rbb20201231_10k.htm
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(Amendment No. 1)
 
(Mark One)
☒
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2020
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE TRANSITION PERIOD FROM                       TO                      
Commission File Number  001-38149
RBB BANCORP
(Exact name of Registrant as specified in its Charter)
 
California
27-2776416
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
1055 Wilshire Blvd. , 12 th floor
Los Angeles , California
90017
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code: ( 213 )   627-9888
 
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
  Trading Symbol(s)
  Name of exchange on which registered
Common Stock, No Par Value
  RBB
  NASDAQ Global Select Market
 
Securities registered pursuant to Section 12(g) of the Act: None
 
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No  ☒
 
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☐  No  ☒
 
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  ☒ No ☐
 
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files).  Yes  ☒ No ☐
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
☐
Accelerated filer
☒
       
Non-accelerated filer
☐  
Smaller reporting company
☐
       
Emerging growth company
☒
   
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   ☐
 
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report ☒
 
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ☐  No ☒
 
The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter was $ 250,297,115 .
 
The number of shares of Registrant’s Common Stock outstanding as of March 2, 2021, was 19,517,486 .
 
Portions of the Registrant’s Definitive Proxy Statement relating to the Annual Meeting of Shareholders, scheduled to be held on May 19, 2021, are incorporated by reference into Part III of this Report.
 
 
 
 
 
 
EXPLANATORY NOTE
 
This Amendment No. 1 on Form 10-K/A (“Amendment No. 1”) is being filed to amend RBB Bancorp’s (together with its consolidated subsidiaries, the “Company”) Annual Report on Form 10-K for the fiscal year ended December 31, 2020 (“Original Filing”), filed with the U.S. Securities and Exchange Commission (“SEC”) on March 9, 2021 (“Original Filing Date”). The sole purpose of this Amendment No. 1 is to correct various, items, statements, balances, percentages and ratios, primarily in the Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. The following chart sets forth a summary of the corrections to the various items, statements, balances, percentages, and ratios:
 
Description
Page Number
Previously Reported
 
Amended Report
Item 1. “Business –
Market Area”
6
“With a 2016 gross domestic product of approximately $ 118   billion , this MSA contains the largest concentration of people in the state (approximately 2.2 million)…”
 
“With a 2016 gross domestic product of approximately $ 108   billion , this MSA contains the largest concentration of people in the state (approximately 2.2 million)…”
Item 1. “Business –
Market Area”
7
“With a 2016 gross domestic product of approximately $ 1.7 billion , this MSA contains the largest concentration of people in the state…”
 
“With a 2016 gross domestic product of approximately $ 1.6 trillion , this MSA contains the largest concentration of people in the state…”
Item 1. “Business – Our Competition”
7
We view the Chinese-American banking market, including the Company, as comprised of 32  banks divided into three segments: publicly-traded banks ( 4  banks), locally-owned banks ( 15  banks), and banks that are subsidiaries of Taiwanese or Chinese banks ( 17  banks).  Fifteen  of the locally-owned banks are based in California. We are currently the sixth-largest bank among this group of 32  banks.
 
We view the Chinese-American banking market, including the Company, as comprised of 37  banks divided into three segments: publicly-traded banks ( 5  banks), locally-owned banks ( 33  banks), and banks that are subsidiaries of Taiwanese or Chinese banks ( 4  banks).   Twenty-four  of the locally-owned banks are based in California. We are currently the sixth-largest bank among this group of 37  banks.
Item 1A. “Risk Factors – Risks Related to Our Loans –
We have a concentration in commercial real estate which could cause our regulators to restrict our ability to grow. ”
30
As of December 31, 2020, our CRE loans represented 229.8 % of our total risk-based capital, as compared to 238.4 % as of December 31, 2018
 
As of December 31, 2020, our CRE loans represented 205 % of our total risk-based capital, as compared to 173 % as of December 31, 2018.
Item 1A. “Risk Factors –   Risks Related to Our Acquisition Strategy –  If the goodwill that we recorded in connection with a business acquisition becomes impaired, it could require charges to earnings, which would have a negative impact on our financial condition and results of operations. ”
35
As of December 31, 2019 , our goodwill totaled $69.3 million
 
As of December 31, 2020 , our goodwill totaled $69.3 million
Item 1A. “Risk Factors –   Risks Related to Our Acquisition Strategy –  Paydowns on our acquired loan portfolio will result in reduced total loan yield, net interest income and net income if not replaced with other high-yielding loans. ”
36
For the year ended December 31, 2020, the yield generated using only the expected coupon would have been 5.09% and 5.25 %, during the same respective periods.
 
For the year ended December 31, 2020, the yield generated using only the expected coupon would have been 5.09% and 5.42 %, during the same respective periods.
Item 3. “Legal Proceedings”
43
As of December 31, 2019 , the Company does not have any litigation reserves.
 
As of December 31, 2020 , the Company does not have any litigation reserves.
Item 5. “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities – Shareholders”
44
As of March 2, 2021, the Company had approximately 1,767  common stock shareholders of record.
 
As of March 2, 2021, the Company had approximately 1,113  common stock shareholders of record.
 
i
 
 
Item 6. “Selected Financial Data – December 31, 2019 FHLB Advances”
46
15,000
 
__
Item 6. “Selected Financial Data – December 31, 2018 FHLB Advances”
46
9,707
 
319,500
Item 6. “Selected Financial Data – December 31, 2018 Common stock dividend payout ratio”
46
16.44%
 
16.59%
Item 6. “Selected Financial Data – December 31, 2017 Common stock dividend payout ratio”
46
20.95%
 
20.99%
Item 6. “Selected Financial Data – December 31, 2016 Common stock dividend payout ratio”
46
19.61%
 
13.42%
Item 6. “Selected Financial Data – December 31, 2018 Loan to deposit ratio”
46
120.17%
 
99.41%
(6) For the purposes of calculating the loan to deposit ratio, short-term loans with maturities of less than 90-days, specifically “ Term Fed Funds ”  and purchased receivables are not included as loans as defined by the regulatory agencies.
Item 6. “Selected Financial Data – December 31,2020 – December 31, 2016 Adjusted loan to deposit ratio (6)”
46
December 31, 2020: 102.72%
December 31, 2019: 97.69%
December 31, 2018: 120.17%
December 31, 2017: 108.80%
December 31, 2016: 102.13%
 
Deleted.
Item 6. “Selected Financial Data – December 31, 2020 Core deposits / total deposits”
46
76.65%
 
77.31%
Item 6. “Selected Financial Data – December 31, 2019 Core deposits / total deposits”
46
70.46%
 
73.44%
Item 6. “Selected Financial Data – December 31, 2020 Net non-core funding dependence ratio”
46
12.47%
 
9.11%
Item 6. “Selected Financial Data – December 31, 2019 Net non-core funding dependence ratio”
46
21.04%
 
13.17%
Item 6. “Selected Financial Data – December 31, 2018 Net non-core funding dependence ratio”
46
23.93%
 
22.32%
Item 6. “Selected Financial Data – December 31, 2017 Net non-core funding dependence ratio”
46
18.11%
 
13.72%
Item 6. “Selected Financial Data – December 31, 2016 Net non-core funding dependence ratio”
46
12.20%
 
19.84%
Item 6. “Selected Financial Data – December 31, 2020 Adjusted net non-core funding dependence ratio”
46
10.30%
 
0.38%
Item 6. “Selected Financial Data – December 31, 2019 Adjusted net non-core funding dependence ratio”
46
9.00%
 
1.84%
Item 6. “Selected Financial Data – December 31, 2018 Adjusted net non-core funding dependence ratio”
46
12.82%
 
12.19%
 
ii
 
 
Item 6. “Selected Financial Data – December 31, 2017 Adjusted net non-core funding dependence ratio”
46
9.13%
 
12.18%
Item 6. “Selected Financial Data – December 31, 2016 Adjusted net non-core funding dependence ratio”
46
8.90%
 
8.82%
Item 6. “Selected Financial Data – Footnote (3)”
47
Tangible book value per share, return on average tangible common equity, tangible common equity to tangible assets and efficiency  ratio are non-GAAP financial measures. See “Non-GAAP Financial Measures” for a reconciliation of these measures to their most comparable GAAP measures.
 
Tangible book value per share, return on average tangible common equity, and  tangible common equity to tangible assets ratio are non-GAAP financial measures. See “Non-GAAP Financial Measures” for a reconciliation of these measures to their most comparable GAAP measures.
Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Overview” 
49
The increase is due to the acquisition of $188.4 million of deposits from PGBH, a net   increase $9   million  from wholesale and brokered deposits, and the remainder from organic growth.
 
The increase is due to the acquisition of $188.4 million of deposits from PGBH, an   increase of $125.2   million in money market demand accounts, offset by a net decrease of $6.9   million  from wholesale and brokered deposits, and the remainder from organic growth.
Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Analysis of the Results of Operations – Financial Performance”
50
(2) Efficiency ratio, tangible   book value per share, return on average tangible common equity, tangible common equity to tangible assets , and the efficiency ratio  are non-GAAP financial measures. See "Non-GAAP Financial Measures" for a reconciliation of these measures to their most comparable GAAP measures.
 
(2) Tangible book value per share, return on average tangible common equity, and tangible common equity to tangible assets are non-GAAP financial measures. See "Non-GAAP Financial Measures" for a reconciliation of these measures to their most comparable GAAP measures.
Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations –Results of Operations—Comparison of Results of Operations for the Years Ended December 31, 2020 to December 31, 2019 – Net Interest Income /Average Balance Sheet – Interest Income”
51
For the years 2020 and 2019, the reported yield on total loans was 5.18 % and 5.54 %, respectively.
 
For the years 2020 and 2019, the reported yield on total loans was 5.19 % and 5.65 %, respectively.
Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations—Comparison of Results of Operations for the Years Ended December 31, 2020 to December 31, 2019 –
Noninterest Income – Gain on sale of loans – December 31, 2018 Loans sold: Single family residential mortgage “
54
$230,771
 
$236,202
 
iii
 
 
Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations—Comparison of Results of Operations for the Years Ended December 31, 2020 to December 31, 2019 –
Noninterest Income – Gain on sale of loans – 2019 vs 2018 Increase (Decrease) ($ and %) Loans sold: Single family residential mortgage” 
54
$241,706
104.7%
 
$236,275
100.0%
Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations—Comparison of Results of Operations for the Years Ended December 31, 2020 to December 31, 2019 –
Noninterest Income – Gain on sale of loans – December 31, 2018 Loans sold: Total loans sold
54
$297,471
 
$302,902
Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations—Comparison of Results of Operations for the Years Ended December 31, 2020 to December 31, 2019 –
Noninterest Income –2019 vs 2018 Increase (Decrease) ($ and %) Loans sold: Total loans sold
54
$214,231
72.0%
 
$208,800
68.9%
Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations—Comparison of Results of Operations for the Years Ended December 31, 2020 to December 31, 2019 –Noninterest Expense – Salaries and employee benefits”
56
Salaries and employee benefits expense increased $403,000 due to severance pay to terminated employees in connection with the PGBH merger. The number of full-time equivalent employees were 366 in 2020, 355 in 2019 and  256  in 2018. 
 
Salaries and employee benefits expense increased $403,000 due to severance pay to terminated employees in connection with the PGBH merger. The number of full-time equivalent employees were 366 in 2020, 355 in 2019 and 365  in 2018. 
Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations—
Comparison of Results of Operations for the Years Ended December 31, 2019 to December 31, 2018 – Noninterest Expense – Salaries and employee benefits”
61
Salaries and employee benefits expense increased $9.7 million. The number of full-time equivalent employees averaged 355 in 2019, 256  in 2018 and 186 in 2017. This increase was primarily due to additional staff and expenses from the FAIC acquisition, plus annual salary increases and increased benefit costs of $ 994,000 .
 
Salaries and employee benefits expense increased $9.7 million. The number of full-time equivalent employees averaged 355 in 2019, 365  in 2018 and 186 in 2017. This increase was primarily due to additional staff and expenses from the FAIC acquisition, plus annual salary increases and increased benefit costs of $ 1.4 million.
Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Analysis of Financial Condition – Investment Securities”
64
The weighted-average yield on the total investment portfolio at December 31, 2020 was 1.35 % with a weighted-average life of 3.3 years. This compares to a weighted-average yield of 2.31 % at December 31, 2019 with a weighted-average life of 3.0  years.
 
The weighted-average yield on the total investment portfolio at December 31, 2020 was 1.14 % with a weighted-average life of 3.3 years. This compares to a weighted-average yield of 2.41 % at December 31, 2019 with a weighted-average life of 3.2  years.
 
iv
 
 
Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Analysis of Financial Condition – Loans – SBA guaranteed loans”
69
SBA loans increased $22.8 million, or 30.5%, to $97.8 million at December 31, 2020 compared to $75.0 million at December 31, 2019. This increase was primarily due to $32.9 million in PPP loan origination, SBA 7A loans originations of $19.4 million less SBA loan sales of $13.7 million, SBA charge-offs of $ 1.3 million and $ 14.5  million in loan payments in 2020
 
SBA loans increased $22.8 million, or 30.5%, to $97.8 million at December 31, 2020 compared to $75.0 million at December 31, 2019. This increase was primarily due to $32.9 million in PPP loan origination, SBA 7A loans originations of $19.4 million less SBA loan sales of $13.7 million, SBA charge-offs of $ 1.0  million and $ 14.8  million in loan payments in 2020.
Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Analysis of Financial Condition – 
Analysis of the ALLL – December 31, 2019 Allowance for loan losses %”
71
0.82%
 
0.86%
 
Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Analysis of Financial Condition – Analysis of the ALLL – Credit-discount on loans purchased through acquisition – December 31, 2019 Total remaining balance of purchased loans through acquisition”
72
$579,329
 
$573,802
Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Analysis of Financial Condition – Goodwill and Other Intangible Assets”
75
We acquired PGBH for $32.9 million in cash. The identifiable assets acquired of $ 222.8  million and liabilities assumed of $ 200.6  million were recorded at fair value.
 
We acquired PGBH for $32.9 million in cash. The identifiable assets acquired of $ 222.4  million and liabilities assumed of $ 200.2  million were recorded at fair value.
Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Analysis of Financial Condition – Liabilities”
75
Total liabilities increased $ 540.0  million to $2.9 billion, or 22.7%, at December 31, 2020 from $2.4 billion at December 31, 2019, primarily due to a $386.2 million increase in deposits, of which $ 188.4  million were acquired in the PGBH acquisition, and a $150.0 million increase in FHLB advances.
 
Total liabilities increased $ 540.7  million to $2.9 billion, or 22.7%, at December 31, 2020 from $2.4 billion at December 31, 2019, primarily due to a $386.2 million increase in deposits, of which $ 192.6  million were acquired in the PGBH acquisition, and a $150.0 million increase in FHLB advances.
Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations –  Analysis of Financial Condition – Deposits”
75
As of December 31, 2020, our top ten deposit relationships totaled $368.4 million, of which two are related to directors and shareholders of the Company for a total of $ 17.9  million or 4.9 % of our top ten deposit relationships.
 
As of December 31, 2020, our top ten deposit relationships totaled $368.4 million, of which two are related to directors and shareholders of the Company for a total of $ 44.9  million or 12.2 % of our top ten deposit relationships.
Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Deposits”
76
As of December 31, 2020, $131,000 in deposit overdrafts were reclassified as other loans. As of December 31, 2019, the amount was $ 141,000 .
 
As of December 31, 2020, $131,000 in deposit overdrafts were reclassified as other loans. As of December 31, 2019, the amount was $ 111,000 .
Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Analysis of Financial Condition – Subordinated Debentures”
78
The subordinated debentures have a variable rate of interest equal to the three-month LIBOR plus 2.10% through final maturity on December 15, 2034. The rate at December 31, 2020 was 2.32% and 4.14 % at December 31, 2019.
 
The subordinated debentures have a variable rate of interest equal to the three-month LIBOR plus 2.10% through final maturity on December 15, 2034. The rate at December 31, 2020 was 2.32% and 3.89 % at December 31, 2019.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Analysis of Financial Condition – Non-GAAP Financial Measures – Return on Average Tangible Common Equity – December 31, 2019 Adjustments
81
Goodwill: (31,086)
Core deposit intangible: (1,483)
 
Goodwill: ( 58,446 )
Core deposit intangible: ( 6,873 )
 
v
 
 
Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Analysis of Financial Condition – Non-GAAP Financial Measures – Return on Average Tangible Common Equity – December 31, 2019 Adjusted average tangible common equity”
81
$361,326
 
$328,576
 
Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Analysis of Financial Condition – Non-GAAP Financial Measures – Return on Average Tangible Common Equity – December 31, 2019 Return on average tangible common equity”
81
10.85%
11.93%
Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Analysis of Financial Condition – Non-GAAP Financial Measures – Core Deposits and Non-core Funding Dependency – December 31, 2020 Short term assets”
82
__
$311,598
Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Analysis of Financial Condition – Non-GAAP Financial Measures – Core Deposits and Non-core Funding Dependency – December 31, 2019 Short term assets”
82
$71,303
$256,625
Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Analysis of Financial Condition – Non-GAAP Financial Measures – Core Deposits and Non-core Funding Dependency – December 31, 2020 Adjusted short term assets”
82
__
$311,598
Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Analysis of Financial Condition – Non-GAAP Financial Measures – Core Deposits and Non-core Funding Dependency – December 31, 2019 Adjusted short term assets”
82
$71,303
$256,625
 
vi
 
 
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Analysis of Financial Condition – Non-GAAP Financial Measures – Core Deposits and Non-core Funding Dependency – December 31, 2020 Net non-core funding” 
82
$323,550
 
$11,952
Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Analysis of Financial Condition – Non-GAAP Financial Measures –
Core Deposits and Non-core Funding Dependency – December 31, 2019 Net non-core funding”
82
$232,944
 
$47,622
Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Analysis of Financial Condition – Non-GAAP Financial Measures –
Core Deposits and Non-core Funding Dependency – December 31, 2020 Adjusted net non-core funding dependency ratio”
82
10.30%
 
0.38%
Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Analysis of Financial Condition – Non-GAAP Financial Measures –
Core Deposits and Non-core Funding Dependency – December 31, 2019 Adjusted net non-core funding dependency ratio”
82
9.00%
 
1.84%
 
vii
 
 
Item 9A. “Controls and Procedures – Management’s Report on Internal Control over Financial Reporting”
134
On January 10, 2020, we completed our acquisition of PGBH. We are in the process of evaluating the existing controls and procedures of PGBH and integrating PGBH into our internal control over financial reporting. In accordance with SEC Staff guidance permitting a company to exclude an acquired business from management’s assessment of the effectiveness of internal control over financial reporting for the year in which the acquisition is completed, we have excluded the business that we acquired in the PGBH combination from our assessment of the effectiveness of internal control over financial reporting as of December 31, 2020. The business that we acquired in the PGBH combination represented 7% of the Company’s total assets as of December 31, 2020, and 6% of the Company’s revenues and 5% of the Company’s net income for the year ended December 31, 2020. The scope of management’s assessment of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of December 31, 2020 includes all of the Company’s consolidated operations except for those disclosure controls and procedures of PGBH that are subsumed by internal control over financial reporting.
Deleted.
 
As required by Rule 12b-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Company’s principal executive officer and principal financial officer are providing new currently dated certifications required pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant Section 302 of the Sarbanes-Oxley Act of 2002, which are attached hereto.
 
Except as described above, this Amendment No. 1 does not amend, update or change any other items or disclosures in the Original Filing. This Amendment No. 1 speaks only as of the Original Filing Date, and the Company has not undertaken herein to amend, supplement or update any information contained in the Original Filing to give effect to any subsequent events. Accordingly, this Amendment No. 1 should be read in conjunction with the Company’s filings made with the SEC subsequent to the filing of the Original Filing, including any amendment to those filings.
 
viii
 
 
 
Table of Contents
 
 
 
Page
PART I
 
 
Item 1.
Business
4
Item 1A.
Risk Factors
29
Item 1B.
Unresolved Staff Comments
42
Item 2.
Properties
42
Item 3.
Legal Proceedings
43
Item 4.
Mine Safety Disclosures
43
 
 
 
PART II
 
 
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
44
Item 6.
Selected Financial Data
46
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
48
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
83
Item 8.
Financial Statements and Supplementary Data
86
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
134
Item 9A.
Controls and Procedures
134
Item 9B.
Other Information
134
 
 
 
PART III
 
 
Item 10.
Directors, Executive Officers and Corporate Governance
135
Item 11.
Executive Compensation
135
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
135
Item 13.
Certain Relationships and Related Transactions, and Director Independence
135
Item 14.
Principal Accountant Fees and Services
135
 
 
 
PART IV
 
 
Item 15.
Exhibits, Financial Statement Schedules
136
Item 16.
Form 10-K Summary
138
 
1
 
 
 
 
FORWARD-LOOKING STATEMENTS
 
In this Annual Report on Form 10-K, the term “Bancorp” refers to RBB Bancorp and the term “Bank” refers to Royal Business Bank. The terms “Company,” “we,” “us,” and “our” refer to Bancorp and the Bank collectively. The statements in this report include forward-looking statements within the meaning of the applicable provisions of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), regarding management’s beliefs, projections, and assumptions concerning future results and events. We intend such forward-looking statements to be covered by the safe harbor provision for forward-looking statements in these provisions. All statements other than statements of historical fact are “forward-looking statements” for purposes of federal and state securities laws, including statements about anticipated future operating and financial performance, financial position and liquidity, growth opportunities and growth rates, growth plans, acquisition and divestiture opportunities, business prospects, strategic alternatives, business strategies, financial expectations, regulatory and competitive outlook, investment and expenditure plans, financing needs and availability, and other similar forecasts and statements of expectation and statements of assumptions underlying any of the foregoing. Words such as “aims,” “anticipates,” “believes,” “can,” “could,” “estimates,” “expects,” “hopes,” “intends,” “may,” “plans,” “projects,” “seeks,” “shall,” “should,” “will,” “predicts,” “potential,” “continue,” “possible,” “optimistic,” and variations of these words and similar expressions are intended to identify these forward-looking statements. Forward-looking statements by us are based on estimates, beliefs, projections, and assumptions of management and are not guarantees of future performance. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our historical experience and our present expectations or projections. Such risks and uncertainties and other factors include, but are not limited to, adverse developments or conditions related to or arising from:
 
 
●
U.S. and international business and economic conditions;
 
 
●
possible additional provisions for loan losses and charge-offs;
 
 
●
credit risks of lending activities and deterioration in asset or credit quality;
 
 
●
extensive laws and regulations and supervision that we are subject to, including potential supervisory action by bank supervisory authorities;
 
 
●
increased costs of compliance and other risks associated with changes in regulation, including any amendments to the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”);
 
 
●
compliance with the Bank Secrecy Act and other money laundering statutes and regulations;
 
 
●
potential goodwill impairment;
 
 
●
liquidity risk;
 
 
●
fluctuations in interest rates;
 
 
●
the expected discontinuation of the London Interbank Offering Rate (“LIBOR”) after 2021, and uncertainty regarding potential alternative reference rates, including the Secured Overnight Financing Rate ("SOFR");
 
 
●
risks associated with acquisitions and the expansion of our business into new markets;
 
 
●
inflation and deflation;
 
 
●
real estate market conditions and the value of real estate collateral;
 
 
●
environmental liabilities;
 
 
●
our ability to compete with larger competitors;
 
 
●
our ability to retain key personnel;
 
 
●
successful management of reputational risk;
 
 
●
s evere weather, natural disasters, acts of war or terrorism, public health issues (including novel coronavirus, or COVID-19), or other adverse external events could harm our business;
 
 
●
general economic or business conditions in Asia, and other regions where the Bank has operations;
 
 
●
failures, interruptions, or security breaches of our information systems;
 
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●
our ability to adapt our systems to the expanding use of technology in banking;
 
 
●
risk management processes and strategies;
 
 
●
adverse results in legal proceedings;
 
 
●
the impact of regulatory enforcement actions, if any;
 
 
●
certain provisions in our charter and bylaws that may affect acquisition of the Company;
 
 
●
changes in tax laws and regulations;
 
 
●
the effect of changes in accounting policies and practices or accounting standards, as may be adopted from time-to-time by bank regulatory agencies, the U.S. Securities and Exchange Commission (“SEC”), the Public Company Accounting Oversight Board, the Financial Accounting Standards Board (“FASB”) or other accounting standards setters, including Accounting Standards Update (“ASU” or “Update”) 2016-13 (Topic 326), “Measurement of Credit Losses on Financial Instruments,” commonly referenced as the Current Expected Credit Loss (“CECL”) model, which will change how we estimate credit losses and may increase the required level of our allowance for credit losses after adoption on December 31, 2022 ;
 
 
●
market disruption and volatility;
 
 
●
fluctuations in the Bancorp’s stock price;
 
 
●
restrictions on dividends and other distributions by laws and regulations and by our regulators and our capital structure;
 
 
●
issuances of preferred stock;
 
 
●
our ability to raise additional capital, if needed, and the potential resulting dilution of interests of holders of our common stock; and
 
 
●
the soundness of other financial institutions.
 
These and other factors are further described in this Annual Report on Form 10-K (at Item 1A in particular), the Company’s other reports filed with the SEC and other filings the Company makes with the SEC from time to time. Actual results in any future period may also vary from the past results discussed in this report. Given these risks and uncertainties, readers are cautioned not to place undue reliance on any forward-looking statements, which speak to the date of this report. We have no intention and undertake no obligation to update any forward-looking statement or to publicly announce any revision of any forward-looking statement to reflect future developments or events, except as required by law.
 
3
 
 
PART I
 
Item 1. Business.
 
Company Overview
 
The Bank began operations in 2008 as a California state-chartered commercial bank. The Bank was organized by a group of very experienced bankers, some of whom began their banking careers in Asia and have worked together at various banks in California in the 1980s and 1990s. After working for many years in positions of increasing responsibility at such banks, these individuals identified an opportunity resulting from the 2007 credit crisis to capitalize on the general dissatisfaction that many customers had with the nature and level of services that were being provided by existing Asian-American and Chinese-American banks. These bankers observed that first generation Chinese immigrants were not well-served by existing banks.
 
Our strategic plan focuses on providing commercial banking services to first generation immigrants, concentrating on Chinese immigrants, as well as Koreans and other Asian ethnicities. The Bank’s management team has utilized their strong local community ties along with their credibility and relationships with both federal and California bank regulatory agencies to create a bank that we believe emphasizes strong credit quality, a solid balance sheet without the burden of the troubled legacy assets of other banks, and a robust capital base, with the ability to raise additional capital.
 
Although the Bank serves all ethnicities, our board and management team are comprised of mostly Chinese-Americans. Using the experience and expertise of our officers and employees, we have tailored our loan and deposit products to serve the Chinese-American, Korean-American, and other Asian-American markets. We focus both on existing businesses and individuals already established in our local market area, as well as Asian immigrants who desire to establish their own businesses, purchase a home, or educate their children in the United States. Our size and infrastructure allow us to serve customers that require higher lending limits than normally associated with other smaller, local banking institutions that serve the Asian-American communities in which we operate. Our strategic plan is centered on delivering high-touch, superior customer service, customized solutions, and quick and local decision-making with respect to loan originations and servicing.
 
The Bank initially offered lending products that included traditional commercial real estate (“CRE”) loans, secured commercial and industrial (“C&I”) loans, and trade finance services for companies doing business in China, Taiwan and other Asian countries. In 2014, we began originating a significant amount of non-conforming single family residential (“SFR”) mortgage loans, a portion of which we accumulate and sell to other banks. Since 2010, we have also originated Small Business Administration (“SBA”) loans, with the intent to accumulate and periodically sell the guaranteed portion of such loans.
 
After forming the Bank and retaining a strong executive management team, we established the Bancorp, a California corporation, as our holding company in January 2011. We began to review potential acquisition candidates and, in July 2011, we acquired Las Vegas, Nevada-based First Asian Bank (“FAB”) in an all cash transaction. In September 2011, we acquired Oxnard, California-based Ventura County Business Bank (“VCBB”) in an all cash transaction. After closing both transactions, our total assets and total deposits increased by an aggregate of $94.2 million and $91.6 million, respectively. In order to further improve our capital and liquidity to further enhance our ability to consummate acquisitions, we conducted a private placement offering of our common stock in 2012, raising over $54 million from investors, many of whom were original shareholders of the Bank.
 
In May 2013, we acquired Los Angeles National Bank (“LANB”) in an all cash transaction, which added $190.7 million in total assets and $162.0 million in total deposits. In February 2016, we acquired TFC Holding Company (“TFC”) and its wholly-owned subsidiary, TomatoBank, which added $469.9 million in total assets and $405.3 million in total deposits.
 
In March 2016, we further supplemented our capital by issuing $50.0 million of subordinated notes, which we refer to as long-term debt in our consolidated financial statements, and in July 2017, we completed an initial public offering of our common stock, raising $86 million in gross proceeds.
 
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In October 2018, we acquired First American International Corp. (“FAIC”) and its wholly-owned subsidiary First American International Bank (“FAIB”), located in the New York City metropolitan area. This transaction involved the issuance by the Company of 3,011,762 shares of common stock (which was valued as of the date of the closing of the acquisition at $69.6 million) and $34.8 million of cash, and which added $850.3 million in total assets, $715.6 million in loans, and $629.7 million in total deposits. In November 2018, we further supplemented our capital by issuing $55.0 million of subordinated notes, which we refer to as long-term debt in our consolidated financial statements.
 
On January 10, 2020, we acquired PGB Holdings Inc. ("PGBH") and its wholly-owned subsidiary, Pacific Global Bank (“PGB”) in an all cash transaction for $32.9 million. At the time of the acquisition, PGB had approximately $217.9 million in total assets, $191.7 million in total deposits, and three branches in Chicago, Illinois.
 
We intend to continue to pursue growth opportunities, both organically as well as through acquisitions that meet our criteria . We will target acquisitions that we believe will be beneficial to our long-term growth strategy for loans and deposits and immediately accretive to earnings.
 
We operate as a minority depository institution, which is defined by the Federal Deposit Insurance Corporation (“FDIC”) as a federally insured depository institution where 51% or more of the voting stock is owned by minority individuals. A minority depository institution is eligible to receive from the FDIC and other federal regulatory agencies training, technical assistance and review, and assistance regarding the implementation of proposed new deposit taking and lending programs, as well as with respect to the adoption of applicable policies and procedures governing such programs. We intend to maintain our minority depository institution designation, as it is expected that at least 51% of our issued and outstanding shares of capital shall remain owned by minority individuals. The minority depository institution designation has been historically beneficial to us, as the FDIC has reviewed and assisted with the implementation of our deposit and lending programs, and we continue to use the program for technical assistance.
 
In addition, in 2016, we became a community development financial institution (“CDFI”) which is a financial institution that has a primary mission of community development, serves a target market, is a financing entity, provides development services, remains accountable to its community, and is a non-governmental entity. CDFIs are certified by the CDFI Fund at the U.S. Department of the Treasury, (“Treasury”) which provide funds to CDFIs through a variety of programs. The Bank has received grants totaling $1.1 million from the CDFI Fund (zero in 2020, $479,000 in 2019, $233,000 in 2018 and $415,000 in prior years). We have established a CDFI advisory board to assist the Bank in finding organizations that provide services to low-to-moderate income people. In our commitment to this designation, the Bank has a policy that requires all directors and management above the level of vice president to contribute at least 24 hours of community service annually to a qualified organization.
 
The Bank currently operates 22 branches across two separate regions: the Western region (sometimes referred to as the Los Angeles region) with branches in Los Angeles County, California; Orange County, California; Ventura County, California; Clark County, Nevada; and our Eastern region (sometimes referred to as the New York region) with branches in Manhattan, Brooklyn and Queens, New York; Chicago, Illinois and Edison, New Jersey. We currently have nine branches in Los Angeles County, located in downtown Los Angeles, San Gabriel, Torrance, Rowland Heights, Monterey Park, Silver Lake, Arcadia, Cerritos, and Diamond Bar; we have one branch in Orange County, located in Irvine. We have two branches in Ventura County, located in Oxnard and Westlake Village, and one branch in Las Vegas, Nevada. We have six branches located in Manhattan, Brooklyn, Queens in New York State and one in Edison, New Jersey.  We have two branches in Chicago; one in the Bridgeport area and one in the Chinatown area.
 
As of December 31, 2020, the Company had total consolidated assets of $3.4 billion, total consolidated held for investment loans of $2.7 billion, total consolidated deposits of $2.6 billion and total consolidated shareholders’ equity of $428.5 million. Our common stock is traded on the NASDAQ Global Select Market under the symbol “RBB”.
 
Our Strategic Plan
 
In connection with the organization of the Bank, we adopted a strategic plan that we update periodically to reflect the Bank’s growth and recent developments. The Bank’s current strategic plan contains the following key elements:
 
 
●
Maintain regulatory capital levels well in excess of fully phased-in Basel III requirements;
 
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●
Provide commercial banking services and products primarily to businesses and their owners operating within Chinese-American communities;
 
 
●
Maintain a board of directors comprised of local business leaders who work closely with community leaders;
 
 
●
Attract and retain an experienced management team with demonstrated industry knowledge and lending expertise;
 
 
●
Focus on a target market consisting of businesses that:
 
 
o
are located in southern California, the San Francisco Bay area, the Chicago metropolitan area, the New York metropolitan area (including northern New Jersey), and Nevada, with possible future geographic expansion currently focused on Hawaii, Seattle, Philadelphia and Houston;
 
 
o
provide or receive goods or services to or from Asian countries, primarily China (including Hong Kong and Macau) and Taiwan;
 
 
o
have annual sales between $5 million and $50 million and between approximately 50 to 500 employees;
 
 
o
have loan needs of $1 million to $7 million; and
 
 
o
prioritize using bankers with strong market knowledge who are dedicated to serving the local markets in which we operate.
 
 
●
Provide four main lending products:
 
 
o
CRE lending consisting of commercial real estate loans and construction and development (“C&D”) loans;
 
 
o
C&I lending that emphasizes trade finance, operating lines of credit, and working capital loans secured by inventory, accounts receivables, fixed assets and real estate;
 
 
o
SFR lending primarily to Asian Americans willing to provide higher down payment amounts and pay higher fees and interest rates in return for reduced documentation requirements. The Bank originates these loans through its correspondent banking relationships, and through its branch network, primarily to be sold. In most cases, the Bank retains the loan servicing rights and obligations; in addition, we offer 15-year and 30-year qualified mortgage loans that are sold directly to the Federal National Mortgage Association (“FNMA”), and
 
 
o
Through our SBA Preferred Lender status, SBA loans consisting primarily of 7(a) loans to Asian Americans that are accumulated on the Bank’s balance sheet with the SBA guaranteed portion sold in the secondary market generally on a quarterly basis.
 
Market Area
 
We are headquartered in Los Angeles County, California. We currently have nine branches in Los Angeles County located in downtown Los Angeles, San Gabriel, Torrance, Rowland Heights, Monterey Park, Silver Lake, Arcadia, Cerritos, and Diamond Bar. We operate primarily in the Los Angeles-Long Beach-Anaheim, California MSA. With over 13 million residents, it is the largest MSA in California, the second largest MSA in the United States, and one of the most significant business markets in the world. It is estimated that the greater Los Angeles area has a gross domestic product of approximately $1 trillion, which would rank it as the 16th largest economy in the world. The economic base of the area is heavily dependent on small- and medium-sized businesses, providing us with a market rich in potential customers. According to the U.S. Census Bureau, Asian Americans account for 14.7% of the over 10.0 million residents in Los Angeles County as of 2019.  We also maintain one branch in Irvine, Orange County, California.
 
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We operate two branches in Ventura County, California, in Westlake Village and Oxnard. Westlake Village is considered part of the Los Angeles-Long Beach-Anaheim, California MSA and has similar market characteristics. Oxnard has similar market characteristics of Ventura County, which is home to a broad array of industries, including agriculture, professional business services, technology and tourism. Its proximity to one of the world’s leading wine-growing regions and its 43 miles of coastline attracts a large number of visitors. Ventura County is not only a port of call for travelers, but also a shipping hub for automobiles and agricultural goods. Port Hueneme serves as a distribution hub for automobile manufacturers and is a collection point for many agricultural goods that are shipped throughout the United States. According to the U.S. Census Bureau, Asian Americans account for 7.3% of the 847,263 residents in Ventura County as of 2019.
 
We operate one branch in the Las Vegas-Paradise, Nevada MSA. This MSA is located in the southern part of the state of Nevada, and includes the cities of Las Vegas, Henderson, North Las Vegas, and Boulder City. A central part of the MSA is the Las Vegas Valley, a 600 square mile basin that includes the MSA’s largest city, Las Vegas. With a 2016 gross domestic product of approximately $108 billion, this MSA contains the largest concentration of people in the state (approximately 2.2 million), and is a significant tourist destination, drawing over 43 million international and domestic visitors in 2016. According to the U.S. Census Bureau, Asian Americans account for 10.0% of the over 2.3 million residents in Clark County as of 2019.
 
We operate seven branches in the New York City/New Jersey metropolitan MSA. This MSA is located in the south-eastern part of the state of New York and northern New Jersey, and includes the boroughs of Manhattan, Queens and Brooklyn, plus our branch in Edison, New Jersey. A central part of the MSA is the borough of Manhattan. With a 2016 gross domestic product of approximately $1.6 trillion, this MSA contains the largest concentration of people in the state, and is a significant business and tourist destination. According to the 2019 U.S. Census Bureau, Asian Americans account for 12% of the over 19.1 million residents in metropolitan New York City.
 
As a result of the PGB acquisition, we operate two branches in the Chinatown area of Chicago (following the closure of one Chicago branch in February 2021) in the metropolitan area of Chicago-Naperville-Elgin MSA. According to the U.S. Census Bureau, as of 2019, Asians account for 90% of Chicago’s Chinatown population, and the Asian population is 7% of the over 9.5 million residents in the Chicago metropolitan area.  
 
Our Competition
 
We view the Chinese-American banking market, including the Company, as comprised of 37 banks divided into three segments: publicly-traded banks (5 banks), locally-owned banks (33 banks), and banks that are subsidiaries of Taiwanese or Chinese banks (4 banks).  Twenty-four of the locally-owned banks are based in California. We are currently the sixth-largest bank among this group of 37 banks.
 
In addition to these Chinese-American banks, we also compete with other banks in the region, particularly with Korean-American banks in our SFR and SBA lending areas. Although we were founded by and market primarily to Chinese Americans, we are broadening our marketing efforts to include all categories of Asian Americans. In certain geographic markets where we currently operate, there is overlap between Chinese-American, Korean-American and other Asian-American banks for loan and deposit business. We aim to grow both organically and potentially through acquisitions in
these markets.
 
Lending Activities
 
Our lending strategy is to maintain a broadly diversified loan portfolio based on the type of customer (i.e., businesses versus individuals), type of loan product (e.g., owner occupied commercial real estate, commercial loans, etc.), geographic location and industries in which our business customers are engaged (e.g., manufacturing, retail, hospitality, etc.). We principally focus our lending activities on loans that we originate from borrowers located in our market areas. We seek to be the premier provider of lending products and services in our market areas and serve the credit needs of high-quality business and individual borrowers in the communities that we serve.
 
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Our loan portfolio currently consists of four loan types: CRE, C&I, SFR and SBA, with diversified product offerings within each type. The charts below shows our loan portfolio composition as of December 31, 2020 , separately by type of collateral support and relevant business line. As described below, the type of collateral supporting a loan is not necessarily indicative of the business line from which the loan was generated.
 
 
We have an extensive loan approval process in which we require not only financial and other information from our borrowers, but our loan and executive officers have an extensive knowledge of the local market area and of the borrower’s past transactions. After receiving an extensive application and loan documentation and conducting an extensive review, our loan officers meet on a very frequent basis concerning the loan request. After reaching a consensus decision to approve, the loan officer will then submit the loan to the chief executive officer for approval, and if the loan request is above the chief executive officer’s lending limit, it will be referred to the board of directors for decision.
 
We have four principal lending areas:
 
Commercial and Industrial Loans. We have significant expertise in small to middle market commercial and industrial lending. Our success is the result of our product and market expertise, and our focus on delivering high-quality, customized and quick turnaround service for our clients due to our focus on maintaining an appropriate balance between prudent, disciplined underwriting, on the one hand, and flexibility in our decision making and responsiveness to our clients, on the other hand, which has allowed us to grow our commercial and industrial loan portfolio since December 31, 2010, while maintaining strong asset quality. As of December 31, 2020, we had outstanding commercial and industrial loans of $290.1 million, or 10.7% of our total loan portfolio. We had $2.2 million non-performing commercial and industrial loans as of December 31, 2020 and no non-performing commercial and industrial loans as of December 31, 2019.
 
Commercial Real Estate Loans. We offer real estate loans for owner occupied and non-owner occupied commercial property, including loans secured by single-family residences for a business purposes, multi-family residential property and construction and land development loans. Our management team has an extensive knowledge of the markets where we operate and our borrowers and takes a conservative approach to commercial real estate lending, focusing on what we believe to be high quality credits with low loan-to-value ratios income-producing properties with strong cash flow characteristics, and strong collateral profiles. The real estate securing our existing commercial real estate loans includes a wide variety of property types, such as owner occupied offices, warehouses and production facilities, office buildings, hotels, mixed-use residential and commercial, retail centers, multi-family properties and assisted living facilities.
 
8
 
 
The total commercial real estate portfolio was $1.0 billion at December 31, 2020 of which $198.8 million was secured by owner occupied properties. The multi-family residential loan portfolio totaled $346.6 million as of December 31, 2020. The single-family residential loan portfolio originated for a business purpose totaled $24.0  million as of December 31, 2020. Our non-performing commercial real estate loans as of December 31, 2020 were $2.6 million.
 
Construction and land development loans. Our construction and land development loans are comprised of residential construction, commercial construction and land acquisition and development construction. Interest reserves are generally established on real estate construction loans. As of December 31, 2020, our real estate construction loan portfolio was divided among the foregoing categories: $124.3 million, or 66.4%, of residential construction; $45.5 million, or 24.4%, of commercial construction; and $16.9 million, or 9.2%, of land acquisition and development.
 
SBA Loans. We are designated a Preferred Lender under the SBA Preferred Lender Program. We offer mostly SBA 7(a) variable-rate loans. We originate all loans to hold for investment and move loans to available for sale as management decides which loans to sell. We generally sell the guaranteed portion of the SBA loans that we originate. Our SBA loans are typically made to small-sized manufacturing, wholesale, retail, hotel/motel and service businesses for working capital needs or business expansions. SBA loans can have any maturity up to 25 years. Typically, non-real estate secure loans mature in less than 10 years. Collateral may also include inventory, accounts receivable and equipment, and includes personal guarantees. Our unguaranteed loans collateralized by real estate are monitored by collateral type and included in our CRE Concentration Guidance as previously discussed. From time to time, we will also originate SBA 504 loans.
 
We originate SBA loans through our branch staff, loan officers and through SBA brokers. In 2020, we originated $ 52.3 million  in SBA loans, of which $32.9 million were PPP loans and $19.4 million were SBA 7A originations. Of SBA loan originations, $45.2 million, or  86 .4%,  were produced by branch staff and loan officers. The remaining $7.1 million, or 13.6%, was referred to us through SBA brokers.
 
As of December 31, 2020 our SBA portfolio totaled $97.8 million of which $48.5 million is guaranteed by the SBA and $49.4 million is unguaranteed, of which $37.6 million is secured by real estate and $11.8 million is unsecured or secured by business assets.  There are $32.9 million SBA loans originated under the Payroll Protection Program (“PPP”).  We monitor the unguaranteed portfolio by type of real estate collateral. As of December 31, 2020, $22.7 million or 46.1% is secured by hotel/motels; $7.3 million or 14.7% by gas stations; and $19.4 million or 39.2% in other real estate types. We further analyze the unguaranteed portfolio by location. As of December 31, 2020, $19.6 million or 39.8% is located in California; $8.3 million or 16.8% is located in Washington state; $5.1 million or 10.4% is located in Nevada; $4.4 million or 8.9% is located in Texas; $1.8 million or 3.7% is located in New York; and $10.1 million or 20.4% is located in other states. Our non-performing SBA loans as of December 31, 2020 amounted to $6.9 million of which $5.2 million are guaranteed by the SBA.
 
SFR Loans. We originate mainly non-qualified, alternative documentation SFR mortgage loans through correspondent relationships or through our branch network or retail channel to accommodate the needs of the Asian-American market. Our loan product is a seven-year hybrid adjustable mortgage with a current start rate of 4.0% plus 0%-1% in points, which re-prices after five or seven years to the one-year CMT plus 2.50%. We also offer qualified mortgage program as a correspondent to major banking financial institutions. As of December 31, 2020, we had $1.1 billion of SFR mortgage loans, representing 41.5% of our total loan portfolio, excluding available for sale SFR loans. We had 12 non-performing single-family residential real estate loans as of December 31, 2020 totaling $7.7 million.
 
We originate these non-qualified single-family residential mortgage loans both to sell and hold for investment. The loans held for investment are generally originated through our retail branch network to our customers, many of whom establish a deposit relationship with us. During 2020, we originated $287.3 million of such loans through our retail channel, and $131.8 million through our correspondent and wholesale channel.
 
We sell many of these non-qualified single-family residential mortgage loans to other Asian-American banks, FNMA and other investors. We currently engage in loan sales to eight banks and private investors, and are working to expand our network of entities who will acquire our SFR loan product. Loans held for sale consist primarily of first trust deed mortgages on single-family residential properties located in California. Single-family residential mortgage loans held for sale are generally sold with the servicing rights retained.
 
Our intention is to continue selling SFR mortgage loans to these investors.  However, our correspondents have moved away from the non-qualified mortgage product to the standard FNMA product.  Therefore, we expect we will have lower non-qualified mortgage sales and higher FNMA sales.  In addition, the current low start rate makes it unprofitable to currently sell non-qualified mortgage loans to institutional investors.   
 
9
 
 
In our Eastern region, we originate 15-year and 30-year conforming mortgages which are sold directly to FNMA. During 2020, we originated $108.9  million of these loans.
 
Consumer Loans. During 2018, we started an automobile lending unit to support the Chinese-American immigrant community. We do not expect material volumes of business in this area as it is an accommodation to our customers. As of December 31, 2020, such loans amounted to $4.1 million, and consist primarily of automobile loans.
 
Deposits
 
The quality of our deposit franchise and access to stable funding are key components to our success. We offer traditional depository products, including checking, savings, money market and certificates of deposits, to individuals, businesses, municipalities and other entities through our branch network throughout our market areas. Deposits at the Bank are insured by the FDIC up to statutory limits.
 
As a Chinese-American business bank that focuses on successful businesses and their owners, many of our depositors choose to leave large deposits with us. We track all deposit relationships over $250,000 on a quarterly basis and consider a relationship to be core if there are any three or more of the following: (i) relationships with us (as a director or shareholder); (ii) deposits within our market area; (iii) additional non-deposit services with us; (iv) electronic banking services with us; (v) active demand deposit account with us; (vi) deposits at market interest rates; and (vii) longevity of the relationship with us. We consider all deposit relationships under $250,000 as a core relationship except for time deposits originated through an internet service. This differs from the traditional definition of core deposits which is demand and savings deposits plus time deposits less than $250,000. As many of our customers have more than $250,000 on deposit with us, we believe that using this method reflects a more accurate assessment of our deposit base. As of December 31, 2020, $2.3 billion or 87.72% of our relationships are considered core relationships.
 
Many of our management team members, including in many cases branch managers, have worked together for up to 30 years, and our deposits relationships have been cultivated over that time period. Many of our depositors have relationships with executive officers and our board of directors. Our ability to gather deposits, particularly core deposits, is an important aspect of our business franchise and we believe core deposits are a significant driver of franchise value as a cost efficient and stable source of funding to support our growth. As of December 31, 2020, we had $2.6 billion of total deposits, with an average total interest-bearing deposit cost of 1.01% for the year 2020.
 
Other Subsidiaries
 
TFC Statutory Trust . In connection with our 2016 acquisition of TomatoBank and its holding company, TFC, the Company acquired the TFC Statutory Trust (the “TFC Trust”), a statutory business trust that was established by TFC in 2006 as a wholly-owned subsidiary. 
 
FAIC Statutory Trust. In connection with our 2018 acquisition of FAIB and its holding company, FAIC, the Company acquired the FAIC Statutory Trust, a statutory business trust that was established by FAIC in 2004 under the laws of Delaware as a wholly-owned subsidiary (the “FAIC Trust”). 
 
PGBH Trust . In connection with our 2020 acquisition of PGB and its holding company, PGBH, the Company acquired Pacific Global Bank Trust I (“PGB Capital Trust I”), a statutory business trust that was established by PGB in 2004 under the laws of Delaware as a wholly-owned subsidiary. 
 
Each of the foregoing Trusts issued trust preferred securities representing undivided preferred beneficial interests in the assets of the Trusts. The proceeds of these trusts preferred securities were invested in certain securities issued by us, with similar terms to the relevant series of securities issued by the Trusts, which we refer to as subordinated debentures. The Company guarantees on a limited basis the payments of distributions on the capital securities of the Trusts and payments on redemption of the capital securities of the Trusts. The Company is the owner of all the beneficial interests represented by the common securities of the Trusts.
 
FAIB Capital Corp. In connection with the 2018 acquisition of FAIC, the Company acquired a real estate investment trust (“REIT”) as a wholly-owned subsidiary of the Bank. FAIB Capital Corp. is a New York State corporation formed on August 28, 2013. The purpose of the REIT is to minimize New York State and local taxes.
 
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With the acquisition of FAIC, we acquired four inactive subsidiaries: FAIC Insurance Services (a New York corporation formed in 2006), and P4G8, LLC, FAIB Reacquisitions I, LLC and FAIB REO Acquisition II, LLC, each of which are New York limited liability companies. FAIC Insurance Services was dissolved in January 2020, and the other three subsidiaries were dissolved in 2019.
 
RBB Asset Management Company .    In 2012, as a result of our acquisitions of FAB and VCBB , we established RBB Asset Management Company, or RAM, as a wholly-owned subsidiary of the Company. In March 2013, RAM purchased approximately $6.5 million in loans and $1.7 million in other real estate owned (“OREO”) from the Bank that had been acquired in the FAB and VCBB acquisitions. We may continue to utilize RAM to purchase certain assets from the Bank acquired in acquisitions that we may make in the future.
 
Human Capital Resources
We believe in the value of teamwork and the power of diversity. We expect and encourage participation and collaboration, and understand that we need each other to be successful. We value accountability because it is essential to our success, and we accept our responsibility to hold ourselves and others accountable for meeting shareholder commitments and achieving exceptional standards of performance.
 
Staffing Model.  The majority of our staff are regular full-time employees. We also employ regular part-time associates and some seasonal/temporary associates. As of December 31, 2020, we had 360 full-time employees and 11 part-time employees, totaling 365.5 full-time equivalent staff.  We do not outsource job functions or use subcontractors to fill open positions. None of our employees are represented by any collective bargaining unit or are parties to a collective bargaining agreement. 
 
Diversity, Equity and Inclusion.  We believe that diversity of thought and experiences results in better outcomes and empowers our employees to make more meaningful contributions within our company and communities.  All members of our board of directors are Asian-American, and two members are women.  Our executive committee is comprised of seven Asian-Americans and one Caucasian, of which two are women.  Our workforce includes 332 Asian-Americans, 20 Latin-Americans, 17 Caucasians and 3 African-Americans.
 
Health & Safety.   We are focused on conducting our business in a safe and efficient manner and in compliance with all local, state and federal safety and health regulations, and special safety concerns.
 
Benefits.  We are committed to offering a competitive total compensation package. We regularly compare compensation and benefits with peer companies and market data, making adjustments as needed to ensure compensation stays competitive. We also offer a wide array of benefits for our associates and their families, including:
 
 
●
Competitive bonus programs;
 
●
Comprehensive medical, dental and vision benefits;
 
●
401(k) plan including a competitive company match;
 
●
Flexible work schedules;
 
●
Paid time off (PTO), holidays and bank holidays; and
 
●
Internal training and development.
 
Properties
 
We believe that the leases to which we are subject are generally on terms consistent with prevailing market terms. None of the leases are with our directors, officers, beneficial owners of more than 5% of our voting securities or any affiliates of the foregoing.
 
Corporate Information
 
Our principal executive offices are located at 1055 Wilshire Blvd. Suite 1200, Los Angeles, California 90017, and our telephone number at that address is (213) 627-9888.
 
Available Information
 
We invite you to visit our website at www.royalbusinessbankusa.com , to access free of charge the Bancorp's Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports, all of which are made available as soon as reasonably practicable after we electronically file such material with or furnish it to the SEC. The content of our website is not incorporated into and is not part of this Annual Report on Form 10-K. In addition, you can write to us to obtain a free copy of any of those reports at RBB Bancorp, 1055 Wilshire Blvd. Suite 1200, Los Angeles, California 90017, Attn: Investor Relations. These reports are also available through the SEC’s Public Reference Room, located at 100 F Street NE, Washington, DC 20549 and online at the SEC’s website, available at http:// www.sec.gov . Investors can obtain information about the operation of the SEC’s Public Reference Room by calling 800-SEC-0330. Bancorp’s Code of Ethics and other corporate governance documents are located on its website at www.royalbusinessbankusa.com.
 
Supervision and Regulation
 
General
 
Financial institutions, their holding companies and their affiliates are extensively regulated under U.S. federal and state law. As a result, the growth and earnings performance of the Company and its subsidiaries may be affected not only by management decisions and general economic conditions, but also by the requirements of federal and state statutes and by the regulations and policies of various bank regulatory agencies, including the California Department of Financial Protection and Innovation (DFPI), previously known as the California Department of Business Oversight, the Board of Governors of the Federal Reserve System (“Federal Reserve”), the FDIC, and the Consumer Financial Protection Bureau (“CFPB”). Furthermore, tax laws administered by the Internal Revenue Service and state taxing authorities, accounting rules developed by the FASB, securities laws administered by the SEC and state securities authorities, anti-money laundering laws enforced by the Treasury, and mortgage related rules, including with respect to loan securitization and servicing by the U.S. Department of Housing and Urban Development (“HUD”), and agencies such as FNMA and the Federal Home Loan Mortgage Corporation (“FHLMC”), have an impact on the Company’s business. The effect of these statutes, regulations, regulatory policies and rules are significant to the financial condition and results of operations of the Company and its subsidiaries, including the Bank, and the nature and extent of future legislative, regulatory or other changes affecting financial institutions are impossible to predict with any certainty.
 
11
 
 
Additional initiatives may be proposed or introduced before Congress, the California Legislature, and other governmental bodies in the future. Such proposals, if enacted, may further alter the structure, regulation, and competitive relationship among financial institutions and may subject us to increased supervision and disclosure and reporting requirements. In addition, the various bank regulatory agencies often adopt new rules and regulations and policies to implement and enforce existing legislation. It cannot be predicted whether, or in what form, any such legislation or regulatory changes in policy may be enacted or the extent to which the business of the Bank would be affected thereby. The outcome of examinations, any litigation, or any investigations initiated by state or federal authorities also may result in necessary changes in our operations and increased compliance costs.
 
Federal and state banking laws impose a comprehensive system of supervision, regulation and enforcement on the operations of financial institutions, their holding companies and affiliates intended primarily for the protection of the FDIC-insured deposits and depositors of banks, rather than their shareholders. These federal and state laws, and the related regulations of the bank regulatory agencies, affect, among other things, the scope of business, the kinds and amounts of investments banks may make, reserve requirements, capital levels relative to operations, the nature and amount of collateral for loans, the establishment of branches, the ability to merge, consolidate and acquire, dealings with insiders and affiliates and the payment of dividends.
 
This supervisory and regulatory framework subjects banks and bank holding companies to regular examination by their respective regulatory agencies, which results in examination reports and ratings that, while not publicly available, can affect the conduct and growth of their businesses. These examinations consider not only compliance with applicable laws and regulations, but also capital levels, asset quality and risk, management ability and performance, earnings, liquidity, and various other factors. The regulatory agencies generally have broad discretion to impose restrictions and limitations on the operations of a regulated entity where the agencies determine, among other things, that such operations are unsafe or unsound, fail to comply with applicable laws or are otherwise inconsistent with laws and regulations or with the supervisory policies of these agencies.
 
The following is a summary of the material elements of the supervisory and regulatory framework applicable to the Company and its subsidiaries, including the Bank. It does not describe all of the statutes, regulations and regulatory policies that apply, nor does it restate all of the requirements of those that are described. The descriptions are qualified in their entirety by reference to the particular statutory and regulatory provision.
 
Bank Holding Company and Bank Regulation
 
Bancorp is a financial holding company within the meaning of the Bank Holding Company Act and is registered as such with the Federal Reserve. Bancorp is also a bank holding company within the meaning of Section 1280 of the California Financial Code. Therefore, Bancorp and its subsidiaries are subject to examination by, and may be required to file reports with, the Federal Reserve and the DFPI. Federal Reserve and DFPI approvals are also required for financial holding companies to acquire control of a bank. As a California commercial bank, the deposits of which are insured by the FDIC, the Bank is subject to regulation, supervision, and regular examination by the DFPI and by the FDIC, as the Bank’s primary federal regulator, and must additionally comply with certain applicable regulations of the Federal Reserve.
 
The wide range of requirements and restrictions contained in both federal and state banking laws include:
 
 
●
Requirements that bank holding companies and banks file periodic reports.
 
 
●
Requirements that bank holding companies and banks meet or exceed minimum capital requirements (see “Regulatory Capital Requirements” below).
 
 
●
Requirements that bank holding companies serve as a source of financial and managerial strength for their banking subsidiaries. In addition, the regulatory agencies have “prompt corrective action” authority to limit activities and require a limited guaranty of a required bank capital restoration plan by a bank holding company if the capital of a bank subsidiary falls below capital levels required by the regulators. (See “Source of Strength” and “Prompt Corrective Action” below.)
 
 
●
Limitations on dividends payable to stockholders. Bancorp’s ability to pay dividends is subject to legal and regulatory restrictions. A substantial portion of Bancorp’s funds to pay dividends or to pay principal and interest on our debt obligations is derived from dividends paid by the Bank. (See “The Company – Dividend Payments” below)
 
12
 
 
 
●
Limitations on dividends payable by bank subsidiaries. These dividends are subject to various legal and regulatory restrictions. The federal banking agencies have indicated that paying dividends that deplete a depositary institution’s capital base to an inadequate level would be an unsafe and unsound banking practice. Moreover, the federal agencies have issued policy statements that provide that bank holding companies and insured banks should generally only pay dividends out of current operating earnings. (See “The Bank – Dividend Payments” below)
 
 
●
Safety and soundness requirements. Banks must be operated in a safe and sound manner and meet standards applicable to internal controls, information systems, internal audit, loan documentation, credit underwriting, interest rate exposure, asset growth, and compensation, as well as other operational and management standards. These safety and soundness requirements give bank regulatory agencies significant latitude in exercising their supervisory authority and the authority to initiate informal or formal enforcement actions.
 
 
●
Requirements for notice, application and approval, or non-objection of acquisitions and certain other activities conducted directly or in subsidiaries of Bancorp or the Bank.
 
 
●
Compliance with the Community Reinvestment Act (“CRA”). The CRA requires that banks help meet the credit needs in their communities, including the availability of credit to low and moderate income individuals. If the Bank fails to adequately serve its communities, restrictions may be imposed, including denials of applications for branches, for adding subsidiaries or affiliate companies, for engaging in new activities or for the merger with or purchase of other financial institutions. In its last reported examination by the FDIC in July 2020, the Bank received a CRA rating of “Satisfactory.”
 
 
●
Compliance with the Bank Secrecy Act, the USA Patriot Act, and other anti-money laundering laws (“AML”), and the regulations of the Treasury’s Office of Foreign Assets Control (“OFAC”). (See “The Bank – Anti-Money Laundering and OFAC Regulation below.)
 
 
●
Limitations on the amount of loans to one borrower and its affiliates and to executive officers and directors.
 
 
●
Limitations on transactions with affiliates.
 
 
●
Restrictions on the nature and amount of any investments in, and the ability to underwrite, certain securities.
 
 
●
Requirements for opening of intra- and interstate branches.
 
 
●
Compliance with truth in lending and other consumer protection and disclosure laws to ensure equal access to credit and to protect consumers in credit transactions. (See “Operations, Consumer and Privacy Compliance Laws” below.)
 
 
●
Compliance with provisions of the Gramm-Leach-Bliley Act of 1999 (“GLB Act”) and other federal and state laws dealing with privacy for nonpublic personal information of customers, including but not limited to the California Consumer Privacy Act of 2018 (the “CCPA”), which took effect January 1, 2020. The CCPA gives consumers more control over the personal information that businesses collect about them and the CCPA regulations provide guidance on how to implement the law. This landmark law secures new privacy rights for California consumers, including: (i) the right to know about the personal information a business collects about them and how it is used and shared; (ii) the right to delete personal information collected from them (with some exceptions); (iii) the right to opt-out of the sale of their personal information; and (iv) the right to non-discrimination for exercising their CCPA rights.  The federal bank regulators have adopted rules limiting the ability of banks and other financial institutions to disclose non-public information about consumers to unaffiliated third parties. These limitations require disclosure of privacy policies to consumers and, in some circumstances, allow consumers to prevent disclosure of certain personal information to an unaffiliated third party. These regulations affect how consumer information is transmitted through diversified financial companies and conveyed to outside vendors.
 
13
 
 
Specific federal and state laws and regulations which are applicable to banks regulate, among other things, the scope of their business, their investments, their reserves against deposits, the timing of the availability of deposited funds, their activities relating to dividends, the nature and amount of and collateral for certain loans, servicing and foreclosing on loans, borrowings, capital requirements, certain check-clearing activities, branching, and mergers and acquisitions. California banks are also subject to statutes and regulations including Federal Reserve Regulation O and Federal Reserve Act Sections 23A and 23B and Regulation W, which restrict or limit loans or extensions of credit to “insiders,” including officers, directors, and principal shareholders, and affiliates, and purchases of assets from affiliates, including parent bank holding companies, except pursuant to certain exceptions and only on terms and conditions at least as favorable to those prevailing for comparable transactions with unaffiliated parties. The Dodd-Frank Act expanded definitions and restrictions on transactions with affiliates and insiders under Sections 23A and 23B, and also lending limits for derivative transactions, repurchase agreements and securities lending, and borrowing transactions.
 
The Bank operates branches and/or loan production offices in California, Illinois, Nevada, New York and New Jersey. While the DFPI remains the Bank’s primary state regulator, the Bank’s operations in these jurisdictions are subject to examination and supervision by local bank regulators, and transactions with customers in those jurisdictions are subject to local laws, including consumer protection laws.
 
CFPB Actions
 
The Dodd-Frank Act provided for the creation of the CFPB as an independent entity within the Federal Reserve with broad rulemaking, supervisory, and enforcement authority over consumer financial products and services, including deposit products, residential mortgages, home-equity loans and credit cards. The CFPB’s functions include investigating consumer complaints, conducting market research, rulemaking, supervising and examining bank consumer transactions, and enforcing rules related to consumer financial products and services. CFPB regulations and guidance apply to all financial institutions and banks with $10 billion or more in assets, which are also subject to examination by the CFPB. As the Bank has less than $10 billion in assets, it is not examined for compliance with CFPB regulation by the CFPB, although it is examined by the FDIC and the DFPI.
 
The CFPB has enforcement authority over unfair, deceptive or abusive act and practices (“UDAAP”). UDAAP is considered one of the most far reaching new enforcement tools at the disposal of the CFPB and covers all consumer and small business financial products or services such as deposit and lending products or services such as overdraft programs and third-party payroll card vendors. It is a wide-ranging regulatory net that potentially picks up the gaps not included in other consumer laws, rules and regulations. Violations of UDAAP can be found in many areas and can include advertising and marketing materials, the order of processing and paying items in a checking account or the design of client overdraft programs. The scope of coverage includes not only direct interactions with clients and prospects but also actions by third-party service providers. The Dodd-Frank Act does not prevent states from adopting stricter consumer protection standards. State regulation of financial products and potential enforcement actions could also adversely affect our business, financial condition or results of operations.
 
In 2020, the California Legislature passed Assembly Bill 1864, which enacts the California Consumer Financial Protection Law ("CCFPL") and changed the name of the Department of Business Oversight (DBO) to the Department of Financial Protection and Innovation ("DFPI").  Among other items, the CCFPL:
 
 
●
Establishes UDAAP authority for the new DFPI, adding “abusive” to “unfair or deceptive” acts or practices prohibited by California law, and authorizing remedies similar to those provided in the Dodd-Frank Act;
 
●
Authorizes the DFPI to impose penalties of $2,500 for “each act or omission” in violation of the law without a showing that the violation was willful, which, arguably, represents an enhancement of DBO’s existing enforcement powers in contrast to Dodd-Frank and existing California law, enhanced penalties for “reckless” violations of up to $25,000 per day or $10,000 per violation, and for “knowing” violations, the penalty may be up to $1,000,000 per day or 1% of the violator’s net worth (whichever is less) or $25,000 per violation;
 
●
Exempts from the DFPI’s new UDAAP authority, banks, credit unions, federal savings and loan associations, and similar entities, as well as current licensees of the former DBO and licensees of other California agencies, “to the extent that licensee or employee is acting under the authority of” the license;
 
●
Creates a “registration” requirement (subject to the DFPI’s implementing regulations) that greatly expands the reach of the DFPI to oversee entities that are not currently subject to licensure/registration;
 
●
Provides DFPI with broad discretion to determine what constitutes a “financial product or service” within the law’s coverage, including by a regulation finding that the financial product or service is either: “(A) Entered into or conducted as a subterfuge or with a purpose to evade any consumer financial law,” or “(B) Permissible for a bank … to offer or provide … [but] has, or likely will have, a material impact on consumers,” with certain enumerated exclusions; and
 
●
Provides that administration of the law will be funded through the fees generated by the new registration process and other funds generated from fines, penalties, settlements, or judgments.
 
Additionally, in 2014, the CFPB adopted revisions to Regulation Z, which implement the Truth in Lending Act, pursuant to the Dodd-Frank Act, and apply to all consumer mortgages (except home equity lines of credit, timeshare plans, reverse mortgages, or temporary loans). The revisions mandate specific underwriting criteria for home loans in order for creditors to make a reasonable, good faith determination of a consumer's ability to repay and establish certain protections from liability under this requirement for “qualified mortgages” meeting certain standards. In particular, it restricts banks from making “no doc” and “low doc” home loans, as the rules require that banks determine a consumer’s ability to pay based in part on verified and documented information. We do originate certain “low doc” loans that meet specific underwriting criteria.
 
Interchange Fees
 
Under the Durbin Amendment to the Dodd-Frank Act, the Federal Reserve adopted rules establishing standards for assessing whether the interchange fees that may be charged with respect to certain electronic debit transactions are “reasonable and proportional” to the costs incurred by issuers for processing such transactions.
 
14
 
 
Interchange fees, or “swipe” fees, are charges that merchants pay to us and other card-issuing banks for processing electronic payment transactions. Under the final rules, for those card-issuing banks with $10 million or more in total assets, the maximum permissible interchange fee is equal to no more than 21 cents plus 5 basis points of the transaction value for many types of debit interchange transactions. We are not subject to this limitation because we have less than $10 billion in total assets. The Federal Reserve also adopted a rule to allow a debit card issuer to recover 1 cent per transaction for fraud prevention purposes if the issuer complies with certain fraud-related requirements required by the Federal Reserve. The Federal Reserve also has rules governing routing and exclusivity that require issuers to offer two unaffiliated networks for routing transactions on each debit or prepaid product.
 
Financial Regulatory Reform
 
The Dodd-Frank Act, which was enacted in July 2010, significantly restructured the financial regulatory landscape in the United States, including the creation of a systemic risk oversight body, the Financial Stability Oversight Council (the “FSOC”). The FSOC oversees and coordinates the efforts of the primary U.S. financial regulatory agencies (including the Federal Reserve, SEC, the Commodity Futures Trading Commission and the FDIC) in establishing regulations to address financial stability concerns. The Dodd-Frank Act and the Federal Reserve’s implementing regulations impose increasingly stringent regulatory requirements on financial institutions as their size and scope of activities increases.
 
In May 2018, the Economic Growth, Regulatory Relief, and Consumer Protection Act (“EGRRCPA”) was enacted. While the EGRRCPA reduced the impact of the Dodd-Frank Act on bank holding companies of our size, the Dodd-Frank Act nonetheless subjected us to additional significant regulatory requirements.
 
Regulatory Capital Requirements
 
Bank holding companies and banks are subject to various regulatory capital requirements administered by state and federal agencies. These agencies may establish higher minimum requirements if, for example, a banking organization previously has received special attention or has a high susceptibility to interest rate risk. Risk-based capital requirements determine the adequacy of capital based on the risk inherent in various classes of assets and off-balance sheet items. Under the Dodd-Frank Act, the Federal Reserve must apply consolidated capital requirements to depository institution holding companies that are no less stringent than those currently applied to depository institutions. The Dodd-Frank Act additionally requires capital requirements to be countercyclical so that the required amount of capital increases in times of economic expansion and decreases in times of economic contraction, consistent with safety and soundness.
 
Under federal regulations, bank holding companies and banks must meet certain risk-based capital requirements. Effective as of January 1, 2015, the Basel III final capital framework, among other things, (i) introduced as a new capital measure “Common Equity Tier 1” (“CET1”) (ii) specified that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments meeting specified requirements, (iii) defined CET1 narrowly by requiring that most adjustments to regulatory capital measures be made to CET1 and not to the other components of capital, and (iv) expanded the scope of the adjustments, as compared to existing regulations. Beginning January 1, 2016, financial institutions were required to maintain a minimum capital conservation buffer to avoid restrictions on capital distributions such as dividends and equity repurchases and other payments such as discretionary bonuses to executive officers. The minimum capital conservation buffer was phased in over a four year transition period with minimum buffers of 0.625%, 1.25%, 1.875%, and 2.50% during 2016, 2017, 2018 and 2019, respectively.
 
As fully phased-in on January 1, 2019, Basel III subjects bank holding companies and banks to the following risk-based capital requirements:
 
 
●
a minimum ratio of CET1 to risk-weighted assets of at least 4.5%, plus a 2.5% “capital conservation buffer”, or 7.0%;
 
 
●
a minimum ratio of Tier I capital to risk-weighted assets of at least 6.0%, plus the capital conservation buffer, or 8.5%;
 
 
●
a minimum ratio of Total (Tier 1 plus Tier 2) capital to risk-weighted assets of at least 8.0%, plus the capital conservation buffer, or 10.5%; and
 
 
●
a minimum leverage ratio of 4%, calculated as the ratio of Tier 1 capital to balance sheet exposures plus certain off-balance sheet exposures.
 
To be considered “well capitalized,” a bank holding company or bank must have the following minimum ratios: (i) a Tier 1 leverage ratio of 5.0%, (ii) a common equity Tier 1 risk-based capital ratio of 6.5%, (iii) a Tier 1 risk-based capital ratio of 8.0%, and (iv) a total risk-based capital ratio of 10.0%.
 
The Basel III final framework provides for a number of deductions from and adjustments to CET1. These include, for example, the requirement that mortgage servicing rights, deferred tax assets dependent upon future taxable income and significant investments in non-consolidated financial entities be deducted from CET1 to the extent that any one such category exceeds 10% of CET1 or all such categories exceed 15% of CET1. Basel III also includes, as part of the definition of CET1 capital, a requirement that banking institutions include the amount of Additional Other Comprehensive Income (“AOCI”), which primarily consists of unrealized gains and losses on available for sale securities, which are not required to be treated as other-than-temporary impairment, net of tax, in calculating regulatory capital. Banking institutions had the option to opt out of including AOCI in CET1 capital if they elected to do so in their first regulatory report following January 1, 2015. As permitted by Basel III, Bancorp and the Bank elected to exclude AOCI from CET1.
 
15
 
 
The Dodd-Frank Act excludes trust preferred securities issued after May 19, 2010, from being included in Tier 1 capital, unless the issuing company is a bank holding company with less than $500 million in total assets. Trust preferred securities issued prior to that date will continue to count as Tier 1 capital for bank holding companies with less than $15 billion in total assets, such as Bancorp. The trust preferred securities issued by our unconsolidated subsidiary capital trusts qualify as Tier 1 capital up to a maximum limit of 25% of total Tier 1 capital. Any additional portion of our trust preferred securities would qualify as “Tier 2 capital.”
 
In addition, goodwill and most intangible assets are deducted from Tier 1 capital. For purposes of applicable total risk-based capital regulatory guidelines, Tier 2 capital (sometimes referred to as “supplementary capital”) is defined to include, subject to limitations: perpetual preferred stock not included in Tier 1 capital, intermediate-term preferred stock and any related surplus, certain hybrid capital instruments, perpetual debt and mandatory convertible debt securities, allowances for loan and lease losses, and intermediate-term subordinated debt instruments. The maximum amount of qualifying Tier 2 capital is 100% of qualifying Tier 1 capital. For purposes of determining total capital under federal guidelines, total capital equals Tier 1 capital, plus qualifying Tier 2 capital, minus investments in unconsolidated subsidiaries, reciprocal holdings of bank holding company capital securities, and deferred tax assets and other deductions.
 
We had outstanding subordinated debentures in the aggregate principal amount of $118.7 million as of December 31, 2020. Of this amount, $14.3 million is attributable to subordinated debentures issued to statutory trusts in connection with prior issuances of trust-preferred securities, which qualifies as Tier 1 capital, and $104.4 million is attributable to outstanding subordinated notes, which qualifies as Tier 2 capital.
 
Basel III changed the manner of calculating risk-weighted assets. New methodologies for determining risk-weighted assets in the general capital rules are included, including revisions to recognition of credit risk mitigation, including a greater recognition of financial collateral and a wider range of eligible guarantors. They also include risk weighting of equity exposures and past due loans; and higher (greater than 100%) risk weighting for certain commercial real estate exposures that have higher credit risk profiles, including higher loan to value and equity components. In particular, loans categorized as “high-volatility commercial real estate” loans, as defined as pursuant to applicable federal regulations, are required to be assigned a 150% risk weighting, and require additional capital support.
 
The Federal Reserve’s Small Bank Holding Company Policy Statement (the "Policy Statement") applies to bank holding companies ("BHCs") with pro forma consolidated assets of less than $3 billion. The Policy Statement was designed to permit the creation of small BHCs and to allow for their expansion by allowing them to have debt levels in excess of what is otherwise allowed for larger BHCs. Under the Policy Statement, a BHC is exempt from the Federal Reserve's risk-based capital and leverage rules (Appendixes A and D of Regulation Y); and may use debt to finance up to 75% of the purchase price of an acquisition allowing (in theory) a BHC to have a debt-to-equity ratio of up to 3:1. The Policy Statement also applies to expedited processing by the Federal Reserve of applications filed by a qualifying BHC and the payment of dividends and the completion of stock redemptions by a qualifying BHC.  However, the Policy Statement is no longer applicable to the Company since it exceeded $3 billion of assets on December 31, 2020. 
 
In addition to the uniform risk-based capital guidelines and regulatory capital ratios that apply across the industry, the regulators have the discretion to set individual minimum capital requirements for specific institutions at rates significantly above the minimum guidelines and ratios. Future changes in regulations or practices could further reduce the amount of capital recognized for purposes of capital adequacy. Such a change could affect our ability to grow and could restrict the amount of profits, if any, available for the payment of dividends.
 
In addition, the Dodd-Frank Act requires the federal banking agencies to adopt capital requirements that address the risks that the activities of an institution poses to the institution and the public and private stakeholders, including risks arising from certain enumerated activities.
 
Basel III became applicable to Bancorp and the Bank on January 1, 2015.  As a result of the EGRRCPA, Bancorp was not subject to the more stringent Basel III minimum capital requirements until Bancorp’s total consolidated assets equaled or exceeded $3 billion.  However, as of December 31, 2020, Bancorp had total consolidated assets of $3.4 billion and, consequently, the more stringent Basel III minimum capital requirements became applicable. Overall, the Company believes that implementation of the Basel III Rule has not had and will not have a material adverse effect on Bancorp’s or the Bank’s capital ratios, earnings, shareholder’s equity, or its ability to pay dividends, effect stock repurchases or pay discretionary bonuses to executive officers.
 
16
 
 
In September 2017, the federal bank regulators proposed to revise and simplify the capital treatment for certain deferred tax assets, mortgage servicing assets, investments in non-consolidated financial entities and minority interests for banking organizations, such as Bancorp and the Bank, that are not subject to the advanced approaches requirements. In November 2017, the federal banking regulators revised the Basel III Rules to extend the current transitional treatment of these items for non-advanced approaches banking organizations until the September 2017 proposal is finalized. The September 2017 proposal would also change the capital treatment of certain commercial real estate loans under the standardized approach, which we use to calculate our capital ratios.
 
In December 2017, the Basel Committee published standards that it described as the finalization of the Basel III post-crisis regulatory reforms (the standards are commonly referred to as “Basel IV”). Among other things, these standards revise the Basel Committee’s standardized approach for credit risk (including by recalibrating risk weights and introducing new capital requirements for certain “unconditionally cancellable commitments,” such as unused credit card lines of credit) and provides a new standardized approach for operational risk capital. Under the Basel framework, these standards will generally be effective on January 1, 2022, with an aggregate output floor phasing in through January 1, 2027. Under the current U.S. capital rules, operational risk capital requirements and a capital floor apply only to advanced approaches institutions, and not to Bancorp or the Bank. The impact of Basel IV on us will depend on the manner in which it is implemented by the federal bank regulators.
 
In 2018, the federal bank regulatory agencies issued a variety of proposals and made statements concerning regulatory capital standards. These proposals touched on such areas as commercial real estate exposure, credit loss allowances under generally accepted accounting principles, capital requirements for covered swap entities, among others. In July 2019, the federal bank regulators adopted a final rule that simplifies the capital treatment for certain deferred tax assets, mortgage servicing assets, investments in non-consolidated financial entities and minority interests for banking organizations, such as Bancorp and the Bank, that are not subject to the advanced approaches requirements. We will be assessing the impact on us of these new regulations and supervisory approaches as they are proposed and implemented.
 
As of December 31, 2020, the Bank’s capital ratios exceeded the minimum capital adequacy guideline percentage requirements of the federal banking agencies for “well capitalized” institutions under the Basel III capital rules on a fully phased-in basis.
 
With respect to the Bank, the Basel III Capital Rules also revise the PCA regulations pursuant to Section 38 of the Federal Deposit Insurance Act, as discussed below under “PCA”.
 
Prompt Corrective Action (“PCA”)
 
The Federal Deposit Insurance Act, as amended, or FDIA, requires federal banking agencies to take PCA in respect of depository institutions that do not meet minimum capital requirements. The FDIA includes the following five capital tiers: “well capitalized”, “adequately capitalized”, “undercapitalized”, “significantly undercapitalized”, and “critically undercapitalized”. A depository institution’s capital tier will depend upon how its capital levels compare with various relevant capital measures and certain other factors, as established by regulation. The Basel III Capital Rules, revised the PCA requirements effective January 1, 2015. Under the revised PCA provisions of the FDIA, an insured depository institution generally will be classified in the following categories based on the capital measures indicated:
 
PCA Category
 
Total
Risk-Based
Capital Ratio
 
 
Tier I
Risk-Based
Capital Ratio
 
 
CET1
Risk-Based
Ratio
 
 
Tier I
Leverage
Ratio
 
Well capitalized
 
 
10
%
 
 
8
%
 
 
6.5
%
 
 
5
%
Adequately capitalized
 
 
8
%
 
 
6
%
 
 
4.5
%
 
 
4
%
Undercapitalized
 
 
< 8
%
 
 
< 6
%
 
 
< 4.5
%
 
 
< 4
%
Significantly undercapitalized
 
 
< 6
%
 
 
< 4
%
 
 
< 3.0
%
 
 
< 3
%
Critically undercapitalized
 
Tangible Equity/Total Assets =< 2%
 
 
An institution may be downgraded to, or deemed to be in, a capital category that is lower than indicated by its capital ratios, if it is determined to be in an unsafe or unsound condition or if it receives an unsatisfactory examination rating with respect to certain matters. A bank’s capital category is determined solely for the purpose of applying PCA regulations and the capital category may not constitute an accurate representation of the bank’s overall financial condition or prospects for other purposes.
 
17
 
 
The FDIA generally prohibits a depository institution from making any capital distributions (including payment of a dividend) or paying any management fee to its parent holding company, if the depository institution would thereafter be “undercapitalized”. “Undercapitalized” institutions are subject to growth limitations and are required to submit capital restoration plans. If a depository institution fails to submit an acceptable plan, it is treated as if it is “significantly undercapitalized”. “Significantly undercapitalized” depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become “adequately capitalized”, requirements to reduce total assets, and cessation of receipt of deposits from correspondent banks. “Critically undercapitalized” institutions are subject to the appointment of a receiver or conservator.
 
The capital classification of a bank holding company and a bank affects the frequency of regulatory examinations, the bank holding company’s and the bank’s ability to engage in certain activities and the deposit insurance premium paid by the bank. As of December 31, 2019, we met the requirements to be “well-capitalized” based upon the aforementioned ratios for purposes of the prompt corrective action regulations, as currently in effect.
 
The Company
 
General. Bancorp, as the sole shareholder of the Bank, is a financial holding company under federal law and regulation. As a financial holding company, Bancorp is registered with, and is subject to regulation by, the Federal Reserve under the Bank Holding Company Act of 1956, as amended (the “BHCA”). In accordance with Federal Reserve policy, and as now codified by the Dodd-Frank Act, Bancorp is legally obligated to act as a source of financial strength to the Bank and to commit resources to support the Bank in circumstances where Bancorp might not otherwise do so. Under the BHCA, Bancorp is subject to periodic examination by the Federal Reserve. Bancorp is required to file with the Federal Reserve periodic reports of Bancorp’s operations and such additional information regarding Bancorp and its subsidiaries as the Federal Reserve may require.
 
Acquisitions, Activities and Change in Control. The primary purpose of a bank holding company is to control and manage banks. The BHCA generally requires the prior approval by the Federal Reserve for any merger involving a bank holding company or any acquisition of control by a bank holding company of another bank or bank holding company. Subject to certain conditions (including deposit concentration limits established by the BHCA and the Dodd-Frank Act), the Federal Reserve may allow a bank holding company to acquire banks located in any state of the United States. In approving interstate acquisitions, the Federal Reserve is required to give effect to applicable state law limitations on the aggregate amount of deposits that may be held by the acquiring bank holding company and its insured depository institution affiliates in the state in which the target bank is located (provided that those limits do not discriminate against out-of-state depository institutions or their holding companies) and state laws that require that the target bank have been in existence for a minimum period of time (not to exceed five years) before being acquired by an out-of-state bank holding company. Furthermore, in accordance with the Dodd-Frank Act, bank holding companies must be well-capitalized and well-managed in order to effect interstate mergers or acquisitions. For a discussion of the capital requirements, see “Regulatory Capital Requirements” above.
 
The BHCA generally prohibits Bancorp from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company that is not a bank and from engaging in any business other than that of banking, managing and controlling banks or furnishing services to banks and their subsidiaries. This general prohibition is subject to a number of exceptions. The principal exception allows bank holding companies to engage in, and to own shares of companies engaged in, certain businesses found by the Federal Reserve prior to November 11, 1999 to be “so closely related to banking ... as to be a proper incident thereto”. This authority would permit Bancorp to engage in a variety of banking-related businesses, including the ownership and operation of a savings association, or any entity engaged in consumer finance, equipment leasing, the operation of a computer service bureau (including software development) and mortgage banking and brokerage. The BHCA generally does not place territorial restrictions on the domestic activities of nonbank subsidiaries of bank holding companies.
 
Additionally, bank holding companies that meet certain eligibility requirements prescribed by the BHCA and elect to operate as financial holding companies may engage in, or own shares in companies engaged in, a wider range of nonbanking activities, including securities and insurance underwriting and sales, merchant banking and any other activity that the Federal Reserve, in consultation with the Secretary of the Treasury, determines by regulation or order is financial in nature or incidental to any such financial activity or that the Federal Reserve determines by order to be complementary to any such financial activity and does not pose a substantial risk to the safety or soundness of depository institutions or the financial system generally. Bancorp has elected to be a financial holding company.
 
In order to maintain Bancorp’s status as a financial holding company, Bancorp and the Bank must be well-capitalized, well-managed, and have a least a satisfactory CRA rating. If the Federal Reserve subsequently determines that Bancorp, as a financial holding company, is not well-capitalized or well-managed, Bancorp would have a period of time during which to achieve compliance, but during the period of noncompliance, the Federal Reserve may place any limitations on Bancorp it believes to be appropriate. Furthermore, if the Federal Reserve subsequently determines that the Bank, as a financial holding company subsidiary, has not received a satisfactory CRA rating, Bancorp would not be able to commence any new financial activities or acquire a company that engages in such activities.
 
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Federal law also prohibits any person or company from acquiring “control” of an FDIC-insured depository institution or its holding company without prior notice to the appropriate federal bank regulator. “Control” is conclusively presumed to exist upon the acquisition of 25% or more of the outstanding voting securities of a bank or bank holding company, but may arise under certain circumstances between 5% and 24.99% ownership.
 
Under the California Financial Code, any proposed acquisition of “control” of the Bank by any person (including a company) must be approved by the Commissioner of the DFPI. The California Financial Code defines “control” as the power, directly or indirectly, to direct the Bank’s management or policies or to vote 25% or more of any class of the Bank’s outstanding voting securities. Additionally, a rebuttable presumption of control arises when any person (including a company) seeks to acquire, directly or indirectly, 10% or more of any class of the Bank’s outstanding voting securities.
 
Capital Requirements. Bank holding companies are required to maintain capital in accordance with Federal Reserve capital adequacy requirements, as affected by the Dodd-Frank Act and Basel III. For a discussion of capital requirements, see “Regulatory Capital Requirements” above.
 
Dividend Payments. Bancorp’s ability to pay dividends to its shareholders may be affected by both general corporate law considerations and the policies of the Federal Reserve applicable to bank holding companies. As a California corporation, Bancorp is subject to the limitations of California law, which allows a corporation to distribute cash or property to shareholders, including a dividend or repurchase or redemption of shares, if the corporation meets either a retained earnings test or a “balance sheet” test. Under the retained earnings test, Bancorp may make a distribution from retained earnings to the extent that its retained earnings exceed the sum of (a) the amount of the distribution plus (b) the amount, if any, of dividends in arrears on shares with preferential dividend rights. Bancorp may also make a distribution if, immediately after the distribution, the value of its assets equals or exceeds the sum of (a) its total liabilities plus (b) the liquidation preference of any shares which have a preference upon dissolution over the rights of shareholders receiving the distribution. Indebtedness is not considered a liability if the terms of such indebtedness provide that payment of principal and interest thereon are to be made only if, and to the extent that, a distribution to shareholders could be made under the balance sheet test. A California corporation may specify in its articles of incorporation that distributions under the retained earnings test or balance sheet test can be made without regard to the preferential rights amount. Bancorp’s articles of incorporation do not address distributions under either the retained earnings test or the balance sheet test.
 
As a general matter, the Federal Reserve has indicated that the board of directors of a bank holding company should eliminate, defer or significantly reduce dividends to shareholders if: (i) Bancorp’s net income available to shareholders for the past four quarters, net of dividends previously paid during that period, is not sufficient to fully fund the dividends; (ii) the prospective rate of earnings retention is inconsistent with Bancorp’s capital needs and overall current and prospective financial condition; or (iii) Bancorp will not meet, or is in danger of not meeting, its minimum regulatory capital adequacy ratios. The Federal Reserve also possesses enforcement powers over bank holding companies and their nonbank subsidiaries to prevent or remedy actions that represent unsafe or unsound practices or violations of applicable statutes and regulations. Among these powers is the ability to proscribe the payment of dividends by banks and bank holding companies.
 
The terms of our Junior Subordinated Notes also limit our ability to pay dividends on our common stock. If we are not current on our payment of interest on our Junior Subordinated Notes, we may not pay dividends on our common stock. The amount of future dividends by Bancorp will depend on our earnings, financial condition, capital requirements and other factors, and will be determined by our board of directors in accordance with the capital management and dividend policy.
 
The Bank is a legal entity that is separate and distinct from its holding company. Bancorp is dependent on the performance of the Bank for funds which may be received as dividends from the Bank for use in the operation of Bancorp and the ability of Bancorp to pay dividends to stockholders. Future cash dividends by the Bank will also depend upon management’s assessment of future capital requirements, contractual restrictions, and other factors. When phased in, the new capital rules will restrict dividends by the Bank if the capital conservation buffer is not achieved.
 
The Bank
 
General. The Bank is a California-chartered bank, but is not a member of the Federal Reserve System (a “non-member bank”). The deposit accounts of the Bank are insured by the FDIC’s Deposit Insurance Fund (“DIF”) to the maximum extent provided under federal law and FDIC regulations. As a California-chartered FDIC-insured non-member bank, the Bank is subject to the examination, supervision, reporting and enforcement requirements of the DFPI, the chartering authority for California banks, and as a non-member bank, the FDIC.
 
Supervisory Assessments. California-chartered banks are required to pay supervisory assessments to the DFPI to fund its operations. The amount of the assessment paid by a California bank to the DFPI is calculated on the basis of the institution’s total assets, including consolidated subsidiaries, as reported to the DFPI. During the year ended December 31, 2020, the Bank paid supervisory assessments to the DFPI totaling $164,000.
 
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Capital Requirements. Banks are generally required to maintain capital levels in excess of other businesses. For a discussion of capital requirements, see “Regulatory Capital Requirements” above.
 
Dividend Payments. The primary source of funds for the Company is dividends from the Bank. Under the California Financial Code, the Bank is permitted to pay a dividend in the following circumstances: (i) without the consent of either the DFPI or the Bank’s shareholders, in an amount not exceeding the lesser of (a) the retained earnings of the Bank; or (b) the net income of the Bank for its last three fiscal years, less the amount of any distributions made during the prior period; (ii) with the prior approval of the DFPI, in an amount not exceeding the greatest of: (a) the retained earnings of the Bank; (b) the net income of the Bank for its last fiscal year; or (c) the net income for the Bank for its current fiscal year; and (iii) with the prior approval of the DFPI and the Bank’s shareholders in connection with a reduction of its contributed capital. The payment of dividends by any financial institution is affected by the requirement to maintain adequate capital pursuant to applicable capital adequacy guidelines and regulations, and a financial institution generally is prohibited from paying any dividends if, following payment thereof, the institution would be undercapitalized. As described above, the Bank exceeded its minimum capital requirements under applicable regulatory guidelines as of December 31, 2020.
 
Transactions with Affiliates and Insiders. Depository institutions are subject to the restrictions contained in the Federal Reserve Act (the “FRA”) with respect to loans to directors, executive officers and principal stockholders. Under the FRA, loans to directors, executive officers and stockholders who own more than 10% of a depository institution and certain affiliated entities of any of the foregoing, may not exceed, together with all other outstanding loans to such person and affiliated entities, the institution’s loans-to-one-borrower limit. Federal regulations also prohibit loans above amounts prescribed by the appropriate federal banking agency to directors, executive officers, and stockholders who own more than 10% of an institution, and their respective affiliates, unless such loans are approved in advance by a majority of the board of directors of the institution. Any “interested” director may not participate in the voting. The proscribed loan amount, which includes all other outstanding loans to such person, as to which such prior board of director approval is required, is the greater of $25,000 or 5% of capital and surplus up to $500,000. The Federal Reserve also requires that loans to directors, executive officers and principal stockholders be made on terms substantially the same as offered in comparable transactions to non-executive employees of the bank and must not involve more than the normal risk of repayment. There are additional limits on the amount a bank can loan to an executive officer.
 
Transactions between a bank and its “affiliates” are quantitatively and qualitatively restricted under Sections 23A and 23B of the FRA. Section 23A restricts the aggregate amount of covered transactions with any individual affiliate to 10% of the capital and surplus of the financial institution. The aggregate amount of covered transactions with all affiliates is limited to 20% of the institution’s capital and surplus. Certain transactions with affiliates are required to be secured by collateral in an amount and of a type described in Section 23A and the purchase of low quality assets from affiliates are generally prohibited.
 
Section 23B generally provides that certain transactions with affiliates, including loans and asset purchases, must be on terms and under circumstances, including credit standards, that are substantially the same or at least as favorable to the institution as those prevailing at the time for comparable transactions with non-affiliated companies. The Federal Reserve has promulgated Regulation W, which codifies prior interpretations under Sections 23A and 23B of the FRA and provides interpretive guidance with respect to affiliate transactions. Affiliates of a bank include, among other entities, a bank’s holding company and companies that are under common control with the bank. Bancorp is considered to be an affiliate of the Bank.
 
The Dodd-Frank Act generally enhanced the restrictions on transactions with affiliates under Section 23A and 23B of the FRA, including an expansion of the definition of “covered transactions” and an increase in the amount of time for which collateral requirements regarding covered credit transactions must be satisfied. Insider transaction limitations are expanded through the strengthening of loan restrictions to insiders and the expansion of the types of transactions subject to the various limits, including derivatives transactions, repurchase agreements, reverse repurchase agreements and securities lending or borrowing transactions. Restrictions are also placed on certain asset sales to and from an insider to an institution, including requirements that such sales be on market terms and, in certain circumstances, approved by the institution’s board of directors.
 
Loans to One Borrower. Under California law, our ability to make aggregate secured and unsecured loans-to-one-borrower is limited to 25% and 15%, respectively, of unimpaired capital and surplus. At December 31, 2020, the Bank’s regulatory limit on aggregate secured loans-to-one-borrower was $136.7 million and unsecured loans-to-one borrower was $82.0 million.
 
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Safety and Soundness Standards /Risk Management. The federal banking agencies have adopted guidelines that establish operational and managerial standards to promote the safety and soundness of federally insured depository institutions. The guidelines set forth standards for internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, asset quality and earnings.
 
In general, the safety and soundness guidelines prescribe the goals to be achieved in each area, and each institution is responsible for establishing its own procedures to achieve those goals. If an institution fails to comply with any of the standards set forth in the guidelines, the financial institution’s primary federal regulator may require the institution to submit a plan for achieving and maintaining compliance. If a financial institution fails to submit an acceptable compliance plan, or fails in any material respect to implement a compliance plan that has been accepted by its primary federal regulator, the regulator is required to issue an order directing the institution to cure the deficiency. Until the deficiency cited in the regulator’s order is cured, the regulator may restrict the financial institution’s rate of growth, require the financial institution to increase its capital, restrict the rates the institution pays on deposits or require the institution to take any action the regulator deems appropriate under the circumstances. Noncompliance with the standards established by the safety and soundness guidelines may also constitute grounds for other enforcement action by the federal bank regulatory agencies, including cease and desist orders and civil money penalty assessments.
 
During the past decade, the bank regulatory agencies have increasingly emphasized the importance of sound risk management processes and strong internal controls when evaluating the activities of the financial institutions they supervise. Properly managing risks has been identified as critical to the conduct of safe and sound banking activities and has become even more important as new technologies, product innovation, and the size and speed of financial transactions have changed the nature of banking markets. The agencies have identified a spectrum of risks facing a banking institution including, but not limited to, credit, market, liquidity, operational, legal, and reputational risk. In particular, recent regulatory pronouncements have focused on operational risk, which arises from the potential that inadequate information systems, operational problems, breaches in internal controls, fraud, or unforeseen catastrophes will result in unexpected losses. New products and services, third-party risk management and cybersecurity are critical sources of operational risk that financial institutions are expected to address in the current environment. The Bank is expected to have active board and senior management oversight; adequate policies, procedures, and limits; adequate risk measurement, monitoring, and management information systems; and comprehensive internal controls.
 
Branching Authority. California banks, such as the Bank, may, under California law, establish a banking office so long as the bank’s board of directors approves the banking office and the DFPI is notified of the establishment of the banking office. Deposit-taking banking offices must be approved by the FDIC, which considers a number of factors, including financial history, capital adequacy, earnings prospects, character of management, needs of the community and consistency with corporate power. The Dodd-Frank Act permits insured state banks to engage in de novo interstate branching if the laws of the state where the new banking office is to be established would permit the establishment of the banking office if it were chartered by such state. Finally, we may also establish banking offices in other states by merging with banks or by purchasing banking offices of other banks in other states, subject to certain restrictions.
 
Community Reinvestment Act Requirements. The CRA requires the Bank to have a continuing and affirmative obligation in a safe and sound manner to help meet the credit needs of its entire community, including low- and moderate-income neighborhoods. Federal regulators regularly assess the Bank’s record of meeting the credit needs of its communities. Applications for additional acquisitions would be affected by the evaluation of the Bank’s effectiveness in meeting its CRA requirements.  In April 2018, the U.S. Department of Treasury issued a memorandum to the federal banking regulators recommending changes to the CRA’s regulations to reduce their complexity and associated burden on banks, and in December 2019, the FDIC and the Office of the Comptroller of the Currency (“OCC”) proposed for public comment rules to modernize the agencies’ regulations under the CRA. In September 2020, the Board of Governors of the Federal Reserve System released for public comment its proposed rules to modernize CRA regulations. We will continue to evaluate the impact of any changes to the CRA regulations.  The Bank received a “satisfactory” rating on its most recent CRA examination, which was conducted in July 2020.
 
Anti-Money Laundering and OFAC Regulation. The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, or the Patriot Act, is designed to deny terrorists and criminals the ability to obtain access to the U.S. financial system and has significant implications for depository institutions, brokers, dealers and other businesses involved in the transfer of money. The Patriot Act mandates financial services companies to have policies and procedures with respect to measures designed to address any or all of the following matters: (i) customer identification programs; (ii) money laundering; (iii) terrorist financing; (iv) identifying and reporting suspicious activities and currency transactions; (v) currency crimes; and (vi) cooperation between financial institutions and law enforcement authorities. Banking regulators also examine banks for compliance with the economic sanctions regulations administered by OFAC. Failure of a financial institution to maintain and implement adequate anti-money laundering and OFAC programs, or to comply with all of the relevant laws or regulations, could have serious legal and reputational consequences for the institution.
 
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Concentrations in Commercial Real Estate. Concentration risk exists when financial institutions deploy too many assets to any one industry or segment. Concentration stemming from commercial real estate is one area of regulatory concern. The CRE Concentration Guidance, provides supervisory criteria, including the following numerical indicators, to assist bank examiners in identifying banks with potentially significant commercial real estate loan concentrations that may warrant greater supervisory scrutiny: (i) commercial real estate loans exceeding 300% of capital and increasing 50% or more in the preceding three years; or (ii) construction and land development loans exceeding 100% of capital. The CRE Concentration Guidance does not limit banks’ levels of commercial real estate lending activities, but rather guides institutions in developing risk management practices and levels of capital that are commensurate with the level and nature of their commercial real estate concentrations. Based on the Bank’s loan portfolio, the Bank does not exceed these guidelines.
 
Consumer Financial Services
 
Banks and other financial institutions are subject to numerous laws and regulations intended to protect consumers in their transactions with banks. These laws include, among others, laws regarding unfair and deceptive acts and practices and usury laws, as well as the following consumer protection statutes: Truth in Lending Act, Truth in Savings Act, Electronic Fund Transfer Act, Expedited Funds Availability Act, Equal Credit Opportunity Act, Fair and Accurate Credit Transactions Act, Fair Housing Act, Fair Credit Reporting Act, Fair Debt Collection Act, GLB Act, Home Mortgage Disclosure Act, Right to Financial Privacy Act and Real Estate Settlement Procedures Act.
 
Many states and local jurisdictions including California have consumer protection laws analogous, and in addition, to those listed above. These federal, state and local laws regulate the manner in which financial institutions deal with customers when taking deposits, making loans or conducting other types of transactions.  Examples include but are not limited to the CCPA and the CCFPL described above.    Failure to comply with these laws and regulations could give rise to regulatory sanctions, customer rescission rights, action by state and local attorneys general and civil or criminal liability.
 
The structure of federal consumer protection regulation applicable to all providers of consumer financial products and services changed significantly on July 21, 2011, when the CFPB commenced operations to supervise and enforce consumer protection laws. The CFPB has broad rulemaking authority for a wide range of consumer protection laws that apply to all providers of consumer products and services, including the Bank, as well as the authority to prohibit “unfair, deceptive or abusive” acts and practices. The CFPB has examination and enforcement authority over providers with more than $10 billion in assets. Banks and savings institutions with $10 billion or less in assets, like the Bank, will continue to be examined by their applicable bank regulators.
 
Mortgage and Mortgage-Related Products, Generally. Because abuses in connection with residential mortgages were a significant factor contributing to the financial crisis, many new rules issued by the CFPB and required by the Dodd-Frank Act address mortgage and mortgage-related products, their underwriting, origination, servicing and sales. The Dodd-Frank Act significantly expanded underwriting requirements applicable to loans secured by 1-4 family residential real property and augmented federal law combating predatory lending practices. In addition to numerous disclosure requirements, the Dodd-Frank Act imposed new standards for mortgage loan originations on all lenders, including banks and savings associations, in an effort to strongly encourage lenders to verify a borrower’s ability to repay, while also establishing a presumption of compliance for certain “qualified mortgages”. The Dodd-Frank Act generally required lenders or securitizers to retain an economic interest in the credit risk relating to loans that the lender sells, and other asset-backed securities that the securitizer issues, if the loans do not comply with the ability-to-repay standards described below. The risk retention requirement generally is 5%, but could be increased or decreased by regulation. The Bank does not currently expect the CFPB’s rules to have a significant impact on its operations, except for higher compliance costs.
 
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Incentive Compensation Guidance
 
The federal bank regulatory agencies have issued comprehensive guidance intended to ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness of those organizations by encouraging excessive risk-taking. The incentive compensation guidance sets expectations for banking organizations concerning their incentive compensation arrangements and related risk-management, control and governance processes. The incentive compensation guidance, which covers all employees that have the ability to materially affect the risk profile of an organization, either individually or as part of a group, is based upon three primary principles: (1) balanced risk-taking incentives; (2) compatibility with effective controls and risk management; and (3) strong corporate governance. Any deficiencies in compensation practices that are identified may be incorporated into the organization’s supervisory ratings, which can affect its ability to make acquisitions or take other actions. In addition, under the incentive compensation guidance, a banking organization’s federal supervisor may initiate enforcement action if the organization’s incentive compensation arrangements pose a risk to the safety and soundness of the organization. In addition, beginning January 1, 2016, the Basel III Rules limit discretionary bonus payments to the Bank’s executive officers if its capital ratios are below the threshold levels of the capital conservation buffer established by the rules. The capital conservation buffer was phased in from January 1, 2016 to January 1, 2019, when the full capital conservation buffer of 2.5% (as a percentage of risk-weighted assets) became effective. The capital conservation buffer is in addition to the minimum risk-based capital requirement. The scope and content of the U.S. banking regulators’ policies on executive compensation are continuing to develop and are likely to continue evolving in the near future.
 
Sarbanes-Oxley Act
 
The Company is subject to the accounting oversight and corporate governance requirements of the Sarbanes-Oxley Act of 2002, including, among other things, required executive certification of financial presentations, requirements for board audit committees and their members, and disclosure of controls and procedures and internal control over financial reporting.
 
Enforcement Powers of Federal and State Banking Agencies
 
The federal bank regulatory agencies have broad enforcement powers, including the power to terminate deposit insurance, impose substantial fines and other civil and criminal penalties, and appoint a conservator or receiver for financial institutions. Failure to comply with applicable laws and regulations could subject us and our officers and directors to administrative sanctions and potentially substantial civil money penalties. In addition to the grounds discussed above under “Prompt Corrective Actions”, the appropriate federal bank regulatory agency may appoint the FDIC as conservator or receiver for a banking institution (or the FDIC may appoint itself, under certain circumstances) if any one or more of a number of circumstances exist, including, without limitation, the fact that the banking institution is undercapitalized and has no reasonable prospect of becoming adequately capitalized, fails to become adequately capitalized when required to do so, fails to submit a timely and acceptable capital restoration plan or materially fails to implement an accepted capital restoration plan. The DFPI also has broad enforcement powers over us, including the power to impose orders, remove officers and directors, impose fines and appoint supervisors and conservators.
 
Financial Privacy
 
The federal bank regulatory agencies have adopted rules that limit the ability of banks and other financial institutions to disclose non-public information about consumers to non-affiliated third parties. These limitations require disclosure of privacy policies to consumers and, in some circumstances, allow consumers to prevent disclosure of certain personal information to a non-affiliated third party. These regulations affect how consumer information is transmitted through financial services companies and conveyed to outside vendors. In addition, consumers may also prevent disclosure of certain information among affiliated companies that is assembled or used to determine eligibility for a product or service, such as that shown on consumer credit reports and asset and income information from applications. Consumers also have the option to direct banks and other financial institutions not to share information about transactions and experiences with affiliated companies for the purpose of marketing products or services.
 
Additional Constraints on the Company and the Bank
 
Monetary Policy. The monetary policy of the Federal Reserve has a significant effect on the operating results of financial or bank holding companies and their subsidiaries. Among the tools available to the Federal Reserve to affect the money supply are open market transactions in U.S. government securities, changes in the discount rate on member bank borrowings and changes in reserve requirements against member bank deposits. These means are used in varying combinations to influence overall growth and distribution of bank loans, investments and deposits, and their use may affect interest rates charged on loans or paid on deposits.
 
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The Volcker Rule. In addition to other implications of the Dodd-Frank Act discussed above, the Dodd-Frank Act amended the BHCA to require the federal regulatory agencies to adopt rules that prohibit banking entities and their affiliates from engaging in proprietary trading and investing in and sponsoring certain unregistered investment companies (defined as hedge funds and private equity funds). This statutory provision is commonly called the “Volcker Rule”. On December 10, 2013, the federal regulatory agencies issued final rules to implement the prohibitions required by the Volcker Rule. Thereafter, in reaction to industry concern over the adverse impact to community banks of the treatment of certain collateralized debt instruments in the final rule, the federal regulatory agencies approved an interim final rule to permit financial institutions to retain interests in collateralized debt obligations backed primarily by trust preferred securities (““TruPS CDOs”), from the investment prohibitions contained in the final rule. Under the interim final rule, the regulatory agencies permitted the retention of an interest in or sponsorship of covered funds by banking entities if the following qualifications were met: (i) the TruPS CDO was established, and the interest was issued, before May 19, 2010; (ii) the banking entity reasonably believes that the offering proceeds received by the TruPS CDO were invested primarily in qualifying TruPS collateral; and (iii) the banking entity’s interest in the TruPS CDO was acquired on or before December 10, 2013.
 
Revisions to the Volcker Rule in 2019, that become effective in 2020, simplifies and streamlines the compliance requirements for banks that do not have significant trading activities. In 2020, the OCC, Federal Reserve, FDIC, SEC and Commodity Futures Trading Commission finalized further amendments to the Volcker Rule. The amendments include new exclusions from the Volcker Rule’s general prohibitions on banking entities investing in and sponsoring private equity funds, hedge funds, and certain other investment vehicles (collectively “covered funds”). The amendments in the final rule, which became effective on October 1, 2020, clarify and expand permissible banking activities and relationships under the Volcker Rule.
 
Additional Restrictions on Bancorp and Bank Activities
 
Subject to prior notice or Federal Reserve approval, bank holding companies may generally engage in, or acquire shares of companies engaged in, activities determined by the Federal Reserve to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. Bank holding companies, such as Bancorp, which elect and retain “financial holding company” status pursuant to the GLB Act may engage in these nonbanking activities and broader securities, insurance, merchant banking and other activities that are determined to be “financial in nature” or are incidental or complementary to activities that are financial in nature without prior Federal Reserve approval. Pursuant to the GLB Act and the Dodd-Frank Act, in order to elect and retain financial holding company status, a bank holding company and all depository institution subsidiaries of a bank holding company must be well capitalized and well managed, and, except in limited circumstances, depository subsidiaries must be in satisfactory compliance with the CRA. Failure to sustain compliance with these requirements or correct any non-compliance within a fixed time period could lead to divestiture of subsidiary banks or require all activities to conform to those permissible for a bank holding company.
 
Pursuant to the Federal Deposit Insurance Act (“FDI Act”) and the California Financial Code, California state chartered commercial banks may generally engage in any activity permissible for national banks. Therefore, the Bank may form subsidiaries to engage in the many so-called “closely related to banking” or “nonbanking” activities commonly conducted by national banks in operating subsidiaries or subsidiaries of bank holding companies. Further, pursuant to the GLB Act, California banks may conduct certain “financial” activities in a subsidiary to the same extent as a national bank, provided the bank is and remains “well-capitalized,” “well-managed” and in satisfactory compliance with the CRA. The Bank currently has no financial subsidiaries.
 
Source of Strength
 
Federal Reserve policy and federal law require bank holding companies to act as a source of financial and managerial strength to their subsidiary banks. Under this requirement, Bancorp is expected to commit resources to support the Bank, including at times when Bancorp may not be in a financial position to provide such resources, and it may not be in Bancorp’s, or Bancorp’s stockholders’ or creditors’, best interests to do so. In addition, any capital loans Bancorp makes to the Bank are subordinate in right of payment to depositors and to certain other indebtedness of the Bank. In the event of Bancorp’s bankruptcy, any commitment by Bancorp to a federal bank regulatory agency to maintain the capital of the Bank will be assumed by the bankruptcy trustee and entitled to priority of payment.
 
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Enforcement Authority
 
The federal and California regulatory structure gives the bank regulatory agencies extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. The regulatory agencies have adopted guidelines to assist in identifying and addressing potential safety and soundness concerns before an institution’s capital becomes impaired. The guidelines establish operational and managerial standards generally relating to: (i) internal controls, information systems, and internal audit systems; (ii) loan documentation; (iii) credit underwriting; (iv) interest-rate exposure; (v) asset growth and asset quality; (vi) loan concentration; and (vii) compensation, fees, and benefits. Further, the regulatory agencies have adopted safety and soundness guidelines for asset quality and for evaluating and monitoring earnings to ensure that earnings are sufficient for the maintenance of adequate capital and reserves. If, as a result of an examination, the DFPI or the FDIC should determine that the financial condition, capital resources, asset quality, earnings prospects, management, liquidity, or other aspects of the Bank’s operations are unsatisfactory or that the Bank or its management is violating or has violated any law or regulation, the DFPI and the FDIC have residual authority to:
 
 
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Require affirmative action to correct any conditions resulting from any violation or practice;
 
 
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Direct an increase in capital and the maintenance of higher specific minimum capital ratios, which may preclude the Bank from being deemed “well-capitalized” and restrict its ability to accept certain brokered deposits, among other things;
 
 
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Restrict the Bank’s growth geographically, by products and services, or by mergers and acquisitions;
 
 
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Issue, or require the Bank to enter into, informal or formal enforcement actions, including required board resolutions, memoranda of understanding, written agreements and consent or cease and desist orders or prompt corrective action orders to take corrective action and cease unsafe and unsound practices;
 
 
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Require prior approval of senior executive officer or director changes, remove officers and directors, and assess civil monetary penalties; and
 
 
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Terminate FDIC insurance, revoke the Bank’s charter, take possession of, close and liquidate the Bank, or appoint the FDIC as receiver.
 
The Federal Reserve has similar enforcement authority over bank holding companies and commonly takes parallel action in conjunction with actions taken by a subsidiary bank’s regulators.
 
In the exercise of their supervisory and examination authority, the regulatory agencies have recently emphasized corporate governance, stress testing, enterprise risk management and other board responsibilities; anti-money laundering compliance and enhanced high risk customer due diligence; vendor management; cyber security and fair lending and other consumer compliance obligations.
 
Deposit Insurance
 
The FDIC is an independent federal agency that insures deposits, up to prescribed statutory limits, of federally insured banks and savings institutions and safeguards the safety and soundness of the banking and savings industries. The FDIC insures our customer deposits through the DIF up to prescribed limits of $250,000 for each depositor pursuant to the Dodd-Frank Act. The amount of FDIC assessments paid by each DIF member institution is based on its relative risk of default as measured by regulatory capital ratios and other supervisory factors. The FDIC uses a performance score and a loss-severity score to calculate an initial assessment rate for the Bank. In calculating these scores, the FDIC uses the Bank’s capital level and regulatory supervisory ratings and certain financial measures to assess the Bank’s ability to withstand asset-related stress and funding-related stress. The FDIC also has the ability to make discretionary adjustments to the total score based upon significant risk factors that are not adequately captured in the calculations. In addition to ordinary assessments described above, the FDIC has the ability to impose special assessments in certain instances.
 
We are generally unable to control the amount of assessments that we are required to pay for FDIC insurance. If there are additional bank or financial institution failures or if the FDIC otherwise determines, we may be required to pay even higher FDIC assessments than the recently increased levels. These increases in FDIC insurance assessments may have a material and adverse effect on our earnings and could have a material adverse effect on the value of, or market for, our common stock.
 
Under the FDI Act, the FDIC may terminate deposit insurance upon a finding that the institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC.
 
Operations, Consumer and Privacy Compliance Laws
 
The Bank must comply with numerous federal and state anti-money laundering and consumer protection statutes and implementing regulations, including the USA Patriot Act, the Bank Secrecy Act, the Foreign Account Tax Compliance Act, the CRA, the Fair Credit Reporting Act, as amended by the Fair and Accurate Credit Transactions Act, the Equal Credit Opportunity Act, the Truth in Lending Act, the Fair Housing Act, the Home Mortgage Disclosure Act, the Real Estate Settlement Procedures Act, the National Flood Insurance Act, the California Homeowner Bill of Rights and various federal and state privacy protection laws, including but not limited to the CCPA. The Bank and Bancorp are also subject to federal and state laws prohibiting unfair or fraudulent business practices, untrue or misleading advertising, and unfair competition. Some of these laws are further discussed below:
 
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The Equal Credit Opportunity Act (“ECOA”) generally prohibits discrimination in any credit transaction, whether for consumer or business purposes, on the basis of race, color, religion, national origin, sex, marital status, age, receipt of income from public assistance programs, or good faith exercise of any rights under the Consumer Credit Protection Act.
 
The Truth in Lending Act (“TILA”) is designed to ensure that credit terms are disclosed in a meaningful way so that consumers may compare credit terms more readily and knowledgeably. As a result of the TILA, all creditors must use the same credit terminology to express rates and payments, including the annual percentage rate, the finance charge, the amount financed, the total of payments and the payment schedule, among other things.
 
The Fair Housing Act (“FH Act”) regulates many practices, including making it unlawful for any lender to discriminate in its housing-related lending activities against any person because of race, color, religion, national origin, sex, handicap or familial status. A number of lending practices have been found by the courts to be, or may be considered, illegal under the FH Act, including some that are not specifically mentioned in the FH Act itself.
 
The Home Mortgage Disclosure Act (“HMDA”) grew out of public concern over credit shortages in certain urban neighborhoods and provides public information that will help show whether financial institutions are serving the housing credit needs of the neighborhoods and communities in which they are located. The HMDA also includes a “fair lending” aspect that requires the collection and disclosure of data about applicant and borrower characteristics as a way of identifying possible discriminatory lending patterns and enforcing anti-discrimination statutes.
 
Finally, the Real Estate Settlement Procedures Act (“RESPA”) requires lenders to provide borrowers with disclosures regarding the nature and cost of real estate settlements. Also, RESPA prohibits certain abusive practices, such as kickbacks, and places limitations on the amount of escrow accounts. Penalties under the above laws may include fines, reimbursements and other civil money penalties.
 
Due to heightened regulatory concern related to compliance with the CRA, TILA, FH Act, ECOA, HMDA and RESPA generally, the Bank may incur additional compliance costs or be required to expend additional funds for investments in its local community.
 
The Federal Reserve and other bank regulatory agencies also have adopted guidelines for safeguarding confidential, personal customer information. These guidelines require financial institutions to create, implement and maintain a comprehensive written information security program designed to ensure the security and confidentiality of customer information, protect against any anticipated threats or hazards to the security or integrity of such information and protect against unauthorized access to or use of such information that could result in substantial harm or inconvenience to any customer. Financial institutions are also required to implement policies and procedures regarding the disclosure of nonpublic personal information about consumers to non-affiliated third parties. In general, financial institutions must provide explanations to consumers on policies and procedures regarding the disclosure of such nonpublic personal information and, except as otherwise required by law, prohibits disclosing such information. The Bank has adopted a customer information security and privacy program to comply with such requirements.
 
Operations, consumer and privacy compliance laws and regulations also mandate certain disclosure and reporting requirements and regulate the manner in which financial institutions must deal with customers when taking deposits, making loans, collecting loans, and providing other services. Failure to comply with these laws and regulations can subject the Bank to lawsuits and penalties, including enforcement actions, injunctions, fines or criminal penalties, punitive damages to consumers, and the loss of certain contractual rights.
 
Federal Home Loan Bank System
 
The Bank is a member of the Federal Home Loan Bank (“FHLB”) of San Francisco. Among other benefits, each FHLB serves as a reserve or central bank for its members within its assigned region. Each FHLB is financed primarily from the sale of consolidated obligations of the FHLB system. Each FHLB makes available loans or advances to its members in compliance with the policies and procedures established by the board of directors of the individual FHLB. Each member of the FHLB of San Francisco is required to own stock in an amount equal to the greater of (i) a membership stock requirement, or (ii) an activity based stock requirement (based on a percentage of outstanding advances). There can be no assurance that the FHLB will pay dividends at the same rate it has paid in the past, or that it will pay any dividends in the future.
 
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Impact of Monetary Policies
 
The earnings and growth of the Bank are largely dependent on its ability to maintain a favorable differential or spread between the yield on its interest-earning assets and the rates paid on its deposits and other interest-bearing liabilities. As a result, the Bank’s performance is influenced by general economic conditions, both domestic and foreign, the monetary and fiscal policies of the federal government, and the policies of the regulatory agencies. The Federal Reserve implements national monetary policies (with objectives such as seeking to curb inflation and combat recession) by its open-market operations in U.S. government securities, by adjusting the required level of reserves for financial institutions subject to its reserve requirements, and by varying the discount rate applicable to borrowings by banks from the Federal Reserve Banks. The actions of the Federal Reserve in these areas influence the growth of bank loans, investments and deposits, and also affect interest rates charged on loans and deposits. The nature and impact of any future changes in monetary policies cannot be predicted.
 
Securities and Corporate Governance
 
Bancorp is subject to the disclosure and regulatory requirements of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, both as administered by the SEC. As a company listed on the NASDAQ Global Select Market, the Company is subject to NASDAQ listing standards for listed companies. Bancorp is also subject to the Sarbanes-Oxley Act of 2002, provisions of the Dodd-Frank Act, and other federal and state laws and regulations which address, among other issues, required executive certification of financial presentations, corporate governance requirements for board audit and compensation committees and their members, and disclosure of controls and procedures and internal control over financial reporting, auditing and accounting, executive compensation, and enhanced and timely disclosure of corporate information. NASDAQ has also adopted corporate governance rules, which are intended to allow stockholders and investors to more easily and efficiently monitor the performance of companies and their directors. Under the Sarbanes-Oxley Act, management and the Bancorp’s independent registered public accounting firm are required to assess the effectiveness of the Bancorp’s internal control over financial reporting. These assessments are included in Part II — Item 9A — “Controls and Procedures.”
 
Federal Banking Agency Compensation Guidelines
 
Guidelines adopted by the federal banking agencies pursuant to the FDI Act prohibit excessive compensation as an unsafe and unsound practice and describe compensation as excessive when the amounts paid are unreasonable or disproportionate to the services performed by an executive officer, employee, director or principal stockholder. The federal banking agencies have issued comprehensive guidance on incentive compensation policies intended to ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness of such organizations by encouraging excessive risk-taking.
 
In addition, the Dodd-Frank Act requires the federal bank regulatory agencies and the SEC to establish joint regulations or guidelines prohibiting certain incentive-based payment arrangements. These regulators must establish regulations or guidelines requiring enhanced disclosure to regulators of incentive-based compensation arrangements. The agencies proposed such regulations in April 2011, but the regulations have not been finalized. In April 2016, the agencies published a notice of proposed rulemaking further revising the incentive-based compensation standards originally proposed in 2011. Similar to the 2011 proposed rule, the 2016 proposed rule would prohibit financial institutions with at least $1 billion in consolidated assets from establishing or maintaining incentive-based compensation arrangements that encourage inappropriate risk by providing any executive officer, employee, director or principal shareholder who is a covered person with excessive compensation, fees or benefits or that could lead to material financial loss to the covered institution. It cannot be predicted whether, or in what form, any such proposed compensation rules may be enacted, particularly in light of the stated intention of the current administration to curtail the Dodd-Frank Act.
 
The scope, content and application of the U.S. banking regulators’ policies on incentive compensation continue to evolve. It cannot be determined at this time whether compliance with such policies will adversely affect the ability of Bancorp and the Bank to hire, retain and motivate key employees.
 
The Federal Reserve will review, as part of the regular, risk-focused examination process, the incentive compensation arrangements of banking organizations, such as us, that are not “large, complex banking organizations.” These reviews will be tailored to each organization based on the scope and complexity of the organization’s activities and the prevalence of incentive compensation arrangements. The findings of the supervisory initiatives will be included in reports of examination. Deficiencies will be incorporated into the organization’s supervisory ratings, which can affect the organization’s ability to make acquisitions and take other actions. Enforcement actions may be taken against a banking organization if its incentive compensation arrangements, or related risk management control or governance processes, pose a risk to the organization’s safety and soundness and the organization is not taking prompt and effective measures to correct the deficiencies.
 
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Audit Requirements
 
The Bank is required to have an annual independent audit, alone or as a part of its bank holding company’s audit, and to prepare all financial statements in accordance with U.S. generally accepted accounting principles. The Bank and Bancorp are also each required to have an audit committee comprised entirely of independent directors. As required by NASDAQ, Bancorp has certified that its audit committee has adopted formal written charters and meets the requisite number of directors, independence, and other qualification standards. As such, among other requirements, Bancorp must maintain an audit committee that includes members with banking or related financial management expertise, has access to its own outside counsel, and does not include members who are large customers of the Bank.
 
Regulation of Non-Bank Subsidiaries
 
Non-bank subsidiaries are subject to additional or separate regulation and supervision by other state, federal and self-regulatory bodies. Additionally, any foreign-based subsidiaries would also be subject to foreign laws and regulations.
 
Future Legislation and Regulation
 
Congress may enact, modify or repeal legislation from time to time that affects the regulation of the financial services industry, and state legislatures may enact, modify or repeal legislation from time to time affecting the regulation of financial institutions chartered by or operating in those states. Federal and state regulatory agencies also periodically propose and adopt changes to their regulations or change the manner in which existing regulations are applied. The substance or impact of pending or future legislation or regulation, or the application thereof, cannot be predicted, although enactment of proposed legislation (or modification or repeal of existing legislation) could impact the regulatory structure under which the Company and Bank operate and may significantly increase its costs, impede the efficiency of its internal business processes, require the Bank to increase its regulatory capital and modify its business strategy, and limit its ability to pursue business opportunities in an efficient manner. The Company’s business, financial condition, results of operations or prospects may be adversely affected, perhaps materially.
 
Federal and State Taxation
 
Bancorp and the Bank report their income on a consolidated basis using the accrual method of accounting, and are subject to federal income taxation in the same manner as other corporations with some exceptions. The Company has not been audited by the Internal Revenue Service. For 2020, 2019 and 2018, the Company was subject to a maximum federal income tax rate of 21.00% and California state income tax rate of 8.84%. For 2017, the Company was subject to a maximum federal income tax rate of 35.00% and California state income tax rate of 8.84%.
 
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) was signed into law. The Tax Act included a number of provisions that impacted us, including the following:
 
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Tax Rate. The Tax Act replaced the graduated corporate income tax rates applicable under prior law, which imposed a maximum corporate income tax rate of 35%, with a reduced 21% flat corporate income tax rate. Although the reduced corporate income tax rate generally was favorable to us, resulting in increased earnings and capital, it decreased the value of our existing deferred tax assets. Accounting principles generally accepted in the United States requires that the impact of the provisions of the Tax Act be accounted for in the period of enactment. Accordingly, the total incremental income tax expense recorded by Bancorp related to the Tax Act was $2.4 million in 2017.
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Employee Compensation. A “publicly held corporation” is not permitted to deduct compensation in excess of $1 million per year paid to certain employees. The Tax Act eliminated certain exceptions to the $1 million limit applicable under prior law related to performance-based compensation (for example, equity grants and cash bonuses paid only on the attainment of performance goals). As a result, our ability to deduct certain compensation paid to our most highly compensated employees is now limited.
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Business Asset Expensing. The Tax Act allows taxpayers to immediately expense the entire cost (instead of only 50%, as under prior law) of certain depreciable tangible property and real property improvements acquired and placed in service after September 27, 2017 and before January 1, 2023 (with an additional year for certain property). This 100% “bonus” depreciation is phased out proportionately for property placed in service on or after January 1, 2023 and before January 1, 2027 (with an additional year for certain property).
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Interest Expense. The Tax Act limits a taxpayer’s annual deduction of business interest expense to the sum of (i) business interest income, and (ii) 30% of “adjusted taxable income,” defined as a business’s taxable income without taking into account business interest income or expense, net operating losses, and, for 2018 through 2021, depreciation, amortization and depletion. Because we generate significant amounts of net interest income, we do not expect to be impacted by this limitation.
 
However, with the new Biden administration and the Democrat controlled Congress, tax laws and banking regulations are subject to change.
 
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Item 1A. Risk Factors.
 
Risks Related to Our Business
 
A decline in general business and economic conditions and any regulatory responses to such conditions could have a material adverse effect on our business, financial position, results of operations and growth prospects.
 
Our business and operations are sensitive to general business and economic conditions in the United States, generally, and particularly in the states of California, Illinois, New Jersey and New York, and the Los Angeles, New York City, Chicago and Las Vegas, Nevada metropolitan areas. Unfavorable or uncertain economic and market conditions could lead to credit quality concerns related to repayment ability and collateral protection as well as reduced demand for the products and services we offer. In recent years there has been a gradual improvement in the U.S. economy as evidenced by a rebound in the housing market, lower unemployment and higher equities markets; however, economic growth has been uneven, and opinions vary on the strength and direction of the economy. Uncertainties also have arisen regarding the potential for a reversal or renegotiation of international trade agreements, as the current U.S. administration has with China, the European Union and the United Kingdom.  In addition, concerns about the performance of international economies, especially in Europe and emerging markets, and economic conditions in Asia, particularly the economies of China and Taiwan, can impact the economy and financial markets here in the United States. If the national, regional and local economies experience worsening economic conditions, including high levels of unemployment, our growth and profitability could be constrained. Weak economic conditions are characterized by, among other indicators, deflation, elevated levels of unemployment, fluctuations in debt and equity capital markets, increased delinquencies on mortgage, commercial and consumer loans, residential and commercial real estate price declines, lower home sales and commercial activity, and fluctuations in the commercial Federal Housing Administration financing sector. All of these factors are generally detrimental to our business. Our business is significantly affected by monetary and other regulatory policies of the U.S. federal government, its agencies and government-sponsored entities. Changes in any of these policies are influenced by macroeconomic conditions and other factors that are beyond our control, are difficult to predict and could have a material adverse effect on our business, financial position, results of operations and growth prospects.
 
Our business depends on our ability to attract and retain Asian-American immigrants as clients .
 
Our business is based on successfully attracting and retaining Asian-American immigrants as clients for both our non-qualified residential mortgage loans and deposits. We may be limited in our ability to attract Asian-American clients to the extent the U.S. adopts restrictive domestic immigration laws. Changes to U.S. immigration policies as proposed by the current administration that restrain the flow of immigrants may inhibit our ability to meet our goals and budgets for non-qualified SFR mortgage loans and deposits, which may adversely affect our net interest income and net income.
 
Risks Related to Our Loans
 
Because a significant portion of our loan portfolio is comprised of real estate loans, negative changes in the economy affecting real estate values and liquidity could impair the value of collateral securing our real estate loans and result in loan and other losses.
 
At December 31, 2020, approximately 91.2% of our loan portfolio was comprised of loans with real estate as a primary or secondary component of collateral. As a result, adverse developments affecting real estate values in our market areas could increase the credit risk associated with our real estate loan portfolio. The market value of real estate can fluctuate significantly in a short period of time as a result of market conditions in the area in which the real estate is located. Adverse changes affecting real estate values and the liquidity of real estate in one or more of our markets could increase the credit risk associated with our loan portfolio, significantly impair the value of property pledged as collateral on loans and affect our ability to sell the collateral upon foreclosure without a loss or additional losses, which could result in losses that would adversely affect profitability. Such declines and losses would have a material adverse impact on our business, results of operations and growth prospects. In addition, if hazardous or toxic substances are found on properties pledged as collateral, the value of the real estate could be impaired. If we foreclose on and take title to such properties, we may be liable for remediation costs, as well as for personal injury and property damage. Environmental laws may require us to incur substantial expenses to address unknown liabilities and may materially reduce the affected property’s value or limit our ability to use or sell the affected property.
 
Many of our loans are to commercial borrowers, which have a higher degree of risk than other types of loans.
 
At December 31, 2020, we had $205.7 million of commercial loans, consisting of $3.6 million of CRE loans and $202.1 million of C&I loans for which real estate is not the primary source of collateral, and $186.7 million of C&D loans. Commercial loans represented 47.8% of our total loan portfolio at December 31, 2020. Commercial loans are often larger and involve greater risks than other types of lending. Because payments on such loans are often dependent on the successful operation or development of the property or business involved, repayment of such loans is often more sensitive than other types of loans to adverse conditions in the real estate market or the general business climate and economy. Accordingly, a downturn in the real estate market and a challenging business and economic environment may increase our risk related to commercial loans, particularly commercial real estate loans. Unlike residential mortgage loans, which generally are made on the basis of the borrowers’ ability to make repayment from their employment and other income and which are secured by real property whose value tends to be more easily ascertainable, commercial loans typically are made on the basis of the borrowers’ ability to make repayment from the cash flow of the commercial venture. Our C&I loans are primarily made based on the identified cash flow of the borrower and secondarily on the collateral underlying the loans. Most often, this collateral consists of accounts receivable, inventory and equipment. Inventory and equipment may depreciate over time, may be difficult to appraise and may fluctuate in value based on the success of the business. If the cash flow from business operations is reduced, the borrower’s ability to repay the loan may be impaired. Due to the larger average size of each commercial loan as compared with other loans such as residential loans, as well as collateral that is generally less readily-marketable, losses incurred on a small number of commercial loans could have a material adverse impact on our financial condition and results of operations.
 
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We have a concentration in commercial real estate which could cause our regulators to restrict our ability to grow.
 
As a part of their regulatory oversight, the federal regulators have issued the CRE Concentration Guidance on sound risk management practices with respect to a financial institution’s concentrations in commercial real estate lending activities. These guidelines were issued in response to the agencies’ concerns that rising CRE concentrations might expose institutions to unanticipated earnings and capital volatility in the event of adverse changes in the commercial real estate market. The CRE Concentration Guidance identifies certain concentration levels that, if exceeded, will expose the institution to additional supervisory analysis with regard to the institution’s CRE concentration risk. The CRE Concentration Guidance is designed to promote appropriate levels of capital and sound loan and risk management practices for institutions with a concentration of CRE loans. In general, the CRE Concentration Guidance establishes the following supervisory criteria as preliminary indications of possible CRE concentration risk: (1) the institution’s total construction, land development and other land loans represent 100% or more of total risk-based capital; or (2) total CRE loans as defined in the regulatory guidelines represent 300% or more of total risk-based capital, and the institution’s CRE loan portfolio has increased by 50% or more during the prior 36-month period. Pursuant to the CRE Concentration Guidelines, loans secured by owner occupied commercial real estate are not included for purposes of CRE Concentration calculation. We believe that the CRE Concentration Guidance is applicable to us. As of December 31, 2020, our CRE loans represented 205% of our total risk-based capital, as compared to 166% and 173% as of December 31, 2019 and 2018, respectively. We actively work to manage our CRE concentration and we have discussed the CRE Concentration Guidance with the FDIC and believe that our underwriting policies, management information systems, independent credit administration process, and monitoring of real estate loan concentrations are currently sufficient to address the CRE Concentration Guidance. Nevertheless, the FDIC could become concerned about our CRE loan concentrations, and they could limit our ability to grow by restricting their approvals for the establishment or acquisition of branches, or approvals of mergers or other acquisition opportunities.
 
Our SFR loan product consists primarily of non-qualified SFR mortgage loans which may be considered less liquid and more risky.
 
As of December 31, 2020, our SFR mortgage loan portfolio amounted to $1.1 billion or 41.5% of our held for investment loan portfolio. As of that dat e, 64.7% of our SFR mortgage loans consisted of non-qualified mortgage loans, which are considered to have a higher degree of risk and are less liquid than qualified mortgage loans. We offer two SFR mortgage products, a low loan-to-value, alternative document hybrid non-qualified SFR mortgage loan, or non-qualified SFR mortgage loan, and a qualified SFR mortgage loan. We originated $55.7  million for the year ended December 31, 2020 and $181.1 million for the year ended December 31, 2019 of non-qualified SFR mortgage loans. We originated qualified SFR mortgage loans of $53.8  million for the year ended December 31, 2020 of and $40.3 million for the year ended December 31, 2019. As of December 31, 2020, our non-qualified SFR mortgage loans had an average loan-to-value of 56.61% and an average FICO score of 757. As of December 31, 2020, 6.15% of our total SFR mortgage loan portfolio was originated to foreign nationals. The non-qualified single-family residential mortgage loans that we originate are designed to assist Asian-Americans who have recently immigrated to the United States and as such are willing to provide higher down payment amounts and pay higher interest rates and fees in return for reduced documentation requirements. Non-qualified SFR mortgage loans are considered less liquid than qualified SFR mortgage loans because such loans are not able to be securitized and can only be sold directly to other financial institutions. Such non-qualified loans may be considered more risky than qualified mortgage loans although we attempt to address this enhanced risk through our underwriting process, including requiring larger down payments and, in some cases, interest reserves.
 
We sold in the secondary market $79.0 million of our non-qualified mortgage loans for the year ended December 31, 2020, and we realized $2.7 million gains on the sale of non-qualified SFR mortgage loans for the year ended December 31, 2020. We also have a concentration in our SFR secondary sale market, as a substantial portion of our non-qualified mortgage loans have been sold to two banks; however, we are currently selling SFR mortgage loans to three banks. Although, we are taking steps to reduce our dependence on these banks, and we are attempting to expand the number of banks that we sell our non-qualified SFR mortgages, we may not be successful expanding our sales market for our non-qualified mortgage loans. These loans also present pricing risk as rates change, and our sale premiums cannot be guaranteed. Further, the criteria for our loans to be purchased by other banks may change from time to time, which could result in a lower volume of corresponding loan originations.
 
Mortgage production historically, including refinancing activity, declines in rising interest rate environments. While we have been experiencing historically low interest rates over the last few years, this low interest rate environment likely will not continue indefinitely. Consequently, when interest rates increase further, there can be no assurance that our mortgage production will continue at current levels. Nonetheless, our SFR mortgage loan production is primarily originated to Asian Americans and Asian-American immigrants, who we believe are not as sensitive to changes in interest rates.
 
The non-guaranteed portion of SBA loans that we retain on our balance sheet as well as the guaranteed portion of SBA loans that we sell could expose us to various credit and default risks.
 
We originated $19.4 million of SBA loans (excluding PPP loans) for the year ended December 31, 2020. We sold $13.7  million for the year ended December 31, 2020, of the guaranteed portion of our SBA loans. Consequently, as of December 31, 2020, we held $97.8 million of SBA loans on our balance sheet, $49.4 million of which consisted of the non-guaranteed portion of SBA loans and $48.5 million or 50.0% consisted of the guaranteed portion of SBA loans which are intended to be sold later in 2021. The non-guaranteed portion of SBA loans have a higher degree of credit risk and risk of loss as compared to the guaranteed portion of such loans. We attempt to limit this risk by generally requiring such loans be collateralized and limiting the overall amount that can be held on our balance sheet to 75% of our total capital.
 
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When we sell the guaranteed portion of SBA loans in the ordinary course of business, we are required to make certain representations and warranties to the purchaser about the SBA loan and the manner in which they were originated. Under these agreements, we may be required to repurchase the guaranteed portion of the SBA loan if we have breached any of these representations or warranties, in which case we may record a loss. In addition, if repurchase and indemnity demands increase on loans that we sell from our portfolios, our liquidity, results of operations and financial condition could be adversely affected. Further, we generally retain the non-guaranteed portions of the SBA loans that we originate and sell, and to the extent the borrowers of such loans experience financial difficulties, our financial condition and results of operations could be adversely impacted.
 
Curtailment of government guaranteed loan programs could affect a segment of our business.
 
A significant segment of our business consists of originating and periodically selling U.S. government guaranteed loans, in particular those guaranteed by the SBA. Presently, the SBA guarantees 75% of the principal amount of each qualifying SBA loan originated under the SBA’s 7(a) loan program. There is no assurance that the U.S. government will maintain the SBA 7(a) loan program or if it does, that such guaranteed portion will remain at its current level. In addition, from time to time, the government agencies that guarantee these loans reach their internal limits and cease to guarantee future loans. In addition, these agencies may change their rules for qualifying loans or Congress may adopt legislation that would have the effect of discontinuing or changing the loan guarantee programs. Non-governmental programs could replace government programs for some borrowers, but the terms might not be equally acceptable. Therefore, if these changes occur, the volume of loans to small business, industrial and agricultural borrowers of the types that now qualify for government guaranteed loans could decline. Also, the profitability associated with the sale of the guaranteed portion of these loans could decline as a result of market displacements due to increases in interest rates, and could cause the premiums realized on the sale of the guaranteed portions to decline from current levels. As the funding and sale of the guaranteed portion of SBA 7(a) loans is a major portion of our business and a significant portion of our noninterest income, any significant changes to the funding for the SBA 7(a) loan program may have an unfavorable impact on our prospects, future performance and results of operations.
 
We may be adversely impacted by the transition from LIBOR as a reference rate.
 
            In 2017, the Financial Conduct Authority announced that after 2021 it will no longer compel banks to submit the rates required to calculate LIBOR. In November 2020, the administrator of LIBOR announced it will consult on its intention to extend the retirement date of certain offered rates whereby the publication of the one week and two month LIBOR offered rates will cease after December 31, 2021; but, the publication of the remaining LIBOR offered rates will continue until June 30, 2023. Given consumer protection, litigation, and reputation risks, the bank regulatory agencies have indicated that entering into new contracts that use LIBOR as a reference rate after December 31, 2021 would create safety and soundness risks and that they will examine bank practices accordingly. Therefore, the agencies encouraged banks to cease entering into new contracts that use LIBOR as a reference rate as soon as practicable and in any event by December 31, 2021.
 
            There is uncertainty as to what rate or rates may become accepted alternatives to LIBOR, or what effect of any such changes in views or alternatives may be on the markets for LIBOR-indexed financial instruments. In response, the Alternative Reference Rates Committee (“ARRC”) was convened in the U.S. to explore alternative reference rates and supporting processes. The ARRC identified a potential successor rate to LIBOR in the SOFR and crafted the Paced Transition Plan to facilitate the transition. However, there are conceptual and technical differences between LIBOR and SOFR that remain unresolved at this time.
 
            We have a significant number of loans, some securities and borrowings, and some deposit products with attributes that are either directly or indirectly dependent on LIBOR. We have not yet determined the optimal reference rate(s) that we will ultimately use for our financial instruments going forward. We have organized a multidisciplinary project team to identify operational and contractual best practices, assess our risks, identify the detailed list of all financial instruments impacted, manage the transaction, facilitate communication with our customers and counterparties, and monitor the impacts. We have drafted and begun including fallback language in our loan agreements.
 
            The transition from LIBOR could create considerable costs and additional risk. The uncertainty as to the nature and effect of the discontinuance of LIBOR may adversely affect the value of, the return on or the expenses associated with our financial assets and liabilities that are based on or are linked to LIBOR, may require extensive changes to the contracts that govern these LIBOR-based products as well as our systems and processes, and could impact our pricing and interest rate risk models, our loan product structures, our funding costs, our valuation tools and result in increased compliance and operational costs. In addition, the market may transition away from LIBOR to an alternative reference rate could prompt inquires or other actions from regulators in respect of our preparation and readiness for the replacement of LIBOR with an alternative reference rate, and result in disputes, litigation or other actions with counterparties regarding the interpretation and enforceability of certain fallback language in LIBOR-based financial instruments. Furthermore, failure to adequately manage this transition process with our customers could adversely impact our reputation.
 
Although we are currently unable to assess the ultimate impact of the transition from LIBOR, the failure to adequately manage the transition could have a material adverse effect on our business, financial condition and results of operations.
 
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Real estate construction loans are based upon estimates of costs and values associated with the complete project. These estimates may be inaccurate, and we may be exposed to significant losses on loans for these projects.
 
Real estate construction loans, including land development loans, comprised approximately 6.9% of our total loan portfolio as of December 31, 2020, and such lending involves additional risks because funds are advanced upon the security of the project, which is of uncertain value prior to its completion, and costs may exceed realizable values in declining real estate markets. Because of the uncertainties inherent in estimating construction costs and the realizable market value of the completed project and the effects of governmental regulation of real property, it is relatively difficult to evaluate accurately the total funds required to complete a project and the related loan-to-value ratio. As a result, construction loans often involve the disbursement of substantial funds with repayment dependent, in part, on the success of the ultimate project and the ability of the borrower to sell or lease the property, rather than the ability of the borrower or guarantor to repay principal and interest. If our appraisal of the value of the completed project proves to be overstated or market values or rental rates decline, we may have inadequate security for the repayment of the loan upon completion of construction of the project. If we are forced to foreclose on a project prior to or at completion due to a default, we may not be able to recover all of the unpaid balance of, and accrued interest on, the loan as well as related foreclosure and holding costs. In addition, we may be required to fund additional amounts to complete the project and may have to hold the property for an unspecified period of time while we attempt to dispose of it.
 
The risks inherent in construction lending may affect adversely our results of operations. Such risks include, among other things, the possibility that contractors may fail to complete, or complete on a timely basis, construction of the relevant properties; substantial cost overruns in excess of original estimates and financing; market deterioration during construction; and lack of permanent take-out financing. Loans secured by such properties also involve additional risk because they have no operating history. In these loans, loan funds are advanced upon the security of the project under construction (which is of uncertain value prior to completion of construction) and the estimated operating cash flow to be generated by the completed project. Such properties may not be sold or leased so as to generate the cash flow anticipated by the borrower. A general decline in real estate sales and prices across the United States or locally in the relevant real estate market, a decline in demand for residential real estate, economic weakness, high rates of unemployment, and reduced availability of mortgage credit, are some of the factors that can adversely affect the borrowers’ ability to repay their obligations to us and the value of our security interest in collateral, and thereby adversely affect our results of operations and financial results.
 
Nonperforming assets take significant time to resolve and adversely affect our results of operations and financial condition, and could result in further losses in the future.
 
As of December 31, 2020, our nonperforming loans (which consist of nonaccrual loans and loans modified under troubled debt restructurings) totaled $19.6 million, or 0.72% of our held for investment (HFI) loan portfolio, and our nonperforming assets (which include nonperforming loans plus OREO) totaled $19.8 million, or 0.59% of total assets. In addition, we had $8.9 million in accruing loans that were 30-89 days delinquent as of December 31, 2020.
 
Our nonperforming assets adversely affect our net income in various ways. We do not record interest income on nonaccrual loans or OREO, thereby adversely affecting our net income and returns on assets and equity, increasing our loan administration costs and adversely affecting our efficiency ratio. When we take collateral in foreclosure and similar proceedings, we are required to mark the collateral to its then-fair market value, which may result in a loss. These nonperforming loans and other real estate owned also increase our risk profile and the level of capital our regulators believe is appropriate for us to maintain in light of such risks. The resolution of nonperforming assets requires significant time commitments from management and can be detrimental to the performance of their other responsibilities. If we experience increases in nonperforming loans and nonperforming assets, our net interest income may be negatively impacted and our loan administration costs could increase, each of which could have an adverse effect on our net income and related ratios, such as return on assets and equity.
 
Adverse conditions in Asia and elsewhere could adversely affect our business.
 
Although we believe less than 1% of our loans and less than 2% of our deposits are with customers that have economic and cultural ties to Asia, we are still likely to feel the effects of adverse economic and political conditions in Asia, including the effects of rising inflation or slowing growth and volatility in the real estate and stock markets in China and other regions. U.S. and global economic policies, military tensions, and unfavorable global economic conditions may adversely impact the Asian economies. In addition, pandemics and other public health crises or concerns over the possibility of such crises could create economic and financial disruptions in the region. A significant deterioration of economic conditions in Asia could expose us to, among other things, economic and transfer risk, and we could experience an outflow of deposits by those of our customers with connections to Asia. Transfer risk may result when an entity is unable to obtain the foreign exchange needed to meet its obligations or to provide liquidity. This may adversely impact the recoverability of investments with, or loans made to, such entities. Adverse economic conditions in Asia, and in China or Taiwan in particular, may also negatively impact asset values and the profitability and liquidity of our customers who operate in this region.
 
The Company is a California state chartered bank with operations in California, New York, New Jersey, Nevada and Chicago. We have no overseas operations, including in China and the Far East. However, as a Chinese-American business bank our client base may have customer and operational contact in the Far East, which could be adversely affected by the current coronavirus outbreak. Management will monitor this situation for its impact on our clients.
 
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Risks Related to Our Deposits
 
Our deposit portfolio includes significant concentrations and a large percentage of our deposits are attributable to a relatively small number of clients.
 
As a commercial bank, we provide services to a number of clients whose deposit levels vary considerably and have a significant amount of seasonality. At December 31, 2020, 131 clients maintained balances (aggregating all related accounts, including multiple business entities and personal funds of business owners) in excess of $2.0 million. This amounted to $886.7 million or approximately 33.5% of the Bank’s total deposits as of December 31, 2020. In addition, our ten largest depositor relationships accounted for approximately 13.9% of our deposits at December 31, 2020. Our largest depositor relationship accounted for approximately 2.0% of our deposits at December 31, 2020. These deposits can and do fluctuate substantially. The depositors are not concentrated in any industry or business. The loss of any combination of these depositors, or a significant decline in the deposit balances due to ordinary course fluctuations related to these customers’ businesses, would adversely affect our liquidity and require us to raise deposit rates to attract new deposits, purchase federal funds or borrow funds on a short-term basis to replace such deposits. Depending on the interest rate environment and competitive factors, low cost deposits may need to be replaced with higher cost funding, resulting in a decrease in net interest income and net income. While these events could have a material impact on the Bank’s results, the Bank expects, in the ordinary course of business, that these deposits will fluctuate and believes it is capable of mitigating this risk, as well as the risk of losing one of these depositors, through additional liquidity, and business generation in the future. However, should a significant number of these customers leave the Bank, it could have a material adverse impact on the Bank.
 
Risk Related to our Allowance for Loan Losses (“ALLL”)
 
If we do not effectively manage our credit risk, we may experience increased levels of delinquencies, nonperforming loans and charge-offs, which could require increases in our provision for loan losses.
 
There are risks inherent in making any loan, including risks inherent in dealing with individual borrowers, risks of nonpayment, risks resulting from uncertainties as to the future value of collateral and cash flows available to service debt and risks resulting from changes in economic and market conditions. We cannot guarantee that our credit underwriting and monitoring procedures will reduce these credit risks, and they cannot be expected to completely eliminate our credit risks. If the overall economic climate in the United States, generally, or our market areas, specifically, declines, our borrowers may experience difficulties in repaying their loans, and the level of nonperforming loans, charge-offs and delinquencies could rise and require further increases in the provision for loan losses, which would cause our net income, return on equity and capital to decrease.
 
Our ALLL may prove to be insufficient to absorb potential losses in our loan portfolio.
 
We establish our ALLL and maintain it at a level that management considers adequate to absorb probable loan losses based on an analysis of our portfolio and market environment. The ALLL represents our estimate of probable losses in the portfolio at each balance sheet date and is based upon relevant information available to us. The allowance contains provisions for probable losses that have been identified relating to specific borrowing relationships, as well as probable losses inherent in the loan portfolio and credit undertakings that are not specifically identified. Additions to the ALLL, which are charged to earnings through the provision for loan losses, are determined based on a variety of factors, including an analysis of the loan portfolio, historical loss experience and an evaluation of current economic conditions in our market areas. The actual amount of loan losses is affected by changes in economic, operating and other conditions within our markets, which may be beyond our control, and such losses may exceed current estimates.
 
As of December 31, 2020, our ALLL as a percentage of total loans was 1.08% and as a percentage of total nonperforming loans was 150.03%. Although management believes that the ALLL is adequate to absorb losses on any existing loans that may become uncollectible, we may be required to take additional provisions for loan losses in the future to further supplement the ALLL, either due to management’s decision to do so or because our banking regulators require us to do so. Our bank regulatory agencies will periodically review our ALLL and the value attributed to nonaccrual loans or to real estate acquired through foreclosure and may require us to adjust our determination of the value for these items. These adjustments may adversely affect our business, financial condition and results of operations.
 
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The current expected credit loss standard established by the FASB Board will require significant data requirements and changes to methodologies.
 
In the aftermath of the 2007-2008 financial crisis, the FASB, decided to review how banks estimate losses in the ALLL calculation, and it issued the final Current Expected Credit Loss (“CECL”), standard on June 16, 2016. Currently, the impairment model used by financial institutions is based on incurred losses, and loans are recognized as impaired when there is no longer an assumption that future cash flows will be collected in full under the originally contracted terms. This model will be replaced by the CECL model that will become effective for the Bank on December 31, 2022 (as the implementation date was deferred by the FASB) in which financial institutions will be required to use historical information, current conditions and reasonable forecasts to estimate the expected loss over the life of the loan. The Bank has run CECL models on its loan portfolio, and although the new CECL standard is currently not expected to have a significant impact on the Bank’s ALLL, the transition to the CECL model will require significantly greater data requirements and changes to methodologies to accurately account for expected losses. There can be no assurance that the Bank will not be required to increase its reserves and ALLL as a result of the implementation of CECL.
 
On December 21, 2018, federal bank regulatory agencies approved a final rule, effective as of April 1, 2019, modifying their regulatory capital rules and providing an option to phase in over a three-year period the initial regulatory capital effects of the CECL methodology. The Company is currently evaluating the magnitude of the one-time cumulative adjustment to its allowance and of the ongoing impact of the CECL model on its loan loss allowance and results of operations, together with the final rule that became effective as of April 1, 2019, to determine if the phase-in option will be elected.
 
Risks Related to our Acquisition Strategy
 
Our strategy of pursuing growth via acquisitions exposes us to financial, execution and operational risks that could have a material adverse effect on our business, financial position, results of operations and growth prospects.
 
Since late 2010, we have been pursuing a strategy of leveraging our human and financial capital by acquiring other financial institutions in our target markets. We have completed several acquisitions in recent years and we may continue pursuing this strategy.
 
Our acquisition activities could require us to use a substantial amount of cash, other liquid assets, and/or incur debt. In addition, if goodwill recorded in connection with our potential future acquisitions were determined to be impaired, then we would be required to recognize a charge against our earnings, which could materially and adversely affect our results of operations during the period in which the impairment was recognized.
 
There are risks associated with an acquisition strategy, including the following:
 
 
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We may incur time and expense associated with identifying and evaluating potential acquisitions and negotiating potential transactions, resulting in management’s attention being diverted from the operation of our existing business.
 
 
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We may encounter insufficient revenue and/or greater than anticipated costs in integrating acquired businesses.
 
 
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We may encounter difficulties in retaining business relationships with vendors and customers of the acquired companies.
 
 
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We are exposed to potential asset and credit quality risks and unknown or contingent liabilities of the banks or businesses we acquire. If these issues or liabilities exceed our estimates, our earnings, capital and financial condition may be materially and adversely affected.
 
 
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The acquisition of other entities generally requires integration of systems, procedures and personnel of the acquired entity. This integration process is complicated and time consuming and can also be disruptive to the customers and employees of the acquired business and our business. If the integration process is not conducted successfully, we may not realize the anticipated economic benefits of acquisitions within the expected time frame, or ever, and we may lose customers or employees of the acquired business. We may also experience greater than anticipated customer losses even if the integration process is successful.
 
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To finance an acquisition, we may borrow funds or pursue other forms of financing, such as issuing voting and/or non-voting common stock or convertible preferred stock, which may have high dividend rights or may be highly dilutive to holders of our common stock, thereby increasing our leverage and diminishing our liquidity, or issuing capital stock, which could dilute the interests of our existing shareholders.
 
 
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We may be unsuccessful in realizing the anticipated benefits from acquisitions. For example, we may not be successful in realizing anticipated cost savings. We also may not be successful in preventing disruptions in service to existing customer relationships of the acquired institution, which could lead to a loss in revenues.
 
In addition to the foregoing, we may face additional risks in acquisitions to the extent we acquire new lines of business or new products, or enter new geographic areas, in which we have little or no current experience, especially if we lose key employees of the acquired operations. Future acquisitions or business combinations also could cause us to incur debt or contingent liabilities or cause us to issue equity securities. These actions could negatively impact the ownership percentages of our existing shareholders, our financial condition and results of operations. In addition, we may not find candidates which meet our criteria for such transactions, and if we do find such a situation, our shareholders may not agree with the terms of such acquisition or business relationship.
 
In addition, our ability to grow may be limited if we cannot make acquisitions. We compete with other financial institutions with respect to proposed acquisitions. We cannot predict if or when we will be able to identify and attract acquisition candidates or make acquisitions on favorable terms.
 
We cannot assure you that we will be successful in overcoming these risks or any other problems encountered in connection with acquisitions. Our inability to overcome risks associated with acquisitions could have an adverse effect on our ability to successfully implement our acquisition growth strategy and grow our business and profitability.
 
If the goodwill that we recorded in connection with a business acquisition becomes impaired, it could require charges to earnings, which would have a negative impact on our financial condition and results of operations.
 
Goodwill represents the amount by which the cost of an acquisition exceeded the fair value of net assets we acquired in connection with the purchase. We review goodwill for impairment at least annually, or more frequently if events or changes in circumstances indicate that the carrying value of the asset might be impaired.
 
We determine impairment by comparing the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. Any such adjustments are reflected in our results of operations in the periods in which they become known. As of December 31, 2020, our goodwill totaled $69.3 million. We evaluated our goodwill and intangibles in the first, second and fourth quarters of 2020  The impairment evaluation did not identify an impairment of goodwill or the core deposit intangible in those quarters of 2020.  However, there were write-downs of mortgage servicing rights of $50,000 in the third quarter of 2020 and $366,000 in the second quarter of 2020. There can be no assurance that our future evaluations of goodwill will not result in findings of impairment and related write-downs, which may have a material adverse effect on our financial condition and results of operations.  
 
We may not be able to continue growing our business, particularly if we cannot make acquisitions or increase loans and deposits through organic growth, either because of an inability to find suitable acquisition candidates, constrained capital resources or otherwise.
 
We have grown our consolidated assets from $300.5 million as of December 31, 2010 to $3.4 billion as of December 31, 2020, and our deposits from $236.4 million as of December 31, 2010 to $2.6 billion as of December 31, 2020. Some of this growth has resulted from several acquisitions that we have completed since 2010. While we intend to continue to grow our business through strategic acquisitions coupled with organic loan and deposit growth, we anticipate that much of our future growth will be dependent on our ability to successfully implement our acquisition growth strategy. A risk exists, however, that we will not be able to identify suitable additional candidates for acquisitions.
 
In addition, even if suitable targets are identified, we expect to compete for such businesses with other potential bidders, many of which may have greater financial resources than we have, which may adversely affect our ability to make acquisitions at attractive prices. Although we have historically been disciplined in pricing our acquisitions, there can be no assurance that the higher multiples being paid in bank acquisitions will not adversely impact our ability to execute acquisitions in the future or adversely affect the return we earn from such acquisitions.
 
Furthermore, many acquisitions we may wish to pursue would be subject to approvals by bank regulatory authorities, and we cannot predict whether any targeted acquisitions will receive the required regulatory approvals. Moreover, our ability to continue to grow successfully will depend to a significant extent on our capital resources. It also will depend, in part, upon our ability to attract deposits and lessen our dependence on larger deposit accounts, identify favorable loan and investment opportunities and on whether we can continue to fund growth while maintaining cost controls and asset quality, as well on other factors beyond our control, such as national, regional and local economic conditions and interest rate trends.
 
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Paydowns on our acquired loan portfolio will result in reduced total loan yield, net interest income and net income if not replaced with other high-yielding loans.
 
Our total loan yield and net interest margin has been positively affected by the accretion of purchased loan discounts relating to loans acquired in prior acquisitions. As our acquired loan portfolio is paid down, we expect downward pressure on our total loan yield and net interest income to the extent that the run-off is not replaced with other high-yielding loans. The accretable yield represents the excess of the net present value of expected future cash flows over the acquisition date fair value and includes both the expected coupon of the loan and the discount accretion. For example, the total loan yield for the year ended December 31, 2020 and 2019 was 5.18% and 5.54%, respectively, and the yield generated using only the expected coupon would have been 5.09% and 5.42%, during the same respective periods. Notwithstanding, if we are unable to replace loans in our existing portfolio with comparable high-yielding loans or a larger volume of loans, our total loan yield, net interest income and net income could be adversely affected.
 
As we expand our business outside of California markets, we will encounter risks that could adversely affect us.
 
We primarily operate in California, New York, New Jersey and Illinois markets with a concentration of Chinese-American individuals and businesses; however, one of our strategies is to expand beyond California into other domestic markets that have concentrations of Chinese-American individuals and businesses. We also currently have operations in Las Vegas, Nevada, including operating a branch office, and are currently looking for additional branch expansion opportunities in the San Francisco Bay area and Houston and, secondarily, San Diego and Riverside counties in southern California, Hawaii and Phoenix. In the course of this expansion, we will encounter significant risks and uncertainties that could have a material adverse effect on our operations. These risks and uncertainties include increased expenses and operational difficulties arising from, among other things, our ability to attract sufficient business in new markets, to manage operations in noncontiguous market areas, to comply with all of the various local laws and regulations, and to anticipate events or differences in markets in which we have no current experience.
 
Risks Related to Interest Rates
 
Fluctuations in interest rates may reduce net interest income and otherwise negatively impact our financial condition and results of operations.
 
Shifts in short-term interest rates may reduce net interest income, which is the principal component of our earnings. Net interest income is the difference between the amounts received by us on our interest-earning assets and the interest paid by us on our interest-bearing liabilities. When interest rates rise, the rate of interest we pay on our assets, such as loans, rises more quickly than the rate of interest that we receive on our interest-bearing liabilities, such as deposits, which may cause our profits to increase. When interest rates decrease, the rate of interest we pay on our assets, such as loans, declines more quickly than the rate of interest that we receive on our interest-bearing liabilities, such as deposits, which may cause our profits to decrease. The impact on earnings is more adverse when the slope of the yield curve flattens, that is, when short-term interest rates increase more than long-term interest rates or when long-term interest rates decrease more than short-term interest rates.
 
Interest rate increases often result in larger payment requirements for our borrowers, which increases the potential for default. At the same time, the marketability of the underlying property may be adversely affected by any reduced demand resulting from higher interest rates. In a declining interest rate environment, there may be an increase in prepayments on loans as borrowers refinance their mortgages and other indebtedness at lower rates. At December 31, 2020, total loans held for investment were 85.7% of our earning assets and exhibited a positive 6% sensitivity to rising interest rates in a 100 basis point parallel shock.
 
Changes in interest rates also can affect the value of loans, securities and other assets. An increase in interest rates that adversely affects the ability of borrowers to pay the principal or interest on loans may lead to an increase in nonperforming assets and a reduction of income recognized, which could have a material adverse effect on our results of operations and cash flows. Further, when we place a loan on nonaccrual status, we reverse any accrued but unpaid interest receivable, which decreases interest income. Subsequently, we continue to have a cost to fund the loan, which is reflected as interest expense, without any interest income to offset the associated funding expense. Thus, an increase in the amount of nonperforming assets would have an adverse impact on net interest income.
 
Rising interest rates will result in a decline in value of the fixed-rate debt securities we hold in our investment securities portfolio. The unrealized losses resulting from holding these securities would be recognized in accumulated other comprehensive income (loss) and reduce total shareholders’ equity. Unrealized losses do not negatively impact our regulatory capital ratios; however, tangible common equity and the associated ratios would be reduced. If debt securities in an unrealized loss position are sold, such losses become realized and will reduce our regulatory capital ratios.
 
If short-term interest rates remain at their historically low levels for a prolonged period, and assuming longer term interest rates fall, we could experience net interest margin compression as our interest earning assets would continue to reprice downward while our interest-bearing liability rates could fail to decline in tandem. This would have a material adverse effect on our net interest income and our results of operations.
 
We could recognize losses on securities held in our securities portfolio, particularly if interest rates increase or economic and market conditions deteriorate.
 
As of December 31, 2020, the fair value of our securities portfolio was approximately $218.5 million. Factors beyond our control can significantly influence the fair value of securities in our portfolio and can cause potential adverse changes to the fair value of these securities. For example, fixed-rate securities acquired by us are generally subject to decreases in market value when interest rates rise. Additional factors include, but are not limited to, rating agency downgrades of the securities or our own analysis of the value of the security, defaults by the issuer or individual mortgagors with respect to the underlying securities, and continued instability in the credit markets. Any of the foregoing factors could cause other-than-temporary impairment in future periods and result in realized losses. The process for determining whether impairment is other-than-temporary usually requires difficult, subjective judgments about the future financial performance of the issuer and any collateral underlying the security in order to assess the probability of receiving all contractual principal and interest payments on the security. Because of changing economic and market conditions affecting interest rates, the financial condition of issuers of the securities and the performance of the underlying collateral, we may recognize realized and/or unrealized losses in future periods, which could have an adverse effect on our financial condition and results of operations.
 
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Other Risks Related to Our Business
 
System failure or breaches of our network security could subject us to increased operating costs as well as litigation and other liabilities.
 
The computer systems and network infrastructure we use could be vulnerable to hardware and cyber security issues. Our operations are dependent upon our ability to protect our computer equipment against damage from fire, power loss, telecommunications failure or a similar catastrophic event. We could also experience a breach by intentional or negligent conduct on the part of employees or other internal or external sources, including our third-party vendors. Any damage or failure that causes an interruption in our operations could have an adverse effect on our financial condition and results of operations. In addition, our operations are dependent upon our ability to protect the computer systems and network infrastructure utilized by us, including our internet banking activities, against damage from physical break-ins, cyber security breaches and other disruptive problems caused by the internet or other users. Such computer break-ins and other disruptions would jeopardize the security of information stored in and transmitted through our computer systems and network infrastructure, which may result in significant liability, damage our reputation and inhibit the use of our internet banking services by current and potential customers.
 
We rely heavily on communications, information systems (both internal and provided by third parties) and the internet to conduct our business. Our business is dependent on our ability to process and monitor large numbers of daily transactions in compliance with legal, regulatory and internal standards and specifications. In addition, a significant portion of our operations relies heavily on the secure processing, storage and transmission of personal and confidential information, such as the personal information of our customers and clients. These risks may increase in the future as we continue to increase mobile payments and other internet-based product offerings and expand our internal usage of web-based products and applications.
 
In addition, U.S. financial institutions have experienced significant distributed denial-of-service attacks, some of which involved sophisticated and targeted attacks intended to disable or degrade service, or sabotage systems. Other potential attacks have attempted to obtain unauthorized access to confidential information or destroy data, often through the introduction of computer viruses or malware, cyber-attacks and other means. To date, none of these type of attacks have had a material effect on our business or operations. Such security attacks can originate from a wide variety of sources, including persons who are involved with organized crime or who may be linked to terrorist organizations or hostile foreign governments. Those same parties may also attempt to fraudulently induce employees, customers or other users of our systems to disclose sensitive information in order to gain access to our data or that of our customers or clients. We are also subject to the risk that our employees may intercept and transmit unauthorized confidential or proprietary information. An interception, misuse or mishandling of personal, confidential or proprietary information being sent to or received from a customer or third party could result in legal liability, remediation costs, regulatory action and reputational harm.
 
We regularly add additional security measures to our computer systems and network infrastructure to mitigate the possibility of cyber security breaches, including firewalls and penetration testing. However, it is difficult or impossible to defend against every risk being posed by changing technologies as well as criminal intent on committing cyber-crime. Increasing sophistication of cyber criminals and terrorists make keeping up with new threats difficult and could result in a breach. Controls employed by our information technology department and cloud vendors could prove inadequate. A breach of our security that results in unauthorized access to our data could expose us to a disruption or challenges relating to our daily operations, as well as to data loss, litigation, damages, fines and penalties, significant increases in compliance costs and reputational damage, any of which could have an adverse effect on our business, financial condition and results of operations.
 
Liabilities from environmental regulations could materially and adversely affect our business and financial condition.
 
In the course of our business, we may foreclose and take title to real estate, and could be subject to environmental liabilities with respect to these properties. We may be held liable to a governmental entity or to third parties for property damage, personal injury, investigation and clean-up costs incurred by these parties in connection with environmental contamination, or may be required to investigate or clear up hazardous or toxic substances, or chemical releases at a property. The costs associated with investigation or remediation activities could be substantial. In addition, as the owner or former owner of any contaminated site, we may be subject to common law claims by third parties based on damages, and costs resulting from environmental contamination emanating from the property. If we ever become subject to significant environmental liabilities, our business, financial condition, liquidity, and results of operations could be materially and adversely affected.
 
A natural disaster or  recurring energy shortage in our geographic markets , especially in California, could harm our business.
 
We are based in California and at December 31, 2020, approximately 46.6% of the aggregate outstanding principal of our loans was secured by real estate located in California. In addition, the computer systems that operate our Internet websites and some of their back-up systems are located in California. Historically, California has been vulnerable to natural disasters. Therefore, we are susceptible to the risks of natural disasters, such as earthquakes, wildfires, floods and mudslides. Natural disasters could harm our operations directly through interference with communications, including the interruption or loss of our information technology structure and websites, which could prevent us from gathering deposits, originating loans and processing and controlling our flow of business, as well as through the destruction of facilities and our operational, financial and management information systems. A natural disaster or recurring power outages may also impair the value of our largest class of assets, our loan portfolio, which is comprised substantially of real estate loans. Uninsured or underinsured disasters may reduce borrowers’ ability to repay mortgage loans. Disasters may also reduce the value of the real estate securing our loans, impairing our ability to recover on defaulted loans through foreclosure and making it more likely that we would suffer losses on defaulted loans. California has also experienced energy shortages, which, if they recur, could impair the value of the real estate in those areas affected. Although we have implemented several back-up systems and protections (and maintain business interruption insurance), these measures may not protect us fully from the effects of a natural disaster. The occurrence of natural disasters or energy shortages in California could have a material adverse effect on our business prospects, financial condition and results of operations.
 
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We face strong competition from financial services companies and other companies that offer banking and mortgage banking services, which could harm our business.
 
Our operations consist of offering banking and mortgage banking services to generate both interest and noninterest income. Many of our competitors offer the same, or a wider variety of, banking and related financial services within our market areas. These competitors include national banks, regional banks and other community banks. We also face competition from many other types of financial institutions, including savings and loan institutions, finance companies, brokerage firms, insurance companies, credit unions, mortgage banks and other financial intermediaries. In addition, a number of out-of-state financial intermediaries have opened production offices or otherwise solicit deposits in our market areas. Additionally, we face growing competition from so-called “online businesses” with few or no physical locations, including online banks, lenders and consumer and commercial lending platforms, as well as automated retirement and investment service providers. Increased competition in our markets may result in reduced loans, deposits and commissions and brokers’ fees, as well as reduced net interest margin and profitability. Ultimately, we may not be able to compete successfully against current and future competitors. If we are unable to attract and retain banking and mortgage loan customers and expand our sales market for such loans, we may be unable to continue to grow our business, and our financial condition and results of operations may be adversely affected.
 
Legislative and regulatory actions taken now or in the future may increase our costs and impact our business, governance structure, financial condition or results of operations.
 
Our operations are subject to extensive regulation by federal, state and local governmental authorities and are subject to various laws and judicial and administrative decisions imposing requirements and restrictions on part or all of our operations. Federal and state banking regulators have significant discretion and authority to prevent or remedy unsafe or unsound practices or violations of laws or regulations by financial institutions and bank holding companies in the performance of their supervisory and enforcement duties. The exercise of regulatory authority may have a negative impact on our financial condition and results of operations. Additionally, in order to conduct certain activities, including acquisitions, we are required to obtain regulatory approval. There can be no assurance that any required approvals can be obtained, or obtained without conditions or on a timeframe acceptable to us.
 
In addition, other new proposals for legislation continue to be introduced in the U.S. Congress that could further substantially increase regulation of the bank and non-bank financial services industries and impose restrictions on the operations and general ability of firms within the industry to conduct business consistent with historical practices. Federal and state regulatory agencies also frequently adopt changes to their regulations or change the manner in which existing regulations are applied. Certain aspects of current or proposed regulatory or legislative changes to laws applicable to the financial industry, if enacted or adopted, may impact the profitability of our business activities, require more oversight or change certain of our business practices, including the ability to offer new products, obtain financing, attract deposits, make loans and achieve satisfactory interest spreads and could expose us to additional costs, including increased compliance costs. These changes also may require us to invest significant management attention and resources to make any necessary changes to operations to comply and could have an adverse effect on our business, financial condition and results of operations.
 
Our use of third party vendors and our other ongoing third party business relationships are subject to increasing regulatory requirements and attention.
 
We regularly use third party vendors as part of our business. We also have substantial ongoing business relationships with other third parties. These types of third party relationships are subject to increasingly demanding regulatory requirements and attention by our federal bank regulators. Recent regulation requires us to enhance our due diligence, ongoing monitoring and control over our third party vendors and other ongoing third party business relationships. In certain cases we may be required to renegotiate our agreements with these vendors to meet these enhanced requirements, which could increase our costs. We expect that our regulators will hold us responsible for deficiencies in our oversight and control of our third party relationships and in the performance of the parties with which we have these relationships. As a result, if our regulators conclude that we have not exercised adequate oversight and control over our third party vendors or other ongoing third party business relationships or that such third parties have not performed appropriately, we could be subject to enforcement actions, including civil money penalties or other administrative or judicial penalties or fines as well as requirements for customer remediation, any of which could have a material adverse effect our business, financial condition or results of operations.
 
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Risks Related to an Investment in Our Common Stock
 
The price of our common stock may fluctuate significantly, and this may make it difficult for you to sell shares of common stock owned by you at times or at prices you find attractive.  
 
The trading price of our common stock may fluctuate widely as a result of a number of factors, many of which are outside our control. In addition, the stock market is subject to fluctuations in the share prices and trading volumes that affect the market prices of the shares of many companies. These broad market fluctuations could adversely affect the market price of our common stock. Among the factors that could affect our stock price are: 
 
 
●
actual or anticipated quarterly fluctuations in our operating results and financial condition and prospects;
 
 
●
changes in revenue or earnings estimates or publication of research reports and recommendations by financial analysts;
 
 
●
failure to meet analysts’ revenue or earnings estimates;
 
 
●
speculation in the press or investment community;
 
 
●
strategic actions by us or our competitors, such as acquisitions or restructurings;
 
 
●
acquisitions of other banks or financial institutions;
 
 
●
actions by institutional stockholders;
 
 
●
fluctuations in the stock price and operating results of our competitors;
 
 
●
general market conditions and, in particular, developments related to market conditions for the financial services industry;
 
 
●
proposed or adopted regulatory changes or developments;
 
 
●
anticipated or pending investigations, proceedings, or litigation that involve or affect us;
 
 
●
successful management of reputational risk;
 
 
●
geopolitical and public health conditions such as acts or threats of terrorism, military conflicts, pandemics and public health issues or crises, such as that related to COVID-19; and
 
 
●
domestic and international economic factors, such as interest or foreign exchange rates, stock, commodity, credit, or asset valuations or volatility, unrelated to our performance.
 
The stock market and, in particular, the market for financial institution stocks, has experienced significant volatility. As a result, the market price of our common stock may be volatile. In addition, the trading volume in our common stock may fluctuate more than usual and cause significant price variations to occur. The trading price of the shares of our common stock and the value of our other securities will depend on many factors, which may change from time to time, including, without limitation, our financial condition, performance, creditworthiness and prospects, future sales of our equity or equity related securities, and other factors identified above in “Forward-Looking Statements,” and in this Item 1A — “Risk Factors.” The capital and credit markets can experience volatility and disruption. Such volatility and disruption can reach unprecedented levels, resulting in downward pressure on stock prices and credit availability for certain issuers without regard to their underlying financial strength. A significant decline in our stock price could result in substantial losses for individual stockholders and could lead to costly and disruptive securities litigation.
 
39
 
 
Our dividend policy may change.
 
We have paid quarterly dividends since our initial public offering in the third quarter of 2017. In 2017 we paid $0.38 per share, in 2018 we paid $0.35 per share, in 2019 we paid $0.40, and in 2020 we paid $0.33. We have no obligation to pay dividends and we may change our dividend policy at any time without notice to our shareholders. Holders of our common stock are only entitled to receive such cash dividends as our board of directors, in its discretion, may declare out of funds legally available for such payments. Furthermore, consistent with our strategic plans, growth initiatives, capital availability and requirements, projected liquidity needs, financial condition, and other factors, we have made, and will continue to make, capital management decisions and policies that could adversely impact the amount of dividends paid to our common shareholders.
 
We are a separate and distinct legal entity from our subsidiaries, including the Bank. We receive substantially all of our revenue from dividends from the Bank and RAM, which we use as the principal source of funds to pay our expenses. Various federal and/or state laws and regulations limit the amount of dividends that the Bank and certain of our non-bank subsidiaries may pay us. Such limits are also tied to the earnings of our subsidiaries. If the Bank does not receive regulatory approval or if our subsidiaries’ earnings are not sufficient to make dividend payments to us while maintaining adequate capital levels, our ability to pay our expenses and our business, financial condition or results of operations could be materially and adversely impacted.
 
Shares of certain shareholders may be sold into the public market in the near future. This could cause the market price of our common stock to decline.
 
We have outstanding options to purchase 1,106,470 shares of our common stock as of December 31, 2020 that may be exercised and sold (assuming all vesting requirements are met), and we have the ability to issue options exercisable for up to an additional 1,182,045 shares of common stock pursuant to our 2017 Omnibus Stock Incentive Plan. The sale of any of such shares could cause the market price of our stock to decline, and concerns that those sales may occur could cause the trading price of our common stock to decrease or to be lower than it might otherwise be.
 
Our business and financial results could be impacted materially by adverse results in legal proceedings.
 
Various aspects of our operations involve the risk of legal liability. We have been, and expect to continue to be, named or threatened to be named as defendants in legal proceedings arising from our business activities. We establish accruals for legal proceedings when information related to the loss contingencies represented by those proceedings indicates both that a loss is probable and that the amount of the loss can be reasonably estimated, but we do not have accruals for all legal proceedings where we face a risk of loss. In addition, amounts accrued may not represent the ultimate loss to us from those legal proceedings. Thus, our ultimate losses may be higher or lower, and possibly significantly so, than the amounts accrued for loss contingencies arising from legal proceedings, and these losses could have a material and adverse effect on our business, financial condition, results of operations and the value of our common stock. 
 
Future equity issuances could result in dilution, which could cause our common stock price to decline.
 
We are generally not restricted from issuing additional shares of our common stock, up to the 100 million shares of common stock and 100 million shares of preferred stock authorized in our articles of incorporation, which in each case could be increased by a vote of a majority of our shares. We may issue additional shares of our common stock in the future pursuant to current or future equity compensation plans, upon conversions of preferred stock or debt, upon exercise of warrants or in connection with future acquisitions or financings. If we choose to raise capital by selling shares of our common stock for any reason, the issuance would have a dilutive effect on the holders of our common stock and could have a material negative effect on the market price of our common stock.
 
Provisions in our charter documents and California law may have an anti-takeover effect, and there are substantial regulatory limitations on changes of control of bank holding companies.
 
Provisions of our charter documents and the California General Corporation Law (“CGCL”) could make it more difficult for a third party to acquire us, even if doing so would be perceived to be beneficial by our shareholders. Furthermore, with certain limited exceptions, federal regulations prohibit a person or company or a group of persons deemed to be “acting in concert” from, directly or indirectly, acquiring more than 10% (5% if the acquirer is a bank holding company) of any class of our voting stock or obtaining the ability to control in any manner the election of a majority of our directors or otherwise direct the management or policies of our company without prior notice or application to and the approval of the Federal Reserve. Accordingly, prospective investors need to be aware of and comply with these requirements, if applicable, in connection with any purchase of shares of our common stock. Moreover, the combination of these provisions effectively inhibits certain mergers or other business combinations, which, in turn, could adversely affect the market price of our common stock.
 
40
 
 
We are an “emerging growth company”, and the reduced regulatory and reporting requirements applicable to emerging growth companies may make our common stock less attractive to investors.
 
We are an “emerging growth company”, as described in the JOBS Act. For as long as we continue to be an emerging growth company, we may take advantage of reduced regulatory and reporting requirements that are otherwise generally applicable to public companies. These include, without limitation, not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act, reduced financial reporting requirements, reduced disclosure obligations regarding executive compensation, and exemptions from the requirements of holding non-binding advisory votes on executive compensation and golden parachute payments.  Since Bancorp’s IPO, it has been the Company’s intention to take advantage of certain temporary exemptions from various reporting requirements and we are taking advantage of additional transitional relief available to emerging growth companies, which for Bancorp will be available through the end of 2022.  We may take advantage of these provisions for up to five years (through December 2022), unless we earlier cease to be an emerging growth company, which would occur if our annual gross revenues exceed $1.0 billion, if we issue more than $1.0 billion in non-convertible debt in a three-year period, or if the market value of our common stock held by non-affiliates exceeds $700.0 million as of any June 30 before that time, in which case we would no longer be an emerging growth company as of the following December 31. Investors may find our common stock less attractive if we rely on the exemptions, which may result in a less active trading market and increased volatility in our stock price.
 
The outbreak of the COVID-19 pandemic has caused a significant global economic downturn which has adversely affected our business and results of operations, and the future impacts of the COVID-9 pandemic on the global economy and our business, results of operations, liquidity, and financial condition remain uncertain.
 
The COVID-19 pandemic continues to cause economic disruption both worldwide and in the markets we operate. Given the ongoing and dynamic nature of these circumstances, it is difficult to predict the impact of the coronavirus pandemic on our business, and there is no guarantee that our efforts to address or mitigate the adverse impacts of the coronavirus will be effective. To date, the impact has included periods of significant volatility in financial, commodities, and other markets. This volatility, if it continues, could have an adverse impact on our customers and on our business, financial condition, and results of operations, as well as our growth strategy.
 
Our business is dependent upon the willingness and ability of our customers to conduct financial transactions and fulfill their obligations. The spread of COVID-19 has caused (and could continue to cause) severe disruptions in the U.S. economy, and has resulted (and may continue to result) in disruptions to our customers’ businesses, and a decrease in consumer confidence, and adversely affect business generally. In addition, actions by U.S. federal, state, and local governments to address the pandemic, including travel bans, stay-at-home orders, and school, business, and entertainment venue closures, have had (and may continue to have) a significant adverse effect on our customers and the markets in which we conduct our business. The extent of impacts resulting from the pandemic and other events beyond our control remain dependent on future developments, including but not limited to the effectiveness and level of acceptance of vaccines, new information that may emerge concerning the severity of the pandemic, the duration of the coronavirus pandemic, any resurgence in the number of COVID-19 cases, any development and proliferation of new strains of COVID-19, actions taken to contain the coronavirus or its impact, and other similar factors; all of which are uncertain and cannot be predicted.
 
Although new loan origination began to rebound during the latter part of 2020, we believe economic impacts stemming from COVID-19 will continue to influence our loan originations in the near term, both in terms of both a reduction in overall demand for new loans and our continued emphasis on prudent credit risk management, particularly within the context of the continued uncertainty surrounding the economic environment.
 
We are actively working to support our borrowers to mitigate the impact of the COVID-19 pandemic on them and on our loan portfolio, including through loan modifications that defer payments for those who experienced a hardship as a result of the COVID-19 pandemic. Although recent regulatory guidance provides that such loan modifications are exempt from the calculation and reporting of troubled debt restructurings ("TDRs") and loan delinquencies, we cannot predict whether such loan modifications may ultimately have an adverse impact on our profitability in future periods. Our inability to successfully manage the increased credit risk caused by the COVID-19 pandemic could have a material adverse effect on our business, financial condition and results of operations.
 
Disruptions to our customers or business in general could result in increased risk of delinquencies, defaults, foreclosures, and losses on our loans. The escalation of the pandemic may also negatively impact regional economic conditions for a period of time, which could result in declines in loan demand, liquidity of loan guarantors, loan collateral (particularly in real estate), loan originations, and deposit availability. If the global response to COVID-19 escalates or is unsuccessful, we could experience a material adverse situation that could affect our business, financial condition, results of operations, and cash flows.
 
Our participation in the SBA’s PPP Loan Program exposes us to risks.
 
Our participation in the SBA PPP loan program exposes us to risks related to noncompliance with the PPP, as well as litigation risk related to our administration of the PPP loan program, which could have a material adverse impact on our business, financial condition and results of operations.
 
The Company participated in the PPP, a loan program administered through the SBA, that was created to help eligible businesses, organizations and self-employed persons fund their operational costs during the COVID-19 pandemic. Under this program, the SBA guarantees 100% of the amounts loaned under the PPP. The PPP opened on April 3, 2020; however, because of the short window between the passing of the CARES Act and the opening of the PPP, there is some ambiguity in the laws, rules and guidance regarding the operation of the PPP, which exposes the Company to risks relating to noncompliance with the PPP. For instance, other financial institutions have experienced litigation related to their process and procedures used in processing applications for the PPP. Any financial liability, litigation costs or reputational damage caused by PPP related litigation could have a material adverse impact on our business, financial condition and results of operations. In addition, the Company may be exposed to credit risk on PPP loans if a determination is made by the SBA that there is a deficiency in the manner in which the loan was originated, funded, or serviced. If a deficiency is identified, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of any loss related to the deficiency from the Company.
 
41
 
 
Item 1B. Unresolved Staff Comments.
 
None.
 
Item 2. Properties.
 
We are headquartered in Los Angeles County, California. We currently have nine branches in Los Angeles County located in downtown Los Angeles, San Gabriel, Torrance, Rowland Heights, Monterey Park, Silver Lake, Arcadia, Cerritos, and Diamond Bar. We have one branch in Irvine, Orange County, California. We operate two branches in Ventura County, California, in Westlake Village and in Oxnard. These branches are in the Los Angeles-Long Beach-Anaheim, California Metropolitan Statistical Area (“MSA”).
 
The Company has six branches in the New York City metropolitan area located in Manhattan, Brooklyn, and Queens. These branches operate in the New York-Newark-Jersey City, NY-NJ-PA MSA. Our Eastern region loan center, located at 4401 8th Avenue, Brooklyn, New York, houses our Eastern region mortgage unit, FNMA servicing, commercial lending and credit administration areas.
 
In November 2020, we opened a new branch in Edison, New Jersey.
 
We operate one branch in the Las Vegas-Paradise, Nevada MSA.  
 
In January 2020, we acquired PGB and its three branches in Chicago, Illinois, located in the neighborhoods of Chinatown and Bridgeport.  We closed one Chinatown branch in February 2021.
 
42
 
 
Our headquarters office is located at 1055 Wilshire Blvd. Suite 1200, Los Angeles, California 90017. The headquarters is in downtown Los Angeles and houses our risk management unit, including compliance and BSA groups, and our single-family residential mortgage group, SBA lending, commercial lending and credit administration.
 
Our administrative center is located at 123 East Valley Blvd., San Gabriel, California and houses our branch administration, human resources and administrative groups. Our operation center is located at 7025 Orangethorpe Avenue, Buena Park, California and houses the operations, IT and finance groups.
 
Except for our Monterey Park, CA branch, our Buena Park, CA operations center, our Eastern region loan center, and two branches in Chicago, all of our offices are leased. We believe that the leases to which we are subject are generally on terms consistent with prevailing market terms. None of the leases are with our directors, officers, beneficial owners of more than 5% of our voting securities or any affiliates of the foregoing.
 
Item 3. Legal Proceedings.
 
In the normal course of business, we are named or threatened to be named as a defendant in various lawsuits. Management, following consultation with legal counsel, does not expect the ultimate disposition of any or a combination of these matters to have a material adverse effect on our business. However, given the nature, scope and complexity of the extensive legal and regulatory landscape applicable to our business (including laws and regulations governing consumer protection, fair lending, fair labor, privacy, information security and anti-money laundering and anti-terrorism laws), we, like all banking organizations, are subject to heightened legal and regulatory compliance and litigation risk.
 
Where appropriate, we establish reserves in accordance with FASB guidance over loss contingencies (ASC 450). The outcome of litigation and other legal and regulatory matters is inherently uncertain, however, and it is possible that one or more of the legal or regulatory matters currently pending or threatened could have a material adverse effect on our liquidity, consolidated financial position, and/or results of operations. As of December 31, 2020, the Company does not have any litigation reserves.
 
Item 4. Mine Safety Disclosures.
 
Not applicable.
 
43
 
 
PART II
 
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
 
Market Information
 
Our common stock began trading on the NASDAQ Global Select Market (NASDAQ) under the symbol “RBB” on July 27, 2017. Prior to that, there was no public market for our common stock.
 
Shareholders
 
As of March 2, 2021, the Company had approximately 1,113 common stock shareholders of record, and the closing price of the Company’s common stock was $19.11 per share. The number of holders of record does not represent the actual number of beneficial owners of our common stock because securities dealers and others frequently hold shares in “street name” for the benefit of individual owners who have the right to vote shares.
 
Dividend Policy
 
It has been our policy to pay quarterly dividends to holders of our common stock, and we intend to generally maintain our current dividend levels. Our dividend policy and practice may change in the future, however, and our board of directors may change or eliminate the payment of future dividends at its discretion, without notice to our shareholders. Any future determination to pay dividends to holders of our common stock will depend on our results of operations, financial condition, capital requirements, banking regulations, contractual restrictions and any other factors that our board of directors may deem relevant.
 
Under the terms of our subordinated notes issued in March 2016 and November 2018, and the related subordinated note purchase agreements, we are not permitted to declare or pay any dividends on our capital stock if an event of default occurs under the terms of the subordinated notes. Additionally, under the terms of such notes, we are not permitted to declare or pay any dividends on our capital stock if we are not “well capitalized” for regulatory purposes immediately prior to the payment of such dividend. The terms of the debentures underlying our Trust Preferred Securities also prohibit us from paying dividends on our capital stock if we are in deferral of interest payments on those debentures.
 
As a bank holding company, our ability to pay dividends is affected by the policies and enforcement powers of the Federal Reserve. Information on regulatory restrictions on our ability to pay dividends is set forth in “Part I, Item I – Business – Supervision and Regulation – The Company – Dividend Payments”. In addition, because we are a holding company, we are dependent upon the payment of dividends by the Bank to us as our principal source of funds to pay dividends in the future, if any, and to make other payments. The Bank is also subject to various legal, regulatory and other restrictions on its ability to pay dividends and make other distributions and payments to us, as further discussed in “Part I, Item I – Business – Supervision and Regulation—The Bank—Dividend Payments”.
 
 
44
 
 
Stock Performance Graph
 
The following graph compares the cumulative total shareholder return on the Company's common stock from July 27, 2017 (the date of the Company’s initial public offering and listing on NASDAQ) through December 31, 2020. The graph compares the Company's common stock with the Russell 2000 Index and the SNL Bank $1B-$5B Index. The graph assumes an investment of $100.00 in the Company's common stock and each index on July 27, 2017 and reinvestment of all quarterly dividends. Measurement points are July 27, 2017 and the last trading day of each year-end through December 31, 2020. There is no assurance that the Company's common stock performance will continue in the future with the same or similar results as shown in the graph.
 
 
 
 
 
Period Ending
 
Index
 
07/26/17
 
 
12/31/17
 
 
12/31/18
 
 
12/31/19
 
 
12/31/20
 
RBB Bancorp
 
 
100.00
 
 
 
117.60
 
 
 
76.45
 
 
 
94.02
 
 
 
69.86
 
Russell 2000 Index
 
 
100.00
 
 
 
107.12
 
 
 
95.32
 
 
 
119.65
 
 
 
143.53
 
SNL Bank $1B-$5B Index
 
 
100.00
 
 
 
105.83
 
 
 
92.72
 
 
 
112.72
 
 
 
95.78
 
 
Source: S&P Global Market Intelligence © 2021
 
Unregistered Sales and Issuer Purchases of Equity Securities
 
On June 24, 2019, the Board of Directors approved a stock repurchase program to buy back up to an aggregate of 1.0 million shares of our common stock. As of December 31, 2020, the Company may repurchase up to 308,772 shares under the June 2019 repurchase program.  The Company has made 173,359 repurchases of shares of its outstanding common stock during the fourth quarter of 2020.
 
 
 
Issuer Purchases of Equity Securities
 
 
 
(a)
 
 
(b)
 
 
(c)
 
 
(d)
 
Period
 
Total Number of Shares Purchased
 
 
Average Price Paid per Share
 
 
Total Number of Shares Purchased as Part of Publically Announced Plan
 
 
Maximum Number of Shares that May Yet Be Purchased Under the Plan
 
October 1, 2020 -- October 31, 2020
 
 
—
 
 
 
—
 
 
 
—
 
 
 
482,131
 
November 1, 2020 -- November 30, 2020
 
 
102,172
 
 
$
14.48
 
 
 
—
 
 
 
379,959
 
December 1, 2020 -- December 31, 2020
 
 
71,187
 
 
$
15.71
 
 
 
—
 
 
 
308,772
 
Total
 
 
173,359
 
 
 
 
 
 
 
—
 
 
 
308,772
 
 
45
 
 
Item 6. Selected Financial Data.
 
The following consolidated selected financial data is derived from the Company’s audited consolidated financial statements as of and for the five years ended December 31, 2020. This information should be read in connection with our audited consolidated financial statements, related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this report.
 
 
 
As of and for the Year Ended December 31,
 
(Dollars in thousands, except per share data)
 
2020
 
 
2019
 
 
2018
 
 
2017
 
 
2016
 
Balance sheet data:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total assets
 
$
3,350,072
 
 
$
2,788,535
 
 
$
2,974,002
 
 
$
1,691,059
 
 
$
1,395,551
 
Total loans, held for investment, net of unaccreted discount and deferred costs and fees
 
 
2,706,766
 
 
 
2,196,934
 
 
 
2,142,015
 
 
 
1,249,074
 
 
 
1,110,446
 
Allowance for loan losses
 
 
(29,337
)
 
 
(18,816
)
 
 
(17,577
)
 
 
(13,773
)
 
 
(14,162
)
Mortgage loans held for sale
 
 
49,963
 
 
 
108,194
 
 
 
434,522
 
 
 
125,847
 
 
 
44,345
 
Securities
 
 
218,041
 
 
 
134,401
 
 
 
83,723
 
 
 
74,966
 
 
 
45,491
 
Goodwill
 
 
69,243
 
 
 
58,563
 
 
 
58,383
 
 
 
29,940
 
 
 
29,940
 
Total deposits
 
 
2,635,128
 
 
 
2,248,938
 
 
 
2,144,041
 
 
 
1,337,281
 
 
 
1,152,763
 
FHLB advances
 
 
150,000
 
 
 
—
 
 
 
319,500
 
 
 
25,000
 
 
 
—
 
Long-term debt
 
 
104,391
 
 
 
104,049
 
 
 
103,708
 
 
 
49,528
 
 
 
49,383
 
Subordinated debentures
 
 
14,283
 
 
 
9,673
 
 
 
9,506
 
 
 
3,424
 
 
 
3,334
 
Total shareholders' equity
 
 
428,488
 
 
 
407,690
 
 
 
374,621
 
 
 
265,176
 
 
 
181,585
 
Tangible common equity
 
 
354,049
 
 
 
343,027
 
 
 
308,637
 
 
 
233,798
 
 
 
149,852
 
Income statement data:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total interest income
 
$
139,120
 
 
$
141,725
 
 
$
102,115
 
 
$
74,104
 
 
$
68,189
 
Total interest expense
 
 
34,365
 
 
 
44,861
 
 
 
23,645
 
 
 
13,938
 
 
 
11,707
 
Net interest income
 
 
104,755
 
 
 
96,864
 
 
 
78,470
 
 
 
60,166
 
 
 
56,482
 
Provision (recapture) for loan losses
 
 
11,823
 
 
 
2,390
 
 
 
4,469
 
 
 
(1,053
)
 
 
4,974
 
Noninterest income
 
 
14,040
 
 
 
18,320
 
 
 
12,842
 
 
 
13,201
 
 
 
8,966
 
Noninterest expense
 
 
59,513
 
 
 
57,473
 
 
 
40,637
 
 
 
27,623
 
 
 
27,906
 
Income before income taxes
 
 
47,459
 
 
 
55,321
 
 
 
46,206
 
 
 
46,797
 
 
 
32,568
 
Income tax expense
 
 
14,531
 
 
 
16,112
 
 
 
10,101
 
 
 
21,269
 
 
 
13,489
 
Net income
 
 
32,928
 
 
 
39,209
 
 
 
36,105
 
 
 
25,528
 
 
 
19,079
 
Revenue (13)
 
 
153,160
 
 
 
160,045
 
 
 
114,957
 
 
 
87,305
 
 
 
77,155
 
Non-interest income / revenue
 
 
9.17
%
 
 
11.45
%
 
 
11.17
%
 
 
15.12
%
 
 
11.62
%
Per share data (common stock):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Earnings:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic (1)
 
$
1.66
 
 
$
1.96
 
 
$
2.11
 
 
$
1.81
 
 
$
1.49
 
Diluted (1)
 
 
1.65
 
 
 
1.92
 
 
 
2.01
 
 
 
1.68
 
 
 
1.39
 
Dividends declared
 
 
0.33
 
 
 
0.40
 
 
 
0.35
 
 
 
0.38
 
 
 
0.20
 
Book value (2)
 
 
21.90
 
 
 
20.35
 
 
 
18.73
 
 
 
16.67
 
 
 
14.16
 
Tangible book value (3)
 
 
18.10
 
 
 
17.12
 
 
 
15.43
 
 
 
14.70
 
 
 
11.68
 
Weighted average shares outstanding:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic
 
 
19,763,422
 
 
 
20,017,306
 
 
 
17,151,222
 
 
 
14,078,281
 
 
 
12,800,990
 
Diluted
 
 
19,921,859
 
 
 
20,393,424
 
 
 
17,967,653
 
 
 
15,238,365
 
 
 
13,695,900
 
Shares outstanding at period end
 
 
19,565,921
 
 
 
20,030,866
 
 
 
20,000,022
 
 
 
15,908,893
 
 
 
12,827,803
 
Performance metrics
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Return on average assets
 
 
1.03
%
 
 
1.38
%
 
 
1.78
%
 
 
1.66
%
 
 
1.41
%
Return on average shareholders' equity
 
 
7.88
%
 
 
9.95
%
 
 
12.16
%
 
 
11.67
%
 
 
11.08
%
Return on average tangible common equity (3)
 
 
9.62
%
 
 
11.93
%
 
 
13.66
%
 
 
13.64
%
 
 
13.14
%
Yield on average earning assets
 
 
4.67
%
 
 
5.31
%
 
 
5.36
%
 
 
5.13
%
 
 
5.35
%
Cost of average interest-bearing liabilities
 
 
1.57
%
 
 
2.24
%
 
 
1.69
%
 
 
1.28
%
 
 
1.15
%
Net interest spread
 
 
3.10
%
 
 
3.07
%
 
 
3.67
%
 
 
3.85
%
 
 
4.20
%
Net interest margin (4)
 
 
3.52
%
 
 
3.63
%
 
 
4.12
%
 
 
4.16
%
 
 
4.43
%
Efficiency ratio
 
 
50.10
%
 
 
49.90
%
 
 
44.50
%
 
 
37.65
%
 
 
42.64
%
Common stock dividend payout ratio (5)
 
 
19.88
%
 
 
20.41
%
 
 
16.59
%
 
 
20.99
%
 
 
13.42
%
Loan to deposit ratio (6)
 
 
102.72
%
 
 
97.69
%
 
 
99.41
%
 
 
93.40
%
 
 
96.33
%
Core deposits / total deposits (7)
 
 
77.31
%
 
 
73.44
%
 
 
77.92
%
 
 
74.09
%
 
 
67.83
%
Adjusted core deposits / total deposits (8)
 
 
87.72
%
 
 
86.47
%
 
 
91.19
%
 
 
75.16
%
 
 
78.47
%
Net non-core funding dependence ratio (9)
 
 
9.11
%
 
 
13.17
%
 
 
22.32
%
 
 
13.72
%
 
 
19.84
%
Adjusted net non-core funding dependence ratio (10)
 
 
0.38
%
 
 
1.84
%
 
 
12.19
%
 
 
12.18
%
 
 
8.82
%
 
46
 
 
 
 
As of and for the Year Ended December 31,
 
(Dollars in thousands, except per share data)
 
2020
 
 
2019
 
 
2018
 
 
2017
 
 
2016
 
Credit quality Data:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans 30-89 days past due
 
$
9,612
 
 
$
5,277
 
 
$
4,677
 
 
$
3,636
 
 
$
343
 
Loans 30-89 days past due to total loans
 
 
0.36
%
 
 
0.24
%
 
 
0.22
%
 
 
0.29
%
 
 
0.03
%
Nonperforming loans (11)
 
$
19,554
 
 
$
13,218
 
 
$
3,282
 
 
$
2,575
 
 
$
6,133
 
Nonperforming loans to total loans (11)
 
 
0.72
%
 
 
0.60
%
 
 
0.15
%
 
 
0.21
%
 
 
0.55
%
Nonperforming assets (12)
 
$
19,847
 
 
$
13,511
 
 
$
4,383
 
 
$
2,868
 
 
$
6,966
 
Nonperforming assets to total assets (12)
 
 
0.59
%
 
 
0.48
%
 
 
0.15
%
 
 
0.16
%
 
 
0.50
%
Allowance for loan losses to total loans
 
 
1.08
%
 
 
0.86
%
 
 
0.82
%
 
 
1.10
%
 
 
1.28
%
Allowance for loan losses to nonperforming loans (11)
 
 
150.03
%
 
 
142.35
%
 
 
535.55
%
 
 
534.87
%
 
 
230.91
%
Net charge-offs (recoveries) to average loans
 
 
0.05
%
 
 
0.05
%
 
 
0.05
%
 
 
-0.06
%
 
 
0.08
%
Regulatory and other capital ratios—Company
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Tangible common equity to tangible assets (3)
 
 
10.81
%
 
 
12.59
%
 
 
10.61
%
 
 
14.09
%
 
 
10.99
%
Tier 1 leverage ratio
 
 
11.32
%
 
 
12.89
%
 
 
11.80
%
 
 
14.35
%
 
 
10.99
%
Tier 1 common capital to risk-weighted assets
 
 
14.62
%
 
 
17.16
%
 
 
15.28
%
 
 
17.54
%
 
 
13.30
%
Tier 1 capital to risk-weighted assets
 
 
15.21
%
 
 
17.65
%
 
 
15.74
%
 
 
17.80
%
 
 
13.55
%
Total capital to risk-weighted assets
 
 
20.77
%
 
 
23.82
%
 
 
21.71
%
 
 
22.55
%
 
 
19.16
%
Regulatory capital ratios—Bank only
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Tier 1 leverage ratio
 
 
14.11
%
 
 
15.23
%
 
 
13.66
%
 
 
14.50
%
 
 
12.81
%
Tier 1 common capital to risk-weighted assets
 
 
18.94
%
 
 
20.87
%
 
 
18.17
%
 
 
17.42
%
 
 
15.81
%
Tier 1 capital to risk-weighted assets
 
 
18.94
%
 
 
20.87
%
 
 
18.17
%
 
 
17.42
%
 
 
15.81
%
Total capital to risk-weighted assets
 
 
20.19
%
 
 
21.86
%
 
 
19.07
%
 
 
18.47
%
 
 
17.06
%
 
(1)
Earnings per share are calculated utilizing the two-class method. Basic earnings per share are calculated by dividing earnings to common shareholders by the weighted average number of common shares outstanding. Diluted earnings per share are calculated by dividing earnings by the weighted average number of shares adjusted for the dilutive effect of outstanding stock options using the treasury stock method.
(2)
For purposes of computing book value per common share, book value equals total common shareholders’ equity.
(3)
Tangible book value per share, return on average tangible common equity and tangible common equity to tangible assets are non-GAAP financial measures. See “Non-GAAP Financial Measures” for a reconciliation of these measures to their most comparable GAAP measures.
(4)
Net interest margin is presented on a fully taxable equivalent (“FTE”) basis. Our management believes that measuring net interest margin, net of purchase accounting accretion, is useful when assessing our net interest margin as compared to the net interest margin of banks that do not reflect purchase accounting adjustments because they are not active acquirers of financial institutions. The effect of accretion income from acquired loans on our net interest margin was an increase of 0.08%, 0.11%, 0.12%, 0.37%, and 0.59 %, for the twelve-month periods ended December 31, 2020, 2019, 2018, 2017 and 2016, respectively. We anticipate that the impact of purchase accounting on our net interest margin will decrease as our previously acquired loans are paid off, charged off, foreclosed upon or sold, offset with new acquired loans.
(5)
Common stock dividend payout ratio represents dividends per share divided by basic earnings per share. See “Dividend Policy.” The common stock dividend payout ratio reflected for the year ended December 31, 2016 represents the dividends declared and paid by the Company during 2016 based on the Company’s earnings for the 12 months ended December 31, 2016.
(6)
For the purposes of calculating the loan to deposit ratio, short-term loans with maturities of less than 90-days, specifically “Term Fed Funds” and purchased receivables are not included as loans as defined by the regulatory agencies.
(7)
Unadjusted core deposits include non-maturity deposits (non-interest bearing demand deposits, savings deposits, NOW accounts, money market demand accounts) and certificates of deposit under $250,000.
(8)
The Bank measures adjusted core deposits by reviewing all relationships over $250,000 on a quarterly basis. We track all deposit relationships over $250,000 on a quarterly basis and consider a relationship to be core if there are any three or more of the following: (i) relationships with us (as a director or shareholder); (ii) deposits within our market area; (iii) additional non-deposit services with us; (iv) electronic banking services with us; (v) active demand deposit account with us; (vi) deposits at market interest rates; and (vii) longevity of the relationship with us. We consider all deposit relationships under $250,000 as a core relationship except for time deposits originated through an internet service. This differs from the traditional definition of core deposits which is demand and savings deposits plus time deposits less than $250,000. As many of our customers have more than $250,000 on deposit with us, we believe that using this method reflects a more accurate assessment of our deposit base. Adjusted core deposits ratio is a ratio management uses to measure core deposits. See “Non-GAAP Financial Measures”.
(9)
Net non-core funding dependency ratio represents the degree to which the Bank is funding longer term assets with non-core funds. We calculate this ratio as non-core liabilities, less short term investments, divided by long term assets.
(10)
Adjusted non-core funding dependency ratio is a ratio management uses to measure dependency on non-core deposits. To determine non-core liabilities we review each deposit relationship using the criteria for determining whether a relationship is core as described in footnote 8 above.
(11)
Nonperforming loans include nonaccrual loans, loans past due 90 days or more and still accruing interest and loans modified under troubled debt restructurings. Nonperforming loans exclude purchase credit impaired ("PCI") loans acquired in prior acquisitions. Nonperforming loans include a SBA guaranteed loan at December 31, 2016 as to which we received a $3.6 million payment in July 2017 pursuant to a SBA loan guaranty. SBA guaranteed loans at December 31, 2020 were $48.5 million.
(12)
Nonperforming assets include nonperforming loans and other repossessed assets. As discussed in footnote 11, above, nonperforming loans exclude PCI loans. This ratio may therefore not be comparable to a similar ratio of our peers.
(13)
Revenue consists of interest income plus non-interest income.
 
 
47
 
 
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
CRITICAL ACCOUNTING POLICIES
 
The discussion and analysis of the Company’s audited consolidated financial statements are based upon its audited consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these audited consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities at the date of our financial statements. Actual results may differ from these estimates under different assumptions or conditions.
 
The following is a summary of the more judgmental and complex accounting estimates and principles. In each area, we have identified the variables we believe are most important in our estimation process. We utilize information available to us to make the necessary estimates to value the related assets and liabilities. Actual performance that differs from our estimates and future changes in the key variables and information could change future valuations and impact the results of operations.
 
 
●
Loans held for investment
 
 
●
Loans available for sale
 
 
●
Securities
 
 
●
Allowance for loan losses (ALLL)
 
 
●
Goodwill and other intangible assets
 
 
●
Deferred income taxes
 
 
●
Servicing rights
 
 
●
Income Taxes
 
 
●
Stock-Based Compensation
 
Our significant accounting policies are described in greater detail in our 2020 audited financial statements included in Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K, specifically in “Note 2 – Summary of Significant Accounting Policies” which are essential to understanding Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
OVERVIEW
 
For the year 2020, we reported net earnings of $32.9 million, compared with $39.2 million for the year 2019. This represented a decrease of $6.3 million or 16.0% over the prior year. The decrease in net earnings reflected a $9.4 million increase in the provision for credit losses, a $4.3 million decrease in non-interest income and a $2.0 million increase in non-interest expenses, which was partially offset by a $7.9 million increase in net interest income and a $1.6 million decrease in income tax expense.
 
At December 31, 2020, total assets were $3.4 billion, an increase of  $561.5 million, or 20.1%, from total assets of $2.8 billion at December 31, 2019. Interest-earning assets were $3.2 billion as of December 31, 2020, an increase of $555.4 million, or 21.3%, compared to $2.6 billion at December 31, 2019. The increase in interest-earning assets was primarily due to net HFI loan growth of $499.3 million, and investment securities growth of $83.6 million, partially offset by a decrease of $58.2 million in mortgage loans available for sale.  The increase in interest-earning assets was due to $212.6 million from the purchase of PGBH and the remainder from organic growth.
 
48
 
 
At December 31, 2020, available for sale (“AFS”) investment securities totaled $210.9 million inclusive of a pre-tax net unrealized gain of $1.6 million, compared to $126.1 million inclusive of a pre-tax net unrealized gain of $340,000 at December 31, 2019. At December 31, 2020, held to maturity (“HTM”) investment securities totaled $7.2 million, compared to $8.3 million as of December 31, 2019.
 
Net loans and leases (held for investment, net of deferred fees, discounts, and the allowance for loan losses) were $2.7 billion at December 31, 2020, compared to $2.2 billion at December 31, 2019. Net loans and leases increased $499.3 million, or 22.9%, from December 31, 2019. The increase in net loans was primarily due to the acquisition of PGBH with loan balances of $173.1 million and the remainder from organic growth.  The increase in net loans included approximately $167.1 million in SFR mortgage loans, $210.4 million in CRE loans, $15.6 million in C&I loans, $90.7 million in construction loans, and $22.8 million in SBA loans.
 
Total deposits were $2.6 billion at December 31, 2020, an increase of $386.2 million, or 17.2%, compared to $2.2 billion at December 31, 2019. The increase is due to the acquisition of $188.4 million of deposits from PGBH, an increase of $125.2 million in money market demand accounts, offset by a net decrease of $6.9 million from wholesale and brokered deposits, and the remainder from organic growth.
 
Noninterest-bearing deposits were $617.2 billion at December 31, 2020, an increase of $158.4 million, or 34.5%, from $458.8 million at December 31, 2019. At December 31, 2020, noninterest-bearing deposits were 23.4% of total deposits, compared to 20.4% at December 31, 2019.
 
Our average cost of total deposits was 1.01% for the year 2020, compared to 1.56% for 2019. The decrease is due to a 63 basis point decrease in the average rate paid on interest bearing deposits. Borrowings, consisting of FHLB long-term advances, long-term debt and subordinated debt, increased $155.0 million to $268.7 million as of December 31, 2020 compared to $113.7 million as of December 31, 2019. The Company had no short-term FHLB advances and $150.0 million in long-term advances at December 31, 2020, compared to none at December 31, 2019.
 
The allowance for loan losses was $29.3 million at December 31, 2020, an increase of $10.5 million or 55.9%, from $18.8 million at December 31, 2019. During 2020, there was a $11.8 million provision for loan losses compared to $2.4 million for 2019. The ALLL to HFI loans and leases outstanding was 1.08% and 0.86% as of December 31, 2020 and December 31, 2019, respectively.
 
Shareholders’ equity increased $20.8 million, or 5.1%, to $428.5 million as of December 31, 2020 from $407.7 million at December 31, 2019.  The increase during 2020 was primarily due to $32.9 million of net income, less $6.6 million of common dividends paid and $7.9 million from the repurchase of common stock.
 
Our capital ratios under the Basel III capital framework regulatory standards remain well capitalized. As of December 31, 2020, the Company’s Tier 1 leverage capital ratio was 11.32%, common equity Tier 1 ratio was 14.62%, Tier 1 risk-based capital ratio totaled 15.21%, and total risk-based capital ratio was 20.77%.
 
49
 
 
ANALYSIS OF THE RESULTS OF OPERATIONS
 
Financial Performance
 
 
 
Years Ended December 31,
 
 
2020 vs. 2019 Variance
 
 
Year Ended
 
 
2019 vs. 2018 Variance
 
 
 
2020
 
 
2019
 
 
 
 
 
$%
 
 
December 31, 2018
 
 
 
 
 
$%
 
 
 
(Dollars in thousands, except per share amounts)
 
Interest income
 
$
139,120
 
 
$
141,725
 
 
$
(2,605
)
 
 
-1.8
%
 
$
102,115
 
 
$
39,610
 
 
 
38.8
%
Interest expense
 
 
34,365
 
 
 
44,861
 
 
 
(10,496
)
 
 
-23.4
%
 
 
23,645
 
 
 
21,216
 
 
 
89.7
%
Net interest income
 
 
104,755
 
 
 
96,864
 
 
 
7,891
 
 
 
8.1
%
 
 
78,470
 
 
 
18,394
 
 
 
23.4
%
Provision for loan losses
 
 
11,823
 
 
 
2,390
 
 
 
9,433
 
 
 
394.7
%
 
 
4,469
 
 
 
(2,079
)
 
 
-46.5
%
Net interest income after provision (recapture) for credit losses
 
 
92,932
 
 
 
94,474
 
 
 
(1,542
)
 
 
-1.6
%
 
 
74,001
 
 
 
20,473
 
 
 
27.7
%
Noninterest income
 
 
14,040
 
 
 
18,320
 
 
 
(4,280
)
 
 
-23.4
%
 
 
12,842
 
 
 
5,478
 
 
 
42.7
%
Noninterest expense
 
 
59,513
 
 
 
57,473
 
 
 
2,040
 
 
 
3.5
%
 
 
40,637
 
 
 
16,836
 
 
 
41.4
%
Income before income taxes
 
 
47,459
 
 
 
55,321
 
 
 
(7,862
)
 
 
-14.2
%
 
 
46,206
 
 
 
9,115
 
 
 
19.7
%
Income tax expense
 
 
14,531
 
 
 
16,112
 
 
 
(1,581
)
 
 
-9.8
%
 
 
10,101
 
 
 
(6,011
)
 
 
-59.5
%
Net income
 
$
32,928
 
 
$
39,209
 
 
$
(6,281
)
 
 
-16.0
%
 
$
36,105
 
 
$
3,104
 
 
 
8.6
%
Earnings per common share:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic
 
$
1.66
 
 
$
1.96
 
 
$
(0.30
)
 
 
 
 
 
$
2.11
 
 
$
(0.15
)
 
 
 
 
Diluted (1)
 
$
1.65
 
 
$
1.92
 
 
$
(0.27
)
 
 
 
 
 
$
2.01
 
 
$
(0.09
)
 
 
 
 
Return on average assets
 
 
1.03
%
 
 
1.38
%
 
 
-0.35
%
 
 
 
 
 
 
1.78
%
 
 
-0.40
%
 
 
 
 
Return on average shareholders’ equity
 
 
7.88
%
 
 
9.95
%
 
 
-2.07
%
 
 
 
 
 
 
12.16
%
 
 
-2.21
%
 
 
 
 
Efficiency ratio
 
 
50.10
%
 
 
49.90
%
 
 
0.20
%
 
 
 
 
 
 
44.50
%
 
 
5.40
%
 
 
 
 
Tangible common equity to tangible assets (2)
 
 
10.81
%
 
 
12.59
%
 
 
-1.78
%
 
 
 
 
 
 
10.61
%
 
 
1.97
%
 
 
 
 
Tangible book value per share (2)
 
$
18.10
 
 
$
17.12
 
 
$
0.98
 
 
 
 
 
 
$
15.43
 
 
$
1.69
 
 
 
 
 
Return on average tangible common equity (2)
 
 
9.62
%
 
 
11.93
%
 
 
-2.31
%
 
 
 
 
 
 
13.66
%
 
 
-1.73
%
 
 
 
 
 
(1)
Earnings per share are calculated utilizing the two-class method. Basic earnings per share are calculated by dividing earnings to common shareholders by the weighted average number of common shares outstanding. Diluted earnings per share are calculated by dividing earnings by the weighted average number of shares adjusted for the dilutive effect of outstanding stock options using the treasury stock method.
(2)
Tangible book value per share, return on average tangible common equity, and tangible common equity to tangible assets are non-GAAP financial measures. See "Non-GAAP Financial Measures" for a reconciliation of these measures to their most comparable GAAP measures.
 
Results of Operations—Comparison of Results of Operations for the Years Ended December 31, 2020 to December 31, 2019
 
Net Interest Income/Average Balance Sheet
 
In 2020, we generated fully-taxable equivalent net interest income of $104.8 million, an increase of $7.9 million, or 8.1%, from the net interest income produced in 2019. This increase was largely due to a 11.7% increase in the average balance of interest-earning assets, in part due to the PGBH acquisition and organic loan growth, partially offset by an 11 basis point decrease in the net interest margin. For the years ended December 31, 2020 and 2019 our reported net interest margin was 3.52% and 3.63%, respectively. Our net interest margin benefits from discount accretion on our purchased loan portfolios.
 
Interest Income . Total interest income was $139.1 million in 2020 compared to $141.7 million in 2019. The $2.6 million, or 1.8%, decrease in total interest income was mainly due to a decrease in the average loan yield of 37 basis points. This was partially offset by increases in the average balance of total loans of $147.5 million, average balance of securities of $88.2 million, and average balance of Federal funds sold, cash equivalents and other investments of $77.5 million.
 
50
 
 
Interest and fees on loans was $133.9 million in 2020 compared to $135.2 million in 2019. The $1.3 million, or 0.94%, decrease in interest income on loans was primarily due to a 46 basis point decrease in the average yield on loans held for investment and 51 basis point decrease in the average yield on loans held for sale, partially offset by a $147.5 million increase in the average balance of held for investment and held for sale loans outstanding. The increase in the average balance of loans outstanding was primarily due to the PGBH acquisition in January 2020 plus organic growth in commercial real estate and single-family residential mortgage loans during 2020. The yield on the loan portfolio benefited from accretion income associated with purchase accounting discounts established on loans acquired in prior acquisitions. For the years 2020 and 2019, the reported yield on total loans was 5.19% and 5.65%, respectively. The impact of accretion income on our yield on total loans for the years 2020 and 2019 was to increase our reported yield on total loans by 0.08% and 0.11%, respectively. A substantial portion of our acquired loan portfolio that is subject to discount accretion consists of commercial real estate loans and single family residential mortgages.
 
The table below illustrates by loan type the accretion income for the years 2020, 2019 and 2018:
 
 
 
Years Ended December 31,
 
(dollars in thousands)
 
2020
 
 
2019
 
 
2018
 
Beginning balance of discount on purchased loans
 
$
5,068
 
 
$
9,228
 
 
$
2,762
 
Additions due to acquisitions:
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
 
 
39
 
 
 
—
 
 
 
10
 
Commercial real estate
 
 
397
 
 
 
—
 
 
 
3,906
 
Single family residential mortgages
 
 
448
 
 
 
—
 
 
 
4,984
 
Total additions
 
$
885
 
 
$
—
 
 
$
8,900
 
Accretion:
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
 
 
—
 
 
 
15
 
 
 
119
 
SBA
 
 
17
 
 
 
18
 
 
 
120
 
Construction and land development
 
 
5
 
 
 
—
 
 
 
—
 
Commercial real estate
 
 
2,345
 
 
 
2,893
 
 
 
2,116
 
Single family residential mortgages
 
 
714
 
 
 
1,234
 
 
 
79
 
Total accretion
 
$
3,081
 
 
$
4,160
 
 
$
2,434
 
Ending balance of discount on purchased loans
 
$
2,872
 
 
$
5,068
 
 
$
9,228
 
 
Interest income from our securities portfolio increased $315,000, or 11.7%, to $3.0 million in 2020. The increase in interest income on securities was primarily due to an increased average balance of $88.2 million, or 93.1%, partially offset by a 120 basis point decrease in the average yield of securities.
 
Interest income on our federal funds sold, cash equivalents and other investments decreased $1.7 million, or 42.3%, to $2.3 million in 2020. The decrease in interest income on these earning assets was primarily due to by an 184 basis point decrease in average yield of cash equivalents, partially offset by a $77.5 million increase in the average balance. The increase in the average balance resulted from pending utilization of these funds to higher yielding loans and securities.
 
Interest Expense. Interest expense on interest-bearing liabilities decreased $10.5 million, or 23.4%, to $34.4 million in 2020 primarily due to a 67 basis point decrease in the average rate on these liabilities plus an increase in non-interest bearing deposits of $142.9 million, partially offset by a $188.2 million increase in the average balance of interest bearing liabilities.
 
Interest expense on total deposits decreased to $25.2 million in 2020. The $9.0 million, or 26.4%, decrease in interest expense on total deposits was primarily due to a 63 basis point decrease in the average rate paid on total interest bearing deposits, partially offset by a $168.5 million increase in the average balance of interest-bearing deposits. The increase in the average balance of deposits resulted primarily from the PGBH acquisition in early 2020 and organic growth in 2020.
 
Interest expense on borrowings decreased from $10.6 million in 2019 to $9.2 million or 13.8% in 2020. This decrease reflected decreased interest expense on subordinated notes, subordinated debentures, and other borrowed funds consisting of FHLB short-term and long-term advances. In 2020, the average rate on these liabilities was 3.70% compared to 4.66% in 2019. A five year FHLB advance was obtained in March 2020 to provide for additional liquidity.
 
51
 
 
Average Balance Sheet, Interest and Yield/Rate Analysis
 
The principal component of our earnings is net interest income, which is the difference between the interest and fees earned on loans and investments (interest-earning assets) and the interest paid on deposits and borrowed funds (interest-bearing liabilities). Net interest margin is net interest income as a percentage of average interest-earning assets for the period. The level of interest rates and the volume and mix of interest-earning assets and interest-bearing liabilities impact net interest income and net interest margin. The net interest spread is the yield on average interest earning assets minus the cost of average interest-bearing liabilities. Net interest margin and net interest spread are included on a tax equivalent (“TE”) basis by adjusting interest income utilizing the federal statutory tax rate of 21% for 2020,  2019 and 2018. Our net interest income, interest spread, and net interest margin are sensitive to general business and economic conditions. These conditions include short-term and long-term interest rates, inflation, monetary supply, and the strength of the international, national and state economies, in general, and more specifically, the local economies in which we conduct business. Our ability to manage net interest income during changing interest rate environments will have a significant impact on our overall performance. We manage net interest income through affecting changes in the mix of interest-earning assets as well as the mix of interest-bearing liabilities, changes in the level of interest-bearing liabilities in proportion to interest-earning assets, and in the growth and maturity of earning assets. See “Analysis of Financial Condition— Capital Resources and Liquidity Management” and Item 7A Quantitative and Qualitative Disclosures about Market Risk included herein.
 
The following tables present average balance sheet information, interest income, interest expense and the corresponding average yields earned and rates paid for the years 2020, 2019 and 2018. The average balances are principally daily averages and, for loans, include both performing and nonperforming balances. Interest income on loans includes the effects of discount accretion and net deferred loan origination costs accounted for as yield adjustments.
 
 
 
Years Ended December 31,
 
 
 
2020
 
 
2019
 
 
2018
 
(tax-equivalent basis, dollars in
 
Average
 
 
Interest
 
 
Yield /
 
 
Average
 
 
Interest
 
 
Yield /
 
 
Average
 
 
Interest
 
 
Yield /
 
thousands)
 
Balance
 
 
& Fees
 
 
Rate
 
 
Balance
 
 
& Fees
 
 
Rate
 
 
Balance
 
 
& Fees
 
 
Rate
 
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Federal funds sold, cash equivalents and other (1)
 
$
212,594
 
 
$
2,258
 
 
 
1.06
%
 
$
135,133
 
 
$
3,914
 
 
 
2.90
%
 
$
74,038
 
 
$
2,284
 
 
 
3.08
%
Securities (2)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available for sale
 
 
175,307
 
 
 
2,714
 
 
 
1.55
%
 
 
85,775
 
 
 
2,354
 
 
 
2.74
%
 
 
72,515
 
 
 
2,019
 
 
 
2.78
%
Held to maturity
 
 
7,665
 
 
 
287
 
 
 
3.74
%
 
 
8,978
 
 
 
334
 
 
 
3.72
%
 
 
11,114
 
 
 
369
 
 
 
3.33
%
Mortgage loans held for sale
 
 
41,019
 
 
 
1,779
 
 
 
4.34
%
 
 
325,039
 
 
 
15,754
 
 
 
4.85
%
 
 
292,328
 
 
 
13,307
 
 
 
4.55
%
Loans held for investment: (3)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Real estate
 
 
2,176,695
 
 
 
113,966
 
 
 
5.24
%
 
 
1,767,923
 
 
 
97,024
 
 
 
5.49
%
 
 
1,076,438
 
 
 
59,494
 
 
 
5.52
%
Commercial (4)
 
 
367,718
 
 
 
18,149
 
 
 
4.94
%
 
 
345,010
 
 
 
22,381
 
 
 
6.49
%
 
 
380,042
 
 
 
24,679
 
 
 
6.49
%
Total loans held for investment
 
 
2,544,413
 
 
 
132,115
 
 
 
5.19
%
 
 
2,112,933
 
 
 
119,405
 
 
 
5.65
%
 
 
1,456,480
 
 
 
84,173
 
 
 
5.78
%
Total earning assets
 
 
2,980,998
 
 
$
139,153
 
 
 
4.67
%
 
 
2,667,858
 
 
$
141,761
 
 
 
5.31
%
 
 
1,906,475
 
 
$
102,152
 
 
 
5.36
%
Noninterest-earning assets
 
 
204,617
 
 
 
 
 
 
 
 
 
 
 
167,324
 
 
 
 
 
 
 
 
 
 
 
117,936
 
 
 
 
 
 
 
 
 
Total assets
 
$
3,185,615
 
 
 
 
 
 
 
 
 
 
$
2,835,182
 
 
 
 
 
 
 
 
 
 
$
2,024,411
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
NOW and money market deposits
 
$
504,905
 
 
$
3,391
 
 
 
0.67
%
 
$
395,376
 
 
$
4,689
 
 
 
1.19
%
 
$
401,070
 
 
$
4,234
 
 
 
1.06
%
Savings deposits
 
 
123,568
 
 
 
149
 
 
 
0.12
%
 
 
97,670
 
 
 
197
 
 
 
0.20
%
 
 
46,260
 
 
 
174
 
 
 
0.38
%
Time deposits
 
 
1,312,443
 
 
 
21,665
 
 
 
1.65
%
 
 
1,279,344
 
 
 
29,347
 
 
 
2.29
%
 
 
769,462
 
 
 
12,548
 
 
 
1.63
%
Total interest-bearing deposits
 
 
1,940,916
 
 
 
25,205
 
 
 
1.30
%
 
 
1,772,390
 
 
 
34,233
 
 
 
1.93
%
 
 
1,216,792
 
 
 
16,956
 
 
 
1.39
%
FHLB advances
 
 
129,071
 
 
 
1,483
 
 
 
1.15
%
 
 
114,388
 
 
 
2,930
 
 
 
2.56
%
 
 
124,990
 
 
 
2,606
 
 
 
2.07
%
Long-term debt
 
 
104,210
 
 
 
6,990
 
 
 
6.71
%
 
 
103,870
 
 
 
6,991
 
 
 
6.73
%
 
 
54,486
 
 
 
3,714
 
 
 
6.82
%
Subordinated debentures
 
 
14,228
 
 
 
687
 
 
 
4.83
%
 
 
9,586
 
 
 
707
 
 
 
7.38
%
 
 
4,968
 
 
 
369
 
 
 
7.43
%
Total interest-bearing liabilities
 
 
2,188,425
 
 
$
34,365
 
 
 
1.57
%
 
 
2,000,234
 
 
$
44,861
 
 
 
2.24
%
 
 
1,401,236
 
 
$
23,645
 
 
 
1.69
%
Noninterest-bearing liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Noninterest-bearing deposits
 
 
564,111
 
 
 
 
 
 
 
 
 
 
 
421,174
 
 
 
 
 
 
 
 
 
 
 
310,282
 
 
 
 
 
 
 
 
 
Other noninterest-bearing liabilities
 
 
15,164
 
 
 
 
 
 
 
 
 
 
 
19,879
 
 
 
 
 
 
 
 
 
 
 
16,024
 
 
 
 
 
 
 
 
 
Total noninterest-bearing liabilities
 
 
579,275
 
 
 
 
 
 
 
 
 
 
 
441,053
 
 
 
 
 
 
 
 
 
 
 
326,306
 
 
 
 
 
 
 
 
 
Shareholders' equity
 
 
417,915
 
 
 
 
 
 
 
 
 
 
 
393,895
 
 
 
 
 
 
 
 
 
 
 
296,869
 
 
 
 
 
 
 
 
 
Total liabilities and shareholders equity
 
$
3,185,615
 
 
 
 
 
 
 
 
 
 
$
2,835,182
 
 
 
 
 
 
 
 
 
 
$
2,024,411
 
 
 
 
 
 
 
 
 
Net interest income / interest rate spreads
 
 
 
 
 
$
104,788
 
 
 
3.10
%
 
 
 
 
 
$
96,900
 
 
 
3.07
%
 
 
 
 
 
$
78,507
 
 
 
3.67
%
Net interest margin
 
 
 
 
 
 
 
 
 
 
3.52
%
 
 
 
 
 
 
 
 
 
 
3.63
%
 
 
 
 
 
 
 
 
 
 
4.12
%
 
(1)
Includes income and average balances for FHLB stock, term federal funds, interest-bearing time deposits and other miscellaneous interest-bearing assets.
(2)
Interest income and average rates for tax-exempt securities are presented on a tax-equivalent basis.
(3)
Average loan balances include nonaccrual loans and loans held for sale. Interest income on loans includes amortization of deferred loan fees, net of deferred loan costs.
(4)
Includes purchased receivables, which are short term loans made to investment grade companies and are used for cash management purposes by the Company.
 
52
 
 
Interest Rates and Operating Interest Differential
 
Increases and decreases in interest income and interest expense result from changes in average balances (volume) of interest-earning assets and interest-bearing liabilities, as well as changes in average interest rates. The following tables show the effect that these factors had on the interest earned on our interest-earning assets and the interest incurred on our interest-bearing liabilities. The effect of changes in volume is determined by multiplying the change in volume by the previous period’s average rate. Similarly, the effect of rate changes is calculated by multiplying the change in average rate by the previous period’s volume. Changes which are not due solely to volume or rate have been allocated to these categories based on the respective percent changes in average volume and average rate as they compare to each other.
 
 
 
Year Ended December 31, 2020 Compared with Year Ended December 31, 2019
 
 
Year Ended December 31, 2019 Compared with Year Ended December 31, 2018
 
 
 
Change due to:
 
 
 
 
 
 
Change due to:
 
 
 
 
 
(tax-equivalent basis, dollars in thousands)
 
Volume
 
 
Rate
 
 
Interest Variance
 
 
Volume
 
 
Rate
 
 
Interest Variance
 
Earning assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Federal funds sold, cash equivalents & other (1)
 
$
1,574
 
 
$
(3,230
)
 
$
(1,656
)
 
$
1,772
 
 
$
(142
)
 
$
1,630
 
Securities (2)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available for sale
 
 
1,696
 
 
 
(1,336
)
 
 
360
 
 
 
363
 
 
 
(28
)
 
 
335
 
Held to maturity
 
 
(49
)
 
 
2
 
 
 
(47
)
 
 
(79
)
 
 
44
 
 
 
(35
)
Mortgage loans held for sale
 
 
(12,474
)
 
 
(1,501
)
 
 
(13,975
)
 
 
1,586
 
 
 
861
 
 
 
2,447
 
Loans held for investment: (3)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Real estate
 
 
21,540
 
 
 
(4,598
)
 
 
16,942
 
 
 
37,963
 
 
 
(433
)
 
 
37,530
 
Commercial (4)
 
 
1,397
 
 
 
(5,629
)
 
 
(4,232
)
 
 
(2,274
)
 
 
(24
)
 
 
(2,298
)
Total loans held for investment
 
 
22,937
 
 
 
(10,227
)
 
 
12,710
 
 
 
35,689
 
 
 
(457
)
 
 
35,232
 
Total earning assets
 
$
13,684
 
 
$
(16,292
)
 
$
(2,608
)
 
$
39,331
 
 
$
278
 
 
$
39,609
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
NOW and money market deposits
 
$
1,092
 
 
$
(2,390
)
 
$
(1,298
)
 
$
(68
)
 
$
523
 
 
$
455
 
Savings deposits
 
 
43
 
 
 
(91
)
 
 
(48
)
 
 
103
 
 
 
(80
)
 
 
23
 
Time deposits
 
 
737
 
 
 
(8,419
)
 
 
(7,682
)
 
 
11,676
 
 
 
5,123
 
 
 
16,799
 
Total interest-bearing deposits
 
 
1,872
 
 
 
(10,900
)
 
 
(9,028
)
 
 
11,711
 
 
 
5,566
 
 
 
17,277
 
FHLB short-term advances
 
 
336
 
 
 
(1,783
)
 
 
(1,447
)
 
 
(271
)
 
 
595
 
 
 
324
 
Long-term debt
 
 
21
 
 
 
(22
)
 
 
(1
)
 
 
3,324
 
 
 
(47
)
 
 
3,277
 
Subordinated debentures
 
 
273
 
 
 
(293
)
 
 
(20
)
 
 
341
 
 
 
(3
)
 
 
338
 
Total interest-bearing liabilities
 
 
2,502
 
 
 
(12,998
)
 
 
(10,496
)
 
 
15,105
 
 
 
6,111
 
 
 
21,216
 
Changes in net interest income
 
$
11,182
 
 
$
(3,294
)
 
$
7,888
 
 
$
24,226
 
 
$
(5,833
)
 
$
18,393
 
 
(1)
Includes income and average balances for FHLB stock, term federal funds, interest-bearing time deposits and other miscellaneous interest-bearing assets.
(2)
Interest income and average rates for tax-exempt securities are presented on a tax-equivalent basis.
(3)
Average loan balances include nonaccrual loans and loans held for sale. Interest income on loans includes amortization of deferred loan fees, net of deferred loan costs.
(4)
Includes purchased receivables, which are short term loans made to investment grade companies and are used for cash management purposes by the Company.
 
53
 
 
Provision for Credit Losses
 
The provision for credit loss expense in 2020 was $11.8 million compared to $2.4 million in 2019. The increase in the 2020 provision expense was primarily attributable to COVID-19 pandemic related market effects of $2.3 million, increases in the size of our overall loan portfolio, and increases in past due loans, substandard loans and impaired loans. Non-performing loans that increased during the year were individually analyzed,  with $525,000 in 2020 and none in 2019,  net addition to the allowance for loan losses.
 
Noninterest Income
 
Noninterest income decreased $4.3 million, or 23.4%, to $14.0 million in 2020 from $18.3 million in 2019. The following table sets forth the major components of noninterest income for the years ended December 31, 2020, 2019 and 2018:
 
 
 
Years Ended December 31,
 
 
2020 vs. 2019 Increase (decrease)
 
 
2019 vs. 2018 Increase (decrease)
 
(dollars in thousands)
 
2020
 
 
2019
 
 
2018
 
 
$
 
 
%
 
 
$
 
 
%
 
Noninterest income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Service charges, fees and other
 
$
4,852
 
 
$
4,072
 
 
$
2,679
 
 
$
780
 
 
 
19.2
%
 
 
1,393
 
 
 
52.0
%
Gain on sale of loans
 
 
5,997
 
 
 
9,893
 
 
 
7,126
 
 
 
(3,896
)
 
 
-39.4
%
 
 
2,767
 
 
 
38.8
%
Loan servicing fee, net of amortization
 
 
2,052
 
 
 
3,383
 
 
 
850
 
 
 
(1,331
)
 
 
-39.3
%
 
 
2,533
 
 
 
298.0
%
Recoveries on loans acquired in business combinations
 
 
84
 
 
 
143
 
 
 
1,385
 
 
 
(59
)
 
 
-41.3
%
 
 
(1,242
)
 
 
-89.7
%
Unrealized gain on equity investments
 
 
—
 
 
 
147
 
 
 
—
 
 
 
(147
)
 
 
-100.0
%
 
 
147
 
 
 
100.0
%
Gain on derivatives
 
 
78
 
 
 
—
 
 
 
—
 
 
 
78
 
 
 
100.0
%
 
 
—
 
 
 
100.0
%
Increase in cash surrender of bank owned life insurance
 
 
767
 
 
 
775
 
 
 
797
 
 
 
(8
)
 
 
-1.0
%
 
 
(22
)
 
 
-2.8
%
Gain on sale of securities
 
 
210
 
 
 
7
 
 
 
5
 
 
 
203
 
 
 
2900.0
%
 
 
2
 
 
 
40.0
%
Loss on sale of OREO
 
 
—
 
 
 
(106
)
 
 
—
 
 
 
106
 
 
 
100.0
%
 
 
(106
)
 
 
-100.0
%
Gain on sale of fixed assets
 
 
—
 
 
 
6
 
 
 
—
 
 
 
(6
)
 
 
-100.0
%
 
 
6
 
 
 
100.0
%
Total noninterest income
 
$
14,040
 
 
$
18,320
 
 
$
12,842
 
 
$
(4,280
)
 
 
-23.4
%
 
$
5,478
 
 
 
42.7
%
 
Service charges, fees and others. The increase in noninterest income from service charges, fees and other income was primarily from service charges on the additional transactional deposit accounts originated organically and acquired in the PGBH acquisition in 2020.  In 2020, the income from interest rate lock commitments ("IRLCs") was $182,000 and was recorded as service charges, fees and other.  The income from forward mortgage loan sales commitments ("FMLSCs") was $78,000 and is reported in the income statement.  There was no IRLC and FMLSC income in 2019.
 
Gain on sale of loans . The gain on sales of loans decreased $3.9 million due primarily to the decrease of $2.9 million in SFR mortgage loans sold and a $788,000 decrease in premiums received on SBA loans sold.  Decreases in gain on sales of loans were due to decreases of $15.1 million on SBA loans sold and $288.3 million on mortgage loans held for sale.   The decrease in the mortgage loan sales is attributable to the change in market conditions in the secondary market primarily caused by COVID-19.
 
 
 
Years Ended December 31,
 
 
2020 vs. 2019 Increase (Decrease)
 
 
2019 vs. 2018 Increase (Decrease)
 
(dollars in thousands)
 
2020
 
 
2019
 
 
2018
 
 
$
 
 
%
 
 
$
 
 
%
 
Loans sold:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
SBA
 
$
13,733
 
 
$
28,803
 
 
$
66,700
 
 
$
(15,070
)
 
 
-52.3
%
 
$
(37,897
)
 
 
-56.8
%
Single family residential mortgage
 
 
184,220
 
 
 
472,477
 
 
 
236,202
 
 
 
(288,257
)
 
 
-61.0
%
 
 
236,275
 
 
 
100.0
%
Commercial real estate
 
 
—
 
 
 
10,422
 
 
 
—
 
 
 
(10,422
)
 
 
-100.0
%
 
 
10,422
 
 
 
100.0
%
 
 
$
197,953
 
 
$
511,702
 
 
$
302,902
 
 
$
(313,749
)
 
 
-61.3
%
 
$
208,800
 
 
 
68.9
%
Gain on loans sold:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
SBA
 
$
754
 
 
$
1,542
 
 
$
2,847
 
 
$
(788
)
 
 
-51.1
%
 
$
(1,305
)
 
 
-45.8
%
Single family residential mortgage
 
 
5,243
 
 
 
8,199
 
 
 
4,279
 
 
 
(2,956
)
 
 
-36.1
%
 
 
3,920
 
 
 
91.6
%
Commercial real estate
 
 
—
 
 
 
152
 
 
 
—
 
 
 
(152
)
 
 
-100.0
%
 
 
152
 
 
 
100.0
%
 
 
$
5,997
 
 
$
9,893
 
 
$
7,126
 
 
$
(3,896
)
 
 
-39.4
%
 
$
2,767
 
 
 
38.8
%
 
54
 
 
Loan servicing income, net of amortization. Servicing income decreased due to increased loan pre-payments in the SFR loans serviced causing a decrease in the volume of mortgage loans we are servicing. SBA loan servicing income increased due to a decline in SBA pre-payments.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2020 vs. 2019 Increase (Decrease)
 
 
2019 vs. 2018 Increase (Decrease)
 
For the year, dollars in thousands
 
2020
 
 
2019
 
 
2018
 
 
$
 
 
%
 
 
$
 
 
%
 
Loan servicing income, net of amortization:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
SFR loans serviced
 
$
1,440
 
 
$
2,981
 
 
$
966
 
 
$
(1,541
)
 
 
-51.7
%
 
$
2,015
 
 
 
208.6
%
SBA loans serviced
 
 
612
 
 
 
402
 
 
 
(116
)
 
 
210
 
 
 
-52.2
%
 
 
518
 
 
 
-446.6
%
Total
 
$
2,052
 
 
$
3,383
 
 
$
850
 
 
$
(1,331
)
 
 
-39.3
%
 
$
2,533
 
 
 
298.0
%
As of year-end, dollars in thousands
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
SFR loans serviced
 
$
1,512,969
 
 
$
1,683,298
 
 
$
1,586,499
 
 
$
(170,329
)
 
 
-10.1
%
 
$
96,799
 
 
 
6.1
%
SBA loans serviced
 
 
156,222
 
 
 
170,849
 
 
 
184,664
 
 
 
(14,627
)
 
 
-8.6
%
 
 
(13,815
)
 
 
-7.5
%
Total
 
$
1,669,191
 
 
$
1,854,147
 
 
$
1,771,163
 
 
$
(184,956
)
 
 
-10.0
%
 
$
82,984
 
 
 
4.7
%
 
Recoveries on loans acquired in business combinations. Recoveries on loans acquired in business combinations decreased by $59,000 to $84,000 in 2020 compared to $143,000 in 2019. 
 
Gain on derivatives.  Due to the amount of loans that were committed to be delivered to FNMA at year-end, we recorded a derivative which resulted in a gain of $78,000 in 2020.
 
Cash surrender value income of bank owned life insurance. Cash surrender value income of bank owned life insurance (“BOLI”) decreased $8,000 due to slightly lower rates.
 
Gain on sales of securities, net. Gain on sales of securities, net was $210,000 in 2020 from the sale of $11.7 million securities. 
 
Loss on Sale of OREO. In 2020, there were no sales of OREO. A $106,000 loss on sale of OREO was recognized in 2019 from the sale of two OREO properties.
 
55
 
 
Noninterest Expense
 
Noninterest expense increased $2.0 million, or 3.5%, to $59.5 million in 2020 from $57.5 million in 2019. The following table sets forth the major components of our noninterest expense for the years ended December 31, 2020, 2019 and 2018:
 
 
 
Years Ended December 31,
 
 
2020 vs. 2019 Increase (decrease)
 
 
2019 vs. 2018 Increase (decrease)
 
(dollars in thousands)
 
2020
 
 
2019
 
 
2018
 
 
 
 
 
$%
 
 
 
 
 
$%
 
Noninterest expense:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Salaries and employee benefits
 
$
33,312
 
 
$
32,909
 
 
$
23,254
 
 
$
403
 
 
 
1.2
%
 
$
9,655
 
 
 
41.5
%
Occupancy and equipment expenses
 
 
9,691
 
 
 
9,750
 
 
 
4,554
 
 
 
(59
)
 
 
-0.6
%
 
 
5,196
 
 
 
114.1
%
Data processing
 
 
4,236
 
 
 
3,699
 
 
 
2,323
 
 
 
537
 
 
 
14.5
%
 
 
1,376
 
 
 
59.2
%
Legal and professional
 
 
2,743
 
 
 
1,832
 
 
 
1,714
 
 
 
911
 
 
 
49.7
%
 
 
118
 
 
 
6.9
%
Office expenses
 
 
1,226
 
 
 
1,257
 
 
 
890
 
 
 
(31
)
 
 
-2.5
%
 
 
367
 
 
 
41.2
%
Marketing and business promotion
 
 
751
 
 
 
1,308
 
 
 
1,143
 
 
 
(557
)
 
 
-42.6
%
 
 
165
 
 
 
14.4
%
Insurance and regulatory assessments
 
 
984
 
 
 
900
 
 
 
951
 
 
 
84
 
 
 
9.3
%
 
 
(51
)
 
 
-5.4
%
Amortization of intangibles
 
 
1,395
 
 
 
1,501
 
 
 
575
 
 
 
(106
)
 
 
-7.1
%
 
 
926
 
 
 
161.0
%
OREO expenses
 
 
35
 
 
 
337
 
 
 
24
 
 
 
(302
)
 
 
-89.6
%
 
 
313
 
 
 
1304.2
%
Merger expenses
 
 
746
 
 
 
471
 
 
 
1,658
 
 
 
275
 
 
 
58.4
%
 
 
(1,187
)
 
 
-71.6
%
Other expenses
 
 
4,394
 
 
 
3,509
 
 
 
3,551
 
 
 
885
 
 
 
25.2
%
 
 
(42
)
 
 
-1.2
%
Total noninterest expense
 
$
59,513
 
 
$
57,473
 
 
$
40,637
 
 
$
2,040
 
 
 
3.5
%
 
$
16,836
 
 
 
41.4
%
 
Salaries and employee benefits. Salaries and employee benefits expense increased $403,000 due to severance pay to terminated employees in connection with the PGBH merger. The number of full-time equivalent employees were 366 in 2020, 355 in 2019 and 365 in 2018. None of our employees are represented by a labor union, or governed by any collective bargaining agreements. We consider relations with our employees to be satisfactory. On a periodic basis, the human resources department will advise senior management of the following human capital management metrics: (1) open positions, (2) overtime expense, (3) staff turnover, and (4) employee headcount.
 
Occupancy and equipment. Occupancy and equipment expense decreased $59,000 from 2019 to 2020 mainly due t o closing three branches in 2020, partially  offset by the addition of three branches in Chicago (one leased and two owned)  and opening one branch in Edison, New Jersey. 
 
Data processing. Data processing expense increased $537,000 in 2020. This increase was primarily due to upgrading our infrastructure and also reflected the impact of increased processing costs incurred subsequent to the PGBH acquisition. Effective June 2019, the Company renegotiated its data processing master agreement with its vendor, under which the Company is allowed to offset future monthly data processing expenses up to approximately $2.2 million through January 2026. As of December 31, 2020, this offset benefit amounted to $ 1.6  million to be recognized through January 2026. Conversion expense associated with the PGBH and FAIC acquisitions is in the “other expenses” line item.
 
Legal and professional. Legal and professional expense increased $911,000 in 2020 due to increases in problem loan collection expenses, and commission expense recognized in connection with the purchase of a new branch location. 
 
56
 
 
Office expenses. Office expenses comprised of communications, postage, armored car, and office supplies, decreased by $31,000 in 2020. The decrease was primarily due to cost saving implemented in 2020 (following the acquisition of PGBH in January).
 
Marketing and business promotion. Marketing and business promotion expense decreased $557,000. In 2020, marketing and promotion activity decreased due to COVID-19 pandemic. 
 
Insurance and regulatory assessments. Insurance and regulatory assessments expense increased by $84,000 to $984,000 in 2020 compared to $900,000 in 2019, following the PGBH acquisition in 2020. The FDIC insurance assessment was $455,000 in 2020 and $386,000 in 2019, an increase of $69,000. The California DFPI regulatory assessment increased by $14,000 from $149,000 for the year 2019 to $163,000 for year 2020.  The corporate insurance expenses (including directors and officers insurance and fidelity bond), was $363,000 for 2020 compared to $360,000 for 2019.
 
Amortization of intangibles. Amortization of intangibles totaled $1.4 million in 2020 as compared to $1.5 million for 2019. The decrease was due to continued amortization of the core deposit intangible asset, following the additional core deposit intangible asset of $491,000 recognized in connection with the PGBH acquisition.
 
OREO expenses. OREO expenses were $35,000 in 2020 and $337,000 in 2019. The $302,000 decrease was due to payments made for delinquent property taxes and construction costs during the year ended 2019.
 
Merger expenses. Merger expenses were $746,000 in 2020 compared to $471,000 in 2019. The 2019 expense includes $104,000 with respect to the PGBH acquisition which closed in January 2020.
 
Other noninterest expenses. Other expenses increased by $885,000 from 2019, primarily due to the provision for credit losses associated with unfunded commitments as of the balance sheet date of $558,000 in 2020 compared to $137,000 in 2019. The off-balance sheet liabilities are letters of credit and other commitments to lend. The provision for off-balance sheet liabilities is a function of the volume of undisbursed loans and other loan commitments multiplied by a risk factor. Other expense increases included a $417,000 increase in mortgage servicing rights impairment due to write-downs reflecting the decline in market rates of interest.
 
Income Tax Expense
 
Income tax expense was $14.5 million in 2020 compared to $16.1 million in 2019, a decrease of $1.6 million or 9.8%. The effective tax rate for 2020 was 30.6% and 29.2% for 2019. Income tax expense for 2020 included a $26,000 benefit for stock options exercised and a $78,000 benefit for 2019.
 
Net Income
 
Net income decreased $6.3 million to $32.9 million in 2020, compared to $39.2 million in 2019.  The decrease is primarily due to a decrease in net interest income of $1.5 million, a decrease in non-interest income of $4.3 million, a $2.0 million increase in non-interest expense and a $9.4 million increase in the credit loss provision, partially offset by a $10.5 million decrease in interest expense.
 
 
Results of Operations—Comparison of Results of Operations for the Years Ended December 31, 2019 to December 31, 2018
 
Net Interest Income/Average Balance Sheet
 
In 2019, we generated fully-taxable equivalent net interest income of $96.9 million, an increase of $18.4 million, or 23.4%, from the net interest income produced in 2018. This increase was largely due to a 39.9% increase in the average balance of interest-earning assets, mainly due to the FAIC acquisition, partially offset by a 49 basis point decrease in the net interest margin. For the years ended December 31, 2019 and 2018 our reported net interest margin was 3.63% and 4.12%, respectively. Our net interest margin benefits from discount accretion on our purchased loan portfolios. The impact of accretion income on our net interest margin for the years ended December 31, 2019 and 2018 was to increase our reported net interest margin by 0.11%, and 0.13%, respectively.
 
57
 
 
Interest Income . Total interest income was $141.7 million in 2019 compared to $102.1 million in 2018. The $39.6 million, or 38.8%, increase in total interest income was mainly due to increases in average total loan balances of $689.2 million partially offset by a 3 basis point decrease in average loan yield. This increase was augmented by higher Federal funds, cash equivalent and other balances resulting in $1.6 million in additional interest income, and $300,000 from an $11.1 million increase in average investment securities, partially offset by a 2 basis point decrease in the average yield on investment securities during the year ended 2019.
 
Interest and fees on loans was $135.2 million in 2019 compared to $97.5 million in 2018. The $37.7 million, or 38.7%, increase in interest income on loans was primarily due to a 39.4% increase in the average balance of held for investment and held for sale loans outstanding partially offset by a 3 basis point decrease in the average yield on loans. The increase in the average balance of loans outstanding was primarily due to the FAIC acquisition in late 2018 plus organic growth in CRE and SFR mortgage loans during 2019. The yield on the loan portfolio benefited from accretion income associated with purchase accounting discounts established on loans acquired in the FAIC acquisition. For the years ended December 31, 2019 and 2018, the reported yield on total loans was 5.54% and 5.57%, respectively. The impact of accretion income on our yield on total loans for the years ended December 31, 2019 and 2018 was to increase our reported yield on total loans by 0.11% and 0.13%, respectively. A substantial portion of our acquired loan portfolio that is subject to discount accretion consists of CRE loans and SFR mortgages.
 
Interest income from our securities portfolio increased $300,000, or 12.6%, to $2.7 million in 2019. The increase in interest income on securities was primarily due to an increased average balance of $11.1 million, or 13.3%, partially offset by a 2 basis point decrease in the average yield of securities.
 
Interest income on our federal funds sold, cash equivalents and other investments increased $1.6 million, or 71.4%, to $3.9 million in 2019. The increase in interest income on these earning assets was primarily due to an increase in the average balance of $61.1 million partially offset by an 18 basis point decrease in average yield of cash equivalents. The increase in the average balance resulted from pending utilization of these funds to higher yielding loans and securities.
 
Interest Expense. Interest expense on interest-bearing liabilities increased $21.2 million, or 89.7%, to $44.9 million in 2019 due to increases in interest expense on both deposits and borrowings.
 
Interest expense on total deposits increased to $34.2 million in 2019. The $17.3 million, or 101.9%, increase in interest expense on total deposits was primarily due to the average balance of deposits increasing 43.6% in addition to a 45 basis point increase in the average rate paid. The increase in the average balance of deposits resulted primarily from the FAIC acquisition in late 2018, organic growth in 2019 and a $100.7 million increase in average brokered deposits.
 
Interest expense on borrowings increased from $6.7 million in 2018 to $10.6 million or 58.9% in 2019. This increase reflected increased interest expense on subordinated notes, subordinated debentures, and other borrowed funds consisting of FHLB short-term advances of less than 90-days. The increase in interest expense on long-term debt and subordinated notes of $3.6 million was due to the issuance of $55.0 million of subordinated notes in November 2018. The increase in interest expense on FHLB advances (other borrowed funds) of $324,000, from $2.6 million in 2018 to $2.9 million in 2019 was due to a 49 basis point increase in the average rate partially offset by a $10.6 million decrease in the average FHLB advances. These FHLB advances were utilized to fund SFR mortgage loans that were originated and held for sale during the year.
 
58
 
 
Provision for Credit Losses
 
The provision for credit loss expense in 2019 was $2.4 million compared to $4.5 million in 2018. The decrease in the 2019 provision expense was primarily attributable to a decrease in our concentration levels of commercial real estate and single-family residential mortgage loans. While non-performing loans increased during the year, they were individually analyzed without a net addition to the allowance for loan losses.
 
Noninterest Income
 
Noninterest income increased $5.5 million, or 42.7%, to $18.3 million in 2019 from $12.8 million in 2018. 
 
Service charges, fees and others. The increase in noninterest income from service charges, fees and other income was primarily from service charges on the additional transactional deposit accounts acquired in the FAIC acquisition.
 
59
 
 
Gain on sale of loans . The gain on sales of loans increased $2.8 million due primarily to the increase of $241.7 million in SFR mortgage loans sold offset by a $37.9 million decrease in SBA loans sold and a decrease in premiums paid on SFR mortgage loans sold in the first half of 2019. The lower premiums on mortgage loans is due to increased 10-year Treasury rates in the first half of 2019 and changes in market conditions. 
 
Loan servicing income, net of amortization. Servicing income increased due to an increase in the volume of mortgage loans we are servicing. SBA loan servicing income also increased due to a decline in SBA pre-payments. 
 
Recoveries on loans acquired in business combination s . Recoveries on loans acquired in business combinations decreased by $1.2 million to $143,000 in 2019 compared to $1.4 million in 2018. The decrease in 2019 was due to a recovery on one VCBB loan purchased that occurred in 2018.
 
Unrealized gain on equity investments. The $147,000 represents the amount of unrealized gains in equity position the Company has with bankers’ banks and as of a result of implementing ASU 2016-01.
 
Cash surrender value income of bank owned life insurance. Cash surrender value income of BOLI decreased $22,000 due to slightly lower rates.
 
Gain on sales of securities, net. Gain on sales of securities, net was $7,000 in 2019. In 2019, the Company sold $6.1 million securities. In late 2018, the Company sold $44.6 million in securities mainly from the FAIC investment portfolio, which were sold immediately after the purchase of FAIC to limit any gains or losses.
 
L oss  on Sale of OREO. A $106,000 loss on sale of OREO was recognized in 2019 from the sale of two OREO properties. There were no OREO sales during 2018.
 
Noninterest Expense
 
Noninterest expense increased $16.8 million, or 41.4%, to $57.5 million in 2019 from $40.6 million in 2018.
 
60
 
 
Salaries and employee benefits. Salaries and employee benefits expense increased $9.7 million. The number of full-time equivalent employees averaged 355 in 2019, 365 in 2018 and 186 in 2017. This increase was primarily due to additional staff and expenses from the FAIC acquisition, plus annual salary increases and increased benefit costs of $1.4 million.
 
Occupancy and equipment. Occupancy and equipment expense increased $5.2 million in 2019 mainly due to the addition of the eight branches in the New York region including the depreciation, real estate taxes, utilities, ongoing maintenance and lease obligations associated with the branch and office facilities we added as a result. These expenses were higher as a result of the FAIC acquisition. During 2018, we recognized additional rent expense of $280,000 due to building out our new headquarters location. On October 15, 2018, we opened a new branch in Irvine, California. In 2019 we opened one new branch in Queens, New York and closed one branch and administration center in Manhattan, New York.
 
Data processing. Data processing expense increased $1.4 million in 2019. This increase was primarily due to upgrading our infrastructure and also reflected the impact of increased processing costs incurred subsequent to the 2018 FAIC acquisition of approximately $350,000. Effective June 2019, the Company renegotiated its data processing master agreement with the vendor, under which the Company is allowed to offset future monthly data processing expenses up to approximately $2.2 million through January 2026. Conversion expense associated with the FAIC acquisition is in the “other expenses” line item.
 
Legal and professional. Legal and professional expense increased $118,000 in 2019. This increase in 2019 is due to increased auditing and internal control testing fees as the Company grew. In 2018, our legal and professional fees increased substantially due to going public in 2017 and the increased accounting and control audits as well as the cost of the accounting work associated with the FAIC acquisition.
 
Office expenses. Office expenses comprised of communications, postage, armored car, and office supplies, increased by $367,000 in 2019. The increase was primarily due to the addition of the locations in the New York region for a full year and to normal business activity.
 
Marketing and business promotion. Marketing and business promotion expense increased $165,000, primarily due to our increase in CRA activities, including increased donations to qualifying non-profit organizations, plus beginning stages of promoting the Company’s presence in the New York City metropolitan area following the FAIC acquisition.
 
Insurance and regulatory assessments. Insurance and regulatory assessments expense decreased by $51,000 to $900,000 in 2019 compared to $951,000 in 2018, following the FAIC acquisition in 2018. Our FDIC insurance assessment was $386,000 in 2019 and $561,000 in 2018, a decrease of $175,000. Our California DFPI regulatory assessment increased by $17,000 from $131,000 for the year ended 2018 to $149,000 for year ended 2019. Our corporate insurance expenses (including directors and officers insurance and fidelity bond), was $360,000 for 2019 compared to $258,000 for 2018.
 
Amortization of intangibles. Amortization of intangibles totaled $1.5 million in 2019 as compared to $575,000 for 2018. The increase was due to the additional core deposit intangible asset of $6.7 million from the FAIC acquisition less continued amortization of the core deposit intangible asset associated with the acquisitions of FAIC and TomatoBank.
 
OREO expenses. OREO expenses were $337,000 in 2019 and $24,000 in 2018. The $313,000 increase was due to payments made for delinquent property taxes and construction costs incurred during the year ended 2019.
 
Merger expenses. Merger expenses were $471,000 in 2019 compared to $1.7 million in 2018, following the October 2018 FAIC acquisition. The 2019 expense includes $104,000 with respect to the PGB acquisition which closed in January 2020.
 
Other noninterest expenses. Other expenses decreased by $42,000 from 2018, primarily due to the provision for credit losses associated with unfunded commitments as of the balance sheet date of $137,000 in 2019 compared to $406,000 in 2018. The off-balance sheet liabilities are comprised of loans, letters of credit and other commitments to lend. The provision for off-balance sheet liabilities is a function of the volume of undisbursed loans and other loan commitments multiplied by a risk factor. Other expense increases included a $204,000 increase in loan expenses and $249,000 decrease in director’s fees and expenses.
 
Income Tax Expense
 
Income tax expense was $16.1 million in 2019 compared to $10.1 million in 2018, an increase of $6.0 million or 59.5%. The effective tax rate for 2019 was 29.2% and 21.8% for 2018. Income tax expense for 2019 included a $78,000 benefit for stock options exercised and $3.9 million benefit for 2018. The estimated annual effective tax rate will vary depending upon tax-advantaged income, stock option exercises, and available tax credits.
 
61
 
 
Net Income
 
Net income increased $3.1 million to $39.2 million in 2019, compared to $36.1 million in 2018. The increase is primarily due to an increase in net interest income of $18.4 million due to the growth in earning assets as a result of the FAIC acquisition in late 2018, organic loan growth, an increase in non-interest income of $5.5 million and a $2.1 million decrease in the credit loss provision partially offset by a $16.8 million increase in non-interest expense.
 
ANALYSIS OF FINANCIAL CONDITION
 
Assets
 
Total assets were $3.4 billion as of December 31, 2020 and $2.8 billion as of December 31, 2019. We increased our loans held for investment by $509.8 million.  This increase included $173.1 million from the PGBH acquisition and $336.7 million from loan growth. Organic loan growth increased mainly in single family residential loans and commercial real estate mortgages. Our mortgage loans held for sale decreased by $58.2 million in 2020. The increase in assets was funded by an increase in deposits of $386.2 million (including $188.4 million in deposits from the PGBH acquisition), $150.0 million in a long-term FHLB borrowing, and a $20.8 million increase in equity (primarily resulting from $32.9 million in net income, less $7.9 million in repurchase of common stock and $6.6 million in dividends paid).
 
Investment Securities. We manage our securities portfolio and cash to maintain adequate liquidity and to ensure the safety and preservation of invested principal, with a secondary focus on yield and returns. Specific goals of our investment portfolio are as follows:
 
 
●
provide a ready source of balance sheet liquidity, ensuring adequate availability of funds to meet fluctuations in loan demand, deposit balances and other changes in balance sheet volumes and composition;
 
 
●
serve as a means for diversification of our assets with respect to credit quality, maturity and other attributes; and
 
 
●
serve as a tool for modifying our interest rate risk profile pursuant to our established policies.
 
Our investment portfolio is comprised primarily of U.S. government agency securities, corporate note securities, mortgage-backed securities backed by government-sponsored entities and taxable and tax exempt municipal securities.
 
Our investment policy is reviewed annually by our board of directors. Overall investment goals are established by our board, CEO, CFO and members of our Asset Liability Committee (“ALCO”) of our board of directors. Our board of directors has delegated the responsibility of monitoring our investment activities to our ALCO. Day-to-day activities pertaining to the securities portfolio are conducted under the supervision of our CEO and CFO. We actively monitor our investments on an ongoing basis to identify any material changes in the securities. We also review our securities for potential other-than-temporary impairment at least quarterly.
 
62
 
 
The following table sets forth the book value and percentage of each category of securities at December 31, 2020, 2019 and 2018. The book value for securities classified as available for sale is equal to fair market value and the book value for securities classified as held to maturity is equal to amortized cost.
 
 
 
December 31, 2020
 
 
December 31, 2019
 
 
December 31, 2018
 
 
 
 
 
 
 
% of
 
 
 
 
 
 
% of
 
 
 
 
 
 
% of
 
(dollars in thousands)
 
Amount
 
 
Total
 
 
Amount
 
 
Total
 
 
Amount
 
 
Total
 
Securities, available for sale, at fair value
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Government agency securities
 
$
1,294
 
 
 
0.6
%
 
$
1,572
 
 
 
1.2
%
 
$
1,815
 
 
 
2.2
%
SBA agency securities
 
 
4,394
 
 
 
2.0
%
 
 
4,691
 
 
 
3.5
%
 
 
5,169
 
 
 
6.2
%
Mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Government sponsored agencies
 
 
17,677
 
 
 
8.1
%
 
 
19,171
 
 
 
14.3
%
 
 
22,541
 
 
 
26.9
%
Collateralized mortgage obligations
 
 
48,874
 
 
 
22.4
%
 
 
11,654
 
 
 
8.7
%
 
 
12,066
 
 
 
14.4
%
Commercial paper
 
 
102,448
 
 
 
47.0
%
 
 
69,899
 
 
 
51.9
%
 
 
14,918
 
 
 
17.8
%
Corporate debt securities (1)
 
 
34,563
 
 
 
15.9
%
 
 
19,082
 
 
 
14.2
%
 
 
17,253
 
 
 
20.6
%
Municipal securities
 
 
1,617
 
 
 
0.7
%
 
 
—
 
 
 
0.0
%
 
 
—
 
 
 
0.0
%
Total securities, available for sale, at fair value
 
$
210,867
 
 
 
96.7
%
 
$
126,069
 
 
 
93.8
%
 
$
73,762
 
 
 
88.1
%
Securities, held to maturity, at amortized cost
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Taxable municipal securities
 
$
2,407
 
 
 
1.1
%
 
$
3,505
 
 
 
2.6
%
 
$
4,290
 
 
 
5.1
%
Tax-exempt municipal securities
 
 
4,767
 
 
 
2.2
%
 
 
4,827
 
 
 
3.6
%
 
 
5,671
 
 
 
6.8
%
Total securities, held to maturity, at amortized cost
 
 
7,174
 
 
 
3.3
%
 
 
8,332
 
 
 
6.2
%
 
 
9,961
 
 
 
11.9
%
Total securities
 
$
218,041
 
 
 
100.0
%
 
$
134,401
 
 
 
100.0
%
 
$
83,723
 
 
 
100.0
%
 
 
(1)
Comprised of corporate debt securities and financial institution subordinated debentures
 
63
 
 
The tables below set forth investment securities AFS and HTM for the periods presented.
 
(dollars in thousands)
 
Amortized
 
 
Unrealized
 
 
Unrealized
 
 
Fair
 
December 31, 2020
 
Cost
 
 
Gains
 
 
Losses
 
 
Value
 
Available for sale
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Government agency securities
 
$
1,257
 
 
$
37
 
 
$
—
 
 
$
1,294
 
SBA agency securities
 
 
4,125
 
 
 
269
 
 
 
—
 
 
 
4,394
 
Mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Government sponsored agencies
 
 
17,415
 
 
 
270
 
 
 
(8
)
 
 
17,677
 
Collateralized mortgage obligations
 
 
48,476
 
 
 
491
 
 
 
(93
)
 
 
48,874
 
Commercial paper
 
 
102,462
 
 
 
—
 
 
 
(14
)
 
 
102,448
 
Corporate debt securities
 
 
33,907
 
 
 
662
 
 
 
(6
)
 
 
34,563
 
Municipal securities
 
 
1,621
 
 
 
2
 
 
 
(6
)
 
 
1,617
 
 
 
$
209,263
 
 
$
1,731
 
 
$
(127
)
 
$
210,867
 
Held to maturity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Municipal taxable securities
 
 
2,407
 
 
$
139
 
 
$
—
 
 
$
2,546
 
Municipal securities
 
 
4,767
 
 
 
290
 
 
 
—
 
 
 
5,057
 
 
 
$
7,174
 
 
$
429
 
 
$
—
 
 
$
7,603
 
December 31, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available for sale
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Government agency securities
 
$
1,591
 
 
$
—
 
 
$
(19
)
 
$
1,572
 
SBA securities
 
 
4,671
 
 
 
42
 
 
 
(22
)
 
 
4,691
 
Mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Government sponsored agencies
 
 
19,126
 
 
 
74
 
 
 
(29
)
 
 
19,171
 
Collateralized mortgage obligations
 
 
11,641
 
 
 
38
 
 
 
(25
)
 
 
11,654
 
Commercial paper
 
 
69,899
 
 
 
—
 
 
 
—
 
 
 
69,899
 
Corporate debt securities
 
 
18,801
 
 
 
281
 
 
 
—
 
 
 
19,082
 
 
 
$
125,729
 
 
$
435
 
 
$
(95
)
 
$
126,069
 
Held to maturity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Municipal taxable securities
 
$
3,505
 
 
$
147
 
 
$
—
 
 
$
3,652
 
Municipal securities
 
 
4,827
 
 
 
153
 
 
 
—
 
 
 
4,980
 
 
 
$
8,332
 
 
$
300
 
 
$
—
 
 
$
8,632
 
 
The weighted-average yield on the total investment portfolio at December 31, 2020 was 1.14% with a weighted-average life of 3.3 years. This compares to a weighted-average yield of 2.41% at December 31, 2019 with a weighted-average life of 3.2 years. The weighted average life is the average number of years that each dollar of unpaid principal due remains outstanding. Average life is computed as the weighted-average time to the receipt of all future cash flows, using as the weights the dollar amounts of the principal pay-downs.
 
Approximately 10.7% of the securities in the total investment portfolio at December 31, 2020, are issued by the U.S. government or U.S. government-sponsored agencies and enterprises, which have the implied guarantee of payment of principal and interest. As of December 31, 2020, no U.S. government agency bonds are callable.
 
64
 
 
The table below shows the Company’s investment securities’ amortized cost and fair value by maturity in the following maturity groupings as of December 31, 2020.
 
 
 
Less than One Year
 
 
More than One Year to Five Years
 
 
More than Five Years to Ten Years
 
 
More than Ten Years
 
 
Total
 
 
 
Amortized
 
 
Estimated
 
 
Amortized
 
 
Estimated
 
 
Amortized
 
 
Estimated
 
 
Amortized
 
 
Estimated
 
 
Amortized
 
 
Estimated
 
(dollars in thousands)
 
Cost
 
 
Fair Value
 
 
Cost
 
 
Fair Value
 
 
Cost
 
 
Fair Value
 
 
Cost
 
 
Fair Value
 
 
Cost
 
 
Fair Value
 
December 31, 2020
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Government agency securities
 
$
—
 
 
$
—
 
 
$
1,257
 
 
$
1,294
 
 
$
—
 
 
$
—
 
 
$
—
 
 
$
—
 
 
$
1,257
 
 
$
1,294
 
SBA securities
 
 
—
 
 
 
—
 
 
 
595
 
 
 
625
 
 
 
3,530
 
 
 
3,769
 
 
 
—
 
 
 
—
 
 
 
4,125
 
 
 
4,394
 
Mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Government sponsored agencies
 
 
7,992
 
 
 
7,987
 
 
 
9,423
 
 
 
9,690
 
 
 
—
 
 
 
—
 
 
 
—
 
 
 
—
 
 
 
17,415
 
 
 
17,677
 
Collateralized mortgage obligations
 
 
—
 
 
 
—
 
 
 
11,911
 
 
 
12,258
 
 
 
36,565
 
 
 
36,616
 
 
 
—
 
 
 
—
 
 
 
48,476
 
 
 
48,874
 
Commercial paper
 
 
102,462
 
 
 
102,448
 
 
 
—
 
 
 
—
 
 
 
—
 
 
 
—
 
 
 
—
 
 
 
—
 
 
 
102,462
 
 
 
102,448
 
Corporate debt securities
 
 
4,991
 
 
 
5,029
 
 
 
11,683
 
 
 
11,740
 
 
 
13,233
 
 
 
13,743
 
 
 
4,000
 
 
 
4,051
 
 
 
33,907
 
 
 
34,563
 
Municipal securities
 
 
—
 
 
 
—
 
 
 
—
 
 
 
—
 
 
 
—
 
 
 
—
 
 
 
1,621
 
 
 
1,617
 
 
 
1,621
 
 
 
1,617
 
Total available for sale
 
$
115,445
 
 
$
115,464
 
 
$
34,869
 
 
$
35,607
 
 
$
53,328
 
 
$
54,128
 
 
$
5,621
 
 
$
5,668
 
 
$
209,263
 
 
$
210,867
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Municipal taxable securities
 
$
899
 
 
$
910
 
 
$
1,508
 
 
$
1,636
 
 
$
—
 
 
$
—
 
 
$
—
 
 
$
—
 
 
$
2,407
 
 
$
2,546
 
Municipal securities
 
 
—
 
 
 
—
 
 
 
—
 
 
 
—
&
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.