Item 5. Market for Registrant’s Common Equity
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
 
 
—
 
 
 
—
 
 
 
—
 
 
 
—
 
 
 
874
 
 
 
925
 
 
 
3,893
 
 
 
4,132
 
 
 
4,767
 
 
 
5,057
 
Total held to maturity
 
$
899
 
 
$
910
 
 
$
1,508
 
 
$
1,636
 
 
$
874
 
 
$
925
 
 
$
3,893
 
 
$
4,132
 
 
$
7,174
 
 
$
7,603
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
65
 
 
The tables below show the Company’s investment securities’ gross unrealized losses and fair value by investment category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2020 and December 31, 2019. The unrealized losses on these securities were primarily attributed to changes in interest rates. The issuers of these securities have not, to our knowledge, evidenced any cause for default on these securities. These securities have fluctuated in value since their purchase dates as market interest rates have fluctuated. However, we have the ability and the intention to hold these securities until their fair values recover to cost or maturity. As such, management does not deem these securities to be other-than-temporarily-impaired A summary of our analysis of these securities and the unrealized losses is described more fully in Note 4 — Investment Securities in the notes to the 2020 consolidated financial statements included in the Form 10-K. Economic trends may adversely affect the value of the portfolio of investment securities that we hold.
 
 
 
Less than Twelve Months
 
 
Twelve Months or More
 
 
Total
 
 
 
Unrealized
 
 
Estimated
 
 
No. of
 
 
Unrealized
 
 
Estimated
 
 
No. of
 
 
Unrealized
 
 
Estimated
 
 
No. of
 
(dollars in thousands)
 
Losses
 
 
Fair Value
 
 
Issuances
 
 
Losses
 
 
Fair Value
 
 
Issuances
 
 
Losses
 
 
Fair Value
 
 
Issuances
 
December 31, 2020
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Government sponsored agencies
 
$
(8
)
 
$
12,982
 
 
 
3
 
 
$
—
 
 
$
—
 
 
 
—
 
 
$
(8
)
 
$
12,982
 
 
 
3
 
Collateralized mortgage obligations
 
 
(93
)
 
 
28,521
 
 
 
6
 
 
 
—
 
 
 
—
 
 
 
—
 
 
 
(93
)
 
 
28,521
 
 
 
6
 
Commercial paper
 
 
(14
)
 
 
16,982
 
 
 
4
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(14
)
 
 
16,982
 
 
 
4
 
Corporate debt securities
 
 
(6
)
 
 
994
 
 
 
2
 
 
 
—
 
 
 
—
 
 
 
—
 
 
 
(6
)
 
 
994
 
 
 
2
 
Municipal securities
 
 
(6
)
 
 
1,092
 
 
 
2
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(6
)
 
 
1,092
 
 
 
2
 
Total available for sale
 
$
(127
)
 
$
60,571
 
 
 
17
 
 
$
—
 
 
$
—
 
 
 
—
 
 
$
(127
)
 
$
60,571
 
 
 
17
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Government agency securities
 
$
(19
)
 
$
1,572
 
 
 
2
 
 
$
—
 
 
$
—
 
 
 
—
 
 
$
(19
)
 
$
1,572
 
 
 
2
 
SBA securities
 
 
(22
)
 
 
1,469
 
 
 
2
 
 
 
—
 
 
 
—
 
 
 
—
 
 
 
(22
)
 
 
1,469
 
 
 
2
 
Mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Government sponsored agencies
 
 
(5
)
 
 
2,631
 
 
 
4
 
 
 
(24
)
 
 
3,912
 
 
 
6
 
 
 
(29
)
 
 
6,543
 
 
 
10
 
Collateralized mortgage obligations
 
 
(10
)
 
 
5,738
 
 
 
3
 
 
 
(15
)
 
 
953
 
 
 
2
 
 
 
(25
)
 
 
6,691
 
 
 
5
 
Total available for sale
 
$
(56
)
 
$
11,410
 
 
 
11
 
 
$
(39
)
 
$
4,865
 
 
 
8
 
 
$
(95
)
 
$
16,275
 
 
 
19
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The Company did not record any charges for other-than-temporary impairment losses for the twelve months ended December 31, 2020 and 2019.
 
The Company has no individual investment security amounting to 10% or more of shareholders’ equity.
 
Loans
 
The loan portfolio is the largest category of our earning assets. At December 31, 2020, total loans held for investment, net of ALLL, totaled $2.7 billion.
 
66
 
 
The following table presents the balance and associated percentage of each major category in our loan portfolio at December 31 for the past five years:
 
 
 
As of December 31,
 
 
 
2020
 
 
2019
 
 
2018
 
 
2017
 
 
2016
 
(dollars in thousands)
 
$
 
 
Mix %
 
 
$
 
 
Mix %
 
 
$
 
 
Mix %
 
 
$
 
 
Mix %
 
 
$
 
 
Mix %
 
Loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
 
$
290,139
 
 
 
10.7
 
 
$
274,586
 
 
 
12.5
 
 
$
304,084
 
 
 
14.2
 
 
$
280,766
 
 
 
22.5
 
 
$
203,843
 
 
 
18.4
 
SBA
 
 
97,821
 
 
 
3.6
 
 
 
74,985
 
 
 
3.4
 
 
 
84,500
 
 
 
3.9
 
 
 
131,421
 
 
 
10.5
 
 
 
158,968
 
 
 
14.3
 
Construction and land development
 
 
186,723
 
 
 
6.9
 
 
 
96,020
 
 
 
4.4
 
 
 
113,235
 
 
 
5.3
 
 
 
91,908
 
 
 
7.4
 
 
 
89,409
 
 
 
8.1
 
Commercial real estate (1)
 
 
1,003,637
 
 
 
37.1
 
 
 
793,268
 
 
 
36.1
 
 
 
758,721
 
 
 
35.4
 
 
 
496,039
 
 
 
39.7
 
 
 
501,798
 
 
 
45.2
 
Mortgage loans held for investment
 
 
1,124,357
 
 
 
41.5
 
 
 
957,254
 
 
 
43.6
 
 
 
881,249
 
 
 
41.1
 
 
 
248,940
 
 
 
19.9
 
 
 
156,428
 
 
 
14.1
 
Other loans
 
 
4,089
 
 
 
0.2
 
 
 
821
 
 
 
0.0
 
 
 
226
 
 
 
0.1
 
 
 
—
 
 
 
—
 
 
 
—
 
 
 
—
 
Total loans (2)
 
 
2,706,766
 
 
 
100.0
 
 
 
2,196,934
 
 
 
100.0
 
 
 
2,142,015
 
 
 
100.0
 
 
 
1,249,074
 
 
 
100.0
 
 
 
1,110,446
 
 
 
100.0
 
Allowance for loan losses
 
 
(29,337
)
 
 
 
 
 
 
(18,816
)
 
 
 
 
 
 
(17,577
)
 
 
 
 
 
 
(13,773
)
 
 
 
 
 
 
(14,162
)
 
 
 
 
Total loans, net
 
$
2,677,429
 
 
 
 
 
 
$
2,178,118
 
 
 
 
 
 
$
2,124,438
 
 
 
 
 
 
$
1,235,301
 
 
 
 
 
 
$
1,096,284
 
 
 
 
 
 
(1)
Includes non-farm and non-residential real estate loans, multifamily residential and 1-4 family SFR loans originated for a business purpose
(2)
Net of discounts and deferred fees and costs
 
Net loans held for investment increased $509.8 million, or 23.2%, to $2.7 billion at December 31, 2020 as compared to $2.2 billion at December 31, 2019. The increase in net loans resulted from $173.1 million loans acquired in the PGBH acquisition, and organic growth for the remaining increase in loans.
 
Commercial and industrial loans. We provide a mix of variable and fixed rate C&I loans. The loans are typically made to small- and medium-sized manufacturing, wholesale, retail and service businesses for working capital needs, business expansions and for international trade financing. C&I loans include lines of credit with a maturity of one year or less, C&I term loans with maturities of five years or less, shared national credits with maturities of five years or less, mortgage warehouse lines with a maturity of one year or less, bank subordinated debentures with a maturity of 10 years, purchased receivables with a maturity of two months or less and international trade discounts with a maturity of three months or less. Substantially all of our C&I loans are collateralized by business assets or by real estate.
 
We originate commercial and industrial lines of credit, term loans, mortgage warehouse lines and international trade discounts which totaled $290.1 million as of December 31, 2020 and $274.6 million at December 31, 2019. The interest rate on these loans are generally Wall Street Journal Prime rate based.
 
The loan to value and the rate on the underlying loans are based on the policy guidance of the Company .
 
 
67
 
 
Our trade finance unit supplies financial needs to many of our core customers including trade financing needs for many of our commercial and industrial loan customers. The unit provides international letters of credit, SWIFT, export advice, trade finance discounts and foreign exchange. Our trade finance area has a correspondent relationship with many of the largest banks in China, Taiwan, Vietnam, Hong Kong and Singapore. All of our international letters of credit, SWIFT, export advice and trade finance discounts are denominated in U.S. currency, and all foreign exchange is issued through a major bank that is also denominated in U.S. currency. As a result, we and our clients are not subject to foreign currency fluctuations, and, therefore, we do not have a need to engage in transactions designed to hedge against foreign currency fluctuations and risk.
 
Commercial and industrial loans increased $15.6 million, or 5.7%%, to $290.1 million as of December 31, 2020 compared to $274.6 million at December 31, 2019. This increase resulted primarily from a $31.5 million increase in mortgage warehouse lines, and an increase of $6.1 million in undisbursed commercial lines of credit, partially offset by a decrease in shared national credits of $6.1 million, and a $16.9 million decrease in commercial lines of credit.
 
Commercial real estate loans.   CRE loans include owner-occupied and non-occupied commercial real estate, multi-family residential and SFR loans originated for a business purpose. Except for the multi-family residential loan portfolio, the interest rate for the majority of these loans are Prime based and have a maturity of five years or less except for the SFR loans originated for a business purpose which may have a maturity of one year. The interest rate for multi-family residential loans are based on the 5 -y ear treasury, are 10 year maturity with a five year fixed rate period followed by a five year floating rate period, and have a declining prepayment penalty for the first five years. At December 31, 2020, approximately 21.86% of the CRE portfolio consisted of fixed-rate loans. Our policy maximum loan-to-value ("LTV") is 75% for CRE loans. The total CRE portfolio totaled $1.0 billion at December 31, 2020 and $793.3 million as of December 31, 2019, of which $198.8 million and $177.3 million, respectively, are secured by owner occupied properties. The multi-family residential loan portfolio totaled $346.6 million as of December 31, 2020 and $235.8 million as of December 31, 2019. The SFR loan portfolio originated for a business purpose totaled $24.0 million as of December 31, 2020 and $19.2 million as of December 31, 2019.
 
Construction & 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. These loans are typically Prime based and have maturities of less than 18 months. Our LTV policy limits are 75% for construction and land development loans. C&D loans increased $90.7 million or 94.5%, to $186.7 million at December 31, 2020 as compared to $96.0 million at December 31, 2019. This increase was primarily due to increases in residential construction loans. As of December 31, 2020 and 2019, our real estate construction loan portfolio was divided among the foregoing categories as shown in the table below.
 
 
 
As of December 31, 2020
 
 
As of December 31, 2019
 
 
Increase (Decrease)
 
(dollars in thousands)
 
$
 
 
Mix %
 
 
$
 
 
Mix %
 
 
 
 
 
$%
 
Residential construction
 
$
124,255
 
 
 
66.5
 
 
$
60,749
 
 
 
63.3
 
 
$
63,506
 
 
 
104.5
 
Commercial construction
 
 
45,540
 
 
 
24.4
 
 
 
29,871
 
 
 
31.1
 
 
 
15,669
 
 
 
52.5
 
Land development
 
 
16,928
 
 
 
9.1
 
 
 
5,400
 
 
 
5.6
 
 
 
11,528
 
 
 
213.5
 
Total construction and land development loans
 
$
186,723
 
 
 
100.0
 
 
$
96,020
 
 
 
100.0
 
 
$
90,703
 
 
 
94.5
 
 
 
SBA guaranteed loans. We are designated a Preferred Lender under the SBA Preferred Lender Program. We offer mostly SBA 7(a) variable-rate loans. We generally sell the 75% 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 secured loans mature in less than 10 years. Collateral may also include inventory, accounts receivable and equipment, and includes personal guarantees. Our unguaranteed SBA loans collateralized by real estate are monitored by collateral type and are included in our CRE Concentration Guidance.
 
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.
 
68
 
 
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. 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; $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 $10.2 million or 20.4% is located in other states.
 
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.
 
SFR real estate loans. We originate qualified SFR mortgage loans and non-qualified, alternative documentation SFR mortgage loans through correspondent relationships or through our branch network or retail channel. The loan product is a seven-year hybrid adjustable mortgage which re-prices between five or seven years to the one-year CMT plus 2.50%. The qualified SFR mortgage loans, 15-year and 30-year conforming mortgages, are originated by our branch network and are sold directly to FNMA within seven days of funding.
 
We originate these non-qualified SFR 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 relationships with us. During 2020, we originated $287.3 million of such loans through our retail channel, and $131.8 million through our wholesale and correspondent channel. We sell many of these non-qualified SFR mortgage loans to other Asian-American banks and private investors. 
 
The loans sold to other banks are sold with no representation or warranties and with a replacement feature for the first 90-days if the loan pays off early.  For SFR loans sold FNMA and to investment funds we provide limited representations and warranties and with a repurchase and premium refund for loans that become delinquent in the first 90-days or a premium refund if paid-off in the first 90-days with respect to all loans sold.  As a condition of the sale, the buyer must have the loans audited for underwriting and compliance standards.
 
During 2020, we originated $419.0 million of SFR mortgage loans and sold $184.2 million to FNMA, investment funds and other banks in our market. SFR real estate loans include home equity loans acquired in the LANB, FAIC and PGBH acquisitions. As of December 31, 2020, we had a total of $5.6 million of home equity loans.
 
SFR real estate loans held for investment, which include $5.6 million of home equity loans, increased $167.1 million, or 17.5%, to $1.1 billion as of December 31, 2020 as compared to $957.3 million as of December 31, 2019. Loans held for sale decreased $58.2 million or 53.8% to $50.0 million as of December 31, 2020 compared to $108.2 million December 31, 2019. In addition, our SFR mortgage lending unit originates mortgage warehouse lines to our correspondents. These loans are including in our commercial and industrial lending unit and totaled $78.3 million as of December 31, 2020 and $46.7 million as of December 31, 2019.
 
69
 
 
The loan maturities in the table below are based on contractual maturities as of December 31, 2020. As is customary in the banking industry, loans that meet underwriting criteria can be renewed by mutual agreement between us and the borrower. Because we are unable to estimate the extent to which our borrowers will renew their loans, the table is based on contractual maturities. As a result, the data shown below should not be viewed as an indication of future cash flows.
 
(dollars in thousands)
 
One Year or Less
 
 
After One Year to Five Years
 
 
Over Five Years
 
 
Total
 
Construction & land development
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed rate
 
$
—
 
 
$
186
 
 
$
13
 
 
$
199
 
Floating rate
 
 
109,882
 
 
 
76,565
 
 
 
77
 
 
 
186,524
 
Commercial & industrial
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed rate
 
 
11,611
 
 
 
3,750
 
 
 
1,474
 
 
 
16,835
 
Floating rate
 
 
155,869
 
 
 
97,047
 
 
 
20,388
 
 
 
273,304
 
Commercial real estate
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed rate
 
 
63,220
 
 
 
153,894
 
 
 
2,290
 
 
 
219,404
 
Floating rate
 
 
46,607
 
 
 
260,119
 
 
 
477,507
 
 
 
784,233
 
SBA
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed rate
 
 
—
 
 
 
31,258
 
 
 
—
 
 
 
31,258
 
Floating rate
 
 
10
 
 
 
2,649
 
 
 
63,904
 
 
 
66,563
 
SFR mortgage
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed rate
 
 
200
 
 
 
4,336
 
 
 
1,118,552
 
 
 
1,123,088
 
Floating rate
 
 
—
 
 
 
—
 
 
 
1,269
 
 
 
1,269
 
Other
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed rate
 
 
63
 
 
 
4,026
 
 
 
—
 
 
 
4,089
 
Floating rate
 
 
—
 
 
 
—
 
 
 
—
 
 
 
—
 
Total loans
 
$
387,462
 
 
$
633,830
 
 
$
1,685,474
 
 
$
2,706,766
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed rate
 
$
75,094
 
 
$
197,450
 
 
$
1,122,329
 
 
$
1,394,873
 
Floating rate
 
 
312,368
 
 
 
436,380
 
 
 
563,145
 
 
 
1,311,893
 
Total loans
 
$
387,462
 
 
$
633,830
 
 
$
1,685,474
 
 
$
2,706,766
 
Allowance for loan losses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(29,337
)
Net loans
 
 
 
 
 
 
 
 
 
 
 
 
 
$
2,677,429
 
Mortgage loans held for sale
 
 
 
 
 
 
 
 
 
 
 
 
 
$
49,963
 
 
Loan Quality
 
We use what we believe is a comprehensive methodology to monitor credit quality and prudently manage credit concentration within our loan portfolio. Our underwriting policies and practices govern the risk profile and credit and geographic concentration for our loan portfolio. We also have what we believe to be a comprehensive methodology to monitor these credit quality standards, including a risk classification system that identifies potential problem loans based on risk characteristics by loan type as well as the early identification of deterioration at the individual loan level. In addition to our ALLL, our purchase discounts on acquired loans provide additional protections against credit losses.
 
Discounts on Purchased Loans. At acquisition we hire a third-party to determine the fair value of loans acquired. In many of the cases fair values were determined by estimating the cash flows expected to result from those loans and discounting them at appropriate market rates. The excess of expected cash flows above the fair value of the majority of loans will be accreted to interest income over the remaining lives of the loans in accordance with FASB Accounting Standards Codification (ASC) 310-20.
 
70
 
 
None of the loans we acquired after 2011 had evidence of deterioration of credit quality since origination for which it was probable, at acquisition, that the Company would be unable to collect all contractually required payments receivable. Loans acquired that had evidence of deterioration of credit quality since origination are referred to as PCI (purchase credit impaired) loans.
 
With our acquisitions of FAB and VCBB, we acquired $16.7 million contractual amount due with a fair value of $9.7 million of PCI loans. There were no outstanding balance and carrying amount of PCI loans as of December 31, 2020 and December 31, 2019, respectively. For these PCI loans, the Company did not record an ALLL for 2020 or 2019 as there were no significant reductions in the expected cash flows.
 
Analysis of the ALLL. The following table allocates the ALLL, or the allowance, by category:
 
 
 
As of December 31,
 
 
 
2020
 
 
2019
 
 
2018
 
 
2017
 
 
2016
 
(dollars in thousands)
 
$
 
 
% (1)
 
 
$
 
 
% (1)
 
 
$
 
 
% (1)
 
 
$
 
 
% (1)
 
 
$
 
 
% (1)
 
Loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
 
$
3,690
 
 
 
1.27
 
 
$
2,736
 
 
 
1.00
 
 
$
3,112
 
 
 
1.02
 
 
$
3,014
 
 
 
1.07
 
 
$
2,581
 
 
 
1.27
 
SBA
 
 
927
 
 
 
0.95
 
 
 
852
 
 
 
1.14
 
 
 
1,027
 
 
 
1.22
 
 
 
1,030
 
 
 
0.78
 
 
 
3,345
 
 
 
2.10
 
Construction and land development
 
 
2,473
 
 
 
1.32
 
 
 
1,268
 
 
 
1.32
 
 
 
1,500
 
 
 
1.32
 
 
 
1,214
 
 
 
1.32
 
 
 
1,206
 
 
 
1.35
 
Commercial real estate (2)
 
 
13,718
 
 
 
1.37
 
 
 
7,668
 
 
 
0.97
 
 
 
6,449
 
 
 
0.85
 
 
 
4,925
 
 
 
0.99
 
 
 
5,952
 
 
 
1.19
 
Single family residential mortgages
 
 
8,486
 
 
 
0.75
 
 
 
6,182
 
 
 
0.65
 
 
 
5,489
 
 
 
0.62
 
 
 
3,170
 
 
 
1.27
 
 
 
1,078
 
 
 
0.69
 
Other
 
 
43
 
 
 
1.05
 
 
 
9
 
 
 
1.10
 
 
 
—
 
 
 
—
 
 
 
—
 
 
 
—
 
 
 
—
 
 
 
—
 
Unallocated
 
 
—
 
 
 
—
 
 
 
101
 
 
 
—
 
 
 
—
 
 
 
—
 
 
 
420
 
 
 
—
 
 
 
—
 
 
 
—
 
Allowance for loan losses
 
$
29,337
 
 
 
1.08
 
 
$
18,816
 
 
 
0.86
 
 
$
17,577
 
 
 
0.82
 
 
$
13,773
 
 
 
1.10
 
 
$
14,162
 
 
 
1.28
 
 
(1)
Represents the percentage of the allowance to total loans in the respective category.
(2)
Includes non-farm and non-residential real estate loans, multi-family residential and SFR loans originated for a business purpose.
 
The allowance and the balance of accretable credit discounts represent our estimate of probable and reasonably estimable credit losses inherent in loans held for investment as of the respective balance sheet date. The accretable credit discount balance was $4.8 million at December 31, 2020 and $5.3 million at December 31, 2019.
 
Allowance for loan losses. Our methodology for assessing the appropriateness of the ALLL includes a general allowance for performing loans, which are grouped based on similar characteristics, and a specific allowance for individual impaired loans or loans considered by management to be in a high-risk category. General allowances are established based on a number of factors, including historical loss rates, an assessment of portfolio trends and conditions, accrual status and economic conditions.
 
For C&I, SBA, CRE, C&D and SFR mortgage loans held for investment, a specific allowance may be assigned to individual loans based on an impairment analysis. Loans are considered impaired when it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. The amount of impairment is based on an analysis of the most probable source of repayment, including the present value of the loan’s expected future cash flows, the estimated market value or the fair value of the underlying collateral. Interest income on impaired loans is accrued as earned, unless the loan is placed on nonaccrual status.
 
71
 
 
Credit-discount on loans purchased through acquisition. Purchased loans are recorded at market value in two categories, credit discount and liquidity discount and premiums. The remaining credit discount at the end of a period is compared to the analysis for loan losses for each acquisition. If the credit discount is greater than the expected loss no additional provision is needed. The following table shows our credit discounts by loan portfolio for purchased loans only as of December 31, 2020 and December 31, 2019. We have recorded additional reserves of $2.1 million due to the credit discounts on the bank acquisitions being less than the analysis for loan losses on those acquisitions as of December 31, 2020.
 
 
 
As of December 31,
 
(dollars in thousands)
 
2020
 
 
2019
 
Commercial and industrial
 
$
53
 
 
$
37
 
SBA
 
 
36
 
 
 
42
 
Commercial real estate
 
 
1,029
 
 
 
1,657
 
Single family residential mortgages
 
 
3,653
 
 
 
3,573
 
Total credit discount on purchased loans
 
$
4,777
 
 
$
5,309
 
Total remaining balance of purchased loans through acquisition
 
$
583,605
 
 
$
573,802
 
Credit-discount to remaining balance of purchased loans
 
 
0.82
%
 
 
0.92
%
 
 
Individual loans considered to be uncollectible are charged off against the allowance. Factors used in determining the amount and timing of charge-offs on loans include consideration of the loan type, length of delinquency, sufficiency of collateral value, lien priority and the overall financial condition of the borrower. Collateral value is determined using updated appraisals and/or other market comparable information. Charge-offs are generally taken on loans once the impairment is determined to be other-than-temporary. Recoveries on loans previously charged off are added to the allowance. Net charge-offs to average loans were 0.05% for both the twelve months ended December 31, 2020 and 2019.
 
The ALLL was $29.3 million at December 31, 2020 compared to $18.8 million at December 31, 2019. The $10.5 million increase in 2020 was primarily due to an addition of $2.3 million related to a COVID-19 special quantitative reserve, loan growth and a $6.3 million increase in non-performing loans.  The COVID-19 portion of the ALLL equates to a seven basis point reserve on the entire loan portfolio plus a reserve on all loans being deferred at December 31, 2020.  
 
We analyze the loan portfolio, including delinquencies, concentrations, and risk characteristics, at least quarterly in order to assess the overall level of the allowance and nonaccretable discounts. We also rely on internal and external loan review procedures to further assess individual loans and loan pools, and economic data for overall industry and geographic trends.
 
In determining the allowance and the related provision for credit losses, we consider three principal elements: (i) valuation allowances based upon probable losses identified during the review of impaired C&I, CRE, C&D loans, (ii) allocations, by loan classes, on loan portfolios based on historical loan loss experience and qualitative factors and (iii) review of the credit discounts in relationship to the valuation allowance calculated for purchased loans. Provisions for credit losses are charged to operations to record changes to the total allowance to a level deemed appropriate by us.
 
72
 
 
The following table provides an analysis of the ALLL, provision for credit losses and net charge-offs for the years 2016 to 2020:
 
 
 
Years Ended December 31,
 
(dollars in thousands)
 
2020
 
 
2019
 
 
2018
 
 
2017
 
 
2016
 
Balance, beginning of period
 
$
18,816
 
 
$
17,577
 
 
$
13,773
 
 
$
14,162
 
 
$
10,023
 
Charge-offs:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
 
 
(200
)
 
 
—
 
 
 
—
 
 
 
—
 
 
 
—
 
SBA
 
 
(973
)
 
 
(1,093
)
 
 
—
 
 
 
(83
)
 
 
(835
)
Commercial real estate
 
 
(85
)
 
 
(166
)
 
 
(701
)
 
 
—
 
 
 
—
 
Other
 
 
(45
)
 
 
—
 
 
 
—
 
 
 
—
 
 
 
—
 
Total charge-offs
 
 
(1,303
)
 
 
(1,259
)
 
 
(701
)
 
 
(83
)
 
 
(835
)
Recoveries:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
 
 
—
 
 
 
—
 
 
 
36
 
 
 
—
 
 
 
—
 
SBA
 
 
1
 
 
 
108
 
 
 
—
 
 
 
747
 
 
 
—
 
Total recoveries
 
 
1
 
 
 
108
 
 
 
36
 
 
 
747
 
 
 
—
 
Net (charge-offs)/recoveries
 
 
(1,302
)
 
 
(1,151
)
 
 
(665
)
 
 
664
 
 
 
(835
)
Provision for (recapture of) loan losses
 
 
11,823
 
 
 
2,390
 
 
 
4,469
 
 
 
(1,053
)
 
 
4,974
 
Balance, end of period
 
$
29,337
 
 
$
18,816
 
 
$
17,577
 
 
$
13,773
 
 
$
14,162
 
Total loans at end of period
 
$
2,706,766
 
 
$
2,196,934
 
 
$
2,142,015
 
 
$
1,249,074
 
 
$
1,110,446
 
Average loans (2)
 
 
2,544,413
 
 
 
2,112,933
 
 
 
1,456,480
 
 
 
1,151,965
 
 
 
1,080,448
 
Net charge-offs (recoveries) to average loans
 
 
0.05
%
 
 
0.05
%
 
 
0.05
%
 
 
-0.06
%
 
 
0.08
%
Allowance for loan losses to total loans
 
 
1.08
%
 
 
0.86
%
 
 
0.82
%
 
 
1.10
%
 
 
1.28
%
Credit-discount on loans purchased through acquisition
 
$
4,777
 
 
$
5,309
 
 
$
8,060
 
 
$
1,689
 
 
$
5,124
 
 
(1)
Total loans are net of discounts and deferred fees and costs.
(2)
Excludes loans held for sale
 
Problem Loans. Loans are considered delinquent when principal or interest payments are past due 30 days or more; delinquent loans may remain on accrual status between 30 days and 89 days past due. Loans on which the accrual of interest has been discontinued are designated as nonaccrual loans. Typically, the accrual of interest on loans is discontinued when principal or interest payments are past due 90 days or when, in the opinion of management, there is a reasonable doubt as to collectability in the normal course of business. When loans are placed on nonaccrual status, all interest previously accrued but not collected is reversed against current period interest income. Income on nonaccrual loans is subsequently recognized only to the extent that cash is received and the loan’s principal balance is deemed collectible. Loans are restored to accrual status when loans become well-secured and management believes full collectability of principal and interest is probable.
 
A loan is considered impaired when it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans include loans on nonaccrual status and performing restructured loans. Income from loans on nonaccrual status is recognized to the extent cash is received and when the loan’s principal balance is deemed collectible. Depending on a particular loan’s circumstances, we measure impairment of a loan based upon either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price, or the fair value of the collateral less estimated costs to sell if the loan is collateral dependent. A loan is considered collateral dependent when repayment of the loan is based solely on the liquidation of the collateral. Fair value, where possible, is determined by independent appraisals, typically on an annual basis. Between appraisal periods, the fair value may be adjusted based on specific events, such as if deterioration of quality of the collateral comes to our attention as part of our problem loan monitoring process, or if discussions with the borrower lead us to believe the last appraised value no longer reflects the actual market for the collateral. The impairment amount on a collateral-dependent loan is charged-off to the allowance if deemed not collectible and the impairment amount on a loan that is not collateral-dependent is set up as a specific reserve.
 
73
 
 
In cases where a borrower experiences financial difficulties and we make certain concessionary modifications to contractual terms, the loan is classified as a troubled debt restructuring (“TDR”). These concessions may include a reduction of the interest rate, principal or accrued interest, extension of the maturity date or other actions intended to minimize potential losses. Loans restructured at a rate equal to or greater than that of a new loan with comparable risk at the time the loan is modified may be excluded from restructured loan disclosures in years subsequent to the restructuring if the loans are in compliance with their modified terms. A restructured loan is considered impaired despite its accrual status and a specific reserve is calculated based on the present value of expected cash flows discounted at the loan’s effective interest rate or the fair value of the collateral less estimated costs to sell if the loan is collateral dependent.
 
Real estate we acquire as a result of foreclosure or by deed-in-lieu of foreclosure is classified as OREO until sold, and is carried at the balance of the loan at the time of foreclosure or at estimated fair value less estimated costs to sell, whichever is less.
 
The following table sets forth the allocation of our nonperforming assets among our different asset categories as of the dates indicated. 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 PCI loans. The Company did not have any loans past due 90 days or more but still accruing interest at any of the dates presented.  The balances of nonperforming loans reflect the net investment in these assets.
 
 
 
As of December 31,
 
(dollars in thousands)
 
2020
 
 
2019
 
 
2018
 
 
2017
 
 
2016
 
Accruing troubled debt restructured loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
 
$
502
 
 
$
—
 
 
$
—
 
 
$
—
 
 
$
—
 
SBA
 
 
34
 
 
 
45
 
 
 
58
 
 
 
—
 
 
 
—
 
Construction and land development
 
 
—
 
 
 
264
 
 
 
276
 
 
 
289
 
 
 
303
 
Commercial real estate
 
 
1,434
 
 
 
1,472
 
 
 
2,033
 
 
 
2,131
 
 
 
2,253
 
Total accruing troubled debt restructured loans
 
 
1,970
 
 
 
1,781
 
 
 
2,367
 
 
 
2,420
 
 
 
2,556
 
Non-accrual loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
 
 
580
 
 
 
—
 
 
 
—
 
 
 
—
 
 
 
—
 
Commercial and industrial - TDR
 
 
1,081
 
 
 
—
 
 
 
—
 
 
 
—
 
 
 
—
 
SBA
 
 
6,828
 
 
 
9,378
 
 
 
914
 
 
 
155
 
 
 
3,577
 
Construction and land development
 
 
173
 
 
 
—
 
 
 
—
 
 
 
—
 
 
 
—
 
Commercial real estate
 
 
1,193
 
 
 
725
 
 
 
—
 
 
 
—
 
 
 
—
 
Single-family residential mortgages
 
 
7,714
 
 
 
1,334
 
 
 
—
 
 
 
—
 
 
 
—
 
Other
 
 
15
 
 
 
—
 
 
 
—
 
 
 
—
 
 
 
—
 
Total non-accrual loans
 
 
17,584
 
 
 
11,437
 
 
 
914
 
 
 
155
 
 
 
3,577
 
Total non-performing loans
 
 
19,554
 
 
 
13,218
 
 
 
3,281
 
 
 
2,575
 
 
 
6,133
 
OREO
 
 
293
 
 
 
293
 
 
 
1,101
 
 
 
293
 
 
 
833
 
Nonperforming assets
 
$
19,847
 
 
$
13,511
 
 
$
4,382
 
 
$
2,868
 
 
$
6,966
 
Nonperforming loans to total loans
 
 
0.72
%
 
 
0.60
%
 
 
0.15
%
 
 
0.21
%
 
 
0.55
%
Nonperforming assets to total assets
 
 
0.59
%
 
 
0.48
%
 
 
0.15
%
 
 
0.17
%
 
 
0.50
%
 
The $6.3 million increase in nonperforming loans at December 31, 2020 was primarily due to the addition of nine SFR mortgage loans for $6.5 million, five commercial and industrial loans for $2.2 million, four SBA loans for $2.1 million and three commercial real estate loans for $552,000, partially offset by payoff of one construction and development loan for $264,000 and one SBA loan for $991,000, and a net balance decrease in nonperforming loans of $3.8 million.
 
Our 30-89 day delinquent loans, excluding non-accrual loans, increased to $8.9 million as of December 31, 2020, compared to $5.3 million at December 31, 2019.
 
74
 
 
We did not recognize any interest income on nonaccrual loans during the years ended December 31, 2020 and December 31, 2019 while the loans were in nonaccrual status. We recognized interest income on loans modified under troubled debt restructurings of $170,000 and $128,000 during the years ended December 31, 2020 and December 31, 2019, respectively.
 
We utilize an asset risk classification system in compliance with guidelines established by the FDIC as part of our efforts to improve asset quality. In connection with examinations of insured institutions, examiners have the authority to identify problem assets and, if appropriate, classify them. There are three classifications for problem assets: “substandard”, “doubtful”, and “loss”. Substandard assets have one or more defined weaknesses and are characterized by the distinct possibility that the insured institution will sustain some loss if the deficiencies are not corrected. Doubtful assets have the weaknesses of substandard assets with the additional characteristic that the weaknesses make collection or liquidation in full questionable and there is a high probability of loss based on currently existing facts, conditions and values. An asset classified as loss is not considered collectable and is of such little value that continuance as an asset is not warranted.
 
We use a risk grading system to categorize and determine the credit risk of our loans. Potential problem loans include loans with a risk grade of 6, which are “special mention”, loans with a risk grade of 7, which are “substandard” loans that are generally not considered to be impaired and loans with a risk grade of 8, which are “doubtful” loans generally considered to be impaired. These loans generally require more frequent loan officer contact and receipt of financial data to closely monitor borrower performance. Potential problem loans are managed and monitored regularly through a number of processes, procedures and committees, including oversight by a loan administration committee comprised of executive officers and other members of the Bank’s senior management.
 
Impact of the COVID-19 Pandemic on the Loan Portfolio
 
As of December 31, 2020, the Bank originated 260 loans totaling $32.9 million, or 1.2% of the Company’s total loan portfolio, under the SBA’s Paycheck Protection Program due to the COVID-19 pandemic.  The following table provides details regarding the Company's COVID-19 loan deferral activity through January 15, 2021.
 
 
 
As of June 30, 2020
 
 
As of October 23, 2020
 
 
As of January 15, 2021
 
 
 
Loans Deferred
 
 
Loans Deferred
 
 
Loans Deferred
 
 
 
Number
 
 
Principal
Amount
($000)
 
 
Number
 
 
Principal
Amount
($000)
 
 
Number
 
 
Principal
Amount
($000)
 
General retail (excluding SBA)
 
 
34
 
 
$
94,251
 
 
 
3
 
 
$
26,840
 
 
 
2
 
 
$
3,174
 
Mixed use commercial
 
 
38
 
 
 
58,841
 
 
 
4
 
 
 
10,547
 
 
 
1
 
 
 
7,500
 
Hospitality (excluding SBA) (1)
 
 
5
 
 
 
25,343
 
 
 
2
 
 
 
12,929
 
 
 
1
 
 
 
6,419
 
Restaurants (excluding SBA)
 
 
11
 
 
 
4,186
 
 
 
1
 
 
 
12
 
 
 
—
 
 
 
—
 
Multifamily
 
 
6
 
 
 
9,086
 
 
 
—
 
 
 
—
 
 
 
—
 
 
 
—
 
Commercial, office and other (1)
 
 
6
 
 
 
22,983
 
 
 
5
 
 
 
19,881
 
 
 
5
 
 
 
18,742
 
SFR mortgage loans - Western region
 
 
183
 
 
 
118,484
 
 
 
38
 
 
 
29,604
 
 
 
14
 
 
 
8,770
 
SFR mortgage loans - Eastern region
 
 
203
 
 
 
85,935
 
 
 
10
 
 
 
4,106
 
 
 
11
 
 
 
4,925
 
SFR mortgage loans - Chicago metropolitan
 
 
84
 
 
 
14,824
 
 
 
4
 
 
 
719
 
 
 
1
 
 
 
249
 
Total
 
 
570
 
 
$
433,933
 
 
 
67
 
 
$
104,638
 
 
 
35
 
 
$
49,779
 
 
(1)  Loans with a principal amount of $23.5 million are principal deferments only.  Interest is paid up to date through December 31, 2020 and January 15, 2021.
 
The Company does not have any shared national credits or loans, backed by airlines or cruise lines, on deferral as of January 15, 2021.
 
 
Cash and Cash Equivalents. Cash and cash equivalents increased $12.9 million, or 7.1%, to $194.7 million as of December 31, 2020 as compared to $181.8 million at December 31, 2019.
 
Goodwill and Other Intangible Assets. Goodwill was $69.2 and $58.6 million at December 31, 2020 and 2019, respectively. Goodwill represents the excess of the consideration paid over the fair value of the net assets acquired. The $10.7 million increase in 2020 was due to the PGBH acquisition.  Our other intangible assets, which consist of core deposit intangibles, were $5.2 million and $6.1 million at December 31, 2020 and December 31, 2019. In 2020, $491,000 was added from the PGBH acquisition. These core deposit intangible assets are amortized primarily on an accelerated basis over their estimated useful lives, generally over a period of 3 to 10 years.
 
On January 10, 2020, we completed the PGBH acquisition. PGBH, and its subsidiary PGB, provided commercial and retail banking services primarily to Asian-Americans through three branches in the metro Chicago area.
 
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. The identifiable assets acquired included the establishment of a $491,000 core deposit intangible, which is being amortized on an accelerated basis over 10 years. Based upon the acquisition date fair values of the net assets acquired, we recorded $10.7 million of goodwill in our consolidated balance sheet.
 
Liabilities. 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.
 
Deposits. 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. The Bank measures 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. As of December 31, 2020, the Bank considers $2.3 billion or 88.0% of our deposits as core 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. As of December 31, 2020, our directors and shareholders with deposits over $250,000 totaled $83.6 million or 5.0% of all relationships over $250,000.
 
75
 
 
The following table summarizes our average deposit balances and weighted average rates at December 31, 2020, 2019 and 2018:
 
 
 
Year Ended
 
 
 
December 31, 2020
 
 
December 31, 2019
 
 
December 31, 2018
 
 
 
 
 
 
 
Weighted
 
 
 
 
 
 
Weighted
 
 
 
 
 
 
Weighted
 
 
 
Average
 
 
Average
 
 
Average
 
 
Average
 
 
Average
 
 
Average
 
(dollars in thousands)
 
Balance
 
 
Rate (%)
 
 
Balance
 
 
Rate (%)
 
 
Balance
 
 
Rate (%)
 
Noninterest-bearing demand
 
$
564,111
 
 
 
—
 
 
$
421,174
 
 
 
—
 
 
$
310,282
 
 
 
—
 
Interest-bearing:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
NOW
 
 
55,794
 
 
 
0.36
 
 
 
24,925
 
 
 
0.27
 
 
 
24,591
 
 
 
0.32
 
Savings
 
 
123,568
 
 
 
0.12
 
 
 
97,670
 
 
 
0.00
 
 
 
46,260
 
 
 
0.38
 
Money market
 
 
449,111
 
 
 
0.71
 
 
 
370,451
 
 
 
1.19
 
 
 
376,479
 
 
 
1.10
 
Time, less than $250,000
 
 
715,181
 
 
 
1.60
 
 
 
712,534
 
 
 
2.25
 
 
 
369,416
 
 
 
1.59
 
Time, $250,000 and over
 
 
597,262
 
 
 
1.71
 
 
 
566,810
 
 
 
2.35
 
 
 
400,046
 
 
 
1.67
 
Total interest-bearing
 
 
1,940,916
 
 
 
1.30
 
 
 
1,772,390
 
 
 
1.93
 
 
 
1,216,792
 
 
 
1.39
 
Total deposits
 
$
2,505,027
 
 
 
1.01
 
 
$
2,193,564
 
 
 
1.56
 
 
$
1,527,074
 
 
 
1.11
 
 
The following table sets forth the maturity of non-core time deposits as of December 31, 2020:
 
 
 
Maturity Within:
 
(dollars in thousands)
 
Three Months
 
 
After Three to Six Months
 
 
Six to 12 Months
 
 
After 12 Months
 
 
Total
 
Time, $250,000 and over
 
$
156,541
 
 
$
134,541
 
 
$
291,351
 
 
$
26,280
 
 
$
608,713
 
Wholesale deposits (1)
 
 
40,767
 
 
 
8,744
 
 
 
13,986
 
 
 
12,105
 
 
 
75,602
 
Time, brokered
 
 
—
 
 
 
—
 
 
 
14,997
 
 
 
2,377
 
 
 
17,374
 
Total
 
$
197,308
 
 
$
143,285
 
 
$
320,334
 
 
$
40,762
 
 
$
701,689
 
 
(1)
Wholesale deposits are defined as time deposits under $250,000 originated through via internet rate line and/or through other deposit originators, and are considered non-core deposits.
 
We acquired time deposits from the internet and outside deposits originators as needed to supplement liquidity. These time deposits are primarily under $250,000 and we do not consider them core deposits. The total amount of such deposits as of December 31, 2020 was $93.7 million or 3.6% of total deposits. The balances of such deposits as of December 31, 2019 were $93.2 million.
 
Total deposits increased $386.2 million to $2.6 billion at December 31, 2020 as compared to $2.2 billion at December 31, 2019, as a result of organic growth and the PGBH acquisition. As of December 31, 2020, total deposits were comprised of 23.4% noninterest-bearing demand accounts, 27.7% interest-bearing non-maturity deposit accounts and 48.8% of time deposits.
 
As of December 31, 2020, $ 131,0 00 in deposit overdrafts were reclassified as other loans. As of December 31, 2019, the amount was $111,000.
 
 
76
 
 
FHLB Borrowings. In addition to deposits, we have used long- and short-term borrowings, such as federal funds purchased and FHLB long-and short-term advances, as a source of funds to meet the daily liquidity needs of our customers and fund growth in earning assets. We had no FHLB short-term advances at December 31, 2020 and at December 31, 2019. In the first quarter of 2020, the Company obtained $150.0 million in long-term FHLB advances. The term is five years, maturing by March 2025. The average fixed interest rate is 1.18%. The Company secured this funding in case there is a liquidity issue caused by the COVID-19 pandemic and to obtain an attractive interest rate. The following table sets forth information on our total FHLB advances during the periods presented:
 
 
 
Years Ended December 31,
 
(dollars in thousands)
 
2020
 
 
2019
 
 
2018
 
Outstanding at period-end
 
$
150,000
 
 
$
—
 
 
$
319,500
 
Average amount outstanding
 
 
129,071
 
 
 
114,388
 
 
 
124,990
 
Maximum amount outstanding at any month-end
 
 
190,000
 
 
 
364,500
 
 
 
319,500
 
Weighted average interest rate:
 
 
 
 
 
 
 
 
 
 
 
 
During period
 
 
1.15
%
 
 
2.56
%
 
 
2.07
%
End of period
 
 
1.18
%
 
 
0.00
%
 
 
2.56
%
 
Long-Term Debt . Long-term debt consists of subordinated notes. As of December 31, 2020 the amount of subordinated notes outstanding was $104.4 million as compared to $104.0 million at December 31, 2019.
 
In March and April 2016, we issued an aggregate of $50.0 million of subordinated notes for aggregate proceeds of $49.4 million. The subordinated notes have a maturity date of April 1, 2026 at a fixed rate of 6.5% for the first five years and a floating rate based on the three-month LIBOR plus 516 basis points thereafter. Under the terms of our subordinated notes and the related subordinated notes 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 long term debt.
 
In November 2018, the Company issued $55.0 million in fixed-to-floating rate subordinated notes due December 1, 2028. The Notes bear a fixed rate of 6.18% for the first five years and will reset quarterly thereafter to the then-current three-month LIBOR rate plus 315 basis points. The Notes were assigned an investment grade rating of BBB by the Kroll Bond Rating Agency, Inc. Under the terms of our subordinated notes and the related subordinated notes 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 long term debt.
 
The Company used the net proceeds from both subordinated debt offerings for general corporate purposes, including providing capital to the Bank and maintaining adequate liquidity at Bancorp. The subordinated notes qualified as Tier 2 capital for Bancorp for regulatory purposes and the portion that Bancorp contributed to the Bank qualified as Tier 1 capital for the Bank.
 
In connection with the November 2018 issuance of subordinated notes, Bancorp entered into a registration rights agreement with the purchasers of such notes pursuant to which the Company agreed to take certain actions to provide for the exchange of the notes for subordinated notes that are registered under the Securities Act and that have substantially the same terms as the privately issued notes. The exchange of notes was completed in March 2019.
 
Subordinated Debentures. Subordinated debentures consist of subordinated notes. As of December 31, 2020 and December 31, 2019, the amount outstanding was $14.3 million and $9.7 million, respectively. Under the terms of our subordinated notes and the related subordinated notes 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 long term debt. These subordinated notes consist of the following:
 
In 2016, Bancorp acquired $5.2 million of subordinated debentures as part of the TFC acquisition (TFC Trust) and recorded them at fair value of $3.3 million. The fair value adjustment is being accreted over the remaining life of the securities. These debentures mature on March 15, 2037 and have a variable rate of interest equal to the three-month LIBOR plus 1.65%. The rate at December 31, 2020 was 1.87% and 3.54% at December 31, 2019.
 
In October 2018, the Company, through the acquisition of FAIC, acquired the FAIC Trust. The FAIC Trust issued thirty-year fixed to floating rate capital securities with an aggregate liquidation amount of $7,000,000 to an independent investor, and all of its common securities, amounting to $217,000, financed by the issuance of $7.2 million of debentures. There was a $1.2 million valuation reserve recorded to arrive at market value which is treated as a yield adjustment and is amortized over the life of the security. The Company has the option to defer interest payments on the subordinated debentures from time to time for a period not to exceed five consecutive years. The subordinated debentures have a variable rate of interest equal to the three-month LIBOR plus 2.25% through final maturity on December 15, 2034. The rate at December 31, 2020 was 2.47% and 4.14% at December 31, 2019.
 
77
 
 
In January 2020, the Company, through the acquisition of PGBH, acquired PGBH Trust, a Delaware statutory trust formed in December 2004. PGBH Trust issued 5,000 fixed-to-floating rate capital securities with an aggregate liquidation amount of $5.0 million and 155 common securities with an aggregate liquidation amount of $155,000. There was a $763,000 valuation reserve recorded to arrive at market value which is treated as a yield adjustment and is amortized over the life of the security. The Company has the option to defer interest payments on the subordinated debentures from time to time for a period not to exceed five consecutive years. 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.
 
In July 2017, British banking regulators announced plans to eliminate the LIBOR rate by the end of 2021, before these subordinated notes and debentures mature. For these subordinated notes and debentures, there are provisions for amendments to establish a new interest rate benchmark.
 
Capital Resources and Liquidity Management
 
Capital Resources. Shareholders’ equity is influenced primarily by earnings, dividends, sales and redemptions of common stock and preferred stock and changes in accumulated other comprehensive income caused primarily by fluctuations in unrealized holding gains or losses, net of taxes, on available for sale investment securities.
 
Shareholders’ equity increased $20.8 million, or 5.1%, to $428.5 million during 2020 due to $32.9 million of net income, $712,000 of additional paid in capital from the exercise of stock options and a $890,000 increase in other comprehensive income, partially offset by $6.6 million of cash dividends declared during the year and $7.9 million from the repurchase of shares of the Company’s common stock. The increase in accumulated other comprehensive income primarily resulted from increases in unrealized gains on available for sale securities.
 
Liquidity Management. Liquidity refers to the measure of our ability to meet the cash flow requirements of depositors and borrowers, while at the same time meeting our operating, capital and strategic cash flow needs, all at a reasonable cost. We continuously monitor our liquidity position to ensure that assets and liabilities are managed in a manner that will meet all short-term and long-term cash requirements. We manage our liquidity position to meet the daily cash flow needs of customers, while maintaining an appropriate balance between assets and liabilities to meet the return on investment objectives of our shareholders.
 
Our liquidity position is supported by management of liquid assets and liabilities and access to alternative sources of funds. Liquid assets include cash, interest-earning deposits in banks, federal funds sold, available for sale securities, term federal funds, purchased receivables and maturing or prepaying balances in our securities and loan portfolios. Liquid liabilities include core deposits, federal funds purchased, securities sold under repurchase agreements and other borrowings. Other sources of liquidity include the sale of loans, the ability to acquire additional national market noncore deposits, the issuance of additional collateralized borrowings such as FHLB advances, the issuance of debt securities, additional borrowings through the Federal Reserve’s discount window and the issuance of preferred or common securities. Our short-term and long-term liquidity requirements are primarily to fund on-going operations, including payment of interest on deposits and debt, extensions of credit to borrowers, capital expenditures and shareholder dividends. These liquidity requirements are met primarily through cash flow from operations, redeployment of prepaying and maturing balances in our loan and investment portfolios, debt financing and increases in customer deposits. For additional information regarding our operating, investing and financing cash flows, see the consolidated statements of cash flows provided in our consolidated financial statements.
 
Integral to our liquidity management is the administration of short-term borrowings. To the extent we are unable to obtain sufficient liquidity through core deposits, we seek to meet our liquidity needs through wholesale funding or other borrowings on either a short- or long-term basis.
 
As of December 31, 2020 and December 31, 2019, we had $92.0 million and $49.0 million, respectively, of unsecured federal funds lines, with no amounts advanced against the lines as of such dates. In addition, lines of credit from the Federal Reserve Discount Window at December 31, 2020 and December 31, 2019 were $9.8 million and $14.3 million, respectively. Federal Reserve Discount Window lines were collateralized by a pool of CRE loans totaling $20.1 million and $28.7 million as of December 31, 2020 and December 31, 2019, respectively. We did not have any borrowings outstanding with the Federal Reserve at December 31, 2020 and December 31, 2019 and our borrowing capacity is limited only by eligible collateral.
 
78
 
 
At December 31, 2020 there were $150.0 million in FHLB advances outstanding and none at December 31, 2019. Based on the values of loans pledged as collateral, we had $915.2 million and $636.5 million of additional borrowing capacity with the FHLB as of December 31, 2020 and December 31, 2019, respectively. We also maintain relationships in the capital markets with brokers and dealers to issue certificates of deposit.
 
Bancorp is a corporation separate and apart from the Bank and, therefore, must provide for its own liquidity. Bancorp’s main source of funding is dividends declared and paid to us by the Bank and RAM. There are statutory, regulatory and debt covenant limitations that affect the ability of the Bank to pay dividends to Bancorp. Management believes that these limitations will not impact our ability to meet our ongoing short-term cash obligations.
 
Regulatory Capital Requirements
 
We are subject to various regulatory capital requirements administered by the federal and state banking regulators. Failure to meet regulatory capital requirements may result in certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on our financial statements. Under capital adequacy guidelines and the regulatory framework for “prompt corrective action” (described below), we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting policies.
 
The table below summarizes the minimum capital requirements applicable to us and the Bank pursuant to Basel III regulations as of the dates reflected and assuming the capital conservation buffer has been fully-phased in. The minimum capital requirements are only regulatory minimums and banking regulators can impose higher requirements on individual institutions. For example, banks and bank holding companies experiencing internal growth or making acquisitions generally will be expected to maintain strong capital positions substantially above the minimum supervisory levels. Higher capital levels may also be required if warranted by the particular circumstances or risk profiles of individual banking organizations. The table below also summarizes the capital requirements applicable to us and the Bank in order to be considered “well-capitalized” from a regulatory perspective, as well as our and the Bank’s capital ratios as of December 31, 2020 and December 31, 2019.  The Bank exceeded all regulatory capital requirements under Basel III and was considered to be “well-capitalized” as of the dates reflected in the table below:
 
 
 
Ratio at December 31, 2020
 
 
Ratio at December 31, 2019
 
 
Regulatory Capital Ratio Requirements
 
 
Regulatory Capital Ratio Requirements, including fully phased-in Capital Conservation Buffer
 
 
Minimum Requirement for "Well Capitalized" Depository Institution
 
Tier 1 Leverage Ratio
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated
 
11.32%
 
 
12.89%
 
 
4.00%
 
 
4.00%
 
 
5.00%
 
Bank
 
14.11%
 
 
15.23%
 
 
4.00%
 
 
4.00%
 
 
5.00%
 
Common Equity Tier 1 Risk-Based Capital Ratio (1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated
 
14.62%
 
 
17.16%
 
 
4.50%
 
 
7.00%
 
 
6.50%
 
Bank
 
18.94%
 
 
20.87%
 
 
4.50%
 
 
7.00%
 
 
6.50%
 
Tier 1 Risk-Based Capital Ratio
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated
 
15.21%
 
 
17.65%
 
 
6.00%
 
 
8.50%
 
 
8.00%
 
Bank
 
18.94%
 
 
20.87%
 
 
6.00%
 
 
8.50%
 
 
8.00%
 
Total Risk-Based Capital Ratio
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated
 
20.77%
 
 
23.82%
 
 
8.00%
 
 
10.50%
 
 
10.00%
 
Bank
 
20.19%
 
 
21.86%
 
 
8.00%
 
 
10.50%
 
 
10.00%
 
 
(1)
The common equity tier 1 risk-based ratio, or CET1, is a ratio created by the Basel III regulations beginning January 1, 2015.
 
79
 
 
Contractual Obligations
 
The following table contains supplemental information regarding our total contractual obligations at December 31, 2020:
 
 
 
Payments Due
 
 
 
Within
 
 
One to
 
 
Three to
 
 
After Five
 
 
 
 
 
(dollars in thousands)
 
One Year
 
 
Three Years
 
 
Five Years
 
 
Years
 
 
Total
 
Deposits without a stated maturity
 
$
1,348,290
 
 
$
—
 
 
$
—
 
 
$
—
 
 
$
1,348,290
 
Time deposits
 
 
1,198,799
 
 
 
78,518
 
 
 
9,521
 
 
 
—
 
 
 
1,286,838
 
FHLB advances
 
 
—
 
 
 
—
 
 
 
150,000
 
 
 
—
 
 
 
150,000
 
Long-term debt
 
 
—
 
 
 
—
 
 
 
—
 
 
 
104,391
 
 
 
104,391
 
Subordinated debentures
 
 
—
 
 
 
—
 
 
 
—
 
 
 
14,283
 
 
 
14,283
 
Leases
 
 
5,082
 
 
 
8,319
 
 
 
5,195
 
 
 
9,477
 
 
 
28,073
 
Total contractual obligations
 
$
2,552,171
 
 
$
86,837
 
 
$
164,716
 
 
$
128,151
 
 
$
2,931,875
 
 
Off-Balance Sheet Arrangements
 
We have limited off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our financial condition, revenues, expenses, results of operations, liquidity, capital expenditures or capital resources.
 
In the ordinary course of business, the Company enters into financial commitments to meet the financing needs of its customers. These financial commitments include commitments to extend credit, unused lines of credit, commercial and similar letters of credit and standby letters of credit. Those instruments involve to varying degrees, elements of credit and interest rate risk not recognized in the Company’s financial statements.
 
The Company’s exposure to loan loss in the event of nonperformance on these financial commitments is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments as it does for loans reflected in the financial statements.
 
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Since many of the commitments are expected to expire without being drawn upon, the total amounts do not necessarily represent future cash requirements. The Company evaluates each client’s credit worthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by the Company is based on management’s credit evaluation of the customer.
 
Non-GAAP Financial Measures
 
Some of the financial measures included in this Annual Report on Form 10-K are not measures of financial performance recognized by GAAP. These non-GAAP financial measures include “tangible common equity to tangible assets”, “tangible book value per share”, “return on average tangible common equity”, “adjusted earnings”, “adjusted diluted earnings per share”, “adjusted return on average assets”, and “adjusted return on average tangible common equity”. Our management uses these non-GAAP financial measures in its analysis of our performance.
 
Tangible Common Equity to Tangible Assets Ratio and Tangible Book Value Per Share. The tangible common equity to tangible assets ratio and tangible book value per share are non-GAAP measures generally used by financial analysts and investment bankers to evaluate capital adequacy. We calculate: (i) tangible common equity as total shareholders’ equity less goodwill and other intangible assets (excluding mortgage servicing rights); (ii) tangible assets as total assets less goodwill and other intangible assets; and (iii) tangible book value per share as tangible common equity divided by shares of common stock outstanding.
 
80
 
 
Our management, banking regulators, many financial analysts and other investors use these measures in conjunction with more traditional bank capital ratios to compare the capital adequacy of banking organizations with significant amounts of goodwill or other intangible assets, which typically stem from the use of the purchase accounting method of accounting for mergers and acquisitions. Tangible common equity, tangible assets, tangible book value per share and related measures should not be considered in isolation or as a substitute for total shareholders’ equity, total assets, book value per share or any other measure calculated in accordance with GAAP. Moreover, the manner in which we calculate tangible common equity, tangible assets, tangible book value per share and any other related measures may differ from that of other companies reporting measures with similar names. The following table reconciles shareholders’ equity (on a GAAP basis) to tangible common equity and total assets (on a GAAP basis) to tangible assets, and calculates our tangible book value per share:
 
(dollars in thousands)
 
December 31, 2020
 
 
December 31, 2019
 
Tangible common equity:
 
 
 
 
 
 
 
 
Total shareholders' equity
 
$
428,488
 
 
$
407,690
 
Adjustments
 
 
 
 
 
 
 
 
Goodwill
 
 
(69,243
)
 
 
(58,563
)
Core deposit intangible
 
 
(5,196
)
 
 
(6,100
)
Tangible common equity
 
$
354,049
 
 
$
343,027
 
Tangible assets:
 
 
 
 
 
 
 
 
Total assets-GAAP
 
$
3,350,072
 
 
$
2,788,535
 
Adjustments
 
 
 
 
 
 
 
 
Goodwill
 
 
(69,243
)
 
 
(58,563
)
Core deposit intangible
 
 
(5,196
)
 
 
(6,100
)
Tangible assets:
 
$
3,275,633
 
 
$
2,723,872
 
Common shares outstanding
 
 
19,565,921
 
 
 
20,030,866
 
Tangible common equity to tangible assets ratio
 
 
10.81
%
 
 
12.59
%
Tangible book value per share
 
$
18.10
 
 
$
17.12
 
 
Return on Average Tangible Common Equity. Management measures return on average tangible common equity (“ROATCE”) to assess the Company’s capital strength and business performance. Tangible equity excludes goodwill and other intangible assets (excluding mortgage servicing rights), and is reviewed by banking and financial institution regulators when assessing a financial institution’s capital adequacy. This non-GAAP financial measure should not be considered a substitute for operating results determined in accordance with GAAP and may not be comparable to other similarly titled measures used by other companies. The following table reconciles return on average tangible common equity to its most comparable GAAP measure:
 
 
 
For the year-ended
 
(dollars in thousands)
 
December 31, 2020
 
 
December 31, 2019
 
 
December 31, 2018
 
Net income available to common shareholders
 
$
32,928
 
 
$
39,209
 
 
$
36,105
 
Average shareholders equity
 
$
417,915
 
 
$
393,895
 
 
$
296,869
 
Adjustments:
 
 
 
 
 
 
 
 
 
 
 
 
Goodwill
 
 
(69,863
)
 
 
(58,446
)
 
 
(31,081
)
Core deposit intangible
 
 
(5,806
)
 
 
(6,873
)
 
 
(1,483
)
Adjusted average tangible common equity
 
$
342,246
 
 
$
328,576
 
 
$
264,305
 
Return on average tangible common equity
 
 
9.62
%
 
 
11.93
%
 
 
13.66
%
Regulatory Reporting to Financial Statements
 
Some of the financial measures included in this Annual Report on Form 10-K differ from those reported on the FRB Y-9C report. These financial measures include “core deposits to total deposits” and “net non-core funding dependency ratio”. Our management uses these financial measures in its analysis of our performance.
 
81
 
 
Core Deposits and Non-core Funding Dependency. The Bank measures 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. The following table reconciles the adjusted core deposit to total deposits and the adjusted net non-core dependency ratio.
 
 
 
As of
 
(dollars in thousands)
 
December 31, 2020
 
 
December 31, 2019
 
 
 
 
 
 
 
 
 
 
Adjusted core deposit to total deposit ratio:
 
 
 
 
 
 
 
 
Core deposits (1)
 
$
2,037,164
 
 
$
1,651,678
 
Adjustments:
 
 
 
 
 
 
 
 
CDs > $250,000 considered core deposits (2)
 
 
448,159
 
 
 
446,968
 
Less brokered deposits considered non-core
 
 
(17,374
)
 
 
(67,089
)
Less internet deposits < $250,000 considered non-core (3)
 
 
(76,356
)
 
 
(26,025
)
Less other deposits not considered core (4)
 
 
(80,016
)
 
 
(60,719
)
Total adjustments:
 
 
274,413
 
 
 
293,135
 
Adjusted core deposits
 
 
2,311,577
 
 
 
1,944,813
 
Total deposits
 
$
2,635,128
 
 
$
2,249,061
 
Adjusted core deposits to total deposits ratio
 
 
87.72
%
 
 
86.47
%
Non core deposits
 
 
597,963
 
 
 
597,382
 
Less total adjustments
 
 
(274,413
)
 
 
(293,135
)
Total adjusted non-core deposits
 
 
323,550
 
 
 
304,247
 
Short term borrowing outstanding
 
 
—
 
 
 
—
 
Adjusted non-core liabilities (A)
 
 
323,550
 
 
 
304,247
 
Short term assets (4)
 
 
311,598
 
 
 
256,625
 
Adjustment to short term assets:
 
 
 
 
 
 
 
 
Purchased receivables with maturities less than 90-days
 
 
—
 
 
 
—
 
Adjusted short term assets (B)
 
 
311,598
 
 
 
256,625
 
Net non-core funding (A-B)
 
 
11,952
 
 
 
47,622
 
Total earning assets
 
 
3,141,819
 
 
 
2,587,093
 
Adjusted net non-core funding dependency ratio
 
 
0.38
%
 
 
1.84
%
 
(1)
Core deposits comprise all demand and savings deposits of any amount plus time deposits less than $250,000.
(2)
Comprised of time deposits to core customers over $250,000 as defined in the lead-in to the table above.
(3)
Comprised of internet and outside deposit originator time deposits less than $250,000 which are not considered core deposits.
(4)
Comprised of demand and savings deposits in relationships over $250,000 which are considered non-core deposits because they do not satisfy the definition of core deposits set forth in the lead-in to the table above.
(5)
Non-core deposits are time deposits greater than $250,000
(6)
Short term assets include cash equivalents and investment with maturities less than one year
 
82
 
 
 
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.