Live Oak Bancshares, Inc. (LOB) FY 2021 MD&A

Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

The following presents management’s discussion and analysis (“MD&A”) of the more significant factors that affected the Company's financial condition and results of operations for the year ended December 31, 2021 as compared to December 31, 2020. For a comparison of 2020 results to 2019 and other 2019 information not included herein, refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under Part II, Item 7 of our 2020 Form 10-K filed with the SEC on February 25, 2021.  This discussion should be read in conjunction with the financial statements and related notes included elsewhere in this Annual Report on Form 10-K. Results of operations for the periods included in this review are not necessarily indicative of results to be obtained during any future period.

Dollar amounts in tables are stated in thousands, except for per share amounts.

Nature of Operations

Live Oak Bancshares, Inc. (collectively with its subsidiaries including Live Oak Banking Company, the “Company”) is a financial holding company and a bank holding company headquartered in Wilmington, North Carolina, incorporated under the laws of North Carolina in December 2008. The Company conducts business operations primarily through its commercial bank subsidiary, Live Oak Banking Company (the “Bank”). The Bank was incorporated in February 2008 as a North Carolina-chartered commercial bank. The Bank specializes in providing lending and deposit related services to small businesses nationwide. The Bank identifies and extends lending to credit-worthy borrowers both within specific industries, also called verticals, through expertise within those industries, and more broadly to select borrowers outside of those industries. A significant portion of the loans originated by the Bank are guaranteed by the U.S. Small Business Administration (“SBA”) under the 7(a) Loan program and the U.S. Department of Agriculture (“USDA”) Rural Energy for America Program (“REAP”), Water and Environmental Program (“WEP”) and Business & Industry (“B&I”) loan programs.

The Company’s wholly owned subsidiaries are the Bank, Government Loan Solutions (“GLS”), Live Oak Grove, LLC (“Grove”), Live Oak Ventures, Inc. (“Live Oak Ventures”), and Canapi Advisors, LLC (“Canapi Advisors”). 504 Fund Advisors, LLC (“504FA”) was a wholly owned subsidiary of the Company until 2019, when 504FA exited as the advisor to The 504 Fund, and the Company dissolved this legal entity.

The Bank’s wholly owned subsidiaries are Live Oak Number One, Inc., Live Oak Clean Energy Financing LLC (“LOCEF”), and Live Oak Private Wealth, LLC.  Live Oak Number One, Inc. holds properties foreclosed on by the Bank. LOCEF provides financing to entities for renewable energy applications and became a wholly owned subsidiary of the Bank during the first quarter of 2019. Live Oak Private Wealth, LLC and its wholly owned subsidiary, Jolley Asset Management, LLC (“JAM”), provide high-net-worth individuals and families with strategic wealth and investment management services.

GLS is a management and technology consulting firm that advises and offers solutions and services to participants in the government guaranteed lending sector. GLS primarily provides services in connection with the settlement, accounting, and securitization processes for government guaranteed loans, including loans originated under the SBA 7(a) loan programs and USDA guaranteed loans. The Grove provides Company employees and business visitors an on-site restaurant location. Live Oak Ventures’ purpose is investing in businesses that align with the Company's strategic initiative to be a leader in financial technology.  Canapi Advisors provides investment advisory services to a series of funds (the “Canapi Funds”) focused on providing venture capital to new and emerging financial technology companies.

The Company generates revenue primarily from net interest income and secondarily through origination and sale of government guaranteed loans.  Income from the retention of loans is comprised principally of interest income.  The Company had historically elected to account for certain loans under the fair value option with interest reported in interest income and changes in fair value reported in the net gain (loss) on loans accounted for under the fair value option line item of the consolidated statements of income.  During the first quarter of 2021, the Company chose not to elect fair value for all retained participating interests arising from new government guaranteed loan sales.  Income from the sale of loans is comprised of loan servicing revenue and revaluation of related servicing assets along with net gains on sales of loans. Offsetting these revenues are the cost of funding sources, provision for loan and lease credit losses, any costs related to foreclosed assets and other operating costs such as salaries and employee benefits, travel, professional services, advertising and marketing and tax expense.  The Company also has less routinely generated gains and losses arising from its financial technology investments in its fintech segment, as discussed more fully later in this section under the caption “Results of Segment Operations.”

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Recent Developments

The COVID-19 pandemic has caused complex and significant adverse impacts on certain areas of the economy, the banking industry and the Company, all of which continue to be subject to a high degree of uncertainty. This uncertainty is magnified with the continued risk of a resurgence of the virus and new variants, which have recently caused cases to increase in the United States.  Despite ongoing uncertainty, the economy continued to generally improve in 2021, resulting in positive impacts on the Company’s allowance for credit losses (“ACL”) on loans and leases, loans carried at fair value, and net gains on sales of loans, as discussed below in MD&A.

Relative to Paycheck Protection Program (“PPP”) loans, the Company ended 2021 with a total outstanding balance net of deferred fees and costs of $261.9 million compared to $1.50 billion at December 31, 2020.  During 2021, the Company recognized a $15.5 million increase in interest income arising from PPP loan amortization of net deferred fees combined with the 1% annualized interest rate leaving $6.5 million in net deferred fees remaining to be recognized into future interest income.  The Company’s corresponding Paycheck Protection Program Liquidity Facility (“PPPLF”) used to help provide financing for the origination of PPP loans decreased from $1.53 billion at December 31, 2020 to $267.6 million at December 31, 2021. Borrowings under the PPPLF bear interest at a rate of 0.35%, and there are no fees paid by the Company.

Credit

In accordance with guidance from banking regulators, the Company has and continues to work with COVID-19 affected borrowers to help defer their payments, interest, and fees.  At December 31, 2021 the Company had $1.1 million in unguaranteed loans and leases on payment deferral for borrowers impacted by the COVID-19 pandemic with $67 thousand in accrued interest receivable.  In addition, the Company had $76.9 million in unguaranteed loans on SBA payment assistance at December 31, 2021.  To date, almost all loans after expiration of assistance have returned to making regular payments.

In previous quarters of 2021, the Company has disclosed certain industries that have heightened levels of exposure as a result of COVID-19.  Specifically, management identified six verticals that were considered to be “at-risk” of significant COVID-19 impacts.  These verticals are hotels, educational services, wine and craft beverage, quick service restaurants, entertainment centers and fitness centers.  Businesses within these six verticals have shown notable improvements throughout 2021.  As of December 31, 2021, these verticals contained two loans with an aggregate balance of $2.7 million, $676 thousand of which was unguaranteed, still on payment deferral and 28 loans that continue to receive SBA payment subsidies with an aggregate balance of $37.6 million, $9.4 million of which was unguaranteed.  While 2021 reflected positive signs of emerging from at-risk status, management continues to closely monitor these vulnerable verticals for signs of weakness.

The Company continues to work with customers directly affected by COVID-19 and is prepared to offer short-term assistance in accordance with regulatory guidelines.  As a result of the uncertain economic environment caused by COVID-19, the Company continues to engage in more frequent communication with borrowers in an effort to better understand their situation and the challenges faced as circumstances evolve, which the Company anticipates will enable it to respond proactively as needs and issues arise.

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Executive Summary

The table below sets forth selected consolidated financial data as of the dates or for the periods indicated.

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The following is a summary of the Company's financial highlights and events for 2021:

Business Outlook

Below is a discussion of management’s current expectations regarding Company performance over the near-term based on market conditions, the regulatory environment and business strategies as of the time the Company filed this Report. Actual outcomes and results may differ materially from what is expressed or forecasted in these forward-looking statements. See “Important Note Regarding Forward-Looking Statements” in this Report for more information on forward-looking statements.

The Company's results for 2021 demonstrated a continuation of strong underlying financial performance and solid growth momentum. Management continues to focus on building recurring revenue streams, promoting change within the financial technology industry, and building out selected existing verticals while adding new verticals to the Company's business model.  Management anticipates that the Company's held-for-sale and held-for-investment loan portfolios will continue to grow as a result of healthy origination volumes and higher levels of loan retention that are intended to promote long-term recurring revenue and profitability, including the continued pursuit of potential opportunities in conventional lending outside of SBA or other government guarantee programs.

Non-GAAP Financial Measures

Statements included in this management's discussion and analysis include non-GAAP financial measures and should be read along with the accompanying tables, which provide a reconciliation of non-GAAP financial measures to GAAP financial measures. The reconciliation of non-GAAP measures is presented at the conclusion of this Item 7.

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Management believes that non-GAAP financial measures provide additional useful information that allows readers to evaluate the ongoing performance of the Company without regard to certain transactional activities. Non-GAAP financial measures should not be considered as an alternative to any measure of performance or financial condition as reported under GAAP, and investors should consider the Company's performance and financial condition as reported under GAAP and all other relevant information when assessing the performance or financial condition of the Company. Non-GAAP financial measures have limitations as analytical tools, and investors should not consider them in isolation or as a substitute for analysis of the Company's results or financial condition as reported under GAAP.  Management’s non-GAAP measures are not necessarily comparable to similar named measures represented by other companies, as they may be calculated differently.

Results of Operations

The Company reported net income of$167.0 million, or $3.71 per diluted share, for 2021 compared to $59.5 million, or $1.43 per diluted share, for 2020.

This increase in net income was primarily attributable to the following items:

Other key factors partially offsetting the year-over-year increase in net income were composed of the following:

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Net Interest Income and Margin

Net interest income represents the difference between the income that the Company earns on interest-earning assets and the cost of interest-bearing liabilities. The Company’s net interest income depends upon the volume of interest-earning assets and interest-bearing liabilities and the interest rates that the Company earns or pays on them, respectively. 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.” As a bank without a branch network, the Bank gathers deposits over the Internet and in the community in which it is headquartered. Due to the nature of a branchless bank and the relatively low overhead required for deposit gathering, the rates the Bank offers are generally above the industry average.

For 2021, net interest income increased $102.1 million, or 52.4%, to $296.8 million compared to $194.7 million for 2020. This increase was principally due to the significant growth in the held for investment loan and lease portfolios reflecting the Company's ongoing initiative to grow recurring revenue sources combined with lower costs of interest-bearing liabilities.  This increase over the prior year was further enhanced by the aforementioned revenue arising from PPP loans with a $15.5 million increase in interest income arising from amortization of net deferred fees combined with a 1% annualized interest rate.   Accordingly, average interest-earning assets increased by $1.24 billion, or 19.4%, to $7.68 billion for 2021, compared to $6.44 billion for 2020, while the yield on average interest-earning assets increased 22 basis points to 4.70%. The cost of funds on interest-bearing liabilities for 2021 decreased 61 basis points to 0.87%, and the average balance of interest-bearing liabilities increased by $1.10 billion, or 17.4%, over 2020. The increase in average interest-bearing liabilities was largely driven by funding for significant loan originations and growth.  As indicated in the rate/volume table below, increased interest-earning asset volume and yields and greater levels of cost declines of interest-bearing liabilities outpaced the higher volume of interest-bearing liabilities, resulting in increases to interest income of $72.8 million and decreases to interest expense of $29.3 million for 2021 compared to 2020.  For 2020 compared to 2021, the net interest margin increased from 3.03% to 3.86%, respectively, due primarily to significant loan portfolio growth and the maturity of longer term deposits which are repricing at lower rates combined with recognition of PPP related income, which is being accelerated with forgiveness efforts.  As of December 31, 2021, the Company had $261.9 million in PPP loan balances on its books which includes $6.5 million in net deferred fees remaining to be recognized into future interest income.  The Company expects to recognize most of the remaining net deferred fees for PPP loans in 2022.

In December 2021, the Federal Reserve released projections where the midpoint of the projected target range for the federal funds rate would rise to 0.9% by the end of 2022, to 1.6% by the end of 2023 and to 2.1% by the end of 2024. These projections imply approximately three 25 basis point increases in the federal funds rate in 2022, followed by three in 2023 and two in 2024.  There can be no assurance that any increases in the federal funds rate will occur, and if they do, the amount and timing of actual increases are subject to change.  See Item 7A. Quantitative and Qualitative Disclosures About Market Risk for information about the Company’s sensitivity to interest rates.

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Average Balances and Yields. The following table presents information regarding average balances for assets and liabilities, the total dollar amounts of interest income and dividends from average interest-earning assets, the total dollar amount 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.

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Rate/Volume Analysis. The following table sets forth the effects of changing rates and volumes on net interest income. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by current period volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior period rate). The total column represents the sum of the prior columns. For purposes of this table, changes attributable to changes in both rate and volume that cannot be segregated have been allocated proportionally based on the changes due to rate and the changes due to volume.

Provision for Loan and Lease Credit Losses

The provision for loan and lease credit losses represents the amount necessary to be charged against the current period’s earnings to maintain the allowance for credit losses (“ACL”) on loans and leases at a level that is appropriate in relation to the estimated losses inherent in the loan and lease portfolio.

Losses inherent in loan relationships are mitigated if a portion of the loan is guaranteed by the SBA or USDA. A typical SBA 7(a) loan carries a 75% guarantee while USDA guarantees range from 50% to 90% depending on loan size, which serve to reduce the risk profile of these loans. The Company believes that its focus on compliance with regulations and guidance from the SBA and USDA are key factors to managing this risk.

For 2021, the provision for loan and lease credit losses was $15.2 million compared to $40.7 million in 2020, a decrease of $25.4 million.  The decrease in provision was primarily the result of continued improvement in forecasts related to employment and default expectations combined with the effects of the below discussed performance metrics, partially offset by the impact of growth in the Company’s loan and lease portfolios.

Loans and leases held for investment at historical cost were $4.88 billion as of December 31, 2021, an increase of $546.5 million, or 12.6%, compared to December 31, 2020.  Excluding PPP loans and net unearned fees on those loans, the balance in loans and leases held for investment at historical cost was $4.61 billion at December 31, 2021, an increase of $1.78 billion, or 63.0%, over December 31, 2020.

Net charge-offs for loans and leases carried at historical cost were $3.9 million, or 0.08% of average loans and leases held for investment, carried at historical cost, for 2021, compared to net charge-offs of $15.3 million, or 0.44%, for 2020.    The decrease in net charge-offs for 2021 as compared to 2020 was principally the result of a third quarter of 2020 reclassification of fifteen hotel loans from held for investment to held for sale totaling $81.2 million in net investment.  This third quarter of 2020 reclassification resulted in a write down reflected in charge-offs of $9.8 million.  Net charge-offs are a key element of historical experience in the Company's estimation of the allowance for credit losses on loans and leases.

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In addition, nonperforming loans and leases not guaranteed by the SBA or USDA, excluding $4.8 million and $5.4 million accounted for under the fair value option at December 31, 2021 and 2020, respectively, totaled $16.0 million, which was 0.33% of the held for investment loan and lease portfolio carried at historical cost at December, 31 2021, compared to $20.1 million, or 0.46% of loans and leases held for investment carried at historical cost at December 31, 2020.  Nonperforming loans and leases carried at historical cost which are not guaranteed by the SBA or USDA were 0.35% and 0.71% of the historical cost portion of the held for investment loan and lease portfolio, excluding PPP loans, at December 31, 2021 and 2020, respectively.

Noninterest Income

Noninterest income is principally comprised of net gains from the sale of SBA and USDA-guaranteed loans along with servicing revenue and related revaluation of the servicing asset. Revenue from the sale of loans depends upon the volume, maturity structure and rates of underlying loans as well as the pricing and availability of funds in the secondary markets prevailing in the period between completed loan funding and closing of sale. In addition, the loan servicing revaluation is significantly impacted by changes in market rates and other underlying assumptions such as prepayment speeds and default rates. Net gain (loss) on loans accounted for under the fair value option is also significantly impacted by changes in market rates, prepayment speeds and inherent credit risk.  Other less common elements of noninterest income include less consistent gains and losses on investments.

The following table shows the components of noninterest income and the dollar and percentage changes for the periods presented.

Years ended December 31, 2021 vs. 2020

For 2021, noninterest income increased by $74.2 million, or 86.3%, compared to 2020.  The increase from the prior year is primarily the result of an increase in equity security gains of $29.8 million, principally the result of a second quarter 2021 gain of $44.1 million associated with the Company’s investment in Greenlight as discussed above, a $17.8 million increase in net gains on sales of loans, an increased net gain on loans accounted for under the fair value option of $17.3 million and a lower loss on equity method investments of $13.0 million, or 88.3%.  The lower loss on equity method investments was largely a product of the Company’s pro rata portion of income tax expense amounting to $7.8 million recorded in 2020 arising from an investee’s conversion from a partnership to a corporation combined with heightened levels of financial performance in 2021 from the Company’s investments in fintech oriented investment funds.

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The tables below reflect loan and lease production, sales of guaranteed loans and the aggregate balance in guaranteed loans sold that are being serviced. These components are key drivers of the Company's noninterest income.

Changes in various components of noninterest income are discussed in more detail below.

Loan Servicing Revenue: While portions of the loans that the Bank originates are sold and generate gain on sale revenue, servicing rights for those sold portions are retained by the Bank. In exchange for continuing to service sold loans, the Bank receives fee income represented in loan servicing revenue equivalent to 1.0% of the outstanding balance of SBA loans sold and 0.40% of the outstanding balance of USDA loans sold. In addition, the standard cost (adequate compensation) for servicing sold loans is approximately 0.40% of the balance of the loans sold, which is included in the loan servicing revaluation computations. Unrecognized servicing revenue above (or below) the standard cost to service is reflected in a net servicing asset (or liability) recorded on the consolidated balance sheets. Revenues associated with the servicing of loans are recognized over the expected life of the loan through the income statement, and the servicing asset is reduced as this revenue is recognized. For 2021, loan servicing revenue decreased $1.4 million, or 5.2%, to $25.2 million as compared to 2020 as a result of the declining balance of the serviced portfolio.  At December 31, 2021, the outstanding balance of guaranteed loans sold in the secondary market was $2.76 billion compared to $2.82 billion at December 31, 2020.

Loan Servicing Revaluation: The Company revalues its serviced loan portfolio at least quarterly. The revaluation considers the amortization of the portfolio, current market conditions for loan sale premiums, and current prepayment speeds. For 2021, there was a negative loan servicing revaluation adjustment of $11.7 million compared to a negative adjustment of $10.0 million for 2020.  The increase in the negative revaluation from 2020 to 2021 was primarily a result of amortization of the guaranteed serviced loan portfolio combined with increased inventory levels in the market.

In consideration of the sensitivity of servicing rights as discussed above and in Note 5 to the accompanying audited consolidated financial statements, the following table is provided to reflect the effect on fair value as of December 31, 2021 due to hypothetical changes in yield curve rates.

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Net Gains on Sales of Loans: For 2021, net gains on sales of loans increased $17.8 million, or 36.0%, compared to 2020. The volume of guaranteed loans sold increased $125.9 million, or 23.2%, in 2021 to $668.5 million from $542.6 million in 2020.  The average net gain on guaranteed loan sales increased from $85.1 thousand to $96.5 thousand, per million sold, in 2020 and 2021, respectively.  With higher loan sale volume and higher premium levels in the secondary market in 2021 compared to 2020, the average net gain on guaranteed loan sales increased, largely as a result of improvement in market premium levels which were magnified by stimulus associated with the SBA program which removed the ongoing guarantee fee, typically paid by the purchaser, on loans originated under the Economic Aid Act. The magnitude of the increase in net gains on sale of loans was muted somewhat due the Company’s choice to not elect fair value for all retained participating interests arising from new government guaranteed loan sales beginning in the first quarter of 2021. Not electing fair value generally results in a larger discount, which will reduce the amount of gain recognized at the date of sale. This larger discount is subsequently accreted into interest income over the underlying loan’s remaining term using the effective interest method. Management made this change of election in alignment with its ongoing effort to reduce volatility and drive more predictable revenue. In accordance with accounting standards, any loans for which fair value was previously elected continue to be measured as such.

Net Gain (Loss) on Loans Accounted for Under the Fair Value Option:   For 2021, the net gain on loans accounted for under the fair value option increased $17.3 million, or 132.5%, compared to 2020.  The carrying amount of loans accounted for under the fair value option at December 31, 2021 and 2020 was $670.5 million ($25.3 million classified as held for sale and $645.2 million classified as held for investment) and $851.5 million ($36.1 million classified as held for sale and $815.4 million classified as held for investment), respectively, a decrease of $181.0 million, or 21.3%.  The net gain on loans accounted for under the fair value option during 2021 was largely due to improving market conditions compared to COVID-19 pandemic economic impacts in the prior year.

Noninterest Expense

Noninterest expense comprises all operating costs of the Company, such as employee related costs, travel, professional services, advertising and marketing expenses, exclusive of interest and income tax expense.

The following table shows the components of noninterest expense and the related dollar and percentage changes for the periods presented.

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Total noninterest expense for 2021 increased $38.3 million, or 19.9%, compared to 2020. The increase in noninterest expense was predominately driven by the following items.

Salaries and employee benefits: Total personnel expense for 2021 increased by $12.4 million, or 11.0%, compared to 2020.  The increase in salaries and employee benefits was principally related to continued investment in human resources to support strategic and growth initiatives. Total full-time equivalent employees increased from 630 at December 31, 2020 to 794 at December 31, 2021.  Salaries and employee benefits expense included $16.9 million of stock-based compensation for 2021, compared to $14.7 million for 2020.  Expenses related to the employee stock purchase program, stock grants, stock option compensation and restricted stock expense are all considered stock-based compensation.

Travel expense:  Travel expense increased $2.4 million, or 68.3%.  Travel expenses increased primarily to support the growth in loan origination volume and customer base as travel restrictions began to ease in 2021.

Professional services expense:  Professional services expense increased $8.8 million, or 138.0%, compared to 2020.  The increase was largely driven by an increase in legal fees related to the previously disclosed letter the Company received in December 2020 and the resulting putative class action filed against the Company in March 2021.  See Note 11. Commitments and Contingencies for additional information.

Data processing expense: Total data processing expense for 2021 increased $5.8 million, or 47.3%, compared to 2020.  The increase over 2020 was predominantly driven by enhanced investments in the Company’s internal software technology resources.

Loan related expenses:  Total loan related expenses for 2021 increased $2.7 million, or 25.4%, compared to 2020.  This increase was principally due to heightened levels of SBA guaranty fees arising from the Company retaining more guaranteed loans.

Renewable energy tax credit investment impairment:  The Company recognized $3.1 million in impairment charges related to a $3.9 million renewable energy tax credit investment that was fully funded during the first quarter of 2021. Investments of this type generate a return primarily through the realization of income tax credits and other benefits; accordingly, impairment of the investment amount is recognized in conjunction with the realization of related tax benefits. This investment generated a federal investment tax credit of $3.4 million which is included in the Company’s estimated annual effective tax rate.

Income Tax Expense

Income tax expense and related effective tax rate in 2021 was $43.8 million and 20.8% compared to an income tax benefit in 2020 of $12.2 million and (25.6%), respectively.  The effective tax rate of 20.8% for 2021 was principally due to the impact of a renewable energy tax credit investment and vesting of approximately 576 thousand restricted stock unit awards with market price conditions, as the fair value of these awards exceeded the total compensation cost recognized by the Company for book purposes.

The income tax benefit in 2020 was principally the product of vesting of restricted stock unit awards with market price conditions during the fourth quarter combined with the tax impact of enactment of the CARES Act on March 27, 2020. Upon vesting, the fair value of these awards exceeded the total compensation cost recognized by the Company for book purposes, which resulted in the recognition of a tax benefit of $22.1 million.

Results of Segment Operations

The Company’s operations are managed along two primary operating segments Banking and Fintech.  A description of each segment and the methodologies used to measure financial performance is described in Note 16. Segments in the accompanying notes to the consolidated financial statements.  Net income (loss) by operating segment is presented below:

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Banking

Net income increased $88.2 million, or 153.5%, compared to 2020.  The increase was primarily the result of increased net interest income and noninterest income.

Net interest income increased $102.9 million, or 52.8%, compared to 2020.  See the analysis of net interest income included in the above section captioned “Net Interest Income and Margin” as it is predominantly related to the Banking segment.

See the analysis of provision for loan and lease credit losses included in the above section captioned “Provision for Loan and Lease Credit Losses” as it is entirely related to the Banking segment.

Noninterest income increased $36.9 million, or 47.5%, compared to 2020.  This increase was largely comprised of net gains on sales of loans increasing $17.8 million, or 36.0% combined with net gains on loans accounted for under the fair value option increasing by $17.3 million, or 132.5%.  See the analysis of these categories of noninterest income included in the above section captioned “Noninterest Income” for additional discussion.

Noninterest expense increased $34.3 million, or 18.9% compared to 2020.  See the analysis of these categories of noninterest expense included in the above section captioned “Noninterest Expense” for additional discussion.

Income tax expense increased $42.7 million compared to 2020. See the above section captioned “Income Tax Expense.”

Fintech

Net income increased by $29.6 million, from a net loss of $1.9 million in 2020 to net income of $27.7 million in 2021.  The increase was principally the result of noninterest income increasing $36.6 million, a result of the aforementioned $44.1 million Greenlight gain recognized in the second quarter of 2021.

Income tax expense increased $7.3 million, or 243.9%, compared to 2020, principally driven by the significant changes in net income before taxes arising from the above discussed gains arising from the Company’s investment in Greenlight

See Note 9. Income Taxes for more information.

Discussion and Analysis of Financial Condition

Total assets at December 31, 2021 were $8.21 billion, an increase of $341.1 million, or 4.3%, compared to total assets of $7.87 billion at December 31, 2020. The growth in total assets was principally driven by the following:

Cash and cash equivalents, comprised of cash and due from banks and federal funds sold, was $203.8 million at December 31, 2021, a decrease of $114.6 million, or 36.0%, compared to $318.3 million at December 31, 2020.  This decrease largely reflects funding for significant loan growth efforts during the year balanced with lower levels of planned liquidity at the end of 2021.

Loans and leases held for sale decreased $59.0 million, or 5.0%, during 2021, from $1.18 billion at December 31, 2020, to $1.12 billion at December 31, 2021. The decrease was primarily the result of strong loan sales in 2021 combined with higher levels of loans being retained as held for investment.

Loans and leases held for investment increased $376.3 million, or 7.3%, during 2021, from $5.14 billion at December 31, 2020, to $5.52 billion at December 31, 2021. The increase was primarily the result of the above-mentioned loan originations in 2021 combined with increased levels of loans retained as held for investment.  All PPP loans are classified as held for investment.

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Total deposits were $7.11 billion at December 31, 2021, an increase of $1.40 billion, or 24.5%, from $5.71 billion at December 31, 2020. The increase in deposits was largely driven by significant loan origination efforts during 2021.

Borrowings decreased to $318.3 million at December 31, 2021 from $1.54 billion at December 31, 2020.  This decrease was related principally to net curtailments of borrowings through the PPPLF in 2021 from PPP loan forgiveness. These PPPLF borrowings are used to help fund PPP loans.

Shareholders’ equity at December 31, 2021 was $715.1 million as compared to $567.9 million at December 31, 2020. The book value per share was $16.39 at December 31, 2021 compared to $13.38 at December 31, 2020. Average equity to average assets was 7.9% for the year ended December 31, 2021 compared to 8.1% for the year ended December 31, 2020. The increase in shareholders’ equity for 2021 was principally the result of net income of $167.0 million and stock-based compensation expense of $17.0 million, partially offset by other comprehensive loss of $19.6 million and $19.2 million in cash paid in lieu of stock for employee tax obligations in settlement of vested stock grants.

Loans Held for Sale & Serviced Portfolio

Any loan or portion of a loan that the Company has the intent and ability to sell is classified as held for sale. The average age of the held for sale portfolio as of December 31, 2021 was 10.1 months from origination date. Approximately 11% of the current held for sale portfolio is older than two years. The majority of held for sale loans over one year old are composed of construction loans. Construction loans typically have extended build out periods that inherently result in longer lead times between origination and the ultimate sale date. Approximately 25.0% of the held for sale portfolio is aged between one and two years.

As of December 31, 2021 and 2020, the cumulative total outstanding principal balance of loans sold since May 2007 totaled $3.30 billion and $3.20 billion, respectively. The Company generally continues to service loans after the date of sale. As of December 31, 2021 and 2020, the total outstanding principal of loans and leases, including those serviced for others, was $9.96 billion and $9.57 billion, respectively.

Loan and Lease Maturity

As of December 31, 2021, $7.72 billion, or 77.5%, of the total outstanding principal of loans and leases, including those serviced for others, were variable rate loans that adjust at specified dates based on the prime lending rate or other variable indices. As of December 31, 2021, $4.54 billion, or 45.6%, of total outstanding principal of loans and leases, including those serviced for others, were variable rate loans that adjust on either a calendar monthly or calendar quarterly basis using the prime lending rate or other variable indices.

At December 31, 2021, 78.2%, or $5.21 billion, of the combined held for sale and held for investment loan and lease portfolio was composed of variable rate loans.

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At December 31, 2021, $1.33 billion, or 24.0%, of the held for investment balance matures in less than five years. Loans and leases maturing in greater than five years total $4.20 billion of the total $5.53 billion. The variable rate portion of the total held for investment loans and leases, excluding PPP loans, is 79.1%, which reflects the Company’s strategy to minimize interest rate risk through the use of variable rate products.

Asset Quality

Management considers asset quality to be of primary importance. A formal loan review function, independent of loan origination, is used to identify and monitor problem loans. This function reports directly to the Audit & Risk Committee of the Board of Directors.

Nonperforming Assets

The Bank places loans and leases on nonaccrual status when they become 90 days past due as to principal or interest payments, or prior to that if management has determined based upon current information available to them that the timely collection of principal or interest is not probable. When a loan or lease is placed on nonaccrual status, any interest previously accrued as income but not actually collected is reversed and recorded as a reduction of loan or lease interest and fee income. Typically, collections of interest and principal received on a nonaccrual loan or lease are applied to the outstanding principal as determined at the time of collection of the loan or lease.

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Troubled debt restructurings (“TDRs”) occur when, because of economic or legal reasons pertaining to the debtor’s financial difficulties, debtors are granted concessions that would not otherwise be considered. Such concessions would include, but are not limited to, the transfer of assets or the issuance of equity interests by the debtor to satisfy all or part of the debt, modification of the terms of debt or the substitution or addition of debtor(s).

Nonperforming assets and TDRs, excluding loans measured at fair value, at December 31, 2021 were $80.2 million, which represented a $2.3 million, or 2.7%, decrease from December 31, 2020. These nonperforming assets, at December 31, 2021 were comprised of $42.5 million in nonaccrual loans and leases and $620 thousand in foreclosed assets. Of the $80.2 million of nonperforming assets and TDRs, $43.2 million carried an SBA guarantee, leaving an unguaranteed exposure of $37.0 million in total nonperforming assets and TDRs at December 31, 2021. This represents a decrease of $2.3 million, or 5.9%, from an unguaranteed exposure of $39.3 million at December 31, 2020.

The following table provides information with respect to nonperforming assets and troubled debt restructurings, excluding loans measured at fair value, at the dates indicated.

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Total nonperforming assets and troubled debt restructurings, including loans measured at fair value, at December 31, 2021 were $153.6 million, which represented a $363 thousand, or 0.2%, increase from December 31, 2020. These nonperforming assets, at December 31, 2021 were comprised of $85.4 million in nonaccrual loans and leases and $620 thousand in foreclosed assets. Of the $153.6 million of nonperforming assets and TDRs, $101.1 million carried an SBA guarantee, leaving an unguaranteed exposure of $52.5 million in total nonperforming assets and TDRs at December 31, 2021. This represents a decrease of $3.0 million, or 5.4%, from an unguaranteed exposure of $55.5 million at December 31, 2020.

See the below discussion related to the change in potential problem and impaired loans and leases for management’s overall observations regarding the change in total nonperforming loans and leases.

As a percentage of the Bank’s total capital, nonperforming loans and leases, excluding loans measured at fair value, represented 6.0% at December 31, 2021, compared to 8.8% at December 31, 2020. Adjusting the ratio to include only the unguaranteed portion of nonperforming loans and leases at historical cost to reflect management’s belief that the greater magnitude of risk resides in this portion, the ratios at December 31, 2021 and December 31, 2020 were 2.3% and 3.8%, respectively.

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As of December 31, 2021, and December 31, 2020, potential problem (also referred to as criticized) and classified loans and leases, excluding loans measured at fair value, totaled $372.7 million and $311.4 million, respectively.  The following is a discussion of these loans and leases.  Risk Grades 5 through 8 represent the spectrum of criticized and classified loans and leases.  For a complete description of the risk grading system used by the Company, see “Credit Quality Indicators” in Note 3 to the notes to consolidated financial statements. At December 31, 2021, the portion of criticized and classified loans and leases guaranteed by the SBA or USDA totaled $197.2 million resulting in unguaranteed exposure risk of $175.5 million, or 6.3% of total held for investment unguaranteed exposure carried at historical cost. This compares to the December 31, 2020 portion of criticized and classified loans and leases guaranteed by the SBA or USDA which totaled $168.9 million resulting in unguaranteed exposure risk of $142.5 million, or 8.2% of total held for investment unguaranteed exposure carried at historical cost. As of December 31, 2021, loans and leases carried at historical cost within the following verticals comprise the largest portion of the total potential problem and classified loans and leases: Educational Services at 16.1%, Wine and Craft Beverage at 13.7%, Hotels at 11.8%, Entertainment Centers at 10.4%, Healthcare at 9.0%, Fitness Centers at 5.3%, Self Storage at 4.8%, Agriculture at 4.5% and Veterinary at 4.4%.  As of December 31, 2020, loans and leases carried at historical cost within the following verticals comprise the largest portion of the total potential problem and classified loans and leases: Educational Services at 15.3%, Wine and Craft Beverage at 14.3%, Hotels at 13.6%, Entertainment Centers at 12.5%, Healthcare at 10.3%, Fitness Centers at 7.2%, Self Storage at 6.4% and Veterinary at 4.5%.  Other than Hotels which are a part of the Company’s Specialty Lending division, all of the above listed verticals are within the Company’s Small Business Banking division.  The majority of the 2021 increase in potential problem and classified loans and leases amounting to $61.3 million was comprised of a relatively small number of borrowers largely concentrated in the Company’s more mature verticals.  Furthermore, the Company believes that its underwriting and credit quality standards have remained high with an emphasis on new production in pandemic resilient verticals and has continued the practice of monitoring existing loans in pandemic susceptible verticals.

Loans and leases that experience insignificant payment delays and payment shortfalls are generally not individually evaluated for the purpose of estimating the allowance for credit losses. The Bank generally considers an “insignificant period of time” from payment delays to be a period of 90 days or less, unless the borrower was not past due at the time of a modification as a part of a COVID-19 assistance program. The Bank would consider a modification for a customer experiencing what is expected to be a short-term event that has temporarily impacted cash flow. This could be due, among other reasons, to illness, weather, impact from a one-time expense, slower than expected start-up, construction issues or other short-term issues. Credit personnel will review the request to determine if the customer is stressed and how the event has impacted the ability of the customer to repay the loan or lease long term.  At December 31, 2021, the Company had $1.1 million in modified unguaranteed loans and leases for borrowers impacted by the COVID-19 pandemic. These modifications were short-term payment deferrals generally no more than six-months in duration and accordingly are not considered troubled debt restructurings.

Management endeavors to be proactive in its approach to identify and resolve problem loans and leases and is focused on working with the borrowers and guarantors of these loans and leases to provide loan and lease modifications when warranted.  Management implements a proactive approach to identifying and classifying loans and leases as special mention (also referred to as criticized), Risk Grade 5. At December 31, 2021, and December 31, 2020, Risk Grade 5 loans and leases, excluding loans measured at fair value, totaled $267.4 million and $237.5 million, respectively. The increase in Risk Grade 5 loans and leases, exclusive of loans measured at fair value, during 2021 was principally confined to eight verticals: Educational Services ($11.3 million or 56.1%), Agriculture ($7.0 million or 34.8%), Hotels ($5.0 million or 24.9%), Healthcare ($4.2 million or 20.8%), General ($3.0 million or 14.8%), Independent Pharmacies ($2.8 million or 14.0%), Sponsor Finance ($2.7 million or 13.3%) and Venture Banking ($2.6 million or 12.8%).  Partially offsetting the above increases were declines in Risk Grade 5 loans principally concentrated in four verticals: Senior Care ($7.9 million or 39.2%), Wine and Craft Beverage ($5.2 million or 26.0%), Fitness Centers ($5.2 million or 25.6%) and Entertainment Centers ($4.6 million or 22.9%).  Other than Hotels, Sponsor Finance and Venture Banking, which are a part of the Company’s Specialty Lending division, all of the above listed verticals are within the Company’s Small Business Banking division.

At December 31 2021, approximately 99.1% of loans and leases classified as Risk Grade 5 are performing with only one relationship having payments past due more than 30 days.  While the level of nonperforming assets fluctuates in response to changing economic and market conditions, in light of the relative size and composition of the loan and lease portfolio and management’s degree of success in resolving problem assets, management believes that a proactive approach to early identification and intervention is critical to successfully managing a small business loan portfolio. In conjunction with this, management believes that volumes of delinquencies may not be an accurate depiction of the borrower’s repayment abilities under the recent pandemic induced circumstances due to payments being made by the SBA on behalf of borrowers with loans under its programs.  As government payment assistance began to expire toward the end of 2020, borrowers with continuing difficulties arising from the pandemic were provided additional relief through payment deferrals.  Management monitors these borrowers closely and has observed financial conditions continuing to improve.  Management has also noted that most loans with expired government assistance have been able to resume making regular payments.

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Allowance for Credit Losses on Loans and Leases

See Note 1. Organization and Summary of Significant Accounting Policies of the Notes to the Consolidated Financial Statements in this report for a description of the methodologies used to estimate the ACL prior to and after the adoption of ASC 326, Financial Instruments – Credit Losses, on January 1, 2020.

The ACL of $52.3 million at December 31, 2020, increased by $11.3 million, or 21.6%, to $63.6 million at December 31, 2021. The ACL as a percentage of loans and leases held for investment at historical cost amounted to 1.3% and 1.2% at December 31, 2021 and 2020, respectively. Excluding PPP loans and related reserves, the ACL as a percentage of loans and leases held for investment at historical cost amounted to 1.3% and 1.8% at December 31, 2021 and 2020, respectively.  The increase in the ACL during 2021 was primarily due to impact of growth in loan and lease originations somewhat mitigated by the effects of improved forecasts related to employment and default expectations as the economic outlook has continued to improve, as addressed more fully in the above section captioned “Provision for Loan and Lease Credit Losses” in “Results of Operations.”

Actual past due held for investment loans and leases, inclusive of loans measured at fair value, have decreased by $1.6 million since December 31, 2020.   Total loans and leases 90 or more days past due decreased $12.7 million, or 20.5%, compared to December 31, 2020.  The decrease was comprised of a $13.2 million decrease in unguaranteed exposure combined partially offset with a $509 thousand increase in the guaranteed portion of past due loans compared to December 31, 2020.  At December 31, 2021 and 2020, total held for investment unguaranteed loans and leases past due as a percentage of total held for investment unguaranteed loans and leases, inclusive of loans measured at fair value, was 0.6% and 1.1%, respectively.  Total unguaranteed loans and leases past due were comprised of $16.6 million carried at historical cost, a decrease of $6.5 million, and $5.1 million measured at fair value, a decrease of $1.2 million, as of December 30, 2021 compared to December 31, 2020.  Management continues to actively monitor and work to improve asset quality. Management believes the ACL of $63.6 million at December 31, 2021 is appropriate in light of the risk inherent in the loan and lease portfolio. Management’s judgments are based on numerous assumptions about current and expected events that it believes to be reasonable, but which may or may not be valid, including but not limited to factors related to the above mentioned SBA delinquency effect and pandemic-susceptible borrowers. Accordingly, no assurance can be given that management’s ongoing evaluation of the loan and lease portfolio in light of changing economic conditions and other relevant circumstances will not require significant future additions to the ACL, thus adversely affecting the Company’s operating results. Additional information on the ACL is presented in Note 3. Loans and Leases Held for Investment and Credit Quality of the consolidated financial statements in this report.

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The following table sets forth the breakdown of the allowance for credit losses on loans and leases carried at historical cost by category at the dates indicated.

Analysis of Loan and Lease Loss Experience. The following table sets forth an analysis of net charge-offs for loans and leases carried at historical cost to average total loans and leases, carried at historical cost, by category for the years indicated.

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Investment Securities

Investment securities totaled $906.1 million at December 31, 2021, an increase of $156.0 million, or 20.8%, compared to $750.1 million at December 31, 2020. The increase in the investment portfolio for 2021 was to support earnings through additional yield, compared to cash alternatives, while the Company continued to deploy the excess liquidity on the balance sheet that arose from 2020’s efforts to safeguard liquidity, in the early stages of the global pandemic, as well as from the pledging of the PPP loans to the Federal Reserve PPPLF. This also included purchases of $348.1 million in mortgage-backed securities, including $43.2 million for purposes of complying with the Community Reinvestment Act, and purchases of $70.7 million in collateralized mortgage obligations to increase yield and duration.

The investment securities portfolio consists entirely of available-for-sale securities. The Company purchases securities for the investment securities portfolio to manage interest rate risk, ensure a stable source of liquidity and to provide a steady source of income in excess of cost of funds.

At December 31, 2021, the duration of the overall available-for-sale securities portfolio was approximately 5.22 years.

The following table sets forth the stated maturities and weighted average yields of investment securities at December 31, 2021. Certain mortgage related securities have adjustable interest rates and will reprice annually within the various maturity ranges. These repricing schedules are not reflected in the tables below.

At December 31, 2021, the Company had 98.2% of its total investment securities portfolio in mortgage-backed securities, compared with 97.4% at December 31, 2020.  The Company has continued to purchase mortgage-backed securities in order to obtain a favorable yield versus cash alternatives while still maintaining a low risk profile within the investment portfolio.

Deposits

The following table sets forth the composition of deposits.

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Deposits increased to $7.11 billion at December 31, 2021 from $5.71 billion at December 31, 2020, an increase of $1.40 billion, or 24.5%.  This increase was primarily due to the growth of the Company’s customer base in the savings and time deposit products, enhanced by a nationwide marketing campaign with attractive rates and additional wholesale funding, to support the significant loan growth in 2021.  Noninterest-bearing deposits increased $14.0 million, or 18.6%, during 2021, and interest-bearing deposits increased $1.39 billion, or 24.6%, during the same period.

At December 31, 2021, the aggregate balance of uninsured time deposit accounts totaled $58.0 million.  At December 31, 2021, 81.5% of uninsured time deposit accounts were scheduled to mature within one year.  The maturity profile of uninsured time deposits at December 31, 2021 is as follows:

Borrowings

Total borrowings decreased $1.22 billion at December 31, 2021 from December 31, 2020 as a result of the following:

In March 2021, the Company entered into a 60-month term loan agreement of $50.0 million with a third party correspondent bank.  The loan accrues interest at a fixed rate of 2.95% with a monthly payment sufficient to fully amortize the loan, with all remaining unpaid principal and interest due at maturity on March 30, 2026. The Company paid the Lender a non-refundable $325 thousand loan origination fee upon signing of the Note that is presented as a direct deduction from the carrying amount of the loan and will be amortized into interest expense over the life of the loan.

In April 2020, the Company entered into the Federal Reserve Bank's PPPLF. Under the PPPLF, advances must be secured by pledges of loans to small businesses originated by the Company under the U.S. Small Business Administration's 7(a) loan program titled the Paycheck Protection Program. The PPPLF accrues interest at thirty-five basis points and matures at various dates equal to the maturity date of the PPPLF collateral pledged to secure the advance, ranging from April 6, 2022 to May 5, 2026, and will be accelerated on and to the extent of any 7(a) loan forgiveness reimbursement by the SBA for any PPPLF collateral or the date of purchase by the SBA from the borrower of any PPPLF collateral. On the maturity date of each advance, the Company repays the advance plus accrued interest. This $267.6 million borrowing was fully advanced at December 31, 2021, compared to $1.53 billion at December 31, 2020.

In September 2020, the Company renewed a $50.0 million revolving line of credit originally issued in 2017 with a third party correspondent bank. There was $14.5 million outstanding and $35.5 million of available credit remaining at December 31, 2020. The Company made a principal paydown of $14.5 million on March 31, 2021 with $50.0 million of available credit remaining. On October 20, 2021, the Company renewed and increased the revolving line of credit from $50.0 million to $100.0 million. The line of credit is unsecured and accrues interest at 30-day SOFR plus 1.25% for a term of 36 months, with an interest rate cap of 4.25% and an interest rate floor of 2.75%.  Payments are interest only with all principal and accrued interest due at maturity on October 10, 2024. The terms of this loan require the Company to maintain minimum capital and debt service coverage ratios. The company drew $8.0 million on December 20, 2021 and there is $92.0 million of available credit remaining at December 31, 2021.

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Liquidity Management

Liquidity management refers to the ability to meet day-to-day cash flow requirements based primarily on activity in loan and deposit accounts of the Company’s customers. Liquidity is immediately available from four major sources: (a) cash on hand and on deposit at other banks; (b) the outstanding balance of federal funds sold; (c) the market value of unpledged investment securities; and (d) availability under lines of credit, FHLB advances, and the Federal Reserve Discount Window. A primary tool in the Company’s liquidity management process is the utilization of a Volatile Liability Coverage Ratio (“VLCR”) model to stress outflows in various scenarios with targeted days of liquidity coverage.  The VLCR model output is then used by management to ensure adequate liquidity sources are available during those future periods. At December 31, 2021, the total amount of these four liquidity source items was $3.42 billion, or 41.6% of total assets, an increase of 2.8% of total assets from $3.06 billion, or 38.8% of total assets, at December 31, 2020.

Loans and other assets are funded primarily by loan sales, wholesale deposits and core deposits. To date, an increasing retail deposit base and a stable amount of brokered deposits have been adequate to meet loan obligations, while maintaining the desired level of immediate liquidity. The Company maintains an investment securities portfolio that is available for both immediate and secondary contingent liquidity purposes, whether via pledging to the Federal Home Loan Bank or through liquidation. Additionally, the Company maintains a guaranteed loan portfolio that is also a contingent liquidity source, whether via pledging to the Federal Reserve Discount Window or through liquidation.

At December 31, 2021, none of the investment securities portfolio was pledged to secure public deposits or pledged to retail repurchase agreements, leaving $903.6 million available to be pledged as collateral.

Contractual Obligations

The Company has entered into significant fixed and determinable contractual obligations for future payments. See the accompanying notes to the consolidated financial statements for expected timing of payments as of December 31, 2021. These include operating and finance leases (Note 4. Leases), time deposits with stated maturity dates (Note 7. Deposits) and borrowings (Note 8. Borrowings).

Off-Balance Sheet Arrangements

In the normal course of operations, the Company engages in a variety of financial transactions that, in accordance with GAAP, are not recorded in the consolidated financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used primarily to manage customers’ requests for funding and take the form of commitments to extend credit and standby letters of credit. For more information, see Note 11. Commitments and Contingencies in the accompanying notes to the consolidated financial statements.

Asset/Liability Management and Interest Rate Sensitivity

One of the primary objectives of asset/liability management is to maximize the net interest margin while minimizing the earnings risk associated with changes in interest rates. One method used to manage interest rate sensitivity is to measure, over various time periods, the interest rate sensitivity positions, or gaps. This method, however, addresses only the magnitude of timing differences and does not address earnings or market value. Therefore, management uses an earnings simulation model to prepare, on a regular basis, earnings projections based on a range of interest rate scenarios to more accurately measure interest rate risk. For more information, see Item 7A of this Report.

The Company's balance sheet, overall, is asset-sensitive with a total cumulative gap position of 4.55% at December 31, 2021. The Company’s near-term asset-sensitive position was eroded throughout 2020 and 2021 as fixed rate investment and lending additions increased the Bank’s asset duration, while its retail deposits growth was primarily in savings and short-term certificates of deposits.  An overall total cumulative gap asset-sensitive position means that net interest income will generally move in the same direction as interest rates. For instance, if interest rates increase, net interest income can be expected to increase, and if interest rates decrease, net interest income can be expected to decrease. For more information on the various measures that the Company utilizes to evaluate near-term and long-term interest rate risk, see Item 7A if this Report. The Company attempts to mitigate interest rate risk through match-funding, meaning that variable rate loans are funded with variable rate deposits and fixed rate loans or investments are funded with term deposits.

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Capital

The maintenance of appropriate levels of capital is a management priority and is monitored on a regular basis. The Company’s principal goals related to the maintenance of capital are to provide adequate capital to support the Company’s risk profile consistent with the risk appetite approved by the Board of Directors; provide financial flexibility to support future growth and client needs; comply with relevant laws, regulations, and supervisory guidance; achieve optimal credit ratings for the Company and its subsidiaries; and provide a competitive return to shareholders. Management regularly monitors the capital position of the Company on both a consolidated and Bank level basis. In this regard, management’s goal is to maintain capital at levels that are in excess of the regulatory “well capitalized” levels. Risk-based capital ratios, which include Tier 1 Capital, Total Capital and Common Equity Tier 1 Capital, are calculated based on regulatory guidance related to the measurement of capital and risk-weighted assets.

Capital amounts and ratios as of December 31, 2021, 2020 and 2019 are presented in the table below.