Annual Statements Open main menu

Bancorp, Inc. - Quarter Report: 2021 September (Form 10-Q)

tbbk-20210930x10q

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

Page

Part I Financial Information

Item 1.

Financial Statements:

4

Consolidated Balance Sheets – September 30, 2021 (unaudited) and December 31, 2020

4

Unaudited Consolidated Statements of Operations – Three and nine months ended September 30, 2021 and 2020

5

Unaudited Consolidated Statements of Comprehensive Income – Three and nine months ended September 30, 2021 and 2020

6

Unaudited Consolidated Statements of Changes in Shareholders’ Equity – Nine months ended September 30, 2021 and 2020

7

Unaudited Consolidated Statements of Cash Flows – Nine months ended September 30, 2021 and 2020

9

Notes to Unaudited Consolidated Financial Statements

10

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

40

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

67

Item 4.

Controls and Procedures

67

Part II Other Information

Item 1.

Legal Proceedings

68

Item 1A.

Risk Factors

68

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

68

Item 3.

Defaults Upon Senior Securities

68

Item 4.

Mine Safety Disclosures

68

Item 5.

Other Information

69

Item 6.

Exhibits

70

Signatures

71


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

7 

1 

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

7 

Amortization of losses previously held as available-for-sale

5 

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

2 

Amortization of losses previously held as available-for-sale

1 

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

7 

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 four 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 four 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, no 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 

$

$

$

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

1 

424 

(1)

424 

(1)

Commercial mortgage-backed securities

11 

44,203 

(658)

66,139 

(560)

110,342 

(1,218)

Corporate debt securities

1 

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

5 

$

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

6 

2,505 

(10)

3,489 

(1)

5,994 

(11)

Commercial mortgage-backed securities

4 

69,486 

(4,562)

69,486 

(4,562)

Corporate debt securities

2 

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 one 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 none 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 no 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 

7 

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)

6 

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)

6 

Consumer - home equity

325 

325 

493 

7 

$

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 

$

3 

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 no 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. No 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

8 

$

1,190 

$

1,190 

8 

$

911 

$

911 

Direct lease financing

1 

251 

251 

Consumer - home equity

1 

249 

249 

2 

469 

469 

Total(1)

9 

$

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 no 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

1 

$

205 

Total

1 

$

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 

4 

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 

7 

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 

4,404 

Total direct lease financing

276,755 

93,089 

55,924 

25,189 

10,074 

1,151 

462,182 

SBLOC

Non-rated

3,772 

3,772 

Pass

1,109,161 

1,109,161 

Total SBLOC

1,112,933 

1,112,933 

IBLOC

Non-rated

132,777 

132,777 

Pass

304,376 

304,376 

Total IBLOC

437,153 

437,153 

Advisor financing

Non-rated

22,341 

22,341 

Pass

25,941 

25,941 

Total advisor financing

48,282 

48,282 

Other loans

Non-rated

1,221 

14 

1,558 

2,793 

Pass

376 

3,569 

6,225 

7,320 

7,228 

13,996 

38,714 

Substandard

301 

301 

Total other loans**

1,597 

3,569 

6,225 

7,334 

7,228 

15,855 

41,808 

Total

$

560,217 

$

190,332 

$

132,082 

$

78,685 

$

59,594 

$

72,388 

$

1,550,086 

$

2,643,384 

Unamortized loan fees and costs

8,939 

Total

$

2,652,323 

24


*Included in the SBL non real estate non-rated total of $170.9 million, were $165.7 million of PPP loans which are government guaranteed.

**Included in Other loans are $35.4 million of SBA loans purchased for CRA purposes as of December 31, 2020. 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 and 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 these loans are expected to be reimbursed by the U.S. government within one year of their origination. 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. The U.S. government guaranteed portion of 7a loans and 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 with respect to 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 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.

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. The qualitative factors for advisor financing focus on changes in lending policies and procedures, portfolio performance and economic conditions.

25


Real estate bridge lending. Real estate bridge loans are transitional commercial mortgage loans which are made to improve and rehabilitate existing properties which are already cash flowing, and which are securitized by those properties. The portfolio is comprised primarily of apartments. Prior to 2020, such loans were originated for securitization and loans which had been originated but not securitized continue to 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 cost, on the balance sheet.

Other specialty lending and consumer loans. Other specialty lending loans and consumer loans are categories of loans which the Company generally no longer offers. The loans primarily are consumer loans and home equity loans. The qualitative factors for all other specialty lending and consumer loans 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 applies: 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 via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. The allowance for credit 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, 2021 was $1.1 million.

A detail of the changes in the allowance for credit losses by loan category and summary of loans evaluated individually and collectively for credit deterioration is as follows (in thousands):

September 30, 2021

SBL non-real estate

SBL commercial mortgage

SBL construction

Direct lease financing

SBLOC / IBLOC

Advisor financing

Real estate bridge lending

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 (credit)*

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 

26


December 31, 2020

SBL non-real estate

SBL commercial mortgage

SBL construction

Direct lease financing

SBLOC / IBLOC

Advisor financing

Other loans

Unallocated

Total

Beginning 12/31/2019

$

4,985 

$

1,472 

$

432 

$

2,426 

$

553 

$

$

52 

$

318 

$

10,238 

1/1 CECL adjustment

(220)

537 

139 

2,362 

(41)

178 

(318)

2,637 

Charge-offs

(1,350)

(2,243)

(3,593)

Recoveries

103 

570 

673 

Provision (credit)*

1,542 

1,306 

(243)

2,928 

263 

362 

(31)

6,127 

Ending balance

$

5,060 

$

3,315 

$

328 

$

6,043 

$

775 

$

362 

$

199 

$

$

16,082 

Ending balance: Individually evaluated for expected credit loss

$

2,129 

$

1,010 

$

34 

$

4 

$

$

$

$

$

3,177 

Ending balance: Collectively evaluated for expected credit loss

$

2,931 

$

2,305 

$

294 

$

6,039 

$

775 

$

362 

$

199 

$

$

12,905 

Loans:

Ending balance**

$

255,318 

$

300,817 

$

20,273 

$

462,182 

$

1,550,086 

$

48,282 

$

6,426 

$

8,939 

$

2,652,323 

Ending balance: Individually evaluated for expected credit loss

$

3,431 

$

7,305 

$

711 

$

751 

$

$

$

557 

$

$

12,755 

Ending balance: Collectively evaluated for expected credit loss

$

251,887 

$

293,512 

$

19,562 

$

461,431 

$

1,550,086 

$

48,282 

$

5,869 

$

8,939 

$

2,639,568 

September 30, 2020

SBL non-real estate

SBL commercial mortgage

SBL construction

Direct lease financing

SBLOC / IBLOC

Advisor financing

Other loans

Unallocated

Total

Beginning 12/31/2019

$

4,985 

$

1,472 

$

432 

$

2,426 

$

553 

$

$

52 

318 

$

10,238 

1/1 CECL adjustment

(220)

537 

139 

2,362 

(41)

178 

(318)

2,637 

Charge-offs

(1,350)

(2,178)

(3,528)

Recoveries

82 

502 

584 

Provision (credit)*

1,304 

1,543 

(148)

2,735 

202 

199 

(39)

5,796 

Ending balance

$

4,801 

$

3,552 

$

423 

$

5,847 

$

714 

$

199 

$

191 

$

15,727 

Ending balance: Individually evaluated for expected credit loss

$

1,818 

$

1,010 

$

26 

$

43 

$

$

$

$

$

2,897 

Ending balance: Collectively evaluated for expected credit loss

$

2,983 

$

2,542 

$

397 

$

5,804 

$

714 

$

199 

$

191 

$

$

12,830 

Loans:

Ending balance**

$

293,488 

$

270,264 

$

27,169 

$

430,675 

$

1,428,253 

$

26,600 

$

6,003 

$

6,308 

$

2,488,760 

Ending balance: Individually evaluated for expected credit loss

$

3,220 

$

7,517 

$

711 

$

804 

$

$

$

567 

$

$

12,819 

Ending balance: Collectively evaluated for expected credit loss

$

290,268 

$

262,747 

$

26,458 

$

429,871 

$

1,428,253 

$

26,600 

$

5,436 

$

6,308 

$

2,475,941 

*The amount shown as the provision for the period, reflects the provision on credit losses for loans, while the income statement provision for credit losses includes the provision for unfunded commitments.

** The ending balance for loans in the unallocated column represents deferred costs and fees.

The Company did not have loans acquired with deteriorated credit quality at either September 30, 2021 or December 31, 2020.

27


A detail of the Company’s delinquent loans by loan category is as follows (in thousands):

September 30, 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

$

1,622 

$

848 

$

1,085 

$

1,708 

$

5,263 

$

166,582 

$

171,845 

SBL commercial mortgage

17 

208 

417 

3,167 

3,809 

363,463 

367,272 

SBL construction

711 

711 

22,406 

23,117 

Direct lease financing

994 

211 

67 

430 

1,702 

512,366 

514,068 

SBLOC / IBLOC

1,389 

1,389 

1,833,134 

1,834,523 

Advisor financing

81,143 

81,143 

Real estate bridge lending

128,699 

128,699 

Other loans

90 

90 

4,827 

4,917 

Unamortized loan fees and costs

11,078 

11,078 

$

4,022 

$

1,267 

$

1,569 

$

6,106 

$

12,964 

$

3,123,698 

$

3,136,662 

December 31, 2020

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

$

1,760 

$

805 

$

110 

$

3,159 

$

5,834 

$

249,484 

$

255,318 

SBL commercial mortgage

87 

961 

7,305 

8,353 

292,464 

300,817 

SBL construction

711 

711 

19,562 

20,273 

Direct lease financing

2,845 

941 

78 

751 

4,615 

457,567 

462,182 

SBLOC / IBLOC

650 

247 

309 

1,206 

1,548,880 

1,550,086 

Advisor financing

48,282 

48,282 

Other loans

301 

301 

6,125 

6,426 

Unamortized loan fees and costs

8,939 

8,939 

$

5,342 

$

2,954 

$

497 

$

12,227 

$

21,020 

$

2,631,303 

$

2,652,323 

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 2021

$

47,882 

2022

146,333 

2023

111,954 

2024

69,895 

2025

34,726 

2026 and thereafter

12,823 

Total undiscounted cash flows

423,613 

Residual value *

142,558 

Difference between undiscounted cash flows and discounted cash flows

(52,103)

Present value of lease payments recorded as lease receivables

$

514,068 

*Of the $142,558,000, $31,122,000 is not guaranteed by the lessee or other guarantors.

   

Note 7. Transactions with Affiliates

The Bank did not maintain any deposits for various affiliated companies as of September 30, 2021 and December 31, 2020, 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 lender. At September 30, 2021, 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 amounted to $3.2 million at September 30, 2021 and $4.7 million at December 31, 2020.

The Bank has periodically purchased securities through J.V.B. Financial Group, LLC (“JVB”), a broker dealer in which the Company’s former Chairman is a registered representative and has a minority interest. Prices for these securities are verified to market rates and no separate commissions or fees are paid to that firm. The Company’s former Chairman also serves as the President, a director and the Chief Investment Officer of Cohen & Company Financial Limited (formerly Euro Dekania Management Ltd.), a wholly-owned subsidiary of Cohen & Company Inc. (formerly Institutional Financial Markets Inc.), the parent company of JVB. In the first nine months of 2021 and 2020, the Company did not purchase any securities from JVB. The Company’s former Chairman retired effective October 31, 2021.

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 $1.5 million and $1.4 million for legal services for the nine months ended September 30, 2021 and 2020, respectively.

28


Note 8. Fair Value Measurements

ASC 825, “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 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 although it has sold loans in the past and may do so in the future. For fair value disclosure purposes, the Company utilized certain value measurement criteria required under ASC 820, “Fair Value Measurements and Disclosures”, as discussed below.

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 $317.3 million and $345.5 million as of September 30, 2021 and December 31, 2020, 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. Level 3 investment security fair values are based on the present valuing 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 2021 and 2020, there were no transfers between the three levels.

FHLB and Atlantic Central Bankers Bank stock is held as required by those respective institutions and is carried at cost. Federal law requires a member institution of the FHLB to hold stock according to predetermined formulas. Atlantic Central Bankers Bank requires its correspondent banking institutions to hold stock as a condition of membership.

Commercial loans held at fair value are comprised of commercial real estate loans and SBA loans which had been originated for sale or securitization in the secondary market, and which are now being held on the balance sheet. Commercial real estate 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.

The net loan portfolio is 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 its 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 on the consolidated balance sheets, which was measured at fair value at each balance sheet date. The fair value was initially established by the sales price and the investment was marked quarterly to fair value, as determined using a discounted cash flow analysis. The change in value of investment in unconsolidated entity in the consolidated statements of operations reflected changes in estimated fair value. Interest paid to the bank on the notes was credited to principal. In the third quarter of 2021, The Bancorp and the other 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.

Assets held-for-sale from discontinued operations are recorded at the lower of cost basis or market value. For loans, market value was determined using the discounted 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. Loan fair values are based on “unobservable inputs” that are based on available information. Level 3 fair values are based on the present value of cash flows by unit of measurement. For commercial loans other than SBA loans, a market adjusted rate to discount expected cash flows from outstanding principal and interest to expected maturity at the measurement date was utilized. For SBA loans, market

29


indications for similar loans were utilized on a pooled basis. For other real estate owned, market value is based upon appraisals of the underlying collateral by third-party appraisers, reduced by 7% to 10% for estimated selling costs.

The estimated fair values of demand deposits (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-term borrowings are equal to their carrying amounts as they are short-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. 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) as of the dates indicated:

September 30, 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

$

1,054,223 

$

1,054,223 

$

$

984,961 

$

69,262 

Federal Home Loan Bank and Atlantic Central Bankers Bank stock

1,663 

1,663 

1,663 

Commercial loans, at fair value

1,550,025 

1,550,025 

1,550,025 

Loans, net of deferred loan fees and costs

3,136,662 

3,129,602 

3,129,602 

Assets held-for-sale from discontinued operations

87,904 

87,904 

87,904 

Interest rate swaps, liability

895 

895 

895 

Demand and interest checking

4,734,352 

4,734,352 

4,734,352 

Savings and money market

378,160 

378,160 

378,160 

Senior debt

98,590 

101,433 

101,433 

Subordinated debentures

13,401 

8,663 

8,663 

Securities sold under agreements to repurchase

42 

42 

42 

Short-term borrowings

300,000 

300,000 

300,000 

December 31, 2020

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

$

1,206,164 

$

1,206,164 

$

$

1,027,213 

$

178,951 

Federal Home Loan Bank and Atlantic Central Bankers Bank stock

1,368 

1,368 

1,368 

Commercial loans, at fair value

1,810,812 

1,810,812 

1,810,812 

Loans, net of deferred loan fees and costs

2,652,323 

2,650,613 

2,650,613 

Investment in unconsolidated entity

31,294 

31,294 

31,294 

Assets held-for-sale from discontinued operations

113,650 

113,650 

113,650 

Interest rate swaps, liability

2,223 

2,223 

2,223 

Demand and interest checking

5,205,010 

5,205,010 

5,205,010 

Savings and money market

257,050 

257,050 

257,050 

Senior debt

98,314 

104,111 

104,111 

Subordinated debentures

13,401 

9,102 

9,102 

Securities sold under agreements to repurchase

42 

42 

42 

30


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:

Fair Value Measurements at Reporting Date Using

Quoted prices in

Significant other

Significant

active markets for

observable

unobservable

Fair value

identical assets

inputs

inputs

September 30, 2021

(Level 1)

(Level 2)

(Level 3)

Investment securities, available-for-sale

U.S. Government agency securities

$

39,120 

$

$

39,120 

$

Asset-backed securities

368,913 

368,913 

Obligations of states and political subdivisions

52,797 

52,797 

Residential mortgage-backed securities

199,270 

199,270 

Collateralized mortgage obligation securities

76,342 

76,342 

Commercial mortgage-backed securities

311,276 

248,519 

62,757 

Corporate debt securities

6,505 

6,505 

Total investment securities, available-for-sale

1,054,223 

984,961 

69,262 

Commercial loans, at fair value

1,550,025 

1,550,025 

Assets held-for-sale from discontinued operations

87,904 

87,904 

Interest rate swaps, liability

895 

895 

$

2,691,257 

$

$

984,066 

$

1,707,191 

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, 2020

(Level 1)

(Level 2)

(Level 3)

Investment securities, available-for-sale

U.S. Government agency securities

$

47,197 

$

$

47,197 

$

Asset-backed securities

238,361 

238,361 

Obligations of states and political subdivisions

56,354 

56,354 

Residential mortgage-backed securities

266,583 

266,583 

Collateralized mortgage obligation securities

148,530 

148,530 

Commercial mortgage-backed securities

367,280 

270,188 

97,092 

Corporate debt securities

81,859 

81,859 

Total investment securities, available-for-sale

1,206,164 

1,027,213 

178,951 

Commercial loans, at fair value

1,810,812 

1,810,812 

Investment in unconsolidated entity

31,294 

31,294 

Assets held-for-sale from discontinued operations

113,650 

113,650 

Interest rate swaps, liability

2,223 

2,223 

$

3,159,697 

$

$

1,024,990 

$

2,134,707 

In addition, ASC 820 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.

31


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)

Available-for-sale

Commercial loans,

securities

at fair value

September 30, 2021

December 31, 2020

September 30, 2021

December 31, 2020

Beginning balance

$

178,951 

$

117,333 

$

1,810,812 

$

1,180,546 

Transfers from investment in unconsolidated entity

22,926 

Reclass of held-to-maturity securities to available-for-sale

85,151 

Total (losses) or gains (realized/unrealized)

Included in earnings

(676)

5,315 

(1,883)

Included in other comprehensive loss

(1,096)

(2,121)

Purchases, issuances, sales and settlements

Issuances

62,151 

721,590 

Settlements

(107,917)

(21,412)

(351,179)

(89,441)

Ending balance

$

69,262 

$

178,951 

$

1,550,025 

$

1,810,812 

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.

$

(879)

$

$

(1,953)

$

(3,567)

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, 2021

December 31, 2020

September 30, 2021

December 31, 2020

Beginning balance

$

31,294 

$

39,154 

$

113,650 

$

140,657 

Transfers to commercial loans, at fair value

(22,926)

Transfers to other real estate owned

(2,145)

Total (losses) or gains (realized/unrealized)

Included in earnings

(45)

1,115 

(3,326)

Purchases, issuances, sales, settlements and charge-offs

Issuances

3,715 

4,942 

Sales

(2,020)

(1,482)

Settlements

(6,223)

(7,815)

(28,556)

(26,846)

Charge-offs

(295)

Ending balance

$

$

31,294 

$

87,904 

$

113,650 

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.

$

$

(45)

$

498 

$

(2,664)

The Company’s other real estate owned activity is summarized below (in thousands) as of the dates indicated:

September 30, 2021

December 31, 2020

Beginning balance

$

$

Transfers from investment in unconsolidated entity

2,145 

Ending balance

$

2,145 

$

32


Level 3 instruments only

Weighted

Fair value at

Range at

average at

September 30, 2021

Valuation techniques

Unobservable inputs

September 30, 2021

September 30, 2021

Commercial mortgage backed investment

securities (a)

$

62,757 

Discounted cash flow

Discount rate

3.11%-7.71%

4.00%

Insurance liquidating trust preferred security (b)

6,505 

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 (c)

3,129,602 

Discounted cash flow

Discount rate

1.00% - 7.00%

3.60%

Commercial - SBA (d)

214,301 

Traders' pricing

Offered quotes

$100 - $106

$103.5

Non-SBA CRE - fixed (e)

85,075 

Discounted cash flow

Discount rate

5.72%-7.44%

5.85%

Non-SBA CRE - floating (f)

1,250,649 

Discounted cash flow

Discount rate

3.96%-8.2%

4.86%

Commercial loans, at fair value

1,550,025 

Assets held-for-sale from discontinued operations (g)

87,904 

Discounted cash flow

Discount rate

3.37%-6.58%

4.69%

Subordinated debentures (h)

8,663 

Discounted cash flow

Discount rate

7.00%

7.00%

Other real estate owned

2,145 

Appraised value

N/A

N/A

N/A

Level 3 instruments only

Weighted

Fair value at

Range at

average at

December 31, 2020

Valuation techniques

Unobservable inputs

December 31, 2020

December 31, 2020

Commercial mortgage backed investment

securities

$

97,092 

Discounted cash flow

Discount rate

3.68%-8.30%

4.62%

Insurance liquidating trust preferred security

6,765 

Discounted cash flow

Discount rate

6.61%

6.61%

Corporate debt securities

75,094 

Traders' pricing

Price indications

$100.13

$100.13

Federal Home Loan Bank and Atlantic

Central Bankers Bank stock

1,368 

Cost

N/A

N/A

N/A

Loans, net of deferred loan fees and costs

2,650,613 

Discounted cash flow

Discount rate

1.00% - 6.36%

2.82%

Commercial - SBA

243,562 

Traders' pricing

Offered quotes

$100.00 - $117.80

$105.60

Non-SBA CRE - fixed

87,288 

Discounted cash flow

Discount rate

5.16%-7.32%

6.03%

Non-SBA CRE - floating

1,479,962 

Discounted cash flow

Discount rate

3.96% -9.70%

4.91%

Commercial loans, at fair value

1,810,812 

Investment in unconsolidated entity

31,294 

Discounted cash flow

Discount rate

3.93%

3.93%

Default rate

1.00%

1.00%

Assets held-for-sale from discontinued operations

113,650 

Discounted cash flow

Discount rate,

2.55%-6.83%

4.15%

Credit analysis

Subordinated debentures

9,102 

Discounted cash flow

Discount rate

6.61%

6.61%

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, traders’ pricing indications for pools determined by date of loan origination were weighted. For commercial loans recorded at fair value and assets held-for-sale from discontinued operations, changes in fair value are reflected in the income statement. Changes in 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, 2021 table.

a)Commercial mortgage backed investment securities, consisting of Bank sponsored CRE securities, are valued using discounted cash flow analyses. The discount rates applied are based upon market observations for comparable securities and implicitly assume market averages for defaults and loss severities. Each of the securities has some credit enhancement, or protection from other tranches in the issue, which limit their valuation exposure to credit losses. Nonetheless, increases in expected default rates

33


or loss severities on the loans underlying the issue could reduce their 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 these holdings in future periods and impact fair values.

b)Insurance liquidating trust preferred 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. At September 30, 2021, the balance included $71.3 million of Paycheck Protection Program loans, which bear interest at 1%, but also earn fees.

d)Commercial-SBL (SBA Loans) are comprised of the government guaranteed portion of SBA insured loans. Their valuation is based upon dealer pricing indications. 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 also impacted by prepayment assumptions resulting from both voluntary payoffs and defaults.

e)Non-SBA CRE-fixed are fixed rate non-SBA commercial real estate mortgages. Discount rates used in applying discounted cash flow analysis are based upon loan terms, the current origination rates for similar loans and the quality of the credit.

f)Non-SBA CRE-floating are floating rate non-SBA loans, the vast majority of which are secured by multi-family properties. These are bridge loans designed to provide owners time and funding for property improvements and are generally valued internally using discounted cash flow analysis. The discount rate for the vast majority of these loans, which are multi-family, was based upon current origination rates for similar loans. Certain of these loans are fair valued by a third-party, based upon discounting at market rates for similar loans.

g)Assets held-for-sale from discontinued operations are valued using discounted cash flow by an independent valuation consultant using loan performance, other credit characteristics and market interest rate comparisons. Changes in those factors could change the valuation.

h)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 the valuation.

 

Assets measured at fair value on a nonrecurring basis, segregated by fair value hierarchy, during the periods shown are summarized below (in thousands):

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

September 30, 2021

(Level 1)

(Level 2)

(Level 3)

Collateral dependent loans (1)

$

5,068 

$

$

$

5,068 

Other real estate owned

2,145 

2,145 

Intangible assets

2,547 

2,547 

$

9,760 

$

$

$

9,760 

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, 2020

(Level 1)

(Level 2)

(Level 3)

Collateral dependent loans (1)

$

9,578 

$

$

$

9,578 

Intangible assets

2,845 

2,845 

$

12,423 

$

$

$

12,423 

(1)The method of valuation approach for the collateral dependent loans was the market value 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, 2021, principal on collateral dependent loans and troubled debt restructurings, which is accounted for on the basis of the value of underlying collateral, is shown at estimated fair value of $5.1 million. To arrive at that fair value, related loan principal of $6.9 million was reduced by specific reserves of $1.8 million within the allowance for credit 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 collateral dependent

34


loans at September 30, 2021 were 9 troubled debt restructured loans with a balance of $1.4 million, which had specific reserves of $626,000. Valuation techniques consistent with the market and/or cost approach were used to measure fair value and primarily included observable inputs for the individual 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.

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 certain non-SBA CRE loans held at fair value. These instruments are not accounted for as effective hedges. As of September 30, 2021, the Company had entered into three interest rate swap agreements with an aggregate notional amount of $21.3 million. These swap agreements provide for the Company to receive an adjustable rate of interest based upon the three-month LIBOR. The Company recorded a net gain of $1.3 million for the nine months ended September 30, 2021 to recognize the fair value of the derivative instruments which is reported in net realized and unrealized gains (losses) on commercial loans, at fair value, in the consolidated statements of operations. The amount payable by the Company under these swap agreements was $895,000 at September 30, 2021, which is reported in other liabilities. The Company had minimum collateral posting thresholds with certain of its derivative counterparties and had posted cash collateral of $2.3 million as of September 30, 2021.

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, 2021 are summarized below (dollars in thousands):

September 30, 2021

Maturity date

Notional amount

Interest rate paid

Interest rate received

Fair value

December 23, 2025

6,800 

2.16%

0.13%

(348)

December 24, 2025

8,200 

2.17%

0.13%

(426)

July 20, 2026

6,300 

1.44%

0.13%

(121)

Total

$

21,300 

$

(895)

Note 10. Other Identifiable Intangible Assets

In May 2016, the Company purchased approximately $60.0 million of lease receivables which resulted in a customer list intangible of $3.4 million that is being amortized over a 10 year period. Amortization expense is $340,000 per year ($1.5 million over the next five years). The gross carrying amount of the customer list intangible is $3.4 million, and as of September 30, 2021 and December 31, 2020, respectively, the accumulated amortization was $1.8 million and $1.6 million.

In January 2020, the Company purchased McMahon Leasing and subsidiaries for approximately $8.7 million allocated as follows: $3.9 million extinguishment of debt, $3.1 million investment in subsidiary, $1.1 million to intangibles and $550,000 primarily comprised of fair value adjustments to the lease receivables and inventory. In the acquisition, the Company acquired $9.9 million of lease receivables, $958,000 in automobile inventory and other assets. The excess of the consideration issued over the book value of the assets acquired was $1.6 million which was comprised of the aforementioned $1.1 million of intangibles and $550,000 of fair value adjustments. The fair value of the leases was $453,000 over their book value which is being amortized over the lives of the leases, with the balance of the $550,000 reflecting automobile inventory fair value adjustments. The $1.1 million of intangibles is 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 depreciation was $100,000 at September 30, 2021. Amortization expense is $57,000 per year ($285,000 over the next five years).

Note 11. Recent Accounting Pronouncements

In March 2020, the FASB issued ASU 2020-04 which addressed optional expedients and exceptions for applying GAAP to contract modifications and hedging relationships, resulting from the phase-out of the LIBOR reference rate. The interest rates on certain of the Company’s securities, the majority of commercial loans held at fair value and its trust preferred securities outstanding (classified as subordinated debenture on the balance sheet), utilize LIBOR as a 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. While the Company discontinued LIBOR based originations in 2021, certain of its financial instruments outstanding use LIBOR based pricing, including its non-SBA commercial loans, at fair value. However, these loans are short-term and generally expected to be repaid by the June 2023 LIBOR end date. When the Company resumed originating non-SBA commercial loans in third quarter 2021 which are identified separately as real estate bridge lending, it utilized the secured overnight financing rate (SOFR). In addition, the Bank owns certain investment securities, including collateralized loan obligations (CLOs) and U.S. government agency adjustable-rate mortgages which utilize LIBOR based pricing. CLOs generally have language regarding an

35


index alternative should LIBOR no longer be available. U.S. government agencies generally have the ability to adjust interest rate indices as necessary. There is less clarity for the Company’s student loan securities, its subordinated debentures and its derivatives based upon publicly available information. However, these types of instruments are relatively widely held and industry standards continue to be considered by trustees and other governing bodies. The Company continues to assess the potential impact of the phase-out of LIBOR on those instruments and any other potential impacts, and related accounting guidance.

Note 12. Shareholder’s Equity

On November 5, 2020, the Company’s Board of Directors (“the “Board”) authorized a common stock repurchase program (the “2021 Common Stock Repurchase Program”). Under the Common Stock Repurchase Program, repurchased shares may be reissued for various corporate purposes. The Company is authorized to repurchase up to $10.0 million in each quarter of 2021 depending on the share 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, 2021, the Company repurchased 440,887 shares and 1,484,630 shares, respectively, of its common stock in the open market under the 2021 Common Stock Repurchase Plan at an average cost of $22.68 per share and $20.21 per share, respectively. 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.

On October 20, 2021, the Board approved a revised stock repurchase program for the upcoming 2022 fiscal year (the “2022 Common Stock Repurchase Plan”). The amount that the Company intends to repurchase has been increased to $15.0 million in value of the Company’s common stock per fiscal quarter in 2022, for a maximum amount of $60.0 million.

Note 13. Regulatory Matters

It is the policy of the Federal Reserve that financial holding companies should pay cash dividends on common stock only out of income available over the past year and only if prospective earnings retention is consistent with the organization’s expected future needs and financial condition. The policy provides that a financial holding company should not maintain a level of cash dividends that undermines the financial holding company’s ability to serve as a source of strength to its banking subsidiaries.
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, the Bank’s directors may declare dividends on common or preferred stock of so much of its net profits as they judge expedient, but the Bank must, before the declaration of a dividend 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.

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.

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.

36


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, 2021

The Bancorp, Inc.

9.82%

15.69%

16.10%

15.69%

The Bancorp Bank

10.24%

16.29%

16.69%

16.29%

"Well capitalized" institution (under FDIC regulations-Basel III)

5.00%

8.00%

10.00%

6.50%

As of December 31, 2020

The Bancorp, Inc.

9.20%

14.43%

14.84%

14.43%

The Bancorp Bank

9.11%

14.27%

14.68%

14.27%

"Well capitalized" institution (under FDIC regulations-Basel III)

5.00%

8.00%

10.00%

6.50%

Note 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 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. At this time, 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.

The Company has received and is responding to two non-public fact-finding inquiries from the SEC, which in each case is seeking to determine if violations of the federal securities laws have occurred. The Company refers to these inquiries collectively as the SEC matters. On October 9, 2019, the Company received a subpoena seeking records related generally to the Bank’s debit card issuance activity and gross dollar volume data, among other things. The Company responded to the subpoena and subsequent subpoenas issued to the Company. Unrelated to the first inquiry, on April 10, 2020, the Company received a subpoena in connection with the Bank’s CMBS business seeking records related to various offerings as well as CMBS securities held by the Bank. Since inception of these SEC matters to the present, the Company has been cooperating fully with the SEC. The SEC has not made any findings, or alleged any wrongdoings, with respect to the SEC matters. The costs related to responding to and cooperating with the SEC staff may be material, and could continue to be material at least through the completion of the SEC matters.

On June 2, 2020, the Bank was served with a complaint filed in the Supreme Court of the State of New York, titled Cascade Funding, LP – Series 6, Plaintiff v. The Bancorp Bank, Defendant. The lawsuit arises from a Purchase and Sale Agreement between Cascade Funding, LP – Series 6 (“Cascade”) and the Bank, pursuant to which Cascade was to purchase certain mortgage loan assets from the Bank for securitization. Cascade improperly attempted to invoke a market disruption clause in the agreement to avoid the purchase. Cascade’s failure to close the transaction constituted a breach of the agreement and, accordingly, the Bank terminated the agreement, effective April 29, 2020. Pursuant to the agreement, the Bank retained Cascade’s deposit of approximately $12.5 million. The lawsuit asserts three causes of action: (i) breach of contract; (ii) injunction and specific performance; and (iii) declaratory judgment. Cascade seeks the return of its deposit plus interest and attorneys’ fees and costs. On October 4, 2021, Cascade filed a motion for summary judgment, which is still pending before the court. The Bank is vigorously defending this matter. At this time, 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 January 12, 2021, three former employees of the Bank filed separate complaints against the Company in the Supreme Court of the State of New 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 Bank’s termination of the plaintiffs’ employment in connection with the restructuring of its CMBS business. The plaintiffs seek damages in the following amounts: $4,135,142 (Barker), $901,088 (Kamai) and $2,909,627 (McGlynn). The Company intends to vigorously defend these matters. On June 11, 2021, the Company filed a motion to dismiss in each case. The motions are still pending before the court. Given the early stage of the lawsuits, 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.

37


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 Automated Clearing House (“ACH”) transactions in connection with Cachet’s payroll services business. The complaint in the matter primarily arises from the Bank’s termination of its Payroll Processing ODFI Agreement with Cachet on October 23, 2019 for safety and soundness reasons. The 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 the Bank’s proof of claim in the bankruptcy case. Cachet seeks approximately $150 million in damages and disallowance of the Bank’s proof of claim. The Bank has not been served with the complaint to date but intends to vigorously defend against Cachet’s claims. Given the early stage of the lawsuit, 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.

In addition, the Company is a party to various routine legal proceedings arising out of the ordinary course of business. The Company believes that none of these actions, individually or in the aggregate, will have a material adverse effect on the Company’s financial condition or operations.

Note 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 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 the origination of non-SBA CRE loans, SBA loans, direct lease financing and security-backed lines of credit, cash value insurance policy-backed lines of credit and deposits generated by those business lines. Payments include prepaid card accounts, card payments, ACH processing and deposits generated by those business lines. Corporate includes the Company’s investment portfolio, corporate overhead and non-allocated expenses. Investment income is reallocated to the payments segment. These operating segments reflect the way the Company views its current operations.

The following tables provide segment information for the periods indicated:

For the three months ended September 30, 2021

Specialty finance

Payments

Corporate

Discontinued operations

Total

(in thousands)

Interest income

$

46,313 

$

$

7,187 

$

$

53,500 

Interest allocation

7,187 

(7,187)

Interest expense

239 

916 

1,452 

2,607 

Net interest income (loss)

46,074 

6,271 

(1,452)

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

34,417 

10,151 

(8,084)

36,484 

Income tax expense

8,289 

8,289 

Income (loss) from continuing operations

34,417 

10,151 

(16,373)

28,195 

Income from discontinued operations

66 

66 

Net income (loss)

$

34,417 

$

10,151 

$

(16,373)

$

66 

$

28,261 

38


For the three months ended September 30, 2020

Specialty finance

Payments

Corporate

Discontinued operations

Total

(in thousands)

Interest income

$

44,408 

$

$

8,070 

$

$

52,478 

Interest allocation

8,070 

(8,070)

Interest expense

232 

1,234 

1,016 

2,482 

Net interest income (loss)

44,176 

6,836 

(1,016)

49,996 

Provision for credit losses

1,297 

1,297 

Non-interest income

2,395 

21,933 

24 

24,352 

Non-interest expense

17,236 

16,939 

7,851 

42,026 

Income (loss) from continuing operations before taxes

28,038 

11,830 

(8,843)

31,025 

Income tax expense

7,894 

7,894 

Income (loss) from continuing operations

28,038 

11,830 

(16,737)

23,131 

Income from discontinued operations

123 

123 

Net income (loss)

$

28,038 

$

11,830 

$

(16,737)

$

123 

$

23,254 

For the nine months ended September 30, 2021

Specialty finance

Payments

Corporate

Discontinued operations

Total

(in thousands)

Interest income

$

143,549 

$

$

23,854 

$

$

167,403 

Interest allocation

23,854 

(23,854)

Interest expense

723 

3,298 

4,663 

8,684 

Net interest income (loss)

142,826 

20,556 

(4,663)

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

104,362 

30,490 

(26,244)

108,608 

Income tax expense

25,195 

25,195 

Income (loss) from continuing operations

104,362 

30,490 

(51,439)

83,413 

Income from discontinued operations

248 

248 

Net income (loss)

$

104,362 

$

30,490 

$

(51,439)

$

248 

$

83,661 

For the nine months ended September 30, 2020

Specialty finance

Payments

Corporate

Discontinued operations

Total

(in thousands)

Interest income

$

125,254 

$

$

30,589 

$

$

155,843 

Interest allocation

30,589 

(30,589)

Interest expense

791 

7,381 

4,518 

12,690 

Net interest income (loss)

124,463 

23,208 

(4,518)

143,153 

Provision for credit losses

5,798 

5,798 

Non-interest income

(1,622)

62,770 

169 

61,317 

Non-interest expense

51,742 

51,345 

19,977 

123,064 

Income (loss) from continuing operations before taxes

65,301 

34,633 

(24,326)

75,608 

Income tax expense

19,033 

19,033 

Income (loss) from continuing operations

65,301 

34,633 

(43,359)

56,575 

Loss from discontinued operations

(662)

(662)

Net income (loss)

$

65,301 

$

34,633 

$

(43,359)

$

(662)

$

55,913 

September 30, 2021

Specialty finance

Payments

Corporate

Discontinued operations

Total

(in thousands)

Total assets

$

4,706,208 

$

39,702 

$

1,434,649 

$

87,904 

$

6,268,463 

Total liabilities

$

342,746 

$

4,691,158 

$

596,582 

$

$

5,630,486 

December 31, 2020

Specialty finance

Payments

Corporate

Discontinued operations

Total

(in thousands)

Total assets

$

4,491,768 

$

32,976 

$

1,638,447 

$

113,650 

$

6,276,841 

Total liabilities

$

304,908 

$

4,877,674 

$

513,095 

$

$

5,695,677 

39


Note 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 loans which constitute the commercial loan portfolio are in the process of disposition including transfers to other financial institutions. As such, financial results of the commercial lending operations are presented as separate from continuing operations on the consolidated statements of operations and assets of the commercial lending operations to be disposed of are presented as assets held-for-sale on the consolidated balance sheets.

The following table presents financial results of the commercial lending business included in net loss from discontinued operations for the three and nine months ended September 30, 2021 and 2020 (in thousands):

For the three months ended September 30,

For the nine months ended September 30,

2021

2020

2021

2020

Interest income

$

754 

$

890 

$

2,388 

$

3,259 

Interest expense

Net interest income

754 

890 

2,388 

3,259 

Non-interest income

48 

4 

51 

18 

Non-interest expense

715 

2,565 

2,115 

5,997 

Income (loss) before taxes

87 

(1,671)

324 

(2,720)

Income tax expense (benefit)

21 

(1,794)

76 

(2,058)

Net income (loss)

$

66 

$

123 

$

248 

$

(662)

The following table presents assets held-for-sale from discontinued operations at September 30, 2021 and December 31, 2020 (in thousands):

September 30,

December 31,

2021

2020

Loans, net

$

69,435 

$

91,316 

Other real estate owned

18,469 

22,334 

Total assets

$

87,904 

$

113,650 

Non-interest expense for the respective three and nine month periods ended September 30, 2021 reflected $384,000 and $1.5 million of recoveries of prior losses on loans. For the respective three and nine month periods ended September 30, 2020 non-interest expense included loan fair value and realized losses of $1.4 million and $2.3 million. Also in non-interest expense are expenses and losses related to other real estate owned of $745,000 and $2.3 million for the three and nine month periods ended September 30, 2021 and $2.1 million and $3.8 million for the three and nine month periods ended September 30, 2020, respectively. Discontinued operations loans are recorded at the lower of their cost or fair value. Fair value is determined using a discontinued cash flow analysis where projections of cash flows are developed in consideration of internal loan review analysis and default/prepayment assumptions for smaller pools of loans. These credit and collateral related assumptions are subject to uncertainty. 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, $87.9 million of loans and other real estate owned remain in assets held-for-sale on the September 30, 2021 consolidated balance sheet as a result of loan sales, principal paydowns and fair value charges as of September 30, 2021. The Company is attempting to dispose of those remaining loans and other real estate owned.

Note 17. Subsequent Events

The Company evaluated its September 30, 2021 consolidated financial statements for subsequent events through the date the consolidated financial statements were issued. On October 20, 2021, the Board approved the 2022 Common Stock Repurchase Program for the upcoming 2022 fiscal year, as discussed in Note 12.

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, 2020 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

40


speak only as of the date hereof. We undertake no obligation to publicly revise or update these forward-looking statements to reflect events or circumstances after the date of this Form 10-Q except as required by applicable law.

In the following discussion we provide information about our results of operations, financial condition, liquidity and asset quality. We intend that this information facilitate your understanding and assessment of significant changes and trends related to our financial condition and results of operations. You should read this section in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the year ended December 31, 2020.

Recent and COVID-19 Pandemic Related Developments

As a result of increased COVID-19 vaccination rates and significant reopening of the economy during 2021, year-to-date 2021 net income of $83.7 million did not reflect significant charges related to the pandemic. Net income of $55.9 million for the nine month period ended September 30, 2020 reflected pre-tax charges of approximately $5.4 million primarily for unrealized losses related to non-SBA commercial real estate (“CRE”) loans, at fair value, which were directly related to the economic impact of COVID-19.

Total loan balances not guaranteed by the United States government for borrowers with Covid-19 payment deferrals had been reduced to $1.3 million as of September 30, 2021. Approximately 75% of the SBA 7a loan portfolio is government guaranteed; however, the unguaranteed portion of 7a loans may represent an elevated risk. The U.S. government paid principal and interest on those loans for a six month period which began in April 2020. In February 2021, pursuant to federal legislation adopted in response to the COVID-19 pandemic, the U.S. government began making payments for at least a two month period on such loans, and for as long as a five month period for loans more impacted by the COVID-19 pandemic, such as loans for hotels and restaurants. Unlike the six payments made under the prior legislation, these payments were limited to $9,000 per month. No additional payments have currently been authorized; however, lenders may defer payments on loans with COVID-related payment issues through December 31, 2021 or the end of the national emergency, whichever comes first. Because only $1.3 million of non-government guaranteed loan balances remained in deferral at September 30, 2021, and the vast majority of borrowers previously in deferral had made their payments due by that date, we do not anticipate that additional government payment support will be required.

In addition to the continuation of Federal Reserve rate reductions in the first quarter of 2020, U.S. government efforts to address the economic impact of the COVID-19 pandemic included several actions which have and will directly impact us as follows:

The Paycheck Protection Program (“PPP”) provided for our having made loans as an SBA lender which are fully guaranteed by the U.S. government to allow businesses to continue funding their payrolls and related costs. In second quarter 2020, under the CARES Act, we originated approximately 1,250 PPP loans under the original program, totaling in excess of $200 million, which resulted in approximately $5.5 million of fees and interest. The average loan size was approximately $165,000, with over 90% of the loans under $350,000. While it was originally anticipated that these fees would be recognized earlier, subsequent legislation and rulemaking resulted in their estimated recognition over approximately eleven months which began in April 2020. At September 30, 2021 most of these loans had been repaid by the U.S. government. The Consolidated Appropriations Act, 2021 provided funding for additional PPP loans beginning in first quarter 2021. In that new lending program we originated approximately 630 PPP loans, totaling approximately $100 million, which resulted in approximately $3.4 million of fees and interest. The average loan size was approximately $155,000, with over 90% of the loans under $350,000. As that new legislation included lost revenue thresholds for participation, our loan volume and fees were less than for the 2020 PPP. These fees are being recognized over an 11 month period, which is the estimated period of repayment by the U.S. government, beginning in February 2021. No future PPP loans have been authorized by legislation. Accordingly, we expect that the $71.3 million of PPP loans outstanding at September 30, 2021 will be repaid and not be replaced, and revenues will not be realized from any new PPP loans. In third quarter 2021, we recognized $1.2 million in interest and fees on such loans, compared to $2.1 million in the third quarter of 2020.

The SBA began, in February 2021, to make between two and five months of principal and interest payments, up to $9,000 per month on SBA 7a loans, which are generally 75% guaranteed by the U.S. government. The payments of up to five months were for businesses more greatly impacted by the COVID-19 pandemic such as hotels and restaurants. As of September 30, 2021, we had $369.7 million of related guaranteed balances, and additionally had $71.3 million of PPP loans which were also guaranteed.

Deferrals for principal and interest payments related to the pandemic may be granted through the earlier of December 31, 2021 or the end of the national emergency. Accounting and banking regulators have determined that loans with deferrals of principal and interest payments related to the COVID-19 pandemic will not, during the deferral period noted above, be classified as restructured.

We have experienced early payoffs in our non-SBA multi-family (apartment) CRE loans, at fair value and in the third quarter of 2021, began originating similar loans to offset the impact of such prepayments. A net reduction of $1.9 million in interest income resulted in third quarter 2021 compared to third quarter 2020, as the impact of the prepayments exceeded interest from the new originations. Additionally, non-interest income reflected an increase of $3.6 million in net realized and unrealized gains (losses) on commercial loans at fair value primarily reflecting fees related to those prepayments. Also, in third quarter 2021, the tax rate was approximately 23%,

41


compared to higher rates in recent periods, as a result of tax benefits related to stock-based compensation which were recognized as a result of the increase in the Company’s stock price.

Key Performance Indicators

We use a number of key performance indicators to measure our overall financial performance. We describe how we calculate and use a number of these performance indicators and analyze their results below.

Return on assets and return on equity. Two performance indicators we believe are commonly used within the banking industry to measure overall financial performance are return on assets and return on equity. Return on assets measures the amount of earnings compared to the level of assets utilized to generate those earnings. It is derived by dividing net income by average assets. Return on equity measures the amount of earnings compared to the equity utilized to generate those earnings. It is derived by dividing net income by average shareholders’ equity.

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. In the past approximately five years, we have transitioned from a balance sheet which was significantly comprised of local Philadelphia commercial real estate loans, to other types of lending which we believe are lower risk. These include: multi-family (apartment) loans in selected national regions; loans collateralized by securities (“SBLOC”) and the cash value of life insurance (“IBLOC”); SBA loans, a significant portion of which are government guaranteed or must have loan-to-value ratios lower than other forms of lending; and leasing to which we have access to underlying vehicles. Loan balances in these categories have grown significantly, which we believe has contributed to improved financial performance over the past five years.

Improved financial performance is reflected in a number of these performance indicators. In third quarter 2021, return on assets and return on equity amounted to 1.76% and 17.84% (annualized), respectively, compared to 1.48% and 16.90% (annualized) in third quarter 2020. For the nine month period ended September 30, 2021, return on assets and return on equity amounted to 1.66% and 18.35% (annualized), respectively, compared to 1.25% and 14.29% (annualized) for the nine month period ended September 30, 2020. Improvements in return on asset and equity in 2021 reflected increases in loan interest, including interest from loan growth, which more than offset reductions in securities interest. The reductions in securities interest reflected lower balances and the impact of the lower rate environment. Loan interest included $3.0 million and $1.4 million of fees, respectively, in the second and first quarters of 2021, related to a line of credit to another institution for PPP loans, which are not expected to recur. Increased returns on assets and equity in 2021 also reflected higher non-interest income. While as a result of the pandemic unrealized losses were recognized in 2020, gains on non-SBA CRE loans, at fair value resulted primarily from fees related to loan prepayments in 2021. Net interest margin was 3.35% in third quarter 2021 versus 3.37% in third quarter 2020 and 3.29% versus 3.41%, respectively, for the nine month periods ended September 30, 2021 and 2020. The reduction in 2021 reflects the impact of temporarily increased balances held at the Federal Reserve earning nominal rates, which resulted from COVID-19 stimulus payments, and lower loan and securities yields resulting from the lower rate environment. 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, 2021, that ratio was 10.18%, compared to 9.05% a year earlier. The increase reflected higher levels of capital from retained earnings, while assets, after increasing temporarily due to stimulus payments, returned to pre-stimulus levels.

Overview

We are a Delaware financial holding company and our primary subsidiary, which we wholly own, is The Bancorp Bank, which we refer to as the Bank. The vast majority of our revenue and income is currently generated through the Bank. In our continuing operations, we have four primary lines of specialty lending:

SBLOC, IBLOC, and investment advisor financing;

leasing (direct lease financing);

small business loans, primarily SBA loans, and

non-SBA commercial real estate (“CRE”) loans.

42


SBLOCs and IBLOCs are loans which are generated through affinity groups and are respectively collateralized by marketable securities and the cash value of insurance policies. SBLOCs are typically offered in conjunction with brokerage accounts and are offered nationally. IBLOC loans are typically viewed as an alternative to standard policy loans from insurance companies and are utilized by our existing advisor base as well as insurance agents throughout the country. Investment advisor financing are loans made to investment advisors for purposes of debt refinance, acquisition of another investment firm or internal succession. Vehicle fleet and, to a lesser extent, other equipment leases are generated in a number of Atlantic Coast and other states and are collateralized primarily by vehicles. SBA loans are made nationally and are collateralized by commercial properties and other types of collateral. Our non-SBA commercial real estate 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.”

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 acquiring accounts provide clearing and settlement services for payments made to merchants which must be settled through associations such as Visa or MasterCard. We also provide banking services to organizations with a pre-existing customer base tailored to support or complement the services provided by these organizations to their customers. These services include loan and deposit accounts for investment advisory companies through our institutional banking department. We typically provide these services under the name and through the facilities of each organization with whom we develop a relationship. We refer to this, generally, as affinity banking.

Our net income of $28.3 million for the third quarter of 2021 increased from $23.3 million for the third quarter of 2020, reflecting increases in net interest and non-interest income and a decrease in non-interest expense. The $897,000 increase in net interest income reflected increases in loan interest, including interest from loan growth, which more than offset reductions in securities interest. SBLOC, IBLOC and investment advisor loans totaled $1.92 billion at September 30, 2021, compared to $1.45 billion at September 30, 2020, reflecting 31.7% annual growth. Related interest increased $3.4 million. Leasing balances totaled $514.1 million at September 30, 2021, compared to $430.7 million at September 30, 2020, reflecting 19.4% growth. Related interest increased $768,000. Excluding the impact of PPP, SBA loans totaled $709.5 million compared to $633.4 million at those respective dates, an increase of 12.0%; however, the impact of SBA growth on interest income was largely offset by lower PPP fees and interest. Increases in loan interest were offset by a $1.0 million decrease in securities interest resulting from lower securities balances and the impact of the lower rate environment. Interest expense increased $125,000, primarily as a result of senior debt issued in the third quarter of 2020. Our largest funding sources, prepaid and debit card account deposits, contractually adjust to only a portion of increases or decreases in market rates, as reflected in an 18 basis point cost of funds in third quarter 2021. A $1.6 million provision for credit losses in third quarter 2021, compared to a $1.3 million provision in third quarter 2020. Prepaid, debit card and other payment related fees are the largest driver of non-interest income. Such fees for third quarter 2021 decreased $1.1 million over the comparable 2020 period. While interest income on non-SBA CRE loans decreased $1.9 million as a result of loan prepayments, non-interest income reflected an increase of $3.6 million in net realized and unrealized gains (losses) on commercial loans, at fair value primarily reflecting fees related to those prepayments. We have begun generating new CRE loans with the first closings occurring in the third quarter, which are intended to replace these prepayments and other related loan payoffs. Additionally, leasing income increased $449,000 over the prior year quarter. The increase reflected the impact of the reopening of vehicle auctions after COVID-19 pandemic shutdowns, and higher vehicle market prices due to vehicle shortages. For those periods, non-interest expense decreased $2.6 million which reflected a $1.9 million reduction in Federal Deposit Insurance Corporation (“FDIC”) insurance 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 credit losses on loans, leases and securities, our determination of the fair value of financial instruments and the level in which an instrument is placed within the valuation hierarchy, and income taxes involve a higher degree of judgment and complexity than our other significant accounting policies.

We determine our allowance for credit losses using the current expected credit losses method, or CECL, with the objective of maintaining a reserve level we believe to be sufficient to absorb our estimated probable credit losses. We base our determination of the adequacy of

43


the allowance on periodic evaluations of our loan portfolio and other relevant factors. However, this evaluation is inherently subjective as it requires material estimates, including, among others, expected default probabilities, the amount of loss we may incur on a defaulted loan, expected commitment usage, the amounts and timing of expected future cash flows on credit deteriorated loans, value of collateral, estimated losses on consumer loans, and historical loss experience. We also evaluate economic conditions and uncertainties in estimating losses and inherent risks in our loan portfolio. To the extent actual outcomes differ from our estimates, we may need additional provisions for credit losses. Any such additional provisions for credit losses will be a direct charge to our earnings. See “Allowance for Credit Losses”.

The fair value of a financial instrument is defined as the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. We estimate the fair value of a financial instrument using a variety of valuation methods. Where financial instruments are actively traded and have quoted market prices, quoted market prices are used for fair value. When the financial instruments are not actively traded, other observable market inputs, such as quoted prices of securities with similar characteristics, may be used, if available, to determine fair value. When observable market prices do not exist, we estimate fair value. Our valuation methods and inputs consider factors such as types of underlying assets or liabilities, rates of estimated credit losses, interest rate or discount rate and collateral. Our best estimate of fair value involves assumptions including, but not limited to, various performance indicators, such as historical and projected default and recovery rates, credit ratings, current delinquency rates, loan-to-value ratios and the possibility of obligor refinancing.

At the end of each quarter, we assess the valuation hierarchy for each asset or liability measured. From time to time, assets or liabilities may be transferred within hierarchy levels due to changes in availability of observable market inputs to measure fair value at the measurement date. Transfers into or out of hierarchy levels are based upon the fair value at the beginning of the reporting period.

We periodically review our investment portfolio to determine whether unrealized losses on securities result from credit, based on evaluations of the creditworthiness of the issuers or guarantors, and underlying collateral, as applicable. In addition, we consider the continuing performance of the securities. We recognize credit losses through the Consolidated Statements of Operations. If management believes market value losses are not credit related, we recognize the reduction in other comprehensive income, through equity. We evaluate whether a credit loss exists by considering primarily the following factors: (a) the extent to which the fair value has been less than the amortized cost of the security, (b) changes in the financial condition, credit rating and near-term prospects of the issuer, (c) whether the issuer is current on contractually obligated interest and principal payments, (d) changes in the financial condition of the security’s underlying collateral and (e) the payment structure of the security. If a credit loss is determined, we estimate expected future cash flows to estimate the credit loss amount with a quantitative and qualitative process that incorporates information received from first-party sources and internal assumptions and judgments regarding the future performance of the security.

We account for our stock-based compensation plans based on the fair value of the awards made, which include stock options, restricted stock, and performance based shares. To assess the fair value of the awards made, management makes assumptions as to expected stock price volatility, option terms, forfeiture rates and dividend rates. All these estimates and assumptions may be susceptible to significant change that may impact earnings in future periods.

We account for income taxes under the liability method whereby we determine deferred tax assets and liabilities based on the difference between the carrying values on our consolidated financial statements and the tax basis of assets and liabilities as measured by the enacted tax rates which will be in effect when these differences reverse. Deferred tax expense (benefit) is the result of changes in deferred tax assets and liabilities.

44


Results of Operations

Third quarter 2021 to third quarter 2020

Net Income: Income from continuing operations before income taxes was $36.5 million in the third quarter of 2021 compared to $31.0 million in the third quarter of 2020. Net income from continuing operations for the third quarter of 2021 was $28.2 million, or $0.48 per diluted share, compared to $23.1 million, or $0.40 per diluted share, for the third quarter of 2020. Income from continuing operations increased between those respective periods primarily as a result of lower non-interest expense and higher non-interest income. After discontinued operations, net income for the third quarter of 2021 amounted to $28.3 million, compared to $23.3 million for the third quarter of 2020. Net interest income for the third quarter of 2021 increased 1.8%, to $50.9 million from $50.0 million in the third quarter of 2020. The increase reflected increases in loan interest as a result of higher loan balances, partially offset by reductions in securities interest resulting from lower balances, and lower loan yields which reflected the impact of Federal Reserve rate reductions. The provision for credit losses increased $316,000 to $1.6 million in the third quarter of 2021 compared to $1.3 million in the third quarter of 2020. Non-interest income (excluding security gains and losses) increased $2.2 million, reflecting an increase in net realized and unrealized gains (losses) on non-SBA CRE loans, at fair value of $3.6 million. The $3.6 million increase primarily reflected fees related to prepayments of non-SBA CRE loan payoffs in the third quarter of 2021. Non-SBA CRE loans, at fair value are primarily comprised of multi-family (apartment) loans. While previously we had securitized such loans, in 2020 we decided to retain these loans in our portfolio and no future securitizations are currently planned. In the third quarter of 2021, we began newly originating such loans. Prepaid, debit card and other payment fees are the primary driver of non-interest income and decreased $1.1 million, or 5.0%, to $20.1 million, in the third quarter of 2021 compared to third quarter 2020. Non-interest expense decreased $2.6 million, or 6.3%, to $39.4 million in the third quarter of 2021 compared to $42.0 million in the third quarter of 2020, reflecting a $1.9 million decrease in FDIC insurance expense between those periods. Additionally, the 2021 effective tax rate was lower compared to other recent periods. Diluted income per share was $0.48 in the third quarter of 2021 compared to $0.40 diluted income per share in the third quarter of 2020 primarily reflecting the above factors.

Net Interest Income: Our net interest income for the third quarter of 2021 increased to $50.9 million, an increase of $897,000, or 1.8%, from $50.0 million in the third quarter of 2020. Our interest income for the third quarter of 2021 increased to $53.5 million, an increase of $1.0 million, or 1.9%, from $52.5 million for the third quarter of 2020. The increase in interest income resulted primarily from higher loan balances. Our average loans and leases increased to $4.58 billion for the third quarter of 2021 from $4.21 billion for the third quarter of 2020, an increase of $368.4 million, or 8.8%. Related interest income increased $2.0 million on a tax equivalent basis. The increase in average loans primarily reflected growth in SBLOC, IBLOC, investment advisor loans and direct lease financing, partially offset by decreases in PPP loans. Small business loans which also grew, have generally been comprised of SBA loans. However, in 2020 and 2021 they reflected balances of pandemic related PPP loans guaranteed by the U.S. government which repaid significant amounts of those loans in 2021, accounting for the decrease. The balance of our commercial loans, at fair value also decreased, primarily reflecting non-SBA CRE loan payoffs. In the third quarter of 2021, we began newly originating such loans, referred to as real estate bridge loans. Of the total $2.0 million net increase in loan interest income, the largest increase was $3.4 million for SBLOC, IBLOC and investment advisor financing loans, while interest on non-SBA commercial real estate loans decreased $1.9 million. Our average investment securities of $1.02 billion for the third quarter of 2021 decreased $288.7 million from $1.30 billion for the third quarter of 2020. Related tax equivalent interest income decreased $1.0 million primarily reflecting a decrease in balances. Yields on loans generally decreased as a result of the impact of the Federal Reserve’s 2020 rate decreases, partially offset by the weighted average 4.8% interest rate floors on non-SBA CRE loans, at fair value. While interest income increased by $1.0 million, interest expense increased by $125,000 primarily as a result of the interest expense on the senior debt issued in the third quarter of 2020.

Our net interest margin (calculated by dividing net interest income by average interest earning assets) for the third quarter of 2021 was 3.35% compared to 3.37% for the third quarter of 2020, a decrease of 2 basis points. While the yield on interest earning assets decreased 1 basis point, the cost of deposits and interest bearing liabilities did not change, for a net change of 1 basis point. The decrease in net interest margin reflected the impact of lower yields on loans. Balances at the Federal Reserve earn nominal rates of interest. Average interest earning deposits at the Federal Reserve Bank increased $66.1 million, or 16.0%, to $479.4 million in the third quarter of 2021 from $413.3 million in the third quarter of 2020. The net interest margin reflected the impact of the 4.8% weighted average floor on non-SBA CRE loans, at fair value, the prepayments for which contributed to a decrease in the average yield on loans. In the third quarter of 2021, the average yield on our loans decreased to 4.05% from 4.22% for the third quarter of 2020, a decrease of 17 basis points. Yields on taxable investment securities in the third quarter of 2021 increased to 2.72% compared to 2.43% for the third quarter of 2020, an increase of 29 basis points. Yields on investment securities were impacted by the timing of prepayments. The cost of total deposits and interest bearing liabilities was 0.18% for the third quarter of 2021 as well as the third quarter of 2020.

45


Average Daily Balances. The following table presents the average daily balances of assets, liabilities and shareholders’ equity and the respective interest earned or paid on interest-earning assets and interest-bearing liabilities, as well as average annualized rates, for the periods indicated:

Three months ended September 30,

2021

2020

Average

Average

Average

Average

Balance

Interest

Rate

Balance

Interest

Rate

(dollars in thousands)

Assets:

Interest earning assets:

Loans, net of deferred loan fees and costs **

$

4,573,431 

$

46,357 

4.05%

$

4,202,054 

$

44,318 

4.22%

Leases-bank qualified*

5,031 

87 

6.92%

8,026 

146 

7.28%

Investment securities-taxable

1,012,007 

6,882 

2.72%

1,300,191 

7,911 

2.43%

Investment securities-nontaxable*

3,558 

32 

3.60%

4,041 

35 

3.46%

Interest earning deposits at Federal Reserve Bank

479,350 

167 

0.14%

413,259 

106 

0.10%

Net interest earning assets

6,073,377 

53,525 

3.53%

5,927,571 

52,516 

3.54%

Allowance for credit losses

(16,277)

(14,587)

Assets held-for-sale from discontinued operations

90,598 

754 

3.33%

124,916 

890 

2.85%

Other assets

214,715 

195,125 

$

6,362,413 

$

6,233,025 

Liabilities and shareholders' equity:

Deposits:

Demand and interest checking

$

5,124,189 

$

1,063 

0.08%

$

5,079,711 

$

1,591 

0.13%

Savings and money market

404,775 

146 

0.14%

484,323 

139 

0.11%

Total deposits

5,528,964 

1,209 

0.09%

5,564,034 

1,730 

0.12%

Short-term borrowings

13,097 

0.21%

3,260 

0.12%

Repurchase agreements

41 

41 

Subordinated debt

13,401 

112 

3.34%

13,401 

118 

3.52%

Senior debt

100,329 

1,279 

5.10%

53,260 

633 

4.75%

Total deposits and liabilities

5,655,832 

2,607 

0.18%

5,633,996 

2,482 

0.18%

Other liabilities

78,038 

53,260 

Total liabilities

5,733,870 

5,687,256 

Shareholders' equity

628,543 

545,769 

$

6,362,413 

$

6,233,025 

Net interest income on tax equivalent basis *

$

51,672 

$

50,924 

Tax equivalent adjustment

25 

38 

Net interest income

$

51,647 

$

50,886 

Net interest margin *

3.35%

3.37%

* Fully taxable equivalent basis, using 21% respective statutory Federal tax rates in 2021 and 2020.

** Includes commercial loans, at fair value. All periods include non-accrual loans.

NOTE: In the table above, interest on loans for 2021 includes $1.2 million of interest and fees on PPP loans. In 2020 the table above includes comparable PPP interest and fees of $2.1 million.

For the third quarter of 2021, average interest earning assets increased to $6.07 billion, an increase of $145.8 million, or 2.5%, from $5.93 billion in the third quarter of 2020. The increase reflected increased average balances of loans and leases of $368.4 million, or 8.8%, partially offset by decreased average investment securities of $288.7 million, or 22.1%. For those respective periods, average demand and interest checking deposits increased $44.5 million, or 0.9%, primarily as a result of deposit growth in prepaid and debit card accounts. The $79.5 million decrease in average savings and money market balances between these respective periods reflected the impact of the exit of a single affinity group. The interest expense shown for demand and interest checking is primarily comprised of interest paid to our affinity groups.

Provision for Credit Losses. Our provision for credit losses was $1.6 million for the third quarter of 2021 compared to $1.3 million for the third quarter of 2020, or a net increase of $316,000. The increase reflected the impact of an increase in SBA non-real estate charge-offs. The allowance for credit losses was $16.2 million, or 0.52%, of total loans at September 30, 2021, from $16.1 million, or 0.61%, of total loans at December 31, 2020. We believe that our allowance is adequate to cover expected losses. For more information about our provision and allowance for credit losses and our loss experience, see “Financial Condition-Allowance for credit losses”, “-Net charge-offs,” and “-Non-performing loans, loans 90 days delinquent and still accruing, and troubled debt restructurings,” below and Note 6 to the consolidated financial statements.

46


Non-Interest Income. Non-interest income was $26.6 million in the third quarter of 2021 compared to $24.4 million in the third quarter of 2020. The $2.2 million, or 9.2%, increase between those respective periods was primarily the result of an improvement in net realized and unrealized gains (losses) on non-SBA CRE loans, at fair value. Net realized and unrealized gains (losses) on such loans increased to a gain of $4.3 million from $684,000. The $3.6 million improvement was primarily the result of fees related to prepayments and payoffs of non-SBA CRE loans in 2021 and also included $1.4 million of increases in fair value reflecting reversals of 2020 fair value decreases related to COVID-19. Prepaid, debit card and related fees decreased $1.2 million, or 6.2%, to $18.2 million for the third quarter of 2021 compared to $19.4 million in third quarter 2020. The decrease primarily reflected the impact of the exit of a single affinity group which transitioned its accounts and related payments 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 other payment processing fees increased $145,000, or 8.2%, to $1.9 million for the third quarter of 2021 compared to $1.8 million in the third quarter of 2020, reflecting increased rapid funds transfer volume. Leasing related income increased $449,000, or 29.6%, to $2.0 million for the third quarter of 2021 from $1.5 million for the third quarter of 2020. The increase reflected the impact of the reopening of vehicle auctions after COVID-19 pandemic shutdowns, and higher vehicle market prices due to vehicle shortages. Other non-interest income decreased $769,000, or 80.5%, to $186,000 for the third quarter of 2021 from $955,000 in the third quarter of 2020, which had included the recovery of certain fees which had previously been written off.

Non-Interest Expense. Total non-interest expense was $39.4 million for the third quarter of 2021, a decrease of $2.6 million, or 6.3%, compared to $42.0 million for the third quarter of 2020. Salaries and employee benefits decreased to $25.1 million for the third quarter of 2021, a decrease of $1.3 million, or 5.0%, from $26.4 million for the third quarter of 2020. Lower salary expense in 2021 reflected lower incentive compensation related expense. Depreciation and amortization decreased $56,000, or 7.1%, to $729,000 in the third quarter of 2021 from $785,000 in the third quarter of 2020, which reflected reduced spending on fixed assets and equipment. Rent and occupancy decreased $120,000, or 8.7%, to $1.3 million in the third quarter of 2021 from $1.4 million in the third quarter of 2020 reflecting a reduction in leased space and a relocation to lower cost space. Data processing increased $17,000, or 1.4%, to $1.2 million in the third quarter of 2021 from $1.2 million in the third quarter of 2020. Printing and supplies decreased $33,000, or 28.9%, to $81,000 in the third quarter of 2021 from $114,000 in the third quarter of 2020, reflecting fewer paper based accounts and processes. Audit expense decreased $41,000, or 10.3%, to $356,000 in the third quarter of 2021 from $397,000 in the third quarter of 2020. Legal expense increased $257,000, or 25.9%, to $1.3 million in the third quarter of 2021 from $994,000 in the third quarter of 2020. The increase reflected costs associated with the Cascade matter. Additionally, costs continue to be incurred with respect to two fact-finding inquiries by the SEC staff. These matters are described in Note 14 to the financial statements. Amortization of intangible assets decreased by $48,000, or 32.7%, to $99,000 in the third quarter of 2021 from $147,000 in the third quarter of 2020. FDIC insurance expense decreased $1.9 million, or 87.8%, to $266,000 for the third quarter of 2021 from $2.2 million in the third quarter of 2020 primarily due to a reduction in the Bank’s assessment rate. The reduction in expense primarily reflected the cumulative impact of the reclassification of certain of our deposits from brokered to non-brokered on the assessment rate. Prior to the current quarter’s insurance rate reduction to approximately 10 basis points annually of average liabilities, the rate approximated 16 basis points. We believe that the insurance rate will continue to be lower than the 16 basis points. However, the rate is subject to multiple factors which may significantly change the amount assessed. Accordingly, we cannot assure you that reduced rates will continue. Software expense increased $450,000, or 12.5%, to $4.0 million in the third quarter of 2021 from $3.6 million in the third quarter of 2020. The increases reflected expenditures for information technology to improve efficiency and scalability, including expenses related to remote operations and cybersecurity, and upgrades for SBA loan processing. Insurance expense increased $369,000, or 49.8%, to $1.1 million in the third quarter of 2021 compared to $741,000 in the third quarter of 2020, reflecting higher rates. Telecom and IT network communications increased $21,000, or 5.4%, to $413,000 in the third quarter of 2021 from $392,000 in the third quarter of 2020. Consulting increased $38,000, or 9.3%, to $448,000 in the third quarter of 2021 from $410,000 in the third quarter of 2020. Other non-interest expense decreased $259,000, or 7.9%, to $3.0 million in the third quarter of 2021 from $3.3 million in the third quarter of 2020. The decrease reflected a $124,000 reduction in prepaid account related losses.

Income Taxes. Income tax expense for continuing operations was $8.3 million for the third quarter of 2021 compared to $7.9 million in the third quarter of 2020. A 22.7% effective tax rate in the third quarter 2021 and a 25.4% effective tax rate in the third quarter of 2020 primarily reflected a 21% federal tax rate and the impact of various state income taxes. The reduction in effective tax rate for 2021 reflected the impact of an excess tax deduction related to stock-based compensation recorded as a discrete item in 2021. The large deduction and tax benefit resulted from the increase in the Company’s stock price as compared to the original grant date of stock based compensation.

47


First nine months 2021 to first nine months 2020

Net Income: Income from continuing operations before income taxes was $108.6 million in the first nine months of 2021 compared to $75.6 million in the first nine months of 2020. Net income from continuing operations for the first nine months of 2021 was $83.4 million, or $1.41 per diluted share, compared to $56.6 million, or $0.97 per diluted share, for the first nine months of 2020. Income from continuing operations increased between those respective periods primarily as a result of higher net interest income and non-interest income. After discontinued operations, net income for the first nine months of 2021 amounted to $83.7 million, compared to $55.9 million for the first nine months of 2020. Net interest income for the first nine months of 2021 increased 10.9%, to $158.7 million from $143.2 million in the first nine months of 2020. The increase reflected increases in loan interest as a result of higher loan balances partially offset by reductions in securities interest resulting from lower balances, and lower yields which reflected the impact of Federal Reserve rate reductions. Loan interest in 2021 included $4.6 million of interest from a line of credit to another institution to fund PPP loans, which is not expected to recur and which offset the impact of decreases in other loan yields. Lower interest expense also reflected the impact of the Federal Reserve’s 1.50% of rate reductions which occurred toward the end of first quarter 2020. The provision for credit losses decreased $4.3 million to a provision for credit losses of $1.5 million in the first nine months of 2021 compared to a $5.8 million provision in the first nine months of 2020. The reduction reflected the reversal of charges in 2020 related to the COVID-19 pandemic and the impact of lower charge-offs in 2021. Non-interest income (excluding security gains and losses) increased $15.2 million, reflecting an increase in net realized and unrealized gains (losses) on non-SBA CRE loans, at fair value of $14.3 million which was primarily the result of unrealized losses in the first nine months of 2020 due to changes in fair value related to the COVID-19 pandemic and fees related to prepayments and payoffs of non-SBA CRE loans in 2021. The vast majority of non-SBA CRE loans at fair value are comprised of multi-family (apartment) loans. Prepaid, debit card and other payment fees are the primary driver of non-interest income and increased $231,000, or 0.4% to $56.9 million in the first nine months of 2021 compared to $56.6 million for the first nine months of 2020. Non-interest expense increased $2.1 million, or 1.7%, to $125.2 million in the first nine months of 2021 compared to $123.1 million in the first nine months of 2020, reflecting a $3.2 million increase in salary expense and a $1.2 million increase in legal expense between those periods which were partially offset by a $2.5 million reduction in our FDIC insurance expense. Additionally, the 2021 effective tax rate was lower compared to other recent periods. Diluted income per share was $1.42 in the first nine months of 2021 compared to $0.96 diluted income per share in the first nine months of 2020 primarily reflecting the above factors.

Net Interest Income: Our net interest income for the first nine months of 2021 increased to $158.7 million, an increase of $15.6 million, or 10.9%, from $143.2 million in the first nine months of 2020. Our interest income for the first nine months of 2021 increased to $167.4 million, an increase of $11.6 million, or 7.4%, from $155.8 million for the first nine months of 2020. The increase in interest income resulted primarily from higher loan balances. Our average loans and leases increased to $4.55 billion for the first nine months of 2021 from $3.81 billion for the first nine months of 2020, an increase of $739.7 million, or 19.4%. Related interest income increased $18.4 million on a tax equivalent basis. The increase in average loans primarily reflected growth in SBLOC, IBLOC, investment advisor loans and direct lease financing, partially offset by decreases in PPP loans. Small business loans which also grew, have generally been comprised of SBA loans. However, in 2020 and 2021 they reflected balances of pandemic related PPP loans guaranteed by the U.S. government which repaid significant amounts of those loans in 2021, accounting for the decrease. The balance of our commercial loans, at fair value also decreased primarily reflecting non-SBA CRE loan payoffs. In third quarter 2021 we began newly originating such loans, referred to as real estate bridge loans. Of the total $18.4 million increase in loan interest income, the largest increases were $7.2 million for SBLOC, IBLOC and investment advisor financing and $7.5 million for SBA loans. The increase in SBA loan interest reflects $4.6 million in fees which were earned on a short-term line of credit to another institution to initially fund PPP loans. Excluding those fees and other PPP interest, SBA loan interest increased $1.8 million. While SBA balances, excluding PPP, grew over the prior year period, lower rates partially offset the impact of higher balances. Our average investment securities of $1.10 billion for the first nine months of 2021 decreased $249.3 million from $1.35 billion for the first nine months of 2020. Related tax equivalent interest income decreased $5.7 million primarily reflecting a decrease in balances and secondarily reflecting a decrease in yields. Yields on loans and securities decreased as a result of the impact of the Federal Reserve’s 2020 rate decreases on variable rate obligations, partially offset by the weighted average 4.8% interest rate floors on the non-SBA CRE loans, at fair value. While interest income increased by $11.6 million, interest expense decreased by $4.0 million as deposits also repriced to the lower rate environment. Decreases in deposit interest expense were partially offset by the impact of the senior debt issuance in August 2020.

Our net interest margin (calculated by dividing net interest income by average interest earning assets) for the first nine months of 2021 was 3.29% compared to 3.41% for the first nine months of 2020, a decrease of 12 basis points. While the yield on interest earning assets decreased 24 basis points, the cost of deposits and interest bearing liabilities decreased 13 basis points, or a net change of 11 basis points. The decrease in net interest margin reflected the impact of higher balances maintained at the Federal Reserve as a result of deposits of stimulus payments resulting from December 2020 and March 2021 federal legislation. Balances at the Federal Reserve earn nominal rates of interest. Average interest earning deposits at the Federal Reserve Bank increased $337.3 million, or 75.9%, to $781.6 million in the first nine months of 2021 from $444.3 million in the first nine months of 2020. The reduction in the net interest margin resulting from higher Federal Reserve balances and lower overall loan yields, was partially offset by the impact of $4.6 million of interest and fees on a short-term line of credit to another institution to initially fund PPP loans, which did not significantly increase average interest earning assets. The net interest margin reflects the 4.8% weighted average floor on non-SBA CRE loans, at fair value. Yields on variable rate loans generally fell as a result of the Federal Reserve rate reductions. In the first nine months of 2021, the average yield on our loans decreased to 4.21% from 4.39% for the first nine months of 2020, a decrease of 18 basis points. Yields on taxable investment securities

48


in the first nine months of 2021 decreased to 2.79% compared to 2.84% for the first nine months of 2020, a decrease of 5 basis points. The cost of total deposits and interest bearing liabilities decreased 13 basis points to 0.19% for the first nine months of 2021 compared to 0.32% in the first nine months of 2020, also resulting from the impact of the aforementioned Federal Reserve rate reductions.

Average Daily Balances. The following table presents the average daily balances of assets, liabilities and shareholders’ equity and the respective interest earned or paid on interest-earning assets and interest-bearing liabilities, as well as average annualized rates, for the periods indicated:

Nine months ended September 30,

2021

2020

Average

Average

Average

Average

Balance

Interest

Rate

Balance

Interest

Rate

(dollars in thousands)

Assets:

Interest earning assets:

Loans, net of deferred loan fees and costs **

$

4,541,262 

$

143,546 

4.21%

$

3,798,104 

$

124,924 

4.39%

Leases-bank qualified*

5,925 

301 

6.77%

9,401 

509 

7.22%

Investment securities-taxable

1,094,633 

22,891 

2.79%

1,343,211 

28,594 

2.84%

Investment securities-nontaxable*

3,824 

99 

3.45%

4,537 

110 

3.23%

Interest earning deposits at Federal Reserve Bank

781,606 

650 

0.11%

444,323 

1,836 

0.55%

Net interest earning assets

6,427,250 

167,487 

3.47%

5,599,576 

155,973 

3.71%

Allowance for credit losses

(16,254)

(13,225)

Assets held-for-sale from discontinued operations

99,472 

2,388 

3.20%

130,880 

3,259 

3.32%

Other assets

225,802 

243,629 

$

6,736,270 

$

5,960,860 

Liabilities and shareholders' equity:

Deposits:

Demand and interest checking

$

5,452,604 

$

4,007 

0.10%

$

4,858,666 

$

9,676 

0.27%

Savings and money market

446,016 

487 

0.15%

298,049 

309 

0.14%

Time

106,113 

1,483 

1.86%

Total deposits

5,898,620 

4,494 

0.10%

5,262,828 

11,468 

0.29%

Short-term borrowings

8,717 

15 

0.23%

25,419 

181 

0.95%

Repurchase agreements

41 

51 

Subordinated debt

13,401 

337 

3.35%

13,401 

408 

4.06%

Senior debt

100,237 

3,838 

5.11%

17,883 

633 

4.72%

Total deposits and liabilities

6,021,016 

8,684 

0.19%

5,319,582 

12,690 

0.32%

Other liabilities

105,683 

119,961 

Total liabilities

6,126,699 

5,439,543 

Shareholders' equity

609,571 

521,317 

$

6,736,270 

$

5,960,860 

Net interest income on tax equivalent basis *

$

161,191 

$

146,542 

Tax equivalent adjustment

84 

130 

Net interest income

$

161,107 

$

146,412 

Net interest margin *

3.29%

3.41%

* Fully taxable equivalent basis, using 21% respective statutory Federal tax rates in 2021 and 2020.

** Includes commercial loans, at fair value. All periods include non-accrual loans.

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 in 2021 also includes $4.9 million of interest and fees on PPP loans. In 2020 the table above includes comparable PPP interest and fees of $3.7 million. Increases in interest earning deposits at the Federal Reserve Bank reflect increased deposits resulting from stimulus payments distributed to a large segment of the population, resulting from December 2020 federal legislation.

For the first nine months of 2021, average interest earning assets increased to $6.43 billion, an increase of $827.7 million, or 14.8%, from $5.60 billion in the first nine months of 2020. The increase reflected increased average balances of loans and leases of $739.7 million, or 19.4%, partially offset by decreased average investment securities of $249.3 million, or 18.5%. For those respective periods, average demand and interest checking deposits increased $593.9 million, or 12.2%, primarily as a result of deposit growth in prepaid and debit card accounts. The $148.0 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 nine month average deposit growth resulted from economic stimulus payments related to the pandemic, and is temporary as described in “Liquidity and Capital Resources”. The interest expense shown for demand and interest checking is primarily comprised of interest paid to our affinity groups.

49


Provision for Credit Losses. Our provision for credit losses was $1.5 million for the first nine months of 2021 compared to a provision for credit losses of $5.8 million for the first nine months of 2020. The reduction reflected the reversal of charges in 2021 for economic factors related to the COVID-19 pandemic which were incurred in 2020, and the impact of lower charge-offs in 2021. The allowance for credit losses was $16.2 million, or 0.52%, of total loans at September 30, 2021, compared to $16.1 million, or 0.61%, of total loans at December 31, 2020. We believe that our allowance is adequate to cover expected losses. For more information about our provision and allowance for credit losses and our loss experience, see “Financial Condition-Allowance for credit losses”, “-Net charge-offs,” and “-Non-performing loans, loans 90 days delinquent and still accruing, and troubled debt restructurings,” below and Note 6 to the consolidated financial statements.

Non-Interest Income. Non-interest income was $76.5 million in the first nine months of 2021 compared to $61.3 million in the first nine months of 2020. The $15.2 million, or 24.8%, increase between those respective periods was primarily the result of an increase in net realized and unrealized gains (losses) on non-SBA CRE loans, at fair value. Net realized and unrealized gains (losses) on such loans increased to a gain of $8.9 million from a loss of $5.4 million. The $14.3 million change was primarily the result of fees related to prepayments and payoffs of non-SBA CRE loans in the second quarter of 2021 and unrealized losses in 2020 due to changes in fair value related to the COVID-19 pandemic. In third quarter 2021, we began newly originating such loans. Prepaid, debit card and related fees increased $231,000, or 0.4%, to $56.9 million for the first nine months of 2021 compared to $56.6 million in the first nine months 2020. The increase reflected higher transaction volume. Related fees in this category include income related to the use of cash in ATMs for prepaid payroll cardholders. ACH, card and other payment processing fees increased $292,000, or 5.5%, to $5.6 million for the first nine months of 2021 compared to $5.3 million in the first nine months of 2020, reflecting increased rapid funds transfer volume. Leasing related income increased $1.9 million, or 68.2%, to $4.7 million for the first nine months of 2021 from $2.8 million for the first nine months of 2020. The increase reflected the impact of the reopening of vehicle auctions after COVID-19 pandemic shutdowns, and higher vehicle market prices due to vehicle shortages. Other non-interest income decreased $1.6 million, or 77.3%, to $459,000 for the first nine months of 2021 from $2.0 million in the first nine months of 2020, which had included the recovery of certain fees which had previously been written off.

Non-Interest Expense. Total non-interest expense was $125.2 million for the first nine months of 2021, an increase of $2.1 million, or 1.7%, compared to $123.1 million for the first nine months of 2020. Salaries and employee benefits increased to $77.8 million for the first nine months of 2021, an increase of $3.2 million, or 4.3%, from $74.7 million for the first nine months of 2020. Higher salary expense in 2021 reflected higher incentive compensation expense, including equity compensation, and higher compliance expense, primarily related to the payments business. Depreciation and amortization decreased $313,000, or 12.7%, to $2.1 million in the first nine months of 2021 from $2.5 million in the first nine months of 2020, which reflected reduced spending on fixed assets and equipment. Rent and occupancy decreased $414,000, or 9.9%, to $3.8 million in the first nine months of 2021 from $4.2 million in the first nine months of 2020 reflecting a reduction in leased space and a relocation to lower cost space. Data processing decreased $57,000, or 1.6%, to $3.5 million in the first nine months of 2021 from $3.5 million in the first nine months of 2020. Printing and supplies decreased $163,000, or 37.0%, to $277,000 in the first nine months of 2021 from $440,000 in the first nine months of 2020, reflecting fewer paper based accounts and processes. Audit expense decreased $95,000, or 7.9%, to $1.1 million in the first nine months of 2021 from $1.2 million in the first nine months of 2020. Legal expense increased $1.2 million, or 29.3%, to $5.3 million in the first nine months of 2021 from $4.1 million in the first nine months of 2020, reflecting increased costs associated with the Cascade matter and two fact-finding inquiries by the SEC as described in Note 14 to the consolidated financial statements. Amortization of intangible assets decreased by $143,000, or 32.4%, to $298,000 in the first nine months of 2021 from $441,000 in the first nine months of 2020. FDIC insurance expense decreased $2.5 million, or 31.9%, to $5.2 million for the first nine months of 2021 from $7.7 million in the first nine months of 2020 primarily due to a reduction in the Bank’s assessment rate. The reduction in expense primarily reflected the cumulative impact of the reclassification of certain of our deposits from brokered to non-brokered on the assessment rate. Prior to the insurance rate reduction in third quarter 2021 to approximately 10 basis points annually of average liabilities, the rate approximated 16 basis points. We believe that the insurance rate will continue to be lower than the 16 basis points. However, the rate is subject to multiple factors which may significantly change the amount assessed. Accordingly, we cannot assure you that reduced rates will continue. Software expense increased $977,000, or 9.3%, to $11.4 million in the first nine months of 2021 from $10.5 million in the first nine months of 2020. The increases reflected expenditures for information technology to improve efficiency and scalability, including expenses related to remote operations and cybersecurity and upgrades for SBA loan processing. Insurance expense increased $822,000, or 39.9%, to $2.9 million in the first nine months of 2021 compared to $2.1 million in the first nine months of 2020, reflecting higher rates. Telecom and IT network communications increased $41,000, or 3.5%, to $1.2 million in the first nine months of 2021 from $1.2 million in the first nine months of 2020. Consulting decreased $59,000, or 5.8%, to $952,000 in the first nine months of 2021 from $1.0 million in the first nine months of 2020. Other non-interest expense decreased $460,000, or 4.8%, to $9.1 million in the first nine months of 2021 from $9.6 million in the first nine months of 2020. The $460,000 decrease reflected a $386,000 reduction in travel expenses which was partially offset by other expense increases, including a $90,000 increase in fraud losses.

Income Taxes. Income tax expense for continuing operations was $25.2 million for the first nine months of 2021 compared to $19.0 million in the first nine months of 2020. A 23.2% effective tax rate in 2021 and a 25.2% effective tax rate in 2020 primarily reflected a 21% federal tax rate and the impact of various state income taxes. The reduction in effective tax rate for 2021 reflected the impact of an excess tax deduction related to stock-based compensation recorded as a discrete item in 2021. The large deduction and tax benefit resulted from the increase in the Company’s stock price as compared to the original grant date of the stock compensation.

50


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. Average total deposits decreased by $35.1 million, or 0.6%, to $5.53 billion for third quarter 2021 compared to third quarter 2020. That decrease reflected the impact of a client relationship transitioning to its own bank, offsetting growth in other debit and prepaid card account balances. That exit also was reflected in average savings and money market account balances which decreased $79.5 million between those periods. A portion of 2021 deposit growth resulted from economic stimulus payments related to the pandemic, and was temporary. Federal Reserve average balances increased to $479.4 million in third quarter 2021 from $413.3 million in third quarter 2020. By September 30, 2021, that balance had been reduced to $310.6 million, reflecting outflows of certain stimulus payment deposits. Overnight borrowings are also periodically utilized as a funding source to facilitate cash management, but average balances have generally not been significant.

Our primary source of liquidity is available-for-sale securities which amounted to $1.05 billion at September 30, 2021 compared to $1.21 billion at December 31, 2020. Loan repayments, also a source of funds, were exceeded by new loan disbursements during third quarter 2021. As a result, at September 30, 2021 outstanding loans amounted to $3.14 billion, compared to $2.65 billion at the prior year end, an increase of $484.3 million, which was funded by deposits and securities prepayments. Commercial loans, at fair value decreased to $1.55 billion from $1.81 billion between those respective dates, a decrease of $260.8 million, which also provided funding for other loan categories. In 2019 and previous years, these loans were generally originated for sale into securitizations at six month intervals, but in 2020 we decided to retain such loans on the balance sheet. After we suspended originating such loans after first quarter 2020, we began newly originating non-SBA CRE loans in the third quarter of 2021. Our liquidity planning has not previously placed undue reliance on securitizations, and while our future planning excludes the impact of securitizations, other liquidity sources, primarily deposits, are determined to be adequate.

While we do not have a traditional branch system, we believe that our core deposits, which include our demand, interest checking, savings and money market accounts, have similar characteristics to those of a bank with a branch system. The majority of our deposit accounts are obtained with the assistance of third-parties and as a result have historically been classified as brokered by the FDIC. Prior 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 certain of our deposits being reclassified from brokered to non-brokered. As a result, the majority of our deposits have been reclassified as non-brokered. Certain accounts currently remain classified as brokered and require applications to the FDIC for reclassification. As of September 30, 2021, approximately $1.77 billion of our total deposit accounts of $5.11 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 such uninsured accounts present a significant liquidity risk.

We focus on customer service which we believe has resulted in a history of customer loyalty. Certain components of our deposits do experience seasonality, creating greater excess liquidity at certain times. The largest deposit inflows occur in the first quarter of the year when certain of our accounts are credited with tax refund payments from the U.S. Treasury.

While consumer deposit accounts including prepaid and debit card accounts comprise the vast majority of our funding needs, we maintain secured borrowing lines with the FHLB and the Federal Reserve. As of September 30, 2021, we had a line of credit with the Federal Reserve which exceeded one billion dollars, which may be collateralized by various types of loans, but which we generally have not used. To mitigate the impact of the COVID-19 pandemic, 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 $1.0 billion of multi-family loans to the FHLB. As a result, we have approximately $900 million of availability on our line of credit which we can access at any time. Additionally, in excess of $400 million of our available-for-sale securities are U.S. government agency securities which are highly liquid and may be pledged as additional collateral. As of September 30, 2021, we had no amounts outstanding on the FHLB line and $300 million outstanding on the Federal Reserve line. We expect to continue to maintain our facilities with the FHLB and Federal Reserve. We actively monitor our positions and contingent funding sources daily.

51


As a holding company conducting substantially all our business through our subsidiaries, our near term needs for liquidity consists principally of cash needed to make required interest payments on our trust preferred securities and senior debt. Our sources of liquidity have primarily come in the form 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, 2021, we had cash reserves of approximately $89.2 million at the holding company. A reduction from the prior quarter end reflected the impact of $10.0 million of common stock repurchases. The biannual interest payments on the $100.0 million of senior debt are approximately $2.4 million based on a fixed rate of 4.75%. Current quarterly interest payments on the $13.4 million of subordinated debentures are approximately $118,000 based on a floating rate of 3.25% over London Inter-bank Offered Rate (“LIBOR”). The senior debt matures in August 2025 and the subordinated debentures mature in March 2038. In lieu of repayment of debt from Bank dividends, industry practice includes the issuance of new debt to repay maturing debt.

Included in our cash and cash-equivalents at September 30, 2021 were $310.6 million of interest earning deposits which primarily consisted of deposits with the Federal Reserve.

Net redemptions of investment securities for the nine months ended September 30, 2021 were $139.4 million compared to net redemptions of $146.2 million for the prior year period. We had outstanding commitments to fund loans, including unused lines of credit, of $2.13 billion and $2.17 billion as of September 30, 2021 and December 31, 2020, respectively. The majority of our commitments are variable rate and originate with security backed lines of credit. The recorded amount of such commitments has, for many accounts, been based on the full amount of collateral in a customer’s investment account. The funding requirements for such commitments occur on a measured basis over time and would be funded by normal deposit growth. Additionally, these loans are “demand” loans and as such, represent a contingency source of funding.

We must comply with capital adequacy guidelines issued by the FDIC. A bank must, in general, have a Tier 1 leverage ratio of 5.00%, a ratio of Tier I capital to risk-weighted assets of 8.0%, a ratio of total capital to risk-weighted assets of 10.0% and a ratio of common equity tier 1 to risk weighted assets of 6.5% to be considered “well capitalized.” The Tier I leverage ratio is the ratio of Tier 1 capital to average assets for the quarter. “Tier I capital” includes common shareholders’ equity, certain qualifying perpetual preferred stock and minority interests in equity accounts of consolidated subsidiaries, less intangibles. At September 30, 2021, we were “well capitalized” under banking regulations.

The reduction in the leverage ratio from year end reflected significant deposit inflows toward the end of first quarter 2021, which resulted primarily from stimulus payments authorized by the December 2020 legislation noted previously.

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, 2021

The Bancorp, Inc.

9.82%

15.69%

16.10%

15.69%

The Bancorp Bank

10.24%

16.29%

16.69%

16.29%

"Well capitalized" institution (under FDIC regulations-Basel III)

5.00%

8.00%

10.00%

6.50%

As of December 31, 2020

The Bancorp, Inc.

9.20%

14.43%

14.84%

14.43%

The Bancorp Bank

9.11%

14.27%

14.68%

14.27%

"Well capitalized" institution (under FDIC regulations-Basel III)

5.00%

8.00%

10.00%

6.50%

Asset and Liability Management

The management of rate sensitive assets and liabilities is essential to controlling interest rate risk and optimizing interest margins. An interest rate sensitive asset or liability is one that, within a defined time period, either matures or experiences an interest rate change in line with general market rates. Interest rate sensitivity measures the relative volatility of an institution’s interest margin resulting from changes in market interest rates.

We monitor, manage and control interest rate risk through a variety of techniques, including the use of traditional interest rate sensitivity analysis (also known as “gap analysis”) and an interest rate risk management model. With the interest rate risk management model, we project future net interest income and then estimate the effect of various changes in interest rates on that projected net interest income. We also use the interest rate risk management model to calculate the change in net portfolio value over a range of interest rate change scenarios. Traditional gap analysis involves arranging our interest earning assets and interest bearing liabilities by repricing periods and then computing the difference (or “interest rate sensitivity gap”) between the assets and liabilities that we estimate will reprice during each time period and cumulatively through the end of each time period.

 

52


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, 2021. Except as stated below, the amounts of assets or liabilities shown which reprice or mature during a particular period were determined in accordance with the contractual terms of each asset or liability. The majority of demand and interest bearing demand deposits and savings deposits are assumed to be “core” deposits, or deposits that will generally remain with us regardless of market interest rates. We estimate the repricing characteristics of these deposits based on historical performance, past experience, judgmental predictions and other deposit behavior assumptions. However, we may choose not to reprice liabilities proportionally to changes in market interest rates for competitive or other reasons. Additionally, although non-interest bearing demand accounts are not paid interest, we estimate certain of the balances will reprice as a result of the contractual fees that are paid to the affinity groups which are based upon a rate index, and therefore are included in interest expense. We have adjusted the demand and interest checking balances in the table downward, to better reflect the impact of their partial adjustment to changes in rates. Loans and security balances, which adjust more fully to market rate changes, are based upon actual balances. The vast majority of loans at their interest rate floors are included in commercial loans, at fair value and totaled approximately $1.33 billion at September 30, 2021. The table does not assume any prepayment of fixed-rate loans and mortgage-backed securities are scheduled based on their anticipated cash flow, including prepayments based on historical data and current market trends. The table does not necessarily indicate the impact of general interest rate movements on our net interest income because the repricing and related behavior of certain categories of assets and liabilities is beyond our control as, for example, prepayments of loans and withdrawal of deposits. As a result, certain assets and liabilities indicated as repricing within a stated period may in fact reprice at different times and at different rate levels.

1-90

91-364

1-3

3-5

Over 5

Days

Days

Years

Years

Years

(dollars in thousands)

Interest earning assets:

Commercial loans, at fair value

$

1,435,292 

$

7,168 

$

25,198 

$

17,518 

$

64,849 

Loans, net of deferred loan fees and costs

2,303,657 

95,002 

242,542 

344,558 

150,903 

Investment securities

518,667 

120,235 

158,099 

165,368 

91,854 

Interest earning deposits

310,642 

Total interest earning assets

4,568,258 

222,405 

425,839 

527,444 

307,606 

Interest bearing liabilities:

Demand and interest checking

3,092,910 

49,629 

49,629 

Savings and money market

94,540 

189,080 

94,540 

Securities sold under agreements to repurchase

42 

Short-term borrowings

300,000 

Senior debt and subordinated debentures

13,401 

98,590 

Total interest bearing liabilities

3,500,893 

238,709 

144,169 

98,590 

Gap

$

1,067,365 

$

(16,304)

$

281,670 

$

428,854 

$

307,606 

Cumulative gap

$

1,067,365 

$

1,051,061 

$

1,332,731 

$

1,761,585 

$

2,069,191 

Gap to assets ratio

17%

4%

7%

5%

Cumulative gap to assets ratio

17%

17%

21%

28%

33%

* While demand deposits are non-interest bearing, related fees paid to affinity groups may reprice according to specified indices.

The methods used to analyze interest rate sensitivity in this table have a number of limitations. Certain assets and liabilities may react differently to changes in interest rates even though they reprice or mature in the same or similar time periods. The interest rates on certain assets and liabilities may change at different times than market interest rates, with some changing in advance of changes in market rates and some lagging behind changes in market rates. Additionally, the actual prepayments and withdrawals we experience when interest rates change may deviate significantly from those assumed in calculating the data shown in the table. Accordingly, actual results can and often do differ from projections. While the gap table above shows a positive gap, interest rate increases of up to 200 basis points might be required to increase net interest income, as a result of interest rate floors.

53


Financial Condition

General. Our total assets at September 30, 2021 were $6.27 billion, of which our total loans were $3.14 billion, and our commercial loans, at fair value were $1.55 billion. At December 31, 2020, our total assets were $6.28 billion, of which our total loans were $2.65 billion, and our commercial loans, at fair value were $1.81 billion. The decrease in assets reflected a decrease in deposits which, after increasing temporarily due to stimulus payments authorized by 2020 federal legislation to address the economic impact of COVID-19, returned to pre-stimulus levels.

Interest earning deposits and federal funds sold. At September 30, 2021, we had a total of $310.6 million of interest earning deposits compared to $339.5 million at December 31, 2020, a decrease of $28.9 million. These deposits were comprised primarily of balances at the Federal Reserve.

Investment portfolio. For detailed information on the composition and maturity distribution of our investment portfolio, see Note 5 to the consolidated financial statements. Total investment securities decreased to $1.05 billion at September 30, 2021, a decrease of $151.9 million, or 12.6%, from December 31, 2020. The decrease reflected prepayments on mortgage backed-securities as a result of the lower rate environment.

Under the accounting guidance related to CECL, changes in fair value of securities unrelated to credit losses, continue to be recognized through equity. However, credit-related losses are recognized through an allowance, rather than through a reduction in the amortized cost of the security. CECL accounting guidance also permits the reversal of allowances for credit deterioration in future periods based on improvements in credit, which was not included in previous guidance. Generally, a security’s credit-related loss is the difference between its amortized cost basis and the best estimate of its expected future cash flows discounted at the security’s effective yield. That difference is recognized through the income statement, as with prior guidance, but is renamed a provision for credit loss. For the nine months ended September 30, 2021 and 2020, we recognized no credit-related losses on our portfolio.

Investments in Federal Home Loan and Atlantic Central Bankers Bank stock are recorded at cost and amounted to $1.7 million at September 30, 2021 and $1.4 million at December 31, 2020. Federal Home Loan Bank stock purchases are required in order to borrow from the Federal Home Loan Bank. Both the FHLB and Atlantic Central Bankers Bank require its correspondent banking institutions to hold stock as a condition of membership.

At September 30, 2021 and December 31, 2020 no investment securities were encumbered through pledging.

The remaining principal balance of the security we owned issued by CRE-1 was repaid on August 17, 2021. As of September 30, 2021, the principal balance of the security we owned issued by CRE-2 was $12.6 million. Repayment is expected from the workout or disposition of commercial real estate collateral, after repayment of more senior tranches. Our $12.6 million security had 41% excess credit support; thus, losses of 41% of remaining security balances would have to be incurred, prior to any loss on our security. Additionally, the commercial real estate collateral supporting four of the remaining five loans was re-appraised in 2020 and 2021. The updated appraised value is approximately $79.9 million. The remaining principal to be repaid on all securities is approximately $76.1 million. The excess of the appraised amount over the remaining principal to be repaid on all securities further reduces credit risk, in addition to the 41% credit support within the securitization structure. However, any future reappraisals could result in further decreases in collateral valuation. While available information indicates that the value of existing collateral will be adequate to repay our security, there can be no assurance that such valuations will be realized upon loan resolutions, and that deficiencies will not exceed the 41% credit support.

54


The following table shows the contractual maturity distribution and the weighted average yield of our investment portfolio security as of September 30, 2021 (in thousands):

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

$

$

5,007 

2.27%

$

18,823 

2.76%

$

15,290 

2.31%

$

39,120 

Asset-backed securities

6,638 

1.54%

145,596 

1.42%

216,679 

1.63%

368,913 

Tax-exempt obligations of states and political subdivisions *

2,523 

2.99%

1,217 

2.30%

3,740 

Taxable obligations of states and political subdivisions

37,927 

3.19%

11,130 

3.83%

49,057 

Residential mortgage-backed securities

1,214 

2.48%

37,287 

2.41%

22,135 

2.84%

138,634 

1.56%

199,270 

Collateralized mortgage obligation securities

8,875 

2.30%

67,467 

1.96%

76,342 

Commercial mortgage-backed securities

74,768 

2.54%

34,034 

0.87%

202,474 

3.78%

311,276 

Corporate debt securities

6,505 

2.97%

6,505 

Total

$

1,214 

$

164,150 

$

241,810 

$

647,049 

$

1,054,223 

Weighted average yield

2.48%

2.62%

1.72%

2.35%

* If adjusted to their taxable equivalents, yields would approximate 3.78% and 2.91% for one to five years and five to ten years, respectively, at a Federal tax rate of 21%.

Commercial loans, at fair value. Commercial loans, at fair value are comprised of non-SBA CRE loans and SBA loans which had been originated for sale or securitization through first quarter 2020, and which are now being held on the balance sheet. Non-SBA CRE loans and SBA loans are valued using a discounted cash flow analysis based upon pricing for similar loans where market indications of the sales price of such loans are not available, on a pooled basis. Commercial loans, at fair value decreased to $1.55 billion at September 30, 2021 from $1.81 billion at December 31, 2020. The decrease resulted from loan prepayments and payoffs. In the third quarter of 2021 we began newly originating non-SBA CRE loans, after having suspended such originations for most of 2020 and the first half of 2021. These originations reflect lending criteria similar to the existing loan portfolio and are primarily comprised of multi-family (apartment buildings) collateral. See “Commercial real estate loans held at fair value, excluding SBA loans…” below. Interest rates shown in that table represent rate floors, set at origination. Rates on new loans will vary with market rates for such loans and are planned to be held for investment.

Loan portfolio. Total loans increased to $3.14 billion at September 30, 2021 from $2.65 billion at December 31, 2020.

The following table summarizes our loan portfolio, excluding loans held at fair value, by loan category for the periods indicated (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

55


30, 2021 resulted from U.S. government repayments of $58.2 million of 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, we 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 summarizes our small business loan portfolio, including SBA loans held at fair value, by loan category as of September 30, 2021 (in thousands):

Loan principal

U.S. government guaranteed portion of SBA loans (a)

$

369,673 

Paycheck Protection Program loans (PPP) (a)

71,262 

Commercial mortgage SBA (b)

194,831 

Construction SBA (c)

12,770 

Non-guaranteed portion of U.S. government guaranteed loans (d)

104,300 

Non-SBA small business loans (e)

18,428 

Total principal

$

771,264 

Unamortized fees and costs

9,509 

Total small business loans

$

780,773 

(a)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.

(b)Substantially all these loans are made under the SBA 504 Fixed Asset Financing program (504) which dictates origination date loan-to-value percentages (“LTV”), generally 50-60%, to which the Bank adheres.

(c)Of the $12.8 million in Construction SBA loans, $10.9 million are 504 first mortgages with an origination date LTV of 50-60% and $1.9 million are SBA interim loans with an approved SBA post-construction full takeout/payoff.

(d)The $104.3 million represents the non-guaranteed 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.

(e)The $18.4 million of non-SBA loans is comprised of approximately 20 conventional coffee/doughnut/carryout franchisee note purchases. The majority of purchased notes were made to multi-unit operators, are considered seasoned and have performed as agreed.

56


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, 2021 (in thousands):

SBL commercial mortgage*

SBL construction*

SBL non-real estate

Total

% Total

Hotels and motels

$

66,500 

$

3,914 

$

21 

$

70,435 

21%

Full-service restaurants

15,873 

1,411 

3,364 

20,648 

6%

Baked goods stores

4,382 

10,733 

15,115 

5%

Child day care services

13,934 

975 

14,909 

5%

Car washes

9,859 

1,610 

176 

11,645 

4%

Lessors of nonresidential buildings (except miniwarehouses)

10,199 

10,199 

3%

Assisted living facilities for the elderly

9,522 

9,522 

3%

Offices of lawyers

9,432 

9,432 

3%

Funeral homes and funeral services

8,706 

8,706 

3%

General warehousing and storage

7,168 

7,168 

2%

Limited-service restaurants

2,022 

1,212 

3,240 

6,474 

2%

Fitness and recreational sports centers

462 

3,650 

2,004 

6,116 

2%

Amusement and recreation industries

4,956 

33 

1,092 

6,081 

2%

Outpatient mental health and substance abuse centers

4,957 

4,957 

1%

Spectator sports

4,835 

4,835 

1%

Perishable prepared food manufacturing

4,500 

39 

4,539 

1%

Gasoline stations with convenience stores

4,424 

4,424 

1%

Offices of dentists

3,498 

131 

37 

3,666 

1%

Warehousing and storage

3,242 

3,242 

1%

New car dealers

3,105 

3,105 

1%

Miscellaneous wood product manufacturing

3,020 

3,020 

1%

Plumbing, heating, and air-conditioning contractors

2,760 

151 

2,911 

1%

Offices of physicians (except mental health specialists)

2,743 

11 

2,754 

1%

Technical and trade schools

47 

2,652 

2,699 

1%

General purpose machinery manufacturing

2,449 

2,449 

1%

Pet care (except veterinary) services

1,899 

474 

2,373 

1%

Landscaping services

725 

1,626 

2,351 

1%

Sewing, needlework, and piece goods stores

2,335 

2,335 

1%

Automotive body, paint, and interior repair and maintenance

1,737 

575 

2,312 

1%

Vocational rehabilitation services

2,274 

2,274 

1%

Amusement arcades

2,244 

2,244 

1%

Lessors of real estate property

2,242 

2,242 

1%

Other**

48,742 

1,034 

25,369 

75,145 

20%

$

264,793 

$

15,647 

$

49,887 

$

330,327 

100%

* Of the SBL commercial mortgage and SBL construction loans, $62.0 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 $2.0 million are spread over a hundred different classifications such as Commercial Printing, Pet and Pet Supplies Stores, Securities Brokerage, etc.

57


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, 2021 (in thousands):

SBL commercial mortgage*

SBL construction*

SBL non-real estate

Total

% Total

Florida

$

56,390 

$

383 

$

7,581 

$

64,354 

19%

California

41,984 

1,411 

4,002 

47,397 

14%

North Carolina

23,478 

3,876 

2,872 

30,226 

9%

Pennsylvania

22,536 

2,742 

25,278 

8%

Illinois

22,317 

2,647 

24,964 

8%

New York

13,860 

3,914 

3,561 

21,335 

6%

New Jersey

12,065 

6,670 

18,735 

6%

Texas

11,967 

3,927 

15,894 

5%

Virginia

9,286 

1,681 

10,967 

3%

Tennessee

10,472 

433 

10,905 

3%

Colorado

2,964 

5,261 

1,510 

9,735 

3%

Georgia

7,277 

1,700 

8,977 

3%

Michigan

4,160 

1,357 

5,517 

2%

Washington

3,145 

185 

3,330 

1%

Ohio

2,684 

561 

3,245 

1%

Other states

20,208 

802 

8,458 

29,468 

9%

$

264,793 

$

15,647 

$

49,887 

$

330,327 

100%

* Of the SBL commercial mortgage and SBL construction loans, $62.0 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, 2021 (in thousands):

Type*

State

SBL commercial mortgage*

Hotel

Florida

$

8,728 

Lawyer's office

California

8,697 

Warehouse

Pennsylvania

7,168 

Hotel

North Carolina

5,774 

Assisted living facility

Florida

5,186 

Mental health and substance abuse centers

Florida

4,957 

Hotel

North Carolina

4,747 

Prepared food manufacturing

New Jersey

4,500 

Hotel

Pennsylvania

4,171 

Hotel

Tennessee

3,786 

Total

$

57,714 

* 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, excluding SBA loans, are as follows including LTV at origination as of September 30, 2021 (dollars in thousands):

# Loans

Balance

Weighted average origination date LTV

Weighted average interest rate

Real estate bridge lending (multi-family apartments)*

15 

$

128,699 

75%

4.22%

Commercial real estate loans, at fair value:

Multi-family (apartments)*

115 

$

1,193,030 

76%

4.75%

Hospitality (hotels and lodging)

65,804 

65%

5.69%

Retail

60,838 

71%

4.33%

Other

21,687 

73%

5.16%

138 

1,341,359 

75%

4.78%

Fair value adjustment

(5,635)

Total commercial real estate loans, at fair value

1,335,724 

Total commercial real estate loans

$

1,464,423 

75%

4.75%

*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.

58


The following table summarizes our commercial real estate loans held at fair value, excluding SBA loans, by state as of September 30, 2021 (in thousands):

Balance

Origination date LTV

Texas

$

459,040 

77%

Georgia

193,175 

76%

Arizona

78,795 

75%

North Carolina

78,643 

77%

Ohio

58,176 

69%

Alabama

56,822 

76%

Virginia

56,576 

73%

Other states each <$55 million

483,196 

73%

Total

$

1,464,423 

75%

The following table summarizes our 15 largest commercial real estate loans held at fair value, excluding SBA loans as of September 30, 2021 (in thousands). All these loans are multi-family loans.

Balance

Origination date LTV

North Carolina

$

44,112 

78%

Texas

38,851 

79%

Texas

36,634 

80%

Missouri

30,000 

72%

Texas

29,962 

75%

Nevada

28,540 

80%

Texas

27,240 

77%

Arizona

27,169 

79%

Mississippi

26,862 

79%

North Carolina

25,010 

77%

Texas

24,667 

77%

Texas

24,652 

77%

Alabama

22,733 

77%

Texas

20,578 

79%

Georgia

19,849 

79%

15 Largest loans

$

426,859 

78%

The following table summarizes our institutional banking portfolio by type as of September 30, 2021 (in thousands):

Type

Principal

% of total

Securities backed lines of credit (SBLOC)

$

1,147,756 

60%

Insurance backed lines of credit (IBLOC)

686,767 

36%

Advisor financing

81,143 

4%

Total

$

1,915,666 

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, 2021 (in thousands):

Principal amount

% Principal to collateral

$

19,050 

65%

17,000 

37%

14,428 

27%

11,571 

29%

9,465 

33%

9,034 

36%

8,609 

53%

8,358 

71%

8,220 

23%

8,144 

46%

Total and weighted average

$

113,879 

43%

59


IBLOC loans are backed by the cash value of life insurance policies which have been assigned to us. We lend up to 100% of such cash value. Our underwriting standards require approval of the insurance companies which carry the policies backing these loans. Currently, eight insurance companies have been approved and, as of August 14, 2021 all were rated A (excellent or better) by AM BEST.

The following table summarizes our direct lease financing portfolio* by type as of September 30, 2021 (in thousands):

Principal balance

% Total

Construction

$

94,889 

18%

Government agencies and public institutions**

76,647 

15%

Waste management and remediation services

63,879 

12%

Real estate and rental and leasing

56,112 

11%

Retail trade

46,540 

9%

Wholesale purchase

34,248 

7%

Transportation and warehousing

28,683 

6%

Health care and social assistance

25,996 

5%

Professional, scientific, and technical services

19,693 

4%

Manufacturing

16,107 

3%

Wholesale trade

14,757 

3%

Educational services

7,992 

2%

Other

28,525 

5%

Total

$

514,068 

100%

* Of the total $514.1 million of direct lease financing, $463.6 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, 2021 (in thousands):

Principal balance

% Total

Florida

$

92,744 

18%

California

47,740 

9%

New Jersey

39,856 

8%

Utah

35,013 

7%

New York

33,200 

6%

Pennsylvania

31,590 

6%

Maryland

24,765 

5%

North Carolina

24,523 

5%

Texas

19,059 

4%

Connecticut

16,371 

3%

Washington

15,385 

3%

Georgia

12,241 

2%

Idaho

10,636 

2%

Tennessee

9,561 

2%

Alabama

9,219 

2%

Other states

92,165 

18%

Total

$

514,068 

100%

The following table presents selected loan categories by maturity for the period indicated:

September 30, 2021

Within

One to five

After

one year

years

five years

Total

(in thousands)

SBL non-real estate

$

9,765 

$

93,810 

$

68,270 

$

171,845 

SBL commercial mortgage

10,792 

5,908 

350,572 

367,272 

SBL construction

2,624 

20,493 

23,117 

Real estate bridge lending

128,699 

128,699 

$

23,181 

$

228,417 

$

439,335 

$

690,933 

Loans at fixed rates

$

71,270 

$

$

71,270 

Loans at variable rates

157,147 

439,335 

596,482 

Total

$

228,417 

$

439,335 

$

667,752 

Allowance for credit losses. We review the adequacy of our allowance for credit losses on at least a quarterly basis to determine that the provision for credit losses is made in an amount necessary to maintain our allowance at a level that is appropriate, based on management’s estimate of current expected credit losses. Our Chief Credit Officer oversees the loan review department processes and

60


measures the adequacy of the allowance for credit losses independently of loan production officers. For detailed information on the allowance for credit loss methodology, please see Note 6 to the consolidated financial statements.

At September 30, 2021, the allowance for credit losses amounted to $16.2 million which represented a $77,000 increase compared to the $16.1 million at December 31, 2020. Troubled debt restructured loans are individually considered by comparing collateral values with principal outstanding and establishing specific reserves within the allowance. At September 30, 2021, there were 9 troubled debt restructured loans with a balance of $1.4 million which had specific reserves of $626,000. 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.

At September 30, 2021, in excess of 50% of the total continuing loan portfolio had been reviewed. The targeted coverages and scope of the reviews are risk-based and vary according to each portfolio. These thresholds are maintained as follows:

Securities Backed Lines of Credit (SBLOC) – The targeted review threshold for 2021 is 40%, including a sample focusing on the largest 25% of SBLOCs by commitment. A random sample of a minimum of 20 will be reviewed each quarter. At September 30, 2021, approximately 55% of the SBLOC portfolio had been reviewed. 

Insurance Backed Lines of Credit (IBLOC) – The targeted review threshold for 2021 is 40%, including a sample focusing on the largest 25% of IBLOCs by commitment. A random sample of a minimum of 20 will be reviewed each quarter. At September 30, 2021, approximately 56% of the IBLOC portfolio had been reviewed.

Advisor Financing – The targeted review threshold for 2021 is 50%. At September 30, 2021, approximately 96% of the advisor financing portfolio had been reviewed. The loan balance review threshold is $1.0 million.

Small Business Loans – The targeted review threshold for 2021 is 60%, to be rated and/or reviewed within 90 days of funding, less fully guaranteed loans purchased for CRA, or fully guaranteed PPP loans. The loan balance review threshold is $1.5 million and additionally includes any classified loans. At September 30, 2021, approximately 74% of the non-government guaranteed loan portfolio had been reviewed.

Leasing – The targeted review threshold for 2021 is 35%. At September 30, 2021, approximately 48% of the leasing portfolio had been reviewed. The loan balance review threshold is $1.5 million.

Commercial Loans, at fair value (floating rate excluding SBA, which are included in Small Business Loans above) – The targeted review threshold for 2021 is 60%. Floating rate loans will be reviewed initially within 90 days of funding and will be monitored on an ongoing basis as to payment status. Subsequent reviews will be performed for relationships over $10 million. At September 30, 2021, approximately 100% of the non-SBA CRE floating rate loans outstanding for more than 90 days had been reviewed.

Commercial Loans, at fair value (fixed rate excluding SBA which are included in Small Business Loans above) The targeted review threshold for 2021 is 100%. At September 30, 2021, approximately 100% of the non-SBA CRE fixed rate portfolio had been reviewed.

Specialty Lending Specialty Lending, defined as commercial loans unique in nature that do not fit into other established categories, will have a review coverage threshold of 100% for non-CRA loans. At September 30, 2021, approximately 100% of the non-CRA loans had been reviewed.

 

Home Equity Lines of Credit or HELOC – The targeted review threshold for 2021 is 50%. Due to the small number and outstanding balances of HELOCs only the largest loans will be subject to review. The remaining loans are monitored and, if necessary, adversely classified under the Uniform Retail Credit Classification and Account Management Policy. At September 30, 2021, approximately 67% of the HELOC portfolio had been reviewed.

61


The following tables present delinquencies by type of loan as of the dates specified (in thousands):

September 30, 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

$

1,622 

$

848 

$

1,085 

$

1,708 

$

5,263 

$

166,582 

$

171,845 

SBL commercial mortgage

17 

208 

417 

3,167 

3,809 

363,463 

367,272 

SBL construction

711 

711 

22,406 

23,117 

Direct lease financing

994 

211 

67 

430 

1,702 

512,366 

514,068 

SBLOC / IBLOC

1,389 

1,389 

1,833,134 

1,834,523 

Advisor financing

81,143 

81,143 

Real estate bridge lending

128,699 

128,699 

Other loans

90 

90 

4,827 

4,917 

Unamortized loan fees and costs

11,078 

11,078 

$

4,022 

$

1,267 

$

1,569 

$

6,106 

$

12,964 

$

3,123,698 

$

3,136,662 

December 31, 2020

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

$

1,760 

$

805 

$

110 

$

3,159 

$

5,834 

$

249,484 

$

255,318 

SBL commercial mortgage

87 

961 

7,305 

8,353 

292,464 

300,817 

SBL construction

711 

711 

19,562 

20,273 

Direct lease financing

2,845 

941 

78 

751 

4,615 

457,567 

462,182 

SBLOC / IBLOC

650 

247 

309 

1,206 

1,548,880 

1,550,086 

Advisor financing

48,282 

48,282 

Other loans

301 

301 

6,125 

6,426 

Unamortized loan fees and costs

8,939 

8,939 

$

5,342 

$

2,954 

$

497 

$

12,227 

$

21,020 

$

2,631,303 

$

2,652,323 

Although we consider our allowance for credit losses to be adequate based on information currently available, future additions to the allowance may be necessary due to changes in economic conditions, our ongoing loss experience and that of our peers, changes in management’s assumptions as to future delinquencies, recoveries and losses, deterioration of specific credits and management’s intent with regard to the disposition of loans and leases.

The following table summarizes select asset quality ratios for each of the periods indicated:

For the nine months ended

or as of September 30,

2021

2020

Ratio of:

Allowance for credit losses to total loans(1)

0.52%

0.63%

Allowance for credit losses to non-performing loans *

210.54%

127.87%

Non-performing loans to total loans*

0.24%

0.49%

Non-performing assets to total assets *

0.16%

0.20%

Net charge-offs to average loans

0.04%

0.08%

* Includes loans 90 days past due still accruing interest.

(1) Because SBLOC and IBLOC loans are respectively collateralized by marketable securities and the cash value of life insurance, management excludes those loans from the ratio of the allowance for credit losses to total loans in its internal analysis. Accordingly, the adjusted ratio used in such internal analysis is 1.2%.

The ratio of the allowance for credit losses to total loans decreased to 0.52% as of September 30, 2021 from 0.63% at September 30, 2020. While the loan portfolio increased which reduced the ratio, the largest component of that growth was in SBLOC, collateralized by marketable securities and IBLOC, collateralized by the cash value of life insurance, both of which have experienced nominal losses and which require minimal allowance coverage in our CECL model. Additionally, the amount of non-performing loans and reserves thereon decreased. The ratio of the allowance for credit losses to non-performing loans increased to 210.54% at September 30, 2021, from127.87% at September 30, 2020, primarily as a result of the decrease in non-performing SBA loans. That decrease was also reflected in the lower ratio of non-performing assets to total assets which decreased to 0.16% at September 30, 2021 from 0.20% at September 30, 2020. Net charge-offs to average loans decreased to 0.04% for the nine months ended September 30, 2021 from 0.08% for the nine months ended September 30, 2020. The decrease reflected higher charge-offs in the prior year period, primarily in direct lease financing and SBL non-real estate loans.

Net charge-offs. Net charge-offs were $1.1 million for the nine months ended September 30, 2021, a decrease of $1.8 million from net charge-offs of $2.9 million during the same period of 2020. The decrease in charge-offs in 2021 resulted primarily from a decrease in direct lease financing and non real estate SBL charge-offs. SBL charge-offs result primarily from the non-government guaranteed portion of SBA loans.

62


The following tables reflect the relationship of average loan volume and net charge-offs by segment (dollars in thousands):

September 30, 2021

SBL non-real estate

SBL commercial mortgage

SBL construction

Direct lease financing

SBLOC / IBLOC

Advisor financing

Real estate bridge lending

Other loans

Charge-offs

$

896 

$

23 

$

$

248 

$

15 

$

$

$

10 

Recoveries

18 

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%

September 30, 2020

SBL non-real estate

SBL commercial mortgage

SBL construction

Direct lease financing

SBLOC / IBLOC

Advisor financing

Other loans

Charge-offs

$

1,350 

$

$

$

2,178 

$

$

$

Recoveries

82 

502 

Net charge-offs

$

1,268 

$

$

$

1,676 

$

$

$

Average loan balance

$

189,034 

$

244,187 

$

36,240 

$

432,568 

$

1,226,337 

$

13,300 

$

6,806 

Ratio of net charge-offs during the period to average loans during the period

0.67%

0.39%

Non-accrual loans, loans 90 days delinquent and still accruing, other real estate owned and troubled debt restructurings. Loans are considered to be non-performing if they are on a non-accrual basis or they are past due 90 days or more and still accruing interest. A loan which is past due 90 days or more and still accruing interest remains on accrual status only when it is both adequately secured as to principal and interest, and is in the process of collection. Troubled debt restructurings are loans with terms that have been renegotiated to provide a reduction or deferral of interest or principal, because of a weakening in the financial positions of the borrowers. We had $2.1 million of other real estate owned (“OREO”) at September 30, 2021 and no OREO at December 31, 2020 in continuing operations. The following tables summarize our non-performing loans, OREO, and loans past due 90 days or more still accruing interest.

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 

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 

63


(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 restructurings loans at 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 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, 2021 or December 31, 2020.

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 following table provides information about credit deteriorated loans at September 30, 2021 and December 31, 2020 (dollars 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 

64


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 

We had $6.1 million of non-accrual loans at September 30, 2021 compared to $12.2 million of non-accrual loans at December 31, 2020. The $6.1million decrease in non-accrual loans was primarily due to $4.3 million of loans placed on non-accrual status partially offset by $9.4 million of loan payments and $1.0 million of charge-offs. Loans past due 90 days or more still accruing interest amounted to $1.6 million at September 30, 2021 and $497,000 at December 31, 2020. The $1.1 million increase reflected $1.9 million of additions, $778,000 of loan payments and $67,000 of loans moved to non-accrual.

We had $2.1 million of OREO at September 30, 2021 and no OREO at December 31, 2020 in continuing operations. The $2.1 million resulted from the dissolution of the Walnut Street investment as described under Investment in Unconsolidated Entity below. There was no other activity during the period.

We evaluate loans under an internal loan risk rating system as a means of identifying problem loans. At September 30, 2021 and December 31, 2020 loans accordingly classified were segregated by year of origination and are shown in Note 6 to the consolidated financial statements.

Premises and equipment, net. Premises and equipment amounted to $16.6 million at September 30, 2021 compared to $17.6 million at December 31, 2020. The decrease reflected depreciation and reduced purchases.

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 discontinued commercial loan portfolio. The purchaser of the loan portfolio was a newly formed entity, Walnut Street 2014-1 Issuer, LLC, or 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. In the third quarter of 2021, The Bancorp and the other 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.

Assets held-for-sale from discontinued operations. Assets held-for-sale as a result of discontinued operations, primarily commercial, commercial mortgage and construction loans, amounted to $87.9 million at September 30, 2021 and were comprised of $69.4 million of net loans and $18.5 million of OREO. The September 30, 2021 balance of OREO includes a Florida mall which has been written down to $15.0 million. We expect to continue our efforts to dispose of the mall, which was appraised in September 2020 for $17.5 million. At December 31, 2020, discontinued assets of $113.6 million were comprised of $91.3 million of net loans and $22.3 million of OREO. We continue our efforts to transfer the loans to other financial institutions, and dispose of the OREO.

Deposits. Our primary source of funding is deposit acquisition. We offer a variety of deposit accounts with a range of interest rates and terms, including demand, checking and money market accounts. The majority of our deposits are generated through prepaid card and other payments related deposit accounts. One strategic focus is growing these accounts through affinity groups. At September 30, 2021, we had total deposits of $5.11 billion compared to $5.46 billion at December 31, 2020, a decrease of $349.5 million, or 6.4%. The decrease reflected reflected the impact of the exit of a single affinity group.

65


The following table presents the average balance and rates paid on deposits for the periods indicated (in thousands):

For the nine months ended

For the year ended

September 30, 2021

December 31, 2020

Average

Average

Average

Average

balance

rate

balance

rate

Demand and interest checking *

$

5,452,604 

0.10%

$

4,864,236 

0.23%

Savings and money market

446,016 

0.15%

291,204 

0.15%

Time

79,439 

1.87%

Total deposits

$

5,898,620 

0.10%

$

5,234,879 

0.25%

* 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 Federal Reserve Bank (“FRB”) or FHLB. There were $300.0 million of borrowings against our Federal Reserve line September 30, 2021 and no other borrowings at September 30, 2021 or December 31, 2020. 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,

2021

2020

(dollars in thousands)

Short-term borrowings

Balance at period end

$

300,000 

$

Average for the three months ended September 30, 2021

13,097 

na

Average during the year

8,717 

27,322 

Maximum month-end balance

300,000 

140,000 

Weighted average rate during the period

0.23%

0.72%

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, 2021, we had other long-term borrowings of $39.7 million compared to $40.3 million at December 31, 2020. The borrowings consisted of sold loans which were accounted for as a secured borrowing because they did not qualify for true sale accounting. We do not have any policy prohibiting us from incurring debt. Subordinated debentures of $13.4 million are grandfathered to qualify as tier 1 capital at the Bank, mature in March 2038 and carry a floating rate of 3-Month LIBOR plus 3.25%.

Other liabilities. Other liabilities amounted to $66.2 million at September 30, 2021 compared to $81.6 million at December 31, 2020.

The difference reflected changes in taxes payable.

Off-balance sheet arrangements. There were no off-balance sheet arrangements during the nine months ended September 30, 2021 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.


66


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, 2020.

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, 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

67


PART II – OTHER INFORMATION

Item 1. Legal Proceedings

For a discussion of Legal Proceedings, see Part I, Financial Information, “Notes to Unaudited Consolidated Financial Statements, Note 14--Legal.” which is incorporated herein by reference.

Item 1A. Risk Factors

Our business, financial condition, operating results and cash flows could be impacted by the factors in Item 1A. Risk Factors in the Form 10-K for the year ended December 31, 2020. 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, 2020.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Information on Stock Repurchases

On November 5, 2020, the Company’s Board of Directors (the “Board”) authorized a common stock repurchase program (the “Common Stock Repurchase Program”). Under the 2021 Common Stock Repurchase Program, repurchased shares may be reissued for various corporate purposes. The Company is authorized to purchase up to $10.0 million in each quarter of 2021 depending on the share price, securities laws and stock exchange rules which regulate such repurchases. This plan may be modified or terminated at any time, but if not terminated earlier, will terminate on December 31, 2021.

On October 20, 2021, the Board approved a revised stock repurchase program for the upcoming 2022 fiscal year (the “2022 Common Stock Repurchase Program”). The amount that the Company intends to repurchase has been increased to $15.0 million in value of the Company’s common stock per fiscal quarter in 2022, for a maximum amount of $60.0 million. Under the stock repurchase program, the Company intends to repurchase shares through open market purchases, privately-negotiated transactions, block purchases or otherwise in accordance with applicable federal securities laws, including Rule 10b-18 of the Securities Exchange Act of 1934 (the “Exchange Act”). The Board also authorized the Company to enter into written trading plans under Rule 10b5-1 of the Exchange Act. The Company cannot predict when or if it will repurchase any shares of common stock and the timing and amount of any shares repurchased will be determined by management based on its evaluation of market conditions and other factors.

The following table sets forth information regarding the Company’s purchases of its common stock during the quarter ended September 30, 2021:

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, 2021 - July 31, 2021

440,887 

$

22.68 

440,887 

$

August 1, 2021 - August 31, 2021

September 1, 2021 - September 30, 2021

Total

440,887 

22.68 

440,887 

10,000 

(1)On November 5, 2020, the Company’s Board of Directors approved a stock repurchase plan, under which the Company was authorized to purchase shares up to $10.0 million in each quarter through the end of 2021, at which date the current plan terminates. See the description of the 2021 Common Stock Repurchase Program and the 2022 Common Stock Repurchase Plan above in the paragraphs preceding this table which describes the maximum dollar value that may yet be purchased under these plans in the fourth quarter of 2021 and each quarter of 2022.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

68


Item 5. Other Information

None.


69


Item 6. Exhibits

Exhibit No.

Description

3.1.1

Certificate of Incorporation filed July 20, 1999, amended July 27, 1999, amended June 7, 2001, and amended October 8, 2002(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

Amended and Restated Bylaws(3)

10.1

Letter Agreement with Daniel G. Cohen(4)

31.1

Rule 13a-14(a)/15d-14(a) Certifications *

31.2

Rule 13a-14(a)/15d-14(a) Certifications *

32.1

Section 1350 Certifications *

32.2

Section 1350 Certifications *

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.

(1) Filed previously as an exhibit to our Registration Statement on Form S-4, registration number 333-117385, and by this reference incorporated herein.

(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).

(4) Filed previously as an exhibit to our current report on Form 8-K filed October 20, 2021, and by this reference incorporated herein (File No. 000-51018).


70


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, INC.

(Registrant)

November 5, 2021

/S/ DAMIAN KOZLOWSKI

Date

Damian Kozlowski

Chief Executive Officer

November 5, 2021

/S/ PAUL FRENKIEL

Date

Paul Frenkiel

Executive Vice President of Strategy,

Chief Financial Officer and Secretary

71