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OPBK OP Bancorp

Filed: 7 May 21, 9:01am

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2021 

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from __________ to __________

 

Commission File Number: 001-38437

 

OP BANCORP

(Exact Name of Registrant as Specified in its Charter)

 

 

California

81-3114676

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer
Identification No.)

1000 Wilshire Blvd., Suite 500,

Los Angeles, CA

90017

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (213) 892-9999

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Common Stock, no par value

 

Trading

Symbol(s)

OPBK

 

Name of each exchange on which registered

NASDAQ Global Market

 

 

 

 

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

  

Accelerated filer

 

☐ 

 

 

 

 

Non-accelerated filer

 

  

  

Smaller reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

As of May 5, 2021, there were 15,044,540 outstanding shares of the Registrant’s common stock.

 

 

 


 

 

Table of Contents

 

 

 

Page

PART I.

FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements (Unaudited)

5

 

Consolidated Balance Sheets

5

 

Consolidated Statements of Income and Comprehensive Income

6

 

Consolidated Statements of Changes in Shareholders’ Equity

7

 

Consolidated Statements of Cash Flows

8

 

Notes to Unaudited Consolidated Financial Statements

9

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

29

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

48

Item 4.

Controls and Procedures

49

 

 

 

PART II.

OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

50

Item 1A.

Risk Factors

50

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

50

Item 3.

Defaults Upon Senior Securities

51

Item 4.

Mine Safety Disclosures

51

Item 5.

Other Information

51

Item 6.

Exhibits

52

 

 

Signatures

53

 

 

 

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Table of Contents

 

 

Cautionary Note Regarding Forward-Looking Statements

Certain matters set forth herein (including any exhibits hereto) constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, including forward-looking statements relating to the Company’s current business plans and expectations regarding future operating results. Forward-looking statements may include, but are not limited to, the use of forward-looking language, such as “likely result in,” “expects,” “anticipates,” “estimates,” “forecasts,” “projects,” “intends to,” or may include other similar words or phrases, such as “believes,” “plans,” “trend,” “objective,” “continues,” “remains,” or similar expressions, or future or conditional verbs, such as “will,” “would,” “should,” “could,” “may,” “might,” “can,” or similar verbs.

These forward-looking statements are subject to risks and uncertainties that could cause actual results, performance or achievements to differ materially from those projected. These risks and uncertainties, some of which are beyond our control, include, but are not limited to:

 

the uncertainties related to the coronavirus pandemic including, but not limited to, the potential adverse effect of the pandemic on the economy, our employees and customers, and our financial performance;

 

the impact of the federal CARES Act and the significant additional lending activities undertaken by the Company in connection with the Small Business Administration’s Paycheck Protection Program enacted thereunder, including risks to the Company with respect to the uncertain application by the Small Business Administration of new borrower and loan eligibility, forgiveness and audit criteria;

 

business and economic conditions, particularly those affecting the financial services industry and our primary market areas;

 

our ability to successfully manage our credit risk and the sufficiency of our allowance for loan losses;

 

factors that can impact the performance of our loan portfolio, including real estate values and liquidity in our primary market areas, the financial health of our commercial borrowers, the success of construction projects that we finance, including any loans acquired in acquisition transactions;

 

our ability to effectively execute our strategic plan and manage our growth;

 

interest rate fluctuations, which could have an adverse effect on our profitability;

 

liquidity issues, including fluctuations in the fair value and liquidity of the securities we hold for sale and our ability to raise additional capital, if necessary;

 

external economic and/or market factors, such as changes in monetary and fiscal policies and laws, including the interest rate policies of the Federal Reserve, inflation or deflation, changes in the demand for loans, and fluctuations in consumer spending, borrowing and savings habits, which may have an adverse impact on our financial condition;

 

continued or increasing competition from other financial institutions, credit unions, and non-bank financial services companies, many of which are subject to different regulations than we are;

 

challenges arising from unsuccessful attempts to expand into new geographic markets, products, or services;

 

restraints on the ability of Open Bank to pay dividends to us, which could limit our liquidity;

 

increased capital requirements imposed by banking regulators, which may require us to raise capital at a time when capital is not available on favorable terms or at all;

 

a failure in the internal controls we have implemented to address the risks inherent to the business of banking;

 

inaccuracies in our assumptions about future events, which could result in material differences between our financial projections and actual financial performance;

 

changes in our management personnel or our inability to retain, motivate and hire qualified management personnel;

 

disruptions, security breaches, or other adverse events, failures or interruptions in, or attacks on, our information technology systems;

 

disruptions, security breaches, or other adverse events affecting the third-party vendors who perform several of our critical processing functions;

 

an inability to keep pace with the rate of technological advances due to a lack of resources to invest in new technologies;

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Table of Contents

 

 

 

risks related to potential acquisitions;

 

political developments, uncertainties or instability, catastrophic events, acts of war or terrorism, or natural disasters, such as earthquakes, drought, pandemic diseases (such as the coronavirus) or extreme weather events, any of which may affect services we use or affect our customers, employees or third parties with which we conduct business;

 

incremental costs and obligations associated with operating as a public company;

 

the impact of any claims or legal actions to which we may be subject, including any effect on our reputation;

 

compliance with governmental and regulatory requirements, including the Dodd-Frank Act and others relating to banking, consumer protection, securities and tax matters, and our ability to maintain licenses required in connection with commercial mortgage origination, sale and servicing operations;

 

changes in federal tax law or policy; and

 

our ability to the manage the foregoing.

The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements included in this report. Because of these risks and other uncertainties, our actual future results, performance or achievement, or industry results, may be materially different from the results indicated by the forward looking statements in this report. In addition, our past results of operations are not necessarily indicative of our future results. You should not rely on any forward looking statements, which represent our beliefs, assumptions and estimates only as of the dates on which they were made, as predictions of future events. Any forward-looking statement speaks only as of the date on which it is made, and we do not undertake any obligation to update or review any forward-looking statement, whether as a result of new information, future developments or otherwise.

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PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

OP BANCORP

CONSOLIDATED BALANCE SHEETS (unaudited)

As of March 31, 2021 and December 31, 2020

 

 

 

 

March 31,

2021

 

 

December 31,

2020

 

 

 

(Dollars in thousands, except share data)

 

ASSETS

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

127,524

 

 

$

106,405

 

Securities available for sale, at fair value

 

 

102,413

 

 

 

91,791

 

Other investments

 

 

9,953

 

 

 

10,006

 

Loans held for sale

 

 

28,575

 

 

 

26,659

 

Loans receivable, net of allowance of $15,339 at March 31, 2021

   and $15,352 at December 31, 2020

 

 

1,140,533

 

 

 

1,084,384

 

Premises and equipment, net

 

 

4,368

 

 

 

4,544

 

Accrued interest receivable, net of allowance of $1,279 at March 31, 2021 and $643 at December 31, 2020

 

 

3,096

 

 

 

3,985

 

Servicing assets

 

 

7,492

 

 

 

7,360

 

Company owned life insurance (COLI)

 

 

10,941

 

 

 

10,879

 

Deferred tax assets

 

 

5,391

 

 

 

5,242

 

Operating right-of-use assets

 

 

6,443

 

 

 

6,786

 

Other assets

 

 

8,605

 

 

 

8,785

 

Total assets

 

$

1,455,334

 

 

$

1,366,826

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

Noninterest bearing

 

$

571,985

 

 

$

522,754

 

Interest bearing:

 

 

 

 

 

 

 

 

Money market and others

 

 

354,148

 

 

 

328,323

 

Time deposits greater than $250,000

 

 

190,960

 

 

 

200,210

 

Other time deposits

 

 

168,297

 

 

 

148,803

 

Total deposits

 

 

1,285,390

 

 

 

1,200,090

 

Federal Home Loan Bank advances

 

 

5,000

 

 

 

5,000

 

Accrued interest payable

 

 

622

 

 

 

1,021

 

Operating lease liabilities

 

 

8,016

 

 

 

8,429

 

Other liabilities

 

 

9,313

 

 

 

8,920

 

Total liabilities

 

 

1,308,341

 

 

 

1,223,460

 

Shareholders’ equity

 

 

 

 

 

 

 

 

Preferred stock – no par value; 10,000,000 shares authorized; 0 shares

   issued or outstanding at March 31, 2021 and December 31, 2020

 

 

 

 

 

 

Common stock – no par value; 50,000,000 shares authorized; 15,037,635

   and 15,016,700 shares issued and outstanding at March 31, 2021

   and December 31, 2020, respectively

 

 

78,654

 

 

 

78,657

 

Additional paid-in capital

 

 

8,652

 

 

 

8,521

 

Retained earnings

 

 

59,373

 

 

 

55,348

 

Accumulated other comprehensive income

 

 

314

 

 

 

840

 

Total shareholders’ equity

 

 

146,993

 

 

 

143,366

 

Total liabilities and shareholders' equity

 

$

1,455,334

 

 

$

1,366,826

 

 

See accompanying notes to consolidated financial statements

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Table of Contents

 

OP BANCORP

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (unaudited)

For the Three Months ended March 31, 2021 and 2020

 

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2021

 

 

2020

 

 

 

(Dollars in thousands, except share data)

 

Interest income

 

 

 

 

 

 

 

 

Interest and fees on loans

 

$

13,284

 

 

$

13,694

 

Interest on investment securities

 

 

236

 

 

 

319

 

Other interest income

 

 

112

 

 

 

332

 

Total interest income

 

 

13,632

 

 

 

14,345

 

Interest expense

 

 

 

 

 

 

 

 

Interest on deposits

 

 

877

 

 

 

3,229

 

Total interest expense

 

 

877

 

 

 

3,229

 

Net interest income

 

 

12,755

 

 

 

11,116

 

Provision for loan losses

 

 

620

 

 

 

743

 

Net interest income after provision for loan losses

 

 

12,135

 

 

 

10,373

 

 

 

 

 

 

 

 

 

 

Noninterest income

 

 

 

 

 

 

 

 

Service charges on deposits

 

 

274

 

 

 

368

 

Loan servicing fees, net of amortization

 

 

531

 

 

 

392

 

Gain on sale of loans

 

 

1,882

 

 

 

1,155

 

Other income

 

 

279

 

 

 

381

 

Total noninterest income

 

 

2,966

 

 

 

2,296

 

Noninterest expense

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

4,662

 

 

 

5,071

 

Occupancy and equipment

 

 

1,235

 

 

 

1,230

 

Data processing and communication

 

 

448

 

 

 

409

 

Professional fees

 

 

314

 

 

 

273

 

FDIC insurance and regulatory assessments

 

 

132

 

 

 

106

 

Promotion and advertising

 

 

177

 

 

 

162

 

Directors’ fees

 

 

116

 

 

 

233

 

Foundation donation and other contributions

 

 

507

 

 

 

330

 

Other expenses

 

 

375

 

 

 

393

 

Total noninterest expense

 

 

7,966

 

 

 

8,207

 

Income before income taxes

 

 

7,135

 

 

 

4,462

 

Income tax expense

 

 

2,058

 

 

 

1,163

 

Net income

 

$

5,077

 

 

$

3,299

 

Earnings per share - Basic

 

$

0.33

 

 

$

0.21

 

Earnings per share - Diluted

 

$

0.33

 

 

$

0.21

 

Other comprehensive (loss)/income:

 

 

 

 

 

 

 

 

Change in unrealized (loss)/income on securities available for sale

 

 

(747

)

 

 

1,294

 

Tax effect

 

 

221

 

 

 

(382

)

Total other comprehensive (loss)/income

 

 

(526

)

 

 

912

 

Comprehensive income

 

$

4,551

 

 

$

4,211

 

 

See accompanying notes to consolidated financial statements

 

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Table of Contents

 

 

OP BANCORP

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (unaudited)

 

 

 

 

Common Stock

 

 

Additional

 

 

 

 

 

 

Accumulated

Other

 

 

Total

 

 

 

Shares

Outstanding

 

 

Amount

 

 

Paid-in

Capital

 

 

Retained

Earnings

 

 

Comprehensive

Income (Loss)

 

 

Shareholders’

Equity

 

 

 

(Dollars in thousands, except share data)

 

Balance at January 1, 2020

 

 

15,703,276

 

 

$

86,381

 

 

$

7,524

 

 

$

46,483

 

 

$

188

 

 

$

140,576

 

Net income

 

 

 

 

 

 

 

 

 

 

 

3,299

 

 

 

 

 

 

3,299

 

Stock issued under stock-based

   compensation plans

 

 

130,046

 

 

 

305

 

 

 

 

 

 

 

 

 

 

 

 

305

 

Stock-based compensation

 

 

 

 

 

 

 

 

358

 

 

 

 

 

 

 

 

 

358

 

Repurchase of common stock

 

 

(717,454

)

 

 

(6,264

)

 

 

 

 

 

 

 

 

 

 

 

(6,264

)

Cash dividends declared

 

 

 

 

 

 

 

 

 

 

 

(1,087

)

 

 

 

 

 

(1,087

)

Change in other comprehensive income(loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

912

 

 

 

912

 

Balance at March 31, 2020

 

 

15,115,868

 

 

$

80,422

 

 

$

7,882

 

 

$

48,695

 

 

$

1,100

 

 

$

138,099

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2021

 

 

15,016,700

 

 

$

78,657

 

 

$

8,521

 

 

$

55,348

 

 

$

840

 

 

$

143,366

 

Net income

 

 

 

 

 

 

 

 

 

 

 

5,077

 

 

 

 

 

 

5,077

 

Stock issued under stock-based

   compensation plans

 

 

24,765

 

 

 

25

 

 

 

 

 

 

 

 

 

 

 

 

25

 

Stock-based compensation

 

 

 

 

 

 

 

 

131

 

 

 

 

 

 

 

 

 

131

 

Repurchase of common stock

 

 

(3,830

)

 

 

(28

)

 

 

 

 

 

 

 

 

 

 

 

(28

)

Cash dividends declared

 

 

 

 

 

 

 

 

 

 

 

(1,052

)

 

 

 

 

 

(1,052

)

Change in other comprehensive income(loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(526

)

 

 

(526

)

Balance at March 31, 2021

 

 

15,037,635

 

 

$

78,654

 

 

$

8,652

 

 

$

59,373

 

 

$

314

 

 

$

146,993

 

 

See accompanying notes to consolidated financial statements

 

 

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Table of Contents

 

 

OP BANCORP

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

For the Three Months ended March 31, 2021 and 2020

 

 

 

 

Three Months Ended March 31,

 

 

 

2021

 

 

2020

 

 

 

(Dollars in thousands)

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net income

 

$

5,077

 

 

$

3,299

 

Adjustments to reconcile net income to net cash and cash equivalents provided

   by operating activities:

 

 

 

 

 

 

 

 

Provision for loan losses

 

 

620

 

 

 

743

 

Depreciation and amortization of premises and equipment

 

 

328

 

 

 

329

 

Amortization of net premiums on securities

 

 

232

 

 

 

58

 

Stock-based compensation

 

 

131

 

 

 

358

 

Gain on sales of loans

 

 

(1,882

)

 

 

(1,155

)

Earnings on company owned life insurance (COLI)

 

 

(62

)

 

 

(65

)

Origination of loans held for sale

 

 

(25,413

)

 

 

(20,566

)

Proceeds from sales of loans held for sale

 

 

24,716

 

 

 

19,012

 

Amortization of servicing assets

 

 

438

 

 

 

467

 

Amortization of low income housing partnerships

 

 

127

 

 

 

54

 

Net change in fair value of equity investment with readily determinable fair value

 

 

66

 

 

 

(58

)

Net change in:

 

 

 

 

 

 

 

 

Accrued interest receivable

 

 

253

 

 

 

110

 

Deferred tax assets

 

 

72

 

 

 

98

 

Other assets

 

 

41

 

 

 

968

 

Accrued interest payable

 

 

(399

)

 

 

(94

)

Other liabilities

 

 

510

 

 

 

(1,192

)

Net cash from operating activities

 

 

4,855

 

 

 

2,366

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

Net change in loans receivable

 

 

(56,039

)

 

 

(6,445

)

Proceeds from matured, called, or paid-down securities available for sale

 

 

8,325

 

 

 

5,605

 

Purchase of securities available for sale

 

 

(19,926

)

 

 

 

Purchase of premises and equipment, net

 

 

(152

)

 

 

(245

)

Investment in low income housing partnerships

 

 

(189

)

 

 

(759

)

Net cash from investing activities

 

 

(67,981

)

 

 

(1,844

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

Net change in deposits

 

 

85,300

 

 

 

31,487

 

Cash received from stock option exercises

 

 

25

 

 

 

305

 

Repurchase of common stock

 

 

(28

)

 

 

(6,264

)

Cash dividend paid on common stock

 

 

(1,052

)

 

 

(1,087

)

Net cash from financing activities

 

 

84,245

 

 

 

24,441

 

Net change in cash and cash equivalents

 

 

21,119

 

 

 

24,963

 

Cash and cash equivalents at beginning of period

 

 

106,405

 

 

 

86,036

 

Cash and cash equivalents at end of period

 

$

127,524

 

 

$

110,999

 

Supplemental cash flow information

 

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

 

Income taxes

 

$

2,868

 

 

$

1,335

 

Interest

 

 

3,628

 

 

 

3,323

 

Supplemental noncash disclosure:

 

 

 

 

 

 

 

 

New commitments to low income housing partnership investments

 

$

 

 

$

3,477

 

 

See accompanying notes to consolidated financial statements

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Table of Contents

 

OP BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

Note 1. Business Description

OP Bancorp (the “Company”) is a California corporation whose common stock is quoted on the Nasdaq Global Market under the ticker symbol, “OPBK.” The Company was formed to acquire 100% of the voting equity of Open Bank (the “Bank”) and commenced operation as a bank holding company on June 1, 2016. This transaction was treated as an internal reorganization as all shareholders of the Bank became shareholders of the Company. The Company has no operations other than ownership of the Bank. The Bank is a California state-chartered and FDIC-insured financial institution, which began its operations on June 10, 2005. Headquartered in downtown Los Angeles, California, the Company operates primarily in the traditional banking business arena that includes accepting deposits and making loans and investments. The Company’s primary deposit products are demand and time deposits, and the primary lending products are commercial business loans to small to medium sized businesses. The Company is operating with 9 full service branches, eight of which are located in California, in Downtown Los Angeles, Los Angeles Fashion District, Los Angeles Koreatown, Gardena, Buena Park and Santa Clara, and one full service branch is located in Carrollton, Texas. The Company also has 4 loan production offices in Atlanta, Georgia, Aurora, Colorado, and Lynwood and Seattle, Washington.

Note 2. Summary of Significant Accounting Policies

Basis of Presentation: The accompanying unaudited consolidated financial statements and notes thereto of the Company have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) for Form 10-Q and conform to practices within the banking industry and include all of the information and disclosures required by accounting principles generally accepted in the United States of America (“GAAP”) for interim financial reporting. The accompanying unaudited consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments), which are necessary for a fair presentation of the financial results for the interim periods presented, including eliminating intercompany transactions and balances. The results of operations for the interim periods are not necessarily indicative of the results for the full year. These interim unaudited financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto as of and for the year ended December 31, 2020, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.

Use of Estimates:  To prepare financial statements in conformity with GAAP, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and actual results could differ. The Company could experience a material adverse effect on its business as a result of the impact of the novel coronavirus pandemic (“COVID-19”) and the resulting governmental actions to curtail its spread. It is at least reasonably possible that the estimates based on information which was available at the date of the financial statements will change in the near term due to the COVID-19 pandemic and that the effect of the change would be material to the financial statements, including the allowance for loan losses. The extent to which the COVID-19 pandemic will impact our estimates and assumptions is highly uncertain and we are unable to make an estimate, at this time.

Concentration of Risk:  Most of the Company’s customers are located within Los Angeles County and the surrounding area. The concentration of loans originated in this area may subject the Company to the risk of adverse impacts associated with economic, regulatory or other developments that could occur in Southern California.  The Company has significant concentration in commercial real estate loans. The Company obtains what it believes to be sufficient collateral to secure potential losses. The extent and value of the collateral obtained varies based upon the details underlying each loan agreement.

 

There have been no significant or material changes to the Company’s accounting policies during the three months ended March 31, 2021, as compared to the Summary of Significant Accounting Policies as described in “Note 1 of the Notes to Consolidated Financial Statements” in the Company’s audited consolidated financial statements included in its Annual Report on Form 10-K for the year ended December 31, 2020.

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Recent Accounting Pronouncements:

In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13). The objective of ASU 2016-13 is to provide financial statement users with decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit. ASU 2016-13 includes provisions that require financial assets measured at amortized cost (such as loans and held to maturity (HTM) debt securities) to be presented at the net amount expected to be collected. This will be accomplished through recognition of an estimate of all current expected credit losses. The estimate will include forecasted information for the timeframe that an entity is able to develop reasonable and supportable forecasts. This is a change from the current practice of recognizing incurred losses based on the probable initial recognition threshold under current GAAP. In addition, credit losses on available for sale (AFS) debt securities will be recorded through an allowance for credit losses rather than as a write-down. Under ASU 2016-13, an entity will be able to record reversals of credit losses in current period income when the estimate of credit losses declines, whereas current GAAP prohibits reflecting those improvements in current period earnings.

 

In July 2019, FASB proposed the effective date delay to January 2020 for SEC filers, excluding smaller reporting companies (“SRCs”) and emerging growth companies (“EGCs”), and January 2023 for all other entities including SRCs and EGCs, and on October 2019, FASB voted to approve the proposed delay. The Company expects the adoption date of ASU 2016-13 will be January 2023. ASU 2016-13 will be applied through a cumulative effect adjustment to retained earnings (modified-retrospective approach), except for debt securities for which an other-than-temporary impairment had been recognized before the effective date. A prospective transition approach is required for these debt securities. The Company is currently evaluating the effects of ASU 2016-13 on its financial statements and disclosures, including software solutions, data requirements and loss estimation methodologies. The company has engaged a third party advisor to develop a new expected loss model. While the effects cannot yet be quantified, the Company expects ASU 2016-13 to add complexity and costs to its current credit loss evaluation process.

 

In March 2020, FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU provides optional expedients and exceptions for contracts, hedging relationships, and other transactions that reference LIBOR or other reference rates expected to be discontinued because of reference rate reform. The ASU is effective for all entities as of March 12, 2020 through December 31, 2022. The Company is in transition to use SOFR to replace LIBOR and does not expect the transition willl be material to its consolidated statement of income.

 

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.  This amendment simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amedments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. The effective date will be January 2023. The Company does not expect the adoption of this guidance will be material to its consolidated statement of income.

 

Note 3. Securities

The following table summarizes the amortized cost, the corresponding amounts of gross unrealized gains and losses, and estimated fair value of securities available for sale as of March 31, 2021 and December 31, 2020:

 

 

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair

Value

 

As of March 31, 2021:

 

(Dollars in thousands)

 

Available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government sponsored agency securities

 

$

1,000

 

 

$

1

 

 

$

 

 

$

1,001

 

Mortgage-backed securities: residential

 

 

25,196

 

 

 

352

 

 

 

(120

)

 

 

25,428

 

Collateralized mortgage obligations: residential

 

 

75,772

 

 

 

679

 

 

 

(467

)

 

 

75,984

 

Total available for sale

 

$

101,968

 

 

$

1,032

 

 

$

(587

)

 

$

102,413

 

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Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair

Value

 

As of December 31, 2020:

 

(Dollars in thousands)

 

Available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government sponsored agency securities

 

$

1,000

 

 

$

5

 

 

$

 

 

$

1,005

 

Mortgage-backed securities: residential

 

 

19,281

 

 

 

430

 

 

 

(7

)

 

 

19,704

 

Collateralized mortgage obligations: residential

 

 

70,318

 

 

 

814

 

 

 

(50

)

 

 

71,082

 

Total available for sale

 

$

90,599

 

 

$

1,249

 

 

$

(57

)

 

$

91,791

 

 

There were 0 sales of securities available for sale in the three months ended March 31, 2021 or 2020. The amortized cost and estimated fair value of securities available for sale at March 31, 2021, by contractual maturity, are shown below. Securities without a contractual maturity are shown separately.

 

 

 

 

 

 

 

Amortized

Cost

 

 

Fair

Value

 

As of March 31, 2021:

 

 

 

 

 

(Dollars in thousands)

 

Available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

Within one year

 

 

 

 

 

$

1,000

 

 

$

1,001

 

One to five years

 

 

 

 

 

 

938

 

 

 

978

 

Mortgage-backed securities: residential

 

 

 

 

 

 

24,258

 

 

 

24,450

 

Collateralized mortgage obligations: residential

 

 

 

 

 

 

75,772

 

 

 

75,984

 

Total available for sale

 

 

 

 

 

$

101,968

 

 

$

102,413

 

 

Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. At March 31, 2021 and December 31, 2020, there were no holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of shareholders’ equity.

 

The following table summarizes securities with unrealized losses as of March 31, 2021 and December 31, 2020, respectively, aggregated by length of time held in a continuous unrealized loss position:

 

 

 

Less Than 12 Months

 

 

12 Months or Longer

 

 

Total

 

 

 

Fair

Value

 

 

Unrealized

Losses

 

 

Fair

Value

 

 

Unrealized

Losses

 

 

Fair

Value

 

 

Unrealized

Losses

 

As of March 31, 2021:

 

(Dollars in thousands)

 

Available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities: residential

 

$

12,426

 

 

$

(120

)

 

$

 

 

$

 

 

$

12,426

 

 

$

(120

)

Collateralized mortgage obligations: residential

 

 

34,616

 

 

 

(467

)

 

 

 

 

 

 

 

 

34,616

 

 

 

(467

)

Total available for sale

 

$

47,042

 

 

$

(587

)

 

$

 

 

$

 

 

$

47,042

 

 

$

(587

)

 

 

 

Less Than 12 Months

 

 

12 Months or Longer

 

 

Total

 

 

 

Fair

Value

 

 

Unrealized

Losses

 

 

Fair

Value

 

 

Unrealized

Losses

 

 

Fair

Value

 

 

Unrealized

Losses

 

As of December 31, 2020:

 

(Dollars in thousands)

 

Available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities: residential

 

$

3,089

 

 

$

(7

)

 

$

 

 

$

 

 

$

3,089

 

 

$

(7

)

Collateralized mortgage obligations: residential

 

 

13,593

 

 

 

(50

)

 

 

 

 

 

 

 

 

13,593

 

 

 

(50

)

Total available for sale

 

$

16,682

 

 

$

(57

)

 

$

-

 

 

$

-

 

 

$

16,682

 

 

$

(57

)

 

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Management evaluates securities for other-than-temporary impairment (“OTTI”) on at least a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. For securities in an unrealized loss position, management considers the extent and duration of the unrealized loss, along with the financial condition and near-term prospects of the issuer. Management also assesses whether it intends to sell, or whether it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components, as follows: (i) OTTI related to credit loss, which must be recognized in the income statement, and (ii) OTTI related to other factors, which is recognized in other comprehensive income. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis. As of March 31, 2021, management believes 0 securities with unrealized losses were OTTI.

 

There were 0 securities pledged as collateral as of March 31, 2021 or December 31, 2020.

Other investments as of March 31, 2021 and December 31, 2020, consisted of the following:

 

 

 

March 31,

2021

 

 

December 31,

2020

 

 

 

(Dollars in thousands)

 

Federal Home Loan Bank (FHLB) stock

 

$

6,043

 

 

$

6,043

 

Pacific Coast Bankers Bank (PCBB) stock

 

 

190

 

 

 

190

 

Mutual fund - CRA qualified

 

 

3,720

 

 

 

3,773

 

Total other investments

 

$

9,953

 

 

$

10,006

 

 

As of March 31, 2021 and December 31, 2020, the Company has $3.7 million and $3.8 million, respectively, of a mutual fund that the Company invested to satisfy the CRA requirements, which is reported at fair value. Unrealized holding losses on this investment were $79,000 for the three months ended March 31, 2021 and unrealized holding gains on this investment were $58,000 for the three months ended March 31, 2020. These gains and losses are included in Other Income in the Statements of Income.

 

Note 4. Loans

The composition of the loan portfolio was as follows at March 31, 2021 and December 31, 2020:

 

 

 

March 31,

2021

 

 

December 31,

2020

 

 

 

(Dollars in thousands)

 

Real estate:

 

 

 

 

 

 

 

 

Commercial real estate

 

$

662,445

 

 

$

651,684

 

SBA loans—real estate

 

 

139,503

 

 

 

136,224

 

Total real estate

 

 

801,948

 

 

 

787,908

 

SBA loans—non-real estate

 

 

123,682

 

(1)

 

75,151

 

Commercial and industrial

 

 

103,883

 

 

 

107,307

 

Home mortgage

 

 

125,285

 

 

 

128,212

 

Consumer

 

 

1,074

 

 

 

1,158

 

Gross loans receivable

 

 

1,155,872

 

 

 

1,099,736

 

Allowance for loan losses

 

 

(15,339

)

 

 

(15,352

)

Loans receivable, net

 

$

1,140,533

 

 

$

1,084,384

 

 

 

 

 

 

 

 

 

 

(1) At March 31, 2021 and December 31, 2020, SBA loans - non-real estate balances include SBA PPP loans of $113.6 million and $64.9 million, respectively.

 

 

NaN loans were outstanding to related parties as of March 31, 2021 or December 31, 2020.  

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Table of Contents

 

The activity in the allowance for loan losses for the three months ended March 31, 2021 and 2020 was as follows:

 

 

 

 

 

 

 

 

 

 

SBA

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

SBA Loans

 

 

Loans Non-

 

 

Commercial

 

 

Home

 

 

 

 

 

 

 

 

 

 

Real Estate

 

 

Real Estate

 

 

Real Estate

 

 

and Industrial

 

 

Mortgage

 

 

Consumer

 

 

Total

 

 

(Dollars in thousands)

 

Three months ended March 31, 2021:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

$

8,505

 

 

$

1,802

 

 

$

278

 

 

$

2,563

 

 

$

2,185

 

 

$

19

 

 

$

15,352

 

Provision for loan losses (1)

 

89

 

 

 

228

 

 

 

14

 

 

 

(232

)

 

 

(110

)

 

 

(5

)

 

 

(16

)

Charge-offs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recoveries

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3

 

 

 

3

 

Ending balance

$

8,594

 

 

$

2,030

 

 

$

292

 

 

$

2,331

 

 

$

2,075

 

 

$

17

 

 

$

15,339

 

Three months ended March 31, 2020:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

$

6,000

 

 

$

939

 

 

$

121

 

 

$

1,289

 

 

$

1,667

 

 

$

34

 

 

$

10,050

 

Provision for loan losses

 

210

 

 

 

143

 

 

 

116

 

 

 

3

 

 

 

254

 

 

 

17

 

 

 

743

 

Charge-offs

 

 

 

 

 

 

 

(45

)

 

 

 

 

 

 

 

 

 

 

 

(45

)

Recoveries

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

$

6,210

 

 

$

1,082

 

 

$

192

 

 

$

1,292

 

 

$

1,921

 

 

$

51

 

 

$

10,748

 

(1) Loan loss provision for the three months ended March 31, 2021, reported on income statement is $620,000. The difference of $636,000 is allocated to allowance on accrued interest receivable on loan deferrals and loans that are no longer on deferral but have not fully caught up on their accrued interest.

 

 

 

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Table of Contents

 

 

The following table presents the balance in the allowance for loan losses and the recorded investment in loans (including accrued interest receivable of $4.1 million and $4.4 million as of March 31, 2021 and December 31, 2020, respectively) by portfolio segment as of March 31, 2021 and December 31, 2020:

 

 

 

Loans

Individually

Evaluated

for Impairment

 

 

Loans

Collectively

Evaluated

for Impairment

 

 

Total

 

As of March 31, 2021:

 

(Dollars in thousands)

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

$

 

 

$

8,594

 

 

$

8,594

 

SBA loans—real estate

 

 

 

 

 

2,030

 

 

 

2,030

 

SBA loans—non-real estate

 

 

125

 

 

 

167

 

 

 

292

 

Commercial and industrial

 

 

326

 

 

 

2,005

 

 

 

2,331

 

Home mortgage

 

 

 

 

 

2,075

 

 

 

2,075

 

Consumer

 

 

 

 

 

17

 

 

 

17

 

Total

 

$

451

 

 

$

14,888

 

 

$

15,339

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

$

 

 

$

664,672

 

 

$

664,672

 

SBA loans—real estate

 

 

 

 

 

140,160

 

 

 

140,160

 

SBA loans—non-real estate

 

 

335

 

 

 

123,876

 

 

 

124,211

 

Commercial and industrial

 

 

327

 

 

 

103,785

 

 

 

104,112

 

Home mortgage

 

 

 

 

 

125,759

 

 

 

125,759

 

Consumer

 

 

 

 

 

1,076

 

 

 

1,076

 

Total

 

$

662

 

 

$

1,159,328

 

 

$

1,159,990

 

As of December 31, 2020:

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

$

 

 

$

8,505

 

 

$

8,505

 

SBA loans—real estate

 

 

 

 

 

1,802

 

 

 

1,802

 

SBA loans—non-real estate

 

 

87

 

 

 

191

 

 

 

278

 

Commercial and industrial

 

 

330

 

 

 

2,233

 

 

 

2,563

 

Home mortgage

 

 

 

 

 

2,185

 

 

 

2,185

 

Consumer

 

 

 

 

 

19

 

 

 

19

 

Total

 

$

417

 

 

$

14,935

 

 

$

15,352

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

$

 

 

$

654,235

 

 

$

654,235

 

SBA loans—real estate

 

 

 

 

 

136,873

 

 

 

136,873

 

SBA loans—non-real estate

 

 

174

 

 

 

75,477

 

 

 

75,651

 

Commercial and industrial

 

 

330

 

 

 

107,175

 

 

 

107,505

 

Home mortgage

 

 

 

 

 

128,683

 

 

 

128,683

 

Consumer

 

 

 

 

 

1,161

 

 

 

1,161

 

Total

 

$

504

 

 

$

1,103,604

 

 

$

1,104,108

 

 

 

The following table presents the recorded investment of individually impaired loans and the specific allowance for loan losses as of March 31, 2021 and December 31, 2020. The difference between the unpaid principal balance (net of partial charge-offs) and the recorded investment in the loans is not considered to be material.

 

 

 

As of March 31, 2021

 

 

As of December 31, 2020

 

 

 

Recorded

 

 

Allowance

 

 

Recorded

 

 

Allowance

 

 

 

Investment

 

 

Allocated

 

 

Investment

 

 

Allocated

 

 

 

(Dollars in thousands)

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SBA loans—non-real estate

 

$

335

 

 

$

124

 

 

$

174

 

 

$

87

 

Commercial and industrial

 

 

327

 

 

 

327

 

 

 

330

 

 

 

330

 

Total

 

$

662

 

 

$

451

 

 

$

504

 

 

$

417

 

14


Table of Contents

 

 

 

The following table presents information related to impaired loans by class of loans for the three months ended March 31, 2021 and 2020. The difference between interest income recognized and cash basis interest recognized was immaterial.

 

 

 

Average

 

 

Interest

 

 

 

Recorded

 

 

Income

 

 

 

Investment

 

 

Recognized

 

For the three months ended March 31, 2021:

 

(Dollars in thousands)

 

With an allowance recorded:

 

 

 

 

 

 

 

 

SBA loans—non-real estate

 

$

255

 

 

$

4

 

Commercial and industrial

 

 

330

 

 

 

3

 

Total

 

$

585

 

 

$

7

 

For the three months ended March 31, 2020:

 

 

 

 

 

 

 

 

With no related allowance recorded:

 

 

 

 

 

 

 

 

SBA loans—real estate

 

$

480

 

 

$

 

SBA loans—non-real estate

 

 

33

 

 

 

 

With an allowance recorded:

 

 

 

 

 

 

 

 

SBA loans—non-real estate

 

 

126

 

 

 

9

 

Commercial and industrial

 

 

331

 

 

 

4

 

Total

 

$

970

 

 

$

13

 

 

 The following table presents the recorded investment in nonaccrual loans and loans past due greater than 90 days still accruing interest, by class of loans, as of March 31, 2021 and December 31, 2020:

 

 

 

Nonaccrual

 

 

Loans >90 Days

Past Due & Still

Accruing

 

 

Total

 

 

 

(Dollars in thousands)

 

As of March 31, 2021:

 

 

 

 

 

 

 

 

 

 

 

 

SBA loans—non-real estate

 

$

221

 

 

$

 

 

$

221

 

Commercial and industrial

 

 

327

 

 

 

 

 

 

327

 

Home mortgage

 

 

600

 

 

 

 

 

 

600

 

Total

 

$

1,148

 

 

$

 

 

$

1,148

 

As of December 31, 2020:

 

 

 

 

 

 

 

 

 

 

 

 

SBA loans—non-real estate

 

$

56

 

 

$

 

 

$

56

 

Commercial and industrial

 

 

330

 

 

 

 

 

 

330

 

Home mortgage

 

 

599

 

 

 

 

 

 

599

 

Total

 

$

985

 

 

$

 

 

$

985

 

 

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Table of Contents

 

 

 Nonaccrual loans and loans past due greater than 90 days still accruing interest include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.

The following table represents the aging of the recorded investment in past due loans as of March 31, 2021 and December 31, 2020:

 

 

 

30-59 Days

Past Due

 

 

60-89 Days

Past Due

 

 

> 90 Days

Past Due

 

 

Total

Past Due

 

 

Loans Not

Past Due

 

 

Total

 

As of March 31, 2021:

 

(Dollars in thousands)

 

Commercial real estate

 

$

 

 

$

 

 

$

 

 

$

 

 

$

664,672

 

 

$

664,672

 

SBA—real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

140,160

 

 

 

140,160

 

SBA—non-real estate

 

 

 

 

 

 

 

 

221

 

 

 

221

 

 

 

123,990

 

 

 

124,211

 

Commercial and industrial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

104,112

 

 

 

104,112

 

Home mortgage

 

 

 

 

 

 

 

 

600

 

 

 

600

 

 

 

125,159

 

 

 

125,759

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,076

 

 

 

1,076

 

 

 

$

 

 

$

 

 

$

821

 

 

$

821

 

 

$

1,159,169

 

 

$

1,159,990

 

As of December 31, 2020:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

$

 

 

$

 

 

$

 

 

$

 

 

$

654,235

 

 

$

654,235

 

SBA—real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

136,873

 

 

 

136,873

 

SBA—non-real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

75,651

 

 

 

75,651

 

Commercial and industrial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

107,505

 

 

 

107,505

 

Home mortgage

 

 

 

 

 

 

 

 

599

 

 

 

599

 

 

 

128,084

 

 

 

128,683

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,161

 

 

 

1,161

 

 

 

$

 

 

$

 

 

$

599

 

 

$

599

 

 

$

1,103,509

 

 

$

1,104,108

 

 

Troubled Debt Restructurings: As of March 31, 2021 and December 31, 2020, the Company had a recorded investment in TDRs of $327,000 and $330,000, respectively. As of March 31, 2021 and December 31, 2020, the Company has allocated $327,000 and $330,000 of specific reserves to customers whose loan terms have been modified in TDRs, respectively. The Company has not committed to lend any additional amounts to customers with outstanding loans that are classified as TDRs.

Modifications made were primarily extensions of existing payment modifications on loans previously identified as TDRs. There were 0 new loans identified as TDRs during the three months ended March 31, 2021 or 2020. There were 0 payment defaults during the three months ended March 31, 2021, and March 31, 2020, of loans that had been modified as TDRs within the previous twelve months.

Loan payment deferrals: Through March 31, 2021, the Company has processed loan deferments for borrowers across multiple industries representing 185 loan accounts, with an aggregate loan balance of $236.8 million under the interagency guidance and Section 4013 of the CARES Act. Recent interagency guidance from the Federal Reserve and the Federal Deposit Insurance Corporation confirmed with the FASB that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief, are not to be considered TDRs. We believe our loan modification program satisfies the applicable requirements.

As of March 31, 2021, 171 loans with an aggregate balance of $217.8 million, including 64 home mortgage loans with an aggregate balance of $27.4 million, have resumed regular payments.

The following table represents the loan deferment status change by loan type as of March 31, 2021:

 

Loan Deferment Status Change by Loan Type

 

 

 

Total deferments

 

 

Payment resumed

 

 

 

 

 

 

 

 

 

 

 

under the CARES Act

 

 

or paid off

 

 

Remaining deferments

 

(Dollars in thousands)

 

as of March 31, 2021

 

 

through March 31, 2021

 

 

as of March 31, 2021

 

Loan Type

 

Number

of

accounts

 

 

Balance

 

 

Number

of

accounts

 

 

Balance

 

 

Number

of

accounts

 

 

Balance

 

Loans, excluding home mortgage and

   consumer loans

 

 

116

 

 

 

206,582

 

 

 

107

 

 

 

190,353

 

 

 

9

 

 

 

16,229

 

Home Mortgage loans

 

 

69

 

 

 

30,205

 

 

 

64

 

 

 

27,444

 

 

 

5

 

 

 

2,761

 

Total

 

 

185

 

 

$

236,787

 

 

 

171

 

 

$

217,797

 

 

 

14

 

 

$

18,990

 

 

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Paycheck Protection Program loans:  A provision in the CARES Act created the Paycheck Protection Program (“PPP”), which is administered by the Small Business Administration (“SBA”). The PPP is intended to provide loans to small businesses to pay expenses related to their employees, rent, mortgage interest and utilities. The loans may be forgiven conditioned upon the client providing applicable documentation evidencing their compliant with the terms of the program, including compliance regarding the use of funds. The Bank is an approved SBA lender and began accepting applications for the program on April 3, 2020.   

 The Company originated 978 loans with an aggregate loan balance of $66.3 million under the first draw of SBA PPP, and $22.9 million and 429 loans from the first draw of SBA PPP loans have been forgiven as of March 31, 2021. The Company originated 1,336 loans with an aggregate loan balance of $74.2 million under the second draw of the SBA PPP loans as of March 31, 2021. The PPP loans are included in the SBA—non-real estate in the Company’s loan portfolio.

Credit Quality Indicators: The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. For consumer loans, a credit grade is established at inception, and generally only adjusted based on performance. The Company analyzes loans individually by classifying the loans according to their credit risk. This analysis is performed on a quarterly basis. The Company uses the following definitions for risk ratings:

Special Mention—Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the Company’s credit position at some future date.

Substandard—Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful—Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass-rated loans.

As of March 31, 2021 and December 31, 2020, and based on the most recent analysis performed, the balance of loans categorized by risk category and class of loans is as follows:

 

 

 

Pass

 

 

Special

Mention

 

 

Substandard

 

 

Doubtful

 

 

Total

 

As of March 31, 2021:

 

(Dollars in thousands)

 

Commercial real estate

 

$

664,672

 

 

$

 

 

$

 

 

$

 

 

$

664,672

 

SBA loans—real estate

 

 

138,861

 

 

 

530

 

 

 

769

 

 

 

 

 

 

140,160

 

SBA loans—non-real estate

 

 

123,826

 

 

 

 

 

 

385

 

 

 

 

 

 

124,211

 

Commercial and industrial

 

 

99,280

 

 

 

 

 

 

4,832

 

 

 

 

 

 

104,112

 

Home mortgage

 

 

125,159

 

 

 

 

 

 

600

 

 

 

 

 

 

125,759

 

Consumer

 

 

1,076

 

 

 

 

 

 

 

 

 

 

 

 

1,076

 

 

 

$

1,152,874

 

 

$

530

 

 

$

6,586

 

(1)

$

 

 

$

1,159,990

 

As of December 31, 2020:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

$

654,235

 

 

$

 

 

$

 

 

$

 

 

$

654,235

 

SBA loans—real estate

 

 

134,815

 

 

 

535

 

 

 

1,523

 

 

 

 

 

 

136,873

 

SBA loans—non-real estate

 

 

75,453

 

 

 

 

 

 

198

 

 

 

 

 

 

75,651

 

Commercial and industrial

 

 

102,500

 

 

 

 

 

 

5,005

 

 

 

 

 

 

107,505

 

Home mortgage

 

 

128,084

 

 

 

 

 

 

599

 

 

 

 

 

 

128,683

 

Consumer

 

 

1,161

 

 

 

 

 

 

 

 

 

 

 

 

1,161

 

 

 

$

1,096,248

 

 

$

535

 

 

$

7,325

 

(1)

$

 

 

$

1,104,108

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) Substandard loans include the guaranteed portion of unsold SBA loans. The aggregate balance of substandard loans, net of the guaranteed portion of unsold SBA loans is $6.4 million as of March 31, 2021. The Company did 0t have the guaranteed portion of unsold SBA loans as of December 31, 2020.

 

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Note 5. Leases

The Company’s operating leases are real estate leases which are comprised of its headquarters and office facilities from nonaffiliated parties with remaining lease terms ranging from four months to nine years as of March 31, 2021. Certain lease arrangements contain extension options which are typically around five years. As these extension options are not generally considered reasonably certain of exercise, they are not included in the lease term.

At March 31, 2021 and December 31, 2020, operating right-of-use (“ROU”) assets were $6.4 million $6.8 million, respectively, and related liabilities were $8.0 million and $8.4 million, respectively. Short-term operating leases, which are defined as leases with term of twelve months or less, were not recognized as ROU assets with related lease liabilities as permitted under ASU No. 2016-02. The lease payments on short-term operating leases are immaterial. The Company did not have any finance leases at March 31, 2021 and December 31, 2020.

Operating lease ROU assets represent the Company’s right to use the underlying asset during the lease term, and operating lease liabilities represent the Company’s obligation to make lease payments arising from the lease. ROU assets and operating lease liabilities are recognized at the lease commencement date based on the present value of the remaining lease payments using the Company’s incremental borrowing rate at the lease commencement date. Operating lease expense, which is comprised of amortization of the ROU asset and the implicit interest accreted on the operating lease liability, is recognized on a straight-line basis over the lease term and is recorded in occupancy and equipment expense in the consolidated statements of income. The Company’s occupancy and equipment expense also includes variable lease costs which is comprised of the Company's share of actual costs for utilities, common area maintenance, property taxes, and insurance that are not included in lease liabilities and are expensed as incurred. Variable lease costs can also include rent escalations based on changes to indices, such as the Consumer Price Index, where the Company estimates future rent increases and records the actual difference to variable costs.

The table below summarized the Company’s total lease cost for the associated period:

 

 

 

Three Months Ended March 31,

 

(Dollars in thousands)

 

2021

 

 

2020

 

Operating lease cost

 

$

420

 

 

$

444

 

Variable lease cost

 

 

218

 

 

 

184

 

Total lease cost

 

$

638

 

 

$

628

 

 

The table below summarizes supplemental information related to the Company’s operating leases, as of the associated period:

 

(Dollars in thousands)

 

March 31, 2021

 

 

December 31, 2020

 

Operating right-of-use assets

 

$

6,443

 

 

$

6,786

 

Operating lease liabilities

 

 

8,016

 

 

 

8,429

 

 

 

 

 

 

 

 

 

 

Weighted average remaining lease term - operating leases

 

4.8 years

 

 

5.0 years

 

Weighted average discount rate - operating leases

 

 

2.99

%

 

 

2.99

%

 

 

 

Three Months Ended March 31,

 

(Dollars in thousands)

 

2021

 

 

2020

 

Cash paid for amounts included in the measurement of lease liabilities:

 

 

 

 

 

 

 

 

Operating cash flows from operating leases

 

$

505

 

 

$

500

 

 

Rent expense was $638,000 and $628,000 for the three months ended March 31, 2021 and 2020, respectively.  

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The table below summarizes the remaining contractually obligated lease payments and a reconciliation to the lease liability reported on the consolidated balance sheet as of March 31, 2021:

 

(Dollars in thousands)

 

March 31, 2021

 

2021 remaining

 

$

1,536

 

2022

 

 

2,032

 

2023

 

 

1,811

 

2024

 

 

1,700

 

2025

 

 

676

 

Thereafter

 

 

956

 

Total lease payments

 

 

8,711

 

Discount to present value

 

 

(695

)

Total lease liability

 

$

8,016

 

 

Note 6. Premises and equipment

The Company’s premises and equipment consisted of the following as of March 31, 2021 and December 31, 2020:

 

 

 

March 31, 2021

 

 

December 31, 2020

 

 

 

(Dollars in thousands)

 

Leasehold improvements

 

$

6,882

 

 

$

6,878

 

Furniture and fixtures

 

 

3,316

 

 

 

3,307

 

Equipment and others

 

 

2,732

 

 

 

2,593

 

Total cost

 

 

12,930

 

 

 

12,778

 

Accumulated depreciation

 

 

(8,562

)

 

 

(8,234

)

Net book value

 

$

4,368

 

 

$

4,544

 

 

Total depreciation expense included in occupancy and equipment expenses was $328,000 and $329,000 for the three months ended March 31, 2021 and 2020, respectively.  

Note 7. Servicing Assets

Servicing assets at March 31, 2021 and December 31, 2020 were $7.5 million and $7.4 million, respectively.

Activity for loan servicing assets during the three months ended March 31, 2021 and 2020 is as follows:

 

 

 

Three Months Ended March 31,

 

 

 

 

2021

 

 

 

2020

 

 

 

(Dollars in thousands)

 

Beginning balance

 

$

7,360

 

 

$

7,024

 

Additions

 

 

570

 

 

 

406

 

Amortized to expense

 

 

(438

)

 

 

(467

)

Ending balance

 

$

7,492

 

 

$

6,963

 

 

There was 0 valuation allowance recorded against the carrying value of the servicing assets as of March 31, 2021 or 2020.

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The fair value of the servicing assets was $9.3 million at March 31, 2021, which was determined using discount rates ranging from 5.4% to 11.9% and prepayment speeds ranging from 14.3% to 14.4%, depending on the stratification of the specific assets.

The fair value of the servicing assets was $8.0 million at March 31, 2020, which was determined using discount rates ranging from 5.7% to 11.9% and prepayment speeds ranging from 15.0% to 15.1%, depending on the stratification of the specific assets.

Note 8. Deposits

 

Time deposits that exceed the FDIC insurance limit of $250,000 at March 31, 2021 and December 31, 2020 were $191.0 million and $200.2 million, respectively.

 

The scheduled maturities of time deposits as of March 31, 2021 were as follows:

 

 

 

March 31, 2021

 

 

 

(Dollars in thousands)

 

2021 remaining

 

$

272,931

 

2022

 

 

83,228

 

2023

 

 

1,694

 

2024

 

 

789

 

2025

 

 

582

 

Thereafter

 

 

33

 

Total

 

$

359,257

 

 

Deposits from principal officers, directors, and their affiliates as of March 31, 2021 and December 31, 2020 were $1.9 million and $1.5 million, respectively.

Note 9. Borrowing Arrangements

As of March 31, 2021, the Company had $5.0 million in borrowings from the Federal Home Loan Bank (“FHLB”) of San Francisco which had 0% rate under the Zero-Rate Recovery Advance Program, FHLB’s pandemic relief initiative. The Company has a letter of credit with the FHLB in the amount of $67.0 million to secure a public deposit.

The Company had available borrowings from the following institutions as of March 31, 2021:

 

 

 

March 31, 2021

 

 

 

(Dollars in thousands)

 

Federal Home Loan Bank—San Francisco

 

$

269,708

 

Federal Reserve Bank

 

 

132,073

 

Pacific Coast Bankers Bank

 

 

50,000

 

Zions Bank

 

 

25,000

 

First Horizon Bank

 

 

25,000

 

Total

 

$

501,781

 

 

The Company has pledged approximately $914.0 million of loans as collateral for these lines of credit as of March 31, 2021.  

Note 10. Income Taxes

The Company’s income tax expense was $2.1 million and $1.2 million for the three months ended March 31, 2021 and 2020, respectively. The effective income tax rate was 28.8% and 26.1% for the three months ended March 31, 2021 and 2020, respectively.  

The Company is subject to U.S. Federal income tax as well as various state taxing jurisdictions. The Company is no longer subject to examination by Federal taxing authorities for tax years prior to 2017 and for state taxing authorities for tax years prior to 2016.

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There were 0 significant unrealized tax benefits recorded as of March 31, 2021 and 2020, and the Company does not expect any significant increase in unrealized tax benefits in the next twelve months.

Note 11. Commitments and Contingencies

Off-Balance-Sheet Credit Risk: The commitments and contingent liabilities include various commitments to extend credit and standby letters of credit, which arise in the normal course of business. Commitments to extend credit are legally binding loan commitments with set expiration dates. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. They are intended to be disbursed, subject to certain conditions, upon request of the borrower.

The Company evaluates the creditworthiness of each borrower. Collateral, if deemed necessary by the Company upon the extension of credit, is obtained based on management’s evaluation of the borrower. Collateral for commercial and industrial loans may vary, but may include securities, accounts receivable, inventory, property, plant and equipment, and income producing commercial or other properties. The following table shows the distribution of undisbursed loan commitments as of the dates indicated:

 

 

 

March 31,

2021

 

 

December 31,

2020

 

 

 

(Dollars in thousands)

 

Commitments to extend credit

 

$

108,887

 

 

$

75,740

 

Standby letter of credit

 

 

8,586

 

 

 

9,212

 

Commercial letter of credit

 

 

981

 

 

 

1,552

 

Total undisbursed loan commitments

 

$

118,454

 

 

$

86,504

 

 

The majority of these off-balance sheet commitments have a variable interest rate. Management does not anticipate any material losses as a result of these transactions.

Investments in low income housing partnership: The Company invests in qualified affordable housing partnerships. The following table shows the balance of the investments in low income housing partnerships and the total unfunded commitments related to the investments in low income housing partnerships as of the dates indicated:

 

 

 

March 31,

2021

 

 

December 31,

2020

 

 

 

(Dollars in thousands)

 

Investments in low income housing partnerships

 

$

4,806

 

 

$

4,932

 

Unfunded commitments to fund investments for low income housing partnerships

 

 

1,965

 

 

 

2,154

 

These balances are reflected in the other assets and other liabilities lines on the consolidated balance sheets. The Company expects to finish fulfilling these commitments during the year ending 2034.

The Company recognized amortization expense of $127,000 and $54,000, for the three months ended March 31, 2021 and 2020, respectively, which was included within income tax expense on the consolidated statements of income. Additionally, the Company recognized tax credits and other benefits from the investments in low income housing partnerships of $114,000 and $50,000, for the three months ended March 31, 2021 and 2020, respectively.  

 

Note 12. Stock-based Compensation

The Company has two stock-based compensation plans currently in effect as of March 31, 2021, as described further below. Total compensation cost charged against earnings for these plans was $131,000 and $358,000 for the three months ended March 31, 2021 and 2020, respectively.  

2005 Plan: In 2005, the Board of Directors and shareholders of the Bank approved a stock option plan for the benefit of directors and employees of the Bank (the “2005 Plan”). The 2005 Plan was assumed by the Company in 2016 at the time of the bank holding company reorganization. Under the 2005 Plan, the Bank was authorized to grant options to purchase up to 770,000 shares of the Company’s common stock.  

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The exercise prices of the options may not be less than 100% of the fair value of the Company’s common stock at the date of grant. The options, when granted, vest either immediately or ratably over five years from the date of the grant and expire after ten years if not exercised. The 2005 Plan expired in 2015 and 0 future grants can be made under the 2005 Plan.  

A summary of the transactions under the 2005 Plan for the three months ended March 31, 2021 is as follows:

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

Number of

 

 

Average

 

 

Aggregate

 

 

 

Options

 

 

Exercise

 

 

Intrinsic

 

 

 

Outstanding

 

 

Price

 

 

Value

 

 

 

(Dollars in thousands, except per share data)

 

Outstanding, as of January 1, 2021

 

 

100,000

 

 

$

5.77

 

 

 

 

 

Options granted

 

 

 

 

 

 

 

 

 

 

Options exercised

 

 

(30,000

)

 

 

 

 

 

 

 

Options forfeited

 

 

 

 

 

 

 

 

 

 

Options expired

 

 

 

 

 

 

 

 

 

 

Outstanding, as of March 31, 2021

 

 

70,000

 

 

 

6.30

 

 

$

295

 

Fully vested and expected to vest

 

 

70,000

 

 

 

6.30

 

 

$

295

 

Vested

 

 

70,000

 

 

$

6.30

 

 

$

295

 

 

Information related to the 2005 Plan for the periods indicated is as follows:

 

 

 

Three Months Ended March 31,

 

 

 

 

2021

 

 

 

2020

 

 

 

(Dollars in thousands)

 

Intrinsic value of options exercised

 

$

132

 

 

$

370

 

Cash received from option exercises

 

 

 

 

 

63

 

Tax benefit realized from option exercised

 

 

20

 

 

 

17

 

 

The weighted average remaining contractual term of stock options outstanding under the 2005 Plan at March 31, 2021 was 2.49 years. The weighted average remaining contractual term of stock options that were exercisable at March 31, 2021 was 2.49 years. All of the stock options that are outstanding under the 2005 Plan were fully vested as of March 31, 2021.

2010 Plan: In 2010, the Board of Directors of the Bank approved a new equity incentive plan for granting stock options and restricted stock awards to key employees, officers, and non-employee directors of the Bank (the “2010 Plan”). In 2013, the 2010 Plan was amended and approved by the shareholders to increase the number of shares authorized to be issued from 1,350,000 shares of common stock to 2,500,000 shares of common stock. The 2010 Plan was assumed by the Company in 2016 at the time of the bank holding company reorganization.

The exercise prices of stock options granted under the plan may not be less than 100% of the fair value of the Company’s stock at the date of grant. The options, when granted, vest ratably over five years from the date of the grant and expire after ten years if not exercised. There were 0 stock options granted under the 2010 Plan during the three months ended March 31, 2021 or 2020.

Restricted stock awards issued under the 2010 Plan may or may not be subject to vesting provisions. NaN awards were granted in the three months ended March 31, 2021, or 2020. Owners of the restricted stock awards shall have all of the rights of a shareholder including the right to vote the shares and to all dividends (cash or stock). Compensation expense related to restricted stock awards will be recognized over the vesting period of the awards based on the fair value of the Company’s common stock at the issue date.

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A summary of stock options outstanding under the 2010 Plan for the three months ended March 31, 2021 is as follows:

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

Number of

 

 

Average

 

 

Aggregate

 

 

 

Options

 

 

Exercise

 

 

Intrinsic

 

 

 

Outstanding

 

 

Price

 

 

Value

 

 

 

(Dollars in thousands, except per share data)

 

Outstanding, as of January 1, 2021

 

 

220,000

 

 

$

7.75

 

 

 

 

 

Options granted

 

 

 

 

 

 

 

 

 

 

Options exercised

 

 

(10,000

)

 

 

2.53

 

 

 

 

 

Options forfeited

 

 

 

 

 

 

 

 

 

 

Options expired

 

 

 

 

 

 

 

 

 

 

Outstanding, as of March 31, 2021

 

 

210,000

 

 

 

8.00

 

 

$

529

 

Fully vested and expected to vest

 

 

202,500

 

 

 

8.00

 

 

$

510

 

Vested

 

 

180,000

 

 

$

8.00

 

 

$

454

 

 

Information related to stock options exercised under the 2010 Plan for the periods indicated is as follows:

 

 

 

Three Months Ended March 31,

 

 

 

 

2021

 

 

 

2020

 

 

 

(Dollars in thousands)

 

Intrinsic value of options exercised

 

$

86

 

 

$

519

 

Cash received from option exercises

 

 

25

 

 

 

242

 

Tax benefit realized from option exercised

 

 

 

 

 

134

 

 

The weighted average remaining contractual term of stock options outstanding under the 2010 Plan at March 31, 2021 was 3.01 years. The weighted average remaining contractual term of stock options that were exercisable at March 31, 2021 was 3.01 years.

A summary of the changes in the Company’s non-vested restricted stock awards under the 2010 Plan for the three months ended March 31, 2021 is as follows:

 

 

 

Shares

Issued

 

 

Weighted

Average

Grant Date

Fair Value

 

 

Aggregate

Intrinsic

Value

 

 

 

(Dollars in thousands, except share data)

 

Non-vested, as of January 1, 2021

 

 

154,500

 

 

$

11.66

 

 

 

 

 

Awards granted

 

 

 

 

 

 

 

 

 

 

Awards vested

 

 

 

 

 

 

 

 

 

 

Awards forfeited

 

 

 

 

 

 

 

 

 

 

Non-vested, as of March 31, 2021

 

 

154,500

 

 

$

11.66

 

 

$

1,625

 

 

No tax benefits or expenses were realized from restricted stock awards under the 2010 Plan for the three months ended March 31, 2021 or 2020.

 

The 2010 Plan expired in August 2020, and 0 future grants can be made under the 2010 Plan. The Company had approximately $235,000 of unrecognized compensation cost related to unvested stock options and restricted stock awards under the 2010 Plan as of March 31, 2021. The Company expects to recognize these costs over a weighted average period of 0.52 years. 

Note 13. Employee Benefit Plan

The Company established a 401(k) profit sharing plan (the “401(k) Plan”), which is open to all eligible employees who are at least 18 years old and have completed 90 days of service. Each employee is allowed to contribute to the 401(k) Plan up to the maximum percentage allowable, not to exceed the limits of applicable IRS Code Sections. Each year, the Company may, in its discretion, make matching contributions to the 401(k) Plan. Total employer contributions to the 401(k) Plan amounted to $174,000 and $180,000 for the three months ended March 31, 2021 and 2020, respectively.

 

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Note 14. Revenue Recognition

Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers (“ASC 606”), establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity's contracts to provide goods or services to customers. The core principle requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration that it expects to be entitled to receive in exchange for those goods or services recognized as performance obligations are satisfied.

The majority of the Company’s revenue-generating transactions are not subject to ASC 606, including revenue generated from financial instruments, such as loans, letters of credit, and investment securities, as well as revenue related to mortgage servicing activities and revenue on COLI, as these activities are subject to other GAAP discussed elsewhere within the disclosures. Descriptions of the Company’s revenue-generating activities that are within the scope of ASC 606, which are presented in the Company’s income statements as components of noninterest income are as follows:

Service charges on deposits:  Income from service charges on deposits is within the scope of ASC 606. These include general service fees for monthly account maintenance and activity or transaction-based fees and consist of transaction-based revenue, time-based revenue (service period), item-based revenue or some other individual attribute-based revenue. Revenue on these types of fees are recognized when the Company’s performance obligation is completed which is generally monthly for account maintenance services or when a transaction has been completed. Payment for such performance obligations are generally received at the time the performance obligations are satisfied. Total revenues from services charges on deposits in the three months ended March 31, 2021 and 2020, on a dollar and percentage of total revenue basis was $227,000 or 1.4%, and $152,000 or 1.1%, respectively, of service charges on deposits is related to these revenue streams.  Service charges on deposits also include overdraft and non-sufficient funds (“NSF”) fees. Overdraft fees are charged when a depositor has a draw on their account that has inadequate funds.  In certain instances, the Company, at its sole discretion, may pay to the party requesting the draw on the deposit account, the balance of the draw for which there are inadequate funds rather than denying payment of the item. The Company then charges a fee for this short-term extension of credit to the depositor for not complying with the balance requirements stipulated in the deposit agreement with the Bank, and as well as to cover the cost of advancing those funds. NSF fees are charged to customers when in the event of a draw on the customer's account that has insufficient funds to meet the payment of the draw (such as through written checks or ACH transactions), the Company returns the item rather than paying the balance of the draw for which the customer has inadequate funds.  This typically happens when the customer has fairly sizable draws or multiple draws on an account that has inadequate funds to meet the demands for payment. Total revenues from service charges on deposits from overdraft and NSF fees for the three months ended March 31, 2021 and 2020, on a dollar and percentage of total revenue basis was $47,000, or 0.3%, and $215,000, or 1.6%, respectively.  

Wire transfer fee income: This revenue stream is generated through the processing of customers’ incoming and outgoing wire transfers. Income generated from wire transfer fees is within the scope of ASC 606 and approximately $81,000, or 0.5%, and $63,000, or 0.6% of total revenues for the three months ended March 31, 2021 and 2020, respectively, is included in other income in noninterest income.

Other revenue streams that are recorded in other income in noninterest income include revenue generated from letters of credit and income on COLI. These revenue streams are either not material or out of scope of ASC 606.

Note 15. Fair Value of Financial Instruments

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:

Level 1—Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2—Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.

Level 3—Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

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The Company used the following methods and significant assumptions to estimate fair value:

Securities Available for Sale: The fair values of investment securities are determined by matrix pricing, which is a mathematical technique used to value debt securities without relying exclusively on quoted prices for the specific securities, but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2). Management obtains the fair values of investment securities on a monthly basis from a third-party pricing service.

Other Investment: The Company has equity investment with readily determinable fair value. The fair value for the equity investment with readily determinable fair value is obtained from unadjusted quoted prices in active markets on the date of measurement and classified as Level 1.

Impaired Loans: The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s judgment, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

Appraisals for collateral-dependent impaired loans are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Company. Once received, a member of the credit department reviews the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics.

Assets and liabilities measured at fair value on a recurring basis as of March 31, 2021 and December 31, 2020 are summarized below:

 

 

 

 

 

 

 

Fair Value Measure Using

 

 

 

 

 

 

 

Quoted

 

 

Significant Other

 

 

Significant

 

 

 

 

 

 

 

Prices in

 

 

Observable

 

 

Unobservable

 

 

 

Total

 

 

Active Markets

 

 

Inputs

 

 

Inputs

 

 

 

Fair Value

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

 

 

(Dollars in thousands)

 

As of March 31, 2021:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government sponsored agency securities

 

$

1,001

 

 

$

 

 

$

1,001

 

 

$

 

Mortgage-backed securities - residential

 

 

25,428

 

 

 

 

 

 

25,428

 

 

 

 

Collateralized mortgage obligations

 

 

75,984

 

 

 

 

 

 

75,984

 

 

 

 

Other investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mutual fund - CRA qualified

 

 

3,720

 

 

 

3,720

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2020:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government sponsored agency securities

 

$

5,001

 

 

$

 

 

$

5,001

 

 

$

 

Mortgage-backed securities - residential

 

 

15,641

 

 

 

 

 

 

15,641

 

 

 

 

Collateralized mortgage obligations

 

 

35,907

 

 

 

 

 

 

35,907

 

 

 

 

Other investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mutual fund - CRA qualified

 

 

3,628

 

 

 

3,628

 

 

 

 

 

 

 

 

There were 0 transfers between Level 1 and Level 2 in the three months ended March 31, 2021 or 2020. There were 0 assets or liabilities measured at fair value on a non-recurring basis as of March 31, 2021 or December 31, 2020.

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Table of Contents

 

Financial Instruments: The carrying amounts and estimated fair values of financial instruments not carried at fair value as of March 31, 2021 are as follows:

 

 

 

Carrying

Amount

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Value

 

As of March 31, 2021:

 

(Dollars in thousands)

 

Financial Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

127,524

 

 

$

127,524

 

 

$

 

 

$

 

 

$

127,524

 

Loans held for sale

 

 

28,575

 

 

 

 

 

 

31,238

 

 

 

 

 

 

31,238

 

Loans receivable, net

 

 

1,140,533

 

 

 

 

 

 

 

 

 

1,156,500

 

 

 

1,156,500

 

Accrued interest receivable, net

 

 

3,096

 

 

 

8

 

 

 

249

 

 

 

2,839

 

 

 

3,096

 

Other investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FHLB and PCBB stock

 

 

6,233

 

 

N/A

 

 

N/A

 

 

N/A

 

 

N/A

 

Financial Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposit

 

$

1,285,390

 

 

$

 

 

$

1,285,750

 

 

$

 

 

$

1,285,750

 

FHLB Advances

 

 

5,000

 

 

 

 

 

 

5,000

 

 

 

 

 

 

5,000

 

Accrued interest payable

 

 

622

 

 

 

 

 

 

622

 

 

 

 

 

 

622

 

 

The carrying amounts and estimated fair values of financial instruments not carried at fair value as of December 31, 2020 are as follows:

 

 

 

Carrying

Amount

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Value

 

As of December 31, 2020:

 

(Dollars in thousands)

 

Financial Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

106,405

 

 

$

106,405

 

 

$

 

 

$

 

 

$

106,405

 

Loans held for sale

 

 

26,659

 

 

 

 

 

 

26,659

 

 

 

 

 

 

26,659

 

Loans receivable, net

 

 

1,084,384

 

 

 

 

 

 

 

 

 

1,109,217

 

 

 

1,109,217

 

Accrued interest receivable, net

 

 

3,985

 

 

 

7

 

 

 

249

 

 

 

3,729

 

 

 

3,985

 

Other investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FHLB and PCBB stock

 

 

6,233

 

 

N/A

 

 

N/A

 

 

N/A

 

 

N/A

 

Financial Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposit

 

$

1,200,090

 

 

$

 

 

$

1,200,789

 

 

$

 

 

$

1,200,789

 

FHLB Advances

 

 

5,000

 

 

$

 

 

$

5,000

 

 

$

 

 

 

5,000

 

Accrued interest payable

 

 

1,021

 

 

 

 

 

 

1,021

 

 

 

 

 

 

1,021

 

 

Note 16. Regulatory Capital Matters

Under the Basel III rules, the Bank must hold a capital conservation buffer above the adequately capitalized risk-based capital ratios. As of March 31, 2021, the capital conservation buffers for the Company is 2.50%. Management believes that as of March 31, 2021 and December 31, 2020, the Bank met all capital adequacy requirements to which they are subject to. Based on recent changes to the Federal Reserve’s definition of a “Small Bank Holding Company” that increased the threshold to $3 billion in assets, the Company is not currently subject to separate minimum capital measurements. At such time as the Company reaches the $3 billion asset level, it will again be subject to capital measurements independent of the Bank. For comparison purposes, the Company’s ratios are included in following discussion as well. Unrealized gain or loss on securities available-for-sale is not included in computing regulatory capital.   

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Table of Contents

 

The following table presents the regulatory capital amounts and ratios for the Company and the Bank as of dates indicated:

 

 

 

 

 

 

 

 

 

 

 

Required for

 

 

Minimum

 

 

 

 

 

 

 

 

 

 

 

Capital Adequacy

 

 

To be Considered

 

 

 

Actual

 

 

Purposes

 

 

"Well Capitalized"

 

(Dollars in thousands)

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

As of March 31, 2021:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total capital (to risk-weighted assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

$

159,626

 

 

 

15.04

%

 

N/A

 

 

N/A

 

 

N/A

 

 

N/A

 

Bank

 

 

156,697

 

 

 

14.77

%

 

 

84,884

 

 

 

8.00

%

 

 

106,106

 

 

 

10.00

%

Tier 1 capital (to risk-weighted assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

 

146,319

 

 

 

13.79

%

 

N/A

 

 

N/A

 

 

N/A

 

 

N/A

 

Bank

 

 

143,391

 

 

 

13.51

%

 

 

63,663

 

 

 

6.00

%

 

 

84,884

 

 

 

8.00

%

Common equity Tier 1 capital (to risk-weighted

   assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

 

146,319

 

 

 

13.79

%

 

N/A

 

 

N/A

 

 

N/A

 

 

N/A

 

Bank

 

 

143,391

 

 

 

13.51

%

 

 

47,747

 

 

 

4.50

%

 

 

68,969

 

 

 

6.50

%

Tier 1 capital (to average assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

 

146,319

 

 

 

10.38

%

 

N/A

 

 

N/A

 

 

N/A

 

 

N/A

 

Bank

 

 

143,391

 

 

 

10.17

%

 

 

56,376

 

 

 

4.00

%

 

 

70,470

 

 

 

5.00

%

Note: The capital requirements are only applicable to the Bank, and the Company's ratios are included for comparison purpose.

 

 

 

 

 

 

 

 

 

 

 

 

Required for

 

 

Minimum

 

 

 

 

 

 

 

 

 

 

 

Capital Adequacy

 

 

To be Considered

 

 

 

Actual

 

 

Purposes

 

 

"Well Capitalized"

 

(Dollars in thousands)

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

As of December 31, 2020:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total capital (to risk-weighted assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

$

155,287

 

 

 

14.81

%

 

N/A

 

 

N/A

 

 

N/A

 

 

N/A

 

Bank

 

 

152,232

 

 

 

14.52

%

 

 

83,859

 

 

 

8.00

%

 

 

104,824

 

 

 

10.00

%

Tier 1 capital (to risk-weighted assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

 

142,147

 

 

 

13.56

%

 

N/A

 

 

N/A

 

 

N/A

 

 

N/A

 

Bank

 

 

139,092

 

 

 

13.27

%

 

 

62,894

 

 

 

6.00

%

 

 

83,859

 

 

 

8.00

%

Common equity Tier 1 capital (to risk-weighted

   assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

 

142,147

 

 

 

13.56

%

 

N/A

 

 

N/A

 

 

N/A

 

 

N/A

 

Bank

 

 

139,092

 

 

 

13.27

%

 

 

47,171

 

 

 

4.50

%

 

 

68,136

 

 

 

6.50

%

Tier 1 capital (to average assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

 

142,147

 

 

 

10.55

%

 

N/A

 

 

N/A

 

 

N/A

 

 

N/A

 

Bank

 

 

139,092

 

 

 

10.32

%

 

 

53,915

 

 

 

4.00

%

 

 

67,393

 

 

 

5.00

%

Note: The capital requirements are only applicable to the Bank, and the Company's ratios are included for comparison purpose.

 

 

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Table of Contents

 

 

Note 17. Earnings per Share

The two-class method is used in the calculation of basic and diluted earnings per share. Under the two-class method, earnings available to common shares are allocated between common shares and participating securities. The Company’s restricted stock awards are considered participating securities as the unvested awards have non-forfeitable rights to dividends, paid or unpaid, on unvested awards. The factors used in the earnings per share computation are as follows:

 

 

 

Three Months Ended

 

 

 

March 31,

 

(Dollars in thousands, except share data)

 

2021

 

 

2020

 

Basic

 

 

 

 

 

 

 

 

Net income

 

$

5,077

 

 

$

3,299

 

Undistributed earnings allocated to participating securities

 

 

(52

)

 

 

(62

)

Net income allocated to common shares

 

 

5,025

 

 

 

3,237

 

Weighted average common shares outstanding

 

 

15,022,876

 

 

 

15,486,549

 

Basic earnings per common share

 

$

0.33

 

 

$

0.21

 

Diluted

 

 

 

 

 

 

 

 

Net income allocated to common shares

 

$

5,025

 

 

$

3,237

 

Weighted average common shares outstanding for basic earnings per common share

 

 

15,022,876

 

 

 

15,486,549

 

Add: Dilutive effects of assumed exercises of stock options

 

 

46,568

 

 

 

99,706

 

Average shares and dilutive potential common shares

 

 

15,069,444

 

 

 

15,586,255

 

Diluted earnings per common share

 

$

0.33

 

 

$

0.21

 

 

  NaN shares of common stock were antidilutive for the three months ended March 31, 2021 or 2020.  

28


Table of Contents

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited consolidated financial statements and related notes included in this Quarterly Report on Form 10-Q.

Overview

As of March 31, 2021, we had total assets of $1.46 billion, gross loans of $1.16 billion, total deposits of $1.29 billion, and total consolidated shareholders’ equity of $147.0 million. For the three months ended March 31, 2021 and 2020, we recorded net income of $5.1 million and $3.3 million, respectively.

The following significant items are of note for the three months ended March 31, 2021:

 

Net income totaled $5.1 million, or $0.33 per diluted common share, for the three months ended March 31, 2021, compared to $3.3 million, or $0.21 per diluted common share, for the three months ended March 31, 2020

 

Net interest income for the three months ended March 31, 2021 increased to $12.8 million, up 14.7% from $11.1 million for the three months ended March 31, 2020

 

Total assets of $1.46 billion, a 6.5% increase over the three months ended March 31, 2021

 

Gross loans of $1.16 billion, a 5.1% increase over the three months ended March 31, 2021

 

Total deposits of $1.29 billion, a 7.1% increase over the three months ended March 31, 2021

 

Shareholders’ equity of $147.0 million, a 2.5% increase over the three months ended March 31, 2021

Critical Accounting Policies and Estimates

Our accounting and reporting policies conform to accounting principles generally accepted in the United States of America (“GAAP”) and conform to general practices within the industry in which we operate. To prepare financial statements in conformity with GAAP, management makes estimates, assumptions and judgments based on available information. These estimates, assumptions and judgments affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions and judgments are based on information available as of the date of the financial statements and, as this information changes, actual results could differ from the estimates, assumptions and judgments reflected in the financial statement. In particular, management has identified several accounting policies that, due to the estimates, assumptions and judgments inherent in those policies, are critical in understanding our financial statements.

The following is a discussion of the critical accounting policies and significant estimates that require us to make complex and subjective judgments. Additional information about these policies can be found in the “Notes to Consolidated Financial Statements, Note 1. Summary of Significant Accounting Policies” of the audited consolidated financial statements included in the Company’s Form 10-K for the period ended December 31, 2020.

Allowance for Loan Losses

The allowance for loan losses (“ALL”) is a valuation allowance for probable incurred credit losses. Loan losses are charged against the ALL when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the ALL. Management estimates the ALL balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the ALL may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged off.

The ALL is maintained at a level that management believes is appropriate to provide for known and inherent incurred loan losses as of the date of the consolidated balance sheet and we have established methodologies for the determination of its adequacy. The methodologies are set forth in a formal policy and take into consideration the need for an overall general valuation allowance as well as specific allowances that are determined on an individual loan basis.

The evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available. While management uses available information to recognize losses on loans, changes in economic or other conditions may necessitate revision of the estimate in future periods.

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Table of Contents

 

Selected Financial Data

 

Financial Highlights (unaudited)

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands, except per share data)

 

 

Three Months Ended

 

 

 

 

March 31,

 

 

 

March 31,

 

 

 

 

2021

 

 

 

2020

 

Income Statement Data:

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

$

13,632

 

 

 

$

14,345

 

Interest expense

 

 

 

877

 

 

 

 

3,229

 

Net interest income

 

 

 

12,755

 

 

 

 

11,116

 

Provision for loan losses

 

 

 

620

 

 

 

 

743

 

Noninterest income

 

 

 

2,966

 

 

 

 

2,296

 

Noninterest expense

 

 

 

7,966

 

 

 

 

8,207

 

Income before taxes

 

 

 

7,135

 

 

 

 

4,462

 

Provision for income taxes

 

 

 

2,058

 

 

 

 

1,163

 

Net Income

 

 

$

5,077

 

 

 

$

3,299

 

Diluted earnings per share

 

 

$

0.33

 

 

 

$

0.21

 

Performance Ratios:

 

 

 

 

 

 

 

 

 

 

Return on average assets (annualized)

 

 

 

1.44

%

 

 

 

1.12

%

Return on average equity (annualized)

 

 

 

14.02

%

 

 

 

9.44

%

Net interest margin (annualized)

 

 

 

3.80

%

 

 

 

3.95

%

Efficiency ratio (1)

 

 

 

50.67

%

 

 

 

61.19

%

 

(1)

Represents noninterest expense divided by the sum of net interest income and noninterest income.

 

 

Financial Highlights (unaudited)

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands, except per share data)

 

 

As of

 

 

 

 

March 31,

 

 

 

December 31,

 

 

 

 

2021

 

 

 

2020

 

Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

Loans held for sale

 

 

$

28,575

 

 

 

$

26,659

 

Gross loans, net of unearned income

 

 

 

1,155,872

 

 

 

 

1,099,736

 

Allowance for loan losses

 

 

 

15,339

 

 

 

 

15,352

 

Total assets

 

 

 

1,455,334

 

 

 

 

1,366,826

 

Deposits

 

 

 

1,285,390

 

 

 

 

1,200,090

 

Shareholders’ equity

 

 

 

146,993

 

 

 

 

143,366

 

Credit Quality:

 

 

 

 

 

 

 

 

 

 

Nonperforming loans

 

 

$

1,148

 

 

 

$

985

 

Nonperforming assets

 

 

 

1,148

 

 

 

 

985

 

Net charge-offs to average gross loans (annualized)

 

 

 

0.00

%

 

 

 

0.00

%

Nonperforming assets to gross loans plus OREO

 

 

 

0.10

%

 

 

 

0.09

%

ALL to nonperforming loans

 

 

 

1,337

%

 

 

 

1,558

%

ALL to gross loans, net of unearned income

 

 

 

1.33

%

 

 

 

1.40

%

Capital Ratios:

 

 

 

 

 

 

 

 

 

 

Total risk-based capital ratio

 

 

 

15.04

%

 

 

 

14.81

%

Tier 1 risk-based capital ratio

 

 

 

13.79

%

 

 

 

13.56

%

Common equity tier 1 ratio

 

 

 

13.79

%

 

 

 

13.56

%

Leverage ratio

 

 

 

10.38

%

 

 

 

10.55

%

 

 

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Table of Contents

 

 

COVID-19 AND GOVERNMENT RESPONSE

The COVID-19 pandemic has caused significant, unprecedented disruption around the world that has affected daily living and negatively impacted the local, state, national and global economies. The pandemic has resulted in temporary closures of many businesses and the institution of social distancing and shelter-in-place requirements in many states and communities. This has increased unemployment levels and caused extreme volatility in the financial markets. While COVID-19 has negatively impacted the economy, the CARES Act provided for financial stimulus and government lending program. The benefits of these programs, as well as additional stimulus, supported businesses and consumers within the economy.

The Company was able to react quickly to these changes because of the commitment and flexibility of its workforce coupled with a well-prepared business continuity plan. The Company has taken various steps to help our customers, employees, and communities, while maintaining safe and sound banking operations. The Company has been assisting customers with loan deferrals and the PPP loans and has provided employees remote working environment while maintaining fully functioning operations in all areas. As the recent distribution of vaccinations for the virus accelerates and state and local governments focus on reopening and increased capacity of businesses, the Company anticipates that many of business customers will soon resume their operation to full capacity.

 

The following tables summarize loan portfolio breakdown by industry and loan deferral requests as of the dates presented:

 

Loan Portfolio Breakdown by Industry

 

Excluding Home mortgage and consumer loans

 

 

 

(Dollars in thousands)

 

As of March 31, 2021

 

Industry

 

Number of

accounts

 

 

% of total

 

 

Balance

 

 

% of total

 

Hotel / motel

 

 

225

 

 

 

7.5

%

 

$

150,375

 

 

 

14.1

%

Wholesale

 

 

375

 

 

 

12.4

 

 

 

77,331

 

 

 

7.2

 

Food services / restaurant

 

 

432

 

 

 

14.3

 

 

 

62,716

 

 

 

5.9

 

Laundry services

 

 

152

 

 

 

5.0

 

 

 

21,196

 

 

 

2.0

 

Real estate lessor

 

 

240

 

 

 

8.0

 

 

 

396,092

 

 

 

37.1

 

Car washes

 

 

52

 

 

 

1.7

 

 

 

36,459

 

 

 

3.4

 

Educational service

 

 

32

 

 

 

1.1

 

 

 

7,166

 

 

 

0.7

 

Other

 

 

1,505

 

 

 

50.0

 

 

 

315,396

 

 

 

29.6

 

Total

 

 

3,013

 

 

 

100

%

 

$

1,066,731

 

 

 

100

%

 

Loan Deferment Summary by Industry

 

Excluding Home mortgage and consumer loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

As of March 31, 2021

 

Industry

 

Number of

accounts

 

 

% of

deferment

 

 

% of

total

loans

 

 

Balance

 

 

% of

deferment

 

 

% of

total

loans

 

Hotel / motel

 

 

6

 

 

 

66.7

%

 

 

2.7

%

 

$

15,188

 

 

 

93.6

%

 

 

10.1

%

Wholesale

 

 

1

 

 

 

11.1

 

 

 

0.3

 

 

 

486

 

 

 

3.0

 

 

 

0.6

 

Food services / restaurant

 

 

1

 

 

 

11.1

 

 

 

0.2

 

 

 

465

 

 

 

2.9

 

 

 

0.7

 

Laundry services

 

 

1

 

 

 

11.1

 

 

 

0.7

 

 

 

90

 

 

 

0.6

 

 

 

0.4

 

Total

 

 

9

 

 

 

100.0

%

 

 

0.3

%

 

$

16,229

 

 

 

100.0

%

 

 

1.5

%

 

Loan Deferment Summary by Loan Type

 

(Dollars in thousands)

 

As of March 31, 2021

 

Loan Type

 

Number of

accounts

 

 

% of

deferment

 

 

% of

total

loans

 

 

Balance

 

 

% of

deferment

 

 

% of

total

loans

 

Real estate loans

 

 

6

 

 

 

42.9

%

 

 

1.7

%

 

$

15,188

 

 

 

80.0

%

 

 

2.3

%

C & I loans

 

 

3

 

 

 

21.4

 

 

 

1.3

 

 

 

1,041

 

 

 

5.5

 

 

 

1.0

 

Loans, excluding home mortgage and

   consumer loans

 

 

9

 

 

 

64.3

 

 

 

0.3

 

 

 

16,229

 

 

 

85.5

 

 

 

1.5

 

Home mortgage loans

 

 

5

 

 

 

35.7

 

 

 

1.6

 

 

 

2,761

 

 

 

14.5

 

 

 

2.2

 

Total

 

 

14

 

 

 

100.0

%

 

 

0.4

%

 

$

18,990

 

 

 

100.0

%

 

 

1.6

%

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Table of Contents

 

 

 

Loan Deferment Status Change by Loan Type

 

 

 

Total deferments

 

 

Payment resumed

 

 

 

 

 

 

 

 

 

 

 

under the CARES Act

 

 

or paid off

 

 

Remaining deferments

 

(Dollars in thousands)

 

as of March 31, 2021

 

 

through March 31, 2021

 

 

as of March 31, 2021

 

Loan Type

 

Number

of

accounts

 

 

Balance

 

 

Number

of

accounts

 

 

Balance

 

 

Number

of

accounts

 

 

Balance

 

Loans, excluding home mortgage and

   consumer loans

 

 

116

 

 

 

206,582

 

 

 

107

 

 

 

190,353

 

 

 

9

 

 

 

16,229

 

Home mortgage loans

 

 

69

 

 

 

30,205

 

 

 

64

 

 

 

27,444

 

 

 

5

 

 

 

2,761

 

Total

 

 

185

 

 

$

236,787

 

 

 

171

 

 

$

217,797

 

 

 

14

 

 

$

18,990

 

 

Results of Operations—Comparison for the Three Months Ended March 31, 2021 and 2020

The following discussion of our results of operations compares the three months ended March 31, 2021 to the three months ended March 31, 2020.

We reported net income for the three months ended March 31, 2021 of $5.1 million, or $0.33 per diluted common share, compared to net income of $3.3 million, or $0.21 per diluted common share, for the three months ended March 31, 2020, an increase of $1.8 million, or 53.9%. The increase was primarily due to a $1.6 million increase in net interest income and a $670,000 increase in noninterest income, partially offset by a $895,000 increase in income tax expense.

Net Interest Income

The management of interest income and expense is fundamental to our financial performance. Net interest income, the difference between interest income and interest expense, is the largest component of the Company’s total revenue. Management closely monitors both total net interest income and the net interest margin (net interest income divided by average earning assets). We seek to maximize net interest income without exposing the Company to an excessive level of interest rate risk through our asset and liability policies. Interest rate risk is managed by monitoring the pricing, maturity and repricing options of all classes of interest-bearing assets and liabilities. Our net interest margin is also adversely impacted by the reversal of interest on nonaccrual loans and the reinvestment of loan payoffs into lower yielding investment securities and other short-term investments.

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Table of Contents

 

The following table presents, for the periods indicated, information about: (i) weighted average balances, the total dollar amount of interest income from interest-earning assets and the resultant average yields, (ii) average balances, the total dollar amount of interest expense on interest-bearing liabilities and the resultant average rates, (iii) net interest income, (iv) the interest rate spread, and (v) the net interest margin.

 

 

 

Three Months Ended March 31,

 

 

 

2021

 

 

2020

 

(Dollars in thousands)

 

Average

Balance

 

 

Interest

and Fees

 

 

Yield /

Rate

 

 

Average

Balance

 

 

Interest

and Fees

 

 

Yield /

Rate

 

Interest earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal Funds sold and other investments (1)

 

$

99,349

 

 

$

112

 

 

 

0.45

%

 

$

78,256

 

 

$

332

 

 

 

1.68

%

Securities available for sale

 

 

92,951

 

 

 

236

 

 

 

1.02

 

 

 

54,647

 

 

 

319

 

 

 

2.33

 

Total investments

 

 

192,300

 

 

 

348

 

 

 

0.72

 

 

 

132,903

 

 

 

651

 

 

 

1.95

 

Real estate loans

 

 

653,498

 

 

 

7,466

 

 

 

4.63

 

 

 

633,963

 

 

 

8,198

 

 

 

5.20

 

SBA loans

 

 

268,440

 

 

 

3,280

 

 

 

4.95

 

 

 

138,900

 

 

 

2,667

 

 

 

7.72

 

C & I loans

 

 

116,327

 

 

 

1,072

 

 

 

3.74

 

 

 

100,686

 

 

 

1,277

 

 

 

5.10

 

Home Mortgage loans

 

 

125,698

 

 

 

1,451

 

 

 

4.62

 

 

 

121,768

 

 

 

1,514

 

 

 

4.97

 

Consumer loans

 

 

1,187

 

 

 

15

 

 

 

5.12

 

 

 

2,774

 

 

 

38

 

 

 

5.51

 

Total loans (2)

 

 

1,165,150

 

 

 

13,284

 

 

 

4.62

 

 

 

998,091

 

 

 

13,694

 

 

 

5.51

 

Total earning assets

 

 

1,357,450

 

 

 

13,632

 

 

 

4.07

 

 

 

1,130,994

 

 

 

14,345

 

 

 

5.10

 

Noninterest-earning assets

 

 

52,376

 

 

 

 

 

 

 

 

 

 

 

48,189

 

 

 

 

 

 

 

 

 

Total assets

 

$

1,409,826

 

 

 

 

 

 

 

 

 

 

$

1,179,183

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market deposits and others

 

$

336,796

 

 

$

270

 

 

 

0.33

%

 

$

297,202

 

 

$

957

 

 

 

1.29

%

Time deposits

 

 

361,803

 

 

 

607

 

 

 

0.68

 

 

 

431,772

 

 

 

2,272

 

 

 

2.12

 

Total interest-bearing deposits

 

 

698,599

 

 

 

877

 

 

 

0.51

 

 

 

728,974

 

 

 

3,229

 

 

 

1.78

 

Borrowings

 

 

5,000

 

 

 

 

 

 

0.00

 

 

 

45

 

 

 

 

 

 

0.00

 

Total interest-bearing liabilities

 

 

703,599

 

 

 

877

 

 

 

0.51

 

 

 

729,019

 

 

 

3,229

 

 

 

1.78

 

Noninterest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-bearing deposits

 

 

544,492

 

 

 

 

 

 

 

 

 

 

 

292,453

 

 

 

 

 

 

 

 

 

Other noninterest-bearing liabilities

 

 

16,865

 

 

 

 

 

 

 

 

 

 

 

17,921

 

 

 

 

 

 

 

 

 

Total noninterest-bearing liabilities

 

 

561,357

 

 

 

 

 

 

 

 

 

 

 

310,374

 

 

 

 

 

 

 

 

 

Shareholders’ equity

 

 

144,870

 

 

 

 

 

 

 

 

 

 

 

139,790

 

 

 

 

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

1,409,826

 

 

 

 

 

 

 

 

 

 

$

1,179,183

 

 

 

 

 

 

 

 

 

Net interest income / interest rate spreads

 

 

 

 

 

$

12,755

 

 

 

3.56

%

 

 

 

 

 

$

11,116

 

 

 

3.32

%

Net interest margin

 

 

 

 

 

 

 

 

 

 

3.80

%

 

 

 

 

 

 

 

 

 

 

3.95

%

Cost of deposits & cost of funds:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total deposits / cost of deposits

 

$

1,243,091

 

 

$

877

 

 

 

0.29

%

 

$

1,021,427

 

 

$

3,229

 

 

 

1.27

%

Total funding liabilities / cost of funds

 

$

1,248,091

 

 

$

877

 

 

 

0.28

%

 

$

1,021,472

 

 

$

3,229

 

 

 

1.27

%

 

(1)

Includes income and average balances for Federal Home Loan Bank (“FHLB”) and Pacific Coast Bankers Bank (“PCBB”) stock, CRA qualified mutual fund, term federal funds, interest-earning time deposits and other miscellaneous interest-earning assets.

(2)

Average loan balances include non-accrual loans and loans held for sale.

33


Table of Contents

 

 

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 set forth the effects of changing rates and volumes on our net interest income during the period shown. Information is provided with respect to (i) effects on interest income attributable to changes in volume (change in volume multiplied by prior rate) and (ii) effects on interest income attributable to changes in rate (changes in rate multiplied by prior volume). Change applicable to both volume and rate have been allocated to volume and rate ratably.

 

 

 

Three Months Ended March 31,

 

 

 

2021 over 2020

 

 

 

Change due to:

 

 

 

 

 

(Dollars in thousands)

 

Volume

 

 

Rate

 

 

Interest

Variance

 

Interest earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

Federal Funds sold and other investments

 

$

70

 

 

$

(290

)

 

$

(220

)

Securities available for sale

 

 

153

 

 

 

(236

)

 

 

(83

)

Total investments

 

 

223

 

 

 

(526

)

 

 

(303

)

Real estate loans

 

 

236

 

 

 

(968

)

 

 

(732

)

SBA loans

 

 

1,831

 

 

 

(1,218

)

 

 

613

 

C & I loans

 

 

177

 

 

 

(382

)

 

 

(205

)

Home Mortgage loans

 

 

47

 

 

 

(110

)

 

 

(63

)

Consumer loans

 

 

(20

)

 

 

(3

)

 

 

(23

)

Total loans

 

 

2,271

 

 

 

(2,681

)

 

 

(410

)

Total earning assets

 

 

2,494

 

 

 

(3,207

)

 

 

(713

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market deposits and others

 

 

111

 

 

 

(798

)

 

 

(687

)

Time deposits

 

 

(320

)

 

 

(1,345

)

 

 

(1,665

)

Total interest-bearing deposits

 

 

(209

)

 

 

(2,143

)

 

 

(2,352

)

Borrowings

 

 

 

 

 

 

 

 

 

Total interest-bearing liabilities

 

 

(209

)

 

 

(2,143

)

 

 

(2,352

)

Net interest income

 

$

2,703

 

 

$

(1,064

)

 

$

1,639

 

 

Total interest income decreased $713,000, or 5.0%, to $13.6 million for the three months ended March 31, 2021 from $14.3 million for the same period in 2020, primarily due to a decrease in interest earned on our loan portfolio and a decrease in interest earned on federal funds sold.

Interest and fees on loans was $13.3 million for the three months ended March 31, 2021, compared to $13.7 million for the same period in 2020, a decrease of $410,000, or 3.0%. This decrease in interest income on loans was primarily due to an 89 basis point decrease to 4.62% for the three months ended March 31, 2021 from 5.51% for the same period in 2020 in the average yield on loans, partially offset by an increase in the average balance of loans outstanding. Average loans increased $167.1 million, or 16.7%, to $1.17 billion for the three months ended March 31, 2021 from $998.1 million for the same period in 2020, primarily due to increases in real estate and SBA loans including SBA PPP loans.

Interest income on total investment was $348,000 for the three months ended March 31, 2021, compared to $651,000 for the same period in 2020. Interest income on the securities portfolio decreased $83,000, or 26.0%, to $236,000 for the three months ended March 31, 2021, compared to $319,000 for the same period in 2020. The decrease in interest income on the securities portfolio was due to a 131 basis point decrease in the average yield on the securities portfolio, offset by 70.1% increase in the average balance of securities available for sale. Interest income on federal funds sold and other investments decreased $220,000, or 66.3%, to $112,000 the three months ended March 31, 2021 from $332,000 for the same period in 2020, due to a 123 basis point decrease in the average yield on the federal funds sold and other investments, offset by 27.0% increase in the average balance of federal funds sold and other investments.

Average yield on interest-earning assets decreased 103 basis points to 4.07% for the three months ended March 31, 2021 from 5.10% for the same period in 2020. Average interest-earning assets increased $226.5 million, or 20.0%, to $1.36 billion for the three months ended March 31, 2021 from $1.13 billion for the same period in 2020.

34


Table of Contents

 

Total interest expense decreased $2.4 million, or 72.8%, to $877,000 for the three months ended March 31, 2021 from $3.2 million for the same period in 2020, primarily due to a decrease in interest expense on deposits as a result of the downward adjustments of the Company’s rates paid on interest-bearing deposits in response to the rate decreases by the Federal Reserve and a decrease in the average balance of interest-bearing liabilities.

Average cost of interest-bearing liabilities decreased 127 basis points to 0.51% for the three months ended March 31, 2021 from 1.78% for the same period in 2020. Average interest-bearing liabilities decreased $25.4 million, or 3.5%, to $703.6 million for the three months ended March 31, 2021 compared to $729.0 million for the same period in 2020.

Net interest income increased $1.6 million, or 14.7%, to $12.8 million for the three months ended March 31, 2021 compared to $11.1 million for the same period in 2020. The net interest spread and net interest margin for the three months ended March 31, 2021, 2021, were 3.56% and 3.80%, respectively, compared to 3.32% and 3.95%, respectively, for the same period in 2020.

Provision for Loan Losses

Credit risk is inherent in the business of making loans. We establish an allowance for loan losses through charges to earnings, which are shown in the statements of operations as the provision for loan losses. Specifically identifiable and quantifiable known losses are promptly charged off against the allowance. The provision for loan losses is determined by conducting a quarterly evaluation of the adequacy of our allowance for loan losses and charging the shortfall or excess, if any, to the current quarter’s expense. This has the effect of creating variability in the amount and frequency of charges to earnings. The provision for loan losses and level of allowance for each period are dependent upon many factors, including loan growth, net charge-offs, changes in the composition of the loan portfolio, delinquencies, management’s assessment of the quality of the loan portfolio, the valuation of problem loans and the general economic conditions in our market area.

The provision for loan losses for the three months ended March 31, 2021 was $620,000. Management has made adjustments to qualitative factors on all loan types to reflect the pandemic’s prolonged potential adverse impacts on national, state, and local economic and business conditions. The changes in qualitative factors accounted for $10,000, or 2% of the provision, and the changes in quantitative factors accounted $579,000, or 93% of the provision, which included a provision of $636,000 for accrued interest receivables on deferred loans and loans that are no longer on deferral but have not fully caught up on their accrued interest, and $56,000 in net reversal from loss factor change and loan balance change. The changes in specific reserve for impaired loans was $34,000 for the three month ended March 31, 2021. The provision for loan losses for the same period in 2020 was $743,000. The changes in qualitative factors accounted for $593,000, or 80% of the provision, and the changes in quantitative factors accounted $48,000, or 6% of the provision. The changes in specific reserve for impaired loans was $53,000 for the three month ended March 31, 2020.

Noninterest Income

While interest income remains the largest single component of total revenues, noninterest income is also an important component. A portion of our noninterest income is associated with SBA lending activity, consisting of gains on the sale of loans sold in the secondary market and servicing income from loans sold with servicing retained. Other sources of noninterest income include loan servicing fees, service charges and fees, and gains on the sale of securities.

Noninterest income for the three months ended March 31, 2021 increased $670,000, or 29.2%, to $3.0 million compared to $2.3 million for the same period in 2020, primarily due to increases of $727,000 in gain on sale of loans and $139,000 in loan servicing fees, partially offset by decreases of $94,000 in service charges on deposits and $102,000 in other income.

The following table sets forth the various components of our noninterest income for the three months ended March 31, 2021 and 2020:

 

 

 

Three Months Ended March 31,

 

(Dollars in thousands)

 

2021

 

 

2020

 

 

Increase

(Decrease)

 

Noninterest income:

 

 

 

 

 

 

 

 

 

 

 

 

Service charges on deposit accounts

 

$

274

 

 

$

368

 

 

$

(94

)

Loan servicing fees, net of amortization

 

 

531

 

 

 

392

 

 

 

139

 

Gain on sale of loans

 

 

1,882

 

 

 

1,155

 

 

 

727

 

Other income and fees

 

 

279

 

 

 

381

 

 

 

(102

)

Total noninterest income

 

$

2,966

 

 

$

2,296

 

 

$

670

 

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The increase in gain on sale of loans was due to a $1.8 million gain on $22.4 million sales in SBA loans for the three months ended March 31, 2021 compared to a $1.1 million gain on $17.5 million sales in SBA loans for the same period in 2020. The increase in loan servicing fees, net of amortization, was primarily due to a decrease in amortization from lower SBA loan payoffs in the three months ended March 31, 2021 compared to the same period in 2020.

The decrease in service charges on deposits was primarily due to lower overdraft charges, partially offset by an increase in analysis charges on business accounts for the three months ended March 31, 2021 compared to the same period in 2020. The decrease in other income was primarily due to unrealized holding loss of $66,000 on CRA qualified mutual fund for the three months ended March 31, 2021 compared to unrealized holding gain of $58,000 on CRA qualified mutual fund for the same period of 2020.

 

Noninterest Expense

Noninterest expense for the three months ended March 31, 2021 was $8.0 million compared to $8.2 million for the same period in 2020, a decrease of $241,000, or 2.9%. The decrease was primarily attributable to decreases of $407,000 in salaries and employee benefits, $117,000 in director’s fees and stock-based compensation expenses, partially offset by an increase of $177,000 in foundation and other contribution expenses.

The following table sets forth the major components of our noninterest expense for the three months ended March 31, 2021 and 2020:

 

 

 

Three Months Ended March 31,

 

(Dollars in thousands)

 

2021

 

 

2020

 

 

Increase

(Decrease)

 

Noninterest expense:

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

$

4,662

 

 

$

5,071

 

 

$

(409

)

Occupancy and equipment

 

 

1,235

 

 

 

1,230

 

 

 

5

 

Data processing and communication

 

 

448

 

 

 

409

 

 

 

39

 

Professional fees

 

 

314

 

 

 

273

 

 

 

41

 

FDIC insurance and regulatory assessments

 

 

132

 

 

 

106

 

 

 

26

 

Promotion and advertising

 

 

177

 

 

 

162

 

 

 

15

 

Directors' fees and stock-based compensation

 

 

116

 

 

 

233

 

 

 

(117

)

Foundation donation and other contributions

 

 

507

 

 

 

330

 

 

 

177

 

Other expenses

 

 

375

 

 

 

393

 

 

 

(18

)

Total noninterest expense

 

 

7,966

 

 

 

8,207

 

 

 

(241

)

 

Salaries and employee benefits expense decreased $409,000, or 8.1%, to $4.7 million for the three months ended March 31, 2021 from $5.1 million for the same period in 2020, primarily attributable to an increase in deferred loan origination costs. The increase in deferred loan origination costs was due to higher loan origination of $169.2 million, including SBA PPP loan origination of $74.2 million for the three months ended March 31, 2021 compared to $77.9 million for the same period in 2020.

Director’s fees and stock-based compensation expenses decreased $117,000, or 50.2%, to $116,000 for the three months ended March 31, 2021 compared to $233,000 for the same period in 2020, primarily due to a decrease of $108,000 in restricted stock unit expense resulting from the full vesting of the restricted stock units in July 2020.

Foundation donation and other contributions expenses increased $177,000, or 53.6%, to $507,000 for the three months ended March 31, 2021 compared to $330,000 for the same period in 2020. The increase was due to increased donation accruals for Open Stewardship Foundation, which is directly proportionate to our after-tax net income.

Income Tax Expense

Income tax expense was $2.1 million and $1.2 million for the three months ended March 31, 2021 and 2020, respectively. The effective income tax rate increased to 28.8% for the three months ended March 31, 2021 compared to 26.1% for the same period in 2020, primarily due to realizing a lower amount of tax benefits resulting from a decrease in the number of non-qualified stock options exercises during the three months ended March 31, 2021 compared to the same period in 2020.

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Financial Condition

Total assets increased $88.5 million, or 6.5%, to $1.46 billion at March 31, 2021 compared to $1.37 billion at December 31, 2020, primarily due to increases of $56.1 million, or 5.1%, in gross loans, and $10.6 million, or 11.6%, in securities available for sale. We funded our asset growth primarily with an increase of $85.3 million, or 7.1% in total deposits during the three months ended March 31, 2021.

Investment portfolio

The securities portfolio is the second largest component of our interest earning assets, and the structure and composition of this portfolio is important to an analysis of our financial condition. The portfolio serves the following purposes: (i) it provides a source of pledged assets for securing certain deposits and borrowed funds, as may be required by law or by specific agreement with a depositor or lender; (ii) it provides liquidity to even out cash flows from the loan and deposit activities of customers; (iii) it can be used as an interest rate risk management tool, because it provides a large base of assets, the maturity and interest rate characteristics of which can be changed more readily than the loan portfolio to better match changes in the deposit base and our other funding sources; and (iv) it is an alternative interest-earning use of funds when loan demand is weak or when deposits grow more rapidly than loans.

We classify our securities as either available-for-sale or held-to-maturity at the time of purchase. Accounting guidance requires available-for-sale securities to be marked to fair value with an offset to accumulated other comprehensive income (loss), a component of shareholders’ equity. Monthly adjustments are made to reflect changes in the fair value of our available-for-sale securities.

All securities in our investment portfolio were classified as available-for-sale at March 31, 2021. There were no held-to-maturity securities in our investment portfolio at March 31, 2021. All available-for-sale securities are carried at fair value. Securities available-for-sale consist primarily of US government-sponsored agency securities, home mortgage-backed securities and collateralized mortgage obligations.

Securities available for sale increased $10.6 million, or 11.6%, to $102.4 million at March 31, 2021 from $91.8 million at December 31, 2020, primarily due to purchases of $19.9 million, partially offset by principal paydowns of $8.3 million and a maturity of $3.1 million in securities available for sale for the three months ended March 31, 2021. No issuer of securities available for sale, other than the U.S. Government and its agencies, comprised more than 10% of our shareholders’ equity as of March 31, 2021 or December 31, 2020.

The following table summarizes the fair value of the available-for-sale securities portfolio as of the dates presented.

 

 

 

March 31, 2021

 

 

December 31, 2020

 

 

 

Amortized

 

 

Fair

 

 

Unrealized

 

 

Amortized

 

 

Fair

 

 

Unrealized

 

(Dollars in thousands)

 

Cost

 

 

Value

 

 

Gain/(Loss)

 

 

Cost

 

 

Value

 

 

Gain/(Loss)

 

Available for sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agencies

 

$

1,000

 

 

$

1,001

 

 

$

1

 

 

$

1,000

 

 

$

1,005

 

 

$

5

 

Mortgage-backed securities: residential

 

 

25,196

 

 

 

25,428

 

 

 

232

 

 

 

19,281

 

 

 

19,704

 

 

 

423

 

Collateralized mortgage obligations

 

 

75,772

 

 

 

75,984

 

 

 

212

 

 

 

70,318

 

 

 

71,082

 

 

 

764

 

Total available for sale

 

$

101,968

 

 

$

102,413

 

 

$

445

 

 

$

90,599

 

 

$

91,791

 

 

$

1,192

 

 

Certain securities have fair values less than amortized cost and, therefore, contain unrealized losses. At March 31, 2021, we evaluated the securities which had an unrealized loss for other than temporary impairment (“OTTI”) and determined all decline in value to be temporary. We anticipate full recovery of amortized cost with respect to these securities by maturity, or sooner in the event of a more favorable market interest rate environment. We do not intend to sell these securities and it is not more likely than not that we will be required to sell them before recovery of the amortized cost basis, which may be at maturity.

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Table of Contents

 

The following table sets forth certain information regarding contractual maturities and the weighted average yields of our investment securities as of the dates presented. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties.

 

 

 

As of March 31, 2021

 

 

 

Due in One Year

 

 

Due after One Year

 

 

Due after Five Years

 

 

 

 

 

 

or Less

 

 

Through Five Years

 

 

Through Ten Years

 

 

Due after Ten Years

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

Weighted

 

 

 

Amortized

 

 

Average

 

 

Amortized

 

 

Average

 

 

Amortized

 

 

Average

 

 

Amortized

 

 

Average

 

(Dollars in thousands)

 

Cost

 

 

Yield

 

 

Cost

 

 

Yield

 

 

Cost

 

 

Yield

 

 

Cost

 

 

Yield

 

Available for sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agencies

 

$

1,000

 

 

 

1.75

%

 

$

 

 

 

%

 

$

 

 

 

%

 

$

 

 

 

%

Mortgage-backed securities - residential

 

 

 

 

 

%

 

 

938

 

 

 

1.99

%

 

 

4,194

 

 

 

1.90

%

 

 

20,064

 

 

 

1.05

%

Collateralized mortgage obligations

 

 

 

 

 

%

 

 

 

 

 

%

 

 

708

 

 

 

1.73

%

 

 

75,064

 

 

 

1.06

%

Total available for sale

 

$

1,000

 

 

 

1.75

%

 

$

938

 

 

 

1.99

%

 

$

4,902

 

 

 

1.88

%

 

$

95,128

 

 

 

1.06

%

 

We have not used interest rate swaps or other derivative instruments to hedge fixed rate loans or securities to otherwise mitigate interest rate risk.

Loans

Our loans represent the largest portion of our earning assets, substantially greater than the securities portfolio or any other asset category, and the quality and diversification of the loan portfolio is an important consideration when reviewing our financial condition.

Gross loans including net deferred costs increased $56.1 million, or 5.1%, to $1.16 billion at March 31, 2021, compared to $1.10 billion at December 31, 2020, primarily due to originations of SBA PPP loans and organic growth in commercial real estate for the three months ended March 31, 2021.

The loan distribution table that follows sets forth our gross loans outstanding, and the percentage distribution in each category as of the dates indicated:

 

 

 

March 31, 2021

 

 

December 31, 2020

 

(Dollars in thousands)

 

Amount

 

 

% of Total

 

 

Amount

 

 

% of Total

 

Real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

$

662,445

 

 

 

57

%

 

$

651,684

 

 

 

59

%

SBA loan - real estate

 

 

139,503

 

 

 

12

%

 

 

136,224

 

 

 

12

%

Total real estate

 

 

801,948

 

 

 

69

%

 

 

787,908

 

 

 

71

%

SBA loan - non-real estate

 

 

123,682

 

 

 

11

%

 

 

75,151

 

 

 

7

%

Commercial and industrial

 

 

103,883

 

 

 

9

%

 

 

107,307

 

 

 

10

%

Home mortgage

 

 

125,285

 

 

 

11

%

 

 

128,212

 

 

 

12

%

Consumer

 

 

1,074

 

 

<1%

 

 

 

1,158

 

 

<1%

 

Gross loans

 

 

1,155,872

 

 

 

100

%

 

 

1,099,736

 

 

 

100

%

Allowance for loan losses

 

 

(15,339

)

 

 

 

 

 

 

(15,352

)

 

 

 

 

Net loans

 

$

1,140,533

 

 

 

 

 

 

$

1,084,384

 

 

 

 

 

 

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Table of Contents

 

 

The following tables presents the maturity distribution of our loans as of March 31, 2021 and December 31, 2020. The table shows the distribution of such loans between those loans with predetermined (fixed) interest rates and those with variable (floating) interest rates.

 

 

 

As of March 31, 2021

 

 

 

 

 

 

 

 

 

 

 

Due after One Year

 

 

 

 

 

 

 

 

 

 

Due in One Year or Less

 

 

Through Five Years

 

 

Due after Five Years

 

 

 

 

 

 

 

 

 

 

 

Adjustable

 

 

 

 

 

 

Adjustable

 

 

 

 

 

 

Adjustable

 

 

 

 

 

(Dollars in thousands)

 

Fixed Rate

 

 

Rate

 

 

Fixed Rate

 

 

Rate

 

 

Fixed Rate

 

 

Rate

 

 

Total

 

Real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

$

58,894

 

 

$

54,096

 

 

$

292,863

 

 

$

140,752

 

 

$

88,949

 

 

$

26,891

 

 

$

662,445

 

SBA loans - real estate

 

 

 

 

 

 

 

 

 

 

 

49

 

 

 

 

 

 

139,454

 

 

 

139,503

 

Total real estate

 

 

58,894

 

 

 

54,096

 

 

 

292,863

 

 

 

140,801

 

 

 

88,949

 

 

 

166,345

 

 

 

801,948

 

SBA loan - non-real estate

 

 

 

 

 

7

 

 

 

113,552

 

 

 

1,153

 

 

 

 

 

 

8,970

 

 

 

123,682

 

Commercial and industrial

 

 

139

 

 

 

37,438

 

 

 

216

 

 

 

38,531

 

 

 

18,556

 

 

 

9,003

 

 

 

103,883

 

Home mortgage

 

 

 

 

 

 

 

 

 

 

 

 

 

 

111,188

 

 

 

14,097

 

 

 

125,285

 

Consumer

 

 

 

 

 

250

 

 

 

 

 

 

824

 

 

 

 

 

 

 

 

 

1,074

 

Gross loans

 

$

59,033

 

 

$

91,791

 

 

$

406,631

 

 

$

181,309

 

 

$

218,693

 

 

$

198,415

 

 

$

1,155,872

 

 

 

 

As of December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

Due after One Year

 

 

 

 

 

 

 

 

 

 

Due in One Year or Less

 

 

Through Five Years

 

 

Due after Five Years

 

 

 

 

 

 

 

 

 

 

 

Adjustable

 

 

 

 

 

 

Adjustable

 

 

 

 

 

 

Adjustable

 

 

 

 

 

(Dollars in thousands)

 

Fixed Rate

 

 

Rate

 

 

Fixed Rate

 

 

Rate

 

 

Fixed Rate

 

 

Rate

 

 

Total

 

Real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

$

58,101

 

 

$

44,439

 

 

$

293,045

 

 

$

155,303

 

 

$

74,302

 

 

$

26,494

 

 

$

651,684

 

SBA loans - real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

136,224

 

 

 

136,224

 

Total real estate

 

 

58,101

 

 

 

44,439

 

 

 

293,045

 

 

 

155,303

 

 

 

74,302

 

 

 

162,718

 

 

 

787,908

 

SBA loan - non-real estate

 

 

 

 

 

11

 

 

 

64,906

 

 

 

952

 

 

 

 

 

 

9,282

 

 

 

75,151

 

Commercial and industrial

 

 

8,933

 

 

 

43,618

 

 

 

221

 

 

 

36,853

 

 

 

4,887

 

 

 

12,795

 

 

 

107,307

 

Home mortgage

 

 

 

 

 

 

 

 

 

 

 

 

 

 

114,141

 

 

 

14,071

 

 

 

128,212

 

Consumer

 

 

 

 

 

271

 

 

 

 

 

 

887

 

 

 

 

 

 

 

 

 

1,158

 

Gross loans

 

$

67,034

 

 

$

88,339

 

 

$

358,172

 

 

$

193,995

 

 

$

193,330

 

 

$

198,866

 

 

$

1,099,736

 

 

Our loan portfolio is concentrated in commercial real estate, commercial (primarily manufacturing, wholesale, and services-oriented entities), SBA loans (primarily unguaranteed portion) with the remaining balance in home mortgage, and consumer loans. We do not have any material concentrations by industry or group of industries in the loan portfolio. However, 80.2% of our gross loans are secured by real property as of March 31, 2021, compared to 83.3% as of December 31, 2020.

We have established concentration limits in the loan portfolio for commercial real estate loans, commercial and industrial loans, and unsecured lending, among others. All loan types are within established limits. We use underwriting guidelines to assess the borrowers’ historical cash flow to determine debt service, and we further stress test the debt service under higher interest rate scenarios. Financial and performance covenants are used in commercial lending agreements to allow us to react to a borrower’s deteriorating financial condition, should that occur.

Commercial real estate loans include owner-occupied and non-occupied commercial real estate. We originate both fixed and adjustable rate loans. Adjustable rate loans are based on the Wall Street Journal prime rate. At March 31, 2021, approximately 66% of the commercial real estate portfolio consisted of fixed-rate loans. Our policy maximum loan-to-value, or LTV, is 70% for commercial real estate loans. At March 31, 2021, our average loan-to-value for commercial real estate loans was approximately 53%. Our commercial real estate loan portfolio totaled $662.4 million at March 31, 2021 compared to $651.7 million at December 31, 2020.

We are designated an SBA 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 have maturities 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 may include personal guarantees. Our unguaranteed SBA loans collateralized by real estate are monitored by collateral type and included in our CRE Concentration Guidance.

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Table of Contents

 

As of March 31, 2021, our SBA portfolio totaled $263.2 million, including $113.6 million of SBA PPP loans, compared to $211.4 million, including $64.9 million of SBA PPP loans as of December 31, 2020, an increase of $51.8 million, or 24.5%. We originated $105.3 million of SBA loans, including $74.2 million of SBA PPP loans during the three months ended March 31, 2021 compared to $25.7 million during the three months ended March 31, 2020. We sold $22.4 million and $17.5 million of SBA loans during the three months ended March 31, 2021 and 2020, respectively.

Loans held for sale was $28.6 million at March 31, 2021, compared to $26,7 million at December 31, 2020.

Commercial and industrial loans totaled $103.9 million at March 31, 2021 compared to $107.3 million at December 31, 2020.

We originate mainly non-qualified single-family home mortgage loans (“home mortgage”) primarily through broker relationships, but also through our branch network. We offer a five-year or seven-year hybrid adjustable rate mortgage loans, which reprice annually after the initial fixed rate period. These loans are held for investment.

Home mortgage loans totaled $125.3 million at March 31, 2021, compared to $128.2 million at December 31, 2020, a decrease of $2.9 million, or 2.3%. During the three months ended March 31, 2021, we originated $11.6 million and sold $4.3 million in home mortgage loans. Payoffs and paydowns for the same period were $9.1 million and $1.1 million, respectively. During the same period in 2020, we originated $9.3 million and sold $1.9 million in home mortgage loans. Payoffs and paydowns for the same period were $6.9 million and $1.9 million, respectively.

Loan Payment Deferrals: As a result of the COVID-19 pandemic, a loan modification program was designed and implemented to assist our clients experiencing financial stress resulting from the economic impacts caused by the global pandemic. The Company has offered loan payment deferrals of up to twelve months for commercial and consumer borrowers impacted by the pandemic who have not been delinquent over 30 days on payments at the time of borrowers’ deferral requests. Through March 31, 2021, the Company has processed loan deferments for borrowers across multiple industries representing 185 loan accounts, with an aggregate loan balance of $236.8 million under the interagency guidance and Section 4013 of the CARES Act. Recent interagency guidance from the Federal Reserve and the Federal Deposit Insurance Corporation confirmed with the FASB that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief, are not to be considered TDRs. We believe our loan modification program satisfies the applicable requirements.

As of March 31, 2021, 171 loans with an aggregate balance of $217.8 million, including 64 home mortgage loans with an aggregate balance of $27.4 million, have resumed regular payments.

The following tables summarize loan portfolio breakdown by industry and loan deferral requests as of the dates presented:

 

Loan Portfolio Breakdown by Industry

 

Excluding Home mortgage and consumer loans

 

 

 

(Dollars in thousands)

 

As of March 31, 2021

 

Industry

 

Number of

accounts

 

 

% of total

 

Balance

 

 

% of total

 

Hotel / motel

 

 

225

 

 

 

7.5

%

$

150,375

 

 

 

14.1

%

Wholesale

 

 

375

 

 

 

12.4

 

 

77,331

 

 

 

7.2

 

Food services / restaurant

 

 

432

 

 

 

14.3

 

 

62,716

 

 

 

5.9

 

Laundry services

 

 

152

 

 

 

5.0

 

 

21,196

 

 

 

2.0

 

Real estate lessor

 

 

240

 

 

 

8.0

 

 

396,092

 

 

 

37.1

 

Car washes

 

 

52

 

 

 

1.7

 

 

36,459

 

 

 

3.4

 

Educational service

 

 

32

 

 

 

1.1

 

 

7,166

 

 

 

0.7

 

Other

 

 

1,505

 

 

 

50.0

 

 

315,396

 

 

 

29.6

 

Total

 

 

3,013

 

 

 

100

%

$

1,066,731

 

 

 

100

%

40


Table of Contents

 

 

 

Loan Deferment Summary by Industry

 

Excluding Home mortgage and consumer loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

As of March 31, 2021

 

Industry

 

Number of

accounts

 

 

% of

deferment

 

 

% of

total

loans

 

 

Balance

 

 

% of

deferment

 

 

% of

total

loans

 

Hotel / motel

 

 

6

 

 

 

66.7

%

 

 

2.7

%

 

$

15,188

 

 

 

93.6

%

 

 

10.1

%

Wholesale

 

 

1

 

 

 

11.1

 

 

 

0.3

 

 

 

486

 

 

 

3.0

 

 

 

0.6

 

Food services / restaurant

 

 

1

 

 

 

11.1

 

 

 

0.2

 

 

 

465

 

 

 

2.9

 

 

 

0.7

 

Laundry services

 

 

1

 

 

 

11.1

 

 

 

0.7

 

 

 

90

 

 

 

0.6

 

 

 

0.4

 

Total

 

 

9

 

 

 

100.0

%

 

 

0.3

%

 

$

16,229

 

 

 

100.0

%

 

 

1.5

%

 

Loan Deferment Summary by Loan Type

 

(Dollars in thousands)

 

As of March 31, 2021

 

Loan Type

 

Number of

accounts

 

 

% of

deferment

 

 

% of

total

loans

 

 

Balance

 

 

% of

deferment

 

 

% of

total

loans

 

Real estate loans

 

 

6

 

 

 

42.9

%

 

 

1.7

%

 

$

15,188

 

 

 

80.0

%

 

 

2.3

%

C & I loans

 

 

3

 

 

 

21.4

 

 

 

1.3

 

 

 

1,041

 

 

 

5.5

 

 

 

1.0

 

Loans, excluding home mortgage and

   consumer loans

 

 

9

 

 

 

64.3

 

 

 

0.3

 

 

 

16,229

 

 

 

85.5

 

 

 

1.5

 

Home mortgage loans

 

 

5

 

 

 

35.7

 

 

 

1.6

 

 

 

2,761

 

 

 

14.5

 

 

 

2.2

 

Total

 

 

14

 

 

 

100.0

%

 

 

0.4

%

 

$

18,990

 

 

 

100.0

%

 

 

1.6

%

 

Loan Deferment Status Change by Loan Type

 

 

 

Total deferments

 

 

Payment resumed

 

 

 

 

 

 

 

 

 

 

 

under the CARES Act

 

 

or paid off

 

 

Remaining deferments

 

(Dollars in thousands)

 

as of March 31, 2021

 

 

through March 31, 2021

 

 

as of March 31, 2021

 

Loan Type

 

Number

of

accounts

 

 

Balance

 

 

Number

of

accounts

 

 

Balance

 

 

Number

of

accounts

 

 

Balance

 

Loans, excluding home mortgage and

   consumer loans

 

 

116

 

 

 

206,582

 

 

 

107

 

 

 

190,353

 

 

 

9

 

 

 

16,229

 

Home mortgage loans

 

 

69

 

 

 

30,205

 

 

 

64

 

 

 

27,444

 

 

 

5

 

 

 

2,761

 

Total

 

 

185

 

 

$

236,787

 

 

 

171

 

 

$

217,797

 

 

 

14

 

 

$

18,990

 

Loan Servicing

As of March 31, 2021, and December 31, 2020, we serviced $401.1 million and $388.8 million respectively, of SBA loans for others. Activities for loan servicing rights for the three months ended March 31, 2021 and 2020 were as follows:

 

 

 

Three Months Ended March 31,

 

(Dollars in thousands)

 

2021

 

 

2020

 

 

Increase

(decrease)

 

Beginning balance

 

$

7,360

 

 

$

7,024

 

 

$

336

 

Additions

 

 

570

 

 

 

406

 

 

 

164

 

Amortized to expense

 

 

(438

)

 

 

(467

)

 

 

29

 

Ending balance

 

$

7,492

 

 

$

6,963

 

 

$

529

 

 

Loan servicing rights are included in accrued interest receivable and other assets on our consolidated balance sheets and reported net of amortization.

41


Table of Contents

 

Allowance for loan losses

The allowance for loan losses is an estimate of probable incurred losses in the loan portfolio. Loans are charged-off against the allowance when management believes a loan balance is uncollectible. Subsequent recoveries, if any, are credited to the allowance for loan losses. Management’s methodology for estimating the allowance balance consists of several key elements, which include specific allowances on individual impaired loans and the formula driven allowances on pools of loans with similar risk characteristics. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged-off.

The allowance for loan losses is determined on a quarterly basis and reflects management’s estimate of probable incurred credit losses inherent in the loan portfolio. 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. The computation includes element of judgment and high levels of subjectivity.

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 non-accrual status and performing restructured loans. Income from loans on non-accrual 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 value 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.

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. 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. Interest income on impaired loans is accrued as earned, unless the loan is placed on non-accrual status.

The allowance for loan losses was $15.3 million at March 31, 2021 and $15.4 million at December 31, 2020. The allowance for loan losses was 1.33% of gross loans at March 31, 2021 compared to 1.40% at December 31, 2020. Excluding fully guaranteed SBA PPP loans, the allowance for loan losses was 1.47% of gross loans at March 31, 2021 and 1.48% of gross loans at December 31, 2020.

In determining the allowance and the related provision for loan losses, we consider two principal elements: (i) valuation allowances based upon probable losses identified during the review of impaired commercial and industrial, commercial real estate, construction and land development loans; and (ii) allocations, by loan classes, on loan portfolios based on historical loan loss experience and qualitative factors.

It is the policy of management to maintain the allowance for loan losses at a level adequate for risks inherent in the loan portfolio. The Federal Reserve Board and the California Department of Financial Protection and Innovation also review the allowance for loan losses as an integral part of their examination process. Based on information currently available, management believes that our allowance for loan losses is adequate. However, the loan portfolio can be adversely affected if California’s economic conditions and the real estate market in our market area were to weaken. The effect of such events, although uncertain at this time, could result in an increase in the level of nonperforming loans and increased loan losses, which could adversely affect our future growth and profitability. No assurance of the ultimate level of credit losses can be given with any certainty.

42


Table of Contents

 

Analysis of the Allowance for Loan Losses.

The following table provides an analysis of the allowance for loan losses, provision for loan losses and net charge-offs, by category, for the three months ended March 31, 2021 and 2020.

 

 

 

As of and For the Three Months Ended March 31,

 

 

 

2021

 

 

2020

 

 

 

 

 

 

 

 

 

 

 

Net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net

 

 

 

 

 

 

 

Beginning

 

 

 

 

 

 

Charge-

 

 

Ending

 

 

Beginning

 

 

 

 

 

 

Charge-

 

 

Ending

 

(Dollars in thousands)

 

Balance

 

 

Provision

 

 

offs

 

 

Balance

 

 

Balance

 

 

Provision

 

 

offs

 

 

Balance

 

Real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

$

8,505

 

 

$

89

 

 

$

 

 

$

8,594

 

 

$

6,000

 

 

$

210

 

 

$

 

 

$

6,210

 

SBA loans - real estate

 

 

1,802

 

 

 

228

 

 

 

 

 

 

2,030

 

 

 

939

 

 

 

143

 

 

 

 

 

 

1,082

 

Total real estate

 

 

10,307

 

 

 

317

 

 

 

 

 

 

10,624

 

 

 

6,939

 

 

 

353

 

 

 

 

 

 

7,292

 

SBA loan - non-real estate

 

 

278

 

 

 

14

 

 

 

 

 

 

292

 

 

 

121

 

 

 

116

 

 

 

45

 

 

 

192

 

Commercial and industrial

 

 

2,563

 

 

 

(232

)

 

 

 

 

 

2,331

 

 

 

1,289

 

 

 

3

 

 

 

 

 

 

1,292

 

Home mortgage

 

 

2,185

 

 

 

(110

)

 

 

 

 

 

2,075

 

 

 

1,667

 

 

 

254

 

 

 

 

 

 

1,921

 

Consumer

 

 

19

 

 

 

(5

)

 

 

(3

)

 

 

17

 

 

 

34

 

 

 

17

 

 

 

 

 

 

51

 

Total

 

$

15,352

 

(1)

$

(16

)

 

$

(3

)

 

$

15,339

 

 

$

10,050

 

 

$

743

 

 

$

45

 

 

$

10,748

 

Gross loans (2)

 

 

 

��

 

 

 

 

 

 

 

 

 

$

1,155,872

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

996,559

 

Average gross loans (2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,139,458

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

992,736

 

Net charge-offs to average

   gross loans (3)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(0.00

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

0.02

%

Allowance for loans losses to

   gross loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1.33

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1.08

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) Loan loss provision for the three months ended March 31, 2021, reported on income statement is $620,000. The difference of $636,000 is allocated to allowance on accrued interest receivable on loan deferrals and loans that are no longer on deferral but have not fully caught up on their accrued interest.

 

(2) Gross loans balance and average gross loans balance exclude loans held for sale

 

(3) Net charge-offs are loan charge-offs net of loan recoveries.

 

Non-performing 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 90 days past due. Loans on which the accrual of interest has been discontinued are designated as non-accrual 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 non-accrual status, all interest previously accrued but not collected is reversed against current period interest income. Income on non-accrual 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.

Real estate we acquire as a result of foreclosure or by deed-in-lieu of foreclosure is classified as other real estate owned (“OREO”) until sold, and is initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. We had no OREO property at March 31, 2021 and at December 31, 2020.

Non-performing loans include loans 90 days past due and still accruing, loans accounted for on a non-accrual basis and accruing restructured loans. Non-performing assets consist of non-performing loans plus OREO. Non-performing loans were $1.1 million at March 31, 2021, an increase of $163,000, compared to $985,000 at December 31, 2020.

Classified loans were $6.6 million at March 31, 2021, a decrease of $739,000, compared to $7.3 million at December 31, 2020. Excluding the SBA guarantee balance retained, classified loans were $6.4 million at March 31, 2021. No SBA guarantee balance was retained at December 31, 2020. Classified loans of $5.9 million as of March 31, 2021 are fully secured by real estate collaterals.

43


Table of Contents

 

The following table sets forth the allocation of our non-performing assets among our different asset categories as of the dates indicated. Non-performing loans include non-accrual loans, loans past due 90 days or more and still accruing interest, and loans modified under troubled debt restructurings.

 

(Dollars in thousands)

 

March 31, 2021

 

 

December 31, 2020

 

Non-accrual loans

 

$

1,148

 

 

$

985

 

Past due loans 90 days or more and still accruing

 

 

 

 

 

 

Accruing troubled debt restructured loans

 

 

 

 

 

 

Total non-performing loans

 

 

1,148

 

 

 

985

 

Other real estate owned

 

 

 

 

 

 

Total non-performing assets

 

$

1,148

 

 

$

985

 

Non-performing loans to gross loans

 

 

0.10

%

 

 

0.09

%

Non-performing assets to total assets

 

 

0.08

%

 

 

0.07

%

Allowance for loan losses to non-performing loans

 

 

1,337

%

 

 

1,558

%

 

Deposits

We gather deposits primarily through our branch locations. We offer a variety of deposit products including demand deposits accounts, interest-bearing products, savings accounts and certificate of deposits. We focus our efforts to originate noninterest demand deposits accounts through marketing to our existing and new loan customers, customer referrals, and the involvement of our marketing staff in various community networks.

Total deposits increased $85.3 million, or 7.1%, to $1.29 billion at March 31, 2021 compared to $1.20 billion at December 31, 2020. Noninterest-bearing deposits increased $49.2 million, or 9.4%, to $572.0 million at March 31, 2021 compared to $522.8 million at December 31, 2020, primarily due to the SBA PPP loans funded to customers’ noninterest-bearing deposits and new accounts opened during the three months ended March 31, 2021. Noninterest-bearing deposits accounted for 44.5% of total deposits at March 31, 2021 compared to 43.6% at December 31, 2020.

The following tables summarize our average deposit balances and weighted average rates for the three months ended March 31, 2021 and 2020:

 

 

 

Three Months Ended March 31,

 

 

 

2021

 

 

2020

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

Weighted

 

 

 

Average

 

 

Average

 

 

Average

 

 

Average

 

(Dollars in thousands)

 

Balance

 

 

Rate

 

 

Balance

 

 

Rate

 

Noninterest-bearing demand

 

$

544,492

 

 

 

%

 

$

292,453

 

 

 

%

Interest-bearing:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market deposits and others

 

 

336,796

 

 

 

0.33

 

 

 

297,202

 

 

 

1.29

 

Time deposits (more than $250,000)

 

 

197,096

 

 

 

0.63

 

 

 

210,986

 

 

 

2.17

 

Time deposits ($250,000 or less)

 

 

164,707

 

 

 

0.74

 

 

 

220,786

 

 

 

2.07

 

Total interest-bearing

 

 

698,599

 

 

 

0.51

 

 

 

728,974

 

 

 

1.78

 

Total deposits

 

$

1,243,091

 

 

 

0.29

%

 

$

1,021,427

 

 

 

1.27

%

 

 

 

The following tables set forth the maturity of time deposits as of March 31, 2021 and December 31, 2020:

 

 

 

As of March 31, 2021

 

 

 

Maturity Within:

 

 

 

Three

 

 

Three to

 

 

Six to 12

 

 

After

 

 

 

 

 

(Dollars in thousands)

 

Months

 

 

Six Months

 

 

Months

 

 

12 Months

 

 

Total

 

Time deposits (more than $250,000)

 

$

25,831

 

 

$

92,119

 

 

$

70,781

 

 

$

2,229

 

 

$

190,960

 

Time deposits ($250,000 or less)

 

 

46,430

 

 

 

40,932

 

 

 

73,795

 

 

 

7,140

 

 

 

168,297

 

Total time deposits

 

$

72,261

 

 

$

133,051

 

 

$

144,576

 

 

$

9,369

 

 

$

359,257

 

44


Table of Contents

 

 

 

 

 

As of December 31, 2020

 

 

 

Maturity Within:

 

 

 

Three

 

 

Three to

 

 

Six to 12

 

 

After

 

 

 

 

 

(Dollars in thousands)

 

Months

 

 

Six Months

 

 

Months

 

 

12 Months

 

 

Total

 

Time deposits (more than $250,000)

 

$

107,198

 

 

$

25,498

 

 

$

63,818

 

 

$

3,696

 

 

$

200,210

 

Time deposits ($250,000 or less)

 

 

33,474

 

 

 

28,020

 

 

 

80,308

 

 

 

7,001

 

 

 

148,803

 

Total time deposits

 

$

140,672

 

 

$

53,518

 

 

$

144,126

 

 

$

10,697

 

 

$

349,013

 

 

Borrowed Funds

Other than deposits, we also utilized FHLB advances as a supplementary funding source to finance our operations. The advances from the FHLB are collateralized by residential and commercial real estate loans. At March 31, 2021 and December 31, 2020, we had maximum borrowing capacity from the FHLB of $393.2 million and $394.0 million, respectively. We had $5.0 million in borrowings from the FHLB, which has a 0% interest rate under the Zero-Rate Recovery Advance Program, FHLB’s pandemic relief initiative at March 31, 2021 and December 31, 2020.

Liquidity

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 access to alternative sources of funds. Our liquid assets include cash, interest-bearing deposits in correspondent banks, Federal Funds sold, and fair value of unpledged investment securities. Other available sources of liquidity include wholesale deposits, and additional borrowings from correspondent banks, FHLB advances, and the Federal Reserve discount window.

At March 31, 2021 and December 31, 2020, our gross loan to deposit ratio was 89.9% and 91.6%, respectively.

Our short-term and long-term liquidity requirements are primarily met through cash flow from operations, redeployment of prepaying and maturing balances in our loan and investment portfolios, and increases in customer deposits. Other alternative sources of funds will supplement these primary sources to the extent necessary to meet additional liquidity requirements on either a short-term or long-term basis.

We had $100.0 million of unsecured Federal Funds lines with no amounts advanced as of March 31, 2021 and as of December 31, 2020. In addition, on such dates we had lines of credit from the Federal Reserve discount window of $132.1 million and $125.7 million, respectively. The Federal Reserve discount window lines were collateralized by a pool of commercial real estate loans and commercial and industrial loans totaling $223.0 million and $219.1 million as of March 31, 2021 and December 31, 2020, respectively. We did not have any borrowings outstanding with the Federal Reserve at March 31, 2021 or December 31, 2020, and our borrowing capacity is limited only by eligible collateral.

Based on the values of loans pledged as collateral, we had $262.7 million and $263.0 million of additional borrowing availability with the FHLB as of March 31, 2021 and December 31, 2020, respectively. We also maintain relationships in the capital markets with brokers to issue certificates of deposit and money market accounts.

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,” 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 capital amounts and classifications are subject to qualitative judgments by the federal banking regulators regarding components, risk weightings and other factors. Qualitative measures established by regulation to ensure capital adequacy required us to maintain minimum amounts and various ratios of CET1 capital, Tier 1 capital and total capital to risk-weighted assets and of Tier 1 capital to average consolidated assets, referred to as the “leverage ratio.” For further information, see “Supervision and Regulation.”

45


Table of Contents

 

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 March 31, 2021 and December 31, 2020. The Bank exceeded all regulatory capital requirements under the Basel III Capital Rules and were considered to be “well-capitalized” as of the dates reflected in the table below. At March 31, 2021, the FDIC categorized us as well-capitalized under the prompt corrective action framework. There have been no conditions or events since March 31, 2021 that management believes would change this classification.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Regulatory

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital Ratio

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Requirements,

 

 

 

 

 

 

 

 

 

 

 

Regulatory

 

 

Minimum

 

 

including fully

 

 

 

 

 

 

 

 

 

 

 

Capital Ratio

 

 

To be Considered

 

 

phased in Capital

 

 

 

Actual

 

 

Requirements

 

 

"Well Capitalized"

 

 

Conservation Buffer

 

(Dollars in thousands)

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

As of March 31, 2021:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total capital (to risk-weighted assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

$

159,626

 

 

 

15.04

%

 

N/A

 

 

N/A

 

 

N/A

 

 

N/A

 

 

N/A

 

 

N/A

 

Bank

 

 

156,697

 

 

 

14.77

%

 

 

84,884

 

 

 

8.00

%

 

 

106,106

 

 

 

10.00

%

 

 

111,411

 

 

 

10.50

%

Tier 1 capital (to risk-weighted assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

 

146,319

 

 

 

13.79

%

 

N/A

 

 

N/A

 

 

N/A

 

 

N/A

 

 

N/A

 

 

N/A

 

Bank

 

 

143,391

 

 

 

13.51

%

 

 

63,663

 

 

 

6.00

%

 

 

84,884

 

 

 

8.00

%

 

 

90,190

 

 

 

8.50

%

CET1 capital (to risk-weighted assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

 

146,319

 

 

 

13.79

%

 

N/A

 

 

N/A

 

 

N/A

 

 

N/A

 

 

N/A

 

 

N/A

 

Bank

 

 

143,391

 

 

 

13.51

%

 

 

47,747

 

 

 

4.50

%

 

 

68,969

 

 

 

6.50

%

 

 

74,274

 

 

 

7.00

%

Tier 1 capital (to average assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

 

146,319

 

 

 

10.38

%

 

N/A

 

 

N/A

 

 

N/A

 

 

N/A

 

 

N/A

 

 

N/A

 

Bank

 

 

143,391

 

 

 

10.17

%

 

 

56,376

 

 

 

4.00

%

 

 

70,470

 

 

 

5.00

%

 

 

56,376

 

 

 

4.00

%

Note: The capital requirements are only applicable to the Bank, and the Company's ratios are included for comparison purpose.

 

 

<

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Regulatory

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital Ratio

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Requirements,

 

 

 

 

 

 

 

 

 

 

 

Regulatory

 

 

Minimum

 

 

including fully

 

 

 

 

 

 

 

 

 

 

 

Capital Ratio

 

 

To be Considered

 

 

phased in Capital

 

 

 

Actual

 

 

Requirements

 

 

"Well Capitalized"

 

 

Conservation Buffer

 

(Dollars in thousands)

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

As of December 31, 2020:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total capital (to risk-weighted assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

$

155,287

 

 

 

14.81

%

 

N/A

 

 

N/A

 

 

N/A

 

 

N/A

 

 

N/A

 

 

N/A

 

Bank

 

 

152,232

 

 

 

14.52

%

 

 

83,859

 

 

 

8.00

%

 

 

104,824

 

 

 

10.00

%

 

 

110,065

 

 

 

10.50

%

Tier 1 capital (to risk-weighted assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

 

142,147

 

 

 

13.56

%

 

N/A

 

 

N/A

 

 

N/A

 

 

N/A

 

 

N/A

 

 

N/A

 

Bank

 

 

139,092

 

 

 

13.27