Item 2. |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and related notes
thereto and other financial information included elsewhere in this Report. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions that could cause
actual results to differ materially from our expectations. Factors that could cause such differences are discussed in the sections of this Report and our most recently filed Annual Report on Form 10-K entitled “Risk Factors,” “Cautionary Note
Regarding Forward-Looking Statements” and elsewhere in this Report. We assume no obligation to update any of these forward-looking statements except to the extent required by law.
The following discussion pertains to our historical results, on a consolidated basis. However, because we conduct all our material business operations through our wholly owned
subsidiary, FinWise Bank, the discussion and analysis relates to activities primarily conducted at the subsidiary level.
All dollar amounts in the tables in this section are in thousands of dollars, except per share data or where otherwise specifically noted. Unless otherwise stated, all information in
this Report gives effect to a six-for-one stock split of our common stock completed effective July 26, 2021. The effect of the stock split on outstanding shares and per share figures has been retroactively applied to all periods presented in this
Report.
Overview
The Company is a Utah corporation and the parent company of FinWise Bank. The Company’s assets consist primarily of its investment in the Bank and all of its material business activities are conducted
through the Bank. The Company is a registered bank holding company that is subject to supervision by the UDFI and the Federal Reserve. As a Utah state-chartered bank that is not a member of the Federal Reserve System, the Bank is separately subject
to regulations and supervision by both the UDFI and the FDIC. The Bank’s deposits are federally insured up to the maximum legal limits. See “Supervision and Regulation.”
Our banking business is our only business line. Our banking business offers a diverse range of commercial and retail banking products and services, and consists primarily of originating loans in a
variety of sectors. Attracting nationwide deposits from the general public, businesses and other financial institutions, and investing those deposits, together with borrowings and other sources of funds, is also critical to our banking business.
While our commercial and residential real estate lending and other products and services offered from our branch continue to be concentrated in and around the Salt Lake City, Utah MSA, our third-party loan origination relationships have allowed us to
expand into new markets across the United States. These relationships were developed to support our ability to generate significant loan volume across diverse consumer and commercial markets and have been the primary source of our significant growth
and superior profitability. Our analytics platform, FinView™, enhances our ability to gather and interpret performance data for our originations and provides management with an ability to identify attractive, risk-adjusted sectors for growth. These
insights coupled with the billions of dollars in originations funded annually and our ability to sell loans or retain for investment enhance our unique position. Our track record has demonstrated that these qualities deliver superior growth and
profitability and that the flexibility inherent in our model enhances our ability to manage credit risk.
Our financial condition and results of operations depend primarily on our ability to (i) originate loans using our strategic relationships with third-party loan origination platforms to earn interest
and noninterest income, (ii) utilize FinView™ to identify attractive risk-adjusted lending opportunities and inform the selection of loans for investment while limiting credit losses, (iii) attract and retain low cost, stable deposits, and (iv)
efficiently operate in compliance with applicable regulations.
Our lending focuses on four main lending areas: (i) SBA 7(a) loans, (ii) Strategic Programs, (iii) residential and commercial real estate and (iv) consumer lending. For a description and analysis of the
Company’s loan categories, see “—Financial Condition”.
Covid 19 Pandemic
Since March 2020, our nation has experienced a massive health and economic crisis as a result of the Covid-19 pandemic, which continues to negatively impact the health and finances of millions of people
and businesses and have a pronounced impact on the global and national economy. To control the spread of the Covid-19 virus, governments around the world instituted widespread shutdowns of the economy which resulted in record unemployment in a matter
of weeks. The economic turbulence spawned by the Covid-19 pandemic left many banks with potential credit quality and income issues. These issues are further compounded by uncertainties regarding the length, depth and possible resurgence of the
pandemic and its ultimate long-term effects on the economy. In an effort to reduce the impact of economic shutdowns, the United States Congress has passed the CARES Act, the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act, the
Consolidated Appropriations Act, 2021, and recently the American Rescue Plan Act of 2021. These relief measures have provided stimulus payments to individuals, expanded unemployment benefits, and created programs that provided critical financing to
small businesses through products such as the EIDL and the PPP, both of which are being administered by the SBA. Additionally, the United States government agreed to make six months of payments on SBA loans and increase the SBA guaranty on SBA 7(a)
loans to 90% for loans originated from February 1, 2020 through September 30, 2021. The SBA has made the full monthly P&I payments with respect to our qualifying SBA 7(a) customers in “regular servicing” status for six months. For most of our SBA
portfolio (the legacy loans), the SBA made borrowers’ principal and interest payments from April 2020 through September 2020. These were officially referred to as First Round Section 1112 Payments, as they derived from Section 1112 of the CARES Act.
To be eligible for the full six months of First Round Section 1112 Payments, the SBA loans were required to be: (i) in “regular servicing” status; (ii) approved by the SBA before March 27, 2020; and (iii) fully disbursed by September 27, 2020. Under
the Economic Aid Act, the SBA will make an additional two payments for eligible SBA customers, capped at $9,000 per month per loan. Borrowers with loan payments above $9,000 per month are responsible for paying the difference. For our legacy
portfolio, the SBA made payment on the lesser of a borrower’s monthly principal and interest payment or $9,000 per month from February 2021 through March 2021. These are referred to as Second Round Section 1112 Payments.
The SBA released a list of NAICS codes deemed to have been particularly affected by the Covid-19 pandemic. SBA customers who met all other Section 1112 qualifying criteria and operated within certain
NAICS codes, are entitled to an additional three months of payments which were completed in 2021. As of December 31, 2021, the Bank had 30 qualifying SBA loans totaling approximately $4.5 million in SBA 7(a) unguaranteed balance that received an
additional three months of Second Round Section 1112 Payments, which were capped at $9,000 per month and per loan. As of June 30, 2022, 4 of the 30 qualifying SBA loans have been paid in full. The remaining 26 loans are performing and total
approximately $4.0 million in SBA 7(a) unguaranteed balance. As of June 30, 2022, none of the remaining 26 loans are entitled to additional Section 1112 payments. We ceased originating PPP loans after 2020.
We believe the Bank’s diversified loan portfolio and associated revenue streams have enabled the Bank to withstand the adverse conditions relating to the Covid-19 pandemic. For the three months ended
June 30, 2022 the provision for loan losses amounted to $2.9 million. For the three months ended June 30, 2021, the provision for loan losses amounted to $1.5 million. For the six months ended June 30, 2022 the provision for loan losses amounted to
$5.9 million. For the six months ended June 30, 2021, the provision for loan losses amounted to $2.2 million. While some of the adverse conditions relating to the Covid-19 pandemic began to reverse in 2021, sustained improvements are highly dependent
upon strengthening economic conditions. The Covid-19 pandemic continues to cause economic uncertainties which may again result in these and other adverse impacts to our financial condition and results of operations. We believe our SBA 7(a)
underwriting program has remained strong throughout the Covid-19 pandemic and our SBA 7(a) loans are well collateralized when compared to the SBA industry in general.
Results of Operations
Net Income Overview
The following table sets forth the principal components of net income for the periods indicated.
|
|
For the Three Months
Ended June 30,
|
|
|
For the Six Months
Ended June 30,
|
|
($ in thousands)
|
|
2022
|
|
|
2021
|
|
|
2022
|
|
|
2021
|
|
Interest income
|
|
$
|
13,013
|
|
|
$
|
11,135
|
|
|
$
|
26,236
|
|
|
$
|
19,941
|
|
Interest expense
|
|
|
(244
|
)
|
|
|
(333
|
)
|
|
|
(506
|
)
|
|
|
(705
|
)
|
Provision for loan losses
|
|
|
(2,913
|
)
|
|
|
(1,536
|
)
|
|
|
(5,860
|
)
|
|
|
(2,169
|
)
|
Non-interest income
|
|
|
8,431
|
|
|
|
8,161
|
|
|
|
20,113
|
|
|
|
14,240
|
|
Non-interest expense
|
|
|
(11,019
|
)
|
|
|
(7,079
|
)
|
|
|
(20,067
|
)
|
|
|
(13,742
|
)
|
Provision for income taxes
|
|
|
(1,786
|
)
|
|
|
(2,609
|
)
|
|
|
(5,000
|
)
|
|
|
(4,535
|
)
|
Net income
|
|
|
5,482
|
|
|
|
7,739
|
|
|
|
14,916
|
|
|
|
13,030
|
|
Net income for the three months ended June 30, 2022 was $5.5 million, a decrease of $2.2 million or 29.2% from net income of $7.7 million for the three months ended June 30, 2021. The decrease was
primarily due to an increase of $3.9 million or 55.7% in non-interest expense and an increase of $1.4 million or 89.6% in provision for loan losses, partially offset by an increase of $1.9 million or 16.9% in interest income and a decrease of $0.8
million or 31.5% in provision for income taxes, as described below.
Net income for the six months ended June 30, 2022 was $14.9 million, an increase of $1.9 million or 14.5% from net income of $13.0 million for the six months ended June 30, 2021. The increase was
primarily due to an increase of $6.3 million or 31.6% in interest income and an increase of $5.9 million or 41.2% in non-interest income, partially offset by an increase of $6.3 million or 46.0% in non-interest expense and an increase of $3.7 million
or 170.2% in provision for loan losses, as described below.
Net Interest Income and Net Interest Margin Analysis
Net interest income was the primary contributor to our earnings in 2022 and 2021. Net interest income is affected by changes in the amount and mix of interest-earning assets and interest-bearing
liabilities, referred to as “volume changes.” It is also affected by changes in yields earned on interest-earning assets and rates paid on interest-bearing deposits and other borrowed funds, referred to as “rate changes.”
For the three months ended June 30, 2022, our net interest income increased $2.0 million, or 18.2%, to $12.8 million compared to the three months ended June 30, 2021. This increase was primarily due to
growth in average interest earning assets and a decrease in our cost of funds. Average interest earning assets increased by $72.1 million, or 24.0%, to $373.2 million for the three months ended June 30, 2022 compared to the three months ended June
30, 2021, while the related yield on average interest earning assets decreased by 84 basis points to 13.95%, resulting in interest income for the three months ended June 30, 2022 of $13.0 million. A substantial increase in the average balances of
comparatively low yielding interest-bearing deposits, and a loan mix shift towards loans carrying lower yields within the Strategic Program held for sale portfolio during the three months ended June 30, 2022 contributed to the decrease in yield on
average interest earning assets for the period. The corresponding cost of funds on interest bearing liabilities for the three months ended June 30, 2022 declined by 20 basis points to 0.76%, and the average balance in interest bearing liabilities
decreased by $11.0 million to $127.8 million, or 7.9%, compared to the prior year period. Our ability to renew time deposits at lower rates is the primary cause for the decline in the cost of funds. As indicated in the rate/volume table set forth
below, the decline in the cost of funds and the effect of decreased volumes of interest-bearing liabilities resulted in decreased interest expense for the three months ended June 30, 2022 to $0.2 million compared to $0.3 million for the prior year
period. We gather deposits in the Salt Lake City, Utah MSA through our one branch and nationwide from our Strategic Program service providers, SBA 7(a) borrowers, Institutional Deposit exchanges, and brokered deposit arrangements. For the three
months ended June 30, 2022, average outstanding balances under our PPPLF decreased compared to the three months ended June 30, 2021. The decrease in funding from our PPPLF was partially offset by increases in deposits sourced through our brokered
deposit arrangements, Strategic Programs, national Institutional Deposit exchanges, branch, and SBA 7(a) borrowers compared to the three months ended June 30, 2021. Our net interest margin decreased to 13.69% from 14.35% for the three months ended
June 30, 2022 and 2021, respectively.
For the six months ended June 30, 2022, our net interest income increased $6.5 million, or 33.8%, to $25.7 million compared to the six months ended June 30, 2021. This increase was primarily due to
growth in average interest earning assets, an increase in asset yields, and a decrease in our cost of funds. Average interest earning assets increased by $76.1 million, or 25.0%, to $380.4 million for the six months ended June 30, 2022 compared to
the six months ended June 30, 2021, while the related yield on average interest earning assets increased by 69 basis points to 13.79%, resulting in interest income for the six months ended June 30, 2022 of $26.2 million. A substantial decrease in the
average balances of comparatively low yielding PPP loans and increase in average balances of Strategic Program held for sale loans during the six months ended June 30, 2022 contributed to the increase in yield on average interest earning assets for
the period. The corresponding cost of funds on interest bearing liabilities for the six months ended June 30, 2022 declined by 15 basis points to 0.77%, and the average balance in interest bearing liabilities decreased by $23.2 million to $130.6
million, or 15.1%, compared to the prior year period. Our ability to renew time deposits at lower rates is the primary cause for the decline in the cost of funds. As indicated in the rate/volume table set forth below, the decline in the cost of funds
and the effect of decreased volumes of interest-bearing liabilities resulted in decreased interest expense for the six months ended June 30, 2022 to $0.5 million compared to $0.7 million for the prior year period. For the six months ended June 30,
2022, average outstanding balances under our PPPLF decreased compared to the six months ended June 30, 2021. The decrease in funding from our PPPLF was partially offset by increases in deposits sourced through our Strategic Programs, brokered
deposit arrangements, national Institutional Deposit exchanges, branch, and SBA 7(a) borrowers compared to the six months ended June 30, 2021. Our net interest margin increased to 13.53% from 12.64% for the six months ended June 30, 2022 and 2021,
respectively.
Average Balances and Yields. The following table presents average balances for assets and liabilities, the total dollar amounts of interest income from average
interest-earning assets, the total dollar amounts of interest expense on average interest-bearing liabilities, and the resulting average yields and costs. The yields and costs for the periods indicated are derived by dividing the income or expense by
the average balances for assets or liabilities, respectively, for the periods presented. Loan fees are included in interest income on loans and represent net fees of approximately $0.1 million (including de minimis
SBA fees related to PPP loans) and $1.2 million (including approximately $0.7 million in SBA fees related to PPP loans) included in interest income on loans for the three months ended June 30, 2022 and 2021, respectively. Loan fees are included in
interest income on loans and represent a net cost of approximately $0.3 million (including de minimis SBA fees related to PPP loans) for the six months ended June 30, 2022, and $2.5 million (including
approximately $1.6 million in SBA fees related to PPP loans) of net loan fees are included in interest income on loans for the six months ended June 30, 2021. Average balances have been calculated using daily averages.
|
|
Three Months Ended June 30,
|
|
|
|
2022
|
|
|
2021
|
|
($ in thousands)
|
|
Average
Balance
|
|
|
Interest
|
|
|
Average
Yield/Rate
|
|
|
Average
Balance
|
|
|
Interest
|
|
|
Average
Yield/Rate
|
|
Interest earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits with the Federal Reserve, non-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. central banks and other banks
|
|
$
|
82,046
|
|
|
$
|
105
|
|
|
|
0.51
|
%
|
|
$
|
49,682
|
|
|
$
|
10
|
|
|
|
0.08
|
%
|
Investment securities
|
|
|
11,837
|
|
|
|
44
|
|
|
|
1.49
|
%
|
|
|
1,622
|
|
|
|
6
|
|
|
|
1.48
|
%
|
Loans held for sale
|
|
|
74,800
|
|
|
|
5,949
|
|
|
|
31.81
|
%
|
|
|
49,684
|
|
|
|
5,049
|
|
|
|
40.65
|
%
|
Loans held for investment
|
|
|
204,501
|
|
|
|
6,915
|
|
|
|
13.53
|
%
|
|
|
200,062
|
|
|
|
6,070
|
|
|
|
12.14
|
%
|
Total interest earning assets
|
|
|
373,184
|
|
|
|
13,013
|
|
|
|
13.95
|
%
|
|
|
301,050
|
|
|
|
11,135
|
|
|
|
14.79
|
%
|
Less: ALL
|
|
|
(10,425
|
)
|
|
|
|
|
|
|
|
|
|
|
(6,334
|
)
|
|
|
|
|
|
|
|
|
Non-interest earning assets
|
|
|
32,558
|
|
|
|
|
|
|
|
|
|
|
|
13,214
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
395,317
|
|
|
|
|
|
|
|
|
|
|
$
|
307,930
|
|
|
|
|
|
|
|
|
|
Interest bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand
|
|
$
|
7,587
|
|
|
$
|
27
|
|
|
|
1.42
|
%
|
|
$
|
5,533
|
|
|
$
|
13
|
|
|
|
0.94
|
%
|
Savings
|
|
|
7,430
|
|
|
|
1
|
|
|
|
0.05
|
%
|
|
|
8,328
|
|
|
|
3
|
|
|
|
0.14
|
%
|
Money market accounts
|
|
|
29,318
|
|
|
|
21
|
|
|
|
0.29
|
%
|
|
|
18,872
|
|
|
|
18
|
|
|
|
0.38
|
%
|
Certificates of deposit
|
|
|
82,870
|
|
|
|
195
|
|
|
|
0.94
|
%
|
|
|
57,468
|
|
|
|
257
|
|
|
|
1.79
|
%
|
Total deposits
|
|
|
127,205
|
|
|
|
244
|
|
|
|
0.77
|
%
|
|
|
90,201
|
|
|
|
291
|
|
|
|
1.29
|
%
|
Other borrowings
|
|
|
601
|
|
|
|
—
|
|
|
|
0.35
|
%
|
|
|
48,621
|
|
|
|
42
|
|
|
|
0.35
|
%
|
Total interest bearing liabilities
|
|
|
127,806
|
|
|
|
244
|
|
|
|
0.76
|
%
|
|
|
138,822
|
|
|
|
333
|
|
|
|
0.96
|
%
|
Non-interest bearing deposits
|
|
|
120,359
|
|
|
|
|
|
|
|
|
|
|
|
105,459
|
|
|
|
|
|
|
|
|
|
Non-interest bearing liabilities
|
|
|
19,429
|
|
|
|
|
|
|
|
|
|
|
|
9,464
|
|
|
|
|
|
|
|
|
|
Shareholders’ equity
|
|
|
127,723
|
|
|
|
|
|
|
|
|
|
|
|
54,185
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders’ equity
|
|
$
|
395,317
|
|
|
|
|
|
|
|
|
|
|
$
|
307,930
|
|
|
|
|
|
|
|
|
|
Net interest income and interest rate spread
|
|
|
|
|
|
$
|
12,769
|
|
|
|
13.19
|
%
|
|
|
|
|
|
$
|
10,802
|
|
|
|
13.83
|
%
|
Net interest margin
|
|
|
|
|
|
|
|
|
|
|
13.69
|
%
|
|
|
|
|
|
|
|
|
|
|
14.35
|
%
|
Ratio of average interest-earning assets to average interest- bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
291.99
|
%
|
|
|
|
|
|
|
|
|
|
|
216.86
|
%
|
|
|
Six Months Ended June 30,
|
|
|
|
2022
|
|
|
2021
|
|
($ in thousands)
|
|
Average
Balance
|
|
|
Interest
|
|
|
Average
Yield/Rate
|
|
|
Average
Balance
|
|
|
Interest
|
|
|
Average
Yield/Rate
|
|
Interest earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits with the Federal Reserve, non-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. central banks and other banks
|
|
$
|
80,962
|
|
|
$
|
133
|
|
|
|
0.33
|
%
|
|
$
|
48,291
|
|
|
$
|
20
|
|
|
|
0.08
|
%
|
Investment securities
|
|
|
11,552
|
|
|
|
83
|
|
|
|
1.44
|
%
|
|
|
1,685
|
|
|
|
12
|
|
|
|
1.42
|
%
|
Loans held for sale
|
|
|
84,650
|
|
|
|
12,714
|
|
|
|
30.04
|
%
|
|
|
42,556
|
|
|
|
8,615
|
|
|
|
40.49
|
%
|
Loans held for investment
|
|
|
203,282
|
|
|
|
13,306
|
|
|
|
13.09
|
%
|
|
|
211,830
|
|
|
|
11,294
|
|
|
|
10.66
|
%
|
Total interest earning assets
|
|
|
380,446
|
|
|
|
26,236
|
|
|
|
13.79
|
%
|
|
|
304,362
|
|
|
|
19,941
|
|
|
|
13.10
|
%
|
Less: ALL
|
|
|
(10,391
|
)
|
|
|
|
|
|
|
|
|
|
|
(6,311
|
)
|
|
|
|
|
|
|
|
|
Non-interest earning assets
|
|
|
28,874
|
|
|
|
|
|
|
|
|
|
|
|
12,302
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
398,929
|
|
|
|
|
|
|
|
|
|
|
$
|
310,353
|
|
|
|
|
|
|
|
|
|
Interest bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand
|
|
$
|
6,969
|
|
|
$
|
41
|
|
|
|
1.18
|
%
|
|
$
|
5,908
|
|
|
$
|
27
|
|
|
|
0.91
|
%
|
Savings
|
|
|
7,056
|
|
|
|
2
|
|
|
|
0.06
|
%
|
|
|
7,594
|
|
|
|
6
|
|
|
|
0.16
|
%
|
Money market accounts
|
|
|
30,596
|
|
|
|
43
|
|
|
|
0.28
|
%
|
|
|
18,303
|
|
|
|
34
|
|
|
|
0.37
|
%
|
Certificates of deposit
|
|
|
85,235
|
|
|
|
419
|
|
|
|
0.98
|
%
|
|
|
54,196
|
|
|
|
521
|
|
|
|
1.92
|
%
|
Total deposits
|
|
|
129,856
|
|
|
|
505
|
|
|
|
0.78
|
%
|
|
|
86,001
|
|
|
|
588
|
|
|
|
1.37
|
%
|
Other borrowings
|
|
|
792
|
|
|
|
1
|
|
|
|
0.35
|
%
|
|
|
67,837
|
|
|
|
117
|
|
|
|
0.35
|
%
|
Total interest bearing liabilities
|
|
|
130,648
|
|
|
|
506
|
|
|
|
0.77
|
%
|
|
|
153,838
|
|
|
|
705
|
|
|
|
0.92
|
%
|
Non-interest bearing deposits
|
|
|
129,014
|
|
|
|
|
|
|
|
|
|
|
|
97,330
|
|
|
|
|
|
|
|
|
|
Non-interest bearing liabilities
|
|
|
15,630
|
|
|
|
|
|
|
|
|
|
|
|
8,032
|
|
|
|
|
|
|
|
|
|
Shareholders’ equity
|
|
|
123,637
|
|
|
|
|
|
|
|
|
|
|
|
51,153
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders’ equity
|
|
$
|
398,929
|
|
|
|
|
|
|
|
|
|
|
$
|
310,353
|
|
|
|
|
|
|
|
|
|
Net interest income and interest rate spread
|
|
|
|
|
|
$
|
25,730
|
|
|
|
13.02
|
%
|
|
|
|
|
|
$
|
19,236
|
|
|
|
12.18
|
%
|
Net interest margin
|
|
|
|
|
|
|
|
|
|
|
13.53
|
%
|
|
|
|
|
|
|
|
|
|
|
12.64
|
%
|
Ratio of average interest-earning assets to average interest- bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
291.20
|
%
|
|
|
|
|
|
|
|
|
|
|
197.85
|
%
|
Rate/Volume Analysis. The following table sets forth the
effects of changing rates and volumes on our net interest income based on average balances. The rate column shows the effects attributable to changes in average rate. The volume column shows the effects attributable to changes in average volume. For purposes of this table,
changes attributable to changes in both average rate and average volume that cannot be segregated have
been allocated proportionally based on the changes due to rate and the changes due to volume.
($ in thousands)
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2022 vs 2021
|
|
|
2022 vs 2021
|
|
|
|
Increase (Decrease) Due to
Change in:
|
|
|
Increase (Decrease) Due to
Change in:
|
|
($ in thousands)
|
|
Rate
|
|
|
Volume
|
|
|
Total
|
|
|
Rate
|
|
|
Volume
|
|
|
Total
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits with the Federal Reserve, non-U.S. central banks and other banks
|
|
$
|
85
|
|
|
$
|
10
|
|
|
$
|
95
|
|
|
$
|
92
|
|
|
$
|
21
|
|
|
$
|
113
|
|
Investment securities
|
|
|
—
|
|
|
|
38
|
|
|
|
38
|
|
|
|
—
|
|
|
|
71
|
|
|
|
71
|
|
Loans held-for-sale
|
|
|
(679
|
)
|
|
|
1,579
|
|
|
|
900
|
|
|
|
(1,447
|
)
|
|
|
5,546
|
|
|
|
4,099
|
|
Loans held for investment
|
|
|
708
|
|
|
|
137
|
|
|
|
845
|
|
|
|
2,445
|
|
|
|
(433
|
)
|
|
|
2,012
|
|
Total interest income
|
|
|
114
|
|
|
|
1,764
|
|
|
|
1,878
|
|
|
|
1,090
|
|
|
|
5,205
|
|
|
|
6,295
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand
|
|
|
8
|
|
|
|
6
|
|
|
|
14
|
|
|
|
9
|
|
|
|
5
|
|
|
|
14
|
|
Savings
|
|
|
(2
|
)
|
|
|
—
|
|
|
|
(2
|
)
|
|
|
(4
|
)
|
|
|
—
|
|
|
|
(4
|
)
|
Money market accounts
|
|
|
(2
|
)
|
|
|
5
|
|
|
|
3
|
|
|
|
(5
|
)
|
|
|
14
|
|
|
|
9
|
|
Certificates of deposit
|
|
|
(924
|
)
|
|
|
862
|
|
|
|
(62
|
)
|
|
|
593
|
|
|
|
(695
|
)
|
|
|
(102
|
)
|
Other borrowings
|
|
|
—
|
|
|
|
(42
|
)
|
|
|
(42
|
)
|
|
|
—
|
|
|
|
(116
|
)
|
|
|
(116
|
)
|
Total interest bearing liabilities
|
|
|
(920
|
)
|
|
|
831
|
|
|
|
(89
|
)
|
|
|
593
|
|
|
|
(792
|
)
|
|
|
(199
|
)
|
Change in net interest income
|
|
$
|
1,034
|
|
|
$
|
933
|
|
|
$
|
1,967
|
|
|
$
|
497
|
|
|
$
|
5,997
|
|
|
$
|
6,494
|
|
Provision for Loan Losses
The provision for loan losses is a charge to income to bring our ALL to a level deemed appropriate by management and approved by of board of directors. We determine the provision for loan losses monthly
in connection with our monthly evaluation of the adequacy of our ALL. For a description of the factors we considered in determining the ALL see “—Financial Condition—Allowance for Loan Losses” and “—Critical Accounting Policies and Estimates.”
Our provision for loan losses was $2.9 million and $1.5 million for the three months ended June 30, 2022 and 2021, respectively. Our provision for loan losses was $5.9 million and $2.2 million for the
six months ended June 30, 2022 and 2021, respectively. The increase over both comparative periods was primarily due to substantial growth in unguaranteed loans.
Noninterest Income
The largest portion of our noninterest income is associated with our Strategic Program fees. Other sources of noninterest income include gain on sale of loans, SBA loan servicing fees, change in fair
value on investment in BFG and other miscellaneous income.
The following table presents, for the periods indicated, the major categories of noninterest income:
|
|
For the Three Months
Ended
June 30,
|
|
|
Change
|
|
($ in thousands)
|
|
2022
|
|
|
2021
|
|
|
$ |
|
|
|
%
|
|
Noninterest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Strategic Program fees
|
|
$
|
6,221
|
|
|
$
|
3,942
|
|
|
$
|
2,279
|
|
|
|
57.8
|
%
|
Gain on sale of loans
|
|
|
2,412
|
|
|
|
2,397
|
|
|
|
15
|
|
|
|
0.6
|
%
|
SBA loan servicing fees
|
|
|
342
|
|
|
|
311
|
|
|
|
31
|
|
|
|
10.0
|
%
|
Change in fair value on investment in BFG
|
|
|
(575
|
)
|
|
|
1,501
|
|
|
|
(2,076
|
)
|
|
|
(138.3
|
%)
|
Other miscellaneous income
|
|
|
31
|
|
|
|
10
|
|
|
|
21
|
|
|
|
210.0
|
%
|
Total noninterest income
|
|
$
|
8,431
|
|
|
$
|
8,161
|
|
|
$
|
270
|
|
|
|
3.3
|
%
|
For the three months ended June 30, 2022, total noninterest income increased $0.3 million, or 3.3%, to $8.4 million compared to the three months ended June 30, 2021. This increase was primarily due to
the increase in Strategic Program fees. The increase in Strategic Program fees was mainly due to the increase in loan origination volume in the Strategic Program. These increases were partially offset by a decrease in the fair value of the Company’s
investment in BFG due primarily to the softening of comparable company values used in determining BFG fair value.
|
|
For the Six Months
Ended
June 30,
|
|
|
Change
|
|
($ in thousands)
|
|
2022
|
|
|
2021
|
|
|
$ |
|
|
|
%
|
|
Noninterest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Strategic Program fees
|
|
$
|
12,844
|
|
|
$
|
6,895
|
|
|
$
|
5,949
|
|
|
|
86.3
|
%
|
Gain on sale of loans
|
|
|
7,464
|
|
|
|
5,000
|
|
|
|
2,464
|
|
|
|
49.3
|
%
|
SBA loan servicing fees
|
|
|
729
|
|
|
|
463
|
|
|
|
266
|
|
|
|
57.4
|
%
|
Change in fair value on investment in BFG
|
|
|
(973
|
)
|
|
|
1,861
|
|
|
|
(2,834
|
)
|
|
|
(152.3
|
%)
|
Other miscellaneous income
|
|
|
49
|
|
|
|
21
|
|
|
|
28
|
|
|
|
133.5
|
%
|
Total noninterest income
|
|
$
|
20,113
|
|
|
$
|
14,240
|
|
|
$
|
5,873
|
|
|
|
41.2
|
%
|
For the six months ended June 30, 2022, total noninterest income increased $5.9 million, or 41.2%, to $20.1 million compared to the six months ended June 30, 2021. This increase was primarily due to the
increase in Strategic Program fees, gain on sale of loans, and SBA loan servicing fees. The increase in Strategic Program fees was primarily due to the increase in loan origination volume in the Strategic Program. The increase in gain on sale of
loans was primarily due to the increase in the number of SBA 7(a) loans sold during the six months ended June 30, 2022. The increase in SBA loan servicing fees was primarily due to the increase in SBA 7(a) loans serviced for others during the
period. These increases were partially offset by a decrease in the fair value of the Company’s investment in BFG due primarily to the softening of comparable company values used in determining BFG fair value.
Noninterest Expense
Noninterest expense has increased as we have become a public company, grown, expanded and modernized our operational infrastructure and implemented our plan to build an efficient, technology-driven
banking operation with significant capacity for growth.
The following table presents, for the periods indicated, the major categories of noninterest expense:
($ in thousands)
|
|
For the Three Months
Ended
June 30,
|
|
|
Change
|
|
|
|
2022
|
|
|
2021
|
|
|
$ |
|
|
|
%
|
|
Noninterest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
$
|
7,182
|
|
|
$
|
5,488
|
|
|
$
|
1,694
|
|
|
|
30.9
|
%
|
Occupancy and equipment expenses
|
|
|
419
|
|
|
|
203
|
|
|
|
216
|
|
|
|
106.4
|
%
|
Impairment of SBA servicing asset
|
|
|
1,135
|
|
|
|
—
|
|
|
|
1,135
|
|
|
|
100.0
|
%
|
Other operating expenses
|
|
|
2,283
|
|
|
|
1,388
|
|
|
|
895
|
|
|
|
64.5
|
%
|
Total noninterest expense
|
|
$
|
11,019
|
|
|
$
|
7,079
|
|
|
$
|
3,940
|
|
|
|
55.7
|
%
|
For the three months ended June 30, 2022, total noninterest expense increased $3.9 million, or 55.7%, to $11.0 million compared to the three months ended June 30, 2021. This increase was primarily due
to the increase in salaries and employee benefits, impairment of the Company’s SBA servicing asset, and other operating expenses. For the three months ended June 30, 2022, salaries and employee benefits increased $1.7 million, or 30.9%, to $7.2
million compared to the three months ended June 30, 2021. This increase was primarily due to the increased number of employees as compared to the three months ended June 30, 2021. The increase in employees during this timeframe coincided with an
increase in Strategic Program loan volume and the expansion of our information technology and security division to support enhancements in our infrastructure, and an increase in contractual bonuses paid relating to the expansion of the Strategic
Programs in 2022. For the three months ended June 30, 2022, an impairment of the Company’s SBA servicing asset was recognized for $1.1 million due primarily to rising market interest rates and market-wide increasing prepayment speeds on SBA loans.
For the three months ended June 30, 2022, other operating expense increased $0.9 million, or 64.5%, to $2.3 million compared to the three months ended June 30, 2021. This increase was primarily due to increased legal and professional fees.
($ in thousands)
|
|
For the Six Months
Ended
June 30,
|
|
|
Change
|
|
|
|
2022
|
|
|
2021
|
|
|
$ |
|
|
|
%
|
|
Noninterest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
$
|
14,274
|
|
|
$
|
10,383
|
|
|
$
|
3,891
|
|
|
|
37.5
|
%
|
Occupancy and equipment expenses
|
|
|
721
|
|
|
|
397
|
|
|
|
324
|
|
|
|
81.5
|
%
|
Impairment of SBA servicing asset
|
|
|
1,076
|
|
|
|
—
|
|
|
|
1,076
|
|
|
|
100.0
|
%
|
Other operating expenses
|
|
|
3,996
|
|
|
|
2,962
|
|
|
|
1,034
|
|
|
|
34.9
|
%
|
Total noninterest expense
|
|
$
|
20,067
|
|
|
$
|
13,742
|
|
|
$
|
6,325
|
|
|
|
46.0
|
%
|
For the six months ended June 30, 2022, total noninterest expense increased $6.3 million, or 46.0%, to $20.1 million compared to the six months ended June 30, 2021. This increase was primarily due to
the increase in salaries and employee benefits, impairment of the Company’s SBA servicing asset, and other operating expenses. For the six months ended June 30, 2022, salaries and employee benefits increased $3.9 million, or 37.5%, to $14.3 million
compared to the six months ended June 30, 2021. This increase was primarily due to the increased number of employees as compared to the six months ended June 30, 2021. The increase in employees during this timeframe coincided with an increase in
Strategic Program loan volume and the expansion of our information technology and security division to support enhancements in our infrastructure, and an increase in contractual bonuses paid relating to the expansion of the Strategic Programs in
2022. For the six months ended June 30, 2022, an impairment of the Company’s SBA servicing asset was recognized for $1.1 million due primarily to rising market interest rates and market-wide increasing prepayment speeds on SBA loans. For the six
months ended June 30, 2022, other operating expense increased $1.0 million, or 34.9%, to $4.0 million compared to the six months ended June 30, 2021. This increase was primarily due to increased legal and professional fees.
Financial Condition
Loan Portfolio
We manage our loan portfolio based on factors that include concentrations per loan program and aggregated portfolio, industry selection and geographies. We also monitor the impact of identified and
estimated losses on capital as well as the pricing characteristics of each product. The following provides a general description and the risk characteristics relevant to each of the business lines. Each loan is assigned a risk grade during the
origination and closing process by credit administration personnel based on criteria described later in this section. We analyze the resulting ratings, as well as other external statistics and factors such as delinquency, to track the migration
performance of the portfolio balances. This ratings analysis is performed at least quarterly.
SBA 7(a) Loans
We originate and service loans partially guaranteed by the SBA under its Section 7(a) loan program. SBA 7(a) loans are made to small businesses and professionals throughout the USA. As of June 30, 2022
and December 31, 2021, we had total SBA 7(a) loans of $123.7 million and $141.3 million, respectively, representing 53.3% and 53.2% of our total loans, respectively. Loans are sourced primarily through our referral relationship with BFG. Although BFG
actively markets throughout the USA, because of its physical location in the New York area we have developed a lending presence in the New York and New Jersey geographies. The maximum SBA 7(a) loan amount is $5 million. Underwriting is generally
based on commercial credit metrics where the primary repayment source is borrower cash flow, secondary is personal guarantor cash flow and tertiary is the sale of collateral pledged. These loans may be secured by commercial and residential mortgages
as well as liens on business assets. In addition to typical underwriting metrics, we review the nature of the business, use of proceeds, length of time in business and management experience to help us target loans that we believe have lower credit
risk. The SBA 7(a) program generally provides 50%, 75%, 85% and 90% guarantees for eligible SBA 7(a) loans. The guaranty is conditional and covers a portion of the risk of payment default by the borrower, but not the risk of improper underwriting,
closing or servicing by the lender. As such, prudent underwriting, closing and servicing processes are essential to effective utilization of the SBA 7(a) program. Historically, we have generally sold the SBA-guaranteed portion (typically 75% of the
principal balance) of a majority of the loans we originate at a premium in the secondary market while retaining all servicing rights and the unguaranteed portion; however, beginning in 2020, we made the decision to drive interest income by
temporarily retaining a larger amount of the guaranteed portion of these loans.
SBA Paycheck Protection Program Loans
As of June 30, 2022 and December 31, 2021, we had total PPP loans of $0.7 million and $1.1 million, respectively, representing 0.3% and 0.4% of our total loans, respectively. The PPP loans also resulted
in fees paid by the SBA to the originating bank for processing PPP loans, which fees are accreted into interest income over the life of the applicable loans. If a PPP loan is forgiven or paid off before maturity, the remaining unearned fee is
recognized into income at that time. For the three months ended June 30, 2021, the Company recognized a total of $0.7 million in PPP-related accreted fees ($0.6 million of which were accelerated due to loan forgiveness). A de minimis amount was recognized during the three months ended June 30, 2022 and a de minimis amount of deferred fees remained as of June 30, 2022. For the six months ended June 30, 2021,
the Company recognized a total of $1.6 million in PPP-related accreted fees ($1.2 million of which were accelerated due to loan forgiveness). A de minimis amount was recognized during the six months ended
June 30, 2022 and a de minimis amount of deferred fees remained as of June 30, 2022.
Commercial, non-real estate
Commercial non-real estate loans consist of loans and leases made to commercial enterprises that are not secured by real estate. As of June 30, 2022 and December 31, 2021, we had total commercial
non-real estate loans of $7.8 million and $3.4 million, respectively, representing 3.4% and 1.3% of our total loans, respectively. Any loan, line of credit, or letter of credit (including any unfunded commitments) and any interest obtained in such
loans made by another lender to individuals, sole proprietorships, partnerships, corporations, or other business enterprises for commercial, industrial, agricultural, or professional purposes, not secured by real estate, but not for personal
expenditure purposes are included in this category. For example, commercial vehicle term loans and commercial working capital term loans. Underwriting is generally based on commercial credit metrics where the primary repayment source is borrower cash
flow, secondary is personal guarantor cash flow (when applicable) and tertiary is the sale of collateral pledged. The nature of the business, use of proceeds, length of time in business, management experience, repayment ability, credit history, ratio
calculations and assessment of collateral adequacy are all considerations. These loans are generally secured by liens on business assets. Historically, we have retained these loans on our balance sheet for investment.
Residential real estate
Residential real estate loans include construction, lot and land development loans that are for the purpose of acquisition and development of property to be improved through the construction of
residential buildings, and loans secured by other residential real estate. As of June 30, 2022 and December 31, 2021, we had total residential real estate loans of $31.0 million and $27.1 million, respectively, representing 13.3% and 10.2% of our
total loans, respectively. Construction loans are usually paid off through the conversion to permanent financing from third-party lending institutions. Lot loans may be paid off as the borrower converts to a construction loan. At the completion of
the construction project, if the loan is converted to permanent financing by us or if scheduled loan amortization begins, it is then reclassified from construction to single-family dwelling. Underwriting of construction and development loans
typically includes analysis of not only the borrower’s financial condition and ability to meet the required debt obligations, but also the general market conditions associated with the area and type of project being funded. These loans are generally
secured by mortgages for residential property located primarily in the Salt Lake City, Utah MSA, and we obtain guarantees from responsible parties. Historically, we have retained these loans on our balance sheet for investment.
Strategic Program loans
We, through our Strategic Program service providers, issue, on a nationwide basis, unsecured consumer and secured or unsecured business loans to borrowers within certain approved credit profiles. As of
June 30, 2022 and December 31, 2021, we had total Strategic Program loans of $59.1 million and $85.9 million, respectively, representing 25.5% and 32.3% of our total loans, respectively. Loans originated through these programs are limited to
predetermined Bank underwriting criterion, which has been approved by our board of directors. The primary form of repayment on these loans is from personal or business cash flow. Business loans may be secured by liens on business assets, as
applicable. We have generally sold most of these loans, but as our capital grows, we may choose to hold more of the funded loans and/or receivables. We reserve the right to sell any portion of funded loans and/or receivables directly to the Strategic
Program service providers or other investors. We retain the legal right to service all these loans, but contract with the Strategic Program service provider or another approved sub-servicer to service these loans on our behalf.
Commercial real estate
Commercial real estate loans include loans to individuals, sole proprietorships, partnerships, corporations, or other business enterprises for commercial, industrial, agricultural, or professional
purposes, secured by real estate primarily located in the Salt Lake City, Utah MSA, but not for personal expenditure purposes. As of June 30, 2022 and December 31, 2021, we had total commercial real estate loans of $4.7 million and $2.4 million,
respectively, representing 2.0% and 0.9% of our total loans, respectively. Underwriting is generally based on commercial credit metrics where the primary repayment source is borrower cash flow, secondary is personal guarantor cash flow (when
applicable) and tertiary is the sale of collateral pledged. The nature of the business, use of proceeds, length of time in business, management experience, repayment ability, credit history, ratio calculations and assessment of collateral adequacy
are all considerations. In addition to real estate, these loans may also be secured by liens on business assets. Historically, we have retained these loans on our balance sheet for investment.
Consumer
Consumer lending provides financing for personal, family, or household purposes on a nationwide basis. Most of these loans are originated through our POS platform and come from a variety of sources,
including other approved merchant or dealer relationships and lending platforms. As of June 30, 2022 and December 31, 2021, we had total consumer loans of $5.1 million and $4.6 million, respectively, representing 2.2% and 1.7% of our total loans,
respectively. We use a debt-to-income (“DTI”) ratio to determine whether an applicant will be able to service the debt. The DTI ratio compares the applicant’s anticipated monthly expenses and total monthly obligations to the applicant’s monthly gross
income. Our policy is to limit the DTI ratio to 45% after calculating interest payments related to the new loan. Loan officers, at their discretion, may make exceptions to this ratio if the loan is within their authorized lending limit. DTI ratios of
no more than 50% may be approved subject to an increase in interest rate. Strong offsetting factors such as higher discretionary income or large down payments are used to justify exceptions to these guidelines. All exceptions are documented and
reported. While the loans are generally for the purchase of goods which may afford us a purchase money security interest, they are underwritten as if they were unsecured. On larger loans, we may file a Uniform Commercial Code financing form.
Historically, we have retained these loans on our balance sheet for investment.
Loan Portfolio Program Summary
Through our diversification efforts, we have built a portfolio that we believe positions us to withstand economic shifts. For example, we focus on industries and loan types that have historically lower
loss rates such as professional, scientific and technical services (including law firms), non-store retailers (e-commerce), and ambulatory healthcare services.
The following table summarizes our loan portfolio by loan program as of the dates indicated:
|
As of June 30,
2022
|
|
As of December 31,
2021
|
|
|
Amount
|
|
|
% of
total
loans
|
|
Amount
|
|
|
% of
total
loans
|
|
SBA(1)
|
$
|
|
|
124,477
|
|
|
|
53.6
|
%
|
$
|
|
|
142,392
|
|
|
|
53.6
|
%
|
Commercial, non real estate
|
|
|
|
7,847
|
|
|
|
3.4
|
%
|
|
|
|
3,428
|
|
|
|
1.3
|
%
|
Residential real estate
|
|
|
|
30,965
|
|
|
|
13.3
|
%
|
|
|
|
27,108
|
|
|
|
10.2
|
%
|
Strategic Program loans
|
|
|
|
59,066
|
|
|
|
25.5
|
%
|
|
|
|
85,850
|
|
|
|
32.3
|
%
|
Commercial real estate
|
|
|
|
4,722
|
|
|
|
2.0
|
%
|
|
|
|
2,436
|
|
|
|
0.9
|
%
|
Consumer
|
|
|
|
5,062
|
|
|
|
2.2
|
%
|
|
|
|
4,574
|
|
|
|
1.7
|
%
|
Total
|
$
|
|
|
232,139
|
|
|
|
100.0
|
%
|
|
|
$
|
265,788
|
|
|
|
100.0
|
%
|
(1) The amount of SBA loans as of June 30, 2022 and December 31, 2021 includes approximately $0.7 million and $1.1 million of PPP loans. SBA loans as of June 30, 2022 and December 31, 2021 include $46.0
million and $75.7 million, respectively, of SBA 7(a) loan balances that are guaranteed by the SBA.
Loan Maturity and Sensitivity to Changes in Interest Rates
As of June 30, 2022, including the impact of PPP loans, $113.8 million, or 56.7%, of the total held for investment loan balance matures in less than five years. Loans maturing in greater than five years
totaled $86.7 million as of June 30, 2022. The variable rate portion of our total held for investment loan portfolio at June 30, 2022 was $151.2 million, or 75.4%. As of December 31, 2021, including the impact of PPP loans, $103.1 million, or 50.3%,
of the total held for investment loan balance matures in less than five years. Loans maturing in greater than five years totaled $101.9 million as of December 31, 2021. The variable rate portion of our total held for investment loan portfolio at
December 31, 2021 was $163.8 million, or 79.9%. The variable rate portion of the total held for investment loans reflects our strategy to minimize interest rate risk through the use of variable rate products.
The following tables detail maturities and sensitivity to interest rate changes for our loan portfolio at June 30, 2022 and December 31, 2021:
At June 30, 2022
|
Remaining Contractual Maturity Held for Investment
|
|
($ in thousands)
|
One Year
or Less
|
|
|
After One
Year and
Through
Five Years
|
|
|
After Five
Years and
Through
Fifteen
Years
|
|
|
After
Fifteen
Years
|
|
|
Total
|
|
Fixed rate loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SBA(1)
|
$
|
|
|
322
|
|
|
$
|
692
|
|
|
$
|
246
|
|
|
$
|
107
|
|
|
$
|
1,367
|
|
Commercial, non-real estate
|
|
|
|
2,044
|
|
|
|
5,493
|
|
|
|
286
|
|
|
|
24
|
|
|
|
7,847
|
|
Residential real estate
|
|
|
|
3,909
|
|
|
|
1,850
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,759
|
|
Strategic Program loans
|
|
|
|
17,830
|
|
|
|
9,636
|
|
|
|
1
|
|
|
|
—
|
|
|
|
27,467
|
|
Commercial real estate
|
|
|
|
1,732
|
|
|
|
377
|
|
|
|
10
|
|
|
|
—
|
|
|
|
2,119
|
|
Consumer
|
|
|
|
1,601
|
|
|
|
3,084
|
|
|
|
64
|
|
|
|
—
|
|
|
|
4,749
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable rate loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SBA
|
|
|
|
7,887
|
|
|
|
30,031
|
|
|
|
51,927
|
|
|
|
33,265
|
|
|
|
123,110
|
|
Commercial, non-real estate
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Residential real estate
|
|
|
|
24,723
|
|
|
|
291
|
|
|
|
192
|
|
|
|
—
|
|
|
|
25,206
|
|
Strategic Program loans
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Commercial real estate
|
|
|
|
1,441
|
|
|
|
533
|
|
|
|
629
|
|
|
|
—
|
|
|
|
2,603
|
|
Consumer
|
|
|
|
83
|
|
|
|
230
|
|
|
|
—
|
|
|
|
—
|
|
|
|
313
|
|
Total
|
|
|
$
|
61,572
|
|
|
$
|
52,217
|
|
|
$
|
53,355
|
|
|
$
|
33,396
|
|
|
$
|
200,540
|
|
(1) The amount of SBA fixed rate loans includes approximately $0.7 million of PPP loans. PPP loans originated prior to June 5, 2020, have a two year term. PPP loans originated on or after June 5, 2020,
have a five year term. For PPP borrowers who submit completed applications for forgiveness, loan payments are automatically deferred until the SBA renders a decision on the forgiveness request. PPP borrowers who fail to submit timely forgiveness
applications are required to make monthly payments beginning ten months from the end of the chosen “covered period”. The “covered period” is a maximum of 24 weeks from the origination date. Assuming a 24 week covered period, PPP borrowers are not
required to begin making payments until 16 months after the origination date. At the time payments begin, if the borrower and lender of a two year PPP loan mutually agree to extend the term of the loan it can be extended to a five year term. As of
June 30, 2022, six PPP loans have been granted maturity date extensions.
At December 31, 2021
|
Remaining Contractual Maturity Held for Investment
|
|
($ in thousands)
|
One Year
or Less
|
|
|
After One
Year and
Through
Five Years
|
|
|
After Five
Years and
Through
Fifteen
Years
|
|
|
After
Fifteen
Years
|
|
|
Total
|
|
Fixed rate loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SBA(1)
|
$
|
|
|
644
|
|
|
$
|
732
|
|
|
$
|
259
|
|
|
$
|
114
|
|
|
$
|
1,749
|
|
Commercial, non-real estate
|
|
|
|
1,168
|
|
|
|
2,112
|
|
|
|
142
|
|
|
|
6
|
|
|
|
3,428
|
|
Residential real estate
|
|
|
|
2,876
|
|
|
|
1,519
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,395
|
|
Strategic Program loans
|
|
|
|
18,121
|
|
|
|
6,981
|
|
|
|
—
|
|
|
|
—
|
|
|
|
25,102
|
|
Commercial real estate
|
|
|
|
1,565
|
|
|
|
639
|
|
|
|
7
|
|
|
|
1
|
|
|
|
2,212
|
|
Consumer
|
|
|
|
1,500
|
|
|
|
2,793
|
|
|
|
66
|
|
|
|
—
|
|
|
|
4,359
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable rate loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SBA
|
|
|
|
7,920
|
|
|
|
31,598
|
|
|
|
58,493
|
|
|
|
42,632
|
|
|
|
140,643
|
|
Commercial, non-real estate
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Residential real estate
|
|
|
|
22,234
|
|
|
|
291
|
|
|
|
188
|
|
|
|
—
|
|
|
|
22,713
|
|
Strategic Program loans
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Commercial real estate
|
|
|
|
224
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
224
|
|
Consumer
|
|
|
|
62
|
|
|
|
153
|
|
|
|
—
|
|
|
|
—
|
|
|
|
215
|
|
Total
|
|
|
$
|
56,314
|
|
|
$
|
46,818
|
|
|
$
|
59,155
|
|
|
$
|
42,753
|
|
|
$
|
205,040
|
|
(1) The amount of SBA fixed rate loans includes approximately $1.1 million of PPP loans. PPP loans originated prior to June 5, 2020, have a two year term. PPP loans originated on or after June 5, 2020,
have a five year term. For PPP borrowers who submit completed applications for forgiveness, loan payments are automatically deferred until the SBA renders a decision on the forgiveness request. PPP borrowers who fail to submit timely forgiveness
applications are required to make monthly payments beginning ten months from the end of the chosen “covered period”. The “covered period” is a maximum of 24 weeks from the origination date. Assuming a 24 week covered period, PPP borrowers are not
required to begin making payments until 16 months after the origination date. At the time payments begin, if the borrower and lender of a two year PPP loan mutually agree to extend the term of the loan it can be extended to a five year term. As of
December 31, 2021, three PPP loans have been granted maturity date extensions.
Nonperforming Assets
Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were contractually due. Loans are placed on nonaccrual status when, in
management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. Loans may be placed on nonaccrual status regardless of whether such loans are actually past due. In
general, we place loans on nonaccrual status when they become 90 days past due. We also generally place loans on nonaccrual status if they are less than 90 days past due if the collection of principal or interest is in doubt. When interest accrual is
discontinued, all unpaid accrued interest is reversed from income. Interest income is subsequently recognized only to the extent recoveries received (either from payments received from the customer, derived from the disposition of collateral or from
legal action, such as judgment enforcement) exceed liquidation expenses incurred and outstanding principal.
A non-accrual asset may be restored to accrual status when (1) none of its principal and interest is due and unpaid, and we expect repayment of the remaining contractual principal and interest, or (2)
when asset otherwise becomes well secured and is not in the process of collection.
Any loan which we deem to be uncollectible, in whole or in part, is charged off to the extent of the anticipated loss. In general, loans that are past due for 90 days or more are charged off unless the
loan is both well secured and in the process of collection. We believe our disciplined lending approach and focused management of nonperforming assets has resulted in sound asset quality and timely resolution of problem assets. We have several
procedures in place to assist us in maintaining the overall quality of our loan portfolio. We have established underwriting guidelines to be followed by our loan officers, and we also monitor our delinquency levels for any negative or adverse trends.
There can be no assurance, however, that our loan portfolio will not become subject to increasing pressures from deteriorating borrower credit due to general economic conditions.
The following table provides information with respect to our nonperforming assets and troubled debt restructurings at the dates indicated:
|
|
As of
|
|
($ in thousands)
|
|
June 30, 2022
|
|
|
December 31, 2021
|
|
Nonaccrual loans:
|
|
|
|
|
|
|
SBA
|
|
$
|
633
|
|
|
$
|
657
|
|
Commercial, non real estate
|
|
|
—
|
|
|
|
—
|
|
Residential real estate
|
|
|
—
|
|
|
|
—
|
|
Strategic Program loans
|
|
|
—
|
|
|
|
—
|
|
Total nonperforming loans
|
|
$
|
633
|
|
|
$
|
657
|
|
|
|
|
|
|
|
|
|
|
Total accruing loans past due 90 days or more
|
|
$
|
175
|
|
|
$
|
54
|
|
Nonaccrual troubled debt restructuring
|
|
$
|
—
|
|
|
$
|
25
|
|
Total troubled debt restructurings
|
|
|
95
|
|
|
|
106
|
|
Other Real Estate Owned
|
|
|
—
|
|
|
|
—
|
|
Less nonaccrual troubled debt restructurings
|
|
|
—
|
|
|
|
(25
|
)
|
Total nonperforming assets and troubled debt restructurings
|
|
$
|
728
|
|
|
$
|
763
|
|
Total nonperforming loans to total loans
|
|
|
0.3
|
%
|
|
|
0.2
|
%
|
Total nonperforming loans to total assets
|
|
|
0.2
|
%
|
|
|
0.2
|
%
|
Total nonperforming assets and troubled debt restructurings to total loans
|
|
|
0.3
|
%
|
|
|
0.3
|
%
|
Total nonperforming assets and troubled debt restructurings to total assets
|
|
|
0.2
|
%
|
|
|
0.2
|
%
|
Total nonperforming assets and troubled debt restructurings to total assets (less PPP loans) (1)
|
|
|
0.2
|
%
|
|
|
0.2
|
%
|
(1) See “GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures” for a reconciliation of this measure to its most comparable GAAP measure.
Our total nonperforming assets and troubled debt restructurings at June 30, 2022 and December 31, 2021 was $0.7 million and $0.8 million. Total nonperforming assets at June 30, 2022 and December 31,
2021 were composed of $0.6 million and $0.7 million in nonaccrual loans and $0.1 million of troubled debt restructurings.
We do not classify loans that experience insignificant payment delays and payment shortfalls as impaired. We consider an “insignificant period of time” from payment delays to be a period of 90 days or
less, or 120 days or less in certain Strategic Programs. We will customarily attempt to provide a modification for a customer experiencing what we consider to be a short-term event that has temporarily impacted cash flow. In those cases, we will
review the request to determine if the customer is experiencing cash flow strain and how the event has impacted the ability of the customer to repay in the long term. Short-term modifications are not classified as troubled debt restructurings because
they do not meet the definition set by the FDIC or our accounting policy for identifying troubled debt restructurings.
Interest income that would have been recorded for the six months ended June 30, 2022 and 2021 had nonaccrual loans been current throughout the period amounted to de
minimis amounts for each period.
Credit Risk Profile
We believe that we underwrite loans carefully and thoroughly, limiting our lending activities to those products and services where we have the resources and expertise to lend profitably without undue
credit risk. We require all loans to conform to policy (or otherwise be identified as exceptions to policy and monitored and reported on, at minimum, quarterly) and be granted on a sound and collectable basis. Loans are made with a primary emphasis
on loan profitability, credit risk and concentration exposures.
We are proactive in our approach to identifying and resolving problem loans and are focused on working with the borrowers and guarantors of problem loans to provide loan modifications when warranted.
When considering how to best diversify our loan portfolio, we consider several factors including our aggregate and product-line specific concentration risks, our business line expertise, and the ability of our infrastructure to appropriately support
the product. While certain product lines generate higher net charge-offs, our exposure is carefully monitored and mitigated by our concentration policies and reserved for by the loan loss allowance we maintain. Specifically, retention of certain
Strategic Program loans with higher default rates account for a disproportionate amount of our charge-offs. In addition to our oversight of the credit policies and processes associated with these programs, we limit within our concentration policies
the aggregate exposure of these loans as a percentage of the total loan portfolio, carefully monitor certain vintage loss-indicative factors such as first payment default and marketing channels, and appropriately provision for these balances so that
the cumulative charge-off rates remain consistent with management expectations. While the level of nonperforming assets fluctuates in response to changing economic and market conditions, the relative size and composition of the loan portfolio, and
our management’s degree of success in resolving problem assets, we believe our proactive stance to early identification and intervention is the key to successfully managing our loan portfolio. As an example, at the beginning of the Covid-19 pandemic
we analyzed our portfolio to identify loans that were more likely to be vulnerable to the pandemic’s impact. We then proactively opened a dialogue with potentially affected borrowers to assess their needs and provide assistance. Through this process
we were able to not only better understand our portfolio risks but were able to intercede with borrowers if needed.
Accurate and timely loan risk grading is considered a critical component of an effective credit risk management system. Loan grades take into consideration the borrower’s financial condition, industry
trends, and the economic environment. Loan risk grades are changed as necessary to reflect the risk inherent in the loan. Among other things, we use loan risk grading information for loan pricing, risk and collection management and determining
monthly loan loss reserve adequacy. Further, on a quarterly basis, the Loan Committee holds a Loan Risk Grade meeting, wherein all loans in our portfolio are reviewed for accurate risk grading. Any changes are made after the Loan Risk Grade meeting
to provide for accurate reporting. Reporting is achieved in Loan Committee minutes, which minutes are reviewed by the Board. We supplement credit department supervision of the loan underwriting, approval, closing, servicing and risk grading process
with periodic loan reviews by risk department personnel specific to the testing of controls.
We use a grading system to rank the quality of each loan. The grade is periodically evaluated and adjusted as performance dictates. Loan grades 1 through 4 are passing grades, grade 5 is special
mention. Collectively, grades 6 (substandard), 7 (doubtful) and 8 (loss) represent classified loans within the portfolio. The following guidelines govern the assignment of these risk grades. We do not currently grade Strategic Program loans held for
investment due to their small balances and homogenous nature. As credit quality for Strategic Program loans have been highly correlated with delinquency levels, the Strategic Program loans are evaluated collectively for impairment.
Grade 1: Pass - Loans fully secured by deposit accounts. Loans where the borrower has strong sources of repayment, generally 5 years or more of consistent employment (or related field) and income
history. Debt of the borrower is modest relative to the borrower’s financial strength and ability to pay with a DTI ratio of less than 25%. Cash flow is very strong as evidenced by significant discretionary income amounts. Borrower will consistently
maintain 30% of the outstanding debts in deposit accounts with us, often with the right of offset, holds, etc. Loan to value ratios (LTV) will be 60% or less. Loans in this category require very minimal monitoring.
Grade 2: Pass - The borrower has good sources of repayment, generally 3 years or more of consistent employment (or related field) and income history. The debt of the borrower is reasonable relative to
the borrower’s financial strength with a DTI ratio of less than 35%. Cash flow is strong as evidenced by exceptional discretionary income amounts. Borrowers will consistently maintain 20% of the outstanding debts in deposit accounts with us. LTV
ratios will be 70% or less. These loans require minimal monitoring.
Grade 3: Pass - There is a comfortable primary source of repayment, generally 2 years or more of consistent employment (or related field) and income history. Borrowers may exhibit a mix of strengths and
weaknesses. For example, they have either adequate cash flow with higher than desired leverage, or marginal cash flow with strong collateral and liquidity. Borrowers will have DTIs less than 45%. Borrowers will generally maintain deposit accounts
with us, but the consistency and amount of the deposits are not as strong as Grades 1 and 2. LTV ratios will be within our guidelines. These loans will be monitored on a quarterly basis.
Grade 4: Pass Watch – There is adequate primary source of repayment, generally employment time or time in a related field is less than 2 years. Borrowers’ debt to income ratios may fall outside of our
guidelines or there is minimal excess cash flow. There may be heavy reliance on collateral, or the loan is large, relative to the financial strength of the borrower. The loans may be maintenance intensive requiring closer monitoring.
Grade 5: Special Mention – A loan in this category has a specific weakness or problem but does not currently present a significant risk of loss or default as to any material terms of the loan or
financing agreement. A typical problem could include a documentation deficiency. If the deficiency is corrected the account will be re-graded.
Grade 6: Classified Substandard – A substandard loan has a developing or current weakness or weaknesses that could result in loss or default if deficiencies are not corrected, or adverse conditions
arise.
Grade 7: Classified Doubtful – A doubtful loan has an existing weakness or weaknesses that make collection or liquidation in full, on the basis of currently existing facts and conditions, highly
questionable and improbable.
Grade 8: Classified Loss – A loss loan has an existing weakness or weaknesses that render the loan uncollectible and of such little value that continuing to carry as an asset on our book is not
warranted. This classification does not mean that the loan has absolutely no recovery or salvage value, but rather it is not practical nor desirable to defer writing off this basically worthless asset, even though partial recovery may be affected in
the future.
The following table presents, as of the period presented, the loan balances by loan program as well as risk rating. No loans were classified as ‘Loss’ grade during the periods presented.
|
|
As of June 30, 2022
|
|
|
|
|
($ in thousands)
|
|
Pass
Grade 1-4
|
|
|
Special
Mention
Grade 5
|
|
|
Classified/
Doubtful
Grade 6-7
|
|
|
Loss
Grade 8
|
|
|
Total
|
|
SBA
|
|
$
|
122,338
|
|
|
$
|
1,411
|
|
|
$
|
728
|
|
|
$
|
—
|
|
|
$
|
124,477
|
|
Commercial, non real estate
|
|
|
7,847
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
7,847
|
|
Residential real estate
|
|
|
30,965
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
30,965
|
|
Commercial real estate
|
|
|
4,722
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,722
|
|
Consumer
|
|
|
5,062
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,062
|
|
Not Risk Graded
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Strategic Program loans(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
59,066
|
|
Total
|
|
$
|
170,934
|
|
|
$
|
1,411
|
|
|
$
|
728
|
|
|
$
|
—
|
|
|
$
|
232,139
|
|
|
|
As of December 31, 2021
|
|
($ in thousands)
|
|
Pass
Grade 1-4
|
|
|
Special
Mention
Grade 5
|
|
|
Classified/
Doubtful
Grade 6-7
|
|
|
Loss
Grade 8
|
|
|
Total
|
|
SBA
|
|
$
|
139,985
|
|
|
$
|
1,435
|
|
|
$
|
972
|
|
|
$
|
—
|
|
|
$
|
142,392
|
|
Commercial, non real estate
|
|
|
3,382
|
|
|
|
46
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,428
|
|
Residential real estate
|
|
|
27,108
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
27,108
|
|
Commercial real estate
|
|
|
2,436
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,436
|
|
Consumer
|
|
|
4,574
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,574
|
|
Not Risk Graded
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Strategic Program loans(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
85,850
|
|
Total
|
|
$
|
177,485
|
|
|
$
|
1,481
|
|
|
$
|
972
|
|
|
$
|
—
|
|
|
$
|
265,788
|
|
(1) The Strategic Program loan balance includes $31.6 million and $60.7 million of loans classified as held-for-sale as of June 30, 2022 and December 31, 2021, respectively.
Allowance for Loan Losses
We have not adopted Financial Accounting Standards Board Accounting Standards Update No. 2016–13, Financial Instruments – Credit Losses (Topic 326), commonly
referred to as the “CECL model,” but plan to adopt the CECL model in the 2023 calendar year.
The ALL, a material estimate which could change significantly in the near-term in the event of rapidly shifting credit quality, is established through a provision for loan losses charged to earnings to
account for losses that are inherent in the loan portfolio and estimated to occur, and is maintained at a level that we consider adequate to absorb potential losses in the loan portfolio. Loan losses are charged against the ALL when we believe that
the collectability of the principal loan balance is unlikely. Subsequent recoveries, if any, are credited to the ALL when received.
Our judgment in determining the adequacy of the allowance is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available and as
situations and information change.
We evaluate the ALL on a monthly basis and take into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans and
current economic conditions and trends that may affect the borrower’s ability to repay. The quality of the loan portfolio and the adequacy of the ALL is reviewed by regulatory examinations.
The ALL consists of the following two elements:
● |
Specific allowance for identified impaired loans. For such loans that are identified as impaired, an allowance is established when the discounted cash flows (or collateral
value if the loan is collateral dependent) or observable market price of the impaired loan are lower than the carrying value of that loan.
|
|
Independent appraisals are obtained for all collateral dependent loans deemed impaired when collateral value is expected to exceed $5 thousand net of actual and/or anticipated
liquidation-related expenses. After initially measured for impairment, new appraisals are ordered on at least an annual basis for all real estate secured loans deemed impaired. Non-real estate secured loan appraisal values are reevaluated
and assessed throughout the year based upon interim changes in collateral and market conditions.
|
● |
General valuation allowance. This component represents a valuation allowance on the remainder of the loan portfolio, after excluding impaired loans. For this portion of the
allowance, loans are reviewed based on industry, stage and structure and are assigned allowance percentages based on historical loan loss experience for similar loans with similar characteristics and trends adjusted for qualitative factors.
Qualitative factors that, in management’s judgment, affect the collectability of the portfolio as of the evaluation date, may include changes in lending policies and procedures; changes in national and local economic and business
conditions, including the condition of various market sectors; changes in the nature and volume of the portfolio; changes in the experience, ability and depth of lending management and staff; changes in the volume and severity of past due
and classified loans and in the volume of nonaccruals, troubled debt restructurings, and other loan modifications; the existence and effect of any concentrations of credit and changes in the level of such concentrations; and the effect of
external factors, such as competition and legal and regulatory requirements, on the level of estimated and inherent credit losses in our current portfolio.
|
The ALL was $10.6 million at June 30, 2022 compared to $9.9 million at December 31, 2021, an increase of $0.7 million, or 7.6%. The increase was primarily due to increased unguaranteed loan balances.
The following table presents a summary of changes in the ALL for the periods and dates indicated:
|
|
For the Three Months
Ended
June 30,
|
|
|
For the Six Months
Ended
June 30,
|
|
($ in thousands)
|
|
2022
|
|
|
2021
|
|
|
2022
|
|
|
2021
|
|
ALL:
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
9,987
|
|
|
$
|
6,184
|
|
|
$
|
9,855
|
|
|
$
|
6,199
|
|
Provision for loan losses
|
|
|
2,913
|
|
|
|
1,536
|
|
|
|
5,860
|
|
|
|
2,169
|
|
Charge offs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SBA
|
|
|
(102
|
)
|
|
|
(47
|
)
|
|
|
(133
|
)
|
|
|
(54
|
)
|
Commercial, non-real estate
|
|
|
—
|
|
|
|
(22
|
)
|
|
|
—
|
|
|
|
(63
|
)
|
Residential real estate
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Strategic Program loans
|
|
|
(2,560
|
)
|
|
|
(541
|
)
|
|
|
(5,438
|
)
|
|
|
(1,199
|
)
|
Commercial real estate
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Consumer
|
|
|
—
|
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
(3
|
)
|
Recoveries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SBA
|
|
|
48
|
|
|
|
—
|
|
|
|
48
|
|
|
|
11
|
|
Commercial, non-real estate
|
|
|
1
|
|
|
|
81
|
|
|
|
2
|
|
|
|
81
|
|
Residential real estate
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Strategic Program loans
|
|
|
315
|
|
|
|
48
|
|
|
|
408
|
|
|
|
97
|
|
Commercial real estate
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Consumer
|
|
|
—
|
|
|
|
1
|
|
|
|
—
|
|
|
|
1
|
|
Ending balance
|
|
|
10,602
|
|
|
|
7,239
|
|
|
|
10,602
|
|
|
|
7,239
|
|
Although we believe that we have established our ALL in accordance with GAAP and that the ALL was adequate to provide for known and inherent losses in the portfolio at all times shown above, future
provisions for loan losses will be subject to ongoing evaluations of the risks in our loan portfolio.
The following table shows the allocation of the ALL among loan categories and certain other information as of the dates indicated. The ALL related to Strategic Programs constitutes 60.8% and 66.5% of
the total ALL while comprising 25.5% and 32.3% of total loans as of June 30, 2022 and December 31, 2021, respectively. This reflects the increased credit risks associated with certain retained Strategic Program loans.
|
|
June 30, 2022
|
|
($ in thousands)
|
|
Amount
|
|
|
Total
Loans
|
|
|
% of
Total
Allowance
|
|
|
% of
Loans in
Category
of
Total
Loans
|
|
SBA
|
|
$
|
3,384
|
|
|
$
|
124,477
|
|
|
|
31.9
|
%
|
|
|
53.6
|
%
|
Commercial, non real estate
|
|
|
274
|
|
|
|
7,847
|
|
|
|
2.6
|
%
|
|
|
3.4
|
%
|
Residential real estate
|
|
|
415
|
|
|
|
30,965
|
|
|
|
3.9
|
%
|
|
|
13.3
|
%
|
Strategic Program loans
|
|
|
6,442
|
|
|
|
59,066
|
|
|
|
60.8
|
%
|
|
|
25.5
|
%
|
Commercial real estate
|
|
|
22
|
|
|
|
4,722
|
|
|
|
0.2
|
%
|
|
|
2.0
|
%
|
Consumer
|
|
|
65
|
|
|
|
5,062
|
|
|
|
0.6
|
%
|
|
|
2.2
|
%
|
Total
|
|
$
|
10,602
|
|
|
$
|
232,139
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
December 31, 2021
|
|
($ in thousands)
|
|
Amount
|
|
|
Total Loans
|
|
|
% of
Total
Allowance
|
|
|
% of
Loans in
Category
of
Total
Loans
|
|
SBA
|
|
$
|
2,739
|
|
|
$
|
142,392
|
|
|
|
27.8
|
%
|
|
|
53.6
|
%
|
Commercial, non real estate
|
|
|
132
|
|
|
|
3,428
|
|
|
|
1.3
|
%
|
|
|
1.3
|
%
|
Residential real estate
|
|
|
352
|
|
|
|
27,108
|
|
|
|
3.6
|
%
|
|
|
10.2
|
%
|
Strategic Program loans
|
|
|
6,549
|
|
|
|
85,850
|
|
|
|
66.5
|
%
|
|
|
32.3
|
%
|
Commercial real estate
|
|
|
21
|
|
|
|
2,436
|
|
|
|
0.2
|
%
|
|
|
0.9
|
%
|
Consumer
|
|
|
62
|
|
|
|
4,574
|
|
|
|
0.6
|
%
|
|
|
1.7
|
%
|
Total
|
|
$
|
9,855
|
|
|
$
|
265,788
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
The following tables reflect the ratio of the ALL to nonperforming loan balances and net charge-offs to average loans outstanding by loan category, for the periods presented. Due primarily to some
normalization of credit losses to pre-pandemic market conditions, the ratio of net charge-offs to average loans outstanding was generally higher for loan categories in the three months ended June 30, 2022 as compared to the three months ended June
30, 2021. The increase in the ratio for Strategic Programs loans, Commercial non-real estate loans, and SBA loans was primarily due to increases in net charge-offs in the three months ended June 30, 2022. Due primarily to some normalization of credit
losses to pre-pandemic market conditions, the ratio of net charge-offs to average loans outstanding was generally higher for loan categories in the six months ended June 30, 2022 as compared to the six months ended June 30, 2021. The increase in the
ratio for Strategic Programs loans and Commercial non-real estate loans was primarily due to increases in net charge-offs in the six months ended June 30, 2022 while the decrease in Consumer loans was primarily due to lower net charge-off amounts in
the six months ended June 30, 2022.
|
|
For the Three Months
Ended
June 30,
|
|
|
For the Six Months
Ended
June 30,
|
|
|
|
2022
|
|
|
2021
|
|
|
2022
|
|
|
2021
|
|
Net charge-offs to average loans outstanding by loan category
|
|
|
|
|
|
|
|
|
|
|
|
|
SBA
|
|
|
0.2
|
%
|
|
|
0.1
|
%
|
|
|
0.1
|
%
|
|
|
0.1
|
%
|
Commercial, non-real estate
|
|
|
(0.1
|
%)
|
|
|
(6.0
|
%)
|
|
|
(0.1
|
%)
|
|
|
(0.9
|
%)
|
Residential real estate
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Strategic Program loans
|
|
|
8.7
|
%
|
|
|
3.3
|
%
|
|
|
9.0
|
%
|
|
|
4.3
|
%
|
Commercial real estate
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Consumer
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.1
|
%
|
|
|
As of
|
|
|
|
June 30,
2022
|
|
|
December
31,
2021
|
|
ALL to nonperforming loans
|
|
|
1,674.9
|
%
|
|
|
1,499.1
|
%
|
Interest-Bearing Deposits in Other Banks
Our interest-bearing deposits in other banks increased to $96.1 million at June 30, 2022 from $85.3 million at December 31, 2021, an increase of $10.8 million, or 12.6%. This increase was primarily due
to a decrease in loan balances. Interest-bearing deposits in other banks have generally been the primary repository of the liquidity we use to fund our operations. Aside from minimal balances held with our correspondent banks, the majority of our
interest-bearing deposits in other banks was held directly with the Federal Reserve.
Securities
We use our securities portfolio to provide a source of liquidity, provide an appropriate return on funds invested, manage interest rate risk, meet collateral requirements and meet regulatory capital
requirements.
We classify investment securities as either held-to-maturity or available-for-sale based on our intentions and the Company’s ability to hold such securities until maturity. In determining such
classifications, securities that we have the positive intent and the ability to hold until maturity are classified as held-to-maturity and carried at amortized cost. All other securities are designated as available-for-sale and carried at estimated
fair value with unrealized gains and losses included in shareholders’ equity on an after-tax basis. For the year presented, all securities were classified as held-to-maturity.
The following tables summarize the contractual maturities and weighted average yields of investment securities at June 30, 2022, and the amortized cost of those securities as of the indicated dates.
|
|
At June 30, 2022
|
|
|
|
One Year or Less
|
|
|
After One to Five Years
|
|
($ in thousands)
|
|
Amortized
Cost
|
|
|
Weighted
Average
Yield
|
|
|
Amortized
Cost
|
|
|
Weighted
Average
Yield
|
|
Mortgage-backed securities
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
|
At June 30, 2022
|
|
|
|
|
|
|
After Five to Ten Years Weighted
|
|
|
After Ten Years
Weighted
|
|
|
|
|
($ in thousands)
|
|
Amortized
Cost
|
|
|
Weighted
Average
Yield
|
|
|
Amortized
Cost
|
|
|
Weighted
Average
Yield
|
|
|
Total
Amortized
Cost
|
|
Mortgage-backed securities
|
|
$
|
2,328
|
|
|
|
2.1
|
%
|
|
$
|
10,135
|
|
|
|
1.6
|
%
|
|
$
|
12,463
|
|
The weighted average yield of investment securities is the sum of all interest that the investments generate, divided by the sum of the book value.
There were no calls, sales or maturities of securities during the six months ended June 30, 2022 and June 30, 2021.
At June 30, 2022, there were 15 securities, consisting of six collateralized mortgage obligations and nine mortgage-backed securities. All of these securities were in an unrealized loss position as of
June 30, 2022. There were nine securities in an unrealized loss position as of December 31, 2021.
Deposits
Deposits are the major source of funding for the Company, with the exception of the Company’s participation in the PPPLF, which added a significant amount of funding in 2020 (see discussion below in Liquidity and Capital Resources – Liquidity Management). We offer a variety of deposit products including interest and noninterest bearing demand accounts, money market and savings accounts and certificates of
deposit, all of which we market at competitive pricing. We generate deposits from our customers on a relationship basis and through access to national Institutional and brokered deposit sources. We also generate deposits in relation to our Strategic
Programs in the form of reserve accounts as discussed above. These deposits add an element of flexibility in that they tend to increase or decrease in relation to the size of or Strategic Program loan portfolio. In addition to the reserve account,
some Strategic Program loan originators maintain operating deposit accounts with us.
The following table presents the end of period and average balances and for the periods indicated (average balances have been calculated using daily averages):
|
|
June 30, 2022
|
|
|
December 31, 2021
|
|
($ in thousands)
|
|
Total
|
|
|
Percent
|
|
|
Total
|
|
|
Percent
|
|
Period end:
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing demand deposits
|
|
$
|
83,490
|
|
|
|
38.1
|
%
|
|
$
|
110,548
|
|
|
|
43.9
|
%
|
Interest-bearing deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand
|
|
|
11,360
|
|
|
|
5.1
|
%
|
|
|
5,399
|
|
|
|
2.1
|
%
|
Savings
|
|
|
7,462
|
|
|
|
3.4
|
%
|
|
|
6,685
|
|
|
|
2.7
|
%
|
Money markets
|
|
|
48,273
|
|
|
|
22.0
|
%
|
|
|
31,076
|
|
|
|
12.3
|
%
|
Time certificates of deposit
|
|
|
68,774
|
|
|
|
31.4
|
%
|
|
|
98,184
|
|
|
|
39.0
|
%
|
Total period end deposits
|
|
$
|
219,359
|
|
|
|
100.0
|
%
|
|
$
|
251,892
|
|
|
|
100.0
|
%
|
|
|
Three Months Ended
|
|
|
|
June 30, 2022
|
|
|
December 31, 2021
|
|
|
June 30, 2021
|
|
($ in thousands)
|
|
Total
|
|
|
Weighted
Average
rate paid
|
|
|
Percent
of total
|
|
|
Total
|
|
|
Weighted
Average
rate paid
|
|
|
Percent
of total
|
|
|
Total
|
|
|
Weighted
Average
rate paid
|
|
|
Percent
of total
|
|
Average:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing demand deposits
|
|
$
|
120,359
|
|
|
|
0.00
|
%
|
|
|
48.6
|
%
|
|
$
|
127,590
|
|
|
|
0.00
|
%
|
|
|
46.3
|
%
|
|
$
|
105,459
|
|
|
|
0.00
|
%
|
|
|
53.9
|
%
|
Interest-bearing deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand
|
|
|
7,587
|
|
|
|
1.42
|
%
|
|
|
3.1
|
%
|
|
|
7,411
|
|
|
|
0.81
|
%
|
|
|
2.7
|
%
|
|
|
5,533
|
|
|
|
0.94
|
%
|
|
|
2.8
|
%
|
Savings
|
|
|
7,430
|
|
|
|
0.05
|
%
|
|
|
3.0
|
%
|
|
|
7,573
|
|
|
|
0.05
|
%
|
|
|
2.7
|
%
|
|
|
8,328
|
|
|
|
0.14
|
%
|
|
|
4.3
|
%
|
Money market
|
|
|
29,318
|
|
|
|
0.29
|
%
|
|
|
11.8
|
%
|
|
|
28,859
|
|
|
|
0.29
|
%
|
|
|
10.5
|
%
|
|
|
18,872
|
|
|
|
0.38
|
%
|
|
|
9.6
|
%
|
Time certificates of deposit
|
|
|
82,870
|
|
|
|
0.94
|
%
|
|
|
33.5
|
%
|
|
|
104,134
|
|
|
|
0.93
|
%
|
|
|
37.8
|
%
|
|
|
57,468
|
|
|
|
1.79
|
%
|
|
|
29.4
|
%
|
Total average deposits
|
|
$
|
247,564
|
|
|
|
0.39
|
%
|
|
|
100.0
|
%
|
|
$
|
275,567
|
|
|
|
0.40
|
%
|
|
|
100.0
|
%
|
|
$
|
195,660
|
|
|
|
0.59
|
%
|
|
|
100.0
|
%
|
|
|
Six Months Ended
|
|
|
|
June 30, 2022
|
|
|
June 30, 2021
|
|
($ in thousands)
|
|
Total
|
|
|
Weighted
average
rate paid
|
|
|
Percent
of total
|
|
|
Total
|
|
|
Weighted
average
rate paid
|
|
|
Percent
of total
|
|
Average:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing demand deposits
|
|
$
|
129,014
|
|
|
|
0.00
|
%
|
|
|
49.9
|
%
|
|
$
|
97,330
|
|
|
|
0.00
|
%
|
|
|
53.1
|
%
|
Interest-bearing deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand
|
|
|
6,969
|
|
|
|
1.18
|
%
|
|
|
2.7
|
%
|
|
|
5,908
|
|
|
|
0.91
|
%
|
|
|
3.2
|
%
|
Savings
|
|
|
7,056
|
|
|
|
0.06
|
%
|
|
|
2.7
|
%
|
|
|
7,594
|
|
|
|
0.16
|
%
|
|
|
4.1
|
%
|
Money market
|
|
|
30,596
|
|
|
|
0.28
|
%
|
|
|
11.8
|
%
|
|
|
18,303
|
|
|
|
0.37
|
%
|
|
|
10.0
|
%
|
Time certificates of deposit
|
|
|
85,235
|
|
|
|
0.98
|
%
|
|
|
32.9
|
%
|
|
|
54,196
|
|
|
|
1.92
|
%
|
|
|
29.6
|
%
|
Total average deposits
|
|
$
|
258,870
|
|
|
|
0.39
|
%
|
|
|
100.0
|
%
|
|
$
|
183,331
|
|
|
|
0.64
|
%
|
|
|
100.0
|
%
|
Our deposits decreased to $219.4 million at June 30, 2022 from $251.9 million at December 31, 2021, a decrease of $32.5 million, or 12.9%. This decrease was primarily due to the decline in our Strategic Program loan program.
As an FDIC-insured institution, our deposits are insured up to applicable limits by the DIF of the FDIC. The Dodd-Frank Act raised the limit for federal deposit insurance to $250,000 for most deposit
accounts and increased the cash limit of Securities Investor Protection Corporation protection from $100,000 to $250,000. Our total uninsured deposits were $128.3 million and $163.7 million as of June 30, 2022 and December 31, 2021, respectively. The
maturity profile of our uninsured time deposits, those amounts that exceed the FDIC insurance limit, at June 30, 2022 is as follows:
|
|
June 30, 2022
|
|
($ in thousands)
|
|
Three
months
or less
|
|
|
More than
three
months
to six
months
|
|
|
More than
six months
to twelve
months
|
|
|
More than
twelve
months
|
|
|
Total
|
|
Time deposits, uninsured
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
631
|
|
|
$
|
148
|
|
|
$
|
779
|
|
Liquidity and Capital Resources
Liquidity Management
Liquidity management is the ability to meet current and future financial obligations of a short-term nature. Our primary sources of funds consist of deposit inflows, the sale of loans, repayment of
loans and net profits. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows, loan prepayments, loan sales and security sales are greatly influenced by general interest rates, economic
conditions, and competition.
On November 23, 2021, we completed our IPO at a price of $10.50 per share. We raised approximately $36.1 million in net proceeds after deducting underwriting discounts and commissions of approximately
$3.0 million and certain estimated offering expenses payable by us of approximately of $3.2 million. The net proceeds less $0.5 million in other related expenses, including legal fees totaled $35.6 million.
Our primary source of funds to originate new loans (other than the PPPLF program used to fund PPP loans in 2020) is derived from deposits. Deposits are comprised of core and noncore deposits. We use
brokered deposits and a rate listing service to advertise rates to banks, credit unions, and other institutional entities. We designate deposits obtained from this source as Institutional Deposits. To date, depositors of brokered and Institutional
Deposits have been willing to place deposits with us at rates near the middle of the market. To attract deposits from local and nationwide consumer and commercial markets, we historically paid rates at the higher end of the market, which we have been
able to pay due to our high margin and technology oriented business model. We utilize rate listing services and website advertising to attract deposits from consumer and commercial sources.
We regularly evaluate new, core deposit products and in 2020, we launched a deposit product targeted to the needs of our PPP borrowers. We intend to have various term offerings to match our funding
needs. With no current plans to expand our brick-and-mortar branch network, online and mobile banking offers a means to meet customer needs and better efficiency through technology compared to traditional branch networks. We believe that the rise of
mobile and online banking provides us the opportunity to further leverage the technological competency we have demonstrated in recent years.
We regularly adjust our investment in liquid assets based upon our assessment of (1) expected loan demand, (2) expected deposit flows, (3) yields available on interest-earning deposits and securities
and (4) the objectives of our asset/liability management, funds management and liquidity policies. The objective of the liquidity policy is to reduce the risk to our earnings and capital arising from the inability to meet obligations in a timely
manner. This entails ensuring sufficient funds are available at a reasonable cost to meet potential demands from both fund providers and borrowers. Liquid assets, defined as cash and due from banks and interest bearing deposits, were 26.4% of total
assets at June 30, 2022.
We primarily utilize short-term and long-term borrowings to supplement deposits to fund our lending and investment activities, each of which is discussed below. At June 30, 2022, we had the ability to
access $10.0 million from the Federal Reserve Bank’s Discount Window on a collateralized basis. Through Zions Bank, the Bank had an available unsecured line available of $1.0 million. The Bank had an available unsecured line of credit with Bankers’
Bank of the West to borrow up to $1.05 million in overnight funds. We also maintain a $3.2 million line of credit with Federal Home Loan Bank, secured by specific pledged loans. We had no outstanding balances on such unsecured or secured lines of
credit as of June 30, 2022. In long term borrowings, we had $0.4 million outstanding at June 30, 2022 related to the PPPLF. The PPPLF is secured by pledged PPP loans.
Our most liquid assets are cash and cash equivalents. The levels of these assets depend on our operating, financing, lending and investing activities during any given period. At June 30, 2022, liquid
assets (defined as cash and due from banks and interest bearing deposits), consisting of cash and due from banks, totaled $96.5 million. We believe that our liquid assets combined with the available lines of credit provide adequate liquidity to meet
our current financial obligations for at least the next 12 months.
Capital Resources
Shareholders’ equity increased $15.1 million to $130.5 million at June 30, 2022 compared to $115.4 million at December 31, 2021. The increase in shareholders’ equity was primarily attributable to net
income recognized of $14.9 million. Stock options exercised, and stock-based compensation increased additional paid-in capital aggregately by approximately $0.2 million.
We use several indicators of capital strength. The most commonly used measure is average common equity to average assets, which was 32.3% and 18.2% for the three months ended June 30, 2022 and 2021,
respectively. Average common equity to average assets was 33.0% and 17.5% for the six months ended June 30, 2022 and 2021, respectively.
Our return on average equity was 17.2% and 55.0% for the three months ended June 30, 2022 and 2021, respectively. Our return on average assets was 5.5% and 10.0% for the three months ended June 30, 2022
and 2021, respectively. Our return on average equity was 24.3% and 49.1% for the six months ended June 30, 2022 and 2021, respectively. Our return on average assets was 8.0% and 8.6% for the six months ended June 30, 2022 and 2021, respectively.
We seek to maintain adequate capital to support anticipated asset growth, operating needs and unexpected risks, and to ensure that we are in compliance with all current and anticipated regulatory
capital guidelines. Our primary sources of new capital include retained earnings and proceeds from the sale and issuance of capital stock or other securities. Expected future use or activities for which capital may be set aside include balance sheet
growth and associated relative increases in market or credit exposure, investment activity, potential product and business expansions, acquisitions and strategic or infrastructure investments.
The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet
specific capital guidelines that involve quantitative measures of its assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classifications are also subject to
qualitative judgments by the regulators about components, risk weightings, and other factors.
Under the prompt corrective action rules, an institution is deemed “well capitalized” if its Tier 1 leverage ratio, Common Equity Tier 1 ratio, Tier 1 Capital ratio, and Total Capital ratio meet or
exceed 5%, 6.5%, 8%, and 10%, respectively. On September 17, 2019, the federal banking agencies jointly finalized a rule intending to simplify the regulatory capital requirements described above for qualifying community banking organizations that opt
into the Community Bank Leverage Ratio framework, as required by Section 201 of the Regulatory Relief Act. The Bank has elected to opt into the Community Bank Leverage Ratio framework starting in 2020. Under these new capital requirements, as
temporarily amended by Section 4012 of the CARES Act, the Bank must maintain a leverage ratio greater than 8.5% for 2021 and 9.0% for 2022.
As of June 30, 2022 and December 31, 2021, the most recent notification from the FDIC categorized the Bank as well-capitalized under the regulatory framework for prompt corrective action (there are no
conditions or events since that notification we believe have changed the Bank’s category). The following table sets forth the actual capital amounts and ratios for the Bank and the amount of capital required to be categorized as well-capitalized as
of the dates indicated.
The following table presents the regulatory capital ratios for the Bank as of the dates indicated:
|
|
June 30,
|
|
|
December 31,
|
|
|
2022
|
|
|
2021
|
|
|
Capital Ratios
|
|
2022
|
|
|
2021
|
|
|
Well-
Capitalized
Requirement
|
|
|
Well-
Capitalized
Requirement
|
|
|
Leverage Ratio (under CBLR)
|
|
|
21.4
|
%
|
|
|
17.7
|
%
|
|
|
9.0
|
%(1)
|
|
|
8.5
|
%(1)
|
|
(1)
|
The Well-Capitalized Requirement for years 2022 and 2021 were 9.0% and 8.5%, respectively.
|
Contractual Obligations
We have contractual obligations to make future payments on debt and lease agreements. While our liquidity monitoring and management consider both present and future demands for and sources of liquidity,
the following table of contractual commitments focuses only on future obligations and summarizes our contractual obligations as of June 30, 2022.
($ in thousands)
|
|
Total
|
|
Less than
One Year
|
|
|
One to
Three
Years
|
|
|
Three to
Five Years
|
|
|
More
Than Five
Years
|
|
Contractual Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits without stated maturity
|
|
$
|
94,850
|
|
$
|
|
|
94,850
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Time deposits
|
|
|
68,774
|
|
|
|
|
12,666
|
|
|
|
37,643
|
|
|
|
17,581
|
|
|
|
884
|
|
Long term borrowings(1)
|
|
|
376
|
|
|
|
|
—
|
|
|
|
376
|
|
|
|
—
|
|
|
|
—
|
|
Operating lease obligations
|
|
|
7,954
|
|
|
|
|
733
|
|
|
|
2,201
|
|
|
|
2,237
|
|
|
|
2,783
|
|
Total
|
|
$
|
171,954
|
|
|
|
$
|
108,249
|
|
|
$
|
40,220
|
|
|
$
|
19,818
|
|
|
$
|
3,667
|
|
(1)
|
Balances in this category pertain to the PPPLF and are fully-collateralized with PPP loans
|
Off-Balance Sheet Items
In the normal course of business, we enter into various transactions, which, in accordance with GAAP, are not included in our consolidated statements of financial condition. We enter into these
transactions to meet the financing needs of our customers. These transactions include commitments to extend credit, which involves, to varying degrees, elements of credit risk and interest rate risk exceeding the amounts recognized in our
consolidated statements of financial condition. Our exposure to credit loss is represented by the contractual amounts of these commitments. The same credit policies and procedures are used in making these commitments as for on-balance sheet
instruments. We are not aware of any accounting loss to be incurred by funding these commitments; if required, we would maintain an allowance for off-balance sheet credit risk which would be recorded in other liabilities on the consolidated balance
sheets.
Our commitments to extend credit as of the dates indicated are summarized below. Since commitments associated with commitments to extend credit may expire unused, the amounts shown do not necessarily
reflect the actual future cash funding requirements.
($ in thousands)
|
|
As of June 30,
2022
|
|
|
As of December 31,
2021
|
|
Revolving, open-end lines of credit
|
|
$
|
1,290
|
|
|
$
|
1,259
|
|
Commercial real estate
|
|
|
23,830
|
|
|
|
15,402
|
|
Other unused commitments
|
|
|
644
|
|
|
|
377
|
|
Total commitments
|
|
$
|
25,764
|
|
|
$
|
17,038
|
|
Critical Accounting Policies and Estimates
The accompanying management’s discussion and analysis of results of operations and financial condition is based upon our unaudited interim consolidated financial statements, which have been prepared in
accordance with GAAP. The preparation of these financial statements in accordance with GAAP requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosure of
contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under current circumstances, results of which form the basis for making judgments about the carrying
value of certain assets and liabilities that are not readily available from other sources. We evaluate our estimates on an ongoing basis. Actual results may differ from these estimates under different assumptions or conditions. There have been no
significant changes during the six months ended June 30, 2022 to the items that we disclosed as our critical accounting policies and estimates in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the 2021 Form
10-K.
Accounting policies, as described in detail in the notes to our consolidated financial statements, included in the 2021 Form 10-K, are an integral part of our financial statements. A thorough
understanding of these accounting policies is essential when reviewing our reported results of operations and our financial position. We believe that those critical accounting policies and estimates require us to make difficult, subjective or complex
judgments about matters that are inherently uncertain. Changes in these estimates, which are likely to occur from period to period, or use of different estimates that we could have reasonably used in the current period, would have a material impact
on our financial position, results of operations or liquidity.
GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures
Some of the financial measures included in this Report are not measures of financial performance recognized by GAAP. This non-GAAP financial measure is “total nonperforming assets and troubled debt
restructurings to total assets (less PPP loans).” Our management uses this non-GAAP financial measures in its analysis of our performance.
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“Total nonperforming assets and troubled debt restructurings to total assets (less PPP loans)” is defined as the sum of nonperforming assets and troubled debt restructurings divided by total assets minus PPP loans.
The most directly comparable GAAP financial measure is the sum of nonperforming assets and troubled debt restructurings to total assets. We believe this measure is important because we believe that PPP loans will not be included in
nonperforming assets or troubled debt restructurings since PPP loans are 100% guaranteed by the SBA. We believe that the non-GAAP measure more accurately discloses the proportion of nonperforming assets and troubled debt restructurings to
total assets consistently with periods prior to the presence of PPP loans.
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We believe these non-GAAP financial measures provide useful information to management and investors that is supplementary to our financial condition, results of operations and cash flows computed in
accordance with GAAP; however, we acknowledge that our non-GAAP financial measures have a number of limitations. As such, you should not view these measures as a substitute for results determined in accordance with GAAP, and they are not necessarily
comparable to non-GAAP financial measures that other companies use. The following table provides a reconciliation of these non-GAAP financial measures to the most closely related GAAP measure.
Total nonperforming assets and troubled debt restructurings to total assets (less PPP loans)
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As of
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($ in thousands)
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June 30, 2022
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December 31, 2021
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Total nonperforming assets and troubled debt restructuring
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$
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728
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$
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763
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Total assets
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$
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365,987
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$
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380,214
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PPP loans
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$
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734
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$
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1,091
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Total assets less PPP loans
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$
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365,253
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$
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379,123
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Total nonperforming assets and troubled debt restructurings to total assets (less PPP loans)
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0.2
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%
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0.2
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%
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