# Bancorp, Inc. (TBBK) FY 2021 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Bancorp, Inc.'s 10-K for fiscal year 2021.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1295401/000156276222000070/tbbk-20211231x10k.htm
Accession: 0001562762-22-000070
Filing date: 2022-03-01
Report date: 2021-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Published MD&A gate trimmed front/tail over-capture.
Confidence: high

Company profile: /company/TBBK/
All MD&A years: /company/TBBK/mda/
Next year: /company/TBBK/mda/fy2022/ (FY 2022)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion provides information to assist in understanding our financial condition and results of operations. This discussion should be read in conjunction with our consolidated financial statements and related notes appearing in Item 8 of this report.

Recent and COVID-19 Pandemic Related Developments

As a result of increased COVID-19 vaccination rates and significant reopening of the economy during the year, 2021 net income of $110.7 million did not reflect significant charges related to the pandemic. Net income of $80.1 million for the year ended December 31, 2020 reflected pre-tax charges for unrealized losses related to non-SBA commercial real estate (“CRE”) loans, at fair

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value, which were directly related to the economic impact of COVID-19. These charges were recognized primarily in the first quarter of 2020 in “Net realized and unrealized gains (losses) on commercial loans (at fair value) in the income statement which showed a loss of $3.9 million for full year 2020.

Accounting and banking regulators had determined that loans with deferrals of principal and interest payments related to the COVID-19 pandemic would not, during the deferral period, be classified as restructured through December 31, 2021. Substantially all our loans with such COVID-19 loan payment deferrals had returned to repayment status by that date, including our SBA loans, the unguaranteed portion of which may represent an elevated risk. The U.S. government paid principal and interest on SBA 7a loans for a six month period which began in April 2020. In February 2021, pursuant to additional federal legislation adopted in response to the COVID-19 pandemic, the U.S. government began making payments for at least a two month period on such loans, and for as long as a five month period for loans more impacted by the COVID-19 pandemic, such as loans for hotels and restaurants. Unlike the six payments made under the prior legislation, those payments were limited to $9,000 per month. As of December 31, 2021, we had $371.5 million of related guaranteed balances, and additionally had $44.8 million of outstanding PPP loans which were also guaranteed.

In addition to the maintenance of Federal Reserve rate reductions in 2021, initiated in the first quarter of 2020, U.S. government efforts to address the economic impact of the COVID-19 pandemic included other actions which have and will directly impact us. The Paycheck Protection Program (“PPP”) provided for our having made loans as an SBA lender which are fully guaranteed by the U.S. government to allow businesses to continue funding their payrolls and related costs. In second quarter 2020, under the CARES Act, we originated approximately 1,250 PPP loans under the original program, totaling in excess of $200 million. The average loan size was approximately $165,000, with over 90% of the loans under $350,000. The Consolidated Appropriations Act, 2021 provided funding for additional PPP loans beginning in first quarter 2021. In that new lending program we originated approximately 630 PPP loans, totaling approximately $100 million. The average loan size was approximately $155,000, with over 90% of the loans under $350,000. As that new legislation included lost revenue thresholds for participation, our loan volume and fees were less than for the 2020 PPP. No future PPP loans have been authorized by legislation. Accordingly, we expect that the $44.8 million of PPP loans outstanding at December 31, 2021 will be repaid and not be replaced, and revenues will not be realized from any new PPP loans. In each of 2021 and 2020, we recognized $5.8 million in interest and fees on such loans. Additionally, 2021 interest on loans reflected $4.6 million of fees which were earned on a short-term line of credit to another institution to initially fund PPP loans, which did not significantly increase average loans or assets and which are not expected to recur.

In the third and fourth quarters of 2021, we experienced early payoffs in our non-SBA multi-family (apartment) CRE loans, at fair value and in the third quarter of 2021, resumed originating similar loans. Also, in 2021 the effective tax rate was approximately 23%, compared to higher rates in recent periods, which reflected the impact of tax benefits related to stock-based compensation resulting from the increase in the Company’s stock price.

Overview

In 2021, we recorded net income of $110.7 million compared to $80.1 million in 2020, with pre-tax income from continuing operations increasing to $144.2 million in 2021 from $108.3 million in 2020. The increases reflected increases in net interest and non-interest income. The $16.0 million increase in net interest income primarily reflected the impact of loan growth, which more than offset reductions in securities interest, which reflected lower rates and lower balances resulting from the impact of the low interest rate environment. Average loans and leases grew to $4.60 billion in 2021 from $3.94 billion in 2020, which reflected growth in SBLOC, IBLOC and investment advisor loans, small business (primarily SBA) excluding short-term PPP loans, leases, and real estate bridge lending. Commercial loans, at fair value, primarily comprised of non-SBA CRE loans, were previously generated for sale or securitization, but we decided in 2020 to retain those loans on the balance sheet. In 2021, the balance of those loans decreased $441.0 million primarily as a result of prepayments, but we resumed originations of non-SBA CRE loans in the third quarter of 2021, with $621.7 million of new loan balances by year-end. Those loans are reported under the description of REBL and are primarily collateralized by apartment buildings. Non-interest income included $14.9 million in net realized and unrealized gains (losses) on commercial loans, at fair value primarily reflecting income related to those repayments. Interest expense in 2021 decreased by $4.7 million compared to the prior year, reflecting the full year impact of Federal Reserve rate reductions in March 2020 in response to COVID-19. Non-interest expense increased $3.5 million year over year reflecting higher salaries and employee benefits and lower FDIC insurance expense, which resulted primarily from the reclassification of certain deposits from brokered to non-brokered.

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Key Performance Indicators

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

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

Net interest margin and credit losses. The largest component of our earnings is net interest income, or the difference between the interest earned on our interest-earning assets consisting of loans and investments, less the interest on our funding, consisting primarily of deposits. The key performance indicator for net interest income is net interest margin, derived by dividing net interest income by average interest-earning assets. Higher levels of earnings and net interest income, on lower levels of assets, equity and interest-earning assets are generally desirable. However, these indicators must be considered in light of regulatory capital requirements which impact equity, and credit risk inherent in loans. Accordingly, the magnitude of credit losses is an additional key performance indicator.

Other performance indicators. Other performance indicators we use include net interest income, non-interest income, the level of non-interest expense and capital measures including equity to assets.

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Results of performance indicators. In the past two years we have continued to target loan niches which we believe are lower risk. These include: loans collateralized by securities (“SBLOC”) and the cash value of life insurance (“IBLOC”); SBA loans, a significant portion of which are government guaranteed or must have loan-to-value ratios lower than other forms of lending; leasing to which we have access to underlying vehicles; and real estate bridge lending for apartment buildings in selected national regions. Balances in these loan categories have grown significantly, which has contributed to improved financial performance, primary components of which are shown in the table above. In 2021, the increase in net interest income reflected the impact of loan growth, which more than offset the impact of loan prepayments and reductions in securities interest, which reflected balance and yield reductions.

Our most recent improved financial performance is reflected in a number of these performance indicators. In 2021, return on assets and return on equity amounted to 1.68% and 17.94%, respectively, compared to 1.34% and 15.08% in the prior year. Net interest margin was 3.35% in 2021 and 3.45% in 2020, notwithstanding the historically low rate environment resulting from the pandemic. Deposit accounts generated by our payments business resulted in a cost of funds lower than other forms of funding and also contributed to the margin. In 2021, income related to the aforementioned loan prepayments comprised the majority of the increase in non-interest income. The payments business also contributes to increases in non-interest income, and grew especially in 2020 when prepaid, debit card and other related fees grew $9.3 million over the prior year. Those fees in 2021 were consistent with the prior year, as they were impacted by a client relationship transitioning to its own bank, which offset growth in other debit and prepaid card

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account programs and reduced margins on certain incremental volume. We attempt to manage increases in non-interest expense in conjunction with revenue increases, the results of which are reflected in the growth in net income in the above table.

Critical Accounting Policies and Estimates

Our accounting and reporting policies conform with accounting principles generally accepted in the United States and general practices within the financial services industry. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates. We believe that the determination of our allowance for credit losses on loans, leases and securities, our determination of the fair value of financial instruments and the level in which an instrument is placed within the valuation hierarchy, the fair value of stock grants and income taxes involve a higher degree of judgment and complexity than our other significant accounting policies.

We determine our allowance for credit losses with the objective of maintaining an allowance level we believe to be sufficient to absorb our estimated current and future expected credit losses. We base our determination of the adequacy of the allowance on periodic evaluations of our loan portfolio and other relevant factors. However, this evaluation is inherently subjective as it requires material estimates, including, among others, expected default probabilities, the amount of loss we may incur on a defaulted loan, expected commitment usage, the amounts and timing of expected future cash flows, collateral values and historical loss experience. We also evaluate economic conditions and uncertainties in estimating losses and other risks in our loan portfolio. To the extent actual outcomes differ from our estimates, we may need additional provisions for credit losses. Any such additional provisions for credit losses will be a direct charge to our earnings. We utilize a CECL model to determine the adequacy of the allowance and inputs include net charge-off history and estimated loan lives. The allowance for credit losses is accordingly sensitive to changes in these inputs, such that related increases would increase the allowance and provision. See “Allowance for Credit Losses” and Note D to the financial statements for other factors to which the allowance and provision are sensitive.

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

The fair value of a financial instrument is defined as the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. We estimate the fair value of a financial instrument using a variety of valuation methods. Where financial instruments are actively traded and have quoted market prices, quoted market prices are used for fair value. When the financial instruments are not actively traded, other observable market inputs, such as quoted prices of securities with similar characteristics, may be used, if available, to determine fair value. When observable market prices do not exist, we estimate fair value. Our valuation methods and inputs consider factors such as types of underlying assets or liabilities, rates of estimated credit losses, interest rate or discount rate and collateral. Our best estimate of fair value involves assumptions including, but not limited to, various performance indicators, such as historical and projected default and recovery rates, credit ratings, current delinquency rates, loan-to-value ratios and the possibility of obligor refinancing. One significant input is that at December 31, 2021, $988.5 million of commercial real estate, at fair value are multi-family loans (apartments). Multi-family loans have an updated expected COVID-19 pandemic cumulative loss rate of 1.2% based on an analysis by a nationally recognized analytics firm. To the extent actual outcomes differ from our estimates, subsequent adjustments to the financial statements may be required. Changes in fair value estimates are sensitive to factors which may vary by asset class, and which are described in Note Q to the financial statements.

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

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

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

LIBOR Transition

We discontinued LIBOR (London Interbank Offered Rate) based originations in 2021; however, certain of our financial instruments outstanding are indexed to LIBOR, including non-SBA commercial loans, at fair value, which amounted to $1.13 billion at December 31, 2021. However, these loans are short-term and generally expected to be repaid by the June 2023 LIBOR end date. At December 31, 2021 we also owned $64.1 million of LIBOR based securities purchased from previous securitizations, which are also expected to mature before June 2023. When we resumed originating non-SBA commercial loans in the third quarter of 2021, which are identified separately under real estate bridge lending, we utilized the secured overnight financing rate (“SOFR”) as the index. In addition, we own certain investment securities, including collateralized loan obligations (“CLOs”) and U.S. government agency adjustable-rate mortgages which utilize LIBOR based pricing. CLOs, which amounted to $338.0 million at December 31, 2021, generally have language regarding an index alternative should LIBOR no longer be available. U.S. government agencies generally have the ability to adjust interest rate indices as necessary on impacted LIBOR based securities, which amounted to $93.5 million at December 31, 2021. There is less clarity for our student loan securities of $22.5 million and subordinated debentures payable of $13.4 million at that date, and for which industry standards continue to be considered by trustees and other governing bodies. Our derivatives, the notional amount for which totaled $21.3 million at December 31, 2021, are interest rate swaps that are documented under bilateral agreements which contain Interbank Offered Rates (“IBOR”) fallback provisions by virtue of counterparty adherence to the 2020 International Swaps and Derivatives Association, Inc.’s LIBOR Fallbacks Protocol. We continue to assess the potential impact of the phase-out of LIBOR on all affected accounts and any other potential impacts, and related accounting guidance.

Results of Operations

Overview: Net interest income continued its upward trend in 2021, increasing $16.0 million to $210.9 million in 2021 from $194.9 million in 2020. The increase primarily reflected the impact of higher loan balances, partially offset by reductions in securities interest resulting from lower balances and lower yields. Loan interest in 2021 included $4.6 million of fees from a line of credit to another institution to fund PPP loans, which is not expected to recur and which partially offset the impact of decreases in other loan yields. Lower interest expense reflected the full year impact of the Federal Reserve’s 1.50% of rate reductions which occurred in March 2020. The provision for credit losses decreased $3.2 million to $3.1 million in 2021, reflecting the impact of lower net charge-offs in recent periods and the reversal of charges in 2021 for economic factors related to the COVID-19 pandemic which were incurred in 2020. A $20.1 million increase in non-interest income reflected an $18.8 million change in net realized and unrealized gains (losses) on commercial loans, primarily non-SBA CRE loans, at fair value. Unrealized losses were recognized in 2020 due to changes in fair value related to the COVID-19 pandemic versus 2021 fees related to prepayments and payoffs of non-SBA CRE loans.

The vast majority of non-SBA CRE loans at fair value are comprised of multi-family (apartment) loans. A total of $1.1 billion of these loans with a weighted average 4.8% yield remained outstanding at year-end 2021. Based upon scheduled 2022 maturities and potential prepayments, we believe that the majority of such loans may be repaid in 2022. While we continue to generate new REBL originations to offset resulting balance reductions and grow the portfolio, there can be no assurance as to the level of those new originations. As these loans are repaid, we may continue to recognize additional related prepayment income, which comprised the majority of “Net realized and unrealized gains on commercial loans (at fair value)” on the income statement in 2021. Additionally, we have established a goal of increasing returns on the institutional banking portfolio, by emphasizing higher yielding loans and other strategies.

In 2021, total non-interest expense increased $3.5 million to $168.4 million compared to $164.8 million in 2020, reflecting a $4.3 million increase in salaries and employee benefits expense and a $1.7 million increase in legal expense between those periods which were partially offset by a $4.2 million reduction in FDIC insurance expense. The increase in salaries and employee benefits reflected higher incentive compensation expense, including equity compensation, and higher compliance expense, primarily related to the payments business. The increase in legal expense reflected increased costs associated with the Cascade matter and two fact-finding inquiries by the SEC as described in Note O to the consolidated financial statements. The decrease in FDIC insurance expense is

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primarily due to a reduction in the Bank’s assessment rate, which primarily reflected the impact of the reclassification of certain of our deposits from brokered to non-brokered.

While the dollar amount of payment transactions grew in 2021 compared to 2020, prepaid, debit card and related fees did not grow proportionately, as transactions have been shifting to debit cards, for which margins are generally lower. Fees earned for volumes above certain thresholds for individual relationships may also be lower. Additionally, fees in 2021 were impacted by an affinity client relationship transitioning to its own bank, which offset growth in other debit and prepaid card account programs.

We continue our efforts to manage expense in line with revenue increases, to achieve the financial targets as described on our website.

At December 31, 2021, our total loans, including commercial loans, at fair value, amounted to $5.08 billion, an increase of $610.9 million, or 13.7%, over the $4.46 billion balance at December 31, 2020, reflecting growth in all major categories of loans. Our investment securities available-for-sale decreased $252.5 million to $953.7 million from $1.21 billion between those respective dates which reflected prepayments on mortgage-backed and other higher rate securities as a result of the lower rate environment.

Net Income: 2021 compared to 2020. Net income from continuing operations was $110.4 million in 2021 compared to $80.6 million in 2020 while income before taxes was, respectively, $144.2 million and $108.3 million, an increase of $35.9 million. In 2021, net interest income grew by $16.0 million and non-interest income increased $20.1 million. The $16.0 million, or 8.2%, increase in 2021 net interest income over 2020 resulted primarily from higher loan balances partially offset by reductions in securities interest resulting from lower balances, and lower yields which reflected the impact of Federal Reserve rate reductions. Loan interest in 2021 included $4.6 million of fees from a line of credit to another institution to fund PPP loans, which is not expected to recur and which partially offset the impact of decreases in other loan yields. The $20.1 million increase in non-interest income reflected an $18.8 million change in net realized and unrealized gains (losses) on commercial loans, primarily non-SBA CRE loans, at fair value. Unrealized losses were recognized in 2020 due to changes in fair value related to the COVID-19 pandemic versus 2021 income related to prepayments and payoffs of non-SBA CRE loans.

In 2021, total non-interest expense increased $3.5 million to $168.4 million, reflecting a $4.3 million increase in salaries and employee benefits and a $1.7 million increase in legal expense, partially offset by a $4.2 million reduction in FDIC insurance expense. The increase in salaries and employee benefits reflected higher incentive compensation expense, including equity compensation, and higher compliance expense, primarily related to the payments business. The increase in legal expense reflected increased costs associated with the Cascade matter and two fact-finding inquiries by the SEC as described in Note O to the consolidated financial statements. The decrease in FDIC insurance expense is primarily due to a reduction in the Bank’s assessment rate. The reduction in expense primarily reflected the cumulative impact of the reclassification of certain of our deposits from brokered to non-brokered on the assessment rate. Prior to the insurance rate reduction in third quarter 2021 to approximately 10 basis points annually of average liabilities, the rate approximated 16 basis points. We believe that the insurance rate will continue to be lower than the 16 basis points. However, the rate is subject to multiple factors which may significantly change the amount assessed. Accordingly, we cannot assure you that reduced rates will continue.

Reflecting these changes, net income from continuing operations amounted to $110.4 million in 2021 compared to $80.6 million in 2020, or continuing operations earnings per diluted share of $1.88 compared to $1.38 in 2020. Net income from discontinued operations was $212,000 for 2021 compared to a net loss of $512,000 for 2020. Including discontinued operations, diluted income per share was $1.88 for 2021 compared to $1.37 for 2020 on net income of $110.7 million and $80.1 million, respectively.

Net Income: 2020 compared to 2019. Net income from continuing operations was $80.6 million in 2020 compared to $51.3 million in 2019 while income before taxes was, respectively, $108.3 million and $72.5 million, an increase of $35.8 million. In 2020, net interest income grew by $53.6 million while non-interest income decreased $19.5 million. The $53.6 million, or 37.9%, increase in 2020 net interest income over 2019 resulted primarily from higher balances of loans previously originated for sale or securitization, and higher SBA and leasing balances. The reduction in non-interest income reflected $24.1 million of gains related to securitizations in 2019. In 2020 there were no securitizations, and net losses of $3.9 million on loans previously generated for sale or securitization were recognized primarily as a result of the Covid-19 pandemic. In 2020 compared to 2019, the primary drivers of fee income, prepaid, debit and related fees, increased 14.3% to $74.5 million. The increase reflected increased volumes of transactions including volume increases from new relationships.

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In 2020, total non-interest expense decreased $3.7 million to $164.8 million, reflecting a $7.5 million increase in salaries and employee benefits and a $2.8 million increase in FDIC insurance expense, partially offset by $8.9 million of civil money penalties in 2019. The increase in salaries and employee benefits reflected increases in incentive compensation, compliance, risk management and IT expense. The increase in FDIC insurance expense reflected balance sheet growth.

A 21% statutory federal corporate tax rate was effective for 2021, 2020 and 2019, in addition to income tax rates which vary in the states in which we operate. The combined effective federal and state income tax rate was 26% in 2020, which was lower than the 29% rate in 2019 primarily as a result of the non-deductibility of the $8.9 million of civil penalties in 2019. The 23% effective rate in 2021 reflected the impact of tax benefits related to stock-based compensation resulting from the increase in the Company’s stock price.

Reflecting these changes, net income from continuing operations amounted to $80.6 million in 2020 compared to $51.3 million in 2019, or continuing operations earnings per diluted share of $1.38 compared to $0.89 in 2019. Net loss from discontinued operations was $512,000 for 2020 compared to net income of $291,000 for 2019. Including discontinued operations, diluted income per share was $1.37 for 2020 compared to $0.90 for 2019 on net income of $80.1 million and $51.6 million, respectively.

Net Interest Income: 2021 compared to 2020. Our net interest income for 2021 increased to $210.9 million, an increase of $16.0 million, or 8.2%, from $194.9 million for 2020, reflecting an $11.3 million, or 5.4%, increase in interest income to $222.1 million from $210.8 million for 2020. The growth in interest income resulted primarily from higher loan balances, partially offset by the impact of lower securities balances, and lower yields on both loans and securities. Growth in interest income was also impacted by prepayments and payoffs of non-SBA commercial real estate loans which had been originated for securitization and are now held as interest earning assets in “Commercial loans, at fair value” on the balance sheet. Income related to those prepayments and payoffs comprised the majority of the “Net realized and unrealized gains (losses) on commercial loans (at fair value)” in the income statement in 2021. In the third quarter of 2021 we resumed origination of such non-SBA commercial real estate loans, which now comprise our real estate bridge lending portfolio. These loans are similar to those previously originated for securitization and are collateralized primarily by multi-family properties (apartment buildings). Our average loans and leases increased 16.8% to $4.60 billion in 2021 from $3.94 billion for 2020. The increase in loans reflected growth in SBLOC, IBLOC and investment advisor loans, SBA, direct lease financing and real estate bridge lending, partially offset by decreases in PPP loans. Small business loans have generally been comprised of SBA loans. However, in 2020 and 2021 they reflected balances of pandemic related PPP loans guaranteed by the U.S. government which repaid significant amounts of those loans in 2021, resulting in a decrease in that category. The balance of our commercial loans, at fair value also decreased primarily reflecting non-SBA CRE loan payoffs. As noted previously, in the third quarter of 2021 we resumed originating such loans, referred to as real estate bridge loans. Of the total $21.6 million increase in loan interest income on a tax equivalent basis, the largest increases were $10.7 million for SBLOC, IBLOC and investment advisor financing, $7.1 million for SBL and $2.8 million for leasing. The increase in SBL loan interest reflected $4.6 million of fees which were earned on a short-term line of credit to another institution to initially fund PPP loans which are not expected to recur. Our average investment securities were $1.06 billion for 2021 compared to $1.32 billion for 2020, while related interest income decreased $9.2 million on a tax equivalent basis primarily reflecting a decrease in balances and secondarily reflecting a decrease in yields. Yields on loans and securities decreased as a result of the impact of the Federal Reserve’s 2020 rate decreases on variable rate obligations, partially offset by the impact of the weighted average 4.8% interest rate floors on the non-SBA CRE loans, at fair value. While interest income increased by $11.3 million, interest expense decreased by $4.7 million or 29.4% to $11.2 million in 2021 from $15.9 million in 2020 as deposits also repriced to the lower rate environment. Decreases in deposit interest expense were partially offset by the full year impact of the senior debt issuance in August 2020.

Our net interest margin (calculated by dividing net interest income by average interest-earning assets) for 2021 decreased 10 basis points to 3.35% from 3.45% for 2020, as the decrease in the yield on interest-earning assets was greater than the decrease in the cost of funds. The average yield on our interest-earning assets decreased to 3.53% from 3.74% for 2020, a decrease of 21 basis points, while the cost of total deposits and interest-bearing liabilities decreased to 0.19% for 2021 from 0.30% for 2020, a decrease of 11 basis points. The net interest margins reflected the impact of weighted average 4.8% floors on non-SBA commercial real estate variable rate loans, previously originated for securitization, which significantly offset the impact of lower rates in the SBLOC and IBLOC portfolio. The SBLOC and IBLOC portfolio yield decreased to approximately 2.5% after the Federal Reserve rate reductions. However, that portfolio, due to the nature of the collateral, has experienced only insignificant credit losses. The net interest margin also reflected the impact of growth in higher yielding SBA loans and leases, which have yielded in the 5% to 6% range. The yield on loans in total decreased to 4.18% from 4.34%, a decrease of 16 basis points, while the yield on taxable investment securities decreased 16 basis points to 2.71% from 2.87%. In 2021, average demand and interest checking deposits amounted to $5.32 billion, compared to $4.86 billion in 2020, an increase of 9.4%, reflecting growth in debit, prepaid card account and other payments balances. The yield on

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those deposits decreased to 0.09% in 2021 compared to 0.23% in 2020, reflecting the full year impact of March 2020 Federal Reserve rate decreases. Savings and money market balances averaged $427.7 million in 2021 compared to $291.2 million in 2020 with an average 0.14% rate in 2021 compared to 0.15% in 2020. The $136.5 million increase in savings and money market between these respective periods reflected growth in interest-bearing accounts offered by our affinity group clients to prepaid and debit card account customers.

Net Interest Income: 2020 compared to 2019. Our net interest income for 2020 increased to $194.9 million, an increase of $53.6 million, or 37.9%, from $141.3 million for 2019, reflecting a $31.2 million, or 17.4%, increase in interest income to $210.8 million from $179.6 million for 2019. The increase in interest income reflected the impact of loan growth, including the impact of the decision to retain loans previously generated for sale or securitization. Our average loans and leases increased 63.0% to $3.94 billion in 2020 from $2.42 billion for 2019, while related interest income increased $43.7 million on a tax equivalent basis. The largest increase in average loans and leases was in commercial loans previously originated for sale, now retained on the balance sheet, which increased $864.1 million. Related interest income increased $36.4 million in 2020 compared to the prior year. Small business loan (primarily SBA) and leasing interest income respectively increased $8.1 million and $1.6 million. Notwithstanding significant increases in balances, SBLOC and IBLOC interest decreased by $1.8 million as a result of the Federal Reserve rate reductions. Our average investment securities were $1.32 billion for 2020 compared to $1.41 billion for 2019, while related interest income decreased $4.5 million on a tax equivalent basis primarily as a result of Federal Reserve rate reductions. Those rate reductions also contributed to the increase in net interest income as they were reflected in a decrease in interest expense of $22.4 million or 58.4% to $15.9 million, from $38.3 million in 2019.

Our net interest margin (calculated by dividing net interest income by average interest earning assets) for 2020 increased 13 basis points to 3.45% from 3.32% for 2019, as the decrease in cost of funds was greater than the decrease in the yield on earning assets. The average yield on our interest earning assets decreased to 3.74% from 4.18% for 2019, a decrease of 44 basis points, while the cost of total deposits and interest-bearing liabilities decreased to 0.30% for 2020 from 0.92% for 2019, a decrease of 62 basis points. The net interest margin increase reflected the impact of weighted average 4.8% floors on an average $1.4 billion portfolio of commercial real estate variable rate apartment loans, which were previously originated for sale or securitization, which significantly offset lower rates in the similarly sized SBLOC and IBLOC portfolio. That SBLOC and IBLOC portfolio yield decreased to approximately 2.5% after the Federal Reserve rate reductions. However, that portfolio, due to the nature of the collateral, has experienced only insignificant credit losses. The net interest margin also reflected the impact of growth in higher yielding SBA loans and leases, which have yielded in the 5% to 6% range. The yield on loans in total decreased to 4.34% from 5.25%, a decrease of 91 basis points. The yield on the investment portfolio decreased less, 14 basis points, but as noted previously, yields decreased further in 2021 in the securities and loan portfolios, as maturities repriced to a lower rate environment. In 2020, average demand and interest checking deposits amounted to $4.86 billion, compared to $3.82 billion in 2019, an increase of 27.4%, reflecting growth in debit and prepaid card account balances. The yield on those deposits decreased to 0.23% in 2020 compared to 0.80% in 2019. Savings and money market balances averaged $291.2 million in 2020 compared to $37.7 million in 2019 with an average 0.15% rate in 2020 compared to 0.48% in 2019. The $253.5 million increase in savings and money market between these respective periods reflected growth in interest-bearing accounts offered by our affinity group clients to prepaid and debit card account customers. The lower rates on these deposit categories also reflected the impact of Federal Reserve rate reductions.

51

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

[[GREPCENT_TABLE]]
[["","","Year ended December 31,"],["","","2021","","2020"],["","","Average","","","","","Average","","Average","","","","","Average"],["","","balance","","Interest","","rate","","balance","","Interest","","rate"],["","","","(dollars in thousands)"],["Assets:"],["Interest earning assets:"],["Loans, net of deferred loan fees and costs **","","$","4,597,977","","$","192,338","","","4.18%","","$","3,931,758","","$","170,449","","4.34%"],["Leases-bank qualified*","","","5,557","","","377","","","6.78%","","","8,885","","","647","","7.28%"],["Investment securities-taxable","","","1,059,229","","","28,661","","","2.71%","","","1,317,031","","","37,822","","2.87%"],["Investment securities-nontaxable*","","","3,757","","","130","","","3.46%","","","4,412","","","145","","3.29%"],["Interest earning deposits at Federal Reserve Bank","","","637,056","","","715","","","0.11%","","","381,290","","","1,885","","0.49%"],["Net interest earning assets","","","6,303,576","","","222,221","","","3.53%","","","5,643,376","","","210,948","","3.74%"],["Allowance for credit losses","","","(16,469)","","","","","","","","","(13,878)"],["Assets held-for-sale from discontinued operations","","","95,527","","","3,096","","","3.24%","","","127,519","","","4,222","","3.31%"],["Other assets","","","217,476","","","","","","","","","226,210"],["","","$","6,600,110","","","","","","","","$","5,983,227"],["Liabilities and Shareholders' Equity:"],["Deposits:"],["Demand and interest checking","","$","5,321,283","","$","5,022","","","0.09%","","$","4,864,236","","$","11,356","","0.23%"],["Savings and money market","","","427,708","","","601","","","0.14%","","","291,204","","","442","","0.15%"],["Time","","","\u2014","","","\u2014","","","\u2014","","","79,439","","","1,483","","1.87%"],["Total deposits","","","5,748,991","","","5,623","","","0.10%","","","5,234,879","","","13,281","","0.25%"],["Short-term borrowings","","","19,958","","","49","","","0.25%","","","27,322","","","198","","0.72%"],["Repurchase agreements","","","41","","","\u2014","","","\u2014","","","49","","","\u2014","","\u2014"],["Subordinated debt","","","13,401","","","449","","","3.35%","","","13,401","","","524","","3.91%"],["Senior debt","","","100,283","","","5,118","","","5.10%","","","38,532","","","1,913","","4.96%"],["Total deposits and liabilities","","","5,882,674","","","11,239","","","0.19%","","","5,314,183","","","15,916","","0.30%"],["Other liabilities","","","100,627","","","","","","","","","137,983"],["Total liabilities","","","5,983,301","","","","","","","","","5,452,166"],["Shareholders' equity","","","616,809","","","","","","","","","531,061"],["","","$","6,600,110","","","","","","","","$","5,983,227"],["Net interest income on tax equivalent basis *","","","","","$","214,078","","","","","","","","$","199,254"],["Tax equivalent adjustment","","","","","","106","","","","","","","","","166"],["Net interest income","","","","","$","213,972","","","","","","","","$","199,088"],["Net interest margin *","","","","","","","","","3.35%","","","","","","","","3.45%"],["* Fully taxable equivalent basis, using a 21% statutory Federal tax rate in 2021 and 2020."],["** Includes commercial loans, at fair value. All periods include non-accrual loans."],["NOTE: In the table above, the 2021 interest on loans reflects $4.6 million of interest and fees which were earned on a short-term line of credit to another institution to initially fund PPP loans, which did not significantly increase average loans or assets and which are not expected to recur. Interest on loans in each of 2021 and 2020 also includes $5.8 million of interest and fees on PPP loans. Increases in interest earning deposits at the Federal Reserve Bank reflect increased deposits resulting from stimulus payments distributed to a large segment of the population, resulting from December 2020 federal legislation."]]
[[/GREPCENT_TABLE]]

52

[[GREPCENT_TABLE]]
[["","","Year ended December 31,"],["","","2019"],["","","Average","","","","Average"],["","","balance","","Interest","","rate"],["","","","(dollars in thousands)"],["Assets:"],["Interest earning assets:"],["Loans, net of deferred loan fees and costs**","","$","2,402,686","","$","126,176","","","5.25%"],["Leases-bank qualified*","","","14,968","","","1,177","","","7.86%"],["Investment securities-taxable","","","1,406,247","","","42,286","","","3.01%"],["Investment securities-nontaxable*","","","6,533","","","215","","","3.29%"],["Interest earning deposits at Federal Reserve Bank","","","472,279","","","10,007","","","2.12%"],["Net interest earning assets","","","4,302,713","","","179,861","","","4.18%"],["Allowance for credit losses","","","(9,696)"],["Assets held-for-sale from discontinued operations","","","169,986","","","6,710","","","3.95%"],["Other assets","","","254,674"],["","","$","4,717,677"],["Liabilities and Shareholders' Equity:"],["Deposits:"],["Demand and interest checking","","$","3,817,176","","$","30,664","","","0.80%"],["Savings and money market","","","37,671","","","181","","","0.48%"],["Time","","","170,438","","","3,555","","","2.09%"],["Total deposits","","","4,025,285","","","34,400","","","0.85%"],["Short-term borrowings","","","129,031","","","3,131","","","2.43%"],["Repurchase agreements","","","90","","","\u2014","","","\u2014"],["Subordinated debt","","","13,401","","","750","","","5.60%"],["Total deposits and interest-bearing liabilities","","","4,167,807","","","38,281","","","0.92%"],["Other liabilities","","","104,233"],["Total liabilities","","","4,272,040"],["Shareholders' equity","","","445,637"],["","","$","4,717,677"],["Net interest income on tax equivalent basis *","","","","","$","148,290"],["Tax equivalent adjustment","","","","","","292"],["Net interest income","","","","","$","147,998"],["Net interest margin *","","","","","","","","","3.32%"]]
[[/GREPCENT_TABLE]]

* Fully taxable equivalent basis, using a 21% statutory Federal tax rate.

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

In 2021 compared to 2020, average interest-earning assets increased to $6.30 billion, an increase of $660.2 million, or 11.7%, from 2020. The increase reflected a $662.9 million, or 16.8%, increase in average loans and leases. The increase in average loans reflected growth in SBLOC, IBLOC and investment advisor financing, small business (primarily SBA exclusive of short term PPP loans), direct lease financing and real estate bridge lending. Average balances of investment securities decreased $258.5 million, or 19.6%, reflecting the prepayment of higher rate securities in a lower interest rate environment. Yields on loans and securities decreased as a result of the impact of the Federal Reserve’s March 2020 rate decreases on variable rate obligations, partially offset by the weighted average 4.8% interest rate floors on the non-SBA CRE loans, at fair value. In 2021, average demand and interest checking deposits amounted to $5.32 billion, compared to $4.86 billion in 2020, an increase of 9.4%, reflecting growth in debit and prepaid card account balances.

In 2020 compared to 2019, average interest earning assets increased to $5.64 billion, an increase of $1.34 billion, or 31.2%, from 2019. The increase reflected a $1.52 billion, or 63.0%, increase in average loans and leases. The increase resulted primarily from higher balances of loans previously originated for sale into securitizations and loan growth in SBLOC and IBLOC, small business (primarily SBA) and leasing. Average balances of investment securities decreased $91.3 million, or 6.5%, as prepayments of higher yielding securities accelerated after the Federal Reserve rate reductions in first quarter 2020. In 2020, average demand and interest

53

checking deposits amounted to $4.86 billion, compared to $3.82 billion in 2019, an increase of 27.4%, reflecting growth in debit and prepaid card account balances.

Volume and Rate Analysis. The following table sets forth the changes in net interest income attributable to either changes in volume (average balances) or to changes in average rates from 2019 through 2021 on a tax equivalent basis. The changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate.

[[GREPCENT_TABLE]]
[["","","2021 versus 2020","","2020 versus 2019"],["","","Due to change in:","","Due to change in:"],["","","Volume","","Rate","","Total","","Volume","","Rate","","Total"],["","","(in thousands)"],["Interest income:"],["Taxable loans net of unearned discount","","$","27,604","","$","(5,715)","","$","21,889","","$","60,996","","$","(16,723)","","$","44,273"],["Bank qualified tax free leases net of"],["unearned discount","","","(228)","","","(42)","","","(270)","","","(448)","","","(82)","","","(530)"],["Investment securities-taxable","","","(7,073)","","","(2,088)","","","(9,161)","","","(2,612)","","","(1,852)","","","(4,464)"],["Investment securities-nontaxable","","","(23)","","","8","","","(15)","","","(70)","","","\u2014","","","(70)"],["Interest earning deposits","","","810","","","(1,980)","","","(1,170)","","","(1,631)","","","(6,491)","","","(8,122)"],["Assets held-for-sale from discontinued"],["operations","","","(1,038)","","","(88)","","","(1,126)","","","(1,512)","","","(976)","","","(2,488)"],["Total interest earning assets","","","20,052","","","(9,905)","","","10,147","","","54,723","","","(26,124)","","","28,599"],["Interest expense:"],["Demand and interest checking","","","1,067","","","(7,401)","","","(6,334)","","","8,833","","","(28,141)","","","(19,308)"],["Savings and money market","","","189","","","(30)","","","159","","","291","","","(30)","","","261"],["Time","","","(741)","","","(742)","","","(1,483)","","","(1,732)","","","(340)","","","(2,072)"],["Total deposit interest expense","","","515","","","(8,173)","","","(7,658)","","","7,392","","","(28,511)","","","(21,119)"],["Short-term borrowings","","","(43)","","","(106)","","","(149)","","","(1,552)","","","(1,381)","","","(2,933)"],["Subordinated debt","","","\u2014","","","(75)","","","(75)","","","\u2014","","","(226)","","","(226)"],["Senior debt","","","3,150","","","55","","","3,205","","","1,913","","","\u2014","","","1,913"],["Total interest expense","","","3,622","","","(8,299)","","","(4,677)","","","7,753","","","(30,118)","","","(22,365)"],["Net interest income:","","$","16,430","","$","(1,606)","","$","14,824","","$","46,970","","$","3,994","","$","50,964"]]
[[/GREPCENT_TABLE]]

Provision for Credit Losses. Our provision for credit losses was $3.1 million for 2021, $6.4 million for 2020 and $4.4 million for 2019. Provisions are based on our evaluation of the adequacy of our allowance for credit losses, particularly in light of the estimated impact of charge-offs and the potential impact of current economic conditions which might impact our borrowers. The reduction in 2021 compared to each of the prior two years reflected the impact of lower net charge-offs and the reversal of charges in 2021 for economic factors related to the COVID-19 pandemic which were incurred in 2020. At December 31, 2021, our allowance for credit losses amounted to $17.8 million, or 0.48%, of total loans. We believe that our allowance is adequate to cover current and future expected losses, consistent with the newly implemented CECL guidance. For more information about our provision and allowance for credit losses and our loss experience see “—Financial Condition—Allowance for Credit Losses” and “—Summary of Loan and Lease Loss Experience,” below.

Non-Interest Income: 2021 compared to 2020. Non-interest income was $104.7 million for 2021 compared to $84.6 million for 2020. The $20.1 million, or 23.8%, increase between those respective periods was primarily the result of the change in net realized and unrealized gains (losses) on non-SBA CRE loans, at fair value reflected in the income statement in “Net realized and unrealized gains (losses) on commercial loans”, which increased to a gain of $14.9 million from a loss of $3.9 million. The $18.8 million change was primarily the result of 2021 income related to prepayments and payoffs of non-SBA CRE loans in 2021 versus unrealized losses in 2020 due to changes in fair value related to the COVID-19 pandemic. In the third quarter of 2021, we resumed originating such loans. Prepaid and debit card and related fees increased $189,000, or 0.3%, to $74.7 million for 2021 from $74.5 million for 2020. The increase reflected higher transaction volume. Those fees in 2021 were impacted by an affinity client relationship transitioning to its own bank, which offset growth in other debit and prepaid card account programs. Related fees in this category include income related to the use of cash in ATMs for prepaid payroll cardholders. Automated Clearing House (“ACH”), card and other payment processing fees increased $425,000, or 6.0%, to $7.5 million for 2021 compared to $7.1 million for 2020, reflecting increased rapid funds transfer volume. Leasing related income increased $3.2 million, or 96.0%, to $6.5 million for 2021 from $3.3 million for 2020. The increase reflected the impact of the reopening of vehicle auctions after COVID-19 pandemic shutdowns, and higher vehicle market prices due to vehicle shortages. Other non-interest income decreased $2.4 million, or 66.6%, to $1.2 million in 2021 from $3.7 million in 2020, which had included the recovery of certain fees which had previously been written off.

54

Non-Interest Income: 2020 compared to 2019. Non-interest income was $84.6 million for 2020 compared to $104.1 million for 2019. The $19.5 million, or 18.7%, reduction resulted primarily from the $27.9 million change in net realized and unrealized gains (losses) on commercial loans previously originated for sale or securitization which was partially offset by an increase in prepaid and debit card and related fees. Prepaid and debit card and related fees increased $9.3 million, or 14.3%, to $74.5 million for 2020 from $65.1 million for 2019. The increase reflected higher transactional volume including increases from new relationships. Related fees in this category include income related to the use of cash in ATMs for prepaid payroll cardholders. Automated Clearing House (“ACH”), card and other payment processing fees decreased $2.3 million, or 24.3%, to $7.1 million for 2020 compared to $9.4 million for 2019. The decrease reflected the exit of higher risk ACH customers and the exit of a relationship with an ownership change. Net realized and unrealized gains (losses) on commercial loans previously originated for sale reflected a loss of $3.9 million in 2020 resulting primarily from the impact of the Covid-19 pandemic, compared to a gain of $24.1 million in the prior year. In 2019 the vast majority of the $24.1 million gain was realized upon the closing of two securitizations, while the $3.9 million 2020 loss resulted from fair value adjustments to our portfolio of commercial loans held at fair value, including losses on related hedges. Total fair value adjustments related to the previously securitized loans now held on the balance sheet were $5.6 million, but were partially offset by $1.7 million of exit fees on loan payoffs in that portfolio. We are planning to hold the loans which were originated for securitizations in our portfolio and are not currently planning any further securitizations. Leasing related income was comparable, increasing $51,000, or 1.6%, to $3.3 million for 2020 from $3.2 million for 2019. Other non-interest income increased $1.4 million, or 60.2%, to $3.7 million in 2020 from $2.3 million in 2019. The increase reflected the recovery of certain prepaid fees which were written off in prior years and other legal settlements.

Non-Interest Expense: 2021 compared to 2020. Total non-interest expense in 2021 was $168.4 million, an increase of $3.5 million, or 2.1%, from the $164.8 million in 2020. Salaries and employee benefits expense increased to $106.0 million, an increase of $4.3 million, or 4.2%, from $101.7 million for 2020. Higher salary expense in 2021 reflected higher incentive compensation expense, including equity compensation, and higher compliance expense, primarily related to the payments business. Depreciation and amortization decreased $299,000, or 9.3%, to $2.9 million in 2021 from $3.2 million in 2020 which reflected reduced spending on fixed assets and equipment. Rent and occupancy decreased $525,000, or 9.5%, to $5.0 million in 2021 from $5.5 million in 2020, reflecting a reduction in leased space and a relocation to lower cost space. Data processing expense decreased $48,000, or 1.0%, to $4.7 million in 2021 from $4.7 million in 2020. Printing and supplies decreased $143,000, or 27.8%, to $371,000 in 2021 from $514,000 in 2020, reflecting fewer paper based accounts and processes. Audit expense increased $408,000, or 38.5%, to $1.5 million in 2021 from $1.1 million in 2020, reflecting an increase in rates. Legal expense increased $1.7 million, or 33.2%, to $6.8 million for 2021 from $5.1 million in 2020, reflecting increased costs associated with the Cascade matter and two fact-finding inquiries by the SEC as described in Note O to the consolidated financial statements. Amortization of intangible assets decreased $158,000, or 28.4%, to $398,000 for 2021 from $556,000 for 2020. The decrease represented the full amortization in 2020 of software rights acquired in 2012. FDIC insurance expense decreased $4.2 million, or 43.0%, to $5.6 million for 2021 from $9.8 million in 2020, primarily due to a reduction in the Bank’s assessment rate. The reduction in rate primarily reflected the cumulative impact of the reclassification of certain of our deposits from brokered to non-brokered. Prior to the insurance rate reduction in the second half of 2021 to less than 10 basis points annually of average liabilities, the rate approximated 16 basis points. We believe that the insurance rate will continue to be lower than the 16 basis points in 2022. However, the rate is subject to multiple factors which may significantly change the amount assessed. Accordingly, we cannot assure you that reduced insurance rates will continue. Software expense increased $1.6 million, or 11.6%, to $15.7 million in 2021 from $14.0 million in 2020 which reflected expenditures for information technology to improve efficiency and scalability, including expenses related to remote operations and cybersecurity and upgrades for SBA loan processing. Insurance expense increased $1.1 million, or 38.3%, to $3.9 million in 2021 from $2.8 million in 2020, reflecting higher rates. Telecom and IT network communications expense decreased $54,000, or 3.3%, to $1.6 million in 2021 from $1.6 million in 2020. Consulting expense increased $65,000, or 4.8%, to $1.4 million in 2021 from $1.4 million in 2020. Other non-interest expense decreased $198,000, or 1.6%, to $12.5 million in 2021 from $12.7 million in 2020. The $198,000 decrease reflected a $156,000 reduction in travel expenses.

Non-Interest Expense: 2020 compared to 2019. Total non-interest expense in 2020 was $164.8 million, a decrease of $3.7 million, or 2.2%, over the $168.5 million in 2019. Salaries and employee benefits expense increased to $101.7 million, an increase of $7.5 million, or 7.9%, from $94.3 million for 2019. Higher salary expense in 2020 reflected higher incentive compensation expense, and higher compliance, risk management and IT expense, which were primarily related to the payments business. Depreciation and amortization decreased $494,000, or 13.4%, to $3.2 million in 2020 from $3.7 million in 2019 which reflected reduced spending on fixed assets and equipment. Rent and occupancy decreased $1.1 million, or 16.4%, to $5.5 million in 2020 from $6.6 million in 2019, reflecting the impact of office relocations. Data processing expense decreased $182,000, or 3.7%, to $4.7 million in 2020 from $4.9 million in 2019. The decrease reflected reduced check clearing and other costs related to non-electronic account

55

processing, as paper based accounts and transactions decreased, while electronic transaction volume increased. Printing and supplies decreased $123,000, or 19.3%, to $514,000 in 2020 from $637,000 in 2019, reflecting decreased levels of paper based accounts and transactions. Audit expense decreased $724,000, or 40.6%, to $1.1 million in 2020 from $1.8 million in 2019 which reflected decreased regulatory and tax compliance audit fees. Legal expense decreased $178,000, or 3.3%, to $5.1 million for 2020 from $5.3 million in 2019, reflecting decreased costs associated with two fact-finding inquiries by the SEC as described in Note O to the financial statements. Amortization of intangible assets decreased $975,000, or 63.7%, to $556,000 for 2020 from $1.5 million for 2019. The reduction reflected the completion of the amortization of our customer list intangible for the Stored Value Solutions purchase from Marshall Bankfirst. FDIC insurance expense increased $2.8 million, or 39.6%, to $9.8 million for 2020 from $7.0 million in 2019, primarily due to an increase in average liabilities, against which insurance rates are applied. Software expense increased $1.3 million, or 10.2%, to $14.0 million in 2020 from $12.7 million in 2019 which reflected increased expenditures for information technology infrastructure to improve efficiency and scalability, especially for SBLOC and IBLOC loans. Insurance expense increased $343,000, or 13.9%, to $2.8 million in 2020 from $2.5 million in 2019, reflecting higher rates and higher coverage limits. Telecom and IT network communications expense increased $130,000, or 8.7%, to $1.6 million in 2020 from $1.5 million in 2019. The increase reflected migration to a new fiber optic network to improve performance and efficiency. Consulting expense decreased $1.9 million, or 58.0%, to $1.4 million in 2020 from $3.2 million in 2019, reflecting decreased BSA and other regulatory consulting. In 2019, civil money penalties were assessed in the amount of $8.9 million, comprised of a $7.5 million FDIC settlement and a $1.4 million SEC settlement. Additionally, lease termination expense amounted to $908,000 in 2019. Other non-interest expense decreased $174,000, or 1.3%, to $12.7 million in 2020 from $12.9 million in 2019 reflecting $2.0 million of decreased travel expense, partially offset by increases of $962,000 in SBA guarantee fees, $548,000 in marketing expense and $367,000 in other operating taxes.

Income Tax Benefit and Expense

Income tax expense for continuing operations was $33.7 million, $27.7 million and $21.2 million, respectively, for 2021, 2020 and 2019. The effective tax rate of 23.4% in 2021 compared to 25.6% in 2020 and 29.3% in 2019. The lower effective rate in 2021 reflected the impact of tax benefits related to stock-based compensation resulting from the increase in the Company’s stock price. The difference between those rates and the federal statutory rate of 21% also reflected the impact of state income taxes. The higher rate in 2019 resulted primarily from the non-deductibility of $8.9 million of civil money penalties in that year.

Liquidity and Capital Resources

Liquidity defines our ability to generate funds to support asset growth, meet deposit withdrawals, satisfy borrowing needs and otherwise operate on an ongoing basis. Based on our sources of funding and liquidity discussed below, we believe we have sufficient liquidity and capital resources available for our needs in the next 12 months and for the foreseeable future. We invest the funds we do not need for daily operations primarily in our interest-bearing account at the Federal Reserve. Interest-bearing balances at the Federal Reserve Bank, maintained on an overnight basis, averaged $208.1 million for the fourth quarter of 2021, compared to the prior year fourth quarter average of $193.6 million.

Our primary source of funding has been deposits. Average deposits in 2021 increased by $514.1 million, or 9.8%, to $5.75 billion compared to the prior year. Balances in both years reflected the temporary impact of government stimulus payments and growth in other debit and prepaid card account balances, partially offset in 2021 by the impact of a client relationship transitioning to its own bank. Average savings and money market account balances increased $136.5 million between those periods, reflecting growth in interest-bearing accounts offered by our affinity group clients to prepaid and debit card account customers. A portion of 2021 deposit growth resulted from economic stimulus payments related to the pandemic, and was temporary. Average quarterly deposits peaked in the second quarter of 2021, at $6.26 billion, and decreased to $5.31 billion in the fourth quarter. We believe that the majority of stimulus payment related deposits have exited, and do not expect comparable reductions going forward. Overnight borrowings are also periodically utilized as a funding source to facilitate cash management, but average balances have generally not been significant.

Our primary source of liquidity is available-for-sale securities which amounted to $953.7 million at December 31, 2021 compared to $1.21 billion at December 31, 2020. In excess of $400 million of our available-for-sale securities are U.S. government agency securities which are highly liquid and which may be pledged as collateral for our Federal Home Loan Bank (“FHLB”) line of credit. Loan repayments, also a source of funds, were exceeded by new loan disbursements during 2021. As a result, at December 31, 2021 outstanding loans amounted to $3.75 billion, compared to $2.65 billion at the prior year end, an increase of $1.09 billion, which was partially funded by deposits, and prepayments on securities and commercial loans, at fair value. Commercial loans, at fair value decreased to $1.33 billion from $1.81 billion between those respective dates, a decrease of $484.0 million, which also provided

56

funding for other loan categories. In 2019 and previous years, commercial loans, at fair value were generally originated for sale into securitizations at six month intervals, but in 2020 we decided to retain such loans on the balance sheet. After we suspended originating such loans after first quarter 2020, we resumed originating non-SBA CRE loans in the third quarter of 2021. Our liquidity planning has not previously placed undue reliance on securitizations, and while our future planning excludes the impact of securitizations, other liquidity sources, primarily deposits, are determined to be adequate.

While we do not have a traditional branch system, we believe that our core deposits, which include our demand, interest checking, savings and money market accounts, have similar characteristics to those of a bank with a branch system. The majority of our deposit accounts are generated by third parties and were, prior to June 30, 2021, classified as brokered by the FDIC. If the Bank ceases to be categorized as “well capitalized” under banking regulations, it will be prohibited from accepting, renewing or rolling over brokered deposits without the consent of the FDIC. In such a case, the FDIC’s refusal to grant consent to our accepting, renewing or rolling over brokered deposits could effectively restrict or eliminate the ability of the Bank to operate its business lines as presently conducted. In December 2020, the FDIC issued a new regulation which resulted in the majority of our deposits being reclassified from brokered to non-brokered. Certain accounts currently remain classified as brokered and require applications to the FDIC for reclassification. As of December 31, 2021, approximately $2.04 billion of our total deposit accounts of $5.98 billion were not insured by FDIC insurance, which requires identification of the depositor and is limited to $250,000 per identified depositor. Uninsured accounts may represent a greater liquidity risk than FDIC-insured accounts, should large depositors withdraw funds as a result of negative financial developments either at the Bank or in the economy. Significant amounts of our uninsured deposits are comprised of small balances, such as anonymous gift cards and corporate incentive cards for which there is no identified depositor. We do not believe that such uninsured accounts present a significant liquidity risk.

We focus on customer service which we believe has resulted in a history of customer loyalty. Stability, lower cost compared to certain other funding sources and customer loyalty comprise key characteristics of core deposits which we believe are comparable to core deposits of peers with branch systems. Certain components of our deposits do experience seasonality, creating greater excess liquidity at certain times in 2021. The largest deposit inflows have generally occurred in the first quarter of the year when certain of our accounts are credited with tax refund payments from the U.S. Treasury.

While consumer deposit accounts including prepaid and debit card accounts comprise the majority of our funding needs, we maintain secured borrowing lines with the FHLB and the Federal Reserve. As of December 31, 2021, we had a line of credit with the Federal Reserve which approximated $1 billion, which may be collateralized by various types of loans, but which we generally have not used. To mitigate the impact of the COVID-19 pandemic, the Federal Reserve has encouraged banks to utilize their lines to maximize the amount of funding available for credit markets. Accordingly, the Bank has borrowed on its line on an overnight basis and may do so in the future. The amount of loans pledged varies and the collateral may be unpledged at any time to the extent remaining collateral value exceeds advances. Additionally, we have pledged in excess of $1 billion of multi-family apartment loans to the FHLB, with in excess of $1 billion of availability on our line of credit, which we can access at any time. As noted previously, that line may be increased by $400 million by pledging our U.S. government agency securities. As of December 31, 2021, we had no amount outstanding on the Federal Reserve line or on our FHLB line. We expect to continue to maintain our facilities with the FHLB and Federal Reserve, which, with the $400 million of U.S. government agency securities, represent our most readily accessible liquidity sources. We actively monitor our positions and contingent funding sources daily. As discussed later in this section, in 2020, we issued $100 million in senior notes, providing additional liquidity to our holding company.

Included in our cash and cash-equivalents at December 31, 2021, were $596.4 million of interest-earning deposits, which primarily consisted of deposits with the Federal Reserve. These amounts may vary on a daily basis.

In 2021, $492.3 million of securities sales and repayments exceeded purchases of $259.1 million. In 2020, $233.8 million of securities sales and repayments exceeded purchases of $34.7 million. In 2019, $173.9 million of securities sales and repayments exceeded purchases of $157.5 million. As shown in the consolidated statements of cash flows, cash required to fund loans was $1.10 billion in 2021, $836.2 million in 2020 and $322.6 million in 2019.

At December 31, 2021, we had outstanding commitments to fund loans, including unused lines of credit, of $2.15 billion, the vast majority of which are SBLOC lines of credit which are variable rate. We attempt to increase such line usage; however, usage percentages have been historically consistent and the majority of these lines of credit have historically not been drawn. The recorded amount of such commitments has, for many accounts, been based on the full amount of collateral in a customer’s investment account. Accordingly, the funding requirements for such commitments occur on a measured basis over time and are expected to be funded by deposit growth. Additionally, these loans are “demand” loans and as such, represent a contingency source of funding.

57

As a holding company conducting substantially all of our business through our subsidiaries, our near term needs for liquidity consist principally of cash needed to make required interest payments on our trust preferred securities and senior debt, while our liquidity consists primarily of dividends from the Bank to the holding company. In the third quarter of 2020, holding company cash was increased by approximately $98.2 million as a result of the net proceeds of a senior debt offering. As of December 31, 2021, we had cash reserves of approximately $68.4 million at the holding company. The semi-annual interest payments on the $100.0 million of senior debt are approximately $2.4 million based on a fixed rate of 4.75%. Current quarterly interest payments on the $13.4 million of subordinated debentures are approximately $118,000 based on a floating rate of 3.25% over LIBOR. The senior debt matures in August 2025 and the subordinated debentures mature in March 2038. In lieu of repayment of debt from Bank dividends, industry practice includes the issuance of new debt to repay maturing debt.

We must comply with capital adequacy guidelines issued by the FDIC. A bank must, in general, have a Tier 1 leverage ratio of 5.0%, a ratio of Tier 1 capital to risk-weighted assets of 8.0%, a ratio of total capital to risk-weighted assets of 10.0% and a ratio of common equity to risk-weighted assets of 6.50% to be considered “well capitalized.” The Tier 1 leverage ratio is the ratio of Tier 1 capital to average assets for the most recent quarter. Tier 1 capital includes common shareholders’ equity, certain qualifying perpetual preferred stock and minority interests in equity accounts of consolidated subsidiaries, less intangibles. At December 31, 2021, we were “well capitalized” under banking regulations.

The following table sets forth our regulatory capital amounts and ratios for the periods indicated:

[[GREPCENT_TABLE]]
[["","","Tier 1 capital","","Tier 1 capital","","Total capital","","Common equity"],["","","to average","","to risk-weighted","","to risk-weighted","","tier 1 to risk-"],["","","assets ratio","","assets ratio","","assets ratio","","weighted assets"],["As of December 31, 2021"],["The Bancorp, Inc.","","10.40%","","14.72%","","15.13%","","14.72%"],["The Bancorp Bank","","10.98%","","15.48%","","15.88%","","15.48%"],["\"Well capitalized\" institution (under FDIC regulations-Basel III)","","5.00%","","8.00%","","10.00%","","6.50%"],["As of December 31, 2020"],["The Bancorp, Inc.","","9.20%","","14.43%","","14.84%","","14.43%"],["The Bancorp Bank","","9.11%","","14.27%","","14.68%","","14.27%"],["\"Well capitalized\" institution (under FDIC regulations)","","5.00%","","8.00%","","10.00%","","6.50%"]]
[[/GREPCENT_TABLE]]

Asset and Liability Management

The management of rate sensitive assets and liabilities is essential to controlling interest rate risk and optimizing interest margins. An interest rate sensitive asset or liability is one that, within a defined time period, either matures or experiences an interest rate change in line with general market rates. Interest rate sensitivity measures the relative volatility of an institution’s interest margin resulting from changes in market interest rates. While it is difficult to predict the impact of inflation and responsive Federal Reserve rate changes on our net interest income, the Federal Reserve has historically utilized interest rate increases in the overnight federal funds rate as one tool in fighting inflation. Our largest funding source, prepaid and debit card accounts, contractually adjust to only a portion of increases or decreases in rates which are largely determined by such Federal Reserve actions. That pricing has generally supported the maintenance of a balance sheet for which net interest income tends to increase with increases in rates. While deposits reprice to only a portion of rate increases, interest earning assets tend to adjust more fully to rate increases at contractual pricing intervals which may be monthly or up to several years. Most of our loans and securities reprice monthly or quarterly, although some reprice over longer periods. Additionally, the impact of loan interest rate floors which must be exceeded before rates on certain loans increase, may result in decreases in net interest income with lesser increases in rates. Based upon our December 31, 2021 balance sheet modeling, a cumulative increase of 150 basis points in Federal Reserve rate increases might be required to increase net interest income.

As a financial institution, potential interest rate volatility is a primary component of our market risk. Fluctuations in interest rates will ultimately impact the level of our earnings and the market value of our interest-earning assets, other than those with short-term maturities. We do not own any trading assets. We used hedging transactions only for fixed rate commercial loans previously originated for sale into secondary securities markets. We no longer originate loans for sale or securitization and no longer engage in new hedging transactions.

58

We have adopted policies designed to manage net interest income and preserve capital over a broad range of interest rate movements. To effectively administer the policies and to monitor our exposure to fluctuations in interest rates, we maintain an asset/liability committee, consisting of the Bank’s Chief Executive Officer, Chief Accounting Officer, Chief Financial Officer, Chief Credit Officer and others. This committee meets quarterly to review our financial results, develop strategies to optimize margins and to respond to market conditions. The primary goal of our policies is to optimize margins and manage interest rate risk, subject to overall policy constraints for prudent management of interest rate risk.

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

Both interest rate sensitivity modeling and gap analysis are done at a specific point in time and involve a variety of significant estimates and assumptions. Interest rate sensitivity modeling requires, among other things, estimates of how much and when yields and costs on individual categories of interest-earning assets and interest-bearing liabilities will respond to general changes in market rates, future cash flows and discount rates. Gap analysis requires estimates as to when individual categories of interest sensitive assets and liabilities will reprice, and assumes that assets and liabilities assigned to the same repricing period will reprice at the same time and in the same amount. Gap analysis does not account for the fact that repricing of assets and liabilities is discretionary and subject to competitive and other pressures. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities. A gap is considered negative when the amount of interest rate sensitive liabilities exceeds interest rate sensitive assets. During a period of falling interest rates, a positive gap would tend to adversely affect net interest income, while a negative gap would tend to result in an increase in net interest income, all else equal. During a period of rising interest rates, a positive gap would tend to result in an increase in net interest income while a negative gap would tend to affect net interest income adversely.

The following table sets forth the estimated maturity or repricing structure of our interest-earning assets and interest-bearing liabilities at December 31, 2021. Except as stated below, the amounts of assets or liabilities shown which reprice or mature during a particular period were determined in accordance with the contractual terms of each asset or liability. The majority of demand and interest-bearing demand deposits and savings deposits are assumed to be “core” deposits, or deposits that will generally remain with us regardless of market interest rates. We estimate the repricing characteristics of these deposits based on historical performance, past experience, judgmental predictions and other deposit behavior assumptions. However, we may choose not to reprice liabilities proportionally to changes in market interest rates for competitive or other reasons. Additionally, although non-interest-bearing demand accounts are not paid interest, we estimate certain of the balances will reprice as a result of the contractual fees that are paid to the affinity groups which are based upon a rate index, and therefore are included in interest expense. We have adjusted the demand and interest checking balances in the table downward, to better reflect the impact of their partial adjustment to changes in rates. Loans and security balances, which adjust more fully to market rate changes, are based upon actual balances. The largest segment of loans at their interest rate floors are included in commercial loans, at fair value and totaled approximately $1.13 billion at December 31, 2021. Additionally, most of the $788 million of the IBLOC loans at December 31, 2021 were at their floors. The table does not assume any prepayment of fixed-rate loans and mortgage-backed securities based on their anticipated cash flow, including prepayments based on historical data and current market trends. The table does not necessarily indicate the impact of general interest rate movements on our net interest income because the repricing and related behavior of certain categories of assets and liabilities is beyond our control as, for example, prepayments of loans and withdrawal of deposits. As a result, certain assets and liabilities indicated as repricing within a stated period may in fact reprice at different times and at different rate levels. While the estimated repricing table below shows a positive gap, interest rate increases of up to 150 basis points might be required to increase net interest income, as a result of the impact of interest rate floors.

59

[[GREPCENT_TABLE]]
[["","","1-90","","91-364","","1-3","","3-5","","Over 5"],["","","Days","","Days","","Years","","Years","","Years"],["","","(dollars in thousands)"],["Interest earning assets:"],["Commercial loans, at fair value","","$","1,211,653","","$","9,402","","$","28,372","","$","12,891","","$","64,518"],["Loans, net of deferred loan fees and costs","","","2,835,045","","","78,795","","","246,493","","","356,088","","","230,803"],["Investment securities","","","503,803","","","57,827","","","161,147","","","140,024","","","90,908"],["Interest earning deposits","","","596,402","","","\u2014","","","\u2014","","","\u2014","","","\u2014"],["Total interest earning assets","","","5,146,903","","","146,024","","","436,012","","","509,003","","","386,229"],["Interest-bearing liabilities:"],["Demand and interest checking","","","3,636,595","","","52,978","","","52,978","","","\u2014","","","\u2014"],["Savings and money market","","","103,887","","","207,773","","","103,886","","","\u2014","","","\u2014"],["Securities sold under agreements to repurchase","","","42","","","\u2014","","","\u2014","","","\u2014","","","\u2014"],["Senior debt and subordinated debentures","","","13,401","","","\u2014","","","\u2014","","","98,682","","","\u2014"],["Total interest-bearing liabilities","","","3,753,925","","","260,751","","","156,864","","","98,682","","","\u2014"],["Gap","","$","1,392,978","","$","(114,727)","","$","279,148","","$","410,321","","$","386,229"],["Cumulative gap","","$","1,392,978","","$","1,278,251","","$","1,557,399","","$","1,967,720","","$","2,353,949"],["Gap to assets ratio","","","20%","","","(2)%","","","4%","","","6%","","","6%"],["Cumulative gap to assets ratio","","","20%","","","18%","","","22%","","","28%","","","34%"]]
[[/GREPCENT_TABLE]]

The method used to analyze interest rate sensitivity in this table has a number of limitations. Certain assets and liabilities may react differently to changes in interest rates even though they reprice or mature in the same or similar time periods. The interest rates on certain assets and liabilities may change at different times than changes in market interest rates, with some changing in advance of changes in market rates and some lagging behind changes in market rates. Additionally, the actual prepayments and withdrawals we experience when interest rates change may deviate significantly from those assumed in calculating the data shown in the table

Because of the limitations in the gap analysis discussed above, we believe that interest sensitivity modeling may more accurately reflect the effects of our exposure to changes in interest rates, notwithstanding its own limitations. Net interest income simulation considers the relative sensitivities of the consolidated balance sheet including the effects of the aforementioned loans which are at their interest rate floors, interest rate caps on adjustable rate mortgages and the relatively stable aspects of core deposits. As such, net interest income simulation is designed to address the potential impact of interest rate changes and the behavioral response of the consolidated balance sheet to those changes. Market Value of Portfolio Equity (“MVPE”) represents the modeled fair value of the net present portfolio value of assets, liabilities and off-balance sheet items.

We believe that the assumptions utilized in evaluating our estimated net interest income are reasonable; however, the interest rate sensitivity of our assets, liabilities and off-balance sheet financial instruments, as well as the estimated effect of changes in interest rates on estimated net interest income, could vary substantially if different assumptions are used or actual experience differs from presumed behavior of various deposit and loan categories. The following table shows the effects of interest rate shocks on our MVPE and net interest income. Rate shocks assume that current interest rates change immediately and sustain parallel shifts. For interest rate increases or decreases of 100 and 200 basis points, our policy includes a guideline that our MVPE ratio should not decrease more than 10% and 15%, respectively, and that net interest income should not decrease more than 10% and 15%, respectively. As illustrated in the following table, we complied with our asset/liability policy guidelines at December 31, 2021, with the exception of the decrease of 200 basis points in the net interest income scenario, which is discussed in the note below*. While our modeling suggests an increase in market rates of 200 basis points will have a positive impact on margin (as shown in the table below), the actual amount of such increase cannot be determined, and there can be no assurance any increase will be realized.

[[GREPCENT_TABLE]]
[["","","Net portfolio value at","","Net interest income"],["","","December 31, 2021","","December 31, 2021"],["","","","","Percentage","","","","Percentage"],["Rate scenario","","Amount","","change","","Amount","","change"],["","","","(dollars in thousands)"],["+200 basis points","","$","1,036,007","","","4.45%","","$","223,812","","","3.72%"],["+100 basis points","","","1,012,795","","","2.11%","","","213,984","","","(0.83)%"],["Flat rate","","","991,876","","","\u2014","","","215,783","","","\u2014"],["-100 basis points","","","893,848","","","(9.88)%","","","198,295","","","(8.10)%"],["-200 basis points","","","810,652","","","(18.27)%","","","178,325","","","(17.36)%"]]
[[/GREPCENT_TABLE]]

60

*The target Federal Funds rate at December 31, 2021 was .25%. As such, scenarios calculating Present Value of Equity and Net Interest Income at rate declines of greater than 100 basis points assume negative interest rates. With the Federal Funds rate near zero percent, such scenarios, while included here, are less reliable than higher rate scenarios.

If we should experience a mismatch in our desired gap ranges, or an excessive decline in our MVPE subsequent to an immediate and sustained change in interest rate, we have a number of options available to remedy such a mismatch. We could restructure our investment portfolio through the sale or purchase of securities with more favorable repricing attributes. We could also emphasize loan products with appropriate maturities or repricing attributes, or we could emphasize deposits or obtain borrowings with desired maturities.

Historically, we have used variable rate loans as the principal means of limiting interest rate risk. The Bank’s SBLOC, IBLOC and SBA loans are primarily variable rate as are the vast majority of commercial loans, at fair value and REBL. At year-end 2021, loans at their rate floors were comprised primarily of $1.13 billion of commercial loans, at fair value and most of the $788 million of the IBLOC loans. The weighted average rate floors for the commercial loans, at fair value, was approximately 4.8%. As noted previously, rate increases of 150 basis points might be required before the impact of these floors are exceeded and increases in net interest income are realized. Model projections for down rate scenarios indicate reductions in net interest income. However, these down rate projections would require negative interest rate assumptions which we believe are significantly less reliable than higher rate assumptions. We continue to evaluate market conditions and may change our current interest rate strategy in response to changes in those conditions.

Financial Condition

General. Our total assets at December 31, 2021 were $6.84 billion, of which our total loans and commercial loans, at fair value from continuing operations were $5.08 billion and investment securities available-for-sale were $953.7 million. At December 31, 2020, our total assets were $6.28 billion, of which our total loans and commercial loans, at fair value from continuing operations were $4.46 billion and investment securities available-for-sale were $1.21 billion. The increase in total assets at December 31, 2021 reflected increases in loans including increases in SBLOC and IBLOC, apartment building loans, leasing, investment advisor financing and SBA loans, net of the impact of the repayment of short-term PPP loans.

Interest-earning Deposits and Federal Funds Sold. At December 31, 2021, we had a total of $596.4 million of interest-earning deposits, comprised primarily of balances at the Federal Reserve, which pays interest on such balances. At December 31, 2020, we had $339.5 million of such balances. The increase reflected net deposit inflows which vary on a daily basis.

Investment Portfolio. For detailed information on the composition and maturity distribution of our investment portfolio, see Note D to the Consolidated Financial Statements. Total investment securities available-for-sale decreased to $953.7 million on December 31, 2021, a decrease of $252.5 million, or 20.9%, from a year earlier. The decrease reflected prepayments on higher rate securities as a result of the lower rate environment.

The Financial Accounting Standards Board Accounting Standards Codification (“ASC”) 320, Investments—Debt and Equity Securities, requires that debt and equity securities classified as available-for-sale be reported at fair value, with unrealized gains and losses unrelated to credit losses excluded from earnings and reported in other comprehensive income. Marking an available-for-sale portfolio to market (fair value) results in fluctuations in the level of shareholders’ equity and equity-related financial ratios as market interest rates and market demand for such securities cause the fair value of fixed-rate securities to fluctuate. Debt securities for which we had the positive intent and ability to hold to maturity were classified as held-to-maturity and carried at amortized cost as of December 31, 2019. In March 2020, we transferred the four securities comprising our held-to-maturity securities portfolio to available-for-sale. The interest rates for these securities utilize LIBOR as a benchmark and the transfer was made pursuant to a provision of Accounting Standards Update (“ASU” or “Update”) 2020-04, which sought to maximize management and accounting flexibility as a result of the future phase-out of LIBOR.

The four securities transferred to available-for-sale and their values as of December 31, 2020 were as follows: a trust preferred unrated security issued by an insurance company with a book value of $10.0 million and a fair value of $6.8 million; and three securities supported by diversified portfolios of corporate securities with a book value of $75.0 million and a fair value of $75.1 million.

61

Under the accounting guidance related to current expected credit loss (“CECL”), changes in fair value of securities unrelated to credit losses, continue to be recognized through equity. However, credit-related losses are recognized through an allowance, rather than through a reduction in the amortized cost of the security. The guidance for the new CECL allowance includes a provision for the reversal of credit losses in future periods based on improvements in credit, which was not included in previous guidance. Generally, a security’s credit-related loss is the difference between its amortized cost basis and the best estimate of its expected future cash flows discounted at the security’s effective yield. That difference is recognized through the income statement, as with prior guidance, but is renamed a provision for credit loss. For the years ended December 31, 2021 and 2020, we recognized no credit-related losses on our portfolio.

The following table presents the book value and the approximate fair value for each major category of our investment securities portfolio. At December 31, 2021 and 2020, our investments were all categorized as available-for-sale (in thousands).

[[GREPCENT_TABLE]]
[["","December 31, 2021"],["","Amortized","","Fair"],["","cost","","value"],["U.S. Government agency securities","$","36,182","","$","37,302"],["Asset-backed securities","","360,332","","","360,418"],["Tax-exempt obligations of states and political subdivisions","","3,559","","","3,731"],["Taxable obligations of states and political subdivisions","","45,984","","","48,406"],["Residential mortgage-backed securities","","179,778","","","184,301"],["Collateralized mortgage obligation securities","","60,778","","","61,861"],["Commercial mortgage-backed securities","","248,599","","","251,076"],["Corporate debt securities","","10,000","","","6,614"],["","$","945,212","","$","953,709"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","December 31, 2020"],["","Amortized","","Fair"],["","cost","","value"],["U.S. Government agency securities","$","44,960","","$","47,197"],["Asset-backed securities","","238,678","","","238,361"],["Tax-exempt obligations of states and political subdivisions","","4,042","","","4,290"],["Taxable obligations of states and political subdivisions","","47,884","","","52,064"],["Residential mortgage-backed securities","","256,914","","","266,583"],["Collateralized mortgage obligation securities","","145,260","","","148,530"],["Commercial mortgage-backed securities","","359,125","","","367,280"],["Corporate debt securities","","85,043","","","81,859"],["","$","1,181,906","","$","1,206,164"]]
[[/GREPCENT_TABLE]]

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

In 2020 we began pledging loans against our line of credit at the FHLB and had no securities pledged against that line as of December 31, 2021 and December 31, 2020. At December 31, 2021 and December 31, 2020, no investment securities were encumbered through pledging or otherwise.

Of the six securities we own resulting from our securitizations all have been repaid except those from CRE-2 and CRE-6. Payments on CRE-6 are on schedule. As of December 31, 2021 the principal balance of the security we owned issued by CRE-2 was $12.6 million. Repayment is expected from the workout or disposition of commercial real estate collateral, after repayment of more senior tranches. Our $12.6 million security has 41% excess credit support; thus, losses of 41% of remaining security balances would have to be incurred, prior to any loss on our security. Additionally, the commercial real estate collateral supporting four of the remaining five loans was re-appraised in 2020 and 2021. The updated appraised value is approximately $78.8 million, which is net of $3.1 million due to the servicer. The remaining principal to be repaid on all securities is approximately $76.1 million and, as noted, our security is scheduled to be repaid prior to 41% of the outstanding securities. However, any future reappraisals could result in further decreases in collateral valuation. While available information indicates that the value of existing collateral will be adequate to repay our security, there can be no assurance that such valuations will be realized upon loan resolutions, and that deficiencies will not exceed the 41% credit support.

62

The following tables show the contractual maturity distribution and the weighted average yields of our investment securities portfolio as of December 31, 2021 (in thousands):

[[GREPCENT_TABLE]]
[["","","","After","","","","After"],["","","","one to","","","","five to","","","","Over"],["","","","five","","Average","","ten","","Average","","ten","","Average"],["Available-for-sale","","","years","","yield","","years","","yield","","years","","yield","","Total"],["U.S. Government agency securities","","","$","4,936","","2.25%","","$","18,619","","2.76%","","$","13,747","","2.31%","","$","37,302"],["Asset-backed securities","","","","6,384","","1.57%","","","139,471","","1.52%","","","214,563","","1.69%","","","360,418"],["Tax-exempt obligations of states and political subdivisions *","","","","3,731","","2.77%","","","\u2014","","\u2014","","","\u2014","","\u2014","","","3,731"],["Taxable obligations of states and political subdivisions","","","","40,746","","3.19%","","","7,660","","4.11%","","","\u2014","","\u2014","","","48,406"],["Residential mortgage-backed securities","","","","43,671","","2.45%","","","19,022","","3.01%","","","121,608","","1.67%","","","184,301"],["Collateralized mortgage obligation securities","","","","\u2014","","\u2014","","","9,008","","2.27%","","","52,853","","2.03%","","","61,861"],["Commercial mortgage-backed securities","","","","72,167","","2.61%","","","31,727","","0.93%","","","147,182","","2.99%","","","251,076"],["Corporate debt securities","","","","\u2014","","\u2014","","","\u2014","","\u2014","","","6,614","","3.05%","","","6,614"],["Total","","","$","171,635","","","","$","225,507","","","","$","556,567","","","","$","953,709"],["Weighted average yield","","","","","","2.66%","","","","","1.79%","","","","","2.09%"]]
[[/GREPCENT_TABLE]]

* If adjusted to their taxable equivalents, yields would approximate 3.51% for one to five years at a Federal tax rate of 21%.

Commercial Loans, at Fair Value. Commercial loans, at fair value are comprised of non-SBA CRE loans and SBA loans which had been originated for sale or securitization through first quarter 2020, and which are now being held on the balance sheet. Non-SBA CRE loans and SBA loans are valued using a discounted cash flow analysis based upon pricing for similar loans where market indications of the sales price of such loans are not available, on a pooled basis. Commercial loans, at fair value decreased to $1.33 billion at December 31, 2021 from $1.81 billion at December 31, 2020. The decrease resulted from loan prepayments and payoffs. In the third quarter of 2021 we resumed originating non-SBA CRE loans, after having suspended such originations for most of 2020 and the first half of 2021. These originations reflect lending criteria similar to the existing loan portfolio and are primarily comprised of multi-family (apartment buildings) collateral. See the table below prefaced by the introduction: “Commercial real estate loans, excluding SBA loans…”.

Loan Portfolio. We have developed a detailed credit policy for our lending activities and utilize loan committees to oversee the lending function. SBLOC, IBLOC and other consumer loans, investment advisor financing, small business loans (“SBL”), leases and real estate bridge lending each have their own loan committee. The Chief Executive Officer and Chief Credit Officer serve on all loan committees. Each committee also includes lenders from that particular type of specialty lending. The Chief Credit Officer is responsible for both regulatory compliance and adherence to our internal credit policy. Key committee members have lengthy experience and certain of them have had similar positions at substantially larger institutions.

We originate substantially all of our portfolio loans, although from time to time we have purchased lease pools and may purchase other individual loans. If a proposed loan should exceed our lending limit, we would sell a participation in the loan to another financial institution. The following table summarizes our loan portfolio, excluding loans at fair value, by loan category for the periods indicated (in thousands):

[[GREPCENT_TABLE]]
[["","December 31,","","December 31,","","December 31,","","December 31,","","December 31,"],["","2021","","2020","","2019","","2018","","2017"],["SBL non-real estate","$","147,722","","$","255,318","","$","84,579","","$","76,340","","$","70,379"],["SBL commercial mortgage","","361,171","","","300,817","","","218,110","","","165,406","","","142,086"],["SBL construction","","27,199","","","20,273","","","45,310","","","21,636","","","16,740"],["Small business loans","","536,092","","","576,408","","","347,999","","","263,382","","","229,205"],["Direct lease financing","","531,012","","","462,182","","","434,460","","","394,770","","","375,890"],["SBLOC / IBLOC *","","1,929,581","","","1,550,086","","","1,024,420","","","785,303","","","730,462"],["Advisor financing **","","115,770","","","48,282","","","\u2014","","","\u2014","","","\u2014"],["Real estate bridge lending","","621,702","","","\u2014","","","\u2014","","","\u2014","","","\u2014"],["Other loans***","","5,014","","","6,426","","","7,609","","","48,138","","","44,853"],["","","3,739,171","","","2,643,384","","","1,814,488","","","1,491,593","","","1,380,410"],["Unamortized loan fees and costs","","8,053","","","8,939","","","9,757","","","10,383","","","10,048"],["Total loans, net of unamortized loan fees and costs","$","3,747,224","","$","2,652,323","","$","1,824,245","","$","1,501,976","","$","1,390,458"]]
[[/GREPCENT_TABLE]]

63

The following table shows SBL loans and SBL loans held at fair value for the periods indicated (in thousands):

[[GREPCENT_TABLE]]
[["","December 31,","","December 31,","","December 31,","","December 31,","","December 31,"],["","2021","","2020","","2019","","2018","","2017"],["SBL loans, including costs net of deferred fees of $5,345 and $1,536 \u200efor December 31, 2021 and December 31, 2020, respectively","$","541,437","","$","577,944","","$","352,214","","$","270,860","","$","236,724"],["SBL loans included in commercial loans, at fair value","","199,585","","","243,562","","","220,358","","","199,977","","","165,177"],["Total small business loans ****","$","741,022","","$","821,506","","$","572,572","","$","470,837","","$","401,901"]]
[[/GREPCENT_TABLE]]

* Securities Backed Lines of Credit, or SBLOC, are collateralized by marketable securities, while Insurance Backed Lines of Credit, or IBLOC, are collateralized by the cash surrender value of insurance policies. At December 31, 2021 and December 31, 2020, respectively, IBLOC loans amounted to $788.3 million and $437.2 million.

** In 2020, we began originating loans to investment advisors for purposes of debt refinance, acquisition of another firm or internal succession. Maximum loan amounts are subject to loan-to-value ratios of 70%, based on third-party business appraisals, but may be increased depending upon the debt service coverage ratio. Personal guarantees and blanket business liens are obtained as appropriate.

*** Included in the table above under Other loans are demand deposit overdrafts reclassified as loan balances totaling $322,000 and $663,000 at December 31, 2021 and December 31, 2020, respectively. Estimated overdraft charge-offs and recoveries are reflected in the allowance for credit losses and have been immaterial.

**** The preceding table shows small business loans and small business loans held at fair value. The small business loans held at fair value are comprised of the government guaranteed portion of certain SBA loans at the dates indicated (in thousands). A reduction in SBL non-real estate from $171.8 million to $147.7 million in the fourth quarter of 2021 resulted from U.S. government repayments of $26.5 million of PPP loans authorized by The Consolidated Appropriations Act, 2021. PPP loans totaled $44.8 million at December 31, 2021 and $165.7 million at December 31, 2020, respectively.

The following table summarizes our small business loan portfolio, including loans held at fair value, by loan category as of December 31, 2021 (in thousands):

[[GREPCENT_TABLE]]
[["","","Loan principal"],["U.S. government guaranteed portion of SBA loans (a)","","$","371,484"],["Paycheck Protection Program loans (PPP) (a)","","","44,800"],["Commercial mortgage SBA (b)","","","183,290"],["Construction SBA (c)","","","16,624"],["Non-guaranteed portion of U.S. government guaranteed loans (d)","","","99,514"],["Non-SBA small business loans (e)","","","17,071"],["Total principal","","","732,783"],["Unamortized fees and costs","","","8,239"],["Total small business loans","","$","741,022"]]
[[/GREPCENT_TABLE]]

(a)This is the portion of SBA 7a loans (7a) and PPP which have been guaranteed by the U.S. government, and therefore is assumed to have no credit risk.

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

(c)Of the $16.6 million in Construction SBA loans, $13.0 million are 504 first mortgages with an origination date LTV of 50-60% and $3.6 million are SBA interim loans with an approved SBA post-construction full takeout/payoff.

(d)The $99.5 million represents the unguaranteed portion of 7a loans which are 70% or more guaranteed by the U.S. government. 7a loans are not made on the basis of real estate LTV; however, they are subject to SBA's "All Available Collateral" rule which mandates that to the extent a borrower or its 20% or greater principals have available collateral (including personal residences), the collateral must be pledged to fully collateralize the loan, after applying SBA-determined liquidation rates. In addition, all 7a and 504 loans require the personal guaranty of all 20% or greater owners.

(e)The $17.1 million of non-SBA loans is comprised of approximately 20 conventional coffee/doughnut/carryout franchisee note purchases. The majority of purchased notes were made to multi-unit operators, are considered seasoned and have performed as agreed.

64

The following table summarizes our small business loan portfolio, excluding the government guaranteed portion of SBA 7a loans and PPP loans, by loan type as of December 31, 2021 (in thousands):

[[GREPCENT_TABLE]]
[["","","SBL commercial mortgage*","","SBL construction*","","SBL non-real estate","","Total","","% Total"],["Hotels and motels","","$","64,784","","$","4,471","","$","21","","$","69,276","","","22%"],["Full-service restaurants","","","12,912","","","1,879","","","2,822","","","17,613","","","6%"],["Child day care services","","","14,164","","","\u2014","","","983","","","15,147","","","5%"],["Outpatient mental health and substance abuse centers","","","14,451","","","\u2014","","","\u2014","","","14,451","","","5%"],["Baked goods stores","","","4,382","","","\u2014","","","8,732","","","13,114","","","4%"],["Lessors of nonresidential buildings","","","11,262","","","\u2014","","","\u2014","","","11,262","","","4%"],["Car washes","","","10,014","","","\u2014","","","123","","","10,137","","","3%"],["Offices of lawyers","","","9,373","","","\u2014","","","\u2014","","","9,373","","","3%"],["Funeral homes and funeral services","","","8,456","","","\u2014","","","\u2014","","","8,456","","","3%"],["All other amusement and recreation industries","","","6,639","","","\u2014","","","1,080","","","7,719","","","2%"],["General warehousing and storage","","","7,102","","","\u2014","","","\u2014","","","7,102","","","2%"],["Fitness and recreational sports centers","","","459","","","4,507","","","1,537","","","6,503","","","2%"],["Assisted living facilities for the elderly","","","6,387","","","\u2014","","","\u2014","","","6,387","","","2%"],["Limited-service restaurants","","","1,047","","","1,575","","","3,114","","","5,736","","","1%"],["Gasoline stations with convenience stores","","","4,398","","","\u2014","","","\u2014","","","4,398","","","1%"],["Other technical and trade schools","","","44","","","3,550","","","\u2014","","","3,594","","","1%"],["Offices of dentists","","","3,488","","","\u2014","","","104","","","3,592","","","1%"],["Other warehousing and storage","","","3,222","","","\u2014","","","\u2014","","","3,222","","","1%"],["All other miscellaneous wood product manufacturing","","","3,004","","","\u2014","","","\u2014","","","3,004","","","1%"],["Plumbing, heating, and air-conditioning contractors","","","2,912","","","\u2014","","","87","","","2,999","","","1%"],["Other performing arts companies","","","2,775","","","\u2014","","","\u2014","","","2,775","","","1%"],["Offices of physicians","","","2,743","","","\u2014","","","10","","","2,753","","","1%"],["Lessors of other real estate property","","","2,441","","","\u2014","","","\u2014","","","2,441","","","1%"],["All other miscellaneous general purpose machinery manufacturing","","","2,432","","","\u2014","","","\u2014","","","2,432","","","1%"],["Landscaping services","","","826","","","\u2014","","","1,457","","","2,283","","","1%"],["Sewing, needlework, and piece goods stores","","","2,323","","","\u2014","","","\u2014","","","2,323","","","1%"],["Automotive body, paint, and interior repair and maintenance","","","1,729","","","\u2014","","","563","","","2,292","","","1%"],["Pet care (except veterinary) services","","","1,898","","","\u2014","","","350","","","2,248","","","1%"],["Amusement arcades","","","2,226","","","\u2014","","","\u2014","","","2,226","","","1%"],["Caterers","","","2,105","","","\u2014","","","108","","","2,213","","","1%"],["Offices of real estate agents and brokers","","","2,156","","","\u2014","","","\u2014","","","2,156","","","1%"],["Other**","","","41,221","","","642","","","25,409","","","67,272","","","19%"],["Total","","$","253,375","","$","16,624","","$","46,500","","$","316,499","","","100%"]]
[[/GREPCENT_TABLE]]

* Of the SBL commercial mortgage and SBL construction loans, $65.2 million represents the total of the non-guaranteed portion of SBA 7a loans and non-SBA loans. The balance of those categories represents SBA 504 loans with 50%-60% origination date loan-to-values.

** Loan types less than $2.0 million are spread over a hundred different classifications such as Commercial Printing, Pet and Pet Supplies Stores, Securities Brokerage, etc.

65

The following table summarizes our small business loan portfolio, excluding the government guaranteed portion of SBA 7a loans and PPP loans, by state as of December 31, 2021 (in thousands):

[[GREPCENT_TABLE]]
[["","","SBL commercial mortgage*","","SBL construction*","","SBL non-real estate","","Total","","% Total"],["Florida","","$","59,338","","$","\u2014","","$","5,939","","$","65,277","","$","21%"],["California","","","42,043","","","1,879","","","3,683","","","47,605","","","15%"],["North Carolina","","","23,782","","","5,127","","","3,290","","","32,199","","","10%"],["Pennsylvania","","","26,605","","","\u2014","","","2,644","","","29,249","","","9%"],["New York","","","13,677","","","5,111","","","2,950","","","21,738","","","7%"],["Illinois","","","16,053","","","\u2014","","","2,444","","","18,497","","","6%"],["Texas","","","11,988","","","\u2014","","","3,715","","","15,703","","","5%"],["New Jersey","","","6,219","","","\u2014","","","6,579","","","12,798","","","4%"],["Virginia","","","9,264","","","\u2014","","","1,650","","","10,914","","","3%"],["Tennessee","","","9,779","","","\u2014","","","387","","","10,166","","","3%"],["Colorado","","","3,207","","","4,507","","","1,471","","","9,185","","","3%"],["Michigan","","","4,145","","","\u2014","","","810","","","4,955","","","2%"],["Georgia","","","3,091","","","\u2014","","","1,354","","","4,445","","","1%"],["Ohio","","","2,662","","","\u2014","","","563","","","3,225","","","1%"],["Washington","","","2,786","","","\u2014","","","185","","","2,971","","","1%"],["Other States","","","18,736","","","\u2014","","","8,836","","","27,572","","","9%"],["Total","","$","253,375","","$","16,624","","$","46,500","","$","316,499","","$","100%"]]
[[/GREPCENT_TABLE]]

* Of the SBL commercial mortgage and SBL construction loans, $65.2 million represents the total of the non-guaranteed portion of SBA 7a loans and non-SBA loans. The balance of those categories represents SBA 504 loans with 50%-60% origination date loan-to-values.

The following table summarizes the 10 largest loans in our small business loan portfolio, including loans held at fair value, as of December 31, 2021 (in thousands):

[[GREPCENT_TABLE]]
[["Type*","","State","","SBL commercial mortgage*"],["Mental health and substance abuse center","","Florida","","$","10,189"],["Hotel","","Florida","","","8,728"],["Lawyer\u2019s office","","California","","","8,639"],["General warehousing and storage","","Pennsylvania","","","7,102"],["Hotel","","North Carolina","","","5,774"],["Assisted living facility","","Florida","","","5,178"],["Hotel","","New York","","","5,110"],["Hotel","","North Carolina","","","4,727"],["Mental health and substance abuse center","","Pennsylvania","","","4,262"],["Hotel","","Pennsylvania","","","4,171"],["Total","","","","$","63,880"]]
[[/GREPCENT_TABLE]]

* All of the top 10 loans are 504 SBA loans with 50%-60% origination date loan-to-value and are in the commercial mortgage category. The top 10 loan table above does not include loans to the extent that they are U.S. government guaranteed.

Commercial real estate loans, excluding SBA loans, are as follows including LTV at origination as of December 31, 2021 (dollars in thousands).

[[GREPCENT_TABLE]]
[["","# Loans","","Balance","","Weighted average origination date LTV","","Weighted average interest rate"],["Real estate bridge lending (multi-family apartments)*","","57","","$","621,702","","","74%","","","3.99%"],["Non-SBA commercial real estate loans, at fair value:"],["Multi-family (apartments)*","","86","","$","988,525","","","76%","","","4.74%"],["Hospitality (hotels and lodging)","","9","","","68,556","","","65%","","","5.68%"],["Retail","","6","","","60,753","","","71%","","","4.33%"],["Other","","7","","","13,781","","","73%","","","5.12%"],["","","108","","","1,131,615","","","75%","","","4.78%"],["Fair value adjustment","","","","","(4,365)"],["Total non-SBA commercial real estate loans, at fair value","","","","","1,127,250"],["Total commercial real estate loans","","","","$","1,748,952","","","75%","","","4.51%"]]
[[/GREPCENT_TABLE]]

*In the third quarter of 2021, we resumed the origination of multi-family apartment loans. These are similar to the multi-family apartment loans carried at fair value, but at origination are intended to be held on the balance sheet, so are not accounted for at fair value.

66

The following table summarizes our commercial real estate loans, excluding SBA loans, by state as of December 31, 2021 (in thousands):

[[GREPCENT_TABLE]]
[["","","Balance","","Origination date LTV"],["Texas","","$","606,639","","","76%"],["Georgia","","","168,569","","","75%"],["Ohio","","","110,738","","","72%"],["Alabama","","","89,834","","","74%"],["Florida","","","76,363","","","74%"],["Arizona","","","65,857","","","74%"],["Tennessee","","","64,172","","","66%"],["Other States each $55 million","","","566,780","","","73%"],["Total","","$","1,748,952","","","74%"]]
[[/GREPCENT_TABLE]]

The following table summarizes our 15 largest commercial real estate loans, excluding SBA loans, as of December 31, 2021 (in thousands). All these loans are multi-family apartment loans.

[[GREPCENT_TABLE]]
[["","","Balance","","Origination date LTV"],["Texas","","$","39,344","","","79%"],["Texas","","","37,282","","","75%"],["Texas","","","36,780","","","80%"],["Tennessee","","","30,361","","","62%"],["Missouri","","","30,000","","","72%"],["Texas","","","29,962","","","75%"],["Mississippi","","","28,853","","","79%"],["Texas","","","28,500","","","77%"],["North Carolina","","","27,969","","","77%"],["Texas","","","27,480","","","77%"],["New Jersey","","","26,800","","","77%"],["Oklahoma","","","26,800","","","78%"],["Ohio","","","26,080","","","74%"],["Texas","","","25,850","","","77%"],["Ohio","","","22,240","","","75%"],["15 Largest loans","","$","444,301","","","76%"]]
[[/GREPCENT_TABLE]]

The following table summarizes our institutional banking portfolio by type as of December 31, 2021 (in thousands):

[[GREPCENT_TABLE]]
[["Type","","Principal","","% of total"],["Securities backed lines of credit (SBLOC)","","$","1,141,316","","","56%"],["Insurance backed lines of credit (IBLOC)","","","788,265","","","39%"],["Advisor financing","","","115,770","","","5%"],["Total","","$","2,045,351","","","100%"]]
[[/GREPCENT_TABLE]]

For SBLOC, we generally lend up to 50% of the value of equities and 80% for investment grade securities. While equities have fallen in excess of 30% in recent periods, the reduction in collateral value of brokerage accounts collateralizing SBLOCs generally was less, for two reasons. First, many collateral accounts are “balanced” and accordingly, have a component of debt securities, which did not necessarily decrease in value as much as equities, or in some cases may have increased in value. Secondly, many of these accounts have the benefit of professional investment advisors who provided some protection against market downturns, through diversification and other means. Additionally, borrowers often utilize only a portion of collateral value, which lowers the percentage of principal to the market value of collateral.

67

The following table summarizes our top 10 SBLOC loans as of December 31, 2021 (in thousands):

[[GREPCENT_TABLE]]
[["","","Principal amount","","% Principal to collateral"],["","","$","17,506","","37%"],["","","","14,428","","25%"],["","","","9,465","","31%"],["","","","9,099","","56%"],["","","","9,034","","35%"],["","","","8,399","","70%"],["","","","7,907","","65%"],["","","","6,792","","13%"],["","","","6,690","","44%"],["","","","6,096","","32%"],["Total and weighted average","","$","95,416","","40%"]]
[[/GREPCENT_TABLE]]

IBLOC loans are backed by the cash value of eligible life insurance policies which have been assigned to us. We lend up to 100% of such cash value. Our underwriting standards require approval of the insurance companies which carry the policies backing these loans. Currently, eight insurance companies have been approved and, as of January 26, 2022 all were rated Excellent (A or better) by AM BEST based upon the most recent available ratings as of that date.

The following table summarizes our direct lease financing portfolio* by type as of December 31, 2021 (in thousands):

[[GREPCENT_TABLE]]
[["","","Principal balance","","% Total"],["Construction","","$","99,634","","","19%"],["Government agencies and public institutions**","","","78,181","","","15%"],["Waste management and remediation services","","","61,963","","","12%"],["Real estate and rental and leasing","","","54,229","","","10%"],["Retail trade","","","46,076","","","9%"],["Wholesale purchase","","","39,385","","","7%"],["Health care and social assistance","","","29,896","","","5%"],["Transportation and warehousing","","","27,536","","","5%"],["Professional, scientific, and technical services","","","19,103","","","4%"],["Wholesale trade","","","16,233","","","3%"],["Manufacturing","","","15,624","","","3%"],["Educational services","","","8,237","","","2%"],["Other","","","34,915","","","6%"],["Total","","$","531,012","","","100%"]]
[[/GREPCENT_TABLE]]

* Of the total $531.0 million of direct lease financing, $474.9 million consisted of vehicle leases with the remaining balance consisting of equipment leases.

** Includes public universities and school districts.

The following table summarizes our direct lease financing portfolio by state as of December 31, 2021 (in thousands):

[[GREPCENT_TABLE]]
[["","","Principal balance","","","% Total"],["Florida","","$","91,599","","","17%"],["California","","","49,414","","","9%"],["Utah","","","42,186","","","8%"],["New Jersey","","","40,375","","","8%"],["Pennsylvania","","","34,242","","","6%"],["New York","","","32,230","","","6%"],["North Carolina","","","24,133","","","5%"],["Maryland","","","23,948","","","5%"],["Texas","","","19,822","","","4%"],["Connecticut","","","15,657","","","3%"],["Washington","","","14,594","","","3%"],["Georgia","","","12,334","","","2%"],["Idaho","","","10,540","","","2%"],["Alabama","","","9,893","","","2%"],["Tennessee","","","9,233","","","2%"],["Other States","","","100,812","","","18%"],["Total","","$","531,012","","","100%"]]
[[/GREPCENT_TABLE]]

68

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

[[GREPCENT_TABLE]]
[["","","December 31, 2021"],["","","Within","","One to five","","After"],["","","one year","","years","","five years","","Total"],["","","","(in thousands)"],["SBL non-real estate","","$","10,164","","$","64,466","","$","73,092","","$","147,722"],["SBL commercial mortgage","","","11,187","","","2,882","","","347,102","","","361,171"],["SBL construction","","","3,272","","","\u2014","","","23,927","","","27,199"],["Real estate bridge lending","","","\u2014","","","621,702","","","\u2014","","","621,702"],["","","$","24,623","","$","689,050","","$","444,121","","$","1,157,794"],["Loans at fixed rates","","","","","$","44,800","","$","\u2014","","$","44,800"],["Loans at variable rates","","","","","","644,250","","","444,121","","","1,088,371"],["Total","","","","","$","689,050","","$","444,121","","$","1,133,171"]]
[[/GREPCENT_TABLE]]

Allowance for Credit Losses. We review the adequacy of our allowance for credit losses on at least a quarterly basis to determine a provision for credit losses to maintain our allowance at a level we believe is appropriate to recognize current expected credit losses. Our chief credit officer oversees the loan review department, which measures the adequacy of the allowance for credit losses independently of loan production officers. A description of loan review coverage is summarized in Note E to the financial statements which also provides a description of the methodology by which our quarterly provision for credit losses is determined.

The following table presents delinquencies by type of loan for December 31, 2021 and 2020 (in thousands):

[[GREPCENT_TABLE]]
[["","","December 31, 2021"],["","","30-59 Days","","60-89 Days","","90+ Days","","","","Total","","","","Total"],["","","past due","","past due","","still accruing","","Non-accrual","","past due","","Current","","loans"],["SBL non-real estate","","$","1,375","","$","3,138","","$","441","","$","1,313","","$","6,267","","$","141,455","","$","147,722"],["SBL commercial mortgage","","","\u2014","","","220","","","\u2014","","","812","","","1,032","","","360,139","","","361,171"],["SBL construction","","","\u2014","","","\u2014","","","\u2014","","","710","","","710","","","26,489","","","27,199"],["Direct lease financing","","","1,833","","","692","","","20","","","254","","","2,799","","","528,213","","","531,012"],["SBLOC / IBLOC","","","5,985","","","289","","","\u2014","","","\u2014","","","6,274","","","1,923,307","","","1,929,581"],["Advisor financing","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","115,770","","","115,770"],["Real estate bridge lending","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","621,702","","","621,702"],["Other loans","","","\u2014","","","\u2014","","","\u2014","","","72","","","72","","","4,942","","","5,014"],["Unamortized loan fees and costs","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","8,053","","","8,053"],["","","$","9,193","","$","4,339","","$","461","","$","3,161","","$","17,154","","$","3,730,070","","$","3,747,224"],["","","December 31, 2020"],["","","30-59 Days","","60-89 Days","","90+ Days","","","","Total","","","","Total"],["","","past due","","past due","","still accruing","","Non-accrual","","past due","","Current","","loans"],["SBL non-real estate","","$","1,760","","$","805","","$","110","","$","3,159","","$","5,834","","$","249,484","","$","255,318"],["SBL commercial mortgage","","","87","","","961","","","\u2014","","","7,305","","","8,353","","","292,464","","","300,817"],["SBL construction","","","\u2014","","","\u2014","","","\u2014","","","711","","","711","","","19,562","","","20,273"],["Direct lease financing","","","2,845","","","941","","","78","","","751","","","4,615","","","457,567","","","462,182"],["SBLOC / IBLOC","","","650","","","247","","","309","","","\u2014","","","1,206","","","1,548,880","","","1,550,086"],["Advisor financing","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","48,282","","","48,282"],["Other loans","","","\u2014","","","\u2014","","","\u2014","","","301","","","301","","","6,125","","","6,426"],["Unamortized loan fees and costs","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","8,939","","","8,939"],["","","$","5,342","","$","2,954","","$","497","","$","12,227","","$","21,020","","$","2,631,303","","$","2,652,323"]]
[[/GREPCENT_TABLE]]

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

69

The following table presents an allocation of the allowance for credit losses among the types of loans or leases in our portfolio at December 31, 2021, 2020, 2019, 2018 and 2017 (in thousands):

[[GREPCENT_TABLE]]
[["","","December 31, 2021","","December 31, 2020","","December 31, 2019"],["","","","","% Loan","","","","% Loan","","","","% Loan"],["","","","","type to","","","","type to","","","","type to"],["","","Allowance","","total loans","","Allowance","","total loans","","Allowance","","total loans"],["SBL non-real estate","","$","5,415","","","3.95%","","$","5,060","","","9.66%","","$","4,985","","","4.66%"],["SBL commercial mortgage","","","2,952","","","9.66%","","","3,315","","","11.38%","","","1,472","","","12.02%"],["SBL construction","","","432","","","0.73%","","","328","","","0.77%","","","432","","","2.50%"],["Direct lease financing","","","5,817","","","14.20%","","","6,043","","","17.48%","","","2,426","","","23.94%"],["SBLOC / IBLOC","","","964","","","51.60%","","","775","","","58.64%","","","553","","","56.46%"],["Advisor financing","","","868","","","3.10%","","","362","","","1.83%","","","\u2014","","","\u2014"],["Real estate bridge lending","","","1,181","","","16.63%","","","\u2014","","","\u2014","","","\u2014","","","\u2014"],["Other loans","","","177","","","0.13%","","","199","","","0.24%","","","52","","","0.42%"],["Unallocated","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","318","","","\u2014"],["","","$","17,806","","","100.00%","","$","16,082","","","100.00%","","$","10,238","","","100.00%"],["","","December 31, 2018","","December 31, 2017"],["","","."],["","","","","","% Loan","","","","","% Loan"],["","","","","","type to","","","","","type to"],["","","Allowance","","total loans","","Allowance","","total loans"],["SBL non-real estate","","$","4,636","","","5.11%","","$","3,145","","","5.15%"],["SBL commercial mortgage","","","941","","","11.07%","","","1,120","","","10.27%"],["SBL construction","","","250","","","1.45%","","","136","","","1.21%"],["Direct lease financing","","","2,025","","","26.60%","","","1,495","","","27.33%"],["SBLOC","","","393","","","52.55%","","","365","","","52.80%"],["Other loans","","","168","","","3.22%","","","638","","","3.24%"],["Unallocated","","","240","","","\u2014","","","197","","","\u2014"],["","","$","8,653","","","100.00%","","$","7,096","","","100.00%"]]
[[/GREPCENT_TABLE]]

Summary of Loan and Lease Loss Experience. The following tables summarize our credit loss experience for each of the periods indicated (in thousands):

[[GREPCENT_TABLE]]
[["","","December 31, 2021"],["","","SBL non-real estate","","SBL commercial mortgage","","SBL construction","","Direct lease financing","","SBLOC / IBLOC","","Advisor financing","","Real estate bridge lending","","Other loans","","Unallocated","","Total"],["Beginning balance 1/1/2021","","$","5,060","","$","3,315","","$","328","","$","6,043","","$","775","","$","362","","$","\u2014","","$","199","","$","\u2014","","$","16,082"],["Charge-offs","","","(1,138)","","","(417)","","","\u2014","","","(412)","","","(15)","","","\u2014","","","\u2014","","","(24)","","","\u2014","","","(2,006)"],["Recoveries","","","51","","","9","","","\u2014","","","58","","","\u2014","","","\u2014","","","\u2014","","","1,099","","","\u2014","","","1,217"],["Provision (credit)*","","","1,442","","","45","","","104","","","128","","","204","","","506","","","1,181","","","(1,097)","","","\u2014","","","2,513"],["Ending balance","","$","5,415","","$","2,952","","$","432","","$","5,817","","$","964","","$","868","","$","1,181","","$","177","","$","\u2014","","$","17,806"],["Ending balance: Individually evaluated for expected credit loss","","$","829","","$","115","","$","34","","$","\u2014","","$","\u2014","","$","\u2014","","$","\u2014","","$","\u2014","","$","\u2014","","$","978"],["Ending balance: Collectively evaluated for expected credit loss","","$","4,586","","$","2,837","","$","398","","$","5,817","","$","964","","$","868","","$","1,181","","$","177","","$","\u2014","","$","16,828"],["Loans:"],["Ending balance**","","$","147,722","","$","361,171","","$","27,199","","$","531,012","","$","1,929,581","","$","115,770","","$","621,702","","$","5,014","","$","8,053","","$","3,747,224"],["Ending balance: Individually evaluated for expected credit loss","","$","1,887","","$","812","","$","710","","$","254","","$","\u2014","","$","\u2014","","$","\u2014","","$","320","","$","\u2014","","$","3,983"],["Ending balance: Collectively evaluated for expected credit loss","","$","145,835","","$","360,359","","$","26,489","","$","530,758","","$","1,929,581","","$","115,770","","$","621,702","","$","4,694","","$","8,053","","$","3,743,241"]]
[[/GREPCENT_TABLE]]

70

[[GREPCENT_TABLE]]
[["","","December 31, 2020"],["","","SBL non-real estate","","SBL commercial mortgage","","SBL construction","","Direct lease financing","","SBLOC / IBLOC","","Advisor financing","","Other loans","","Unallocated","","Total"],["Beginning balance 12/31/2019","","$","4,985","","$","1,472","","$","432","","$","2,426","","$","553","","$","\u2014","","$","52","","$","318","","$","10,238"],["1/1 CECL adjustment","","","(220)","","","537","","","139","","","2,362","","","(41)","","","\u2014","","","178","","","(318)","","","2,637"],["Charge-offs","","","(1,350)","","","\u2014","","","\u2014","","","(2,243)","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","(3,593)"],["Recoveries","","","103","","","\u2014","","","\u2014","","","570","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","673"],["Provision (credit)*","","","1,542","","","1,306","","","(243)","","","2,928","","","263","","","362","","","(31)","","","\u2014","","","6,127"],["Ending balance","","$","5,060","","$","3,315","","$","328","","$","6,043","","$","775","","$","362","","$","199","","$","\u2014","","$","16,082"],["Ending balance: Individually evaluated for expected credit loss","","$","2,129","","$","1,010","","$","34","","$","4","","$","\u2014","","$","\u2014","","$","\u2014","","$","\u2014","","$","3,177"],["Ending balance: Collectively evaluated for expected credit loss","","$","2,931","","$","2,305","","$","294","","$","6,039","","$","775","","$","362","","$","199","","$","\u2014","","$","12,905"],["Loans:"],["Ending balance**","","$","255,318","","$","300,817","","$","20,273","","$","462,182","","$","1,550,086","","$","48,282","","$","6,426","","$","8,939","","$","2,652,323"],["Ending balance: Individually evaluated for expected credit loss","","$","3,431","","$","7,305","","$","711","","$","751","","$","\u2014","","$","\u2014","","$","557","","$","\u2014","","$","12,755"],["Ending balance: Collectively evaluated for expected credit loss","","$","251,887","","$","293,512","","$","19,562","","$","461,431","","$","1,550,086","","$","48,282","","$","5,869","","$","8,939","","$","2,639,568"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","","December 31, 2019"],["","","SBL non-real estate","","SBL commercial mortgage","","SBL construction","","Direct lease financing","","SBLOC / IBLOC","","Advisor financing","","Other loans","","Unallocated","","Total"],["Beginning balance 1/1/2019","","$","4,636","","$","941","","$","250","","$","2,025","","$","393","","$","\u2014","","$","168","","$","240","","$","8,653"],["Charge-offs","","","(1,362)","","","\u2014","","","\u2014","","","(528)","","","\u2014","","","\u2014","","","(1,103)","","","\u2014","","","(2,993)"],["Recoveries","","","125","","","\u2014","","","\u2014","","","51","","","\u2014","","","\u2014","","","2","","","\u2014","","","178"],["Provision (credit)","","","1,586","","","531","","","182","","","878","","","160","","","\u2014","","","985","","","78","","","4,400"],["Ending balance","","$","4,985","","$","1,472","","$","432","","$","2,426","","$","553","","$","\u2014","","$","52","","$","318","","$","10,238"],["Ending balance: Individually evaluated for impairment","","$","2,961","","$","136","","$","36","","$","\u2014","","$","\u2014","","$","\u2014","","$","9","","$","\u2014","","$","3,142"],["Ending balance: Collectively evaluated for impairment","","$","2,024","","$","1,336","","$","396","","$","2,426","","$","553","","$","\u2014","","$","43","","$","318","","$","7,096"],["Loans:"],["Ending balance**","","$","84,579","","$","218,110","","$","45,310","","$","434,460","","$","1,024,420","","$","\u2014","","$","7,609","","$","9,757","","$","1,824,245"],["Ending balance: Individually evaluated for impairment","","$","4,139","","$","1,047","","$","711","","$","286","","$","\u2014","","$","\u2014","","$","610","","$","\u2014","","$","6,793"],["Ending balance: Collectively evaluated for impairment","","$","80,440","","$","217,063","","$","44,599","","$","434,174","","$","1,024,420","","$","\u2014","","$","6,999","","$","9,757","","$","1,817,452"]]
[[/GREPCENT_TABLE]]

71

[[GREPCENT_TABLE]]
[["","","December 31, 2018"],["","","SBL non-real estate","","SBL commercial mortgage","","SBL construction","","Direct lease financing","","SBLOC / IBLOC","","Advisor financing","","Other loans","","Unallocated","","Total"],["Beginning balance 1/1/2018","","$","3,145","","$","1,120","","$","136","","$","1,495","","$","365","","$","\u2014","","$","638","","$","197","","$","7,096"],["Charge-offs","","","(1,348)","","","(157)","","","\u2014","","","(637)","","","\u2014","","","\u2014","","","(21)","","","\u2014","","","(2,163)"],["Recoveries","","","57","","","13","","","\u2014","","","64","","","\u2014","","","\u2014","","","1","","","\u2014","","","135"],["Provision (credit)","","","2,782","","","(35)","","","114","","","1,103","","","28","","","\u2014","","","(450)","","","43","","","3,585"],["Ending balance","","$","4,636","","$","941","","$","250","","$","2,025","","$","393","","$","\u2014","","$","168","","$","240","","$","8,653"],["Ending balance: Individually evaluated for impairment","","$","2,806","","$","71","","$","\u2014","","$","145","","$","\u2014","","$","\u2014","","$","17","","$","\u2014","","$","3,039"],["Ending balance: Collectively evaluated for impairment","","$","1,830","","$","870","","$","250","","$","1,880","","$","393","","$","\u2014","","$","151","","$","240","","$","5,614"],["Loans:"],["Ending balance**","","$","76,340","","$","165,406","","$","21,636","","$","394,770","","$","785,303","","$","\u2014","","$","48,138","","$","10,383","","$","1,501,976"],["Ending balance: Individually evaluated for impairment","","$","3,716","","$","458","","$","\u2014","","$","871","","$","\u2014","","$","\u2014","","$","1,741","","$","\u2014","","$","6,786"],["Ending balance: Collectively evaluated for impairment","","$","72,624","","$","164,948","","$","21,636","","$","393,899","","$","785,303","","$","\u2014","","$","46,397","","$","10,383","","$","1,495,190"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","","December 31, 2017"],["","","SBL non-real estate","","SBL commercial mortgage","","SBL construction","","Direct lease financing","","SBLOC / IBLOC","","Advisor financing","","Other loans","","Unallocated","","Total"],["Beginning balance 1/1/2017","","$","1,976","","$","737","","$","76","","$","1,994","","$","315","","$","\u2014","","$","1,007","","$","227","","$","6,332"],["Charge-offs","","","(1,171)","","","\u2014","","","\u2014","","","(927)","","","\u2014","","","\u2014","","","(109)","","","\u2014","","","(2,207)"],["Recoveries","","","19","","","\u2014","","","\u2014","","","8","","","\u2014","","","\u2014","","","24","","","\u2014","","","51"],["Provision (credit)","","","2,321","","","383","","","60","","","420","","","50","","","\u2014","","","(284)","","","(30)","","","2,920"],["Ending balance","","$","3,145","","$","1,120","","$","136","","$","1,495","","$","365","","$","\u2014","","$","638","","$","197","","$","7,096"],["Ending balance: Individually evaluated for impairment","","$","1,689","","$","225","","$","\u2014","","$","\u2014","","$","\u2014","","$","\u2014","","$","\u2014","","$","\u2014","","$","1,914"],["Ending balance: Collectively evaluated for impairment","","$","1,456","","$","895","","$","136","","$","1,495","","$","365","","$","\u2014","","$","638","","$","197","","$","5,182"],["Loans:"],["Ending balance**","","$","70,379","","$","142,086","","$","16,740","","$","375,890","","$","730,462","","$","\u2014","","$","44,853","","$","10,048","","$","1,390,458"],["Ending balance: Individually evaluated for impairment","","$","2,858","","$","693","","$","\u2014","","$","229","","$","\u2014","","$","\u2014","","$","1,695","","$","\u2014","","$","5,475"],["Ending balance: Collectively evaluated for impairment","","$","67,521","","$","141,393","","$","16,740","","$","375,661","","$","730,462","","$","\u2014","","$","43,158","","$","10,048","","$","1,384,983"]]
[[/GREPCENT_TABLE]]

*The amount shown as the provision for the period, reflects the provision on credit losses for loans, while the income statement provision for credit losses includes the provision for unfunded commitments of $597,000 and $225,000 for the years ended December 31, 2021 and 2020, respectively.

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

72

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

[[GREPCENT_TABLE]]
[["","As of or"],["","for the years ended"],["","December 31,"],["","2021","","2020"],["Ratio of:"],["Allowance for credit losses to total loans (1)","0.48%","","0.61%"],["Allowance for credit losses to non-performing loans*","491.61%","","126.39%"],["Non-performing loans to total loans*","0.10%","","0.48%"],["Non-performing assets to total assets*","0.08%","","0.20%"],["Net charge-offs to average loans","0.03%","","0.07%"],["* Includes loans 90 days past due still accruing interest."]]
[[/GREPCENT_TABLE]]

(1) Because SBLOC and IBLOC loans are respectively collateralized by marketable securities and the cash value of life insurance, management excludes those loans from the ratio of the allowance for credit losses to total loans in its internal analysis. Accordingly, the adjusted non-GAAP ratio used in such internal analysis is .93% at December 31, 2021. A reconciliation of the GAAP ratio of .48% to the non-GAAP ratio of .93% at that date is as follows in thousands. The total GAAP allowance for credit losses of $17,806 is reduced by the SBLOC and IBLOC allowance of $964 and that result is divided into total GAAP loans of $3,747,224 less SBLOC and IBLOC loans of $1,929,581.

The ratio of the allowance for credit losses to total loans decreased to 0.48% at December 31, 2021 compared to 0.61% at December 31, 2020. While the loan portfolio increased which reduced the ratio, the largest component of that growth was in IBLOC, collateralized by the cash value of life insurance, which has experienced nominal losses and which requires minimal allowance coverage in our CECL model. Additionally, the amount of non-performing loans and reserves thereon decreased. The ratio of the allowance for credit losses to non-performing loans increased to 491.61% at December 31, 2021 from 126.39% over the prior year end, reflecting the decrease in non-performing SBL loans, comprised primarily of the unguaranteed portion of SBA loans, including SBA 504 commercial mortgages. That decrease was also reflected in the lower ratio of non-performing assets to total assets which decreased to 0.08% from 0.20%. The ratio of net charge-offs to average loans decreased to 0.03% for 2021 compared to 0.07% for the prior year, reflecting a home equity loan recovery in 2021 versus higher direct lease financing and SBL non-real estate charge-offs in 2020.

Net Charge-Offs. Net charge-offs were $789,000 in 2021, a decrease of $2.1 million from net charge-offs of $2.9 million in 2020. Net charge-offs were $2.8 million in 2019. The decrease in net charge-offs in 2021 reflected a $1.1 million recovery on a home equity loan and decreases in direct lease financing and non real estate SBL charge-offs. SBL charge-offs during these periods resulted primarily from the non-government guaranteed portion of SBA 7a loans.

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

[[GREPCENT_TABLE]]
[["","December 31, 2021"],["","SBL non-real estate","","SBL commercial mortgage","","SBL construction","","Direct lease financing","","SBLOC / IBLOC","","Advisor financing","","Real estate bridge lending","","Other loans"],["Charge-offs","$","1,138","","$","417","","$","\u2014","","$","412","","$","15","","$","\u2014","","$","\u2014","","$","24"],["Recoveries","","51","","","9","","","\u2014","","","58","","","\u2014","","","\u2014","","","\u2014","","","1,099"],["Net charge-offs/(recoveries)","$","1,087","","$","408","","$","\u2014","","$","354","","$","15","","$","\u2014","","$","\u2014","","$","(1,075)"],["Average loan balance","$","221,858","","$","338,552","","$","21,955","","$","499,600","","$","1,733,235","","$","75,261","","$","150,080","","$","5,730"],["Ratio of net charge-offs/(recoveries) during the period to average loans during the period","","0.49%","","","0.12%","","","\u2014","","","0.07%","","","\u2014","","","\u2014","","","\u2014","","","(18.76)%"]]
[[/GREPCENT_TABLE]]

73

[[GREPCENT_TABLE]]
[["","December 31, 2020"],["","SBL non-real estate","","SBL commercial mortgage","","SBL construction","","Direct lease financing","","SBLOC / IBLOC","","Advisor financing","","Other loans"],["Charge-offs","$","1,350","","$","\u2014","","$","\u2014","","$","2,243","","$","\u2014","","$","\u2014","","$","\u2014"],["Recoveries","","103","","","\u2014","","","\u2014","","","570","","","\u2014","","","\u2014","","","\u2014"],["Net charge-offs","$","1,247","","$","\u2014","","$","\u2014","","$","1,673","","$","\u2014","","$","\u2014","","$","\u2014"],["Average loan balance","$","202,405","","$","256,286","","$","34,954","","$","439,158","","$","1,289,308","","$","18,082","","$","6,696"],["Ratio of net charge-offs during the period to average loans during the period","","0.62%","","","\u2014","","","\u2014","","","0.38%","","","\u2014","","","\u2014","","","\u2014"]]
[[/GREPCENT_TABLE]]

Non-accrual Loans, Loans 90 Days Delinquent and Still Accruing, Other Real Estate Owned and Troubled Debt Restructurings. Loans are considered to be non-performing if they are on a non-accrual basis or they are past due 90 days or more and still accruing interest. A loan which is past due 90 days or more and still accruing interest remains on accrual status only when it is both adequately secured as to principal and interest, and is in the process of collection. Troubled debt restructurings are loans with terms that have been renegotiated to provide a material reduction or deferral of interest or principal because of a weakening in the financial positions of the borrowers. We had $1.5 million of other real estate owned (“OREO”) at December 31, 2021 and no OREO at December 31, 2020 in continuing operations. The following tables summarize our non-performing loans, OREO and our loans past due 90 days or more still accruing interest.

[[GREPCENT_TABLE]]
[["","","December 31,"],["","","2021","","2020","","2019","","2018","","2017"],["","","","(in thousands)"],["Non-accrual loans"],["SBL non-real estate","","$","1,313","","$","3,159","","$","3,693","","$","2,590","","$","1,889"],["SBL commercial mortgage","","","812","","","7,305","","","1,047","","","458","","","693"],["SBL construction","","","710","","","711","","","711","","","\u2014","","","\u2014"],["Direct leasing","","","254","","","751","","","\u2014","","","\u2014","","","\u2014"],["Consumer - home equity","","","72","","","301","","","345","","","1,468","","","1,414"],["Consumer - other","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014"],["Total non-accrual loans","","","3,161","","","12,227","","","5,796","","","4,516","","","3,996"],["Loans past due 90 days or more and still accruing","","","461","","","497","","","3,264","","","954","","","227"],["Total non-performing loans","","","3,622","","","12,724","","","9,060","","","5,470","","","4,223"],["Other real estate owned","","","1,530","","","\u2014","","","\u2014","","","\u2014","","","450"],["Total non-performing assets","","$","5,152","","$","12,724","","$","9,060","","$","5,470","","$","4,673"]]
[[/GREPCENT_TABLE]]

The loans that were modified for the years ended December 31, 2021 and 2020 and considered troubled debt restructurings are as follows (in thousands):

[[GREPCENT_TABLE]]
[["","","December 31, 2021","","December 31, 2020"],["","","Number","","Pre-modification recorded investment","","Post-modification recorded investment","","Number","","Pre-modification recorded investment","","Post-modification recorded investment"],["SBL non-real estate","","","9","","$","1,231","","$","1,231","","","8","","$","911","","$","911"],["Direct lease financing","","","\u2014","","","\u2014","","","\u2014","","","1","","","251","","","251"],["Consumer - home equity","","","1","","","248","","","248","","","2","","","469","","","469"],["Total(1)","","","10","","$","1,479","","$","1,479","","","11","","$","1,631","","$","1,631"]]
[[/GREPCENT_TABLE]]

(1) Troubled debt restructurings include non-accrual loans of $656,000 and $1.1 million at December 31, 2021 and December 31, 2020, respectively.

74

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

[[GREPCENT_TABLE]]
[["","","December 31, 2021","","December 31, 2020"],["","","Adjusted interest rate","","Extended maturity","","Combined rate and maturity","","Adjusted interest rate","","Extended maturity","","Combined rate and maturity"],["SBL non-real estate","","$","\u2014","","$","\u2014","","$","1,231","","$","\u2014","","$","16","","$","895"],["Direct lease financing","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","251","","","\u2014"],["Consumer - home equity","","","\u2014","","","\u2014","","","248","","","\u2014","","","\u2014","","","469"],["Total(1)","","$","\u2014","","$","\u2014","","$","1,479","","$","\u2014","","$","267","","$","1,364"]]
[[/GREPCENT_TABLE]]

(1) Troubled debt restructurings include non-accrual loans of $656,000 and $1.1 million at December 31, 2021 and December 31, 2020, respectively.

The tables above do not include loans which are reported at fair value. A $30.0 million credit, collateralized by a commercial retail property with multiple tenants, is included in commercial loans, at fair value. The underlying collateral consists of a multi-tenant shopping center and the loan value had been previously written down as a result of a decreased occupancy rate. By December 31, 2020 the center had been substantially all leased and previous write-downs had been reversed. On March 13, 2019, we renewed this loan for four years and reduced the interest rate to the following: LIBOR plus 2% in year one, increasing 0.5% each year until the fourth year when the rate will be LIBOR plus 3.5% which will also be the rate for a one year extension, if exercised. The loan is performing in accordance with those restructured terms.

We had no commitments to extend additional credit to loans classified as troubled debt restructurings as of December 31, 2021.

The following table summarizes loans that were restructured within the 12 months ended December 31, 2021 that have subsequently defaulted (in thousands).

[[GREPCENT_TABLE]]
[["","","December 31, 2021"],["","","Number","","Pre-modification recorded investment"],["SBL non-real estate","","","1","","$","205"],["Total","","","1","","$","205"]]
[[/GREPCENT_TABLE]]

75

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

[[GREPCENT_TABLE]]
[["","December 31, 2021"],["","Recorded \u200einvestment","","Unpaid \u200eprincipal \u200ebalance","","Related \u200eallowance","","Average \u200erecorded \u200einvestment","","Interest \u200eincome \u200erecognized"],["Without an allowance recorded"],["SBL non-real estate","$","409","","$","3,414","","$","\u2014","","$","412","","$","5"],["SBL commercial mortgage","","223","","","246","","","\u2014","","","1,717","","","\u2014"],["Direct lease financing","","254","","","254","","","\u2014","","","430","","","\u2014"],["Consumer - home equity","","320","","","320","","","\u2014","","","458","","","8"],["With an allowance recorded"],["SBL non-real estate","","1,478","","","1,478","","","(829)","","","2,267","","","13"],["SBL commercial mortgage","","589","","","589","","","(115)","","","2,634","","","\u2014"],["SBL construction","","710","","","710","","","(34)","","","711","","","\u2014"],["Direct lease financing","","\u2014","","","\u2014","","","\u2014","","","132","","","\u2014"],["Consumer - other","","\u2014","","","\u2014","","","\u2014","","","5","","","\u2014"],["Total"],["SBL non-real estate","","1,887","","","4,892","","","(829)","","","2,679","","","18"],["SBL commercial mortgage","","812","","","835","","","(115)","","","4,351","","","\u2014"],["SBL construction","","710","","","710","","","(34)","","","711","","","\u2014"],["Direct lease financing","","254","","","254","","","\u2014","","","562","","","\u2014"],["Consumer - other","","\u2014","","","\u2014","","","\u2014","","","5","","","\u2014"],["Consumer - home equity","","320","","","320","","","\u2014","","","458","","","8"],["","$","3,983","","$","7,011","","$","(978)","","$","8,766","","$","26"],["","December 31, 2020"],["","Recorded \u200einvestment","","Unpaid \u200eprincipal \u200ebalance","","Related \u200eallowance","","Average \u200erecorded \u200einvestment","","Interest \u200eincome \u200erecognized"],["Without an allowance recorded"],["SBL non-real estate","$","387","","$","2,836","","$","\u2014","","$","370","","$","3"],["SBL commercial mortgage","","2,037","","","2,037","","","\u2014","","","1,253","","","\u2014"],["Direct lease financing","","299","","","299","","","\u2014","","","3,352","","","\u2014"],["Consumer - home equity","","557","","","557","","","\u2014","","","554","","","10"],["With an allowance recorded"],["SBL non-real estate","","3,044","","","3,044","","","(2,129)","","","3,257","","","15"],["SBL commercial mortgage","","5,268","","","5,268","","","(1,010)","","","2,732","","","\u2014"],["SBL construction","","711","","","711","","","(34)","","","711","","","\u2014"],["Direct lease financing","","452","","","452","","","(4)","","","716","","","\u2014"],["Consumer - home equity","","\u2014","","","\u2014","","","\u2014","","","24","","","\u2014"],["Total"],["SBL non-real estate","","3,431","","","5,880","","","(2,129)","","","3,627","","","18"],["SBL commercial mortgage","","7,305","","","7,305","","","(1,010)","","","3,985","","","\u2014"],["SBL construction","","711","","","711","","","(34)","","","711","","","\u2014"],["Direct lease financing","","751","","","751","","","(4)","","","4,068","","","\u2014"],["Consumer - home equity","","557","","","557","","","\u2014","","","578","","","10"],["","$","12,755","","$","15,204","","$","(3,177)","","$","12,969","","$","28"]]
[[/GREPCENT_TABLE]]

We had $3.2 million of non-accrual loans at December 31, 2021, compared to $12.2 million of non-accrual loans at December 31, 2020. The $9.1 million decrease reflected $2.8 million of loans placed on non-accrual status partially offset by $10.1 million of loan payments and $1.8 million of charge-offs. Loans past due 90 days or more still accruing interest amounted to $461,000 and $497,000 at December 31, 2021 and December 31, 2020, respectively. The $36,000 decrease reflected $2.1 million of additions, $2.1 million of loan payments and $67,000 of loans moved to non-accrual. We had no OREO at December 31, 2020 in continuing operations. During 2021, a total of $2.1 million of OREO resulted from the dissolution of the Walnut Street investment as described under “Investment in Unconsolidated Entity,” below. A subsequent property sale resulted in a decrease of $615,000, and the December 31, 2021 balance of $1.5 million.

76

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

Investment in Unconsolidated Entity. On December 30, 2014, the Bank entered into an agreement for, and closed on, the sale of a portion of its discontinued commercial loan portfolio. The purchaser of the loan portfolio was a newly formed entity, Walnut Street 2014-1 Issuer, LLC, or Walnut Street. The price paid to the Bank for the loan portfolio, which had a face value of approximately $267.6 million, was approximately $209.6 million, of which approximately $193.6 million was in the form of two notes issued by Walnut Street to the Bank; a senior note in the principal amount of approximately $178.2 million bearing interest at 1.5% per year and maturing in December 2024 and a subordinate note in the principal amount of approximately $15.4 million, bearing interest at 10.0% per year and maturing in December 2024. In the third quarter of 2021, we and the other investor dissolved the entity, as the remaining balance did not warrant ongoing administrative and accounting expenses. As a result of the dissolution, the investment in unconsolidated entity, which had a June 30, 2021 balance of $25.0 million, was reclassified as follows. Approximately $22.9 million of loans were reclassified to commercial loans, at fair value and $2.1 million was reclassified to other real estate owned.

Assets Held-for-Sale from Discontinued Operations. Assets held-for-sale as a result of discontinued operations, primarily commercial, commercial mortgage and construction loans, amounted to $82.2 million at December 31, 2021 and were comprised of $64.1 million of net loans and $18.1 million of other real estate owned. The balance of OREO includes a Florida mall, which has been written down to $15.0 million. We expect to continue our efforts to dispose of the mall, which was appraised in December 2021 for $21.4 million. At December 31, 2020, discontinued assets of $113.6 million were comprised of $91.3 million of net loans and $22.3 million of other real estate owned. We continue our efforts to transfer the loans to other financial institutions, and dispose of the OREO.

Deposits. Our primary source of funding is deposit acquisition. We offer a variety of deposit accounts with a range of interest rates and terms, including demand, checking and money market accounts, through and with the assistance of affinity groups. The majority of our deposits are generated through prepaid card and debit and other payments related deposit accounts. At December 31, 2021, we had total deposits of $5.98 billion compared to $5.46 billion at December 31, 2020, which reflected an increase of $514.9 million, or 9.4%. Daily deposit balances are subject to variability, and deposits averaged $5.31 billion in the fourth quarter of 2021. In 2021, growth in debit, prepaid card and other accounts was offset by the impact of an affinity client transitioning to its own bank. A diversified group of prepaid and debit card accounts, which have an established history of stability and lower cost than certain other types of funding, comprise the majority of our deposits. Our product mix includes prepaid card accounts for salary, medical spending, commercial, general purpose reloadable, corporate and other incentive, gift, government payments and transaction accounts accessed by debit cards. Balances are subject to daily fluctuations, which may comprise a significant component of variances between dates. The following table presents the average balance and rates paid on deposits for the periods indicated (in thousands):

[[GREPCENT_TABLE]]
[["","","December 31, 2021","","December 31, 2020","","December 31, 2019"],["","","Average","","Average","","Average","","Average","","Average","","Average"],["","","balance","","rate","","balance","","rate","","balance","","rate"],["Demand and interest checking *","","$","5,321,283","","0.09%","","$","4,864,236","","0.23%","","$","3,817,176","","0.80%"],["Savings and money market","","","427,708","","0.14%","","","291,204","","0.15%","","","37,671","","0.48%"],["Time","","","\u2014","","\u2014","","","79,439","","1.87%","","","170,438","","2.09%"],["Total deposits","","$","5,748,991","","0.10%","","$","5,234,879","","0.25%","","$","4,025,285","","0.85%"]]
[[/GREPCENT_TABLE]]

* Non-interest-bearing demand accounts are not paid interest. The rate shown reflects the fees paid to affinity groups, which are based upon a rate index, and therefore classified as interest expense.

77

Short-Term Borrowings. We had no outstanding advances from the FHLB or Federal Reserve at December 31, 2021 or 2020 on our lines of credit with them, although we periodically have accessed such overnight borrowings for cash management purposes. We discuss these lines in “Liquidity and Capital Resources.” Tables showing information for securities sold under repurchase agreements and short-term borrowings are as follows.

[[GREPCENT_TABLE]]
[["","","As of or for the year ended December 31,"],["","","2021","","2020","","2019"],["","","","(dollars in thousands)"],["Securities sold under repurchase agreements"],["Balance at year-end","","$","42","","$","42","","$","82"],["Average during the year","","","41","","","49","","","90"],["Maximum month-end balance","","","42","","","82","","","93"],["Weighted average rate during the year","","","\u2014","","","\u2014","","","\u2014"],["Rate at December 31","","","\u2014","","","\u2014","","","\u2014"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","","As of or for the year ended December 31,"],["","","2021","","2020","","2019"],["","","","(dollars in thousands)"],["Short-term borrowings"],["Balance at year-end","","$","\u2014","","$","\u2014","","$","\u2014"],["Average during the year","","","19,958","","","27,322","","","129,031"],["Maximum month-end balance","","","300,000","","","140,000","","","300,000"],["Weighted average rate during the year","","","0.25%","","","0.72%","","","2.43%"],["Rate at December 31","","","0.25%","","","0.25%","","","1.50%"]]
[[/GREPCENT_TABLE]]

We do not have any policy prohibiting us from incurring debt. We have issued senior debt at the holding company, which may be used for various corporate purposes including stock repurchases, or in the future for common stock cash dividends, although we historically have not paid such dividends. Those funds may also be downstreamed to the Bank, where for purposes of the Bank only, they would constitute Tier 1 capital. In 2021, we utilized $40 million of the proceeds of the senior debt to repurchase stock. Additionally, we have issued subordinated debentures which are grandfathered to also constitute Tier 1 capital, but only at the Bank level. Those instruments are described below. We believe we are in compliance with any covenants applicable to our debt.

Senior debt. On August 13, 2020, we issued $100.0 million of senior debt with a maturity date of August 15, 2025, and a 4.75% interest rate, with interest paid semi-annually on March 15 and September 15. The Senior Notes are our direct, unsecured and unsubordinated obligations and rank equal in priority with all of our existing and future unsecured and unsubordinated indebtedness and senior in right of payment to all of our existing and future subordinated indebtedness. When these instruments mature in 2025, in lieu of repayment from Bank dividends, industry practice includes the issuance of new debt to repay maturing debt.

Subordinated debentures. As of December 31, 2021, we had two established statutory business trusts: The Bancorp Capital Trust II and The Bancorp Capital Trust III, which we refer to as (“the Trusts”). In each case, we own all the common securities of the Trusts. These Trusts issued preferred capital securities to investors and invested the proceeds in us through the purchase of junior subordinated debentures issued by us. These debentures are the sole assets of the Trusts. The $10.3 million of debentures issued to The Bancorp Capital Trust II and the $3.1 million of debentures issued to The Bancorp Capital Trust III were both issued on November 28, 2007, mature on March 15, 2038 and bear interest equal to 3-month LIBOR plus 3.25%.

Other Long-term Borrowings. At December 31, 2021 and 2020, we had long term borrowings of $39.5 million and $40.3 million respectively, which consisted of sold loans which were accounted for as a secured borrowing, because they did not qualify for true sale accounting.

Other Liabilities. Other liabilities amounted to $62.2 million at December 31, 2021 compared to $81.6 million at December 31, 2020. The difference reflected changes in taxes payable.

Shareholders’ Equity. At December 31, 2021, we had $652.5 million in shareholders’ equity compared to $581.2 million at the prior year end. The increase primarily reflected 2021 net income, net of common stock repurchases and the decrease in the market value of securities resulting from the increase in certain market interest rates.

78

Off-balance Sheet Commitments

We are party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in our consolidated financial statements.

Credit risk is defined as the possibility of sustaining a loss due to the failure of the other parties to a financial instrument to perform in accordance with the terms of the contract. The maximum exposure to credit loss under commitments to extend credit and standby letters of credit is represented by the contractual amount of these instruments. We use the same underwriting standards and policies in making credit commitments as we do for on-balance sheet instruments.

Financial instruments whose contract amounts represent potential credit risk for us, are our unused commitments to extend credit and standby letters of credit which were approximately $2.15 billion and $1.7 million, respectively, at December 31, 2021. The vast majority of commitments reflect SBLOC commitments, which are variable rate, and connected to lines of credit collateralized by marketable securities. The amount of those lines is generally based upon the value of the collateral, and not expected usage. The majority of those available lines have not been drawn upon, and SBLOC loans are “demand” loans and can be called at any time.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and many require the payment of a fee. Standby letters of credit are conditional commitments that guarantee the performance of a customer to a third party. Since we expect that many of the commitments or letters of credit we issue will not be fully drawn upon, the total commitment or letter of credit amounts do not necessarily represent future cash requirements. We evaluate each customer’s creditworthiness on a case-by-case basis. We base the amount of collateral we obtain when we extend credit on our credit evaluation of the customer. SBLOC commitments are limited to a percentage of the collateral value, which varies for equities and fixed income securities. For IBLOC, the commitment may be as high as the cash value of the applicable eligible life insurance policy. Collateral for other loan commitments varies but may include real estate, marketable securities, pledged deposits, equipment and accounts receivable.

Contractual Obligations and Other Commitments

The following table sets forth our contractual obligations and other commitments, including off-balance sheet commitments, representing required and potential cash outflows as of December 31, 2021 (in thousands):

[[GREPCENT_TABLE]]
[["","","","","","Payments due by period"],["","","","","Less than","","One to","","Three to","","After"],["Contractual obligation","","Total","","one year","","three years","","five years","","five years"],["Minimum annual rentals on"],["noncancelable operating leases","","$","9,677","","$","2,908","","$","5,135","","$","1,634","","$","\u2014"],["Loan commitments","","","2,154,352","","","44,611","","","68,131","","","37,324","","","2,004,286"],["Senior debt","","","98,682","","","\u2014","","","\u2014","","","98,682","","","\u2014"],["Interest expense on senior debt","","","17,417","","","4,750","","","9,500","","","3,167","","","\u2014"],["Subordinated debentures","","","13,401","","","\u2014","","","\u2014","","","\u2014","","","13,401"],["Interest expense on subordinated"],["debentures (1)","","","7,281","","","449","","","898","","","898","","","5,036"],["Standby letters of credit","","","1,698","","","1,698","","","\u2014","","","\u2014","","","\u2014"],["Total","","$","2,302,508","","$","54,416","","$","83,664","","$","141,705","","$","2,022,723"]]
[[/GREPCENT_TABLE]]

(1) Presentation assumes a weighted average interest rate of 3.46%.

Impact of Inflation

The primary direct impact of inflation on our operations is on our operating costs. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institution’s performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or in the same magnitude as the price of goods and services. While it is difficult to predict the impact of inflation and responsive Federal Reserve rate changes on our net interest income, the Federal Reserve has historically utilized interest rate increases

79

in the overnight federal funds rate as one tool in fighting inflation. While we have generally maintained a balance sheet for which net interest income tends to increase with increases in rates, the impact of floors which must be surpassed before rates on certain loans increase, may result in decreases in net income with lesser increases in rates. Cumulative Federal Reserve rate increases of 150 basis points may be required to increase net interest income from current levels. While we anticipate that inflation will affect our future operating costs, we cannot predict the timing or amounts of any such effects.

Recently Issued Accounting Standards

Information on recent accounting pronouncements is set forth in Note B, item 21, to the consolidated financial statements included in this report and is incorporated herein by this reference.