Item 7. Management’s Discussion and Analysis
Item 7. 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 in conjunction with our consolidated financial statements and related notes appearing elsewhere in this report.
The following discussion, analysis and comparisons generally focus on the operating results for the years ended December 31, 2021 and 2020. Discussion, analysis and comparisons of the years ended December 31, 2020 and 2019 that are not included in this Annual Report on Form 10-K can be found in “Management's Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2020. This discussion and analysis includes certain forward-looking statements that involve risks, uncertainties and assumptions. You should review the “Risk Factors” section of this report for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by such forward-looking statements. See also the “Cautionary Note Regarding Forward-Looking Statements” at the beginning of this report.
COVID-19 Pandemic
The year 2021 was characterized by continued uncertainty as the coronavirus (“COVID-19”) pandemic persisted globally. However, federal, state and local governments have continued to take additional steps to reopen and stimulate economies, evidenced by improving economic indicators as 2021 progressed. While the effects of COVID-19 did have an impact on our operating results during 2021, we believe the impact was consistent with the effects of COVID-19 on the overall banking industry. The extent to which COVID-19 will continue to impact our business will depend on numerous evolving factors and future developments that we are not able to predict, including potential new variants of COVID-19, the effectiveness of continuing containment measures, including the speed of the ongoing vaccine distribution effort, the efficacy of the various vaccines, and how quickly and to what extent normal economic and operating conditions can resume.
COVID-19 impacted our business during 2021, as the low interest rate environment following Federal Reserve rate cuts in the first quarter 2020 had a negative impact on some variable rate assets throughout 2021. However, the low interest rate environment has also allowed us to reprice our interest-bearing deposits at lower rates, which provided a benefit to net interest income in 2021.
Throughout COVID-19, our top priority has been the health of our team and clients. As a digitally-focused institution without branch locations, we were able to continue serving clients when they needed us most, while minimizing operational disruptions caused by COVID-19. The vast majority of our employees who worked remotely during the earlier stages of the pandemic have returned to the office. Management continues to assess the evolving health and safety situations at local, regional and national levels. Our plans remain flexible to adapt as these situations evolve.
Pending Merger Transaction
On November 1, 2021, we entered into a merger agreement to acquire all of the outstanding shares of common stock of First Century Bancorp. (“First Century”), the parent company of First Century Bank, N.A. (“First Century Bank”), for $80 million in cash. First Century Bank is a technology-driven, financial solutions company with lines of business focused on payments, tax product lending, sponsored card programs and homeowners association services. We expect to fund our payment obligations upon closing with available on-balance sheet cash. The acquisition is subject to customary regulatory approvals and the completion of various closing conditions. The acquisition has received approval from the Indiana Department of Financial Institutions and First Century shareholders, but it is awaiting approval from the Federal Deposit Insurance Corporation and the Federal Reserve. As of December 31, 2021, First Century had total assets of $486.7 million, total deposits of $409.4 million, and total loans of $25.2 million.
Results of Operations
During the twelve months ended December 31, 2021, net income was $48.1 million, or $4.82 per diluted share, compared to net income of $29.5 million, or $2.99 per diluted share, for the twelve months ended December 31, 2020 and net income of $25.2 million, or $2.51 per diluted share, for the twelve months ended December 31, 2019.
The $18.7 million increase in net income for the twelve months ended December 31, 2021 compared to the twelve months ended December 31, 2020 was due primarily to a $22.0 million increase in net interest income and an $8.3 million decrease in provision for loan losses, partially offset by a $4.1 million increase in noninterest expense, a $4.0 million increase in income tax expense and a $3.5 million decrease in noninterest income.
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The increase in net income of $4.2 million for the twelve months ended December 31, 2020 compared to the twelve months ended December 31, 2019 was due primarily to a $19.5 million increase in noninterest income and a $1.6 million increase in net interest income, partially offset by an $11.0 million increase in noninterest expense, a $3.4 million increase in provision for loan losses and a $2.5 million increase in income tax expense.
During the twelve months ended December 31, 2021, return on average assets was 1.14%, compared to 0.69% for the twelve months ended December 31, 2020. During the twelve months ended December 31, 2021, return on average shareholders’ equity was 13.44%, compared to 9.39% for the twelve months ended December 31, 2020. Additionally, for the twelve months ended December 31, 2021, return on average tangible common equity was 13.61% compared to 9.53% for the twelve months ended December 31, 2020. These profitability ratios improved during 2021 due to net income growth of 63.4%, while total average assets was down slightly from 2020. Additionally, the growth in net income outpaced growth in average shareholders' equity of 14.1% and growth in average tangible common equity of 14.4%. Refer to the “Reconciliation of Non-GAAP Financial Measures” section of Item 7 of Part II of this report, Management's Discussion and Analysis of Financial Condition and Results of Operations for additional information.
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Consolidated Average Balance Sheets and Net Interest Income Analyses
For the periods presented, the following tables provide the average balances of interest-earning assets and interest-bearing liabilities and the related yields and cost of funds. The tables do not reflect any effect of income taxes. Balances are based on the average of daily balances. Nonaccrual loans are included in average loan balances.
Twelve Months Ended
December 31, 2021 December 31, 2020 December 31, 2019
(dollars in thousands) Average Balance Interest/Dividends Yield/Cost Average Balance Interest/Dividends Yield/Cost Average Balance Interest/Dividends Yield/Cost
Assets
Interest-earning assets
Loans, including loans held-for-sale $ 2,999,232 $ 123,467 4.12 % $ 3,025,989 $ 120,628 3.99 % $ 2,894,174 $ 122,228 4.22 %
Securities - taxable 544,613 7,970 1.46 % 530,849 11,123 2.10 % 462,704 13,807 2.98 %
Securities - non-taxable 84,482 1,017 1.20 % 95,173 1,728 1.82 % 97,613 2,595 2.66 %
Other earning assets 466,608 1,429 0.31 % 523,788 3,380 0.65 % 355,412 8,784 2.47 %
Total interest-earning assets 4,094,935 133,883 3.27 % 4,175,799 136,859 3.28 % 3,809,903 147,414 3.87 %
Allowance for loan losses (29,068) (24,660) (19,891)
Noninterest earning-assets 140,059 112,659 100,696
Total assets $ 4,205,926 $ 4,263,798 $ 3,890,708
Liabilities
Interest-bearing liabilities
Interest-bearing demand deposits $ 195,699 $ 583 0.30 % $ 145,207 $ 840 0.58 % $ 118,874 $ 882 0.74 %
Savings accounts 56,967 203 0.36 % 40,593 303 0.75 % 35,751 398 1.11 %
Money market accounts 1,434,829 5,892 0.41 % 1,156,084 11,381 0.98 % 637,360 12,661 1.99 %
Certificates and brokered deposits 1,411,211 23,144 1.64 % 1,882,773 43,452 2.31 % 2,146,637 55,372 2.58 %
Total interest-bearing deposits 3,098,706 29,822 0.96 % 3,224,657 55,976 1.74 % 2,938,622 69,313 2.36 %
Other borrowed funds 600,035 17,505 2.92 % 586,372 16,342 2.79 % 564,757 15,134 2.68 %
Total interest-bearing liabilities 3,698,741 47,327 1.28 % 3,811,029 72,318 1.90 % 3,503,379 84,447 2.41 %
Noninterest-bearing deposits 101,825 74,277 44,682
Other noninterest-bearing liabilities 47,255 64,729 46,265
Total liabilities 3,847,821 3,950,035 3,594,326
Shareholders' equity 358,105 313,763 396,382
Total liabilities and shareholders' equity $ 4,205,926 $ 4,263,798 $ 3,990,708
Net interest income $ 86,556 $ 64,541 $ 62,967
Interest rate spread 1
1.99 % 1.38 % 1.46 %
Net interest margin 2
2.11 % 1.55 % 1.65 %
Net interest margin - FTE 3
2.25 % 1.68 % 1.82 %
1 Yield on total interest-earning assets minus cost of total interest-bearing liabilities
2 Net interest income divided by average interest-earning assets
3 On a fully-taxable equivalent (“FTE”) basis assuming a 21% tax rate. Refer to the “Reconciliation of Non-GAAP Financial Measures” section of Item 7 of Part II of this report, Management's Discussion and Analysis of Financial Condition and Results of Operations
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Rate/Volume Analysis
The following table illustrates the impact of changes in the volume of interest-earning assets and interest-bearing liabilities and interest rates on net interest income for the periods indicated. The change in interest not due solely to volume or rate has been allocated in proportion to the absolute dollar amounts of the change in each.
Rate/Volume Analysis of Net Interest Income
Twelve Months Ended December 31, 2021 vs. December 31, 2020 Due to Changes in Twelve Months Ended December 31, 2020 vs. December 31, 2019 Due to Changes in
(amounts in thousands) Volume Rate Net Volume Rate Net
Interest income
Loans, including loans held-for-sale $ (1,074) $ 3,913 $ 2,839 $ 5,333 $ (6,933) $ (1,600)
Securities – taxable 285 (3,438) (3,153) 1,817 (4,501) (2,684)
Securities – non-taxable (177) (534) (711) (64) (803) (867)
Other earning assets (337) (1,614) (1,951) 2,948 (8,352) (5,404)
Total (1,303) (1,673) (2,976) 10,034 (20,589) (10,555)
Interest expense
Interest-bearing deposits (2,097) (24,057) (26,154) 6,245 (19,582) (13,337)
Other borrowed funds 388 775 1,163 583 625 1,208
Total (1,709) (23,282) (24,991) 6,828 (18,957) (12,129)
Increase (decrease) in net interest income $ 406 $ 21,609 $ 22,015 $ 3,206 $ (1,632) $ 1,574
Net interest income for the twelve months ended December 31, 2021 was $86.6 million, an increase of $22.0 million, or 34.1%, compared to $64.5 million for the twelve months ended December 31, 2020. The increase in net interest income was the result of a $25.0 million, or 34.6%, decrease in total interest expense to $47.3 million for the twelve months ended December 31, 2021 compared to $72.3 million for the twelve months ended December 31, 2020. This decrease in total interest expense was partially offset by a $3.0 million, or 2.2%, decrease in total interest income to $133.9 million for the twelve months ended December 31, 2021 compared to $136.9 million for the twelve months ended December 31, 2020.
The decrease in total interest expense was driven primarily by decreases in interest expense related to certificates and brokered deposits and money market accounts. Interest expense on certificates and brokered deposits decreased $20.3 million, or 46.7%, due to a decline of 67 bps in the cost of these deposits as well as a $471.6 million, or 25.0%, decrease in the average balance of these deposits. The decrease in certificates and brokered deposit balances was driven by our pricing strategy to reduce the level of these higher cost deposits. The decrease in interest expense related to money market accounts of $5.5 million, or 48.2%, was driven by a decline of 57 bps in the cost of these deposits, partially offset by an increase of $278.7 million, or 24.1%, in the average balance of these deposits. Money market balances increased throughout 2021 due to targeted digital marketing efforts to grow small business accounts, as well as consumers, small businesses and commercial clients increasing their cash balances due in part to the continued economic uncertainty resulting from COVID-19. The decrease in interest expense related to interest-bearing demand deposits and savings accounts was due primarily to decreases of 28 bps and 39 bps, respectively, in the cost of these deposits, partially offset by increases of $50.5 million, or 34.8%, and $16.4 million, or 40.3%, respectively, in the average balance of these deposits. The increase in interest expense associated with other borrowed funds was due primarily to the recognition of $0.8 million of costs related to the Company redeeming the 2026 Notes on September 30, 2021.
The decrease in total interest income was due primarily to decreases in interest earned on securities and other earning assets, partially offset by an increase in interest earned on loans, including loans held-for sale. Interest income earned on securities decreased $3.9 million, or 21.6%, due to a decline of 62 bps in the yield earned on securities, partially offset by an increase of $3.1 million, or 0.4%, in the average balance of securities. The decrease in the yield earned on securities was driven primarily by lower market interest rates following Federal Reserve interest rate cuts in March 2020 in response to the economic effects of COVID-19, which contributed to increased prepayment activity and lower yields earned on private label and agency mortgage-backed securities and U.S. Government agency securities, as well as early redemptions and maturities in corporate and municipal securities. Interest income earned on other earning assets decreased $2.0 million, or 57.7%, due to a decline of 34 bps in the yield earned on these assets, as well as a decrease of $57.2 million, or 10.9%, in the average balance of other earning assets. The decrease in the yield earned on other earning assets was due primarily to lower market interest rates, as
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described above. The decrease in the average balance of other earning assets was due to lower cash balances driven by declines in the average balance of deposits. Interest income earned on loans, including loans held-for-sale, increased by $2.8 million as the yield on the loan portfolio increased by 13 bps, but was partially offset by a decrease of $26.8 million, or 0.9%, in the average balance of loans. The decrease in average loan balances was due primarily to declines in the single tenant lease financing, public finance, owner-occupied commercial real estate, commercial and industrial and consumer portfolios, but was partially offset by increases in the healthcare finance, construction, small business lending (which included loans originated through the Paycheck Protection Program (“PPP”)), franchise finance and investor commercial real estate portfolios.
Net interest margin was 2.11% for the twelve months ended December 31, 2021 compared to 1.55% for the twelve months ended December 31, 2020. The increase in net interest margin was due primarily to a 62 bp decrease in the cost of interest-bearing liabilities, partially offset by a 1 bp decrease in the yield earned on interest-earning assets. The decline in the cost of interest-bearing liabilities was driven primarily by the lower deposit costs, as discussed above, due primarily to the continued low interest rate environment following Federal Reserve interest rate cuts in March 2020 in response to the economic effects of COVID-19. Looking ahead into 2022, we believe that yields on interest-earning assets will increase as we anticipate growing our commercial loan portfolio. We have approximately $712.8 million of certificates and brokered deposits with a weighted average cost of 1.02% that mature over the next twelve months. As the weighted average of cost of these deposits is significantly higher than current new production costs, we expect the cost of deposit funding to continue to decline in 2022, although at a much slower pace than in 2021.
Noninterest Income
The following table presents noninterest income for the three most recent years.
Twelve Months Ended December 31,
(amounts in thousands) 2021 2020 2019
Service charges and fees $ 1,114 $ 824 $ 885
Loan servicing revenue 1,934 1,159 166
Loan servicing asset revaluation (1,069) (432) —
Mortgage banking activities 15,050 24,693 11,541
Gain on sale of loans 11,598 8,298 2,074
Gain (loss) on sale of securities — 139 (458)
Gain on sale of premises and equipment 2,523 — —
Other 1,694 1,655 2,581
Total noninterest income $ 32,844 $ 36,336 $ 16,789
During the twelve months ended December 31, 2021, noninterest income totaled $32.8 million, representing a decrease of $3.5 million, or 9.6%, compared to $36.3 million for the twelve months ended December 31, 2020. The decrease in noninterest income was driven primarily by a decrease in revenue from mortgage banking activities, which was partially offset by increases in gain on sale of loans and gain on sale of premises and equipment. The decrease in mortgage banking revenue was due mainly to decreases in interest rate locks and sold loan volume as well as lower gain-on-sale margins. The increase in gain on sale of loans for the twelve months ended December 31, 2021 was due to a higher amount of SBA 7(a) guaranteed loan sales as well as the sale of single tenant lease financing loans. The increase in gain on sale of premises and equipment was due to the Company completing the sale of its headquarters during 2021.
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Noninterest Expense
The following table presents noninterest expense for the three most recent years.
Twelve Months Ended December 31,
(amounts in thousands) 2021 2020 2019
Salaries and employee benefits $ 38,223 $ 34,231 $ 27,014
Marketing, advertising and promotion 3,261 1,654 1,800
Consulting and professional services 4,054 3,511 3,669
Data processing 1,649 1,528 1,338
Loan expenses 2,112 2,036 1,142
Premises and equipment 7,063 6,396 6,059
Deposit insurance premium 1,213 1,810 1,903
Write-down of other real estate owned — 2,065 —
Other 4,223 4,423 3,709
Total noninterest expense $ 61,798 $ 57,654 $ 46,634
Noninterest expense for the twelve months ended December 31, 2021 was $61.8 million, compared to $57.7 million for the twelve months ended December 31, 2020. The increase of $4.1 million, or 7.2%, compared to the twelve months ended December 31, 2020 was due primarily to a $4.0 million increase in salaries and employee benefits, a $1.6 million increase in marketing, advertising and promotion, a $0.7 million increase in premises and equipment, and a $0.5 million increase in consulting and professional fees, partially offset by a $2.1 million decrease in write-down of other real estate owned and a $0.6 million decrease in deposit insurance premium. The increase in salaries and employee benefits was due mainly to increased headcount, predominately in the Company’s small business lending, information technology and construction lending groups. The increase in marketing, advertising and promotion was due primarily to higher mortgage lead generation costs and digital marketing initiatives. The increase in consulting and professional fees was due primarily to acquisition-related expenses. The increase in premises and equipment was driven primarily by a $0.5 million termination fee related to an information technology contract. The decrease in write-down of other real estate owned was due to no write-down in 2021, as opposed to a $2.1 million write-down in 2020. The decrease in deposit insurance premium was due primarily to a decrease in asset growth and an increase in the Bank's regulatory capital ratios, both of which positively impact the formula used to calculate deposit insurance expense.
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Income Taxes
The following table reconciles reported income tax expense to that computed at the statutory federal tax rate for the three most recent years.
Twelve Months Ended December 31,
(amounts in thousands) 2021 2020 2019
Statutory rate times pre-tax income $ 11,884 $ 7,119 $ 5,703
(Subtract) add the tax effect of:
Income from tax-exempt securities and loans (4,217) (4,464) (4,881)
State income taxes, net of federal tax effect 865 1,765 1,285
Bank-owned life insurance (199) (200) (198)
Tax credits (175) (178) (181)
Other differences 300 403 189
Income tax expense $ 8,458 $ 4,445 $ 1,917
We recognized income tax expense of $8.5 million in 2021, resulting in an effective tax rate of 15.0%, compared to $4.4 million and an effective tax rate of 13.1% in 2020. Our federal statutory tax rate was 21% in 2021 and 2020. In both 2021 and 2020, the variance from the federal statutory rate was due primarily to tax-exempt income, partially offset by state income taxes. Interest income on certain loans or securities issued by governmental, municipal and not-for-profit entities, and earnings from bank-owned life insurance were the primary components of tax-exempt income. The increase in the effective tax rate and income tax expense was due primarily to the increase in pre-tax earnings driven by a higher proportion of taxable revenue, including higher net interest income, gain on sale of loans and gain on sale of premises and equipment.
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Financial Condition
The following table presents summary balance sheet data as of the end of the last two years.
(amounts in thousands) December 31,
Balance Sheet Data: 2021 2020
Total assets $ 4,210,994 $ 4,246,156
Loans 2,887,662 3,059,231
Total securities 662,609 565,851
Loans held-for-sale 47,745 39,584
Noninterest-bearing deposits 117,531 96,753
Interest-bearing deposits 3,061,428 3,174,132
Total deposits 3,178,959 3,270,885
Advances from Federal Home Loan Bank 514,922 514,916
Total shareholders' equity 380,338 330,944
Total assets decreased $35.2 million, or 0.8%, to $4.2 billion as of December 31, 2021 compared to $4.2 billion as of December 31, 2020. The decline in total assets was driven primarily by a decrease in loan balances of $171.6 million, or 5.6%. The liquidity provided by the decline in loan balances was used, in part, to fund the reduction in higher cost deposit balances. Overall, deposit balances declined $91.9 million, or 2.8%, compared to the year-end 2020. Additional liquidity from the decline in loan balances was deployed into securities as total securities balances increased $96.8 million, or 17.1%, compared to balances at December 31, 2020.
As of December 31, 2021, total shareholders’ equity was $380.3 million, an increase of $49.4 million, or 14.9%, compared to December 31, 2020, due primarily to the net income earned during the year, as well as a decrease in accumulated other comprehensive loss. Tangible common equity totaled $375.7 million as of December 31, 2021, representing an increase of $49.4 million, or 15.1%, compared to December 31, 2020. As both total shareholders’ equity and tangible common equity increased compared to a slight decline in both total assets and tangible assets, the ratio of total shareholders’ equity to total assets increased to 9.03% as of December 31, 2021 from 7.79% as of December 31, 2020 and the ratio of tangible common equity to tangible assets increased to 8.93% as of December 31, 2021 from 7.69% as of December 31, 2020.
Book value per common share increased 15.5% to $38.99 as of December 30, 2021 from $33.77 as of December 31, 2020. Tangible book value per share increased 15.7% to $38.51 as of December 31, 2021 from $33.29 as of December 31, 2020. The growth in both book value per common share and tangible book value per share reflects the growth in total shareholders’ equity and tangible common equity while total common shares outstanding decreased slightly year-over-year, or 0.5%. Refer to the “Reconciliation of Non-GAAP Financial Measures” section of Item 7 of Part II of this report, Management's Discussion and Analysis of Financial Condition and Results of Operations for additional information.
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Loan Portfolio Analysis
The following table provides information regarding our loan portfolio as of the end of the last two years.
December 31,
(dollars in thousands) 2021 2020
Commercial loans
Commercial and industrial $ 96,008 3.3 % $ 75,387 2.5 %
Owner-occupied commercial real estate 66,732 2.3 % 89,785 2.9 %
Investor commercial real estate 28,019 1.0 % 13,902 0.5 %
Construction 136,619 4.7 % 110,385 3.6 %
Single tenant lease financing 865,854 30.0 % 950,172 31.1 %
Public finance 592,665 20.5 % 622,257 20.3 %
Healthcare finance 387,852 13.4 % 528,154 17.3 %
Small business lending 108,666 3.8 % 125,589 4.1 %
Franchise finance 81,448 2.8 % — 0.0 %
Total commercial loans 2,363,863 81.8 % 2,515,631 82.3 %
Consumer loans
Residential mortgage 186,770 6.5 % 186,787 6.1 %
Home equity 17,665 0.6 % 19,857 0.6 %
Other consumer 265,478 9.2 % 275,692 9.0 %
Total consumer loans 469,913 16.3 % 482,336 15.7 %
Total commercial and consumer loans 2,833,776 98.1 % 2,997,967 98.0 %
Net deferred loan origination costs and premiums and discounts on purchased loans and other (1)
53,886 1.9 % 61,264 2.0 %
Total loans 2,887,662 100.0 % 3,059,231 100.0 %
Allowance for loan losses (27,841) (29,484)
Net loans $ 2,859,821 $ 3,029,747
1 Includes carrying value adjustments of $37.5 million and $42.7 million related to terminated interest rate swaps associated with public finance loans as of December 31, 2021 and December 31, 2020, respectively.
Total loans were $2.9 billion as of December 31, 2021, a decrease of $171.6 million, or 5.6%, compared to December 31, 2020. Total commercial loan balances were $2.4 billion, as of December 31, 2021, down $151.8 million, or 6.0%, from December 31, 2020. Total consumer loan balances were $469.9 million as of December 30, 2021, a decrease of $12.4 million, or 2.6%, compared to December 31, 2020. Compared to December 31, 2020, the decline in commercial loan balances was driven largely by net payoffs in healthcare finance, single tenant lease financing, small business lending and public finance loans. These items were partially offset by increases in franchise finance, construction, commercial and industrial, franchise finance and investor commercial real estate loan balances. The net payoffs in the healthcare finance portfolio were driven primarily by elevated prepayment activity and minimal origination activity. Going forward, we expect the balance of healthcare finance loans to continue to decline as a result of Provide, Inc.'s acquisition by a superregional financial institution, as well as potential prepayment activity. The decline in single tenant lease financing balances was due to elevated prepayment activity and lower origination volumes as well as a sale of $20.1 million of balances in the fourth quarter 2021. The decline in public finance balances was due to lower origination activity and scheduled maturities. Related to single tenant lease financing, public finance and other lending areas with fixed interest rates, the combination of the low interest rate environment and heightened competition for high quality borrowers drove pricing to levels that we consider unattractive, which negatively impacted origination activity in such areas during 2021. The net payoffs in small business lending were predominantly related to PPP loan forgiveness, partially offset by originations.
Franchise finance was established in July 2021 in conjunction with our business relationship with ApplePie Capital, a provider of growth financing to franchisees in various industry segments across the country. We began funding franchise finance loans during 2021 and, as of December 31, 2021, we funded a total of $81.4 million in loans. We expect to fund approximately $150.0 million of franchise finance loans during 2022. The increase in construction balances was driven by increased origination activity, offset by paydowns, as we have increased our reserves in this area due to the variable rate structure and attractive pricing levels.
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Loan Maturities and Rate Sensitivity
The following table shows the contractual maturity distribution intervals (without regard to repayment schedules) of the outstanding loans in our portfolio as of December 31, 2021.
(amounts in thousands) Within 1 Year 1-5 Years 5-15 Years Beyond 15 Years Total
Commercial loans
Commercial and industrial $ 22,085 $ 44,950 $ 28,964 $ 9 $ 96,008
Owner-occupied commercial real estate 6,411 21,780 37,751 790 66,732
Investor commercial real estate 2,096 24,078 1,845 — 28,019
Construction 39,489 97,130 — — 136,619
Single tenant lease financing 51,894 386,946 427,014 — 865,854
Public finance 14,211 79,374 499,080 — 592,665
Healthcare finance 9 7,831 380,012 — 387,852
Small business lending 1,055 6,567 69,297 31,747 108,666
Franchise finance — 1,968 79,480 — 81,448
Total commercial loans 137,250 670,624 1,523,443 32,546 2,363,863
Consumer loans
Residential mortgage 1,163 1,107 23,741 160,759 186,770
Home equity 856 1,694 3,954 11,161 17,665
Other consumer 1,217 28,047 236,214 — 265,478
Total consumer loans 3,236 30,848 263,909 171,920 469,913
Total commercial and consumer loans $ 140,486 $ 701,472 $ 1,787,352 $ 204,466 $ 2,833,776
The following table shows the rate sensitivity of the outstanding loans in our portfolio by the contractual maturity distribution intervals as of December 31, 2021.
(amounts in thousands) Within 1 Year 1-5 Years 5-15 Years Beyond 15 Years Total
Predetermined rates $ 73,199 $ 562,473 $ 1,655,648 $ 125,658 $ 2,416,978
Adjustable rate 67,287 138,999 131,704 78,808 416,798
Total commercial and consumer loans $ 140,486 $ 701,472 $ 1,787,352 $ 204,466 $ 2,833,776
Loan Approval Procedures and Authority
Our lending activities follow written, non-discriminatory policies with loan approval limits approved by the Board of Directors of the Bank. Loan officers have underwriting and approval authorization of varying amounts based on their lending experience and product type. Additionally, based on the amount of the loan, multiple approvals may be required. Based on the Bank’s legal lending limit, the maximum it could lend to any one borrower at December 31, 2021 was $69.0 million.
Our goal is to have a well-diversified and balanced loan portfolio. In order to manage our loan portfolio risk, we establish concentration limits by borrower, product type, industry and geography. To supplement our internal loan review resources, we have engaged independent third-party loan review groups, which are a key component of our overall risk management process related to credit administration.
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Asset Quality
December 31,
(dollars in thousands) 2021 2020
Nonaccrual loans
Commercial loans:
Commercial and industrial $ 674 $ —
Owner-occupied commercial real estate 3,419 1,838
Single tenant lease financing 1,100 7,116
Small business lending 959 —
Total commercial loans 6,152 8,954
Consumer loans:
Residential mortgage 1,226 1,183
Home equity 14 —
Other consumer 9 46
Total consumer loans 1,249 1,229
Total nonaccrual loans 7,401 10,183
Past Due 90 days and accruing loans — —
Total nonperforming loans 7,401 10,183
Other real estate owned
Single tenant lease financing 1,188 —
Total other real estate owned 1,188 —
Other nonperforming assets 29 35
Total nonperforming assets $ 8,618 $ 10,218
Total nonperforming loans to total loans 0.26 % 0.33 %
Total nonperforming assets to total assets 0.20 % 0.22 %
Allowance for loan losses to total loans 0.96 % 0.96 %
Nonaccrual loans to total loans 0.26 % 0.33 %
Allowance for loan losses to nonaccrual loans 376.2 % 289.5 %
A loan is designated as impaired, in accordance with the impairment accounting guidance when, based on current information or events, it is probable that we will be unable to collect all amounts due (principal and interest) according to the contractual terms of the loan agreement. Payments with delays generally not exceeding 90 days outstanding are not considered impaired. Certain nonaccrual and substantially all delinquent loans more than 90 days past due may be considered to be impaired. Generally, loans are placed on nonaccrual status at 90 days past due and accrued interest is reversed against earnings, unless the loan is well secured and in the process of collection. The accrual of interest on impaired and nonaccrual loans is discontinued when, in management’s opinion, the borrower may be unable to meet payments as they become due.
Impaired loans include nonperforming loans and also include loans modified in troubled debt restructurings (“TDRs”) where concessions have been granted to borrowers experiencing financial difficulties. These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance, or other actions intended to maximize collection.
Nonperforming loans are comprised of total nonaccrual loans and loans 90 days past due and accruing. Nonperforming assets include nonperforming loans, other real estate owned and other nonperforming assets, which consist of repossessed assets. Nonperforming assets can also include investments that were classified as other-than-temporarily impaired; however, we did not own any investments classified as such during the two-year period ended December 31, 2021.
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Troubled Debt Restructurings
December 31,
(amounts in thousands) 2021 2020
Troubled debt restructurings – nonaccrual $ 2,492 $ 2,637
Troubled debt restructurings – performing 1,693 367
Total troubled debt restructurings $ 4,185 $ 3,004
The decrease in nonperforming loans of $2.8 million, or 27.3%, to $7.4 million as of December 31, 2021 compared to $10.2 million as of December 31, 2020 was due primarily to a decrease in nonaccrual single tenant lease financing balances, which was partially offset by an increase in nonaccrual loans in owner-occupied commercial real estate, and to a lessor extent, increases in small business lending and commercial and industrial loans. The decrease in nonaccrual single tenant lease financing balances was due to a payoff of a loan that was previously on nonaccrual, as well as positive developments related to a single tenant lease financing relationship which included two loans, one of which was paid off at net book value (unpaid principal balance less specific reserves) and the other was transferred to other real estate owned (“OREO”).
Total nonperforming assets decreased $1.6 million, or 15.7%, as of December 31, 2021 compared to December 31, 2020, due primarily to the decrease in nonperforming loans discussed above, partially offset by a $1.2 million increase in OREO related to the single tenant loan financing relationship discussed above. The ratio of nonperforming loans to total loans decreased to 0.26% as of December 31, 2021 compared to 0.33% as of December 31, 2020 and the ratio of nonperforming assets to total assets decreased to 0.20% as of December 31, 2021, compared to 0.22% as of December 31, 2020.
Total TDRs as of December 31, 2021 were $4.2 million, up $1.2 million from December 31, 2020. The increase was driven by two portfolio residential mortgage loans classified as new TDRs during the twelve months ended December 31, 2021 with a pre-modification and post-modification outstanding recorded investment of $1.6 million.
As of December 31, 2021, we had one commercial property in OREO with a carrying value of $1.2 million. We did not have any OREO as of December 31, 2020.
As of December 31, 2021, our financial results have reflected little impact on asset quality to date as a result of COVID-19. We are optimistic that the combination of vaccinations, government stimulus programs and relief programs we have provided to our clients will continue to mitigate the impact of the pandemic on our business. However, if economic conditions return to levels experienced during 2020, our credit quality and overall financial performance could be adversely affected.
Non-TDR Loan Modifications due to COVID-19
The “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus” was issued by our banking regulators on March 22, 2020. This guidance encourages financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations due to the effects of COVID-19.
Additionally, Section 4013 of the CARES Act further provides that loan modifications due to the impact of COVID-19 that would otherwise be classified as TDRs under GAAP will not be so classified. Modifications within the scope of this relief were in effect from the period beginning March 1, 2020 until January 1, 2022.
In accordance with this guidance, we offered modifications to borrowers who were both impacted by COVID-19 and current on all principal and interest payments. As of December 31, 2021, we had eleven loans totaling $10.5 million in non-TDR loan modifications due to COVID-19.
U.S. Small Business Administration Paycheck Protection Program
Section 1102 of the CARES Act created the PPP, which is jointly administered by the SBA and the Department of the Treasury. The PPP is designed to provide a direct incentive to small businesses to retain employees on their payroll during COVID-19 as well as to help cover certain utility costs and rent payments. These loans may be forgiven if certain conditions are satisfied and are fully guaranteed by the SBA. In 2020, as a preferred SBA lender, we assisted our clients in participating in the PPP to help them maintain their workforces in an uncertain and challenging environment. The loans originated in 2020 bear an interest rate of 1.00%, and we received gross origination fees of approximately $2.3 million. We received this fee revenue from
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the SBA in late June 2020, and it was deferred over the life of the PPP loans and recognized as interest income. We began processing applications for forgiveness from this round beginning in December 2020 and 100% of loan balances have been forgiven as of December 31, 2021.
On December 27, 2020, $285 billion in additional funding was allocated to the PPP through the passage of the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act. We began offering PPP loans again in 2021 and continued until the program’s funds were depleted. These loans may be forgiven if certain conditions are satisfied and are fully guaranteed by the SBA. The loans originated during 2021 bear an interest rate of 1.00% and we received gross origination fees of approximately $1.3 million. We received this fee revenue from the SBA during 2021, and it is being deferred over the life of the PPP loans and recognized as interest income. We began processing applications for forgiveness from this round beginning in May 2021 and 96.5% of loan balances have been forgiven as of December 31, 2021.
The following table provides a rollforward of the activity of PPP loans through December 31, 2021.
(dollars in thousands)
Number of Loans Principal Balance Net Deferred Fees
Originated 447 $ 58,336 $ 1,851
Principal repaid (71) (7,184)
Net deferred fees recognized (1,253)
Balance, December 31, 2020 376 51,152 598
Originated 281 27,377 1,125
Principal repaid (634) (75,377)
Net deferred fees recognized (1,624)
Balance, December 31, 2021 23 $ 3,152 $ 99
We anticipate that the majority of PPP loans we originated will ultimately be forgiven, in whole or in part, by the SBA in accordance with the terms of the program. Management anticipates that loan forgiveness applications will continue during 2022.
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Allowance for Loan Losses
December 31,
(amounts in thousands) 2021 2020
Balance, beginning of period $ 29,484 $ 21,840
Provision charged to expense 1,030 9,325
Losses charged off
Commercial and industrial (28) (461)
Owner-occupied commercial real estate — (24)
Single tenant lease financing (2,391) —
Healthcare finance — (743)
Small business lending (222) (110)
Residential mortgage (6) (20)
Home equity (51) —
Other consumer (529) (804)
Total losses charged off (3,227) (2,162)
Recoveries
Commercial and industrial 89 6
Healthcare finance — 87
Small business lending 80 19
Residential mortgage 63 4
Home equity 7 11
Other consumer 315 354
Total recoveries 554 481
Balance, end of period $ 27,841 $ 29,484
Net charge-offs $ 2,673 $ 1,681
Net charge-offs (recoveries) to average loans (annualized)
Commercial and industrial (0.08) % 0.58 %
Owner-occupied commercial real estate — % 0.03 %
Single tenant lease financing 0.26 % — %
Healthcare finance — % 0.16 %
Small business lending 0.11 % 0.08 %
Total commercial net charge-offs (recoveries) 0.10 % 0.05 %
Residential mortgage (0.03) % 0.01 %
Home equity 0.24 % (0.05) %
Other consumer 0.29 % 0.68 %
Total consumer net charge-offs (recoveries) 0.04 % 0.08 %
Net charge-offs to average loans 0.09 % 0.06 %
The determination of the allowance for loan losses and the related provision for loan losses are components of our significant accounting policies as discussed within Note 1 to our consolidated financial statements. The adequacy of the allowance for loan losses and the provision are based on the review and evaluation of the loan portfolio and reflect management’s assessment of the risks and potential losses within the portfolio. This evaluation considers historical loss experience as well as qualitative factors such as economic and business conditions, portfolio growth, concentrations of credit in the portfolio, trends in risk grades, delinquencies within the portfolio and changes in our lending policies and practices.
Management actively monitors asset quality and, when appropriate, charges off loans against the allowance for loan losses. Although management believes it uses the best information available to make determinations with respect to the allowance for loan losses, future adjustments may be necessary if economic conditions differ substantially from those in the assumptions used to determine the size of the allowance for loan losses.
The allowance for loan losses was $27.8 million as of December 31, 2021, compared to $29.5 million as of December 31, 2020. The decrease in the allowance for loan losses compared to December 31, 2020 was due primarily to the elimination of $2.9 million of specific reserves related to single tenant lease financing loans and a commercial and industrial relationship, all of which had been classified as nonaccrual. The single tenant lease financing loans included a nonaccrual loan
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that was paid off during the year and a relationship consisting of two loans, one of which was paid off at net book value (unpaid principal balance less specific reserves) and the other was transferred to OREO. The commercial and industrial relationship included four loans, two of which were paid off during the year. The decrease in the specific reserves was partially offset by additional adjustments to the qualitative factors in our allowance model that increased the allowance for loan losses to total loans.
The allowance for loan losses as a percentage of total loans was 0.96% as of December 31, 2021, or 0.97 % when excluding PPP Loans, compared to 0.96% and 0.98%, respectively, as of December 31, 2020. The allowance for loan losses as a percentage of nonperforming loans increased to 376.2% as of December 31, 2021, up from to 289.5% as of December 31, 2020. The provision for loans losses was $1.0 million for the twelve months ended December 31, 2021 compared to $9.3 million for the twelve months ended December 31, 2020. The decrease in the provision for loan losses was due primarily to the decline in loan balances during the year. During 2021, we recorded net charge-offs of $2.7 million, compared to $1.7 million during 2020. The increase in net charge-offs was due primarily to the elimination of the specific reserve related to the single tenant lease financing loans disclosed above, offset by a $0.7 million charge-off of a healthcare finance relationship in 2020.
Investment Securities Portfolio
In managing our investment securities portfolio, management focuses on providing an adequate level of liquidity and managing long-term interest rate risk, while earning an adequate level of investment income without taking undue risk. Investment securities that are acquired and held principally for the purpose of selling them in the near term with the objective of generating economic profits on short-term differences in market characteristics are classified as “trading securities.” We did not classify any securities as trading securities as of December 31, 2021 and 2020. Securities that we intend to hold until maturity are classified as “held-to-maturity” securities, and all other investment securities are classified as “available-for-sale.” The carrying values of available-for-sale investment securities are adjusted for unrealized gains or losses as a valuation allowance and any gain or loss is reported on an after-tax basis as a component of other comprehensive income (loss).
We periodically evaluate each security in an unrealized loss position to determine if the impairment is temporary or other-than-temporary. As of December 31, 2021, the unrealized losses in our investment securities portfolio were due primarily to interest rate changes. We have the ability and intent to hold all investment securities in an unrealized loss position resulting from interest rate changes to the earlier of the forecasted recovery or the maturity of the underlying investment security. As of December 31, 2021, we did not have any investment securities of a single issuer that exceeded 10% of shareholders’ equity. The term “issuer” excludes the U.S. Government and its sponsored agencies and corporations.
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The following tables present the amortized cost and approximate fair value of our investment securities portfolio by security type as of the end of the last two years.
(amounts in thousands) December 31,
Amortized Cost 2021 2020
Securities available-for-sale
U.S. Government-sponsored agencies $ 50,013 $ 61,765
Municipal securities 75,158 82,757
Agency mortgage-backed securities - residential 377,928 213,408
Agency mortgage-backed securities - commercial 36,024 28,387
Private label mortgage-backed securities - residential 15,902 57,268
Asset-backed securities 5,000 5,000
Corporate securities 46,482 48,419
Total securities available-for-sale 606,507 497,004
Securities held-to-maturity
Municipal securities 13,992 14,571
Corporate securities 45,573 53,652
Total securities held-to-maturity 59,565 68,223
Total securities $ 666,072 $ 565,227
December 31,
Approximate Fair Value 2021 2020
Securities available-for-sale
U.S. Government-sponsored agencies $ 49,040 $ 60,545
Municipal securities 77,033 82,489
Agency mortgage-backed securities - residential 373,236 214,330
Agency mortgage-backed securities - commercial 36,326 29,591
Private label mortgage-backed securities - residential 16,021 58,116
Asset-backed securities 5,004 4,961
Corporate securities 46,384 47,596
Total securities available-for-sale 603,044 497,628
Securities held-to-maturity
Municipal securities 14,709 15,317
Corporate securities 46,759 54,135
Total securities held-to-maturity 61,468 69,452
Total securities $ 664,512 $ 567,080
The approximate fair value of investment securities available-for-sale increased $105.4 million, or 21.2%, to $603.0 million as of December 31, 2021 compared to $497.6 million as of December 31, 2020. The increase was due primarily to an increase of $158.9 million in agency mortgage-backed securities - residential and $6.7 million in agency mortgage-backed securities - commercial, partially offset by decreases of $42.1 million in private label mortgage-backed securities - residential, $11.5 million in U.S. Government-sponsored agencies securities, and $5.5 million in municipal securities. The increase in agency mortgage-backed securities was driven primarily by purchases during the twelve months ended December 31, 2021, partially offset by prepayments and maturities in agency and private label mortgage-backed securities and U.S. Government-sponsored agencies, as well as early redemptions and maturities in municipal securities. As of December 31, 2021, we had securities with an amortized cost basis of $59.6 million designated as held-to-maturity compared to $68.2 million as of December 31, 2020, a decrease of $8.7 million, due mainly to contractual calls within corporate securities.
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Investment Maturities
The following table summarizes the contractual maturity schedule of our investment securities at their amortized cost and their weighted average yields at December 31, 2021.
1 year or less More than 1 year
to 5 years More than 5 years
to 10 years More than 10 years Total
(dollars in thousands) Amortized
Cost Wtd.
Avg.
Yield Amortized
Cost Wtd.
Avg.
Yield Amortized
Cost Wtd.
Avg.
Yield Amortized
Cost Wtd.
Avg.
Yield Amortized
Cost Wtd.
Avg.
Yield
Securities:
U.S. Government-sponsored agencies
$ — 0.00 % $ 1,343 1.91 % $ 31,085 0.31 % $ 17,585 1.05 % $ 50,013 0.62 %
Municipal securities — 0.00 % 10,335 1.92 % 13,165 2.64 % 65,650 2.67 % 89,150 2.53 %
Agency mortgage-backed securities — 0.00 % — 0.00 % 1,892 1.46 % 376,036 1.36 % 377,928 1.36 %
Agency mortgage-backed securities - commercial — 0.00 % 360 2.37 % 11,675 1.78 % 23,989 1.99 % 36,024 1.93 %
Private-label mortgage-backed securities - residential — 0.00 % — 0.00 % — 0.00 % 15,902 2.90 % 15,902 2.90 %
Asset-backed securities
— 0.00 % — 0.00 % 5,000 1.72 % — 0.00 % 5,000 1.72 %
Corporate securities — 0.00 % 31,925 2.06 % 55,130 3.85 % 5,000 3.00 % 92,055 1.80 %
Total securities $ — 0.00 % $ 43,963 2.03 % $ 117,947 2.45 % $ 504,162 1.62 % $ 666,072 1.56 %
Accrued Income and Other Assets
Accrued income and other assets were $46.9 million at December 31, 2021 compared to $64.3 million at December 31, 2020. The decrease was primarily related to a decrease of $14.9 million in cash pledged as collateral. As of these dates, we pledged $15.7 million and $30.6 million, respectively, of cash collateral to counterparties on interest rate swap agreements as security for its obligations related to these agreements. Collateral posted and received is dependent on the fair value of the underlying agreements as of the respective date.
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Deposits
The following table presents the composition of our deposit base as of the end of the last two years.
December 31,
(dollars in thousands) 2021 2020
Noninterest-bearing deposits $ 117,531 3.7 % $ 96,753 3.0 %
Interest-bearing demand deposits 247,967 7.8 % 188,645 5.8 %
Savings accounts 59,998 1.9 % 43,200 1.3 %
Money market accounts 1,483,936 46.7 % 1,350,566 41.3 %
Certificates of deposits 970,107 30.5 % 1,289,319 39.4 %
Brokered deposits 299,420 9.4 % 302,402 9.2 %
Total $ 3,178,959 100.0 % $ 3,270,885 100.0 %
Total deposits decreased $91.9 million, or 2.8%, to $3.2 billion as of December 31, 2021 compared to $3.3 billion as of December 31, 2020. This decrease was due primarily to a decline of $319.2 million, or 24.8%, in certificates of deposits, partially offset by increases of $133.4 million, or 9.9%, in money market accounts, $59.3 million, or 31.4%, in interest-bearing demand deposits, $20.8 million, or 21.5%, in noninterest-bearing deposits, and $16.8 million, or 38.9%, in savings accounts. We experienced strong growth in money market and interest-bearing demand deposits balances due to targeted digital marketing efforts to grow small business accounts, as well as consumers, small businesses and commercial clients increasing their cash balances due in part to the continued economic uncertainty resulting from the COVID-19 pandemic. The declines in certificates of deposits and brokered deposits were due to the maturity of higher cost balances and reduced pricing strategies designed to limit the volume of new production.
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The following tables present contractual interest rates paid on time deposits, their scheduled maturities, and the scheduled maturities for time deposits greater than $250,000.
Time Deposit Maturities at December 31, 2021
Period to Maturity Percentage of Total Certificate Accounts
(dollars in thousands) Less than 1
year > 1 year
to 2 years > 2 years
to 3 years More than
3 years Total
Interest Rate:
<1.00% $ 602,016 $ 122,013 $ 28,973 $ 49,598 $ 802,600 71.7 %
1.00% – 1.99% $ 63,373 $ 11,455 $ 8,684 $ 14,183 $ 97,695 8.7 %
2.00% – 2.99% 82,158 71,523 57,621 — 211,302 18.9 %
3.00% – 3.99% 5 3,682 4,152 250 8,089 0.7 %
Total $ 747,552 $ 208,673 $ 99,430 $ 64,031 $ 1,119,686 100.0 %
Time Deposit Maturities Greater than $250,000
(dollars in thousands) December 31, 2021
Maturity Period:
3 months or less $ 84,509
Over 3 through 6 months 75,838
Over 6 through 12 months 79,670
Over 12 months 87,473
Total $ 327,490
Federal Home Loan Bank Advances
Although deposits are the primary source of funds for our lending and investment activities and for general business purposes, we may use short-term advances from the Federal Home Loan Bank of Indianapolis (the “FHLB”) to manage liquidity needs and longer-term advances to supplement balance sheet growth and manage interest rate risk. Refer to Note 18 to our consolidated financial statements for additional information about derivative financial instruments. The following table is a summary of FHLB borrowings for the periods indicated.
At Or For The Twelve Months Ended December 31,
(dollars in thousands) 2021 2020 2019
Balance outstanding at end of period $ 514,922 $ 514,916 $ 514,910
Average amount outstanding during period 514,617 514,913 511,093
Maximum outstanding at any month end during period 514,922 514,916 525,000
Weighted average interest rate at end of period 1
1.65 % 1.30 % 1.98 %
Weighted average interest rate during period 1
1.68 % 1.78 % 2.15 %
1 Excludes the impact of interest rate swaps.
Subordinated Notes due 2031
On August 16, 2021, we issued $60.0 million of subordinated notes at an initial fixed interest rate of 3.75%, which is payable semi-annually. Beginning on September 1, 2026, the interest rate converts to a variable interest rate, reset quarterly, equal to the three-month Term SOFR plus 3.11%, which is payable quarterly. The subordinated notes mature on September 1, 2031. The subordinated notes, net of issuance costs, were $58.6 million million at December 31, 2021. On December 30, 2021, we completed an exchange of $59.3 million principal amount of the subordinated notes for substantially identical subordinated notes registered under the Securities Act of 1933, in satisfaction of our obligations under a registration rights agreement entered into with the initial purchasers of the subordinated notes. The subordinated notes qualify for Tier 2 regulatory capital treatment at the Company level under applicable regulatory guidelines.
For additional information regarding these and our other outstanding subordinated notes, refer to Note 10 to our consolidated financial statements
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Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities were $30.5 million at December 31, 2021 compared to $48.4 million at December 31, 2020. The decrease in accrued expenses and other liabilities was due primarily to an $16.1 million, or 52.9%, decrease in derivative liabilities due to changes in fair value.
Liquidity and Capital Resources
Liquidity management is the process we use to manage the continuing flow of funds necessary to meet our financial commitments on a timely basis and at a reasonable cost while also maintaining safe and sound operations. Liquidity, represented by cash and investment securities, is a product of our operating, investing and financing activities. The primary sources of funds are deposits, principal and interest payments on loans and investment securities, maturing loans and investment securities, access to wholesale funding sources and collateralized borrowings. While scheduled payments and maturities of loans and investment securities are relatively predictable sources of funds, deposit flows are greatly influenced by interest rates, general economic conditions and competition. We supplement deposit growth and enhance interest rate risk management, if necessary, through borrowings and wholesale funding, which are generally advances from the FHLB and brokered deposits.
We hold cash and investment securities that qualify as liquid assets to maintain adequate liquidity to ensure safe and sound operations and to meet our financial commitments. At December 31, 2021, on a consolidated basis, we had $1.0 billion in cash and cash equivalents and investment securities available-for-sale, and $47.7 million in loans held-for-sale that were generally available for our cash needs. Additionally, at December 31, 2021, the Bank had the ability to borrow an additional $596.5 million in advances from the FHLB and correspondent bank Fed Funds lines of credit.
The Company is a separate legal entity from the Bank and must provide for its own liquidity. In addition to its operating expenses, the Company is responsible for paying any dividends declared to its common shareholders and interest and principal on outstanding debt. The Company’s primary sources of funds are cash maintained at the holding company level and dividends from the Bank, the payment of which is subject to regulatory limits. At December 31, 2021, the Company, on an unconsolidated basis, had $52.9 million in cash generally available for its cash needs, which is in excess of its current annual regular shareholder dividend and operating expenses.
We use our sources of funds primarily to meet ongoing financial commitments, including withdrawals by depositors, credit commitments to borrowers, operating expenses and capital expenditures. At December 31, 2021, approved outstanding loan commitments, including unused lines of credit, amounted to $324.3 million. Certificates of deposits and brokered certificates of deposits scheduled to mature in one year or less at December 31, 2021 totaled $747.6 million.
The following table presents the Company’s significant contractual obligations as of December 31, 2021.
Payments Due In
(dollars in thousands) Note Reference Less than 1 year 1-3 years 3-5 years More than 5 years Total
Premises and equipment 5 $ 14,780 $ — $ — $ — $ 14,780
Deposits and brokered deposits without stated maturity 1
8 2,059,273 — — — 2,059,273
Certificates of deposits and brokered certificates of deposits 1
8 747,552 308,103 29,452 34,579 1,119,686
FHLB advances 1,2
9 110,000 180,014 100,000 124,908 514,922
Subordinated debt 1
10 — — — 107,000 107,000
Total contractual obligations $ 2,931,605 $ 488,117 $ 129,452 $ 266,487 $ 3,815,661
1 Amounts do not include associated interest payments.
2 Amounts do not include the effect of interest rate swaps used to convert short-term advances into long-term funding.
On October 18, 2021, our Board of Directors approved a stock repurchase program authorizing the repurchase of up to $30.0 million of our outstanding common stock from time to time on the open market or in privately negotiated transactions. The stock repurchase authorization is scheduled to expire on December 31, 2022.
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Reconciliation of Non-GAAP Financial Measures
This Management's Discussion and Analysis contains financial information determined by methods other than in accordance with GAAP. Non-GAAP financial measures, specifically tangible common equity, tangible assets, tangible book value per common share, tangible common equity to tangible assets ratio, average tangible common equity, return on average tangible common equity, total interest income - FTE, net interest income - FTE, adjusted net interest income, adjusted net interest income - FTE, net interest margin - FTE, adjusted net interest margin, adjusted net interest margin - FTE, allowance for loan losses, loans, excluding PPP loans, adjusted total revenue, adjusted noninterest income, adjusted noninterest expense, adjusted income before income taxes, adjusted income tax provision, adjusted net income, adjusted diluted earnings per share, adjusted return on average assets, adjusted return on average shareholders' equity, adjusted return on average tangible common equity and adjusted effective income tax rate are used by the Company's management to measure the strength of its capital and analyze profitability, including its ability to generate earnings on tangible capital invested by its shareholders. The Company also believes that it is standard practice in the banking industry to present total interest income, net interest income and net interest margin on a fully-taxable equivalent basis, as those measures provide useful information for peer comparisons. Although the Company believes these non-GAAP financial measures provide a greater understanding of its business, they should not be considered a substitute for financial measures determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP financial measures that may be presented by other companies. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures are included in the following table for the last three completed fiscal years ended on December 31.
(dollars in thousands, except share and per share data) At or For The Twelve Months Ended December 31,
2021 2020 2019
Total equity - GAAP $ 380,338 $ 330,944 $ 304,913
Adjustments:
Goodwill (4,687) (4,687) (4,687)
Tangible common equity $ 375,651 $ 326,257 $ 300,226
Total assets - GAAP $ 4,210,994 $ 4,246,156 $ 4,100,083
Adjustments:
Goodwill (4,687) (4,687) (4,687)
Tangible assets $ 4,206,307 $ 4,241,469 $ 4,095,396
Total common shares outstanding 9,754,455 9,800,569 9,741,800
Book value per common share $ 38.99 $ 33.77 $ 31.30
Effect of goodwill (0.48) (0.48) (0.48)
Tangible book value per common share $ 38.51 $ 33.29 $ 30.82
Total shareholders’ equity to assets 9.03 % 7.79 % 7.44 %
Effect of goodwill (0.10) % (0.10) % (0.11) %
Tangible common equity to tangible assets 8.93 % 7.69 % 7.33 %
Total average equity - GAAP $ 358,105 $ 313,763 $ 296,382
Adjustments:
Average goodwill (4,687) (4,687) (4,687)
Average tangible common equity $ 353,418 $ 309,076 $ 291,695
Return on average shareholders' equity 13.44 % 9.39 % 8.52 %
Effect of goodwill 0.17 % 0.14 % 0.13 %
Return on average tangible common equity 13.61 % 9.53 % 8.65 %
Total interest income $ 133,883 $ 136,859 $ 147,414
Adjustments:
Fully-taxable equivalent adjustments 1
5,453 5,796 6,334
Total interest income - FTE $ 139,336 $ 142,655 $ 153,748
Net interest income $ 86,556 $ 64,541 $ 62,967
Adjustments:
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Fully-taxable equivalent adjustments 1
5,453 5,796 6,334
Net interest income - FTE $ 92,009 $ 70,337 $ 69,301
Net interest income $ 86,556 $ 64,541 $ 62,967
Adjustments:
Subordinated debt redemption cost 810 — —
Adjusted net interest income $ 87,366 $ 64,541 $ 62,967
Net interest income $ 86,556 $ 64,541 $ 62,967
Adjustments:
Fully-taxable equivalent adjustments 1
5,453 5,796 6,334
Subordinated debt redemption cost 810 — —
Adjusted net interest income - FTE $ 92,819 $ 70,337 $ 69,301
Net interest margin 2.11 % 1.55 % 1.65 %
Effect of fully-taxable equivalent adjustments 1
0.14 % 0.13 % 0.17 %
Net interest margin - FTE 2.25 % 1.68 % 1.82 %
Net interest margin 2.11 % 1.55 % 1.65 %
Effect of subordinated debt redemption cost 0.02 % — % — %
Adjusted net interest margin 2.13 % 1.55 % 1.65 %
Net interest margin 2.11 % 1.55 % 1.65 %
Effect of fully-taxable equivalent adjustments 1
0.14 % 0.13 % 0.17 %
Effect of subordinated debt redemption cost 0.02 % — % — %
Adjusted net interest margin - FTE 2.27 % 1.68 % 1.82 %
Allowance for loan losses $ 27,841 $ 29,484 $ 21,840
Loans $ 2,887,662 $ 3,059,231 $ 2,963,547
Adjustments:
PPP loans (3,152) (50,554) —
Loans, excluding PPP loans $ 2,884,510 $ 3,008,677 $ 2,963,547
Allowance for loan losses to loans 0.96 % 0.96 % 0.74 %
Effect of PPP loans 0.01 % 0.02 % — %
Allowance for loan losses to loans, excluding PPP loans 0.97 % 0.98 % 0.74 %
1 Assuming a 21% tax rate
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(dollars in thousands, except share and per share data) At Or For The Twelve Months Ended December 31,
2021 2020 2019
Total revenue - GAAP $ 119,400 $ 100,877 $ 79,756
Adjustments:
Gain on sale of premises and equipment (2,523) — —
Subordinated debt redemption cost 810 — —
Adjusted total revenue $ 117,687 $ 100,877 $ 79,756
Noninterest income - GAAP $ 32,844 $ 36,336 $ 16,789
Adjustments:
Gain on sale of premises and equipment (2,523) — —
Adjusted noninterest income $ 30,321 $ 36,336 $ 16,789
Noninterest expense - GAAP $ 61,798 $ 57,654 $ 46,634
Adjustments:
Acquisition-related expenses (163) — —
IT termination fee (475) — —
Adjusted noninterest expense $ 61,160 $ 57,654 $ 46,634
Income before income taxes - GAAP $ 56,572 $ 33,898 $ 27,156
Adjustments:
Write-down of other real estate owned — 2,065 —
Gain on sale of premises and equipment (2,523) — —
Subordinated debt redemption cost 810 — —
Acquisition-related expenses 163 — —
IT termination fee 475 — —
Adjusted income before income taxes $ 55,497 $ 35,963 $ 27,156
Income tax provision - GAAP $ 8,458 $ 4,445 $ 1,917
Adjustments:
Write-down of other real estate owned — 434 —
Gain on sale of premises and equipment (530) — —
Subordinated debt redemption cost 170 — —
Acquisition-related expenses 34 — —
IT termination fee 100 — —
Net deferred tax asset revaluation — — —
Adjusted income tax provision $ 8,232 $ 4,879 $ 1,917
Net income - GAAP $ 48,114 $ 29,453 $ 25,239
Adjustments:
Write-down of other real estate owned — 1,631 —
Gain on sale of premises and equipment (1,993) — —
Subordinated debt redemption cost 640 — —
Acquisition-related expenses 129 — —
IT termination fee 375 — —
Net deferred tax asset revaluation — — —
Adjusted net income $ 47,265 $ 31,084 $ 25,239
Diluted average common shares outstanding 9,976,261 9,842,425 10,044,483
Diluted earnings per share - GAAP $ 4.82 $ 2.99 $ 2.51
Adjustments:
Effect of write-down of other real estate owned — 0.17 —
Effect of gain on sale of premises and equipment (0.19) — —
Effect of subordinated debt redemption cost 0.06 — —
Effect of acquisition-related expenses 0.01 — —
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Effect of IT termination fee 0.04 — —
Effect of net deferred tax asset revaluation — — —
Adjusted diluted earnings per share $ 4.74 $ 3.16 $ 2.51
Return on average assets 1.14 % 0.69 % 0.65 %
Effect of write-down of other real estate owned — % 0.04 % — %
Effect of gain on sale of premises and equipment (0.05) % — % — %
Effect of subordinated debt redemption cost 0.02 % — % — %
Effect of acquisition-related expenses — % — % — %
Effect of IT termination fee 0.01 % — % — %
Effect of net deferred tax asset revaluation — % — % — %
Adjusted return on average assets 1.12 % 0.73 % 0.65 %
Return on average shareholders' equity 13.44 % 9.39 % 8.52 %
Effect of write-down of other real estate owned — % 0.52 % — %
Effect of gain on sale of premises and equipment (0.56) % — % — %
Effect of subordinated debt redemption cost 0.18 % — % — %
Effect of acquisition-related expenses 0.04 % — % — %
Effect of IT termination fee 0.10 % — % — %
Effect of net deferred tax asset revaluation — % — % — %
Adjusted return on average shareholders' equity 13.20 % 9.91 % 8.52 %
Return on average tangible common equity 13.61 % 9.53 % 8.65 %
Effect of write-down of other real estate owned — % 0.53 % — %
Effect of gain on sale of premises and equipment (0.56) % — % — %
Effect of subordinated debt redemption cost 0.18 % — % — %
Effect of acquisition-related expenses 0.04 % — % — %
Effect of IT termination fee 0.10 % — % — %
Effect of net deferred tax asset revaluation — % — % — %
Adjusted return on average tangible common equity 13.37 % 10.06 % 8.65 %
Effective income tax rate 15.0 % 13.1 % 7.1 %
Effect of write-down of other real estate owned — % 0.5 % — %
Effect of gain on sale of premises and equipment (0.4) % — % — %
Effect of subordinated debt redemption cost 0.1 % — % — %
Effect of acquisition-related expenses — % — % — %
Effect of IT termination fee 0.1 % — % — %
Effect of net deferred tax asset revaluation — % — % — %
Adjusted effective income tax rate 14.8 % 13.6 % 7.1 %
Critical Accounting Policies and Estimates
Allowance for Loan Losses. We believe the allowance for loan losses is the critical accounting policy that requires the most significant judgments and assumptions used in the preparation of our consolidated financial statements. An estimate of potential losses inherent in the loan portfolio is determined and an allowance for those losses is established by considering factors including historical loss rates, expected cash flows, estimated collateral values, and other qualitative factors. The allowance for loan losses represents management’s best estimate of losses inherent in the existing loan portfolio. The allowance for loan losses is increased by the provision for loan losses charged to expense and reduced by loans charged off, net of recoveries. Management evaluates the allowance for loan losses quarterly. If the underlying assumptions later prove to be inaccurate based on subsequent loss evaluations, the allowance for loan losses is adjusted.
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Management estimates the appropriate level of allowance for loan losses by separately evaluating impaired and non-impaired loans. A specific allowance is assigned to an impaired loan when expected cash flows or collateral do not justify the carrying amount of the loan. The methodology used to assign an allowance to a non-impaired loan is more subjective. Generally, the allowance assigned to non-impaired loans is determined by applying historical loss rates to existing loans with similar risk characteristics, adjusted for qualitative factors including changes in economic and business conditions, unemployment rates, concentrations of credit, changes in the nature and volume of the portfolio, terms of loans, risk grades, trends in charge-offs and recoveries, trends in delinquencies, nonaccrual loans, and impaired loans, and changes in lending policies and procedures. Because the economic and business climate in any given industry or market, and its impact on any given borrower, can change rapidly, the risk profile of the loan portfolio is periodically assessed and adjusted when appropriate. Notwithstanding these procedures, there still exists the possibility that the assessment could prove to be significantly incorrect and that an immediate adjustment to the allowance for loan losses would be required.
Investments in Debt and Equity Securities. We classify investments in debt and equity securities as available-for-sale in accordance with Accounting Standards Codification, or ASC, Topic 320, “Accounting for Certain Investments in Debt and Equity Securities.” Securities classified as held-to-maturity would be recorded at cost or amortized cost. Available-for-sale securities are carried at fair value. Fair value calculations are based on quoted market prices when such prices are available. If quoted market prices are not available, estimates of fair value are computed using a variety of pricing sources, including Reuters/EJV, Interactive Data and Standard & Poors. Due to the subjective nature of the valuation process, it is possible that the actual fair values of these investments could differ from the estimated amounts, thereby affecting our financial position, results of operations and cash flows. If the estimated value of investments is less than the cost or amortized cost, management evaluates whether an event or change in circumstances has occurred that may have a significant adverse effect on the fair value of the investment. If such an event or change has occurred and management determines that the impairment is other-than-temporary, a further determination is made as to the portion of impairment that is related to credit loss. The impairment of the investment that is related to the credit loss is expensed in the period in which the event or change occurred. The remainder of the impairment is recorded in other comprehensive income (loss).
Other Real Estate Owned. OREO acquired through loan foreclosure is initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. The adjustment at the time of foreclosure is recorded through the allowance for loan losses. Due to the subjective nature of establishing the fair value when the asset is acquired, the actual fair value of the OREO or foreclosed asset could differ from the original estimate. If it is determined that fair value declines subsequent to foreclosure, a valuation adjustment is recorded through noninterest expense. Net operating costs associated with the assets after acquisition are also recorded as noninterest expense. Gains and losses on the disposition of OREO and foreclosed assets are netted and posted through noninterest income.
Impairment of Goodwill. As a result of a previous acquisition by the Company, goodwill, an intangible asset with an indefinite life, is reflected on the balance sheet. Goodwill is evaluated for impairment annually, unless there are factors present that indicate a potential impairment, in which case, the goodwill impairment test is performed more frequently.
Deferred Income Tax Assets/Liabilities. Our net deferred income tax asset arises from differences in the dates that items of income and expense enter into our reported income and taxable income. Deferred tax assets and liabilities are established for these items as they arise. From an accounting standpoint, deferred tax assets are reviewed to determine if they are realizable based on the historical level of taxable income, estimates of future taxable income and the reversals of deferred tax liabilities. In most cases, the realization of the deferred tax asset is based on future profitability. If we were to experience net operating losses for tax purposes in a future period, the realization of deferred tax assets would be evaluated for a potential valuation reserve.
Recent Accounting Pronouncements
Refer to Note 22 to our consolidated financial statements.
Off-Balance Sheet Arrangements
In the ordinary course of business, we enter into financial transactions to extend credit, interest rate swaps and forms of commitments that may be considered off-balance sheet arrangements. Interest rate swaps are arranged to receive hedge accounting treatment and are classified as either fair value or cash flow hedges. Fair value hedges are purchased to convert certain fixed rate assets to floating rate. Cash flow hedges are used to convert certain variable rate liabilities into fixed rate liabilities. In June 2020, we terminated all fair value hedging instruments associated with loans. At December 31, 2021 and December 31, 2020, we had interest rate swaps with notional amounts of $260.0 million and $298.2 million, respectively. Additionally, we enter into forward contracts relating to our mortgage banking business to hedge the exposures we have from commitments to extend new residential mortgage loans to our customers and from our mortgage loans held-for-sale. At
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December 31, 2021 and December 31, 2020, we had commitments to sell residential real estate loans of $72.8 million and $107.5 million, respectively. These contracts mature in less than one year. Refer to Note 18 to our consolidated financial statements for additional information about derivative financial instruments.
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