Item 7. Management’s Discussion and Analysis
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our audited consolidated financial statements and the accompanying notes included elsewhere in this Annual Report on Form 10-K. The following discussion contains "forward-looking statements" that reflect our future plans, estimates, beliefs and expected performance. We caution that assumptions, expectations, projections, intentions or beliefs about future events may, and often do, vary from actual results and the differences can be material. See "Cautionary Statement Regarding Forward-Looking Statements." Also, see the risk factors and other cautionary statements described under the heading "Item 1A – Risk Factors" included in Item 1A of this Annual Report on Form 10-K. We do not undertake any obligation to publicly update any forward-looking statements except as otherwise required by applicable law.
Company Overview
We are a financial holding company founded in 2002 and headquartered in Denver, Colorado. We provide a fully integrated suite of wealth management services to our clients including banking, trust and investment management products and services. Our mission is to be the best private bank for the Western wealth management client. We target entrepreneurs, professionals and high-net worth individuals, typically with $1.0 million-plus in liquid net worth, and their related philanthropic and business organizations, which we refer to as the " Western wealth management client. " We believe that the Western wealth management client shares our entrepreneurial spirit and values our sophisticated, high-touch wealth management services that are tailored to meet their specific needs. We partner with our clients to solve their unique financial needs through our expert integrated services provided in a team approach.
We offer our services through a branded network of boutique private trust bank offices, which we believe are strategically located in affluent and high-growth markets in locations across Colorado, Arizona, Wyoming and California. Our profit centers, which are comprised of private bankers, lenders, wealth planners and portfolio managers, under the leadership of a local chairman and/or president, are also supported centrally by teams providing management services such as operations, risk management, credit administration, marketing, technology support, human capital and accounting/finance services, which we refer to as support centers.
From 2004, when we opened our first profit center, until December 31, 2020, we have expanded our footprint into eleven full service profit centers, two loan production offices, and two trust offices located across four states. Following the completion of the branch purchase and assumption agreement ("Branch Acquisition") in the second quarter 2020, we added one full service profit center in Lone Tree, Colorado. During the third quarter of 2020, we closed two branch locations which were acquired in the Branch Acquisition during the second quarter of 2020. As of and for the year ended December 31, 2020, we had $1.97 billion in total assets, $92.6 million in total revenues and provided fiduciary and advisory services on $6.26 billion of assets under management ( " AUM " ).
Response to COVID-19
The spread of COVID-19 has caused significant disruptions in the U.S. economy since it was declared a pandemic in March 2020 by the World Health Organization. Disruptions include temporary closures of many businesses that have led to a loss of revenues and a rapid increase in unemployment, disrupted global supply chains, market downturns and volatility, changes in consumer behavior related to pandemic fears, related emergency response legislation and an expectation that Federal Reserve policy will maintain a low interest rate environment for the foreseeable future. The changes have impacted our clients and their industries, as well as the financial services industry. At this time, we cannot predict the impact or how long the economy or our impacted clients will be disrupted.
The Company activated its Business Continuity Plan in early March in response to the emergence of COVID-19 and has continued to adjust as the crisis continues to impact our markets, clients and business. Since March, a majority of our associates have been working remotely. All of our offices are open, functioning, and continue to operate in an appointment only model for client service to limit the risk of potential exposure to COVID-19 for our associates and clients. We are taking additional precautions within our profit centers, including enhanced cleaning procedures and physical distancing measures, to ensure the safety of our clients and our associates.
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A provision in the Coronavirus Aid, Relief and Economic Security Act ("CARES Act") created the Paycheck Protection Program ("PPP"), which is administered by the Small Business Administration ("SBA"). The PPP is intended to provide loans to small businesses to pay their employees, rent, mortgage interest and utilities. The loans may be forgiven conditioned upon the client providing payroll documentation evidencing their compliant use of funds and otherwise complying with the terms of the program. The Bank is an approved SBA lender and began accepting applications for the program on April 3, 2020. As of December 31, 2020, we held 423 PPP loans for a total of $142.9 million with an average loan size of $0.3 million. As of February 28, 2021, the Company had submitted 509 loans with original loan amounts of $142.0 million to the SBA for forgiveness and had received forgiveness on 456 loans totaling $78.5 million all related to the first round of the PPP.
On January 11, 2021 the SBA reopened the PPP, to First Draw PPP Loans and began accepting applications for Second Draw PPP Loans on January 13, 2021. The Bank began accepting applications for the reopened program on January 19, 2021. As of February 28, 2021, we had received 660 applications for the newest round of PPP loans from borrowers for $91.4 million with an average loan size of $0.1 million; of the applications received, 410 applications for $68.7 million have been approved and funded by the SBA under the reopened program.
As a result of the COVID-19 pandemic, a loan modification program was designed and implemented to assist our clients experiencing financial stress resulting from the economic impacts caused by the global pandemic. The Company has offered loan extensions, temporary payment moratoriums, and financial covenant waivers for commercial and consumer borrowers impacted by the pandemic who have a pass risk rating and have not been delinquent over 30 days on payments in the last two years. The Company had eighty-nine loans across multiple industries in the amount of $160.8 million of loans that took part in the Company’s COVID loan modification program. No loans in the loan modification program were delinquent according to Bank policy as of December 31, 2020. Two loans, in the aggregate amount of $2.1 million, were still in the modification period as of December 31, 2020. The CARES Act provides banks optional, temporary relief from accounting for certain loan modifications as a troubled debt restructuring ("TDR"). The modifications must be related to the adverse effects of COVID-19, and certain other criteria are required to be met in order to apply the relief. Interagency guidance from the Federal Reserve and the FDIC confirmed with the FASB that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief, are not to be considered TDRs. We believe our loan modification program satisfies the applicable requirements.
The Company will continue to closely monitor the performance of COVID-19 impacted clients. Additionally, the Company will continue to review and revise its provision for loan losses as more information becomes available including the resolution of certain uncertainties some of our impacted clients face related to the government mandated shutdowns and shelter-in-place orders and the resulting financial stress. The extent to which the COVID-19 pandemic and government actions taken in response to the pandemic will impact our operations and financial results is highly uncertain.
The Company is also lending under the Federal Reserve’s Main Street Lending Program ("MSLP") to support lending to small and medium-sized for profit businesses and nonprofit organizations that were in sound financial condition before the onset of the COVID-19 pandemic. As of December 31, 2020, the Company had six loans with a balance held by the Bank of $6.6 million. These loans represent 4.5% of the Commercial and Industrial line. Further details of the MSLP are provided in Note 5 – Loans and the Allowance for Loan Losses of the accompanying Notes to the Consolidated Financial Statements.
Primary Factors Used to Evaluate the Results of Operations
As a financial institution, we manage and evaluate various aspects of both our results of operations and our financial condition. We evaluate the comparative levels and trends of the line items in our Consolidated Balance Sheets and Statements of Income as well as various financial ratios that are commonly used in our industry. The primary factors we use to evaluate our results of operations include net interest income, non-interest income and non-interest expense.
Net Interest Income
Net interest income represents interest income less interest expense. We generate interest income on interest-earning assets, primarily loans and available-for-sale securities. We incur interest expense on interest-bearing liabilities, primarily interest-bearing deposits and borrowings. To evaluate net interest income, we measure and monitor: (i) yields on loans, available-for-sale securities and other interest-earning assets; (ii) the costs of deposits and other funding sources;
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(iii) the rates incurred on borrowings and other interest-bearing liabilities; and (iv) the regulatory risk weighting associated with the assets. Interest income is primarily impacted by loan growth and loan repayments, along with changes in interest rates on the loans. Interest expense is primarily impacted by changes in deposit balances, changes in interest rates on deposits, along with the volume and type of interest-bearing liabilities. Net interest income is primarily impacted by changes in market interest rates, the slope of the yield curve, and interest we earn on interest-earning assets or pay on interest-bearing liabilities.
Non-Interest Income
Non-interest income primarily consists of the following:
● Trust and investment management fees —fees and other sources of income charged to clients for managing their trust and investment assets, providing financial planning consulting services, 401(k) and retirement advisory consulting services, and other wealth management services. Trust and investment management fees are primarily impacted by rates charged and increases and decreases in AUM. AUM is primarily impacted by opening and closing of client advisory and trust accounts, contributions and withdrawals, and the fluctuation in market values.
● Net gain on mortgage loans —gain on originating and selling mortgages, origination fees, and borrower credits, less commissions to loan originators, lender credits, document review and other costs specific to originating and selling the loan. The market adjustments for interest rate lock commitments ("IRLC") and gains and losses incurred on the mandatory trading of loans are also included in this line item. Net gain on mortgage loans is primarily impacted by the amount of loans sold, the type of loans sold and market conditions.
● Bank fees —income generated through bank-related service charges such as: electronic transfer fees, treasury management fees, bill pay fees, servicing fees for Main Street Lending Program, and other banking fees. Banking fees are primarily impacted by the level of business activities and cash movement activities of our clients.
● Risk management and insurance fees —commissions earned on insurance policies we have placed for clients through our client risk management team who incorporate insurance services, primarily life insurance, to support our clients’ wealth planning needs. Our insurance revenues are primarily impacted by the type and volume of policies placed for our clients.
● Income on company-owned life insurance —income earned on the growth of the cash surrender value of life insurance policies we hold on certain key associates. The income on the increase in the cash surrender value is non-taxable income.
● Net gain on sale of securities/assets —gain on sale of available-for-sale securities and other assets sold. Net gain on sale of securities/assets are primarily impacted by the amount of securities/assets sold, the type of securities/assets sold and market conditions.
Non-Interest Expense
Non-interest expense is comprised primarily of the following:
● Salaries and employee benefits —all forms of compensation-related expenses including salary, incentive compensation, payroll-related taxes, stock-based compensation, benefit plans, health insurance, 401(k) plan match costs and other benefit-related expenses. Salaries and employee benefit costs are primarily impacted by changes in headcount and fluctuations in benefits costs.
● Occupancy and equipment —costs related to leasing our office space, depreciation charges for the furniture, fixtures and equipment, amortization of leasehold improvements, utilities and other occupancy-related expenses. Occupancy and equipment costs are primarily impacted by the number of locations we occupy.
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● Professional services —costs related to legal, accounting, tax, consulting, personnel recruiting, insurance and other outsourcing arrangements. Professional services costs are primarily impacted by corporate activities requiring specialized services. FDIC insurance expense is also included in this line and represents the assessments that we pay to the FDIC for deposit insurance.
● Technology and information systems —costs related to software and information technology services to support office activities and internal networks. Technology and information system costs are primarily impacted by the number of locations we occupy, the number of associates we have and the level of service we require from our third-party technology vendors.
● Data processing —costs related to processing fees paid to our third-party data processing system providers relating to our core private trust banking platform. Data processing costs are primarily impacted by the number of loan, deposit and trust accounts we have and the level of transactions processed for our clients.
● Marketing —costs related to promoting our business through advertising, promotions, charitable events, sponsorships, donations and other marketing-related expenses. Marketing costs are primarily impacted by the levels of advertising programs and other marketing activities and events held throughout the year.
● Amortization of other intangible assets —primarily represents the amortization of intangible assets, including client lists and other similar items recognized in connection with acquisitions.
● Goodwill impairment —represents the $1.6 million goodwill impairment charge in 2019 related to the Company’s Los Angeles-based fixed income portfolio management team.
● Net loss on assets held for sale —represents the fair value adjustment on disposal groups held for sale.
● Provision for other real estate owned —represents the fair value adjustment for other real estate owned ( " OREO " ).
● Other —includes costs related to operational expenses associated with office supplies, postage, travel expenses, meals and entertainment, dues and memberships, costs to maintain or prepare OREO for sale, director compensation and travel, and other general corporate expenses that do not fit within one of the specific non-interest expense lines described above. Other operational expenses are generally impacted by our business activities and needs.
Operating Segments
We measure the overall profitability of operating segments based on income before income tax. We believe this is a more useful measurement as our wealth management products and services are fully integrated with our private trust bank. We allocate costs to our segments, which consist primarily of compensation and overhead expense directly attributable to the products and services within the Wealth Management and Mortgage segments. We measure the profitability of each segment based on a post-allocation basis, as we believe it better approximates the operating cash flows generated by our reportable operating segments. A description of each segment is provided in Note 19 - Segment Reporting of the accompanying Notes to the Consolidated Financial Statements.
During the year ended December 31, 2020, we evaluated our reportable segments following the sale of our Los Angeles-based fixed income portfolio management team and certain related advisory and sub-advisory arrangements ("LA fixed income team"). We determined that the income before income tax related to the Capital Management segment was no longer significant and management will no longer be evaluating Capital Management separately for internal reporting. As such, Capital Management is no longer a reporting unit and the Company has discontinued reporting of the Capital Management segment on a standalone basis. The residual assets that remained in the Capital Management segment are now included in the Wealth Management segment. All reported periods are presented under the Wealth Management segment as of December 31, 2020.
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P rimary Factors Used to Evaluate our Balance Sheet
The primary factors we use to evaluate our balance sheet include asset and liability levels, asset quality, capital, liquidity, and potential profit production from assets.
We manage our asset levels to ensure our lending initiatives are efficiently and profitably supported and to ensure we have the necessary liquidity and capital to meet the required regulatory capital ratios. Funding needs are evaluated and forecasted by communicating with clients, reviewing loan maturity and draw expectations, and projecting new loan opportunities.
We manage the diversification and quality of our assets based upon factors that include the level, distribution, severity and trend of problem assets such as those determined to be classified, delinquent, non-accrual, non-performing or restructured; the adequacy of our allowance for loan losses; the diversification and quality of loan and investment portfolios; the extent of counterparty risks, credit risk concentrations, and other factors.
We manage our liquidity based upon factors that include the level and quality of capital and our overall financial condition, the trend and volume of problem assets, our balance sheet risk exposure, the level of deposits as a percentage of total loans, the amount of non-deposit funding used to fund assets, the availability of unused funding sources and off-balance sheet obligations, the availability of assets to be readily converted into cash without undue loss, the amount of cash and liquid securities we hold, and other factors.
Financial institution regulators have established guidelines for minimum capital ratios for banks and bank holding companies. The Company has adopted the Basel III regulatory capital framework. As of December 31, 2020, the Bank’s capital ratios exceeded the current well capitalized regulatory requirements established under Basel III.
Branch Acquisition
On February 10, 2020, the Company entered into a branch purchase and assumption agreement with Simmons Bank, pursuant to which the Company agreed to acquire all of Simmons’ Colorado locations, including three branches and one loan production office located in metro Denver, as well as certain deposits and loans and other assets. On May 15, 2020, the Branch Acquisition was successfully completed. See Note 2 - Acquisitions of the accompanying Notes to Consolidated Financial Statements for additional information.
Recent Events
On September 18, 2020, the Company entered into an agreement to sell its LA fixed income team and certain related advisory and sub-advisory arrangements to Lido Advisors, LLC and Oakhurst Advisors, LLC. On November 13, 2020, the Company completed the sale. On an ongoing basis, the sale of the LA fixed income team is expected to be earnings neutral to the Company, as the revenue decrease will be approximately in-line with the expected expense reduction. The sale is not expected to have an impact on Bank clients but reduced the Company’s assets under management by $330.6 million. As a result of the sale, the Company evaluated its reportable segments and determined the remaining assets following the sale in the Capital Management segment no longer meet the thresholds of income before income tax to be a reportable segment. The residual assets that remained in the Capital Management segment are now included in the Wealth Management segment.
Results of Operations
Overview
The year ended December 31, 2020 compared with the year ended December 31, 2019 . For the year ended December 31, 2020, we reported net income available to common shareholders of $24.5 million, compared to net income available to common shareholders for December 31, 2019 of $8.0 million, a $16.5 million, or 206.3% increase. For the year ended December 31, 2020, our income before income tax was $33.1 million, a $22.9 million, or 224.4%, increase from December 31, 2019. For the year ended December 31, 2020, compared to the year ended December 31, 2019, income before income tax increased primarily as a result of a $14.0 million, or 43.8%, increase in net interest income and an increase of $18.6 million, or 57.1%, in non-interest income. The increase in non-interest income was primarily the result
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of a $691.4 million increase in mortgage loans funded, which resulted in a $18.7 million increase in net gain on mortgage loans during the year ended December 31, 2020 compared to December 31, 2019. The increase in income before income taxes was partially offset by an increase of $5.8 million, or 10.7%, in non-interest expense, which was primarily due to an increase in expenses related to salaries and employee benefits and professional services.
Net Interest Income
The year ended December 31, 2020 compared with the year ended December 31, 2019 . For the year ended December 31, 2020, compared to the year ended December 31, 2019, net interest income, before the provision for loan losses, increased $14.0 million, or 43.8%, to $46.1 million. This increase was partially attributable to a $381.8 million increase in average outstanding loan balances compared to December 31, 2019, and a 94 bps decrease in the average rate on interest bearing deposits, partially offset by a decrease in our average yield on loans to 3.94% for the year ended December 31, 2020 from 4.49% for the year ended December 31, 2019. For the year ended December 31, 2020, our net interest margin was 3.09% and our net interest spread was 2.92%. For the year ended December 31, 2019, our net interest margin was 2.99% and our net interest spread was 2.62%.
The increase in average loans outstanding for the year ended December 31, 2020 compared to the same periods in 2019 was primarily due to diversified growth across all loan categories. Net interest income is also impacted by changes in the amount and type of interest-earning assets and interest-bearing liabilities. To evaluate net interest income, we measure and monitor the yields on our loans and other interest-earning assets and the costs of our deposits and other funding sources.
Interest income on our available-for-sale securities portfolio decreased as a result of lower average investment balances and lower average yields on the portfolio for the year ended December 31, 2020 compared to the same period in 2019. Our average available-for-sale securities balance during the year ended December 31, 2020 was $45.5 million, a decrease of $7.6 million from the year ended December 31, 2019. For the year ended December 31, 2020, our average yield on the available-for-sale securities portfolio decreased to 1.93%, from 2.40% the prior year.
Interest expense on deposits decreased during the year ended December 31, 2020 compared to the same period in 2019. Average rates on interest bearing deposits decreased 94 basis points, consistent with the lower interest rate environment. The reduction in cost of deposits was partially offset by an increase in average interest-bearing deposit accounts of $177.1 million compared to the prior year.
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The following tables present an analysis of net interest income and net interest margin for the periods presented, using daily average balances for each major category of interest-earning assets and interest-bearing liabilities, the interest earned or paid and the average rate earned or paid on those assets or liabilities.
As of and For the Year Ended December 31,
2020
2019
Interest
Average
Interest
Average
Average
Earned /
Yield /
Average
Earned /
Yield /
(Dollars in thousands)
Balance (1)
Paid
Rate
Balance (1)
Paid
Rate
Assets
Interest-earning assets:
Interest-bearing deposits in other financial institutions
$
129,670
$
458
0.35
%
$
80,985
$
1,732
2.14
%
Available-for-sale securities (2)
45,466
878
1.93
53,063
1,274
2.40
Loans (3)
1,318,648
51,998
3.94
936,821
42,045
4.49
Interest-earning assets
1,493,784
53,334
3.57
1,070,869
45,051
4.21
Mortgage loans held for sale (4)
80,469
2,388
2.97
39,436
1,415
3.59
Total interest-earning assets, plus mortgage loans held for sale
$
1,574,253
$
55,722
3.54
%
$
1,110,305
$
46,466
4.18
%
Allowance for loan losses
(9,945)
(7,639)
Noninterest-earning assets
94,935
79,700
Total assets
$
1,659,243
$
1,182,366
Liabilities and Shareholders’ Equity
Interest-bearing liabilities:
Interest-bearing deposits
$
976,108
$
5,794
0.59
%
$
798,986
$
12,263
1.53
%
FHLB and Federal Reserve borrowings
122,773
584
0.48
12,217
250
2.05
Subordinated notes
13,812
854
6.18
6,560
477
7.27
Total interest-bearing liabilities
$
1,112,693
$
7,232
0.65
%
$
817,763
$
12,990
1.59
%
Noninterest-bearing liabilities:
Noninterest-bearing deposits
383,271
222,058
Other liabilities
21,402
19,511
Total noninterest-bearing liabilities
$
404,673
$
241,569
Shareholders’ equity
141,877
123,034
Total liabilities and shareholders’ equity
$
1,659,243
$
1,182,366
Net interest rate spread (5)
2.92
%
2.62
%
Net interest income (6)
$
46,102
$
32,061
Net interest margin (7)
3.09
%
2.99
%
(1) Average balance represents daily averages, unless otherwise noted.
(2) Available-for-sale securities represents monthly averages.
(3) Non-performing loans are included in the respective average loan balances. Income, if any, on such loans is recognized on a cash basis.
(4) Tax-equivalent yield adjustments are immaterial.
(5) Mortgage loans held for sale are separated from the interest-earning assets above, as these loans are held for a short period of time until sold in the secondary market and are not held for investment purposes, with interest income recognized in the net gain on mortgage loans line of the income statement. These balances are excluded from the margin calculations in these tables.
(6) Net interest spread is the average yield on interest-earning assets (excluding mortgage loans held for sale) minus the average rate on interest-bearing liabilities.
(7) Net interest income is the difference between income earned on interest-earning assets, which does not include interest earned on mortgage loans held for sale, and expense paid on interest-bearing liabilities.
(8) Net interest margin is equal to net interest income divided by average interest-earning assets (excluding mortgage loans held for sale).
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The following tables present the dollar amount of changes in interest income and interest expense for the periods presented, for each component of interest-earning assets and interest-bearing liabilities (excluding mortgage loans held for sale) and distinguishes between changes attributable to volume and interest rates. Changes attributable to both rate and volume that cannot be separated have been allocated to volume.
Year Ended December 31, 2020
Compared to 2019
Increase
(Decrease) Due
Total
to Change in:
Increase
(Dollars in thousands)
Volume
Rate
(Decrease)
Interest-earning assets:
Interest-bearing deposits in other financial institutions
$
172
$
(1,446)
$
(1,274)
Available for sale securities
(147)
(249)
(396)
Loans
15,056
(5,103)
9,953
Total increase (decrease) in interest income
$
15,081
$
(6,798)
$
8,283
Interest-bearing liabilities:
Interest-bearing deposits
1,051
(7,520)
(6,469)
FHLB and Federal Reserve borrowings
526
(192)
334
Subordinated notes
448
(71)
377
Total increase (decrease) in interest expense
$
2,025
$
(7,783)
$
(5,758)
Increase in net interest income
$
13,056
$
985
$
14,041
Non-Interest Income
The year ended December 31, 2020 compared with the year ended December 31, 2019 . For the year ended December 31, 2020 compared to the year ended December 31, 2019, non-interest income increased $18.6 million, or 57.1%, to $51.2 million. The increase in non-interest income was attributable to higher net gain on mortgage loans, primarily related to a $691.4 million increase in mortgage loans funded from the prior year.
The table below presents the significant categories of our non-interest income for the year ended December 31, 2020 and 2019.
Year Ended
December 31,
Change
(Dollars in thousands)
2020
2019
$
%
Non-interest income:
Trust and investment management fees
$
19,022
$
18,935
$
87
0.5
%
Net gain on mortgage loans
29,276
10,585
18,691
176.6
Bank fees
1,320
1,173
147
12.5
Risk management and insurance fees
1,199
1,205
(6)
(0.5)
Income on company-owned life insurance
363
377
(14)
(3.7)
Net gain on sale of securities
—
119
(119)
*
Net gain on sale of assets
—
183
(183)
*
Total non-interest income
$
51,180
$
32,577
$
18,603
57.1
%
________________
* Not meaningful
Trust and investment management fees — For the year ended December 31, 2020 compared to the same period in 2019, our trust and investment management fees remained relatively unchanged.
Net gain on mortgage loans — For the year ended December 31, 2020 compared to the year ended December 31, 2019, our net gain on mortgage loans increased by $18.7 million, or 176.6%, to $29.3 million. For the year ended December 31, 2020 and 2019, our origination volume of mortgage loans was $1.33 billion and $640.6 million, respectively. The net gain on sale of loans will fluctuate with the amount and type of loans sold and market conditions. The increase in gain on mortgage loans for the year ended December 31, 2020 compared to 2019 was primarily related to the increase in origination volume in 2020 compared to 2019. The increase in origination volume in 2020 was primarily
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related to lower market rates driving an increase in refinance activity, a strong residential real estate market in our footprint, and management’s commitment and ability to capitalize on the mortgage environment.
Bank fees — For the year ended December 31, 2020 compared to the same period in 2019, our bank fees increased by $0.1 million or 12.5% mostly related to additional fees on MSLP loans.
Risk management and insurance fees — Risk management fees include fees earned by our risk management product group as a result of assisting clients with obtaining life insurance policies and fees from the trailing annuity revenue streams. For the years ended December 31, 2020 and 2019, the Company recognized $1.2 million of risk management fees.
Net gain on sale of securities/assets — For the year ended December 31, 2020, the Company did not sell securities/assets. For the year ended December 31, 2019, the Company recognized a net gain on sale of securities of $0.1 million and a net gain on sale of assets of $0.2 million related to the sale of our third party administrator services.
Provision for Loan Losses
We have a dedicated problem loan resolution team comprised of associates from our credit, senior leadership, risk and accounting teams that meets frequently to ensure that watch list and problem credits are identified early and actively managed. We work to identify potential losses in a timely manner and proactively manage the problem credits to minimize losses. For the year ended December 31, 2020, we recorded $4.7 million of provision for loan losses, primarily resulting from an increase based on the additional variability surrounding the loan modifications made during the second quarter along with increased economic uncertainty related to the impact of the COVID-19 pandemic and overall loan growth.
The Company has increased loan level reviews and portfolio monitoring to address the changing environment. We identified clients who could be more highly impacted by the recent COVID-19 pandemic and economic disruption and are meeting regularly with them. The analysis reviewed the borrowers in industries we believe may be more impacted including those the lenders believed would have one or more of the following characteristics: greater than 50% probability of a downgrade, a covenant violation or 20% reduction in collateral position. The Company receives and reviews current financial data and cash flow forecasts from borrowers with loan modification agreements.
Management believes the financial strength of the Bank’s clientele and the diversity of the portfolio continues to mitigate the credit risk within the portfolio. Only two loans remained on modified terms at December 31, 2020.
Non-Interest Expense
The year ended December 31, 2020 compared with the year ended December 31, 2019 . The increase in non-interest expense of 10.7% to $59.5 million for the year ended December 31, 2020, was primarily due to higher salaries and employee benefits expense, higher professional services expense, offset partially by a reduction in goodwill impairment charges.
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The table below presents the significant categories of our non-interest expense for the periods noted:
Year Ended
December 31,
Change
(Dollars in thousands)
2020
2019
$
%
Non-interest expense:
Salaries and employee benefits
$
34,785
$
31,810
$
2,975
9.4
%
Occupancy and equipment
6,009
5,562
447
8.0
Professional services
5,035
3,519
1,516
43.1
Technology and information systems
4,035
3,973
62
1.6
Data processing
4,000
3,065
935
30.5
Marketing
1,478
1,292
186
14.4
Amortization of other intangible assets
14
374
(360)
(96.3)
Goodwill impairment
—
1,572
(1,572)
*
Net loss on assets held for sale
553
—
553
*
Provision on other real estate owned
176
—
176
*
Other
3,452
2,617
835
31.9
Total non-interest expense
$
59,537
$
53,784
$
5,753
10.7
%
* Not meaningful
Salaries and employee benefits— The increase in salaries and employee benefits of $3.0 million, or 9.4%, was primarily related to added personnel from the Branch Acquisition and to support the growth in our Mortgage segment, and an increase in incentive compensation accruals driven by the strong financial performance of the Company. These increases were partially offset by $2.9 million in deferred compensation in the form of loan origination costs related to PPP loan originations during 2020.
Occupancy and equipment— The increase in occupancy and equipment of $0.4 million, or 8.0%, was primarily driven by the addition of one full service profit center and the closing of two branch locations which were acquired in the Branch Acquisition.
Professional Services— The increase in professional services of $1.5 million, or 43.1%, was primarily driven by additional FDIC insurance expense related to our balance sheet growth, transaction expenses related to the Branch Acquisition, and an FDIC assessment credit offsetting expense in the year ended December 31, 2019.
Data processing— The increase in data processing costs of $0.9 million, or 30.5%, was primarily driven by an increase in core systems cost as a result of an increase in accounts and transactions related to the Branch Acquisition and growth in our Mortgage segment.
Marketing— The increase was driven by higher corporate advertising and agency related expenses, offset partially by lower client meal and entertainment related expenses.
Amortization of other intangible assets— The decrease in amortization of other intangible assets of $0.4 million, or 96.3%, was primarily due to certain intangibles becoming fully amortized during the year ended December 31, 2019.
Goodwill impairment— The decrease was due to a goodwill impairment charge of $1.6 million related to the Capital Management segment during the second quarter of 2019. No goodwill impairment charges were recorded in 2020. See Note 7 – Goodwill and Other Intangible Assets.
Net loss on assets held for sale— This amount represents the fair value adjustment on disposal groups held for sale. In the first quarter of 2020, we recorded an impairment loss on intangibles held for sale of $0.6 million related to the Capital Management segment.
Provision on other real estate owned— This amount represents the fair value adjustment for other real estate owned. During the year ended December 31, 2020, we incurred $0.2 million in losses as a result of sales contracts in place which were lower than the carrying value.
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Other— The increase in other non-interest expense was driven by product related expenses, increased expense due to the growth in our balance sheet, and a $0.2 million SEC penalty in the previously reported Capital Management segment.
Income Tax
During the year ended December 31, 2020, the Company recorded an income tax provision of $8.5 million, reflecting an effective tax rate 25.8%. During the year ended December 31, 2019, the Company recorded an income tax provision of $2.2 million, reflecting an effective tax rate of 21.4%. The increase in the effective tax rate was primarily attributable to a $0.4 million valuation allowance recorded following the sale of the LA fixed income team as a result of the Company’s ability to utilize the full California NOL.
Segment Reporting
We have two reportable operating segments: Wealth Management and Mortgage. Our Wealth Management segment consists of operations relating to the Company’s fully integrated wealth management products and services. Services provided include deposit, loan, insurance, and trust and investment management advisory products and services. Our Mortgage segment consists of operations relating to the Company’s residential mortgage service offerings. Mortgage products and services are financial in nature for which premiums are recognized, net of expenses, upon the sale of mortgage loans to third parties. Services provided by our Mortgage segment include soliciting, originating and selling mortgage loans into the secondary market. Mortgage loans originated and held for investment purposes are recorded in the Wealth Management segment, as this segment provides ongoing services to our clients.
The Company completed the sale of its LA fixed income team in the fourth quarter 2020. The LA fixed income team and the related assets made up a majority of the previously reported Capital Management Segment. As a result of the sale, the Company evaluated its reportable segments and determined the remaining assets in the Capital Management segment no longer met the thresholds to be a reportable segment.
For all periods presented, the Wealth Management segment includes the key metrics of the previously reported Capital Management segment.
The following table presents key metrics related to our segments:
Year Ended December 31, 2020
Wealth
(Dollars in thousands)
Management (1)
Mortgage
Consolidated
Income (2)
$
63,256
$
29,344
$
92,600
Income before taxes
$
12,086
$
20,977
$
33,063
Profit margin
19.1
%
71.5
%
35.7
%
Year Ended December 31, 2019
Wealth
(Dollars in thousands)
Management (1)
Mortgage
Consolidated
Income (2)
$
53,301
$
10,675
$
63,976
Income before taxes
$
6,152
$
4,040
$
10,192
Profit margin
11.5
%
37.8
%
15.9
%
(1) Includes financial information previously reported under the Capital Management segment.
(2) Net interest income after provision plus non-interest income.
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The tables below present selected financial metrics of each segment as of and for the periods presented:
Wealth Management
As of and For the Year Ended December 31,
(Dollars in thousands)
2020 (1)
2019 (1)
$ Change
% Change
Total interest income
$
53,334
$
45,051
$
8,283
18.4
%
Total interest expense
7,232
12,990
(5,758)
(44.3)
Provision for loan losses
4,682
662
4,020
607.3
Net interest income, after provision for loan losses
41,420
31,399
10,021
31.9
Non-interest income
21,836
21,902
(66)
(0.3)
Total income
63,256
53,301
9,955
18.7
Depreciation and amortization expense
1,035
1,453
(418)
(28.8)
All other non-interest expense
50,135
(2)
45,696
(3)
4,439
9.7
Income before income tax
$
12,086
$
6,152
$
5,934
96.5
%
Goodwill
$
24,191
$
19,686
$
4,505
22.9
%
Assets held for sale
—
3,553
(3,553)
*
Total assets
$
1,798,416
$
1,204,620
$
593,796
49.3
%
________________________________________
* Not meaningful
(1) Periods include financial information previously reported under the Capital Management segment.
(2) Includes loss on assets held for sale of $0.6 million and $0.2 million SEC penalty in the previously reported Capital Management segment.
(3) Includes goodwill impairment charge of $1.6 million in the previously reported Capital Management segment.
The Wealth Management segment reported income before income tax of $12.1 million for the year ended December 31, 2020, compared to $6.2 million, for the same period in 2019. The increase is primarily driven by an increase in average outstanding loan balances and a decrease in cost of funds, offset partially by increasing provision for loan losses and non-interest expense. During the year ended December 31, 2020, average loans increased $381.8 million and the cost of funds decreased to 0.48% from 1.25% compared to the year ended December 31, 2019.
Mortgage
As of and For the Year Ended December 31,
(Dollars in thousands)
2020
2019
$ Change
% Change
Total interest income
$
—
$
—
$
—
—
%
Total interest expense
—
—
—
—
Provision for loan losses
—
—
—
—
Net interest income, after provision for loan losses
—
—
—
—
Non-interest income
29,344
10,675
18,669
174.9
Total income
29,344
10,675
18,669
174.9
Depreciation and amortization expense
70
218
(148)
(67.9)
All other non-interest expense
8,297
6,417
1,880
29.3
Income before income tax
$
20,977
$
4,040
$
16,937
419.2
%
Total assets
$
175,239
$
47,062
$
128,177
272.4
%
The Mortgage segment reported income before income tax of $21.0 million for the year ended December 31, 2020, compared to $4.0 million for the same period in 2019. The overall increase in non-interest income was primarily related to lower market rates driving an increase in refinance activity, a strong residential real estate market in our footprint and management’s commitment and ability to capitalize on the mortgage environment. During the years ended December 31, 2020 and 2019, our origination volume was $1.33 billion and $640.6 million, respectively. During the year ended December 31, 2020, the Company originated $875.8 million in refinance loans compared to $292.7 million the prior year.
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Financial Condition
The table below presents our condensed Consolidated Balance Sheets as of the dates presented:
December 31,
(Dollars in thousands)
2020
2019
$ Change
% Change
Balance Sheet Data:
Cash and cash equivalents
$
155,989
$
78,638
$
77,351
98.4
%
Investments
36,666
58,903
(22,237)
(37.8)
Gross loans
1,532,833
998,007
534,826
53.6
Allowance for loan losses
(12,539)
(7,875)
(4,664)
59.2
Loans, net of allowance
1,520,294
990,132
530,162
53.5
Mortgage loans held for sale
161,843
48,312
113,531
235.0
Goodwill & other intangible assets, net
24,258
19,714
4,544
23.0
Company-owned life insurance
15,449
15,086
363
2.4
Other assets
59,156
37,344
21,812
58.4
Assets held for sale
—
3,553
(3,553)
*
Total assets
$
1,973,655
$
1,251,682
$
721,973
57.7
%
Deposits
$
1,619,910
$
1,086,784
$
533,126
49.1
%
Borrowings
173,854
16,560
157,294
949.8
Other liabilities
24,929
20,543
4,386
21.4
Liabilities held for sale
—
117
(117)
*
Total liabilities
1,818,693
1,124,004
694,689
61.8
Total shareholders’ equity
154,962
127,678
27,284
21.4
Total liabilities and shareholders’ equity
$
1,973,655
$
1,251,682
$
721,973
57.7
%
* Not meaningful
Cash and cash equivalents increased by $77.4 million, or 98.4%, to $156.0 million as of December 31, 2020 compared to December 31, 2019. The increase in liquidity was driven by organic growth in deposits related to new client relationships, increases in existing client accounts, and corporate initiatives to support current and future balance sheet growth. During the same period, investments decreased by $22.2 million due to accelerated prepayments on mortgage backed securities, or 37.8%, to $36.7 million as of December 31, 2020. The Company elected not to reinvest cash flows into the investment portfolio and instead increased cash balances to support loan growth due to low yield environment in the securities market.
Loans increased by $534.8 million, or 53.6%, to $1.53 billion as of December 31, 2020 compared to December 31, 2019. The increase was driven by three primary factors: organic growth, PPP loan originations and the Branch Acquisition. We experienced growth in our all major loan categories with the largest growth coming in the Cash, Securities and Other category that includes $142.9 million in PPP loans.
Mortgage loans held for sale increased $113.5 million, or 235.0%, to $161.8 million as of December 31, 2020 compared to December 31, 2019. This increase corresponds to the increase in mortgage origination volume as noted in the Mortgage segment activity.
Goodwill and other intangible assets, net increased by $4.5 million as of December 31, 2020 compared to December 31, 2019. The increase was driven by the recording of $4.5 million in goodwill and $0.1 million of core deposit intangibles related to the Branch Acquisition.
Other assets increased by $21.8 million, or 58.4%, to $59.2 million as of December 31, 2020 compared to December 31, 2019. This was primarily related to a $8.7 million increase in balances related to unfunded mortgage IRLC, a $3.6 million increase in accrued interest receivable as a result of payment moratoriums related to loan modifications and PPP loans and a $3.1 million contingent consideration asset recorded as a result of the sale of the LA fixed income team.
Total deposits increased $533.1 million, or 49.1%, to $1.62 billion as of December 31, 2020 compared to December 31, 2019. The increase in total deposits from December 31, 2019 was attributable to organic growth and the Branch Acquisition. We experienced growth in all our major deposit categories with the largest increases coming from non-interest bearing accounts and money market deposit accounts.
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Money market deposit accounts increased $231.9 million, or 37.7%, to $847.4 million as of December 31, 2020 compared to December 31, 2019. Time deposit accounts increased $37.8 million, or 28.0%, to $172.7 million as of December 31, 2020. Negotiable order of withdrawal ("NOW") accounts increased $21.1 million, or 23.0%, to $113.1 million compared to December 31, 2019. This increase in money market deposit and NOW accounts was primarily due to continued organic growth in our market areas.
Total borrowings increased $157.3 million, or 949.8%, to $173.9 million as of December 31, 2020 compared to December 31, 2019. The increase is primarily attributed to participation in the Paycheck Protection Program Loan Facility from the Federal Reserve in the amount of $134.6 million. Borrowing from this facility is expected to match fund the balances of PPP loans. During the year ended December 31, 2020, the Company completed the issuance and sale of subordinated notes in the aggregate principal amount of $18.0 million to support its capital objectives.
Total shareholders’ equity increased $27.3 million, or 21.4%, to $155.0 million as of December 31, 2020. The increase is primarily due to an increase in net income.
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Assets Under Management
Year Ended
December 31,
(Dollars in millions)
2020
2019
Managed Trust Balance at Beginning of Period
$
1,750
$
1,380
New relationships
17
49
Closed relationships
(12)
(2)
Contributions
98
38
Withdrawals
(119)
(114)
Market change, net
156
399
Ending Balance
$
1,890
$
1,750
Yield*
0.17
%
0.17
%
Directed Trust Balance at Beginning of Period
$
989
$
789
New relationships
18
139
Closed relationships
(6)
—
Contributions
42
32
Withdrawals
(96)
(64)
Market change, net
4
93
Ending Balance
$
951
$
989
Yield*
0.08
%
0.07
%
Investment Agency Balance at Beginning of Period
$
2,009
$
1,846
New relationships
179
109
Closed relationships (2)
(451)
(72)
Contributions
268
145
Withdrawals
(231)
(257)
Market change, net
66
238
Ending Balance
$
1,840
$
2,009
Yield*
0.73
%
0.66
%
Custody Balance at Beginning of Period
$
452
$
356
New relationships
7
11
Closed relationships
(4)
(4)
Contributions
105
84
Withdrawals
(82)
(71)
Market change, net
40
76
Ending Balance
$
518
$
452
Yield*
0.03
%
0.03
%
401(k)/Retirement Balance at Beginning of Period
$
988
$
864
New relationships
23
7
Closed relationships
(60)
(69)
Contributions
133
84
Withdrawals
(85)
(63)
Market change, net
57
165
Ending Balance (1)
$
1,056
$
988
Yield*
0.15
%
0.20
%
Total Assets Under Management at Beginning of Period
$
6,188
$
5,235
New relationships
244
315
Closed relationships (2)
(533)
(147)
Contributions
646
383
Withdrawals
(613)
(569)
Market change, net
323
971
Total Assets Under Management
$
6,255
$
6,188
Yield*
0.30
%
0.31
%
* Trust & investment management fees divided by period-end balance.
(1) AUM reported for the current period are one quarter in arrears.
(2) Sale of LA fixed income team resulted in closed accounts of $330.6 million.
Assets under management increased $67.0 million, or 1.1%, to $6.26 billion for the year ended December 31, 2020. Assets under management increased $953.0 million, or 18.2%, to $6.19 billion for the year December 31, 2019. The sale of the LA fixed income team resulted in closed accounts of $330.6 million during the year ended December 31, 2020. Excluding the impact of the sale, the increase in 2020 is primarily attributable to net market gains.
Available-for-sale securities
Investments we intend to hold for an indefinite period of time, but not necessarily to maturity, are classified as available-for-sale and are recorded at fair value using current market information from a pricing service, with unrealized
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gains and losses excluded from earnings and reported in other comprehensive income (loss), net of tax. All our investments in securities were classified as available-for-sale for the periods presented below. The carrying values of our investment securities classified as available-for-sale are adjusted for unrealized gain or loss, and any gain or loss is reported on an after-tax basis as a component of other comprehensive income in shareholders’ equity.
The following table summarizes the amortized cost and estimated fair value of our investment securities as of December 31, 2020:
December 31, 2020
Gross
Gross
Amortized
Unrealized
Unrealized
Fair
(Dollars in thousands)
Cost
Gains
Losses
Value
Investment securities available-for-sale:
U.S. Treasury debt
$
250
$
4
$
—
$
254
Corporate bonds
6,000
55
(11)
6,044
Government National Mortgage Association ("GNMA") mortgage -backed securities—residential
23,806
798
—
24,604
Federal National Mortgage Association ("FNMA") mortgage-backed securities—residential
1,616
61
—
1,677
Corporate collateralized mortgage obligations ("CMO") and mortgage-backed securities ("MBS")
4,078
62
(53)
4,087
Total securities available-for-sale
$
35,750
$
980
$
(64)
$
36,666
The following table summarizes the amortized cost and estimated fair value of our investment securities as of December 31, 2019:
December 31, 2019
Gross
Gross
Amortized
Unrealized
Unrealized
Fair
(Dollars in thousands)
Cost
Gains
Losses
Value
Investment securities available-for-sale:
U.S. Treasury debt
$
250
$
4
$
—
$
254
GNMA mortgage -backed securities—residential
45,490
157
(335)
45,312
FNMA mortgage-backed securities—residential
2,935
11
(29)
2,917
Corporate CMO and MBS
10,425
40
(45)
10,420
Total securities available-for-sale
$
59,100
$
212
$
(409)
$
58,903
The following tables represent the book value of our contractual maturities and weighted average yield for our investment securities as of the dates presented. Contractual maturities may differ from expected maturities because issuers can have the right to call or prepay obligations without penalties. Our investments are taxable securities. Weighted average yields are not presented on a taxable equivalent basis. Securities not due at a single maturity date are included as after ten years.
Maturity as of December 31, 2020
One Year or Less
One to Five Years
Five to Ten Years
After Ten Years
Weighted
Weighted
Weighted
Weighted
Amortized
Average
Amortized
Average
Amortized
Average
Amortized
Average
(Dollars in thousands)
Cost
Yield
Cost
Yield
Cost
Yield
Cost
Yield
Available-for-sale:
U.S. Treasury debt
$
250
0.02
%
$
—
—
%
$
—
—
%
$
—
—
%
Corporate Bonds
—
—
1,250
0.17
—
—
4,750
0.60
GNMA mortgage-backed securities - residential
—
—
—
—
—
—
23,806
1.59
FNMA mortgage-backed securities - residential
—
—
—
—
—
—
1,616
0.10
Corporate CMO and MBS
—
—
—
—
43
*
4,035
0.31
Total available-for-sale
$
250
0.02
%
$
1,250
0.17
%
$
43
—
%
$
34,207
2.60
%
* Not meaningful
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Maturity as of December 31, 2019
One Year or Less
One to Five Years
Five to Ten Years
After Ten Years
Weighted
Weighted
Weighted
Weighted
Amortized
Average
Amortized
Average
Amortized
Average
Amortized
Average
(Dollars in thousands)
Cost
Yield
Cost
Yield
Cost
Yield
Cost
Yield
Available-for-sale:
U.S. Treasury debt
$
—
—
%
$
250
0.01
%
$
—
—
%
$
—
—
%
GNMA mortgage-backed securities - residential
—
—
—
—
—
—
45,490
2.28
FNMA mortgage-backed securities - residential
—
—
—
—
—
—
2,935
0.14
Corporate CMO and MBS
—
—
—
—
52
—
10,373
0.66
Total available-for-sale
$
—
—
%
$
250
0.01
%
$
52
—
%
$
58,798
3.08
%
As of December 31, 2020 and December 31, 2019, there were no holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of shareholders’ equity.
Loan Portfolio
Our primary source of interest income is derived through interest earned on loans to high net worth individuals and their related commercial interests. Our senior lending and credit team consists of seasoned, experienced personnel and we believe that our officers are well versed in the types of lending in which we are engaged. Underwriting policies and decisions are managed centrally and the approval process is tiered based on loan size, making the process consistent, efficient and effective. The management team and credit culture demands prudent, practical, and conservative approaches to all credit requests in compliance with the loan policy guidelines to ensure strong credit underwriting practices.
In addition to originating loans for our own portfolio, we conduct mortgage banking activities in which we originate and sell, servicing-released, whole loans in the secondary market. Our mortgage banking loan sales activities are primarily directed at originating single family mortgages that are priced and underwritten to conform to previously agreed-upon criteria before loan funding and are delivered to the investor shortly after funding. The level of future loan originations, loan sales and loan repayments depends on overall credit availability, the interest rate environment, the strength of the general economy, local real estate markets and the housing industry, and conditions in the secondary loan sale market. The amount of gain or loss on the sale of loans is primarily driven by market conditions and changes in interest rates, as well as our pricing and asset liability management strategies. As of December 31, 2020 and December 31, 2019, we had mortgage loans held for sale of $161.8 million and $48.3 million, respectively, in residential mortgage loans we originated.
Loan balances include the impacts of PPP and the Branch Acquisition. See Note 2 - Acquisitions of the accompanying Notes to Consolidated Financial Statements for additional information.
As of December 31, 2020, the Company has $142.9 million in PPP loans outstanding with $1.3 million in remaining fees to be recognized. The remaining fees represent the net amount of the fees from the SBA for participation in the PPP less the loan origination costs on these loans. The current amortization of this income is being recognized over a two-year period, however if a loan receives full forgiveness from the SBA, the remaining income will be recognized upon receipt of the funds from the SBA. As of February 28, 2021, the Company had submitted to the SBA 509 loans for forgiveness with original loan amounts of $142.0 million and had received forgiveness and receipt of funds on 456 loans totaling $78.5 million all related to the first round of the PPP. For PPP balances not forgiven, the remaining net fee is extended and amortized over a 5 year payback period.
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The following table summarizes our loan portfolio by type of loan as of the dates indicated, in thousands:
December 31,
2020
2019
2018
2017
2016
(Dollars in thousands)
Amount
% of Total
Amount
% of Total
Amount
% of Total
Amount
% of Total
Amount
% of Total
Cash, Securities and Other
$
357,020
23.3
%
$
146,701
14.7
%
$
114,165
12.8
%
$
131,756
16.2
%
$
111,966
16.7
%
Construction and Development
131,111
8.5
28,120
2.8
31,897
3.5
24,914
3.1
39,702
5.9
1-4 Family Residential
455,038
29.7
400,134
40.2
350,852
39.3
282,014
34.7
242,221
36.0
Non-Owner Occupied CRE
281,943
18.4
165,179
16.6
173,741
19.5
176,987
21.8
152,317
22.7
Owner Occupied CRE
163,042
10.6
127,968
12.8
108,480
12.2
92,742
11.4
62,879
9.4
Commercial and Industrial
146,031
9.5
128,457
12.9
113,660
12.7
104,284
12.8
62,940
9.3
Total loans held for investment (1)
$
1,534,185
100.0
%
$
996,559
100.0
%
$
892,795
100.0
%
$
812,697
100.0
%
$
672,025
100.0
%
Mortgage loans held for sale
$
161,843
$
48,312
$
14,832
$
22,940
$
8,053
(1) Loans held for investment exclude deferred costs (fees) and unamortized premiums/ (unaccreted discounts), net of $(1.4) million, $1.4 million, $1.2 million, $1.0 million and $0.8 million as of December 31, 2020, 2019, 2018, 2017 and 2016, respectively.
● Cash, Securities and Other— consists of consumer and commercial purpose loans that are primarily secured by securities managed and under custody with us, cash on deposit with us or life insurance policies. In addition, loans in this portfolio are collateralized with other sources of consumer collateral and an immaterial amount of each loan may be unsecured. This segment of our portfolio is affected by a variety of local and national economic factors affecting borrowers’ employment prospects, income levels, and overall economic sentiment. PPP loans that are fully guaranteed by the SBA are classified within this line item as of December 31, 2020.
● Construction and Development —consists of loans to finance the construction of residential and non-residential properties. These loans are dependent on the strength of the industries of the related borrowers and the risks consistent with construction projects.
● 1-4 Family Residential— consists of loans and home equity lines of credit secured by 1-4 family residential properties. These loans typically enable borrowers to purchase or refinance existing homes, most of which serve as the primary residence of the owner. In addition, some borrowers secure a commercial purpose loan with owner occupied or non-owner occupied 1-4 family residential properties. Loans in this segment are dependent on the industries tied to these loans as well as the national and local economies, and local residential and commercial real estate markets.
● Commercial Real Estate, Owner Occupied and Non-Owner Occupied —consists of commercial loans collateralized by real estate. These loans may be collateralized by owner occupied or non-owner occupied real estate, as well as multi-family residential real estate. These loans are dependent on the strength of the industries of the related borrowers and the success of their businesses.
● Commercial and Industrial —consists of commercial and industrial loans, including working capital lines of credit, permanent working capital term loans, business asset loans, acquisition, expansion and development loans, and other loan products, primarily in our target markets. This portfolio primarily consists of term loans and lines of credit which are dependent on the strength of the industries of the related borrowers and the success of their businesses. MSLP loans are included in this category as of December 31, 2020.
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The contractual maturity ranges of loans in our loan portfolio and the amount of such loans with fixed and floating interest rates in each maturity range, excluding deferred costs (fees), and unamortized premiums/ (unaccreted discounts), as of the date indicated are summarized in the following tables:
As of December 31, 2020
One Year
One Through
After
(Dollars in thousands)
or Less
Five Years
Five Years
Total
Cash, Securities and Other
$
90,053
$
259,611
(1)
$
7,356
$
357,020
Construction and Development
78,900
50,703
1,508
131,111
1-4 Family Residential
41,212
78,359
335,467
455,038
Non-Owner Occupied CRE
25,801
175,476
80,666
281,943
Owner Occupied CRE
8,355
54,403
100,284
163,042
Commercial and Industrial
47,397
68,607
30,027
146,031
Total loans
$
291,718
$
687,159
$
555,308
$
1,534,185
Amounts with fixed rates
$
76,131
$
469,155
$
205,548
$
750,834
Amounts with floating rates
215,587
218,004
349,760
783,351
Total loans
$
291,718
$
687,159
$
555,308
$
1,534,185
(1) Includes PPP loans.
As of December 31, 2019
One Year
One Through
After
(Dollars in thousands)
or Less
Five Years
Five Years
Total
Cash, Securities and Other
$
66,634
$
68,326
$
11,741
$
146,701
Construction and Development
9,126
16,953
2,041
28,120
1-4 Family Residential
32,300
96,886
270,948
400,134
Non-Owner Occupied CRE
13,286
113,457
38,436
165,179
Owner Occupied CRE
9,540
32,861
85,567
127,968
Commercial and Industrial
37,341
78,022
13,094
128,457
Total loans
$
168,227
$
406,505
$
421,827
$
996,559
Amounts with fixed rates
$
58,289
$
251,378
$
128,452
$
438,119
Amounts with floating rates
109,938
155,127
293,375
558,440
Total loans
$
168,227
$
406,505
$
421,827
$
996,559
Loan Modifications
As a result of the COVID-19 pandemic, a loan modification program was designed and implemented to assist our clients experiencing financial stress resulting from the economic impacts caused by the global pandemic. The Company was offering loan extensions, temporary payment moratoriums, and financial covenant waivers for commercial and consumer borrowers impacted by the pandemic who have a pass risk rating and have not been delinquent over 30 days on payments in the last two years.
As of December 31, 2020, the Company’s loans include two modified loans, including acquired loans, across multiple industries in the amount of $2.1 million, representing 0.13% of total loans.
The following presents loans modifications as a result of COVID-19 as of December 31, 2020 (dollars in thousands):
Total Loans
# of Loans Modified
Outstanding Balance of Modified Loans
% of Total Loan Balance Modified
Cash, Securities and Other
$
357,020
—
$
—
—
%
Construction and Development
131,111
—
—
—
1-4 Family Residential
455,038
1
346
0.02
Non-Owner Occupied CRE
281,943
—
—
—
Owner Occupied CRE
163,042
1
1,716
0.11
Commercial and Industrial
146,031
—
—
—
Total Loans
$
1,534,185
2
$
2,062
0.13
%
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The CARES Act provides banks optional, temporary relief from accounting for certain loan modifications as a TDR. The modifications must be related to the adverse effects of COVID-19, and certain other criteria are required to be met in order to apply the relief. Interagency guidance from Federal Reserve and the FDIC confirmed with the FASB that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief, are not to be considered TDRs. We believe our loan modification program meets that definition. In accordance with that guidance, the Company is recognizing interest income on all loans modified for temporary payment moratoriums, primarily for a period of 180 days or less.
The Company had eighty-nine loans across multiple industries in the amount of $160.8 million of loans that took part in the Company’s COVID loan modification program. No loans in the loan modification program were delinquent according to Bank policy as of December 31, 2020. Two loans, in the aggregate amount of $2.1 million, were still in the modification period as of December 31, 2020.
All loans modified in response to COVID-19 are classified as performing and pass rated as of December 31, 2020. These loans are included in the allowance for loan loss general reserve in accordance with ASC 450-20. Management has increased our loan level reviews and portfolio monitoring to address the changing environment. The Company continues to meet regularly with clients who could be more highly impacted by the recent COVID-19 pandemic. These are borrowers in industries we believe may be more impacted by the pandemic, for instance those loans where there may be a greater than 50% probability of a downgrade, covenant violation or 20% reduction in collateral position. Management believes the diversity of the loan portfolio is prudent and remains consistent with the credit culture and goals of the Bank.
Interest accrued during the modification term on modified loans is deferred to the end of the loan term. As of December 31, 2020, no allowance for loan loss was deemed necessary on the accrued interest balances related to loan modifications.
Non-Performing Assets
Non-performing assets include non-accrual loans, TDRs, loans past due 90 days or more and still accruing interest, and OREO. The accrual of interest on loans is discontinued at the time the loan becomes 90 or more days delinquent unless the loan is well secured and in the process of collection. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on non-accrual status or charged off if collection of interest or principal is considered doubtful.
OREO represents assets acquired through, or in lieu of, foreclosure. The amounts reported as OREO are supported by recent appraisals, with the appraised values adjusted, where applicable, for expected transaction fees likely to be incurred upon sale of the property. We incur recurring expenses relating to OREO in the form of maintenance, taxes, insurance and legal fees, among others, until the OREO parcel is disposed. While disposition efforts with respect to our OREO are generally ongoing, if these properties are appraised at lower-than-expected values or if we are unable to sell the properties at the prices for which we expect to be able to sell them, we may incur additional losses. During the year ended December 31, 2020, we incurred $0.2 million in losses as a result of sales contracts in place which were lower than the carrying value.
The amount of lost interest for non-accrual loans was $0.2 million and $0.4 million for the year ended December 31, 2020 and 2019, respectively.
We had $4.3 million in non-performing assets as of December 31, 2020 compared to $12.9 million as of December 31, 2019. The $8.6 million decrease in our non-performing assets was primarily related to the payoff of a $5.1 million Commercial and Industrial loan, a $0.8 million paydown on another Commercial and Industrial loan, and $2.8 million paydown on a Cash, Securities, and Other loan during the year ended December 31, 2020.
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The following table presents information regarding non-performing loans as of the dates indicated:
As of December 31,
(Dollars in thousands)
2020
2019
2018
2017
2016
Non-accrual loans by category (1)
Cash, Securities and Other
$
50
$
2,803
$
11,252
$
—
$
—
Construction and Development
—
—
—
—
—
1-4 Family Residential
—
—
—
1,171
—
Non-Owner Occupied CRE
—
—
—
—
—
Owner Occupied CRE
479
—
—
—
—
Commercial and Industrial
3,529
4,412
1,735
1,835
3,607
Total non-accrual loans
4,058
7,215
12,987
3,006
3,607
TDRs still accruing
—
5,055
4,848
—
—
Accruing loans 90 or more days past due
—
—
1,217
1,217
—
Total non-performing loans
4,058
12,270
19,052
4,223
3,607
OREO
194
658
658
658
2,836
Total non-performing assets
$
4,252
$
12,928
$
19,710
$
4,881
$
6,443
Ratio of non-performing loans to total loans (2)
0.26
%
1.23
%
2.13
%
0.52
%
0.54
%
Ratio of non-performing assets to total assets
0.22
1.03
1.82
0.50
0.70
Allowance as a percentage of non-performing loans
308.99
%
64.18
%
39.11
%
172.55
%
179.60
%
(1) As of December 31, 2020, two non-accrual loans, totaling $0.5 million, were not also classified as a TDR. As of December 31, 2019, all non-accrual loans were also classified as TDRs. See Note 5 – Loans and the Allowance for Loan Losses to the Consolidated Financial Statements.
(2) Excludes mortgage loans held for sale of $161.8 million, $48.3 million, $14.8 million, $22.9 million and $8.1 million as of December 31, 2020, 2019, 2018, 2017, and 2016, respectively.
Potential Problem Loans
We categorize loans into risk categories based on relevant information about the ability of the borrowers to service their debt, such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. We analyze loans individually by classifying the loans by credit risk on a quarterly basis, which are segregated into the following definitions for risk ratings:
Special Mention — Loans categorized as special mention have a potential weakness or borrowing relationships that require more than the usual amount of management attention. Adverse industry conditions, deteriorating financial conditions, declining trends, management problems, documentation deficiencies or other similar weaknesses may be evident. Ability to meet current payment schedules may be questionable, even though interest and principal are still being paid as agreed. The asset has potential weaknesses that may result in deteriorating repayment prospects if left uncorrected. Loans in this risk grade are not considered adversely classified.
Substandard— Substandard loans are considered "classified" and are inadequately protected by the current net worth and paying capacity of the obligor or by the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardizes the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Loans in this category may be placed on non-accrual status and may individually be evaluated for impairment if indicators of impairment exist.
Doubtful —Loans graded doubtful are considered "classified" and have all the weaknesses inherent in those classified as Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions and values, highly questionable and improbable. However, the amount or certainty of eventual loss is not known because of specific pending factors.
Loans not meeting any of the three criteria above are considered to be pass-rated loans.
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As of December 31, 2020 and December 31, 2019 non-performing loans of $4.1 million and $12.3 million, respectively, were included in the substandard category in the table below. The following tables present, by class and by credit quality indicator, the recorded investment in our loans as of the dates indicated:
As of December 31, 2020
As of December 31, 2019
Special
Special
(Dollars in thousands)
Pass
Mention
Substandard
Total
Pass
Mention
Substandard
Total
Cash, Securities and Other
$
356,970
$
—
$
50
$
357,020
$
143,898
$
—
$
2,803
$
146,701
Construction and Development
131,111
—
—
131,111
28,120
—
—
28,120
1-4 Family Residential
451,918
—
3,120
455,038
395,224
—
4,910
400,134
Non-Owner Occupied CRE
275,627
6,316
—
281,943
164,021
1,158
—
165,179
Owner Occupied CRE
161,850
—
1,192
163,042
127,968
—
—
127,968
Commercial and Industrial
140,432
—
5,599
146,031
114,241
—
14,216
128,457
Total
$
1,517,908
$
6,316
$
9,961
$
1,534,185
$
973,472
$
1,158
$
21,929
$
996,559
Allowance for Loan Losses
The allowance for loan losses is established through a provision for loan losses, which is a noncash charge to earnings. Loan losses are charged against the allowance when management believes that a loan balance is confirmed uncollectable. Subsequent recoveries, if any, are credited to the allowance for loan losses.
The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and dollar volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral and prevailing economic conditions. Allocations of the allowance for loan losses may be made for specific loans, but the entire allowance for loan losses is available for any loan that, in management’s judgment, should be charged off.
We are closely monitoring the changing dynamics in the economy and the client impact driven by the COVID-19 pandemic. We have intensified our portfolio management, focusing on higher impacted industries and commercial property types. Our clientele is generally comprised of high net-worth individuals and commercial borrowers with strong credit profiles and multiple sources of repayment. The portion of our credit exposure to the highest risk industries impacted by COVID-19, such as accommodations, transportation and restaurants, is less than 3.0% of our loan portfolio. The Company has increased our loan level reviews and portfolio monitoring to address the changing environment and continues to engage in more frequent communication with these borrowers to better understand the impact on our borrower’s cash flows and respond proactively. While the length of time some of these businesses are unable to operate or operate at full capacity is unknown, it could have a significant impact on many factors that impact our borrowers and our reserve requirement. During the year ended December 31, 2020, the Company increased its allowance for loan losses to account for the additional variability surrounding the loan modifications made during the year and increased economic uncertainty related to the COVID-19 pandemic. Management will continue to closely monitor the loan portfolio and analyze the economic data to assess the impact on the allowance for loan loss. We believe the allowance for loan losses is adequate as of December 31, 2020.
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The following table presents summary information regarding our allowance for loan losses for the periods indicated:
Year Ended December 31,
(Dollars in thousands)
2020
2019
2018
2017
2016
Average loans outstanding (1)(2)
$
1,318,648
$
936,821
$
849,263
$
740,903
$
647,228
Gross loans outstanding at end of period (3)
$
1,532,833
$
998,007
$
893,966
$
813,689
$
672,815
Allowance for loan losses at beginning of period
$
7,875
$
7,451
$
7,287
$
6,478
$
5,956
Provision for loan losses
4,682
662
180
788
985
Charge-offs:
Cash, Securities and Other
31
248
16
—
124
Construction and Development
—
—
—
—
—
1-4 Family Residential
—
—
—
—
—
Non-Owner Occupied CRE
—
—
—
—
—
Owner Occupied CRE
—
—
—
—
—
Commercial and Industrial
—
—
—
—
687
Total charge-offs
31
248
16
—
811
Recoveries:
Cash, Securities and Other
13
10
—
10
17
Construction and Development
—
—
—
—
163
1-4 Family Residential
—
—
—
11
33
Non-Owner Occupied CRE
—
—
—
—
135
Owner Occupied CRE
—
—
—
—
—
Commercial and Industrial
—
—
—
—
—
Total recoveries
13
10
—
21
348
Net charge-offs (recoveries)
18
238
16
(21)
463
Allowance for loan losses at end of period
$
12,539
$
7,875
$
7,451
$
7,287
$
6,478
Ratio of allowance to end of period loans (4)
0.82
%
0.79
%
0.83
%
0.90
%
0.96
%
Ratio of net charge-offs to average loans (5)
—
%
0.03
%
—
%
—
%
0.07
%
(1) Average balances are average daily balances.
(2) Excludes average outstanding balances of mortgage loans held for sale of $80.5 million, $39.4 million, $21.8 million, $12.7 million and $19.0 million for the years ended for December 31, 2020, 2019, 2018, 2017 and 2016, respectively.
(3) Excludes mortgage loans held for sale of $161.8 million, $48.3 million, $14.8 million, $22.9 million, and $8.1 million as of December 31, 2020, 2019, 2018, 2017 and 2016, respectively.
(4) End of period loans at December 31, 2020 includes $127.2 million in acquired loans and $142.9 million in PPP loans of which $12.9 million are acquired PPP loans. No reserve is allocated for those loans. Excluding these loans would result in an increase of the ratio for the year ended December 31, 2020
(5) For percentages shown as a dash, the ratio of net charge-offs to average loans is negligible or immaterial.
The following table represents the allocation of the allowance for loan losses among loan categories and other summary information. The allocation for loan losses by category should neither be interpreted as an indication of future charge-offs, nor as an indication that charge-offs in future periods will necessarily occur in these amounts or in the indicated proportions. The allocation of a portion of the allowance for loan losses to one category of loans does not preclude its availability to absorb losses in other categories.
As of December 31,
2020
2019
2018
2017
2016
(Dollars in thousands)
Amount
% (1)
Amount
% (1)
Amount
% (1)
Amount
% (1)
Amount
% (1)
Cash, Securities and Other
$
2,579
23.3
%
$
1,058
14.7
%
$
764
12.8
%
$
1,066
16.2
%
$
846
16.7
%
Construction and development
932
8.5
200
2.8
232
3.5
202
3.1
301
5.9
1-4 Family Residential
3,233
29.7
2,850
40.2
2,552
39.3
2,283
34.7
1,833
36.0
Non-Owner Occupied CRE
2,004
18.4
1,176
16.6
1,264
19.5
1,433
21.8
1,153
22.7
Owner Occupied CRE
1,159
10.6
911
12.8
789
12.2
751
11.4
476
9.4
Commercial and Industrial
2,632
9.5
1,680
12.9
1,850
12.7
1,552
12.8
1,869
9.3
Total allowance for loan losses
$
12,539
100.0
%
$
7,875
100.0
%
$
7,451
100.0
%
$
7,287
100.0
%
$
6,478
100.0
%
(1) Represents the percentage of loans to total loans in the respective category.
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Deferred Tax Assets, Net
Deferred tax assets, net represent the differences in timing of when items are recognized for GAAP purposes and when they are recognized for tax purposes, as well as our net operating losses. As a result of the Tax Cuts and Jobs Act of 2017, our deferred tax assets, net, are valued based on the amounts that are expected to be recovered in the future utilizing the tax rates in effect at the time recognized. As a result of book and tax basis differences, our deferred tax assets, net for year ended December 31, 2020 increased $1.0 million from December 31, 2019. This increase was primarily driven by higher provision for loan losses along with higher incentive accruals. The increase was partially offset by a $0.4 million valuation allowance related to the California net operating loss carry forward following the completion of the sale of our LA fixed income team.
Deposits
Our deposit products include money market accounts, demand deposit accounts, time-deposit accounts (typically certificates of deposit), NOW accounts (interest checking accounts), and saving accounts. Our accounts are federally insured by the FDIC up to the legal maximum amount.
Total deposits increased by $533.1 million, or 49.1%, to $1.62 billion as of December 31, 2020 from December 31, 2019. Total average deposits for the year ended December 31, 2020 were $1.36 billion, an increase of $338.3 million, or 33.1%, compared to $1.02 billion as of December 31, 2019. The increase in total deposits from December 31, 2019 was attributable to organic growth and the Branch Acquisition. Organic growth was due to our general deposit growth initiatives, the cross-selling of products, the skills of our sales and service team, as well as additional deposits added from our trust and investment management relationships for which we also provide deposit products. The decrease in average rates in 2020 was driven primarily by the lower interest rate environment.
The following table presents the average balances and average rates paid on deposits for the periods below:
As of and For the Year Ended December 31,
2020
2019
Average
Average
Average
Average
(Dollars in thousands)
Balance
Rate
Balance
Rate
Deposits
Money market deposit accounts
$
719,946
0.46
%
$
548,776
1.57
%
NOW accounts
92,383
0.25
77,071
0.32
Certificates and other time deposits > $250k
59,996
1.69
52,593
2.10
Certificates and other time deposits < $250k
98,231
1.28
117,585
1.96
Total time deposits
158,227
1.44
170,178
2.01
Savings accounts
5,552
0.08
2,961
0.20
Total interest-bearing deposits
976,108
0.59
798,986
1.53
Noninterest-bearing accounts
383,271
222,058
Total deposits
$
1,359,379
0.43
%
$
1,021,044
1.20
%
Average noninterest-bearing deposits to average total deposits was 28.2% and 21.7% for the year ended December 31, 2020 and 2019, respectively.
Our average cost of funds was 0.48% and 1.25% during the year ended December 31, 2020 and 2019, respectively. The decrease was driven by a 94 basis point reduction in interest bearing deposit costs consistent with the lower interest rate environment.
Total money market accounts as of December 31, 2020 were $847.4 million, an increase of $231.9 million, or 37.7%, compared to $615.6 million as of December 31, 2019. NOW accounts increased $21.1 million, or 23.0%, to $113.1 million compared to December 31, 2019.
Total time deposits as of December 31, 2020 were $172.7 million, an increase of $37.8 million, or 28.0%, compared to December 31, 2019. The increase in deposits from December 31, 2019 was attributable to organic growth and the Branch Acquisition.
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The following table represents the amount of certificates of deposit by time remaining until maturity as of December 31, 2020:
As of December 31, 2020
Maturity Within:
(Dollars in thousands)
Three Months or Less
Three to Six Months
Six to 12 Months
After 12 Months
Total
Time, $250,000 and over
$
5,529
$
8,114
$
30,073
$
29,685
$
73,401
Other
18,318
20,905
42,297
17,761
99,281
Total
$
23,847
$
29,019
$
72,370
$
47,446
$
172,682
Borrowings
We have short-term and long-term borrowing sources available to supplement deposits and meet our liquidity needs. As of December 31, 2020 and December 31, 2019, borrowings totaled $173.9 million and $16.6 million, respectively.
During the year ended December 31, 2020, the Company completed the issuance and sale of subordinated notes totaling $18.0 million. The increase in other borrowings is primarily attributed to participation in the Paycheck Protection Program Loan Facility from the Federal Reserve with a period end balance of $134.6 million. Borrowing from this facility is expected to match fund the balances of PPP loans. The table below presents balances of each of the borrowing facilities as of the dates indicated:
December 31,
December 31,
(Dollars in thousands)
2020
2019
Borrowings
FHLB borrowings
$
15,000
$
10,000
Federal Reserve borrowings
134,563
—
Subordinated notes
24,291
6,560
Total
$
173,854
$
16,560
FHLB
We have a blanket pledge and security agreement with FHLB that requires certain loans and securities to be pledged as collateral for any outstanding borrowings under the agreement. The collateral pledged as of December 31, 2020 and December 31, 2019 amounted to $668.6 million and $515.5 million, respectively. Based on this collateral and the Company’s holdings of FHLB stock, the Company was eligible to borrow an additional $441.8 million as of December 31, 2020.
As of and for the
Year Ended
December 31,
(Dollars in thousands)
2020
Short-term borrowings:
Maximum outstanding at any month-end during the period
$
28,000
Balance outstanding at end of period
15,000
Average outstanding during the period
$
15,880
Average interest rate during the period
0.75
%
Average interest rate at the end of the period
0.32
%
The Bank has borrowing capacity associated with three unsecured federal funds lines of credit up to $10.0 million, $19.0 million, and $25.0 million. As of December 31, 2020 and 2019, there were no amounts outstanding on any of the federal funds lines.
As of December 31, 2019, we had a Restated Revolving Credit Note with a correspondent lending partner and the borrowing capacity associated with this facility was $5.0 million with no balance outstanding. The Company renewed the Restated Revolving Credit Note under a new Business Loan Agreement and associated Promissory Note on October
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28, 2020 to be effective as of June 30, 2020. As of December 31, 2020, the Promissory Note had a borrowing capacity under this facility of $5.0 million and had no balance outstanding.
Our borrowing facilities include various financial and other covenants, including, but not limited to, a requirement that the Bank maintains regulatory capital that is deemed "well capitalized" by federal banking agencies. As of December 31, 2020 and December 31, 2019, the Company was in compliance with the covenant requirements.
Liquidity and Capital Resources
Liquidity resources primarily include interest-bearing and noninterest-bearing deposits which primarily contribute to our ability to raise funds to support asset growth, acquisitions, and meet deposit withdrawals and other payment obligations. Access to purchased funds primarily include the ability to borrow from FHLB, other correspondent banks and the use of brokered deposits.
The following table illustrates, during the periods presented, the composition of our funding sources and the average assets in which those funds are invested as a percentage of average total assets for the period indicated.
Average Percentage for the Year Ended
December 31,
2020
2019
Sources of Funds:
Deposits:
Noninterest-bearing
23.10
%
18.78
%
Interest-bearing
58.83
67.58
FHLB and Federal Reserve borrowings
7.40
1.03
Subordinated notes
0.83
0.55
Other liabilities
1.29
1.65
Shareholders’ equity
8.55
10.41
Total
100
%
100
%
Uses of Funds:
Total loans
78.87
%
78.58
%
Available-for-sale securities
2.74
4.49
Mortgage loans held for sale
4.85
3.34
Interest-bearing deposits in other financial institutions
7.82
6.85
Noninterest-earning assets
5.72
6.74
Total
100
%
100
%
Average noninterest-bearing deposits to total average deposits
28.19
%
21.75
%
Average loans to total average deposits
97.00
91.75
Average interest-bearing deposits to total average deposits
71.81
%
78.25
%
Our primary source of funds is interest-bearing and noninterest-bearing deposits, and our primary use of funds is loans. We do not expect a change in the primary source or use of our funds in the foreseeable future.
Capital Resources
Total shareholders’ equity increased $27.3 million, or 21.4%, to $155.0 million as of December 31, 2020 compared to December 31, 2019. The increase is primarily due to net income of $24.5 million, $2.5 million of stock-based compensation charges, and other comprehensive income, net of tax of $0.8 million. During the year ended December 31, 2020, the Bank’s capital was also positively impacted by $3.7 million following the closure of the Capital Management segment as a result of the Bank assuming the remaining Goodwill of First Western Capital Management. These increases were partially offset by stock repurchases of $0.4 million and $0.3 million of share awards settled.
On November 3, 2020, the Company announced that its board of directors authorized the repurchase of up to 400,000 shares of the Company’s common stock, no par value, from time to time, within one year (the "2020 Repurchase Plan") and that the Board of Governors of the Federal Reserve System advised the Company that it has no objection to the Company’s 2020 Repurchase Plan. The Company may repurchase shares in privately negotiated transactions, in the open
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market, including pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 promulgated by the Securities and Exchange Commission, or otherwise in a manner that complies with applicable federal securities laws. The 2020 Repurchase Plan does not obligate the Company to acquire a specific dollar amount or number of shares and it may be extended, modified or discontinued at any time without notice.
During the year ended December 31, 2020, the Company repurchased 23,105 shares at an average price of $16.59. See Note 12 – Shareholders’ Equity for a breakout of repurchased shares by repurchase plan.
We are subject to various regulatory capital adequacy requirements at a consolidated level and the bank level. These requirements are administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on our consolidated financial statements. Under capital adequacy guidelines and, additionally for banks, the regulatory framework for prompt corrective action, we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices.
Capital levels are viewed as important indicators of an institution’s financial soundness by banking regulators. Generally, FDIC-insured depository institutions and their holding companies are required to maintain minimum capital relative to the amount and types of assets they hold. As of December 31, 2020 and December 31, 2019, respectively, our holding company and Bank were in compliance with all applicable regulatory capital requirements, and the Bank was classified as "well capitalized," for purposes of the prompt corrective action regulations. As we continue to grow our operations and maintain capital requirements, our regulatory capital levels may decrease depending on our level of earnings. During the year ended December 31, 2020, the Company made a $10.0 million capital injection into the Bank as a result of the growth due to the acquisition. We continue to monitor growth and control our capital activities in order to remain in compliance with all applicable regulatory capital standards.
The following table presents our regulatory capital ratios for the dates noted.
December 31, 2020
December 31, 2019
(Dollars in thousands)
Amount
Ratio
Amount
Ratio
Tier 1 capital to risk-weighted assets
Bank
$
133,963
10.22
%
$
99,461
10.67
%
Consolidated Company
131,507
9.96
105,821
11.31
Common Equity Tier 1(CET1) to risk-weighted assets
Bank
133,963
10.22
99,461
10.67
Consolidated Company
131,507
9.96
105,821
11.31
Total capital to risk-weighted assets
Bank
146,853
11.20
107,509
11.53
Consolidated Company
168,957
12.80
120,429
12.87
Tier 1 capital to average assets
Bank
133,963
7.62
99,461
8.09
Consolidated Company
$
131,507
7.45
%
$
105,821
8.58
%
Contractual Obligations and Off-Balance Sheet Arrangements
We enter into credit-related financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our clients. These financial instruments include commitments to extend credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the Consolidated Balance Sheets. Commitments may expire without being utilized. Our exposure to loan loss is represented by the contractual amount of these commitments, although material losses are not anticipated. We follow the same credit policies in making commitments as we do for on-balance sheet instruments.
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The following table presents future contractual obligations to make future payments for the periods indicated (amounts in thousands):
As of December 31, 2020
More than
More than
1 Year
1 Year but Less
3 Years but Less
5 Years
or Less
than 3 Years
than 5 Years
or More
Total
FHLB and Federal Reserve
$
—
$
149,563
$
—
$
—
$
149,563
Subordinated notes
—
—
—
24,291
(1)
24,291
Time deposits
125,238
43,180
4,241
23
172,682
Minimum lease payments
3,323
6,176
4,568
867
14,934
Total
$
128,561
$
198,919
$
8,809
$
25,181
$
361,470
(1) Reflects contractual maturity dates of December 31, 2026, March 31, 2030, and December 1, 2030.
The following tables present financial instruments whose contract amounts represent credit risk, as of the dates indicated.
December 31,
December 31,
2020
2019
Fixed Rate
Variable Rate
Fixed Rate
Variable Rate
Unused lines of credit
$
78,506
$
360,883
$
32,896
$
290,653
Standby letters of credit
1,933
17,524
1,759
24,197
Commitments to make loans to sell
370,512
—
47,354
—
Commitments to make loans
$
24,225
$
25,316
$
—
$
—
We may enter into contracts for services in the conduct of ordinary business operations, which may require payment for services to be provided in the future and may contain penalty clauses for early termination of the contracts. We do not believe these off-balance sheet arrangements have or are reasonably likely to have a material effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources. However, there can be no assurance that such arrangements will not have an effect on future operations.
Critical Accounting Policies
Our accounting policies and procedures are described in Note 1 - Organization and Summary of Significant Accounting Policies in the accompanying Notes to the Consolidated Financial Statements.