
For the three months ended | ||||||||
September 30, 2021 | ||||||||
Income | Shares | Per share | ||||||
(numerator) | (denominator) | amount | ||||||
(dollars in thousands except share and per share data) | ||||||||
Basic earnings per share from discontinued operations | ||||||||
Net earnings available to common shareholders | $ | 66 | 57,198,778 | $ | — | |||
Effect of dilutive securities | ||||||||
Common stock options and restricted stock units | — | 1,429,528 | — | |||||
Diluted earnings per share | ||||||||
Net earnings available to common shareholders | $ | 66 | 58,628,306 | $ | — |
For the three months ended | ||||||||
September 30, 2021 | ||||||||
Income | Shares | Per share | ||||||
(numerator) | (denominator) | amount | ||||||
(dollars in thousands except share and per share data) | ||||||||
Basic earnings per share | ||||||||
Net earnings available to common shareholders | $ | 28,261 | 57,198,778 | $ | 0.49 | |||
Effect of dilutive securities | ||||||||
Common stock options and restricted stock units | — | 1,429,528 | (0.01) | |||||
Diluted earnings per share | ||||||||
Net earnings available to common shareholders | $ | 28,261 | 58,628,306 | $ | 0.48 |
Notes: The total of diluted earnings per share from continuing and discontinued operations does not equal diluted earnings per share due to rounding.
In 2022, after reclassification of discontinued assets to continuing operations, there was no further income or expense for discontinued operations.
Stock options for 504,104 shares, exercisable at prices between $6.75$6.87 and $25.43$18.81 per share, were outstanding at September 30, 2016 but2021, and included in the dilutive earnings per share computation. Stock options for 100,000 shares were anti-dilutive and not included in dilutive shares because the Company had a net loss available to common shareholders.
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|
|
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|
|
| For the nine months ended | ||||
|
| September 30, 2016 | ||||
|
| Income |
| Shares |
| Per share |
|
| (numerator) |
| (denominator) |
| amount |
|
|
|
|
|
|
|
|
| (dollars in thousands except share and per share data) | ||||
Basic loss per share from continuing operations |
|
|
|
|
|
|
Net loss available to common shareholders |
| $ (29,811) |
| 40,957,247 |
| $ (0.73) |
Effect of dilutive securities |
|
|
|
|
|
|
Common stock options |
| - |
| - |
| - |
Diluted loss per share |
|
|
|
|
|
|
Net loss available to common shareholders |
| $ (29,811) |
| 40,957,247 |
| $ (0.73) |
earnings per share calculation.
|
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|
|
|
|
|
|
|
|
|
| For the nine months ended | ||||
|
| September 30, 2016 | ||||
|
| Income |
| Shares |
| Per share |
|
| (numerator) |
| (denominator) |
| amount |
|
|
|
|
|
|
|
|
| (dollars in thousands except share and per share data) | ||||
Basic loss per share from discontinued operations |
|
|
|
|
|
|
Net loss available to common shareholders |
| $ (37,909) |
| 40,957,247 |
| $ (0.92) |
Effect of dilutive securities |
|
|
|
|
|
|
Common stock options |
| - |
| - |
| - |
Diluted loss per share |
|
|
|
|
|
|
Net loss available to common shareholders |
| $ (37,909) |
| 40,957,247 |
| $ (0.92) |
|
| For the nine months ended | ||||
|
| September 30, 2016 | ||||
|
| Income |
| Shares |
| Per share |
|
| (numerator) |
| (denominator) |
| amount |
|
|
|
|
|
|
|
|
| (dollars in thousands except share and per share data) | ||||
Basic loss per share |
|
|
|
|
|
|
Net loss available to common shareholders |
| $ (67,720) |
| 40,957,247 |
| $ (1.65) |
Effect of dilutive securities |
|
|
|
|
|
|
Common stock options |
| - |
| - |
| - |
Diluted loss per share |
|
|
|
|
|
|
Net loss available to common shareholders |
| $ (67,720) |
| 40,957,247 |
| $ (1.65) |
For the nine months ended | ||||||||
September 30, 2021 | ||||||||
Income | Shares | Per share | ||||||
(numerator) | (denominator) | amount | ||||||
(dollars in thousands except share and per share data) | ||||||||
Basic earnings per share from continuing operations | ||||||||
Net earnings available to common shareholders | $ | 83,413 | 57,221,174 | $ | 1.45 | |||
Effect of dilutive securities | ||||||||
Common stock options and restricted stock units | — | 1,710,972 | (0.04) | |||||
Diluted earnings per share | ||||||||
Net earnings available to common shareholders | $ | 83,413 | 58,932,146 | $ | 1.41 |
For the nine months ended | ||||||||
September 30, 2021 | ||||||||
Income | Shares | Per share | ||||||
(numerator) | (denominator) | amount | ||||||
(dollars in thousands except share and per share data) | ||||||||
Basic earnings per share from discontinued operations | ||||||||
Net earnings available to common shareholders | $ | 248 | 57,221,174 | $ | 0.01 | |||
Effect of dilutive securities | ||||||||
Common stock options and restricted stock units | — | 1,710,972 | — | |||||
Diluted earnings per share | ||||||||
Net earnings available to common shareholders | $ | 248 | 58,932,146 | $ | 0.01 |
For the nine months ended | ||||||||
September 30, 2021 | ||||||||
Income | Shares | Per share | ||||||
(numerator) | (denominator) | amount | ||||||
(dollars in thousands except share and per share data) | ||||||||
Basic earnings per share | ||||||||
Net earnings available to common shareholders | $ | 83,661 | 57,221,174 | $ | 1.46 | |||
Effect of dilutive securities | ||||||||
Common stock options and restricted stock units | — | 1,710,972 | (0.04) | |||||
Diluted earnings per share | ||||||||
Net earnings available to common shareholders | $ | 83,661 | 58,932,146 | $ | 1.42 |
Stock options for 2,036,500504,104 shares, exercisable at prices between $6.75$6.87 and $25.43$18.81 per share, were outstanding at September 30, 2016 but2021, and included in the dilutive earnings per share computation. Stock options for 100,000 shares were anti-dilutive and not included in dilutive shares because the Company had a net loss available to common shareholders.earnings per share calculation.
Note 5. Investment Securities
The amortized cost, gross unrealized gains and losses, and fair values of the Company’s investment securities classified as available-for-sale and held-to-maturity at September 30, 20172022 and December 31, 20162021 are summarized as follows (in thousands):
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Available-for-sale |
| September 30, 2017 | September 30, 2022 | ||||||||||||||||
|
|
|
| Gross |
| Gross |
|
| Gross | Gross | |||||||||
|
| Amortized |
| unrealized |
| unrealized |
| Fair | Amortized | unrealized | unrealized | Fair | |||||||
|
| cost |
| gains |
| losses |
| value | cost | gains | losses | value | |||||||
U.S. Government agency securities |
| $ 35,162 |
| $ 87 |
| $ (24) |
| $ 35,225 | $ | 25,872 | $ | 14 | $ | (1,604) | $ | 24,282 | |||
Asset-backed securities * |
| 264,196 |
| 1,182 |
| (439) |
| 264,939 | 354,690 | — | (13,709) | 340,981 | |||||||
Tax-exempt obligations of states and political subdivisions |
| 13,157 |
| 179 |
| (17) |
| 13,319 | 3,559 | — | (102) | 3,457 | |||||||
Taxable obligations of states and political subdivisions |
| 71,592 |
| 1,671 |
| (150) |
| 73,113 | 45,696 | 54 | (1,718) | 44,032 | |||||||
Residential mortgage-backed securities |
| 367,017 |
| 840 |
| (3,420) |
| 364,437 | 154,920 | 120 | (10,726) | 144,314 | |||||||
Collateralized mortgage obligation securities |
| 129,722 |
| 294 |
| (923) |
| 129,093 | 46,479 | — | (1,717) | 44,762 | |||||||
Commercial mortgage-backed securities |
| 153,274 |
| 488 |
| (114) |
| 153,648 | 194,856 | — | (12,890) | 181,966 | |||||||
Foreign debt securities |
| 59,685 |
| 398 |
| (88) |
| 59,995 | |||||||||||
Corporate debt securities |
| 102,205 |
| 1,047 |
| (65) |
| 103,187 | 10,000 | — | (3,200) | 6,800 | |||||||
|
| $ 1,196,010 |
| $ 6,186 |
| $ (5,240) |
| $ 1,196,956 | $ | 836,072 | $ | 188 | $ | (45,666) | $ | 790,594 |
|
|
|
|
|
|
|
|
| |||||||||||
|
| September 30, 2017 | September 30, 2022 | ||||||||||||||||
|
|
|
| Gross |
| Gross |
|
| Gross | Gross | |||||||||
|
| Amortized |
| unrealized |
| unrealized |
| Fair | Amortized | unrealized | unrealized | Fair | |||||||
* Asset-backed securities as shown above |
| cost |
| gains |
| losses |
| value | cost | gains | losses | value | |||||||
Federally insured student loan securities |
| $ 94,409 |
| $ 254 |
| $ (418) |
| $ 94,245 | $ | 18,692 | $ | — | $ | (244) | $ | 18,448 | |||
Collateralized loan obligation securities |
| 153,369 |
| 800 |
| (19) |
| 154,150 | 335,998 | — | (13,465) | 322,533 | |||||||
Other |
| 16,418 |
| 128 |
| (2) |
| 16,544 | |||||||||||
|
| $ 264,196 |
| $ 1,182 |
| $ (439) |
| $ 264,939 | $ | 354,690 | $ | — | $ | (13,709) | $ | 340,981 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-maturity |
| September 30, 2017 | ||||||
|
|
|
| Gross |
| Gross |
|
|
|
| Amortized |
| unrealized |
| unrealized |
| Fair |
|
| cost |
| gains |
| losses |
| value |
Other debt securities - single issuers |
| $ 11,017 |
| $ 118 |
| $ (2,761) |
| $ 8,374 |
Other debt securities - pooled |
| 75,385 |
| 1,340 |
| - |
| 76,725 |
|
| $ 86,402 |
| $ 1,458 |
| $ (2,761) |
| $ 85,099 |
Available-for-sale | December 31, 2021 | ||||||||||
Gross | Gross | ||||||||||
Amortized | unrealized | unrealized | Fair | ||||||||
cost | gains | losses | value | ||||||||
U.S. Government agency securities | $ | 36,182 | $ | 1,167 | $ | (47) | $ | 37,302 | |||
Asset-backed securities * | 360,332 | 327 | (241) | 360,418 | |||||||
Tax-exempt obligations of states and political subdivisions | 3,559 | 172 | — | 3,731 | |||||||
Taxable obligations of states and political subdivisions | 45,984 | 2,422 | — | 48,406 | |||||||
Residential mortgage-backed securities | 179,778 | 4,804 | (281) | 184,301 | |||||||
Collateralized mortgage obligation securities | 60,778 | 1,083 | — | 61,861 | |||||||
Commercial mortgage-backed securities | 248,599 | 4,106 | (1,629) | 251,076 | |||||||
Corporate debt securities | 10,000 | — | (3,386) | 6,614 | |||||||
$ | 945,212 | $ | 14,081 | $ | (5,584) | $ | 953,709 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale |
| December 31, 2016 | ||||||
|
|
|
| Gross |
| Gross |
|
|
|
| Amortized |
| unrealized |
| unrealized |
| Fair |
|
| cost |
| gains |
| losses |
| value |
U.S. Government agency securities |
| $ 27,771 |
| $ 23 |
| $ (92) |
| $ 27,702 |
Asset-backed securities * |
| 355,622 |
| 1,811 |
| (2,037) |
| 355,396 |
Tax-exempt obligations of states and political subdivisions |
| 15,492 |
| 129 |
| (137) |
| 15,484 |
Taxable obligations of states and political subdivisions |
| 78,143 |
| 1,539 |
| (633) |
| 79,049 |
Residential mortgage-backed securities |
| 347,120 |
| 598 |
| (5,149) |
| 342,569 |
Collateralized mortgage obligation securities |
| 160,649 |
| 619 |
| (1,445) |
| 159,823 |
Commercial mortgage-backed securities |
| 117,844 |
| 250 |
| (1,008) |
| 117,086 |
Foreign debt securities |
| 56,603 |
| 168 |
| (274) |
| 56,497 |
Corporate debt securities |
| 95,005 |
| 421 |
| (418) |
| 95,008 |
|
| $ 1,254,249 |
| $ 5,558 |
| $ (11,193) |
| $ 1,248,614 |
December 31, 2021 | |||||||||||
Gross | Gross | ||||||||||
Amortized | unrealized | unrealized | Fair | ||||||||
* Asset-backed securities as shown above | cost | gains | losses | value | |||||||
Federally insured student loan securities | $ | 22,518 | $ | 13 | $ | (73) | $ | 22,458 | |||
Collateralized loan obligation securities | 337,814 | 314 | (168) | 337,960 | |||||||
$ | 360,332 | $ | 327 | $ | (241) | $ | 360,418 |
|
|
|
|
|
|
|
|
|
|
| December 31, 2016 | ||||||
|
|
|
| Gross |
| Gross |
|
|
|
| Amortized |
| unrealized |
| unrealized |
| Fair |
* Asset-backed securities as shown above |
| cost |
| gains |
| losses |
| value |
Federally insured student loan securities |
| $ 122,579 |
| $ 346 |
| $ (2,000) |
| $ 120,925 |
Collateralized loan obligation securities |
| 215,117 |
| 1,294 |
| (14) |
| 216,397 |
Other |
| 17,926 |
| 171 |
| (23) |
| 18,074 |
|
| $ 355,622 |
| $ 1,811 |
| $ (2,037) |
| $ 355,396 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-maturity |
| December 31, 2016 | ||||||
|
|
|
| Gross |
| Gross |
|
|
|
| Amortized |
| unrealized |
| unrealized |
| Fair |
|
| cost |
| gains |
| losses |
| value |
Other debt securities - single issuers |
| $ 17,983 |
| $ 179 |
| $ (3,026) |
| $ 15,136 |
Other debt securities - pooled |
| 75,484 |
| 1,179 |
| - |
| 76,663 |
|
| $ 93,467 |
| $ 1,358 |
| $ (3,026) |
| $ 91,799 |
Investments in Federal Home Loan andBank (“FHLB”), Atlantic Central Bankers Bank stock, and Federal Reserve Bank stock are recorded at cost and amounted to $991,000$12.6 million and $1.6$1.7 million respectively, at September 30, 20172022 and December 31, 2016.2021, respectively. The Bank’s conversion to a national charter required the purchase of $11.0 million of Federal Reserve Bank stock in September of 2022. The amount of FHLB stock required to be held is based on the amount of borrowings, and after repayment thereof, the stock may be redeemed.
The amortized cost and fair value of the Company’s investment securities at September 30, 2017,2022, by contractual maturity, are shown below (in thousands). Expected maturities may differ from contractual maturities because borrowers have the right to call or prepay obligations with or without call or prepayment penalties.
|
|
|
|
|
|
|
|
| |||||||||
|
|
|
|
|
|
|
|
| |||||||||
|
| Available-for-sale |
| Held-to-maturity | Available-for-sale | ||||||||||||
|
| Amortized |
| Fair |
| Amortized |
| Fair | Amortized | Fair | |||||||
|
| cost |
| value |
| cost |
| value | cost | value | |||||||
Due before one year |
| $ 6,433 |
| $ 6,441 |
| $ - |
| $ - | $ | 27,387 | $ | 27,232 | |||||
Due after one year through five years |
| 170,145 |
| 171,473 |
| - |
| - | 144,209 | 137,727 | |||||||
Due after five years through ten years |
| 361,549 |
| 362,268 |
| - |
| - | 229,430 | 219,888 | |||||||
Due after ten years |
| 657,883 |
| 656,774 |
| 86,402 |
| 85,099 | 435,046 | 405,747 | |||||||
|
| $ 1,196,010 |
| $ 1,196,956 |
| $ 86,402 |
| $ 85,099 | $ | 836,072 | $ | 790,594 |
At September 30, 20172022 and December 31, 2016, there were2021, no investment securities pledged for securities sold under repurchase agreementswere encumbered through pledging or otherwise, as required or permitted by law. At September 30, 2017 and December 31, 2016, investment securitiesborrowings were collateralized with a fair value of approximately $606.8 million and $607.2 million, respectively, were pledged to secure a line of credit with the FHLB.loans.
Fair valuevalues of available-for-sale securities are based on the fair market valuevalues supplied by a third-party market data provider, while theor where such third-party market data is not available, fair value of held-to-maturity securitiesvalues are based on the present value of cash flows, which discounts expected cash flows from principal
16
and interest using yield to maturity at the measurement date. The Company periodically reviews its investment portfolio to determine whether unrealized losses are other than temporary, based on an evaluation of the creditworthiness of the issuers/guarantors as well as the underlying collateral, if applicable, in addition to the continuing performance of the securities. The amount of the credit impairment is calculated by estimating the discounted cash flows for those securities.flows. The Company did not recognize any other-than-temporary impairment charges in the first nine months of 2017. third-party market data provider uses a pricing matrix which it creates daily, taking into consideration actual trade data, projected prepayments, and when relevant, projected credit defaults and losses.
The table below indicates the length of time individual securities had been in a continuous unrealized loss position at September 30, 20172022 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
Available-for-sale |
|
|
| Less than 12 months |
| 12 months or longer |
| Total | Less than 12 months | 12 months or longer | Total | |||||||||||||||||||||||
|
| Number of securities |
| Fair Value |
| Unrealized losses |
| Fair Value |
| Unrealized losses |
| Fair Value |
| Unrealized losses | Number of securities | Fair Value | Unrealized losses | Fair Value | Unrealized losses | Fair Value | Unrealized losses | |||||||||||||
Description of Securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
U.S. Government agency securities |
| 4 |
| $ 17,266 |
| $ (24) |
| $ - |
| $ - |
| $ 17,266 |
| $ (24) | 12 | $ | 20,101 | $ | (1,571) | $ | 2,409 | $ | (33) | $ | 22,510 | $ | (1,604) | |||||||
Asset-backed securities |
| 16 |
| 16,453 |
| (20) |
| 58,961 |
| (419) |
| 75,414 |
| (439) | 58 | 179,430 | (5,571) | 161,551 | (8,138) | 340,981 | (13,709) | |||||||||||||
Tax-exempt obligations of states and |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
political subdivisions |
| 2 |
| - |
| - |
| 2,148 |
| (17) |
| 2,148 |
| (17) | 4 | 3,457 | (102) | — | — | 3,457 | (102) | |||||||||||||
Taxable obligations of states and |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
political subdivisions |
| 14 |
| 14,844 |
| (127) |
| 977 |
| (23) |
| 15,821 |
| (150) | 26 | 39,727 | (1,718) | — | — | 39,727 | (1,718) | |||||||||||||
Residential mortgage-backed securities |
| 93 |
| 173,175 |
| (1,573) |
| 98,021 |
| (1,847) |
| 271,196 |
| (3,420) | 132 | 124,133 | (9,413) | 8,513 | (1,313) | 132,646 | (10,726) | |||||||||||||
Collateralized mortgage obligation securities |
| 26 |
| 62,244 |
| (468) |
| 30,937 |
| (455) |
| 93,181 |
| (923) | 22 | 44,762 | (1,717) | — | — | 44,762 | (1,717) | |||||||||||||
Commercial mortgage-backed securities |
| 8 |
| 23,434 |
| (114) |
| 243 |
| - |
| 23,677 |
| (114) | 43 | 143,893 | (7,450) | 38,073 | (5,440) | 181,966 | (12,890) | |||||||||||||
Foreign debt securities |
| 21 |
| 15,869 |
| (68) |
| 1,180 |
| (20) |
| 17,049 |
| (88) | ||||||||||||||||||||
Corporate debt securities |
| 20 |
| 11,658 |
| (30) |
| 4,514 |
| (35) |
| 16,172 |
| (65) | 1 | — | — | 6,800 | (3,200) | 6,800 | (3,200) | |||||||||||||
Total temporarily impaired |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
Total unrealized loss position | ||||||||||||||||||||||||||||||||||
investment securities |
| 204 |
| $ 334,943 |
| $ (2,424) |
| $ 196,981 |
| $ (2,816) |
| $ 531,924 |
| $ (5,240) | 298 | $ | 555,503 | $ | (27,542) | $ | 217,346 | $ | (18,124) | $ | 772,849 | $ | (45,666) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-maturity |
|
|
| Less than 12 months |
| 12 months or longer |
| Total | ||||||
|
| Number of securities |
| Fair Value |
| Unrealized losses |
| Fair Value |
| Unrealized losses |
| Fair Value |
| Unrealized losses |
Description of Securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate and other debt securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single issuers |
| 1 |
| $ - |
| $ - |
| $ 6,343 |
| $ (2,761) |
| $ 6,343 |
| $ (2,761) |
Total temporarily impaired |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
investment securities |
| 1 |
| $ - |
| $ - |
| $ 6,343 |
| $ (2,761) |
| $ 6,343 |
| $ (2,761) |
The table below indicates the length of time individual securities had been in a continuous unrealized loss position at December 31, 20162021 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
Available-for-sale |
|
|
| Less than 12 months |
| 12 months or longer |
| Total | Less than 12 months | 12 months or longer | Total | |||||||||||||||||||||||
|
| Number of securities |
| Fair Value |
| Unrealized losses |
| Fair Value |
| Unrealized losses |
| Fair Value |
| Unrealized losses | Number of securities | Fair Value | Unrealized losses | Fair Value | Unrealized losses | Fair Value | Unrealized losses | |||||||||||||
Description of Securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
U.S. Government agency securities |
| 5 |
| $ 7,414 |
| $ (36) |
| $ 7,824 |
| $ (56) |
| $ 15,238 |
| $ (92) | 2 | $ | — | $ | — | $ | 2,700 | $ | (47) | $ | 2,700 | $ | (47) | |||||||
Asset-backed securities |
| 23 |
| 10,186 |
| (49) |
| 93,375 |
| (1,988) |
| 103,561 |
| (2,037) | 42 | 243,598 | (235) | 1,197 | (6) | 244,795 | (241) | |||||||||||||
Tax-exempt obligations of states and |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
political subdivisions |
| 8 |
| 6,056 |
| (118) |
| 3,301 |
| (19) |
| 9,357 |
| (137) | ||||||||||||||||||||
Taxable obligations of states and |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
political subdivisions |
| 27 |
| 42,963 |
| (633) |
| - |
| - |
| 42,963 |
| (633) | ||||||||||||||||||||
Residential mortgage-backed securities |
| 68 |
| 180,357 |
| (4,833) |
| 54,254 |
| (316) |
| 234,611 |
| (5,149) | 30 | 21,640 | (159) | 5,160 | (122) | 26,800 | (281) | |||||||||||||
Collateralized mortgage obligation securities |
| 28 |
| 88,936 |
| (1,004) |
| 30,386 |
| (441) |
| 119,322 |
| (1,445) | ||||||||||||||||||||
Commercial mortgage-backed securities |
| 28 |
| 79,345 |
| (963) |
| 4,547 |
| (45) |
| 83,892 |
| (1,008) | 12 | 3,334 | (43) | 91,355 | (1,586) | 94,689 | (1,629) | |||||||||||||
Foreign debt securities |
| 34 |
| 26,696 |
| (274) |
| 700 |
| - |
| 27,396 |
| (274) | ||||||||||||||||||||
Corporate debt securities |
| 39 |
| 30,418 |
| (414) |
| 645 |
| (4) |
| 31,063 |
| (418) | 1 | — | — | 6,614 | (3,386) | 6,614 | (3,386) | |||||||||||||
Total temporarily impaired |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
Total unrealized loss position | ||||||||||||||||||||||||||||||||||
investment securities |
| 260 |
| $ 472,371 |
| $ (8,324) |
| $ 195,032 |
| $ (2,869) |
| $ 667,403 |
| $ (11,193) | 87 | $ | 268,572 | $ | (437) | $ | 107,026 | $ | (5,147) | $ | 375,598 | $ | (5,584) |
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-maturity |
|
|
| Less than 12 months |
| 12 months or longer |
| Total | ||||||
|
| Number of securities |
| Fair Value |
| Unrealized losses |
| Fair Value |
| Unrealized losses |
| Fair Value |
| Unrealized losses |
Description of Securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate and other debt securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single issuers |
| 1 |
| $ - |
| $ - |
| $ 6,039 |
| $ (3,026) |
| $ 6,039 |
| $ (3,026) |
Total temporarily impaired |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
investment securities |
| 1 |
| $ - |
| $ - |
| $ 6,039 |
| $ (3,026) |
| $ 6,039 |
| $ (3,026) |
Other securities included in the held-to-maturity classification at September 30, 2017 consisted of three securities secured by diversified portfolios of corporate securities and two single-issuerThe Company owns one single issuer trust preferred securities.
A total of $11.0 million of other debt securities - single issuers is comprised of the following: amortized cost of the two single-issuer trust preferred securities of $11.0 million, of which one security for $1.9 million was issued by a bank and one security for $9.1 million was issued by an insurance company.
A totalThe security is not rated by any bond rating service. At September 30, 2022, it had a book value of $75.4$10.0 million and a fair value of other$6.8 million. This security is presented in the corporate debt securities – pooled is comprised of three securities consisting of diversified portfolios of corporate securities.classification in the tables above.
The following table provides additional information related to the Company’s single issuer trust preferred securities as of September 30, 2017 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single issuer |
| Book value |
| Fair value |
| Unrealized gain/(loss) |
| Credit rating |
Security A |
| $ 1,913 |
| $ 2,031 |
| $ 118 |
| Not rated |
Security B |
| 9,104 |
| 6,343 |
| (2,761) |
| Not rated |
|
|
|
|
|
|
|
|
|
Class: All of the above are trust preferred securities. |
|
|
|
|
|
|
|
|
The Company has evaluated the securities in the above tables as of September 30, 2022 and has concluded that none of these securities has impairment that is other-than-temporary. required an allowance for credit loss. The Company evaluates whether aan allowance for credit impairment existsloss is required by considering primarily the following factors: (a) the length of time and extent to which the fair value has beenis 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. The Company’s determination of the best estimate of expected future cash flows, which is used to determine the credit loss amount, is a quantitative and qualitative process that incorporates information received from third-party sources along with internal assumptions and judgments regarding the future performance of the security. The Company concluded that most of the securities that are in an unrealized loss position are in a loss position because of changes in market interest rates after the securities were purchased. Securities that have been in an unrealized loss position for 12 months or longer include other securities whose market values are sensitive to market interest rates. The Company’s unrealized loss for other debt securities, which include twoone single issuer trust preferred securities,security, is primarily related to general market conditions, including a lack of liquidity in the market. The severity of the temporary impairmentsimpact of fair value in relation to the carrying amounts of the individual investments is consistent with market developments. The Company’s analysis of each investment is performed at the security level. As a result of its review, the Company concluded that other-than-temporary impairment didan allowance was not exist duerequired to the Company’s ability and intention to hold these securities to recover their amortized cost basis.recognize credit losses.
Note 6. Loans
The Company has several lending lines of business includingincluding: small business comprised primarily of SBA loans,loans; direct lease financing primarily for commercial vehicles and to a lesser extent equipment; SBLOC collateralized by marketable securities; IBLOC collateralized by the cash value of eligible life insurance policies; and other specialty and consumer lending. Theinvestment advisor financing for purposes of debt refinance, acquisition of another firm or internal succession. Prior to 2020, the Company also originatesoriginated commercial real estate bridge loans for sale into commercial mortgage backed securitizations or to secondary government guaranteed loan markets. These sales are accounted for as true sales and servicing rights on these loans are not retained. Thesecuritizations. At origination, the Company has elected fair value treatment for these loans as they were originally held-for-sale, to better reflect the economics of the transactions. Currently, the Company intends to hold these loans on its balance sheet, and thus no
longer accounts for these loans as held-for-sale. The Company continues to present these loans at fair value. At September 30, 2017,2022, the total commercial loans, at fair value were $818.0 million, and the unpaid principal balance was $826.0 million, including the guaranteed portion of certain SBA loans also previously held for sale. Included in “Net realized and unrealized gains (losses) on commercial loans, at fair value” in the consolidated statements of operations were changes in the fair value of the loans held for sale was $383.0 million and their book value was $378.2 million. Included in the gain on sale of loans in the Statements of Operations were gains recognized from changes in fair value of $1.9 million forsuch loans. For the nine months ended September 30, 2017. There were no2022, related net unrealized losses recognized for changes in fair value relatedwere $5.3 million, which reflected $6.4 million of losses attributable to credit risk. Interest earnedweaknesses. Included in the $6.4 million was a $4.0 million third quarter unrealized loss to reflect a write-down to a September 2022 appraisal, less estimated disposition costs, of a $9.5 million loan. The loan, collateralized by a movie theater, had been current and performing but missed its August 2022 payment, and ceased operations in that month. Additionally, during the third quarter of 2022, the parent company of the theater chain declared bankruptcy and filed a motion to reject the lease at the property. The loan was previously measured based on its scheduled contractual cash flows, discounted at a market rate. However, based on the events occurring during the quarter and the current likelihood of foreclosure, the estimated fair value of the loan at September 30, 2022 was determined to equal the fair value of the theater based on the aforementioned new appraisal, less the estimated cost of disposition. The loan represents the only movie theater loan in the Company’s portfolios and was originated in 2015, before non-SBA commercial loan originations were primarily comprised of apartment building loans. Of the $2.15 billion of non-SBA commercial loans, at fair value and REBL loans which together comprise the non-SBA CRE portfolios, $2.05 billion are comprised of apartment building loans. For the nine months ended September 30, 2021, unrealized losses recognized for such changes in fair value were $285,000 of which $15,000 was attributable to credit weaknesses. In the third quarter of 2021, the Company resumed the origination of such loans which it also intends to hold for investment and which are accounted for at amortized cost. They are captioned as REBLs as they are transitional commercial mortgage loans which are made to improve and rehabilitate existing properties which already have cash flow. The Bank pledged the majority of its loans held for investment at amortized cost and commercial loans at fair value to either the Federal Home Loan Bank or the Federal Reserve Bank for lines of credit with those institutions. The Federal Home Loan Bank line is periodically utilized to manage liquidity, but the Federal Reserve line has not generally been used. However, in light of the impact of the COVID-19 pandemic, the Federal Reserve has encouraged banks to utilize their lines to maximize the amount of funding available for credit markets. Accordingly, the Bank has periodically borrowed against its Federal Reserve line on an overnight basis. The amount of loans pledged varies and the collateral may be unpledged at any time to the extent the collateral exceeds advances. The lines are maintained consistent with the Bank’s liquidity policy which maximizes potential liquidity. At September 30, 2022, $2.01 billion of loans were pledged to the Federal Reserve and $1.41 billion of loans were pledged to the Federal Home Loan Bank. At September 30, 2022, there was $0 outstanding against the Federal Reserve line and $0 outstanding against the Federal Home Loan Bank line.
Prior to 2020, the Company sponsored the structuring of commercial mortgage loan securitizations, and in 2020, the Company decided not to pursue additional securitizations. The loans previously sold to the commercial mortgage-backed securitizations were transitional commercial mortgage loans made to improve and rehabilitate existing properties which already have cash flow. Servicing rights were not retained. Each of the securitizations is considered a variable interest entity of which the Company is not the primary beneficiary. Further, true sale duringaccounting has been applicable to each of the period heldsecuritizations, as supported by a review performed by an independent third-party consultant. In each of the securitizations, the Company obtained a tranche of certificates which are accounted for as available-for-sale debt securities. The securities were recorded in Interest Income-Loans, including fees,at fair value at acquisition, which was determined by an independent third-party based on the Statementsdiscounted cash flow method using unobservable (level 3) inputs. Of the six securities resulting from our securitizations all have been repaid except that from CRE-2. As of Operations.September 30, 2022, the principal balance of the security we own issued by CRE-2 was $12.6 million. Repayment is expected from the workout or disposition of commercial real estate collateral, after repayment of the one remaining senior tranche. The Company’s $12.6 million security has 50% excess credit support; thus, losses of 50% of remaining security balances would have to be incurred, prior to any loss on our security. Additionally, the commercial real estate collateral supporting the three remaining loans was re-appraised between 2020 and 2022. The updated appraised value is approximately $60.9 million, which is net of $573,000 due to the servicer. The remaining principal to be repaid on all securities is approximately $58.1 million and, as noted, the Company’s security is scheduled to be repaid prior to 50% of the outstanding securities. However, any future reappraisals could result in further decreases in credit enhancement, and if such decreases exceed such credit enhancements, losses could result. While available information indicates that the value of existing collateral will be adequate to repay the Company’s security, there can be no assurance that such valuations will be realized upon loan resolutions, and that deficiencies will not exceed the 50% credit support. Of the remaining three loans, the property collateral for two of the loans is expected to be liquidated through sale. The third loan was originally extended two years to June of 2022 and terms have not yet been reached for another extension, thus putting the loan in maturity default. If not extended by the special servicer, the property will be foreclosed and sold. The property was appraised at $28.4 million on September 1, 2020 with total exposure in the security of $25.0 million. A recent broker opinion of property liquidation value was $20.9 million. The existing 50% credit enhancement continues to provide repayment protection for the Bank owned tranche.
The Company analyzes credit risk prior to making loans on an individual loan basis. The Company considers relevant aspects of the
18
borrowers’ financial position and cash flow, past borrower performance, management’s knowledge of market conditions, collateral and the ratio of loan amounts to estimated collateral value in making its credit determinations.
Major classifications of loans, excluding commercial loans held for sale,at fair value, are as follows (in thousands):
|
|
|
|
|
|
|
|
| September 30, |
| December 31, |
| 2017 |
| 2016 |
|
|
|
|
SBA non real estate | $ 72,055 |
| $ 74,644 |
SBA commercial mortgage | 132,997 |
| 126,159 |
SBA construction | 14,205 |
| 8,826 |
SBA loans * | 219,257 |
| 209,629 |
Direct lease financing | 369,069 |
| 346,645 |
SBLOC | 720,279 |
| 630,400 |
Other specialty lending | 36,664 |
| 11,073 |
Other consumer loans | 20,107 |
| 17,374 |
| 1,365,376 |
| 1,215,121 |
Unamortized loan fees and costs | 8,684 |
| 7,790 |
Total loans, net of deferred loan fees and costs | $ 1,374,060 |
| $ 1,222,911 |
|
|
|
|
September 30, | December 31, | ||||
2022 | 2021 | ||||
SBL non-real estate | $ | 116,080 | $ | 147,722 | |
SBL commercial mortgage | 429,865 | 361,171 | |||
SBL construction | 26,841 | 27,199 | |||
Small business loans | 572,786 | 536,092 | |||
Direct lease financing | 599,796 | 531,012 | |||
SBLOC / IBLOC * | 2,369,106 | 1,929,581 | |||
Advisor financing ** | 168,559 | 115,770 | |||
Real estate bridge loans | 1,488,119 | 621,702 | |||
Other loans *** | 64,980 | 5,014 | |||
5,263,346 | 3,739,171 | ||||
Unamortized loan fees and costs | 4,029 | 8,053 | |||
Total loans, including unamortized loan fees and costs | $ | 5,267,375 | $ | 3,747,224 |
Included in
September 30, | December 31, | ||||
2022 | 2021 | ||||
SBL loans, including costs net of deferred fees of $6,370 and $5,345 | |||||
for September 30, 2022 and December 31, 2021, respectively | $ | 579,156 | $ | 541,437 | |
SBL loans included in commercial loans, at fair value | 159,914 | 199,585 | |||
Total small business loans **** | $ | 739,070 | $ | 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 table abovecash surrender value of insurance policies. At September 30, 2022 and December 31, 2021, respectively, IBLOC loans amounted to $1.10 billion 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 $7.1$1.0 million and $2.4 million$322,000 at September 30, 20172022 and December 31, 2016,2021, respectively. OverdraftEstimated overdraft charge-offs and recoveries are reflected in the allowance for loancredit losses and lease losses.have been immaterial. September 30, 2022 includes $54.2 million of balances previously included in discontinued assets including $19.5 million of residential mortgage loans, with the balance comprised of commercial loans.
**** The following table shows SBA loans and SBAsmall business loans held for saleat fair value are comprised of the government guaranteed portion of SBA 7a loans at the dates indicated (in thousands):.
|
|
|
|
| September 30, |
| December 31, |
| 2017 |
| 2016 |
|
|
|
|
SBA loans, including deferred fees and costs | $ 225,909 |
| $ 215,786 |
SBA loans included in held for sale | 160,855 |
| 154,016 |
Total SBA loans | $ 386,764 |
| $ 369,802 |
The following table provides information about impaired loans individually evaluated for credit loss at September 30, 2022and December 31, 2021 (in thousands):
September 30, 2022 | ||||||||||||||
Recorded | Unpaid | Related | Average | Interest | ||||||||||
Without an allowance recorded | ||||||||||||||
SBL non-real estate | $ | 357 | $ | 3,526 | $ | — | $ | 385 | $ | 7 | ||||
SBL commercial mortgage | — | — | — | 56 | — | |||||||||
Direct lease financing | — | — | — | 66 | — | |||||||||
Other loans | 3,552 | 3,552 | — | 1,184 | 113 | |||||||||
Consumer - home equity | 298 | 298 | — | 309 | 7 | |||||||||
With an allowance recorded | ||||||||||||||
SBL non-real estate | 990 | 990 | (594) | 1,303 | 6 | |||||||||
SBL commercial mortgage | 1,423 | 1,423 | (222) | 1,006 | — | |||||||||
SBL construction | 710 | 710 | (34) | 710 | — | |||||||||
Other loans | 592 | 592 | (13) | 2,974 | — | |||||||||
Total | ||||||||||||||
SBL non-real estate | 1,347 | 4,516 | (594) | 1,688 | 13 | |||||||||
SBL commercial mortgage | 1,423 | 1,423 | (222) | 1,062 | — | |||||||||
SBL construction | 710 | 710 | (34) | 710 | — | |||||||||
Direct lease financing | — | — | — | 66 | — | |||||||||
Other loans | 4,144 | 4,144 | (13) | 4,158 | 113 | |||||||||
Consumer - home equity | 298 | 298 | — | 309 | 7 | |||||||||
$ | 7,922 | $ | 11,091 | $ | (863) | $ | 7,993 | $ | 133 |
December 31, 2021 | ||||||||||||||
Recorded | Unpaid | Related | Average | Interest | ||||||||||
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 |
The loan review department recommendsnon-accrual status for loans to the surveillance committee, where interest income appears to be uncollectible or a protracted delay in collection becomes evident. The surveillance committee further vets and approves the non-accrual status.
The following table summarizes non-accrual loans with and without an allowance for credit losses (“ACL”) as of the periods indicated
(in thousands):
September 30, 2022 | December 31, 2021 | ||||||||||
Non-accrual loans with a related ACL | Non-accrual loans without a related ACL | Total non-accrual loans | Total non-accrual loans | ||||||||
SBL non-real estate | $ | 861 | $ | 216 | $ | 1,077 | $ | 1,313 | |||
SBL commercial mortgage | 1,423 | — | 1,423 | 812 | |||||||
SBL construction | 710 | — | 710 | 710 | |||||||
Direct leasing | — | — | — | 254 | |||||||
Consumer - home equity | — | 58 | 58 | 72 | |||||||
Other loans | 592 | — | 592 | — | |||||||
$ | 3,586 | $ | 274 | $ | 3,860 | $ | 3,161 |
The Company had $18.9 million of other real estate owned at September 30, 20172022 and $18.9 million of other real estate owned at December 31, 2016 (in thousands):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Recorded |
| Unpaid |
| Related |
| Average |
| Interest |
September 30, 2017 |
|
|
|
|
|
|
|
|
|
Without an allowance recorded |
|
|
|
|
|
|
|
|
|
SBA non real estate | $ 357 |
| $ 357 |
| $ - |
| $ 274 |
| $ - |
SBA commercial mortgage | - |
| - |
| - |
| - |
| - |
Direct lease financing | 284 |
| 396 |
| - |
| 71 |
| - |
Consumer - other | - |
| - |
| - |
| - |
| - |
Consumer - home equity | 1,700 |
| 1,700 |
| - |
| 1,716 |
| - |
With an allowance recorded |
|
|
|
|
|
|
|
| - |
SBA non real estate | 2,288 |
| 2,288 |
| 1,659 |
| 2,534 |
| - |
SBA commercial mortgage | 1,226 |
| 1,226 |
| 185 |
| 761 |
| - |
Direct lease financing | - |
| - |
| - |
| 506 |
| - |
Consumer - other | - |
| - |
| - |
| 18 |
| - |
Consumer - home equity | - |
| - |
| - |
| - |
| - |
Total |
|
|
|
|
|
|
|
|
|
SBA non real estate | 2,645 |
| 2,645 |
| 1,659 |
| 2,808 |
| - |
19
SBA commercial mortgage | 1,226 |
| 1,226 |
| 185 |
| 761 |
| - |
Direct lease financing | 284 |
| 396 |
| - |
| 577 |
| - |
Consumer - other | - |
| - |
| - |
| 18 |
| - |
Consumer - home equity | 1,700 |
| 1,700 |
| - |
| 1,716 |
| - |
| 5,855 |
| 5,967 |
| 1,844 |
| 5,880 |
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016 |
|
|
|
|
|
|
|
|
|
Without an allowance recorded |
|
|
|
|
|
|
|
|
|
SBA non real estate | $ 191 |
| $ 191 |
| $ - |
| $ 336 |
| $ - |
Direct lease financing | - |
| - |
| - |
| - |
| - |
Consumer - other | - |
| - |
| - |
| 259 |
| - |
Consumer - home equity | 1,730 |
| 1,730 |
| - |
| 1,187 |
| - |
With an allowance recorded |
|
|
|
|
|
|
|
|
|
SBA non real estate | 2,183 |
| 2,183 |
| 938 |
| 1,277 |
| - |
Direct lease financing | 734 |
| 734 |
| 216 |
| 147 |
| - |
Consumer - other | - |
| - |
| - |
| - |
| - |
Consumer - home equity | - |
| - |
| - |
| 549 |
| - |
Total |
|
|
|
|
|
|
|
|
|
SBA non real estate | 2,374 |
| 2,374 |
| 938 |
| 1,613 |
| - |
Direct lease financing | 734 |
| 734 |
| 216 |
| 147 |
| - |
Consumer - other | - |
| - |
| - |
| 259 |
| - |
Consumer - home equity | 1,730 |
| 1,730 |
| - |
| 1,736 |
| - |
| 4,838 |
| 4,838 |
| 1,154 |
| 3,755 |
| - |
2021. The following tables summarizetable summarizes the Company’s non-accrual loans, loans past due 90 days and still accruingor more, and other real estate owned for the periods indicated (the Company had no non-accrual leases at September 30, 2017 or2022 and December 31, 2016) (in thousands):2021, respectively:
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|
| |||||
|
|
|
|
| |||||
|
| September 30, |
| December 31, | September 30, | December 31, | |||
|
| 2017 |
| 2016 | 2022 | 2021 | |||
|
|
|
|
| (Dollars in thousands) | ||||
Non-accrual loans |
|
|
|
| |||||
SBA non real estate |
| $ 2,310 |
| $ 1,530 | |||||
SBA commercial mortgage |
| 1,226 |
| - | |||||
Consumer |
| 1,417 |
| 1,442 | |||||
SBL non-real estate | $ | 1,077 | $ | 1,313 | |||||
SBL commercial mortgage | 1,423 | 812 | |||||||
SBL construction | 710 | 710 | |||||||
Direct leasing | — | 254 | |||||||
Other loans | 592 | — | |||||||
Consumer - home equity | 58 | 72 | |||||||
Total non-accrual loans |
| 4,953 |
| 2,972 | 3,860 | 3,161 | |||
|
|
|
|
| |||||
Loans past due 90 days or more |
| 354 |
| 661 | |||||
Loans past due 90 days or more and still accruing | 4,415 | 461 | |||||||
Total non-performing loans |
| 5,307 |
| 3,633 | 8,275 | 3,622 | |||
Other real estate owned |
| - |
| 104 | 18,873 | 18,873 | |||
Total non-performing assets |
| $ 5,307 |
| $ 3,737 | $ | 27,148 | $ | 22,495 |
Interest which would have been earned on loans classified as non-accrual for the nine months ended September 30, 2022 and 2021, was $133,000 and $247,000, respectively. No income on non-accrual loans was recognized during the nine months ended September 30, 2022. In the nine months ended September 30, 2022 and 2021 a total of $208,000 and $39,000, respectively, was reversed from interest income, which represented interest accrued on loans placed into non-accrual status during the period.
The Company’s loans that were modified as of September 30, 20172022 and December 31, 20162021 and considered troubled debt restructurings are as follows (dollars in thousands):
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|
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|
|
| September 30, 2017 |
| December 31, 2016 | ||||||||
|
| Number |
| Pre-modification recorded investment |
| Post-modification recorded investment |
| Number |
| Pre-modification recorded investment |
| Post-modification recorded investment |
SBA non real estate |
| 4 |
| $ 1,013 |
| $ 1,013 |
| 2 |
| $ 844 |
| $ 844 |
Direct lease financing |
| 1 |
| 285 |
| 285 |
| 1 |
| 734 |
| 734 |
Consumer |
| 2 |
| 541 |
| 541 |
| 1 |
| 288 |
| 288 |
Total |
| 7 |
| $ 1,839 |
| $ 1,839 |
| 4 |
| $ 1,866 |
| $ 1,866 |
September 30, 2022 | December 31, 2021 | ||||||||||||||||
Number | Pre-modification recorded investment | Post-modification recorded investment | Number | Pre-modification recorded investment | Post-modification recorded investment | ||||||||||||
SBL non-real estate | 8 | $ | 657 | $ | 657 | 9 | $ | 1,231 | $ | 1,231 | |||||||
SBL commercial mortgage | 1 | 834 | 834 | — | — | — | |||||||||||
Other loans | 1 | 3,552 | 3,552 | — | — | — | |||||||||||
Consumer - home equity | 1 | 241 | 241 | 1 | 248 | 248 | |||||||||||
Total(1) | 11 | $ | 5,284 | $ | 5,284 | 10 | $ | 1,479 | $ | 1,479 |
(1)Troubled debt restructurings include non-accrual loans of $1.2 million and $656,000 at September 30, 2022 and December 31, 2021, respectively.
The balances below provide information as to how the loans were modified as troubled debt restructuringsrestructuring loans as of September 30, 20172022 and December 31, 20162021 (in thousands):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| September 30, 2017 |
| December 31, 2016 | ||||||||
|
| Adjusted interest rate |
| Extended maturity |
| Combined rate and maturity |
| Adjusted interest rate |
| Extended maturity |
| Combined rate and maturity |
SBA non real estate |
| $ - |
| $ 144 |
| $ 869 |
| $ - |
| $ 144 |
| $ 700 |
Direct lease financing |
| - |
| - |
| 285 |
| - |
| - |
| 734 |
Consumer |
| - |
| - |
| 541 |
| - |
| - |
| 288 |
Total |
| $ - |
| $ 144 |
| $ 1,695 |
| $ - |
| $ 144 |
| $ 1,722 |
September 30, 2022 | December 31, 2021 | ||||||||||||||||
Adjusted interest rate | Extended maturity | Combined rate and maturity | Adjusted interest rate | Extended maturity | Combined rate and maturity | ||||||||||||
SBL non-real estate | $ | — | $ | — | $ | 657 | $ | — | $ | — | $ | 1,231 | |||||
SBL commercial mortgage | — | — | 834 | — | — | — | |||||||||||
Other loans | — | — | 3,552 | — | — | — | |||||||||||
Consumer - home equity | — | — | 241 | — | — | 248 | |||||||||||
Total(1) | $ | — | $ | — | $ | 5,284 | $ | — | $ | — | $ | 1,479 |
The following table summarizes, as(1)Troubled debt restructurings include non-accrual loans of $1.2 million and $656,000 at September 30, 2017, loans that had been restructured within the last 12 months that have subsequently defaulted.
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|
|
|
|
|
|
|
|
| Number |
| Pre-modification recorded investment |
SBA non real estate |
| 2 |
| $ 679 |
Total |
| 2 |
| $ 679 |
As of September 30, 20172022 and December 31, 2016, the2021, respectively.
The Company had no commitments to lendextend additional fundscredit to loan customers whose loan terms have been modified inloans classified as troubled debt restructurings.restructurings as of September 30, 2022 or December 31, 2021.
When loans are classified as troubled debt restructurings, the Company estimates the value of underlying collateral and repayment sources. A detail of the changesspecific reserve in the allowance for credit losses is established if the collateral valuation, less estimated disposition costs, is lower than the recorded loan and leasevalue. The amount of the specific reserve serves to increase the provision for credit losses byin the quarter the loan category is classified as followsa troubled debt restructuring. As of September 30, 2022, there were 11 troubled debt restructured loans with a balance of $5.3 million which had specific reserves of $447,000. As of December 31, 2021, there were 10 troubled debt restructured loans with a balance of $1.5 million which had specific reserves of $476,000. Substantially all of these reserves related to the non-guaranteed portion of SBA loans for start-up businesses.
The following table summarizes loans that were restructured within the 12 months ended September 30, 2022 that have subsequently defaulted (in thousands):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| SBA non real estate |
| SBA commercial mortgage |
| SBA construction |
| Direct lease financing |
| SBLOC |
| Other specialty lending |
| Other consumer loans |
| Unallocated |
| Total |
September 30, 2017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance |
| $ 1,976 |
| $ 737 |
| $ 76 |
| $ 1,994 |
| $ 315 |
| $ 32 |
| $ 975 |
| $ 227 |
| $ 6,332 |
Charge-offs |
| (343) |
| - |
| - |
| (780) |
| - |
| - |
| (113) |
| - |
| (1,236) |
Recoveries |
| 13 |
| - |
| - |
| - |
| - |
| - |
| 24 |
| - |
| 37 |
Provision (credit) |
| 1,576 |
| 521 |
| 22 |
| 196 |
| 45 |
| 36 |
| (220) |
| (26) |
| 2,150 |
Ending balance |
| $ 3,222 |
| $ 1,258 |
| $ 98 |
| $ 1,410 |
| $ 360 |
| $ 68 |
| $ 666 |
| $ 201 |
| $ 7,283 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance: Individually evaluated for impairment |
| $ 1,659 |
| $ 185 |
| $ - |
| $ - |
| $ - |
| $ - |
| $ - |
| $ - |
| $ 1,844 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance: Collectively evaluated for impairment |
| $ 1,563 |
| $ 1,073 |
| $ 98 |
| $ 1,410 |
| $ 360 |
| $ 68 |
| $ 666 |
| $ 201 |
| $ 5,439 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance |
| $ 72,055 |
| $ 132,997 |
| $ 14,205 |
| $ 369,069 |
| $ 720,279 |
| $ 36,664 |
| $ 20,107 |
| $ 8,684 |
| $ 1,374,060 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2022 | ||||
Number | Pre-modification recorded investment | |||
SBL non-real estate | 1 | $ | 334 | |
Total | 1 | $ | 334 |
21
Ending balance: Individually evaluated for impairment |
| $ 2,645 |
| $ 1,226 |
| $ - |
| $ 284 |
| $ - |
| $ - |
| $ 1,700 |
| $ - |
| $ 5,855 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance: Collectively evaluated for impairment |
| $ 69,410 |
| $ 131,771 |
| $ 14,205 |
| $ 368,785 |
| $ 720,279 |
| $ 36,664 |
| $ 18,407 |
| $ 8,684 |
| $ 1,368,205 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance |
| $ 844 |
| $ 408 |
| $ 48 |
| $ 1,022 |
| $ 762 |
| $ 199 |
| $ 936 |
| $ 181 |
| $ 4,400 |
Charge-offs |
| (128) |
| - |
| - |
| (119) |
| - |
| - |
| (1,211) |
| - |
| (1,458) |
Recoveries |
| 1 |
| - |
| - |
| 17 |
|
|
|
|
| 12 |
| - |
| 30 |
Provision (credit) |
| 1,259 |
| 329 |
| 28 |
| 1,074 |
| (447) |
| (167) |
| 1,238 |
| 46 |
| 3,360 |
Ending balance |
| $ 1,976 |
| $ 737 |
| $ 76 |
| $ 1,994 |
| $ 315 |
| $ 32 |
| $ 975 |
| $ 227 |
| $ 6,332 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance: Individually evaluated for impairment |
| $ 938 |
| $ - |
| $ - |
| $ 216 |
| $ - |
| $ - |
| $ - |
| $ - |
| $ 1,154 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance: Collectively evaluated for impairment |
| $ 1,038 |
| $ 737 |
| $ 76 |
| $ 1,778 |
| $ 315 |
| $ 32 |
| $ 975 |
| $ 227 |
| $ 5,178 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance |
| $ 74,644 |
| $ 126,159 |
| $ 8,826 |
| $ 346,645 |
| $ 630,400 |
| $ 11,073 |
| $ 17,374 |
| $ 7,790 |
| $ 1,222,911 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance: Individually evaluated for impairment |
| $ 2,374 |
| $ - |
| $ - |
| $ 734 |
| $ - |
| $ - |
| $ 1,730 |
| $ - |
| $ 4,838 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance: Collectively evaluated for impairment |
| $ 72,270 |
| $ 126,159 |
| $ 8,826 |
| $ 345,911 |
| $ 630,400 |
| $ 11,073 |
| $ 15,644 |
| $ 7,790 |
| $ 1,218,073 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance |
| $ 844 |
| $ 408 |
| $ 48 |
| $ 1,022 |
| $ 762 |
| $ 199 |
| $ 936 |
| $ 181 |
| 4,400 |
Charge-offs |
| (76) |
| - |
| - |
| (63) |
| - |
| - |
| (39) |
| - |
| (178) |
Recoveries |
| 1 |
| - |
| - |
| 18 |
| - |
| - |
| 7 |
| - |
| 26 |
Provision (credit) |
| 1,179 |
| 343 |
| 7 |
| 568 |
| (451) |
| (143) |
| 176 |
| 131 |
| 1,810 |
Ending balance |
| $ 1,948 |
| $ 751 |
| $ 55 |
| $ 1,545 |
| $ 311 |
| $ 56 |
| $ 1,080 |
| $ 312 |
| $ 6,058 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance: Individually evaluated for impairment |
| $ 939 |
| $ - |
| $ - |
| $ - |
| $ - |
| $ - |
| $ 474 |
| $ - |
| $ 1,413 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance: Collectively evaluated for impairment |
| $ 1,009 |
| $ 751 |
| $ 55 |
| $ 1,545 |
| $ 311 |
| $ 56 |
| $ 606 |
| $ 312 |
| $ 4,645 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance |
| $ 74,262 |
| $ 117,053 |
| $ 6,317 |
| $ 332,632 |
| $ 621,456 |
| $ 20,076 |
| $ 19,375 |
| $ 7,066 |
| $ 1,198,237 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance: Individually evaluated for impairment |
| $ 2,774 |
| $ - |
| $ - |
| $ - |
| $ - |
| $ - |
| $ 2,707 |
| $ - |
| $ 5,481 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance: Collectively evaluated for impairment |
| $ 71,488 |
| $ 117,053 |
| $ 6,317 |
| $ 332,632 |
| $ 621,456 |
| $ 20,076 |
| $ 16,668 |
| $ 7,066 |
| $ 1,192,756 |
Management estimates the allowance for credit losses using relevant available internal and external historical loan performance information, current economic conditions, and reasonable and supportable forecasts. Historical credit loss experience provides the initial basis for the estimation of expected credit losses over the estimated remaining life of the loans. The Company did not have loans acquired with deterioratedmethodology used in the estimation of the allowance, which is performed at least quarterly, is designed to be responsive to changes in portfolio credit quality at either September 30, 2017 or December 31, 2016.
22
A detailand the impact of current and future economic conditions on loan performance. The review of the appropriateness of the allowance is performed by the Chief Credit Officer and presented to the Audit Committee of the Company’s delinquent loans byBoard of Directors for their review. With the exception of SBLOC and IBLOC, which utilize probability of loss/loss given default, and the other loan category, which uses discounted cash flow to determine a reserve, the allowances for other categories are determined by establishing reserves on loan pools with similar risk characteristics based on a lifetime loss-rate model, or vintage analysis, as described in the following paragraph. Loans that do not share risk characteristics are evaluated on an individual basis. If foreclosure is believed to be probable or repayment is expected from the sale of the collateral, a reserve for deficiency is established within the allowance. Those reserves are estimated based on the difference between loan principal and the estimated fair value of the collateral, adjusted for estimated disposition costs.
Except for SBLOC, IBLOC and other loans as follows (in thousands):noted above, for purposes of determining the pool-basis reserve, the loans not assigned an individual reserve are segregated by product type, to recognize differing risk characteristics within portfolio segments, and an average historical loss rate is calculated for each product type. Loss rates are computed by classifying net charge-offs by year of loan origin, and
dividing into total originations for that specific year. This methodology is referred to as vintage analysis. The average loss rate is then projected over the estimated remaining loan lives unique to each loan pool, to determine estimated lifetime losses. For SBLOC and IBLOC, since losses have not been incurred, probability of loss/loss given default considerations are utilized. For the other loan category discounted cash flow is utilized to determine a reserve. For all loan pools the Company considers the need for an additional allowance based upon qualitative factors such as the Company’s current loan performance statistics as determined by pool. These qualitative factors are intended to account for forward looking expectations over a twelve to eighteen month period not reflected in historical loss rates and otherwise unaccounted for in the quantitative process. Accordingly, such factors may increase or decrease the allowance compared to historical loss rates as the Company’s forward looking expectations change. Aside from the qualitative adjustments to account for forward looking expectations of loss over a twelve to eighteen month projection period, the balance of the allowance reverts directly to the Company’s quantitative analysis derived from its historical loss rates.
A similar process is employed to calculate an allowance assigned to off-balance sheet commitments, which are comprised of unfunded loan commitments and letters of credit. That allowance for unfunded commitments is recorded in other liabilities. Even though portions of the allowance may be allocated to loans that have been individually measured for credit deterioration, the entire allowance is available for any credit that, in management’s judgment, should be charged off.
The Company ranks its qualitative factors in five levels: minimal, low, moderate, moderate-high and high risk. The individual qualitative factors for each portfolio segment have their own scale based on an analysis of that segment. A high risk ranking has the greatest impact on the allowance calculation with each level below having a lesser impact on a sliding scale. The qualitative factors used for each portfolio are described below in the description of each portfolio segment. When the Company adopted CECL as of January 1, 2020, the management assumption was that some degree of economic slowdown should be considered over the next eighteen months. That belief reflected the length of the current economic expansion and the relatively high level of unsustainable U.S. government deficit spending. Accordingly, certain of the Company’s qualitative factors were set at moderate as of January 1, 2020. Based on the uncertainty as to how the COVID-19 pandemic would impact the Company’s loan pools, the Company increased other qualitative factors to moderate and moderate high in 2020. In the second quarter of 2021, the Company reassessed these factors and reversed increases to moderate-high for certain pools, based upon increased vaccination rates and significant reopening of the economy. As a result of continuing economic uncertainty in 2022, including heightened inflation and increased risks of recession, the qualitative factors were maintained at their original levels, which had been set in anticipation of a downturn. The potential impact of heightened inflation was also considered by line of business heads, credit leadership and other staff. Two areas were identified which might be specifically impacted. First, Federal Reserve rate increases will directly increase a real estate bridge loan sponsors’ floating rate borrowing costs, and may also impair repayment ability in the future. However, borrowers generally are required to purchase interest rate caps that will partially limit the increase in borrowing costs during the term of the loan. Additionally, higher rents in the multifamily sector provide a significant risk mitigant to that portfolio which consists of apartment buildings, which we generally consider to be workforce housing in selected states and locales. Second, inflation in fuel prices poses a risk to the Company’s vehicle fleet leases, specifically for less fuel efficient vehicles for which demand and values may decrease. However, used vehicle prices are anticipated to be sustained for an additional twelve to eighteen months, impacted by chip shortages which may persist into 2024.
The economic qualitative factor is based on the estimated impact of economic conditions on the loan pools, as distinguished from the economic factors themselves, for the following reasons. The Company has not experienced charge-offs for either real estate bridge lending or similarly underwritten loans in its predecessor commercial loans, at fair value portfolio, despite stressed economic conditions. Additionally, there have been no losses for multi-family (apartment buildings) in the Company’s securitizations. Accordingly, the estimated credit losses for this pool were derived purely from industry loss information for multi-family housing. The estimated reserve on the multi-family portfolio is currently derived from that industry qualitative factor. Similarly, the Company’s charge-offs have been virtually non-existent for SBLOC and IBLOC notwithstanding stressed economic periods. Investment advisor loans were first offered in 2020 with limited performance history, during which charge-offs have not been experienced. For investment advisor loans, the nature of the underlying ultimate repayment source was considered, namely the fee-based advisory income streams resulting from investment portfolios under management and the impact changes in economic conditions would have on those payment streams. Additionally, the Company’s charge-off histories for small business loans, primarily SBA, and leases have not correlated with economic conditions, including trends in unemployment. While specific economic factors did not correlate with actual historical losses, multiple economic factors are considered. For the non-guaranteed portion of SBA loans, leases, real estate bridge lending and investment advisor financing the Company’s loss forecasting analysis included a review of industry statistics. However, the Company’s own charge-off history and average life estimates, for categories in which the Company has experienced charge-offs, was the primary quantitatively derived element in the forecasts. The qualitative component results from management’s qualitative assessments. In the second quarter of 2022, the Company adjusted its collateral qualitative factor for small business loans downward to account for a greater percentage of government guaranteed balances in applicable pools as compared to prior periods. Additionally, in the second quarter of 2022, allowances on credit deteriorated loans were reduced. The largest reduction was $1.0 million which resulted when single family units from a construction loan were sold for higher than expected prices. That loan had been included in discontinued loans prior to first quarter 2022, when discontinued assets were reclassified to continuing operations. The Company no longer engages in new construction residential lending.
Below are the portfolio segments used to pool loans with similar risk characteristics and align with the Company’s methodology for measuring expected credit losses. These pools have similar risk and collateral characteristics, and certain of these pools are broken down further in determining and applying the vintage loss estimates previously discussed. For instance, within the direct lease financing pool, government and public institution leases are considered separately. Additionally, the Company evaluates its loans under an internal loan risk rating system as a means of identifying problem loans. The special mention classification indicates weaknesses that may, if not cured, threaten the borrower’s future repayment ability. A substandard classification reflects an existing weakness indicating the possible inadequacy of net worth and other repayment sources. These classifications are used both by regulators and peers, as they have been correlated with an increased probability of credit losses. A summary of the Company’s primary portfolio pools and loans accordingly classified, by year of origination, at September 30, 2022 and December 31, 2021 are as follows (in thousands):
As of September 30, 2022 | 2022 | 2021 | 2020 | 2019 | 2018 | Prior | Revolving loans at amortized cost | Total | |||||||||||||||
SBL non real estate | |||||||||||||||||||||||
Non-rated* | $ | 4,135 | $ | 6,321 | $ | 306 | $ | — | $ | — | $ | — | $ | — | $ | 10,762 | |||||||
Pass | 23,140 | 30,941 | 14,209 | 7,568 | 6,756 | 6,782 | — | 89,396 | |||||||||||||||
Special mention | — | — | — | — | 603 | 303 | — | 906 | |||||||||||||||
Substandard | — | — | 334 | 190 | — | 2,819 | — | 3,343 | |||||||||||||||
Total SBL non-real estate | 27,275 | 37,262 | 14,849 | 7,758 | 7,359 | 9,904 | — | 104,407 | |||||||||||||||
SBL commercial mortgage | |||||||||||||||||||||||
Non-rated | 15,964 | — | — | — | — | — | — | 15,964 | |||||||||||||||
Pass | 68,176 | 99,428 | 58,784 | 65,792 | 42,986 | 69,141 | — | 404,307 | |||||||||||||||
Special mention | — | — | 141 | 1,853 | — | 644 | — | 2,638 | |||||||||||||||
Substandard | — | — | — | — | 834 | 589 | — | 1,423 | |||||||||||||||
Total SBL commercial mortgage | 84,140 | 99,428 | 58,925 | 67,645 | 43,820 | 70,374 | — | 424,332 | |||||||||||||||
SBL construction | |||||||||||||||||||||||
Non-rated | 286 | — | — | — | — | — | — | 286 | |||||||||||||||
Pass | 1,751 | 11,633 | 9,756 | 2,704 | — | — | — | 25,844 | |||||||||||||||
Substandard | — | — | — | — | — | 710 | — | 710 | |||||||||||||||
Total SBL construction | 2,037 | 11,633 | 9,756 | 2,704 | — | 710 | — | 26,840 | |||||||||||||||
Direct lease financing | |||||||||||||||||||||||
Non-rated | 65,992 | 33,930 | 9,081 | 1,302 | 508 | 146 | — | 110,959 | |||||||||||||||
Pass | 189,365 | 145,489 | 98,078 | 36,550 | 12,753 | 3,274 | — | 485,509 | |||||||||||||||
Special mention | 31 | — | 68 | — | 9 | — | — | 108 | |||||||||||||||
Substandard | 1,598 | 653 | 951 | 18 | — | — | — | 3,220 | |||||||||||||||
Total direct lease financing | 256,986 | 180,072 | 108,178 | 37,870 | 13,270 | 3,420 | — | 599,796 | |||||||||||||||
SBLOC | |||||||||||||||||||||||
Non-rated | — | — | — | — | — | — | 830 | 830 | |||||||||||||||
Pass | — | — | — | — | — | — | 1,264,187 | 1,264,187 | |||||||||||||||
Total SBLOC | — | — | — | — | — | — | 1,265,017 | 1,265,017 | |||||||||||||||
IBLOC | |||||||||||||||||||||||
Non-rated | — | — | — | — | — | — | 548,178 | 548,178 | |||||||||||||||
Pass | — | — | — | — | — | — | 555,911 | 555,911 | |||||||||||||||
Total IBLOC | — | — | — | — | — | — | 1,104,089 | 1,104,089 | |||||||||||||||
Advisor financing | |||||||||||||||||||||||
Non-rated | 17,259 | 3,712 | — | — | — | — | — | 20,971 | |||||||||||||||
Pass | 41,498 | 66,560 | 39,530 | — | — | — | — | 147,588 | |||||||||||||||
Total advisor financing | 58,757 | 70,272 | 39,530 | — | — | — | — | 168,559 | |||||||||||||||
Real estate bridge loans | |||||||||||||||||||||||
Pass | 840,423 | 647,696 | — | — | — | — | — | 1,488,119 | |||||||||||||||
Total real estate bridge loans | 840,423 | 647,696 | — | — | — | — | — | 1,488,119 | |||||||||||||||
Other loans | |||||||||||||||||||||||
Non-rated | 3,774 | 37 | 62 | — | — | 21,714 | 522 | 26,109 | |||||||||||||||
Pass | 227 | 368 | 2,612 | 2,794 | 3,741 | 40,930 | 1,205 | 51,877 | |||||||||||||||
Special mention | — | — | — | — | — | 3,552 | — | 3,552 | |||||||||||||||
Substandard | — | — | — | — | — | 592 | 57 | 649 | |||||||||||||||
Total other loans** | 4,001 | 405 | 2,674 | 2,794 | 3,741 | 66,788 | 1,784 | 82,187 | |||||||||||||||
$ | 1,273,619 | $ | 1,046,768 | $ | 233,912 | $ | 118,771 | $ | 68,190 | $ | 151,196 | $ | 2,370,890 | $ | 5,263,346 | ||||||||
Unamortized loan fees and costs | — | — | — | — | — | — | — | 4,029 | |||||||||||||||
Total | $ | 5,267,375 |
*Included in the SBL non real estate non-rated total of $10.8 million, were $6.6 million of PPP loans.
**Included in Other loans are $17.2 million of SBA loans purchased for Community Reinvestment Act (“CRA”) purposes as of September 30, 2022. These loans are classified as SBL in the Company’s loan table which classify loans by type, as opposed to risk characteristics.
As of December 31, 2021 | 2021 | 2020 | 2019 | 2018 | 2017 | Prior | Revolving loans at amortized cost | Total | ||||||||||||||||
SBL non real estate | ||||||||||||||||||||||||
Non-rated* | $ | 39,318 | $ | 7,257 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 46,575 | ||||||||
Pass | 34,172 | 15,934 | 8,794 | 8,988 | 5,088 | 9,809 | — | 82,785 | ||||||||||||||||
Special mention | — | — | 99 | 666 | — | 859 | — | 1,624 | ||||||||||||||||
Substandard | — | — | — | 18 | 848 | 895 | — | 1,761 | ||||||||||||||||
Total SBL non-real estate | 73,490 | 23,191 | 8,893 | 9,672 | 5,936 | 11,563 | — | 132,745 | ||||||||||||||||
SBL commercial mortgage | ||||||||||||||||||||||||
Non-rated | 10,963 | — | — | — | — | — | — | 10,963 | ||||||||||||||||
Pass | 79,166 | 57,554 | 75,290 | 43,820 | 37,607 | 46,016 | — | 339,453 | ||||||||||||||||
Special mention | — | 141 | 1,853 | — | — | 247 | — | 2,241 | ||||||||||||||||
Substandard | — | — | — | — | — | 812 | — | 812 | ||||||||||||||||
Total SBL commercial mortgage | 90,129 | 57,695 | 77,143 | 43,820 | 37,607 | 47,075 | — | 353,469 | ||||||||||||||||
SBL construction | ||||||||||||||||||||||||
Pass | 6,869 | 12,629 | 1,880 | 5,111 | — | — | — | 26,489 | ||||||||||||||||
Substandard | — | — | — | — | — | 710 | — | 710 | ||||||||||||||||
Total SBL construction | 6,869 | 12,629 | 1,880 | 5,111 | — | 710 | — | 27,199 | ||||||||||||||||
. | ||||||||||||||||||||||||
Direct lease financing | ||||||||||||||||||||||||
Non-rated | 56,152 | 13,271 | 1,933 | 1,115 | 355 | 104 | — | 72,930 | ||||||||||||||||
Pass | 214,780 | 145,256 | 58,337 | 26,662 | 8,574 | 2,105 | — | 455,714 | ||||||||||||||||
Special mention | — | — | — | 22 | 38 | — | — | 60 | ||||||||||||||||
Substandard | 526 | 1,679 | 38 | 22 | 31 | 12 | — | 2,308 | ||||||||||||||||
Total direct lease financing | 271,458 | 160,206 | 60,308 | 27,821 | 8,998 | 2,221 | — | 531,012 | ||||||||||||||||
SBLOC | ||||||||||||||||||||||||
Non-rated | — | — | — | — | — | — | 3,176 | 3,176 | ||||||||||||||||
Pass | — | — | — | — | — | — | 1,138,140 | 1,138,140 | ||||||||||||||||
Total SBLOC | — | — | — | — | — | — | 1,141,316 | 1,141,316 | ||||||||||||||||
IBLOC | ||||||||||||||||||||||||
Non-rated | — | — | — | — | — | — | 346,604 | 346,604 | ||||||||||||||||
Pass | — | — | — | — | — | — | 441,661 | 441,661 | ||||||||||||||||
Total IBLOC | — | — | — | — | — | — | 788,265 | 788,265 | ||||||||||||||||
Advisor financing | ||||||||||||||||||||||||
Non-rated | 38,330 | 258 | — | — | — | — | — | 38,588 | ||||||||||||||||
Pass | 33,776 | 43,406 | — | — | — | — | — | 77,182 | ||||||||||||||||
Total advisor financing | 72,106 | 43,664 | — | — | — | — | — | 115,770 | ||||||||||||||||
Real estate bridge loans | ||||||||||||||||||||||||
Pass | 621,702 | — | — | — | — | — | — | 621,702 | ||||||||||||||||
Total real estate bridge loans | 621,702 | — | — | — | — | — | — | 621,702 | ||||||||||||||||
Other loans | ||||||||||||||||||||||||
Non-rated | 396 | 152 | — | — | — | 216 | 656 | 1,420 | ||||||||||||||||
Pass | 373 | 113 | 3,081 | 4,553 | 5,212 | 11,604 | 1,264 | 26,200 | ||||||||||||||||
Substandard | — | — | — | — | — | — | 73 | 73 | ||||||||||||||||
Total other loans** | 769 | 265 | 3,081 | 4,553 | 5,212 | 11,820 | 1,993 | 27,693 | ||||||||||||||||
Total | $ | 1,136,523 | $ | 297,650 | $ | 151,305 | $ | 90,977 | $ | 57,753 | $ | 73,389 | $ | 1,931,574 | $ | 3,739,171 | ||||||||
Unamortized loan fees and costs | — | — | — | — | — | — | — | 8,053 | ||||||||||||||||
Total | $ | 3,747,224 |
*Included in the SBL non real estate non-rated total of $46.6 million, were $44.8 million of PPP loans which are government guaranteed.
**Included in Other loans are $22.7 million of SBA loans purchased for CRA purposes as of December 31, 2021. These loans are classified as SBL in the Company’s loan table which classify loans by type, as opposed to risk characteristics.
SBL. Substantially all small business loans consist of SBA loans. The Bank participates in loan programs established by the SBA, including the 7(a) Loan Guarantee Program, the 504 Fixed Asset Financing Program, and a temporary program, the PPP. The 7(a) Loan Guarantee Program is designed to help small business borrowers start or expand their businesses by providing partial guarantees of loans made by banks and non-bank lending institutions for specific business purposes, including long or short term working capital; funds for the purchase of equipment, machinery, supplies and materials; funds for the purchase, construction or renovation of real estate; and funds to acquire, operate or expand an existing business or refinance existing debt, all under conditions established by the SBA. The 504 Fixed Asset Financing Program includes the financing of real estate and commercial mortgages. In 2020 and 2021, the Company also participated in PPP, which provides short-term loans to small businesses. PPP loans are fully guaranteed by the U.S. government. This program was a specific response to the COVID-19 pandemic, and the vast majority of these loans have been reimbursed by the U.S. government, with $6.6 million remaining to be reimbursed as of September 30, 2022. The Company segments the SBL portfolio into four pools: non real estate, commercial mortgage and construction to capture the risk characteristics of each pool, and the PPP loans discussed above. In the table above, the PPP loans are included in non-rated SBL non real estate. The qualitative factors for SBL loans focus on pool loan performance, underlying collateral for collateral dependent loans and changes in economic conditions. Additionally, the construction segment adds a qualitative factor for general construction risk, such as construction delays resulting from labor shortages or availability/pricing of construction materials. PPP loans, which are fully guaranteed, are not included in the risk pools because they have inherently different risk characteristics, because of the U.S. government guarantee.
Direct lease financing. The Company provides lease financing for commercial and government vehicle fleets and, to a lesser extent, provides lease financing for other equipment. Leases are either open-end or closed-end. An open-end lease is one in which, at the end of the lease term, the lessee must pay the difference between the amount at which the Company sells the leased asset and the stated termination value. Termination value is a contractual value agreed to by the parties at the inception of a lease as to the value of the leased asset at the end of the lease term. A closed-end lease is one for which no such payment is due on lease termination. In a closed-end lease, the risk that the amount received on a sale of the leased asset will be less than the residual value is assumed by the Bank, as lessor. The qualitative factors for direct lease financing focus on underlying collateral for collateral dependent loans, portfolio loan performance, loan concentrations and changes in economic conditions.
SBLOC. SBLOC loans are made to individuals, trusts and entities and are secured by a pledge of marketable securities maintained in one or more accounts for which the Company obtains a securities account control agreement. The securities pledged may be either debt or equity securities or a combination thereof, but all such securities must be listed for trading on a national securities exchange or automated inter-dealer quotation system. SBLOCs are typically payable on demand. Maximum SBLOC line amounts are calculated by applying a standard ‘advance rate’ calculation against the eligible security type depending on asset class: typically, up to 50% for equity securities and mutual fund securities and 80% for investment grade (Standard & Poor’s rating of BBB- or higher, or Moody’s rating of Baa3 or higher) municipal or corporate debt securities. Substantially all SBLOCs have full recourse to the borrower. The underlying securities collateral for SBLOC loans is monitored on a daily basis to confirm the composition of the client portfolio and its daily market value. The primary qualitative factor in the SBLOC analysis is the ratio of loans outstanding to market value. This factor has been maintained at low levels, which has remained appropriate as losses have not materialized despite the historic declines in the equity markets during 2020, during which there were no losses. Significant losses have not been incurred since inception of this line of business. Additionally, the advance rates noted above were established to provide the Company with protection from declines in market conditions from the origination date of the lines of credit.
IBLOC. IBLOC loans are collateralized by the cash surrender value of eligible insurance policies. Should a loan default, the primary risks for IBLOCs are if the insurance company issuing the policy were to become insolvent, or if that company would fail to recognize the Bank’s assignment of policy proceeds. To mitigate these risks, insurance company ratings are periodically evaluated for compliance with Bank standards. Additionally, the Bank utilizes assignments of cash surrender value, which legal counsel has concluded are enforceable. The qualitative factors for IBLOC primarily focus on the concentration risk with insurance companies.
Investment advisor financing. In 2020, the Bank 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. As credit losses have not been experienced, the allowance is determined by qualitative factors. The qualitative factors for investment advisor financing focus on historical industry losses, changes in lending policies and procedures, portfolio performance and economic conditions.
Real estate bridge loans. Real estate bridge loans are transitional commercial mortgage loans which are made to improve and rehabilitate existing properties which already have cash flow, and which are securitized by those properties. The portfolio is comprised primarily of apartment buildings. Prior to 2020, such loans were originated for securitization and loans which had been originated but not securitized continue to be accounted for at fair value in “Commercial loans, at fair value”, on the balance sheet. In 2021, originations resumed and are being held for investment in “Loans, net of deferred fees and costs”, on the balance sheet. As credit losses have not been experienced,
the allowance is determined by qualitative factors. Qualitative factors focus on historical industry losses, changes in economic conditions, underlying collateral and portfolio performance.
Other loans. Other loans include commercial and consumer loans including home equity lines of credit of the type the Company generally no longer offers. Qualitative factors focus on changes in the underlying collateral for collateral dependent loans, portfolio loan performance, loan concentrations and changes in economic conditions.
Expected credit losses are estimated over the estimated remaining lives of loans. The estimate excludes possible extensions, renewals and modifications unless either of the following table provides informationapplies: management has a reasonable expectation that a loan will be restructured, or the extension or renewal options are included in the borrower contract and are not unconditionally cancellable by us.
The Company does not measure an allowance for credit losses on accrued interest receivable balances, because these balances are written off in a timely manner as a reduction to interest income when loans are placed on non-accrual status.
Allowance for credit losses on off-balance sheet credit exposures. The Company estimates expected credit losses over the contractual period in which the Company is exposed to credit risk rating indicatorvia a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. The allowance for each segmentcredit losses on off-balance sheet credit exposures is adjusted through the provision for credit losses. The estimate considers the likelihood that funding will occur over the estimated life of the commitment. The amount of the allowance in the liability account as of September 30, 2022 and as of December 31, 2021 was $2.8 million and $1.4 million, respectively.
A detail of the changes in the allowance for credit losses by loan portfolio, excludingcategory and summary of loans heldevaluated individually and collectively for sale, at the dates indicatedcredit deterioration is as follows (in thousands):
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September 30, 2017 |
| Pass |
| Special mention |
| Substandard |
| Doubtful |
| Loss |
| Unrated subject to review * |
| Unrated not subject to review * |
| Total loans |
SBA non real estate |
| $ 44,996 |
| $ 3,981 |
| $ 4,107 |
| $ - |
| $ - |
| $ - |
| $ 18,971 |
| $ 72,055 |
SBA commercial mortgage |
| 110,059 |
| 279 |
| 1,226 |
| - |
| - |
| 2,163 |
| 19,270 |
| 132,997 |
SBA construction |
| 14,205 |
| - |
| - |
| - |
| - |
| - |
| - |
| 14,205 |
Direct lease financing |
| 193,792 |
| - |
| 2,770 |
| - |
| - |
| 8,733 |
| 163,774 |
| 369,069 |
SBLOC |
| 357,906 |
| - |
| - |
| - |
| - |
| - |
| 362,373 |
| 720,279 |
Other specialty lending |
| 36,664 |
| - |
| - |
| - |
| - |
| - |
| - |
| 36,664 |
Consumer |
| 8,791 |
| 283 |
| 1,885 |
| - |
| - |
| - |
| 9,148 |
| 20,107 |
Unamortized loan fees and costs |
| - |
| - |
| - |
| - |
| - |
| - |
| 8,684 |
| 8,684 |
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| $ 766,413 |
| $ 4,543 |
| $ 9,988 |
| $ - |
| $ - |
| $ 10,896 |
| $ 582,220 |
| $ 1,374,060 |
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December 31, 2016 |
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SBA non real estate |
| $ 51,437 |
| $ 2,723 |
| $ 3,628 |
| $ - |
| $ - |
| $ - |
| $ 16,856 |
| $ 74,644 |
SBA commercial mortgage |
| 92,485 |
| - |
| - |
| - |
| - |
| 15,164 |
| 18,510 |
| 126,159 |
SBA construction |
| 8,060 |
| - |
| - |
| - |
| - |
| - |
| 766 |
| 8,826 |
Direct lease financing |
| 122,571 |
| - |
| 3,736 |
| - |
| - |
| 30,881 |
| 189,457 |
| 346,645 |
SBLOC |
| 277,489 |
| - |
| - |
| - |
| - |
| - |
| 352,911 |
| 630,400 |
Other specialty lending |
| 11,073 |
| - |
| - |
| - |
| - |
| - |
| - |
| 11,073 |
Consumer |
| 9,837 |
| 288 |
| 2,312 |
| - |
| - |
| - |
| 4,937 |
| 17,374 |
Unamortized loan fees and costs |
| - |
| - |
| - |
| - |
| - |
| - |
| 7,790 |
| 7,790 |
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| $ 572,952 |
| $ 3,011 |
| $ 9,676 |
| $ - |
| $ - |
| $ 46,045 |
| $ 591,227 |
| $ 1,222,911 |
September 30, 2022 | |||||||||||||||||||||||||||||
SBL non-real estate | SBL commercial mortgage | SBL construction | Direct lease financing | SBLOC / IBLOC | Advisor financing | Real estate bridge loans | Other loans | Unallocated** | Total | ||||||||||||||||||||
Beginning 1/1/2022 | $ | 5,415 | $ | 2,952 | $ | 432 | $ | 5,817 | $ | 964 | $ | 868 | $ | 1,181 | $ | 177 | $ | — | $ | 17,806 | |||||||||
Charge-offs | (861) | — | — | (312) | — | — | — | — | — | (1,173) | |||||||||||||||||||
Recoveries | 57 | — | — | 108 | — | — | — | — | — | 165 | |||||||||||||||||||
Provision (credit)* | 300 | (794) | (6) | 682 | 220 | 396 | 1,602 | 491 | — | 2,891 | |||||||||||||||||||
Ending balance | $ | 4,911 | $ | 2,158 | $ | 426 | $ | 6,295 | $ | 1,184 | $ | 1,264 | $ | 2,783 | $ | 668 | $ | — | $ | 19,689 | |||||||||
Ending balance: Individually evaluated for expected credit loss | $ | 594 | $ | 222 | $ | 34 | $ | — | $ | — | $ | — | $ | — | $ | 13 | $ | — | $ | 863 | |||||||||
Ending balance: Collectively evaluated for expected credit loss | $ | 4,317 | $ | 1,936 | $ | 392 | $ | 6,295 | $ | 1,184 | $ | 1,264 | $ | 2,783 | $ | 655 | $ | — | $ | 18,826 | |||||||||
Loans: | |||||||||||||||||||||||||||||
Ending balance** | $ | 116,080 | $ | 429,865 | $ | 26,841 | $ | 599,796 | $ | 2,369,106 | $ | 168,559 | $ | 1,488,119 | $ | 64,980 | $ | 4,029 | $ | 5,267,375 | |||||||||
Ending balance: Individually evaluated for expected credit loss | $ | 1,347 | $ | 1,423 | $ | 710 | $ | — | $ | — | $ | — | $ | — | $ | 4,442 | $ | — | $ | 7,922 | |||||||||
Ending balance: Collectively evaluated for expected credit loss | $ | 114,733 | $ | 428,442 | $ | 26,131 | $ | 599,796 | $ | 2,369,106 | $ | 168,559 | $ | 1,488,119 | $ | 60,538 | $ | 4,029 | $ | 5,259,453 |
December 31, 2021 | |||||||||||||||||||||||||||||
SBL non-real estate | SBL commercial mortgage | SBL construction | Direct lease financing | SBLOC / IBLOC | Advisor financing | Real estate bridge loans | Other loans | Unallocated** | Total | ||||||||||||||||||||
Beginning balance 1/1/2021 | $ | 5,060 | $ | 3,315 | $ | 328 | $ | 6,043 | $ | 775 | $ | 362 | $ | — | $ | 199 | $ | — | $ | 16,082 | |||||||||
Charge-offs | (1,138) | (417) | — | (412) | (15) | — | — | (24) | — | (2,006) | |||||||||||||||||||
Recoveries | 51 | 9 | — | 58 | — | — | — | 1,099 | — | 1,217 | |||||||||||||||||||
Provision (reversal of)* | 1,442 | 45 | 104 | 128 | 204 | 506 | 1,181 | (1,097) | — | 2,513 | |||||||||||||||||||
Ending balance | $ | 5,415 | $ | 2,952 | $ | 432 | $ | 5,817 | $ | 964 | $ | 868 | $ | 1,181 | $ | 177 | $ | — | $ | 17,806 | |||||||||
Ending balance: Individually evaluated for expected credit loss | $ | 829 | $ | 115 | $ | 34 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 978 | |||||||||
Ending balance: Collectively evaluated for expected credit loss | $ | 4,586 | $ | 2,837 | $ | 398 | $ | 5,817 | $ | 964 | $ | 868 | $ | 1,181 | $ | 177 | $ | — | $ | 16,828 | |||||||||
Loans: | |||||||||||||||||||||||||||||
Ending balance** | $ | 147,722 | $ | 361,171 | $ | 27,199 | $ | 531,012 | $ | 1,929,581 | $ | 115,770 | $ | 621,702 | $ | 5,014 | $ | 8,053 | $ | 3,747,224 | |||||||||
Ending balance: Individually evaluated for expected credit loss | $ | 1,887 | $ | 812 | $ | 710 | $ | 254 | $ | — | $ | — | $ | — | $ | 320 | $ | — | $ | 3,983 | |||||||||
Ending balance: Collectively evaluated for expected credit loss | $ | 145,835 | $ | 360,359 | $ | 26,489 | $ | 530,758 | $ | 1,929,581 | $ | 115,770 | $ | 621,702 | $ | 4,694 | $ | 8,053 | $ | 3,743,241 | |||||||||
September 30, 2021 | |||||||||||||||||||||||||||||
SBL non-real estate | SBL commercial mortgage | SBL construction | Direct lease financing | SBLOC / IBLOC | Advisor financing | Real estate bridge loans | Other loans | Unallocated** | Total | ||||||||||||||||||||
Beginning 1/1/2021 | $ | 5,060 | $ | 3,315 | $ | 328 | $ | 6,043 | $ | 775 | $ | 362 | $ | — | $ | 199 | $ | — | $ | 16,082 | |||||||||
Charge-offs | (896) | (23) | — | (248) | (15) | — | — | (10) | — | (1,192) | |||||||||||||||||||
Recoveries | 18 | 9 | — | 50 | — | — | — | — | — | 77 | |||||||||||||||||||
Provision (reversal of)* | 1,196 | (506) | 42 | (208) | 157 | 247 | 245 | 19 | — | 1,192 | |||||||||||||||||||
Ending balance | $ | 5,378 | $ | 2,795 | $ | 370 | $ | 5,637 | $ | 917 | $ | 609 | $ | 245 | 208 | $ | — | $ | 16,159 | ||||||||||
Ending balance: Individually evaluated for expected credit loss | $ | 1,163 | $ | 510 | $ | 34 | $ | 91 | $ | — | $ | — | $ | — | $ | 14 | $ | — | $ | 1,812 | |||||||||
Ending balance: Collectively evaluated for expected credit loss | $ | 4,215 | $ | 2,285 | $ | 336 | $ | 5,546 | $ | 917 | $ | 609 | $ | 245 | $ | 194 | $ | — | $ | 14,347 | |||||||||
Loans: | |||||||||||||||||||||||||||||
Ending balance** | $ | 171,845 | $ | 367,272 | $ | 23,117 | $ | 514,068 | $ | 1,834,523 | $ | 81,143 | $ | 128,699 | $ | 4,917 | $ | 11,078 | $ | 3,136,662 | |||||||||
Ending balance: Individually evaluated for expected credit loss | $ | 2,233 | $ | 3,167 | $ | 711 | $ | 430 | $ | — | $ | — | $ | — | $ | 339 | $ | — | $ | 6,880 | |||||||||
Ending balance: Collectively evaluated for expected credit loss | $ | 169,612 | $ | 364,105 | $ | 22,406 | $ | 513,638 | $ | 1,834,523 | $ | 81,143 | $ | 128,699 | $ | 4,578 | $ | 11,078 | $ | 3,129,782 | |||||||||
*The amount shown as the provision for credit losses for the period reflects the provision on credit losses for loans, while the consolidated statements of operations provision for credit losses include provisions for unfunded commitments of $1.4 million, $292,000 and $597,000, respectively, for the nine months ended September 30, 2022 and September 30, 2021, and for full year 2021.
** For information on targetedThe ending balance for loans in the unallocated column represents deferred costs and fees.
A summary of the Company’s net charge-offs accordingly classified, by year of origination, at September 30, 2022 are as follows (in thousands):
As of September 30, 2022 | 2022 | 2021 | 2020 | 2019 | 2018 | Prior | Total | ||||||||||||||
SBL non-real estate | |||||||||||||||||||||
Current period charge-offs | $ | — | $ | — | $ | (16) | $ | — | $ | — | $ | (845) | $ | (861) | |||||||
Current period recoveries | — | — | — | — | 3 | 54 | 57 | ||||||||||||||
Current period SBL non-real estate net charge-offs | — | — | (16) | — | 3 | (791) | (804) | ||||||||||||||
SBL commercial mortgage | |||||||||||||||||||||
Current period charge-offs | — | — | — | — | — | — | — | ||||||||||||||
Current period recoveries | — | — | — | — | — | — | — | ||||||||||||||
Current period SBL commercial mortgage net charge-offs | — | — | — | — | — | — | — | ||||||||||||||
SBL construction | |||||||||||||||||||||
Current period charge-offs | — | — | — | — | — | — | — | ||||||||||||||
Current period recoveries | — | — | — | — | — | — | — | ||||||||||||||
Current period SBL construction net charge-offs | — | — | — | — | — | — | — | ||||||||||||||
Direct lease financing | |||||||||||||||||||||
Current period charge-offs | (31) | (132) | (123) | (26) | — | — | (312) | ||||||||||||||
Current period recoveries | — | — | 101 | 7 | — | — | 108 | ||||||||||||||
Current period direct lease financing net charge-offs | (31) | (132) | (22) | (19) | — | — | (204) | ||||||||||||||
SBLOC | |||||||||||||||||||||
Current period charge-offs | — | — | — | — | — | — | — | ||||||||||||||
Current period recoveries | — | — | — | — | — | — | — | ||||||||||||||
Current period SBLOC net charge-offs | — | — | — | — | — | — | — | ||||||||||||||
IBLOC | |||||||||||||||||||||
Current period charge-offs | — | — | — | — | — | — | — | ||||||||||||||
Current period recoveries | — | — | — | — | — | — | — | ||||||||||||||
Current period IBLOC net charge-offs | — | — | — | — | — | — | — | ||||||||||||||
Advisor financing | |||||||||||||||||||||
Current period charge-offs | — | — | — | — | — | — | — | ||||||||||||||
Current period recoveries | — | — | — | — | — | — | — | ||||||||||||||
Current period advisor financing net charge-offs | — | — | — | — | — | — | — | ||||||||||||||
Real estate bridge loans | |||||||||||||||||||||
Current period charge-offs | — | — | — | — | — | — | — | ||||||||||||||
Current period recoveries | — | — | — | — | — | — | — | ||||||||||||||
Current period real estate bridge loans net charge-offs | — | — | — | — | — | — | — | ||||||||||||||
Other loans | |||||||||||||||||||||
Current period charge-offs | — | — | — | — | — | — | — | ||||||||||||||
Current period recoveries | — | — | — | — | — | — | — | ||||||||||||||
Current period other loans net recoveries | — | — | — | — | — | — | — | ||||||||||||||
Total | |||||||||||||||||||||
Current period charge-offs | (31) | (132) | (139) | (26) | — | (845) | (1,173) | ||||||||||||||
Current period recoveries | — | — | 101 | 7 | 3 | 54 | 165 | ||||||||||||||
Current period net charge-offs | $ | (31) | $ | (132) | $ | (38) | $ | (19) | $ | 3 | $ | (791) | $ | (1,008) |
The Company did not have loans acquired with deteriorated credit quality at either September 30, 2022 or December 31, 2021. In the third quarter of 2022, the Company purchased $6.3 million of lease receivables and $12.5 million of SBL none of which were credit deteriorated.
A detail of the Company’s delinquent loans by loan review thresholds see “Allowance for Loan Losses” category is as follows (in thousands):
September 30, 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 | $ | 1,715 | $ | 1,246 | $ | 370 | $ | 1,077 | $ | 4,408 | $ | 111,672 | $ | 116,080 | ||||||
SBL commercial mortgage | 3,252 | 6 | — | 1,423 | 4,681 | 425,184 | 429,865 | |||||||||||||
SBL construction | — | — | — | 710 | 710 | 26,131 | 26,841 | |||||||||||||
Direct lease financing | 1,799 | 1,392 | 49 | — | 3,240 | 596,556 | 599,796 | |||||||||||||
SBLOC / IBLOC | 3,175 | 227 | — | — | 3,402 | 2,365,704 | 2,369,106 | |||||||||||||
Advisor financing | — | — | — | — | — | 168,559 | 168,559 | |||||||||||||
Real estate bridge loans | — | — | — | — | — | 1,488,119 | 1,488,119 | |||||||||||||
Other loans | 473 | 181 | 3,996 | 650 | 5,300 | 59,680 | 64,980 | |||||||||||||
Unamortized loan fees and costs | — | — | — | — | — | 4,029 | 4,029 | |||||||||||||
$ | 10,414 | $ | 3,052 | $ | 4,415 | $ | 3,860 | $ | 21,741 | $ | 5,245,634 | $ | 5,267,375 |
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 |
The scheduled maturities of the direct financing leases reconciled to the total lease receivables in the consolidated balance sheet, are as follows (in thousands):
Remaining 2022 | $ | 47,438 |
2023 | 160,895 | |
2024 | 136,205 | |
2025 | 81,108 | |
2026 | 46,765 | |
2027 and thereafter | 17,435 | |
Total undiscounted cash flows | 489,846 | |
Residual value * | 167,946 | |
Difference between undiscounted cash flows and discounted cash flows | (57,996) | |
Present value of lease payments recorded as lease receivables | $ | 599,796 |
*Of the $167,946,000, $29,984,000 is not guaranteed by the lessee or other guarantors.
Note 7. Transactions with Affiliates
The Bank maintainsdid not maintain any deposits for various affiliated companies totaling approximately $3.5 million and $5.5 million as of September 30, 20172022 and December 31, 2016,2021, respectively.
The Bank has entered into lending transactions in the ordinary course of business with directors, executive officers, principal stockholders and affiliates of such persons.All loans were made on substantially the same terms, including interest rate and collateral, as those prevailing at the time for comparable loans with persons not related to the Bank.lender. At September 30, 2017,2022, these loans were current as to principal and interest payments and did not involve more than normal risk of collectability. Loans to these related parties included in Loans, net of deferred loan fees and costs, amounted to $1.4$4.0 million at September 30, 20172022 and $649,000$5.2 million at December 31, 2016.2021.
The Bank periodically purchases securities under agreements to resell and engages in other securities transactions as follows. The Company executed transactions through J.V.B. Financial Group, LLC, (JVB), a broker dealer in which the Company’s Chairman has a minority interest. The Company’s Chairman also serves as Vice Chairman of Institutional Financial Markets Inc., the parent company of JVB. In 2017, the Company purchased $2.8 million of government guaranteed SBA loans from JVB for Community Reinvestment Act purposes. The Company also purchased securities under agreements to resell through JVB primarily consisting of G.N.M.A. certificates which are full faith and credit obligations of the United States government issued at competitive rates. JVB was in compliance with all of the terms of the agreements at September 30, 2017 and had complied with all terms for all prior repurchase agreements. There were $65.1 million and $39.2 million of repurchase agreements outstanding at September 30, 2017 and December 31, 2016, respectively.
Mr. Hersh Kozlov, a director of the Company, is a partner at Duane Morris LLP, an international law firm. The Company paid Duane Morris LLP $2.5$1.4 million and $2.4$1.5 million for legal services for the nine months ended September 30, 20172022 and September 30, 2016,2021, respectively.
Note 8. Fair Value Measurements
ASC 825, “ Financial Instruments Available for Sale”“Financial Instruments”, requires disclosure of the estimated fair value of an entity’s assets and liabilities considered to be financial instruments. For the Company, as for most financial institutions, the majority of its assets and liabilities are considered to be financial instruments. However, many such instruments lack an available trading market as characterized by a willing
24
buyer and willing seller engaging in an exchange transaction. Accordingly, estimated fair values are determined by the Company using the best available data and an estimation methodology it believes to be suitable for each category of financial instruments. Also, it is the Company’s general practice and intent to hold its financial instruments to maturity whether or not categorized as “available-for-sale” and not to engage in trading or sales activities except foralthough it has sold loans in the sale of commercial loans to secondary markets.past and may do so in the future. For fair value disclosure purposes, the Company utilized certain value measurement criteria required under the ASCin accordance with 820, “Fair Value Measurements and Disclosures”, andas discussed below.
Estimated fair values have been determined by the Company using the best available data and an estimation methodology it believes to be suitable for each category of financial instruments. Changes in the assumptions or methodologies used to estimate fair values may materially affect the estimated amounts. Also, there may not be reasonable comparability between institutions due to the wide range of permitted assumptions and methodologies in the absence of active markets. This lack of uniformity gives rise to a high degree of subjectivity in estimating financial instrument fair values.
Cash and cash equivalents, which are comprised of cash and due from banks, the Company’s balance at the Federal Reserve Bank and securities purchased under agreements to resell, had recorded values of $398.9$722.7 million and $999.1$601.8 million as of September 30, 20172022 and December 31, 2016,2021, respectively, which approximated fair values.
The estimated fair values of investment securities are based on quoted market prices, if available, or estimated using a methodology based on management’s inputs. The fair values of the Company’s investment securities held-to-maturity and loans held for sale are based on using “unobservable inputs” that are the best information available in the circumstances. Level 3 investment securitiessecurity fair values are based on the present valuevaluing of cash flows, which discounts expected cash flows from principal and interest using yield to maturity, or yield to call as appropriate, at the measurement date. In the third quarter of 2022 and 2021, there were no transfers between the three levels.
FHLB, and Atlantic Central Bankers Bank stock isand Federal Reserve Bank stock are held as required by those respective institutions and isare carried at cost. Federal law requires a member institutionEach of the FHLB to hold stock according to predetermined formulas. Atlantic Central Bankers Bank requires itsthese institutions require their correspondent banking institutions to hold stock as a condition of membership. While a fixed stock amount is required by each of these institutions, the Federal Home Loan Bank stock requirement increases or decreases with the level of borrowing activity.
CommercialCommercial loans held at fair value are comprised primarily of commercial real estate bridge loans and SBA loans which had been originated for sale have estimated fair valuesor securitization in the secondary market, and which are now being held on the balance sheet. Commercial real estate bridge loans and SBA loans are valued using a discounted cash flow analysis based upon eitherpricing for similar loans where market indications of the sales price of such loans from recent sales transactions or discounted cash flow analysis.are not available, on a pooled basis.
The net loan portfolio at September 30, 2017 and December 31, 2016 has beenis valued using the present value of discounted cash flow where market prices were not available. The discount rate used in these calculations is the estimated current market rate adjusted for credit risk. Accrued interest receivable has a carrying value that approximates fair value.
On December 30, 2014, the Bank entered into an agreement for, and closed on, the sale of a portion of itsAssets held-for-sale from discontinued commercial loan portfolio. The purchaser of the loan portfolio was a newly formed entity, 2014-1 LLC (Walnut Street). The price paid to the Bank for the loan portfolio which had a face value of approximately $267.6 million, was approximately $209.6 million, of which approximately $193.6 million was in the form of two notes issued by Walnut Street to the Bank; a senior note in the principal amount of approximately $178.2 million bearing interest at 1.5% per year and maturing in December 2024 and a subordinate note in the principal amount of approximately $15.4 million, bearing interest at 10.0% per year and maturing in December 2024. The balance of these notes comprises the balance of the investment in unconsolidated entity. The fair value was established by the sales price and subsequently subjected to cash flow analysis. The change in value of investment in unconsolidated entity in the income statement includes interest paid and changes in estimated fair value.
Discontinued assets held for sale as of September 30, 2017 are heldoperations were recorded at the lower of cost basis or market value. For loans, market value was determined using the incomediscounted cash flow approach which converts expected cash flows from the loan portfolio by unit of measurement to a present value estimate. Unit of measurement was determined by loan type and for significant loans on an individual loan basis. TheLoan fair values of the Company’s loans classified as assets held for sale are based on “unobservable inputs” that are the best informationbased on available in the circumstances.information. Level 3 fair values are based on the present value of cash flows by unit of measurement. For commercialIn the first quarter of 2022, discontinued loans a market adjusted ratewere reclassified to discount expected cash flows from outstanding principalloans held for investment, as efforts to sell the loans had concluded. Accordingly, these loans will be accounted for as such, and interestincluded in related tables. Discontinued other real estate owned which constituted the remainder of discontinued assets was reclassified to expected maturity at the measurement date was utilized. other real estate owned caption on the consolidated balance sheet.
For other real estate owned, market value wasis based upon appraisals of the underlying collateral by third partythird-party appraisers, reduced by 7% to 10% for estimated selling costs.
The estimated fair values of demand deposits (comprising (comprised of interest and non-interest bearing checking accounts, savings accounts, and certain types of money market accounts) are equal to the amount payable on demand at the reporting date (generally, their carrying amounts). The fair values of securities sold under agreements to repurchase and short termshort-term borrowings are equal to their carrying amounts as they are short termshort-term borrowings.
Time deposits, when outstanding, senior debt and subordinated debentures have a fair value estimated using a discounted cash flow calculation that applies current interest rates to discount expected cash flows. Based upon time deposit maturities at September 30, 2017, the carrying values approximate their fair values. The carrying amount of accrued interest payable approximates its fair value. Long term borrowings resulted from sold loans which did not qualify for true sale accounting. They are presented in the amount of the principal of such loans.
The fair values of interest rate swaps, recorded in other assets or other liabilities, are determined using models that use readily observable market inputs and a market standard methodology applied to the contractual terms of the derivatives, including the period to maturity and interest rate indices.
The fair value of commitments to extend credit is estimated based on the amount of unamortized deferred loan commitment fees. The fair value of letters of credit is based on the amount of unearned fees plus the estimated cost to terminate the letters of credit. Fair values of unrecognized financial instruments, including commitments to extend credit, and the fair value of letters of credit are considered immaterial.
The following tables provide information regarding carrying amounts and estimated fair values (in thousands):thousands) as of the dates indicated:
September 30, 2022 | ||||||||||||||
Quoted prices in | Significant other | Significant | ||||||||||||
active markets for | observable | unobservable | ||||||||||||
Carrying | Estimated | identical assets | inputs | inputs | ||||||||||
amount | fair value | (Level 1) | (Level 2) | (Level 3) | ||||||||||
Investment securities, available-for-sale | $ | 790,594 | $ | 790,594 | $ | — | $ | 771,597 | $ | 18,997 | ||||
Federal Home Loan Bank, Atlantic Central Bankers Bank, and Federal Reserve Bank stock | 12,629 | 12,629 | — | — | 12,629 | |||||||||
Commercial loans, at fair value | 818,040 | 818,040 | — | — | 818,040 | |||||||||
Loans, net of deferred loan fees and costs | 5,267,375 | 5,254,340 | — | — | 5,254,340 | |||||||||
Interest rate swaps, asset | 952 | 952 | — | 952 | — | |||||||||
Demand and interest checking | 5,934,591 | 5,934,591 | — | 5,934,591 | — | |||||||||
Savings and money market | 575,381 | 575,381 | — | 575,381 | — | |||||||||
Time deposits | 401,331 | 401,331 | — | 401,331 | — | |||||||||
Senior debt | 98,958 | 93,871 | — | 93,871 | — | |||||||||
Subordinated debentures | 13,401 | 8,947 | — | — | 8,947 | |||||||||
Securities sold under agreements to repurchase | 42 | 42 | 42 | — | — |
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|
|
| September 30, 2017 | ||||||||
|
|
|
|
| Quoted prices in |
| Significant other |
| Significant |
|
|
|
|
| active markets for |
| observable |
| unobservable |
| Carrying |
| Estimated |
| identical assets |
| inputs |
| inputs |
| amount |
| fair value |
| (Level 1) |
| (Level 2) |
| (Level 3) |
Investment securities available-for-sale | $ 1,196,956 |
| $ 1,196,956 |
| $ - |
| $ 1,153,403 |
| $ 43,553 |
Investment securities held-to-maturity | 86,402 |
| 85,099 |
| - |
| 78,756 |
| 6,343 |
Securities purchased under agreements to resell | 65,095 |
| 65,095 |
| 65,095 |
| - |
| - |
Federal Home Loan Bank and Atlantic Central Bankers Bank stock | 991 |
| 991 |
| - |
| - |
| 991 |
Commercial loans held for sale | 380,272 |
| 380,272 |
| - |
| - |
| 380,272 |
Loans, net of deferred loan fees and costs | 1,374,060 |
| 1,373,325 |
| - |
| - |
| 1,373,325 |
Investment in unconsolidated entity, senior note | 103,950 |
| 103,950 |
| - |
| - |
| 103,950 |
Investment in unconsolidated entity, subordinated note | 3,761 |
| 3,761 |
| - |
| - |
| 3,761 |
Assets held for sale | 314,994 |
| 314,994 |
| - |
| - |
| 314,994 |
Demand and interest checking | 3,113,212 |
| 3,113,212 |
| 3,113,212 |
| - |
| - |
Savings and money market | 452,183 |
| 452,183 |
| 452,183 |
| - |
| - |
Subordinated debentures | 13,401 |
| 9,873 |
| - |
| - |
| 9,873 |
Securities sold under agreements to repurchase | 180 |
| 180 |
| 180 |
| - |
| - |
Interest rate swaps, asset | 722 |
| 722 |
| - |
| 722 |
| - |
December 31, 2021 | ||||||||||||||
Quoted prices in | Significant other | Significant | ||||||||||||
active markets for | observable | unobservable | ||||||||||||
Carrying | Estimated | identical assets | inputs | inputs | ||||||||||
amount | fair value | (Level 1) | (Level 2) | (Level 3) | ||||||||||
Investment securities, available-for-sale | $ | 953,709 | $ | 953,709 | $ | — | $ | 934,678 | $ | 19,031 | ||||
Federal Home Loan Bank and Atlantic Central Bankers Bank stock | 1,663 | 1,663 | — | — | 1,663 | |||||||||
Commercial loans, at fair value | 1,388,416 | 1,388,416 | — | — | 1,388,416 | |||||||||
Loans, net of deferred loan fees and costs | 3,747,224 | 3,745,548 | — | — | 3,745,548 | |||||||||
Assets held-for-sale from discontinued operations | 3,268 | 3,268 | — | — | 3,268 | |||||||||
Interest rate swaps, liability | 553 | 553 | — | 553 | — | |||||||||
Demand and interest checking | 5,561,365 | 5,561,365 | — | 5,561,365 | — | |||||||||
Savings and money market | 415,546 | 415,546 | — | 415,546 | — | |||||||||
Senior debt | 98,682 | 101,980 | — | 101,980 | — | |||||||||
Subordinated debentures | 13,401 | 8,815 | — | — | 8,815 | |||||||||
Securities sold under agreements to repurchase | 42 | 42 | 42 | — | — |
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| December 31, 2016 | ||||||||
|
|
|
|
| Quoted prices in |
| Significant other |
| Significant |
|
|
|
|
| active markets for |
| observable |
| unobservable |
| Carrying |
| Estimated |
| identical assets |
| inputs |
| inputs |
| amount |
| fair value |
| (Level 1) |
| (Level 2) |
| (Level 3) |
Investment securities available-for-sale | $ 1,248,614 |
| $ 1,248,614 |
| $ - |
| $ 1,248,614 |
| $ - |
Investment securities held-to-maturity | 93,467 |
| 91,799 |
| - |
| 85,760 |
| 6,039 |
Securities purchased under agreements to resell | 39,199 |
| 39,199 |
| 39,199 |
| - |
| - |
Federal Home Loan Bank and Atlantic Central Bankers Bank stock | 1,613 |
| 1,613 |
| - |
| - |
| 1,613 |
Commercial loans held for sale | 663,140 |
| 663,140 |
| - |
| - |
| 663,140 |
Loans, net of deferred loan fees and costs | 1,222,911 |
| 1,219,625 |
| - |
| - |
| 1,219,625 |
Investment in unconsolidated entity, senior note | 118,389 |
| 118,389 |
| - |
| - |
| 118,389 |
Investment in unconsolidated entity, subordinated note | 8,541 |
| 8,541 |
| - |
| - |
| 8,541 |
Assets held for sale | 360,711 |
| 360,711 |
| - |
| - |
| 360,711 |
Demand and interest checking | 3,816,524 |
| 3,816,524 |
| 3,816,524 |
| - |
| - |
Savings and money market | 421,780 |
| 421,780 |
| 421,780 |
| - |
| - |
Subordinated debentures | 13,401 |
| 9,290 |
| - |
| - |
| 9,290 |
Securities sold under agreements to repurchase | 274 |
| 274 |
| 274 |
| - |
| - |
Interest rate swaps, asset | 3,207 |
| 3,207 |
| - |
| 3,207 |
| - |
The assets and liabilities measured at fair value on a recurring basis, segregated by fair value hierarchy, are summarized below (in thousands): as of the dates indicated:
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| Fair Value Measurements at Reporting Date Using | Fair Value Measurements at Reporting Date Using | ||||||||||||||
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| Quoted prices in active |
| Significant other |
| Significant | Quoted prices in | Significant other | Significant | ||||||||
|
|
|
| markets for identical |
| observable |
| unobservable | active markets for | observable | unobservable | ||||||||
|
| Fair value |
| assets |
| inputs |
| inputs | Fair value | identical assets | inputs | inputs | |||||||
|
| September 30, 2017 |
| (Level 1) |
| (Level 2) |
| (Level 3) | September 30, 2022 | (Level 1) | (Level 2) | (Level 3) | |||||||
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| |||||||||||
Investment securities available-for-sale |
|
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|
|
|
|
| |||||||||||
Investment securities, available-for-sale | |||||||||||||||||||
U.S. Government agency securities |
| $ 35,225 |
| $ - |
| $ 35,225 |
| $ - | $ | 24,282 | $ | — | $ | 24,282 | $ | — | |||
Asset-backed securities |
| 264,939 |
| - |
| 264,939 |
| - | 340,981 | — | 340,981 | — | |||||||
Obligations of states and political subdivisions |
| 86,432 |
| - |
| 86,432 |
| - | 47,489 | — | 47,489 | — | |||||||
Residential mortgage-backed securities |
| 364,437 |
| - |
| 364,437 |
| - | 144,314 | — | 144,314 | — | |||||||
Collateralized mortgage obligation securities |
| 129,093 |
| - |
| 129,093 |
| - | 44,762 | — | 44,762 | — | |||||||
Commercial mortgage-backed securities |
| 153,648 |
| - |
| 110,095 |
| 43,553 | 181,966 | — | 169,769 | 12,197 | |||||||
Foreign debt securities |
| 59,995 |
| - |
| 59,995 |
| - | |||||||||||
Corporate debt securities |
| 103,187 |
| - |
| 103,187 |
| - | 6,800 | — | — | 6,800 | |||||||
Total investment securities available-for-sale |
| 1,196,956 |
| - |
| 1,153,403 |
| 43,553 | |||||||||||
Loans held for sale |
| 380,272 |
| - |
| - |
| 380,272 | |||||||||||
Investment in unconsolidated entity, senior note |
| 103,950 |
| - |
| - |
| 103,950 | |||||||||||
Investment in unconsolidated entity, subordinated note |
| 3,761 |
| - |
| - |
| 3,761 | |||||||||||
Total investment securities, available-for-sale | 790,594 | — | 771,597 | 18,997 | |||||||||||||||
Commercial loans, at fair value | 818,040 | — | — | 818,040 | |||||||||||||||
Interest rate swaps, asset |
| 722 |
| - |
| 722 |
| - | 952 | — | 952 | — | |||||||
|
| $ 1,685,661 |
| $ - |
| $ 1,154,125 |
| $ 531,536 | $ | 1,609,586 | $ | — | $ | 772,549 | $ | 837,037 |
Fair Value Measurements at Reporting Date Using | |||||||||||
Quoted prices in | Significant other | Significant | |||||||||
active markets for | observable | unobservable | |||||||||
Fair value | identical assets | inputs | inputs | ||||||||
December 31, 2021 | (Level 1) | (Level 2) | (Level 3) | ||||||||
Investment securities, available-for-sale | |||||||||||
U.S. Government agency securities | $ | 37,302 | $ | — | $ | 37,302 | $ | — | |||
Asset-backed securities | 360,418 | — | 360,418 | — | |||||||
Obligations of states and political subdivisions | 52,137 | — | 52,137 | — | |||||||
Residential mortgage-backed securities | 184,301 | — | 184,301 | — | |||||||
Collateralized mortgage obligation securities | 61,861 | — | 61,861 | — | |||||||
Commercial mortgage-backed securities | 251,076 | — | 238,659 | 12,417 | |||||||
Corporate debt securities | 6,614 | — | — | 6,614 | |||||||
Total investment securities, available-for-sale | 953,709 | — | 934,678 | 19,031 | |||||||
Commercial loans, at fair value | 1,388,416 | — | — | 1,388,416 | |||||||
Assets held-for-sale from discontinued operations | 3,268 | — | — | 3,268 | |||||||
Interest rate swaps, liability | 553 | — | 553 | — | |||||||
$ | 2,344,840 | $ | — | $ | 934,125 | $ | 1,410,715 |
27
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| Fair Value Measurements at Reporting Date Using | ||||
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|
| Quoted prices in active |
| Significant other |
| Significant |
|
|
|
| markets for identical |
| observable |
| unobservable |
|
| Fair value |
| assets |
| inputs |
| inputs |
|
| December 31, 2016 |
| (Level 1) |
| (Level 2) |
| (Level 3) |
|
|
|
|
|
|
|
|
|
Investment securities available-for-sale |
|
|
|
|
|
|
|
|
U.S. Government agency securities |
| $ 27,702 |
| $ - |
| $ 27,702 |
| $ - |
Asset-backed securities |
| 355,396 |
| - |
| 355,396 |
| - |
Obligations of states and political subdivisions |
| 94,533 |
| - |
| 94,533 |
| - |
Residential mortgage-backed securities |
| 342,569 |
| - |
| 342,569 |
| - |
Collateralized mortgage obligation securities |
| 159,823 |
| - |
| 159,823 |
| - |
Commercial mortgage-backed securities |
| 117,086 |
| - |
| 117,086 |
| - |
Foreign debt securities |
| 56,497 |
| - |
| 56,497 |
| - |
Corporate debt securities |
| 95,008 |
| - |
| 95,008 |
| - |
Total investment securities available-for-sale |
| 1,248,614 |
| - |
| 1,248,614 |
| - |
Loans held for sale |
| 663,140 |
| - |
| - |
| 663,140 |
Investment in unconsolidated entity, senior note |
| 118,389 |
| - |
| - |
| 118,389 |
Investment in unconsolidated entity, subordinated note |
| 8,541 |
| - |
| - |
| 8,541 |
Interest rate swaps, asset |
| 3,207 |
| - |
| 3,207 |
| - |
|
| $ 2,041,891 |
| $ - |
| $ 1,251,821 |
| $ 790,070 |
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In addition, ASC 820 “Fair Value Measurements and Disclosures”, establishes a common definition for fair value to be applied to assets and liabilities. It clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It also establishes a framework for measuring fair value and expands disclosures concerning fair value measurements. ASC 820 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). Level 1 valuation is based on quoted market prices for identical assets or liabilities to which the Company has access at the measurement date. Level 2 valuation is based on other observable inputs for the asset or liability, either directly or indirectly. This includes quoted prices for similar assets in active or inactive markets, inputs other than quoted prices that are observable for the asset or liability such as yield curves, volatilities, prepayment speeds, credit risks, default rates, or inputs that are derived principally from, or corroborated through, observable market data by market-corroborated reports. Level 3 valuation is based on “unobservable inputs” which the Company believes is the best information available in the circumstances. A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.
The changes in the Company’s Level 3 assets measured at fair value on a recurring basis, segregated by fair value hierarchy level,asset activity for the categories shown are summarized below (in thousands):
Fair Value Measurements Using | |||||||||||
Significant Unobservable Inputs | |||||||||||
(Level 3) | |||||||||||
Available-for-sale | Commercial loans, | ||||||||||
securities | at fair value | ||||||||||
September 30, 2022 | December 31, 2021 | September 30, 2022 | December 31, 2021 | ||||||||
Beginning balance | $ | 19,031 | $ | 178,951 | $ | 1,388,416 | $ | 1,810,812 | |||
Transfers from investment in unconsolidated entity | — | — | — | 22,926 | |||||||
Transfers from assets held-for-sale from discontinued operations | — | — | — | 61,580 | |||||||
Transfers to loans, net | — | — | (61,580) | — | |||||||
Total net (losses) or gains (realized/unrealized) | |||||||||||
Included in earnings | — | (44) | 9,756 | 13,214 | |||||||
Included in other comprehensive loss | (34) | (1,422) | — | — | |||||||
Purchases, issuances, sales and settlements | |||||||||||
Issuances | — | — | 36,877 | 127,765 | |||||||
Settlements | — | (158,454) | (555,429) | (647,881) | |||||||
Ending balance | $ | 18,997 | $ | 19,031 | $ | 818,040 | $ | 1,388,416 | |||
Total losses year to date included | |||||||||||
in earnings attributable to the change in | |||||||||||
unrealized gains or losses relating to assets still | |||||||||||
held at the reporting date as shown above. | $ | — | $ | — | $ | (5,278) | $ | (2,133) |
28
The Company’s Level 3 asset activity for the categories shown are summarized below (in thousands):
Fair Value Measurements Using | |||||||||||
Significant Unobservable Inputs | |||||||||||
(Level 3) | |||||||||||
Investment in | Assets held-for-sale | ||||||||||
unconsolidated entity | from discontinued operations | ||||||||||
September 30, 2022 | December 31, 2021 | September 30, 2022 | December 31, 2021 | ||||||||
Beginning balance | $ | — | $ | 31,294 | $ | 3,268 | $ | 113,650 | |||
Transfers to commercial loans, at fair value | — | (22,926) | — | (61,580) | |||||||
Transfers to other real estate owned | — | (2,145) | — | (17,343) | |||||||
Total (losses) or gains (realized/unrealized) | |||||||||||
Included in earnings | — | — | — | 1,102 | |||||||
Purchases, issuances, sales, settlements and charge-offs | |||||||||||
Issuances | — | — | — | 5,222 | |||||||
Sales | — | — | — | (2,020) | |||||||
Settlements | — | (6,223) | (3,268) | (35,750) | |||||||
Charge-offs | — | — | — | (13) | |||||||
Ending balance | $ | — | $ | — | $ | — | $ | 3,268 | |||
Total losses year to date included | |||||||||||
in earnings attributable to the change in | |||||||||||
unrealized gains or losses relating to assets still | |||||||||||
held at the reporting date as shown above. | $ | — | $ | — | $ | — | $ | 566 |
The Company’s other real estate owned activity is summarized below (in thousands) as of the dates indicated:
September 30, 2022 | December 31, 2021 | ||||
Beginning balance | $ | 18,873 | $ | — | |
Transfers from investment in unconsolidated entity | — | 2,145 | |||
Sales | — | (615) | |||
Transfers from discontinued operations | — | 17,343 | |||
Ending balance | $ | 18,873 | $ | 18,873 |
Information related to fair values of level 3 balance sheet categories is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Fair Value Measurements Using | ||||||
|
| Significant Unobservable Inputs | ||||||
|
| (Level 3) | ||||||
|
|
|
|
|
|
|
|
|
|
| Available-for-sale |
| Commercial loans | ||||
|
| securities |
| held for sale | ||||
|
| September 30, 2017 |
| December 31, 2016 |
| September 30, 2017 |
| December 31, 2016 |
Beginning balance |
| $ - |
| $ - |
| $ 663,140 |
| $ 489,938 |
Transfers into level 3 |
| - |
| - |
| - |
| - |
Transfers out of level 3 |
| - |
| - |
| - |
| - |
Total gains or losses (realized/unrealized) |
|
|
|
|
|
|
|
|
Included in earnings |
| - |
| - |
| 20,019 |
| (3,078) |
Included in other comprehensive income |
| - |
| - |
| - |
| - |
Purchases, issuances, and settlements |
|
|
|
|
|
|
|
|
Purchases |
| 43,553 |
|
|
|
|
|
|
Issuances |
| - |
| - |
| 398,410 |
| 528,584 |
Sales |
| - |
| - |
| (701,297) |
| (352,304) |
Settlements |
| - |
| - |
| - |
| - |
Ending balance |
| $ 43,553 |
| $ - |
| $ 380,272 |
| $ 663,140 |
|
|
|
|
|
|
|
|
|
The amount of total gains or (losses) for the period |
|
|
|
|
|
|
|
|
included in earnings attributable to the change in |
|
|
|
|
|
|
|
|
unrealized gains or losses relating to assets still |
|
|
|
|
|
|
|
|
held at the reporting date. |
| $ - |
| $ - |
| $ 703 |
| $ (2,674) |
Level 3 instruments only | ||||||||||||
Weighted | ||||||||||||
Fair value at | Range at | average at | ||||||||||
September 30, 2022 | Valuation techniques | Unobservable inputs | September 30, 2022 | September 30, 2022 | ||||||||
Commercial mortgage-backed investment | ||||||||||||
security (a) | $ | 12,197 | Discounted cash flow | Discount rate | 11.08% | 11.08% | ||||||
Insurance liquidating trust preferred security (b) | 6,800 | Discounted cash flow | Discount rate | 10.82% | 10.82% | |||||||
Federal Home Loan Bank, Atlantic | ||||||||||||
Central Bankers Bank, and Federal Reserve Bank stock | 12,629 | Cost | N/A | N/A | N/A | |||||||
Loans, net of deferred loan fees and costs (c) | 5,254,340 | Discounted cash flow | Discount rate | 5.00%-10.00% | 5.87% | |||||||
Commercial - SBA (d) | 159,914 | Discounted cash flow | Discount rate | 3.85%-5.07% | 4.95% | |||||||
Non-SBA CRE - fixed (e) | 62,923 | Discounted cash flow and appraisal | Discount rate | 8.26%-19.23% | 12.34% | |||||||
Non-SBA CRE - floating (f) | 595,203 | Discounted cash flow | Discount rate | 5.56%-16.00% | 6.26% | |||||||
Commercial loans, at fair value | 818,040 | |||||||||||
Subordinated debentures (g) | 8,947 | Discounted cash flow | Discount rate | 11.05% | 11.05% | |||||||
Other real estate owned (h) | 18,873 | Appraised value | N/A | N/A | N/A |
|
|
|
|
|
|
|
|
|
| Fair Value Measurements Using | |||||||
| Significant Unobservable Inputs | |||||||
| (Level 3) | |||||||
|
|
|
|
|
|
|
|
|
| Investment in |
| Assets | |||||
| unconsolidated entity |
| held for sale | |||||
|
| September 30, 2017 |
| December 31, 2016 |
| September 30, 2017 |
| December 31, 2016 |
Beginning balance |
| $ 126,930 |
| $ 178,520 |
| $ 360,711 |
| $ 583,909 |
Transfers into level 3 |
| - |
| - |
| - |
| - |
Transfers out of level 3 |
| - |
| - |
| - |
| - |
Total gains or losses (realized/unrealized) |
|
|
|
|
|
|
|
|
Included in earnings |
| (20) |
| (39,816) |
| 638 |
| (48,836) |
Included in other comprehensive income |
| - |
| - |
| - |
| - |
Purchases, issuances, and settlements |
|
|
|
|
|
|
|
|
Purchases |
| - |
| - |
| - |
| - |
Issuances |
| - |
| - |
| - |
| - |
Sales |
| - |
| - |
| - |
| (63,712) |
Settlements |
| (19,199) |
| (11,774) |
| (33,400) |
| (110,650) |
Charge-offs |
| - |
| - |
| (12,955) |
| - |
Ending balance |
| $ 107,711 |
| $ 126,930 |
| $ 314,994 |
| $ 360,711 |
|
|
|
|
|
|
|
|
|
The amount of total gains or (losses) for the period |
|
|
|
|
|
|
|
|
included in earnings attributable to the change in |
|
|
|
|
|
|
|
|
unrealized gains or losses relating to assets still |
|
|
|
|
|
|
|
|
held at the reporting date. |
| $ (20) |
| $ (39,816) |
| $ (1,776) |
| $ (48,836) |
Level 3 instruments only | |||||||||||
Weighted | |||||||||||
Fair value at | Range at | average at | |||||||||
December 31, 2021 | Valuation techniques | Unobservable inputs | December 31, 2021 | December 31, 2021 | |||||||
Commercial mortgage-backed investment | |||||||||||
security | $ | 12,417 | Discounted cash flow | Discount rate | 8.00% | 8.00% | |||||
Insurance liquidating trust preferred security | 6,614 | Discounted cash flow | Discount rate | 7.00% | 7.00% | ||||||
Federal Home Loan Bank and Atlantic | |||||||||||
Central Bankers Bank stock | 1,663 | Cost | N/A | N/A | N/A | ||||||
Loans, net of deferred loan fees and costs | 3,745,548 | Discounted cash flow | Discount rate | 1.00% - 7.00% | 3.70% | ||||||
Commercial - SBA | 199,585 | Discounted cash flow | Discount rate | 1.04% - 2.12% | $103.40 | ||||||
Non-SBA CRE - fixed | 79,864 | Discounted cash flow | Discount rate | 5.31%-7.43% | 6.26% | ||||||
Non-SBA CRE - floating | 1,047,387 | Discounted cash flow | Discount rate | 3.96%-10.20% | 4.96% | ||||||
Other loans | 61,580 | Discounted cash flow | Discount rate | 3.18%-6.80% | 4.36% | ||||||
Commercial loans, at fair value | 1,388,416 | ||||||||||
Assets held-for-sale from discontinued operations | 3,268 | Discounted cash flow | Discount rate | 3.18%-6.80% | 4.36% | ||||||
Subordinated debentures | 8,815 | Discounted cash flow | Discount rate | 7.00% | 7.00% | ||||||
Other real estate owned | 18,873 | Appraised value | N/A | N/A | N/A |
The valuations for each of the instruments above, as of the balance sheet date, are subject to judgments, assumptions and uncertainties, changes in which could have a significant impact on such valuations. Weighted averages were calculated by using the discount rate for each individual security or loan weighted by its market value, except for SBA loans. For SBA loans, the yields derived from market pricing indications for pools determined by date of loan origination were weighted. For commercial loans recorded at fair value, changes in fair value are reflected in the income statement. Changes in the fair value of securities which are unrelated to credit are recorded through equity. Changes in the fair value of loans recorded at amortized cost which are unrelated to credit are a disclosure item, without impact on the financial statements. The notes below refer to the September 30, 2022 table.
a)Commercial mortgage-backed investment security, consisting of a single Bank issued CRE security, is valued using discounted cash flow analysis. The discount rate and prepayment rate applied are based upon market observations and actual experience for comparable securities and implicitly assume market averages for defaults and loss severities. The security has significant
credit enhancement, or protection from other tranches in the issue, which limits the valuation exposure to credit losses. Nonetheless, increases in expected default rates or loss severities on the loans underlying the issue could reduce its value. In market environments in which investors demand greater yield compensation for credit risk, the discount rate applied would ordinarily be higher and the valuation lower. Changes in prepayments and loss experience could also change the interest earned on this holding in future periods and impact its fair value. As a single security, the weighted average rate shown is the actual rate applied to the security.
b)Insurance liquidating trust preferred security is a single debenture which is valued using discounted cash flow analysis. The discount rate used is based on the market rate on comparable relatively illiquid instruments and credit analysis. A change in the liquidating trust’s ability to repay the note, or an increase in interest rates, particularly for privately placed debentures, would affect the discount rate and thus the valuation. As a single security, the weighted average rate shown is the actual rate applied to the security.
c)Loans, net of deferred loan fees and costs are valued using discounted cash flow analysis. Discount rates are based upon available information for estimated current origination rates for each loan type. Origination rates may fluctuate based upon changes in the risk free (Treasury) rate and credit experience for each loan type.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Fair value at |
| Fair value at |
|
|
|
|
|
|
Level 3 instruments only |
| September 30, 2017 |
| December 31, 2016 |
| Valuation techniques |
| Unobservable inputs |
| Range |
|
|
|
|
|
|
|
|
|
|
|
Investment securities available-for-sale |
| $ 43,553 |
| $ �� - |
| Discounted cash flow |
| Discount rate |
| 7.0%-9.5% |
Investment securities held-to-maturity |
| 6,343 |
| 6,039 |
| Discounted cash flow |
| Discount rate |
| 8.00% |
Federal Home Loan Bank and Atlantic |
| 991 |
| 1,613 |
| Cost |
| N/A |
| N/A |
Central Bankers Bank stock |
|
|
|
|
|
|
|
|
|
|
Loans, net of deferred loan fees and costs |
| 1,373,325 |
| 1,219,625 |
| Discounted cash flow |
| Discount rate |
| 3.5%-7.2% |
Commercial loans held for sale |
| 380,272 |
| 663,140 |
| Discounted cash flow |
| Discount rate |
| 4.85%-7.05% |
Investment in unconsolidated entity, |
| 103,950 |
| 118,389 |
| Discounted cash flow |
| Discount rate |
| 4.75% |
senior note |
|
|
|
|
|
|
| Default rate |
| 1.00% |
Investment in unconsolidated entity, |
| 3,761 |
| 8,541 |
| Discounted cash flow |
| Discount rate |
| 11.00% |
subordinated note |
|
|
|
|
|
|
| Default rate |
| 1.00% |
Assets held for sale |
| 314,994 |
| 360,711 |
| Discounted cash flow |
| Discount rate |
| 3.67%-9.32% |
Subordinated debentures |
| 9,873 |
| 9,290 |
| Discounted cash flow |
| Discount rate |
| 7.00% |
d)Commercial-SBA Loans are comprised of the government guaranteed portion of SBA insured loans. Their valuation is based upon the yield derived from dealer pricing indications for guaranteed pools, adjusted for seasoning and prepayments. A limited number of broker/dealers originate the pooled securities for which the loans are purchased and as a result, prices can fluctuate based on such limited market demand, although the government guarantee has resulted in consistent historical demand. Valuations are impacted by prepayment assumptions resulting from both voluntary payoffs and defaults. Such assumptions for both poolable and seasoned loans are based on a seasoning vector for constant prepayment rates from 3% to 30% over life.
e)Non-SBA CRE-fixed are fixed rate non-SBA commercial real estate mortgages. These loans are fair valued by a third party, based upon discounting at market rates for similar loans, except for one loan which is fair valued on the basis of an appraisal. Discount rates used in applying discounted cash flow analysis utilize input based upon loan terms, the general level of interest rates and the quality of the credit. Deterioration in loan performance or other credit weaknesses could result in fair value ranges which would be dependent upon potential buyers’ tolerance for such weaknesses and are difficult to estimate. The loan which is valued on the basis of an appraisal has a fair value of $4.8 million, an outstanding principal balance of $9.5 million and is discussed in Note 6.
f)Non-SBA CRE-floating are floating rate non-SBA loans, the vast majority of which are secured by multi-family properties (apartments). These are bridge loans designed to provide owners time and funding for property improvements and are generally valued using discounted cash flow analysis. The discount rate for the vast majority of these loans was based upon current origination rates for similar loans. Deterioration in loan performance or other credit weaknesses could result in fair value ranges which would be dependent upon potential buyers’ tolerance for such weaknesses and are difficult to estimate. At September 30, 2022, these loans were fair valued by a third party, based upon discounting at market rates for similar loans.
g)Subordinated debentures are comprised of two subordinated notes issued by the Company, maturing in 2038 with a floating rate of 3-month LIBOR plus 3.25%. These notes are valued using discounted cash flow analysis. The discount rate is based on the market rate for comparable relatively illiquid instruments. Changes in those market rates, or the credit of the Company could result in changes in valuation.
h)For other real estate owned, fair value is based upon appraisals of the underlying collateral by third party appraisers, reduced by 7% to 10% for estimated selling costs. Such appraisals reflect estimates of amounts realizable upon property sales based on the sale of comparable properties and other factors. Actual sales prices may vary based upon the identification of potential purchasers, changing conditions in local real estate markets and the level of interest rates required to finance purchases.
Assets measured at fair value on a nonrecurring basis, segregated by fair value hierarchy, during the periods shown are summarized below (in thousands):
|
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|
|
|
|
|
| |||||||||||
|
|
|
|
|
|
|
|
| |||||||||||
|
|
|
| Fair Value Measurements at Reporting Date Using | Fair Value Measurements at Reporting Date Using | ||||||||||||||
|
|
|
| Quoted prices in active |
| Significant other |
| Significant | Quoted prices in active | Significant other | Significant | ||||||||
|
|
|
| markets for identical |
| observable |
| unobservable | markets for identical | observable | unobservable | ||||||||
|
| Fair value |
| assets |
| inputs |
| inputs | Fair value | assets | inputs | inputs(1) | |||||||
Description |
| September 30, 2017 |
| (Level 1) |
| (Level 2) |
| (Level 3) | September 30, 2022 | (Level 1) | (Level 2) | (Level 3) | |||||||
|
|
|
|
|
|
|
|
| |||||||||||
Impaired loans - collateral dependent |
| $ 4,011 |
| $ - |
| $ - |
| $ 4,011 | |||||||||||
Collateral dependent loans(1) | $ | 7,059 | $ | — | $ | — | $ | 7,059 | |||||||||||
Other real estate owned |
| - |
| - |
| - |
| - | 18,873 | — | — | 18,873 | |||||||
Intangible assets |
| 5,185 |
| - |
| - |
| 5,185 | 2,149 | — | — | 2,149 | |||||||
|
| $ 9,196 |
| $ - |
| $ - |
| $ 9,196 | $ | 28,081 | $ | — | $ | — | $ | 28,081 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Fair Value Measurements at Reporting Date Using | ||||
|
|
|
| Quoted prices in active |
| Significant other |
| Significant |
|
|
|
| markets for identical |
| observable |
| unobservable |
|
| Fair value |
| assets |
| inputs |
| inputs |
Description (1) |
| December 31, 2016 |
| (Level 1) |
| (Level 2) |
| (Level 3) |
|
|
|
|
|
|
|
|
|
Impaired loans - collateral dependent |
| $ 3,685 |
| $ - |
| $ - |
| 3,685 |
Other real estate owned |
| 104 |
| - |
| - |
| 104 |
Intangible assets |
| 6,906 |
| - |
| - |
| 6,906 |
|
| $ 10,695 |
| $ - |
| $ - |
| $ 10,695 |
Fair Value Measurements at Reporting Date Using | |||||||||||
Quoted prices in active | Significant other | Significant | |||||||||
markets for identical | observable | unobservable | |||||||||
Fair value | assets | inputs | inputs(1) | ||||||||
Description | December 31, 2021 | (Level 1) | (Level 2) | (Level 3) | |||||||
Collateral dependent loans(1) | $ | 3,005 | $ | — | $ | — | $ | 3,005 | |||
Other real estate owned | 18,873 | — | — | 18,873 | |||||||
Intangible assets | 2,447 | — | — | 2,447 | |||||||
$ | 24,325 | $ | — | $ | — | $ | 24,325 |
|
|
1.The method of valuation approach for the loans evaluated for an allowance for credit losses on an individual loan basis and also for other real estate owned was the market approach based upon appraisals of the underlying collateral by external appraisers, reduced by 7% to 10% for estimated selling costs. Intangible assets are valued based upon internal analyses.
At September 30, 2017,2022, principal on impairedcollateral dependent loans and troubled debt restructurings, thatwhich is accounted for on the basis of the value of underlying collateral, is shown at estimated fair value of $4.0$7.1 million. To arrive at that fair value, related loan principal of $5.8$7.9 million was reduced by specific reserves of $1.8 million$863,000 within the allowance for loancredit losses as of that date, representing the deficiency between principal and estimated collateral values, which were reduced by estimated costs to sell. When the deficiency is deemed uncollectible, it is charged off by reducing the specific reserve and decreasing principal. Included in the impaired balancecollateral dependent loans at September 30, 20172022 were seven11 troubled debt restructured loans with a balance of $1.8$5.3 million, which had specific reserves of $534,000.$447,000. Included in the collateral dependent loans at December 31, 2021, were 10 troubled debt restructured loans with a balance of $1.5 million which had specific allowances of $476,000. Valuation techniques consistent with the market and/or cost approach were used to measure fair value and primarily included observable inputs for the individual
30
impaired collateral dependent loans being evaluated such as recent sales of similar assets or observable market data for operational or carrying costs. In cases where such inputs were unobservable, the loan balance is reflected within the Level 3 hierarchy. The fair value of other real estate owned is based on an appraisal of the property using the market approach for valuation.
Note 9. Derivatives
The Company utilizes derivative instruments to assist in the management of interest rate sensitivity by modifying the repricing, maturity and option characteristics on commercial real estatecertain non-SBA CRE loans held for sale.at fair value. These instruments are not accounted for as effective hedges. As of September 30, 2017,2022, the Company had entered into eleventwo interest rate swap agreements with an aggregate notional amount of $59.7$15.0 million. These swap agreements provide for the Company to receive an adjustable rate of interest based upon the three-month London Interbank Offering Rate (LIBOR).LIBOR. The Company recorded a lossnet gain of $2.5$1.5 million for the nine months ended September 30, 20172022 to recognize the fair value of the derivative instruments which is reported in gain (loss)net realized and unrealized gains (losses) on salecommercial loans, at fair value, in the consolidated statements of loans.operations. The amount receivable by the Company under these swap agreements was $722,000$952,000 at September 30, 20172022, which is reported in other assets. The Company had minimum collateral posting thresholds with certain of its derivative counterparties and had posted cash collateral of $756,000$518,000 as of September 30, 2017.2022.
The maturity dates, notional amounts, interest rates paid and received and fair value of the Company’s remaining interest rate swap agreements as of September 30, 20172022 are summarized below (dollars in thousands):
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| September 30, 2017 | ||||||
Maturity date |
| Notional amount |
| Interest rate paid |
| Interest rate received |
| Fair value |
August 4, 2021 |
| $ 10,300 |
| 1.12% |
| 1.31% |
| $ 306 |
August 17, 2025 |
| 2,500 |
| 2.27% |
| 1.31% |
| (15) |
August 17, 2025 |
| 2,500 |
| 2.27% |
| 1.31% |
| (15) |
December 11, 2025 |
| 2,400 |
| 2.14% |
| 1.32% |
| 13 |
December 23, 2025 |
| 6,800 |
| 2.16% |
| 1.33% |
| 27 |
December 24, 2025 |
| 8,200 |
| 2.17% |
| 1.33% |
| 22 |
January 28, 2026 |
| 3,000 |
| 1.87% |
| 1.31% |
| 79 |
July 20, 2026 |
| 6,300 |
| 1.44% |
| 1.31% |
| 405 |
December 12, 2026 |
| 3,200 |
| 2.26% |
| 1.31% |
| (2) |
January 4, 2027 |
| 10,100 |
| 2.35% |
| 1.30% |
| (79) |
April 27, 2027 |
| 4,400 |
| 2.32% |
| 1.32% |
| (19) |
Total |
| $ 59,700 |
|
|
|
|
| $ 722 |
September 30, 2022 | |||||||||||
Maturity date | Notional amount | Interest rate paid | Interest rate received | Fair value | |||||||
December 23, 2025 | 6,800 | 2.16% | 3.60% | 433 | |||||||
December 24, 2025 | 8,200 | 2.17% | 3.64% | 519 | |||||||
Total | $ | 15,000 | $ | 952 |
Note 10. Other Identifiable Intangible Assets
On November 29, 2012, the Company acquired certain software rights for approximately $1.8 million for use in managing prepaid cards in connection with an acquisition. The software is being amortized over eight years. Amortization expense is $217,000 per year ($610,000 over the remainder of the amortization period). The gross carrying amount of the software is $1.8 million, and as of September 30, 2017, the accumulated amortization was $1.3 million.
The Company accounts for its prepaid card customer list in accordance with ASC 350, “Intangibles-Goodwill and Other”. The acquisition of the Stored Value Solutions division of Marshall Bank First in 2007 resulted in a customer list intangible of $12.0 million which is being amortized over a 12 year period. Amortization expense is $1.0 million per year ($2.3 million over the remainder of the amortization period). The gross carrying amount of the customer list intangible is $12.0 million, and as of September 30, 2017, the accumulated amortization was $9.8 million. For both 2017 and 2016, amortization expense for the first nine months was $750,000.
In May 2016, the Company purchased approximately $60$60.0 million of lease receivables which resulted in a customer list intangible of $3.4 million whichthat is being amortized over a 10 year period. Amortization expense is $340,000 per year ($1.71.3 million over the next five years). The gross carrying amount of the customer list intangible is $3.4 million, and as of September 30, 2017,2022 and December 31, 2021, respectively, the accumulated amortization expense was $471,000.$2.2 million and $1.9 million.
In January 2020, the Company purchased McMahon Leasing and subsidiaries for approximately $8.7 million which resulted in $1.1 million of intangibles. The gross carrying value of $1.1 million of intangibles was comprised of a customer list intangible of $689,000, goodwill of $263,000 and a trade name valuation of $135,000. The customer list intangible is being amortized over a 12 year period and accumulated amortization expensewas $158,000 at September 30, 2022 and $115,000 at December 31, 2021. Amortization expense is $57,000 per year ($287,000 over the next five years).The gross carrying value and accumulated amortization related to the Company’s intangibles at September 30, 2022 and December 31, 2021 are presented below.
September 30, | December 31, | |||||||||||
2022 | 2021 | |||||||||||
Gross | Gross | |||||||||||
Carrying | Accumulated | Carrying | Accumulated | |||||||||
Amount | Amortization | Amount | Amortization | |||||||||
(Dollars in thousands) | ||||||||||||
Customer list intangibles | $ | 4,093 | $ | 2,342 | $ | 4,093 | $ | 2,044 | ||||
Goodwill | 263 | — | 263 | — | ||||||||
Trade Name | 135 | — | 135 | — | ||||||||
Total | $ | 4,491 | $ | 2,342 | $ | 4,491 | $ | 2,044 |
Note 11. Recent Accounting Pronouncements
In May 2014,March 2020, the FASB issued Accounting Standards Update (ASU) 2014-09, “Revenue(“ASU” or “Update”) 2020-04 which addressed optional expedients and exceptions for applying GAAP to contract modifications and hedging relationships, resulting from Contracts with Customers”.the phase-out of the London Inter-Bank Offered Rate (“LIBOR”) reference rate. To maximize management and accounting flexibility for holders of instruments using LIBOR as a benchmark, the guidance permitted a one-time transfer of such instruments from held-to-maturity to available-for-sale. The Company made such a transfer of four LIBOR-based securities, which comprised its held-to-maturity portfolio, in the first quarter of 2020. The Company discontinued LIBOR-based originations in 2021; however, certain financial instruments outstanding are indexed to LIBOR, including non-SBA commercial loans, at fair value, which amounted to $585.8 million at September 30, 2022. However, these loans are short-term and are generally expected to be repaid by the June 2023 LIBOR end date. At September 30, 2022, the Company owned $12.6 million of LIBOR based securities purchased from previous securitizations, which are also expected to mature before June 2023. When the Company resumed originating non-SBA commercial loans in the third quarter of 2021, which are identified separately under real estate bridge loans, it utilized the secured overnight financing rate (“SOFR”) as the index. In addition, the Company owns collateralized loan obligations (“CLOs”) and U.S. government agency adjustable-rate mortgages which utilize LIBOR based pricing. CLOs, which amounted to $336.1 million at September 30, 2022, generally have language regarding an index alternative should LIBOR no longer be available. U.S. government agencies generally have the ability to adjust interest rate indices as necessary on impacted LIBOR based securities, which amounted to $62.7 million at September 30, 2022. There is less clarity for the Company’s student loan securities of $18.6 million and its subordinated debentures payable of $13.4 million at that date, and for which industry standards continue to be considered by trustees and other governing bodies. The Company’s derivatives, the notional amount for which totaled $15.0 million at September 30, 2022, are interest rate swaps that are documented under bilateral agreements which contain LIBOR fallback provisions by virtue of counterparty adherence to the 2020 International Swaps and Derivatives Association, Inc.’s LIBOR Fallbacks Protocol. The Bank also owns $10 million of a Floating Rate Junior Subordinated Deferrable Interest Debenture issued by an insurance holding company in liquidation for which the rate index is three month LIBOR. The indenture contains terms for a substitution of the index when LIBOR quotes become unavailable. The Company continues to assess the potential impact of the phase-out of LIBOR on all affected accounts and any other potential impacts, and related accounting guidance.
In August 2021, the FASB issued ASU 2021-06. This ASU establishes a comprehensive revenue recognition standard for virtually all industries utilizing U.S. GAAP, including those that
31
previously followed industry-specific guidance such as the real estateadds new quarterly disclosures and construction industries. The revenue standard’s core principle is built on the contract between a vendor and a customer for the provision of goods and services. It attemptsexpands certain annual disclosures to depict the exchange of rights and obligations between the parties in the pattern of revenue recognition based on the consideration to which the vendor is entitled. To accomplish this, the standard requires five basic steps: (i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) identify the transaction price, (iv) allocate the transaction price to the performance obligations in the contract, and (v) recognize revenue when (or as) the entity satisfies the performance obligation. Three basic transition methods are available - full retrospective, retrospective with certain practical expedients, and a cumulative effect approach. We plan to adopt the standard using the cumulative effect approach. Under the cumulative effect alternative, an entity would apply the new revenue standard only to contracts that are incomplete under legacy U.S. GAAP at the date of initial application and recognize the cumulative effect of the new standard as an adjustment to the opening balance of retained earnings. The guidance inquarterly reporting. Amendments within this ASU isare effective for annual periods and interim reporting periods within those annual periods, beginningfiscal years ending after December 15, 2017. Since the standard does not apply to revenue from loans, securities2021 and other financial instruments, based on our evaluation to date, we do not expect the adoption of this standard to have a significant impact on our consolidated results of operations or our consolidated financial position. We are still evaluating the presentation of certain in-scope revenue on the income statement related to our payments business. We have commenced a contract review for those in-scope revenue streams. The Company’s contracts with its various third parties generally do not entail significant amounts of deferred revenues. Instead, services are performed monthly and amounts are billed either monthly or quarterly. Nonetheless, the Company is presenting the quarterly disclosures in process“Management’s Discussion and Analysis of conducting aFinancial Condition and Results of Operations.”
In March 2022, the FASB issued ASU 2022-02, Financial Instruments-Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures. ASU 2022-02 addresses areas identified by the FASB as part of its post-implementation review of its contractsthe credit losses standard (ASU 2016-13) that introduced the CECL model. The amendments eliminate the accounting guidance for troubled debt restructurings by creditors that have adopted the CECL model and sources of income to ascertain thatenhance the standarddisclosure requirements for loan refinancings and restructurings made with borrowers experiencing financial difficulty. The effective date is January 1, 2023. The Company does not expect it will not have a material impact on the consolidated statementfinancial statements.
On March 31, 2022, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin Number 121 (“SAB 121”). In SAB 121, the SEC staff expressed the views of operations or financial position. The review will includeits staff regarding the non interest income producing categories ofaccounting for obligations to safeguard crypto-assets an entity holds for platform users. As the Company which include prepaid cards, merchant acquiring, ACH, service fees on deposit accounts, gains and losses on other real estate owned, gains and lossesdoes not currently hold crypto-assets this release will not impact its consolidated financial statements or disclosures.
Note 12. Shareholder’s Equity
In 2020, the Company’s Board of Directors (“the Board”) authorized a common stock repurchase program (the “2021 Common Stock Repurchase Program”). Under the 2021 Common Stock Repurchase Program, repurchased shares may be reissued for various corporate purposes. The Company repurchased $10.0 million in each quarter of 2021.
On October 20, 2021, the Board approved a revised common stock repurchase program for the 2022 fiscal year (the “2022 Common Stock Repurchase Plan”).Under the 2022 Common Stock Repurchase Plan, the Company is authorized to repurchase up to $15.0 million in each quarter of 2022, for a maximum amount of $60.0 million, depending on the saleshare price, securities laws and stock exchange rules which regulate such repurchases. This plan may be modified or terminated at any time. During the three and nine months ended September 30, 2022, the Company repurchased 663,934 shares and 1,769,253 shares of loansits common stock in the open market under the 2022 Common Stock Repurchase Plan at an average cost of $22.59 per share and other categories.
In August 2014, the FASB issued ASU 2014-14, “Receivables - Troubled Debt Restructurings by Creditors (Subtopic 310-40): Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure”. The guidance in this ASU affects creditors that hold government-guaranteed mortgage loans, including those guaranteed by the Federal Home Administration (FHA) and the Veterans Administration (VA). It requires that a mortgage loan be derecognized and a separate other receivable be recognized upon foreclosure if the following conditions are met:
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This standard did not have a significant impact on our consolidated results of operations or our consolidated financial position.
In January 2016, the FASB issued ASU 2016-11, “Financial Instruments-Overall (Subtopic 825-10) Recognition and Measurement of Financial Assets and Financial Liabilities”. This ASU revises an entity’s accounting related to the classification and measurement of investments in equity securities and the presentation of certain fair value changes for financial liabilities measured at fair value. It also amends certain disclosure requirements associated with the fair value of financial instruments. For public business entities, the amendments in this update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is currently assessing the impact that the adoption of this standard will have on the financial condition and results of operations of the Company.
In February 2016, the FASB issued ASU 2016-02, “Leases”. The FASB issued this ASU to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet by lessees for those leases classified as operating leases under current U.S. GAAP and disclosing key informationabout leasing arrangements. The amendments in this ASUare effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018. Early application of this ASU is permitted for all entities. The Company is currently assessing the impact that the adoption of this standard will have on the financial condition and results of operations of the Company.
In March 2016, the FASB issued ASU 2016-09, “Compensation-Stock Compensation: Improvements to Employee Share-Based Payment Accounting”. This ASU simplifies several areas of accounting for$25.43 per share, based payment award transactions, including the income tax consequences, classification of awards as either equity or liabilities, and the classification on the statement of cash flows. For public companies, this is effective for annual periods beginning after December 15, 2016, and the interim periods within those annual periods. The Company adopted the guidance inrespectively. In the first quarter of 2017,2021, the Company changed its presentation of treasury stock acquired through common stock repurchases. To simplify presentation, common stock repurchases previously shown separately as treasury stock are now shown as reductions in common stock and the adoption did not have a material impact on first quarter results.additional paid-in capital.
In September 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326):Measurement of Credit Losses on Financial Instruments-Update”. The Update changes the accounting for credit losses on loans and debt securities. For loans and held-to-maturity debt securities, the Update requires an expected credit loss model to determine the allowance for credit losses. The expected credit loss model estimates losses for the estimated life of the financial asset. Expected credit losses reflect losses over the remaining contractual life of an asset, considering the effect of voluntary prepayments and considering available information about the collectability
32
of cash flows, including information about past events, current conditions, and reasonable and supportable forecasts. The resulting allowance for credit losses reflects the portion of the amortized cost basis that the entity does not expect to collect. Additional quantitative and qualitative disclosures are required upon adoption. In addition, the Update modifies the other-than-temporary impairment model for available-for-sale debt securities to require an allowance for credit impairment instead of a direct write-down, which allows for reversal of credit impairments in future periods. The guidance is effective in the first quarter of 2020 with a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption. Early adoption is permitted beginning in the first quarter of 2019. The Company is evaluating the impact the Update will have on the consolidated financial statements.
Note 12.13. Regulatory Matters
Various federal and state statutory provisions limit the amount of dividends that subsidiary banks can pay to their holding companies without regulatory approval. Under Delaware banking law,Without the Bank’s directorsprior approval of the OCC, a dividend may declarenot be paid if the total of all dividends on common or preferred stockdeclared by a bank in any calendar year is in excess of so muchthe current year’s net income combined with the retained net income of its net profits as they judge expedient, but the Bank must, before the declarationtwo preceding years. Additionally, a dividend may not be paid in excess of a bank’s retained earnings. Moreover, an insured depository institution may not pay a dividend if the payment would cause it to be less than “adequately capitalized” under the prompt corrective action framework as defined in the Federal Deposit Insurance Act or if the institution is in default in the payment of an assessment due to the FDIC. Similarly, a banking organization that fails to satisfy regulatory minimum capital conservation buffer requirements will be subject to certain limitations, which include restrictions on common stock from net profits, carry 50% of its net profits from the preceding period for which the dividend is paid to its surplus fund until its surplus fund amounts to 50% of its capital stock and thereafter must carry 25% of its net profits for the preceding period for which the dividend is paid to its surplus fund until its surplus fund amounts to 100% of its capital stock.distributions.
In addition to these explicit limitations, federal and state regulatory agencies are authorized to prohibit a banking subsidiary or financial holding company from engaging in an unsafe or unsound practice. Depending upon the circumstances, the agencies could take the position that paying a dividend would constitute an unsafe or unsound banking practice. In August 2015, the Bank entered into an Amendment to a 2014 Consent Order with the FDIC pursuant to which the Bank may not pay dividends without prior FDIC approval. On May 11, 2015, the Company had received a Supervisory Letterpursuant to which the Company may not pay dividends without prior Federal Reserve approval. The Federal Reserve approved the payment of the interest on the Company’s trust preferred securities which were due September 15, 2017. Future payments are subject to future approval by the Federal Reserve.
The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification of the Company and the Bank are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Moreover, capital requirements may be modified based upon regulatory rules or by regulatory discretion at any time reflecting a variety of factors. including deterioration in asset quality.
The following table sets forth our regulatory capital amounts and ratios for the periods indicated:
Tier 1 capital | Tier 1 capital | Total capital | Common equity | ||||
to average | to risk-weighted | to risk-weighted | tier 1 to risk | ||||
assets ratio | assets ratio | assets ratio | weighted assets | ||||
As of September 30, 2022 | |||||||
The Bancorp, Inc. | 9.66% | 13.13% | 13.56% | 13.13% | |||
The Bancorp Bank, National Association | 10.79% | 14.73% | 15.15% | 14.73% | |||
"Well capitalized" institution (under federal regulations-Basel III) | 5.00% | 8.00% | 10.00% | 6.50% | |||
As of December 31, 2021 | |||||||
The Bancorp, Inc. | 10.40% | 14.72% | 15.13% | 14.72% | |||
The Bancorp Bank, National Association | 10.98% | 15.48% | 15.88% | 15.48% | |||
"Well capitalized" institution (under federal regulations-Basel III) | 5.00% | 8.00% | 10.00% | 6.50% |
Note 13.14. Legal
On June 12, 2019, the Bank was served with a qui tam lawsuit filed in the Superior Court of the State of Delaware, New Castle County. The Delaware Department of Justice intervened in the litigation. The case is titled The State of Delaware, Plaintiff, Ex rel. Russell S. Rogers, Plaintiff-Relator, v. The Bancorp Bank, Interactive Communications International, Inc., and InComm Financial Services, Inc., Defendants. The lawsuit alleges that the defendants violated the Delaware False Claims Act by not paying balances on certain open-loop “Vanilla” prepaid cards to the State of Delaware as unclaimed property. The complaint seeks actual and treble damages, statutory penalties, and attorneys’ fees. The Bank has filed an answer denying the allegations and continues to vigorously defend against the claims. The Bank and other defendants previously filed a motion to dismiss the action, but the motion was denied and the case is in preliminary stages of discovery. The Company is unable to determine whether the ultimate resolution of the matter will have a material adverse effect on the Company’s financial condition or operations.
As previously disclosed, the Company received and responded to two non-public fact-finding inquiries from the SEC, which in each case sought to determine if violations of the federal securities laws occurred. On October 9, 2019, the Company received a subpoena fromseeking records related generally to the SEC, dated March 22, 2016, relating to an investigation by the SEC of the Company's restatement of its financial statements for the years ended December 31, 2010 through December 31, 2013Bank’s debit card issuance activity and the interim periods ended March 31, 2014, September 30, 2014 and September 30, 2014, which restatement was filed with the SEC on September 28, 2015, and the facts and circumstances underlying the restatement.gross dollar volume data, among other things. The Company is cooperating fully with the SEC's investigation. The costs to respondresponded to the subpoena and cooperatesubsequent subpoenas issued to the Company. The SEC last requested information from the Company relating to this inquiry in September 2021. The SEC has not made any findings, or alleged any wrongdoing, with respect to this matter. Future costs related to responding to and cooperating with the SEC's investigation have beenSEC staff may be material, and we expect such costs tocould continue to be material at least through the completion of this matter. Unrelated to the SEC’s investigation.
On September 30, 2016,first inquiry, on April 10, 2020, the Company received written notice froma subpoena in connection with the Internal Revenue ServiceBank’s CMBS business seeking records related to various offerings as well as CMBS securities held by the Bank. In connection with that it will be conducting an audit ofinvestigation, on July 6, 2022, the Company's tax returns for the tax years 2012, 2013 and 2014. The audit is in process.
The Company received a letter dated August 1, 2016, demanding inspection“Wells Notice” from the SEC Staff stating that the SEC Staff made a preliminary determination to recommend that the SEC file an enforcement action against the Company alleging violations of its booksrecord keeping, reporting and records pursuant to Section 220internal control provisions of the Delaware General Corporation Law,Exchange Act. Without admitting or DCGL,denying any of the SEC’s allegations, the Company subsequently agreed to resolve the investigation by consenting to the entry of an order by the SEC that: (1) the Company will cease and desist from legal counsel representingcommitting or causing any violations of the books-and-records provisions of the Securities Exchange Act and the relevant rules thereunder; and (2) the Company pay a shareholderpenalty of $1.75 million (the "Demand Letter"“Settlement Payment”). to the SEC. The order became effective on August 24, 2022. The Company through outside legal counsel, respondedrecognized a charge in its third fiscal quarter in the amount of the Settlement Payment. Further, as a result of the settlement, certain costs to the Demand Letter by permittingCompany related to the shareholder to inspect certainCMBS matter will cease, including the legal costs of the Company’s booksinvestigation, compliance with the SEC’s subpoena, and records and by objecting to other requests. cooperation with the SEC.
On January 30, 2017,12, 2021, three former employees of the shareholderBank filed a complaintseparate complaints against the Company in the Supreme Court of Chancery of the State of Delaware seeking an orderNew York, New York County. The Company subsequently removed all three lawsuits to the United States District Court for the Southern District of New York. The cases are captioned: John Edward Barker, Plaintiff v. The Bancorp, Inc., Defendant; Alexander John Kamai, Plaintiff v. The Bancorp, Inc., Defendant; and John Patrick McGlynn III, Plaintiff v. The Bancorp, Inc., Defendant. The lawsuits arise from the court, pursuant to Section 220Bank’s termination of the DGCL, compelling the Company to permit the shareholder to inspect additional books and records of the Company. The Company believes that its original response to the Demand Letter was appropriate in all respects and continues to defend against the complaint. On July 27, 2017, the Court of Chancery ruled in favor of the Company and granted an Order of Final Judgment Denying Plaintiff’s Demand To Inspect The Books And Records of Defendant. The court’s Order was subject to an appeal right which has now expired; no appeal was filed. Both the Demand Letter and the complaint threaten the commencement of a shareholder’s derivative suit against certain officers and directors of the Company
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seeking damages and other remedies on behalf of the Company. We have been advised by our counsel in the matter that reasonably possible losses cannot be estimated, but we and our counsel continue to believe the claim is without merit.
On October 17, 2017, the Federal Deposit Insurance Corporation (the “FDIC”) informed The Bancorp Bank (the “Bank”), a wholly owned subsidiary of The Bancorp, Inc. (the “Company”), that it intends to pursue an Order For Restitution (“Restitution Order”) and Order to Pay Civil Money Penalty (“CMP Order”) in an amount up to $2,576,000. The FDIC’s action principally emanates from one of the Bank’s third-party payment processors (“Third Party Processor”) suffering an internal system programming glitch. This inadvertently resulted in consumers that engaged in signature-based point of sale transactions during the period from December 2010 to November 2014 being charged a greater fee than what was disclosed by the Bank. Impacted consumers are being reimbursed by the Third Party Processor at its own expense. The Restitution Order would require the Bank to make such reimbursements if not otherwise made by the Third Party Processor, however, the Bank is indemnified by the Third Party Processor for such reimbursements. Although the Bank is still evaluating its position with regard to the Restitution Order and the CMP Order, the Company accrued $2,500,000 of related expense in its financial statements for the quarter ended September 30, 2017plaintiffs’ employment in connection with the CMP Order. Any amounts owedrestructuring of its CMBS business. The plaintiffs sought damages in the following amounts: $4,135,142 (Barker), $901,088 (Kamai) and $2,909,627 (McGlynn). On June 11, 2021, the Company filed a consolidated motion to dismiss in each case. On February 25, 2022, the court granted the Company’s motion in part, dismissing McGlynn’s claims in entirety and most of Barker and Kamai’s claims. The sole claims remaining are Barker and Kamai’s breach of implied contract claims related to an unpaid bonus, for which they seek $2,000,000 and $300,000, respectively.The Company is vigorously defending against these claims. On September 29, 2022, the Company filed a motion for summary judgment in both matters, which is still pending before the court. The Company is not yet able to determine whether the ultimate resolution of this matter will have a material adverse effect on the Company’s financial conditions or operations.
On September 14, 2021, Cachet Financial Services (“Cachet”) filed an adversary proceeding against the Bank in the United States Bankruptcy Court for the Central District of California, titled Cachet Financial Services v. The Bancorp Bank. The case was filed within the context of Cachet’s pending Chapter 11 bankruptcy case. The Bank previously served as the Originating Depository Financial Institution (“ODFI”) for ACH transactions in connection with Cachet’s payroll services business. The matter arises from the CMP Order would not be subjectBank’s termination of its Payroll Processing ODFI Agreement with Cachet on October 23, 2019 for safety and soundness reasons. The initial complaint alleges eight causes of action: (i) breach of contract; (ii) negligence; (iii) intentional interference with contract; (iv) conversion; (v) express indemnity; (vi) implied indemnity; (vii) accounting; and (viii) objection to any indemnification or recovery from any third party.
The independent investorthe Bank’s proof of claim in Walnut Street, the securitization into whichbankruptcy case. On November 4, 2021, the Bank sold certain loans when it discontinued its Philadelphia commercial loan operations, has taken actions which may resultfiled a motion in litigation. Specifically, counselthe United States District Court for the independent investor has requested thatCentral District of California to withdraw the Note Administrator hold monthly distribution payments in escrow until the independent investor’s alternative interpretationreference of the order of payments, as comparedadversary proceeding to the interpretation ofbankruptcy court. The motion is still pending. On August 3, 2022, Cachet served the Bank with a First Amended Complaint wherein Cachet, among other things, withdraws its implied indemnity claim against the Bank and the Note Administrator, is resolved. Based on the independent investor’s request, the Note Administrator withheld the September 2017 payment to the independent investor andadds several defendants unaffiliated with the Bank and indicated that it would continuecauses of action related to do so until this issue was resolved. Managementthose parties. As to the Bank, Cachet seeks approximately $150 million in damages, an accounting and disallowance of the Company, based on adviceBank’s proof of its counsel, believes itclaim. The Bank is unlikely thatvigorously defending against these claims. On September 28, 2022, the Bank and Note Administrator’s interpretationfiled a partial motion to dismiss, seeking to dispose of the majority of Cachet’s claims against the Bank. The motion is still pending before the court. The Company is not yet able to determine whether the ultimate resolution of this matter will be overturned. However, if such interpretation is overturned, based uponhave a material adverse effect on the current model used to value Walnut Street, an estimated $8 million loss may be recognized, based on currently estimated cash flows which would be redirected from the Bank to the independent investor.Company’s financial conditions or operations.
In addition, we arethe Company is a party to various routine legal proceedings arising out of the ordinary course of our business. ManagementThe Company believes that none of these actions, individually or in the aggregate, will have a material adverse effect on ourthe Company’s financial condition or operations.
Note 14.15. Segment Financials
The Company performed a strategic evaluation of its businesses in the third quarter of 2014. As a result of the evaluation, the Company decided to discontinue its commercial lending operations, as described in Note 15,16, Discontinued Operations. The shift from a traditional bank balance sheet led the Company to evaluate its continuing operations. Based on the continuing operations of the Company, it was determined that there would be four segments of the business: specialty finance, payments, corporate and discontinued operations. The chief decision maker for these segments is the Chief Executive Officer. Specialty finance includes commercial loan sales,the origination of non-SBA CRE loans, SBA loans, leasingdirect lease financing, security-backed lines of credit, cash value insurance policy-backed lines of credit and SBLOCs and any deposits generated by those business lines. Payments include prepaid cards, merchantcard accounts, card payments, ACH processing and affinity accounts.deposits generated by those business lines. Corporate includes the Company’s investment portfolio, corporate overhead and other non-allocated expenses. Investment income is allocated toIn the payments segment.third quarter of 2022, the Company began allocating interest expense between segments and adjusted prior period presentation for consistency. These operating segments reflect the way the Company views its current operations.
The following tables provide segment information for the periods indicated:
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| For the three months ended September 30, 2017 | For the three months ended September 30, 2022 | |||||||||||||||||||||
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| Specialty finance |
| Payments |
| Corporate |
| Discontinued operations |
| Total | Specialty finance | Payments | Corporate | Discontinued operations | Total | |||||||||
|
| (in thousands) | (Dollars in thousands) | |||||||||||||||||||||
Interest income |
| $ 21,631 |
| $ - |
| $ 10,283 |
| $ - |
| $ 31,914 | $ | 75,041 | $ | 34 | $ | 8,846 | $ | — | $ | 83,921 | ||||
Interest allocation |
| - |
| 10,283 |
| (10,283) |
| - |
| - | (17,747) | 17,154 | 593 | — | — | |||||||||
Interest expense |
| 848 |
| 2,709 |
| 456 |
| - |
| 4,013 | 940 | 13,981 | 4,341 | — | 19,262 | |||||||||
Net interest income |
| 20,783 |
| 7,574 |
| (456) |
| - |
| 27,901 | 56,354 | 3,207 | 5,098 | — | 64,659 | |||||||||
Provision for loan and lease losses |
| 800 |
| - |
| - |
| - |
| 800 | ||||||||||||||
Provision for credit losses | 822 | — | — | — | 822 | |||||||||||||||||||
Non-interest income |
| 13,834 |
| 14,638 |
| 535 |
| - |
| 29,007 | 1,952 | 21,440 | 34 | — | 23,426 | |||||||||
Non-interest expense |
| 14,844 |
| 16,384 |
| 12,655 |
| - |
| 43,883 | 18,292 | 17,348 | 9,190 | — | 44,830 | |||||||||
Income (loss) from continuing operations before taxes |
| 18,973 |
| 5,828 |
| (12,576) |
| - |
| 12,225 | ||||||||||||||
Income (loss) before taxes | 39,192 | 7,299 | (4,058) | — | 42,433 | |||||||||||||||||||
Income tax expense |
| - |
| - |
| 5,455 |
| - |
| 5,455 | — | — | 11,829 | — | 11,829 | |||||||||
Income (loss) from continuing operations |
| 18,973 |
| 5,828 |
| (18,031) |
| - |
| 6,770 | ||||||||||||||
Income from discontinued operations |
| - |
| - |
| - |
| 511 |
| 511 | ||||||||||||||
Net income (loss) |
| $ 18,973 |
| $ 5,828 |
| $ (18,031) |
| $ 511 |
| $ 7,281 | $ | 39,192 | $ | 7,299 | $ | (15,887) | $ | — | $ | 30,604 | ||||
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Specialty finance | Payments | Corporate | Discontinued operations | Total | ||||||||||
(Dollars in thousands) | ||||||||||||||
Interest income | $ | 46,313 | $ | — | $ | 7,187 | $ | — | $ | 53,500 | ||||
Interest allocation | (4,314) | 5,155 | (841) | — | — | |||||||||
Interest expense | 239 | 916 | 1,452 | — | 2,607 | |||||||||
Net interest income | 41,760 | 4,239 | 4,894 | — | 50,893 | |||||||||
Provision for credit losses | 1,613 | — | — | — | 1,613 | |||||||||
Non-interest income | 6,408 | 20,166 | 14 | — | 26,588 | |||||||||
Non-interest expense | 16,452 | 16,286 | 6,646 | — | 39,384 | |||||||||
Income (loss) from continuing operations before taxes | 30,103 | 8,119 | (1,738) | — | 36,484 | |||||||||
Income tax expense | — | — | 8,289 | — | 8,289 | |||||||||
Income (loss) from continuing operations | 30,103 | 8,119 | (10,027) | — | 28,195 | |||||||||
Income from discontinued operations | — | — | — | 66 | 66 | |||||||||
Net income (loss) | $ | 30,103 | $ | 8,119 | $ | (10,027) | $ | 66 | $ | 28,261 |
34
For the nine months ended September 30, 2022 | ||||||||||||||
Specialty finance | Payments | Corporate | Discontinued operations | Total | ||||||||||
(Dollars in thousands) | ||||||||||||||
Interest income | $ | 179,700 | $ | 89 | $ | 21,596 | $ | — | $ | 201,385 | ||||
Interest allocation | (28,300) | 28,565 | (265) | — | — | |||||||||
Interest expense | 1,429 | 19,989 | 7,886 | — | 29,304 | |||||||||
Net interest income | 149,971 | 8,665 | 13,445 | — | 172,081 | |||||||||
Provision for credit losses | 4,331 | — | — | — | 4,331 | |||||||||
Non-interest income | 11,496 | 64,524 | 3,923 | — | 79,943 | |||||||||
Non-interest expense | 53,071 | 51,529 | 21,427 | — | 126,027 | |||||||||
Income (loss) before taxes | 104,065 | 21,660 | (4,059) | — | 121,666 | |||||||||
Income tax expense | — | — | 31,694 | — | 31,694 | |||||||||
Net income (loss) | $ | 104,065 | $ | 21,660 | $ | (35,753) | $ | — | $ | 89,972 |
For the nine months ended September 30, 2021 | ||||||||||||||
Specialty finance | Payments | Corporate | Discontinued operations | Total | ||||||||||
(Dollars in thousands) | ||||||||||||||
Interest income | $ | 143,549 | $ | — | $ | 23,854 | $ | — | $ | 167,403 | ||||
Interest allocation | (12,713) | 15,438 | (2,725) | — | — | |||||||||
Interest expense | 723 | 3,298 | 4,663 | — | 8,684 | |||||||||
Net interest income | 130,113 | 12,140 | 16,466 | — | 158,719 | |||||||||
Provision for credit losses | 1,484 | — | — | — | 1,484 | |||||||||
Non-interest income | 13,864 | 62,600 | 59 | — | 76,523 | |||||||||
Non-interest expense | 50,844 | 52,666 | 21,640 | — | 125,150 | |||||||||
Income (loss) from continuing operations before taxes | 91,649 | 22,074 | (5,115) | — | 108,608 | |||||||||
Income tax expense | — | — | 25,195 | — | 25,195 | |||||||||
Income (loss) from continuing operations | 91,649 | 22,074 | (30,310) | — | 83,413 | |||||||||
Income from discontinued operations | — | — | — | 248 | 248 | |||||||||
Net income (loss) | $ | 91,649 | $ | 22,074 | $ | (30,310) | $ | 248 | $ | 83,661 |
September 30, 2022 | ||||||||||||||
Specialty finance | Payments | Corporate | Discontinued operations | Total | ||||||||||
(Dollars in thousands) | ||||||||||||||
Total assets | $ | 6,061,700 | $ | 59,561 | $ | 1,655,813 | $ | — | $ | 7,777,074 | ||||
Total liabilities | $ | 368,932 | $ | 5,724,483 | $ | 1,019,921 | $ | — | $ | 7,113,336 |
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|
|
|
|
| For the three months ended September 30, 2016 | ||||||||
|
| Specialty finance |
| Payments |
| Corporate |
| Discontinued operations |
| Total |
|
| (in thousands) | ||||||||
Interest income |
| $ 17,727 |
| $ - |
| $ 9,005 |
| $ - |
| $ 26,732 |
Interest allocation |
| - |
| 9,005 |
| (9,005) |
| - |
| - |
Interest expense |
| 740 |
| 1,975 |
| 475 |
| - |
| 3,190 |
Net interest income |
| 16,987 |
| 7,030 |
| (475) |
| - |
| 23,542 |
Provision for loan and lease losses |
| 750 |
| - |
| - |
| - |
| 750 |
Non-interest income |
| 4,215 |
| 15,180 |
| 509 |
| - |
| 19,904 |
Non-interest expense |
| 16,352 |
| 24,081 |
| 3,738 |
| - |
| 44,171 |
Income (loss) from continuing operations before taxes |
| 4,100 |
| (1,871) |
| (3,704) |
| - |
| (1,475) |
Income tax expense |
| - |
| - |
| 55 |
| - |
| 55 |
Income (loss) from continuing operations |
| 4,100 |
| (1,871) |
| (3,759) |
| - |
| (1,530) |
Loss from discontinued operations |
| - |
| - |
| - |
| (24,021) |
| (24,021) |
Net income (loss) |
| $ 4,100 |
| $ (1,871) |
| $ (3,759) |
| $ (24,021) |
| $ (25,551) |
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|
|
|
|
|
|
|
|
|
December 31, 2021 | ||||||||||||||
Specialty finance | Payments | Corporate | Discontinued operations | Total | ||||||||||
(in thousands) | ||||||||||||||
Total assets | $ | 5,099,388 | $ | 41,593 | $ | 1,698,990 | $ | 3,268 | $ | 6,843,239 | ||||
Total liabilities | $ | 329,372 | $ | 5,312,115 | $ | 549,298 | $ | — | $ | 6,190,785 |
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|
|
| For the nine months ended September 30, 2017 | ||||||||
|
| Specialty finance |
| Payments |
| Corporate |
| Discontinued operations |
| Total |
|
| (in thousands) | ||||||||
Interest income |
| $ 59,861 |
| $ - |
| $ 31,315 |
| $ - |
| $ 91,176 |
Interest allocation |
| - |
| 31,315 |
| (31,315) |
| - |
| - |
Interest expense |
| 2,627 |
| 7,567 |
| 989 |
| - |
| 11,183 |
Net interest income |
| 57,234 |
| 23,748 |
| (989) |
| - |
| 79,993 |
Provision |
| 2,150 |
| - |
| - |
| - |
| 2,150 |
Non-interest income |
| 24,507 |
| 45,625 |
| 1,267 |
| - |
| 71,399 |
Non-interest expense |
| 42,251 |
| 54,829 |
| 21,949 |
| - |
| 119,029 |
Income (loss) from continuing operations before taxes |
| 37,340 |
| 14,544 |
| (21,671) |
| - |
| 30,213 |
Income tax benefit |
| - |
| - |
| (457) |
| - |
| (457) |
Income (loss) from continuing operations |
| 37,340 |
| 14,544 |
| (21,214) |
| - |
| 30,670 |
Income from discontinued operations |
| - |
| - |
| - |
| 3,438 |
| 3,438 |
Net income (loss) |
| $ 37,340 |
| $ 14,544 |
| $ (21,214) |
| $ 3,438 |
| $ 34,108 |
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35
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|
|
| For the nine months ended September 30, 2016 | ||||||||
|
| Specialty finance |
| Payments |
| Corporate |
| Discontinued operations |
| Total |
|
| (in thousands) | ||||||||
Interest income |
| $ 48,712 |
| $ 2 |
| $ 25,613 |
| $ - |
| $ 74,327 |
Interest allocation |
| - |
| 25,613 |
| (25,613) |
| - |
| - |
Interest expense |
| 2,139 |
| 5,779 |
| 1,421 |
| - |
| 9,339 |
Net interest income |
| 46,573 |
| 19,836 |
| (1,421) |
| - |
| 64,988 |
Provision |
| 1,810 |
| - |
| - |
| - |
| 1,810 |
Non-interest income |
| (6,787) | * | 48,245 |
| 6,674 |
| - |
| 48,132 |
Non-interest expense |
| 47,828 |
| 96,376 |
| 12,241 |
| - |
| 156,445 |
Loss from continuing operations before taxes |
| (9,852) |
| (28,295) |
| (6,988) |
| - |
| (45,135) |
Income tax benefit |
| - |
| - |
| (15,324) |
| - |
| (15,324) |
Income (loss) from continuing operations |
| (9,852) |
| (28,295) |
| 8,336 |
| - |
| (29,811) |
Loss from discontinued operations |
| - |
| - |
| - |
| (37,909) |
| (37,909) |
Net income (loss) |
| $ (9,852) |
| $ (28,295) |
| $ 8,336 |
| $ (37,909) |
| $ (67,720) |
* Reflects writedown of investment in unconsolidated entity |
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|
|
| September 30, 2017 | ||||||||
|
| Specialty finance |
| Payments |
| Corporate |
| Discontinued operations |
| Total |
|
| (in thousands) | ||||||||
Total assets |
| $ 1,818,646 |
| $ 38,155 |
| $ 1,821,823 |
| $ 314,994 |
| $ 3,993,618 |
Total liabilities |
| $ 645,265 |
| $ 2,702,958 |
| $ 305,934 |
| $ - |
| $ 3,654,157 |
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|
|
| December 31, 2016 | ||||||||
|
| Specialty finance |
| Payments |
| Corporate |
| Discontinued operations |
| Total |
|
| (in thousands) | ||||||||
Total assets |
| $ 2,019,180 |
| $ 27,935 |
| $ 2,450,288 |
| $ 360,711 |
| $ 4,858,114 |
Total liabilities |
| $ 596,574 |
| $ 3,401,142 |
| $ 561,435 |
| $ - |
| $ 4,559,151 |
Note 15.16. Discontinued Operations
The Company performed a strategic evaluation of its businesses in the third quarter of 2014 and decided to discontinue its Philadelphia commercial lending operations to focus on its specialty finance lending. The Company has since disposed of the vast majority of related loans which constitute the commercial loan portfolio areand other real estate owned. While in the process of disposition. As such,disposition, financial results of the commercial lending operations arewere presented as separate from continuing operations on the consolidated statements of operations and assets of the commercial lending operations to be disposed areof were presented as assets held for saleheld-for-sale on the consolidated balance sheets.As disposition efforts were winding down, discontinued loans of $61.6 million were reclassified to loans held for investment in the first quarter of 2022. These loans will accordingly be accounted for as such, and included in related tables as management continues related collections. Discontinued other real estate owned of $17.3 million which constituted the remainder of discontinued assets was reclassified to the other real estate owned caption on the balance sheet.
36
The following table presents financial results of the commercial lending business included in net income (loss)loss from discontinued operations for the three months ended September 30, 2022 and 2021 (in thousands):
For the three months ended September 30, | For the nine months ended September 30, | ||||||||||
2022 | 2021 | 2022 | 2021 | ||||||||
Interest income | $ | — | $ | 754 | $ | — | $ | 2,388 | |||
Interest expense | — | — | — | — | |||||||
Net interest income | — | 754 | — | 2,388 | |||||||
Non-interest income | — | 48 | — | 51 | |||||||
Non-interest expense | — | 715 | — | 2,115 | |||||||
Income before taxes | — | 87 | — | 324 | |||||||
Income tax expense | — | 21 | — | 76 | |||||||
Net income | $ | — | $ | 66 | $ | — | $ | 248 |
The following table presents assets held-for-sale from discontinued operations at September 30, 2022 and December 31, 2021 (in thousands):
September 30, | December 31, | ||||
2022 | 2021 | ||||
Commercial loans, at fair value | $ | — | $ | 2,907 | |
Other real estate owned | — | 361 | |||
Total assets | $ | — | $ | 3,268 | |
Non-interest expense for the three and nine months ended September 30, 20172021 reflected $384,000 and 2016 (in thousands).
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|
| For the three months ended September 30, |
| For the nine months ended September 30, | ||||
| 2017 |
| 2016 |
| 2017 |
| 2016 |
Interest income | $ 3,098 |
| $ 3,891 |
| $ 9,594 |
| $ 15,037 |
Interest expense | - |
| - |
| - |
| - |
Provision for loan and lease losses | - |
| - |
| - |
| - |
Net interest income after provision | 3,098 |
| 3,891 |
| 9,594 |
| 15,037 |
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|
|
|
|
|
|
|
Non interest income | 549 |
| 575 |
| 1,001 |
| 678 |
Non interest expense | 2,818 |
| 25,956 |
| 5,107 |
| 53,788 |
|
|
|
|
|
|
|
|
Income (loss) before taxes | 829 |
| (21,490) |
| 5,488 |
| (38,073) |
Income tax (benefit) provision | 318 |
| 2,531 |
| 2,050 |
| (164) |
Net income (loss) | $ 511 |
| $ (24,021) |
| $ 3,438 |
| $ (37,909) |
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|
|
| September 30, |
| December 31, |
| 2017 |
| 2016 |
Loans, net | $ 277,385 |
| $ 340,396 |
Other real estate owned | 37,609 |
| 20,315 |
Total assets | $ 314,994 |
| $ 360,711 |
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|
The Company utilizes$1.5 million of recoveries of prior losses on loans. It also reflected respective expenses and losses of $745,000 and $2.3 million for the three and nine month periods ended September 30, 2021, respectively, related to other real estate owned.Discontinued operations loans are recorded at the lower of their cost or market valuations forfair value. Fair value is determined using a discontinued operations loans whichcash flow analysis where projections of cash flows are updated based on internal loan officers’ information, third party consultant information,developed in consideration of internal loan review analysis and third party reviewdefault/prepayment assumptions for smaller pools of impairments. Based on that review, weighted average fair values were appliedloans. These credit and collateral related assumptions are subject to the loans not specifically reviewed. The results of discontinued operations do not include any future severance payments. Of the approximately $1.1 billion in book value of loans in that portfolio as of the September 30, 2014 date of discontinuance of operations, $315.0 million of loans and other real estate owned remain in assets held for sale on the balance sheet as a result of loan sales, principal paydowns and fair value charges. The Company is attempting to sell those remaining loans. Additionally, the balance sheet reflects $107.7 million in investment in unconsolidated entity, which is comprised of notes owned by the Company as a result of the sale of certain discontinued loans to Walnut Street, see uncertainty.
Note 8, Fair Value Measurements.
Note 16.17. Subsequent Events
The Company evaluated its September 30, 20172022 consolidated financial statements for subsequent events through the date the consolidated financial statements were issued. ThePursuant to a stock repurchase plan described in Note 12, between October 1, 2022 through November 3, 2022, the Company is not awarerepurchased 281,275 common shares, at a total cost of any subsequent events which would require recognition$6.9 million and an average price of $24.57 per share.
On October 26, 2022, the Company’s board of directors approved a new stock repurchase program authorizing the Company to increase its share repurchases to $25.0 million per quarter, or disclosure$100.0 million in the financial statements, not otherwise disclosed herein.2023, from $15.0 million a quarter, or $60.0 million in 2022.
37
Part I - Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 ended December 31, 20162021 and in other of our public filings with the Securities 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 reportForm 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 ended December 31, 2016.2021.
OverviewKey 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.
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. Notwithstanding a non-deductible $1.75 million civil money penalty, third quarter 2022 return on assets and equity amounted to 1.69% and 18.39% (annualized), respectively, compared to 1.76% and 17.84% (annualized) in the third quarter of 2021. For the nine month period ended September 30, 2022, return on assets and return on equity amounted to 1.69% and 18.28% (annualized), respectively, compared to 1.66% and 18.35% (annualized) for the nine month period ended September 30, 2021. Net interest income increased $13.8 million in the third quarter of 2022 compared to the comparable prior year quarter, which had included $1.2 million of PPP related interest and fees, and which did not recur in the current year quarter. Average loans and leases grew to $5.91 billion in third quarter 2022 compared to $4.58 billion in third quarter 2021. Net interest margin was 3.69% in the third quarter of 2022 versus 3.35% in the third quarter of 2021 and 3.32% versus 3.29%, respectively, for the nine month periods ended September 30, 2022 and 2021. The increase in 2022 reflected growth of loan balances at higher rates as a result of the Federal Reserve rate increases in 2022. Variable rate loans and securities comprise the majority of the Company’s earning assets, and while they reprice on a lagged basis, they adjust more fully to the Federal Reserve rate increases than deposits. Accordingly, we expect that those loan repricings will continue to positively impact net interest income and net interest margin in the fourth quarter of 2022. The provision for credit losses was $822,000 in the third quarter of 2022 compared to $1.6 million in the third quarter of 2021. A provision for credit losses of $4.3 million for the nine month period ended September 30, 2022 compared to $1.5 million for the nine month period ended September 30, 2021. 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 September 30, 2022, that ratio was 8.53%, compared to 10.18% a year earlier. An increase in equity capital from retained earnings was partially offset by fair value adjustments to investment securities and share repurchases. The impact on the ratio of resulting levels of equity capital was more than offset by growth in assets, primarily loans, between the periods.
Overview
We are a Delaware financial holding company and our primary subsidiary, which we wholly owned,own, is The Bancorp Bank, National Association, which we refer to as the Bank. The vast majority of our revenue and income is currently generated through the Bank. In our continuing lending operations, we have four primary lines of specialty lending: securities-backed lines of credit, or
SBLOC, automobile fleetIBLOC, and other equipment investment advisor financing;
leasing Small Business Administration, or(direct lease financing);
small business loans, primarily SBA and loans, and loans generated for sale into capital markets primarily through
non-SBA commercial loan securitizations, or CMBS. real estate bridge (“CRE”) loans.
SBLOCs and IBLOCs are loans which are generated through institutional banking affinity groups and are respectively collateralized by marketable securities.securities and the cash value of insurance policies. SBLOCs are typically offered in conjunction with brokerage accounts and are offered nationally. AutomobileIBLOC 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 of Atlantic coastCoast and other states.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 into CMBS capital marketsthrough 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 to Fintech 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 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 collection services for payments made nationally.
In ourto merchants consist of those which must be settled through associations such as Visa or MasterCard. We also provide banking operations, we focus on providing our services on a national basis to organizations with a pre-existing customer base who can use one or more selected banking services tailored to support or complement the services provided by these organizations to their customers. These services include private label banking; creditloan and debit card processingdeposit accounts for merchants affiliated with independent service organizations; and prepaid cards, also known as stored value cards, for insurers, incentive plans, large retail chains and consumer service organizations.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 group banking. Our private label banking, merchant processing and prepaid card programs are a source of fee
An increase in our net income and low-cost deposits.
Into $30.6 million for the third quarter of 2014, we decided to discontinue our Philadelphia-based commercial lending operations. The loans which constitute that portfolio are2022, from $28.3 million for the third quarter of 2021, reflected a $13.8 million increase in the process of disposition. This representsnet interest income, a strategic shift to$3.2 million decrease in non-interest income, and a focus on our national specialty lending programs including small fleet leasing, SBLOC, CMBS origination$5.4 million increase in non-interest expense. Loan growth and SBA lending. We anticipate using the proceeds from disposition to acquire investment securities and to provide liquidity to fund growthhigher rates resulted in our continuing specialty lending lines. Yields we obtain from reinvestment of the proceeds will be subject to economic and other conditions at the time of reinvestment, including marketincreases in loan interest, with higher rates many of which will be beyond our control. We cannot predict whether income resulting from the reinvestment of loans we hold for sale resulting from discontinued operations will match or exceed the amount from the sold loans. Of the approximate $1.1 billion in book value of loans in that commercial and residential portfolio as of the September 30, 2014 date of discontinuance of operations, $315.0 million of loans and other real estate owned remain in assets held for sale on the balance sheet, which reflectsalso offsetting the impact of related sales, paydownslower securities
balances. Our largest funding sources, prepaid and fair value charges. Additionally, the balance sheet reflects $107.7 million in investment in unconsolidated entity, Walnut Street, which is compriseddebit card account deposits, contractually adjust immediately to only a portion of notes owned by the Company as a result of the sale of certain discontinued loans. In the third quarter, the independent investor in Walnut Street took actions which may result in litigation which may result in financial loss to the Bank, although in the opinion of counsel that is unlikely (see note 13 to the financial statements).
The results of the first nine months of 2017 reflected a return to profitability, consistent with our business plan and budget. The improvement reflected revenue growth, expense reductions, the conclusion of BSA lookback expense in 2016 and credit related charges in discontinued operations in 2016. Year to date net income for 2017 was $34.1 million. Continuing growth in net interest income resulted from loan growth including SBLOC balances which grew 16% year over year with leasing and SBA balances each growing 11% year over year. In addition to the impact of loan growth, Federal Reserve rate increases also resultedor decreases. Accordingly, our cost of funds rose to 1.19% in higher interest income, while interest expense increased to a lesser extent. The Bank’s largest funding source, prepaid card deposits, contractually adjust to only a fraction of increases in market rates. Expense reductions also contributed to the first nine months of 2017 earnings, and non-interest expense was $8.3 million less than the first nine months of 2016, excluding Bank Secrecy Act lookback expenses. Additional expense reductions are being pursued and may impact future periods; however, timing of such expense reductions is difficult to project. In the third quarter of 2017,2022. The majority of our loans and significant amounts of our securities are variable rate with loans repricing on a lagged basis, most within ninety days. While they reprice on a lagged basis, loan rates adjust more fully to Federal Reserve rate increases. Accordingly, we expect that loan repricings will continue to positively impact net interest income and the FDIC notifiednet interest margin in the Bank that it intendedfourth quarter of 2022. Additionally, in 2022 non-interest income reflected a $4.0 million third quarter unrealized loss resulting from the write-down to pursue a civil money penalty to be paid by the Bank. While the
38
Bank is still evaluating its position with respect to the penalty, $2.5September 2022 appraisal, less estimated disposition costs, of a $9.5 million of expense was accruedloan. An $822,000 provision for credit losses in the third quarter (see note 13of 2022, compared to a provision for credit losses of $1.6 million in the financial statements).third quarter of 2021. Prepaid, debit card and other payment fees including ACH, are the largest driver of non-interest income. FeesSuch fees for the third quarter of 2022 increased $1.3 million over the comparable 2021 period. Leasing income decreased $920,000 from the comparable prior year quarter. Both periods reflected vehicle sales at relatively higher market prices due to vehicle shortages, while the decrease reflected reduced volume in the first nine months2022. Third quarter 2022 non-interest expense increased $5.4 million which reflected increases of 2017 were comparable to the first nine months of 2016 reflecting the exit of$2.9 million in salaries and employee benefits, $413,000 in Federal Deposit Insurance Corporation (“FDIC”) insurance expense, and a client which changed ownership and the termination of several programs whose sponsors decided to exit prepaid cards. Those volumes were$1.8 million civil money penalty partially offset by organic growtha decrease of $344,000 in other programs. A decrease in assets from $4.2 billion at September 30, 2016 to $4.0 billion at September 30, 2017 reflected the exit of less profitable deposit relationships. legal expense.
Critical Accounting Policies and Estimates
Our accounting and reporting policies conform with accounting principles generally accepted in the United States and general practices within the financial services industry. The preparation of financial statements in conformity with accounting principles generally accepted in the 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 loancredit losses on loans, leases and lease losses,securities, our determination of the fair value of financial instruments and the level in which an instrument is placed within the valuation hierarchy, our determination of other than temporary impairment,and stock compensation and income taxestax accounting involve a higher degree of judgment and complexity than our other significant accounting policies.
We determine our allowance for loan and leasecredit losses using the current expected credit losses method, or CECL, with the objective of maintaining a reserve levelan allowance for credit losses 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 impairedcredit deteriorated loans, value of collateral, estimated losses on consumer loans, and residential mortgages, and general amounts for 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 loancredit losses. Any such additional provisions for loancredit losses will be a direct charge to our earnings. See “Allowance for Loan and LeaseCredit 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.
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 are temporary,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 income statement.Consolidated Statements of Operations. If management believes market value losses are temporary and that we have the ability and intention to hold those securities to maturity,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. We currently use the tax expenses as calculated on year-to-date numbers, since small changes in annual estimates would have a significant change in the annual effective rate.
Financial Statement Restatement; Regulatory Actions Recent Developments
We have adjusted our financial statement presentation for items related to discontinued operations. Separately, we have restated our financial statements for periods from 2010 through September 30, 2014, the last date through which financial statementsAs previously had been filed prior to our 2015 filing of our Annual Report on Form 10-K for the year ended December 31, 2014.disclosed, The restatement reflected the recognition of provisions for loan losses and loan charge-offs for discontinued operations in periods earlier than those in which those charges were initially recognized. The majority of these loan charges were originally recognized in 2014, primarily in the third quarter, when commercial lending operations were discontinued. An additional $28.5 million of discontinued operations losses that were not previously reported were included within these periods. Also, $12.7 million of losses incurred in 2015 related to loans that were resolved
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before the issuance date of our financial statements and were reflected in our 2014 financial statements. Substantially all of the losses and corresponding restatement adjustments resulted from the discontinued commercial loan operations.
The Bank has entered into a Stipulation and Consent to the Issuance of a Consent Order, or the 2014 Consent Order, with the Federal Deposit Insurance Corporation, or FDIC, which became effective on September 5, 2014. The Bank took this action without admitting or denying any charges of unsafe or unsound banking practices or violations of law or regulation relating to the Bank’s BSA compliance program.
The 2014 Consent Order requires the Bank to take certain affirmative actions to comply with its BSA obligations, among them: appoint a qualified BSA/OFAC (Office of Foreign Assets Control) officer; revise the written BSA Compliance Program; develop and implement additional policies and procedures for suspicious activity monitoring and reporting; review and enhance customer due diligence and risk assessment processes; review past account activity to determine whether suspicious activity was properly identified and reported; strengthen internal controls, including augmenting oversight by the Bank’s Board of Directors of BSA activities; establish an independent testing program; and develop policies and procedures to govern staffing and training for BSA compliance.
To date, the Bank has implemented multiple upgrades that address the requirements of the 2014 Consent Order, such as appointing a qualified BSA/OFAC officer, increasing oversight and staffing of the BSA compliance function, improving practices and procedures to monitor and report transactions, and increasing training, as well as adopting an independent testing program to ensure adherence to more effective BSA standards.
Until the Bank submits to the FDIC (and the FDIC approves) a BSA report summarizing the completion of its corrective actions, the 2014 Consent Order places some restrictions on certain activities as follows: the Bank is restricted from signing and boarding new independent sales organizations, issuing new non-benefit related reloadable prepaid card programs, establishing new distribution channels for existing non-benefit reloadable prepaid card programs and originating Automated Clearing House transactions for new merchant-related payments. Until we receive the FDIC’s approval, restrictions in these specific areas may potentially impact their growth. We do not believe that these restrictions will have a material impact on current revenue levels. The Bank utilized one primary consultant related to its BSA-AML (Anti-Money Laundering) program refinement and one primary consultant related to conducting a lookback review of historical transactions to confirm that suspicious activity was properly identified and reported in accordance with applicable law. The consultant assisting with the BSA-AML program refinement completed its work in 2014. The consultant performing the BSA lookback completed its work in July 2016, and no additional related fees are expected to be incurred. Suspicious activity reports resulting from the lookback have been filed.
On August 27, 2015, the Bank entered into an Amendment to Consent Order, or the Amendment, with the FDIC, amending the 2014 Consent Order. The Bank took this action without admitting or denying any additional charges of unsafe or unsound banking practices or violations of law or regulation relating to continued weaknesses in the Bank’s BSA compliance program. The Amendment provides that the Bank may not declare or pay any dividend without the prior written consent of the FDIC and for certain assurances regarding management.
On May 11, 2015, the Federal Reserve issued a letter, or the Supervisory Letter, to the Bank as a result of the 2014 Consent Order and the Amendment, (which, at the time of the Supervisory Letter, was in proposed form), which provides that we may not pay any dividends on our common stock, make any distributions to our European entities or make any interest payments on our trust preferred securities, without the prior written approval of the Federal Reserve. It further provides that we may not incur any debt (excluding payables in the ordinary course of business) or redeem any shares of our stock, without the prior written approval of the Federal Reserve. The Federal Reserve approved the payment of the interest on our trust preferred securities which was due September 15, 2017. Future payments are subjectto future approval by the Federal Reserve.
On December 23, 2015, the Bank entered into a Stipulation and Consent to the Issuance of an Amended Consent Order, Order for Restitution, and Order to Pay Civil Money Penalty with the FDIC, which we refer to as the 2015 Consent Order. The Bank took this action without admitting or denying any charges of violations of law or regulation. The 2015 Consent Order supercedes in its entirety the terms of a previous consent order entered into in 2012.
The 2015 Consent Order was based on FDIC allegations regarding electronic fund transfer, or EFT, error resolution practices, account termination practices and fee practices of various third parties with whom the Bank had previously provided, or currently provides, deposit-related products which we refer to as Third Parties. The specific operational practices of the third parties identified by the FDIC were the following: practices related to the termination of a third-party rewards program tied to deposit accounts, including the timing of the notice of termination, and the disclosure of the effects of such termination on the consumer’s ability to obtain unredeemed rewards; practices performed by third parties related to the time frames within which we must respond to a consumer’s notice of error related to electronic transactions related to various types of deposit accounts; and, practices related to the timing and frequency of disclosed account fees and the manner by which the accountholder is notified of these fees in periodic statements which are generated by third parties. The 2015 Consent Order continues the Bank's obligations originally set forth in the 2012 Consent Order, including its obligations to increase board oversight of the Bank's compliance management system, or CMS, improve the Bank's CMS, enhance its
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internal audit program, increase its management and oversight of Third Parties, and correct any apparent violations of law. The 2015 Consent Order also directs the Bank’s Board to establish a Complaint and Error Claim Oversight and Review Committee, which we refer to as the Complaint and Error Claim Committee, to review and oversee the Bank’s processes and practices for handling, monitoring and resolving consumer complaints and EFT error claims (whether received directly or through Third Parties) and to review management's plans for correcting any weaknesses that may be found in such processes and practices; and implement a corrective action plan regarding those prepaid cardholders who asserted or attempted to assert EFT error claims and to provide restitution to cardholders harmed by EFT error resolution practices. The Bank’s Board of Directors appointed the required Complaint and Error Claim Committee on January 29, 2016. The Bank corrective action plan is in process.
We received a subpoena from the SEC, dated March 22, 2016, relating to an investigation by the SEC of the restatement of our financial statements for the years ended December 31, 2010 through December 31, 2013 and the interim periods ended March 31, 2014, September 30, 2014 and September 30, 2014, which restatement was filed with the SEC on September 28, 2015, and the facts and circumstances underlying the restatement. We are cooperating fully with the SEC's investigation. The costs to respond to the subpoena and cooperate with the SEC's investigation have been material, and we expect such costs to continue to be material at least through the completion of the SEC’s investigation.
On October 5, 2016, the Consumer Financial Protection Bureau (CFPB) released its final Prepaid Card Rule (Final Prepaid Rule), which it first proposed by publication on December 23, 2014. The general effective date of the Final Prepaid Rule was October 1, 2017, but applicability of certain requirements of the Final Prepaid Rule are delayed until October 1, 2018. However, on April 20, 2017 the CFPB released a final rule delaying the general effective date of the Final Prepaid Rule until April 1, 2018. The Final Prepaid Rule regulates certain prepaid products, including physical cards as well as codes and other access devices. The Final Prepaid Rule did not materially deviate from the terms of the proposed rule that we have disclosed in previous filings. The Final Prepaid Rule among other things, causes prepaid products to be fully-covered by Regulation E, which implements the Electronic Fund Transfer Act, and to be covered by Regulation Z, which implements the Truth in Lending Act, to the extent the prepaid product accesses a “credit” feature.
The Final Prepaid Rule and related commentary is over 1,600 pages in length and provides significant discussion, materials and commentary that we are currently assessing. The Final Prepaid Rule includes a significant number of changes to the regulatory framework for prepaid products, some of which include: (a) establishing a definition of “prepaid account” within Regulation E that includes reloadable and non-reloadable physical cards, as well as codes or other devices, and focuses on how the product is issued and used; (b) modifying Regulation E to require that short form and long form disclosures be provided to a consumer prior to a consumer agreeing to acquire a prepaid account with certain exceptions and with specified forms that, if used, would provide a safe harbor for financial institutions; (c) extending to prepaid accounts the periodic transaction history and statement requirements of Regulation E, with certain specified permissible alternatives to the provision of periodic statements; (d) extending the error resolution and limited liability provisions of Regulation E to prepaid cards, with some modifications specific to prepaid cards; (e) requiring financial institutions to provide prepaid account agreements to the CFPB and to either post them to the issuer’s website or provide them upon request of the consumer in specified manner and timeframes; (f) extending Regulation Z’s credit card rules and disclosure requirements to prepaid accounts that provide overdraft protection and other credit features and incorporating into Regulation Z a new definition of “hybrid prepaid-credit card”; (g) requiring an issuer to obtain a prepaid account holder’s consent prior to adding overdraft services or other credit features and prohibiting the issuer from adding overdraft services or other credit features for at least 30 calendar days after a consumer registers the prepaid account; and (h) prohibiting the application of different terms and conditions, such as charging different fees, to a prepaid account depending on whether the consumer elects to link the prepaid account to overdraft services or other credit features.
The Final Prepaid Rule represents a material change in the rules and regulations governing prepaid cards. We rely on prepaid cards as the largest single component of our deposits and the largest single component of our non-interest income. We are continuing to evaluate the Prepaid Card Rule and the impact it may have on our business and our results of operations. We are in the process of evaluating and building implementation plans for the Prepaid Card Rule and, as such, we cannot reasonably quantify the financial impact, if any, that implementation of the Prepaid Card Rule may have on the Bank’s business, financial condition, or results of operations.
On July 10, 2017, the CFPB issued a final rule to regulate arbitration agreements in contracts for specified consumer financial product and services (Arbitration Rule). The Arbitration Rule prohibits covered providers of certain consumer financial products and services from using an agreement with a consumer that provides for arbitration of any future dispute between the parties to bar the consumer from filing or participating in a class action concerning the covered consumer financial product or service. The Arbitration Rule also requires covered providers that are involved in an arbitration pursuant to a pre-dispute arbitration agreement to submit specified arbitral records to the CFPB together with specified court records. The Arbitration Rule becomes effective on March 19, 2018; however, on November 1, 2017, President Trump signed legislation to repeal the Arbitration Rule.
On October 17, 2017, the Federal Deposit Insurance CorporationBancorp, Inc.’s (the “FDIC”“Company”) informedwholly-owned subsidiary, The Bancorp Bank (the “Bank”), filed applications with the Office of the Comptroller of the Currency (“OCC”) to convert the Bank’s state charter to a wholly owned subsidiary offederal charter and to relocate the Bank’s headquarters from Wilmington, Delaware to Sioux Falls, South Dakota, while retaining a branch in Wilmington, Delaware. The referenced applications were approved by the OCC in June 2022, subject to the condition that the Bank notify and receive non-objection from the OCC prior to significantly deviating or changing its business plan or operations. On September 13, 2022, the Bank received written notification from the OCC acknowledging that the conversion process is complete, and that the Bank is authorized to commence business as a national bank. Accordingly, effective September 15, 2022, the Bank began operating as a national bank named ‘The Bancorp Inc. (the “Company”)Bank, National Association’, regulated by the OCC. As previously disclosed, it is anticipated that, it intendson or after January 1, 2023, the Bank will move its headquarters to pursue an Order For Restitution (“Restitution Order”) and Order to Pay Civil Money Penalty (“CMP Order”) in an amount up to $2,576,000. The FDIC’s action principally emanates from oneSioux Falls, South Dakota, the location of the Bank’s third-party payment processors (“Third Party Processor”) suffering anpayments operations and other core business and internal system programming glitch. Thiscontrol functions, and a site more geographically proximate to many fintech-related entities and their regulators.
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inadvertently resulted in consumers that engaged in signature-based point of sale transactions during the period from December 2010 to November 2014 being charged a greater fee than what was disclosed by the Bank. Impacted consumers are being reimbursed by the Third Party Processor at its own expense. The Restitution Order would require the Bank to make such reimbursements if not otherwise made by the Third Party Processor, however, the Bank is indemnified by the Third Party Processor for such reimbursements. Although the Bank is still evaluating its position with regard to the Restitution Order and the CMP Order,As previously reported, on July 6, 2022, the Company accrued $2,500,000received a Wells Notice from the Securities and Exchange Commission (“SEC”), stating that the SEC Staff had made a preliminary determination to recommend that the SEC file an enforcement action against the Company alleging violations of related expense in its financial statements forrecord keeping, reporting and internal control provisions of the quarter ended September 30, 2017Exchange Act in connection with various CMBS securities held by The Bancorp Bank. The Wells Notice was neither a formal charge of wrongdoing nor a final determination that the CMP Order. Any amounts owedrecipient has violated any law. Without admitting or denying any of the SEC’s allegations, the Company agreed to resolve the investigation by consenting to the entry of an order by the SEC that: (1) the Company will cease and desist from committing or causing any violations of the CMP Order would not be subjectbooks-and-records provisions of the Securities Exchange Act and the relevant rules thereunder; and (2) the Company will pay a penalty of $1.75 million (the “Settlement Payment”) to any indemnification or recovery from anythe SEC. The order became effective on August 24, 2022. The Company recognized a non-deductible charge in its third party. fiscal quarter in the amount of the Settlement Payment. Further, as a result of the settlement, certain costs to the Company related to the investigation will cease, including the legal costs of the investigation, compliance with the SEC’s subpoena, and cooperation with the SEC.
Results of Operations
Third quarter 20172022 to third quarter 20162021
Net Income:The improvement Income from continuing operations before income taxes was $42.4 million in net income inthe third quarter 2017of 2022 compared to $36.5 million in the third quarter 2017 reflected revenue growth, expense reductions, the conclusion of BSA lookback expense in 2016 and credit related charges in discontinued operations in 2016. 2021. Net income from continuing operations for the third quarter of 20172022 was $6.8$30.6 million, or $0.12$0.54 per diluted share, compared to net loss of $1.5$28.2 million, or $0.03$0.48 per diluted share, for the third quarter of 2016.2021. Income increased between those respective periods primarily as a result of higher net interest income. After discontinued operations, net income for the third quarter of 2017 was $7.32022 amounted to $30.6 million, compared to a net loss of $25.6$28.3 million for the third quarter of 2016.2021. Net interest income for the third quarter of 2017 compared2022 increased 27.0%, to the third quarter of 2016 increased to $27.9$64.7 million from $23.5$50.9 million primarily as a result of higher loan balances and higher yields, reflecting the Federal Reserve’s rate increases. The provision for loan and lease losses increased $50,000 to $800,000 in the third quarter of 2017 compared2021. The increase was primarily driven by loan growth and rate increases in the loan portfolio. Variable rate loans and securities comprise the majority of the Company’s earning assets, and while they reprice on a lagged basis, they adjust more fully than deposits to $750,000Federal Reserve rate increases. Accordingly, we expect that loan repricings will continue to positively impact net interest income and the net interest margin in the fourth quarter of 2022. The provision for credit losses decreased $791,000 to $822,000 in the third quarter of 2016.2022 compared to $1.6 million in the third quarter of 2021, reflecting the impact of lower charge-offs in the 2022 quarter. Non-interest income (excluding security gains and losses) increased$9.6decreased $3.2 million, reflecting a decrease in “Net realized and unrealized gains on commercial loans, at fair value” of $3.6 million which reflected a $4.0 million third quarter unrealized loss from the write-down to a September 2022 appraisal, less estimated disposition costs, of a $9.5 million loan. The unrealized loss resulted primarily from an increasethe only loan in gain on saleour portfolios collateralized by a movie theater and was originated in 2015. It was a legacy loan from our initial entry into the CMBS securitization business which was subsequently discontinued. Prepaid, debit card and related fees are the primary driver of loans into two securitizations. Non-interest expensenon-interest income and increased $952,000, or 5.2% to $19.2 million in the third quarter of 2017 was comparable2022, compared to $18.2 million for the third quarter 2016. Cost reductionsof 2021. Non-interest expense increased $5.4 million, or 13.8%, to $44.8 million in data processing, consultingthe third quarter of 2022, compared to $39.4 million in the third quarter of 2021, reflecting increases of $2.9 million in salary expense, $413,000 in FDIC insurance expense, and other expenses were largely offset by a $2.5$1.8 million civil money penalty in third quarter 2017 (see note 13 to the financial statements) and a $1.1 million contractual exit fee. The exit fee was for a data processing contracts which will be significantly exceeded by future savings. Lower data processing expense reflected the impact of a renegotiated data processing contract and the phase out of an affinity program. A $21.5 million loss from discontinued operations in third quarter 2016 resulted primarily from the writedown of a $42 million loan securedpartially offset by a shopping mall.decrease of $344,000 in legal expenses. Additionally, the 2022 effective tax rate was higher compared to other recent periods,
primarily as a result of the non-deductible civil money penalty. Diluted income per share was $0.13$0.54 in the third quarter of 20172022 compared to $0.54 loss$0.48 diluted income per share in the third quarter of 20162021 primarily reflecting the factors noted above. above factors.
Net Interest Income: Our net interest income for the third quarter of 20172022 increased to $27.9 million, an increase of $4.4$13.8 million, or 18.5%27.0%, to $64.7 million, from $23.5$50.9 million in the third quarter of 2016.2021. Our interest income for the third quarter of 20172022 increased to $31.9$83.9 million, an increase of $5.2$30.4 million, or 19.4%56.9%, from $26.7$53.5 million for the third quarter of 2016.2021. The increase in interest income resulted primarily from higherthe impact of loan balancesgrowth and higher yields.an increase in loan yields as a result of Federal Reserve rate increases. Our average loans and leases increased to $1.84$5.91 billion for the third quarter of 20172022 from $1.68$4.58 billion for the third quarter of 2016,2021, an increase of $154.7 million.$1.33 billion, or 29.0%. Related interest income increased $3.7$29.1 million on a tax equivalent basis. The increase in average loans reflected organic growth in leasing,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 the U.S. government, the majority of which have been repaid, accounting for their decrease. The balance of our commercial loans, at fair value also decreased, as a result of non-SBA CRE bridge loan repayments. In the third quarter of 2021 we resumed originating such loans, referred to as real estate bridge loans. Of the total $29.1 million increase in loan interest income on a tax equivalent basis, the largest increases were $14.0 million for SBLOC, IBLOC and SBLOC lending.investment advisor financing, and $12.5 million for all real estate bridge loans. Leasing interest grew $1.5 million. Our average investment securities of $827.7 million for the third quarter of 2022 decreased to $1.25$187.8 million from $1.02 billion for the third quarter of 2017 from $1.42 billion for the third quarter of 2016, as investment securities were replaced with higher yielding loans. Notwithstanding the decrease in average balances, related2021. Related tax equivalent interest income increased $412,000 ondecreased $91,000 primarily reflecting a tax equivalent basis as a result of higher yields. Yields on both loans and investment securities increased as a result ofdecrease in balances, the impact of which was mostly offset by an increase in yields. Higher yields on loans and securities reflected the continuing impact of 2022 Federal Reserve’sReserve rate increases as variable rate loans and securities repriced to higher rates. Federal Reserve rate increases in 2022 had an immediate impact on cost of funds, while their impact on variable rate loans and securities. Rates paid on deposits and resultinglags. Generally, interest expense is contractually adjusted only partially to the Federal Reserve’sdaily. The majority of our loans and securities are variable rate increases.and generally reprice monthly or quarterly, although some reprice over several years.
Our net interest margin (calculated by dividing net interest income by average interest earning assets) for the third quarter of 2017 increased2022 was 3.69% compared to 3.26% from 2.69% in3.35% for the third quarter of 2016,2021, an increase of 5734 basis points. While the yield on interest earning assets increased 126 basis points, the cost of deposits and interest bearing liabilities increased 101 basis points, or a net change of 25 basis points. The more pronounced increase in the net interest margin compared to that net change, reflected higher yields on loans and investment securities reflecting the impact of higher rates on assets funded by equity. Balances at the aforementioned Federal Reserve rate increases on variable rateearn lower rates of interest than loans and securities. Average interest earning deposits at the Federal Reserve Bank decreased $211.9 million, or 44.2%, to $267.4 million in the third quarter of 2022 from $479.4 million in the third quarter of 2021. In 2021, the net interest margin benefited from PPP related interest and fees which were $1.2 million higher than those in 2022, and which did not proportionately increase average interest earning assets. In the third quarter of 2017,2022, the average yield on our loans increased to 4.66%5.12% from 4.19%4.05% for the third quarter of 2016,2021, an increase of 47107 basis points. Yields on taxable investment securities in the third quarter of 20172022 increased to 2.86%3.30% compared to 2.43%2.72% for the third quarter of 2016,2021, an increase of 4358 basis points. The net interest margin also benefited from the reinvestment of maturities of investment securities into higher yielding loans. Average interest earning deposits at the Federal Reserve Bank increased $42.5 million, or 13.1% to $366.7 million in the third quarter of 2017 from $324.2 million in the third quarter of 2016. That difference reflects a minimal percentage of total deposits, and resulted primarily from daily fluctuations in deposits and loans. The interest cost of total deposits and interest bearing liabilities increased 101 basis points to 0.43%1.19% for the third quarter of 2017 as2022 compared to 0.33%0.18% in the third quarter of 2016. The cost of deposits increased significantly less than the increase in variable rates on loans and investments primarily due to contractual provisions related to prepaid card deposits. Those contracts result in only partial adjustment to Federal Reserve rate increases.2021.
Average Daily Balances. The following table presents the average daily balances of assets, liabilities and stockholders’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 September 30, | Three months ended September 30, | |||||||||||||||||||||||||
2022 | 2021 | 2022 vs 2021 | ||||||||||||||||||||||||
Average | Average | Average | Average | |||||||||||||||||||||||
Balance | Interest | Rate | Balance | Interest | Rate | Due to Volume | Due to Rate | Total | ||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||
Assets: | ||||||||||||||||||||||||||
Interest earning assets: | ||||||||||||||||||||||||||
Loans, net of deferred loan fees and costs * | $ | 5,904,996 | $ | 75,536 | 5.12% | $ | 4,573,431 | $ | 46,357 | 4.05% | $ | 15,358 | $ | 13,821 | $ | 29,179 | ||||||||||
Leases-bank qualified** | 3,299 | 55 | 6.67% | 5,031 | 87 | 6.92% | (29) | (3) | (32) | |||||||||||||||||
Investment securities-taxable | 824,178 | 6,792 | 3.30% | 1,012,007 | 6,882 | 2.72% | (1,548) | 1,458 | (90) | |||||||||||||||||
Investment securities-nontaxable** | 3,559 | 31 | 3.48% | 3,558 | 32 | 3.60% | — | (1) | (1) | |||||||||||||||||
Interest earning deposits at Federal Reserve Bank | 267,424 | 1,525 | 2.28% | 479,350 | 167 | 0.14% | (40) | 1,398 | 1,358 | |||||||||||||||||
Net interest earning assets | 7,003,456 | 83,939 | 4.79% | 6,073,377 | 53,525 | 3.53% | ||||||||||||||||||||
Allowance for credit losses | (19,111) | (16,277) | ||||||||||||||||||||||||
Assets held-for-sale from discontinued operations | — | — | — | 90,598 | 754 | 3.33% | (377) | (377) | (754) | |||||||||||||||||
Other assets | 212,078 | 214,715 | ||||||||||||||||||||||||
$ | 7,196,423 | $ | 6,362,413 | 13,364 | 16,296 | 29,660 | ||||||||||||||||||||
Liabilities and shareholders' equity: | ||||||||||||||||||||||||||
Deposits: | ||||||||||||||||||||||||||
Demand and interest checking | $ | 5,545,115 | $ | 12,726 | 0.92% | $ | 5,124,189 | $ | 1,063 | 0.08% | 94 | 11,569 | 11,663 | |||||||||||||
Savings and money market | 479,260 | 2,792 | 2.33% | 404,775 | 146 | 0.14% | 32 | 2,614 | 2,646 | |||||||||||||||||
Time | 87,562 | 547 | 2.50% | — | — | — | — | 547 | 547 | |||||||||||||||||
Total deposits | 6,111,937 | 16,065 | 1.05% | 5,528,964 | 1,209 | 0.09% | ||||||||||||||||||||
Short-term borrowings | 200,423 | 1,235 | 2.46% | 13,097 | 7 | 0.21% | 707 | 521 | 1,228 | |||||||||||||||||
Repurchase agreements | 41 | — | — | 41 | — | — | — | — | — | |||||||||||||||||
Long-term borrowings | 39,035 | 506 | 5.19% | — | — | — | — | 506 | 506 | |||||||||||||||||
Subordinated debt | 13,401 | 177 | 5.28% | 13,401 | 112 | 3.34% | — | 65 | 65 | |||||||||||||||||
Senior debt | 98,910 | 1,279 | 5.17% | 100,329 | 1,279 | 5.10% | — | — | — | |||||||||||||||||
Total deposits and liabilities | 6,463,747 | 19,262 | 1.19% | 5,655,832 | 2,607 | 0.18% | ||||||||||||||||||||
Other liabilities | 72,539 | 78,038 | ||||||||||||||||||||||||
Total liabilities | 6,536,286 | 5,733,870 | 833 | 15,822 | 16,655 | |||||||||||||||||||||
Shareholders' equity | 660,137 | 628,543 | ||||||||||||||||||||||||
$ | 7,196,423 | $ | 6,362,413 | |||||||||||||||||||||||
Net interest income on tax equivalent basis ** | $ | 64,677 | $ | 51,672 | $ | 12,531 | $ | 474 | $ | 13,005 | ||||||||||||||||
Tax equivalent adjustment | 18 | 25 | ||||||||||||||||||||||||
Net interest income | $ | 64,659 | $ | 51,647 | ||||||||||||||||||||||
Net interest margin ** | 3.69% | 3.35% | ||||||||||||||||||||||||
* Includes commercial loans, at fair value. All periods include non-accrual loans. | ||||||||||||||||||||||||||
** Full taxable equivalent basis, using 21% respective statutory Federal tax rates in 2021 and 2020. | ||||||||||||||||||||||||||
NOTE: In the table above, interest on loans for 2022 and 2021 includes $21,000 and $1.2 million, respectively, of interest and fees on PPP loans. |
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| Three months ended September 30, | ||||||||||
|
| 2017 |
| 2016 | ||||||||
|
| Average |
|
|
| Average |
| Average |
|
|
| Average |
|
| Balance |
| Interest |
| Rate |
| Balance |
| Interest |
| Rate |
|
| (dollars in thousands) | ||||||||||
Assets: |
|
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|
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|
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|
|
Interest earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Loans net of unearned fees and costs ** |
| $ 1,816,751 |
| $ 21,147 |
| 4.66% |
| $ 1,661,807 |
| $ 17,425 |
| 4.19% |
Leases - bank qualified* |
| 20,787 |
| 419 |
| 8.06% |
| 21,006 |
| 418 |
| 7.96% |
Investment securities-taxable |
| 1,235,615 |
| 8,847 |
| 2.86% |
| 1,373,776 |
| 8,350 |
| 2.43% |
Investment securities-nontaxable* |
| 13,238 |
| 133 |
| 4.02% |
| 48,683 |
| 218 |
| 1.79% |
Interest earning deposits at Federal Reserve Bank |
| 366,724 |
| 1,190 |
| 1.30% |
| 324,179 |
| 397 |
| 0.49% |
Federal funds sold and securities purchased under agreement to resell |
| 65,008 |
| 371 |
| 2.28% |
| 39,392 |
| 146 |
| 1.48% |
Net interest earning assets |
| 3,518,123 |
| 32,107 |
| 3.65% |
| 3,468,843 |
| 26,954 |
| 3.11% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan and lease losses |
| (6,961) |
|
|
|
|
| (5,267) |
|
|
|
|
Assets held for sale from discontinued operations |
| 325,912 |
| 3,098 |
| 3.80% |
| 459,400 |
| 3,891 |
| 3.39% |
Other assets |
| 235,070 |
|
|
|
|
| 246,171 |
|
|
|
|
|
| $ 4,072,144 |
|
|
|
|
| $ 4,169,147 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and shareholders' equity: |
|
|
|
|
|
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
Demand and interest checking |
| $ 3,224,167 |
| $ 3,136 |
| 0.39% |
| $ 3,249,801 |
| $ 2,379 |
| 0.29% |
Savings and money market |
| 439,688 |
| 552 |
| 0.50% |
| 392,045 |
| 423 |
| 0.43% |
Time |
| - |
| - |
| 0.00% |
| 76,931 |
| 104 |
| 0.54% |
Total deposits |
| 3,663,855 |
| 3,688 |
| 0.40% |
| 3,718,777 |
| 2,906 |
| 0.31% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings |
| 51,413 |
| 175 |
| 1.36% |
| 102,243 |
| 153 |
| 0.60% |
Repurchase agreements |
| 189 |
| - |
| 0.00% |
| 376 |
| - |
| 0.00% |
Subordinated debt |
| 13,401 |
| 150 |
| 4.48% |
| 13,401 |
| 131 |
| 3.91% |
Total deposits and interest bearing liabilities |
| 3,728,858 |
| 4,013 |
| 0.43% |
| 3,834,797 |
| 3,190 |
| 0.33% |
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|
|
|
|
|
Other liabilities |
| 8,046 |
|
|
|
|
| 19,670 |
|
|
|
|
Total liabilities |
| 3,736,904 |
|
|
|
|
| 3,854,467 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders' equity |
| 335,240 |
|
|
|
|
| 314,680 |
|
|
|
|
|
| $ 4,072,144 |
|
|
|
|
| $ 4,169,147 |
|
|
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|
|
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|
|
|
|
|
|
|
|
|
|
|
Net interest income on tax equivalent basis * |
|
|
| $ 31,192 |
|
|
|
|
| $ 27,655 |
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
Tax equivalent adjustment |
|
|
| 193 |
|
|
|
|
| 222 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
| $ 30,999 |
|
|
|
|
| $ 27,433 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin * |
|
|
|
|
| 3.26% |
|
|
|
|
| 2.69% |
|
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|
| ||||
* Full taxable equivalent basis, using a 35% statutory tax rate. |
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** Includes loans held for sale. |
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For the third quarter of 2017,2022, average interest earning assets increased to $3.52$7.00 billion, an increase of $49.3$930.1 million, or 1.4%15.3%, from $3.47$6.07 billion in the third quarter of 2016.2021. The increase reflected increases inincreased average balances of loans and leases of $154.7$1.33 billion, or 29.0%, partially offset by decreased average investment securities of $187.8 million, or 9.2%, and $42.5 million, or 13.1%, of average interest earning deposits at the Federal Reserve Bank, net of decreases in average balances of investment securities. For third quarter 2017 compared to third quarter 2016, average securities decreased $173.6 million, or 12.2%, to $1.25 billion from $1.42 billion.18.5%. For those respective periods, average demand and interest checking deposits decreased $25.6increased $420.9 million,
43
or 0.8%, to $3.22 billion from $3.25 billion.8.2% The decrease$74.5 million increase in average savings and money market balances between these respective periods reflected the planned exit of certain less profitable deposit relationships, which was partially offset by growth in payments related deposits. interest bearing accounts offered by our affinity group clients to
prepaid and debit card account customers. The interest expense shown for demand and interest checking is primarily comprised of interest paid to our affinity groups. Additionally in the third quarter of 2022, average short-term borrowings increased $187.3 million and time deposits increased $87.6 million, as loan growth exceeded deposit growth. The time deposits are short term and will mature in the fourth quarter of 2022 and the borrowings mature on a daily basis.
Provision for Loan and LeaseCredit Losses. Our provision for loan and leasecredit losses was $800,000$822,000 for the third quarter of 20172022 compared to $750,000$1.6 million for the third quarter of 2016.2021. The provision in 2022 reflected the impact of lower net-charge-offs in third quarter 2022. The allowance for loancredit losses increased to $7.3was $19.7 million, or 0.53%0.37%, of total loans at September 30, 2017, from $6.32022, compared to $17.8 million, or 0.52%0.48%, of total loans at December 31, 2016. 2021. The lower ratio in 2022 reflected a downward adjustment in the second quarter of 2022 for a greater proportion of government guaranteed balances. Additionally, the majority of loan growth has been in SBLOC, IBLOC and REBL, which require lower allowance allocations. SBLOC are collateralized by marketable securities, IBLOC by the cash value of life insurance and REBL by apartment buildings. We believe that our allowance is adequate to cover expected losseslosses. For more information about our provision and allowance for loan and leasecredit losses and our loss experience, see “Financial Condition-Allowance for loan and leasecredit 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 $28.5$23.4 million in the third quarter of 20172022 compared to $18.9$26.6 million in the third quarter of 2016 before gains on sale of investment securities of $506,000 in the third quarter of 2017 and $981,000 in the third quarter of 2016.2021. The $9.6$3.2 million, or 50.6% increase11.9%, decrease between those respective periods reflected an $815,000a decrease in “Net realized and unrealized gains on commercial loans, at fair value” to $745,000 from $4.3 million. The $3.6 million change reflected a $4.0 million third quarter 2022 unrealized loss to reflect the changewrite-down to a September 2022 appraisal, less estimated disposition costs, of a $9.5 million loan. The loan represents the only movie theater loan in the Company’s portfolios and was originated in 2015, before non-SBA loan originations were primarily comprised of apartment building loans. Of the $2.15 billion of non-SBA commercial loans, at fair value and REBL loans which together comprise the non-SBA CRE portfolios, $2.05 billion are comprised of investment in unconsolidated entity. Gain on sale of loansapartment building loans. Prepaid, debit card and related fees increased $952,000, or 5.2%, to $11.4$19.2 million for the third quarter of 2017 from $903,0002022 compared to $18.2 million in the third quarter of 2016 which resulted primarily from2021. The increase reflected higher transaction volume. Related fees in this category include income related to the saleuse of loans into a securitizationcash in 2017. PrepaidATMs for prepaid payroll cardholders. ACH, card and other payment processing fees increased by $242,000$325,000, or 2.0%17.1%, to $12.5$2.2 million for the third quarter of 20172022 compared to $12.2$1.9 million in the third quarter 2016. The increase reflected organic growth which more than offset the impact of a client whose ownership changed and clients who decided2021, reflecting increased volume. Leasing related income decreased $920,000, or 46.7%, to terminate card programs. Service fees on deposit accounts increased $190,000 or 12.6% to $1.7$1.0 million for the third quarter of 20172022 from $1.5$2.0 million for the third quarter of 2016, reflecting increases in service charges on safe harbor individual retirement accounts. Leasing2021. The reduction reflected decreased volume, as 2021 was impacted by the reopening of vehicle auctions after pandemic closures. Both periods reflected vehicle sales at relatively higher market prices due to vehicle shortages. Other non-interest income increased $117,000$42,000, or 19.9%22.6%, to $705,000$228,000 for the third quarter of 20172022 from $588,000 for$186,000 in the third quarter of 2016, which reflected higher gains on disposition2021.
The following table presents the principal categories of leased vehicles in 2017. Affinity fees decreased by $816,000, or 74.8% to $275,000non-interest expense for the third quarter of 2017 from $1.1periods indicated:
For the three months ended September 30, | |||||||||||
2022 | 2021 | Increase (Decrease) | Percent Change | ||||||||
(Dollars in thousands) | |||||||||||
Salaries and employee benefits | $ | 28,001 | $ | 25,094 | $ | 2,907 | 11.6% | ||||
Depreciation and amortization | 685 | 729 | (44) | (6.0) | |||||||
Rent and related occupancy cost | 1,268 | 1,256 | 12 | 1.0 | |||||||
Data processing expense | 1,292 | 1,209 | 83 | 6.9 | |||||||
Printing and supplies | 154 | 81 | 73 | 90.1 | |||||||
Audit expense | 366 | 356 | 10 | 2.8 | |||||||
Legal expense | 907 | 1,251 | (344) | (27.5) | |||||||
Civil money penalty | 1,750 | — | 1,750 | 100.0 | |||||||
Amortization of intangible assets | 99 | 99 | — | — | |||||||
FDIC insurance | 679 | 266 | 413 | 155.3 | |||||||
Software | 4,001 | 4,045 | (44) | (1.1) | |||||||
Insurance | 1,314 | 1,110 | 204 | 18.4 | |||||||
Telecom and IT network communications | 368 | 413 | (45) | (10.9) | |||||||
Consulting | 339 | 448 | (109) | (24.3) | |||||||
Other | 3,607 | 3,027 | 580 | 19.2 | |||||||
Total non-interest expense | $ | 44,830 | $ | 39,384 | $ | 5,446 | 13.8% |
Non-Interest Expense. Total non-interest expense was $44.8 million for the third quarter of 2016. The decrease resulted from the exit2022, an increase of one affinity relationship whose ownership had changed. Other non-interest income increased $64,000,$5.4 million, or 20.5%13.8%, compared to $376,000 for the third quarter of 2017 from $312,000 in the third quarter of 2016.
Non-Interest Expense. Total non-interest expense was $43.9$39.4 million for the third quarter of 2017, a decrease of $288,000, or 0.7% compared2021. Salaries and employee benefits increased to $44.2$28.0 million for the third quarter of 2016. Decreases in ongoing data processing expenses, consulting fees and BSA lookback expense were partially offset by a proposed $2.52022, an increase of $2.9 million, civil money penalty which was accrued, a $1.1 million data processing contract exit fee and higher legal expenses. The exit of the data processing contract will result in future savings significantly greater than the exit fee and the BSA lookback expenses concluded in third quarter 2016. The civil money penalty resultedor 11.6%, from a programming glitch within one of the Bank’s third party processors. As a result, a higher fee was assessed to consumers for certain point of sale transactions during the period from December 2010 to November 2014. Salaries and employee benefits increased to $21.8$25.1 million for the third quarter of 2017, an increase2021. Higher salary expense in 2022 reflected higher incentive compensation, financial crimes and compliance, payments and employee insurance expense. Depreciation and
amortization decreased $44,000, or 6.0%, to $685,000 in the third quarter of $280,000,2022 from $729,000 in the third quarter of 2021. Rent and occupancy increased $12,000, or 1.3%1.0%, to $1.3 million in the third quarter of 2022 from $21.5$1.3 million in the third quarter of 2021. Data processing increased $83,000, or 6.9%, to $1.3 million in the third quarter of 2022 from $1.2 million in the third quarter of 2021. Printing and supplies increased $73,000, or 90.1%, to $154,000 in the third quarter of 2022 from $81,000 in the third quarter of 2021. Audit expense increased $10,000, or 2.8%, to $366,000 in the third quarter of 2022 from $356,000 in the third quarter of 2021. Legal expense decreased $344,000, or 27.5%, to $907,000 in the third quarter of 2022 from $1.3 million in the third quarter of 2021, reflecting decreased costs associated with the Cascade matter which was resolved in the second quarter of 2022 and two fact-finding inquiries by the SEC as described in Note 14 to the consolidated financial statements. FDIC insurance expense increased $413,000, or 155.3%, to $679,000 for the third quarter of 2016. The2022 from $266,000 in the third quarter of 2021, primarily due to growth of the balance sheet. In October 2022, the FDIC adopted a proposal to increase reflected incentive compensationassessments on all depository institutions by 2 basis points for full year 2023. Based on an estimated $7.5 billion of assets, FDIC insurance expense relatedis expected to increase approximately $1.5 million for full year 2023. Software expense decreased $44,000, or 1.1%, to $4.0 million in the gain on salethird quarter of loans into securitizations and other revenue and performance based compensation. Those increases offset2022 from $4.0 million in the impactthird quarter of staffing levels which had been reduced2021. Insurance expense increased $204,000, or 18.4%, to $1.3 million in the third quarter of 2022 compared to the prior year in most departments. Depreciation and amortization decreased $161,000 or 13.0% to $1.1 million in the third quarter of 2017 from $1.2 million in the third quarter of 2016. The decrease reflected reduced spending2021, reflecting higher rates, especially on fixed assets and equipment. Rent and occupancy decreased $270,000 or 16.5%, to $1.4 million in the third quarter of 2017 from $1.6 million in the third quarter of 2016. The decrease reflected a reduction in leased space and more efficient use of office space. Data processing decreased by $1.6 million, or 45.1%, to $1.9 million in the third quarter of 2017 from $3.5 million in the third quarter of 2016. The decrease reflected the impact of a renegotiated data processing contract and lower account and transaction volume as a result of the planned exit of an affinity program which had changed ownership. It also reflected the impact of the consolidation of our call centers as an efficiency and cost cutting measure. Printing and supplies decreased $543,000 or 65.8% to $282,000 in the third quarter of 2017 from $825,000 in the third quarter of 2016, which reflected elevated expense in 2016 due to service charge and other communications in that year. Audit expense increased $147,000 or 59.8% to $393,000 in the third quarter of 2017 from $246,000 in the third quarter of 2016 which reflected increased regulatory compliance audit fees. Legal expense increased $1.9 million or 237.1%, to $2.7 million in the third quarter of 2017 from $814,000 in the third quarter of 2016, reflecting costs associated with an SEC subpoena related to the restatement of the financial statements (see “Financial Statements; Regulatory Actions”) and other regulatory related legal fees. Amortization of intangible assets decreased $17,000, or 4.3%, to $377,000 for the third quarter of 2017 from $394,000 for the third quarter of 2016 reflecting amortization of an intangible resulting from the 2016 purchase of $60 million of lease receivables. FDIC insurance expense decreased $373,000 or 15.3% to $2.1 million for the third quarter of 2017 from $2.4 million in the third quarter of 2016 reflecting a decrease in average deposits and a reduction in rate. Software expense increased $56,000 or 1.8% to $3.1 million in the third quarter of 2017 from $3.0 million in the third quarter of 2016 as a result of additional information technology infrastructure to improve efficiency and scalability, including BSA software required to satisfy regulatory requirements. Insurance expense increased $2,000 or 0.3% to $633,000 in the third quarter 2017 compared to $631,000 in the third quarter of 2016.cyber insurance. Telecom and IT network communications decreased $156,000$45,000, or 26.8%10.9%, to $426,000$368,000 in the third quarter of 20172022 from $582,000$413,000 in the third quarter of 2016. The decrease reflected cost cutting efforts which included the elimination of corporate sponsored cell phones.2021. Consulting decreased $1.2 million$109,000, or 70.3%24.3%, to $505,000$339,000 in the third quarter of 20172022 from $1.7 million$448,000 in the third quarter of 2016 reflecting reduced regulatory related consulting expense.2021. In the third quarter of 2022, a $1.8 million civil money penalty resulted from the SEC matter as described in Note 14 to the consolidated financial statements. Other non-interest expense decreased $702,000increased $580,000, or 16.4%19.2%, to $3.6 million in the third quarter of 20172022 from $4.3$3.0 million in the third quarter of 2016, which2021. The $580,000 increase primarily reflected decreases of $448,000 for travel and entertainment expenses and $384,000 of customer identification expense. The decreasea $291,000 increase in travel and entertainment expenses, reflected the impact of staff reductions and other cost cutting measures. The decrease in customeras travel increased post-pandemic.
44
identification expense primarily reflected the exit of one affinity group and reduced health savings volume due to the sale of that business.
Income Taxes. Income tax expense for continuing operations was $5.5$11.8 million for the third quarter of 20172022 compared to $55,000$8.3 million in the third quarter of 2016. The 45%2021. A 27.9% effective tax rate in 20162022 and a 22.7% effective tax rate in 2021 primarily wasreflected a 21% federal tax rate and the impact of various state income taxes. The higher thaneffective tax rate in the statutory ratethird quarter of 34% and2022 reflected the impact of taxesthe $1.8 million civil money penalty which is non-deductible for tax purposes. A lower effective tax rate for the prior year period reflected the impact of a tax deduction related to European operations which were being exitedstock-based compensation recorded as a discrete item in 2017.2021. The large deduction and tax benefit resulted from the increase in the Company’s stock price as compared to the original grant dates of the stock compensation.
First nine months 20172022 to nine months 2021
Net Income: Income from continuing operations before income taxes was $121.7 million in the first nine months 2016
Net Income: The improvement in net income in third quarter 2017of 2022 compared to third quarter 2017 reflected revenue growth, expense reductions,$108.6 million in the conclusionfirst nine months of BSA lookback expense in 2016 and credit related charges in discontinued operations in 2016. 2021. Net income from continuing operations for the first nine months of 2017 2022 was $30.7$90.0 million, or $0.55 $1.56 per diluted share, compared to net loss of $29.8$83.4 million, or $0.73$1.41 per diluted share, for the first nine months of 2016.2021. Income increased between those respective periods primarily as a result of higher net interest income and higher non-interest income. After discontinued operations, net income for the first nine months of 2017 was $34.12022 amounted to $90.0 million, compared to net loss of $67.7$83.7 million for the first nine months of 2016.2021. Net interest income for the first nine months of 2022 increased $15.08.4%, to $172.1 million from $158.7 million in the first nine months of 2021. In the first two quarters of 2022, increases in loan interest resulting from loan growth more than offset decreases in securities interest, but were offset by higher interest expense related to 2022 rate increases by the Federal Reserve. Those increases have an immediate impact on the Company’s cost of funds, while variable rate loans and securities, which comprise the majority of the Company’s earning assets, reprice on a lagged basis and adjust more fully to the Federal Reserve rate increases. Accordingly we expect that loan repricings will continue to positively impact net interest income and the net interest margin in the fourth quarter of 2022. The provision for credit losses increased $2.8 million to $80.0$4.3 million in the first nine months of 2022 compared to $1.5 million in the first nine months of 2021. The provision in 2022 reflected the impact of the reclassification of discontinued loans to held for investment. In 2022, as a result of that loan reclassification from discontinued and held for sale to held for investment, related valuation reserves were reversed as a credit to “Net realized and unrealized gains on commercial loans, at fair value” in the consolidated statement of operations, while the allowances for credit losses and loan commitments in the consolidated balance sheet were increased through a provision for credit losses. A $3.5 million credit to “Net realized and unrealized gains on commercial loans, at fair value” was offset by a provision for credit losses of $3.5 million with no net impact on income. Of the $3.5 million provision, $1.3 million increased the allowance for credit losses and $2.2 million increased the allowance for loan commitments recorded in other liabilities. Partially offsetting the current year provision was the impact of a downward qualitative factor adjustment in our CECL methodology. The downward adjustment resulted from a greater proportion of government guaranteed balances, compared to prior periods in applicable small business loan pools which are segregated on the basis of similar risk characteristics (see Note 6 to the consolidated financial statements).The credit to the provision in the prior year reflected reversals of COVID-19 related provisions made in 2020. Non-interest income (excluding security gains and losses) increased $3.4 million, reflecting an increase in “Net realized and unrealized gains on commercial loans, at fair value” of $2.4 million which reflected the impact of the aforementioned reclassification in addition to increases in fees related to non-SBA CRE bridge loan repayments in 2022. These increases were partially offset by a $4.0 million third quarter unrealized loss to reflect a write-down to a September 2022 appraisal, less estimated disposition costs, of a $9.5 million loan. Prepaid, debit card and related fees are the primary driver of non-interest income and increased $987,000, or 1.7% to $57.9 million in the first nine months of 2022, compared to $56.9 million for the first nine months of 2017 compared2021. Non-interest expense increased $877,000, or 0.7%, to $65.0 million for the first nine months of 2016 primarily as a result of higher loan balances and yields which reflected the Federal Reserve’s rate increases. The provision for loan and lease losses increased $340,000 to $2.2$126.0 million in the first nine months of 20172022, compared to $1.8$125.2 million in the first nine months of 2016. Non-interest2021, reflecting an increase of $9,000 in salary expense, a $1.2 million legal settlement resulting from the Cascade matter in the second quarter of 2022, and a $1.8 million civil money penalty partially offset by decreases of $2.9 million in FDIC insurance expense and $2.2 million in legal expense.
Additionally, the 2022 effective tax rate was higher compared to other recent periods. Diluted income increased $24.8 million (excluding security gains and losses), from $45.0 million forper share was $1.56 in the first nine months of 2016,2022 compared to $69.8 million. The increase reflected a $12.3 million change in the value of investment in unconsolidated entity and $17.5 million of gain on sale of loans into securitizations in 2017. In 2017, a $2.5 million gain on the sale of our health savings accounts was more than offset by a loss of $3.4 million on the sale of our European prepaid operations. A $3.8 million decrease in other income, from $4.7 million in 2016 to $892,000 in 2017, resulted primarily from a second quarter 2016 gain on the sale of Visa Europe to Visa U.S.A., in which members of Visa Europe shared in the sales proceeds. Non-interest expense reflected a $29.1 million decrease in BSA lookback-related consulting expenses and an $8.3 million decrease in other non interest expenses, which reflected a $4.5 million decrease in salaries and employee benefits and a $2.9 million decrease in data processing expense. Diluted$1.42 diluted income per share was $0.61 for the first nine months of 2017 compared to diluted loss per share of $1.65 forin the first nine months of 2016.2021 primarily reflecting the above factors.
Net Interest Income: Our net interest income for the first nine months of 20172022 increased to $80.0 million, an increase of $15.0$13.4 million, or 23.1%8.4%, to $172.1 million, from $65.0$158.7 million in the first nine months of 2016.2021. Our interest income for the first nine months of 20172022 increased to $91.2$201.4 million, an increase of $16.8$34.0 million, or 22.7%20.3%, from $74.3$167.4 million for the first nine months of 2016.2021. The increase in interest income resulted from the impact of loan growth and the impact of Federal Reserve rate hikes on variable rate loans and securities, partially offset by decreases in securities interest resulting primarily from higher balanceslower balances. Additionally, securities yields were lower for the first two quarters of loansthe year, before variable rate securities had adjusted to Federal Reserve and higher yields.other market rate increases. Our average loans and leases increased $197.8 million to $1.76$5.54 billion for the first nine months of 20172022 from $1.56$4.55 billion for the first nine months of 2016, while related2021, an increase of $988.4 million, or 21.7%. Related interest income increased $10.1$37.5 million on a tax equivalent basis. The increase in average loans reflected organic growth in leasing,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 the U.S. government, the majority of which have been repaid, accounting for their decrease. The balance of our commercial loans, at fair value also decreased as a result of non-SBA CRE bridge loan repayments. In the third quarter of 2021 we resumed originating such loans, referred to as real estate bridge loans. Of the total $37.5 million increase in loan interest income on a tax equivalent basis, the largest increases were $23.7 million for SBLOC, IBLOC and SBLOC lending.investment advisor financing, and $16.5 million for all real estate bridge loans. Leasing interest grew $2.6 million. SBA loan interest decreased $6.9 million, which reflected an $8.9 million decrease in PPP related interest and fees. Our average investment securities of $884.0 million for the first nine months of 2022 decreased to $1.28$214.5 million from $1.10 billion for the first nine months of 2017 from $1.34 billion for the first nine months of 2016 while related2021. Related tax equivalent interest income increased $3.6decreased $5.8 million onprimarily reflecting a tax equivalent basis as a result of higher yields. Yields on both loansdecrease in yields and investment securities increased as a result of the impact of thebalances. Federal Reserve’sReserve rate increases in 2022 had an immediate impact on cost of funds which adjusts only partially to such increases, while their impact on variable rate loans and securities. Depositlags due to contractual timing of repricings, which adjust more fully to such rate increases. The majority of such repricings on variable rate loans occur over 90 days. Additionally, in the first half of 2022, rate floors on certain loans had to be exceeded before rates on those loans were increased. As a result, through June 30, 2022 year to date increases in interest income and resulting interest expense over the comparable prior year period were largely offsetting, while loan interest grew significantly more than interest expense in third quarter 2022. Accordingly, while through third quarter 2022 interest income had increased by $34.0 million, interest expense had increased by $20.6 million. The majority of interest expense is contractually adjusted only partially to the Federal Reserve’sdaily. The majority of our loans and securities are variable rate increases.and generally reprice monthly or quarterly, although some reprice over several years.
Our net interest margin (calculated by dividing net interest income by average interest earning assets) for the first nine months of 2017 increased2022 was 3.32% compared to 3.02% from 2.57% in3.29% for the first nine months of 2016,2021, an increase of 453 basis points. While the yield on interest earning assets increased 41 basis points, the cost of deposits and interest bearing liabilities increased 42 basis points, or a net change of 1 basis point. The increase in the net interest margin compared to that net change, reflected the impact of higher yieldsrates on assets funded by equity. Balances at the Federal Reserve earn lower rates of interest than loans and investment securities, reflecting the aforementioned Federal Reserve increases. In the first nine months of 2017, the average yield on our loans increased to 4.46% from 4.15% for the first nine months of 2016, an increase of 31 basis points. Yields on taxable investment securities were higher at 2.83% compared to 2.37% an increase of 46 basis points. The net interest margin also benefited from the reinvestment of maturities of investment securities into higher yielding loans.securities. Average interest earning deposits at the Federal Reserve Bank increased $42.2decreased $282.5 million, or 8.6%36.1%, to $532.2$499.1 million in the first nine months of 20172022 from $490.0$781.6 million in the first nine months of 2016. That difference reflects2021. In 2021, the net interest margin benefited from PPP related interest and fees related which were $8.9 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. In the first nine months of 2022, the average yield on our loans increased to 4.37% from 4.21% for the first nine months of 2021, an increase of 16 basis points. Yields on taxable investment securities in the first nine months of 2022 decreased to 2.59% compared to 2.79% for the first nine months of 2021, a minimal percentagedecrease of total deposits, and resulted primarily from daily fluctuations in deposits and loans.20 basis points. The interest cost of total deposits and interest bearing liabilities was relatively stable at 0.38%increased 42 basis points to 0.61% for the first nine months of 20172022 compared to 0.32%0.19% in the first nine months of 2016. The cost of deposits increased significantly less than the increase in variable rates on loans and investments primarily due to contractual provisions related to prepaid card deposits. Those contracts result in only partial adjustment to Federal Reserve rate increases.2021.
Average Daily Balances. The following table presents the average daily balances of assets, liabilities and stockholders’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:
Nine months ended September 30, | Nine months ended September 30, | |||||||||||||||||||||||||
2022 | 2021 | 2022 vs 2021 | ||||||||||||||||||||||||
Average | Average | Average | Average | |||||||||||||||||||||||
Balance | Interest | Rate | Balance | Interest | Rate | Due to Volume | Due to Rate | Total | ||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||
Assets: | ||||||||||||||||||||||||||
Interest earning assets: | ||||||||||||||||||||||||||
Loans, net of deferred loan fees and costs * | $ | 5,531,902 | $ | 181,174 | 4.37% | $ | 4,541,262 | $ | 143,546 | 4.21% | $ | 32,283 | $ | 5,345 | $ | 37,628 | ||||||||||
Leases-bank qualified** | 3,657 | 185 | 6.75% | 5,925 | 301 | 6.77% | (115) | (1) | (116) | |||||||||||||||||
Investment securities-taxable | 880,426 | 17,115 | 2.59% | 1,094,633 | 22,891 | 2.79% | (4,248) | (1,528) | (5,776) | |||||||||||||||||
Investment securities-nontaxable** | 3,559 | 93 | 3.48% | 3,824 | 99 | 3.45% | (7) | 1 | (6) | |||||||||||||||||
Interest earning deposits at Federal Reserve Bank | 499,104 | 2,876 | 0.77% | 781,606 | 650 | 0.11% | (145) | 2,371 | 2,226 | |||||||||||||||||
Net interest earning assets | 6,918,648 | 201,443 | 3.88% | 6,427,250 | 167,487 | 3.47% | ||||||||||||||||||||
Allowance for credit losses | (19,087) | (16,254) | ||||||||||||||||||||||||
Assets held-for-sale from discontinued operations | — | — | — | 99,472 | 2,388 | 3.20% | (1,194) | (1,194) | (2,388) | |||||||||||||||||
Other assets | 203,143 | 225,802 | ||||||||||||||||||||||||
$ | 7,102,704 | $ | 6,736,270 | 26,574 | 4,994 | 31,568 | ||||||||||||||||||||
Liabilities and shareholders' equity: | ||||||||||||||||||||||||||
Deposits: | ||||||||||||||||||||||||||
Demand and interest checking | $ | 5,598,028 | $ | 18,522 | 0.44% | $ | 5,452,604 | $ | 4,007 | 0.10% | 110 | 14,405 | 14,515 | |||||||||||||
Savings and money market | 522,525 | 4,192 | 1.07% | 446,016 | 487 | 0.15% | 97 | 3,608 | 3,705 | |||||||||||||||||
Time | 29,508 | 547 | 2.47% | — | — | — | — | 547 | 547 | |||||||||||||||||
Total deposits | 6,150,061 | 23,261 | 0.50% | 5,898,620 | 4,494 | 0.10% | ||||||||||||||||||||
Short-term borrowings | 71,589 | 1,267 | 2.36% | 8,717 | 15 | 0.23% | 547 | 705 | 1,252 | |||||||||||||||||
Repurchase agreements | 41 | — | — | 41 | — | — | — | — | — | |||||||||||||||||
Long-term borrowings | 39,286 | 506 | 1.72% | — | — | — | — | 506 | 506 | |||||||||||||||||
Subordinated debt | 13,401 | 432 | 4.30% | 13,401 | 337 | 3.35% | — | 95 | 95 | |||||||||||||||||
Senior debt | 98,817 | 3,838 | 5.18% | 100,237 | 3,838 | 5.11% | — | — | — | |||||||||||||||||
Total deposits and liabilities | 6,373,195 | 29,304 | 0.61% | 6,021,016 | 8,684 | 0.19% | ||||||||||||||||||||
Other liabilities | 71,413 | 105,683 | ||||||||||||||||||||||||
Total liabilities | 6,444,608 | 6,126,699 | 754 | 19,866 | 20,620 | |||||||||||||||||||||
Shareholders' equity | 658,096 | 609,571 | ||||||||||||||||||||||||
$ | 7,102,704 | $ | 6,736,270 | |||||||||||||||||||||||
Net interest income on tax equivalent basis ** | $ | 172,139 | $ | 161,191 | $ | 25,820 | $ | (14,872) | $ | 10,948 | ||||||||||||||||
Tax equivalent adjustment | 58 | 84 | ||||||||||||||||||||||||
Net interest income | $ | 172,081 | $ | 161,107 | ||||||||||||||||||||||
Net interest margin ** | 3.32% | 3.29% | ||||||||||||||||||||||||
* Includes commercial loans, at fair value. All periods include non-accrual loans. | ||||||||||||||||||||||||||
** Full taxable equivalent basis, using 21% respective statutory Federal tax rates in 2021 and 2020. | ||||||||||||||||||||||||||
NOTE: In the table above, the 2021 interest on loans reflects $4.6 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 $502,000 and $4.9 million, respectively, of interest and fees on PPP loans. |
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| Nine months ended September 30, | ||||||||||
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| 2017 |
| 2016 | ||||||||
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| Average |
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| Average |
| Average |
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| Average |
|
| Balance |
| Interest |
| Rate |
| Balance |
| Interest |
| Rate |
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| (dollars in thousands) | ||||||||||
Assets: |
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Interest earning assets: |
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|
|
Loans net of unearned fees and costs ** |
| $ 1,740,655 |
| $ 58,266 |
| 4.46% |
| $ 1,543,448 |
| $ 48,061 |
| 4.15% |
Leases - bank qualified* |
| 21,167 |
| 1,231 |
| 7.75% |
| 20,618 |
| 1,334 |
| 8.63% |
Investment securities-taxable |
| 1,269,922 |
| 26,990 |
| 2.83% |
| 1,280,692 |
| 22,782 |
| 2.37% |
Investment securities-nontaxable* |
| 14,423 |
| 351 |
| 3.24% |
| 59,892 |
| 983 |
| 2.19% |
Interest earning deposits at Federal Reserve Bank |
| 532,223 |
| 3,961 |
| 0.99% |
| 490,037 |
| 1,677 |
| 0.46% |
Federal funds sold and securities purchased under agreement to resell |
| 60,119 |
| 931 |
| 2.06% |
| 27,414 |
| 301 |
| 1.46% |
Net interest earning assets |
| 3,638,509 |
| 91,730 |
| 3.36% |
| 3,422,101 |
| 75,138 |
| 2.93% |
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Allowance for loan and lease losses |
| (6,793) |
|
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|
|
| (4,538) |
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Assets held for sale from discontinued operations |
| 337,102 |
| 9,594 |
| 3.79% |
| 528,168 |
| 15,037 |
| 3.80% |
Other assets |
| 251,629 |
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| 283,171 |
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| $ 4,220,447 |
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| $ 4,228,902 |
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Liabilities and shareholders' equity: |
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Deposits: |
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Demand and interest checking |
| $ 3,433,027 |
| $ 8,836 |
| 0.34% |
| $ 3,325,047 |
| $ 7,217 |
| 0.29% |
Savings and money market |
| 434,768 |
| 1,718 |
| 0.53% |
| 390,202 |
| 1,028 |
| 0.35% |
Time |
| - |
| - |
| 0.00% |
| 103,624 |
| 447 |
| 0.58% |
Total deposits |
| 3,867,795 |
| 10,554 |
| 0.36% |
| 3,818,873 |
| 8,692 |
| 0.30% |
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Short-term borrowings |
| 19,498 |
| 197 |
| 1.35% |
| 58,056 |
| 263 |
| 0.60% |
Repurchase agreements |
| 245 |
| - |
| 0.00% |
| 812 |
| 1 |
| 0.16% |
Subordinated debt |
| 13,401 |
| 432 |
| 4.30% |
| 13,401 |
| 383 |
| 3.81% |
Total deposits and interest bearing liabilities |
| 3,900,939 |
| 11,183 |
| 0.38% |
| 3,891,142 |
| 9,339 |
| 0.32% |
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Other liabilities |
| 431 |
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| 21,306 |
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Total liabilities |
| 3,901,370 |
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| 3,912,448 |
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Shareholders' equity |
| 319,077 |
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| 316,454 |
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| $ 4,220,447 |
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| $ 4,228,902 |
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Net interest income on tax equivalent basis * |
|
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| $ 90,141 |
|
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| $ 80,836 |
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Tax equivalent adjustment |
|
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| 554 |
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| 811 |
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Net interest income |
|
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| $ 89,587 |
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| $ 80,025 |
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Net interest margin * |
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| 3.02% |
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| 2.57% |
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* Full taxable equivalent basis, using a 35% statutory tax rate. |
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** Includes loans held for sale. |
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For the first nine months of 2017,2022, average interest earning assets increased to $3.64$6.92 billion, an increase of $216.4$491.4 million, or 6.3%7.6%, from $3.42$6.43 billion in the first nine months of 2016.2021. The increase reflected increased average balances of loans and leases of $197.8$988.4 million,
or 21.7%, partially offset by decreased average investment securities of $214.5 million, or 12.6%, and increased19.5%. For those respective periods, average balances of interest earning deposits at the Federal Reserve Bank of $42.2 million, or 8.6%. Average securities decreased $56.2 million or 4.2% as lower yielding securities were replaced with higher yielding loans. Average demand and interest checking deposits increased $108.0$145.4 million, or 3.2% due2.7%, primarily toas a result of deposit growth in prepaid and debit card accounts. The $76.5 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 deposits.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 Loan and LeaseCredit Losses. Our provision for loan and leasecredit losses increased $340,000, to $2.2was $4.3 million for the first nine months of 20172022 compared to $1.8$1.5 million for the first nine months of 2016.2021. The increaseprovision in 2022 reflected the impact of the reclassification of discontinued loans to held for investment. In 2022, as a result of a loan reclassification from discontinued and held for sale to held for investment, related valuation reserves were reversed as a credit to “Net realized and unrealized gains on commercial loans, at fair value” in the consolidated statement of operations, while the allowances for credit losses and loan commitments in the consolidated balance sheet were increased through a provision is basedfor credit losses. A $3.5 million credit to “ Net realized and unrealized gains on our evaluationcommercial loans, at fair value” was offset by a provision for credit losses of
46
$3.5 million with no net impact on income. Of the adequacy of our$3.5 million provision, $1.3 million increased the allowance for credit losses and $2.2 million increased the allowance for loan and leases losses, particularlycommitments recorded in lightother liabilities. Partially offsetting the current year provision was the impact of current economic conditions. At September 30, 2017,a downward qualitative factor adjustment in our CECL methodology. The downward adjustment resulted from a greater proportion of government guaranteed balances, compared to prior periods, in applicable small business loan pools, which are segregated on the basis of similar risk characteristics (see Note 6 to the consolidated financial statements). The credit to the provision in the prior year reflected reversals of COVID-19 related provisions made in 2020.Provisions for both periods included allocations for loan growth. We believe that our allowance for loan and lease losses amountedis adequate to $7.3 million, or 0.53% of total loans compared to $6.3 million, or 0.52% of total loans at December 31, 2016. cover expected losses.For more information about our provision and allowance for loan and leasecredit losses and our loss experience, see “Financial Condition-Allowance for loan and leasecredit 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.Income. Non-interest income was $69.8$79.9 million in the first nine months of 20172022 compared to $45.0$76.5 million in the first nine months of 2016, before2021. The $3.4 million, or 4.5%, increase between those respective periods was primarily the result of an increase in “Net realized and unrealized gains on securitiescommercial loans, at fair value” to $11.3 million from $8.9 million, a difference of $1.6$2.4 million. The $11.3 million year to date “Net realized and unrealized gains on commercial loans, at fair value” for 2022 was comprised of the $3.5 million adjustment described under “Net Income” above, $11.5 million of non-SBA CRE bridge loan repayment related fees and a $1.5 million hedge gain, partially offset by $5.2 million of fair value losses. The $5.2 million in fair value losses reflected a $4.0 million third quarter unrealized loss to reflect the write-down to a September 2022 appraisal, less estimated disposition costs, of a $9.5 million loan. The loan represents the only movie theater loan in the Company’s portfolios and was originated in 2015, before non-SBA loan originations were primarily comprised of apartment building loans. Of the $2.15 billion of non-SBA commercial loans, at fair value and REBL loans which together comprise the non-SBA CRE portfolios, $2.05 billion are comprised of apartment building loans. Prior year net gains consisted primarily of repayment related fees. Prepaid, debit card and related fees increased $987,000, or 1.7%, to $57.9 million for the first nine months of 2022 compared to $56.9 million in the first nine months of 20172021. The increase reflected higher transaction volume partially offset by the impact of an affinity client relationship transitioning to its own bank. Related fees in this category include income related to the use of cash in ATMs for prepaid payroll cardholders. ACH, card and $3.1other payment processing fees increased $947,000, or 16.9%, to $6.6 million for the first nine months of 2022 compared to $5.6 million in the first nine months of 2016. The $24.82021, reflecting increased volume. Leasing related income decreased $1.1 million, or 55.1%24.1%, increase between those respective periods reflected a $12.3 million change in value of investment in unconsolidated entity. It also reflected a $16.7 million increase in gain on sale of loans into securitizations resulting primarily from two securitizations in 2017. In the second quarter of 2017 we had a $2.5 million gain on the sale of a portion of our health savings portfolio which was more than offset by a $3.4 million loss on the sale of our European prepaid card operations. Gain on sale of loans increased to $17.5$3.6 million for the first nine months of 20172022 from $809,000 in the first nine months of 2016 primarily as a result of gain on sale of loans into two securitizations. Service fees on deposit accounts increased $1.6 million, or 46.8%, to $4.9$4.7 million for the first nine months of 20172021. The reduction reflected decreased volume, as 2021 was impacted by the reopening of vehicle auctions after pandemic closures. Both periods reflected vehicle sales at relatively higher market prices due to vehicle shortages. Other non-interest income increased $239,000, or 52.1%, to $698,000 for the first nine months of 2022 from $3.3$459,000 in the first nine months of 2021.
The following table presents the principal categories of non-interest expense for the periods indicated:
For the nine months ended September 30, | |||||||||||
2022 | 2021 | Increase (Decrease) | Percent Change | ||||||||
(Dollars in thousands) | |||||||||||
Salaries and employee benefits | $ | 77,848 | $ | 77,839 | $ | 9 | — | ||||
Depreciation and amortization | 2,224 | 2,144 | 80 | 3.7% | |||||||
Rent and related occupancy cost | 3,831 | 3,777 | 54 | 1.4 | |||||||
Data processing expense | 3,727 | 3,481 | 246 | 7.1 | |||||||
Printing and supplies | 342 | 277 | 65 | 23.5 | |||||||
Audit expense | 1,107 | 1,110 | (3) | (0.3) | |||||||
Legal expense | 3,175 | 5,349 | (2,174) | (40.6) | |||||||
Legal settlement | 1,152 | — | 1,152 | 100.0 | |||||||
Civil money penalty | 1,750 | — | 1,750 | 100.0 | |||||||
Amortization of intangible assets | 298 | 298 | — | — | |||||||
FDIC insurance | 2,326 | 5,235 | (2,909) | (55.6) | |||||||
Software | 12,030 | 11,435 | 595 | 5.2 | |||||||
Insurance | 3,692 | 2,881 | 811 | 28.1 | |||||||
Telecom and IT network communications | 1,119 | 1,227 | (108) | (8.8) | |||||||
Consulting | 902 | 952 | (50) | (5.3) | |||||||
Other | 10,504 | 9,145 | 1,359 | 14.9 | |||||||
Total non-interest expense | $ | 126,027 | $ | 125,150 | $ | 877 | 0.7% |
Non-Interest Expense. Total non-interest expense was $126.0 million for the first nine months of 2016 reflecting increases in service charges on safe harbor individual retirement accounts. Prepaid card fees decreased $61,000,2022, an increase of $877,000, or 0.2%0.7%, compared to $39.3$125.2 million for the first nine months of 2017 from $39.32021. Salaries and employee benefits increased to $77.8 million for the first nine months of 2016 which reflected decreased volumes2022, an increase of $9,000, or 0.0%, from a client as a result of its change in ownership and several programs whose sponsors decided to exit prepaid cards. Those volume decreases were largely offset with organic growth in other programs. Leasing income increased $632,000 or 43.4% to $2.1$77.8 million for the first nine months of 2017 from $1.5 million for the first nine months of 2016, which2021. Higher salary expense in 2022 reflected higher gains on disposition of leased vehicleslower incentive compensation expense, including equity compensation expense, offset by increases in 2017. Affinity fees decreased $2.1 million,IT and cybersecurity, financial crimes and compliance, payments and employee insurance expense. Depreciation and amortization increased $80,000, or 58.8%3.7%, to $1.4 million for the first nine months of 2017 from $3.5 million for the first nine months of 2016. The decrease resulted primarily from the planned exit of one affinity relationship which had a change of ownership. Other non-interest income decreased $3.8 million, or 81.0% to $892,000 for the first nine months of 2017 from $4.7$2.2 million in the first nine months of 2016. The decrease resulted primarily2022 from a gain on the sale of Visa Europe to Visa U.S.A., in which members of Visa Europe shared in the sales proceeds, which occurred in the second quarter of 2016.
Non-Interest Expense. Total non-interest expense was $119.0 million for the first nine months of 2017, a decrease of $37.4 million, or 23.9% from $156.4 million for the first nine months of 2016. The decrease reflected a decrease of $29.1 million in Bank Secrecy Act lookback expense which concluded in the third quarter of 2016. Salaries and employee benefits expense also decreased to $57.9 million, a decrease of $4.5 million, or 7.2% from $62.4 million for the first nine months of 2016. The decrease in salaries and employee benefits reflected bankwide staff reductions in the third quarter of 2016 which reduced total staff by approximately 20%. Depreciation and amortization decreased $346,000, or 9.2%, to $3.4$2.1 million in the first nine months of 20172021, primarily as a result of equipment additions related to a new data center and a new telephone system. Rent and occupancy increased $54,000, or 1.4%, to $3.8 million in the first nine months of 2022 from $3.8 million in the first nine months of 2016 which reflected reduced spending on fixed assets and equipment. Rent and occupancy decreased $570,0002021. Data processing increased $246,000, or 11.9%7.1%, to $4.2$3.7 million in the first nine months of 20172022 from $4.8$3.5 million in the first nine months of 2016. The decrease reflected a reduction in leased space2021. Printing and more efficient use of office space. Data processing expense decreased $2.9 million,supplies increased $65,000, or 26.5%23.5%, to $8.0 million$342,000 in the first nine months of 20172022 from $10.9 million$277,000 in the first nine months of 2016. The decrease reflected the impact of a renegotiated data processing contract and lower account and transaction volume as a result of the planned exit of an affinity program which had an ownership change. It also reflected the impact of the consolidation of our call centers as an efficiency and cost cutting measure. Printing and supplies2021. Audit expense decreased $1.1 million$3,000, or 49.0%0.3%, to $1.1 million in the first nine months of 20172022 from $2.2$1.1 million in the first nine months of 2016, which reflected elevated2021. Legal expense in 2016 duedecreased $2.2 million, or 40.6%, to service charge and other communications in that year. Audit expense increased $524,000 or 70.2% to $1.3$3.2 million in the first nine months of 20172022 from $746,000$5.3 million in the first nine months of 2016 which reflected increased2021, reflecting decreased costs associated with the Cascade matter resolved in second quarter 2022 and two fact-finding inquiries by the SEC as described in Note 14 to the consolidated financial statements, and other regulatory compliance audit fees. Legalrelated expenses. FDIC insurance expense increased $2.1decreased $2.9 million, or 56.1%55.6%, to $5.9$2.3 million for the first nine months of 20172022 from $3.8$5.2 million in the first nine months of 20162021 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. In October 2022, the FDIC adopted a proposal to increase assessments on all depository institutions by 2 basis points for full year 2023. Based on an estimated $7.5 billion of assets, FDIC insurance expense is expected to increase approximately $1.5 million for full year 2023.Software expense increased $595,000, or 5.2%, to $12.0 million in the first nine months of 2022 from $11.4 million in the first nine months of 2021. The increase reflected costs associated with an SEC subpoenaexpenditures for information technology to improve efficiency and scalability, including expenses related to cybersecurity. Insurance expense increased $811,000, or 28.1%, to $3.7 million in the restatementfirst nine months of 2022 compared to $2.9 million in the financial statements (see “Financial Statements; Regulatory Actions”)first nine months of 2021, reflecting higher rates, especially for cyber insurance. Telecom and other regulatory related legal fees. The year to date increase was net of insurance coverage. Amortization of intangible assets increased $101,000,IT network communications decreased $108,000, or 9.8%8.8%, to $1.1 million in the first nine months of 2022 from $1.2 million in the first nine months of 2021. Consulting decreased $50,000, or 5.3%, to $902,000 in the first nine months of 2022 from $952,000 in the first nine months of 2021. In the second quarter of 2022, a $1.2 million legal settlement resulted from the Cascade matter as described in Note 14 to the consolidated financial statements. In the third quarter of 2022, a $1.8 million civil money penalty resulted from the SEC matter as described in Note 14. Other non-interest expense increased $1.4 million, or 14.9%, to $10.5 million in the first nine months of 2022 from $9.1 million in the first nine months of 2021. The $1.4 million increase primarily reflected an $842,000 increase in travel expenses, as travel increased post-pandemic.
Income Taxes. Income tax expense for continuing operations was $31.7 million for the first nine months of 2017 from $1.0 million for the first nine months of 2016. The increase resulted primarily from the amortization of the intangible asset resulting from the 2016 purchase of the $60 million of lease receivables. FDIC insurance expense increased $468,000, or 6.6%2022 compared to $7.6 million for the first nine months of 2017 from $7.1$25.2 million in the first nine months of 2016, which2021. A 26.0% effective tax rate in 2022 and a 23.2% effective tax rate in 2021 primarily reflected a 21% federal tax rate and the impact of an increasevarious state income taxes. The higher effective tax rate in the FDIC assessment rate. Software expense increased $1.1 million, or 12.8% to $9.3 million in the first nine months of 2017 from $8.3 million in the first nine months of 2016 which reflected additional information technology infrastructure to improve efficiency and scalability, including BSA software required to satisfy regulatory requirements. Insurance expense increased $158,000, or 9.3%, to $1.9 million in the first nine months of 2017 from $1.7 million in the first nine months of 2016. The increase reflected higher cyber and director and officer coverages. Telecom and IT network communications expense decreased $104,000 or 6.7% to $1.4 million in the first nine months of 2017 from $1.5 million in the first nine months of 2016. The decrease reflected cost cutting efforts which included the elimination of corporate sponsored cell phones. Securitization and servicing expense decreased $647,000 or 86.6%, to $100,000 in the first nine months of 2017 from $747,000 in the first nine months of 2016. Expense in 2016 reflected expenditures related to a potential securitization for loans which were instead sold directly to a single buyer. Consulting expense decreased $2.5 million, or 58.6% to $1.7 million in the first nine months of 2017 from $4.2 million in the first nine months of 2016. The decrease reflected reduced regulatory related and investor relations consulting. Other non-interest expense decreased $3.8 million, or 27.0% to $10.3 million in the first nine months of 2017 from $14.1 million in the first nine months of 2016. The $3.8 million decrease reflected decreases of $1.8 million in travel and entertainment expenses, $815,000 in customer identification expense, $512,000 in
47
postage expense, $299,000 in expense related to third party origination of SBA loans and $190,000 in other leasing expense. The decrease in customer identification expense primarily reflected the exit of one affinity group and reduced health savings volume due to the sale of that business. The decrease in postage expense2022 reflected the impact of the sale of$1.8 million civil money penalty which is non-deductible for tax purposes. A lower effective tax rate for the health savings business and also reflected elevated expense in 2016 due to service charge and other communications mailings in that year. The decrease in travel and entertainment expense prior year period
reflected the impact of staff reductionsa tax deduction related to stock-based compensation recorded as a discrete item in 2021. The large deduction and a concerted effort to reduce travel and related expenses.
Income Taxes. Income tax benefit for continuing operations was $457,000 forresulted from the first nine months of 2017increase in the Company’s stock price as compared to $15.3 million in the first nine monthsoriginal grant dates of 2016. The tax benefit in 2017 reflected the impact of approximately $12 million of deferred tax valuation allowance reversals. That tax benefit was largely offset by the application of statutory federal and state tax rates against $30.2 million of pre tax income. The 35% effective tax benefit rate in 2016 reflected the statutory 34% rate and the impact of state income taxes.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 the Federal Reserve.
Our primary source of funding has been deposits. We have been exiting deposit relationshipsAverage total deposits increased by $583.0 million, or 10.5%, to reduce excess balances at$6.11 billion for the third quarter of 2022 compared to the third quarter of 2021. Federal Reserve which earn relatively low rates of interest. While such exits continuedaverage balances decreased to $267.4 million in the third quarter 2022 from $479.4 billion in the third quarter of 2017, they were offset by growth in prepaid card and other payments deposits. Accordingly, overnight balances at the Federal Reserve Bank averaged $366.7 million for2021. In the third quarter of 2017, which was higher than the prior year third quarter2022, we averaged $87.6 million of time deposits with terms of 90 days and less. Overnight borrowings are also periodically utilized as a funding source to facilitate cash management, but average of $324.2 million. Investment securities available-for-sale also provide a significantbalances have generally not been significant. Such borrowings and time deposits increased in 2022 as loan growth exceeded deposit growth.
Our primary source of liquidity.liquidity is available-for-sale securities which amounted to $790.6 million at September 30, 2022, compared to $953.7 million at December 31, 2021. Loan repayments, also a source of funds, were exceeded by new loan disbursements during the third quarter of 2022. As a result, at September 30, 2022 outstanding loans amounted to $5.27 billion, compared to $3.75 billion at the prior year end, an increase of $1.52 billion. In addition to funding by securities repayments, funding for loan growth included repayments of commercial loans, at fair value. Commercial loans, at fair value, decreased to $818.0 million from $1.39 billion between those respective dates, a decrease of $570.4 million, which also provided funding. 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 nine monthsquarter of 2017. 2020, we resumed originations, which consist primarily of non-SBA CRE bridge loans, in the third quarter of 2021. Such originations are held for investment and are included in “Loans, net of deferred loan fees and costs” on the balance sheet. Accordingly, commercial loans, at fair value will continue to run off. 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. As noted previously, borrowings and time deposits were also utilized to fund loans, as loan growth outpaced deposit growth during the quarter.
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 the FDIC. Prior to December 2020, FDIC 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 the FDIC. In such a case, the FDIC’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. In December 2020, the FDIC 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. As of September 30, 2022, approximately $2.09 billion of our total deposit accounts of $6.91 billion were not insured by FDIC insurance, which requires identification of the depositor and is limited to $250,000 per identified depositor. Uninsured accounts may represent a greater liquidity risk than FDIC-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 the ratesuch uninsured accounts present a significant liquidity risk.
We focus on our deposits is at or below competitors’ rates. However, the focuscustomer service which we believe has resulted in a history of our business model is to identify affinity groups that control significant deposits as part of their business. A key component to the model is that the affinity group deposits are both stable and “sticky,” in the sense that they do not react to fluctuations in the market. Nonetheless, certaincustomer loyalty. Certain components of theour deposits do experience seasonality, creating greater excess liquidity at certain times during the year, especiallytimes. The largest deposit inflows occur in the first quarter as a result of the year when certain of our accounts are credited with tax refund payments from the U.S. Treasury.
While consumer deposit accounts including prepaid and debit card balances.
Historically, we have also used sources outside of our deposit products to fund our loan growth, including Federal Home Loan Bank advances, repurchase agreements, and institutional (brokered) certificates of deposit. In the first nine months of 2017,accountscomprise the vast majority of our funding was derived from prepaid cards and transaction accounts. While the FDIC now classifies prepaid and most of our other deposits obtained with the cooperation of third parties as brokered, these deposits have demonstrated stability and low cost for an extended historical period. Weneeds, we maintain secured borrowing lines with the Federal Home Loan Bank of Pittsburgh, or FHLB,(“FHLB”) and the Federal Reserve Bank.Reserve. As of September 30, 2017,2022, we had approximately $573.7 million available on a line of credit with the Federal Home Loan Bank and $179.8 million available on a line of credit with the Federal Reserve Bank. These lineswhich exceeded one billion dollars, which may be collateralized by specifiedvarious types of loans, orbut which we generally did not use prior to the pandemic. To mitigate the impact of the COVID-19 pandemic, the Federal 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 $1.4 billion of multi-family loans to the FHLB. As a result, we have approximately $1.2 billion of availability on our line of credit which we can access at any time. Additionally, approximately $400 million of our available-for-sale securities are U.S. government agency securities which are highly liquid and wemay be pledged as additional collateral. Our collateralized line of credit with the Federal Reserve Bank (“FRB”) is $1.4 billion as of September 30, 2022. As of September 30, 2022, there were no amounts outstanding on either of these lines of credit. We expect to
continue to maintain these facilities.our facilities with the FHLB and Federal Reserve. We actively monitor our positions and contingent funding sources on a daily basis. As of September 30, 2017, we did not have any borrowings outstanding on our lines of credit.daily.
As a holding company conducting substantially all of our business through our subsidiaries, our near term need for liquidity consists principally of cash needed to makefor required interest payments on our trust preferred securities.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 of September 30, 2017,2022, we had cash reserves of approximately $13.0$17.3 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 trust preferred securitiessubordinated debentures are approximately $150,000$250,000 based on a floating rate of 3.25% over LIBOR. We expect that whenLondon Inter-bank Offered Rate (“LIBOR”). The senior debt matures in August 2025 and the conditions under which the amendment to the 2014 Consent Order was issued will have been remediated, the FDIC will permit the Bank to resume paying dividends to us to fund holding company operations. There can, however, be no assurance that the FDIC will,subordinated debentures mature in fact, allow the resumptionMarch 2038. In lieu of repayment of debt from Bank dividends, industry practice includes the issuance of new debt to us at the end of that period or at all and, accordingly, there is risk that we will need to obtain alternate sources of funding. There can be no assurance that such sources would be available to us on acceptable terms or at all.repay maturing debt.
Included in our cash and cash-equivalents at September 30, 20172022 were $328.0$700.2 million of interest earning deposits which primarily consisted of deposits with the Federal Reserve and included deposits for reserve requirements. Reserve.
Funding was directed primarily at cash outflows required for net loan growth of $152.5 million for the nine months ended September 30, 2017, and $120.3 million for the nine months ended September 30, 2016. Net redemptions of investment securities for the nine months ended September 30, 2017, were $87.2 million compared to netIn 2022, purchases of $251.1$19.3 million for the prior year.of securities were exceeded by $127.4 million of redemptions. We had outstanding commitments to fund loans, including unused lines of credit, of $1.31$1.98 billion and $1.09$2.15 billion as of September 30, 20172022 and December 31, 2016,2021, respectively. The majority of our commitments are variable rate and originate with security backed lines of credit. SuchThe recorded amount of such commitments are normallyhas, for many accounts, been based on the full amount of collateral in a customerscustomer’s investment account. However, such commitments have historically been drawn at only a fraction of the total commitment. 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.
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We must comply with capital adequacy guidelines issued by the FDIC.our regulators. 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 period.quarter. “Tier I capital” includes common shareholders’ equity, certain qualifying perpetual preferred stock and minority interests in equity accounts of consolidated subsidiaries, less intangibles. At September 30, 2017,2022, we were “well capitalized” under banking regulations.
The following table sets forth our regulatory capital amounts and ratios for the periods indicated:
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| to risk-weighted |
| to risk-weighted |
| tier 1 to risk |
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| assets ratio |
| weighted assets |
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As of September 30, 2017 |
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The Bancorp, Inc. |
| 8.24% |
| 16.27% |
| 16.62% |
| 16.27% |
The Bancorp Bank |
| 8.05% |
| 15.95% |
| 16.31% |
| 15.95% |
"Well capitalized" institution (under FDIC regulations-Basel III) |
| 5.00% |
| 8.00% |
| 10.00% |
| 6.50% |
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As of December 31, 2016 |
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The Bancorp, Inc. |
| 6.90% |
| 13.34% |
| 13.63% |
| 13.34% |
The Bancorp Bank |
| 6.84% |
| 13.24% |
| 13.53% |
| 13.24% |
"Well capitalized" institution (under FDIC regulations) |
| 5.00% |
| 8.00% |
| 10.00% |
| 6.50% |
Tier 1 capital | Tier 1 capital | Total capital | Common equity | ||||
to average | to risk-weighted | to risk-weighted | tier 1 to risk | ||||
assets ratio | assets ratio | assets ratio | weighted assets | ||||
As of September 30, 2022 | |||||||
The Bancorp, Inc. | 9.66% | 13.13% | 13.56% | 13.13% | |||
The Bancorp Bank, National Association | 10.79% | 14.73% | 15.15% | 14.73% | |||
"Well capitalized" institution (under federal regulations-Basel III) | 5.00% | 8.00% | 10.00% | 6.50% | |||
As of December 31, 2021 | |||||||
The Bancorp, Inc. | 10.40% | 14.72% | 15.13% | 14.72% | |||
The Bancorp Bank, National Association | 10.98% | 15.48% | 15.88% | 15.48% | |||
"Well capitalized" institution (under federal 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 responsive Federal Reserve rate changes on our net interest income, the Federal Reserve has historically utilized increases in the overnight federal funds rate as one tool in fighting inflation. As a result of high rates of inflation, the Federal Reserve raised rates in each quarter of 2022. Our largest funding source, prepaid and debit card deposit accounts, contractually adjusts to only a portion of increases or decreases in rates which are largely determined by such Federal 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 Federal Reserve rate changes, such changes are immediate. Interest earning assets comprised primarily of loans and securities tend to adjust more fully to rate increases at lagged contractual pricing intervals. The majority of our loans and securities are variable rate and generally reprice monthly or quarterly, although some reprice over several years. 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. Cumulative 2022 Federal Reserve
interest rate increases resulted in contractual rates on loans generally exceeding rate floors in the second quarter of 2022. As these loans repriced more fully than deposits to Federal Reserve rate hikes, net interest income was positively impacted beginning in the third quarter of 2022. We expect that net interest income will increase further in fourth quarter 2022; however, due to variables discussed in this section, the timing and extent of such increases is difficult to predict.
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 and balance sheet growth 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 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 at September 30, 2017.2022. 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, at other institutionsjudgmental 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 transaction account 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 majority of commercial loans, at fair value, and IBLOC loans totaling $658.1 million and $1.10 billion at September 30, 2022, respectively, were previously at their floors, which were generally exceeded at that date. The table does not assume any prepayment of fixed-rate loans and mortgage-backed securities which 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
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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.
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| 1-90 |
| 91-364 |
| 1-3 |
| 3-5 |
| Over 5 |
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| Days |
| Days |
| Years |
| Years |
| Years |
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| (dollars in thousands) | ||||||||
Interest earning assets: |
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Commercial loans held for sale |
| $ 169,953 |
| $ 19,356 |
| $ 50,267 |
| $ 21,181 |
| $ 119,515 |
Loans net of deferred loan costs |
| 905,299 |
| 124,564 |
| 150,922 |
| 183,104 |
| 10,171 |
Investment securities |
| 357,407 |
| 153,315 |
| 181,936 |
| 199,881 |
| 390,819 |
Interest earning deposits |
| 328,023 |
| - |
| - |
| - |
| - |
Securities purchased under agreements to resell |
| 65,095 |
| - |
| - |
| - |
| - |
Total interest earning assets |
| 1,825,777 |
| 297,235 |
| 383,125 |
| 404,166 |
| 520,505 |
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Interest bearing liabilities: |
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Demand and interest checking |
| 2,012,233 |
| 66,386 |
| 66,386 |
| - |
| - |
Savings and money market |
| 113,046 |
| 226,091 |
| 113,046 |
| - |
| - |
Securities sold under agreements to repurchase |
| 180 |
| - |
| - |
| - |
| - |
Subordinated debenture |
| 13,401 |
| - |
| - |
| - |
| - |
Total interest bearing liabilities |
| 2,138,860 |
| 292,477 |
| 179,432 |
| - |
| - |
Gap |
| $ (313,083) |
| $ 4,758 |
| $ 203,693 |
| $ 404,166 |
| $ 520,505 |
Cumulative gap |
| $ (313,083) |
| $ (308,325) |
| $ (104,632) |
| $ 299,534 |
| $ 820,039 |
Gap to assets ratio |
| -8% |
| * |
| 5% |
| 10% |
| 13% |
Cumulative gap to assets ratio |
| -8% |
| -8% |
| -3% |
| 8% |
| 21% |
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 | $ | 704,644 | $ | 25,194 | $ | 15,005 | $ | 73,197 | $ | — | ||||
Loans, net of deferred loan fees and costs | 4,124,427 | 110,974 | 319,100 | 501,157 | 211,717 | |||||||||
Investment securities | 429,406 | 49,399 | 152,154 | 77,086 | 82,549 | |||||||||
Interest earning deposits | 700,175 | — | — | — | — | |||||||||
Total interest earning assets | 5,958,652 | 185,567 | 486,259 | 651,440 | 294,266 | |||||||||
Interest bearing liabilities: | ||||||||||||||
Transaction accounts as adjusted* | 2,967,296 | — | — | — | — | |||||||||
Savings and money market | 575,381 | — | — | — | — | |||||||||
Time deposits | 401,331 | — | — | — | — | |||||||||
Securities sold under agreements to repurchase | 42 | — | — | — | — | |||||||||
Senior debt and subordinated debentures | 13,401 | — | 98,958 | — | — | |||||||||
Total interest bearing liabilities | 3,957,451 | — | 98,958 | — | — | |||||||||
Gap | $ | 2,001,202 | $ | 185,567 | $ | 387,301 | $ | 651,440 | $ | 294,266 | ||||
Cumulative gap | $ | 2,001,202 | $ | 2,186,768 | $ | 2,574,069 | $ | 3,225,509 | $ | 3,519,775 | ||||
Gap to assets ratio | 26% | 2% | 5% | 8% | 4% | |||||||||
Cumulative gap to assets ratio | 26% | 28% | 33% | 41% | 45% |
*Transaction accounts are comprised primarily of demand deposits. 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 changes in 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.
We believe that the assumptions utilized in evaluating our estimated net interest income are reasonable; however, the interest rate sensitivity of our assets, liabilities and off-balance sheet financial instruments, as well as the estimated effect of changes in interest rates on estimated net interest income, could vary substantially if different assumptions are used or actual experience differs from presumed behavior of various deposit and loan categories. The following table shows the effects of interest rate shocks on our net portfolio value described as Market Value of Portfolio Equity (“MVPE”) and net interest income. Rate shocks assume that current interest rates change immediately and sustain parallel shifts. For interest rate increases or decreases of 100 and 200 basis points, our policy includes a guideline that our MVPE ratio should not decrease more than 10% and 15%, respectively, and that net interest income should not decrease more than 10% and 15%, respectively. As illustrated in the following table, we complied with our asset/liability policy guidelines at September 30, 2022, except for a slight deviation in the 200 basis point decrease scenario. While our modeling suggests that rate increases of 100 and 200 basis points will have a positive impact on net interest income (as shown in the table below), the actual amount of such increase cannot be determined, and there can be no assurance any increase will be realized.
Net portfolio value at | Net interest income | |||||||||||
September 30, 2022 | September 30, 2022 | |||||||||||
Percentage | Percentage | |||||||||||
Rate scenario | Amount | change | Amount | change | ||||||||
(Dollars in thousands) | ||||||||||||
+200 basis points | $ | 1,415,201 | 5.58% | $ | 362,761 | 16.31% | ||||||
+100 basis points | 1,378,452 | 2.84% | 337,250 | 8.13% | ||||||||
Flat rate | 1,340,354 | — | 311,895 | — | ||||||||
-100 basis points | 1,298,657 | (3.11)% | 287,220 | (7.91)% | ||||||||
-200 basis points | 1,248,986 | (6.82)% | 262,764 | (15.75)% |
Financial Condition
General.Our total assets at September 30, 20172022 were $3.99$7.78 billion, of which our total loans were $1.37 billion.$5.27 billion, and our commercial loans, at fair value, were $818.0 million. At December 31, 2016,2021, our total assets were $4.86$6.84 billion, of which our total loans were $1.22$3.75 billion, and our commercial loans, at fair value were $1.39 billion. The decreaseincrease in assets reflected loan growth, partially offset by continuing decreases in securities. In recent periods, we limited securities purchases which would have replaced repayments or grown balances, as a result of the exitrelatively low interest rate environment. As a result of less profitable deposit relationships. increases in interest rates, increased purchases of securities will be considered.
Interest earning deposits and federal funds sold. At September 30, 2017,2022, we had a total of $328.0$700.2 million of interest earning deposits compared to $955.7$596.4 million at December 31, 2016, a decrease2021, an increase of $627.7 million or 65.7%.$103.8 million. These deposits were comprised primarily of balances
at the Federal Reserve, which pays interest on such balances. ReductionsReserve. The September 30, 2022 balance of $700.2 million will likely be reduced by $401.3 million of short term time deposits maturing in such balances reflected deploymentthe fourth quarter of such funds into higher yielding loans and securities and the exit of less profitable deposit relationships.2022.
Investment portfolio. For detailed information on the composition and maturity distribution of our investment portfolio, see Note 5 to the Financial Statements.consolidated financial statements. Total investment securities decreased to $1.28 billion$790.6 million at September 30, 2017,2022, a decrease of $58.7$163.1 million, or 4.4%17.1%, from year-end 2016.December 31, 2021. The decrease in investmentreflected securities was primarily a result of prepayments on collateralized loan obligation securities. Other securities, included in the held-to-maturity classification at September 30, 2017, consisted of three securities secured by diversified portfolios of corporate securities and two single-issuer trust preferred securities.repayments.
A total of $11.0 million of other debt securities - single issuers is comprised of the following: amortized cost of two single-issuer trust preferred securities of $11.0 million, of which one security for $1.9 million was issued by a bank and one security for $9.1 million was issued by an insurance company.
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A total of $75.4 million of other debt securities – pooled is comprised of three securities consisting of diversified portfolios of corporate securities.
The following table provides additional information related to our single issuer trust preferred securities as of September 30, 2017 (in thousands):
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Single issuer |
| Book value |
| Fair value |
| Unrealized gain/(loss) |
| Credit rating |
Security A |
| $ 1,913 |
| $ 2,031 |
| $ 118 |
| Not rated |
Security B |
| 9,104 |
| 6,343 |
| (2,761) |
| Not rated |
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Class: All of the above are trust preferred securities. |
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Under the accounting guidance related to the recognitionCECL, changes in fair value of other-than-temporary impairment charges on debt securities an impairment on a debt security is deemedunrelated to credit losses, continue to be other-than-temporary if it meetsrecognized through equity. However, credit-related losses are recognized through an allowance, rather than through a reduction in the following conditions: (i) we intend to sell or it is more likely than not we will be required to sell the security before a recovery in value, or (ii) we do not expect to recover the entire amortized cost basis of the security. If we intend to sell or it is more likely thanCECL accounting guidance also permits the reversal of allowances for credit deterioration in future periods based on improvements in credit, which was not we will be required to sell the security before a recoveryincluded in value, a charge is recorded in net realized capital losses equal to the difference between the fair value and amortized cost basis of the security. For those other-than-temporarily impaired debt securities which do not meet the first condition and for which we do not expect to recover the entire amortized cost basis, the difference between the security’s amortized cost basis and the fair value is separated into the portion representing a credit impairment, which is recorded in net realized capital losses, and the remaining impairment, which is recorded in other comprehensive income.previous guidance. Generally, a security’s credit impairmentcredit-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 yieldyield. That difference is recognized through the income statement, as with prior to impairment. The previous amortized cost basis less the impairment recognized in net realized capital losses becomes the security’s new cost basis.guidance, but is renamed a provision for credit loss. For the ninethree months ended September 30, 20172022 and September 30, 2016,2021, we recognized no other-than-temporary impairment charges related to trust preferred securities classified incredit-related losses on our held-to-maturity portfolio.
Investments in Federal Home Loan, and Atlantic Central Bankers and Federal Reserve Bank stock are recorded at cost and amounted to $991,000$12.6 million at September 30, 2017, compared to $1.62022 and $1.7 million at December 31, 2016.2021. Each of these institutions require their correspondent banking institutions to hold stock as a condition of membership. The decrease resulted fromBank’s conversion to a decreasenational charter required the purchase of $11.0 million of Federal Reserve Bank stock in theSeptember of 2022. While a fixed stock amount is required by each of these institutions, the Federal Home Loan Bank stock requirement increases or decreases with the level of borrowing activity.
At September 30, 2022 and December 31, 2021 no investment securities were encumbered as borrowings were collateralized with loans.
Of the six securities resulting from our securitizations all have been repaid except that entity periodically requestsfrom CRE-2. As of September 30, 2022, the principal balance of the security we own issued by CRE-2 was $12.6 million. Repayment is expected from the workout or disposition of commercial real estate collateral, after repayment of the one remaining senior tranche. The Company’s $12.6 million security has 50% excess credit support; thus, losses of 50% of remaining security balances would have to be incurred, prior to any loss on our security. Additionally, the commercial real estate collateral supporting the three remaining loans were re-appraised between 2020 and 2022. The updated appraised value is approximately $60.9 million, which is net of $573,000 due to the servicer. The remaining principal to be repaid on all securities is approximately $58.1 million and, as noted, the Company’s security is scheduled to be repaid prior to 50% 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 the Company’s security, there can be no assurance that such valuations will be realized upon loan resolutions, and that deficiencies will not exceed the 50% credit support. Of the remaining three loans, the property collateral for two of the loans is expected to be liquidated through sale. The third loan was originally extended two years to June of 2022 and terms have not yet been reached for another extension, thus putting the loan in maturity default. If not extended by the special servicer, the property will be foreclosed and sold. The property was appraised at $28.4 million on September 1, 2020 with total exposure in the security of $25.0 million. A recent broker opinion of property liquidation value was $20.9 million. The existing 50% credit enhancement continues to provide repayment protection for the Bank owned tranche.
The following table shows the contractual maturity distribution and the weighted average yield of our investment portfolio security as of September 30, 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 | Total | ||||||||||||||
U.S. Government agency securities | $ | — | — | $ | 7,825 | 2.41% | $ | 5,197 | 3.06% | $ | 11,260 | 2.79% | $ | 24,282 | |||||||||
Asset-backed securities | 5,668 | 4.37% | — | — | 154,869 | 4.43% | 180,444 | 4.56% | 340,981 | ||||||||||||||
Tax-exempt obligations of states and political subdivisions * | 659 | 2.60% | 2,798 | 2.81% | — | — | — | — | 3,457 | ||||||||||||||
Taxable obligations of states and political subdivisions | 2,026 | 4.99% | 38,985 | 3.23% | 3,021 | 3.59% | — | — | 44,032 | ||||||||||||||
Residential mortgage-backed securities | — | — | 40,767 | 2.47% | 14,168 | 3.05% | 89,379 | 2.47% | 144,314 | ||||||||||||||
Collateralized mortgage obligation securities | — | — | 364 | 1.84% | 7,074 | 2.59% | 37,324 | 2.88% | 44,762 | ||||||||||||||
Commercial mortgage-backed securities | 18,879 | 2.42% | 46,988 | 2.60% | 35,559 | 2.51% | 80,540 | 3.36% | 181,966 | ||||||||||||||
Corporate debt securities | — | — | — | — | — | — | 6,800 | 6.33% | 6,800 | ||||||||||||||
Total | $ | 27,232 | $ | 137,727 | $ | 219,888 | $ | 405,747 | $ | 790,594 | |||||||||||||
Weighted average yield | 3.02% | 2.73% | 3.93% | 3.66% | |||||||||||||||||||
* If adjusted to its leveltheir taxable equivalents, yields would approximate 3.29% and 3.56% for zero to one year and one to five years, respectively, at a Federal tax rate of services. 21%.
Commercial loans, at fair value of $606.8 million. Commercial loans, at September 30, 2017 and $607.2 million at December 31, 2016, were pledged as collateral for Federal Home Loan Bank advances and letters of credit as required or permitted by law.
Loans held for sale. Loans held for salefair value are comprised of commercial mortgagenon-SBA CRE loans and SBA loans which had been originated for sale or securitization inthrough first quarter 2020, and which are now being held on the secondary market. Thebalance 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 of commercial mortgage loans and the SBA loans originated for sale is based on purchase commitments, quoted prices for the same or similar loans or fair market valuations based on other market information. Commercial loans held for sale decreased to $380.3$818.0 million at September 30, 20172022 from $663.1 million$1.39 billion at December 31, 2016. The decrease reflected a difference in the timing of loan originations and related sales. The December balance had accumulated until its recording as a sale in first quarter 2017 while the lower September balance reflected2021, primarily reflecting the impact of a sale inloan repayments. These loans continue to be accounted for at fair value. In the third quarter 2017.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.
Loan portfolio. Total loans increased to $1.37$5.27 billion at September 30, 20172022 from $1.22$3.75 billion at December 31, 2016.2021.
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The following table summarizes our loan portfolio, not includingexcluding loans held for sale,at fair value, by loan category for the periods indicated (in
thousands):
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| September 30, |
| December 31, |
| 2017 |
| 2016 |
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SBA non real estate | $ 72,055 |
| $ 74,644 |
SBA commercial mortgage | 132,997 |
| 126,159 |
SBA construction | 14,205 |
| 8,826 |
SBA loans * | 219,257 |
| 209,629 |
Direct lease financing | 369,069 |
| 346,645 |
SBLOC | 720,279 |
| 630,400 |
Other specialty lending | 36,664 |
| 11,073 |
Other consumer loans | 20,107 |
| 17,374 |
| 1,365,376 |
| 1,215,121 |
Unamortized loan fees and costs | 8,684 |
| 7,790 |
Total loans, net of deferred loan fees and costs | $ 1,374,060 |
| $ 1,222,911 |
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September 30, | December 31, | ||||
2022 | 2021 | ||||
SBL non-real estate | $ | 116,080 | $ | 147,722 | |
SBL commercial mortgage | 429,865 | 361,171 | |||
SBL construction | 26,841 | 27,199 | |||
Small business loans | 572,786 | 536,092 | |||
Direct lease financing | 599,796 | 531,012 | |||
SBLOC / IBLOC * | 2,369,106 | 1,929,581 | |||
Advisor financing ** | 168,559 | 115,770 | |||
Real estate bridge loans | 1,488,119 | 621,702 | |||
Other loans *** | 64,980 | 5,014 | |||
5,263,346 | 3,739,171 | ||||
Unamortized loan fees and costs | 4,029 | 8,053 | |||
Total loans, including unamortized loan fees and costs | $ | 5,267,375 | $ | 3,747,224 |
September 30, | December 31, | ||||
2022 | 2021 | ||||
SBL loans, including costs net of deferred fees of $6,370 and $5,345 | |||||
for September 30, 2022 and December 31, 2021, respectively | $ | 579,156 | $ | 541,437 | |
SBL loans included in commercial loans, at fair value | 159,914 | 199,585 | |||
Total small business loans **** | $ | 739,070 | $ | 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. At September 30, 2022 and December 31, 2021, respectively, IBLOC loans amounted to $1.10 billion 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 $1.0 million and $322,000 at September 30, 2022 and December 31, 2021, respectively. Estimated overdraft charge-offs and recoveries are reflected in the allowance for credit losses and have been immaterial. September 30, 2022 includes $54.2 million of balances previously included in discontinued assets including $19.5 million of residential loans with the balance comprised of commercial loans.
****The following table shows SBA loans and SBAsmall business loans held for saleat fair value are comprised of the government guaranteed portion of SBA 7a loans at the dates indicated (in thousands):.
The following table summarizes our small business loan portfolio, including loans held at fair value, by loan category as of September 30, 2022 (in thousands):
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| September 30, |
| December 31, |
| 2017 |
| 2016 |
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SBA loans, including deferred fees and costs | $ 225,909 |
| $ 215,786 |
SBA loans included in held for sale | 160,855 |
| 154,016 |
Total SBA loans | $ 386,764 |
| $ 369,802 |
Loan principal | ||
U.S. government guaranteed portion of SBA loans (a) | $ | 371,002 |
Paycheck Protection Program loans (PPP) (a) | 6,627 | |
Commercial mortgage SBA (b) | 223,607 | |
Construction SBA (c) | 9,776 | |
Non-guaranteed portion of U.S. government guaranteed 7a loans (d) | 98,742 | |
Non-SBA small business loans | 21,090 | |
Total principal | $ | 730,844 |
Unamortized fees and costs | 8,226 | |
Total small business loans | $ | 739,070 |
This is the portion of SBA 7a loans (7a) and PPP loans which have been guaranteed by the U.S. government, and therefore are assumed to have no credit risk.
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 Bancorp Bank, N. A. adheres.
Of the $9.8 million in Construction SBA loans, $8.7 million are 504 first mortgages with an origination date LTV of 50-60% and $1.1 million are SBA interim loans with an approved SBA post-construction full takeout/payoff.
The $98.7 million represents the unguaranteed portion of 7a loans which are 70% or more guaranteed by the U.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.
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 of September 30, 2022 (dollars in thousands):
SBL commercial mortgage* | SBL construction* | SBL non-real estate | Total | % Total | |||||||||
Hotels and motels | $ | 60,951 | $ | 71 | $ | 22 | $ | 61,044 | 17% | ||||
Car washes | 17,103 | 1,180 | 112 | 18,395 | 5% | ||||||||
Full-service restaurants | 12,634 | 2,704 | 1,719 | 17,057 | 5% | ||||||||
Lessors of nonresidential buildings | 15,849 | — | — | 15,849 | 5% | ||||||||
Child day care services | 14,374 | — | 1,058 | 15,432 | 4% | ||||||||
Outpatient mental health and substance abuse centers | 15,149 | — | — | 15,149 | 4% | ||||||||
Funeral homes and funeral services | 11,749 | — | 49 | 11,798 | 3% | ||||||||
Offices of lawyers | 9,387 | — | — | 9,387 | 3% | ||||||||
Assisted living facilities for the elderly | 8,694 | — | — | 8,694 | 3% | ||||||||
Gasoline stations with convenience stores | 8,145 | — | — | 8,145 | 2% | ||||||||
Fitness and recreational sports centers | 5,685 | — | 2,358 | 8,043 | 2% | ||||||||
General warehousing and storage | 6,904 | — | — | 6,904 | 2% | ||||||||
Solar electric power generation | — | — | 6,856 | 6,856 | 2% | ||||||||
Plumbing, heating, and air-conditioning contractors | 5,709 | — | 1,007 | 6,716 | 2% | ||||||||
Baked goods stores | — | — | 6,118 | 6,118 | 2% | ||||||||
Lessors of other real estate property | 5,883 | — | — | 5,883 | 2% | ||||||||
All other amusement and recreation industries | 4,535 | 33 | 1,049 | 5,617 | 2% | ||||||||
Limited-service restaurants | 900 | 1,959 | 2,329 | 5,188 | 1% | ||||||||
Other miscellaneous durable goods merchant wholesalers | 4,877 | — | 59 | 4,936 | 1% | ||||||||
Lessors of residential buildings and dwellings | 4,865 | — | — | 4,865 | 1% | ||||||||
Other technical and trade schools | — | 4,827 | — | 4,827 | 1% | ||||||||
Other spectator sports | 4,745 | — | — | 4,745 | 1% | ||||||||
Offices of dentists | 2,542 | 654 | 71 | 3,267 | 1% | ||||||||
Other warehousing and storage | 3,162 | — | — | 3,162 | 1% | ||||||||
Vocational rehabilitation services | 3,090 | — | — | 3,090 | 1% | ||||||||
Other** | 68,041 | 1,367 | 22,640 | 92,048 | 27% | ||||||||
$ | 294,973 | $ | 12,795 | $ | 45,447 | $ | 353,215 | 100% |
* Of the SBL commercial mortgage and SBL construction loans, $74.4 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 $3.0 million are spread over a hundred different classifications such as Commercial Printing, Pet and Pet Supplies Stores, Securities Brokerage, etc.
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 September 30, 2022 (dollars in thousands):
SBL commercial mortgage* | SBL construction* | SBL non-real estate | Total | % Total | |||||||||
Florida | $ | 63,023 | $ | 319 | $ | 3,539 | $ | 66,881 | 19% | ||||
California | 50,443 | 2,704 | 3,991 | 57,138 | 16% | ||||||||
North Carolina | 30,172 | 6,995 | 2,139 | 39,306 | 11% | ||||||||
New York | 22,802 | 71 | 9,088 | 31,961 | 9% | ||||||||
Pennsylvania | 17,737 | — | 2,303 | 20,040 | 6% | ||||||||
New Jersey | 12,270 | — | 7,232 | 19,502 | 6% | ||||||||
Illinois | 14,761 | — | 1,547 | 16,308 | 5% | ||||||||
Texas | 12,056 | — | 3,125 | 15,181 | 4% | ||||||||
Colorado | 11,418 | 1,636 | 1,190 | 14,244 | 4% | ||||||||
Connecticut | 10,179 | — | 467 | 10,646 | 3% | ||||||||
Virginia | 8,530 | — | 1,040 | 9,570 | 3% | ||||||||
Georgia | 7,069 | — | 1,584 | 8,653 | 2% | ||||||||
Tennessee | 8,081 | — | 337 | 8,418 | 2% | ||||||||
Ohio | 6,270 | — | 478 | 6,748 | 2% | ||||||||
Michigan | 3,345 | — | 334 | 3,679 | 1% | ||||||||
Other States | 16,817 | 1,070 | 7,053 | 24,940 | 7% | ||||||||
$ | 294,973 | $ | 12,795 | $ | 45,447 | $ | 353,215 | 100% |
* Of the SBL commercial mortgage and SBL construction loans, $74.4 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 September 30, 2022 (in thousands):
Type* | State | SBL commercial mortgage* | ||||
Mental health and substance abuse center | Florida | $ | 10,096 | |||
Hotel | Florida | 8,687 | ||||
Lawyer’s office | California | 8,461 | ||||
General warehousing and storage | Pennsylvania | 6,904 | ||||
Hotel | New York | 5,883 | ||||
Hotel | North Carolina | 5,738 | ||||
Mental health and substance abuse center | Connecticut | 5,053 | ||||
Assisted living facility | Florida | 4,978 | ||||
Lessors of nonresidential buildings | North Carolina | 4,940 | ||||
Lessors of residential buildings and dwellings | New Jersey | 4,865 | ||||
Total | $ | 65,605 | ||||
* 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 U.S. government guaranteed.
Commercial real estate loans, primarily bridge loans, excluding SBA loans, are as follows including LTV at origination as of September 30, 2022 (dollars in thousands):
# Loans | Balance | Weighted average origination date LTV | Weighted average interest rate | |||||||
Real estate bridge loans (multi-family apartment loans recorded at book value)* | 115 | $ | 1,488,119 | 73% | 6.18% | |||||
Non-SBA commercial real estate loans, at fair value: | ||||||||||
Multi-family (apartment bridge loans)* | 35 | $ | 564,482 | 76% | 5.82% | |||||
Hospitality (hotels and lodging) | 5 | 37,768 | 65% | 6.56% | ||||||
Retail | 4 | 51,827 | 71% | 5.56% | ||||||
Other | 5 | 13,886 | 73% | 5.07% | ||||||
49 | 667,963 | 75% | 5.83% | |||||||
Fair value adjustment | (9,837) | |||||||||
Total non-SBA commercial real estate loans, at fair value | 658,126 | |||||||||
Total commercial real estate loans | $ | 2,146,245 | 74% | 6.10% |
* 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.
The following table summarizes our commercial real estate loans, primarily bridge loans excluding SBA loans, by state as of September 30, 2022 (dollars in thousands):
Balance | Origination date LTV | ||||
Texas | $ | 814,502 | 74% | ||
Georgia | 219,574 | 72% | |||
Florida | 187,465 | 72% | |||
Ohio | 99,784 | 71% | |||
Tennessee | 92,423 | 70% | |||
Alabama | 73,034 | 74% | |||
Michigan | 72,815 | 74% | |||
Other States each <$50 million | 586,648 | 74% | |||
Total | $ | 2,146,245 | 74% |
The following table summarizes our 15 largest commercial real estate loans, primarily bridge loans, excluding SBA loans, as of September 30, 2022 (dollars in thousands). All these loans are multi-family loans.
Balance | Origination date LTV | ||||
Texas | $ | 41,040 | 75% | ||
Texas | 39,345 | 79% | |||
Texas | 38,625 | 72% | |||
Tennessee | 37,380 | 72% | |||
Texas | 37,283 | 75% | |||
Texas | 37,259 | 80% | |||
Michigan | 35,941 | 71% | |||
Florida | 32,441 | 72% | |||
Texas | 31,244 | 67% | |||
Michigan | 30,700 | 79% | |||
Tennessee | 30,361 | 62% | |||
Missouri | 30,000 | 72% | |||
Texas | 29,895 | 62% | |||
Texas | 28,500 | 77% | |||
Texas | 27,481 | 77% | |||
15 Largest loans | $ | 507,495 | 73% |
The following table summarizes our institutional banking portfolio by type as of September 30, 2022 (dollars in thousands):
Type | Principal | % of total | ||
Securities backed lines of credit (SBLOC) | $ | 1,265,017 | 50% | |
Insurance backed lines of credit (IBLOC) | 1,104,089 | 43% | ||
Advisor financing | 168,559 | 7% | ||
Total | $ | 2,537,665 | 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 September 30, 2022 (dollars in thousands):
Principal amount | % Principal to collateral | ||||
$ | 20,288 | 58% | |||
18,000 | 42% | ||||
17,181 | 72% | ||||
14,428 | 38% | ||||
9,465 | 33% | ||||
9,376 | 66% | ||||
9,034 | 48% | ||||
8,529 | 71% | ||||
7,906 | 75% | ||||
6,373 | 32% | ||||
Total and weighted average | $ | 120,580 | 54% |
IBLOC loans are backed by the cash value of life insurance policies which have been assigned to us. We generally lend up to 95% 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 of August 2, 2022, all were rated A- or better by AM BEST.
The following table summarizes our direct lease financing portfolio* by type as of September 30, 2022 (dollars in thousands):
Principal balance | % Total | ||||
Construction | $ | 110,215 | 18% | ||
Government agencies and public institutions** | 90,158 | 15% | |||
Waste management and remediation services | 67,897 | 11% | |||
Real estate and rental and leasing | 59,875 | 10% | |||
Retail trade | 48,102 | 8% | |||
Health care and social assistance | 31,585 | 5% | |||
Transportation and warehousing | 31,259 | 5% | |||
Finance and insurance | 27,439 | 5% | |||
Professional, scientific, and technical services | 19,738 | 3% | |||
Manufacturing | 16,985 | 3% | |||
Wholesale trade | 15,879 | 3% | |||
Educational services | 7,985 | 1% | |||
Mining, Quarrying, and Oil and Gas Extractions for Oil and Gas Operations | 3,930 | 1% | |||
Other | 68,749 | 12% | |||
Total | $ | 599,796 | 100% | ||
* Of the total $599.8 million of direct lease financing, $519.6 million consisted of vehicle leases with the remaining balance consisting of equipment leases.
** Includes public universities and school districts.
The following table summarizes our direct lease financing portfolio by state as of September 30, 2022 (dollars in thousands):
Principal balance | % Total | ||||
Florida | $ | 96,749 | 16% | ||
Utah | 55,543 | 9% | |||
California | 52,436 | 9% | |||
New Jersey | 41,885 | 7% | |||
Pennsylvania | 39,422 | 7% | |||
New York | 29,622 | 5% | |||
North Carolina | 27,355 | 5% | |||
Maryland | 26,086 | 4% | |||
Texas | 25,650 | 4% | |||
Connecticut | 20,274 | 3% | |||
Washington | 16,221 | 3% | |||
Georgia | 14,869 | 2% | |||
Idaho | 13,610 | 2% | |||
Illinois | 11,419 | 2% | |||
Alabama | 10,485 | 2% | |||
Other states and non-classified | 118,170 | 20% | |||
Total | $ | 599,796 | 100% |
The following table presents loan categories by maturity for the period indicated. Actual repayments historically have, and will likely in the future, 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.
September 30, 2022 | ||||||||||||||
Within | One to five | After five but | ||||||||||||
one year | years | within 15 years | After 15 years | Total | ||||||||||
(Dollars in thousands) | ||||||||||||||
SBL non-real estate | $ | 16,957 | $ | 42,080 | $ | 119,875 | $ | 1,376 | $ | 180,288 | ||||
SBL commercial mortgage | 16,428 | 6,373 | 121,692 | 387,144 | 531,637 | |||||||||
SBL construction | 1,430 | — | — | 25,715 | 27,145 | |||||||||
Leasing | 86,816 | 487,876 | 25,104 | — | 599,796 | |||||||||
SBLOC/IBLOC | 2,369,106 | — | — | — | 2,369,106 | |||||||||
Advisor financing | — | 19,561 | 148,998 | — | 168,559 | |||||||||
Real estate bridge lending | — | 1,488,119 | — | — | 1,488,119 | |||||||||
Other loans | 38,539 | 4,041 | 5,074 | 14,985 | 62,639 | |||||||||
Loans at fair value excluding SBL | 604,670 | 51,762 | — | 1,694 | 658,126 | |||||||||
$ | 3,133,946 | $ | 2,099,812 | $ | 420,743 | $ | 430,914 | $ | 6,085,415 | |||||
Loan maturities after one year with: | ||||||||||||||
Fixed rates | ||||||||||||||
SBL non-real estate | $ | 6,627 | $ | — | $ | — | $ | 6,627 | ||||||
Leasing | 487,876 | 25,104 | — | 512,980 | ||||||||||
Advisor financing | 19,561 | 148,998 | — | 168,559 | ||||||||||
Other loans | 1,311 | 2,818 | 14,985 | 19,114 | ||||||||||
Loans at fair value excluding SBL | 51,762 | — | — | 51,762 | ||||||||||
Total loans at fixed rates | 567,137 | 176,920 | 14,985 | 759,042 | ||||||||||
Variable rates | ||||||||||||||
SBL non-real estate | 35,453 | 119,875 | 1,376 | 156,704 | ||||||||||
SBL commercial mortgage | 6,373 | 121,692 | 387,144 | 515,209 | ||||||||||
SBL construction | — | — | 25,715 | 25,715 | ||||||||||
Real estate bridge lending | 1,488,119 | — | — | 1,488,119 | ||||||||||
Other loans | 2,730 | 2,256 | — | 4,986 | ||||||||||
Loans at fair value excluding SBL | — | — | 1,694 | 1,694 | ||||||||||
Total at variable rates | 1,532,675 | 243,823 | 415,929 | 2,192,427 | ||||||||||
Total | $ | 2,099,812 | $ | 420,743 | $ | 430,914 | $ | 2,951,469 | ||||||
Allowance for loan and leasecredit losses. We review the adequacy of our allowance for loan and leasecredit losses on at least a quarterly basis to determine that thea provision for loancredit losses is made in an amount necessary to maintain our allowance at a level thatwe believe is appropriate based on management’s estimate of inherent losses. Our estimates of loan and leaseto recognize current expected credit losses are intended to, and, in management’s opinion, do, meet the criteria for accrual of loss contingencies in accordance with ASC 450, “Contingencies”, and ASC 310, “Receivables”. The process of evaluating this adequacy has two basic elements: first, the identification of problem loans or leases based on current financial information and the fair value of the underlying collateral; and second, a methodology for estimating general loss reserves. For loans or leases classified as “special mention,” “substandard” or “doubtful,” we reserve all losses inherent in the portfolio at the time we classify the loan or lease. This “specific” portion of the allowance is the total of potential, although unconfirmed, losses for individually classified loans. In this process, we establish specific reserves based on an analysis of the most probable sources of repayment and liquidation of collateral. While each impaired loan is individually evaluated, not every loan requires a reserve when the collateral value and estimated cash flows exceed the current balance.
The second phase of our analysis represents an allocation of the allowance. This methodology analyzes pools of loans that have similar characteristics and applies historical loss experience and other factors for each pool including management’s experience with similar loan and lease portfolios at other institutions, the historic loss experience of our peers and a review of statistical information from various industry reports to determine the allocable portion of the allowance. This estimate is intended to represent the potential unconfirmed and inherent losses within the portfolio. Individual loan pools are created for the following major loan categories: SBLOCs, SBA loans, direct lease financing and other specialty lending and consumer loans. We augment historical experience for each loan pool by accounting for such items as current economic conditions, current loan portfolio performance, loan policy or management changes, loan concentrations, increases in our lending limit, average loan size and other factors as appropriate. Our Chief Credit Officer oversees the loan review department, processes andwhich measures the adequacy of the allowance for loan and leasecredit losses independently of loan production officers. officers. For detailed information on the allowance for credit loss methodology, please see Note 6 to the consolidated financial statements.
The Company performed a strategic evaluation of its businesses in the third quarter of 2014 and decided to discontinue its Philadelphia commercial lending operations to focus on its specialty finance lending. The Company has since disposed of the vast majority of related loans and other real estate owned. While in the process of disposition, financial results of the commercial lending operations were presented as separate from continuing operations on the consolidated statements of operations and assets of the commercial lending operations to be disposed of were presented as assets held-for-sale on the consolidated balance sheets. As disposition efforts had concluded, discontinued loans of $61.6 million were reclassified to loans held for investment in the first quarter of 2022. Accordingly, these loans will be accounted for as such, and included in related tables. On the December 31, 2021 consolidated balance sheet, these discontinued loans were reclassified as loans held for sale in continuing operations and included within “Commercial loans, at fair value”. Discontinued other real estate owned of $17.3 million which constituted the remainder of discontinued assets was reclassified to the other real estate owned caption on the balance sheet. As noted above, in the first quarter of 2022 the loans previously in discontinued operations were reclassified to held for investment. In the second quarter of 2022, as a result of the loan reclassification, related valuation reserves were reversed as a credit to “Net realized and unrealized gains on commercial loans, at fair value” in the consolidated statement of operations, while the allowances for credit losses and loan commitments in the consolidated balance sheet were increased through a provision for credit losses. The $3.5 million credit to “ Net realized and unrealized gains on commercial loans, at fair value” was offset by a provision for credit losses of $3.5 million with no net impact on income. Of the $3.5 million provision, $1.3 million increased the allowance for credit losses and $2.2 million increased the allowance for loan commitments recorded in other liabilities. These reclassification entries were made retroactive to the first quarter of 2022 and are reflected in year to date 2022 results.
At September 30, 2022, the allowance for credit losses amounted to $19.7 million which represented a $1.9 million increase compared to the $17.8 million at December 31, 2021. In addition to the increase resulting from the reclassification of discontinued loans noted above, the increase reflected the impact of loan growth on the CECL model which was offset by allowance reductions as described in
“Provision for Credit Losses”. Troubled debt restructured loans are individually considered by comparing collateral values with principal outstanding and establishing specific reserves within the allowance. At September 30, 2022, there were 11 troubled debt restructured loans with a balance of $5.3 million which had specific reserves of $447,000. 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. At September 30, 2017,2022, in excess of 50% of the total continuing loan portfolio had beenwas reviewed as a resultby the loan review department or, for small business loans, rated internally by that department. In addition to the review of all classified loans, the coverage of each loan portfolio type. The targeted coverages and scope of the reviews are risk-based and vary according to each portfolio. These thresholds are maintainedportfolio as follows:
Securities Backed Lines of Credit (SBLOC) – The targeted review threshold for 20172022 is 40%, withincluding a sample focusing on the largest 25% of SBLOCs by commitment to be reviewed annually.commitment. A random samplingsample of a minimum of 20 of the remainingat least twenty loans will be reviewed each quarter. At September 30, 2017,2022, approximately 50%48% of the SBLOC portfolio had been reviewed.
52Insurance 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. At September 30, 2022, approximately 47% of the IBLOC portfolio had been reviewed.
Advisor Financing – The targeted review threshold for 2022 is 50%. At September 30, 2022, approximately 87% of the advisor financing portfolio had been reviewed. The loan balance review threshold is $1.0 million.
SBA
Small Business Loans – The targeted review threshold for 20172022 is 100%60%, to be rated and/or reviewed within 90 days of funding, lessexcluding fully guaranteed portions of anyloans purchased for CRA, and fully guaranteed PPP loans. The 100% coverageloan balance review threshold is $1.5 million and additionally includes loan review work performed by designated SBA department personnel.any classified loans. At September 30, 2017,2022, approximately 100%71% of the governmentnon-government guaranteed loan portfolio had been reviewed. The review threshold for the independent loan review department is $1,000,000.
LeasingDirect Lease Financing – The targeted review threshold for 20172022 is 35%. At September 30, 2017,2022, approximately 53%42% of the leasing portfolio had been reviewed. The loan balance review threshold is $1,000,000.$1.5 million.
CMBS (Floating Rate)Commercial Real Estate Bridge Loans, at fair value and Commercial Real Estate Bridge Loans, at amortized cost (floating rate excluding SBA, which are included in Small Business Loans above) – The targeted review threshold for 20172022 is 100%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 based on a sampling each quarter. Each floating rate loan will be reviewed if any available extension options are exercised.for relationships over $10.0 million. At September 30, 2017,2022, approximately 100% of the CMBSnon-SBA CRE floating rate loans on the booksoutstanding for more than 90 days had been reviewed.
CMBS (Fixed Rate) – 100% of fixedCommercial Real Estate Loans, at fair value (fixed rate loans thatexcluding SBA which are unable to be readily sold on the secondary market and remain on the Bank's books after nine months will be reviewed at least annually.included in Small Business Loans above) – The targeted review threshold for 2022 is 100%. At September 30, 2017,2022, approximately 100% of the CMBSnon-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 CRAnon-CRA loans. At September 30, 2017,2022, approximately 100% of the non CRAnon-CRA loans had been reviewed.
Home Equity Lines of Credit (HELOC)or HELOC – The targeted review threshold for 2017 is 50%. The largest 25%Due to the small number and outstanding balances of HELOCs by commitment will be reviewed annually. A random sampling of a minimum of ten ofonly the remaininglargest loans will be reviewed each quarter.subject to review. The remaining loans are monitored and, if necessary, adversely classified under the Uniform Retail Credit Classification and Account Management Policy. At September 30, 2017,2022, approximately 84%71% of the HELOC portfolio had been reviewed.
Other minor loan categories are reviewed at the discretion of the loan review department.
The following table presentstables present delinquencies by type of loan as followsof the dates specified (in thousands):
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 30-59 Days |
| 60-89 Days |
| 90 Days |
|
|
| Total |
|
|
| Total |
September 30, 2017 |
| past due |
| past due |
| or greater |
| Non-accrual |
| past due |
| Current |
| loans |
SBA non real estate |
| $ 272 |
| $ 165 |
| $ - |
| $ 2,310 |
| $ 2,747 |
| $ 69,308 |
| $ 72,055 |
SBA commercial mortgage |
| - |
| - |
| - |
| 1,226 |
| 1,226 |
| 131,771 |
| 132,997 |
SBA construction |
| - |
| - |
| - |
| - |
| - |
| 14,205 |
| 14,205 |
Direct lease financing |
| 5,065 |
| 1,060 |
| 354 |
| - |
| 6,479 |
| 362,590 |
| 369,069 |
SBLOC |
| - |
| - |
| - |
| - |
| - |
| 720,279 |
| 720,279 |
Other specialty lending |
| - |
| - |
| - |
| - |
| - |
| 36,664 |
| 36,664 |
Consumer - other |
| - |
| - |
| - |
| - |
| - |
| 9,585 |
| 9,585 |
Consumer - home equity |
| 144 |
| - |
| - |
| 1,417 |
| 1,561 |
| 8,961 |
| 10,522 |
Unamortized loan fees and costs |
| - |
| - |
| - |
| - |
| - |
| 8,684 |
| 8,684 |
|
| $ 5,481 |
| $ 1,225 |
| $ 354 |
| $ 4,953 |
| $ 12,013 |
| $ 1,362,047 |
| $ 1,374,060 |
September 30, 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 | $ | 1,715 | $ | 1,246 | $ | 370 | $ | 1,077 | $ | 4,408 | $ | 111,672 | $ | 116,080 | ||||||
SBL commercial mortgage | 3,252 | 6 | — | 1,423 | 4,681 | 425,184 | 429,865 | |||||||||||||
SBL construction | — | — | — | 710 | 710 | 26,131 | 26,841 | |||||||||||||
Direct lease financing | 1,799 | 1,392 | 49 | — | 3,240 | 596,556 | 599,796 | |||||||||||||
SBLOC / IBLOC | 3,175 | 227 | — | — | 3,402 | 2,365,704 | 2,369,106 | |||||||||||||
Advisor financing | — | — | — | — | — | 168,559 | 168,559 | |||||||||||||
Real estate bridge loans | — | — | — | — | — | 1,488,119 | 1,488,119 | |||||||||||||
Other loans | 473 | 181 | 3,996 | 650 | 5,300 | 59,680 | 64,980 | |||||||||||||
Unamortized loan fees and costs | — | — | — | — | — | 4,029 | 4,029 | |||||||||||||
$ | 10,414 | $ | 3,052 | $ | 4,415 | $ | 3,860 | $ | 21,741 | $ | 5,245,634 | $ | 5,267,375 |
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 |
53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 30-59 Days |
| 60-89 Days |
| 90 Days |
|
|
| Total |
|
|
| Total |
December 31, 2016 |
| past due |
| past due |
| or greater |
| Non-accrual |
| past due |
| Current |
| loans |
SBA non real estate |
| $ 559 |
| $ - |
| $ - |
| $ 1,530 |
| $ 2,089 |
| $ 72,555 |
| $ 74,644 |
SBA commercial mortgage |
| - |
| - |
| - |
| - |
| - |
| 126,159 |
| 126,159 |
SBA construction |
| - |
| - |
| - |
| - |
| - |
| 8,826 |
| 8,826 |
Direct lease financing |
| 11,856 |
| 1,998 |
| 661 |
| - |
| 14,515 |
| 332,130 |
| 346,645 |
SBLOC |
| - |
| - |
| - |
| - |
| - |
| 630,400 |
| 630,400 |
Other specialty lending |
| - |
| - |
| - |
| - |
| - |
| 11,073 |
| 11,073 |
Consumer - other |
| - |
| - |
| - |
| - |
| - |
| 5,403 |
| 5,403 |
Consumer - home equity |
| 155 |
| - |
| - |
| 1,442 |
| 1,597 |
| 10,374 |
| 11,971 |
Unamortized loan fees and costs |
| - |
| - |
| - |
| - |
| - |
| 7,790 |
| 7,790 |
|
| $ 12,570 |
| $ 1,998 |
| $ 661 |
| $ 2,972 |
| $ 18,201 |
| $ 1,204,710 |
| $ 1,222,911 |
Although we consider our allowance for loan and leasecredit 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 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:
|
|
|
|
|
|
|
|
|
|
|
| As of or | ||
|
| for the nine months ended | ||
|
| September 30, | ||
|
| 2017 |
| 2016 |
|
|
|
|
|
Ratio of the allowance for loan losses to total loans |
| 0.53% |
| 0.51% |
Ratio of the allowance for loan losses to nonperforming loans * |
| 137.23% |
| 87.12% |
Ratio of nonperforming assets to total assets * |
| 0.13% |
| 0.16% |
Ratio of net charge-offs to average loans |
| 0.07% |
| 0.01% |
Ratio of net charge-offs to average loans annualized |
| 0.09% |
| 0.01% |
|
|
|
|
|
* Includes loans 90 days past due still accruing interest. |
|
|
|
|
For the nine months ended | For the year ended | |||||
or as of September 30, | or as of December 31, | |||||
2022 | 2021 | 2021 | ||||
Ratio of: | ||||||
Allowance for credit losses to total loans | 0.37% | 0.52% | 0.48% | |||
Allowance for credit losses to non-performing loans * | 237.93% | 210.54% | 491.61% | |||
Non-performing loans to total loans* | 0.16% | 0.24% | 0.10% | |||
Non-performing assets to total assets * | 0.35% | 0.40% | 0.33% | |||
Net charge-offs to average loans | 0.02% | 0.04% | 0.03% | |||
* Includes loans 90 days past due still accruing interest. | ||||||
The ratio of the allowance for loan and leasecredit losses to total loans was 0.53%decreased to 0.37% as of September 30, 2022 from 0.52% at September 30, 2017, compared to 0.51% at September 30, 2016.2021. The higher current period ratio reflectedreduction resulted from an increase in loans which was proportionately greater than the increase in the allowance. Continuing growth in SBLOC, IBLOC and REBL, which have allowance allocations lower than the overall percentage of allowance for credit losses to total loans, due to the nature of the collateral, has generally reduced that percentage. The reduction also reflected the impact of a downward qualitative factor adjustment in our CECL methodology in the second quarter of 2022. The downward adjustment resulted from a greater proportion of government guaranteed balances in applicable small business loan pools, which are segregated on the basis of similar risk characteristics (see Note 6 to the consolidated financial statements). These decreases in the allowance which exceeded proportional loan growth duringwere partially offset by an increase of $1.3 million resulting from the period.reclassification of loans from discontinued operations (see Note 2 to the consolidated financial statements). The ratio of the allowance for loancredit losses to non-performing loans increased to 137.23%237.93% at September 30, 2017,2022, from 87.12%210.54% at September 30, 2016,2021, primarily as a result of a decrease in non-performing loans and anthe increase in the allowance.allowance which proportionately exceeded the increase in non-performing loans. The ratio of non-performing loans to total loans decreased to 0.16% from 0.24% as loan growth between those dates proportionately exceeded the increase in non-performing loans. The ratio of non-performing assets to total assets decreased to 0.13%0.35% at September 30, 2017,2022 from 0.16%0.40% at September 30, 2016, primarily2021 as a result of a decreasethe increase in assets, reflecting the aforementioned loan growth between those dates, was proportionately greater than the increase in non-performing loans.assets. Net charge-offs to average loans increaseddecreased to 0.07%0.02% for the nine months ended September 30, 2017, from 0.01%2022 compared to 0.04% for the nine months ended September 30, 2016, primarily as a result of higher2021, reflecting slightly lower net charge offs. charge-offs and significantly increased loans.
Net charge-offs. Net charge-offs were $1.2$1.0 million for the nine months ended September 30, 2017, an increase2022, a decrease of $1.0 million$107,000 from net charge-offs of $152,000$1.1 million during the samecomparable period of 2016. The majority of the charge-offs2021. Charge-offs in the first nine months of 2017 were associated with leasing relationships. The majority of the charge-offs in the first nine months of 2016 were associated with SBA non realboth periods resulted primarily from non-real estate SBL and leasing relationships.charge-offs. SBL charge-offs result primarily from the non-government guaranteed portion of SBA loans.
Non-performing loans, loansThe following tables reflect the relationship of average loan volume and net charge-offs by segment (dollars in thousands):
September 30, 2022 | |||||||||||||||||||||||
SBL non-real estate | SBL commercial mortgage | SBL construction | Direct lease financing | SBLOC / IBLOC | Advisor financing | Real estate bridge loans | Other loans | ||||||||||||||||
Charge-offs | $ | 861 | $ | — | $ | — | $ | 312 | $ | — | $ | — | $ | — | $ | — | |||||||
Recoveries | (57) | — | — | (108) | — | — | — | — | |||||||||||||||
Net charge-offs | $ | 804 | $ | — | $ | — | $ | 204 | $ | — | $ | — | $ | — | $ | — | |||||||
Average loan balance | $ | 124,761 | $ | 400,454 | $ | 28,129 | $ | 563,128 | $ | 2,160,044 | $ | 146,506 | $ | 1,005,043 | $ | 48,651 | |||||||
Ratio of net charge-offs during the period to average loans during the period | 0.64% | — | — | 0.04% | — | — | — | — |
September 30, 2021 | |||||||||||||||||||||||
SBL non-real estate | SBL commercial mortgage | SBL construction | Direct lease financing | SBLOC / IBLOC | Advisor financing | Real estate bridge loans | Other loans | ||||||||||||||||
Charge-offs | $ | 896 | $ | 23 | $ | — | $ | 248 | $ | 15 | $ | — | $ | — | $ | 10 | |||||||
Recoveries | (18) | (9) | — | (50) | — | — | — | — | |||||||||||||||
Net charge-offs | $ | 878 | $ | 14 | $ | — | $ | 198 | $ | 15 | $ | — | $ | — | $ | 10 | |||||||
Average loan balance | $ | 213,582 | $ | 334,045 | $ | 21,695 | $ | 488,125 | $ | 1,692,305 | $ | 64,713 | $ | — | $ | 5,672 | |||||||
Ratio of net charge-offs during the period to average loans during the period | 0.41% | — | — | 0.04% | — | — | — | — |
Non-accrual Loans, Loans 90 days delinquentDays Delinquent and still accruing,Still Accruing, Other Real Estate Owned and troubled debt restructurings. 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 September 30, 2022 and $18.9 million of OREO at December 31, 2021. The following tables summarize our non-performing loans, other real estate ownedOREO, and loans past due 90 days or more still accruing interest (in thousands). interest.
|
|
September 30, | December 31, | ||||
2022 | 2021 | ||||
(Dollars in thousands) | |||||
Non-accrual loans | |||||
SBL non-real estate | $ | 1,077 | $ | 1,313 | |
SBL commercial mortgage | 1,423 | 812 | |||
SBL construction | 710 | 710 | |||
Direct leasing | — | 254 | |||
Other loans | 592 | — | |||
Consumer - home equity | 58 | 72 | |||
Total non-accrual loans | 3,860 | 3,161 | |||
Loans past due 90 days or more and still accruing | 4,415 | 461 | |||
Total non-performing loans | 8,275 | 3,622 | |||
Other real estate owned | 18,873 | 18,873 | |||
Total non-performing assets | $ | 27,148 | $ | 22,495 |
|
| 2017 |
| 2016 |
|
|
|
|
|
Non-accrual loans |
|
|
|
|
SBA non real estate |
| $ 2,310 |
| $ 1,530 |
SBA commercial mortgage |
| 1,226 |
| - |
Consumer |
| 1,417 |
| 1,442 |
Total non-accrual loans |
| 4,953 |
| 2,972 |
|
|
|
|
|
Loans past due 90 days or more |
| 354 |
| 661 |
Total non-performing loans |
| 5,307 |
| 3,633 |
Other real estate owned |
| - |
| 104 |
Total non-performing assets |
| $ 5,307 |
| $ 3,737 |
Loans that were modified as of September 30, 20172022 and December 31, 20162021 and considered troubled debt restructurings are as follows (dollars
dollars in thousands):
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|
|
| September 30, 2017 |
| December 31, 2016 | ||||||||
|
| Number |
| Pre-modification recorded investment |
| Post-modification recorded investment |
| Number |
| Pre-modification recorded investment |
| Post-modification recorded investment |
SBA non real estate |
| 4 |
| $ 1,013 |
| $ 1,013 |
| 2 |
| $ 844 |
| $ 844 |
Direct lease financing |
| 1 |
| 285 |
| 285 |
| 1 |
| 734 |
| 734 |
Consumer |
| 2 |
| 541 |
| 541 |
| 1 |
| 288 |
| 288 |
Total |
| 7 |
| $ 1,839 |
| $ 1,839 |
| 4 |
| $ 1,866 |
| $ 1,866 |
September 30, 2022 | December 31, 2021 | ||||||||||||||||
Number | Pre-modification recorded investment | Post-modification recorded investment | Number | Pre-modification recorded investment | Post-modification recorded investment | ||||||||||||
SBL non-real estate | 8 | $ | 657 | $ | 657 | 9 | $ | 1,231 | $ | 1,231 | |||||||
SBL commercial mortgage | 1 | 834 | 834 | — | — | — | |||||||||||
Other loans | 1 | 3,552 | 3,552 | — | — | — | |||||||||||
Consumer - home equity | 1 | 241 | 241 | 1 | 248 | 248 | |||||||||||
Total(1) | 11 | $ | 5,284 | $ | 5,284 | 10 | $ | 1,479 | $ | 1,479 |
(1)Troubled debt restructurings include non-accrual loans of $1.2 million and $656,000 at September 30, 2022 and December 31, 2021, respectively.
The balances below provide information as to how the loans were modified as troubled debt restructurings loans at September 30, 20172022 and December 31, 20162021 (in thousands).:
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|
|
|
| September 30, 2017 |
| December 31, 2016 | ||||||||
|
| Adjusted interest rate |
| Extended maturity |
| Combined rate and maturity |
| Adjusted interest rate |
| Extended maturity |
| Combined rate and maturity |
SBA non real estate |
| $ - |
| $ 144 |
| $ 869 |
| $ - |
| $ 144 |
| $ 700 |
Direct lease financing |
| - |
| - |
| 285 |
| - |
| - |
| 734 |
Consumer |
| - |
| - |
| 541 |
| - |
| - |
| 288 |
Total |
| $ - |
| $ 144 |
| $ 1,695 |
| $ - |
| $ 144 |
| $ 1,722 |
September 30, 2022 | December 31, 2021 | ||||||||||||||||
Adjusted interest rate | Extended maturity | Combined rate and maturity | Adjusted interest rate | Extended maturity | Combined rate and maturity | ||||||||||||
SBL non-real estate | $ | — | $ | — | $ | 657 | $ | — | $ | — | $ | 1,231 | |||||
SBL commercial mortgage | — | — | 834 | — | — | — | |||||||||||
Other loans | — | — | 3,552 | — | — | — | |||||||||||
Consumer - home equity | — | — | 241 | — | — | 248 | |||||||||||
Total(1) | $ | — | $ | — | $ | 5,284 | $ | — | $ | — | $ | 1,479 |
(1)Troubled debt restructurings include non-accrual loans of $1.2 million and $656,000 at September 30, 2022 and December 31, 2021, respectively.
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. By December 31, 2020 the center had been substantially all leased and previous write-downs had been reversed. On March 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 September 30, 2022 or December 31, 2021.
The following table summarizes as of September 30, 2017, loans that had beenwere restructured within the last 12 months ended September 30, 2022 that have subsequently defaulted.defaulted (in thousands):
|
|
|
|
| ||||
|
|
|
|
| September 30, 2022 | |||
|
| Number |
| Pre-modification recorded investment | Number | Pre-modification recorded investment | ||
SBA non real estate |
| 2 |
| $ 679 | ||||
SBL non-real estate | 1 | $ | 334 | |||||
Total |
| 2 |
| $ 679 | 1 | $ | 334 |
The following table provides information about impairedcredit deteriorated loans at September 30, 20172022 and December 31, 2016:2021 (dollars in thousands):
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Recorded |
| Unpaid |
| Related |
| Average |
| Interest |
September 30, 2017 |
|
|
|
|
|
|
|
|
|
Without an allowance recorded |
|
|
|
|
|
|
|
|
|
SBA non real estate | $ 357 |
| $ 357 |
| $ - |
| $ 274 |
| $ - |
SBA commercial mortgage | - |
| - |
| - |
| - |
| - |
Direct lease financing | 284 |
| 396 |
| - |
| 71 |
| - |
Consumer - other | - |
| - |
| - |
| - |
| - |
Consumer - home equity | 1,700 |
| 1,700 |
| - |
| 1,716 |
| - |
With an allowance recorded |
|
|
|
|
|
|
|
| - |
SBA non real estate | 2,288 |
| 2,288 |
| 1,659 |
| 2,534 |
| - |
SBA commercial mortgage | 1,226 |
| 1,226 |
| 185 |
| 761 |
| - |
Direct lease financing | - |
| - |
| - |
| 506 |
| - |
Consumer - other | - |
| - |
| - |
| 18 |
| - |
Consumer - home equity | - |
| - |
| - |
| - |
| - |
Total |
|
|
|
|
|
|
|
|
|
SBA non real estate | 2,645 |
| 2,645 |
| 1,659 |
| 2,808 |
| - |
SBA commercial mortgage | 1,226 |
| 1,226 |
| 185 |
| 761 |
| - |
Direct lease financing | 284 |
| 396 |
| - |
| 577 |
| - |
Consumer - other | - |
| - |
| - |
| 18 |
| - |
Consumer - home equity | 1,700 |
| 1,700 |
| - |
| 1,716 |
| - |
| 5,855 |
| 5,967 |
| 1,844 |
| 5,880 |
| - |
September 30, 2022 | ||||||||||||||
Recorded | Unpaid | Related | Average | Interest | ||||||||||
Without an allowance recorded | ||||||||||||||
SBL non-real estate | $ | 357 | $ | 3,526 | $ | — | $ | 385 | $ | 7 | ||||
SBL commercial mortgage | — | — | — | 56 | — | |||||||||
Direct lease financing | — | — | — | 66 | — | |||||||||
Other loans | 3,552 | 3,552 | — | 1,184 | 113 | |||||||||
Consumer - home equity | 298 | 298 | — | 309 | 7 | |||||||||
With an allowance recorded | ||||||||||||||
SBL non-real estate | 990 | 990 | (594) | 1,303 | 6 | |||||||||
SBL commercial mortgage | 1,423 | 1,423 | (222) | 1,006 | — | |||||||||
SBL construction | 710 | 710 | (34) | 710 | — | |||||||||
Other loans | 592 | 592 | (13) | 2,974 | — | |||||||||
Total | ||||||||||||||
SBL non-real estate | 1,347 | 4,516 | (594) | 1,688 | 13 | |||||||||
SBL commercial mortgage | 1,423 | 1,423 | (222) | 1,062 | — | |||||||||
SBL construction | 710 | 710 | (34) | 710 | — | |||||||||
Direct lease financing | — | — | — | 66 | — | |||||||||
Other loans | 4,144 | 4,144 | (13) | 4,158 | 113 | |||||||||
Consumer - home equity | 298 | 298 | — | 309 | 7 | |||||||||
$ | 7,922 | $ | 11,091 | $ | (863) | $ | 7,993 | $ | 133 |
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| ||||||||||||||
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| ||||||||||||||
December 31, 2016 |
|
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|
|
| ||||||||||||||
December 31, 2021 | |||||||||||||||||||||||
Recorded | Unpaid | Related | Average | Interest | |||||||||||||||||||
Without an allowance recorded |
|
|
|
|
|
|
|
|
| ||||||||||||||
SBA non real estate | $ 191 |
| $ 191 |
| $ - |
| $ 336 |
| $ - | ||||||||||||||
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 | - |
| - |
| - |
| 259 |
| - | — | — | — | 5 | — | |||||||||
Consumer - home equity | 1,730 |
| 1,730 |
| - |
| 1,187 |
| - | ||||||||||||||
With an allowance recorded |
|
|
|
|
|
|
|
|
| ||||||||||||||
SBA non real estate | 2,183 |
| 2,183 |
| 938 |
| 1,277 |
| - | ||||||||||||||
Direct lease financing | 734 |
| 734 |
| 216 |
| 147 |
| - | ||||||||||||||
Consumer - other | - |
| - |
| - |
| - |
| - | ||||||||||||||
Consumer - home equity | - |
| - |
| - |
| 549 |
| - | ||||||||||||||
Total |
|
|
|
|
|
|
|
|
| ||||||||||||||
SBA non real estate | 2,374 |
| 2,374 |
| 938 |
| 1,613 |
| - | ||||||||||||||
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 | 734 |
| 734 |
| 216 |
| 147 |
| - | 254 | 254 | — | 562 | — | |||||||||
Consumer - other | - |
| - |
| - |
| 259 |
| - | — | — | — | 5 | — | |||||||||
Consumer - home equity | 1,730 |
| 1,730 |
| - |
| 1,736 |
| - | 320 | 320 | — | 458 | 8 | |||||||||
| 4,838 |
| 4,838 |
| 1,154 |
| 3,755 |
| - | $ | 3,983 | $ | 7,011 | $ | (978) | $ | 8,766 | $ | 26 |
We had $5.0$3.9 million of non-accrual loans at September 30, 20172022 compared to $3.0$3.2 million of non-accrual loans at December 31, 2016.2021. The $2.0 million$699,000 increase in non-accrual loans was primarily due to $3.7$2.9 million of loans placed on non-accrual status partially offset by $1.1$860,000 of charge-offs and $1.4 million of loan payments and $589,000 of charge-offs.payments. Loans past due 90 days or more still accruing interest amounted to $354,000$4.4 million at September 30, 20172022 and $661,000$461,000 at December 31, 2016.2021. The $307,000 decrease$4.0 million increase reflected $1.7$1.4 million of additions, partially offset by $1.3$1.0 million of loan payments $144,000 of charge-offs and $526,000$3.6 million of loans moved to repossessed assets. reclassified from discontinued operations.
56
We had no other real estate owned$18.9 million of OREO at September 30, 20172022 and $104,000$18.9 million of OREO at December 31, 2016 with2021 after the reclassification of $17.3 million from discontinued operations. There was no additionalother significant activity during the intervening period.quarter.
The following table classifies ourWe evaluate loans (not including loans held for sale) by categories which are used throughout the industryunder an internal loan risk rating system as a means of identifying problem loans. At September 30, 20172022 and December 31, 2016:2021 loans accordingly classified were segregated by year of origination and are shown in Note 6 to the consolidated financial statements.
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September 30, 2017 |
| Pass |
| Special mention |
| Substandard |
| Doubtful |
| Loss |
| Unrated subject to review * |
| Unrated not subject to review * |
| Total loans |
SBA non real estate |
| $ 44,996 |
| $ 3,981 |
| $ 4,107 |
| $ - |
| $ - |
| $ - |
| $ 18,971 |
| $ 72,055 |
SBA commercial mortgage |
| 110,059 |
| 279 |
| 1,226 |
| - |
| - |
| 2,163 |
| 19,270 |
| 132,997 |
SBA construction |
| 14,205 |
| - |
| - |
| - |
| - |
| - |
| - |
| 14,205 |
Direct lease financing |
| 193,792 |
| - |
| 2,770 |
| - |
| - |
| 8,733 |
| 163,774 |
| 369,069 |
SBLOC |
| 357,906 |
| - |
| - |
| - |
| - |
| - |
| 362,373 |
| 720,279 |
Other specialty lending |
| 36,664 |
| - |
| - |
| - |
| - |
| - |
| - |
| 36,664 |
Consumer |
| 8,791 |
| 283 |
| 1,885 |
| - |
| - |
| - |
| 9,148 |
| 20,107 |
Unamortized loan fees and costs |
| - |
| - |
| - |
| - |
| - |
| - |
| 8,684 |
| 8,684 |
|
| $ 766,413 |
| $ 4,543 |
| $ 9,988 |
| $ - |
| $ - |
| $ 10,896 |
| $ 582,220 |
| $ 1,374,060 |
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December 31, 2016 |
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|
|
SBA non real estate |
| $ 51,437 |
| $ 2,723 |
| $ 3,628 |
| $ - |
| $ - |
| $ - |
| $ 16,856 |
| $ 74,644 |
SBA commercial mortgage |
| 92,485 |
| - |
| - |
| - |
| - |
| 15,164 |
| 18,510 |
| 126,159 |
SBA construction |
| 8,060 |
| - |
| - |
| - |
| - |
| - |
| 766 |
| 8,826 |
Direct lease financing |
| 122,571 |
| - |
| 3,736 |
| - |
| - |
| 30,881 |
| 189,457 |
| 346,645 |
SBLOC |
| 277,489 |
| - |
| - |
| - |
| - |
| - |
| 352,911 |
| 630,400 |
Other specialty lending |
| 11,073 |
| - |
| - |
| - |
| - |
| - |
| - |
| 11,073 |
Consumer |
| 9,837 |
| 288 |
| 2,312 |
| - |
| - |
| - |
| 4,937 |
| 17,374 |
Unamortized loan fees and costs |
| - |
| - |
| - |
| - |
| - |
| - |
| 7,790 |
| 7,790 |
|
| $ 572,952 |
| $ 3,011 |
| $ 9,676 |
| $ - |
| $ - |
| $ 46,045 |
| $ 591,227 |
| $ 1,222,911 |
* For information on targeted loan review thresholds see “Allowance for Loan Losses”.
Premises and equipment, net. Premises and equipment amounted to $21.1$18.4 million at September 30, 20172022 compared to $24.1$16.2 million at December 31, 2016.2021. The decreaseincrease reflected depreciation and reduced purchases compared to prior periods.equipment for a new data center.
Investment in Unconsolidated Entity. On December 30, 2014, the Bank entered into an agreement for, and closed on, the sale of a portion of its commercial loan portfolio. The purchaser of the loan portfolio was a newly formed entity, Walnut Street 2014-1 Issuer, LLC (“Walnut Street”). The price paid to the Bank for the loan portfolio, which had a face value of approximately $267.6 million, was approximately $209.6 million, of which approximately $193.6 million was in the form of two notes issued by Walnut Street to the Bank; a senior note in the principal amount of approximately $178.2 million bearing interest at 1.5% per year and maturing in December 2024 and a subordinate note in the principal amount of approximately $15.4 million, bearing interest at 10.0% per year and maturing in December 2024. The balance of these notes comprise the $107.7 million investment in unconsolidated entity at September 30, 2017.
The independent investor in Walnut Street, the securitization into which the Bank sold certain loans when itAssets held-for-sale from discontinued its Philadelphia commercial loan operations, has taken actions which may result in litigation. Specifically, counsel for the independent investor has requested that the Note Administrator hold monthly distribution payments in escrow until the independent investor’s alternative interpretation of the order of payments, as compared to the interpretation of the Bank and the Note Administrator, is resolved. Based on the independent investor’s request, the Note Administrator withheld the September 2017 payment to the independent investor and the Bank and indicated that it would continue to do so until this issue was resolved. Management of the Company, based on advice of its counsel, believes it is unlikely that the Bank and Note Administrator’s interpretation will be overturned. However, if such interpretation is overturned, based upon the current model used to value Walnut Street, an estimated $8 million loss may be recognized, based on currently estimated cash flows which would be redirectedoperations. Assets held-for-sale from the Bank to the independent investor.
Assets held for sale. Assets held for sale as a result of discontinued operations were reclassified to continuing operations as of March 31, 2022 and as of prior period reporting dates. Those assets had consisted primarily of commercial, commercial
mortgage and construction loans, amountedand OREO, which consisted primarily of a Florida mall which has been written down to $315.0 million at September 30, 2017 compared$15.0 million. We expect to $360.7 million atcontinue our efforts to disposeof the mall, which was appraised in December 31, 2016. The decrease resulted primarily from loan repayments.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. However, theThe majority of our deposits are generated through prepaid card and other payments related deposits.deposit accounts. One strategic focus is growing these accounts through affinity groups. At September
57
30, 2017,2022, we had total deposits of $3.57$6.91 billion compared to $4.24$5.98 billion at December 31, 2016, a decrease2021, an increase of $672.9$934.4 million, or 15.9%15.6%. The decreasechange reflected a $401.3 million increase in short term time deposits. Those time deposits mature in the planned exitfourth quarter of higher cost deposit relationships which did not have adequate income components. 2022.
The following table presents the average balance and rates paid on deposits for the periods indicated (in(dollars in thousands):
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| For the nine months ended |
| For the year ended | ||||
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| September 30, 2017 |
| December 31, 2016 | ||||
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| Average |
| Average |
| Average |
| Average |
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| balance |
| rate |
| balance |
| rate |
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Demand and interest checking * |
| $ 3,433,027 |
| 0.34% |
| $ 3,347,191 |
| 0.28% | |
Savings and money market |
| 434,768 |
| 0.53% |
| 394,434 |
| 0.39% | |
Time |
|
| - |
| 0.00% |
| 77,576 |
| 0.58% |
| Total deposits |
| $ 3,867,795 |
| 0.36% |
| $ 3,819,201 |
| 0.30% |
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For the nine months ended | For the year ended | |||||||||
September 30, 2022 | December 31, 2021 | |||||||||
Average | Average | Average | Average | |||||||
balance | rate | balance | rate | |||||||
Demand and interest checking* | $ | 5,598,028 | 0.44% | $ | 5,321,283 | 0.09% | ||||
Savings and money market | 522,525 | 1.07% | 427,708 | 0.14% | ||||||
Time | 29,508 | 2.47% | — | — | ||||||
Total deposits | $ | 6,150,061 | 0.50% | $ | 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 September 30, 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.
September 30, | December 31, | ||||
2022 | 2021 | ||||
(Dollars in thousands) | |||||
Short-term borrowings | |||||
Balance at period end | $ | — | $ | — | |
Average for the three months ended September 30, 2022 | 200,423 | na | |||
Average during the year | 71,589 | 19,958 | |||
Maximum month-end balance | — | 300,000 | |||
Weighted average rate during the period | 2.36% | 0.25% | |||
Rate at period end | — | 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 September 30, 2017,2022, we had other long-term borrowings of $42.5$38.9 million compared to $263.1$39.5 million at December 31, 2016.2021. The $42.5 million outstanding at September 30, 2017, reflected the proceeds from twoborrowings consisted of sold loans which were sold in which we retained a participating interest. Long-term borrowings of $263.1 million at December 31, 2016 reflected the proceeds of loans sold into a securitization which, at that date, was accounted for as a secured borrowing. In the first quarter of 2017, the documentation requiredborrowing because they did not qualify for true sale accounting was completed, and the sale was recorded in that quarter.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 $32.7$50.7 million at September 30, 20172022 compared to $44.1$62.2 million at December 31, 2016, representing an increase2021.
The difference reflected changes in taxes payable and the repayment of $11.4 million. Other liabilities consist primarily of investment payables and accrued expenses.a $12.5 million deposit related to the Cascade matter described in our Quarterly Report on Form 10Q for the quarter ended June 30, 2022 in Note 14 to the consolidated financial statements.
Off balanceOff-balance sheet arrangements. There were no off-balance sheet arrangements during the ninethree months ended September 30, 20172022 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Except as discussed in Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” there has been no material change in our assessment of our sensitivity to market risk since our presentation in our Annual Report on Form 10-K for the year ended December 31, 2016.2021.
Information with respect to quantitative and qualitative disclosures about market risk is included under the section entitled “Asset and Liability Management” in Part 1 Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.
Item 4. Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended, or the Exchange Act, is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Members of our operational management and internal audit meet regularly to provide an established structure to report any weaknesses or other issues with controls, or any matter that has not been reported previously, to our Chief Executive Officer and Chief Financial Officer, and, in turn to the Audit Committee of our Board of Directors. In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Under the supervision of our Chief Executive Officer and Chief Financial Officer, we have carried out an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective at the reasonable assurance level.
There has been no change in our internal control over financial reporting that occurred during the quarter ended September 30, 20172022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. reporting.
PART II – OTHER INFORMATION
For a discussion of certain regulatory proceedings involving the FDIC and FRB,Legal Proceedings, see Part I, Financial Information, “Notes to Unaudited Consolidated Financial Statements, Note 14--Legal.” which is incorporated herein by reference.
Item 2 “Management’s Discussion1A. Risk Factors
Our business, financial condition, operating results and Analysis of Financial Condition and Results of Operations-Financial Statement Restatement; Regulatory Actions”.
The Company received a subpoena from the SEC, dated March 22, 2016, relating to an investigationcash flows could be impacted by the SEC offactors in Item 1A. Risk Factors in the Company's restatement of its financial statementsAnnual Report on Form 10-K for the yearsyear ended December 31, 2010 through2021. There have been no material changes from the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 20132021.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Information on Stock Repurchases
In October 2021, the interim periods ended March 31, 2014, September 30, 2014 and September 30, 2014, which restatement was filed withBoard approved a revised common stock repurchase program for the SEC on September 28, 2015, and2022 fiscal year (the “2022 Common Stock Repurchase Plan”).Under the facts and circumstances underlying2022 Common Stock Repurchase Plan, the restatement. The Company is cooperating fullyauthorized to repurchase up to $15.0 million in each quarter of 2022, for a maximum amount of $60.0 million, depending on the share price, securities laws and stock exchange rules which regulate such repurchases. Under the 2022 Common Stock Repurchase Plan, the Company intends to repurchase shares through open market purchases, privately-negotiated transactions, block purchases or otherwise in accordance with the SEC's investigation. The costs to respond to the subpoena and cooperate with the SEC's investigation have been material, and we expect such costs to continue to be material at least through the completionapplicable federal securities laws, including Rule 10b-18 of the SEC’s investigation.
On September 30, 2016, the Company received written notice from the Internal Revenue Service that it will be conducting an auditSecurities Exchange Act of the Company's tax returns for the tax years 2012, 2013 and 2014. The audit is in process.
The Company received a letter, dated August 1, 2016, demanding inspection of its books and records pursuant to Section 220 of the Delaware General Corporation Law, or DCGL, from legal counsel representing a shareholder (the "Demand Letter"1934 (“Exchange Act”). The Company, through outside legal counsel, responded to the Demand Letter by permitting the shareholder to inspect certain of the Company’s books and records and by objecting to other requests. On January 30, 2017, the shareholder filed a complaint in the Court of Chancery of the State of Delaware seeking an order from the court, pursuant to Section 220 of the DGCL, compellingBoard also authorized the Company to permit the shareholder to inspect additional books and recordsenter into written trading plans under Rule 10b5-1 of the Company. The Company believes that its original responseExchange Act. With respect to the Demand Letter was appropriatefurther repurchases in all respects and continues to defend against the complaint. On July 27, 2017, the Court of Chancery ruled in favor ofsubsequent quarters under this program, the Company and granted an Ordercannot predict if, or when, it will repurchase any shares of Final Judgment Denying Plaintiff’s Demand To Inspect The Books And Records of Defendant. The court’s Order was subject to an appeal right which has now expired; no appeal was filed. Both the Demand Lettercommon stock and the complaint threaten the commencementtiming and amount of a shareholder’s derivative suit against certain officers and directorsany shares repurchased will be determined by management based on its evaluation of the Company seeking damagesmarket conditions and other remedies on behalffactors.
The following table sets forth information regarding the Company’s purchases of the Company. We have been advised by our counsel in the matter that reasonably possible losses cannot be estimated, but we and our counsel continue to believe the claim is without merit.
On October 17, 2017, the Federal Deposit Insurance Corporation (the “FDIC”) informed The Bancorp Bank (the “Bank”), a wholly owned subsidiary of The Bancorp, Inc. (the “Company”), that it intends to pursue an Order For Restitution (“Restitution Order”) and Order to Pay Civil Money Penalty (“CMP Order”) in an amount up to $2,576,000. The FDIC’s action principally emanates from one of the Bank’s third-party payment processors (“Third Party Processor”) suffering an internal system programming glitch. This inadvertently resulted in consumers that engaged in signature-based point of sale transactionsits common stock during the period from December 2010 to November 2014 being charged a greater fee than what was disclosed by the Bank. Impacted consumers are being reimbursed by the Third Party Processor at its own expense. The Restitution Order would require the Bank to make such reimbursements if not otherwise made by the Third Party Processor, however, the Bank is indemnified by the Third Party Processor for such reimbursements. Although the Bank is still evaluating its position with regard to the Restitution Order and the CMP Order, the Company accrued $2,500,000 of related expense in its financial statements for the quarter ended September 30, 20172022:
Period | Total number of shares purchased(1) | Average price paid per share | Total number of shares purchased as part of publicly announced plans or programs | Maximum number (or approximate dollar value) of shares that may yet be purchased under the plans or programs(1) | ||||||
(Dollars in thousands, except per share data) | ||||||||||
July 1, 2022 - July 31, 2022 | 330,433 | $ | 20.89 | 330,433 | $ | 23,098 | ||||
August 1, 2022 - August 31, 2022 | 270,681 | 24.45 | 270,681 | 16,479 | ||||||
September 1, 2022 - September 30, 2022 | 62,820 | 23.54 | 62,820 | 15,000 | ||||||
Total | 663,934 | 22.59 | 663,934 | 15,000 |
(1)On October 20, 2021, the Company’s Board of Directors approved a stock repurchase plan, under which the Company was authorized to purchase shares for up to $15.0 million in connection witheach quarter through December 31, 2022, at which date the CMP Order. Any amounts owed from the CMP Order would not be subject to any indemnification or recovery from any third party. current plan terminates.
In addition, we are a party to various routine legal proceedings arising out of the ordinary course of our business. Management believes that none of these actions, individually or in the aggregate, will have a material adverse effect on our financial condition or operations.Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
The Exhibits furnished as part of this Quarterly Report on Form 10-Q are identified in the Exhibit Index immediately following the signature page of this Report. Such Exhibit Index is incorporated herein by reference.
Exhibit No. | Description | |
| ||
3.1.1 | ||
3.1.2 | Amendment to Certificate of Incorporation filed July 30, 2009(2) | |
3.1.3 | Amendment to Certificate of Incorporation filed May 18, 2016(2) | |
3.2 | ||
31.1 | ||
31.2 | ||
32.1 | ||
32.2 | ||
101.INS | Inline XBRL Instance Document ** | |
101.SCH | Inline XBRL Taxonomy Extension Schema Document * | |
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document * | |
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document * | |
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document * | |
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document * | |
104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)* | |
|
| |
* | Filed herewith | |
** | The Instance Document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
SIGNATURES(1)Filed previously as an exhibit to our Registration Statement on Form S-4, registration number 333-117385, and by this reference incorporated herein.
Pursuant(2)Filed previously as an exhibit to our quarterly report on Form 10-Q filed November 9, 2016, and by this reference incorporated herein (File No. 000-51018).
(3)Filed previously as an exhibit to our annual report on Form 10-K filed March 16, 2017, and by this reference incorporated herein (File No. 000-51018).
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
THE BANCORP, | ||
(Registrant) | ||
November 9, | / | |
Date | Damian Kozlowski | |
| ||
November 9, | / | |
Date | Paul Frenkiel
| |
Chief Financial Officer and Secretary | ||
61