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TBBK Bancorp Inc. (The)

Filed: 5 Nov 21, 3:35pm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: September 30, 2021

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the transition period from: _____ to _____

Commission file number: 000-51018

THE BANCORP, INC.

(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 No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes 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.

Large accelerated filer o

Accelerated filer x

Non-accelerated filer o

Smaller reporting company o

Emerging growth company o

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

As of October 29, 2021, there were 56,980,415 outstanding shares of common stock, $1.00 par value.

2


THE BANCORP, INC

Form 10-Q Index


PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

THE BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

September 30,

December 31,

2021

2020

(unaudited)

(in thousands, except share data)

ASSETS

Cash and cash equivalents

Cash and due from banks

$

6,687 

$

5,984 

Interest earning deposits at Federal Reserve Bank

310,642 

339,531 

Total cash and cash equivalents

317,329 

345,515 

Investment securities, available-for-sale, at fair value

1,054,223 

1,206,164 

Commercial loans, at fair value

1,550,025 

1,810,812 

Loans, net of deferred loan fees and costs

3,136,662 

2,652,323 

Allowance for credit losses

(16,159)

(16,082)

Loans, net

3,120,503 

2,636,241 

Federal Home Loan Bank and Atlantic Central Bankers Bank stock

1,663 

1,368 

Premises and equipment, net

16,602 

17,608 

Accrued interest receivable

17,180 

20,458 

Intangible assets, net

2,547 

2,845 

Other real estate owned

2,145 

Deferred tax asset, net

12,237 

9,757 

Investment in unconsolidated entity, at fair value

31,294 

Assets held-for-sale from discontinued operations

87,904 

113,650 

Other assets

86,105 

81,129 

Total assets

$

6,268,463 

$

6,276,841 

LIABILITIES

Deposits

Demand and interest checking

$

4,734,352 

$

5,205,010 

Savings and money market

378,160 

257,050 

Total deposits

5,112,512 

5,462,060 

Securities sold under agreements to repurchase

42 

42 

Short-term borrowings

300,000 

Senior debt

98,590 

98,314 

Subordinated debentures

13,401 

13,401 

Other long-term borrowings

39,715 

40,277 

Other liabilities

66,226 

81,583 

Total liabilities

5,630,486 

5,695,677 

SHAREHOLDERS' EQUITY

Common stock - authorized, 75,000,000 shares of $1.00 par value; 57,330,846 and 57,550,629

shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively

57,331 

57,551 

Additional paid-in capital

357,528 

377,452 

Retained earnings

212,114 

128,453 

Accumulated other comprehensive income

11,004 

17,708 

Total shareholders' equity

637,977 

581,164 

Total liabilities and shareholders' equity

$

6,268,463 

$

6,276,841 

The accompanying notes are an integral part of these consolidated statements.


4


THE BANCORP, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

For the three months ended September 30,

For the nine months ended September 30,

2021

2020

2021

2020

(in thousands, except per share data)

Interest income

Loans, including fees

$

46,426 

$

44,433 

$

143,784 

$

125,326 

Investment securities:

Taxable interest

6,882 

7,911 

22,891 

28,594 

Tax-exempt interest

25 

28 

78 

87 

Interest earning deposits

167 

106 

650 

1,836 

53,500 

52,478 

167,403 

155,843 

Interest expense

Deposits

1,209 

1,730 

4,494 

11,468 

Short-term borrowings

15 

181 

Senior debt

1,279 

633 

3,838 

633 

Subordinated debentures

112 

118 

337 

408 

2,607 

2,482 

8,684 

12,690 

Net interest income

50,893 

49,996 

158,719 

143,153 

Provision for credit losses

1,613 

1,297 

1,484 

5,798 

Net interest income after provision for credit losses

49,280 

48,699 

157,235 

137,355 

Non-interest income

ACH, card and other payment processing fees

1,905 

1,760 

5,605 

5,313 

Prepaid, debit card and related fees

18,223 

19,434 

56,878 

56,647 

Net realized and unrealized gains (losses) on commercial loans,

at fair value

4,306 

684 

8,881 

(5,412)

Change in value of investment in unconsolidated entity

(45)

Leasing related income

1,968 

1,519 

4,700 

2,795 

Other

186 

955 

459 

2,019 

Total non-interest income

26,588 

24,352 

76,523 

61,317 

Non-interest expense

Salaries and employee benefits

25,094 

26,417 

77,839 

74,650 

Depreciation and amortization

729 

785 

2,144 

2,457 

Rent and related occupancy cost

1,256 

1,376 

3,777 

4,191 

Data processing expense

1,209 

1,192 

3,481 

3,538 

Printing and supplies

81 

114 

277 

440 

Audit expense

356 

397 

1,110 

1,205 

Legal expense

1,251 

994 

5,349 

4,136 

Amortization of intangible assets

99 

147 

298 

441 

FDIC insurance

266 

2,180 

5,235 

7,687 

Software

4,045 

3,595 

11,435 

10,458 

Insurance

1,110 

741 

2,881 

2,059 

Telecom and IT network communications

413 

392 

1,227 

1,186 

Consulting

448 

410 

952 

1,011 

Other

3,027 

3,286 

9,145 

9,605 

Total non-interest expense

39,384 

42,026 

125,150 

123,064 

Income from continuing operations before income taxes

36,484 

31,025 

108,608 

75,608 

Income tax expense

8,289 

7,894 

25,195 

19,033 

Net income from continuing operations

$

28,195 

$

23,131 

$

83,413 

$

56,575 

Discontinued operations

Income (loss) from discontinued operations before income taxes

87 

(1,671)

324 

(2,720)

Income tax expense (benefit)

21 

(1,794)

76 

(2,058)

Income (loss) from discontinued operations, net of tax

66 

123 

248 

(662)

Net income

$

28,261 

$

23,254 

$

83,661 

$

55,913 

Net income per share from continuing operations - basic

$

0.49 

$

0.40 

$

1.45 

$

0.98 

Net income (loss) per share from discontinued operations - basic

$

$

$

0.01 

$

(0.01)

Net income per share - basic

$

0.49 

$

0.40 

$

1.46 

$

0.97 

Net income per share from continuing operations - diluted

$

0.48 

$

0.40 

$

1.41 

$

0.97 

Net income (loss) per share from discontinued operations - diluted

$

$

$

0.01 

$

(0.01)

Net income per share - diluted

$

0.48 

$

0.40 

$

1.42 

$

0.96 

The accompanying notes are an integral part of these consolidated statements.


5


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,

2021

2020

2021

2020

(in thousands)

Net income

$

28,261 

$

23,254 

$

83,661 

$

55,913 

Other comprehensive (loss) income, net of reclassifications into net income:

Other comprehensive (loss) income

Securities available-for-sale:

Change in net unrealized (losses) gains during the period

(4,867)

(114)

(9,192)

20,068 

Reclassification adjustments for losses included in income

Amortization of losses previously held as available-for-sale

Other comprehensive (loss) income

(4,867)

(114)

(9,185)

20,073 

Income tax (benefit) expense related to items of other comprehensive income

Securities available-for-sale:

Change in net unrealized (losses) gains during the period

(1,314)

(31)

(2,483)

5,418 

Reclassification adjustments for losses included in income

Amortization of losses previously held as available-for-sale

Income tax (benefit) expense related to items of other comprehensive income

(1,314)

(31)

(2,481)

5,419 

Other comprehensive (loss) income, net of tax and reclassifications into net income

(3,553)

(83)

(6,704)

14,654 

Comprehensive income

$

24,708 

$

23,171 

$

76,957 

$

70,567 

The accompanying notes are an integral part of these consolidated statements.

6


THE BANCORP, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY

For the 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 option exercises,

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 

The accompanying notes are an integral part of these consolidated statements.


7


THE BANCORP, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY

For the nine months ended September 30, 2020

(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, 2020

56,840,521 

$

56,841 

$

370,867 

$

50,742 

$

6,047 

$

484,497 

Adoption of current expected credit loss

accounting, net of taxes

(2,373)

(2,373)

Net income

12,591 

12,591 

Common stock issued from option exercises,

net of tax benefits

74,000 

74 

546 

620 

Common stock issued from restricted units,

net of tax benefits

411,035 

411 

(411)

Stock-based compensation

1,216 

1,216 

Other comprehensive income net of

reclassification adjustments and tax

1,553 

1,553 

Balance at March 31, 2020

57,325,556 

$

57,326 

$

372,218 

$

60,960 

$

7,600 

$

498,104 

Net income

$

$

$

20,068 

$

$

20,068 

Common stock issued from option exercises,

net of tax benefits

129,752 

129 

(129)

Stock-based compensation

1,723 

1,723 

Other comprehensive income net of

reclassification adjustments and tax

13,184 

13,184 

Balance at June 30, 2020

57,455,308 

$

57,455 

$

373,812 

$

81,028 

$

20,784 

$

533,079 

Net income

$

$

$

23,254 

$

$

23,254 

Common stock issued from restricted units,

net of tax benefits

35,566 

36 

(36)

Stock-based compensation

2,209 

2,209 

Other comprehensive loss net of

reclassification adjustments and tax

(83)

(83)

Balance at September 30, 2020

57,490,874 

$

57,491 

$

375,985 

$

104,282 

$

20,701 

$

558,459 

The accompanying notes are an integral part of these consolidated statements.


8


THE BANCORP, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the nine months

ended September 30,

2021

2020

(in thousands)

Operating activities

Net income from continuing operations

$

83,413 

$

56,575 

Net income (loss) from discontinued operations

248 

(662)

Adjustments to reconcile net income to net cash provided by (used in) operating activities

Depreciation and amortization

2,442 

2,898 

Provision for credit losses

1,484 

5,798 

Net amortization of investment securities discounts/premiums

3,216 

13,929 

Stock-based compensation expense

6,523 

5,149 

(Gain) loss on commercial loans, at fair value

(7,267)

126 

(Gain) loss from discontinued operations

(1,492)

668 

Fair value adjustment on investment in unconsolidated entity

45 

Change in fair value of commercial loans, at fair value

1,330 

3,054 

Change in fair value of derivatives

(1,328)

2,233 

Loss on sales of investment securities

Decrease (increase) in accrued interest receivable

3,278 

(5,233)

(Increase) decrease in other assets

(6,216)

8,050 

Change in fair value of discontinued assets held-for-sale

498 

Decrease in other liabilities

(14,744)

(2,770)

Net cash provided by operating activities

71,392 

89,860 

Investing activities

Purchase of investment securities available-for-sale

(246,958)

(27,658)

Proceeds from redemptions and prepayments of securities available-for-sale

386,369 

173,892 

Net cash paid due to acquisitions, net of cash acquired

(3,920)

Net decrease in repossessed assets

927 

10,529 

Net increase in loans

(485,647)

(672,666)

Net decrease in discontinued loans held-for-sale

21,882 

13,710 

Commercial loans, at fair value originated or drawn during the period

(62,151)

(683,696)

Payments on commercial loans, at fair value

351,239 

10,586 

Purchases of premises and equipment

(1,237)

(999)

Change in receivable from investment in unconsolidated entity

18 

45 

Return of investment in unconsolidated entity

7,337 

7,326 

Decrease in discontinued assets held-for-sale

4,858 

4,026 

Net cash used in investing activities

(23,363)

(1,168,825)

Financing activities

Net (decrease) increase in deposits

(349,548)

336,732 

Net decrease in securities sold under agreements to repurchase

(40)

Proceeds of short-term borrowings

300,000 

Proceeds of senior debt offering

98,160 

Proceeds from the issuance of common stock

3,333 

619 

Repurchases of common stock

(30,000)

Net cash (used in) provided by financing activities

(76,215)

435,471 

Net decrease in cash and cash equivalents

(28,186)

(643,494)

Cash and cash equivalents, beginning of period

345,515 

944,472 

Cash and cash equivalents, end of period

$

317,329 

$

300,978 

Supplemental disclosure:

Interest paid

$

10,343 

$

11,098 

Taxes paid

$

31,057 

$

16,694 

Non-cash investing and financing activities

Loans settled in acquisition

$

$

3,961 

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 

$

3,780 

Leased vehicles transferred to repossessed assets

$

757 

$

15,318 

The accompanying notes are an integral part of these consolidated statements.


9


THE BANCORP, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Structure of Company

The Bancorp, Inc., or (“the Company”), is a Delaware corporation and a registered financial holding company. Its primary subsidiary is The Bancorp Bank, or (“the Bank”), which is wholly owned by the Company. The Bank is a Delaware chartered commercial bank located in Wilmington, Delaware and is a Federal Deposit Insurance Corporation (“FDIC”) insured institution. In its continuing operations, the Bank has 4 primary lines of national specialty lending: securities-backed lines of credit (“SBLOC”) and cash value of insurance-backed lines of credit (“IBLOC”), leasing (direct lease financing), Small Business Administration (“SBA”) loans and non-SBA commercial real estate (“CRE”) loans (the “CRE loans”). Prior to 2020, The Company generated non-SBA CRE loans for sale into capital markets primarily through loan securitizations which issued commercial mortgage backed securities (“CMBS”). In 2020, the Company decided to retain the CRE loans on its balance sheet and no future securitizations are currently planned. In the third quarter of 2021, the Company resumed originating non-SBA CRE loans, after suspending the origination of such loans for most of 2020 and the first half of 2021. Additionally, in 2020, the Company began originating advisor financing loans to investment advisors for debt refinance, acquisition of other advisory firms or internal succession. Through the Bank, the Company also provides banking services nationally, which include prepaid and debit cards, private label banking, deposit accounts to investment advisors’ customers, card payment and other payment processing.

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, 2021 and for the three and nine month periods ended September 30, 2021 and 2020, 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”) have been condensed or omitted in this Form 10-Q pursuant to the rules and regulations of the Securities and Exchange 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, 2020 (the “2020 Form 10-K”). The results of operations for the nine month period ended September 30, 2021 may not necessarily be indicative of the results of operations for the full year ending December 31, 2021. Reclassifications have been made to the 2020 consolidated financial statements to conform to the 2021 presentation. Specifically, the minimal service fees on deposit accounts which were shown separately on the income statement are now shown in other income. 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 2020 Form 10-K. Those significant accounting policies remain unchanged at September 30, 2021, except those relating to the COVID-19 pandemic for which management has updated their assessment of related risks and uncertainties. Those risks have been reduced as a result of increased vaccination rates, the significant reopening of the economy and the elimination of the vast majority of the Company’s COVID-related loan payment deferrals. Additionally, previous balance sheets included investment in unconsolidated entity, which reflected the Company’s balance of the Walnut Street investment. Walnut Street was comprised of Bancorp loans sold to that entity, which was partially financed by an independent investor. In the third quarter of 2021, The Bancorp and that investor dissolved the entity, as the remaining balance did not warrant ongoing administrative and accounting expenses. As a result of the dissolution, the investment in unconsolidated entity, which had a June 30, 2021 balance of $25.0 million, was reclassified as follows. Approximately $22.9 million of loans were reclassified to commercial loans, at fair value and $2.1 million was reclassified to other real estate owned, as those assets continue to be reported at fair value.

Our non-SBA commercial real estate loans, at fair value, are primarily collateralized by multi-family properties (apartment buildings), and to a lesser extent, by hotel and retail properties. These loans were originally generated for sale through securitizations. In 2020, we decided to retain these loans on our balance sheet as interest earning assets and have again begun originating such loans, primarily to replace the impact of loan payoffs. 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 which were accounted for at fair value, continue to be accounted for at fair value, and are included in the balance sheet in “commercial loans, at fair value.”

10


 

Note 3. Stock-based Compensation

The Company recognizes compensation expense for stock options in accordance with Financial Accounting Standards Board (“FASB”) 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, 2021, the Company had 4 active stock-based compensation plans.

The Company granted 100,000 stock options with a vesting period of four years during the nine month period ended September 30, 2021. The weighted average grant-date fair value was $8.51. The Company granted 300,000 stock options with a vesting period of four years during the nine month period ended September 30, 2020. The weighted average grant-date fair value was $3.02. There were 657,500 common stock options exercised in the nine month period ended September 30, 2021. There were 74,000 common stock options exercised in the nine month period ended September 30, 2020.

A summary of the Company’s stock options is presented below.

Weighted average

remaining

Weighted average

contractual

Aggregate

Options

exercise price

term (years)

intrinsic value

Outstanding at January 1, 2021

1,161,604 

$

7.62 

4.75 

$

7,001,843 

Granted

100,000 

18.81 

9.37 

664,000 

Exercised

(657,500)

7.51 

10,465,250 

Expired

Forfeited

Outstanding at September 30, 2021

604,104 

$

9.60 

6.81 

$

9,574,056 

Exercisable at September 30, 2021

246,552 

$

8.50 

4.03 

$

4,180,078 

The Company granted 313,697 restricted stock units (“RSUs”) in the first nine months of 2021 of which 261,073 have a vesting period of three years and 52,624 have a vesting period of one year. At issuance, the 313,697 RSUs granted in the first nine months of 2021 had a fair value of $18.81 per unit. In the first nine months of 2020, the Company granted 1,531,702 RSUs of which 1,387,602 have a vesting period of three years and 144,100 have a vesting period of one year. At issuance, the 1,531,702 RSUs granted in the first nine months of 2020 had a fair value of $6.87 per unit.

A summary of the status of the Company’s RSUs is presented below.

Weighted average

Average remaining

grant date

contractual

RSUs

fair value

term (years)

Outstanding at January 1, 2021

1,787,943 

$

7.49 

1.50 

Granted

313,697 

18.81 

2.03 

Vested

(672,533)

7.72 

Forfeited

(50,487)

8.73 

Outstanding at September 30, 2021

1,378,620 

$

9.91 

1.12 

As of September 30, 2021, there was a total of $9.3 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 1.5 years. Related compensation expense for the nine months ended September 30, 2021 and 2020 was $6.5 million and $5.1 million, respectively. The total issuance date fair value of RSUs vested and options exercised during the nine months ended September 30, 2021 and 2020 was $7.6 million and $5.3 million, respectively. The total intrinsic value of the options exercised and RSUs vested in those respective periods was $25.3 million and $6.5 million, respectively.

11


For the periods ended September 30, 2021 and 2020, 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,

2021

2020

Risk-free interest rate

1.19%

0.68%

Expected dividend yield

Expected volatility

45.61%

45.20%

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, 2021 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.

Note 4. Earnings Per Share

The Company calculates earnings per share under 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 or other contracts to issue common stock were exercised and converted into common stock.

The following tables show the Company’s earnings per share for the periods presented:

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 

1

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 

$

1

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 

Note: The total of diluted earnings per share from continuing and discontinued operations does not equal diluted earnings per share due to rounding.

12


Stock options for 504,104 shares, exercisable at prices between $6.87 and $18.81 per share, were outstanding at September 30, 2021, and included in the dilutive earnings per share computation. Stock options for 100,000 shares were anti-dilutive and not included in the earnings per share calculation.

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 504,104 shares, exercisable at prices between $6.87 and $18.81 per share, were outstanding at September 30, 2021, and included in the dilutive earnings per share computation. Stock options for 100,000 shares were anti-dilutive and not included in the earnings per share calculation.

For the three months ended

September 30, 2020

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

$

23,131 

57,588,168 

$

0.40 

Effect of dilutive securities

Common stock options and restricted stock units

883,024 

Diluted earnings per share

Net earnings available to common shareholders

$

23,131 

58,471,192 

$

0.40 

For the three months ended

September 30, 2020

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

$

123 

57,588,168 

$

Effect of dilutive securities

Common stock options and restricted stock units

883,024 

Diluted earnings per share

Net earnings available to common shareholders

$

123 

58,471,192 

$

13


For the three months ended

September 30, 2020

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

$

23,254 

57,588,168 

$

0.40 

Effect of dilutive securities

Common stock options and restricted stock units

883,024 

Diluted earnings per share

Net earnings available to common shareholders

$

23,254 

58,471,192 

$

0.40 

Stock options for 1,056,604 shares, exercisable at prices between $6.75 and $8.57 per share, were outstanding at September 30, 2020, and included in the dilutive earnings per share computation. Stock options for 326,000 were anti-dilutive and not included in the earnings per share calculation.

For the nine months ended

September 30, 2020

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

$

56,575 

57,433,477 

$

0.98 

Effect of dilutive securities

Common stock options and restricted stock units

618,356 

(0.01)

Diluted earnings per share

Net earnings available to common shareholders

$

56,575 

58,051,833 

$

0.97 

For the nine months ended

September 30, 2020

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

$

(662)

57,433,477 

$

(0.01)

Effect of dilutive securities

Common stock options and restricted stock units

618,356 

Diluted loss per share

Net loss

$

(662)

58,051,833 

$

(0.01)

For the nine months ended

September 30, 2020

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

$

55,913 

57,433,477 

$

0.97 

Effect of dilutive securities

Common stock options and restricted stock units

618,356 

(0.01)

Diluted earnings per share

Net earnings available to common shareholders

$

55,913 

58,051,833 

$

0.96 

Stock options for 1,056,604 shares, exercisable at prices between $6.75 and $8.57 per share, were outstanding at September 30, 2020, and included in the dilutive earnings per share computation. Stock options for 326,000 were anti-dilutive and not included in the earnings per share calculation.

14


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 at September 30, 2021 and December 31, 2020 are summarized as follows (in thousands):

Available-for-sale

September 30, 2021

Gross

Gross

Amortized

unrealized

unrealized

Fair

cost

gains

losses

value

U.S. Government agency securities

$

37,489 

$

1,680 

$

(49)

$

39,120 

Asset-backed securities *

368,502 

481 

(70)

368,913 

Tax-exempt obligations of states and political subdivisions

3,559 

181 

3,740 

Taxable obligations of states and political subdivisions

46,013 

3,044 

49,057 

Residential mortgage-backed securities

193,037 

6,442 

(209)

199,270 

Collateralized mortgage obligation securities

74,628 

1,715 

(1)

76,342 

Commercial mortgage-backed securities

305,922 

6,572 

(1,218)

311,276 

Corporate debt securities

10,000 

(3,495)

6,505 

$

1,039,150 

$

20,115 

$

(5,042)

$

1,054,223 

September 30, 2021

Gross

Gross

Amortized

unrealized

unrealized

Fair

* Asset-backed securities as shown above

cost

gains

losses

value

Federally insured student loan securities

$

24,709 

$

85 

$

(14)

$

24,780 

Collateralized loan obligation securities

343,793 

396 

(56)

344,133 

$

368,502 

$

481 

$

(70)

$

368,913 

Available-for-sale

December 31, 2020

Gross

Gross

Amortized

unrealized

unrealized

Fair

cost

gains

losses

value

U.S. Government agency securities

$

44,960 

$

2,357 

$

(120)

$

47,197 

Asset-backed securities *

238,678 

143 

(460)

238,361 

Tax-exempt obligations of states and political subdivisions

4,042 

248 

4,290 

Taxable obligations of states and political subdivisions

47,884 

4,180 

52,064 

Residential mortgage-backed securities

256,914 

9,765 

(96)

266,583 

Collateralized mortgage obligation securities

145,260 

3,281 

(11)

148,530 

Commercial mortgage-backed securities

359,125 

12,717 

(4,562)

367,280 

Corporate debt securities

85,043 

63 

(3,247)

81,859 

$

1,181,906 

$

32,754 

$

(8,496)

$

1,206,164 

December 31, 2020

Gross

Gross

Amortized

unrealized

unrealized

Fair

* Asset-backed securities as shown above

cost

gains

losses

value

Federally insured student loan securities

$

28,013 

$

38 

$

(93)

$

27,958 

Collateralized loan obligation securities

210,665 

105 

(367)

210,403 

$

238,678 

$

143 

$

(460)

$

238,361 

Investments in Federal Home Loan Bank (“FHLB”) and Atlantic Central Bankers Bank stock are recorded at cost and amounted to $1.7 million and $1.4 million at September 30, 2021 and December 31, 2020, respectively. 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, 2021, 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

Amortized

Fair

cost

value

Due before one year

$

1,215 

$

1,214 

Due after one year through five years

156,589 

164,150 

Due after five years through ten years

238,612 

241,810 

Due after ten years

642,734 

647,049 

$

1,039,150 

$

1,054,223 

15


At September 30, 2021 and December 31, 2020, 0 investment securities were encumbered through pledging or otherwise.

Fair values of available-for-sale securities are based on the fair market values supplied by a third-party market data provider, or where such third-party market data is not available, fair values are based on discounted cash flows. The 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, 2021 (dollars in thousands):

Available-for-sale

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

U.S. Government agency securities

$

$

$

2,817 

$

(49)

$

2,817 

$

(49)

Asset-backed securities

27 

148,324 

(68)

1,233 

(2)

149,557 

(70)

Residential mortgage-backed securities

14 

13,688 

(118)

3,743 

(91)

17,431 

(209)

Collateralized mortgage obligation securities

424 

(1)

424 

(1)

Commercial mortgage-backed securities

11 

44,203 

(658)

66,139 

(560)

110,342 

(1,218)

Corporate debt securities

6,505 

(3,495)

6,505 

(3,495)

Total unrealized loss position

investment securities

56 

$

206,215 

$

(844)

$

80,861 

$

(4,198)

$

287,076 

$

(5,042)

The table below indicates the length of time individual securities had been in a continuous unrealized loss position at December 31, 2020 (dollars in thousands):

Available-for-sale

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

U.S. Government agency securities

$

594 

$

(2)

$

5,322 

$

(118)

$

5,916 

$

(120)

Asset-backed securities

24 

123,447 

(337)

29,563 

(123)

153,010 

(460)

Residential mortgage-backed securities

12 

6,221 

(35)

6,650 

(61)

12,871 

(96)

Collateralized mortgage obligation securities

2,505 

(10)

3,489 

(1)

5,994 

(11)

Commercial mortgage-backed securities

69,486 

(4,562)

69,486 

(4,562)

Corporate debt securities

31,796 

(3,247)

31,796 

(3,247)

Total unrealized loss position

investment securities

53 

$

202,253 

$

(4,946)

$

76,820 

$

(3,550)

$

279,073 

$

(8,496)

The Company owns 1 single issuer trust preferred security issued by an insurance company. The security is not rated by any bond rating service. At September 30, 2021, it had a book value of $10.0 million and a fair value of $6.5 million. This security is presented in the corporate debt securities classification in the tables above.

The Company has evaluated the securities in the above tables as of September 30, 2021 and has concluded that 0ne of these securities required an allowance for credit loss. The Company evaluates whether an allowance for credit loss is required by considering primarily the following factors: (a) the extent to which the fair value is 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 interest and principal payments it is contractually obligated to make, (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 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. The Company’s unrealized loss for other debt securities, which include one single issuer trust preferred security, is primarily related to general market conditions, including a lack of liquidity in the market. The severity of the impact 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 an allowance was not required to recognize credit losses.

16


Note 6. Loans

The Company has several lending lines of business including small business comprised primarily of SBA loans, direct lease financing, SBLOC, IBLOC, real estate bridge lending, investment advisor financing and other specialty and consumer lending. Prior to 2020, the Company also originated real estate bridge loans for sale into commercial mortgage-backed securitizations or to secondary government guaranteed loan markets. At origination, the Company 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, 2021, the fair value of these loans was $1.55 billion, and their amortized cost was $1.55 billion. Included in “Net realized and unrealized gains (losses) on commercial loans, at fair value” in the consolidated statements of operations are changes in the estimate in fair value of such loans. For the nine months ended September 30, 2021, net unrealized gains recognized for such changes in fair value were $285,000, which reflected $15,000 of loss attributable to credit weaknesses. For the nine months ended September 30, 2020, unrealized losses recognized for such changes in fair value were $3.1 million of which $490,000 was attributable to credit weaknesses. The Bank also pledged the majority of its loans held for investment at amortized cost and commercial loans at fair value to the Federal Home Loan Bank and to the Federal Reserve Bank for lines of credit. 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, 2021, $1.80 billion of loans were pledged to the Federal Reserve and $891.6 million of loans were pledged to the Federal Home Loan Bank. At September 30, 2021, there were $300 million of advances outstanding against the Federal Reserve line and 0 amount outstanding against the Federal Home Loan Bank line.

Prior to 2020, the Company periodically sponsored the structuring of commercial mortgage loan securitizations. The Company has sponsored six of these securitizations since 2017 which are described in the 2020 Form 10-K. The loans previously sold to the commercial mortgage-backed securitizations, and now originated and held on the balance sheet at fair value, are transitional commercial mortgage loans which are made to improve and rehabilitate existing properties which are already cash flowing. Servicing rights are not retained. Each of the securitizations is considered a variable interest entity of which the Company is not the primary beneficiary and therefore are not consolidated in its financial statements. Further, true sale accounting has been applicable to each of the securitizations, as supported by a review performed by an independent third-party consultant. In each of the securitizations, the Company has obtained a tranche of certificates which are accounted for as available-for-sale debt securities. The securities are recorded at fair value at acquisition, which is determined by an independent third-party based on the discounted cash flow method using unobservable (level 3) inputs. The loans securitized are structured with some prepayment protection and with extension options which are common for rehabilitation loans. It was expected such prepayment protection and extension options would generally offset the impact of prepayments which would therefore not be significant. Accordingly, prepayments on CRE securities were not originally assumed in the first four securitizations. However, as a result of higher than expected prepayments on CRE2 annual prepayments of 15% on CRE5 were assumed, beginning after the first-year anniversary of the CRE5 securitization. For CRE6, there was no premium or discount associated with the tranche purchased and prepayments were accordingly not estimated. During the third quarter of 2021, the remaining principal balances of certificates owned by the Company from the CRE1 and CRE4 securitizations which respectively amounted to $7.1 million and $25.6 million at June 30, 2021, were fully repaid.

Because of credit enhancements for each security, cash flows were not reduced by expected losses. For each of the securitizations, the Company has recorded a gain which is comprised of (i) the excess of consideration received by the Company in the transaction over the carrying value of the loans at securitization, less related transactions costs incurred; and (ii) the recognition of previously deferred origination and exit fees.

In 2020, the Company decided to not pursue securitizations and no future securitizations are currently planned. The loans currently retained total approximately $1.3 billion and are mostly comprised of multi-family loans, specifically apartment buildings. The $1.3 billion comprises the majority of the commercial loans, at fair value on the September 30, 2021 balance sheet, with the balance of that category comprised of the government guaranteed portion of SBA loans.

The Company analyzes credit risk prior to making loans on an individual loan basis. The Company considers relevant aspects of the 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.

17


Major classifications of loans, excluding commercial loans at fair value, are as follows (in thousands):

September 30,

December 31,

2021

2020

SBL non-real estate

$

171,845 

$

255,318 

SBL commercial mortgage

367,272 

300,817 

SBL construction

23,117 

20,273 

Small business loans *

562,234 

576,408 

Direct lease financing

514,068 

462,182 

SBLOC / IBLOC **

1,834,523 

1,550,086 

Advisor financing ***

81,143 

48,282 

Real estate bridge lending

128,699 

Other loans ****

4,917 

6,426 

3,125,584 

2,643,384 

Unamortized loan fees and costs

11,078 

8,939 

Total loans, net of unamortized loan fees and costs

$

3,136,662 

$

2,652,323 

September 30,

December 31,

2021

2020

SBL loans, net of deferred costs of $4,238 and $1,536

for September 30, 2021 and December 31, 2020, respectively

$

566,472 

$

577,944 

SBL loans included in commercial loans, at fair value

214,301 

243,562 

Total small business loans

$

780,773 

$

821,506 

* The preceding table shows small business loans and small business loans held at fair value. The small business loans held at fair value are comprised of the government guaranteed portion of SBA 7a loans at the dates indicated. A reduction in SBL non-real estate loans from $229.0 million at June 30, 2021 to $171.8 million at September 30, 2021 resulted from U.S. government repayments of $58.2 million of Paycheck Protection Program (“PPP”) loans authorized by The Consolidated Appropriations Act, 2021. PPP loans totaled $71.3 million at September 30, 2021 and $165.7 million at December 31, 2020, respectively.

** 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, 2021 and December 31, 2020, respectively, IBLOC loans amounted to $686.8 million and $437.2 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.

**** Included in the table above under Other loans are demand deposit overdrafts reclassified as loan balances totaling $272,000 and $663,000 at September 30, 2021 and December 31, 2020, respectively. Estimated overdraft charge-offs and recoveries are reflected in the allowance for credit losses and have been immaterial.

The following table provides information about loans individually evaluated for credit loss at September 30, 2021 and December 31, 2020 (in thousands):

September 30, 2021

Recorded
investment

Unpaid
principal
balance

Related
allowance

Average
recorded
investment

Interest
income
recognized

Without an allowance recorded

SBL non-real estate

$

408 

$

3,497 

$

$

413 

$

SBL commercial mortgage

2,183 

2,206 

2,091 

Direct lease financing

289 

289 

474 

Consumer - home equity

325 

325 

493 

With an allowance recorded

SBL non-real estate

1,825 

1,825 

(1,163)

2,464 

12 

SBL commercial mortgage

984 

984 

(510)

3,145 

SBL construction

711 

711 

(34)

711 

Direct lease financing

141 

141 

(91)

165 

Consumer - other

14 

14 

(14)

Total

SBL non-real estate

2,233 

5,322 

(1,163)

2,877 

12 

SBL commercial mortgage

3,167 

3,190 

(510)

5,236 

SBL construction

711 

711 

(34)

711 

Direct lease financing

430 

430 

(91)

639 

Consumer - other

14 

14 

(14)

Consumer - home equity

325 

325 

493 

$

6,880 

$

9,992 

$

(1,812)

$

9,962 

$

19 

18


December 31, 2020

Recorded
investment

Unpaid
principal
balance

Related
allowance

Average
recorded
investment

Interest
income
recognized

Without an allowance recorded

SBL non-real estate

$

387 

$

2,836 

$

$

370 

$

SBL commercial mortgage

2,037 

2,037 

1,253 

Direct lease financing

299 

299 

3,352 

Consumer - home equity

557 

557 

554 

10 

With an allowance recorded

SBL non-real estate

3,044 

3,044 

(2,129)

3,257 

15 

SBL commercial mortgage

5,268 

5,268 

(1,010)

2,732 

SBL construction

711 

711 

(34)

711 

Direct lease financing

452 

452 

(4)

716 

Consumer - home equity

24 

Total

SBL non-real estate

3,431 

5,880 

(2,129)

3,627 

18 

SBL commercial mortgage

7,305 

7,305 

(1,010)

3,985 

SBL construction

711 

711 

(34)

711 

Direct lease financing

751 

751 

(4)

4,068 

Consumer - home equity

557 

557 

578 

10 

$

12,755 

$

15,204 

$

(3,177)

$

12,969 

$

28 

The loan review department recommends non-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, 2021

December 31, 2020

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

$

1,300 

$

408 

$

1,708 

$

3,159 

SBL commercial mortgage

984 

2,183 

3,167 

7,305 

SBL construction

711 

711 

711 

Direct leasing

141 

289 

430 

751 

Consumer - home equity

76 

76 

301 

Consumer - other

14 

14 

$

3,150 

$

2,956 

$

6,106 

$

12,227 

The Company had $2.1 million of other real estate owned at September 30, 2021 and 0 other real estate owned at December 31, 2020 in continuing operations. The following table summarizes the Company’s non-accrual loans, loans past due 90 days or more, and other real estate owned at September 30, 2021 and December 31, 2020, respectively:

September 30,

December 31,

2021

2020

(in thousands)

Non-accrual loans

SBL non-real estate

$

1,708 

$

3,159 

SBL commercial mortgage

3,167 

7,305 

SBL construction

711 

711 

Direct leasing

430 

751 

Consumer - home equity

76 

301 

Consumer - other

14 

Total non-accrual loans

6,106 

12,227 

Loans past due 90 days or more and still accruing

1,569 

497 

Total non-performing loans

7,675 

12,724 

Other real estate owned

2,145 

Total non-performing assets

$

9,820 

$

12,724 

19


Interest which would have been earned on loans classified as non-accrual for the nine months ended September 30, 2021 and 2020, was $247,000 and $459,000, respectively. NaN income on non-accrual loans was recognized during the nine months ended September 30, 2021. In the nine months ended September 30, 2021 and 2020 a total of $39,000 and $361,000, 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, 2021 and December 31, 2020 and considered troubled debt restructurings are as follows (dollars in thousands):

September 30, 2021

December 31, 2020

Number

Pre-modification recorded investment

Post-modification recorded investment

Number

Pre-modification recorded investment

Post-modification recorded investment

SBL non-real estate

$

1,190 

$

1,190 

$

911 

$

911 

Direct lease financing

251 

251 

Consumer - home equity

249 

249 

469 

469 

Total(1)

$

1,439 

$

1,439 

11 

$

1,631 

$

1,631 

(1) Troubled debt restructurings include non-accrual loans of $665,000 and $1.1 million at September 30, 2021 and December 31, 2020, respectively.

The balances below provide information as to how the loans were modified as troubled debt restructuring loans as of September 30, 2021 and December 31, 2020 (in thousands):

September 30, 2021

December 31, 2020

Adjusted interest rate

Extended maturity

Combined rate and maturity

Adjusted interest rate

Extended maturity

Combined rate and maturity

SBL non-real estate

$

$

$

1,190 

$

$

16 

$

895 

Direct lease financing

251 

Consumer - home equity

249 

469 

Total(1)

$

$

$

1,439 

$

$

267 

$

1,364 

(1) Troubled debt restructurings include non-accrual loans of $665,000 and $1.1 million at September 30, 2021 and December 31, 2020, respectively.

The Company had 0 commitments to extend additional credit to loans classified as troubled debt restructurings as of September 30, 2021 or December 31, 2020.

When loans are classified as troubled debt restructurings, the Company estimates the value of underlying collateral and repayment sources. A specific reserve in the allowance for credit losses is established if the collateral valuation, less disposition costs, is lower than the recorded loan value. The amount of the specific reserve serves to increase the provision for credit losses in the quarter the loan is classified as a troubled debt restructuring. As of September 30, 2021, there were 9 troubled debt restructured loans with a balance of $1.4 million which had specific reserves of $626,000. 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, 2021 that have subsequently defaulted (in thousands):

September 30, 2021

Number

Pre-modification recorded investment

SBL non-real estate

$

205 

Total

$

205 

The SBA began, in April 2020, to make six months of principal and interest payments on SBA 7a loans, which are generally 75% guaranteed by the U.S. government. As of September 30, 2021, the Company had $369.7 million of related guaranteed balances, and additionally had $71.3 million of PPP loan balances which were also guaranteed. The majority of the six months of support expired in the fourth quarter of 2020, and the Company generally approved COVID-19 pandemic-related deferrals for principal and interest payments as requested by borrowers. Additionally, the Company granted such deferrals for certain other loans. The Consolidated Appropriations Act, 2021, became law in December 2020, provide for at least an additional two months of principal and interest payments on SBA 7a loans, with up to five months of payments for hotel, restaurant and other more highly impacted loans. Unlike the six months of COVID-19 Aid, Relief, and Economic Security Act (“CARES Act”) payments, these additional payments are capped at $9,000 per month. Per section 4013 of the CARES Act, accounting and banking regulators have determined that loans with COVID-19 pandemic-related deferrals of principal and interest payments will not, during the deferral period, be classified as restructured. Such treatment is temporary and will terminate after the earlier of the end of the national emergency, or December 31, 2021. As of September

20


30, 2021, substantially all borrowers with prior COVID-19 deferrals had resumed making their payments, with $1.3 million of principal remaining in deferral status as of that date.

Effective January 1, 2020, current expected credit loss (“CECL”) accounting replaced the prior incurred loss model that recognized losses when it became probable that a credit loss would be incurred, with a new requirement to recognize lifetime expected credit losses immediately when a financial asset is originated or purchased. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of loans to present the net amount expected to be collected on the loans. Loans, or portions thereof, are charged off against the allowance when they are deemed uncollectible. Loans are deemed uncollectible based on individual facts and circumstances including the quality of repayment sources, the length of collection efforts and the probability and timing of recoveries. During the first quarter of 2020, upon adoption of the guidance, the allowance for credit losses was increased by $2.6 million. Additionally, $569,000 was established as an allowance for off-balance sheet credit losses (for unfunded loan commitments) and recorded in other liabilities. These amounts did not impact our Consolidated Statement of Operations, as the guidance required these cumulative differences between the two accounting conventions to flow through retained earnings, net of their income tax benefit. The following table shows the effect of the adoption of CECL as of January 1, 2020 and the September 30, 2021 allowance for credit loss (in thousands).

December 31, 2019

January 1, 2020

September 30, 2021

Incurred loss method

CECL (day 1 adoption)

CECL

Amount

% of Segment

Amount

% of Segment

Amount

% of Segment

Allowance for credit losses on loans and leases

SBL non real estate

$

4,985 

5.89%

$

4,765 

5.63%

$

5,378 

3.13%

SBL commercial mortgage

1,472 

0.67%

2,009 

0.92%

2,795 

0.76%

SBL construction

432 

0.95%

571 

1.26%

370 

1.60%

Direct lease financing

2,426 

0.56%

4,788 

1.10%

5,637 

1.10%

SBLOC

440 

0.05%

440 

0.05%

574 

0.05%

IBLOC

113 

0.08%

72 

0.05%

343 

0.05%

Advisor financing

609 

0.75%

Real estate bridge lending

245 

0.19%

Other loans (1)

52 

0.68%

230 

3.02%

208 

4.23%

Unallocated

318 

$

10,238 

0.56%

$

12,875 

0.71%

$

16,159 

0.52%

Liabilities:

Allowance for credit losses on off-balance sheet credit exposures

569 

1,088 

Total allowance for credit losses

$

10,238 

$

13,444 

$

17,247 

(1)Included in Other loans are $25.0 million of SBA loans purchased for Community Reinvestment Act (“CRA”) purposes as of September 30, 2021. These loans are classified as SBL in our loan tables.

Management estimates the allowance 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 methodology used in the estimation of the allowance, which is performed at least quarterly, is designed to be responsive to changes in portfolio credit quality and 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 for their review. The allowance for credit losses includes 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. Expected credit losses for such collateral dependent loans are based on the difference between loan principal and the estimated fair value of the collateral, adjusted for estimated disposition costs as appropriate.

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. A historical loss rate is calculated for each product type, except SBLOC, IBLOC, real estate bridge lending and investment advisor financing, based upon historical net charge-offs for that product. The loss rate is determined by classifying charge-off losses according to the year the related loans were originated, which is referred to as vintage analysis. The 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 real estate bridge lending, industry loss rate statistics were utilized. Due to the specialized nature of investment advisor financing, industry loss rate statistics are not available. Accordingly, factors based upon the nature of the underlying collateral were utilized, namely the income streams resulting from investment portfolios which represent the primary repayment source

21


for such loans. For all loan pools the Company adds to the allowance a component for each pool based upon qualitative factors such as the Company’s current loan performance statistics as determined by pool. These qualitative factors adjust for asset specific differences between historical loss experience and the current portfolio for each pool. The qualitative factors are intended to address factors that may not be reflected in historical loss rates and otherwise unaccounted for in the quantitative process. 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 is recorded in other liabilities. These qualitative factors may increase the allowance compared to historical loss rates. Expected losses provided for in the allowance are based on applying historical loss rates over the estimated remaining lives of the loans, when historical loss rate information is available. The qualitative factor percentages are applied against the portfolio balance as of the end of the period. 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 risk, low, moderate, moderate-high and high. 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 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. 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’s charge-offs in its lines of business have been non-existent for SBLOC and IBLOC, notwithstanding stressed economic periods. Additionally, the charge-off histories for SBL and leasing have not correlated with economic conditions. While specific groups of economic factors did not correlate with actual historical losses, multiple economic factors are considered. For the non-guaranteed portion of SBA loans and leasing, the Company’s loss forecasting analysis included a review of industry statistics. However, the Company’s own charge-off history was the primary quantitative element in the forecasts.

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, 2021 and December 31, 2020 are as follows (in thousands):

22


As of September 30, 2021

2021

2020

2019

2018

2017

Prior

Revolving loans at amortized cost

Total

SBL non real estate

Non-rated*

$

66,244 

$

8,844 

$

$

$

$

$

$

75,088 

Pass

21,814 

17,432 

9,180 

9,563 

5,534 

12,934 

76,457 

Special mention

79 

687 

873 

1,639 

Substandard

18 

574 

1,282 

1,874 

Total SBL non-real estate

88,137 

26,276 

9,180 

10,268 

6,108 

15,089 

155,058 

SBL commercial mortgage

Non-rated

9,707 

4,500 

14,207 

Pass

62,268 

55,850 

77,930 

46,916 

38,465 

58,177 

339,606 

Special mention

1,853 

249 

2,102 

Substandard

3,167 

3,167 

Total SBL commercial mortgage

71,975 

55,850 

84,283 

46,916 

38,465 

61,593 

359,082 

SBL construction

Pass

3,194 

13,958 

1,411 

3,844 

22,407 

Substandard

711 

711 

Total SBL construction

3,194 

13,958 

1,411 

3,844 

711 

23,118 

Direct lease financing

Non-rated

44,973 

14,486 

2,088 

1,291 

474 

126 

63,438 

Pass

168,932 

166,215 

65,411 

32,392 

11,573 

2,956 

447,479 

Substandard

792 

2,170 

39 

58 

78 

14 

3,151 

Total direct lease financing

214,697 

182,871 

67,538 

33,741 

12,125 

3,096 

514,068 

SBLOC

Non-rated

4,465 

4,465 

Pass

1,143,291 

1,143,291 

Total SBLOC

1,147,756 

1,147,756 

IBLOC

Non-rated

277,567 

277,567 

Pass

409,200 

409,200 

Total IBLOC

686,767 

686,767 

Advisor financing

Non-rated

1,847 

264 

2,111 

Pass

34,452 

44,580 

79,032 

Total advisor financing

36,299 

44,844 

81,143 

Real estate bridge lending

Pass

128,699 

128,699 

Total real estate bridge lending

128,699 

128,699 

Other loans

Non-rated

428 

184 

217 

677 

1,510 

Pass

101 

114 

3,323 

4,820 

5,632 

12,977 

1,278 

28,245 

Substandard

14 

48 

76 

138 

Total other loans**

529 

312 

3,323 

4,820 

5,684 

13,194 

2,031 

29,893 

$

543,530 

$

324,111 

$

165,735 

$

99,589 

$

62,382 

$

93,683 

$

1,836,554 

$

3,125,584 

Unamortized loan fees and costs

11,078 

Total

$

3,136,662 

23


*Included in the SBL non real estate non-rated total of $75.1 million, were $71.3 million of PPP loans which are government guaranteed.

**Included in Other loans are $25.0 million of SBA loans purchased for CRA purposes as of September 30, 2021. 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, 2020

2020

2019

2018

2017

2016

Prior

Revolving loans at amortized cost

Total

SBL non real estate

Non-rated*

$

170,910 

$

$

$

$

$

$

$

170,910 

Pass

10,775 

10,943 

12,002 

5,454 

7,153 

9,964 

56,291 

Special mention

731 

499 

767 

1,997 

Substandard

20 

1,489 

1,347 

1,491 

4,347 

Total SBL non-real estate

181,685 

10,943 

12,753 

6,943 

8,999 

12,222 

233,545 

SBL commercial mortgage

Non-rated

17,592 

2,758 

20,350 

Pass

26,971 

76,975 

46,099 

39,219 

32,505 

35,298 

257,067 

Special mention

1,852 

257 

2,109 

Substandard

77 

7,605 

7,682 

Total SBL commercial mortgage

44,563 

81,585 

46,099 

39,219 

32,582 

43,160 

287,208 

SBL construction

Non-rated

566 

566 

Pass

6,769 

1,146 

11,081 

18,996 

Substandard

711 

711 

Total SBL construction

7,335 

1,146 

11,081 

711 

20,273 

.

Direct lease financing

Non-rated

23,273 

2,888 

2,189 

1,093 

447 

29,897 

Pass

249,946 

90,156 

53,638 

23,944 

9,091 

1,106 

427,881 

Substandard

3,536 

45 

97 

152 

536 

38